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, 2003
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 (I.R.S. Employer
of Incorporation or Organization) Identification Number)
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|
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). YES |_| NO|X|
As of June 30, 2003, there were issued and outstanding 7,399,953 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 June 30, 2003 ($15.79 ) was $48,794,305 .
DOCUMENTS INCORPORATED BY REFERENCE
1. Sections of Annual Report to Stockholders for the fiscal year ended
December 31, 2003 (Parts II and IV).
2. Proxy Statement for the 2004 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. The Company is majority-owned by Oneida
Financial, MHC, a Federally-chartered mutual holding company (the "Mutual
Holding Company"). The Company and the mutual holding company are each subject
to regulation by the Office of Thrift Supervision ("OTS"). The Company's assets
consist primarily of its ownership in the shares of the Bank's common stock.
At December 31, 2003 the Company had consolidated assets and consolidated
stockholders' equity of $428.2 million and $50.8 million, respectively. Through
the Bank, the Company has deposits totaling $305.5 million. All disclosures and
financial information is presented on a consolidated basis.
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 seven full service branch offices and
using those deposits, together with funds generated from operations and
borrowings 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 Bailey & Haskell Associates, Inc., its
insurance agency subsidiary.
At December 31, 2003, $135.1 million, or 66.6%, of the Bank's loans were
secured by real estate. At December 31, 2003, $79.9 million, or 39.4%, of the
Bank's loans were secured by one-to-four family residential real estate, $38.2
million, or 18.8%, of the Bank's loans were secured by commercial real estate,
and $17.0 million, or 8.4%, of the Bank's loans were home equity loans. Consumer
loans totaled $36.1 million, or 17.8% of the Bank's loans, at December 31, 2003.
The Bank also originates commercial business loans which totaled $31.5 million,
or 15.6%, of loans at December 31, 2003. The Bank's investment securities and
mortgage-backed securities portfolios totaled $122.0 million and $51.8 million,
respectively, at December 31, 2003.
In April 1999 the Bank established Oneida Preferred Funding Corp. as the
Bank's wholly owned real estate investment trust subsidiary. At December 31,
2003 Oneida Preferred Funding Corp. held $40.9 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.
In October 2000, the Bank acquired Bailey & Haskell Associates, Inc.,
which is a wholly owned insurance and financial services subsidiary. Since the
acquisition of Bailey & Haskell Associates, Inc. we have acquired four insurance
agencies, all of which have been merged into Bailey & Haskell Associates, Inc.
1
On May 31, 2002, the Bank completed its acquisition of SBC Financial
Corporation ("SBC"), the holding company of State Bank of Chittenango
("Chittenango"), a New York State chartered commercial bank. The two banking
offices of Chittenango became banking offices of the Bank. The Bank has retained
Chittenango as a special purpose commercial bank subsidiary of the Bank.
Chittenango is permitted to accept municipal deposit accounts from the various
municipalities, school districts and other public sources, a source of funds not
available to the Bank under New York law. The Bank paid $11.9 million or $102.60
in cash for each of the 116,079 shares of SBC common stock. Assets acquired as a
result of the acquisition totaled $66.5 million and resulted in additional
goodwill of $5.6 million and a core deposit intangible of approximately $1.2
million. At December 31, 2003, no impairment adjustment has been made to
goodwill or other intangibles that were created in the transaction.
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. The average
household income of persons residing in Oneida and Madison counties was below
that of New York State and the United States.
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 adjustable rate mortgage ("
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 number 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 allowance for loan losses) as of the dates
indicated.
At December 31,
-------------------------------------------------------------------------
2003 2002 2001
-------------------- --------------------- ---------------------
Amount Percent Amount Percent Amount Percent
-------- -------- ---------- -------- ---------- --------
(Dollars in thousands)
Real Estate Loans:
One- to- four family...... $ 79,910 39.4% $ 85,581 42.8% $ 76,477 44.3%
Multi-family............... 2,378 1.2 1,983 1.0 1,003 0.6
Home equity................ 17,001 8.4 15,149 7.6 11,077 6.4
Commercial real estate..... 35,806 17.6 30,096 15.0 23,517 13.6
-------- -------- ---------- -------- ---------- --------
Total real estate loans.. 135,095 66.6 132,809 66.4 112,074 64.9
-------- -------- ---------- -------- ---------- --------
Consumer Loans:
Automobile loans.......... 30,042 14.8 28,857 14.4 29,569 17.1
Mobile home............... 205 0.1 280 0.1 381 0.2
Personal loans............ 4,326 2.1 6,842 3.4 2,691 1.6
Guaranteed student loans.. -- -- -- -- -- --`
Other consumer loans...... 1,549 0.8 1,442 0.8 1,465 0.9
-------- -------- ---------- -------- ---------- --------
Total consumer loans..... 36,122 17.8 37,421 18.7 34,106 19.8
Commercial business loans..... 31,494 15.6 29,775 14.9 26,385 15.3
-------- -------- ---------- -------- ---------- --------
Total consumer and commercial
business loans........... 67,616 33.4 67,196 33.6 60,491 35.1
-------- -------- ---------- -------- ---------- --------
Total loans.............. $202,711 100.00% $ 200,005 100.00% $ 172,565 100.00%
======== ========= ========== ========= ========== =========
Less:
Allowance for losses....... 2,115 2,109 1,672
-------- ---------- ----------
Total loans receivable, net $200,596 $ 197,896 $ 170,893
======== ========== ==========
At December 31,
----------------------------------------------
2000 1999
-------------------- ---------------------
Amount Percent Amount Percent
--------- -------- --------- --------
Real Estate Loans:
One- to- four family...... $ 84,386 50.7% $ 81,264 53.9%
Multi-family............... 1,134 0.7 1,358 0.9
Home equity................ 10,940 6.6 9,740 6.5
Commercial real estate..... 18,742 11.3 16,560 11.0
--------- -------- --------- --------
Total real estate loans.. 115,202 69.3 108,922 72.3
--------- -------- --------- --------
Consumer Loans:
Automobile loans.......... 25,818 15.5 16,768 11.1
Mobile home............... 526 0.4 595 0.4
Personal loans............ 3,450 2.1 6,901 4.6
Guaranteed student loans.. -- -- 305 0.2
Other consumer loans...... 1,432 0.8 1,451 1.0
--------- -------- --------- --------
Total consumer loans..... 31,226 18.8 26,020 17.3
Commercial business loans..... 19,865 11.9 15,727 10.4
--------- -------- --------- --------
Total consumer and commercial
business loans........... 51,091 30.7 41,747 27.7
--------- -------- --------- --------
Total loans.............. $ 166,293 100.00% $ 150,669 100.00%
========= ========= ========= =========
Less:
Allowance for losses....... 1,632 1,523
--------- ---------
Total loans receivable, net $ 164,661 $ 149,146
========= =========
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,
-------------------------------------------------------------------------
2003 2002 2001
-------------------- --------------------- ---------------------
Amount Percent Amount Percent Amount Percent
-------- -------- ---------- -------- ---------- --------
(Dollars in thousands)
FIXED-RATE LOANS:
Real Estate Loans:
One- to- four family...... $ 29,197 14.4% $ 27,848 13.9% $ 21,370 12.4%
Multi-family............... -- -- -- -- -- --
Home equity................ 10,543 5.2 10,423 5.2 6,634 3.8
Commercial real estate..... 4,174 2.0 1,799 0.9 1,248 0.7
-------- -------- ---------- -------- ---------- --------
Total real estate loans.. 43,914 21.6 40,070 20.0 29,252 16.9
Consumer Loans:
Total consumer loans....... 35,211 17.4 36,704 18.4 33,371 19.4
Commercial business loans:
Total commercial loans..... 13,981 7.0 12,172 6.1 13,765 8.0
-------- -------- ---------- -------- ---------- --------
Total fixed-rate loans..... 93,106 46.0 88,946 44.5 76,388 44.3
-------- -------- ---------- -------- ---------- --------
ADJUSTABLE RATE LOANS:
Real Estate Loans:
One- to- four family...... $ 50,713 25.0% $ 57,733 28.9% $ 55,107 31.9%
Multi-family............... 2,378 1.2 1,983 1.0 1,003 0.6
Home equity................ 6,458 3.2 4,726 2.4 4,443 2.6
Commercial real estate..... 31,632 15.6 28,297 14.1 22,269 12.9
-------- -------- ---------- -------- ---------- --------
Total real estate loans.. 91,181 45.0 92,739 46.4 82,822 48.0
Consumer Loans:
Total consumer loans....... 911 0.4 717 0.3 735 0.4
Commercial business loans:
Total commercial business loans 17,513 8.6 17,603 8.8 12,620 7.3
-------- -------- ---------- -------- ---------- --------
Total adjustable-rate loans 109,605 54.0 111,059 55.5 96,177 55.7
-------- -------- ---------- -------- ---------- --------
Total loans................ 202,711 100.00% $ 200,005 100.00% $ 172,565 100.00%
======== ========= ========== ========= ========== =========
Less:
Allowance for loan losses.. 2,115 2,109 1,672
-------- ---------- ----------
Total loans receivable, net... $200,596 $ 197,896 $ 170,893
======== ========== ==========
At December 31,
----------------------------------------------
2000 1999
-------------------- ---------------------
Amount Percent Amount Percent
---------- -------- ---------- --------
FIXED-RATE LOANS:
Real Estate Loans:
One- to- four family...... $ 17,485 10.5% $ 18,208 12.1%
Multi-family............... -- -- -- --
Home equity................ 6,211 3.7 5,416 3.6
Commercial real estate..... 775 0.5 1,023 0.7
---------- -------- ---------- --------
Total real estate loans.. 24,471 14.7 24,647 16.4
Consumer Loans:
Total consumer loans....... 30,745 18.5 25,284 16.8
Commercial business loans:
Total commercial loans..... 12,965 7.8 10,027 6.6
---------- -------- ---------- --------
Total fixed-rate loans..... 68,181 41.0 59,958 39.8
---------- -------- ---------- --------
ADJUSTABLE RATE LOANS:
Real Estate Loans:
One- to- four family...... $ 66,901 40.2% $ 63,056 41.8%
Multi-family............... 1,134 0.7 1,358 0.9
Home equity................ 4,729 2.9 4,324 2.9
Commercial real estate..... 17,967 10.8 15,537 10.3
---------- -------- ---------- --------
Total real estate loans.. 90,731 54.6 84,275 55.9
Consumer Loans:
Total consumer loans....... 481 0.3 736 0.5
Commercial business loans:
Total commercial business loans 6,900 4.1 5,700 3.8
---------- -------- ---------- --------
Total adjustable-rate loans 98,112 59.0 90,711 60.2
---------- -------- ---------- --------
Total loans................ $ 166,293 100.00% $ 150,669 100.00%
========== ========= ========== =========
Less:
Allowance for loan losses.. 1,632 1523
---------- ----------
Total loans receivable, net... $ 164,661 $ 149,146
========== ==========
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. owever, the Bank will
originate one-to-four family loans with loan-to-value ratios of up to 97%,
provided the borrower obtains private mortgage insurance. 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 without recourse to the Bank. At December 31, 2003, loans serviced by the
Bank for others totaled $93.1 million. During the year ended December 31, 2003
and December 31, 2002, the Bank sold $50.2 million and $32.4 million,
respectively in fixed-rate one-to-four family loans. As of December 31, 2003 the
Bank has $2.0 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,
2003, 25.0% 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, 2003, approximately $79.9 million, or 39.4% of the Bank's
loan portfolio, consisted of one-to-four family residential loans. Approximately
$114,000 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 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
5
loans are originated with terms up to 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, 2003, the outstanding balances of home
equity loans totaled $17.0 million, or 8.4% of the Bank's loan portfolio.
Commercial Real Estate Loans. At December 31, 2003, $38.2 million, or
18.8% 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 terms of up to 20
years. The maximum loan-to-value ratio of commercial real estate loans is 80%.
At December 31, 2003, the largest commercial real estate loan had a principal
balance of $1.4 million and was secured by a medical building. This loan is
performing in accordance with its terms. As of December 31, 2003, there were no
commercial real estate loans 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. At December 31, 2003, consumer loans totaled $36.1
million, or 17.8% of the total loan portfolio. 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). 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, 2003, loans secured by automobiles totaled $30.0 million, of which
$24.2 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.
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
6
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,
at fixed rates of interest except for lines of credit which have variable rates
of interest. 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, 2003, the Bank
had $31.5 million of commercial business loans which represented 15.6% of the
total loan portfolio. On such date, the largest commercial business lending
relationship totaled $2.0 million, which was an unsecured demand note to a local
multi-national corporation. At December 31, 2003, unsecured commercial business
loans totaled $4.3 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, 2003, 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 Ten
Through Three Five Through Beyond
Within One Three Through Through Twenty-Five Twenty-Five
Year Years Five Years Ten Years Years Years Total
---------- -------- ---------- --------- ----------- ----------- --------
(In thousands)
Real estate loans:
One- to- four family..... $ 567 $ 778 $ 2,209 $ 11,120 $ 46,901 $ 18,335 $ 79,910
Home equity............... 176 1,129 3,031 12,276 291 98 17,001
Commercial real estate.... 2,198 264 1,024 7,407 27,291 -- 38,184
-------- -------- -------- -------- -------- -------- --------
Total real estate loans. 2,941 2,171 6,264 30,803 74,483 18,433 135,095
Consumer and other loans..... 1,341 11,432 20,020 2,752 340 237 36,122
Commercial business loans.... 15,330 6,442 5,843 3,186 689 4 31,494
-------- -------- -------- -------- -------- -------- --------
Total loans............. $ 19,612 $ 20,045 $ 32,127 $ 36,741 $ 75,512 $ 18,674 $202,711
======== ======== ======== ======== ======== ======== ========
Fixed- and Adjustable-Rate Loan Schedule. The following table sets forth
at December 31, 2003, the dollar amount of all fixed-rate and adjustable-rate
loans due after December 31, 2004. Adjustable- and floating-rate loans are
included based on contractual maturities.
Due After December 31, 2004
----------------------------------
Fixed Adjustable Total
------- --------- --------
(In thousands)
Real estate loans
One- to- four family ............... $28,711 $50,632 $ 79,343
Home equity ......................... 10,444 6,381 16,825
Commercial real estate .............. 4,067 31,919 35,986
------- ------- --------
Total real estate loans ........... 43,222 88,932 132,154
Consumer and other loans ............... 34,136 645 34,781
Commercial business loans .............. 10,152 6,012 16,164
------- ------- --------
Total loans ....................... $87,510 $95,589 $183,099
======= ======= ========
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
except for those purchased as part of the acquisition of SBC.
Year Ended December 31,
------------------------------
2003 2002 2001
-------- ------- -------
(Dollars in thousands)
Originations by Type:
Adjustable Rate:
Real estate:
One- to- four family ................. $ 5,733 $ 6,540 $ 4,188
Home equity ........................... 6,570 2,857 2,350
Commercial and real estate ............ 8,873 7,977 4,562
-------- ------- -------
Total real estate loans ............... 21,176 17,374 11,100
Consumer loans ........................ 1,336 969 506
Commercial business loans ............. 6,532 4,270 9,969
-------- ------- -------
Total adjustable rate loans ....... $ 29,044 $22,613 21,575
-------- ------- -------
Fixed-Rate:
Real estate:
One- to- four family ................. $ 63,031 $36,989 $35,173
Home equity ........................... 2,564 3,551 2,135
Commercial and real estate ............ 1,890 1,172 4,029
-------- ------- -------
Total real estate loans ............... 67,485 41,712 41,337
Consumer loans ........................ 20,641 19,085 23,206
Commercial business loans ............. 17,127 13,568 11,651
-------- ------- -------
Total fixed rate loans ............ $105,253 $74,365 $76,194
-------- ------- -------
Total loans originated ....................... $134,297 $96,978 $97,769
-------- ------- -------
Purchased Adjustable Rate:
Real estate:
One- to- four family ................. $ -- $ 4,143 $ --
Home equity ........................... -- 354 --
Commercial and real estate ............ -- 1,940 --
-------- ------- -------
Total real estate loans ............... -- 6,437 --
Consumer loans ........................ -- 10 --
Commercial business loans ............. -- 3,964 --
-------- ------- -------
Total adjustable rate loans ....... $ -- $10,411 $ --
-------- ------- -------
Fixed-Rate:
Real estate:
One- to- four family ................. $ -- $ 8,080 $ --
Home equity ........................... -- 2,595 --
Commercial and real estate ............ -- -- --
-------- ------- -------
Total real estate loans ............... -- 10,675 --
Consumer loans ........................ -- 6,582 --
Commercial business loans ............. -- -- --
-------- ------- -------
Total fixed rate loans ............ $ -- $17,257 $ --
-------- ------- -------
Total loans purchased ........................ $ -- $27,668 $ --
-------- ------- -------
Sales:
Real estate:
One- to- four family ................. $ 50,222 $32,408 $26,597
Consumer loans ........................ -- 542 --
-------- ------- -------
Total loans sold ............................. $ 50,222 $32,950 $26,597
Repayments:
Real estate:
One- to- four family ................. $ 24,213 $14,240 $20,673
Home equity ........................... 7,282 5,285 4,348
Commercial and real estate ............ 4,658 3,530 3,947
-------- ------- -------
Total real estate loans ........... 36,153 23,055 28,968
Consumer loans .......................... 23,276 22,789 20,832
Commercial business loans ............... 21,940 18,412 15,100
-------- ------- -------
Total repayments .................. $ 81,369 $64,256 $64,900
-------- ------- -------
Total reductions .................. $131,591 $97,206 $91,497
-------- ------- -------
Net increases/(decreases)............... $ 2,706 $27,440 $ 6,272
======== ======= =======
9
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 $500,000 must be approved by the Bank Loan Committee
(consisting of two persons; the President and/or Executive Vice President in
charge of credit administration and either one of two senior lending officers
appointed to this committee). All loan relationships in excess of $500,000 and
up to $750,000 (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 $750,000 up to $1.5 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 $1.5 million must
be approved by the Board of Directors.
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's 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, and 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, 2003, the largest aggregate amount loaned by the Bank to
one borrower consisted of a line of credit and commercial loans to a
not-for-profit corporation with an outstanding balance totaling $2.4 million.
The loans are secured by business assets. At December 31, 2003 this lending
relationship was performing in accordance with its terms.
Delinquencies and Classified Assets
Collection Procedures. A computer generated late notice is sent when a
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 Bank's Collection Department Manager. Generally, after 90
days the Bank will commence legal action.
10
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, 2003, the Bank had
nonperforming loans of $181,000 and a ratio of nonperforming loans to total
assets of 0.04%. At December 31, 2003, the Bank's ratio of nonperforming assets
to total assets was 0.07%.
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.
The following table sets forth delinquencies in the Bank's loan portfolio
as of December 31, 2003. When a loan is delinquent 90 days or more, the Bank
fully reverses all interest accrued and ceases to accrue interest thereafter.
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 2 $ 70 3 $ 114 5 $ 184
Home equity......................... -- -- 1 34 1 34
Commercial real estate.............. -- -- -- -- -- --
Consumer ........................... 2 19 1 1 3 20
Commercial business................. -- -- 1 22 1 22
------ ------- ------- ------- ------- ------
Total ........................... 4 $ 89 6 $ 171 10 $ 260
====== ======= ======= ======= ======= ======
11
Nonaccrual Loans and Nonperforming Assets. The following table sets forth
information regarding nonaccrual loans and other nonperforming assets.
At December 31,
--------------------------------------------------------------
2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
(Dollars in thousands)
Non-accruing loans:
One-to-four family........................... $ 114 $ 49 $ 139 $ 112 $ 132
Multi-family................................. -- - - - -
Commercial real estate....................... -- - 69 75 -
Construction and land........................ -- - - - -
Consumer..................................... 11 - - -
Commercial business.......................... 22 - - - -
--------- --------- --------- --------- ---------
Total...................................... 147 49 208 187 132
--------- --------- --------- --------- ---------
Accruing loans delinquent more than 90 days:
One-to-four family........................... -- - - - -
Multi-family................................. -- - - - -
Commercial real estate....................... -- - - - -
Construction and land........................ -- - - - -
Consumer..................................... 34 - - - -
Commercial business.......................... -- - - - -
--------- --------- --------- --------- ---------
Total...................................... 34 - - - -
--------- --------- --------- --------- ---------
Total nonperforming loans....................... $ 181 $ 49 $ 208 $ 187 $ 132
========= ========= ========= ========= =========
Foreclosed assets:
One-to-four family........................... $ -- $ - $ 77 $ 55 $ 76
Multi-family................................. -- - - - -
Commercial real estate....................... 115 - - - 18
Construction and land........................ -- - - - -
Consumer..................................... -- - - - 1
Commercial business.......................... -- - - - -
--------- --------- --------- --------- ---------
Total...................................... 115 - 77 55 95
========= ========= ========= ========= =========
Total nonperforming loans as a percentage of
total assets.................................... 0.04% 0.01% 0.06% 0.06% 0.05%
========= ========= ========= ========= =========
Total nonperforming assets...................... $ 296 $ 49 $ 285 $ 242 $ 227
========= ========= ========= ========= =========
Total nonperforming assets as a percentage of
total assets.................................... 0.07% 0.01% 0.08% 0.08% 0.08%
========= ========= ========= ========= =========
During the years ended December 31, 2003 and 2002, respectively, gross
interest income of $7,000 and $3,700 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, 2003 and 2002.
Classification of Assets. On the basis of management's review of its
assets, at December 31, 2003, the Bank had classified a total of $4.1 million of
loans as follows:
Amount
------
(in thousands):
Special mention......................... $ 2,000
Substandard............................. 1,376
Doubtful assets......................... --
Loss assets............................. --
Impaired assets......................... 700
---------
Total ............................. $ 4,076
=========
General loss allowance.................. $ 1,456
=========
Specific loss allowance................. 659
=========
Net charge-offs............................ 524
=========
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 probable and estimable
losses in the loan portfolio, the composition of the loan portfolio and other
quantitative and qualitative factors. Management's evaluation of the adequacy of
the allowance is based on the Bank's past loan loss experience, known and
inherent risks in the portfolio, adverse circumstances that may affect the
borrower's ability to repay, the estimated value of any underlying collateral,
and an analysis of the levels and trends of delinquencies, charge-offs, and the
risk rating of the various loan categories. 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 the Bank to recognize additions to the
allowance based on their judgment about information available to them at the
time of their examination. At December 31, 2003, the total allowance was $2.1
million, which amounted to 1.05% of loans, net and 1,168.5% of nonperforming
loans. Management considers whether the allowance should be adjusted to protect
against risks in the loan portfolio. Quarterly, management evaluates the
adequacy of the allowance and determines the appropriate level of provision for
loan losses by applying a range of estimated loss percentages to each category
of performing loans and classified loans. The allowance adjustment is based upon
the net change in each portfolio category, as well as an adjustment related to
impaired loans, since the prior quarter. A loan is considered impaired, based on
current information and events, if it is probable that the Bank will be unable
to collect the scheduled payments of principal or interest when due according to
the contractual terms of the loan agreement. The measurement of impaired loans
is generally based on the present value of expected future cash flows discounted
at the historical effective interest rate, except that all collateral-dependent
loans are measured for impairment based on the estimated fair value of the
collateral securing the loan. 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. 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, 2003 and
2002, the Bank had charge-offs of $725,000 and $807,000, respectively, against
this allowance.
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,
------------------------------------------------------------------
2003 2002 2001 2000 1999
---------- ---------- --------- ---------- ----------
(Dollars in thousands)
Balance at beginning of period............ $ 2,109 $ 1,672 $ 1,632 $ 1,523 $ 1,543
Charge-offs:
One-to-four family..................... 13 19 8 7 91
Commercial real estate................. -- -- 25 -- --
Construction and land.................. -- -- -- -- --
Consumer............................... 509 382 294 260 246
Commercial business.................... 203 406 176 44 1
---------- ---------- --------- ---------- ----------
Total.................................. 725 807 503 311 338
---------- ---------- --------- ---------- ----------
Recoveries:
One-to-four family..................... -- 34 1 3 3
Commercial real estate................. -- -- -- -- --
Construction and land.................. -- -- -- -- --
Consumer............................... 95 62 50 66 85
Commercial business.................... 106 23 12 6 1
---------- ---------- --------- ---------- ----------
Total.................................. 201 119 63 75 89
---------- ---------- --------- ---------- ----------
Net charge-offs........................... (524) (688) (440) (236) (249)
Addition of allowance from acquisition.... -- 961 -- -- -
Additions charged to operations........... 530 164 480 345 229
---------- ---------- --------- ---------- ----------
Balance at end of period.................. $ 2,115 $ 2,109 $ 1,672 $ 1,632 $ 1,523
========== ========== ========= ========== ==========
Allowance for loan losses as a percentage
of total loans receivable, net............ 1.05% 1.07% 0.98% 0.99% 1.02%
========== ========== ========= ========== ==========
Ratio of net charge-offs to average loans. 0.26% 0.37% 0.26% 0.15% 0.18%
========== ========== ========= ========== ==========
Ratio of net charge-offs to non-performing
loans..................................... 289.50% 1,404.08% 211.54% 126.20% 188.64%
========== ========== ========= ========== ==========
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,
--------------------------------------------------------------------------------
2003 2002
------------------------------------- ---------------------------------------
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................... 330 $ 96,911 47.81% $ 459 $ 100,730 50.36%
Commercial real estate.................. 353 38,184 18.84 409 32,079 16.04
Consumer ............................... 675 36,122 17.82 538 37,421 18.71
Commercial business..................... 743 31,494 15.53 687 29,775 14.89
Unallocated............................. 14 -- -- 16 -- --
--------- --------- -------- -------- --------- ------
Total.......................... 2,115 $ 202,711 100.00% $ 2,109 $ 200,005 100.00%
========= ======== ======== ======== ========= ======
At December 31,
-------------------------------------
2001
-------------------------------------
Percent
of Loans
Amount of Loan In Each
Loan Loss Amounts Category to
Allowance by Category Total Loans
--------- ----------- -----------
Residential mortgages................... $ 382 $ 87,554 50.74%
Commercial real estate.................. 366 24,520 14.21
Consumer ............................... 437 34,106 19.76
Commercial business..................... 487 26,385 15.29
Unallocated............................. -- -- --
--------- -------- ------
Total.......................... $ 1,672 $172,565 100.00%
========= ======== ======
At December 31,
---------------------------------------------------------------------------------
2000 1999
------------------------------------- -------------------------------------
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 to
Allowance by Category Total Loans Allowance by Category Total Loans
--------- ----------- ----------- --------- ----------- -----------
(Dollars in thousands)
Residential mortgages.................... $ 487 $ 95,326 57.3% $ 469 $ 91,004 60.40%
Commercial real estate................... 280 19,876 12.0 235 17,918 11.89
Consumer ................................ 422 31,226 18.8 358 26,020 17.27
Commercial business...................... 434 19,865 11.9 295 15,727 10.44
Unallocated.............................. 9 -- -- 166 -- --
--------- --------- --------- -------- --------- ----------
Total........................... $ 1,632 $ 166,293 100.00% $ 1,523 $ 150,669 100.00%
========= ========= ========== ======== ========= ===========
15
Securities Investment Activities
The securities investment policy is established by the Board of Directors
of the Bank. This policy dictates that investment decisions will be made based
on the safety of the investment, the Bank's liquidity needs, 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 Ginnie
Mae. 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 investment strategy 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, 2003, the Bank had $122.0 million,
or 28.5% 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 $5.4 million and an estimated market value of
$5.4 million at December 31, 2003. 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, 2003, the Bank's investment securities portfolio had a weighted
average life of 7.51 years.
16
Investment Securities. The following table sets forth certain information
regarding the investment securities and other interest earning assets as of the
dates indicated.
At December 31,
----------------------------------------------------------------------
2003 2002 2001
--------------------- ---------------------- ---------------------
Amortized Percent Amortized Percent Amortized Percent
Cost of Total Cost of Total Cost of Total
-------- --------- ---------- --------- ---------- --------
(Dollars in thousands)
Investment securities available for
sale:
U.S. Government securities.... $ -- --% $ -- --% $ -- --%
Federal agency securities..... 45,840 37.92 48,594 39.61 25,035 31.36
Corporate debt securities..... 31,175 25.79 42,751 34.84 31,663 40.00
Tax exempt bonds.............. 25,496 21.09 12,642 10.31 3,480 4.40
Public utilities.............. -- -- -- -- 200 0.25
Equity securities............. 15,020 12.42 15,020 12.24 14,944 18.88
-------- --------- ---------- --------- ---------- --------
Subtotal.................. 117,531 97.22 119,007 97.00 75,322 95.16
FHLB stock.................... 3,370 2.78 3,685 3.00 3,830 4.84
-------- --------- ---------- --------- ---------- --------
Total..................... 120,901 100.00% $ 122,692 100.00% $ 79,152 100.00%
======== ========= ========== ========= ========== ========
Average remaining life of
investment securities............ 7.51 years 6.07 Years 7.32 Years
Other interest earning assets:
Interest-bearing deposits with
banks....................... 1,340 100.00 2,092 46.57 4,909 33.15
Federal funds sold............ -- 2,400 53.43 9,900 66.85
-------- --------- ---------- --------- ---------- --------
Total loans............... 1,340 100.00% $ 4,492 100.00% $ 14,809 100.00%
======== ========= ========== ========= ========== ========
At December 31,
----------------------------------------------
2000 1999
---------------------- ---------------------
Amortized Percent Amortized Percent
Cost of Total Cost of Total
---------- --------- ---------- --------
(Dollars in thousands)
Investment securities available for
sale:
U.S. Government securities.... $ -- 0.00% $ -- 0.00%
Federal agency securities..... 47,795 52.23 54,803 61.73
Corporate debt securities..... 17,189 18.78 11,420 12.86
Tax exempt bonds.............. 2,569 2.81 3,624 4.08
Public utilities.............. 200 0.22 200 0.23
Equity securities............. 19,806 21.64 16,183 18.23
---------- --------- ---------- --------
Subtotal.................. 87,559 95.68 86,230 97.13
FHLB stock.................... 3,950 4.32 2,547 2.87
---------- --------- ---------- --------
Total..................... $ 91,509 100.00% $ 88,777 100.00%
========== ========= ========== ========
Average remaining life of
investment securities............ 6.40 Years 5.09 Years
Other interest earning assets:
Interest-bearing deposits with
banks....................... 297 15.7 873 100.00
Federal funds sold............ 1,600 84.3 -- --
---------- --------- ---------- --------
Total loans............... $ 1,897 100.00% $ 873 100.00%
========== ========= ========== ========
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, 2003.
December 31, 2003
----------------------------------------------------------------------------------
Less Than 1 to 5 5 to 10 Over
1 Year Years Years 10 Years Total Investment Securities
--------- --------- --------- --------- --------- ---------
Amortized Amortized Amortized Amortized Amortized Carrying
Cost Cost Cost Cost Cost Value
--------- --------- --------- --------- --------- ---------
(Dollars in thousands)
U.S. Government securities.... $ -- $ -- $ -- $ -- $ -- $ --
Federal agency securities..... -- 13,201 21,153 11,486 45,840 45,500
Corporate debt securities..... -- 5,299 4,023 21,853 31,175 31,736
Tax exempt bonds.............. 1,183 2,775 8,405 13,133 25,496 26,109
Public utilities.............. -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Equity securities............. -- -- -- 18,390 18,390 18,704
--------- --------- --------- --------- --------- ---------
Total securities............. $ 1,183 $ 21,275 $ 33,581 $ 64,862 $ 120,901 $ 122,049
========= ========= ========= ========= ========= =========
Weighted average yield (1)........ 2.30% 3.89% 4.14% 5.16% 4.60% 5.11%
- ----------
(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 Ginnie Mae; and (iii)
increase liquidity. At December 31, 2003, the amortized cost of mortgage-backed
securities totaled $51.7 million or 12.1% of total assets, all of which were
classified as available for sale. The mortgage-backed securities portfolio had
coupon rates ranging from 1.5% to 8.5%, a weighted average yield of 4.68% and a
weighted average life (including payment assumption) of 13.6 years at December
31, 2003. The estimated fair value of the Bank's mortgage-backed securities at
December 31, 2003 was $51.8 million which was $100,000 higher than the amortized
cost of $51.7 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 Ginnie Mae) 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 $51.7 million mortgage-backed securities
portfolio at December 31, 2003, $1.1 million with a weighted average yield of
5.51% had contractual maturities within five years, $3.2 million with a weighted
average yield of 4.82% had contractual maturities of five to ten years and $47.4
million with a weighted average yield of 4.65% had contractual maturities of
over ten years. However, the actual
18
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,
-----------------------------------------------------------------
2003 2002 2001
------------------ ------------------- -------------------
Amortized Percent Amortized Percent Amortized Percent
Cost of Total Cost of Total Cost of Total
--------- -------- --------- -------- -------- --------
(Dollars in thousands)
Mortgage-backed securities available for sale:
GinnieMae.................................... $ 1,504 2.90% $ 4,256 11.02% $14,661 27.57%
FannieMae.................................... 21,863 42.30 12,628 32.68 16,105 30.28
FreddieMac................................... 22,795 44.10 18,914 48.95 19,395 36.47
CMOs......................................... 4,961 9.60 2,127 5.50 2,140 4.02
Small business administration................ 565 1.10 713 1.85 883 1.66
------- -------- ------- ------- ------- ------
Total.................................... $51,688 100.00% $38,638 100.00% $53,184 100.00%
======= ====== ======== ====== ======= ======
December 31,
-------------------------------------------
2000 1999
------------------ -------------------
Amortized Percent Amortized Percent
Cost of Total Cost of Total
--------- -------- --------- --------
(Dollars in thousands)
Mortgage-backed securities available for sale:
GinnieMae.................................... $13,349 32.94% 7,023 25.60%
FannieMae.................................... 13,336 32.91 14,824 54.05
FreddieMac................................... 13,793 34.03 5,518 20.12
CMOs......................................... 50 0.12 62 0.23
Small business administration................ ------- ------ ------- -----
Total.................................... $40,528 100.00% $ 27,427 100.0%
======= ====== ======== =====
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, 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. Through our special purpose subsidiary at December 31, 2003 the Bank
held $6.0 million in municipal deposits.
At December 31, 2003, deposits totaled $305.5 million. At December 31,
2003, the Bank had a total of $126.7 million in certificates of deposit, of
which $79.5 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, 2003 certificates
of deposit with balances of $100,000 or more totaled $32.5 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,
-------------------------------------------
2003 2002 2001
------------ ---------- -----------
(Dollars in thousands)
Opening balance........................................ $ 291,779 $ 228,163 $ 202,755
Deposits acquired from acquisition of SBC.............. -- 60,146 --
Deposits............................................... 2,249,912 1,915,273 1,448,285
Withdrawals............................................ (2,241,116) (1,918,344) (1,430,907)
Interest credited...................................... 4,940 6,541 8,030
------------ ---------- -----------
Ending balance......................................... $ 305,515 $ 291,779 $ 228,163
------------ ---------- -----------
Net increase........................................... $ 13,736 $ 63,616 $ 25,408
============ ========== ===========
Percent increase....................................... 4.71% 27.88% 12.53%
============ ========== ===========
21
The following table indicates the amount of the Bank's certificates of
deposit by time remaining until maturity as of December 31, 2003.
Maturity
-----------------------------------------------
3 Months Over 3 to Over 6 to Over 12
or Less 6 Months 12 Months Months Total
-------- --------- --------- ------- --------
(In thousands)
Certificates of deposit less than $100,000........ $ 19,723 $ 15,867 $23,749 $34,943 $ 94,282
Certificates of deposit of $100,000 or more....... 9,776 3,373 7,053 12,265 32,467
-------- -------- ------- ------- ---------
Total of certificates of deposit.................. $ 29,499 $ 19,240 $30,802 $47,208 $126,749
======== ======== ======== ======= ========
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,
----------------------------------------------------------------------
2003 2002 2001
-------------------- --------------------- ---------------------
Amount Percent Amount Percent Amount Percent
-------- -------- -------- -------- -------- ---------
(Dollars in thousands)
Transactions and savings deposits:
Noninterest-bearing..................... $ 49,644 16.25% $ 45,951 15.75% $ 29,882 13.10%
Savings accounts........................ 69,177 22.64 64,946 22.26 44,459 19.48
NOW accounts............................ 19,907 6.51 12,118 4.15 8,455 3.71
Money market accounts................... 40,038 13.11 35,206 12.07 23,691 10.38
-------- -------- -------- -------- -------- ---------
Total.............................. 178,766 58.51 158,221 54.23 106,487 46.67
-------- -------- -------- -------- -------- ---------
Certificates of deposit:
Less than 2.00%......................... 59,380 19.44 26,014 8.91 11,550 5.06
2.00-3.99%.............................. 38,156 12.49 59,481 20.39 13,497 5.92
4.00-5.99%.............................. 20,187 6.61 35,309 12.10 50,732 22.23
6.00-7.99%.............................. 9,026 2.95 12,754 4.37 45,897 20.12
-------- -------- -------- -------- -------- ---------
Total certificates of deposit...... 126,749 41.49 133,558 45.77 121,676 53.33
-------- -------- -------- -------- -------- ---------
Total deposits.................. $305,515 100.00% $291,779 100.00% $228,163 100.00%
======== ======== ======== ======== ======== =========
The following table sets forth the amount and remaining maturities of the
Bank's certificates of deposit accounts at December 31, 2003.
Percent
<2.00% 2.00-3.99% 4.00-5.99% 6.00-7.99% Total of Total
------------ --------- ---------- ---------- ----------- --------
(Dollars in thousands)
Certificate accounts maturing
in quarter ending:
March 31, 2004............. $ 24,470 $ 3,063 $ 781 $ 1,185 $ 29,499 23.27%
June 30, 2004.............. 13,146 3,793 2,080 221 19,240 15.18
September 30, 2004......... 9,650 4,586 1,767 248 16,251 12.82
December 31, 2004.......... 8,256 4,904 1,377 14 14,551 11.48
March 31, 2005............. 263 3,363 455 1,678 5,759 4.54
June 30, 2005.............. 640 2,523 294 2,254 5,711 4.51
September 30, 2005......... 774 2,900 176 1,404 5,254 4.14
December 31, 2005.......... 1,452 1,645 46 590 3,733 2.95
Thereafter................. 729 11,379 13,211 1,432 26,751 21.11
------------ ---------- --------- -------- ----------- ------
Total................... $ 59,380 $ 38,156 $ 20,187 $ 9,026 $ 126,749 100.00%
============ ========== ========= ======== =========== ======
Percent of total........ 46.85% 30.10% 15.93% 7.12% 100.00%
22
Borrowed Funds. Set forth below is a schedule detailing the Bank's
borrowings.
At December 31,
-------------------------------------
2003 2002 2001
--------- --------- ----------
(Dollars in thousands)
Short-term borrowings:
Overnight line of credit............................................. $ 2,500 $ 2,000 $ --
Repurchase agreements - FHLB......................................... --
Term advances - FHLB................................................... 13,500 16,500 11,600
Long-term borrowings:
Repurchase agreements - FHLB......................................... 32,000 34,000 36,000
Term advances - FHLB................................................. 19,400 21,000 29,000
-------- -------- -------
Total borrowings................................................... $ 67,400 $ 73,500 $76,600
-------- -------- -------
Weighted Average interest cost of short-term borrowings
during the year........................................................ 4.38% 4.63% 5.02%
-------- -------- -------
Weighted Average interest cost of long-term borrowings
during the year........................................................ 4.75% 4.89% 5.15%
-------- -------- -------
Average Balance of borrowings outstanding during the year.............. $ 68,757 $ 72,912 $ 74,904
-------- -------- -------
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, 2003, the Bank maintained 435
trust/fiduciary accounts, with total assets of $79.9 million under management as
compared to 380 trust/fiduciary accounts with $55.6 million total assets at
December 31, 2002. Management anticipates that in the future the Trust
Department will become a more significant component of the Bank's business.
Limited Purpose Commercial Bank
In connection with the acquisition of SBC on May 31, 2002, the Bank holds
The State Bank of Chittenango as a limited purpose commercial bank. At December
31, 2003, The State Bank of Chittenango held $8.4 million in assets, consisting
primarily of U.S. Government obligations and mortgage-backed securities and $6.0
million in deposits.
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, Cazenovia, New Hartford and
Syracuse. B&H is a full-service insurance and financial services firm with over
90 employees providing services to over 19,000 customers. Adding B&H insurance
and financial services business has enabled the Bank to continue evolving from a
traditional depository institution into a full-service 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.
On January 2, 2001, the Bank completed its acquisition of Noyes and
LaLonde, Inc., an insurance agency. The Bank paid $667,500 in cash and
established a note payable for $612,500 to be paid over 24 months with interest
at 7.5% per annum to acquire certain tangible and intangible assets of the
agency. Noyes and LaLonde, Inc. was subsequently merged into B&H. Additionally,
effective as of January 1, 2001, the Bank also completed its acquisition of The
Dunn Agency. The Bank paid $247,500 in cash and established a note payable for
$247,500 to be paid over 24 months with interest at 7.5% per annum to acquire
100% of the capital stock of The Dunn Agency. The Dunn Agency was merged into
B&H as of January 1, 2002.
23
On July 1, 2002, the Bank completed its acquisition of Kennedy & Clarke,
Inc., an insurance agency. The Bank paid $200,855 in cash and established a note
payable for $195,500 to be paid over 24 months with interest at 6.0% per annum
for fixed assets and other intangible assets. Kennedy & Clarke, Inc. has been
subsequently merged into B&H.
On October 1, 2003, the Bank completed it acquisition of MacDonald/Yando
Agency, Inc., an insurance agency. The Bank paid $219,783 in cash and
established a note payable for $219,783 to be paid over 24 months with interest
at 5.0% per annum to acquire the capital stock of the MacDonald/Yando Agency,
Inc. The MacDonald/Yando Agency, Inc. has been merged into B&H.
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.
Personnel
As of December 31, 2003, the Bank had 139 full-time employees and 14
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 its
Bank Insurance Fund. The Bank is subject to extensive regulation by the New York
State Banking Department (the "Department"), and by the FDIC. The Bank is
required to file reports with, and is periodically examined by, the FDIC and the
Department 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 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
24
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 sStock.
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 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 directors
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
25
institution has engaged or is engaging in unsafe or unsound practices or is in
an unsafe or unsound condition.
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 bank