<PAGE>
This statement is intended to satisfy the requirements for an annual disclosure
statement as contained in Section 350.4(a) of the Federal Deposit Insurance
Corporation regulations. This statement has not been reviewed, or confirmed for
accuracy or relevance, by the Federal Deposit Insurance Corporation.
- --------------------------------------------------------------------------------
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K
[X] Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1998
OR
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from _______ to _______
Commission File Number: 0-17177
BSB BANCORP, INC.
---------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 16-1327860
---------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
58-68 Exchange Street, Binghamton, New York 13902
- ------------------------------------------- ----------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (607) 779-2492
Securities registered pursuant to Section 12(b) of the Act: Not applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, ($0.01 par value per share)
-----------------------------------------
Title of class
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (SS229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference of Part III of this Form 10-K
or any amendment to this Form 10-K. Yes [X] No [ ]
As of March 5, 1999, the aggregate value of the 8,669,455 shares of Common
Stock of the Registrant issued and outstanding on such date, excluding 888,341
shares held by all affiliates of the Registrant, was approximately $202,795,284.
This figure is based on the closing sales price of $26.0625 per share of the
Registrant's Common Stock on March 5, 1999. For purposes of this calculation,
the shares held by directors and executive officers of the registrant have been
excluded because such persons may be deemed to be affiliates. This reference to
affiliate status is not necessarily a conclusive determination for other
purposes.
Number of shares of Common Stock outstanding as of March 5, 1999 - 8,669,455
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents incorporated by reference and
the Part of the Form 10-K into which the document is incorporated:
(1) Portions of the Registrant's Annual Report to Shareholders for
the year ended December 31, 1998 are incorporated by reference into Part II,
Items 5 - 8 of this Form 10-K.
(2) Portions of the definitive Proxy Statement for the Registrant's
Annual Meeting of Shareholders to be held on April 26, 1999 are incorporated by
reference into Part III, Items 10 - 13 of this Form 10-K.
Page 1 of 38: Exhibit Index appears on sequentially numbered page 30
<PAGE>
TABLE OF CONTENTS
FORM 10-K ANNUAL REPORT
FOR THE YEAR ENDED
DECEMBER 31, 1998
BSB BANCORP, INC.
Page
----
PART I
Item 1. Business 3
Item 2. Properties 22
Item 3. Legal Proceedings 23
Item 4. Submission of Matters to a Vote of
Security Holders 23
PART II
Item 5. Market for the Registrants Common Equity and
Related Stockholder Matters 23
Item 6. Selected Financial Data 23
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 23
Item 7A. Quantitative and Qualitative
Disclosures About Market Risk 23
Item 8. Financial Statements and Supplementary Data 23
Item 9. Changes In and Disagreements with Accountants
on Accounting and Financial Disclosure 23
PART III
Item 10. Directors and Executive Officers of the Registrant 23
Item 11. Executive Compensation 23
Item 12. Security Ownership of Certain Beneficial
Owners and Management 23
Item 13. Certain Relationships and Related Transactions 23
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 24-27
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
BSB Bancorp, Inc.
BSB Bancorp, Inc. (the "Company") is the Delaware-chartered bank holding
company for BSB Bank & Trust Company ("BSB Bank & Trust" or the "Bank"). Until
1995, the Bank was known as Binghamton Savings Bank. The Bank's new name
reflects the change in charter from that of a savings bank to a commercial bank
and trust company. The Company owns 100% of the issued and outstanding common
stock, $1.00 par value, of the Bank, which is the primary asset of the Company.
The business of the Company is the business of the Bank. The Company's and the
Bank's principal executive offices are located at 58-68 Exchange Street,
Binghamton, New York 13901, telephone (607) 779-2492.
The Company, as a bank holding company, and the Bank, are subject to
regulation, examination, and supervision by the Board of Governors of the
Federal Reserve System (the "Federal Reserve Board"), the Federal Deposit
Insurance Corporation ("FDIC") and the New York State Banking Department
("Banking Department"). Unless the context otherwise requires, all references to
the Company herein are intended to include the activities of the Bank.
BSB Bank & Trust Company
The Bank is headquartered in Binghamton, New York and conducts business in
Broome, Tioga, Chenango, Onondaga, and Chemung Counties, and adjacent areas of
New York State. BSB Bank & Trust serves its customers from thirteen full-service
banking offices, and twenty-one off-premise automatic teller machines
(MachineTeller(R)). The Bank also serves its customers at twelve proprietary
banking service locations (StoreTeller(R)) situated in a large area supermarket
chain.
The primary market area of the Bank is Broome, Tioga, Chenango, Onondaga, and
Chemung Counties with a combined population of 880,433 according to the 1990
United States Census. The Bank is the leader in total deposits in Broome County.
Over the past decade, BSB Bank & Trust has changed from a traditional thrift
institution to a diversified financial service organization providing a broad
range of deposit and loan products to area businesses and consumers. In
particular, the Bank has become a major provider of banking services to the
business community, as well as offering banking services to school districts and
cooperative education centers, cities, towns, villages, and numerous municipal
agencies. It has also expanded all phases of consumer lending, including both
direct and indirect automobile financing, and credit card lending. A full-
service Trust Department was established in 1991.
LENDING ACTIVITIES
Loan Portfolio Composition
BSB Bank & Trust's portfolio of loans totaled $1.4 billion at December 31,
1998, representing 73.3% of the Bank's total assets at that date, compared to
$1.2 billion, and 77.3% of the Bank's total assets at December 31, 1997.
Commercial loans continued to comprise a significant portion of the loan
portfolio, increasing to $772.8 million, or 56.7% of all loans at December 31,
1998. These loans, being generally tied to the Company's Prime Rate, tend to
increase the interest rate sensitivity of the loan portfolio. The consumer loan
share of the portfolio increased from 24.8% of all loans at December 31, 1997 to
26.4%, or $359.2 million at December 31, 1998. The Company's continued efforts
to increase this portfolio via expanded indirect financing through local and
surrounding area automobile dealers has produced significant results.
Originations of all consumer loans were $216.9 million for 1998, compared to
$205.6 million for 1997. Results from this focus on originating consumer loans
has increased the balance of the indirect new and used auto loan portfolios to
$205.6 million at December 31, 1998 from $161.6 million at December 31, 1997,
and direct consumer loans from $46.9 million at December 31, 1997 to $55.3
million at December 31, 1998. The balance of mobile home loans increased to
$54.9 million at December 31, 1998 from $45.5 million at December 31, 1997.
3
<PAGE>
The Company's policy of selling or securitizing fixed-rate residential
mortgages to improve the liquidity of the portfolio, reduce interest rate risk,
and to build servicing portfolio income resulted in sales and securitizations of
$79.5 million in 1997. In 1998, $166.4 million of fixed-rate residential
mortgages were sold or securitized to aid in managing liquidity and collateral
needs. The Company had originations of fixed-rate residential mortgages of
$176.4 million for 1998 compared to $94.1 million in 1997. Management remains
committed to originating adjustable-rate residential loans and holding these
loans, either in whole loan or securitized form, due to their attractive yield
and responsiveness to rate changes over time.
The following table sets forth the composition of the Bank's loan portfolio by
loan type as of the dates indicated.
<TABLE>
<CAPTION>
December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
Amount Percent Amount Percent Amount Percent Amount Percent Amount
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 772,793 56.70% $ 654,243 54.26% $ 536,779 53.22% $455,444 49.13% $386,875
- ------------------------------------------------------------------------------------------------------------------------------------
Consumer:
Student 1,483 0.11 3,012 0.25 1,569 0.16 8,940 0.96 12,404
Personal direct 55,301 4.06 46,883 3.89 35,552 3.53 28,867 3.10 28,282
Personal
indirect-used
auto 153,893 11.29 112,103 9.30 67,336 6.68 50,487 5.45 43,606
Personal
indirect-new
auto 51,746 3.80 49,475 4.10 44,843 4.45 48,556 5.24 53,594
Personal
indirect-mobile
homes 54,867 4.02 45,506 3.77 27,728 2.75 23,002 2.48 22,572
Personal
indirect-others 3,355 0.25 3,807 0.32 4,374 0.43 4,610 0.50 3,361
Savings account 153 0.01 229 0.02 340 0.03 423 0.05 632
Overdraft
checking 667 0.05 816 0.07 940 0.09 836 0.09 614
Business line of
credit 956 0.07 1,025 0.09
Home equity 24,523 1.80 24,991 2.07 24,278 2.41 25,133 2.71 26,233
Debit card 1,814 0.13 1,277 0.11 628 0.06
Credit card 10,433 0.77 10,183 0.84 9,480 0.94 9,692 1.05 9,565
- ------------------------------------------------------------------------------------------------------------------------------------
Total consumer loans 359,191 26.36 299,307 24.83 217,068 21.53 200,546 21.63 200,863
- ------------------------------------------------------------------------------------------------------------------------------------
Real estate
Fixed-rate:
Residential 40,201 2.95 37,213 3.09 24,598 2.44 37,071 4.00 38,340
FHA & VA 7,910 0.58 10,390 0.86 13,390 1.33 16,810 1.81 20,309
Commercial 4,237 0.31 4,426 0.37 4,912 0.49 3,011 0.32 3,218
Commercial FHA 194 0.01 202 0.02 208 0.02 214 0.02 219
- ------------------------------------------------------------------------------------------------------------------------------------
Total fixed-rate 52,542 3.85 52,231 4.33 43,108 4.27 57,106 6.16 62,086
- ------------------------------------------------------------------------------------------------------------------------------------
Adjustable-rate:
Residential 47,438 3.48 64,208 5.32 73,648 7.30 82,470 8.90 81,200
Commercial 130,921 9.61 135,808 11.26 137,937 13.68 131,450 14.18 134,058
- ------------------------------------------------------------------------------------------------------------------------------------
Total adjustable-rate 178,359 13.09 200,016 16.58 211,585 20.98 213,920 23.08 215,258
- ------------------------------------------------------------------------------------------------------------------------------------
Total real estate 230,901 16.94 252,247 20.91 254,693 25.25 271,026 29.24 277,344
- ------------------------------------------------------------------------------------------------------------------------------------
$1,362,885 100.00% $1,205,797 100.00% $1,008,540 100.00% $927,016 100.00% $865,082
====================================================================================================================================
</TABLE>
4
<PAGE>
The following table sets forth scheduled contractual amortization of loans in
the Bank's portfolio at December 31, 1998. Demand loans, loans having no stated
schedule of repayments and no stated maturity, and overdraft loans are reported
as due in one year or less. The following table also sets forth the dollar
amount of loans which are scheduled to mature after one year which have fixed
and adjustable interest rates.
<TABLE>
<CAPTION>
Residential Commercial Commercial
Real Estate Real Estate Business Consumer
Loans Loans Loans Loans Total
- ---------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Amounts due:
Within one year $ 52 $ 11,772 $315,582 $ 45,359 $ 372,765
After one year through five years 2,488 45,190 332,699 232,086 612,463
Beyond five years 93,009 78,390 124,512 81,746 377,657
- ---------------------------------------------------------------------------------------------------------
Total $95,549 $135,352 $772,793 $359,191 $1,362,885
=========================================================================================================
Amounts due after one year:
Fixed $48,697 $ 3,553 $258,625 $313,832 $ 624,707
=========================================================================================================
Adjustable $46,800 $120,027 $198,586 $ 365,413
=========================================================================================================
</TABLE>
Contractual maturities of loans do not necessarily reflect the actual term of
loans in the Bank's portfolio. The average life of mortgage loans is
substantially less than their contractual terms because of loan prepayments and
enforcement of due-on-sale clauses, which give the Bank the right to declare a
loan immediately due and payable in the event, among other things, that the
borrower sells the real property subject to the mortgage and the loan is not
repaid. The average life of mortgage loans tends to increase, however, when
current mortgage rates substantially exceed rates on existing mortgages.
Interest rates charged by the Bank on loans are affected principally by the
demand for such loans and the supply of funds available for lending purposes.
These factors are in turn affected by general economic conditions, monetary
policies of the federal government, including the Federal Reserve Board,
legislative tax policies, and governmental budgetary matters.
5
<PAGE>
Origination, Securitization, and Sale of Loans
The following table shows the loans originated, securitized, sold, and repaid
during the periods indicated.
<TABLE>
<CAPTION>
Years Ended December 31,
- ----------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Gross loans receivable at beginning of period $1,213,256 $1,010,107 $ 928,296
Mortgage loan originations:
Conventional
One- to four-family dwellings
Fixed-rate 173,596 89,916 52,445
Adjustable-rate 2,773 6,771 17,165
Commercial real estate 21,679 25,547 23,745
FHA/VA 2,795 4,188 1,385
- ----------------------------------------------------------------------------------------------------------------------
Total mortgage loans originated 200,843 126,422 94,740
- ----------------------------------------------------------------------------------------------------------------------
Commercial loan originations 328,077 244,165 159,834
Consumer loan originations:
Student loans 3,033 3,151 3,535
Personal direct loans 31,607 30,234 20,529
Personal indirect used auto loans 96,066 85,406 47,078
Personal indirect new auto loans 26,737 29,655 22,592
Personal indirect mobile home loans 18,634 22,867 8,862
Personal indirect other loans 2,244 1,181 1,913
Home improvement loans 82 19 1,610
Savings account loans 39 231 168
Business line of credit loans 2,998 1,149
Overdraft checking 2,137 2,552 3,199
Debit card 4,094 2,822 1,086
Equity lines of credit 11,730 10,602 8,503
Credit card 17,525 15,721 13,169
- ----------------------------------------------------------------------------------------------------------------------
Total consumer loans originated 216,926 205,590 132,244
- ----------------------------------------------------------------------------------------------------------------------
Total loans originated 745,846 576,177 386,818
- ----------------------------------------------------------------------------------------------------------------------
Commercial loan-credit advances 919,438 984,800 1,116,506
Principal repayments 1,327,839 1,276,644 1,335,588
Loans securitized:
FNMA-fixed 43,761 1,620 11,099
FNMA-adjustable 15,724
- ----------------------------------------------------------------------------------------------------------------------
Total loans securitized 43,761 1,620 26,823
- ----------------------------------------------------------------------------------------------------------------------
Loan sales:
Student loans 4,562 1,708 10,491
Residential mortgages 122,687 77,856 48,611
- ----------------------------------------------------------------------------------------------------------------------
Total loan sales 127,249 79,564 59,102
- ----------------------------------------------------------------------------------------------------------------------
Net loan activity 166,435 203,149 81,811
- ----------------------------------------------------------------------------------------------------------------------
Gross loans receivable and loans held for sale at end of period 1,379,691 1,213,256 1,010,107
Loans held for sale (16,806) (7,459) (1,567)
- ----------------------------------------------------------------------------------------------------------------------
Gross loans receivable at the end of the period 1,362,885 1,205,797 1,008,540
Allowance for possible credit losses (22,168) (19,207) (17,054)
Net deferred (fees) costs 186 (595) (594)
- ----------------------------------------------------------------------------------------------------------------------
Net loans receivable at the end of period $1,340,903 $1,185,995 $ 990,892
======================================================================================================================
</TABLE>
6
<PAGE>
Commercial Lending
The commercial loan portfolio has become a significant part of the Bank's
asset base. As of December 31, 1998, commercial loans amounted to $772.8
million, or 56.7% of the Bank's total loans as compared with $654.2 million, or
54.3% as of December 31, 1997. Under New York law, the Bank generally may not
lend to any one entity more than 15% of the Bank's capital stock, surplus, and
undivided profits. However, the Bank is permitted to extend a loan up to 25% of
the Bank's capital stock, surplus, and undivided profits, provided that at least
the amount of such loan between 15% and 25% of the Bank's capital stock,
surplus, and undivided profits is collateralized. The Bank's policy, however,
restricts loans to any borrower and related entities to 15% of shareholders'
equity. Loan relationships approaching 15% of the Bank's shareholders' equity
generally require diversification in both repayment source and collateral. At
December 31, 1998, 15 loan relationships had outstanding loans and commitments
exceeding 10% of shareholders' equity. Also at December 31, 1998, there were 2
loan relationships with outstanding loans and commitments exceeding 15% of
shareholders' equity. Each of these relationships have a well diversified source
of repayment with adequate collateral, and each of the loans were approved by
the Board Loan Committee as an exception to policy. The Bank offers a variety of
commercial loan services, including term loans and revolving lines of credit, as
well as letters of credit. Commercial lending involves somewhat greater credit
risks to the Bank than most other types of lending. See "Loan Underwriting
Policies".
At December 31, 1998, there were $357.2 million in commitments outstanding and
the portfolio consisted of loans with an average outstanding balance of
$134,000. Management continues to emphasize commercial loan originations, which
amounted to $244.2 million, or 42.4% of total loans originated in 1997 compared
to $328.1 million, or 44.0% of total loans originated in 1998.
The commercial loan portfolio is diversified by industry, type, and size, and
the loans have been made primarily to small- and medium-sized businesses in the
regional market. Approximately 61% of the Bank's commercial loans bear floating
interest rates tied to the Bank's prime rate ("Prime Rate"). The average yield
on the commercial loan portfolio was 9.60% in 1998 and 9.79% in 1997. The Bank's
average Prime Rate was 8.35% in 1998 and 8.44% in 1997. Commercial loans are
made on both a collateralized and uncollateralized basis, and include
collateralized lines of credit. Although most have shorter terms, the maximum
term of a non-real estate collateralized commercial loan is ten years. The
largest single extension of credit at December 31, 1998 was in the amount of
$15.0 million and, as of that date, there was $1.9 million outstanding on that
credit. As of December 31, 1998, the Bank had 19 other relationships with
outstanding loans and relationships exceeding $9.8 million.
In addition to the various types of lending services, the Bank also offers to
commercial customers a range of depository and related services, including
commercial demand deposit accounts, cash management, payroll, and direct deposit
to employees' accounts.
Consumer Lending
The Bank engages in a variety of consumer lending activities. As of December
31, 1998, a total of $359.2 million of consumer loans was outstanding as
compared to $299.3 million and $217.1 million at December 31, 1997 and 1996,
respectively. As seen in the table on page 4, the majority of the consumer loans
are comprised of $319.3 million in personal loans (which includes indirect loans
and savings account loans), $24.5 million in home equity loans, and $12.2
million in credit and debit card loans. Consumer loans generally involve more
risk of collectibility than mortgage loans because of the type and nature of the
collateral, and, in certain cases, the absence of collateral. As a result,
consumer lending collections are dependent on the borrowers' continuing
financial stability, and thus are more likely to be adversely affected by job
loss, divorce, personal bankruptcy, and by adverse economic conditions.
Of the $319.3 million in personal loans outstanding at December 31, 1998,
$55.3 million represented the Bank's portfolio of direct consumer loans
originated by the Bank's lending staff and $263.9 million represented the
indirect consumer loan portfolio originated through relationships with mobile
home service companies, and automobile and other retail dealers. Of the indirect
originations in 1998, $18.6 million or 13.0% financed mobile homes, and $2.2
million or 1.6% financed recreational vehicles. Mobile home loans are
originated through service companies and are supported by recourse agreements
against significant reserve account balances. All personal loans originated for
the Bank are advanced at fixed interest rates, with a high percentage of the
loans offering repayment terms up to 60 months.
7
<PAGE>
The Bank began offering indirect financing through local auto dealerships in
early 1986. The lending and support staff and data processing system have since
been enhanced as the portfolio has grown. Given the past performance of the
indirect loan portfolio and the opportunities for geographic and product
diversification provided by growth in the indirect portfolio, the Bank began
during 1992 and 1993, to place greater emphasis on the origination of indirect
consumer loans. In 1998, the Bank originated $143.7 million of indirect consumer
loan contracts compared with $139.1 million of such consumer loans in 1997.
The remainder of the indirect consumer originations experienced during 1997
were the direct result of the Bank's earlier efforts to expand the geographic
markets served by its auto dealership base. In particular, during 1992, the Bank
expanded its market for indirect consumer lending into the Central New York
Region, including the Syracuse metropolitan area.
Home equity lines of credit are primarily an adjustable-rate consumer loan
product with a term of 20 or 30 years, and are generally collateralized by the
borrower's primary residence, when the loan to value ratio, taking into account
the first mortgage loan, does not exceed 75%. During the fourth quarter of 1994,
the Bank began offering home equity lines of credit with a term of 30 years. As
of December 31, 1998, there were total home equity lines of credit available of
$44.7 million with an outstanding balance of $24.5 million. Interest rates on
home equity lines of credit are adjusted monthly to reflect changes in the Prime
Rate.
In 1993, the Bank introduced an adjustable-rate MasterCard program to
complement its fixed-rate Visa credit card program. As of December 31, 1998,
there were total credit card lines available of $36.4 million with an
outstanding balance of $10.4 million as compared to $33.8 million and $10.2
million, respectively, at December 31, 1997.
The significant growth in consumer lending, with its short-term
characteristics, contributed to the improvement of the Bank's overall interest
rate sensitivity because of its more rapid amortization compared to residential
and commercial real estate loans.
Residential Real Estate Lending
The Bank historically has been, and continues to be, a leading originator of
residential real estate loans in its market area. At December 31, 1998, $95.5
million, or 7.0% of the Bank's total loan portfolio consisted of residential
mortgage loans. In 1998 and 1997, residential mortgage loan originations
amounted to $179.2 million and $100.9 million, respectively, which represented
approximately 24.0% and 17.5%, respectively, of the Bank's total loan
originations.
Mortgage activity in recent years has resulted in a substantial increase in
the Bank's serviced mortgage loan portfolio. The serviced mortgage loan
portfolio, a source of non-interest income, increased from $392.0 million at
December 31, 1997 to $481.4 million at December 31, 1998. This increase in
serviced loans from December 31, 1997 to December 31, 1998 was facilitated by an
increase in the sales of residential mortgages from $77.9 million in 1997 to
$122.7 million in 1998.
Commercial Real Estate Lending
In 1996, the Bank continued to originate loans collateralized by income-
producing commercial real estate, including multi-family (over four units) and
commercial properties, such as apartment complexes, retail buildings, office
buildings, and shopping centers. The Bank originated $21.7 million in commercial
real estate loans in 1998 compared to $25.5 million in 1997 and $23.7 million in
1996. At December 31, 1998, the Bank had $135.4 million of commercial real
estate loans outstanding, representing approximately 9.9% of the Bank's total
loan portfolio. Adjustable-rate commercial real estate loans, with rates
adjusting every one, three, or five years, represent 96.7% of the total
commercial real estate loan portfolio at December 31, 1998.
The commercial real estate loans offered by the Bank are being underwritten
with terms of up to 25 years. In setting interest rates and origination fees on
new loans and extensions, management considers both current market conditions
and its analysis of the risk associated with the particular project. The
weighted average yield on commercial
8
<PAGE>
real estate adjustable-rate loans for 1998 was 9.19% and 9.13% in 1997. The
largest single commercial real estate loan advanced during 1998 was $6.0
million.
Non-performing Loans and Other Real Estate Owned ("ORE")
The following table sets forth information regarding non-accrual (non-
performing) loans, accruing loans which are 90 days or more overdue, and other
real estate owned held by the Bank at the dates indicated:
<TABLE>
<CAPTION>
December 31,
1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Commercial loans:
Non-accrual loans $11,423 $10,542 $ 6,130 $ 8,032 $4,449
Consumer loans:
Accruing loans 90 days overdue 513 304 236 96 109
Residential real estate loans:
Non-accrual loans 1,701 1,309 1,556 1,920 1,037
Commercial real estate loans:
Non-accrual loans 276 821 4,295 2,764 2,286
- -------------------------------------------------------------------------------------------------------
Total non-performing loans and
accruing loans 90 days overdue $13,913 $12,976 $12,217 $12,812 $7,881
=======================================================================================================
Total non-performing loans to total loans 1.02% 1.08% 1.21% 1.38% 0.91%
=======================================================================================================
Total real estate acquired in settlement of loans
at lower of cost or fair value $ 2,122 $ 2,784 $ 1,393 $ 2,468 $3,234
=======================================================================================================
Total non-performing loans and real estate acquired
in settlement of loans at net
realizable value to total assets 0.86% 1.01% 1.00% 1.23% 0.96%
=======================================================================================================
</TABLE>
During 1998, 1997, 1996, 1995, and 1994, approximately $697,000, $728,000,
$808,000, $986,000 and $405,000 of additional interest income would have been
recorded on loans accounted for on a non-accrual basis as of the end of each
period if such loans had been current. These amounts were not included in the
Bank's interest and dividend income for the respective periods.
During 1998, 1997, 1996, 1995, and 1994, $466,000, $598,000, $276,000,
$241,000 and $365,000 respectively, of interest income on non-accrual loans was
recognized during the periods as loans were paid to a current status or paid in
full.
The Company has no troubled debt restructuring except as included in non-
accruing commercial loans. Total non-performing loans and other real estate
owned increased to $16.0 million, or 0.86% of total assets at December 31, 1998,
compared to $15.8 million, or 1.01% of total assets at December 31, 1997.
At December 31, 1997, 28 non-performing residential real estate loans totaled
$1.3 million. At December 31, 1998, non-performing residential real estate loans
totaled $1.7 million and included 36 loans. Loan loss reserves have been
established that are deemed adequate by management.
At December 31, 1997, non-performing commercial real estate loans decreased to
$0.8 million and consisted of 3 loans ranging in size from $78,000 to $594,000.
At December 31, 1998, non-performing commercial real estate loans totaled
$276,000, and included 2 loans ranging in size from $84,000 to $192,000.
At December 31, 1997, non-performing commercial loans increased to $10.5
million and consisted of 35 individual loans ranging in size from $5,000 to $1.3
million. Non-performing commercial loans at December 31, 1998 totaled $11.4
million and included 62 individual loans ranging in size from $2,000 to $1.2
million. These loans and all other non-performing loans have been internally
risk-rated.
The Bank's non-accrual loans increased from $13.0 million at December 31, 1997
to $13.9 million at December 31, 1998. At December 31, 1997, the recorded
investment in loans for which impairment has been
9
<PAGE>
recognized in accordance with Statement of Financial Accounting Standards
("SFAS") No. 114 totaled $12.0 million with a valuation allowance aggregating
$4.3 million. For the twelve months ended December 31, 1997, the average
recorded investment in impaired loans was approximately $8.9 million. The
Company recognized, on a cash basis, $272,000 of interest on impaired loans
during the portion of the year they were impaired. At December 31, 1998, the
recorded investment in loans for which impairment has been recognized in
accordance with SFAS No. 114 totaled $10.6 million with a valuation allowance
aggregating $4.1 million. For the twelve months ended December 31, 1998, the
average recorded investment in impaired loans was approximately $9.0 million.
The Company recognized, on a cash basis, $256,000 of interest on impaired loans
during the portion of the year they were impaired.
At December 31, 1997, ORE, which is defined to include property acquired by
foreclosure or by deed in lieu of foreclosure, totaled $2.8 million, which
consisted of 10 single-family residential properties with a book value totaling
$474,000 and 9 commercial real estate properties with a book value totaling $2.3
million. At December 31, 1998, ORE totaled $2.1 million and consisted of 3
single-family residential properties with a book value totaling $77,000 and 8
local commercial real estate properties with a book value totaling $2.0 million.
During 1998, 17 single-family residential properties with a book value
totaling $0.6 million were sold. During 1998, 3 single-family residential
properties with a book value of $77,000 were added to the ORE portfolio.
During 1998, 5 commercial real estate properties with a book value of $1.2
million were sold, and 9 local commercial real estate properties with a book
value totaling $1.3 million were charged off, and 6 commercial real estate
properties valued at $0.8 million were partially charged off. During 1998, 5
commercial real estate properties with a book value totaling $1.1 million were
added to the portfolio. Due to declining commercial real estate values, 6
commercial real estate ORE properties were reduced by $0.6 million and charged
to other real estate expenses. All real estate carried in the Company's ORE
portfolio are supported by recent independent appraisals.
Allowance for Possible Credit Losses. Management reviews the adequacy of the
allowance at least quarterly. Prior to 1995, the allowance was assessed by
applying projected loss ratios to the risk-ratings (i.e. "classification") of
loans both individually and by category. The projected loss ratios incorporate
such factors as recent loss experience, current economic conditions and trends,
trends in past due and non-accrual amounts, the risk characteristics of various
"classifications" and concentrations of loans, transfer risks, and other
pertinent factors.
During 1995, the Company adopted SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan". Under this standard, a loan is considered impaired, based
on current information and events, if it is probable that the Bank will be
unable to collect the scheduled payments of principal or interest when due
according to the contractual terms of the loan agreement. The measurement of
impaired loans is generally based upon the present value of expected future cash
flows discounted at the historical effective interest rate, except that all
collateral-dependent loans are measured for impairment based on the fair value
of the collateral. Loans not deemed impaired continue to be classified to their
risk-rating and general reserves are maintained accordingly. The following table
summarizes activity in the Bank's allowance for possible credit losses during
the periods indicated. Management considers the allowance for possible credit
losses (reserves) of $22.2 million at December 31, 1998 adequate to cover
potential credit losses.
10
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
- ------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Average total loans outstanding $1,296,482 $1,103,563 $970,060 $914,988 $828,739
======================================================================================================
Allowance at beginning of period $ 19,207 $ 17,054 $ 14,065 $ 13,354 $ 12,756
Charge-offs:
Commercial loans 6,262 5,178 5,800 3,944 3,104
Consumer loans 3,126 2,137 1,714 1,123 850
Residential real estate loans 147 83 116 81 54
Commercial real estate loans 988 2,480 1,184 2,185 306
- ------------------------------------------------------------------------------------------------------
Total loans charged-off 10,523 9,878 8,814 7,333 4,314
- ------------------------------------------------------------------------------------------------------
Recoveries:
Commercial loans 418 852 1,114 311 830
Consumer loans 764 572 550 358 344
Residential real estate loans 9 12 18
Commercial real estate loans 36 293 156 24 21
- ------------------------------------------------------------------------------------------------------
Total recoveries 1,227 1,717 1,832 711 1,195
- ------------------------------------------------------------------------------------------------------
Net charge-offs 9,296 8,161 6,982 6,622 3,119
- ------------------------------------------------------------------------------------------------------
Provision for credit losses charged to
operating expenses 12,257 10,314 9,971 7,333 3,717
- ------------------------------------------------------------------------------------------------------
Allowance at end of period $ 22,168 $ 19,207 $ 17,054 $ 14,065 $ 13,354
======================================================================================================
Ratio of net charge-offs to:
Average total loans outstanding 0.72% 0.74% 0.72% 0.72% 0.38%
Ratio of allowance to:
Non-performing loans 159.33% 148.02% 139.59% 109.78% 169.45%
Year-end total loans outstanding 1.63% 1.59% 1.69% 1.52% 1.54%
</TABLE>
The provision for credit losses was $12.3 million in 1998 and $10.3 million in
1997. The allowance for possible credit losses increased to $22.2 million, or
1.63% of total loans at December 31, 1998, from $19.2 million, or 1.59% at year-
end 1997 to reflect the continued growth in the commercial and consumer loan
portfolios relative to other loan assets. Net charge-offs in 1998 amounted to
$9.3 million, or 0.72% of average total loans outstanding, compared with $8.2
million, or 0.74% in 1997. Non-performing loans at December 31, 1998 were $13.9
million, or 1.02% of total loans outstanding, up from $13.0 million, or 1.08% at
December 31, 1997.
The following table indicates the allowance for possible credit losses by the
following categories of loans for the following periods:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996 1995 1994
Amount %(1) Amount %(1) Amount %(1) Amount %(1) Amount %(1)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Real Estate:
Commercial $ 2,100 9.93% $ 3,130 11.65% $ 2,915 14.18% $ 1,700 14.53% $ 1,460 15.89%
Residential 175 7.01 175 9.27 175 11.07 175 14.71 175 16.17
Commercial 16,111 56.70 13,662 54.26 12,584 53.23 10,890 49.13 10,419 44.72
Consumer 3,782 26.36 2,240 24.82 1,380 21.52 1,300 21.63 1,300 23.22
- --------------------------------------------------------------------------------------------------------------------------
$22,168 100.00% $19,207 100.00% $17,054 100.00% $14,065 100.00% $13,354 100.00%
==========================================================================================================================
</TABLE>
(1) Percent of loans in each category to total loans at the dates indicated.
11
<PAGE>
INVESTMENT ACTIVITIES
As of December 31, 1998, the Bank's investment securities portfolio of $407.2
million constituted 21.9% of its total assets. Such securities consist of
United States Government agency securities, mortgage-backed securities,
collateralized mortgage obligations ("CMO"), obligations of state and local
governments, and corporate debt and equity securities.
Collateralized mortgage obligations consist of pools of mortgages divided into
classes (or "tranches"). Principal amortization and prepayments directed in a
predetermined order, as received, into each class until it is paid off. The vast
majority of CMOs purchased by the Bank are issued by the Federal Home Loan
Mortgage Corporation ("FHLMC") and the Federal National Mortgage Association
("FNMA"). The Bank owns and occasionally buys private issuer CMOs. The Bank
purchases mostly senior tranches that have been rated in the top two categories
by major rating services such as Moody's and Standard and Poor's. The bank
performs tests on CMOs, at the time of purchase, to determine that the issues
being considered for purchase fall within the risk parameters established by the
Bank's investment policy.
The Bank also purchases and sells mortgage participation certificates that
consist primarily of certificates issued by FNMA and the FHLMC. The Bank's
portfolio of mortgage-backed securities also includes securities guaranteed by
the Government National Mortgage Association ("GNMA"). At December 31, 1998, the
Bank's gross mortgage-backed securities portfolio of $168.5 million included
$110.3 million of CMOs, $10.2 million in GNMA securities, and $47.2 million in
participation certificates.
There also is significant uncertainty as to the timing of repayments from
mortgage-backed securities because borrowers whose mortgages are pooled into
mortgage-backed securities have the option to prepay their loans at any time.
This option can affect the returns the Bank hopes to earn by investing in these
securities. When interest rates fall as they did during 1997 and 1998, borrowers
tend to refinance their mortgages resulting in accelerated prepayments of the
mortgages underlying mortgage-backed securities and thereby adversely limiting
the return the Bank can earn.
Market values are also affected by the borrowers option to prepay. In falling
rate environments, the increased possibility of prepayments limits the degree to
which mortgage-backed securities can appreciate. Conversely, rising rates reduce
the probability of prepayment. This increases the average time in which
principal is repaid and can increase the impact that rising rates have on the
market value.
The following table sets forth the carrying value of the Bank's gross
mortgage-backed securities portfolio as of the dates indicated. (Also, see Note
2 of the Consolidated Financial Statements included in the 1998 Annual Report to
Shareholders):
<TABLE>
<CAPTION>
December 31,
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Collateralized mortgage obligations $110,301 $ 57,988 $108,780 $ 85,344 $ 84,351
GNMA securities 10,228 1,204 1,495 1,886 2,512
Participation certificates 47,179 21,962 48,989 56,469 63,049
- ------------------------------------------------------------------------------------------------
167,708 81,154 159,264 143,699 149,912
- ------------------------------------------------------------------------------------------------
Net (discounts) and premiums 486 (253) 47 (383) (159)
Unrealized appreciation (depreciation) 340 (1,292) (523) 662 (6,576)
- ------------------------------------------------------------------------------------------------
$168,534(1) $ 79,609 $158,788 $143,978 $143,177
================================================================================================
</TABLE>
(1) The book value of mortgage-backed securities at December 31, 1998
include approximately $143.7 million pledged under various agreements,
principally lines of credit and Municipal Option Put Securities.
12
<PAGE>
The U.S. Government Obligations in the Bank's investment portfolio consist
primarily of securities callable by the issuing agencies. The calls range from
immediately callable out to four years. The call features limit the
appreciation potential of the securities as the possibility of them being called
on the call date rises as interest rates decline.
The following table shows the Bank's activity in mortgage-backed securities
during the years indicated:
<TABLE>
<CAPTION>
December 31,
1998 1997 1996
- -----------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Mortgage-backed securities at beginning of year (gross) $ 81,154 $159,264 $143,699
Purchases:
GNMA securities 9,989
Collateralized mortgage obligations 119,220 29,184 78,900
Participation certificates 1,621 1,100
- -----------------------------------------------------------------------------------------
Total purchases 130,830 29,184 80,000
- -----------------------------------------------------------------------------------------
Securitizations:
Participation certificates 43,761 1,620 26,823
Sales:
GNMA securities 697
Collateralized mortgage obligations 46,831 66,338 39,974
Participation certificates 15,388 19,867 26,837
- -----------------------------------------------------------------------------------------
Total sales 62,916 86,205 66,811
- -----------------------------------------------------------------------------------------
Principal repayments:
GNMA securities 268 291 391
Collateralized mortgage obligations 20,076 13,638 15,490
Participation certificates 4,777 8,780 8,566
- -----------------------------------------------------------------------------------------
Total principal repayments 25,121 22,709 24,447
- -----------------------------------------------------------------------------------------
Net change in principal 86,554 (78,110) 15,565
- -----------------------------------------------------------------------------------------
Mortgage-backed securities at end of year (gross) 167,708 81,154 159,264
- -----------------------------------------------------------------------------------------
Net (discounts) and premiums 486 (253) 47
Unrealized appreciation (depreciation) 340 (1,292) (523)
- -----------------------------------------------------------------------------------------
Net mortgage-backed securities at end of year $168,534 $ 79,609 $158,788
=========================================================================================
</TABLE>
The primary reason for the increase in the outstanding balances of
collateralized mortgage obligations and participation certificates is
restructuring of the investment portfolio. The tranches that have been purchased
are intended to provide greater prepayment protection and yield.
13
<PAGE>
The following table sets forth the Bank's investment portfolio at carrying
value at the dates indicated:
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Bond investments:
U.S. Government obligations $203,526 $174,593 $ 91,014
Municipal obligations 16,707 9,680 18,959
Corporate obligations 5,025 1,997
Other 1,020 727 597
- --------------------------------------------------------------------------
Total bond investments 221,253 190,025 112,567
- --------------------------------------------------------------------------
Stock investments:
Marketable equity securities 22 22 3
Preferred sinking fund stocks 591 591 2,591
Other securities 16,326 14,708 14,698
- --------------------------------------------------------------------------
Total stock investments 16,939 15,321 17,292
- --------------------------------------------------------------------------
Total investment securities at book value 238,192 205,346 129,859
- --------------------------------------------------------------------------
Unrealized appreciation (depreciation) 439 34 (981)
- --------------------------------------------------------------------------
Total investment securities $238,631 $205,380 $128,878
==========================================================================
</TABLE>
14
<PAGE>
The following table presents the maturities of and the weighted average yield
on the Bank's investment portfolio at December 31, 1998. At this date, the Bank
had no securities which exceeded 10% of stockholders' equity. No tax equivalent
adjustments have been made.
<TABLE>
<CAPTION>
Maturing After Five Years
After One Year Through Five Years Through Ten Years
- --------------------------------------------------------------------------------------------------------------------------
In one Fixed Variable Fixed Variable
Year Interest
or less
- --------------------------------------------------------------------------------------------------------------------------
Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment securities
U.S. Treasury and U.S.
government agencies
and corporations $1,096 4.91% $36,357 6.21% $ - ---% $147,367 6.79% $ - ---%
Obligations of states and
political subdivisions 3,954 3.94 1,857 4.77 8,583 4.95
Corporate bonds:
Domestic 271 3.90 17 8.00
Corporate stocks
Other securities
- --------------------------------------------------------------------------------------------------------------------------
Total net investments
and other securities $5,321 4.14% $38,231 6.14% $ - ---% $155,950 6.69% $ - ---%
==========================================================================================================================
After Ten Years Total
- -------------------------------------------------------------------------------------------------
Fixed Variable
- -------------------------------------------------------------------------------------------------
Amount Rate Amount Rate Amount Rate
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment securities
U.S. Treasury and U.S.
government agencies
and corporations $18,706 4.56% $ --- ---% $203,526 6.47%
Obligations of states and
political subdivisions 2,313 6.59 16,707 4.92
Corporate bonds:
Domestic 732 7.43 1,020 6.50
Corporate stocks 613 6.14 613 6.14
Other securities 16,326 6.83 16,326 6.83
- -------------------------------------------------------------------------------------------------
Total net investments
and other securities $38,690 5.72% $ - ---% $238,192 6.39%
=================================================================================================
</TABLE>
15
<PAGE>
DEPOSITS
At December 31, 1998, the Bank had $1,472.7 million in total deposits
(including escrow funds). Deposits are attracted principally from within the
Bank's primary market area through the offering of a broad selection of deposit
instruments, including commercial savings and demand deposits, negotiable order
of withdrawal ("NOW") accounts, money market deposit accounts, passbook and
statement savings accounts, term accounts and pension accounts for both
individuals and small businesses. Of these deposit instruments, $891.2 million,
or 60.52% of all deposits consisted of term accounts, $274.9 million, or 18.7%
consisted of money market deposit accounts, $136.3 million, or 9.25% consisted
of passbook, escrow, and statement savings accounts, $81.9 million, or 5.57%
consisted of NOW accounts and $88.4 million, or 6.00% consisted of commercial
checking accounts.
In the second half of 1997, the Company established a money desk to attract
larger wholesale deposits primarily from institutional investors. This attracted
$199.1 million as of December 31, 1998.
At December 31, 1998, brokered deposits totaled $97.8 million with original
maturities of one to five years. The variety of deposit accounts offered by the
Bank has allowed it to be competitive with other financial institutions;
however, the threat of disintermediation (the flow of funds away from banking
institutions into direct investment vehicles such as government and corporate
securities) still exists.
Since 1979, the Bank has offered electronic delivery systems. Since such date,
the Bank's ATM network (MachineTeller(R)) and point-of-sale network
(StoreTeller(R)) have processed over 19.5 million transactions for the Bank's
depositors.
Deposit accounts in the Bank are insured to the maximum permissible amounts by
the BIF, as administered by the FDIC. Accordingly, the Bank is subject to rules,
regulations and examinations of the FDIC.
The following table shows the distribution of the deposit accounts in the Bank
by type of deposits as of the dates indicated:
<TABLE>
<CAPTION>
December 31,
- ------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
Average Average Average
Interest Interest Interest
Amount % Rate Amount % Rate Amount % Rate
- ------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Passbook and statement $ 133,491 9.06% 2.80% $ 132,007 10.65% 3.00% $ 132,732 11.87% 3.00%
NOW accounts 81,967 5.57 1.43 67,250 5.43 1.53 61,326 5.49 1.53
Money market
deposit accounts 274,861 18.66 4.36 263,345 21.25 4.76 249,322 22.30 4.43
Commercial checking
accounts 88,351 6.00 76,159 6.14 57,007 5.10
One to two year
certificates (1) 214,256 14.55 5.48 193,208 15.59 5.69 161,528 14.45 5.29
Two to three year
certificates (1) 134,939 9.16 5.75 143,680 11.59 5.93 125,342 11.21 6.04
Other certificates (1) 542,040 36.81 5.68 360,819 29.10 5.81 327,873 29.32 5.47
Escrow 2,841 0.19 2.00 3,040 0.25 2.00 2,922 0.26 2.00
- ------------------------------------------------------------------------------------------------------------------------
Total deposits at end
of period $1,472,746 100.00% 4.62% $1,239,508 100.00% 4.68% $1,118,052 100.00% 4.48%
========================================================================================================================
</TABLE>
(1) Minimum balance required to earn interest, depending upon type of
certificate, ranges from $500 to $100,000.
16
<PAGE>
The Bank attempts to manage the flow of deposits by pricing its accounts to
remain generally competitive with other financial institutions in its market
area. The Bank has used its pricing policies to moderate deposit inflow to
control its cost of funds in view, among other considerations, of its capital
adequacy requirements. Management believes that this action does not have an
adverse effect on its ability to acquire deposits.
The following table presents, by various interest rate categories, the amounts
of certificate accounts at December 31, 1997 and December 31, 1998, which mature
during the periods indicated:
<TABLE>
<CAPTION>
Amounts at December 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Maturing Within
December 31, One Two Three
1997 1998 Year Years Years Thereafter
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Certificate accounts:
2% to 3.99% $ 2,599 $ 6,228 $ 6,219 $ 1 $ 8
4% to 5.99% 592,493 811,536 677,948 96,983 $22,818 13,787
6% to 7.99% 100,428 71,825 49,328 17,495 2,277 2,725
8% to 9.99% 1,319 1,247 152 410 158 527
10% to 11.99% 869 399 190 209
- ------------------------------------------------------------------------------------------------------------------------------------
Total certificate accounts $697,708 $891,235 $733,837 $114,889 $25,462 $17,047
====================================================================================================================================
The following table sets forth deposit
activity for the periods indicated:
Years Ended December 31,
- -------------------------------------------------------------------------------------------
1998 1997 1996
- -------------------------------------------------------------------------------------------
(Dollars in Thousands)
Net increase before interest credited $169,250 $ 69,520 $ 64,263
Interest credited 63,988 51,936 47,324
- -------------------------------------------------------------------------------------------
Net deposit increase $233,238 $121,456 $111,587
===========================================================================================
</TABLE>
The following table sets forth the deposits and the changes in dollar amount
of deposits in the various programs offered by the Bank for the periods
indicated. The net increase (decrease) in deposits during the period is
inclusive of the effects of interest credited.
<TABLE>
<CAPTION>
Years Ended December 31,
- ----------------------------------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Deposits at beginning of period $1,239,508 $1,118,052 $1,006,465
Increase (decrease) in:
Passbook accounts 1,484 (725) (6,471)
NOW accounts 14,717 5,924 1,586
Money market deposit accounts 11,516 14,023 25,965
Commercial checking accounts 12,192 19,152 11,511
One to two year certificates 21,048 31,680 (27,339)
Two to three year certificates (8,741) 18,338 22,555
Other certificates 181,221 32,946 84,959
Escrow (199) 118 (1,179)
- ----------------------------------------------------------------------------------------------
Net increase (decrease) in deposits during the period 233,238 121,456 111,587
- ----------------------------------------------------------------------------------------------
Deposits at end of period $1,472,746 $1,239,508 $1,118,052
==============================================================================================
</TABLE>
17
<PAGE>
The following table presents, by various interest rate categories, the amounts
of certificate accounts of $100,000 or more at December 31, 1998, which mature
during the periods indicated:
<TABLE>
<CAPTION>
Amounts at December 31, 1998
Maturing Within
Over Over
Three Six to
December 31, Three to Six Twelve
1998 Months Months Months Thereafter
- ------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
2% to 3.99% $ 3,501 $ 516 $ 2,985
4% to 5.99% 272,738 177,600 42,823 $36,350 $15,965
6% to 7.99% 9,231 872 3,736 2,134 2,489
10% to 11.99% 148 148
- ------------------------------------------------------------------------------
Total $285,618 $178,988 $49,544 $38,484 $18,602
==============================================================================
</TABLE>
BORROWINGS
The Bank has available a number of borrowing sources of funds. The Bank's
principal borrowings are the securities sold under repurchase agreements, and
advances from the Federal Home Loan Bank of New York ("FHLB"). See Note 9 of
Notes to Consolidated Financial Statements included in the 1998 Annual Report to
Shareholders.
The following table sets forth the borrowings of the Bank's as of the dates
indicated:
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Municipal option put securities $ 1,893 $ 1,893 $ 1,999
Federal Home Loan Bank advances 175,000 153,000 113,000
Mandatorily redeemable preferred securities 30,000
Securities sold under repurchase agreements $ 36,866 23,751 5,503
- ------------------------------------------------------------------------------------------------------------------------------------
$243,759 $178,644 $120,502
===================================================================================================================================
</TABLE>
<TABLE>
Borrowings at December 31, 1998 have maturity dates as follows:
Weighted
Average Rate Amount
- ---------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C>
January 4, 1999 4.75% $ 75,000
January 4, 1999 4.50 36,866
January 11, 1999 5.63 30,000
September 11, 1999 7.33 1,893
FHLB obligations due - 2008 4.92 70,000
Mandatorily redeemable preferred securities - 2028 8.13 30,000
- ---------------------------------------------------------------------------------------------------------------------
5.30% $243,759
=====================================================================================================================
</TABLE>
The following table sets forth information related to short-term borrowings of
the Bank as of the dates indicated:
<TABLE>
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding balance at end of year $143,759 $178,644 $120,502
Average interest rate 4.90% 6.13% 6.44%
Maximum outstanding at any month end $176,847 $225,972 $127,656
Average amount outstanding during year (1) $142,485 $177,392 $ 91,605
Average interest rate during year (1) 5.46% 5.68% 5.62%
</TABLE>
(1) Average amounts outstanding and average interest rates are computed using
weighted monthly averages.
18
<PAGE>
TRUST POWERS
The Bank provides full trust services to individuals, corporations, and non-
profit organizations including executor of estates, trustee under wills, living
trust agreements, custodian services, investment management services, and acts
as trustee of qualified retirement plans. At December 31, 1998, the Bank managed
$299.2 million in trust assets.
INVESTMENT IN SUBSIDIARIES
At December 31, 1998, the Bank is the only banking subsidiary of the Company.
BSB Bank & Trust has an investment, at cost, in four wholly-owned subsidiaries
aggregating $298,000 at December 31, 1998. B-Save Corporation was incorporated
in 1982 and performs investment management services for the Bank.
On July 24, 1998, the Company formed a subsidiary business trust, BSB
Capital Trust I, L.L.C. (the "Trust"), for the purpose of issuing preferred
securities which qualify as Tier I capital. Concurrent with its formation, the
Trust issued $30,000,000 at par value of 8.125% preferred securities in an
exempt offering. The preferred securities are non-voting, mandatorily redeemable
in 2028, and guaranteed by the Company. The entire net proceeds to the Trust
from the offering were invested in junior subordinated obligations of the
Company. The costs related to the issuance of these securities are capitalized
and amortized over the life of the period to redemption on a straightline basis.
The net proceeds were used to fund commercial and consumer loan growth.
BSB Credit was incorporated in 1983 to solicit mortgage loan applications for
BSB Bank & Trust. During 1992, the name was changed to BSB Mortgage Corporation.
During 1996, the Bank formed a wholly-owned subsidiary, BSB Financial
Services, Inc. This Company became the focal point for marketing brokerage
services. Plans are currently under way to add new financial services to the
Bank's product mix to better serve the non-traditional banking customer. BSB
NEWPRO was incorporated in 1997 and acquires, holds, maintains, and disposes of
property acquired through foreclosure for the Bank.
PERSONNEL
As of December 31, 1998, the Company, on a consolidated basis, had 340 full-
time and 99 part-time employees. The employees are not represented by any
collective bargaining unit, and BSB Bank & Trust considers its relationship with
its employees to be good.
COMPETITION
BSB Bank & Trust faces significant competition in attracting deposits and
loans. Its most direct competition for deposits has historically come from
commercial banks, thrift institutions, and credit unions located in its market
area. BSB Bank & Trust also faces additional significant competition for
investors' funds from short-term money market mutual funds and issuers of
corporate and government securities. BSB Bank & Trust competes for deposits
principally by offering depositors a wide variety of deposit programs,
convenient branch locations and banking hours, tax-deferred retirement programs,
and other services. BSB Bank & Trust also utilizes newspaper, radio, television,
and other media to advertise its deposit and loan services. BSB Bank & Trust
does not rely upon any individual group or entity for a material portion of its
deposits.
BSB Bank & Trust's competition for loans comes principally from thrift
institutions, credit unions, mortgage banking companies, and commercial banks.
BSB Bank & Trust competes for loan originations primarily through the interest
rates and loan fees it charges, and the efficiency and quality of services it
provides consumers and commercial borrowers, real estate brokers, automobile
dealers, builders, and regional mortgage correspondent originators. The Bank
also relies on the residential mortgage origination efforts of BSB Mortgage
Corporation, a wholly owned subsidiary. Factors which affect competition include
the general availability of lendable funds and credit, general and local
economic conditions, current interest rate levels, and volatility in the lending
markets.
19
<PAGE>
REGULATION
General
The Company, as a bank holding company, is subject to regulation, supervision,
and examination by the Federal Reserve Board. The Bank, as a New York-chartered
bank and trust company, is subject to regulation, supervision, and examination
by the FDIC as its primary federal regulator and by the Superintendent as its
state regulator. The Bank also is subject to regulation, supervision, and
examination as to certain matters by the Federal Reserve Board.
The Bank's deposits are insured to applicable limits by the BIF, as
administered by the FDIC.
As a bank holding company, the Company is required to maintain qualifying
capital, half of which must be leverage or Tier 1 capital, equal to 8% of its
risk-weighted assets and off-balance sheet items. In 1990, the Federal Reserve
Board amended its capital regulation to establish a new minimum leverage ratio
of 3% Tier 1 capital to total average assets for the highest rated bank holding
companies with an additional cushion of approximately 100 to 200 basis points
for all other bank holding companies. At December 31, 1998, the Bank met the
requirements for a "well-capitalized" institution. At December 31, 1998, the
Company's Tier 1 or leverage capital-to-average assets ratio, as defined in the
risk-based capital regulation equaled 7.54% of average assets or $138.8 million,
which exceeds the current minimum requirements for the Company by $83.6 million.
At December 31, 1998, its total capital to risk-weighted assets ratio,
calculated under the Federal Reserve Board risk-based capital requirement, was
10.58%, which exceeded the 8% minimum by $38.4 million. As an FDIC insured
institution, the Bank is required to maintain specified levels of minimum
capital, including: (i) core or Tier 1 capital in an amount not less than 3% of
total assets (plus an additional cushion of at least 100 to 200 basis points for
all but the most highly rated banks) and (ii) "risk-based" Capital (one-half of
which must be core capital) not less than 8% of risk-weighted assets. At
December 31, 1998, the Bank's ratio of total capital to total risk-weighted
assets was approximately 10.58%, which exceeded the 8% minimum by $38.4 million.
TAXATION
Federal Taxation
General. The Company and the Bank file a consolidated tax return. The Company
and the Bank currently report their income and expenses under the accrual basis
of accounting and use a tax year ending December 31 for filing its federal
income tax return. The following discussion of federal taxation is a summary of
certain pertinent federal income tax matters.
Bad Debts. The Bank is currently taxed as a commercial institution. A bank is
treated as a "large" bank if its average total assets exceed $500.0 million. As
a "large" bank, the Bank may only deduct specific wholly or partially worthless
debts pursuant to Section 166 of the Code.
Net Operating Loss Carryovers. A financial institution may carry back net
operating losses ("NOLs") to the preceding three taxable years and forward to
the succeeding 15 taxable years. At December 31, 1997, the Company and the Bank
had no net operating loss carryforward for federal income tax purposes.
Capital Gains and Corporate Dividends-Received Deduction. Corporate net
capital gains are taxed at a maximum tax rate of 35%. The dividends-received
deduction is 70% of the dividends received from less than 20% owned
corporations. However, certain dividend payments between members of an
"affiliated group" of corporations, such as the Company, are eligible for a 100%
deduction.
The Bank's federal income tax returns for its tax years beginning in 1993 are
open under the statute of limitations and are subject to review by the IRS.
20
<PAGE>
New York State Taxation
The Company and the Bank are subject to an annual New York State Franchise tax
equal to the greater of a regular tax (the "State Regular Tax"), an alternative
minimum tax (the "State Alternative Minimum Tax"), a tax based on the combined
taxable assets of the Company and the Bank, or a fixed minimum tax of $250, plus
a tax surcharge.
The State Regular Tax is computed at the rate of 9% on the Company's and the
Bank's entire net income, allocated to New York State, calculated on a
consolidated return basis.
The State Alternative Minimum Tax is computed at the rate of 3% on the
Company's and the Bank's alternative entire net income allocable to New York
State for the taxable year. The Company and the Bank's alternative entire net
income consists of their entire net income, increased by certain deductions,
primarily interest on obligations of New York State or the United State
government, taken in computing entire taxable income that are not allowed in
computing alternative entire taxable income.
The tax based on combined taxable assets consists of the Company's and the
Bank's combined average assets. The tax is computed at the rate of one-tenth of
a million per dollar of taxable assets, but lower rates apply for banks with at
least 33% of their assets in mortgages and that have a "net worth ratio" of less
than 5%.
The New York State Franchise tax paid by the Company is deductible for Federal
income tax purposes.
The Company's and the Bank's New York State income tax returns for the tax
years beginning in 1994 are open and subject to review by New York State.
Delaware State Taxation
The Company is subject to an annual Delaware State Franchise Tax. The
Franchise Tax provides that every corporation incorporated under the laws of the
State of Delaware "shall pay an annual tax . . . by way of license" for its
corporate franchise. See Del. Code. Ann. Tit. 8, (S) 501. Two methods are
provided for calculating the Franchise Tax and the lesser amount calculated
under either method is the tax payable. The first method, which is called the
"authorized shares method," is based on the authorized number of shares of
capital stock and is calculated according to the following formula: where the
authorized capital stock does not exceed 3,000 shares, $30; where the authorized
capital stock exceeds 3,000 shares but is not more than 5,000 shares, $50; where
the authorized capital stock exceeds 5,000 shares but is not more than 10,000
shares, $90; and the further sum of $50 on each 10,000 shares or part thereof.
Under the formula, the Company, with its authorized capital of 30,000,000
shares of common stock, with a one cent par value, and 5,000,000 shares of
preferred stock, with a one cent par value, pays an annual franchise tax of
approximately $150,000. This is a lesser amount than would be due if the
Franchise Tax were calculated under the second method, which is referred to as
the "assumed par value capital method". The second method is calculated by
dividing the corporation's total gross assets by its total number of outstanding
shares and multiplying the quotient by the total number or authorized shares.
The product equals the capitalization for assessment of the franchise tax which
is assessed at a rate of $140 per $1 million of capitalization.
21
<PAGE>
ITEM 2. PROPERTIES
The Company does not own or lease any property, other than that owned or
leased by the Bank and its subsidiary. BSB Bank & Trust conducts its business
from its executive office and thirteen full-service offices located in Broome,
Tioga, Chenango, Onondaga, and Chemung counties in the southern tier of Upstate
New York. The following table sets forth certain information relating to each of
BSB Bank & Trust's offices as of December 31, 1998:
<TABLE>
<CAPTION>
Lease Net Book
Owned Expiration Value at
or Including December 31,
Office Location Leased Options 1998
- ------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
Main Office 56-68 Exchange St., Binghamton Owned N/A $1,118
Annex 58 Exchange St., Binghamton Owned N/A 1,057
99 Hawley St. 99 Hawley St., Binghamton Owned N/A 352
92 Hawley St. 92 Hawley St., Binghamton Owned N/A 779
Endwell Office 540 Hooper Rd., Endwell Owned N/A 320
Vestal Plaza Office Vestal Plaza, Vestal Leased 11/09/11 139
Tioga County Office Fifth Ave., Owego Leased 3/08/13 67
Oakdale Mall Office Reynolds Rd., Johnson City Leased 7/31/15 31
Norwich Office North Plaza, Norwich Leased 7/21/15 57
Northgate Plaza Office 1250 Front St., Binghamton Leased 4/30/17 91
West Side Office 273 Main St., Binghamton Leased 10/31/12 31
Endicott Office 43 Washington Ave., Endicott Owned N/A 986
Eastside Office 160 Robinson St., Binghamton Leased 8/01/21 496
Elmira Office 352 North Main St., Elmira Owned N/A 402
Elmira Heights Office 2075 Upper Lake Rd. Leased 8/26/09 68
Elmira Heights
Syracuse Office 100 Clinton Square, Syracuse Leased 10/31/01 10
BSB Mortgage Corp. Valley Plaza, Johnson City Leased 4/30/99 1
</TABLE>
BSB Bank & Trust also operates 36 ATMs (MachineTeller(R)), the most extensive
system in its market area, which provides 24-hour banking services, and the Bank
operates 15 proprietary bank service locations (StoreTeller(R)) situated in a
large area supermarket chain. BSB Bank & Trust issued approximately 50,000
plastic cards which allow depositors to use the ATMs and in-store facilities.
22
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings, other than ordinary
routine litigation incidental to its business, to which the Company or
any of its subsidiaries is a party or of which any of their property
is the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The information required herein is incorporated by reference from
under the sections captioned "Market Prices and Related Shareholder
Matters" on page 37 of the Company's Annual Report to Shareholders for
the year ended December 31, 1998 portions of which are included herein
as Exhibit 13 ("Annual Report").
ITEM 6. SELECTED FINANCIAL DATA
The information required herein is incorporated by reference from the
table captioned "Selected Financial and Other Data" on page 18 of the
Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required herein is incorporated by reference from the
section captioned "Management's Discussion and Analysis of Financial
Condition and Results of Operations" on pages 19 to 37 of the Annual
Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" contained in the 1998 Annual Report to
Shareholders and incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required is
incorporated by reference from pages 38 to 61 of the Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required herein is incorporated by reference from
pages 2 to 8 of the Company's definitive Proxy Statement filed with
the SEC on March 5, 1999 (the "Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information required herein is incorporated by reference from
the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required herein is incorporated by reference from
the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required herein is incorporated by reference from
the Proxy Statement.
23
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) The following financial statements are incorporated by
reference from Item 8 hereof:
Consolidated Statements of Condition at December 31, 1998
and 1997
Consolidated Statements of Income For Each of the Three Years
in the Period Ended December 31, 1998
Consolidated Statements of Changes In Shareholders' Equity For
Each of the Three Years in the Period Ended December 31, 1998
Consolidated Statements of Cash Flows For Each of the Three
Years in the Period Ended December 31, 1998
Notes to Consolidated Financial Statements
Report of Independent Auditors
(a)(2) There are no financial statement schedules which are
required to be filed as part of this form since they are not
applicable.
(a)(3) See (c) below for all exhibits filed herewith and the
Exhibit Index.
(b) Reports on Form 8-K. N/A
(c) Exhibits. The following exhibits are either filed as part of
this annual report on Form 10-K, or are incorporated herein by
reference:
24
<PAGE>
Exhibit Table
-------------
No. Exhibit
- --- -------
3.1 Certificate of Incorporation, as amended by the Certificate of
Amendment dated May 24, 1993 and the Certificate of Amendment
dated April 22, 1996 (incorporated by reference from Exhibit 3.1
to the Quarterly Report on Form 10-Q of BSB Bancorp, Inc. (the
"Company") for the Quarter Ended March 31, 1996).
3.2 Form of Certificate of Designation (incorporated by reference
from Exhibit A to the Rights Agreement, Exhibit 1 to the
Company's Current Report on Form 8-K, filed with the Securities
and Exchange Commission (the "SEC") on June 1, 1989).
3.3 Bylaws (incorporated by reference from Exhibit 3.2 to the
Company's Annual Report on Form 10-K for the Year Ended December
31, 1994).
4.1 Specimen stock certificate (incorporated by reference from
Exhibit 4 to the Company's Registration Statement on Form S-4,
filed with the SEC on March 2, 1988).
4.2 Rights Agreement, dated as of May 22, 1989, between the
Company and Chase Lincoln First Bank, N.A. (incorporated by
reference to Exhibit 1 to the Company's Current Report on Form 8-
K, filed with the SEC on June 1, 1989).
4.3 Amendment No. 1 to Rights Agreement, entered into January 29,
1996, by and between the Company and American Stock Transfer and
Trust Company (incorporated by reference to Exhibit 4 to the
Company's Current Report on Form 8-K, filed with the SEC on
February 6, 1996).
10.1 Long-Term Incentive and Capital Accumulation Plan
(incorporated herein by reference to Exhibit 10.1 to the
Company's Registration Statement on Form S-4, filed with the SEC
on March 2, 1998).
10.2 1996 Long-Term Incentive and Capital Accumulation Plan
(incorporated by reference to Exhibit A to the Company's Proxy
Statement for the 1996 Annual Meeting of Shareholders).
10.3 Directors' Stock Option Plan (incorporated by reference to
Exhibit A to the Company's Proxy Statement for the 1994 Annual
Meeting of Shareholders).
10.4 Change of Control Severance Agreement, entered into as of
January 22, 1996, by and between the Company, BSB Bank & Trust
Company (the "Bank") and Arthur C. Smith (incorporated by
reference to Exhibit 10.3 to the Company's Annual Report on Form
10-K for the Year Ended December 31, 1995).
10.5 Employment Contract, entered into as of November 2, 1990, by and
between the Company, the Bank and Alex S. DePersis (incorporated
by reference to Exhibit 10.4 to the Company's Annual Report on
Form 10-K for the Year Ended December 31, 1992).
10.6 Amendment to Employment Contract, entered into as of December 29,
1995, by and among Alex S. DePersis, the Company and the Bank
(incorporated by reference to Exhibit 10.4 to the Company's
Annual Report on Form 10-K for the Year Ended December 31, 1995).
10.7 Amendment to Employment Contract, entered into as of
December 30, 1996, by and among the Company, the Bank and Alex S.
DePersis (incorporated by reference to Exhibit 10.6 to the
Company's Annual Report on Form 10-K for the Fiscal Year Ended
December 31, 1996).
25
<PAGE>
10.8 Amendment to Employment Contract, entered into as of December 29,
1997, by and among the Company, the Bank and Alex S. DePersis
(incorporated by reference to Exhibit 10.8 to the Company's
Annual Report on Form 10-K for the Year Ended December 31, 1997).
10.9 Change of Control Severance Agreement, entered into as of
November 2, 1990, by and between the Company, the Bank and Edward
R. Andrejko (incorporated by reference to Exhibit 10.3 to the
Company's Annual Report on Form 10-K for the Year Ended December
31, 1990).
10.10 Amendment to Change of Control Severance Agreement, entered into
as of December 29, 1995, by and among the Company, the Bank and
Edward R. Andrejko (incorporated by reference to Exhibit 10.5 to
the Company's Annual Report on Form 10-K for the Year Ended
December 31, 1995).
10.11 Change of Control Severance Agreement, entered into as of
November 2, 1990, by and between the Company, the Bank and Larry
G. Denniston (incorporated by reference to Schedule 10.3 to
Exhibit 10.3 to the Company's Annual Report on Form 10-K for the
Year Ended December 31, 1990).
10.12 Amendment to Change of Control Severance Agreement, entered
into as of December 29, 1995, by and among the Company, the Bank
and Larry G. Denniston (incorporated by reference to Exhibit 10.6
to the Company's Annual Report on Form 10-K for the Year Ended
December 31, 1995).
10.13 Change of Control Severance Agreement, entered into as of
November 2, 1990, by and between the Company, the Bank and
Douglas R. Johnson (incorporated by reference to Schedule 10.3 to
Exhibit 10.3 to the Company's Annual Report on Form 10-K for the
Year Ended December 31, 1990).
10.14 Amendment to Change of Control Severance Agreement, entered into
as of December 29, 1995, by and among the Company, the Bank and
Douglas R. Johnson (incorporated by reference to Exhibit 10.8 to
the Company's Annual Report on Form 10-K for the Year Ended
December 31, 1995).
10.15 Change of Control Severance Agreement, entered into as of
November 2, 1990, by and between the Company, the Bank and
Fielding Simmons III (incorporated by reference to Schedule 10.3
to Exhibit 10.3 to the Company's Annual Report on Form 10-K for
the Year Ended December 31, 1990).
10.16 Amendment to Change of Control Severance Agreement, entered into
as of December 29, 1995, by and among the Company, the Bank and
Fielding Simmons III (incorporated by reference to Exhibit 10.9
to the Company's Annual Report on Form 10-K for the Year Ended
December 31, 1995).
10.17 Change of Control Severance Agreement, entered into as of
November 2, 1990, by and between the Company, the Bank and Glenn
R. Small (incorporated by reference to Schedule 10.3 to Exhibit
10.3 to the Company's Annual Report on Form 10-K for the Year
Ended December 31, 1995).
10.18 Amendment to Change of Control Severance Agreement, entered into
as of December 29, 1995, by and among the Company, the Bank and
Glenn R. Small (incorporated by reference to Exhibit 10.10 to the
Company's Annual Report on Form 10-K for the Year Ended December
31, 1995).
10.19 Amendment to 1996 Long-Term Incentive and Capital Accumulation
Plan (incorporated by reference to Exhibit 10 to the Company's
Quarterly Report on Form 10-Q for the Period Ended June 30, 1998,
filed with the SEC on August 13, 1998).
26
<PAGE>
13 Annual Report to Shareholders for the Year Ended
December 31, 1998
21 List of the Company's Subsidiaries
23 Consent of Independent Public Accountants
27 Financial Data Schedule
(d) There are no other financial statements and financial statement
schedules which were excluded from the Annual Report which are
required to be included herein.
27
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange
Act of 1934, BSB Bancorp, Inc. has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
BSB BANCORP, INC.
- -----------------
(Registrant)
By: /s/ Alex S. DePersis Date: March 30, 1999
------------------------- ---------------
Alex S. DePersis
Director and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/ Rexford C. Decker
----------------------------------------
Rexford C. Decker Date: March 30, 1999
Senior Vice President and Chief Financial
Officer (Principal Accounting Officer)
By: /s/ Ferris G. Akel
----------------------------------------
Ferris G. Akel Date: March 30, 1999
Director
By: /s/ Robert W. Allen
----------------------------------------
Robert W. Allen Date: March 30, 1999
Director
By: /s/ Diana J. Bendz
----------------------------------------
Diana J. Bendz Date: March 30, 1999
Director
By: /s/ William C. Craine
----------------------------------------
William C. Craine Date: March 30, 1999
Director
By: /s/ Alex S. DePersis
----------------------------------------
Alex S. DePersis Date: March 30, 1999
Director
By: /s/ Thomas F. Kelly
----------------------------------------
Thomas F. Kelly, Ph.D. Date: March 30, 1999
Director
By: /s/ Herbert R. Levine
----------------------------------------
Herbert R. Levine Date: March 30, 1999
Director
By: /s/ David A. Niermeyer
----------------------------------------
David A. Niermeyer Date: March 30, 1999
Director
By: /s/ Mark T. O'Neil, Jr.
----------------------------------------
Mark T. O'Neil, Jr. Date: March 30, 1999
Director
28
<PAGE>
By: /s/ William H. Rincker
----------------------------------------
William H. Rincker Date: March 30, 1999
Director
By: /s/ Thomas L. Thorn
----------------------------------------
Thomas L. Thorn Date: March 30, 1999
Director
29
<PAGE>
Exhibit Index
-------------
No. Exhibit
- --- -------
3.1 Certificate of Incorporation, as amended by the Certificate of
Amendment dated May 24, 1993 and the Certificate of Amendment
dated April 22, 1996 (incorporated by reference from Exhibit 3.1
to the Quarterly Report on Form 10-Q of BSB Bancorp, Inc. (the
"Company") for the Quarter Ended March 31, 1996).
3.2 Form of Certificate of Designation (incorporated by reference
from Exhibit A to the Rights Agreement, Exhibit 1 to the
Company's Current Report on Form 8-K, filed with the Securities
and Exchange Commission (the "SEC") on June 1, 1989).
3.3 Bylaws (incorporated by reference from Exhibit 3.2 to the
Company's Annual Report on Form 10-K for the Year Ended December
31, 1994).
4.1 Specimen stock certificate (incorporated by reference from
Exhibit 4 to the Company's Registration Statement on Form S-4,
filed with the SEC on March 2, 1988).
4.2 Rights Agreement, dated as of May 22, 1989, between the
Company and Chase Lincoln First Bank, N.A. (incorporated by
reference to Exhibit 1 to the Company's Current Report on
Form 8-K, filed with the SEC on June 1, 1989).
4.3 Amendment No. 1 to Rights Agreement, entered into January 29,
1996, by and between the Company and American Stock Transfer and
Trust Company (incorporated by reference to Exhibit 4 to the
Company's Current Report on Form 8-K, filed with the SEC on
February 6, 1996).
10.1 Long-Term Incentive and Capital Accumulation Plan
(incorporated herein by reference to Exhibit 10.1 to the
Company's Registration Statement on Form S-4, filed with the SEC
on March 2, 1998).
10.2 1996 Long-Term Incentive and Capital Accumulation Plan
(incorporated by reference to Exhibit A to the Company's Proxy
Statement for the 1996 Annual Meeting of Shareholders).
10.3 Directors' Stock Option Plan (incorporated by reference to
Exhibit A to the Company's Proxy Statement for the 1994 Annual
Meeting of Shareholders).
10.4 Change of Control Severance Agreement, entered into as of
January 22, 1996, by and between the Company, BSB Bank & Trust
Company (the "Bank") and Arthur C. Smith (incorporated by
reference to Exhibit 10.3 to the Company's Annual Report on Form
10-K for the Year Ended December 31, 1995).
10.5 Employment Contract, entered into as of November 2, 1990, by and
between the Company, the Bank and Alex S. DePersis (incorporated
by reference to Exhibit 10.4 to the Company's Annual Report on
Form 10-K for the Year Ended December 31, 1992).
10.6 Amendment to Employment Contract, entered into as of December 29,
1995, by and among Alex S. DePersis, the Company and the Bank
(incorporated by reference to Exhibit 10.4 to the Company's
Annual Report on Form 10-K for the Year Ended December 31, 1995).
10.7 Amendment to Employment Contract, entered into as of
December 30, 1996, by and among the Company, the Bank and Alex S.
DePersis (incorporated by reference to Exhibit 10.6 to the
Company's Annual Report on Form 10-K for the Fiscal Year Ended
December 31, 1996).
30
<PAGE>
10.8 Amendment to Employment Contract, entered into as of December 29,
1997, by and among the Company, the Bank and Alex S. DePersis
(incorporated by reference to Exhibit 10.8 to the Company's
Annual Report on Form 10-K for the Year Ended December 31, 1997).
10.9 Change of Control Severance Agreement, entered into as of
November 2, 1990, by and between the Company, the Bank and Edward
R. Andrejko (incorporated by reference to Exhibit 10.3 to the
Company's Annual Report on Form 10-K for the Year Ended December
31, 1990).
10.10 Amendment to Change of Control Severance Agreement, entered into
as of December 29, 1995, by and among the Company, the Bank and
Edward R. Andrejko (incorporated by reference to Exhibit 10.5 to
the Company's Annual Report on Form 10-K for the Year Ended
December 31, 1995).
10.11 Change of Control Severance Agreement, entered into as of
November 2, 1990, by and between the Company, the Bank and Larry
G. Denniston (incorporated by reference to Schedule 10.3 to
Exhibit 10.3 to the Company's Annual Report on Form 10-K for the
Year Ended December 31, 1990).
10.12 Amendment to Change of Control Severance Agreement, entered
into as of December 29, 1995, by and among the Company, the Bank
and Larry G. Denniston (incorporated by reference to Exhibit 10.6
to the Company's Annual Report on Form 10-K for the Year Ended
December 31, 1995).
10.13 Change of Control Severance Agreement, entered into as of
November 2, 1990, by and between the Company, the Bank and
Douglas R. Johnson (incorporated by reference to Schedule 10.3 to
Exhibit 10.3 to the Company's Annual Report on Form 10-K for the
Year Ended December 31, 1990).
10.14 Amendment to Change of Control Severance Agreement, entered into
as of December 29, 1995, by and among the Company, the Bank and
Douglas R. Johnson (incorporated by reference to Exhibit 10.8 to
the Company's Annual Report on Form 10-K for the Year Ended
December 31, 1995).
10.15 Change of Control Severance Agreement, entered into as of
November 2, 1990, by and between the Company, the Bank and
Fielding Simmons III (incorporated by reference to Schedule 10.3
to Exhibit 10.3 to the Company's Annual Report on Form 10-K for
the Year Ended December 31, 1990).
10.16 Amendment to Change of Control Severance Agreement, entered into
as of December 29, 1995, by and among the Company, the Bank and
Fielding Simmons III (incorporated by reference to Exhibit 10.9
to the Company's Annual Report on Form 10-K for the Year Ended
December 31, 1995).
10.17 Change of Control Severance Agreement, entered into as of
November 2, 1990, by and between the Company, the Bank and Glenn
R. Small (incorporated by reference to Schedule 10.3 to Exhibit
10.3 to the Company's Annual Report on Form 10-K for the Year
Ended December 31, 1995).
10.18 Amendment to Change of Control Severance Agreement, entered into
as of December 29, 1995, by and among the Company, the Bank and
Glenn R. Small (incorporated by reference to Exhibit 10.10 to the
Company's Annual Report on Form 10-K for the Year Ended December
31, 1995).
10.19 Amendment to 1996 Long-Term Incentive and Capital Accumulation
Plan (incorporated by reference to Exhibit 10 to the Company's
Quarterly Report on Form 10-Q for the Period Ended June 30, 1998,
filed with the SEC on August 13, 1998).
31
<PAGE>
13 Annual Report to Shareholders for the Year Ended
December 31, 1998
21 List of the Company's Subsidiaries
23 Consent of Independent Public Accountants
27 Financial Data Schedule
(d) There are no other financial statements and financial statement
schedules which were excluded from the Annual Report which are
required to be included herein.
32
<PAGE>
EXHIBIT 13
ANNUAL REPORT
<PAGE>
BSB Bancorp, Inc., a Delaware corporation, is the bank holding company for BSB
Bank & Trust Company. BSB Bancorp, Inc. had 8,633,883 shares of common stock
outstanding at December 31, 1998. The stock is traded over-the-counter and is
listed on The Nasdaq Stock Market under the symbol BSBN. BSB Bancorp, Inc., is
subject to regulation by the Federal Reserve Board. BSB Bank & Trust is the
principal subsidiary of BSB Bancorp, Inc. Incorporated as a state-chartered
mutual savings bank in 1867, BSB Bank & Trust was converted to a state-chartered
stock savings bank in 1985, and in 1995 completed a charter change to that of a
state-chartered commercial bank. It is headquartered in Binghamton, New York and
conducts business in Broome, Tioga, Chenango, Onondaga, and Chemung Counties,
and adjacent areas in New York State. BSB Bank & Trust is a diversified
financial services institution providing a broad range of deposit and loan
products as well as trust and investment services to area businesses and
consumers. In particular, BSB Bank & Trust is a major provider of financial
services to the business community, as well as offering banking services to
school districts and cooperative education centers, cities, towns, villages, and
numerous municipal agencies. Deposits in BSB Bank & Trust are insured by the
Federal Deposit Insurance Corporation to applicable limits.
BSB BANCORP, INC.
FINANCIAL HIGHLIGHTS
(Dollars in Thousands - Except Per Share Amounts)
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 % Change
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PERFORMANCE Net interest income $ 70,738 $ 60,364 17.2%
Net income 19,870 16,986 17.0
Return on average equity 15.61% 14.65% 6.6
Diluted earnings per share $ 2.24 $ 1.93 16.1
- ---------------------------------------------------------------------------------------------------
SELECTED Interest rate margin 4.29% 4.39% (2.3)
FINANCIAL Dividend payout ratio 39.43 37.81 4.3
DATA Efficiency ratio 40.78 42.95 (5.1)
- ---------------------------------------------------------------------------------------------------
PER SHARE Book value $ 15.64 $ 14.12 10.8
Dividends declared 0.91 0.76 19.7
- ---------------------------------------------------------------------------------------------------
FINANCIAL Total assets $1,859,079 $1,560,571 19.1
CONDITION Total loans 1,362,885 1,205,797 13.0
DATA Deposits 1,472,746 1,239,508 18.8
(at December 31) Shareholders' Equity 134,991 120,866 11.7
Allowance for possible credit losses 22,168 19,207 15.4
Non-performing loans to total loans 1.02% 1.08% (5.6)
- ---------------------------------------------------------------------------------------------------
OFF-BALANCE Mortgage serviced loans $ 481,394 $ 392,020 22.8
SHEET Trust assets under management 299,188 243,432 22.9
(at December 31)
===================================================================================================
</TABLE>
1
<PAGE>
Message to Shareholders
Success can be measured by many criteria. Our focus at BSB is high financial
performance and sound strategic growth. We are pleased to report that by these
standards 1998 was an excellent year.
In thinking about a theme for this year's annual report, we selected "The
Road to Success" for a number of reasons. Not the least of which is the
realization that our Company has been involved in a significant journey from its
modest beginnings in 1867 to the vital and dynamic financial institution of
today. The road we have been traveling has taken many interesting turns to get
us to this point in our journey. Not only have we "traveled" figuratively into
new and challenging areas of banking service, but we have journeyed, literally,
into new markets, as well.
Advancements in technology have made possible an ever-expanding array of
products and services, and they have paved the way to a delivery system that
offers our customers more banking convenience than ever before. What's more,
our agreement to acquire Skaneateles Bancorp, Inc. creates an important
opportunity for us to expand our presence significantly in the greater Syracuse
market. This action represents an important opportunity for BSB, to be sure. At
the same time, it begins another leg of the journey.
Consequently, as we make this report on the year just past and share with you
some of our expectations for the future, we are reminded that this journey on
"The Road to Success" is far from over. Instead, it is a continuous process of
goals established and attained, and through that attainment, of leading the way
to new goals, new directions, and new achievements.
Financial Performance
It is my pleasure to report that 1998 was one of the most successful, though
challenging years, in the 132-year history of the Bank. We produced record net
income, substantially increased return on equity, and grew both assets and
deposits to record levels. We also completed two major systems conversions which
increase our capacity to deliver improved services and products to our customers
and further enhance our efficiency. In addition, we implemented new strategies
designed to further our goals of continued growth in non-interest income and to
promote operational integrity.
The financial results for 1998 are covered in detail in the Management's
Discussion and Analysis section, but I want to comment on some of the
highlights. In 1998, net income reached a record $19.9 million, an increase of
$2.9 million or 17.0% over 1997. Diluted earnings per share increased 16.1%, to
$2.24 in 1998, compared to $1.93 for 1997. This improvement in earnings was
driven primarily by asset and deposit growth that produced net interest income
of $70.7 million versus $60.4 million in 1997. Also contributing to our success
in 1998 was growth in non-interest income, which increased to $7.7 million, up
22.3% from the $6.3 million earned in 1997.
Another major measure of bank performance, return on average equity, increased
significantly to 15.61% in 1998, compared to 14.65% in 1997. The improvement in
return on average equity in 1998 represents the third consecutive year your
Company has produced a substantial improvement in this important performance
benchmark.
Shareholders benefited significantly from the earnings improvement, as it
allowed your Board of Directors to raise cash dividends once again. Dividends
paid in 1998 rose to a total of $7.8 million, compared to $6.4 million in 1997,
an increase of nearly 22%. The most recent increase in the quarterly dividend,
to $0.25 in the fourth quarter of 1998, represents an 88% increase in the
quarterly dividend in the past four years. While we are disappointed in the
overall market price performance of our stock this past year, we recognize that
1998 was a difficult year for bank equities in general. We remain confident in
our strong operating fundamentals and strategic growth potential. BSB stock
continues to show excellent absolute and relative performance on a five-year
basis as reflected in the performance graph in this year's proxy statement.
Our ability to grow net interest income was key to our success in 1998. BSB
produced significant growth in loan assets, led by outstanding results in
commercial lending. Commercial loans increased 18.1% last year, from $654.2
million at year-end 1997 to $772.8 million at year-end 1998. We also exceeded
our lending goals in direct and indirect consumer lending and residential
mortgage originations.
The success achieved in our two newest markets, Chemung and Onondaga Counties,
has been particularly gratifying. We continue to exploit effectively our
reputation as a responsive lender, providing quick responses to loan requests
and prudent flexibility in loan structuring. We have developed a niche in
business banking relationships, serving small- and medium-sized companies
through credit, deposit, and cash management services that can be tailored to
their specific needs.
2
<PAGE>
As we grow our loan portfolios, we carefully manage the asset quality issues
that are part of the business of risk management. In 1998, we increased our
allowance for possible credit losses by $3.0 million, an increase of 15.4% over
the allowance at year-end 1997. At year-end 1998, non-performing assets totaled
$16.0 million, an increase of $0.3 million, or 1.7% over year-end 1997.
Non-interest income increased 22.3% for the year. Important contributors to
this high level of performance were growth in assets in our Trust Department,
brokerage revenues, fees associated with loan activity and charges for deposits
and branch services.
Our Trust Department has been united with our brokerage activities under a
single banner, BSB Financial Services, Inc. This new organizational structure is
enhancing cross-selling opportunities, providing operating efficiencies not
previously possible, and providing a platform that is allowing us to consider
the addition of new fee-based services. During 1998, fee income from the
delivery of trust and brokerage services reached a record $1.5 million, an
increase of 35.5%.
I am pleased to note that, despite our growth, we have kept tight control of
our operating expenses. Our already strong efficiency ratio improved again in
1998 to 40.78%, from 42.95% in 1997. The lower the ratio, the more efficient a
bank is considered to be. We currently rank among the 10% most efficient banks
in the country.
Strategic Growth
We are confident that our strategic and business plans provide the framework
on which we can continue to generate future profitable growth. We plan to use
our strong capital position to grow both internally and through attractive
acquisition opportunities.
On January 25, 1999, BSB Bancorp, Inc. and Skaneateles Bancorp, Inc. entered
into a definitive agreement for BSB Bancorp to acquire Skaneateles Bancorp, the
holding company for Skaneateles Savings Bank, subject to approval by Skaneateles
shareholders and regulatory authorities. Based on December 31, 1998 data, this
acquisition adds $276 million in assets, $237 million in deposits and nine
retail branches to our presence in the greater Syracuse area.
The acquisition is an excellent strategic fit and represents a significant
growth opportunity in a major market area of upstate New York. It enhances our
existing commercial lending presence in Onondaga County and provides us with a
significant retail market position and infrastructure to help sustain the
broadest possible growth for the future. The acquisition of Skaneateles will
present many opportunities to expand the menu of financial services to their
customer base. We expect the acquisition will have a significant and positive
impact on future earnings and be accretive to earnings by the first quarter of
2000. The transaction is expected to close in the summer of 1999.
Other efforts to further our goals of growth and performance were undertaken
during 1998. Plans were implemented during 1998 to open a new branch office in
Vestal, New York. This new office, which is scheduled to open in the second
quarter of 1999, will provide BSB Bank & Trust a presence in the fastest growing
retail corridor in Broome County.
Customer Service
Improvements in service to our household and business customers play an
important role in our future growth. Our most recent expansion of our electronic
delivery systems, which began in 1997, allowed us to improve customer service
levels and enhance our efficiency and fee income potential at the same time.
Additional off-premise ATM locations at major retail and employer sites have
been very well received by our customers, and they provide fee revenues from
non-BSB users, as well. Furthermore, we continue to develop our PC Home Banking
product, which is adding a new scope to our delivery system.
Beginning in the first quarter of 1999, representatives from our brokerage
service operation will be located in selected branch offices, significantly
expanding the range of financial services available to our customers on a daily
basis.
As I suggested earlier, 1998 was a particularly challenging year. During this
past year, BSB completed a much-anticipated conversion to a new data processing
platform-one that enhances our readiness to meet the challenges brought by the
new millenium and our ability to improve customer service. The Bank also
converted to a new system for check processing, resulting in both additional
operating efficiency and new services for our customers. I am very pleased to
state that neither conversion adversely affected customer service at BSB Bank &
Trust. The key to our success in these major software conversions was the
quality, dedication, and professionalism of our entire staff.
3
<PAGE>
In April 1999, after 24 years of service, Herbert R. Levine will retire from
the Board of Directors. He has been a Director/Trustee of the Bank since 1974
and of BSB Bancorp, Inc. since its formation in 1988. The Board of Directors and
management wish to express their appreciation to Mr. Levine for his significant
contributions. He brought valuable insight to the Board, reflecting his many
years as a successful businessman and highly respected contributor to our
community.
In December 1998, Diana J. Bendz joined the Board of Directors of both the
Bank and the Company. Mrs. Bendz is the Senior Location Executive of IBM
Corporation, Endicott, New York. We are very pleased to have her join us at this
exciting time.
Having just completed a year of unprecedented accomplishment, we enter 1999
with high expectations. We expect the upstate New York economies we serve to
continue to improve in 1999. The planned acquisition of Skaneateles Bancorp will
represent a major expansion of our banking franchise that brings new customers
and the opportunity to further penetrate one of the largest markets in upstate
New York. These important factors, combined with our new data processing
platform, strong capital position and dedicated, professional staff, lead us to
believe that we are well positioned for future success.
Once again this year, I want to offer my sincere gratitude to our Board of
Directors for their efforts, dedication and support. On behalf of the Board of
Directors, our officers and staff, thank you, our shareholders, for your
continued support.
Alex S. DePersis
President & Chief Executive Officer
Lending Operations
Lending Operations approached 1998 with high expectations. Energized by the
successes achieved during the preceding year, we set out with a business plan
that included some very challenging goals. Happily, we can report that we
reached or exceeded virtually every one of them. Loan originations reached
record levels in every category, while loan quality remained excellent. As a
result, BSB's delinquency and loss experience continues to compare very
favorably to industry peer groups. In addition, we continued to be the
beneficiary of a favorable interest-rate environment that allowed for a positive
spread between interest earned on loan assets and the cost of funds. We also
realized significant growth of non-interest income, a trend that we will
continue to develop as we move forward.
There is no question that our status as an independent community bank presents
significant opportunities for our lending operation, in terms of responsiveness
to our customers and the Bank's operating efficiency. Our knowledge and
understanding of the Central New York region also has aided our efforts to
expand into new markets for indirect lending activity and to develop additional
sources for mortgage originations. We are especially pleased with the continued
growth of lending activity generated through our office in downtown Syracuse,
and with the record level of direct lending activity generated by our branches.
While it is standard practice to measure our accomplishments by analyzing the
numbers, our successes really have a very human face. They are the result of the
outstanding performance turned in by our fine staff of loan professionals. One
of our highest priorities continues to be doing everything possible to assist
them in their efforts. To that end, we initiated new training programs and
incentive opportunities during the year that yielded positive results, as did
the numerous improvements that were made to the Bank's support systems.
As we look to the year ahead, we plan to build on the achievements of the
recent past. We expect to keep our customer base growing by continuing to offer
highly competitive products in mortgage, commercial, and consumer lending. We
also recognize that innovation and superior service are critical to
strengthening our position as the "lender of choice" in the markets we serve. As
such, we will continue to pay priority attention to training and technology. It
is an approach, we believe, that will continue to benefit both the Bank and our
shareholders.
Consumer Lending
In 1998, consumer lending achieved another year of record growth. Total
outstanding loans rose 20%, or $59.9 million. While we experienced increases in
every category of consumer lending, new indirect auto contracts led the way once
again. These are auto loans financed through an ever-increasing network of new
and used car dealers throughout the upstate region. These relationships have
created an important growth opportunity for BSB. As such, it is an area of our
lending operation that will continue to receive priority attention in the year
ahead.
4
<PAGE>
Placing increased emphasis on direct lending through the branch system also
produced excellent results during 1998. Not only is the development of lending
relationships with existing customers a cost-effective way to acquire new loans,
but it also helps us improve our "share of wallet" position while providing
greater banking convenience to our customers. During the year, a number of
training and incentive programs were initiated in support of the outstanding
effort being made by our branch personnel. These programs will remain in place,
and we will continue to emphasize building our consumer loan portfolio.
Residential Mortgage Lending
Residential mortgage loan originations reached record levels in 1998, as
favorable interest rates and a positive turn in the area's housing market fueled
demand for both new mortgages and mortgage refinancing. Despite heavy
competitive pressures, BSB continues to enjoy solid customer preference as a
result of emphasizing superior customer service and product delivery.
During the year, we saw continued growth from the Bank's portfolio of serviced
loans. These are loans where BSB continues to collect payments and administer
loans after they have been sold into the secondary market. We believe that
serviced loans continue to be an excellent source of fee income. In addition,
serviced loan activity makes possible ongoing contact with borrowers and creates
excellent opportunities to cross sell other bank products and services.
Ensuring all qualified individuals access to home ownership through mortgage
financing is a responsibility that BSB takes very seriously. The company
participates in a variety of programs that provide financing to all racial,
ethnic, and income groups.
Commercial Lending
For BSB, 1998 was another year of record growth in commercial lending, as our
commercial loan portfolio increased by $118.6 million, to $772.8 million. The
improving economy in New York State did much to stimulate loan activity. Also,
the presence of our fully staffed office in downtown Syracuse continued to make
a significant contribution to the growth of our commercial loan portfolio. With
the acquisition of the nine Skaneateles Savings Bank branches in the greater
Syracuse area, we look forward to greatly expanded opportunities for growth in
this very important upstate market.
Much of our success is attributable to the fine work being accomplished by our
experienced staff of commercial lenders. Their contributions to our success are
many, and the strong relationships that they have forged with their customers
serve us well. Not only do we enjoy a significant amount of repeat business as a
direct result of their efforts, we also can credit an impressive number of new
referrals to their outstanding performance in the area of customer satisfaction.
We continue to believe that our ability to provide financing that meets the
needs of small- to medium-sized companies positions us ideally relative to the
typical commercial customer profile in our region. Increasingly, businesses know
that they can rely on BSB to be responsive and knowledgeable in meeting their
needs. We also will remain diligent in our efforts to build a high-quality loan
portfolio and in maintaining loan loss reserves at more than satisfactory
levels. In this way, we are confident that we can serve our loan customers
efficiently and our shareholders profitably as we strengthen our position among
business owners as a preferred funding source.
5
<PAGE>
Retail Banking
Retail banking has continued to evolve in ways that could not have been
anticipated only a few years ago. While the popularity of electronic delivery
channels has more than met expectations, the long predicted demise of
traditional "brick and mortar" branches has not occurred. This has certainly
been the case at BSB. Even as we record ever-higher numbers of customer
inquiries and transactions through our electronic banking channels, our
full-service banking offices are more utilized than ever. Simply put, our
customers like them. We do too. To us, the strength of our branches lies in
their enduring value as a sales platform. They are like permanent advertising
billboards that attract many of our best customers. Noteworthy, too, is the way
our approach to sales is changing. Where we used to try to find the ideal
customer for a given product, we now seek out the best products and services for
an individual customer. The results have been most rewarding. Solid deposit
growth, record consumer lending volume, and higher non-interest income
highlighted an outstanding 1998.
Our slogan "Your Bank for all Reasons(R)" will be even more meaningful in
1999. Several of our larger branches will take on the additional role of
financial services centers. We will be augmenting our regular complement of
consumer and small business bankers with registered securities specialists and
mortgage originators. This will allow our customers to take advantage of "one
stop shopping" as they seek to fulfill their financial needs. And, in mid-year,
our retail branch network will expand to fourteen full-service offices, with the
opening of our newest branch at Giant Plaza on Rano Boulevard in the Town of
Vestal. This new facility will fill an identified niche in Broome County's
fastest growing retail area.
The growth of our non-traditional banking channels will continue in 1999 with
the addition of Internet Banking. Along with our StoreTeller, MachineTeller,
TelephoneTeller and PC Home Banking Services, it will make "anytime...anywhere"
banking a reality.
At the heart of any successful Retail Banking System are people who have the
ability to satisfy customers, the desire to do so, and the support system to
carry out their mission. We have taken steps to insure that these attributes,
which BSB employees have always had in abundance, will continue in the future.
Our in-house training program, long a foundation for our service and sales
excellence, has been expanded to include more classroom hours, enhanced product
knowledge, and financial services curricula. Retail Banking employees are well
prepared to assess the financial needs of our customers and provide them with
the appropriate BSB solution. By linking pay to performance via incentives
designed to bring about desired results, employees are clearly focused on
achieving our business objectives.
And, the recent change in our core data processing systems has given us a more
flexible platform from which to serve our customers. The new system also
integrates information from throughout the Bank into a comprehensive "data
warehouse," containing a wealth of knowledge on our customers. This new tool
helps us to better understand the value of individual customer relationships and
how customers use our various banking channels. It is assisting us in product
development, service offerings, and pricing decisions.
1999 promises to be an exciting and rewarding year. While continuing to
emphasize those strategies that have brought us success, we will broaden our
base of consumer and small business customers through technology, targeted
marketing campaigns, and one-on-one sales efforts. We are confident that we can
meet the challenges of the ever changing world of retail banking.
6
<PAGE>
BSB BANCORP, INC.
SELECTED FINANCIAL AND OTHER DATA
(Dollars in Thousands-Except Per Share Amounts)
<TABLE>
<CAPTION>
December 31,
FINANCIAL CONDITION DATA 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total assets $1,859,079 $1,560,571 $1,363,120 $1,239,036 $1,161,901
Total loans 1,362,885 1,205,797 1,008,540 927,016 865,082
Investment securities 407,165 284,988 287,665 247,092 229,863
Deposits 1,472,746 1,239,508 1,118,052 1,006,465 962,780
Borrowings and mandatorily
redeemable preferred securities 213,759 178,644 120,502 98,949 79,028
Shareholders' equity 134,991 120,866 108,729 116,774 106,870
Allowance for possible credit losses 22,168 19,207 17,054 14,065 13,354
<CAPTION>
Years Ended December 31,
OPERATIONS DATA 1998 1997 1996 1995 1994
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total interest income $ 146,005 $ 122,380 $ 106,252 $ 99,034 $ 84,924
Total interest expense 75,267 62,016 52,471 50,421 39,201
-----------------------------------------------------------------------------------------------------------
Net interest income 70,738 60,364 53,781 48,613 45,723
Provision for credit losses 12,257 10,314 9,971 7,333 3,717
-----------------------------------------------------------------------------------------------------------
Net interest income after provision
for credit losses 58,481 50,050 43,810 41,280 42,006
Gains (losses) on sale of securities (821) 380 1,208 97 355
Gains (losses) on sale of mortgages (779) (377) (34) (41) (952)
Non-interest income 7,701 6,298 8,140 6,672 5,501
Operating expense 31,989 28,631 28,045 27,239 25,752
-----------------------------------------------------------------------------------------------------------
Income before income taxes 32,593 27,720 25,079 20,769 21,158
Income tax expense 12,723 10,734 9,875 8,175 8,287
-----------------------------------------------------------------------------------------------------------
Net income $ 19,870 $ 16,986 $ 15,204 $ 12,594 $ 12,871
===========================================================================================================
<CAPTION>
Years Ended December 31,
SELECTED FINANCIAL AND OTHER DATA 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Weighted average yield of all
interest-earning assets 8.86% 8.90% 8.80% 8.77% 7.98%
Weighted average cost of all
interest-bearing liabilities 4.74 4.71 4.58 4.75 3.94
Interest rate spread during the period 4.12 4.19 4.22 4.02 4.04
Interest rate margin during the period 4.29 4.39 4.46 4.30 4.30
Return on average assets 1.14 1.17 1.19 1.06 1.15
Return on average equity 15.61 14.65 13.49 10.89 11.59
Average equity to average assets 7.33 7.98 8.83 9.71 9.94
Dividend payout ratio 39.43 37.81 34.58 32.25 26.93
Efficiency ratio 40.78 42.95 45.29 49.27 50.27
Book value per share $ 15.64 $ 14.12 $ 12.92 $ 12.47 $ 11.07
Basic earnings per share $ 2.31 $ 2.00 $ 1.72 $ 1.32 $ 1.30
Diluted earnings per share $ 2.24 $ 1.93 $ 1.67 $ 1.27 $ 1.26
</TABLE>
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FINANCIAL REVIEW
- --------------------------------------------------------------------------------
BSB Bancorp, Inc. (the "Company") is the bank holding company of BSB Bank &
Trust Company, Binghamton, New York (the "Bank"). The Bank, a New York-chartered
commercial bank and trust company, operates 13 branches in Broome, Tioga,
Chenango, Onondaga, and Chemung Counties of New York State. The Bank is in the
business of providing a wide variety of loan and deposit products to its
commercial and consumer customers. In addition, the Bank provides mortgage
banking, trust, municipal, and other related services. Unless otherwise
specified, references to the Company are intended also to include the activities
of the Bank.
In 1998, the Company attained record net income of $19.9 million, or diluted
earnings of $2.24 per share, as compared to 1997 net income of $17.0 million, or
diluted earnings of $1.93 per share. The return on average equity increased from
14.65% in 1997 to 15.61% in 1998, an increase of 6.6%. The return on average
assets decreased from 1.17% in 1997 to 1.14% in 1998.
Net interest income increased 17.2% in 1998 to $70.7 million from $60.4
million in 1997. The interest rate margin decreased from 4.39% in 1997 to 4.29%
in 1998. Non-interest income increased from $6.3 million in 1997 to $7.7 million
in 1998. Net gains and losses on the sale of securities and loans produced a
loss of $1.6 million in 1998, compared to a gain of $3,000 in 1997. The
provision for credit losses increased from $10.3 million in 1997 to $12.3
million in 1998. Net charge-offs increased from $8.2 million in 1997 to $9.3
million in 1998. Operating expense increased 11.7% from $28.6 million in 1997 to
$32.0 million in 1998. The Company's ratio of operating expense to average
assets decreased from 1.97% in 1997 to 1.84% in 1998.
Total assets increased from $1.6 billion at December 31, 1997 to $1.9 billion
at December 31, 1998, an increase of 19.1%. Total loans increased 13.0% from
$1.2 billion at December 31, 1997 to $1.4 billion at December 31, 1998. This
growth was due primarily to the Company's ability to originate commercial and
consumer loans in its lending market. The Company's management strategy is
designed to accommodate earning asset growth while controlling overall risk to
the institution. Both liquidity and interest rate sensitivity are constantly
monitored. The Company's loan originations increased 29.4%, from $576.2 million
in 1997 to $745.8 million in 1998. Commercial loan originations were up $83.9
million from $244.2 million in 1997 to $328.1 million in 1998. Consumer loan
originations increased 5.5% with originations of $216.9 million in 1998 compared
to $205.6 million in 1997. Residential mortgage loans originated were $100.9
million in 1997 and $179.2 million in 1998, an increase of 77.6%. Loan sales and
securitizations increased from $81.2 million in 1997 to $171.0 million in 1998.
The allowance for possible credit losses (reserves) increased from $19.2 million
at December 31, 1997 to $22.2 million at December 31, 1998, an increase of
15.4%. Deposits increased 18.8% from $1,239.5 million in 1997 to $1,472.7
million in 1998. Borrowings increased from $178.6 million in 1997 to $213.8
million in 1998, an increase of 19.7%. Shareholders' equity increased 11.7% from
$120.9 million in 1997 to $135.0 million in 1998. During 1997, the Company split
its common stock three-for two and increased its cash dividend. As a result,
cash dividends paid to stockholders totaled $7.8 million in 1998, compared to
$6.4 million in 1997.
The Company operates as an independent, community, commercial bank focusing on
the origination of commercial and consumer loans. The Company provides a broad
range of deposit and loan products to area businesses and consumers through its
Retail Branch network. In addition, the Company's Trust Department provides full
trust services to individuals, corporations, and non-profit organizations. The
Bank's wholly owned subsidiary, BSB Financial Services, Inc. markets brokerage
services. The Company expects to continue its independence and to focus on
enhancing shareholder value through increasing market share as well as
developing new geographic market areas. Emphasis will continue to center on
originating commercial and selected consumer loan products to grow and further
diversify loan asset portfolios.
On January 25, 1999, the Company announced the signing of a definitive merger
agreement between BSB Bancorp and Skaneateles Bancorp, the holding company for
Skaneateles Savings Bank. Skaneateles Savings Bank is a New York-chartered
savings bank headquartered in Skaneateles, New York with 9 branches in the
greater Syracuse area. At year end 1998, Skaneateles had total assets of $276.1
million. The definitive agreement, which has been approved by both companies'
boards of directors, is subject to approval by the Skaneateles shareholders and
regulatory authorities.
The decline in interest rates is expected to result in additional refinancing
of fixed-rate residential mortgages in 1999. Since the Company sells and retains
servicing of a large portion of its fixed-rate residential originations, the
8
<PAGE>
Company intends to take advantage of its loan servicing portfolio by refinancing
other bank's mortgages as well as to aggressively market to its existing
customer base in an effort to increase mortgage servicing fee income.
In order to continue funding the current and anticipated future level of loan
growth, the Company has sought other sources of funding outside of its normal
retail deposits. In the past several years, the Company has expanded its market
area through the acquisition of branch offices in Chemung County, New York, and
the establishment of a branch office in Syracuse, New York, commenced a
municipal deposit program, and increased its borrowings through retail
repurchase agreements and other sources.
To assist in managing the average cost of funds, the Company embarked on an
aggressive campaign in mid-year 1997 to produce new low cost checking and NOW
account deposits. This effort produced growth in average checking/NOW account
deposit levels by approximately 10% for the year 1997 and 17% for the year 1998.
The growth in these low-cost funding sources, coupled with the continued effort
to originate higher yielding consumer and commercial loan assets, resulted in
the Company producing an average interest rate margin of 4.29% for the year
1998. The Company expects to continue its efforts to manage interest rate margin
within the difficult interest rate environment that currently exists.
As the evolution of the financial services industry continues, more and more
emphasis has been placed on the use of customer information and cost effective
use of technologies in new delivery and processing systems. In this regard, the
Company made significant inroads during 1998 in providing customers with new
services and improved accessibility to the Bank. In addition, the Company
expanded its electronic delivery systems by adding 12 ATMS, introduced BSB
"BankIt", a personal interactive banking service via personal computer, and "BSB
PayIt", an electronic method for consumers to pay their bills.
This Annual Report, including certain statements made in this Management's
Discussion and Analysis of Financial Condition and Results of Operations, may
include "forward-looking statements". Any statements with regard to the
Company's expectations as to its financial results, and other aspects of its
business, and general economic conditions, may constitute forward-looking
statements. Although the Company makes such statements based on assumptions
which it believes to be reasonable, there can be no assurance that actual
results will not differ materially from the Company's expectations. Some of the
important factors which could cause its results to differ from any results which
might be projected, forecasted, or estimated based on such forward-looking
statements include: (i) general economic and competitive conditions in the
markets in which the Company operates, and the risks inherent in its operations;
(ii) the Company's ability to continue to control its provision for credit
losses and operating expense, increase earning assets and non-interest income,
and maintain its margin; and (iii) the level of consumer demand for new and
existing products. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those described in the forward-looking statements. The
Company does not intend to update forward-looking statements.
9
<PAGE>
FINANCIAL CONDITION
- -------------------------------------------------------------------------------
The following table sets forth information regarding average balances of the
Company's assets and liabilities, and shareholders' equity, as well as changes
in such amounts from period to period.
<TABLE>
<CAPTION>
1998 1997 1996
Average Increase (Decrease) Average Increase (Decrease) Average
Balance Amount % Balance Amount % Balance
- ----------------------------------------------------------------------------------------------------------------------------
Interest-earning assets: (Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Commercial loans $ 709,729 $132,729 23.0% $ 577,000 $ 93,940 19.4% $ 483,060
Consumer loans
Passbook 183 (88) (32.5) 271 (96) (26.2) 367
Overdraft checking 725 (139) (16.1) 864 (44) (4.8) 908
Business line of credit 1,021 932 1,047.2 89 89
Credit cards 9,576 475 5.2 9,101 286 3.2 8,815
Personal-direct 51,457 11,655 29.3 39,802 7,481 23.1 32,321
Personal-indirect-new auto 48,721 2,027 4.3 46,694 (386) (0.8) 47,080
Personal-indirect-used auto 134,685 42,935 46.8 91,750 32,020 53.6 59,730
Personal-indirect-mobile homes 49,796 14,234 40.0 35,562 10,720 43.2 24,842
Personal-indirect-other 3,658 (468) (11.3) 4,126 (510) (11.0) 4,636
Home Equity Line of Credit 25,086 322 1.3 24,764 152 0.6 24,612
Checkcard reserve 1,467 533 57.1 934 727 351.2 207
Student 2,694 24 0.9 2,670 (363) (12.0) 3,033
- ----------------------------------------------------------------------------------------------------------------------------
Total consumer loans 329,069 72,442 28.2 256,627 50,076 24.2 206,551
- ----------------------------------------------------------------------------------------------------------------------------
Mortgage loans
Residential-fixed 53,331 13,628 34.3 39,703 (12,194) (23.5) 51,897
Commercial-fixed 4,528 (272) (5.7) 4,800 984 25.8 3,816
Residential-adjustable 54,282 (15,858) (22.6) 70,140 (7,759) (10.0) 77,899
Commercial-adjustable 124,287 (12,373) (9.1) 136,660 5,900 4.5 130,760
- ----------------------------------------------------------------------------------------------------------------------------
Total mortgage loans 236,428 (14,875) (5.9) 251,303 (13,069) (4.9) 264,372
- ----------------------------------------------------------------------------------------------------------------------------
Investment securities 359,550 73,168 25.5 286,382 36,077 14.4 250,305
Mortgages held for sale 14,016 9,594 217.0 4,422 1,707 62.9 2,715
- ----------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 1,648,792 273,058 19.8 1,375,734 168,731 14.0 1,207,003
- ----------------------------------------------------------------------------------------------------------------------------
Non-interest-earning assets 86,994 10,761 14.1 76,233 5,884 8.4 70,349
- ----------------------------------------------------------------------------------------------------------------------------
Total assets $1,735,786 $283,819 19.5% $1,451,967 $174,615 13.7% $1,277,352
============================================================================================================================
Interest-bearing liabilities:
Deposits
Savings $ 135,734 $ 959 0.7% $ 134,775 $ (5,815) (4.1)% $ 140,590
Money market 275,115 20,437 8.0 254,678 19,345 8.2 235,333
Certificates of deposit 836,466 203,996 32.3 632,470 59,593 10.4 572,877
NOW 65,274 5,072 8.4 60,202 (400) (0.7) 60,602
Commercial checking 71,821 14,727 25.8 57,094 11,284 24.6 45,810
- ----------------------------------------------------------------------------------------------------------------------------
Total deposits 1,384,410 245,191 21.5 1,139,219 84,007 8.0 1,055,212
Borrowings 189,965 12,573 7.1 177,392 85,787 93.6 91,605
Mandatorily redeemable
preferred securities 13,145 13,145
- ----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 1,587,520 270,909 20.6 1,316,611 169,794 14.8 1,146,817
- ----------------------------------------------------------------------------------------------------------------------------
Non-interest-bearing liabilities 20,963 1,536 7.9 19,427 1,629 9.2 17,798
Shareholders' equity 127,303 11,374 9.8 115,929 3,192 2.8 112,737
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $1,735,786 $283,819 19.5% $1,451,967 $174,615 13.7% $1,277,352
============================================================================================================================
</TABLE>
10
<PAGE>
USES OF FUNDS
- --------------------------------------------------------------------------------
The Company's principal use of funds is originating loans, primarily to
individuals and small- and medium-sized companies in its lending area.
Commercial loans tend to increase the interest rate sensitivity of the loan
portfolio, because interest rates on these loans are generally tied to the
Company's Prime Rate (the "Prime Rate"). Commercial loan originations increased
from $244.2 million in 1997 to $328.1 million in 1998. The average balance of
commercial loans increased from $577.0 million in 1997 to $709.7 million in
1998, an increase of $132.7 million, or 23.0%. The increase in originations and
in portfolio size in 1998 over 1997 was due primarily to an increase in activity
in the Syracuse market where the Bank is gaining market share since the opening
of a full-service office at the end of 1996.
Consumer loan originations were $205.6 million in 1997 and $216.9 million in
1998. The average balance of consumer loans increased from $256.6 million in
1997 to $329.1 million in 1998, an increase of $72.4 million, or 28.2%. This
increase resulted mainly from the Company's continuing efforts to expand its
direct consumer lending as well as its indirect financing through local and
surrounding area automobile dealers. These types of loans typically earn among
the highest yields of the Bank's assets, as is the case of indirect used auto
loans which yielded 9.43% for 1998, but also tend to have a higher credit risk.
During 1998, the Company increased its originations of targeted consumer loan
products as compared to 1997. Indirect used auto loan originations increased
12.5%, increasing from $85.4 million in 1997 to $96.1 million in 1998. Direct
loan originations increased from $30.2 million for 1997 to $31.6 million for
1998, an increase of $1.4 million, or 4.5%.
The Company originated residential mortgage loans of $100.9 million in 1997
and $179.2 million in 1998, an increase of 77.6%. Commercial real estate
originations decreased from $25.5 million in 1997 to $21.7 million in 1998.
The Company's policy of selling or securitizing fixed-rate residential
mortgages to improve the liquidity of the portfolio and to build the servicing
income portfolio resulted in sales and securitizations of $79.5 million in 1997.
In 1998, $166.4 million of fixed-rate residential mortgages were sold or
securitized to aid in managing liquidity and collateral needs. The average
balance of fixed-rate residential mortgage loans increased from $39.7 million in
1997 to $53.3 million in 1998, an increase of 34.3%. The average balance of
adjustable-rate residential mortgage loans decreased from $70.1 million in 1997
to $54.3 million in 1998, a decrease of 22.6%. The average balance of
adjustable-rate commercial real estate loans decreased from $136.7 million in
1997 to $124.3 million in 1998.
The Company has authority to invest in a wide range of investment and
mortgage-backed securities, including corporate and municipal bonds, and a
limited amount of common and preferred stock. The portfolio consists primarily
of U.S. Government Agency securities and mortgage-backed securities issued by
U.S. Government agencies such as the Freddie Mac and Fannie Mae. The average
balance of investment securities increased from $286.4 million in 1997 to $359.6
million in 1998.
In 1997 and 1998, respectively, the Company purchased $29.2 million and $130.8
million of mortgage-backed securities. The Company securitized $1.6 million of
its residential mortgages in 1997 and $43.8 million in 1998, making these
mortgages marketable in the secondary market. Sales of mortgage-backed
securities declined from $86.2 million in 1997 to $62.9 million in 1998, while
principal repayments increased from $22.7 million in 1997 to $25.1 million in
1998.
SOURCES OF FUNDS
- --------------------------------------------------------------------------------
Funding for the Company's assets is derived primarily from deposits from
individuals, business customers, municipalities, and borrowings. In addition,
the Company established a money desk in the second half of 1997 to attract
larger wholesale deposits primarily from institutional investors. These
wholesale deposits were used to fund the growth in loans. In addition to the
above sources, the Bank used demand and time deposits and long- and short-term
borrowings. The average balance of all deposits increased from $1,139.2 million
in 1997 to $1,384.4 million in 1998. The average balance of all borrowings
increased 14.5%, from $177.4 million in 1997 to $203.1 million in 1998.
11
<PAGE>
ASSET QUALITY
- -------------
The Company has maintained its focus on sound credit quality in the loan
portfolio. The Company utilizes a system to rate substantially all of its loans
based on their respective risks. This assists management in determining and
maintaining the desired blend of assets with varying risks within the loan
portfolio, and helps in assessing the adequacy of the allowance for possible
credit losses. Loan ratings are continually reviewed to determine the propriety
of the respective ratings.
Allowance for Possible Credit Losses
A loan is considered impaired, based on current information and events, if it is
probable that the Bank will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. The measurement of impaired loans is generally based upon the present
value of expected future cash flows discounted at the historical effective
interest rate, except that all loans that have become collateral-dependent are
measured for impairment based on the fair value of the collateral. Loans not
deemed impaired continue to be classified based on their risk-rating and general
reserves are maintained accordingly. Management considers the current level of
reserves adequate to cover potential credit losses.
The following table summarizes activity in the Company's allowance for possible
credit losses during the periods indicated:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
- ---------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Average total loans outstanding $1,296,482 $1,103,563 $970,060
===================================================================================================
Allowance at beginning of period $ 19,207 $ 17,054 $ 14,065
Charge-offs:
Commercial loans 6,262 5,178 5,800
Consumer loans 3,126 2,137 1,714
Residential real estate loans 147 83 116
Commercial real estate loans 988 2,480 1,184
- ---------------------------------------------------------------------------------------------------
Total loans charged-off 10,523 9,878 8,814
- ---------------------------------------------------------------------------------------------------
Recoveries:
Commercial loans 418 852 1,114
Consumer loans 764 572 550
Residential real estate loans 9 12
Commercial real estate loans 36 293 156
- ---------------------------------------------------------------------------------------------------
Total recoveries 1,227 1,717 1,832
- ---------------------------------------------------------------------------------------------------
Net charge-offs 9,296 8,161 6,982
- ---------------------------------------------------------------------------------------------------
Provision for credit losses charged to operating expenses 12,257 10,314 9,971
- ---------------------------------------------------------------------------------------------------
Allowance at end of period $ 22,168 $ 19,207 $ 17,054
===================================================================================================
Ratio of net charge-offs to:
Average total loans outstanding 0.72% 0.74% 0.72%
- ---------------------------------------------------------------------------------------------------
Ratio of allowance to:
Non-performing loans 159.33% 148.02% 139.59%
- ---------------------------------------------------------------------------------------------------
Year-end total loans outstanding 1.63% 1.59% 1.69%
===================================================================================================
</TABLE>
The provision for credit losses increased from $10.3 million in 1997 to $12.3
million in 1998. The allowance for possible credit losses increased to $22.2
million, or 1.63% of total loans at December 31, 1998, from $19.2 million, or
1.59% at year-end 1997. Net charge-offs in 1998 amounted to $9.3 million, or
0.72% of average total loans outstanding, compared to $8.2 million, or 0.74% in
1997. Non-performing loans at December 31, 1998 were $13.9 million, or 1.02% of
total loans outstanding, as compared to $13.0 million, or 1.08% of total loans
outstanding at December 31, 1997.
12
<PAGE>
Non-Performing Assets
The Company's accounting and classification policies regarding non-accrual loans
reflect the importance of recognizing problems early.
Loans are placed on a non-accrual status when, in the judgment of management,
the probability of collection of principal or interest is deemed to be
insufficient to warrant further accrual. Such loans include potential problem
loans where known information about possible credit problems of borrowers has
caused management to have serious doubts as to the ability of such borrowers to
comply with the loan repayment terms. When a loan is placed in a non-accrual
status, previously accrued but unpaid interest is deducted from interest income.
The Company does not accrue interest on loans greater than 90 days past due
unless the estimated fair value of the collateral and active collection efforts
are believed to be adequate to result in full recovery.
At December 31, 1998, the Company had $513,000 of consumer loans greater than
90 days past due on which it was accruing interest, as compared to $304,000 and
$236,000 at December 31, 1997 and 1996, respectively. At each such date,
consumer loans were the only accruing loans 90 days or more past due.
The following table sets forth information regarding non-accrual loans, loans
which are 90 days or more overdue, and other real estate owned ("ORE") held by
the Company at the dates indicated:
<TABLE>
<CAPTION>
December 31,
1998 1997 1996
- ----------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Commercial loans:
Non-accrual loans $11,423 $10,542 $ 6,130
- ----------------------------------------------------------------------------------------------------
Consumer loans:
Accruing loans 90 days overdue 513 304 236
- ----------------------------------------------------------------------------------------------------
Residential real estate loans:
Non-accrual loans 1,701 1,309 1,556
- ----------------------------------------------------------------------------------------------------
Commercial real estate loans:
Non-accrual loans 276 821 4,295
- ----------------------------------------------------------------------------------------------------
Total non-performing loans and accruing
loans 90 days overdue $13,913 $12,976 $12,217
====================================================================================================
Total non-performing loans to total loans 1.02% 1.08% 1.21%
- ----------------------------------------------------------------------------------------------------
Total real estate acquired in settlement of loans at lower of
cost or fair value $ 2,122 $ 2,784 $ 1,393
- ----------------------------------------------------------------------------------------------------
Total non-performing loans and real estate acquired in
settlement of loans at fair value to total assets 0.86% 1.01% 1.00%
====================================================================================================
</TABLE>
The Company has no troubled debt restructurings except as included in non-
accruing commercial loans. Total non-performing loans and other real estate
owned increased to $16.0 million, or 0.86% of total assets at December 31, 1998,
compared to $15.8 million, or 1.01% of total assets at December 31, 1997.
At December 31, 1997, 28 non-performing residential real estate loans totaled
$1.3 million. At December 31, 1998, non-performing residential real estate loans
totaled $1.7 million and included 36 loans.
At December 31, 1997, non-performing commercial real estate loans totaled
$821,000, and consisted of 3 loans ranging in size from $78,000 to $594,000. At
December 31, 1998, non-performing commercial real estate loans decreased to
$276,000 million, made up of 2 loans. The decline in these commercial real
estate non-performing loans from December 31, 1997 to December 31, 1998, was
largely due to 2 loans totaling $672,000 transferred to ORE during 1998. After
write-downs, these properties reside in ORE at December 31, 1998 at $297,000.
These properties are commercial real estate properties.
Non-performing commercial loans at December 31, 1997 totaled $10.5 million and
included 35 individual loans ranging in size from $5,000 to $1.3 million. At
December 31, 1998, non-performing commercial loans increased to $11.4 million
and consisted of 62 individual loans ranging in size from $2,000 to $1.2
million. Of these 62 loans, 21 loans were to one leasing company for a total of
$247,000. In the last quarter of 1997, 4 commercial loans totaling $3.5 million
were added to non-performing assets. These loans were to a company which leases
vehicles to non-personal entities such as schools, rehabilitation centers, and
similar businesses. At December 31, 1998, these loans remained in non-accrual
status with a reduced balance of $2.7 million. These loans and all other non-
performing loans have been internally risk-rated.
13
<PAGE>
Although the Company's non-performing loans increased from $13.0 million at
December 31, 1997 to $13.9 million at December 31, 1998, the ratio of non-
performing loans to total loans decreased from 1.08% to 1.02%. At December 31,
1997, the recorded investment in loans for which impairment has been recognized
in accordance with Statement of Financial Accounting Standards ("SFAS") No. 114
totaled $12.0 million with a valuation allowance aggregating $4.3 million. For
the twelve months ended December 31, 1997, the average recorded investment in
impaired loans was approximately $8.9 million. The Company recognized, on a cash
basis, $272,000 of interest on impaired loans during the portion of the year
they were impaired. At December 31, 1998, the recorded investment in loans for
which impairment has been recognized in accordance with SFAS No. 114 totaled
$10.6 million with a valuation allowance aggregating $4.1 million. For the
twelve months ended December 31, 1998, the average recorded investment in
impaired loans was approximately $9.0 million. The Company recognized, on a cash
basis, $256,000 of interest on impaired loans during the portion of the year
they were impaired.
At December 31, 1997, other real estate ("ORE"), which is defined to include
property acquired by foreclosure or by deed in lieu of foreclosure, totaled $2.8
million, which consisted of 10 single-family residential properties with a book
value totaling $474,000 and 9 commercial real estate properties with a book
value totaling $2.3 million. At December 31, 1998, ORE totaled $2.1 million and
consisted of 3 single-family residential properties with a book value totaling
$77,000 and 8 commercial real estate properties with a book value totaling $2.0
million. The largest single property in ORE at December 31, 1998 was $1.0
million.
During 1998, 17 single-family residential properties with a book value
totaling of $608,000 were sold. At December 31, 1998, 3 single-family
residential properties with a book value totaling of $77,000 were added to the
ORE portfolio from 1997. In 1998, 13 residential real estate ORE properties were
written down by $223,000.
During 1998, 5 commercial real estate properties with a book value totaling
$1.2 million were sold, 9 commercial real estate properties with a book value of
$1.3 million were charged off, and 6 commercial real estate properties valued at
$0.8 million were partially charged off. During 1998, 5 commercial real estate
properties with a book value totaling $1.1 million were added to the portfolio.
During the year, 6 commercial real estate ORE properties were written down by
$0.6 million. All ORE charge-offs are recorded as other real estate expenses.
All real estate carried in the Company's ORE portfolio are supported by recent
independent appraisals.
The Company carries a reserve of $2.9 million for the credit risk associated
with certain off-balance sheet letters of credit. This amount has been
reclassified to other liabilities.
LIQUIDITY
- ---------
A fundamental objective of the Company is effective management of its liquidity.
The goal of liquidity management is to maintain the Company's ability to meet
its contractual obligations, to meet its customers' loan demands, fund all its
operations, and minimize the effects of interest rate fluctuations on earnings.
The major factor which determines the exposure of the Company's earnings to
interest rate risk is the relationship between the maturities and repricing
characteristics of its interest-earning assets and interest-bearing liabilities.
The management of the Company continues to employ strategies designed to achieve
a favorable match between those assets and liabilities. The Board authorizes the
Asset and Liability Management Committee (the "Committee") of the Company to
manage the sources and uses of the Company's cash flow, and establish the
pricing of its products. The Committee's primary goal is to structure the
Company's assets and liabilities in a manner that produces a favorable interest
rate spread and also provides net interest income protection against significant
volatility in the general level of interest rates.
Accordingly, the Committee focuses on effectively managing the Bank's gap,
which is a measure of the mismatch between the dollar amount of the Company's
interest-earning assets and interest-bearing liabilities which mature or reprice
within certain time frames. If those assets exceed the liabilities within a
prescribed time period, a "positive" gap results. This could tend to have a
favorable impact on earnings during a period of rising interest rates and could
have an unfavorable impact during a period of declining rates. Conversely, if
those liabilities exceed the assets during the time period in question, a
"negative" gap results, in which case a rise in the general level of interest
rates could have an unfavorable impact on earnings, while a decline in rates
could have a favorable influence on earnings.
To accommodate asset growth during 1998, deposits and borrowing balances
increased; the greatest of these was an increase of $193.5 million in
certificates of deposits. Non-interest-bearing deposits increased $12.2 million
to $88.4 million, and money market accounts increased $11.5 million to $274.9
million at December 31, 1998. The other primary source of funding is borrowed
funds which increased from $178.6 million at December 31, 1997 to $243.8 million
at December 31, 1998. See Note 9 in Notes to Consolidated Financial Statements
for further discussion on borrowed funds.
14
<PAGE>
Quantitative and Qualitative Disclosures About Market Risk
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1998, which are
anticipated by the Company, based upon certain assumptions, to reprice or mature
in each of the future time periods shown:
<TABLE>
<CAPTION>
More More More More
than than than than More
3 mos 3 mos to 1 yr to 3 yrs to 5 yrs to than
or less 12 mos 3 yrs 5 yrs 10 yrs 10 yrs Total
- -------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Commercial and
consumer loans $ 600,605 $ 26,540 $ 204,834 $174,313 $72,871 $52,821 $1,131,984
Mortgage loans 83,121 112,903 27,054 8,293 2,495 13,841 247,707
Mortgage-backed securities 19,701 57,710 85,389 5,394 168,194
Investment securities 37,084 79,199 76,788 13,577 20,203 11,541 238,392
- -------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 740,511 276,352 394,065 201,577 95,569 78,203 1,786,277
- -------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Money market accounts 274,861 274,861
Savings accounts 136,332 136,332
Demand and NOW accounts 17,270 15,942 7,239 13,029 58,675 58,163 170,318
Certificate accounts 329,403 404,435 140,350 16,754 293 891,235
FHLB advances 130,000 35,000 10,000 175,000
Borrowed funds 36,866 1,893 38,759
Preferred securities 30,000 30,000
- -------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 924,732 455,377 157,589 29,783 60,861 88,163 1,716,505
- -------------------------------------------------------------------------------------------------------------------
Interest sensitivity gap
per period $(184,221) $(179,025) $ 236,476 $171,794 $34,708 $(9,960) $ 69,772
===================================================================================================================
Cumulative interest
sensitivity gap $(184,221) $(363,246) $(126,770) $ 45,024 $79,732 $69,772
===================================================================================================================
Cumulative interest
sensitivity gap as a
percentage of total assets (9.91)% (19.54)% (6.82)% 2.42% 4.29% 3.75%
===================================================================================================================
</TABLE>
With the exception of certain categories described below, the amounts of assets
and liabilities shown which reprice or mature during a particular period were
determined in accordance with their contractual terms. All assets and
liabilities are placed in time periods which represent the earlier of their next
repricing or scheduled maturity. Adjustable-rate loans, for example, are placed
in the time periods which correspond to their next scheduled rate change.
Prepayment assumptions are made to indicate the rate at which these loans prepay
in excess of scheduled amortization. Prepayment assumptions for fixed-rate one-
to four-family residential mortgage loans are at annual rates of 1.00% to
18.00%.
Money market accounts, which increased from $263.3 million at December 31,
1997 to $274.9 million at December 31, 1998, and savings accounts, which
increased from $135.0 million at December 31, 1997 to $136.3 million at December
31, 1998, are included in interest-bearing liabilities anticipated to reprice
within three months. Demand and NOW accounts, which grew from $143.4 million at
December 31, 1997 to $170.3 million at December 31, 1998, are assumed to be
withdrawn at rates of approximately 19.50% in the next twelve months and 1.00%
to 18.00% per year in the years which follow. These assumed withdrawal rates are
based upon management's estimate of the impact of a substantial and sustained
rise in interest rates. At December 31, 1998, the Company had outstanding $175.0
million of borrowings from the Federal Home Loan Bank of New York (the "FHLB"),
an increase of $22.0 million from December 31, 1997, and had $68.8 million in
other borrowings at December 31, 1998 compared to $25.6 million at December 31,
1997.
Certain shortcomings are inherent in the method of analysis presented in the
foregoing table. For example, although certain assets and liabilities may have
similar maturities or periods of repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may
15
<PAGE>
fluctuate in advance of changes in market interest rates, while interest rates
on other types may lag behind changes in market rates. Additionally, certain
assets, such as adjustable-rate loans, have features which restrict the
magnitude of changes in interest rates on a short-term basis and over the life
of the asset. Further, in the event of changes in interest rate, prepayment and
early withdrawal levels would likely deviate significantly from those assumed in
calculating the table. Finally, should interest rates increase, the ability of
borrowers to service their debt may decrease.
At year end, the Bank conducted a rate shock test of all rate-sensitive assets
and liabilities. The test is a simulation of the impact an instantaneous change
in interest rates would have on the Bank's net interest income. The test is
conducted in two parts. First, all rates are raised 1 percent and annualized net
interest income is determined, then rates are lowered by 1 percent and net
interest income is again measured. The results are compared with anticipated
results when interest rates do not change. With rates raised 1 percent, the test
indicated a reduction in net interest income of $1.29 million. When rates were
lowered 1 percent, the test indicated an increase in net interest income of
$3.28 million. The test assumes that all categories of rates will move at the
same time and by the same amount. The test further assumes that depositor and
borrower preferences will not change, and therefore the composition of the
Company's balance sheet, will remain unchanged. There can be no assurance that
if interest rates did move by 1% that the Company's results of operations would
be impacted as indicated by these tests.
The Company's primary sources of funds have consisted of deposits,
amortization and prepayments of outstanding loans and mortgage-backed
securities, bond maturities, and such other sources as long- and short-term
borrowings, and sales of investment securities, loans, and mortgage-backed
securities. Scheduled maturities of borrowings during 1999 are $143.8 million.
Of these borrowings, $105.0 million are advances from the Federal Home Loan Bank
which are anticipated to be renewed. See Note 9 of Notes to Consolidated
Financial Statements for details. The remainder of borrowings are short-term in
nature, and the Company anticipates these to be renewed. Savings certificates
which are scheduled to mature during 1999 total $733.8 million. Management
expects that a substantial portion of these maturing certificates will remain on
deposit with the Company. At December 31, 1998, the Company had $100.0 million
of long-term borrowings. See Note 9 of Notes to Consolidated Financial
Statements for details.
The liquidity of the Company's operations, measured by the ratio of cash and
cash equivalents (not committed, pledged or required to liquidate specific
liabilities) to the sum of net withdrawable deposits and borrowings payable
within one year, averaged 8.42% in 1996, 7.41% in 1997, and 6.21% in 1998.
The primary source of cash and cash equivalent resources for the Company on an
unconsolidated basis is dividends from the Bank. During 1998, the Bank paid $7.8
million of dividends to the Company. The payment of such dividends by the Bank
is subject to various regulatory and other restrictions.
CAPITAL
- -------
Shareholders' equity increased from $120.9 million in 1997 to $135.0 million in
1998. The 1998 net income of $19.9 million, the unrealized appreciation of $1.2
million recognized under SFAS No. 115, and $0.8 million in new capital received
as a result of the exercise of stock options, were offset by the cash dividends
paid on common stock of $7.8 million. At year-end 1996, 1997, and 1998, the
Company's book value per common share was $12.92, $14.12, and $15.64,
respectively.
Capital adequacy is an important indicator of financial stability and
performance. Overall, the Company's capital position remains strong with a ratio
of total shareholders' equity to total assets of 7.26% at December 31, 1998, and
7.74% at December 31, 1997.
Banking industry regulators define minimum capital ratios for bank holding
companies and their bank subsidiaries. The Board of Governors of the Federal
Reserve System and the Federal Deposit Insurance Corporation (the "FDIC") also
have adopted regulations which group holding companies and banks into five broad
categories based on certain capital ratios. The five categories are "well
capitalized," "adequately capitalized," "under capitalized," "significantly
undercapitalized," and "critically undercapitalized." The Company and the Bank
meet the requirements for "well capitalized" at December 31, 1998. Under the
capital rules, the Bank's Tier I and total capital to risk-adjusted assets
ratios at December 31, 1998 were 9.33% and 10.58%, respectively. These compare
favorably with the minimum requirements of 4.00% for Tier I and 8.00% for total
capital. At December 31, 1998, the Bank's leverage ratio was 7.54%,
substantially higher than the minimum requirement of 4.00%.
16
<PAGE>
The following table presents the Bank's capital position at the dates
indicated based on the current capital guidelines:
<TABLE>
<CAPTION>
Capital Analysis Years Ended December 31,
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C>
Tier I:
Common Shareholders' Equity $ 140,869 $ 119,823 $ 108,331
Adjusted for FASB No. 115 (454) 733 877
Adjusted for unamortized goodwill (1,598) (1,893) (2,188)
- ------------------------------------------------------------------------------------------------------------
Total Tier I capital 138,817 118,663 107,020
- ------------------------------------------------------------------------------------------------------------
Tier II:
Allowable portion of reserve for possible credit losses 18,650 16,191 13,462
- ------------------------------------------------------------------------------------------------------------
Total Tier II capital 18,650 16,191 13,462
- ------------------------------------------------------------------------------------------------------------
Total risk-based capital $ 157,467 $ 134,854 $ 120,482
- ------------------------------------------------------------------------------------------------------------
Risk-adjusted assets $1,488,463 $1,292,251 $1,073,383
- ------------------------------------------------------------------------------------------------------------
Total average assets $1,841,173 $1,523,002 $1,327,570
- ------------------------------------------------------------------------------------------------------------
Amount by which capital exceeds minimum requirements:
Tier I capital/risk-adjusted assets $ 79,278 $ 66,973 $ 64,085
- ------------------------------------------------------------------------------------------------------------
Total risk-based capital/risk-adjusted assets $ 38,390 $ 31,474 $ 34,611
- ------------------------------------------------------------------------------------------------------------
Tier I capital/total average assets (leverage ratio) $ 83,582 $ 72,973 $ 67,193
- ------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Capital Ratios Regulatory Years Ended December 31,
Minimums 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tier I capital/risk-adjusted assets 4.0 9.33% 9.18% 9.97%
- ------------------------------------------------------------------------------------------------------------
Total risk-based capital/risk-adjusted assets 8.0 10.58 10.44 11.22
- ------------------------------------------------------------------------------------------------------------
Tier I capital/total average assets (leverage ratio) 3.0 to 5.0 7.54 7.79 8.06
===========================================================================================================
</TABLE>
EARNINGS PERFORMANCE
- --------------------
The operating results of the Company depend primarily on its net interest
income, which is the difference between interest income on interest-earning
assets, mainly loans and investments, and interest expense on interest-bearing
liabilities, primarily deposits and borrowings. The Company's operating results
also are affected by credit losses, operating expenses, the level of other
income, including gains or losses on sale of loans and securities, and other
fees.
17
<PAGE>
The following table sets forth, for and at the periods indicated, information
regarding (i) the total dollar amount of interest income from interest-earning
assets and the resulting average yields, (ii) the total dollar amount of
interest expense on interest-bearing liabilities and the resultant average cost,
(iii) net interest income, (iv) interest rate spread, (v) interest rate margin,
and (vi) ratio of interest-earning assets to interest-bearing liabilities. No
tax equivalent adjustments were made.
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
Interest Yield/Rate Interest Yield/Rate Interest Yield/Rate
-------- ---------- -------- ---------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Commercial loans $ 68,117 9.60% $ 56,504 9.79% $ 46,516 9.63%
Consumer loans:
Passbook 20 10.93 33 12.18 38 10.35
Overdraft checking 144 19.86 174 20.14 179 19.71
Business line of credit 111 10.87 9 10.11
Credit cards 1,549 16.18 1,416 15.56 1,377 15.62
Personal-direct 5,294 10.29 4,062 10.20 3,274 10.13
Personal-indirect-new auto 4,247 8.72 3,998 8.56 3,767 8.00
Personal-indirect-used auto 12,696 9.43 8,502 9.27 5,383 9.01
Personal-indirect-mobile homes 4,802 9.64 3,393 9.54 2,377 9.57
Personal-indirect-other 343 9.38 403 9.78 484 10.45
Home Equity Line of Credit 2,296 9.15 2,330 9.41 2,355 9.57
Checkcard reserve 475 32.38 269 28.80 48 23.19
Student 245 9.09 89 3.33 322 10.62
- ------------------------------------------------------------------------------------------------------------------------
Total consumer loans 32,222 9.79 24,678 9.62 19,604 9.49
- ------------------------------------------------------------------------------------------------------------------------
Mortgage loans:
Residential-fixed 3,843 7.21 3,283 8.27 4,274 8.24
Commercial-fixed 419 9.25 444 9.25 351 9.20
Residential-adjustable 4,109 7.57 5,460 7.78 5,727 7.35
Commercial-adjustable 11,419 9.19 12,475 9.13 11,833 9.05
- ------------------------------------------------------------------------------------------------------------------------
Total mortgage loans 19,790 8.37 21,662 8.62 22,185 8.39
- ------------------------------------------------------------------------------------------------------------------------
Investment securities 24,749 6.88 19,184 6.70 17,672 7.06
Mortgages held for sale 1,127 8.04 352 7.96 275 10.13
- ------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $146,005 8.86% $122,380 8.90% $106,252 8.80%
- ------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Deposits:
Savings $ 3,866 2.85% $ 3,867 2.87% $ 4,039 2.87%
Money market 11,984 4.36 11,613 4.56 10,526 4.47
Certificates of deposits 47,202 5.64 35,652 5.64 31,961 5.58
NOW 936 1.43 804 1.34 799 1.32
- ------------------------------------------------------------------------------------------------------------------------
Total deposits 63,988 4.62 51,936 4.56 47,325 4.48
- ------------------------------------------------------------------------------------------------------------------------
Borrowings 10,204 5.37 10,080 5.68 5,146 5.62
Mandatorily redeemable
preferred securities 1,075 8.18
- ------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 75,267 4.74 62,016 4.71 52,471 4.58
- ------------------------------------------------------------------------------------------------------------------------
Net interest income $ 70,738 $ 60,364 $ 53,781
========================================================================================================================
Interest rate spread 4.12% 4.19% 4.22%
========================================================================================================================
Interest rate margin 4.29 4.39 4.46
========================================================================================================================
Ratio of interest-earning assets
to interest-bearing liabilities 1.04x 1.04x 1.05x
========================================================================================================================
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
1998 Compared to 1997 1997 Compared to 1996
Increase (Decrease) Increase (Decrease)
Volume Rate Net Volume Rate Net
- ----------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income on interest-
earning assets:
Commercial loans $12,731 $(1,118) $11,613 $ 9,242 $ 746 $ 9,988
Consumer loans 7,100 444 7,544 4,803 271 5,074
Mortgage loans (1,256) (616) (1,872) (1,119) 596 (523)
Investment securities 5,807 533 6,340 2,593 (1,004) 1,589
- ----------------------------------------------------------------------------------------------------------
Total 24,382 (757) 23,625 15,519 609 16,128
- ----------------------------------------------------------------------------------------------------------
Interest expense on interest-
bearing liabilities:
Savings 27 (28) (1) (172) (172)
Money market 899 (528) 371 873 214 1,087
Certificates of deposit 11,550 11,550 3,345 346 3,691
NOW 73 59 132 (6) 11 5
- ----------------------------------------------------------------------------------------------------------
Total deposits 12,549 (497) 12,052 4,040 571 4,611
Borrowings 1,434 (235) 1,199 4,878 56 4,934
- ----------------------------------------------------------------------------------------------------------
Total 13,983 (732) 13,251 8,918 627 9,545
- ----------------------------------------------------------------------------------------------------------
Net interest income $10,399 $ (25) $10,374 $ 6,601 $ (18) $ 6,583
========================================================================================================
</TABLE>
The above table presents changes in interest income and interest expense
attributable to (i) changes in volume (change in volume multiplied by old rate),
and (ii) changes in rate (change in rate multiplied by old volume). The net
change attributable to the combined impact of volume and rate has been allocated
proportionately to the change due to volume and the change due to rate.
Net Interest Income
Net interest income is determined by the difference between rates earned on
interest-earning assets and the rates paid on interest-bearing liabilities
(interest rate spread), and the relative amounts of interest-earning assets and
interest-bearing liabilities. The interest income and the cost of funds of
financial institutions are significantly affected by general economic
conditions, policies of regulatory authorities, and other factors.
The Company earned net interest income of $53.8 million, $60.4 million, and
$70.7 million in 1996, 1997, and 1998, respectively. The Company's interest rate
spread decreased from 4.22% in 1996 to 4.19% in 1997 to 4.12% in 1998. The
increase in the average balance in the commercial and consumer loan portfolios
continued to produce increases in interest income that more than offset the rise
in cost of interest-bearing liabilities. This combination produced a 12.2%
increase in net interest income from 1996 to 1997 and a 17.2% increase from 1997
to 1998.
Interest on Commercial Loans
Growth in commercial lending continued in 1998 with the average balance of
commercial loans increasing from $483.1 million in 1996, to $577.0 million in
1997, and to $709.7 million in 1998. The yields on these loans increased from
9.63% in 1996 to 9.79% in 1997, but decreased to 9.60% in 1998. The Prime Rate
was 8.25% in 1996, increased to 8.50% in 1997, and decreased to 7.75% in 1998.
During this three year period, the interest on commercial loans was $46.5
million, $56.5 million, and $68.1 million, respectively, due to the steady
growth in the balance of this portfolio. The yield on approximately 80% of the
commercial loan portfolio fluctuates with changes in Prime. Yields on the
balance of the portfolio are fixed for up to five years with adjustments based
on other market indices.
Interest on Consumer Loans
Interest on consumer loans consists of interest on passbook, personal, direct
and indirect auto and mobile home, student loans, credit cards, overdraft
checking, checkcard reserve, and home equity line of credit.
The consumer loan portfolio has continued to grow and has continued to be
among the highest yielding assets of the Company. Average balances for the years
1996, 1997, and 1998 were $206.6 million, $256.6 million, and
19
<PAGE>
$329.1 million, respectively. Yields on all consumer loans for 1996, 1997, and
1998 were 9.49%, 9.62%, and 9.79%, respectively. Interest income on all these
loans continued to increase for the three year period 1996 through 1998 with
income of $19.6 million in 1996, $24.7 million in 1997, and $32.2 million in
1998.
The Company continues to emphasize the origination of direct and indirect auto
and mobile home loans. The single biggest area of consumer loan growth has been
in indirect used auto loans. The average balance of these loans have grown from
$59.7 million in 1996, to $91.8 million in 1997, and to $134.7 million in 1998.
The average rates paid on these loans has increased as well, providing yields of
9.01%, 9.27%, and 9.43% for the years 1996, 1997, and 1998, respectively.
Accordingly, income provided from these loans has also risen from $5.4 million
in 1996, $8.5 million in 1997, and finally $12.7 million in 1998. Indirect
mobile home loans have shown a 41.5% growth in interest income from 1997 to
1998. This has resulted from an increase in average balance from $35.6 million
in 1997 to $49.8 million in 1998, with an increase in the yield from 9.54% in
1997 to 9.64% in 1998. Direct personal loans have steadily increased for 1996,
1997, and 1998. Average balances have increased from $32.3 million in 1996, to
$39.8 million in 1997, and to $51.5 million in 1998. This has generated interest
income of $3.3 million in 1996 with an average yield of 10.13%, $4.1 million in
1997 with an average yield of 10.20%, and $5.3 million in 1998 with an average
yield of 10.29%.
Interest on Mortgage Loans
Interest on mortgage loans consists of interest on fixed- and adjustable-rate
residential mortgages and fixed- and adjustable-rate commercial real estate
mortgages.
Interest on mortgage loans declined $0.5 million from 1996 to 1997, and
declined $1.9 million from the twelve months ended December 31, 1997 to $19.8
million for the twelve months ended December 31, 1998. The average balance of
all mortgage loans declined from $264.4 million at December 31, 1996 to $251.3
million at December 31, 1997, to $236.4 million at December 31, 1998, and caused
the decline in the interest income earned on these loans. Yields on mortgage
loans rose from 8.39% for 1996 to 8.62% for 1997, and declined to 8.37% for the
twelve months ended December 31, 1998. The Bank continues to sell or securitize
fixed-rate mortgage loans as evidenced by an increase in sales of $44.8 million
from 1997 to 1998 to $122.7 million. Securitization of these same loans
increased $42.1 million from 1997 to 1998 to $43.8 million. This total increase
in sales and securitization of $86.9 million of these loans offset the increase
of originations from 1997 to 1998 of $82.3 million of fixed-rate residential
mortgages.
The average balance of adjustable-rate residential mortgages declined from
$77.9 million in 1996 to $70.1 million in 1997, and to $54.3 million in 1998.
Adjustable-rate residential mortgage originations declined significantly, from
$17.2 million in 1996 to $6.8 million in 1997, and declined further to $2.8
million in 1998. The fluctuation in origination levels is primarily a result of
changing consumer preferences for fixed- versus adjustable-rate loans as changes
occur from time to time in the rate differential between the two.
The average balance of adjustable-rate commercial real estate loans increased
from $130.8 million in 1996 to $136.7 million in 1997. The yields on these loans
increased from 9.05% in 1996 to 9.13% in 1997. This resulted in an increase in
interest income from these loans from $11.8 million in 1996 to $12.5 million in
1997. Although the average balance of adjustable-rate commercial real estate
loans decreased $12.4 million to $124.3 million in 1998, the average yield
increased to 9.19% resulting in interest income of $11.4 million for the year.
Interest and Dividends on Investments
The practice of the Company has been to reduce fixed-rate, long-term investments
and to acquire assets with shorter maturities or shorter estimated lives. In
1995, the Company reduced its position in fixed-rate, long-term investments and
replaced them with securities having maturities of five years or less, floating-
rate instruments, tax-free municipal securities, and securities that provided
advantageous tax benefits. The average balance of investment securities was
$250.3 million in 1996, $286.4 million in 1997, and $359.6 million in 1998.
Interest and dividends on investment securities were $17.7 million in 1996,
$19.2 million in 1997, and $24.7 million in 1998. The yields on these assets
decreased from 7.06% in 1996, to 6.70% in 1997, and increased to 6.88% in 1998.
20
<PAGE>
Interest on Deposits
Deposit balances continued to rise. In 1996, the average balance of all deposits
was $1,055.2 million, rising to $1,139.2 million in 1997. In 1998, average
balances rose $245.2 million to $1,384.4 million. Customer preference fuels
changes in deposit balances; this is reflected in a decline in savings account
average balances from $140.6 million in 1996 to $135.7 million in 1998, with a
minimal change in the rates during that time. Offsetting this level in savings
average balances was a growth in the average balance of money market deposits.
Average balances for these deposits for the years 1996, 1997, and 1998 were
$235.3 million, $254.7 million, and $275.1 million. This increase in money
market average balances accompanied an increase in the rates from 4.47% in 1996
to 4.56% in 1997. Interest expense was $10.5 million for 1996 rising to $11.6 in
1997. With the increase in average balance and the decrease in the average rate
paid in 1998 to 4.36%, interest expense rose to $12.0 million for the year. The
growth in the certificates of deposit balances was the major reason why the
interest expense on these products rose from $35.7 million in 1997 to $47.2
million in 1998. Average balances of certificates of deposits have steadily
increased from $572.9 million, $632.5 million, and $836.5 million in 1996, 1997,
and 1998, respectively. After an increase in the average rate of certificates of
deposit from 5.58% in 1996 to 5.64% in 1997, the average rate remained the same
at 5.64% in 1998. The Bank continues to monitor the cost and the availability of
deposits against the cost and levels of borrowing to determine the best funding
sources for the growth seen in the loan portfolios.
Interest on Borrowings
The average balance of borrowings increased from $91.6 million in 1996 to $177.4
million in 1997. The cost of borrowings increased from 5.62% in 1996 to 5.68% in
1997, and interest paid on borrowings increased from $5.1 million in 1996 to
$10.1 million in 1997. The average balance of borrowings during 1998 increased
to $203.1 million, and offset with a decrease in the average interest rate paid
on borrowings to 5.55%, caused interest paid on borrowings to increase to $11.3
million. This source of funding is used to supplement or enhance retail and
business deposits that in turn provide the funds for asset growth. See Note 9 in
Notes to Consolidated Financial Statements.
Provision for Credit Losses
The provision for credit losses was $10.0 million, $10.3 million, and $12.3
million for the years 1996, 1997, and 1998, respectively. The growth in the
commercial and consumer loan portfolio continued, and management increased the
allowance for possible credit losses in 1997 to $19.2 million. Net charge-offs
increased from $7.0 million in 1996, to $8.2 million in 1997, and to $9.3
million in 1998. In 1998, as the commercial and consumer loan portfolios
continued to increase, management increased the allowance for possible credit
losses to $22.2 million. With this provision increase in 1998, the Bank was able
to increase the allowance for possible credit losses to 1.63% of loans
outstanding at December 31, 1998 from 1.59% at December 31, 1997.
Gains (Losses) on Sale of Investments
As a result of investment security sales, the Company had net security gains of
$1.2 million in 1996. During 1997, the Company had net security gains of
$380,000, and in 1998, had net losses of $821,000.
Gains (Losses) on Sale of Loans
The losses on the sale of mortgages were $34,000 in 1996 and $377,000 in 1997.
These losses were principally the result of the Company selling and securitizing
mortgages. During 1998, the losses on sale of mortgages was $779,000.
21
<PAGE>
Non-interest Income
As shown in the chart below, non-interest income decreased from $8.1 million in
1996 to $6.3 million in 1997, and increased to $7.7 million in 1998. The
decrease of non-interest income in 1997 was mainly as a result of the loss of
one large merchant credit card relationship. The reduction of income was
substantially offset by a reduction in the processing fee expenses associated
with that merchant. Trust fees, service charges on deposit accounts, and other
fees and commissions reflected significant increases for 1997 and 1998. Mortgage
servicing fees continued to rise as the servicing portfolio continued to
increase. Fees and commissions from brokerage services declined as investors
using this service had less activity in the market in 1997, but increased in
1998.
<TABLE>
<CAPTION>
Analysis of Non-Interest Income
(Dollars in Thousands)
Percent Change
1998 1997 1996 1997-98 1996-97
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Service charges on deposit accounts $2,464 $2,296 $2,015 7.3% 13.9 %
Credit card fees 1,252 828 3,088 51.2 (73.2)
Mortgage servicing fees 1,214 1,071 1,020 13.4 5.0
Fees and commissions-brokerage services 518 407 670 27.3 (39.3)
Trust fees 994 709 595 40.2 19.2
Other charges, commissions, and fees 1,259 987 752 27.6 31.3
- ---------------------------------------------------------------------------------------------------------------------
$7,701 $6,298 $8,140 22.3% (22.6)%
=====================================================================================================================
</TABLE>
Operating Expense
Operating expense increased from $28.0 million in 1996 to $28.6 million in
1997 and to $32.0 million in 1998. The increase from 1996 to 1997 reflected
increased commissions paid to dealers for increased indirect lending of $1.6
million. As the contractual agreements with certain types of lending changed,
this expense declined to $1.0 million in 1998. This type of lending was a
significant area of asset growth for the Bank for 1996, 1997, and 1998. The
decline in expense associated with decreased credit card activity from 1996 to
1997 reversed in 1998 to show an increase of interchange fees to $0.9 million
for the year. This is consistent with the increase of credit card fees to $1.3
million for 1998. Costs associated with ORE properties increased from $0.4
million in 1996 to $0.9 million in 1997. In 1998, a net recovery of $19,000 was
shown for the year as gains on sales of ORE properties exceed writedowns and
losses during the year. Building occupancy increased as our Syracuse office
opened in December of 1996, and a purchase of a building to accommodate our
expanded lending function increased this expense by $0.3 million in 1997.
Since a substantial portion of operating expense relates directly to income
generation, an effective measurement of the control of operating expense is the
Efficiency Ratio. This ratio consists of operating expense divided by recurring
revenues (net interest income and non-interest income) on a pre-tax basis. The
Efficiency Ratio for the Company was 45.29%, 42.95%, and 40.78% for 1996, 1997,
and 1998, respectively. The Company's excellent achievement of a 40.78%
Efficiency Ratio ranks as one of the best in the country. The Company's ratio of
operating expense to average assets was 2.20% in 1996, 1.97% in 1997, and 1.84%
in 1998. Both ratios reflect the attention paid to expense control by management
and staff.
INCOME TAXES
- ------------
The Company utilizes SFAS No. 109, "Accounting for Income Taxes," which requires
an asset and liability approach to recognizing the tax effects of temporary
differences between tax and financial reporting. See Note 13 of Notes to
Consolidated Financial Statements for details.
The Company is subject to New York State and Delaware franchise taxes. State
taxes amounted to $2.3 million in 1996 and 1997, and $2.5 million in 1998.
22
<PAGE>
IMPACT OF INFLATION AND CHANGING PRICES
- ---------------------------------------
The financial statements and related data presented herein have been prepared in
accordance with generally accepted accounting principles which require the
measurement of financial position and operating results in terms of historical
dollars, without considering changes in the relative purchasing power of money
over time due to inflation. Unlike most industrial companies, virtually all of
the assets and liabilities of a financial institution are monetary in nature. As
a result, interest rates have a more significant impact on a financial
institution's performance than the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or in the same
magnitude as the price of goods and services.
OTHER MATTERS
- -------------
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities". This
Statement requires all derivative instruments to be carried at fair value.
Changes in fair value are recorded in either comprehensive income or net income,
depending on the nature of the derivative instrument. The Company does not
currently hold any derivative instruments and does not expect this pronouncement
to have a significant effect on the financial statements of the Company.
Year 2000 Compliance
The Year 2000 brings with it potential issues to all organizations who use
computers in the conduct of their business or depend on business associates who
use computers. To the extent computer use is date-sensitive, hardware or
software that recognizes the year by the last two digits may erroneously
recognize "00" as 1900 rather than 2000, which could result in errors or system
failures.
The Company utilizes a number of computers and computer software (systems) in
the conduct of its business. Many systems are for specific business segments and
others have broader corporate-wide use. The Company initiated the review of the
Year 2000 and the impact it would have in 1995. With this review, a strategic
plan to address the issues and maintain the technological standards of the
hardware and software within the Company was incorporated. This plan was
initiated and approved by senior officers within the Company and is revisited at
least quarterly to ensure portions of the plan are completed as scheduled and
progress is continuing with any problems being addressed. This plan included the
following steps:
. Awareness: Since 1995, the Company has been aware of, and has defined the
Year 2000 problem and has increased the awareness of all staff, vendors, and
customers to the problem. This awareness included gaining the support of
senior management to recognize the problem and provide the resources needed
to put together a plan and Task Force that would address and find solutions
for all areas affected by this unusual problem. The Task Force assembled a
strategy that would encompass all in-house systems, systems maintained by
outsourced parties, customers, suppliers, and any other vendors dealing with
the Company.
. Assessment: Inventories of all systems, hardware, media, interfaces, internal
programs and databases, vendor packages, and networks have been made and are
updated as needed. All inventoried items were prioritized by the impact they
would have on the Company's business. The single largest area of need was the
conversion to a core processor that responded to the problems encountered by
the Year 2000. This was accomplished by a conversion to M&I Data Services in
the fourth quarter of 1998. All peripheral software and equipment were
evaluated and addressed with a bank modernization project. Communication with
vendors to ascertain their status, plan and upgrades for Year 2000 compliance
was implemented. The acquisition of Skaneateles Bancorp, Inc. and the
requisite conversion of its data processing to the Company's processor will
eliminate any of the Year 2000 issues that may have arisen with their
processing. All other systems will be evaluated prior to the merger and
rectified as needed. The Company expects those to be minimal.
. Renovation: Since 1995, the Company has formulated and completed two
initiatives to maintain high quality data processing on an on-going basis.
Year 2000 issues were addressed within the larger issue of maintaining the
highest quality data processing available. In 1995, a Branch Automation
Project was started and continued into 1996. In 1996, a Back Office
Automation Project was completed. This provided the Company with Year 2000
compliant back office hardware and most software to address the concerns of
both technology modernization and Year 2000 issues. The cost of these
projects approximated $1.7 million which included both asset purchases and
employee costs. In October of 1998, BSB converted to M&I Data Services, which
provides data service to all of our core processing and delivery systems. The
M&I system is certified compliant by the Information Technology Association
of America. The cost of this conversion approximated $1.5 million which
included costs paid to the servicers to convert data from the old servicer to
the new and all employee costs
23
<PAGE>
associated with the process. The next largest renovation project was
outsourcing item processing to address both Year 2000 and technology needs.
This was completed in the fourth quarter of 1998 and costs associated with
this approximated $150,000. This was the last of the major projects needed to
address the Year 2000 technological concerns at the Company.
. Validation: Testing of all in-house hardware and software was conducted on an
independent Local Area Network that has been established at the Company
solely for that purpose. Systems supplied by vendors have been tested by the
vendors prior to conversion by the Bank or tested by Bank personnel if
already in use. Any updates supplied by vendors are tested by the vendors
prior to release and acceptance by the Bank. The Bank's core processor has
been tested by the vendor and will be proxy tested at another Bank in the
first quarter of 1999. Communication systems such as Automated Clearing House
and Federal Reserve Wire Transfer software will be tested in conjunction with
the vendor by the second quarter of 1999.
. Implementation: In this phase, systems should be tested and acceptable to the
user as being able to accommodate the Year 2000 issues. A significant number
of the Company's mission critical applications are supplied by third party
vendors. Remediation of the software is performed by the vendor, tested by
the vendor, and then provided to the Company. Saturday, January 1, 2000 will
be treated as a data processing conversion. Contingency plans are being
developed and will be completed in 1999.
Contact with significant vendors and commercial loan customers was made.
Commercial loan customers were asked to fill out a survey so assessment of their
status with regard to the complications of the upcoming Year 2000 issues and
their readiness for that time could be determined. Significant vendors were
queried as to their ability to continue to supply their product without delay
with the passing of Year 2000. Of course, the response of certain third parties
is beyond control of the Company.
Year 2000 compliance costs still to be recognized will approximate $100,000 of
equipment and personnel costs. These costs do not include normal ongoing costs
for computer hardware (including ATM's) and software that have been incurred or
would be replaced in the next year even without the presence of the Year 2000
issue as these pertain to the ongoing programs for updating the Company's
delivery infrastructure.
The Company has a contingency plan which continues to be reviewed and upgraded
as needed. This includes selecting an off-premise disaster recovery site with
alternative communication resources. An emergency branch location is designated
with an alternative power source. Giving public talks discussing the issues and
how the Bank is addressing each scenario will continue throughout 1999. Plans to
increase liquidity and increase staffing for on-site preparedness has already
been addressed.
Despite the Company's efforts in regards to the Year 2000 issue, there can be
no assurance that partial or total systems interruptions or the costs necessary
to update hardware and software would not have a material adverse effect upon
the Company's business, financial condition, results of operations, and business
prospects.
MARKET PRICES AND RELATED SHAREHOLDER MATTERS
- ---------------------------------------------
The common stock of the Company is listed on The Nasdaq Stock Market National
Market Tier under the symbol "BSBN". As of December 31, 1998, the Company had
1,742 shareholders of record and 8,633,883 shares of common stock issued and
outstanding. The number of shareholders does not reflect persons or entities who
hold their stock in nominee or "street" name through various brokerage firms.
Payment of dividends on the Company's common stock is subject to various
restrictions and limitations which may affect the Company's ability to pay cash
dividends in the future.
24
<PAGE>
The following table sets forth the market price information for the common stock
and the cash dividends paid per share, as adjusted for the three-for-two stock
split effective on September 10, 1997:
<TABLE>
<CAPTION>
1998
Price Range Cash Dividends
High Low Per Share
- --------------------------------------------------------------
<S> <C> <C> <C>
First Quarter $36.00 $28.00 $0.22
Second Quarter 35.25 27.50 0.22
Third Quarter 32.75 25.63 0.22
Fourth Quarter 33.00 22.00 0.25
1997
Price Range Cash Dividends
High Low Per Share
- --------------------------------------------------------------
First Quarter $21.33 $17.17 $0.17
Second Quarter 26.00 19.50 0.17
Third Quarter 29.00 23.83 0.20
Fourth Quarter 37.25 25.75 0.22
</TABLE>
25
<PAGE>
REPORT OF INDEPENDENT AUDITORS
THE BOARD OF DIRECTORS
BSB BANCORP, INC.
BINGHAMTON, NEW YORK
In our opinion, the accompanying consolidated statements of condition and the
related consolidated statements of income and shareholders' equity and cash
flows present fairly, in all material respects, the financial position of BSB
Bancorp, Inc. (the "Company") and Subsidiaries at December 31, 1998 and 1997,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers L.L.P.
Syracuse, New York
January 29, 1999
26
<PAGE>
BSB BANCORP, INC.
CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
December 31,
1998 1997
-----------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS Cash and due from banks $ 36,630,466 $ 36,066,241
Investment securities available for sale (Note 2) 398,642,521 271,120,484
Investment securities held to maturity (Note 2) 8,522,237 13,867,971
Mortgages held for sale 16,806,155 7,459,397
Loans (Notes 3, 4, 5, and 6):
Commercial 772,793,371 654,243,259
Consumer 359,190,985 299,306,752
Real estate 230,900,712 252,246,799
-----------------------------------------------------------------------------------------
Total loans 1,362,885,068 1,205,796,810
Less: Net deferred fees (costs) (185,761) 594,544
Allowance for possible credit losses 22,168,100 19,207,473
-----------------------------------------------------------------------------------------
Net loans 1,340,902,729 1,185,994,793
Bank premises and equipment (Note 7) 10,100,575 9,500,037
Accrued interest receivable 14,818,460 11,117,057
Other real estate 2,121,852 2,784,450
Intangible asset 1,597,916 1,892,916
Other assets 28,936,489 20,767,402
-----------------------------------------------------------------------------------------
$1,859,079,400 $1,560,570,748
=========================================================================================
LIABILITIES Due to depositors (Note 8) $1,472,746,382 $1,239,508,352
AND Borrowings (Note 9) 213,758,805 178,643,518
SHAREHOLDERS' Company obligated mandatorily redeemable
EQUITY preferred securities of subsidiary, Capital Trust I,
holding solely junior subordinated debentures
of the Company 30,000,000
Other liabilities 7,583,370 21,552,504
Commitments (Note 11)
Shareholders' Equity (Notes 15 and 16):
Preferred stock, par value $.01 per share;
2,500,000 shares authorized; none issued
Common stock, par value $.01 per share;
30,000,000 shares authorized; 11,237,470 and
11,159,924 shares issued 112,375 111,599
Additional paid-in capital 30,145,303 29,215,440
Undivided profits 134,065,569 122,029,557
Accumulated other comprehensive income 453,849 (733,065)
Treasury stock, at cost; 2,603,587 and 2,602,692 shares (29,786,253) (29,757,157)
-----------------------------------------------------------------------------------------
Total Shareholders' Equity 134,990,843 120,866,374
-----------------------------------------------------------------------------------------
$1,859,079,400 $1,560,570,748
=========================================================================================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
27
<PAGE>
BSB BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $120,129,396 $102,844,067 $ 88,304,418
Interest on investment securities 24,748,926 19,184,116 17,672,004
Interest on mortgages held for sale 1,127,037 352,146 275,145
- --------------------------------------------------------------------------------------------------------
Total interest income 146,005,359 122,380,329 106,251,567
- --------------------------------------------------------------------------------------------------------
Interest expense:
Interest on savings deposits 3,866,369 3,866,917 4,038,946
Interest on time accounts 47,201,861 35,651,668 31,960,648
Interest on money market deposit accounts 11,984,551 11,613,153 10,525,401
Interest on NOW accounts 935,592 804,015 799,362
Interest on borrowed funds 10,203,828 10,080,235 5,146,385
Interest on mandatorily redeemable securities of subsidiary 1,075,171
- --------------------------------------------------------------------------------------------------------
Total interest expense 75,267,372 62,015,988 52,470,742
- --------------------------------------------------------------------------------------------------------
Net interest income 70,737,987 60,364,341 53,780,825
Provision for credit losses (Note 4) 12,256,567 10,314,484 9,971,256
- --------------------------------------------------------------------------------------------------------
Net interest income after provision for credit losses 58,481,420 50,049,857 43,809,569
Gains (losses) on sale of securities (821,037) 380,382 1,207,767
Losses on sale of loans (778,659) (377,494) (34,454)
Non-interest income:
Service charges on deposit accounts 2,463,610 2,296,081 2,014,876
Credit card fees 1,252,494 827,940 3,088,327
Mortgage servicing fees 1,213,705 1,071,077 1,020,493
Fees and commissions-brokerage services 518,353 406,581 669,789
Trust fees 993,990 709,333 595,365
Other charges, commissions, and fees 1,258,499 986,782 751,391
- --------------------------------------------------------------------------------------------------------
Total non-interest income 7,700,651 6,297,794 8,140,241
- --------------------------------------------------------------------------------------------------------
Operating expense:
Salaries, pensions, and other employee benefits 15,432,114 13,466,108 12,618,628
Building occupancy 2,697,478 2,654,666 2,377,978
Dealer commission expense 996,127 1,626,361 985,037
Computer service fees 1,345,631 924,679 875,975
Services 3,134,564 2,309,118 2,450,229
FDIC insurance 171,682 138,904 246,955
Goodwill 295,000 295,000 295,000
Interchange fees 924,689 573,069 2,165,218
Other real estate (18,529) 892,828 387,578
Other expenses 7,010,064 5,749,806 5,642,479
- --------------------------------------------------------------------------------------------------------
Total operating expense 31,988,820 28,630,539 28,045,077
- --------------------------------------------------------------------------------------------------------
Income before income taxes 32,593,555 27,720,000 25,078,046
Provision for income taxes (Note 13) 12,723,086 10,733,646 9,874,419
- --------------------------------------------------------------------------------------------------------
NET INCOME $ 19,870,469 $ 16,986,354 $ 15,203,627
========================================================================================================
Earnings per share (Notes 1 and 14):
Basic $ 2.31 $ 2.00 $ 1.72
Diluted $ 2.24 $ 1.93 $ 1.67
========================================================================================================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
28
<PAGE>
BSB BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Paid-In Undivided Treasury Comprehensive
Stock Capital Profits Stock Income Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ 72,709 $26,861,407 $101,518,771 $(11,848,119) $ 168,878 $116,773,646
Comprehensive income:
Net income 15,203,627 15,203,627
Other comprehensive income,
net of tax:
Unrealized depreciation in
available for sale securities,
net of reclassification
amount (Note 2) (1,045,525) (1,045,525)
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income 15,203,627 (1,045,525) 14,158,102
Stock options exercised (Note 15) 735 788,143 788,878
Tax benefit on stock options 174,597 174,597
Cash dividend paid on common
stock ($.59 per share) (5,257,190) (5,257,190)
Treasury stock purchased (17,909,038) (17,909,038)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 73,444 27,824,147 111,465,208 (29,757,157) (876,647) 108,728,995
Comprehensive income:
Net income 16,986,354 16,986,354
Other comprehensive income,
net of tax:
Unrealized appreciation in
available for sale securities,
net of reclassification
amount (Note 2) 143,582 143,582
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income 16,986,354 143,582 17,129,936
Effect of three-for-two stock split 37,142 (37,142)
Stock options exercised (Note 15) 1,013 1,290,022 1,291,035
Tax benefit on stock options 138,413 138,413
Cash dividend paid on common
stock ($.76 per share) (6,422,005) (6,422,005)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 111,599 29,215,440 122,029,557 (29,757,157) (733,065) 120,866,374
Comprehensive income:
Net income 19,870,469 19,870,469
Other comprehensive income,
net of tax:
Unrealized appreciation in
available for sale securities,
net of reclassification
amount (Note 2) 1,186,914 1,186,914
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income 19,870,469 1,186,914 21,057,383
Stock options exercised (Note 15) 776 821,966 822,742
Tax benefit on stock options 107,897 107,897
Cash dividend paid on common
stock ($.91 per share) (7,834,457) (7,834,457)
Treasury stock purchased (29,096) (29,096)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 $112,375 $30,145,303 $134,065,569 $(29,786,253) $ 453,849 $134,990,843
====================================================================================================================================
</TABLE>
THE ACCOMPANYING STATEMENTS ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
29
<PAGE>
BSB BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities:
Net income $ 19,870,469 $ 16,986,354 $ 15,203,627
Adjustments to reconcile net income to net cash provided by
operating activities:
Deferred taxes (1,449,292) (728,241) (1,768,729)
Provision for credit losses 12,256,567 10,314,484 9,971,256
Realized losses (gains) on available for sale investment securities 821,037 (380,382) (1,207,767)
Other losses, net 229,357 139,789 (61,033)
Depreciation and amortization 1,734,931 1,731,211 1,406,226
Net accretion of premiums and discounts
on investment securities (1,531,951) (194,045) (388,306)
Net (accretion) amortization of premiums and discounts on loans (780,304) 318 (11,254)
Sales of loans originated for sale 69,423,654 44,060,371 27,460,903
Net increase in loans originated for sale (87,338,586) (50,243,273) (27,896,736)
Writedowns of other real estate 832,727 960,522 416,880
Net change in other assets and liabilities (24,932,353) (1,423,222) (47,376)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash (used) provided by operating activities (10,863,744) 21,223,886 23,077,691
- ----------------------------------------------------------------------------------------------------------------------------
Investing activities:
Proceeds from calls of held to maturity investment securities 8,458,827 14,555,814 19,094,627
Purchases of held to maturity investment securities (3,868,953) (6,159,504) (28,365,124)
Principal collected on held to maturity investment securities 744,782 2,101,289 4,250,731
Proceeds from sales of available for sale investment securities 188,641,769 179,700,006 153,216,354
Purchases of available for sale investment securities (294,771,518) (214,080,858) (183,856,490)
Principal collected on available for sale investment securities 24,927,723 29,000,314 21,711,698
Net increase in loans (260,889,318) (245,960,273) (148,199,145)
Proceeds from sales of loans 57,046,779 35,126,205 31,606,144
Proceeds from sales of other real estate 1,852,231 1,583,116 2,125,775
Other (2,026,858) (1,917,566) (2,823,653)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (279,884,536) (206,051,457) (131,239,083)
- ----------------------------------------------------------------------------------------------------------------------------
Financing activities:
Net increase in demand deposits, NOW accounts, savings
accounts, and money market deposit accounts 39,710,307 38,491,228 31,394,965
Net increase in time deposits 193,527,722 82,964,820 80,192,156
Net change in short-term borrowings (34,884,713) 58,247,456 23,353,234
Net change of long-term borrowings 70,000,000 (105,900) (1,800,000)
Net proceeds from issuance of capital securities 30,000,000
Proceeds from exercise of stock options 822,742 1,291,035 788,878
Purchases of treasury stock (29,096) (17,909,038)
Dividends paid (7,834,457) (6,422,005) (5,257,190)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 291,312,505 174,466,634 110,763,005
- ----------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 564,225 (10,360,937) 2,601,613
Cash and cash equivalents at beginning of year 36,066,241 46,427,178 43,825,565
- ----------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 36,630,466 $ 36,066,241 $ 46,427,178
============================================================================================================================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest credited on deposits and paid on other borrowings $ 74,180,370 $ 60,861,267 $ 52,471,389
- ----------------------------------------------------------------------------------------------------------------------------
Income taxes $ 15,096,968 $ 10,580,441 $ 11,663,132
- ----------------------------------------------------------------------------------------------------------------------------
Non-cash investing activity:
Securitization of mortgage loans and transfers to other real estate $ 45,247,855 $ 5,329,403 $ 28,131,143
- ----------------------------------------------------------------------------------------------------------------------------
Unrealized appreciation (depreciation) in securities $ 2,036,833 $ 246,398 $ (1,794,198)
============================================================================================================================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
30
<PAGE>
BSB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- -------------------------------------------------
Nature of Operations
BSB Bancorp, Inc. (the "Company") is the bank holding company of BSB Bank and
Trust Company (the "Bank"). The Bank is a New York-chartered commercial bank and
trust company and operates 13 branches in Broome, Tioga, Chenango, Onondaga, and
Chemung Counties of New York State. The Bank is in the business of providing a
wide variety of loan and deposit products to its commercial and consumer
customers, and also provides mortgage banking, trust, municipal, and other
related services.
Principles of Consolidation
The consolidated financial statements of the Company include the accounts of the
Bank and the Bank's wholly owned subsidiaries, after elimination of intercompany
accounts and transactions.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash equivalents include cash and due from banks and federal funds sold.
Generally, federal funds are purchased and sold for one-day periods.
Investment Securities
The Bank has classified its investment securities as held to maturity or
available for sale. Held to maturity securities are those for which the Bank has
the positive intent and ability to hold to maturity, and are reported at cost,
adjusted for amortization of premiums and accretion of discounts. Securities not
classified as held to maturity are classified as available for sale and reported
at market value, with net unrealized gains and losses reflected as a separate
component of shareholders' equity, net of the applicable income tax effect. None
of the Bank's securities have been classified as trading securities.
Purchases and sales of securities are recorded as of the settlement date.
Premiums and discounts on securities are amortized and accreted, respectively,
on a systematic basis over the period to maturity, estimated life, or earliest
call date of the related security. Gains or losses on securities sold are
computed based on identified cost.
Mortgages Held For Sale
Mortgages held for sale are carried at the lower of cost or fair value. Fair
value is determined in the aggregate.
Income Recognition on Impaired and Nonaccrual Loans
Loans, including impaired loans, are generally classified as nonaccrual if they
are past due as to maturity or payment of principal or interest for a period of
more than 90 days. While a loan is classified as nonaccrual and the future
collectibility of the recorded loan balance is doubtful, collections of interest
and principal are generally applied as a reduction to principal outstanding.
When future collectibility of the recorded loan balance is expected, interest
income may be recognized on a cash basis.
Deferred Loan Fees and Costs
Nonrefundable loan fees and related direct costs are deferred and amortized over
the life of the loan as an adjustment of loan yield.
31
<PAGE>
Allowance for Possible Credit Losses
The allowance for possible credit losses is maintained at a level considered
adequate to provide for potential credit losses related to lending activities.
The allowance is increased by provisions charged to expense. The level of the
allowance is based upon management's evaluation of potential losses relating to
outstanding loans, as well as prevailing economic conditions. Loans are charged
against the allowance for possible credit losses when management believes that
the collectibility of principal is unlikely.
A loan is considered impaired, based on current information and events, if it
is probable that the Bank will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. The measurement of impaired loans is generally based upon the present
value of expected future cash flows discounted at the historical effective
interest rate, except that all collateral-dependent loans are measured for
impairment based on the fair value of the collateral.
Banking Premises and Equipment
Banking premises and equipment are stated at cost and depreciated on a straight-
line basis over the estimated useful lives of the related assets (15-50 years
for bank premises and 3-10 years for furniture and equipment). Maintenance and
repairs are charged to operating expenses as incurred.
Other Real Estate
Other real estate is comprised of real estate acquired through foreclosure and
is recorded at the lower of cost or fair value (net of estimated costs to sell)
at the date of acquisition.
Intangible Asset
Intangible asset represents the premium paid in connection with the June 1994
acquisition of 2 branches of the Columbia Banking F.S.A. from the RTC. The
premium of $2,950,000, less accumulated amortization of $1,352,084, is being
amortized over a ten-year period.
Earnings Per Share
Basic and diluted earnings per share are presented for each period in which an
income statement is presented. Basic earnings per share is based on the weighted
average shares actually outstanding for the period. Diluted earnings per share
reflects the dilutive effect of stock options.
Per share information for all years presented has been adjusted to reflect the
3-for-2 stock split effective on September 10, 1997.
Fair Value of Financial Instruments
The following methods and assumptions were used by the Bank in estimating its
fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the statements of
condition for cash and short-term instruments approximate those assets' fair
value.
Investment securities: Fair values for investment securities are based on
quoted market prices or dealer quotes.
Loans and mortgages held for sale: Fair values for loans are estimated using
discounted cash flow analysis, based on interest rates approximating those
currently being offered for loans with similar terms and credit quality. The
fair value of accrued interest approximates carrying value.
Deposits: The fair values disclosed for non-interest bearing accounts and
accounts with no stated maturities are, by definition, equal to the amount
payable on demand at the reporting date. The fair value of time deposits was
estimated by discounting expected monthly maturities at interest rates
approximating those currently being offered on time deposits of similar terms.
The fair value of accrued interest approximates carrying value.
Borrowings and mandatorily redeemable securities: The carrying amounts of
repurchase agreements and other short-term borrowings approximate their fair
values. Fair values of long-term borrowings are estimated using discounted cash
flows, based on current market rates for similar borrowings.
Off-balance sheet instruments: Off-balance sheet financial instruments consist
of letters of credit, commitments to extend credit. Such instruments are fair
valued based on fees and interest rates currently charged to enter into
agreements with similar terms and credit quality.
32
<PAGE>
Comprehensive Income
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income". This pronouncement requires
the Company to report the effects of unrealized investment holding gains or
losses on comprehensive income. This statement has been applied to prior periods
and has been presented in the Statements of Changes in Shareholders' Equity.
Subsequent Event
On January 25, 1999, the Company entered into an agreement for BSB Bancorp to
acquire Skaneateles Bancorp, Inc., the holding company for Skaneateles Savings
Bank, in a tax-free, stock-for-stock exchange. The Company expects to issue
approximately 1,400,000 shares of stock in exchange for the outstanding shares
of Skaneateles Bancorp stock which is estimated to result in a .970 exchange
ratio. The transaction is subject to regulatory and shareholder approval.
Skaneateles Savings Bank operates 9 banking offices in the Onondaga and Oswego
Counties of New York State and had $276,148,000 of assets and $19,101,000 of
shareholders' equity at December 31, 1998. The transaction is expected to be
completed in the second or third quarter of 1999.
Reclassifications
Certain data for prior years has been reclassified to conform to the current
year's presentation. These reclassifications had no effect on net income.
NOTE 2-INVESTMENT SECURITIES
- ----------------------------
The carrying value and market value of the investment securities portfolio at
December 31 are summarized as follows:
<TABLE>
<CAPTION>
1998
- -------------------------------------------------------------------------------------
Gross Gross
Carrying Unrealized Unrealized Market
Value Gains Losses Value
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale portfolio:
U.S. Government Agencies $203,526,367 $1,203,443 $1,043,034 $203,686,776
Municipal obligations 10,358,947 215,664 152 10,574,459
Mortgage-backed securities 167,040,390 1,151,094 810,918 167,380,566
Equity securities 16,937,977 63,593 850 17,000,720
- -------------------------------------------------------------------------------------
$397,863,681 $2,633,794 $1,854,954 $398,642,521
- -------------------------------------------------------------------------------------
Held to maturity portfolio:
Corporate debt securities $ 1,020,308 $ 300,093 $ 270,721 $ 1,049,680
Municipal obligations 6,348,415 189,272 768 6,536,919
Mortgage-backed securities 1,153,514 28,278 1,181,792
- -------------------------------------------------------------------------------------
$ 8,522,237 $ 517,643 $ 271,489 $ 8,768,391
=====================================================================================
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
1997
- -------------------------------------------------------------------------------------------------------------------
Gross Gross
Carrying Unrealized Unrealized Market
Value Gains Losses Value
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale portfolio:
U.S. Government Agencies $174,290,580 $ 700,157 $ 792,719 $174,198,018
Corporate debt securities 5,024,961 23,439 5,048,400
Municipal obligations 931,849 54,243 986,092
Mortgage-backed securities 76,810,120 527,848 1,819,890 75,518,078
Equity securities 15,320,968 49,108 180 15,369,896
- -------------------------------------------------------------------------------------------------------------------
$272,378,478 $1,354,795 $2,612,789 $271,120,484
- -------------------------------------------------------------------------------------------------------------------
Held to maturity portfolio:
U.S. Government Agencies $ 302,047 $ 15 $ 302,062
Corporate debt securities 726,730 112,451 $ 1 839,180
Municipal obligations 8,748,339 123,113 130,825 8,740,627
Mortgage-backed securities 4,090,855 168,472 4,259,327
- -------------------------------------------------------------------------------------------------------------------
$ 13,867,971 $ 404,051 $ 130,826 $ 14,141,196
===================================================================================================================
</TABLE>
The following reflects the net unrealized gains (losses) on available for sale
securities on a before and net of tax basis, including its effect on other
comprehensive income:
<TABLE>
<CAPTION>
Before Tax Tax (Expense) Net of Tax
Amount or Benefit Amount
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1998
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period $ 2,857,870 $(1,192,516) $ 1,665,354
Less: Reclassification adjustment for gains (losses)
realized in net income (821,037) 342,597 (478,440)
- ----------------------------------------------------------------------------------------------------------------------
Net unrealized gains (losses) 2,036,833 (849,919) 1,186,914
- ----------------------------------------------------------------------------------------------------------------------
Other comprehensive income $ 2,036,833 $ (849,919) $ 1,186,914
======================================================================================================================
1997
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period $ (133,984) $ 55,917 $ (78,067)
Less: Reclassification adjustment for gains (losses)
realized in net income 380,382 (158,733) 221,649
- ----------------------------------------------------------------------------------------------------------------------
Net unrealized gains (losses) 246,398 (102,816) 143,582
- ----------------------------------------------------------------------------------------------------------------------
Other comprehensive income $ 246,398 $ (102,816) $ 143,582
======================================================================================================================
1996
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period $(3,001,965) $ 1,252,634 $ (1,749,331)
Less: Reclassification adjustment for gains (losses)
realized in net income 1,207,767 (503,961) 703,806
- ----------------------------------------------------------------------------------------------------------------------
Net unrealized gains (losses) (1,794,198) 748,673 (1,045,525)
- ----------------------------------------------------------------------------------------------------------------------
Other comprehensive income $(1,794,198) $ 748,673 $ (1,045,525)
======================================================================================================================
</TABLE>
34
<PAGE>
The carrying value and market value of debt securities at December 31, 1998, by
contractual maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
certain obligations with or without penalties.
<TABLE>
<CAPTION>
Carrying Market
Value Value
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Securities available for sale:
Within one year $ 1,106,372 $ 1,103,003
After one year but within five years 40,057,843 40,285,671
After five years but within ten years 190,508,613 190,968,874
After ten years 149,252,876 149,284,253
- -------------------------------------------------------------------------------------------------------------------
$ 380,925,704 $ 381,641,801
- -------------------------------------------------------------------------------------------------------------------
Securities held to maturity:
Within one year $ 4,014,659 $ 3,745,795
After one year but within five years 482,055 491,307
After five years but within ten years 840,443 1,223,894
After ten years 3,185,080 3,307,395
- -------------------------------------------------------------------------------------------------------------------
$ 8,522,237 $ 8,768,391
===================================================================================================================
</TABLE>
The gross realized gains and gross realized losses on investment securities
transactions are summarized below:
<TABLE>
<CAPTION>
Year ended December 31, 1998 Available For Sale Held To Maturity
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Gross gains $ 822,817 $166,228
Gross losses 1,791,512 18,570
- -------------------------------------------------------------------------------------------------------------------
Net gains $ (968,695) $147,658
===================================================================================================================
Year ended December 31, 1997 Available For Sale Held To Maturity
- -------------------------------------------------------------------------------------------------------------------
Gross gains $ 1,159,456 $ 5,900
Gross losses 784,974
- -------------------------------------------------------------------------------------------------------------------
Net gains $ 374,482 $ 5,900
===================================================================================================================
Year ended December 31, 1996 Available For Sale Held To Maturity
- -------------------------------------------------------------------------------------------------------------------
Gross gains $ 1,456,991
Gross losses 249,224
- -------------------------------------------------------------------------------------------------------------------
Net gains $ 1,207,767
===================================================================================================================
</TABLE>
Gains and losses related to held to maturity securities represents the results
of sales of held to maturity securities which had less than 15% of their
original principal remaining.
Investment securities at December 31, 1998 and 1997 include approximately
$343,812,000 and $230,225,000, respectively, pledged under various agreements,
principally municipal deposits, letters of credit, lines of credit, and
municipal option put securities.
NOTE 3-LOANS
- --------------------------------------------------------------------------------
Substantially all of the Bank's loans are granted to borrowers concentrated
primarily within Broome, Tioga, Chenango, Onondaga, and Chemung Counties, and
other communities located in upstate New York.
35
<PAGE>
NOTE 4-ALLOWANCE FOR POSSIBLE CREDIT LOSSES
- --------------------------------------------------------------------------------
Changes in the allowance for possible credit losses at December 31 are presented
in the following summary:
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $19,207,473 $17,053,647 $14,065,000
Recoveries credited 1,227,158 1,717,734 1,831,990
Provision for credit losses 12,256,567 10,314,484 9,971,256
Loans charged off 10,523,098 9,878,392 8,814,599
- ------------------------------------------------------------------------------------------------------------------
Balance at end of year $22,168,100 $19,207,473 $17,053,647
==================================================================================================================
</TABLE>
At December 31, 1998 and 1997, the recorded investment in loans for which
impairment has been recognized in accordance with SFAS No. 114 totaled
$10,605,739 and $12,045,259, respectively. A valuation allowance aggregating
$4,145,639 and $4,302,507 was recorded against impaired loans at December 31,
1998 and 1997, respectively. The average recorded investment in impaired loans
was approximately $8,965,626 in 1998 and $8,879,435 in 1997. The Bank
recognized, on a cash basis, $255,868 and $272,374 of interest on impaired loans
during 1998 and 1997, respectively (during the portion of the year they were
impaired).
NOTE 5-LOAN SERVICING
- --------------------------------------------------------------------------------
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial condition. The unpaid principal balances of
mortgage loans serviced for others was $481,393,958 and $392,019,810 at December
31, 1998 and 1997, respectively.
Mortgage servicing rights capitalized and amortization recognized on those
rights were not significant.
NOTE 6-LOANS TO RELATED PARTIES
- --------------------------------------------------------------------------------
At December 31, 1998, loans to directors and officers or to entities (or other
shareholders of such entities) which owned or controlled 10% or more of the
Company's voting stock were $10,513,177. During 1998, new loans to such related
parties amounted to $6,999,308 and repayments amounted to $6,830,202.
NOTE 7-BANK PREMISES AND EQUIPMENT
- --------------------------------------------------------------------------------
A summary of bank premises and equipment at December 31 is shown as follows:
<TABLE>
<CAPTION>
1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 1,166,327 $ 1,166,327
Banking premises 11,685,923 11,133,105
Furniture and equipment 12,128,200 10,899,341
- -------------------------------------------------------------------------------------------------------------------
24,980,450 23,198,773
Less: Accumulated depreciation 14,879,875 13,698,736
- -------------------------------------------------------------------------------------------------------------------
$10,100,575 $ 9,500,037
===================================================================================================================
</TABLE>
NOTE 8-DUE TO DEPOSITORS
- --------------------------------------------------------------------------------
A summary of amounts due to depositors at December 31 is shown as follows:
<TABLE>
<CAPTION>
1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Savings accounts $ 136,331,582 $ 135,047,208
Money market deposit accounts 274,860,915 263,344,699
Certificates of deposit 891,235,544 697,707,822
NOW accounts 81,967,358 67,249,777
Non-interest-bearing deposit accounts 88,350,983 76,158,846
- ------------------------------------------------------------------------------------------------------------------
$1,472,746,382 $1,239,508,352
===================================================================================================================
</TABLE>
36
<PAGE>
Time deposits with balances in excess of $100,000 amounted to approximately
$285,618,000 and $168,161,000 at December 31, 1998 and 1997, respectively. The
approximate maturity of time deposits follows:
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------------------------------------------------
Year of Maturity Amount Percent Amount Percent
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 $733,836,826 82.3% $487,555,677 69.9%
2 114,889,045 12.9 149,085,074 21.3
3 25,462,198 2.9 47,836,197 6.9
4 13,661,336 1.5 7,789,886 1.1
5 and over 3,386,139 0.4 5,440,988 0.8
- ---------------------------------------------------------------------------------------------------------------------------
$891,235,544 100.0% $697,707,822 100.0%
===========================================================================================================================
</TABLE>
NOTE 9-BORROWINGS
- ------------------------------------------------------------------------------
The following is a summary of borrowings at December 31:
<TABLE>
<CAPTION>
1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Municipal option put securities $ 1,892,828 $ 1,892,828
Federal Home Loan Bank advances 175,000,000 153,000,000
Mandatorily redeemable preferred securities 30,000,000
Securities sold under repurchase agreements 36,865,977 23,750,690
- ---------------------------------------------------------------------------------------------------------------------------
$ 243,758,805 $ 178,643,518
===========================================================================================================================
</TABLE>
Borrowings at December 31, 1998 have maturity dates as follows:
<TABLE>
<CAPTION>
Weighted
Average Rate Amount
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
January 4, 1999 4.75% $ 75,000,000
January 4, 1999 4.50 36,865,977
January 11, 1999 5.63 30,000,000
September 11, 1999 7.33 1,892,828
FHLB obligations due - 2008 4.92 70,000,000
Mandatorily redeemable preferred securities - 2028 8.13 30,000,000
- ----------------------------------------------------------------------------------------------------------------------------
5.30% $243,758,805
============================================================================================================================
</TABLE>
Information related to short-term borrowings at December 31 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding balance at end of year $143,758,805 $178,643,518 $120,501,962
Average interest rate 4.90% 6.13% 6.44%
Maximum outstanding at any month end $176,846,590 $225,971,919 $127,656,192
Average amount outstanding during year $142,485,096 $177,391,880 $ 91,604,941
Average interest rate during year 5.46% 5.68% 5.62%
=============================================================================================================================
</TABLE>
Average amounts outstanding and average interest rates are computed using
weighted monthly averages.
On July 24, 1998, the Company formed a subsidiary business trust, BSB
Capital Trust I, L.L.C. (the "Trust"), for the purpose of issuing preferred
securities which qualify as Tier I capital. Concurrent with its formation, the
Trust issued $30,000,000 at par value of 8.125% preferred securities in an
exempt offering. The preferred securities are non-voting, mandatorily redeemable
in 2028, and guaranteed by the Company. The entire net proceeds to the Trust
from the offering were invested in junior subordinated obligations of the
Company. The costs related to the issuance of these securities are capitalized
and amortized over the life of the period to redemption on a straightline basis.
The net proceeds were used to fund commercial and consumer loan growth.
The collateral agent requires that the market value of the collateral for
the municipal option put securities must be maintained at 150% of the
outstanding balance of the agreements. The Bank has assigned mortgage-backed
securities as collateral for the agreements. Such securities have a market value
aggregating $11,158,000, and $7,925,000 at December 31, 1998 and 1997,
respectively.
37
<PAGE>
At December 31, 1998, the Bank had available a line of credit with the
Federal Home Loan Bank of New York ("FHLB") subject to the amount of available
collateral, of which $75,000,000 is outstanding as of December 31, 1998. This
outstanding balance is collateralized by certain mortgage loans, mortgage-backed
securities, and other investment securities under a blanket pledge agreement
with the FHLB. The Bank also had available a $15,000,000 unsecured line of
credit with First Union Corp., which requires daily repayment.
Securities sold under repurchase agreements represent the purchase of
interests in government securities by commercial checking customers which are
repurchased by the Bank on the following business day. The government securities
continue to be held by the Bank and the purchaser is precluded from engaging in
repurchase transactions or otherwise pledging or hypothecating these securities.
NOTE 10-EMPLOYEE BENEFITS
- --------------------------------------------------------------------------------
The Bank has a noncontributory qualified defined benefit pension plan covering
substantially all employees. Under the plan, retirement benefits are primarily a
function of both the years of service and the level of compensation. The Bank's
policy is to fund the plan in amounts sufficient to pay liabilities. The pension
plan assets consist primarily of listed stocks, governmental securities, and
cash equivalents.
The Bank also provides certain life and health insurance benefits to
substantially all employees through an unfunded plan. The Bank makes
contributions to the plan as premiums are due.
The following table represents a reconciliation of the funded status of the
plans at October 1:
<TABLE>
<CAPTION>
Pension Benefits Life and Health Benefits
- -----------------------------------------------------------------------------------------------------------------------------
1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $16,607,111 $14,376,100 $3,470,625 $3,979,800
Service cost 634,287 550,521 122,970 107,198
Interest cost 1,161,718 1,084,896 240,097 231,915
Actuarial (gains) losses 1,285,764 1,342,061 829,827 (725,128)
Annuity payments (817,003) (733,912)
Premiums paid (150,000) (123,162)
Settlements (4,871) (12,555)
- -----------------------------------------------------------------------------------------------------------------------------
Benefit obligations at end of year 18,867,006 16,607,111 4,513,519 3,470,623
- -----------------------------------------------------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at beginning of year 19,126,737 15,990,166
Actual return on plan assets 33,864 3,532,918
Employer contributions 350,120 150,000 123,162
Annuity payments (817,003) (733,912)
Premiums paid (150,000) (123,162)
Settlements (4,871) (12,555)
- -----------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year 18,338,727 19,126,737
- -----------------------------------------------------------------------------------------------------------------------------
Funded status (528,279) 2,519,626 (4,513,517) (3,470,623)
Unrecognized transition (asset) obligation (4,995) (171,543) 2,424,600 2,597,800
Unrecognized (gains) losses 1,701,965 (1,094,422) (195,546) (1,085,021)
Unrecognized past service liability (143,934) (168,708)
- -----------------------------------------------------------------------------------------------------------------------------
Prepaid (accrued) benefit cost $ 1,024,757 $ 1,084,953 $(2,284,463) $(1,957,844)
=============================================================================================================================
</TABLE>
38
<PAGE>
The benefit obligations and prepaid (accrued) benefit costs presented in
the above table were determined using the following weighted average assumptions
at October 1:
<TABLE>
<CAPTION>
1998 1997 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Weighted-average assumptions at December 31:
Discount rate 6.50% 7.25% 6.50% 7.25%
Expected return on plan assets 8.75% 8.75%
Rate of compensation increase 4.50% 5.00% 4.50% 5.00%
</TABLE>
The net periodic pension cost and the net postretirement benefit cost for the
years ended December 31, 1998, 1997, and 1996 are as follows:
<TABLE>
<CAPTION>
Pension Benefits Life and Health Benefits
- --------------------------------------------------------------------------------------- ------------------------------------
1998 1997 1996 1998 1997 1996
- --------------------------------------------------------------------------------------- ------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 634,287 $ 550,521 $ 576,260 $ 122,970 $ 107,198 $ 114,013
Interest cost 1,161,718 1,084,896 1,010,617 240,097 231,915 292,213
Expected return on assets (1,544,487 (1,327,754) (1,178,087)
Unrecognized transition (asset)/obligation (166,548) (166,548) (166,548) 173,200 173,200 173,200
Unrecognized (gains)/losses 34,735 (59,648) (75,871)
Unrecognized past service liability (24,774) (24,774) (24,774)
- --------------------------------------------------------------------------------------- ------------------------------------
Net periodic benefit cost $ 60,196 $ 116,341 $ 252,203 $ 476,619 $ 436,442 $ 579,426
======================================================================================= ====================================
</TABLE>
For measurement purposes, a 6.5% annual rate of increase in the per capita cost
of covered health care benefits was assumed for 1999. The rate was assumed to
decrease gradually to 5.0% for 2003 and remain at that level thereafter.
A one-percentage-point change in assumed health care cost trend rates would have
the followings effects on life and health benefits at October 1, 1998:
<TABLE>
<CAPTION>
1-Percentage- 1-Percentage-
Point Increase Point Decrease
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Effect on total of service and interest cost components $ 9,808 $ (4,079)
Effect on postretirement benefit obligation 179,816 (253,118)
</TABLE>
The Bank also has a defined contribution employee savings 401(k) plan. Full-time
salaried employees, age twenty-one and older who have completed one year of
service, are eligible to join the 401(k) plan. The Bank matches 100% of basic
contributions up to 2.0% of each participant's annual contribution and 50% of
contribution over 2.0% with the Bank's total match not to exceed 3%.
Contributions to the plan amounted to $248,110 in 1998, $215,350 in 1997, and
$197,593 in 1996.
NOTE 11-COMMITMENTS
- --------------------------------------------------------------------------------
The Bank is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments consist primarily of commitments to extend credit and
letters of credit, which involve, to varying degrees, elements of credit risk in
excess of the amount recognized in the consolidated statements of condition. The
contract amount of those commitments and letters of credit reflects the extent
of involvement the Bank has in those particular classes of financial
instruments. The Bank's exposure to credit loss in the event of nonperformance
by the counterparty to the financial instrument for commitments to extend credit
and letters of credit is represented by the contractual amount of the
instruments. The Bank uses the same credit policies in making commitments and
letters of credit as it does for on-balance-sheet instruments.
Financial instruments whose contract amounts represent credit risk:
<TABLE>
<CAPTION>
1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Commitments to extend credit $461,581,333 $337,938,453
Letters of credit 24,995,433 18,460,310
</TABLE>
39
<PAGE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since some of the commitment amounts are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements.
Standby and other letters of credit written are conditional commitments
issued by the Bank to guarantee the performance of a customer to a third party.
Those guarantees are primarily issued to support public and private borrowing
arrangements, including bond financing and similar transactions. Most of these
guarantees extend for periods ranging from three months to five years. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. Since some of the
letters of credit are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
For both commitments to extend credit and letters of credit, the amount of
collateral obtained, if deemed necessary by the Bank upon extension of credit,
is based on management's credit evaluation of the counterparty. Collateral held
varies, but includes residential and commercial real estate. Outstanding loans
sold with recourse approximated $17,627,000 as of December 31, 1998.
As required by certain letters of credit agreements, the Bank has pledged
as collateral, mortgage-backed securities having a market value of approximately
$12,607,000 at December 31, 1998. The Bank has previously accrued $2,901,000,
included in other liabilities, for the credit risk associated with a certain
off-balance sheet letter of credit. The Company is required to maintain a
reserve balance, as established by the Federal Reserve Board of New York. The
required average total reserve for the 14-day maintenance period ended December
30, 1998 was $15,458,000 of which $6,418,000 was required to be on deposit with
the Federal Reserve Bank of New York. The remaining $9,040,000 was represented
by cash on had.
The Bank rents facilities under leases expiring at various dates through
2016. Rent expense totaled approximately $377,000 in 1998, $388,000 in 1997, and
$423,000 in 1996.
Approximate minimum rental commitments under existing noncancelable leases with
remaining terms of one year or more are presented below:
<TABLE>
<CAPTION>
Years ended December 31:
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C>
1999 $ 365,361
2000 348,203
2001 317,364
2002 236,389
2003 142,056
Later years 1,043,098
- --------------------------------------------------------------------------------------------------------------------------------
Total minimum lease payment $2,452,471
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 12-LIMITS ON DIVIDENDS
- ------------------------------------------------------------------------------
The Company's ability to pay dividends to its shareholders is largely dependent
on the Bank's ability to pay dividends to the Company. In addition to state law
requirements and the capital requirements discussed below, the circumstances
under which the Bank may pay dividends are limited by federal statutes,
regulations, and policies. The Bank must obtain the approval of the Federal
Deposit Insurance Corporation (FDIC) for payment of dividends if the total of
all dividends declared in any calendar year would exceed the total of the Bank's
net profits as defined by applicable regulations, for that year, combined with
its retained net profits for the preceding two years. Furthermore, the Bank may
not pay a dividend in an amount greater than its undivided profits then on hand
after deducting its losses and bad debts, as defined by applicable regulations.
At December 31, 1998, the Bank had approximately $32.5 million in undivided
profits legally available for the payment of dividends.
In addition, the Federal Reserve Board and the FDIC are authorized to
determine under certain circumstances that the payment of dividends would be an
unsafe or unsound practice and to prohibit payment of such dividends. The
payment of dividends that deplete a bank's capital base could be deemed to
constitute such an unsafe or an unsound practice. The Federal Reserve Board has
indicated that banking organizations could generally pay dividends only out of
current operating earnings. There are also statutory limits on the transfer of
funds to the Company by its banking subsidiary whether in the form of loans or
other extensions of credit, investments, or asset purchases. Such
40
<PAGE>
transfers by the Bank to the Company generally are limited in amount to 10% of
the Bank's capital and surplus, or 20% in the aggregate. Furthermore, such loans
and extensions of credit are required to be collateralized in specific amounts.
NOTE 13-INCOME TAXES
- ------------------------------------------------------------------------------
The Company provides for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes" which requires an asset and liability approach to
recognizing the tax effects of temporary differences between tax and financial
reporting.
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current $14,172,378 $11,461,887 $11,643,148
Deferred (benefit) (1,449,292) (728,241) (1,768,729)
- ---------------------------------------------------------------------------------------------------------------------------------
$12,723,086 $10,733,646 $ 9,874,419
=================================================================================================================================
</TABLE>
The components of deferred income taxes at December 31, which are included in
other assets are:
<TABLE>
<CAPTION>
1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Available for sale investments $ 524,929
Allowance for possible credit losses $ 9,310,560 8,024,792
Postretirement benefits 959,474 822,294
Non-accrual interest 387,938 288,889
Contingent liabilities 1,218,525 1,047,900
Other 556,566 645,740
- ---------------------------------------------------------------------------------------------------------------------------------
12,433,063 11,354,544
- ---------------------------------------------------------------------------------------------------------------------------------
Liabilities:
Depreciation 648,427 613,336
Pension benefits 359,747 392,259
Available for sale investments 327,113
Investment accretion 492,526 220,896
Other 71,223 191,276
- ---------------------------------------------------------------------------------------------------------------------------------
1,899,036 1,417,767
- ---------------------------------------------------------------------------------------------------------------------------------
Net deferred tax asset $10,534,027 $ 9,936,777
=================================================================================================================================
</TABLE>
A reconciliation between the federal statutory income tax rate and the effective
income tax rate at December 31 follows:
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal statutory income tax rate 35.0% 35.0% 35.0%
Tax-exempt interest income (0.8) (1.3) (1.1)
Dividends received deduction (0.1) (0.2)
Other (0.3) (0.3) (0.2)
- ---------------------------------------------------------------------------------------------------------------------------------
Effective federal income tax rate 33.9% 33.3% 33.5%
=================================================================================================================================
</TABLE>
41
<PAGE>
NOTE 14-EARNINGS PER SHARE
- --------------------------
Basic earnings per share is computed based on the weighted average shares
outstanding. Diluted earnings per share is computed based on the weighted
average shares outstanding adjusted for the dilutive effect of the assumed
exercise of stock options during the year.
The following is a reconciliation of basic earnings per share to diluted
earnings per share for the years ended December 31, 1998, 1997, and 1996:
<TABLE>
<CAPTION>
Net Weighted Earnings
Income Average Shares Per Share
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1996: Basic earnings per share $15,203,627 8,864,201 $1.72
Effect of stock options 224,667
- -------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $15,203,627 9,088,868 $1.67
===================================================================================================================
1997: Basic earnings per share $16,986,354 8,509,089 $2.00
Effect of stock options 286,983
- -------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $16,986,354 8,796,072 $1.93
===================================================================================================================
1998: Basic earnings per share $19,870,469 8,605,241 $2.31
Effect of stock options 283,995
- -------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $19,870,469 8,889,236 $2.24
===================================================================================================================
</TABLE>
NOTE 15-OPTIONS AND SHAREHOLDER RIGHTS
- --------------------------------------
The Company has a Long-Term Incentive and Capital Accumulation Plan (the
"Incentive Plan") for the benefit of officers and certain other employees of the
Company and its subsidiary. The Plan, as approved by shareholders at the 1996
Annual Meeting of Shareholders and as amended at the 1998 Annual Meeting of
Shareholders, provides for options to purchase a total of 875,000 shares of
authorized common stock, of which options to purchase 384,649 shares have been
granted as of December 31, 1998. At December 31, 1998, there were 490,351
options to purchase shares available for future grant under the Plan. Four kinds
of rights are contained in the Incentive Plan and are available for grant:
incentive stock options, non-statutory options, stock appreciation rights, and
performance share awards. Options under this Plan have a 10 year term, and vest
and become exercisable at 25% per year at the end of each of the first four
years following the grant date.
The Directors' Stock Option Plan (the "Directors' Plan"), as approved by
shareholders at the 1994 Annual Meeting of Shareholders, provides for options to
purchase 393,750 shares of authorized but unissued common stock by incumbent and
future non-employee directors of the Company; 186,750 options to purchase shares
have been granted as of December 31, 1998. At December 31, 1998, 207,000 options
to purchase shares are available for future grant under the Directors' Plan. All
options granted under the Directors' Plan are intended to be non-qualified
options. Vesting occurs on the grant date, and options may be exercised six
months after the grant date. Options terminate on the expiration date of the
Directors' Plan in 2004. Under the Directors' Plan, to the extent options remain
available for grant, upon initial election or appointment as a director, new
non-employee directors of the Company will each receive a grant of an option to
purchase 6,750 shares of common stock. Furthermore, in January of each year,
each non-employee director, including any director who becomes a non-employee
director prior to such anniversary, shall be granted an option to purchase 2,250
shares of common stock.
42
<PAGE>
Activity in the Plans during 1998, 1997, and 1996 was as follows:
<TABLE>
<CAPTION>
Number of Option Price
Shares Per Share Aggregate
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding options at December 31, 1995 357,064 $ 3.89-$20.67 $ 4,605,190
1996: Options forfeited (750) 25.75 (19,312)
Options exercised (73,502) 3.89-18.50 (788,878)
Options granted 85,500 22.63-25.75 2,149,805
- -------------------------------------------------------------------------------------------------------------------
Outstanding options at December 31, 1996 368,312 3.89-25.75 5,946,805
1997: Effect of three-for-two stock split 184,130
Options forfeited (750) 18.83 (14,123)
Options exercised (143,284) 4.52-18.83 (1,291,035)
Options granted 156,750 18.67-18.83 2,947,740
- -------------------------------------------------------------------------------------------------------------------
Outstanding options at December 31, 1997 565,158 4.52-18.83 7,589,387
1998: Options exercised (77,546) 4.52-18.83 (822,742)
Options granted 182,550 29.63-32.75 5,450,772
- -------------------------------------------------------------------------------------------------------------------
Outstanding options at December 31, 1998 670,162 $ 4.52-$32.75 $12,217,417
===================================================================================================================
</TABLE>
Since the option price per share at the date of grant approximates the fair
market value of the shares on the grant date, no expense is recognized as the
stock options are exercised.
During 1989, the Company adopted a shareholders' rights plan. Pursuant to
the plan, the Company's Board of Directors declared a dividend of one right for
each outstanding share of common stock. These rights will also be attached to
common stock issued subsequent to the adoption of the plan. The rights can only
be exercised when an individual or group intends to acquire or has acquired a
defined amount of the Company's outstanding common shares. Each right will
entitle the holder to receive common stock having a market value equivalent to
two times the exercise price (as defined). The rights expire on June 1, 1999 and
may be redeemed by the Company in whole at a price of $.01 per right.
NOTE 16-STOCK-BASED COMPENSATION
- --------------------------------
The Company has two stock-based compensation plans, as described in Note 15. The
Company has elected to follow APB Opinion No. 25 and related interpretations in
accounting for stock options granted under these plans. Under APB No. 25,
because the exercise price of the Company's stock options approximates the
market price of the underlying stock on the date of grant, no compensation
expense is recognized. Had compensation cost for these plans been determined
based on the fair value at the grant dates for awards under those plans, the
Company's net income and earnings per share would have been reduced to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income:
As reported $19,870,469 $16,986,354 $15,203,627
Pro forma 18,476,757 16,689,614 15,054,549
- --------------------------------------------------------------------------------------------------------------------
Earnings Per Share:
As reported:
Basic $ 2.31 $2.00 $1.72
Diluted 2.24 1.93 1.67
Pro forma:
Basic 2.15 $1.96 $1.70
Diluted 2.08 1.90 1.66
</TABLE>
The weighted average fair value of options granted during 1998, 1997, and 1996
was $7.63, $7.51, and $6.09, respectively.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1998, 1997, and 1996, respectively: dividend
yield of 3.1% for 1998 and 1997, and 3.3% for 1996; expected volatility of 24.2%
for 1998, 25.1% for
43
<PAGE>
1997, and 19.2% for 1996; risk-free interest rates of 5.7% for 1998, 6.5% in
1997, and ranging from 5.5% to 6.8% in 1996; and expected lives of 7.4% in 1998
and 1997, and 7.2 years for 1996.
Options exercisable under the plans at December 31, 1998, 1997, and 1996
amounted to 375,806, 328,836, and 399,327, respectively. The weighted average
exercise price of options exercisable at December 31, 1998, 1997, and 1996 were
$13.49, $10.77, and $9.09, respectively.
The following table summarizes information about options outstanding at December
31, 1998:
<TABLE>
<CAPTION>
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Options Contractual Exercise Number Exercise
Prices Outstanding Life in Years Price Exercisable Price
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$4.52 to $5.19 43,304 0.9 $ 4.70 43,304 $ 4.70
$9.33 to $12.89 200,022 5.3 $10.83 190,879 $10.77
$13.78 to $18.83 244,286 7.8 $17.99 116,873 $17.59
$29.625 to $32.750 182,550 9.1 $29.86 24,750 $30.50
- -------------------------------------------------------------------------------------------------------------------
670,162 375,806
===================================================================================================================
</TABLE>
NOTE 17-SELECTED QUARTERLY FINANCIAL DATA
-----------------------------------------
Summarized quarterly financial information (in thousands of dollars) for the
years ended December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
- --------------------------------------------------------------------------- ---------------------------------------
3/31/98 6/30/98 9/30/98 12/31/98 3/31/97 6/30/97 9/30/97 12/31/97
- --------------------------------------------------------------------------- ---------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total interest income $33,529 $36,393 $38,038 $38,046 $28,691 $30,002 $31,082 $32,605
Total interest expense 17,246 18,837 19,664 19,521 14,369 15,248 15,859 16,539
- --------------------------------------------------------------------------- ---------------------------------------
Net interest income 16,283 17,556 18,374 18,525 14,322 14,754 15,223 16,066
Provision for credit losses 2,785 2,919 3,333 3,219 2,460 2,354 2,538 2,963
- --------------------------------------------------------------------------- ---------------------------------------
Net interest income after
provision for credit losses 13,498 14,637 15,041 15,306 11,862 12,400 12,685 13,103
Gains (losses) on sale of securities (144) (359) (6) (312) (4) (14) 126 273
Gains (losses) on sale of loans (247) (133) (75) (324) (1) (89) (94) (194)
Non-interest income 1,683 1,998 1,978 2,041 1,378 1,625 1,528 1,767
Operating expense 7,356 8,041 8,350 8,242 6,617 7,222 7,162 7,630
- --------------------------------------------------------------------------- ---------------------------------------
Income before income taxes 7,434 8,102 8,588 8,469 6,618 6,700 7,083 7,319
Income taxes 2,925 3,098 3,428 3,273 2,609 2,582 2,705 2,838
- --------------------------------------------------------------------------- ---------------------------------------
Net income $ 4,509 $ 5,004 $ 5,160 $ 5,196 $ 4,009 $ 4,118 $ 4,378 $ 4,481
=========================================================================== =======================================
Earnings per share:
Basic $ 0.53 $ 0.58 $ 0.60 $ 0.60 $ 0.47 $ 0.48 $ 0.51 $ 0.52
Diluted $ 0.51 $ 0.56 $ 0.58 $ 0.59 $ 0.46 $ 0.47 $ 0.50 $ 0.50
=========================================================================== ========================================
</TABLE>
NOTE 18-FAIR VALUE OF FINANCIAL INSTRUMENTS
- -------------------------------------------
SFAS No. 107 requires disclosure of fair value information about financial
instruments, whether or not recognized in the statement of condition, for which
it is practicable to estimate that value. In cases where quoted market prices
are not available, fair values are based on estimates using present value or
other valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the certain derived value estimates cannot be
substantiated by comparison to independent markets and, in many cases, could not
be realized in immediate settlement of the instrument. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value of
the Bank. The fair value of off-balance-sheet financial instruments is not
significant.
44
<PAGE>
The net carrying amount and fair values of financial instruments (in thousands
of dollars) at December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
Carrying Fair Carrying Fair
Amount Value Amount Value
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 36,630 $ 36,630 $ 36,066 $ 36,066
Investment securities 238,192 238,849 205,380 205,485
Mortgage-backed securities 168,194 168,562 79,609 79,777
Loans 1,363,071 1,376,177 1,205,797 1,204,599
Allowance for possible credit losses (22,168) (19,207)
- -------------------------------------------------------------------------------------------------------------------
Net loans 1,340,903 1,376,177 1,186,590 1,204,599
Mortgages held for sale 16,888 16,806 7,459 7,459
- -------------------------------------------------------------------------------------------------------------------
Total financial assets $ 1,800,807 $ 1,837,024 $ 1,515,104 $ 1,533,386
===================================================================================================================
Financial liabilities:
Deposits $ 1,472,746 $ 1,474,689 $ 1,239,508 $ 1,242,653
Borrowings 243,759 245,773 178,644 177,870
- -------------------------------------------------------------------------------------------------------------------
Total financial liabilities $ 1,716,505 $ 1,720,462 $ 1,418,152 $ 1,420,523
===================================================================================================================
</TABLE>
NOTE 19-REGULATORY MATTERS
- --------------------------
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory-and possibly additional discretionary-actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to risk-
weighted assets (as defined), and Tier I capital (as defined) to average assets
(as defined). Management believes, as of December 31, 1998, that the Bank meets
all capital adequacy requirements to which it is subject.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes: Action Provisions:
Amount Ratio Amount Ratio Amount Ratio
- -------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998
- -------------------------------------------------------------------------------------------------------------------
Total capital/to risk-weighted assets $157,467 10.58% *$119,077 *8.00% *$148,846 *10.00%
Tier I capital/to risk-weighted assets $138,817 9.33% *$ 59,539 *4.00% *$ 89,308 * 6.00%
Tier I capital/to average assets $138,817 7.53% *$ 73,647 *4.00% *$ 92,059 * 5.00%
As of December 31, 1997
- -------------------------------------------------------------------------------------------------------------------
Total capital/to risk-weighted assets $134,854 10.44% *$103,380 *8.00% *$129,225 *10.0%
Tier I capital/to risk-weighted assets $118,663 9.18% *$ 51,690 *4.00% *$ 77,535 * 6.0%
Tier I capital/to average assets $118,663 7.79% *$ 60,920 *4.00% *$ 76,150 * 5.0%
</TABLE>
* Greater than or equal to
45
<PAGE>
NOTE 20-FINANCIAL INFORMATION-PARENT COMPANY
- --------------------------------------------
STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
December 31,
1998 1997
------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS Cash and due from banks $ 24,486,649 $ 1,030,904
Investment in Bank, at equity 140,868,922 119,823,282
Investment in trust subsidiary 928,000
Prepaid expenses 719,753
Other assets 53,948 12,188
------------------------------------------------------------------------------------------
$167,057,272 $120,866,374
===========================================================================================
LIABILITIES AND Accrued interest payable $ 1,108,429
SHAREHOLDERS' Other liabilities 30,000
EQUITY Junior subordinated debentures 30,928,000
Shareholders' Equity:
Preferred stock, par value $.01 per share; 2,500,000
shares authorized; none issued
Common stock, par value $.01 per share;
30,000,000 shares authorized; 11,237,470
shares and 11,159,924 shares issued 112,375 $ 111,599
Additional paid-in capital 30,145,303 29,215,440
Undivided profits 134,065,569 122,029,557
Accumulated other comprehensive income 453,849 (733,065)
Treasury stock at cost; 2,603,587 and 2,602,692 shares (29,786,253) (29,757,157)
-------------------------------------------------------------------------------------------
Total Shareholders' Equity 134,990,843 120,866,374
-------------------------------------------------------------------------------------------
$167,057,272 $120,866,374
===========================================================================================
</TABLE>
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCOME Dividends from Bank $ 7,834,457 $ 6,422,005 $ 23,166,228
Interest on investments 33,259
Equity in undistributed net income of
Bank, net of dividends 13,218,829 10,949,884 (7,604,645)
-------------------------------------------------------------------------------------------
Total income 21,086,545 17,371,889 15,561,583
------------------------------------------------------------------------------------------
EXPENSE Interest on junior subordinated debentures 1,108,430
Other expense 917,646 645,535 597,956
------------------------------------------------------------------------------------------
Total expense 2,026,076 645,535 597,956
------------------------------------------------------------------------------------------
Income before income tax benefit 19,060,469 16,726,354 14,963,627
Income tax benefit 810,000 260,000 240,000
------------------------------------------------------------------------------------------
NET INCOME $ 19,870,469 $ 16,986,354 $ 15,203,627
==========================================================================================
</TABLE>
46
<PAGE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------------------------------------------
1998 1997 1996
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING Net income $ 19,870,469 $ 16,986,354 $ 15,203,627
ACTIVITIES Adjustments to reconcile net income to
net cash provided by operating activities:
Equity in undistributed net income
of Bank, net of dividends (14,028,829) (11,209,884) 7,364,645
Net change in other assets and liabilities 376,916 (25,838) 13,648
-------------------------------------------------------------------------------------------------
Net cash provided by operating
activities 6,218,556 5,750,632 22,581,920
-------------------------------------------------------------------------------------------------
INVESTING Capital contribution to subsidiaries (6,650,000)
ACTIVITIES -------------------------------------------------------------------------------------------------
Net cash used by investing activities (6,650,000)
-------------------------------------------------------------------------------------------------
FINANCING Proceeds from issuance of junior
ACTIVITIES subordinated debentures to subsidiary 30,928,000
Dividends paid to shareholders (7,834,457) (6,422,005) (5,257,190)
Purchases of treasury stock (29,096) (17,909,038)
Proceeds from exercise of stock options 822,742 1,291,035 788,878
-------------------------------------------------------------------------------------------------
Net cash used by financing activities 23,887,189 (5,130,970) (22,377,350)
-------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 23,455,745 619,662 204,570
Cash and cash equivalents at beginning of year 1,030,904 411,242 206,672
-------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 24,486,649 $ 1,030,904 $ 411,242
=================================================================================================
</TABLE>
47
<PAGE>
BSB Bank & Trust (Subsidiary of BSB Bancorp, Inc.)
Officers
Executive
Alex S. DePersis
President and Chief Executive Officer
Larry G. Denniston, Senior Vice President and Corporate Secretary
Cynthia A. Hicks, Assistant Corporate Secretary
Banking Operations
Arthur C. Smith, Executive Vice President-Retail Banking Officer
Branch Administration
Michael V. Radicchi, Administrative Vice President-Branch Administrator
Jacqueline L. Michalek, Vice President, Branch Lending, Sales & Business
Development
James A. Berry, Assistant Vice President-Regional Business Development Officer
Margaret J. Murray, Assistant Vice President-Regional Business Development
Officer
Dana L. Lutsic, Assistant Vice President-Banking Services Development Officer
Elizabeth I. Donahue, Senior Branch Officer
Lori A. Micha, Senior Branch Officer
Denise G. Mughetti, Senior Branch Officer
Gerald F. Walker, Senior Branch Officer
Marian M. Avery-Tierno, Branch Officer
Patricia A. Blair, Branch Officer
Jeanine M. Cianciosi, Branch Officer
Wendy K. McBride, Branch Officer
Lucille E. Roberts, Branch Officer
Lorianne Welch, Branch Officer
Bank Operations
Julia G. Kamishlian, Administrative Vice President-Banking Support Services
Thomas J. Lamphere, Assistant Vice President-Risk Management
James H. DiMascio, Assistant Vice President-Facilities and Services
Janet L. McHenry, Assistant Vice President-Special Services
Glenn H. Cashel, Records and Research Officer
Systems
Matthew W. Schaefer, Administrative Vice President-Systems
Paul F. Santodonato, Assistant Vice President-Technology
Joyce E. Burke, Assistant Vice President-Computer Services
Accounting
Rexford C. Decker, Senior Vice President and Chief Financial Officer
Donald R. Schmitt, Vice President and Controller
Kevin P. Harty, Vice President-Finance
BSB Financial Services
Trust
Douglas R. Johnson, Senior Vice President and Senior Trust Officer
Leslie J. Distin, Vice President and Trust Officer
John P. Riesbeck, Vice President and Trust Investment Officer
Bradley S. Eaton, Trust Investment Officer
Brokerage Services
Pamela A. Kelley, Vice President
48
<PAGE>
Lending Operations
Glenn R. Small, Executive Vice President-Senior Credit Officer
Commercial Lending
John B. Westcott, Administrative Vice President
Edward P. Bahrenburg, Vice President
Susan A. Burtis, Vice President
Marvin F. Mastrangelo, Vice President
Edward P. Michalek, Vice President
Kevin P. O'Hara, Vice President
Kenneth J. Scott, Vice President
F. Mathew Zlomek, Vice President-Regional Loan Officer
Kelly E. O'Brien, Commercial Loan Officer
Carl J. Speicher, Commercial Loan Officer
Ann Marie F. Smith, Assistant Vice President-Commercial Credit
Melody A. Gardner, Assistant Vice President-Commercial Loan Operations
Commercial Real Estate
Gary K. Hart, Administrative Vice President
William B. Meredith, Vice President
Consumer Lending
William T. Slote, Administrative Vice President
Joseph Diorio, Assistant Vice President-Business Development
Joseph D. Dempsey, Assistant Vice President-Consumer Credit
Arthur L. Dunning, Jr., Assistant Vice President-Credit Card Officer
Karen L. Thurber, Assistant Vice President -Consumer Loan Operations
James W. Rowlands, Assistant Vice President-Adjustments/Recovery
Nicholas J. Abdou, Business Development Officer
Residential Mortgage Lending
Gary T. Drabo, Administrative Vice President
Christopher B. Loughridge, Assistant Vice President-Secondary Marketing
Allen E. Fuller, Assistant Vice President-Mortgage Servicing
John J. Saraceno, Assistant Vice President-Business Development
Robert L. Anderson, Jr., Assistant Vice President-Mortgage Processing
Arthur R. Truesdell, Residential Collections Officer-Mortgage Servicing
Investments
Fielding Simmons III, Senior Vice President and Treasurer
Lawrence M. Harris, Vice President-Municipal Services
Jonathan J. Hullick, Assistant Vice President-Assistant Treasurer
Louis M. Petrilli, Municipal Development Officer
Auditing
Bruce R. Hayes, Administrative Vice President and Auditor
Penne M. Gaeta, Assistant Vice President-Assistant Auditor
Human Resources
Patricia A. Phelps, Administrative Vice President
Roy W. Brock, Assistant Vice President
Patrick M. Gleason, Training Officer
Loan Review
Phyllis K. Gilroy, Vice President
John A. Savelli, Loan Review Officer-Loan Review
49
<PAGE>
Marketing
Stephanie Garrison, Vice President-Marketing Director
Kimberly A. Maietta, Assistant Marketing Director
BSB Bancorp, Inc. Board of Directors
Robert W. Allen, President & Chief Executive Officer, Tuscan/Lehigh Dairies,
L.P.
William H. Rincker, Former Chairman & Chief Executive Officer, BSB Bancorp
Ferris G. Akel, President, Binghamton Giant Markets, Inc.
Alex S. DePersis, President & Chief Executive Officer
William C. Craine, Chairman, Granite Capital Holdings Inc.
David A. Niermeyer, President & Chief Executive Officer, Stakmore Co., Inc.
Thomas L. Thorn, Private Investor
Thomas F. Kelly, Ph.D., Vice President, Binghamton University, State
University of New York
Mark T. O'Neil, Jr., President & Chief Executive Officer, United Health
Services, Inc.
Diana J. Bendz, Endicott Senior Location Executive, IBM Corporation
Herbert R. Levine, Chairman of the Board, Van Cott Jeweler, Ltd.
The membership of the Board of Directors of BSB Bank & Trust Company is
identical. All members serve on both boards.
Officers
Alex S. DePersis, President & Chief Executive Officer
Glenn R. Small, Executive Vice President-Senior Credit Officer
Arthur C. Smith, Executive Vice President-Retail Banking Officer
Rexford C. Decker, Senior Vice President-Chief Financial Officer
Larry G. Denniston, Senior Vice President-Corporate Secretary
Fielding Simmons III, Senior Vice President-Treasurer
Douglas R. Johnson, Senior Vice President
Directors Emeriti
Aubrey S. Bowen
Charles G. Brink
John J. Consey
Vincent J. Earley
Helen A. Gamble
Floyd H. Lawson, Jr.
Robert J. Nash
Dr. William L. Roberts
Edgar E. Severson
John V. Smith
Dr. J. Glezen Watts
Shareholder Information
Corporate Headquarters:
BSB Bancorp, Inc.
58-68 Exchange Street
Binghamton, New York 13901
Mailing Address:
P. O. Box 1056
Binghamton, New York 13902
Annual Meeting:
The Annual Meeting of Shareholders of BSB Bancorp, Inc. will be held at 10:00
A.M. on April 26, 1999, in the Sears Harkness Hall at the Roberson Museum &
Science Center, 30 Front Street, Binghamton, New York.
50
<PAGE>
Form 10-K Annual Report:
A copy of BSB Bancorp, Inc. Form 10-K Annual Report may be obtained without
charge upon written request to Larry G. Denniston, Senior Vice President and
Corporate Secretary, Shareholder Relations Department, BSB Bancorp, Inc., 58-68
Exchange Street, Binghamton, New York 13901.
Registrar and Transfer Agent:
American Stock Transfer and Trust Company
40 Wall Street-46th Floor
New York, New York 10005
Stock Listing:
BSB Bancorp, Inc. common stock is traded over the counter and is listed on The
Nasdaq Stock Market under the symbol BSBN. High, low, and closing prices and
daily trading volume are reported in most major newspapers as "BSB Bcp."
Auditors:
PricewaterhouseCoopers L.L.P.
One Lincoln Center
Syracuse, New York 13202
General Counsel:
Hinman, Howard & Kattell, L.L.P.
Security Mutual Building
Binghamton, New York 13901
Special Counsel:
Hogan & Hartson L.L.P.
Columbia Square
555 13th Street, N.W.
Washington, D.C. 20004
Shareholder Relations Department:
BSB Bancorp, Inc.
58-68 Exchange Street
Binghamton, New York 13901
(607) 779-2406
51
<PAGE>
EXHIBIT 21
BSB Bank & Trust Company
Capital Trust I
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------
We consent to the incorporation by reference in the registration
statement of BSB Bancorp, Inc. on Form S-8 (File No. 339-2138) of our
report dated January 29, 1999, on our audits of the consolidated financial
statements of BSB Bancorp, Inc. as of December 31, 1998 and 1997, and for
the years ended December 31, 1998, 1997, 1996, which report is included in
the Annual Report to Shareholders, which is incorporated by reference on
Form 10-K.
PricewaterhouseCoopers LLP
Syracuse, N.Y.
March 29, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 36,630 36,066
<INT-BEARING-DEPOSITS> 0 0
<FED-FUNDS-SOLD> 0 0
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 398,643 271,120
<INVESTMENTS-CARRYING> 8,522 13,868
<INVESTMENTS-MARKET> 407,411 285,262
<LOANS> 1,379,691 1,213,256
<ALLOWANCE> 22,168 19,207
<TOTAL-ASSETS> 1,859,079 1,560,571
<DEPOSITS> 1,472,746 1,239,508
<SHORT-TERM> 143,759 178,644
<LIABILITIES-OTHER> 7,583 21,553
<LONG-TERM> 100,000 0
0 0
0 0
<COMMON> 112 112
<OTHER-SE> 134,878 120,755
<TOTAL-LIABILITIES-AND-EQUITY> 1,859,079 1,560,571
<INTEREST-LOAN> 121,256 103,196
<INTEREST-INVEST> 24,749 19,184
<INTEREST-OTHER> 0 0
<INTEREST-TOTAL> 146,005 122,380
<INTEREST-DEPOSIT> 63,988 51,936
<INTEREST-EXPENSE> 11,279 10,080
<INTEREST-INCOME-NET> 70,738 60,364
<LOAN-LOSSES> 12,275 10,314
<SECURITIES-GAINS> (821) 380
<EXPENSE-OTHER> 31,989 28,631
<INCOME-PRETAX> 32,594 27,720
<INCOME-PRE-EXTRAORDINARY> 32,594 27,720
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 19,870 16,986
<EPS-PRIMARY> 2.31 2.00
<EPS-DILUTED> 2.24 1.93
<YIELD-ACTUAL> 8.86 8.90
<LOANS-NON> 13,400 12,672
<LOANS-PAST> 513 304
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 19,207 17,054
<CHARGE-OFFS> 10,523 9,878
<RECOVERIES> 1,227 1,717
<ALLOWANCE-CLOSE> 22,168 19,207
<ALLOWANCE-DOMESTIC> 22,168 19,207
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>
