-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FbB6toLSid8y2wVAdfLXaftDVIfCmcaIDVF5smFW63tSGY9Xpw4PVq25yNwZkQvM Qwp8w6tFh3bP5YbCxVfaWg== 0000950109-00-001157.txt : 20000328 0000950109-00-001157.hdr.sgml : 20000328 ACCESSION NUMBER: 0000950109-00-001157 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000327 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PATHFINDER BANCORP INC CENTRAL INDEX KEY: 0001046188 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTIONS, NOT FEDERALLY CHARTERED [6036] IRS NUMBER: 161540137 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-23601 FILM NUMBER: 580011 BUSINESS ADDRESS: STREET 1: 214 W FIRST ST CITY: OSWEGO STATE: DE ZIP: 13126 BUSINESS PHONE: 3153430057 MAIL ADDRESS: STREET 1: 214 W FIRST ST CITY: OSWEGO STATE: DE ZIP: 13126 10-K405 1 FORM 10-K 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, 1999 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)
Delaware 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 $.10 per share ---------------------------------------- (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file reports) and (2) has been subject to such requirements for the past 90 days. YES X NO ------ ------ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. [X] As of February 28, 2000, there were 2,884,720 shares issued and 2,614,245 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 February 28, 2000 ($7.75) was $6,112,456. DOCUMENTS INCORPORATED BY REFERENCE 1. Sections of Annual Report to Stockholders for the fiscal year ended December 31, 1999 (Parts II and IV). 2. Proxy Statement for the 2000 Annual Meeting of Stockholders (Parts I and III). PART I ------ ITEM 1. Business - ------------------ General Pathfinder Bancorp, Inc. Pathfinder Bancorp, Inc. (the "Company") is a Delaware corporation which was organized in September 1997. The only significant asset of the Company is its investment in Pathfinder Bank (the "Bank"). The Company is majority owned by Pathfinder Bancorp, MHC, a New York-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 $.l0 per share (the "Common Stock"). At February 28, 2000 the Mutual Holding Company held 1,552,500 shares of Common Stock and the public held 1,061,745 shares of Common Stock (the "Minority Shareholders"). 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 five 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. On November 19, 1999, the Bank changed its name to Pathfinder 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, 1999, the Bank had total assets of $216.3 million, total deposits of $152.4 million, and shareholders' equity of $20.1 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, 1999, $119.9 million, or 92% of the Bank's total loan portfolio consisted of loans secured by real estate, of which $87.8 million, or 73%, were loans secured by one- to four-family residences, $20.1 million, or 17%, were secured by commercial real estate, $1.7 million, or 1%, were secured by multi-family properties and $9.5 million, or 8%, of total real estate loans, were secured by second liens on residential properties. The Bank also originates consumer and other loans which totaled $12.1 million, or 9%, 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, 1999 Pathfinder REIT, Inc. held $29.7 million in mortgage and mortgage related assets. All disclosures in the Form 10-K relating to the Bank's loans and investments includes 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 Niagara Mohawk, Alcan Aluminum, the New York Power Authority, Nestle and Sealright, a food container manufacturer. 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, although during 1999 the Bank originated and securitized approximately $3.9 million of 30 year fixed rate mortgages, and sold approximately $6.0 million into the secondary market. The loan sales resulted in approximately $52,000 in capitalized servicing rights. At December 31, 1999, $697,000 million, or 0.8% 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. 2 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, -------------------------------------------------------------- 1999 1998 1997 ------------------- ------------------ ------------------ Amount Percent Amount Percent Amount Percent -------- ------ -------- ------- ------ ------- (Dollars in Thousands) Real estate loans: First mortgage loans/(1)//(3)/ $110,374 84.4% $109,372 85.3% $102,403 84.2% Second mortgage loans/(2)/.. 9,492 7.3 9,631 7.5 9,561 7.9 -------- ----- -------- ----- -------- ----- Total real estate loans...... 119,866 91.7 119,003 92.8 111,964 92.1 -------- ----- -------- ----- -------- ----- Consumer loans and other loans: Consumer.................... 3,482 2.7 4,073 3.2 4,278 3.5 Student..................... 12 -- 12 -- 13 -- Lease financing............. 278 0.2 350 0.3 564 0.5 Commercial business loans... 8,357 6.4 5,900 4.6 5,908 4.9 -------- ----- -------- ----- -------- ----- Total consumer and other loans..................... 12,129 9.3 10,335 8.1 10,763 8.9 -------- ----- -------- ----- -------- ----- Total loans receivable..... 131,995 101.0 128,200 100.9 122,727 101.0 Less: Unearned discount and origination fees........... (84) (0.1) (199) (0.2) (314) (0.3) Allowance for loan losses... (1,150) (0.9) (939) (0.7) (828) (0.7) -------- ----- -------- ----- -------- ----- Total loans receivable, net $130,761 100.0% $129,338 100.0% $121,585 100.0% ======== ===== ======== ===== ======== ===== Years Ended December 31, -------------------------------------------- 1996 1995 ------------------ --------------------- Amount Percent Amount Percent ------ ------- ------ ------- (Dollars in Thousands) Real estate loans: First mortgage loans/(1)//(3)/ $ 90,761 83.5% $ 83,325 83.2% Second mortgage loans/(2)/.. 9,082 8.3 8,303 8.3 -------- ------ -------- ---- Total real estate loans...... 99,843 91.8 91,628 91.5 -------- ------ -------- ---- Consumer loans and other loans: Consumer.................... 3,481 3.2 3,286 3.2 Student..................... 58 0.1 63 0.1 Lease financing............. 1,153 1.1 2,013 2.0 Commercial business loans... 5,482 5.0 3,860 3.9 -------- ------ -------- ---- Total consumer and other loans..................... 10,174 9.4 9,222 9.2 -------- ------ -------- ---- Total loans receivable..... 110,017 101.2 100,850 100.7 Less: Unearned discount and origination fees........... (368) (0.4) (355) (0.4) Allowance for loan losses... (907) (0.8) (346) (0.3) -------- ------ -------- ----- Total loans receivable, net $108,742 100.00% $100,149 100.0% ======== ====== ======== =====
- -------------------------------------------------------------------------- /(1)/ Includes $87.1 million, $20.9 million and $1.7 million of one- to four- family residential loans, commercial real estate and multi-family loans, respectively, at December 31, 1999. /(2)/ Includes $3.5 million and $6.0 million of home equity line of credit loans and home equity fixed rate, fixed term loans, respectively, at December 31, 1999. /(3)/ Includes $697,000 of mortgage loans held for sale at December 31, 1999. 3 Loan Maturity Schedule. The following table sets forth certain information as of December 31, 1999, 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 Ten Beyond Within Through Through Through Through Twenty One Year Three Years Five Years Ten Years Twenty Years Years Total -------- ----------- ---------- --------- ------------ ------ -------- (In Thousands) Real estate loans: First mortgage loans...... $31,219 $17,217 $23,695 $ 9,162 $25,290 $3,791 $110,374 Second mortgage loans..... 3,570 395 1,149 3,990 388 -- 9,492 Consumer and other loans... 6,805 2,228 1,764 729 603 -- 12,129 ------- ------- ------- ------- ------- ------ -------- Total loans.............. $41,594 $19,840 $26,608 $13,881 $26,281 $3,791 $131,995 ======= ======= ======= ======= ======= ====== ========
The following table sets forth at December 31, 1999, the dollar amount of all fixed rate and adjustable rate loans due or repricing after December 31, 2000.
Fixed Adjustable Total ------- ---------- ------- (In Thousands) Real estate loans: First mortgage loans...... $39,039 $40,116 $79,155 Second mortgage loans..... -- 5,922 5,922 Consumer and other loans... 5,324 -- 5,324 ------- ------- ------- Total loans.............. $44,363 $46,038 $90,401 ======= ======= =======
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, 1999, approximately 91.2% 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 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 3% 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, 1999 and 1998, 43.9% and 36.1%, respectively, of the Bank's one- to four-family mortgage loan originations consisted of fixed-rate loans. The Bank also originates ARM loans which serve to reduce interest rate risk. The Bank currently originates one-year ARM loans which adjust each year at 275 basis points (100 basis points equal 1%) above the adjusted six month moving average of the six-month Treasury bill auction discount rate. The Bank also offers a loan product whereby the interest is fixed for the first five years and adjusts annually thereafter. This loan product typically is originated with terms 4 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 $9.0, $11.6 million and $13.2 million, during the years 1999, 1998, and 1997, respectively. The Bank requires that borrowers qualify for ARM loans based upon the loan's fully indexed rate. At December 31, 1999, $53.5 million, or 61.0%, 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, 1999, the Bank held $1.4 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 $20.9 million, or 17%, of the Bank's total loan portfolio at December 31, 1999. At December 31, 1999, substantially all of the Bank's commercial real estate loans were secured by properties located within the Bank's market area. At December 31, 1999, the Bank's commercial real estate loans had an average principal balance of $133.8. At that date, the largest commercial real estate loan had a principal balance of $1.1 million, and was secured by a facility for a private, non-profit human services agency located in Oswego, New York. This loan is currently performing in accordance with the 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 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 $1.7 million, or 1.3%, of the Bank's total loan portfolio at December 31, 1999. At December 31, 1999, the Bank had a total of 13 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, 1999, substantially all of the Bank's multi-family real estate 5 loans were secured by properties located within the Bank's market area. At December 31, 1999, the Bank's multi-family real estate loans had an average principal balance of approximately $139,800 and the largest multi-family real estate loan had a principal balance of $358,400, 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, 1999, the disbursed portion of home equity lines of credit totaled $3.5 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, 1999, consumer loans totaled $3.5 million, or 2.7%, 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. Commercial Business Loans. The Bank currently offers commercial business loans to businesses in its market area and to deposit account holders. At December 31, 1999, the Bank had commercial business loans outstanding with an aggregate balance of $8.6 million, of which $4.9 million consisted of commercial lines of credit and $278,000 were lease financing arrangements. The average commercial business loan balance was approximately $52,000. 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 6 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 $200,000 may be approved by any designated loan officer; mortgage loans in excess of $200,000 must be approved by the Board of Directors. Commercial loans of up to $35,000 unsecured, or $50,000 (if secured by other than real estate) may be approved by the Bank's President or either of the two lending Vice Presidents. These individuals may join their limits to a total approval amount of $105,000 unsecured, and $150,000 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. Fire and casualty insurance is required at the time the loan is made and throughout the term of the loan, and upon request of the Bank, flood insurance may be required. After the loan is approved, a loan commitment letter is promptly issued to the borrower. At December 31, 1999, the Bank had commitments to originate $9.0 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. 7 Origination, Purchase and Sale of Loans. The table below shows the Bank's loan origination, purchase and sales activity for the periods indicated.
Year Ended December 31, ---------------------------------------------------- 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- (In Thousands) Loan receivable, beginning of period........ $129,338 $122,727 $110,017 $100,850 $ 90,412 Originations: Real estate: First mortgage/(1)//(3)/.................. 26,987 34,908 26,281 $ 23,496 18,219 Second mortgage/(2)/...................... 1,408 1,516 2,178 1,912 643 Consumer and other loans: Consumer loans............................ 1,299 2,412 2,306 3,442 2,747 Student................................... -- -- -- -- 438 Lease financing........................... -- -- 300 -- 1,177 Commercial................................ 5,210 6,849 3,525 1,850 2,756 -------- -------- -------- -------- -------- Total originations...................... 34,904 45,685 34,590 30,700 25,980 Transfer of mortgage loans to foreclosed real estate.............................. 93 563 374 445 645 Repayments................................. 26,201 29,969 21,506 21,088 13,774 Loan sales................................. 5,993 8,542 -- -- 1,123 -------- -------- -------- -------- -------- Net loan activity........................... 2,617 6,611 12,710 9,167 10,438 -------- -------- -------- -------- -------- Total loans receivable at end of period... $131,995 $129,338 $122,727 $110,017 $100,850 ======== ======== ======== ======== ======== - ---------------------------------------------------------------------------------------------------
/(1)/ Includes $23.1 million, and $3.9 million in one- to four-family residential loans and commercial real estate loans, respectively, for the year ended December 31, 1999. /(2)/ Includes $1.7 million in home equity loans and a net change of $278,000 in home equity lines of credit for the year ended December 31, 1999. /(3)/ Includes $3.8 million of mortgage loans held for sale originated during the year ended December 31, 1999. 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, 1999, the Bank had $84,000 of net deferred loan origination fees. 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 $993,000, $775,000 and $856,000, for the fiscal years ended December 31, 1999, 1998, and 1997, respectively. Loans-to-One Borrower. With certain limited exceptions, a New York chartered savings bank may not make unsecured loans or extend unsecured credit for commercial, corporate or business purposes (including lease financing) to a single borrower, which in the aggregate exceed 15% of the Bank's net worth. At December 31, 1999, the Bank's largest lending relationship totaled $2.6 million and consisted of loans secured by retail businesses and properties. The Bank's second largest lending relationship totaled $2.0 million and consisted of loans secured by commercial retail businesses and properties. The Bank's third largest lending relationship totaled $2.0 million and consisted of loans secured by retail businesses and properties. The Bank's fourth largest lending relationship totaled $1.9 million and was secured by a retail office plaza, retail business property and residence. The Bank's fifth largest lending relationship totaled $1.4 million and consisted of loans secured by multi-family residential housing and residence. At December 31, 1999 all of the aforementioned loans were performing in accordance with their terms. 8 Delinquencies and Classified Assets Delinquencies. The Bank's collection procedures provide that when a loan is 15 days past due, a computer-generated late notice is sent to the borrower requesting payment. If the delinquency continues, at 30 days a delinquent notice is sent and personal contact efforts are attempted, either in person or by telephone, to strengthen the collection process and obtain reasons for the delinquency. Also, plans to arrange a repayment plan are made. If a loan becomes 60 days past due, and no progress has been made in resolving the delinquency, the Bank will send a 10-day demand letter and personal contact is attempted, and the loan becomes subject to possible legal action if suitable arrangements to repay have not been made. When a loan continues in a delinquent status for 90 days or more, and a repayment schedule has not been made or kept by the borrower, generally a notice of intent to foreclose is sent to the borrower for mortgage loans, and a final demand letter is presented to the borrower of non-real estate loans, giving 30 days to repay all outstanding interest and principal. If not cured, 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. Interest accrued and unpaid at the time a loan is placed on non-accrual status is charged against interest income. At December 31, 1999, the Bank had non-performing assets of $3.2 million, and a ratio of non-performing loans and real estate owned ("REO") of 1.5% total assets. Non- performing assets increased $621,000, or 24%, from $2.8 million in 1998. While the changes in non-performing assets tend to be cyclical, the increase can be attributed to longer workout or liquidation time lines, due primarily to a larger volume of real estate foreclosures as well as a generally soft local economy. 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 $641,000, $742,000 and $767,000 at December 31, 1999, 1998,and 1997, respectively. The largest component of REO consists of a real estate development project which had a net book value of $510,000 at December 31, 1999. 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, 1999, the Bank had 16 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. 9 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, --------------------------------------------------------- 1999 1998 1997 1996 1995 --------- --------- --------- --------- --------- (Dollars In Thousands) Loans delinquent 90 days or more: Real estate loans........................................ $ 2,284 $ 1,298 $ 1,207 $ 1,953 $ 849 Consumer loans........................................... 270 534 283 45 70 -------- -------- -------- -------- -------- Total delinquent loans.................................. 2,554 1,832 1,490 1,998 919 Total REO................................................ 641 742 767 700 586 -------- -------- -------- -------- -------- Total nonperforming assets/(1)/....................... $ 3,195 $ 2,574 $ 2,257 $ 2,698 $ 1,505 ======== ======== ======== -------- ======== Total loans delinquent 90 days or more to total loans receivable/(2)/........................... 2.0% 1.4% 1.2% 1.8% 0.9% Total loans delinquent 90 days or more to total assets... 1.2% 0.9% 0.8% 1.1% 0.5% Total nonperforming assets to total assets............... 1.5% 1.3% 1.2% 1.4% 0.8% Net loans receivable/(3)/................................ 130,761 128,200 121,585 108,742 100,149 -------- -------- -------- -------- -------- Total assets............................................. $216,324 $203,252 $196,770 $189,937 $180,752 ======== ======== ======== ======== ========
- ----------------------------- /(1)/ Net of specific valuation allowances. /(2)/ Net of unearned discount, and the allowance for loan losses. /(3)/ Includes $697,000 of mortgage loans held for sale at December 31, 1999. During the year ended December 31, 1999, and year ended December 31, 1998, respectively, additional gross interest income of $84,000 and $24,000 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, ------------------------------------------ 1999 1998 1997 1996 1995 ------ ------ ------ ------ ------ (In Thousands) Loans past due 30-89 days: Real estate loans............ $1,619 $2,010 $2,232 $1,867 $2,465 Consumer and other loans..... 161 126 296 249 133 ------ ------ ------ ------ ------ Total past due 30-89 days... $1,780 $2,136 $2,528 $2,116 $2,598 ====== ====== ====== ====== ======
10 The following table sets forth information regarding the Bank's delinquent loans 60 days and greater and REO at December 31, 1999.
At December 31, 1999 ------------------------------ Balance Number ------------- ----------- (Dollars In Thousands) Residential real estate: Loans 60 to 89 days delinquent................................... $ 429 10 Loans more than 90 days delinquent............................... 2,284 59 Consumer and commercial business loans 60 days or more delinquent... 299 25 Real estate owned................................................... 641 5 ------ -- Total......................................................... $3,653 99 ====== ==
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. The following table sets forth the aggregate amount of the Bank's internally classified assets at the dates indicated.
At December 31, ------------------------------------------ 1999 1998 1997 1996 1995 ------ ------ ------ ------ ------ (In Thousands) Substandard assets/(1)/.... $2,668 $2,482 $1,719 $1,980 $1,163 Doubtful assets............ 110 103 55 59 34 Loss assets................ 7 90 16 6 5 ------ ------ ------ ------ ------ Total classified assets... 2,785 $2,675 $1,790 $2,045 $1,202 ====== ====== ====== ====== ======
- --------------- /(1)/ Includes $510,000, $638,000, $483,000, $250,000 and 292,000 for a real estate development project classified as REO at December 31, 1999, 1998, 1997, 1996 and 1995, 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 11 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. 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, --------------------------------------------------------- 1999 1998 1997 1996 1995 --------- --------- --------- --------- --------- (Dollars In Thousands) Total loans receivable, net................................. $130,761 $128,200 $121,585 $108,742 $100,149 Average loans outstanding................................... 130,728 126,931 113,651 104,354 95,979 Allowance balance (at beginning of period).................. 939 828 907 346 315 Provision for losses: Real estate................................................. 135 83 121 90 53 Consumer and other loans.................................... 238 298 140 547 50 Charge-offs: Real estate................................................. -- 141 -- -- 17 Consumer and other loans.................................... 190 140 358 93 64 Recoveries: Real estate................................................. -- -- -- -- -- Consumer and other loans.................................... 28 11 18 17 9 -------- -------- -------- -------- -------- Allowance balance (at end of period)........................ $ 1,150 $ 939 $ 828 $ 907 $ 346 ======== ======== ======== ======== ======== Allowance for loan losses as a percent of net loans receivable at end of period................................. 0.9% 0.7% 0.7% 0.8% 0.3% Loans charged off as a percent of average loans outstanding................................................. 0.2% 0.1% 0.3% 0.1% 0.1% Ratio of allowance for loan losses to total nonperforming loans at end of period/(1)/................................. 45.0% 51.3% 55.6% 45.3% 37.6% Ratio of allowance for loan losses to total nonperforming assets at end of period/(1)/............................... 36.0% 36.5% 36.7% 33.6% 23.0%
- ------------------------------------------- /(1)/ Net of specific reserves. 12 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, --------------------------------------------------------------------- 1999 1998 1997 ---------------------- -------------------- ------------------- % 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........... $ 440 90.81% $380 92.01% $ 462 91.23% Consumer and other loans.... 710 9.19 559 7.99 366 8.77 ------ ------ ---- ------ ----- ------ Total allowance for loan losses /(1)/.............. $1,150 100.00% $939 100.00% $ 828 100.00% ====== ====== ==== ====== ===== ====== At December 31, ------------------------------------------ 1996 1995 -------------------- -------------------- % of Loans % of Loans In Each In Each Category to Category to Amount Total Loans Amount Total Loans ------ ----------- ------ ----------- (Dollars in Thousands) Balance at end of period applicable to: Real estate loans........... $ 340 90.75% $ 250 90.86% Consumer and other loans.... 567 9.25 96 9.14 ----- ------ ----- ------ Total allowance for loan losses /(1)/............. $ 907 100.00% $ 346 100.00% ===== ====== ===== ======
- ------------------------ /(1)/ Percentages include unearned discount and origination fees. 13 Investment Activities The investment policy of the Bank established by the Board of Directors attempts to provide 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, 1999, the Bank had investment securities with an aggregate amortized cost of $67.8 million and a market value of $66.4 million. At December 31, 1999, the Bank's amortized cost value of investment securities consisted of $21.2 million of corporate debt issues and $17.9 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 issue was $1.0 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 30-50 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, 1999, the Bank held $2.0 million in common stock and $2.7 million in an equity mutual fund. At December 31, 1999, the Bank had invested $23.3 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 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. At December 31, 1999, the Bank's available- for-sale and held-to-maturity portfolios had amortized cost of $67.8 million and $113,000, respectively, and market values of $66.4 million and $113,000, respectively. 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, 1999, the Company holds the following investments which exceed 10% of total capital.
Issuer Book Value Fair Market Value --------------- ---------- ----------------- Lehman Brothers $2,999,000 $2,705,000 CNA Financial $3,503,000 $3,339,000
14 Investment Portfolio. The following table sets forth the carrying value of the Bank's investment portfolio at the dates indicated. At December 31, 1999, the market value of the Bank's investments was approximately $66.4 million. The market value of investments includes interest-earning deposits, and mortgage- backed securities.
At December 31, ---------------------------- 1999 1998 1997 -------- ------- ------- (In Thousands) Investment securities: U.S. Government and agency obligations.................. $11,167 $ 1,471 $ 4,856 State and municipal obligations......................... 6,695 5,906 6,636 Corporate debt issues................................... 21,302 20,347 18,121 Equity securities....................................... 2,015 1,230 1,139 Mutual funds............................................ 2,656 2,298 1,785 ------- ------- ------- 43,835 31,252 32,537 Unrealized gain (loss) on available for sale portfolio... (786) 1,413 1,126 ------- ------- ------- Total investment securities............................ 43,049 32,665 33,663 ------- ------- ------- Interest-earning deposits in other institutions.......... -- -- -- Federal funds sold....................................... 1,800 -- ------- ------- Total investments..................................... $43,048 $34,465 $33,663 ======= ======= ======= Mortgage-backed securities, net: Adjustable rate......................................... 1,602 2,505 3,823 Fixed rate.............................................. 22,453 17,976 19,200 ------- ------- ------- 24,055 20,481 23,023 Unrealized gain (loss) on available for sale portfolio... (707) 297 135 ------- ------- ------- Total mortgage-backed securities, net................. $23,348 $20,778 $23,158 ======= ======= =======
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, 1999.
Annualized Average Weighted Amortized Market Life Average Cost Value Years Yield ---------- --------- ----- -------- (Dollars in Thousands) Investment securities: U.S. Government treasury.......................... $ 2,012 $ 1,993 1.50 5.55% U.S. Government agency............................ 9,155 8,892 5.95 6.54 State and municipal obligations................... 6,695 6,751 6.96 5.55 Corporate debt issues............................. 21,302 20,195 9.93 6.60 Marketable equity securities...................... 4,671 5,218 -- -- ------- ------- ---- ---- Total............................................ $43,835 $43,049 ------- ======= Unrealized loss on available for sale portfolio... (786) ------- Carrying value of investment securities............ $43,049 ======= Investment securities held to maturity: /(1)/ Corporate debt obligations........................ $ 113 113 -- 9.52 ======= ======= ==== ====
- -------------------------------- /(1)/ The information is included above as a component of corporate debt issues. 15 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, 1999. Yield is calculated on the amortized cost to maturity.
At December 31, 1999 -------------------------------------------------------------------------- One Year or Less One to Five Years Five to Ten Years ------------------------ ------------------------ --------------------- Annualized Annualized Annualized Weighted Weighted Weighted Carrying Average Carrying Average Carrying Average Value Yield Value Yield Value Yield ---------- ----------- ---------- ----------- ---------- -------- (Dollars in Thousands) Debt investment securities: U.S. Agency securities................ $ -- --% $ 3,250 6.317% $ 5,881 6.659% U.S. Government securities............ -- -- 1,993 5.500 19 10.927 State and municipal obligations....... 276 6.372 3,641 5.664 1,399 5.604 Corporate debt issues................. -- -- 2,804 6.618 11,602 6.617 ------ ----- ------- ----- ------- ------ Total............................... $ 276 6.372% $11,688 6.141% $18,901 6.546% ====== ===== ======= ===== ======= ====== Equity and mortgage-backed securities: Mutual funds.......................... $2,656 0.600% $ -- --% $ -- --% Mortgage-backed securities............ 134 6.476 747 6,705 5,723 6.684 Common stock.......................... 2,015 5.374 -- -- -- -- ------ ----- ------- ----- ------- ------ Total............................... $4,805 2.774% $ 747 6.705% $ 5,723 6.684% ====== ===== ======= ===== ======= ====== Total investment securities......................... $5,081 2.970% $12,435 6.169% $24,624 6.581% ====== ===== ======= ===== ======= ====== Unrealized gain on available for sale portfolio....................... Total carrying value............... Investment securities held to maturity:/(1)/ Corporate debt obligations............ $ -- --% $ -- --% $ -- --% ------ ----- ------- ----- ------- ------ Total securities..................... $ -- --% $ -- --% $ -- --% ====== ===== ======= ===== ======= ====== At December 31, 1999 --------------------------------------------------- More than Ten Years Total Investment Securities --------------------- ----------------------------- Annualized Annualized Weighted Weighted Carrying Average Carrying Market Average Value Yield Value Value Yield --------- -------- -------- ------- -------- (Dollars in thousands) Debt investment securities: U.S. Agency securities................ $ 24 10.126% $ 9,155 $ 8,892 6.546% U.S. Government securities............ -- -- 2,012 1,993 5.552 State and municipal obligations....... 1,379 4.990 6,695 6,751 5.553 Corporate debt issues................. 6,783 6.561 21,189 20,082 6.601 ------- ------ ------- ------- ------ Total............................... $ 8,186 6.325% $39,051 $37,718 6.354% ======= ====== ======= ======= ====== Equity and mortgage-backed securities: Mutual funds.......................... $ -- --% $ 2,656 $ 3,203 0.600% Mortgage-backed securities............ 17,451 6.702 24,055 23,348 6.698 Common stock.......................... -- -- 2,015 2,015 5.374 ------- ------ ------- ------- ------ Total............................... $17,451 6.702% $28,566 $28,566 6.041% ======= ====== ======= ======= ====== Total investment securities......................... $25,637 6.582% $67,777 $66,397 6.222% ======= ====== ======= ======= ====== Unrealized gain on available for sale portfolio........................ (1,493) ------ Total carrying value................ $66,284 $66,397 6.362% ======= ======= ====== Investment securities held to maturity:/(1)/ Corporate debt obligations............ $ 113 7.161% $ 113 $ 113 7.161% ------- ------ ------- ------- ------ Total securities..................... $ 113 7.161% $66,397 $65,851 6.351% ======= ====== ======= ======= ======
- ----------------------------------------- /(1)/ The information is included as a component of debt investment securities. 16 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. 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, 1999:
Weighted Percentage Average Minimum of Total Interest Rate Minimum Term Checking and Savings Deposits Amount Balances Deposits - ------------- -------------- ----------------------------- ---------- --------- --------- (In Thousands) 0.000% None Non-interest demand account $ 50 $ 9,746 6.43% 2.000 None NOW accounts 500 13,996 9.24 2.150 None Savings Accounts - Fixed Rate 100 45,541 30.05 2.970 None Savings Account- Tiered Rate 100 13,889 9.17 3.546 None Money market accounts 2,500 418 .028 Certificates of Deposit -------------------------- 4.900 6 months Fixed term, fixed rate 2,500 6,135 4.05 5.692 9 months Fixed term, fixed rate 1,000 110 0.07 5.179 12 months Fixed term, fixed rate 1,000 23,641 15.60 5.144 15 months Fixed term, fixed rate 1,000 6,091 4.02 5.442 18 months Fixed term, variable rate 1,000 1,398 0.92 5.272 18 months Fixed term, fixed rate 1,000 4,579 3.02 5.380 24 months Fixed term, fixed rate 1,000 4,668 3.08 5.691 30 months Fixed term, fixed rate 1,000 3,253 2.15 5.853 36 months Fixed term, fixed rate/(1)/ 1,000 6,169 4.07 5.781 48 months Fixed term, fixed rate/(1)/ 1,000 3,855 2.54 5.909 60 months Fixed term, fixed rate 1,000 1,840 1.21 6.076 84 months Fixed term, fixed rate 1,000 6,160 4.07 2.858 60 through 120 months Fixed term, fixed rate 1,000 47 0.03 ------- ------ TOTAL $151,536 /(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 then prevailing rate. /(2)/ Tables excludes escrow accounts totalling $901,000 of December 31, 1999. 17 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. S
Balance Percent Balance Percent Balance Percent at of Incr. at of Incr. at of 12/31/99 Deposits (Decr) 12/31/98 Deposits (Decr) 12/31/97 Deposits --------- -------- ------- --------- -------- ------- --------- -------- (In Thousands) Club accounts................ $ 1,002 .66% $ 94 $ 908 0.57% $ 115 $ 792 0.52% Noninterest accounts......... 9,746 6.43 273 9,473 5.94 1,829 7,644 5.03 NOW accounts................. 13,996 9.24 (2,331) 16,327 10.23 3,021 13,306 8.75 Passbooks.................... 58,429 38.56 (4,893) 63,322 39.70 177 63,145 41.53 Money market deposit accounts 418 .28 343 75 0.05 (38) 113 0.07 Time deposits which mature: Within 12 months............ 45,670 30.14 (6,059) 51,729 32.43 12,869 38,860 25.56 Within 12-36 months......... 16,190 10.68 2,799 13,391 8.40 (9,220) 22,611 14.87 Beyond 36 months............ 6,085 4.02 1,801 4,284 2.68 1,303 5,588 3.67 --------- ------ ------- --------- ------ ------- --------- ------ Total...................... $ 151,536 100.00% $(7,973) $ 159,509 100.00% $ 7,450 $ 152,059 100.00% ========= ====== ======= ========= ====== ======= ========= ====== Balance Percent Balance Incr. at of Incr. at (Decr) 12/31/96 Deposits (Decr) 12/31/95 -------- --------- -------- ------- --------- (In Thousands) Club accounts................ $ 131 $ 661 0.42% $ 110 $ 551 Noninterest accounts......... 303 7,341 4.63 129 7,212 NOW accounts................. 224 13,082 8.24 917 12,165 Passbooks.................... (1,828) 64,973 40.94 (5,495) 70,468 Money market deposit accounts (61) 174 0.11 (78) 252 Time deposits which mature: Within 12 months............ (14,075) 52,935 33.36 15,011 37,924 Within 12-36 months......... 7,679 14,933 9.41 (5,968) 20,901 Beyond 36 months............ 990 4,598 2.90 (3,914) 8,512 -------- --------- ----- ------- --------- Total...................... $ (6,637) $ 158,697 100.0% $ 712 $ 157,985 ======== ========= ===== ======= =========
- ----------------------------- /(1)/ Excludes escrow accounts totalling $901,000 of December 31, 1999. 18 The following table sets forth the certificates of deposit in the Bank classified by rates as of the dates indicated: s
At December 31, ----------------------------------- 1999 1998 1997 ------- --------------- ------- (In Thousands) Rate - ---- 3.00% or less................... $ 10 $ 8 $ 139 3.01 - 4.99%.................... 20,466 10,824 7,253 5.00 - 6.99%.................... 46,702 53,920 55,115 7.00 - 8.99%.................... 767 4,652 4,552 9.00 - 10.99%................... -- -- -- ------- ------- ------- $67,945 $69,404 $67,079 ======= ======= =======
The following table sets forth the amount and maturities of certificates of deposit at December 31, 1999.
Amount Due ------------------------------------------------------------------------ Less Than 1-2 2-3 3-4 4-5 After 5 One Year Years Years Years Years Years Total --------- ------- ----- ----- ----- ----- ----- (In Thousands) Rate - ---- 3.00% or less..... $ 10 $ -- $ -- $ -- $ -- $ -- $ 10 3.01 - 3.99%...... 469 6 -- -- -- -- 57 4.00 - 4.99%...... 19,096 1,022 161 130 -- -- 20,409 5.00 - 5.99%...... 24,152 7,855 5,438 1,167 1,595 2,351 43,058 6.00 - 6.99%...... 2,361 240 701 176 60 106 3,644 7.00 - 7.99%...... -- -- 767 -- -- -- 767 8.00% and above... -- -- -- -- -- -- -- ------- ------ ------ ------ ------ ------ ------- $46,088 $9,123 $7,067 $1,973 $1,655 $2,457 $67,945 ======= ====== ====== ====== ====== ====== =======
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, 1999.
Certificates of Deposit of $100,000 Remaining Maturity or More - ------------------ --------------- (In Thousands) Three months or less....................................... $ 1,673 Three through six months................................... 2,431 Six through twelve months.................................. 2,239 Over twelve months......................................... 2,386 -------- Total..................................................... $ 8,729 ========
The following table sets forth the net changes in the deposit activities of the Bank for the periods indicated:
At December 31, ------------------------------------ 1999 1998 1997 -------- -------- -------- (In Thousands) Balance at beginning of period................................... $159,509 $152,059 $158,696 Net deposits (withdrawals)....................................... (13,322) 1,367 (12,920) Interest credited................................................ 5,349 6,083 6,283 -------- -------- -------- Ending balance................................................... 151,536 159,509 132,059 -------- -------- -------- Net increase (decrease) in deposits.............................. $ (7,973) $ 7,450 $ (6,637) ======== ======== ========
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, 1999, the Bank had $10.2 million in funds obtained from repurchase agreements outstanding and $28.4 million in term advances. The Bank is a member of the Federal Home Loan Bank System. 19 The following table summarizes the outstanding balance of short-term borrowing of the Bank for the years indicated.
At December 31, ------------------------------------- 1999 1998 1997 ------------------------------------- (In thousands) Overnight Line of Credit................. $ 4,350 $ -- $ 5,750 Term borrowings (original term) 90 days or less......................... 9,612 1,587 7,942 1 year.................................. 10,995 8,404 3,550 2 year.................................. 2,700 1,000 1,000 ------- ------- ------- Balance at end of period... $27,657 $10,991 $18,242 ======= ======= ======= Daily average during the year 18,148 15,077 10,212 Maximum month-end balance................ 27,657 18,691 18,892 Weighted average rate during the year................................ 5.42% 5.64% 5.92% Year-end average rate.................... 5.06% 5.32% 5.84%
Personnel As of December 31, 1999, the Bank had 68 full-time and 21 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 General The Bank is a New York State chartered stock savings bank and its deposit accounts are insured up to applicable limits by the FDIC. The Bank is subject to extensive regulation by the State of New York Banking Department (the "Department") as its chartering agency, and by the FDIC, as the deposit insurer. The Bank must file reports with the Department and the FDIC concerning its activities and financial condition, in addition to obtaining regulatory approvals prior to entering into certain transactions such as establishing branches and mergers with, or acquisitions of, other depository institutions. There are periodic examinations by the Department and the FDIC to assess the Bank's compliance with various regulatory requirements. This regulation and supervision establishes a comprehensive framework of activities in which a savings bank may engage, and is intended primarily for the protection of the insurance fund and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such regulation, whether by the Department, the FDIC or through legislation, could have a material adverse impact on the Holding Company, the Bank, and their operations and stockholders. The Company is also required to file certain reports with, and otherwise comply with the rules and regulations of, the FRB and the Department and the FDIC which administers the provisions of the Securities Exchange Act of 1934. Certain of the regulatory requirements applicable to the Bank and to the Company are referred to below or elsewhere herein. The exercise by an FDIC-insured savings bank of the lending and investment powers of a savings bank 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 Banking 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 20 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 debt and equity 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 Department. Investment by a savings bank in the stock, capital notes and debentures of its service corporations is limited to 3% of the bank's assets, and such investments, together with the bank's loans to its service corporations, may not exceed 10% of the savings bank's assets. Furthermore, New York banking regulations impose requirements on loans which a bank may make to its executive officers and directors and to certain corporations or partnerships in which such persons have equity interests. These requirements include, but are not limited to, requirements that (i) certain loans must be approved in advance by a majority of the entire board of directors and the interested party must abstain from participating directly or indirectly in the voting on such loan, (ii) the loan must be on terms that are not more favorable than those offered to unaffiliated third parties, and (iii) the loan must not involve more than a normal risk of repayment or present other unfavorable features. Under the New York State Banking Law, the Superintendent of Banks (the "Superintendent") may issue an order to a New York State chartered banking institution to appear and explain an apparent violation of law, to discontinue unauthorized or unsafe practices and to keep prescribed books and accounts. Upon a finding by the Department that any director, trustee or officer of any banking organization has violated any law, or has continued unauthorized or unsafe practices in conducting the business of the banking organization after having been notified by the Superintendent to discontinue such practices, such director, trustee or officer may be removed from office after notice and an opportunity to be heard. The Bank does not know of any past or current practice, condition or violation that might lead to any proceeding by the Superintendent or the Department against the Bank or any of its directors or officers. Standards for Safety and Soundness. FDICIA requires the federal bank regulatory agencies to prescribe regulatory standards for all insured depository institutions and depository institution holding companies relating to: (i) internal controls, information systems and audit systems; (ii) loan documentation; (iii) credit underwriting; (iv) interest rate risk exposure; (v) asset growth; and (vi) compensation, fees and benefits. The compensation standards would prohibit employment contracts, compensation or benefit arrangements, stock option plans, fee arrangements or other compensatory arrangements that provide excessive compensation, fees or benefits or could lead to material financial loss. In addition the federal banking regulatory agencies are required to prescribe by regulation standards specifying: (i) maximum classified assets to capital ratios; (ii) minimum earnings sufficient to absorb losses without impairing capital; and (iii) to the extent feasible, a minimum ratio of market value to book value for publicly traded shares of depository institutions and depository institution holding companies. In November 1993, the federal banking agencies, including the FDIC, proposed regulations regarding the implementation of these standards. Other Deposit Insurance Reforms. FDICIA amended the FDI Act to prohibit insured depository institutions that are not well-capitalized from accepting brokered deposits unless a waiver has been obtained from the FDIC. Deposit brokers are required to register with the FDIC. 21 Consumer Protection Provisions. FDICIA enacted consumer oriented provisions including a requirement of notice to regulators and customers for any proposed branch closing and provisions intended to encourage the offering of "lifeline" banking accounts and lending in distressed communities. FDICIA also requires depository institutions to make additional disclosures to depositors with respect to the rate of interest and the terms of their deposit accounts. Uniform Lending Standard. Under FDICIA, the federal banking agencies are required to adopt uniform regulations prescribing standards for extensions of credit that are secured by liens on interests in real estate or made for the purpose of financing the construction of a building or other improvements to real estate. Insured depository institutions must adopt and maintain written policies that establish appropriate limits and standards for extensions of credit that are secured by liens or interests in real estate or are made for the purpose of financing permanent improvements to real estate. These policies must establish loan portfolio diversification standards, prudent underwriting standards (including loan-to-value limits) that are clear and measurable, loan administration procedures, and documentation, approval and reporting requirements. The real estate lending policies must reflect consideration of the Interagency Guidelines for Real Estate Lending Policies (the "Interagency Guidelines") that have been adopted by the federal banking regulators. The Interagency Guidelines, among other things, require depository institutions to establish internal loan-to-value limits for real estate loans that are not in excess of the following supervisory limits: (i) for loans secured by undeveloped land, the supervisory loan-to-value limit is 65% of the value of the collateral; (ii) for land development loans, the supervisory limit is 75%; (iii) for loans for the construction of commercial, multi-family or other nonresidential property, the supervisory limit is 80%; (iv) for loans for the construction of one- to four- family properties, the supervisory limit is 85%; and (v) for loans secured by other improved property (e.g. farmland, commercial property and other income-producing property including non-owner- occupied, one- to four- family property) the supervisory limit is 85%. The Interagency Guidelines indicate that on a case-by-case basis it may be appropriate to originate or purchase loans with loan-to-value ratios in excess of the supervisory loan-to-value limits, based on the support provided by other credit factors. The aggregate amount of loans in excess of the supervisory loan-to-value limits, however, should not exceed 100% of total capital and the total of such loans secured by commercial, agricultural, multi-family and other non-one- to four- family residential properties should not exceed 30% of total capital. The supervisory loan-to-value limits do not apply to certain categories of loans including loans insured or guaranteed by the United States Government and its agencies or by financially capable state, local or municipal governments or agencies, loans backed by the full faith and credit of state governments, loans that are to be sold promptly after origination without recourse to a financially responsible party, loans that are renewed, refinanced or restructured in connection with a workout, loans to facilitate sales of real estate acquired by the institution in the ordinary course of collecting a debt previously contracted and loans where the real estate is not the primary collateral. Insurance of Deposit Accounts The Bank is a member of the Bank Insurance Fund ("BIF"). The BIF has achieved the required reserve ratio of 1.25% of insured reserve deposits. At December 31, 1999 the Bank held $25.6 million in deposits which are insured by the Savings Association Insurance Fund. The Bank paid $31,000 in federal deposit insurance premiums for the fiscal year ended December 31, 1999, as compared to $35,000 in 1998. Under the FDI Act, insurance of deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. The management of the Bank does not know of any practice, condition or violation that might lead to termination of deposit insurance. At December 31, 1999, the Bank's capital exceeded the capital requirements imposed by the FDIC. 22 Capital Maintenance The FDIC has issued regulations that require BIF-insured banks, such as the Bank, to maintain minimum levels of capital. The regulations establish a minimum leverage capital ratio requirement of not less than 3.0% for banks in the strongest financial and managerial condition, with a CAMEL Rating of 1 (the highest examination rating of the FDIC for banks). For all other banks, the minimum leverage capital requirement is 3% plus additional capital of at least 100 to 200 basis points. Core capital (also referred to as "Tier 1 capital") is comprised of the sum of common stockholders' equity, non-cumulative perpetual preferred stock (including any related surplus) and minority interests in consolidated subsidiaries, minus all intangible assets (other than qualifying servicing rights). The FDIC also requires that savings banks meet a risk-based capital standard. The risk-based capital standard requires the maintenance of total capital (which is defined as core capital and supplementary capital) to risk- weighted assets of at least 8% and core capital to risk-weighted assets of at least 4%. In determining the amount of risk-weighted assets, all assets, plus certain off-balance sheet items, are multiplied by a risk-weight of 0% to 100%, based on the risks the FDIC believes are inherent in the type of asset or off- balance sheet item. The components of core capital are equivalent to those discussed above under the leverage capital ratio requirement. The components of supplementary capital currently include cumulative perpetual preferred stock, perpetual preferred stock, mandatory convertible securities, subordinated debt, intermediate preferred stock and allowance for possible loan and lease losses. Allowance for possible loan and lease losses includable in supplementary capital is limited to a maximum of 1.25% of risk-weighted assets. Overall, the amount of capital counted toward supplementary capital cannot exceed 100% of core capital. Loans-to-One-Borrower Limitations With certain limited exceptions, a New York State chartered savings bank may not make unsecured loans or extend credit for commercial, corporate or business purposes (including lease financing) to a single borrower, the aggregate amount of which would be in excess of 15% of the bank's net worth. In addition, the Bank may make secured loans or extensions of credit to a single borrower which aggregate 25% of the Bank's net worth provided that the underlying collateral is valued in an amount equal to at least 10% of the Bank's net worth. The Bank currently complies with all applicable loans-to-one- borrower limitations. Community Reinvestment Act Federal Regulation. Under the Community Reinvestment Act ("CRA"), as implemented by FDIC regulations, a savings institution has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the FDIC, in connection with its examination of a savings institution, to assess the institution's record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such institution. The Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") amended the CRA to require, effective July 1, 1990, public disclosure of an institution's CRA rating and require the FDIC to provide a written evaluation of an institution's CRA performance utilizing a four-tiered descriptive rating system which replaced the five-tiered numerical rating system. New York State Regulation. The Bank is also subject to provisions of the New York State Banking Law which impose continuing and affirmative obligations upon banking institutions organized in New York State to serve the credit needs of its local community ("NYCRA") which are substantially similar to those imposed by the CRA. Pursuant to the NYCRA, a bank must file an annual NYCRA report and copies of all federal CRA reports with the Banking Department. The NYCRA requires the Banking Department to make an annual written assessment of a bank's compliance with the NYCRA, utilizing a four-tiered rating system, and make such assessment available to the public. The NYCRA also requires the Superintendent to consider a bank's NYCRA rating when reviewing a bank's application to engage in certain transactions, including mergers, asset purchases and the establishment of branch offices or automated teller machines, 23 and provides that such assessment may serve as a basis for the denial of any such application. At December 31, 1999, the Bank complied with its NYCRA requirements. The Bank's CRA rating as of its latest examination was satisfactory. Federal Reserve System Under Federal Reserve Board regulations, the Bank is required to maintain noninterest-earning reserves against its transaction accounts (primarily NOW and regular checking accounts). At December 31, 1999, the Bank complied with these requirements. Holding Company Regulation The Company is a registered bank holding company pursuant to the Bank Holding Company Act of 1956, as amended (the "BHCA"). The Company is subject to examination, regulation and periodic reporting under the BHCA, as administered by the FRB. The FRB has adopted capital adequacy guidelines for bank holding companies (on a consolidated basis) substantially similar to those of the FDIC for the Bank. The Company's consolidated capital exceeds these requirements. A bank holding company is generally prohibited from engaging in, or acquiring direct or indirect control of any company engaged in, non-banking activities. One of the principal exceptions to this prohibition is for activities found by the FRB to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Some of the principal activities that the FRB has determined by regulation to be so closely related to banking are: (i) making or servicing loans; (ii) performing certain data processing services: (iii) providing securities brokerage services; (iv) acting as fiduciary, investment or financial advisor; (v) leasing personal or real property; (vi) making investments in corporations or projects designed primarily to promote community welfare; and (vii) acquiring a savings and loan association. Subsidiary banks of a bank holding company are subject to certain restrictions imposed by the FRA on any extension of credit to the bank holding company or its subsidiaries, and on the acceptance of stocks or securities of such holding company or its subsidiaries as collateral, and on the acceptance of such stocks or securities as collateral for loans. In addition, related provisions of the FRA and FRB regulations limit the amount of, and establish required procedures and credit standards with respect to, loans and other extensions of credit to officers, directors and principal stockholders of the Bank, the Company, any subsidiary of the Company and related interests of such persons. Moreover, subsidiaries of bank holding companies are prohibited from engaging in certain tie-in arrangements (with the Company or any of its subsidiaries) in connection with any extension of credit, lease or sale of property or furnishing of services. The Company and the Bank will be affected by the monetary and fiscal policies of various agencies of the United States Government, including the Federal Reserve System. In view of changing conditions in the national economy and in the money markets, it is impossible for management of the Company to accurately predict future changes in monetary policy or the effect of such changes on the business or financial condition of the Company. New York State Bank Holding Company Regulation. In addition to the federal bank holding company regulations, a bank holding company 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 Department 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 24 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. Although the Company will not be a bank holding company for purposes of New York State law, any future acquisition of ownership, control, or the power to vote 10% or more of the voting stock of another bank or bank holding company would cause it to become such. Gramm-Leach-Bliley Financial Services Modernization Act of 1999 In November 1999, President Clinton signed into law the Gramm-Leach-Bliley Financial Services Modernization Act of 1999, federal legislation intended to modernize the financial services industry by establishing a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms and other financial service providers. To the extent the legislation permits banks, securities firms and insurance companies to affiliate, the financial services industry may experience further consolidation. This could result in a growing number of larger financial institutions that offer a wider variety of financial services than the Bank currently offers and that can aggressively compete in the markets the Bank currently serves. FEDERAL AND STATE TAXATION Federal Taxation. The following discussion of federal taxation is intended only to summarize certain pertinent federal income tax matters and is not a comprehensive description of the tax rules applicable to the Company or the Bank. Bad Debt Reserves. Prior to the 1996 Act, the Bank was permitted to establish a reserve for bad debts and to make annual additions to the reserve. These additions could, within specified formula limits, be deducted in arriving at the Bank's taxable income. As a result of the 1996 Act, the Bank must use the specific charge off method in computing its bad debt deduction beginning with its 1996 Federal tax return. In addition, the federal legislation requires the recapture (over a six year period) of the excess of tax bad debt reserves at December 31, 1995 over those established as of December 31, 1987. Taxable Distributions and Recapture. Prior to the 1996 Act, bad debt reserves created prior to January 1, 1988 were subject to recapture into taxable income should the Bank fail to meet certain thrift asset and definitional tests. New federal legislation eliminated these thrift related recapture rules. However, under current law, pre-1988 reserves remain subject to recapture should the Bank make certain non-dividend distributions. Minimum Tax. The Code imposes an alternative minimum tax ("AMT") at a rate of 20% on a base of regular taxable income plus certain tax preferences ("alternative minimum taxable income" or "AMTI"). The AMT is payable to the extent such AMTI is in excess of an exemption amount. Net operating losses can offset no more than 90% of AMTI. Certain payments of alternative minimum tax may be used as credits against regular tax liabilities in future years. The Bank has not been subject to the alternative minimum tax and has no such amounts available as credits for carryover. Net Operating Loss Carryovers. A financial institution may carry back net operating losses to the preceding two taxable years and forward to the succeeding 20 taxable years. This provision applies to losses incurred in taxable years beginning after August 5, 1997. At December 31, 1999, the Bank had no net operating loss carryforwards for federal income tax purposes. The Internal Revenue Service has examined the federal income tax return for the fiscal year ended 1992; the fiscal year-end tax returns for 1991, 1993, 1994 and 1995 remain open. See Note 12 to the Financial Statements. 25 State Taxation New York Taxation. The Bank is subject to the New York State Franchise Tax on Banking Corporations in an annual amount equal to the greater of (i) 9% of the Bank's "entire net income" allocable to New York State during the taxable year, or (ii) the applicable alternative minimum tax. The alternative minimum tax is generally the greater of (a) 0.01% of the value of the Bank's assets allocable to New York State with certain modifications, (b) 3% of the Bank's "alternative entire net income" allocable to New York State, or (c) $250. Entire net income is similar to federal taxable income, subject to certain modifications (including the fact that net operating losses cannot be carried back or carried forward) and alternative entire net income is equal to entire net income without certain modifications. Delaware State Taxation. As a Delaware holding company not earning income in Delaware, the Company is exempt from Delaware corporate income tax but is required to file an annual report with and pay an annual franchise tax to the State of Delaware. ITEM 2. Properties - -------------------- The Bank conducts its business through its main office located in Oswego, New York, and four full service branch offices located in Oswego County. The following table sets forth certain information concerning the main office and each branch office of the Bank at December 31, 1999. The aggregate net book value of the Bank's premises and equipment was $4.9 million at December 31, 1999. For additional information regarding the Bank's properties, see Note 5 to Notes to Financial Statements.
LOCATION OPENING DATE OWNED/LEASED ANNUAL RENT - -------- ------------ ------------- ----------- Main Office 1874 Owned -- - ----------- 214 West First Street Oswego, New York 13126 Plaza Branch 1989 Owned /(1)/ -- - ------------ Route 104, Ames Plaza Oswego, New York 13126 Mexico Branch 1978 Owned -- - ------------- Norman & Main Streets Mexico, New York 13114 Oswego East Branch 1994 Owned -- - ------------------ 34 East Bridge Street Oswego, New York 13126 Fulton Branch 1994 Owned -- - ------------- 114 Oneida Street
Fulton, New York 13068 - --------------------------- /(1)/ The property is owned; the underlying land is leased. ITEM 3. Legal Proceedings - --------------------------- There are various claims and lawsuits to which the Company is periodically involved incident to the Company's business. In the opinion of management, such claims and lawsuits in the aggregate are immaterial to the Company's consolidated financial condition and results of operations. ITEM 4. Submission of Matters to a Vote of Security Holders - ------------------------------------------------------------- No matters were submitted to a vote of stockholders during the fourth quarter of the year under report. 26 PART II ITEM 5. Market for Company's Common Stock and Related Security Holder Matters - ------------------------------------------------------------------------------- The "Market for Common Stock" section of the Company's Annual Report to Stockholders is incorporated herein by reference. ITEM 6. Selected Financial Data - --------------------------------- The selected financial information for the year ended December 31, 1999 is filed as part of the Company's Annual Report to Stockholders and is incorporated by reference. ITEM 7. Management's Discussion and Analysis of Financial Condition and - ------------------------------------------------------------------------- Results of Operations --------------------- The "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of the Company's Annual Report to Stockholders is incorporated herein by reference. ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk - -------------------------------------------------------------------- The information required by this item is set forth under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Annual Report to Stockholders which is incorporated herein by reference. ITEM 8. Financial Statements and Supplementary Data - ----------------------------------------------------- The financial statements are contained in the Company's Annual Report to Stockholders and are incorporated herein by reference. ITEM 9. Changes in and Disagreements with Accountants on Accounting and - ------------------------------------------------------------------------- Financial Disclosure -------------------- None. 27 PART III -------- ITEM 10. Directors and Executive Officers of the Company - --------------------------------------------------------- (a) Information concerning the directors of the Company is incorporated by reference hereunder in the Company's Proxy Materials for the Annual Meeting of Stockholders. (b) Set forth below is information concerning the Principal Officers of the Company at December 31, 1999.
Name Age Positions Held With the Company - --------------------------- --- -------------------------------------------------------------- Chris C. Gagas 69 Chairman of the Board, President and Chief Executive Officer Anita J. Austin 50 Internal Auditor Melissa A. Miller 42 Vice President, Secretary James A. Dowd, CPA 32 Vice President--Controller Edgar J. Manwaring 54 Vice President--Lending Gregory L. Mills 39 Vice President, Director of Marketing, Branch Administrator W. David Schermerhorn 39 Executive Vice President-Lending Thomas W. Schneider/(1)/ 38 Executive Vice President and Chief Financial Officer Barry S. Thompson 45 Senior Vice President, Compliance Officer and Security Officer - -------------------
/(1)/ Effective January 15, 2000, Mr. Schneider was named President and Chief Executive Officer of the Company. ITEM 11. Executive Compensation - ------------------------------------ Information with respect to management compensation and transactions required under this item is incorporated by reference hereunder in the Company's Proxy Materials for the Annual Meeting of Stockholders under the caption "Compensation". ITEM 12. Security Ownership of Certain Beneficial Owners and Management - ------------------------------------------------------------------------ The information contained under the sections captioned "Stock Ownership of Management" is incorporated by reference to the Company's Proxy Materials for its Annual Meeting of Stockholders. ITEM 13. Certain Relationships and Related Transactions - -------------------------------------------------------- The information required by this item is set forth under the caption "Certain Transactions" in the Definitive Proxy Materials for the Annual Meeting of Stockholders and is incorporated herein by reference. 28 PART IV ------- ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K - -------------------------------------------------------------------------- (a)(1) Financial Statements -------------------- The exhibits and financial statement schedules filed as a part of this Form 10- K are as follows: (A) Independent Auditors' Report; (B) Consolidated Statements of Condition - December 31, 1999 and 1998. (C) Consolidated Statements of Income - years ended December 31, 1999, 1998 and 1997; (D) Consolidated Statements of Stockholders' Equity - years ended December 31, 1999, 1998 and 1997 (F) Consolidated Statements of Cash Flows - years ended December 31, 1999, 1998 and 1997; and (G) Notes to Consolidated Financial Statements. (a)(2) Financial Statement Schedules ----------------------------- All financial statement schedules have been omitted as the required information is inapplicable or has been included in the Notes to Consolidated Financial Statements. (b) Reports on Form 8-K ------------------- The Company has not filed a Current Report on Form 8-K during the fourth quarter of the fiscal year ended December 31, 1999. (c) Exhibits -------- 3.1 Certificate of Incorporation of Pathfinder Bancorp, Inc. Incorporated herein by reference to the Company's Registration Statement on S-4, file no. 333-36051 (the "S- 4") 3.2 Bylaws of Pathfinder Bancorp, Inc. (Incorporated herein by reference to the Company's S-4 4 Form of Stock Certificate of Pathfinder Bancorp, Inc. 10.1 Form of Oswego City Savings Bank 1999 Stock Option Plan Incorporated by reference to the Company's S-4 10.2 Form of Oswego City Savings Bank 1999 Recognition and Retention Plan Incorporated by reference to the Company's S-4 29 10.3 Employment Agreement between the Bank and Chris C. Gagas, President and Chief Executive Officer Incorporated by reference to the Company's S-4 10.4 Employment Agreement between the Bank and Thomas W. Schneider, Vice President and Chief Financial Officer Incorporated by reference to the Company's S-4 10.5 Employment Agreement between the Bank and W. David Schermerhorn, Vice President - Loan Administration Incorporated by reference to the Company's S-4 13 Annual Report to Stockholders 21 Subsidiaries of Company 27 Financial Data Schedule 30 Signatures Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Pathfinder Bancorp, Inc. Date: March 21, 2000 By: /S/ Thomas W. Schneider --------------------------------- Thomas W. Schneider President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
By: /S/ Chris C. Gagas ------------------------------------- Chris C. Gagas, Chairman of the Board Date: March 21, 2000 By: /S/ Thomas W. Schneider By: /S/ Chris R. Burritt ---------------------------------------- --------------------------------- Thomas W. Schneider, President and Chief Chris R. Burritt, Director Executive Officer Date: March 21, 2000 Date: March 21, 2000 By: /S/ James A. Dowd By: /S/ Raymond W. Jung ---------------------------------------- -------------------------------- James A. Dowd, Vice President and Controller Raymond W. Jung, Director (Principal Accounting Officer) Date: March 21, 2000 Date: March 21, 2000 By: /S/ Bruce E. Manwaring By: /S/ Victor S. Oakes ---------------------------------------- --------------------------------- Bruce E. Manwaring., Director Victor S. Oakes, Director Date: March 21, 2000 Date: March 21, 2000 By: /S/ L. William Nelson, Jr. By: /S/ Corte J. Spencer ---------------------------------------- -------------------------------- L. William Nelson, Jr., Director Corte J. Spencer, Director Date: March 21, 2000 Date: March 21, 2000 By: /S/ Lawrence W. O'Brien ---------------------------------------- Lawrence W. O'Brien, Director Date: March 21, 2000 By: /S/ Janette Resnick ---------------------------------------- Janette Resnick, Director Date: March 21, 2000
Exhibit Index ------------- 3.1 Certificate of Incorporation of Pathfinder Bancorp, Inc. Incorporated herein by reference to the Company's registration statement on S-4, file no. 333-36051 (the "S-4") 3.2 Bylaws of Pathfinder Bancorp, Inc. (Incorporated herein by reference to the Company's S-4 4 Form of Stock Certificate of Pathfinder Bancorp, Inc. 10.1 Form of Oswego City Savings Bank 1999 Stock Option Plan Incorporated by reference to the Company's S-4 10.2 Form of Oswego City Savings Bank 1999 Recognition and Retention Plan Incorporated by reference to the Company's S-4 10.3 Employment Agreement between the Bank and Chris C. Gagas, President and Chief Executive Officer Incorporated by reference to the Company's S-4 10.4 Employment Agreement between the Bank and Thomas W. Schneider, Vice President and Chief Financial Officer Incorporated by reference to the Company's S-4 10.5 Employment Agreement between the Bank and W. David Schermerhorn, Vice President - Loan Administration Incorporated by reference to the Company's S-4 13 Annual Report to Stockholders 21 Subsidiaries of Company 27 Financial Data Schedule EX-4 2 CERTIFICATE FOREIGN CORPORATION CERTIFICATE (See Note Below) -------------------------------- THE UNDERSIGNED, a corporation duly organized and existing under the laws of the State of , in accordance with the provisions of ----------------------- section 371 of Title 8 of the Delaware Code, does hereby certify: FIRST: That ---------------------------------------------------------- (See Note Below) is a corporation duly organized and existing under the laws of the State of and is filing herewith a certificate evidencing its corporate existence. SECOND: That the name and address of its registered agent in said State of Delaware upon whom service of process may be had is The Corporation Trust Company, Corporation Trust Center, 1209 Orange Street, Wilmington, Delaware 19801. THIRD: That the assets of said corporation are $ and that the ---------------- liabilities thereof are $ . The assets and liabilities ----------------- indicated are as of a date within six months prior to the filing date of this Certificate. FOURTH: That the business which it proposes to do in the State of Delaware is as follows: FIFTH: That the business which it proposes to do in the State of Delaware is a business it is authorized to do in the jurisdiction of its Incorporation. IN WITNESS WHEREOF, said corporation has caused this certificate to be signed on its behalf this day of . ------------------ --------------------- (See Note below)* ------------------------------ (Title) * Any authorized officer or the Chairman or Vice-Chairman of the Board of Directors may execute this certificate. Note: If the corporation is qualifying under an assumed name because its true - ---- name is unavailable for use in Delaware, the certificate should set forth (whether in the heading, the body or the execution thereof) the true name of the corporation followed by "also known as (assumed name)" or "doing business as (assumed name)" wherever the name is required. EX-13 3 ANNUAL REPORT TO STOCKHOLDERS EXHIBIT 13 ANNUAL REPORT TO STOCKHOLDERS Pathfinder Bancorp, Inc. is the parent company of Pathfinder Bank. Pathfinder Bank has two operating subsidiaries - Pathfinder REIT Inc., and Whispering Oaks Development Corporation. Pathfinder Bancorp, Inc.'s common stock currently trades on the NASDAQ Small Cap Market under the symbol "PBHC". The following table sets forth certain financial highlights of the consolidated entity for the periods and at the dates indicated:
1999 1998 1997 1996 1995 - --------------------------------------------------------------------------------------------------- FOR THE YEAR (In Thousands) Interest Income $ 14,689 $ 14,056 $ 14,168 $ 13,213 $ 12,205 Interest Expense 7,035 6,969 6,892 6,414 6,259 Net Interest Income 7,654 7,086 7,276 6,799 5,946 Net Income 930 1,209 1,854 1,272 990 PER COMMON SHARE (a) (b) Net Income: Primary 0.35 0.44 0.66 0.45 0.07 Fully diluted 0.35 0.42 0.66 0.45 0.07 Book Value 7.61 8.12 8.20 7.44 7.22 Cash dividends declared 0.24 0.20 0.17 0.13 0.00 Stock Price: IOP 5.00 5.00 5.00 5.00 5.00 High 12.00 26.125 20.00 7.083 7.167 Low 7.50 9.125 6.25 5.333 5.583 Close 8.875 9.125 20.0 6.25 7.00 YEAR END (In Thousands) Total assets $216,324 $203,252 $196,770 $189,937 $180,752 Interest-earning deposits at other financial institutions -- 1,800 -- 1,550 8,200 Investment securities 43,049 32,665 33,663 36,673 44,932 Mortgage-backed securities 23,348 20,778 23,158 22,829 7,953 Loans Receivable, net: Real estate 118,643 115,380 109,543 99,047 91,023 Consumer and other 11,420 9,978 10,495 9,695 9,126 Total loans receivable, net 130,063 125,358 120,038 108,742 100,149 Intangible assets 2,973 3,289 3,605 3,921 4,236 Deposits 152,436 160,219 152,399 158,998 158,324 Borrowed funds 42,880 18,691 18,242 7,610 -- Notes Payable ESOP -- -- 430 486 425 Equity 20,075 22,287 23,583 21,390 20,751 SELECTED PERFORMANCE RATIOS Return on average assets 0.44% 0.62% 0.97% 0.69% 0.56% Return on average equity 4.33 5.12 8.35 6.09 6.31 Return on tangible equity 5.44 6.36 9.28 7.28 5.99 Average equity to average assets 10.24 12.05 11.59 11.32 8.84 Equity to total assets 9.28 10.97 11.98 11.26 11.47 Dividend payout ratio 67.65 45.07 26.19 29.37 0.0 Net interest rate spread 3.73 3.73 3.85 3.88 3.72 Noninterest expense to total assets 3.30 3.24 2.93 2.82 2.94 Nonperforming loans to net loans receivable 1.96 1.46 1.24 2.05 0.92 Nonperforming assets to total assets 1.48 1.27 1.15 1.54 0.83 Allowance for loan losses to net loans receivable 0.88 0.75 0.69 0.83 0.35 Number of full service offices 5 5 5 5 5
(a) Earnings per share for 1995 are based on the period from November 15,1995 to December 31, 1995. (b) Per common share data has been retroactively restated to reflect the three- for-two stock split paid on February 5, 1998 to shareholders of record January 26, 1998. 2 Cash Earnings and Related Returns The Company's net income is significantly impacted by the non-cash amortization of certain expenses associated with the Company's stock based compensation plans, as well as, the amortization of goodwill. The recognition of these expense items are considered non-cash because they do not adversely impact the Company's generation of tangible shareholders' equity since the full realization of such items have previously been deducted from tangible shareholders' equity. Management believes that a presentation of the Company's cash earnings (which measure tangible equity generation), alongside reported earnings, is important in determining the Company's financial capacity for growth, share repurchases, and payments of dividends. Cash earnings, which represent the amount by which tangible equity changes each period due to operating results, includes reported earnings and excludes non- cash charges for amortization relating to the allocation of ESOP stock, the earned portion of Option plan and MRP stock, and the amortization of the premium for deposits acquired ("goodwill"). Cash earnings increased tangible shareholders' equity in 1999 by $1.5 million, or 64.7% more than reported earnings would indicate.
Cash Earnings Analysis For the Years Ended December 31, - -------------------------------------------------------------------------------------------------- (in thousands, except per share data) 1999 1998 1997 - -------------------------------------------------------------------------------------------------- Net Income 930 $1,209 $1,854 Add back non-cash expenses related to: Stock-related benefit plans 544 599 494 Amortization of intangible asset 316 316 316 Associated tax benefits (258) (274) (243) - -------------------------------------------------------------------------------------------------- Cash earnings $1,532 $1,850 $2,421 - -------------------------------------------------------------------------------------------------- Cash earnings per share-basic $ .58 $ .67 $ .87 Cash earnings per share-diluted $ .57 $ .65 $ .86 - --------------------------------------------------------------------------------------------------
Cash Earnings Performance Ratios For the Years Ended December 31, - -------------------------------------------------------------------------------------------------- 1999 1998 1997 - -------------------------------------------------------------------------------------------------- Return on average assets .73% .94% 1.26% Return on average tangible shareholders' equity 8.36% 9.44% 13.12% Non interest expense to average assets 2.99% 2.89% 2.59% Efficiency ratio 70.84% 65.42% 57.37% - --------------------------------------------------------------------------------------------------
General Throughout the Management's Discussion and Analysis the term, "the Company", refers to the consolidated entity of Pathfinder Bancorp, Inc. Pathfinder Bank is a wholly owned subsidiary of Pathfinder Bancorp, Inc. Pathfinder REIT, Inc. and Whispering Oaks Development Corp. represent wholly owned subsidiaries of Pathfinder Bank. At December 31, 1999, Pathfinder Bancorp, Inc.'s only business was the 100% ownership of Pathfinder Bank. At December 31, 1999, 1,552,500 shares, or 58.8%, of the Company's common stock was held by Pathfinder Bancorp, MHC, the Company's mutual holding company parent and 1,086,745 shares, or 41.2%, was held by the public. When used in this Annual Report the words or phrases "will likely result", "are expected to", "will continue", "is anticipated", "estimate", "project" or similar expression are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties, including, among other things, changes in economic conditions in the Company's market area, changes in policies by regulatory agencies, fluctuations in interest 3 rates, demand for loans in the Company's market areas and competition, that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Company wishes to advise readers that the factors listed above could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. The Company does not undertake, and specifically declines any obligation, to publicly release the results of any revisions which may be made to any forward- looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. The Company's net income is primarily dependent on its net interest income, which is the difference between interest income earned on its investments in mortgage and other loans, investment securities and other assets, and its cost of funds consisting of interest paid on deposits and other borrowings. The Company's net income also is affected by its provision for loan losses, as well as by the amount of non-interest income, including income from fees, service charges and servicing rights, net gains and losses on sales of securities and loans, and non interest expense such as employee compensation and benefits, deposit insurance premiums, occupancy and equipment costs, data processing costs and income taxes. Earnings of the Company also are affected significantly by general economic and competitive conditions, particularly changes in market interest rates, government policies and actions of regulatory authorities, which events are beyond the control of the Company. In particular, the general level of market rates tends to be highly cyclical. Management Succession On January 14, 2000, Chris C. Gagas retired as President and Chief Executive Officer of the Pathfinder Bancorp, MHC, Pathfinder Bancorp, Inc. and Pathfinder Bank. Mr. Gagas continues as Chairman of the Board of the Company and its mutual holding company parent. Thomas W. Schneider succeeded him. Mr. Schneider has been employed by the Company since 1988 and most recently served as Executive Vice President and Chief Financial Officer. Bank Name Change On November 16, 1999, Oswego City Savings Bank changed its name to Pathfinder Bank. Trust Department During the fourth quarter of 1999, the Company began providing trust and custodial services. The Company incurred approximately $17,000 in expense during 1999 associated with trust operations establishment. Real Estate Investment Trust On May 13, 1999, the Company established and funded Pathfinder REIT, Inc., a Real Estate Investment Trust ("the REIT"), as a subsidiary of Pathfinder Bank. The REIT holds a portion of the residential and commercial loans originated by the Company. The establishment of the REIT will enable the Company to secure a method of achieving liquidity enhancement and contingency funding in the future. The Company incurred expenses of approximately $90,000 during 1999 associated with the establishment of the REIT. At December 31, 1999, Pathfinder REIT, Inc. had total assets of $31.4 million. Impact of the Year 2000 Prior to year-end 1999, the Company had completed the assessment of its Year 2000 risk, had implemented all necessary system enhancements, and had tested all systems and equipment to ensure customer service, and minimize its business risks associated with the century date rollover. A business resumption contingency plan along with a liquidity contingency plan were in place to provide for problems should they have occurred. As a result of strong customer communications and marketing efforts by both the Company and the banking industry, consumer confidence in the banking industry increased. The Company experienced no significant year 2000 related deposit declines or cash withdrawals in December of 4 1999. The month of January 2000 reflected a successful transition to the year 2000 of all the Company's systems and equipment. All year end processing was completed as scheduled and daily processing since year-end has been performed without any year 2000 related incidents. During the month of January, the Company had successfully reinvested its contingency cash balances. The Company estimates that interest expense was negatively impacted in December of 1999 by $14,000 as a result of the cash being reserved for customer contingencies. Costs of the Company's efforts to prepare its data processing systems for the impact of the Year 2000 were approximately $180,000 in non-capitalized costs with the majority of expenditures for software and hardware upgrades being capitalized upon implementation in February 1999, and maintenance costs of operating parallel systems. The total amount capitalized was $575,000 and is being depreciated over an average of approximately four and one-third years. The depreciation will result in additional annual expenses of approximately $133,000 over this period. To date, there has been no indication that the quality of the Company's commercial loan portfolio has had any negative year 2000 related impact. The Company believes that its year 2000 related business risks have been significantly reduced with the successful operation of its systems during the early part of the year 2000. By the end of the first quarter of 2000, the Company expects that a sufficient level of business activity with all its third party vendors will indicate if any risk remains. Until such time, the Company will continue to maintain its year 2000 business resumption contingency plan to manage such risk. Business Strategy The Company's business strategy is to operate as a well-capitalized, profitable and independent community bank dedicated to providing quality customer service. Generally, the Company has sought to implement this strategy by emphasizing retail deposits as its primary source of funds and maintaining a substantial part of its assets in locally-originated residential first mortgage loans and in investment securities. Specifically, the Company's business strategy incorporates the following elements: (i) operating as a community-oriented financial institution, maintaining a strong customer base; (ii) maintaining capital in excess of regulatory requirements; (iii) emphasizing investment in one-to-four family residential mortgage loans, and investment securities; and (iv) maintaining a strong retail deposit base. Highlights of the Company's business strategy are as follows: Community-Oriented Institution The Company is committed to meeting the financial needs of its customers in Oswego County, New York, the county in which it operates. The Company believes it is large enough to provide a full range of personal and business financial services, and yet is small enough to be able to provide such services on a personalized and efficient basis. Management believes that the Company can be more effective in servicing its customers than many of its non-locally headquartered competitors because of the Company's ability to quickly and effectively provide senior management responses to customer needs and inquiries. The Company's ability to provide these services is enhanced by the stability of the Company's senior management, which has an average tenure with the Company of over 13 years. Management believes that the following actions over the past five years have helped to enhance and preserve its presence as a community bank: the 1994 acquisition of two branches of the former Columbia Federal Savings located in the cities of Oswego and Fulton; the public offering and subsequent reorganization into the two-tier holding company structure to further enhance growth and independence, the expansion of the Company's small business lending services, and the creation of a Trust division to further serve the community needs and provide additional revenue sources. The Company is committed to exploring additional lines of business and the formation of strategic alliances to maintain its independence and enhance its profitability in a competitive, consolidating industry. Capital and Asset Levels The Company's shareholders' equity has decreased from $20.8 million at December 31, 1995 to $20.1 million at December 31, 1999. Exclusive of treasury share repurchases, the Company's equity has increased $2.4 million or 11.6% during the same time period. The Company's ratio of shareholders' equity to total assets was 9.28% at December 31, 1999. Total assets have increased by $35.6 million, or 19.7%, 5 since December 31, 1995. The Company's capital exceeds all regulatory capital requirements (see footnote # 15 of the consolidated financial statements for Pathfinder Bancorp, Inc.). Emphasis on Residential Mortgage Lending and Investment Securities The Company emphasizes residential real estate financing and anticipates a continued commitment to financing the purchase or improvement of residential real estate in its market area. Historically, the Company has not been an active purchaser of loans or loan participations. To supplement local mortgage loan originations, the Company invests in investment securities consisting primarily of investment grade corporate debt instruments, securities issued by the United States Government, state and municipal obligations, mutual funds, equity securities, and mortgage-backed securities. By investing in these types of assets, the Company reduces the credit risk of its asset base but must accept lower yields than would typically be available on commercial real estate loans and multi-family real estate loans. At December 31, 1999, 90.8% of the Company's total loan portfolio consisted of loans secured by real estate. In addition, at December 31, 1999, 30.7% of the Company's total assets consisted of investment securities. Strong Retail Deposit Base The Company has a relatively strong retail base drawn from the five full-service offices in its market area. At December 31, 1999, 55.4% of the Company's deposit base of $152.4 million consisted of core deposits, which included non- interest-bearing demand accounts, NOW accounts, passbook and club savings accounts and money market deposit accounts. Core deposits are considered to be a more stable and lower cost source of funds than certificates of deposit or outside borrowings. The Company will continue to emphasize retail deposits by maintaining its network of full service offices, and providing depositors with a full range of accounts. Changes in Financial Condition Comparison at December 31, 1999 and December 31, 1998. Total assets increased $13.0 million, or 6.4%, to $216.3 million at December 31, 1999 from $203.3 million at December 31, 1998. The increase in assets is primarily the result of increases of $13.0 million, or 24.3%, in investment securities to $66.4 million from $53.4 million, and an increase of $4.7 million in net loans receivable. The increase in total assets was primarily the result of the continued implementation of a wholesale growth strategy in which the Company uses borrowings to fund the purchase of investments, and the origination of loans, as well as offsetting reductions in core deposits. Additionally, the Company had originations of mortgage loans held-for-sale of $3.8 million and loan sale proceeds of $5.9 million from sales into the secondary market. These originations consist of 15 year and 30 year fixed rate mortgages. The Company services these mortgages and recognizes income from the capitalization of mortgage servicing rights. At December 31, 1999, the Company's mortgage loans held-for-sale portfolio was $697,000, compared to $2.8 million at December 31, 1998. These asset increases were also offset by a $2.2 million dollar decrease in cash and cash equivalents. Non-performing loans (past due 90 days or more) increased $722,000, or 39.4%, to $2.6 million at December 31, 1999, from $1.8 million at the end of the prior year. The non-performing loans to total loans ratio at December 31, 1999 was 2.0% compared to 1.5% at December 31, 1998. The Company's allowance for loan losses to total loans and non-performing loans was .88% and 45.0%, respectively, at December 31, 1999. The increase in non-performing loans occurred primarily in the Company's one-to-four family real estate loan portfolio. While this trend is indicative of the slow economic growth in the Company's market area, the underwriting of these loans allows for relatively low loan-to-value ratios. The average loan-to-value ratio of the Company's non-performing one-to-four family mortgage loans was approximately 63% at December 31, 1999. The relatively low loan-to-value ratio serves as a mitigating factor in estimating the company's potential losses from credit default. Total liabilities increased $16.2 million, or 9.0%, to $196.3 million at December 31, 1999 from $180.1 million at the end of the prior fiscal year. The increase was primarily attributable to a $24.2 million increase in borrowed funds to $42.9 million at December 31, 1999, from $18.7 at December 31, 1998. The increase in borrowings represent term advances and reverse repurchase agreements utilized to fund the Company's growth in its investment and loan portfolios, as well as an extension of the Company's line of credit. The increase in borrowed funds was partially offset by a $7.8 million decrease in deposits, and a $1.1 million 6 decrease in other liabilities. The decrease in deposits was comprised of a $4.8 million, or a 7.5% decrease in savings accounts, a $2.3 million, or 14.3%, decrease in interest-bearing demand deposits, and a $1.5 million decrease in time accounts. The decrease in deposits reflects both the lack of significant growth in the Company's market area and increased competitive forces for alternative investment products and returns. The decrease in other liabilities was the result of a $1.3 million increase in deferred taxes, partially offset by a $196,000 increase in deferred compensation and a $143,000 increase in interest payable. Shareholders' equity decreased $2.2 million, or 9.9%, to $20.1 million at December 31, 1999 from $22.3 million at December 31, 1998. The decrease is attributable to the repurchase of 113,475 shares of the Company's common stock totaling $1.2 million, a decrease in accumulated other comprehensive income of $1.9 million and dividends declared of $ 629,000. The decreases were offset by net income of $930,000 and stock based compensation earned of $544,000. Comparison at December 31, 1998 and December 31, 1997. Total assets increased $6.5 million, or 3.3%, to $203.3 million at December 31, 1998 from $196.8 million at December 31, 1997. The increase in assets is primarily the result of increases in the balance of net loans receivable to $125.4 million from $120.0 million, an increase of $5.4 million, or 4.5%. This increase was principally attributable to the deployment of maturing short term investments to fund the demand for the Company's loan products, principally one to four family mortgage loans and commercial real estate loans. Increases also occurred in the following areas: interest-bearing deposits at other financial institutions increased by $1.8 million, cash and due from banks increased by $382,000, premises and equipment increased $770,000, and other assets increased $810,000. The increase in premises and equipment consists primarily of upgrades to the Company's data processing systems. The increase in other assets was primarily attributable to a $554,000 increase in the cash value of life insurance, an $84,000 increase in prepaid pension expense, $55,000 in capitalized mortgage servicing rights, a $100,000 receivable from another financial institution, and $76,000 in other prepaid expenses. These increases were partially offset by decreases in investment securities of $3.4 million, or 6.0%, to $53.4 million from $56.8 million, and intangible assets of $316,000 to $3.3 million from 3.6 million. Non-performing loans (past due 90 days or more) increased $342,000, or 22.9%, to $1.8 million at December 31, 1998, from $1.5 million at the end of the prior year. The non-performing loans to total loans ratio at December 31, 1998 was 1.5% compared to 1.2% at December 31, 1997. The Company's allowance for loan losses to total loans and non-performing loans was .75% and 51.3%, respectively, at December 31, 1998. Total liabilities increased $6.9 million, or 4.0%, to $180.1 million at December 31, 1998 from $173.2 million at the end of the prior fiscal year. The increase was primarily attributable to a $7.8 million increase in deposits to $160.2 million at December 31, 1998, from $152.4 at December 31, 1997. The increase in deposits was comprised of a $5.8 million increase in interest bearing deposits and a $2.0 million increase in non-interest bearing deposits. Savings accounts increased $292,000, or .5%, to $64.2 million while time deposits increased $2.3 million, or 3.5%. The Company's borrowings increased $449,000, or 2.5% to $18.7 million at December 31, 1998 from $18.2 million at the end of the prior year. Shareholders' equity decreased $1.3 million, or 5.5%, to $22.3 million at December 31, 1998 from $23.6 million at December 31, 1997. The decrease is attributable to the repurchase of 132,000 shares of the Company's common stock totaling $1.9 million and dividends declared of $545,000, partially offset by net income of $1.2 million, an increase in the unrealized appreciation on investment securities available for sale of $269,000, a net decrease in unearned ESOP and stock compensation plans of $599,000. Results of Operations General The Company had net income of $930,000, $1.2 million, and $1.9 million for the fiscal years ended December 31, 1999, 1998 and 1997, respectively. The decrease in net income for the year ended December 31, 1999, compared to 1998 resulted primarily from an increase in other expenses of $548,000, or 8.3%, to $7.1 million, and a decrease in other income of $382,000, or 24.1%. This was partially offset by an increase in net interest income of $567,000, or 8.1%. The Company's return on average assets and 7 return on shareholders' equity for the years ended December 31, 1999, 1998 and 1997 were .44%, .62%, and .97% and 4.33%, 5.12%, and 8.35%, respectively. These performance ratios tend to be below the Company's peer group during the period. The peer group is derived from the FDIC Uniform Bank Performance Report and comprises all FDIC insured savings banks having assets between $100 million and $300 million. The peer groups annualized return on average assets for the periods ended September 30, 1999 and December 31, 1998 and 1997 were .89%, .92%, and .99%, respectively. The peer groups annualized return on average equity for the periods ended September 30, 1999 and December 31, 1998 and 1997 were 7.53%, 7.78%, and 8.77%, respectively. The primary reason for declining earnings trends and lower than peer returns is the growth rate in operating expenses exceeding the rate of growth of revenue. During the three year period ended December 31, 1999, operating expenses increased at an average annualized rate of 11.0%, while revenue, exclusive of securities gains/losses, increased at an average annualized rate of 4.8%. The growth in operating expenses is representative of the Company's actions to position the bank as a more diverse provider of financial services. Management and the Board are committed to harnessing the Company's enhanced capacity and capabilities to consistently grow revenue at a rate in excess of the growth of expenses. Comparison of Operating Results for the Years Ended December 31, 1999 and 1998 Interest Income Interest income totaled $14.7 million for the year ended December 31, 1999, as compared to $14.1 million for the year ended December 31, 1998, an increase of $633,000 or 4.5%. The increase in interest income was principally attributable to an increase of $14.8 million in the average balance of interest-earning assets to $191.9 million from $177.1 million, partially offset by a decrease in the average yield on interest earning-assets to 7.72% from 8.03%. The increase in average interest-earning assets occurred as a result of growth in both the securities and loan portfolio. Average investment securities increased $11.0 million, or 22.0%, and average loans increased $3.8 million, or 3.0%. The yield reduction is principally the result of a lower interest rate environment during the first 3 quarters of 1999, which in turn has resulted in new mortgage loan originations at rates in excess of 90 basis points below the weighted average rate of the existing loan portfolio which lowered the total portfolio to 8.27% from 8.56%, combined with the reinvestment of investment security principal maturity's and prepayments taking place during the year at rates over 75 basis points less than the existing portfolio yield. The increase in average interest-earning assets was primarily attributable to the Company's continued implementation of a wholesale growth strategy in which borrowings are utilized to purchase investments and fund loan portfolio growth. Interest income on real estate loans totaled $9.6 million and $9.7 million for the years ended December 31, 1999 and 1998, respectively. The $142,000, or 1.5%, decrease resulted primarily from a decrease in the average yield on real estate loans of .36%, to 7.97% for 1999 from 8.33% for 1998. The decrease in the average yield on real estate loans was partially offset by an increase of $3.4 million, or 3.0%, in the average balance of such loans to $119.9 million from $116.5 million. The increase in the average balance on real estate loans was principally due to the origination of 15 year term one-to-four family residential mortgages loans, and one-to-four family adjustable rate mortgage loans retained in the Company's portfolio. The origination of adjustable rate mortgage loans is primarily comprised of "5/1 ARMS" which have interest rates that are fixed for the first five years and are adjustable annually thereafter, and amortize over 30 years. To a lesser degree, the Company also increased its origination of commercial real estate loans. The decrease in the yield on average real estate loans was attributable to the lower rates charged on the 15 year conforming mortgage loans originated during the year, and the initial rates charged on 5/1 ARMS. Interest income on consumer and other loans increased $79,000, or 6.7%, to $1.3 million for the year ended December 31, 1999 from $1.2 million for the year ended December 31, 1998. The increase was due to an increase in the average yield on consumer and other loans to 11.56% from 11.19%, as well as an increase in the average balance on consumer and other loans of $351,000, or 3.4%, to $10.8 million from $10.5 million. The increase in the average yield on consumer and other loans reflects the Company's continuing efforts to provide lending to qualified local businesses, which tend to carry higher interest rates. The increase in the average balance on consumer and other loans demonstrates continued penetration into this particular segment of the market. 8 Interest income on mortgage-backed securities increased by $88,000, or 6.5%, to $1.5 million from $1.4 million for the years ended December 31, 1999 and 1998, respectively. The increase in interest income on mortgage-backed securities resulted generally from a increase in the average yield on mortgage-backed securities to 6.75% from 6.69%, as well as an increase in the average balance of mortgage-backed securities of $1,134, or 5.6%. The increase in the average balance reflects the continued utilization of mortgage-backed securities in repurchase agreement transactions by the Company. The increase in the average yield on mortgage-backed securities was a result of the funds from the scheduled amortization and prepayments being reinvested at higher market rates. Interest income on investment securities, on a tax equivalent basis, increased $672,000, or 36.7%, for the year ended December 31, 1999 to $2.5 million from $1.8 million for the same period in 1998. The increase resulted primarily from an increase in the average balance of investment securities of $11.7 million, or 43.6%, to $38.6 million at the end of the 1999 fiscal year from $26.9 million at December 31, 1998. The increase in average balance was partially offset by a decrease in the average yield on investment securities, on a tax equivalent basis, to 6.48% from 6.80% for the years ended December 31, 1999 and 1998, respectively. The increase in the average balance of investment securities resulted primarily from the continuation of the Company's wholesale strategy whereby borrowings are utilized to fund investment portfolio growth. Interest income on interest-earning deposits decreased $85,000, or 58.6%, to $60,000 for the year ended December 31, 1999 from $145,000 for the prior year. The decrease was due to a $1.8 million, or 64.6%, decrease in the average balance on interest-earning deposits, partially offset by an increase in the average yield on such deposits to 5.99% from 5.13%. Interest Expense Interest expense increased $66,000, or .1%, to $7.0 million for the year ended December 31 1999. The increase was primarily attributable to an increased utilization of borrowed funds in connection with the Company's continued wholesale growth strategy and the use of borrowed funds to supplement deposit declines. The average balance of interest-bearing liabilities increased $14.5 million, or 8.9%, to $176.5 million at December 31, 1999 as compared to $162.0 million at the end of the prior year. The average cost of interest-bearing liabilities decreased to 3.99% during the year ended December 31, 1999 from 4.30% for the year ended December 31, 1998. The decrease in the average cost is primarily attributable to reductions in the interest rates paid on NOW accounts and savings deposits. Interest expense on savings and club accounts decreased $405,000, or 21.7%. The average balance on savings and club accounts decreased $2.0 million, or 3.1%, to $62.4 million for the year ended December 31, 1999 from $64.4 for the prior year, while the average cost of such deposits decreased to 2.34% from 2.90%. The average balance on time deposits remained relatively constant when comparing the years ended December 31, 1999 and 1998, while the average cost of time deposits decreased to 5.28% from 5.69%. The decrease in the average balance on the Company's core deposits is reflective of increased competition form non-bank investment products and a lack of growth in the Company's market area. These conditions are anticipated to continue in the near future. The Company's borrowings consist of term and overnight advances from the Federal Home Loan Bank of New York and funds obtained through repurchase agreements ("repos"). Interest expense on borrowed funds increased $808,000, or 92.0%, to $1.7 million for the year ended December 31,1999 from $878,000 at the prior year end. This increase was primarily the result of a increase in the average balance of the borrowings of $15.6 million, to $30.5 million, from $14.9 million for 1999 and 1998 respectively, partially offset be a decrease in the average cost of borrowed fund of .35% to 5.53% from 5.88%. The reduction in the average cost of borrowed funds is primarily a result of approximately $10 million of borrowings being entered into during the fourth quarter of 1998 and the first quarter of 1999 when the prevailing rates were at their lowest. Average Balance Sheet The following table sets forth certain information concerning average interest earning assets and interest-bearing liabilities and the yields and rates thereon. Interest income and resultant yield information in the table is on a fully tax-equivalent basis for the three years ended December 31, 1999, 1998, and 1997 using marginal federal income tax rates of 34%. Averages are computed on the daily average balance for each month in the period divided by the number of days in the period. Yields and amounts earned include loan fees. Non-accrual loans have been included in interest-earning assets for purposes of these calculations. 9
Years Ended December 31, 1999 1998 1997 Average Average Average Average Average Average Balance Interest Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost - ------------------------------------------------------------------------------------------------------------------------------------ (in thousands) Interest Earning Assets: Real Estate Loans $119,893 $ 9,556 7.97% $116,447 $ 9,698 8.33% $103,600 $ 8,971 8.66% Consumer & Other Loans 10,835 1,252 11.56% 10,484 1,173 11.19% 10,051 1,093 10.87% Mortgage-backed Securities 21,519 1,452 6.75% 20,385 1,364 6.69% 23,244 1,591 6.84% Taxable investment securities 32,935 2,014 6.12% 20,877 1,330 6.37% 29,160 1.968 6.75% Non-taxable investment securities 5,695 488 8.57% 6,034 500 8.29% 6,432 554 8.61% Interest-earning deposits 1,002 60 5.99% 2,829 145 5.13% 3,426 173 5.05% - ---------------------------------------------------------------------------------------------------------------------------------- Total interest-earning assets $191,879 $14,822 7.72% $177,056 $ 14,210 8.03% $175,913 $14,350 8.16% Non Interest Earning Assets: Other assets 18,525 18,352 16,017 Allowance for loan losses (1,000) (851) (936) Net unrealized gains on available for sale portfolio 406 1,443 648 - ------------------------------------------------------------------------------------------------------------------------------------ Total Assets $209,810 $196,000 $191,642 - -------------------------------------------------------------------------------------------------------------------------- Interest-bearing Liabilities: Now accounts $ 15,119 $ 273 1.81% $ 14,281 $ 331 2.32% $ 13,346 $ 341 2.56% Savings and club accounts 62,403 1,460 2.34% 64,417 1,865 2.90% 65,383 1,971 3.01% Time deposits 68,482 3,616 5.28% 68,417 3,895 5.69% 70,591 3,975 5.63% Borrowings 30,511 1,686 5.53% 14,927 878 5.88% 10,677 605 5.67% - ------------------------------------------------------------------------------------------------------------------------------------ Total Interest bearing liabilities $176,515 $ 7,035 3.99% $162,042 $ 6,969 4.30% $159,997 $ 6,892 4.31% - ------------------------------------------------------------------------------------------------------------------------------------ Non-Interest-Bearing Liabilities: Demand deposits 9,736 8,436 7,633 Other liabilities 2,083 1,913 1,798 - -------------------------------------------------------------------------------------------------------------------------- Total liabilities 188,334 172,391 169,428 - ------------------------------------------------------------------------------------------------------------------------------------ Shareholder's equity 21,476 23,609 22,214 - -------------------------------------------------------------------------------------------------------------------------- Total liabilities & shareholder's equity $209,810 $196,000 $191,642 - -------------------------------------------------------------------------------------------------------------------------- Net interest income $ 7,787 $ 7,241 $ 7,458 Net interest rate spread 3.73% 3.73% 3.85% Net interest margin 4.06% 4.09% 4.24% Ratio of average interest-earning assets to average interest-bearing liabilities 108.70% 109.27% 109.95%
Rate/Volume Analysis Net interest income can also be analyzed in terms of the impact of changing interest rates on interest earning assets and interest-bearing liabilities and changing the volume or amount of these assets and liabilities. The following table represents the extent to which changes in interest rates and changes in the volume of interest earning assets and interest-bearing liabilities have affected the Company's interest income and interest expense during the periods indicated. Information is provided in each category with respect to: (i) changes attributable to changes in volume (change in volume multiplied by prior rate); (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume); and (iii) changes attributable to both rate and volume have been allocated equally.
Year Ended December 31, - ------------------------------------------------------------------------------------------------------------------------------------ 1999 vs. 1998 1998 vs. 1997 Increase (Decrease) Due to Increase (Decrease) Due to - ------------------------------------------------------------------------------------------------------------------------------------ Total Total Increase Increase Volume Rate (Decrease) Volume Rate (Decrease) - ------------------------------------------------------------------------------------------------------------------------------------ (in thousands) Interest Income: Real estate loans $ 282 $ (424) ($142) $1,091 $(364) $ 727 Consumer and other loans 39 40 79 47 33 80 Mortgage-backed securities 76 12 88 (195) (32) (227)
10 Taxable investment securities 752 (68) 684 (543) (95) (638) Non-taxable investment securities (28) 16 (12) (34) (20) (54) Interest-earning deposits (101) 16 (85) (30) 2 (28) - ------------------------------------------------------------------------------------------------------------------------------------ Total interest income 1,020 (408) 612 336 (476) (140) Interest Expense: Now and escrow accounts 18 (76) (58) 23 (33) (10) Savings and club accounts (51) (354) (405) (31) (75) (106) Time deposits 3 (282) (279) (122) 42 (80) Borrowings 888 (80) 808 246 27 273 - ------------------------------------------------------------------------------------------------------------------------------------ Total Interest expense: 858 (792) 66 116 (39) 77 - ------------------------------------------------------------------------------------------------------------------------------------ Net change in interest income $ 162 $ 384 $ 546 $ 220 $(437) $(217) - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------
Net Interest Income Net interest income increased $546,000, on a tax equivalent basis, for the year ended December 31, 1999 as compared to December 31, 1998. The increase occurred due to an increase in the average balance of interest earning assets of $14.8 ------------------------------------------------------ million, or 8.4%, and a decrease in the average cost of interest-bearing - -------------------------------------------------------------------------------- liabilities to 3.99% from 4.30%, partially offset by an increase in the average - -------------------------------------------------------------------------------- balance of interest-bearing liabilities of $14.5 million, or 8.9%, and a - -------------------------------------------------------------------------------- decrease in the average yield of interest-earning assets to 7.72% from 8.03%. - ---------------------------------------------------------------------------- Provision for Loan Losses The Company maintains an allowance for loan losses based upon a monthly evaluation of known and inherent risks in the loan portfolio, which includes a review of the balances and composition of the loan portfolio as well as analyzing the level of delinquencies in each segment of the loan portfolio. Loan loss provisions are based upon management's estimate of the fair value of the collateral and the Company's actual loss experience, as well as standards applied by the FDIC. The Company established a provision for possible loan losses for the year ended December 31, 1999 of $373,000 as compared to a provision of $382,000 for the year ended December 31, 1998. The decrease in the provision for loan losses is attributable a lower level of net charge offs during 1999 when compared to 1998. The Company's allowance for loan losses as a percentage of total loans receivable was .88%, while the allowance for loan losses to non-performing loans was 45.01% at December 31, 1999. Non interest Income The Company's non interest income is principally comprised of fees on deposit accounts and transactions, loan servicing, commissions, and net gain on securities and loans. Non interest income exclusive of net gains on securities and loans increased $151,000 or 15.6%, to 1.1 million for the year ended December 31, 1999, when compared to the same period in the prior year. The increase in non interest income, exclusive of net gain on securities and loans, is a result of an ongoing effort by the Company to diversify its revenue sources and lessen its dependence on net interest income. As a component of this objective, the Company has expanded its facilities and resources to provide trust services and enhance its investment management services. Net gain on securities and loans decreased $532,000, or 86.1%, for the year ended December 31, 1999 when compared to the 1998 period. The decrease in net gain on securities and loans is a result of a reduction in the mark-to-market gain in the Company's equity mutual fund holdings. Non interest Expense Non interest expense increased $548,000, or 8.3%, to $7.1 million for the year ended December 31, 1999 from $6.6 million for the prior year. The increase in non-interest expense was comprised of a $351,000, or 78.5% increase in data processing charges, a $247,000, or 45.9% increase in professional and other services, a $124,000 increase in building occupancy, and a $183,000 increase in salaries and employee benefits. These increases were offset by a $379,000 charge recorded in the prior year as a result of the termination of the Company's merger transaction. The increase in data processing costs are primarily the result of increases in depreciation and maintenance on upgraded hardware and software placed into service during the first quarter on 1999. These upgrades to hardware and software represent efforts by the company to undertake remedial actions for Year 2000 contingency and enhance its ability to compete over 11 the near term. The increase in professional and other services is primarily comprised of increased fees for information systems consulting, advertising associated with the company name change, investment and risk management, and attorney fees. The increase in building occupancy expense is principally due to depreciation and maintenance increases associated with expansion of the Company's main office. The increase in salaries and employee benefits is primarily due to commissions paid to mortgage originators, accelerated amortization of certain stock-based compensation plans, and annual salary increases. The Company's overhead (non-interest expense to average assets) and efficiency ratios for the year ended December 31, 1999 were 3.40% and 80.5%, respectively. The stock based compensation plan expenses and the Company's amortization of goodwill represent non-cash expenses in that they do not decrease the generation of tangible capital (see page xxx). If these non-cash expenses were deducted from the Company's overhead and efficiency ratios, those adjusted ratios for the year ended December 31, 1999 would be 2.99% and 70.8%, respectively. Income Tax Expense Income tax expense decreased $75,000, or 15.1% to $421,000 for the year ended December 31, 1999 from $495,000 for the prior year. The decrease in income tax expense reflected lower pre-tax income during the year. Comparison of Operating Results for the Years Ended December 31, 1998 and 1997 Interest Income Interest income totaled $14.1 million for the year ended December 31, 1998, as compared to $14.2 million for the year ended December 31, 1997, a decrease of $112,000, or 1.0%. The decrease in interest income was principally attributable to a decrease in the average yield on interest-earning assets to 8.03% from 8.16%, partially offset by an increase of $1.2 million, or .6%, in the average balance of interest earning-assets to $177.1 million from $175.9 million. The decline in yield on mortgages and investments was caused by a general decline in market interest rates. The increase in average interest-earning assets was primarily attributable to loan origination activity. Loan originations totaled 45.7 million for the 1998 fiscal year, of which $28.1 were one-to-four family residential mortgages. Loan sales during this period were $7.7 million. The originations, less loan repayments and sales, increased the average balance of real estate loans by $12.8 million, or 12.4%, to $116.5 million at December 31, 1998 from $103.6 million for the prior fiscal year. The average balance on consumer and other loans increased by $433,000, or 4.3%. The average balance on mortgage-backed securities and investment securities decreased by $2.9 million and $8.7 million, respectively. The average balance on interest-earning deposits at other financial institutions decreased by $597,000. Interest income on real estate loans totaled $9.7 million and $9.0 million for the years ended December 31, 1998 and 1997, respectively. The $727,000, or 8.1%, increase resulted primarily from an increase in the average balance of real estate loans of $12.8 million, or 12.4%, to $116.5 million for 1998 from $103.6 million for 1997. The increase in the average balance on real estate loan was partially offset by a reduction in the average yield on such loans to 8.33% from 8.66%. The increase in the average balance on real estate loans was principally due to the origination of 15 and 30 year term one-to-four family residential mortgages loans held-for-sale and one-to-four family adjustable rate mortgage loans retained in the Company's portfolio. Interest income on consumer and other loans increased $80,000, or 7.3%, to $1.2 million for the year ended December 31, 1998 from $1.1 million for the year ended December 31, 1997. The increase was due to an increase in the average yield on consumer and other loans to 11.19% from 10.87%, as well as an increase in the average balance on consumer and other loans of $433,000, or 4.3%, to $10.5 million from $10.1 million. Interest income on mortgage-backed securities decreased by $227,000, or 14.3%, to $1.4 million from $1.6 million for the years ended December 31, 1998 and 1997, respectively. The decrease in interest income on mortgage- 12 backed securities resulted generally from a decrease in the average balance on mortgage-backed securities of $2.9 million, or 12.3%, to $20.4 million at December 31, 1998 from $23.2 million at the end of the prior year, as well as a decrease in the average yield on mortgage-backed securities to 6.69% from 6.84%. The decrease in the average balance of mortgage-backed securities resulted from the scheduled amortization and prepayments of principal on the underlying mortgage loans. Interest income on investment securities, on a tax equivalent basis, decreased $692,000, or 27.4%, for the year ended December 31, 1998 to $1.8 million from $2.5 million for the same period in 1997. The decrease resulted primarily from a decrease in the average balance of investment securities of $8.7 million, or 24.4%, to $26.9 million at the end of the 1998 fiscal year from $35.6 million at December 31, 1997. Additionally, the average yield on investment securities, on a tax equivalent basis, decreased to 6.80% from 7.09% for the years ended December 31, 1998 and 1997, respectively. The decrease in the average balance of investment securities resulted primarily from the reinvestment of funds from maturing and called securities into loan originations. Interest income on interest-earning deposits decreased $28,000, or 16.2%, to $145,000 for the year ended December 31, 1998 from $173,000 for the prior year. The decrease was due to a $597,000, or 17.4%, decrease in the average balance on interest-earning deposits, partially offset by an increase in the average yield on such deposits to 5.13% from 5.05%. Interest Expense Interest expense increased $77,000, or 1.1%, to $7.0 million for the year ended December 31 1998, from $6.9 million for the prior year. The increase was primarily attributable to an increase in the use of borrowed funds which resulted in a higher average balance on interest-bearing liabilities. The average balance of interest-bearing liabilities increased $2.0 million, or 1.3%, to $162.0 million at December 31, 1998 as compared to $160.0 million at the end of the prior year. The average cost of interest-bearing liabilities decreased to 4.30% during the year ended December 31, 1998 from 4.31% for the year ended December 31, 1997. The decrease in the average cost is primarily attributable to reductions in the interest rates paid on NOW accounts and savings deposits. Interest expense on savings and club accounts decreased $106,000, or 5.4%, while the interest expense on time deposits decreased $80,000, or 2.0%. The average balance on savings and club accounts decreased $966,000, or 1.5%, to $64.4 million for the year ended December 31, 1998 from $65.4 for the prior year, while the average cost of such deposits decreased to 2.90% from 3.01%. The stated rate of interest paid on fixed rate savings accounts was reduced to 2.15% from 3.00% during the fourth quarter of 1998. During 1998, the Company introduced a tiered-rate savings account, which allows for higher rates of interest at higher balances ranging from 2.15% to 3.25%. At December 31, 1998, $49.49 million, or 76.9%, of the total savings deposits were held in fixed rate accounts while $14.9 million were held in the tiered-rate product. The average balance on time deposits decreased $2.2 million, or 3.1%, to $68.4 million for the year ended December 31, 1998 from $70.6 million at December 31, 1997, while the average cost of time deposits increased to 5.69% from 5.63%. The average balance of borrowed funds increased $4.2 million, or 39.8%, to $14.9 million at December 31, 1998 as compared to $10.7 million at the end of the prior year. The average cost of borrowed funds increased to 5.67% during the year ended December 31, 1998 from 5.67 for the same period in the prior year. The increase in the average balance of borrowed funds reflects the Company's continued emphasis on wholesale growth. Net Interest Income Net interest income decreased $217,000, on a tax equivalent basis, for the year ended December 31, 1998 as compared to December 31, 1997. The decrease occurred due to a decrease in the ratio of average interest-earning assets to average interest bearing liabilities to 109.27% from 109.95%, as well as a compression of the Company's net interest rate spread to 3.73% from 3.85%. These ratios are the result of a $2.0 million, or 1.3%, increase in average interest-bearing liabilities, and a decrease in the average yield of interest-earning assets to 8.03% from 8.16%. These decreases were offset in part by an increase in the average balance of interest earning assets of $1.1 million, or .6%, and a decrease in the average cost on interest bearing liabilities to 4.30% from 4.31%. Provision for Loan Losses 13 The Company maintains an allowance for loan losses based upon a monthly evaluation of known and inherent risks in the loan portfolio, which includes a review of the balances and composition of the loan portfolio as well as analyzing the level of delinquencies in each segment of the loan portfolio. Loan loss provisions are based upon management's estimate of the fair value of the collateral and the Company's actual loss experience, as well as standards applied by the FDIC. The Company established a provision for possible loan losses for the year ended December 31, 1998 of $382,000 as compared to a provision of $261,000 for the year ended December 31, 1997. The Company's allowance for loan losses as a percentage of total loans receivable was .75%, while the allowance for loan losses to non-performing loans was 51.20% at December 31, 1998. Non interest Income Non interest income consists of servicing income and fee income, gains (losses) on the sale of investment securities and loans and other operating income. Non interest income increased $213,000, or 15.5%, to $1.6 million for the year ended December 31, 1998, as compared to $1.4 million for the year ended December 31, 1997. The increase in non interest income was primarily attributable to an increase in fees and service charges of $26,000, or 5.3%, to $515,000 from $489,000, and additional gains on the sale of investment securities and loans of $290,000, partially offset by a decrease in other charges, commissions, and fees of $107,000, or 29.1%, to $260,000 from $367,000. Non interest Expense Non interest expense increased $816,000, or 14.1%, to $6.6 million for the year ended December 31, 1998 from $5.8 million for the prior year. The increase in non interest expense was primarily attributable to increases in employee compensation and benefits of $199,000, or 6.8%, data processing costs of $59,000, or 15.3%, professional service expense increases of $8,000, other expense increases of $211,000, or 22.1%, and a charge of $379,000 in connection with the cancellation of the merger. The merger expenses were attributable to professional services rendered for legal, tax, accounting work, as well as for certain filing fees. The increases in the employee compensation and benefits is primarily the result of increased salaries of approximately of $105,000, stock compensation expense of $40,000, and directors fees of $62,000. The increase in other expenses was primarily attributable to the following: $81,000 in connection with the liquidation of certain OREO properties, $52,000 in non- recurring data communications costs for networks, $49,000 for costs related to the operation of the mid-tier holding company (principally franchise tax), and $16,000 in additional liability insurance expense. The expense increase were partially offset by a decrease in occupancy costs of $40,000, or 6.0%. The Company's overhead (non-interest expense to average assets) and efficiency ratios for the year ended December 31, 1998 were 3.36% and 70.57%, respectively. Exclusive of the merger costs the same ratios were 3.17% and 65.22%, respectively. The stock based compensation plan expenses and the Company's amortization of goodwill represent non-cash expenses in that they do not decrease the generation of tangible capital (see page 14). If these non-cash expenses were deducted from the Company's overhead and efficiency ratios, exclusive of the merger costs, those adjusted ratios for the year ended December 31, 1998 would be 2.70% and 52.33%, respectively. Income Tax Expense Income tax expense decreased $267,000, or 35.0% to $495,000 for the year ended December 31, 1998 from $762,000 for the prior year. The decrease in income tax expense reflected lower pre-tax income during the year. Quantitative and Qualitative Disclosure about Market Risk Market risk is the risk of loss in a financial instrument arising from adverse changes in market rates or prices such as interest rates, foreign currency exchange rates, commodity prices, and equity prices. The Company's most significant form of market risk is interest rate risk, as the majority of the Company's assets and liabilities are sensitive to changes in interest rates. The Company's mortgage loan portfolio consists primarily of loans on residential real property located in Oswego County, and is therefore subject to risks associated with the local economy. The Company's interest rate risk management program focuses primarily on evaluating and managing the composition of the Company's assets and liabilities in the context 14 of various interest rate scenarios. Factors beyond management's control, such as market interest rates and competition, also have an impact on interest income and interest expense. Other types of market risks do not arise in the normal course of the Company's business activities. The extent to which such assets and liabilities are "interest rate sensitive" can be measured by an institution's interest rate sensitivity "gap". An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period. The interest rate sensitivity gap is defined as the difference between the amount of interest- earning assets maturing or repricing within a specific time period and that amount of interest-bearing liabilities maturing or repricing within that time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. During a period of rising interest rates, a negative gap would tend to adversely affect net interest income while a positive gap would tend to positively affect net interest income. Conversely, during a period of falling interest rates, a negative gap would tend to positively affect net interest income while a positive gap would tend to adversely affect net interest income. The Company does not generally maintain in its portfolio fixed interest rate loans with terms exceeding 20 years. In addition, ARM loans are originated with terms that provide that the interest rate on such loans cannot adjust below the initial rate. Generally, the Company tends to fund longer term loans and mortgage-backed securities with shorter term time deposits, repurchase agreements, and advances. The impact of this asset/liability mix creates an inherent risk to earnings in a rising interest rate environment. In a rising interest rate environment, the Company's cost of shorter term deposits may rise faster than its earnings on longer term loans and investments. Additionally, the prepayment of principal on real estate loans and mortgage-backed securities tends to decrease as rates rise, providing less available funds to invest in the higher rate environment. Conversely, as interest rates decrease the prepayment of principal on real-estate loans and mortgage-backed securities tends to increase, causing the Company to invest funds in a lower rate environment. The potential impact on earnings from this mismatch, is mitigated to a large extent by the size and stability of the Company's savings accounts. Savings accounts have traditionally provided a source of relatively low cost funding that have demonstrated historically a low sensitivity to interest rate changes. The Company generally matches a percentage of these, which are deemed core, against longer term loans and investments. In addition, the Company has sought to extend the terms of its time deposits. In this regard, the Company has on occasion offered certificates of deposits with three and four year terms which allow depositors to make a one-time election, at any time during the term of the certificate of deposit, to adjust the rate of the certificate of deposit to the then prevailing rate for a certificate of deposit with the same term. The Company has further sought to reduce the term of a portion of its rate sensitive assets by originating one year ARM loans, five year/one year ARM loans (mortgage loans which are fixed rate for the first five years and adjustable annually thereafter), and by maintaining a relatively short term investment securities (original maturities of three to five years) portfolio with staggered maturities. The Company manages its interest rate sensitivity by monitoring (through simulation and net present value techniques) the impact on it's GAP position, net interest income, net portfolio value and net portfolio value ratio to changes in interest rates on its current and forecast mix of assets and liabilities. The Company has an Asset-Liability Management Committee which is responsible for reviewing the Company's assets and liability policies, setting prices and terms on rate-sensitive products, and monitoring and measuring the impact of interest rate changes on the Company's earnings. The Committee meets monthly on a formal basis and reports to the Board of Directors on interest rate risks and trends, as well as liquidity and capital ratios and requirements. The Company does not have a targeted gap range, rather the Board of Directors has set parameters of percentage change by which net interest margin and the net portfolio value are affected by changing interest rates. The Board and management deem these measures to be a more significant and realistic means of measuring interest rate risk. The results of these techniques are outlined below in the GAP table. Gap Table The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at December 31, 1999, which are expected to reprice or mature based upon certain assumptions in each of the future time periods shown. The Company has assumed that its passbook savings, NOW, and money market accounts which totaled $75.0 million at December 31, 1999 are withdrawn at the annual percentage rates set forth below. These withdrawal rates are based upon historical industry experience. Management believes that these assumptions approximate actual experience and considers them appropriate and reasonable. 15
Amounts Maturing or Repricing Within 3 to 12 1 to 3 3 to 5 5 to 10 More than 3 Months Months Years Years Years 10 Years Total - ----------------------------------------------------------------------------------------------------------------------------------- (Dollars In Thousands) Interest-earning assets: Real estate loans: Residential one-to-four family: Market index ARM's $16,073 $ 17,248 $ 11,868 $ 5,723 $ 2,572 $ 0 $ 53,484 Fixed rate 405 1,876 8,469 7,590 11,035 4,247 33,622 Commercial and multi-family ARM's 5,040 5,403 5,063 463 0 0 15,969 Fixed 108 471 1,911 1,688 2,423 0 6,601 Home equity fixed rate loans 147 1,396 462 1,670 2,275 0 5,950 Home equity line of credit 3,541 0 0 0 0 0 3,541 Consumer loans 241 664 2,540 49 0 0 3,494 Commercial business loans 1,569 435 4,047 1,284 1,264 36 8,635 Mortgage-backed securities 1,284 3,188 5,189 4,069 6,401 3,924 24,055 Investment securities 8,453 276 8,231 3,458 17,856 5,561 43,835 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest-earning assets 36,861 30,957 47,780 25,994 43,826 13,768 199,186 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ Interest-bearing liabilities: Passbook accounts 463 6,618 13,312 9,865 14,857 15,212 60,327 NOW accounts 2,309 6,928 4,759 0 0 0 13,996 Certificate accounts 12,600 33,488 16,188 3,629 2,457 0 68,362 Repurchase agreements 17,540 10,117 6,913 1,000 7,310 0 42,880 Total interest-bearing liabilities 32,912 57,151 41,172 14,494 24,624 15,212 185,565 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ Interest-earning assets less interest- bearing liabilities ("interest rate sensitivity gap") 3,949 (26,194) 6,608 11,500 19,202 (1,444) Cumulative excess (deficiency) of interest-sensitive assets over interest-sensitive liabilities 3,949 (22,245) (15,637) (4,137) 15,065 13,621 Interest sensitivity gap to total assets 1.83 (12.11) 3.05 5.32 8.88 (.67) Cumulative interest sensitivity gap to total assets 1.83 (10.28) (7.23) (1.91) 6.97 6.3 Ratio of interest-earning assets to interest-bearing liabilities 112.00 54.17 116.05 179.34 177.98 90.51 Cumulative ratio of interest-earning assets to interest-bearing liabilities 112.00 75.30 88.08 97.16 108.84 107.34 - ------------------------------------------------------------------------------------------------------------------------------------
At December 31, 1999, the total interest bearing liabilities maturing or repricing within one year exceeded total interest-earning assets maturing or repricing in the same period by $22.2 million, representing a cumulative one- year gap ratio of a negative 12.11%. Simulation and net present value analysis demonstrate percentage changes to net interest income and net portfolio value of a negative 14.16% and a negative 11.94%, respectively, in an upward 200 basis point parallel shift in the yield curve. The above assumptions are annual percentage rates based on remaining balances and should not be regarded as indicative of the actual withdrawals that may be experienced by the Company. Moreover, certain shortcomings are inherent in the analysis presented by the foregoing tables. For example, interest rates on certain types of liabilities may fluctuate in advance of or lag behind changes in market interest rates. Moreover, in the event of a change in interest rates, withdrawal levels would likely deviate significantly from those assumed in calculating the tables. Changes in Net Interest Income and Net Portfolio Value The following table measures the Company's interest rate risk exposure in terms of the percentage change in its net interest income and net portfolio value as a result of hypothetical changes in 100 basis point increments in market interest rates. Net portfolio value (also referred to as market value of portfolio equity) 16 represent the fair value of net assets (determined as the market value of assets minus the market value of liabilities). The table quantifies the changes in net interest income and net portfolio value to parallel shifts in the yield curve. The column "Net Interest Income Percent Change" measures the change to the next twelve month's projected net interest income, due to parallel shifts in the yield curve. The column "Net Portfolio Value Percent Change" measures changes in the current net mark-to-market value of assets and liabilities due to parallel shifts in the yield curve. The base case assumes December 31, 1999 interest rates. The Company uses these percentage changes as a means to measure interest rate risk exposure and quantifies those changes against guidelines set by the Board of Directors as part of the Company's Interest Rate Risk policy. The Company's current interest rate risk exposure is within those guidelines set forth.
1999 1998 - ---------------------------------------------------------------------------------------------------------- Change Percentage Percentage Change Percentage Percentage In NPV Change in Change in In NPV Change in Change in Interest Capital Net Income Net Market Interest Capital Net Income Net Market Rates Ratio Interest Value Rates Ratio Interest Value - ---------------------------------------------------------------------------------------------------------- -300 15.58% 4.59% 2.52% -300 14.02% -0.40% 10.87% -200 16.40% 7.42% 6.55% -200 13.97% 3.47% 9.12% -100 16.55% 4.65% 5.92% -100 13.67% 2.32% 5.40% 0 16.00% 0.00% 0.00% 0 13.17% 0.00% 0.00% 100 15.24% -5.90% -7.11% 100 12.11% -3.59% -9.99% 200 14.44% -11.94% -14.16% 200 10.78% -7.57% -21.79% 300 13.57% -18.27% -21.34% 300 9.43% -12.00% -33.25%
Liquidity and Capital Resources The Company's primary sources of funds are deposits, borrowed funds, amortization and prepayment of loans and maturities of investment securities and other short-term investments, and earnings and funds provided from operations. While scheduled principal repayments on loans are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. The Company manages the pricing of deposits to maintain a desired deposit balance. In addition, the Company invests excess funds in short-term interest-bearing and other assets, which provide liquidity to meet lending requirements. For additional information about cash flows from the Company's operating, financing, and investing activities, see Statements of Cash Flows included in the Financial Statements. The Company adjusts its liquidity levels in order to meet funding needs of deposit outflows, payment of real estate taxes on mortgage loans and loan commitments. The Company also adjusts liquidity as appropriate to meet its asset and liability management objectives. The Company's liquidity has been enhanced by its membership in the Federal Home Loan Bank of New York, whose competitive advance programs and lines of credit will provide the Company with a safe, reliable and convenient source of funds. A major portion of the Company's liquidity consists of cash and cash equivalents, which are a product of operating, investing, and financing activities. The primary sources of cash were net income, principal repayments on loans and increases in deposit accounts and borrowed funds. The Company has experienced a decrease in savings account deposits during the past three years. Savings account balances decreased $6.2 million, or 9.5%, from $65.6 million at December 31, 1996 to $59.4 million at December 31, 1999. The decrease in savings account deposits has caused the Company to rely, at times, on overnight borrowings for liquidity purposes. A significant decrease in deposits in the future could result in the Company having to seek other sources of funds for liquidity purposes. Such sources could include, but are not limited to, additional borrowings, brokered deposits, negotiated time deposits, the sale of "available-for-sale" investment securities, the sale of securitized loans, or the sale of whole loans. Such actions could result in higher interest expense costs and/or losses on the sale of securities or loans. At December 31, 1999, the Company had outstanding loan commitments of $3.0 million. This amount includes the unfunded portion of loans in process. Certificates of deposit scheduled to mature in less that 17 one year at December 31, 1999 totaled $46.1 million. Based on prior experience, management believes that a significant portion of such deposits will remain with the Company. New Accounting Pronouncements Accounting for Derivative Instruments and Hedging Activities. In June of 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" effective for all fiscal quarters for fiscal years beginning after June 15, 2000. This statement requires an entity to recognize all derivative financial instruments as either assets or liabilities in the consolidated statement of condition and measure those instruments at fair value. Management does not believe that this statement will have a significant impact on the results of operation or shareholders' equity of the Company. Common Stock and Related Matters The Common Stock trades and is listed on The Nasdaq SmallCap Stock Market under the symbol "PBHC" and the short name PathBcp. The common stock was issued on November 15, 1995 at $5.00 per share (adjusted for the three for two stock split on February 5, 1998). As of February 25, 2000, there were 410 shareholders of record and 2,614,245 outstanding shares of common stock. Share Repurchases On January 22, 1999, the Company announced its second share repurchase program for the purchase of up to 135,000 shares. At December 31, 1999 the program has resulted in the repurchase of 113,475 shares at an average price of $10.54. The following table sets forth the high and low closing bid prices and dividends paid per share of common stock for the periods indicated.
Dividends Quarter ended High Low Paid --------------------- ------- ------- ---------- December 31, 1999 $10.000 $ 7.500 $.0600 September 30, 1999 10.000 7.938 $.0600 June 30, 1999 11.000 8.750 $.0600 March 31, 1999 12.000 9.250 $.0600 December 31, 1998 10.375 9.125 $.0500 September 30, 1998 23.000 12.000 $.0500 June 30, 1998 26.125 21.000 $.0500 March 31, 1998 24.625 17.172 $.0500
Payment of dividends on the common stock is subject to determination and declaration by the Board of Directors and will depend upon a number of factors, including capital requirements, regulatory limitations on the payment of dividends, Pathfinder Bank and its subsidiaries results of operations and financial condition, tax considerations, and general economic conditions. No assurance can be given that dividends will be declared or, if declared, what the amount of dividends will be, or whether such dividends, once declared, will continue. 18 Independent Auditors' Report Board of Directors and Shareholders Pathfinder Bancorp, Inc. Oswego, New York In our opinion, the accompanying consolidated statements of condition and the related consolidated statements of income and comprehensive income, changes in shareholders' equity and cash flows present fairly, in all material respects, the financial position of Pathfinder Bancorp, Inc. at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Syracuse, New York February 11, 2000 19
Statements of Condition December 31, -------------------------------- 1999 1998 - ------------------------------------------------------------------------------------------------------------ ASSETS: Cash and due from banks $ 4,280,255 $ 4,716,238 Federal funds sold ---- 1,800,000 - ------------------------------------------------------------------------------------------------------------ Total cash and cash equivalents 4,280,255 6,516,238 Investment securities (approximate fair value $66,397,000 and $53,443,000) 66,397,491 53,443,039 Mortgage loans - held-for-sale 697,405 2,841,931 Loans: Real estate 119,167,708 116,161,445 Consumer and other 12,129,363 10,334,531 - ------------------------------------------------------------------------------------------------------------ Total loans 131,297,071 126,495,976 Less: Allowance for loan losses 1,149,677 939,161 Unearned discounts and origination fees 84,453 199,156 - ------------------------------------------------------------------------------------------------------------ Loans receivable, net 130,062,941 125,357,659 Premises and equipment, net 4,869,553 4,489,928 Accrued interest receivable 1,431,251 1,237,069 Other real estate 641,384 742,163 Intangible assets, net 2,973,365 3,289,121 Other assets 4,969,908 5,334,919 - ------------------------------------------------------------------------------------------------------------ Total assets $216,323,553 $203,252,067 ============================================================================================================ LIABILITIES AND SHAREHOLDERS' EQUITY: Deposits: Interest bearing $142,690,583 $150,745,802 Non-interest bearing 9,745,513 9,473,352 - ------------------------------------------------------------------------------------------------------------ Total deposits 152,436,096 160,219,154 Borrowed funds 42,879,500 18,691,000 Other liabilities 933,345 2,055,228 - ------------------------------------------------------------------------------------------------------------ Total liabilities 196,248,941 180,965,382 Shareholders' equity: Common stock, par value $.10 per share; authorized 9,000,000 shares; 2,884,720 and 2,877,470 shares issued and 2,639,245 and 2,745,470 outstanding, respectively. 288,472 287,747 Additional paid-in-capital 6,912,580 6,828,836 Retained earnings 18,121,372 17,820,409 Unearned stock based compensation (981,125) (1,428,746) Accumulated other comprehensive (loss) income (895,894) 1,012,462 Unearned ESOP shares (287,609) (346,917) Treasury stock, at cost; 245,475 and 132,000 shares respectively (3,083,184) (1,887,106) - ------------------------------------------------------------------------------------------------------------ Total shareholders' equity 20,074,612 22,286,685 - ------------------------------------------------------------------------------------------------------------ Total liabilities and shareholders' equity $216,323,553 $203,252,067 ============================================================================================================
The accompanying notes are an integral part of the consolidated financial statements 20
Statements of Income December 31, ----------------------------------------------- 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ INTEREST INCOME: Loans $10,807,715 $10,871,385 $10,063,659 Interest and dividends on investments: U.S. Treasury and agencies 391,496 198,401 407,628 State and political subdivisions 355,767 345,303 372,376 Corporate obligations 1,509,688 1,032,369 1,477,630 Marketable equity securities 112,610 98,951 82,819 Mortgage-backed securities 1,451,756 1,364,002 1,590,701 Federal funds sold and interest-bearing deposits 59,551 145,132 172,839 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest income 14,688,583 14,055,543 14,167,652 INTEREST EXPENSE: Interest on deposits 5,348,868 6,091,009 6,287,117 Interest on borrowed funds 1,686,202 878,364 604,844 - ------------------------------------------------------------------------------------------------------------------------------------ Total interest expense 7,035,070 6,969,373 6,891,961 Net interest income 7,653,513 7,086,170 7,275,691 Provision for loan losses 372,910 381,561 261,112 - ------------------------------------------------------------------------------------------------------------------------------------ Net interest income after provision for loan losses 7,280,603 6,704,609 7,014,579 - ------------------------------------------------------------------------------------------------------------------------------------ OTHER INCOME: Service charges on deposit accounts 525,363 460,954 488,799 Mortgage servicing fees 218,644 53,797 ---- Cash surrender value 125,028 192,368 188,315 Net gain on securities and loans 86,130 618,448 328,565 Other charges, commissions and fees 249,099 260,170 366,883 - ------------------------------------------------------------------------------------------------------------------------------------ Total other income 1,204,264 1,585,737 1,372,562 - ------------------------------------------------------------------------------------------------------------------------------------ OTHER EXPENSES: Salaries and employee benefits 3,300,004 3,116,577 2,917,470 Building occupancy 750,618 626,231 666,082 Data processing expenses 798,027 447,024 387,741 Professional and other services 783,872 537,339 529,724 Amortization of intangible assets 315,756 315,756 315,756 Merger expense ---- 378,896 ---- Other expenses 1,185,721 1,164,689 953,920 - ------------------------------------------------------------------------------------------------------------------------------------ Total other expenses 7,133,998 6,586,512 5,770,693 Income before income taxes 1,350,869 1,703,834 2,616,448 Provision for income taxes 420,474 495,033 762,087 - ------------------------------------------------------------------------------------------------------------------------------------ Net income $ 930,395 $ 1,208,801 $ 1,854,361 Other comprehensive (loss) income, net of taxes: Unrealized net (losses) gains on securities: Unrealized holding (losses) gains arising during period $(3,217,269) $ 437,441 $ 538,574 Reclassification adjustment for gains included in net income 14,685 11,602 11,596 - ------------------------------------------------------------------------------------------------------------------------------------ (3,202,584) 449,043 550,170 Income tax benefit (provision) 1,294,228 (179,617) (220,068) - ------------------------------------------------------------------------------------------------------------------------------------ Other comprehensive (loss) income, net of tax (1,908,356) 269,426 330,102 - ------------------------------------------------------------------------------------------------------------------------------------ Comprehensive (loss) income $ (977,961) $ 1,478,227 $ 2,184,463 - ------------------------------------------------------------------------------------------------------------------------------------ Net income per share - basic $.35 $.44 $.66 - ------------------------------------------------------------------------------------------------------------------------------------ Net income per share - diluted $.35 $.42 $.66 - ------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements 21 Statements of Changes in Shareholders' Equity
Common Stock Additional Unearned ---------------------------------- Paid in Retained Stock Based Shares Amount Capital Earnings Compensation - ---------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1996 1,916,666 $ 1,916,666 $ 3,750,726 $ 15,787,666 $ -- Net Income 1,854,361 ESOP shares earned 59,692 Unearned stock-based compensation awarded 2,203,500 (2,203,500) Stock based compensation earned 367,250 Change in unrealized net appreciation on investment securities Dividends declared ($0.17 per share) (485,612) Three-for-two stock split and reduction in par value of common stock 958,333 (1,629,166) 1,629,166 - ---------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1997 2,874,999 287,500 7,643,084 17,156,415 (1,836,250) Net Income 1,208,801 ESOP shares earned 127,533 Stock options exercised 2,471 247 16,207 Treasury stock purchased Common stock issued under stock based compensation plan (957,988) Stock based compensation earned 407,504 Change in unrealized net appreciation on investment securities Dividends declared ($0.20 per share) (544,807) - ---------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1998 2,877,470 287,747 6,828,836 17,820,409 (1,428,746) Net Income 930,395 ESOP shares earned 36,742 Stock options exercised 7,250 725 47,002 Treasury stock purchased Stock based compensation earned 447,621 Change in unrealized net depreciation on investment securities Dividends declared ($0.24 per share) (629,432) - ---------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1999 2,884,720 $ 288,472 $ 6,912,580 $ 18,121,372 $ (981,125) ================================================================================================================================== Accumulated Other Unearned Comprehensive ESOP Treasury Income (loss) Shares Stock Total - -------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1996 $ 412,934 $ (477,908) $ -- $21,390,084 Net Income 1,854,361 ESOP shares earned 66,858 126,550 Unearned stock-based compensation awarded -- Stock based compensation earned 367,250 Change in unrealized net appreciation on investment securities 330,102 330,102 Dividends declared ($0.17 per share) (485,612) Three-for-two stock split and reduction in par value of common stock -- - --------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1997 743,036 (411,050) -- 23,582,735 Net Income 1,208,801 ESOP shares earned 64,133 191,666 Stock options exercised 16,454 Treasury stock purchased (2,845,094) (2,845,094) Common stock issued under stock based compensation plan 957,988 -- Stock based compensation earned 407,504 Change in unrealized net appreciation 269,426 269,426 on investment securities Dividends declared ($0.20 per share) (544,807) - --------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1998 1,012,462 (346,917) (1,887,106) 22,286,685 Net Income 930,395 ESOP shares earned 59,308 96,050 Stock options exercised 47,727 Treasury stock purchased (1,196,078) (1,196,078) Stock based compensation earned 447,621 Change in unrealized net depreciation on investment securities (1,908,356) (1,908,356) Dividends declared ($0.24 per share) (629,432) - --------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1999 $ (895,894) $(287,609) $(3,083,184) $20,074,612 =====================================================================================================================
The accompanying notes are an integral part of the consolidated financial statements 22
Statements of Cash Flows Years Ended December 31 - ------------------------------------------------------------------------------------------------------------------------------------ 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ OPERATING ACTIVITIES: Net Income $ 930,395 $ 1,208,801 $ 1,854,361 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 372,910 381,561 261,112 ESOP and other stock-based compensation earned 543,671 599,170 493,800 Deferred income tax benefit (101,638) (117,667) (76,942) Proceeds from sale of loans 5,919,922 7,726,767 ---- Originations of loans held-for-sale (3,848,919) (8,961,646) ---- Realized and unrealized loss/(gain) on: Sale of real estate acquired through foreclosure 48,332 68,741 ---- Loans 73,523 (59,410) 6,697 Available-for-sale investment securities (159,653) (559,038) (335,262) Depreciation 425,135 231,617 235,282 Amortization of intangibles 315,756 315,756 315,756 Net amortization of premiums and discounts on investment securities 292,701 (39,951) 65,923 (Increase) decrease in interest receivable (194,182) 206,106 22,827 Net change in other assets and liabilities 542,706 (480,270) (71,829) - ------------------------------------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 5,160,659 520,537 2,771,725 - ------------------------------------------------------------------------------------------------------------------------------------ INVESTING ACTIVITIES Purchase of investment securities available-for-sale (27,418,591) (15,633,561) (8,482,036) Purchase of investment securities held-to-maturity (32,724) ---- ---- Proceeds from maturities and principal reductions of investment securities held-to-maturity ---- 4,270,000 4,790,000 Proceeds from maturities and principal reductions of investment securities available-for-sale 9,435,170 14,863,726 6,420,245 Proceeds from sale of: Real estate acquired through foreclosure 171,188 753,334 586,109 Available-for-sale investment securities 1,726,061 926,143 792,352 Net increase in loans (5,170,784) (6,276,483) (13,484,773) Purchase of premises and equipment (804,760) (1,001,275) (571,072) Decrease (increase) in surrender value of life insurance 75,315 (474,230) (188,315) Other investing activities (26,149) (234,573) (279,179) - ------------------------------------------------------------------------------------------------------------------------------------ Net cash used in investing activities (22,045,274) (2,806,919) (10,416,669) - ------------------------------------------------------------------------------------------------------------------------------------ FINANCING ACTIVITIES Net (decrease) increase in demand deposits, NOW accounts, savings accounts, money market deposit accounts and escrow deposits (6,324,318) 5,475,054 (1,191,170) Net (decrease) increase in time deposits (1,458,740) 2,344,959 (5,407,527) Proceeds from borrowings, net 24,188,500 449,000 10,632,000 Repayments of note payable-ESOP ---- (430,126) (55,800) Proceeds from exercise of stock options 47,727 16,454 ---- Cash dividends (608,459) (541,699) (351,446) Treasury stock purchased (1,196,078) (2,845,094) ---- - ------------------------------------------------------------------------------------------------------------------------------------ Net cash provided by financing activities 14,648,632 4,468,548 3,626,057 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ (Decrease) increase in cash and cash equivalent (2,235,983) 2,182,166 (4,018,887) Cash and cash equivalents at beginning of year 6,516,238 4,334,072 8,352,959 - ------------------------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents at end of year $ 4,280,255 $ 6,516,238 $ 4,334,072 - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ CASH PAID DURING THE PERIOD FOR: Interest $ 6,891,736 $ 7,014,726 $ 6,835,301 Income taxes paid 605,000 868,950 795,705 NON-CASH INVESTING ACTIVITY: Transfer of loans to other real estate 92,592 563,046 373,628 Decrease (increase) in unrealized gains and losses on available for sale investment securities 3,202,584 (449,043) (550,170) NON-CASH FINANCING ACTIVITY: Dividends declared and unpaid 155,438 134,465 134,166
The accompanying notes are an integral part of the consolidated financial statements 23 Note 1: Summary of Significant Accounting Policies Nature of operations The accompanying consolidated financial statements include the accounts of Pathfinder Bancorp, Inc. (the "Company") and its wholly owned subsidiaries, Pathfinder Bank (the "Bank"), Whispering Oaks Development Inc. and Pathfinder REIT, Inc. All inter-company accounts and activity have been eliminated in consolidation. The Company has five full service offices located in Oswego County. The Company is primarily engaged in the business of attracting deposits from the general public in the Company's market area, and investing such deposits, together with other sources of funds, in loans secured by one-to-four family residential real estate and investment securities. Pathfinder Bancorp, M.H.C., (the "Holding Company") a mutual holding company whose activity is not included in the accompanying financial statements, owns approximately 58.8% of the outstanding common stock of the Company. Salaries, employee benefits and rent approximating $151,700, $71,000 and $48,000 were allocated from the Company to Pathfinder Bancorp, M.H.C. during 1999, 1998 and 1997, respectively. On November 29,1999, Oswego City Savings Bank formally changed its name to Pathfinder Bank, in conformity with its parent company. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents Cash and cash equivalents include cash on hand, amounts due from banks, interest-bearing deposits (with original maturity of three months or less) and federal funds sold. Generally, federal funds are purchased and sold for one-day periods. The estimated fair value of cash and cash equivalents approximates carrying value. Investment Securities The Company classifies investment securities as held-to-maturity or available- for-sale. Held-to-maturity securities are those that the Company has the positive intent and ability to hold to maturity, and are reported at cost, adjusted for amortization of premiums and accretion of discounts. Investment securities not classified as held-to-maturity are classified as available-for- sale and are reported at fair value, with net unrealized gains and losses reflected as a separate component of shareholders' equity, net of the applicable income tax effect. None of the Company's investment securities have been classified as trading securities. Gains or losses on investment security transactions are based on the amortized cost of the specific securities sold. Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Premiums and discounts on securities are amortized and accreted into income using the straight-line method over the period to maturity. Mortgage Loans Held-for-Sale Mortgage loans held-for-sale are carried at the lower of cost or fair value. Fair value is determined in the aggregate. Loans Loans are stated at unpaid principal balances, less the allowance for loan losses and net deferred loan origination fees and costs. Interest income is generally recognized when income is earned using the interest method. Nonrefundable loan fees received and related direct origination costs incurred are deferred and amortized over the life of the loan using the interest method, resulting in a constant effective yield over the loan term. Deferred fees are recognized into income immediately upon prepayment of the related loan. For variable rate loans that reprice frequently and with no significant credit risk, fair values approximate carrying values. Fair values for fixed rate loans are estimated using discounted cash flow analysis, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. The carrying amount of accrued interest approximates its fair value. 24 Allowance for Possible Loan Losses The adequacy of the allowance for possible loan losses is periodically evaluated by the Company in order to maintain the allowance at a level that is sufficient to absorb probable credit losses. Management's evaluation of the adequacy of the allowance is based on a review of the Company's historical loss experience, known and inherent risks in the loan portfolio and an analysis of the levels and trends of delinquencies and charge-offs. A loan is considered impaired, based on current information and events, if it is probable the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. The measurement of impaired loans is generally based upon the present value of future cash flows discounted at the historical effective rate, except that all collateral-dependent loans are measured for impairment based on fair values of collateral. Income Recognition on Impaired and Non-accrual Loans Loans, including impaired loans, are generally classified as non-accrual if they are past due as to maturity or payment of principal or interest for a period of more than 90 days. When a loan is classified as non-accrual and the future collectibility of the recorded loan balance is doubtful, collections of interest and principal are generally applied as a reduction to principal outstanding. When future collectibility of the recorded loan balance is expected, interest income may be recognized on a cash basis. In the case where a non-accrual loan had been partially charged off, recognition of interest on a cash basis is limited to that which would have been recognized on the recorded loan balance at the contractual interest rate. Cash interest receipts in excess of that amount are recorded as recoveries to the allowance for loan losses until prior charge- offs have been fully recovered. The amount of loans on which the Company has ceased accruing interest aggregated approximately $2,554,000 and $1,832,000 at December 31, 1999 and 1998, respectively. The amount of interest not accrued related to these loans was approximately $84,000, $24,000 and $13,000 for 1999, 1998 and 1997, respectively. Premises and Equipment Premises and equipment are stated at cost, less accumulated depreciation. Depreciation is computed on a straight-line basis over the estimated useful lives of the related assets, ranging up to 31.5 years for premises and 10 years for equipment. Maintenance and repairs are charged to operating expenses as incurred. The asset cost and accumulated depreciation are removed from the accounts for assets sold or retired and any resulting gain or loss is included in the determination of income. Other Real Estate Properties acquired through foreclosure, or by deed in lieu of foreclosure, are carried at the lower of cost (fair value at the date of foreclosure) or fair value less estimated disposal costs. Write downs of, and expenses related to other real estate holdings included in noninterest expense were $53,000, $60,000 and $63,000 in 1999, 1998 and 1997. Intangible Assets Intangible assets represent goodwill arising from branch acquisitions and are being amortized on a straight-line basis over a 15-year period. The Company periodically reviews the carrying value of intangible assets using fair value methodologies. Accumulated amortization approximated $1,763,000 and $1,447,000 at December 31, 1999 and 1998, respectively. Mortgage Servicing Rights Included in other assets is approximately $78,000 and $55,000 of mortgage servicing rights at December 31, 1999 and 1998, respectively. Originated mortgage servicing rights are recorded at their fair value at the time of transfer and are amortized in proportion to and over the period of estimated net servicing income or loss. The Company uses a valuation model that calculates the present value of future cash flows to determine the fair value of servicing rights. In using this valuation method, the Company incorporated assumptions that market participants would use in estimating future net servicing income, which included estimates of the cost of servicing per loan, the discount rate, and prepayment speeds. The carrying value of the originated mortgage servicing rights is periodically evaluated for impairment using these same market assumptions. Deposits Interest on deposits is accrued and paid to the depositors or credited to the depositors accounts monthly. Fair values disclosed for demand, savings, and variable rate money market accounts and certificates of deposit approximate their carrying values at the reporting date. Fair values for fixed rate time deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered on similar certificates to a schedule of aggregated expected monthly maturities on time deposits. The carrying value of accrued interest approximates fair value. 25 Treasury Stock Treasury stock purchases are recorded at cost. During 1999, the Company purchased 113,475 shares at an average cost of $10.54 per share. The Company considers the common stock to be an attractive investment, in view of the current price at which the common stock is trading relative to the Company's earnings per share, book value per share, and general market and economic factors. Treasury stock has also been acquired in order to have shares available for issuance under the Management Recognition and Retention Plan. Income Taxes Provisions for income taxes are based on taxes currently payable or refundable and deferred income taxes on temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets and liabilities are reported in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets and liabilities are expected to be realized or settled. Earnings per Share Basic earnings per share are computed by dividing net income by the weighted average number of common shares outstanding throughout each year. Diluted earnings per share gives effect to weighted average shares which would be outstanding assuming the exercise of issued stock options using the treasury stock method. Trust Division The Company has applied for and received regulatory approval to form a Trust Department as a division of Pathfinder Bank. The Company incurred approximately $17,000 in expense during 1999 associated with trust operations start-up. Fair Values of Financial Instruments SFAS No. 107, "Disclosure About Fair Value of Financial Instruments," requires disclosure of fair value information of financial instruments, whether or not recognized in the consolidated statement of condition, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair values estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. The carrying amounts and estimated fair values of financial instruments at December 31, are as follows:
1999 1998 - -------------------------------------------------------------------------------------------------- Carrying Estimated Carrying Estimated Amounts Fair Values Amounts Fair Values - -------------------------------------------------------------------------------------------------- Cash and cash equivalents $ 4,280,255 $ 4,280,000 $ 6,516,238 $ 6,516,000 Investment securities 66,397,491 66,397,000 53,443,039 53,443,000 Mortgage loans held-for-sale 697,405 697,000 2,841,931 2,888,000 Loans 130,062,941 131,109,000 125,357,659 127,369,000 Accrued interest receivable 1,431,251 1,431,000 1,237,069 1,237,000 Deposits 152,436,096 138,327,000 160,219,154 157,979,000 Borrowed funds 42,879,500 42,016,000 18,691,000 18,693,000
Reclassification Certain amounts from 1998 and 1997 have been reclassified to conform to the current year presentation. These reclassications had no affect on net income as previously reported. 26 Note 2: Investment Securities The amortized cost and estimated fair value of investment securities are summarized as follows:
December 31, 1999 - --------------------------------------------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Estimated Cost Gains Losses Fair Value - --------------------------------------------------------------------------------------------------------------- Held to maturity Corporate debt $ 112,942 $ -- $ -- $ 112,942 - --------------------------------------------------------------------------------------------------------------- Available-for-sale: Bond investments: U.S. Treasury and agencies 11,167,203 3,395 286,033 10,884,565 State and political subdivision 6,694,828 156,633 100,309 6,751,152 Corporate 21,189,143 37,279 1,143,994 20,082,428 Mortgage-backed 24,055,195 13,184 719,689 23,348,690 - --------------------------------------------------------------------------------------------------------------- Total 63,106,369 210,491 2,250,025 61,066,835 Stock investments: Federal Home Loan Bank and other 4,671,340 546,374 -- 5,217,714 - --------------------------------------------------------------------------------------------------------------- Total available-for-sale $67,777,709 $ 756,865 $2,250,025 $66,284,549 ========== ========== =========== Net unrealized loss on available-for-sale (1,493,160) - -------------------------------------------- ----------- Grand total carrying value $66,397,491 ============================================ =========== December 31, 1999 - --------------------------------------------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Estimated Cost Gains Losses Fair Value - --------------------------------------------------------------------------------------------------------------- Held to maturity Corporate debt $ 80,218 $ -- $ -- $ 80,218 - --------------------------------------------------------------------------------------------------------------- Available-for-sale: Bond investments: U.S. Treasury and agencies 1,470,989 42,470 1,246 1,512,213 State and political subdivision 5,906,335 420,035 -- 6,326,370 Corporate 20,266,946 346,720 16,408 20,597,258 Mortgage-backed 20,480,552 338,071 40,332 20,778,291 - --------------------------------------------------------------------------------------------------------------- Total 48,124,822 1,147,296 57,986 49,214,132 Stock investments: Federal Home Loan Bank and other 3,528,576 620,113 -- 4,148,689 - --------------------------------------------------------------------------------------------------------------- Total available-for-sale $51,653,398 $1,767,409 $ 57,986 $53,362,821 ========== ========== =========== Net unrealized gain on available-for-sale 1,709,423 - -------------------------------------------- ----------- Grand total carrying value $53,443,039 ============================================ ===========
27 The amortized cost and estimated fair value of debt investments at December 31, 1999 by contractual maturity are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties.
Available for Sale Held-to Maturity - ------------------------------------------------------------------------------------------------------------------------------------ Amortized Estimated Amortized Estimated Cost Fair Value Cost Fair Value - ------------------------------------------------------------------------------------------------------------------------------------ Due in one year or less $ 276,046 $ 280,379 $ -- $ -- Due after one year through five years 11,688,319 11,682,707 -- -- Due after five years through ten years 18,900,701 17,970,186 -- -- Due after ten years 8,186,108 7,784,873 112,942 112,942 Mortgage-backed securities 24,055,195 23,348,690 -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Totals $63,106,369 $ 61,066,835 $ 112,942 $ 112,942 ==================================================================================================================================== Note 3: Loans Major classifications of loans at December 31, are as follows: - ------------------------------------------------------------------------------------------------------------------------------------ 1999 1998 - ------------------------------------------------------------------------------------------------------------------- Real estate mortgages: Conventional $ 85,635,997 $ 83,047,925 Second mortgage loans 9,491,545 9,630,621 Construction 1,380,211 1,037,445 FHA insured 43,147 66,852 VA guaranteed 46,733 75,809 Commercial 22,570,075 22,302,793 - ------------------------------------------------------------------------------------------------------------------- 119,167,708 116,161,445 - ------------------------------------------------------------------------------------------------------------------- Other loans: Consumer 3,378,452 3,902,896 Lease financing 278,088 350,088 Passbook loans 103,572 170,060 Student 12,361 12,630 Commercial 8,356,890 5,898,857 - ------------------------------------------------------------------------------------------------------------------- 12,129,363 10,334,531 - ------------------------------------------------------------------------------------------------------------------- Total loans 131,297,071 126,495,976 - ------------------------------------------------------------------------------------------------------------------- Less: Allowance for loan losses 1,149,677 939,161 Unearned discount and origination fees 84,453 199,156 - ------------------------------------------------------------------------------------------------------------------- Loans receivable, net $130,062,941 $125,357,659 - -------------------------------------------------------------------------------------------------------------------
The Company grants mortgage and consumer loans to customers throughout Oswego and parts of Onondaga counties. Although the Company has a diversified loan portfolio, a substantial portion of its debtors ability to honor their contracts is dependent upon the counties employment and economic conditions. At December 31, 1999 and 1998, loans to officers and directors were not significant. Mortgage loans serviced for others are not included in the accompanying consolidated statements of condition. The unpaid principle balances of mortgage loans serviced for others was approximately $16,292,000 and $8,669,000 at December 31, 1999 and 1998, respectively. Note 4: Allowances for Loan Losses Changes in the allowance for loan losses for the year ended December 31, are summarized as follows:
1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------- Balance at beginning of year $ 939,161 $ 827,521 $ 906,567 Recoveries credited 27,926 11,014 18,113 Provision for loan losses 372,910 381,561 261,112 Loans charged off (190,320) (280,935) (358,271) - ------------------------------------------------------------------------------------------------------------------------- Balance at end of year $1,149,677 $ 939,161 $ 827,521 - -------------------------------------------------------------------------------------------------------------------------
28 At December 31, 1999 and 1998, the Company had no loans for which specific valuation allowances were recorded. Note 5: Premises and Equipment A summary of premises and equipment at December 31, is as follows:
1999 1998 - -------------------------------------------------------------------- Land $ 631,773 $ 631,773 Buildings 3,735,579 3,228,123 Furniture, fixture and equipment 3,207,417 2,319,478 Construction in progress 139,990 730,625 - -------------------------------------------------------------------- 7,714,759 6,909,999 Less: Accumulated depreciation 2,845,206 2,420,071 - -------------------------------------------------------------------- $4,869,553 $4,489,928 - -------------------------------------------------------------------- - --------------------------------------------------------------------
Note 6: Deposits A summary of amounts due to depositors at December 31, is shown as follows:
1999 1998 - ----------------------------------------------------------------------------- Savings accounts $ 59,430,007 $ 64,229,261 Money market accounts 418,126 75,395 Time accounts 67,945,116 69,403,856 Demand deposits interest bearing 13,996,417 16,326,717 Demand deposits non-interest bearing 9,745,513 9,473,352 Mortgage escrow funds 900,917 710,573 - ----------------------------------------------------------------------------- $152,436,096 $160,219,154 - -----------------------------------------------------------------------------
Time deposits with balances in excess of $100,000 amounted to approximately $8,729,000 and $8,691,000 at December 31, 1999 and 1998, respectively. The approximate maturity of time deposits at December 31, is as follows:
1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ Year of Maturity Amount Percent Amount Percent - ------------------------------------------------------------------------------------------------------------------------------------ 1 $45,670,000 67.2% $51,729,000 74.5% 2 9,123,000 13.4% 8,314,000 12.0% 3 7,067,000 10.4% 5,077,000 7.3% 4 1,973,000 2.9% 1,413,000 2.1% 5 1,655,000 2.5% 1,190,000 1.7% Thereafter 2,457,000 3.6% 1,681,000 2.4% - ------------------------------------------------------------------------------------------------------------------------------------ $67,945,000 100.0% $69,404,000 100.0% - ------------------------------------------------------------------------------------------------------------------------------------
Note 7: Borrowed Funds The composition of borrowings at December 31 as as follows:
1999 1998 Short-term: Repurchase agreements $ 9,242,000 $ 5,411,000 Advances 14,065,000 5,580,000 Overnight line of credit 4,350,000 - - ------------------------------------------------------------------------------------------------------------------- Total short term 27,657,000 10,991,000 - -------------------------------------------------------------------------------------------------------------------
29 Long-term: Repurchase agreements 912,500 - Advances 14,310,000 7,700,000 - ------------------------------------------------------------------------------------------------------------------- Total long- term $15,222,500 $ 7,700,000 - -------------------------------------------------------------------------------------------------------------------
The principal balance, interest rate and maturity of the above borrowings at December 31, 1999 is as follows:
Term Principal Rates Short-term: Repurchase agreements with Morgan Stanley due within 3 months $ 4,886,000 5.85%-6.00% due within 3-6 months 909,000 5.91% due within 6 months to 1 year 910,000 5.91% Repurchase agreements with FHLB due within 3 months 2,537,000 5.68%-6.01% - ------------------------------------------------------------------------------------------------------------------------------------ Total repurchase agreements 9,242,000 Advances with FHLB due within 3 months 4,835,000 5.41%-5.99% due within 3-6 months 6,530,000 5.60%-6.18% due within 6 months to 1 year 2,700,000 4.80%-5.11% Total advances 14,065,000 Overnight line of credit with FHLB 4,350,000 3.60% - ------------------------------------------------------------------------------------------------------------------------------------ Total short-term borrowings $27,657,000 - ------------------------------------------------------------------------------------------------------------------------------------ Long-term: Repurchase agreement with Morgan Stanley due within 3 years $ 912,500 5.35% - ------------------------------------------------------------------------------------------------------------------------------------ Advances with FHLB due within 2 years 4,000,000 5.60%-5.31% due within 4 years 1,000,000 5.61% due within 5 years 1,000,000 5.43% due after 5 years 7,310,000 5.56%-5.98% Total advances with FHLB 14,310,000 - ------------------------------------------------------------------------------------------------------------------------------------ Total long-term borrowings $15,222,500 - ------------------------------------------------------------------------------------------------------------------------------------
Other information related to borrowed funds is as follows:
1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ Maximum outstanding at any month end $43,349,000 $20,480,000 Average amount outstanding during the year 30,511,000 14,927,000 Average interest rate during the year 5.53% 5.88% - ------------------------------------------------------------------------------------------------------------------------------------
The repurchase agreements are collateralized by mortgage-backed and government agency securities which had a carrying value of $13,242,000 at December 31, 1999. The overnight line of credit agreement with the Federal Home Loan Bank (FHLB) is used for liquidity purposes. Interest on this line is determined at the time of borrowing. The average rate paid on the overnight line during 1999 approximated 5.30%. At December 31, 1999, $10,102,100 was available under the line of credit. In addition to the overnight line of credit program, the Company also has access to the FHLB's Term Advance Program under which it can borrow at various terms and interest rates. Residential mortgage loans in the amount of $77.8 million have been pledged by the Company under a blanket collateral agreement to secure the Company's lsine of credit and term borrowings. 30 Note 8: Employee Benefits The Company has a noncontributory defined benefit pension plan covering substantially all employees. In addition, the Company provides certain health and life insurance benefits for eligible retired employees. The following tables set forth the changes in the plan's benefit obligation, fair value of plan assets and prepaid (accrued) benefit cost as of December 31, 1999 and 1998.
Pension Benefits Postretirement Benefits - ------------------------------------------------------------------------------------------------------------------------------------ 1999 1998 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ Change in benefit obligation: Benefit obligation at beginning of year $2,989,234 $2,477,313 $ 385,747 $ 377,729 Service cost 115,393 94,188 3,086 2,641 Interest cost 188,462 183,151 23,975 24,938 Actuarial (gain) loss (426,076) 350,752 -- 12,786 Benefits paid (107,499) (116,170) (33,807) (32,347) - ------------------------------------------------------------------------------------------------------------------------------------ Benefit obligation at end of year $2,759,514 $2,989,234 $ 379,001 $ 385,747 - ------------------------------------------------------------------------------------------------------------------------------------ Change in plan assets: Fair value of plan assets at beginning of year $3,129,180 $3,231,536 $ - $ - Actual return on plan assets 540,592 (4,338) Company contribution -- 18,152 Benefits paid (107,499) (116,170) - ------------------------------------------------------------------------------------------------------------------------------------ Fair value of plan assets at end of year $3,562,273 $3,129,180 $ - $ - - ------------------------------------------------------------------------------------------------------------------------------------ Components of prepaid/accrued benefit cost Funded (unfunded) status $ 802,759 $ 139,946 $(379,001) $(385,747) Unrecognized prior service cost 3,377 4,457 -- -- Unrecognized transition obligation --- - 235,953 254,931 Unrecognized actuarial net (gain)loss (292,476) 435,814 24,999 25,273 - ------------------------------------------------------------------------------------------------------------------------------------ Prepaid/(accrued) benefit cost $ 513,660 $ 580,217 $(118,049) $(105,543) - ------------------------------------------------------------------------------------------------------------------------------------
The significant assumptions used in determining the benefit obligation as of December 31, 1999 and 1998 is as follows: Weighted average discount rate 7.75% 6.50% 6.50% 6.50% Expected long-term rate of return on plan assets 8.00% 8.00% - - Rate of increase in future compensation levels 5.50% 4.50% - -
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage point change in the health care cost trend rates (including those for the dental plan) would have the following effects:
1 Percentage 1 Percentage Point Point Increase Decrease - -------------------------------------------------------------------------------------------------------------- Effect on total of service and interest cost components 1,321 (1,241) Effect on postretirement benefit obligation 18,885 (17,738)
Plan assets consist primarily of temporary cash investments and listed stocks and bonds. 31 The composition of the net periodic benefit plan for the years ended December 31, 1999, 1998 and 1997 is as follows:
Pension Benefits Postretirement Benefits - ------------------------------------------------------------------------------------------------------------------------------------ 1999 1998 1997 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ Service cost $ 115,393 $ 94,188 $ 76,262 $ 3,086 $ 2,641 $ 3,014 Interest cost 188,462 183,151 169,405 23,975 24,938 24,898 Amortization of transition obligation --- -- (34,165) 18,978 18,978 18,978 Amortization of unrecognized prior service cost 1,080 1,080 1,080 -- -- -- Amortization of gains and losses 7,656 -- -- 274 (893) (528) Expected return on plan assets (246,034) (253,781) (208,272) -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Net periodic benefit plan cost $ 66,557 $ 24,638 $ 4,310 $46,313 $45,664 $46,362 =================================================================================================================================
The Company also offers a 401(k) plan to its employees. Contributions to these plans were $48,000, $45,000 and $41,400 for 1999, 1998, and 1997, respectively. Note 9: Deferred Compensation and Supplemental Retirement Plans The Company maintains optional deferred compensation plans for its directors whereby fees normally received are deferred and paid by the Company based upon a payment schedule commencing at age 65 and continue monthly for 10 years. Directors must serve on the board for a minimum of 5 years to be eligible for the Plan. At December 31, 1999 and 1998, other liabilities include approximately $1,080,000 and $1,009,000, respectively, relating to deferred compensation. Deferred compensation expense for the years ended December 31, 1999, 1998, and 1997 amounted to approximately $89,000, $136,000 and $150,000, respectively. The Company has a supplemental executive retirement plan for the benefit of certain executive officers. At December 31, 1999 and 1998, other liabilities include approximately $314,000 and $189,000 accrued under these plans. Compensation expense includes approximately $161,000, $53,000, and $46,000 relating to the supplemental executive retirement plan for 1999, 1998, and 1997, respectively. Note 10: Stock Based Compensation Plans During 1997, shareholders approved the 1997 Stock Option Plan and Management Recognition and Retention Plan for directors, officers and key employees. Under the Stock Option Plan, up to 132,249 options have been authorized for grant of incentive stock options and non-qualified stock options. All options have a 10- year term and vest and become exercisable ratably over a 6-year period. Activity in the Stock Option Plan is as follows:
Options Option Price Shares Outstanding Per Share Exercisable - ----------------------------------------------------------------------------------- Outstanding at December 31, 1996 --- --- --- Granted 132,000 $6.583 0 Exercised --- --- --- Forfeited --- --- --- - ----------------------------------------------------------------------------------- Outstanding at December 31, 1997 132,000 $6.583 0 Granted --- --- --- Exercised (2,500) --- 19,500 Forfeited --- --- --- - ----------------------------------------------------------------------------------- Outstanding at December 31, 1998 129,500 $6.583 19,500 Granted --- --- --- Exercised (7,250) --- 24,750 Forfeited --- --- --- - ----------------------------------------------------------------------------------- Outstanding at December 31, 1999 122,250 $6.583 44,250 - -----------------------------------------------------------------------------------
In February 1997, the Board of Directors approved an option plan with an exercise price equal to the market value of the Company's shares at the date of grant, subject to shareholder approval. Upon shareholder approval of the plans in December 1997, the excess of market value over exercise price for approved options approximated 32 $1,330,000. This amount has been recorded as unearned stock-based compensation within the stockholders' equity section of the consolidated statement of condition and will be recognized as compensation expense ratably over the 6-year vesting period. Compensation expense for the years ended December 31, 1999, 1998 and 1997 approximated $272,000, $247,000, and $222,000, respectively. During 1997, the Company awarded 52,350 shares (52,950 authorized) of restricted stock under the Management Recognition and Retention Plan. The market value of shares awarded at the date of grant approximated $873,000 and has been recognized in the accompanying statement of condition as unearned stock-based compensation. Compensation expense for the years ended December 31, 1999, 1998, and 1997 was $175,000, $160,000, and $145,000, respectively. The market value of shares awarded will be recognized as compensation expense ratably over the 6- year restriction period. The Company has elected to account for its stock-based compensation plans in accordance with Accounting Principles Board Opinion No. 25. Pro forma amounts of net income and earnings per share under Statement of Financial Accounting Standards No. 123 are as follows:
1999 1998 1997 - ----------------------------------------------------------------------------------------------- Net Income: - ------------------------------------------------------------------------------------------------------------ As reported 930,395 $1,208,801 $1,854,361 Pro forma 864,312 1,117,602 1,738,214
Earnings per share: Basic Diluted Basic Diluted Basic Diluted - ------------------------------------------------------------------------------------------------------------ As reported $ .35 $ .35 $ .44 $ .42 $ .66 $ .66 Pro forma $ .33 $ .32 $ .41 $ .40 $ .62 $ .62
The fair value of these options was estimated at the date of grant using a Black-Scholes options pricing model with the following assumptions for 1999, 1998 and 1997, respectively: risk free interest rate - 4.63%; dividend yield - 2.19%; market price volatility - 93.6%. An assumed weighted average option life of 6 years has been utilized for each year. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. Therefore, the foregoing pro forma results are not likely to be representative of the effects of reported net income of future periods due to additional years of vesting. The weighted-average fair value per share of discounted options during 1999 is $46.07. The Bank sponsors an Employee Stock Ownership Plan (ESOP) for employees who have attained the age of 21 and who have completed a 12 month period of employment with the Bank during which they worked at least 1,000 hours. The Bank purchased 92,574 shares of common stock on behalf of the ESOP. The purchase of the shares was funded by a loan from the Company and the unearned shares are pledged as collateral for the borrowing. As the loan is repaid, earned shares are released from collateral and are allocated to the particpants. As shares are earned, the Bank records compensation expense at the average market price of the shares during the period. Cash dividends received on unearned shares are allocated among the participants and are reported as compensation expense. ESOP compensation expense approximated $96,000, $192,000 and $127,000 for the years ended December 31, 1999, 1998 and 1997, respectively. Total earned shares at December 31, 1999, 1998 and 1997 were 43,970, 33,920 and 23,052, respectively. The estimated fair value of the remaining 48,604 unearned shares at December 31, 1999 is $431,000. Unearned ESOP shares are not considered outstanding for purposes of computing earnings per share. Note 11: Income Taxes The provision (benefit) for income taxes for the years ended December 31, is as follows:
1999 1998 1997 - ---------------------------------------------------- Current $ 522,112 $ 612,700 $839,029 Deferred (101,638) (117,667) (76,942) - ---------------------------------------------------- $ 420,474 $ 495,033 $762,087 - ----------------------------------------------------
The provision for income taxes includes the following:
1999 1998 1997 - ---------------------------------------------------------------- Federal Income Tax $384,853 $410,013 $642,237 New York State Franchise Tax 35,621 85,020 119,850 - ----------------------------------------------------------------- $420,474 $495,033 $762,087 - -----------------------------------------------------------------
33 The components of net deferred tax asset (liability), included in other liabilities for the years ended December 31, are as follows:
1999 1998 - --------------------------------------------------------------------- Assets: Deferred and other compensation $ 777,581 $ 724,063 Allowance for loan losses 288,047 182,191 Investment securities 597,263 -- Loan origination fees 33,731 79,543 ESOP 12,500 10,977 Postretirement benefits 57,131 51,366 Other 6,092 6,092 - --------------------------------------------------------------------- 1,772,345 1,054,232 Liabilities Prepaid pension (205,156) (232,180) IIMF reserve (195,071) (241,745) Depreciation (103,449) (25,593) Accretion (48,603) (35,845) Other (2,294) --- Investments --- (686,820) - --------------------------------------------------------------------- (554,573) (1,222,183) - --------------------------------------------------------------------- Net deferred tax asset (liability) $1,217,772 $ (167,951) - ---------------------------------------------------------------------
The Company has determined that no valuation allowance is necessary as it is more likely than not deferred tax assets will be realized through carryback to taxable income in prior years, future reversals of existing temporary differences and through future taxable income. A reconciliation of the federal statutory income tax rate to the effective income tax rate at December 31, is as follows:
1999 1998 1997 - ---------------------------------------------------------------------- Federal statutory income tax rate 34.0% 34.0% 34.0% State tax, net of federal benefit 1.0 3.2 4.3 Tax-exempt interest income and other, net (3.9) (8.1) (9.2) - ---------------------------------------------------------------------- Effective income tax rate 31.1% 29.1% 29.1% - ---------------------------------------------------------------------- - ----------------------------------------------------------------------
Note 12: Earnings per Share Basic earnings per share is computed based on the weighted average shares outstanding. Diluted earnings per share is computed based on the weighted average shares outstanding adjusted for the dilutive effect of the assumed exercise of stock options during the year. The following is a reconciliation of basic to diluted earnings per share for the years ended December 31:
Earnings Shares EPS 1999 Net Income $ 930,395 Basic EPS 930,395 2,631,812 $.35 - ---------------------------------------------------------------------------- Effect of dilutive securities: Stock options 0 62,961 Diluted EPS 930,395 2,694,773 $.35 ============================================================================ 1998 Net Income $1,208,801 Basic EPS 1,208,801 2,773,673 $.44 - ---------------------------------------------------------------------------- Effect of dilutive securities: Stock options 0 81,206 Diluted EPS $1,208,801 2,854,879 $.42 ============================================================================ 1997 Net Income $1,854,361 Basic EPS 1,854,361 2,798,610 $.66 - ---------------------------------------------------------------------------- Effect of dilutive securities: Stock options 0 3,603
34 Diluted EPS 1,854,361 2,802,213 $.66 ==================================== ========== ========== ====
Note 13: Commitments and Contingencies The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments consist primarily of commitments to extend credit, which involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated statement of condition. The contract amount of those commitments to extend credit reflects the extent of involvement the commitment has in this particular class of financial instrument. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of the instrument. The Company uses the same credit policies in making commitments as it does for on-balance sheet instruments. Financial instruments whose contract amounts represent credit risk at December 31: Contract Amount 1999 1998 - -------------------------------------------------------------------------------- Commitment to extend credit $8,973,000 $7,897,000 Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitment amounts are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the counter party. Collateral held varies but may include residential real estate and income-producing commercial properties. The fair value of these commitments as of December 31, 1999 and 1998, is not readily determinable. The Company leases land for a branch under an operating lease expiring in 2013. Rent expense totaled approximately $16,000 in 1999, $16,200 in 1998, and $15,000 in 1997. The lease provides for renewal options for two 10 year periods at specified amounts ranging from $18,000 to $24,000 per year. Rental payments are subject to increases based upon the preceding years Revised Consumer Price Index, but limited to 5% in any one year. Approximate minimum rental commitments for the non-cancelable operating lease is as follows:
Years ending December 31: - ------------------------------------------------------------------------ 2000 $ 16,000 2001 17,000 2002 17,000 2003 17,000 2004 18,000 Thereafter 170,000 - ------------------------------------------------------------------------ Total minimum lease payments $255,000 - ------------------------------------------------------------------------
The Company is required to maintain a reserve balance as established by the Federal Reserve Bank of New York. The required average total reserve for the 14 day maintenance period ended December 29, 1999 was $574,000. Note 14: Dividends and Restrictions The board of trustees of Pathfinder Bancorp, M.H.C., determines whether the Holding Company will waive or receive dividends declared by the Company each time the Company declares a dividend, which is expected to be on a quarterly basis. The Holding Company may elect to receive dividends and utilize such funds to pay expenses or for other allowable purposes. The Federal Reserve Bank (the "FRB") has indicated that (i) the Holding Company shall provide the FRB annually with written notice of its intent to waive its dividends prior to the proposed date of the dividend, and the FRB shall have the authority to approve or deny any dividend waiver request; (ii) if a waiver is granted, dividends waived by the Holding Company will not be available for payment to the minority shareholders and such amounts will be excluded from the Company's capital accounts for purposes of calculating dividend payments to minority shareholders; (iii) the Company shall establish a restricted capital account in the amount of any dividends waived by the Holding Company, and such restricted capital account would be added to any liquidation account in the Company established in connection with a conversion of the Holding Company to stock form and would be maintained in accordance with OTS requirements. During 1999, the Company paid cash dividends totaling $357,075 to the Holding Company. The restricted capital account has a $0 balance as of December 31, 1999. 35 Retained earnings of the Bank are subject to certain restrictions under New York State Banking regulations. The amount of retained earnings restricted under these regulations approximated $2,333,706 as of December 31, 1999. Note 15: Regulatory Matters The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guideline and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classifications are also subject to qualitative judgements by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of December 31, 1999, that the Bank meets all capital adequacy requirements to which it is subject. As of June 30, 1999, the Bank's most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as "well-capitalized", under the regulatory framework for prompt corrective action. To be categorized as "well-capitalized", the Bank must maintain total risk based, Tier 1 risk-based and Tier 1 leverage ratios as set for in the tables below. There are no conditions or events since that notification that management believes have changed the institution's category.
To be "Well Capitalized" For Capital Under Prompt Adequacy Corrective Actual Purposes Provisions - --------------------------------------------------------------------------------------------------------------------- Amount Ratio Amount Ratio Amount Ratio - --------------------------------------------------------------------------------------------------------------------- As of December 31, 1999: Total Core Capital (to Risk Weighted Assets) $19,146,818 14.0% $10,900,160 8.0% $13,625,200 10.0% Tier 1 Capital (to Risk Weighted assets) $17,997,141 13.1% $ 5,450,080 4.0% $ 8,175,120 6.0% Tier 1 Capital (to Average Assets) $17,997,141 8.5% $ 8,255,800 4.0% $10,490,500 5.0% - --------------------------------------------------------------------------------------------------------------------- As of December 31, 1998: Total Core Capital (to Risk Weighted Assets) $18,924,263 15.1% $10,122,080 8.0% $12,652,600 10.0% Tier 1 Capital (to Risk Weighted assets) $17,985,102 14.3% $ 5,061,040 4.0% $ 7,591,560 6.0% Tier 1 Capital (to Average Assets) $17,985,102 9.2% $ 7,840,000 4.0% $ 9,800,000 5.0%
Note 16: Parent Company - Financial Information - -------------------------------------------------------------------------------- The following represents the condensed financial information of Pathfinder Bancorp, Inc. for years ended December 31:
1999 1998 ------------ ------------ Statement of Condition - ---------------------- Assets Cash $ 121,239
36 Investments 150,000 -- Receivable from subsidiary 318,905 390,435 Investment in bank subsidiary 21,906,029 Other Assets 44,110 6,256 - --------------------------------------------------------------------- Total Assets $22,423,959 ===================================================================== Liabilities Accrued Liabilities 24,469 $ 137,274 - --------------------------------------------------------------------- Total Liabilities 24,469 137,274 Shareholders' equity Common stock, par value $.10 per share; authorized 9,000,000 shares; 2,884,720 and 2,877,470 shares issued and 2,639,245 and 2,745,470 outstanding for 1999 and 1998, respectively. 288,472 287,747 Additional paid in capital 6,912,580 6,828,836 Retained earnings 18,121,372 17,820,409 Unearned stock based compensation (981,125) (1,428,746) Accumulated other comprehensive income (895,894) 1,012,462 Unearned ESOP shares (287,609) (346,917) Treasury stock, at cost; 245,475 and (3,083,184) (1,887,106) 132,000 shares, respectively - --------------------------------------------------------------------- Total liaibilities and shareholders' equity $20,099,081 $22,423,959 =====================================================================
Statement of Income - ------------------- Year Ended December 31, 1999 ----------------- Equity in undistributed income of Subsidiary Interest Income Income from operations Operating Expenses Net Income Statement of Cash Flow - ---------------------- Year Ended December 31, 1999 ----------------- Operating Activities Net Income Equity in undistributed earnings Of subsidiary ESOP and other stock based compensation earned Other operating activities Net cash provided by operating activities - -------------------------------------------------------------------- Investing Activities Loan distributed to subsidiary Net cash used in investing activities - -------------------------------------------------------------------- Financing Activities Capital contribution from Oswego City Savings Bank Proceeds from exercise of stock option plan Cash dividends Treasury stock purchased Net cash used in financing activities - -------------------------------------------------------------------- 37 Increase in cash and cash equivalents Cash and cash equivalents beginning of year ------------------------------------------- Cash and cash equivalents at end of year =========================================== 38 EX-21 4 SUBSIDIARIES OF THE COMPANY EXHIBIT 21 SUBSIDIARIES OF THE COMPANY Company Percent Owned - ------- ------------- Oswego City Savings Bank 100% Whispering Oaks Development Corp. 100% EX-27 5 FINANCIAL DATA SCHEDULE
9 1,000 YEAR DEC-31-1999 DEC-31-1999 4,280 0 0 0 0 113 113 131,297 1,150 216,324 152,436 27,657 153,369 15,223 289 0 0 11,786 216,324 10,808 3,821 60 14,689 5,349 7,035 7,654 373 86 7,134 1,351 0 0 0 930 .35 .35 7.72 2,553 0 0 0 939 190 28 1,150 0 0 1,150
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