<PAGE>
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 [NO FEE REQUIRED]
For the Fiscal Year Ended June 30, 1998
[ ] TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
Commission File Number: 0-18782
ES&L BANCORP, INC.
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(Exact name of registrant as specified in its charter)
Delaware 16-1387158
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(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. Yes X No
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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 ($23.25 per share), management estimates that
the aggregate market value of the voting stock held by non-affiliates of the
registrant at September 1, 1998 was $10,962,863. 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 1, 1998, there were 835,192 shares outstanding of the
registrant's common stock, of which directors and executive officers and more
than 5% beneficial owners held 363,671 shares.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Annual Report to Stockholders for the Fiscal Year
Ended June 30, 1998. (Parts I and II)
2. Portions of Proxy Statement for the 1998 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's main
office is 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, 1998, the Bank had total assets of
$152.2 million, deposits of $112.2 million, net loans receivable of $126.2
million and shareholders' equity of $14.5 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."
PROPOSED REGULATORY AND LEGISLATIVE CHANGES
On May 13, 1998, the U.S. House of Representatives by one vote passed H.R.
10 (the "Act"), the "Financial Services Competition Act of 1998," which calls
for a sweeping modernization of the banking system that would permit
affiliations between commercial banks, securities firms, insurance companies
and, subject to certain limitations, other commercial enterprises. The stated
purposes of the Act are to enhance consumer choice in the financial services
marketplace, level the playing field among providers of financial services and
increase competition.
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H.R. 10 removes the restrictions contained in the Glass-Steagall Act of
1933 and the Bank Holding Company Act of 1956, thereby allowing qualified
financial holding companies to control banks, securities firms, insurance
companies, and other financial firms. Conversely, securities firms, insurance
companies and financial firms would be allowed to own or affiliate with a
commercial bank. Under the new framework, the Federal Reserve would serve as an
umbrella regulator to oversee the new financial holding company structure.
Securities affiliates would be required to comply with all applicable federal
securities laws, including registration and other requirements applicable to
broker-dealers. The Act also provides that insurance affiliates be subject to
applicable state insurance regulations and supervision. The Act preserves the
thrift charter and all existing thrift powers, but restricts the activities of
new unitary thrift holding companies.
The Senate is now considering the legislation but may further modify the
Act. At this time, it is unknown whether the Act will be enacted, or if
enacted, what form the final version of such legislation might take.
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,
-------------------------------------------------------------
1998 1997 1996
--------------------- ------------------ ------------------
Amount % Amount % Amount %
------------ ------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
First Mortgage Permanent Loans:
Conventional 1-4 family...................... $ 65,069 51.57% $ 74,276 56.39% $ 66,251 54.47%
FHA/VA 1-4 family............................ -- -- -- -- 16 .01
Multi-family................................. 12,972 10.28 11,554 8.77 12,420 10.21
Commercial real estate....................... 29,740 23.57 28,003 21.26 25,722 21.15
Construction:
Residential................................ 1,997 1.58 2,210 1.68 1,912 1.57
Commercial................................. 2,996 2.37 2,510 1.91 2,046 1.68
-------- ------ -------- ------ -------- ------
Total first mortgage...................... $112,774 89.37 $118,553 90.01 $108,367 89.09
Consumer loans:
Home equity line of credit.................. $ 5,392 4.27 6,049 4.58 6,699 5.51
Loans on savings accounts................... 264 0.21 246 .19 214 .18
Education loans.............................. 333 0.26 462 .35 471 .39
Automobile loans............................. 460 0.36 627 .48 681 .56
Second mortgage loans........................ 5,005 3.97 4,440 3.37 3,847 3.16
Other consumer loans......................... 157 0.13 136 .11 136 .11
Demand notes................................. 954 0.76 1,188 .90 1,520 1.25
-------- ------ -------- ------ -------- ------
Total consumer loans...................... $ 12,565 9.96 13,148 9.98 13,568 11.15
Commercial lines of credit.................... $ 2,891 2.29 1,353 1.03 1,212 1.00
Commercial non-mortgage....................... 1,603 1.27 1,807 1.37 1,926 1.58
-------- ------ -------- ------ -------- ------
Total..................................... $129,833 -- $134,861 -- $125,073 --
Less:
Loans in process............................. $ (2,274) (1.80) (1,790) (1.36) (1,953) (1.60)
Allowance for loan loss.................... (1,473) (1.17) (1,435) (1.09) (1,431) (1.18)
Deferred loan origination fees and premiums.. 95 .08 75 .06 (53) (.04)
-------- ------ -------- ------ -------- ------
Total.................................... $126,181 100.00% $131,711 100.00% $121,636 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
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The following table presents at June 30, 1998 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 ending 5 years after years after
June 30, June 30, June 30,
1999 1998 1998
--------------- ------------- -----------
<S> <C> <C> <C>
Real estate mortgage....... $ 4,952,617 $19,339,683 $83,488,146
Mortgages held for resale.. 8,231,474 -- --
Real estate construction... 1,525,976 350,414 3,117,004
Installment................ 2,627,163 4,593,434 5,344,272
Commercial................. 327,970 1,306,771 2,859,199
----------- ----------- -----------
Total.................. $17,665,200 $25,590,302 $94,808,621
=========== =========== ===========
</TABLE>
The following table apportions the dollar amount of the loans due
subsequent to the year ended June 30, 1998 between those with predetermined
interest rates and those with adjustable interest rates.
<TABLE>
<CAPTION>
Predetermined Rates Adjustable Rates
------------------- ----------------
<S> <C> <C>
Real estate mortgage....... $ 4,413,237 $103,367,206
Mortgages held for resale.. 8,231,474 --
Real estate construction... 853,913 4,139,482
Installment................ 7,176,530 5,388,340
Commercial................. 28,875 4,465,066
----------- ------------
Total.................. $20,704,029 $117,360,094
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</TABLE>
ONE- TO FOUR-FAMILY MORTGAGE LOANS. At June 30, 1998, the Bank held in
its portfolio $65.1 million of first mortgage loans secured by one- to four-
family residential units, representing 51.6% 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 either the initial
interest rate or at 200 basis points above the initial rate on adjustable-rate
mortgage loans. At June 30, 1998, approximately $61.8 million of the Bank's
first mortgage one-to four-family residential loan portfolio consisted of
adjustable-rate loans.
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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 1998, the Bank, Cayuga Mortgage and PACE
Funding originated approximately $13.0 million of residential adjustable-rate
mortgage loans with such below-market rates.
The Bank also makes 15 through 30 year fixed rate fully amortizing loans.
Substantially all of 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 1998, the Bank and its
mortgage banking subsidiary originated approximately $39.4 million of fixed-rate
loans and sold $41.7 million, servicing retained, in the secondary market. At
June 30, 1998, the Bank had forward commitments to sell closed loans totaling
approximately $15.7 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, 1998, the Bank had a residential mortgage servicing
portfolio of $151.1 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. As of June 30, 1998 the Bank had $5.0 million outstanding in
construction loans. Of that amount, $2.0 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 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.
5
<PAGE>
Cayuga Mortgage and PACE Funding originated approximately $1.1 million of
the $2.0 million total residential construction loans outstanding at June 30,
1998. 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. These residential construction loans are generally
in amounts under $200,000 and are secured by single family properties.
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 project. 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 review 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, 1998, the
Bank held $29.7 million in commercial real estate loans and $13.0 million in
multi-family loans, which represented approximately 23.6% and 10.3% 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 75% and 80% 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
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.
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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, 1998.
<TABLE>
<CAPTION>
Outstanding
Number Principal Amount
of Loans Balance Non Performing
--------- ----------- --------------
<S> <C> <C> <C>
Medical facilities.................. 36 $ 5,469,059 $0.00
Retail property..................... 40 4,592,138 0.00
Office buildings.................... 36 3,419,793 0.00
Restaurant/lounge................... 15 927,984 0.00
Office and warehouse/storage units.. 15 2,541,024 0.00
Hotel/motel......................... 10 5,189,617 0.00
Nonprofit/church/school............. 8 582,468 0.00
Other............................... 52 7,018,162 0.00
--- ----------- -----
Total........................... 212 $29,740,245 $0.00
=== =========== =====
</TABLE>
CONSUMER AND COMMERCIAL BUSINESS LENDING. At June 30, 1998, the Bank's
consumer loan portfolio totaled $12.6 million and its commercial business loans
totaled $4.5 million, representing 10.0% and 3.6% of the Bank's total loan
portfolio, respectively. The majority of the loans in the Bank's consumer loan
portfolio are secured by real estate. The Bank offers a variety of secured
consumer loans, including automobile loans, home equity loans and loans secured
by savings deposits. In addition, the Bank offers home improvement loans and
other unsecured consumer loans. The Bank expects to continue, subject to market
conditions, to expand its consumer lending activities as part of its plan to
provide a wide range of personal financial services to its customers. Management
believes that the shorter terms and normally higher interest rates available on
various types of consumer loans will be helpful in maintaining a profitable
spread between Elmira Savings & Loan's average loan yield and its cost of funds.
Consumer loans may entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans which are unsecured or secured by
rapidly depreciable assets such as automobiles. In such cases, any repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance as a result of the greater likelihood
of damage, loss or depreciation. The remaining deficiency often does not
warrant further substantial collection efforts against the borrower. In
addition, consumer loan collections are dependent on the borrower's continuing
financial stability, and thus are more likely to be adversely affected by job
loss, divorce, illness or personal bankruptcy. Furthermore, the application of
various federal and state laws, including federal and state bankruptcy and
insolvency laws, may limit the amount which can be recovered on such loans.
Such loans may also give rise to claims and defenses by a consumer loan borrower
against an assignee of such loans such as the Bank, and a borrower may be able
to assert against such assignee claims and defenses which it has against the
seller of the underlying collateral. These risks are somewhat minimized with
respect to the Bank's consumer loan portfolio since the majority of these loans
are home equity loans secured by residential real estate.
The Bank adds general provisions to its consumer loan loss allowance, based
on general economic conditions and prior loss experience. The Bank's allowance
for consumer loan losses at June 30, 1998 was equal to $115,599, or
approximately .92% 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 ($106,000, or
approximately 0.84% of the consumer loan portfolio, at June 30, 1998), there can
be no assurance that delinquencies will not increase in the future.
7
<PAGE>
Since 1986, the Bank has been actively involved in originating home equity
lines of credit. These loans amounted to $5.4 million or 4.3% of the Bank's
loan portfolio at June 30, 1998. 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, 1998, these consumer mortgages
totaled $5.0 million, or 4.0% 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 $460,000
outstanding at June 30, 1998), and had approximately $950,000 of secured and
unsecured time and demand notes outstanding at June 30, 1998.
The Bank had approximately $1.6 million of commercial business loans
outstanding at June 30, 1998 which were not collateralized by real estate.
Approximately 44.8% 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, 1998, lines totaling
$4.0 million had been approved with loan balances outstanding of approximately
$2.9 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, for its portfolio, lends up to 95% of the lower of
current cost or appraised value of a residential one-to-four family property,
and typically 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.
Certain residential mortgages originated for sale in the national secondary
mortgage market may exceed a 95% loan-to-value, based on the specific investor
product requirements.
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
8
<PAGE>
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, 1998, 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, 1998, the Bank was servicing
residential loans for others in the amount of $151.1 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 1998, Cayuga Mortgage and PACE Funding originated
$27.4 million in loans for sale to the Bank.
Set forth below is a table showing the Bank's loan origination and sales
activity for the periods indicated. Neither loans originated by Cayuga Mortgage
for sale to investors other than the Bank nor loans closed by Cayuga Mortgage
and sold to investors other than the Bank are included in this table. Loans
originated by Cayuga Mortgage for sale to the Bank are not considered loan sales
because no income is generated for the subsidiary in accordance with the
provisions of Financial Accounting Standards Statement No. 91. See Note A to
the Notes to Consolidated Financial Statements included in the Corporation's
Annual Report to Stockholders for the Fiscal Year Ended June 30, 1998 (the
"Annual Report") filed as Exhibit 13 to this 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,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
(In thousands)
Loans originated:
Conventional real estate loans:
Construction loans.......................... $ 3,887 $ 1,477 $ 2,871
Loans on existing property.................. 34,862 35,787 25,482
Loans refinanced............................ 18,899 7,726 17,902
Insured and guaranteed loans................. 2,707 3,194 1,852
Consumer..................................... 2,491 2,080 2,277
Commercial loans............................. 146 470 1,728
Other loans.................................. 5,279 3,397 3,556
-------- -------- --------
Total loans originated...................... $ 68,271 $ 54,131 $ 55,668
Loans sold:
Whole Loans.................................. (42,311) (27,682) (30,216)
Participation loans.......................... -- (375) --
-------- -------- --------
Total loans sold............................ (42,311) (28,057) (30,216)
Loans held for sale........................... (8,231) (4,461) ( 5,458)
Principal repayments.......................... (21,969) (13,060) (12,571)
Loans transferred to foreclosed real estate.. (737) (173) (214)
Increase (decrease) in other items, net...... (553) 1,695 (3,760)
-------- -------- --------
Net increase (decrease)...................... $ (5,530) $ 10,075 $ 3,449
======== ======== ========
</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, 1998, Elmira Savings & Loan was servicing approximately
$151.1 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, 1998, the Bank's
outstanding commitments totaled approximately $5.3 million.
10
<PAGE>
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
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, 1998, 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, 1998, 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, 1998, the Bank had one loan totaling approximately $17,000,
which was classified as a troubled debt restructured loan in accordance with
SFAS 118. The loan, a home equity line of credit, was classified at both June
30, 1998 and 1997 as a result of a Chapter 13 Bankruptcy filing. There were no
loans classified as troubled debts at June 30, 1996.
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,
--------------------------------
1998 1997 1996
---------- --------- ---------
<S> <C> <C> <C>
Loans accounted for on a non-accrual basis: (1)
Real Estate:
Residential................................... $183,402 $250,078 $176,550
Commercial and Multi-Family................... 80,218 61,132 --
Consumer/Home Equity.......................... 32,307 29,193 46,103
Consumer........................................ -- -- --
Other........................................... -- -- --
-------- -------- --------
Total............................................. $295,927 $340,403 $222,653
======== ======== ========
Accruing loans which are contractually past due
90 days or more:
Real Estate:
Residential................................... $ -- $ 62,898 $ 70,368
Commercial and Multi-Family................... -- 316,148 --
Consumer/Home Equity.......................... -- -- --
Education...................................... -- -- --
Consumer....................................... -- -- 9,862
Other.......................................... -- -- --
--------- -------- --------
Total....................................... $ $379,046 $ 80,230
========= ======== ========
Troubled debt restructurings...................... $ 17,060 $ 17,116 $ --
========= ======== ========
Total of nonaccrual and 90 days past
due loans and troubled debt restructurings...... $312,987 $736,565 $302,883
======== ======== ========
Percentage of total loans......................... .23% .55% .24%
======== ======== ========
Other non-performing assets (2)................... $485,226 $131,000 $ 90,815
======== ======== ========
- - ------------------------
</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, 1998, gross interest income of $31,945 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 $7,702.
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,
-------------------------------------
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
Balance at beginning of period........................................... $1,435,499 $1,430,781 $1,423,826
Loans charged-off:
Real Estate -- mortgage:
Residential........................................................... 101,993 44,466 260
Commercial............................................................ 125,404 -- 48,398
Commercial business..................................................... 10,506 -- --
Consumer................................................................ 32,087 -- 5,549
---------- ---------- ----------
Total charge-offs........................................................ $ 269,990 $ 44,466 $ 54,207
---------- ---------- ----------
Recoveries:
Real Estate--Mortgage:
Residential.......................................................... $ 7,630 $ 8,140 $ --
Commercial........................................................... 147 292 412
Commercial business.................................................... -- -- --
Consumer............................................................... 60 752 750
---------- ---------- ----------
Total recoveries......................................................... $ 7,837 $ 9,184 $ 1,162
---------- ---------- ----------
Net loans charged-off.................................................... $ (262,153) $ (35,282) $ (53,045)
Provision for possible loan losses...................................... 300,000 40,000 60,000
Allocation to specific reserve........................................... (68,000) (33,000) --
General Allowance for Loan Losses........................................ 1,405,346 1,402,499 1,430,781
Specific Allowance for Loan Losses....................................... 68,000 33,000 --
---------- ---------- ----------
Total Allowance....................................................... $1,473,346 $1,435,499 $1,430,781
========== ========== ==========
Ratio of net charge-offs to average
loans outstanding during the period.................................. .21% .03% .04%
========== ========== ==========
</TABLE>
For a discussion of the Bank's provision for loan losses in fiscal year
1998, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Comparison of Operating Results for the Years Ended
June 30, 1998 and 1997 -- 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,
-----------------------------------------------------------------------------------
1998 1997 1996
-------------------------- ----------------------------- ------------------------
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....................... $ 255,086 17.34% $ 310,754 21.64% $ 273,197 55.80%
Commercial........................ 704,155 47.79 671,293 46.76 515,270 32.80
Commercial business................. 29,000 1.96 34,000 2.36 37,000 1.60
Consumer............................ 115,599 7.84 101,585 7.07 81,369 9.80
Unallocated......................... 369,505 25.07 % 317,867 22.17 523,945 N/A
---------- ------ ---------- ------ ---------- ------
Total allowance for loan losses $1,473,345 100.00% $1,435,499 100.00% $1,430,781 100.00%
========== ====== ========== ====== ========== ======
</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, 1998, the Bank had $1,461,629 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, 1998, the market value of the Bank's investment
securities portfolio was approximately $8.4 million.
<TABLE>
<CAPTION>
At June 30,
-----------------------
1998 1997 1996
------- ------ ------
(In thousands)
<S> <C> <C> <C>
Investment securities:
U.S. Government and agency securities.... $1,000 $3,991 $2,988
Corporate debt securities................. 25 32 42
Corporate Stock........................... 82 66 49
------ ------ ------
Total investment securities............. $1,107 $4,089 $3,079
Federal funds sold and overnight deposits.. 6,000 -- --
------ ------ ------
Total investment securities, federal
funds sold and overnight deposits.... 7,107 4,089 3,079
Federal Home Loan Bank of New York stock... 1,313 1,313 1,104
------ ------ ------
Total investments....................... $8,420 $5,402 $4,183
====== ====== ======
</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, 1998, the market value of investment securities "Held to
Maturity" was approximately $1,000 higher than the carrying value while the
"Available for Sale" investment was approximately $46,500 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, 1998.
<TABLE>
<CAPTION>
One Year or Less One to five Years Five to Ten Years More than Ten Years Total Investment Portfolio
----------------- ----------------- ----------------- ------------------- --------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Market Average
Value Yield Value Yield Value Yield Value Yield Value Value Yield
-------- ------- -------- ------- -------- ------- -------- -------- -------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
U.S. Government and
agency obligations....... $ -- --% $1,000 7.13% $ -- --% $ -- --% $1,000 $1,001 7.13%
Corporate debt securities. -- -- -- -- -- -- 25 6.66 25 25 6.66
Corporate Stock............ -- -- -- -- -- -- 82 2.21 82 82 2.21
-------- -------- ------- ------- ------- ------- ------ ------ ------
Total..................... $ -- -- $1,000 7.13% $ -- -- $ 107 3.25% $1,107 $1,108 6.75%
======== ======== ======= ======= ======= ======= ====== ====== ======
</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
15.5% of deposits at June 30, 1998. Under New York law, the Bank is not
permitted as a savings association to accept public funds. The jumbo deposits
in the portfolio have come from local union funds, businesses and individuals,
the majority of which have been longstanding customers of the Bank; these funds
do not represent brokered deposits.
17
<PAGE>
The following table sets forth the change in dollar amount of deposits in
the various types of accounts offered by the Bank between the dates indicated.
<TABLE>
<CAPTION>
Increase Increase
(Decrease) (Decrease)
Balance Balance from June 30, Balance from June 30,
at June 30, % at June 30, % 1997 to June at June 30, % 1996 to June
1998 Deposits 1997 Deposits 30, 1998 1996 Deposits 30, 1997
------------ -------- ------------ -------- ----------- ------------ -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest bearing
savings
account.................. $ 1,427,622 1.27% $ 407,841 .36% 1,019,781 $ 1,224,899 1.15% (817,058)
NOW checking account....... 4,078,966 3.64 4,443,572 3.98 (364,606) 4,010,094 3.76 433,478
Jumbo certificates......... 17,361,558 15.48 15,651,466 14.01 1,710,092 13,940,224 13.07 1,711,242
Super NOW checking accounts 2,836,831 2.53 2,900,320 2.60 (63,489) 1,507,242 1.41 1,393,078
Passbook and statement
savings................... 14,817,520 13.20 14,183,722 12.69 633,798 15,552,151 14.58 (1,368,429)
Money market deposit
accounts.................. 5,275,041 4.70 5,232,229 4.68 42,812 5,727,747 5.37 (495,518)
Six month money market
certificates............. 3,932,711 3.51 5,195,663 4.65 (1,262,952) 4,811,089 4.51 384,574
30 and 48 month
certificates.............. 3,604,647 3.21 4,126,996 3.69 (522,349) 4,281,412 4.02 (154,416)
IRA certificates, excluding
jumbo certificates....... 4,645,049 4.14 4,515,806 4.04 129,243 4,211,301 3.95 304,505
Other certificates......... 54,199,886 48.32 55,090,903 49.30 (891,017) 51,386,670 48.18 3,704,233
------------ ------ ------------ ------ ----------- ------------ ------ -----------
Total.................. $112,179,831 100.00% $111,748,518 100.00% $ 431,313 $106,652,829 100.00% $ 5,095,689
============ ====== ============ ====== =========== ============ ====== ===========
</TABLE>
18
<PAGE>
Deposits in the Bank as of June 30, 1998 were represented by the various
types of savings programs described below.
<TABLE>
<CAPTION>
Weighted
Average Percentage
Interest Minimum Balance in of Total
Rate Term Category Amount Thousands Savings
- - ----------- ------------ ----------------------------------------- ---------- ---------- ----------
<C> <S> <C> <C> <C> <C>
Demand Deposits
-----------------------------------------
--% On Demand Non-Interest Bearing Savings Accounts $ 1 $ 1,428 1.27
-- On Demand NOW Accounts 10 4,079 3.64
2.81 On Demand Passbook and Statement Savings Accounts 5 14,588 13.00
2.96 On Demand Money Market Accounts 2,500 5,275 4.70
1.74 On Demand Super NOW Accounts 2,500 2,837 2.53
2.81 On Demand Holiday Club Accounts 1 229 0.20
Certificates of Deposit
-----------------------------------------
3.55 30 Days 30 Day Certificate, Fixed-Rate 20,000 208 0.19
4.89 91 Days 91 Day Certificate, Fixed-Rate 2,500 1,495 1.33
5.08 182 Days 6 Month Certificate, Fixed-Rate 2,500 4,261 3.80
5.18 8 Months 8 Month Certificate, Fixed-Rate 500 1,343 1.20
5.17 9 Months 9 Month Certificate, Fixed-Rate 5,000 525 0.47
5.19 10 Months 10 Month Certificate, Fixed-Rate 500 163 0.15
5.70 11 Months 11 Month Certificate, Fixed Rate 2500 20,663 18.42
5.37 12 Months 1 Year Certificate, Fixed-Rate 500 4,666 4.16
5.55 14 Months 14 Month Certificate, Fixed-Rate 2,500 14,211 12.67
5.38 18 Months 18 Month Certificate, Fixed-Rate 500 673 0.60
5.79 24 Months 24 Month Certificate, Fixed-Rate 500 10,511 9.37
5.57 100 Weeks 100 Week Certificate, Fixed-Rate 5,000 317 0.28
5.45 30 Months 30 Month Certificate, Fixed-Rate 500 6,713 5.98
5.86 36 Months 36 Month Certificate, Fixed-Rate 2,500 3,148 2.80
6.22 48 Months 4 Year Certificate, Fixed-Rate 500 3,142 2.80
6.44 60 Months 5 Year Certificate, Fixed-Rate 500 10,345 9.22
5.33 12 Months 1 Year Mini Jumbo Certificate, Fixed-Rate 20,000 1,353 1.21
5.41 18 Months 18 Month Certificate, Variable-Rate 10 7 0.01
-------- ------
$112,180 100.00%
======== ======
</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,
1998.
<TABLE>
<CAPTION>
Maturity Period Amount
--------------------------- --------------
(In thousands)
<S> <C>
Three months or less....... $ 9,261
Three through six months... 1,918
Six through twelve months.. 4,347
Over twelve months......... 1,836
-------
Total.................... $17,362
=======
</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,
----------------------------------------------------------------
1998 1997 1996
-------------------- -------------------- --------------------
Demand Time Demand Time Demand Time
Deposits Deposits Deposits Deposits Deposits Deposits
--------- --------- --------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Average Balance.. $27,597 $87,128 $27,273 $82,040 $27,854 $78,963
Average Rate..... 2.51% 5.55% 2.63% 5.42% 2.59% 5.62%
</TABLE>
The following table sets forth the Bank's deposit activities for the
periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------
1998 1997 1996
--------- --------- --------
(In thousands)
<S> <C> <C> <C>
Deposits........................................... $155,419 $140,913 $137,013
Withdrawals........................................ 160,526 140,920 136,505
-------- -------- --------
Net increase (decrease) before interest credited.. (5,107) (7) 508
Interest credited.................................. 5,538 5,103 5,130
-------- -------- --------
Net increase (decrease) in deposits............... $ 431 $ 5,096 $ 5,638
======== ======== ========
</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, 1998, Elmira Savings & Loan had advances totaling $21.9
million from the FHLB of New York.
20
<PAGE>
The FHLB of New York functions as a central bank providing credit for
savings institutions and certain other member financial institutions. As a
member, Elmira Savings & Loan is required to own capital stock in the FHLB and
is authorized to apply for advances on the security of such stock and certain of
its home mortgages and other assets (principally, securities which are
obligations of, or guaranteed by, the United States) provided certain standards
related to creditworthiness have been met.
From time to time the Bank borrows funds under reverse repurchase
agreements. Under a reverse repurchase agreement, the Bank sells securities
(generally government securities, mortgage-backed securities and FHLMC
participation certificates) and agrees to repurchase them at a specified price
at a later date. Reverse repurchase agreements are generally for terms of up to
90 days, are subject to renewal, and are deemed to be borrowings collateralized
by the securities sold. At June 30, 1998, 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,
---------------------
1998 1997
---------- ----------
<S> <C> <C>
Weighted average rate...................... 6.54% 6.47%
</TABLE>
<TABLE>
<CAPTION>
During the
Year Ended June 30,
---------------------
1998 1997
----------- --------
(In thousands)
<S> <C> <C>
Maximum amount outstanding at any
month end................................. $21,700 $22,000
Approximate average amount.................. $11,408 $18,208
Approximate weighted average rate paid (1).. 6.00% 6.01%
</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,
-------------------------------------------------------------------------------------------------------
1998 vs. 1997 1997 vs. 1996 1996 vs. 1995
--------------------------------- --------------------------------- ---------------------------------
Increase (Decrease) Increase (Decrease) Increase (Decrease)
Due to Due to Due to
--------------------------------- --------------------------------- ---------------------------------
Volume Rate Net Volume Rate Net Volume Rate Net
---------- ---------- --------- ---------- ---------- --------- --------- --------- -----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Loan portfolio............ $468,365 (55,547) 412,818 $644,680 $ (38,481) $606,199 $632,378 $706,768 $1,339,146
Investment securities..... (96,077) 11,282 (84,795) 10,642 10,141 20,783 957 2,074 3,031
Mortgage-backed
securities.............. (34,920) 13,800 (21,120) (37,940) (19,458) (57,398) (38,852) 29,147 (9,705)
Interest-earning deposits
with other banks........ 20,326 ( 6,558) 13,768 (7,344) 3,746 (3,598) (412) (5,211) (5,623)
-------- --------- -------- -------- --------- -------- -------- -------- ----------
Total interest earning
assets................ $357,694 (37,023) 320,671 $610,038 $ (44,052) $565,986 $594,071 $732,778 $1,326,849
-------- --------- -------- -------- --------- -------- -------- -------- ----------
Interest expense:
Demand deposits........... $ 8,453 (35,063) (26,610) $(15,190) $ 12,307 $ (2,883) $(40,656) $(55,808) $ (96,464)
Time deposits............. 280,610 103,349 383,959 169,681 (155,964) 13,717 472,128 300,043 772,171
Borrowings and advances... (64,707) 3,831 (60,876) 210,150 (11,719) 198,431 (36,156) 81,318 45,162
-------- --------- -------- -------- --------- -------- -------- -------- ----------
Total interest-bearing
liabilities........... $224,356 72,117 296,473 $364,641 $(155,376) $209,265 $395,316 $325,553 $ 720,869
-------- --------- -------- -------- --------- -------- -------- -------- ----------
Increase (decrease) in net
interest income........... $133,338 $(109,140) $ 24,198 $245,398 $ 111,323 $356,721 $198,755 $407,225 $ 605,980
======== ========= ======== ======== ========= ======== ======== ======== ==========
</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,
-----------------------------------------------------------------------------------------------------
1998 1997 1996
-------------------------------- -------------------------------- ------------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
------------ ----------- -------- ------------ ----------- ------- ------------ ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Total loan portfolio
(1)................... $138,797,744 $11,874,446 8.55% $133,325,929 $11,461,628 8.60% $125,828,250 $10,855,429 8.63%
Investment securities,
including
FHLB stock............. 3,836,541 254,680 6.64 5,289,207 339,475 6.42 5,120,897 318,692 6.22
Mortgage-backed
securities.............. 1,429,283 110,899 7.76 1,894,287 132,019 6.97 2,416,603 189,417 7.84
Interest-Earning
Deposits............... 1,039,447 25,635 2.47 284,727 11,867 4.17 479,325 15,465 3.23
------------ ----------- ---- ------------ ----------- ------ ------------ ----------- ------
Total interest-earning
assets................ $145,103,015 $12,265,660 8.45% $140,794,150 $11,944,989 8.48% $133,845,075 $11,379,003 8.50%
Non-interest earning
assets................... 5,284,444 4,716,671 4,226,208
------------ ------------ ------------
Total assets........... $150,387,459 $145,510,821 $138,071,283
============ ============ ============
Interest-bearing
liabilities:
Demand deposits.......... $ 27,596,906 $ 692,009 2.51 $ 27,272,996 $ 718,619 2.63 $ 27,853,918 721,502 2.59
Time deposits............ 87,128,369 4,833,624 5.55 82,039,648 4,449,665 5.42 78,962,880 4,435,948 5.62
------------ ----------- ---- ------------ ----------- ------ ------------ ----------- ------
Total deposits,
including escrows..... 114,725,275 5,525,633 4.82% 109,312,644 5,168,284 4.73% 106,816,798 5,157,450 4.83%
Borrowings............... 20,884,473 1,175,585 5.63 22,034,197 1,236,462 5.61 18,291,440 1,038,030 5.67
------------ ----------- ---- ------------ ----------- ------ ------------ ----------- ------
Total interest-bearing
liabilities........... $135,609,748 $ 6,701,218 4.94% $131,346,841 $ 6,404,745 4.88% $125,108,238 $ 6,195,480 4.95%
Non-interest-bearing
liabilities............... 1,268,273 1,261,612 1,223,028
------------ ------------ ------------
Total liabilities...... $136,878,021 $132,608,453 $126,331,266
Retained earnings.......... 13,509,438 12,902,368 11,740,017
------------ ------------ ------------
Total liabilities and
retained earnings..... $150,387,459 $145,510,821 $138,071,283
============ ============ ============
Net interest income........ $ 5,564,442 $ 5,540,244 $ 5,183,523
============ ============ ============
Interest rate spread....... 3.51% 3.61% 3.55%
==== ==== ====
Net yield on
interest-earning assets... 3.83% 3.93% 3.88%
==== ==== ====
Ratio of average
interest-earning assets to
average interest-bearing
liabilities............. 107.00% 107.19% 106.98%
====== ====== ======
</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, 1998, Elmira Savings & Loan was authorized to invest
up to approximately $3.0 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, 1998, 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 division of Brilie Corporation had net
pretax revenues of approximately $75,700 during fiscal year 1998. 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, 1998.
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, 1998, the Bank had loaned
approximately $636,000 to the partnership. Brilie Corporation earned $54,800
from this partnership during the fiscal year ended June 30, 1998.
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, 1998, Cayuga
Mortgage and PACE Funding originated approximately $28.7 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, 1998.
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, 1998, Elmira Savings & Loan and its subsidiaries had 39
full-time and 3 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 1998 Position
- - ---------------------- -------- -------------------------------------
<S> <C> <C>
William A. McKenzie 47 President and Chief Executive Officer
J. Michael Ervin 49 Senior Vice President and Treasurer
Michael J. Wayne 37 Vice President
Lynn M. Morris 46 Vice President
James D. Stanton 51 Vice President
Judy A. Peters 40 Vice President
Michael J. Crimmins 46 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 Inc., 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
Tier
25
<PAGE>
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 and
immediate past President of Woodbrook, Inc., and Board member and Assistant
Treasurer 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 Inc. Mr. Wayne is a Board
member of 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 is a Committee Chairman
for the 1999 United Way Fund Drive and a member of the Chemung County Chamber
Reaccreditation Task Force. He is a division leader for the Clemens Center
1998/1999 Capital Fund Raising Campaign. 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 is presently a member of the Advisory Board
for R.S.V.P. (Retired Senior Volunteer Program) and is a Board Member of the
Near Westside Neighborhood Association. 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
26
<PAGE>
to conduct special examinations of the Bank. The Bank must file reports with
OTS describing its activities and financial condition, and is subject to certain
reserve requirements promulgated by the Federal Reserve Board. This supervision
and regulation is intended primarily for the protection of depositors. As a
savings and loan holding company, the Corporation is subject to OTS regulation,
examination, supervision and reporting requirements. Certain of these
regulatory requirements are referred to in the following paragraphs or appear
elsewhere herein.
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, 1998, 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,
1998, Elmira Savings & Loan had advances of $21.9 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 4%) of its net withdrawable savings deposits plus short-term
borrowings. Monetary penalties may be imposed for failure to meet liquidity
requirements. The average daily liquidity ratio of the Bank for June 1998 was
12.45%.
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
27
<PAGE>
portfolio 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, 1998, approximately 84.1% 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, 1998,
the Bank was permitted to lend approximately $2.2 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, 1998, the largest amount outstanding to
any one borrower of the Bank was $1.9 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 3.0% of adjusted total
assets and "total" capital (a combination of core and "supplementary" capital)
equal to 8.0% of risk-weighted assets. In addition, the OTS has recently
adopted regulations which impose certain restrictions on savings associations
that have a total risk-based capital ratio that is less than 8.0%, a ratio of
Tier 1 capital to risk-weighted assets of less than 4.0% or a ratio of Tier 1
capital to adjusted total assets of less than 4.0% (or 3.0% if the institution
is rated composite 1 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, 1998, the Bank had $766,000 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, 1998, the Bank's
adjusted total assets for the purposes of the core and tangible capital
requirements were approximately $151.5 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, all equity
investments and that portion of the institution's land loans and non-residential
construction loans in excess of 80% loan-to-value ratio. As of June 30, 1998,
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, 1998.
<TABLE>
<CAPTION>
At June 30, 1998
-----------------------
Percent
of
Amount Assets (1)
---------- -----------
(Dollars in thousands)
<S> <C> <C>
Tangible Capital................. $13,540 8.94%
Tangible Capital Requirement..... 2,273 1.50
------- -----
Excess........................... $11,267 7.44%
======= =====
Tier 1/Core Capital.............. 13,540 8.94%
Tier 1/Core Capital Requirement.. 4,546 3.00
------- -----
Excess........................... $ 8,994 5.94%
======= =====
Risk-Based Capital............... 14,805 14.65%
Risk-Based Capital Requirement... 8,087 8.00
------- -----
Excess........................... $ 6,718 6.65%
======= =====
- - -------------------------
</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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<PAGE>
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
30
<PAGE>
officers of a significantly undercapitalized institution may not receive bonuses
or increases in compensation without prior approval and the institution is
prohibited from making payments of principal or interest on its subordinated
debt. In their discretion, the federal banking regulators may also impose the
foregoing sanctions on an undercapitalized institution if the regulators
determine that such actions are necessary to carry out the purposes of the
prompt corrective action provisions. If an institution's ratio of tangible
capital to total assets falls below a "critical capital level," the institution
will be subject to conservatorship or receivership within 90 days unless
periodic determinations are made that forbearance from such action would better
protect the deposit insurance fund. Unless appropriate findings and
certifications are made by the appropriate federal bank regulatory agencies, a
critically undercapitalized institution must be placed in receivership if it
remains critically undercapitalized on average during the calendar quarter
beginning 270 days after the date it became critically undercapitalized.
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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<PAGE>
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.
Historically, institutions with SAIF-assessable deposits, like the Bank,
paid higher deposit insurance premiums than institutions with deposits insured
by the Bank Insurance Fund ("BIF") also 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 fiscal 1997.
The special assessment recapitalized the SAIF, and as a result, the FDIC
lowered the SAIF deposit insurance assessment rates 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. 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, or sooner if the two funds are merged,
both BIF and SAIF members will be assessed at the same rate for FICO payments.
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 $47.8 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, 1998, 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.
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
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<PAGE>
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 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
33
<PAGE>
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 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.
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<PAGE>
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.
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
35
<PAGE>
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. 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, 1998, 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 $44,500 at June 30, 1998.
At June 30, 1998, the net book value of the Bank's furniture, fixtures and
equipment (including leasehold improvements) was approximately $285,000.
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ITEM 3. LEGAL PROCEEDINGS
- - --------------------------
Although the Bank is, from time to time, involved in various legal
proceedings in the normal course of business, there are no material pending
legal proceedings to which the Corporation, the Bank or its subsidiary is a
party, or to which any of their property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- - ------------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended June 30, 1998.
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, 1998, 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.
37
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- - --------------------------------------------------------------------------------
OF OPERATIONS
- - -------------
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Annual Report is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- - ----------------------------------------------------
The financial statements contained in the Annual Report which are listed
under Item 14 herein are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- - ------------------------------------------------------------------------
FINANCIAL DISCLOSURE
- - --------------------
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- - ------------------------------------------------------------
The information contained under the section captioned "Proposal I --
Election of Directors" and "Beneficial Ownership Reports" in the Corporation's
definitive Proxy Statement for the Corporation's 1998 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.
38
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- - --------------------------------------------------------
The information required by this item is incorporated herein by reference
to the section captioned "Proposal I --Election of Directors" of the Proxy
Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- - --------------------------------------------------------------------------
(a)(1) The Consolidated Financial Statements and Independent Auditors'
Report included in the Annual Report, listed below, are incorporated herein by
reference.
1. Report of Independent Certified Public Accountants
2. Consolidated Balance Sheets as of June 30, 1998 and 1997
3. Consolidated Statements of Income for the Years Ended June 30, 1998,
1997 and 1996
4. Consolidated Statements of Changes in Shareholders' Equity for the Years
Ended June 30, 1998, 1997 and 1996
5. Consolidated Statements of Cash Flows for the Years Ended June 30, 1998,
1997 and 1996
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 1998 Annual Report to Stockholders ***
Exhibit No. 21 Subsidiaries of the Registrant
Exhibit No. 23 Consent of Independent Accountants
Exhibit No. 27 Financial Data Schedule
- - -------------------------
* 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.
*** The 1998 Annual Report to Stockholders is included as an exhibit to this
Report. Except for those portions of the 1998 Annual Report to Stockholders
which have been expressly incorporated by reference into this Annual Report
on 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.
(b) None.
(c) Exhibits to this Form 10-K are attached or incorporated by reference as
stated above.
(d) None.
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 22, 1998 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 22, 1998
William A. McKenzie
Principal Executive Officer and
Director
By: /s/ J. Michael Ervin
--------------------------------- Date: September 22, 1998
J. Michael Ervin
Principal Financial and Accounting
Officer
By: /s/ Robert E. Butler
--------------------------------- Date: September 22, 1998
Robert E. Butler
Director
By: /s/ John F. Cadwallader
--------------------------------- Date: September 22, 1998
John F. Cadwallader
Director
By: /s/ L. Edward Considine
--------------------------------- Date: September 22, 1998
L. Edward Considine
Director
By: /s/ Dr. Adrian P. Hulsebosch
--------------------------------- Date: September 22, 1998
Dr. Adrian P. Hulsebosch
Director
40
<PAGE>
By: /s/ Jack H. Mikkelsen
---------------------------------- Date: September 22, 1998
Jack H. Mikkelsen
Director
By: /s/ Frederick J. Molter
---------------------------------- Date: September 22, 1998
Frederick J. Molter
Director
By: /s/ Paul Morss
---------------------------------- Date: September 22, 199A
Paul Morss
Director
By: /s/ Gerald F. Schichtel
---------------------------------- Date: September 22, 1998
Gerald F. Schichtel
Director
41
<PAGE>
EXHIBIT 13
================================================================================
1998
ANNUAL
REPORT
[LOGO OF ES&L BANCORP, INC. APPEARS HERE]
================================================================================
<PAGE>
Selected Consolidated Financial Data
<TABLE>
<CAPTION>
SUMMARY OF FINANCIAL CONDITION
- - ------------------------------------------------------------------------------------------------------------------------------------
At June 30 1998 1997 1996 1995 1994
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total amount of:
Assets $152,160,204 $149,641,144 $140,138,518 $136,484,313 $120,933,211
Loans receivable, net 126,181,335 131,710,850 121,636,011 118,186,529 106,437,875
Cash and investment securities (1) 8,474,514 4,812,020 4,452,792 5,305,872 5,487,223
Mortgage-backed securities 1,348,600 1,575,642 2,069,579 2,867,553 3,257,042
Deposit accounts 112,179,831 111,748,518 106,652,829 101,014,522 86,856,773
Advances from FHLB 21,897,090 20,606,615 17,615,560 20,523,963 20,831,855
Shareholders' equity, substantially
restricted 14,500,671 14,155,282 12,912,145 11,471,243 10,145,984
Book value (2) 17.43 16.71 15.29 13.92 12.38
</TABLE>
<TABLE>
<CAPTION>
====================================================================================================================================
SUMMARY OF OPERATIONS
- - ------------------------------------------------------------------------------------------------------------------------------------
Year Ended June 30, 1998 1997 1996 1995 1994
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income $12,265,660 $11,944,989 $11,379,003 $10,052,154 $ 8,535,120
Interest expense 6,701,218 6,404,745 6,195,480 5,474,611 4,441,012
- - ------------------------------------------------------------------------------------------------------------------------------------
Net interest income before provision for
loan losses 5,564,442 5,540,244 5,183,523 4,577,543 4,094,108
Provision for loan losses 300,000 40,000 60,000 150,000 640,000
- - ------------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for
loan losses 5,264,442 5,500,244 5,123,523 4,427,543 3,454,108
Other income 1,267,843 1,041,176 800,752 673,417 816,574
Other expenses 3,297,107 4,012,490 3,078,154 2,770,757 2,638,756
- - ------------------------------------------------------------------------------------------------------------------------------------
Income before income taxes and
cumulative effect 3,235,178 2,528,930 2,846,121 2,330,203 1,631,926
Income taxes 1,195,785 690,550 1,092,560 747,227 369,433
- - ------------------------------------------------------------------------------------------------------------------------------------
Income before cumulative effect 2,039,393 1,838,380 1,753,561 1,582,976 1,262,493
Cumulative effect of accounting change --- --- --- --- 142,000
- - ------------------------------------------------------------------------------------------------------------------------------------
Net Income $ 2,039,393 $ 1,838,380 $ 1,753,561 $ 1,582,976 $ 1,404,493
=========== =========== =========== =========== ===========
Net Income per share, assuming dilution (2) $ 2.41 $ 2.14 $ 2.05 $ 1.88 $ 1.71
=========== =========== =========== =========== ===========
Cash dividends paid (2) $ 1.68 $ 0.68 $ 0.45 $ 0.40 $ 0.25
=========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
====================================================================================================================================
KEY OPERATING RATIOS
- - ------------------------------------------------------------------------------------------------------------------------------------
Year Ended June 30, 1998 1997 1996
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Return on average assets 1.35% 1.27% 1.27%
Return on average equity 14.23% 13.58% 14.38%
Average equity-to-average asset ratio 9.49% 9.34% 8.81%
Interest rate spread 3.51% 3.61% 3.55%
Net yield on interest-earning assets 3.83% 3.93% 3.87%
Other expenses to average total assets 2.18% 2.77% 2.23%
Non-performing loans as a percentage of total loans, at 6/30 0.23% 0.53% 0.24%
One year interest rate sensitivity gap to total assets, at 6/30 0.61% 0.73% 12.00%
Net interest income to other expenses (3) 1.69X 1.38X 1.68X
</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.
ES&L Bancorp, Inc.
- - --------------------------------------------------------------------------------
<PAGE>
A Message from the Managing Officer
TO OUR SHAREHOLDERS:
I am pleased to report that ES&L Bancorp completed another record fiscal
year during 1998. The $2,039,393 earned generated a 1.35% return on average
assets and a 14.23% return on average equity. Our earnings increased almost 11%
over the previous period. Additionally, a record $71.3 million in loan
originations by ES&L and its affiliates contributed significantly to the
successful year. These performance indicators are well above the average of
various peer groups that we monitor.
As a stockholder, you shared in the Company's success by receiving four
quarterly dividends of $.17 each and a $1.00 special dividend which was paid in
July of 1997. The Board of Directors also approved a 47% increase in the
quarterly dividend payable in August of 1998. The new quarterly cash dividend
rate is $0.25 per share. In addition, based on the limited trades that we are
aware of, the company's stock appreciated in value from $16.50 per share at the
beginning of the fiscal year to $21.00 per share at the end of the fiscal year.
The cash dividend paid and the appreciation in the share price represents a
37.45% total return to our stockholders during our 1998 fiscal year.
Last year was a good one for ES&L. However, as we look to the near future,
new challenges are expected which may restrain our efforts to achieve growth in
earnings comparable to prior periods. Competition is intense and is coming from
a variety of sectors. This drives down pricing and shrinks profit margins within
our industry. In some cases, competitive pricing is irrational.
Another issue we are wrestling with is the current interest rate
environment. Long term interest rates have fallen substantially and are only
slightly higher than short term interest rates. This flat yield curve affects
our business in several ways. Loan payoffs increase as consumers refinance out
of higher rate loans, while our resulting reinvestment opportunitites are
limited. At the same time, our cost of money has not declined because short term
rates haven't fallen to the same extent as long term rates. If all of these
factors continue and the economy begins to slow, even more pressure will be
placed on earnings.
In developing our strategy to address these conditions, ES&L's Board
believes it is not in our best long term interest to take on unwarranted
additional interest rate risk and/or unwise additional credit risk. Instead, it
is the Bank's intent to maximize the resources of our company to further pursue
the strategies that have made it successful to date. This course of action may,
however, limit balance sheet growth and expectations of earnings growth in the
short term.
Additionally, the regulatory climate for our industry is still clouded.
Financial modernization legislation is slowly working its way through the halls
of Congress. Proposals are made from time to time that would harm our industry
by curtailing some of the powers currently available through our holding company
structure. We believe that our trade associations will be effective in
persuading Congress to maintain our structure as it currently exists.
While future challenges are abundant, so are opportunities. All of us
associated with ES&L are committed to maximizing the return to shareholders over
the long run. Our intent is to strengthen the sound financial foundation that
has been built up over the years by focusing our efforts on prudent strategies
that serve our community. New and innovative products, backed by state of the
art technology, will be instrumental in achieving objectives.
I thank our staff and Board of Directors for their outstanding efforts in
bringing our Bank to the performance level it has achieved. They are talented
and dedicated people fully capable of meeting future challenges. And thank you,
our owners, for your continued support.
/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, 1998, the Bank had a positive one-year gap of 0.61% of total assets.
The following table presents the Bank's interest sensitivity gap between
interest-earning assets and interest-bearing liabilities at June 30, 1998
(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 $ 1,299 $ 0 $ 0 $ 0 $ 1,299
Loans Receivable 88,219 38,213 3,599 5,759 135,790
Investments 7,313 1,025 0 0 8,338
----------------------------------------------------------------------
Total $ 96,831 $ 39,238 $ 3,599 $ 5,759 $ 145,427
Interest-Bearing Liabilities:
Certificates of Deposit $ 64,852 $ 14,517 $ 4,573 $ 0 $ 83,942
Other Deposits 22,445 0 0 5,793 28,238
Borrowings 8,612 1,121 1,276 10,887 21,897
----------------------------------------------------------------------
Total $ 95,909 $ 15,638 $ 5,849 $ 16,681 $ 134,077
Interest Sensitivity Gap $ 922 $ 23,599 $ (2,250) $(10,922) $ 11,350
Gap as a Percentage of Total Assets 0.61% 15.51% -1.48% -7.18%
Cumulative Gap $ 922 $ 24,521 $ 22,272 $ 11,349
Cumulative Gap as a Percentage of Total Assets 0.61% 16.11% 14.63% 7.46%
</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, 1998 AND JUNE 30, 1997
General:
- - --------
For the fiscal year ending June 30, 1998 the Corporation recorded net income
totaling $2,039,393, an increase of $201,013, or 10.93%, compared to net income
of $1,838,380 earned during the year ending June 30, 1997.
Since the beginning of the 1998 fiscal year, the Corporation's total assets have
increased by $2,519,060, or 1.68%, to $152,160,204, compared to $149,641,144 at
June 30, 1997. The growth in assets occurred primarily in cash and cash
equivalents, specifically federal funds sold and mortgage loans held for sale,
and offset reductions in the outstanding balance of the Corporation's net loans
receivable and securities portfolios.
The Corporation, like many lenders throughout the country, has experienced a
shrinkage in its loan portfolio as a result of a flat yield curve which has
prompted a significant and lengthy, decline in long term interest rates, while
short term interest rates have not decreased proportionately. The majority of
the residential and commercial loans which comprise the Corporation's loan
portfolio are adjustable rate mortgages. With the overall reduction of long term
fixed interest rates, many borrowers have opted to refinance out of adjustable
rate mortgages to fixed rate mortgages. The Corporation originates substantially
all of its fixed rate residential mortgages for sale in the national secondary
mortgage market and only originates fixed rate commercial mortgages on loans
with very short maturities. As a result, despite record overall loan origination
volumes, the outstanding balance of the portfolio, net of adjustments, decreased
$5,529,515 to $126,181,335 at June 30, 1998. Persistence of a flat yield curve
will continue to put pressure on the Corporation's net interest margin and
therefore its net income in future periods. The portion of the Corporation's
investment security portfolio, which was scheduled to be held to maturity,
decreased by $2,997,688 as a result of the payoff of certain investments in the
portfolio which had callable features. The monies generated by these identified
reductions helped fund a $6,644,423 increase in cash and cash equivalents and a
$3,770,664 increase in mortgage loans held for sale.
Total liabilities of the Corporation increased by $2,173,671 to $137,659,533 at
June 30, 1998, compared to $135,485,862 at June 30, 1997. Despite extensive
competition from non-traditional, uninsured, investment alternatives, aimed at
luring customer deposits from federally insured deposit instruments, the
Corporation, after the payment of approximately $5.5 million in interest,
reported a small increase, $431,313, in total deposits at June 30, 1998 compared
to the start of the 1998 fiscal year. Total deposits were $112,179,831 and
$11,748,518 at June 30, 1998 and 1997, respectively. At the end of the 1998
fiscal year, the Corporation's total borrowings, advances from the Federal Home
Loan Bank of New York, grew by $1,290,475, or 6.26%, to $21,897,090. The
Corporation's mortgage servicing escrow balance, advances from borrowers for
taxes and insurance, have increased by $417,922, or 16.29%, to $2,982,958 at
June 30, 1998, compared to $2,565,036 at June 30, 1997.
The fiscal year end balance of the Corporation's Shareholders' equity increased
by $345,389, or 2.44%, to $14,500,671, compared to $14,155,282 at the start of
the fiscal year. While net income added in excess of $2 million to equity, the
Corporation paid $1,415,869 in cash dividends, including a $1.00 per share
special cash dividend, and utilized $275,722 towards the repurchase of 15,261
shares of the Corporation's common stock.
Net Interest Income:
- - --------------------
Despite a 10 basis point reduction in its net interest spread, the Corporation's
1998 fiscal year net interest income, $5,564,442, remained nearly unchanged
compared to the previous year's net interest income of $5,540,244. The
Corporation's net interest spread for the year ending June 30, 1998 was 3.51%,
compared to a 3.61% net interest spread for the year ending June 30, 1997.
Interest Income:
- - ----------------
Interest earned by the Corporation during the 1998 fiscal year equaled
$12,265,660, an increase of $320,671 or 2.68%, compared to $11,944,989 earned
during the 1997 fiscal year.
Income provided from the Corporation's loan portfolio, including mortgage loans
held for sale, generates the majority of the interest earned by the Corporation.
For the year ending June 30, 1998, loan interest income was $11,874,446, an
increase of $412,818, or 3.60%, compared to $11,461,628 earned during the year
ending June 30, 1997. The increase is the result of a $5.5 million increase in
the average balance of the loan portfolio and despite a 4 basis point decrease
in the average yield earned on these assets. During the 1998 fiscal year the
average balance outstanding totaled $138.8 million, yielding 8.56%, compared to
$133.3 million, yielding 8.60%, during the 1997 fiscal year.
Decreases in the average balances of the Corporation's investment security and
mortgage-backed security (MBS) portfolios more than offset increases in the
average yields earned on the portfolios and resulted in lower earnings for both
during the recently concluded fiscal year. As was previously mentioned, during
the 1998 fiscal year several assets within the investment security portfolio,
with callable features, were redeemed by their issuers. As a result, the average
balance of the Corporation's investment portfolio decreased from $5.3 million,
yielding 6.42%, during the 1997 fiscal year to $3.8 million, yielding 6.64%,
during the 1998 fiscal year. Overall, interest provided from the investment
security portfolio decreased by $84,795 to $254,680 for the year ending June 30,
1998. The average balance of the Corporation's MBS portfolio, which is comprised
solely of adjustable rate mortgages, decreased from $1.9 million, yielding
6.97%, during the 1997 fiscal year, to $1.4 million, yielding 7.76%, for the
1998 fiscal year. Interest earned from the MBS portfolio totaled $110,899 during
the 1998 period, a decrease of $21,120 from the previous fiscal year.
Interest Expense:
- - -----------------
The Corporation's total interest expense was $6,701,218 during the year ending
June 30, 1998, an increase of $296,473, or 4.63%, compared to $6,404,745
recorded during the 1997 fiscal year.
During the 1998 fiscal year the Corporation paid $5,525,633 in interest on
deposits, an increase of $357,349, or 6.91%, compared to deposit interest
expense of $5,168,284 during the 1997 fiscal period. The increase in deposit
interest expense is the direct result of an increase in
ES&L Bancorp, Inc.
- - --------------------------------------------------------------------------------
3
<PAGE>
Management's Discussion and Analysis (continued)
both the average balance and average cost of the Corporation's deposits. During
the 1998 fiscal period, average deposits outstanding totaled $114.7 million,
costing 4.82%, compared to $109.3 million, costing 4.73%, during the 1997 fiscal
year. Interest paid on the Corporation's borrowings, Advances from the Federal
Home Loan Bank of New York (FHLB Advances), decreased by $60,876, or 4.92%, as a
result of a decrease in the average balance of borrowings. For the twelve months
ending June 30, 1998, the average balance of FHLB Advances was $20.9 million,
compared to $22.0 million, for the twelve months ending June 30, 1997. The
average cost for each of the two years was nearly identical.
Provision for Loan Losses:
- - --------------------------
Provisions for loan losses are charged to earnings to bring the total allowance
to a level considered appropriate based on historical experience, the volume and
type of lending conducted by the Corporation, industry standards, the status of
past due principal and interest payments, general economic conditions -
particularly as they relate to the Corporation's market area - and other factors
related to the collectibility of the Corporation's loan portfolio. The
Corporation's provision for loan loss totaled $300,000, for the year ending June
30, 1998, compared to a $40,000 provision which was charged to earnings during
the 1997 period. During the 1998 fiscal period the Corporation resolved, through
foreclosure, several delinquent mortgage loan accounts which resulted in net
charge-offs of approximately $270,000. At June 30, 1998 the Corporation's total
allowance for loan loss was $1,473,346, compared to $1,435,500 at June 30, 1997.
Other Income:
- - -------------
Total other income earned by the Corporation during the 1998 fiscal year was
$1,267,843, an increase of $226,667, or 21.77%, compared to other income of
$1,041,176 earned during the 1997 fiscal period.
The majority of the increase is related to the gain on the sale of mortgages,
which increased by $197,673, or 51.34%, to $582,664 for the fiscal year ending
June 30, 1998. As was mentioned earlier, the Corporation sells substantially all
of its newly originated fixed rate mortgages in the national secondary mortgage
market, and the flat yield curve and low interest rate environment, which has
existed throughout the entire fiscal year, has significantly increased the
volume of mortgages originated for sale.
Income earned by the Corporation's unconsolidated mortgage banking partnership,
PACE Funding Company, was $59,567 for the 1998 period, an increase of $37,042 in
comparison to the 1997 fiscal year. PACE Funding Company originates residential
mortgages, servicing released, for sale to investors, one of whom is the
Corporation. The increase in the earnings from the partnership are the result of
an increase in mortgages originated.
Service fees and other charges increased $32,301, or 25.38%, to $159,549 for the
year ending June 30, 1998. The increase was largely attributable to increases in
late payment, checking account and mortgage conversion fees.
During the 1998 fiscal year the Corporation recognized income of $54,817 from
its unconsolidated land development joint venture partnership, an increase of
$25,090 over the 1997 fiscal year. Income earned by the joint venture is the
direct result of lot sales of real estate owned by the partnership.
Despite a substantial increase in the Corporation's loans serviced for others
(from $129.5 million at June 30, 1997 to $151.1 million at June 30, 1998),
income generated from loan servicing for others decreased by $49,778, or 16.93%,
to $244,211 for the year ending June 30, 1998. The decrease is directly related
to the amortization of mortgage servicing rights, as required by Financial
Accounting Standards No. 122 (SFAS 122) entitled "Accounting for Mortgage
Servicing Rights." Exclusive of this adjustment, the income from loan servicing
would have increased during the 1998 fiscal year.
Other operating income earned by the Corporation during the 1998 fiscal year was
$165,787, a reduction of $26,909, or 13.96%, when compared to the 1997 fiscal
year. During the 1997 period the Corporation had received a $35,000 settlement
of a deficiency judgment which resulted from a 1989 mortgage foreclosure. No
such income was included during the 1998 period.
Other Expenses:
- - ---------------
During the 1998 fiscal year the Corporation's total other expenses were
$3,297,107, a reduction of $715,383, or 17.83%, compared to total other expenses
of $4,012,490 for the year ending June 30, 1997.
The majority of the decrease is related to a reduction of federal deposit
insurance premium expense, which totaled $844,055 during the 1997 period,
compared to $115,156 for the 1998 period. During the first quarter of the 1997
fiscal year the Corporation, in response to the passage of federal legislation
to recapitalize its insurance fund, paid a one-time, pre-tax special assessment
of $657,000. The assessment was charged to all institutions insured by the
Savings Association Insurance Fund (SAIF). Included in the legislation was also
a provision which reduced the Corporation's ongoing insurance premiums to a
level nearly equal to its competitors, who are insured by the Bank Insurance
Fund (BIF). Both insurance funds, SAIF and BIF, are part of the Federal Deposit
Insurance Corporation (FDIC).
Employee compensation and benefits expense decreased by $50,732, or 2.54%, to
$1,945,004 for the year ending June 30, 1998, compared to $1,995,736 for the
year ending June 30, 1997. There were fewer employees working throughout the
Corporation during the 1998 period when compared to the 1997 year and this
savings more than offset any wage and benefit cost increases.
Other expenses of the Corporation totaled $743,669 during the 1998 fiscal year,
an increase of $73,269, or 10.93%, compared to $670,400 for the 1997 period. The
majority of the increase is a result of expenses related to loan origination
activities which, as reported earlier, were significantly greater than during
the comparable period. The Corporation also recognized increases in expenses
related to office supplies, contributions and in costs related to properties
owned as a result of foreclosure during the 1998 fiscal year.
Income Taxes:
- - -------------
The Corporation has recorded an income tax provision of $1,195,785 for the
fiscal year ending June 30, 1998, compared to $690,550 for the fiscal year
ending June 30, 1997. The income tax provision during the 1997 fiscal year was
substantially reduced after an extensive review of all tax liabilities during
the first quarter of that fiscal year. The provision for the 1998 period
approximates the statutory rate on the Corporation's pre-tax earnings, less any
applicable tax credits.
ES&L Bancorp, Inc.
- - --------------------------------------------------------------------------------
4
<PAGE>
Management's Discussion and Analysis (continued)
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 $20,60,615 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 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
ES&L Bancorp, Inc.
- - --------------------------------------------------------------------------------
5
<PAGE>
Management's Discussion and Analysis (continued)
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.
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.
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 4.0%. Elmira Savings
& Loan's liquidity ratio for June 1998 was 12.45%.
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 normally 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 $1,187,000 for the current year ending June 30, 1998.
Although net income provided $2,039,000 to our cash position, this amount was
more than offset by a negative $3,715,000 in the net proceeds from loan sales
category. During year ending June 30, 1997, net income was $1,838,000 while net
loan sales were $1,139,000. Conversely, gain on sales of mortgages caused a
reduction in cash of $583,000, $385,000 and $161,000 for the same years.
Advances from borrowers for taxes and insurance also added $418,000 and $279,000
for years ending June 30, 1998 and June 30, 1997 but had a negative impact for
year ending June 30, 1996 of $371,000.
Net cash provided from investing activities amounted to $7,801,000 for year
ending June 30, 1998 but had a negative effect for the prior two years,
amounting to $11,227,000 and $1,810,000. One of the main categories in these
large differences is the net change in loans receivable. During the current
year, this generated $4,473,000 but lost $10,287,000 and $3,668,000 the prior
two years. Net proceeds from the sale and maturity of investments netted against
purchases provided $3,009,000 and $923,000 during fiscal years ending June 30,
1998 and June 30, 1996, respectively but had a negative cash impact of $989,000
during year ending June 30, 1997. Proceeds from sale of foreclosed real estate
also provided $408,000, $120,000 and $284,000 during the last three years. Other
large factors were principal repayments on mortgage-backed securities which
provided $200,000, $502,000 and $773,000 during years ending June 30, 1998, June
30, 1997 and June 30, 1996, respectively, and purchase of mortgage servicing
rights which had a negative impact of $227,000 and $105,000 for years ending
June 30, 1998 and June 30, 1997. The significant changes in the net loans
receivable balances are driven by the interest rate environment and due to a
relatively flat yield curve, most borrowers are currently opting for fixed rate
loans. Because we sell substantially all of our fixed rate instruments, total
loans receivable is declining.
Financing activities, the third component of cash flows, provided $30,000,
$7,470,000 and $2,396,000 in cash and cash equivalent for fiscal years ending
June 30, 1998, June 30, 1997 and June 30, 1996, respectively. Interest credited
to deposit accounts consistently had a positive impact, amounting to $5,538,000,
$5,103,000 and $5,130,000, however, net other change in deposits had significant
fluctuation. Increased competition, combined with some irrational pricing for
deposits, caused a net decrease of $5,107,000 for year ending June 30, 1998.
Advances from Federal Home Loan Bank provided $1,290,000 and $2,991,000 during
years ending June 30, 1998 and June 30, 1997, while the impact was negative for
year ending June 30, 1996 of $2,908,000. Dividends paid are always a negative to
our cash position but was even more significant during the current year because
of a special $1.00 per share dividend paid in addition to our normal quarterly
payments. The total cost of dividends paid over the last three years was
$1,416,000, $577,000 and $381,000. ES&L Bancorp has actively attempted to
buy-back its own stock and these purchases amounted to $276,000, $62,000 and
$36,000 for the last three fiscal years.
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.
Year 2000 Considerations
A great deal of information has been disseminated about the global computer
crash that may occur in the year 2000. Many computer programs that can only
distinguish the final two digits of the year entered (a common programming
practice in earlier years) are expected to read entries for the year 2000 as
1900 and compute payment, interest or delinquency based on the wrong date or are
expected to be unable to compute payment, interest or delinquency. Rapid and
accurate data processing is essential to the operations of the Corporation.
During 1997, the Corporation developed a Year 2000 preparedness plan which was
submitted and approved by the Corporation's Board of Directors on July 10, 1997
and was subsequently submitted to the Office of Thrift Supervision (OTS).
The plan established procedures to contact and monitor the Year 2000
preparedness of all third party servicers, including NCR Corporation, the
company responsible for the Bank's customer account processing. NCR has a plan
in place which has been reviewed by external audit organizations, as well as
Federal Bank examiners. NCR is currently in the process of testing their plan.
All other service providers have been contacted and have responded identifying
the plan they have developed and have provided testing dates to verify the
resolution of any potential problems.
The Corporation has tested all of its internal systems and have found them to be
year 2000 compliant. Additionally, the Corporation has surveyed its commercial
loan customer base asking for information on how those companies are addressing
any potential problems.
While, at the present time, the Corporation anticipates no significant financial
expenditure will be necessary with regard to year 2000 compliance, there can be
no assurance in this regard.
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, 1998 and 1997, 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, 1998. These consolidated
financial statements are the responsibility of the Corporation's management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of ES&L
Bancorp, Inc. and Subsidiary as of June 30, 1998 and 1997, and the results of
their operations and their cash flows for each of the years in the three-year
period ended June 30, 1998, 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 and impairment of
loans in fiscal years 1997 and 1996, respectively.
/s/ MENGEL, METZGER, BARR & CO. LLP
Elmira, New York
July 17, 1998
-9-
<PAGE>
ES&L BANCORP, INC. AND SUBSIDIARY
---------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
<TABLE>
<CAPTION>
June 30,
-----------------------------------------
ASSETS 1998 1997
------ ------------------- ------------------
<S> <C> <C>
Cash and due from banks $ 1,362,039 $ 721,891
Federal funds sold 6,000,000 -
Short-term investments 5,316 1,041
------------ ------------
Cash and cash equivalents 7,367,355 722,932
Securities available for sale 81,915 66,156
Securities to be held to maturity -
approximate market value of $1,026,199
and $4,036,495 at 1998 and 1997, respectively 1,025,244 4,022,932
Mortgage-backed securities available for sale 1,212,122 1,403,848
Mortgage-backed securities to be held to
maturity - approximate market value of $136,478
and $171,794 at 1998 and 1997, respectively 136,478 171,794
Mortgage loans held for sale 8,231,474 4,460,810
Loans receivable, net of allowance for loan
losses of $1,473,346 and $1,435,500
at 1998 and 1997, respectively 126,181,335 131,710,850
Federal Home Loan Bank stock, at cost 1,313,100 1,313,100
Foreclosed real estate 485,226 131,000
Investment in joint venture - acquisition,
development and construction arrangement 765,952 676,001
Investment in mortgage banking partnership 197,646 183,318
Property and equipment, net 2,901,870 3,053,735
Accrued interest receivable:
Loans and mortgage-backed securities 739,429 811,247
Investment securities and other 35,887 89,675
Other assets 1,485,171 823,746
------------ ------------
TOTAL ASSETS $152,160,204 $149,641,144
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-10-
<PAGE>
<TABLE>
<CAPTION>
June 30,
----------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1997
- - ------------------------------------------------------------------- ------------------ ------------------
Deposits:
<S> <C> <C>
Non-interest bearing $ 5,506,587 $ 4,851,413
Interest bearing 106,673,244 106,897,105
------------ ------------
112,179,831 111,748,518
Advances from Federal Home Loan Bank 21,897,090 20,606,615
Accrued interest payable:
Deposits 7,607 26,777
Borrowings 84,614 69,695
Advances from borrowers for taxes and insurance 2,982,958 2,565,036
Other liabilities 507,433 469,221
------------ ------------
TOTAL LIABILITIES 137,659,533 135,485,862
Shareholders' equity:
Preferred stock:
Authorized, 500,000 shares
Issued, none - -
Common stock, $.01 par value:
Authorized, 3,000,000 shares
Issued 855,967 shares 8,560 8,560
Additional paid-in capital 2,599,654 2,599,654
Retained earnings, substantially restricted 12,219,481 11,595,957
Net unrealized gain on securities available for sale 57,069 59,482
------------ ------------
14,884,764 14,263,653
Less cost of treasury stock, 24,194 and
8,933 shares, respectively 384,093 108,371
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 14,500,671 14,155,282
------------ ------------
$152,160,204 $149,641,144
============ ============
</TABLE>
-11-
<PAGE>
ES&L BANCORP, INC. AND SUBSIDIARY
---------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
<TABLE>
<CAPTION>
Year ended June 30,
------------------------------------------------------------
1998 1997 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Interest income:
Loans $11,874,446 $11,461,628 $10,855,429
Investment securities 254,680 339,475 318,692
Mortgage-backed securities 110,899 132,019 189,417
Interest-earning deposits and other 25,635 11,867 15,465
----------- ----------- -----------
TOTAL INTEREST INCOME 12,265,660 11,944,989 11,379,003
Interest expense:
Deposits 5,525,633 5,168,284 5,157,450
Borrowings 1,175,585 1,236,461 1,038,030
----------- ----------- -----------
TOTAL INTEREST EXPENSE 6,701,218 6,404,745 6,195,480
----------- ----------- -----------
NET INTEREST INCOME 5,564,442 5,540,244 5,183,523
Provision for loan losses 300,000 40,000 60,000
----------- ----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 5,264,442 5,500,244 5,123,523
Other income:
Service fees and other charges 159,549 127,248 131,394
Net gain (loss) on investment securities 1,248 (10,000) (39)
Income from loan servicing 244,211 293,989 314,915
Income from unconsolidated joint venture 54,817 29,727 16,478
Income from mortgage banking partnership 59,567 22,525 -
Gain on sale of mortgages 582,664 384,991 160,949
Other operating income 165,787 192,696 177,055
----------- ----------- -----------
TOTAL OTHER INCOME 1,267,843 1,041,176 800,752
Other expenses:
Employee compensation and benefits 1,945,004 1,995,736 1,823,184
Office occupancy and equipment 493,278 502,299 503,559
Federal deposit insurance premiums 115,156 844,055 278,094
Other expenses 743,669 670,400 473,317
----------- ----------- -----------
TOTAL OTHER EXPENSES 3,297,107 4,012,490 3,078,154
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 3,235,178 2,528,930 2,846,121
Income taxes 1,195,785 690,550 1,092,560
----------- ----------- -----------
NET INCOME $ 2,039,393 $ 1,838,380 $ 1,753,561
=========== =========== ===========
Earnings per common share $ 2.44 $ 2.17 $ 2.09
=========== =========== ===========
Earnings per common share - assuming dilution $ 2.41 $ 2.14 $ 2.05
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-12-
<PAGE>
ES&L BANCORP, INC. AND SUBSIDIARY
---------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
----------------------------------------------------------
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
----------------------------------------
<TABLE>
<CAPTION>
Retained
Additional earnings
Common paid-in (Substantially
stock capital restricted)
-------- ----------- ---------------
<S> <C> <C> <C>
Balance at July 1, 1995 $5,508 $2,465,316 $ 8,962,639
Current year change in unrealized gain on securities available for sale,
net of deferred taxes of ($6,926) - - -
Issuance of 23,519 shares in connection with stock options exercised at
$3 5/9 per share 157 83,472 -
Dividends on common stock ($.45 per share) - - (381,259)
Tax benefit from exercise of non-incentive stock options - 31,304 -
Purchase of 2,766 shares of treasury stock - - -
Net income - - 1,753,561
------- ----------- -----------
BALANCE AT JUNE 30, 1996 5,665 2,580,092 10,334,941
Current year change in unrealized gain on securities available for sale,
net of deferred taxes of $14,396 - - -
Issuance of 283,147 shares in connection with three-for-two stock split 2,832 (2,832) -
Dividend in lieu of fractional shares due to three-for-two stock split - - (1,405)
Dividends on common stock ($.68 per share) - - (575,959)
Issuance of 6,315 shares in connection with options exercised at
$3 5/9 per share 63 22,394 -
Purchase of 3,917 shares of treasury stock - - -
Net income - - 1,838,380
------- ----------- -----------
BALANCE AT JUNE 30, 1997 8,560 2,599,654 11,595,957
Current year change in unrealized gain on securities available for sale,
net of deferred taxes of ($1,608) - - -
Dividends on common stock ($1.68 per share) - - (1,415,869)
Purchase of 15,261 shares of treasury stock - - -
Net income - - 2,039,393
------- ----------- -----------
BALANCE AT JUNE 30, 1998 $8,560 $2,599,654 $12,219,481
======= =========== ===========
<CAPTION>
Net unrealized
gain on
securities
available Treasury
for sale stock Total
-------------- --------- ------------
<S> <C> <C> <C>
Balance at July 1, 1995 $ 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
$3 5/9 per share - - 83,629
Dividends on common stock ($.45 per share) - - (381,259)
Tax benefit from exercise of non-incentive stock options - - 31,304
Purchase of 2,766 shares of treasury stock - (35,941) (35,941)
Net income - - 1,753,561
-------------- ---------- -----------
BALANCE AT JUNE 30, 1996 37,888 (46,441) 12,912,145
Current year change in unrealized gain on securities available for sale,
net of deferred taxes of $14,396 21,594 - 21,594
Issuance of 283,147 shares in connection with three-for-two stock split - - -
Dividend in lieu of fractional shares due to three-for-two stock split - - (1,405)
Dividends on common stock ($.68 per share) - - (575,959)
Issuance of 6,315 shares in connection with options exercised at
$3 5/9 per share - - 22,457
Purchase of 3,917 shares of treasury stock - (61,930) (61,930)
Net income - - 1,838,380
-------------- ---------- -----------
BALANCE AT JUNE 30, 1997 59,482 (108,371) 14,155,282
Current year change in unrealized gain on securities available for sale,
net of deferred taxes of ($1,608) (2,413) - (2,413)
Dividends on common stock ($1.68 per share) - - (1,415,869)
Purchase of 15,261 shares of treasury stock - (275,722) (275,722)
Net income - - 2,039,393
-------------- ---------- -----------
BALANCE AT JUNE 30, 1998 $57,069 $ (384,093) $14,500,671
============== ========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-13-
<PAGE>
ES&L BANCORP, INC. AND SUBSIDIARY
---------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
Year ended June 30,
----------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS - OPERATING ACTIVITIES
- - ------------------------------------------------------
Net income $ 2,039,393 $ 1,838,380 $ 1,753,561
Adjustments to reconcile net income to net cash
(used for) provided from operating activities:
Depreciation 172,874 175,774 180,336
Deferred income taxes 227,484 17,254 24,884
Provision for loan losses 300,000 40,000 60,000
Net amortization 214,286 85,201 22,533
Deferred loan origination fees (30,490) (22,515) (52,490)
Income from unconsolidated joint venture (54,817) (29,727) (16,478)
Income from mortgage banking partnership (59,567) (22,525) -
Net (gain) loss on investment securities (1,248) 10,000 39
Net loss on sale of property and equipment - 3,091 -
Net loss (gain) on sale of foreclosed real
estate 24,786 19,847 (13,457)
Gain on sale of mortgages (582,664) (384,991) (160,949)
Proceeds from loan sales 41,739,938 27,155,312 29,370,422
Originations and purchases of loans held for (45,455,024) (26,016,597) (30,990,370)
sale
Changes in certain assets and liabilities
affecting operations:
Accrued interest receivable 125,606 (106,982) (67,415)
Other assets (299,520) 80,522 (96,051)
Accrued interest payable (4,251) (5,682) 8,494
Advances from borrowers for taxes
and insurance 417,922 278,638 (370,808)
Other liabilities 38,212 (8,240) (154,287)
------------ ------------ ------------
NET CASH (USED FOR) PROVIDED FROM
OPERATING ACTIVITIES (1,187,080) 3,106,760 (502,036)
CASH FLOWS - INVESTING ACTIVITIES
- - ------------------------------------------------------
Net other decrease (increase) in loans receivable 4,472,577 (10,286,971) (3,667,626)
Net increase in Federal Home Loan Bank stock - (209,300) -
Investment in foreclosed real estate (49,894) (9,102) (383)
Investment in joint venture (35,134) (149,109) 9,356
Investment in mortgage banking partnership 45,239 9,272 (20,065)
Proceeds from sale of foreclosed real estate 408,191 120,038 283,620
Proceeds from sale of securities available for sale 2,362 - 49,812
Proceeds on maturity of securities available for - - 150,000
sale
Purchases of securities to be held to maturity - (2,324,062) (2,987,912)
Proceeds from maturities of securities to be held
to maturity 3,006,688 1,335,269 3,710,959
Principal repayments on mortgage-backed securities 199,652 502,279 772,543
Proceeds from sale of property and equipment - 13,464 -
Purchases of property and equipment (21,009) (124,351) (110,363)
Purchase of mortgage servicing rights (227,366) (104,925) -
------------ ------------ ------------
NET CASH PROVIDED FROM (USED FOR)
INVESTING ACTIVITIES 7,801,306 (11,227,498) (1,810,059)
</TABLE>
-14-
<PAGE>
ES&L BANCORP, INC. AND SUBSIDIARY
---------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS, Cont'd
---------------------------------------------
<TABLE>
<CAPTION>
Year ended June 30,
----------------------------------------------------------
1998 1997 1996
--------------- -------------- ---------------
<S> <C> <C> <C>
CASH FLOWS - FINANCING ACTIVITIES
- - ------------------------------------------------------
Interest credited to deposit accounts $ 5,538,398 $5,103,199 $ 5,129,548
Net other (decrease) increase in deposits (5,107,085) (7,510) 508,759
Net increase (decrease) in advances from
Federal Home Loan Bank 1,290,475 2,991,055 (2,908,403)
Proceeds from exercise of stock options - 22,457 83,629
Purchase of treasury stock (275,722) (61,930) (35,941)
Dividends paid (1,415,869) (577,364) (381,259)
----------- ---------- -----------
NET CASH PROVIDED FROM
FINANCING ACTIVITIES 30,197 7,469,907 2,396,333
----------- ---------- -----------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS 6,644,423 (650,831) 84,238
Cash and cash equivalents at beginning
of year 722,932 1,373,763 1,289,525
----------- ---------- -----------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 7,367,355 $ 722,932 $ 1,373,763
=========== ========== ===========
SUPPLEMENTAL DISCLOSURE OF
- - ------------------------------------------------------
CASH FLOW INFORMATION
- - ------------------------------------------------------
Cash paid during the year for:
Interest on advances from Federal
Home Loan Bank $ 1,160,666 $1,239,795 $ 1,027,992
=========== ========== ===========
Income taxes $ 1,101,335 $ 782,909 $ 1,156,051
=========== ========== ===========
SUPPLEMENTAL SCHEDULE OF
- - ------------------------------------------------------
NONCASH INVESTING ACTIVITIES
- - ------------------------------------------------------
Loans transferred to foreclosed real estate $ 737,309 $ 170,968 $ 213,815
=========== ========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-15-
<PAGE>
ES&L BANCORP, INC. AND SUBSIDIARY
---------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
JUNE 30, 1998, 1997 AND 1996
----------------------------
NOTE A: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- - ----------------------------------------------------------------------------
Nature of operations
--------------------
ES&L Bancorp, Inc. and Subsidiary (the "Corporation") provides a variety of
financial services to individuals and corporate customers through its offices
in Elmira and Ithaca, New York. The Corporation's primary sources of revenue
are from single family residential loans to individuals and commercial
mortgage loans to small and middle market businesses.
Principles of consolidation
---------------------------
ES&L Bancorp, Inc. is a unitary savings and loan holding company, which
engages in no significant business activity other than holding the stock of
Elmira Savings and Loan, F.A. (the "Bank") and operating the business of a
savings and loan through the Bank. The consolidated financial statements
include the accounts of the Corporation, its wholly-owned subsidiary, the Bank
and the wholly-owned subsidiaries of the Bank, Brilie Corporation (D/B/A ES&L
Financial Services) and ES&L Mortgage Corporation (D/B/A Cayuga Mortgage
Company). All significant intercompany transactions and balances have been
eliminated in consolidation.
Cash and cash equivalents
-------------------------
For purposes of reporting cash flows, cash and cash equivalents include cash,
due from banks, federal funds sold, and short-term investments, with original
terms to maturity of less than 90 days.
Investments in debt, equity and mortgage-backed securities
----------------------------------------------------------
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 shareholders' equity. The (decrease) increase in
unrealized gain amounted to $(2,413), $21,594 and $(10,392) net of deferred
taxes of $(1,608), $14,396 and $(6,926) for 1998, 1997 and 1996, 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, 1998 and 1997, 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.
-16-
<PAGE>
ES&L BANCORP, INC. AND SUBSIDIARY
---------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
--------------------------------------------------
JUNE 30, 1998, 1997 AND 1996
----------------------------
NOTE A: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
- - ----------------------------------------------------------------------------
Cont'd
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.
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.
-17-
<PAGE>
ES&L BANCORP, INC. AND SUBSIDIARY
---------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
--------------------------------------------------
JUNE 30, 1998, 1997 AND 1996
----------------------------
NOTE A: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
- - -----------------------------------------------------------------------------
Cont'd
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. In 1997, the adoption of SFAS 122 increased net
income by approximately $128,400, net of income taxes of $85,600.
During 1998 and 1997, approximately $754,000 and $348,000, respectively, of
costs of acquiring the rights to service mortgage loans were capitalized and
included in other assets in the accompanying consolidated balance sheets.
Amortization of servicing rights amounted to $166,700 and $65,000 for the
years ended June 30, 1998 and 1997, respectively. The aggregate fair value of
mortgage servicing rights is approximately $1,165,000 and $398,000 at June
30, 1998 and 1997, respectively. 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,
1998 and 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.
-18-
<PAGE>
ES&L BANCORP, INC. AND SUBSIDIARY
---------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
--------------------------------------------------
JUNE 30, 1998, 1997 AND 1996
----------------------------
NOTE A: NATURE OF OPERATIONS AND 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, mortgage servicing rights 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-balance-sheet risk. These financial
instruments include loan commitments, standby letters of credit, loans
written with interest rate caps and floors, and forward contracts. Those
instruments involve, to varying degrees, elements of credit and interest rate
risk in excess of the amount recognized in the balance sheet. The contract or
notional amounts of those instruments reflect the extent of involvement the
Bank has in particular classes of financial instruments.
The Bank considers its primary market area for lending and savings activities
to be Chemung, Tompkins, Steuben, Schuyler and Tioga Counties in New York and
Tioga and Bradford Counties in Pennsylvania. Although the Bank has a
diversified loan portfolio, a substantial portion of its debtors' ability to
honor their contracts is reliant upon the economic stability of the area.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for loan commitments and standby
letters of credit is represented by the contractual or notional amount of
those instruments. The Bank uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments. For interest rate caps, floors, and forward contracts, the
contract or notional amounts do not represent exposure to credit loss. The
Bank controls the credit risk of forward contracts through credit approvals,
limits and monitoring procedures.
Loan commitments are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Loan commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. The Bank evaluates each customer's creditworthiness
on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Bank upon extension of credit, is based on management's
credit evaluation. Collateral held varies but may include accounts
receivable, inventory, property, plant and equipment, income-producing
commercial properties, and residential and personal properties.
Forward contracts are written primarily with government agencies, whereby the
agency agrees to purchase substantially all fixed-rate loans originated by
the Bank. Risks arise from the possible inability of counterparties to meet
the terms of their contracts.
-19-
<PAGE>
ES&L BANCORP, INC. AND SUBSIDIARY
---------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
--------------------------------------------------
JUNE 30, 1998, 1997 AND 1996
----------------------------
NOTE A: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,
- - -----------------------------------------------------------------------------
Cont'd
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.
Earnings per common share
-------------------------
During fiscal 1998, the Bank adopted the provisions of 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. Prior period EPS disclosures have been restated. See also
Note N.
The numerator for the basic and diluted EPS equals net income for each of the
years. For basic EPS the weighted average shares actually outstanding
(denominator) amounted to 836,303, 846,200 and 839,299 shares for the years
ended June 30, 1998, 1997 and 1996, respectively. For diluted EPS, the effect
of dilutive stock options was to add weighted average shares of 10,938,
12,438 and 16,937 shares for the years ended June 30, 1998, 1997 and 1996,
respectively. As a result, the denominator for diluted EPS amounted to
847,241, 858,658 and 856,236 shares for 1998, 1997 and 1996, respectively.
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
-----------------------------
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Comprehensive Income" (SFAS 130).
SFAS 130 requires entities to include details of comprehensive income that
arise in the reporting period. Comprehensive income consists of net income or
loss for the current period and other comprehensive income - income,
expenses, gains, and losses that bypass the income statement and are reported
directly as a separate component of equity.
SFAS 130 is effective for fiscal years beginning after December 15, 1997.
Accordingly, the Bank is required to adopt SFAS 130 for the year ending June
30, 1999. The adoption of SFAS 130 will require details relating to
unrealized gains and losses on certain investment securities, which is the
primary other comprehensive income of the Bank. Net unrealized gains recorded
in equity amounted to $57,069 as of June 30, 1998.
-20-
<PAGE>
ES&L BANCORP, INC. AND SUBSIDIARY
---------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
--------------------------------------------------
JUNE 30, 1998, 1997 AND 1996
----------------------------
NOTE B: INVESTMENT AND MORTGAGE-BACKED SECURITIES
- - ---------------------------------------------------
The amortized cost and fair value of investments in securities are as
follows:
<TABLE>
<CAPTION>
June 30, 1998: Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Securities available for sale:
Corporate stock $ 35,437 $ 46,478 $ - $ 81,915
========== ======== ====== ==========
Securities to be held to maturity:
U.S. Government and its agencies $1,000,000 $ 940 $ - $1,000,940
Corporate debt securities 25,244 15 - 25,259
---------- -------- ------ ----------
$1,025,244 $ 955 $ - $1,026,199
========== ======== ====== ==========
Mortgage-backed securities available
for sale $1,163,485 $ 48,637 $ - $1,212,122
========== ======== ====== ==========
Mortgage-backed securities to be
held to maturity $ 136,478 $ - $ - $ 136,478
========== ======== ====== ==========
June 30, 1997:
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
---------- -------- ------ ----------
$4,022,932 $ 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>
-21-
<PAGE>
ES&L BANCORP, INC. AND SUBSIDIARY
---------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
--------------------------------------------------
JUNE 30, 1998, 1997 AND 1996
----------------------------
NOTE B: INVESTMENT AND MORTGAGE-BACKED SECURITIES, Cont'd
- - ----------------------------------------------------
The amortized cost and fair value of debt securities at June 30, 1998, 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 1,000,000 1,000,940
Due after five years through
ten years - -
Due after ten years 25,244 25,259
---------- ----------
$1,025,244 $1,026,199
========== ==========
</TABLE>
Proceeds and gross realized gains and losses from sales and maturities of
securities are as follows:
<TABLE>
<CAPTION>
Securities Available for Sale
-----------------------------------------------------------------------------
Proceeds
from
sales and Realized Realized
maturities gains losses
------------------------- ---------------------- ------------------------
Year ended June 30,
- - -------------------
<S> <C> <C> <C>
1998 $ 2,362 $1,037 $ -
1997 - - -
1996 199,812 - 39
</TABLE>
<TABLE>
<CAPTION>
Securities to be Held to Maturity
-----------------------------------------------------------------------------
Proceeds
from
sales and Realized Realized
maturities gains losses
------------------------- ---------------------- ------------------------
Year ended June 30,
- - -------------------
<S> <C> <C> <C>
1998 $3,006,688 $ 211 $ -
1997 1,335,269 - 10,000
1996 3,710,959 - -
</TABLE>
-22-
<PAGE>
ES&L BANCORP, INC. AND SUBSIDIARY
---------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
--------------------------------------------------
JUNE 30, 1998, 1997 AND 1996
----------------------------
NOTE C: LOANS RECEIVABLE
- - ---------------------------
Loans receivable consist of the following:
<TABLE>
<CAPTION>
June 30,
--------------------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Conventional first mortgage loans:
Residential $ 79,358,322 $ 86,088,562
Commercial 28,422,122 27,744,971
Construction loans 4,993,395 4,719,712
Loans on savings accounts 263,905 245,864
Education loans 333,449 462,353
Consumer loans 5,621,782 5,202,370
Demand notes 953,474 1,188,781
Home equity lines of credit 5,392,259 6,048,557
Commercial non-mortgage loans 1,602,953 1,806,681
Commercial lines of credit 2,890,988 1,353,262
------------ ------------
Subtotal 129,832,649 134,861,113
Allowance for loan losses (1,473,346) (1,435,500)
Loans in process (2,273,617) (1,789,694)
Net deferred loan origination fees and premiums 95,649 74,931
------------ ------------
$126,181,335 $131,710,850
============ ============
</TABLE>
The activity in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
Year ended June 30,
--------------------------------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Balance at beginning of year $1,435,500 $1,430,781 $1,423,826
Provision for possible loan losses 300,000 40,000 60,000
Charged-off loans (269,990) (44,465) (54,207)
Recoveries 7,836 9,184 1,162
---------- ---------- ----------
Balance at end of year $1,473,346 $1,435,500 $1,430,781
========== ========== ==========
</TABLE>
Nonaccrual loans for which interest has been reduced totaled approximately
$313,000 and $340,000 at June 30, 1998 and 1997, respectively. Interest
income that would have been recorded on these loans for the years ended June
30, 1998, 1997 and 1996 was approximately $28,000, $23,000 and $20,000,
respectively.
The Bank is not committed to lend additional funds to debtors whose loans have
been modified.
-23-
<PAGE>
ES&L BANCORP, INC. AND SUBSIDIARY
---------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
--------------------------------------------------
JUNE 30, 1998, 1997 AND 1996
----------------------------
NOTE C: LOANS RECEIVABLE, Cont'd
- - ---------------------------
The Bank, in the ordinary course of business, has granted loans to certain
officers, directors and their related interests. Related party loans were
made on substantially the same terms as those prevailing at the time for
comparable transactions with unrelated persons and do not involve more than
normal risk of collectibility. An analysis of related party loan activity is
as follows:
<TABLE>
<S> <C>
Balance at July 1, 1996 $ 444,593
Increase 18,000
Decrease (190,375)
---------
BALANCE AT JUNE 30, 1997 272,218
Increase 51,187
Decrease (61,233)
---------
BALANCE AT JUNE 30, 1998 $ 262,172
=========
</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 $151,050,157, $129,495,624 and $110,496,667 at June 30,
1998, 1997 and 1996, respectively.
NOTE D: PROPERTY AND EQUIPMENT
- - --------------------------------
Property and equipment is summarized by major classification as follows:
<TABLE>
<CAPTION>
June 30,
------------------------
1998 1997
---------- ----------
<S> <C> <C>
Land $ 672,933 $ 672,933
Buildings 2,262,652 2,262,652
Furniture and equipment 829,460 808,450
---------- ----------
3,765,045 3,744,035
Less accumulated depreciation 863,175 690,300
---------- ----------
$2,901,870 $3,053,735
========== ==========
</TABLE>
-24-
<PAGE>
ES&L BANCORP, INC. AND SUBSIDIARY
---------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
--------------------------------------------------
JUNE 30, 1998, 1997 AND 1996
----------------------------
NOTE E: DEPOSITS
- - -------------------
Deposit accounts consist of the following:
<TABLE>
<CAPTION>
June 30,
-----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Savings accounts with a year end interest rate of 2.81%
and 2.96% at June 30, 1998 and 1997, respectively $ 14,817,520 $ 14,183,722
NOW accounts with a year end interest rate of 1.74%
at June 30, 1998 and 1997 8,556,180 7,883,421
Money market deposit accounts with a year end
interest rate of 2.96% and 3.11% at
June 30, 1998 and 1997, respectively 5,062,280 5,100,541
Certificates of deposit with a year end interest rate
range of 3.44% - 6.90% at June 30, 1998 and 1997 83,743,851 84,580,834
------------ ------------
$112,179,831 $111,748,518
============ ============
</TABLE>
Non-interest bearing checking accounts are included in the table above in NOW
accounts.
Maturities of outstanding certificates of deposit at June 30, 1998, are
summarized as follows:
<TABLE>
<CAPTION>
Year Amount
---- -----------
<S> <C>
1999 $63,862,227
2000 12,140,557
2001 2,748,205
2002 2,298,658
2003 2,682,249
Thereafter 11,955
-----------
$83,743,851
===========
</TABLE>
The aggregate amount of individual deposits in excess of $100,000 was
approximately $23,000,000 and $21,000,000 at June 30, 1998 and 1997,
respectively.
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
Year ended June 30,
----------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Savings accounts $ 431,611 $ 453,090 $ 507,794
NOW accounts 79,073 59,416 24,565
Money market 187,732 209,290 217,075
Certificates of deposit 4,827,217 4,446,488 4,408,016
---------- ---------- ----------
$5,525,633 $5,168,284 $5,157,450
========== ========== ==========
</TABLE>
-25-
<PAGE>
ES&L BANCORP, INC. AND SUBSIDIARY
---------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
--------------------------------------------------
JUNE 30, 1998, 1997 AND 1996
----------------------------
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. The
rate is variable (5.07% to 6.28% at June 30, 1998).
Scheduled maturities are as follows:
<TABLE>
<CAPTION>
Maturing in
fiscal year ending Amount
------------------ -----------
<S> <C>
1999 $ 8,610,139
2000 610,796
2001 611,491
2002 612,237
2003 613,027
Thereafter 10,839,400
-----------
$21,897,090
===========
</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 $100,735, $90,476 and $83,521 for the years
ended June 30, 1998, 1997 and 1996, 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, 1998 and 1997 was $54,298 and $57,918, 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.
-26-
<PAGE>
ES&L BANCORP, INC. AND SUBSIDIARY
---------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
--------------------------------------------------
JUNE 30, 1998, 1997 AND 1996
----------------------------
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. Options outstanding at both June
30, 1998 and 1997 amounted to 13,598. See also Note N.
NOTE H: INCOME TAXES
- - -----------------------
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Year ended June 30,
--------------------------------------
1998 1997 1996
---------- -------- ----------
<S> <C> <C> <C>
Currently payable:
State $ 97,560 $ 92,945 $ 160,560
Federal 870,741 580,351 907,116
Deferred 227,484 17,254 24,884
---------- -------- ----------
$1,195,785 $690,550 $1,092,560
========== ======== ==========
</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,
--------------------------------------
1998 1997 1996
---------- --------- ----------
<S> <C> <C> <C>
Total provision at federal statutory
rates $1,100,000 $ 860,000 $ 968,000
States taxes, net of federal benefit 65,000 61,000 106,000
Resolution and adjustment of
prior year tax liabilities - (235,000) -
Other 30,785 4,550 18,560
---------- --------- ----------
$1,195,785 $ 690,550 $1,092,560
========== ========= ==========
</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.
-27-
<PAGE>
ES&L BANCORP, INC. AND SUBSIDIARY
---------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
--------------------------------------------------
JUNE 30, 1998, 1997 AND 1996
----------------------------
NOTE H: INCOME TAXES, Cont'd
- - -----------------------
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,
------------------------
1998 1997
--------- --------
<S> <C> <C>
Depreciation $ (99,000) $(70,000)
Nonrefundable loan fees 14,000 21,000
Employee benefits 18,000 20,000
Allowance for loan losses 276,000 234,000
Mortgage servicing rights (218,000) -
Unrealized gain on securities
available for sale (19,000) (28,000)
Other 36,000 50,000
--------- --------
$ 8,000 $227,000
========= ========
</TABLE>
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.
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, 1998, 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 $17,375, $17,029 and $17,886 for the years ended June 30, 1998,
1997 and 1996, respectively.
-28-
<PAGE>
ES&L BANCORP, INC. AND SUBSIDIARY
---------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
--------------------------------------------------
JUNE 30, 1998, 1997 AND 1996
----------------------------
NOTE I: COMMITMENTS, Cont'd
- - ----------------------
At June 30, 1998 and 1997, the Bank had outstanding commitments of $5,256,912
and $5,243,927, respectively, to originate loans, of which $3,011,112 and
$2,358,115, respectively, were comprised of fixed-rate loans and $2,245,800
and $2,885,812, 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, 1998 and 1997, the Bank had outstanding commitments under standby
letters of credit totaling $365,358 and $256,822, 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, 1998 and 1997, the Bank had loaned $636,401
and $561,439, respectively, to the partnership, and was committed to lend an
additional $313,599 and $188,561, 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.
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.
-29-
<PAGE>
ES&L BANCORP, INC. AND SUBSIDIARY
---------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
--------------------------------------------------
JUNE 30, 1998, 1997 AND 1996
----------------------------
NOTE J: INVESTMENT IN JOINT VENTURE - ACQUISITION, DEVELOPMENT AND
- - --------------------------------------------------------------------
CONSTRUCTION ARRANGEMENT, Cont'd
------------------------
As of June 30, 1998, Brilie's share of the partnership's capital was $129,551,
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,
---------------------------
1998 1997
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
ASSETS
------
Investment in real estate $686,653 $773,487
Mortgage and lot sale receivable 276,850 93,000
Other asset 800 800
-------- --------
$964,303 $867,287
======== ========
LIABILITIES AND
---------------
PARTNERS' CAPITAL
-----------------
Liabilities:
Note payable to Elmira Savings and Loan $636,401 $561,439
Mortgage payable 68,000 68,000
Other liabilities 800 8,724
-------- --------
705,201 638,163
Partners' capital 259,102 229,124
-------- --------
$964,303 $867,287
======== ========
</TABLE>
-30-
<PAGE>
ES&L BANCORP, INC. AND SUBSIDIARY
---------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
--------------------------------------------------
JUNE 30, 1998, 1997 AND 1996
----------------------------
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,
--------------------------------------------------------------
1998 1997 1996
------------------ ------------------ ------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Sales $479,250 $307,000 $311,901
Cost of sales 337,006 234,484 265,042
-------- -------- --------
Gross profit 142,244 72,516 46,859
Net rental income (expense) 3,902 1,885 (6,622)
Interest income 5,324 - -
General and administrative expense (12,316) (14,947) (7,281)
-------- -------- --------
Net income 139,154 59,454 32,956
Partners' capital at beginning of year 229,124 215,990 206,116
Partners' withdrawals 109,176 46,320 23,082
-------- -------- --------
Partners' capital at end of year $259,102 $229,124 $215,990
======== ======== ========
</TABLE>
-31-
<PAGE>
ES&L BANCORP, INC. AND SUBSIDIARY
---------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
--------------------------------------------------
JUNE 30, 1998, 1997 AND 1996
----------------------------
NOTE K: PARENT COMPANY FINANCIAL INFORMATION
- - ----------------------------------------------
BALANCE SHEETS
--------------
<TABLE>
<CAPTION>
June 30,
-------------------------------------------
ASSETS 1998 1997
------ ------------------- -----------------
<S> <C> <C>
Cash and cash equivalents $ 208,358 $ 328,270
Securities available for sale 81,915 66,156
Investment in subsidiary 10,111,123 9,636,063
Other assets 5,184 18,038
----------- -----------
$10,406,580 $10,048,527
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Shareholders' equity:
Common stock $ 8,560 $ 8,560
Additional paid-in capital 2,599,654 2,599,654
Retained earnings 8,154,572 7,531,048
Net unrealized gain on securities available for sale 27,887 17,636
----------- -----------
10,790,673 10,156,898
Less treasury stock 384,093 108,371
----------- -----------
$10,406,580 $10,048,527
=========== ===========
</TABLE>
STATEMENTS OF INCOME AND RETAINED EARNINGS
------------------------------------------
<TABLE>
<CAPTION>
Year ended June 30,
------------------------------------------------------------------------
1998 1997 1996
---------------------- ---------------------- ----------------------
<S> <C> <C> <C>
Revenues:
Equity in earnings of subsidiary $2,075,061 $1,883,734 $1,801,129
Income from investments and other 3,033 2,619 3,091
---------- ---------- ----------
2,078,094 1,886,353 1,804,220
General and administrative expenses 44,916 60,209 66,099
---------- ---------- ----------
INCOME BEFORE INCOME TAXES 2,033,178 1,826,144 1,738,121
Income tax benefit 6,215 12,236 15,440
---------- ---------- ----------
NET INCOME 2,039,393 1,838,380 1,753,561
Retained earnings at beginning of year 7,531,048 6,270,032 4,897,730
Dividends paid 1,415,869 577,364 381,259
---------- ---------- ----------
RETAINED EARNINGS AT
END OF YEAR $8,154,572 $7,531,048 $6,270,032
========== ========== ==========
</TABLE>
-32-
<PAGE>
ES&L BANCORP, INC. AND SUBSIDIARY
---------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
--------------------------------------------------
JUNE 30, 1998, 1997 AND 1996
----------------------------
NOTE K: PARENT COMPANY FINANCIAL INFORMATION, Cont'd
- - ----------------------------------------------
STATEMENTS OF CASH FLOWS
------------------------
<TABLE>
<CAPTION>
Year ended June 30,
-------------------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS - OPERATING ACTIVITIES
-----------------------------------------
Net income $ 2,039,393 $ 1,838,380 $ 1,753,561
Adjustments to reconcile net income to net
cash used for operating activities:
Equity in earnings of subsidiary (2,075,061) (1,883,734) (1,801,129)
Gain on sale of securities available
for sale (1,037) - -
Change in other assets affecting
operations 6,022 43,794 (36,276)
----------- ----------- -----------
NET CASH USED FOR
OPERATING ACTIVITIES (30,683) (1,560) (83,844)
CASH FLOWS - INVESTING ACTIVITIES
-----------------------------------------
Dividend received from subsidiary 1,600,000 800,000 -
Proceeds from sale of securities
available for sale 2,362 - -
----------- ----------- -----------
NET CASH PROVIDED FROM
INVESTING ACTIVITIES 1,602,362 800,000 -
CASH FLOWS - FINANCING ACTIVITIES
-----------------------------------------
Dividends paid (1,415,869) (577,364) (381,259)
Purchase of treasury stock (275,722) (61,930) (35,941)
Net proceeds from exercise of stock - 22,457 83,629
options ----------- ----------- -----------
NET CASH USED FOR
FINANCING ACTIVITIES (1,691,591) (616,837) (333,571)
----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (119,912) 181,603 (417,415)
Cash and cash equivalents
at beginning of year 328,270 146,667 564,082
----------- ----------- -----------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 208,358 $ 328,270 $ 146,667
=========== =========== ===========
</TABLE>
-33-
<PAGE>
ES&L BANCORP, INC. AND SUBSIDIARY
---------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
--------------------------------------------------
JUNE 30, 1998, 1997 AND 1996
----------------------------
NOTE L: OFFICE OCCUPANCY AND EQUIPMENT EXPENSE
- - ------------------------------------------------
Office occupancy and equipment expense is comprised of the following:
<TABLE>
<CAPTION>
Year ended June 30,
------------------------------------------------------------
1998 1997 1996
------------------ ------------------ ------------------
<S> <C> <C> <C>
Depreciation $172,874 $175,774 $180,336
Service bureau 151,526 150,012 134,893
Other 168,878 176,513 188,330
-------- -------- --------
$493,278 $502,299 $503,559
======== ======== ========
</TABLE>
NOTE M: REGULATORY CAPITAL
- - ----------------------------
The Bank is subject to various regulatory capital requirements administered by
its primary federal regulator, the Office of Thrift Supervision (OTS).
Failure to meet the minimum regulatory capital requirements can initiate
certain mandatory, and possible additional discretionary actions by
regulators, that if undertaken, could have a direct material affect on the
Bank's consolidated financial statements. Under the regulatory capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Bank must meet specific capital guidelines involving quantitative measures
of the Bank's assets, liabilities and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Bank's capital amounts
and classifications are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of: total risk-based
capital and Tier I capital to risk-weighted assets (as defined in the
regulations), Tier I capital to adjusted total assets (as defined), and
tangible capital to adjusted total assets (as defined). Management believes,
as of June 30, 1998, that the Bank meets all capital adequacy requirements to
which it is subject.
As of June 30, 1998, the most recent notification from OTS categorized the
Bank as well capitalized under the regulatory framework for prompt corrective
action. To be categorized as well capitalized, the Bank must maintain minimum
total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth
in the table. There are no conditions or events since that notification that
management believes have changed the Bank's category.
-34-
<PAGE>
ES&L BANCORP, INC. AND SUBSIDIARY
---------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
--------------------------------------------------
JUNE 30, 1998, 1997 AND 1996
----------------------------
NOTE M: REGULATORY CAPITAL, Cont'd
- - ----------------------------
The Bank's actual capital amounts and ratios are also presented in the table
(000's omitted).
<TABLE>
<CAPTION>
To be well
capitalized under prompt
Actual For capital adequacy purposes corrective action provisions
-------------------- ---------------------------------------- -------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
-------- --------- ------------------- ------------------- ---------------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1998
Total risk-based capital
(to risk-weighted assets) $14,805 14.65 % greater than $8,087 greater than 8.00 % greater than $10,109 greater than 10.00 %
or equal to or equal to or equal to or equal to
Tier I capital
(to risk-weighted assets) 13,540 13.39 % greater than 4,044 greater than 4.00 % greater than 6,065 greater than 6.00 %
or equal to or equal to or equal to or equal to
Tier I capital (leveraged)
(to adjusted total assets) 13,540 8.94 % greater than 4,546 greater than 3.00 % greater than 7,576 greater than 5.00 %
or equal to or equal to or equal to or equal to
Tangible capital
(to adjusted total assets) 13,540 8.94 % greater than 2,273 greater than 1.50 % greater than Not applicable
or equal to or equal to or equal to
As of June 30, 1997
Total risk-based capital
(to risk-weighted assets) $14,377 14.55 % greater than $7,907 greater than 8.00 % greater than $ 9,884 greater than 10.00 %
or equal to or equal to or equal to or equal to
Tier I capital
(to risk-weighted assets) 13,140 13.29 % greater than 3,954 greater than 4.00 % greater than 5,931 greater than 6.00 %
or equal to or equal to or equal to or equal to
Tier I capital (leveraged)
(to adjusted total assets) 13,140 8.78 % greater than 4,471 greater than 3.00 % greater than 7,452 greater than 5.00 %
or equal to or equal to or equal to or equal to
Tangible capital
(to adjusted total assets) 13,140 8.78 % greater than 2,235 greater than 1.50 % Not applicable
or equal to or equal to
</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).
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.
-35-
<PAGE>
ES&L BANCORP, INC. AND SUBSIDIARY
---------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
--------------------------------------------------
JUNE 30, 1998, 1997 AND 1996
----------------------------
NOTE N: SHAREHOLDERS' EQUITY, Cont'd
- - ------------------------------
Preferred stock
---------------
Shareholders of the Corporation have authorized the issuance of up to 500,000
shares of preferred stock with terms to be established by the Board of
Directors. The serial preferred may rank prior to the common stock as to
dividend rights, liquidation preference, or both, and may have full or limited
voting rights. No shares of this preferred stock have been issued, nor does
the Corporation have any present plan for the issuance or sale of any such
shares.
Stock split
-----------
The Corporation's common stock was split three-for-two on 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.
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 non-interest
bearing demand deposits, savings, and certain types of money market accounts)
are, by definition, equal to the amount payable on demand at the reporting
date (i.e., their carrying amounts). The carrying amounts of variable rate,
fixed-term money market accounts and certificates of deposit approximate their
fair values at the reporting date. Fair values of fixed rate certificates of
deposit are estimated using a discounted cash flow calculation that applies
interest rates currently being offered to a schedule of aggregated expected
monthly time deposit maturities.
-36-
<PAGE>
ES&L BANCORP, INC. AND SUBSIDIARY
---------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
--------------------------------------------------
JUNE 30, 1998, 1997 AND 1996
----------------------------
NOTE O: DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS, Cont'd
- - ------------------------------------------------------------------
Borrowed funds
--------------
The fair value of the advances from the Federal Home Loan Bank is estimated
using discounted cash flow analyses based on the Bank's current incremental
borrowing rate for similar borrowing arrangements.
Off-balance-sheet instruments
-----------------------------
Fair values for off-balance-sheet lending commitments approximate the loan
commitment amount (see Note I).
Information regarding the Corporation's financial instruments is as follows at
June 30, 1998 and 1997: (000's)
<TABLE>
<CAPTION>
1998
-----------------------------------------------
Carrying Estimated
value fair value
---------------------- ----------------------
<S> <C> <C>
Financial assets:
Cash and short-term investments $ 7,367 $ 7,367
Investment securities (including mortgage-backed 3,769 3,770
securities)
Loans receivable 134,413 137,803
Accrued interest receivable 775 775
Financial liabilities:
Deposits 112,180 112,342
Advances from Federal Home Loan Bank 21,897 21,375
Off-balance-sheet instruments:
Commitments to extend credit 5,257 5,257
Standby letters of credit 365 365
1997
-----------------------------------------------
Carrying Estimated
value fair value
---------------------- ----------------------
Financial assets:
Cash and short-term investments $ 723 $ 723
Investment securities (including mortgage-backed 6,978 6,991
securities)
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>
-37-
<PAGE>
ES&L BANCORP, INC. AND SUBSIDIARY
---------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Cont'd
--------------------------------------------------
JUNE 30, 1998, 1997 AND 1996
----------------------------
NOTE P: IMPACT OF YEAR 2000 (UNAUDITED)
- - ----------------------------------------
The Year 2000 issue is the result of computer programs being written using two
digits rather than four digits to define the applicable year. Certain
computer programs or operating equipment that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than Year 2000. This
could result in a computer system failure or miscalculations causing
disruptions of operations.
During 1997, the Corporation developed a Year 2000 preparedness plan. The
plan established procedures to contact and monitor the Year 2000 preparedness
of all third party servicers, including NCR Corporation - the company
responsible for the Bank's customer account processing. NCR has a plan in
place which has been reviewed by external audit organizations, as well as
Federal Bank examiners. NCR is currently in the process of testing their
plan. All other service providers have been contacted and have responded
identifying the plan they have developed and have provided testing dates to
verify the resolution of any potential problems.
The Corporation has tested its internal systems and believes them to be year
2000 compliant. Therefore, the Corporation anticipates no significant
financial expenditure will be necessary with regard to year 2000 compliance.
-38-
<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 local brokerage offices have facilitated purchases and
sales of ES&L Bancorp Stock:
Morgan Stanley Dean Witter, Smith Barney Shearson,
Elmira, New York Elmira, New York
During the 1998 fiscal year, the Corporation's Board of Directors declared a
special cash dividend of $1.00 per share, payable on July 31, 1997 to
stockholders of record on July 22, 1997. The special cash dividend was paid in
addition to four quarterly cash dividends of $0.17 per share.
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 1998, the
trading price of the stock has ranged from $16.50 to $21.00 per share.
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, 1998, ES&L was a Tier 1
Institution.
ES&L Bancorp, Inc. has paid the following per share cash dividends, adjusted to
reflect the effect of the 1996 three-for-two stock split, to its shareholders
during the past three fiscal years:
<TABLE>
<CAPTION>
1998 Fiscal Year 1997 Fiscal Year 1996 Fiscal Year
<S> <C> <C> <C> <C> <C> <C>
7/31/97 $1.00 8/30/96 $0.17 8/31/95 $0.1133
8/29/97 $0.17 11/29/96 $0.17 11/30/95 $0.1133
11/28/97 $0.17 2/28/97 $0.17 2/29/96 $0.1133
2/27/98 $0.17 5/30/97 $0.17 5/31/96 $0.1133
----- -------
5/29/98 $0.17
-----
$1.68 $0.68 $0.4532
Dividend Payment Ratio 69.71% 31.76% 22.11%
</TABLE>
The Corporation's Board of Directors intend to periodically review the financial
condition, earnings and capital requirements of the Corporation in an effort to
determine the declaration of future dividend payments.
At June 30, 1998, the Corporation had 831,773 shares of common stock
outstanding. At September 1, 1998, 835,192 shares were outstanding, representing
approximately 450 shareholders of record, excluding those shares registered in
the "street name" of brokerage firms and stock depositories.
ES&L Bancorp, Inc.
- - --------------------------------------------------------------------------------
-39-
<PAGE>
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
------------
Brilie Corporation Special Counsel
- - ------------------ ---------------
ES&L Financial Services Housley Kantarian & Bronstein, P.C.
300 West Water Street Suite 700
Elmira, New York 14901 1220 19th Street, NW
607-733-5533 Washington, D.C. 20036
ES&L Mortgage Corporation Stock Registrar and Transfer Agent
- - ------------------------- ----------------------------------
Cayuga Mortgage Company American Stock Transfer & Trust Co.
200 East Buffalo Street 40 Wall Street
Suite 101B New York, New York 10005
Ithaca, New York 14850 (800) 937-5449
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 26, 1998, at 7:00 p.m.
ES&L Bancorp, Inc.
- - --------------------------------------------------------------------------------
-40-
<PAGE>
DIRECTORS
- - -------------------------------------------------------------------------------
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,
Zelser Wilbert Vault, Inc.
William A. McKenzie -
President and Chief Executive Officer,
Elmira Savings & Loan, F.A. Frederick J. Molter -
Professional Engineer,
The Sear Brown Group
John F. Cadwallader -
President of the following companies:
John F. Cadwallader, Inc. Paul Morss -
d/b/a "The Glass Company" Retired Insurance Executive,
Windshield Installation Network, Inc. Swan & Sons Morss Co.
d/b/a WIN Insurance Agency
Auto Glass Insurance Company
Gerald F. Schichtel -
L. Edward Considine - Retired President,
Professional Engineer, Hilliard Corporation
Hunt Engineers and Architects
Retired General Manager, Elmira Water Board
All directors of ES&L Bancorp, Inc. are directors of Elmira Savings and
Loan, F.A.
OFFICERS
- - -------------------------------------------------------------------------------
William A. McKenzie Glenn R. Ahart
President and Chief Executive Officer Assistant Vice President
J. Michael Ervin Anne H. Bennett
Senior Vice President and Treasurer Assistant Vice President
Michael J. Wayne 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
Vice President Assistant Vice President
Michael J. Crimmins Shirley L. Gleockner
Vice President Corporate Secretary
All officers of ES&L Bancorp, Inc. are officers of Elmira Savings and Loan, F.A.
ES&L Bancorp, Inc.
- - --------------------------------------------------------------------------------
-41-
<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, conducts business through its main office located
in Elmira, NY and its "CASHLESS" Deposit Office located in Ithaca, 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, 1998, AS FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION, MAY BE OBTAINED AFTER SEPTEMBER 30,
1998, 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.
- - --------------------------------------------------------------------------------
<PAGE>
[LETTERHEAD OF ES&L BANCORP, INC. APPEARS HERE]
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Percentage State of
Name Owned Incorporation
- - ---- ----------- -------------
<S> <C> <C>
Elmira Savings & Loan, F.A. 100% United States
Brilie Corporation (a) 100% New York
ES&L Mortgage Corporation (a) 100% New York
- - --------------------
</TABLE>
(a) Wholly-owned subsidiary of Elmira Savings & Loan, F.A.
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITORS' REPORT
----------------------------
ES&L Bancorp, Inc.
We consent to the incorporation by reference in the Registration Statement of
ES&L Bancorp, Inc. on Form S-8 of our report dated July 17, 1998 appearing in
this Annual Report on Form 10-K of ES&L Bancorp, Inc. for this fiscal year ended
June 30, 1998.
/s/ Mengel, Metzger, Barr & Co., LLP
Elmira, New York
September 16, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 1,367
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 6,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,294
<INVESTMENTS-CARRYING> 2,474
<INVESTMENTS-MARKET> 2,475
<LOANS> 138,064
<ALLOWANCE> 1,473
<TOTAL-ASSETS> 152,160
<DEPOSITS> 112,180
<SHORT-TERM> 8,610
<LIABILITIES-OTHER> 3,583
<LONG-TERM> 13,287
0
0
<COMMON> 9
<OTHER-SE> 14,492
<TOTAL-LIABILITIES-AND-EQUITY> 152,160
<INTEREST-LOAN> 11,874
<INTEREST-INVEST> 366
<INTEREST-OTHER> 26
<INTEREST-TOTAL> 12,266
<INTEREST-DEPOSIT> 5,526
<INTEREST-EXPENSE> 6,701
<INTEREST-INCOME-NET> 5,565
<LOAN-LOSSES> 300
<SECURITIES-GAINS> 1
<EXPENSE-OTHER> 3,297
<INCOME-PRETAX> 3,235
<INCOME-PRE-EXTRAORDINARY> 3,235
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,039
<EPS-PRIMARY> 2.44
<EPS-DILUTED> 2.41
<YIELD-ACTUAL> 3.83
<LOANS-NON> 296
<LOANS-PAST> 0
<LOANS-TROUBLED> 17
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,435
<CHARGE-OFFS> 270
<RECOVERIES> 8
<ALLOWANCE-CLOSE> 1,473
<ALLOWANCE-DOMESTIC> 1,103
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 370
</TABLE>
