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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED JUNE 30, 1996
[ ] TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ______________ to _______________
Commission File Number: 0-18782
ES&L BANCORP, INC.
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(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 16-1387158
- --------------------------------------------- -----------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
300 West Water Street, Elmira, New York 14901
- ----------------------------------------- --------
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (607) 733-5533
--------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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(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 (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety days. Yes X No
_____ _____.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The registrant's voting stock is not regularly and actively traded in any
established market and there are no regularly quoted bid and asked prices for
the registrant's common stock. On the basis of the last per share sales price
of which the registrant is aware ($13.33 per share), management estimates that
the aggregate market value of the voting stock held by non-affiliates of the
registrant at September 2, 1996 was $6,588,686. Solely for purposes of this
calculation, the shares held by directors and executive officers of the
registrant and by any stockholder beneficially owning more than 5% of the
registrant's outstanding common stock are deemed to be shares held by
affiliates.
As of September 2, 1996, there were 846,888 shares outstanding of the
registrant's common stock, of which directors and executive officers and more
than 5% beneficial owners held 352,613 shares.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Annual Report to Stockholders for the Fiscal Year
Ended June 30, 1996. (Parts I and II)
2. Portions of Proxy Statement for the 1996 Annual Meeting of
Stockholders. (Part III)
<PAGE>
PART I
ITEM 1. BUSINESS
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GENERAL
THE CORPORATION. ES&L Bancorp, Inc. (the "Corporation") was incorporated
under the laws of the State of Delaware in March 1990 for the purpose of
becoming a savings and loan holding company for Elmira Savings & Loan, F.A.
("Elmira Savings & Loan" or the "Bank"). On August 28, 1990, the Corporation
acquired all of the outstanding stock of Elmira Savings & Loan issued in
connection with the Bank's conversion from mutual to stock form. The
Corporation issued 352,558 shares of common stock in connection with the Bank's
conversion.
Prior to the acquisition of all of the outstanding stock of the Bank the
Corporation had no assets or liabilities and engaged in no business activities.
Since its acquisition of the Bank, the Corporation has engaged in no significant
activity other than holding the stock of the Bank and operating the business of
a savings association through Elmira Savings & Loan. Accordingly, the
information set forth in this report, including financial statements and related
data, relates primarily to the Bank and its subsidiaries.
The Corporation's executive offices are located at 300 West Water Street,
Elmira, New York. Its telephone number is (607) 733-5533.
THE BANK. Elmira Savings & Loan was incorporated in 1888 as a New York
chartered savings association. In 1983, the Bank converted from a state to a
federally chartered association and acquired its current name. The Bank
operates through one office located in Elmira, New York.
The Bank is principally engaged in the business of accepting deposits from
the general public and originating loans secured by residential real estate.
The Bank also engages in commercial real estate lending in its primary market
area and, to a lesser extent, consumer lending, and invests in government and
federal agency obligations. At June 30, 1996, the Bank had total assets of
$140.1 million, deposits of $106.7 million, net loans receivable of $121.6
million and shareholders' equity of $12.9 million.
The Bank's mortgage banking subsidiary, ES&L Mortgage Corporation, d/b/a
Cayuga Mortgage Company, is partner in a mortgage banking partnership with
Audrey Edelman & Associates Real Estate, the largest real estate firm in Ithaca,
New York. The company, PACE Funding, operates as a correspondent for a number
of large mortgage banking companies and financial institutions, one of whom is
the Bank.
Elmira Savings & Loan is subject to examination and comprehensive
regulation by the Office of Thrift Supervision ("OTS"). The Bank's deposits are
insured by the Savings Association Insurance Fund ("SAIF") administered by the
Federal Deposit Insurance Corporation ("FDIC"). The Bank is a member of and
owns capital stock in the Federal Home Loan Bank ("FHLB") of New York, which is
one of the twelve regional banks in the FHLB system. The Bank is further
subject to regulations of the Board of Governors of the Federal Reserve System
(the "Federal Reserve Board") governing reserves to be maintained against
deposits and certain other matters. See "Regulation."
RECENT DEVELOPMENTS
SAIF PREMIUM DISPARITY. Currently, there exists a substantial disparity in
the deposit insurance premiums paid by members of the SAIF, such as the Bank,
and members of the Bank Insurance Fund ("BIF"). This premium disparity places
SAIF-insured savings institutions at a significant competitive disadvantage to
BIF-insured institutions. A number of proposals have been considered to
recapitalize the SAIF in order to eliminate the premium disparity. The Senate
and the House of Representatives have both, as part of a budget reconciliation
package to balance the federal budget, approved legislation requiring a one-time
assessment of an amount sufficient to bring the SAIF to
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a level equal to 1.25% of insured deposits (estimated to be approximately 0.85%
of insured deposits) to be imposed on all SAIF-insured deposits as of March 31,
1995. This assessment was originally scheduled to be payable during the first
quarter of 1996. It is unknown whether this legislation will be enacted, or if
enacted, the amount of such special assessment. If a special assessment as
described above were to be required it would result in a one-time charge of up
to approximately $830,000 (or $498,000 after taxes), which would have the effect
of reducing the Bank's tangible and core capital to $11.7 million, or 8.40% of
adjusted total assets, and risk-based capital to $12.9 million, or 14.01% of
risk-weighted assets as of June 30, 1996.
BAD DEBT RECAPTURE. On August 20, 1996, the President signed into law the
Small Business Jobs Protection Act. Included within this act were provisions
repealing the percentage of taxable income method of calculating a thrift's bad
debt reserve for tax purposes. This method had permitted thrift institutions,
such as the Bank, who satisfied certain definitional tests and other conditions
prescribed by the Internal Revenue Code to deduct an annual addition to their
bad debt reserve calculated as a percentage of taxable income. Other financial
institutions generally were required to calculate their bad debt deduction based
upon actual loss experience (the "experience method"). As a result of the
elimination of the percentage of taxable income method, institutions that have
utilized such method will be required to recapture into taxable income post-1987
reserves in excess of the reserves calculated under the experience method, over
a period of six years commencing in the first taxable year beginning after
December 31, 1995. An institution will be able to defer recapture until up to
the third taxable year after December 31, 1995 if the dollar amount of the
institution's residential loan originations in each year is not less than the
average dollar amount of residential loan originations originated in each of the
six most recent years disregarding the years with the highest and lowest
originations during such period. For purposes of this test, residential loan
originations would not include refinancings and home equity loans.
Beginning with the first taxable year beginning after December 31, 1995,
savings institutions, such as the Bank, will be treated the same as commercial
banks. Institutions with $500 million or more in assets will only be able to
take a tax deduction when a loan is actually charged off. Institutions with
less than $500 million in assets will still be permitted to make deductible bad
debt additions to reserves, but only using the experience method. The Bank has
provided deferred taxes on its post-1987 additions to the bad debt reserve and,
and a result, management does not expect that the recapture of the Bank's post-
1987 reserves will have a material adverse effect on the Bank's operations.
LENDING ACTIVITIES
GENERAL. The Bank originates loans through its home office in Elmira and
its mortgage banking subsidiary in Ithaca, New York. Historically, the Bank
originated primarily conventional first mortgage loans secured by one-to-four-
family residential property. In recent years, the Bank has actively originated
loans secured by commercial and multi-family properties located in its primary
market area, and home equity loans.
The Bank has emphasized the origination of adjustable-rate mortgage loans
for portfolio. When market conditions require, the Bank originates fixed-rate
loans primarily for sale in the secondary market.
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Set forth below is selected data relating to the composition of Elmira
Savings & Loan's loan portfolio by type of loan on the dates indicated.
<TABLE>
<CAPTION>
At June 30,
----------------------------------------------------------
1996 1995 1994
------------------ ------------------ ------------------
Amount % Amount % Amount %
--------- ------- --------- ------- --------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
First Mortgage Permanent Loans:
Conventional 1-4 family.......... $ 66,251 54.47% $ 66,751 56.48% $ 57,477 54.00%
FHA/VA 1-4 family................ 16 .01 810 .69 672 0.63
Multi-family..................... 12,420 10.21 10,048 8.50 8,286 7.79
Commercial real estate........... 25,722 21.15 22,496 19.03 20,788 19.53
Construction
Residential.................... 1,912 1.57 2,788 2.36 4,248 3.99
Commercial..................... 2,046 1.68 2,511 2.12 4,130 3.88
-------- ------ -------- ------ -------- ------
Total first mortgage.......... 108,367 89.09 105,404 89.18 95,601 89.82
Consumer loans:
Home equity line of credit...... 6,699 5.51 7,660 6.48 8,172 7.68
Loans on savings accounts....... 214 .18 253 .21 256 .24
Education loans.................. 471 .39 653 .55 513 .48
Automobile loans................. 681 .56 620 .52 617 .58
Property improvement loans...... 3,847 3.16 3,147 2.66 2,348 2.21
Other consumer loans............. 136 .11 139 .13 112 .11
Demand notes..................... 1,520 1.25 1,078 .91 947 .89
-------- ------ -------- ------ -------- ------
Total consumer loans.......... 13,568 11.15 13,550 11.46 12,965 12.19
Commercial lines of credit......... 1,212 1.00 1,096 .93 660 .62
Commercial non-mortgage............ 1,926 1.58 1,844 1.56 1,877 1.76
-------- ------ -------- ------ -------- ------
Total......................... 125,073 -- 121,894 -- 111,103 --
Less:
Loans in process................. (1,953) (1.60) (2,178) (1.84) (3,284) (3.09)
Unearned discounts............... - - -- -- -- --
Allowance for loan loss......... (1,431) (1.18) (1,424) (1.20) (1,269) (1.19)
Deferred loan origination fees.. (53) (.04) (105) (0.09) (112) (0.11)
-------- ------ -------- ------ -------- ------
Total........................ $121,636 100.00% $118,187 100.00% $106,438 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
3
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The following table presents at June 30, 1996 the scheduled amounts of loan
principal repayments expected to be received by the Bank during the periods
shown based upon the time remaining before contractual maturity. Demand loans,
loans having no schedule of repayments and no stated maturity, and overdrafts
are reported as due in one year or less.
The table below does not include any estimate of prepayments. Prepayments
significantly shorten the average life of all mortgage loans. Thus, management
believes that the following table will bear little resemblance to what the
actual repayments of the loan portfolio will be.
<TABLE>
<CAPTION>
Due after
Due During 1 through Due after 5
the year ended 5 years after years after
June 30, June 30, June 30,
1997 1996 1996
-------------- ------------- -----------
(In thousands)
<S> <C> <C> <C>
Real estate mortgage....... $ 4,038 $16,813 $83,733
Mortgages held for resale.. 5,458 - -
Real estate construction... 847 500 2,611
Installment................ 3,395 4,741 5,431
Commercial................. 878 1,236 850
------- ------- -------
Total.................. $14,616 $23,290 $92,625
======= ======= =======
</TABLE>
The following table apportions the dollar amount of the loans due
subsequent to the year ended June 30, 1996 between those with predetermined
interest rates and those with adjustable interest rates.
<TABLE>
<CAPTION>
Predetermined Rates Adjustable Rates
------------------- ----------------
<S> <C> <C>
(In thousands)
Real estate mortgage....... $ 4,768 $ 99,816
Mortgages held for resale.. 5,458 -
Real estate construction... 952 3,006
Installment................ 6,398 7,170
Commercial................. - 2,963
------- --------
Total..................... $17,576 $112,955
======= ========
</TABLE>
ONE- TO FOUR-FAMILY MORTGAGE LOANS. At June 30, 1996, the Bank held in its
portfolio $66.3 million of first mortgage loans secured by one- to four-family
residential units, representing 54.5% of its total portfolio. Since
approximately 1983 the principal one- to four-family mortgage instruments
offered by the Bank have included several forms of adjustable-rate loans with
interest rates and payment adjustments made at regular intervals (generally on a
12 month cycle). These loans are generally limited to 2% maximum annual
adjustments and a maximum aggregate adjustment over the life of the loan, and
are based upon movements in the United States Treasury Securities Index for
securities of the same length as the applicable adjustment period, with
amortization schedules generally varying from 15 to 30 years. The Bank also
offers adjustable rate mortgage loans which are convertible, at the option of
the borrower, into fixed rate mortgage loans. Upon conversion, these loans are
generally sold by the Bank in the secondary market. The Bank's adjustable rate
mortgage loans do not permit negative amortization of principal and carry no
prepayment penalty. The Bank qualifies the borrower at 200 basis points above
the initial rate or the fully indexed rate, whichever is higher, on adjustable-
rate mortgage loans. At June 30, 1996,
4
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approximately $63.0 million of the Bank's first mortgage one- to four-family
residential loan portfolio consisted of adjustable-rate loans.
The retention of adjustable-rate mortgage loans in the Bank's loan portfolio
helps reduce the Bank's exposure to increases in interest rates. However, there
are unquantifiable credit risks resulting from potential increased costs to the
borrower as a result of repricing of adjustable-rate mortgage loans. It is
possible therefore that during periods of rising interest rates, the risk of
default on adjustable-rate mortgage loans may increase due to the upward
adjustment of interest cost to the borrower. Further, the adjustable-rate
mortgages offered by the Bank, as well as by many other thrift institutions,
sometimes provide for initial rates of interest below the rates which would
prevail were the index used for pricing applied initially. These loans are
subject to increased risk of delinquency or default as the higher, fully indexed
rate of interest subsequently comes into effect, replacing the lower initial
rate. During fiscal year 1996, the Bank and its mortgage banking subsidiary
originated approximately $11.5 million of adjustable-rate mortgage loans with
such below-market rates.
The Bank also makes 15 through 30 year fixed rate fully amortizing loans.
These loans are originated with a commitment for sale in the secondary market.
Typically, when the rate is established on these loans, a forward commitment is
generated to sell the loan. Loans sold in the secondary market are sold without
recourse. During fiscal year 1996, the Bank and its mortgage banking subsidiary
originated approximately $24.0 million of fixed-rate loans and sold $30.2
million, servicing retained, in the secondary market. At June 30, 1996, the
Bank had forward commitments to sell closed loans totalling approximately $6.0
million in the secondary mortgage market.
ES&L Mortgage Corporation d/b/a/ Cayuga Mortgage Company ("Cayuga Mortgage"),
the Bank's mortgage banking subsidiary originates fixed rate mortgage loans for
the Bank, which then sells them, servicing retained, in the secondary market.
At June 30, 1996, the Bank had a residential mortgage servicing portfolio of
$110.7 million.
The terms of the residential real estate loans originated by the Bank
generally conform to underwriting guidelines of the Federal Home Loan Mortgage
Corporation ("FHLMC"). The Bank also offers 15 to 30 year fixed-rate and 15 to
30 year conforming and non-conforming adjustable-rate loans. Loans with
balances in excess of the amount prescribed by FHLMC may be sold to private
investors on a negotiated basis.
Conventional residential mortgage loans granted by the Bank generally contain
a "due-on-sale" clause which normally permits the Bank to accelerate the
indebtedness of the loan upon transfer of ownership of the mortgaged property.
Due-on-sale clauses are an important means of increasing the rate on existing
fixed rate mortgage loans during periods of rising interest rates and increasing
the turnover of mortgage loans in the Bank's portfolio. Due-on-sale clauses are
required for loans to be sold to FHLMC and private investors in the secondary
mortgage markets. Additionally, due to prepayments in connection with
refinancings and sales of property, the average length of the Bank's long term
residential loans is shorter than their weighted average contractual maturity.
In periods of rising interest rates, prepayments tend to decline whereas in
periods of declining interest rates, prepayments tend to increase.
CONSTRUCTION LENDING. The Bank originates construction loans for the
construction of one- to four-family residences and commercial real estate
properties. Such loans are secured by a first lien on the subject property and
are made in conjunction with the Bank's review and approval to provide the
permanent mortgage loan financing for the residential or commercial property.
Upon completion of construction, a portion of these permanent residential loans
are then converted to the fixed rates offered by the Bank at the time of
completion and are subsequently sold. Construction loans generally have a
construction period which ranges from three months to one year, with interest
due monthly. The rate , during construction, is typically tied to the Prime
Interest Rate and either fixed at Prime +2% or adjusted to prime quarterly. As
of June 30, 1996 the Bank had $4.0 million outstanding in construction loans.
Of that amount, $1.9 million represented loans on one- to four-family residences
made directly to the homeowner.
Construction loans originated by the Bank include single- and multi-family
residences, motels and office buildings. The Bank typically will not originate
the construction loan unless it is also making the permanent loan
5
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if a permanent loan is required. These loans typically range in size between
$50,000 and $200,000 for residential loans and up to $800,000 for commercial
loans.
Cayuga Mortgage and PACE Funding originated approximately $1.4 million of the
$1.9 million total residential construction loans outstanding at June 30, 1996.
All construction loans originated by Cayuga Mortgage are underwritten according
to the same standards and on the same general terms as those originated by the
Bank. Cayuga Mortgage's residential construction loans are generally in amounts
under $200,000 and are secured by single family properties located primarily in
Tompkins and Cortland Counties.
Construction financing is generally considered to involve a higher degree of
risk of loss than long-term financing on improved occupied real estate because
loan funds are advanced upon the security of the project under construction,
which is of uncertain value prior to the completion of construction. The Bank's
risk of loss on a construction loan is dependent largely upon the accuracy of
the initial estimate of the property's value at completion of construction or
development and the estimated cost (including interest) of construction. If the
estimate of construction cost proves to be inaccurate, the Bank may be required
to advance funds beyond the amount originally committed to permit completion of
the development. If the estimate of value proves to be inaccurate, the Bank may
be confronted, at or prior to the maturity of the loan, with a project with a
value which is insufficient to assure full repayment.
The Bank's underwriting criteria are designed to evaluate and minimize the
risks of each construction loan. Among other things, the Bank considers the
reputation of the borrower and the contractor, the amount of the borrower's
equity in the project, independent valuations and reviews of cost estimates,
pre-construction sale and leasing information, and cash flow projections of the
borrower. To reduce the risks inherent in construction lending, the Bank also
requires, where appropriate, personal guarantees of the principals of the
borrower.
COMMERCIAL REAL ESTATE AND MULTI-FAMILY LENDING. As of June 30, 1996 the Bank
held $25.7 million in commercial real estate loans and $12.4 million in multi-
family loans, which represented approximately 21.2% and 10.2% of loans held in
the Bank's loan portfolio, respectively. These loans are secured by property
located in the Bank's market area and by diverse forms of collateral, including
apartment buildings, single proprietor businesses, motels, restaurants, and
various special purpose properties. The Bank originates a small number of these
loans with Small Business Administration ("SBA") guarantees. SBA will generally
guarantee between 80% and 90% of the loan balance. However, the SBA imposes
some limitations on the interest rate and loan origination fees charged.
Commercial real estate lending and multi-family residential lending may
involve a higher degree of credit risk than one- to four-family residential
lending because of the concentration of funds in a limited number of loans
typically involving large loan balances and because such loans depend on cash
flow from the property to service the debt. Cash flow may be significantly
affected by adverse conditions in the real estate market or by general economic
conditions. The Bank has attempted to minimize the risks involved in
originating such loans by considering, among other things, the creditworthiness
of the borrower, the location of the real estate, the condition and occupancy
levels of the security and the quality of the organization managing the
property. Substantially all of the properties securing the loans in the
commercial real estate portfolio are inspected by the Bank's lending personnel.
The Bank also obtains appraisals of each property in accordance with applicable
federal regulations.
Commercial real estate loans have been originated for varying terms and
interest rates depending on market conditions and on the interest rates
prevailing at the time the loan is originated. In general, commercial real
estate loans are primarily made as adjustable rate loans with interest rates
adjustable at specifically identified intervals up to five years and primarily
based upon movements in the United States Treasury Securities Index. These
loans generally range in size from $50,000 to $200,000 and have been made in
amounts up to approximately $1.4 million. Amortization schedules for this type
of loan generally vary from 15 to 20 years.
The Bank has become increasingly active in lending on commercial real estate
and multi-family properties in recent years as a result of increased referrals
from existing customers and an expanded presence in the Bank's
6
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market area. Management expects continued moderate growth in commercial real
estate and multi-family lending in the future, subject to the continued
imposition of the underwriting and credit review standards discussed above.
The table below sets forth, by type of security property, the number and
amount of Elmira Savings & Loan's commercial real estate loans at June 30, 1996.
<TABLE>
<CAPTION>
Outstanding
Number Principal Amount
of Loans Balance Non Performing
---------- ----------- --------------
<S> <C> <C> <C>
Medical facilities.................. 32 $ 5,443,563
Retail property..................... 43 4,723,659
Office buildings.................... 33 2,822,895
Restaurant/lounge................... 19 1,144,724
Office and warehouse/storage units.. 16 3,258,498
Hotel/motel......................... 7 1,917,171
Nonprofit/church/school............. 9 567,039
Other............................... 39 5,844,629
--- -----------
Total........................... 198 $25,722,178 $0.00
=== =========== =====
</TABLE>
CONSUMER AND COMMERCIAL BUSINESS LENDING. At June 30, 1996, the Bank's
consumer loan portfolio totalled $13.6 million and its commercial business
loans totalled $3.1 million, representing 11.2% and 2.6% of the Bank's total
loan portfolio, respectively. The majority of the loans in the Bank's consumer
loan portfolio are secured by real estate. The Bank offers a variety of secured
consumer loans, including automobile loans, home equity loans and loans secured
by savings deposits. In addition, the Bank offers home improvement loans and
other unsecured consumer loans. The Bank expects to continue, subject to market
conditions, to expand its consumer lending activities as part of its plan to
provide a wide range of personal financial services to its customers. Management
believes that the shorter terms and normally higher interest rates available on
various types of consumer loans will be helpful in maintaining a profitable
spread between Elmira Savings & Loan's average loan yield and its cost of funds.
Consumer loans may entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans which are unsecured or secured by
rapidly depreciable assets such as automobiles. In such cases, any repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance as a result of the greater likelihood
of damage, loss or depreciation. The remaining deficiency often does not
warrant further substantial collection efforts against the borrower. In
addition, consumer loan collections are dependent on the borrower's continuing
financial stability, and thus are more likely to be adversely affected by job
loss, divorce, illness or personal bankruptcy. Furthermore, the application of
various federal and state laws, including federal and state bankruptcy and
insolvency laws, may limit the amount which can be recovered on such loans.
Such loans may also give rise to claims and defenses by a consumer loan borrower
against an assignee of such loans such as the Bank, and a borrower may be able
to assert against such assignee claims and defenses which it has against the
seller of the underlying collateral. These risks are somewhat minimized with
respect to the Bank's consumer loan portfolio since the majority of these loans
are home equity loans secured by residential real estate.
The Bank adds general provisions to its consumer loan loss allowance, based on
general economic conditions and prior loss experience. The Bank's allowance for
consumer loan losses at June 30, 1996 was equal to $81,369, or approximately
0.60% of the total outstanding balance of such loans. In establishing its
allowance for consumer loan losses, management considers that the majority of
the loans in its consumer loan portfolio are home equity loans secured by
residential real estate. Consumer loan delinquencies often increase over time
as the loans age. Accordingly, although the level of delinquencies in the
Bank's consumer loan portfolio has generally been low
7
<PAGE>
($25,507, or approximately 0.55% of the consumer loan portfolio, at June 30,
1996), there can be no assurance that delinquencies will not increase in the
future.
Since 1986, the Bank has been actively involved in originating home equity
loans. These loans amounted to $6.7 million or 5.5% of the Bank's loan
portfolio at June 30, 1996. Home equity loan rates adjust quarterly with an
open credit line during the initial four to seven year period. Loan to value
ratios on these loans (including the first mortgage) typically do not exceed 80%
of the appraised value of the real estate.
The Bank originates student loans, most of which are guaranteed by the federal
government and sold to the Student Loan Marketing Association. The Bank also
originates direct automobile loans to its customers (approximately $681,000
outstanding at June 30, 1996), and had approximately $1.5 million of secured and
unsecured time and demand notes outstanding at June 30, 1996.
The Bank had approximately $1.9 million of commercial business loans
outstanding at June 30, 1996 which were not collateralized by real estate.
Approximately 30.5% of these loans are guaranteed by the SBA. The Bank's
commercial business lending activities encompass loans with a variety of
purposes and forms of security, including loans to finance accounts receivable,
inventory and equipment. The Bank offers a commercial line of credit secured by
real estate. These lines of credit have adjustable rates which adjust monthly
or quarterly and are tied to the prime rate. At June 30, 1996, lines totalling
$2.3 million had been approved with loan balances outstanding of approximately
$1.2 million.
Unlike residential mortgage loans, which generally are made on the basis of
the borrower's ability to make repayment from his or her employment and other
income and which are secured by real property whose value tends to be more
easily ascertainable, commercial business loans are of higher risk and typically
are made on the basis of the borrower's ability to make repayment from the cash
flow of the borrower's business. As a result, the availability of funds for the
repayment of commercial business loans may be substantially dependent on the
success of the business itself. Further, the collateral securing the loans may
depreciate over time, may be difficult to appraise and may fluctuate in value
based on the success of the business.
The Bank recognizes the generally increased risks associated with commercial
business lending. The Bank's commercial business lending policy emphasizes
complete credit file documentation and analysis of the borrower's character,
capacity to repay the loan, the adequacy of the borrower's capital and
collateral as well as an evaluation of the industry conditions affecting the
borrower. Analysis of the borrower's past, present and future cash flows is
also an important aspect of the Bank's credit analysis. The Bank's commercial
business loans have been to borrowers in its primary market area, and the Bank
intends to continue its commercial business lending in this geographic area.
LOAN UNDERWRITING POLICIES. The Board of Directors of the Bank has the
responsibility and authority for general supervision over the loan policies of
the Bank. The Board has approved a written lending policy for the Bank and has
established a Board Loan Committee responsible for review and ratification of
all loans up to $500,000 and for monitoring compliance with the written loan
policies of the Bank.
Generally, the Bank lends up to 95% of the lower of current cost or appraised
value of a residential one-to-four family property, and requires private
mortgage insurance on all such loans when loan to value ratios exceed 80%.
Loans on commercial and multi-family (more than four units) property are
required to have a loan to value ratio of 80% or less.
All of the Bank's lending is subject to its written, nondiscriminatory
standards and to loan origination procedures prescribed by the Board of
Directors. Decisions on loan applications are made on the basis of detailed
applications and property valuations (based upon the Bank's written appraisal
policy) by staff or independent appraisers approved by the Board of Directors.
The loan applications are designed primarily to determine the
8
<PAGE>
borrower's ability to repay and the more significant items on the application
are verified through use of credit reports, financial statements and
confirmations.
The Staff Loan Committee, chaired by the Chief Lending Officer or the Chief
Executive Officer, has the authority to approve loans up to $300,000, whereas
the Board Loan Committee may approve loans up to $500,000. All loans in excess
of $500,000 must be approved by the full Board of Directors. In addition, the
Chief Executive Officer or the Chief Lending Officer and one other Executive
Officer may act on behalf of the Staff Loan Committee. Individual loan
personnel may also approve loans up to specified limits established for each
individual and approved by the Board of Directors. All loan approvals are
ultimately ratified by the full Board of Directors.
It is the policy of the Bank to obtain a title insurance policy or title
abstract insuring that the Bank has a valid first lien on mortgaged real estate.
The borrower must also obtain fire and casualty insurance policies.
LOAN ORIGINATIONS, PURCHASES AND SALES. The Bank has general authority to
make real estate loans secured by properties located throughout the United
States. However, at June 30, 1996, greater than 98% of all of the Bank's total
mortgage loans receivable were secured by real estate located in its primary
market area.
The Bank originates adjustable-rate real estate loans for portfolio and
originates fixed-rate one- to four-family owner-occupied residential mortgage
loans primarily for sale in the secondary market as part of the management of
its asset and liability interest rate sensitivity. The Bank typically obtains a
contract to sell fixed-rate loans at the time of rate commitment and sells those
loans in the secondary market without recourse while retaining the servicing on
the majority of the loans it sells. At June 30, 1996, the Bank was servicing
residential loans for others in the amount of $110.7 million. Due to the strong
loan demand in the Bank's market area, the Bank has not purchased loans during
recent years.
Historically, loans have been originated by the Bank primarily through
referrals received from real estate brokers, builders, and customers as well as
through refinancing of loans for existing customers. The Bank attempts to
carefully monitor interest rates in its market areas and believes that it is
competitive in such areas. In December 1990, the Bank formed ES&L Mortgage
Corporation d/b/a Cayuga Mortgage Company for the purpose of engaging in
mortgage banking activities through the origination of mortgage loans for sale
to investors, including the Bank. Currently, substantially all of Cayuga
Mortgage loans are originated for sale to the Bank, which retains the adjustable
rate mortgage loans in its portfolio and sells the fixed rate mortgage loans,
servicing retained, in the secondary market. During fiscal year 1996, Cayuga
Mortgage and PACE Funding originated $20.4 million in loans for sale to the
Bank.
Set forth below is a table showing the Bank's loan origination and sales
activity for the periods indicated. Neither loans originated by Cayuga Mortgage
for sale to investors other than the Bank nor loans closed by Cayuga Mortgage
and sold to investors other than the Bank are included in this table. Loans
originated by Cayuga Mortgage for sale to the Bank are not considered loan sales
because no income is generated for the subsidiary in accordance with the
provisions of Financial Accounting Standards Statement No. 91. See Note A to
the Notes to Consolidated Financial Statements included in the Corporation's
Annual Report to Stockholders for the Fiscal Year Ended June 30, 1996 (the
"Annual Report"). Loans originated, as shown in the following table, include
loans from the Bank, Cayuga Mortgage Company, and its mortgage banking
partnership, PACE Funding, where such loans are currently being serviced by the
Bank.
9
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------
1996 1995 1994
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Loans originated:
Conventional real estate loans:
Construction loans........................... $ 2,871 $ 2,802 $ 3,130
Loans on existing property................... 25,482 26,331 27,635
Loans refinanced............................. 17,902 4,603 27,819
Insured and guaranteed loans................... 1,852 1,273 499
Consumer....................................... 2,277 2,060 1,503
Commercial loans............................... 1,728 277 707
Other loans.................................... 3,556 3,471 3,996
-------- -------- --------
Total loans originated....................... $ 55,668 $ 40,817 $ 65,289
Loans sold:
Whole Loans.................................... (30,216) (11,833) (42,502)
Participation loans............................ -- --
-------- -------- --------
Total loans sold............................. (30,216) (11,833) (42,502)
Loans held for sale.............................. ( 5,458) (3,796) (1,913)
Loans exchanged for mortgage- backed securities.. -- -- --
Principal repayments............................. (12,571) (10,501) (14,037)
Loans transferred to foreclosed real estate..... (214) (91) --
Increase (decrease) in other items, net......... (3,760) (2,847) (2,013)
-------- -------- --------
Net increase (decrease)........................ $ 3,449 $ 11,749 $ 4,824
======== ======== ========
</TABLE>
LOAN SERVICING AND LOAN FEES. Interest rates charged by the Bank on mortgage
loans are primarily determined by competitive loan rates offered in its market
area. Mortgage loan rates reflect factors such as general interest rate levels,
the supply of money available to the savings industry and the demand for such
loans. These factors are in turn affected by general economic conditions, the
monetary policies of the Federal government, including the Federal Reserve
Board, the general supply of money in the economy, tax policies and governmental
budget matters.
As of June 30, 1996, Elmira Savings & Loan was servicing approximately $110.7
million of loans for others. The Bank receives a servicing fee typically
ranging from 1/4% to 3/8% for these loans.
In addition to interest earned on loans and income from servicing of loans,
the Bank receives fees in connection with loan commitments and originations,
loan modifications, late payments, changes of property ownership and for
miscellaneous services related to its loans. Income from these activities
varies from period to period with the volume and type of loans originated, sold
and purchased, which in turn are dependent on prevailing mortgage interest rates
and their effect on the demand for loans in the markets served by the Bank. See
Note A of the Notes to Consolidated Financial Statements included in the Annual
Report for information regarding the accounting treatment of loan origination
fees.
LOAN COMMITMENTS. Real estate loan commitments are generally granted for a
period of 35 days from the date of commitment. When the Bank issues a written
loan commitment the borrower pays an origination fee up to 3% at that time in
order to retain the commitment. Historically less than 5% of the Bank's
commitments expire before being funded. At June 30, 1996, the Bank's
outstanding commitments totalled approximately $3.2 million.
The Bank generally obtains forward commitments on a loan by loan basis to
sell Fixed Rate loans to FHLMC. Interest rates on real estate loans sold are
generally locked in at either application, commitment or closing.
10
<PAGE>
NON-PERFORMING LOANS AND ASSET CLASSIFICATION. Loans are reviewed on a
monthly basis and are placed on non-accrual status when, in the opinion of
management, the collection of additional interest is doubtful. Residential and
commercial mortgage loans are generally placed on non-accrual status when either
principal or interest is more than 90 days past due. Interest accrued and
unpaid at the time a loan is placed on non-accrual status is charged against
interest income. Subsequent payments are either applied to the outstanding
principal balance or recorded as interest income, depending on the assessment of
the ultimate collectibility of the loan. Consumer loans are generally charged
off when or before the loan becomes 120 days delinquent, although collection
efforts continue.
Identification of a delinquent mortgage loan is generally made by the 15th day
of delinquency, and a late notice is mailed between the 16th and 18th day of
delinquency. The Bank attempts to contact the borrower by telephone beginning
approximately five days after mailing the notice. If satisfactory arrangements
to bring the account current have not been made by the 45th day of delinquency,
efforts are made to conduct a face-to-face interview with the borrower. If a
satisfactory response is not obtained, the Bank continues to follow up with
notices, telephone contacts and personal interviews until the mortgage loan has
been brought current or until the Bank determines that recommendation for
foreclosure, deed in lieu of foreclosure, or other action is appropriate.
Real estate acquired by the Bank as a result of foreclosure or by deed in lieu
of foreclosure is classified as real estate owned until such time as it is sold.
Real estate properties acquired through loan foreclosure are valued at the lower
of cost or fair value minus estimated costs to sell. Costs relating to the
improvement of property are capitalized to the extent that the carrying value
does not exceed estimated fair value, whereas costs relating to holding property
are expensed. Valuations are periodically performed by management and an
allowance for losses is established, if necessary, by a charge to operations if
the carrying value of a property exceeds its estimated net realizable value.
As of June 30, 1996, there were no loans excluded from the table below where
known information about the possible credit problems of borrowers caused
management to have serious doubts as to the ability of the borrower to comply
with present loan repayment terms and which may result in disclosure of such
loans in the future except as identified herein. As of June 30, 1996, there
were no concentrations of loans in any types of industry which exceeded 10% of
the Bank's total loans that are not included as a loan category in the table
which follows. In addition, for all years presented and at June 30, 1996, the
Bank had no restructured loans as defined in SFAS 15.
11
<PAGE>
The following table sets forth information with respect to the Bank's non-
performing assets for the periods indicated.
<TABLE>
<CAPTION>
At June 30,
-----------------------------------
1996 1995 1994
--------- ------------ ----------
<S> <C> <C> <C>
Loans accounted for on a non-accrual basis: (1)
Real Estate:
Residential................................... $176,550 $194,587 $153,089
Commercial.................................... - 442,351 155,262
Consumer/Home Equity.......................... 46,103 81,324 73,904
Consumer........................................ - - -
Other........................................... - - 13,927
-------- -------- --------
Total............................................. $222,653 $718,262 $396,182
======== ======== ========
Accruing loans which are contractually past due
90 days or more:
Real Estate:
Residential................................... $ 70,368 $ 90,766 $ 98,020
Commercial.................................... - 185,114 94,406
Consumer/Home Equity.......................... - - 1,487
Education...................................... - - -
Consumer....................................... 9,862 - -
Other.......................................... - - --
-------- -------- --------
Total....................................... $ 80,230 $275,880 $193,913
======== ======== ========
Total of nonaccrual and 90 days past
due loans....................................... $302,883 $994,142 $590,095
======== ======== ========
Percentage of total loans......................... .24% .79% .52%
======== ======== ========
Other non-performing assets (2)................... $ 90,815 $149,961 $ 15,000
======== ======== ========
</TABLE>
- -------------------
(1) Non-accrual status denotes loans on which, in the opinion of management,
the collection of additional interest is unlikely, or loans that meet non-
accrual criteria as established by regulatory authorities. Payments
received on a non-accrual loan are either applied to the outstanding
principal balance or recorded as interest income, depending on an
assessment of the collectibility of the loan.
(2) Other non-performing assets represents property acquired or in the process
of being acquired by the Bank through foreclosure or repossession. This
property is carried at the lower of its fair market value or the principal
balance of the related loan.
During the year ended June 30, 1996, gross interest income of $19,447 would
have been recorded on loans accounted for on a non-accrual basis if the loans
had been current throughout the period. Interest on such loans included in
income during the period amounted to $6,304.
12
<PAGE>
The following table sets forth an analysis of the Bank's allowance for loan
loss account for the periods indicated.
<TABLE>
<CAPTION>
At June 30,
-----------------------------------------------------------------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Balance at beginning of
period.................... $1,423,826 $1,268,611 $ 681,614
Loans charged-off:
Real Estate -- mortgage:
Residential............. 260 2,037 52,752
Commercial.............. 48,398 105 1,567
Commercial business....... -- -- --
Consumer.................. 5,549 -- 1,202
---------- ---------- ----------
Total charge-offs.......... $ 54,207 $ 2,142 $ 55,521
---------- ---------- ----------
Recoveries:
Real Estate--Mortgage:
Residential............ $ -- $ 4,608 $ 170
Commercial............. 412 -- --
Commercial business...... -- 2,149 2,348
Consumer................. 750 600 --
---------- ---------- ----------
Total recoveries........... $ 1,162 $ 7,357 $ 2,518
---------- ---------- ----------
Net loans charged-off...... $ 53,045 $ (5,215) $ 53,003
Provision for possible
loan losses............... $ 60,000 150,000 640,000
---------- ---------- ----------
Balance at end of period... $1,430,781 $1,423,826 $1,268,611
========== ========== ==========
Ratio of net charge-offs
to average loans outstanding
during the period...... 0.00% 0.00% 0.05%
========== ========== ==========
</TABLE>
For a discussion of the Bank's provision for loan losses in fiscal year 1996,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Comparison of Operating Results for the Years Ended June 30, 1996
and 1995 -- Provision for Loan Losses" in the Annual Report.
The following table sets forth the breakdown of the allowance for loan losses
by loan category for the periods indicated. Management believes that the
allowance can be allocated by category only on an approximate basis. The
allocation of the allowance to each category is not necessarily indicative of
future losses and does not restrict the use of the allowance to absorb losses in
any category.
<TABLE>
<CAPTION>
At June 30,
----------------------------------------------------------------------------------
1996 1995 1994
-------------------------- -------------------------- --------------------------
Percent of Percent of Percent of
Loans in Each Loans in Each Loans in Each
Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans
---------- -------------- ---------- -------------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Real estate mortgage:
Residential......................... $ 273,197 55.80% $ 102,354 64.2% $ 90,471 59.40
Commercial.......................... 515,270 32.80 315,072 24.4 250,092 28.50
Commercial business................. 37,000 1.60 9,000 1.6 10,000 1.00
Consumer............................ 81,369 9.80 39,604 9.8 35,293 11.10
Unallocated......................... 523,945 N/A 957,796 N/A 882,755 N/A
---------- ------ ---------- ------ ---------- ------
Total allowance for loan losses.. $1,430,781 100.00% $1,423,826 100.00% $1,268,611 100.00%
========== ====== ========== ====== ========== ======
</TABLE>
13
<PAGE>
Federal regulations require savings associations to review their assets on a
regular basis and to classify them as "substandard," doubtful" or "loss," if
warranted. Assets classified as substandard or doubtful require the
institution to establish general allowances for loan losses. If an asset or
portion thereof is classified loss, the insured institution must either
establish specified allowances for loan losses in the amount of 100% of the
portion of the asset classified loss, or charge off such amount. An asset which
does not currently warrant classification but which possesses weaknesses or
deficiencies deserving close attention is required to be designated as "special
mention." OTS examiners may disagree with the insured institution's
classifications and amounts reserved. If an institution does not agree with an
examiner's classification of an asset, it may appeal this determination to the
OTS. As of June 30, 1996, the Bank had $717,000 of assets classified as
substandard and no assets classified as doubtful or as loss.
Included in the Bank's substandard classification at June 30, 1996 were loans
totalling approximately $600,000 which were not delinquent as of June 30, 1996.
These loans were classified following a specific review of each individual
account, including a review of the borrower's financial statements, the economic
conditions surrounding the secured property and other factors. All foreclosed
real estate is included as a substandard asset.
While the Bank believes it has established its existing allowances for loan
losses in accordance with generally accepted accounting principles, there can be
no assurance that regulators, in reviewing the Bank's loan portfolio in the
future, will not request the Bank to increase its allowance for loan losses,
thereby negatively impacting the Bank's financial condition and earnings.
The Bank's primary lending area has experienced controlled growth over the
last several years. There continues to be a softening in the real estate market
in some parts of the Bank's market area, especially in the higher end of the
market and on properties located in rural areas, which has been manifested
primarily in a reduced demand for new homes in these areas. Management believes
that the market is fairly stable. There can be no assurance, however, that
economic conditions in the Bank's market area will remain stable or that the
slowdown experienced in some parts of the Bank's market area will continue to be
limited to origination activity. Any deterioration in the condition of the real
estate market could adversely effect the Bank's earnings or financial condition.
INVESTMENT ACTIVITIES
Elmira Savings & Loan is required under federal regulations to maintain a
minimum amount of liquid assets which can be invested in specified short-term
securities and is also permitted to make certain other investments. See
"Regulation -- Liquidity Requirements" It has generally been Elmira Savings &
Loan's policy to maintain a liquidity portfolio in order to satisfy regulatory
requirements. All corporate bonds are investment grade. Liquidity levels may
be increased or decreased depending upon the yields on investment alternatives,
management's judgment as to the attractiveness of the yields then available in
relation to other opportunities, its expectations of the level of yield that
will be available in the future and its projections as to the short-term demand
for funds to be used in the Bank's loan origination and other activities.
14
<PAGE>
The following table sets forth the carrying value of the Bank's investment
securities portfolio, short-term investments and FHLB stock at the dates
indicated. At June 30, 1996, the market value of the Bank's investment
securities portfolio was approximately $4.1 million.
<TABLE>
<CAPTION>
At June 30,
----------------------
1996 1995 1994
------ ------ ------
(In thousands)
<S> <C> <C> <C>
Investment securities:
U.S. Government and agency securities.... $2,988 $2,902 $2,551
Corporate debt securities................. 42 1,075 1,119
Corporate Stock........................... 49 39 38
Bank certificates of deposit.............. -- 330 --
------ ------ ------
Total investment securities............. $3,079 $4,346 $3,708
Federal funds sold and overnight deposits.. -- 97 159
------ ------ ------
Total investment securities, federal
funds sold and overnight deposits.... 3,079 4,443 3,867
Federal Home Loan Bank of New York stock... 1,104 1,104 1,067
------ ------ ------
Total investments....................... $4,183 $5,547 $4,934
====== ====== ======
</TABLE>
The Bank carries its investment securities in one of the following manners:
1) Held to Maturity - carried at cost as adjusted for discounts and
unamortized premiums with the intent to hold until maturity.
2) Available for Sale - carried at cost and subject to sale at any time.
However, a valuation allowance is established with an offset entry for
any unrealized appreciation or depreciation made against capital with
actual gains or losses being recorded on the income statement at time of
sale.
At June 30, 1996, the market value of investment securities "Held to
Maturity" was approximately $37,000 lower than the carrying value while the
"Available For Sale" investment was approximately $12,000 in excess of the
carrying value.
For further information, see Notes A and B to Notes to Consolidated
Financial Statements included in the Annual Report.
15
<PAGE>
The following table sets forth the scheduled maturities, carrying values,
market values and average yields for certain of the Corporation's investment
securities at June 30, 1996.
<TABLE>
<CAPTION>
One Year or Less One to Five Years Five to Ten Years More than Ten Years
----------------- ------------------- ----------------- --------------------
Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield
-------- ------ -------- ------- -------- ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
C>
U.S. Government and
agency obligations....... $ - - % $ 2,989 6.46% $ - - % $ - - %
Corporate debt securities. - - - - - - 42 6.61
Corporate Stock............ - - - - - - 48 2.87
---- ------- ---- ---
Total..................... $ - - % $ 2,989 6.46% $ - - % $90 4.60 %
==== ======= ==== ===
Total Investment Portfolio
---------------------------
Carrying Market Average
Value Value Yield
-------- ------ -------
U.S. Government and
agency obligations....... $ 2,989 $ 2,951 6.46 %
Corporate debt securities. 42 42 6.61
Corporate Stock............ 48 48 2.87
------- -------
Total..................... $ 3,079 $ 3,041 6.41 %
======= =======
</TABLE>
16
<PAGE>
DEPOSIT ACTIVITY AND OTHER SOURCES OF FUNDS
GENERAL. Deposits are a significant source of the Bank's funds for
lending and other investment purposes. In addition to deposits, Elmira Savings
& Loan derives funds from loan principal repayments, interest payments, advances
from the FHLB of New York and reverse repurchase agreements. Loan repayments
and interest payments are a relatively stable source of funds, while deposit
inflows and outflows are significantly influenced by general interest rates and
money market conditions. Borrowing may be used on a short-term basis to
compensate for reductions in the availability of funds from other sources. They
may also be used on a longer term basis for general business purposes.
DEPOSITS. Consumer and commercial deposits are attracted principally
from within the Bank's primary market area through the offering of a variety of
deposit instruments, including passbook and statement accounts and certificates
of deposit ranging in term from 30 days to 5 years. Deposit account terms vary,
with the principal differences being the minimum balance required, the time
periods the funds must remain on deposit and the interest rate. The Bank also
offers individual retirement accounts ("IRAs").
The Bank's policies are designed primarily to attract deposits from
local residents rather than to actively solicit deposits from areas outside its
primary market. The Bank does not accept deposits from brokers due to the
volatility and rate sensitivity of such deposits, nor does the Bank pay above
market rates for deposits received from outside its primary market area.
Interest rates paid, maturity terms, service fees and withdrawal
penalties are established by the Bank on a periodic basis. Determination of
rates and terms are predicated upon funds acquisition and liquidity
requirements, rates paid by competitors, growth goals and federal regulations.
As part of the Bank's strategy of managing its assets and
liabilities, it has attracted, by rate, certificates of deposit with terms of
fourteen months or less. Since the Bank has only one office, it has been unable
to attract a large number of transaction accounts.
Certificates of deposit with balances in excess of $100,000 amounted
to 13.1% of deposits at June 30, 1996. Under New York law, the Bank is not
permitted as a savings association to accept public funds. The jumbo deposits
in the portfolio have come from local union funds, businesses and individuals,
the majority of which have been longstanding customers of the Bank; these funds
do not represent brokered deposits.
17
<PAGE>
The following table sets forth the change in dollar amount of deposits in
the various types of accounts offered by the Bank between the dates indicated.
<TABLE>
<CAPTION>
Increase Increase
(Decrease) (Decrease)
Balance Balance from June 30, Balance from June 30,
at June 30, % at June 30, % 1995 to June at June 30, % 1994 to June
1996 Deposits 1995 Deposits 30, 1996 1994 Deposits 30, 1995
------------ -------- ------------ -------- ---------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest bearing
savings account........... $ 1,224,899 1.15% $ 1,139,158 1.13% $ 85,741 $ 955,122 1.10% $ 184,036
NOW checking account....... 4,010,094 3.76 2,906,433 2.88 1,103,661 2,422,776 2.79 483,657
Jumbo certificates......... 13,940,224 13.07 12,691,834 12.56 1,248,390 10,467,044 12.05 2,224,790
Super NOW checking accounts 1,507,242 1.41 1,278,279 1.26 228,963 1,433,128 1.65 (154,849)
Passbook and statement
savings................... 15,552,151 14.58 16,179,373 16.02 (627,222) 19,803,021 22.80 (3,623,648)
Money market deposit
accounts.................. 5,727,747 5.37 5,417,514 5.36 310,233 5,974,135 6.88 (556,621)
Six month money market
certificates............. 4,811,089 4.51 4,928,016 4.88 (116,927) 3,787,550 4.36 1,140,466
30 and 48 month
certificates.............. 4,281,412 4.02 5,158,721 5.11 (877,309) 5,344,939 6.15 (186,218)
IRA certificates, excluding
jumbo certificates....... 4,211,301 3.95 4,158,551 4.12 52,750 3,110,853 3.58 1,047,698
Other certificates......... 51,386,670 48.18 47,156,643 46.68 4,230,027 33,558,205 38.64 13,598,438
------------ ------ ------------ ------ ---------- ----------- ------ -----------
Total.................. $106,652,829 100.00% $101,014,522 100.00% $5,638,307 $86,856,773 100.00% $14,157,749
============ ====== ============ ====== ========== =========== ====== ===========
</TABLE>
18
<PAGE>
Deposits in the Bank as of June 30, 1996 were represented by the various
types of savings programs described below.
<TABLE>
<CAPTION>
Weighted
Average Percentage
Interest Minimum Balance in of Total
Rate Term Category Amount Thousands Savings
- -------- ----------- ----------------------------------------- ------- ---------- -----------
<C> <C> <S> <C> <C> <C>
Demand Deposits
-----------------------------------------
- % On Demand Non-Interest Bearing Savings Accounts $ 1 $ 1,225 1.15%
- On Demand NOW Accounts 10 4,010 3.76
3.05 On Demand Passbook and Statement Savings Accounts 5 15,334 14.38
3.20 On Demand Money Market Accounts 2,500 5,728 5.37
1.80 On Demand Super NOW Accounts 2,500 1,507 1.41
3.05 On Demand Holiday Club Accounts 1 218 .21
Certificates of Deposit
-----------------------------------------
3.66 30 Days 30 Day Certificate, Fixed-Rate 20,000 844 .79
4.39 91 Days 91 Day Certificate, Fixed-Rate 2,500 1,696 1.59
4.92 182 Days 6 Month Certificate, Fixed-Rate 2,500 5,087 4.77
5.07 8 Months 8 Month Certificate, Fixed-Rate 500 4,576 4.29
4.84 9 Months 9 Month Certificate, Fixed-Rate 5,000 592 .56
5.02 10 Months 10 Month Certificate, Fixed-Rate 500 116 .11
5.20 12 Months 1 Year Certificate, Fixed-Rate 500 3,985 3.74
5.52 14 Months 14 Month Certificate, Fixed-Rate 2,500 26,569 24.91
5.32 18 Months 18 Month Certificate, Fixed-Rate 500 1,089 1.02
5.94 24 Months 24 Month Certificate, Fixed-Rate 500 10,673 10.01
5.34 100 Weeks 100 Week Certificate, Fixed-Rate 5,000 186 .17
5.73 30 Months 30 Month Certificate, Fixed-Rate 500 1,508 1.41
5.75 36 Months 36 Month Certificate, Fixed-Rate 2,500 2,534 2.38
5.64 48 Months 4 Year Certificate, Fixed-Rate 500 3,607 3.38
6.72 60 Months 5 Year Certificate, Fixed-Rate 500 13,389 12.55
5.24 12 Months 1 Year Mini Jumbo Certificate, Fixed-Rate 20,000 2,165 2.03
5.32 18 Months 18 Month Certificate, Variable-Rate 10 10 .01
7.59 12 Months Various other time deposits, Fixed-Rate 500 5 -
-------- ------
$106,653 100.00%
======== ======
</TABLE>
19
<PAGE>
The following table indicates the amount of the Bank's certificates of
deposit of $100,000 or more by time remaining until maturity as of June 30,
1996.
<TABLE>
<CAPTION>
Maturity Period Amount
--------------- --------------
(In thousands)
<S> <C>
Three months or less....... $ 4,329
Three through six months... 1,180
Six through twelve months.. 4,607
Over twelve months......... 3,824
-------
Total.................... $13,940
=======
</TABLE>
The following table sets forth the average balances and interest rates based
on month end balances for demand deposits and time deposits as of the dates
indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------------------------
1996 1995 1994
-------------------- -------------------- --------------------
Demand Time Demand Time Demand Time
Deposits Deposits Deposits Deposits Deposits Deposits
--------- --------- --------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Average Balance.. $27,854 $78,963 $29,358 $70,315 $30,703 $58,083
Average Rate..... 2.59% 5.62% 2.79% 5.21% 2.52% 4.81%
</TABLE>
The following table sets forth the Bank's deposit activities
for the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------
1996 1995 1994
-------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Deposits........................................... $137,013 $142,340 $129,154
Withdrawals........................................ 136,505 132,618 129,798
-------- -------- --------
Net increase (decrease) before interest credited.. 508 9,722 (644)
Interest credited.................................. 5,130 4,436 3,527
-------- -------- --------
Net increase (decrease) in deposits............... $ 5,638 $ 14,158 $ 2,883
======== ======== ========
</TABLE>
BORROWINGS. Savings deposits are the primary source of funds for the
Bank's lending and investment activities and for its general business
activities. The Bank does, however, rely upon advances from the FHLB of New
York to supplement its supply of lendable funds and to meet deposit withdrawal
requirements. Advances from the FHLB are typically secured by the Bank's stock
in the FHLB and a portion of the Bank's mortgage loans. The Bank has utilized
borrowings from the FHLB of New York as a source of funds to duration match
against loan originations. The FHLB has served as the Bank's primary borrowing
source. At June 30, 1996, Elmira Savings & Loan had advances totaling $17.6
million from the FHLB of New York.
20
<PAGE>
The FHLB of New York functions as a central bank providing credit for
savings institutions and certain other member financial institutions. As a
member, Elmira Savings & Loan is required to own capital stock in the FHLB and
is authorized to apply for advances on the security of such stock and certain of
its home mortgages and other assets (principally, securities which are
obligations of, or guaranteed by, the United States) provided certain standards
related to creditworthiness have been met.
From time to time the Bank borrows funds under reverse repurchase
agreements. Under a reverse repurchase agreement, the Bank sells securities
(generally government securities, mortgage-backed securities and FHLMC
participation certificates) and agrees to repurchase them at a specified price
at a later date. Reverse repurchase agreements are generally for terms of up to
90 days, are subject to renewal, and are deemed to be borrowings collateralized
by the securities sold. At June 30, 1996, the Bank had no reverse repurchase
agreements outstanding. Reverse repurchase agreements are contracted with
primary registered broker-dealers or Shay Government Securities Company,
formerly the U.S. League Securities, Inc.
The following tables set forth certain information regarding the
Bank's FHLB advances (which represent the Bank's only short term borrowings
during the periods covered) at the end of and during the periods indicated.
<TABLE>
<CAPTION>
At June 30,
------------------
1996 1995
-------- --------
<S> <C> <C>
Weighted average rate .............. 5.65% 6.34%
During the
Year Ended June 30,
---------------------
1996 1995
--------- ---------
(In thousands)
Maximum amount outstanding at any
month end.................................. $15,400 $16,100
Approximate average amount................... $13,208 $13,375
Approximate weighted average rate paid (1).. 5.79% 5.80%
</TABLE>
- --------------------
(1) The weighted average rate is determined by use of the weighted average rate
for each month-end in the period.
21
<PAGE>
RATE/VOLUME ANALYSIS. The table below sets forth certain information
regarding changes in interest income and interest expense of the Bank for the
periods indicated. For each category of interest-earning asset and interest-
bearing liability, information is provided on changes attributable to (i)
changes in volume (changes in volume multiplied by old rate); (ii) changes in
rate (changes in rate multiplied by old volume); and (iii) the net change. The
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.
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------------------------------------------------------------------
1996 vs. 1995 1995 vs. 1994 1994 vs. 1993
------------------------------- -------------------------------- --------------------------------
Increase (Decrease) Increase (Decrease) Increase (Decrease)
Due to Due to Due to
------------------------------- -------------------------------- --------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Volume Rate Net Volume Rate Net Volume Rate Net
-------- -------- ---------- -------- --------- ---------- -------- --------- ---------
(In thousands)
Interest income:
Loan portfolio............ $632,378 $706,768 $1,339,146 $716,901 $790,365 $1,507,266 $557,655 $(742,794) $(185,139)
Investment securities..... 957 2,074 3,031 81,940 (23,654) 58,286 40,965 (11,207) 29,758
Mortgage-backed
securities.............. (38,852) 29,147 (9,705) (46,661) 39,263 (7,398) 172,822 (5,460) 167,362
Federal funds sold........ - - - (31,596) 22,145 (9,451)
Interest-earning deposits
with other banks........ (412) (5,211) (5,623) (50,725) 9,605 (41,120) -- -- --
-------- -------- ---------- -------- -------- ---------- -------- --------- ---------
Total interest earning
assets................ 594,071 732,778 1,326,849 701,455 815,579 1,517,034 739,846 (737,316) 2,530
-------- -------- ---------- -------- -------- ---------- -------- --------- ---------
Interest expense:
Demand deposits........... (40,656) (55,808) (96,464) (34,902) 80,298 45,396 22,463 (87,490) (65,027)
Time deposits............. 472,128 300,043 772,171 623,757 243,637 867,394 74,717 (556,578) (481,861)
Borrowings and advances... (36,156) 81,318 45,162 (97,232) 218,041 120,809 268,567 47,787 316,354
-------- -------- ---------- -------- -------- ---------- -------- --------- ---------
Total interest-bearing
liabilities........... 395,316 325,553 720,869 491,623 541,795 1,033,599 365,747 (596,281) (230,534)
-------- -------- ---------- -------- -------- ---------- -------- --------- ---------
Increase (decrease) in net
interest income........... $198,755 $407,225 $ 605,980 $209,832 $273,604 $ 483,435 $374,099 $(141,035) $ 233,064
======== ======== ========== ======== ======== ========== ======== ========= =========
</TABLE>
22
<PAGE>
AVERAGE BALANCE SHEET. The following table sets forth certain
information relating to the Bank's average balance sheet and reflects the
average yield on assets and average cost of liabilities for the periods
indicated. Such yields and costs are derived by dividing income or expense by
the average monthly balance of assets or liabilities, respectively, for the
periods presented. Average balances are derived from month-end balances.
Management does not believe that the use of month-end balances instead of
average daily balances has caused any material difference in the information
presented.
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------------------------------------------------------------------
1996 1995 1994
-------------------------------------------------------------------------------------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
------------ ----------- ----- ------------ ----------- ----- ------------ ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Total loan portfolio
(1)................... $125,828,250 $10,855,429 8.63% $118,229,410 $ 9,516,283 8.05% $108,900,574 $8,009,017 7.35%
Investment securities,
including
FHLB stock............. 5,120,897 318,692 6.22 5,105,455 315,661 6.18 3,804,763 256,582 6.74
Mortgage-backed
securities.............. 2,416,603 189,417 7.84 2,946,677 199,122 6.76 3,704,760 206,520 5.57
Interest-Earning
Deposits............... 479,325 15,465 3.23 489,068 21,088 4.31 1,702,917 62,208 3.65
------------ ----------- ----- ------------ ----------- ----- ------------ ---------- -----
Total interest-earning
assets................ 133,845,075 11,379,003 8.50 126,770,610 10,052,154 7.93 118,113,014 8,534,327 7.23
Non-interest earning
assets................... 4,226,208 3,108,593 1,715,974
------------ ------------ ------------
Total assets........... $138,071,283 $129,879,203 $119,828,988
============ ============ ============
Interest-bearing
liabilities:
Demand deposits.......... $ 27,853,918 721,502 2.59 $ 29,357,665 817,966 2.79 $ 30,702,883 772,570 2.52
Time deposits............ 78,962,880 4,435,948 5.62 70,315,088 3,663,777 5.21 58,082,822 2,796,383 4.81
------------ ----------- ----- ------------ ----------- ----- ------------ ---------- -----
Total deposits,
including escrows..... 106,816,798 5,157,450 4.83 99,672,753 4,481,743 4.50 88,785,705 3,568,953 4.02
Borrowings............... 18,291,440 1,038,030 5.67 18,965,258 992,868 5.24 21,160,020 872,059 4.12
------------ ----------- ----- ------------ ----------- ----- ------------ ---------- -----
Total interest-bearing
liabilities........... 125,108,238 6,195,480 4.95 118,638,011 5,474,611 4.61 109,945,725 4,441,012 4.04
Non-interest-bearing
liabilities............... 1,223,028 818,800 868,271
------------ ------------ ------------
Total liabilities...... 126,331,266 119,456,811 110,813,996
Retained earnings.......... 11,740,017 10,422,392 9,014,992
------------ ------------ ------------
Total liabilities and
retained earnings..... $138,071,283 $129,879,203 $119,828,988
============ ============ ============
Net interest income........ $ 5,183,523 $ 4,577,543 $ 4,093,315
============ ============ ============
Interest rate spread....... 3.55% 3.31% 3.19%
===== ===== =====
Net yield on
interest-earning assets... 3.88% 3.61% 3.47%
===== ===== =====
Ratio of average
interest-earning assets to
average interest-bearing
liabilities............. 106.98% 106.85% 107.43%
====== ====== =====
</TABLE>
- --------------------
(1) Average balances include non-accrual loans.
23
<PAGE>
SUBSIDIARY ACTIVITIES
As a federally chartered savings association, Elmira Savings & Loan is
permitted to invest an amount equal to 2% of its assets in subsidiaries with an
additional investment of 1% of assets where such investment serves primarily
community, inner-city, and community development purposes. Under such
limitations, as of June 30, 1996, Elmira Savings & Loan was authorized to invest
up to approximately $2.8 million in the stock of or loans to subsidiaries.
Institutions meeting regulatory capital requirements, which Elmira Savings &
Loan currently does, may invest up to 50% of their regulatory capital in
conforming first mortgage loans to subsidiaries. As of June 30, 1996, Elmira
Savings & Loan had $265,000 of equity invested in its subsidiaries.
In July 1987, the Bank activated its wholly owned subsidiary, Brilie
Corporation (d/b/a ES&L Financial Services), for the purpose of selling life
insurance and annuity products, health insurance and mutual funds under an
agency relationship with major insurance companies and third party mutual fund
providers to the Bank's customers. This company has two employees. This
division of Brilie Corporation had net pretax revenues of approximately $54,400
during fiscal year 1996. In 1993, Brilie Corporation formed a new subsidiary,
d/b/a ES&L Appraisal Services. This company performs real estate appraisals for
residential and commercial properties, primarily for the Bank and Cayuga
Mortgage Company. During the 1996 fiscal year, this company had pretax revenues
of approximately $20,800.
In May 1989, Brilie Corporation entered into a 50% joint venture
partnership agreement with a family group who resides in the Elmira area and who
is affiliated with a real estate brokerage company. The partnership was formed
for the purpose of developing a planned unit development located in Horseheads,
New York. The property includes two multi-family developments, two townhome
developments and 70 single family lots. Pursuant to the partnership agreement,
the family group receives sales commissions on the purchase price of building
lots which they sell on behalf of the partnership and the family group agrees to
use its best efforts to encourage building lot purchasers to place their
construction and permanent mortgages with the Bank. The Bank has a 50% interest
in the partnership and has committed up to $750,000 in financing. At June 30,
1996, the Bank had loaned approximately $389,200 to the partnership. Brilie
Corporation earned $16,500 from this partnership during the fiscal year ended
June 30, 1996.
In December 1990, the Bank formed ES&L Mortgage Corporation d/b/a
Cayuga Mortgage Company as a wholly owned subsidiary of the Bank for purposes of
engaging in mortgage banking activities. Cayuga Mortgage's primary function is
to originate mortgages for sale to investors, one of whom is the Bank. With
respect to mortgages sold by Cayuga Mortgage to the Bank, no income is generated
for the subsidiary in accordance with the provisions of Financial Accounting
Standards Statement No. 91. (See Note A to the Notes to Consolidated Financial
Statements included in the Annual Report for a discussion of loan fees). With
respect to mortgages sold to third parties, income generated is not recognized
until after the closing of the sale of the mortgage. During the fiscal year
ended June 30, 1996, Cayuga Mortgage and PACE Funding originated approximately
$20.4 million of mortgages, the majority of which were originated for the Bank
for sale in the secondary market. The subsidiary currently has two employees.
The Bank's aggregate investment in Cayuga Mortgage was $265,000 at June 30,
1996.
The Bank is required to give the FDIC and the Director of the OTS 30
days' prior notice before establishing or acquiring a new subsidiary, or
commencing any new activity through an existing subsidiary. Both the FDIC and
the Director of the OTS have authority to order termination of subsidiary
activities determined to pose a risk to the safety or soundness of the
institution. In addition, federal regulations require savings associations to
deduct the amount of their investments in and extensions of credit to
subsidiaries engaged in activities not permissible to national banks from
capital in determining regulatory capital compliance. See "Regulation --
Regulatory Capital Requirements."
24
<PAGE>
COMPETITION
Elmira Savings & Loan is one of two thrift institutions headquartered
in Chemung County. The Bank experiences substantial competition both in
attracting and retaining savings deposits and in the making of mortgage and
other loans. Direct competition for savings deposits comes from other savings
institutions, credit unions and commercial banks located in its primary market
area. Additional significant competition for savings deposits comes from money
market mutual funds and corporate and government debt securities.
The primary factors in competing for loans are interest rates and loan
origination fees and the range of services offered by various financial
institutions. Competition for origination of real estate loans normally comes
from other thrift institutions, commercial banks, mortgage bankers, mortgage
brokers and insurance companies. There are six commercial banks, four savings
associations and eight credit unions with branches located in Chemung County.
Elmira Savings & Loan is able to compete effectively in its primary market area
by offering competitive interest rates and loan fees, and a wide variety of
deposit products, and by emphasizing personal customer service and cultivating
relationships with local businesses.
EMPLOYEES
As of June 30, 1996, Elmira Savings & Loan and its subsidiaries had 38
full-time and 5 part-time employees, none of whom were represented by a
collective bargaining agreement. Elmira Savings & Loan believes that it enjoys
good relations with its personnel.
EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
executive officers of the Corporation.
<TABLE>
<CAPTION>
Age at
June 30,
Name 1996 Position
- ---------------------- ------- --------
<S> <C> <C>
William A. McKenzie 45 President and Chief Executive Officer
J. Michael Ervin 47 Senior Vice President and Treasurer
Michael J. Wayne 35 Vice President
Lynn M. Morris 44 Vice President
James D. Stanton 49 Vice President
Judy A. Peters 38 Vice President
Michael J. Crimmins 44 Vice President
</TABLE>
WILLIAM A. MCKENZIE has served as President and Chief Executive Officer of
Elmira Savings & Loan since June 1983. In this capacity, Mr. McKenzie is
responsible for the overall operations of the Bank pursuant to the policies and
procedures established by the Board of Directors. Mr. McKenzie is a Board
member of Elmira Downtown Development Corporation and America's Community
Bankers. He has also served as Chairman of the following organizations:
Chemung County Chamber of Commerce, Southern Tier Economic Growth and the
Chemung County United Way Fund Drive. Mr. McKenzie has been employed at the
Bank since 1983.
25
<PAGE>
J. MICHAEL ERVIN has served as Senior Vice President/Treasurer of the Bank
since 1984. In this capacity, Mr. Ervin oversees all of the Bank's financial,
accounting and operating activities. Prior to 1984, Mr. Ervin served as first
Vice President of the Bank. Mr. Ervin serves as a Board member, past President
and Treasurer of the Arctic League of Chemung County and Woodbrook, Inc., as
well as a Board member and Assistant Treasurer of Southern Tier Economic
Growth. Mr. Ervin is a Board member of the Chemung/Schuyler Chapter of the
American Red Cross. Mr. Ervin has been employed by the Bank since 1973.
MICHAEL J. WAYNE has served as Vice President of Marketing, Stockholder and
Public Relations since 1993. Since 1990, Mr. Wayne has supervised the
Corporation's compliance with the periodic reporting requirements of the
Securities and Exchange Commission. Prior to 1993, Mr. Wayne was in charge of
the Corporation's secondary market activities and its Loan Servicing Department.
From 1987 to August 1989, Mr. Wayne served as Vice President in charge of
Mortgage Originations. He is a member of the Executive, Finance and Ticket
Committees for the LPGA Corning Classic , and is on the Executive Committee and
Board of Directors of Elmira Downtown Development Corporation. Mr. Wayne is a
Board member of Glove House and Capabilities. He is a Past President of the
Elmira Kiwanis Club and a member of the Chemung County Historical Society and
the Near Westside Neighborhood's Columbia Street Task Force. Mr. Wayne has been
employed by the Bank since 1982.
LYNN M. MORRIS has served as Vice President of Residential Loan Originations
since September 1990. Prior to 1990, Ms. Morris was the Bank's Marketing
Director. She is a 1990 graduate of the Chemung County Chamber of Commerce
Leadership Chemung program. Ms. Morris is a member of the United Way
Allocations Committee and the Association of Professional Mortgage Women. She
has been employed at the Bank since 1989.
JAMES D. STANTON has served as Vice President of Compliance and Loan Review
for the Bank since 1991. Mr. Stanton is a member of the City of Elmira's
Community Development Loan Committee and the United Way Allocations Committee.
He is a Board Member and Treasurer of the Near Westside Neighborhood Association
and has worked on the Chemung County Chamber of Commerce membership drive. He
has been employed by the Bank since 1988.
JUDY A. PETERS has served as Vice President of Commercial Loan Originations
since 1992. She has been an instrumental employee in the department since its
inception in 1984. In 1993 Mrs. Peters was named Small Business Advocate of the
Year by the U.S. Small Business Administration. She is a member of the Audit
Committee of the St. Mathew's Church and has worked on the Chemung County
Chamber of Commerce membership drive. Mrs. Peters has been employed by the Bank
since 1984.
MICHAEL J. CRIMMINS has served as Vice President of Operations, Accounting
and Loan Servicing since 1994. Prior to that Mr. Crimmins was a systems and
operations analyst for the Bank and was responsible for the development of the
Bank's disaster recovery plan. He is the Treasurer of the Hendy Avenue School
Parent Teachers Organization and a Board member of United Cerebral Palsey. He
is a member of the AT&T/NCR New York Users Group. Mr. Crimmins worked part-time
for the Bank from January 1993 until May 1993, at which time he became a full
time employee of the Bank.
REGULATION
GENERAL. As a savings association, Elmira Savings & Loan is subject to
extensive regulation by the OTS. The Bank's lending activities and other
investments must comply with various federal regulatory requirements. The OTS
periodically examines the Bank for compliance with various regulatory
requirements and the FDIC has the authority to conduct special examinations of
the Bank. The Bank must file reports with OTS describing its activities and
financial condition, and is subject to certain reserve requirements promulgated
by the Federal Reserve Board. This supervision and regulation is intended
primarily for the protection of depositors. As a savings and loan holding
company, the Corporation is subject to OTS regulation, examination, supervision
and reporting requirements. Certain of these regulatory requirements are
referred to in the following paragraphs or appear elsewhere herein.
26
<PAGE>
FEDERAL HOME LOAN BANK SYSTEM
The Bank is a member of the FHLB System, which consists of 12 regional
Federal Home Loan Banks ("FHLB's") subject to supervision and regulation by the
Federal Housing Finance Board ("FHFB"). The FHLB's provide a central credit
facility primarily for member institutions. As a member of the FHLB of New
York, the Bank is required to acquire and hold shares of capital stock in the
FHLB of New York in an amount at least equal to 1% of the aggregate unpaid
principal of its home mortgage loans, home purchase contracts, and similar
obligations at the beginning of each year, or 1/20 of its advances (borrowings)
from the FHLB of New York, whichever is greater. Elmira Savings & Loan was in
compliance with this requirement with an investment in FHLB of New York stock at
June 30, 1996, of $1,103,800. The FHLB of New York serves as a reserve or
central bank for its member institutions within its assigned region. It is
funded primarily from proceeds derived from the sale of consolidated obligations
of the FHLB System. It offers advances to members in accordance with policies
and procedures established by the FHFB and the Board of Directors of the FHLB of
New York. Long-term advances may only be made for the purpose of providing
funds for residential housing finance. As of June 30, 1996, Elmira Savings &
Loan had advances of $17.6 million outstanding from the FHLB of New York. See
"Business of the Bank -- Sources of Funds -- Borrowings."
LIQUIDITY REQUIREMENTS. As a member of the FHLB System, the Bank is required
to maintain average daily balances of liquid assets (cash, deposits maintained
pursuant to Federal Reserve Board requirements, time and savings deposits in
certain institutions, obligations of states and political subdivisions thereof,
shares in mutual funds with certain restricted investment policies, highly rated
corporate debt, and mortgage loans and mortgage-related securities with less
than one year to maturity or subject to purchase within one year) equal to the
monthly average of not less than a specified percentage (currently 5%) of its
net withdrawable savings deposits plus short-term borrowings. Member
institutions have also been required to maintain average daily balances of
short-term liquid assets at a specified percentage (currently 1%) of the total
of their net withdrawable savings accounts and borrowings payable in one year or
less. Monetary penalties may be imposed for failure to meet liquidity
requirements. The average liquidity and short term liquidity ratios of the Bank
for June 1996 were 5.48% and 2.88%, respectively.
QUALIFIED THRIFT LENDER TEST
The Bank is currently subject to OTS regulations which use the concept of a
qualified thrift lender ("QTL") to determine eligibility for Federal Home Loan
Bank advances and for certain other purposes. To qualify as a QTL, a savings
association must maintain at least 65% of its "portfolio" assets in qualified
thrift investments. Portfolio assets are defined as total assets less
intangibles, property used by a savings association in its business and
liquidity investments in an amount not exceeding 20% of assets. Qualified
thrift investments consist of: (i) loans, equity positions or securities related
to domestic, residential real estate or manufactured housing; (ii) property used
by the savings association in the conduct of its business; and (iii) stock in a
Federal Home Loan Bank or the Federal National Mortgage Association or the
FHLMC. Qualified thrift investments may also include liquidity investments and
50% of the dollar amount of residential mortgage loans subject to sale under
certain conditions. To qualify as a QTL, a savings association must maintain
its status as a QTL on a monthly basis in nine out of every 12 months. Failure
to qualify as a QTL results in a number of sanctions, including the imposition
of certain operating restrictions imposed on national banks and a restriction on
obtaining additional advances from the Federal Home Loan Bank System. Upon
failure to qualify as a QTL for two years, a savings association must convert to
a commercial bank. At June 30, 1996, approximately 85.7% of the Bank's assets
were invested in qualified thrift investments.
LENDING LIMITS
The aggregate amount of loans which a federally chartered savings association
may make on the security of liens on non-residential real property may not
exceed 400% of the institution's capital. The Director of the OTS may, however,
permit savings associations to exceed the 400% of capital limit in certain
circumstances.
27
<PAGE>
Under regulations of the OTS, loans and extensions of credit to a person
outstanding at one time generally may not exceed 15% of the unimpaired capital,
surplus and the loan loss allowance of the Bank. As of June 30, 1996, the Bank
was permitted to lend approximately $1.9 million to one borrower under this
standard. Loans and extensions of credit fully secured by readily marketable
collateral (as defined) may comprise an additional 10% of unimpaired capital and
surplus. As of June 30, 1996, the largest amount outstanding to any one
borrower of the Bank was $1.4 million, which was below the current limit.
REGULATORY CAPITAL REQUIREMENTS
Under the OTS's regulatory capital requirements, savings associations must
maintain "tangible" capital equal to 1.5% of adjusted total assets, "core"
capital equal to 3% of adjusted total assets and "total" capital (a combination
of core and "supplementary" capital) equal to 8% of risk-weighted assets. In
addition, the OTS has recently adopted regulations which impose certain
restrictions on savings associations that have a total risk-based capital ratio
that is less than 8.0%, a ratio of Tier 1 capital to risk-weighted assets of
less than 4.0% or a ratio of Tier 1 capital to adjusted total assets of less
than 4.0% (or 3.0% if the institution is rated composite 1 under the OTS
examination rating system). For purposes of these regulations, Tier 1 capital
has the same definitions as core capital. See "--Prompt Corrective Regulatory
Action."
For purposes of the OTS regulation, core capital is defined as common
stockholders' equity (including retained earnings), noncumulative perpetual
preferred stock and related surplus, minority interests in the equity accounts
of fully consolidated subsidiaries, certain nonwithdrawable accounts and pledged
deposits and "qualifying supervisory goodwill." Core capital is generally
reduced by the amount of the savings association's intangible assets for which
no market exists. Limited exceptions to the deduction of intangible assets are
provided for purchased mortgage servicing rights and qualifying supervisory
goodwill. Tangible capital is given the same definition as core capital but
does not include qualifying supervisory goodwill and is reduced by the amount of
all the savings association's intangible assets with only a limited exception
for purchased mortgage servicing rights. Both core and tangible capital are
further reduced by an amount equal to a savings institution's debt and equity
investments in subsidiaries engaged in activities not permissible to national
banks (other than subsidiaries engaged in activities undertaken as agent for
customers or in mortgage banking activities and subsidiary depository
institutions or their holding companies). Investments in and extensions of
credit to such subsidiaries are required to be fully netted against tangible and
core capital. At June 30, 1996, the Bank had $497,165 of investments in or
extensions of credit to a subsidiary engaged in activities not permitted to
national banks.
Adjusted total assets are a savings association's total assets as determined
under generally accepted accounting principles increased by certain goodwill
amounts and by a pro rated portion of the assets of subsidiaries in which the
savings association holds a minority interest and which are not engaged in
activities for which the capital rules require the savings association to net
its debt and equity investments in such subsidiaries against capital as well as
a pro rated portion of the assets of other subsidiaries for which netting is not
fully required under phase-in rules. Adjusted total assets are reduced by the
amount of assets that have been deducted from capital, the portion of savings
association's investments in subsidiaries that must be netted against capital
under the capital rules and, for purposes of the core capital requirement,
qualifying supervisory goodwill. At June 30, 1996, the Bank's adjusted total
assets for the purposes of the core and tangible capital requirements were
approximately $139.7 million.
In determining compliance with the risk-based capital requirement, a savings
association is allowed to include both core capital and supplementary capital in
its total capital provided the amount of supplementary capital included does not
exceed the savings association's core capital. Supplementary capital is defined
to include certain preferred stock issues, nonwithdrawable accounts and pledged
deposits that do not qualify as core capital, certain approved subordinated
debt, certain other capital instruments and a portion of the savings
association's general loss allowances. Total core and supplementary capital are
reduced by the amount of capital instruments held by other depository
institutions pursuant to reciprocal arrangements and by an increasing percentage
of the savings association's high loan-to-value ratio land loans and non-
residential construction loans and equity investments other than those deducted
28
<PAGE>
from core and tangible capital. As of June 30, 1996, the Bank had no high ratio
land or non-residential construction loans and no equity investments for which
OTS regulations require phased-in deductions from total capital.
The risk-based capital requirement is measured against risk-weighted assets
which equals the sum of each asset and the credit-equivalent amount of each off-
balance sheet item after being multiplied by an assigned risk weight. Under the
OTS risk-weighting system, one- to four-family first mortgages not more than 90
days past due with loan-to-value ratios under 80% are assigned a risk weight of
50%. Consumer and construction loans are assigned a risk weight of 100%.
Mortgage-backed securities issued, or fully guaranteed as to principal and
interest, by the FNMA or FHLMC are assigned a 20% risk weight. Cash and U.S.
Government securities backed by the full faith and credit of the U.S. Government
are given a 0% risk weight.
The table below presents the Bank's capital position relative to its
various minimum statutory and regulatory capital requirements at June 30, 1996.
<TABLE>
<CAPTION>
At June 30, 1996
-------------------
Percent
of
Amount Assets (1)
------- ----------
(Dollars in thousands)
<S> <C> <C>
Tangible Capital................. $12,228 8.75%
Tangible Capital Requirement..... 2,096 1.50
------- -----
Excess........................... $10,132 7.25%
======= =====
Tier 1/Core Capital.............. 12,228 8.75%
Tier 1/Core Capital Requirement.. 4,191 3.00
------- -----
Excess........................... $ 8,037 5.75%
======= =====
Risk-Based Capital............... 13,381 14.55%
Risk-Based Capital Requirement... 7,355 8.00
------- -----
Excess........................... $ 6,026 6.55%
======= =====
- --------------------
</TABLE>
(1) Based upon tangible assets for purposes of the tangible capital and core
capital requirements, and risk-weighted assets for purposes of the risk-
based capital requirement.
The Director of OTS must restrict the asset growth of savings associations
not in regulatory capital compliance, subject to a limited exception for growth
not exceeding interest credited. In addition, savings associations not in full
compliance with capital standards then applicable would be subject to a capital
directive which may include such restrictions, including restrictions on the
payment of dividends and on compensation, as deemed appropriate by the Director
of OTS. Institutions not in capital compliance must, within 60 days thereafter,
submit a capital plan to the OTS District Director for approval explaining in
detail its proposed strategies for raising capital and for accomplishing its
overall objective, and the institution may concurrently apply for an exemption
from a capital directive. The Director of OTS is directed to treat as an unsafe
and unsound practice any material failure by a savings association to comply
with a capital plan or capital directive. The sanctions and penalties that
could be imposed range from restrictions on branching or on the activities of
the institution, to restrictions on the ability to obtain FHLB advances, to
termination of insurance of accounts following appropriate proceedings, to the
appointment of a conservator or receiver. A savings association not in full
compliance with the capital standards may apply for a limited exemption from
sanctions. If the exemption is granted, the savings association would still
remain subject to restrictions on growth.
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OTS staff policies specify that savings associations failing any one of
their minimum regulatory capital requirements may not increase their total
assets during any quarter in excess of an amount equal to net interest credited
during the quarter. Under these policies, associations that have submitted
capital plans that are rejected by the District Director or that have had
capital plans approved but do not meet the targets or requirements of the
capital plan may not make any new loans or investments except with the prior
written approval of the District Director. Such approval will only be granted
when the proposed loan or investment is reasonable in the context of the
association's operations and does not significantly increase the risk profile of
the savings association.
In addition to requiring generally applicable capital standards for savings
associations, the Director of OTS is authorized to establish the minimum level
of capital for a savings association at such amount or at such ratio of capital-
to-assets as the Director determines to be necessary or appropriate for such
association in light of the particular circumstances of the association. The
Director of OTS may treat the failure of any savings association to maintain
capital at or above such level as an unsafe or unsound practice and may issue a
directive requiring any savings association which fails to maintain capital at
or above the minimum level required by the Director to submit and adhere to a
plan for increasing capital. Such an order may be enforced in the same manner
as an order issued by the FDIC.
The OTS's risk-based capital requirements require savings institutions with
more than a "normal" level of interest rate risk to maintain additional total
capital. A savings institution's interest rate risk is measured in terms of the
sensitivity of its "net portfolio value" to changes in interest rates. Net
portfolio value is defined, generally, as the present value of expected cash
inflows from existing assets and off-balance sheet contracts less the present
value of expected cash outflows from existing liabilities. A savings
institution is considered to have a "normal" level of interest rate risk
exposure if the decline in its net portfolio value after an immediate 200 basis
point increase or decrease in market interest rates (whichever results in the
greater decline) is less than two percent of the current estimated economic
value of its assets. A savings institution with a greater than normal interest
rate risk is required to deduct from total capital, for purposes of calculating
its risk-based capital requirement, an amount (the "interest rate risk
component") equal to one-half the difference between the institution's measured
interest rate risk and the normal level of interest rate risk, multiplied by the
economic value of its total assets.
The OTS calculates the sensitivity of a savings institution's net portfolio
value based on data submitted by the institution in a schedule to its quarterly
Thrift Financial Report and using the interest rate risk measurement model
adopted by the OTS. The amount of the interest rate risk component, if any,
that is deducted from a savings institution's total capital is based on the
institution's Thrift Financial Report filed two quarters earlier. Savings
institutions with less than $300 million in assets and a risk-based capital
ratio above 12% are generally exempt from filing the interest rate risk schedule
with their Thrift Financial Reports. However, the OTS requires any exempt
savings institution that it determines may have a high level of interest rate
risk exposure to file such schedule on a quarterly basis. The Bank has
determined that, on the basis of current financial data, it will not be deemed
to have more than normal level of interest rate risk under the new rule and
believes that it will not be required to increase its total capital as a result
of the rule.
PROMPT CORRECTIVE REGULATORY ACTION. Under the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"), the federal banking regulators
are required to take prompt corrective action if an insured depository
institution fails to satisfy certain minimum capital requirements. All
institutions, regardless of their capital levels, are restricted from making any
capital distribution or paying any management fees if the institution would
thereafter fail to satisfy the minimum levels for any of its capital
requirements. An institution that fails to meet the minimum level for any
relevant capital measure (an "undercapitalized institution") may be: (i) subject
to increased monitoring by the appropriate federal banking regulator; (ii)
required to submit an acceptable capital restoration plan within 45 days; (iii)
subject to asset growth limits; and (iv) required to obtain prior regulatory
approval for acquisitions, branching and new lines of businesses. The capital
restoration plan must include a guarantee by the institution's holding company
that the institution will comply with the plan until it has been adequately
capitalized on average for four consecutive quarters, under which the holding
company would be liable up to the lesser of 5% of the institution's total assets
or the amount necessary to bring the institution into capital compliance as of
the date
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it failed to comply with its capital restoration plan. A "significantly
undercapitalized" institution, as well as any undercapitalized institution that
did not submit an acceptable capital restoration plan, may be subject to
regulatory demands for recapitalization, broader application of restrictions on
transactions with affiliates, limitations on interest rates paid on deposits,
asset growth and other activities, possible replacement of directors and
officers, and restrictions on capital distributions by any bank holding company
controlling the institution. Any company controlling the institution could also
be required to divest the institution or the institution could be required to
divest subsidiaries. The senior executive officers of a significantly
undercapitalized institution may not receive bonuses or increases in
compensation without prior approval and the institution is prohibited from
making payments of principal or interest on its subordinated debt. In their
discretion, the federal banking regulators may also impose the foregoing
sanctions on an undercapitalized institution if the regulators determine that
such actions are necessary to carry out the purposes of the prompt corrective
action provisions. If an institution's ratio of tangible capital to total assets
falls below a "critical capital level," the institution will be subject to
conservatorship or receivership within 90 days unless periodic determinations
are made that forbearance from such action would better protect the deposit
insurance fund. Unless appropriate findings and certifications are made by the
appropriate federal bank regulatory agencies, a critically undercapitalized
institution must be placed in receivership if it remains critically
undercapitalized on average during the calendar quarter beginning 270 days after
the date it became critically undercapitalized. If a savings association is in
compliance with an approved capital plan on the date of enactment of FDICIA,
however, it will not be required to submit a capital restoration plan if it is
undercapitalized or become subject to the statutory prompt corrective action
provisions applicable to significantly and critically undercapitalized
institutions prior to July 1, 1994.
Under implementing regulations, the federal banking regulators, including
the OTS, generally measure a depository institution's capital adequacy on the
basis of the institution's total risk-based capital ratio (the ratio of its
total capital to risk-weighted assets), Tier 1 risk-based capital ratio (the
ratio of its core capital to risk-weighted assets) and leverage ratio (the ratio
of its core capital to adjusted total assets). Under the regulations, a savings
association that is not subject to an order or written directive to meet or
maintain a specific capital level is deemed "well capitalized" if it also has:
(i) a total risk-based capital ratio of 10% or greater; (ii) a Tier 1 risk-based
capital ratio of 6.0% or greater; and (iii) a leverage ratio of 5.0% or greater.
An "adequately capitalized" savings association is a savings association that
does not meet the definition of well capitalized and has: (i) a total risk-based
capital ratio of 8.0% or greater; (ii) a Tier 1 capital risk-based ratio of 4.0%
or greater; and (iii) a leverage ratio of 4.0% or greater (or 3.0% or greater if
the savings association has a composite 1 CAMEL rating). An "undercapitalized
institution" is a savings association that has (i) a total risk-based capital
ratio less than 8.0%; or (ii) a Tier 1 risk-based capital ratio of less than
4.0%; or (iii) a leverage ratio of less than 4.0% (or 3.0% if the association
has a composite 1 CAMEL rating). A "significantly undercapitalized" institution
is defined as a savings association that has: (i) a total risk-based capital
ratio of less than 6.0%; or (ii) a Tier 1 risk-based capital ratio of less than
3.0%; or (iii) a leverage ratio of less than 3.0%. A "critically
undercapitalized" savings association is defined as a savings association that
has a ratio of core capital to total assets of less than 2.0%. The OTS may
reclassify a well capitalized savings association as adequately capitalized and
may require an adequately capitalized or undercapitalized association to comply
with the supervisory actions applicable to associations in the next lower
capital category if the OTS determines, after notice and an opportunity for a
hearing, that the savings association is in an unsafe or unsound condition or
that the association has received and not corrected a less-than-satisfactory
rating for any CAMEL rating category. The Bank is classified as "well
capitalized" under these regulations.
DEPOSIT INSURANCE
The Bank is required to pay assessments based on a percent of its insured
deposits to the FDIC for insurance of its deposits by the SAIF. Under the
Federal Deposit Insurance Act, the FDIC is required to set semi-annual
assessments for SAIF-insured institutions to maintain the designated reserve
ratio of the SAIF at 1.25% of estimated insured deposits or at a higher
percentage of estimated insured deposits that the FDIC determines to be
justified for that year by circumstances raising a significant risk of
substantial future losses to the SAIF.
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Under the FDIC's risk-based assessment system, the assessment rate for an
insured depository institution depends on the assessment risk classification
assigned to the institution by the FDIC, which is determined by the
institution's capital level and supervisory evaluations. Based on the data
reported to regulators for the date closest to the last day of the seventh month
preceding the semi-annual assessment period, institutions are assigned to one of
three capital groups -- well capitalized, adequately capitalized or
undercapitalized -- using the same percentage criteria as under the prompt
corrective action regulations. See " -- Prompt Corrective Regulatory Action."
Within each capital group, institutions are assigned to one of three subgroups
on the basis of supervisory evaluations by the institution's primary supervisory
authority and such other information as the FDIC determines to be relevant to
the institution's financial condition and the risk posed to the deposit
insurance fund. Subgroup A will consist of financially sound institutions with
only a few minor weaknesses. Subgroup B consists of institutions that
demonstrate weaknesses which, if not corrected, could result in significant
deterioration of the institution and increased risk of loss to the deposit
insurance fund. Subgroup C consists of institutions that pose a substantial
probability of loss to the deposit insurance fund unless effective corrective
action is taken. The assessment rate ranges from 0.23% of deposits for well
capitalized institutions in Subgroup A to 0.31% of deposits for undercapitalized
institutions in Subgroup C.
SAIF members are generally prohibited from converting to the status of
members of the Bank Insurance Fund ("BIF") administered by the FDIC or merging
with or transferring assets to a BIF member before the date on which the SAIF
meets or exceeds the designated reserve ratio of 1.25% of insured deposits .
The FDIC, however, may approve such a transaction in the case of a SAIF member
in default or if the transaction involves an insubstantial portion of the
deposits of each participant. In addition, mergers, transfers of assets and
assumptions of liabilities may be approved by the appropriate bank regulator so
long as deposit insurance premiums continue to be paid to the SAIF for deposits
attributable to the SAIF members plus an adjustment for the annual rate of
growth of deposits in the surviving bank without regard to subsequent
acquisitions. Each depository institution participating in a SAIF to BIF
conversion transaction is required to pay an exit fee to SAIF and an entrance
fee to BIF. A savings association may adopt a commercial bank or savings bank
charter if the resulting bank remains an SAIF member.
For information regarding the disparity between the rates paid by SAIF-
insured institutions such as the Bank and BIF-insured institutions, as well as a
possible assessment on the Bank in order to remove such disparity, see "Recent
Developments -- SAIF Premium Disparity."
FEDERAL RESERVE SYSTEM
Pursuant to regulations of the Federal Reserve Board, a savings institution
must maintain average daily reserves equal to 3% on the first $52.0 million of
transaction accounts, plus 10% on the remainder. This percentage is subject to
adjustment by the Federal Reserve Board. Because required reserves must be
maintained in the form of vault cash or in a non-interest bearing account at a
Federal Reserve Bank, the effect of the reserve requirement is to reduce the
amount of the institution's interest-earning assets. As of June 30, 1996, the
Bank met its reserve requirements.
HOLDING COMPANY REGULATION
SAVINGS AND LOAN HOLDING COMPANY REGULATION. The Corporation is a savings
and loan holding company within the meaning of the Home Owners' Loan Act. As
such, the Corporation is registered with the OTS and is subject to OTS
regulations, examinations, supervision and reporting requirements. As a
subsidiary of a savings and loan holding company, the Bank is subject to certain
restrictions in its dealings with the Corporation and affiliates thereof.
The Home Owners' Loan Act generally prohibits a savings and loan holding
company, without prior approval of the Director of OTS, from (i) acquiring
control of any other savings institution or savings and loan holding company or
controlling the assets thereof or (ii) acquiring more than 5% of the voting
shares of a savings
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institution or holding company thereof which is not a subsidiary. Under certain
circumstances a registered savings and loan holding company is permitted to
acquire, with the approval of the Director of OTS, up to 15% of the voting
shares of an under-capitalized savings association pursuant to a "qualified
stock issuance" without that savings association being deemed controlled by the
holding company. In order for the shares acquired to constitute a "qualified
stock issuance," the shares must consist of previously unissued stock or
treasury shares, the shares must be acquired for cash, the savings institution
holding company's other subsidiaries must have tangible capital of at least 6-
1/2% of total assets, there must not be more than one common director or officer
between the savings institution holding company and the issuing savings
institution and transactions between the savings institution and the savings
institution holding company and any of its affiliates must conform to Sections
23A and 23B of the Federal Reserve Act. Except with the prior approval of the
Director of OTS, no director or officer of a savings institution holding company
or person owning or controlling by proxy or otherwise more than 25% of such
company's stock, may also acquire control of any savings institution, other than
a subsidiary savings institution, or of any other savings institution holding
company.
OTS regulations permit federal associations to branch in any state or
states of the United States and its territories. Except in supervisory cases or
when interstate branching is otherwise permitted by state law or other statutory
provision, a federal association may not establish an out-of-state branch unless
(i) the federal association qualifies as a "domestic building and loan
association" under (S)7701(a)(19) of the Internal Revenue Code and the total
assets attributable to all branches of the association in the state would
qualify such branches taken as a whole for treatment as a domestic building and
loan association and (ii) such branch would not result in (a) formation of a
prohibited multi-state multiple savings and loan holding company or (b) a
violation of certain statutory restrictions on branching by savings association
subsidiaries of banking holding companies. Federal associations generally may
not establish new branches unless the association meets or exceeds minimum
regulatory capital requirements. The OTS will also consider the association's
record of compliance with the Community Reinvestment Act of 1977 in connection
with any branch application.
The Bank Holding Company Act of 1956 authorizes the Federal Reserve Board
to approve an application by a bank holding company to acquire control of any
savings association or holding company thereof. Pursuant to rules promulgated by
the Federal Reserve Board, owning, controlling or operating a savings
association is a permissible activity for bank holding companies, if the savings
association engages only in deposit-taking activities and lending and other
activities that are permissible for bank holding companies. In approving such an
application, the Federal Reserve Board may not impose any restriction on
transactions between the savings association and its holding company affiliates
except as required by Sections 23A and 23B of the Federal Reserve Act.
A bank holding company that controls a savings association may merge or
consolidate the assets and liabilities of the savings association with, or
transfer assets and liabilities to, any subsidiary bank which is a member of the
BIF with the approval of the appropriate federal banking agency and the Federal
Reserve Board. The resulting bank will be required to continue to pay
assessments to the SAIF at the rates prescribed for SAIF members on the deposits
attributable to the merged savings association plus an annual deposit growth
increment. In addition, the transaction must comply with the restrictions on
interstate acquisitions of commercial banks under the Bank Holding Company Act.
Transactions between savings associations and any affiliate are governed by
Sections 23A and 23B of the Federal Reserve Act. An affiliate of a savings
association is any company or entity which controls, is controlled by or is
under common control with the savings association. In a holding company
context, the parent holding company of a savings association (such as the
Company) and any companies which are controlled by such parent holding company
are affiliates of the savings association. Generally, Sections 23A and 23B (i)
limit the extent to which the savings institution or its subsidiaries may engage
in "covered transactions" with any one affiliate to an amount equal to 10% of
such institution's capital stock and surplus, and contain an aggregate limit on
all such transactions with all affiliates to an amount equal to 20% of such
capital stock and surplus and (ii) require that all such transactions be on
terms substantially the same, or at least as favorable, to the institution or
subsidiary as those provided to a nonaffiliate. The term "covered transaction"
includes the making of loans, purchase of assets, issuance of a guarantee
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and similar other types of transactions. In addition to the restrictions imposed
by Sections 23A and 23B, no savings association may (i) loan or otherwise extend
credit to an affiliate, except for any affiliate which engages only in
activities which are permissible for bank holding companies, or (ii) purchase or
invest in any stocks, bonds, debentures, notes or similar obligations of any
affiliate, except for affiliates which are subsidiaries of the savings
association.
Savings associations are also subject to the restrictions contained in
Section 22(h) of the Federal Reserve Act on loans to executive officers,
directors and principal stockholders. Under Section 22(h), loans to a director,
executive officer or greater than 10% stockholder of a savings association and
certain affiliated interests of the foregoing, may not exceed, together with all
other outstanding loans to such person and affiliated interests, the
association's loans to one borrower limit (generally equal to 15% of the
institution's unimpaired capital and surplus) and all loans to such persons may
not exceed the institution's unimpaired capital and unimpaired surplus. Section
22(h) also prohibits loans, above amounts prescribed by the appropriate federal
banking agency, to directors, executive officers and greater than 10%
stockholders of a savings association, and their respective affiliates, unless
such loan is approved in advance by a majority of the board of directors of the
association with any "interested" director not participating in the voting. The
Federal Reserve Board has prescribed the loan amount (which includes all other
outstanding loans to such person), as to which such prior board of director
approval if required, as being the greater of $25,000 or 5% of capital and
surplus (up to $500,000). Further, the Federal Reserve Board pursuant to
Section 22(h) requires that loans to directors, executive officers and principal
stockholders be made on terms substantially the same as offered in comparable
transactions to other persons. Section 22(h) also prohibits a depository
institution from paying the overdrafts of any of its executive officers or
directors.
Savings associations are also subject to the requirements and restrictions
of Section 22(g) of the Federal Reserve Act on loans to executive officers and
the restrictions of 12 U.S.C. (S) 1972 on certain tying arrangements and
extensions of credit by correspondent banks. Section 22(g) of the Federal
Reserve Act requires that loans to executive officers of depository institutions
not be made on terms more favorable than those afforded to other borrowers,
requires approval for such extensions of credit by the board of directors of the
institution, and imposes reporting requirements for and additional restrictions
on the type, amount and terms of credits to such officers. Section 1972 (i)
prohibits a depository institution from extending credit to or offering any
other services, or fixing or varying the consideration for such extension of
credit or service, on the condition that the customer obtain some additional
service from the institution or certain of its affiliates or not obtain services
of a competitor of the institution, subject to certain exceptions, and (ii)
prohibits extensions of credit to executive officers, directors, and greater
than 10% stockholders of a depository institution by any other institution which
has a correspondent banking relationship with the institution, unless such
extension of credit is on substantially the same terms as those prevailing at
the time for comparable transactions with other persons and does not involve
more than the normal risk of repayment or present other unfavorable features.
The Board of Directors of the Corporation presently intends to operate the
Corporation as a unitary savings institution holding company. There are
generally no restrictions on the activities of a unitary savings institution
holding company. However, if the director of OTS determines that there is
reasonable cause to believe that the continuation by a savings institution
holding company of an activity constitutes a serious risk to the financial
safety, soundness, or stability of its subsidiary savings institution, the
Director of OTS may impose such restrictions as deemed necessary to address such
risk and limiting (i) payment of dividends by the savings institution, (ii)
transactions between the savings institution and its affiliates, and (iii) any
activities of the savings institution that might create a serious risk that the
liabilities of the holding company and its affiliates may be imposed on the
savings institution.
Notwithstanding the above rules as to permissible business activities of
unitary savings and loan holding companies, if the savings institution
subsidiary of such a holding company fails to meet the Qualified Thrift Lender
test, then such unitary holding company shall also presently become subject to
the activities restrictions applicable to multiple holding companies. See
"Regulation -- Qualified Thrift Lender Test."
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If the Corporation were to acquire control of another savings institution,
other than through merger or other business combination with Elmira Savings &
Loan, the Corporation would thereupon become a multiple savings institution
holding company. Except where such acquisition is pursuant to the authority to
approve emergency acquisitions and where each subsidiary savings institution
meets the Qualified Thrift Lender test, the activities of the Corporation and
any of its subsidiaries (other than Elmira Savings & Loan or other subsidiary
savings institutions) would thereafter be subject to further restrictions. The
Home Owners' Loan Act provides that, among other things, no multiple savings
institution holding company or subsidiary thereof which is not a savings
institution shall commence or continue for a limited period of time after
becoming a multiple savings institution holding company or subsidiary thereof,
any business activity, upon prior notice to, and no objection by the OTS, other
than (i) furnishing or performing management services for a subsidiary savings
institution, (ii) conducting an insurance agency or escrow business, (iii)
holding, managing, or liquidating assets owned by or acquired from a subsidiary
savings institution, or (iv) holding or managing properties used or occupied by
a subsidiary savings institution, (v) acting as trustee under deeds of trust,
(vi) those activities previously directly authorized by the FSLIC by regulation
as of March 5, 1987 to be engaged in by multiple holding companies; or (vii)
those activities authorized by the Federal Reserve Board as permissible for bank
holding companies, unless the Director of OTS by regulation prohibits or limits
such activities for savings and loan holding companies. Those activities
described in (vii) above must also be approved by the Director of OTS prior to
being engaged in by a multiple holding company.
The Director of OTS may also approve acquisitions resulting in the
formation of a multiple savings institution holding company which controls
savings institutions in more than one state, if (i) the multiple savings
institution holding company involved controls a savings institution which
operated a home or branch office in the state of the institution to be acquired
as of March 5, 1987; [(ii) the acquiror is authorized to acquire control of the
savings institution pursuant to the emergency acquisition provisions of the
Federal Deposit Insurance Act;] or (iii) the laws of the state in which the
institution to be acquired is located specifically permit institutions to be
acquired by state-chartered institutions or savings institution holding
companies located in the state where the acquiring entity is located (or by a
holding company that controls such state-chartered savings institutions). As
under prior law, the Director of OTS may approve an acquisition resulting in a
multiple savings institution holding company controlling savings institutions in
more than one state in the case of certain emergency acquisitions.
TAXATION
FEDERAL INCOME TAXATION. The Corporation and its subsidiaries file a
consolidated federal income tax return based on a fiscal year ending June 30.
Consolidated returns have the effect of eliminating intercompany distributions,
including dividends, from the computation of consolidated taxable income for the
taxable year in which the distributions occur.
Savings institutions are subject to the provisions of the Internal Revenue
Code of 1986, as amended (the "Code") in the same general manner as other
corporations. However, institutions such as Elmira Savings & Loan which meet
certain definitional tests and other conditions prescribed by the Code may
benefit from certain favorable provisions regarding their deductions from
taxable income for annual additions to their bad debt reserve. For purposes of
the bad debt reserve deduction, loans are separated into "qualifying real
property loans," which generally are loans secured by interests in certain real
property, and "nonqualifying loans," which are all other loans. The bad debt
reserve deduction with respect to nonqualifying loans must be based on actual
loss experience. The amount of the bad debt reserve deduction with respect to
qualifying real property loans may be based upon (a) actual loss experience (the
"experience method") or (b) a percentage (8%) of taxable income before such
deduction.
The Bank has historically elected to use the percentage of taxable income
method. Under the percentage of taxable income method, the bad debt reserve
deduction for qualifying real property loans is computed as a percentage, which
Congress has reduced from as much as 60% in prior years to 8% of taxable income,
with certain adjustments, effective for taxable years beginning after 1986. The
allowable deduction under the percentage of taxable income method (the
"percentage bad debt deduction") for taxable years beginning before 1987 was
scaled downward in the event that less than 82% of the total dollar amount of
the assets of an association qualified within
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certain designated categories. When the percentage method bad debt deduction was
lowered to 8%, the 82% qualifying assets requirement was lowered to 60%. For all
taxable years, there is no deduction in the event that less than 60% of the
total dollar amount of the assets of an association falls within such
categories.
Earnings appropriated to an institution's bad debt reserve and claimed as a
tax deduction were not available for the payment of cash dividends or for
distribution to shareholders (including distributions made on dissolution or
liquidation), unless such amount was included in taxable income, along with the
amount deemed necessary to pay the resulting federal income tax.
Legislation recently signed by the President repealed the percentage of
taxable income method of calculating the bad debt reserve. Savings
associations, like the Bank, which have previously used that method are required
to recapture into taxable income post-1987 reserves in excess of the reserves
calculated under the experience method over a six-year period beginning with the
first taxable year beginning after December 31, 1995. The start of such
recapture may be delayed until the third taxable year beginning after December
31, 1995 if the dollar amount of the institution's residential loan originations
in each year is not less than the average dollar amount of residential loan
originated in each of the six most recent years disregarding the years with the
highest and lowest originations during such period. For purposes of this test,
residential loan originations would not include refinancings and home equity
loans. The Bank has provided deferred taxes on its post-1987 additions to its
bad debt reserves and, as a result, the recapture provisions will have no effect
on the Bank's results of operations.
Beginning with the first taxable year beginning after December 31, 1995,
savings institutions, such as the Bank, will be treated the same as commercial
banks. Institutions with $500 million or more in assets will only be able to
take a tax deduction when a loan is actually charged off. Institutions with
less than $500 million in assets will still be permitted to make deductible bad
debt additions to reserves, but only using the experience method.
For taxable years beginning after December 31, 1986, the Code imposes an
alternative minimum tax at a rate of 20%. The alternative minimum tax generally
applies to a base of regular taxable income plus certain tax preferences
("alternative minimum taxable income" or "AMTI") and is payable to the extent
such AMTI exceeds an exemption amount. The Code provides that an item of tax
preference is the excess of the bad debt deduction allowable for a taxable year
pursuant to the percentage of taxable income method over the amount allowable
under the experience method. The other items of tax preference that constitute
AMTI include (a) tax-exempt interest on newly-issued (generally, issued on or
after August 8, 1986) private activity bonds other than certain qualified bonds
and (b) for taxable years including 1987 through 1989, 50% of the excess of (i)
the taxpayer's pre-tax adjusted net book income over (ii) AMTI (determined
without regard to this latter preference and prior to reduction by net operating
losses). For taxable years beginning after 1989, this latter preference has
been replaced by 75% of the excess (if any) of (i) adjusted current earnings as
defined in the Code, over (ii) AMTI (determined without regard to this
preference and prior to reduction by net operating losses). For any taxable
year beginning after 1986, net operating losses can offset no more than 90% of
AMTI. Certain payments of alternative minimum taxes may be used as credits
against regular tax liabilities in future years. In addition, for taxable years
after 1986 and before 1992, corporations, including savings institutions, are
also subject to an environmental tax equal to 0.12% of the excess of AMTI for
the taxable year (determined without regard to net operating losses and the
deduction for the environmental tax) over $2.0 million.
The Bank's federal income tax returns were last audited in 1975.
The Bank is subject to the New York State franchise tax on banking
corporations. The New York State tax on banking corporations is imposed in an
annual amount of the greater (i) 9% of the Bank's "Entire Net Income" allocable
to New York State during the taxable year, or (ii) the applicable alternative
minimum tax. In addition, the Corporation is subject to a 7.5% surtax on the
greater of (i) or (ii). The applicable alternative minimum tax is generally
the greater of (i) a percentage (0.01%, 0.004% or 0.002%, depending upon the
nature and mix of the Bank's assets and on the ratio of its net worth to the
value of its assets) of the value of the Bank's assets allocable
36
<PAGE>
to New York State with certain modifications, (ii) 3 1/2% of the Bank's
"Alternative Entire Net Income" allocable to New York State or (iii) $325.00.
For purposes of the New York State tax on banking corporations, "Entire Net
Income" is similar to federal taxable income, subject to certain modifications
(including the fact that net operating losses cannot be carried back or carried
forward), and "Alternative Entire Net Income" is similar to "Entire Net Income,"
subject to certain further modifications.
The Bank and its subsidiaries file separate New York State franchise tax
returns. The Bank's state tax returns were last audited in February 1994.
ITEM 2. PROPERTIES
- -------------------
The Bank opened its office at 300 West Water Street in Elmira in 1955.
During the 1995 fiscal year, the Bank completed an expansion and complete
renovation of the office facility. As a result, an additional 7,600 square feet
was added, bringing the total size of the facility to 13,500 square feet. At
June 30, 1996, the Bank's total investment in this property was $2.9 million and
the net book value was $2.7 million. The Bank's mortgage banking subsidiary's
office in Ithaca totalled approximately 1,000 square feet and had a net book
value of furniture, fixtures and equipment (including leasehold improvements)
of approximately $8,900 at June 30, 1996.
At June 30, 1996, the net book value of the Bank's furniture, fixtures and
equipment (including leasehold improvements) was approximately $367,000.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
Although the Bank is, from time to time, involved in various legal
proceedings in the normal course of business, there are no material pending
legal proceedings to which the Corporation, the Bank or its subsidiary is a
party, or to which any of their property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended June 30, 1996.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
- --------------------------------------------------------------------------
MATTERS
-------
The information contained under the section "Market Price and Dividend
Information" in the Annual Report is incorporated herein by reference.
Since the Corporation has no significant source of income other than
dividends from the Bank, the payment of dividends by the Corporation is
dependent upon receipt of dividends from the Bank. Payment of cash dividends by
the Bank is limited by certain federal regulations under which the Bank may not
declare or pay a cash dividend on or repurchase any of its common stock if the
effect thereof would cause its regulatory capital to be reduced below (1) the
amount required for the liquidation account established in connection with the
Bank's conversion to stock form or (2) the regulatory capital requirements
imposed by the OTS. In certain circumstances earnings appropriated to bad debt
reserves and deducted for federal income tax purposes may not be available to
pay cash dividends without the payment of federal income taxes by the Bank on
the amount of such earnings removed from the reserves for such purposes at the
then current income tax rate.
37
<PAGE>
Federal regulations impose certain additional limitations on the payment of
dividends and other capital distributions (including stock repurchases and cash
mergers) by Elmira Savings & Loan. Under such regulations, a savings
association that, immediately prior to, and on a pro forma basis after giving
effect to, a proposed capital distribution, has total capital (as defined by OTS
regulation) that is equal to or greater than the amount of its fully phased-in
capital requirements (a "Tier 1 Association") is generally permitted, after
notice, to make capital distributions during a calendar year in the amount equal
to the greater of (i) 75% of its net income for the previous four quarters; or
(ii) 100% of its net income to date during the calendar year plus an amount that
would reduce by one-half the amount by which its total capital to assets ratio
exceeded its fully phased-in risk-based capital ratio requirement at the
beginning of the calendar year. A savings association with total capital in
excess of the fully phased-in current minimum capital requirements but not in
excess of the fully phased-in requirements (a "Tier 2 Association") is
permitted, after notice, to make capital distributions without OTS approval of
between 25% and 75% of its net income for the previous four quarters, less
dividends already paid for such period depending on the savings association's
level of risk-based capital.] A savings association that fails to meet current
minimum capital requirements (a "Tier 3 Association") is prohibited from making
any capital distributions without the prior approval of the OTS. Tier 1
Associations that have been notified by the OTS that they are in need of more
than normal supervision will be treated as either a Tier 2 or Tier 3
Association. At June 30, 1996, the Bank was a Tier 1 Association.
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
The information contained in the table captioned "Selected Consolidated
Financial Data" in the Annual Report is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
-------------
The information contained in the section captioned "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in the Annual
Report is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
The financial statements contained in the Annual Report which are listed
under Item 14 herein are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
The information contained under the section captioned "Proposal I --
Election of Directors" and "Beneficial Ownership Reports" in the Corporation's
definitive proxy statement for the Corporation's 1996 Annual Meeting of
Stockholders (the "Proxy Statement") is incorporated herein by reference.
For certain information regarding the executive officers of the
Corporation, see "Item 1. Business --Executive Officers."
38
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
The information contained under the section captioned "Proposal I --
Election of Directors" in the Proxy Statement is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
The information required by this item is incorporated herein by
reference to the section captioned "Voting Securities and Principal
Holders Thereof" of the Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by reference
to the sections captioned "Proposal I -- Election of Directors" and
"Voting Securities and Principal Holders Thereof" of the Proxy
Statement.
(c) Changes in Control
Management of the Corporation knows of no arrangements, including
any pledge by any person of securities of the Corporation, the
operation of which may at a subsequent date result in a change of
control of the registrant.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
The information required by this item is incorporated herein by reference
to the section captioned "Proposal I -- Election of Directors" of the Proxy
Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------
(a)(1) The Consolidated Financial Statements and Independent Auditors'
Report included in the Annual Report, listed below, are incorporated herein by
reference.
1. Report of Independent Certified Public Accountants
2. Consolidated Balance Sheets as of June 30, 1996 and 1995
3. Consolidated Statements of Income for the Years Ended June 30, 1996,
1995 and 1994
4. Consolidated Statements of Changes in Shareholders' Equity for the
Years Ended June 30, 1996, 1995 and 1994
5. Consolidated Statements of Cash Flows for the Years Ended June 30,
1996, 1995 and 1994
6. Notes to Consolidated Financial Statements
(a)(2) All schedules have been omitted as the required information is
either inapplicable or included in the Notes to Consolidated Financial
Statements.
39
<PAGE>
(a)(3) The following exhibits are either filed or attached as part of this
report or are incorporated herein by reference.
Exhibit No. 3(i) Certificate of Incorporation of ES&L Bancorp, Inc. *
Exhibit No. 3(ii) Bylaws of ES&L Bancorp, Inc. *
Exhibit No. 10(i) Employment Agreements between the Bank and William A.
McKenzie and J. Michael Ervin, as amended **
Exhibit No. 10(ii) Stock Option Plan *
Exhibit No. 13 1996 Annual Report to Stockholders
The 1996 Annual Report to Stockholders is included as an exhibit to this
Report. Except for those portions of the 1996 Annual Report to Stockholders
which have been expressly incorporated by reference into this Annual Report Form
10-K, such Annual Report to Stockholders is furnished solely for the information
of the Securities and Exchange Commission and is not to be deemed "filed" as
part of this Form 10-K.
Exhibit No. 21 Subsidiaries of the Registrant
Exhibit No. 23 Consent of Independent Accountants
Exhibit No. 27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the last quarter of the
fiscal year covered by this report.
(c) Exhibits to this Form 10-K are attached or incorporated by reference
as stated above.
(d) None.
_____________________________________________
* Incorporated by reference to registrant's Form S-1 Registration Statement
(File No. 33-33998) declared effective by the Securities and Exchange
Commission on July 13, 1990.
** Incorporated by reference to the Registrant's Annual Report on Form 10-K for
the fiscal year ended June 30, 1990.
40
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ES&L BANCORP, INC.
Date: September 25, 1996 By: /s/ William A. McKenzie
------------------------------
William A. McKenzie
President and Chief Executive
Officer
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By:/s/ William A. McKenzie Date: September 25, 1996
-----------------------------
William A. McKenzie
Principal Executive Officer and
Director
By:/s/ J. Michael Ervin Date: September 25, 1996
-----------------------------
J. Michael Ervin
Principal Financial and Accounting
Officer
By:/s/ Robert E. Butler Date: September 25, 1996
-----------------------------
Robert E. Butler
Director
By:/s/ John F. Cadwallader Date: September 25, 1996
-----------------------------
John F. Cadwallader
Director
By:/s/ L. Edward Considine Date: September 25, 1996
-----------------------------
L. Edward Considine
Director
By:/s/ Dr. Adrian P. Hulsebosch Date: September 25, 1996
-----------------------------
Dr. Adrian P. Hulsebosch
Director
41
<PAGE>
By:/s/ Jack H. Mikkelsen Date: September 25, 1996
-----------------------------------
Jack H. Mikkelsen
Director
By:/s/ Frederick J. Molter Date: September 25, 1996
-----------------------------------
Frederick J. Molter
Director
By:/s/ Paul Morss Date: September 25, 1996
-----------------------------------
Paul Morss
Director
By:/s/ Gerald F. Schichtel Date: September 25, 1996
-----------------------------------
Gerald F. Schichtel
Director
42
<PAGE>
[LOGO: ES&L BANCORP, INC APPEARS HERE]
-------
1996
ANNUAL
REPORT
-------
<PAGE>
Corporate Profile
ES&L Bancorp, Inc. (the "Corporation") was formed in 1990 as a Delaware
corporation at the direction of Elmira Savings & Loan, F.A. (the "Bank") for the
purpose of becoming a holding company for the Bank as part of the Bank's
conversion from mutual to stock form. The Bank, a federally chartered savings
association founded in 1888, operates through one office located in Elmira, NY.
Prior to the acquisition of all of the outstanding stock of the Bank, the
Corporation had no assets or liabilities and engaged in no business activities.
Subsequent to the acquisition of the Bank, the Corporation has engaged in no
significant activity other than holding the stock of the Bank and operating the
business of a savings and loan through Elmira Savings & Loan, F.A. Accordingly,
the information set forth in this report, including financial statements and
related data, relates primarily to the Bank and its subsidiaries.
The Corporation, through the Bank, is primarily engaged in the business of
accepting deposits from the general public and originating loans secured by
residential real estate. The Bank also engages in commercial real estate lending
in its primary market area and, to a lesser extent, consumer lending, and
invests in government and federal agency obligations.
Mission Statement
The primary mission of the Directors, Officers and staff of Elmira Savings and
Loan, F.A. is to generate profits, in the course of business, sufficient enough
to pay a fair and equitable return to the shareholders of the institution,
within the constraints of applicable laws and regulations.
It is also recognized that this institution has an obligation to the community
or communities within which it is located to provide services for the financial
needs of the area. In accordance with the Bank's Charter and its membership in
the Federal Home Loan Bank, it will concentrate its efforts on real estate
finance. The services provided must be cost justified as well as conducive to
sound banking principles. The institution will also be supportive of those
activities that contribute to the quality of life within the communities served.
The Bank will provide its employees: a safe and aesthetically appealing work
environment, fair wages and benefits for services rendered, adequate training,
regular performance review and an opportunity to voice their opinion on factors
that contribute to the well being of the institution.
The above mission will be accomplished by striving to be the best customer
driven organization in the community by providing financial services to the
Bank's primary market area defined as Chemung County and its secondary market
areas defined as all counties contiguous to Chemung County.
ES&L Bancorp, Inc.
- --------------------------------------------------------------------------------
<PAGE>
A Message from the Managing Officer
TO OUR SHAREHOLDERS:
I am happy to report, the performance of your company over the fiscal year
ending June 30, 1996 exceeded industry norms and various peer groups which we
track. Highlights of our performance include:
. Record net income for the year of $1.75 million, a 1.27% return on
average assets.
. Earnings per share for the year of $3.07.
. A return on average equity of 14.38%.
. Growth in assets to $140 million at year end.
Based on the year's performance and our view of the future, the Board of
Directors declared a 3 for 2 stock split payable in August. In addition, the
quarterly dividend was maintained at $.17 per share after the split, thereby
increasing the cash dividend payment by 50%. You should be interested in knowing
that the last known trade in our stock was at $20.00 per share - that was before
the August '96 split. The market value at this time last year was $11.125 per
share.
It was a busy, yet, satisfying year for those associated with ES&L. Loan
originations for the Bank and its subsidiaries totalled $55.6 million for the
year. Our serviced loans portfolio (loans we originate and sell to other
investors) increased 19% resulting in a year end portfolio of $111 million,
which generated over $300,000 in loan servicing fees for the year.
Significant efforts continue to be made to control expenses, mitigate interest
rate risk and maintain high asset quality.
The Board recognizes that effective capital management is imperative if we are
to continue as an Independent Community Bank. Balancing good earnings with a
proper capital level is a top priority. An ongoing stock repurchase plan and an
effective dividend payment strategy assist in achieving desired results.
A year ago, in my message, I discussed legislative action that was proposed to
solve the Federal Deposit Insurance premium disparity, to include a possible one
time charge to our earnings to recapitalize the SAIF fund prior to merging it
with the BIF fund. Unfortunately, this matter became very politicized and as of
this date the issue is still unresolved. Considerable progress has been made of
late, with a concensus developing among interested parties. Therefore, we fully
expect a legislative solution to this problem in the near future. Part of the
solution will be to combine the Thrift and Commercial Bank charters. Our trade
organizations, our peers across the country and those of us at ES&L will be
working hard to ensure that the resolution of this charter issue will not
diminish the financial powers which currently exist and have proven to benefit
the communities we serve.
As we move into the next fiscal year we are hopeful that many of our newly
planned initiatives will become reality. New loan and deposit products, a
"cashless" Ithaca branch depository, innovative delivery systems and a number of
technological developments are planned in order to improve service to our
customer base.
Profit margins in our business, like so many other businesses, are being
compressed. In banking many financial service products, like mortgages, are
being treated as a commodity which has an adverse effect on the profit potential
of those services. Our intent is to develop more relationships with existing and
new customers. In addition, we will continue to explore joint ventures and other
synergies that are conducive to our core business.
All of our efforts focus on the long term benefit to shareholders. In order to
satisfy shareholders, we recognize that we must be clearly committed to customer
and employee satisfaction. Our highly productive employees are our most
important resource. Together we will work hard to capitalize on future
opportunities.
Thank you for supporting our efforts.
/s/ William A. McKenzie
William A. McKenzie
President & Chief Executive Officer
ES&L Bancorp, Inc.
- --------------------------------------------------------------------------------
1
<PAGE>
SHAREHOLDERS' EQUITY
[BAR GRAPH APPEARS HERE]
At June 30, 1994 = $10.1 million
At June 30, 1995 = $11.5 million
At June 30, 1996 = $12.9 million
NET INCOME
[BAR GRAPH APPEARS HERE]
Year Ending June 30, 1994 = $1.40 million
Year Ending June 30, 1995 = $1.58 million
Year Ending June 30, 1996 = $1.75 million
TOTAL ASSETS
[BAR GRAPH APPEARS HERE]
June 30, 1994 = $120.9 million
June 30, 1995 = $136.5 million
June 30, 1996 = $140.1 million
ES&L Bancorp, Inc.
- --------------------------------------------------------------------------------
2
<PAGE>
BOOK VALUE
[BAR GRAPH APPEARS HERE]
At June 30, 1994 = 18.57 million
At June 30, 1995 = 20.88 million
At June 30, 1996 = 22.93 million
EARNINGS PER SHARE
[BAR GRAPH APPEARS HERE]
Year Ending June 30, 1994 = 2.57 million
Year Ending June 30, 1995 = 2.82 million
Year Ending June 30, 1996 = 3.07 million
RETURN ON AVERAGE ASSETS
[BAR GRAPH APPEARS HERE]
Year Ending June 30, 1994 = 1.18 million
Year Ending June 30, 1995 = 1.23 million
Year Ending June 30, 1996 = 1.27 million
ES&L Bancorp, Inc.
- --------------------------------------------------------------------------------
3
<PAGE>
Selected Consolidated Financial Data
<TABLE>
<CAPTION>
SUMMARY OF FINANCIAL CONDITION
- ------------------------------------------------------------------------------------------------------------------------------
At June 30 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total amount of:
Assets $140,138,518 $136,484,313 $120,933,211 $116,300,778 $101,297,521
Loans receivable, net 121,636,011 118,186,529 106,437,875 101,613,693 87,637,344
Cash and investment securities (1) 4,452,792 5,305,872 5,487,223 4,253,751 8,938,972
Mortgage-backed securities 2,069,579 2,867,553 3,257,042 4,279,104 316,124
Deposit accounts 106,652,829 101,014,522 86,856,773 83,973,773 84,531,297
Advances from FHLB 17,615,560 20,523,963 20,831,855 16,750,000 6,450,000
Shareholders' equity, substantially
restricted 12,912,145 11,471,243 10,145,984 8,833,098 7,800,455
Book value (2) 22.93 20.88 18.57 16.75 14.75
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
- ------------------------------------------------------------------------------------------------------------------------------
Year Ended June 30, 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income $ 11,379,003 $ 10,052,154 $ 8,535,120 $ 8,531,797 $ 8,615,412
Interest expense 6,195,480 5,474,611 4,441,012 4,671,546 5,504,511
- ------------------------------------------------------------------------------------------------------------------------------
Net interest income before
provision for loan losses 5,183,523 4,577,543 4,094,108 3,860,251 3,110,901
Provision for loan losses 60,000 150,000 640,000 265,000 205,000
- ------------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 5,123,523 4,427,543 3,454,108 3,595,251 2,905,901
Other income 800,752 673,417 816,574 960,306 961,573
Other expenses 3,078,154 2,770,757 2,638,756 2,472,398 2,457,359
- ------------------------------------------------------------------------------------------------------------------------------
Income before income taxes
and cumulative effect 2,846,121 2,330,203 1,631,926 2,083,159 1,410,115
Income taxes 1,092,560 747,227 369,433 830,560 606,954
- ------------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect 1,753,561 1,582,976 1,262,493 1,252,599 803,161
Cumulative effect of accounting change (3) --- --- 142,000 47,398 ---
- ------------------------------------------------------------------------------------------------------------------------------
Net Income $ 1,753,561 $ 1,582,976 $ 1,404,493 $ 1,205,201 $ 803,161
============ ============ ============ ============ ============
Net Income per share (2) $ 3.07 $ 2.82 $ 2.57 $ 2.27 $ 1.52
============ ============ ============ ============ ============
Cash dividends paid (2) $ 0.68 $ 0.60 $ 0.38 $ 0.31 $ 0.20
============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
KEY OPERATING RATIOS
- ------------------------------------------------------------------------------------------------------------------------------------
Year Ended June 30, 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Return on average assets 1.27% 1.23% 1.18%
Return on average equity 14.38 14.65 14.80
Average equity-to-average asset ratio 8.81 8.40 8.00
Interest rate spread 3.55 3.31 3.19
Net yield on interest-earning assets 3.87 3.61 3.47
Other expenses to average total assets 2.23 2.15 2.22
Non-performing loans as a percentage of total loans, at 6/30 0.24 0.82 0.53
One year interest rate sensitivity gap to total assets, at 6/30 12.00 19.65 9.45
Net interest income to other expenses (4) 1.68X 1.65X 1.55X
</TABLE>
(1) Includes interest-earning deposits in other depository institutions.
(2) Per share data has been adjusted for the three-for-two stock split which
occurred September 1, 1994, but has not been adjusted for the three-for-two
stock split which occurred on August 23, 1996.
(3) See footnotes A and H of the accompanying audited financial statements for
full disclosure.
(4) Represents the number of times net interest income covers other expenses.
ES&L Bancorp, Inc.
- --------------------------------------------------------------------------------
4
<PAGE>
Asset/Liability Management
The matching of assets and liabilities may be analyzed by examining the extent
to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap". An asset or
liability is said to be interest rate sensitive within a specific period if it
will mature or reprice within that period. The interest rate sensitivity gap is
defined as the difference between the amount of interest-earning assets maturing
or repricing within a specific time period and the amount of interest-bearing
liabilities maturing or repricing within that time period. A gap is considered
positive when the amount of interest rate sensitive assets exceeds the amount of
interest rate sensitive liabilities, and is considered negative when the amount
of interest rate sensitive liabilities exceeds the amount of interest rate
sensitive assets. Generally, during a period of rising interest rates, a
negative gap would adversely affect net interest income while a positive gap
would result in an increase in net interest income, and during a period of
falling interest rates, a negative gap would result in an increase in net
interest income while conversely a positive gap would negatively affect net
interest income.
The thrift industry has experienced significant fluctuations in net interest
income due to changing interest rate environments. During periods of increasing
rates, net interest income has decreased because thrifts generally have larger
amounts of rate sensitive liabilities than rate sensitive assets. The Bank has a
positive one-year gap however, which means that its net interest income should
increase during periods of increasing rates, and should decrease during periods
of declining rates.
The Bank is subject to interest rate risk to the degree that its interest-
bearing liabilities mature or reprice more slowly, or on a different basis, than
its interest-earning assets. As a continuing part of its financial strategy, the
Bank attempts to manage the impact of fluctuations in market interest rates on
its net interest income. This effort entails providing a reasonable balance
between interest rate risk, credit risk and maintenance of yield.
Management believes that interest rate risk is one of the most significant
factors affecting the Bank's future ability to generate earnings consistently.
The Bank has established a policy on the management of interest rate risk which
establishes guidelines for acceptable limits on the sensitivity of the market
value of the Bank's assets and liabilities to changes in interest rates.
Accordingly, since 1983 the Bank has improved the matching and limited the
sensitivity of its interest-earning assets and interest-bearing liabilities to a
level which management believes provides an acceptable level of interest rate
risk. To accomplish this, fixed-rate mortgages, mortgage-backed securities and
investments have been sold and proceeds reinvested in loans and securities with
shorter terms or adjustable rates. Although the Bank continues to hold an amount
of fixed-rate mortgage loans, management believes that it has adequately
mitigated the interest rate exposure of these loans through the origination of
adjustable-rate mortgages and the occasional purchase of adjustable-rate
mortgage-backed securities and investment grade corporate bonds.
The Board of Directors of the Bank has adopted an interest rate policy providing
that one-year gap of up to negative 5% or positive 25% is acceptable. At June
30, 1996, the Bank had a positive one-year gap of 12.00% of total assets.
The following table presents the Bank's interest sensitivity gap between
interest-earning assets and interest-bearing liabilities at
June 30, 1996(000's):
<TABLE>
<CAPTION>
1 Yr. Over 1 Over 3 Over
or thru thru 5
Less 3 Yrs. 5 Yrs. Yrs. Total
------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Mortgage-Backed Securities $ 2,070 $ 0 $ 0 $ 0 $ 2,790
Loans Receivable 98,062 22,282 2,587 6,036 128,966
Investments 1,369 1,050 1,980 0 4,399
------------------------------------------------------
Total $ 101,501 $ 23,332 $ 4,567 $ 6,036 $ 135,435
Interest-Bearing Liabilities:
Certificates of Deposit $ 49,182 $ 27,110 $ 2,558 $ 0 $ 78,850
Other Deposits 22,674 0 0 7,457 30,131
Borrowings 12,830 3,004 1,706 76 17,616
-----------------------------------------------------
Total $ 84,686 $ 30,114 $ 4,264 $ 7,533 $ 126,597
Interest Sensitivity Gap $ 16,815 $ (6,781) $ 303 $(1,497) $ 8,838
Gap as a Percentage of Total Assets 12.00% -4.84% 0.22% -1.07%
Cumulative Gap $ 16,815 $ 10,034 $ 10,336 $ 8,838
Cumulative Gap as a Percentage of Total Assets 12.00% 7.16% 7.38% 6.31%
</TABLE>
ES&L Bancorp, Inc.
- --------------------------------------------------------------------------------
5
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDING JUNE 30, 1996 AND JUNE 30,
1995
General
For the fiscal year ending June 30, 1996 the Corporation recorded net income of
$1,753,561, an increase of $170,585, or 10.78%, compared to the $1,582,976
earned during the 1995 fiscal year.
At June 30, 1996, the Corporation's total assets were $140,138,518, an increase
of $3,654,205, or 2.68%, compared to total assets of $136,484,313 at June 30,
1995. The increase is primarily attributable to the growth of the Corporation's
net loan portfolio which increased by $3,449,482, or 2.92%, to $121,636,011,
compared to $118,186,529 at the start of the fiscal year. Total mortgage loans
held for sale also increased from $3,795,855 at June 30, 1995 to $5,457,831 at
June 30, 1996.
The Corporation's asset growth was funded by an increase in deposits, which
totalled $106,652,829 at June 30, 1996, an increase of $5,638,307, or 5.58%,
from $101,014,522 at June 30, 1995. The increase in deposits also helped fund a
decrease in advances from the Federal Home Loan Bank of New York, which were
reduced by $2,908,403, or 14.17%, during the 1996 fiscal year to $17,615,560 at
June 30, 1996.
In the beginning of the 1996 fiscal year ES&L Mortgage Corporation (d/b/a Cayuga
Mortgage Company) received formal approval to activate PACE Funding, a mortgage
banking partnership, with the largest real estate firm in Ithaca, NY. The
partnership originates loans for sale to investors, one of whom is the Bank.
Net Interest Income
The Corporation's net interest income was $5,183,523 for the 1996 fiscal year,
an increase of $605,980, or 13.24%, from $4,577,543 for the year ending June 30,
1995. The Corporation's net interest margin was 3.55% for the year ending June
30, 1996, compared to 3.31%, a year earlier.
Interest Income
Interest income earned by the Corporation increased by $1,326,849, or 13.20%,
during the 1996 fiscal year, totalling $11,379,003 compared to $10,052,154
during the 1995 fiscal year.
Interest income provided from the Corporation's loan portfolio generates the
majority of all interest income. For the fiscal year ending June 30, 1996
$10,855,429 was earned on the loan portfolio, representing an increase of
$1,339,146, or 14.07%, when compared to loan interest income of $9,516,283 for
the 1995 fiscal year. The increase is the result of increases in both the
average balance of the loan portfolio and average yield of the portfolio. During
the 1996 fiscal year the average balance of the portfolio increased to $125.8
million, yielding 8.63%, compared to $118.2 million, yielding 8.05%.
Interest Expense
Total interest expense paid by the Corporation was $6,195,480 during the 1996
fiscal year, an increase of $720,869, or 13.17%, compared to $5,474,611 the year
earlier.
Interest paid on deposits increased by $675,707, or 15.08%, to $5,157,450 for
the year ending June 30, 1996, compared to $4,481,743 for the comparable 1995
period. The current year's average balance of deposits outstanding was $106.8
million, costing 4.83%, compared to $99.7 million, costing 4.50%, for the year
ending June 30, 1995. The growth in volume prompted the majority ($431,472) of
the increased interest expense, more so than the 33 basis point increase in the
average cost of deposits.
During the 1996 fiscal year the average balance of the Corporation's outstanding
borrowings decreased from $19.0 million, costing 5.24%, during the 1995 fiscal
period to $18.3 million, costing 5.67%, for the current year. Despite the
decrease in the average balance, the increase in the average cost prompted an
increase in interest expense. Overall, for the year ending June 30, 1996,
interest paid on borrowings was $1,038,030, an increase of $45,162, or 4.55%,
from $992,868, during the 1995 fiscal year.
Provision for Loan Losses
Provisions for loan losses are charged to earnings to bring the allowance to a
level considered appropriate by management based on historical experience, the
volume and type of lending conducted by the Bank, industry standards, the status
of past due principal and interest payments, general economic conditions -
particularly as they relate to the Bank's market area - and other factors
related to the collectibility of the Bank's loan portfolio. During the 1996
fiscal year the Bank reduced its provision from $150,000 during the year ending
June 30, 1995 to $60,000 for the year ending June 30, 1996. At June 30, 1996 the
total allowance available for loan losses was $1,430,781 compared to $1,423,826
at June 30, 1995.
ES&L Bancorp, Inc.
- --------------------------------------------------------------------------------
6
<PAGE>
Management's Discussion and Analysis (continued)
Other Income
Total other income earned by the Corporation was $800,752, for the 1996 fiscal
year, an increase of $127,335, or 18.91%, when compared to the $673,417 recorded
during the 1995 fiscal year.
During the 1996 fiscal year the Corporation recorded $160,949 in gains on the
sale of mortgages, an increase of $91,855, more than double the $69,094 earned
last year. The increase is the result of increased fixed rate mortgage
originations by the Bank and its mortgage banking subsidiaries. Substantially
all residential fixed rate mortgages originated are sold, while adjustable rate
mortgages are originated for the Corporation's loan portfolio. A lower fixed
interest rate environment prevailed during the 1996 fiscal year, compared to the
1995 period, which prompted more borrowers to opt for this type of financing.
During the 1996 fiscal period $24.0 million in fixed rate residential mortgages
were originated, compared to $10.9 million the year earlier.
The Corporation's other operating income increased by $49,608, or 38.92%, to
$177,055 for the year ending June 30, 1996, compared to $127,447 for the year
ending June 30, 1995. The increase results primarily from additional income
earned by ES&L Mortgage Corporation for processing mortgage applications for its
mortgage banking partnership, PACE Funding, which became operational during the
1996 period.
During the 1996 fiscal year the Corporation recognized income of $16,478 from
its unconsolidated land development joint venture, a reduction of $43,821, or
72.67%, from the $60,299 earned during the 1995 fiscal year. Income earned by
the joint venture is the direct result of lot sales, of which there were fewer
during the 1996 fiscal year when compared to the 1995 fiscal year.
Other Expenses
During the 1996 fiscal year, total operating expenses of the Corporation were
$3,078,154, an increase of $307,397, or 11.09%, compared to $2,770,757 incurred
during the last fiscal year.
Employee compensation and benefit expense increased by 4.25%, or $74,406, to
$1,823,184 during the year ending June 30, 1996, compared to $1,748,778 the year
earlier. The increase is the result of salary adjustments and increased payments
from the officer/manager bonus plan, which are directly related to the
Corporation's net income.
During the 1995 fiscal year the Corporation completed the expansion and
renovation of its main office facility. As a result, the 1996 fiscal year
included a full year's operating and depreciation expenses for the much larger
facility. For the year ending June 30, 1996 total office occupancy and equipment
expense was $503,559, an increase of $130,714, or 35.06%, compared to $372,845,
for the year ending June 30, 1995.
The expense paid by the Corporation to insure customers' deposits increased by
$23,684, or 9.31%, to $278,094 for the 1996 fiscal period, compared to $254,410
during the comparable period. The increase is the result of an increase in
outstanding deposits.
Other expenses for the 1996 fiscal year were $473,317, an increase of $78,593,
or 19.91%, compared to $394,724. The increase in expenses is related to a rise
in mortgage origination expenses, resulting from increased origination levels.
The Bank also incurred additional expenses related to engaging consultants to
improve operations and enhance shareholder value.
Income Taxes
The Corporation's income tax expense was $1,092,560 for the 1996 fiscal year,
compared to $747,227 during the comparable fiscal year. See note H of the
accompanying audited financial statements for more information on this expense.
Management's Discussion and Analysis of Financial Condition and Results of
Operation
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDING JUNE 30, 1995 AND JUNE 30,
1994
General
The Corporation recorded net income of $1,583,000 for the fiscal year ending
June 30, 1995, an increase of $179,000 or 12.7% over net income of $1,404,000
earned during the 1994 fiscal year. Net income during the 1994 period included
$142,000, which represented the cumulative effect on the prior years of a change
in accounting principle. No such income adjustment occurred during the 1995
period. See notes A & H of the accompanying audited financial statements for
more information.
At June 30, 1995 the Corporation had assets totalling $136,484,000, an increase
of $15,551,000, or 12.9%, when compared to total assets ($120,933,000) at June
30, 1994. The majority of the asset growth occurred within the Corporation's
loan portfolio, including loans held for sale, which increased by $13,631,000,
or 12.6%, from $108,351,000 at June 30, 1994 to $121,982,000 at June 30, 1995.
ES&L Bancorp, Inc.
- --------------------------------------------------------------------------------
7
<PAGE>
Management's Discussion Analysis (continued)
During the 1995 period the Corporation also finished the addition and renovation
project on its main office facility. As a result, the Corporation's property
and equipment, net of depreciation, increased by $2,290,000 during the recently
concluded fiscal year.
The growth in the Corporation's assets was funded almost exclusively by an
increase in retail deposits, which rose $14,158,000 or 16.3%, from $86,857,000
at June 30, 1994 to $101,015,000 at June 30, 1995. The majority of the increase
occurred during the first quarter of the 1995 fiscal year as management
aggressively priced its certificate of deposit products in anticipation of an
increasing rate environment. Total liabilities at June 30, 1995 were
$125,013,000, compared to $110,787,000 at June 30, 1994.
Net Interest Income
Net interest income earned by the Corporation was $4,578,000 during the 1995
fiscal year, an increase of $484,000 over the $4,094,000 earned during the
comparable 1994 period. For the year ending June 30, 1995, the Corporation's
Interest Rate Spread rose to 3.31%, compared to 3.19% for the fiscal year ending
June 30, 1994.
Interest Income
The Corporation's total interest income increased by $1,517,000, or 17.8%,
during the fiscal year ending June 30, 1995.
The majority of the increase in interest income came from the Corporation's loan
portfolio, which generated $9,516,000 in interest during the 1995 fiscal year,
compared to $8,009,000 for the previous fiscal year. During the year ending June
30, 1995 the average balance in the Corporation's loan portfolio increased by
$9,328,000 to $118,229,000 (yielding 8.05%) compared to $108,901,000 (yielding
7.35%) for the previous year. The increase in the balance of the portfolio
generated an additional $717,000 in interest income, while the increase in the
average yield prompted additional earnings totalling $790,000.
The Corporation also recognized a $59,000 increase in earnings in its investment
portfolio. Increased volumes provided an increase in earnings of $82,000 which
was partially offset by a decreasing yield earned on the portfolio, which
prompted a $23,000 reduction in revenue. At June 30, 1995, the average
balance of the investment portfolio was $5,105,000 compared to $3,805,000 at
June 30, 1994. The average yield earned on the portfolio decreased from 6.76%
to 6.18% at June 30, 1994 and 1995, respectively.
Despite an increase in the yield earned by the Corporation on its interest
earning deposits, from 3.65% to 4.31%, for the years ending June 30, 1994 and
June 30, 1995, respectively, the Corporation recorded a reduction in earnings of
$41,000 as a result of a reduction in the outstanding average balance of these
assets. The average balance for the year ending June 30, 1995 was $489,000
compared to $1,703,000, the previous year.
Interest Expense
As was previously mentioned, the Corporation's total customer deposits increased
significantly, by $14,158,000, or 16.3%, during the 1995 fiscal year. This
volume increase, combined with an increasing interest rate environment, prompted
a $913,000, or 25.6%, increase in the interest paid for deposits during the most
recently concluded year. For the year ending June 30, 1995 interest expense on
deposits totalled $4,482,000 compared to $3,569,000 for the 1994 fiscal year.
Average deposits totalled $99,673,000 for the year ending June 30, 1995, while
during the year ending June 30, 1994 they averaged $88,786,000. The average
cost paid to depositors increased from 4.02% for the year ending June 30, 1994
to 4.50% for the year ending June 30, 1995.
Interest paid on the Corporation's borrowings, primarily advances from the
Federal Home Loan Bank of New York, also increased during the 1995 period. For
the year ending June 30, 1995 interest paid on borrowings was $993,000, an
increase of $121,000 or 13.9%, compared to $872,000 paid in the comparable 1994
fiscal year. The increase is a result of an increase in the average cost of the
borrowings, from 4.12% for the 1994 fiscal period to 5.24%, for the 1995 period.
This increase in interest expense outpaced the savings which resulted from a
reduction of the Corporation's average total borrowings, which decreased by
$2,195,000 to $18,965,000 during the 1995 fiscal year.
Provision for Loan Losses
Provisions for loan losses are charged to earnings to bring the total allowance
to a level considered appropriate by management based on historical experience,
the volume and type of lending conducted by the Corporation, industry standards,
the status of past due interest and principal payments, general economic
conditions - particularly as they relate to the Corporation's market area - and
other factors related to the collectibility of the Corporation's loan portfolio.
During the 1995 fiscal year the Corporation's provision for loan losses totalled
$150,000, a $490,000 reduction from its 1994 fiscal year provision. At June 30,
1995 the Corporation's total allowance for losses was $1,424,000 compared to
$1,269,000 at June 30, 1994.
ES&L Bancorp, Inc.
- --------------------------------------------------------------------------------
8
<PAGE>
Management's Discussion and Analysis (continued)
Other Income
Other income earned by the Corporation decreased by $144,000, or 17.6%, to
$673,000 for the fiscal year ending June 30, 1995, compared to $817,000 during
the comparable period. Most areas of income showed increases when compared to
the 1994 fiscal period all of which were offset by a large reduction in earnings
attributable to the gain on the sale of mortgages.
During the 1995 fiscal year the Corporation recorded income from the gain on the
sale of mortgages totalling $69,000, which was a decrease in earnings of
$228,000 when compared to the $297,000 recorded the year earlier. The Bank, and
its mortgage banking subsidiary, originate all fixed rate residential mortgages
for sale in the secondary mortgage market. Given the substantial change in the
mortgage interest rate environment, both lenders experienced a decrease in the
origination levels of this type of product. Additionally, refinance activity,
which has contributed significantly to origination levels during the past few
years, has slowed dramatically as most qualified borrowers have taken advantage
of the change in the interest rate environment over the past few years.
Adjustable rate mortgages originated by the Bank and its mortgage banking
subsidiary are held in the Corporation's loan portfolio.
Service fees and other charges increased by $25,000, or 28.1%, to $114,000 for
the 1995 fiscal year, compared to $89,000 during the previous year.
As mentioned earlier, the Bank, and ES&L Mortgage Corporation, sell fixed rate
mortgage originations into the secondary mortgage market. The Bank, however,
continues to service these loans for the secondary market investors, for which
it is either paid a servicing fee, or, in the case of mortgages serviced for the
State of New York Mortgage Agency (SONYMA), a tax credit. The Corporation
recorded $302,000 in servicing income fees during the 1995 fiscal year, an
increase of $30,000, or 11.0%, over the previous fiscal year. The increase is
the result of an increase in the average balance of loans serviced during the
current year. At June 30, 1995, the total of all residential mortgages serviced
was $91,000,000, compared to $87,000,000 at June 30, 1994.
The Corporation earned $60,000 from its unconsolidated joint venture during the
year ending June 30, 1995. This represents a $37,000 increase over the
comparable period. Income derived from the land development joint venture is
directly related to lot sales.
Other Expenses
Total employee compensation and benefit expense was $1,749,000 during the 1995
fiscal year, an increase of $78,000, or 4.7%, over the comparable period. The
increase is attributable to a general increase in salaries and corresponding
benefit expenses. Additionally, the expense related to the Corporation's semi-
annual bonus plan, which is tied to after tax income, increased as a result of
the increased year end earnings of the Corporation.
During the 1995 fiscal year office occupancy and equipment expense decreased by
$18,000, or 4.6%, to $373,000 compared to $391,000 the year earlier. The
decrease results from a reduction in depreciation expenses during the current
period inasmuch as certain assets, having been fully depreciated by the Bank
prior to the current period, were not replaced until the Bank's new office
facility was completed, and the assets were placed in service, during the fourth
quarter of the 1995 fiscal year.
The premiums paid by the Bank to the FDIC for federal deposit insurance were
$254,000 during the year ending June 30, 1995, an increase of $19,000 or 8.1%
when compared to the 1994 fiscal year. As previously identified, total deposits
increased by $14,158,000 during the current period, thereby prompting the
increased premiums.
Other expenses increased by $54,000, or 15.8%, to $395,000 for the fiscal year
ending June 30, 1995. The majority of the increase results from an increase in
advertising ($35,000) and office supply ($11,000) expenses. Much of this
increase was a result of expenses related to the completion and grand opening of
the Corporation's main office facility. Increased advertising expenses were
also incurred in the Bank's successful efforts to increase retail deposits.
Income Taxes
During the fiscal year ending June 30, 1995 the Corporation incurred expense
totalling $747,000 for taxes related to income earned. This represents a
$378,000 increase over the 1994 fiscal year. See note A & H of the accompanying
audited financial statements for more information on this expense.
ES&L Bancorp, Inc.
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9
<PAGE>
Liquidity and Capital Resources
The Bank's primary source of funds are deposits, principal and interest payments
on loans, Federal Home Loan Bank (FHLB) of New York advances and funds provided
from operations. While scheduled loan payments and short-term investment
maturities are a relatively predictable source of funds, deposit flows are
significantly influenced by interest rates, general economic conditions and more
recently, the competition from traditional and non-traditional financial
instruments, specifically the growth of mutual funds.
The Bank is required to maintain minimum levels of liquid assets as defined by
Office of Thrift Supervision (OTS) requirements. This requirement, which may,
depending upon economic conditions and cash flows of the Bank, be varied from
time to time at the direction of the OTS, is based upon a percentage of deposits
and short-term borrowings. The required ratio is currently 5.0%. Elmira Savings
& Loan's liquidity ratio for June 1996 was 5.48%.
An analysis of the three components of the Consolidated Statements of Cash Flows
provides a more detailed presentation of the Bank's activities. Net cash
provided from operating activities is expected to continue to be a steady source
of liquidity, however, for the period ending June 30, 1995 the total cash
provided was only $278,000 and was a negative $502,000 for the current year. Net
income of $1,754,000 for year ending June 30, 1996 was more than offset by
various other categories, the largest variance being in the net change between
loans held for sale. In 1996 total loans held for sale increased by $1,620,000
while the increase for the 1995 period was $1,814,000. These large increases are
strictly timing differences in that the majority of these loans are all under
contract and will be delivered into the secondary market within 60 days. The
other major item which prompted a reduction in cash of $371,000, during the year
ending June 30, 1996, was advances from borrowers for taxes and insurance.
Although the total of portfolio loans and loans serviced for others experienced
a significant increase, the total of these advances decreased due to changes in
regulations, which prompted a refund of a portion of borrower's account balance.
The period ending June 30, 1995 showed a $291,000 increase in these balances.
Net cash used for investing activities amounted to $1,810,000 for year ending
June 30, 1996 and $14,307,000 for 1995. The largest item responsible for this
reduction in cash was net loans receivable which utilized $3,668,000 for 1996
and $11,987,000 for 1995. The 1996 figure was partially offset by an increase in
cash generated from net activity from securities held to maturity of $723,000,
principal payments on mortgage backed securities of $773,000 and $284,000 from
the proceeds from sale of foreclosed real estate. The significant changes in the
net loans receivable balances are driven both by the interest rate environment
and the increase in activity of adjustable rate loans which are originated for
the Bank's loan portfolio. As rates move upward demand for adjustable rate loans
increase.
Financing activities, the third component of cash flows, provided $2,396,000 in
cash and cash equivalents for 1996 and $13,539,000 for 1995. Interest credited
to deposit accounts was $5,130,000 for 1996 and $4,436,000 for 1995. The current
year figure was offset by a decrease in advances from the Federal Home Loan Bank
amounting to $2,908,000.
ES&L has available to it significant funds in the form of retail repurchase
agreements and advances from FHLB of New York, though there can be no assurance
as to the impact of any increase in such borrowings on the Bank's cost of funds.
There are no limits on the amount of advances made to Banks that are Qualified
Thrift Lenders (QTLs), of which the Bank is one, or that are exempt from the QTL
limitations, in order to replace deposit outflows occurring in the 30 days
immediately preceding an advance application, or advances made to fulfill
outstanding advance commitments, including AHP, CIP and CDF commitments, or in
order to repay maturing advances. Advances and new money commitments to ES&L for
purposes other than what was stated above may not exceed, net new, $150 million
per calendar month or 30% of a customer's assets without prior approval of the
FHLB's Board of Directors or its Executive Committee.
ES&L is not aware of any trends, events or uncertainties that will have or that
are reasonably likely to have a material affect on the Bank's liquidity
position, operations or capital resources.
ES&L Bancorp, Inc.
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10
<PAGE>
Possible Assessment Relating to Deposit Insurance Premiums
The Bank's savings deposits are insured by the Savings Association Insurance
Fund ("SAIF"), which is administered by the FDIC. The assessment rate currently
ranges from 0.23% of deposits for well capitalized institutions to 0.31% of
deposits for undercapitalized institutions.
The FDIC also administers the Bank Insurance Fund ("BIF"), which has the same
designated reserve ratio as the SAIF. The insurance assessment rate for most
commercial banks and other depository institutions with deposits insured by the
BIF ranges from a statutory minimum of $2,000 annually for well-capitalized
institutions (which constitute over 90% of the BIF-insured institutions) to
0.27% of insured deposits for undercapitalized BIF-insured institutions. The
substantial disparity in the deposit insurance premiums paid by BIF and SAIF
members place existing SAIF-insured savings institutions at a significant
competitive disadvantage to BIF-insured institutions.
A number of proposals have been considered to recapitalize the SAIF in order to
eliminate the premium disparity. The Senate and the House of Representatives
have both, as part of a budget reconciliation package to balance the federal
budget, approved legislation requiring a one-time assessment of an amount
sufficient to bring the SAIF to a level equal to 1.25% of insured deposits (then
estimated to be approximately 0.85% of insured deposits) to be imposed on all
SAIF-insured deposits as of March 31, 1995. This assessment was originally
scheduled to be payable during the first quarter of 1996. It is unknown whether
legislation of this type will be enacted, or if enacted, the amount of such
special assessment. If a special assessment as described above were to be
required, it would result in a one-time charge of up to approximately $830,000
(or $498,000 after taxes, assuming such charge would be tax deductible), which
would have the effect of reducing the Bank's tangible and core capital to
$11,730,000, or 8.40% of adjusted total assets, and risk-based capital to
$12,883,000, or 14.01% of risk-weighted assets as of June 30, 1996.
If such a special assessment were required and the SAIF as a result was fully
recapitalized, it could have the effect of reducing the Bank's deposit insurance
premiums to the SAIF, thereby increasing net income in future periods.
Impact of Inflation and Changing Prices
The Bank's Consolidated Financial Statements and Notes thereto, 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 consideration of the changes in
the relative purchasing power of money over time due to inflation. The impact of
inflation is reflected in the increased cost of the Bank's operations. Unlike
most industrial companies, nearly all the assets and liabilities of the Bank are
monetary. As a result, interest rates have a greater impact on the Bank's
performance than do the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or to the same extent as the price
of goods and services.
ES&L Bancorp, Inc.
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11
<PAGE>
[LETTERHEAD: MENGEL/METZGER/BARR & CO., LLP APPEARS HERE]
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
To the Board of Directors of
ES&L Bancorp, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheets of ES&L Bancorp,
Inc. and Subsidiary as of June 30, 1996 and 1995, and the related consolidated
statements of income, changes in shareholders' equity, and cash flows for each
of the years in the three-year period ended June 30, 1996. These consolidated
financial statements are the responsibility of the Corporation's management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of ES&L
Bancorp, Inc. and Subsidiary as of June 30, 1996 and 1995, and the results of
their operations and their cash flows for each of the years in the three-year
period ended June 30, 1996, in conformity with generally accepted accounting
principles.
As discussed in Notes A and H to the consolidated financial statements, the
Corporation changed its method of accounting for impairment of loans, certain
investments in debt and equity securities and income taxes in fiscal years 1996,
1995 and 1994, respectively.
/s/ Mengel, Metzger, Barr & Co. LLP
Elmira, New York
July 19, 1996
ES&L Bancorp, Inc.
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12
<PAGE>
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30,
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
- ----------------------------------------------------
Cash and due from banks $ 1,355,844 $ 863,072
Short-term investments 17,919 426,453
------------ ------------
Cash and cash equivalents 1,373,763 1,289,525
Securities available for sale 48,508 241,041
Securities to be held to maturity -
approximate market value of $2,993,573
and $3,744,890 at 1996 and 1995, respectively 3,030,521 3,775,306
Mortgage-backed securities available for sale 1,874,951 2,661,308
Mortgage-backed securities to be held to
maturity - approximate market value of $194,628
and $206,245 at 1996 and 1995, respectively 194,628 206,245
Mortgage loans held for sale 5,457,831 3,795,855
Loans receivable, net of allowance for loan
losses of $1,430,781 and $1,423,826
at 1996 and 1995, respectively 121,636,011 118,186,529
Federal Home Loan Bank stock, at cost 1,103,800 1,103,800
Foreclosed real estate 90,815 149,961
Investment in joint venture - acquisition,
development and construction arrangement 497,165 490,043
Investment in mortgage banking partnership 170,065 150,000
Property and equipment, net 3,121,713 3,191,686
Accrued interest receivable:
Loans and mortgage-backed securities 749,780 657,930
Investment securities and other 44,160 68,595
Other assets 744,807 516,489
------------ ------------
TOTAL ASSETS $140,138,518 $136,484,313
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Deposits:
Non-interest bearing $ 5,009,504 $ 4,045,591
Interest bearing 101,643,325 96,968,931
------------ ------------
106,652,829 101,014,522
Advances from Federal Home Loan Bank 17,615,560 20,523,963
Accrued interest payable:
Deposits 29,125 30,669
Borrowings 73,029 62,991
Advances from borrowers for taxes and insurance 2,286,398 2,657,206
Other liabilities 569,432 723,719
------------ ------------
TOTAL LIABILITIES 127,226,373 125,013,070
Commitments
Shareholders' equity:
Preferred stock:
Authorized, 500,000 shares
Issued, none - -
Common stock, $.01 par value:
Authorized, 3,000,000 shares
Issued, 566,505 and 550,826 shares, respectively 5,665 5,508
Additional paid-in capital 2,580,092 2,465,316
Retained earnings, substantially restricted 10,334,941 8,962,639
Net unrealized gain on securities available for
sale 37,888 48,280
------------ ------------
12,958,586 11,481,743
Less cost of treasury stock, 3,344 and
1,500 shares, respectively 46,441 10,500
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 12,912,145 11,471,243
------------ ------------
$140,138,518 $136,484,313
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
ES&L Bancorp, Inc.
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13
<PAGE>
Consolidated Statements of Income
<TABLE>
<CAPTION>
Year ended June 30,
-------------------------------------
1996 1995 1994
------------ ----------- ----------
<S> <C> <C> <C>
Interest income:
Loans $10,855,429 $ 9,516,283 $8,009,017
Investment securities 318,692 315,661 257,375
Mortgage-backed securities 189,417 199,122 206,520
Interest-earning deposits and other 15,465 21,088 62,208
----------- ----------- ----------
TOTAL INTEREST INCOME 11,379,003 10,052,154 8,535,120
Interest expense:
Deposits 5,157,450 4,481,743 3,568,953
Borrowings 1,038,030 992,868 872,059
----------- ----------- ----------
TOTAL INTEREST EXPENSE 6,195,480 5,474,611 4,441,012
----------- ----------- ----------
NET INTEREST INCOME 5,183,523 4,577,543 4,094,108
Provision for loan losses 60,000 150,000 640,000
----------- ----------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 5,123,523 4,427,543 3,454,108
Other income:
Service fees and other charges 131,394 114,012 88,913
Net (loss) gain on sale of investment
securities (39) 800 5,459
Income from loan servicing 314,915 301,765 271,725
Income from unconsolidated joint venture 16,478 60,299 22,976
Gain on sale of mortgages 160,949 69,094 296,794
Other operating income 177,055 127,447 130,707
----------- ----------- ----------
TOTAL OTHER INCOME 800,752 673,417 816,574
Other expenses:
Employee compensation and benefits 1,823,184 1,748,778 1,671,411
Office occupancy and equipment 503,559 372,845 390,626
Federal deposit insurance premiums 278,094 254,410 235,463
Other expenses 473,317 394,724 341,256
----------- ----------- ----------
TOTAL OTHER EXPENSES 3,078,154 2,770,757 2,638,756
----------- ----------- ----------
INCOME BEFORE INCOME TAXES AND
CUMULATIVE EFFECT ADJUSTMENT 2,846,121 2,330,203 1,631,926
Income taxes 1,092,560 747,227 369,433
----------- ----------- ----------
INCOME BEFORE CUMULATIVE
EFFECT ADJUSTMENT 1,753,561 1,582,976 1,262,493
Cumulative effect of accounting change
on years prior to 1994 - - 142,000
----------- ----------- ----------
NET INCOME $ 1,753,561 $ 1,582,976 $1,404,493
=========== =========== ==========
Primary income per common share:
Income before cumulative effect
of accounting change $3.07 $2.82 $2.31
Cumulative effect of accounting changes - - .26
----------- ----------- ----------
Net income per common share $3.07 $2.82 $2.57
=========== =========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
ES&L Bancorp, Inc.
- --------------------------------------------------------------------------------
14
<PAGE>
Consolidated Statements of Changes in Shareholders' Equity
Years ended June 30, 1996, 1995 and 1994
- ----------------------------------------
<TABLE>
<CAPTION>
Net unrealized
gain on
Additional securities
Common paid-in Retained available Treasury
stock capital earnings for sale stock Total
------ ----------- ------------ ----------- --------------- ---------------
(Substantially
restricted)
<S> <C> <C> <C> <C> <C> <C>
Balance at July 1, 1993 $3,526 $2,332,983 $ 6,507,089 $ - $(10,500) $ 8,833,098
Dividends on common stock
($.38 per share) - - (203,600) - - (203,600)
Issuance of 12,566 shares
in connection with stock
options exercised at $8
per share 125 100,403 - - - 100,528
Tax benefit from exercise
of non-incentive stock
options - 11,465 - - - 11,465
Net income - - 1,404,493 - - 1,404,493
------ ---------- ----------- ---------- ----------- -----------
BALANCE AT JUNE 30, 1994 3,651 2,444,851 7,707,982 - (10,500) 10,145,984
Cumulative effect of
accounting change -
unrealized gain on
securities available for
sale, net of deferred taxes
of $38,684 - - - 58,027 - 58,027
Current year change in
unrealized gain on securities
available for sale, net of
deferred taxes of $6,498 - - - (9,747) - (9,747)
Issuance of 182,499 shares in
connection with three-for-two
stock split 1,825 (1,825) - - - -
Dividends on common stock
($.60 per share) - - (328,319) - - (328,319)
Issuance of 3,203 shares in
connection with stock options
exercised at $5 1/3 per share 32 17,043 - - - 17,075
Tax benefit from exercise of
non-incentive stock options - 5,247 - - - 5,247
Net income - - 1,582,976 - - 1,582,976
------ ---------- ----------- ---------- ---------- -------------
BALANCE AT JUNE 30, 1995 5,508 2,465,316 8,962,639 48,280 (10,500) 11,471,243
Current year change in
unrealized gain on
securities available for
sale, net of deferred taxes
of $6,926 - - - (10,392) - (10,392)
Dividends on common stock
($.68 per share) - - (381,259) - - (381,259)
Issuance of 15,679 shares in
connection with stock options
exercised at $5 1/3 per share 157 83,472 - - - 83,629
Tax benefit from exercise of non-
incentive stock options - 31,304 - - - 31,304
Purchase of 1,844 shares of
treasury stock - - - - (35,941) (35,941)
Net income - - 1,753,561 - - 1,753,561
------ ---------- ----------- ---------- ---------- -----------
BALANCE AT JUNE 30, 1996 $5,665 $2,580,092 $10,334,941 $ 37,888 $(46,441) $12,912,145
====== ========== =========== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
ES&L Bancorp, Inc.
- --------------------------------------------------------------------------------
15
<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended June 30,
-------------------------------------------
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS - OPERATING ACTIVITIES
- ---------------------------------
Net income $ 1,753,561 $ 1,582,976 $ 1,404,493
Adjustments to reconcile net income
to net cash (used for) provided from
operating activities:
Depreciation 180,336 64,666 97,397
Deferred income taxes 24,884 4,221 (281,353)
Provision for loan losses 60,000 150,000 640,000
Net amortization of premiums and
discounts 22,533 29,202 28,446
Deferred loan origination fees (52,490) (7,446) (57,730)
Income from unconsolidated joint
venture (16,478) (60,299) (22,976)
Net loss (gain) on sale of
investment securities 39 (800) (5,459)
Net loss on sale of property and
equipment - - (5,368)
Net gain on sale of foreclosed
real estate (13,457) - -
Gain on sale of mortgages (160,949) (69,094) (296,794)
Proceeds from loan sales 29,370,422 11,240,565 42,132,313
Originations and purchases of
loans held for sale (30,990,370) (13,054,383) (41,191,819)
Changes in certain assets and
liabilities
affecting operations:
Accrued interest receivable (67,415) (158,330) (16,244)
Other assets (96,051) 181,053 (227,105)
Accrued interest payable 8,494 14,340 33,314
Advances from borrowers for
taxes and insurance (370,808) 291,259 536,699
Other liabilities (154,287) 70,387 (170,321)
------------ ------------ ------------
NET CASH (USED FOR) PROVIDED FROM
OPERATING ACTIVITIES (502,036) 278,317 2,597,493
CASH FLOWS - INVESTING ACTIVITIES
- ---------------------------------
Net other increase in loans
receivable (3,667,626) (11,987,160) (5,384,626)
Net (increase) decrease in Federal
Home Loan Bank stock - (37,200) 123,700
Investment in foreclosed real estate (383) (7,221) -
Investment in joint venture 9,356 128,565 (95,058)
Investment in partnership (20,065) (150,000) -
Proceeds from sale of foreclosed
real estate 283,620 19,608 162,000
Proceeds from sale of securities
available for sale 49,812 1,900 -
Proceeds on maturity of securities
available for sale 150,000 50,000 55,000
Purchase of securities available
for sale - - (37,863)
Proceeds from sale of securities to
be held to maturity - - 406,995
Purchases of securities to be held
to maturity (2,987,912) (500,000) (2,000,000)
Proceeds from maturities of
securities to be held to maturity 3,710,959 114,664 171,586
Principal repayments on
mortgage-backed securities 772,543 466,322 1,022,062
Proceeds from sale of property and
equipment - - 175,825
Purchases of property and equipment (110,363) (2,406,315) (160,893)
------------ ------------ ------------
NET CASH (USED FOR) INVESTING
ACTIVITIES (1,810,059) (14,306,837) (5,561,272)
CASH FLOWS - FINANCING ACTIVITIES
- -------------------------------------
Interest credited to deposit
accounts 5,129,548 4,435,853 3,526,860
Net other increase (decrease) in
deposits 508,759 9,721,896 (643,860)
Net (decrease) increase in advances
from Federal Home Loan Bank (2,908,403) (307,892) 4,081,855
Payments on reverse repurchase
agreements - - (4,045,000)
Proceeds from exercise of stock
options 83,629 17,075 100,527
Purchase of treasury stock (35,941) - -
Dividends paid (381,259) (328,319) (203,600)
------------ ------------ ------------
NET CASH PROVIDED FROM FINANCING
ACTIVITIES 2,396,333 13,538,613 2,816,782
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 84,238 (489,907) (146,997)
Cash and cash equivalents at
beginning of year 1,289,525 1,779,432 1,926,429
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF
YEAR $ 1,373,763 $ 1,289,525 $ 1,779,432
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
- -------------------------------------
Cash paid during the year for:
Interest on advances from Federal
Home Loan Bank $ 1,027,992 $ 977,182 $ 840,489
============ ============ ============
Income taxes $ 1,156,051 $ 727,300 $ 793,454
============ ============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING ACTIVITIES
- -------------------------------------
Loans transferred to foreclosed
real estate $ 213,815 $ 91,455 $ -
============ ============ ============
Foreclosed real estate transferred
to property and equipment $ - $ 51,285 $ -
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
ES&L Bancorp, Inc.
- --------------------------------------------------------------------------------
16
<PAGE>
Notes to Consolidated Financial Statements
NOTE A: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ----------------------------------------------------
Principles of consolidation
- ---------------------------
ES&L Bancorp, Inc. (the "Corporation") is a savings and loan holding company,
which engages in no significant business activity other than holding the stock
of Elmira Savings and Loan, F.A. (the "Bank") and operating the business of a
savings and loan through the Bank. The consolidated financial statements
include the accounts of the Corporation, its wholly-owned subsidiary, the Bank
and the wholly-owned subsidiaries of the Bank, Brilie Corporation (D/B/A ES&L
Financial Services) and ES&L Mortgage Corporation (D/B/A Cayuga Mortgage
Company). All significant intercompany transactions and balances have been
eliminated in consolidation.
Cash and cash equivalents
- -------------------------
For purposes of reporting cash flows, cash and cash equivalents include cash,
due from banks, federal funds sold and short-term investments, with original
terms to maturity of less than 90 days. Generally, federal funds are purchased
and sold for one-day periods.
Investments in debt, equity and mortgage-backed securities
- ----------------------------------------------------------
The Corporation adopted the provisions of Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS 115") on July 1, 1994. SFAS 115 applies to investments in
equity securities whose fair values are readily determinable and to all debt
securities. SFAS 115 requires banks to classify debt and equity securities into
three reporting categories: (1) held-to-maturity, (2) available-for-sale, or
(3) trading.
The Corporation has classified as held-to-maturity, all debt securities
including certain mortgage-backed securities which the Corporation has the
positive intent and ability to hold until maturity. These securities are
carried at amortized cost. All other debt and equity securities, including
certain mortgage-backed securities, having readily determinable fair values have
been categorized as securities available-for-sale and are carried at fair value.
Unrealized holding gains and losses for these securities are reported as a
separate component of equity. The cumulative effect of this accounting change
at July 1, 1994, was recorded in the accompanying consolidated statement of
changes in shareholders' equity as an unrealized gain on securities available-
for-sale of $58,027 net of deferred taxes of $38,684. The decrease in
unrealized gain amounted to $10,392 and $9,747 net of deferred taxes of $6,926
and $6,498 for 1996 and 1995, respectively. The Corporation has no securities
classified as trading securities.
Prior to July 1, 1994, securities available for sale, consisting of certain
government and corporate bonds, equity securities and certain mortgage-backed
securities, were carried at the lower of aggregate cost or market. Net
unrealized losses on these investments were recognized in the consolidated
statement of income as they occurred.
At June 30, 1994, investment and mortgage-backed securities held to maturity
were carried at cost, adjusted for amortization of premium and accretion of
discount over the term of the related securities. Net unrealized losses on
these securities were recognized on the consolidated statement of income as they
occurred.
Realized gains or losses are recognized upon the sale of securities on a
specific identification basis.
Mortgage loans held for sale
- ----------------------------
Mortgage loans held for sale are carried at the lower of cost or estimated
market value, determined in the aggregate. At June 30, 1996 and 1995, market
values of the mortgage loans held for resale approximate cost. The mortgage
loans held for resale represent fixed rate one-to-four family mortgage loans,
which are to be sold pursuant to forward commitments. For purposes of
determining the gain on the sale of loans sold in the secondary market, normal
servicing fees are determined by reference to the stipulated servicing fee set
forth in the loan sale agreements.
Loans receivable
- ----------------
Loans held in portfolio are stated at the principal amount outstanding, less the
allowance for losses and net deferred loan origination fees and costs. Interest
is accrued as earned unless collectibility of the loan is in doubt, at which
time an allowance is provided.
Uncollectible interest on loans that are contractually past due is charged off,
or an allowance is established based on management's periodic evaluation. The
allowance is established by a charge to interest income equal to all interest
previously accrued and still due, and income is subsequently recognized only to
the extent that cash payments are received until, in management's judgment, the
borrower's ability to make periodic interest and principal payments is back to
normal, in which case the loan is returned to accrual status. Interest income
generally is not recognized on specific impaired loans unless the likelihood of
further loss is remote. Interest payments received on such loans are applied as
a reduction of the loan principal balance.
ES&L Bancorp, Inc.
- --------------------------------------------------------------------------------
17
<PAGE>
Notes to Consolidated Financial Statements
NOTE A: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Cont'd
- -----------------------------------------------------
Loan fees
- ---------
All loan origination fees received from loans with similar characteristics, net
of direct origination costs, are deferred and amortized to interest income using
the level yield method, giving effect to actual loan prepayments. Fees received
for loan commitments that are expected to be drawn upon, based on the Bank's
experience with similar commitments, are deferred and amortized over the life of
the loan using the level yield method. Fees for other loan commitments are
deferred and amortized over the loan commitment period on a straight-line basis.
Allowance for possible loan losses
- ----------------------------------
The allowance for possible loan losses is maintained at a level which management
considers adequate to provide for potential loan losses based upon an evaluation
of known and inherent risks in the loan portfolio. Management's evaluation is
based upon a continuing review of the loan portfolio which includes many
factors, such as identification of adverse situations which may affect the
borrower's ability to repay, a review of overall portfolio quality and an
assessment of current and future economic conditions.
Management believes that the allowance for loan loss is adequate. While
management uses available information to recognize losses on loans and
foreclosed real estate, future additions to the allowances may be necessary
based on changes in local economic conditions. In addition, regulatory
agencies, as an integral part of their examination process, periodically review
the Bank's allowances for losses on loans and foreclosed real estate. Such
agencies may require the Bank to recognize additions to the allowances based on
their judgments about information available to them at the time of their
examination.
The Bank adopted the provisions of Statement of Financial Accounting Standards
(SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan" as amended by
SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures" on July 1, 1995. Management considers a loan
impaired when, based on current information and events, it is probable that the
Bank will be unable to collect all amounts of principal and interest under the
original terms of the loan agreement. Accordingly, the Bank measures certain
impaired commercial mortgage loans based on the present value of expected future
cash flows, discounted at the loan's effective interest rate or, at the loan's
observable market price or fair value of collateral. Impairment losses are
included in the allowance for loan losses through a charge to the provision for
loan losses. The Bank recognizes interest income on impaired loans using the
cash basis of income recognition. Adoption of these statements did not have a
material impact on the Bank's 1996 consolidated financial statements.
Mortgage servicing rights
- -------------------------
The cost of acquiring the rights to service mortgage loans other than the Bank's
own accounts is capitalized and amortized in proportion to, and over the period
of, estimated net servicing income. During 1996, approximately $118,000 of such
costs were capitalized.
Foreclosed real estate
- ----------------------
Real estate properties acquired through loan foreclosure are valued at the lower
of cost or fair value minus estimated costs to sell. Costs relating to the
improvement of property are capitalized to the extent that carrying value does
not exceed estimated fair value, whereas costs relating to holding property are
expensed. Valuations are periodically performed by management and an allowance
for losses is established, if necessary, by a charge to operations if the
carrying value of a property exceeds its estimated net realizable value.
Property and equipment
- ----------------------
Property and equipment are carried at cost. Depreciation is computed on the
straight-line method over the estimated useful lives of the related assets.
Repairs and maintenance, as well as renewals and replacements of a routine
nature, are charged to operations, while costs incurred to improve or extend the
life of existing assets are capitalized.
Income taxes
- ------------
The Corporation adopted the provisions of Statement of Financial Accounting
Standards 109, "Accounting for Income Taxes ("SFAS 109") in fiscal year 1994.
SFAS 109 required a change from the deferred method to the asset and liability
method of accounting for income taxes. Under the asset and liability method,
deferred income taxes are recognized for the tax consequences of "temporary
differences" by applying enacted statutory tax rates applicable to future years
to differences between the financial statement carrying amounts and the tax
bases of existing assets and liabilities. Under SFAS 109, the effect on
deferred taxes of a change in tax rates is recognized in income in the period
that includes the enactment date. The Corporation reported the cumulative
effect of the change in the method of accounting for income taxes as of July 1,
1993 in the fiscal 1994 consolidated statement of income.
ES&L Bancorp, Inc.
- --------------------------------------------------------------------------------
18
<PAGE>
Notes to Consolidated Financial Statements
NOTE A: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Cont'd
- -----------------------------------------------------
Financial Instruments and Concentration of Credit Risk
- ------------------------------------------------------
In the normal course of business to meet the financing needs of its customers
and to reduce its own exposure to fluctuations in interest rates, the Bank is a
party to financial instruments with off-balance-sheet risk. These financial
instruments include loan commitments, standby letters of credit, loans written
with interest rate caps and floors, and forward contracts. Those instruments
involve, to varying degrees, elements of credit and interest rate risk in excess
of the amount recognized in the balance sheet. The contract or notional amounts
of those instruments reflect the extent of involvement the Bank has in
particular classes of financial instruments.
The Bank considers its primary market area for lending and savings activities to
be Chemung, Tompkins, Steuben, Schuyler and Tioga Counties in New York and Tioga
and Bradford Counties in Pennsylvania. Although the Bank has a diversified loan
portfolio, a substantial portion of its debtors' ability to honor their
contracts is reliant upon the economic stability of the area.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for loan commitments and standby letters of
credit is represented by the contractual or notional amount of those
instruments. The Bank uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments. For
interest rate caps, floors, and forward contracts, the contract or notional
amounts do not represent exposure to credit loss. The Bank controls the credit
risk of forward contracts through credit approvals, limits and monitoring
procedures.
Loan commitments are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Loan commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. The Bank evaluates each customer's creditworthiness
on a case-by-case basis. The amount of collateral obtained, if deemed necessary
by the Bank upon extension of credit, is based on management's credit
evaluation. Collateral held varies but may include accounts receivable,
inventory, property, plant and equipment, income-producing commercial
properties, and residential and personal properties.
Forward contracts are written primarily with government agencies, whereby the
agency agrees to purchase substantially all fixed-rate loans originated by the
Bank. Risks arise from the possible inability of counterparties to meet the
terms of their contracts.
The Bank writes variable rate loan contracts with interest rate caps and floors
in order to manage its interest rate exposure. Substantially, all variable rate
loans are held by the Bank; the interest rate caps and floors enable both
customers and the Bank to transfer, modify, or reduce their interest rate risk.
Standby 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 borrowing arrangements. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers.
Net income per share
- --------------------
Primary net income per share is computed by dividing net income by the weighted
average number of shares of common stock and common stock equivalents
outstanding during the period. Common stock equivalents include shares issuable
upon exercise of the Company's outstanding stock options. Using the treasury
stock method for outstanding options, equivalent common shares of 11,291, 14,281
and 12,579 were added to weighted average shares for 1996, 1995 and 1994. Fully
diluted net income per share amounts are not presented because they are not
materially dilutive. Weighted average shares outstanding amounted to 570,824
for 1996, 560,637 for 1995, and 547,060 for 1994. See also Note N.
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.
ES&L Bancorp, Inc.
- --------------------------------------------------------------------------------
19
<PAGE>
Notes to Consolidated Financial Statements
NOTE A: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Cont'd
- -----------------------------------------------------
New Accounting Pronouncements
- -----------------------------
Mortgage servicing rights
-------------------------
In May 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 122, "Accounting for Certain
Mortgage Banking Activities" ("SFAS 122"). SFAS 122 requires mortgage banking
enterprises, including enterprises such as the Bank that conduct operations
that are substantially similar to the primary operations of a mortgage banking
enterprise, to recognize rights to service mortgage loans for others as
separate assets, regardless of how the servicing rights are acquired. Under
current standards part of the cost of acquiring the loans is capitalized as
mortgage servicing rights if the loans are purchased, but not if they are
originated by the seller. Additionally, under SFAS 122 mortgage servicing
rights are to be assessed for impairment based on their fair value, determined
for each group of underlying loans with similar risk characteristics.
SFAS 122 is effective prospectively for fiscal years beginning after December
15, 1995. Accordingly, the Bank is required to adopt SFAS 122 for the year
ending June 30, 1997. The Bank has not completed all of the analyses required
to estimate the impact of adopting the Statement, however, management does not
expect the adoption of SFAS 122 to have an adverse effect on the Bank's
financial condition or results of operations.
Accounting for long-lived assets
--------------------------------
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
("SFAS 121"). SFAS 121 establishes guidance for when to recognize and how to
measure impairment losses of long-lived assets and certain identifiable
intangibles and how to value long-lived assets to be disposed of.
SFAS 121 is effective for fiscal years beginning after December 15, 1995.
Accordingly, the Bank is required to adopt SFAS 121 for the year ending June
30, 1997. Management does not expect the adoption of SFAS 121 to have a
material effect on the Bank's financial condition or results of operation.
Reclassifications
- -----------------
Certain 1995 amounts have been reclassified to conform with the 1996
presentation.
NOTE B: INVESTMENT AND MORTGAGE-BACKED SECURITIES
- ---------------------------------------------------
The amortized cost and fair value of investments in securities are as follows:
<TABLE>
<CAPTION>
June 30, 1996:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Securities available for
sale:
Corporate stock $ 36,763 $13,558 $ (1,813) $ 48,508
========== ========== ========== ==========
Securities to be held to
maturity:
U.S. Government and its
agencies $2,988,894 $ - $(37,664) $2,951,230
Corporate debt
securities 41,627 716 - 42,343
---------- ---------- ---------- ----------
$3,030,521 $ 716 $(37,664) $2,993,573
========== ========== ========== ==========
Mortgage-backed
securities
available for sale $1,823,549 $51,402 $ - $1,874,951
========== ========== ========== ==========
Mortgage-backed
securities
to be held to maturity $ 194,628 $ - $ - $ 194,628
========== ========== ========== ==========
</TABLE>
ES&L Bancorp, Inc.
- --------------------------------------------------------------------------------
20
<PAGE>
Notes to Consolidated Financial Statements
NOTE B: INVESTMENT AND MORTGAGE-BACKED SECURITIES, Cont'd
- ----------------------------------------------------
<TABLE>
<CAPTION>
June 30, 1995:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Securities
available for
sale:
U.S.
Government and
its
agencies $ 200,646 $ 1,760 $ - $ 202,406
Corporate stock 36,763 3,947 (2,075) 38,635
---------- ------- -------- ----------
$ 237,409 $ 5,707 $ (2,075) $ 241,041
========== ======= ======== ==========
Securities to be
held to
maturity:
U.S.
Government and
its
agencies $2,700,076 $ 5,236 $(34,374) $2,670,938
Corporate debt
securities 1,075,230 1,003 (2,281) 1,073,952
---------- ------- -------- ----------
$3,775,306 $ 6,239 $(36,655) $3,744,890
========== ======= ======== ==========
Mortgage-backed
securities
available for
sale $2,584,475 $76,833 $ - $2,661,308
========== ======= ======== ==========
Mortgage-backed
securities
to be held to
maturity $ 206,245 $ - $ - $ 206,245
========== ======= ======== ==========
</TABLE>
The amortized cost and fair value of debt securities at June 30, 1996, by
contractual maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to repay obligations
with or without call or prepayment penalties. All mortgage-backed securities
mature after ten years.
<TABLE>
<CAPTION>
Securities Securities to be
Available For Sale Held to Maturity
--------------------- ----------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Due in one year or less $ - $ - $ - $ -
Due after one year
through
five years - - 2,988,894 2,951,230
Due after five years
through
ten years - - - -
Due after ten years - - 41,627 42,343
--------- ---------- ---------- ----------
$ - $ - $3,030,521 $2,993,573
========= ========== ========== ==========
</TABLE>
Proceeds and gross realized gains and losses from sales and maturities of
securities are as follows:
<TABLE>
<CAPTION>
Securities Available for Sale
----------------------------------
Proceeds
from
sales and Realized Realized
maturities gains losses
---------- ---------- ----------
<S> <C> <C> <C>
Year ended June 30,
-------------------
1996 $199,812 $ - $ 39
1995 51,900 800 -
1994 55,000 - -
</TABLE>
ES&L Bancorp, Inc.
- --------------------------------------------------------------------------------
21
<PAGE>
Notes to Consolidated Financial Statements
NOTE B: INVESTMENT AND MORTGAGE-BACKED SECURITIES, Cont'd
- ----------------------------------------------------
<TABLE>
<CAPTION>
Securities to be Held to Maturity
-----------------------------------------------
Proceeds
from
sales and Realized Realized
maturities gains losses
----------------- ------------- -------------
<S> <C> <C> <C>
Year ended June 30,
-------------------
1996 $3,710,959 $ - $ -
1995 114,664 - -
1994 578,581 5,459 -
NOTE C: LOANS RECEIVABLE
- --------------------------
Loans receivable consist of
the following:
June 30,
-----------------------------
1996 1995
------------ ------------
Conventional first mortgage
loans:
Residential $ 79,401,037 $ 72,944,756
Commercial 25,007,635 27,159,817
Construction loans 3,958,500 5,299,305
Loans on savings accounts 213,679 253,261
Education loans 470,515 652,739
Consumer loans 4,663,964 3,905,649
Demand notes 1,519,863 1,078,021
Home equity lines of credit 6,699,341 7,659,588
Commercial non-mortgage loans 1,926,130 1,844,375
Commercial lines of credit 1,212,320 1,095,718
------------ ------------
125,072,984 121,893,229
Less:
Allowance for loan losses 1,430,781 1,423,826
Loans in process 1,953,552 2,177,744
Deferred loan origination
fees 52,640 105,130
------------ ------------
$121,636,011 $118,186,529
============ ============
</TABLE>
The activity in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
Year ended June 30,
------------------------------------------
1996 1995 1994
---------- ------------ --------------
<S> <C> <C> <C>
Balance at beginning of year $1,423,826 $ 1,268,611 $ 681,614
Provision for possible loan
losses 60,000 150,000 640,000
Charged-off loans (54,207) (2,142) (55,522)
Recoveries 1,162 7,357 2,519
---------- ------------ ------------
Balance at end of year $1,430,781 $ 1,423,826 $ 1,268,611
========== ============ ============
</TABLE>
Nonaccrual loans for which interest has been reduced totaled approximately
$223,000 and $718,000 at June 30, 1996 and 1995, respectively. Interest income
that would have been recorded on these loans for the years ended June 30, 1996
and 1995 was approximately $20,000 and $30,000, respectively.
The Bank is not committed to lend additional funds to debtors whose loans have
been modified.
ES&L Bancorp, Inc.
- --------------------------------------------------------------------------------
22
<PAGE>
Notes to Consolidated Financial Statements
NOTE C: LOANS RECEIVABLE, Cont'd
- ---------------------------
The Bank, in the ordinary course of business, has granted loans to certain
officers, directors and their related interests. Related party loans were made
on substantially the same terms, as those prevailing at the time for comparable
transactions with unrelated persons and do not involve more than normal risk of
collectibility. An analysis of related party loan activity is as follows:
Balance at July 1, 1994 $ 348,122
Increase 209,468
Decrease (32,820)
---------
BALANCE AT JUNE 30, 1995 524,770
Increase 103,207
Decrease (183,384)
---------
BALANCE AT JUNE 30, 1996 $ 444,593
=========
As stated in Note A, the Bank sells loans in the secondary market and generates
income on the subsequent servicing of such loans. The income is generated by
continuing to service loans sold in the secondary market for an agreed-upon
percentage of the interest earned. Total residential loans serviced for others
amounted to $110,694,667, $90,824,269 and $87,027,163 at June 30, 1996, 1995 and
1994, respectively.
NOTE D: PROPERTY AND EQUIPMENT
- --------------------------------
Property and equipment is summarized by major classification as follows:
June 30,
----------------------
1996 1995
---------- ----------
Land $ 672,933 $ 640,836
Buildings 2,251,476 2,215,263
Furniture and equipment 789,356 741,573
---------- ----------
3,713,765 3,597,672
Less accumulated depreciation 592,052 405,986
---------- ----------
$3,121,713 $3,191,686
========== ==========
Interest cost incurred on borrowed funds during fiscal year 1995 amounted to
$1,053,261, of which $60,393 was capitalized as building costs. No interest was
capitalized for 1996 or 1994.
NOTE E: DEPOSITS
- ------------------
Deposit accounts consist of the following:
June 30,
------------------------
1996 1995
---------- ------------
Savings accounts with a year end interest rate of
3.05% and 3.0% at June 30, 1996 and 1995,
respectively $15,777,639 $ 16,179,373
NOW accounts with a year end interest rate of 1.80%
and 1.75% at June 30, 1996 and 1995, respectively 6,516,746 5,323,870
Money market deposit accounts with a year end
interest rate of 3.20% and 3.15% at
June 30, 1996 and 1995, respectively 5,727,747 5,417,514
Certificates of deposit with a year end interest rate
range of 3.80% - 8.35% at June 30, 1996 and 1995 78,630,697 74,093,765
----------- ------------
$106,652,829 $101,014,522
============ ============
Non-interest bearing checking accounts are included in the table above in NOW
accounts.
ES&L Bancorp, Inc.
- --------------------------------------------------------------------------------
23
<PAGE>
Notes to Consolidated Financial Statements
NOTE E: DEPOSITS, Cont'd
- -------------------------
Maturities of outstanding certificates of deposit at June 30, 1996, are
summarized as follows:
Year Amount
---- -----------
1997 $47,917,784
1998 21,511,426
1999 4,097,331
2000 4,225,089
2001 879,067
-----------
$78,630,697
===========
The aggregate amount of individual deposits in excess of $100,000 was
approximately $19,000,000 and $18,000,000 at June 30, 1996 and 1995,
respectively.
Interest expense on deposits is summarized as follows:
Year ended June 30,
----------------------------------
1996 1995 1994
---------- ---------- ----------
Savings accounts $ 507,794 $ 578,524 $ 582,212
NOW accounts 24,565 26,287 23,909
Money market 217,075 213,155 166,449
Certificates of deposit 4,408,016 3,663,777 2,796,383
---------- ---------- ----------
$5,157,450 $4,481,743 $3,568,953
========== ========== ==========
NOTE F: ADVANCES FROM FEDERAL HOME LOAN BANK
- ---------------------------------------------
Advances from Federal Home Loan Bank are collateralized by certain residential
mortgage loans and the Bank's investment in Federal Home Loan Bank stock
pursuant to the provisions of a collateral pledge and security.
Scheduled maturities are as follows:
Maturing in Amount
fiscal year ending -----------
- --------------------
1997 $13,108,178
1998 609,523
1999 610,139
2000 610,796
2001 611,491
Thereafter 2,065,433
-----------
$17,615,560
===========
The Bank has the ability to obtain additional advances from the Federal Home
Loan Bank, up to an amount established at the time of borrowing by a predefined
formula.
NOTE G: BENEFIT PLANS
- -----------------------
Savings and Profit Sharing Plan
- -------------------------------
The Bank maintains a defined contribution savings incentive plan (401k) and a
profit sharing plan for all eligible employees. Under these plans, the Bank
will match up to 3% of annual employee wages, dollar for dollar, for amounts
contributed to the savings incentive plan and will contribute a Board approved
percentage of wages to the profit sharing plan. Total expense including
administrative costs amounted to $83,521, $81,178 and $66,517 for the years
ended June 30, 1996, 1995 and 1994, respectively.
Other Retirement Benefits
- -------------------------
The Bank provides limited medical and life insurance benefits to current
retirees. The Bank intends to continue to fund the liability associated with
these benefits on a "pay-as-you-go" basis, and does not expect to extend this
benefit beyond those currently receiving benefits.
ES&L Bancorp, Inc.
- --------------------------------------------------------------------------------
24
<PAGE>
Notes to Consolidated Financial Statements
NOTE G: BENEFIT PLANS, Cont'd
- ------------------------
The accumulated postretirement benefit obligation of all retirees as of June 30,
1996 and 1995 was $61,538 and $65,158, respectively. There are no plan/trust
assets designated for this purpose.
For measurement purposes, the weighted-average discount rate used in determining
the accumulated postretirement benefit obligation was 8%. The mortality rate
was based on the 1983 Group Annuity Mortality Table.
Stock option plan
- -----------------
Under the terms of the ES&L Bancorp, Inc. 1990 Stock Option Plan (the "Option
Plan"), shares were reserved for future issuance by the Corporation upon
exercise of stock options granted to employees and directors of the Corporation
and its subsidiary from time to time under the Option Plan. The Option Plan
provides for a term of ten years, after which no awards may be made, unless
earlier terminated by the Board of Directors pursuant to the Option Plan. These
options are priced at $5 1/3 per share, the equivalent of the purchase price at
the time of issuance. See also Note N.
Options outstanding June 30, 1995 28,955
Less options exercised 15,679
------
Options outstanding June 30, 1996 13,276
======
NOTE H: INCOME TAXES
- ---------------------
The Corporation adopted, effective July 1, 1993, Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes". Under the
liability method specified by SFAS 109, deferred tax assets and liabilities are
determined based on the difference between the financial statement and tax bases
of assets and liabilities as measured by the enacted tax rates which are
expected to be in effect when these differences reverse. Those differences are
more inclusive in nature than timing differences as determined under previously
applicable accounting principles. Deferred tax expense (credit) is the result
of the changes in deferred tax assets and liabilities, except for the change in
deferred taxes related to unrealized gain on securities available for sale which
is reflected in shareholders' equity. The principal types of differences
between assets and liabilities for financial statement and tax return purposes
are depreciation, nonrefundable loan fees, certain postretirement benefits,
allowance for loan losses incurred after July 1, 1988 and unrealized gain on
securities available for sale.
The deferred method, used in years prior to July 1, 1993, required the Bank to
provide for deferred tax expense based on certain items of income and expense
which were reported in different years in the financial statements and the tax
returns as measured by the tax rate in effect for the year the difference
occurred.
The change from the deferred method to the liability method of accounting for
income taxes increased the Bank's 1994 net income by $156,400, $.29 per share,
before the cumulative effect of the change in accounting. Also, net income for
the year ended June 30, 1994, increased by $142,000, $.26 per share, as a result
of the cumulative effect of the change in accounting related to years prior to
July 1, 1993, which were not restated. Net income for the years ended June 30,
1996 and 1995 was not materially effected by this change.
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Year ended June 30,
----------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Currently payable:
State $ 160,560 $ 145,934 $ 62,560
Federal 907,116 597,072 446,226
Deferred 24,884 4,221 (139,353)
---------- --------- ---------
$1,092,560 $ 747,227 $ 369,433
========== ========= =========
</TABLE>
A reconciliation of income taxes at the federal statutory corporate tax rates to
the effective tax rates follows:
<TABLE>
<CAPTION>
Year ended June 30,
---------------------------------
1996 1995 1994
---------- --------- ---------
<S> <C> <C> <C>
Total provision at federal statutory
rates $ 968,000 $ 785,000 $ 555,000
States taxes, net of federal benefit 106,000 96,000 30,000
Resolution of prior year tax
liabilities - (124,000) (196,000)
Other 18,560 (9,773) (19,567)
---------- --------- ---------
$1,092,560 $ 747,227 $ 369,433
========== ========= =========
</TABLE>
ES&L Bancorp, Inc.
- --------------------------------------------------------------------------------
25
<PAGE>
Notes to Consolidated Financial Statements
NOTE H: INCOME TAXES, Cont'd
- -----------------------
Amounts by which income taxes currently payable exceed estimated tax payments
made during the year are included in other liabilities in the accompanying
financial statements.
A deferred tax asset resulting from temporary differences is summarized as
follows and is included in other assets in the accompanying consolidated balance
sheet:
June 30,
--------------------
1996 1995
--------- ---------
Depreciation $(50,000) $ (2,000)
Nonrefundable loan fees 35,000 42,000
Employee benefits 21,000 22,000
Allowance for loan losses 344,000 302,000
Unrealized gain on securities
available for sale (25,000) (32,000)
Other (3,000) 8,000
-------- --------
$322,000 $340,000
======== ========
As required by SFAS 109, deferred taxes have not been provided for the allowance
for loan losses for tax purposes that arose in tax years beginning before July
1, 1988, as management believes that it is not apparent such temporary
differences will reverse in the foreseeable future. However, a deferred tax
asset has been recognized for the difference between the provision for loan loss
for book purposes and the bad debt tax deductions arising in tax years after
July 1, 1988.
Various tax court decisions have questioned the validity of tax regulations
which required thrift institutions to reduce, or eliminate, the bad debt
deductions in the year to which certain net operating losses were carried back.
As a result, the Bank filed its tax returns with an increased net operating loss
carryforward (NOL) of approximately $1.5 million. The Bank used this increased
NOL to offset income for the year ended June 30, 1990 and 1991, while continuing
to accrue income taxes for financial reporting purposes without regard to the
increase. During the years ended June 30, 1995 and 1994, contingencies relating
to this matter were resolved and the accruals were adjusted.
The IRS has permitted a tax deduction for estimated bad debts in an amount
greater than the amount reported in the accompanying financial statements. This
excess amount of the estimated bad debts is subject to tax only if its is
actually distributed to stockholders or depositors. At June 30, 1996, the
accumulated amount of such excess for which income taxes have not been accrued
was approximately $2.1 million.
NOTE I: COMMITMENTS
- ---------------------
The Bank leases an office for ES&L Mortgage Corporation under a lease agreement,
which is renewable annually. The agreement requires minimum monthly rentals, as
well as requiring the Bank to pay its pro rata share of property taxes and
utilities. Total rental expense under this agreement amounted to $17,886,
$14,696 and $15,678 for the years ended June 30, 1996, 1995 and 1994,
respectively.
At June 30, 1996 and 1995, the Bank had outstanding commitments of $3,169,511
and $5,375,316, respectively, to originate loans, of which $931,311 and
$1,236,241, respectively, were comprised of fixed-rate loans and $2,238,200 and
$4,139,075, respectively, were comprised of variable-rate loans. Substantially
all of the fixed-rate loan commitments are to be sold upon establishment of a
specified fixed rate of interest. In the opinion of management, all fixed-rate
loan commitments equalled or exceeded prevalent market interest rates and all
loan commitments will be funded via cash flows from operations, existing excess
liquidity, advances from the Federal Home Loan Bank and other borrowings as
necessary.
At June 30, 1996 and 1995, the Bank had outstanding commitments under standby
letters of credit totalling $436,222 and $92,425, respectively.
At June 30, 1996 the Bank was committed to purchase a Federal Home Loan Bank
$1,000,000 bond at par value. The bond has an interest rate of 7.13% and
matures July 2, 2001.
NOTE J: INVESTMENT IN JOINT VENTURE - ACQUISITION, DEVELOPMENT AND
- --------------------------------------------------------------------
CONSTRUCTION ARRANGEMENT
------------------------
During 1989, the Bank's wholly-owned subsidiary, Brilie Corporation ("Brilie")
entered into a partnership agreement with two unrelated parties. The primary
purpose of this partnership is to develop land in the Town of Horseheads for
eventual resale as residential housing. Management of the partnership intends
to develop the land in several phases, enabling the partnership to increase its
equity as sales take place. As of June 30, 1996 and 1995, the Bank had loaned
$389,170 and $387,627, respectively, to the partnership, and was committed to
lend an additional $360,830 and $362,373, respectively, to finance further land
development.
ES&L Bancorp, Inc.
- --------------------------------------------------------------------------------
26
<PAGE>
Notes to Consolidated Financial Statements
NOTE J: INVESTMENT IN JOINT VENTURE - ACQUISITION, DEVELOPMENT AND
- --------------------------------------------------------------------
CONSTRUCTION ARRANGEMENT, Cont'd
-------------------------
All costs incurred by the joint venture partnership during development stages,
including interest financing costs, directly attributable to the project are
capitalized and specifically allocated to individual parcels within the
subdivision. Interest ceases to be capitalized upon the phase's readiness for
sale. As sales take place, the partnership recognizes profits by subtracting
previously allocated costs for each parcel from the individual sales proceeds of
each parcel. Further, interest is not capitalized for phases of the project not
presently undergoing development.
The Bank has classified these loans as an acquisition, development, and
construction arrangement, since the partnership has title to, but little or no
equity in the underlying security and Brilie receives 50% of the profit on the
ultimate sale of the project.
Brilie recognizes profits from these activities under the equity method of
accounting when the collectibility of the sales price is reasonably assured and
the partnership is not obligated to perform significant activities after the
sale. Accordingly, profits on sales which do not meet the criteria for profit
recognition are deferred and credited to operations on the installment basis
until such time as the criteria for profit recognition is met.
All interest income earned by the Bank is deferred. The interest deferred is
realized at the time of the sale of related parcels of the project. In
addition, the Bank capitalizes interest expense related to the average
outstanding investment balance multiplied by the Bank's average cost of funds
rate.
As of June 30, 1996, Brilie's share of the partnership's capital was $107,995,
which represents 50% of the accumulated earnings of the partnership as of that
date less partners' withdrawals. The following summarizes the unaudited
financial condition and results of operations of the joint venture partnership:
BALANCE SHEETS
- --------------
June 30,
-------------------
1996 1995
----------- -----------
(UNAUDITED) (UNAUDITED)
ASSETS
------
Investment in real estate $673,160 $661,743
Other assets 1,526 800
-------- --------
$674,686 $662,543
======== ========
LIABILITIES AND
---------------
PARTNERS' CAPITAL
-----------------
Liabilities
Note payable to Elmira Savings and Loan $389,170 $387,627
Mortgage payable 68,000 68,000
Other liability 1,526 800
-------- --------
458,696 456,427
Partners' capital 215,990 206,116
-------- --------
$674,686 $662,543
======== ========
ES&L Bancorp, Inc.
- --------------------------------------------------------------------------------
27
<PAGE>
Notes to Consolidated Financial Statements
NOTE J: INVESTMENT IN JOINT VENTURE - ACQUISITION, DEVELOPMENT AND
- --------------------------------------------------------------------
CONSTRUCTION ARRANGEMENT, Cont'd
-------------------------
STATEMENTS OF INCOME AND PARTNERS' CAPITAL
- ------------------------------------------
<TABLE>
<CAPTION>
Year ended June 30,
--------------------------------------
1996 1995 1994
----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
----------- ----------- -----------
<S> <C> <C> <C>
Sales $ 311,901 $ 319,499 $ 207,400
Cost of sales 265,042 185,186 156,406
-------- ---------- ----------
Gross profit 46,859 134,313 50,994
Net rental (expense)
income (6,622) (1,157) 274
General and
administrative
expense (7,281) (12,558) (5,316)
-------- ---------- ----------
Net income 32,956 120,598 45,952
Partners' capital at
beginning
of year 206,116 124,828 118,076
Partners' withdrawals 23,082 39,310 39,200
-------- ---------- ----------
Partners' capital at end
of year $215,990 $ 206,116 $ 124,828
======== ========== ==========
</TABLE>
NOTE K: PARENT COMPANY FINANCIAL INFORMATION
- ----------------------------------------------
BALANCE SHEETS
- --------------
June 30,
-----------------------
ASSETS 1996 1995
------ ---------- ----------
Cash and cash equivalents $ 146,667 $ 564,082
Securities available for
sale 48,508 38,635
Investment in subsidiary 8,552,329 6,751,200
Other assets 68,891 5,261
---------- ----------
$8,816,395 $7,359,178
========== ==========
LIABILITIES AND
---------------
SHAREHOLDERS' EQUITY
--------------------
Shareholders' equity:
Common stock $ 5,665 $ 5,503
Additional paid-in
capital 2,580,092 2,465,321
Retained earnings 6,270,032 4,897,730
Net unrealized gain on
securities available
for sale 7,047 1,124
---------- ----------
8,862,836 7,369,678
Less treasury stock 46,441 10,500
---------- ----------
$8,816,395 $7,359,178
========== ==========
ES&L Bancorp, Inc.
- --------------------------------------------------------------------------------
28
<PAGE>
Notes to Consolidated Financial Statements
NOTE K: PARENT COMPANY FINANCIAL INFORMATION, Cont'd
- -----------------------------------------------
STATEMENTS OF INCOME AND RETAINED EARNINGS
- ------------------------------------------
<TABLE>
<CAPTION>
Year ended June 30,
----------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Equity in earnings of subsidiary $ 1,801,129 $ 1,579,440 $ 1,403,868
Income from investments and other 3,091 3,536 791
Management fee income - 56,131 59,398
----------- ----------- -----------
1,804,220 1,639,107 1,464,057
General and administrative expenses 66,099 38,571 42,004
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 1,738,121 1,600,536 1,422,053
Income tax benefit (expense) 15,440 (17,560) (17,560)
----------- ----------- -----------
NET INCOME 1,753,561 1,582,976 1,404,493
Retained earnings at beginning
of year 4,897,730 3,643,073 2,442,180
Dividends paid 381,259 328,319 203,600
----------- ----------- -----------
RETAINED EARNINGS AT END OF YEAR $ 6,270,032 $ 4,897,730 $ 3,643,073
=========== =========== ===========
STATEMENTS OF CASH FLOWS
- ------------------------
Year ended June 30,
----------------------------------------
1996 1995 1994
----------- ----------- -----------
CASH FLOWS - OPERATING ACTIVITIES
- ----------------------------------
Net income $ 1,753,561 $ 1,582,976 $ 1,404,493
Adjustments to reconcile net income
to net
cash (used for) provided from
operating
activities:
Equity in earnings of subsidiary (1,801,129) (1,579,440) (1,403,868)
Gain on sale of securities available
for sale - (800) -
Change in other assets affecting
operations (36,276) 10,704 -
----------- ----------- -----------
NET CASH (USED FOR) PROVIDED FROM
OPERATING ACTIVITIES (83,844) 13,440 625
CASH FLOWS - INVESTING ACTIVITIES
- ----------------------------------
Dividend received from subsidiary - 500,000 -
Purchase of securities available for
sale - - (37,863)
Proceeds from sale of securities
available
for sale - 1,900 -
----------- ----------- -----------
NET CASH PROVIDED FROM (USED FOR)
INVESTING ACTIVITIES - 501,900 (37,863)
CASH FLOWS - FINANCING ACTIVITIES
- ----------------------------------------
Dividends paid (381,259) (328,319) (203,600)
Purchase of treasury stock (35,941) - -
Net proceeds from exercise of stock
options 83,629 17,075 100,527
----------- ----------- -----------
NET CASH (USED FOR) FINANCING
ACTIVITIES (333,571) (311,244) (103,073)
----------- ----------- -----------
<PAGE>
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (417,415) 204,096 (140,311)
Cash and cash equivalents at beginning
of year 564,082 359,986 500,297
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF
YEAR $ 146,667 $ 564,082 $ 359,986
=========== =========== ===========
</TABLE>
ES&L Bancorp, Inc.
- --------------------------------------------------------------------------------
29
<PAGE>
Notes to Consolidated Financial Statements
NOTE L: OFFICE OCCUPANCY AND EQUIPMENT EXPENSE
- ------------------------------------------------
Office occupancy and equipment expense is comprised of the following:
Year ended June 30,
----------------------------
1996 1995 1994
-------- -------- --------
Depreciation $180,336 $ 64,666 $ 97,397
Service bureau 134,893 119,989 95,529
Other 188,330 188,190 197,700
-------- -------- --------
$503,559 $372,845 $390,626
======== ======== ========
NOTE M: REGULATORY CAPITAL
- ---------------------------
The Bank is required to meet minimum capital standards, which have been
established by the Office of Thrift Supervision. The minimum capital standards
generally require the maintenance of regulatory capital sufficient to meet each
of three tests, hereinafter described as the tangible capital requirement, the
core capital requirement and the risk-based capital requirement. The tangible
capital requirement provides for a minimum tangible capital (defined as
shareholders' equity determined in accordance with generally accepted accounting
principles less all intangible assets) ratio equal to 1.5% of adjusted assets.
The core capital requirement provides for a minimum core capital (tangible
capital plus certain intangible assets) to adjusted assets ratio of 3.0%. The
risk-based capital requirement provides for the maintenance of core capital plus
general loss allowances equal to 8.0% of risk-weighted assets. In computing
risk-weighted assets, the Bank multiplies the value of each asset on its balance
sheet by a defined risk-weighting factor, e.g., one-to-four family residential
loans carry a risk-weighted factor of 50%.
Based on management's calculations, the Bank is in full compliance, as of June
30, 1996, with all of the current regulatory capital requirements as follows:
June 30, 1996
--------------------------------
Tangible Core Risk-based
capital capital capital
--------- -------- -----------
[S] [C] [C] [C]
(in thousands)
GAAP capital $12,648 $12,648 $12,648
Investment in joint venture (389) (389) (389)
Net unrealized gain on securities
available for sale (31) (31) (31)
General allowance for loan losses - - 1,153
------- ------- -------
Actual amount 12,228 12,228 13,381
Required amount 2,096 4,191 7,355
------- ------- -------
EXCESS $10,132 $ 8,037 $ 6,026
======= ======= =======
NOTE N: SHAREHOLDERS' EQUITY
- -----------------------------
Capital restrictions
- --------------------
Since the Corporation has no significant source of income other than dividends
from the Bank, the payment of dividends by the Corporation is dependent upon
receipt of dividends from the Bank. Payment of cash dividends by the Bank is
limited by certain federal regulations under which the Bank may not declare or
pay a cash dividend on or repurchase any of its common stock if the effect
thereof would cause its regulatory capital to be reduced below (1) the amount
required for the liquidation account established in connection with the Bank's
conversion to stock form or (2) the regulatory capital requirements imposed by
the OTS. In certain circumstances, earnings appropriated to bad debt reserves
and deducted for federal income tax purposes may not be available to pay cash
dividends without the payment of federal income taxes by the Bank on the amount
of such earnings removed from the reserves for such purposes at the then current
income tax rate (see Note H).
At the time of conversion, the Bank established a liquidation account for the
benefit of Eligible Account Holders who continue to maintain their accounts in
the Bank. The liquidation account was set at an amount equal to the regulatory
capital of the Bank at March 31, 1990. The liquidation account will be reduced
annually to the extent that Eligible Account Holders reduce their eligible
deposits. Subsequent increases will not restore an Eligible Account Holder's
interest in the liquidation account. In the event of a complete liquidation,
each Eligible Account Holder will be entitled to receive a distribution from the
liquidation account in an amount proportionate to the current adjusted eligible
account balance held.
ES&L Bancorp, Inc.
- --------------------------------------------------------------------------------
30
<PAGE>
Notes to Consolidated Financial Statements
NOTE N: SHAREHOLDERS' EQUITY, Cont'd
- -------------------------------
Preferred stock
- ---------------
Shareholders of the Corporation have authorized the issuance of up to 500,000
shares of preferred stock with terms to be established by the Board of
Directors. The serial preferred may rank prior to the common stock as to
dividend rights, liquidation preference, or both, and may have full or limited
voting rights. No shares of this preferred stock have been issued, nor does the
Corporation have any present plan for the issuance or sale of any such shares.
Stock split
- -----------
The Corporation's common stock was split three-for-two on September 1, 1994,
effected in the form of a 50% stock dividend. All stock option data, common and
treasury stock, and earnings and dividend per share amounts in the consolidated
financial statements were restated to give effect to this stock split.
Subsequent event
- ----------------
On July 16, 1996, the Board of Directors of the Corporation authorized a three-
for-two stock split, effected in the form of a 50% stock dividend, of the
Corporation's common stock, payable on August 23, 1996 to shareholders of record
on August 16, 1996. Financial information contained in this report has not been
adjusted to reflect the impact of this common stock split.
NOTE O: DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
- ------------------------------------------------------------------
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Cash and short-term investments
- -------------------------------
The balance sheet carrying amounts for cash and short-term instruments
approximate the estimated fair values of such assets.
Securities (including mortgage-backed securities)
- -------------------------------------------------
Fair values for securities are based on quoted market prices, if available. If
quoted market prices are not available, fair values are based on quoted market
prices of comparable instruments.
Loans receivable
- ----------------
For variable rate loans that reprice frequently and which entail no significant
change in credit risk, fair values are based on the carrying values. The
estimated fair values of certain mortgage loans are based on quoted market
prices of similar loans sold in conjunction with the securitization
transactions, adjusted for differences in loan characteristics. The estimated
fair values of other loans are estimated based on discounted cash flow analyses
using interest rates currently offered for loans with similar terms to borrowers
of similar credit quality.
Deposits
- --------
The fair values estimated for demand deposits (e.g., interest and non-interest
bearing demand deposits, savings, and certain types of money market accounts)
are, by definition, equal to the amount payable on demand at the reporting date
(i.e., their carrying amounts). The carrying amounts of variable rate, fixed-
term money market accounts and certificates of deposit approximate their fair
values at the reporting date. Fair values of fixed rate certificates of deposit
are estimated using a discounted cash flow calculation that applies interest
rates currently being offered to a schedule of aggregated expected monthly time
deposit maturities.
Borrowed funds
- --------------
The fair value of the advances from the Federal Home Loan Bank is estimated
using discounted cash flow analyses based on the Bank's current incremental
borrowing rate for similar borrowing arrangements.
Off-balance-sheet instruments
- -----------------------------
Fair values for off-balance-sheet lending commitments, which are substantially
comprised of variable rate loans, approximate the loan commitment amount (see
Note I).
Accrued interest
- ----------------
The carrying amount of accrued interest approximates its fair value.
ES&L Bancorp, Inc.
- --------------------------------------------------------------------------------
31
<PAGE>
Notes to Consolidated Financial Statements
NOTE O: DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS, Cont'd
- -------------------------------------------------------------------
The estimated fair value of the Corporation's financial instruments are as
follows: (000's)
1996
--------------------
Carrying Estimated
value fair value
-------- ----------
Financial assets:
Cash and short-term investments $ 1,374 $ 1,374
Investment securities (including
mortgage-backed securities) 5,149 5,112
Loans receivable 127,094 129,593
Accrued interest receivable 794 794
Financial liabilities:
Deposits 106,653 107,143
Advances from Federal Home Loan Bank 17,616 17,373
Off-balance-sheet instruments:
Commitments to extend credit 3,170 3,170
Standby letters of credit 436 436
ES&L Bancorp, Inc.
- --------------------------------------------------------------------------------
32
<PAGE>
Market Price and Dividend Information
ES&L Bancorp stock is not listed on a national or regional exchange and there
are minimal trades occurring. While there are no market makers for the stock,
registered brokers can facilitate sales and purchases of ES&L Bancorp shares by
using standard procedures for trading unlisted stocks.
Currently the following brokerage firms have facilitated purchases and sales of
ES&L Bancorp Stock:
Dean Witter Reynolds Smith Barney Shearson
Elmira, New York Elmira, New York
On July 16, 1996, the Corporation's Board of Directors approved a three-for-two
stock split, effected in the form of a 50% stock dividend. As a result, on
August 23, 1996, the Corporation issued 282,227 new shares of its common stock
to stockholders of record as of August 16, 1996. No fractional shares were
issued by the Corporation, rather 211 stockholders were paid $13.33 per full
share in lieu of any fractional shares created by the split. Management of the
Corporation established the $13.33 per share price by adjusting the last known
market price relative to the terms of the stock split.
On September 1, 1994 the Corporation also enacted a three-for-two stock split,
effected in the form of a 50% stock dividend.
Given the minimal trading activity, the Corporation must rely on information
obtained from brokers, investment advisors and investors themselves in
identifying the market price of the common stock. During fiscal 1996, the
trading price of the stock has ranged from $11.125 to $20.00 per share. These
prices have not been adjusted to reflect the effect of the August 1996 three-
for-two stock split.
Since the Corporation has no significant source of income other than dividends
from the Bank, the payment of dividends by the Corporation is dependent upon
receipt of dividends from the Bank. Payment of cash dividends by the Bank is
limited by certain federal regulations under which the Bank may not declare or
pay a cash dividend on or repurchase any of its common stock if the effect
thereof would cause its regulatory capital to be reduced below (1) the amount
required for the liquidation account established in connection with the Bank's
conversion to stock form or (2) the regulatory capital requirements imposed by
the OTS. In certain circumstances, earnings appropriated to bad debt reserves
and deducted for federal income tax purposes may not be available to pay cash
dividends without the payment of federal income taxes by the Bank on the amount
of such earnings removed from the reserves for such purposes at the then current
income tax rate.
Federal regulations impose certain additional limitations on the payment of
dividends and other capital distributions (including stock repurchases and cash
mergers) by Elmira Savings & Loan. Under such regulations, a savings institution
that, immediately prior to, and on a pro forma basis after giving effect to, a
proposed capital distribution, has total capital (as defined by OTS regulation)
that is equal to or greater than the amount of its fully phased-in capital
requirements (a "Tier 1 Institution") is generally permitted without OTS
approval to make capital distributions during a calendar year in the amount of
the greater of (a) 75% of its income for the previous four quarters or (b) up to
100% of its net income to date during the calendar year plus an amount that
would reduce by one-half the amount by which its total capital to assets ratio
exceeded its fully phased-in capital requirement to assets ratio at the
beginning of the calendar year. A savings institution with total capital in
excess of current minimum capital requirements but not in excess of the fully
phased-in requirements (a "Tier 2 Institution") is permitted to make capital
distributions without OTS approval of up to 75% of its net income for the
previous quarters, less dividends already paid for such period. A savings
institution that fails to meet current minimum capital requirements (a "Tier 3
Institution") is prohibited from making any capital distributions without the
prior approval of the OTS. Tier 1 Institutions that have been notified by the
OTS that they are in need of more than normal supervision will be treated as
either a Tier 2 or Tier 3 Institution. At June 30, 1996, ES&L was a Tier 1
Institution.
ES&L Bancorp, Inc. has paid the following per share cash dividends, adjusted to
reflect the effect of the 1994 three-for-two stock split, to its shareholders
during the past three fiscal years:
<TABLE>
<CAPTION>
1996 Fiscal Year 1995 Fiscal Year 1994 Fiscal Year
<S> <C> <C> <C>
8/31/95 $0.17 9/1/94 $0.15 9/1/93 $0.08
11/30/95 $0.17 12/1/94 $0.15 12/1/93 $0.10
2/29/96 $0.17 3/1/95 $0.15 3/1/94 $0.10
5/31/96 $0.17 6/1/95 $0.15 6/1/94 $0.10
----- ----- -----
$0.68 $0.60 $0.38
Dividend Payment Ratio 22.15% 21.28% 14.79%
</TABLE>
The Corporation's Board of Directors intend to periodically review the financial
condition, earnings and capital requirements of the Corporation in an effort to
determine the declaration of future dividend payments.
At June 30, 1996, the Corporation had 563,161 shares of common stock
outstanding. At September 2, 1996, after the previously identified August 1996
stock split, 846,888 shares were outstanding, representing approximately 450
shareholders of record, excluding those shares registered in the "street name"
of brokerage firms and stock depositories.
ES&L Bancorp, Inc.
- --------------------------------------------------------------------------------
33
<PAGE>
DIRECTORS
- --------------------------------------------------------------------------------
Robert E. Butler -
Chairman of the Board
President, Deister & Butler, Inc.
Owner, H. H. Equipment, Inc.
William A. McKenzie -
President and Chief Executive Officer,
Elmira Savings & Loan, F.A.
John F. Cadwallader -
President and Chief Executive Officer,
The Glass Company
Owner, Windshield Installation Network, Inc.
L. Edward Considine -
Professional Engineer,
Hunt Engineers and Architects
Retired General Manager, Elmira Water Board
Dr. Adrian P. Hulsebosch -
Retired Othodontist
Jack H. Mikkelsen -
Retired President,
Zeiser Wilbert Vault, Inc.
Frederick J. Molter -
Professional Engineer,
The Sear Brown Group
Paul Morss -
Retired Insurance Executive,
Swan & Sons Morss Co. Insurance Agency
Gerald F. Schichtel -
President,
Hilliard Corporation
All directors of ES&L Bancorp, Inc. are directors of Elmira Savings and Loan,
F.A.
OFFICERS
- --------------------------------------------------------------------------------
William A. McKenzie Glenn R. Ahart
President and Chief Executive Officer Assistant Vice President
J. Michael Ervin Anne H. Bennett
Senior Vice President and Treasurer Assistant Vice President
Michael J. Wayne Howard M. Fox
Vice President Assistant Vice President
Lynn M. Morris Maryanna S. Atkinson
Vice President Assistant Vice President
James D. Stanton Brenda A. Bement
Vice President Assistant Vice President
Judy A. Peters Larry A. Tressler/1/
Vice President Assistant Treasurer
Michael J. Crimmins Shirley L. Gleockner
Vice President Corporate Secretary
1 - Elected October 25, 1995
All officers of ES&L Bancorp, Inc. are officers of Elmira Savings and Loan, F.A.
ES&L Bancorp, Inc.
- --------------------------------------------------------------------------------
34
<PAGE>
Corporate Information
------------------
Main Office
- -----------
300 West Water Street
Elmira, New York 14901
607-733-5533
Subsidiaries
------------
Brilie Corporation
- ------------------
ES&L Financial Services
300 West Water Street
Elmira, New York 14901
607-733-5533
ES&L Appraisal Services
300 West Water Street
Elmira, New York 14901
607-733-5533
ES&L Mortgage Corporation
- -------------------------
Cayuga Mortgage Company
200 East Buffalo Street
Suite 101B
Ithaca, New York 14850
607-272-3595
Auditors, Agents and Counsel
-----------
Independent Auditors
- --------------------
Mengel, Metzger, Barr & Co. LLP
Suite 210
147 West Gray Street
Elmira, New York 14901
General Counsel
- ---------------
Denton, Keyser, LaBrecque & Moore
150 Lake Street
Elmira, New York 14901
Special Counsel
- ---------------
Housley Kantarian & Bronstein, P.C.
Suite 700
1220 19th Street, NW
Washington, D.C. 20036
Stock Registrar and Transfer Agent
- ----------------------------------
American Stock Transfer & Trust Co.
40 Wall Street
New York, New York 10005
(800) 937-5449
Meeting Information
------------------------------------------------------------
The annual Meeting of Stockholders of ES&L Bancorp, Inc. will be held at
Mandeville Hall, The Clemens Center, Clemens Center Parkway, Elmira, New York,
on Wednesday, October 23, 1996, at 7:00 p.m.
COPIES OF THE CORPORATION'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED
JUNE 30, 1996, AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, MAY BE
OBTAINED AT NO CHARGE TO STOCKHOLDERS BY WRITING TO THE SECRETARY OF THE
CORPORATION, 300 WEST WATER STREET, ELMIRA, NEW YORK 14901.
ES&L Bancorp, Inc.
- --------------------------------------------------------------------------------
35
<PAGE>
ES&L Bancorp, Inc.
- --------------------------------------------------------------------------------
<PAGE>
[GRAPHIC APPEARS HERE]
This Publication was printed with recycled materials.
ES&L Bancorp, Inc.
- --------------------------------------------------------------------------------
<PAGE>
[ES&L BANCORP LETTERHEAD APPEARS HERE]
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Percentage State of
Name Owned Incorporation
- ------------------------------- ----------- -------------
<S> <C> <C>
Elmira Savings & Loan, F.A. 100% United States
Brilie Corporation (a) 100% New York
ES&L Mortgage Corporation (a) 100% New York
- --------------------
</TABLE>
(a) Wholly-owned subsidiary of Elmira Savings & Loan, F.A.
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITORS' REPORT
----------------------------
ES&L Bancorp, Inc.
We consent to the incorporation by reference in the Registration Statement of
ES&L Bancorp, Inc. on Form S-8 of our report dated July 19, 1996 appearing in
this Annual Report on Form 10-K of ES&L Bancorp, Inc. for this fiscal year ended
June 30, 1996.
/s/ Mengel, Merger, Barr & Co., LLP
Elmira, New York
September 26, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 1,355,844
<INT-BEARING-DEPOSITS> 17,919
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,923,459
<INVESTMENTS-CARRYING> 3,225,149
<INVESTMENTS-MARKET> 3,188,201
<LOANS> 121,636,011
<ALLOWANCE> 1,430,781
<TOTAL-ASSETS> 140,138,518
<DEPOSITS> 106,652,829
<SHORT-TERM> 17,615,560
<LIABILITIES-OTHER> 2,957,984
<LONG-TERM> 0
5,665
0
<COMMON> 0
<OTHER-SE> 12,906,480
<TOTAL-LIABILITIES-AND-EQUITY> 140,138,518
<INTEREST-LOAN> 10,855,429
<INTEREST-INVEST> 318,692
<INTEREST-OTHER> 204,882
<INTEREST-TOTAL> 11,379,003
<INTEREST-DEPOSIT> 5,157,450
<INTEREST-EXPENSE> 6,195,480
<INTEREST-INCOME-NET> 5,183,523
<LOAN-LOSSES> 60,000
<SECURITIES-GAINS> (39)
<EXPENSE-OTHER> 3,078,154
<INCOME-PRETAX> 2,846,121
<INCOME-PRE-EXTRAORDINARY> 1,753,561
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,753,561
<EPS-PRIMARY> 3.07
<EPS-DILUTED> 3.07
<YIELD-ACTUAL> 3.87
<LOANS-NON> 222,653
<LOANS-PAST> 80,230
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,423,826
<CHARGE-OFFS> 54,207
<RECOVERIES> 1,162
<ALLOWANCE-CLOSE> 1,430,781
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,430,781
</TABLE>
