-----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, QoUUU9W+18+ntBRIqZ3kWD+9XmmmVvlS4UWL/DLJe+Zu+9V6zJkm7bUhCJhbAWgC AtFNf2aifZmPH2i6Js3AoA== 0000904280-02-000109.txt : 20020415 0000904280-02-000109.hdr.sgml : 20020415 ACCESSION NUMBER: 0000904280-02-000109 CONFORMED SUBMISSION TYPE: 10KSB40 PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020401 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PEOPLES BANKCORP INC CENTRAL INDEX KEY: 0001070243 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 161560886 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB40 SEC ACT: 1934 Act SEC FILE NUMBER: 000-25217 FILM NUMBER: 02596219 BUSINESS ADDRESS: STREET 1: 825 STATE STREET CITY: OGDENSBURG STATE: NY ZIP: 13669 BUSINESS PHONE: 3153934340 MAIL ADDRESS: STREET 1: 825 STATE STREET CITY: OGDENSBURG STATE: NY ZIP: 13669 10KSB40 1 peoples10k-123101.txt FORM 10-KSB SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ________ (Mark One) FORM 10-KSB [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 [ ] TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to _______ Commission File No. 0-25217 PEOPLES BANKCORP, INC. ---------------------------------------------- (Name of Small Business Issuer In Its Charter) NEW YORK 16-1560886 - ---------------------------- ---------------- (State or Other Jurisdiction (I.R.S. Employer of Incorporation or Organization) Identification no.) 825 STATE STREET, OGDENSBURG, NEW YORK 13669 - ---------------------------------------- ---------- (Address of Principal Executive Offices) (Zip Code) Issuer's telephone number, including area code: (315) 393-4340 Securities registered pursuant to Section 12(b) of the Act: NOT APPLICABLE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR VALUE, $.01 PER SHARE --------------------------------------- Check whether the issuer: (1) filed all reports required by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will 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-KSB or any amendment to this Form 10-KSB. [X] Registrant's revenues for the fiscal year ended December 31, 2001: $2,195,000. As of March 1, 2002, the aggregate market value of the 72,643 shares of Common Stock of the registrant issued and outstanding held by non-affiliates on such date was approximately $1,452,860 based on the closing sales price of $20.00 per share of the registrant's Common Stock on March 1, 2002 as reported on the OTC Electronic Bulletin Board. For purposes of this calculation, it is assumed that directors the Company's Employee Stock Ownership Plan, executive officers and beneficial owners of more than 10% of the registrant's outstanding voting stock are affiliates. Number of shares of Common Stock outstanding as of March 1, 2002: 131,979 Transitional Small Business Disclosure Format Yes No X ---- ---- DOCUMENTS INCORPORATED BY REFERENCE 1. Portions of Proxy Statement for the 2002 Annual Meeting of Stockholders. (Part III) PART I ITEM 1. DESCRIPTION OF BUSINESS - -------------------------------- GENERAL THE COMPANY. Peoples Bankcorp, Inc. (the "Company"), a New York corporation, was organized at the direction of the Board of Directors of Ogdensburg Federal Savings and Loan Association ("Ogdensburg Federal" or the "Association") in September 1998 to acquire all of the capital stock to be issued by the Association in its conversion from mutual to stock form (the "Conversion"). The Conversion was completed on December 28, 1998, with the Company issuing 134,390 shares of its common stock, par value $0.01 per share (the "Common Stock") to the public, and the Association issuing all of its issued and outstanding common stock to the Company. Prior to the Conversion, the Company did not engage in any material operations. The Company does not have any significant assets other than the outstanding capital stock of the Association, cash and investment securities and a note receivable from the ESOP. Because substantially all of the Company's operations consist of the operations of the Association, this Form 10-KSB is largely a discussion of the Association's operations. At December 31, 2001, the Company had total assets of $28.2 million, deposits of $24.0 million, net loans receivable of $18.8 million and stockholders' equity of $3.1 million. OGDENSBURG FEDERAL SAVINGS AND LOAN ASSOCIATION. The Association is a federal stock savings and loan association operating through one office in Ogdensburg, New York. Ogdensburg Federal was founded in 1888 as a federally chartered institution and a member of the Federal Home Loan Bank ("FHLB") System. The Association's principal business consists of attracting deposits from the public and originating residential mortgage loans. The Association also offers various types of consumer loans and a limited number of commercial real estate and commercial business loans. The Association's deposits are insured up to applicable limits by the Federal Deposit Insurance Corporation ("FDIC") under the SAIF. Both the Company's and Ogdensburg Federal's executive offices are located at 825 State Street, Ogdensburg, New York 13669 and its main telephone number is (315) 393-4340. MARKET AREA The Association considers its primary market area to be the City of Ogdensburg, and the surrounding townships of Lisbon, Oswegatchie, Madrid, Morristown, Heuvelton, Hammond, Depeyster, Macomb and Waddington and the village of Rennsselaer Falls, all of which are located in St. Lawrence County, New York. St. Lawrence County is the largest county east of the Mississippi in terms of total acreage. Ogdensburg is the eastern-most United States port on the Great Lakes and the northern most port in New York and is adjacent to the Montreal-Ottawa-Toronto corridor. Although Ogdensburg is fairly rural with only approximately 13,000 residents, it is within a two-hour drive of more than 15 million people. The largest employers in Ogdensburg and the surrounding communities include the Ogdensburg Bridge and Port Authority, local government offices, U.S. Customs Office, Acco, Ogdensburg School District, Mitel Corporation, Aimtronics, two New York State correctional facilities, and several local hospitals. By industry, the largest sectors of the Ogdensburg economy are retail, services and manufacturing. The average household income of $28,000 in 1999 for Ogdensburg was significantly below that of New York as a whole of $57,000 and the average for the United States of $50,000. The overall population of Ogdensburg has declined by approximately 5% from 1990 to 1998 as compared to marginal growth of 1% for New York State and a 7.5% growth rate for the United States. 1 LENDING ACTIVITIES Most of the Association's loans are mortgage loans which are secured by one- to four-family residences. The Association also makes consumer, residential construction and commercial real estate and commercial business loans. The Association believes there is sufficient demand in its market area to continue its policy of emphasizing lending in the one- to four- family real estate loan area and continue originating various types of consumer loans. At December 31, 2001, the Association's gross loans totaled $19.0 million of which $12.3 million were mortgage loans secured by one-to four-family residences. The Association originates both fixed rate mortgage and ARM loans. Generally, all of the consumer loans the Association originates have fixed rates, with the exception of home equity lines of credit. The following table sets forth information concerning the types of loans held by the Association at the dates indicated. Other than as disclosed below, there were no concentrations of loans which exceeded 10% of total loans at December 31, 2001.
AT DECEMBER 31, ----------------------------------------------------- 2001 2000 --------------------- ---------------------- AMOUNT % AMOUNT % ------ ------ ------ ------ (DOLLARS IN THOUSANDS) Real estate loans: One- to four-family residential.......... $ 12,332 64.93% $ 12,506 60.52% Commercial............................... 517 2.72 523 2.54 Construction............................. 266 1.40 78 0.34 Other loans: Automobile............................... 3,093 16.28 4,513 21.84 Home equity.............................. 1,042 5.48 1,127 5.46 Passbook................................. 164 0.86 126 0.61 Commercial............................... 674 3.54 699 3.39 Other consumer........................... 904 4.79 1,095 5.30 ---------- ------ --------- ------ 18,992 100.00% 20,667 100.00% ====== ====== Less: Deferred fees............................ (23) (21) Allowance for loan losses................ 179 176 ---------- --------- Total................................. $ 18,836 $ 20,512 ========== =========
The following table sets forth certain information regarding the dollar amount of loans maturing in the Association's loan portfolio based on their contractual terms to maturity and/or repricing period. Included within the "Due Within One Year" column are approximately $5.9 million in one year adjustable rate mortgages.
DUE AFTER DUE WITHIN 1 THROUGH DUE AFTER ONE YEAR AFTER 5 YEARS AFTER 5 YEARS AFTER DECEMBER 31, 2001 DECEMBER 31, 2001 DECEMBER 31, 2001 TOTAL ----------------- ----------------- ----------------- ----- (IN THOUSANDS) Real estate loans: One- to four-family... $ 5,898 $ 262 $ 6,172 $12,332 Commercial ........... 473 44 -- 517 Construction ......... 55 -- 211 266 Automobile and other.... 131 3,475 391 3,997 Home equity ............ 1,042 -- -- 1,042 Passbook ............... 109 55 -- 164 Commercial ............. 674 -- -- 674 ------- ------- ------- ------- Total ............. $ 8,382 $ 3,836 $ 6,774 $18,992 ======= ======= ======= =======
2 The next table shows at December 31, 2001, the dollar amount of all the Association's loans due after one year from December 31, 2001 which have fixed interest rates and have floating or adjustable interest rates. PREDETERMINED FLOATING OR RATES ADJUSTABLE RATES ---------- ---------------- (IN THOUSANDS) Real Estate: One- to four-family residential $ 6,334 $ 100 Commercial .................... 44 -- Construction .................. 211 -- Automobile and other ............. 3,866 -- Home equity ...................... -- -- Passbook ......................... 55 -- Commercial ....................... -- -- ------- ------- Total ......................... $10,510 $ 100 ======= ======= ONE- TO FOUR-FAMILY RESIDENTIAL LOANS. The Association's primary lending activity consists of the origination of one- to four-family residential mortgage loans secured by property located in its primary market area. The Association generally originates one- to four-family residential mortgage loans in amounts up to 80% of the lesser of the appraised value or purchase price with a maximum loan amount of $200,000 and a maximum term of 30 years. The Association also offers a first-time home buyer program pursuant to which loans may be made in amounts up to 90% of the lesser of the appraised value or purchase price with the same maximum loan amount and terms as its other mortgage loans. The Association also offers ARM loans. The interest rate on ARM loans is based on an index. ARM loans provide for periodic interest rate adjustments upward or downward of up to 2% per year. The interest rate may not increase above a "ceiling rate" established at the time the loan is originated. Generally, ARM loans typically reprice every year and provide for terms of up to 30 years with most loans having terms of between 10 and 20 years. ARM loans decrease the risk associated with changes in interest rates by periodically repricing, but involve other risks because as interest rates increase, the underlying payments by the borrower increase, thus increasing the potential for default by the borrower. At the same time, higher interest rates may adversely affect the marketability of the underlying collateral. Upward adjustment of the contractual interest rate is also limited by the maximum periodic and lifetime interest rate adjustment permitted by the loan documents, and, therefore is potentially limited in effectiveness during periods of rapidly rising interest rates. At December 31, 2001, approximately 48% of the one- to four-family residential loans the Association held had adjustable rates of interest. Mortgage loans originated and held by the Association generally include due-on-sale clauses. This gives the Association the right to deem the loan immediately due and payable in the event the borrower transfers ownership of the property securing the mortgage loan without the Association's consent. RESIDENTIAL CONSTRUCTION LOANS. The Association makes a limited number of residential construction loans on one- to four-family residential properties to the individuals who will be the owners and occupants upon completion of construction. Borrowers are required to pay interest during the construction period which may not last beyond 12 months. Upon completion of the construction, the loan converts to a fully amortizing mortgage loan. Loan proceeds are disbursed according to a draw schedule and the Association inspects the progress of the construction before additional funds are disbursed. Construction loans are offered on either a fixed or adjustable basis. Construction lending is generally considered to involve a higher degree of credit risk than long-term financing of residential properties. The Association's risk of loss on a construction loan is dependent largely upon the accuracy of the initial estimate of the property's value at completion of construction and the estimated cost of construction. If the estimate of construction cost and the marketability of the property upon completion of the project prove to be inaccurate, the Association may be compelled to advance additional funds to complete the 3 construction. Furthermore, if the final value of the completed property is less than the estimated amount, the value of the property might not be sufficient to assure the repayment of the loan. COMMERCIAL REAL ESTATE LOANS. The Association offers limited commercial real estate loans secured by small apartment buildings, office buildings, and other commercial properties. Loan amounts do not exceed 75% of the appraised value of the property. At December 31, 2001, the Association had a participation interest in a commercial real estate loan originated by the Thrift Associations Service Corporation ("TASCO"), a service corporation owned by various thrift institutions operating in New York State. The Association's interest in this loan amounted to $258,000 and was secured by an office building. This loan was performing in accordance with its terms at December 31, 2001. Commercial real estate lending entails significant additional risks compared to residential property lending. These loans typically involve large loan balances to single borrowers or groups of related borrowers. The repayment of these loans typically is dependent on the successful operation of the real estate project securing the loan. These risks can be significantly affected by supply and demand conditions in the market for office and retail space and may also be subject to adverse conditions in the economy. To minimize these risks, the Association generally limits this type of lending to its market area and to borrowers who are otherwise well known to the Association. COMMERCIAL BUSINESS LOANS. The Association engages in a limited amount of commercial business lending to benefit from the higher fees and interest rates and the shorter term to maturity. The Association's commercial business loans consist of equipment, lines of credit and other business purpose loans, which generally are secured by either the underlying properties or by the personal guarantees of the borrower. The Association's largest commercial business loan at December 31, 2001 had a balance of $474,000 and was made to a local auto dealer. Unlike residential mortgage loans, which generally are made on the basis of the borrower's ability to make repayment from his or her employment and other income and which are secured by real property whose value tends to be more easily ascertainable, commercial business loans typically are made on the basis of the borrower's ability to make repayment from the cash flow of the borrower's business. As a result, the availability of funds for the repayment of commercial business loans may be substantially dependent on the success of the business itself and the general economic environment. CONSUMER LOANS. The Association offers various types of consumer loans in order to provide a wider range of financial services to its customers. Consumer loans totaled $5.9 million, or 30.9%, of its total loans at December 31, 2001. The Association's consumer loans consist of automobile, home equity lines of credit, passbook, personal unsecured loans, boat loans, home improvement loans and equipment loans. Home equity lines of credit have a maximum draw period of ten years with a maximum term of 20 years. Passbook and certificate of deposit secured loans are offered up to the maximum of the deposit balance and are due on demand. The Association offers loans for both new and used automobiles with maximum terms of sixty-six months and maximum loan amounts of $30,000. Consumer loans may entail greater risk than residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by assets that depreciate rapidly. Repossessed collateral for a defaulted consumer loan may not be sufficient for repayment of the outstanding loan, and the remaining deficiency may not be collectible. LOAN APPROVAL AUTHORITY AND UNDERWRITING. The Association's President may approve all consumer loans up to $30,000. All other loans require the approval of its board of directors. Upon receipt of a completed loan application from a prospective borrower, a credit report is ordered. Income and certain other information is verified. If necessary, additional financial information may be requested. An appraisal or other estimate of value of the real estate intended to be used as security for the proposed loan is obtained. Appraisals are prepared by outside fee appraisers who are approved by the board of directors. 4 Either title insurance or a title opinion is generally required on all real estate loans. Borrowers also must obtain fire and casualty insurance. Flood insurance is also required on loans secured by property which is located in a flood zone. LOAN COMMITMENTS. Written commitments are given to prospective borrowers on all approved real estate loans. Generally, the commitment requires acceptance within 30 days of the date of issuance. At December 31, 2001, commitments to cover originations of mortgage loans were $210,800. The Association's believes that virtually all of its commitments will be funded. LOANS TO ONE BORROWER. The maximum amount of loans which the Association may make to any one borrower may not exceed the greater of $500,000, or 15%, of its unimpaired capital and unimpaired surplus. The Association may lend an additional 10% of its unimpaired capital and unimpaired surplus if the loan is fully secured by readily marketable collateral. The Association's maximum loan-to-one borrower limit was $500,000 at December 31, 2001. At December 31, 2001, the Association's largest loan concentration outstanding had a balance of $474,000. NONPERFORMING AND PROBLEM ASSETS LOAN DELINQUENCIES. Generally when a mortgage loan becomes 15 days past due, a notice of nonpayment is sent to the borrower. If after 30 days payment is still delinquent, the borrower will receive a formal delinquency notice. The borrower will be contacted by telephone or visited personally if the loan remains delinquent after 45 days. If the loan continues in a delinquent status for 120 days past due and no repayment plan is in effect, the loan will be referred to an attorney for collection, with foreclosure commenced no later than 180 days. The customer will be notified when foreclosure is commenced. At December 31, 2001, the Association's loans past due between 30 and 89 days totaled $388,000. Loans are reviewed on a monthly basis and are generally placed on a non-accrual status when the loan becomes more than 90 days delinquent or when, in the Association's opinion, the collection of additional interest is doubtful. Interest accrued and unpaid at the time a loan is placed on nonaccrual status is charged against interest income. Subsequent interest payments, if any, are either applied to the outstanding principal balance or recorded as interest income, depending on the assessment of the ultimate collectibility of the loan. NONPERFORMING ASSETS. At December 31, 2001 and 2000, the Association had $47,000 and $0, respectively, on nonaccrual status and $45,000 and $0, respectively, in real estate owned. During the year ended December 31, 2001, the Association would have recorded additional interest income of approximately $2,000 on nonaccrual loans if such loans had been current throughout the period. At December 31, 2001, the Association did not have any loans which were not classified as nonaccrual, 90 days past due or restructured, but where known information causes the Association to have serious concerns as to the ability of these borrowers to comply with its current loan terms. CLASSIFIED ASSETS. OTS regulations provide for a classification system for problem assets of savings associations which covers all problem assets. Under this classification system, problem assets of savings associations such as the Association's are classified as "substandard," "doubtful," or "loss." An asset is considered substandard if it is inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any. Substandard assets include those characterized by the "distinct possibility" that the savings association will sustain "some loss" if the deficiencies are not corrected. Assets classified as doubtful have all of the weaknesses inherent in those classified substandard, with the added characteristic that the weaknesses present make "collection or liquidation in full, on the basis of currently existing facts, conditions, and, values, "highly questionable and improbable." Assets classified as loss are those considered "uncollectible" and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets may be designated "special mention" because of potential weakness that do not currently warrant classification in one of the aforementioned categories. 5 When a savings association classifies problem assets as either substandard or doubtful, it may establish general allowances for loan losses in an amount deemed prudent by management. General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When a savings association classifies problem assets as loss, it is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to charge off such amount. A savings association's determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the OTS, which may order the establishment of additional general or specific loss allowances. A portion of general loss allowances established to cover possible losses related to assets classified as substandard or doubtful may be included in determining a savings association's regulatory capital. Specific valuation allowances for loan losses generally do not qualify as regulatory capital. At December 31, 2001, none of the Association's assets were classified as special mention, doubtful or loss but it had $88,000 in loans classified as substandard. FORECLOSED REAL ESTATE. Real estate acquired in settlement of loans is carried at the lower of the unpaid loan balance or fair value less estimated costs to sell. Write-downs from the unpaid loan balance to fair value at the time of foreclosure are charged to the allowance for loan losses. Subsequent write-downs to fair value, net of disposal costs, are charged to other expenses. At December 31, 2001, the Association had $45,000 in real estate acquired through foreclosure. ALLOWANCE FOR LOAN LOSSES. The Association's policy is to provide for losses on unidentified loans in its loan portfolio. A provision for loan losses is charged to operations based on management's evaluation of the potential losses that may be incurred in its loan portfolio. The evaluation, including a review of all loans on which full collectibility of interest and principal may not be reasonably assured, considers: (i) the Association's past loan loss experience, (ii) known and inherent risks in its portfolio, (iii) adverse situations that may affect the borrower's ability to repay, (iv) the estimated value of any underlying collateral, and (v) current economic conditions. The Association monitors its allowance for loan losses and make additions to the allowance as economic conditions dictate. Although the Association maintains its allowance for loan losses at a level that it considers adequate for the inherent risk of loss in its loan portfolio, actual losses could exceed the balance of the allowance for loan losses and additional provisions for loan losses could be required. In addition, the Association's determination as to the amount of its allowance for loan losses is subject to review by the OTS, as part of its examination process. After a review of the information available, the OTS might require the establishment of an additional allowance. 6 The following table sets forth an analysis of the Association's allowance for loan losses for the periods indicated. YEAR ENDED DECEMBER 31, 2001 2000 -------- -------- (IN THOUSANDS) Balance at beginning of period ......... $176 $176 Loans charged off: Real estate mortgage: One- to four-family residential... -- -- Commercial ....................... -- -- Construction ..................... -- -- Automobile .......................... 56 33 Home equity ......................... -- -- Passbook ............................ -- -- Commercial .......................... -- -- Other ............................... 8 12 ---- ---- Total charge-offs ...................... 64 45 ---- ---- Recoveries: Real estate mortgage: One- to four-family residential... -- -- Commercial ....................... -- -- Construction ..................... -- -- Automobile .......................... 5 5 Home equity ......................... -- -- Passbook ............................ -- -- Commercial .......................... -- -- Other ............................... 1 1 ---- ---- Total recoveries ....................... 6 6 ---- ---- Net loans charged off .................. 58 39 ---- ---- Provision for loan losses .............. 61 39 ---- ---- Balance at end of period ............... $179 $176 ==== ==== Ratio of net charge-offs to average loans outstanding during the period............................... 0.23% 0.16% ==== ==== 7 The following table illustrates the allocation of the allowance for loan losses for each category of loan. The allocation of the allowance to each category is not necessarily indicative of future loss in any particular category and does not restrict the Association's use of the allowance to absorb losses in other loan categories.
AT DECEMBER 31, ------------------------------------------------- 2001 2000 ----------------------- ------------------------ PERCENT OF PERCENT OF LOANS IN LOANS IN CATEGORY TO CATEGORY TO AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS ------- ----------- ------- ----------- (DOLLARS IN THOUSANDS) Real estate loans: One- to four-family residential......... $ 25 64.93% $ 24 60.52% Commercial.............................. 10 2.72 10 2.54 Construction............................ 1 1.40 -- 0.34 Automobile................................. 86 16.28 85 21.84 Home equity................................ 11 5.48 11 5.46 Passbook................................... -- 0.86 -- 0.61 Commercial................................. 19 3.54 19 3.39 Other...................................... 27 4.79 27 5.30 ------- ----- ------- ------- Total allowance for loan losses....... $ 179 100.00% $ 176 100.00% ======= ====== ======= ======
INVESTMENT ACTIVITIES SECURITIES. The Association is required under federal regulations to maintain a minimum amount of liquid assets which may be invested in specified short-term securities and certain other investments. The level of liquid assets varies depending upon several factors, including: (i) the yields on investment alternatives, (ii) the Association's judgment as to the attractiveness of the yields then available in relation to other opportunities, (iii) expectation of future yield levels, and (iv) the Association's projections as to the short-term demand for funds to be used in loan origination and other activities. At December 31, 2001, the Association's investment portfolio policy allowed investments in instruments such as: (i) U.S. Treasury obligations, (ii) U.S. federal agency or federally sponsored agency obligations, (iii) local municipal obligations, (iv) mortgage-backed securities, (v) bankers' acceptances, (vi) time certificates, (vii) federal funds, including FHLB overnight and term deposits (up to six months), and (viii) investment grade corporate bonds, commercial paper and mortgage derivative products. See " -- Mortgage-Backed Securities." The board of directors may authorize additional investments. The Association's securities at December 31, 2001 did not contain securities of any issuer with an aggregate book value in excess of 10% of its equity, excluding those issued by the United States Government or its agencies. MORTGAGE-BACKED SECURITIES. To supplement lending activities, the Association has invested in residential mortgage-backed securities. Mortgage-backed securities can serve as collateral for borrowings and, through repayments, as a source of liquidity. Mortgage-backed securities represent a participation interest in a pool of one- to four-family or other type of mortgages. Principal and interest payments are passed from the mortgage originators, through intermediaries (generally quasi-governmental agencies) that pool and repackage the participation interests in the form of securities, to investors such as the Association. The Association's mortgage-backed securities portfolio consists of participations or pass-through certificates issued by the Government National Mortgage Association ("GNMA"). GNMA certificates are guaranteed as to principal and interest by the full faith and credit of the United States. The Association's mortgage-backed securities portfolio at December 31, 2001 included one GNMA securities classified as "Held to Maturity" and five GNMA securities classified as available for sale. Expected maturities will differ from contractual maturities due to scheduled repayments and because borrowers may have the right to call or prepay obligations with or without prepayment penalties. Mortgage-backed securities typically are issued with stated principal amounts. The securities are backed by pools of mortgages that have loans with interest rates that are within a set range and have varying maturities. The 8 underlying pool of mortgages can be composed of either fixed-rate or adjustable mortgage loans. Mortgage-backed securities are generally referred to as mortgage participation certificates or pass-through certificates. The interest rate risk characteristics of the underlying pool of mortgages (i.e., fixed-rate or adjustable-rate) and the prepayment risk, are passed on to the certificate holder. The life of a mortgage-backed pass-through security is equal to the life of the underlying mortgages. The following table sets forth the carrying value of the Association's investment securities and mortgage-backed portfolio at the dates indicated. AT DECEMBER 31, ------------------- 2001 2000 ------ ------ (DOLLARS IN THOUSANDS) Securities available-for-sale: Mortgage-backed securities - GNMA .... $5,034 $1,000 Securities held to maturity : U.S. Government securities ........... 1,500 2,500 Mortgage-backed securities - GNMA .... 25 1,626 ------ ------ Total investments ................. $6,559 $5,126 ====== ====== 9 The following table sets forth the scheduled maturities, carrying values, market values and average yields for the Association's investment portfolio at December 31, 2001.
ONE YEAR OR LESS ONE TO FIVE YEARS FIVE TO TEN YEARS ------------------- ----------------- ----------------- WEIGHTED WEIGHTED WEIGHTED BOOK AVERAGE BOOK AVERAGE BOOK AVERAGE VALUE YIELD VALUE YIELD VALUE YIELD ----- ------- ----- ------- ----- ------- (DOLLARS IN THOUSANDS) Securities held-to-maturity: U.S. Government and agency securities..... $ 250 6.03% $ 1,000 7.52% $ 250 8.20% Mortgage-backed securities - GNMA..... -- -- -- -- 25 11.00 -------- --------- ------- Total................. $ 250 $ 1,000 $ 275 ======== ========= ======= MORE THAN TEN YEARS TOTAL INVESTMENT PORTFOLIO ------------------- -------------------------- WEIGHTED WEIGHTED BOOK AVERAGE BOOK MARKET AVERAGE VALUE YIELD VALUE VALUE YIELD ------ ------- ----- ----- ------- (DOLLARS IN THOUSANDS) Securities held-to-maturity: U.S. Government and agency securities..... $ -- --% $ 1,500 $ 1,537 7.38% Mortgage-backed securities - GNMA..... 5,034 7.06 5,059 5,059 7.08 -------- ------- ------- Total................. $ 5,034 $ 6,559 $ 6,596 ======== ======= =======
10 SOURCES OF FUNDS Deposits are the Association's major external source of funds for lending and other investment purposes. Funds are also derived from the receipt of payments on loans and prepayment of loans and, to a much lesser extent, maturities of investment securities and mortgage-backed securities, borrowings and operations. Scheduled loan principal repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are significantly influenced by general interest rates and market conditions. DEPOSITS. Consumer and commercial deposits are attracted principally from within the Association's primary market area through the offering of a selection of deposit instruments including regular savings accounts, money market accounts, and term certificate accounts. Deposit account terms vary according to the minimum balance required, the time period the funds must remain on deposit, and the interest rate. The interest rates paid by the Association on deposits are set weekly at the direction of the Association's senior management. Interest rates are determined based on the Association's liquidity requirements, interest rates paid by its competitors, and its growth goals and applicable regulatory restrictions and requirements. At December 31, 2001, time certificates in amounts of $100,000 or more constituted $3.8 million, or 15.8%, of the deposit portfolio. The majority of these certificates represent deposits from long-standing customers. At December 31, 2001, the Association's deposits were represented by the various types of savings programs described below.
INTEREST MINIMUM MINIMUM BALANCES IN PERCENTAGE OF RATE(1) TERM CATEGORY AMOUNT THOUSANDS TOTAL DEPOSITS ------- ---- -------- ------ --------- -------------- -- % -- Demand accounts $ 100 $ 735 3.06% 2.00 - 4.00 -- Savings and club accounts 100 3,215 13.38 1.00 - 2.50 -- NOW and money market accounts 100 to 2,500 1,943 8.08 TIME CERTIFICATES ----------------- 4.00-4.99 6 months Fixed-term, fixed-rate 1,000 5,051 21.02 5.00-6.99 12 months - 60 Fixed-term, fixed-rate 1,000 13,075 54.46 months -------- ------ $ 24,019 100.00% ======== ======
The following table sets forth the Association's time certificates classified by interest rate at the dates indicated. AT DECEMBER 31, 2001 2000 ------- ------- (IN THOUSANDS) 4.00 - 4.99% ............... $ 5,051 $ 760 5.00 - 5.99% ............... 10,449 7,193 6.00 - 6.99% ............... 2,626 10,122 ------- ------- $18,126 $18,075 ======= ======= 11 The following table sets forth the amount and maturities of the Association's time certificates at December 31, 2001. Approximately 58% of such time certificates has interest rates from 5.00% to 5.99%. AMOUNT DUE ----------------------------------------------------------- LESS THAN AFTER ONE YEAR 1-2 YEARS 2-3 YEARS 3 YEARS TOTAL --------- --------- --------- --------- -------- (IN THOUSANDS) $ 15,263 $ 2,345 $ 291 $ 227 $ 18,126 ========= ========= ========= ========= ======== The following table indicates the amount of the Association's time certificates of $100,000 or more by original maturity as of December 31, 2001. CERTIFICATES ORIGINAL MATURITY OF DEPOSIT ----------------- ---------- (IN THOUSANDS) Three months or less....................... $ 447 Over three through six months.............. 371 Over six through 12 months................. 1,088 Over 12 months............................. 1,956 ----------- Total................................ $ 3,862 =========== BORROWINGS. Advances (borrowings) may be obtained from the FHLB of New York to supplement the Association's supply of lendable funds. Advances from the FHLB of New York are typically secured by a pledge of the Association's stock in the FHLB of New York, a portion of its first mortgage loans and other assets. Each FHLB credit program has its own interest rate, which may be fixed or adjustable, and range of maturities. At December 31, 2001, the Association had $1,000,000 in short term borrowings with the FHLB of New York. COMPETITION The Association competes for deposits with other insured financial institutions such as commercial banks, thrift institutions, credit unions, finance companies, and multi-state regional banks in its market area. The Association also competes for funds with insurance products sold by local agents and investment products such as mutual funds and other securities sold by local and regional brokers. Loan competition varies depending upon market conditions. The Association's competition comes from commercial banks, thrift institutions, credit unions and mortgage bankers, many of whom have greater resources than it has. PERSONNEL At December 31, 2001, the Association had five full-time and no part-time employees. None of the Association's employees are represented by a collective bargaining group. The Association believes that its relationship with its employees is good. REGULATION OF THE COMPANY GENERAL. The Company is a savings and loan holding company within the meaning of the Home Owners' Loan Act, as amended ("HOLA"). As such the Company is registered with the OTS and is subject to OTS regulations, examinations, supervision and reporting requirements. As a subsidiary of a savings and loan holding company, the Association is subject to certain restrictions in its dealings with the Company and affiliates thereof. The Company is required to file certain reports with, and otherwise comply with the rules and regulations of the SEC under the federal securities laws. ACTIVITIES RESTRICTIONS. The Board of Directors of the Company presently operates the Company as a unitary savings and loan holding company. There are generally no restrictions on the activities of unitary savings 12 and loan holding companies which were formed before May 4, 1999 (like the Company), provided that their thrift subsidiary satisfies the Qualified Thrift Lender ("QTL") Test. See "Regulation of the Association -- Qualified Thrift Lender Test." However, if the Director of OTS determines that there is reasonable cause to believe that the continuation by a savings and loan holding company of an activity constitutes a serious risk to the financial safety, soundness, or stability of its subsidiary savings association, the Director of OTS may impose such restrictions as deemed necessary to address such risk including limiting: (i) payment of dividends by the savings institution, (ii) transactions between the savings institution and its affiliates; and (iii) any activities of the savings institution that might create a serious risk that the liabilities of the holding company and its affiliates may be imposed on the savings institution. Notwithstanding the above rules as to permissible business activities of unitary savings and loan holding companies, if the savings institution subsidiary of such a holding company fails to meet the QTL Test, then such unitary holding company shall also presently become subject to the activities restrictions applicable to multiple holding companies and unless the savings association requalifies as a QTL within one year thereafter, register as, and become subject to, the restrictions applicable to a bank holding company. See "Regulation of the Association -- Qualified Thrift Lender Test." If the Company were to acquire control of another savings association, other than through merger or other business combination with the Association, the Company would thereupon become a multiple savings and loan holding company. Except where such acquisition is pursuant to the authority to approve emergency thrift acquisitions and where each subsidiary savings institution meets the QTL Test, the activities of the Company and any of its subsidiaries (other than the Association or other subsidiary savings institutions) would thereafter be subject to further restrictions. Among other things, no multiple savings and loan holding company or subsidiary thereof which is not a savings institution may commence or continue for a limited period of time after becoming a multiple savings and loan holding company or subsidiary thereof, any business activity, upon prior notice to, and no objection by the OTS, other than (i) furnishing or performing management services for a subsidiary savings institution, (ii) conducting an insurance agency or escrow business, (iii) holding, managing, or liquidating assets owned by or acquired from a subsidiary savings institution, (iv) holding or managing properties used or occupied by a subsidiary savings institution, (v) acting as trustee under deeds of trust, (vi) those activities previously directly authorized by regulation as of March 5, 1987 to be engaged in by multiple holding companies, or (vii) those activities authorized by the Federal Reserve Board as permissible for bank holding companies, unless the Director of OTS by regulation prohibits or limits such activities for savings and loan holding companies. Those activities described in (vii) above must also be approved by the Director of OTS prior to being engaged in by a multiple holding company. TRANSACTIONS WITH AFFILIATES. Transactions between savings institutions and any affiliate are governed by Sections 23A and 23B of the Federal Reserve Act. An affiliate of a savings institution is any company or entity which controls, is controlled by or is under common control with the savings institution or any subsidiary that would be deemed a financial subsidiary of a national bank. In a holding company context, the parent holding company of a savings institution (such as the Company) and any companies which are controlled by such parent holding company are affiliates of the savings institution. Generally, Sections 23A and 23B (i) limit the extent to which the savings institution or its subsidiaries may engage in "covered transactions" with any one affiliate to an amount equal to 10% of such institution's capital stock and surplus, and contain an aggregate limit on all such transactions with all affiliates to an amount equal to 20% of such capital stock and surplus, and (ii) require that all such transactions be on terms substantially the same, or at least as favorable, to the institution or subsidiary as those provided to a non-affiliate. The term "covered transaction" includes the making of loans, purchase of assets, issuance of a guarantee and similar other types of transactions. In addition to the restrictions imposed by Sections 23A and 23B, no savings institution may (i) loan or otherwise extend credit to an affiliate, except for any affiliate which engages only in activities which are permissible for bank holding companies, or (ii) purchase or invest in any stocks, bonds, debentures, notes or similar obligations of any affiliate, except for affiliates which are subsidiaries of the savings institution. Savings associations are also subject to the anti-tying provisions of Section 106(b) of the Bank Holding Company Act of 1956 ("BHCA") which prohibits a depository institution from extending credit to or offering any other services, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the institution or certain of its affiliates or not obtain services of a competitor of the institution, subject to certain exceptions. Savings institutions are also subject to the restrictions contained in Section 22(h) of the Federal Reserve Act on loans to executive officers, directors and principal stockholders. Under Section 22(h), loans to an executive 13 officer and to a greater than 10% stockholder of a savings institution, and certain affiliated entities of either, may not exceed, together with all other outstanding loans to such person and affiliated entities the institution's loan to one borrower limit (generally equal to 15% of the institution's unimpaired capital and surplus and an additional 10% of such capital and surplus for loans fully secured by certain readily marketable collateral) and all loans to such persons may not exceed the institution's unimpaired capital and unimpaired surplus unless the institution has less than $100 million in deposits in which case the aggregate limit may be increased to no more than two times unimpaired capital and surplus. Section 22(h) also prohibits loans, above amounts prescribed by the appropriate federal banking agency, to directors, executive officers and greater than 10% stockholders of a savings institution, and their respective affiliates, unless such loan is approved in advance by a majority of the board of directors of the institution with any "interested" director not participating in the voting. The Federal Reserve Board has prescribed the loan amount (which includes all other outstanding loans to such person), as to which such prior board of director approval is required, as being the greater of $25,000 or 5% of capital and surplus (up to $500,000). Further, the Federal Reserve Board pursuant to Section 22(h) requires that loans to directors, executive officers and principal stockholders be made on terms substantially the same as offered in comparable transactions to other persons unless the loan is made pursuant to a benefit or compensation plan that is widely available to other employees and does not give preference to insiders. Section 22(h) also generally prohibits a depository institution from paying the overdrafts of any of its executive officers or directors. Savings institutions are also subject to the requirements and restrictions of Section 22(g) of the Federal Reserve Act and Regulation on loans to executive officers and the restrictions of 12 U.S.C. ss. 1972 on certain tying arrangements and extensions of credit by correspondent banks. Section 22(g) of the Federal Reserve Act requires that loans to executive officers of depository institutions not be made on terms more favorable than those afforded to other borrowers, requires approval for such extensions of credit by the board of directors of the institution, and imposes reporting requirements for and additional restrictions on the type, amount and terms of credits to such officers. Section 1972 prohibits (i) a depository institution from extending credit to or offering any other services, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the institution or certain of its affiliates or not obtain services of a competitor of the institution, subject to certain exceptions, and (ii) extensions of credit to executive officers, directors, and greater than 10% stockholders of a depository institution by any other institution which has a correspondent banking relationship with the institution, unless such extension of credit is on substantially the same terms as those prevailing at the time for comparable transactions with other persons and does not involve more than the normal risk of repayment or present other unfavorable features. RESTRICTIONS ON ACQUISITIONS. The HOLA generally prohibits savings and loan holding companies from acquiring, without prior approval of the Director of OTS, (i) control of any other savings institution or savings and loan holding company or substantially all the assets thereof, or (ii) more than 5% of the voting shares of a savings institution or holding company thereof which is not a subsidiary. Under certain circumstances, a registered savings and loan holding company is permitted to acquire, with the approval of the Director of OTS, up to 15% of the voting shares of an under-capitalized savings institution pursuant to a "qualified stock issuance" without that savings institution being deemed controlled by the holding company. In order for the shares acquired to constitute a "qualified stock issuance," the shares must consist of previously unissued stock or treasury shares, the shares must be acquired for cash, the savings and loan holding company's other subsidiaries must have tangible capital of at least 6-1/2% of total assets, there must not be more than one common director or officer between the savings and loan holding company and the issuing savings institution and transactions between the savings institution and the savings and loan holding company and any of its affiliates must conform to Sections 23A and 23B of the Federal Reserve Act. Except with the prior approval of the Director of OTS, no director or officer of a savings and loan holding company or person owning or controlling by proxy or otherwise more than 25% of such company's stock, may also acquire control of any savings institution, other than a subsidiary savings institution, or of any other savings and loan holding company. The Director of OTS may only approve acquisitions resulting in the formation of a multiple savings and loan holding company which controls savings institutions in more than one state if: (i) the multiple savings and loan holding company involved controls a savings institution which operated a home or branch office in the state of the institution to be acquired as of March 5, 1987; (ii) the acquiror is authorized to acquire control of the savings institution pursuant to the emergency acquisition provisions of the Federal Deposit Insurance Act; or (iii) the statutes of the state in which the institution to be acquired is located specifically permit institutions to be acquired by state- 14 chartered institutions or savings and loan holding companies located in the state where the acquiring entity is located (or by a holding company that controls such state-chartered savings institutions). The OTS regulations permit federal savings associations to branch in any state or states of the United States and its territories. Except in supervisory cases or when interstate branching is otherwise permitted by state law or other statutory provision, a federal association may not establish an out-of-state branch unless (i) the federal association qualifies as a QTL or as a "domestic building and loan association" under ss.7701(a)(19) of the Code and the total assets attributable to all branches of the association in the state would qualify such branches taken as a whole for treatment as a domestic building and loan association and (ii) such branch would not result in (a) formation of a prohibited multi-state multiple savings and loan holding company or (b) a violation of certain statutory restrictions on branching by savings association subsidiaries of banking holding companies. Federal savings associations generally may not establish new branches unless the association meets or exceeds minimum regulatory capital requirements. The OTS will also consider the association's record of compliance with the Community Reinvestment Act of 1977 in connection with any branch application. Under the BHCA, bank holding companies are specifically authorized to acquire control of any savings association. Pursuant to rules promulgated by the Federal Reserve Board, owning, controlling or operating a savings institution is a permissible activity for bank holding companies, if the savings institution engages only in deposit-taking activities and lending and other activities that are permissible for bank holding companies. A bank holding company that controls a savings institution may merge or consolidate the assets and liabilities of the savings institution with, or transfer assets and liabilities to, any subsidiary bank which is a member of the Association with the approval of the appropriate federal banking agency and the Federal Reserve Board. The resulting bank will be required to continue to pay assessments to the SAIF at the rates prescribed for SAIF members on the deposits attributable to the merged savings institution plus an annual growth increment. In addition, the transaction must comply with the restrictions on interstate acquisitions of commercial banks under the BHCA. REGULATION OF THE ASSOCIATION GENERAL. As a federally chartered savings institution, Ogdensburg Federal is subject to extensive regulation by the OTS. The lending activities and other investments of Ogdensburg Federal must comply with various state and federal regulatory requirements. The OTS periodically examines the Association for compliance with various regulatory requirements. The FDIC also has the authority to conduct special examinations of the Association because its deposits are insured by SAIF. The Association must file reports with these agencies describing its activities and financial condition. The Association is also subject to certain reserve requirements promulgated by the Federal Reserve Board. This supervision and regulation is intended primarily for the protection of depositors. Certain of these regulatory requirements are referred to below or appear elsewhere herein. FINANCIAL MODERNIZATION LEGISLATION. On November 12, 1999, President Clinton signed legislation which could have a far-reaching impact on the financial services industry. The Gramm-Leach-Bliley ("G-L-B") Act authorizes affiliations between banking, securities and insurance firms and authorizes bank holding companies and national banks to engage in a variety of new financial activities. Among the new activities that will be permitted to bank holding companies are securities and insurance brokerage, securities underwriting, insurance underwriting and merchant banking. The Federal Reserve Board, in consultation with the Secretary of the Treasury, may approve additional financial activities. The G-L-B Act, however, prohibits future acquisitions of existing unitary savings and loan holding companies, like the Company, by firms which are engaged in commercial activities and limits the permissible activities of unitary savings and loan holding companies formed after May 4, 2000. The G-L-B Act imposes new requirements on financial institutions with respect to customer privacy. The G-L-B Act generally prohibits disclosure of customer information to non-affiliated third parties unless the customer has been given the opportunity to object and has not objected to such disclosure. Financial institutions are further required to disclose their privacy policies to customers annually. Financial institutions, however, will be required to comply with state law if it is more protective of customer privacy than the G-L-B Act. The G-L-B Act directs the federal banking agencies, the National Credit Union Administration, the Secretary of the Treasury, the Securities and Exchange Commission and the Federal Trade Commission, after consultation with the National Association of Insurance Commissioners, to promulgate implementing regulations within six months of enactment. The privacy provisions became effective in July 2001. 15 The G-L-B Act contains significant revisions to the FHLB System. The G-L-B Act imposes new capital requirements on the FHLBs and authorizes them to issue two classes of stock with differing dividend rates and redemption requirements. The G-L-B Act deletes the current requirement that the FHLBs annually contribute $300 million to pay interest on certain government obligations in favor of a 20% of net earnings formula. The G-L-B Act expands the permissible uses of FHLB advances by community financial institutions (under $500 million in assets) to include funding loans to small businesses, small farms and small agri-businesses. The G-L-B Act makes membership in the FHLB voluntary for federal savings associations. The G-L-B Act contains a variety of other provisions including a prohibition against ATM surcharges unless the customer has first been provided notice of the imposition and amount of the fee. The G-L-B Act reduces the frequency of Community Reinvestment Act examinations for smaller institutions and imposes certain reporting requirements on depository institutions that make payments to non-governmental entities in connection with the Community Reinvestment Act. The G-L-B Act eliminates the SAIF special reserve and authorizes a federal savings association that converts to a national or state bank charter to continue to use the term "federal" in its name and to retain any interstate branches. The Company is unable to predict the impact of the G-L-B Act on its and the Bank's operations and competitive environment at this time. Although the G-L-B Act reduces the range of companies with which the Company may affiliate, it may facilitate affiliations with companies in the financial services industry. REGULATORY CAPITAL REQUIREMENTS. Under OTS capital standards, savings associations must maintain "tangible" capital equal to 1.5% of adjusted total assets, "core" capital equal to 4.0% (or 3.0% if the institution is rated CAMELS 1 under the OTS examination rating system) of adjusted total assets and a combination of core and "supplementary" capital equal to 8.0% of "risk-weighted" assets. In addition, OTS regulations impose certain restrictions on savings associations that have a total risk-based capital ratio that is less than 8.0%, a ratio of Tier 1 capital to risk-weighted assets of less than 4.0% or a ratio of Tier 1 capital to adjusted total assets of less than 4.0% (or 3.0% if the institution is rated CAMELS 1). See " -- Prompt Corrective Regulatory Action." For purposes of this regulation, Tier 1 capital has the same definition as core capital which is defined as common shareholders' equity (including retained earnings), noncumulative perpetual preferred stock and related surplus, minority interests in the equity accounts of fully consolidated subsidiaries, certain nonwithdrawable accounts and pledged deposits and "qualifying supervisory goodwill." Core capital is generally reduced by the amount of the savings association's intangible assets for which no market exists. Limited exceptions to the deduction of intangible assets are provided for purchased mortgage servicing rights and qualifying supervisory goodwill. Tangible capital is given the same definition as core capital but does not include an exception for qualifying supervisory goodwill and is reduced by the amount of all the savings association's intangible assets with only a limited exception for purchased mortgage servicing rights and purchased credit card relationships. Both core and tangible capital are further reduced by an amount equal to the savings association's debt and equity investments in subsidiaries engaged in activities not permissible to national banks other than subsidiaries engaged in activities undertaken solely as an agent for customers or in mortgage banking activities and subsidiary depository institutions or their holding companies. At December 31, 2001, Ogdensburg Federal had no such investments. Adjusted total assets are a savings association's total assets as determined under generally accepted accounting principles, adjusted for certain goodwill amounts and increased by a pro rated portion of the assets of subsidiaries in which the savings association holds a minority interest and which are not engaged in activities for which the capital rules require deduction of its debt and equity investments. Adjusted total assets are reduced by the amount of assets that have been deducted from capital, the portion of the savings association's investments in subsidiaries that must be netted against capital under the capital rules and, for purposes of the core capital requirement, qualifying supervisory goodwill. In determining compliance with the risk-based capital requirement, a savings association is allowed to use both core capital and supplementary capital provided the amount of supplementary capital used does not exceed the savings association's core capital. Supplementary capital is defined to include certain preferred stock issues, nonwithdrawable accounts and pledged deposits that do not qualify as core capital, certain approved subordinated debt, certain other capital instruments, a portion of the savings association's general loss allowances and up to 45% of unrealized gains on equity securities. Total core and supplementary capital are reduced by the amount of capital instruments held by other depository institutions pursuant to reciprocal arrangements and by the savings 16 association's high loan-to-value ratio land loans and non-residential construction loans and equity investments other than those deducted from core and tangible capital. At December 31, 2001, the Association had no high ratio land or nonresidential construction loans and had no equity investments for which OTS regulations require deduction from total capital. The risk-based capital requirement is measured against risk-weighted assets which equal the sum of each asset and the credit-equivalent amount of each off-balance sheet item after being multiplied by an assigned risk weight. Under the OTS risk-weighting system, one- to four-family first mortgages not more than 90 days past due with loan-to-value ratios under 80% are assigned a risk weight of 50%. Consumer and residential construction loans are assigned a risk weight of 100%. Mortgage-backed securities issued, or fully guaranteed as to principal and interest, by FNMA and the FHLMC are assigned a 20% risk weight. Cash and U.S. Government securities backed by the full faith and credit of the U.S. Government are given a 0% risk weight. As of December 31, 2001, the Association's risk-weighted assets were approximately $13 million. The table below presents the Association's capital position relative to its various regulatory capital requirements at December 31, 2001. PERCENT OF AMOUNT ASSETS (1) ------ ---------- (DOLLARS IN THOUSANDS) Tangible capital ................................... $2,725 9.8% Tangible capital requirement ....................... 418 1.5 ------ ----- Excess ............................................. $2,307 8.3% ====== ===== Core capital ....................................... $2,725 9.8% Core capital requirement ........................... 1,115 4.0 ------ ----- Excess ............................................. $1,610 5.8% ====== ===== Total capital (i.e., core and supplementary capital) ................................... $2,892 21.6% Risk-based capital requirement ..................... 1,070 8.0 ------ ----- Excess ............................................. $1,822 13.6% ====== ===== - ---------- (1) Based upon adjusted total assets for purposes of the tangible, core and Tier 1 capital requirements, and risk-weighted assets for purposes of the risk-based capital requirements. OTS regulations require savings institutions with more than a "normal" level of interest rate risk to maintain additional total capital. A savings institution's interest rate risk is measured in terms of the sensitivity of its "net portfolio value" to changes in interest rates. Net portfolio value is defined, generally, as the present value of expected cash inflows from existing assets and off-balance sheet contracts less the present value of expected cash outflows from existing liabilities. A savings institution will be considered to have a "normal" level of interest rate risk exposure if the decline in its net portfolio value after an immediate 200 basis point increase or decrease in market interest rates (whichever results in the greater decline) is less than two percent of the current estimated economic value of its assets. A savings institution with a greater than normal interest rate risk is required to deduct from total capital, for purposes of calculating its risk-based capital requirement, an amount (the "interest rate risk component") equal to one-half the difference between the institution's measured interest rate risk and the normal level of interest rate risk, multiplied by the economic value of its total assets. The OTS calculates the sensitivity of a savings institution's net portfolio value based on data submitted by the institution in a schedule to its quarterly Thrift Financial Report and using the interest rate risk measurement model adopted by the OTS. The amount of the interest rate risk component, if any, to be deducted from a savings institution's total capital is based on the institution's Thrift Financial Report filed two quarters earlier. Savings institutions with less than $300 million in assets and a risk-based capital ratio above 12% are generally exempt from filing the interest rate risk schedule with their Thrift Financial Reports. However, the OTS will require any exempt savings institution that it determines may have a high level of interest rate risk exposure to file such schedule on a 17 quarterly basis. The Association has determined that, on the basis of current financial data, it will not be deemed to have more than normal level of interest rate risk under the rule and does not expect that it will be required to increase its total capital as a result of the rule. In addition to requiring generally applicable capital standards for savings institutions, the OTS is authorized to establish the minimum level of capital for a savings institution at such amount or at such ratio of capital-to-assets as the OTS determines to be necessary or appropriate for such institution in light of the particular circumstances of the institution. The OTS may treat the failure of any savings institution to maintain capital at or above such level as an unsafe or unsound practice and may issue a directive requiring any savings institution which fails to maintain capital at or above the minimum level required by the OTS to submit and adhere to a plan for increasing capital. Such an order may be enforced in the same manner as an order issued by the FDIC. PROMPT CORRECTIVE REGULATORY ACTION. Under the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), the federal banking regulators are required to take prompt corrective action if an insured depository institution fails to satisfy certain minimum capital requirements. All institutions, regardless of their capital levels, are restricted from making any capital distribution or paying any management fees if the institution would thereafter fail to satisfy the minimum levels for any of its capital requirements. An institution that fails to meet the minimum level for any relevant capital measure (an "undercapitalized institution") may be: (i) subject to increased monitoring by the appropriate federal banking regulator; (ii) required to submit an acceptable capital restoration plan within 45 days; (iii) subject to asset growth limits; and (iv) required to obtain prior regulatory approval for acquisitions, branching and new lines of businesses. The capital restoration plan must include a guarantee by the institution's holding company that the institution will comply with the plan until it has been adequately capitalized on average for four consecutive quarters, under which the holding company would be liable up to the lesser of 5% of the institution's total assets or the amount necessary to bring the institution into capital compliance as of the date it failed to comply with its capital restoration plan. A "significantly undercapitalized" institution, as well as any undercapitalized institution that did not submit an acceptable capital restoration plan, may be subject to regulatory demands for recapitalization, broader application of restrictions on transactions with affiliates, limitations on interest rates paid on deposits, asset growth and other activities, possible replacement of directors and officers, and restrictions on capital distributions by any bank holding company controlling the institution. Any company controlling the institution could also be required to divest the institution or the institution could be required to divest subsidiaries. The senior executive officers of a significantly undercapitalized institution may not receive bonuses or increases in compensation without prior approval and the institution is prohibited from making payments of principal or interest on its subordinated debt. In their discretion, the federal banking regulators may also impose the foregoing sanctions on an undercapitalized institution if the regulators determine that such actions are necessary to carry out the purposes of the prompt corrective action provisions. If an institution's ratio of tangible capital to total assets falls below a "critical capital level," the institution will be subject to conservatorship or receivership within 90 days unless periodic determinations are made that forbearance from such action would better protect the deposit insurance fund. Unless appropriate findings and certifications are made by the appropriate federal bank regulatory agencies, a critically undercapitalized institution must be placed in receivership if it remains critically undercapitalized on average during the calendar quarter beginning 270 days after the date it became critically undercapitalized. If a savings institution is in compliance with an approved capital plan on the date of enactment of FDICIA, however, it will not be required to submit a capital restoration plan if it is undercapitalized or become subject to the statutory prompt corrective action provisions applicable to significantly and critically undercapitalized institutions prior to July 1, 1994. The federal banking regulators, including the OTS, generally measure a depository institution's capital adequacy on the basis of the institution's total risk-based capital ratio (the ratio of its total capital to risk-weighted assets), Tier 1 risk-based capital ratio (the ratio of its core capital to risk-weighted assets) and leverage ratio (the ratio of its core capital to adjusted total assets). 18 The following table shows the capital ratio requirements for each prompt corrective action category:
ADEQUATELY SIGNIFICANTLY WELL CAPITALIZED CAPITALIZED UNDERCAPITALIZED UNDERCAPITALIZED ---------------- ----------- ---------------- ---------------- Total risk-based capital 10.0% or more 8.0% or more Less than 8.0% Less than 6.0% Tier 1 risk-based capital ratio 6.0% or more 4.0% or more Less than 4.0% Less than 3.0% Leverage ratio 5.0% or more 4.0% or more* Less than 4.0% Less than 3.0%
- -------- * 3.0% if institution has a composite 1 CAMELS rating. A "critically undercapitalized" savings institution is defined as a savings institution that has a ratio of "tangible equity" to total assets of less than 2.0%. Tangible equity is defined as core capital plus cumulative perpetual preferred stock (and related surplus) less all intangibles other than qualifying supervisory goodwill and certain purchased mortgage servicing rights. The OTS may reclassify a well capitalized savings institution as adequately capitalized and may require an adequately capitalized or undercapitalized institution to comply with the supervisory actions applicable to institutions in the next lower capital category (but may not reclassify a significantly undercapitalized institution as critically under-capitalized) if the OTS determines, after notice and an opportunity for a hearing, that the savings institution is in an unsafe or unsound condition or that the institution has received and not corrected a less-than-satisfactory rating for any CAMELS rating category. The Association is classified as "well capitalized" under these regulations. QUALIFIED THRIFT LENDER TEST. A savings institution that does not meet the QTL Test must either convert to a bank charter or comply with the following restrictions on its operations: (i) the institution may not engage in any new activity or make any new investment, directly or indirectly, unless such activity or investment is permissible for a national bank; (ii) the branching powers of the institution shall be restricted to those of a national bank; and (iii) payment of dividends by the institution shall be subject to the rules regarding payment of dividends by a national bank. Upon the expiration of three years from the date the institution ceases to be a QTL, it must cease any activity, and not retain any investment unless it is permissible for a national bank and a savings association. To qualify as a QTL, a savings institution must qualify as a "domestic building and loan association" under the Internal Revenue Code or maintain at least 65% of its "portfolio" assets in Qualified Thrift Investments. Portfolio assets are defined as total assets less intangibles, property used by a savings institution in its business and liquidity investments in an amount not exceeding 20% of assets. Qualified Thrift Investments consist of: (i) loans, equity positions, or securities related to domestic, residential real estate or manufactured housing, and educational, small business and credit card loans; (ii) shares of stock issued by an FHLB. Subject to a 20% of portfolio assets limit, however, savings institutions are able to treat the following as Qualified Thrift Investments: (i) 50% of the dollar amount of residential mortgage loans subject to sale under certain conditions but do not include any intangible assets; (ii) investments, both debt and equity, in the capital stock or obligations of and any other security issued by a service corporation or operating subsidiary, provided that such subsidiary derives at least 80% of its annual gross revenues from activities directly related to purchasing, refinancing, constructing, improving or repairing domestic residential housing or manufactured housing; (iii) 200% of their investments in loans to finance "starter homes" and loans for construction, development or improvement of housing and community service facilities or for financing small businesses in "credit-needy" areas; (iv) loans for the purchase, construction, development or improvement of community service facilities, (v) loans for personal, family, household or educational purposes, provided that the dollar amount treated as Qualified Thrift Investments may not exceed 10% of the savings association's portfolio assets; and (vi) shares of stock issued by FNMA or FHLMC. A savings institution must maintain its status as a QTL on a monthly basis in nine out of every 12 months. A savings institution that fails to maintain QTL status will be permitted to requalify once, and if it fails the QTL Test a second time, it will become immediately subject to all penalties as if all time limits on such penalties had expired. Failure to qualify as a QTL results in a number of sanctions, including the imposition of certain operating restrictions imposed on national banks and a restriction on obtaining additional advances from the FHLB System. Upon failure to qualify as a QTL for two years, a savings association must convert to a commercial bank. At December 31, 2001, approximately 96% of the Association's assets were invested in Qualified Thrift Investments. 19 DIVIDEND LIMITATIONS. Under OTS regulations, the Association is not permitted to pay dividends on its capital stock if its regulatory capital would thereby be reduced below the amount then required for the liquidation account established for the benefit of certain depositors of the Association at the time of its conversion to stock form. In addition, savings institution subsidiaries of savings and loan holding companies are required to give the OTS 30 days' prior notice of any proposed declaration of dividends to the holding company. OTS regulations require that savings institutions submit notice to the OTS prior to making a capital distribution if (a) they would not be well-capitalized after the distribution, (b) the distribution would result in the retirement of any of the institution's common or preferred stock or debt counted as its regulatory capital, or (c) the institution is a subsidiary of a holding company. A savings institution must make application to the OTS to pay a capital distribution if (x) the institution would not be adequately capitalized following the distribution, (y) the institution's total distributions for the calendar year exceeds the institution's net income for the calendar year to date plus its net income (less distributions) for the preceding two years, or (z) the distribution would otherwise violate applicable law or regulation or an agreement with or condition imposed by the OTS. If neither the savings institution nor the proposed capital distribution meet any of the foregoing criteria, then no notice or application is required to be filed with the OTS before making a capital distribution. The OTS may disapprove or deny a capital distribution if in the view of the OTS, the capital distribution would constitute an unsafe or unsound practice. Under the OTS' prompt corrective action regulations, the Association is also prohibited from making any capital distributions if after making the distribution, the Association would have: (i) a total risk-based capital ratio of less than 8.0%; (ii) a Tier 1 risk-based capital ratio of less than 4.0%; or (iii) a leverage ratio of less than 4.0%. The OTS, after consultation with the FDIC, however, may permit an otherwise prohibited stock repurchase if made in connection with the issuance of additional shares in an equivalent amount and the repurchase will reduce the institution's financial obligations or otherwise improve the institution's financial condition. DEPOSIT INSURANCE. The Association is required to pay assessments based on a percentage of its insured deposits to the FDIC for insurance of its deposits by the FDIC through the SAIF. Under the Federal Deposit Insurance Act, the FDIC is required to set semi-annual assessments for SAIF-insured institutions at a level necessary to maintain the designated reserve ratio of the SAIF at 1.25% of estimated insured deposits or at a higher percentage of estimated insured deposits that the FDIC determines to be justified for that year by circumstances indicating a significant risk of substantial future losses to the SAIF. Under the FDIC's risk-based deposit insurance assessment system, the assessment rate for an insured depository institution depends on the assessment risk classification assigned to the institution by the FDIC, which is determined by the institution's capital level and supervisory evaluations. Based on the data reported to regulators for the date closest to the last day of the seventh month preceding the semi-annual assessment period, institutions are assigned to one of three capital groups -- well capitalized, adequately capitalized or undercapitalized -- using the same percentage criteria as under the prompt corrective action regulations. See " -- Prompt Corrective Regulatory Action." Within each capital group, institutions are assigned to one of three subgroups on the basis of supervisory evaluations by the institution's primary supervisory authority and such other information as the FDIC determines to be relevant to the institution's financial condition and the risk posed to the deposit insurance fund. The SAIF deposit insurance assessment rate set by the FDIC is zero for well-capitalized institutions with the highest supervisory ratings and institutions in the lowest risk assessment classification are assessed at the rate of 0.27% of insured deposits. In addition, FDIC-insured institutions are required to pay assessments to the FDIC to help fund interest payments on certain bonds issued by the Financing Corporation ("FICO"), an agency of the federal government established to finance takeovers of insolvent thrifts. Effective January 1, 2000, both BIF and SAIF members began being assessed at the same rate for FICO payments. Prior to such date, BIF-insured institutions were assessed at one-fifth the rate of SAIF-insured institutions for purposes of the FICO assessment. The FDIC has adopted a regulation which provides that any insured depository institution with a ratio of Tier 1 capital to total assets of less than 2% will be deemed to be operating in an unsafe or unsound condition, which would constitute grounds for the initiation of termination of deposit insurance proceedings. The FDIC, however, will not initiate termination of insurance proceedings if the depository institution has entered into and is in compliance with a written agreement with its primary regulator, and the FDIC is a party to the agreement, to increase its Tier 1 capital to such level as the FDIC deems appropriate. Tier 1 capital is defined as the sum of 20 common stockholders' equity, noncumulative perpetual preferred stock (including any related surplus) and minority interests in consolidated subsidiaries, minus all intangible assets other than certain purchased servicing rights and purchased credit card receivables and qualifying supervisory goodwill eligible for inclusion in core capital under OTS regulations and minus identified losses and investments in certain securities subsidiaries. Insured depository institutions with Tier 1 capital equal to or greater than 2% of total assets may also be deemed to be operating in an unsafe or unsound condition notwithstanding such capital level. The regulation further provides that in considering applications that must be submitted to it by savings institutions, the FDIC will take into account whether the savings association is meeting the Tier 1 capital requirement for state non-member banks of 4% of total assets. FEDERAL HOME LOAN BANK SYSTEM. The Association is a member of the FHLB, which consists of 12 Federal Home Loan Banks subject to supervision and regulation by the Federal Housing Finance Board ("FHFB"). The Federal Home Loan Banks provide a central credit facility primarily for member institutions. As a member of the FHLB of New York, the Association is required to acquire and hold shares of capital stock in the FHLB of New York in an amount at least equal to 1% of the aggregate unpaid principal of its home mortgage loans, home purchase contracts, and similar obligations at the beginning of each year, or 1/20 of its advances from the FHLB of New York, whichever is greater. The Association was in compliance with this requirement with an investment in the FHLB of New York stock at December 31, 2001, of $162,500. The FHLB of New York is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System. It makes advances to members in accordance with policies and procedures established by the FHFB and the Board of Directors of the FHLB of New York. As of December 31, 2001, the Association had $1,000,000 on in short term borrowings from the FHLB of New York. See "Sources of Funds -- Borrowings." FEDERAL RESERVE SYSTEM. Pursuant to regulations of the Federal Reserve Board, a thrift institution must maintain average daily reserves equal to 3% on the first $41.3 million of transaction accounts, plus 10% on the remainder. This percentage is subject to adjustment by the Federal Reserve Board. Because required reserves must be maintained in the form of vault cash or in a non-interest bearing account at a Federal Reserve Bank, the effect of the reserve requirement is to reduce the amount of the institution's interest-earning assets. As of December 31, 2001, the Association met its reserve requirements. TAXATION The Company will file a consolidated federal income tax return on a December 31 fiscal year basis. Consolidated returns have the effect of eliminating intercompany distributions, including dividends, from the computation of consolidated taxable income for the taxable year in which the distributions occur. The Association is subject to the provisions of the Internal Revenue Code of 1986, as amended (the "Code"), in the same general manner as other corporations. However, prior to August 1996, savings institutions such as the Association, which met certain definitional tests and certain other conditions prescribed by the Code could benefit from certain favorable provisions regarding their deductions from taxable income for annual additions to their bad debt reserve. The amount of the bad debt deduction that a qualifying savings institution could claim for tax purposes with respect to additions to its reserve for bad debts for "qualifying real property loans" could be based upon the Association's actual loss experience (the "experience method") or as a percentage of the Association's taxable income (the "percentage of taxable income method"). Historically, the Association used the method that would allow the Association to take the largest deduction. In August 1996, the Code was revised to equalize the taxation of savings institutions and banks. Savings institutions, such as the Association, no longer have a choice between the percentage of taxable income method and the experience method in determining additions to bad debt reserves. Thrifts with $500 million of assets or less may still use the experience method, which is generally available to small banks currently. Larger thrifts may only take a tax deduction when a loan is actually charged off. Any reserve amounts added after 1987 will be taxed over a six year period beginning in 1996; however, bad debt reserves set aside through 1987 are generally not taxed. A savings institution may delay recapturing into income its post-1987 bad debt reserves for an additional two years if it meets a residential-lending test. This law is not expected to have a material impact on the Association. 21 Earnings appropriated to the Association's bad debt reserve and claimed as a tax deduction including the Association's supplemental reserves for losses will not be available for the payment of cash dividends or for distribution (including distributions made on dissolution or liquidation), unless the Association includes the amount in income, along with the amount deemed necessary to pay the resulting federal income tax. If such amount is used for any purpose other than bad debt losses, including a dividend distribution or a distribution in liquidation, it will be subject to federal income tax at the then current rate. Retained earnings at December 31, 2001 included approximately $426,000 for which no deferred Federal income tax liability has been recognized. This amount represents such allocation of income to tax bad debt deduction for income tax purposes. The Code imposes a tax ("AMT") on alternative minimum taxable income ("AMTI") at a rate of 20%. AMTI is increased by certain preference items, including the excess of the tax bad debt reserve deduction using the percentage of taxable income method over the deduction that would have been allowable under the experience method. Only 90% of AMTI can be offset by net operating loss carryovers of which the Association currently has none. AMTI is also adjusted by determining the tax treatment of certain items in a manner that negates the deferral of income resulting from the regular tax treatment of those items. Thus, the Association's AMTI is increased by an amount equal to 75% of the amount by which the Association's adjusted current earnings exceeds the Association's AMTI (determined without regard to this adjustment and prior to reduction for net operating losses). In addition, for taxable years beginning after December 31, 1986 and before January 1, 1996, an environmental tax of 0.12% of the excess of AMTI (with certain modifications) over $2 million is imposed on corporations, including the Association, whether or not an AMT is paid. Under pending legislation, the AMT rate would be reduced to zero for taxable years beginning after December 31, 1994, but this rate reduction would be suspended for taxable years beginning in 1995 and 1996 and the suspended amounts would be refunded as tax credits in subsequent years. The Company may exclude from its income 100% of dividends received from the Association as a member of the same affiliated group of corporations. A 70% dividends received deduction generally applies with respect to dividends received from corporations that are not members of such affiliated group, except that an 80% dividends received deduction applies if the Company owns more than 20% of the stock of a corporation paying a dividend. The above exclusion amounts, with the exception of the affiliated group figure, were reduced in years in which the Association availed itself of the percentage of taxable income bad debt deduction method. The Association's federal income tax returns have not been audited by the IRS. STATE TAXATION The Company reports income on a combined basis to New York State. The Company is subject to the New York State franchise tax on banking corporations. The New York State tax on banking corporations is imposed in an annual amount of the greater (i) 8.5% of the Company's "Entire Net Income" allocable to New York State during the taxable year, or (ii) the applicable alternative minimum tax. The applicable alternative minimum tax is generally the greater of (i) a percentage (0.01%, 0.004% or 0.002%, depending upon the nature and mix of the Company's assets and on the ratio of its net worth to the value of its assets) of the value of the Company's assets allocable to New York State with certain modifications, (ii) 3% of the Company's "Alternative Entire Net Income" allocable to New York State, or (iii) $250.00. For purposes of the New York State tax on banking corporations, "Entire Net Income" is similar to federal taxable income, subject to certain modifications (including the fact that net operating losses cannot be carried back or carried forward), and "Alternative Entire Net Income" is similar to "Entire Net Income," subject to certain further modifications. 22 EXECUTIVE OFFICERS At December 31, 2001, the executive officers of the Company were as follows: NAME AGE POSITION ---- --- -------- Robert E. Wilson 64 President and Chief Executive Officer Todd R. Mashaw 38 Vice President, Secretary/ Treasurer ROBERT E. WILSON has served as President and Chief Executive Officer of the Association since 1963 and as President and Chief Executive Officer of the Company since its formation. He is a former member of the Ogdensburg City School Board having served 15 years with two terms as President and two terms as Vice President. He is a member of Kiwanis International for 15 years and has served on their Board of Directors. For 25 years he participated in the Kiwanis youth activity programs. TODD R. MASHAW has served as Vice President of the Association since 1989 and Vice President, Secretary/Treasurer of the Company since its formation. He was a member of the Board of Assessment and Review for the City of Ogdensburg from 1995 to 2000 and has been a member of S.U.N.Y. Canton College Business Administration Advisory Committee since 1991. He has also coached Kiwanis Baseball. ITEM 2. DESCRIPTION OF PROPERTY - -------------------------------- The following table sets forth certain information regarding the Association's main office which is its only location. BOOK VALUE AT DEPOSITS AT YEAR OWNED OR DECEMBER 31, APPROXIMATE DECEMBER 31, OPENED LEASED 2001 (1) SQUARE FOOTAGE 2001 ------ -------- ------------ -------------- ------- (DOLLARS IN THOUSANDS) MAIN OFFICE: 1987 Owned $ 383 2,800 $24,019 825 State Street Ogdensburg, NY 13669 - ---------- (1) Cost less accumulated depreciation and amortization. ITEM 3. LEGAL PROCEEDINGS. - ------------------------- The Association is, from time to time, a party to legal proceedings arising in the ordinary course of its business, including legal proceedings to enforce the rights against borrowers. The Association is not currently a party to any legal proceedings which are expected to have a material adverse effect on its financial statements. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------------------------------------------------------------ There were no matters submitted to a vote of the security holders during the fourth quarter of fiscal year 2001. 23 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS' - -------------------------------------------------------------------------------- MATTERS ------- The Common Stock is listed in the over-the-counter through the OTC "Electronic Bulletin Board" under the symbol "PBKO" There are currently 131,390 shares of the Common Stock outstanding. The number of registered holders of Common Stock on December 31, 2001 was 126. Trading in the Common Stock commenced on December 28, 1998. The high and low bid prices for the Common Stock and dividends declared for each quarter of 1999 and 2000 are set forth below. These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions. QUARTER HIGH LOW DIVIDENDS DECLARED ------- ---- --- ------------------ March 31, 2000 11.75 11.75 -- June 30, 2000 12.00 11.75 -- September 30, 2000 14.00 12.25 -- December 31, 2000 14.00 14.00 $0.05 March 31, 2001 14.75 14.00 -- June 30, 2001 17.25 14.75 -- September 30, 2001 18.00 17.25 -- December 31, 2001 20.00 18.00 $0.05 The income of the Company consists of interest on investment and related securities and dividends which may periodically be declared and paid by the Board of Directors of the Association on the common shares of the Association held by the Company. In addition to certain federal income tax considerations, OTS regulations impose limitations on the payment of dividends and other capital distributions by savings associations. Under OTS regulations applicable to converted savings associations, the Association is not permitted to pay a cash dividend on its common shares if the Association's regulatory capital would, as a result of the payment of such dividend, be reduced below the amount required for the liquidation account established in connection with the Conversion or applicable regulatory capital requirements prescribed by the OTS. OTS regulations require that savings institutions submit notice to the OTS prior to making a capital distribution if (a) they would not be well-capitalized after the distribution, (b) the distribution would result in the retirement of any of the institution's common or preferred stock or debt counted as its regulatory capital, or (c) the institution is a subsidiary of a holding company. A savings institution must make application to the OTS to pay a capital distribution if (x) the institution would not be adequately capitalized following the distribution, (y) the institution's total distributions for the calendar year exceeds the institution's net income for the calendar year to date plus its net income (less distributions) for the preceding two years, or (z) the distribution would otherwise violate applicable law or regulation or an agreement with or condition imposed by the OTS. If neither the savings institution nor the proposed capital distribution meet any of the foregoing criteria, then no notice or application is required to be filed with the OTS before making a capital distribution. The OTS may disapprove or deny a capital distribution if in the view of the OTS, the capital distribution would constitute an unsafe or unsound practice. The Association currently meets all of its regulatory requirements and, unless the OTS determines that the Association is an institution requiring more than normal supervision, the Association may pay dividends in accordance with the foregoing provisions of the OTS regulations. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION - ------------------------------------------------------------------ The Company's results of operations depend primarily on net interest income, which is determined by (i) the difference between rates of interest it earns on its interest-earning assets and the rates it pays on interest-bearing liabilities (interest rate spread), and (ii) the relative amounts of interest-earning assets and interest-bearing liabilities. 24 The Company's results of operations are also affected by non-interest expense, including primarily compensation and employee benefits, federal deposit insurance premiums and office occupancy costs. The Company's results of operations also are affected significantly by general and economic and competitive conditions, particularly changes in market interest rates, government policies and actions of regulatory authorities, all of which are beyond its control. The Company believes there is sufficient demand in its market area to continue its policy of emphasizing lending in the one- to four-family real estate loan area. In addition, the Company hopes to experience continued growth in its consumer loan portfolio; however, there is no assurance that it will be able to do so. See "Item 1. Description of Business -- Lending Activities." MARKET/INTEREST RATE RISK DISCLOSURE QUALITATIVE DISCLOSURE. The Company's assets and liabilities may be analyzed by examining the extent to which its assets and liabilities are interest-rate sensitive and by monitoring the expected effects of interest rate changes on its net portfolio value. An asset or liability is interest rate sensitive within a specific time period if it will mature or reprice within that time period. If the Company's assets mature or reprice more quickly or to a greater extent than its liabilities, its net portfolio value and net interest income would tend to increase during periods of rising interest rates but decrease during periods of falling interest rates. Conversely, if the Company's assets mature or reprice more slowly or to a lesser extent than its liabilities, its net portfolio value and net interest income would tend to decrease during periods of rising interest rates but increase during periods of falling interest rates. The Company's policy has been to mitigate the interest rate risk inherent in the historical savings institution business of originating long-term loans funded by short-term deposits by pursuing certain strategies designed to decrease the vulnerability of its earnings to material and prolonged changes in interest rates. The Company's primary method of managing interest rate is to emphasize the origination of ARM loans. The Company's ARM loans provide that the interest rate will adjust every year. The terms of these loans generally limit the amount of any rate change to a maximum of 2% and also provide that the rate may not increase above a "ceiling" rate established at the time the loan is made. At December 31, 2001, approximately 48% of its mortgage loan portfolio had adjustable rates. The Company also purchases investment securities with relatively short maturities, normally three years or less. At December 31, 2001, approximately 20% of its investment portfolio had a maturity of five years or less. The Company also seeks to cushion itself against interest rate fluctuations by preserving a loyal depositor base whose accounts are less likely to switch to institutions that may be offering higher rates. The Company monitors its deposit rates on a weekly basis to ensure that it remains competitive. QUANTITATIVE DISCLOSURE. In recent years, the Company has measured its interest rate sensitivity by computing the "gap" between the assets and liabilities which were expected to mature or reprice within certain time periods, based on assumptions regarding loan prepayment and the rates at which deposits will be withdrawn by depositors over time formerly provided by the OTS. However, the OTS now measures an institution's interest rate risk by computing the amount by which the net present value of cash flow from assets, liabilities and off balance sheet items (the institution's net portfolio value or "NPV") would change in the event of a range of assumed changes in market interest rates. These computations estimate the effect on an institution's NPV from instantaneous and permanent 1% to 3% (100 to 300 basis points) increases and decreases in market interest rates. The following table presents the interest rate sensitivity of the Company's NPV at December 31, 2001, as calculated by the OTS, which is based upon quarterly information that it voluntarily provided to the OTS. 25 NPV AS % OF NET PORTFOLIO VALUE PORTFOLIO VALUE OF ASSETS CHANGE ------------------------------- ------------------------------- IN RATES $ AMOUNT $ CHANGE % CHANGE NPV RATIO BASIS POINT CHANGE -------- -------- -------- -------- -------- ------------------- (DOLLARS IN THOUSANDS) + 300 bp $1,917 $(1,389) (42)% 7.10% (439) bp + 200 bp 2,375 (931) (28) 8.61 (288) bp + 100 bp 2,855 (451) (14) 10.13 (136) bp 0 bp 3,306 11.49 - - 100 bp 3,631 325 10 12.42 93 bp - - 200 bp -- 0 0 0.00 0 bp - - 300 bp -- 0 0 0.00 0 bp The board of directors has established a policy setting forth maximum NPV variances as a result of such instantaneous and permanent changes in interest rates. At December 31, 2001, the Company's interest rate sensitivity was within the policy established by the board. While the Company cannot predict future interest rates or their effects on its NPV or net interest income, it does not expect current interest rates to have a material adverse effect on its NPV or net interest income in the near future. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, prepayments and deposit runoff and should not be relied upon as indicative of actual results. Certain shortcomings are inherent in such computations. Although certain assets and liabilities may have similar maturity or periods of repricing, they may react at different times and in different degrees to changes in the market interest rates. The interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while rates on other types of assets and liabilities may lag behind changes in market interest rates. Certain assets, such as ARM loans, generally have features which restrict changes in interest rates on a short-term basis and over the life of the loan. In the event of a change in interest rates, prepayments and early withdrawal levels could deviate significantly from those assumed in making calculations set forth above. Additionally, an increased credit risk may result as the ability of many borrowers to service their debt may decrease in the event of an interest rate increase. The board of directors reviews the Company's asset and liability policies. The board of directors meets regularly to review interest rate risk and trends, as well as liquidity and capital ratios and requirements. Management administers the policies and determinations of the board of directors with respect to its asset and liability goals and strategies. The Company expects that its asset and liability policies and strategies will continue as described so long as competitive and regulatory conditions in the financial institution industry and market interest rates continue as they have in recent years. 26 AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS The following table sets forth certain information relating to the Company's average balance sheet and reflects the average yield on assets and average cost of liabilities for the periods indicated and the average yields earned and rates paid for the periods indicated. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods presented.
YEAR ENDED DECEMBER 31, ------------------------------------------------------------------------- 2001 2000 --------------------------------- ---------------------------------- AVERAGE AVERAGE AVERAGE YIELD/ AVERAGE YIELD/ BALANCE INTEREST COST BALANCE INTEREST COST ------- -------- ---- ------- -------- ---- (DOLLARS IN THOUSANDS) ASSETS: Interest-earning assets: Loans (1)................................ $ 19,674 $ 1,606 8.16% $ 20,651 $ 1,697 8.21% Securities (2)........................... 5,851 432 7.38 4,433 286 6.45 Other short-term investments............. 1,588 56 3.52 1,173 67 5.71 -------- --------- ---------- --------- Total interest-earning assets......... 27,113 2,094 7.72 26,257 2,050 7.81 Non-interest-earning assets................. 626 562 -------- ---------- Total assets.......................... $ 27,739 $ 26,819 ======== ========== Interest-bearing liabilities: Savings and club accounts................ $ 3,073 $ 77 2.51 $ 3,018 83 2.76 Time certificates........................ 18,101 1,080 6.00 17,784 1,014 5.71 NOW accounts and money market accounts... 1,935 40 2.07 1,643 29 1.77 Borrowings.................................. 750 52 6.93 625 42 6.70 -------- --------- ---------- --------- Total interest-bearing liabilities..... 23,859 1,249 5.23 23,070 1,168 5.07 Non-interest-bearing liabilities............ 884 870 -------- ---------- Total liabilities...................... 24,743 23,940 Total equity................................ 2,996 2,879 -------- ---------- Total liabilities and equity........... $ 27,739 $ 26,819 ======== ========== Net interest income......................... $ 845 $ 882 ========= ========= Net interest rate spread.................... 2.49% 2.74% ===== ===== Net yield on interest-earning assets........ 3.12% 3.36% ===== ===== Average interest-earning assets to average interest-bearing liabilities.. 1.14x 1.14x ===== =====
- ---------- (1) Non-accrual loans are included in average balances, less allowance for loan losses and deferred fees. (2) Securities are included at amortized cost, with net unrealized gains or losses on securities available-for-sale included as a component of non-earning assets. 27 RATE/VOLUME ANALYSIS The table below sets forth certain information regarding changes in interest income and interest expense for the periods indicated. For each category of interest-earning asset and interest-bearing liability, information is provided on changes attributable to: (i) changes in volume (changes in volume multiplied by old rate); and (ii) changes in rate (change in rate multiplied by old volume), and the net change in net interest income. The net change attributable to the combined impact of volume and rate has been allocated proportionately to the absolute dollar amounts of change in each.
YEAR ENDED DECEMBER 31, ----------------------------------------------------------------- 2001 VS. 2000 2000 VS. 1999 ------------------------------ ------------------------------ INCREASE (DECREASE) INCREASE (DECREASE) DUE TO DUE TO ------------------------------ ------------------------------ VOLUME RATE TOTAL VOLUME RATE TOTAL -------- -------- ------- ------- -------- -------- (IN THOUSANDS) Interest income: Loans...................... $ (81) $ (10) $ (91) $ 30 $ 31 $ 61 Securities................. 91 55 146 88 20 108 Other short-term investments............ 24 (35) (11) (21) (2) (23) -------- -------- ------- ------- -------- -------- Total interest-earning assets............. 34 10 44 97 49 146 -------- -------- ------- ------- -------- -------- Interest expense: Savings and club accounts.. 2 (8) (6) 3 (9) (6) Time certificates.......... 18 48 66 58 52 110 NOW and money market accounts................. 6 5 11 (12) 11 (1) Borrowings................. 8 2 10 (6) 13 7 -------- -------- ------- ------- -------- -------- Total interest-bearing liabilities...... 34 47 81 43 67 110 -------- -------- ------- ------- -------- -------- Change in net interest income................... $ -- $ (37) $ (37) $ 54 $ (18) $ 36 ======== ======== ======= ======= ======== ========
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 2001 AND DECEMBER 31, 2000 Total assets increased by $900,000, or 3.2%, from $27.3 million at December 31, 2000 to $28.2 million at December 31, 2001. The increase in assets for the period was attributable to the growth in the Company's investment portfolio of $1.4 million, or 27.5%, which was the result of GNMA purchases. The growth was partially funded by the short-term borrowings from the FHLB of New York. Total liabilities increased by $800,000, or 3.2%, from $24.3 million at December 31, 2000 to $25.1 million at December 31, 2001. At December 31, 2001, total deposits amounted to $24.0 million, an increase of $300,000, or 1.3%, from December 31, 2000's level of $23.7 million. The deposit growth consisted primarily of time certificates and savings and club accounts. Total equity increased by $137,000, or 4.7%, due mainly to retained earnings from the period. At December 31, 2001, the Company was in compliance with all applicable regulatory capital requirements with total core and tangible capital of $2.7 million (9.8% of adjusted total assets) and total risk-based capital of $2.9 million (21.6% of risk-weighted assets). 28 COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000 NET INCOME. Net income decreased $22,000, or 13.75% from $160,000 for the fiscal year ended December 31, 2000 to $138,000 for the fiscal year ended December 31, 2001. The primary reasons for the decrease were an increase in noninterest expense and decrease in net interest income. NET INTEREST INCOME. Net interest income before provision for loan losses decreased from $882,000 for fiscal year 2000 to $845,000 for fiscal year 2001. The $37,000, or 4.2%, decrease was due to an increase in interest expense and a decrease in loan and fee income offset by an increase in interest on investment securities. Interest income from loans totaled $1.6 million for the year ended December 31, 2001 as compared to $1.7 million for the year ended December 31, 2000 for a decrease of $100,000 or 5.9%. During the year ended December 31, 2001, the average balance of the loan portfolio decreased by $977,000 or 4.7% to $19.7 million for 2001 as compared to $20.6 million for 2000. The average yield decreased by 5 basis points from 8.21% in 2000 to 8.16% in 2001. During the year ended December 31, 2001, the average balance of the securities portfolio increased by $1.4 million, or 32% to $5.9 million. The average yield on the securities portfolio rose by 93 basis points from 6.45% in 2000 to 7.38% in 2001. Interest income from the Company's securities portfolio increased by $146,000, or 51.0%, from $286,000 for the year ended December 31, 2000 to $432,000 for the year ended December 31, 2001 with the increase primarily attributable to the increase in the average balance of the portfolio and, to a lesser extent, the improved yield. Interest income from short-term investments amounted to $56,000 in 2001, down from $67,000 for the year ended December 31, 2000 with the $11,000 decrease attributable to a decreased average balance of investments of this type. Total interest expense amounted to $1.2 million in the year ended December 31, 2001, equal to the $1.2 million n the year ended December 31, 2000. For the year ended December 31, 2001, the average balance of certificate of deposit accounts was $18.1 million, a $300,000, or 2% increase from $17.8 million in 2000. The Bank did utilize Federal Home Loan Bank of New York advances during 2000. Interest expense related to these borrowings amounted to $52,000 in 2001 as compared to $42,000 in 2000 with the $10,000 increase amount of such borrowings. PROVISION FOR LOAN LOSSES. During fiscal year 2001, the Company recorded a $61,000 provision for loan losses, as compared to a provision of $39,000 during the previous fiscal year. Future additions to the loan loss allowance will be based on the analysis of the loan portfolio as described above, and, accordingly, are not predictable. NONINTEREST INCOME. Noninterest income was $102,000 for fiscal year 2001 as compared to $50,000 for fiscal year 2000 for an increase of $52,000, or 104%, in 2001. The primary component of noninterest income in 2001 was a gain on sale of available for sale securities. Service charges totaled $36,000 in 2001 equaling $36,000 in 2000. NONINTEREST EXPENSE. For fiscal year 2001, total noninterest expenses were $690,000 as compared to $646,000 for fiscal year 2000. The increase in this expense level was due mainly to increases in salaries and employee benefits of $26,000 and directors' fees and expenses of $5,000. INCOME TAX EXPENSE. Income tax expense for fiscal year 2001 amounted to $58,000 as compared to $87,000 for fiscal year 2000. The $29,000 decrease was attributable to changes in the composition of the income base, the amount of tax-exempt income and non-deductible expenses. The Company's effective tax rates for fiscal years 2001 and 2000 were 30% and 35.0%, respectively. LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of funds are deposits, repayment of loans and mortgage-backed securities, maturities of investments and interest-bearing deposits and funds provided from operations. The Association is also able to obtain advances from the FHLB of New York, although historically it has done this rarely. While scheduled repayments of loans and mortgage-backed securities and maturities of investment securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by the general level of interest rates, economic 29 conditions and competition. The Company uses its liquidity resources principally to fund existing and future loan commitments, to fund maturing time certificates and demand deposit withdrawals, to invest in other interest-earning assets, to maintain liquidity, and to meet operating expenses. Liquidity may be adversely affected by unexpected deposit outflows, higher interest rates paid by competitors, adverse publicity relating to the savings and loan industry, and similar matters. Management monitors projected liquidity needs and determines the level desirable, based in part on the Company's commitments to make loans and management's assessment of its ability to generate funds. A major portion of the Company's liquidity consists of cash and cash equivalents, which include cash and interest-bearing deposits in other banks. The level of these assets is dependent upon its operating, investing, lending and financing activities during any given period. At December 31, 2001, cash and cash equivalents totaled $2,048,000. The Company's primary investing activities include origination of loans and purchases of investment and mortgage-backed securities. During the years ended December 31, 2001 and 2000, purchases of investment and mortgage-backed securities totaled $7.7 million and $1.8 million, respectively, while loan originations totaled $3.5 million and $5.4 million, respectively. These investments were funded in part by loan and securities and mortgage-backed securities repayments and maturities and an increase in time certificates received for the years ended December 31, 2001 and 2000. At December 31, 2001, the Company had $115,800 in outstanding commitments to originate fixed-rate loans all at fixed rates between 7.50% - 10.00% and commitments to originate $95,000 on an adjustable rate basis. The Company anticipates that it will have sufficient funds available to meet its current loan origination commitments. Time certificates which are scheduled to mature in one year or less totaled $15.3 million at December 31, 2001. Based on historical experience management believes that a significant portion of such deposits will remain with the Company. The Company is subject to federal regulations that impose certain minimum capital requirements. For a discussion on such capital levels, see " Item 1. Description of Business -- Regulation of the Association -- Regulatory Capital Requirements." IMPACT OF INFLATION AND CHANGING PRICES The Company's financial statements and the accompanying notes presented elsewhere in this document, have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time and due to inflation. The impact of inflation is reflected in the increased cost of its operations. As a result, interest rates have a greater impact on its performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services. IMPACT OF NEW ACCOUNTING STANDARDS In February 1998, the FASB issued SFAS 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," which amends existing disclosure rules regarding pension and other post-retirement benefits to standardize the disclosure formats effective for fiscal years beginning after December 15, 1997. The Bank adopted the provisions of SFAS No. 132 on January 1, 1998. In June 1998, the FASB issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes comprehensive accounting and reporting requirements for derivative instruments and hedging activities. The statement requires companies to recognize all derivatives as either assets or liabilities, with the instruments measured at fair value. The accounting for gains and losses resulting from changes in fair value depends on the intended use of the derivative and the type of risk being hedged. SFAS 133 is effective for the Company and the Association for all fiscal quarters beginning January 1, 2000. SFAS 137 delayed the effective 30 date until all fiscal quarters of all fiscal years beginning after June 15, 2000. Earlier adoption is permitted although the Company does not expect to do so. SFAS No. 133 also permits certain reclassifications of securities among the trading, available for sale and held to maturity classifications. The Company has no current intention to reclassify any securities pursuant to SFAS 133. The Company does not presently use derivatives and the adoption of SFAS 133 is not expected to have a material impact on the Company's consolidated financial statements. During June 2000, the FASB issued SFAS 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," which addressed implementation difficulties that apply to SFAS 133. This statement is to be adopted concurrently with SFAS 133. The Company does not expect this statement to have a material impact on its consolidated financial statements. The FASB issued SFAS 140, "Accounting and Servicing of Financial Assets and Extinguishments of Liabilities," during September 2000. This statement revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures. The effective date for this statement is for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. This statement is effective for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. The Company does not expect this statement to have a material impact on its consolidated financial statements. SFAS No. 141, "Business Combinations" was issued during June 2001. This statement requires that all business combinations be accounted for by the purchase method. This statement also requires additional disclosure about the reason for the business combination and allocation of the purchase price. This statement applies to all business combinations initiated after June 30, 2001. The Company does not expect this statement to have a material impact on its consolidated financial statements. During June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." This statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. This statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company does not expect this statement to have a material impact on its consolidated financial statements. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This statement requires that one accounting model be used for long-lived assets to be disposed of by sale. This statement is effective for financial statements issued for fiscal years beginning after December 15, 2001. The Company does not expect this statement to have a material impact on its consolidated financial statements. 31 ITEM 7. FINANCIAL STATEMENTS - ----------------------------- INDEX TO CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED FINANCIAL STATEMENTS PAGE - --------------------------------- ---- Independent Auditor's Report 33 Consolidated Statements of Financial Condition as of December 31, 2001 and 1999 34 Consolidated Statements of Income for the Years Ended December 31, 2001 and 1999 35 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2001 and 1999 36 Consolidated Statements of Cash Flows for the Years Ended December 31, 2001 and 1999 37 Notes to Consolidated Financial Statements 39 32 MORROW & POULSEN, P.C. CERTIFIED PUBLIC ACCOUNTANTS 145 CLINTON STREET WATERTOWN, N.Y. 13601 INDEPENDENT AUDITOR'S REPORT To the Board of Directors and Stockholders of Peoples Bankcorp, Inc. We have audited the accompanying consolidated statements of financial condition of Peoples Bankcorp, Inc. (the Company) and subsidiary as of December 31, 2001 and 2000, and the related consolidated statements of income, changes in stockholders' equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company'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 auditing standards generally accepted in the United States of America. 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 consolidated 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 Peoples Bankcorp, Inc. and subsidiary as of December 31, 2001 and 2000, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. MORROW & POULSEN, P.C. CERTIFIED PUBLIC ACCOUNTANTS /s/ Morrow & Poulsen, P.C. -------------------------------- MARCH 6, 2002 WATERTOWN, NEW YORK 33 PEOPLES BANKCORP, INC. AND SUBSIDIARY ===================================== CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION DECEMBER 31, 2001 AND 2000 (IN THOUSANDS) - -------------------------------------------------------------------------------- ASSETS 2001 2000 Cash and Cash Equivalents: Cash and due from banks $ 1,403 $ 605 Interest-bearing deposits with other banks 645 204 -------- -------- Total Cash and Cash Equivalents 2,048 809 Securities available-for-sale - at fair value 5,034 1,017 Securities held-to-maturity (fair value of $1,568 at December 31, 2001 and $4,192 at December 31, 2000) 1,525 4,126 Loans, net of deferred fees 19,015 20,688 Less - allowance for loan losses 179 176 -------- -------- Net Loans 18,836 20,512 Premises and equipment, net 418 444 Foreclosed real estate 45 0 Federal Home Loan Bank stock, at cost- required by law 163 155 Accrued interest receivable 145 179 Other assets 3 19 -------- -------- TOTAL ASSETS $ 28,217 $ 27,261 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits: Demand accounts - non-interest bearing $ 735 $ 813 Savings and club accounts - interest bearing 3,215 2,930 Time certificates - interest bearing 18,126 18,075 NOW and money market accounts - interest bearing 1,943 1,927 -------- -------- Total Deposits 24,019 23,745 Borrowed money 1,000 500 Advance payments by borrowers for property taxes and insurance 2 2 Other liabilities 131 86 -------- -------- Total Liabilities 25,152 24,333 -------- -------- Commitments and contingencies (Note 12) Stockholders' Equity: Preferred stock $.O1 par value per share, 500,000 shares authorized, no shares issued or outstanding 0 0 Common stock of $.O1 par value, 3,000,000 shares authorized, 131,979 and 132,390 shares issued and outstanding at December 31, 2001 and 2000 1 1 Additional paid-in capital 1,007 1,003 Retained earnings - substantially restricted 2,167 2,036 Accumulated other comprehensive income 3 0 Loan to Employee Stock Ownership Plan (75) (86) Common stock in treasury, at cost (2,411 and 2,000 shares at December 31, 2001 and 2000) (38) (26) -------- -------- Total Stockholders' Equity 3,065 2,928 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 28,217 $ 27,261 ======== ======== See accompanying notes to consolidated financial statements. - -------------------------------------------------------------------------------- 34 PEOPLES BANKCORP, INC. AND SUBSIDIARY ===================================== CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2001 AND 2000 (IN THOUSANDS EXCEPT FOR SHARE DATA) - -------------------------------------------------------------------------------- 2001 2000 Interest Income: Interest and fees on loans $1,606 $1,697 Interest on investment securities 432 286 Interest on other short-term investments 56 67 ------ ------ Total Interest Income 2,094 2,050 ------ ------ Interest Expense: Deposits 1,197 1,126 Borrowings 52 42 ------ ------ Total Interest Expense 1,249 1,168 ------ ------ Net Interest Income 845 882 Provision for Loan Losses 61 39 ------ ------ Net Interest Income after Provision for Loan Losses 784 843 ------ ------ Non-Interest Income: Service charges 36 36 Gain on sale of available-for-sale securities 46 0 Other 20 14 ------ ------ Total Non-Interest Income 102 50 ------ ------ Non-Interest Expenses: Salaries and employee benefits 343 317 Directors' fees and expense 63 58 Building, occupancy and equipment 63 62 Data processing 38 35 Postage and supplies 35 29 Deposit insurance premium 5 5 Insurance 11 18 Other 132 122 ------ ------ Total Non-Interest Expenses 690 646 ------ ------ Income before Income Tax Expense 196 247 Income Tax Expense 58 87 ------ ------ Net Income $ 138 $ 160 ====== ====== Earnings Per Share - Basic $1.10 $1.28 Earnings Per Share - Diluted 1.05 1.23 See accompanying notes to consolidated financial statements. - -------------------------------------------------------------------------------- 35 PEOPLES BANKCORP, INC. AND SUBSIDIARY ===================================== CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 2001 AND 2000 (IN THOUSANDS) - --------------------------------------------------------------------------------
Loan to Retained Accumulated Additional Employee Earnings Other Common Paid-In Stock Substantially Comprehensive Treasury Stock Capital Ownership Plan Restricted Income Stock Total Balance at December 31, 1999 $1 $1,002 ($97) $1,882 $ $ $2,788 Comprehensive Income: Net Income 160 160 ------ ------ Comprehensive Income 160 160 ESOP Transactions 1 11 12 Purchase of treasury stock (2000 shares) (26) (26) Cash dividends declared ($.05 per share) (6) (6) ----- ------ ------ ------ ----- ------ ------ Balance at December 31, 2000 1 1,003 (86) 2,036 0 (26) 2,928 Comprehensive Income: Net Income 138 138 Other Comprehensive Income: Net unrealized gains on securities available-for- sale 3 3 ------ ----- ------ Total Comprehensive Income $138 $3 141 ESOP Transactions 4 11 15 Purchase of treasury stock (1000 shares) (20) (20) Issuance of common shares: Management recognition plan (589 shares) 8 8 Cash dividends declared ($.05 per share) (7) (7) ===== ====== ====== ====== ===== ====== ====== Balance at December 31, 2001 $1 $1,007 ($75) $2,167 $3 ($38) $3,065 ===== ====== ====== ====== ===== ====== ======
See accompanying notes to consolidated financial statements. - -------------------------------------------------------------------------------- 36 PEOPLES BANKCORP, INC. AND SUBSIDIARY ===================================== CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2001 AND 2000 (IN THOUSANDS) - -------------------------------------------------------------------------------- 2001 2000 Cash Flows from Operating Activities: Net income $ 138 $ 160 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 26 25 (Gain) on sale of available-for-sale securities (46) 0 (Gain) on sale of foreclosed real estate (3) 0 (Increase) decrease in accrued interest receivable 34 (16) Provision for loan losses 61 39 Net amortization of premiums/discounts 26 1 Increase (decrease) in other liabilities 53 (39) (Increase) decrease in other assets 16 (12) ------- ------- Net Cash Provided by Operating Activities 305 158 ------- ------- Cash Flows from Investing Activities: Net decrease in loans 1,428 215 Purchases of securities available-for-sale (7,754) (1,017) Proceeds from maturities and principal reductions of securities available-for-sale 1,796 0 Proceeds from sales of securities available for-sale 1,964 0 Purchases of securities held-to-maturity 0 (750) Proceeds from maturities and principal reductions of securities held-to-maturity 2,601 488 Purchase of FHLB stock - required by law (8) (16) Purchase of premises and equipment 0 (6) Sale of foreclosed real estate 145 0 ------- ------- Net Cash Provided (Used) by Investing Activities 172 (1,086) ------- ------- Cash Flows from Financing Activities: Increase in deposits 274 1,301 Advances from FHLB 1,000 0 Repayments to FHLB (500) (1,000) Loan payment received from Employee Stock Ownership Plan 15 12 Decrease in advance payments by borrowers for property taxes and insurance 0 (1) Cash dividends paid on common stock (7) (6) Payments to acquire treasury stock (20) (26) ------- ------- Net Cash Provided by Financing Activities 762 280 ------- ------- Net Increase (Decrease) in Cash and Cash Equivalents 1,239 (648) Cash and Cash Equivalents at Beginning of Year 809 1,457 ------- ------- Cash and Cash Equivalents at End of Year $ 2,048 $ 809 ======= ======= 37 PEOPLES BANKCORP, INC. AND SUBSIDIARY ===================================== CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT.) YEARS ENDED DECEMBER 31, 2001 AND 2000 (IN THOUSANDS) - -------------------------------------------------------------------------------- 2001 2000 Supplemental Disclosure of Cash Flow Information: Non-cash investing activities: Loans transferred to real estate owned through foreclosure $ 202 $ 0 Cash Paid During the Year for: Interest 1,248 1,181 Income taxes 57 74 See accompanying notes to consolidated financial statements. - -------------------------------------------------------------------------------- 38 PEOPLES BANKCORP, INC. AND SUBSIDIARY ===================================== NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000 - -------------------------------------------------------------------------------- (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Peoples Bankcorp, Inc. ("the Company" or "the Parent") was incorporated on September 17, 1998 in connection with its wholly-owned subsidiary's, Ogdensburg Federal Savings and Loan Association ("the Bank"), conversion from a Federally-chartered mutual saving and loan to a Federally-chartered stock savings and loan, as approved by the Office of Thrift Supervision ("OTS"). Ogdensburg Federal was founded in 1888 as a federally chartered institution and a member of the Federal Home Loan Bank ("FHLB") System. The Bank's principal business consists of attracting deposits from the public and originating residential mortgage loans. The Bank also offers various types of consumer loans and a limited number of commercial real estate and commercial business loans. The Bank's deposits are insured up to applicable limits by the Federal Deposit Insurance Corporation ("FDIC") under the SAIF. The accounting principles used and methods of applying them conform with generally accepted accounting principles and practices within the savings and loan industry. The following are descriptions of the more significant of the accounting and reporting policies. (a) BASIS OF FINANCIAL STATEMENT PRESENTATION In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the statements of financial condition and revenues and expenses for the period. Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses. Actual results could differ significantly from those estimates. Management believes that the allowance for losses on loans is adequate. While management uses available information to recognize losses on loans and real estate owned, future additions to the allowance may be necessary based on changes in economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for losses on loans. Such agencies may require the Bank to recognize additions to the allowance based on their judgments about information available to them at the time of their examination. (b) PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the financial statements of the Company and the Bank. All significant intercompany balances and transactions have been eliminated in consolidation. (c) CASH AND CASH EQUIVALENTS Cash and cash equivalents include vault cash and amounts due from banks, which represents short-term highly liquid investments. 39 PEOPLES BANKCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000 (CONT.) - -------------------------------------------------------------------------------- (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.) (d) SECURITIES The Bank classifies its debt securities as either available-for-sale or held-to-maturity as the Bank does not hold any securities considered to be trading. Held-to-maturity securities are those debt securities the Bank has the ability and intent to hold until maturity. All other debt securities are classified as available-for-sale. Available-for-sale securities are recorded at fair value. Held-to-maturity securities are recorded at amortized cost. Unrealized holding gains and losses, net of the related tax effect, on available-for-sale securities are excluded from earnings and reported as a separate component of equity until realized. Transfers of securities between categories are recorded at fair value at the date of transfer. A decline in the fair value of an available-for-sale or held-to-maturity security that is deemed to be other than temporary results in a charge to earnings resulting in the establishment of a new cost basis for the security. Premiums and discounts are amortized or accreted over the life of the related security as an adjustment to yield using the interest method. Dividend and interest income are recognized when earned. Realized gains and losses on securities are included in earnings and are calculated using the specific identification method for determining the cost of the securities sold. (e) LOANS Loans are reported at the principal amount outstanding, net of deferred fees. Fees and certain direct origination costs related to lending activities are recognized using the interest method over the contractual lives of the loans. Management has the ability and intent to hold its loans to maturity. Interest on loans is accrued and included in income at contractual rates applied to the principal outstanding. The accrual of interest on loans (including impaired loans) is generally discontinued and previously accrued interest is reversed or an allowance is established when loan payments are 90 days or more past due or when, by the judgment of management, collectibility becomes uncertain. The allowance is established by a charge to interest income equal to all interest previously accrued. Subsequent recognition of income occurs only to the extent that payment is received. Loans are returned to an accrual status when both principal and interest are current and the loan is determined to be performing in accordance with the applicable loan terms. 40 PEOPLES BANKCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000 (CONT.) - -------------------------------------------------------------------------------- (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.) (f) ALLOWANCE FOR LOAN LOSSES The allowance for loan losses consists of the provision charged to operations based upon past loan loss experience, management's evaluation of the loan portfolio under current economic conditions and such other factors that require current recognition in estimating loan losses. Loan losses and recoveries of loans previously written-off are charged or credited to the allowance as incurred or realized, respectively. The Bank estimates losses on impaired loans based on the present value of expected future cash flows (discounted at the loan's effective interest rate) or the fair value of the underlying collateral if the loan is collateral dependent. An impairment loss exists if the recorded investment in a loan exceeds the value of the loan as measured by the aforementioned methods. A loan is considered impaired when it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. Generally, all commercial mortgage loans and commercial loans in a delinquent payment status (90 days or more delinquent) are considered impaired. Residential mortgage loans, consumer loans and home equity lines of credit are evaluated collectively since they are homogenous and generally carry smaller individual balances. Impairment losses are included as a component of the allowance for loan losses. The Bank recognizes interest income on impaired loans using the cash basis of income recognition. Cash receipts on impaired loans are generally applied according to the terms of the loan agreement, or as a reduction of principal, based upon management judgement and the related factors discussed above. (g) REAL ESTATE OWNED Real estate acquired in settlement of loans is carried at the lower of the unpaid loan balance or fair value less estimated costs to sell. Write-downs from the unpaid loan balance to fair value at the time of foreclosure are charged to the allowance for loan losses. Subsequent write-downs to fair value, net of disposal costs, are charged to other expenses. (h) PREMISES AND EQUIPMENT Land is carried at cost and buildings and improvements and furniture and equipment are carried at cost less accumulated depreciation and amortization. Depreciation is computed on the straight-line method over the estimated useful lives of the assets (10-36 years for building and improvements and 5-7 years for furniture and equipment). 41 PEOPLES BANKCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000 (CONT.) - -------------------------------------------------------------------------------- (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.) (i) INCOME TAXES Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. (j) COMPREHENSIVE INCOME On January 1, 1998, the Bank adopted the provisions of Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income. This statement establishes standards for reporting and displaying of comprehensive income and its components. Comprehensive income includes the reported net income of a bank adjusted for items that are currently accounted for as direct entries to equity, such as the mark to market adjustment on securities available for sale, foreign currency items and minimum pension liability adjustments. At the Company, comprehensive income represents net income plus other comprehensive income, which consists of the net change in unrealized gains or losses on securities available for sale for the period. Accumulated other comprehensive income represents the net unrealized gains or losses on securities available for sale as of the balance sheet dates. The following summarizes the components of other comprehensive income (in thousands): YEARS ENDED DECEMBER 31, 2001 2000 Other comprehensive income, before tax: Net unrealized holding gain (loss) on securities $3 $0 Reclassification adjustment for (gains) losses included in net income 0 0 --- --- Other comprehensive income, before tax $3 $0 Income tax expense related to items of other comprehensive income 0 0 --- --- Other comprehensive income, net of tax $3 $0 === === 42 PEOPLES BANKCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000 (CONT.) - -------------------------------------------------------------------------------- (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.) (k) EARNINGS PER SHARE Earnings Per Common Share. Basic earnings per share represents income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Corporation relate solely to outstanding stock options, and are determined using the treasury stock method. A reconciliation of the numerator and denominator of both basic and dilutive earnings per share: DECEMBER 31, 2001 2000 Numerator: Income available to common stockholders $138,000 $160,000 ======== ======== Denominator: Weighted average number of common shares used in basic EPS 124,986 124,994 Effect of dilutive securities: Stock options 7,392 4,638 -------- -------- Weighted Number of Common Shares and Dilutive Potential Common Shares Used in Dilutive EPS 132,378 129,632 ======== ======== (l) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK The Bank does not engage in the use of derivative financial instruments. The Bank's off-balance sheet financial instruments are limited to commitments to extend credit. 43 PEOPLES BANKCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000 (CONT.) - -------------------------------------------------------------------------------- (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.) (m) NEW ACCOUNTING STANDARDS In June 1998, the FASB issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes comprehensive accounting and reporting requirements for derivative instruments and hedging activities. The statement requires companies to recognize all derivatives as either assets or liabilities, with the instruments measured at fair value. The accounting for gains and losses resulting from changes in fair value depends on the intended use of the derivative and the type of risk being hedged. SFAS 133 is effective for the Bank for all fiscal quarters beginning January 1, 2000. SFAS 137 delayed the effective date until all fiscal quarters of all fiscal years beginning after June 15, 2000. Earlier adoption is permitted although the Bank did not do so. SFAS No. 133 also permits certain reclassifications of securities among the trading, available-for-sale and held-to-maturity classifications. The Bank has no current intention to reclassify any securities pursuant to SFAS 133. The Bank does not presently use derivatives and the adoption of SFAS 133 is not expected to have a material impact on the Bank's consolidated financial statements. In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." SFAS No. 132 standardizes the disclosure requirements for pensions and other postretirement benefits. This statement is effective for financial statements for periods beginning after December 15, 1997. The Bank adopted the provisions of SFAS No. 132 on January 1, 1998. During June 2000, the FASB issued SFAS 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," which addressed implementation difficulties that apply to SFAS 133. This statement is to be adopted concurrently with SFAS 133. The Bank does not expect this statement to have a material impact on its consolidated financial statements. 44 PEOPLES BANKCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000 (CONT.) - -------------------------------------------------------------------------------- (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT.) (m) NEW ACCOUNTING STANDARDS (CONT.) The FASB issued SFAS 140, "Accounting and Servicing of Financial Assets and Extinguishments of Liabilities," during September 2000. This statement revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures. The effective date for this statement is for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. This statement is effective for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. The Bank does not expect this statement to have a material impact on its consolidated financial statements. SFAS No. 141, "Business Combinations" was issued during June 2001. This statement requires that all business combinations be accounted for by the purchase method. This statement also requires additional disclosure about the reason for the business combination and allocation of purchase price. This statement applies to all business combinations initiated after June 30, 2001. The Bank does not expect this statement to have a material impact on its consolidated financial statements. During June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." This statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. This statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Bank does not expect this statement to have a material impact on its consolidated financial statements. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This statement requires that one accounting model be used for long-lived assets to be disposed of by sale. This statement is effective for financial statements issued for fiscal years beginning after December 15, 2001. The Bank does not expect this statement to have a material impact on its consolidated financial statements. 45 PEOPLES BANKCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000 (CONT.) - -------------------------------------------------------------------------------- (2) SECURITIES Securities are summarized as follows (in thousands): ...........DECEMBER 31, 2001............. GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE Available-for-Sale: Mortgage-backed Securities - GNMA $5,031 $ 3 $ 0 $5,034 ====== ====== ====== ====== Held-to-Maturity: U. S. Government and federal agency securities $1,500 $ 37 $ 0 $1,537 Mortgage-backed securities - GNMA 25 6 0 31 ------ ------ ------ ------ $1,525 $ 43 $ 0 $1,568 ====== ====== ====== ====== ..........DECEMBER 31, 2000.............. GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE Available-for-Sale: Mortgage-backed Securities - GNMA $1,017 $ 0 $ 0 $1,017 ====== ====== ====== ====== Held-to-Maturity: U. S. Government and federal agency securities $2,500 $ 29 $ 1 $2,528 Mortgage-backed securities - GNMA 1,626 38 0 1,664 ------ ------ ------ ------ $4,126 $ 67 $ 1 $4,192 ====== ====== ====== ====== 46 PEOPLES BANKCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000 (CONT.) - -------------------------------------------------------------------------------- (2) SECURITIES (CONT.) The following table presents the carrying value and fair value of securities based on maturity date at December 31, 2001: AMORTIZED FAIR COST VALUE (IN THOUSANDS) Available-for-sale: Due after ten years $5,031 $5,034 ====== ====== Held-to-maturity: Due within one year $ 250 $ 255 Due after one year through five years 1,000 1,014 Due after five years through ten years 275 299 ------ ------ $1,525 $1,568 ====== ====== The following table presents the carrying value and fair value of securities based on maturity date at December 31, 2000: AMORTIZED FAIR COST VALUE (IN THOUSANDS) Available-for-sale: Due after ten years $1,017 $1,017 ====== ====== Held-to-maturity: Due within one year $ 500 $ 499 Due after one year through five years 1,250 1,266 Due after five years through ten years 779 794 Due after ten years 1,597 1,633 ------ ------ $4,126 $4,192 ====== ====== The amortized cost and fair value of mortgage-backed securities are presented by contractual maturity in the preceding table. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations without call or prepayment penalties. During 2001, the proceeds from sale of available-for-sale securities were $1,963,779 and gains recognized were $45,956. There were no sales of available-for-sale securities during 2000. 47 PEOPLES BANKCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000 (CONT.) - -------------------------------------------------------------------------------- (3) LOANS RECEIVABLE Loans are summarized as follows (in thousands): DECEMBER 31, 2001 2000 Mortgages: One to four family residential $12,328 $12,506 Commercial 517 523 Construction 266 78 ------- ------- 13,111 13,107 ------- ------- Other Loans: Automobile 3,093 4,513 Home equity 1,042 1,127 Passbook 164 126 Commercial 674 699 Other 908 1,095 ------- ------- 5,881 7,560 ------- ------- Total Loans 18,992 20,667 Net Deferred Fees 23 21 ------- ------- $19,015 $20,688 ======= ======= Changes in the allowance for loan losses are summarized as follows (in thousands): YEARS ENDED DECEMBER 31, 2001 2000 Balance at beginning of period $ 176 $ 176 Provision charged to operations 61 39 Recoveries 6 6 Loans charged off (64) (45) ----- ----- Balance at end of period $ 179 $ 176 ===== ===== 48 PEOPLES BANKCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000 (CONT.) - -------------------------------------------------------------------------------- (3) LOANS RECEIVABLE (CONT.) At December 31, 2001 and 2000, impaired loans totaled $47,000 and $16,000, respectively, with no related allowance for loan losses as a result of cash flow analysis. The average recorded investment in impaired loans was $121,000 and $28,000 during the years ended December 31, 2001 and 2000, respectively. Interest income recognized on impaired loans was $1,000 and $5,000 during the years ended December 31, 2001 and 2000, respectively. The principal balances of loans not accruing interest amounted to approximately $47,000 and $-0- at December 31, 2001 and 2000, respectively. The interest income foregone for non-accruing loans was approximately $2,000 and $1,000 during the years ended December 31, 2001 and 2000, respectively. In the ordinary course of business, the Bank has and expects to continue to have transactions, including borrowings, with its officers and directors. In the opinion of management, such transactions were on substantially the same terms, including interest rates and collateral, as those prevailing at the time of comparable transactions with other persons and did not involve more than a normal risk of collectibility or present any other unfavorable features to the Bank. The following table presents a summary of the activity with respect to loans to directors and executive officers at December 31, 2001 and 2000: DECEMBER 31, 2001 2000 Balance outstanding - beginning of year $ 737,335 $ 735,805 New loans 7,000 85,000 Principal repayments (104,044) (83,470) --------- --------- Balance outstanding - end of year $ 640,291 $ 737,335 ========= ========= (4) PREMISES AND EQUIPMENT Premises and equipment are summarized as follows (in thousands): DECEMBER 31, 2001 2000 Land $ 125 $ 125 Buildings and improvements 429 429 Furniture and equipment 67 67 ----- ----- 621 621 Less - accumulated depreciation and amortization (203) (177) ----- ----- $ 418 $ 444 ===== ===== Depreciation and amortization expense amounted to $26,000 and $25,000 during the years ended December 31, 2001 and 2000, respectively. 49 PEOPLES BANKCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000 (CONT.) - -------------------------------------------------------------------------------- (5) ACCRUED INTEREST RECEIVABLE Accrued interest receivable is summarized as follows (in thousands): DECEMBER 31, 2001 2000 Loans $ 95 $117 Securities 50 62 ---- ---- $145 $179 ==== ==== (6) DEPOSITS At December 31, 2001 and 2000, the aggregate amounts of time deposits in denominations of $100,000 or more were approximately $3,769,000 and $3,887,000, respectively. Deposit balances in excess of $100,000 are not insured by the FDIC. Deposits from officers and directors at December 31, 2001 were $173,620. Contractual maturities of time certificates are summarized as follows (in thousands): DECEMBER 31, 2001 2000 Within one year $15,263 $14,820 One through two years 2,345 2,520 Two through three years 291 604 Three through four years 122 17 Four through five years 105 114 ------- ------- Total Time Certificates $18,126 $18,075 ======= ======= Interest expense on deposits is summarized as follows (in thousands): YEARS ENDED DECEMBER 31, 2001 2000 Savings, club and escrow accounts $ 77 $ 83 Time certificates 1,080 1,014 NOW accounts and money market accounts 40 29 ------ ------ $1,197 $1,126 ====== ====== 50 PEOPLES BANKCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000 (CONT.) - -------------------------------------------------------------------------------- (7) BORROWINGS The Bank is a member of the Federal Home Loan Bank of New York (FHLB). As a member, the Bank is required to own capital stock in the FHLB and is authorized to apply for advances from the FHLB. At December 31, 2001 and 2000, the Bank was authorized to borrow up to 30 percent of total assets. During 2001 the Bank had the following advances from the FHLB: ADVANCE MATURITY CURRENT OUTSTANDING BALANCE DATE DATE RATE (IN THOUSANDS) 12/14/01 10/14/03 3.31% $1,000 ====== (8) INCOME TAXES The Company and its subsidiary file consolidated tax returns on a calendar year basis. Income taxes were allocated as follows (in thousands): DECEMBER 31, 2001 2000 Income before income tax expense $58 $87 Changes in equity, for changes in unrealized gains on securities 0 0 --- --- $58 $87 === === The components of income tax expense attributable to income from operations are (in thousands): DECEMBER 31, 2001 2000 Current: Federal $ 67 $ 60 State 13 9 ---- ---- $ 80 $ 69 ---- ---- Deferred: Federal ($17) $ 17 State (5) 1 ---- ---- ($22) $ 18 ---- ---- $ 58 $ 87 ==== ==== 51 PEOPLES BANKCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000 (CONT.) - -------------------------------------------------------------------------------- (8) INCOME TAXES (CONT.) Actual tax expense attributable to income before income taxes differed from "expected" tax expense, computed by applying the U. S. Federal statutory tax rate of 34% to income before income tax as follows (in thousands): YEARS ENDED DECEMBER 31, 2001 2000 Computed "expected" tax expense $ 67 $ 84 Increase (decrease) in income taxes resulting from: State taxes, net of: Federal tax benefits 4 4 Benefit of Federal tax rates below statutory rates (4) (4) Other items, net (9) 3 ---- ---- $ 58 $ 87 ==== ==== Effective tax rate 29.6% 35.0% ==== ==== The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are (in thousands): DECEMBER 31, 2001 2000 Deferred tax assets: Allowance for loan losses $ 63 $ 65 Net deferred loan fees 3 4 Accrued expenses 11 10 ----- ----- Total Gross Deferred Tax Assets $ 77 $ 79 ----- ----- Deferred tax liabilities: Accumulated depreciation on premises and equipment $ 17 $ 19 Accrued interest receivable 52 68 Bad debt reserves in excess of base year reserve 0 4 Deferred expense 11 13 ----- ----- Total Gross Deferred Tax Liabilities $ 80 $ 104 ----- ----- Net Deferred Tax Assets (Liabilities) $ (3) $ (25) ===== ===== 52 PEOPLES BANKCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000 (CONT.) - -------------------------------------------------------------------------------- (8) INCOME TAXES (CONT.) Realization of deferred tax assets is dependent upon the generation of future taxable income or the existence of sufficient taxable income within the carryback period. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. In assessing the need for a valuation allowance, management considers the scheduled reversal of the deferred tax liabilities, the level of historical taxable income and projected future taxable income over the periods in which the temporary differences comprising the deferred tax assets will be deductible. Management believes that no valuation allowance is necessary. Included in retained earnings at December 31, 2001 and 2000 is approximately $426,000 representing aggregate provisions for loan losses taken under the Internal Revenue Code. Use of these reserves to pay dividends in excess of earnings and profits or to redeem stock, or if the institution fails to qualify as a bank for Federal income tax purposes, would result in taxable income to the Bank. (9) PENSION PLAN AND BENEFIT PLANS The Bank has a non-contributory multiemployer pension plan. The Bank participates in the Financial Institutions Retirement Fund. The Fund is a tax-qualified pension trust covering approximately 300 participating employers. Separate actuarial valuations are not made with respect to each employer. All full-time employees of the Bank are covered by the plan. Statement of Financial Accounting Standards (SFAS) No. 87, Employers' Accounting for Pensions requires that in multiemployer plans, pension expense is equal to contributions required each accounting period. During the years ended December 31, 2001 and 2000, the Bank made contributions to the plan of $20,052 and $-0-, respectively. The plan uses the projected unit credit cost method as its funding method. The maximum number of years in which the initial past service liability would be required to be paid off by any participating employer is 15. Actuarial gains and losses are spread as a part of the valuation method. The Bank adopted a 401(k) Plan effective January 1, 1994 covering all full-time employees. The Bank's match of employee contributions was terminated December 31, 1998. 53 PEOPLES BANKCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000 (CONT.) - -------------------------------------------------------------------------------- (9) PENSION PLAN AND BENEFIT PLANS (CONT.) EMPLOYEE STOCK OWNERSHIP PLAN On December 28, 1998, the board of directors adopted an Employee Stock Ownership Plan ("ESOP") to provide stock awards to eligible employees of the Company. The Company issued a promissory note to the ESOP for $107,510 to purchase shares of the Company's common stock. The ESOP will repay the note in annual payments of principal and interest through December 31, 2008. The first payment was due on December 31, 1999. Dividends on allocated ESOP shares are recorded as a reduction of retained earnings; dividends on unallocated ESOP shares are recorded as a reduction of debt. As shares are released from collateral, the shares become outstanding for earnings-per-share computations. The ESOP shares as of December 31, 2001 and 2000 are as follows: DECEMBER 31, 2001 2000 Allocated shares 2,051 1,075 Shares released for allocation 1,075 1,075 Unreleased shares 7,526 8,601 Total ESOP shares 10,751 10,751 Fair values of unreleased shares at December 31 $150,520 $120,414 The amount of the Company's annual contribution to the ESOP is at the discretion of the Company's board of directors. Contributions for 2001 and 2000 were $15,856 and $11,825,respectively. 54 PEOPLES BANKCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000 (CONT.) - -------------------------------------------------------------------------------- (9) PENSION PLAN AND BENEFIT PLANS (CONT.) MANAGEMENT RECOGNITION PLAN On May 16, 2000, the stockholders of the Company approved a management recognition plan ("MRP"). With funds to be contributed by the Company, the MRP will purchase 2,956 shares of the Company's common stock. These shares will be purchased over a five year period with the first 20% of shares purchased May 16, 2001 and an additional 20% purchased on the following four anniversary dates. Under current accounting standards, the Company will recognize compensation expense as the shares are issued. The fair market value for the shares was established on the date the MRP was approved. As of December 31, 2001 and 2000, $6,876 and $4,584 of expense was recognized by the Company, respectively. STOCK OPTION AND INCENTIVE PLAN On May 16, 2000, the stockholders of the Company also approved a stock option and incentive plan. The option plan provides for the granting of stock options to certain employees and directors of the Company and the Bank and has a term of ten years from the effective date of the Plan. The Plan grants option for 7,392 shares of common stock. Certain executive officers and directors received an option to purchase shares at an exercise price equal to the market value on the day the Plan was adopted. The options vest over a five-year period from the date of award. Amounts received from the exercising of options are credited to common stock, and no charges to operations are made in connection with the stock option plan in accordance with Accounting Principles Board opinion No. 25. If compensation cost had been determined on the basis of fair value pursuant to SFAS 123, net income and earnings per share would have been reduced as follows: DECEMBER 31, 2000 Net Income: As reported $160,000 Proforma 111,000 Basic Earnings Per Share: As reported 1.28 Proforma .89 Diluted Earnings Per Share: As reported 1.23 Proforma .86 55 PEOPLES BANKCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000 (CONT.) - -------------------------------------------------------------------------------- (9) PENSION PLAN AND BENEFIT PLANS (CONT.) STOCK OPTION AND INCENTIVE PLAN (CONT.): The following is a summary of the status of the stock option plan: WEIGHTED AVERAGE NUMBER OF SHARES EXERCISE PRICE Outstanding at December 31, 1999 0 $ 0 Granted 7,392 11.625 Exercised 0 0 Cancelled 0 0 ----- ------ Outstanding at December 31, 2000 7,392 11.625 Granted 0 0 Exercised 0 0 Cancelled 0 0 ----- ------ Outstanding at December 31, 2001 7,392 11.625 ===== ====== Options exercisable at December 31, 2000 0 0 Options exercisable at December 31, 2001 1,480 11.625 The following is a summary of the status of options outstanding at December 31, 2001: .................OUTSTANDING OPTIONS................. EXERCISABLE OPTION WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE REMAINING EXERCISE EXERCISE EXERCISE PRICE NUMBER CONTRACTUAL LIFE PRICE NUMBER PRICE 11.625 7,392 8 Years 11.625 1,480 11.625 56 PEOPLES BANKCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000 (CONT.) - -------------------------------------------------------------------------------- (9) PENSION PLAN AND BENEFIT PLANS (CONT.) STOCK OPTION AND INCENTIVE PLAN (CONT.): The weighted average estimated fair value of stock options granted during 2000 was $6.69 per share. This amount was determined using the Black-Scholes option-price model, which values options based on the stock price at the grant date, the expected life of the option, the estimated volatility of the stock, the expected dividend payments, and the risk-free interest rate over the expected life of the option. The assumptions used on the Black-Scholes model were as follows for stock options granted in 2000: Risk-free interest rate 5.11% Expected volatility of common stock 45.1% Dividend yield 0% Expected life of options 10 Years The Black-Scholes option valuation model was developed for estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Because option valuation models require the use of subjective assumptions, changes in these assumptions can materially affect the fair values of the options, and the Company's options do not have the characteristics of traded options, the option valuation models do not necessarily provide a reliable measure of the fair value of its options. (10) COMMITMENTS AND CONTINGENCIES The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments consist of commitments to extend credit and involve, to varying degrees, elements of credits, market and interest rate risk in excess of the amounts recognized in the balance sheet. Credit risk represents the accounting loss that would be recognized at the reporting date if obligated counterparties failed completely to perform as contracted. Market risk represents risk that future changes in market prices make financial instruments less valuable. 57 PEOPLES BANKCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000 (CONT.) - -------------------------------------------------------------------------------- (10) COMMITMENTS AND CONTINGENCIES (CONT.) Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's evaluation of the customer's financial position. Collateral held varies, but may include real estate, accounts receivable, inventory, property, plant and equipment and income-producing commercial properties. Substantially all commitments to extend credit, if exercised, will represent loans secured by real estate. Commitments to originate fixed and adjustable rate loans are as follows (in thousands): DECEMBER 31, 2001 Fixed rate - 7.5%-10% $116 Adjustable rate 95 ---- Total Commitments to Originate Loans $211 ==== Unused lines of credit, which includes home equity, consumer and commercial, amounted to $364,000 and $422,000 at December 31, 2001 and 2000, respectively. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instruments for loan commitments is represented by the contractual or notional amount of these instruments. The Bank uses the same credit policies in making commitments as it does for on-balance sheet instruments. The Bank controls its credit risk through credit approvals, limits, and monitoring procedures. In the normal course of business, there are various outstanding legal proceedings. In the opinion of management, the aggregate amount involved in such proceedings is not material to the financial condition or results of operations of the Bank. 58 PEOPLES BANKCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000 (CONT.) - -------------------------------------------------------------------------------- (11) CONCENTRATIONS OF CREDIT A substantial portion of the Bank's loans are mortgages in Northern 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 area. A majority of the Bank's loan portfolio is secured by real estate. The Bank's concentrations of credit risk are disclosed in the schedule of loan classifications. Other than general economic risks, management is not aware of any material concentrations of credit risk to any industry or individual borrower. (12) REGULATORY MATTERS The Bank is subject to various regulatory capital requirements administered by its primary Federal regulator, the Office of Thrift Supervision (OTS). Failure to meet the minimum regulatory capital requirements can initiate certain mandatory, and possible additional discretionary actions by regulators, that if undertaken, could have a direct material affect on the Bank and the financial statements. Under the regulatory capital adequacy guidelines and the regulatory framework for prompt correction action, the Bank must meet specific capital guidelines involving 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 classification under the prompt corrective action guidelines are also subject to qualitative judgments 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 of: total risk-based capital and Tier I capital to risk-weighted assets (as defined in the regulations), Tier I capital to adjusted tangible assets (as defined), and tangible capital to tangible assets (as defined). As discussed in greater detail below, as of December 31, 2001, the Bank met all of the capital adequacy requirements to which it is subject. As of March 31, 2001, the most recent notification from the OTS, the Bank was categorized as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank has to maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as disclosed in the table below. There are no conditions or events since the most recent notification that management believes have changed the Bank's prompt corrective action category. 59 PEOPLES BANKCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000 (CONT.) - -------------------------------------------------------------------------------- (12) REGULATORY MATTERS (CONT.) The following is a reconciliation of the Bank's GAAP and Regulatory capital at December 31, 2001 and 2000 (in thousands):
GAAP TANGIBLE % CORE CAPITAL % RISK-BASED % CAPITAL CAPITAL CAPITAL DECEMBER 31, 2001 $2,728 $2,728 $2,728 $2,728 Regulatory capital adjustments: Accumulated gain on available-for-sale securities (3) (3) (3) General allowance for loan losses (up to 1.25% of risk-weighted assets) 167 ------ ------ ------ Total regulatory capital $2,725 9.8% $2,725 9.8% $2,892 21.6% Regulatory capital requirement 418 1.5% 1,115 4.0% 1,070 8.0% ------ ------ ------ Regulatory capital excess $2,307 $1,610 $1,822 ====== ====== ======
GAAP TANGIBLE RISK-BASED CAPITAL CAPITAL % CORE CAPITAL % CAPITAL % DECEMBER 31, 2000 $2,561 $2,561 $2,561 $2,561 Regulatory capital adjustments: General allowance for loan losses (up to 1.25% of risk weighted assets) 176 ------ ------ ------ Total regulatory capital $2,561 9.5% $2,561 9.5% $2,737 18.4% Regulatory capital requirement 403 1.5% 1,075 4.0% 1,193 8.0% ----- ----- ----- Regulatory capital excess $2,158 $1,486 $1,544 ====== ====== ======
60 PEOPLES BANKCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000 (CONT.) - -------------------------------------------------------------------------------- (12) REGULATORY MATTERS (CONT.) The following is a summary of the Bank's actual capital amounts and ratios compared to the OTS minimum capital adequacy requirements and the OTS requirements for classification as a well capitalized institution under prompt corrective action provisions (in thousands):
TO BE CLASSIFIED MINIMUM AS WELL- CAPITAL CAPITALIZED UNDER ADEQUACY PROMPT CORRECTIVE ACTUAL REQUIREMENT ACTION PROVISIONS AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO AS OF DECEMBER 31, 2001 Total capital (to risk weighted assets) $2,892 21.6% $1,070 8.0% $1,337 10.0% Tier I Capital (to risk weighted assets) 2,725 20.4 535 4.0 802 6.0 Tier I Capital (to adjusted tangible assets) 2,725 9.8 1,115 4.0 1,394 5.0 Tangible Capital (to tangible assets) 2,725 9.8 418 1.5 - N/A AS OF DECEMBER 31, 2000 Total capital (to risk weighted assets) $2,737 18.4% $1,193 8.0% $1,491 10.0% Tier I Capital (to risk weighted assets) 2,561 17.2 596 4.0 894 6.0 Tier I Capital (to adjusted tangible assets) 2,561 9.5 1,075 4.0 1,344 5.0 Tangible Capital (to tangible assets) 2,561 9.5 403 1.5 - N/A
61 PEOPLES BANKCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000 (CONT.) - -------------------------------------------------------------------------------- (13) FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used by the Bank in estimating fair values of financial instruments: CASH AND CASH EQUIVALENTS: The fair values are considered to approximate the carrying values, as reported in the balance sheet. SECURITIES: Fair values of securities are based on exchange quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of similar instruments. LOANS: For variable rate loans that reprice frequently and loans due on demand with no significant change in credit risk, fair values are considered to approximate carrying values. The fair values for certain mortgage loans (e.g., one-to-four family residential) and other consumer loans are based on quoted market prices of similar loans sold on the secondary market, adjusted for differences in loan characteristics. The fair values for other loans (e.g., commercial real estate and rental property mortgage loans) are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit rating. The carrying amount of accrued interest approximates its fair value. FHLB STOCK: The carrying value of this instrument, which is redeemable at par, approximates fair value. OFF-BALANCE-SHEET INSTRUMENTS: Fair values for the Bank's off-balance-sheet instruments (lines of credit and commitments to fund loans) are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing. The fair value of these financial instruments is immaterial and has therefore been excluded from the table below. DEPOSITS: The fair values of demand, savings, club, NOW and money market accounts are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate time certificates are estimated using a discounted cash flow calculation that applies interest rates currently being offered on these products to a schedule of aggregated expected monthly maturities on time deposits. SHORT-TERM BORROWINGS: As a result of the short-term nature of these instruments, the carrying amount approximates their fair value. 62 PEOPLES BANKCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000 (CONT.) - -------------------------------------------------------------------------------- (13) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONT.) The estimated carrying values and fair values of the Bank's financial instruments are as follows (in thousands): DECEMBER 31, 2 0 0 1 2 0 0 0 CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE Financial assets: Cash and cash equivalents $ 2,048 $ 2,048 $ 809 $ 809 Securities 6,559 6,602 5,143 5,209 Loans, net 18,836 19,327 20,512 20,666 FHLB stock 163 163 155 155 Accrued interest receivable 145 145 179 179 Financial liabilities: Deposits: Demand accounts 735 735 813 813 Savings and club accounts 3,215 3,215 2,930 2,930 Time certificates 18,126 18,272 18,075 18,132 NOW and money market accounts 1,943 1,943 1,927 1,927 Borrowed money 1,000 1,000 500 500 Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instrument. 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. (14) CONVERSION FROM MUTUAL TO STOCK ORGANIZATION On December 28, 1998 the Bank converted from a Federally chartered mutual savings and loan to a Federally chartered stock savings and loan. In connection with this conversion, the Bank issued all of its stock to the Parent and the Company issued 134,390 shares of common stock and received gross proceeds of $1,343,900. Costs associated with the conversion of $342,556 were accounted for as a reduction of gross proceeds. At the time of conversion, the Bank established a liquidation account, which is a memorandum account that does not appear on the statement of financial condition, in an amount equal to its retained earnings as reflected in the latest statement of financial condition used in the final conversion prospectus. The liquidation account is maintained for the benefit of eligible account holders who continue to maintain their deposit accounts in the Bank after conversion. In the event of a complete liquidation of the Bank (and only in such an event), eligible depositors who continue to maintain accounts shall be entitled to receive a distribution from the liquidation account before any liquidation may be made with respect to common stock. 63 PEOPLES BANKCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000 (CONT.) - -------------------------------------------------------------------------------- (15) CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY Financial information pertaining only to Peoples Bankcorp, Inc. is as follows: DECEMBER 31, BALANCE SHEET 2001 2000 (IN THOUSANDS) Assets: Cash - interest bearing deposits with other banks $ 145 $ 175 Loans 200 200 Accrued interest receivable 1 1 Investment in common stock of Ogdensburg Federal Savings and Loan Association 2,728 2,560 ------ ------ Total Assets $3,074 $2,936 ====== ====== Liabilities and Stockholders' Equity: Other liabilities $ 9 $ 8 Stockholders' Equity 3,065 2,928 ------ ------ Total Liabilities and Stockholders' Equity $3,074 $2,936 ====== ====== YEARS ENDED DECEMBER 31, STATEMENT OF INCOME 2001 2000 (IN THOUSANDS) Interest on Loans $ 14 $ 19 Interest on Investments 6 11 ----- ----- $ 20 $ 30 Operating expenses 46 39 ----- ----- Income (loss) before equity in undistributed net income of Ogdensburg Federal Savings and Loan Association $ (26) $ (9) Equity in undistributed net income of Ogdensburg Federal Savings and Loan Association 164 169 ----- ----- Net Income $ 138 $ 160 ===== ===== 64 PEOPLES BANKCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 AND 2000 (CONT.) - -------------------------------------------------------------------------------- (15) CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY (CONT.) YEARS ENDED DECEMBER 31, STATEMENT OF CASH FLOWS 2001 2000 (IN THOUSANDS) Cash Flows from Operating Activities: Net income $ 138 $ 160 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed net income of Ogdensburg Federal Savings and Loan Association (164) (169) (Increase) decrease in accrued interest receivable 0 3 Increase in other liabilities 8 3 ----- ----- Net Cash Provided (Used) by Operating Activities $ (18) $ (3) ----- ----- Cash Flows from Investing Activities: Proceeds from maturities of securities held-to-maturity $ 0 $ 125 ----- ----- Net Cash Provided (Used) by Investing Activities $ 0 $ 125 ----- ----- Cash Flows from Financing Activities: Cash dividends paid on common stock $ (7) $ (6) Payments to acquire treasury stock (20) (26) Loan payment received from ESOP trustee 15 12 ----- ----- Net Cash Provided (Used) by Financing Activities $ (12) $ (20) ----- ----- Net Increase (Decrease) in Cash and Cash Equivalents $ (30) $ 102 Cash and Cash Equivalents at Beginning of Year 175 73 ----- ----- Cash and Cash Equivalents at End of Year $ 145 $ 175 ===== ===== 65 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND - -------------------------------------------------------------------------------- FINANCIAL DISCLOSURE -------------------- None. PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE - -------------------------------------------------------------------------------- WITH SECTION 16(A) OF THE EXCHANGE ACT -------------------------------------- The information required by this item is incorporated by reference to "Proposal I -- Election of Directors" in the Proxy Statement. For certain information regarding the non-director executive officers of the Company, see "Item 1. Description of Business -- Executive Officers." ITEM 10. EXECUTIVE COMPENSATION - ------------------------------- The information required by this item is incorporated by reference to "Executive Compensation" in the Proxy Statement. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - ----------------------------------------------------------------------- The information required by this item is incorporated by reference to "Voting Securities and Principal Holders Thereof" and "Proposal I -- Election of Directors" in the Proxy Statement. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - -------------------------------------------------------- The information required by this item is incorporated herein by reference to the section captioned "Transactions with Management" in the Proxy Statement. ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K - ------------------------------------------------ (a) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT ---------------------------------------------- (1) Financial Statements. The following financial statements are incorporated by reference from Item 7: Independent Auditor's Report of Morrow & Poulsen, P.C. Consolidated Statements of Financial Condition as of December 31, 2001 and 2000 Consolidated Statements of Income for the Years Ended December 31, 2001 and 2000 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2001 and 2000 Consolidated Statements of Cash Flows for the Years Ended December 31, 2001 and 2000 Notes to Consolidated Financial Statements 66 (2) Exhibits. The following is a list of exhibits filed as part of this Annual Report on Form 10-KSB and is also the Exhibit Index. No. Description --- ----------- 3.1 Certificate of Incorporation of Peoples Bankcorp, Inc. * 3.2 Bylaws of Peoples Bankcorp, Inc. * 4 Form of Common Stock Certificate of Peoples Bankcorp, Inc. * 10.1 Proposed Peoples Bankcorp, Inc. 1998 Stock Option and Incentive Plan *+ 10.2 Proposed Peoples Bankcorp, Inc. Management Recognition Plan and Trust Agreement *+ 10.3 Employment Agreement between People's Bankcorp, Inc. and Robert E. Wilson *+ 10.4 Guaranty Agreement between People's Bankcorp, Inc. and Robert E. Wilson *+ 10.5 Employment Agreement between Ogdensburg Federal Savings and Loan Association and Todd R. Mashaw *+ 10.6 Amendment No. 1 to Employment Agreement between Ogdensburg Federal Savings and Loan Association and Robert E. Wilson **+ 10.7 Amendment No. 1 to Employment Agreement between Ogdensburg Federal Savings Loan Association and Todd R. Mashaw **+ 10.8 Amendment No. 2 to Employment Agreement between Ogdensburg Federal Savings Loan Association and Robert E. Wilson ***+ 10.9 Amendment No. 2 to Employment Agreement between Ogdensburg Federal Savings Loan Association and Todd R. Mashaw ***+ 21 Subsidiaries - ---------- (*) Incorporated herein by reference from Registration Statement on Form SB-2 filed (File No. 333-63625). (**) Incorporated herein by reference from the Registrant's Annual Report on Form 10-KSB for the year ended December 31, 1999. (***)Incorporated herein by reference from the Registrant's Annual Report on Form 10-KSB for the year ended December 31, 2000. (+) Management contract or compensatory plan or arrangement. (b) REPORTS ON FORM 8-K. There were no Current Reports on Form 8-K filed by the Company during the fourth quarter of fiscal year 2001. 67 SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PEOPLES BANKCORP, INC. March 28, 2002 By: /s/ Robert E. Wilson ------------------------------------- Robert E. Wilson President and Chief Executive Officer (Duly Authorized Representative) In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ Robert E. Wilson March 28, 2002 - ----------------------------------------- Robert E. Wilson President and Chief Executive Officer (Director and Principal Executive, Accounting and Financial Officer) /s/ Robert E. Hentschel March 28, 2002 - ----------------------------------------- Robert E. Hentschel (Director) /s/ Anthony P. LeBarge, Sr. March 28, 2002 - ----------------------------------------- Anthony P. LeBarge, Sr. (Director) /s/ Wesley L. Stitt March 28, 2002 - ----------------------------------------- Wesley L. Stitt Chairman of the Board (Director) /s/ George E. Silver March 28, 2002 - ----------------------------------------- George E. Silver (Director) EX-21 3 peoples10kex21-123101.txt SUBSIDIARIES OF THE REGISTRANT Exhibit 21 SUBSIDIARIES OF THE REGISTRANT Parent - ------ Peoples Bankcorp, Inc. State or Other Percentage Subsidiaries (1) Jurisdiction of Incorporation Ownership - ---------------- ----------------------------- --------- Ogdensburg Federal Savings United States 100% and Loan Association - ---------- (1) The assets, liabilities and operations of the subsidiaries are included in the consolidated financial statements contained in the financial statements attached hereto as an exhibit. -----END PRIVACY-ENHANCED MESSAGE-----