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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 1999
OR
[ ] 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 (I.R.S. Employer
Incorporation 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 re-
quirements for the past 90 days. YES X NO .
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K 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 .
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 ($26.25 per share), management estimates
that the aggregate market value of the voting stock held by non-
affiliates of the registrant at September 1, 1999 was
$12,284,239. 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, 1999, there were 830,595 shares outstanding
of the registrant's common stock, of which directors and
executive officers and more than 5% beneficial owners held
362,624 shares.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Annual Report to Stockholders for the Fiscal
Year Ended June 30, 1999. (Part II)
2. Portions of Proxy Statement for the 1999 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, 1999, the Bank had
total assets of $153.7 million, deposits of $111.6 million, net
loans receivable of $129.3 million and shareholders' equity of
$15.6 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, Inc., 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
Legislation has been passed by both the U.S. House of
Representatives and Senate which calls for the modernization
of the banking system and which would significantly affect the
operations and regulatory structure of the financial services
industry, including savings institutions like Elmira Savings &
Loan. At this time, management does not know what form final
legislation might take, but if enacted into law, the legislation
could affect the Corporation's competitive environment as well
as its business and operations. See " -- Regulation -- Proposed
Legislative and Regulatory Changes."
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LENDING ACTIVITIES
GENERAL. The Bank originates loans through its home
office in Elmira and its mortgage banking subsidiary in Ithaca,
New York. Historically, the Bank originated primarily
conventional first mortgage loans secured by one-to-four-family
residential property. Additionally, the Bank originates 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, the majority of which are
sold 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,
---------------------------------------------------
1999 1998 1997
--------------- --------------- ----------------
Amount % Amount % Amount %
------ ----- ------ ----- ------ ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
First Mortgage Permanent Loans:
Conventional 1-4 family. . . . . . . . . . . $ 64,907 50.20% $ 65,069 51.57% $ 74,276 56.39%
FHA/VA 1-4 family. . . . . . . . . . . . . . -- -- -- -- -- --
Multi-family . . . . . . . . . . . . . . . . 14,617 11.30 12,972 10.28 11,554 8.77
Commercial real estate . . . . . . . . . . . 28,257 21.86 29,740 23.57 28,003 21.26
Construction:
Residential. . . . . . . . . . . . . . . . 4,171 3.23 1,997 1.58 2,210 1.68
Commercial . . . . . . . . . . . . . . . . 6,721 5.20 2,996 2.37 2,510 1.91
-------- ------ -------- ------ -------- ------
Total first mortgage. . . . . . 118,673 91.79 112,774 89.37 118,553 90.01
Consumer loans:
Home equity line of credit . . . . . . . . . 4,316 3.34 5,392 4.27 6,049 4.58
Loans on savings accounts. . . . . . . . . . 394 .30 264 .21 246 .19
Education loans. . . . . . . . . . . . . . . 148 .11 333 .26 462 .35
Automobile loans . . . . . . . . . . . . . . 410 .32 460 .36 627 .48
Second mortgage loans. . . . . . . . . . . . 4,728 3.66 5,005 3.97 4,440 3.37
Other consumer loans . . . . . . . . . . . . 172 .13 157 .13 136 .11
Demand notes . . . . . . . . . . . . . . . . 1,369 1.06 954 .76 1,188 .90
-------- ------ -------- ------ -------- ------
Total consumer loans. . . . . . . . . . . 11,537 8.92 12,565 9.96 13,148 9.98
Commercial lines of credit . . . . . . . . . . 2,039 1.58 2,891 2.29 1,353 1.03
Commercial non-mortgage. . . . . . . . . . . . 1,629 1.26 1,603 1.27 1,807 1.37
-------- ------ -------- ------ -------- ------
Total . . . . . . . . . . . . . . . . . . 133,878 -- 129,833 -- 134,861 --
Less:
Loans in process . . . . . . . . . . . . . . . (3,477) (2.69) (2,274) (1.80) (1,790) (1.36)
Allowance for loan loss . . . . . . . . . . . (1,269) (.98) (1,473) (1.17) (1,435) (1.09)
Deferred loan origination fees and premiums. . 155 .12 95 .08 75 .06
-------- ------ -------- ------ -------- ------
Total . . . . . . . . . . . . . . . . . . $129,287 100.00% $126,181 100.00% $131,711 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
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The following table presents at June 30, 1999 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,
2000 1999 1999
---------------- -------------- -------------
<S> <C> <C> <C>
Real estate mortgage . . . . . . . $ 4,584,607 $19,207,976 $83,987,316
Mortgages held for resale. . . . . 5,541,981 -- --
Real estate construction . . . . . 1,460,552 937,736 8,494,018
Installment. . . . . . . . . . . . 3,077,401 4,238,546 4,220,861
Commercial . . . . . . . . . . . . 387,444 1,174,728 2,105,642
----------- ----------- -----------
Total. . . . . . . . . . . . . $15,051,985 $25,558,986 $98,807,837
=========== =========== ===========
</TABLE>
The following table apportions the dollar amount of the
loans due subsequent to the year ended June 30, 1999 between
those with predetermined interest rates and those with
adjustable interest rates.
<TABLE>
<CAPTION>
Predetermined Rates Adjustable Rates
------------------- ----------------
<S> <C> <C>
Real estate mortgage . . . . . . . . . $ 6,656,148 $101,123,751
Mortgages held for resale. . . . . . . 5,541,981 --
Real estate construction . . . . . . . 4,805,199 6,087,107
Installment. . . . . . . . . . . . . . 6,920,805 4,616,003
Commercial . . . . . . . . . . . . . . 1,628,738 2,039,076
----------- ------------
Total. . . . . . . . . . . . . . . $25,552,871 $113,865,937
=========== ============
</TABLE>
ONE- TO FOUR-FAMILY MORTGAGE LOANS. At June 30, 1999,
the Bank held in its portfolio $64.9 million of first mortgage
loans secured by one- to four-family residential units,
representing 50.2% of its total portfolio. Since approximately
1983, the majority of 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, 1999, approximately
$59.6 million of the Bank's first mortgage one- to four-family
residential loan portfolio consisted of adjustable-rate loans.
The retention of adjustable-rate mortgage loans in the
Bank's loan portfolio helps reduce the Bank's exposure to
increases in interest rates. However, there are unquantifiable
credit risks resulting from potential increased costs to the
4
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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 1999, the Bank, Cayuga
Mortgage and PACE Funding originated approximately $8.5 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. The majority 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. During fiscal year
1999, the Bank and its mortgage banking subsidiary originated
approximately $53.9 million of fixed-rate loans and sold $52.5
million, servicing retained, in the secondary market. At June
30, 1999, the Bank had forward commitments to sell closed loans
totaling approximately $13.3 million in the secondary mortgage
market.
Cayuga Mortgage and PACE Funding also originate fixed-rate
mortgage loans for the Bank, some of which may be sold,
servicing retained, in the secondary market. At June 30, 1999,
the Bank had a residential mortgage servicing portfolio of
$174.0 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. 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, 1999
the Bank had $10.9 million outstanding in construction loans.
Of that amount, $4.2 million represented loans on one- to four-
family residences made directly to the homeowner.
Construction loans originated by the Bank include single-
and multi-family residences, motels and office buildings. The
Bank typically will not originate the construction loan unless
it is also making the permanent loan if a permanent loan is
required. These loans typically range in size between $50,000
and $250,000 for residential loans and up to approximately $1.0
million for commercial loans.
Cayuga Mortgage and PACE Funding originated approximately
$1.8 million of the $4.2 million total residential construction
loans outstanding at June 30, 1999. 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 $250,000 and are secured by
single family properties.
5
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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, 1999, the Bank held $28.3 million in commercial real
estate loans and $14.6 million in multi-family loans, which
represented approximately 21.9% and 11.3% 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. The Bank also obtains
appraisals of each property in accordance with applicable
federal regulations. Additionally, the Bank's loan review
policy includes provisions for the periodic inspection,
throughout the term of the loan, of real estate securing large
balance commercial real estate and multi-family loans.
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.
6
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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, 1999.
<TABLE>
<CAPTION>
Outstanding
Number Principal Amount
of Loans Balance Non-Performing
-------- --------- --------------
<S> <C> <C> <C>
Medical facilities . . . . . 32 $ 4,785,195 $ 0.00
Retail property. . . . . .. 35 4,005,578 0.00
Office buildings . . . . . . 42 3,982,294 0.00
Restaurant/lounge. . . . . . 14 869,945 0.00
Office and warehouse/storage
units . . . . . . . . . . 13 2,042,617 0.00
Hotel/motel. . . . . . . . . 12 5,190,506 0.00
Nonprofit/church/
school . . . . . . . . . . 7 603,977 0.00
Other. . . . . . . . . . . . 62 6,776,667 0.00
--- ----------- ------
Total. . . . . . . . . . 217 $28,256,779 $ 0.00
=== =========== ======
</TABLE>
CONSUMER AND COMMERCIAL BUSINESS LENDING. At June 30,
1999, the Bank's consumer loan portfolio totaled $11.5 million
and its commercial business loans totaled $3.7 million,
representing 8.9% and 2.8% 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 and home improvement loans, as well as loans
secured by savings deposits. Additionally, the Bank offers, on
a small scale, 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, 1999 was equal to $98,364, or approximately 0.85% 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
($121,000, or approximately 1.05% of
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the consumer loan portfolio, at June 30, 1999), there can be no
assurance that delinquencies will not increase in the future.
Since 1986, the Bank has been actively involved in
originating home equity lines of credit. These loans amounted
to $4.3 million or 3.3% of the Bank's loan portfolio at June 30,
1999. 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, 1999, these consumer mortgages
totaled $4.7 million, or 3.7% 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 $410,000
outstanding at June 30, 1999), and had approximately $1.4
million of secured and unsecured time and demand notes
outstanding at June 30, 1999.
The Bank had approximately $1.6 million of commercial
business loans outstanding at June 30, 1999 which were not
collateralized by real estate. Approximately 40% 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, 1999,
lines totaling $5.1million had been approved with loan balances
outstanding of approximately $2.0 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.
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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 to repay and the more
significant items on the application are verified through use of
credit reports, financial statements and confirmations.
8
<PAGE>
<PAGE>
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, 1999, 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, 1999, the Bank was servicing
residential loans for others in the amount of $174.0 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 1999, Cayuga Mortgage and
PACE Funding originated $32.3 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, 1999 (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>
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------
1999 1998 1997
------- -------- -------
(In thousands)
<S> <C> <C> <C>
Loans originated:
Conventional real estate loans:
Construction loans . . . . . . . . . $ 3,096 $ 3,887 $ 1,477
Loans on existing property . . . . . 42,358 34,862 35,787
Loans refinanced . . . . . . . . . . 27,704 18,899 7,726
Insured and guaranteed loans . . . . . 4,545 2,707 3,194
Consumer . . . . . . . . . . . . . . . 1,976 2,491 2,080
Commercial loans . . . . . . . . . . . 430 146 470
Other loans. . . . . . . . . . . . . . 4,734 5,279 3,397
-------- -------- --------
Total loans originated . . . . . . . $ 84,843 $ 68,271 $ 54,131
Loans sold:
Whole Loans. . . . . . . . . . . . . . (53,076) (42,311) (27,682)
Participation loans. . . . . . . . . . -- -- (375)
-------- -------- --------
Total loans sold . . . . . . . . . . (53,076) (42,311) (28,057)
Loans held for sale. . . . . . . . . . . (5,542) (8,231) (4,461)
Principal repayments . . . . . . . . . . (25,344) (21,969) (13,060)
Loans transferred to foreclosed
real estate . . . . . . . . . . . . . (374) (737) (173)
Increase (decrease) in other items,
net. . . . . . . . . . . . . . . . . . 2,599 (553) 1,695
-------- -------- --------
Net increase (decrease). . . . . . . . $ 3,106 $ (5,530) $ 10,075
======== ======== ========
</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, 1999, Elmira Savings & Loan was servicing
approximately $174.0 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 and mortgage servicing
rights.
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,
1999, the Bank's outstanding commitments totaled approximately
$8.4 million.
The Bank generally obtains forward commitments on a loan
by loan or pooled mortgage backed security basis to sell fixed
rate residential mortgages in the national secondary mortgage
market. Interest rates on real estate loans sold
are generally locked in at either application, commitment or
closing.
10
<PAGE>
<PAGE>
NON-PERFORMING LOANS AND ASSET CLASSIFICATION. Loans are
reviewed on a monthly basis and are placed on non-accrual status
when, in the opinion of management, the collection of additional
interest is doubtful. Residential and commercial mortgage loans
are generally placed on non-accrual status when either principal
or interest is more than 90 days past due. Interest accrued and
unpaid at the time a loan is placed on non-accrual status is
charged against interest income. Subsequent payments are either
applied to the outstanding principal balance or recorded as
interest income, depending on the assessment of the ultimate
collectibility of the loan. Consumer loans are generally
charged off when or before the loan becomes 120 days delinquent,
although collection efforts continue.
Identification of a delinquent mortgage loan is generally
made by the 15th day of delinquency, and a late notice is mailed
between the 16th and 18th day of delinquency. The Bank attempts
to contact the borrower by telephone beginning approximately
five days after mailing the notice. If satisfactory
arrangements to bring the account current have not been made by
the 45th day of delinquency, efforts are made to conduct a face-
to-face interview with the borrower. If a satisfactory response
is not obtained, the Bank continues to follow up with notices,
telephone contacts and personal interviews until the mortgage
loan has been brought current or until the Bank determines that
recommendation for foreclosure, deed in lieu of foreclosure, or
other action is appropriate.
Real estate acquired by the Bank as a result of
foreclosure or by deed in lieu of foreclosure is classified as
real estate owned until such time as it is sold. Real estate
properties acquired through loan foreclosure are valued at the
lower of cost or fair value minus estimated costs to sell.
Costs relating to the improvement of property are capitalized to
the extent that the carrying value does not exceed estimated
fair value, whereas costs relating to holding property are
expensed. Valuations are periodically performed by management
and an allowance for losses is established, if necessary, by a
charge to operations if the carrying value of a property exceeds
its estimated net realizable value.
As of June 30, 1999, 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, 1999,
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, 1999, the Bank had two loans totaling
approximately $72,000, which were classified as troubled debt
restructured loans in accordance with SFAS 118. A portion of
the larger of the two loans, a home equity line of credit, was
classified at both June 30, 1998 and 1997 as a result of a
Chapter 13 Bankruptcy filing.
11
<PAGE>
<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,
----------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Loans accounted for on a non-accrual basis: (1)
Real Estate:
Residential. . . . . . . . . . . . . . . . . . $ 73,476 $183,402 $250,078
Commercial and Multi-Family. . . . . . . . . . 66,129 80,218 61,132
Consumer/Home Equity. . . . . . . . . . . . . -- 32,307 29,193
Consumer . . . . . . . . . . . . . . . . . . . . -- -- --
Other. . . . . . . . . . . . . . . . . . . . . . -- -- --
-------- -------- --------
Total. . . . . . . . . . . . . . . . . . . . $139,605 $295,927 $340,403
======== ======== ========
Accruing loans which are contractually past due
90 days or more:
Real Estate:
Residential. . . . . . . . . . . . . . . . . . $182,284 $ -- $ 62,898
Commercial and Multi-Family. . . . . . . . . . 75,308 -- 316,148
Consumer/Home Equity . . . . . . . . . . . . . -- -- --
Education. . . . . . . . . . . . . . . . . . . . -- -- --
Consumer . . . . . . . . . . . . . . . . . . . . -- -- --
Other. . . . . . . . . . . . . . . . . . . . . . -- -- --
-------- -------- --------
Total . . . . . . . . . . . . . . . . . . $257,592 $ -- $379,046
======== ======== ========
Troubled debt restructurings . . . . . . . . . . . $ 71,807 $ 17,060 $ 17,116
======== ======== ========
Total of nonaccrual and 90
days past due loans and
troubled debt restructurings . . . . . . . . . . $469,004 $312,987 $736,565
======== ======== ========
Percentage of total loans. . . . . . . . . . . . . .35% .23% .55%
======== ======== ========
Other non-performing assets (2). . . . . . . . . . $ 34,000 $485,226 $131,000
======== ======== ========
<FN>
___________
(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.
</FN>
</TABLE>
During the year ended June 30, 1999, gross interest income
of $17,021 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 $11,472.
12
<PAGE>
<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,
-------------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Balance at beginning of period . . . . . . . . . $1,473,346 $1,435,499 $1,430,781
Loans charged-off:
Real Estate -- mortgage:
Residential . . . . . . . . . . . . . . . . . 37,863 101,993 44,466
Commercial. . . . . . . . . . . . . . . . . . 89,677 125,404 --
Commercial business. . . . . . . . . . . . . . 8,681 10,506 --
Consumer. . . . . . . . . . . . . . . . . . . . 49,410 32,087 --
---------- ---------- ----------
Total charge-offs. . . . . . . . . . . . . $ 185,631 $ 269,990 $ 44,466
---------- ---------- ----------
Recoveries:
Real Estate--Mortgage:
Residential. . . . . . . . . . . . . . . . . $ 298 $ 7,630 $ 8,140
Commercial . . . . . . . . . . . . . . . . . 4,599 147 292
Commercial business. . . . . . . . . . . . . . 300 -- --
Consumer . . . . . . . . . . . . . . . . . . . 656 60 752
---------- ---------- ----------
Total recoveries . . . . . . . . . . . . . $ 5,853 $ 7,837 $ 9,184
---------- ---------- ----------
Net loans charged-off. . . . . . . . . . . . . . $ (179,778) $ (262,153)$ (35,282)
Provision for possible loan losses . . . . . . . -- 300,000 40,000
Allocation to specific reserve . . . . . . . . . -- (68,000) (33,000)
General allowance valuation adjustment . . . . . (25,000) -- --
Specific allowance for loan losses . . . . . . . -- 68,000 33,000
---------- ---------- ----------
Total allowance . . . . . . . . . . . . . . . $1,268,568 $1,473,346 $1,435,499
========== ========== ==========
Ratio of net charge-offs to average
loans outstanding during the period. . . . . .14% .21% .03%
========== ========== ==========
</TABLE>
For a discussion of the Bank's provision for loan losses in
fiscal year 1999, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Comparison of
Operating Results for the Years Ended June 30, 1999 and 1998 --
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,
-----------------------------------------------------------------------
1999 1998 1997
---------------------- ---------------------- ------------------------
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 . . . . . . . . $ 328,932 25.92% $ 255,086 17.34% $ 310,754 21.64%
Commercial. . . . . . . . . 790,700 62.33 704,155 47.79 671,293 46.76
Commercial business. . . . . . 33,000 2.62 29,000 1.96 34,000 2.36
Consumer . . . . . . . . . . . 98,364 7.75 115,599 7.84 101,585 7.07
Unallocated. . . . . . . . . . 17,572 1.38 369,505 25.07 317,867 22.17
---------- ------ ---------- ------ ---------- ------
Total allowance for loan
losses . . . . . . . . . . $1,268,568 100.00% $1,473,345 100.00% $1,435,499 100.00%
========== ====== ========== ====== ========== ======
</TABLE>
13
<PAGE>
<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, 1999, the Bank had $1.2 million of
assets classified as substandard, no assets were classified as
doubtful and $15,800 were classified 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. 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. 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>
<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, 1999, the
market value of the Bank's investment securities portfolio was
approximately $5.9 million.
<TABLE>
<CAPTION>
At June 30,
------------------------------
1999 1998 1997
------ ------ ------
(In thousands)
<S> <C> <C> <C>
Investment securities:
U.S. Government and agency securities . . . . $4,380 $1,000 $3,991
Corporate debt securities. . . . . . . . . . . 18 25 32
Corporate Stock. . . . . . . . . . . . . . . . 162 82 66
------ ------ ------
Total investment securities . . . . . . . . 4,560 1,107 4,089
Federal funds sold and overnight deposits . . . -- 6,000 --
------ ------ ------
Total investment securities, federal
funds sold and overnight deposits . . . . 4,560 7,107 4,089
Federal Home Loan Bank of New York stock. . . . 1,313 1,313 1,313
------ ------ ------
Total investments . . . . . . . . . . . . . $5,873 $8,420 $5,402
====== ====== ======
</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, 1999, the market value of investment
securities "Held to Maturity" was approximately $10,500 less
than the carrying value while the "Available for Sale"
investment was approximately $26,100 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>
<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, 1999.
<TABLE>
<CAPTION>
One Year or Less One to Five Years Five to Ten Years
------------------- -------------------- ----------------------
Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield
-------- ------- --------- -------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. government and
agency obligations . . . . $ -- --% $4,380 5.85% $ -- --%
Corporate debt securities. . -- -- -- -- -- --
Corporate stock. . . . . . . -- -- -- -- -- --
------ ---- ------ ---- ------- ----
Total. . . . . . . . . . $ -- --% $4,380 5.85% $ -- --%
====== ==== ====== ==== ======= ====
<CAPTION>
More than Ten Years Total Investment Portfolio
------------------- ----------------------------------
Carrying Average Carrying Market Average
Value Yield Value Value Yield
-------- ------- --------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
U.S. government and
agency obligations . . . . $ -- -- % $ 4,380 $ 4,369 5.85%
Corporate debt securities. . 18 6.61 18 19 6.61
Corporate stock. . . . . . . 162 1.20 162 162 1.20
------- ---- ------- ------- ----
Total. . . . . . . . . . $ 180 1.76% $ 4,560 $ 4,550 5.64%
======= ==== ======= ======= ====
</TABLE>
16
<PAGE>
<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 17.6% of deposits at June 30, 1999. 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>
<PAGE>
The following table sets forth the change in dollar amount
of deposits in the various types of accounts offered by the Bank
between the dates indicated.
<TABLE>
<CAPTION>
Increase
(Decrease)
Balance at Balance from June 30,
June 30, % at June 30, % 1998 to June
1999 Deposits 1998 Deposits 30, 1999
--------- -------- --------- -------- -------------
<S> <C> <C> <C> <C> <C>
Non-interest bearing savings
account . . . . . . . . . . . $ 964,386 .86% $ 1,427,622 1.27% $ (463,236)
NOW checking account . . . . . . 4,134,097 3.70 4,078,966 3.64 55,131
Jumbo certificates . . . . . . . 19,649,626 17.61 17,361,558 15.48 2,288,068
Super NOW checking accounts. . . 2,256,667 2.02 2,836,831 2.53 (580,164)
Passbook and statement savings . 14,300,702 12.82 14,817,520 13.20 (516,818)
Money market deposit accounts. . 4,848,123 4.34 5,275,041 4.70 (426,918)
Six month money market
certificates . . . . . . . . . 5,484,324 4.91 3,932,711 3.51 1,551,613
30 and 48 month certificates . . 3,214,557 2.88 3,604,647 3.21 (390,090)
IRA certificates, excluding
jumbo certificates . . . . . . 4,843,846 4.34 4,645,049 4.14 198,797
Other certificates . . . . . . . 51,889,967 46.52 54,199,886 48.32 (2,309,919)
------------ ------ ----------- ------ -----------
Total. . . . . . . . . . . . $111,586,295 100.00% $112,179,831 100.00% $ (593,536)
============ ====== ============ ====== ===========
<CAPTION>
Increase
(Decrease)
Balance at from June 30,
June 30, % 1997 to June
1997 Deposits 30, 1998
--------- -------- ------------
<S> <C> <C> <C>
Non-interest bearing savings
account . . . . . . . . . . . $ 407,841 .36% $ 1,019,781
NOW checking account . . . . . . 4,443,572 3.98 (364,606)
Jumbo certificates . . . . . . . 15,651,466 14.01 1,710,092
Super NOW checking accounts. . . 2,900,320 2.60 (63,489)
Passbook and statement savings . 14,183,722 12.69 633,798
Money market deposit accounts. . 5,232,229 4.68 42,812
Six month money market
certificates . . . . . . . . . 5,195,663 4.65 (1,262,952)
30 and 48 month certificates . . 4,126,996 3.69 (522,349)
IRA certificates, excluding
jumbo certificates . . . . . . 4,515,806 4.04 129,243
Other certificates . . . . . . . 55,090,903 49.30 (891,017)
------------ ------ -----------
Total. . . . . . . . . . . . $111,748,518 100.00% $ 431,313
============ ====== ============
</TABLE>
18
<PAGE>
<PAGE>
Deposits in the Bank as of June 30, 1999 were represented by
the various types of savings programs described below.
<TABLE>
<CAPTION>
Weighted
Average Percentage
Interest Minimum Balance in of Total
Rate Term Category Amount Thousands Savings
- -------- -------- ---------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Demand Deposits
---------------
0.00% On Demand Non-Interest Bearing Savings
Accounts $ 1 $ 964 0.86%
0.00 On Demand NOW Accounts 10 4,134 3.70
2.37 On Demand Passbook and Statement Savings
Accounts 5 14,054 12.59
2.83 On Demand Money Market Accounts 2,500 4,848 4.34
2.37 On Demand Super NOW Accounts 2,500 2,257 2.02
2.37 On Demand Holiday Club Accounts 1 247 0.22
Certificates of Deposit
-----------------------
3.08 30 Days 30 Day Certificate, Fixed-Rate 5,000 309 0.28
3.94 91 Days 91 Day Certificate, Fixed-Rate 2,500 1,042 0.93
4.58 182 Days 6 Month Certificate, Fixed-Rate 2,500 5,751 5.15
5.13 7 Months 7 Month Certificate, Fixed-Rate 500 32 0.03
4.60 8 Months 8 Month Certificate, Fixed-Rate 500 1,045 0.94
4.60 9 Months 9 Month Certificate, Fixed-Rate 5,000 421 0.38
4.73 10 Months 10 Month Certificate, Fixed-Rate 500 245 0.22
4.88 11 Months 11 Month Certificate, Fixed Rate 2,500 8,008 7.18
4.99 12 Months 1 Year Certificate, Fixed-Rate 500 8,810 7.90
5.11 14 Months 14 Month Certificate, Fixed-Rate 500 11,832 10.60
4.96 18 Months 18 Month Certificate, Fixed-Rate 500 4,721 4.23
5.49 24 Months 24 Month Certificate, Fixed-Rate 500 9,005 8.07
5.17 100 Weeks 100 Week Certificate, Fixed-Rate 500 378 0.34
5.02 30 Months 30 Month Certificate, Fixed-Rate 500 17,590 15.76
5.61 36 Months 36 Month Certificate, Fixed-Rate 500 2,070 1.86
5.53 48 Months 4 Year Certificate, Fixed-Rate 500 3,647 3.27
6.25 60 Months 5 Year Certificate, Fixed-Rate 500 8,900 7.98
4.93 12 Months 1 Year Mini Jumbo Certificate,
Fixed-Rate 20,000 1,269 1.14
5.41 18 Months 18 Month Certificate, Variable-
Rate 10 7 0.01
-------- ------
$111,586 100.00%
======== ======
</TABLE>
19
<PAGE>
<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, 1999.
Maturity Period Amount
- --------------- -------------
(In thousands)
Three months or less. . . . . . . . . . . . . $ 5,194
Three through six months. . . . . . . . . . . 3,867
Six through twelve months . . . . . . . . . . 8,019
Over twelve months. . . . . . . . . . . . . . 2,570
-------
Total . . . . . . . . . . . . . . . . . . $19,650
=======
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,
--------------------------------------------------------------------
1999 1998 1997
------------------- -------------------- ----------------------
Demand Time Demand Time Demand Time
Deposits Deposits Deposits Deposits Deposits Deposits
-------- -------- --------- -------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Average balance. . . . . . . $27,750 $85,622 $27,597 $87,128 $27,273 $82,040
Average rate . . . . . 2.23% 5.24% 2.51% 5.55% 2.63% 5.42%
</TABLE>
The following table sets forth the Bank's deposit
activities for the periods indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------
1999 1998 1997
------ ------ ------
(In thousands)
<S> <C> <C> <C>
Deposits . . . . . . . . . . . . . . . . . $155,915 $155,419 $140,913
Withdrawals. . . . . . . . . . . . . . . . 161,605 160,526 140,920
-------- -------- --------
Net increase (decrease) before interest
credited . . . . . . . . . . . . . . . . (5,690) (5,107) (7)
Interest credited. . . . . . . . . . . . . 5,096 5,538 5,103
-------- -------- --------
Net increase (decrease) in deposits . . . $ (594) $ 431 $ 5,096
======== ======== ========
</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, 1999, Elmira Savings & Loan had advances totaling $22.6
million from the FHLB of New York.
20
<PAGE>
<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,
1999, 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,
---------------------
1999 1998
------ ------
<S> <C> <C>
Weighted average rate . . . . . . . 5.82% 6.54%
<CAPTION>
During the
Year Ended June 30,
---------------------
1999 1998
------ ------
(In thousands)
<S> <C> <C>
Maximum amount outstanding at any
month end. . . . . . . . . . . . . $8,100 $21,700
Approximate average amount . . . . . $1,483 $11,408
Approximate weighted average
rate paid (1). . . . . . . . . . . 5.56% 6.00%
<FN>
___________
(1) The weighted average rate is determined by use of the
weighted average rate for each month-end in the period.
</FN>
</TABLE>
21
<PAGE>
<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,
_________________________________________________________________________________
1999 vs 1998 1998 vs. 1997
______________________________________ ________________________________________
Increase (Decrease) Increase (Decrease)
Due to Due to
______________________________________ _______________________________________
Volume Rate Net Volume Rate Net
_______ ____ ____ _______ ____ ___
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income:
Loan portfolio . . . . . . $(422,687) $(435,529) $(858,216) $468,365 $(55,547) $412,818
Investment securities. . . (99,289) (51,181) (150,470) (96,077) 11,282 (84,795)
Mortgage-backed
securities . . . . . . . (6,246) (10,445) (16,691) (34,920) 13,800 (21,120)
Interest-earning deposits
with other banks . . . . 40,446 27,890 68,336 20,326 (6,558) 13,768
--------- --------- --------- -------- --------- --------
Total interest-earning
assets . . . . . . . . (487,776) (469,265) 957,041 357,694 (37,023) 320,671
--------- --------- --------- -------- --------- --------
Interest expense:
Demand deposits . . . . . 3,809 (77,884) (74,075) 8,453 (35,063) (26,610)
Time deposits . . . . . . (82,489) (262,730) (345,219) 280,610 103,349 383,959
Borrowings and advances . (300,714) (67,093) (367,807) (64,707) 3,831 (60,876)
--------- --------- --------- -------- --------- --------
Total interest-bearing
liabilities . . . . . (379,394) (407,707) (787,101) 224,356 72,117 296,473
--------- --------- --------- -------- --------- --------
Increase (decrease) in
net interest income . . . $(108,382) $ (61,558) $(169,940) $133,338 $(109,140) $ 24,198
========= ========= ========= ======== ========= ========
<PAGE>
<CAPTION>
Year Ended June 30,
______________________________________
1997 vs 1996
______________________________________
Increase (Decrease)
Due to
______________________________________
Volume Rate Net
_______ ____ ___
(In thousands)
<S> <C> <C> <C>
Interest income:
Loan portfolio . . . . . . $ 644,680 $ (38,481) $ 606,199
Investment securities. . . 10,642 10,141 20,783
Mortgage-backed
securities . . . . . . . (37,940) (19,458) (57,398)
Interest-earning deposits
with other banks . . . . (7,344) 3,746 (3,598)
--------- --------- ---------
Total interest-earning
assets . . . . . . . . 610,038 (44,052) 565,986
--------- --------- ---------
Interest expense:
Demand deposits . . . . . (15,190) 12,307 (2,883)
Time deposits . . . . . . 169,681 (155,964) 13,717
Borrowings and advances . 210,150 (11,719) 198,431
--------- --------- ---------
Total interest-bearing
liabilities . . . . . 364,641 (155,376) 209,265
--------- --------- ---------
Increase (decrease) in
net interest income . . . $ 245,398 $ 111,323 $ 356,721
========= ========= =========
</TABLE>
22
<PAGE>
<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,
-------------------------------------------------------------------------
1999 1998
------------------------------------ -----------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
--------- -------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Total loan portfolio(1). . $133,764,419 $11,016,230 8.24% $138,797,744 $11,874,446 8.55%
Investment securities,
including FHLB stock . . 2,061,496 104,210 5.06 3,836,541 254,680 6.64
Mortgage-backed
securities . . . . . . . 1,345,728 94,208 7.00 1,429,283 110,899 7.76
Interest-earning
deposits . . . . . . . . 2,174,020 93,971 4.32 1,039,447 25,635 2.47
------------ ----------- ----- ------------ ----------- -----
Total interest-earning
assets . . . . . . . . 139,345,663 11,308,619 8.12 145,103,015 12,265,660 8.45
Non-interest earning
assets . . . . . . . . . . 5,257,832 5,284,444
------------ ------------
Total assets . . . . . . $144,603,495 $150,387,459
============ ============
Interest-bearing
liabilities:
Demand deposits. . . . . . $ 27,749,610 617,934 2.23 $ 27,596,906 692,009 2.51
Time deposits. . . . . . . 85,621,638 4,488,405 5.24 87,128,369 4,833,624 5.55
------------ ----------- ----- ------------ ----------- -----
Total deposits,
including escrows. . . 113,371,248 5,106,339 4.50 114,725,275 5,525,633 4.82
Borrowings . . . . . . . . 15,266,567 807,778 5.29 20,884,473 1,175,585 5.63
------------ ----------- ----- ------------ ----------- -----
Total interest-bearing
liabilities. . . . . . 128,637,815 5,914,117 4.60 135,609,748 6,701,218 4.94
Non-interest-bearing
liabilities. . . . . . . . 1,180,489 1,268,273
------------ ------------
Total liabilities. . . . 129,818,304 136,878,021
Retained earnings. . . . . . 14,785,191 13,509,438
------------ ------------
Total liabilities and
retained earnings. . . $144,603,495 $150,387,459
============ ============
Net interest income. . . . . $ 5,394,502 $ 5,564,442
=========== ===========
Interest rate spread . . . . 3.52% 3.51%
==== ====
Net yield on interest-
earning assets . . . . . . 3.87% 3.83%
==== ====
Ratio of average interest-
earning assets to average
interest-bearing
liabilities. . . . . . . . 108.32% 107.00%
====== ======
_______________
(1) Average balances include non-accrual loans.
<PAGE>
<CAPTION>
Year Ended June 30,
-----------------------------------
1997
-----------------------------------
Average
Average Yield/
Balance Interest Cost
--------- -------- -------
<S> <C> <C> <C>
Interest-earning assets:
Total loan portfolio(1). . $133,325,929 $11,461,628 8.60%
Investment securities,
including FHLB stock . . 5,289,207 339,475 6.42
Mortgage-backed
securities . . . . . . . 1,894,287 132,019 6.97
Interest-earning
deposits . . . . . . . . 284,727 11,867 4.17
------------ ----------- -----
Total interest-earning
assets . . . . . . . . 140,794,150 11,944,989 8.48
Non-interest earning
assets . . . . . . . . . . 4,716,671
------------
Total assets . . . . . . $145,510,821
============
Interest-bearing
liabilities:
Demand deposits. . . . . . $ 27,272,996 718,619 2.63
Time deposits. . . . . . . 82,039,648 4,449,665 5.42
------------ ----------- -----
Total deposits,
including escrows. . . 109,312,644 5,168,284 4.73
Borrowings . . . . . . . . 22,034,197 1,236,462 5.61
------------ ----------- -----
Total interest-bearing
liabilities. . . . . . 131,346,841 6,404,745 4.88
Non-interest-bearing
liabilities. . . . . . . . 1,261,612
------------
Total liabilities. . . . 132,608,453
Retained earnings. . . . . . 12,902,368
------------
Total liabilities and
retained earnings. . . $145,510,821
============
Net interest income. . . . . $ 5,540,244
===========
Interest rate spread . . . . 3.61%
====
Net yield on interest-
earning assets . . . . . . 3.93%
====
Ratio of average interest-
earning assets to average
interest-bearing
liabilities. . . . . . . . 107.19%
======
_______________
(1) Average balances include non-accrual loans.
</TABLE>
23
<PAGE>
<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, 1999, Elmira
Savings & Loan was authorized to invest up to approximately $3.1
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, 1999, 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
$98,000 during fiscal year 1999. 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, 1999.
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, 1999, the Bank had loaned approximately
$353,000 to the partnership. Brilie Corporation earned $33,700
from this partnership during the fiscal year ended June 30,
1999.
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,
1999, Cayuga Mortgage and PACE Funding originated approximately
$32.3 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, 1999.
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>
<PAGE>
COMPETITION
Elmira Savings & Loan is one of three local banks
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, two 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, 1999, Elmira Savings & Loan and its
subsidiaries had 35 full-time and 5 part-time employees, none
of whom were represented by a collective bargaining agreement.
Elmira Savings & Loan believes that it enjoys good relations
with its personnel.
EXECUTIVE OFFICERS
The following table sets forth certain information with
respect to the executive officers of the Corporation.
<TABLE>
<CAPTION>
Age at
June 30,
Name 1999 Position
---- -------- --------
<S> <C> <C>
William A. McKenzie 48 President and Chief Executive Officer
J. Michael Ervin 50 Senior Vice President and Treasurer
Michael J. Wayne 38 Vice President
Lynn M. Morris 47 Vice President
James D. Stanton 52 Vice President
Judy A. Peters 41 Vice President
Michael J. Crimmins 47 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
25
<PAGE>
<PAGE>
Chairman of the following organizations: Chemung County Chamber
of Commerce, Southern Tier Economic Growth and the Chemung
County United Way Fund Drive. Mr. McKenzie has been employed at
the Bank since 1983.
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 Treasurer of Southern Tier
Economic Growth. He also is a past Director of the Chemung/
Schuyler Chapter of the American Red Cross and past President
and Board Member of Woodbrook, Inc. Mr. Ervin has been employed
by the Bank since 1973.
MICHAEL J. WAYNE is currently Vice President of Stockholder
and Public Relations, a position he has held since 1993. In May
1999, Mr. Wayne was named the Corporation's Internal Auditor.
Since 1990, he has supervised the Corporation's compliance with
its reporting requirements to the Securities and Exchange
Commission. Mr. Wayne has served as Vice President of
Marketing, Mortgage Originations and Loan Servicing. He is a
member of the Executive, Finance and Ticket Committees for the
LPGA Corning Classic and is on the Executive Committee and
Treasurer of Elmira Downtown Development, Inc. Mr. Wayne is a
Board member of Capabilities and Family Services of Chemung
County, Inc. He is a Past President of the Elmira Kiwanis Club.
Mr. Wayne is a volunteer for the United Way, the Chemung County
Chamber of Commerce and the Clemens Center. 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 past 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 St. Mathew's Church and has worked on the
Chemung County Chamber of Commerce Membership Drive, the 1997
National Kidney Foundation Fund Drive and 1999 American Cancer
Society 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 is Vice President of
the Board of Directors for 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.
26
<PAGE>
<PAGE>
REGULATION
GENERAL. As a savings association, Elmira Savings & Loan
is subject to extensive regulation by the OTS. The Bank's
lending activities and other investments must comply with
various federal regulatory requirements. The OTS periodically
examines the Bank for compliance with various regulatory
requirements and the FDIC has the authority to conduct special
examinations of the Bank. The Bank must file reports with OTS
describing its activities and financial condition, and is
subject to certain reserve requirements promulgated by the
Federal Reserve Board. This supervision and regulation is
intended primarily for the protection of depositors. As a
savings and loan holding company, the Corporation is subject to
OTS regulation, examination, supervision and reporting
requirements. Certain of these regulatory requirements are
referred to in the following paragraphs or appear elsewhere
herein.
PROPOSED LEGISLATIVE AND REGULATORY CHANGES. The U.S.
Congress is in the process of drafting legislation which may
have a profound effect on the financial services industry. In
January 1999 legislation restructuring the activities and
regulations oversight of the financial services industry was
reintroduced in both houses of the U.S. Congress. The stated
purposes of the House bill ("H.R. 10") are to enhance consumer
choice in the financial services marketplace, level the playing
field among providers of financial services and increase
competition. H.R. 10 would permit affiliations between
commercial banks, securities firms, insurance companies and,
subject to certain limitations, other commercial enterprises
allowing holding companies to offer new services and products.
In particular, H.R. 10 repeals the Glass-Steagall Act
prohibitions on bank affiliating with securities firms and
thereby allow holding companies to engage in securities
underwriting and dealing without limits and to sponsor and act
as distributor for mutual funds and also removes the Bank
Holding Company Act's prohibitions on insurance underwriting
allowing holding companies to underwrite and broker any type of
insurance product. H.R. 10 also calls for a new regulatory
framework for financial institutions and their holding
companies. The legislation preserves the thrift charter and all
existing thrift powers, but would restrict the activities of new
unitary thrift holding companies. Both Houses passed differing
versions of the legislation, which have yet to be reconciled in
a conference committee. At this time, it is unknown how the
legislation will be modified, or if enacted, what form the final
version of the legislation might take and how it will affect the
Corporation's and the Bank's business and operations and
competitive environment.
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, 1999, 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, 1999, Elmira Savings & Loan had advances of $22.6
million outstanding from the FHLB of New York. See "Business of
the Bank -- Sources of Funds -- Borrowings."
LIQUIDITY REQUIREMENTS. As a member of the FHLB System,
the Bank is required to maintain average daily balances of
liquid assets (cash, deposits maintained pursuant to Federal
Reserve Board requirements, time and savings deposits in certain
institutions, obligations of states and political subdivisions
thereof, shares in mutual funds with certain restricted
investment policies, highly rated corporate debt, and mortgage
loans and mortgage-related securities with less than one year to
maturity or subject to purchase within one year) equal to the
monthly average of not less than a specified percentage
(currently 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 1999 was 13.02%.
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<PAGE>
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, the value
of property used by a savings institution in its business and
liquidity investments in an amount not exceeding 20% of total
assets. All of the following may be included as Qualified
Thrift Investments: investments in residential mortgages, home
equity loans, loans made for educational purposes, small
business loans, credit card loans and shares of stock issued by
a Federal Home Loan Bank. Subject to a 20% of portfolio 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 or household
purposes.
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, 1999,
approximately 81.11% of the Bank's "portfolio" assets were
invested in Qualified Thrift Investments.
<PAGE>
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, 1999, the Bank
was permitted to lend approximately $2.5 million to one
borrower under this standard. Loans and extensions of credit
fully secured by readily marketable collateral (having a market
value at least equal to the funds outstanding) may comprise an
additional 10% of unimpaired capital and surplus. As of June 30,
1999, the largest amount outstanding to any one borrower of the
Bank was $2.3 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 at least 4.0% or 3.0% (if the
institution is rated composite 1 CAMELS under the OTS
examination rating system) 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
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
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<PAGE>
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, 1999, the Bank
had $480,000 of investments in or extensions of credit to a
subsidiary engaged in activities not permitted to national
banks.
Adjusted total assets are a savings association's total
assets as determined under generally accepted accounting
principles increased by certain goodwill amounts and by a pro
rated portion of the assets of 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, 1999, the Bank's
adjusted total assets for the purposes of the core and tangible
capital requirements were approximately $153.3 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, a portion of the savings
association's general loss allowances and up to 45% of
unrealized gains on equity securities. 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,
1999, 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.
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The table below presents the Bank's capital position
relative to its various minimum statutory and regulatory capital
requirements at June 30, 1999.
<TABLE>
<CAPTION>
At June 30, 1999
-----------------------
Percent of
Amount Assets (1)
-----------------------
(Dollars in thousands)
<S> <C> <C>
Tangible Capital . . . . . . . . . $15,005 9.79%
Tangible Capital Requirement . . . 2,299 1.50
------- -----
Excess . . . . . . . . . . . . . . $12,706 8.29%
======= =====
Tier 1/Core Capital. . . . . . . . 15,005 9.79%
Tier 1/Core Capital Requirement. . 4,598 3.00
------- -----
Excess . . . . . . . . . . . . . . $10,407 6.79%
======= =====
Risk-Based Capital . . . . . . . . 16,270 16.07%
Risk-Based Capital Requirement . . 8,101 8.00
------- -----
Excess . . . . . . . . . . . . . . $ 8,169 8.07%
======= =====
<FN>
____________
(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.
</FN>
</TABLE>
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
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Director to submit and adhere to a plan for increasing capital.
Such an order may be enforced in the same manner as an order
issued by the FDIC.
PROMPT CORRECTIVE REGULATORY ACTION. Under the Federal
Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"), the federal banking regulators, including the OTS,
are required to take prompt corrective action if an insured
depository institution fails to satisfy certain minimum capital
requirements. All institutions, regardless of their capital
levels, are restricted from making any capital distribution or
paying any management fees if the institution would thereafter
fail to satisfy the minimum levels for any of its capital
requirements. An institution that fails to meet the minimum
level for any relevant capital measure (an "undercapitalized
institution") may be: (i) subject to increased monitoring by the
appropriate federal banking regulator; (ii) required to submit
an acceptable capital restoration plan within 45 days; (iii)
subject to asset growth limits; and (iv) required to obtain
prior regulatory approval for acquisitions, branching and new
lines of businesses. The capital restoration plan must include
a guarantee by the institution's holding company that the
institution will comply with the plan until it has been
adequately capitalized on average for four consecutive quarters,
under which the holding company would be liable up to the lesser
of 5% of the institution's total assets or the amount necessary
to bring the institution into capital compliance as of the date
it failed to comply with its capital restoration plan. A
"significantly undercapitalized" institution, as well as any
undercapitalized institution that did not submit an acceptable
capital restoration plan, may be subject to regulatory demands
for recapitalization, broader application of restrictions on
transactions with affiliates, limitations on interest rates paid
on deposits, asset growth and other activities, possible
replacement of directors and officers, and restrictions on
capital distributions by any bank holding company controlling
the institution. Any company controlling the institution could
also be required to divest the institution or the institution
could be required to divest subsidiaries. The senior executive
officers of a significantly 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
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<PAGE>
and not corrected a less-than-satisfactory rating for any CAMELS
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 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 0.27% 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, both BIF and SAIF members will be assessed at
the same rate for FICO payments.
<PAGE>
SAIF members may 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 transaction accounts of
between $4.9 million and $46.5 million, 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
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<PAGE>
reserve requirement is to reduce the amount of the institution's
interest-earning assets. As of June 30, 1999, 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 voting shares
of an undercapitalized 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
Section 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
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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 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."
34
<PAGE>
<PAGE>
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 there-
upon 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.
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").
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
35
<PAGE>
<PAGE>
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 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, 1999, the Bank's total investment in this property was $2.9
million and the net book value was $2.5 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
$32,300 at June 30, 1999.
At June 30, 1999, the net book value of the Bank's
furniture, fixtures and equipment (including leasehold
improvements) was approximately $284,000.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
Although the Bank is, from time to time, involved in
various legal proceedings in the normal course of business,
there are no material pending legal proceedings to which the
Corporation, the Bank or its subsidiary is a party, or to which
any of their property is subject.
36
<PAGE>
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
No matters were submitted to a vote of security holders
during the fourth quarter of the fiscal year ended June 30,
1999.
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 OTS regulations, savings institutions must submit
notice to the OTS prior to making a capital distribution if (a)
they would not be well capitalized after the distribution, (b)
the distribution would result in the retirement of any of the
institution's common or preferred stock or debt counted as its
regulatory capital, or (c) the institution is a subsidiary of a
holding company. A savings institution must make application to
the OTS to pay a capital distribution if (x) the institution
would not be adequately capitalized following the distribution,
(y) the institution's total distributions for the calendar year
exceeds the institution's net income for the calendar year to
date plus its net income (less distributions) for the preceding
two years, or (z) the distribution would otherwise violate
applicable law or regulation or an agreement with or condition
imposed by the OTS.
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
The information contained in the table captioned "Selected
Consolidated Financial Data" in the Annual Report is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
- ----------------------------------------------------------
The information contained in the section captioned
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" in the Annual Report is incorporated
herein by reference.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
The financial statements contained in the Annual Report
which are listed under Item 14 herein are incorporated herein by
reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
- ---------------------------------------------------------
None.
37
<PAGE>
<PAGE>
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 1999 Annual Meeting of Stockholders (the "Proxy
Statement") is incorporated herein by reference.
For certain information regarding the executive officers
of the Corporation, see "Item 1. Business --Executive
Officers."
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
The information contained under the section captioned
"Proposal I -- Election of Directors" in the Proxy Statement is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
- -------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
The information required by this item is
incorporated herein by reference to the section
captioned "Voting Securities and Principal Holders
Thereof" of the Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated
herein by reference to the sections captioned
"Proposal I -- Election of Directors" and "Voting
Securities and Principal Holders Thereof" of the
Proxy Statement.
(c) Changes in Control
Management of the Corporation knows of no
arrangements, including any pledge by any person of
securities of the Corporation, the operation of
which may at a subsequent date result in a change of
control of the registrant.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
The information required by this item is incorporated
herein by reference to the section captioned "Proposal I --
Election of Directors" of the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
- --------------------------------------------------------------
(a) List of Documents Filed as a Part of this Report.
(1) Financial Statements. The Consolidated
Financial Statements and Independent Auditor's
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, 1999 and
1998
3. Consolidated Statements of Income for the Years
Ended June 30, 1999, 1998 and 1997
4. Consolidated Statements of Changes in Shareholders'
Equity and Comprehensive Income the Years Ended June
30, 1999, 1998 and 1997
5. Consolidated Statements of Cash Flows for the Years
Ended June 30, 1999, 1998 and 1997
6. Notes to Consolidated Financial Statements
38
<PAGE>
<PAGE>
(2) Financial Statement Schedules. All schedules
have been omitted as the required information is
either inapplicable or included in the Notes to
Consolidated Financial Statements.
(3) Exhibits. The following exhibits are either
filed or attached as part of this report or are
incorporated herein by reference.
No. Description
--- -----------
3.1 Certificate of Incorporation of ES&L Bancorp, Inc.*
3.2 Bylaws of ES&L Bancorp, Inc. *
10.1 Employment Agreements between the Bank and William
A. McKenzie and J. Michael Ervin, as amended **
10.2 Stock Option Plan *
13 1999 Annual Report to Stockholders ***
21 Subsidiaries of the Registrant
23 Consent of Independent Accountants
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 1999 Annual Report to Stockholders is included as an
exhibit to this Report. Except for those portions of the
1999 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) REPORTS ON FORM 8-K. No Current Reports on Form 8-K
have been filed during the last quarter of the period covered by
this Report.
(c) EXHIBITS. The exhibits required by Item 601 of
Regulation S-K are either filed as a part of this Annual Report
on Form 10-K or incorporated by reference herein.
(d) FINANCIAL STATEMENTS AND SCHEDULES EXCLUDED FROM
ANNUAL REPORT. There are no other financial statements and
financial statement schedules which were excluded from
the Annual Report to Stockholders pursuant to Rule 14a-3(b)
which are required to be included herein.
39
<PAGE>
<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 21, 1999 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 21, 1999
----------------------------
William A. McKenzie
Principal Executive Officer and
Director
By: /s/ J. Michael Ervin Date: September 27, 1999
----------------------------
J. Michael Ervin
Principal Financial and Accounting
Officer
By: /s/ Robert E. Butler Date: September 21, 1999
----------------------------
Robert E. Butler
Director
By: /s/ John F. Cadwallader Date: September 21, 1999
----------------------------
John F. Cadwallader
Director
By: /s/ L. Edward Considine Date: September 21, 1999
----------------------------
L. Edward Considine
Director
By: /s/ Dr. Adrian P. Hulsebosch Date: September 21, 1999
----------------------------
Dr. Adrian P. Hulsebosch
Director
<PAGE>
<PAGE>
By: /s/ Jack H. Mikkelsen Date: September 21, 1999
----------------------------
Jack H. Mikkelsen
Director
By: /s/ Frederick J. Molter Date: September 21, 1999
----------------------------
Frederick J. Molter
Director
By: /s/ Paul Morss Date: September 21, 1999
----------------------------
Paul Morss
Director
By: /s/ Paul Morss Date: September 21, 1999
----------------------------
Gerald F. Schichtel
Director
<PAGE>
1999
ANNUAL
REPORT
ES&L BANCORP, INC.
<PAGE>
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
SUMMARY OF FINANCIAL CONDITION
____________________________________________________________________________________________________
AT JUNE 30 1999 1998 1997 1996 1995
____________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Total amount of:
Assets $153,681,808 $152,160,204 $149,641,144 $140,138,518 $136,484,313
Loans receivable, net 129,286,692 126,181,335 131,710,850 121,636,011 118,186,529
Cash and investment
securities (1) 7,063,466 8,474,514 4,812,020 4,452,792 5,305,872
Mortgage-backed securities 4,023,347 1,348,600 1,575,642 2,069,579 2,867,553
Deposit accounts 111,586,295 112,179,831 111,748,518 106,652,829 101,014,522
Advances from FHLB 22,586,951 21,897,090 20,606,615 17,615,560 20,523,963
Shareholders' equity,
substantially restricted 15,639,100 14,500,671 14,155,282 12,912,145 11,471,243
Book value (2) 18.80 17.43 16.71 15.29 13.92
</TABLE>
<TABLE>
<CAPTION>
____________________________________________________________________________________________________
SUMMARY OF OPERATIONS
____________________________________________________________________________________________________
YEAR ENDED JUNE 30, 1999 1998 1997 1996 1995
____________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Interest income $11,308,619 $12,265,660 $11,944,989 $11,379,003 $10,052,154
Interest expense 5,914,117 6,701,218 6,404,745 6,195,480 5,474,611
- ----------------------------------------------------------------------------------------------------
Net interest income before
provision for loan losses 5,394,502 5,564,442 5,540,244 5,183,523 4,577,543
Provision for loan losses (25,000) 300,000 40,000 60,000 150,000
- ----------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 5,419,502 5,264,442 5,500,244 5,123,523 4,427,543
Other income 1,392,809 1,267,843 1,041,176 800,752 673,417
Other expenses 3,441,868 3,297,107 4,012,490 3,078,154 2,770,757
- ----------------------------------------------------------------------------------------------------
Income before income taxes
and cumulative effect 3,370,443 3,235,178 2,528,930 2,846,121 2,330,203
Income taxes 1,228,482 1,195,785 690,550 1,092,560 747,227
- ----------------------------------------------------------------------------------------------------
NET INCOME $ 2,141,961 $ 2,039,393 $ 1,838,380 $ 1,753,561 $ 1,582,976
=========== =========== =========== =========== ===========
Net Income per share, assuming
dilution (2) $ 2.55 $ 2.41 $ 2.14 $ 2.05 $ 1.88
=========== =========== =========== =========== ===========
Cash dividends paid (2) $ 1.00 $ 1.68 $ 0.68 $ 0.45 $ 0.40
=========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
____________________________________________________________________________________________________
KEY OPERATING RATIOS
____________________________________________________________________________________________________
YEAR ENDED JUNE 30, 1999 1998 1997
____________________________________________________________________________________________________
<S> <C> <C> <C>
Return on average assets 1.40% 1.35% 1.27%
Return on average equity 14.21% 14.23% 13.58%
Average equity-to-average
asset ratio 9.85% 9.49% 9.34%
Interest rate spread 3.52% 3.51% 3.61%
Net yield on interest-earning
assets 3.87% 3.83% 3.93%
Other expenses to average total
assets 2.25% 2.18% 2.77%
Non-performing loans as a
percentage of total loans,
at 6/30 0.29% 0.23% 0.53%
One year interest rate sensitivity
gap to total assets, at 6/30 -5.57% 0.61% 0.73%
Net interest income to other
expenses (3) 1.57% 1.69X 1.38X
<FN>
__________
(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.
</FN>
</TABLE>
<PAGE>
<PAGE>
A MESSAGE FROM THE MANAGING OFFICER
TO OUR SHAREHOLDERS:
Thanks to the outstanding efforts of our staff, the expert
guidance of our Board and support from our community, I am
pleased to report another year of record performance. For year
end June 30, 1999, net income totaled $2,141,961, a 5% increase
over the prior year. As a result of our performance, we are
reporting a return on average assets of 1.40% and a return on
average equity of 14.21%. These measurements continue to exceed
the industry peer groups that we monitor.
Shareholders benefited from the Bank's performance by
receiving quarterly dividends totaling $1.00 during the fiscal
year along with a special dividend of $1.00 per share, which was
paid on July 30, 1999. In addition, based on the limited trades
we are aware of, the Company's stock appreciated in value from
$21.00 per share at the beginning of the fiscal year to $26.25
per share at the end of the fiscal year.
A number of initiatives were successfully implemented
during this past year:
ES&L became the first bank to participate in the Federal
Home Loan Bank of New York's Mortgage Partnership
Finance Program. We expect our participation in this
program will favorably impact our mortgage banking
operation - a significant component of our operation.
Early in the year debit cards or check cards, if you
will, were introduced allowing our customers to pay for
merchandise directly out of their checking account
without writing a check. These can also be used to
access cash at ATM machines. The cards are part of the
MasterCard system and accepted wherever a MasterCard is
accepted.
Loan origination levels, within all departments and
affiliates, were at record levels. Closings for the Bank
and its affiliates totaled $84.8 million, a 19% increase
over the prior period. PACE Funding and Cayuga Mortgage
Company, our Ithaca affiliates, contributed
significantly to this achievement.
The new relationship that our subsidiary, ES&L Financial
Services, established with Raymond James Financial
Services, proved to be very beneficial. Profitability
increased and our customers are now being offered new
non-deposit investment opportunities that are being very
well received.
A major effort, on our part, that has been underway for
quite sometime has been preparing for the Year 2000. We feel
confident in our planning and expect business as usual the first
business day after the turn of the millennium. Our systems have
been tested and reviewed by examiners. Contingency backup plans
are in place. We are, however, concerned that depositors will
take imprudent risks with excess cash. Scam artists and other
thieves will be looking for easy prey. It is our hope that
individuals will realize the best place for their money is in
the Bank where it is insured by the Federal Deposit Insurance
Corporation.
As we look to the future, a multitude of issues must be
considered. They include: products and pricing, competition,
technological advancements, regulatory and legislative actions,
capital management and staffing requirements. These and other
issues are evolving at an accelerating rate. In days gone by, it
was sufficient to establish a business plan before the year
started and then stick to it. Today we must have a plan in
effect that is flexible to change. Planning is no longer a once
a year event. It is now an ongoing exercise. As we consider the
many issues confronting the Bank, please be assured that your
interests as owners of our company will be held in the forefront
of our deliberations.
Your continued support is greatly appreciated.
/s/ William A. McKenzie
William A. McKenzie
President & CEO
1
<PAGE>
<PAGE>
ASSET/LIABILITY MANAGEMENT
The matching of assets and liabilities may be analyzed by
examining the extent to which such assets and liabilities are
"interest rate sensitive" and by monitoring an institution's
interest rate sensitivity "gap". An asset or liability is said
to be interest rate sensitive within a specific period if it
will mature or reprice within that period. The interest rate
sensitivity gap is defined as the difference between the amount
of interest-earning assets maturing or repricing within a
specific time period and the amount of interest-bearing
liabilities maturing or repricing within that time period. A
gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive
liabilities and is considered negative when the amount of
interest rate sensitive liabilities exceeds the amount of
interest rate sensitive assets. Generally, during a period of
rising interest rates, a negative gap would adversely affect net
interest income while a positive gap would result in an increase
in net interest income, and during a period of falling interest
rates, a negative gap would result in an increase in net
interest income while conversely a positive gap would negatively
affect net interest income.
The thrift industry has experienced significant fluctuations in
net interest income due to changing interest rate environments.
During periods of increasing rates, net interest income has
decreased because thrifts generally have larger amounts of rate
sensitive liabilities than rate sensitive assets. The Bank
currently has a negative one-year gap of 5.57%, which means if
rates increase, its net interest income should decrease
slightly.
The Bank is subject to minimal interest rate risk to the degree
that its interest-bearing liabilities mature or reprice slightly
faster, 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.
At June 30, 1999, the Bank had a one-year negative gap of 5.57%
of total assets.
<PAGE>
The following table presents the Bank's interest sensitivity gap
between interest-earning assets and interest-bearing liabilities
at June 30, 1999 (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 $ 4,070 $ 0 $ 0 $ 0 $ 4,070
Loans Receivable 79,988 44,620 4,275 7,159 136,043
Investments 1,545 0 4,969 0 6,514
-------------------------------------------------
Total $85,603 $ 44,620 $ 9,244 $ 7,159 $146,627
Interest-Bearing Liabilities:
Certificates of Deposit $66,074 $ 14,380 $ 4,845 $ 0 $ 85,299
Other Deposits 20,990 0 0 5,253 26,243
Borrowings 7,100 1,752 2,218 11,514 22,584
-------------------------------------------------
Total $94,164 $ 16,132 $ 7,063 $16,767 $134,126
Interest Sensitivity Gap $(8,561) $ 28,488 $ 2,181 $(9,608) $ 12,501
Gap as a Percentage of
Total Assets -5.57% 18.54% 1.42% -6.25%
Cumulative Gap $ (8,561) $ 19,928 $22,109 $12,500
Cumulative Gap as a Percentage
of Total Assets -5.57% 12.97% 14.39% 8.14%
</TABLE>
2
<PAGE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
COMPARISON OF THE OPERATING RESULTS FOR THE YEARS ENDING JUNE
30, 1999 AND JUNE 30, 1998
GENERAL:
- -------
During the Corporation's 1999 fiscal year it recorded net income
totaling $2,141,961, an increase of $102,568, or 5.03%, compared
to net income of $2,039,393 earned during the 1998 fiscal year.
Total assets of the Corporation equaled $153,681,808 at June 30,
1999, an increase of $1,521,604, or 1.00%, compared to the start
of the fiscal year.
The Corporation's cash and cash equivalents decreased by
$6,574,845 to $792,510, as funds were reallocated from federal
funds sold into longer term investments. During the 1999 fiscal
year the Corporation's investment securities portfolio,
including U.S. Government and agency investments, mortgage-
backed securities and certificates of deposit, increased by
$7,838,544 to $10,294,303.
The majority of all the fixed rate mortgages originated by the
Bank, and its mortgage banking affiliates, are sold in the
national secondary mortgage market, while adjustable rate and
short term loans are kept in the loan portfolio. Long term
mortgage interest rates remained low, during the majority of the
1999 fiscal year, prompting a significant number of the
residential borrowers to opt for fixed rate conventional
financing. Therefore, despite a record $84.8 million in loan
originations, the Corporation's net loan portfolio, including
mortgage loans held for sale, increased by only $415,864, or
less than 1.00% to $134,828,673 at June 30, 1999. During the
1999 fiscal year the residential lending department of the Bank,
and its mortgage banking affiliates originated $51.4 million of
fixed rate mortgages for sale in the national secondary mortgage
market.
Total liabilities of the Corporation remained nearly unchanged
during the 1999 and 1998 fiscal years, increasing by only
$383,175, or 0.28%, during the 1999 fiscal period. At June 30,
1999 total liabilities equaled $138,042,708.
Shareholders' equity increased by $1,138,429, or 7.85%, during
the 1999 fiscal year. The payment of cash dividends totaling
$833,794 and the repurchase of $240,426 worth of the
Corporation's common stock offset the Corporation's net income
of $2,141,961.
NET INTEREST INCOME:
- -------------------
The Corporation's net interest income decreased by 3.05% to
$5,394,502 for the 1999 fiscal period, compared to $5,564,442
for the comparative period.
INTEREST INCOME:
- ---------------
During the 1999 fiscal year the Corporation earned interest
income of $11,308,619, a reduction of $957,041, or 7.80%,
compared to the fiscal year ending June 30, 1998.
The majority of the interest earned by the Corporation is
generated from its loan portfolio. As a result of a decrease in
both the average yield and average balance of the loan
portfolio, during the 1999 period the Corporation's loan
interest income decreased by $858,216, or 7.23%, to $11,016,230.
During the year ending June 30, 1998, the average balance of the
loan portfolio was $138.8 million, yielding 8.56%, compared to
$133.8 million, yielding 8.24%, for the year ending June 30,
1999. While, at June 30, 1999, the outstanding balance of the
net loan portfolio has increased from the beginning of the
fiscal year, up until the fourth quarter of the fiscal year the
outstanding balance of net loans receivable was lower than the
start of the fiscal period. The majority of the loans
originated by the Corporation and its mortgage banking
affiliates are residential mortgages. The Corporation sells,
servicing retained, most of its fixed rate residential mortgage
originations in the national secondary market, in order to
insulate itself from long term interest rate risk. Adjustable
rate residential mortgages, and other commercial and consumer
loans, are originated and held in the Corporation's loan
portfolio.
Interest and dividend income generated from the Corporation's
investment portfolio totaled $104,210 for the 1999 fiscal year,
a decrease of $150,470 from the comparable period. The decrease
is the result of a lower average balance and yield earned on the
portfolio during the current period. While investment purchases
late in the 1999 fiscal year increased the year end investment
portfolio balance, the average balance of the portfolio,
excluding mortgage-backed securities, during the 1999 fiscal
year was $2.1 million, yielding 5.06%, compared to $3.8 million,
yielding 6.64% during the comparative period.
The interest earned on short term interest earning deposits
increased by $68,336 to $93,971 for the fiscal year ending June
30, 1999. The increase is attributable to an increase in the
average balance and average yield of these deposits. The
average balance increased as the Corporation accumulated cash
and cash equivalents, during the 1999 period, primarily as a
timing difference related to the origination and sale of fixed
rate mortgages in the national secondary mortgage market, and
prior to the purchase of longer term investment securities,
which occurred during the fourth quarter of the 1999 fiscal
year.
INTEREST EXPENSE:
- ----------------
During the year ending June 30, 1999 the Corporation's total
interest expense equaled $5,914,117, a decrease of $787,101, or
11.75%, compared to $6,701,218, recorded during the year ending
June 30, 1998.
Interest paid to depositors during the 1999 period decreased
$419,294, or 7.59%, to $5,106,339. During the comparative 1998
period deposit interest expense totaled $5,525,633. The
interest savings was generated by a 32 basis point decrease in
the average cost of deposits combined with a $1.3 million
decrease in the average balance of deposits outstanding.
Average deposits outstanding totaled $114.7 million, costing
4.82%, compared to $113.4 million, costing 4.50%, for the years
ending June 30, 1998 and 1999, respectively.
Throughout the 1999 fiscal year the Corporation had utilized a
portion of cash and cash equivalents, generated early in the
fiscal year, to reduce its outstanding short term borrowings
(Federal Home Loan Bank Advances.) The resulting reduction in
the average balance,
3
<PAGE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
combined with a 34 basis point reduction in the average cost,
prompted a $367,807, or 31.29%, decrease in the Corporation's
interest expense paid on borrowings for the 1999 fiscal year.
During the year ending June 30, 1999 average borrowings totaled
$15.3 million, costing 5.29%, compared to $20.9 million, costing
5.63%, for the year ending June 30, 1998.
PROVISION FOR LOAN LOSSES:
- -------------------------
Provisions for loan loss 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
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.
In May 1999 the Securities and Exchange Commission (SEC), one of
the Corporation's Regulators, criticized the Banking industries
perceived excess loan loss allowances, based on loan
classifications and historical experience. The SEC encouraged
individual financial institutions to review their allowance
allocation and balance. As a result of an extensive management
review, and discussions with the Corporation's independent
accountant, the Corporation reduced its provision for loan loss
by $25,000 during the fourth quarter of the 1999 fiscal year,
thus resulting in a reduction of expense. During the 1998
fiscal year the Corporation's provision expense totaled
$300,000. At June 30, 1999 the Corporation's allowance for loan
loss totaled $1.3 million, compared to $1.5 million at June 30,
1998.
OTHER INCOME:
- ------------
During the 1999 fiscal year the Corporation's total other income
equaled $1,392,809, an increase of $124,966, or 9.86%, compared
to the 1998 fiscal year.
As has been previously identified, the Corporation sells the
majority of its fixed rate residential mortgages in the national
secondary mortgage market. Long term mortgage interest rates
remained relatively low throughout the majority of the 1999
fiscal year which prompted a significant number of residential
mortgage borrowers to select fixed rate instruments rather than
adjustable rate mortgages, which would have been held in the
Corporation's loan portfolio. The Corporation recorded $690,443
in gains on the sale of mortgages during the year ending June
30, 1999, an increase of $107,779, or 18.50%, compared to the
prior year. Residential mortgage originations, totaling $52.5
million, were sold during the 1999 fiscal year, an increase of
$10.8 million over the 1998 comparative period.
Other operating income generated by the Corporation increased
$134,872 to $300,659 for the twelve months ending June 30, 1999.
Sales commissions generated by Brilie Corporation (d/b/a ES&L
Financial Services) increased by approximately $24,000 during
the current year and totaled nearly $158,000 for the current
fiscal year. ES&L Financial Services is the Bank's subsidiary
which provides nontraditional investment and insurance products
to the Bank's customers and the general public, through an
agency relationship with major insurance companies and third
party mutual fund providers. The 1999 fiscal year also included
approximately $35,000 in income related to the settlement of two
deficiency actions the Corporation had successfully initiated
against former borrowers. Additionally, during the 1999 fiscal
period, the sale of foreclosed real estate resulted in an
increase in net gains on sale to the Corporation of nearly
$77,500. Minimal income for these items was recorded during the
1998 fiscal year.
The Corporation recognized a $104,141 reduction in loan
servicing income, which totaled $140,070 for the year ending
June 30, 1999. The reduction results from an increase in the
expense related to the amortization of the value of mortgage
servicing rights, as required by Financial Accounting Standards
No. 122 (SFAS 122), entitled Accounting for Mortgage Servicing
Rights. Without this accounting adjustment loan servicing
income would have increased by more than $164,000, or
approximately 40.00% when compared to the 1998 fiscal year. The
outstanding balance of the Corporation's loan servicing
portfolio totaled $174.0 million and $151.1 million at June 30,
1999 and 1998, respectively.
OTHER EXPENSES:
- --------------
The Corporation's total other expenses equaled $3,441,868 for
the 1999 fiscal year, an increase of $144,761, or 4.39%,
compared to $3,297,107 during the 1998 fiscal year.
During the 1999 fiscal period employee compensation and benefit
expense totaled $2,094,019, an increase of 7.66%, or $149,015.
The increase is the result of cost increases for employee wages,
Directors' fees and certain benefit expenses. The Corporation
has also incurred an increase in expense related to its
Officer/Manager incentive payment plan, which is directly
related to the Corporation's net income.
Office occupancy and equipment expenses increased by $67,895, or
13.76%, to $561,173 for the current twelve month period. The
increase results largely from an increase in the expense related
to third party service providers, some of which had been offset
by account credits in the prior fiscal year.
The Corporation's other expenses totaled $677,589 for the year
ending June 30, 1999, a $66,080, or 8.89%, decrease when
compared to the previous fiscal year. The majority of the
decrease is related to timing differences relative to mortgage
origination expenses. Additionally, expenses related to
foreclosed properties were significantly less during the current
year. Losses incurred on the sale of foreclosed property during
the 1999 fiscal year were approximately $26,200 less than the
previous year, while the expense related to maintaining
foreclosed properties also decreased, by nearly $16,000, during
the year ending June 30, 1999.
INCOME TAXES:
- ------------
The Corporation's income tax expense increased by $32,697, or
2.73%, to $1,228,482 for the 1999 fiscal year. The increase is
directly related to an increase in the Corporation's operating
income and approximates the statutory rate on pre-tax earnings,
less applicable tax credits.
4
<PAGE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
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
5
<PAGE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
in 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.
6
<PAGE>
<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%.
Elmira Savings & Loan's liquidity ratio for June 1999 was
13.02%.
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 $4,544,000 during the current fiscal year ending
June 30, 1999. The period ending June 30, 1997 also provided a
positive $2,828,000 but year ending June 30, 1998 showed a
negative $1,605,000. Two areas make up the majority of these
amounts. Net income provided $2,142,000, $2,039,000 and
$1,838,000 during years ending June 30, 1999, 1998 and 1997,
respectively, while the net amounts provided from loan sales
offset by originations and purchase of loans for sale was
$2,421,000 <$3,715,000> and $1,139,000 for the same three
periods.
Net cash provided from investing activities was a negative
$10,387,000 for year ending June 30, 1999, positive $7,801,000
for the year ending June 30, 1998 and negative $11,227,000 for
the year ending June 30, 1997. Again, the two main areas make
up the bulk of the differences. Net other <increase> decrease
in loans receivable amounted to <$3,449,000>, $4,473,000 and
<$10,287,000> for the three periods while the net activity
between the purchase of securities versus the maturity or sale
of securities was <$8,190,000>, $3,009,000 and <$989,000> for
the comparable periods. Additionally, to a much smaller degree,
proceeds from the sale of foreclosed real estate provided
$925,000, $408,000 and $120,000 for the three years.
Financing activities, the third component of cash flows,
decreased cash by $732,000 for period ending June 30, 1999 and
provided cash of $448,000 and $7,749,000 for periods ending June
30, 1998 and June 30, 1997. Interest credited to deposit
accounts provided $5,096,000, $5,538,000 and $5,103,000 for the
three years but net other decreases in deposits offset most of
those gains. These decreases amounted to $5,690,000 for the
1999 fiscal year and $5,107,000 and $8,000 for the comparable
periods. We continue to rely heavily on the FHLB for advances
and each period showed an increase. These increases were
$690,000, $1,290,000 and $2,991,000 for the fiscal years ending
June 30, 1999, 1998 and 1997, respectively. The final
significant item in this component is dividends paid and the net
cash used for the three periods amounted to $834,000, $1,416,000
and $577,000, respectively.
ES&L has available to it significant funds in the form of retail
repurchase agreements and advances from FHLB of New York, though
there can be no assurance as to the impact of any increase in
such borrowings on the Bank's cost of funds. There are no
limits on the amount of advances made to Banks that are
Qualified Thrift Lenders (QTLs), of which the Bank is one, or
that are exempt from the QTL limitations, in order to replace
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.
The Bank has included in its Y2K preparedness and contingency
plans, steps necessary to maintain adequate liquidity levels.
ES&L is not aware of any other 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.
7
<PAGE>
<PAGE>
YEAR 2000 CONSIDERATIONS
A great deal of information has been disseminated about the
possible computer problems that may occur in the Year 2000. Many
computer programs that can only distinguish the final two digits
of the year (a common computer practice in earlier years) are
expected to read entries for the year 2000 as 1900, and compute
payment, interest or delinquency information based on the wrong
date, or are expected to be unable to function all together.
Rapid and accurate data processing is essential to the operation
of our Bank and, as a result, during 1997 we developed a Year
2000 preparedness plan. In 1998 the Bank developed a contingency
plan. Our plans have been reviewed and approved by our Board of
Directors and have been submitted and reviewed by our Regulator,
the Office of Thrift Supervision.
The Bank has tested all of our internal systems for Year 2000
readiness. The vast majority of all of our equipment was ready
for the Year 2000, and the small amount of equipment that was
not has either been replaced or updated. During the fiscal year
ending June 30, 1999 the Corporation has incurred expenses
totaling approximately $11,400 related to our Y2K preparedness
planning. No expense was incurred in the fiscal year ending June
30, 1998 and the Bank does not anticipate incurring significant
expense between now and the end of the 1999 calendar year,
although there can be no assurance in this regard.
The Bank's plan also included procedures to contact and monitor
the Year 2000 readiness of third party service providers,
including NCR Corporation, the company responsible for the
Bank's customer account processing. NCR has in place a plan that
has been reviewed by external audit organizations, as well as
Federal Bank Examiners.
All of the Bank's other major service providers have been
contacted and have provided the Bank with information regarding
their Year 2000 plans. Additionally, the Bank has surveyed our
commercial loan customer base, asking for information on how
these companies are addressing any potential problems.
The Bank has provided customers with information about our
readiness, and has provided written literature to identify how
the banking industry, as a whole, has prepared itself for the
transition to the Year 2000.
In summary, the Bank understands the significance of any
potential problem and believes it is poised to be more than
adequately prepared for those factors within our control.
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.
8
<PAGE>
<PAGE>
[Letterhead of Mengel, Metzger, Barr & Co. LLP]
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
--------------------------------------------------
To the Board of Directors of
ES&L Bancorp, Inc. and Subsidiary
We have audited the accompanying September 27, 1999 of ES&L
Bancorp, Inc. and Subsidiary as of June 30, 1999 and 1998, and
the related consolidated statements of income, changes in
shareholders' equity and comprehensive income, and cash flows
for each of the years in the three-year period ended June 30,
1999. 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, 1999 and 1998, and the results of
their operations and their cash flows for each of the years in
the three-year period ended June 30, 1999, in conformity with
generally accepted accounting principles.
/s/ Mengel, Metzger, Barr & Co. LLP
Elmira, New York
July 16, 1999
9
<PAGE>
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
-------------------------
1999 1998
---------- -----------
<S> <C> <C>
ASSETS
- ------
Cash and due from banks $ 791,116 $ 1,362,039
Federal funds sold - 6,000,000
Short-term investments 1,394 5,316
------------ ------------
CASH AND CASH EQUIVALENTS 792,510 7,367,355
Investment securities:
Available for sale 1,051,032 1,294,037
Held to maturity 7,533,271 1,161,722
Other investments 1,710,000 -
Mortgage loans held for sale 5,541,981 8,231,474
Loans receivable, net of allowance for loan
losses of $1,268,568 and $1,473,346 at
1999 and 1998, respectively 129,286,692 126,181,335
Federal Home Loan Bank stock, at cost 1,313,100 1,313,100
Foreclosed real estate 34,000 485,226
Investment in joint venture - acquisition,
development and construction arrangement 480,272 765,952
Investment in mortgage banking partnership 182,334 197,646
Property and equipment, net 2,811,006 2,901,870
Accrued interest receivable:
Loans receivable 757,994 731,153
Investment securities and other 57,864 44,163
Other assets 2,129,752 1,485,171
------------ ------------
TOTAL ASSETS $153,681,808 $152,160,204
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Deposits:
Non-interest bearing $ 5,093,766 $ 5,506,587
Interest bearing 106,492,529 106,673,244
------------ ------------
111,586,295 112,179,831
Advances from Federal Home Loan Bank 22,586,951 21,897,090
Accrued interest payable:
Deposits 4,090 7,607
Borrowings 85,356 84,614
Advances from borrowers for taxes and insurance 3,192,995 2,982,958
Other liabilities 587,021 507,433
------------ ------------
TOTAL LIABILITIES 138,042,708 137,659,533
Shareholders' equity:
Preferred stock:
Authorized, 500,000 shares
Issued, none - -
Common stock, $.01 par value:
Authorized 3,000,000 shares
Issued 866,166 and 855,967 shares,
respectively 8,662 8,560
Additional paid-in capital 2,711,666 2,599,554
Retained earnings, substantially restricted 13,527,648 12,219,481
Accumulated other comprehensive income 15,643 57,069
------------ ------------
16,263,619 14,884,764
Less cost of treasury stock, 34,131 and
24,194 shares, respectively 624,519 384,093
------------ ------------
15,639,100 14,500,671
------------ ------------
TOTAL SHAREHOLDERS' EQUITY $153,681,808 $152,160,204
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
10
<PAGE>
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended June 30,
---------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Interest income
Loans $11,016,230 $11,874,448 $11,461,628
Investment securities 104,210 254,680 339,475
Mortgage-backed securities 94,208 110,899 132,019
Interest-earning deposits and other 93,971 25,635 11,867
----------- ----------- -----------
TOTAL INTEREST INCOME 11,308,619 12,265,660 11,944,989
Interest expense:
Deposits 5,106,339 5,525,633 5,168,284
Borrowings 807,778 1,175,585 1,236,461
----------- ----------- -----------
TOTAL INTEREST EXPENSE 5,914,117 6,701,218 6,404,745
----------- ----------- -----------
NET INTEREST INCOME 5,394,502 5,564,442 5,540,244
Provision for loan losses (25,000) 300,000 40,000
----------- ----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 5,419,502 5,264,442 5,500,244
Other income:
Service fees and other changes 166,374 159,549 127,248
Net gain (loss) on investment
securities - 1,248 (10,000)
Income from loan servicing 140,070 244,211 293,989
Income from unconsolidated joint
venture 33,677 54,817 29,727
Income from mortgage banking
partnership 61,586 59,567 22,525
Gain on sale of mortgages 690,443 582,664 384,991
Other operating income 300,659 165,787 192,696
----------- ----------- -----------
TOTAL OTHER INCOME 1,392,809 1,267,843 1,041,176
Other expenses:
Employee compensation and benefits 2,094,019 1,945,004 1,995,736
Office occupancy and equipment 561,173 493,278 502,299
Federal deposit insurance premiums 109,087 115,156 844,055
Other expenses 677,589 743,669 670,400
----------- ----------- -----------
TOTAL OTHER EXPENSES 3,441,868 3,297,107 4,012,490
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 3,370,443 3,235,178 2,528,930
Income taxes 1,228,482 1,195,785 690,550
----------- ----------- -----------
NET INCOME $ 2,141,961 $ 2,039,393 $ 1,838,380
=========== =========== ===========
Earnings per common share $ 2.57 $ 2.44 $ 2.17
=========== =========== ===========
Earnings per common share - assuming
dilution $ 2.55 $ 2.41 $ 2.14
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
11
<PAGE>
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
Years ended June 30, 1999, 1998 and 1997
- ----------------------------------------
<TABLE>
<CAPTION>
Retained Accumulated
Additional earnings, other
Common paid-in substantially comprehensive Treasury
stock capital restricted income stock Total
------ ---------- ------------- ------------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at July 1, 1996 $5,665 $2,580,092 $10,334,941 $ 37,888 $ (46,441) $12,912,145
Comprehensive income:
Net income - - 1,838,380 - - 1,838,380
Other comprehensive income,
net of tax:
Change in net unrealized gain
on securities available
for sale - - - 21,594 - 21,594
------ ---------- ----------- -------- --------- -----------
Comprehensive income - - 1,838,380 21,594 - 1,859,974
Issuance of 283,147 shares in
connection with three-for-two
stock split 2,832 (2,832) - - - -
Dividend in lieu of fractional
shares due to three-for-two
stock split - - (1,405) - - (1,405)
Dividends on common stock
($.68 per share) - - (575,959) - - (575,959)
Issuance of 6,315 shares in
connection with options
exercised at $3 5/9 per
share 63 22,394 - - - 22,457
Purchase of 3,917 shares of
treasury stock - - - - (61,930) (61,930)
------ ---------- ----------- -------- --------- -----------
BALANCE AT JUNE 30, 1997 8,560 2,599,654 11,595,957 59,482 (108,371) 14,155,282
Comprehensive income:
Net income - - 2,039,393 - - 2,039,393
Other comprehensive income,
net of tax:
Change in net unrealized gain
on securities available for
sale, net reclassification
amount - - - (2,413) - (2,413)
------ ---------- ----------- -------- --------- -----------
Comprehensive income - - 2,039,393 (2,413) - 2,036,980
Dividends on common stock
($1.68 per share) - - (1,415,869) - - (1,415,869)
Purchase of 15,261 shares of
treasury stock - - - - (275,722) (275,722)
------ ---------- ----------- ------- --------- -----------
BALANCE AT JUNE 30, 1998 8,560 2,599,654 12,219,481 57,089 (384,093) 14,500,671
Comprehensive income:
Net income - - 2,141,961 - - 2,141,961
Other comprehensive income,
net of tax:
Change in net unrealized gain
on securities available for
sale - - - (41,426) - (41,426)
------ ---------- ----------- -------- --------- -----------
Comprehensive income - - 2,141,961 (41,426) - 2,100,535
Dividends on common stock
($1.00 per share) - - (833,794) - - (833,794)
Issuance of 10,199 shares in
connection with options exercised
at $3 5/9 per share 102 36,163 - - - 36,265
Tax benefit from exercise of
non-incentive stock options - 75,849 - - - 75,849
Purchase of 9,937 shares of
treasury stock - - - - (240,426) (240,426)
------ ---------- ----------- ------- --------- -----------
BALANCE AT JUNE 30, 1999 $8,862 $2,711,666 $13,527,648 $15,643 $(624,519) $15,639,100
====== ========== =========== ======= ========= ===========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
12
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended June 30,
---------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS - OPERATING ACTIVITIES
- ---------------------------------
Net Income $ 2,141,961 $ 2,039,393 $ 1,838,380
Adjustments to reconcile net cash
cash provided from (used for)
operating activities:
Depreciation 174,151 172,874 175,774
Deferred income taxes 337,756 227,484 17,254
Provision for loan losses (25,000) 300,000 40,000
Net amortization 488,041 214,286 85,201
Deferred loan origination fees (60,414) (30,490) (22,515)
Income from unconsolidated joint
venture (33,677) (54,817) (29,727)
Income from mortgage banking
partnership (61,586) (59,567) (22,525)
Net (gain) loss on investment
securities - (1,248) 10,000
Net loss on sale of property and
equipment - - 3,091
Net (gain)loss on sale of foreclosed
real estate (78,926) 24,786 19,847
Gain on sale of mortgages (690,443) (582,664) (384,991)
Proceeds from loan sales 52,522,317 41,739,938 27,155,312
Originations and purchases of loans
held for sale (50,101,192) (45,455,024) (26,016,597)
Changes in certain assets and
liabilities affecting operations:
Accrued interest receivable (40,542) 125,606 (106,982)
Other assets (180,915) (299,520) 80,522
Accrued interest payable (2,775) (4,251) (5,682)
Other liabilities 155,437 38,212 (8,240)
------------ ------------ ------------
NET CASH PROVIDED FROM (USED FOR)
OPERATING ACTIVITIES 4,544,193 (1,605,002) 2,828,122
CASH FLOWS - INVESTING ACTIVITIES
- ---------------------------------
Net other (increase) decrease in loan
receivable (3,448,873) 4,472,577 (10,286,971)
Net increase in Federal Home Loan
Bank stock - - (209,300)
Investment in foreclosed real estate (20,713) (49,894) (9,102)
Investment in joint venture 319,357 (35,134) (149,109)
Investment in mortgage banking
partnership 76,898 45,239 9,272
Proceeds from sale of foreclosed real
estate 925,093 408,191 120,038
Proceeds from sale of securities
available for sale - 2,362 -
Purchase of securities available for
sale (100,778) - -
Purchase of securities held to
maturity (7,386,392) - (2,324,062)
Proceeds from maturities of securities
held to maturity 1,006,975 3,006,688 1,335,269
Purchase of other investments (1,710,000) - -
Principal repayments on mortgage-
backed securities 284,262 199,652 502,279
Proceeds from sale of property and
equipment - - 13,464
Purchase of property and equipment (83,287) (21,009) (124,351)
Purchase of mortgage servicing rights (249,987) (227,366) (104,925)
------------ ------------ ------------
NET CASH (USED FOR) PROVIDED FROM
INVESTING ACTIVITIES (10,387,445) 7,801,306 (11,227,498)
<PAGE>
CASH FLOWS - FINANCING ACTIVITIES
- ---------------------------------
Interest credited to deposit accounts 5,096,411 5,538,398 5,103,199
Net other decrease in deposits (5,689,947) (5,107,085) (7,510)
Net increase in advances from Federal
Home Loan Bank 689,861 1,290,475 2,991,055
Advances from borrowers for taxes and
insurance 210,037 417,922 278,638
Proceeds from exercise of stock options 36,265 - 22,457
Purchase of treasury stock (240,426) (275,722) (61,930)
Dividends paid (833,794) (1,415,869) (577,364)
------------ ------------ ------------
NET CASH (USED FOR) PROVIDED FROM
FINANCING ACTIVITIES (731,593) 448,119 7,748,545
------------ ------------ ------------
NET (DECREASE) INCREASE IN
CASH AND CASH EQUIVALENTS (6,574,845) 6,644,423 (650,831)
Cash and cash equivalents at beginning
of year 7,367,355 722,932 1,373,763
------------ ------------ ------------
CASH AND EQUIVALENT AT END OF YEAR $ 792,510 $ 7,367,355 $ 722,932
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF
- --------------------------
CASH FLOW INFORMATION
---------------------
Cash paid during the year for:
Interest on advances from Federal
Home Loan Bank $ 807,036 $ 1,160,666 $ 1,239,795
============ ============ ============
Income taxes $ 1,113,622 $ 1,101,335 $ 782,909
============ ============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH
- --------------------------------
INVESTING ACTIVITIES
--------------------
Loans transferred to foreclosed
real estate $ 374,228 $ 737,309 $ 170,968
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
13
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 90 days or less.
INVESTMENTS 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 gains and losses for
these securities are reported in other comprehensive income.
The (decrease) increase in unrealized gains amounted to
$(41,426), $(2,413) and $21,594, net of deferred taxes of
$(27,616), $(1,608) and $14,396 for 1999, 1998 and 1997,
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.
Securities are exposed to various risks, such as interest rate,
market and credit risk. Due to the risks associated with
securities and the uncertainty related to changes in their fair
value, it is at least reasonably possible that changes in risk
could affect the Corporation.
OTHER INVESTMENTS
- -----------------
Other investments consist of certificates of deposit with
original maturities of between six and twenty-four months.
Certificates of deposit are recorded at cost, which approximates
market value, and are generally held until maturity.
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. Market
values of the mortgage loans held for resale approximate cost.
The mortgage loans held for resale represent fixed rate
one-to-four family mortgage loans, which are to be sold pursuant
to forward commitments. For purposes of determining the gain on
the sale of loans sold in the secondary market, normal servicing
fees are determined by reference to the stipulated servicing fee
set forth in the loan sale agreements.
LOANS RECEIVABLE
- ----------------
Loans held in portfolio are stated at the principal amount
outstanding, less the allowance for losses and net deferred
loan origination fees and costs. Interest is accrued as earned
unless collectibility of the loan is in doubt, at which time
an allowance is provided.
Uncollectible interest on loans that are contractually past due
is charged off, or an allowance is established based on
management's periodic evaluation. The allowance is established
by a charge to interest income equal to all interest previously
accrued and still due, and income is subsequently recognized
only to the extent that cash payments are received until, in
management's judgment, the borrower's ability to make periodic
interest and principal payments is back to normal, in which case
the loan is returned to accrual status. Interest income
generally is not recognized on specific impaired loans unless
the likelihood of further loss is remote. Interest payments
received on such loans are applied as a reduction of the loan
principal balance.
14
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT
- --------------------------------------------------------
ACCOUNTING POLICIES, CONT'D
- -------------------
LOAN FEES
- ---------
All loan origination fees received from loans with similar
characteristics, net of direct origination costs, are deferred
and amortized to interest income using the level yield method,
giving effect to actual loan prepayments. Fees received for
loan commitments that are expected to be drawn upon, based on
the Bank's experience with similar commitments, are deferred
and amortized over the life of the loan using the level yield
method. Fees for other loan commitments are deferred and
amortized over the loan commitment period on a straight-line
basis.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
- ----------------------------------
The allowance for possible loan losses is maintained at a level
which management considers adequate to provide for
potential loan losses based upon an evaluation of known and
inherent risks in the loan portfolio. Management's
evaluation is based upon a continuing review of the loan
portfolio which includes many factors, such as identification
of adverse situations which may affect the borrower's ability to
repay, a review of overall portfolio quality and an
assessment of current and future economic conditions.
Management believes that the allowance for loan 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.
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.
MORTGAGE SERVICING RIGHTS
- -------------------------
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.
During 1999 and 1998, approximately $1,209,000 and $754,000,
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 $435,000,
$166,700 and $65,000 for the years ended June 30,
1999, 1998 and 1997, respectively. The aggregate fair value of
mortgage servicing rights is approximately
$2,519,000 and $1,165,000 at June 30, 1999 and 1998,
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, 1999 and 1998, 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.
15
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 gains on securities available for
sale which is reflected in other comprehensive income. 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, certain
accrued expenses and unrealized gains on securities available
for sale.
COMPREHENSIVE INCOME
- --------------------
On July 1, 1998, the Bank adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income". SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its
components. Comprehensive income represents net income and the
net change in unrealized gains or losses on securities available
for sale, net of taxes, and is presented in the Consolidated
Statements of Changes in Shareholders' Equity and Comprehensive
Income. Prior year consolidated financial statements have been
reclassified to conform to the requirements of SFAS No. 130.
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 non
performance 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 residential mortgage loans originated by the
Bank. Risks arise from the possible inability of counterparties
to meet the terms of their contracts.
The Bank writes variable rate loan contracts with interest rate
caps and floors in order to manage its interest rate exposure.
Substantially, all variable rate loans are held by the Bank; the
interest rate caps and floors enable both customers and the Bank
to transfer, modify, or reduce their interest rate risk.
Standby letters of credit written are conditional commitments
issued by the Bank to guarantee the performance of a
customer to a third party. Those guarantees are primarily
issued to support borrowing arrangements. The credit risk
involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers.
16
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT
- ---------------------------------------------------------
ACCOUNTING POLICIES, CONT'D
- -------------------
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.
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 832,346,
836,303 and 846,220 shares for the years ended June 30, 1999,
1998 and 1997, respectively. For diluted EPS, the effect of
dilutive stock options was to add weighted average shares of
6,017, 10,938 and 12,438 shares for the years ended June 30,
1999, 1998 and 1997, respectively. As a result, the denominator
for diluted EPS amounted to 838,363, 847,241 and 858,658 shares
for 1999, 1998 and 1997, 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.
NOTE B: INVESTMENT SECURITIES
- -------------------------------
<PAGE>
The amortized cost and fair value of investments in securities
are as follows:
<TABLE>
<CAPTION>
June 30, 1999: Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----
<S> <C> <C> <C> <C>
Securities available for sale
Corporate stock $ 136,215 $35,332 $ (9,260) $ 162,287
Mortgage-backed securities 888,745 -- -- 888,745
---------- ------- -------- ----------
$1,024,960 $35,332 $ (9,260) $1,051,032
========== ======= ======== ==========
Securities held to maturity:
U.S. Government and its
agencies $4,380,258 $ -- $(10,660) $4,369,598
Corporate debt securities 18,411 145 -- 18,556
Mortgage-backed securities 3,134,602 2,204 (13,186) 3,123,620
---------- ------- -------- ----------
$7,533,271 $ 2,349 $(23,846) $7,511,774
========== ======= ======== ==========
</TABLE>
<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 $ 34,437 $46,478 $ -- $ 81,915
Mortgage-backed securities 1,163,485 48,637 -- 1,212,122
---------- ------- -------- ----------
$1,198,922 $95,115 $ -- $1,294,037
========== ======= ======== ==========
Securities held to maturity:
U.S. Government and its
agencies $1,000,000 $ 940 $ -- $1,000,940
Corporate debt securities 25,244 15 -- 25,259
Mortgage-backed securities 136,478 -- -- 136,478
---------- ------- -------- ----------
$1,161,722 $ 955 $ -- $1,162,677
========== ======= ======== ==========
</TABLE>
17
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B: INVESTMENT SECURITIES, CONT'D
- -------------------------------
The amortized cost and fair value of debt securities at June 30,
1999, 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 Held
to Maturity
---------------------------
Amortized Fair
Cost Value
---------- -----------
<S> <C> <C>
Due in one year or less $ -- $ --
Due after one year through
five years 4,380,258 4,369,598
Due after five years through
ten years -- --
Due after ten years 18,411 18,556
---------- ----------
$4,398,669 $4,388,154
========== ==========
</TABLE>
Proceeds and gross realized gains and losses from sales and
maturities of securities are as follows:
<TABLE>
<CAPTION>
Securities Available for Sale
-------------------------------------
Proceeds
from
sales and Realized Realized
maturities gains losses
-------------------------------------
<S> <C> <C> <C>
Year ended June 30,
- ------------------
1999 $ -- $ -- $ --
1998 2,362 1,037 --
1997 -- -- --
<CAPTION>
Securities Held to Maturity
-------------------------------------
Proceeds
from
sales and Realized Realized
maturities gains losses
-------------------------------------
<S> <C> <C> <C>
Year ended June 30,
- ------------------
1999 $1,006,975 $ -- $ --
1998 3,006,688 211 --
1997 1,335,269 -- 10,000
</TABLE>
18
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE C: LOANS RECEIVABLE
- --------------------------
Loans receivable consist of the following:
<TABLE>
<CAPTION>
June 30,
-------------------------
1999 1998
---------- -----------
<S> <C> <C>
Conventional first mortgage loans:
Residential $ 81,909,305 $ 81,576,916
Commercial 25,870,595 26,203,528
Construction loans 10,892,305 4,993,395
Loans on savings accounts 394,094 263,905
Education loans 147,527 333,449
Consumer loans 5,309,915 5,621,782
Demand notes 1,369,269 953,474
Home equity lines of credit 4,316,003 5,392,259
Commercial non-mortgage loans 1,628,739 1,602,953
Commercial lines of credit 2,039,076 2,890,988
------------ ------------
SUBTOTAL 133,876,828 129,832,649
Allowance for loan losses (1,268,568) (1,473,346)
Loan in process (3,476,979) (2,273,617)
Net deferred loan origination fees and premiums 155,411 95,649
------------ ------------
$129,286,692 $126,181,335
============ ============
</TABLE>
The activity in the allowance for loan losses is as follows:
<TABLE>
<CAPTION>
Year ended June 30,
-------------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Balance at beginning of year $1,473,346 $1,435,500 $1,430,781
Provision for possible loan losses (25,000) 300,000 40,000
Charged-off loans (185,631) (269,990) (44,465)
Recoveries 5,853 7,836 9,184
---------- ---------- ----------
BALANCE AT END OF YEAR $1,268,568 $2,473,346 $1,435,500
========== ========== ==========
</TABLE>
Nonaccrual loans for which interest has been reduced totaled
approximately $140,000 and $313,000 at June 30, 1999 and 1998,
respectively. Interest income that would have been recorded on
these loans for the years ended June 30, 1999, 1998 and 1997 was
approximately $3,000, $28,000 and $23,000, respectively.
The Bank is not committed to lend additional funds to debtors
whose loans have been modified.
<PAGE>
The Bank, in the ordinary course of business, has granted loans
to certain officers, directors and their related interests.
Related party loans were made on substantially the same terms as
those prevailing at the time for comparable transactions with
unrelated persons and do not involve more than normal risk of
collectibility. An analysis of related party loan activity is
as follows:
Balance at July 1, 1997 $272,218
Increase 51,187
Decrease (61,233)
--------
BALANCE AT JUNE 30, 1998 262,172
Increase 117,900
Decrease (41,115)
--------
BALANCE AT JUNE 30, 1999 $338,957
========
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 $174,024,228, $151,050,157 and
$129,495,624 at June 30, 1999, 1998 and 1997, respectively.
19
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE D: PROPERTY AND EQUIPMENT
- -------------------------------
Property and equipment is summarized by major classification as
follows:
<TABLE>
<CAPTION>
June 30,
---------------------------
1999 1998
---------- ----------
<S> <C> <C>
Land $ 672,933 $ 672,933
Buildings 2,262,652 2,262,652
Furniture and equipment 881,140 829,460
---------- ----------
3,816,725 3,765,045
Less allowances for
depreciation 1,005,719 863,175
---------- ----------
$2,811,006 $2,901,870
========== ==========
</TABLE>
NOTE E: DEPOSITS
- ------------------
Deposit accounts consist of the following:
<TABLE>
<CAPTION>
June 30,
---------------------------
1999 1998
---------- ----------
<S> <C> <C>
Savings accounts with a year end
interest rate of 2.37% and 2.81%
at June 30, 1999 and 1998,
respectively $14,300,702 $14,817,520
NOW accounts with a year end
interest rate of 1.29%, 1.74%
at June 30, 1999 and 1998,
respectively 7,460,995 8,556,180
Money market deposit accounts
with a year end interest rate
of 2.57% and 2.96% at June
30, 1999 and 1998, respectively 4,742,277 5,062,280
Certificates of deposit with a
year end interest rate range
of 3.20% - 6.90% at June 30,
1999 and 1998 85,082,321 83,743,851
------------ ------------
$111,586,295 $112,179,831
============ ============
</TABLE>
Non-interest bearing checking accounts are included in the table
above in NOW accounts.
Maturities of outstanding certificates of deposit at June 30,
1999, are summarized as follows:
Year Amount
---- -----------
2000 $65,789,352
2001 11,655,637
2002 2,794,100
2003 4,028,481
2004 814,751
-----------
$85,082,321
===========
<PAGE>
The aggregate amount of individual deposits in excess of
$100,000 was approximately $23,700,000 and $23,000,000 at
June 30, 1999 and 1998, respectively.
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
Year ended June 30,
-------------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Savings accounts $ 384,895 $ 431,611 $ 453,090
NOW accounts 73,738 79,073 59,416
Money market 169,385 187,732 209,290
Certificates of deposit 4,478,321 4,827,217 4,446,486
---------- ---------- ----------
$5,106,339 $5,525,833 $5,168,284
========== ========== ==========
</TABLE>
20
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
(5.05% to 6.42% at June 30, 1999).
Scheduled maturities are as follows:
Maturing in
fiscal year ending Amount
------------------ ----------
2000 $8,110,796
2001 611,491
2002 1,812,237
2003 613,027
2004 888,872
Thereafter 10,550,528
-----------
$22,586,951
===========
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
$97,078, $92,019 and $90,476 for the years ended
June 0, 1999, 1998 and 1997, 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, 1999 and 1998 was $50,678 and $54,298,
respectively. There are no plan/trust assets designated for
this purpose.
For measurement purposes, the weighted-average discount rate
used in determining the accumulated postretirement
benefit obligation was 8%. The mortality rate was based on the
1983 Group Annuity Mortality Table.
STOCK OPTION PLAN
- -----------------
Under the terms of the ES&L Bancorp, Inc. 1990 Stock Option Plan
(the "Option Plan"), shares were reserved for future
issuance by the Corporation upon exercise of stock options
granted to employees and directors of the Corporation and
its subsidiary from time to time under the Option Plan. The
Option Plan provides for a term of ten years, after which no
awards may be made, unless earlier terminated by the Board of
Directors pursuant to the Option Plan. These options are
priced at $3 5/9 per share, the equivalent of the purchase price
at the time of issuance. Options outstanding at June 30,
1999 and 1998 amounted to 3,399 and 13,598, respectively.
21
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE H: INCOME TAXES
- ----------------------
The provision for income taxes consists of the following:
A reconciliation of income taxes at the federal statutory
corporate tax rates to the effective tax rates follows:
<TABLE>
<CAPTION>
Year ended June 30,
-------------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Currently payable:
State $ 50,184 $ 97,560 $ 92,945
Federal 840,542 870,741 580,351
Deferred 337,756 227,484 17,254
---------- ---------- --------
$1,228,482 $1,195,785 $690,550
========== ========== ========
</TABLE>
The difference between estimated tax payments made during the
year and income taxes currently payable are included in other
assets or other liabilities, as applicable, in the accompanying
consolidated financial statements.
<TABLE>
<CAPTION>
Year ended June 30,
-------------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Total provision at federal
statutory rates $1,146,000 $1,100,000 $ 860,000
State taxes, net of federal
benefit 79,000 65,000 61,000
Resolution and adjustment of
prior year tax liabilities -- -- (235,000)
Other 3,482 30,785 4,550
---------- ---------- ---------
$1,228,482 $1,195,785 $ 690,550
========== ========== =========
</TABLE>
A deferred tax (liability) asset resulting from temporary
differences is summarized as follows and is included in other
(liabilities) assets in the accompanying consolidated balance
sheets:
<TABLE>
<CAPTION>
June 30,
---------------------------
1999 1998
---------- ----------
<S> <C> <C>
Depreciation $(120,000) $ (99,000)
Nonrefundable loan fees 8,000 14,000
Employee benefits 20,000 18,000
Allowance for loan losses 236,000 276,000
Mortgage servicing rights (518,000) (218,000)
Accrued expenses 38,000 --
Unrealized gains on securities
available for sale (10,000) (19,000)
Other 26,000 36,000
--------- ---------
$(320,000) $ 8,000
========= =========
</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
consolidated 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, 1999,
the accumulated amount of such excess for which income taxes
have not been accrued was approximately $2.7 million.
22
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $17,628,
$17,375 and $17,029 for the years ended June 30, 1999, 1998 and
1997, respectively.
At June 30, 1999 and 1998, the Bank had outstanding commitments
of $8,371,539 and $5,256,912, respectively, to originate loans,
of which $3,184,719 and $3,011,112, respectively, were comprised
of fixed-rate loans and $5,186,820 and $2,245,800, 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
prevailing market interest rates and all loan commitments will
be funded by cash flows from operations, existing excess
liquidity, advances from the Federal Home Loan Bank and other
borrowings as necessary.
At June 30, 1999 and 1998, the Bank had outstanding commitments
under standby letters of credit totaling $397,571 and $365,358,
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 resale as residential
housing. Management of the partnership developed the land in
several phases, enabling the partnership to increase its equity
as sales take place. As of June 30, 1999 and 1998, the Bank had
loaned $352,536 and $636,401, respectively, to the partnership,
and was committed to lend an additional $597,464 and $313,599,
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.
<PAGE>
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.
23
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE J: INVESTMENT IN JOINT VENTURE - ACQUISITION, DEVELOPMENT
- --------------------------------------------------------------
AND CONSTRUCTION ARRANGEMENT, CONT'D
- -----------------------------
As of June 30, 1999, Brilie's share of the partnership's capital
was $127,736, 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,
---------------------------
1999 1998
---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
ASSETS
------
Investment in real estate $575,008 $686,653
Mortgage and lot sale receivable 101,000 276,850
Other asset 800 800
-------- --------
$676,808 $964,303
======== ========
LIABILITIES AND
PARTNERS' CAPITAL
------------------
Liabilities:
Note payable to Elmira Savings
and Loan $352,536 $636,401
Mortgage payable 68,000 68,000
Other liabilities 600 800
-------- --------
421,336 705,201
Partners' capital 255,472 259,102
-------- --------
$676,808 $964,303
======== ========
</TABLE>
<PAGE>
STATEMENTS OF INCOME AND PARTNERS' CAPITAL
- ------------------------------------------
<TABLE>
<CAPTION>
Year ended June 30,
-------------------------------------------
1999 1998 1997
---------- ---------- ----------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
Sales $417,500 $479,250 $307,000
Cost of sales 328,556 337,006 234,484
-------- -------- --------
GROSS PROFIT 88,944 142,244 72,516
Net rental income (expense) (7,659) 3,902 1,885
Interest income -- 5,324 --
General and administrative expense (13,931) (12,316) (14,947)
-------- -------- --------
NET INCOME 67,354 139,154 59,454
Partners' capital at beginning
of year 259,102 229,124 215,990
Partners' withdrawals 70,984 109,176 46,320
-------- -------- --------
PARTNERS' CAPITAL AT END OF YEAR $255,472 $259,102 $229,124
======== ======== ========
</TABLE>
24
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE K: PARENT COMPANY FINANCIAL INFORMATION
- ----------------------------------------------
BALANCE SHEETS
- --------------
<TABLE>
<CAPTION>
June 30,
---------------------------
1999 1998
---------- ----------
<S> <C> <C>
ASSETS
------
Cash and cash equivalents $ 28,036 $ 208,358
Securities available for sale 162,287 81,915
Investment in subsidiary 11,292,265 10,111,123
Other assets 91,603 5,184
----------- -----------
$11,574,191 $10,406,580
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Shareholders' equity:
Common stock $ 8,662 $ 8,580
Additional paid-in capital 2,711,666 2,599,654
Retained earnings 9,462,739 8,154,572
Accumulated other comprehensive
income 15,643 27,887
----------- -----------
12,198,710 10,790,673
Less treasury stock 624,519 384,093
----------- -----------
$11,574,191 $10,406,580
=========== ===========
</TABLE>
<PAGE>
STATEMENTS OF INCOME AND RETAINED EARNINGS
- ------------------------------------------
<TABLE>
<CAPTION>
Year ended June 30,
-------------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Equity in earnings of subsidiary $2,181,142 $2,075,061 $1,883,734
Income from investments and
other 2,406 3,033 2,619
---------- ---------- ----------
2,183,548 2,078,094 1,886,353
General and administrative expenses 50,105 44,916 60,209
---------- ---------- ----------
INCOME BEFORE INCOME TAXES 2,133,443 2,033,178 1,826,144
Income tax benefit 8,518 6,215 12,236
---------- ---------- ----------
NET INCOME 2,141,961 2,039,393 1,838,380
Retained earnings at beginning
of year 8,154,572 7,531,048 6,270,032
Dividends paid 833,794 1,415,869 577,364
---------- ---------- ----------
RETAINED EARNINGS AT
END OF YEAR $9,462,739 $8,154,572 $7,531,048
========== ========== ==========
</TABLE>
25
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE K: PARENT COMPANY FINANCIAL INFORMATION, CONT'D
- -----------------------------------------------
STATEMENTS OF CASH FLOWS
- ------------------------
<TABLE>
<CAPTION>
Year ended June 30,
-------------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS - OPERATING ACTIVITIES
- ---------------------------------
Net income $ 2,141,961 $ 2,039,393 $ 1,838,380
Adjustments to reconcile net
income to net cash used
for operating activities:
Equity in earnings of subsidiary (2,181,142) (2,075,061) (1,883,734)
Gain on sale of securities
available for sale -- (1,037) --
Change in other assets
affecting operations (2,408) 6,022 43,794
----------- ----------- -----------
NET CASH USED FOR
OPERATING ACTIVITIES (41,589) (30,683) (1,560)
CASH FLOWS - INVESTING ACTIVITIES
- ---------------------------------
Dividend received from subsidiary 1,000,000 1,600,000 800,000
Proceeds from sale of securities
available for sale -- 2,362 --
Purchase of securities available
for sale (100,778) -- --
----------- ----------- -----------
NET CASH PROVIDED FROM
INVESTING ACTIVITIES 899,222 1,602,362 800,000
CASH FLOWS - FINANCING ACTIVITIES
- ---------------------------------
Dividends paid (833,794) (1,415,869) (577,364)
Purchase of treasury stock (240,426) (275,722) (61,930)
Net proceeds from exercise of
stock options 36,265 -- 22,457
----------- ----------- -----------
NET CASH USED FOR
FINANCING ACTIVITIES (1,037,955) (1,691,591) (616,837)
----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (180,322) (119,912) 181,603
Cash and cash equivalents
at beginning of year 208,358 328,270 146,667
----------- ----------- -----------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 28,036 $ 208,358 $ 328,270
=========== =========== ===========
</TABLE>
<PAGE>
NOTE L: OFFICE OCCUPANCY AND EQUIPMENT EXPENSE
- ------------------------------------------------
Office occupancy and equipment expense is comprised of the following:
<TABLE>
<CAPTION>
Year ended June 30,
------------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Depreciation $174,151 $172,874 $175,774
Service bureau 161,000 151,526 150,012
Other 226,022 168,878 176,513
-------- -------- --------
$561,173 $493,278 $502,299
======== ======== ========
</TABLE>
26
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE M: OTHER COMPREHENSIVE INCOME
- -----------------------------------
The components of other comprehensive income are as follows:
<TABLE>
<CAPTION>
Year ended June 30, 1999
--------------------------------------------
Before tax Tax Net of tax
amount benefit amount
---------- -------- ----------
<S> <C> <C> <C>
Unrealized losses on securities
available for sale:
Unrealized losses arising during
the period $(69,042) $27,616 $(41,426)
-------- ------- --------
OTHER COMPREHENSIVE INCOME $(69,042) $27,616 $(41,426)
======== ======= ========
<CAPTION>
Year ended June 30, 1998
--------------------------------------------
Before tax Tax Net of tax
amount benefit amount
---------- -------- ----------
<S> <C> <C> <C>
Unrealized losses on securities
available for sale:
Unrealized losses arising during
the period $ (2,984) $ 1,193 $ (1,791)
Less: reclassification adjustment
for gains included in net
income (1,037) 415 (622)
-------- ------- --------
OTHER COMPREHENSIVE INCOME $ (4,021) $ 1,608 $ (2,413)
======== ======= ========
<CAPTION>
Year ended June 30, 1997
--------------------------------------------
Before tax Tax Net of tax
amount benefit amount
---------- -------- ----------
<S> <C> <C> <C>
Unrealized gains on securities
available for sale:
Unrealized gains arising during
the period $ 35,990 $(14,396) $ 21,594
-------- -------- --------
OTHER COMPREHENSIVE INCOME $ 35,990 $(14,396) $ 21,594
======== ======== ========
</TABLE>
NOTE N: 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, 1999, that the Bank meets
all capital adequacy requirements to which it is subject.
As of June 30, 1999, 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.
27
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE N: 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
For capital capitalized under prompt
Actual adequacy purposes corrective action provisions
--------------- ----------------- ----------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1999
Total risk-based capital
(to risk-weighted assets) $16,270 16.07% > $8,101 > 8.00% > $10,126 > 10.00%
- - - -
Tier 1 capital
(to risk-weighted assets) 15,005 14.82% > 4,050 > 4.00% > 6,076 > 6.00
- - - -
Tier 1 capital (leveraged)
(to adjusted total assets) 15,005 9.79% > 4,598 > 3.00% > 7,664 > 6.00
- - - -
Tangible capital
(to adjusted total assets) 15,005 9.79% > 2,299 > 1.50% > Not applicable
- - -
As of June 30, 1998
Total risk-based capital
(to risk-weighted assets) $14,805 14.65% > $8,087 > 8.00% > $10,109 > 10.00%
- - - -
Tier 1 capital
(to risk-weighted assets) 13,540 13.39% > 4,044 > 4.00% > 6,065 > 6.00
- - - -
Tier 1 capital (leveraged)
(to adjusted total assets) 13,540 8.94% > 4,546 > 3.00% > 7,576 > 5.00
- - - -
Tangible capital
(to adjusted total assets) 13,540 8.94% > 2,273 > 1.50% > Not applicable
- - -
</TABLE>
NOTE O: 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.
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.
SUBSEQUENT EVENT
- ----------------
On July 13, 1999, the Board of Directors of the Corporation
declared a special cash dividend of $1.00 per share payable
on July 30, 1999 to shareholders of record on July 16, 1999.
28
<PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE P: 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 (INCLUDING MORTGAGE LOANS HELD FOR SALE)
- ----------------
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.
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).
<PAGE>
Information regarding the Corporation's financial instruments is
as follows at June 30, 1999 and 1998: (000's)
<TABLE>
<CAPTION>
1999 1998
---------------------- ----------------------
Carrying Estimated Carrying Estimated
value fair value value fair value
--------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and short-term
investments $ 793 $ 793 $ 7,367 $ 7,367
Investment securities
(including mortgage-
backed securities) 11,607 11,586 3,769 3,770
Loans receivable 134,829 137,728 134,413 137,803
Accrued interest receivable 816 816 775 775
Financial liabilities:
Deposits 111,586 112,155 112,180 112,342
Advances from Federal Home
Loan Bank 22,587 22,422 21,897 21,375
Off-balance-sheet instruments:
Commitments to extend credit 8,372 8,372 5,257 5,257
Standby letters of credit 398 398 365 365
</TABLE>
29
<PAGE>
<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, Elmira, New York
Smith Barney Shearson, Ithaca, New York
During the 1999 fiscal year, the Corporation's Board of
Directors declared four quarterly cash dividends, paid at the
rate of $0.25 per share. During the 1998 fiscal year the
Corporation paid an annualized dividend of $1.68 per share,
represented by four quarterly dividends of $0.17 per share, and
a special cash dividend of $1.00 per share, which was paid in
July 1997.
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 1999, the trading price of the stock
has ranged from $21.00 to $26.25 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, 1999, ES&L
was a Tier 1 Institution.
ES&L Bancorp, Inc. has paid the following per share cash
dividends to its shareholders during the past three fiscal
years:
<TABLE>
<CAPTION>
1999 FISCAL YEAR 1998 FISCAL YEAR 1997 FISCAL YEAR
<S> <C> <C> <C>
8/28/98 $0.25 7/31/97 $1.00 8/30/96 $0.17
11/27/98 $0.25 8/29/97 $0.17 11/29/96 $0.17
2/26/99 $0.25 11/28/97 $0.17 2/28/97 $0.17
5/28/99 $0.25 2/27/98 $0.17 5/30/97 $0.17
5/29/98 $0.17
----- ----- -----
$1.00 $1.68 $0.68
DIVIDEND PAYMENT RATIO 39.22% 69.71% 31.76%
</TABLE>
On July 14, 1999, the Board of Directors of the Corporation
announced a special cash dividend of $1.00 per share, payable
July 30, 1999 to Stockholders' of record on July 16, 1999.
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, 1999, the Corporation had 832,035 shares of common
stock outstanding. At September 1, 1999, 830,595 shares were
outstanding, representing approximately 400 shareholders of
record, excluding those shares registered in the "street name"
of brokerage firms and stock depositories.
30
<PAGE>
<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 GENERAL COUNSEL
- ------------------------- ---------------
200 East Buffalo Street Denton, Keyser, LaBrecque & Moore
Suite 101B 150 Lake Street
Ithaca, NY 14850 Elmira, New York 14901
607-272-4880
SUBSIDIARIES
------------
BRILIE CORPORATION SPECIAL COUNSEL
- ------------------ ---------------
ES&L Financial Services Housley Kantarian &
300 West Water Street Bronstein, P.C.
Elmira, New York 14901 Suite 700
607-733-5533 1220 19th Street, NW
Washington, DC 20036
ES&L MORTGAGE CORPORATION STOCK REGISTRAR AND TRANSFER AGENT
- ------------------------- ----------------------------------
Cayuga Mortgage Company American Stock Transfer &
200 East Buffalo Street Trust Co.
Suite 101B 40 Wall Street
Ithaca, New York 14850 New York, New York 10005
607-272-3595 (800) 937-5449
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 25, 1999, AT 7:00 P.M.
VISIT OUR WEBSITE_______________________________________________
FOR INFORMATION ON BANK PRODUCTS, INCLUDING CURRENT INTEREST
RATES VISIT OUR WEBSITE . . . WWW.ELMIRABANK.COM
31
<PAGE>
<PAGE>
DIRECTORS
________________________________________________________________
ROBERT E. BUTLER -
Chairman of the Board
President, Deister & Butler, Inc.
Former Owner, H. H. Equipment, Inc.
WILLIAM A. MCKENZIE -
President and Chief Executive Officer,
Elmira Savings & Loan, F.A.
JOHN F. CADWALLADER -
President of the following companies:
John F. Cadwallader, Inc. d/b/a "The Glass Company"
Windshield Installation Network, Inc. d/b/a WIN
Autoglass Insurance Company
L. EDWARD CONSIDINE -
Professional Engineer,
Hunt Engineers and Architects
Retired General Manager, Elmira Water Board
DR. ADRIAN P. HULSEBOSCH -
Retired Othodontist
JACK H. MIKKELSEN -
Retired President,
Zeiser Wilbert Vault, Inc.
FREDERICK J. MOLTER -
Professional Engineer,
The Sear Brown Group
PAUL MORSS -
Retired Insurance Executive,
Swan & Sons Morss Co. Insurance Agency
GERALD F. SCHICHTEL -
Retired President,
Hilliard Corporation
All directors of ES&L Bancorp, Inc. are directors of Elmira
Savings and Loan, F.A.
OFFICERS
________________________________________________________________
WILLIAM A. MCKENZIE GLENN R. AHART
President and Chief Executive Assistant Vice President
Officer
J. MICHAEL ERVIN ANNE H. BENNETT
Senior Vice President and Assistant Vice President
Treasurer
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.
32
<PAGE>
<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, 1999, AS FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION, MAY BE OBTAINED AFTER SEPTEMBER 30,
1999, AT NO CHARGE TO STOCKHOLDERS BY WRITING TO THE SECRETARY
OF THE CORPORATION, 300 WEST WATER STREET, ELMIRA, NEW YORK
14901.
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Percentage State of
Name Owned Incorporation
- ---- ---------- -------------
Elmira Savings & Loan, F.A. 100% United States
Brilie Corporation (a) 100% New York
ES&L Mortgage Corporation (a) 100% New York
___________
(a) Wholly-owned subsidiary of Elmira Savings & Loan, F.A.
[Letterhead of Mengel, Metzger, Barr & Co., LLP]
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 16, 1999 appearing in this Annual Report on Form 10-K of
ES&L Bancorp, Inc. for this fiscal year ended June 30, 1999.
/s/ Mengel, Metzger, Barr & Co., LLP
Elmira, New York
September 22, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 793
<INT-BEARING-DEPOSITS> 1,710
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,051
<INVESTMENTS-CARRYING> 8,846
<INVESTMENTS-MARKET> 8,825
<LOANS> 139,419
<ALLOWANCE> 1,269
<TOTAL-ASSETS> 153,682
<DEPOSITS> 111,586
<SHORT-TERM> 8,111
<LIABILITIES-OTHER> 3,870
<LONG-TERM> 14,476
<COMMON> 9
0
0
<OTHER-SE> 15,630
<TOTAL-LIABILITIES-AND-EQUITY> 153,682
<INTEREST-LOAN> 11,016
<INTEREST-INVEST> 198
<INTEREST-OTHER> 94
<INTEREST-TOTAL> 11,308
<INTEREST-DEPOSIT> 5,106
<INTEREST-EXPENSE> 5,914
<INTEREST-INCOME-NET> 5,394
<LOAN-LOSSES> (25)
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,442
<INCOME-PRETAX> 3,370
<INCOME-PRE-EXTRAORDINARY> 3,370
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,142
<EPS-BASIC> 2.57
<EPS-DILUTED> 2.55
<YIELD-ACTUAL> 3.87
<LOANS-NON> 140
<LOANS-PAST> 256
<LOANS-TROUBLED> 72
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,473
<CHARGE-OFFS> 186
<RECOVERIES> 6
<ALLOWANCE-CLOSE> 1,269
<ALLOWANCE-DOMESTIC> 1,251
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 18
</TABLE>
