Back to GetFilings.com
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, 2002
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: 000-23601
PATHFINDER BANCORP, INC.
------------------------
(Exact Name of Registrant as Specified in its Charter)
Federal. . . . . . . . . . . . . . 16-1540137
- -------------------------------------------------------------------------------------------------------
(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification Number)
214 West First Street, Oswego, NY. . . . . 13126
- -------------------------------------------------------------------------------------------------------
Address of Principal Executive Office). . . . (Zip Code)
(315) 343-0057
--------------
(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 $.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 Act).
YES NO [X]
As of March 18, 2003, there were 2,914,669 shares issued and 2,441,882 shares
outstanding 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 18, 2003 ($14.35)
was $12,321,517.
The Form 10-K contains 38 pages. The Exhibit Index is located on page 38.
DOCUMENTS INCORPORATED BY REFERENCE
1. Sections of Annual Report to Stockholders for the fiscal year ended
December 31, 2002 (Parts II and IV).
2. Proxy Statement for the 2002 Annual Meeting of Stockholders (Parts I and
III).
1
PART I
------
ITEM 1. BUSINESS
- ----------------
GENERAL
PATHFINDER BANCORP, INC.
Pathfinder Bancorp, Inc. (the "Company") is a Federal corporation. On July
19, 2001, the Company completed its conversion from a Delaware chartered company
to a federal charter. As a result of the charter conversion the Company's
chartering authority and primary federal regulator is the Office of Thrift
Supervision. References to the Company include the Company before or after the
charter conversion. The only business of the Company is its investment in
Pathfinder Bank (the "Bank") and Pathfinder Statutory Trust 1. The Company is
majority owned by Pathfinder Bancorp, MHC, a Federal-chartered mutual holding
company (the "Mutual Holding Company"). On December 30, 1997 the Company
acquired all of the issued and outstanding common stock of the Bank in
connection with the Bank's reorganization into the two-tier form of mutual
holding company ownership. At that time, each share of outstanding Bank common
stock was automatically converted into one share of Company common stock, par
value $.10 per share (the "Common Stock"). At February 28, 2003, the Mutual
Holding Company held 1,583,239 shares of Common Stock and the public held
1,027,257 shares of Common Stock (the "Minority Shareholders").
On June 26, 2002, the Company formed a wholly owned subsidiary, Pathfinder
Statutory Trust I, a Connecticut business trust. The trust issued $5,000,000 of
30-year floating rate Company-obligated pooled capital securities of Pathfinder
Statutory Trust I. The Company borrowed the proceeds of the capital securities
from its subsidiary by issuing floating rate junior subordinated deferrable
interest debentures having substantially similar terms. The capital securities
mature in 2032 and qualify as Tier 1 capital by the Federal Deposit Insurance
Company and the Office of Thrift Supervision. The capital securities of the
trust are a pooled trust preferred fund of Preferred Term Securities VI, Ltd.
and are tied to the 3 month LIBOR plus 3.45% with a five year call provision.
These securities are guaranteed by the Company.
The Company's executive office is located at 214 West First Street, Oswego,
New York and the telephone number at that address is (315) 343-0057.
PATHFINDER BANK
The Bank is a New York-chartered savings bank headquartered in Oswego, New
York. The Bank has six full-service offices located in its market area
consisting of Oswego County and the contiguous counties. The Bank's deposits are
insured by the Federal Deposit Insurance Corporation ("FDIC"). The Bank was
chartered as a New York savings bank in 1859 as Oswego City Savings Bank. The
Bank is a consumer-oriented institution dedicated to providing mortgage loans
and other traditional financial services to its customers. The Bank is committed
to meeting the financial needs of its customers in Oswego County, New York, the
county in which it operates. At December 31, 2002, the Bank had total assets of
$279.1 million, total deposits of $204.5 million, and shareholders' equity of
$23.2 million.
On October 25, 2002, Pathfinder Bank completed the purchase of assets and
the assumption of non-municipal deposits of the Lacona, New York branch of
Cayuga Bank (the "Branch Acquisition"). In addition, Pathfinder Bank formed a
limited purpose commercial bank subsidiary, Pathfinder Commercial Bank.
Pathfinder Commercial Bank was established to serve the depository needs of
public entities in its market area and it assumed the municipal deposit
liabilities acquired as part of the Branch Acquisition. The transaction included
approximately $26.4 million in deposits, $2.3 million in loans and $430,000 in
vault cash and facilities and equipment. The acquisition reflects a premium on
deposit liabilities assumed of approximately $2.4 million.
The Bank is primarily engaged in the business of attracting deposits from
the general public in the Bank's market area, and investing such deposits,
together with other sources of funds, in loans secured by one- to four-family
residential real estate. At December 31, 2002, $167.0 million, or 91.4% of the
Bank's total loan portfolio consisted of loans secured by real estate, of which
$123.2 million, or 73.8 %, were loans secured by one- to four-family residences,
2
$31.7 million, or 19.0%, were secured by commercial real estate and $973,000, or
..5%, were secured by multi-family properties. Additionally, $11.2 million, or
6.7 %, of total real estate loans, were secured by second liens on residential
properties that are classified in consumer loans. The Bank also originates
commercial and consumer loans that totaled $13.2 and $3.9 million, respectively,
or 9.4%, of the Bank's total loan portfolio. The Bank invests a portion of its
assets in securities issued by the United States Government, state and municipal
obligations, corporate debt securities, mutual funds, and equity securities. The
Bank also invests in mortgage-backed securities primarily issued or guaranteed
by the United States Government or agencies thereof. The Bank's principal
sources of funds are deposits, principal and interest payments on loans and
borrowings from correspondent financial institutions. The principal source of
income is interest on loans and investment securities. The Bank's principal
expenses are interest paid on deposits, and employee compensation and benefits.
The Bank's executive office is located at 214 West First Street, Oswego,
New York, and its telephone number at that address is (315) 343-0057.
In April 1999, the Bank established Pathfinder REIT, Inc. as the Bank's
wholly-owned real estate investment trust subsidiary. At December 31, 2002
Pathfinder REIT, Inc. held $27.8 million in mortgage and mortgage related
assets. All disclosures in the Form 10-K relating to the Bank's loans and
investments include loan and investments that are held by Pathfinder REIT, Inc.
MARKET AREA AND COMPETITION
The economy in the Bank's market area is manufacturing-oriented and is also
significantly dependent upon the State University of New York College at Oswego.
The major manufacturing employers in the Bank's market area are National Grid,
Alcan, Constellation, NRG and Huhtamaki. The Bank is the second largest
financial institution headquartered in Oswego County. However, the Bank
encounters competition from a variety of sources. The Bank's business and
operating results are significantly affected by the general economic conditions
prevalent in its market areas.
The Bank encounters strong competition both in attracting deposits and in
originating real estate and other loans. Its most direct competition for
deposits has historically come from commercial and savings banks, savings
associations and credit unions in its market area. Competition for loans comes
from such financial institutions as well as mortgage banking companies. The Bank
expects continued strong competition in the foreseeable future, including
increased competition from "super-regional" banks entering the market by
purchasing large banks and savings banks. Many such institutions have greater
financial and marketing resources available to them than does the Bank. The Bank
competes for savings deposits by offering depositors a high level of personal
service and a wide range of competitively priced financial services. The Bank
competes for real estate loans primarily through the interest rates and loan
fees it charges and advertising, as well as by originating and holding in its
portfolio mortgage loans which do not necessarily conform to secondary market
underwriting standards.
LENDING ACTIVITIES
LOAN PORTFOLIO COMPOSITION. The Bank's loan portfolio primarily consists of
one-to-four family mortgage loans secured by residential and investment
properties, as well as mortgage loans secured by multi-family residences and
commercial real estate. To a lesser extent the Bank's loan portfolio also
includes consumer and business loans. The Bank generally originates loans for
retention in its portfolio and for sale in the secondary market. During 2002,
the Bank sold approximately $19.4 million of loans in the secondary market. The
loan sales resulted in approximately $152,000 in capitalized servicing rights.
At December 31, 2002, $3.6 million, or 3.0%, of the Bank's total one-to-four
family real estate portfolio consisted of loans held for sale. In recent years,
the Bank has not purchased loans originated by other lenders.
3
ANALYSIS OF LOAN PORTFOLIO. The following table sets forth the composition
of the Bank's loan portfolio in dollar amounts and in percentages of the
portfolio at the dates indicated.
Years Ended December 31,
- -----------------------------------------------------------------------------------------
2002 2001 2000
Amount Percent Amount Percent Amount Percent
- ------------------------------------------------------------------------------------------
(Dollars in Thousands)
Real estate loans:
First mortgage loans/(1)//(3)/. ..$155,835 85.3% $141,710 84.8% $124,636 83.6%
Second mortgage loans/(2)/. . . 11,151 6.1 9,262 5.5 9,978 6.7
- ------------------------------------------------------------------------------------------
Total real estate loans . . . . 166,986 91.4 150,972 90.3 134,614 90.3
- ------------------------------------------------------------------------------------------
Commercial and consumer loans:
Consumer. . . . . . . . . . . . 3,917 2.2 3,353 2.0 3,009 2.0
Lease financing . . . . . . . . 431 0.2 244 0.2 237 0.2
Commercial business loans . . . 12,765 7.0 14,113 8.4 12,636 8.5
- ------------------------------------------------------------------------------------------
Total commercial and
consumer loans. . . . . . . . . 17,113 9.4 17,710 10.6 15,882 10.7
- ------------------------------------------------------------------------------------------
Total loans receivable. . . . . 184,099 100.8 168,682 100.9 150,496 101.0
Less:
Unearned premium and
origination costs/(fees). . . . - - 38 - (120) (0.1)
Allowance for loan losses . . . (1,481) (0.8) (1,679) (0.9) (1,274) (0.9)
- ------------------------------------------------------------------------------------------
Total loans receivable, net . . $182,618 100.0% $167,041 100.0% $149,102 100.0%
==========================================================================================
1999 1998
- ---------------------------------------------------------------------------
Amount Percent Amount Percent
===========================================================================
Real estate loans:
First mortgage loans $110,374 84.4% $109,372 85.3%
Second mortgage loans 9,492 7.3 9,631 7.5
---------------------------------------------------------------------------
Total real estate loans 119,866 91.7 119,003 92.8
- ---------------------------------------------------------------------------
Commercial and consumer loans:
Consumer 3,494 2.7 4,085 3.2
Lease financing 278 0.2 350 0.3
Commercial business loans 8,357 6.4 5,900 4.6
- ---------------------------------------------------------------------------
Total commercial and
consumer loans 12,129 9.3 10,335 8.1
---------------------------------------------------------------------------
Total loans receivable 131,995 101.0 129,338 100.9
Less:
Unearned premium and
origination costs/(fees) (84) (0.1) (199) (0.2)
Allowance for loan losses (1,150) 0.9) (939) (0.7)
- ---------------------------------------------------------------------------
Total loans receivable, net $130,761 100.0% $128,200 100.0%
===========================================================================
/(1)/Includes $123.2 million, $31.7 million and $973,000 thousand of one- to
four-family residential loans, commercial real estate and multi-family
loans, respectively, at December 31, 2002.
/(2)/Includes $4.4 million and $6.7 million of home equity line of credit loans
and home equity fixed rate, fixed term loans, respectively at December 31,
2002.
/(3)/Includes $3.6 million of mortgage loans held-for-sale at December 31, 2002.
4
LOAN MATURITY SCHEDULE. The following table sets forth certain information
as of December 31, 2002 regarding the dollar amount of loans maturing in the
Bank's portfolio based on their contractual terms to maturity. Demand loans
having no stated schedule of repayments and no stated maturity, and overdrafts
are reported as due in one year or less. Adjustable and floating rate loans are
included in the period in which interest rates are next scheduled to adjust
rather than the period in which they contractually mature, and fixed rate loans
are included in the period in which the final contractual repayment is due.
One Three Five
Through Through Through
Within Three Five Ten
One Year Years Years Years
- ---------------------------------------------------------------------
(In Thousands)
Real estate loans:
First mortgage loans . . . . . $ 32,455 $19,494 $27,451 $13,955
Second mortgage loans. . . . . 4,478 454 1,096 3,560
Commercial and consumer loans. 11,403 1,488 2,722 1,196
- ---------------------------------------------------------------------
Total loans. . . . . . . . . . $ 48,336 $21,436 $31,269 $18,711
=====================================================================
Ten
Through Beyond
Twenty Twenty
Years Years Total
- ----------------------------------------------------------
Real estate loans:
First mortgage loans. . . . . $48,005 $14,475 $155,835
Second mortgage loans . . . . 1,563 0 11,151
Commercial and consumer loans 304 0 17,113
- ----------------------------------------------------------
Total loans . . . . . . . . . $49,872 $14,475 $184,099
==========================================================
The following table sets forth at December 31, 2002, the dollar amount of
all fixed rate and adjustable rate loans due or repricing after December 31,
2003:
Fixed Adjustable Total
- ----------------------------------------------------------------
(In Thousands)
Real estate loans:
First mortgage loans . . . . . $ 95,559 $ 27,820 $123,379
Second mortgage loans. . . . . 6,673 - 6,673
Commercial and consumer loans. 5,712 - 5,712
- ----------------------------------------------------------------
Total loans. . . . . . . . . . $107,944 $ 27,820 $135,764
================================================================
ONE- TO FOUR-FAMILY RESIDENTIAL MORTGAGE LOANS. The Bank's primary lending
activity is the origination of first mortgage loans secured by one- to
four-family residential properties. A portion of one- to four-family mortgage
loans originated by the Bank are secured by non-owner occupied homes which are
primarily used to furnish housing to students attending the SUNY College at
Oswego. The Bank generally retains in its portfolio all ARM loans that it
originates. However, the Bank generally underwrites its loans so as to be
eligible for resale in the secondary mortgage market. At December 31, 2002,
approximately 76.7% of the Bank's one- to four-family residential real estate
loans were secured by owner-occupied properties.
Fixed-rate one- to four-family residential mortgage loans originated by the
Bank are originated with terms of up to 30 years (although fixed rate loans held
in portfolio are generally limited to terms of 20 years or less), amortize on a
monthly basis, and have principal and interest due each month. Such real estate
loans often remain outstanding for significantly shorter periods than their
contractual terms to maturity, particularly in a declining interest rate
environment. Borrowers may refinance or prepay loans at their option. One- to
5
four-family residential mortgage loans originated by the Bank customarily
contain "due-on-sale" clauses which permit the Bank to accelerate the
indebtedness of the loan upon transfer of ownership of the mortgaged property.
Due-on-sale clauses are an important means of increasing the interest rate on
existing mortgage loans during periods of rising interest rates. An origination
fee of up to 1% is charged on fixed-rate mortgage loans. As a result of the low
interest rate environment that has existed in recent years, many of the Bank's
borrowers have refinanced their mortgage loans with the Bank at lower interest
rates. During years ended December 31, 2002 and 2001, 60.3% and 72.0%,
respectively, of the Bank's one-to-four-family mortgage loan originations
consisted of fixed-rate loan.
The Bank also originates ARM loans which serve to reduce interest rate
risk. The Bank currently originates 3/1 ARM and 5/1 ARM loans; mortgage loans in
which the interest rate is fixed for the first three or five years and adjusts
annually thereafter. This loan product typically is originated with terms up to
30 years. ARM loans are originated with terms ranging from 5 to 30 years. ARM
loans originated by the Bank provide for maximum periodic interest rate
adjustment of 2 percent per year and an overall maximum interest rate increase
which is determined at the time the loan is originated. However, ARM loans may
not adjust to a level below the initial rate. ARMs may be offered at an initial
rate below the prevailing market rate. The Bank's one- to four-family ARM loan
originations totaled $6.9 million, $9.1 million, and $2.0 million, during the
years 2002, 2001 and 2000, respectively. The Bank requires that borrowers
qualify for ARM loans based upon the loan's fully indexed rate.
At December 31, 2002, $58.5 million, or 49.2 %, of the Bank's one- to
four-family loan portfolio consisted of ARM loans. ARM loans generally pose a
credit risk in that as interest rates rise, the amount of a borrower's monthly
loan payment also rises, thereby increasing the potential for delinquencies and
loan losses. At the same time, the marketability of such loans may be adversely
affected by higher rates.
The Bank also originates loans to finance the construction of one- to
four-family owner-occupied residences. Funds are disbursed as construction
progresses. Loans to finance one- to four-family construction typically provide
for a six-month construction phase during which interest accrues and which is
deducted from the funds disbursed. Upon completion of the construction phase the
loan automatically converts to permanent financing. At December 31, 2002, the
Bank held $4.4 million of one- to four-family construction loans.
The Bank's lending policies require private mortgage insurance for loan to
value ratios in excess of 80%.
COMMERCIAL REAL ESTATE LOANS. Loans secured by commercial real estate
constituted approximately $31.7 million, or 17.2%, of the Bank's total loan
portfolio at December 31, 2002. At December 31, 2002, substantially all of the
Bank's commercial real estate loans were secured by properties located within
the Bank's market area. At December 31, 2002, the Bank's commercial real estate
loans had an average principal balance of $173,000. At that date, the largest
commercial real estate loan had a principal balance of $1.3 million, and was
secured by five retail business properties located in Oswego County. This loan
is currently performing in accordance with its original terms. Commercial real
estate loans are generally offered with adjustable interest rates tied to a
market index which currently is the adjusted six month moving average of the six
month Treasury bill auction discount rate, with an overall interest rate cap
which is determined at the time the loan is originated. Commercial real estate
loans may not adjust to a level below the initial rate. The Bank generally
offers commercial real estate loans with from one to five year adjustment
periods. The Bank generally makes commercial real estate loans up to 75% of the
appraised value of the property securing the loan. An origination fee of up to
2% of the principal balance of the loan is typically charged on commercial real
estate loans. Commercial real estate loans originated by the Bank generally are
underwritten to mature between 5 and 20 years with an amortization schedule of
between 10 and 30 years. The Bank has in the past sold loan participations to
other financial institutions and expects to do so in the future as opportunities
arise.
In underwriting commercial real estate loans the Bank reviews the expected
net operating income generated by the real estate to support debt service, the
age and condition of the collateral, the financial resources and income level of
the borrower and the borrower's experience in owning or managing similar
properties. The Bank generally obtains personal guarantees from all commercial
borrowers. Loans secured by commercial real estate generally involve a greater
degree of risk than one- to four-family residential mortgage loans and carry
larger loan balances. This increased credit risk is a result of several factors,
including the concentration of principal in a limited number of loans and
6
borrowers, the effects of general economic conditions on income producing
properties, and the increased difficulty of evaluating and monitoring these
types of loans. Furthermore, the repayment of loans secured by commercial real
estate is typically dependent upon the successful operation of the related real
estate. If the cash flow from the property is reduced, the borrower's ability to
repay the loan may be impaired.
MULTI-FAMILY REAL ESTATE LOANS. Loans secured by multi-family real estate
(real estate containing five or more dwellings) constituted approximately
$973,000, or .5%, of the Bank's total loan portfolio at December 31, 2002. At
December 31, 2002, the Bank had a total of 8 loans secured by multi-family real
estate properties. The Bank's multi-family real estate loans are secured by
multi-family rental properties (primarily townhouses and walk-up apartments). At
December 31, 2002, substantially all of the Bank's multi-family real estate
loans were secured by properties located within the Bank's market area. At
December 31, 2002, the Bank's multi-family real estate loans had an average
principal balance of approximately $122,000 and the largest multi-family real
estate loan had a principal balance of $352,000, and was performing in
accordance with its terms. Multi-family real estate loans generally are offered
with adjustable interest rates tied to the adjusted six month moving average of
the six month Treasury Bill auction discount rate index with an overall interest
rate cap which is determined at the time the loan is originated. Multi-family
real estate loans may not adjust below the initial rate. Multi-family real
estate loans are underwritten to mature between 5 and 20 years, and to amortize
over 10 to 30 years. An origination fee of 1% is generally charged on
multi-family real estate loans.
In underwriting multi-family real estate loans, the Bank reviews the
expected net operating income generated by the real estate to support the debt
service, the age and condition of the collateral, the financial resources and
income level of the borrower and the borrower's experience in owning or managing
similar properties. The Bank generally requires a debt service coverage ratio of
at least 120% (net of operating expenses) of the monthly loan payment. The Bank
makes multi-family real estate loans up to 75% of the appraised value of the
property securing the loan. The Bank generally obtains personal guarantees from
all multi-family real estate borrowers.
Loans secured by multi-family real estate generally involve a greater
degree of credit risk than one- to four-family residential mortgage loans and
carry larger loan balances. This increased credit risk is a result of several
factors, including the concentration of principal in a limited number of loans
and borrowers, the effects of general economic conditions on income producing
properties, and the increased difficulty of evaluating and monitoring these
types of loans. Furthermore, the repayment of loans secured by multi-family real
estate and commercial real estate is typically dependent upon the successful
operation of the related real estate property. If the cash flow from the project
is reduced, the borrower's ability to repay the loan may be impaired.
SECOND MORTGAGE LOANS. The Bank also offers home equity loans and equity
lines of credit collateralized by a second mortgage on the borrower's principal
residence. The Bank's home equity lines of credit are secured by the borrower's
principal residence with a maximum loan-to-value ratio, including the principal
balances of both the first and second mortgage loans of 80%, or up to 90% where
the Bank has made the first mortgage loan. At December 31, 2002, the disbursed
portion of home equity lines of credit totaled $4.4 million. Home equity lines
of credit are offered on an adjustable rate basis with interest rates tied to
the prime rate as published in The Wall Street Journal, plus up to 50 basis
points and with terms of up to 15 years.
Home equity loans are fixed rate loans with terms generally up to 10 years,
although on occasion the Bank may originate a home equity loan with a term of up
to 15 years.
CONSUMER LOANS. As of December 31, 2002, consumer loans totaled $3.9
million, or 2.1%, of the Bank's total loan portfolio. The principal types of
consumer loans offered by the Bank are unsecured personal loans, and loans
secured by deposit accounts. Other consumer loans are offered on a fixed rate
basis with maturities generally of less than five years.
The underwriting standards employed by the Bank for consumer loans include
a determination of the applicant's credit history and an assessment of ability
to meet existing obligations and payments on the proposed loan. The stability of
the applicant's monthly income may be determined by verification of gross
monthly income from primary employment, and additionally from any verifiable
secondary income. Creditworthiness and the employment history of the applicant
are of primary consideration in originating consumer loans, and in the case of
home equity lines of credit, the Bank obtains a title guarantee, title search,
or an opinion as to the validity of title.
7
COMMERCIAL BUSINESS LOANS. The Bank currently offers commercial business
loans to businesses in its market area and to deposit account holders. At
December 31, 2002, the Bank had commercial business loans outstanding with an
aggregate balance of $12.8 million, of which $8.1 million consisted of
commercial lines of credit. The average commercial line of credit balance was
approximately $80,000. Commercial lines of credit generally have variable rates
of interest tied to the prime rate and adjust monthly. The lines of credit are
generally collateralized by current assets of the borrower and renewed on an
annual basis. The average commercial business loan balance was approximately
$39,000. Commercial business loans generally have fixed rates of interest. The
loans are generally of short duration with average terms of five years, but
which may range up to 15 years. Lease financing arrangements are loans which are
secured by pools of leases for medical or dental equipment or leases to finance
the acquisition of business equipment.
Underwriting standards employed by the Bank for commercial business loans
include a determination of the applicant's ability to meet existing obligations
and payments on the proposed loan from normal cash flows generated by the
applicant's business. The financial strength of each applicant also is assessed
through a review of financial statements provided by the applicant.
Commercial business loans generally bear higher interest rates than
residential loans, but they also may involve a higher risk of default since
their repayment is generally dependent on the successful operation of the
borrower's business. The Bank generally obtains guarantees from the borrower, a
third party, or the Small Business Administration, as a condition to originating
its commercial business loans.
LOAN ORIGINATIONS, SOLICITATION, PROCESSING, AND COMMITMENTS. Loan
originations are derived from a number of sources such as existing customers,
developers, walk-in customers, real estate broker referrals, and commissioned
mortgage loan originators. Upon receiving a loan application, the Bank obtains a
credit report and employment verification to verify specific information
relating to the applicant's employment, income, and credit standing. In the case
of a real estate loan, an independent appraiser approved by the Bank appraises
the real estate intended to secure the proposed loan. A loan processor in the
Bank's loan department checks the loan application file for accuracy and
completeness, and verifies the information provided. Mortgage loans of up to
$275,000 may be approved by any designated loan officer; mortgage loans in
excess of $325,000 must be approved by the Board of Directors. Commercial loans
of up to $50,000 unsecured, or $75,000 (if secured by other than real estate)
may be approved by the Bank's President, the Executive Vice President and Senior
Commercial Lender. These individuals may join their limits to a total approval
amount of $225,000 unsecured, and $325,000 secured. Loans in excess of these
limits must be approved by either the entire Board of Directors, or a
subcommittee of the Board of Directors. The Board of Directors, at their monthly
meeting, will review and verify that management's approvals of loans are made
within the scope of management's authority. After the loan is approved, a loan
commitment letter is promptly issued to the borrower. At December 31, 2002, the
Bank had commitments to originate $15.3 million of loans.
If the loan is approved, the commitment letter specifies the terms and
conditions of the proposed loan including the amount of the loan, interest rate,
amortization term, a brief description of the required collateral, and required
insurance coverage. The borrower must provide proof of fire and casualty
insurance on the property (and, as required, flood insurance) serving as
collateral, which insurance must be maintained during the full term of the loan.
Title insurance, title search, or an opinion of counsel as to the validity of
title are required on all loans secured by real property. In recent years, the
Bank has not purchased loans originated by other lenders.
8
ORIGINATION, REPAYMENT AND SALE OF LOANS. The table below shows the Bank's
loan origination, repayment and sales activity for the periods indicated.
Year Ended December 31,
- --------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
- --------------------------------------------------------------------------------------------
(In Thousands)
Loan receivable, beginning of period . . $169,538 $150,496 $131,995 $129,338 $122,727
Originations:
Real estate:
First mortgage/(1)//(3) . . . . . . . . 73,778 44,510 30,627 26,987 34,908
Second mortgage/(2). . . . . . . . . . . 2,645 1,871 2,721 1,408 1,516
Commercial and consumer loans:
Consumer loans . . . . . . . . . . . . . 1,697 1,960 1,784 1,299 2,412
Lease financing. . . . . . . . . . . . . - - - - -
Commercial . . . . . . . . . . . . . . . 3,004 6,003 3,812 5,210 6,849
- --------------------------------------------------------------------------------------------
Total originations . . . . . . . . . . 81,124 54,344 38,944 34,904 45,685
Transfer of mortgage loans to
foreclosed real estate . . . . . . . . . 1,138 348 638 93 563
Repayments . . . . . . . . . . . . . . . 45,984 20,979 18,930 26,161 29,969
Loan sales . . . . . . . . . . . . . . . 19,441 13,975 875 5,993 8,542
- --------------------------------------------------------------------------------------------
Net loan activity. . . . . . . . . . . . 14,561 19,042 18,501 2,657 6,611
- --------------------------------------------------------------------------------------------
Total loans receivable at end of period. $184,099 $169,538 $150,496 $131,995 $129,338
============================================================================================
____________________________________
/(1)/Includes $10.7 million in commercial real estate loans for the year ended
December 31, 2002.
/(2)/Includes $2.6 million in home equity loans and a net change of $l.1 million
in home equity lines of credit for year ended December 31, 2002.
/(3)/Includes $12.1 million of mortgage loans held-for-sale originated during
the year ended December 31, 2002.
LOAN ORIGINATION FEES AND OTHER INCOME. In addition to interest earned on
loans, the Bank generally receives loan origination fees. To the extent that
loans are originated or acquired for the Bank's portfolio, SFAS 91 requires that
the Bank defer loan origination fees and costs and amortize such amounts as an
adjustment of yield over the life of the loan by use of the level yield method.
ARM loans originated below the fully indexed interest rate will have a
substantial portion of the deferred amount recognized as income in the initial
adjustment period. Fees deferred under SFAS 91 are recognized into income
immediately upon prepayment or the sale of the related loan. At December 31,
2002, the Bank had $259,000 of net deferred loan origination costs. Loan
origination fees 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 for 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, late charges and income from REO operations. The Bank
recognized fees and service charges of $1.1 million, $934,000 and $853,000, for
the fiscal years ended December 31, 2002, 2001 and 2000, respectively.
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. If the loan is secured by readily
marketable collateral, the bank is allowed to apply an additional amount equal
to 10% of unimpaired net worth. At December 31, 2002, the Bank's largest lending
relationship totaled $3.8 million and consisted of loans secured by a retail
business property and residence. The Bank's second largest lending relationship
totaled $3.5 million and consisted of loans secured by commercial retail
businesses and residential properties. The Bank's third largest lending
relationship totaled $3.2 million and consisted of loans secured by business
assets, equipment and real estate. The Bank's fourth largest lending
relationship totaled $2.8 million and was secured by retail business property.
The Bank's fifth largest lending relationship totaled $1.8 million and consisted
of loans secured by retail business property, retail office plaza and one-to
four- family residential properties. All of the above loans are also secured by
underlying personal guarantees. At December 31, 2002, the aforementioned loans
were performing in accordance with their terms with the exception of one credit
relationship which was delinquent at December 31, 2002. Subsequent to year end,
this credit relationship was modified and is now performing in accordance with
those terms.
9
DELINQUENCIES AND CLASSIFIED ASSETS
DELINQUENCIES. The Bank's collection procedures provide that when a loan is
15 days past due, a courtesy phone call is made to the borrower. If the
delinquency continues, at 35 days a delinquent notice is sent and immediate
payment is demanded. If a loan becomes 40 days past due, and no progress has
been made in resolving the delinquency, the Bank will send a notice of
foreclosure or notice to commence another legal proceeding, if it is not a
mortgagee. When a loan continues in a delinquent status for 70 days or more, and
a repayment schedule has not been made or kept by the borrower, generally
foreclosure proceedings or other appropriate legal actions are initiated to
minimize any potential loss.
NON-PERFORMING ASSETS. Loans are reviewed on a regular basis and are placed
on a non-accrual status when, in the opinion of management, the collection of
additional interest is doubtful. Loans are placed on non-accrual status when
either principal or interest is 90 days or more past due or less than 90 days,
in the event the loan has been referred to the Bank's legal counsel for
foreclosure or other colletions. Interest accrued and unpaid at the time a loan
is placed on non-accrual status is charged against interest income. At December
31, 2002, the Bank had non-performing assets of $3.1 million, and a ratio of
non-performing loans and real estate owned ("REO") of 1.11% total assets.
Non-performing assets increased $355,000, or 12.9%, from $2.8 million in 2001.
Real estate acquired by the Bank as a result of foreclosure or by the deed
in lieu of foreclosure is classified as REO until such time as it is sold. These
properties are carried at the lower of their recorded amount or estimated fair
value less estimated costs to sell the property. REO totaled $1.4 million,
$632,000 and $884,000 at December 31, 2002, 2001 and 2000, respectively.
A component of REO consists of a real estate development project which had
a net book value of $297,000 at December 31, 2002. The Bank originally entered
into a $570,000 commercial real estate loan in 1988 for the development of 49
single family residences. This loan was made under the "leeway provision" of the
New York State Banking Law. Under this provision of the Banking Law the lending
relationship was originally structured so that the Bank held title to the
property securing the loan subject to the fulfillment of the borrower's
obligations under the loan. In 1990, the developer became insolvent, was unable
to satisfy the terms of the loan and the Bank assumed control of the project. In
1998, the Bank established a wholly-owned subsidiary, whose sole business is the
ownership and final development of the Whispering Oaks real estate subdivision
in Baldwinsville, New York. This subsidiary was initially capitalized with
$50,000 in cash. It is anticipated that this capitalization, together with
interim financing to be provided by the Bank, will be sufficient to complete and
liquidate this asset. At December 31, 2002, the Bank had 10 lots remaining to be
sold. The proceeds from the sale of the lots are used to reduce the outstanding
balance of REO. The Bank believes it will fully recover its investment in this
property.
DELINQUENT LOANS AND NON-PERFORMING ASSETS
The following table sets forth information regarding the Bank's loans
delinquent 90 days or more, and real estate acquired or deemed acquired by
foreclosure at the dates indicated. When a loan is delinquent 90 days or more,
the Bank 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 15 and SFAS 114.
At December 31,
- -------------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
- -------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Loans delinquent, 90 days or more:
Real estate loans . . . . . . . . . . . $ 1,483 $ 1,576 $ 1,594 $ 2,284 $ 1,298
Commercial and consumer loans . . . . . 228 543 234 270 534
- -------------------------------------------------------------------------------------------------
Total delinquent loans. . . . . . . . . 1,711 2,119 1,828 2,554 1,832
Total REO . . . . . . . . . . . . . . . 1,396 632 884 641 742
- -------------------------------------------------------------------------------------------------
Total nonperforming assets/(1)/ . . . . $ 3,107 $ 2,751 $ 2,712 $ 3,195 $ 2,574
=================================================================================================
Total loans delinquent 90 days or more
to total loans receivable/(2)/ . . . . . 0.9% 1.3% 1.2% 2.0% 1.4%
Total loans delinquent 90 days or more
to total assets . . . . . . . . . . . . 0.6% 0.9% 0.8% 1.2% 0.9%
Total nonperforming assets to total
assets. . . . . . . . . . . . . . . . 1.1% 1.1% 1.2% 1.5% 1.3%
Net loans receivable/(3)/. . . . . . . . 182,618 167,041 149,102 130,761 128,200
- -------------------------------------------------------------------------------------------------
Total assets. . . . . . . . . . . . . . $279,055 $244,366 $231,847 $216,324 $203,252
=================================================================================================
10
________________________________
/(1)/Net of specific valuation allowances.
/(2)/Net of unearned discount, and the allowance for loan losses.
/(3)/Includes $3.6 million of mortgage loans held-for-sale.
During the year ended December 31, 2002 and 2001, respectively, additional
gross interest income of $141,000 and $118,000 would have been recorded on loans
accounted for on a non-accrual basis if the loans had been current throughout
the period. No interest income on non-accrual loans was included in income
during the same periods.
The following table sets forth information with respect to loans past due
30-89 days in the Bank's portfolio at the dates indicated.
At December 31,
- -------------------------------------------------------------------------
2002 2001 2000 1999 1998
- -------------------------------------------------------------------------
(In Thousands)
Loans past due 30-89 days:
Real estate loans. . . . . . . $2,234 $3,476 $2,493 $1,619 $2,010
Commercial and consumer loans. 2,156 994 147 161 126
- -------------------------------------------------------------------------
Total past due 30-89 days. . . $4,390 $4,470 $2,640 $1,780 $2,136
=========================================================================
The following table sets forth information regarding the Bank's delinquent
loans 60 days and greater and REO at December 31, 2002.
At December 31, 2002
- -----------------------------------------------------------
Balance Number
- -----------------------------------------------------------
(Dollars in Thousands)
Residential real estate:
Loans 60 to 89 days delinquent. . . . . $ 368 6
Loans more than 90 days delinquent. . . 1,483 24
Consumer and commercial business loans
60 days or more delinquent. . . . . . . 1,577 22
Real estate owned . . . . . . . . . . . 1,396 7
- -----------------------------------------------------------
Total . . . . . . . . . . . . . . . . . $ 4,824 59
===========================================================
CLASSIFICATION OF ASSETS. Federal regulations provide for the classification of
loans and other assets such as debt and equity securities considered to be of
lesser quality as "substandard," "doubtful," or "loss" assets. An asset is
considered "substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the savings institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "doubtful" have all of the weaknesses
inherent in those classified "substandard," with the added characteristic that
the weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted. Assets that do not
expose the savings institution to risk sufficient to warrant classification in
one of the aforementioned categories, but which possess some weaknesses, are
required to be designated "special mention" by management.
When a savings institution classifies problem assets as either substandard
or doubtful, it is required to establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances that have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When a savings institution classifies
problem assets as "loss," it is required either to establish a specific
allowance for losses equal to 100% of the amount of the assets so classified, or
to charge off such amount. A savings institution's determination as to the
classification of its assets and the amount of its valuation allowances is
subject to review by federal and state regulatory authorities, which can order
the establishment of additional general or specific loss allowances. The Bank
regularly reviews the problem loans in its portfolio to determine whether any
loans require classification in accordance with applicable regulations.
11
The following table sets forth the aggregate amount of the Bank's
internally classified assets at the dates indicated.
At December 31,
- ------------------------------------------------------------------
2002 2001 2000 1999 1998
- ------------------------------------------------------------------
(In Thousands)
Substandard assets/(1)/. $2,828 $2,395 $1,770 $2,668 $2,482
Doubtful assets. . . . . 26 30 34 110 103
Loss assets. . . . . . . 70 33 44 7 90
- ------------------------------------------------------------------
Total classified assets. $2,924 $2,458 $1,848 $2,785 $2,675
==================================================================
_______________________________
/(1)/Includes $297,000 $297,000, $458,000, $510,000, and $638,000 for a real
estate development project classified as REO at December 31, 2002, 2001,
2000, 1999 and 1998, respectively.
ALLOWANCE FOR LOAN LOSSES. Management's policy is to provide for estimated
losses on the Bank's loan portfolio based on management's evaluation of the
potential losses that may be incurred. The Bank reviews on a quarterly basis the
loans in its portfolio which have demonstrated delinquencies, including problem
loans, to determine whether any loans require classification or the
establishment of appropriate reserves or allowances for losses. Such evaluation,
which includes a review of all loans of which full collectibility of interest
and principal may not be reasonably assured, considers, among other matters,
past loss experience, present economic conditions and other factors deemed
relevant by management. Management calculates the general allowance for loan
losses on past experience as well as current delinquencies and the composition
of the Bank's loan portfolio. While both general and specific loss allowances
are charged against earnings, general loan loss allowances are included, subject
to certain limitations, as capital in computing risk-based capital under federal
regulations.
In accordance with SFAS 114, a loan is considered impaired when each of the
following criteria are met: the loan is of a material size, the loan is
considered to be non-performing, and a loss is probable. The measurement of
impaired loans is generally based upon the present value of expected future cash
flows discounted at the historic effective interest rate, except that all
collateral-dependent loans are measured for impairment based on the fair value
of the collateral. There were no impaired loans as of December 31, 2002.
Management will continue to review the entire loan portfolio to determine
the extent, if any, to which further additional loan loss provisions may be
deemed necessary. Management believes that the Bank's current allowance for loan
losses is adequate, however, there can be no assurance that the allowance for
loan losses will be adequate to cover losses that may in fact be realized in the
future or that additional provisions for loan losses will not be required.
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES. The following table sets forth
the analysis of the allowance for loan losses at or for the periods indicated.
At or for the Period Ended December 31,
- --------------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
- --------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Total loans receivable, net. . . . . . . . . $182,618 $167,041 $149,102 $130,761 $128,200
Average loans outstanding. . . . . . . . . . 177,047 155,653 139,258 130,728 126,931
Allowance balance (at beginning of period) . 1,679 1,274 1,150 939 828
Provision for losses:
Real estate. . . . . . . . . . . . . . . . . 254 139 65 135 83
Commercial and consumer loans. . . . . . . . 1,122 569 179 238 298
Charge offs:
Real estate. . . . . . . . . . . . . . . . . 85 109 40 0 141
Commercial and consumer loans. . . . . . . . 1,578 256 99 190 140
Recoveries:
Commercial and consumer loans. . . . . . . . 89 62 19 28 11
- --------------------------------------------------------------------------------------------------
Allowance balance (at end of period) . . . . $ 1,481 $ 1,679 $ 1,274 $ 1,150 $ 939
==================================================================================================
12
Allowance for loan losses as a percent of
net loans receivable at end of period. . . . 0.8% 1.0% 0.9% 0.9% 0.7%
Loans charged off as a percent of average
loans outstanding. . . . . . . . . . . . . . 0.9% 0.2% 0.1% 0.1% 0.2%
Ratio of allowance for loan losses to total
nonperforming loans at end of period . 86.6% 79.2% 69.7% 45.0% 51.3%
Ratio of allowance for loan losses to total
nonperforming assets at end of period . 47.7% 61.0% 47.0% 36.0% 36.5%
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES. The following table sets forth the
allocation of allowance for loan losses by loan category for the periods
indicated. The allocation of the allowance by category is not necessarily
indicative of future losses and does not restrict the use of the allowance to
absorb losses in any category.
At December 31,
- ------------------------------------------------------------------------------------------------------------
2002 2001 2000
- ------------------------------------------------------------------------------------------------------------
% of Loans % of Loans % of Loans
In Each In Each In Each
Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans
------- ------------ ------- ------------ ------- ------------
(Dollars in Thousands)
Balance at end of period applicable to:
Real estate loans. . . . . . . . . . . . $ 303 90.52% $ 496 89.50% $ 466 89.39%
Commercial and consumer loans. . . . . . 1,178 9.48 1,183 10.50 808 10.61
- ------------------------------------------------------------------------------------------------------------
Total allowance for loan losses/(1)/ . . $ 1,481 100.00% $ 1,679 100.00% $ 1,274 100.00%
=============================================================================================================
1999 1998
- --------------------------------------------------------------------------------------
% of Loans % of Loans
In Each In Each
Category to Category to
Amount Total Loans Amount Total Loans
- --------------------------------------------------------------------------------------
Balance at end of period applicable to:
Real estate loans. . . . . . . . . . . . $ 440 90.81% $ 380 92.01%
Commercial and consumer loans. . . . . . 710 9.19 559 7.99
- --------------------------------------------------------------------------------------
Total allowance for loan losses/(1)/ . . .$ 1,150 100.00% $ 939 100.00%
======================================================================================
___________________________________________________
/(1)/ Percentages include unearned discount and origination fees.
INVESTMENT ACTIVITIES
The investment policy of the Bank established by the Board of Directors
attempts to provide for the overall asset/liability management needs of the
Bank, and maintain liquidity, maintain a high quality diversified investment
portfolio in order to obtain a favorable return on investment without incurring
undue interest rate and credit risk, provide collateral for pledging
requirements, and to complement the Bank's lending activities. At December 31,
2002, the Bank had investment securities with an aggregate amortized cost of
$62.0 million and a market value of $62.5 million. At December 31, 2002, the
Bank's amortized cost value of investment securities consisted of $15.4 million
of corporate debt issues and $12.9 million of securities issued or guaranteed by
the United States Government or agencies thereof and state and municipal
obligations. The corporate debt issues primarily consist of financial
corporation debt and industrial debentures (the largest single issuer was $3.0
million). These issues generally have maturities ranging up to 20 years. All
corporate debt investments have been rated as investment grade by either Moody's
or Standard & Poor's. Typically, such investments yield 60-70 basis points more
than Treasury securities with comparable maturities. To a lesser extent, the
Bank also invests in mutual funds and equity securities. At December 31, 2002,
the Bank held $6.2 million in common stock, of which $2.2 million was Federal
Home Loan Bank Stock. The Bank's mutual fund investments at December 31, 2002
consisted of $3.1 million in an equity mutual fund and $3.0 million in an
adjustable rate mortgage fund. At December 31, 2002, the Bank had invested $25.2
million in mortgage-backed securities, net. Mortgage-backed securities, like
mortgage loans, amortize over the life of the security as the underlying
mortgages are paid down. The speed at which principal payments above normally
scheduled amortization occurs, is generally unpredictable. Historically, the
13
securities have paid down more rapidly in a falling interest rate environment,
thereby shortening the life of the security. Likewise, in a rising interest rate
environment, the life of the mortgage-backed security tends to extend. The
result is that, generally, the Bank will receive more investable funds in lower
interest rate environments and less investable funds during periods of higher
interest rates. The embedded option on the part of the underlying mortgagee to
prepay the loan, therefore, tends to impact the value of the security and can
adversely impact the Bank's net interest margin. The Bank's investments are,
generally, liquid, and therefore allow the Bank to respond more readily to
changing market conditions. The investment portfolio is accounted for in
accordance with FASB Statement 115.
The Bank generally has maintained a portfolio of liquid assets that exceeds
regulatory requirements. Liquidity levels may be increased or decreased
depending upon the yields on investment alternatives and upon management's
judgment as to the attractiveness of the yields then available in relation to
other opportunities and its expectation of the yield that will be available in
the future, as well as management's projections as to the short term demand for
funds to be used in the Bank's loan origination and other activities. For
further information regarding the Bank's investments see Note 2 to the Notes to
Financial Statements.
At December 31, 2002, the Company holds the following corporate debt
investments which exceed 10% of total capital.
Issuer Book Value Fair Market Value
-----------------------------------------------
CNA Financial $2,999,626 $2,920,704
INVESTMENT PORTFOLIO. The following table sets forth the carrying value of
the Bank's investment portfolio at the dates indicated. At December 31, 2002,
the market value of the Bank's investments was approximately $62.5 million. The
market value of investments includes interest-earning deposits, and
mortgage-backed securities.
At December 31,
- ------------------------------------------------------------------------------
2002 2001 2000
- ------------------------------------------------------------------------------
(In Thousands)
Investment securities:
US Government and agency obligations . . . . . . $ 4,378 $ 5,971 $ 9,667
State and municipal obligations. . . . . . . . . 8,549 6,012 6,405
Corporate debt issues. . . . . . . . . . . . . . 15,375 20,949 23,027
Equity securities. . . . . . . . . . . . . . . . 6,225 3,227 2,340
Mutual funds . . . . . . . . . . . . . . . . . . 3,070 3,007 2,861
- ------------------------------------------------------------------------------
37,597 39,166 44,300
Unrealized loss on available for sale portfolio. (251) (293) (26)
- ------------------------------------------------------------------------------
Total investment securities. . . . . . . . . . . 37,346 38,873 44,274
- ------------------------------------------------------------------------------
Total investments. . . . . . . . . . . . . . . . $37,346 $38,873 $44,274
==============================================================================
Mortgage-backed securities, net:
Adjustable rate. . . . . . . . . . . . . . . . . 3,423 633 1,284
Fixed rate . . . . . . . . . . . . . . . . . . . 21,017 13,488 18,122
- ------------------------------------------------------------------------------
24,440 14,121 19,406
Unrealized gain on available for sale portfolio. 720 428 78
- ------------------------------------------------------------------------------
Total mortgage-backed securities, net. . . . . . $25,160 $14,549 $19,484
==============================================================================
14
INVESTMENT PORTFOLIO MATURITIES. The following table sets forth the
amortized cost, market value, average life in years, and annualized weighted
average yield of the Bank's investment portfolio at December 31, 2002.
Annualized
Average Weighted
Amortized Market Life Average
Cost Value Years Yield
- -----------------------------------------------------------------------------------
(Dollars in Thousands)
Investment securities:
U.S. Government treasury . . . . . . . . . . . . $ 19 $ 18 6.88 10.9%
U.S. Government agency . . . . . . . . . . . . . 4,359 4,447 2.22 3.5%
State and municipal obligations. . . . . . . . . 8,549 8,864 6.87 5.1%
Corporate debt issues. . . . . . . . . . . . . . 15,375 15,270 8.11 6.3%
Marketable equity securities . . . . . . . . . . 9,295 8,747
- -----------------------------------------------------------------------------------
Total. . . . . . . . . . . . . . . . . . . . . .$37,597 $37,346
- ---------------------------------------------------------- =======
Unrealized loss on available for sale portfolio. (251)
- ----------------------------------------------------------
Carrying value of investment securities. . . . . $37,346
==========================================================
SECURITIES PORTFOLIO MATURITIES. The following table sets forth the
scheduled maturities, carrying values, market values and average yields for the
Bank's investment securities at December 31, 2002. Yield is calculated on the
amortized cost to maturity, and does not reflect adjustments to a fully
tax-equivalent basis.
December 31, 2002
- ----------------------------------------------------------------------------------------------
One year One to Five to
or less five years Ten Years
- ----------------------------------------------------------------------------------------------
Annualized Annualized Annualized
Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield
------- ------ ------- ------ ------- -------
(Dollars in Thousands)
INVESTMENT SECURITIES AVAILABLE FOR SALE:
Debt investment securities:
- ------------------------------------------
U.S. Agency securities . . . . . . . . . . $ 2,014 3.505% $ 2,327 3.495% $ 18 6.626%
U.S. Government securities . . . . . . . . - - - - 19 10.853
State and municipal obligations. . . . . . 937 7.860 3,388 4.923 1,330 4.287
Corporate debt issues. . . . . . . . . . . 783 7.024 7,603 6.336 3,217 7.200
- ----------------------------------------------------------------------------------------------
Total. . . . . . . . . . . . . . . . . . $ 3,734 5.336% $13,318 5.478% $ 4,584 6.373%
- ----------------------------------------------------------------------------------------------
Equity and mortgage-backed securities:
- ------------------------------------------
Mutual funds . . . . . . . . . . . . . . . $ 6,118 1.401% - - - -
Mortgage-backed securities . . . . . . . . - - 2,031 6.464 6,684 4.224
Common stock . . . . . . . . . . . . . . . 3,117 3.977 - - - -
- ----------------------------------------------------------------------------------------------
Total. . . . . . . . . . . . . . . . . . $ 9,295 2.277 2,031 6.464% $ 6,684 4.224%
- ----------------------------------------------------------------------------------------------
Total investment securities. . . . . . . . $13,029 3.164% $15,349 5.606% $11,268 5.105%
==============================================================================================
15
More Than Total
Ten Years Investment Securities
- -------------------------------------------------------------------------------------
Annualized Annualized
Weighted Weighted
Carrying Average Carrying Market Average
Value Yield Value Value Yield
- -------------------------------------------------------------------------------------
(Dollars in Thousands)
INVESTMENT SECURITIES AVAILABLE FOR SALE:
Debt investment securities:
- ------------------------------------------
U.S. Agency securities . . . . . . . . . . $ - -% $ 4,359 $ 4,446 3.512%
U.S. Government securities . . . . . . . . - - 19 18 10.854
State and municipal obligations. . . . . . 2,894 4.430 8,549 8,864 4.979
Corporate debt issues. . . . . . . . . . . 3,770 4.911 15,375 15,270 6.277
- -------------------------------------------------------------------------------------
Total. . . . . . . . . . . . . . . . . $ 6,664 4.673% $28,302 $28,598 5.079%
- -------------------------------------------------------------------------------------
Equity and mortgage-backed securities:
- ------------------------------------------
Mutual funds . . . . . . . . . . . . . . . $ - -% $ 6,118 $ 5,280 1.401%
Mortgage-backed securities . . . . . . . . 15,723 5.349 24,438 25,160 5.079
Common stock . . . . . . . . . . . . . . . 0 - 3,177 3,468 3.977
- -------------------------------------------------------------------------------------
Total. . . . . . . . . . . . . . . . . . . $15,723 5.349% $33,735 $33,908 4.307%
-------------------------------------------------------------------------------------
Total investment securities. . . . . . . . $22,527 5.146% $62,037 $62,506 5.268%
=========================================================== ================
Unrealized gain on available
for sale portfolio 469
-------
Total carrying value $62,506 5.268%
======= =======
SOURCES OF FUNDS
GENERAL. Deposits are the primary source of the Bank's funds for lending
and other investment purposes. In addition to deposits, the Bank derives funds
from the amortization and prepayment of loans and mortgage-backed securities,
the maturity of investment securities and operations and from other borrowings.
Scheduled loan principal repayments are a relatively stable source of funds,
while deposit inflows and outflows and loan prepayments are influenced
significantly by general interest rates and market conditions. Borrowings may be
used on a short-term basis to compensate for reductions in the availability of
funds from other sources or on a longer term basis for general business
purposes.
DEPOSITS. Consumer and commercial deposits are attracted principally from
within the Bank's market area through the offering of a broad selection of
deposit instruments including noninterest-bearing demand accounts, NOW accounts,
passbook and club accounts, money market deposit, term certificate accounts and
individual retirement accounts. While the Bank accepts deposits of $100,000 or
more, it generally does not currently offer premium rates for such deposits.
Deposit account terms vary according to the minimum balance required, the period
of time during which the funds must remain on deposit, and the interest rate,
among other factors. The Bank has a committee which meets weekly to evaluate the
Bank's internal cost of funds, surveys rates offered by competing institutions,
reviews the Bank's cash flow requirements for lending and liquidity and the
number of certificates of deposit maturing in the upcoming week. This committee
executes rate changes when deemed appropriate. The Bank does not obtain funds
through brokers, nor does it solicit funds outside its market area.
16
DEPOSIT PORTFOLIO. The following table sets forth information regarding
interest rates, terms, minimum amounts and balances of the Bank's savings and
other deposits as of December 31, 2002:
Weighted Percentage
Average Checking and Savings Minimum of Total
Interest Rate. Minimum Term Deposits Amount Balance Deposits
- -----------------------------------------------------------------------------------------------
(Balance in thousands)
0.000% . . . . None Non-interest demand account $ 50 $ 15,764 7.77%
0.768% . . . . None NOW accounts 500 15,404 7.59%
1.050% . . . . None Savings accounts - fixed 100 46,658 23.00%
1.320% . . . . None Savings accounts - tiered 100 18,859 9.30%
1.497% . . . . None Money management accounts 1,500 19,765 9.74%
Certificates of deposit:
1.793% . . . . 30-day Fixed term, fixed rate 2,500 2,332 1.15%
1.457% . . . . 3 months Fixed term, fixed rate 1,000 150 0.07%
1.896% . . . . 6 months Fixed term, fixed rate 2,500 8,046 3.97%
2.254% . . . . 9 months Fixed term, fixed rate 1,000 29 0.01%
2.976% . . . . 11 months Fixed term, fixed rate 1,000 527 0.26%
2.729% . . . . 12 months Fixed term, fixed rate 1,000 23,279 11.47%
3.142% . . . . 15 months Fixed term, fixed rate 1,000 3,841 1.89%
2.101% . . . . 18 months Fixed term, variable rate 1,000 1,201 0.59%
3.330% . . . . 18 months Fixed term, fixed rate 1,000 4,792 2.36%
4.166% . . . . 24 months Fixed term, fixed rate 1,000 5,839 2.88%
3.883% . . . . 30 months Fixed term, fixed rate 1,000 2,347 1.16%
5.088% . . . . 36 months Fixed term, fixed rate/(1)/ 1,000 14,336 7.07%
5.050% . . . . 48 months Fixed term, fixed rate/(1)/ 1,000 7,593 3.74%
5.968% . . . . 60 months Fixed term, fixed rate 1,000 2,665 1.31%
5.904% . . . . 84 months Fixed term, fixed rate 1,000 9,450 4.66%
3.045% . . . . 60-120 months Fixed term, fixed rate 1,000 4 0.01%
- -----------------------------------------------------------------------------------------------
Total $202,881/(2)/ 100.00%
===============================================================================================
________________________________
/(1)/This deposit product allows the depositor to elect to adjust the interest
rate paid once during the initial term of the deposit to the the prevailing
rate.
/(2)/Excludes escrow accounts totalling $1,640,784 at December 31, 2002.
The following table sets forth the change in dollar amount of savings
deposits in the various types of savings accounts offered by the Bank between
the dates indicated.
Balance Percent Balance Percent
At of Incr. At of Incr.
12/31/02 Deposits (Decr) 12/31/01 Deposits (Decr)
- ------------------------------------------------------------------------------------------
(Dollars in Thousands)
Club Accounts . . . . . . . $ 1,135 0.56% $ 161 $ 974 0.58% $ 16
Noninterest accounts. . . . 15,764 7.77 2,728 13,036 7.75 3,140
NOW accounts. . . . . . . . 15,404 7.59 173 15,231 9.06 (280)
Passbooks . . . . . . . . . 64,382 31.74 4,540 59,842 35.59 2,968
Money management accounts . 19,765 9.74 15,348 4,417 2.63 4,417
Time deposits which mature
Within 12 months. . . . . . 48,721 24.01 (2,450) 51,172 30.43 (604)
Within 12-36 months . . . . 24,622 12.14 7,909 16,713 9.94 (1,557)
Beyond 36 months. . . . . . 13,088 6.45 6,329 6,759 4.02 (320)
- ------------------------------------------------------------------------------------------
Total . . . . . . . . . . . $ 202,881/(1)/100.00% $34,737 $ 168,144 100.00% $ 7,783
==========================================================================================
17
Balance Percent Balance Percent Balance
at of Incr. At of Incr. At
12/31/00 Deposits (Decr) 12/31/99 Deposits (Decr) 12/31/98
- -------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Club Accounts . . . . . . . $ 958 0.60% $ (44) $ 1,002 0.66% $ 94 $ 908
Noninterest accounts. . . . 9,893 6.17 147 9,746 6.43 273 9,473
NOW accounts. . . . . . . . 15,511 9.67 1,515 13,996 9.24 (2,331) 16,327
Passbooks . . . . . . . . . 56,874 35.47 (1,555) 58,429 38.56 (4,893) 63,322
Time deposits which mature
Within 12 months. . . . . . 51,776 32.29 5,688 46,088 30.41 (5,716) 51,804
Within 12-36 months . . . . 18,270 11.39 2,080 16,190 10.68 2,799 13,391
Beyond 36 months. . . . . . 7,079 4.41 994 6,085 4.02 1,801 4,284
- --------------------------------------------------------------------------------------------------------
Total . . . . . . . . . . . $160,361 100.00% $ 8,825 $ 151,536 100.00% $(7,973) $ 159,509
========================================================================================================
_____________________________________________________
/(1)/ Excludes escrow accounts totalling $1,640,784 at December 31, 2002.
The following table sets forth the certificates of deposit in the Bank
classified by rates as of the dates indicated:
At December 31,
- -----------------------------------------
2002 2001 2000
- -----------------------------------------
(In Thousands)
RATE
- -----------------------------------------
3.00% or less. $36,659 $ 7,169 $ 6
3.01 - 3.99% . 14,776 13,701 14
4.00 - 4.99% . 16,334 17,331 1,133
5.00 - 5.99% . 8,168 17,284 20,353
6.00 - 6.99% . 10,198 18,000 54,324
7.00 - 7.99% . 296 1,159 1,169
- -----------------------------------------
$86,431 $74,644 $76,999
=========================================
The following table sets forth the amount and maturities of certificates of
deposit at December 31, 2002.
Amount due
- ---------------------------------------------------------------------------------------
Less Than 1-2 2-3 3-4 4-5 After 5
One Year Years Years Years Years Years Total
- ---------------------------------------------------------------------------------------
(Dollars in Thousands)
3.00% or less. . . . . $ 31,539 $ 4,597 $ 202 $ 307 $ 13 $ 0 $36,659
3.01 - 3.99% . . . . . 6,867 4,190 2,284 828 323 284 14,776
4.00 - 4.99% . . . . . 3,720 1,608 6,297 2,839 434 1,436 16,334
5.00 - 5.99% . . . . . 1,989 1,665 757 1,217 173 2,367 8,168
6.00 - 6.99% . . . . . 4,443 1,946 943 1,060 1,665 141 10,198
7.00 and above . . . . 163 96 37 0 0 0 296
- ---------------------------------------------------------------------------------------
$ 48,721 $14,102 $10,520 $6,252 $2,608 $ 4,228 $86,431
=======================================================================================
The following table indicates the amount of the Bank's certificates of
deposit of $100,000 or more by time remaining until maturity as of December 31,
2002.
Certificates
Of Deposit
Of $100,000
Remaining Maturity or More
- ------------------------------------------
(In thousands)
Three months or less. . . $ 4,149
Three through six months. 3,317
Six through twelve months 3,223
Over twelve months. . . . 5,139
- ------------------------------------------
Total . . . . . . . . . . $ 15,828
==========================================
18
The following table sets forth the net changes in the deposit activities of
the Bank for the periods indicated:
At December 31
- -------------------------------------------------------------------
2002 2001 2000
- -------------------------------------------------------------------
(In Thousands)
Balance at beginning of period . . . $168,144 $160,364 $151,536
Net deposits . . . . . . . . . . . . 30,081 1,680 2,975
Interest credited. . . . . . . . . . 4,656 6,100 5,853
- -------------------------------------------------------------------
Ending Balance . . . . . . . . . . . $202,881 168,144 160,364
- -------------------------------------------------------------------
Net increase/(decrease) in deposits. $ 34,737 $ 7,780 $ 8,828
==================================================================
BORROWINGS
Savings deposits are the primary source of funds of the Bank's lending and
investment activities and for its general business purposes. At December 31,
2002, the Bank had $3.4 million in funds obtained from repurchase agreements
outstanding, $29.8 million in long-term term advances and $5.0 million in a
pooled trust preferred security obligation. The Bank is a member of the Federal
Home Loan Bank System.
The following table summarizes the outstanding balance of short-term
borrowing of the Bank for the years indicated.
At December 31
- --------------------------------------------------------------------
2002 2001 2000
- --------------------------------------------------------------------
(In Thousands)
Overnight Line of Credit . . . . . . . $ - $ - $ 5,600
Term borrowings (original term)
90 days or less. . . . . . . . . . . . 2,700 10,718 16,407
1 year . . . . . . . . . . . . . . . . 7,000 8,500 11,000
2 year - 1,000 -
- --------------------------------------------------------------------
Balance at end of period . . . . . . . $ 9,700 $20,218 $33,007
====================================================================
Daily average during the year. . . . . 13,716 15,240 32,911
Maximum month-end balance. . . . . . . 23,580 20,218 40,388
Weighted average rate during the year. 3.75% 4.56% 6.29%
Year-end average rate. . . . . . . . . 4.65% 4.19% 6.50%
PERSONNEL
As of December 31, 2002, the Bank had 94 full-time and 17 part-time
employees. None of the Bank's employees is represented by a collective
bargaining group. The Bank believes its relationship with its employees to be
good.
REGULATION AND SUPERVISION
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
Bank Insurance Fund. 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
19
subject to certain regulations by the Federal Home Loan Bank System. On July 19,
2001 the Company and the Mutual Holding Company completed their conversion to
federal charters. Consequently, they are subject to regulations of the Office of
Thrift Supervision ("OTS") as savings and loan holding companies. Any change in
such regulations, whether by the Department, the FDIC, or the OTS could have a
material adverse impact on the Bank, the Company or the Mutual Holding Company.
Regulatory requirements applicable to the Bank, the Company and the Mutual
Holding Company are referred to below or elsewhere herein.
NEW YORK BANK REGULATION. The exercise by an FDIC-insured savings bank of
the lending and investment powers under the New York State Banking Law is
limited by FDIC regulations and other federal law and regulations. In
particular, the applicable provisions of New York State Banking Law and
regulations governing the investment authority and activities of an FDIC insured
state-chartered savings bank have been substantially limited by the Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") and the FDIC
regulations issued pursuant thereto.
The Bank derives its lending, investment and other authority primarily from
the applicable provisions of New York State Banking Law and the regulations of
the Department, as limited by FDIC regulations. Under these laws and
regulations, savings banks, including the Bank, may invest in real estate
mortgages, consumer and commercial loans, certain types of debt securities,
including certain corporate debt securities and obligations of federal, state
and local governments and agencies, certain types of corporate equity securities
and certain other assets. Under the statutory authority for investing in equity
securities, a savings bank may invest up to 7.5% of its assets in corporate
stock, with an overall limit of 5% of its assets invested in Common Stock.
Investment in the stock of a single corporation is limited to the lesser of 2%
of the outstanding stock of such corporation or 1% of the savings bank's assets,
except as set forth below. Such equity securities must meet certain earnings
ratios and other tests of financial performance. A savings bank's lending powers
are not subject to percentage of assets limitations, although there are limits
applicable to single borrowers. A savings bank may also, pursuant to the
"leeway" power, make investments not otherwise permitted under the New York
State Banking Law. This power permits investments in otherwise impermissible
investments of up to 1% of assets in any single investment, subject to certain
restrictions and to an aggregate limit for all such investments of up to 5% of
assets. Additionally, in lieu of investing in such securities in accordance with
and reliance upon the specific investment authority set forth in the New York
State Banking Law, savings banks are authorized to elect to invest under a
"prudent person" standard in a wider range of investment securities as compared
to the types of investments permissible under such specific 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
20
to keep prescribed books and accounts. Upon a finding by the Department that any
director, trustee or officer of any banking organization has violated any law,
or has continued unauthorized or unsafe practices in conducting the business of
the banking organization after having been notified by the Superintendent to
discontinue such practices, such director, trustee or officer may be removed
from office after notice and an opportunity to be heard. The Bank does not know
of any past or current practice, condition or violation that might lead to any
proceeding by the Superintendent or the Department against the Bank or any of
its directors, trustees or officers.
INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC. The Bank is a member of
the BIF, which is administered by the FDIC. Deposits are insured up to
applicable limits by the FDIC and such insurance is backed by the full faith and
credit of the U.S. Government. As insurer, the FDIC imposes deposit insurance
premiums and is authorized to conduct examinations of and to require reporting
by FDIC-insured institutions. It also may prohibit any FDIC-insured institution
from engaging in any activity the FDIC determines by regulation or order to pose
a serious risk to the FDIC. The FDIC also has the authority to initiate
enforcement actions against savings banks, after giving the Superintendent an
opportunity to take such action, and may terminate the deposit insurance if it
determines that the institution has engaged or is engaging in unsafe or unsound
practices or is in an unsafe or unsound condition.
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 theinstitution's primary federal regulator and information that
the FDIC determines to be relevant to the institution's financial condition and
the risk posed to the deposit insurance funds (which may include, if applicable,
information provided by the institution's state supervisor). An institution's
assessment rate depends on the capital category and supervisory category to
which it is assigned. Under the final risk-based assessment system, there are
nine assessment risk classifications (i.e., combinations of capital groups and
supervisory subgroups) to which different assessment rates are applied.
Assessments rates for deposit insurance currently range from 0 basis points to
27 basis points. The capital and supervisory subgroup to which an institution is
assigned by the FDIC is confidential and may not be disclosed. The Bank's rate
of deposit insurance assessments will depend upon the category and subcategory
to which the Bank is assigned by the FDIC. Any increase in insurance assessments
could have an adverse effect on the earnings of the Bank.
REGULATORY CAPITAL REQUIREMENTS. The FDIC has adopted risk-based capital
guidelines to which the Bank is subject. The guidelines establish a systematic
analytical framework that makes regulatory capital requirements more sensitive
to differences in risk profiles among banking organizations. The Bank is
required to maintain certain levels of regulatory capital in relation to
regulatory risk-weighted assets. The ratio of such regulatory capital to
regulatory risk-weighted assets is referred to as the Bank's "risk-based capital
ratio." Risk-based capital ratios are determined by allocating assets and
specified off-balance sheet items to four risk-weighted categories ranging from
0% to 100%, with higher levels of capital being required for the categories
perceived as representing greater risk.
These guidelines divide a savings bank's capital into two tiers. The first
tier ("Tier I") includes common equity, retained earnings, certain
non-cumulative perpetual preferred stock (excluding auction rate issues) and
minority interests in equity accounts of consolidated subsidiaries, less
goodwill and other intangible assets (except mortgage servicing rights and
purchased credit card relationships subject to certain limitations).
Supplementary ("Tier II") capital includes, among other items, cumulative
perpetual and long-term limited-life preferred stock, mandatory convertible
securities, certain hybrid capital instruments, term subordinated debt and the
allowance for loan and lease losses, subject to certain limitations, less
required deductions. Savings banks are required to maintain a total risk-based
capital ratio of at least 8%, of which at least 4% must be Tier I capital.
21
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.
LIMITATIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS. The FDIC has the
authority to use its enforcement powers to prohibit a savings bank from paying
dividends if, in its opinion, the payment of dividends would constitute an
unsafe or unsound practice. Federal law also prohibits the payment of dividends
by a bank that will result in the bank failing to meet its applicable capital
requirements on a pro forma basis. New York law also restricts the Bank from
declaring a dividend which would reduce its capital below (i) the amount
required to be maintained by state law and regulation, or (ii) the amount of the
Bank's liquidation account established in connection with the Reorganization.
PROMPT CORRECTIVE ACTION. The federal banking agencies have promulgated
regulations to implement the system of prompt corrective action required by
federal law. Under the regulations, a bank shall be deemed to be (i) "well
capitalized" if it has total risk-based capital of 10.0% or more, has a Tier I
risk-based capital ratio of 6.0% or more, has a Tier I leverage capital ratio of
5.0% or more and is not subject to any written capital order or directive; (ii)
"adequately capitalized" if it has a total risk-based capital ratio of 8.0% or
more, a Tier I risk-based capital ratio of 4.0% or more and a Tier I leverage
capital ratio of 4.0% or more (3.0% under certain circumstances) and does not
meet the definition of "well capitalized"; (iii) "undercapitalized" if it has a
total risk-based capital ratio that is lessthan 8.0%, a Tier I risk-based
capital ratio that is less than 4.0% or a Tier I leverage capital ratio that is
less than 4.0% (3.0% under certain circumstances); (iv) "significantly
undercapitalized" if it has a total risk-based capital ratio that is less than
6.0%, a Tier I risk-based capital ratio that is less than 3.0% or a Tier I
leverage capital ratio that is less than 3.0%; and (v) "critically
undercapitalized" if it has a ratio of tangible equity to total assets that is
equal to or less than 2.0%. Federal law and regulations also specify
circumstances under which a federal banking agency may reclassify a well
capitalized institution as adequately capitalized and may require an adequately
capitalized institution to comply with supervisory actions as if it were in the
next lower category (except that the FDIC may not reclassify a significantly
undercapitalized institution as critically undercapitalized).
Based on the foregoing, the Bank is currently classified as a "well
capitalized" savings institution.
TRANSACTIONS WITH AFFILIATES. Under current federal law, transactions
between depository institutions and their affiliates are governed by Sections
23A and 23B of the Federal Reserve Act. An affiliate of a savings bank is any
company or entity that controls, is controlled by, or is under common control
with the savings bank, other than a subsidiary of the savings bank. In a holding
company context, at a minimum, the parent holding company of a savings bank and
any companies which are controlled by such parent holding company are affiliates
of the savings bank. Generally, Section 23A limits the extent to which the
savings bank or its subsidiaries may engage in "covered transactions" with any
one affiliate to an amount equal to 10% of such savings bank's capital stock and
surplus and contains an aggregate limit on all such transactions with all
affiliates to an amount equal to 20% of such capital stock and surplus. The term
"covered transaction" includes the making of loans or other extensions of credit
to an affiliate; the purchase of assets from an affiliate, the purchase of, or
an investment in, the securities of an affiliate; the acceptance of securities
of an affiliate as collateral for a loan or extension of credit to any person;
or issuance of a guarantee, acceptance, or letter of credit on behalf of an
affiliate. Section 23A also establishes specific collateral requirements for
loans or extensions of credit to, or guarantees, acceptances on letters of
credit issued on behalf of an affiliate. Section 23B requires that covered
transactions and a broad list of other specified transactions be on terms
substantially the same, or no less favorable, to the savings bank or its
subsidiary as similar transactions with nonaffiliates.
22
Further, Section 22(h) of the Federal Reserve Act restricts a savings bank
with respect to loans to directors, executive officers, and principal
stockholders. Under Section 22(h), loans to directors, executive officers and
stockholders who control, directly or indirectly, 10% or more of voting
securities of a savings bank and certain related interests of any of the
foregoing, may not exceed, together with all other outstanding loans to such
persons and affiliated entities, the savings bank's total capital and surplus.
Section 22(h) also prohibits loans above amounts prescribed by the appropriate
federal banking agency to directors, executive officers, and stockholders who
control 10% or more of voting securities of a stock savings bank, and their
respective related interests, unless such loan is approved in advance by a
majority of the board of directors of the savings bank. Any "interested"
director may not participate in the voting. The loan amount (which includes all
other outstanding loans to such person) as to which such prior board of director
approval is required, is the greater of $25,000 or 5% of capital and surplus or
any loans over $500,000. Further, pursuant to Section 22(h), loans to directors,
executive officers and principal stockholders must generally be made on terms
substantially the same as offered in comparable transactions to other persons.
Section 22(g) of the Federal Reserve Act places additional limitations on loans
to executive officers.
FEDERAL HOLDING COMPANY REGULATION.
GENERAL. The Company and the Mutual Holding Company are nondiversified
mutual savings and loan holding companies within the meaning of the Home Owners'
Loan Act. As such, the Company and the Mutual Holding Company are registered
with the OTS and are subject to OTS regulations, examinations, supervision and
reporting requirements. In addition, the OTS has enforcement authority over the
Company and the Mutual Holding Company, and their subsidiaries. Among other
things, this authority permits the OTS to restrict or prohibit activities that
are determined to be a serious risk to the subsidiary savings institution.
PERMITTED ACTIVITIES. Under OTS regulation and policy, a mutual holding
company and a federally chartered mid-tier holding company such as the Company
may engage in the following activities: (i) investing in the stock of a savings
association; (ii) acquiring a mutual association through the merger of such
association into a savings association subsidiary of such holding company or an
interim savings association subsidiary of such holding company; (iii) merging
with or acquiring another holding company, one of whose subsidiaries is a
savings association; (iv) investing in a corporation, the capital stock of which
is available for purchase by a savings association under federal law or under
the law of any state where the subsidiary savings association or associations
share their home offices; (v) furnishing or performing management services for a
savings association subsidiary of such company; (vi) holding, managing or
liquidating assets owned or acquired from a savings subsidiary of such company;
(vii) holding or managing properties used or occupied by a savings association
subsidiary of such company; (viii) acting as trustee under deeds of trust; (ix)
any other activity (A) that the Federal Reserve Board, by regulation, has
determined to be permissible for bank holding companies under Section 4(c) of
the Bank Holding Company Act of 1956, unless the Director, by regulation,
prohibits or limits any such activity for savings and loan holding companies; or
(B) in which multiple savings and loan holding companies were authorized (by
regulation) to directly engage on March 5, 1987; (x) any activity permissible
for financial holding companies under Section 4(k) of the Bank Holding Company
Act, including securities and insurance underwriting; and (xi) purchasing,
holding, or disposing of stock acquired in connection with a qualified stock
issuance if the purchase of such stock by such savings and loan holding company
is approved by the Director. If a mutual holding company acquires or merges with
another holding company, the holding company acquired or the holding company
resulting from such merger or acquisition may only invest in assets and engage
in activities listed in (i) through (xi) above, and has a period of two years to
cease any nonconforming activities and divest of any nonconforming investments.
The Home Owners' Loan Act prohibits a savings and loan holding company,
directly or indirectly, or through one or more subsidiaries, from acquiring
another savings association or holding company thereof, without prior written
approval of the OTS. It also prohibits the acquisition or retention of, with
certain exceptions, more than 5% of a nonsubsidiary savings association, a
nonsubsidiary holding company, or a nonsubsidiary company engaged in activities
other than those permitted by the Home Owners' Loan Act; or acquiring or
retaining control of an institution that is not federally insured. In evaluating
applications by holding companies to acquire savings association, the OTS must
consider the financial and managerial resources, future prospects of the company
and association involved, the effect of the acquisition on the risk to the
insurance fund, the convenience and needs of the community and competitive
factors.
23
The Office of Thrift Supervision is prohibited from approving any
acquisition that would result in a multiple savings and loan holding company
controlling savings association in more than one state, subject to two
exceptions: (i) the approval of interstate supervisory acquisitions by savings
and loan holding companies, and (ii) the acquisition of a savings institution in
another state if the laws of the state of the target savings institution
specifically permit such acquisitions. The states vary in the extent to which
they permit interstate savings and loan holding company acquisitions.
WAIVERS OF DIVIDENDS BY MUTUAL HOLDING COMPANY. Office of Thrift
Supervision regulations require the Mutual Holding Company to notify the OTS of
any proposed waiver of its receipt of dividends from the Company. The OTS
reviews dividend waiver notices on a case-by-case basis, and, in general, does
not object to any such waiver if: (i) the mutual holding company's board of
directors determines that such waiver is consistent with such directors'
fiduciary duties to the mutual holding company's members; (ii) for as long as
the savings association subsidiary is controlled by the mutual holding company,
the dollar amount of dividends waived by the mutual holding company are
considered as a restriction on the retained earnings of the savings association,
which restriction, if material, is disclosed in the public financial statements
of the savings association as a note to the financial statements; (iii) the
amount of any dividend waived by the mutual holding company is available for
declaration as a dividend solely to the mutual holding company, and, in
accordance with SFAS 5, where the savings association determines that the
payment of such dividend to the mutual holding company is probable, an
appropriate dollar amount is recorded as a liability; and (iv) the amount of any
waived dividend is considered as having been paid by the savings association in
evaluating any proposed dividend under OTS capital distribution regulations. The
Mutual Holding Company generally intends to waive dividends paid by the Company
in excess of its operating cash requirements. Under OTS regulations, our public
stockholders would not be diluted because of any dividends waived by the Mutual
Holding Company (and waived dividends would not be considered in determining an
appropriate exchange ratio) in the event the Mutual Holding Company converts to
stock form.
CONVERSION OF THE MUTUAL HOLDING COMPANY TO STOCK FORM. OTS regulations
permit the Mutual Holding Company to convert from the mutual form of
organization to the capital stock form of organization (a "Conversion
Transaction"). There can be no assurance when, if ever, a Conversion Transaction
will occur, and the Board of Directors has no current intention or plan to
undertake a Conversion Transaction. In a Conversion Transaction a new holding
company would be formed as the successor to the Company (the "New Holding
Company"), the Mutual Holding Company's corporate existence would end, and
certain depositors of the Bank would receive the right to subscribe for
additional shares of the New Holding Company. In a Conversion Transaction, each
share of common stock held by stockholders other than the Mutual Holding Company
("Minority Stockholders") would be automatically converted into a number of
shares of common stock of the New Holding Company determined pursuant an
exchange ratio that ensures that Minority Stockholders own the same percentage
of common stock in the New Holding Company as they owned in the Company
immediately prior to the Conversion Transaction. Under OTS regulations, Minority
Stockholders would not be diluted because of any dividends waived by the Mutual
Holding Company (and waived dividends would not be considered in determining an
appropriate exchange ratio), in the event the Mutual Holding Company converts to
stock form. The total number of shares held by Minority Stockholders after a
Conversion Transaction also would be increased by any purchases by Minority
Stockholders in the stock offering conducted as part of the Conversion
Transaction.
24
NEW YORK STATE BANK HOLDING COMPANY REGULATION. In addition to the federal
regulation, a holding company controlling a state chartered savings bank
organized or doing business in New York State also may be subject to regulation
under the New York State Banking Law. The term "bank holding company," for the
purposes of the New York State Banking Law, is defined generally to include any
person, company or trust that directly or indirectly either controls the
election of a majority of the directors or owns, controls or holds with power to
vote more than 10% of the voting stock of a bank holding company or, if the
Company is a banking institution, another banking institution, or 10% or more of
the voting stock of each of two or more banking institutions. In general, a bank
holding company controlling, directly or indirectly, only one banking
institution will not be deemed to be a bank holding company for the purposes of
the New York State Banking Law. Under New York State Banking Law, the prior
approval of the Banking Board is required before: (1) any action is taken that
causes any company to become a bank holding company; (2) any action is taken
that causes any banking institution to become or be merged or consolidated with
a subsidiary of a bank holding company; (3) any bank holding company acquires
direct or indirect ownership or control of more than 5% of the voting stock of a
banking institution; (4) any bank holding company or subsidiary thereof acquires
all or substantially all of the assets of a banking institution; or (5) any
action is taken that causes any bank holding company to merge or consolidate
with another bank holding company. Additionally, certain restrictions apply to
New York State bank holding companies regarding the acquisition of banking
institutions which have been chartered five years or less and are located in
smaller communities. Officers, directors and employees of New York State bank
holding companies are subject to limitations regarding their affiliation with
securities underwriting or brokerage firms and other bank holding companies and
limitations regarding loans obtained from its subsidiaries.
FINANCIAL SERVICES MODERNIZATION ACT. On November 12, 1999, the
Gramm-Leach-Bliley Act was signed into law, repealing provisions of the
depression-era Glass-Steagall Act, which prohibited commercial banks, securities
firms, and insurance companies from affiliating with each other and engaging in
each other's businesses. The major provisions of the Act took effect on March
12, 2000.
The Act creates a new type of financial services company called a
"Financial Holding Company" (an "FHC"), a bank holding company with dramatically
expanded powers. FHCs may offer virtually any type of financial service,
including banking, securities underwriting, insurance (both agency and
underwriting) and merchant banking. The Federal Reserve serves as the primary
"umbrella" regulator of FHCs. Balanced against the attractiveness of these
expanded powers are higher standards for capital adequacy and management, with
heavy penalties for noncompliance.
Bank holding companies that wish to engage in expanded activities but do
not wish to become financial holding companies may elect to establish "financial
subsidiaries," which are subsidiaries of national banks with expanded powers.
The Act permits financial subsidiaries to engage in the same types of activities
permiss