SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the Fiscal Year Ended December 31, 2001
OR
[ _ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transaction period from ___________________ to
______________________
Commission File Number: 000-25101
ONEIDA FINANCIAL CORP.
(Exact Name of Registrant as Specified in its Charter)
Federal 16-1561678
- ------------------------------- ---------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
182 Main Street, Oneida, New York 13421-1676
---------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
(315) 363-2000
------------------------------------------------
(Registrant's Telephone Number including area code)
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 $0.01 per share
---------------------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file reports) and (2) has been subject to such
requirements for the past 90 days. YES [ X ] NO[ _ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K 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 amendments to
this Form 10-K. [ X ]
As of March 15, 2002, there were issued and outstanding 3,219,632 shares of
the Registrant's Common Stock. The aggregate value of the voting stock held by
non-affiliates of the Registrant, computed by reference to the average bid and
asked prices of the Common Stock as of March 15, 2002 ($24.01) was $34,640,151.
DOCUMENTS INCORPORATED BY REFERENCE
1. Sections of Annual Report to Stockholders for the fiscal year ended
December 31, 2001 (Parts II and IV).
2. Proxy Statement for the 2002 Annual Meeting of Stockholders (Parts I and
III).
PART I
ITEM 1. BUSINESS
Oneida Financial Corp.
Oneida Financial Corp. (the "Company") was organized in September 1998, for
the purpose of acquiring all of the capital stock of The Oneida Savings Bank
(the "Bank") upon completion of the Bank's reorganization into the two-tier form
of mutual holding company ownership and the minority stock offering. The Company
is majority owned by Oneida Financial, MHC, a Federal-chartered mutual holding
company (the "Mutual Holding Company"). The Company is a savings and loan
holding company subject to regulation by the Office of Thrift Supervision
("OTS"). Both the Company and the Mutual Holding Company converted to federal
charters effective on July 18, 2001. The Company's only assets consist of shares
of the Bank's common stock.
At December 31, 2001 the Company had consolidated assets and consolidated
stockholders' equity of $352.7 million and $45.0 million, respectively. Through
the Bank, the Company has deposits totaling $228.2 million.
The Company's executive office is located at the main office of the Bank,
at 182 Main Street, Oneida, New York 13421-1676. The Company's telephone number
is (315) 363-2000.
The Oneida Savings Bank
The Bank was organized in 1866 as a New York-chartered mutual savings bank.
The Bank's deposits are insured by the Bank Insurance Fund ("BIF"), as
administered by the FDIC, up to the maximum amount permitted by law. The Bank is
a community bank engaged primarily in the business of accepting deposits from
customers through its main office and five full service branch offices and using
those deposits, together with funds generated from operations and borrowing
proceeds to make one-to-four family residential and commercial real estate
loans, commercial business loans, consumer loans and to invest in mortgage-
backed and other securities. The Bank also sells insurance and other commercial
services and products through its insurance agency subsidiary.
At December 31, 2001, $112.1 million, or 64.9%, of the Bank's loans were
secured by real estate. At December 31, 2001, $76.5 million, or 44.3%, of the
Bank's loans were secured by one-to-four family residential real estate, $24.5
million, or 14.2%, of the Bank's loans were secured by commercial real estate,
and $11.1 million, or 6.4%, of the Bank's loans were home equity loans. Consumer
loans totaled $34.1 million, or 19.8% of the Bank's total loans, at December 31,
2001. The Bank also originates commercial business loans which totaled $26.4
million, or 15.3%, of total loans at December 31, 2001. The Bank's investment
securities and mortgage-backed securities portfolios totaled $78.4 million and
$53.7 million, respectively, at December 31, 2001.
In April 1999 the Bank established Oneida Preferred Funding Corp. as the
Bank's wholly-owned real estate investment trust subsidiary. At December 31,
2001 Oneida Preferred Funding Corp. held $39.8 million in mortgage and mortgage
related assets. All disclosures in the Form 10-K relating to the Bank's loans
and investments include loans and investments that are held by Oneida Preferred
Funding Corp.
1
In October 2000, the Bank acquired Bailey & Haskell Associates, Inc., which
is a wholly-owned insurance and financial services subsidiary. During 2001, two
additional insurance agencies were acquired, which were subsequently merged into
Bailey & Haskell Associates, Inc. All disclosures and financial information is
presented on a consolidated basis.
On November 22, 2001 the Company and Bank entered into an Agreement and
Plan of Merger to acquire SBC Financial Corp., the holding company parent of
State Bank of Chittenango. Pursuant to the Agreement, each share of SBC
Financial Corp.'s outstanding common stock will be converted into the right to
receive $102.60 in cash, for a total of approximately $11.9 million. As part of
the acquisition, the Bank will continue to operate the State Bank of Chittenango
as a special purpose bank limited to taking municipal deposits. The acquisition
of SBC Financial Corp., is subject to the receipt of regulatory approval and the
approval of SBC Financial Corp.'s stockholders. It is expected that the
acquisition will be completed during the second quarter of 2002.
The Bank's main office is located at 182 Main Street, Oneida, New York
13421-1676. The Bank's telephone number is (315) 363-2000.
Market Area
The Bank is a community-based savings institution that offers a variety of
financial products and services. The Bank's primary lending area is Madison
county, New York and surrounding counties, and most of the Bank's deposit
customers reside in Madison county and surrounding counties. The City of Oneida
is located approximately 30 miles from Syracuse and 20 miles from Utica. The
Bank's market area is characterized as rural, although the local economy is also
affected by economic conditions in Syracuse and Utica, New York. As of 1997, the
average household income of persons residing in Oneida and Madison counties was
below that of New York State and the United States. During the period 1980-1990
the population of Oneida county decreased by 1.04% while the population of
Madison county grew by 6.09%.
The Bank competes with commercial banks, savings banks and credit unions
for deposits and loans. In addition to the financial institutions operating in
Madison and Oneida counties, the Bank competes with a number of mortgage bankers
for the origination of loans. The largest employers in the Bank's market area
are Oneida Ltd. and The Oneida Indian Nation of New York.
Lending Activities
General. The principal lending activity of the Bank has been the
origination, for retention in its portfolio, of ARM loans collateralized by
one-to-four family residential real estate located within its primary market
area. In the current low interest rate environment, borrowers have shown a
preference for fixed-rate loans. Consequently, in recent periods the Bank has
originated fixed-rate one-to-four family loans for resale in the secondary
market without recourse and on a servicing retained basis. In order to
complement the Bank's traditional emphasis of one-to-four family residential
real estate lending, management has sought to increase the amount of higher
yielding commercial real estate loans, consumer loans and commercial business
loans. To a limited extent, the Bank will originate loans secured by
multi-family properties. The Bank does not view multi-family lending as a
significant aspect of its business.
2
Loan Portfolio Composition. Set forth below is selected information
concerning the composition of the Bank's loan portfolio in dollar amounts and in
percentages (before deductions for loans in process and allowance for loan
losses) as of the dates indicated.
At December 31,
----------------------------------------------------------------
2001 2000 1999
-------------------- ------------------- ------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in thousands)
Real estate loans:
One-to-four family ........................ $76,477 44.3% $84,386 50.7% $81,264 53.9%
Multi-family............................... 1,003 0.6 1,134 0.7 1,358 0.9
Home equity................................ 11,077 6.4 10,940 6.6 9,740 6.5
Commercial real estate..................... 23,517 13.6 18,742 11.3 16,560 11.0
------- ---- ------- ---- ------- ----
Total real estate loans.................. 112,074 64.9 115,202 69.3 108,922 72.3
---- ---- ----
Consumer loans:
Automobile loans........................... 29,569 17.1 25,818 15.5 16,768 11.1
Mobile home................................ 381 0.2 526 0.4 595 0.4
Personal loans............................. 2,691 1.6 3,450 2.1 6,901 4.6
Guaranteed student loans................... -- -- -- -- 305 0.2
Other consumer loans....................... 1,465 0.9 1,432 0.8 1,451 1.0
------- ---- ------- ---- ------- ----
Total consumer loans..................... 34,106 19.8 31,226 18.8 26,020 17.3
---- ---- ----
Commercial business loans.................... 26,385 15.3 19,865 11.9 15,727 10.4
Total consumer and commercial business loans 60,491 35.1 51,091 30.7 41,747 27.7
------- ---- ------- ---- ------- ----
Total loans.............................. 172,565 100.0% 166,293 100.0% 150,669 100.0%
======= ===== ======= ===== ======= =====
Less:
Loans in process........................... -- -- --
Allowance for loan losses.................. 1,672 1,632 1,523
------- ------- -------
Total loans receivable, net.............. $170,893 $164,661 $149,146
======== ======== ========
At December 31,
-----------------------------------------
1998 1997
-------------------- ------------------
Amount Percent Amount Percent
------ ------- ------ ------
(Dollars in thousands)
Real estate loans:
One-to-four family ........................ $82,353 61.6% $96,792 67.0%
Multi-family............................... 1,468 1.1 2,714 1.9
Home equity................................ 9,377 7.0 8,829 6.1
Commercial real estate..................... 13,499 10.1 13,868 9.6
------- ---- ------- ----
Total real estate loans.................. 106,697 79.8 122,203 84.6
---- ----
Consumer loans:
Automobile loans........................... 10,405 7.8 6,683 4.6
Mobile home................................ 717 0.5 784 0.5
Personal loans............................. 2,438 1.8 2,580 1.8
Guaranteed student loans................... 446 0.3 1,659 1.2
Other consumer loans....................... 1,547 1.2 1,017 0.7
------- ---- ------- ----
Total consumer loans..................... 15,553 11.6 12,723 8.8
---- ----
Commercial business loans.................... 11,549 8.6 9,587 6.6
Total consumer and commercial business loans 27,102 20.2 22,310 15.4
------- ---- ------- ----
Total loans.............................. $133,799 100.0% $144,513 100.0%
======== ===== ======== =====
Less:
Loans in process........................... -- 352
Allowance for loan losses.................. 1,543 1,793
------- -------
Total loans receivable, net.............. $132,256 $142,368
======== ========
3
The following table sets forth the composition of the Bank's loan portfolio by
fixed and adjustable rates at the dates indicated.
At December 31,
------------------------------------------------------------------
2001 2000 1999
-------------------- ------------------- ------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in thousands)
FIXED-RATE LOANS:
Real estate loans:
One-to-four family ....................... $21,370 12.4% $17,485 10.5% $18,208 12.1%
Multi-family.............................. -- -- -- -- -- --
Home equity............................... 6,634 3.8 6,211 3.7 5,416 3.6
Commercial real estate.................... 1,248 0.7 775 0.5 1,023 0.7
------- ---- ------- ---- ------- ----
Total real estate loans................. 29,252 16.9 24,471 14.7 24,647 16.4
------- ---- ------- ---- ------- ----
Consumer loans:
Total consumer loans...................... 33,371 19.4 30,745 18.5 25,284 16.8
Commercial business loans:
Total commercial loans.................... 13,765 8.0 12,965 7.8 10,027 6.6
------- ---- ------- ---- ------- ----
Total fixed-rate loans.................... $76,388 44.3 $68,181 41.0 $59,958 39.8
------- ---- ------- ---- ------- ----
ADJUSTABLE RATE LOANS:
Real estate loans:
One-to-four family........................ $55,107 31.9 $66,901 40.2 $63,056 41.8%
Multi-family.............................. 1,003 0.6 1,134 0.7 1,358 0.9
Home equity............................... 4,443 2.6 4,729 2.9 4,324 2.9
Commercial real estate.................... 22,269 12.9 17,967 10.8 15,537 10.3
------- ---- ------- ---- ------- ----
Total real estate loans................. 82,822 48.0 90,731 54.6 84,275 55.9
------- ---- ------- ---- ------- ----
Consumer loans:
Total consumer loans...................... 735 0.4 481 0.3 736 0.5
Commercial business loans:
Total commercial business loans........... 12,620 7.3 6,900 4.1 5,700 3.8
------- ---- ------- ---- ------- ----
Total adjustable-rate loans............... $96,177 55.7 $98,112 59.0 $90,711 60.2%
------- ---- ------- ---- ------- ----
Total loans............................... $172,565 100.0% $166,293 100.0% $150,669 100.0%
======== ===== ======== ===== ======== =====
Less:
Loans in process.......................... -- -- --
Allowance for loan losses................. 1,672 1,632 1,523
------- ---- ------- ---- ------- ----
Total loans receivable, net................. $170,893 $164,661 $149,146
======== ======== ========
At December 31,
-----------------------------------------
1998 1997
-------------------- -----------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in thousands)
FIXED-RATE LOANS:
Real estate loans:
One-to-four family ....................... $12,879 9.6% $11,563 8.0%
Multi-family.............................. -- -- -- --
Home equity............................... 4,626 3.5 2,804 1.9
Commercial real estate.................... 1,138 0.9 1,213 0.8
------- --- ------- ---
Total real estate loans................. 18,643 14.0 15,580 10.7
------- --- ------- ---
Consumer loans:
Total consumer loans...................... 14,475 10.8 12,723 8.8
Commercial business loans:
Total commercial loans.................... 5,355 4.0 1,628 1.1
------- --- ------- ---
Total fixed-rate loans.................... $38,473 28.8 $29,931 20.6
------- --- ------- ---
ADJUSTABLE RATE LOANS:
Real estate loans:
One-to-four family........................ $69,474 51.9% $85,229 59.0%
Multi-family.............................. 1,468 1.1 2,714 1.9
Home equity............................... 4,751 3.6 6,025 4.2
Commercial real estate.................... 12,361 9.2 12,655 8.8
------- --- ------- ---
Total real estate loans................. 88,054 65.8 106,623 73.9
------- --- ------- ---
Consumer loans:
Total consumer loans...................... $ 1,078 0.8 -- --
Commercial business loans:
Total commercial business loans........... 6,194 4.6 7,959 5.5
------- --- ------- ---
Total adjustable-rate loans............... $95,326 71.2 $114,582 79.4
------- --- ------- ---
Total loans............................... $133,799 100.0% $144,513 100.0%
======== ===== ======== =====
Less:
Loans in process.......................... -- 352
Allowance for loan losses................. 1,543 1,793
------- --- ------- ---
Total loans receivable, net................. $132,256 $142,368
======== ========
4
One-to-Four Family Residential Loans. The Bank's primary lending activity
is the origination of one-to-four family residential mortgage loans secured by
property located in the Bank's primary lending area. Generally, one-to-four
family residential mortgage loans are made in amounts up to 80% of the lesser of
the appraised value or purchase price of the property, however, the Bank will
originate one-to-four family loans with loan-to-value ratios of up to 97%, with
private mortgage insurance required. Generally, fixed-rate loans are originated
for terms of up to 30 years. One-to-four family fixed-rate loans are offered
with a monthly payment feature.
The Bank originates both adjustable rate and fixed-rate one-to-four family
loans. The interest rate on ARM loans is indexed to the one year Treasury Bill
rate. The Bank's ARM loans currently provide for maximum rate adjustments of 200
basis points per year and 600 basis points over the term of the loan. The Bank
offers ARM loans with initial interest rates that are below market, referred to
as "teaser rates." Residential ARM loans amortize over a maximum term of up to
30 years. ARM loans are offered with both monthly and bi-weekly payment
features. ARM loans are originated for retention in the Bank's portfolio.
As a result of the lower interest rate environment during the past year, a
greater percentage of the Bank's one-to-four family loan originations consisted
of fixed-rate one-to-four family mortgage loans. The Bank originates and
generally sells its fixed-rate one-to-four family loans on a servicing retained
basis. Such loans are sold without recourse to the Bank. At December 31, 2001,
loans serviced by the Bank for others totaled $55.5 million. During the year
ended December 31, 2001 and December 31, 2000, the Bank sold $26.6 million and
$7.8 million, respectively in fixed-rate one-to-four family loans. As of
December 31, 2001 the Company has $4.6 million of mortgage loan forward sale
commitments to hedge interest rate risk on certain committed originated loans.
The fair value of these commitments is not material.
ARM loans decrease the risk associated with changes in market interest
rates by periodically repricing, but involve other risks. As interest rates
increase, the underlying required periodic payments by the borrower increase,
thus increasing the potential for default by the borrower. At the same time, the
marketability of the underlying collateral may be adversely affected by higher
interest rates. Upward adjustment of the contractual interest rate is also
limited by the maximum periodic and lifetime interest rate adjustment permitted
by the terms of the ARM loans, and therefore, is potentially limited in
effectiveness during periods of rapidly rising interest rates. At December 31,
2001, 31.9% of the Bank's loan portfolio consisted of one-to-four family
residential loans with adjustable interest rates.
All one-to-four family residential mortgage loans originated by the Bank
include "due-on-sale" clauses, which give the Bank the right to declare a loan
immediately due and payable in the event that, among other things, the borrower
sells or otherwise disposes of the real property subject to the mortgage and the
loan is not repaid.
At December 31, 2001, approximately $76.5 million, or 44.3% of the Bank's
loan portfolio, consisted of one-to-four family residential loans. Approximately
$139,000 of such loans (representing three loans) were included in nonperforming
loans as of that date.
Home Equity Loans. The Bank offers home equity loans that are secured by
the borrower's primary residence. The Bank offers a home equity line of credit
under which the borrower is permitted to draw on the home equity line of credit
during the first ten years after it is originated and repay the outstanding
balance over a term not to exceed 25 years from the date the line of credit is
originated. The interest rates on home equity lines of credit are fixed for the
first year and adjust monthly thereafter at a margin over the prime
5
interest rate. The Bank also offers a home equity product providing for a
fixed-rate of interest. Both adjustable rate and fixed-rate home equity loans
are underwritten under the same criteria that the Bank uses to underwrite
one-to-four family fixed-rate loans. Fixed-rate home equity loans are originated
with terms not to exceed ten years. Home equity loans may be underwritten with a
loan to value ratio of 85% when combined with the principal balance of the
existing mortgage loan. The maximum amount of a home equity loan may not exceed
$250,000 unless approved by the Board of Directors. The Bank appraises the
property securing the loan at the time of the loan application (but not
thereafter) in order to determine the value of the property securing the home
equity loans. At December 31, 2001, the outstanding balances of home equity
loans totaled $11.1 million, or 6.4% of the Bank's loan portfolio.
Commercial Real Estate Loans. At December 31, 2001, $24.5 million, or 14.2%
of the total loan portfolio consisted of commercial real estate loans.
Commercial real estate loans are secured by office buildings, mixed-use
properties, religious facilities and other commercial properties. The Bank
originates adjustable rate commercial mortgage loans with maximum terms of up to
20 years. The maximum loan-to- value ratio of commercial real estate loans is
80%. At December 31, 2001, the largest commercial real estate loan had a
principal balance of $1.0 million and was secured by a medical building. This
loan is performing in accordance with its terms. As of December 31, 2001,
approximately $69,000 of commercial real estate loans (representing one loan)
were included in nonperforming loans.
In underwriting commercial real estate loans, the Bank reviews the expected
net operating income generated by the real estate to ensure that it is at least
110% of the amount of the monthly debt service; the age and condition of the
collateral; the financial resources and income level of the borrower; and the
borrower's business experience. Personal guarantees are routinely obtained from
all commercial real estate borrowers.
Loans secured by commercial real estate generally are larger than
one-to-four family residential loans and involve a greater degree of risk.
Commercial mortgage loans often involve large loan balances to single borrowers
or groups of related borrowers. Payments on these loans depend to a large degree
on the results of operations and management of the properties or underlying
businesses, and may be affected to a greater extent by adverse conditions in the
real estate market or the economy in general. Accordingly, the nature of
commercial real estate loans makes them more difficult for Bank management to
monitor and evaluate.
Consumer Lending. The Bank's consumer loans consist of automobile loans,
mobile home loans, secured personal loans (secured by bonds, equity securities
or other readily marketable collateral), and other consumer loans (consisting of
passbook loans, unsecured home improvement loans and recreational vehicle
loans). At December 31, 2001, consumer loans totaled $34.1 million, or 19.8% of
the total loan portfolio. Consumer loans are originated with terms to maturity
of three to seven years. The Bank has sought to increase its level of consumer
loans primarily through increased automobile lending. The Bank participates in a
number of indirect automobile lending programs with local automobile
dealerships. All indirect automobile loans must satisfy the Bank's underwriting
criteria for automobile loans originated directly by the Bank to the borrower
and must be approved by one of the Bank's lending officers. At December 31,
2001, loans secured by automobiles totaled $29.6 million, of which $22.4 million
were originated through the Bank's indirect automobile lending program. The Bank
has also sought to increase its level of automobile loans directly to borrowers
by increasing its marketing efforts with existing customers. Automobile loans
generally do not have terms exceeding five years. The Bank does not provide
financing for leased automobiles.
6
Consumer loans generally have shorter terms and higher interest rates than
one-to-four family mortgage loans. In addition, consumer loans expand the
products and services offered by the Bank to better meet the financial services
needs of its customers. Consumer loans generally involve greater credit risk
than residential mortgage loans because of the difference in the underlying
collateral. Repossessed collateral for a defaulted consumer loan may not provide
an adequate source of repayment of the outstanding loan balance because of the
greater likelihood of damage to, loss of or depreciation in the underlying
collateral. The remaining deficiency often does not warrant further substantial
collection efforts against the borrower beyond obtaining a deficiency judgment.
In addition, consumer loan collections depend on the borrower's personal
financial stability. Furthermore, the application of various federal and state
laws, including federal and state bankruptcy and insolvency laws, may limit the
amount that can be recovered on such loans.
The Bank's underwriting procedures for consumer loans include an assessment
of the applicant's credit history and the ability to meet existing and proposed
debt obligations. Although the applicant's creditworthiness is the primary
consideration, the underwriting process also includes a comparison of the value
of the security to the proposed loan amount. The Bank underwrites its consumer
loans internally, which the Bank believes limits its exposure to credit risks
associated with loans underwritten or purchased from brokers and other external
sources.
Commercial Business Loans. The Bank also originates commercial business
loans. Commercial business loans are originated with terms of up to seven years
and provide for rates that adjust on a monthly basis. Commercial business loans
are originated to persons with a prior relationship with the Bank or referrals
from persons with a prior relationship with the Bank. The decision to grant a
commercial business loan depends primarily on the creditworthiness and cash flow
of the borrower (and any guarantors) and secondarily on the value of and ability
to liquidate the collateral which generally consists of receivables, inventory
and equipment. The Bank generally requires annual financial statements and tax
returns from its commercial business borrowers and personal guarantees from the
commercial business borrowers. The Bank also generally requires an appraisal of
any real estate that secures the commercial business loan. At December 31, 2001,
the Bank had $26.4 million of commercial business loans which represented 15.3%
of the total loan portfolio. On such date, the largest commercial business
lending relationship totaled $2.0 million, which was an unsecured operating line
of credit advance to a local multi-national corporation. At December 31, 2001,
unsecured commercial business loans totaled $3.7 million.
Commercial business lending generally involves greater risk than
residential mortgage lending and involves risks that are different from those
associated with residential and commercial real estate lending. Real estate
lending is generally considered to be collateral based, with loan amounts based
on predetermined loan to collateral values and liquidation of the underlying
real estate collateral is viewed as the primary source of repayment in the event
of borrower default. Although commercial business loans may be collateralized by
equipment or other business assets, the liquidation of collateral in the event
of a borrower default is often an insufficient source of repayment because
equipment and other business assets may be obsolete or of limited use, among
other things. Accordingly, the repayment of a commercial business loan depends
primarily on the creditworthiness of the borrower (and any guarantors), while
liquidation of collateral is a secondary and often insufficient source of
repayment.
7
Loan Maturity Schedule. The following table sets forth certain information
as of December 31, 2001, regarding the amount of loans maturing in the Bank's
portfolio. Demand loans having no stated schedule of repayment and no stated
maturity and overdrafts are reported as due in one year or less. All loans are
included in the period in which the final contractual repayment is due.
One Three Five Ten
Within Through Through Through Through Beyond
One Three Five Ten Twenty-Five Twenty-Five
Year Years Years Years Years Years Total
---- ----- ----- ----- ----- ----- -----
(In thousands)
Real estate loans:
One-to-four family............... $ 1,263 $ 702 $ 1,849 $10,747 $42,899 $19,017 $ 76,477
Home equity...................... 47 323 2,159 8,122 426 -- 11,077
Commercial real estate........... 1,025 1,148 621 5,237 16,489 -- 24,520
----- ----- --- ----- ------ ------
Total real estate loans........ 2,335 2,173 4,629 24,106 59,814 19,017 112,074
----- ----- ----- ------ ------ ------ -------
Consumer and other loans............ 1,627 9,422 20,699 2,139 219 -- 34,106
Commercial business loans........... 9,135 5,399 7,041 4,124 686 -- 26,385
----- ----- ----- ----- --- ------
Total loans.................... $13,097 $16,994 $32,369 $30,369 $60,719 $19,017 $172,565
======= ======= ======= ======= ======= ======= ========
Fixed- and Adjustable-Rate Loan Schedule. The following table sets forth at
December 31, 2001, the dollar amount of all fixed-rate and adjustable-rate loans
due after December 31, 2002. Adjustable- and floating-rate loans are included
based on contractual maturities.
Due After December 31, 2002
----------------------------------------
Fixed Adjustable Total
----- ---------- -----
(In thousands)
Real estate loans:
One-to-four family........................ $ 20,168 $ 55,046 $ 75,214
Home equity............................... 6,587 4,443 11,030
Commercial real estate.................... 1,125 22,370 23,495
---------- ---------- -----------
Total real estate loans............... 27,880 81,859 109,739
---------- ---------- -----------
Consumer and other loans ...................... 32,171 308 32,479
Commercial business loans...................... 12,384 4,866 17,250
---------- ---------- -----------
Total loans........................... $ 72,435 $ 87,033 $ 159,468
========== ========== ===========
8
Loan Origination, Sales and Repayments. The following table sets forth the
loan origination, sales and repayment activities of the Bank for the periods
indicated. The Bank did not purchase any loans during the periods presented.
Year Ended December 31,
------------------------------------------------------
2001 2000 1999 1998
---- ---- ---- ----
(In thousands)
Originations by Type:
Adjustable Rate:
Real estate:
One-to-four family......................... $ 4,188 $ 7,351 $ 5,003 $ 5,417
Home equity................................ 2,350 2,552 1,507 2,883
Commercial real estate..................... 4,562 2,253 2,575 2,294
--------- --------- --------- --------
Total real estate loans.................. 11,100 12,156 9,115 10,594
Consumer loans................................ 506 195 370 770
Commercial business loans..................... 9,969 11,773 4,422 5,364
--------- --------- --------- --------
Total adjustable rate loans.............. 21,575 24,124 13,907 16,728
--------- --------- --------- --------
Fixed Rate:
Real estate:
One-to-four family......................... 35,173 13,136 14,989 19,113
Home equity................................ 2,135 1,362 1,985 1,656
Commercial real estate..................... 4,029 2,048 1,748 165
--------- --------- --------- --------
Total real estate loans.................. 41,337 16,546 18,722 20,934
Consumer loans................................ 23,206 25,510 22,721 13,327
Commercial business loans..................... 11,651 12,063 10,774 7,173
--------- --------- --------- --------
Total fixed-rate loans................... 76,194 54,119 52,217 41,434
--------- --------- --------- --------
Total loans originated........................... 97,769 78,243 66,124 58,162
--------- --------- --------- --------
Sales:
Real estate:
One-to-four family......................... 26,597 7,754 5,106 16,523
--------- --------- --------- --------
Consumer loans............................. -- 413 -- 2,027
--------- --------- --------- --------
Total loans sold.............................. 26,597 8,167 5,106 18,550
========= ========= ========= ========
Repayments:
Real estate:
One-to-four family......................... 20,673 9,611 16,005 22,446
Home equity................................ 4,348 2,714 3,129 3,991
Commercial real estate..................... 3,947 2,343 1,372 4,074
--------- --------- --------- --------
Total real estate loans.................. 28,968 14,668 20,506 30,511
Consumer loans................................ 20,832 20,086 12,624 9,240
Commercial business loans..................... 15,100 19,698 11,018 10,575
--------- --------- --------- --------
Total repayments......................... 64,900 54,452 44,148 50,326
--------- --------- --------- --------
Total reductions......................... 91,497 62,619 49,254 68,876
--------- --------- --------- --------
Net increases/(decreases)................ $ 6,272 $ 15,624 $ 16,870 $(10,714)
========= ========= ========= ========
Loan Approval Procedures and Authority. The Board of Directors establishes
the lending policies and loan approval limits of the Bank. Loan officers
generally have the authority to originate mortgage loans, consumer loans and
commercial business loans up to amounts established for each lending officer.
All residential loans over $300,000 must be approved by the Bank Loan Committee
(consisting of three persons; the President and/or Senior Vice President in
charge of credit administration and either one or two of the four directors
appointed to this committee). All loan relationships in excess of $300,000 and
up to $500,000 (exclusive of residential mortgages and home equity loans secured
by a lien on the borrower's primary residence) must be approved by the Bank Loan
Committee. All lending relationships in excess of $500,000 up to $1.0 million
(exclusive of residential mortgages and home equity loans secured by a lien on
the borrower's primary residence) must be approved by the Executive Committee of
the Board of Directors. All lending relationships in excess of $1.0 million must
be approved by the Board of Directors.
9
The Board annually approves independent appraisers used by the Bank. The
Bank requires an environmental site assessment to be performed by an independent
professional for all non-residential mortgage loans. It is the Bank policy to
require hazard insurance on all mortgage loans and title insurance on fixed-rate
one-to-four family loans.
Loan Origination Fees and Other Income. In addition to interest earned on
loans, the Bank receives loan origination fees. Such fees and costs vary with
the volume and type of loans and commitments made and purchased, principal
repayments and competitive conditions in the mortgage markets, which in turn
respond to the demand and availability of money.
In addition to loan origination fees, the Bank also receives other fees,
service charges and other income that consist primarily of deposit transaction
account service charges and late charges.
Loans-to-One Borrower. Savings banks are subject to the same loans-to-one
borrower limits as those applicable to national banks, which under current
regulations restrict loans to one borrower to an amount equal to 15% of
unimpaired net worth on an unsecured basis. An additional amount equal to 10% of
unimpaired net worth if the loan is secured by readily marketable collateral
(generally, financial instruments and bullion, but not real estate). The Bank's
policy provides that loans to one borrower (or related borrowers) should not
exceed 15% of the Bank's capital.
At December 31, 2001, the largest aggregate amount loaned by the Bank to
one borrower consisted of a line of credit with an outstanding balance totaling
$2.0 million. The total borrowing capacity under this line of credit is $3.0
million. This loan was performing in accordance with the terms of the loan.
Delinquencies and Classified Assets
Collection Procedures. A computer generated late notice is sent when the
loan's grace period ends. After the late notice has been mailed, accounts are
assigned to collectors for follow-up to determine reasons for delinquency and
explore payment options. Generally, loans that are 30 days delinquent will
receive a default notice from the Bank. With respect to consumer loans, the Bank
will commence efforts to repossess the collateral after the loan becomes 45 days
delinquent. Loans secured by real estate that are delinquent over 60 days are
turned over to the Collection Department Manager. Generally, after 90 days the
Bank will commence legal action.
Loans Past Due and Nonperforming Assets. Loans are reviewed on a regular
basis and are placed on nonaccrual status when, in the opinion of management,
the collection of additional interest is doubtful. Loans are placed on
nonaccrual status when either principal or interest is 90 days or more past due.
Interest accrued and unpaid at the time a loan is placed on a nonaccrual status
is reversed from interest income. At December 31, 2001, the Bank had
nonperforming loans of $208,000 and a ratio of nonperforming loans to total
assets of 0.06%. At December 31, 2001, the Bank's ratio of nonperforming assets
to total assets was 0.08%.
Real estate acquired as a result of foreclosure or by deed in lieu of
foreclosure is classified as Other Real Estate ("REO") until such time as it is
sold. When real estate is acquired through foreclosure or by deed in lieu of
foreclosure, it is recorded at its fair value, less estimated costs of disposal.
If the value of the property is less than the loan, less any related specific
loan loss provisions, the difference is charged against the allowance for loan
losses. Any subsequent write-down of REO is charged against earnings.
10
The following table sets forth delinquencies in the Bank's loan portfolio
as of December 31, 2001. When a loan is delinquent 90 days or more, the Bank
fully reverses all accrued interest thereon and ceases to accrue interest
thereafter. The Bank did not have any restructured loans within the meaning of
SFAS 114.
Loans Delinquent for:
-------------------------------------------------------------------------
60-89 Days 90 Days or More Total delinquent Loans
------------------ ------------------- ----------------------
Number Amount Number Amount Number Amount
------ ------ ------ ------ ------ ------
(Dollars in thousands)
One-to-four family.................. -- $ -- 3 $ 139 3 $ 139
Home Equity......................... -- -- -- -- -- --
Commercial real estate.............. -- -- 1 69 1 69
Consumer Loans...................... -- -- -- -- -- --
Commercial Loans.................... -- -- -- --
------- ------- ------- ------- ------- ------
Total ........................... -- $ -- 4 $ 208 4 $ 208
======= ======= ======= ======= ======= ======
11
Nonaccrual Loans and Nonperforming Assets. The following table sets forth
information regarding nonaccrual loans and other nonperforming assets.
At December 31,
------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(Dollars in thousands)
Non-accruing loans:
One-to-four family...................................... $ 139 $ 112 $ 132 $ 1,010 $ 588
Multi-family............................................ -- -- -- -- --
Commercial real estate.................................. 69 75 -- -- 242
Construction and land loans............................. -- -- -- -- --
Consumer................................................ -- -- -- 8 2
Commercial business..................................... -- -- -- 40 --
------- ------- ------- ------- ------
Total................................................. 208 187 132 1,058 832
------- ------- ------- ------- ------
Accruing loans delinquent more than 90 days:
One-to-four family...................................... $ -- $ -- $ -- $ -- 60
Multi-family............................................ -- -- -- -- --
Commercial real estate.................................. -- -- -- -- --
Construction and land loans............................. -- -- -- -- --
Consumer................................................ -- -- -- -- --
Commercial business..................................... -- -- -- -- 1
------- ------- ------- ------- ------
Total................................................. -- -- -- -- 61
------- ------- ------- ------- ------
Total nonperforming loans................................. $ 208 $ 187 $ 132 $ 1,058 $ 893
======= ======= ======= ======= =======
Foreclosed assets:
One-to-four family...................................... $ 77 $ 55 $ 76 $ 179 $ 263
Multi-family............................................ -- -- -- -- --
Commercial real estate.................................. -- -- 18 45 45
Construction and land loans............................. -- -- -- -- --
Consumer................................................ -- -- 1 -- --
Commercial business..................................... -- -- -- -- --
------- ------- ------- ------- ------
Total................................................. $ 77 $ 55 $ 95 $ 224 $ 308
======= ======= ======= ======= =======
Total nonperforming loans as a percentage of total assets. 0.06% 0.06% 0.05% 0.43% 0.42%
======= ======= ======= ======= =======
Total nonperforming assets................................ $ 285 $ 242 $ 227 $ 1,282 $ 1,201
======= ======= ======= ======= =======
Total nonperforming assets as a percentage of total assets 0.08% 0.08% 0.08% 0.52% 0.57%
======= ======= ======= ======= =======
During the years ended December 31, 2001 and 2000, respectively, gross
interest income of $6,300 and $7,500 would have been recorded on nonaccruing
loans under their original terms, if the loans had been current throughout the
period. No interest income was recorded on nonaccruing loans during the years
ended December 31, 2001 and 2000.
Classification of Assets. On the basis of management's review of its
assets, at December 31, 2001, the Bank had classified a total of $2.0 million of
loans as follows (in thousands):
Special Mention......................... $ 792
Substandard............................. 1,214
Doubtful assets......................... --
Loss assets............................. --
---------
Total ............................. $ 2,006
=========
General loss allowance.................. $ 1,450
=========
Specific loss allowance................. 222
=========
Net Charge-offs......................... 440
=========
12
Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the risk
inherent in the loan portfolio and current economic conditions. The allowance is
established based upon management's evaluation of the risks inherent in the loan
portfolio, the composition of the loan portfolio and the general economy to
increase allowances for losses as a percentage of total loans. Such evaluation
also includes a review of all loans on which full collectibility may not be
reasonably assured, considering among other matters, the estimated net
realizable value or the fair value of the underlying collateral, economic
conditions, historical loan loss experience, geographic concentrations and other
factors that warrant recognition in providing for an adequate loan loss
allowance. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Bank's allowance for loan
losses and valuation of real estate owned. Such agencies may require us to
recognize additions to the allowance based on their judgment about information
available to them at the time of their examination. At December 31, 2001, the
total allowance was $1.7 million, which amounted to 0.98% of total loans, net
and 803.8% of nonperforming loans. Management considers whether the allowance
should be adjusted to protect against risks in the loan portfolio. Management
applies fixed percentages for each category of performing loans not designated
as problem loans to determine an additional component of the allowance to
protect against unascertainable risks inherent in any portfolio of performing
loans. Management monitors and modifies the level of the allowance for loan
losses in order to maintain it at a level which it considers adequate to provide
for potential loan losses. For the years ended December 31, 2001 and 2000, the
Bank had charge-offs of $503,000 and $311,000, respectively, against this
allowance.
The Bank evaluates the adequacy of the allowance for loan losses and
determines the appropriate level of provisions for loan losses by applying fixed
percentages to each category of performing loans and classified loans. The
allowance adjustment is based upon the net change in each portfolio category
since the prior quarter to reflect the ongoing shifts in the portfolio toward
higher risk loan categories, such as consumer loans, commercial business loans
and commercial real estate loans. Management believes the current method of
determining the adequacy of the allowance is prudent in light of the Bank's
intention to continue to diversify its lending operations through the increased
origination of consumer loans, commercial business loans and commercial real
estate loans.
13
Analysis of the Allowance For Loan Losses. The following table sets forth
the analysis of the allowance for loan losses for the periods indicated.
December 31,
------------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(Dollars in thousands)
Balance at the beginning of period........................ $1,632 $1,523 $1,543 $1,793 $1,546
Charge-offs:
One-to-four family..................................... 8 7 91 117 72
Commercial real estate................................. 25 -- -- -- 118
Construction and land loans............................ -- -- -- -- --
Consumer............................................... 294 260 246 196 82
Commercial business.................................... 176 44 1 35 27
------ ------ ------ ------ ------
Total................................................ 503 311 338 348 299
------ ------ ------ ------ ------
Recoveries:
One-to-four family..................................... 1 3 3 15 14
Commercial real estate................................. -- -- -- 12 2
Construction and land loans............................ -- -- -- -- --
Consumer............................................... 50 66 85 71 53
Commercial business.................................... 12 6 1 -- --
------ ------ ------ ------ ------
Total................................................ 63 75 89 98 69
------ ------ ------ ------ ------
Net charge-offs........................................... (440) (236) (249) (250) (230)
Additions charged to operations........................... 480 345 229 -- 477
------ ------ ------ ------ ------
Balance at end of period.................................. $1,672 $1,632 $1,523 $1,543 $1,793
====== ====== ====== ====== ======
Allowance for loan losses as a percentage of total loans
receivable, net........................................ 0.98% 0.99% 1.02% 1.17% 1.26%
====== ====== ====== ====== ======
Ratio of net charge-offs to average loans................. 0.26% 0.15% 0.18% 0.18% 0.16%
====== ====== ====== ====== ======
Ratio of net charge-offs to nonperforming loans........... 211.54% 126.20% 188.64% 23.63% 25.76%
====== ====== ====== ====== ======
14
Allocation of Allowance for Loan Losses. The following table sets forth the
allocation of the allowance for loan losses by loan category for the periods
indicated.
At December 31,
------------------------------------------------------------------------------
2001 2000
------------------------------------- ---------------------------------------
Percent Percent
of Loans of Loans
Amount of Loan in Each Amount of Loan In Each
Loan Loss Amounts Category to Loan Loss Amounts Category
Allowance by Category Total Loans Allowances by Category Total Loans
--------- ----------- ----------- ---------- ----------- -----------
(Dollars in thousands)
Residential mortgages................... $ 382 $ 87,554 50.74% $ 487 $ 95,326 57.3%
Commercial real estate.................. 366 24,520 14.21 280 19,876 12.0
Consumer ............................... 437 34,106 19.76 422 31,226 18.8
Commercial business..................... 487 26,385 15.29 434 19,865 11.9
Unallocated............................. -- -- -- 9 -- --
Total.......................... $ 1,672 $ 172,565 100.00% $ 1,632 $ 166,293 100.00%
At December 31,
--------------------------------------
1999
--------------------------------------
Percent
of Loans
Amount of Loan In Each
Loan Loss Amounts Category to
Allowance by Category Total Loans
--------- ----------- -----------
(Dollars in thousands)
Residential mortgages................... $ 469 $ 91,004 60.40%
Commercial real estate.................. 235 17,918 11.89
Consumer ............................... 358 26,020 17.27
Commercial business..................... 295 15,727 10.44
Unallocated............................. 166 -- --
Total.......................... $ 1,523 $ 150,669 100.00%
------------------------------------------------------------------------------
At December 31,
1998 1997
------------------------------------- ---------------------------------------
Percent Percent
of Loans of Loans
Amount of Loan in Each Amount of Loan In Each
Loan Loss Amounts Category to Loan Loss Amounts Category
Allowance by Category Total Loans Allowances by Category Total Loans
--------- ----------- ----------- ---------- ----------- -----------
(Dollars in thousands)
Residential mortgages................... $ 610 $ 91,730 68.56% $ 455 $ 105,621 73.09%
Commercial real estate.................. 231 14,967 11.19 260 16,582 11.47
Consumer ............................... 249 15,553 11.62 138 12,723 8.80
Commercial business..................... 250 11,549 8.63 171 9,587 6.64
Unallocated............................. 203 -- -- 769 -- --
Total.......................... $ 1,543 $ 133,799 100.00 $ 1,793 $ 144,513 100.00%
15
Securities Investment Activities
The securities investment policy is established by the Board of Directors.
This policy dictates that investment decisions will be made based on the safety
of the investment, liquidity requirements, potential returns, cash flow targets
and desired risk parameters. In pursuing these objectives, management considers
the ability of an investment to provide earnings consistent with factors of
quality, maturity, marketability and risk diversification.
The Bank's current policies generally limit securities investments to U.S.
Government and agency securities, tax-exempt bonds, public utilities debt
obligations, corporate debt obligations and corporate equity securities. In
addition, the Bank's policy permits investments in mortgage related securities,
including securities issued and guaranteed by Fannie Mae, Freddie Mac and GNMA.
In the past, the Bank invested in privately issued collateralized mortgage
obligations ("CMOs"), but has only invested in agency issued CMOs in recent
years. The Bank's current securities investment strategy utilizes a risk
management approach of diversified investing between three categories: short-,
intermediate- and long-term. The emphasis of this approach is to increase
overall investment securities yields while managing interest rate risk. The Bank
will only invest in securities rated as investment grade by a nationally
recognized investment rating agency. The Bank does not engage in any hedging
transactions, such as interest rate swaps or caps.
Investment Securities. At December 31, 2001, the Bank had $78.4 million, or
22.2% of total assets, invested in investment securities, which consisted
primarily of U.S. Government obligations, tax-exempt securities, public utility
and corporate obligations, a mutual fund and equity investments in corporate and
FHLB stock. The corporate debt obligations reported includes trust preferred
investments with a book value of $9.5 million and an estimated market value of
$9.1 million at December 31, 2001. SFAS No. 115 requires the Bank to designate
its securities as held to maturity, available for sale or trading, depending on
the Bank's ability and intent regarding its investments. The Bank does not have
a trading portfolio. Investment securities are classified as available for sale.
At December 31, 2001, the Bank's investment securities portfolio had a weighted
average life of 7.32 years.
16
Cost of Investment Securities. The following table sets forth certain
information regarding the investment securities and other interest earning
assets as of the dates indicated.
December 31,
----------------------------------------------------------------
2001 2000 1999
---------------- ---------------- -----------------
Percent of Percent of Percent of
Cost Total Cost Total Cost Total
---- ----- ---- ----- ---- -----
(Dollars in thousands)
Investment securities available for sale:
U.S. government securities........................... $ -- --% $ -- 0.00% $ -- 0.00%
Federal agency securities............................ 25,035 31.63 47,795 52.23 54,803 61.73
Corporate debt securities............................ 31,663 40.00 17,189 18.78 11,420 12.86
Tax exempt bonds..................................... 3,480 4.40 2,569 2.81 3,624 4.08
Public utilities..................................... 200 0.25 200 0.22 200 0.23
Equity securities.................................... 14,944 18.88 19,806 21.64 16,183 18.23
-------- ------ -------- ------ --------- ------
Subtotal........................................... 75,322 95.16 87,559 95.68 86,230 97.13
FHLB stock........................................... 3,830 4.84 3,950 4.32 2,547 2.87
-------- ------ -------- ------ --------- ------
Total.............................................. $ 79,152 100.00% $ 91,509 100.00% $ 88,777 100.00%
======== ====== ======== ====== ========= ======
Average remaining life of investment securities........ 7.32 Years 6.40 Years 5.09 Years
Other interest earning assets:
Interest-bearing deposits with banks................. 4,909 33.15 297 15.7 873 100.00
Federal funds sold................................... 9,900 66.85 1,600 84.3 -- --
-------- ------ -------- ------ --------- ------
Total............................................ $ 14,809 100.00% $ 1,897 100.00% $ 873 100.00%
======== ====== ======== ====== ========= ======
December 31,
----------------------------------------
1998 1997
---------------- -----------------
Percent of Percent of
Cost Total Cost Total
---- ----- ---- -----
(Dollars in thousands)
Investment securities available for sale:
U.S. government securities........................... 1,000 1.63 2,002 4.67
Federal agency securities............................ 37,346 60.93 24,504 57.19
Corporate debt securities............................ 15,580 25.42 11,833 27.62
Tax exempt bonds..................................... 3,919 6.40 2,162 5.05
Public utilities..................................... 300 0.49 750 1.75
Equity securities.................................... 1,918 3.13 1,288 3.02
--------- ------ --------- ------
Subtotal........................................... 60,063 98.00 42,539 99.30
FHLB stock........................................... 1,228 2.00 306 0.70
--------- ------ --------- ------
Total.............................................. $ 61,291 100.00% $ 42,845 100.00%
========= ====== ========= ======
Average remaining life of investment securities........ 3.92 Years 1.89 Years
Other interest earning assets:
Interest-bearing deposits with banks................. 261 1.17 115 6.34
Federal funds sold................................... 22,100 98.83 1,700 93.66
--------- ------ --------- ------
Total............................................ $ 22,361 100.00% $ 1,815 100.00%
========= ====== ========= ======
17
Investment Portfolio Maturities. The following table sets forth the
scheduled maturities, cost, market value and weighted average yields for the
Bank's investment portfolio at December 31, 2001.
December 31, 2001
------------------------------------------------------------------------------
Less Than 1 to 5 5 to 10 Over
1 Year Years Years 10 Years Total Securities
------ ----- ----- -------- ----------------
Cost Cost Cost Cost Cost Market Value
---- ---- ---- ---- ---- ------------
(Dollars in thousands)
Federal agency obligations.......... $ -- $ 14,990 $ 8,498 $ 1,547 $ 25,035 $25,238
Corporate bonds..................... -- 2,391 3,793 25,479 31,663 30,285
Public utilities.................... -- -- 200 -- 200 201
Tax exempt bonds.................... 47 1,449 1,487 497 3,480 3,498
Other .............................. -- -- -- 18,774 18,774 19,168
------- -------- --------- -------- -------- -------
Total securities.................. $ 47 $ 18,830 $ 13,978 $ 46,297 $ 79,152 $78,390
======= ======== ========= ======== ======== =======
Weighted average yield(1)........... 10.50% 5.91% 5.34% 5.86% 5.78% 5.48%
________________
(1) Weighted average yield has not been adjusted to reflect tax equivalent
adjustments.
Mortgage-Backed Securities. The Bank purchases mortgage-backed securities
in order to: (i) generate positive interest rate spreads with minimal
administrative expense; (ii) lower the Bank's credit risk as a result of the
guarantees provided by Freddie Mac, Fannie Mae, and GNMA; and (iii) increase
liquidity. At December 31, 2001, the amortized cost of mortgage-backed
securities totaled $53.2 million or 15.1% of total assets, all of which were
classified as available for sale. The mortgage-backed securities portfolio had
coupon rates ranging from 3.08% to 8.50%, a weighted average yield of 6.14% and
a weighted average life (including payment assumption) of 16.7 years at December
31, 2001. The estimated fair value of the Bank's mortgage-backed securities at
December 31, 2001 was $53.7 million which was $500,000 higher than the amortized
cost of $53.2 million.
Mortgage-backed securities are created by the pooling of mortgages and the
issuance of a security with an interest rate that is less than the interest rate
on the underlying mortgages. Mortgage-backed securities typically represent a
participation interest in a pool of single-family or multi-family mortgages,
although the Bank focuses its investments on mortgage related securities backed
by single-family mortgages. The issuers of such securities (generally U.S.
Government agencies and government sponsored enterprises, including Fannie Mae,
Freddie Mac and GNMA) pool and resell the participation interests in the form of
securities to investors, such as the Bank, and guarantee the payment of
principal and interest to these investors. Mortgage-backed securities generally
yield less than the loans that underlie such securities because of the cost of
payment guarantees and credit enhancements. In addition, mortgage related
securities are usually more liquid than individual mortgage loans and may be
used to collateralize certain liabilities and obligations of the Bank.
Investments in mortgage-backed securities involve a risk that actual prepayments
will be greater than estimated over the life of the security, which may require
adjustments to the amortization of any premium or accretion of any discount
relating to such instruments thereby reducing the net yield on such securities.
There is also reinvestment risk associated with the cash flows from such
securities or in the event such securities are redeemed by the issuer. In
addition, the market value of such securities may be adversely affected by
changes in interest rates. Management reviews prepayment estimates periodically
to ensure that prepayment assumptions are reasonable considering the underlying
collateral for the securities at issue and current interest rates and to
determine the yield and estimated maturity of the Bank's mortgage- backed
securities portfolio. Of the Bank's $53.2 million mortgage-backed securities
portfolio at December 31, 2001, $349,000 with a weighted average yield of 7.0%
had contractual maturities within five years, $2.0 million with a weighted
average yield of 6.37% had contractual maturities of five to ten years and $50.9
million with a weighted average yield of 6.13% had contractual maturities of
over ten years. However, the
18
actual maturity of a mortgage-backed security may be less than its stated
maturity due to prepayments of the underlying mortgages. Prepayments that are
faster than anticipated may shorten the life of the security and may result in a
loss of any premiums paid and thereby reduce the net yield on such securities.
Although prepayments of underlying mortgages depend on many factors, the
difference between the interest rates on the underlying mortgages and the
prevailing mortgage interest rates generally is the most significant determinant
of the rate of prepayments. During periods of declining mortgage interest rates,
refinancing generally increases and accelerates the prepayment of the underlying
mortgages and the related security. Under such circumstances, the Bank may be
subject to reinvestment risk because, to the extent that the Bank's mortgage
related securities prepay faster than anticipated, the Bank may not be able to
reinvest the proceeds of such repayments and prepayments at a comparable rate of
return. Conversely, in a rising interest rate environment prepayments may
decline, thereby extending the estimated life of the security and depriving the
Bank of the ability to reinvest cash flows at the increased rates of interest.
19
Mortgage-Backed Securities. Set forth below is information relating to the
Bank's mortgage-backed securities for the periods indicated.
December 31,
----------------------------------------------------------------
2001 2000 1999
---------------- ---------------- -----------------
Percent of Percent of Percent of
Cost Total Cost Total Cost Total
---- ----- ---- ----- ---- -----
(Dollars in thousands)
Mortgage-backed securities available for sale:
GNMA......................................... $14,661 27.57% $13,349 32.94 $ 7,023 25.60%
FNMA......................................... 16,105 30.28 13,336 32.91 14,824 54.05
FHLMC........................................ 19,395 36.47 13,793 34.03 5,518 20.12
CMOs......................................... 2,140 4.02 50 0.12 62 0.23
Small Business Administration................ 883 1.66 -- -- -- --
------- ------ ------- ------ ------- ------
Total.................................... $53,184 100.00% $40,528 100.00% $27,427 100.00%
======= ====== ======= ====== ======= ======
December 31,
----------------------------------------
1998 1997
----------------- -----------------
Percent of Percent of
Cost Total Cost Total
---- ----- ---- -----
(Dollars in thousands)
Mortgage-backed securities available for sale:
GNMA......................................... $ 12 0.06% $ 16 0.14%
FNMA......................................... 13,851 69.74 7,752 66.40
FHLMC........................................ 5,924 29.82 3,808 32.61
CMOs......................................... 76 0.38 99 0.85
Small Business Administration................ -- -- -- --
------- ------ ------- ------
Total.................................... $19,863 100.00% $11,675 100.00%
======= ====== ======= ======
20
Sources of Funds
General. The primary sources of the Bank's funds for use in lending,
investing and for other general purposes are deposits, repayments and
prepayments of loans and securities, proceeds from sales of loans and
securities, and proceeds from maturing securities and cash flows from
operations.
Deposits. The Bank offers a variety of deposit accounts with a range of
interest rates and terms. The Bank's deposit accounts consist of savings, NOW
accounts, noninterest-bearing checking accounts and money market accounts and
certificates of deposit. The Bank also offers IRAs and other qualified plan
accounts.
At December 31, 2001, deposits totaled $228.2 million. At December 31,
2001, the Bank had a total of $121.7 million in certificates of deposit, of
which $89.9 million had maturities of one year or less. Although the Bank has a
significant portion of its deposits in shorter term certificates of deposit,
management monitors activity on these accounts. Based on historical experience
and the Bank's current pricing strategy, management believes it will retain a
large portion of such accounts upon maturity. At December 31, 2001 certificates
of deposit with balances of $100,000 or more totaled $27.3 million.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market rates, prevailing interest rates and
competition. Deposits are obtained predominantly from the areas in which the
Bank's branch offices are located. The Bank relies primarily on competitive
pricing of its deposit products and customer service and long-standing
relationships with customers to attract and retain these deposits; however,
market interest rates and rates offered by competing financial institutions
significantly affect the Bank's ability to attract and retain deposits. The Bank
uses traditional means of advertising its deposit products, including radio and
print media and it generally does not solicit deposits from outside its market
area. While certificates of deposit in excess of $100,000 are accepted by the
Bank, and may be subject to preferential rates, the Bank does not actively
solicit such deposits as they are more difficult to retain than core deposits.
Historically, the Bank has not used brokers to obtain deposits.
The following table sets forth the deposit activities of the Bank for the
periods indicated.
Year Ended December 31,
------------------------------
2001 2000 1999
---- ---- ----
(Dollars in thousands)
Opening balance.................. $ 202,755 $ 189,120 $194,205
Deposits......................... 1,448,285 1,008,188 979,766
Withdrawals...................... (1,430,907) (1,002,146) (992,067)
Interest credited................ 8,030 7,593 7,216
--------- --------- --------
Ending balance................... $ 228,163 $ 202,755 $189,120
--------- --------- --------
Net increase (decrease).......... $ 25,408 $ 13,635 $ (5,085)
========= ========= ========
Percent increase (decrease)...... 12.53% 7.21% (2.62)%
========= ========= ========
21
The following table indicates the amount of the Bank's certificates of
deposit by time remaining until maturity as of December 31, 2001.
Maturity
----------------------------------------------
3 Months Over 3 to 6 Over 6 to 12 Over 12
or Less Months Months Months Total
------- ------ ------ ------ -----
(In thousands)
Certificates of deposit less than $100,000........ $ 18,599 $ 17,982 $30,675 $27,094 $ 94,350
Certificates of deposit of $100,000 or more....... 8,532 4,754 9,389 4,651 27,326
-------- -------- ------- ------- --------
Total of certificates of deposit.................. $ 27,131 $ 22,736 $40,064 $31,745 $121,676
======== ======== ======= ======= ========
The following tables set forth information, by various rate categories,
regarding the dollar balance of deposits by types of deposit for the periods
indicated.
December 31,
--------------------------------------------------------------
2001 2000 1999
------------------ ------------------ ------------------
Amount Percent Amount Percent Amounts Percent
------ ------- ------ ------- ------- -------
(Dollars in thousands)
Transactions and savings deposits:
Noninterest-bearing......................... $ 29,882 13.10% $ 22,672 11.18% $ 19,560 10.35%
Savings accounts............................ 44,459 19.48 43,851 21.63 43,648 23.08
NOW accounts................................ 8,455 3.71 8,800 4.34 8,120 4.29
Money market accounts....................... 23,691 10.38 17,086 8.43 14,737 7.79
-------- ----- -------- ----- -------- -----
Total..................................... 106,487 46.67 92,409 45.58 86,065 45.51
-------- ----- -------- ----- -------- -----
Certificates of deposit:
0.00-3.99%.................................. 25,047 10.98 4,863 2.40 3,419 1.81
4.00-5.99%.................................. 50,732 22.23 57,027 28.12 87,850 46.45
6.00-7.99%.................................. 45,897 20.12 48,456 23.90 11,786 6.23
-------- ----- -------- ----- -------- -----
Total certificates of deposit............. 121,676 53.33 110,346 54.42 103,055 54.49
-------- ----- -------- ----- -------- -----
Total deposits.............................. $228,163 100.00% $202,755 100.00% $189,120 100.00%
======== ====== ======== ====== ======== ======
The following table sets forth the amount and remaining maturities of the
Bank's certificates of deposit accounts at December 31, 2001.
Percent
2.00-3.99% 4.00-5.99% 6.00-7.99% Total of Total
--------- --------- --------- ----- ---------
(Dollars in thousands)
Certificate accounts maturing in quarter ending:
December 31, 2001........................... $ 4,011 $ -- $ -- $ 4,011 3.29%
March 31, 2002 ............................. 8,038 8,422 6,660 23,120 19.00
June 30, 2002............................... 4,507 12,355 5,874 22,736 18.68
September 30, 2002.......................... 852 9,178 14,669 24,699 20.30
December 31, 2002........................... 3,799 3,396 8,170 15,365 12.63
March 31, 2003.............................. 1,292 4,958 1,192 7,442 6.16
June 30, 2003............................... 733 2,901 1,589 5,223 4.29
September 30, 2003.......................... -- 1,884 227 2,111 1.73
December 31, 2003........................... 889 1,274 611 2,774 2.28
March 31, 2004.............................. -- 699 1,008 1,707 1.40
June 30, 2004............................... -- 1,015 173 1,188 0.97
September 30, 2004.......................... 250 1,321 824 2,395 1.96
December 31, 2004........................... 306 1,048 11 1,365 1.12
Thereafter.................................. 370 2,281 4,889 7,540 6.19
------ ------ ------ ------- ------
Total .................................... 25,047 50,732 45,897 121,676 100.00%
====== ====== ====== ======= ======
Percent of total............................ 20.58% 41.70% 37.72% 100.00%
====== ====== ====== =======
22
Borrowed Funds. Set forth below is a schedule detailing the Bank's borrowings.
At December 31,
------------------------------
2001 2000 1999
---- ---- ----
(Dollars in thousands)
Short-Term Borrowings:
Repurchase Agreements - FHLB......................................... $ -- $ 7,000 $14,000
Term Advances - FHLB................................................. 11,600 5,000 --
Overnight Advance - FHLB............................................. -- -- 200
Long-Term Borrowings:
Repurchase Agreements - FHLB......................................... 36,000 31,000 20,000
Term Advances - FHLB................................................. 29,000 29,100 16,000
-------- -------- -------
Total Borrowings................................................... $ 76,600 $ 72,100 $50,200
-------- -------- -------
Weighted Average interest cost of short-term borrowings during the year 5.02% 6.23% 5.71%
-------- -------- -------
Weighted Average interest cost of long-term borrowings during the year. 5.15% 6.03% 5.32%
-------- -------- -------
Average Balance of borrowings outstanding during the year.............. $ 74,904 $ 65,856 $32,841
-------- -------- -------
Trust Activities. The Bank provides trust and investment services, acts as
executor or administrator of estates and as trustee or custodian for various
types of trusts. Trust services are offered through the Bank's Trust Department.
Services include fiduciary services for trusts and estates, money management and
custodial services. At December 31, 2001, the Bank maintained 304
trust/fiduciary accounts, with total assets of $49.5 million under management as
compared to 307 trust/fiduciary accounts with $37.7 million total assets at
December 31, 2000. Management anticipates that in the future the Trust
Department will become a more significant component of the Bank's business.
Insurance Activities
On October 2, 2000, the Bank completed the acquisition of Bailey & Haskell
Associates, Inc., ("B&H"), an insurance agency located in Central New York
State. B&H has offices in Oneida, Canastota, New Hartford and Syracuse. B&H is a
full-service insurance and financial services firm with over 60 employees
providing services to over 10,000 customers. The addition of insurance and
financial services enables the Bank to continue evolving from a traditional
depository institution into a financial services organization. B&H offers
personal and commercial property insurance, life insurance, pension plan
services, mutual funds and annuity sales, and other products and services. B&H
represents many insurance companies including, Travelers, CNA, Hartford,
Progressive, Utica National, Chubb and many more. During 2001, the Bank also
completed the acquisition of two additional insurance agencies.
Competition
Competition in the banking and financial services industry is intense. The
Bank competes with commercial banks, savings institutions, mortgage banking
firms, credit unions, finance companies, mutual funds, insurance companies, and
brokerage and investment banking firms operating locally and elsewhere. Many of
these competitors have substantially greater resources and lending limits than
the Bank and may offer certain services that the Bank does not or cannot
provide. Moreover, credit unions which offer substantially the same services as
the Bank, are not subject to federal or state income taxation. Trends toward the
consolidation of the financial services industry, and the removal of
restrictions on interstate branching and banking powers may make it more
difficult for smaller institutions such as the Bank to compete effectively with
large national and regional banking institutions. The Bank's profitability
depends upon its continued ability to successfully compete in its market area.
23
Personnel
As of December 31, 2001, the Bank had 114 full-time employees and 12
part-time employees. The employees are not represented by a collective
bargaining unit and the Bank considers its relationship with its employees to be
good.
Regulation
General. The Bank is a New York-chartered stock savings bank and its
deposit accounts are insured up to applicable limits by the FDIC through the
BIF. The Bank is subject to extensive regulation by the Department, as its
chartering agency, and by the FDIC, as its deposit insurer. The Bank is required
to file reports with, and is periodically examined by, the FDIC and the
Superintendent concerning its activities and financial condition and must obtain
regulatory approvals prior to entering into certain transactions, including, but
not limited to, mergers with or acquisitions of other banking institutions. The
Bank is a member of the FHLB of New York and is subject to certain regulations
by the Federal Home Loan Bank System. On July 18, 2001 the Company and the
Mutual Holding Company completed their conversion to federal charters.
Consequently, they are subject to regulations of the Office of Thrift
Supervision ("OTS") as savings and loan holding companies. Any change in such
regulations, whether by the Department, the FDIC, or the OTS could have a
material adverse impact on the Bank, the Company, or the Mutual Holding Company.
Regulatory requirements applicable to the Bank, the Company and the Mutual
Holding Company are referred to below or elsewhere herein.
New York Bank Regulation. The exercise by an FDIC-insured savings bank of
the lending and investment powers under the New York State Banking Law is
limited by FDIC regulations and other federal law and regulations. In
particular, the applicable provisions of New York State Banking Law and
regulations governing the investment authority and activities of an FDIC insured
state-chartered savings bank have been substantially limited by the Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") and the FDIC
regulations issued pursuant thereto.
The Bank derives its lending, investment and other authority primarily from
the applicable provisions of New York State Banking Law and the regulations of
the Department, as limited by FDIC regulations. Under these laws and
regulations, savings banks, including the Bank, may invest in real estate
mortgages, consumer and commercial loans, certain types of debt securities,
including certain corporate debt securities and obligations of federal, state
and local governments and agencies, certain types of corporate equity securities
and certain other assets. Under the statutory authority for investing in equity
securities, a savings bank may invest up to 7.5% of its assets in corporate
stock, with an overall limit of 5% of its assets invested in Common Stock.
Investment in the stock of a single corporation is limited to the lesser of 2%
of the outstanding stock of such corporation or 1% of the savings bank's assets,
except as set forth below. Such equity securities must meet certain earnings
ratios and other tests of financial performance. A savings bank's lending powers
are not subject to percentage of assets limitations, although there are limits
applicable to single borrowers. A savings bank may also, pursuant to the
"leeway" power, make investments not otherwise permitted under the New York
State Banking Law. This power permits investments in otherwise impermissible
investments of up to 1% of assets in any single investment, subject to certain
restrictions and to an aggregate limit for all such investments of up to 5% of
assets. Additionally, in lieu of investing in such securities in accordance with
and reliance upon the specific investment authority set forth in the New York
State Banking Law, savings banks are authorized to elect to invest under a
"prudent person" standard in a wider range of investment securities as compared
to the types of investments permissible under such specific
24
investment authority. However, in the event a savings bank elects to utilize the
"prudent person" standard, it will be unable to avail itself of the other
provisions of the New York State Banking Law and regulations which set forth
specific investment authority. The Bank has not elected to conduct its
investment activities under the "prudent person" standard. A savings bank may
also exercise trust powers upon approval of the Department.
New York State chartered savings banks may also invest in subsidiaries
under their service corporation investment authority. A savings bank may use
this power to invest in corporations that engage in various activities
authorized for savings banks, plus any additional activities which may be
authorized by the Banking Board. Investment by a savings bank in the stock,
capital notes and debentures of its service corporations is limited to 3% of the
bank's assets, and such investments, together with the bank's loans to its
service corporations, may not exceed 10% of the savings bank's assets.
Furthermore, New York banking regulations impose requirements on loans which a
bank may make to its executive officers and directors and to certain
corporations or partnerships in which such persons have equity interests. These
requirements include, but are not limited to, requirements that (i) certain
loans must be approved in advance by a majority of the entire board of trustees
and the interested party must abstain from participating directly or indirectly
in the voting on such loan, (ii) the loan must be on terms that are not more
favorable than those offered to unaffiliated third parties, and (iii) the loan
must not involve more than a normal risk of repayment or present other
unfavorable features.
Under the New York State Banking Law, the Superintendent may issue an order
to a New York State chartered banking institution to appear and explain an
apparent violation of law, to discontinue unauthorized or unsafe practices and
to keep prescribed books and accounts. Upon a finding by the Department that any
director, trustee or officer of any banking organization has violated any law,
or has continued unauthorized or unsafe practices in conducting the business of
the banking organization after having been notified by the Superintendent to
discontinue such practices, such director, trustee or officer may be removed
from office after notice and an opportunity to be heard. The Bank does not know
of any past or current practice, condition or violation that might lead to any
proceeding by the Superintendent or the Department against the Bank or any of
its directors, trustees or officers.
Insurance of Accounts and Regulation by the FDIC. The Bank is a member of
the BIF, which is administered by the FDIC. Deposits are insured up to
applicable limits by the FDIC and such insurance is backed by the full faith and
credit of the U.S. Government. As insurer, the FDIC imposes deposit insurance
premiums and is authorized to conduct examinations of and to require reporting
by FDIC-insured institutions. It also may prohibit any FDIC-insured institution
from engaging in any activity the FDIC determines by regulation or order to pose
a serious risk to the FDIC. The FDIC also has the authority to initiate
enforcement actions against savings banks, after giving the Superintendent an
opportunity to take such action, and may terminate the deposit insurance if it
determines that the institution has engaged or is engaging in unsafe or unsound
practices or is in an unsafe or unsound condition.
25
The FDIC establishes deposit insurance premiums based upon the risks a
particular bank or savings association poses to its deposit insurance funds.
Under the risk-based deposit insurance assessment system, the FDIC assigns an
institution to one of three capital categories based on the institution's
financial information, as of the reporting period ending six months before the
assessment period, consisting of: (i) well capitalized; (ii) adequately
capitalized; or (iii) undercapitalized and one of three supervisory
subcategories within each capital group. With respect to the capital ratios,
institutions are classified as well capitalized or adequately capitalized using
ratios that are substantially similar to the prompt corrective action capital
ratios discussed above. Any institution that does not meet these two definitions
is deemed to be undercapitalized
for this purpose. The supervisory subgroup to which an institution is assigned
is based on a supervisory evaluation provided to the FDIC by the institution's
primary federal regulator and information that the FDIC determines to be
relevant to the institution's financial condition and the risk posed to the
deposit insurance funds (which may include, if applicable, information provided
by the institution's state supervisor). An institution's assessment rate depends
on the capital category and supervisory category to which it is assigned. Under
the final risk-based assessment system, there are nine assessment risk
classifications (i.e., combinations of capital groups and supervisory subgroups)
to which different assessment rates are applied. Assessments rates for deposit
insurance currently range from 0 basis points to 27 basis points. The capital
and supervisory subgroup to which an institution is assigned by the FDIC is
confidential and may not be disclosed. The Bank's rate of deposit insurance
assessments will depend upon the category and subcategory to which the Bank is
assigned by the FDIC. Any increase in insurance assessments could have an
adverse effect on the earnings of the Bank.
Regulatory Capital Requirements. The FDIC has adopted risk-based capital
guidelines to which the Bank is subject. The guidelines establish a systematic
analytical framework that makes regulatory capital requirements more sensitive
to differences in risk profiles among banking organizations. The Bank is
required to maintain certain levels of regulatory capital in relation to
regulatory risk-weighted assets. The ratio of such regulatory capital to
regulatory risk-weighted assets is referred to as the Bank's "risk-based capital
ratio." Risk-based capital ratios are determined by allocating assets and
specified off-balance sheet items to four risk-weighted categories ranging from
0% to 100%, with higher levels of capital being required for the categories
perceived as representing greater risk.
These guidelines divide a savings bank's capital into two tiers. The first
tier ("Tier I") includes common equity, retained earnings, certain
non-cumulative perpetual preferred stock (excluding auction rate issues) and
minority interests in equity accounts of consolidated subsidiaries, less
goodwill and other intangible assets (except mortgage servicing rights and
purchased credit card relationships subject to certain limitations).
Supplementary ("Tier II") capital includes, among other items, cumulative
perpetual and long-term limited-life preferred stock, mandatory convertible
securities, certain hybrid capital instruments, term subordinated debt and the
allowance for loan and lease losses, subject to certain limitations, less
required deductions. Savings banks are required to maintain a total risk-based
capital ratio of at least 8%, of which at least 4% must be Tier I capital.
In addition, the FDIC has established regulations prescribing a minimum
Tier I leverage ratio (Tier I capital to adjusted total assets as specified in
the regulations). These regulations provide for a minimum Tier I leverage ratio
of 3% for banks that meet certain specified criteria, including that they have
the highest examination rating and are not experiencing or anticipating
significant growth. All other banks are required to maintain a Tier I leverage
ratio of 3% plus an additional cushion of at least 100 to 200 basis points. The
FDIC and the other federal banking regulators have proposed amendments to their
minimum capital
26
regulations to provide that the minimum leverage capital ratio
for a depository institution that has been assigned the highest composite rating
of 1 under the Uniform Financial Institutions Rating System will be 3% and that
the minimum leverage capital ratio for any other depository institution will be
4% unless a higher leverage capital ratio is warranted by the particular
circumstances or risk profile of the depository institution. The FDIC may,
however, set higher leverage and risk-based capital requirements on individual
institutions when particular circumstances warrant. Savings banks experiencing
or anticipating significant growth are expected to maintain capital ratios,
including tangible capital positions, well above the minimum levels.
Limitations on Dividends and Other Capital Distributions. The FDIC has the
authority to use its enforcement powers to prohibit a savings bank from paying
dividends if, in its opinion, the payment of dividends would constitute an
unsafe or unsound practice. Federal law also prohibits the payment of dividends
by a bank that will result in the bank failing to meet its applicable capital
requirements on a pro forma basis. New York law also restric