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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 [FEE REQUIRED] For the Fiscal Year Ended
December 31, 1998
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transaction period
from ___________________ to ______________________
Commission File Number: 000-25101
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(Exact Name of Registrant as Specified in its Charter)
Oneida Financial Corp.
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Delaware 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)
(313) 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 $.10 per share
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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, 1999, there were issued and outstanding 3,580,200 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, 1999 ($9.8125) was $13,209,754.
DOCUMENTS INCORPORATED BY REFERENCE
1. Sections of Annual Report to Stockholders for the fiscal year ended
December 31, 1998 (Parts II and IV).
2. Proxy Statement for the 1999 Annual Meeting of Stockholders (Parts I and
III).
3. Exhibit Index on page 35.
Total number of pages in Document is 41.
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 New York-chartered mutual holding
company (the "Mutual Holding Company"). The Company is a bank holding company
subject to regulation by the Board of Governors of the Federal Reserve System
(the "Federal Reserve Board"). The Company's only assets consist of shares of
the Bank's common stock and net proceeds of the Offering which it retained. The
Company neither owns nor leases any property, but uses the premises, equipment
and furniture of the Bank. At the present time, the Company does not employ any
persons other than certain officers of the Bank and will use the support staff
of the Bank from time to time.
At December 31, 1998 the Company had consolidated assets and
consolidated stockholders' equity of $248.8 million and $44.1 million,
respectively. Through the Bank, the Company has deposits totaling $194.2
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 four 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.
At December 31, 1998, $106.7 million, or 79.8%, of the Bank's loans
were secured by real estate, $82.4 million, or 61.6%, of the Bank's loans were
secured by one-to-four family residential real estate, $15.0 million, or 11.2%,
of the Bank's loans were secured by commercial real estate, and $9.4 million, or
7.0%, of the Bank's loans were home equity loans. Consumer loans totaled $15.6
million, or 11.6% of the Bank's total loans, at December 31, 1998. The Bank also
originates commercial business loans which totaled $11.5 million, or 8.6%, of
total loans at December 31, 1998. The Bank's investment securities and
mortgage-backed securities portfolios totaled $62.7 million and $20.0 million,
respectively, at December 31, 1998.
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.
1
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. At December 31, 1998, there was a total of 97
commercial bank, savings bank and credit union branches operating in Madison and
Oneida counties. 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
Limited 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 allowances for losses)
as of the dates indicated.
At December 31,
1998 1997 1996 1995 1994
---------------- ----------------- ------------------ ---------------- ----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
(Dollars in thousands)
Real estate loans:
One-to-four family ........... $82,353 61.6% $96,792 67.0% $100,557 73.1% $108,397 76.0% $109,441 76.0%
Multi-family.................. 1,468 1.1 2,714 1.9 2,972 2.2 3,240 2.3 3,735 2.5
Home equity................... 9,377 7.0 8,829 6.1 7,983 5.8 7,207 5.1 6,851 4.8
Commercial real estate........ 13,499 10.1 13,868 9.6 12,686 9.1 11,603 8.0 11,033 7.7
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total real estate loans..... 106,697 79.8 122,203 84.6 124,198 90.2 130,447 91.4 131,060 91.0
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Consumer loans:
Automobile loans.............. 10,405 7.8 6,683 4.6 2,701 2.0 2,108 1.5 1,799 1.2
Mobile home................... 717 0.5 784 0.5 914 0.7 1,162 0.8 1,384 1.0
Personal loans................ 2,438 1.8 2,580 1.8 1,719 1.3 1,831 1.3 1,689 1.2
Guaranteed student loans...... 446 0.3 1,659 1.2 1,981 1.4 2,943 2.1 3,443 2.4
Other consumer loans.......... 1,547 1.2 1,017 0.7 879 0.6 766 0.5 894 0.6
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total consumer loans........ 15,553 11.6 12,723 8.8 8,194 6.0 8,810 6.2 9,209 6.4
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Commercial business loans...... 11,549 8.6 9,587 6.6 5,241 3.8 3,424 2.4 3,764 2.6
Total consumer and
commercial business loans . 27,102 20.2 22,310 15.4 13,435 9.8 12,234 8.6 12,973 9.0
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total loans................ $133,799 100.0% $144,513 100.0% $137,633 100.0% $142,681 100.0% $144,033 100.0%
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Less:
Loans in process.............. -- 352 215 223 626
Allowance for losses.......... 1,543 1,793 1,546 1,781 2,117
------- -------- -------- -------- --------
Total loans receivable, net. $132,256 $142,368 $135,872 $140,677 $141,290
======== ======== ======== ======== ========
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,
1998 1997 1996 1995 1994
---------------- ------------------ ----------------- ----------------- -----------------
Amount Percent Amount Percent Amount Percent 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% $ 9,678 7.0% $ 8,652 6.1% $10,909 7.6%
Multi-family.................... -- -- -- -- -- -- -- -- -- --
Home equity..................... 4,626 3.5 2,804 1.9 1,679 1.2 871 0.5 686 0.5
Commercial real estate.......... 1,138 0.9 1,213 0.8 1,350 1.0 1,380 1.0 1,627 1.1
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total real estate loans....... 18,643 14.0 15,580 10.7 12,707 9.2 10,903 7.6 13,222 9.2
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Consumer loans:
Total consumer loans............ 14,475 10.8 12,723 8.8 8,194 6.0 8,810 6.2 9,209 6.4
Commercial business loans:
Total commercial loans.......... 5,355 4.0 1,628 1.1 748 0.5 484 0.3 882 0.6
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total fixed-rate loans.......... $38,473 28.8 $29,931 20.6 $21,649 15.7 $20,197 14.1 $23,313 16.2
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
ADJUSTABLE RATE LOANS:
Real estate loans:
One-to-four family.............. $69,474 51.9% $85,229 59.0% $90,879 66.0% $99,745 69.9% $98,532 68.4%
Multi-family.................... 1,468 1.1 2,714 1.9 2,972 2.2 3,240 2.3 3,735 2.6
Home equity..................... 4,751 3.6 6,025 4.2 6,304 4.6 6,336 4.4 6,165 4.3
Commercial real estate.......... 12,361 9.2 12,655 8.8 11,336 8.2 10,223 7.2 9,406 6.5
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total real estate loans....... 88,054 65.8 106,623 73.9 111,491 81.0 119,544 83.8 117,838 81.8
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Consumer loans:
Total consumer loans............ $ 1,078 0.8
Commercial business loans:
Total commercial business loans. 6,194 4.6 7,959 5.5 4,493 3.3 2,940 2.1 2,882 2.0
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total adjustable-rate loans..... $95,326 71.2 $114,582 79.4 $15,984 84.3 $122,484 85.9 $120,720 83.8
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans..................... $133,799 100.0% $144,513 100.0% $137,633 100.0% $142,681 100.0% $144,033 100.0%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
Less:
Loans in process................ -- 352 215 223 626
Allowance for losses............ 1,543 1,793 1,546 1,781 2,117
-------- -------- -------- -------- --------
Total loans receivable, net....... $132,256 $142,368 $135,872 $140,677 $141,290
======== ======== ======== ======== ========
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. Historically, the Bank's emphasis has been on the origination of
ARM 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. In the current low interest rate environment, borrowers have shown a
preference for fixed-rate loans. Consequently, in recent periods the Bank has
increased its origination of fixed-rate one-to-four family mortgage loans. The
Bank generally sells its fixed-rate one-to-four family loans on a servicing
retained basis. Such loans are sold without recourse to the Bank. The Bank
recently introduced two one-to-four family residential loan products providing
for fixed-rates of interest for an initial period of either three or five years,
and which adjust annually thereafter. At December 31, 1998, loans serviced by
the Bank for others totaled $37.4 million. During the year ended December 31,
1998 and December 31, 1997, the Bank sold $16.5 million and $4.0 million,
respectively in fixed-rate one-to-four family loans.
ARM loans decrease the risk associated with changes in market interest
rates by periodically repricing, but involve other risks because as interest
rates increase, the underlying 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,
1998, 51.9% 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, 1998, approximately $82.4 million, or 61.6% of the
Bank's loan portfolio, consisted of one-to-four family residential loans.
Approximately $1.0 million of such loans (representing 23 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, 1998, the outstanding balances of home equity
loans totaled $9.4 million, or 7.0% of the Bank's loan portfolio.
Commercial Real Estate Loans. At December 31, 1998, $15.0 million, or
11.2% 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, 1998, the largest commercial real estate loan had a
principal balance of $1.3 million and was secured by a medical building. As of
December 31, 1998, nonperforming loans did not include any commercial real
estate 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 have always been
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), guaranteed student loans and
other consumer loans (consisting of passbook loans, unsecured home improvement
loans and recreational vehicle loans). At December 31, 1998, consumer loans
totaled $15.6 million, or 11.6% 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, 1998, loans secured by automobiles totaled
$10.4 million, of which $6.1 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, 1998,
the Bank had $11.5 million of commercial business loans which represented 8.6%
of the total loan portfolio. On such date, the average balance of the Bank's
commercial business loans was $37,100, and the largest commercial business
lending relationship totaled $1.1 million, which consisted of 24 loans secured
by equipment and assignment of leases. As of December 31, 1998, unsecured
commercial business loans totaled $987,000.
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, 1998, 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-FiveTwenty-Five
Year Years Years Years Years Years Total
------- ------- ------- ------- ------- ------- -------
(In thousands)
Real estate loans:
One- to-four family.............. $ 537 $ 725 $ 2,521 $14,638 $48,875 $15,057 $82,353
Home equity...................... 442 688 1,163 6,551 533 -- 9,377
Commercial real estate........... 17 35 911 3,755 10,249 -- 14,967
------- ------- ------- ------- ------- ------- -------
Total real estate loans........ 996 1,448 4,595 24,944 59,657 15,057 106,697
------- ------- ------- ------- ------- ------- -------
Consumer and other loans............ 1,110 4,138 8,947 1,358 -- -- 15,553
Commercial business loans........... 3,444 1,558 3,925 1,418 1,204 -- 11,549
------- ------- ------- ------- ------- ------- -------
Total loans.................... $ 5,550 $ 7,144 $17,467 $27,720 $60,861 $15,057 $133,799
======= ======= ======= ======= ======= ======= ========
Fixed- and Adjustable-Rate Loan Schedule. The following table sets
forth at December 31, 1998, the dollar amount of all fixed-rate and
adjustable-rate loans due after December 31, 1999. Adjustable- and floating-rate
loans are included based on contractual maturities.
Due After December 31, 1999
----------------------------------------------
Fixed Adjustable Total
---------- ---------- -----------
(In thousands)
Real estate loans:
One-to-four family........................ $ 12,392 $ 69,424 $ 81,816
Home equity............................... 4,605 4,330 8,935
Commercial real estate.................... 1,138 13,812 14,950
---------- ---------- -----------
Total real estate loans............... 18,135 87,566 105,701
---------- ---------- -----------
Consumer and other loans ...................... 13,771 672 14,443
Commercial business loans...................... 4,644 3,461 8,105
---------- ---------- -----------
Total loans........................... $ 36,550 $ 91,699 $ 128,249
========== ========== ===========
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,
---------------------------------------------------------
1998 1997 1996 1995
--------- --------- --------- ------
(In thousands)
Originations by Type:
Adjustable Rate:
Real estate:
One-to-four family......................... $ 5,417 $ 11,812 $ 10,806 $ 14,261
Home equity................................ 2,883 1,825 2,281 2,800
Commercial real estate..................... 2,294 2,363 2,641 1,691
--------- --------- --------- --------
Total real estate loans.................. 10,594 16,000 15,728 18,752
Consumer loans................................ 770 -- -- --
Commercial business loans..................... 5,364 6,395 5,274 930
--------- --------- --------- --------
Total adjustable rate loans.............. 16,728 22,395 21,002 19,682
--------- --------- --------- --------
Fixed Rate:
Real estate:
One-to-four family......................... 19,113 4,113 5,492 3,128
Home equity................................ 1,656 1,744 1,141 388
Commercial real estate..................... 165 67 -- 60
--------- --------- --------- --------
Total real estate loans.................. 20,934 5,924 6,633 3,576
Consumer loans................................ 13,327 11,051 4,334 3,737
Commercial business loans..................... 7,173 6,800 2,000 1,021
--------- --------- --------- --------
Total fixed-rate loans................... 41,434 23,775 12,967 8,334
--------- --------- --------- --------
Total loans originated........................... 58,162 46,170 33,969 28,016
--------- --------- --------- --------
(Comtinued)
Year Ended December 31,
---------------------------------------------------------
1998 1997 1996 1995
--------- --------- --------- ------
(In thousands)
Sales:
Real estate:
One-to-four family......................... 16,523 3,988 5,504 3,069
--------- --------- --------- --------
Consumer loans............................. 2,027 -- -- --
--------- --------- --------- --------
Total loans sold.............................. 18,550 3,988 5,504 3,069
========= ========= ========= ========
Repayments:
Real estate:
One-to-four family......................... 22,446 15,702 18,633 15,365
Home equity................................ 3,991 2,723 2,647 2,832
Commercial real estate..................... 4,074 1,506 1,826 1,676
--------- --------- --------- --------
Total real estate loans.................. 30,511 19,931 23,106 19,873
Consumer loans................................ 9,240 6,522 4,951 4,136
Commercial business loans..................... 10,575 8,849 5,456 2,290
--------- --------- --------- --------
Total repayments......................... 50,326 35,302 33,513 26,299
--------- --------- --------- --------
Total reductions......................... 68,876 39,290 39,017 29,368
--------- --------- --------- --------
Net increases/(decreases)................ $ (10,714) $ 6,880 $ (5,048) $ (1,352)
========= ========= ========= ========
- -----------------------------
* Includes charge offs, discounts and premiums
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 $250,000 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
trustees appointed to this committee). All loan relationships in excess of
$250,000 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
9
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.
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, 1998, the largest aggregate amount loaned by the Bank
to one borrower consisted of $2.1 million. The loans comprising this lending
relationship were performing in accordance with their terms.
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, 1998, the Bank had
nonperforming loans of $1.1 million and a ratio of nonperforming loans to total
assets of 0.43%. At December 31, 1998, the Bank's ratio of nonperforming assets
to total assets was 0.52%.
Real estate acquired as a result of foreclosure or by deed in lieu of
foreclosure is classified as REO until such time as it is sold. When real estate
is acquired through foreclosure or by deed in lieu of
10
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, 1998. When a loan is delinquent 90 days or more,
the Bank fully reverses all accrued interest thereon and ceases to accrue
interest thereafter. For all the dates indicated, the Bank did not have any
material 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.................. 7 $ 485 11 $ 430 18 $ 915
Home Equity......................... 2 42 -- -- 2 42
Commercial real estate.............. -- -- 1 86 1 86
Consumer Loans...................... 2 13 2 8 4 21
Commercial Loans.................... 1 51 1 40 2 91
------ ------- ------- ------- ------- ------
Total ........................... 12 $ 591 15 $ 564 27 $1,155
====== ======= ======= ======= ======= ======
Nonaccrual Loans and Nonperforming Assets. The following table sets
forth information regarding nonaccrual loans and other nonperforming assets.
At December 31,
-------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- -------- -------- ------
(Dollars in thousands)
Non-accruing loans:
One-to-four family...................................... $ 1,010 $ 588 $ 735 $ 820 $ 902
Multi-family............................................ -- -- -- -- --
Commercial real estate.................................. -- 242 274 346 634
Construction and land loans............................. -- -- -- -- --
Consumer................................................ 8 2 18 49 36
Commercial business..................................... 40 -- -- 7 551
------- ------- ------- ------- -------
Total................................................. 1,058 832 1,027 1,222 2,123
------- ------- ------- ------- -------
Accruing loans delinquent more than 90 days:
One-to-four family...................................... $ -- 60 63 148 --
Multi-family............................................ -- -- -- -- --
Commercial real estate.................................. -- -- -- -- --
Construction and land loans............................. -- -- -- -- --
Consumer................................................ -- -- -- -- --
Commercial business..................................... -- 1 3 1 --
------- ------- ------- ------- -------
Total................................................. -- 61 66 149 --
------- ------- ------- ------- -------
Total nonperforming loans................................. $ 1,058 $ 893 $ 1,093 $ 1,371 $ 2,123
======= ======= ======= ======= =======
Foreclosed assets:
One-to-four family...................................... $ 179 $ 263 $ 712 $ 613 $ 597
Multi-family............................................ -- -- -- -- 56
Commercial real estate.................................. 45 45 147 367 31
Construction and land loans............................. -- -- -- 10 10
Consumer................................................ -- -- -- -- --
Commercial business..................................... -- -- -- -- --
------- ------- ------- ------- -------
Total................................................. $ 224 $ 308 $ 859 $ 990 $ 694
======= ======= ======= ======= =======
Total nonperforming loans as a percentage of total assets. 0.43% 0.42% 0.52% 0.67% 1.06%
======= ======= ======= ======= =======
Total nonperforming assets................................ $ 1,282 $ 1,201 $ 1,952 $ 2,361 $ 2,817
======= ======= ======= ======= =======
Total nonperforming assets as a percentage of total assets 0.52% 0.57% 0.92% 1.15% 1.40%
======= ======= ======= ======= =======
11
During the years ended December 31, 1998 and 1997, respectively, gross
interest income of $41,000 and $40,000 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, 1998 and 1997.
Classification of Assets. On the basis of management's review of its
assets, at December 31, 1998, the Bank had classified a total of $3.2 million of
loans as follows (in thousands):
Special Mention......................... $ 1,299
Substandard............................. 1,869
Doubtful assets......................... --
Loss assets............................. --
---------
Total ............................. $ 3,168
=========
General loss allowance.................. $ 1,193
=========
Specific loss allowance................. 350
=========
Charge-offs............................. --
=========
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, the general economy and the
general trend in the savings industry 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 REO. 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,
1998, the total allowance was $1.5 million, which amounted to 1.17% of total
loans, net and 145.84% 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. Finally, management includes an unallocated component in its
allowance to address general factors and general uncertainties such as changes
in economic conditions and the inherent inaccuracy of any attempt to predict
future default rates and property values based upon past experience. Management
will continue to monitor and modify the level of the allowance for loan losses
in order to maintain it at a level which management considers adequate to
provide for potential loan losses. For the years ended December 31, 1998 and
1997, the Bank had charge-offs of $348,000 and $299,000, respectively, against
this allowance.
The Bank employed a new method at year-end 1997 of evaluating the
adequacy of the allowance for loan losses and determining the appropriate level
of provisions for loan losses. The new method applies fixed percentages to each
category of performing loans and classified loans. The allowance adjustment is
12
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. The former method utilized by the Bank followed the FDIC format which
considered historic losses, peer allowance levels and current portfolio mix.
Management believes the new method of determining the adequacy of the allowance
is more prudent in light of the Bank's intention to diversify its lending
operations through the increased origination of consumer loans, commercial
business loans and commercial real estate loans.
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,
--------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- -------- -------- ------
(Dollars in thousands)
Balance at the beginning of period........................ $1,793 $1,546 $1,781 $2,117 $2,045
Charge-offs:
One-to-four family..................................... 117 72 112 360 58
Commercial real estate................................. -- 118 -- 150 166
Construction and land loans............................ -- -- -- -- --
Consumer............................................... 196 82 64 38 119
Commercial business.................................... 35 27 -- 11 51
------ ------ ------ ------ ------
Total................................................ 348 299 176 559 394
------ ------ ------ ------ ------
Recoveries:
One-to-four family..................................... 15 14 7 99 --
Commercial real estate................................. 12 2 -- -- --
Construction and land loans............................ -- -- -- -- --
Consumer............................................... 71 53 28 38 50
Commercial business.................................... -- -- 9 6 3
------ ------ ------ ------ ------
Total................................................ 98 69 44 143 53
------ ------ ------ ------ ------
Net charge-offs........................................... (250) (230) (132) (416) (341)
Additions charged to operations........................... -- 477 (103) 80 413
------ ------ ------ ------ ------
Balance at end of period.................................. $1,543 $1,793 $1,546 $1,781 $2,117
====== ====== ====== ====== ======
Allowance for loan losses as a percentage of total loans,
receivable, net........................................ 1.17% 1.26% 1.14% 1.27% 1.50%
===== ===== ===== ===== =====
Ratio of net charge-offs to average loans................. 0.18% 0.16% 0.10% 0.29% 0.24%
===== ===== ===== ===== =====
Ratio of net charge-offs to average nonperforming loans... 23.63% 25.76% 12.08% 30.34% 16.06%
===== ===== ===== ===== =====
13
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,
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%
========= ========= ======== ======== ========= =========
(continued)
1996
-------------------------------------
Percent
of Loans
Amount of Loan In Each
Loan Loss Amounts Category to
Allowance by Category Total Loans
--------- ----------- -----------
Residential mortgages................... $ 467 $ 108,540 78.86%
Commercial real estate.................. 343 15,658 11.38
Consumer................................ 82 8,194 5.95
Commercial business..................... 137 5,241 3.81
Unallocated............................. 517 -- --
--------- --------- --------
Total.......................... $ 1,546 $ 137,633 100.00%
========= ========= ========
At December 31,
----------------------------------------------------------------------------
1995 1994
----------------------------------- ------------------------------------
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...................... $ 426 $115,604 81.02% $ 375 $116,292 80.74%
Commercial real estate..................... 410 14,843 10.40 725 14,768 10.25
Consumer................................... 73 8,810 6.17 74 9,209 6.39
Commercial business........................ 140 3,424 2.41 223 3,764 2.62
Unallocated................................ 732 -- -- 720 -- --
--------- --------- --------- -------- --------- ---------
Total............................. $ 1,781 $142,681 100.00% $ 2,117 $144,033 100.00%
========= ========= ========= ======== ========= =========
14
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, GNMA. In
the past, the Bank invested in collateralized mortgage obligations ("CMOs"), but
it has not invested in 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, 1998, the Bank had $62.7
million, or 25.2% 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 FHLB stock. 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, 1998, the Bank's investment securities portfolio had a weighted
average life of 3.92 years.
15
Book Value 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,
-------------------------------------------------------------
1998 1997 1996
------------------ ----------------- -----------------
Book Percent of Book Percent of Book Percent of
Value Total Value Total Value Total
------------------ ----------------- -----------------
(Dollars in thousands)
Investment securities held for investment:
U.S. government and agency securities................ $ -- --% $ -- --% $ -- --%
State and municipals................................. -- -- -- -- -- --
Other................................................ -- -- -- -- -- --
-------- ----- -------- ------ --------- ------
Subtotal........................................... -- -- -- -- -- --
Investment securities available for sale:
U.S. government securities........................... 1,000 1.63 2,002 4.67 5,013 9.52
Federal agency securities............................ 37,346 60.93 24,504 57.19 21,503 40.84
Corporate debt securities............................ 15,580 25.42 11,833 27.62 21,882 41.56
Tax exempt bonds..................................... 3,919 6.40 2,162 5.05 2,207 4.19
Public utilities..................................... 300 0.49 750 1.75 848 1.61
Equity securities.................................... 1,918 3.13 1,288 3.02 1,194 2.28
-------- ----- -------- ------ --------- ------
Subtotal........................................... 60,063 98.00 42,539 99.30 52,647 100.00
FHLB stock........................................... 1,228 2.00 306 0.70 -- --
-------- ----- -------- ------ --------- ------
Total.............................................. $ 61,291 100.00% $ 42,845 100.00% $ 52,647 100.00%
======== ====== ======== ====== ========= ======
Average remaining life of investment securities........ 3.92 Years 1.89 Years 1.51 Years
Other interest earning assets:
Interest-bearing deposits with banks................. 261 1.17 115 6.34 1,778 20.73
Federal funds sold................................... 22,100 98.83 1,700 93.66 6,800 79.27
-------- ----- -------- ------ --------- ------
Total............................................ $ 22,361 100.00% $ 1,815 100.00% $ 8,578 100.00%
======== ====== ======== ====== ========= ======
(continued)
16
December 31,
--------------------------------------
1995 1994
----------------- ----------------
Book Percent of Book Percent of
Value Total Value Total
----------------- ----------------
(Dollars in thousands)
Investment securities held for investment:
U.S. government and agency securities................ $ -- --% $ -- --%
State and municipals................................. -- -- 2,997 6.14
Other................................................ -- -- 1,466 3.01
--------- ------ --------- ------
Subtotal........................................... -- $ 4,463 9.15%
Investment securities available for sale:
U.S. government securities........................... 5,584 11.82 5,706 11.70
Federal agency securities............................ 3,000 6.35 491 1.01
Corporate debt securities............................ 34,350 72.74 36,408 74.67
Tax exempt bonds..................................... 2,258 4.78 -- --
Public utilities..................................... 1,246 2.64 -- --
Equity securities.................................... 788 1.67 1,690 3.47
--------- ------ --------- ------
Subtotal........................................... 47,226 100.00 44,295 90.85
FHLB stock........................................... -- -- -- --
--------- ------ --------- ------
Total.............................................. $ 47,226 100.00% $ 48,758 100.00%
========= ====== ========= ======
Average remaining life of investment securities........ 1.80 Years 2.00 Years
Other interest earning assets:
Interest-bearing deposits with banks................. 1,972 28.28 -- --
Federal funds sold................................... 5,000 71.72 1,800 100.00
--------- ------ --------- ------
Total............................................ $ 6,972 $100.00% $ 1,800 100.00%
========= ======= ========= ======
Investment Portfolio Maturities. The following table sets forth the
scheduled maturities, book value, market value and weighted average yields for
the Bank's investment portfolio at December 31, 1998.
December 31, 1998
------------------------------------------------------------------------------
Less Than 1 to 5 5 to 10 Over
1 Year Years Years 10 Years Total Securities
Book Value Book Value Book Value Book Value Book Value Market Value
---------- ---------- ---------- ---------- ---------- ------------
(Dollars in thousands)
U.S. government securities.......... $ 1,000 $ -- $ -- $ -- $ 1,000 $ 1,009
Federal agency obligations.......... 1,208 12,957 19,901 3,280 37,346 37,371
Corporate bonds..................... 9,487 5,051 1,042 -- 15,580 16,016
Public utilities.................... -- -- 300 -- 300 303
Tax exempt bonds.................... 104 465 3,107 243 3,919 4,054
Other .............................. -- -- -- 3,146 3,146 3,915
------- -------- --------- -------- -------- -------
Total securities.................. $11,799 $ 18,473 $ 24,350 $ 6,669 $ 61,291 $62,668
======= ======== ========= ======== ======== =======
Weighted average yield(1)........... 7.14% 5.72% 6.13% 6.27% 6.22% 6.39%
- ----------------
(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. The Bank has not invested in CMOs in recent years. At December 31,
1998, mortgage-backed securities totaled $20.0 million or 8.0% of total assets,
all of which were classified as available for sale. At December 31, 1998, all of
the mortgage-backed securities were fixed-rate. The mortgage-backed securities
portfolio had coupon rates ranging from 6.0% to 9.5%, a weighted average yield
of 7.2% and a weighted average life (including payment assumption) of 5.5 years
at December 31, 1998. The estimated fair value of the Bank's mortgage-backed
securities at December 31, 1998 was $20.0 million which was $159,000 greater
than the amortized cost of $19.9 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 $20.0 million mortgage-backed securities
portfolio at December 31, 1998, $3.9 million with a weighted average yield of
6.6% had contractual maturities within five years,
17
$5.4 million with a weighted average yield of 6.6% had contractual maturities of
five to ten years and $10.7 million with a weighted average yield of 6.5% had
contractual maturities of over ten years. However, the 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.
18
Mortgage-Backed Securities. Set forth below is information relating to
the Bank's mortgage-backed securities for the periods indicated.
December 31,
----------------------------------------------------------------
1998 1997 1996
-------------------- -------------------- -------------------
Book Percent of Book Percent of Book Percent of
Value Total Value Total Value Total
-------------------- -------------------- -------------------
(Dollars in thousands)
Mortgage-backed securities available for sale:
GNMA......................................... $ 12 0.06% $ 16 0.14% $ 19 0.40%
FNMA......................................... 13,851 69.74 7,752 66.40 3,540 75.11
FHLMC........................................ 5,924 29.82 3,808 32.61 1,035 21.97
CMOs......................................... 76 0.38 99 0.85 119 2.52
------- ------ ------- ------ ------- ------
Subtotal................................. 19,863 100.00 11,675 100.00 4,713 100.00
Unamortized premium/discount................... -- -- -- -- -- --
------- ------ ------- ------ ------- ------
Total.................................... $19,863 100.00% $11,675 100.00% $ 4,713 100.00%
======= ====== ======= ====== ======= ======
(continued)
December 31,
---------------------------------------
1995 1994
------------------ ------------------
Book Percent of Book Percent of
Value Total Value Total
------------------ ------------------
(Dollars in thousands)
Mortgage-backed securities available for sale:
GNMA......................................... $ 25 9.80% $ 29 10.21%
FNMA......................................... -- -- -- --
FHLMC........................................ 75 30.20 88 30.99
CMOs......................................... 153 60.00 167 58.80
------- ------ ------- ------
Subtotal................................. 253 100.00 284 100.00
Unamortized premium/discount................... -- -- -- --
------- ------ ------- ------
Total.................................... $ 253 100.00% $ 284 100.00%
======= ====== ======= ======
19
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, 1998, deposits totaled $194.2 million. At December 31,
1998, the Bank had a total of $108.9 million in certificates of deposit, of
which $65.5 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, 1998 certificates
of deposit with balances of $100,000 or more totaled $21.1 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,
----------------------------------
1998 1997 1996
--------- --------- --------
(Dollars in thousands)
Opening balance............................... $ 182,961 $ 185,508 $181,385
Deposits...................................... 843,441 678,376 606,912
Withdrawals................................... (840,130) (688,820) (610,684)
Interest credited............................. 7,933 7,897 7,895
--------- --------- --------
Ending balance................................ $ 194,205 $ 182,961 $185,508
--------- --------- --------
Net increase (decrease)....................... $ 11,244 $ (2,547) $ 4,123
========= ========= ========
Percent increase (decrease)................... 6.15% (1.37%) 2.27%
========= ========= ========
20
The following table indicates the amount of the Bank's certificates of
deposit by time remaining until maturity as of December 31, 1998.
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........ $ 16,104 $ 13,521 $ 24,314 $ 33,797 $ 87,736
-------- -------- -------- -------- --------
Certificates of deposit of $100,000 or more....... 4,939 3,350 3,308 9,540 21,137
Total of certificates of deposit.................. $ 21,043 $ 16,871 $ 27,622 $ 43,337 $108,873
======== ======== ======== ======== ========
The following tables set forth information, by various rate categories,
regarding the average balance of deposits by types of deposit for the periods
indicated.
December 31,
--------------------------------------------------------------
1998 1997 1996
-------------------- ------------------- ------------------
Amount Percent Amount Percent Amounts Percent
------ ------- ------ ------- ------- -------
(Dollars in thousands)
Transactions and savings deposits:
Noninterest-bearing......................... $20,564 10.59% $13,947 7.62% $12,113 6.53%
Savings accounts............................ 43,069 22.18 41,924 22.92 42,454 22.88
NOW accounts................................ 7,145 3.68 5,677 3.10 5,984 3.22
Money market accounts....................... 14,554 7.49 10,600 5.79 14,096 7.59
------- ----- ------- ----- ------- -----
Total..................................... 85,332 43.94 72,148 39.43 74,647 40.24
------- ----- ------- ----- ------- -----
Certificates of deposit:
0.00-3.99%.................................. 3,184 1.64 2,464 1.35 2,985 1.62
4.00-5.99%.................................. 88,583 45.61 85,121 46.52 79,892 43.06
6.00-7.99%.................................. 17,106 8.81 23,228 12.70 27,984 15.08
8.00-9.99%.................................. -- -- -- -- -- --
10.00% and over............................. -- -- -- -- -- --
------- ----- ------- ----- ------- -----
Total certificates of deposit............... 108,873 56.06 110,813 60.57 110,861 59.76
------- ----- ------- ----- ------- -----
Total deposits.............................. $194,205 100.00% $182,961 100.00% $185,508 100.00%
======== ====== ======== ====== ======== ======
The following table sets forth the amount and remaining maturities of
the Bank's certificates of deposit accounts at December 31, 1998.
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, 1998........................... $ 2,335 $ -- $ -- $ 2,335 2.14%
March 31, 1999.............................. 800 16,788 1,120 18,708 17.18
June 30, 1999............................... -- 14,973 1,898 16,871 15.50
September 30, 1999.......................... -- 14,305 463 14,768 13.56
December 31, 1999........................... -- 10,469 2,385 12,854 11.81
March 31, 2000 ............................. -- 2,561 4,535 7,096 6.52
June 30, 2000............................... -- 2,595 2,407 5,002 4.59
September 30, 2000.......................... -- 5,321 1,089 6,410 5.89
December 31, 2000........................... -- 4,565 16 4,581 4.21
March 31, 2001.............................. -- 2,387 721 3,108 2.85
June 30, 2001............................... -- 2,324 100 2,424 2.23
September 30, 2001.......................... -- 1,745 -- 1,745 1.60
December 31, 2001........................... -- 1,838 88 1,926 1.77
Thereafter.................................. 49 8,712 2,284 11,045 10.15
------- ------- ------- ------- -------
Total .................................... 3,184 88,583 17,106 108,873 100.00%
======= ======= ======= ======= =======
Percent of total............................ 2.92% 81.36% 15.71% 100.00%
======= ======= ======= =======
21
Borrowed Funds. Set forth below is a schedule detailing the Bank's borrowings.
At December 31,
----------------------------------
1998 1997 1996
-------- -------- -------
(In Thousands)
Short-Term Borrowings:
Repurchase Agreements - FHLB......................................... $ 5,000 $ -- $ --
Overnight Advances - FHLB............................................ -- -- $ --
Long-Term Borrowings:
Term Advances - FHLB................................................. 5,000 -- --
-------- -------- -------
Total Borrowings................................................... $ 10,000 $ -- $ --
-------- -------- -------
Weighted Average interest cost of borrowings during the year........... 5.22% --% --%
-------- -------- -------
Average Balance of borrowings outstanding during the year.............. $ 1,264 $ -- $ --
-------- -------- -------
Trust Activities. The Bank provides trust and investment services, acts
as executor or administrator of estates and as trustee 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, 1998, the Bank maintained 111
trust/fiduciary accounts, with total assets of $18.9 million under management.
The Bank recently hired an experienced trust officer. Management anticipates
that in the future the Trust Department will become a more significant component
of the Bank's business.
Brokerage Services. The Bank entered into an agreement with a third
party provider whereby the Bank will be able to offer investment and brokerage
services to its customers. The Bank intends to begin offering such services
during the second quarter of 1999.
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, 1998, the Bank had 82 full-time employees and 17
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. Both the Company and the Mutual Holding
Company, as bank holding
22
companies, are subject to regulation by the Federal Reserve Board and file
reports with the Federal Reserve Board. Any change in such regulations, whether
by the Department, the FDIC, or the Federal Reserve Board 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 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
23
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.
Pursuant to the FDICIA, the FDIC established a system for setting
deposit insurance premiums based upon the risks a particular bank or savings
association posed 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.
Under the Deposit Insurance Funds Act of 1996 (the "Funds Act"), the
assessment base for the payments on the bonds ("FICO bonds") issued in the late
1980s by the Financing Corporation to recapitalize the now defunct Federal
Savings and Loan Insurance Corporation was expanded to include, beginning
January 1, 1997, the deposits of BIF-insured institutions, such as the Bank.
Until December 31, 1999, or such earlier date on which the last savings
association ceases to exist, the rate of assessment for BIF-assessable deposits
shall be one-fifth of the rate imposed on SAIF-assessable deposits. The annual
rate of assessments for the payments on the FICO bonds for the semi-annual
period beginning on July 1, 1998 was 0.0122% for BIF-assessable deposits and
0.0610% for SAIF-assessable deposits.
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.
24
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 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.
Standards for Safety and Soundness. The federal banking agencies have
adopted a final regulation and Interagency Guidelines Prescribing Standards for
Safety and Soundness ("Guidelines") to implement the safety and soundness
standards required under federal law. The Guidelines set forth the safety and
soundness standards that the federal banking agencies use to identify and
address problems at insured depository institutions before capital becomes
impaired. The standards set forth in the Guidelines address internal controls
and inform