-----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, LScxkm/Kyoh5Kot60g/A8pd5qnSx3Z5CXjgenkwELmhA6bubI6jJiLWuXm7LXJO4 LPTCk3xBOx9GYl4tL8+ppw== 0000928385-98-001063.txt : 19980518 0000928385-98-001063.hdr.sgml : 19980518 ACCESSION NUMBER: 0000928385-98-001063 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980515 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NIAGARA BANCORP INC CENTRAL INDEX KEY: 0001051741 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTIONS, NOT FEDERALLY CHARTERED [6036] IRS NUMBER: 161545669 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-23975 FILM NUMBER: 98625167 BUSINESS ADDRESS: STREET 1: 6950 SOUTH TRANSIT CITY: LOCKPORT STATE: NY ZIP: 14095 BUSINESS PHONE: 7166257500 MAIL ADDRESS: STREET 1: 6950 SOUTH TRANSIT CITY: LOCKPORT STATE: NY ZIP: 14095 10-K405 1 FORM 10-K405 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transaction period from ______________ to _____________ Commission File Number: 0-23975 ------- NIAGARA BANCORP, INC. ----------------------------------------------------------- (Exact Name of Registrant as Specified in its Charter) DELAWARE 16-1545669 ------------------------------- -------------------------------------- (State or Other Jurisdiction of (I.R.S. Employer Identification Number) Incorporation or Organization) 6950 SOUTH TRANSIT ROAD, P.O. BOX 514, LOCKPORT, NY 14095-0514 --------------------------------------------------- ---------- (Address of Principal Executive Offices) (Zip Code) (716) 625-7500 -------------------------------------------------- (Registrant's Telephone Number including area code) Securities Registered Pursuant to Section 12(b) of the Act: NONE ---- Securities Registered Pursuant to Section 12(g) of the Act: COMMON STOCK, PAR VALUE $.01 PER SHARE ---------------------------------------- (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file reports) and (2) has been subject to such requirements for the past 90 days. YES ____ NO X --- 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 May 11, 1998, there were issued and outstanding 29,756,250 shares of the Registrant's Common Stock. DOCUMENTS INCORPORATED BY REFERENCE None. PART I ITEM 1. BUSINESS - ------------------ GENERAL NIAGARA BANCORP, INC. Niagara Bancorp, Inc. (the "Company") is a Delaware corporation that was organized in December 1997 at the direction of the Board of Trustees of Lockport Savings Bank (the "Bank") for the purpose of acquiring all of the capital stock of the Bank upon completion of the Bank's reorganization into the mutual holding company structure. The initial public offering of common stock by the Company in connection with the reorganization was consummated on April 20, 1998, and accordingly, had not been consummated by December 31, 1997, the end of the 12- month period for which this Annual Report on Form 10-K is filed. Prior to the consummation of the reorganization and the initial stock offering, the Company had not issued any stock, had no assets and no liabilities, and had not conducted operations other than of an organizational nature. Following consummation of the reorganization and initial stock offering, the Company's only significant assets are 100% of the shares of the Bank's outstanding common stock, the Company's loan to the Bank's employee stock ownership plan and up to 50% of the net proceeds of the Company's initial public stock offering. The Company does not intend to employ any persons other than certain officers who are currently officers of the Bank, but will utilize the support staff of the Bank from time to time. Additional employees will be hired as appropriate to the extent the Company expands its business in the future. The directors and executive officers of the Company are set forth below. The Company's offices are located at the executive offices of the Bank at 6950 South Transit Road P.O. Box 514, Lockport, New York, 14095-0514. Its telephone number is (716) 625-7500. Filed herewith as Exhibits 99.1 and 99.2 for informational purposes only are the consolidated financial statements of the Bank and its subsidiaries, and management's discussion and analysis of such consolidated financial statements, as of December 31, 1997 and 1996 and for the years ended December 31, 1997, 1996 and 1995. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following individuals serve as directors and executive officers of the Company: (a) Directors of the Company
DIRECTOR AGE* OCCUPATION TERM EXPIRES - -------- ---- ---------- ------------ Gordon P. Assad 49 President and Chief Executive Officer, 2001 Erie & Niagara Insurance Association Christa R. Caldwell 63 Director (Retired), 2000 Lockport Public Library James W. Currie 56 President, 1999 Ag Pak, Inc. Gary B. Fitch 62 Owner-Manager, 2000 Ontario Orchards, Inc. David W. Heinrich 61 President, 1999 Heinrich Chevrolet Corp. Daniel W. Judge 55 President and Chief Executive Officer, 2000 I.D. ONE, Inc. B. Thomas Mancuso 41 President, 1999 Joseph L. Mancuso & Sons, Inc. James Miklinski 55 General Manager, 2000 Niagara Milk Cooperative Barton G. Smith 68 Paul Garrick, Inc. (Retired) 2001 William E. Swan 50 President and Chief Executive Officer, 2001 Lockport Savings Bank Robert G. Weber 60 Managing Partner (Retired), 1999 KPMG Peat Marwick LLP
______________ *As of December 31, 1997 (b) Executive Officers of the Company The following individuals are executive officers of the Company and hold the offices set forth below opposite their names.
NAME AGE POSITION - ---- --- -------- William E. Swan 50 President and Chief Executive Officer Paul J. Kolkmeyer 44 Executive Vice President and Chief Financial Officer G. Gary Berner 49 Senior Vice President Kathleen P. Monti 49 Senior Vice President Diane Allegro 42 Senior Vice President
The executive officers of the Company are elected annually and hold office until their successors are elected and qualified, or until death, resignation, retirement or removal by the board of directors. 2 BIOGRAPHICAL INFORMATION Directors of the Company Gordon P. Assad has served as a trustee of the Bank since 1995. Mr. Assad is the President and Chief Executive Officer of Erie & Niagara Insurance Association and has served in that position since 1972. Christa R. Caldwell has served as a trustee of the Bank since 1986. Ms. Caldwell is retired and was the director of the Lockport Public Library from 1967 to 1996. James W. Currie has served as a trustee of the Bank since 1987. Mr. Currie is the President of Ag Pak, Inc., a manufacturer of produce packaging machines, and has served in that position since 1974. Gary B. Fitch has served as a trustee of the Bank since 1981. Mr. Fitch is the Owner-Manager of Ontario Orchards, Inc., and has served in that position since 1976. Mr. Fitch also serves as the Executive Secretary of Agricultural Affiliates, Inc. and has served in that position since 1991. David W. Heinrich served as a trustee of the Bank from 1969 to 1991. He was re-elected to the board in June of 1993. Mr. Heinrich is the President of Heinrich Chevrolet Corp. Daniel W. Judge has served as a trustee of the Bank since 1992. Mr. Judge is the President and Chief Executive Officer of I.D. ONE, Inc., a purchasing and marketing cooperative of independent industrial distributors, and has served in that position since 1996. Mr. Judge served as the Executive Director of I.D. ONE, Inc. from 1993 to 1996. Mr. Judge has also served as President and Manager of Dansam, Inc., a business management services company, since 1990. B. Thomas Mancuso has served as a trustee of the Bank since 1990. Mr. Mancuso is the President of Joseph L. Mancuso & Sons, Inc., a real estate development company. James Miklinski has served as a trustee of the Bank since 1996. Mr. Miklinski is the General Manager of Niagara Milk Cooperative, and has served in that position since 1990. Barton G. Smith has served as a trustee of the Bank since 1986. Mr. Smith is retired from Paul Garrick, Inc., an insurance agency. William E. Swan has served as a trustee of the Bank since 1996. Mr. Swan is the President and Chief Executive Officer of the Bank, and has served in that position since 1989. Prior to joining the Bank in 1988, he served as an Administrative Vice President of Manufacturers and Traders Trust Company. Robert G. Weber has served as a trustee of the Bank since 1996. Mr. Weber is a retired Buffalo Office Managing Partner of KPMG Peat Marwick LLP where he served from 1959 to 1995. Executive Officers of the Company Who Are Not Directors Paul J. Kolkmeyer has served as Executive Vice President and Chief Financial Officer of the Bank since 1995. Mr. Kolkmeyer served as Senior Vice President and Chief Financial Officer of the Bank. Prior to joining the Bank in 1990, he served as a Vice President at Morgan Guaranty Trust Company. Kathleen P. Monti has served as Senior Vice President of Human Resources and Administration of the Bank since 1995. From 1993 to 1995 Ms. Monti served as Vice President of Human Resources of the Bank. Prior to 1993, she served as an Administrative Vice President-Regional Human Resource Manager at Marine Midland Bank. 3 G. Gary Berner has served as Senior Vice President and Chief Lending Officer of the Bank since 1992. Prior to joining the Bank, he was a Vice President in the Asset Management Group at Key Bank of New York, N.A. Diane Allegro has been Senior Vice President of Retail Banking since October 1997. From 1994 to October 1997, she was Vice President-Retail Sales & Delivery Systems at Rochester Community Savings Bank. Prior to 1994, she was employed by First Federal Savings and Loan Association of Rochester. ITEM 2. PROPERTIES - -------------------- The Company conducts its business through its office at 6950 South Transit Road, Lockport, New York. ITEM 3. LEGAL PROCEEDINGS - --------------------------- The Company is not party to any legal proceedings, claims or lawsuits. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------------------------------------------------------------- No matters were submitted during the fourth quarter of the year ended December 31, 1997 to a vote of security holders. 4 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS - ---------------------------------------------------------- (a) The common stock of the Company is quoted on the Nasdaq National Market under the symbol "NBCP". As of December 31, 1997, the date for which this report is filed, the Company had not issued shares and there had been no trading in the common stock of the Company. (b) The effective date of the Securities Act registration statement for which use of proceeds information is being disclosed herein was February 17, 1998; the commission file number assigned to the registration statement was 333- 42977. The offering commenced on or about February 24, 1998 and continued through March 24, 1998. The offering was managed on a best efforts basis by CIBC Oppenheimer Corp. and Trident Securities, Inc., as marketing agent. The securities registered were the common stock, par value $.01 per share, of the Company. In the registration statement, 13,501,554 shares of such common stock were registered at an aggregate price of $135,015,540. In the Reorganization, 29,756,250 shares of common stock were issued, of which 13,501,554 shares were sold to the public, which includes shares purchased by the Bank's Employee Stock Ownership Plan. In addition, 15,849,650 shares were issued to Niagara Bancorp, MHC, the mutual holding company formed in the reorganization and 405,046 shares were issued to the Charitable Foundation established by the Company. In that the effective date of the registration statement was subsequent to December 31, 1997, the ending date of the reporting period for this report, the amount of expenses incurred and the amount of net offering proceeds will be reported in the Company's next periodic report filed pursuant to section 13(a) and 15(b) of the Securities Exchange Act of 1934. However, the total expenses of the reorganization and offering are not expected to exceed $2.2 million. ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA - -------------------------------------------------------- None. As of December 31, 1997, the Company had not issued any stock, had no assets and no liabilities, and had not conducted operations other than of an organizational nature. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - ----------------------------------------------------------- None. As of December 31, 1997, the Company had not issued any stock, had no assets and no liabilities, and had not conducted operations other than of an organizational nature. See Exhibit 99.2. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK - ------------------------------------------------------------------- Not applicable. See Exhibit 99.2 ITEM 8. FINANCIAL STATEMENTS - ------------------------------ None. As of December 31, 1997, the Company had not issued any stock, had no assets and no liabilities, and had not conducted operations other than of an organizational nature. See Exhibit 99.1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE - ---------------------------------------------------------- Not applicable. 5 PART III ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT - ---------------------------------------------------- See Item 1. "Directors and Executive Officers of the Registrant" for information concerning the Company's directors and executive officers. ITEM 11. EXECUTIVE COMPENSATION - ---------------------------------- No compensation has been paid by the Company to the executive officers or directors of the Company. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - ----------------------------------------------------------- Not applicable. ITEM 13. CERTAIN TRANSACTIONS - -------------------------------- Not applicable. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K - ------------------------------------------------------- The exhibits and financial statement schedules filed as a part of this Form 10-K are as follows: (a)(3) Exhibits -------- 99.1 Consolidated Financial Statements of Lockport Savings Bank and subsidiaries as of December 31, 1997 and 1996 and for the years ended December 31, 1997, 1996 and 1995, with Report of Independent Auditors. 99.2 Management's discussion and analysis of the Consolidated Financial Statements, and certain statistical data. (b) Reports on Form 8-K: ------------------- The Registrant filed no Current Report on Form 8-K during the fourth quarter of 1997. 6 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NIAGARA BANCORP, INC. Date: May 11, 1998 By: /s/ William E. Swan -------------------------------------------- William E. Swan President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act 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. Signatures Title Date - ---------- ----- ---- /s/ William E. Swan President, Chief Executive May 11, 1998 - ------------------------- Officer (Principal Executive William E. Swan Officer)and Director /s/ Paul J. Kolkmeyer Executive Vice President and May 11, 1998 - ------------------------- Chief Financial Officer (Principal Paul J. Kolkmeyer Accounting Officer) /s/ Gordon P. Assad Director May 11, 1998 - ------------------------- Gordon P. Assad /s/ Christa P. Caldwell Director May 11, 1998 - ------------------------- Christa P. Caldwell /s/ James W. Currie Director May 11, 1998 - ------------------------- James W. Currie /s Gary B. Fitch Director May 11, 1998 - ------------------------- Gary B. Fitch /s/ David W. Heinrich Director May 11, 1998 - ------------------------- David W. Heinrich /s/ Daniel W. Judge Director May 11, 1998 - ------------------------- Daniel W. Judge 7 /s/ B. Thomas Mancuso Director May 11, 1998 - ------------------------- B. Thomas Mancuso /s/ James Miklinski Director May 11, 1998 - ------------------------- James Miklinski /s/ Barton G. Smith Director May 11, 1998 - ------------------------- Barton G. Smith /s/ Robert G. Weber Director May 11, 1998 - ------------------------- Robert G. Weber EX-27 2 FINANCIAL DATA SCHEDULE
9 1,000 12-MOS DEC-31-1997 DEC-31-1997 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
EX-99.1 3 EXHIBIT 99.1 [LOGO OF PEAT MARWICK LLP APPEARS HERE] Exhibit 99.1 12 Fountain Plaza, Suite 601 Buffalo, NY 14202 INDEPENDENT AUDITORS' REPORT The Board of Trustees Lockport Savings Bank: We have audited the accompanying consolidated statements of condition of Lockport Savings Bank and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income and cash flows for each of the years in the three-year period ended December 31, 1997. These consolidated financial statements are the responsibility of the Bank's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Lockport Savings Bank and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Buffalo, New York February 20, 1998 LOCKPORT SAVINGS BANK AND SUBSIDIARIES Consolidated Statements of Condition December 31, 1997 and 1996 (In thousands)
Assets 1997 1996 ------ ---- ---- Cash and cash equivalents: Cash and due from banks $ 13,913 11,219 Federal funds sold 7,700 5,000 Securities purchased under resale agreements 15,000 - ----------- ----------- Total cash and cash equivalents 36,613 16,219 Securities available for sale 449,281 409,735 Securities held to maturity 17,000 38,000 Loans, net 635,396 598,486 Accrued interest receivable 7,085 6,348 Premises and equipment, net 22,308 13,240 Federal Home Loan Bank stock, at cost 6,392 5,394 Other assets 4,951 5,936 ----------- ----------- $ 1,179,026 1,093,358 =========== =========== Liabilities and Net Worth ------------------------- Liabilities: Deposits $ 986,875 920,072 Mortgagors' payments held in escrow 8,746 8,773 Short-term borrowings 18,783 27,008 Long-term debt 14,934 5,000 Other liabilities 19,217 16,841 ----------- ----------- 1,048,555 977,694 ----------- ----------- Commitments and contingencies Net worth: Surplus and undivided profits 127,941 116,690 Net unrealized gain (loss) on securities available for sale, net of deferred income taxes 2,530 (1,026) ----------- ----------- 130,471 115,664 ----------- ----------- $ 1,179,026 1,093,358 =========== ===========
See accompanying notes to consolidated financial statements. LOCKPORT SAVINGS BANK AND SUBSIDIARIES Consolidated Statements of Income Years ended December 31, 1997, 1996 and 1995 (In thousands)
1997 1996 1995 ---- ---- ---- Interest Income: Real estate loans $ 44,540 40,440 36,948 Other loans 7,029 6,845 6,400 Securities available for sale 27,838 24,422 21,743 Securities held to maturity 1,429 1,698 2,780 Federal funds sold and securities purchased under resale argreements 1,079 1,293 1,647 Other 448 364 338 --------- ---------- ---------- 82,363 75,062 69,856 Interest expense: Deposits 43,385 39,814 39,034 Borrowed funds 1,593 841 - --------- ---------- ---------- Net interest income 37,385 34,407 30,822 Provision for loan losses 1,493 2,187 1,016 --------- ---------- ---------- Net interest income after provision for loan losse 35,892 32,220 29,806 --------- ---------- ---------- Noninterest income: Banking service charges and fees 3,085 2,468 1,837 Loan fees 1,147 1,027 855 Net gain on sale of securities available for sale 910 576 1,477 Other 1,654 1,681 1,237 --------- ---------- ---------- Total noninterest income 6,796 5,752 5,406 --------- ---------- ---------- Noninterest expense: Salaries and employee benefits 13,119 11,477 9,706 Occupancy and equipment 3,749 3,178 2,635 Network interchange fees 1,197 984 877 Deposit insurance 121 2 983 Marketing and advertising 1,398 1,355 978 Other 5,594 3,930 4,964 --------- ---------- ---------- Total noninterest expense 25,178 20,926 20,143 --------- ---------- ---------- Income before income taxes 17,510 17,046 15,069 Income taxes 6,259 6,278 5,144 --------- ---------- ---------- Net income $ 11,251 10,768 9,925 ========= ========== ==========
See accompanying notes to consolidated financial statements. LOCKPORT SAVINGS BANK AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 1997, 1996 and 1995 (In thousands)
1997 1996 1995 ---- ---- ---- Cash flows from operating activities: Net income $11,251 10,768 9,925 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation of premises and equipment 2,256 1,911 1,607 Amortization (accretion) of fees and discounts, net (279) (717) 554 Provision for loan losses 1,493 2,187 1,016 Other provisions for losses 339 23 834 Net gain on sale of securities available for sale (910) (576) (1,477) Deferred income taxes (324) (387) (253) (Increase) decrease in: Accrued interest receivable (737) (726) (198) Other assets (2,497) 3,356 (10,390) Increase in other liabilities 2,378 2,661 8,607 --------- -------- --------- Net cash provided by operating activities 12,970 18,500 10,225 --------- -------- --------- Cash flows from investing activities: Purchase of securities available for sale (99,005) (91,304) (11,770) Proceeds from sales of securities available for sale 27,366 16,803 11,892 Proceeds from maturities of securities available for sale 11,175 27,215 - Purchase of mortgage-backed securities available for sale (67,340) (85,506) (46,375) Proceeds from sales of mortgage-backed securities available for sale 47,792 24,924 50,755 Principal payments on mortgage-backed securities available for sale 47,379 35,522 29,780 Purchase of securities held to maturity (199,100) (249,700) (239,100) Proceeds from maturities of securities held to maturity 220,100 258,400 227,368 Net increase in loans (36,394) (65,123) (62,288) Other (13,034) (2,534) (3,647) ---------- ---------- ---------- Net cash used by investing activities (61,061) (131,303) (43,385) ---------- ---------- ----------
LOCKPORT SAVINGS BANK AND SUBSIDIARIES Consolidated Statements of Cash Flows, continued
1997 1996 1995 -------- ------- ------- Cash flows from financing activities: Net increase in deposits $ 66,803 59,007 41,375 Net increase (decrease) in mortgagors' payments held in escrow (27) (1,416) 589 Proceeds from (repayment of) short-term borrowings (8,225) 27,008 - Proceeds from long-term debt 10,000 5,000 - Repayments of long-term debt (66) - - -------- ------- ------- Net cash provided by financing activities 68,485 89,599 41,964 -------- ------- ------- Net increase (decrease) in cash and cash equivalents 20,394 (23,204) 8,804 Cash and cash equivalents at beginning of year 16,219 39,423 30,619 -------- ------- ------- Cash and cash equivalents at end of year $ 36,613 16,219 39,423 ======== ======= ======= Supplemental disclosure of cash flow information: Cash paid during the year for: Income taxes $ 3,870 6,597 4,110 Interest expense 44,693 40,485 38,972 ======== ======= =======
See accompanying notes to consolidated financial statements. LOCKPORT SAVINGS BANK AND SUBSIDIARIES Notes to Consolidated Financial Statements Years Ended December 31, 1997, 1996 and 1995 (1) Summary of Significant Accounting Policies - ----------------------------------------------- The accounting and reporting policies of Lockport Savings Bank, a New York State chartered FDIC insured mutual savings bank, and its subsidiaries conform to general practices within the banking industry and to generally accepted accounting principles. The following is a description of the more significant accounting policies. (a) Principles of Consolidation -------------------------------- The consolidated financial statements include the accounts of Lockport Savings Bank (LSB) and its subsidiaries (the Bank), LSB Associates, Inc., an agent for third party mutual fund and annuity sales; LSB Realty, Inc., a real estate development company; LSB Funding, Inc., a real estate investment trust; and LSB Securities, Inc., a securities investment company. All significant intercompany balances and transactions have been eliminated in consolidation. (b) Cash and Cash Equivalents ------------------------------ For purposes of reporting cash flows, cash and cash equivalents include, cash on hand, amounts due from banks, federal funds generally sold for one to three day periods, and securities purchased under resale agreements generally sold within 90 days. (c) Investment Securities -------------------------- Debt securities and marketable equity securities are classified as either available for sale or held to maturity. Held to maturity securities are those that the Bank has the positive intent and ability to hold to maturity. All other securities are classified as available for sale. Securities available for sale are carried at fair value with unrealized gains and losses, net of the related deferred tax effect, excluded from earnings and reported as a separate component of net worth. Realized gains and losses are determined using the specific identification method. Securities held to maturity are recorded at cost with discounts accreted and premiums amortized to maturity using a method that approximates level-yield. If permanent impairment of a security exists, that security is written down to fair value with a charge to earnings. 1 LOCKPORT SAVINGS BANK AND SUBSIDIARIES Notes to Consolidated Financial Statements (1) Summary of Significant Accounting Policies, Continued - ---------------------------------------------------------- (d) Loans ---------- Loans are stated at the principal amount outstanding, adjusted for net unamortized deferred fees and costs which are accrued to income on the interest method. Accrual of interest income on loans is discontinued after payments become more than ninety days delinquent, unless the status of a particular loan clearly indicates earlier discontinuance is more appropriate. All uncollected interest income previously recognized on non-accrual loans is reversed and subsequently recognized only to the extent payments are received. In those instances where there is doubt as to the collectibility of principal, interest payments are applied to principal. Loans are generally returned to accrual status when principal and interest payments are current, full collectibility of principal and interest is reasonably assured and a consistent record of performance, generally six months, has been demonstrated. Purchased loans are recorded at cost with related premiums or discounts amortized to expense or accreted to income using the interest method over the estimated life of the loans. Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or market. Net unrealized losses are recognized through a valuation allowance by charges to earnings. (e) Real Estate Owned ---------------------- Real estate owned consists of property acquired in settlement of loans which are initially valued at the lower of cost or fair value based on appraisals at foreclosure and are periodically adjusted to the lower of adjusted cost or net realizable value throughout the remaining period. (f) Allowance for Loan Losses ------------------------------ The allowance for loan losses is established through charges to earnings. Management's determination of the balance of the allowance is based on many factors including credit evaluation of the loan portfolio, current and expected economic conditions and past loss experience. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses and may require the Bank to recognize additions to the allowance based on their judgment of information available to them at the time of their examination. 2 LOCKPORT SAVINGS BANK AND SUBSIDIARIES Notes to Consolidated Financial Statements (1) Summary of Significant Accounting Policies, Continued - ---------------------------------------------------------- (f) Allowance for Loan Losses, Continued ----------------------------------------- A loan is considered impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts of principal and interest under the original terms of the agreement. Such loans are measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, the loan's observable market price or the fair value of the underlying collateral if the loan is collateral dependent. The Bank excludes smaller- balance homogeneous loans that are collectively evaluated for impairment, including one-to four-family residential mortgage loans, student loans and consumer loans, other than those modified in a troubled debt restructuring. (g) Mortgage Servicing Rights ------------------------------ In 1996, the Bank adopted Statement of Financial Accounting Standards (SFAS) No. 122, "Accounting for Mortgage Servicing Rights", an amendment to SFAS No. 65. Accordingly, the rights to service mortgage loans for others are carried as separate assets at fair value, whether acquired through purchase transactions or through loan originations. The adoption of this standard did not have a material impact on the Bank's consolidated financial statements. (h) Premises and Equipment --------------------------- Premises and equipment are carried at cost, net of accumulated depreciation and amortization. Depreciation is computed on the straight-line method over the estimated useful lives of the assets. Lease hold improvements are amortized on the straight- line method over the lesser of the life of the improvements or the lease term. (i) Employee Benefits ---------------------- The Bank maintains a non-contributory, qualified, defined benefit pension plan that covers substantially all full time employees. The actuarially determined pension benefits in the form of a life annuity are based on the employee's combined years of service, age and compensation. The Bank's policy is to fund the minimum amount required by government regulations. The Bank also provides certain post-retirement benefits, principally health care and group life insurance, to employees and their beneficiaries and dependents. The Bank accrues for the expected cost of providing these post-retirement benefits during an employee's active years of service. 3 LOCKPORT SAVINGS BANK AND SUBSIDIARIES Notes to Consolidated Financial Statements (1) Summary of Significant Accounting Policies, Continued - ---------------------------------------------------------- (j) Income Taxes ----------------- Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. (k) Transfers and Servicing of Financial Assets and Extinguishments of ----------------------------------------------------------------------- Liabilities ----------- In 1997, the Bank adopted SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", as amended by SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of Financial Accounting Standards Board (FASB) Statement No. 125". SFAS No. 125 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities based on consistent application of a financial-components approach that focuses on control. It distinguishes transfers of financial assets that are sales from transfers that are secured borrowings. SFAS No. 127 deferred the adoption of certain provisions of SFAS No. 125 until January 1, 1998. The adoption of SFAS No. 125, as amended by SFAS No. 127, did not have a material impact on the Bank's financial position, results of operations, or liquidity. (l) New Accounting Standards ----------------------------- In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information about Capital Structure". SFAS No. 129 summarizes previously issued disclosure guidance contained within APB Opinion Nos. 10 and 15 as well as SFAS No. 47. There will be no changes to the Bank's disclosures pursuant to the adoption of SFAS No. 129. This statement is effective for financial statements for periods ending after December 15, 1997. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income," which establishes standards for reporting and display of comprehensive income and its components in a full set of general- purpose financial statements. The comprehensive income and related cumulative equity impact of comprehensive income items will be required to be disclosed prominently as part of the notes to the financial statements. Only the impact of unrealized gains or losses on securities available for sale is expected to be disclosed as an additional component of the Bank's income under the requirements of SFAS No. 130. This statement is effective for fiscal years beginning after December 15, 1997. 4 LOCKPORT SAVINGS BANK AND SUBSIDIARIES Notes to Consolidated Financial Statements (1) Summary of Significant Accounting Policies, Continued - ---------------------------------------------------------- (l) New Accounting Standards (Continued) ----------------------------------------- In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which changes the way companies report information about segments of their business on their annual financial statements and requires them to report selected segment information in their quarterly reports issued to shareholders. It also requires entity wide disclosures about the products and services an entity provides, the foreign countries in which it holds assets and reports revenues, and its major customers. This statement is effective for fiscal years beginning after December 15, 1997. (m) Use of Estimates --------------------- Management of the Bank has made a number of estimates and assumptions relating to the reporting of assets and liabilities and disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. (n) Reclassifications ---------------------- Certain reclassifications were made to the 1996 and 1995 financial statements to conform them to the 1997 presentation. (2) Securities Purchased under Resale Agreements - ------------------------------------------------- The Bank enters into agreements with large securities dealers to purchase residential and commercial mortgage loans, mortgage-backed securities and U.S. Treasury Notes and to resell substantially identical securities, generally within 90 days. Such agreements at December 31, 1997, consist of mortgage loans and U.S. Treasury Notes, have a weighted average rate of 6.07% and mature within 90 days. No material amount of agreements was outstanding with any individual dealer. The securities underlying the agreements are book-entry securities and were delivered into the Bank's account maintained at the Federal Home Loan Bank of New York, or into a third-party custodian's account designated by the Bank under a written custodial agreement that explicitly recognizes the Bank's interest in the securities. Mortgage loans underlying the agreements are held in safekeeping by the seller on behalf of the Bank. Securities purchased under resale agreements averaged approximately $11.1 million since the Bank began entering into these agreements during November 1997, and the maximum amount outstanding at any month-end during 1997 was $15.0 million. 5 LOCKPORT SAVINGS BANK AND SUBSIDIARIES Notes to Consolidated Financial Statements (3) Securities Available for Sale - ---------------------------------- The amortized cost and approximate fair value of securities available for sale at December 31, 1997 are summarized as follows (in thousands):
Amortized Unrealized Unrealized Fair cost gains losses value --------- ---------- ----------- ------- Debt securities: U.S. Treasury $ 84,877 921 (47) 85,751 States and political subdivisions 1,760 110 - 1,870 Corporate 6,933 121 - 7,054 -------- ----- ------ ------- 93,570 1,152 (47) 94,675 -------- ----- ------ ------- Mortgage-backed securities: Collateralized mortgage obligations 100,037 673 (746) 99,964 Government National Mortgage Association 31,515 1,091 (7) 32,599 Federal National Mortgage Association 24,282 223 (22) 24,483 Freddie Mac 114,922 1,108 (121) 115,909 -------- ----- ------ ------- 270,756 3,095 (896) 272,955 -------- ----- ------ ------- Asset-backed securities: Home equity 61,983 36 (78) 61,941 Student Loans 9,475 - (24) 9,451 Auto 3,515 15 - 3,530 -------- ----- ------ ------- 74,973 51 (102) 74,922 -------- ----- ------ ------- Equity securities - Common stock 5,693 1,170 (134) 6,729 -------- ----- ------ ------- $444,992 5,468 (1,179) 449,281 ======== ===== ====== =======
6 LOCKPORT SAVINGS BANK AND SUBSIDIARIES Notes to Consolidated Financial Statements (3) Securities Available for Sale, Continued - --------------------------------------------- Scheduled contractual maturities of securities, other than equity securities, at December 31, 1997 are as follows (in thousands):
Amortized Fair cost value --------- ------- Within one year $ 17,079 17,103 After one year through five years 121,643 122,663 After five years through ten years 76,169 76,705 After ten years 224,408 226,081 -------- ------- $439,299 442,552 ======== =======
The amortized cost and approximate fair value of securities available for sale at December 31, 1996 are summarized as follows (in thousands):
Amortized Unrealized Unrealized Fair cost gains losses value --------- ---------- ----------- ------- Debt securities: U.S. Treasury $ 84,716 723 (219) 85,220 U.S. government agencies 5,012 - (8) 5,004 States and political subdivisions 1,942 99 - 2,041 Corporate 999 1 - 1,000 -------- ----- ------ ------- 92,669 823 (227) 93,265 -------- ----- ------ ------- Mortgage-backed securities: Collateralized mortgage obligations 104,244 133 (2,385) 101,992 Government National Mortgage Association 44,966 931 (117) 45,780 Federal National Mortgage Association 28,487 20 (251) 28,256 Freddie Mac 109,903 475 (1,546) 108,832 -------- ----- ------ ------- 287,600 1,559 (4,299) 284,860 -------- ----- ------ ------- Asset-backed securities - Home equity 28,090 36 (128) 27,998 -------- ----- ------ ------- Equity securities - Common stock 3,115 594 (97) 3,612 -------- ----- ------ ------- $411,474 3,012 (4,751) 409,735 ======== ===== ====== =======
7 LOCKPORT SAVINGS BANK AND SUBSIDIARIES Note to Consolidated Financial Statements, Continued (3) Securities Available for Sale, Continued - --------------------------------------------- Gross realized gains (losses) on sales of securities available for sale are summarized as follows (in thousands):
1997 1996 1995 -------- ---- ------ Realized gains $1,195 896 2,442 Realized losses (285) (320) (965) ====== ==== =+====
At December 31, 1997, approximately $5.0 million of U.S. Treasury Notes were pledged under a collateral agreement with the Federal Reserve Treasury, Tax and Loan Program and $19.0 million of U.S. Treasury Notes were pledged as collateral under reverse repurchase agreements. (4) Securities Held To Maturity - -------------------------------- The Bank's held to maturity securities consist of money market preferred stock which matures approximately every 49 days. Cost approximates fair value at December 31, 1997 and 1996. Each maturity and subsequent reinvestment in the stock during the year is included in the accompanying consolidated statements of cash flows as maturities and purchases, respectively. Aside from the rollover of that investment, there were no maturities of held to maturity debt securities in 1997 and 1996. There were no sales of, or transfers to or from, securities classified as held to maturity in either year. 8 LOCKPORT SAVINGS BANK AND SUBSIDIARIES Note to Consolidated Financial Statements, Continued (5) Loans - ---------- Loans receivable at December 31, 1997 and 1996 consist of the following (in thousands):
1997 1996 ---------- -------- Real estate: Residential conventional $392,846 360,573 Residential home equity 13,587 11,337 Commercial 151,266 139,998 Construction 10,791 12,493 -------- ------- 568,490 524,401 -------- ------- Consumer installment: Mobile home 22,747 21,406 Vehicle 7,306 18,747 Guaranteed student 10,975 10,702 Other 24,640 22,412 -------- ------- 65,668 73,267 -------- ------- Commercial 4,893 4,895 -------- ------- Total loans 639,051 602,563 Net deferred costs and discounts 3,266 2,462 Allowance for loan losses (6,921) (6,539) -------- ------- Loans, net $635,396 598,486 ======== =======
Non-accrual loans amounted to $3,047,000, $4,718,000 and $3,955,000 at December 31, 1997, 1996, and 1995, respectively, representing .47%, .78% and .74% of total loans. Interest income that would have been recorded if the loans had been performing in accordance with their original terms amounted to $245,000, $325,000 and $367,000 in 1997, 1996 and 1995, respectively. 9 LOCKPORT SAVINGS BANK AND SUBSIDIARIES Note to Consolidated Financial Statements, Continued (5) Loans, Continued - --------------------- Mortgage loans sold amounted to $33.8 million, $26.1 million, and $30.1 million for the years ending December 31, 1997, 1996, and 1995, respectively. Servicing fee income included in loan fees in the consolidated statements of income amounted to $424,000, $363,000, and $274,000 in 1997, 1996, and 1995, respectively. Mortgages serviced for others by the Bank amounted to $152.5 million and $129.0 million at December 31, 1997 and 1996, respectively. At December 31, 1997, the Bank maintained $3 million in fidelity blanket bond coverage and under its mortgage impairment insurance policy, maintained errors and omissions coverage of $2 million per commercial and residential mortgage occurrence. At December 31, 1997, the Bank had outstanding commitments to originate loans of approximately $44.2 million with $14.6 million at fixed rates and $29.6 million at variable rates. Changes in the allowance for loan losses in 1997, 1996 and 1995 were as follows (in thousands):
1997 1996 1995 --------- ------ ------ Balance, beginning of year $ 6,539 4,707 4,192 Provision for loan losses 1,493 2,187 1,016 Charge-offs (1,362) (436) (556) Recoveries on loans previously charged-off 251 81 55 ------- ----- ----- Balance, end of year $ 6,921 6,539 4,707 ======= ===== =====
Approximately 96.5% of the Bank's mortgage and consumer loans are in New York State. Accordingly, the ultimate collectibility of a substantial portion of the Bank's loan portfolio is susceptible to changes in market conditions in this primary market area. 10 LOCKPORT SAVINGS BANK AND SUBSIDIARIES Note to Consolidated Financial Statements, Continued (6) Premises and Equipment - --------------------------- A summary of premises and equipment at December 31, 1997 and 1996 follows (in thousands):
1997 1996 --------- ------ Land $ 1,049 1,049 Buildings and improvements 17,230 10,996 Furniture and equipment 14,820 9,785 ------- ------ 33,099 21,830 Less accumulated depreciation and amortization 10,791 8,590 ------- ------ $22,308 13,240 ======= ======
Minimum rental commitments for premises and equipment under noncancellable operating leases at December 31, 1997 follows (in thousands):
Year ending December 31: 1998 $ 612 1999 658 2000 671 2001 674 2002 681 Later years 6,603 ------ Total minimum lease payments $9,899 ======
Real estate taxes, insurance and maintenance expenses related to these leases are obligations of the Bank. Rent expense was $534,000, $414,000, and $271,000 in 1997, 1996 and 1995, respectively, and is included in occupancy expense. During 1997, the Bank completed construction of a new Administrative Center. Included in premises and equipment at December 31, 1997 and 1996 are $11.7 million and $1.8 million, respectively, of costs, net of accumulated depreciation, relating to this new facility. 11 LOCKPORT SAVINGS BANK AND SUBSIDIARIES Note to Consolidated Financial Statements, Continued (7) Deposits - ------------- Deposits consist of the following at December 31, 1997 and 1996 (in thousands):
Weighted average 1997 rate Balance -------- ------- Savings accounts 3.34% $297,020 -------- Certificates maturing: Within one year 5.52 355,534 After one year, through two years 6.63 118,162 After two years, through three years 6.41 16,375 After three years, through four years 6.46 9,151 After four years, through five years 5.73 740 After five years 6.06 2,464 -------- 5.83 502,426 -------- Checking accounts: Non-interest bearing - 27,689 Interest-bearing: NOW accounts 2.00 65,756 Money market accounts 4.24 93,984 -------- 187,429 -------- 4.51% $986,875 ==== ========
12 LOCKPORT SAVINGS BANK AND SUBSIDIARIES Note to Consolidated Financial Statements, Continued (7) Deposits, Continued - ------------------------
Weighted average 1996 rate Balance -------- ------- Savings accounts 3.34% $300,747 -------- Certificates maturing: Within one year 5.33 356,401 After one year, through two years 6.01 69,923 After two years, through three years 8.16 42,054 After three years, through four years 6.96 8,992 After four years, through five years 6.89 5,905 After five years 6.17 1,446 -------- 5.72 484,721 -------- Checking accounts: Non-interest bearing - 25,382 Interest-bearing: NOW accounts 2.00 55,901 Money market accounts 3.54 53,321 -------- 134,604 -------- 4.43% $920,072 ==== ========
13 LOCKPORT SAVINGS BANK AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (7) Deposits, Continued - ------------------------ Generally, interest rates on certificates of deposit range from 3.68% to 9.50% at December 31, 1997. Interest expense in 1997, 1996 and 1995 is summarized as follows (in thousands):
1997 1996 1995 -------- ------ ------ Savings accounts $10,124 10,353 11,636 Certificates 29,426 26,432 24,159 NOW accounts 1,120 955 901 Money market accounts 2,561 1,916 2,164 Mortgagors' payments held in escrow 154 158 174 ------- ------ ------ $43,385 39,814 39,034 ======= ====== ======
Included in 1995 interest expense is a special interest payment of $1,250,000 which was approved by the Board of Trustees of the Bank and paid on a pro rata basis on all interest-bearing accounts in recognition of the Bank's 125th anniversary. Certificates issued in amounts over $100,000 amounted to $88.6 million, $83.9 million, and $75.2 million at December 31, 1997, 1996 and 1995, respectively. Interest expense thereon approximated $5.2 million, $4.6 million, and $4.2 million in 1997, 1996 and 1995, respectively. 14 LOCKPORT SAVINGS BANK AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (8) Other Borrowed Funds - ------------------------- The Bank has a $127.8 million line of credit with the Federal Home Loan Bank (FHLB), secured by FHLB stock and the residential mortgage portfolio, which provides a secondary funding source for lending, liquidity, and asset/liability management. The Bank also pledged, to broker-dealers, U.S. Treasury Notes as collateral under agreements to repurchase. Under these agreements, the broker- dealers are required to transfer securities to the Bank upon maturity of the agreements, generally within 90 to 180 days after the transaction date. Information relating to outstanding borrowings at December 31, 1997 and 1996 is summarized as follows (in thousands):
1997 1996 ---- ---- Short-term borrowings: Advances from Federal Home Loan Bank $ - 7,000 Reverse repurchase agreements 18,783 20,008 ------- ------ $18,783 27,008 ======= ====== Long-term advances from FHLB, bearing fixed interest rates: 5.72%, maturing on January 29, 2001 $ 5,000 5,000 6.59%, amortizing through July 31, 2012 4,934 - 6.37%, amortizing through December 22, 2012 5,000 - ------- ------ $14,934 5,000 ======= ====== Information relating to the reverse repurchase agreements at December 31, 1997 and 1996 is summarized as follows: 1997 1996 ---- ---- Weighted average interest rate of reverse repurchase agreements 5.65% 5.42 Maximum outstanding at any month end $28,961 24,675 Average amount outstanding during the year 20,807 11,091 ======= ======
The average amounts outstanding are computed using weighted monthly averages. Related interest expense for 1997 and 1996 was $1,158,000 and $576,000, respectively. The Bank had no such borrowings in 1995. The aggregate maturities of long-term advances from FHLB for each of the five years subsequent to December 31, 1997, are as follows: 1998, $395,000; 1999, $439,000; 2000, $468,000; 2001, $5,499,000; and 2002, $533,000. 15 LOCKPORT SAVINGS BANK AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (9) Net Worth - -------------- The changes in net worth for 1997, 1996 and 1995 follow (in thousands):
1997 1996 1995 --------- -------- ------- Net worth, beginning of year $115,664 107,653 81,322 Net income 11,251 10,768 9,925 Net change in unrealized gain (loss) on securities available for sale, net of taxes 3,556 (2,757) 16,406 -------- ------- ------- Net worth, end of year $130,471 115,664 107,653 ======== ======= =======
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 guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific 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 minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets. As of December 31, 1997, the Bank meets all capital adequacy requirements to which it is subject. As of December 31, 1997, the 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 adequately capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the following table. There are no conditions or events since that notification that management believes have changed the Bank's category. 16 LOCKPORT SAVINGS BANK AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (9) Net Worth, Continued - ------------------------- The Bank's actual capital amounts and ratios are presented in the following table (in thousands):
To Be Well For Capital Capitalized Under Adequacy Prompt Corrective Actual Purposes Action Provisions ---------------- --------------- ------------------ Amount Ratio Amount Ratio Amount Ratio -------- ------ ------- ------ --------- ------- As of December 31, 1997: Total capital to risk-weighted assets $134,920 21.81% $49,490 8.00% $61,863 10.00% Tier 1 capital to risk-weighted assets 127,999 20.69 24,745 4.00 37,118 6.00 Tier 1 capital to average assets 127,999 10.96 35,050 3.00 58,416 5.00 As of December 31, 1996: Total capital to risk- weighted assets 123,229 22.84 43,160 8.00 53,950 10.00 Tier 1 capital to risk-weighted assets 116,690 21.63 21,580 4.00 32,370 6.00 Tier 1 capital to average assets 116,690 10.77 32,492 3.00 54,154 5.00
17 LOCKPORT SAVINGS BANK AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (10) Income Taxes - ----------------- Total income taxes in 1997, 1996 and 1995 were allocated as follows (in thousands):
1997 1996 1995 ------- ------- ------ Income from operations $6,259 6,278 5,144 Net worth, for unrealized gain/loss on securities available for sale 2,472 (1,917) 10,028 ====== ====== ======
The components of income taxes attributable to income from operations in 1997, 1996 and 1995 are as follows (in thousands):
1997 1996 1995 ---- ---- ---- Current: Federal $5,858 5,640 4,353 State 725 1,025 1,044 ------ ----- ----- 6,583 6,665 5,397 ------ ----- ----- Deferred: Federal (312) (387) (253) State (12) - - ------ ----- ----- (324) (387) (253) ------ ----- ----- $6,259 6,278 5,144 ====== ===== =====
Income tax expense attributable to income from operations in 1997, 1996 and 1995 differs from the expected tax expense (computed by applying the Federal corporate tax rate of 35% to income before income taxes) as follows (in thousands):
1997 1996 1995 -------- ------ ------ Expected tax expense $6,129 5,966 5,274 Increase (decrease) attributable to: State income taxes, net of Federal benefit 471 666 679 Dividends received deduction (375) (434) (436) Non-taxable interest income (34) (68) (386) Increase in valuation allowance for deferred tax assets 84 264 44 Other (16) (116) (31) ------ ----- ----- $6,259 6,278 5,144 ====== ===== =====
18 LOCKPORT SAVINGS BANK AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (10) Income Taxes, Continued - ---------------------------- The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1997 and 1996 are presented below:
1997 1996 -------- ------- Deferred tax assets: Financial reporting allowance for loan losses $ 2,838 2,681 Deferred compensation 759 576 Post-retirement benefit obligation 678 638 Losses on investments in affiliates 535 490 Net unrealized loss on securities available for sale - 713 Other 659 659 ------- ------ Total gross deferred tax assets 5,469 5,757 Valuation allowance (1,386) (1,302) ------- ------ Net deferred tax assets 4,083 4,455 ------- ------ Deferred tax liabilities: Tax allowance for loan losses, in excess of base year amount (1,905) (1,790) Net unrealized gain on securities available for sale (1,759) - Prepaid pension costs (282) (301) Other (81) (160) ------- ------ Total gross deferred tax liabilities (4,027) (2,251) ------- ------ Net deferred tax asset $ 56 2,204 ======= ======
19 LOCKPORT SAVINGS BANK AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (10) Income Taxes, Continued - ---------------------------- In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, availability of operating loss carrybacks, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income, the opportunity for net operating loss carrybacks, and projections for future taxable income over the periods which deferred tax assets are deductible, management believes it is more likely than not the Bank will realize the benefits of these deductible differences, net of the existing valuation allowance, at December 31, 1997. At December 31, 1997, net worth includes approximately $11.1 million representing bad debt deductions taken under the provisions of the Internal Revenue Code. Federal legislation repealed this provision of the Tax Code thereby requiring the Bank to recapture $4.2 million in additions to the tax bad debt reserve for periods after the 1987 base year. At December 31, 1997, the deferred tax liability related to the tax allowance for loan losses in excess of the base year amount includes $1.5 million of Federal income taxes which the Bank will repay over tax years 1998 through 2003. 20 LOCKPORT SAVINGS BANK AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (11) Benefit Plans - ------------------ Pension Plan ------------ The funded status of the Bank's pension plan and the amounts recognized in the financial statements as of December 31, 1997 and 1996 follow (in thousands):
1997 1996 -------- ------- Actuarial present value of benefit obligation: Vested $ 5,172 4,174 Non-vested 251 467 ------- ------ Total accumulated benefit obligation $ 5,423 4,641 ======= ====== Projected benefit obligation for service rendered to date 6,936 6,084 Plan assets at fair value 9,195 7,602 ------- ------ Plan assets in excess of projected benefit obligation 2,259 1,518 Unrecognized net asset being recognized over 10 years (60) (122) Unrecognized net gain (1,653) (799) Prior service cost not yet recognized in net periodic pension costs 10 14 ------- ------ Prepaid pension costs, included in other assets $ 556 611 ======= ======
Net pension cost in 1997, 1996, and 1995 is comprised of the following (in thousands):
1997 1996 1995 ------- ------- ------ Service cost, benefits earned during the year $ 383 340 277 Interest cost on projected benefit obligation 452 422 385 Actual return on plan assets (1,698) (949) (1,133) Net amortization and deferral 1,023 366 640 ------- ----- ------ Net periodic pension cost $ 160 179 169 ======= ===== ======
21 LOCKPORT SAVINGS BANK AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (11) Benefit Plans, Continued - ----------------------------- The principal actuarial assumptions used in 1997, 1996 and 1995 were as follows:
1997 1996 1995 ---- ---- ---- Discount rate 7.25% 7.75% 7.50% Expected long-term rate of return on assets 8.00 8.00 8.00 Assumed rate of future compensation increase 5.00 5.50 5.50 ==== ==== ====
The plan assets are in mutual funds consisting primarily of listed stocks and bonds, government securities and cash equivalents. 401(k) Plan ----------- All employees are also eligible to participate in a Bank sponsored 401(k) plan. Participants may make contributions to the Plan in the form of salary reductions of up to 15% of their eligible compensation subject to the Internal Revenue Code limit. The Bank contributes an amount to the Plan equal to 50% of employee contributions, up to a maximum of 6% of the employee's eligible compensation. The Bank's contribution was $196,000, $169,000 and $143,000 in 1997, 1996 and 1995, respectively. Other Post-retirement Benefits ------------------------------ In addition to providing pension benefits, the Bank provides post-retirement health care and life insurance benefits for substantially all full-time employees and their beneficiaries (and dependents) if they reach normal retirement age while working for the Bank. The components of net periodic post-retirement benefit cost for the years ended December 31, 1997, 1996, and 1995 are as follows (in thousands):
1997 1996 1995 ---- ---- ---- Service cost $ 64 64 49 Interest cost 99 105 101 Net amortization and deferral (11) - - ----- ---- ---- Total cost $ 152 169 150 ===== ==== ====
22 LOCKPORT SAVINGS BANK AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (11) Benefit Plans, Continued - ----------------------------- The accumulated post-retirement benefit obligation recognized as of December 31, 1997 and 1996 is as follows (in thousands):
1997 1996 ---- ---- Fully eligible active participants $ 86 45 Active participants not yet eligible 559 427 Retirees 963 798 Unrecognized net gain 46 285 ------ ----- Total accumulated post- retirement benefit obligation,included in other liabilities $1,654 1,555 ====== =====
The post-retirement benefit obligation was determined using a discount rate of 7.25% for 1997 and 8.0% for 1996. The assumed health care cost trend rate used in measuring the accumulated post-retirement benefit obligation initially ranged from 6.0% to 15.0% in 1998, depending on the specific plan, and was decreased to 5.0% in the year 2003 and thereafter, over the projected payout of benefits. The health care cost trend rate assumption can have a significant effect on the amounts reported. If the health care cost trend rate were increased one percent, the accumulated post-retirement benefit obligation as of December 31, 1997 would have increased by 4.1%, and the aggregate of service and interest cost would increase by 1.4%. However, the plan limits the increase in the Bank's annual contributions to the plan for most participants to the increase in base compensation for active employees. Other Plans ----------- The Bank also sponsors two non-qualified compensation plans, one for officers and one for employees. Awards are payable if certain earnings and performance objectives are met. Awards under these plans were $1,153,000, $1,202,000 and $1,173,000 in 1997, 1996 and 1995, respectively. The Bank also maintains a supplemental benefit plan for certain executive officers that is funded by the Bank through life insurance contracts. 23 LOCKPORT SAVINGS BANK AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (12) Fair Value of Financial Instruments - ----------------------------------------- The carrying value and estimated fair value of the Bank's financial instruments, all of which are non-trading, are as follows (in thousands):
December 31, 1997 -------------------------- Carrying Estimated fair value value ----- ----- Financial assets: Cash and cash equivalents $ 36,613 36,613 Securities available for sale 449,281 449,281 Securities held to maturity 17,000 17,000 Loans 635,396 646,988 Accrued interest receivable 7,085 7,085 Federal Home Loan Bank stock 6,392 6,392 Financial liabilities: Deposits $ 986,975 989,550 Mortgagors' payments held in escrow 8,746 8,746 Borrowed funds 33,717 33,917 Accrued interest payable 615 615 Unrecognized financial instruments: Commitments to extend credit $ 44,152 44,152 December 31, 1996 -------------------------- Carrying Estimated fair value value ----- ----- Financial assets: Cash and cash equivalents $ 16,219 16,219 Securities available for sale 409,735 409,735 Securities held to maturity 38,000 38,000 Loans 598,486 604,000 Accrued interest receivable 6,348 6,348 Federal Home Loan Bank stock 5,394 5,394 Financial liabilities: Deposits $ 920,072 923,796 Mortgagors' payments held in escrow 8,773 8,773 Borrowed funds 32,008 31,863 Accrued interest payable 330 330 Unrecognized financial instruments: Commitments to extend credit $ 34,193 34,193
24 LOCKPORT SAVINGS BANK AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (12) Fair Value of Financial Instruments, Continued - ---------------------------------------------------- Fair value estimates are based on existing on and off balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in these estimates. Fair value estimates, methods, and assumptions are set forth below for each type of financial instrument. Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument, including judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Cash and Cash Equivalents ------------------------- The carrying value approximates the fair value because the instruments mature in 90 days or less. Securities ---------- The fair values are estimated based on quoted market prices supplied by the Bank's custody agent and investment broker. Loans ----- Residential revolving home equity and personal and commercial open ended lines of credit reprice as the prime rate changes. Therefore, the carrying values of such loans, totalling $16.1 million and $14.0 million at December 31, 1997 and 1996, respectively, approximate their fair value. The fair value of fixed-rate performing loans is calculated by discounting scheduled cash flows through the estimated maturity using the Bank's current origination rates. The estimate of maturity is based on the Bank's contractual cash flows adjusted for prepayment estimates based on current economic and lending conditions. Fair value for significant nonperforming loans is based on carrying value which does not exceed recent external appraisals of any underlying collateral. 25 LOCKPORT SAVINGS BANK AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (12) Fair Value of Financial Instruments, Continued - --------------------------------------------------- Deposits -------- The fair value of deposits with no stated maturity, such as savings, money market, checking, as well as mortgagors' payments held in escrow, is equal to the amount payable on demand as of December 31, 1997 and 1996. The fair value of certificates of deposit is based on the discounted value of contractual cash flows, using rates currently offered for deposits of similar remaining maturities. Borrowed Funds -------------- The fair value of the Bank's borrowed funds is calculated by discounting scheduled cash flows through the estimated maturity using current market rates. Other Assets and Liabilities ---------------------------- The fair value of the Bank's accrued interest receivable on loans and investments and accrued interest payable to depositors approximates the carrying value because all interest is receivable or payable in 90 to 120 days. Commitments to Extend Credit ---------------------------- The fair value of the Bank's commitments to extend credit approximates the notional amount of the agreements because of the short-term (90 to 120 days) commitment period or because they reprice as market rates change. 26 LOCKPORT SAVINGS BANK AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (13) Plan of Reorganization and Stock Issuance - ---------------------------------------------- On September 15, 1997, the Board of Trustees of LSB unanimously adopted a Plan of Reorganization (the Plan) whereby LSB will be reorganized into a New York chartered two-tiered mutual holding company. The Reorganization will be accomplished in the following manner: (i) LSB will organize an interim stock savings bank as a wholly-owned subsidiary (Interim One); (ii) Interim One will organize an interim stock savings bank as a wholly-owned subsidiary (Interim Two); (iii) Interim One will organize Niagara Bancorp, Inc., (the Company) as a wholly-owned subsidiary; (iv) LSB will exchange its charter for a New York stock savings bank charter to become the Stock Bank and Interim One will exchange its charter for a New York mutual holding company charter to become the Mutual Holding Company ("MHC"); (v) simultaneously with step (iv), Interim Two will merge with and into the Stock Bank with the Stock Bank as the resulting institution; (vi) all of the initially issued stock of the Stock Bank will be transferred to the MHC in exchange for membership interests in the MHC; and (vii) the MHC will contribute the capital stock of the Stock Bank to the Company, and the Stock Bank will become a wholly-owned subsidiary of the Company. Contemporaneously with the Reorganization, the Company will offer for sale in the stock offering shares of common stock representing the pro forma market value of the Company and the Bank. Each savings account of LSB at the time of Reorganization will become a savings account in the newly- formed bank in the same amount and upon the same terms and conditions, except the holder of each such deposit account will have liquidation rights with respect to the MHC rather than the Bank. LSB has applied to the Federal Reserve Board, the New York State Banking Department, the FDIC and the SEC for approval of transactions contemplated by the Plan. The Plan authorizes the Company to offer stock in one or more stock offerings up to a maximum of 49% of the issued and outstanding shares of its common stock. The common stock will be offered on a priority basis to depositors, employee benefit plans of LSB, certain other eligible subscribers, the community and a charitable foundation to be established pursuant to the Plan. The Company proposes to fund the foundation by contributing a number of authorized but unissued shares of common stock or grants of cash, securities or other assets to the foundation, immediately following the conversion. Such contribution, once made, will not be recoverable by the Company or the Bank. The Company will recognize expense equal to the fair value of the stock, cash, securities or other assets in the quarter in which the contribution occurs, which is expected to be the first or second quarter of 1998. Such expense will reduce earnings and have a material impact on the Company's earnings for such quarter and for 1998. The costs of the Reorganization and offering will be deferred and reduce the proceeds from the shares sold in the offering. If the Reorganization and offering are not completed, all costs will be charged to expense. 27 EX-99.2 4 EXHIBIT 99.2 Exhibit 99.2 SELECTED FINANCIAL INFORMATION
DECEMBER 31, ------------------------------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (IN THOUSANDS) SELECTED FINANCIAL CONDITION DATA: - ---------------------------------- Total assets......................... $1,179,026 $1,093,358 $994,291 $916,185 $914,910 Loans, net........................... 635,396 598,486 535,971 474,191 421,061 Securities available for sale (1): Mortgage related securities......... 272,955 284,860 261,543 273,280 300,582 Other securities.................... 176,326 124,875 79,941 65,733 67,903 Securities held to maturity.......... 17,000 38,000 46,700 43,838 51,927 Deposits............................. 988,875 920,072 861,065 819,690 812,939 Other borrowed funds................. 33,717 32,008 -- -- -- Net worth............................ 130,471 115,664 107,653 81,322 87,195 YEAR ENDED DECEMBER 31, ------------------------------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (IN THOUSANDS) SELECTED OPERATIONS DATA: - ------------------------- Interest income...................... $ 82,363 $ 75,062 $ 69,856 $ 63,144 $ 61,681 Interest expense..................... 44,978 40,655 39,034(2) 31,754 32,597 ---------- ---------- --------- -------- -------- Net interest income................ 37,385 34,407 30,822 31,390 29,084 Provision for loan losses............ 1,493 2,187 1,016 948 1,522 ---------- ---------- --------- -------- -------- Net interest income after provision for loan losses.......... 35,892 32,220 29,806 30,442 27,562 ---------- ---------- --------- -------- -------- Fees and service charges............. 4,232 3,495 2,692 2,283 2,293 Net gain (loss) on sale of securities available for sale...... 910 576 1,477 (849) 3,601 Other operating income............... 1,654 1,681 1,237 952 1,149 ---------- ---------- --------- -------- -------- Total operating income............... 6,796 5,752 5,406 2,386 7,043 ---------- ---------- --------- -------- -------- Operating and other expenses......... 25,178 20,926 20,143 18,399 16,666 ---------- ---------- --------- -------- -------- Income before taxes and cumulative effect of change in accounting principle.......................... 17,510 17,046 15,069 14,429 17,939 Income taxes......................... 6,259 6,278 5,144 4,704 6,595 Cumulative effect of change in accounting principle............... -- -- -- (924)(3) 129(4) ---------- ---------- --------- -------- -------- Net income........................... $ 11,251 $ 10,768 $ 9,925 $ 8,801 $ 11,473 ========== ========== ========= ======== ========
___________________________ (1) The Bank adopted the provisions set forth in SFAS No. 115 on January 1, 1994, which requires securities available for sale to be carried at fair value. At December 31, 1993 securities held for sale were carried at amortized cost. (2) Includes $1.25 million paid as a special interest payment in 1995, which was paid on a prorata basis on all interest-bearing savings, NOW, money market and certificate of deposit accounts in recognition of the Bank's 125th anniversary. (3) Cumulative effect of change in accounting for postretirement health care and life insurance benefits. (4) Cumulative effect of change in accounting for income taxes.
AT OR FOR THE YEAR ENDED DECEMBER 31, ------------------------------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (IN THOUSANDS) SELECTED FINANCIAL RATIOS AND OTHER DATA (1): - --------------------------------------------- PERFORMANCE RATIOS: Return on assets (ratio of net income to average total assets).......... 0.98% 1.03% 1.04% 0.95% 1.31% Return on net worth (ratio of net income to average net worth)...... 9.20 9.84 10.25 10.41 14.01 Interest rate spread information: Average during period..................... 2.83 2.82 2.88 3.07 3.10 End of period............................. 2.87 3.03 2.83 3.18 3.04 Net interest margin (2)................... 3.37 3.38 3.44 3.50 3.49 Operating income to average total assets (3).................. 0.51 0.50 0.41 0.35 0.40 Operating expenses to average total assets...................... 2.20 2.01 2.10 1.99 1.92 Average interest-earning assets to average interest-bearing liabilities.. 113.42 113.93 113.92 112.30 109.95 ASSET QUALITY RATIOS: Non-performing loans to total loans........ 0.47% 0.78% 0.74% 0.89% 1.10% Non-performing assets to total assets...... 0.28 0.48 0.97 0.56 0.69 Allowance for loan losses to non- performing loans.......................... 227.14 138.60 119.01 99.29 88.61 Allowance for loan losses to total loans... 1.08 1.09 0.88 0.88 0.96 Net charge-offs during the period to average loans outstanding during the period.................................... 0.18% 0.06% 0.10% 0.17% 0.05% CAPITAL RATIOS: Net worth to total assets.................. 11.07% 10.58% 10.92% 8.88% 9.53% Average net worth to average assets........ 10.70 10.49 10.11 9.17 9.37 OTHER DATA: Number of full-service offices............. 15 13 11 10 10 Number of deposit accounts................. 144,415 129,087 122,464 114,464 107,242 Loans serviced for others.................. $ 152.5 $ 129.0 $ 110.4 $ 85.1 $ 69.5 (in millions) Residential loan originations.............. $ 108.2 $ 110.9 $ 107.6 $ 84.1 $ 134.5 (in millions) Full time equivalent employees............. 356.5 325.0 276.5 243.5 238.5
___________________________ (1) Averages presented are monthly averages. (2) Net interest income divided by average interest earning assets. (3) Operating income excludes net gain(loss) on sale of securities available for sale. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The following discussion should be read in conjunction with the consolidated financial statements and related notes. The Bank's results of operations are dependent primarily on net interest income, which is the difference between the income earned on our loan and securities portfolios and our cost of funds, consisting of the interest paid on deposits and borrowings. Results of operations are also affected by the provision for loan losses, securities and loan sale activities, loan servicing activities and service charges and fees collected on our deposit accounts. Our non-interest expense primarily consists of salaries and employee benefits, occupancy and equipment expense, federal deposit insurance premiums, marketing expenses and other expenses. Results of operations are also significantly affected by general economic and competitive conditions, particularly changes in interest rates, government policies and actions of regulatory authorities. COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1997 AND DECEMBER 31, 1996 Total assets increased by $85.7 million, or 7.8%, from $1.093 billion at December 31, 1996 to $1.179 billion at December 31, 1997. The growth in assets is primarily attributable to a $30.5 million increase in investment securities in the available for sale and held to maturity portfolios, a $44.1 million increase in real estate loans, and a $15.0 million increase in securities purchased under resale agreements. Asset growth was funded through deposit inflows resulting from the continued expansion of the Bank's branch network. The asset growth was partially offset by an $11.9 million decrease in mortgage related securities available for sale and a $7.6 million decrease in consumer loans resulting from a $12.5 million early repayment of the automobile lease portfolio. Debt, equity and asset-backed investment securities in the available for sale portfolio increased $51.5 million from December 31, 1996 to December 31, 1997. Substantially all of the increase in these securities was attributable to purchases of one- to three-year weighted average life, fixed-rate corporate bonds and asset-backed securities, as well as common stock of corporate issuers. While the rates earned on these securities is lower than rates earned on longer- term securities, the Bank's strategy was to shorten its interest rate risk exposure and obtain more consistent cash flows in this low rate, flat yield curve environment. Partially offsetting these increases in investment securities were $21.0 million of maturities in money market preferred stock in the held to maturity portfolio with the Bank reinvesting these liquid assets into securities purchased under resale agreements that earned slightly higher yields. Real estate loans increased from $524.4 million at December 31, 1996 to $568.5 million at December 31, 1997, primarily due to increased one- to four-family, bi-weekly residential mortgage loans, an enhanced home equity loan product, and increased originations in commercial real estate loans as the Bank continued to emphasize the expansion of real estate lending. Premises and equipment increased by $9.1 million, or 68.5%, primarily due to the construction of a new building which was occupied in August 1997 and provides office space for administrative functions and lending departments. At December 31, 1997, the Bank's allowance for loan losses as a percentage of total non-performing loans improved to 227.1%, compared to 138.6% at December 31, 1996, due to a slight increase in the allowance as well as a decrease in non-performing loans from $4.7 million at December 31, 1996 to $3.0 million at December 31, 1997. This decrease was attributable to repayments, writedowns to net realizable values and a settlement with a bankruptcy trustee. At December 31, 1997, the Bank's allowance for loan losses as a percentage of total loans was 1.08% compared to 1.09% at December 31, 1996. While management uses available information to recognize losses on loans, future loan loss provisions may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses and may require the Bank to recognize additional provisions based on their judgement of information available to them at the time of their examination. Total deposits at December 31, 1997 were $986.9 million, an increase of $66.8 million, or 7.3%, compared to $920.1 million at December 31, 1996. The increase was primarily due to the introduction of a new money market deposit account, which from a rate perspective competes against mutual fund money market accounts, and grew to $47.6 million by December 31, 1997. The Bank's certificates of deposit grew from $484.7 million at December 31, 1996 to $502.4 million at December 31, 1997. The increase in certificates of deposit was primarily attributable to the Bank's strategy of offering introductory rates on certain certificates of deposit whenever a new branch is opened, as was the case in both March and May of 1997. The Bank's borrowed funds increased $1.7 million, or 5.3%, from $32.0 million at December 31, 1996 to $33.7 million at December 31, 1997. In 1997, the Bank obtained two $5.0 million, fifteen year, amortizing FHLB borrowings, one in July 1997 at a rate of 6.59% and one in December 1997 at a rate of 6.37%. The increase in borrowed funds was offset by the repayment of a short-term FHLB advance of $7.0 million, which matured in early January. Other borrowings, primarily in the form of reverse repurchase agreements (repos), declined $1.2 million. These borrowings are used to fund the Bank's borrowing/reinvestment program which takes advantage of low rate short-term borrowings, typically three- to six- month repos, and invests in one-to two-year securities, primarily U.S. Treasury securities, to earn additional net interest income. The relatively flat yield curve in 1997 made it less attractive to enter into more borrowing/reinvestment transactions due to the very low interest rate spreads the Bank could earn. Net worth increased to $130.5 million at December 31, 1997 from $115.7 million at December 31, 1996. This increase was the result of net income of $11.3 million and a $3.5 million net unrealized gain on available for sale securities due to the lower market interest rates at December 31, 1997 which positively affected the market value of the Bank's available for sale securities portfolio. Average Balance Sheet The following table sets forth certain information relating to the Bank for the years ended December 31, 1997, 1996 and 1995. For the periods indicated, the total dollar amount of interest income from average interest-earning assets and the resultant yields, as well as the interest expense on average interest- bearing liabilities, is expressed both in dollars and rates. No tax equivalent adjustments were made. The average balance for federal funds sold and securities purchased under resale agreements is an average daily balance, while all other average balances are monthly averages. Non-accruing loans have been excluded from the yield calculations in this table.
YEAR ENDED DECEMBER 31, ------------------------------------------------------------------------------------------- 1997 1996 1995 ----------------------------- ----------------------------- ----------------------------- AVERAGE INTEREST AVERAGE INTEREST AVERAGE INTEREST OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/ BALANCE PAID RATE BALANCE PAID RATE BALANCE PAID RATE - -------------------------------------- ----------- -------- ------ ----------- -------- ------ ----------- -------- ------ (DOLLARS IN THOUSANDS) Interest-earning assets: Federal funds sold and securities purchased under resale agreements... $ 19,123 $ 1,079 5.64% $ 24,057 $ 1,293 5.37% $ 27,434 $ 1,647 6.00% Investment securities(1)............. 180,759 10,295 5.70 141,865 7,573 5.34 115,303 6,584 5.71 Mortgage related securities(1)....... 283,873 18,972 6.68 281,843 18,547 6.58 275,448 17,939 6.51 Loans (2)............................ 617,356 51,569 8.35 564,049 47,285 8.38 506,600 43,348 8.56 Other interest-earning assets (3).... 7,086 448 6.32 5,981 364 6.09 7,720 338 4.38 ---------- ------- ---------- ------- -------- ------- Total interest-earning assets..... 1,108,197 $82,363 7.43% 1,017,795 $75,062 7.37% 932,505 $69,856 7.49% ---------- ------- ---------- ------- -------- ------- Allowance for loan losses............. (6,495) (5,701) (4,436) Other noninterest-earning assets (4).. 45,336 34,894 32,548 ---------- ---------- -------- Total assets....................... $1,147,038 $1,046,988 $960,617 ========== ========== ======== Interest-bearing liabilities: Savings accounts (5)................. $ 301,932 $10,124 3.35% $ 307,530 $10,353 3.37% $326,125 $11,154 3.42% Interest-bearing checking (5)........ 129,303 3,681 2.85 105,717 2,871 2.72 96,551 2,909 3.01 Certificates of deposit (5).......... 508,964 29,426 5.78 455,230 26,432 5.81 386,648 23,546 6.09 Mortgagor's payments held in escrow.. 7,959 154 1.93 8,174 158 1.93 9,222 174 1.89 Other borrowed funds................. 28,878 1,593 5.52 16,674 841 5.04 - - - ---------- ------- ---------- ------- -------- ------- Total interest-bearing liabilities. 977,036 $44,978 4.60% 893,325 $40,655 4.55% 818,546 $37,783 4.61% ---------- ------- ---------- ------- -------- ------- Noninterest-bearing demand deposits... 27,497 26,248 26,658 Other noninterest-bearing liabilities. 19,660 17,873 15,332 ---------- ---------- -------- Total liabilities.................. 1,024,193 937,446 862,536 Net worth............................. 122,845 109,542 98,081 ---------- ---------- -------- Total liabilities and net worth.... $1,147,038 $1,046,988 $960,617 ========== ========== ======== Net interest income................... $37,385 $34,407 $32,073 ======= ======= ======= Net interest rate spread.............. 2.83% 2.82% 2.88% ====== ====== ====== Net earning assets.................... $ 131,161 $ 124,470 $113,959 ========== ========== ======== Net interest income as a percentage of average interest-earning assets... 3.37% 3.38% 3.44% ====== ====== ====== Ratio of average interest-earning assets to average interest-bearing liabilities.......................... 113.42% 113.93% 113.92% ====== ====== ======
___________________________ (1) Amounts shown are amortized cost. (2) Net of deferred loan fees and expenses, loan discounts, loans in process and non-accruing loans. (3) Includes Federal Home Loan Bank stock and interest-bearing demand accounts. (4) Includes unrealized gains/(losses) on securities available for sale. (5) Excludes $1.25 million paid for a special interest payment in 1995 which was approved by the Bank's board of trustees and paid on a pro rata basis on all interest-bearing savings, NOW, money market, and certificates of deposit accounts in recognition of the Bank's 125th anniversary. Rate/Volume Analysis The following table presents the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected the Bank'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 (changes in volume multiplied by prior rate); (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume); and (iii) the net change. The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.
YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------------------------------- 1997 VS. 1996 1996 VS. 1995 1995 VS. 1994 ------------------------------ ------------------------------ ------------------------------ INCREASE/(DECREASE) INCREASE/(DECREASE) INCREASE/(DECREASE) DUE TO TOTAL DUE TO TOTAL DUE TO TOTAL ------------------ INCREASE ------------------ INCREASE ------------------ INCREASE VOLUME RATE (DECREASE) VOLUME RATE (DECREASE) VOLUME RATE (DECREASE) -------- ------ ---------- -------- ------- ---------- -------- ------ ---------- (IN THOUSANDS) Interest-earning assets: Federal funds sold and securities purchased under resale agreements............. $ (277) $ 63 $ (214) $ (190) $ (164) $ (354) $ 332 $ 467 $ 799 Investment securities.......... 2,187 535 2,722 1,441 (452) 989 (472) 738 266 Mortgage related securities.... 134 291 425 419 189 608 (1,698) 1,363 (335) Loans.......................... 4,454 (170) 4,284 4,830 (893) 3,937 4,925 719 5,644 Other interest-earning assets........................ 69 15 84 (88) 114 26 338 0 338 ------ ----- ------ ------ ------- ------ ------- ------ ------- Total interest-earning assets..................... 6,567 734 7,301 6,412 (1,206) 5,206 3,425 3,287 6,712 ====== ===== ====== ====== ======= ====== ======= ====== ======= Interest-bearing liabilities: Savings accounts............... (188) (41) (229) (628) (173) (801) (2,973) 1,258 (1,715) Interest-bearing checking...... 666 144 810 263 (301) (38) 296 330 626 Certificates of deposit........ 3,107 (113) 2,994 4,022 (1,136) 2,886 5,969 1,134 7,103 Mortgagors' payments held in escrow..................... (4) 0 (4) (20) 4 (16) 14 1 15 Other borrowed funds........... 667 85 752 841 - 841 - - 0 ------ ----- ------ ------ ------- ------ ------- ------ ------- Total interest-bearing liabilities................ $4,248 $ 75 $4,323 $4,478 $(1,606) $2,872 $ 3,306 $2,723 $ 6,029 ====== ===== ====== ====== ======= ====== ======= ====== ======= Net interest income.............. $2,978 $2,334 $ 683 ====== ====== =======
Calculations for the above table exclude $1.25 million paid as a special interest payment in 1995, which was paid on a pro rata basis on all interest- bearing savings, NOW, money market and certificates of deposit accounts in recognition of the Bank's 125th anniversary. COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1996. General. The earnings of the Bank depend primarily on its level of net interest income, which is the difference between interest earned on interest- earning assets, consisting primarily of residential and commercial real estate loans, consumer loans, securities available for sale and securities held to maturity, and the interest paid on interest-bearing liabilities, consisting primarily of deposits and other borrowed funds. Net interest income is a function of the Bank's interest rate spread, which is the difference between the average yield earned on interest-earning assets and the average rate paid on interest-bearing liabilities, as well as a function of the average balance of interest-earning assets as compared to interest-bearing liabilities. The Bank's earnings also are affected by its level of service charges and gains on sale of loans and securities, as well as its level of operating and other expenses, including salaries and employee benefits, occupancy and equipment costs, and marketing and advertising costs. Net income for the year ended December 31, 1997 increased by $483,000, or 4.5%, from $10.8 million for the year ended December 31, 1996 to $11.3 million in 1997. The increase was due primarily to an increase in interest income which resulted from an increase in the average balance of interest- earning assets, as well as an increase in other operating income related to fees and service charges on deposits, increased gains on the sale of securities available for sale, and lower provisions for loan losses. The increases were partially offset by increased interest expense which resulted primarily from an increase in average interest-bearing liabilities and an increase in operating and other expenses reflecting the expansion of the Bank's branch network. Interest Income. Interest income increased by $7.3 million, or 9.7%, to $82.4 million for the year ended December 31, 1997 from $75.1 million for the year ended December 31, 1996. The increase was primarily due to a $4.3 million increase in income from loans, a $2.7 million increase in income from investment securities, and a $425,000 increase in income from mortgage related securities. These increases were partially offset by a $214,000 decrease in income from federal funds sold and securities purchased under resale agreements. The increase in income from loans was attributable to a $53.4 million increase in the average balance of loans to $617.4 million from $564.0 million, partially offset by a 3 basis point decrease in the average yield on loans from 8.38% to 8.35%. The continued origination and portfolio growth of the Bank's one- to four-family real estate loans was primarily responsible for the loan growth. The increase in income from investment securities was attributable to a $38.9 million increase in the average balance of investment securities to $180.8 million from $141.9 million, and a 36 basis point increase in the average yield on investment securities to 5.70% from 5.34%. The Bank invested in U.S. Treasury securities and asset-backed securities during 1997 to take advantage of their short-term structure and higher yields which increased the Bank's overall yield on its investment securities. The increase in income from mortgage related securities was attributable to a $2.1 million increase in the average balance of mortgage related securities. During the year as interest rates fluctuated the Bank took the opportunity to invest in CMO's, 5-year and 7-year balloons, and 30-year mortgage related securities to obtain yields between 6.47% and 7.40% and increased the Bank's overall yield on its mortgage related securities. The decrease in income from federal funds sold and securities purchased under resale agreements was partially due to a $4.9 million decrease in the average balance of these short-term investments resulting from the Bank's redeployment of excess funds into loans and investment securities. In 1997, the Bank began entering into higher yielding securities purchased under resale agreements with various large securities dealers which grew to $15.0 million by year end. The average yield on federal funds sold and securities purchased under resale agreements increased 27 basis points from 5.37% in 1996 to 5.64% in 1997. Interest Expense. Interest expense increased by $4.3 million, or 10.6%, to $45.0 million for the year ended December 31, 1997 from $40.7 million for the year ended December 31, 1996. This increase was the result of an $83.7 million increase in the average balance of interest-bearing liabilities in the 1997 period compared to the 1996 period, and a 5 basis point increase in the average rate paid on such liabilities over the same period. In particular, the increase resulted primarily from a $3.0 million increase in interest expense on certificates of deposit, a $752,000 increase in interest expense on other borrowings, and a $810,000 increase in interest expense on interest-bearing checking accounts. These increases were partially offset by a $229,000 decrease in interest expense on savings accounts. The increase in interest expense attributable to certificates of deposit resulted from a $53.8 million increase in the average balance of certificates of deposit to $509.0 million in 1997 from $455.2 million in 1996, which was partially offset by a 3 basis point decrease in the average cost of certificates of deposit from 5.81% to 5.78%. The rate decline reflects the slightly lower interest rate environment during 1997, as well as the results of the Bank closely monitoring maturing certificates of deposit with high rates and promoting alternative certificates of deposit to lower the overall rate paid on these accounts. Two new branch openings in early 1997 and one new branch opening in late 1996 contributed to the large increase in average certificates of deposit balances. The increase in interest expense attributable to other borrowings resulted from a $12.2 million increase in the average balance of other borrowings to $28.9 million in 1997 from $16.7 million in 1996. The Bank continues to implement a borrowing/reinvestment program which utilizes reverse repurchase agreements to fund investments in securities as long as such agreements are a cost effective source of funds. Also contributing to the increase in interest expense on borrowings was a 48 basis point increase in the average borrowing cost to 5.52% from 5.04% which resulted from borrowing costs associated with FHLB advances that were obtained by the Bank in 1997. However, as short-term interest rates increased and the yield curve flattened in 1997, the rates being paid on these borrowings increased and the spread earned on the related investments began to narrow, thus reducing the attractiveness of these transactions. The increase in interest expense attributable to interest- bearing checking accounts resulted from a $23.6 million increase in the average balance of interest-bearing checking accounts to $129.3 million in 1997 from $105.7 million in 1996, and a 13 basis point increase in the average cost of interest-bearing checking accounts to 2.85% from 2.72%. Contributing most significantly to these increases was the introduction in June 1997 of a new money market deposit account product that contributed $16.4 million of the total increase in the average balance of interest-bearing checking accounts. The decrease in interest expense attributable to savings accounts resulted from a $5.6 million decrease in the average balance of total savings accounts to $301.9 million from $307.5 million, and a 2 basis point decrease in the average cost of savings accounts to 3.35% from 3.37%. Provision for Loan Losses. The Bank establishes provisions for loan losses, which are charged to operations, in order to maintain the allowance for loan losses at a level sufficient to absorb future charge-offs of loans deemed uncollectible. In determining the appropriate level of the allowance for loan losses, management considers past and anticipated loss experience, evaluations of real estate collateral, current and anticipated economic conditions, volume and type of lending and the levels of non-performing and other classified loans. The amount of the allowance is based on estimates and the ultimate losses may vary from such estimates. Management of the Bank assesses the allowance for loan losses on a quarterly basis. The Bank provided $1.5 million and $2.2 million in loan loss provisions during the years ended December 31, 1997 and December 31, 1996, respectively. During 1996, management provided $800,000 for potential losses on approximately $1.8 million of loans to a borrower that had filed for bankruptcy protection. The Bank charged-off $496,000 of this loan during 1997 after a settlement was reached with the bankruptcy trustee. This amount contributed to the increase in the net charge-offs to average loans outstanding to .18% from .06% during 1997 and 1996, respectively. Operating Income. Operating income includes fee income and service charges and gains from the sale of loans and securities. Total operating income was $6.8 million for the year ended December 31, 1997, a $1.0 million, or 18.2% increase from $5.8 million for the year ended December 31, 1996. The primary reasons for the improvement were net gains of $910,000 on the sale of securities available for sale during 1997 compared to $576,000 in 1996, reflecting the Bank's desire to realize some of the gains, primarily on marketable equity securities, which occurred in 1997 as a result of the strong performance of the stock market. Bank service charges and fees on deposit accounts increased $617,000 for the year ended December 31, 1997 to $3.1 million from $2.5 million for the year ended December 31, 1996. This increase was primarily the result of increased fee income of $212,000 on the Bank's debit card which was introduced in 1995 and continues to see significant growth in customer acceptance and usage. In addition, service charges and charges for insufficient funds on checking accounts increased $363,000 from December 31, 1996 to December 31, 1997 as a result of the Bank's continued promotion of its low fee checking account products. Loan origination and servicing fees increased $120,000 for the year ended December 31, 1997 to $1.1 million from $1.0 million for 1996. Operating and Other Expenses. Operating and other expenses increased by $4.3 million, or 20.3%, to $25.2 million for the year ended December 31, 1997 from $20.9 million for the year ended December 31, 1996. The increase was due to a $1.7 million increase in other expenses, a $1.6 million increase in salaries and employee benefits, a $571,000 increase in occupancy and equipment, a $213,000 increase in network interchange fees, a $119,000 increase in deposit insurance and a $43,000 increase in marketing and advertising. Other expenses increased to $5.6 million for the year ended December 31, 1997 from $3.9 million for the year ended December 31, 1996. The December 31, 1996 total reflects the benefit recognized for the reversal of a $600,000 provision for possible loss on demand deposit balances held at Nationar, Inc. ("Nationar"), which had originally been made in 1995. (See the comparison of operating results for fiscal years 1996 and 1995). Without this reversal, the net increase in other expenses would have been $1.1 million, which includes professional fees associated with the implementation of various tax planning strategies, additional charitable contributions, additional costs incurred as a result of the growth in the number of checking accounts, and expenses associated with the anticipated settlement of a real estate tax escrow lawsuit. Salaries and employee benefits increased to $13.1 million for the year ended December 31, 1997 from $11.5 million for 1996, as a result of an additional 31.5 full time equivalent employees hired at the four new branch locations opened by the Bank since August of 1996 as well as normal merit and promotional salary increases. The depreciation and building expenses associated with these new branches as well as with the Bank's new administrative center contributed to the increase in occupancy and equipment to $3.7 million for the year ended December 31, 1997 from $3.2 million for 1996. Included in occupancy and equipment is $573,000 of depreciation on the furniture and equipment and leasehold improvements for the new facilities and $327,000 of building-related operating expenses. Occupancy and equipment also reflects approximately $95,000 of technology equipment writedowns related to the Bank's continued upgrading of its technology, communications and information systems, primarily personal computers and related software. Network interchange fees increased to $1.2 million for the year ended December 31, 1997 from $984,000 for 1996 reflecting the costs associated with the continued growth in the number of customer transactions performed utilizing the Bank's debit card product. Deposit insurance increased to $121,000 for the year ended December 31, 1997 from $2,000 in 1996, resulting from the FDIC's decision to raise the assessment for deposit insurance in 1997 to $0.013/per one hundred dollars of deposits from the minimal assessment in 1996. Income Taxes. Income tax expense was $6.3 million for the years ended December 31, 1997 and December 31, 1996. The effective tax rate decreased from 36.8% for 1996 to 35.8% for 1997 reflective of the implementation of various tax planning strategies during the second half of 1997. COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND DECEMBER 31, 1995 General. Net income for the year ended December 31, 1996 of $10.8 million increased by $843,000, or 8.5%, from $9.9 million for the year ended December 31, 1995. The increase was due primarily to an increase in interest income which primarily resulted from an increase in the average balance of interest-earning assets and an increase in other operating income related to fees and service charges on deposits. The increases were partially offset by increased interest expense which resulted primarily from an increase in average interest-bearing liabilities, decreased gains on the sale of securities available for sale, higher provisions for loan losses, increases in operating and other expenses, and increased income taxes. Interest Income. Interest income increased by $5.2 million, or 7.5%, to $75.1 million in 1996 from $69.9 million in 1995, due to a $3.9 million increase in income from loans, a $989,000 increase in income from investment securities, and a $608,000 increase in income from mortgage related securities. These increases were partially offset by a $354,000 decrease in income from federal funds sold. The increase in income from loans was attributable to a $57.4 million increase in the average balance of loans to $564.0 million from $506.6 million, partially offset by an 18 basis point decrease in the average yield from 8.56% to 8.38%. The origination and portfolio growth of the Bank's one- to four-family real estate loans was responsible for over 64% of the total loan growth. However, since interest rates decreased throughout 1995, refinancings increased during the last quarter of 1995 and into early 1996 which lowered the total portfolio yield in 1996. The increase in income from investment securities was attributable to a $26.6 million increase in the average balance of investment securities to $141.9 million from $115.3 million, partially offset by a 37 basis point decrease in the average yield on investment securities to 5.34% from 5.71%. This decrease in yield resulted from high coupon municipal bonds being called during the second half of 1995 as well as a decrease in the yield on the Bank's asset-backed securities from 6.28% to 5.78% resulting from the declining rate environment. The $989,000 increase in 1996 interest income was the result of the development of a five year laddered portfolio of U.S. Treasury securities and the start-up of the Bank's borrowing/reinvestment program which was initiated in 1996 and mainly invested in two year U.S. Treasury securities. The increase in income from mortgage related securities was attributable to a $6.4 million increase in the average balance of mortgage related securities to $281.8 million from $275.4 million, and a 7 basis point increase in the average yield on mortgage related securities to 6.58% from 6.51%. The $608,000 increase in 1996 interest income is attributable to the repositioning of the Bank's mortgage related securities in early 1996 to achieve a higher yielding portfolio. The decrease in income from federal funds sold was due to a $3.3 million decrease in the average balance of federal funds sold to $24.1 million from $27.4 million, and a 63 basis point decrease in the yield on the Bank's federal funds sold to 5.37% from 6.00%. This decrease was the result of our continuing deployment of excess funds, mainly in investment securities. Interest Expense. Interest expense increased by $1.7 million, or 4.2%, to $40.7 million for the year ended December 31, 1996 from $39.0 million for the year ended December 31, 1995. Interest expense for the year ended December 31, 1995 includes a special interest payment of $1.25 million paid in connection with our 125th anniversary. Excluding this special interest payment, interest expense increased by $2.9 million, or 7.6%, to $40.7 million from $37.8 million for the prior year. Overall, the average balance of interest-bearing liabilities increased by $74.8 million in 1996, while the average rate paid on these liabilities decreased 6 basis points since year end 1995. In particular, this increase resulted primarily from a $2.9 million increase in interest expense on certificates of deposit, and an $841,000 increase in interest expense on other borrowings. These were partially offset by an $801,000 decrease in interest expense on savings accounts and a decrease of $38,000 in interest expense on interest-bearing checking accounts. The increase in interest expense attributable to certificates of deposit resulted from a $68.6 million increase in the average balance of certificates of deposit to $455.2 million in 1996 from $386.6 million in 1995 which was partially offset by a 28 basis point decrease in the average cost of certificates of deposit to 5.81% from 6.09%. The Bank's customers continued to move deposits from core savings accounts into certificates of deposit as a result of the higher rates being paid on certificates of deposit. The Bank benefitted from $19.0 million of matured 9% to 10% interest-bearing certificates of deposit which occurred in early 1996 and helped to reduce the Bank's overall cost of funds. The increase in interest expense on other borrowings was due to the Bank's average borrowings of $16.7 million during 1996, as compared to no borrowings during 1995. The Bank's first FHLB advance, a 5-year advance, was recorded in January 1996 when interest rates declined to their lowest point since late 1993. In addition, the Bank initiated a short-term borrowing/reinvestment program during 1996 which included borrowings with reverse repurchase agreements and corresponding investments mainly in short-term U.S. Treasury securities. By year end 1996, the Bank had averaged over $11.1 million in reverse repurchase agreements. The decrease in interest expense attributable to savings accounts was due to an $18.6 million decrease in the average balance of total savings accounts to $307.5 million in 1996 from $326.1 million in 1995, and a 5 basis point decrease in the average cost of savings accounts to 3.37% from 3.42%. Provision for Loan Losses. The Bank's provision for loan losses increased by $1.2 million, from $1.0 million for the year ended December 31, 1995 to $2.2 million for the year ended December 31, 1996. The increase in the provision was due primarily to management's assessment of the potential losses that ultimately would be recognized on the $1.8 million of loans to a borrower that had filed for bankruptcy protection. The increase is also reflective of management's objective to increase the allowance for loan losses as a percentage of total loans due to the growth in the loan portfolios. Operating Income. Total operating income was $5.8 million for the year ended December 31, 1996, a $346,000, or 6.4%, increase from $5.4 million for the year ended December 31, 1995. Banking service charges and fees on deposit accounts increased $631,000 for the year ended December 31, 1996, from $1.8 million for 1995 to $2.5 million for 1996. The increase was primarily attributable to a $222,000 increase in fees charged for insufficient funds on the Bank's checking accounts resulting from modifications to the Bank's insufficient funds policy, $220,000 in additional revenue generated because of the increased usage of the Bank's new debit card product, and $138,000 of additional service charges received due to the growth in the Bank's interest- bearing checking accounts. Loan origination and servicing fees increased $172,000 for the year ended December 31, 1996, to $1.0 million from $855,000 for 1995, reflective of the Bank's increased loan origination activity. Additionally, all other operating income increased $444,000, from $1.2 million for 1995 to $1.7 million for 1996. This increase was primarily due to an additional $218,000 of commissions received on increased sales of annuity products during 1996. The 1995 amount also includes a $200,000 write-off charged to operations in connection with the Bank's investments in real estate development projects. These increases were partially offset by a $901,000 decline in net gains on the sale of securities available for sale from $1.5 million during 1995 to $576,000 during 1996 due to the market driven reduced sales opportunities in 1996. Operating and Other Expenses. Operating and other expenses increased by $783,000, or 3.9%, to $20.9 million for the year ended December 31, 1996 from $20.1 million for the year ended December 31, 1995. The increase was due to a $1.8 million increase in salaries and employee benefits, a $543,000 increase in occupancy and equipment, a $377,000 increase in marketing and advertising and a $107,000 increase in network interchange fees. These increases were partially offset by a $981,000 decrease in deposit insurance and a $1.0 million decrease in other expenses. Salaries and employee benefits increased to $11.5 million for 1996 from $9.7 million for 1995. Occupancy and equipment expenses increased to $3.2 million in 1996 from $2.6 million for 1995. Both expense categories were impacted by the opening of two new branch locations during 1996. Besides the costs related to expansion, salaries and employee benefits and occupancy and equipment reflects the first full year of operating costs related to the 1995 start up and implementation of the Bank's new item processing center and telephone service center. The item processing center, designed to be the first area bank to utilize imaging technology, was established to perform check clearing and statement rendering functions previously outsourced to a third party. The telephone service center was established to enhance the Bank's retail delivery system by minimizing the number of telephone calls into the branches thereby enabling branch personnel to focus on more personalized service and cross selling opportunities to branch walk-in customers. The increase in marketing and advertising, to $1.4 million for 1996 from $978,000 for 1995, was attributable to the Bank's efforts to expand its marketing coverage area to include localities where the Bank had opened new branches, primarily in Erie County. The significant decrease in deposit insurance, from $983,000 for 1995 to $2,000 for 1996, reflects the FDIC's decision to lower the insurance premiums paid by BIF-insured institutions to the legal minimum effective January 1, 1996. The Bank's "well capitalized" risk classification allowed the Bank to pay the minimum annual assessment during 1996. Other operating expenses decreased from $5.0 million for 1995 to $3.9 million for 1996. The significant decrease was related to circumstances involving the Bank's relationship with Nationar. On February 6, 1995, the Superintendent of Banks for the State of New York seized Nationar, a checking- clearing and trust company, placing it in receivership, and freezing all of its assets. The Bank and its Savings Bank Life Insurance affiliate had $5.8 million of demand deposits at Nationar frozen by this action. Since there were numerous uncertainties regarding the total amount of claims filed against Nationar, the priorities thereof, the proceeds remaining after disposition of assets and the ultimate cost of the liquidation, management believed there to be reasonable likelihood that the Bank would not recover all amounts due it from Nationar. Because of these uncertainties, a $600,000 loss provision was reflected in other operating expenses for 1995. However, during 1996 the Bank received all funds due from Nationar and therefore reversed the allowance with the benefit reflected as a reduction in other operating expenses. Income Taxes. Income tax expense was $6.3 million for the year ended December 31, 1996 compared to $5.1 million for the year ended December 31, 1995. The effective tax rate increased from 34.1% for 1995 to 36.8% for 1996, primarily related to a decrease in tax-exempt income and an increase in the valuation allowance on its deferred tax assets. SUPPLEMENTARY TABLES Regulatory Capital. The table below sets forth the Bank's capital position relative to its regulatory capital requirements at December 31, 1997. The definitions of the terms used in the table are those provided in the capital regulations issued by the FDIC.
AT DECEMBER 31, 1997 -------------------- PERCENT OF AMOUNT ASSETS (1) -------- ---------- (DOLLARS IN THOUSANDS) Leverage Capital: Capital level........................... $127,999 10.96% Requirement (2)......................... 35,050 3.00 -------- ----- Excess................................. $ 92,949 7.96% ======== ===== Risk-based capital: Tier 1 capital level.................... $127,999 20.69% Requirement............................. 24,745 4.00 -------- ----- Excess................................. $103,254 16.69% ======== ===== Total capital level..................... $134,920 21.81% Requirement............................. 49,490 8.00 -------- ----- Excess................................. $ 85,430 13.81% ======== =====
__________________________ (1) Leverage capital levels are shown as a percentage of tangible assets. Risk-based capital levels are calculated on the basis of a percentage of risk-weighted assets. (2) The current leverage capital requirement is 3% of total adjusted assets for banks that receive the highest supervisory rating for safety and soundness and that are not experiencing or anticipating significant growth. The current leverage capital ratio applicable to all other banks is 4% to 5%. See "Regulation - Regulatory Capital Requirements." Allocation of Allowance for Loan Losses. The following table sets forth the allocation of the allowance for loan losses by category at December 31, 1997.
AMOUNT PERCENT OF OF ALLOWANCE LOANS IN EACH FOR LOAN CATEGORY TO LOSSES TOTAL LOANS ------ ----------- (DOLLARS IN THOUSANDS) Real Estate Loans: One- to four-family................. $ 443 61.96% Home equity......................... 33 2.12 Commercial and multi-family......... 390 24.46 Consumer and other................... 359 10.70 Commercial business.................. 218 0.76 Unallocated.......................... 5,478 -- ------ ------ Total allowance for loan losses.... $6,921 100.00% ====== ======
Loan Portfolio Composition. Set forth below is selected information concerning the composition of the Bank's loan portfolio in dollar amounts and in percentages (before deductions for deferred fees and costs, unearned discounts and allowances for losses) as of the dates indicated.
AT DECEMBER 31, --------------------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 ----------------- ----------------- ----------------- ----------------- ----------------- AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT -------- ------- -------- ------- -------- ------- -------- ------- -------- ------- (DOLLARS IN THOUSANDS) Real Estate Loans: - --------------------------- One- to four-family...... $392,846 61.47% $360,573 59.85% $319,340 59.31% $277,010 58.12% $248,324 58.66% Home equity.............. 13,587 2.13 11,337 1.88 10,234 1.90 10,729 2.25 10,832 2.56 Multi-family............. 74,049 11.59 71,397 11.85 71,489 13.28 66,972 14.05 59,943 14.16 Commercial real estate... 77,217 12.08 68,601 11.38 62,005 11.52 55,946 11.74 42,326 10.00 Construction (1)......... 10,791 1.69 12,493 2.07 7,891 1.47 3,454 0.72 6,910 1.63 -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Total real estate loans. 568,490 88.96 524,401 87.03 470,959 87.48 414,111 86.88 368,335 87.01 -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Consumer and Other Loans: - --------------------------- Consumer Loans: Mobile home............. 22,747 3.56 21,406 3.55 20,630 3.83 20,662 4.33 19,785 4.68 Vehicle................. 7,306 1.14 18,747 3.11 12,591 2.34 9,391 1.97 7,275 1.72 Personal................ 15,157 2.37 13,596 2.26 11,485 2.13 10,213 2.14 8,402 1.98 Home improvement........ 7,609 1.19 6,879 1.14 7,046 1.31 6,517 1.37 6,028 1.42 Other consumer.......... 1,874 0.29 1,937 0.32 1,698 0.32 1,841 0.39 2,059 0.49 Guaranteed student...... 10,975 1.72 10,702 1.78 9,874 1.83 9,951 2.09 8,123 1.92 -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Total consumer loans... 65,668 10.27 73,267 12.16 63,324 11.76 58,575 12.29 51,672 12.21 Commercial business loans.. 4,893 0.77 4,895 0.81 4,085 0.76 3,948 0.83 3,321 0.78 -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Total loans 639,051 100.00% 602,563 100.00% 538,368 100.00% 476,634 100.00% 423,328 100.00% ======== ====== ======== ====== ======== ====== ======== ====== ======== ====== Net deferred costs.... 3,380 2,809 2,349 1,749 1,763 Unearned discounts.... (114) (347) (39) -- -- Allowance for losses.. (6,921) (6,539) (4,707) (4,192) (4,030) -------- -------- -------- -------- -------- Loans, net............ $635,396 $598,486 $535,971 $474,191 $421,061 ======== ======== ======== ======== ========
_____________________ (1) Includes loans for the construction of one-to-four family residential, multi-family and commercial real estate properties. At December 31, 1997, construction loans included $4,194,000 of one- to four-family loans and $6,597,000 of commercial real estate and multi-family loans. Loan Maturity and Repricing Schedule. The following table sets forth certain information as of December 31, 1997, regarding the amount of loans maturing or repricing in the Bank's portfolio. Demand loans having no stated schedule of repayment and no stated maturity, and overdrafts are reported as due in one year or less. 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 WITHIN THROUGH THROUGH THROUGH THROUGH BEYOND ONE THREE FIVE TEN TWENTY TWENTY YEAR YEARS YEARS YEARS YEARS YEARS TOTAL -------- ------- ------- ------- -------- ------- -------- (IN THOUSANDS) Real Estate Loans: One- to four-family...... $ 86,886 $10,681 $ 6,591 $27,965 $188,600 $72,123 $392,846 Home equity............... 9,101 155 701 2,028 1,602 -- 13,587 Multi-family.............. 31,542 20,924 20,810 217 556 -- 74,049 Commercial................ 20,646 25,786 17,210 11,021 2,554 -- 77,217 Construction.............. 6,374 422 277 1,974 572 1,172 10,791 -------- ------- ------- ------- -------- ------- -------- Total real estate loans.. 154,549 57,968 45,589 43,205 193,884 73,295 568,490 -------- ------- ------- ------- -------- ------- -------- Consumer and other loans 17,353 8,742 10,271 11,527 17,627 148 65,668 Commercial business loans 3,443 293 291 662 -- 204 4,893 -------- ------- ------- ------- -------- ------- -------- Total loans $175,345 $67,003 $56,151 $55,394 $211,511 $73,647 $639,051 ======== ======= ======= ======= ======== ======= ========
Fixed- and Adjustable-Rate Loan Schedule. The following table sets forth at December 31, 1997 the dollar amount of all fixed-rate and adjustable-rate loans due after December 31, 1998. Adjustable- and floating-rate loans are included based on the period in which interest rates are next scheduled to adjust rather than the period in which the final contractual repayment is due.
DUE AFTER DECEMBER 31, 1998 -------------------------------- FIXED ADJUSTABLE TOTAL ----- ---------- ----- (IN THOUSANDS) Real Estate Loans: One- to four-family.................. $293,940 $12,020 $305,960 Home equity.......................... 4,486 -- 4,486 Multi-family......................... 9,507 33,000 42,507 Commercial........................... 11,846 44,725 56,571 Construction......................... 2,034 2,383 4,417 -------- ------- -------- Total real estate loans.......... 321,813 92,128 413,941 -------- ------- -------- Consumer and other loans............... 48,315 -- 48,315 Commercial business loans.............. 1,450 -- 1,450 -------- ------- -------- Total loans....................... $371,578 $92,128 $463,706 ======== ======= ========
Loan Activities. The following table sets forth the loan origination, purchase and repayment activities of the Bank for the periods indicated.
YEAR ENDED DECEMBER 31, ----------------------------- 1997 1996 1995 -------- --------- -------- Originations by Type: - --------------------- Real estate: One- to four-family...................................... $108,222 $110,894 $107,618 Home equity.............................................. 3,155 1,357 852 Commercial and multi-family.............................. 28,176 27,168 24,880 Consumer and other......................................... 26,172 31,688 25,053 Commercial business........................................ 6,000 5,972 2,767 -------- -------- -------- Total loans originated.................................. 171,725 177,079 161,170 -------- -------- -------- Purchases: - ---------- Real estate: Commercial and multi family.............................. 5,127 - - Sales: - ------ Real estate: One- to four- family..................................... 33,764 26,148 30,141 Consumer and other......................................... 5,457 4,749 4,948 -------- -------- -------- Total loans sold........................................ 39,221 30,897 35,089 -------- -------- -------- Repayments: - ----------- Real estate: One- to four-family...................................... 43,518 42,323 32,959 Home equity.............................................. 905 254 1,347 Commercial and multi-family.............................. 21,983 17,066 11,716 Consumer and other......................................... 29,387(1) 16,247 15,141 Commercial business........................................ 5,444 5,169 2,630 -------- -------- -------- Total repayments........................................ 101,237 81,059 63,793 -------- -------- -------- Total reductions........................................ 140,458 111,956 98,882 Increase (decrease) in other items, net (2)................. 898 (776) 7 -------- -------- -------- Net increase............................................ $ 37,292 $ 64,347 $ 62,295 ======== ======== ========
______________________________ (1) Includes the early repayment of loans secured by pledges and assignments of automobile leases. (2) Other items include charge-offs, deferred fees and expenses, and discounts and premiums. Loan Delinquencies. The following table sets forth delinquencies in the Bank's loan portfolio as of the dates indicated. When a loan is delinquent 90 days or more, the Bank fully reverses all accrued interest thereon and ceases to accrue interest thereafter. For all the dates indicated, the Bank did not have any material restructured loans within the meaning of SFAS 114.
AT DECEMBER 31, 1997 AT DECEMBER 31, 1996 ------------------------------------------ ----------------------------------------- 60-89 DAYS 90 DAYS OR MORE 60-89 DAYS 90 DAYS OR MORE --------------------- ------------------- -------------------- ------------------- PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS ---------- --------- -------- --------- -------- ---------- -------- --------- (DOLLARS IN THOUSANDS) One- to four-family...................... 9 $385 20 $1,126 9 $373 17 $ 473 Home equity.............................. 2 35 - - 1 13 1 58 Commercial real estate and multi-family.. 1 63 8 1,364 -- -- 8 1,822 Consumer and other....................... 52 290 79 235 73 296 89 257 Commercial business...................... 1 5 13 322 -- -- 13 2,108 ---------- --------- -------- --------- -------- ---------- -------- --------- Total................................... 65 $778 120 $3,047 83 $682 128 $4,718 ========== ========= ======== ========= ======== ========== ======== ========= Delinquent loans to total loans (1) (2).. 0.12% 0.47% 0.11% 0.78% ========= ========= ========== ========= AT DECEMBER 31, 1995 AT DECEMBER 31, 1994 ------------------------------------------ ---------------------------------------------- 60-89 DAYS 90 DAYS OR MORE 60-89 DAYS 90 DAYS OR MORE --------------------- ------------------- -------------------- ------------------------ PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS ---------- --------- -------- --------- -------- ---------- -------- -------------- (DOLLARS IN THOUSANDS) One- to four-family...................... 6 $147 25 $1,100 16 $ 344 17 $ 715 Home equity.............................. 2 21 1 34 4 86 1 12 Commercial real estate and multi-family.. -- -- 10 2,436 2 613 9 3,133 Consumer and other....................... 70 212 60 166 29 108 39 117 Commercial business...................... -- -- 1 219 -- -- 1 245 ---------- --------- -------- --------- -------- ---------- -------- -------------- Total................................... 78 $380 97 $3,955 51 $1,151 67 $4,222 ========== ========= ======== ========= ======== ========== ======== ============== Delinquent loans to total loans (1) (2).. 0.07% 0.74% 0.24% 0.89% ========= ========= ========== ==============
__________________________________ (1) Total loans include principal balance net of the deferred loan fees and expenses and unamortized premiums and discounts. (2) Excludes loans that had matured and as to which the Bank had not formally extended the maturity date. Regular principal and interest payments continued in accordance with the original terms of the loan. The Bank continued to accrue interest on these loans as long as regular payments received were less than 90 days delinquent. These loans totaled $3.9 million, $3.1 million and $2.7 million at December 31, 1996, 1995 and 1994, respectively. There were no such loans 90 days past the maturity date as of December 31, 1997. Non-Accrual Loans and Non-Performing Assets. The following table sets forth information regarding nonaccrual loans and other non-performing assets.
AT DECEMBER 31, ------------------------------------------ 1997 1996 1995 1994 1993 ------ ------ ------ ------ ------ (Dollars in thousands) Non-accruing loans (1): One- to four-family.................................. $1,126 $ 473 $1,100 $ 715 $ 689 Home equity.......................................... -- 58 34 12 9 Commercial real estate and multi-family.............. 1,364 1,822 2,436 3,133 3,611 Consumer and other................................... 235 257 166 117 140 Commercial business.................................. 322 2,108 219 245 99 ------ ------ ------ ------ ------ Total............................................... 3,047 4,718 3,955 4,222 4,548 ------ ------ ------ ------ ------ Non-performing assets: Other real estate owned (2): One- to four-family.................................. 21 155 -- -- 15 Commercial real estate and multi-family.............. 202 162 257 259 922 Other non-performing assets: Investments in affiliates............................ -- 157 264 629 789 Nationar receivable (3).............................. -- -- 5,053 -- -- ------ ------ ------ ------ ------ Total............................................... 223 474 5,574 888 1,726 ------ ------ ------ ------ ------ Total non-performing assets........................... $3,270 $5,192 $9,529 $5,110 $6,274 ====== ====== ====== ====== ====== Total non-performing assets as a percentage of total assets............................................... 0.28% 0.48% 0.97% 0.56% 0.69% ====== ====== ====== ====== ====== Total non-performing loans to total loans (4)......... 0.47% 0.78% 0.74% 0.89% 1.10% ====== ====== ====== ====== ======
- ----------------------- (1) Loans are placed on non-accrual status when they become 90 days or more past due or if they have been identified by the Bank as presenting uncertainty with respect to the collectibility of interest or principal. (2) Other real estate owned balances are shown net of related allowances. (3) On February 6, 1995, the Superintendent seized Nationar, a check-clearing and trust company, freezing all of Nationar's assets. As of December 31, 1995, the Bank had $5.7 million in demand deposits held in receivership by the New York State Banking Department. As of December 31, 1996, the Bank had received all funds due from Nationar. (4) Excludes loans that had matured and the Bank had not formally extended the maturity date. Regular principal and interest payments continued in accordance with the original terms of the loan. The Bank continued to accrue interest on these loans as long as regular payments received were less than 90 days delinquent. These loans totaled $3.9 million, $3.1 million, $2.7 million, and $1.5 million at December 31, 1996, 1995, 1994, and 1993, respectively. There were no such loans 90 days past the maturity date as of December 31, 1997 For the years ended December 31, 1997 and 1996, gross interest income which would have been recorded had the non-accruing loans been current in accordance with their original terms amounted to $245,000 and $325,000, respectively. No interest income on non-accrual loans was included in income during such periods except for $30,000 and $39,000 of cash interest payments received for the Bank's largest non-performing loan for the years ended December 31, 1997 and 1996, respectively. Classified Loans. On the basis of management's review of its assets, at December 31, 1997, a total of $6.4 million of loans were classified as follows (in thousands): Special Mention.................... $3,931 Substandard........................ 2,487 Doubtful........................... -- Loss............................... -- ------ Total classified................. $6,418 ====== Allowance for loan losses.......... $6,921 ====== Analysis of the Allowance For Loan Losses. The following table sets forth the analysis of the allowance for loan losses for the periods indicated.
YEAR ENDED DECEMBER 31, ------------------------------------------ 1997 1996 1995 1994 1993 ------ ------ ------ ------ ------ (DOLLARS IN THOUSANDS) Balance at the beginning of period.......... $6,539 $4,707 $4,192 $4,030 $2,689 Charge-offs: One- to four-family........................ 46 28 17 -- -- Multi-family............................... 173 122 215 223 -- Commercial real estate..................... 198 35 108 460 -- Construction or development................ -- -- -- -- -- Consumer and other......................... 388 251 216 142 160 Commercial business (1).................... 557 -- -- -- 66 ------ ------ ------ ------ ------ 1,362 436 556 825 226 ------ ------ ------ ------ ------ Recoveries: One- to four-family........................ -- -- -- -- -- Multi-family............................... 149 -- -- -- -- Commercial real estate..................... 21 25 -- -- -- Construction or development................ -- -- -- -- -- Consumer and other......................... 81 56 55 30 42 Commercial business........................ -- -- -- 9 3 ------ ------ ------ ------ ------ 251 81 55 39 45 ------ ------ ------ ------ ------ Net charge-offs............................. 1,111 355 501 786 181 Provision for loan losses................... 1,493 2,187 1,016 948 1,522 ------ ------ ------ ------ ------ Balance at end of period.................... $6,921 $6,539 $4,707 $4,192 $4,030 ====== ====== ====== ====== ====== Ratio of net charge-offs during the period to average loans outstanding during the period................................. 0.18% 0.06% 0.10% 0.17% 0.05% ====== ====== ====== ====== ====== Allowance for loan losses to total loans.... 1.08% 1.09% 0.88% 0.88% 0.96% ====== ====== ====== ====== ====== Allowance for loan losses to non-performing loans....................... 227.14% 138.60% 119.01% 99.29% 88.61% ====== ====== ====== ====== ======
____________________ (1) Included in 1997 is $496,000 related to a settlement that the Bank had reached with the bankruptcy trustee relating to loans to a borrower that had filed for bankruptcy protection. Allocation of Allowance for Loan Losses. The following table sets forth the allocation of the allowance for loan losses by loan category for the periods indicated.
AT DECEMBER 31, ------------------------------------------------------------------------------ 1997 1996 1995 ------------------------- ------------------------- ---------------------- PERCENT PERCENT PERCENT OF LOANS OF LOANS OF LOANS AMOUNT IN EACH AMOUNT IN EACH AMOUNT IN EACH OF ALLOWANCE CATEGORY OF ALLOWANCE CATEGORY OF ALLOWANCE CATEGORY FOR TO TOTAL FOR TO TOTAL FOR TO TOTAL LOAN LOSSES LOANS LOAN LOSSES LOANS LOAN LOSSES LOANS ------------ ----------- ------------ ----------- ------------ -------- (DOLLARS IN THOUSANDS) One- to four-family...................... $ 443 61.96% $ 412 60.77% $ 367 60.14% Home equity.............................. 33 2.12 27 1.88 24 1.90 Commercial real estate and multi-family.. 390 24.46 374 24.38 630 25.44 Consumer and other....................... 359 10.70 385 12.16 302 11.76 Commercial business...................... 218 0.76 1,432 0.81 164 0.76 Unallocated.............................. 5,478 -- 3,909 -- 3,220 -- ------------ ----------- ------------ ----------- ------------ -------- Total................................... $6,921 100.00% $6,539 100.00% $4,707 100.00% ============ =========== ============ =========== ============ ========
AT DECEMBER 31, ------------------------------------------------------ 1994 1993 ------------------------- ------------------------- PERCENT PERCENT OF LOANS OF LOANS AMOUNT IN EACH AMOUNT IN EACH OF ALLOWANCE CATEGORY OF ALLOWANCE CATEGORY FOR TO TOTAL FOR TO TOTAL LOAN LOSSES LOANS LOAN LOSSES LOANS ------------ ----------- ------------ ----------- (DOLLARS IN THOUSANDS) One- to four-family..................................................... $ 350 58.59% $ 290 59.43% Home equity............................................................. 26 2.25 26 2.56 Commercial real estate and multi-family................................. 736 26.04 1,367 25.02 Consumer and other...................................................... 298 12.29 286 12.21 Commercial business..................................................... 164 0.83 119 0.78 Unallocated............................................................. 2,618 - 1,942 - ------------ ----------- ------------ ----------- Total.................................................................. $4,192 100.00% $4,030 100.00% ============ =========== ============ ===========
Amortized Cost and Fair Value of Investment and Mortgage Related Securities. The following table sets forth certain information regarding the amortized cost and fair values of the Bank's debt, equity, asset-backed and mortgage related securities as of the dates indicated.
AT DECEMBER 31, ----------------------------------------------------------- 1997 1996 1995 ------------------- ------------------ ------------------ AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR COST VALUE COST VALUE COST VALUE --------- -------- --------- ------- --------- -------- (DOLLARS IN THOUSANDS) Investment Securities: Securities held to maturity: Money market preferred stock..................... $17,000 $17,000 $38,000 $38,000 $46,700 $46,700 States and political subdivisions................ -- -- -- -- -- -- --------- -------- -------- -------- -------- -------- Total securities held to maturity.............. 17,000 17,000 38,000 38,000 46,700 46,700 --------- -------- -------- -------- -------- -------- Debt securities available for sale: U.S. Treasury.................................... 84,877 85,751 84,716 85,220 54,839 55,745 U.S. government agency........................... -- -- 5,012 5,004 -- -- States and political subdivisions................ 1,760 1,870 1,942 2,041 9,118 9,317 Corporate bonds.................................. 6,933 7,054 999 1,000 6,035 6,035 --------- -------- -------- -------- -------- -------- Total debt securities available for sale....... 93,570 94,675 92,669 93,265 69,992 71,097 --------- -------- -------- -------- -------- -------- Equity securities available for sale: Common stock..................................... 5,693 6,729 3,115 3,612 3,382 3,566 --------- -------- -------- -------- -------- -------- Total equity securities available for sale..... 5,693 6,729 3,115 3,612 3,382 3,566 --------- -------- -------- -------- -------- -------- Asset-backed securities available for sale........ 74,973 74,922 28,090 27,998 5,350 5,278 --------- -------- -------- -------- -------- -------- Total investment securities.................... $191,238 $193,326 $161,874 $162,875 $125,424 $126,641 ========= ======== ======== ======== ======== ======== Average remaining life of investment securities (1)................................... 1.61 years 1.97 years 1.38 years ========== ========== ========== Mortgage related securities: Available for sale: Freddie Mac.................................... $114,922 $115,909 $109,903 $108,832 $ 43,000 $ 43,392 GNMA........................................... 31,515 32,599 44,966 45,780 51,104 52,984 FNMA........................................... 24,282 24,483 28,487 28,256 33,170 33,575 CMOs........................................... 100,037 99,964 104,244 101,992 132,550 131,592 --------- -------- -------- -------- -------- -------- Total mortgage related securities available for sale:............................. $270,756 $272,955 $287,600 $284,860 $259,824 $261,543 ========= ======== ======== ======== ======== ======== Average remaining life of mortgage related securities....................... 4.92 years 7.56 years 6.21 years ========== ========== ========== Net unrealized gains (losses) on available for sale securities.................... $ 4,289 $ -- $ (1,739) $ -- $ 2,936 $ -- Total securities.................................. $466,281 $466,281 $447,735 $447,735 $388,184 $388,184 ========= ======== ======== ======== ======== ======== Average remaining life of securities (1).......... 3.55 years 5.60 years 4.64 years ========== ========== ==========
____________________ (1) Average remaining life does not include common stock. Securities Portfolio. The following table sets forth certain information regarding the carrying value, weighted average yields and contractual maturities of the Bank's securities portfolio as of December 31, 1997. Adjustable-rate mortgage related securities are included in the period in which interest rates are next scheduled to adjust. No tax equivalent adjustments were made to the weighted average yields. Amounts are shown at amortized cost for held to maturity securities and at fair value for available for sale securities.
AT DECEMBER 31, 1997 ------------------------------------------------------------------------------------------------------- MORE THAN ONE MORE THAN FIVE ONE YEAR OR LESS YEAR TO FIVE YEARS YEARS TO TEN YEARS AFTER TEN YEARS TOTAL ------------------- ------------------- ------------------- ------------------- ------------------- WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD -------- --------- -------- --------- -------- --------- -------- --------- -------- --------- (DOLLARS IN THOUSANDS) AVAILABLE FOR SALE: Mortgage related securities: Freddie Mac............... $ 1,168 6.28% $25,301 6.28% $35,794 6.92% $ 53,646 7.09% $115,909 6.85% GNMA...................... -- -- 50 6.77 496 7.94 32,053 8.09 32,599 8.09 FNMA...................... -- -- 3,333 6.94 21,150 6.70 -- -- 24,483 6.73 CMOs...................... -- -- 3,102 5.64 1,386 4.98 95,494 6.42 99,964 6.37 -------- -------- -------- -------- -------- Total mortgage related securities.............. 1,168 6.28 31,786 6.28 58,808 6.80 181,193 6.91 272,955 6.81 -------- -------- -------- -------- -------- Debt securities: U.S. treasury............. 14,997 5.64 70,754 6.34 -- -- -- -- 85,751 6.21 U.S. government agencies.. -- -- -- -- -- -- -- -- -- -- States and political subdivisions............. 939 4.05 329 4.94 -- -- 602 8.30 1,870 5.58 Corporate bonds........... -- -- 7,054 6.84 -- -- -- -- 7,054 6.84 -------- -------- -------- -------- -------- Total debt securities.... 15,936 5.54 78,137 6.38 -- -- 602 8.30 94,675 6.25 -------- -------- -------- -------- -------- Equity securities: Common stock.............. -- -- -- -- -- -- -- -- 6,729 2.24 -------- -------- -------- -------- -------- Total equity securities.. -- -- -- -- -- -- -- -- 6,729 2.24 -------- -------- -------- -------- -------- Asset-backed securities.... -- -- 12,739 6.41 17,897 6.06 44,286 6.47 74,922 6.36 Total securities available for sale...... 17,104 5.59 122,662 6.36 76,705 6.63 226,081 6.83 449,281 6.55 -------- -------- -------- -------- -------- HELD TO MATURITY: Money market preferred stock.................... 17,000 4.43 -- -- -- -- -- -- 17,000 4.43 -------- -------- -------- -------- -------- Total securities........... $34,104 $122,662 $76,705 $226,081 $466,281 ======== ======== ======== ======== ========
Purchases, Sales, and Repayments of Mortgage Related Securities. Set forth below is information relating to the Bank's purchases, sales and repayments of principal of mortgage related securities for the periods indicated.
YEAR ENDED DECEMBER 31, ----------------------------------------- 1997 1996 1995 1994 -------- -------- -------- -------- (IN THOUSANDS) Purchases: - ---------- Adjustable-rate (1)............................ $ 7,918 $ -- $ -- $ 10,104 Fixed-rate (1)................................. 23,563 85,506 32,885 44,164 CMOs........................................... 35,859 -- 13,490 58,027 -------- -------- -------- -------- Total purchases.............................. 67,340 85,506 46,375 112,295 Sales: - ------ Adjustable-rate (1)............................ (15,726) -- (16,110) -- Fixed-rate (1)................................. (8,409) (11,421) (17,964) (16,507) CMOs........................................... (23,630) (13,125) (18,377) (24,951) -------- -------- -------- -------- Total sales.................................. (47,765) (24,546) (52,451) (41,458) Principal Repayments: - --------------------- Principal repayments........................... (36,301) (33,026) (28,056) (76,816) Increase in other items, net (2)............... (118) (158) (130) (517) Change in unrealized gains (losses) on mortgage related securities............... 4,939 (4,459) 22,525 (20,806) -------- -------- -------- -------- Net increase (decrease)..................... $(11,905) $ 23,317 $(11,737) $(27,302) ======== ======== ======== ========
______________________ (1) Consists of pass-through securities. (2) Other items represent amortization and accretion of premiums and discounts. Deposit Activity. The following table sets forth the deposit activities of the Bank for the periods indicated.
YEAR ENDED DECEMBER 31, ----------------------------------------------------- 1997 1996 1995 1994 ----------- ----------- ----------- ----------- (DOLLARS IN THOUSANDS) Opening balance................... $ 920,072 $ 861,065 $ 819,690 $ 812,939 Deposits.......................... 2,415,023 1,736,655 1,508,173 1,182,400 Withdrawals....................... (2,390,713) (1,716,709) (1,502,621) (1,207,280) Interest credited................. 42,493 39,061 35,823 31,631 ----------- ----------- ----------- ----------- Ending balance.................... 986,875 920,072 861,065 819,690 ----------- ----------- ----------- ----------- Net increase...................... $ 66,803 $ 59,007 $ 41,375 $ 6,751 =========== =========== =========== =========== Percent increase.................. 7.26% 6.85% 5.05% 0.83% =========== =========== =========== ===========
Certificates of Deposit Maturities. The following table indicates the amount of the Bank's certificates of deposit by time remaining until maturity as of December 31, 1997.
MATURITY ------------------------------------------------------- 3 MONTHS OVER 3 TO 6 OVER 6 TO 12 OVER 12 OR LESS MONTHS MONTHS MONTHS TOTAL -------- ----------- ------------ --------- -------- (IN THOUSANDS) Certificates of deposit less than $100,000... $ 91,648 $111,677 $ 97,441 $113,040 $413,806 Certificates of deposit of $100,000 or more.. 15,314 17,824 21,630 33,852 88,620 -------- -------- -------- -------- -------- Total of certificates of deposit............. $106,962 $129,501 $119,071 $146,892 $502,426 ======== ======== ======== ======== ========
Average Balance of Deposits. The following tables set forth information, by various rate categories, regarding the average balance of deposits by types of deposit for the periods indicated.
FOR THE YEAR ENDED DECEMBER 31, ------------------------------------------------------------- 1997 1996 ----------------------------- ----------------------------- PERCENT PERCENT OF TOTAL WEIGHTED OF TOTAL WEIGHTED AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE Balance DEPOSITS RATE BALANCE DEPOSITS RATE -------- -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) Money market accounts................ $ 67,877 7.01% 3.77% $ 53,999 6.04% 3.55% Savings accounts..................... 301,932 31.20 3.35 307,530 34.36 3.37 NOW accounts......................... 61,426 6.35 1.82 51,718 5.78 1.85 Non-interest-bearing accounts........ 27,728 2.86 -- 26,273 2.94 -- -------- ------ -------- ------ Total............................. 458,963 47.42 3.01 439,520 49.12 3.01 -------- ------ -------- ------ Certificates of deposit: Less than six months................. 188,668 19.49 -- 176,787 19.76 -- Over six through 12 months........... 121,630 12.57 -- 106,793 11.94 -- Over 12 through 24 months............ 83,754 8.65 -- 53,409 5.97 -- Over 24 months....................... 26,924 2.78 -- 38,486 4.30 -- Certificates over $100,000........... 87,988 9.09 -- 79,755 8.91 -- -------- ------ -------- ------ Total certificates of deposit..... 508,964 52.58 5.78 455,230 50.88 5.81 -------- ------ -------- ------ Total average deposits......... $967,927 100.00% 4.47% $894,750 100.00% 4.43% ======== ====== ======== ======
FOR THE YEAR ENDED DECEMBER 31, ------------------------------------------------------------- 1995/(1)/ 1994 ----------------------------- ----------------------------- PERCENT PERCENT OF TOTAL WEIGHTED OF TOTAL WEIGHTED AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE Balance DEPOSITS RATE BALANCE DEPOSITS RATE -------- -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) Money market accounts................ $ 52,528 6.27% 3.96% $ 49,671 6.05% 3.09% Savings accounts..................... 326,125 38.91 3.42 415,843 50.68 3.09 NOW accounts......................... 44,023 5.25 1.89 36,386 4.43 2.06 Non-interest-bearing accounts........ 28,720 3.43 -- 30,996 3.78 -- -------- ------ -------- ------ Total............................. 451,396 53.86 3.12 532,896 64.94 2.84 -------- ------ -------- ------ Certificates of deposit: Less than six months................. 117,584 14.03 -- 64,323 7.85 -- Over six through 12 months........... 94,366 11.26 -- 56,520 6.89 -- Over 12 through 24 months............ 55,039 6.57 -- 46,226 5.63 -- Over 24 months....................... 50,891 6.07 -- 62,147 7.57 -- Certificates over $100,000........... 68,768 8.21 -- 58,445 7.12 -- -------- ------ -------- ------ Total certificates of deposit..... 386,648 46.14 6.09 287,661 35.06 5.72 -------- ------ -------- ------ Total average deposits......... $838,044 100.00% 4.49% $820,557 100.00% 3.85% ======== ====== ======== ======
___________________________ (1) Calculations for this table exclude a $1.25 million special interest payment in 1995 which was approved by the Bank's board of trustees and paid on a pro rata basis on all interest-bearing savings, NOW, money market and certificate of deposit accounts in recognition of the Bank's 125th anniversary. Certificates of Deposit Rates and Maturities. The following table sets forth the amount and maturities of certificates of deposit at December 31, 1997.
LESS THREE FOUR THAN ONE TO TWO TO TO TO FIVE AS OF ONE TWO THREE FOUR FIVE YEARS OR DECEMBER 31, YEAR YEARS YEARS YEARS YEARS MORE 1997 -------- ------- ------- ------ ----- -------- ------------ (IN THOUSANDS) Rate: 0 to 4.00%..... $ 981 $ -- $ 2 $ -- $ 2 $ 1 $ 986 4.01 to 5.00%.. 34,327 360 21 0 7 85 34,800 5.01 to 6.00%.. 295,313 84,032 10,836 4,624 716 1,861 397,382 6.01 to 7.00%.. 12,145 3,091 1,058 195 15 409 16,913 7.01 to 8.00%.. 1,938 328 176 4,332 0 0 6,774 8.01 to 9.00%.. 10,815 3,719 4,282 0 0 0 18,816 Over 9.01%..... 15 26,632 -- -- -- 108 26,755 -------- -------- ------- ------ ---- ------ -------- Total $355,534 $118,162 $16,375 $9,151 $740 $2,464 $502,426 ======== ======== ======= ====== ==== ====== ========
Borrowed Funds. The following table sets forth the maximum month-end balance and average monthly balance of FHLB advances and securities sold under agreements to repurchase for the periods indicated. The Bank had no outstanding borrowings at December 31, 1995.
YEARS ENDED DECEMBER 31, ---------------------------- 1997 1996 -------- -------- (DOLLARS IN THOUSANDS) Maximum Balance: - ---------------- FHLB advances................................. $ 14,934 $ 12,000 Securities sold under agreements to repurchase................................ 28,961 24,675 Average Balance: - ---------------- FHLB advances................................. 8,071 5,583 Securities sold under agreements to repurchase................................ 20,807 11,091 Weighted Average Interest Rate: - ------------------------------- FHLB advances................................. 6.02% 5.78% Securities sold under agreements to repurchase................................ 5.60 5.38
The following table sets forth certain information as to the Bank's borrowings at the dates indicated.
DECEMBER 31, ------------------------- 1997 1996 -------- -------- (IN THOUSANDS) FHLB advances..................................... $ 14,934 $ 12,000 Securities sold under agreements to repurchase.... 18,783 20,008 -------- -------- Total borrowings................................ $ 33,717 $ 32,008 ======== ======== Weighted average interest rate of FHLB advances... 6.23% 6.03% Weighted average interest rate of securities sold under agreements to repurchase............. 5.65% 5.42%
MANAGEMENT OF INTEREST RATE RISK The principal objective of our interest rate risk management is to evaluate the interest rate risk inherent in certain assets and liabilities, determine the appropriate level of risk given our business strategy, operating environment, capital and liquidity requirements and performance objectives, and manage the risk consistent with the board's approved guidelines to reduce the vulnerability of our operations to changes in interest rates. The asset/liability committee is comprised of senior management under the direction of the Board, with senior management responsible for reviewing with the Board its activities and strategies, the effect of those strategies on our net interest margin, the fair value of the portfolio and the effect that changes in interest rates will have on the portfolio and our exposure limits. In recent years, we have used the following strategies to manage interest rate risk: (1) emphasizing the origination and retention of residential monthly and bi-weekly fixed-rate mortgage loans having terms to maturity of not more than twenty years, residential and commercial adjustable-rate mortgage loans, and consumer loans consisting primarily of mobile home loans, home equity loans and student loans; (2) selling substantially all newly originated 25-30 year fixed-rate, residential mortgage loans into the secondary market without recourse and on a servicing retained basis (except for such loans with interest rates of 9% or greater, which the Bank retains in its portfolio); and (3) investing in shorter term investments which generally bear lower yields as compared to longer term investments, but which better position the Bank for increases in market interest rates. Shortening the maturities of our interest- earning assets by increasing shorter term investments better matches the maturities of our deposit accounts, in particular our certificates of deposit that mature in one year or less, which, at December 31, 1997 totaled $355.5 million, or 35.5% of total interest-bearing liabilities. These strategies may adversely impact net interest income due to lower initial yields on these investments in comparison to longer term, fixed rate loans and investments. However, management believes that reducing the exposure to interest rate fluctuations will enhance long-term profitability. Gap Analysis. The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are "interest rate sensitive" and by monitoring a bank'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 the amount of interest-bearing liabilities maturing or repricing within that same time period. At December 31, 1997, the Bank's one-year gap position, the difference between the amount of interest-earning assets maturing or repricing within one year and interest-bearing liabilities maturing or repricing within one year, was a negative 21.0%. 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. Accordingly, during a period of rising interest rates, an institution with a negative gap position is likely to experience a decline in net interest income as the cost of its interest-bearing liabilities increase at a rate faster than its yield on interest-earning assets. In comparison, an institution with a positive gap is likely to realize an increase in its net interest income in a rising interest rate environment. Given the Bank's existing liquidity position and its ability to sell securities from its available for sale portfolio, management believes that its negative gap position will not have a material adverse effect on its operating results or liquidity position. If interest rates decrease, there may be a positive effect on the Bank's interest rate spread and corresponding operating results. The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at December 31, 1997, which are anticipated by the Bank, based upon certain assumptions, to reprice or mature in each of the future time periods shown (the "GAP Table"). Except as stated below, the amount of assets and liabilities shown which reprice or mature during a particular period were determined in accordance with the earlier of the repricing date or the contractual maturity of the asset or liability. The table sets forth an approximation of the projected repricing of assets and liabilities at December 31, 1997, on the basis of contractual maturities, anticipated prepayments, and scheduled rate adjustments within the selected time intervals. For adjustable and fixed-rate loans on residential properties, prepayment rates were assumed to range from 4.14% to 10.20% annually. Mortgage related securities were assumed to prepay at rates between 8.04% and 13.38% annually. Savings accounts were assumed to decay at 10.00%, 10.00%, 19.99%, 12.47%, 9.88%, 16.63% and 21.03%; NOW checking accounts were assumed to decay at 22.26%, 22.26%, 44.52%, 2.28%, 1.81%, 3.03% and 3.84%; and money market savings accounts were assumed to decay at 54.75%, 4.11%, 8.23%, 32.91%, 0%, 0%, and 0% for the periods of three months or less, three to six months, six to twelve months, one to three years, three to five years, five to ten years and more than ten years, respectively. Prepayment and deposit decay rates can have a significant impact on the Bank's estimated gap. While the Bank believes such assumptions to be reasonable, there can be no assurance that assumed prepayment rates and decay rates will approximate actual future loan prepayment and deposit withdrawal activity.
AMOUNTS MATURING OR REPRICING AT DECEMBER 31, 1997 ----------------------------------------------------------------------------------------- LESS THAN 3-6 6 MONTHS TO OVER 10 THREE MONTHS MONTHS 1 YEAR 1-3 YEARS 3-5 YEARS 5-10 YEARS YEARS TOTAL ------------ -------- ----------- --------- -------- ---------- -------- ---------- (DOLLARS IN THOUSANDS) Interest-Earning assets: Federal funds sold and securities purchased under resale agreements.................. $ 22,700 - - - - - - $ 22,700 Mortgage related securities (1)...... 12,639 12,716 25,946 120,797 85,294 13,364 - 270,756 Investment securities (1)............ 41,935 5,242 25,241 101,328 16,955 - 500 191,201 FHLB capital stock (1)............... - - - - - - 6,392 6,392 Other interest-earning assets........ 1,534 - - - - - - 1,534 Loans (2)............................ 75,357 37,024 109,960 153,064 106,221 125,376 32,194 639,196 ------------ -------- ----------- --------- -------- ---------- -------- ---------- Total interest-earning assets....... 154,165 54,982 161,147 375,189 208,470 138,740 39,086 1,131,779 ------------ -------- ----------- --------- -------- ---------- -------- ---------- Interest-Bearing liabilities: Savings accounts..................... 30,481 30,138 60,275 36,617 29,004 48,798 61,707 297,020 Interest-bearing checking............ 66,093 18,503 37,005 32,428 1,187 1,998 2,526 159,740 Certificate accounts................. 106,962 129,501 119,071 134,537 9,891 2,464 - 502,426 Mortgagor's payments held in escrow.... 2,586 - 3,160 - - - 3,000 8,746 Other borrowed funds................... 8,968 5,053 209 907 10,980 3,247 4,353 33,717 ------------ -------- ----------- --------- -------- ---------- -------- ---------- Total interest-bearing liabilities.. 215,090 183,195 219,720 204,489 51,062 56,507 71,586 1,001,649 ------------ -------- ----------- --------- -------- ---------- -------- ---------- Interest sensitivity gap............... ($60,925)($128,213) ($58,573) $170,700 $157,408 $82,233 ($32,500) $130,130 ============ ======== =========== ========= ======== ========== ======== ========== Cumulative interest rate sensitivity gap...................... ($60,925)($189,138) ($247,711) ($77,011) $80,397 $162,630 $130,130 ============ ======== =========== ========= ======== ========== ======== Ratio of interest-earning assets to interest-bearing liabilities......... 71.67% 30.01% 73.34% 183.48% 408.27% 245.52% 54.60% 112.99% Ratio of cumulative gap to total assets......................... (5.17)% (16.04)% (21.01)% (6.53)% 6.82% 13.79% 11.04%
________________________________ (1) Amounts shown are amortized cost. (2) Amounts shown include principal balance net of deferred loan fees and expenses, unamortized premiums and discounts, and non-accruing loans. Certain shortcomings are inherent in the method of analysis presented in the GAP Table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable-rate loans, have features which restrict changes in interest rates, both on a short-term basis and over the life of the asset. Further, in the event of changes in interest rates, prepayment and early withdrawal levels would likely deviate significantly from those assumed in calculating the table. Finally, the ability of many borrowers to service their adjustable-rate loans may decrease in the event of an interest rate increase. As a result of these shortcomings, the Bank focuses more attention on simulation modeling, such as the Net Income and Portfolio Value Analysis discussed below, rather than Gap Analysis. Even though the Gap Analysis reflects a ratio of cumulative gap to total assets within the Bank's targeted range of acceptable limits, the net income and net portfolio value simulation modeling is considered by management to be more informative in forecasting future income and economic value trends. Net Income and Net Portfolio Value Analysis. The Bank's interest rate sensitivity is also monitored by management through the use of a net income model and a net portfolio value model which generates estimates of the change in the Bank's net income and net portfolio value ("NPV") over a range of interest rate scenarios. NPV is the present value of expected cash flows from assets and liabilities. The model assumes estimated loan prepayment rates, reinvestment rates and deposit decay rates similar to the assumptions utilized for the GAP Table. The following sets forth the Bank's net income and NPV as of December 31, 1997.
CHANGE IN INTEREST RATES NET INCOME NET PORTFOLIO VALUE IN BASIS POINTS ------------------------------- -------------------------------- (RATE SHOCK) $ AMOUNT $ CHANGE % CHANGE $ AMOUNT $ CHANGE % CHANGE - --------------- -------- -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) 400................ 8,535 (2,539) (22.9)% 114,003 (40,398) (26.2)% 300................ 9,063 (2,011) (18.2)% 124,068 (30,333) (19.6)% 200................ 9,753 (1,321) (11.9)% 134,650 (19,751) (12.8)% 100................ 10,404 (670) (6.0)% 145,179 (9,222) (6.0)% Static............... 11,074 -- -- 154,401 -- -- (100)............... 11,421 347 3.1% 159,591 5,190 3.4% (200)............... 11,784 710 6.4% 163,248 8,847 5.7% (300)............... 12,128 1,054 9.5% 175,001 20,600 13.3% (400)............... 12,485 1,411 12.7% 193,639 39,238 25.4%
As is the case with the GAP Table, certain shortcomings are inherent in the methodology used in the above interest rate risk measurements. Modeling changes in Net Income and NPV requires the making of certain assumptions which may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the Net Income and NPV Table presented assumes that the composition of the Bank's interest sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and also assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration to maturity or repricing of specific assets and liabilities. Accordingly, although the Net Income and NPV Table provides an indication of the Bank's interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on the Bank's net interest income and will differ from actual results. -----END PRIVACY-ENHANCED MESSAGE-----