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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, 1997
[_] 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)
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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (607) 733-5533
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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__.
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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.
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 ($16.50 per share), management estimates that
the aggregate market value of the voting stock held by non-affiliates of the
registrant at September 2, 1997 was $7,721,109. 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, 1997, there were 843,717 shares outstanding of the
registrant's common stock, of which directors and executive officers and more
than 5% beneficial owners held 375,771 shares.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Annual Report to Stockholders for the Fiscal Year Ended June
30, 1997. (Parts I and II)
2. Portions of Proxy Statement for the 1997 Annual Meeting of
Stockholders. (Part III)
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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, 1997, the Bank had total assets of
$149.6 million, deposits of $111.7 million, net loans receivable of $131.7
million and shareholders' equity of $14.2 million.
The Bank's mortgage banking subsidiary, ES&L Mortgage Corporation, d/b/a
Cayuga Mortgage Company ("Cayuga Mortgage") 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 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:
SPECIAL CASH DIVIDEND. On July 15, 1997, the Corporation declared a $1.00
per share special cash dividend, payable on July 31, 1997 to stockholders of
record as of July 22, 1997.
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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,
-------------------------------------------------------------
1997 1996 1995
--------------------- ------------------ ------------------
Amount % Amount % Amount %
------------ ------- --------- ------- --------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
First Mortgage Permanent Loans:
Conventional 1-4 family...................... $ 74,276 56.39% $ 66,251 54.47% $ 66,751 56.48%
FHA/VA 1-4 family............................ -- -- 16 .01 810 .69
Multi-family................................. 11,554 8.77 12,420 10.21 10,048 8.50
Commercial real estate....................... 28,003 21.26 25,722 21.15 22,496 19.03
Construction
Residential................................ 2,210 1.68 1,912 1.57 2,788 2.36
Commercial................................. 2,510 1.91 2,046 1.68 2,511 2.12
-------- ------ -------- ------ -------- ------
Total first mortgage...................... $118,553 90.01 108,367 89.09 105,404 89.18
Consumer loans:
Home equity line of credit.................. $ 6,049 4.58 6,699 5.51 7,660 6.48
Loans on savings accounts................... 246 .19 214 .18 253 .21
Education loans.............................. 462 .35 471 .39 653 .55
Automobile loans............................. 627 .48 681 .56 620 .52
Second mortgage loans........................ 4,440 3.37 3,847 3.16 3,147 2.66
Other consumer loans......................... 136 .11 136 .11 139 .13
Demand notes................................. 1,188 .90 1,520 1.25 1,078 .91
-------- ------ -------- ------ -------- ------
Total consumer loans...................... $ 13,148 9.98 13,568 11.15 13,550 11.46
Commercial lines of credit..................... $ 1,353 1.03 1,212 1.00 1,096 .93
Commercial non-mortgage........................ 1,807 1.37 1,926 1.58 1,844 1.56
-------- ------ -------- ------ -------- ------
Total..................................... $134,861 -- 125,073 -- 121,894 --
Less:
Loans in process............................. $ (1,790) (1.36) (1,953) (1.60) (2,178) (1.84)
Allowance for loan loss..................... (1,435) (1.09) (1,431) (1.18) (1,424) (1.20)
Deferred loan origination fees and premiums.. 75 .06 (53) (.04) (105) (0.09)
-------- ------ -------- ------ -------- ------
Total.................................... $131,711 100.00% $121,636 100.00% $118,187 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
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The following table presents at June 30, 1997 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,
1998 1997 1997
-------------- ------------- -----------
(In thousands)
<S> <C> <C> <C>
Real estate mortgage....... $ 4,534 $18,955 $ 90,345
Mortgages held for resale.. 4,461 -- --
Real estate construction... 298 222 4,199
Installment................ 2,860 4,675 5,613
Commercial................. 961 1,319 880
------- ------- --------
Total.................. $13,114 $25,171 $101,037
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</TABLE>
The following table apportions the dollar amount of the loans due
subsequent to the year ended June 30, 1997 between those with predetermined
interest rates and those with adjustable interest rates.
<TABLE>
<CAPTION>
Predetermined Rates Adjustable Rates
------------------- ----------------
(In thousands)
<S> <C> <C>
Real estate mortgage....... $ 4,531 $109,303
Mortgages held for resale.. 4,461 --
Real estate construction... 614 4,105
Installment................ 6,637 6,511
Commercial................. -- 3,160
------- --------
Total.................. $16,243 $123,079
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</TABLE>
ONE- TO FOUR-FAMILY MORTGAGE LOANS. At June 30, 1997, the Bank held in its
portfolio $74.1 million of first mortgage loans secured by one- to four-family
residential units, representing 56.23% 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
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is higher, on adjustable-rate mortgage loans. At June 30, 1997, approximately
$72.5 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 1997, the Bank, Cayuga Mortgage and PACE
Funding originated approximately $13.0 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 1997, the Bank and its mortgage banking subsidiary
originated approximately $22.2 million of fixed-rate loans and sold $27.2
million, servicing retained, in the secondary market. At June 30, 1997, the Bank
had forward commitments to sell closed loans totaling approximately $9.1 million
in the secondary mortgage market.
Cayuga Mortgage and PACE Funding also originate fixed rate mortgage loans
for the Bank, which then sells them, servicing retained, in the secondary
market. At June 30, 1997, the Bank had a residential mortgage servicing
portfolio of $129.5 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, 1997 the Bank had $4.7 million outstanding in construction loans. Of
that amount, $2.2 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 if a
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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 $1.3 million of
the $2.2 million total residential construction loans outstanding at June 30,
1997. All construction loans originated by Cayuga Mortgage and PACE Funding 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, 1997 the
Bank held $28.3 million in commercial real estate loans and $11.4 million in
multi-family loans, which represented approximately 21.52% and 8.68% 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 $1.8 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 market
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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, 1997.
<TABLE>
<CAPTION>
Outstanding
Number Principal Amount
of Loans Balance Non Performing
--------- ----------- --------------
<S> <C> <C> <C>
Medical facilities.................. 35 $ 5,622,515 $ --
Retail property..................... 44 5,094,952 3,901
Office buildings.................... 34 3,461,260 --
Restaurant/lounge................... 17 973,117 --
Office and warehouse/storage units.. 17 2,767,296 171,025
Hotel/motel......................... 8 3,798,532 --
Nonprofit/church/school............. 9 654,996 --
Other............................... 46 5,630,455 145,123
--- ----------- --------
Total........................... 210 $28,003,123 $320,049
=== =========== ========
</TABLE>
CONSUMER AND COMMERCIAL BUSINESS LENDING. At June 30, 1997, the Bank's
consumer loan portfolio totalled $13.1 million and its commercial business loans
totalled $3.2 million, representing 9.98% and 2.39% 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, 1997 was equal to $83,585, or approximately
0.64% 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 ($110,063, or approximately
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0.84% of the consumer loan portfolio, at June 30, 1997), 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
lines of credit. These loans amounted to $6.0 million or 4.59% of the Bank's
loan portfolio at June 30, 1997. 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 also originates short term,
fixed rate, second mortgage loans. At June 30, 1997 these consumer mortgages
totaled $4.4 million, or 3.37% of the Bank's loan portfolio.
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 $627,000
outstanding at June 30, 1997), and had approximately $1.2 million of secured and
unsecured time and demand notes outstanding at June 30, 1997.
The Bank had approximately $1.8 million of commercial business loans
outstanding at June 30, 1997 which were not collateralized by real estate.
Approximately 38.02% 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, 1997, lines totalling $2.6
million had been approved with loan balances outstanding of approximately $1.4
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 borrower's ability
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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 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 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, 1997, greater than 99% 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, 1997, the Bank was servicing
residential loans for others in the amount of $129.5 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 Cayuga Mortgage 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 1997, Cayuga Mortgage and PACE Funding originated $22.6 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, 1997 (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,
---------------------------------------
1997 1996 1995
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Loans originated:
Conventional real estate loans:
Construction loans........................ $ 1,477 $ 2,871 $ 2,802
Loans on existing property................ 35,787 25,482 26,331
Loans refinanced.......................... 7,726 17,902 4,603
Insured and guaranteed loans................ 3,194 1,852 1,273
Consumer.................................... 2,080 2,277 2,060
Commercial loans............................ 470 1,728 277
Other loans................................. 3,397 3,556 3,471
-------- -------- --------
Total loans originated.................... $ 54,131 $ 55,668 $ 40,817
Loans sold:
Whole Loans................................. (27,682) (30,216) (11,833)
Participation loans......................... (375) -- --
-------- -------- --------
Total loans sold.......................... (28,057) (30,216) (11,833)
Loans held for sale........................... (4,461) ( 5,458) (3,796)
Principal repayments.......................... (13,060) (12,571) (10,501)
Loans transferred to foreclosed real estate.. (173) (214) (91)
Increase (decrease) in other items, net...... 1,695 (3,760) (2,847)
-------- -------- --------
Net increase (decrease)..................... $ 10,075 $ 3,449 $ 11,749
======== ======== ========
</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, 1997, Elmira Savings & Loan was servicing approximately
$129.5 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, 1997, the Bank's outstanding
commitments totalled approximately $5.2 million.
The Bank generally obtains forward commitments on a loan by loan or pooled
mortgage backed security 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.
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
10
<PAGE>
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, 1997, 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, 1997, 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.
At June 30, 1997, the Bank had one loan totalling $17,116, which was
classified as a troubled debt restructured loan in accordance with SFAS 118. The
loan, a home equity line of credit, was classified as a result of a Chapter 13
Bankruptcy filing. For the other years presented, the Bank had no restructured
loans as defined by SFAS 118.
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,
---------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Loans accounted for on a non-accrual basis: (1)
Real Estate:
Residential................................... $250,078 $176,550 $194,587
Commercial and Multi-Family................... 61,132 -- 442,351
Consumer/Home Equity.......................... 29,193 46,103 81,324
Consumer........................................ -- -- --
Other........................................... -- -- --
-------- -------- --------
Total............................................. $340,403 $222,653 $718,262
======== ======== ========
Accruing loans which are contractually past due
90 days or more:
Real Estate:
Residential................................... $ 62,898 $ 70,368 $ 90,766
Commercial and Multi-Family................... 316,148 -- 185,114
Consumer/Home Equity.......................... -- -- --
Education....................................... -- -- --
Consumer........................................ -- 9,862 --
Other........................................... -- -- --
-------- -------- --------
Total....................................... $379,046 $ 80,230 $275,880
======== ======== ========
Troubled debt restructurings...................... $ 17,116 $ -- $ --
======== ======== ========
Total of nonaccrual and 90 days past
due loans and troubled debt restructurings...... $736,565 $302,883 $994,142
======== ======== ========
Percentage of total loans......................... .55% .24% .79%
======== ======== ========
Other non-performing assets (2)................... $131,000 $ 90,815 $149,961
======== ======== ========
</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, 1997, gross interest income of $65,105 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 $36,498.
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,
---------------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Balance at beginning of period...................... $1,430,781 $1,423,826 $1,268,611
Loans charged-off:
Real Estate -- mortgage:
Residential...................................... 44,466 260 2,037
Commercial....................................... -- 48,398 105
Commercial business................................ -- -- --
Consumer........................................... -- 5,549 --
---------- ---------- ----------
Total charge-offs................................... $ 44,466 $ 54,207 $ 2,142
---------- ---------- ----------
Recoveries:
Real Estate--Mortgage:
Residential..................................... $ 8,140 $ -- $ 4,608
Commercial...................................... 292 412 --
Commercial business............................... -- -- 2,149
Consumer.......................................... 752 750 600
---------- ---------- ----------
Total recoveries.................................... $ 9,184 $ 1,162 $ 7,357
---------- ---------- ----------
Net loans charged-off............................... $ (35,282) $ 53,045 $ (5,215)
Provision for possible loan losses.................. 40,000 60,000 150,000
Allocation to specific reserve...................... (33,000)
General Allowance for Loan Losses................... 1,402,499 1,430,781 1,423,826
Specific Allowance for Loan Losses.................. 33,000 -- --
---------- ---------- ----------
Total Allowance.................................. $1,435,499 $1,430,781 $1,423,826
========== ========== ==========
Ratio of net charge-offs to average
loans outstanding during the period.............. .03% --% --%
========== ========== ==========
</TABLE>
For a discussion of the Bank's provision for loan losses in fiscal year
1997, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Comparison of Operating Results for the Years Ended
June 30, 1997 and 1996 -- 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,
---------------------------------------------------------------------------------------
1997 1996 1995
----------------------------- ---------------------------- --------------------------
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......................... $ 310,754 21.64% $ 273,197 55.80% $ 102,354 64.2%
Commercial.......................... 671,293 46.76 515,270 32.80 315,072 24.4
Commercial business................. 34,000 2.36 37,000 1.60 9,000 1.6
Consumer............................ 101,585 7.07 81,369 9.80 39,604 9.8
Unallocated......................... 317,867 22.17 523,945 N/A 957,796 N/A
---------- ------ ---------- ------ ---------- ------
Total allowance for loan losses $1,435,499 100.00% $1,430,781 100.00% $1,423,826 100.00%
========== ====== ========== ====== ========== ======
</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, 1997, the Bank had $1,386,112 of assets classified as
substandard and no assets classified as doubtful or as loss.
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, 1997, the market value of the Bank's investment
securities portfolio was approximately $5.4 million.
<TABLE>
<CAPTION>
At June 30,
--------------------------
1997 1996 1995
------ ------ ------
(In thousands)
<S> <C> <C> <C>
Investment securities:
U.S. Government and agency securities.... $3,991 $2,988 $2,902
Corporate debt securities................. 32 42 1,075
Corporate Stock........................... 66 49 39
Bank certificates of deposit.............. -- -- 330
------ ------ ------
Total investment securities............. $4,089 $3,079 $4,346
Federal funds sold and overnight deposits.. -- -- 97
------ ------ ------
Total investment securities, federal
funds sold and overnight deposits.... 4,089 3,079 4,443
Federal Home Loan Bank of New York stock... 1,313 1,104 1,104
------ ------ ------
Total investments....................... $5,402 $4,183 $5,547
====== ====== ======
</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, 1997, the market value of investment securities "Held to
Maturity" was approximately $13,600 higher than the carrying value while the
"Available for Sale" investment was approximately $29,400 in excess of the cost.
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, 1997.
<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>
U.S. Government and
agency obligations............... $ -- -- % $ 3,991 6.89% $ -- -- % $ -- -- %
Corporate debt securities.......... -- -- -- -- -- -- 32 7.20
Corporate Stock.................... -- -- -- -- -- -- 66 2.60
-------- -------- ---------- --------
Total............................. $ -- -- $3,991 -- $ -- -- $ 98 4.09
======== ======== ========== ========
<CAPTION>
Total Investment Portfolio
---------------------------------
Carrying Market Average
Value Value Yield
-------- ------ --------
<S> <C> <C> <C>
U.S. Government and
agency obligations............... $3,991 $4,004 6.89%
Corporate debt securities......... 32 32 7.20
Corporate Stock.................... 66 66 2.60
------ ------
Total............................. $4,089 $4,102 6.82
====== ======
</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.
In November 1996, the Bank opened a "cashless" deposit office in Ithaca,
New York. The office is located within a suite of offices which also houses its
mortgage banking subsidiary, ES&L Mortgage Corporation, d/b/a Cayuga Mortgage
Company. The primary goal of the office is to open transaction and certificate
of deposit accounts. All transactions must be in the form of a check, although
the Bank installed an ATM machine in the main lobby of the office building
complex.
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 two offices, it has been unable to attract a large
number of transaction accounts.
Certificates of deposit with balances in excess of $100,000 amounted to
14.01% of deposits at June 30, 1997. 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
(Decrease)
Balance Balance from June 30, Balance %
at June 30, % at June 30, % 1996 to June at June 30, Deposits
1997 Deposits 1996 Deposits 30, 1997 1995
------------ -------- ------------ -------- ----------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Non-interest bearing
savings account................... $ 407,841 .36% $ 1,224,899 1.15% (817,058) $ 1,139,158 1.13%
NOW checking account............... 4,443,572 3.98 4,010,094 3.76 433,478 2,906,433 2.88
Jumbo certificates................. 15,651,466 14.01 13,940,224 13.07 1,711,242 12,691,834 12.56
Super NOW checking accounts........ 2,900,320 2.60 1,507,242 1.41 1,393,078 1,278,279 1.26
Passbook and statement
savings........................... 14,183,722 12.69 15,552,151 14.58 (1,368,429) 16,179,373 16.02
Money market deposit
accounts.......................... 5,232,229 4.68 5,727,747 5.37 (495,518) 5,417,514 5.36
Six month money market
certificates..................... 5,195,663 4.65 4,811,089 4.51 384,574 4,928,016 4.88
30 and 48 month
certificates...................... 4,126,996 3.69 4,281,412 4.02 (154,416) 5,158,721 5.11
IRA certificates, excluding
jumbo certificates............... 4,515,806 4.04 4,211,301 3.95 304,505 4,158,551 4.12
Other certificates................. 55,090,903 49.30 51,386,670 48.18 3,704,233 47,156,643 46.68
------------ ------ ------------ ------ ----------- ------------ ------
Total.......................... $111,748,518 100.00% $106,652,829 100.00% $ 5,095,689 $101,014,522 100.00%
============ ====== ============ ====== =========== ============ ======
<CAPTION>
Increase
(Decrease)
from June 30,
1995 to June
30, 1996
------------
<S> <C>
Non-interest bearing
savings account................... $ 85,741
NOW checking account............... 1,103,661
Jumbo certificates................. 1,248,390
Super NOW checking accounts........ 228,963
Passbook and statement
savings........................... (627,222)
Money market deposit
accounts.......................... 310,233
Six month money market
certificates..................... (116,927)
30 and 48 month
certificates...................... (877,309)
IRA certificates, excluding
jumbo certificates............... 52,750
Other certificates................. 4,230,027
----------
Total.......................... $5,638,307
==========
</TABLE>
<PAGE>
Deposits in the Bank as of June 30, 1997 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
- -------- -------- -------- -------- ---------- -------
<S> <C> <C> <C> <C> <C>
Demand Deposits
---------------
- -- % On Demand Non-Interest Bearing Savings Accounts $ 1 $ 408 .36%
%
- -- On Demand NOW Accounts 10 4,444 3.98
2.96 On Demand Passbook and Statement Savings Accounts 5 13,953 12.48
3.11 On Demand Money Market Accounts 2,500 5,232 4.68
1.74 On Demand Super NOW Accounts 2,500 2,900 2.60
2.96 On Demand Holiday Club Accounts 1 231 .21
Certificates of Deposit
-----------------------
3.68 30 Days 30 Day Certificate, Fixed-Rate 20,000 299 .27
5.01 91 Days 91 Day Certificate, Fixed-Rate 2,500 3,248 2.91
5.10 182 Days 6 Month Certificate, Fixed-Rate 2,500 5,247 4.69
5.21 8 Months 8 Month Certificate, Fixed-Rate 500 3,109 2.78
5.16 9 Months 9 Month Certificate, Fixed-Rate 5,000 534 .48
5.82 10 Months 10 Month Certificate, Fixed-Rate 500 1,768 1.58
5.95 11 Months 11 Month Certificate, Fixed Rate 2500 6,096 5.45
5.35 12 Months 1 Year Certificate, Fixed-Rate 500 3,329 2.98
5.65 14 Months 14 Month Certificate, Fixed-Rate 2,500 28,113 25.16
5.24 18 Months 18 Month Certificate, Fixed-Rate 500 869 .78
5.70 24 Months 24 Month Certificate, Fixed-Rate 500 8,102 7.25
5.42 100 Weeks 100 Week Certificate, Fixed-Rate 5,000 312 .28
5.92 30 Months 30 Month Certificate, Fixed-Rate 500 1,250 1.12
6.04 36 Months 36 Month Certificate, Fixed-Rate 2,500 3,755 3.36
5.80 48 Months 4 Year Certificate, Fixed-Rate 500 3,211 2.87
6.07 60 Months 5 Year Certificate, Fixed-Rate 500 13,585 12.16
5.35 12 Months 1 Year Mini Jumbo Certificate, Fixed-Rate 20,000 1,747 1.56
5.37 18 Months 18 Month Certificate, Variable-Rate 10 7 .01
---------- ----------
$ 111,749 100.00%
========== ==========
</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,
1997.
<TABLE>
<CAPTION>
Maturity Period Amount
--------------- --------------
(In thousands)
<S> <C>
Three months or less.............................. $ 5,709
Three through six months.......................... 1,423
Six through twelve months......................... 3,532
Over twelve months................................ 4,987
---------
Total........................................ $ 15,651
=========
</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,
---------------------------------------------------------------------------------
1997 1996 1995
------------------------ ----------------------- -----------------------
Demand Time Demand Time Demand Time
Deposits Deposits Deposits Deposits Deposits Deposits
-------- -------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Average Balance.............. $ 27,273 $ 82,040 $ 27,854 $ 78,963 $ 29,358 $ 70,315
Average Rate................. 2.63% 5.42% 2.59% 5.62% 2.79% 5.21%
</TABLE>
The following table sets forth the Bank's deposit activities for the
periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------
1997 1996 1995
------ ------ -------
(In thousands)
<S> <C> <C> <C>
Deposits...................................................... $ 140,913 $ 137,013 $ 142,340
Withdrawals................................................... 140,920 136,505 132,618
---------- ----------- -----------
Net increase (decrease) before interest credited.............. (7) 508 9,722
Interest credited............................................. 5,103 5,130 4,436
---------- ----------- -----------
Net increase (decrease) in deposits........................... $ 5,096 $ 5,638 $ 14,158
========== =========== ===========
</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, 1997, Elmira Savings & Loan had advances totaling $20.6 million from
the FHLB of New York.
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
20
<PAGE>
(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, 1997, 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,
----------------------
1997 1996
------- -------
<S> <C> <C>
Weighted average rate....................... 6.47% 5.65%
</TABLE>
<TABLE>
<CAPTION>
During the
Year Ended June 30,
---------------------
1997 1996
-------- --------
(In thousands)
<S> <C> <C>
Maximum amount outstanding at any
month end.................................. $ 22,000 $ 15,400
Approximate average amount.................. $ 18,208 $ 13,208
Approximate weighted average rate paid (1).. 6.01% 5.79%
</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,
-----------------------------------------------------------------------------------
1997 vs. 1996 1996 vs. 1995
-----------------------------------------------------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Due to
------------------------------------- --------------------------------
Volume Rate Net Volume Rate Net
------ ----- ------- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C>
(In thousands)
Interest income:
Loan portfolio........................... $ 644,680 $ (38,481) $ 606,199 $ 632,378 $ 706,768 $ 1,339,146
Investment securities.................... 10,642 10,141 20,783 957 2,074 3,031
Mortgage-backed
securities............................. (37,940) (19,458) (57,398) (38,852) 29,147 (9,705)
Interest-earning deposits
with other banks....................... (7,344) 3,746 (3,598) (412) (5,211) (5,623)
---------- --------- ---------- --------- --------- -----------
Total interest earning assets......... 610,038 (44,052) 565,986 594,071 732,778 1,326,849
---------- --------- ---------- --------- --------- -----------
Interest expense:
Demand deposits.......................... (15,190) 12,307 (2,883) (40,656) (55,808) (96,464)
Time deposits............................ 169,681 (155,964) 13,717 472,128 300,043 772,171
Borrowings and advances.................. 210,150 (11,719) 198,431 (36,156) 81,318 45,162
---------- --------- ---------- --------- --------- -----------
Total interest-bearing
liabilities.......................... 364,641 (155,376) 209,265 395,316 325,553 720,869
---------- --------- ---------- --------- --------- -----------
Increase (decrease) in net
interest income.......................... $ 245,398 $ 111,323 $ 356,721 $ 198,755 $ 407,225 $ 605,980
========== ========= ========== ========= ========= ===========
<CAPTION>
Year Ended June 30,
-------------------------------------
1995 vs. 1994
-------------------------------------
Increase (Decrease)
Due to
-------------------------------------
Volume Rate Net
------ ---- ------
<S> <C> <C> <C>
Interest income:
Loan portfolio........................... $ 716,901 $ 790,365 $1,507,266
Investment securities.................... 81,940 (23,654) 58,286
Mortgage-backed
securities............................. (46,661) 39,263 (7,398)
Interest-earning deposits
with other banks....................... (50,725) 9,605 (41,120)
---------- --------- ----------
Total interest earning assets......... 701,455 815,579 1,517,034
---------- --------- ----------
Interest expense:
Demand deposits.......................... (34,902) 80,298 45,396
Time deposits............................ 623,757 243,637 867,394
Borrowings and advances.................. (97,232) 218,041 120,809
---------- --------- ----------
Total interest-bearing
liabilities.......................... 491,623 541,795 1,033,599
---------- --------- ----------
Increase (decrease) in net
interest income.......................... $ 209,832 $ 273,604 $ 483,435
========== ========= ==========
</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,
------------------------------------------------------------------------
1997 1996
----------------------------------- -----------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
-------- -------- -------- ------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Total loan portfolio (1)..................... $133,325,929 $11,461,628 8.60% $125,828,250 $10,855,429 8.63%
Investment securities, including
FHLB stock................................... 5,289,207 339,475 6.42 5,120,897 318,692 6.22
Mortgage-backed securities..................... 1,894,287 132,019 6.97 2,416,603 189,417 7.84
Interest-Earning Deposits...................... 284,727 11,867 4.17 479,325 15,465 3.23
------------ ----------- ------ ------------ ----------- ------
Total interest-earning assets................. 140,794,150 11,944,989 8.48 133,845,075 11,379,003 8.50
Non-interest earning assets................... 4,716,671 4,226,208
------------ ------------
Total assets.................................. $145,510,821 $138,071,283
============ ============
Interest-bearing liabilities:
Demand deposits................................ $ 27,272,996 $ 718,619 2.63 $ 27,853,918 721,502 2.59
Time deposits.................................. 82,039,648 4,449,665 5.42 78,962,880 4,435,948 5.62
------------ ----------- ------ ------------ ----------- ------
Total deposits, including escrows............ 109,312,644 5,168,284 4.73 106,816,798 5,157,450 4.83
Borrowings..................................... 22,034,197 1,236,462 5.61 18,291,440 1,038,030 5.67
------------ ----------- ------ ------------ ----------- ------
Total interest-bearing liabilities........... 131,346,841 6,404,745 4.88 125,108,238 6,195,480 4.95
Non-interest-bearing liabilities................ 1,261,612 1,223,028
------------ ------------
Total liabilities............................ 132,608,453 126,331,266
Retained earnings............................... 12,902,368 11,740,017
------------ ------------
Total liabilities and retained
earnings................................... $145,510,821 $138,071,283
============ ============
Net interest income............................. $ 5,540,244 $ 5,183,523
=========== ===========
Interest rate spread............................ 3.61% 3.55%
====== ======
Net yield on interest-earning assets............ 3.93% 3.88%
====== ======
Ratio of average interest-earning assets to
average interest-bearing liabilities........ 107.19% 106.98%
====== ======
(1) Average balances include non-accrual loans.
<CAPTION>
-------------------------------------------
1995
-------------------------------------------
Average
Average Yield/
Balance Interest Cost
------- -------- ------
<S> <C> <C> <C>
Interest-earning assets:
Total loan portfolio (1)................... $118,229,410 $ 9,516,283 8.05%
Investment securities, including
FHLB stock................................. 5,105,455 315,661 6.18
Mortgage-backed securities.................. 2,946,677 199,122 6.76
Interest-Earning Deposits................... 489,068 21,088 4.31
------------ ----------- -------
Total interest-earning assets.............. 126,770,610 10,052,154 7.93
Non-interest earning assets.................. 3,108,593
------------
Total assets............................... $129,879,203
============
Interest-bearing liabilities:
Demand deposits.............................. $ 29,357,665 817,966 2.79
Time deposits................................ 70,315,088 3,663,777 5.21
------------ ----------- -------
Total deposits, including escrows.......... 99,672,753 4,481,743 4.50
Borrowings................................... 18,965,258 992,868 5.24
------------ ----------- -------
Total interest-bearing liabilities......... 118,638,011 5,474,611 4.61
Non-interest-bearing liabilities.............. 818,800
------------
Total liabilities.......................... 119,456,811
Retained earnings............................. 10,422,392
------------
Total liabilities and retained
earnings.................................. $129,879,203
============
Net interest income........................... $ 4,577,543
===========
Interest rate spread.......................... 3.31%
=======
Net yield on interest-earning assets.......... 3.61%
=======
Ratio of average interest-earning assets to
average interest-bearing liabilities...... 106.85%
=======
</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, 1997, 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, 1997, Elmira
Savings & Loan had $265,100 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 $62,800 during
fiscal year 1997. 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. During the 1997 fiscal year, this company recorded a loss of
approximately $2,000 and was no longer active at June 30, 1997.
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. 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, 1997, the Bank had loaned approximately
$561,000 to the partnership. Brilie Corporation earned $29,700 from this
partnership during the fiscal year ended June 30, 1997.
In December 1990, the Bank formed Cayuga Mortgage 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. PACE Funding was formed during September 1995 through a
mortgage banking partnership between Cayuga Mortgage and Audrey Edelman &
Associates Real Estate. During the fiscal year ended June 30, 1997, Cayuga
Mortgage and PACE Funding originated approximately $23.5 million of mortgages,
the majority of which were originated for the Bank for sale in the secondary
market. The Bank's aggregate investment in Cayuga Mortgage was $265,000 at June
30, 1997.
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, 1997, Elmira Savings & Loan and its subsidiaries had 39
full-time and 4 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 1997 Position
---- ---- --------
<S> <C> <C>
William A. McKenzie 46 President and Chief Executive Officer
J. Michael Ervin 48 Senior Vice President and Treasurer
Michael J. Wayne 36 Vice President
Lynn M. Morris 45 Vice President
James D. Stanton 50 Vice President
Judy A. Peters 39 Vice President
Michael J. Crimmins 45 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, America's Community Bankers
and Community Bankers Association of New York State. He has also served as
Chairman of the following organizations: Chemung County Chamber of Commerce,
Southern
25
<PAGE>
Tier Economic Growth and the Chemung County United Way Fund Drive. Mr. McKenzie
has been employed at the Bank since 1983.
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 current Treasurer of the Arctic League of Chemung County; Board member,
current Treasurer and incoming President of Woodbrook, Inc. and Board member,
Assistant Treasurer and Chairman of the Audit Committee of Southern Tier
Economic Growth. He also is a past Director 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 and served as Team Leader in the Chamber of
Commerce 1997 Membership Drive. Ms. Morris is a member of 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 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 and the 1997 National Kidney Foundation
Fund 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
26
<PAGE>
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.
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, 1997, of $1,313,100. 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,
1997, Elmira Savings & Loan had advances of $20.6 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 1997 were 5.37% and 2.20%, 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. A savings institution that does not meet the QTL Test must either
convert to a bank charter or comply with the following restrictions on its
operations: (i) the institution may not engage in any new activity or make any
new investment, directly or indirectly, unless such activity or investment is
permissible for both a national bank and a savings institution; (ii) the
branching powers of the institution are restricted to those of a national bank
located in the institution's home state; (iii) the institution shall not be
eligible to obtain any advances from its Federal Home Loan Bank; and (iv)
payment of dividends by the institution shall be subject to the rules regarding
payment of dividends by a national bank. In addition, any company that controls
a savings institution that fails to qualify as a QTL will be required to
register as and be deemed a bank holding company subject to all of the
provisions of the Bank Holding Company Act of 1956 and other statutes applicable
to bank holding companies. Upon the expiration of three years from the date the
institution ceases to be a QTL, it must cease any activity, and not retain any
investment not permissible for both a national bank and a savings institution
and immediately repay any outstanding Federal Home Loan Bank advances (subject
to safety and soundness considerations).
To qualify as a QTL, a savings institution must either qualify as a "domestic
building and loan association" under the Internal Revenue Code or maintain at
least 65% of its "portfolio" assets in Qualified Thrift Investments. Portfolio
assets are defined as total assets less intangibles, property used by a savings
institution in its business and liquidity investments in an amount not exceeding
20% of assets. All of the following may be included as Qualified Thrift
Investments: investments in residential mortgages, home equity loans, loans made
for educational purposes, small business loans, credit card loans and shares of
stock issued by a Federal Home Loan Bank. Subject to a 20% of portfolio
27
<PAGE>
assets limit, savings institutions are also able to treat the following as
Qualified Thrift Investments: (i) 50% of the dollar amount of residential
mortgage loans subject to sale under certain conditions, (ii) investments, both
debt and equity, in the capital stock or obligations of and any other security
issued by a service corporation or operating subsidiary, provided that such
subsidiary derives at least 80% of its annual gross revenues from activities
directly related to purchasing, refinancing, constructing, improving or
repairing domestic residential housing or manufactured housing, (iii) 200% of
their investments in loans to finance "starter homes" and loans for
construction, development or improvement of housing and community service
facilities or for financing small businesses in "credit-needy" areas, (iv) loans
for the purchase, construction, development or improvement of community service
facilities, and (v) loans for personal, family, household or educational
purposes, provided that the dollar amount treated as Qualified Thrift
Investments may not exceed 10% of the savings institution's portfolio assets.
A savings institution must maintain its status as a QTL on a monthly basis
in nine out of every 12 months. A savings institution that fails to maintain QTL
status will be permitted to requalify once, and if it fails the QTL Test a
second time, it will become immediately subject to all penalties as if all time
limits on such penalties had expired. At June 30, 1997, approximately 82.7% of
the Bank's "portfolio" 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 association's capital. The Director of the
OTS may, however, permit savings associations to exceed the 400% of capital
limit in certain circumstances.
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, including the loan loss allowance of the Bank. As of June 30, 1997,
the Bank was permitted to lend approximately $2.0 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, 1997, the largest amount outstanding to
any one borrower of the Bank was $1.8 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 CAMELS 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."
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 an exception for
qualifying supervisory goodwill and is reduced by the amount of all the savings
association's intangible assets with only a limited exception for purchased
mortgage servicing rights. 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, 1997, the Bank had $676,001 of investments in or extensions of
credit to a subsidiary engaged in activities not permitted to national banks.
28
<PAGE>
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 unconsolidated
includable subsidiaries in which the savings association holds a minority
interest. Adjusted total assets are reduced by the amount of assets that have
been deducted from capital, the portion of savings association's investments in
unconsolidated includable subsidiaries, and, for purpose of the core capital
requirement, qualifying supervisory goodwill. At June 30, 1997, the Bank's
adjusted total assets for the purposes of the core and tangible capital
requirements were approximately $149.0 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 from core and tangible capital. As of June 30, 1997, the Bank had no
high ratio land or non-residential construction loans and no equity investments
for which OTS regulations require a deduction 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, 1997.
<TABLE>
<CAPTION>
At June 30, 1997
---------------------------
Percent
of
Amount Assets (1)
------ ----------
(Dollars in thousands)
<S> <C> <C>
Tangible Capital................. $13,140 8.78%
Tangible Capital Requirement..... 2,245 1.50
------- -----
Excess........................... $10,895 7.28%
======= =====
Tier 1/Core Capital.............. 13,140 8.78%
Tier 1/Core Capital Requirement.. 4,489 3.00
------- -----
Excess........................... $ 8,651 5.78%
======= =====
Risk-Based Capital............... 14,377 14.55%
Risk-Based Capital Requirement... 7,907 8.00
------- -----
Excess........................... $ 6,470 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.
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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. Management does not believe the
implementation of the interest rate risk requirement will have a material effect
on the Bank.
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 rule and believes
that it will not be required to increase its total capital as a result of the
rule.
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. Such
circumstances would include a high degree of exposure of interest rate risk,
prepayment risk, credit risk and concentration of credit risk and certain risks
arising from non-traditional activities. The Director 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.
PROMPT CORRECTIVE REGULATORY ACTION. Under the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"), the federal banking regulators,
including the OTS, are required to take prompt corrective action if an insured
depository institution fails to satisfy certain minimum capital requirements.
All institutions, regardless of their capital levels, are restricted from making
any capital distribution or paying any management fees if the institution would
thereafter fail to satisfy the minimum levels for any of its capital
requirements. An institution that fails to meet the minimum level for any
relevant capital measure (an "undercapitalized institution") may be: (i) subject
to increased monitoring by the appropriate federal banking regulator; (ii)
required to submit an acceptable capital restoration plan within 45 days; (iii)
subject to asset growth limits; and (iv) required to obtain prior regulatory
approval for acquisitions, branching and new lines of businesses. The capital
restoration plan must include a guarantee by the institution's holding company
that the institution will comply with the plan until it has been adequately
capitalized on average for four consecutive quarters, under which the holding
company would be liable up to the lesser of 5% of the institution's total assets
or the amount necessary to bring the institution into capital compliance as of
the date it failed to comply with its capital restoration plan. A
"significantly undercapitalized" institution, as well as any undercapitalized
institution that did not submit an acceptable capital restoration plan, may be
subject to regulatory demands for recapitalization, broader application of
restrictions on transactions with affiliates, limitations on interest rates paid
on deposits, asset growth and other activities, possible replacement of
directors and officers, and restrictions on capital distributions by any bank
holding company controlling the institution. Any company controlling the
institution could also be required to divest the institution or the institution
could be required to divest subsidiaries. The senior executive officers of a
significantly
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<PAGE>
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.
Under regulations jointly adopted by the federal banking regulators,
including the OTS, a depository institution's capital adequacy for purposes of
the prompt corrective action rules is determined 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% or greater; and (iii) a leverage ratio of 5% 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% or greater; (ii) a Tier 1 capital risk-based ratio of 4% or
greater; and (iii) a leverage ratio of 4% or greater (or 3% or greater if the
savings association has a composite 1 CAMELS rating). An "undercapitalized
institution" is a savings association that has (i) a total risk-based capital
ratio less than 8%; or (ii) a Tier 1 risk-based capital ratio of less than 4%;
or (iii) a leverage ratio of less than 4% (or 3% if the association has a
composite 1 CAMELS rating). A "significantly undercapitalized" institution is
defined as a savings association that has: (i) a total risk-based capital ratio
of less than 6%; or (ii) a Tier 1 risk-based capital ratio of less than 3%; or
(iii) a leverage ratio of less than 3%. A "critically undercapitalized" savings
association is defined as a savings association that has a ratio of "tangible
equity" to total assets of less than 2%. Tangible equity is defined as core
capital plus cumulative perpetual preferred stock (and related surplus) less all
intangibles other than qualifying supervisory goodwill and certain purchased
mortgage servicing rights. 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 (but may not
reclassify a significantly undercapitalized association as critically
undercapitalized) 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
FDIC through the SAIF. Under the Federal Deposit Insurance Act, the FDIC is
required to set semi-annual assessments for SAIF-insured institutions at a level
necessary to maintain 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.
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
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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.
Over the past years, institutions with SAIF-assessable deposits, like the
Bank, were required to pay higher deposit insurance premiums than institutions
with deposits insured by the Bank Insurance Fund ("BIF") administered by the
FDIC. In order to recapitalize the SAIF and address the premium disparity, in
November 1996 the FDIC imposed a one-time special assessment on institutions
with SAIF-assessable deposits based on the amount determined by the FDIC to be
necessary to increase the reserve levels of the SAIF to the designated reserve
ratio of 1.25% of insured deposits. Institutions were assessed at the rate of
65.7 basis points based on the amount of their SAIF-assessable deposits as of
March 31, 1995. As a result of the special assessment the Bank incurred a pre-
tax expense of $657,000 during the quarter ended September 30, 1996.
The special assessment recapitalized the SAIF, and as a result, the FDIC
lowered the SAIF deposit insurance assessment rates through the end of 1997 to
zero for well capitalized institutions with the highest supervisory ratings and
0.31% of insured deposits for institutions in the highest risk-based premium
category. Since the BIF is above its designated reserve ratio of 1.25% of
insured deposits, "well-capitalized" institutions in Subgroup A, numbering 95%
of BIF-insured institutions, pay no federal deposit insurance premiums, with the
remaining 5% of institutions paying a graduated range of rates up to 0.27% of
insured deposits for the highest risk-based premium category. Until December
31, 1999, SAIF-insured institutions will be required to pay assessments to the
FDIC at the rate of 6.5 basis points to help fund interest payments on certain
bonds issued by the Financing Corporation ("FICO") an agency of the federal
government established to finance takeovers of insolvent thrifts. During this
period, BIF members will be assessed for these obligations at the rate of 1.3
basis points. After December 31, 1999, both BIF and SAIF members will be
assessed at the same rate for FICO payments, or sooner if the two funds are
merged.
Since the SAIF now meets its designated reserve ratio as a result of the
special assessment, SAIF members are now permitted to convert to the status of
members of the BIF and may merge with or transfer assets to a BIF member.
Although the Bank would qualify for insurance of deposits of the BIF,
substantial entrance and exit fees apply to conversions from SAIF to BIF
insurance and such fees may make a SAIF to BIF conversion prohibitively
expensive. In the past, the substantial disparity existing between deposit
insurance premiums paid by BIF and SAIF members gave BIF-insured institutions a
competitive advantage over SAIF-insured institutions like the Bank. The
reduction of the SAIF deposit insurance premiums effectively eliminated this
disparity and could have the effect of increasing the net income of the Bank and
restoring the competitive equality between BIF-insured and SAIF-insured
institutions.
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 $49.3 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, 1997, the Bank met its reserve requirements.
SAVINGS AND LOAN HOLDING COMPANY REGULATION
GENERAL. 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.
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<PAGE>
RESTRICTIONS ON ACQUISITIONS. 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 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 and loan holding company.
OTS regulations permit federal savings institutions 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 savings institution may not establish an out-of-
state branch unless (i) the federal institution qualifies as a QTL or 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
institution in the state would qualify such branches taken as a whole for
treatment as a QTL or 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 institution subsidiaries of banking holding
companies. Federal savings institutions generally may not establish new branches
unless the institution meets or exceeds minimum regulatory capital requirements.
The OTS will also consider the institution's record of compliance with the
Community Reinvestment Act of 1977 in connection with any branch application.
TRANSACTIONS WITH RELATED PARTIES. 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 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. Section 106 of the Bank
Holding Company Act which also applies to the Bank, prohibits the Bank 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.
Savings associations are also subject to the restrictions contained in
Section 22(h) and Section 22(g) 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
33
<PAGE>
association's loans to one borrower limit (generally equal to 15% of the
institution's unimpaired capital and surplus and an additional 10% of such
capital and surplus for loans fully secured by certain readily marketable
collateral) and all loans to such persons may not exceed the institution's
unimpaired capital and unimpaired surplus. 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 is required, as
being the greater of $25,000 or 5% of capital and surplus (up to $500,000).
Further, the Federal Reserve Board pursuant to Section 22(h) requires that loans
to directors, executive officers and principal stockholders be made on terms
substantially the same as offered in comparable transactions to other persons.
Section 22(h) also prohibits a depository institution from paying the overdrafts
of any of its executive officers or directors.
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. In addition, Section 106 of the Bank Holding Company
Act 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.
ACTIVITIES RESTRICTIONS. The Board of Directors of the Corporation
presently intends to operate the Corporation as a unitary savings and loan
holding company. There are generally no restrictions on the activities of a
unitary savings and loan holding company. However, if the director of OTS
determines that there is reasonable cause to believe that the continuation by a
savings and loan holding company of an activity constitutes a serious risk to
the financial safety, soundness, or stability of its subsidiary savings
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 QTL Test, then within one
year after the institution ceased to be a QTL, such unitary savings and loan
holding company shall register as and be deemed to be a bank holding company and
will become subject to the activities restrictions applicable to bank holding
companies. See "Regulation -- Qualified Thrift Lender Test."
If the Company were to acquire control of another savings institution,
other than through merger or other business combination with Elmira Savings &
Loan, the Company would thereupon become a multiple savings and loan holding
company. Except where such acquisition is pursuant to the authority to approve
emergency acquisitions and where each subsidiary savings institution meets the
QTL Test, the activities of the Company 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 and loan 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 and loan holding
company or subsidiary thereof, any business activity, upon prior notice to, and
no objection by the OTS, other than (i) furnishing or performing management
services for a subsidiary savings institution, (ii) conducting an insurance
agency or escrow business, (iii) holding, managing, or 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
authorized by regulation on March 5, 1987 to be directly engaged in by multiple
savings and loan holding companies; or (vii) those activities authorized by the
Federal Reserve Board as permissible for bank holding companies, unless the
Director of
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<PAGE>
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 savings
and loan holding company.
The Director of OTS may also approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
institutions in more than one state, if (i) the multiple savings and loan
holding company involved controls a savings institution which operated a home or
branch office in the state of the institution to be acquired as of March 5,
1987; (ii) the acquiror is authorized to acquire control of the savings
institution pursuant to the emergency acquisition provisions of the Federal
Deposit Insurance Act; or (iii) the 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 and loan holding companies located in
the state where the acquiring entity is located (or by a holding company that
controls such state-chartered savings institutions).
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. The amount of
the bad debt reserve deduction is based upon actual loss experience (the
"experience method").
In years prior to fiscal 1997, the Bank used 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 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.
Effective for the Bank's fiscal year ending June 30, 1997, legislation
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.
For the first taxable year beginning after December 31, 1995, savings
institutions, such as the Bank, are treated the same as commercial banks.
Institutions with $500 million or more in assets are only able to take a tax
deduction when a loan is actually charged off. Institutions with less than $500
million in assets are still permitted to make deductible bad debt additions to
reserves, but only using the experience method.
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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.
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
private activity bonds other than certain qualified bonds and (b) 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). 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.
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 2.5% 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 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, 1997, the Bank's total investment in this property was $2.9 million and
the net book value was $2.6 million. The Bank's Ithaca office, which houses its
mortgage banking subsidiary and "cashless" deposit office, totaled approximately
1,000 square feet and had a net book value of furniture, fixtures and equipment
(including leasehold improvements) of approximately $53,400 at June 30, 1997.
At June 30, 1997, the net book value of the Bank's furniture, fixtures and
equipment (including leasehold improvements) was approximately $350,000.
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.
36
<PAGE>
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, 1997.
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.
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, 1997, 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.
37
<PAGE>
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 1997 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."
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.
38
<PAGE>
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, 1997 and 1996
3. Consolidated Statements of Income for the Years Ended June 30, 1997,
1996 and 1995
4. Consolidated Statements of Changes in Shareholders' Equity for the
Years Ended June 30, 1997, 1996 and 1995
5. Consolidated Statements of Cash Flows for the Years Ended June 30,
1997, 1996 and 1995
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.
(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 1997 Annual Report to Stockholders
The 1997 Annual Report to Stockholders is included as an exhibit to this
Report. Except for those portions of the 1997 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) A Current Report on Form 8-K was filed during the last quarter of the
fiscal year covered by this report to report the Corporation's adoption of a
shareholder rights plan.
(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.
39
<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 18, 1997 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 18, 1997
----------------------------
William A. McKenzie
Principal Executive Officer and
Director
By:/s/ J. Michael Ervin Date: September 18, 1997
------------------------------------
J. Michael Ervin
Principal Financial and Accounting
Officer
By:/s/ Robert E. Butler Date: September 18, 1997
------------------------------------
Robert E. Butler
Director
By:/s/ John F. Cadwallader Date: September 18, 1997
------------------------------------
John F. Cadwallader
Director
By:/s/ L. Edward Considine Date: September 18, 1997
------------------------------------
L. Edward Considine
Director
By:/s/ Dr. Adrian P. Hulsebosch Date: September 18, 1997
------------------------------------
Dr. Adrian P. Hulsebosch
Director
<PAGE>
By:/s/ Jack H. Mikkelsen Date: September 18, 1997
------------------------------------
Jack H. Mikkelsen
Director
By:/s/ Frederick J. Molter Date: September 18, 1997
------------------------------------
Frederick J. Molter
Director
By:/s/ Paul Morss Date: September 18, 1997
------------------------------------
Paul Morss
Director
By:/s/ Gerald F. Schichtel Date: September 18, 1997
------------------------------------
Gerald F. Schichtel
Director
<PAGE>
1997
Annual Report
ES&L Bancorp, Inc.
<PAGE>
Selected Consolidated Financial Data
<TABLE>
<CAPTION>
SUMMARY OF FINANCIAL CONDITION
- ------------------------------------------------------------------------------------------------------------------
At June 30 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total amount of:
Assets $149,641,144 $140,138,518 $136,484,313 $120,933,211 $116,300,778
Loans receivable, net 131,710,850 121,636,011 118,186,529 106,437,875 101,613,693
Cash and investment securities (1) 4,812,020 4,452,792 5,305,872 5,487,223 4,253,751
Mortgage-backed securities 1,575,642 2,069,579 2,867,553 3,257,042 4,279,104
Deposit accounts 111,748,518 106,652,829 101,014,522 86,856,773 83,973,773
Advances from FHLB 20,606,615 17,615,560 20,523,963 20,831,855 16,750,000
Shareholders' equity, substantially
restricted 14,155,282 12,912,145 11,471,243 10,145,984 8,833,098
Book value (2) 16.71 15.29 13.92 12.38 11.17
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
- ------------------------------------------------------------------------------------------------------------------
Year Ended June 30, 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income $11,944,989 $11,379,003 $10,052,154 $8,535,120 $8,531,797
Interest expense 6,404,745 6,195,480 5,474,611 4,441,012 4,671,546
- ------------------------------------------------------------------------------------------------------------------
Net interest income before provision for
loan losses 5,540,244 5,183,523 4,577,543 4,094,108 3,860,251
Provision for loan losses 40,000 60,000 150,000 640,000 265,000
- ------------------------------------------------------------------------------------------------------------------
Net interest income after provision for
loan losses 5,500,244 5,123,523 4,427,543 3,454,108 3,595,251
Other income 1,041,176 800,752 673,417 816,574 960,306
Other expenses 4,012,490 3,078,154 2,770,757 2,638,756 2,472,398
- ------------------------------------------------------------------------------------------------------------------
Income before income taxes and
cumulative effect 2,528,930 2,846,121 2,330,203 1,631,926 2,083,159
Income taxes 690,550 1,092,560 747,227 369,433 830,560
- ------------------------------------------------------------------------------------------------------------------
Income before cumulative effect 1,838,380 1,753,561 1,582,976 1,262,493 1,252,599
Cumulative effect of accounting change --- --- --- 142,000 47,398
- ------------------------------------------------------------------------------------------------------------------
Net Income $ 1,838,380 $ 1,753,561 $ 1,582,976 $ 1,404,493 $ 1,205,201
============ ============ ============ ============ ============
Net Income per share (2) $ 2.14 $ 2.05 $ 1.88 $ 1.71 $ 1.51
============ ============ ============ ============ ============
Cash dividends paid (2) $ 0.68 $ 0.45 $ 0.40 $ 0.25 $ 0.21
============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
KEY OPERATING RATIOS
- ------------------------------------------------------------------------------------------------------------------
Year Ended June 30, 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Return on average assets 1.27% 1.27% 1.23%
Return on average equity 13.58% 14.38% 14.65%
Average equity-to-average asset ratio 9.34% 8.81% 8.40%
Interest rate spread 3.61% 3.55% 3.31%
Net yield on interest-earning assets 3.93% 3.87% 3.61%
Other expenses to average total assets 2.77% 2.23% 2.15%
Non-performing loans as a percentage of total loans, at 6/30 0.53% 0.24% 0.82%
One year interest rate sensitivity gap to total assets, at 6/30 0.73% 12.00% 19.65%
Net interest income to other expenses (3) 1.38X 1.68X 1.65X
</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 on August 23, 1996.
(3) Represents the number of times net interest income covers other expenses.
ESL&L Bancorp, Inc.
- --------------------------------------------------------------------------------
<PAGE>
A Message from the Managing Officer
TO OUR SHAREHOLDERS:
On behalf of the Directors and staff, I am pleased to report that your
Corporation again achieved record success during our recently concluded 1997
fiscal year. Earnings were $1.8 million which generated a 1.3% return on average
assets and a 13.6% return on average equity. These numbers compare very
favorably with our industry as a whole.
Last year's commercial, consumer and residential lending volume of $54
million by the Bank and its affiliates, continued to be a key factor in our long
run profitability. That, coupled with high asset quality, well matched maturity
structures and tight expense control, positioned the Bank well ahead of various
peer groups.
Deposit growth was assisted greatly by our new limited service "cashless"
Ithaca deposit office. Customer acceptance of this facility resulted in new
deposits of $4.4 million as of the end of July 1997. Our Ithaca operation to
include the Branch, our wholly-owned subsidiary, Cayuga Mortgage Company, and
our joint venture, Pace Funding Company, contributed to the Corporation's
success for the year.
ES&L Bancorp stock continues to generate a desirable return for investors.
The last known trade was at $16.50 per share. In addition to regular quarterly
dividends of $.17 per share, a special cash dividend of $1.00 per share was
declared and paid this past July, the first month of our 1998 fiscal year.
Part of the banking moderization and deposit insurance legislation, which I
have reported in previous reports, was enacted during the first quarter of the
1997 fiscal year. Our FDIC insurance fund is now fully capitalized and our
insurance premiums are more in line with the commercial banking sector.
Unfortunately, the Thrift Industry's cost to solve this problem was a $4.5
billion special assessment, of which our share of the expense was $657,000. We
charged that expense off last September.
Now Congress is wrestling with modernization of banking powers and a merger
of the FDIC funds. There are many pitfalls ahead as this legislation moves
through Congress over the next year. We are working hard through our trade
organizations to prevent losing any of our current desirable powers.
In summary, your Corporation has done well over the past year and we are
optimistic that our objectives will be met and we will do even better in the
future. Your continued support is greatly appreciated. Our Directors and staff
members are determined to enhance your investment in our Bank as we move
forward.
/s/ William A. McKenzie
William A. McKenzie
President & Chief Executive Officer
ES&L Bancorp, Inc.
- --------------------------------------------------------------------------------
1
<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. However, the
Bank has a virtual even one-year gap, which means that its net interest income
should be stable regardless of shifts in interest rates.
The Bank is subject to minimal 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, 1997, the Bank had a positive one-year gap of 0.73% of total assets.
The following table presents the Bank's interest sensitivity gap between
interest-earning assets and interest-bearing liabilities at June 30, 1997
(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 $ 1,516 $ 0 $ 0 $ 0 $ 1,516
Loans Receivable 96,678 33,369 2,287 5,457 137,790
Investments 1,335 1,000 3,000 23 5,358
----------------------------------------------------------------------
Total $ 99,529 $ 34,369 $ 5,287 $ 5,480 $ 144,664
Interest-Bearing Liabilities:
Certificates of Deposit $ 60,844 $ 23,000 $ 967 $ 0 $ 84,811
Other Deposits 20,940 0 0 7,778 28,718
Borrowings 16,648 800 400 2,759 20,607
----------------------------------------------------------------------
Total $ 98,432 $ 23,800 $ 1,367 $ 10,537 $ 134,136
Interest Sensitivity Gap $ 1,097 $ 10,569 $ 3,920 $ (5,057) $ 10,528
Gap as a Percentage of Total Assets 0.73% 7.06% 2.62% -3.38%
Cumulative Gap $ 1,097 $ 11,666 $ 15,586 $ 10,528
Cumulative Gap as a Percentage of Total Assets 0.73% 7.80% 10.42% 7.04%
</TABLE>
ES&L Bancorp, Inc.
- --------------------------------------------------------------------------------
2
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operation
COMPARISON OF THE OPERATING RESULTS FOR THE YEARS ENDING JUNE 30, 1997 AND JUNE
30, 1996
General:
- -------
The Corporation recorded net income of $1,838,380, for the fiscal year ending
June 30, 1997, an increase of $84,819, or 4.84% compared to net income totaling
$1,753,561, earned during the fiscal year ending June 30, 1996.
Total assets of the Corporation increased by $9,502,626, or 6.78%, to
$149,641,144 for the fiscal year ending June 30, 1997, compared to $140,138,518
at the start of the fiscal year. The majority of the increase occurred in the
Corporation's net loans receivable portfolio, which increased by $10,074,839, or
8.28%, to $131,710,850 at June 30, 1997. The majority of the funding for the
increase in net loans outstanding was through an increase in deposits, which
rose by $5,095,689, or 4.78%, to $111,748,518. Additionally, the Corporation's
borrowings, advances from the Federal Home Loan Bank of New York, increased by
$2,991,055, or 16.98%, to $20,606,615 at June 30, 1997.
During the fiscal year ending June 30, 1997 the Corporation's Stockholders'
Equity increased by $1,243,137, or 9.63%, to $14,155,282.
Net Interest Income:
- -------------------
Net interest income earned by the Corporation was $5,540,244 for the fiscal year
ending June 30, 1997, an increase of $356,721, or 6.88%, when compared to net
interest income of $5,183,523 earned during the fiscal year ending June 30,
1996. The Corporation's net interest margin increased to 3.61% for the year
ending June 30, 1997, compared to 3.55% for the year ending June 30, 1996.
Interest Income:
- ---------------
The Corporation's total interest income was $11,944,989 for the year ending June
30, 1997, an increase of $565,986, or 4.97%, over the comparative fiscal period.
The majority of the Corporation's interest income is generated by its loan
portfolio. During the 1997 fiscal year the Corporation's loan portfolio
generated interest income of $11,461,628, an increase of $606,199, or 5.58%,
over the previous fiscal year when $10,855,429 in interest income was generated
from the loan portfolio. The increase in earnings is the result of an increase
in the average outstanding balance of the portfolio, which more than offset a
slight decrease in the average yield earned on the portfolio. For the year
ending June 30, 1997 the average balance of the Corporation's loan portfolio was
$133.3 million, yielding 8.60%, compared to an average balance of $125.8
million, yielding 8.63%, for the year ending June 30, 1996.
The Corporation also recorded a $20,783, or 6.52%, increase in income from its
investment security portfolio. Interest generated from the investment portfolio
totaled $339,475 and $318,692 for the fiscal years ending June 30, 1997 and
1996, respectively. The increase is attributable to an increase in both the
average balance and yield of the portfolio. During the 1997 fiscal year the
average balance of the portfolio was $5.3 million, yielding 6.42%, compared to
$5.1 million, yielding 6.22% for the 1996 fiscal year.
Conversely, a decrease in the average balance and average yield of the
Corporation's mortgage-backed security (MBS) portfolio, combined with the
ongoing legal problems of a servicer of one of the Corporation's smaller MBS
pools, has prompted a $57,398, or 30.30%, decrease in interest income generated
from this portfolio. Because of strong loan demand in its primary markets, the
Corporation has not purchased MBS pools in a number of years and has seen the
balance of its existing MBS portfolio, which is comprised of adjustable rate
mortgages, decrease as a result of scheduled principal paydowns and individual
loan payoffs. This balance reduction, combined with a reduction in the yield of
the portfolio, as the underlying mortgages adjust to current market rates, has
prompted an overall reduction in earnings from the portfolio. In addition, the
Servicer of a small (approximately $182,000) MBS pool owned by the Corporation
is in the midst of a dispute with the FDIC. Despite the fact that the underlying
borrowers have been making payments to the Servicer, a dispute has existed
between the Servicer and the FDIC, and not all the payments due the Corporation
have been remitted by the Servicer. The Corporation began receiving current
payments during the fourth quarter of the 1997 fiscal year and, based on amounts
estimated by the Office of Thrift Supervision, has fully reserved any principal
and interest payments which may not be received as a result of the settlement of
this dispute. During the fiscal year ending June 30, 1997 the average balance of
the MBS portfolio was $1.9 million, yielding 6.97%, compared to $2.4 million,
yielding 7.84% for the year ending June 30, 1996.
Interest Expense:
- ----------------
The Corporation's total interest expense was $6,404,745 for the year ending June
30, 1997, an increase of $209,265, or 3.38%, compared to total interest expense
of $6,195,480 for the year ending June 30, 1996.
Interest paid to the Corporation's depositors during the 1997 fiscal year was
$5,168,284, nearly equal to deposit interest expense of $5,157,450 paid during
the 1996 fiscal year. The increase was prompted by an increase in the average
balance of total deposits, which slightly exceeded the reduction in interest
expense which resulted from a decrease in the average interest rate (cost) paid
on deposits. For the fiscal year ending June 30, 1997 the average balance of
deposits outstanding
ES&L Bancorp, Inc.
- --------------------------------------------------------------------------------
3
<PAGE>
Management's Discussion and Analysis (continued)
totaled $109.3 million, costing 4.73%, compared to an average balance of $106.8
million, costing 4.83%, for the fiscal year ending June 30, 1996.
The expense related to the Corporation's borrowings, advances from the Federal
Home Loan Bank of New York, increased by $198,431, or 19.12%, as a result of an
increase in the average balance of the borrowings, and despite a slight
reduction in the average cost of the borrowings. During the 1997 fiscal year,
the Corporation's average borrowings totaled $22.0 million, costing 5.61%,
compared to $18.3 million, costing 5.67%, for the 1996 fiscal year.
Provisions for Loan Losses:
- --------------------------
Provisions for loan losses are charged to earnings to bring the allowance to a
level considered appropriate based on historical experience, the volume and type
of lending conducted by the Bank, industry standards, the status of past
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 1997 fiscal year the
Bank reduced its provision from $60,000 for the fiscal year ending June 30, 1996
to $40,000 for the fiscal year ending June 30, 1997. At June 30, 1997 the total
allowance for loan losses was $1,435,500, compared to $1,430,781 at June 30,
1996.
Other Income:
- ------------
The Corporation's total other income increased by $240,424, or 30.02%, to
$1,041,176 for the fiscal year ending June 30, 1997, compared to $800,752 for
the same period one year earlier.
Income from loan servicing totaled $293,989 during the 1997 fiscal year, a
decrease of $20,926, or 6.64%, when compared to $314,915 earned during the 1996
fiscal year. During the 1997 fiscal year the Corporation increased the
outstanding balance of the mortgages it serviced for a fee in the national
secondary mortgage market by more than $12.0 million. The reduction in servicing
income is actually attributable to the amortization of mortgage servicing rights
and is prompted by an accounting change issued by the Financial Accounting
Standards Board in Statement of Financial Accounting Standards No. 122 (SFAS
122) entitled "Accounting for Mortgage Servicing Rights." See Note A of the
accompanying audited financial statements for additional information on this
accounting change. At June 30, 1997 the total of all residential mortgages
serviced by the Corporation, in the national secondary mortgage market, for
which it either receives a fee or certain tax credits, was $126.5 million,
compared to $109.1 million at June 30, 1996.
The Corporation recorded earnings of $29,727 from its unconsolidated land
development joint venture during the 1997 fiscal year, an increase of $13,249
over the 1996 fiscal year. Profits are generated from the net income resulting
from lot sales of real estate owned by the partnership.
During the 1997 fiscal year PACE Funding Company, an Ithaca, NY mortgage banking
partnership, 50% of which is owned by ES&L Mortgage Corporation, generated
earnings of $22,525 for the Corporation. The current fiscal year was the first
full year of operation for PACE Funding, which originates residential mortgages,
servicing released, for sale to investors, one of whom is the Corporation. No
comparable income resulted from this mortgage banking operation during the 1996
fiscal year.
During the year ending June 30, 1997 income recorded from the gain on the sale
of mortgages totaled $384,991, an increase of $224,042, compared to $160,949
recorded during the year ending June 30, 1996. Like income from loan servicing,
gains on the sale of mortgages were impacted by the implementation of SFAS 122.
Included during the 1997 fiscal year is income from this accounting change
totaling approximately $243,000 for which there was no comparable offset during
the 1996 fiscal year. See Note A of the accompanying audited financial
statements for additional information on this accounting change.
Other operating income earned by the Corporation during the 1997 fiscal year
increased by $15,641, or 8.83%. The majority of the overall increase is
primarily attributable to a $35,000 settlement received by the Bank on a
deficiency judgment resulting from a 1989 mortgage foreclosure. Additionally,
sales commissions earned through ES&L Financial Services, a division of Brilie
Corporation, generated an increase in revenue of approximately $10,000, and
additional rental income, totaling $8,500, was recorded by leasing a portion of
the Bank's parking lot. During the 1996 fiscal year the Corporation, through
ES&L Mortgage Corporation earned approximately $44,000 in processing fees from
PACE Funding Company. During the 1997 fiscal year PACE Funding Company assumed
these responsibilities, which resulted in a reduction of approximately $27,500
in processing fees earned by ES&L Mortgage Corporation. Additionally, the
Corporation recorded a gain on the sale of foreclosed real estate of
approximately $13,500 during the 1996 fiscal year, while no comparable activity
occurred during the current fiscal year.
Other Expenses:
- --------------
Employee compensation and benefit expense totaled $1,995,736, during the year
ended June 30, 1997, an increase of $172,552, or 9.46%, compared to $1,823,184
during the comparison period. The increase is directly related to increased
wages and the expense related to the Corporation's Officer/Manager bonus plan,
which is related to the overall profitability of the Corporation. Additionally,
the Corporation has also experienced an overall increase in the cost of employee
benefits.
ES&L Bancorp, Inc.
- --------------------------------------------------------------------------------
4
<PAGE>
Management's Discussion and Analysis (continued)
During the first quarter of the Corporation's 1997 fiscal year the federal
government passed legislation which assessed a special premium to all financial
institutions insured by the Savings Association Insurance Fund (SAIF), in an
effort to recapitalize the fund. SAIF is one of the two federal deposit
insurance funds administered by the Federal Deposit Insurance Corporation. The
Corporation's deposits are insured by SAIF. As a result the Corporation recorded
a one time special assessment expense totaling $657,000 before taxes. As a
result, deposit insurance expense for the 1997 fiscal year totaled $844,055, an
increase of $565,961 over deposit insurance expense of $278,094 recorded during
the fiscal year ending June 30, 1996. As a result of the recapitalization of the
fund, the Corporation's ongoing insurance premiums have been decreased
substantially, and are now nearly equal to its competitors. Despite an increase
in deposits outstanding, insurance expense, exclusive of the special assessment,
decreased by $90,600 during the 1997 fiscal year.
Other expenses of the Corporation were $670,400 for the 1997 fiscal year, an
increase of $197,083 over the comparative fiscal period. The majority of the
increase results from increases in expense related to the Corporation's mortgage
origination activity and the coordination of all mortgage banking activities of
the Bank and its mortgage banking subsidiaries. The Corporation reported an
increase in advertising and office supply/printing/stationery expenses, much of
which was related to the November 1996 opening of its "cashless" deposit office
in Ithaca, NY. Additionally, the Corporation reported losses on the sale of
foreclosed real estate during the 1997 fiscal year of approximately $20,000. No
similar losses were recorded during the 1996 fiscal year.
Income Taxes:
- ------------
The Corporation's income tax expense for the year ending June 30, 1997 was
$690,550, a decrease of $402,010 from the year ending June 30, 1996. During the
1997 fiscal year the Corporation concluded a thorough analysis of all potential
income tax liabilities and adjusted the liability balance accordingly, resulting
in an income tax benefit of $235,000. Additionally, the Corporation's pre-tax
income decreased by over $300,000.
COMPARISON OF THE 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
ES&L Bancorp, Inc.
- --------------------------------------------------------------------------------
5
<PAGE>
Management's Discussion and Analysis (continued)
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.
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.
ES&L Bancorp, Inc.
- --------------------------------------------------------------------------------
6
<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 1997 was 5.37%.
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 and this area provided $3,107,000 during fiscal year ending June
30, 1997, however, this amount was a negative $502,000 for the prior year ending
June 30, 1996. The main component of this cash addition for the June 30, 1997
period was net income which provided $1,838,000, in addition to net proceeds
from loan sales amounting to $1,139,000 and increases on advances from borrowers
for taxes and insurance of $279,000. The corresponding numbers for the June 30,
1996 period were $1,754,000, ($1,620,000) and ($371,000). Net income has been a
relatively stable number but net proceeds from loan sales are strictly timing
differences in that the majority of these loans will be delivered into the
secondary market within 60 days. The large change in advances from borrowers for
taxes and insurance was due to increased volumes of loans serviced by Elmira
Savings & Loan.
Net cash used for investing activities amounted to $11,227,000 for year ending
June 30, 1997 and $1,810,000 for 1996. The largest item responsible for this
reduction in cash was net loans receivable which utilized $10,287,000 for 1997
and $3,668,000 for 1996. Another significant item in investing activities was
net activity from securites held to maturity which used cash for the period
ending June 30, 1997 amounting to $989,000 and generated cash of $723,000 for
the June 30, 1996 period. The current year also saw a net increase in Federal
Home Loan Bank stock of $209,000 with no similar entry for the June 30, 1996
period. Principal repayments on mortgage-backed securities provided cash
amounting to $502,000 and $773,000 for both the 1997 and 1996 periods
respectively. The significant changes in the net loans receivable balances are
driven both by the interest rate risk environment and the increase in activity
of adjustable rate loans 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 $7,470,000 in
cash and cash equivalents for 1997 and $2,396,000 for 1996. Interest credited to
deposit accounts was $5,103,000 for 1997 and $5,130,000 for 1996. The current
period also had a net increase in advances from the Federal Home Loan Bank of
$2,991,000 and a decrease for the 1996 period of $2,908,000. Cash outflows of
$577,000 and $381,000 also were incurred through dividends paid for periods of
June 30, 1997 and June 30, 1996 respectively.
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, other than those
disclosed, 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.
- --------------------------------------------------------------------------------
7
<PAGE>
Pending Financial Services Modernization Legislation
Legislation currently under consideration by Congress would repeal the federal
thrift charter and require federal associations like the Bank to convert to
national banks two years after the enactment of the bill. The bill, in its
current form, would permit federal thrifts that converted to national banks to
exercise any authority which they were legally entitled to exercise immediately
prior to such conversion and would not be required to divest any branches.
Further, these institutions could continue to branch in any state in which they
were located to the same extent as national banks. Unitary savings and loan
holding companies, like the Corporation, could continue to exercise any powers
they had prior to their subsidiary becoming a bank by operation of law as long
as they did not acquire another bank. Powers of those unitary savings and loan
holding companies that were grandfathered, however, could not be transferred to
another company which acquires control of the unitary holding company after the
effective date of the law. There can be no assurance that this legislation will
be passed in its current form. At this time, the Corporation is unable to
predict whether such legislation would significantly impact its operations.
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.
- --------------------------------------------------------------------------------
8
<PAGE>
[LETTERHEAD OF 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, 1997 and 1996, 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, 1997. 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 respect, the consolidated financial position of ES&L
Bancorp, Inc. and Subsidiary as of June 30, 1997 and 1996, and the results of
their operations and their cash flows for each of the years in the three-year
period ended June 30, 1997, in conformity with generally accepted accounting
principles.
As discussed in Note A to the consolidated financial statements, the Corporation
changed its method of accounting for mortgage servicing rights, impairment of
loans and certain investments in debt and equity securities in fiscal years
1997, 1996 and 1995, respectively.
Mengel, Metzger, Barr & Co. LLP
Elmira, New York
July 18, 1997
ES&L Bancorp, Inc.
- --------------------------------------------------------------------------------
9
<PAGE>
<TABLE>
<CAPTION>
June 30,
---------------------------
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 721,891 $ 1,355,844
Short-term investments 1,041 17,919
------------ ------------
CASH AND CASH EQUIVALENTS 722,932 1,373,763
Securities available for sale 66,156 48,508
Securities to be held to maturity -
approximate market value of $4,036,495
and $2,993,573 at 1997 and 1996, respectively 4,022,932 3,030,521
Mortgage-backed securities available for sale 1,403,848 1,874,951
Mortgage-backed securities to be held to
maturity - approximate market value of
$171,794 and $194,628 at 1997 and 1996, respectively 171,794 194,628
Mortgage loans held for sale 4,460,810 5,457,831
Loans receivable, net of allowance for loan
losses of $1,435,500 and $1,430,781
at 1997 and 1996, respectively 131,710,850 121,636,011
Federal Home Loan Bank stock, at cost 1,313,100 1,103,800
Foreclosed real estate 131,000 90,815
Investment in joint venture - acquisition,
development and construction arrangement 676,001 497,165
Investment in mortgage banking partnership 183,318 170,065
Property and equipment, net 3,053,735 3,121,713
Accrued interest receivable:
Loans and mortgage-backed securities 811,247 749,780
Investment securities and other 89,675 44,160
Other assets 823,746 744,807
------------ ------------
TOTAL ASSETS $149,641,144 $140,138,518
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Deposits:
Non-interest bearing $ 4,851,413 $ 5,009,504
Interest bearing 106,897,105 101,643,325
------------ ------------
111,748,518 106,652,829
Advances from Federal Home Loan Bank 20,606,615 17,615,560
Accrued interest payable:
Deposits 26,777 29,125
Borrowings 69,695 73,029
Advances from borrowers for taxes and insurance 2,565,036 2,286,398
Other liabilities 469,221 569,432
------------ ------------
TOTAL LIABILITIES 135,485,862 127,226,373
Commitments
Shareholders' equity:
Preferred stock:
Authorized, 500,000 shares
Issued, none - -
Common stock, $.01 par value:
Authorized, 3,000,000 shares
Issued, 855,967 and 849,757 shares, respectively 8,560 5,665
Additional paid-in capital 2,599,654 2,580,092
Retained earnings, substantially restricted 11,595,957 10,334,941
Net unrealized gain on securities available for sale 59,482 37,888
------------ ------------
14,263,653 12,958,586
Less cost of treasury stock, 8,933 and
5,016 shares, respectively 108,371 46,441
------------ ------------
TOTAL SHAREHOLDERS' EQUITY $ 14,155,282 $ 12,912,145
------------ ------------
$149,641,144 $140,138,518
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>
Year ended June 30,
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Interest income:
Loans $11,461,628 $10,855,429 $ 9,516,283
Investment securities 339,475 318,692 315,661
Mortgage-backed securities 132,019 189,417 199,122
Interest-earning deposits and other 11,867 15,465 21,088
----------- ----------- -----------
TOTAL INTEREST INCOME 11,944,989 11,379,003 10,052,154
Interest expense:
Deposits 5,168,284 5,157,450 4,481,743
Borrowings 1,236,461 1,038,030 992,868
----------- ----------- -----------
TOTAL INTEREST EXPENSE 6,404,745 6,195,480 5,474,611
----------- ----------- -----------
NET INTEREST INCOME 5,540,244 5,183,523 4,577,543
Provision for loan losses 40,000 60,000 150,000
----------- ----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 5,500,244 5,123,523 4,427,543
Other income:
Service fees and other charges 127,248 131,394 114,012
Net (loss) gain on investment securities (10,000) (39) 800
Income from loan servicing 293,989 314,915 301,765
Income from unconsolidated joint venture 29,727 16,478 60,299
Income from mortgage banking partnership 22,525 - -
Gain on sale of mortgages 384,991 160,949 69,094
Other operating income 192,696 177,055 127,447
----------- ----------- -----------
TOTAL OTHER INCOME 1,041,176 800,752 673,417
Other expenses:
Employee compensation and benefits 1,995,736 1,823,184 1,748,778
Office occupancy and equipment 502,299 503,559 372,845
Federal deposit insurance premiums 844,055 278,094 254,410
Other expenses 670,400 473,317 394,724
----------- ----------- -----------
TOTAL OTHER EXPENSES 4,012,490 3,078,154 2,770,757
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 2,528,930 2,846,121 2,330,203
Income taxes 690,550 1,092,560 747,227
----------- ----------- -----------
NET INCOME $ 1,838,380 $ 1,753,561 $ 1,582,976
=========== =========== ===========
Primary income per common share:
Net income $ 2.14 $ 2.05 $ 1.88
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
Years ended June 30, 1997, 1996 and 1995
- ----------------------------------------
<TABLE>
<CAPTION>
Net unrealized
Retained gain on
Additional earnings, securities
Common paid-in substantially available Treasury
stock capital restricted for sale stock Total
------------ ------------- --------------- ---------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Balance at July 1, 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 $6,498 - - - (9,747) - (9,747)
Issuance of 273,749
shares in connection with
three-for-two stock split 1,825 (1,825) - - - -
Dividends on common stock
($.40 per share) - - (328,319) - - (328,319)
Issuance of 4,805 shares
in connection with stock
options exercised at
$3 5/9 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)
Issuance of 23,519 shares in
connection with stock options
exercised at $3 5/9 per share 157 83,472 - - - 83,629
Dividends on common stock
($.45 per share) - - (381,259) - - (381,259)
Tax benefit from exercise of
non-incentive stock options - 31,304 - - - 31,304
Purchase of 2,766 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
Current year change in
unrealized gain on securities
available for sale, net of
deferred taxes of $14,396 - - - 21,594 - 21,594
Issuance of 283,147 shares in
connection with three-for-two
stock split 2,832 (2,832) - - - -
Dividend in lieu of fractional
shares due to three-for-two
stock split - - (1,405) - - (1,405)
Dividends on common stock
($.68 per share) - - (575,959) - - (575,959)
Issuance of 6,315 shares in
connection with options
exercised at $3 5/9 per share 63 22,394 - - - 22,457
Purchase of 3,917 shares of
treasury stock - - - - (61,930) (61,930)
Net income - - 1,838,380 - - 1,838,380
------------ ------------- --------------- ---------------- ----------- ---------------
BALANCE AT JUNE 30, 1997 $ 8,560 $ 2,599,654 $ 11,595,957 $ 59,482 $(108,371) $ 14,155,282
============ ============= =============== ================ =========== ===============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>
Year ended June 30,
-------------------------------------------------------
1997 1996 1995
-------------- -------------- ---------------
<S> <C> <C> <C>
CASH FLOWS - OPERATING ACTIVITIES
- ---------------------------------
Net income $ 1,838,380 $ 1,753,561 $ 1,582,976
Adjustments to reconcile net income to net cash
provided from (used for) operating activities:
Depreciation 175,774 180,336 64,666
Deferred income taxes 17,254 24,884 4,221
Provision for loan losses 40,000 60,000 150,000
Net amortization 85,201 22,533 29,202
Deferred loan origination fees (22,515) (52,490) (7,446)
Income from unconsolidated joint venture (29,727) (16,478) (60,299)
Income from mortgage-banking partnership (22,525) - -
Net loss (gain) on investment securities 10,000 39 (800)
Net loss on sale of property and equipment 3,091 - -
Net loss (gain) on sale of foreclosed real estate 19,847 (13,457) -
Gain on sale of mortgages (384,991) (160,949) (69,094)
Proceeds from loan sales 27,155,312 29,370,422 11,240,565
Originations and purchases of loans held for sale (26,016,597) (30,990,370) (13,054,383)
Changes in certain assets and liabilities
affecting operations:
Accrued interest receivable (106,982) (67,415) (158,330)
Other assets 80,522 (96,051) 181,053
Accrued interest payable (5,682) 8,494 14,340
Advances from borrowers for taxes
and insurance 278,638 (370,808) 291,259
Other liabilities (8,240) (154,287) 70,387
-------------- -------------- --------------
NET CASH PROVIDED FROM (USED FOR)
OPERATING ACTIVITIES 3,106,760 (502,036) 278,317
CASH FLOWS - INVESTING ACTIVITIES
- ---------------------------------
Net other increase in loans receivable (10,286,971) (3,667,626) (11,987,160)
Net increase in Federal Home Loan Bank stock (209,300) - (37,200)
Investment in foreclosed real estate (9,102) (383) (7,221)
Investment in joint venture (149,109) 9,356 128,565
Investment in mortgage banking partnership 9,272 (20,065) (150,000)
Proceeds from sale of foreclosed real estate 120,038 283,620 19,608
Proceeds from sale of securities available for sale - 49,812 1,900
Proceeds on maturity of securities available for sale - 150,000 50,000
Purchases of securities to be held to maturity (2,324,062) (2,987,912) (500,000)
Proceeds from maturities of securities to be held
to maturity 1,335,269 3,710,959 114,664
Principal repayments on mortgage-backed securities 502,279 772,543 466,322
Proceeds from sale of property and equipment 13,464 - -
Purchases of property and equipment (124,351) (110,363) (2,406,315)
Purchase of mortgage servicing rights (104,925) - -
-------------- -------------- --------------
NET CASH (USED FOR) INVESTING ACTIVITIES (11,227,498) (1,810,059) (14,306,837)
CASH FLOWS - FINANCING ACTIVITIES
- ---------------------------------
Interest credited to deposit accounts $ 5,103,199 $ 5,129,548 $ 4,435,853
Net other (decrease) increase in deposits (7,510) 508,759 9,721,896
Net increase (decrease) in advances from
Federal Home Loan Bank 2,991,055 (2,908,403) (307,892)
Proceeds from exercise of stock options 22,457 83,629 17,075
Purchase of treasury stock (61,930) (35,941) -
Dividends paid (577,364) (381,259) (328,319)
-------------- -------------- --------------
NET CASH PROVIDED FROM FINANCING ACTIVITIES 7,469,907 2,396,333 13,538,613
-------------- -------------- --------------
NET (DECREASE) INCREASE IN
CASH AND CASH EQUIVALENTS (650,831) 84,238 (489,907)
Cash and cash equivalents at beginning of year 1,373,763 1,289,525 1,779,432
-------------- -------------- --------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 722,932 $ 1,373,763 $ 1,289,525
-------------- -------------- --------------
SUPPLEMENTAL DISCLOSURE OF
- --------------------------
CASH FLOW INFORMATION
---------------------
Cash paid during the year for:
Interest on advances from Federal
Home Loan Bank 1,239,795 1,027,992 977,182
-------------- -------------- --------------
Income taxes $ 782,909 $ 1,156,051 $ 727,300
-------------- -------------- --------------
SUPPLEMENTAL SCHEDULE OF
- ------------------------
NONCASH INVESTING ACTIVITIES
----------------------------
Loans transferred to foreclosed real estate $ 170,968 $ 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.
<PAGE>
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
whollyowned 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, and short-term investments, with original terms to maturity of
less than 90 days.
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 increase (decrease) in
unrealized gain amounted to $21,594, $(10,392) and $(9,747) net of deferred
taxes of $14,396, $(6,926) and $(6,498) for 1997, 1996 and 1995, respectively.
The Corporation has no securities classified as trading securities.
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, 1997 and 1996, 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.
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.
<PAGE>
NOTE A: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONT'D
- -----------------------------------------------------
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 losses 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 Bank adopted the provisions of Statement of Financial Accounting Standards
No. 122, "Accounting for Mortgage Servicing Rights" ("SFAS 122") on July 1,
1996. Under SFAS 122, the cost of mortgage loans purchased or originated and
subsequently sold with servicing rights retained is allocated between the
mortgage servicing rights and the loans based on their relative fair value. The
mortgage servicing rights are amortized in proportion to, and over the period
of, estimated net servicing income. Additionally, mortgage servicing rights are
assessed for impairment based on their fair value, determined for each group of
underlying loans with similar risk characteristics.
Prior to July 1, 1996, a portion of the cost of acquiring loans was capitalized
as mortgage servicing rights if the loans were purchased, but not if they were
originated by the seller. Additionally, no impairment measurement was performed.
During 1997 and 1996, approximately $348,000 and $118,000, respectively, of
costs of acquiring the rights to service mortgage loans were capitalized and
included in other assets in the accompanying consolidated balance sheets. In
1997, the adoption of SFAS 122 increased net income by approximately $128,400,
net of income taxes of $85,600. The aggregate fair value of mortgage servicing
rights is approximately $398,000. Fair value is based on fundamental analysis
and the present value of expected future cash inflows.
For measuring impairment, mortgage servicing rights are stratified based on one
or more of the predominant risk characteristics of the underlying loans. Such
characteristics include the loan size, interest rate, date of origination, loan
term, and geographic region. Impairment is recognized through a valuation
allowance for each stratum, as necessary. At June 30, 1997, no valuation
allowance has been recorded.
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.
<PAGE>
NOTE A: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONT'D
- -----------------------------------------------------
INCOME TAXES
- ------------
Deferred income tax assets and liabilities arise from temporary differences
associated with differences between the financial statement and tax basis of
assets and liabilities, as measured by the enacted tax rates which are expected
to be in effect when these differences reverse. Deferred tax expense (credit) is
a 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 principle types of
temporary 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.
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-balancesheet 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 12,438, 16,937
and 21,422 were added to weighted average shares for 1997, 1996 and 1995. Fully
diluted net income per share amounts are not presented because they are not
materially dilutive. Weighted average shares outstanding amounted to 858,658 for
1997, 856,236 for 1996, and 840,956 for 1995. See also Note N.
<PAGE>
NOTE A: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONT'D
- -----------------------------------------------------
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.
NEW ACCOUNTING PRONOUNCEMENTS
- -----------------------------
EARNINGS PER SHARE
------------------
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS 128"). SFAS 128 changes the manner in which earnings per share (EPS)
amounts are calculated and presented. Under SFAS 128 two EPS amounts are
required basic EPS and diluted EPS. Basic EPS is the per share allocation of
income based only on the weighted average number of common shares actually
outstanding during the period. Diluted EPS represents the per share allocation
of income based on the weighted average number of common shares actually
outstanding plus all dilutive potential common shares outstanding during the
period.
SFAS 128 is effective for fiscal years ending after December 15, 1997.
Accordingly, the Corporation is required to adopt SFAS 128 for the year ending
June 30, 1998. The adoption of SFAS 128 will require the disclosure of basic
EPS, however, management does not expect diluted EPS under SFAS 128 to be
materially different than the currently disclosed primary EPS.
DISCLOSURE OF CAPITAL STRUCTURE
-------------------------------
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 129, "Disclosure of
Information about Capital Structure" ("SFAS 129"). SFAS 129 consolidates
existing guidance about disclosure of capital structure into one standard and
extends the scope of the disclosure requirements to include nonpublic
entities.
SFAS 129 is effective for fiscal years ending after December 15, 1997.
Accordingly, the Corporation is required to adopt SFAS 129 for the year ending
June 30, 1998. The Corporation is currently disclosing the information
required in SFAS 129 since it is a public company; therefore, management does
not expect the adoption of SFAS 129 to have a material effect on the
Corporation's financial statements.
NOTE B: INVESTMENT AND MORTGAGE-BACKED SECURITIES
- ---------------------------------------------------
The amortized cost and fair value of investments in securities are as follows:
June 30, 1997:
<TABLE>
<CAPTION>
Gross Gross
Amortizeed Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Securities available for sale:
Corporate stock $ 36,763 $ 29,790 $ (397) $ 66,156
=========== ========== ========== ===========
Securities to be held to maturity:
U.S. Government and its
agencies $ 3,991,287 $ 13,133 $ - $ 4,004,420
Corporate debt securities 31,645 430 - 32,075
----------- ---------- ---------- -----------
$ 4,022,92 $ 13,563 $ - $ 4,036,495
=========== ========== ========== ===========
Mortgage-backed securities
available for sale $ 1,334,104 $ 69,744 $ - $ 1,403,848
=========== ========== ========== ===========
Mortgage-backed securities
to be held to maturity $ 171,794 $ - $ - $ 171,794
=========== ========== ========== ===========
</TABLE>
<PAGE>
NOTE B: INVESTMENT AND MORTGAGE-BACKED SECURITIES, Cont'd
- ---------------------------------------------------
June 30, 1996:
<TABLE>
<CAPTION>
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>
The amortized cost and fair value of debt securities at June 30, 1997, 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 to be
Held to Maturity
-------------------------
Amortized Fair
Cost Value
----------- -----------
<S> <C> <C>
Due in one year or less $ - $ -
Due after one year through
five years 3,991,287 4,004,420
Due after five years through
ten years - -
Due after ten years 31,645 32,075
----------- -----------
$ 4,022,932 $ 4,036,495
=========== ===========
</TABLE>
Proceeds and gross realized gains and losses from sales and maturities of
securities are as follows:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
NOTE C: LOANS RECEIVABLE
- --------------------------
Loans receivable consist of the following:
<TABLE>
<CAPTION>
June 30,
------------------------------
1997 1996
-------------- -------------
<S> <C> <C>
Conventional first mortgage loans:
Residential $ 86,088,562 $ 79,401,037
Commercial 27,744,971 25,007,635
Construction loans 4,719,712 3,958,500
Loans savings accounts 245,864 213,679
Education loans 462,353 470,515
Consumer loans 5,202,370 4,663,964
Demand notes 1,188,781 1,519,863
Home equity lines of credit 6,048,557 6,699,341
Commercial non-mortgage loans 1,806,681 1,926,130
Commercial lines of credit 1,353,262 1,212,320
-------------- -------------
SUBTOTAL 134,861,113 125,072,984
Allowance for loan losses (1,435,500) (1,430,781)
Loans in process (1,789,694) (1,953,552)
Net deferred loan origination fees and premiums 74,931 (52,640)
-------------- -------------
$ 131,710,850 $ 121,636,011
============== =============
</TABLE>
The activity in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
Year ended June 30,
----------------------------------------
1997 1996 1995
------------ ----------- ------------
<S> <C> <C> <C>
Balance at beginning of year $ 1,430,781 $ 1,423,826 $ 1,268,611
Provision for possible loan losses 40,000 60,000 150,000
Charged-off loans (44,465) (54,207) (2,142)
Recoveries 9,184 1,162 7,357
------------ ----------- ------------
BALANCE AT END OF YEAR $ 1,435,500 $ 1,430,781 $ 1,423,826
============ =========== ============
</TABLE>
Nonaccrual loans for which interest has been reduced totaled approximately
$340,000 and $223,000 at June 30, 1997 and 1996, respectively. Interest income
that would have been recorded on these loans for the years ended June 30, 1997,
1996 and 1995 was approximately $23,000, $20,000 and $30,000, respectively.
The Bank is not committed to lend additional funds to debtors whose loans have
been modified.
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:
<TABLE>
<S> <C>
Balance at July 1, 1995 $ 524,770
Increase 103,207
Decrease (183,384)
----------
BALANCE AT JUNE 30, 1996 444,593
Increase 18,000
Decrease (190,375)
----------
BALANCE AT JUNE 30, 1997 $ 272,218
==========
</TABLE>
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 loans serviced for others amounted to
$129,495,624, $110,694,667 and $90,824,269 at June 30, 1997, 1996 and 1995,
respectively.
<PAGE>
NOTE D: PROPERTY AND EQUIPMENT
- --------------------------------
Property and equipment is summarized by major classification as follows:
<TABLE>
<CAPTION>
June 30,
----------------------------
1997 1996
------------- -------------
<S> <C> <C>
Land $ 672,933 $ 672,933
Buildings 2,262,652 2,251,476
Furniture and equipment 808,450 789,356
------------- -------------
3,744,035 3,713,765
Less accumulated depreciation 690,300 592,052
------------- -------------
$ 3,053,735 $ 3,121,713
============= =============
</TABLE>
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 1997.
NOTE E: DEPOSITS
- ------------------
Deposit accounts consist of the following:
<TABLE>
<CAPTION>
June 30,
----------------------------
1997 1996
------------- -------------
<S> <C> <C>
Savings accounts with a year end interest
rate of 2.96% and 3.05% at June 30, 1997
and 1996, respectively $ 14,183,722 $ 15,777,639
NOW accounts with a year end interest rate
of 1.74% and 1.80% at June 30, 1997 and
1996, respectively 7,883,421 6,516,746
Money market deposit accounts with a year
end interest rate of 3.11% and 3.20% at
June 30, 1997 and 1996, respectively 5,100,541 5,727,747
Certificates of deposit with a year end
interest rate range of 3.80% - 6.08% at
June 30, 1997 and 1996 84,580,834 78,630,697
------------- -------------
$ 111,748,518 $ 106,652,829
============= =============
</TABLE>
Non-interest bearing checking accounts are included in the table above in NOW
accounts.
Maturities of outstanding certificates of deposit at June 30, 1997, are
summarized as follows:
<TABLE>
<CAPTION>
Year Amount
---- ------------
<S> <C>
1998 $ 60,021,723
1999 16,382,440
2000 6,290,303
2001 1,268,757
2002 617,611
------------
$ 84,580,834
============
</TABLE>
The aggregate amount of individual deposits in excess of $100,000 was
approximately $21,000,000 and $19,000,000 at June 30, 1997 and 1996,
respectively.
<PAGE>
NOTE E: DEPOSITS, Cont'd
- ------------------
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
Year ended June 30,
-----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Savings accounts $ 453,090 $ 507,794 $ 578,524
NOW accounts 59,416 24,565 26,287
Money market 209,290 217,075 213,155
Certificates of deposit 4,446,488 4,408,016 3,663,777
---------- ---------- ----------
$5,168,284 $5,157,450 $4,481,743
========== ========== ==========
</TABLE>
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 agreement.
Scheduled maturities are as follows:
<TABLE>
<CAPTION>
Maturing in
fiscal year ending Amount
------------------ ------------
<S> <C>
1998 $ 16,709,523
1999 610,139
2000 610,796
2001 611,491
2002 612,237
Thereafter 1,452,429
------------
$ 20,606,615
============
</TABLE>
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 $90,476 , $83,521 and $81,178 for the years
ended June 30, 1997, 1996 and 1995, 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.
The accumulated postretirement benefit obligation of all retirees as of June 30,
1997 and 1996 was $57,918 and $61,538, 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.
<PAGE>
NOTE G: BENEFIT PLANS, Cont'd
- ------------------------
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 $3 5/9 per share, the equivalent of the purchase price at
the time of issuance. See also Note N.
<TABLE>
<S> <C>
Options outstanding June 30, 1996 13,276
Additional options due to three-for-two stock split 6,637
Less options exercised (6,315)
------
OPTIONS OUTSTANDING JUNE 30, 1997 13,598
======
</TABLE>
NOTE H: INCOME TAXES
- ----------------------
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Year ended June 30,
-----------------------------------------
1997 1996 1995
------------ ----------- --------------
<S> <C> <C> <C>
Currently payable:
State $ 92,945 $ 160,560 $ 145,934
Federal 580,351 907,116 597,072
Deferred 17,254 24,884 4,221
------------ ----------- --------------
$ 690,550 $1,092,560 $ 747,227
============ =========== ==============
</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,
-----------------------------------------
1997 1996 1995
------------ ----------- --------------
<S> <C> <C> <C>
Total provision at federal statutory rates $ 860,000 $ 968,000 $ 785,000
States taxes, net of federal benefit 61,000 106,000 96,000
Resolution and adjustment of
prior year tax liabilities (235,000) - (124,000)
Other 4,550 18,560 (9,773)
------------ ----------- --------------
$ 690,550 $1,092,560 $ 747,227
============ =========== ==============
</TABLE>
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:
<TABLE>
<CAPTION>
June 30,
-------------------------------
1997 1996
------------ ----------------
<S> <C> <C>
Depreciation $ (70,000) $ (50,000)
Nonrefundable loan fees 21,000 35,000
Employee benefits 20,000 21,000
Allowance for loan losses 234,000 344,000
Unrealized gain on securities
available for sale (28,000) (25,000)
Other 50,000 (3,000)
------------ ----------------
$ 227,000 $ 322,000
============ ================
</TABLE>
<PAGE>
NOTE H: INCOME TAXES, Cont'd
- -----------------------
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
losses 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 in previous years, while continuing to accrue income taxes
for financial reporting purposes without regard to the increase. During the year
ended June 30, 1995, contingencies relating to this matter were resolved and the
accruals were adjusted. Additionally, in fiscal year 1997 the Bank performed an
extensive analysis of all potential income tax liabilities, which ultimately
resulted in an income tax benefit of $235,000.
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 estimated bad debts is subject to tax only if it is actually
distributed to shareholders or depositors. At June 30, 1997, 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 $17,029,
$17,886 and $14,696 for the years ended June 30, 1997, 1996 and 1995,
respectively.
At June 30, 1997 and 1996, the Bank had outstanding commitments of $5,243,927
and $3,169,511, respectively, to originate loans, of which $2,358,115 and
$931,311, respectively, were comprised of fixed-rate loans and $2,885,812 and
$2,238,200, 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 equaled 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, 1997 and 1996, the Bank had outstanding commitments under standby
letters of credit totaling $256,822 and $436,222, respectively.
NOTE J: INVESTMENT IN JOINT VENTURE - ACQUISITION, DEVELOPMENT AND
- --------------------------------------------------------------------
CONSTRUCTION ARRANGEMENT
------------------------
The Bank's wholly-owned subsidiary, Brilie Corporation ("Brilie") has 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, 1997 and 1996, the Bank had loaned $561,439 and $389,170,
respectively, to the partnership, and was committed to lend an additional
$188,561 and $360,830, respectively, to finance further land development.
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.
<PAGE>
NOTE J: INVESTMENT IN JOINT VENTURE - ACQUISITION, DEVELOPMENT AND
- --------------------------------------------------------------------
CONSTRUCTION ARRANGEMENT, Cont'd
------------------------
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, 1997, Brilie's share of the partnership's capital was $114,562,
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
--------------
<TABLE>
<CAPTION>
June 30,
-------------------------------
ASSETS 1997 1996
------ -------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Investment in real estate $ 773,487 $ 673,160
Other assets 93,800 1,526
-------------- --------------
$ 867,287 $ 674,686
============== ==============
LIABILITIES AND
---------------
PARTNERS' CAPITAL
-----------------
Liabilities:
Note payable to Elmira Savings and Loan $ 561,439 $ 389,170
Mortgage payable 68,000 68,000
Other 8,724 1,526
-------------- --------------
638,163 458,696
Partners' capital 229,124 215,990
-------------- --------------
$ 867,287 $ 674,686
============== ==============
</TABLE>
<PAGE>
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,
----------------------------------------------
1997 1996 1995
------------- ------------- -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Sales $ 307,000 $ 311,901 $ 319,499
Cost of sales 234,484 265,042 185,186
---------- ----------- ------------
GROSS PROFIT 72,516 46,859 134,313
Net rental income (expense) 1,885 (6,622) (1,157)
General and administrative expense (14,947) (7,281) (12,558)
---------- ----------- ------------
NET INCOME 59,454 32,956 120,598
Partners' capital at
beginning of year 215,990 206,116 124,828
Partners' withdrawals 46,320 23,082 39,310
---------- ----------- ------------
PARTNERS' CAPITAL AT END OF YEAR 229,124 215,990 206,116
========== =========== ============
</TABLE>
NOTE K: PARENT COMPANY FINANCIAL INFORMATION
- ---------------------------------------------
BALANCE SHEETS
--------------
<TABLE>
<CAPTION>
June 30,
-------------------------------
ASSETS 1997 1996
------ -------------- ---------------
<S> <C> <C>
Cash and cash equivalents $ 328,270 $ 146,667
Securities available for sale 66,156 48,508
Investment in subsidiary 9,636,063 8,552,329
Other assets 18,038 68,891
------------ --------------
$ 10,048,527 $ 8,816,395
============ ==============
LIABILITIES AND
---------------
SHAREHOLDERS' EQUITY
--------------------
Shareholders' equity:
Common stock $ 8,560 $ 5,665
Additional paid-in capital 2,599,654 2,580,092
Retained earnings 7,531,048 6,270,032
Net unrealized gain on securities available for sale 17,636 7,047
------------ --------------
10,156,898 8,862,836
Less treasury stock 108,371 46,441
------------ --------------
$ 10,048,527 $ 8,816,395
============ ==============
</TABLE>
<PAGE>
NOTE K: PARENT COMPANY FINANCIAL INFORMATION. Cont'd
- --------------------------------------------
STATEMENTS OF INCOME AND RETAINED EARNINGS
------------------------------------------
<TABLE>
<CAPTION>
Year ended June 30,
--------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Equity in earnings of subsidiary $ 1,883,734 $ 1,801,129 $ 1,579,440
Income from investments and other 2,619 3,091 3,536
Management fee income - - 56,131
----------- ----------- -----------
1,886,353 1,804,220 1,639,107
General and administrative expenses 60,209 66,099 38,571
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 1,826,144 1,738,121 1,600,536
Income tax benefit (expense) 12,236 15,440 (17,560)
----------- ----------- -----------
NET INCOME 1,838,380 1,753,561 1,582,976
Retained earnings at beginning
of year 6,270,032 4,897,730 3,643,073
Dividends paid 577,364 381,259 328,319
----------- ----------- -----------
RETAINED EARNINGS AT
END OF YEAR $ 7,531,048 $ 6,270,032 $ 4,897,730
=========== =========== ===========
</TABLE>
STATEMENTS OF CASH FLOWS
------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
NOTE L: OFFICE OCCUPANCY AND EQUIPMENT EXPENSE
- ----------------------------------------------
Office occupancy and equipment expense is comprised of the following:
<TABLE>
<CAPTION>
Year ended June 30,
------------------------------------
1997 1996 1995
----------- ---------- ---------
<S> <C> <C> <C>
Depreciation $ 175,774 $ 180,336 $ 64,666
Service bureau 150,012 134,893 119,989
Other 176,513 188,330 188,190
----------- ---------- ---------
$ 502,299 $ 503,559 $ 372,845
=========== ========== =========
</TABLE>
NOTE M: REGULATORY CAPITAL
- --------------------------
The Bank is required to meet minimum capital standards, which have been
established by the Office of Thrift Supervision (OTS). 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, 1997, with all of the current regulatory capital requirements as follows:
<TABLE>
<CAPTION>
June 30,
-------------------------------------
Tangible Core Risk-based
capital capital capital
------------ ---------- -----------
(in thousands)
<S> <C> <C> <C>
GAAP capital $ 13,743 $ 13,743 $ 13,743
Investment in joint venture (561) (561) (561)
Net unrealized gain on securities
available for sale (42) (42) (42)
General allowance for loan losses - - 1,237
------------ ---------- -----------
Actual amount 13,140 13,140 14,377
Required amount 2,235 4,471 7,907
------------ ---------- -----------
EXCESS $ 10,905 $ 8,669 $ 6,470
============ ========== ===========
</TABLE>
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).
<PAGE>
NOTE N: SHAREHOLDERS' EQUITY, Cont'd
- -------------------------------
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.
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 August 23, 1996,
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 15, 1997, the Board of Directors of the Corporation declared a special
cash dividend of $1.00 per share payable on July 31, 1997 to shareholders of
record on July 22, 1997.
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.
Accrued interest
- ----------------
The carrying amount of accrued interest approximates its fair value.
Deposits
- --------
The fair values estimated for demand deposits (e.g., interest and noninterest
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.
<PAGE>
NOTE O: DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS, CONT'D
- ---------------------------------------------------------------------
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).
Information regarding the Corporation's financial instruments is as follows at
June 30, 1997 and 1996: (000's)
<TABLE>
<CAPTION>
1997
---------------------------------
Carrying Estimated
value fair value
-------------- ---------------
<S> <C> <C>
Financial assets:
Cash and short-term investments $ 723 $ 723
Investment securities (including
mortgage-backed securities) 6,978 6,991
Loans receivable 136,172 138,594
Accrued interest receivable 901 901
Financial liabilities:
Deposits 111,749 111,550
Advances from Federal Home Loan Bank 20,607 20,333
Off-balance-sheet instruments:
Commitments to extend credit 5,244 5,244
Standby letters of credit 257 257
</TABLE>
<TABLE>
<CAPTION>
1996
----------------------------------
Carrying Estimated
value fair value
-------------- ----------------
<S> <C> <C>
Financial assets:
Cash and short-term investments $ 1,374 $ 1,374
Investment securities (including
mortgage-backed securities) 6,253 6,216
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
</TABLE>
<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 283,147 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
sale 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 1997, the
trading price of the stock has ranged from $13.33 to $16.50 per share. These
prices have 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, 1997, ES&L was a Tier 1
Institution.
ES&L Bancorp, Inc.
- --------------------------------------------------------------------------------
30
<PAGE>
Market Price and Dividend Information (continued)
ES&L Bancorp, Inc. has paid the following per share cash dividends, adjusted to
reflect the effect of the 1996 three-for- two stock split, to its shareholders
during the past three fiscal years:
<TABLE>
<CAPTION>
1997 Fiscal Year 1996 Fiscal Year 1995 Fiscal Year
<S> <C> <C>
8/30/96 $0.17 8/31/95 $0.1133 9/1/94 $0.10
11/29/96 $0.17 11/30/95 $0.1133 12/1/94 $0.10
2/28/97 $0.17 2/29/96 $0.1133 3/1/95 $0.10
5/30/97 $0.17 5/31/96 $0.1133 6/1/95 $0.10
----- ------- -----
$0.68 $0.4532 $0.40
Dividend Payment Ratio 31.76% 22.11% 21.28%
</TABLE>
On July 15, 1997, the Board of Directors of the Corporation declared a special
cash dividend of $1.00 per share, payable July 31, 1997 to stockholders of
record on July 22, 1997.
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, 1997, the Corporation had 847,034 shares of common stock
outstanding. At September 2, 1997, 843,717 shares were outstanding, representing
approximately 450 shareholders of record, excluding those shares registered in
the "street name" of brokerage firms and stock depositories.
Corporate Information______________ Auditors, Agents and Counsel___________
Main Office Independent Auditors
- ----------- --------------------
300 West Water Street Mengel, Metzger, Barr & Co. LLP
Elmira, New York 14901 Suite 210
607-733-5533 147 West Gray Street
Elmira, New York 14901
"CASHLESS" Deposit Office
- -------------------------
200 East Buffalo Street General Counsel
Suite 101B ---------------
Ithaca, NY 14850 Denton, Keyser, LaBrecque & Moore
607-272-4880 150 Lake Street
Elmira, New York 14901
Subsidiaries
------------
Special Counsel
Brilie Corporation ---------------
- ------------------ Housley Kantarian & Bronstein, P.C.
ES&L Financial Services Suite 700
300 West Water Street 1220 19th Street, NW
Elmira, New York 14901 Washington, D.C. 20036
607-733-5533
Stock Registrar and Transfer Agent
ES&L Mortgage Corporation ----------------------------------
- ------------------------- American Stock Transfer & Trust Co.
Cayuga Mortgage Company 40 Wall Street
200 East Buffalo Street New York, New York 10005
Suite 101B (800) 937-5449
Ithaca, New York 14850
607-272-3595
Meeting Information ____________________________________________________________
The annual Meeting of Stockholders of ES&L Bancorp, Inc. will be held at the
Downtown Elmira Holiday Inn, One Holiday Plaza, Elmira, New York, on Monday,
October 27, 1997, at 7:00 p.m.
ES&L Bancorp, Inc.
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31
<PAGE>
<TABLE>
<CAPTION>
DIRECTORS
- --------------------------------------------------------------------------------------------
<S> <C>
Robert E. Butler - Dr. Adrian P. Hulsebosch -
Chairman of the Board Retired Othodontist
President, Deister & Butler, Inc.
Owner, H. H. Equipment, Inc. Jack H. Mikkelsen -
Retired President,
William A. McKenzie - Zeiser Wilbert Vault, Inc.
President and Chief Executive Officer,
Elmira Savings & Loan, F.A. Frederick J. Molter -
Professional Engineer,
John F. Cadwallader - The Sear Brown Group
President and Chief Executive Officer,
The Glass Company Paul Morss -
Owner, Windshield Installation Network, Inc. Retired Insurance Executive,
Swan & Sons Morss Co. Insurance Agency
L. Edward Considine -
Professional Engineer, Gerald F. Schichtel -
Hunt Engineers and Architects President,
Retired General Manager, Elmira Water Board Hilliard Corporation
</TABLE>
All directors of ES&L Bancorp, Inc. are directors of Elmira Savings and Loan,
F.A.
<TABLE>
<CAPTION>
OFFICERS
- ------------------------------------------------------------------------------------
<S> <C>
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 Maryanna S. Atkinson
Vice President Assistant Vice President
Lynn M. Morris Brenda A. Bement
Vice President Assistant Vice President
James D. Stanton Larry A. Tressler
Vice President Assistant Treasurer
Judy A. Peters Robin M. Fuller (1)
Vice President Assistant Vice President
Michael J. Crimmins Shirley L. Gleockner
Vice President Corporate Secretary
</TABLE>
(1)- Elected October 15, 1996
All officers of ES&L Bancorp, Inc. are officers of Elmira Savings and Loan, F.A.
ES&L Bancorp, Inc.
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32
<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.
COPIES OF THE CORPORATION'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED
JUNE 30, 1997, 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.
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<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, 1997 appearing in
this Annual Report on Form 10-K of ES&L Bancorp, Inc. for this fiscal year ended
June 30, 1997.
/s/ Mengel, Metzger, Barr & Co., LLP
Elmira, New York
September 23, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 723
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1470
<INVESTMENTS-CARRYING> 5508
<INVESTMENTS-MARKET> 5521
<LOANS> 139,322
<ALLOWANCE> 1,436
<TOTAL-ASSETS> 149,641
<DEPOSITS> 111,749
<SHORT-TERM> 16,710
<LIABILITIES-OTHER> 3130
<LONG-TERM> 3,897
0
0
<COMMON> 9
<OTHER-SE> 14,146
<TOTAL-LIABILITIES-AND-EQUITY> 149,641
<INTEREST-LOAN> 11,462
<INTEREST-INVEST> 471
<INTEREST-OTHER> 12
<INTEREST-TOTAL> 11,945
<INTEREST-DEPOSIT> 5,168
<INTEREST-EXPENSE> 6,405
<INTEREST-INCOME-NET> 5,540
<LOAN-LOSSES> 40
<SECURITIES-GAINS> (10)
<EXPENSE-OTHER> 4,012
<INCOME-PRETAX> 2,529
<INCOME-PRE-EXTRAORDINARY> 2,529
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,838
<EPS-PRIMARY> 2.14
<EPS-DILUTED> 2.14
<YIELD-ACTUAL> 5,540
<LOANS-NON> 340
<LOANS-PAST> 379
<LOANS-TROUBLED> 17
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,431
<CHARGE-OFFS> 44
<RECOVERIES> 9
<ALLOWANCE-CLOSE> 1,435
<ALLOWANCE-DOMESTIC> 1,117
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 318
</TABLE>
