<PAGE>
Registration No. 33- ______
As filed with the Securities and Exchange Commission on September 19, 1997
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
PATHFINDER BANCORP, INC.
--------------------------------------------------
(Exact name of registrant as specified in charter)
Delaware 6712 To be applied for
- ------------------------------- ----------------- ----------------------
(State or other jurisdiction of (Primary SIC No.) (I.R.S. Employer
incorporation or organization) Identification Number)
214 West First Street
Oswego, New York 13126
(315) 343-0057
-------------------------------------------------------------------------
(Address, including Zip Code, and telephone number, including area code
of Registrant's principal executive offices)
Alan Schick, Esq.
Edward A. Quint, Esq.
Luse Lehman Gorman Pomerenk & Schick
A Professional Corporation
5335 Wisconsin Avenue, N.W.
Suite 400
Washington, D.C. 20015
(202) 274-2000
-----------------------------------------------------------
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Approximate date of commencement of proposed sale of the securities to the
public:
As soon as practicable after receipt of all regulatory approvals.
If the securities being registered on this form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box. [_]
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
================================================================================
Proposed
maximum Proposed
Title of each class of Amount to offering maximum Amount of
securities to be be price offering registration
registered registered per unit price fee
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, 881,666 $19.125/(1)/ $16,861,862 $5,110
$.10 par value shares
- --------------------------------------------------------------------------------
</TABLE>
/(1)/ Pursuant to Rule 457(c), the registration fee is based upon the average of
the high and low prices of the common stock of Oswego City Savings Bank on
September 15, 1997.
<PAGE>
__________ __, 1997
Dear Shareholder:
We cordially invite you to attend a Special Meeting of Shareholders of Oswego
City Savings Bank (the "Bank"). The Special Meeting will be held at the main
office of the Bank, 214 West First Street, at _____ a.m., Eastern Standard Time,
on __________ ___, 1997.
The enclosed Notice of Special Meeting and Prospectus/Proxy Statement describe
the formal business to be transacted. During the Special Meeting we will also
report on the operations of the Bank. Directors and officers of the Bank, as
well as a representative of our independent auditors, will be present to respond
to any questions that shareholders may have.
The Special Meeting is being held so that shareholders may vote to approve (i)
the Bank's Stock Option Plan, (ii) the Bank's Recognition and Retention Plan,
and (iii) the reorganization of the Bank into a mid-tier stock holding company
by establishing Pathfinder Bancorp, Inc. a Delaware corporation, which will own
100% of the common stock of the Bank and which will be majority owned by
Pathfinder Bancorp, MHC, the Bank's mutual holding company parent.
The Board of Directors of the Bank has determined that approval of each of the
matters to be considered at the Special Meeting is in the best interests of the
Bank and its shareholders. For the reasons set forth in the Prospectus/Proxy
Statement, the Board of Directors unanimously recommends a vote "FOR" each
matter to be considered.
On behalf of the Board of Directors, we urge you to sign, date and return the
enclosed proxy card as soon as possible, even if you currently plan to attend
the Special Meeting. This will not prevent you from voting in person, but will
assure that your vote is counted if you are unable to attend the meeting. Your
vote is important, regardless of the number of shares that you own.
Sincerely,
Chris C. Gagas
President and Chief Executive Officer
<PAGE>
Oswego City Savings Bank
214 West First Street
Oswego, New York 13126
(315) 343-0057
NOTICE OF
SPECIAL MEETING OF SHAREHOLDERS
To Be Held On __________ ___, 1997
Notice is hereby given that the Special Meeting of Shareholders of
Oswego City Savings Bank, (the "Bank") will be held at the main office of the
Bank, 214 West First Street, on __________ ___, 1997 at _____ .m., Eastern
Standard Time.
A Proxy Card and a Prospectus/Proxy Statement for the Special Meeting
are enclosed.
The Special Meeting is being held so that shareholders may vote on the
following matters:
1. The approval of the Oswego City Savings Bank 1997 Stock Option Plan;
2. The approval of the Oswego City Savings Bank 1997 Recognition and
Retention Plan;
3. The approval of an Agreement and Plan of Reorganization (the "Plan
of Reorganization") providing for the establishment of Pathfinder
Bancorp, Inc. (the "Stock Holding Company") as a stock holding
company parent of the Bank which stock holding company will be
majority owned by Pathfinder Bancorp, MHC (the "Mutual Holding
Company"), the Bank's mutual holding company. Pursuant to the Plan
of Reorganization: (i) the Bank will become a wholly-owned
subsidiary of the Stock Holding Company; (ii) the Stock Holding
Company will become a majority owned subsidiary of the Mutual
Holding Company; and (iii) each outstanding share of the Bank's
common stock will be converted into one share of the Stock Holding
Company's common stock; and
such other matters as may properly come before the Special Meeting, or any
adjournments thereof. The Board of Directors is not aware of any other business
to come before the Special Meeting.
Any action may be taken on the foregoing proposals at the Special
Meeting on the date specified above, or on any date or dates to which the
Special Meeting may be adjourned. Shareholders of record at the close of
business on _____________, 1997, are the shareholders entitled to vote at the
Special Meeting, and any adjournments thereof.
EACH SHAREHOLDER, WHETHER HE OR SHE PLANS TO ATTEND THE SPECIAL MEETING, IS
REQUESTED TO SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD WITHOUT DELAY IN THE
ENCLOSED POSTAGE-PAID ENVELOPE. ANY PROXY GIVEN BY THE SHAREHOLDER MAY BE
REVOKED AT ANY TIME BEFORE IT IS EXERCISED. A PROXY MAY BE REVOKED BY FILING
WITH THE SECRETARY OF THE BANK A WRITTEN REVOCATION OR A DULY EXECUTED PROXY
BEARING A LATER DATE. ANY SHAREHOLDER PRESENT AT THE SPECIAL MEETING MAY REVOKE
HIS OR HER PROXY AND VOTE PERSONALLY ON EACH MATTER BROUGHT BEFORE THE SPECIAL
MEETING. HOWEVER, IF YOU ARE A SHAREHOLDER WHOSE SHARES ARE NOT REGISTERED IN
YOUR OWN NAME, YOU WILL NEED ADDITIONAL DOCUMENTATION FROM YOUR RECORD HOLDER IN
ORDER TO VOTE PERSONALLY AT THE SPECIAL MEETING.
By Order of the Board of Directors
Melissa A. Dashnau
Secretary
____________, 1997
- --------------------------------------------------------------------------------
IMPORTANT: THE PROMPT RETURN OF PROXIES WILL SAVE THE BANK THE EXPENSE OF
FURTHER REQUESTS FOR PROXIES. A SELF-ADDRESSED ENVELOPE IS ENCLOSED FOR YOUR
CONVENIENCE. NO POSTAGE IS REQUIRED IF MAILED WITHIN THE UNITED STATES.
- --------------------------------------------------------------------------------
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
-----------------
Page Number
-----------
<S> <C>
INTRODUCTION............................................................... 1
REVOCATION OF PROXIES...................................................... 2
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF............................ 3
MARKET INFORMATION......................................................... 4
DIVIDEND POLICY............................................................ 5
MANAGEMENT OF THE BANK..................................................... 6
PROPOSAL I- APPROVAL OF THE OSWEGO CITY SAVINGS BANK
1997 STOCK OPTION PLAN...................................... 11
PROPOSAL II- APPROVAL OF THE OSWEGO CITY SAVINGS BANK
1997 RECOGNITION AND RETENTION PLAN......................... 13
PROPOSAL III- APPROVAL OF THE PROPOSED FORMATION OF
A MID-TIER STOCK HOLDING COMPANY............................ 15
SHAREHOLDER PROPOSALS...................................................... 34
ADDITIONAL INFORMATION..................................................... 34
OTHER MATTERS.............................................................. 35
MISCELLANEOUS.............................................................. 35
APPENDICES
- ----------
APPENDIX A -- OSWEGO CITY SAVINGS BANK 1997 STOCK OPTION PLAN
APPENDIX B -- OSWEGO CITY SAVINGS BANK 1997 RECOGNITION AND RETENTION PLAN
APPENDIX C -- AGREEMENT AND PLAN OR REORGANIZATION
APPENDIX D -- SECTION 6022 OF THE NEW YORK BANKING LAW RELATING TO
DISSENTERS' RIGHTS OF APPRAISAL
APPENDIX E -- CERTIFICATE OF INCORPORATION OF PATHFINDER BANCORP
APPENDIX F -- BYLAWS OF PATHFINDER BANCORP
APPENDIX G -- SELECTED FINANCIAL DATA OF OSWEGO CITY SAVINGS BANK
</TABLE>
<PAGE>
Prospectus/Proxy Statement
Oswego City Savings Bank
214 West First Street
Oswego, New York 13126
(315) 343-0057
SPECIAL MEETING OF SHAREHOLDERS
__________ ___, 1997
- --------------------------------------------------------------------------------
INTRODUCTION
- --------------------------------------------------------------------------------
This Prospectus/Proxy Statement is furnished in connection with the
solicitation of proxies on behalf of the Board of Directors of Oswego City
Savings Bank (the "Bank") to be used at the Special Meeting of Shareholders of
the Bank (the "Special Meeting"), which will be held at the main office of the
Bank, 214 West First Street, on __________ ___, 1997, at _____ .m., Eastern
Standard Time, and all adjournments of the Special Meeting. The accompanying
Notice of Special Meeting of Shareholders and this Prospectus/Proxy Statement
are first being mailed to shareholders on or about _____, 1997.
At the Special Meeting, in addition to being asked to vote on the
approval of the Oswego City Savings Bank 1997 Stock Option Plan and the Oswego
City Savings Bank 1997 Recognition and Retention Plan, shareholders will vote on
the approval of an Agreement and Plan of Reorganization (the "Plan of
Reorganization") pursuant to which the Bank and its mutual holding company
parent, Pathfinder Bancorp, MHC (the "Mutual Holding Company") will reorganize
into the "two-tier" mutual holding company structure. In the Reorganization, a
new Delaware chartered stock holding company, Pathfinder Bancorp, Inc. (the
"Stock Holding Company") will be established as a majority owned subsidiary of
the Mutual Holding Company and the Stock Holding Company will own 100% of the
common stock of the Bank, as described more specifically herein. Under the terms
of the proposed reorganization (the "Reorganization"), each outstanding share of
common stock of the Bank ("Common Stock") will be converted into one share of
common stock of the Stock Holding Company ("Holding Company Common Stock"), and
the holders of Common Stock will become the holders of all of the outstanding
Holding Company Common Stock. Accordingly, as a result of the Reorganization,
the owners of Common Stock other than the Mutual Holding Company ("Minority
Shareholders") will become minority shareholders of the Stock Holding Company.
Please make note of the following important considerations in
connection with the Reorganization:
. Operations of the Bank and the Mutual Holding Company. The
Reorganization will have no impact on the operations of the
Bank and the Mutual Holding Company. The Bank will continue
its operations at the same locations, with the same
management, and subject to all the rights, obligations and
liabilities of the Bank existing immediately prior to the
Reorganization.
. Reasons for the Reorganization. The Board of Directors of the
Bank believes that the "two-tier" structure will be in the
best interests of shareholders because it will offer greater
operating flexibility than is currently available to the Bank
in its existing mutual holding company structure. The
"two-tier" structure will enhance the Bank's ability to make
investments, acquire other institutions, and repurchase shares
of common stock. See "Proposed Formation of the Stock Holding
Company-Reasons for the Stock Holding Company Reorganization."
. Optional Exchange of Stock Certificates. After the
Reorganization stock certificates evidencing shares of Common
Stock will represent, by operation of law, the same number of
shares of Holding
<PAGE>
Company Common Stock. Former holders of the Common Stock will
not be required to exchange their Common Stock certificates
for Holding Company Common Stock certificates, but will have
the option to do so. See "Proposed Formation of the Stock
Holding Company -- Optional Exchange of Stock Certificates."
. Tax Consequences. The Bank has received an opinion of its
special counsel, Luse Lehman Gorman Pomerenk & Schick, P.C.,
Washington, D.C., as to certain federal income tax
consequences of the Reorganization, including that the
Reorganization will be treated as a nontaxable transaction for
federal income tax purposes. Please carefully read the section
of this Prospectus/Proxy Statement titled "Proposed Formation
of the Stock Holding Company -- Tax Consequences."
. Conditions to the Reorganization. The Plan of Reorganization
sets forth a number of conditions to the completion of the
Reorganization, including: (i) approval of the Plan of
Reorganization by the holders of two-thirds of the outstanding
shares of Common Stock; (ii) receipt of an opinion of counsel
that the Reorganization will be treated as a non-taxable
transaction for federal income tax purposes; and (iii) receipt
of any and all regulatory approvals necessary for the lawful
consummation of the Reorganization. See "Proposed Formation of
the Stock Holding Company -- Conditions to the
Reorganization."
. Rights of Dissenting Shareholders. Pursuant to New York
Banking law, stockholders may dissent from the Plan of
Reorganization and elect to have the fair market value of
their shares judicially determined and paid in cash. In order
to perfect dissenters' rights of appraisal, a stockholder must
comply with the provisions of New York law which include
providing the Bank with notice of the stockholder's intention
to seek dissenters' rights of appraisal. Such notice must be
provided to the Bank prior to the Special Meeting. For further
information see "Proposed Formation of the Stock Holding
Company--Rights of Dissenting Stockholders and Appendix D."
Please note that this list may not include all material terms of the
Reorganization, and must be read along with the more complete description of the
Reorganization included herein. For information regarding the interests of
management see "PROPOSAL III--Approval of the Proposed Formation of a Mid-Tier
Stock Holding Company--Indemnification of Officers and Limitation of Liability."
In addition, management and the Board of Directors have an interest in
the adoption of the Oswego City Savings Bank 1997 Stock Option Plan and Oswego
City Savings Bank 1997 Recognition and Retention Plan. See "Proposal I--Approval
of the Oswego City Savings Bank 1997 Stock Option Plan" and "Proposal
II--Approval of the Oswego City Savings Bank 1997 Recognition and Retention
Plan."
THE COMMON STOCK OF PATHFINDER BANCORP, INC. (THE "STOCK HOLDING COMPANY")
HAS BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION UNDER THE
SECURITIES ACT OF 1933. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION, THE NEW YORK BANKING
DEPARTMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY STATE
SECURITIES AUTHORITY. NOR HAS ANY SUCH COMMISSION, DEPARTMENT, OFFICE OR
AUTHORITY PASSED ON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS/PROXY
STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A FEDERAL OFFENSE.
THE BANK'S MUTUAL HOLDING COMPANY, PATHFINDER BANCORP, MHC, BENEFICIALLY
OWNS A MAJORITY OF THE SHARES OF THE BANK OUTSTANDING AND ENTITLED TO VOTE
ON THE PROPOSAL TO ADOPT THE AGREEMENT AND PLAN OF REORGANIZATION, AND IT
INTENDS TO VOTE ITS SHARES IN FAVOR OF THE PROPOSAL.
2
<PAGE>
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR
DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR
ANY OTHER GOVERNMENT AGENCY
THE COMMON STOCK WILL NOT BE GUARANTEED BY THE STOCKHOLDING COMPANY OR
THE BANK AND SUCH COMMON STOCK IS SUBJECT TO INCREASES OR DECREASES IN
VALUE.
The Bank currently files periodic reports and proxy materials in
accordance with the reporting requirements of the Securities Exchange Act of
1934 (the "Exchange Act"), as administered by the Federal Deposit Insurance
Corporation (the "FDIC"). Such reports and proxy materials can be obtained from
the FDIC's Registration Disclosure and Securities Operations Unit, 550 17th
Street, N.W., Washington, D.C. 20429. Telephone - (202) 898-8911. Upon
completion of the transactions described herein, the Stock Holding Company will
register the publicly held shares of the Holding Company Common Stock with the
Securities and Exchange Commission (the "SEC") under the Exchange Act and the
Stock Holding Company will comply with the periodic reporting requirements and
proxy solicitation requirements imposed pursuant to Section 12(g) of the
Exchange Act.
- --------------------------------------------------------------------------------
REVOCATION OF PROXIES
- --------------------------------------------------------------------------------
Shareholders who execute proxies in the form solicited hereby retain
the right to revoke them in the manner described below. Unless so revoked, the
shares represented by such proxies will be voted at the Special Meeting and all
adjournments thereof. Proxies solicited on behalf of the Board of Directors of
the Bank will be voted in accordance with the directions given thereon. Where no
instructions are indicated, validly executed proxies will be voted "FOR" the
proposals set forth in this Prospectus/Proxy Statement for consideration at the
Special Meeting.
Proxies may be revoked by sending written notice of revocation to the
Secretary of the Bank, at the address of the Bank shown above, the submission of
a later dated proxy or by voting in person at the Special Meeting. The presence
at the Special Meeting of any shareholder who had returned a proxy shall not
revoke such proxy unless the shareholder delivers his or her ballot in person at
the Special Meeting or delivers a written revocation to the Secretary of the
Bank prior to the voting of such proxy.
- --------------------------------------------------------------------------------
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
- --------------------------------------------------------------------------------
Holders of record of the Bank's common stock, par value $1.00 per share
(the "Common Stock") as of the close of business on __________ ___, 1997 (the
"Record Date") are entitled to one vote for each share then held. As of the
Record Date, the Bank had 1,916,666 shares of Common Stock issued and
outstanding, 1,035,000 of which were held by the Mutual Holding Company, and
881,666 of which were held by the Minority Shareholders. The presence in person
or by proxy of a majority of the outstanding shares of Common Stock entitled to
vote is necessary to constitute a quorum at the Special Meeting. The affirmative
vote of a majority of the Bank's shares held by Minority Shareholders is
required to approve Proposals I and II. The affirmative vote of two-thirds of
the total shares eligible to vote is required for approval of Proposal III.
Abstentions and broker non-votes will be counted for purposes of determining
that a quorum is present, but will not be counted as votes in favor of Proposals
I and II. Abstention and broker non-votes will have the same effect as a vote
against Proposal III. The Mutual Holding Company intends to vote its shares of
Common Stock in favor of Proposal III.
Persons and groups who beneficially own in excess of five percent of
the Common Stock are required to file certain reports with the FDIC regarding
such ownership. The following table sets forth, as of the Record Date, the
shares of Common Stock beneficially owned by Directors individually, by
executive officers individually, by executive officers and Directors as a group
and by each person who was the beneficial owner of more than five percent of the
Bank's outstanding shares of Common Stock.
In accordance with the provisions of the Bank's Restated Organization
Certificate ("Organization Certificate"), for a period of three years from
November 15, 1995, record holders of Common Stock, who beneficially own in
excess of 10% of the outstanding shares of Common Stock (the "Limit"), are not
entitled to any
3
<PAGE>
vote with respect to the shares held in excess of the Limit. This limitation
does not apply to the Mutual Holding Company which acquired its ownership
interest at the time of the Bank's mutual holding company reorganization and
minority stock issuance. The Bank's Charter authorizes the Board of Directors
(i) to make all determinations necessary to implement and apply the Limit,
including determining whether persons or entities are acting in concert, and
(ii) to demand that any person who is reasonably believed to beneficially own
stock in excess of the Limit supply information to the Bank to enable the Board
to implement and apply the Limit.
<TABLE>
<CAPTION>
Amount of Shares
Owned and Nature Percent of Shares
Name and Address of of Beneficial of Common Stock
Beneficial Owners Ownership (1) (4) Outstanding
----------------------- ------------------- ---------------------
<S> <C> <C>
Directors and Officers (2):
Chris C. Gagas 22,334 (5) 1.2%
Chris R. Burritt 8,367 (6) .4
Raymond W. Jung 2,756 .1
Bruce E. Manwaring 4,810 .3
L. William Nelson, Jr. 12,700 (7) .7
<CAPTION>
Amount of Shares
Owned and Nature Percent of Shares
Name and Address of of Beneficial of Common Stock
Beneficial Owners Ownership (1) (4) Outstanding
----------------------- ------------------- ---------------------
<S> <C> <C>
Victor S. Oakes 6,700 .3
Lawrence W. O'Brien 1,127 (8) *
Janette Resnick 200 (9) *
Corte J. Spencer 3,800 (10) .2
Thomas W. Schneider 200 (11) *
Melissa A. Dashnau 133 *
W. David Schermerhorn 667 (12) *
All Directors and Executive Officers 63,794 3.3
as a Group (12 persons) (3)
Principal Shareholders:
Pathfinder Bancorp, M.H.C. (3) 1,035,000 54.0
214 West First Street
Oswego, New York 13126
Oswego City Savings Bank (4) 61,716 2.6
Employee Stock Ownership Plan
214 West First Street
Oswego, New York 13126
Jewelcor Management Consulting Corp. 168,572 8.8
100 N. Wilkes-Barre Boulevard
Wilkes-Barre, Pennsylvania 18702
</TABLE>
- -----------------------------
* Less than one-tenth of 1%.
4
<PAGE>
(1) For purposes of this table, a person is deemed to be the beneficial
owner of any shares of Common Stock if he has sole or shared voting or
investment power with respect to such security, or has a right to
acquire beneficial ownership at any time within 60 days from the Record
Date. As used herein, "voting power" is the power to vote or direct the
voting of shares and "investment power" is the power to dispose or
direct the disposition of shares. Includes all shares held directly as
well as by spouses and minor children, in trust and other indirect
ownership, over which shares the named individuals effectively exercise
sole or shared voting and investment power. Unless otherwise indicated,
the named individual has sole voting and investment power.
(2) The mailing address for each person is listed as 214 West First Street,
Oswego, New York 13126
(3) The Bank's executive officers and directors are also executive officers
and trustees of Pathfinder Bancorp, M.H.C.
(4) Includes 61,716 shares, of which 53,901 are unallocated and as to which
the Employee Stock Ownership Plan (the "ESOP") trustee has sole voting
and investment power, and 7,815 of which are allocated and as to which
the ESOP trustee has shared voting and sole investment power.
(5) Mr. Gagas has sole voting and investment power over 20,000 shares and
shared voting and investment power over 1,334 shares.
(6) Mr. Burritt has sole voting and investment power over 8,067 shares and
shared voting and investment power over 300 shares.
(7) Mr. Nelson has sole voting and investment power over 5,000 shares and
shared voting and investment power over 5,400 shares.
(8) Mr. O'Brien has shared voting and investment power over all shares
reported.
(9) Ms. Resnick has sole voting power over all shares reported.
(10) Mr. Spencer has shared voting and investment power over all shares
reported.
(11) Mr. Schneider has shared voting and investment power over all shares
reported.
(12) Mr. Schermerhorn has shared voting and investment power over all shares
reported.
- --------------------------------------------------------------------------------
MARKET INFORMATION
- --------------------------------------------------------------------------------
The Common Stock is traded on the Over the Counter Electronic Bulletin
Board (an electronic communications network that provides brokers and dealers
with quotation information) under the symbol "PBHC." As of the record date,
there were approximately 450 shareholders of record.
The following table sets forth market price and dividend information for
the Common Stock in each full quarterly period since completion of the Bank's
mutual holding company reorganization on November 15, 1995. On January 13, 1997,
the date immediately prior to the date the Bank's Board of Directors adopted the
Plan of Reorganization, the Common Stock last traded at $9.875 per share. On
__________, 1997, the record date, the Common Stock traded at $_____ per share.
<TABLE>
<CAPTION>
Quarter Ended High Low Dividends
- ------------- ---- --- ---------
<S> <C> <C> <C>
1995
- ----
December 31 $ 10.75 $ 8.375 N/A
1996
- ----
March 31 10.25 8.75 $ .05
June 30 9.00 8.25 .05
September 30 9.00 8.00 .05
December 31 10.625 8.75 .05
1997
- ----
March 31 13.00 9.375 .05
June 30 14.00 10.875 .07
</TABLE>
- --------------------------------------------------------------------------------
DIVIDEND POLICY
- --------------------------------------------------------------------------------
The Bank has paid a quarterly cash dividend every quarter since the
completion of its mutual holding company reorganization and minority stock
issuance in November 1995. If Proposal III is approved by Shareholders, it is
the intention of the Stock Holding Company to continue to pay cash dividends on
outstanding Holding Company Common Stock. Dividends paid by the Stock Holding
Company will be determined by the Stock Holding Company's Board of Directors and
will be based upon its consolidated financial condition, results of operations,
tax considerations, economic conditions, regulatory restrictions on the payment
of dividends by the Bank to the Stock Holding Company and other factors. Under
New York law, the Bank's ability to pay dividends is limited to the Bank's net
profits. The approval of the New York Superintendent of Banking is required if
the total of all dividends
5
<PAGE>
declared in any calendar year exceeds the total net profits for that year plus
retained net profits for the preceding two years, less any required transfers to
surplus. No dividends may be paid so long as there is any impairment of capital.
There can be no assurance that dividends will be paid on the Holding Company
Common Stock or that, if paid, such dividends will not be reduced or eliminated
in the future.
The Stock Holding Company is not subject to regulatory restrictions on
the payment of dividends to its shareholders, although the source of such
dividends will be dependent upon the factors set forth above. The Stock Holding
Company is subject to the requirements of Delaware law which generally limit
dividends to an amount equal to the excess of net assets of the Stock Holding
Company (the amount by which total assets exceeds total liabilities) over its
stated capital, or if there is no such excess, of its net profits for the
current and/or preceding year. While the Board of Governors of the Federal
Reserve System ("FRB") does not have specific regulations governing the payment
of dividends by bank holding companies, the FRB will focus on the holding
company's capital position, its ability to meet its financial obligations and
its capacity to act as a source of strength to its subsidiaries.
Dividend Waivers by the Mutual Holding Company
In connection with the FRB's approval of the Bank's formation of the
Mutual Holding Company, the FRB imposed certain conditions on the waiver by the
Mutual Holding Company of dividends paid by the Bank on its Common Stock. These
conditions will continue to apply to any waiver by the Mutual Holding Company of
dividends paid on Holding Company Common Stock. In particular, the Mutual
Holding Company must obtain prior FRB approval before it may waive any
dividends. The amount of any waived dividends will not be available for payment
to Minority Shareholders and will be excluded from capital for purposes of
calculating dividends payable to Minority Shareholders. Moreover, the cumulative
amount of waived dividends must be maintained in a restricted capital account
which would be added to any liquidation account of the Bank, and would not be
available for distribution to Minority Shareholders. The restricted capital
account and liquidation account amounts would not be reflected in the Bank's
financial statements or the notes thereto, but would be considered as a
notational or memorandum account of the Bank, and would be maintained in
accordance with the rules, regulations and policy of the New York Superintendent
of Banks and the Federal Deposit Insurance Corporation ("FDIC") except that such
rules would be administered by the FRB, and any other rules and regulations
adopted by the FRB. As of December 31, 1996, the FRB had not given its approval
to any waiver, and the Mutual Holding Company had not waived any dividends paid
by the Bank.
The Reorganization is not expected to have an effect on whether or not
the Mutual Holding Company applies to the FRB for approval to waive dividends.
After the Reorganization, if the Mutual Holding Company decides that it is in
its best interest to waive a particular dividend to be paid by the Stock Holding
Company, and the FRB approves such waiver, then the Stock Holding Company would
pay such dividend only to Minority Shareholders, and the amount of the dividend
waived by the Mutual Holding Company would be treated in the manner described
above. The Mutual Holding Company's decision as to whether or not to waive a
particular dividend will depend on a number of factors, including the Mutual
Holding Company's capital needs, the investment alternatives available to the
Mutual Holding Company as compared to those available to the Bank, and
regulatory approvals. Management believes that, after the Reorganization, the
factors considered by the Mutual Holding Company in deciding whether or not to
waive dividends are not likely to change, except that it will also consider the
investment alternatives available to the Stock Holding Company, which, after the
Reorganization, will include the repurchase of Holding Company Common Stock.
There can be no assurance (i) that after the Reorganization the Mutual Holding
Company will waive dividends paid by the Stock Holding Company, (ii) that the
FRB will approve any dividend waivers by the Mutual Holding Company or (iii) of
the terms that may be imposed by the FRB on any dividend waiver.
6
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT OF THE BANK
- --------------------------------------------------------------------------------
The following table sets forth for each director and executive officer
of the Bank such person's name, age, occupation and position with the Bank. With
respect to directors, additional information is provided regarding the year the
director first became a director and the number of shares and percentage of the
Common Stock beneficially owned by each director. Unless otherwise noted, all
directors and officers have held their positions for at least five years.
<TABLE>
<CAPTION>
Shares of
Common Stock
Positions Beneficially
Held at the Director Current Term Owned on Percent
Name (1) Age Bank Since (2) to Expires Record Date (3) of Class
-------- --- ---- --------- ---------- --------------- --------
<S> <C> <C> <C> <C> <C> <C>
Chris C. Gagas 65 Chairman of the Board, 1966 1999 22,334 1.2%
President and
Chief Executive Officer
Chris R. Burritt 43 Director 1986 1999 8,367 .4
Raymond W. Jung 67 Director 1978 1999 2,756 .1
Bruce E. Manwaring 54 Director 1984 1997 4,810 .3
L. William Nelson, Jr. 52 Director 1986 1997 12,700 .7
Victor S. Oakes 72 Director 1982 1997 6,700 .3
Lawrence W. O'Brien 72 Director 1948 1998 1,127 *
Janette Resnick 58 Director 1996 1999 200 *
Corte J. Spencer 53 Director 1984 1998 3,300 .2
</TABLE>
- --------------------------
(1) The mailing address for each person listed is 214 West First Street,
Oswego, New York 13126. Each of the persons listed is also a Trustee of
Pathfinder Bancorp, M.H.C., which owns the majority of the Bank's
issued and outstanding shares of Common Stock.
(2) Reflects initial appointment to the Board of Trustees of the Bank's
mutual predecessor.
(3) See definition of "beneficial ownership" in the table in "Voting
Securities and Principal Holders Thereof." * Less than one-tenth of one
percent.
Executive Officers Who Are Not Directors
<TABLE>
<CAPTION>
Name Age Positions Held With Bank
---- --- ------------------------
<S> <C> <C>
Barry S. Thompson 42 Senior Vice President
Thomas W. Schneider 36 Vice President and Chief Financial Officer
W. David Schermerhorn 36 Vice President
Edgar J. Manwaring 51 Vice President
Melissa A. Dashnau 39 Vice President and Corporate Secretary
James A. Dowd 29 Controller
Gregory L. Mills 37 Vice President and Director of Marketing, Branch
Administration
</TABLE>
The principal occupation during the past five years of each Director of
the Bank is set forth below. All Directors have held their present positions for
five years unless otherwise stated.
Chris C. Gagas is Chairman, President and Chief Executive Officer of
the Bank. Mr. Gagas has served as an officer of the Bank since 1986.
7
<PAGE>
Chris R. Burritt is the president and general manager of R.M. Burritt
Motors, Inc./Chris Cross, Inc., an automobile dealership located in Oswego, New
York.
Raymond W. Jung is retired. Previously Mr. Jung was the owner of
Raymond's Jewelers in Oswego, New York.
Bruce E. Manwaring is retired. Previously, Mr. Manwaring was the owner
and manager of Oswego Printing Company, Inc., a commercial printing company
located in Oswego, New York.
L. William Nelson, Jr. is the owner and manager of Nelson Funeral Home
located in Oswego, New York.
Victor S. Oakes is retired. Previously, Mr. Oakes was a plant manager
at Hammermill Paper Company in Oswego, New York.
Lawrence W. O'Brien is presently the project coordinator with
Neal-O'Brien Building and Materials Corporation located in Oswego, New York.
Until 1989, Mr. O'Brien was Chairman of the Board and President of Neal-O'Brien
Building and Materials Corporation.
Janette Resnick is the Executive Director of Oswego Opportunities, a
private, not-for-profit human services agency located in Oswego, New York. She
was appointed to the Board of Directors in 1996.
Corte J. Spencer is the Chief Executive Officer and Administrator of
Oswego Hospital located in Oswego, New York.
Directors' Compensation
Each non-employee Director receives a meeting fee of $475 for each
Board meeting attended and $400 for each committee meeting attended. Employee
directors do not receive monthly meeting fees. The Bank paid a total of $75,525
in Director fees during the year ending December 31, 1996.
8
<PAGE>
Executive Compensation
The following table sets forth for the years ended December 31, 1996,
1995, and 1994, certain information as to the total remuneration paid by the
Bank to Mr. Gagas, the Bank's chief executive officer. No other officer of the
Bank received cash compensation exceeding $100,000 in 1996. The Bank's second
highest paid officer during the year ended December 31, 1996 was Thomas W.
Schneider who received annual compensation of $71,100. The Bank's officers (six
persons) received aggregate compensation of $414,000 during the year ending
December 31, 1996.
<TABLE>
<CAPTION>
==========================================================================================================================
SUMMARY COMPENSATION TABLE
==========================================================================================================================
Long-Term
Annual Compensation Compensation Awards
- ----------------------------------------------------------------------- ----------------------------------
Fiscal
Years Other Restricted
Ended Annual Stock Options/ All Other
Name and December Salary Bonus Compensation Award(s) SARs Compensation
Principal Position (1) 31 ($)(2) ($) ($)(3) ($) (#) Payouts ($)
- ---------------------- ----------- ----------- ---------- -------------- ----------- ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Chris C. Gagas 1996 $175,000 -- $10,197 -- -- -- (4)
President and Chief 1995 $165,000 -- -- -- -- -- (4)
Executive Officer 1994 $149,000 -- 1,747 -- -- -- (4)
====================== =========== =========== ========== ============== =========== ========== ========== ===============
</TABLE>
(1) No other executive officer received salary and bonuses that in the
aggregate exceeded $100,000.
(2) Includes compensation deferred at the election of the named individual
under the Bank's cafeteria plan.
(3) Includes shares valued at $6,162 allocated to Mr. Gagas under the Bank's
Employee Stock Ownership Plan and matching contribution under the Bank's
401(K) Plan of $4,035 for the year ended December 31, 1996.
(4) The aggregate amount of such benefits did not exceed the lesser of $50,000
or 10% of cash compensation for the named individuals.
Benefits
Medical and Life Insurance and Educational Assistance. The Bank
provides full-time employees with medical and life and accidental death and
dismemberment insurance. In addition, the Bank maintains a "cafeteria plan" for
employees, which permits qualifying employees to allocate a portion of their
compensation, on a pre-tax basis, for the payment of medical, dental and
dependent care expenses as well as the payment of certain insurance premiums.
Also, the Bank offers educational assistance to full-time employees who have
worked for the Bank for one year and desire to take courses at any accredited
school of learning. The Bank also has purchased long-term disability income
insurance for all employees of the Bank to provide disability income equal to
the lesser of $6,000 per month or 60% of the employee's basic monthly earnings.
Defined Benefit Plan. The Bank maintains a tax-qualified
noncontributory defined benefit plan ("Retirement Plan"). All employees age 21
or older who have worked at the Bank for a period of one year and been credited
with 1,000 or more hours of employment with the Bank during the year are
eligible to accrue benefits under the Retirement Plan. The Bank annually
contributes an amount to the Retirement Plan necessary to satisfy the
actuarially determined minimum funding requirements in accordance with the
Employee Retirement Income Security Act of 1974, as amended ("ERISA").
At the normal retirement age of 65 the plan is designed to provide a
life annuity. The retirement benefit provided is an amount equal to 2% of a
participant's average monthly compensation based on the average of the three
consecutive years during the last 10 years of employment which provides the
highest monthly average compensation multiplied by the participant's years of
credited service (not to exceed 30 years) to the normal retirement date.
Retirement benefits are also payable upon retirement due to early and late
retirement. Benefits are also paid from the Retirement Plan upon a Participant's
disability or death. A reduced benefit is payable upon early retirement at or
after age 60, or the completion of 30 years of service with the Bank. Upon
termination of employment other than as specified above, a participant who was
employed by the Bank for a minimum of five years is eligible to receive
9
<PAGE>
his or her accrued benefit reduced for early retirement or a deferred retirement
benefit commencing on such participant's normal retirement date. Benefits are
payable in various annuity forms. At December 31, 1996, the market value of the
Retirement Plan trust fund equaled approximately $2.8 million. For the plan year
ended December 31, 1996, the Bank made a contribution in the amount of $140,000
to the Retirement Plan.
The following table indicates the annual retirement benefit that would
be payable under the Retirement Plan upon retirement at age 65 in plan year
1996, expressed in the form of a single life annuity for the final average
salary and benefit service classification specified below.
<TABLE>
<CAPTION>
========================================================================================================================
YEARS OF BENEFIT SERVICE AT RETIREMENT
- ------------------------------------------------------------------------------------------------------------------------
Final
Average Compensation 15 20 25 30
- -------------------------------------- --------------------- -------------------- ------------------ -------------------
<S> <C> <C> <C> <C>
$28,333 $7,500 $10,000 $12,500 $15,000
- -------------------------------------- --------------------- -------------------- ------------------ -------------------
$50,000 $15,000 $20,000 $28,333 $30,000
- -------------------------------------- --------------------- -------------------- ------------------ -------------------
$75,000 $22,500 $30,000 $37,500 $45,000
- -------------------------------------- --------------------- -------------------- ------------------ -------------------
$100,000 $30,000 $40,000 $50,000 $60,000
- -------------------------------------- --------------------- -------------------- ------------------ -------------------
$150,000(1) $45,000 $60,000 $75,000 $90,000
====================================== ===================== ================== =================== ==================
</TABLE>
- ------------------------------------
(1) Under Section 401(a)(17) of the Code, the maximum amount of compensation
that may be taken into account under the Retirement Plan in the
1996 Plan Year is $150,000.
As of December 31, 1996, Chris C. Gagas had 11 years of credited
service (i.e., benefit service) under the Retirement Plan.
Employee Savings Plan. The Bank maintains the Employee Savings Plan
which is a qualified, tax-exempt profit sharing plan with a cash or deferred
feature which is tax-qualified under Section 401(k) of the Internal Revenue Code
(the "401(k) Plan"). All employees who have attained age 21 and have completed
one year of employment during which they worked at least 1,000 hours are
eligible to participate.
Under the 401(k) Plan, participants are permitted to make salary
reduction contributions to the 401(k) Plan equal to a percentage of up to 15% of
compensation. For these purposes, "compensation" includes total compensation
(including salary reduction contributions made under the 401(k) Plan or the
flexible benefits plan sponsored by the Bank), but does not include compensation
in excess of the Code Section 401(a)(17) limits. The participants' salary
reduction contribution may be matched by the Bank, in its discretion, based upon
the level of profits of the Bank in the current fiscal year. All employee
contributions and earnings thereon are fully and immediately vested. All
employer matching contributions vest at the rate of 20% per year beginning at
the end of a participant's third year of service with the Bank until a
participant is 100% vested after seven years of service. Participants will also
vest in employer matching contributions upon the attainment of the normal
retirement age of 65 or later, death or disability.
Plan benefits will be paid to each participant in a lump sum. At
December 31, 1996, the market value of the 401(k) Plan trust fund was
approximately $466,000. For the Plan year ended December 31, 1996, the Bank made
a contribution in the amount of $35,000 to the 401(k) Plan Trust.
Executive Supplemental Retirement Income Master Agreement. The Bank
maintains a non-tax-qualified executive supplemental retirement income master
agreement (the "Master Agreement") for certain executives of the Bank. There are
three executives eligible to participate in the Master Agreement. The Master
Agreement provides a supplemental retirement income benefit in an annual amount
equal to the highest average compensation received by the executive during any
36 month period while employed by the Bank, multiplied by a wage replacement
percentage
10
<PAGE>
designated in the individual executive's joinder agreement, less the actual
annual amount available to the executive from the Bank's other tax-qualified or
nonqualified plans. Benefits under the Master Agreement are payable to the
executive upon the benefit age designated in the individual executive's joinder
agreement. Benefits will be payable in monthly installments beginning on the
executive's benefit age and continuing for a period of months designated in the
individual executive's joinder agreement. Payments to an executive, or to his
beneficiary, may be made from the Master Agreement upon the executive's death,
total or permanent disability, or termination of service with the Bank.
The Master Agreement is considered an unfunded plan for tax and ERISA
purposes. All obligations arising under the Master Agreement are payable from
the general assets of the Bank. As of December 31, 1996, $89,000 was accrued
under the Master Agreement on behalf of the three participants, of which $80,000
was accrued on behalf of Mr. Gagas.
Executive Deferred Compensation Master Agreement. The Bank sponsors a
non-tax qualified deferred compensation plan for the benefit of two of its
executives, Mr. Gagas and Mr. Manwaring (the "Executive Plan"). Under the
Executive Plan, the executive is entitled to defer a portion of his income
during the 60-month period commencing January 1, 1988. Deferred amounts are
payable upon attainment of the benefit age as designated in the executive's
joinder agreement, in the form of monthly installments commencing on the first
day of the month following attainment of the executive's benefit age and
continuing for the period designated in the individual executive's joinder
agreement. Payments to an executive, or to his designated beneficiary, may also
be made from the Executive Plan upon the executive's death or total and
permanent disability. Under the Executive Plan, the executive will not recognize
taxable income until their benefits are actually distributed.
Employee Stock Ownership Plan and Trust. The Bank has established an
Employee Stock Ownership Plan and Related Trust ("ESOP") for eligible employees.
The ESOP is a tax-qualified plan subject to the requirements of ERISA and the
Code. Employees with a 12-month period of employment with the Bank during which
they worked at least 1,000 hours and who have attained age 21 are eligible to
participate. The ESOP has borrowed funds from an unrelated third party lender
and has purchased 50,000 shares in open market transactions. The Common Stock
purchased by the ESOP serves as collateral for the loan. The loan will be repaid
principally from the Bank's contributions to the ESOP over a period of up to
seven years. The interest rate for the loan is one percent below the prime rate.
Shares purchased by the ESOP will be held in a suspense account for allocation
among participants as the loan is repaid.
Contributions to the ESOP and shares released from the suspense account
in an amount proportional to the repayment of the ESOP loan will be allocated
among participants on the basis of compensation in the year of allocation, up to
an annual adjusted maximum level of compensation. Benefits generally become
vested after five years of credited service. Forfeitures will be reallocated
among remaining participating employees in the same proportion as contributions.
Benefits may be payable upon death, retirement, early retirement, disability or
separation from service. The Bank's contributions to the ESOP will not be fixed,
so benefits payable under the ESOP cannot be estimated.
In connection with the establishment of the ESOP, a committee
consisting of all nonemployee Directors was selected by the Bank to administer
the ESOP and the Bank's other stock benefit plans (the "Stock Benefits
Committee"). An unrelated corporate trustee for the ESOP initially was
appointed. The Stock Benefits Committee may instruct the trustee regarding
investment of funds contributed to the ESOP. The ESOP trustee generally will
vote all shares of Common Stock held under the ESOP in accordance with the
written instructions of the Stock Benefits Committee. In certain circumstances,
however, the ESOP trustee must vote all allocated shares held in the ESOP in
accordance with the instructions of the participating employees, and unallocated
shares and shares held in the suspense account in a manner calculated to most
accurately reflect the instructions the ESOP trustee has received from
participants regarding the allocated stock, subject to and in accordance with
the fiduciary duties under ERISA owed by the ESOP trustee to the ESOP
participants. Under ERISA, the Secretary of Labor is authorized to bring an
action against the ESOP trustee for the failure of the ESOP trustee to comply
with its fiduciary responsibilities.
11
<PAGE>
Transactions with Certain Related Persons
All transactions between the Bank and its executive officers,
directors, holders of 10% or more of the shares of its Common Stock and
affiliates thereof, are on terms no less favorable to the Bank than could have
been obtained by it in arm's-length negotiations with unaffiliated persons. Such
transactions must be approved by a majority of independent outside directors of
the Bank not having any interest in the transaction.
- --------------------------------------------------------------------------------
RECENT EVENTS
- --------------------------------------------------------------------------------
On September 5, 1997, the Bank entered into an Agreement and Plan of
Merger (the "Merger Agreement") with Oswego County Savings Bank ("County
Savings") providing for the merger of the Savings Bank with and into Bank with
the Bank as the surviving institution (the "Merger"). County Savings is a New
York chartered mutual savings bank located in Oswego, New York. At June 30,
1997, County Savings had assets of $113.5 million, deposits of $100.5 million
and retained earnings of $11.9 million.
The Merger Agreement provides that additional shares of the Bank's
Common Stock (or the Stock Holding Company if Proposal III is approved by
stockholders and the Reorganization is completed prior to the completion of the
Merger) equal to the fair value of County Savings will be transferred to the
Mutual Holding Company. An independent appraisal firm will determine the fair
value of County Savings as if County Savings were forming a mutual holding
company and conducting a minority stock offering.
The Merger is subject to various conditions, including receipt of
regulatory approvals from the FRB, the FDIC, and the Department, as well as
receipt of approval of the Bank's shareholders and if necessary County Savings'
depositors. The Merger is not affected by the Bank's reorganization into a
mid-tier mutual holding company. In the event that Proposal III is approved by
the Bank's shareholders and the Reorganization is completed, the Stock Holding
Company as sole shareholder of the Bank's Common Stock intends to vote its
shares in favor of the Merger.
- --------------------------------------------------------------------------------
PROPOSAL I--APPROVAL OF THE OSWEGO CITY SAVINGS BANK
1997 STOCK OPTION PLAN
- --------------------------------------------------------------------------------
On January 24, 1997, the Board of Directors has adopted the Oswego City
Savings Bank 1997 Stock Option Plan (the "Stock Option Plan"), subject to
shareholder approval of the Stock Option Plan at the Meeting. The following
discussion is qualified in its entirety by reference to the Stock Option Plan, a
copy of which is attached as Appendix A.
Certain directors, officers and employees of the Bank and its
affiliates will be eligible to participate in the Stock Option Plan. The Stock
Option Plan authorizes the grant of stock options and limited rights to purchase
88,167 shares, or 10% of the number of the minority shares of Common Stock
outstanding. Pursuant to the Stock Option Plan, grants may be made of (i)
options to purchase Common Stock intended to qualify as incentive stock options
under Section 422 of the Code, (ii) options that do not so qualify
("nonstatutory options") and (iii) limited rights (described below) that are
exercisable only upon a change in control of the Bank (as defined). Nonemployee
directors are eligible to receive only nonstatutory options. In addition to
shareholder approval, the Stock Option Plan must be approved by the New York
Superintendent of Banks (the "Superintendent"). The Stock Option Plan has
received the preliminary approval of the Superintendent. The Superintendent's
review of the Stock Option Plan implies neither approval of disapproval of the
Stock Option Plan's contents. The Stock Option Plan must receive the final
approval of the Superintendent. In the event the Plan of Reorganization is
approved by shareholders, all options will be exercisable for shares of Holding
Company Common Stock on the same terms as they are for Common Stock.
Grants of options (with limited rights in the case of options granted
to employees) to purchase shares of Common Stock under the Stock Option Plan
have been made to named executive officers, executive officers as a group,
non-employee directors, and employees as a group as set forth below. Under New
York banking law, all awards are subject to the approval of the Stock Option
Plan by the Superintendent. New York banking law also requires that awards to
persons who are also Trustees of the Mutual Holding Company are subject to
shareholder
12
<PAGE>
approval of the Stock Option Plan. Directors who act in an administrative
capacity with respect to the Stock Option Plan are eligible to receive grants of
stock options.
<TABLE>
<CAPTION>
Number of Shares
Name and Dollar Value (1) to be Received Upon
Principal Position as of ,1997 Exercise of Options
------------------ -------------------------- -------------------
<S> <C> <C>
Chris C. Gagas, Chairman of the Board,
President and Chief Executive Officer 24,000
Chris R. Burritt, Director 5,000
Raymond W. Jung, Director 5,000
Bruce E. Manwaring, Director 5,000
Leonard W. Nelson, Jr., Director 5,000
Victor S. Oakes, Director 5,000
Lawrence W. O'Brien, Director 5,000
Janette Resnick, Director 5,000
Corte J. Spencer, Director 5,000
All executive officers as a group (4 persons) 35,000
All non-employee directors
as a group (8 persons) 40,000
All employees, not including
executive officers, as a
group (8 persons) 13,000
</TABLE>
- -----------------------------
(1) The value of the stock options is based upon difference in the market price
of the Common Stock on ________,1997 and the exercise price of the option
of $9.875 which was the fair market value of the Common Stock at January
13, 1997, the date of the award.
(2) All options granted to non-employee directors will be nonstatutory stock
options.
Future grants may be made by the Board of Directors of the Bank or a
stock benefits committee, established by the Bank consisting of at least two
non-employee members of the Board of Directors (the "Stock Benefits Committee").
In granting options, the Stock Benefits Committee considers factors such as
salary, length of employment with the Bank, and the employee's overall
performance. The Board of Directors determined that each non-employee director
should receive an equal stock option grant to purchase 5,000 shares. To the
extent shares are available under the Stock Option Plan, each newly appointed
non-employee director shall receive a stock option grant to purchase 5,000
shares of Common Stock. All stock options will be exercisable in five equal
annual installments of 20% commencing with the vesting of the first installment
one year from the date of grant, and succeeding installments on each anniversary
of the date of grant; provided, however, that all options will be 100%
exercisable in the event the optionee terminates his service due to normal
retirement, death or disability, or in the event of a change in control of the
Bank. Options must be exercised within 10 years from the date of grant. Stock
options may be exercised up to one year following termination of service or such
later period as determined by the Stock Benefits Committee. The exercise price
of the options will be at least 100% of the fair market value of the underlying
Common Stock at the time of the grant. The last sale price of the Common Stock
on the date of grant, January 13, 1997, as quoted on the "Electronic Bulletin
Board" was $9.875 per share. For further information on the Common Stock's price
history including its price at ________, 1997, the Record Date, see "Market
Information.", on page 5 of this Prospectus/Proxy Statement. The exercise price
may be paid in cash or Common Stock. Common Stock issued in connection with the
exercise of options may be treasury shares or authorized but unissued shares.
The issuance of authorized but unissued shares of Common Stock or treasury
shares will have a dilutive effect on the Common Stock holdings of existing
shareholders.
Incentive stock options will only be granted to employees of the Bank.
Nonemployee directors will be granted nonstatutory stock options. No stock
option granted in connection with the Stock Option Plan will be eligible
13
<PAGE>
to be treated as an incentive stock option if it is exercised more than three
months after the date on which the optionee ceases to perform services for the
Bank, except that in the event of death or disability, a stock option may be
eligible to be treated as an incentive stock option if it is exercised within
one year; provided, however, that if an optionee ceases to perform services for
the Bank due to normal retirement or following a change in control (as defined
in the Stock Option Plan), any incentive stock options exercised more than three
months following the date the optionee ceases to perform services shall be
treated as a nonstatutory stock option as described above.
Upon the exercise of "limited rights" in the event of a change in
control, the optionee will be entitled to receive a lump sum cash payment (or in
certain cases, shares of Common Stock) equal to the difference between the
exercise price of the option and the fair market value of the shares of Common
Stock subject to the option on the date of exercise of the right in lieu of
purchasing the stock underlying the option. In the event of death or disability,
the Bank, if requested by the optionee or beneficiary, may elect, in exchange
for the option, to pay the optionee, or beneficiary in the event of death, the
amount by which the fair market value of the Common Stock exceeds the exercise
price of the option on the date of the optionee's termination of service for
death or Disability.
Simultaneously with the grant of any stock option, the Committee may
grant a Dividend Equivalent Right with respect to all or some of the shares
covered by such stock option. The Dividend Equivalent Right provides the grantee
with a separate cash benefit equal to 100% of the amount of any extraordinary
dividend declared by the Bank on shares of Common Stock subject to a stock
option. Under the terms of the Stock Option Plan, an extraordinary dividend is
any dividend paid on shares of Common Stock where the rate of the dividend
exceeds the Bank's weighted average cost of funds on interest bearing
liabilities for the current and preceding three quarters. Upon the payment of an
extraordinary dividend, the holder of a Dividend Equivalent Right will receive,
at the time of vesting of the related stock option, an amount of cash or some
other payment as determined under the Stock Option Plan, equal to 100% of the
extraordinary dividend paid on shares of Common Stock, multiplied by the number
of shares subject to the underlying stock option plus any earnings thereon minus
any tax withholding amounts. Payments shall be decreased by the amount of any
applicable tax withholding prior to distribution in accordance with the Stock
Option Plan. The Dividend Equivalent Right is transferrable only when the
underlying stock option is transferable and under the same conditions.
The purpose of shareholder approval of the Stock Option Plan will be to
qualify the Stock Option Plan for the granting of incentive stock options. The
Board of Directors may amend, suspend or terminate the Stock Option Plan except
that such amendments may not impair awards previously granted. Stockholder
approval must be obtained in order to implement any amendment to the Stock
Option Plan that would increase the number of shares as to which options may be
granted, change the number of shares which may be optioned to an individual,
decrease an option exercise price, extend the term of the Stock Option Plan or
an option, or change the persons or category of persons eligible to be granted
options. The exercise of options will have a dilutive effect on the ownership
interests of existing shareholders. Further, the exercise of options may render
more difficult or discourage, a merger, tender offer or other takeover attempt
even if such transaction would be beneficial to shareholders generally, the
assumption of control by a holder of a large block of the Company's securities,
a proxy contest or the removal of incumbent management.
Federal Income Tax Consequences
Under present Federal tax laws, options granted and exercised under the
Stock Option Plan will result in the following tax consequences:
1. The grant of an option will not by itself result in the recognition
of taxable income to the participant or entitle the Bank to a deduction at the
time of such grant.
2. The exercise of an option which is an "Incentive Stock Option"
within the meaning of Section 422 of the Internal Revenue Code generally will
not, by itself, result in the recognition of taxable income to the participant
or entitle the Bank to a deduction at the time of such exercise. However, the
difference between the exercise price and the fair market value of the option
shares on the date of exercise is an item of tax preference which may, in
14
<PAGE>
certain situations, trigger the alternative minimum tax. The alternative minimum
tax is incurred only when it exceeds the regular income tax. The participant
will recognize capital gain or loss upon resale of the shares received upon such
exercise, provided that such shares are held for at least one year after the
transfer of shares to the participant or two years after the grant of the
option, whichever is later. Generally, if the shares are not held for that
period, the participant will recognize ordinary income upon disposition in an
amount equal to the difference between the exercise price and the fair market
value on the date of exercise, or, if less, the sale proceeds of the shares
acquired pursuant to the option.
3. The exercise of a nonstatutory stock option will result in the
recognition of ordinary income by the participant on the date of exercise in an
amount equal to the difference between the exercise price and the fair market
value on the date of exercise of the Common Stock acquired pursuant to the
option.
4. The Bank will be allowed a tax deduction equal to the amount of
taxable ordinary income recognized by the participant at the time the
participant recognizes such ordinary income.
ALL PROXIES MUST BE SIGNED AND RETURNED TO THE BANK IN ORDER FOR A
SHAREHOLDER'S VOTE TO BE COUNTED. UNLESS MARKED TO THE CONTRARY, THE SHARES
REPRESENTED BY THE ENCLOSED, SIGNED PROXY WILL BE VOTED FOR THE APPROVAL OF THE
1997 STOCK OPTION PLAN.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL OF THE 1997 STOCK
OPTION PLAN.
- --------------------------------------------------------------------------------
PROPOSAL II--APPROVAL OF THE OSWEGO CITY SAVINGS BANK
1997 RECOGNITION AND RETENTION PLAN
- --------------------------------------------------------------------------------
The Board of Directors of the Bank has adopted the 1997 Recognition and
Retention Plan (the "Recognition Plan") as a method of providing certain
employees and non-employee directors of the Bank with a proprietary interest in
the Bank and to provide these individuals with an incentive to increase the
value of the Bank. The following discussion is qualified in its entirety by
reference to the Recognition Plan, which is attached hereto as Appendix B.
The Bank intends to contribute sufficient funds for the Recognition Plan to
acquire shares of Common Stock of the Bank in an aggregate amount of 35,267
shares of Common Stock, or 4% of the minority shares outstanding. Under the
Recognition Plan, shares of Common Stock will be awarded in the following
amounts to Named Executive Officers, executive officers as a group, non-employee
directors, and employees as a group. The Recognition Plan may be funded through
the acquisition of shares from authorized but unissued shares or through open
market purchases. Funding the Recognition Plan with authorized but unissued
shares will have a dilutive effect on the ownership interests of existing
stockholders.
Awards to Officers, Employees and Non-Employee Directors
<TABLE>
<CAPTION>
Name and
Principal Position Dollar Value (1) Number of Shares
- ------------------ ---------------- ----------------
<S> <C> <C>
Chris C. Gagas, Chairman of the Board,
President and Chief Executive Officer 8,800
Chris R. Burritt, Director 1,800
Raymond W. Jung, Director 1,800
Bruce E. Manwaring, Director 1,800
Leonard W. Nelson, Jr., Director 1,800
Victor S. Oakes, Director 1,800
Lawrence W. O'Brien, Director 1,800
Janette Resnick, Director 1,800
Corte J. Spencer, Director 1,800
All executive officers as a group (4 persons) 13,000
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
Name and
Principal Position Dollar Value (1) Number of Shares
- ------------------ ---------------- ----------------
<S> <C> <C>
All non-employee directors
as a group (8 persons) 13,600
All employees, not including
executive officers, as a
group (8 persons) 7,000
</TABLE>
- -----------------------------
(1) Based on the last sale price of the Common Stock on the Record Date.
The Stock Benefits Committee, composed of the non-employee directors of the
Bank, will administer the Recognition Plan, and make awards to officers and
employees pursuant to the Recognition Plan. However, awards to outside directors
will be fixed by the terms of the Recognition Plan. Awards of Common Stock that
are restricted by the Recognition Plan ("Restricted Stock") are nontransferable
and nonassignable. Awards of Restricted Stock will be made following receipt of
stockholder approval. Awards will be made following receipt of stockholder
approval. Participants in the Recognition Plan will earn (become vested in)
shares of Restricted Stock covered by an award and all restrictions will lapse
at a rate of 20% per year commencing with the first lapse of restrictions on the
first trading day of 1998, and succeeding installments being earned on the first
trading day of the following year; provided, however, that the Stock Benefits
Committee may accelerate or extend the earnings rate on any awards made to
officers and employees after the effective date of the Recognition Plan. Awards
to executive officers and outside directors become fully vested upon termination
of employment or service due to normal retirement, death or disability, or
following a termination of employment or service in connection with a change in
control (as defined therein) of the Bank. Upon termination of employment or
service for any other reason, unvested shares are forfeited. When a
participant's shares become vested in accordance with the Recognition Plan, the
participant will recognize income equal to the fair market value of the
Restricted Stock so vested at that time, unless the participant has made an
irrevocable election to be taxed on the shares of Restricted Stock awarded to
him in the year of the award. The amount of income recognized by a participant
will be a deductible expense of the Bank for Federal income tax purposes. After
Restricted Stock has been granted, but before the Restricted Stock has vested,
the recipient shall receive any cash dividends paid with respect to such shares.
Stock dividends declared by the Bank and paid on shares that have not been
earned shall be subject to the same restrictions as the Restricted Stock until
such shares are earned. Prior to vesting, recipients of awards under the
Recognition Plans may vote the shares of Restricted Stock allocated to them.
ALL PROXIES MUST BE SIGNED AND RETURNED TO THE BANK IN ORDER FOR A
SHAREHOLDER'S VOTE TO BE COUNTED. UNLESS MARKED TO THE CONTRARY, THE SHARES
REPRESENTED BY THE ENCLOSED, SIGNED PROXY WILL BE VOTED FOR THE APPROVAL OF THE
RECOGNITION PLAN.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL OF THE
RECOGNITION PLAN.
- --------------------------------------------------------------------------------
PROPOSAL III--APPROVAL OF THE PROPOSED FORMATION
OF A MID-TIER STOCK HOLDING COMPANY
- --------------------------------------------------------------------------------
Summary
The formation of a stock holding company will be accomplished under an
Agreement and Plan of Reorganization, dated January 14, 1997 (the "Plan of
Reorganization"), pursuant to which the Bank will become a wholly-owned
subsidiary of the Stock Holding Company, a newly formed Delaware stock
corporation which will be majority-owned by the Mutual Holding Company (the
"Reorganization"). Under the terms of the Plan of Reorganization, each
outstanding share of Common Stock will be converted into one share of common
stock par value $0.10 per share of the Stock Holding Company ("Holding Company
Common Stock"), and the holders of Common Stock will become the holders of all
of the outstanding Holding Company Common Stock. Accordingly, as a result of the
Reorganization, the owners of Common Stock other than the Mutual Holding Company
("Minority Shareholders") will become minority shareholders of the Stock Holding
Company. The Stock Holding Company was incorporated in August 1997 as a wholly
owned subsidiary of the Bank solely for the purpose of becoming a bank
16
<PAGE>
holding company and has no prior operating history. The Reorganization will have
no impact on the operations of the Bank or the Mutual Holding Company. The Bank
will continue its operations at the same locations, with the same management,
and subject to all the rights, obligations and liabilities of the Bank existing
immediately prior to the Reorganization. The Reorganization is not expected to
result in any material increased expenses or regulatory burden to the Bank.
Following the Reorganization, the Stock Holding Company shall file periodic
reports and proxy materials with the SEC.
Reasons for the Stock Holding Company Reorganization
The Board of Directors of the Bank believes that the formation of the Stock
Holding Company as a subsidiary of the Mutual Holding Company will be in the
best interests of shareholders and will offer greater operating flexibility than
is currently available to the Bank in its existing mutual holding company
structure. The Mutual Holding Company does not operate as a traditional holding
company at the present time because it is a mutual organization and represents
only the mutual ownership interest in the Bank. Establishing the Stock Holding
Company as a subsidiary of the Mutual Holding Company will permit the Stock
Holding Company to conduct activities and make investments for the benefit of
all shareholders. It will also provide greater flexibility to structure and
complete acquisitions of other financial institutions, repurchase shares of
Stock Holding Company Common Stock as market conditions permit, and diversify
the Stock Holding Company's business activities.
Enhanced Ability to Invest Through the Stock Holding Company. Under the
existing mutual holding company structure the Mutual Holding Company cannot make
investments in other financial institutions or business enterprises for the
benefit of all shareholders of the Bank, and the Bank itself is limited by law
or regulation in its permissible investment activities. For example, if the
Mutual Holding Company invests in 5% of the common stock of another bank or
thrift holding company, any gain on such investment would accrue only to the
Mutual Holding Company. The Reorganization will permit the entity that issues
stock (i.e. the Stock Holding Company) to make investments, diversify business
activities, or acquire other financial institutions, for the benefit of all
shareholders. No specific investments, new business activities or acquisitions
by the Stock Holding Company are planned at the present time.
Facilitate Mergers and Acquisitions. The Reorganization will also
facilitate the approval and completion of mergers and acquisitions since the
Stock Holding Company, acting as the sole shareholder of the Bank, will be able
to approve mergers and acquisitions involving the Bank. This is consistent with
the way other stock holding companies are able to approve mergers of their bank
or savings institution subsidiaries. Moreover, the Reorganization will enable
the Stock Holding Company to acquire other financial institutions and to operate
them as separate subsidiaries for the benefit of all shareholders of the Stock
Holding Company.
Stock Repurchases. The Reorganization will enable the Stock Holding Company
to repurchase Holding Company Common Stock which, particularly in recent years,
has been an important, if not essential, means for banks and savings
institutions to enhance shareholder value and invest capital resources.
Historically, the Bank has used the percentage of taxable income method for
establishing its bad debt reserves for tax purposes. Federal tax laws generally
require that thrift institutions recapture into income (and pay tax on) their
excess bad debt reserves in the event of certain distributions and redemptions,
such as stock repurchases. Accordingly, if the Bank were to repurchase any of
its outstanding Common Stock, it would cause recapture of all or part of its
pre-1988 excess tax bad debt reserves. Distribution or redemptions by entities
such as the Stock Holding Company that has not used a percentage of taxable
income method bad debt reserves are not subject to recapture. As a result, the
Stock Holding Company, will be permitted to repurchase Holding Company Common
Stock without causing any recapture of the Bank's tax bad debt reserves. The
ability to repurchase Holding Company Common Stock is an important means of
enhancing shareholder value and investing capital resources. See "Regulation of
the Stock Holding Company--Repurchases of Holding Company Common Stock."
Stock Holding Company Powers. The Stock Holding Company would be permitted
to engage in the activities that are permissible for bank holding companies
under the Bank Holding Company Act (i.e. activities that are closely related to
banking). These include several activities in which the Bank is not permitted to
engage, such
17
<PAGE>
as investing in certain equity securities and holding other savings banks as
subsidiaries. See "Stock Holding Company Regulation" herein.
Although the Reorganization will enable the Stock Holding Company's
shareholders to share in the rewards of the increased operating flexibility,
shareholders should also consider that the Stock Holding Company's shareholders
will also bear the risk that the transactions that are facilitated by the
increased operating flexibility may not ultimately prove to be advantageous to
the Stock Holding Company and its shareholders.
THE BOARD OF DIRECTORS OF THE BANK HAS UNANIMOUSLY APPROVED THE
REORGANIZATION AND RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE PLAN OF
REORGANIZATION.
Plan of Reorganization
The Reorganization will be accomplished under the Plan of Reorganization,
which is attached as Appendix C hereto. The following discussion is qualified in
its entirety by reference to the Plan of Reorganization. The Plan of
Reorganization was unanimously approved by the Board of Directors on January 14,
1997.
The Stock Holding Company is a newly organized Delaware corporation which
was formed by the Bank solely for the purpose of effecting the Reorganization.
Therefore, the Stock Holding Company has no prior operating history.
The Reorganization will be accomplished as follows: (i) the Stock Holding
Company will organize an interim New York stock savings bank ("Interim") as a
wholly-owned subsidiary; (ii) Interim will merge into the Bank, with the Bank as
the surviving corporation; (iii) in connection with the merger in step (ii)
above, all of the issued and outstanding shares of Holding Company Common Stock
held by the Bank prior to the Reorganization will be canceled, all of the issued
and outstanding shares of Common Stock will be converted into and become an
equal number of shares of Holding Company Common Stock, and all of the issued
and outstanding shares of Interim, which are held by the Stock Holding Company,
will automatically be converted by operation of law into common stock of the
Bank. As a result of steps (i) and (ii) above, the Bank will become the wholly-
owned subsidiary of the Stock Holding Company, the Stock Holding Company will
become the majority-owned subsidiary of the Mutual Holding Company, and Minority
Shareholders will become minority shareholders of the Stock Holding Company.
The following diagram sets forth the Bank's current mutual holding company
structure:
-----------------------
Pathfinder Bancorp,
M.H.C.
-----------------------
54.0% of
Common Stock
----------------------- ---------------
Oswego City Savings 46.0% of Minority
Bank Common Stock Shareholders
----------------------- ---------------
18
<PAGE>
The following diagram sets forth the Bank's proposed mutual holding company
structure following completion of the Reorganization:
-----------------------
Pathfinder Bancorp,
M.H.C.
-----------------------
54.0% of Share Holding Company
Common Stock
----------------------- ----------------
Pathfinder Bancorp 46.0% of Share Holding Minority
Company Common Stock Shareholders
----------------------- ----------------
100% Owned
-----------------------
Oswego City Savings
Bank
-----------------------
Capitalization
The Board of Directors of the Bank presently intends to capitalize the
Stock Holding Company with up to $3 million, subject to the receipt of any
required regulatory approvals. The Stock Holding Company is being capitalized in
such amount so that it will be in a position to take advantage of investment
opportunities as they arise from time to time. These opportunities may include
investments in equity securities, acquisitions of other financial institutions
and repurchases of Holding Company Common Stock. Future capitalization of the
Stock Holding Company will depend upon earnings and dividends declared by the
Bank and any issuance of debt or equity securities. Although the Bank has the
authority to issue non-voting securities without obtaining shareholder approval,
it has no current intent to do so. The Board of Directors of the Stock Holding
Company has no present plans or intentions with respect to any future issuance
of securities at this time. Furthermore, at all times, the Mutual Holding
Company must own at least 51.0% of the Stock Holding Company's outstanding
voting stock so long as the Mutual Holding Company remains in existence.
After the Reorganization, the Bank will continue its existing business and
operations as a wholly- owned subsidiary of the Stock Holding Company, and the
consolidated capital, assets, liabilities, and form of financial statements of
the Stock Holding Company immediately following the Reorganization will be
substantially the same as those of the Bank immediately prior to consummation of
the Reorganization. The Organization Certificate and the Bylaws of the Bank will
continue in effect, and will not be affected in any manner by the
Reorganization. The corporate existence of the Bank will be unaffected by the
Reorganization.
Unless the Bank receives the nonobjection of the FDIC, the Bank may not
issue to any person other than Stock Holding Company (i) Common Stock, or (ii)
any equity security that would give the holder the right to acquire any equity
security of the Bank or that would give the holder an interest in the retained
earnings of the Bank. In addition, so long as the Mutual Holding Company is in
existence, no additional shares of Common Stock shall be offered for sale by the
Bank to any person other than Stock Holding Company unless the depositors of the
Bank are give the rights set forth in the FDIC's Rules and Regulations relating
to mutual-to-stock conversions of state-chartered savings banks. The Board of
Directors of the Bank has no present plans or intentions with respect to any
future issuance of securities of the Bank.
19
<PAGE>
Set forth below is the historical capitalization of the Bank and the pro
forma capitalization of the Bank and the Stock Holding Company as of April 30,
1997.
<TABLE>
<CAPTION>
Pro Forma
Consolidated
Historical Pro Forma Capitalization
Capitalization Capitalization of the Stock
of the Bank of the Bank Holding Company
----------- ----------- ---------------
<S> <C> <C> <C>
Deposits................................ $ 157,986,700 $ 157,986,700 $ --
Borrowings.............................. 8,170,000 8,170,000 --
ESOP Debt............................... 471,900 471,900 --
-------------- -------------- -----------
Total Deposits and Borrowed Funds $ 166,628,600 $ 166,628,600 $ --
============== ============== ===========
Capital Stock:
Common Stock at par value (1)
2,500,000 authorized,
1,916,666 outstanding................. $ 1,916,700 $ 1,916,700 $ --
Additional Paid in Capital.............. 3,754,900 3,754,900 3,000,000
Retained earnings, net.................. 16,365,600 13,365,600 --
Unrealized appreciation in securities
available-for-sale.................... 69,100 69,100 --
Less:
Common Stock acquired by ESOP......... (460,800) (460,800) --
-------------- -------------- -----------
Total shareholders' equity (2) $ 21,645,500 $ 18,645,500 $ 3,000,000
============== ============== ===========
</TABLE>
- ---------------
(1) The par value of the Bank's and Stock Holding Company's Common Stock is
$1.00 and $.10 per share, respectively.
(2) Estimated expenses of $75,000 will be capitalized and amortized over a five
year period.
Set forth below is a summary of the Bank's historical and pro forma
regulatory capital at April 30, 1997. Following completion of the
Reorganization, the Bank will exceed all regulatory capital requirements imposed
by the FDIC.
<TABLE>
<CAPTION>
Actual Pro Forma
------ ---------
Percent Percent
Amount of Assets Amount of Assets
------ --------- ------ ---------
<S> <C> <C> <C> <C> <C>
Tier 1 Leverage: Capital........... $17,760,900 9.4% $ 14,760,900 7.8%
Requirement....... 7,587,100 4.0 7,587,100 4.0
----------- ------- ------------ ------
Excess............ $10,173,800 5.4% $ 7,173,800 3.8%
=========== ======= ============ ======
Tier 1 Risk-Based: Capital........... $17,760,900 9.4% $ 14,760,900 7.8%
Requirement....... 7,587,100 4.0 7,587,100 4.0
----------- ------- ------------ ------
Excess............ $10,587,100 5.4% $ 7,173,800 3.8%
=========== ======= ============ ======
Total Risk-Based: Capital........... $22,562,900 11.9% $ 19,562,900 10.3%
Requirement....... 15,174,100 8.0 $ 15,174,100 8.0
----------- ------- ------------ ------
Excess............ $ 7,388,800 3.9% $ 4,388,800 2.3%
=========== ======= ============ ======
</TABLE>
Effective Date
The "Effective Date" of the Reorganization will be the date upon which the
Plan of Reorganization filed with and approved by the New York Banking
Department.
20
<PAGE>
Optional Exchange of Stock Certificates
After the Effective Date stock certificates evidencing shares of Common
Stock will represent, by operation of law, the same number of shares of Holding
Company Common Stock. Former holders of the Common Stock will not be required to
exchange their Common Stock certificates for Holding Company Common Stock
certificates, but will have the option to do so. DO NOT SEND YOUR STOCK
CERTIFICATES TO THE BANK AT THIS TIME. Any shareholder desiring more information
about such exchange may request additional information from the Bank by writing
the Secretary of the Bank, Melissa A. Dashnau, 214 West First Street, Oswego,
New York 13126.
Rights of Dissenting Shareholders
New York law applicable to the Bank generally provides that a shareholder
of a New York-chartered savings bank which engages in a merger transaction shall
have the right to demand from the savings bank the payment of the fair or
appraised value of his or her stock in the savings bank, subject to the
satisfaction of specified procedural requirements. Pursuant to Section 604 of
the New York Banking Law ("NYBL"), holders of the Bank's Common Stock may
dissent from the Plan of Reorganization and elect to have the fair value of
their shares of Common Stock judicially determined and paid in cash, provided
such holder complies with the provisions of Section 6022 of the NYBL. The
following is a brief summary of the statutory procedures to be followed in order
to perfect dissenters' rights of appraisal under Section 6022 of the NYBL. This
summary is not intended to be complete and is qualified in its entirely by
reference to Section 6022, the text of which is attached as Appendix D to the
Prospectus/Proxy Statement.
If a holder of Common Stock elects to exercise his rights of appraisal,
such shareholder must satisfy the following conditions:
(i) such shareholder must deliver to the Bank a written objection to the
Reorganization and a demand that the shareholder intends to demand
payment for his shares if the Reorganization occurs. The written
objection must be filed with the Bank before a vote is taken of the
Plan of Reorganization.
(ii) such shareholder must not vote in favor of the Plan of
Reorganization.
(iii) within 20 days after receipt of written notice from the Bank, the
dissenting shareholder must file a written notice of his election to
dissent, stating his name, residence address, the number and class of
shares as to which he dissents and a demand for payment of the fair
value of his shares.
(iv) At the time of filing the notice of election to dissent or within one
month thereafter the shareholder must surrender his certificates
representing his Common Stock, to either the Bank or its transfer
agent, indicating on the stock certificate that the shareholder has
filed a notice of election to perfect dissenters' rights.
A dissenting shareholder may not dissent as to less than all of the shares
held by him of record and that he owns beneficially. A nominee or fiduciary may
not dissent on behalf of any beneficial owner as to less than all of the shares
of such owner held of record by such nominee or fiduciary.
Within 7 days after the expiration of the period within which shareholders
may file their notices of election to dissent, or within 7 days after the
proposed corporate action is consummated, whichever is later, the Stock Holding
Company shall make a written offer by registered mail to each shareholder who
has filed such notice of election to pay for his shares at a specified price
which the Stock Holding Company considers to be their fair value. Such offer
shall be made at the same price per share to all dissenting shareholders and
shall be accompanied by a balance sheet of the Bank as of the latest available
date, which shall not be earlier than 12 months before the making of such offer,
21
<PAGE>
and a profit and loss statement or statements for not less than a 12 month
period ended on the date of the balance sheet. If within 30 days after the
making of such offer, the Stock Holding Company and any shareholder agree upon
the price to be paid for his shares, payment shall be made within 60 days after
the making of such offer upon the surrender of the certificates representing
such shares.
In the event the Stock Holding Company fails to make such offer within such
period of 7 days, or if it makes the offer and any dissenting shareholder or
shareholders fail to agree on the price to be paid for their shares within a
period of 30 days thereafter, the Stock Holding Company shall, within 20 days
after the expiration of whichever is applicable of the two periods last
mentioned, institute a special proceeding in the supreme court in the judicial
district in which the office of the Stock Holding Company is located to
determine the rights of dissenting shareholders and to fix the fair value of
their shares. If the Stock Holding Company fails to institute such proceeding
within such period of 20 days, any dissenting shareholder may institute such
proceeding for the same purpose not later than 30 days after the expiration of
such 20 day period. If such proceeding is not instituted within such 30 day
period, all dissenters' rights shall be lost unless the Supreme Court, for good
cause shown, shall otherwise direct. All dissenting shareholders other than
those who have agreed with the Stock Holding Company on the price to be paid for
their shares, shall be made parties to such proceeding. The Stock Holding
Company shall serve a copy of the petition in such proceeding upon each
dissenting shareholder who is a resident of New York state in the manner
provided by law for the service of a summons, and upon each nonresident
dissenting shareholder either by registered mail and publication, or in such
other manner as is permitted by law. The Supreme Court shall determine whether
each dissenting shareholder is entitled to receive payment for his shares. If
the Stock Holding Company does not request any such determination or if the
court finds that any dissenting shareholder is so entitled, the court shall
determine the value of the shares, which, shall be the fair value as of the
close of business on the day prior to the shareholders' authorization date,
excluding any appreciation or depreciation directly or indirectly induced by
such corporate action or its proposal. The Supreme Court may, if it so elects,
appoint an appraiser to receive evidence and recommend a decision on the
question of fair value. Such appraiser shall have the power, authority and
duties specified in the order appointing him, or any amendment thereof.
In the event the Supreme Court determines that the dissenting shareholder
is entitled to payment on his shares, the Supreme Court shall award the
dissenting shareholder interest from the shareholders' authorization date to the
date of payment. If the Supreme Court finds that the refusal of any shareholder
to accept the corporate offer of payment for his shares was arbitrary, vexatious
or otherwise not in good faith, no interest shall be paid.
The costs and expenses of such proceeding shall be determined by the court
and shall be assessed against the Stock Holding Company, except that all or any
part of such costs and expenses may be apportioned and assessed, as the Supreme
Court may determine, against any or all of the dissenting shareholders who are
parties to the proceeding if the Supreme Court finds that their refusal to
accept the corporate offer was arbitrary, vexatious or otherwise not in good
faith.
Within 60 days after final determination of the proceeding, the Stock
Holding Company shall pay to each dissenting shareholder the amount found to be
due him, upon surrender of the certificates representing his shares.
Tax Consequences
The Bank has received an opinion of its special counsel, Luse Lehman Gorman
Pomerenk & Schick, P.C., Washington, D.C., as to certain federal income tax
consequences of the Reorganization. This opinion of counsel, which is not
binding upon the Internal Revenue Service, provides substantially as follows:
(1) The merger of Interim with and into the Bank will constitute a
reorganization under Section 368 of the Internal Revenue Code of 1986, as
amended ("Code"), and the Stock Holding Company, the Bank and Interim will each
be a "party to a reorganization" within the meaning of Section 368(b) of the
Code, provided that the merger of Interim with and into the Bank qualifies as a
statutory merger under applicable law, after the transaction the Bank will hold
substantially all of the assets of Interim and Bank shareholders exchange solely
for Holding Company Common Stock an amount of Common Stock
22
<PAGE>
constituting "control" of the Bank; (2) No gain or loss will be recognized by
Bank shareholders on the exchange of Common Stock for Holding Company Common
Stock; (3) No gain or loss will be recognized by the Holding Company on the
receipt by it of Common Stock solely in exchange for Holding Company Common
Stock; (4) The basis of Holding Company Common Stock received by the Bank's
shareholders will be the same as the basis of the Common Stock surrendered in
exchange therefor; (5) The holding period of Holding Company Common Stock to be
received by Bank shareholders will include the holding period of the Common
Stock surrendered in exchange therefor, provided the Bank Common Stock was held
as a capital asset on the date of the exchange; and (6) No gain or loss will be
recognized by the Bank shareholders as a result of conversion of their Bank
stock options into options to purchase Stock Holding Company Common Stock.
Each Bank shareholder should consult his own tax counsel as to specific
federal, state and local tax consequences of the Reorganization, if any, to such
shareholder.
Consequences Under Federal Securities Laws
The Common Stock is registered under Section 12 of the Securities Exchange
Act of 1934 (the "Exchange Act") as administered by the FDIC. Upon consummation
of the Reorganization, the Bank will no longer have the Common Stock registered
under the FDIC and the Bank will no longer file periodic reports and proxy
statements with the FDIC. Following the Reorganization, the Holding Company
Common Stock will be registered under the Section 12 of the Exchange Act as
administered by the Securities and Exchange Commission (the "SEC"). The Exchange
Act will apply to the Stock Holding Company to the same degree that it currently
applies to the Bank, except that the powers, functions and duties to administer
and enforce the Exchange Act requirements, including periodic and other reports,
proxies, tender offers, and short swing profits, and certain other requirements
that are vested in the FDIC with respect to securities of insured banks such as
the Bank, are vested in the SEC with respect to securities of corporations such
as the Stock Holding Company. In carrying out its responsibility to administer
such requirements, however, the FDIC is generally required by law to issue
substantially similar regulations to those adopted by the SEC.
Conditions to the Reorganization
The Plan of Reorganization sets forth a number of conditions to the
completion of the Reorganization, including: (i) approval of the Plan of
Reorganization by the required vote of holders of outstanding shares of Bank
Common Stock; (ii) receipt of an opinion of counsel as to the Federal income tax
consequences of the Reorganization; (iii) approval of the Reorganization by the
New York Banking Department (the "Department"); (iv) FRB approval of the
acquisition of control of the Bank by the Stock Holding Company; (v) approval of
the merger of Interim into the Bank by the FDIC and the Department; and (vi)
registration with the SEC under the Exchange Act of the Holding Company Common
Stock to be issued in the Reorganization and the compliance by the Stock Holding
Company with all applicable state securities laws relating to the issuance of
Holding Company Common Stock.
The Mutual Holding Company, which owns a majority of the outstanding shares
of Common Stock, intends to vote its shares in favor of the Plan of
Reorganization. Furthermore, the Bank has received an opinion of special counsel
that the Reorganization will be treated as a non-taxable transaction for federal
income tax purposes.
Effect of the Reorganization on the Bank's Stock Based Benefit Plans
Following the Reorganization, shares of Common Stock held in the Bank's
ESOP shall be converted into Stock Holding Company Common Stock. Furthermore,
options granted under the Stock Option Plan will be exercisable for shares of
Stock Holding Company Common Stock and restricted stock awards under the
Recognition Plan shall automatically be converted into Stock Holding Company
shares.
23
<PAGE>
Effect of the Reorganization on any Future Mutual-to-Stock Conversion of the
Mutual Holding Company
The Reorganization and the establishment of the Stock Holding Company is not
expected to have a material effect on the rights of Minority Shareholders in the
event of a mutual-to-stock conversion of the Mutual Holding Company. The Mutual
Holding Company has no current intention to engage in a mutual-to-stock
conversion.
Amendment, Termination or Waiver
The Board of Directors of the Bank may cause the Plan of Reorganization to be
amended or terminated if the Board determines for any reason that such amendment
or termination would be advisable. Such amendment or termination may occur at
any time prior to the filing of Plan of Reorganization with the Department,
provided that no such amendment may be made to the Plan of Reorganization after
shareholder approval if such amendment is deemed to be materially adverse to the
shareholders of the Bank. Additionally, any of the terms or conditions of the
Plan of Reorganization may be waived by the party which is entitled to the
benefit thereof.
Business of the Bank
The Bank is a New York-chartered savings bank headquartered in Oswego, New
York. The Bank has five full-service offices located in its market area
consisting of Oswego County. The Bank's deposits are insured by the Federal
Deposit Insurance Corporation ("FDIC"). The Bank was chartered as a New York
savings bank in 1859 as Oswego City Savings Bank. The Bank is a consumer-
oriented institution dedicated to providing mortgage loans and other traditional
financial services to its customers. The Bank is committed to meeting the
financial needs of its customers in Oswego County, New York, the county in which
it operates. At April 30, 1997, the Bank had total assets of $189.7 million,
total deposits of $157.9 million, and shareholders' equity of $21.6 million.
The Bank is primarily engaged in the business of attracting deposits from the
general public in the Bank's market area, and investing such deposits, together
with other sources of funds, in loans secured by one- to four-family residential
real estate. At December 31, 1996, $100.7 million, or 90.8%, of the Bank's
total loan portfolio consisted of loans secured by real estate, of which $74.4
million, or 73.8% of total real estate loans, were loans secured by one-to four-
family residences, $14.9 million, or 14.8% of total real estate loans, were
secured by commercial real estate, $2.3 million, or 2.3% of total real estate
loans, were secured by multi-family properties and $9.2 million, or 9.1% of
total real estate loans, were secured by second liens on residential properties.
The Bank also originates consumer and other loans which totalled $10.1 million,
or 9.1%, of the Bank's total loan portfolio. The Bank invests a portion of its
assets in securities issued by the United States Government, state and municipal
obligations, corporate debt securities, mutual funds, and equity securities.
The Bank also invests in mortgage-backed securities primarily issued or
guaranteed by the United States Government or agencies thereof. The Bank's
principal sources of funds are deposits and principal and interest payments on
loans and other borrowings. The principal source of income is interest on loans
and investment securities. The Bank's principal expenses are interest paid on
deposits and employee compensation and benefits.
On November 15, 1995, the Bank reorganized from a New York chartered mutual
savings bank into the mutual holding company form of ownership, chartering
Pathfinder Bancorp, M.H.C., a New York mutual holding company as its mutual
holding company, and concurrently amending its charter to read as a stock
charter. As part of the reorganization, the Bank issued 881,666 shares of
common stock to the public; 1,035,000 shares were issued to the Mutual Holding
Company.
The Bank's executive office is located at 214 West First Street, Oswego, New
York, and its telephone number at that address is (315) 343-0057.
24
<PAGE>
Business of the Stock Holding Company
General. The Stock Holding Company was formed only recently and currently has
no business activities. Upon the completion of the Reorganization, the Bank will
become a wholly-owned subsidiary of the Stock Holding Company and each
shareholder of the Bank will become a shareholder of the Stock Holding Company
with the same ownership interest therein as such shareholder's ownership
interest in the Bank immediately prior to the Reorganization.
Immediately after consummation of the Reorganization, it is expected that the
Stock Holding Company will not engage in any business activity other than to
hold all of the stock of the Bank. The Stock Holding Company does not
presently have any arrangements or understandings regarding any acquisition or
merger opportunities. It is anticipated, however, in the future that the Stock
Holding Company may pursue other investment opportunities, including possible
diversification through acquisitions and mergers.
Property. The Stock Holding Company is not expected to own or lease real or
personal property initially. Instead, it intends initially to utilize the
premises, equipment and furniture of the Bank. The Stock Holding Company will
pay rental fees to the Bank for the use of the Bank's property.
Legal Proceedings. Since its organization, the Stock Holding Company has not
been a party to any legal proceedings.
Employees. At the present time, the Stock Holding Company does not intend to
employ any persons other than senior officers of the Bank. It will utilize the
support staff of the Bank from time to time. If the Stock Holding Company
acquires other savings institutions or pursues other lines of business, it may
hire additional employees at such time. The Stock Holding Company will
reimburse the Bank for services performed by the Bank's employees on behalf of
the Stock Holding Company.
Competition. It is expected that for the immediate future the primary
business of the Stock Holding Company will be the ownership of the Bank Common
Stock. Therefore, the competitive conditions to be faced by the Stock Holding
Company will be the same as those faced by the Bank.
Management of the Stock Holding Company
Directors. The directors of the Stock Holding Company are, and upon
completion of the Reorganization will continue to be, the same persons who are
at present the directors of the Bank. The three-year terms of the directors are
staggered to provide for the election of approximately one-third of the board
members each year.
Executive Officers. The executive officers of the Stock Holding Company are,
and upon completion of the Reorganization will be, the same persons who are at
present the executive officers of the Bank.
Remuneration. Since the formation of the Stock Holding Company, none of its
executive officers or directors has received any remuneration from the Stock
Holding Company. It is expected that initially no compensation will be paid to
its directors and officers in addition to compensation paid to them by the Bank.
Once the Stock Holding Company engages in business activity other than holding
the common stock of the Bank it intends to pay separate and additional
compensation as appropriate.
Indemnification of Officers and Directors and Limitation of Liability
General. Certain provisions of the Certificate of Incorporation of the Stock
Holding Company and the Bylaws of the Bank seek to ensure that the ability of
such companies' directors to exercise their best business judgment in managing
corporate affairs, subject to their continuing fiduciary duties of loyalty to
their companies and
25
<PAGE>
shareholders, is not unreasonably impeded by exposure to the potentially high
personal costs or other uncertainties of litigation. The nature of the tasks
and responsibilities undertaken by directors and officers often requires such
persons to make difficult judgments of significant importance which can expose
such persons to personal liability, but from which they will acquire no personal
benefit (other than as shareholders). In recent years, litigation against
corporations and their directors and officers, often amounting to mere "second
guessing" of good-faith judgments and involving no allegations of personal
wrongdoing, has become common. Such litigation often claims damages in large
amounts which bear no relationship to the amount of compensation received by the
directors or officers, particularly in the case of directors who are not
officers of the corporation, and the expense of defending such litigation,
regardless of whether it is well founded, can be enormous. Individual directors
and officers can seldom bear either the legal defense costs involved or the risk
of a large judgment.
In order to attract and retain competent and conscientious directors and
officers in the face of these potentially serious risks, corporations have
historically provided for corporate indemnification and limitation of liability
in their articles and bylaws and have obtained liability insurance protecting
the company and its directors and officers against the cost of litigation and
related expenses. Such indemnification and limitation of liability provisions
may also benefit shareholders who indirectly assume the expense of litigation
and directors' and officers' liability insurance. The Bank currently has
insurance coverage for its directors and officers, and the Bank's management
expects that the Stock Holding Company will be able to obtain such coverage for
its directors and officers. The Stock Holding Company's Board of Directors and
officers, the individual members of which will benefit from the inclusion of the
indemnification and limitation of liability provisions, have a personal interest
in including these provisions in the Stock Holding Company's Certificate of
Incorporation.
The Bank's Organization Certificate and Bylaws do not contain any provision
limiting the liability of directors. The NYBL contains no provisions for the
limitation of director liability.
The Stock Holding Company's Certificate of Incorporation provides that a
director shall not be personally liable to the Stock Holding Company or its
shareholders for monetary damages for breach of such director's fiduciary duty
as a director, except for (i) breach of the director's duty of loyalty to the
Stock Holding Company or its shareholders, (ii) acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) certain unlawful distributions, or (iv) any transaction from which the
director derived an improper personal benefit. If the Delaware General
Corporation Law is amended to authorize action further eliminating or limiting
the personal liability of directors, then the liability of a director shall be
eliminated or limited to the fullest extent permitted under the amended law.
This provision eliminates the potential liability of the Stock Holding
Company's directors for failure, through negligence or gross negligence, to
satisfy their duty of care which requires directors to exercise informed
business judgment in discharging their duties. It may thus reduce the
likelihood of derivative litigation against directors and discourage or deter
shareholders or management from bringing a lawsuit against directors for breach
of their duty of care, even though such an action, if successful, might
otherwise have been beneficial to the Stock Holding Company and its
shareholders. Shareholders will thus be surrendering a cause of action based
upon negligent business decisions, including those relating to attempts to
change control of the Stock Holding Company. The provision will not, however,
affect the right to pursue equitable remedies for breach of the duty of care,
although such remedies might not be available as a practical matter. Federal
banking and securities laws may limit the effect of such limitation of liability
provisions.
To the best of management's knowledge, there is currently no pending or
threatened litigation for which indemnification may be sought or any recent
litigation involving directors of the Bank that might have been affected by the
limited liability provision in the Stock Holding Company's Certificate of
Incorporation had it been in effect at the time of the litigation.
26
<PAGE>
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers or persons controlling the Stock
Holding Company, the Stock Holding Company has been informed that in the opinion
of the SEC such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable. In addition, Federal banking
regulations restrict the Bank or the Stock Holding Company from indemnifying
officers and directors for civil monetary penalties or judgments resulting from
administrative or civil actions instituted by any Federal banking agency, or any
other liability or legal expense with regard to any administrative proceeding or
civil action instituted by any Federal banking agency, which results in a final
order or settlement pursuant to which such person is assessed a civil monetary
penalty, removed from office or prohibited from participating in the conduct of
the affairs of an insured depository institution, or required to cease and
desist from or take certain actions.
Indemnification Provisions of the Bank's Bylaws. The Bank's Bylaws provide
that it shall indemnify every person who acts on behalf of the Bank against
judgements, fines, penalties, amounts paid in settlement and reasonable
expenses, provided that no indemnification shall be made if a judgment or other
final adjudication established that such person's acts were in bad faith or were
the result of active and deliberate dishonesty and were material to the cause of
action so adjudicated, or that the person had a financial gain as to which he
was not entitled, and provided that no indemnification shall be required with
respect to a settlement or non-adjudicated disposition unless the Bank has given
its prior written consent to such settlement or disposition.
Indemnification Provisions of the Stock Holding Company's Certificate of
Incorporation. The Certificate of Incorporation of the Stock Holding Company
provides that any individual who is or was a director, officer, employee or
agent of the Stock Holding Company in any proceeding in which the person has
been made a party or is otherwise involved as a result of his service in such
capacity shall be indemnified and held harmless to the fullest extent authorized
under the Delaware General Corporation Law. Under the Certificate of
Incorporation, an indemnified person may be reimbursed for all expenses,
liabilities and losses (including attorney's fees, judgments, fines, ERISA
excise taxes or penalties and amounts paid in settlement) reasonably incurred or
suffered. An indemnified person may be advanced expenses incurred in defending
any proceeding prior to final disposition to the extent permitted under Delaware
law. In accordance with Delaware law, an individual may not be indemnified (i)
in connection with a proceeding by or in the right of the Stock Holding Company
in which the individual was adjudged liable to the Stock Holding Company, or
(ii) in connection with any other proceeding charging improper personal benefit
to him in which he was adjudged liable on the basis that personal benefit was
improperly received by him, unless a court of competent jurisdiction determines
he is fairly and reasonably entitled to indemnification in view of all the
relevant circumstances. Management does not have any plans to provide for
indemnification rights beyond those provided in the Stock Holding Company's
Certificate of Incorporation.
Comparison of Shareholder Rights and Certain Anti-Takeover Provisions
Introduction. As a result of the Reorganization, holders of Common Stock,
whose rights are presently governed by the New York Banking Law ("NYBL") and the
rules and regulations of the Department as well as the Bank's Organization
Certificate and Bylaws, will become shareholders of the Stock Holding Company, a
Delaware corporation. Accordingly, their rights will be governed by the
Certificate of Incorporation and Bylaws of the Stock Holding Company, and by the
NYBL only to the extent the NYBL addresses rights of shareholders of Delaware-
chartered savings bank holding companies. Certain differences arise from this
change of governing law, as well as from distinctions between the Organization
Certificate and Bylaws of the Bank and the Certificate of Incorporation and
Bylaws of the Stock Holding Company. The following discussion is a summary only
of the differences affecting the rights of shareholders of the Bank and the
Stock Holding Company. The Certificate of Incorporation and Bylaws of the Stock
Holding Company are attached hereto as Appendices E and F, respectively, and
should be reviewed for more detailed information.
A number of provisions of the Bank's Organization Certificate and Bylaws and
Stock Holding Company's Certificate of Incorporation and Bylaws deal with
matters of corporate governance and certain rights of shareholders.
27
<PAGE>
Some of these provisions may be deemed to have potential anti-takeover effects
in that they may have the effect of discouraging a future takeover attempt or
change of control which is not approved by the Board of Directors but which a
majority of individual shareholders may deem to be in their best interests or in
which shareholders may receive a substantial premium for their shares over then
current market prices. As a result, shareholders who desire to participate in
such a transaction may not have an opportunity to do so. Such provisions will
also render the removal of the current Board of Directors or management more
difficult.
Issuance of Capital Stock. The Bank's Organization Certificate authorizes the
issuance of 2,500,000 shares of capital stock, all of which are Common Stock,
par value $1.00 per share. The Certificate of Incorporation of the Stock
Holding Company authorizes the issuance of 6 million shares of Common Stock, par
value $.10 per share. Following the Reorganization, there will be the same
number of shares of the Holding Company's Common Stock outstanding as there were
shares of Common Stock outstanding immediately prior to the Reorganization
(assuming there are no dissenting shareholders).
The Stock Holding Company has no present intention to issue additional shares
of stock at this time, other than upon the exercise of stock options and in
connection with the award of restricted stock. If the Stock Holding Company
issues authorized but unissued shares of Holding Company Common Stock or
preferred stock it would not be required to obtain a vote of its shareholders,
or to give such shareholders a right to purchase shares. If additional shares
were issued, the percentage ownership interests of existing shareholders would
be reduced and, depending on the terms pursuant to which new shares are issued,
the book value and earnings per share of outstanding Holding Company Common
Stock might be diluted. Moreover, such additional share issuances could be
construed as having an anti-takeover effect. The ability to issue additional
shares, which exists under both the Bank's Organization Certificate and the
Stock Holding Company's Certificate of Incorporation, gives management greater
flexibility in financing corporate operations. As long as the Mutual Holding
Company is in existence it must own at least 51.0% of the outstanding voting
stock of the Stock Holding Company. Following completion of the Reorganization,
to the extent permitted under the NYBL and the Superintendent, the Bank will
continue to have the ability to issue debt, non-voting equity or convertible
securities to entities other than the Stock Holding Company although it has no
plans or intentions to do so.
Payment of Dividends. Under New York law savings banks may declare and pay
dividends only out of certain net profits, annually, semi-annually or quarterly,
but not more frequently. The approval of the Superintendent is required if the
total for all dividends declared in any calendar year exceeds the total net
profits for the year plus retained net profits of the preceding two years, less
any required transfers to surplus or to fund the retirement of preferred stock.
No dividends may be paid so long as there is any impairment of capital. The
ability of the Bank to pay dividends on Common Stock is restricted by tax
considerations related to state savings banks and by federal regulations
applicable to state chartered savings banks. Income appropriated to bad debt
reserves and deducted for federal income tax purposes may not be used to pay
cash dividends without the payment of federal income taxes by the Bank on the
amount of such income removed from reserves for such purpose at the then current
income tax rate. Additionally, the Bank is precluded from paying dividends on
its Common Stock if its regulatory capital would thereby be reduced below the
regulatory capital requirements prescribed for a state savings bank under
federal law. The Bank currently satisfies its applicable regulatory capital
requirements.
After the Reorganization, the Stock Holding Company's principal source of
income will initially consist of its equity in the earnings, if any, of the
Bank. Although the Stock Holding Company will not be subject to the above
dividend restrictions regarding dividend payments to its shareholders, the
restrictions on the Bank's ability to pay dividends to the Stock Holding Company
will continue in effect.
Under the Delaware General Corporation Law, dividends may be paid either out
of surplus or, if there is no surplus, out of net profits for the fiscal year in
which the dividend is declared and/or the preceding fiscal year. After the
Reorganization, the Stock Holding Company's principal source of income will
initially consist of its equity in the earnings, if any, of the Bank.
28
<PAGE>
The payment of future cash dividends by the Bank, and thus by the Stock
Holding Company, will continue to depend upon the Bank's earnings, financial
condition and capital requirements, as well as the tax and regulatory
considerations discussed herein. Prior to declaring a dividend, the Bank's
Board of Directors considers many factors including the Bank's profitability,
maintenance of adequate capital, the Bank's current and anticipated future
income, outstanding loan commitments, adequacy of loan loss reserves, cash flow
requirements and economic conditions. Moreover, before declaring a dividend, the
Board of Directors must determine that the Bank will exceed its regulatory
capital requirements after the payment of the dividend.
Cumulative Voting. Neither the Bank's Organization Certificate nor the Stock
Holding Company's Certificate of Incorporation provide for cumulative voting.
The absence of cumulative voting rights means that the holders of a majority of
the shares voted at a meeting of shareholders may elect all directors of the
Stock Holding Company thereby precluding minority shareholder representation on
the Board of Directors.
Rights of Shareholders to Dissent. Under the NYBL, shareholders of a New York
savings bank, such as the Bank, are generally entitled to dissenters' rights of
appraisal if they are entitled to vote on a merger of the Bank with or into
another savings institution. Shareholders of the Stock Holding Company will
have no dissenters' rights with respect to a merger or consolidation to which
the Stock Holding Company is a party if the class of shares of the company
acquiring the Stock Holding Company has its stock listed on a national
securities exchange or the Nasdaq Stock Market.
Vacancies on the Board of Directors. Any vacancy occurring in the Bank's
Board of Directors may be filled by the affirmative vote of a majority of the
remaining directors. A director elected to fill a vacancy shall be elected to
serve for the balance of the unexpired term of the predecessor director. Any
directorship to be filled by reason of an increase in the number of directors
may be filled by election by the board of directors for a term of office
continuing for the balance of the term of the class to which the director was
elected.
The Stock Holding Company's Certificate of Incorporation provides that any
vacancy occurring in the Board of Directors, including any vacancy created by
reason of an increase in the number of directors, shall be filled by a majority
vote of the directors then in office. Any director so chosen shall serve until
the term of the class to which he was appointed shall expire and until his
successor is elected and qualified. When the number of directors is changed, the
Board of Directors shall determine the class or classes to which the increased
or decreased number of directors shall be apportioned, provided that no decrease
in the number of directors shall shorten the term of any incumbent director.
Number and Term of Directors. The Bank's stock Organization Certificate
provides that its Board of Directors shall consist of not less than seven nor
more than 30 members, as set forth in the Bylaws. The Stock Holding Company's
Bylaws provide that its Board of Directors shall consist of between five and 15
members, the exact number to be determined by the Board of Directors. The Board
of Directors of the Stock Holding Company has set the number of directors at 9
persons. Although the Stock Holding Company has no present intention of
reducing its number of directors below its present 9 members, the Board of
Directors believes that the ability to reduce the number of directors will
result in greater flexibility in the event of vacancies on the current Board.
The Bank's Organization Certificate provides for a classified board of
directors, consisting of three substantially equal classes of directors, each
serving for a three year term, with the term of each class of directors ending
in successive years. The Stock Holding Company's Certificate of Incorporation
also provides for a classified board of directors.
Presentation of New Business at Meetings of Shareholders. The Bank's Bylaws
generally provide that any shareholder desiring to make a proposal for new
business at a meeting of shareholders must submit written notice filed with the
Secretary of the Bank at least 45 days in advance of the meeting. Failure to
comply with these advance notice requirements will preclude such nominations or
new business from being considered at the meeting; such proposal
29
<PAGE>
however would be laid over for action at an adjourned, special or annual meeting
of shareholders occurring at least 30 days after the original date of the
shareholders meeting.
Any shareholder entitled to vote generally in an election of directors may
nominate one or more persons for election as directors at a meeting, and, if
properly presented, may bring other business before an annual meeting of the
Stock Holding Company. For nominations or other business to be properly brought
before an annual meeting, written notice of such shareholder's intent must be
given not later than 120 days prior to the anniversary date of the mailing of
proxy materials by the Stock Holding Company in connection with the immediately
preceding annual meeting of shareholders of the Stock Holding Company or, in the
case of the first annual meeting of shareholders of the Stock Holding Company
following its acquisition of all of the outstanding capital stock of the Bank,
120 days prior to the anniversary date of the mailing of proxy materials by the
Bank in connection with the immediately preceding annual meeting of the Bank
prior to such acquisition. The Stock Holding Company's Certificate of
Incorporation specifies further procedural requirements that must be satisfied
for notice to be properly given.
Mutual Holding Company Ownership. So long as the Mutual Holding Company is in
existence, the Mutual Holding Company must own at least 51.0% of the outstanding
voting stock of the Bank. Following the Reorganization, the Mutual Holding
Company will be required to own at least 51.0% of the outstanding voting stock
of the Stock Holding Company. The Mutual Holding Company currently is able to
elect the Bank's directors and direct the affairs and business operations of the
Bank. After the Reorganization, the Mutual Holding Company will be able to
elect the Stock Holding Company's directors and direct the affairs and business
operations of the Stock Holding Company. Following the Reorganization, the
Mutual Holding Company will continue to own 54% of the Stock Holding Company's
outstanding common stock. Upon completion of the Merger and as a result of the
issuance of additional shares representing the fair value of County Savings, the
Mutual Holding Company's percentage ownership in the Stock Holding Company will
increase, and Minority Shareholders equity interest will be diluted. See "Recent
Events."
Limitation on Voting Rights. The Organization Certificate of the Bank
provides that for a period of three years following the Bank's organization in
November 1995, no person shall directly or indirectly offer to acquire or
acquire the beneficial ownership of more than 10% of any class of any equity
security of the Bank. This limitation does not apply to the Mutual Holding
Company and would not apply to the Stock Holding Company. In the event shares
are acquired in violation of this provision, all shares beneficially owned by
any person in excess of 10% shall be considered "excess shares" and shall not be
counted as shares entitled to vote and shall not be voted by any person or
counted as voting shares in connection with any matters submitted to the
shareholders for a vote. The Organization Certificate provides that this
limitation shall not apply to a transaction in which the Bank forms a holding
company without change in the respective beneficial ownership interest of its
shareholders. The Stock Holding Company's Certificate of Incorporation contains
a similar provision regarding beneficial ownership of more than 10% of the Stock
Holding Company's shares which is not limited to a three year period.
Amendment of Certificate of Incorporation and Bylaws. Amendments to the Stock
Holding Company's Certificate of Incorporation must be approved by a majority
vote of its Board of Directors and also by a majority of the outstanding shares
of its voting stock, provided, however, that an affirmative vote of at least 80%
of the outstanding voting stock entitled to vote (after giving effect to the
provision limiting voting rights) is required to amend or repeal certain
provisions of the Certificate of Incorporation, including the provision limiting
voting rights, the provisions relating to approval of certain business
combinations, calling special meetings, the number and classification of
directors, and director and officer indemnification by the Stock Holding
Company. The Stock Holding Company's Bylaws may be amended by its Board of
Directors, or by a vote of 80% of the total votes eligible to be voted at a duly
constituted meeting of shareholders. The Bank's Organization Certificate may be
amended following receipt of the Department's approval and thereafter upon the
vote of 80% of the total votes outstanding and eligible to be cast at a
shareholders' meeting. The Bank's bylaws may be amended by a two-thirds majority
of the entire Board of Directors or by a majority of votes cast by shareholders
at a shareholders' meeting.
30
<PAGE>
Shareholder Vote Required to Approve Business Combinations with Principal
Shareholders. The Certificate of Incorporation requires the approval of the
holders of at least 80% of the Stock Holding Company's outstanding shares of
voting stock to approve certain "Business Combinations," as defined therein, and
related transactions. Under the Delaware General Corporation Law, absent this
provision, Business Combinations, including mergers, consolidations and sales of
all or substantially all of the assets of a corporation, subject to exceptions,
must be approved by the vote of the holders of only a majority of the
outstanding shares of Holding Company Common Stock and any other affected class
of stock.
Under the Certificate of Incorporation, at least 80% approval of shareholders
is required in connection with any transaction involving an Interested
Shareholder (as defined below) except (i) in cases where the proposed
transaction has been approved in advance by a majority of those members of the
Stock Holding Company's Board of Directors who are unaffiliated with the
Interested Shareholder and were directors prior to the time when the Interested
Shareholder became an Interested Shareholder, or (ii) if the proposed
transaction met certain conditions set forth therein which are designed to
afford the shareholders a fair price in consideration for their shares, in which
cases approval of only a majority of the outstanding shares of voting stock is
required. The term "Interested Shareholder" is defined to include any
individual, corporation, partnership or other entity (other than the Stock
Holding Company or its subsidiaries) which owns beneficially or controls,
directly or indirectly, 10% or more of the outstanding shares of voting stock of
the Stock Holding Company. This provision of the Certificate of Incorporation
applies to any "Business Combination," which is defined to include (i) any
merger or consolidation of the Stock Holding Company or any of its subsidiaries
with or into any Interested Shareholder or Affiliate (as defined in the
Certificate of Incorporation) of an Interested Shareholder; (ii) any sale,
lease, exchange, mortgage, transfer, or other disposition to or with any
Interested Shareholder or Affiliate of 25% or more of the assets of the Stock
Holding Company or combined assets of the Stock Holding Company and its
subsidiary; (iii) the issuance or transfer to any Interested Shareholder or its
Affiliate by the Company (or any subsidiary) of any securities of the Stock
Holding Company in exchange for any assets, cash or securities the value of
which equals or exceeds 25% of the fair market value of the Common Stock of the
Stock Holding Company; (iv) the adoption of any plan for the liquidation or
dissolution of the Stock Holding Company proposed by or on behalf of any
Interested Shareholder or Affiliate thereof; and (v) any reclassification of
securities, recapitalization, merger or consolidation of the Stock Holding
Company which has the effect of increasing the proportionate share of Holding
Company Common Stock or any class of equity or convertible securities of the
Stock Holding Company owned directly or indirectly, by an Interested Shareholder
or Affiliate thereof. The Bank's Organization Certificate does not include a
similar supermajority vote requirement.
Evaluation of Offers. The Certificate of Incorporation of the Stock Holding
Company further provides that the Board of Directors of the Stock Holding
Company, when evaluating any offer of another "Person" (as defined therein), to
(i) make a tender or exchange offer for any equity security of the Stock Holding
Company, (ii) merge or consolidate the Stock Holding Company with another
corporation or entity, or (iii) purchase or otherwise acquire all or
substantially all of the properties and assets of the Stock Holding Company,
may, in connection with the exercise of its judgment in determining what is in
the best interest of the Stock Holding Company, the Bank and the shareholders of
the Stock Holding Company, give due consideration to all relevant factors,
including, without limitation, the social and economic effects of acceptance of
such offer on the Stock Holding Company's customers and the Bank's present and
future account holders, borrowers and employees, on the communities in which the
Stock Holding Company and the Bank operate or are located, and on the ability of
the Stock Holding Company to fulfill its corporate objectives as a savings and
loan holding company and on the ability of the Bank to fulfill the objectives of
a stock savings bank under applicable statutes and regulations. By having these
standards in the Certificate of Incorporation of the Stock Holding Company, the
Board of Directors may be in a stronger position to oppose such a transaction if
the Board concludes that the transaction would not be in the best interest of
the Stock Holding Company, even if the price offered is significantly greater
than the then market price of any equity security of the Stock Holding Company.
The Bank's Organization Certificate does not contain a similar provision.
31
<PAGE>
Delaware Corporate Law
In 1988 Delaware enacted a statute designed to provide Delaware corporations
with additional protection against hostile takeovers. The takeover statute,
which is codified in Section 203 of the Delaware General Corporation Law
("Section 203"), is intended to discourage certain takeover practices by
impeding the ability of a hostile acquiror to engage in transactions with the
target company.
In general, Section 203 provides that a "Person" (as defined therein) who owns
15% or more of the outstanding voting stock of a Delaware corporation (an
"Interested Shareholder") may not consummate a merger or other business
combination transaction with such corporation at any time during the three-year
period following the date such "Person" became an Interested Shareholder. The
term "business combination" is defined broadly to cover a wide range of
corporate transactions including mergers, sales of assets, issuances of stock,
transactions with subsidiaries and the receipt of disproportionate financial
benefits.
The statute exempts the following transactions from the requirements of
Section 203: (i) any business combination if, prior to the date a person became
an Interested Shareholder, the Board of Directors approved either the business
combination or the transaction which resulted in the shareholder becoming an
Interested Shareholder; (ii) any business combination involving a person who
acquired at least 85% of the outstanding voting stock in the transaction in
which he became an Interested Shareholder, calculated without regard to those
shares owned by the corporation's directors who are also officers or certain
employee stock plans; (iii) any business combination with an Interested
Shareholder that is approved by the Board of Directors and by a two-thirds vote
of the outstanding voting stock not owned by the Interested Shareholder; and
(iv) certain business combinations that are proposed after the corporation had
received other acquisition proposals and which are approved or not opposed by a
majority of certain continuing members of the Board of Directors. A corporation
may exempt itself from the requirements of the statute by adopting an amendment
to its Certificate of Incorporation or Bylaws electing not to be governed by
Section 203. At the present time, the Board of Directors of the Stock Holding
Company does not intend to propose any such amendment.
Regulation of the Stock Holding Company
General. Upon completion of the Reorganization, the Stock Holding Company will
become a registered bank holding company pursuant to the Bank Holding Company
Act of 1956, as amended (the "BHCA"), by acquiring all of the Common Stock. The
Stock Holding Company will be subject to examination, regulation and periodic
reporting under the BHCA, as administered by the FRB. The Mutual Holding
Company is currently regulated by the FRB. The FRB has adopted capital adequacy
guidelines for bank holding companies (on a consolidated basis) substantially
similar to those of the FDIC. The Stock Holding Company's pro forma capital
exceeds these requirements.
BHCA Activities and Other Limitations. The BHCA prohibits a bank holding
company from acquiring direct or indirect ownership or control of more than 5%
of the voting shares of any bank, or increasing such ownership or control of any
bank, without prior approval of the FRB. In determining whether to authorize a
bank holding company (or a company that will become a bank holding company) to
acquire control of a bank, the FRB takes into consideration the financial and
managerial resources of the bank holding company, as well as those of the bank
to be acquired, and considers whether the acquisition is likely to have anti-
competitive effects or other adverse effects. No approval under the BHCA is
required, however, for a bank holding company already owning or controlling 50%
or more of the voting shares of a bank to acquire additional shares of such
bank.
The BHCA also prohibits a bank holding company, with certain exceptions, from
acquiring more than 5% of the voting shares of any company that is not a bank
and from engaging in any business other than banking or managing or controlling
banks. Under the BHCA, the FRB is authorized to approve the ownership of shares
by a bank holding company in any company, the activities of which the FRB has
determined to be so closely related to banking or to managing or controlling
banks as to be a proper incident thereto. In making such determinations, the FRB
is
32
<PAGE>
required to weigh expected benefits to the public, such as greater convenience,
increased competition or gains in efficiency, against the possible adverse
effects, such as undue concentration of resources, decreased or unfair
competition, conflicts of interest or unsound banking practices.
Subsidiary banks of a bank holding company are subject to certain restrictions
imposed by the BHCA on extensions of credit to the bank holding company or any
of its subsidiaries, on investments in the stock or other securities of the bank
holding company or its subsidiaries, and on the taking of such stock or
securities as collateral for loans to any borrower. Furthermore, under
amendments to the BHCA and regulations of the FRB, a bank holding company and
its subsidiaries are prohibited from engaging in certain tie-in arrangements in
connection with any extension of credit or provision of credit or providing any
property or services. Generally, this provision provides that a bank may not
extend credit, lease or sell property, or furnish any service to a customer on
the condition that the customer provide additional credit or service to the
bank, to the bank holding company, or to any other subsidiary of the bank
holding company or on the condition that the customer not obtain other credit or
service from a competitor of the bank, the bank holding company, or any
subsidiary of the bank.
The Stock Holding Company will be, and the Bank is affected by the monetary
and fiscal policies of various agencies of the United States Government,
including the Federal Reserve System. In view of changing conditions in the
national economy and in the money markets, it is impossible for management to
accurately predict future changes in monetary policy or the effect of such
changes on the business or financial condition of the Stock Holding Company.
Regulatory Capital Requirements. The FRB has adopted capital adequacy
guidelines pursuant to which it assesses the adequacy of capital in examining
and supervising a bank holding company and in analyzing applications to it under
the BHCA. The FRB capital adequacy guidelines generally require bank holding
companies to maintain total capital equal to 8% of total risk-adjusted assets,
with at least one-half of that amount consisting of Tier 1 and up to one-half of
that amount consisting of Tier 2 or supplementary capital. Tier 1 capital for
bank holding companies generally consists of the sum of common shareholders'
equity and perpetual preferred stock (subject in the case of the latter to
limitations on the kind and amount of such preferred stock which may be included
as Tier 1 capital), less goodwill. Tier 2 capital generally consists of hybrid
capital instruments; perpetual preferred stock which is not eligible to be
included as Tier 1 capital; term subordinated debt and intermediate-term
preferred stock; and, subject to limitations, general allowances for loan
losses. Assets are adjusted under the risk-based guidelines to take into account
different risk characteristics, with the categories ranging from 0% (requiring
no additional capital) for assets such as cash to 100% for the bulk of assets
which are typically held by a bank holding company, including multi-family
residential and commercial real estate loans, commercial business loans and
consumer loans. One-to four-family residential first mortgage loans which are
not 90 days or more past due or nonperforming and which have been made in
accordance with prudent underwriting standards are assigned a 50% level in the
risk-weighting system, as are certain privately-issued mortgage-backed
securities representing indirect ownership loans. Off-balance sheet items also
are adjusted to take into account certain risk characteristics. The FRB has
indicated that bank holding companies anticipating significant growth will be
expected to maintain capital ratios in excess of the required minimums.
In addition to the risk-based capital requirements, the FRB requires bank
holding companies to maintain a minimum leverage capital ratio of Tier 1 capital
to total assets of 3.0%. Total assets for this purpose does not include goodwill
and any other intangible assets and investments that the FRB determines should
be deducted from Tier 1 capital. The FRB has announced that the 3.0% Tier 1
leverage capital ratio requirement is the minimum for the top-rated bank holding
companies without any supervisory, financial or operational weaknesses or
deficiencies or those which are not experiencing or anticipating significant
growth. Other bank holding companies must maintain Tier 1 leverage capital
ratios of at least 4.0% to 5.0% or more, depending on their overall condition.
Repurchases of Holding Company Common Stock. Regulations promulgated by the
FRB provide that a bank holding company must file written notice with the FRB
prior to any repurchase of its equity securities if the gross consideration for
the purchase, when aggregated with the net consideration paid by the bank
holding company for all repurchases during the preceding 12 months, is equal to
10% or more of the bank holding company's consolidated
33
<PAGE>
net worth. This notice requirement is not applicable, however, to a bank
holding company, such as the Stock Holding Company, that exceeds the thresholds
established for a well capitalized state member bank and that satisfies certain
other regulatory requirements.
Commitments to Affiliated Depository Institutions. Under FRB policy, the
Stock Holding Company will be expected to act as a source of financial strength
to the Bank and to commit resources to support the Bank in circumstances when it
might not do so absent such policy. The enforceability and precise scope of this
policy is unclear. However, in light of recent judicial precedent, should the
Bank require the support of additional capital resources, it should be
anticipated that the Stock Holding Company will be required to respond with any
such resources available to it. In addition, under the Federal Deposit Insurance
Act, any depository institution shall be liable for any loss incurred by the
FDIC in connection with the default of a commonly controlled insured depository
institution or assistance provided by the FDIC to any commonly controlled
depository institution in danger of default.
Federal Securities Law. The Stock Holding Company will be subject to the
information, proxy solicitation, insider trading restrictions and other
requirements under the Securities Exchange Act of 1934, as amended ("Exchange
Act").
Riegle-Neal Interstate Banking Act. The Riegle-Neal Interstate Banking and
Branching Efficiency Act ("Riegle-Neal Act") permits bank holding companies to
acquire banks in any state on or after September 29, 1995, unless the state
elected to opt out of the Act, and beginning July 1, 1997, holding companies
with banks in more than one state may convert all of their out-of-state banks
into interstate branches of one bank. Once a bank establishes a branch in
another state through an interstate acquisition or merger, such bank may
establish and acquire additional branches throughout the state. The Riegle-Neal
Act permits an interstate acquisition of only a branch (without acquisition of
an entire bank) only if the laws of the state in which the branch is located
permits out-of-state banks to acquire a branch of a bank in such state without
acquiring the Bank. Additionally, under the Riegle-Neal Act an institution may
establish a de novo branch if the laws of the state in which the branch is
located permit out-of-state banks to do so.
Description of Capital Stock of the Stock Holding Company
General. The Stock Holding Company is authorized to issue 6 million shares
of common stock having a par value of $.10 per share. In the Reorganization the
Stock Holding Company will issue a number of shares of Holding Company Common
Stock equal to the number of shares of Common Stock outstanding immediately
prior to the Reorganization (assuming no dissenting shareholders). Each share of
the Holding Company Common Stock will have the same relative rights as, and will
be identical in all respects with, each other share of Holding Company Common
Stock. The Stock Holding Company's Certificate of Incorporation does not
authorize the issuance of preferred stock.
The Holding Company Common Stock will represent nonwithdrawable capital,
will not be an account of an insurable type, and will not be insured by the FDIC
or any government agency.
Common Stock
Dividends. The Stock Holding Company can pay dividends out of statutory
surplus or from certain net profits if, as, and when declared by its Board of
Directors. The payment of dividends by the Stock Holding Company is subject to
limitations which are imposed by law and applicable regulation. The holders of
Holding Company Common Stock will be entitled to receive and share equally in
such dividends as may be declared by the Board of Directors of the Stock Holding
Company out of funds legally available therefor. If the Stock Holding Company
issues preferred stock, the holders thereof may have a priority over the holders
of the Holding Company Common Stock with respect to dividends.
34
<PAGE>
Voting Rights. The holders of Holding Company Common Stock will possess
exclusive voting rights in the Stock Holding Company. Each share of Holding
Company Common Stock shall be entitled to one vote on matters to be considered
and voted on by stockholders. Shareholders will not be entitled to cumulate
their votes for the election of directors. They will elect the Stock Holding
Company's Board of Directors and act on such other matters as are required to be
presented to them under Delaware law or as are otherwise presented to them by
the Board of Directors. Certain matters require an 80% shareholder vote.
Liquidation. In the event of any liquidation, dissolution or winding up of
the Bank, the Stock Holding Company, as holder of the Bank's capital stock,
would be entitled to receive, after payment or provision for payment of all
debts and liabilities of the Bank (including all deposit accounts and accrued
interest thereon and the payment of the liquidation account established at the
time of the Bank's mutual holding company reorganization and Minority Stock
issuance to persons having deposits with the Bank as of September 30, 1994 (the
"Liquidation Account), all assets of the Bank available for distribution. In
the event of liquidation, dissolution or winding up of the Stock Holding
Company, the holders of its Holding Company Common Stock would be entitled to
receive, after payment or provision for payment of all its debts and
liabilities, all of the assets of the Stock Holding Company available for
distribution. If preferred stock is issued, the holders thereof may have a
priority over the holders of the Holding Company Common Stock in the event of
liquidation or dissolution. The establishment of the Stock Holding Company and
reorganization into the two-tier form of ownership will not affect the rights of
depositors with rights in the Liquidation Account.
Preemptive Rights. Holders of the Holding Company Common Stock will not be
entitled to preemptive rights with respect to any shares which may be issued.
The Holding Company Common Stock is not subject to redemption.
Accounting Treatment
The transactions comprising the Reorganization are deemed a reorganization
under common control treated similar to a pooling of interests for accounting
purposes. Therefore, the consolidated capitalization, assets, liabilities,
income and financial statements of the Stock Holding Company immediately
following the Reorganization will be substantially the same as those of the Bank
immediately prior to consummation of the Reorganization, all of which will be
recorded by the Stock Holding Company at their historical values. Since the
Reorganization will not result in a change in such financial statements, this
document does not include financial statements of the Bank or the Stock Holding
Company.
Vote Required
Approval of the Plan of Reorganization requires the affirmative vote of a
two-thirds of the total votes eligible to be cast at the Special Meeting.
Failure to vote or a vote to abstain is equivalent to voting against the Plan of
Reorganization. The Board of Directors recommends a vote "FOR" the approval of
the Plan of Reorganization.
This description of the proposed Stock Holding Company for the Bank does
not purport to be complete, but is qualified in its entirety by the Plan of
Reorganization and Certificate of Incorporation and Bylaws of the Stock Holding
Company attached as Appendices C, E and F to this Prospectus/Proxy Statement.
- --------------------------------------------------------------------------------
SHAREHOLDER PROPOSALS
- --------------------------------------------------------------------------------
In the event the Reorganization is not completed, in order to be eligible
for inclusion in the Bank's proxy materials for next year's Annual Meeting of
Shareholders, any shareholder proposal to take action at such meeting must be
received at the Bank's executive office, 214 West First Street, Oswego, New York
13126, no later than December 20, 1997. In the event the Reorganization is
completed, proposals submitted by December 20, 1997 shall be eligible for
inclusion in the Company's proxy materials. Any such proposals shall be subject
to the requirements of the proxy rules adopted under the Securities Exchange Act
of 1934.
35
<PAGE>
- --------------------------------------------------------------------------------
EXPERTS
- --------------------------------------------------------------------------------
The financial statements of the Bank, included in the Annual Report on Form
F-2 of the Bank for the year ended December 31, 1996, which have been filed by
the Stock Holding Company as an exhibit to the registration statement of which
this Prospectus/Proxy Statement is a part, have been audited by Coopers &
Lybrand LLP, independent accountants, as set forth in their report dated
February 7, 1997, accompanying such financial statements, and are incorporated
herein by reference in reliance upon the report of such firm, which report is
given upon their authority as experts in accounting and auditing.
Any financial statements and schedules hereafter incorporated by reference
in the registration statement that have been audited and are the subject of a
report by independent accountants will be so incorporated by reference in
reliance upon such reports and upon the authority of such firms as experts in
accounting and auditing to the extent covered by consents filed with the SEC.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
The Stock Holding Company has filed with the SEC a registration statement
under the Securities Act with respect to the Common Stock offered hereby. As
permitted by the rules and regulations of the SEC, the Prospectus does not
contain all the information set forth in the registration statement. Such
information can be examined without charge at the public reference facilities of
the SEC located at 450 Fifth Street, N.W., Washington, D.C. 20549, and copies of
such material can be obtained from the SEC at prescribed rates. In addition,
the SEC maintains a web site (http://www.sec.gov) that contains reports, proxy
and information statements and other information regarding registrants that file
electronically with the SEC, including the Stock Holding Company. This
Prospectus contains a description of the material terms and features of all
material contracts, reports or exhibits to the Registration Statement required
to be described. The statements contained in this Prospectus as to the contents
of any contract or other document filed as an exhibit to the registration
statement are, of necessity, brief descriptions thereof and are not necessarily
complete; each such statement is qualified by reference to such contract or
document.
In connection with the Plan of Reorganization, the Stock Holding Company
will register its Common Stock with the SEC under the Exchange Act and, upon
such registration, the Stock Holding Company and the holders of its stock will
become subject to the proxy solicitation rules, reporting requirements and
restrictions on stock purchases and sales by directors, officers and greater
than 10% shareholders, the annual and periodic reporting and certain other
requirements of the Exchange Act.
- --------------------------------------------------------------------------------
OTHER MATTERS
- --------------------------------------------------------------------------------
The Board of Directors is not aware of any business to come before the
Special Meeting other than the matters described above in the Prospectus/Proxy
Statement. However, if any matters should properly come before the Special
Meeting, it is intended that holders of the proxies will act as directed by a
majority of the Board of Directors, except for matters related to the conduct of
the Special Meeting, as to which they shall act in accordance with their best
judgment.
- --------------------------------------------------------------------------------
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
- --------------------------------------------------------------------------------
The following documents filed with the FDIC by the Bank pursuant to the
Exchange Act and filed by the Stock Holding Company as exhibits to the
Registration Statement, are incorporated by reference in this Prospectus/Proxy
Statement:
1. The Bank's Annual Report on Form F-2 for the year ended December 31,
1996;
36
<PAGE>
2. The Bank's Quarterly Reports on Form F-4 for each of the quarterly
periods ended March 31, 1997 and June 30, 1997; and
3. The Bank's Current Report on Form 8-K filed with the FDIC on
September 11, 1997.
All documents and reports filed with the FDIC by the Bank pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this
Prospectus/Proxy Statement and prior to the completion of the Reorganization
will also be filed with the SEC by the Stock Holding Company and shall be deemed
to be incorporated by reference in this Prospectus/Proxy Statement and to be
part hereof from the date of filing of such documents or reports. Any statement
contained in a document incorporated or deemed to be incorporated by reference
herein shall be deemed to be modified or superseded for purposes of this
Prospectus/Proxy Statement to the extent that a statement contained herein or in
any other subsequently filed document that also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus/Proxy Statement.
This Prospectus/Proxy Statement incorporates documents by reference that
are not presented herein or delivered herewith. These documents (other than
exhibits to such documents unless such exhibits are specifically incorporated by
reference) are available upon request to each person to whom a copy of this
Prospectus/Proxy Statement is delivered, without charge, upon written or
telephone request to Melissa A. Dashnau, Secretary, Oswego City Savings Bank,
214 West First Street, Oswego, New York 13126, or call at (315) 343-0057.
- --------------------------------------------------------------------------------
MISCELLANEOUS/FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The cost of solicitation of proxies will be borne by the Bank. The Bank
will reimburse brokerage firms and other custodians, nominees and fiduciaries
for reasonable expenses incurred by them in sending proxy materials to the
beneficial owners of Common Stock. In addition to solicitations by mail,
directors, officers and regular employees of the Bank may solicit proxies
personally or by telegraph or telephone without additional compensation.
AN ANNUAL STATEMENT CONTAINING FINANCIAL STATEMENTS FOR THE FISCAL YEAR
ENDED DECEMBER 31, 1996 WAS PREVIOUSLY FURNISHED TO SHAREHOLDERS. A COPY OF THE
BANK'S ANNUAL REPORT ON FORM F-2 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996,
WHICH ALSO CONSTITUTES THE BANK'S ANNUAL DISCLOSURE STATEMENT, AS WELL AS THE
BANK'S QUARTERLY REPORT ON FORM F-4 FOR THE QUARTER ENDED JUNE 30, 1997, WILL BE
FURNISHED WITHOUT CHARGE TO SHAREHOLDERS AS OF THE RECORD DATE UPON WRITTEN OR
TELEPHONIC REQUEST TO MELISSA DASHNAU, SECRETARY, OSWEGO CITY SAVINGS BANK, 214
WEST FIRST STREET, OSWEGO, NEW YORK 13126, OR CALL AT 315/343-0057.
BY ORDER OF THE BOARD OF DIRECTORS
Melissa A. Dashnau
Secretary
Oswego, New York
__________ ___, 1997
37
<PAGE>
APPENDIX A
OSWEGO CITY SAVINGS BANK
1997 STOCK OPTION PLAN
1. Purpose
The purpose of the Oswego City Savings Bank ("Bank") 1997 Stock Option Plan
(the "Plan") is to advance the interests of the Bank and its stockholders by
providing Key Employees and Outside Directors of the Bank and its Affiliates,
including Pathfinder Bancorp, M.H.C. ("Company"), upon whose judgment,
initiative and efforts the successful conduct of the business of the Bank and
its Affiliates largely depends, with an additional incentive to perform in a
superior manner as well as to attract people of experience and ability. In the
event the Company shall be reorganized into a Stock Holding Company, such Stock
Holding Company shall inure to the rights and obligations of the Bank as
provided in this Plan and all awards set forth hereunder shall be converted into
awards of stock of the resultant institution.
2. Definitions
"Affiliate" means any "parent corporation" or "subsidiary corporation" of
the Bank or the Company, as such terms are defined in Section 424(e) or 424(f),
respectively, of the Code, or a successor to a parent corporation or subsidiary
corporation.
"Award" means an Award of Non-Statutory Stock Options, Incentive Stock
Options, Limited Rights, and/or Dividend Equivalent Rights granted under the
provisions of the Plan.
"Bank" means Oswego City Savings Bank, or a successor corporation.
"Beneficiary" means the person or persons designated by a Participant to
receive any benefits payable under the Plan in the event of such Participant's
death. Such person or persons shall be designated in writing on forms provided
for this purpose by the Committee and may be changed from time to time by
similar written notice to the Committee. In the absence of a written
designation, the Beneficiary shall be the Participant's surviving spouse, if
any, or if none, his estate.
"Board" or "Board of Directors" means the board of directors of the Bank or
its Affiliate, as applicable.
"Cause" means personal dishonesty, willful misconduct, any breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties, or the willful violation of any law, rule or regulation (other than
traffic violations or similar offenses) or a final cease-and-desist order, any
of which results in a material loss to the Company or an Affiliate.
"Change in Control" of the Bank or the Company shall mean:
(1) a reorganization, merger, merger conversion, consolidation or sale of
all or substantially all of the assets of the Bank, the Company or the Stock
Holding Company, or a similar transaction in which the Bank, the Company or the
Stock Holding Company is not the resulting entity and that is not approved by a
majority of the Board of Directors of the Bank, the Company or the Stock Holding
Company;
(2) individuals who constitute the Incumbent Board of the Bank, the
Company, or the Stock Holding Company cease for any reason to constitute a
majority thereof; provided that any person becoming a director subsequent to the
date hereof whose election was approved by a vote of at least three-fourths of
the directors composing the Incumbent Board or whose nomination for election by
the Bank's or Company's stockholders or members was approved by the same
nominating committee serving under the Incumbent Board shall be, for purposes of
this Section, considered as though he were a member of the Incumbent Board; or
(3) an acquisition of "control" of the Bank or the Company as defined in
the Bank Holding Company Act of 1956, as amended and applicable rules and
regulations promulgated thereunder as in effect at the time of the Change in
Control (collectively, the "BHCA"), as determined by the Board of Directors of
the Bank or the Company; or
A-1
<PAGE>
(4) an acquisition of the Bank's stock requiring submission of notice
under the change in Bank Control Act; provided, however, that a Change in
Control shall not be deemed to have occurred under (1), (3) or (4) of this
section if the transaction(s) constituting a Change in Control is approved by a
majority of the Board of Directors of the Bank or the Company, as the case may
be.
(5) In the event that the Company converts to the Stock Holding Company
on a stand-alone basis, a "Change in Control" of the Bank or the Stock Holding
Company (a) shall mean an event of a nature that would be required to be
reported in response to Item 1 of the current report on Form 8-K, as in effect
on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (the "Exchange Act"), or results in a Change in Control of the Bank
or the Stock Holding Company within the meaning of the BHCA; or (b) without
limitation shall be deemed to have occurred at such time as (i) any "person" (as
the term is used in Section 13(d) and 14(d) of the Exchange Act) other than the
Stock Holding Company is or becomes a "beneficial owner" (as defined in Rule 13-
d under the Exchange Act) directly or indirectly, of securities of the Bank
representing 25% or more of the Bank's outstanding securities ordinarily having
the right to vote at the election of directors except for any securities of the
Bank received by the Stock Holding Company in connection with the Reorganization
and any securities purchased by the Bank's employee stock ownership plan and
trust shall not be counted in determining whether such plan is the beneficial
owner of more than 25% of the Bank's securities, (ii) a proxy statement
soliciting proxies from stockholders of the Bank, by someone other than the
current management of the Bank, seeking stockholder approval of a plan of
reorganization, merger or consolidation of the Stock Holding Company of the Bank
or similar transaction with one or more corporations as a result of which the
outstanding shares of the class of securities then subject to the plan or
transaction are exchanged or converted into cash or property or securities not
issued by the Bank or the Stock Holding Company, or (iii) a tender offer is made
for 25% or more of the voting securities of the Bank and the shareholders owning
beneficially or of record 25% or more of the outstanding securities of the Bank
have tendered or offered to sell their shares pursuant to such tender offer and
such tendered shares have been accepted by the tender offeror.
Notwithstanding, the foregoing, a "Change in Control" of the Bank or the
Company shall not be deemed to have occurred if the Company ceases to own at
least 51% of all outstanding shares of stock of the Bank in connection with a
conversion of the Company from mutual to stock form.
"Code" means the Internal Revenue Code of 1986, as amended.
"Committee" means a Committee appointed or approved by the Board which (i)
following abstention or recusal of all members who are not Non-Employee
Directors, is composed solely of two or more Non-Employee Directors, or (ii)
includes a subcommittee, composed solely of two or more Non-Employee Directors,
or (iii) consists of the entire Board of the Bank. None of the members of the
Committee shall be under consideration for a grant of options at the time the
Committee acts.
"Common Stock" means shares of the common stock of the Bank, par value
$1.00 per share.
"Company" means Pathfinder Bancorp, M.H.C., or a successor corporation.
"Continuous Service" means employment as a Key Employee and/or service as
an Outside Director without any interruption or termination of such employment
and/or service. Continuous Service shall also mean a continuation as a member of
the Board of Directors following a cessation of employment as a Key Employee. In
the case of a Key Employee, employment shall not be considered interrupted in
the case of sick leave, military leave or any other leave of absence approved by
the Bank or in the case of transfers between payroll locations of the Bank or
between the Bank, its parent, its subsidiaries or its successor.
"Date of Grant" means the actual date on which an Award is granted by the
Committee.
"Director" means a member of the Board.
"Disability" means the permanent and total inability by reason of mental or
physical infirmity, or both, of an employee to perform the work customarily
assigned to him, or of a Director to serve as such. Additionally, in the case of
an employee, a medical doctor selected or approved by the Board must advise the
Committee that it is either not possible to determine when such Disability will
terminate or that it appears probable that such Disability will be permanent
during the remainder of said employee's lifetime.
"Dividend Equivalent Rights" means the right to receive an amount of cash
based upon the terms set forth in Section 10 hereof.
A-2
<PAGE>
"Effective Date" means the date of, or a date determined by, the Board
following approval of the Plan by the Bank's stockholders.
"Fair Market Value" means, when used in connection with the Common Stock on
a certain date, the reported closing price of the Common Stock as reported by
the Nasdaq stock market (as published by the Wall Street Journal, if published)
on such date, or if the Common Stock was not traded on the day prior to such
date, on the next preceding day on which the Common Stock was traded; provided,
however, that if the Common Stock is not reported on the Nasdaq stock market,
Fair Market Value shall mean the average sale price of all shares of Common
Stock sold during the 30-day period immediately preceding the date on which such
stock option was granted, and if no shares of stock have been sold within such
30-day period, the average sale price of the last three sales of Common Stock
sold during the 90-day period immediately preceding the date on which such stock
option was granted. In the event Fair Market Value cannot be determined in the
manner described above, then Fair Market Value shall be determined by the
Committee. The Committee is authorized, but is not required, to obtain an
independent appraisal to determine the Fair Market Value of the Common Stock.
"Incentive Stock Option" means an Option granted by the Committee to a
Participant, which Option is designated as an Incentive Stock Option pursuant to
Section 8.
"Key Employee" means any person who is currently employed by the Bank or an
Affiliate who is chosen by the Committee to participate in the Plan.
"Limited Right" means the right to receive an amount of cash based upon the
terms set forth in Section 9.
"Non-Statutory Stock Option" means an Option granted by the Committee to
(i) an Outside Director or (ii) to any other Participant and such Option is
either (A) not designated by the Committee as an Incentive Stock Option, or (B)
fails to satisfy the requirements of an Incentive Stock Option as set forth in
Section 422 of the Code and the regulations thereunder.
"Non-Employee Director" means, for purposes of the Plan, a Director who (a)
is not employed by the Bank or an Affiliate; (b) does not receive compensation
directly or indirectly as a consultant (or in any other capacity than as a
Director) greater than $60,000; (c) does not have an interest in a transaction
requiring disclosure under Item 404(a) of Regulation S-K; or (d) is not engaged
in a business relationship for which disclosure would be required pursuant to
Item 404(b) of Regulation S-K.
"Normal Retirement" means for a Key Employee, retirement at the normal or
early retirement date set forth in the Bank's Employee Stock Ownership Plan, or
any successor plan. Normal Retirement for an Outside Director means a cessation
of service on the Board of Directors for any reason other than removal for
Cause, after reaching 60 years of age and maintaining at least 10 years of
Continuous Service.
"Offering" means the November 15, 1995 subscription offering of the Common
Stock of the Bank.
"Outside Director" means a Director of the Bank or an Affiliate who is not
an employee of the Bank or an Affiliate.
"Option" means an Award granted under Section 7 or Section 8.
"Participant" means a Key Employee or Outside Director of the Bank or its
Affiliates who receives or has received an award under the Plan.
"Superintendent" means the New York Superintendent of Banks.
"Termination for Cause" means the termination of employment or termination
of service on the Board caused by the individual's personal dishonesty, willful
misconduct, any breach of fiduciary duty involving personal profit, intentional
failure to perform stated duties, or the willful violation of any law, rule or
regulation (other than traffic violations or similar offenses), or a final
cease-and-desist order, any of which results in material loss to the Company or
one of its Affiliates.
A-3
<PAGE>
3. Plan Administration Restrictions
The Plan shall be administered by the Committee. The Committee is
authorized, subject to the provisions of the Plan, to establish such rules and
regulations as it deems necessary for the proper administration of the Plan and
to make whatever determinations and interpretations in connection with the Plan
it deems necessary or advisable. All determinations and interpretations made by
the Committee shall be binding and conclusive on all Participants in the Plan
and on their legal representatives and beneficiaries.
All transactions involving a grant, award or other acquisition from the
Bank shall be approved by the Committee. With respect to awards to Directors,
options shall be granted by the Committee in accordance with the Plan.
4. Types of Awards
Awards under the Plan may be granted in any one or a combination of: (a)
Incentive Stock Options; (b) Non-Statutory Stock Options; (c) Limited Rights;
and (d) Dividend Equivalent Rights.
5. Stock Subject to the Plan
Subject to adjustment as provided in Section 14, the maximum number of
shares reserved for issuance under the Plan is 88,167 shares. To the extent that
Options or rights granted under the Plan are exercised, the shares covered will
be unavailable for future grants under the Plan; to the extent that Options
together with any related rights granted under the Plan terminate, expire or are
canceled without having been exercised or, in the case of Limited Rights
exercised for cash, new Awards may be made with respect to these shares.
6. Eligibility
Key Employees of the Bank and its Affiliates shall be eligible to receive
Incentive Stock Options, Non-Statutory Stock Options, Limited Rights and/or
Dividend Equivalent Rights under the Plan. Outside Directors shall be eligible
to receive Non-Statutory Stock Options and Dividend Equivalent Rights under the
Plan.
7. Non-Statutory Stock Options
7.1 Grant of Non-Statutory Stock Options
(a) Grants to Outside Directors. Each Outside Director, who is serving in
such capacity on the Effective Date of the Plan, shall be granted Options to
purchase shares of Common Stock of the Bank, subject to adjustment pursuant to
Section 16, as follows: Chris R. Burritt, 5,000 shares; Raymond W. Jung, 5,000
shares; Bruce E. Manwaring, 5,000 shares; L. William Nelson, Jr., 5,000 shares;
Victor S. Oakes, 5,000 shares; Lawrence W. O'Brien, 5,000 shares, Janette
Resnick, 5,000 shares, and Corte J. Spencer, 5,000 shares. Each person who
becomes an Outside Director subsequent to the Effective Date, shall be granted
Nonstatutory Stock Options to purchase 5,000 shares of the Common Stock, subject
to adjustment pursuant to Section 16, to the extent shares remain available
under the Plan. Nonstatutory Stock Options granted under the Plan are subject to
the terms and conditions set forth in this Section 7.
(b) Grants to Key Employees. The Committee may, from time to time, grant
Non-Statutory Stock Options to eligible Key Employees, and, upon such terms and
conditions as the Committee may determine, grant Non-Statutory Stock Options in
exchange for and upon surrender of previously granted Awards under the Plan.
Non-Statutory Stock Options granted under the Plan, including Non-Statutory
Stock Options granted in exchange for and upon surrender of previously granted
Awards, are subject to the terms and conditions set forth in this Section 7. The
maximum number of shares subject to a Non-Statutory Option that may be awarded
under the Plan to any Key Employee shall be 10,000.
(c) Option Agreement. Each Option shall be evidenced by a written option
agreement between the Company and the Participant specifying the number of
shares of Common Stock that may be acquired through its exercise and containing
the terms and conditions of the option which shall not be inconsistent with the
terms of the Plan.
(d) Price. The purchase price per share of Common Stock deliverable upon
the exercise of each Non-Statutory Stock Option shall be the Fair Market Value
of the Common Stock of the Bank on the date the Option
A-4
<PAGE>
is granted. Shares may be purchased only upon full payment of the purchase price
in one or more of the manners set forth in Section 12 hereof, as determined by
the Committee.
(e) Manner of Exercise and Vesting. A Non-Statutory Stock Option granted
under the Plan shall vest in a Participant at the rate or rates determined by
the Committee. A vested Option may be exercised from time to time, in whole or
in part, by delivering a written notice of exercise to the President or Chief
Executive Officer of the Bank, or his designee. Such notice shall be irrevocable
and must be accompanied by full payment of the purchase price in cash or shares
of Common Stock at the Fair Market Value of such shares, determined on the
exercise date in the manner described in Section 2 hereof. If previously
acquired shares of Common Stock are tendered in payment of all or part of the
exercise price, the value of such shares shall be determined as of the date of
such exercise.
(f) Terms of Options. The term during which each Non-Statutory Stock
Option may be exercised shall be determined by the Committee, but in no event
shall a Non-Statutory Stock Option be exercisable in whole or in part more than
10 years from the Date of Grant. No Options shall be earned by a Participant
unless the Participant maintains Continuous Service until the vesting date of
such Option, except as set forth herein. The shares comprising each installment
may be purchased in whole or in part at any time after such installment becomes
purchasable. The Committee may, in its sole discretion, accelerate the time at
which any Non-Statutory Stock Option may be exercised in whole or in part by Key
Employees and/or Outside Directors. Notwithstanding any other provision of this
Plan, in the event of a Change in Control of the Company or the Bank, all Non-
Statutory Stock Options that have been awarded shall become immediately
exercisable for three years following such Change in Control.
(g) Termination of Employment or Service. Upon the termination of a Key
Employee's employment or upon termination of an Outside Director's service for
any reason other than, Normal Retirement, death, Disability, Change in Control
or Termination for Cause, the Participant's Non-Statutory Stock Options shall be
exercisable only as to those shares that were immediately purchasable on the
date of termination and only for one year following termination. In the event of
Termination for Cause, all rights under a Participant's Non-Statutory Stock
Options shall expire upon termination. In the event of the Normal Retirement,
death or Disability of any Participant, all Non-Statutory Stock Options held by
the Participant, whether or not exercisable at such time, shall be exercisable
by the Participant or his legal representative or beneficiaries for five years
following the date of his Normal Retirement, death or cessation of employment
due to Disability, provided that in no event shall the period extend beyond the
expiration of the Non-Statutory Stock Option term.
(h) Transferability. No Non-Statutory Stock Option granted hereunder is
transferable except by will or the laws of descent and distribution and may only
be exercised during his or her lifetime by the Participant, or by a guardian or
legal representative of the Participant.
8. Incentive Stock Options
8.1 Grant of Incentive Stock Options
The Committee may, from time to time, grant Incentive Stock Options to Key
Employees. Each Key Employee who is also a Director, who is serving in such
capacity on the Effective Date of the Plan, shall be granted Options to purchase
shares of Common Stock of the Bank, subject to adjustment pursuant to Section
16, as follows: Chris C. Gagas, 24,000 shares. Incentive Stock Options granted
pursuant to the Plan shall be subject to the following terms and conditions:
(a) Option Agreement. Each Option shall be evidenced by a written option
agreement between the Company and the Key Employee specifying the number of
shares of Common Stock that may be acquired through its exercise and containing
the terms and conditions of the option which shall not be inconsistent with the
terms of the Plan.
(b) Price. Subject to Section 14 of the Plan and Section 422 of the Code,
the purchase price per share of Common Stock deliverable upon the exercise of
each Incentive Stock Option shall be not less than 100% of the Fair Market Value
of the Bank's Common Stock on the date the Incentive Stock Option is granted.
However, if a Key Employee owns stock possessing more than 10% of the total
combined voting power of all classes of stock of the Bank or its Affiliates (or
under Section 424(d) of the Code is deemed to own stock representing more than
10% of the total combined voting power of all classes of stock of the Company or
its Affiliates by reason of the ownership of such classes of stock, directly or
indirectly, by or for any brother, sister, spouse, ancestor or lineal descendent
of such Key Employee, or by or for any corporation, partnership, estate or trust
of which such Key Employee is a shareholder, partner or Beneficiary), the
purchase price per share of Common Stock deliverable upon the exercise
A-5
<PAGE>
of each Incentive Stock Option shall not be less than 110% of the Fair Market
Value of the Bank's Common Stock on the date the Incentive Stock Option is
granted. Shares may be purchased only upon payment of the full purchase price in
one or more of the manners set forth in Section 12 hereof, as determined by the
Committee.
(c) Manner of Exercise. Incentive Stock Options granted under the Plan
shall vest in a Participant at the rate or rates determined by the Committee.
The vested Options may be exercised from time to time, in whole or in part, by
delivering a written notice of exercise to the President or Chief Executive
Officer of the Company or his designee. Such notice is irrevocable and must be
accompanied by full payment of the purchase price in cash or shares of Common
Stock at the Fair Market Value of such shares determined on the exercise date by
the manner described in Section 2.
(d) Amounts of Options. Incentive Stock Options may be granted to any
eligible Key Employee in such amounts as determined by the Committee; provided
that the amount granted is consistent with the terms of Section 422 of the Code.
Notwithstanding the above, the maximum number of shares that may be subject to
an Incentive Stock Option awarded under the Plan to any Key Employee shall be
30,000. In granting Incentive Stock Options, the Committee shall consider such
factors as it deems relevant, which factors may include, among others, the
position and responsibilities of the Key Employee, the length and value of his
or her service to the Bank, the Company, or the Affiliate, the compensation paid
to the Key Employee and the Committee's evaluation of the performance of the
Bank, the Company, or the Affiliate, according to measurements that may include,
among others, key financial ratios, levels of classified assets, and independent
audit findings. In the case of an Option intended to qualify as an Incentive
Stock Option, the aggregate Fair Market Value (determined as of the time the
Option is granted) of the Common Stock with respect to which Incentive Stock
Options granted are exercisable for the first time by the Participant during any
calendar year (under all plans of the Company and its Affiliates) shall not
exceed $100,000. The provisions of this Section 8.1(d) shall be construed and
applied in accordance with Section 422(d) of the Code and the regulations, if
any, promulgated thereunder.
(e) Terms of Options. The term during which each Incentive Stock Option
may be exercised shall be determined by the Committee, but in no event shall an
Incentive Stock Option be exercisable in whole or in part more than 10 years
from the Date of Grant. If any Key Employee, at the time an Incentive Stock
Option is granted to him, owns stock representing more than 10% of the total
combined voting power of all classes of stock of the Bank or its Affiliate (or,
under Section 424(d) of the Code, is deemed to own stock representing more than
10% of the total combined voting power of all classes of stock, by reason of the
ownership of such classes of stock, directly or indirectly, by or for any
brother, sister, spouse, ancestor or lineal descendent of such Key Employee, or
by or for any corporation, partnership, estate or trust of which such Key
Employee is a shareholder, partner or Beneficiary), the Incentive Stock Option
granted to him shall not be exercisable after the expiration of five years from
the Date of Grant.
The Committee shall determine the date on which each Incentive Stock Option
shall become exercisable and may provide that an Incentive Stock Option shall
become exercisable in installments. The Committee may also determine as of the
Date of Grant any other specific conditions or specific performance goals which
must be satisfied prior to the Incentive Stock Option becoming exercisable. The
shares comprising each installment may be purchased in whole or in part at any
time after such installment becomes purchasable, provided that the amount able
to be first exercised in a given year is consistent with the terms of Section
422 of the Code. To the extent required by Section 422 of the Code, the
aggregate Fair Market Value (determined at the time the option is granted) of
the Common Stock for which Incentive Stock Options are exercisable for the first
time by a Participant during any calendar year (under all plans of the Bank and
its Affiliates) shall not exceed $100,000.
The Committee may, in its sole discretion, accelerate the time at which any
Incentive Stock Option may be exercised in whole or in part, provided that it is
consistent with the terms of Section 422 of the Code. Notwithstanding the above,
in the event of a Change in Control of the Bank, all Incentive Stock Options
that have been awarded shall become immediately exercisable, unless the Fair
Market Value of the amount exercisable as a result of a Change in Control shall
exceed $100,000 (determined as of the Date of Grant). In such event, the first
$100,000 of Incentive Stock Options (determined as of the Date of Grant) shall
be exercisable as Incentive Stock Options and any excess shall be exercisable as
Non-Statutory Stock Options.
(f) Termination of Employment. Upon the termination of a Key Employee's
service for any reason other than Disability, Normal Retirement, Change in
Control, death or Termination for Cause, the Key Employee's Incentive Stock
Options shall be exercisable only as to those shares that were immediately
purchasable by such Key Employee at the date of termination and only for a
period of three months following termination. In the event of Termination for
Cause all rights under the Incentive Stock Options shall expire upon
termination.
A-6
<PAGE>
Upon termination of a Key Employee's employment due to Normal Retirement,
death, Disability, or following a Change in Control, all Incentive Stock Options
held by such Key Employee, whether or not exercisable at such time, shall be
exercisable for a period of five years following the date of his cessation of
employment, provided however, that any such Option shall not be eligible for
treatment as an Incentive Stock Option in the event such Option is exercised
more than three months following the date of his Normal Retirement or
termination of employment following a Change in Control; and provided further,
that no Option shall be eligible for treatment as an Incentive Stock Option in
the event such Option is exercised more than one year following termination of
employment due to Disability and provided further, in order to obtain Incentive
Stock Option treatment for Options exercised by heirs or devisees of an
Optionee, the Optionee's death must have occurred while employed or within three
(3) months of termination of employment. In no event shall the exercise period
extend beyond the expiration of the Incentive Stock Option term.
(g) Transferability. No Incentive Stock Option granted under the Plan is
transferable except by will or the laws of descent and distribution and is
exercisable during his lifetime only by the Key Employee to which it is granted.
(h) Compliance with Code. The options granted under this Section 8 are
intended to qualify as Incentive Stock Options within the meaning of Section 422
of the Code, but the Company makes no warranty as to the qualification of any
Option as an Incentive Stock Option within the meaning of Section 422 of the
Code. If an Option granted hereunder fails for whatever reason to comply with
the provisions of Section 422 of the Code, and such failure is not or cannot be
cured, such Option shall be a Non-Statutory Stock Option.
9. Limited Rights
9.1 Grant of Limited Rights
The Committee may grant a Limited Right simultaneously with the grant of
any Option to any Key Employee of the Bank, with respect to all or some of the
shares covered by such Option. Limited Rights granted under the Plan are subject
to the following terms and conditions:
(a) Terms of Rights. In no event shall a Limited Right be exercisable in
whole or in part before the expiration of six months from the date of grant of
the Limited Right. A Limited Right may be exercised only in the event of a
Change in Control of the Bank or the Company.
The Limited Right may be exercised only when the underlying Option is
eligible to be exercised, provided that the Fair Market Value of the underlying
shares on the day of exercise is greater than the exercise price of the related
Option.
Upon exercise of a Limited Right, the related Option shall cease to be
exercisable. Upon exercise or termination of an Option, any related Limited
Rights shall terminate. The Limited Rights may be for no more than 100% of the
difference between the exercise price and the Fair Market Value of the Common
Stock subject to the underlying Option. The Limited Right is transferable only
when the underlying Option is transferable and under the same conditions.
(b) Payment. Upon exercise of a Limited Right, the holder shall promptly
receive from the Bank an amount of cash equal to the difference between the Fair
Market Value on the Date of Grant of the related Option and the Fair Market
Value of the underlying shares on the date the Limited Right is exercised,
multiplied by the number of shares with respect to which such Limited Right is
being exercised. In the event of a Change in Control in which pooling accounting
treatment is a condition to the transaction, the Limited Right shall be
exercisable solely for shares of stock of the Bank, or in the event of a merger
transaction, for shares of the acquiring corporation or its parent, as
applicable. The number of shares to be received on the exercise of such Limited
Right shall be determined by dividing the amount of cash that would have been
available under the first sentence above by the Fair Market Value at the time of
exercise of the shares underlying the Option subject to the Limited Right.
10. Dividend Equivalent Rights
Simultaneously with the grant of any Option to a Participant, the Committee
may grant a Dividend Equivalent Right with respect to all or some of the shares
covered by such Option. Dividend Equivalent Rights granted under this Plan are
subject to the following terms and conditions:
A-7
<PAGE>
(a) Terms of Rights. The Dividend Equivalent Right provides the
Participant with a cash benefit per share for each share underlying the
unexercised portion of the related Option equal to the amount of any
extraordinary dividend (as defined in Section 10(c)) per share of Common Stock
declared by the Bank. The terms and conditions of any Dividend Equivalent Right
shall be evidenced in the Option agreement entered into with the Participant and
shall be subject to the terms and conditions of the Plan. The Dividend
Equivalent Right is transferable only when the related Option is transferable
and under the same conditions.
(b) Payment. Upon the payment of an extraordinary dividend, the
Participant holding a Dividend Equivalent Right with respect to Options or
portions thereof which have vested shall promptly receive from the Bank the
amount of cash equal to the amount of the extraordinary dividend per share of
Common Stock, multiplied by the number of shares of Common Stock underlying the
unexercised portion of the related Option. With respect to options or portions
thereof which have not vested, the amount that would have been received pursuant
to the Dividend Equivalent Right with respect to the shares underlying such
unvested Option or portion thereof shall be paid to the Participant holding such
Dividend Equivalent Right together with earnings thereon, on such date as the
Option or portion thereof becomes vested. Payments shall be decreased by the
amount of any applicable tax withholding prior to distribution to the
Participant as set forth in Section 18.
(c) Extraordinary Dividend. For purposes of this Section 10, an
extraordinary dividend is any dividend paid on shares of Common Stock where the
rate of the dividend exceeds the Bank's weighted average cost of funds on
interest-bearing liabilities for the current and preceding three quarters.
11. Surrender of Option
In the event of a Participant's termination of employment or termination of
service as a result of death, Disability or Normal Retirement, the Participant
(or his or her personal representative(s), heir(s), or devisee(s)) may, in a
form acceptable to the Committee make application to surrender all or part of
the Options held by such Participant in exchange for a cash payment from the
Bank of an amount equal to the difference between the Fair Market Value of the
Common Stock on the date of termination of employment or the date of termination
of service on the Board and the exercise price per share of the Option. Whether
the Bank accepts such application or determines to make payment, in whole or
part, is within its absolute and sole discretion, it being expressly understood
that the Bank is under no obligation to any Participant whatsoever to make such
payments. In the event that the Bank accepts such application and determines to
make payment, such payment shall be in lieu of the exercise of the underlying
Option and such Option shall cease to be exercisable.
12. Alternate Option Payment Mechanism
The Committee has sole discretion to determine what form of payment it will
accept for the exercise of an Option. The Committee may indicate acceptable
forms in the agreement with the Participant covering such Options or may reserve
its decision to the time of exercise. No Option is to be considered exercised
until payment in full is accepted by the Committee or its agent.
(a) Cash Payment. The exercise price may be paid in cash or by certified
check. To the extent permitted by law, the Committee may permit all or a portion
of the exercise price of an Option to be paid through borrowed funds.
(b) Cashless Exercise. Subject to vesting requirements, if applicable, a
Participant may engage in a "cashless exercise" of the Option. Upon a cashless
exercise, the Participant shall give the Bank written notice of the exercise of
the Option together with an order to a registered broker-dealer or equivalent
third party, to sell part or all of the Common Stock subject to the Option and
to deliver enough of the proceeds to the Bank to pay the Option exercise price
and any applicable withholding taxes. If the Participant does not sell the
Common Stock subject to the Option through a registered broker-dealer or
equivalent third party, the Optionee can give the Bank written notice of the
exercise of the Option and the third party purchaser of the Common Stock subject
to the Option shall pay the Option exercise price plus applicable withholding
taxes to the Bank.
(c) Exchange of Common Stock. The Committee may permit payment of the
Option exercise price by the tendering of previously acquired shares of Common
Stock. All shares of Common Stock tendered in payment of the exercise price of
an Option shall be valued at the Fair Market Value of the Common Stock on the
date prior to the date of exercise.
A-8
<PAGE>
13. Rights of a Stockholder
A Participant shall have no rights as a stockholder with respect to
any shares covered by a Non-Statutory and/or Incentive Stock Option until the
date of issuance of a stock certificate for such shares. Nothing in the Plan or
in any Award granted confers on any person any right to continue in the employ
of the Bank or its Affiliates or to continue to perform services for the Bank or
its Affiliates or interferes in any way with the right of the Bank or its
Affiliates to terminate his services as an officer, director or employee at any
time.
14. Agreement with Participants
Each Award of Options, and/or Limited Rights will be evidenced by a
written agreement, executed by the Participant and the Bank or its Affiliates
that describes the conditions for receiving the Awards including the date of
Award, the purchase price, applicable periods, and any other terms and
conditions as may be required by the Board or applicable securities law.
15. Designation of Beneficiary
A Participant may, with the consent of the Committee, designate a
person or persons to receive, in the event of death, any stock option or Limited
Rights Award to which he would then be entitled. Such designation will be made
upon forms supplied by and delivered to the Bank and may be revoked in writing.
If a Participant fails effectively to designate a Beneficiary, then his estate
will be deemed to be the Beneficiary.
16. Dilution and Other Adjustments
In the event of any change in the outstanding shares of Common Stock
of the Bank by reason of any stock dividend or split, pro rata return of capital
to all shareholders, recapitalization, merger, consolidation, spin-off,
reorganization, combination or exchange of shares, or other similar corporate
change, or other increase or decrease in such shares without receipt or payment
of consideration by the Bank, the Board of Directors, subject to the
Superintendent's approval, will make such adjustments to previously granted
Awards, to prevent dilution or enlargement of the rights of the Participant,
including any or all of the following:
(a) adjustments in the aggregate number of shares of Common Stock
that may be awarded under the Plan;
(b) adjustments in the aggregate number of shares of Common Stock
that may be awarded to any single individual under the Plan;
(c) adjustments in the aggregate number of shares of Common Stock
covered by Awards already made under the Plan; or
(d) adjustments in the purchase price of outstanding Incentive and/or
Non-Statutory Stock Options, or any Limited Rights attached to
such Options.
No such adjustments may, however, materially change the value of
benefits available to a Participant under a previously granted Award. With
respect to Incentive Stock Options, no such adjustment shall be made if it would
be deemed a "modification" of the Award under Section 424 of the Code.
17. Effect of a Change in Control on Option Awards
In the event of a Change in Control, the Committee and the Board of
Directors will take one or more of the following actions to be effective as of
the date of such Change in Control:
(a) provide that such Options shall be assumed, or equivalent options
shall be substituted, ("Substitute Options") by the acquiring or succeeding
corporation (or an affiliate thereof), provided that: (A) any such Substitute
Options exchanged for Incentive Stock Options shall meet the requirements of
Section 424(a) of the Code, and (B) the shares of stock issuable upon the
exercise of such Substitute Options shall constitute securities registered in
accordance with the Securities Act of 1933, as amended ("1933 Act") or such
securities shall be exempt from such registration in accordance with Sections
3(a)(2) or 3(a)(5) of the 1933 Act, (collectively, "Registered Securities"), or
in the alternative, if the securities issuable upon the exercise of such
Substitute Options shall not constitute Registered Securities, then the
Participant will receive upon consummation of the Change in Control a cash
payment
A-9
<PAGE>
for each Option surrendered equal to the difference between the (1) Fair Market
Value of the consideration to be received for each share of Common Stock in the
Change in Control times the number of shares of Common Stock subject to such
surrendered Options, and (2) the aggregate exercise price of all such
surrendered Options, or
(b) in the event of a transaction under the terms of which the
holders of Common Stock of the Bank will receive upon consummation thereof a
cash payment (the "Merger Price") for each share of Common Stock exchanged in
the Change in Control transaction, to make or to provide for a cash payment to
the Participants equal to the difference between (A) the Merger Price times the
number of shares of Common Stock subject to such Options held by each Optionee
(to the extent then exercisable at prices not in excess of the Merger Price) and
(B) the aggregate exercise price of all such surrendered Options in exchange for
such surrendered Options.
18. Withholding
There may be deducted from each distribution of cash and/or Common
Stock under the Plan the amount of tax required by any governmental authority to
be withheld.
19. Amendment of the Plan
The Board may at any time, and from time to time, modify or amend the
Plan in any respect, or modify or amend an Award received by Key Employees
and/or Outside Directors subject only to the Superintendent's approval;
provided, however, that the approval of the holders of a majority of the Bank's
outstanding capital stock shall be required for any amendment (other than an
adjustment made pursuant to Section 16 of this Plan) which would:
(i) increase the number of shares as to which options may be
granted;
(ii) change the number of shares which may be optioned to any single
individual;
(iii) decrease an Option price;
(iv) extend the term of the Plan or of an Option; or
(v) change the persons or category of persons eligible to be granted
Options.
No such termination, modification or amendment may affect the rights of a
Participant, without his consent, under an outstanding Award.
20. Effective Date of Plan
The Plan shall become effective upon the date of, or a date determined
by the Board of Directors following, approval of the Plan by the Bank's
stockholders.
21. Termination of the Plan
The right to grant Awards under the Plan will terminate upon the
earlier of (i) 10 years after the Effective Date, or (ii) the date on which the
exercise of Options or related rights equaling the maximum number of shares
reserved under the Plan occurs, as set forth in Section 5. The Board may suspend
or terminate the Plan at any time, provided that no such action will, without
the consent of a Participant, adversely affect his rights under a previously
granted Award.
22. Applicable Law
The Plan will be administered in accordance with the laws of the State
of New York. The Plan is subject to the provisions of New York Banking Law,
Section 140-a, the regulations of the New York Banking Board and any other
applicable law or regulation.
A-10
<PAGE>
IN WITNESS WHEREOF, the Bank has caused the Plan to be executed by its
duly authorized officers and the corporate seal to be affixed and duly attested,
as of the ____ day of ________, 1997.
Date Approved by Stockholders: _____________
Effective Date: _____________
ATTEST: OSWEGO CITY SAVINGS BANK
- --------------------- ---------------------------
Secretary Chief Executive Officer
A-11
<PAGE>
APPENDIX B
OSWEGO CITY SAVINGS BANK
1997 RECOGNITION AND RETENTION PLAN
1. Establishment of the Plan
Oswego City Savings Bank (the "Bank") hereby establishes the Bank
Recognition and Retention Plan (the "Plan") upon the terms and conditions
hereinafter stated in the Plan.
2. Purpose of the Plan
The purpose of the Plan is to advance the interests of the Bank and
its stockholders by providing Key Employees and Outside Directors of the Bank
and its Affiliates, including Pathfinder Bancorp, M.H.C. (the "Company"), upon
whose judgment, initiative and efforts the successful conduct of the business of
the Bank and its Affiliates largely depends, with compensation for their
contributions to the Bank and its Affiliates and an additional incentive to
perform in a superior manner, as well as to attract people of experience and
ability. In the event the Company shall be reorganized into a Stock Holding
Company, such Stock Holding Company shall inure to the rights and obligations of
the Bank as provided in this Plan and all awards set forth hereunder shall be
converted into awards of stock of the resultant institution.
3. Definitions
The following words and phrases when used in this Plan with an initial
capital letter, unless the context clearly indicates otherwise, shall have the
meanings set forth below. Wherever appropriate, the masculine pronoun shall
include the feminine pronoun and the singular shall include the plural:
"Affiliate"" means any "parent corporation" or "subsidiary
corporation" of the Bank or the Company, as such terms are defined in Section
424(e) and (f), respectively, of the Code, or a successor to a parent
corporation or subsidiary corporation.
"Award" means the grant by the Committee of Restricted Stock, as
provided in the Plan.
"Bank" means Oswego City Savings Bank, or a successor corporation.
"Beneficiary" means the person or persons designated by a Recipient to
receive any benefits payable under the Plan in the event of such Recipient's
death. Such person or persons shall be designated in writing on forms provided
for this purpose by the Committee and may be changed from time to time by
similar written notice to the Committee. In the absence of a written
designation, the Beneficiary shall be the Recipient's surviving spouse, if any,
or if none, his estate.
"Board" or "Board of Directors" means the Board of Directors of the
Bank or an Affiliate, as applicable. For purposes of Section 4 of the Plan,
"Board" shall refer solely to the Board of the Bank.
"Cause" means personal dishonesty, willful misconduct, any breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties, or the willful violation of any law, rule or regulation (other than
traffic violations or similar offenses) or a final cease-and-desist order, any
of which results in a material loss to the Company or an Affiliate.
B-1
<PAGE>
(1) a reorganization, merger, merger conversion, consolidation or sale
of all or substantially all of the assets of the Bank, the Company or the Stock
Holding Company, or a similar transaction in which the Bank, the Company or the
Stock Holding Company is not the resulting entity and that is not approved by a
majority of the Board of Directors of the Bank, the Company or the Stock Holding
Company;
(2) individuals who constitute the Incumbent Board of the Bank, the
Company, or the Stock Holding Company cease for any reason to constitute a
majority thereof; provided that any person becoming a director subsequent to the
date hereof whose election was approved by a vote of at least three-fourths of
the directors composing the Incumbent Board or whose nomination for election by
the Bank's or Company's stockholders or members was approved by the same
nominating committee serving under the Incumbent Board shall be, for purposes of
this Section, considered as though he were a member of the Incumbent Board; or
(3) an acquisition of "control" of the Bank or the Company as defined
in the Bank Holding Company Act of 1956, as amended and applicable rules and
regulations promulgated thereunder as in effect at the time of the Change in
Control (collectively, the "BHCA"), as determined by the Board of Directors of
the Bank or the Company; or
(4) an acquisition of the Bank's stock requiring submission of notice
under the change in Bank Control Act; provided, however, that a Change in
Control shall not be deemed to have occurred under (1), (3) or (4) of this
section if the transaction(s) constituting a Change in Control is approved by a
majority of the Board of Directors of the Bank or the Company, as the case may
be.
(5) In the event that the Company converts to the Stock Holding
Company on a stand-alone basis, a "Change in Control" of the Bank or the Stock
Holding Company (a) shall mean an event of a nature that would be required to be
reported in response to Item 1 of the current report on Form 8-K, as in effect
on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (the "Exchange Act"), or results in a Change in Control of the Bank
or the Stock Holding Company within the meaning of the BHCA; or (b) without
limitation shall be deemed to have occurred at such time as (i) any "person" (as
the term is used in Section 13(d) and 14(d) of the Exchange Act) other than the
Stock Holding Company is or becomes a "beneficial owner" (as defined in Rule 13-
d under the Exchange Act) directly or indirectly, of securities of the Bank
representing 25% or more of the Bank's outstanding securities ordinarily having
the right to vote at the election of directors except for any securities of the
Bank received by the Stock Holding Company in connection with the Reorganization
and any securities purchased by the Bank's employee stock ownership plan and
trust shall not be counted in determining whether such plan is the beneficial
owner of more than 25% of the Bank's securities, (ii) a proxy statement
soliciting proxies from stockholders of the Bank, by someone other than the
current management of the Bank, seeking stockholder approval of a plan of
reorganization, merger or consolidation of the Stock Holding Company of the Bank
or similar transaction with one or more corporations as a result of which the
outstanding shares of the class of securities then subject to the plan or
transaction are exchanged or converted into cash or property or securities not
issued by the Bank or the Stock Holding Company, or (iii) a tender offer is made
for 25% or more of the voting securities of the Bank and the shareholders owning
beneficially or of record 25% or more of the outstanding securities of the Bank
have tendered or offered to sell their shares pursuant to such tender offer and
such tendered shares have been accepted by the tender offeror.
Notwithstanding, the foregoing, a "Change in Control" of the Bank or
the Company shall not be deemed to have occurred if the Company ceases to own at
least 51% of all outstanding shares of stock of the Bank in connection with a
conversion of the Company from mutual to stock form.
"Code" means the Internal Revenue Code of 1986, as amended.
"Committee" means a Committee of the Board which (i) following
abstention or recusal of all members who are not Non-Employee Directors of the
Bank, is composed solely of two or more Non-Employee Directors, or
B-2
<PAGE>
(ii) includes a subcommittee, composed solely of two or more Non-Employee
Directors, or (iii) consists of the entire Board of the Bank.
"Common Stock" means shares of the common stock of the Bank, par
value $1.00 per share.
"Company" means Pathfinder Bancorp, M.H.C., the stock holding
company of the Bank, or a successor corporation.
"Continuous Service" means employment as a Key Employee and/or service
as an Outside Director without any interruption or termination of such
employment and/or service. Continuous Service shall also mean a continuation as
a member of the Board of Directors following a cessation of employment as a Key
Employee. In the case of a Key Employee, employment shall not be considered
interrupted in the case of sick leave, military leave or any other leave of
absence approved by the Bank or in the case of transfers between payroll
locations of the Bank or between the Bank, its parent, its subsidiaries or its
successor.
"Director" means a member of the Board.
"Disability" means the permanent and total inability by reason of
mental or physical infirmity, or both, of an employee to perform the work
customarily assigned to him, or of a Director to serve as such. Additionally,
in the case of an employee, a medical doctor selected or approved by the Board
must advise the Committee that it is either not possible to determine when such
Disability will terminate or that it appears probable that such Disability will
be permanent during the remainder of such employee's lifetime.
"Effective Date" means the date of, or a date determined by, the Board
of Directors following approval of the Plan by the Bank's stockholders.
"ERISA" means the Employee Retirement Income Security Act of 1974,
as amended.
"Key Employee" means any person who is currently employed by the Bank
or an Affiliate who is chosen by the Committee to participate in the Plan.
"Non-Employee Director" means, for purposes of the Plan, a Director
who (a) is not employed by the Bank or an Affiliate; (b) does not receive
compensation directly or indirectly as a consultant (or in any other capacity
than as a Director) greater than $60,000; (c) does not have an interest in a
transaction requiring disclosure under Item 404(a) of Regulation S-K; or (d) is
not engaged in a business relationship for which disclosure would be required
pursuant to Item 404(b) of Regulation S-K.
"Normal Retirement" means for a Key Employee, retirement at the normal
or early retirement date set forth in the Bank's Employee Stock Ownership Plan,
or any successor plan. Normal Retirement for an Outside Director means a
cessation of service on the Board of Directors for any reason other than removal
for Cause, after reaching 60 years of age and maintaining at least 10 years of
Continuous Service.
"Offering" means the November 15, 1995 subscription offering of the
Common Stock of the Bank.
"Outside Director" means a Director of the Bank or an Affiliate who
is not an employee of the Company or an Affiliate.
"Recipient" means a Key Employee or Outside Director of the Bank or
its Affiliates who receives or has received an Award under the Plan.
B-3
<PAGE>
"Restricted Period" means the period of time selected by the Committee
for the purpose of determining when restrictions are in effect under Section 6
with respect to Restricted Stock awarded under the Plan.
"Restricted Stock" means shares of Common Stock that have been
contingently awarded to a Recipient by the Committee subject to the restrictions
referred to in Section 6, so long as such restrictions are in effect.
4. Administration of the Plan.
4.01 Role of the Committee. The Plan shall be administered and
interpreted by the Committee, which shall have all of the powers allocated to it
in the Plan. The interpretation and construction by the Committee of any
provisions of the Plan or of any Award granted hereunder shall be final and
binding. The Committee shall act by vote or written consent of a majority of its
members. Subject to the express provisions and limitations of the Plan, the
Committee may adopt such rules and procedures as it deems appropriate for the
conduct of its affairs. The Committee shall report its actions and decisions
with respect to the Plan to the Board at appropriate times, but in no event less
than one time per calendar year.
4.02 Role of the Board. The members of the Committee shall be
appointed or approved by, and will serve at the pleasure of, the Board. The
Board may in its discretion from time to time remove members from, or add
members to, the Committee. The Board shall have all of the powers allocated to
it in the Plan, may take any action under or with respect to the Plan that the
Committee is authorized to take, and may reverse or override any action taken or
decision made by the Committee under or with respect to the Plan, provided,
however, that except as provided in Section 6.02, the Board may not revoke any
Award except in the event of revocation for Cause or with respect to unearned
Awards in the event the Recipient of an Award voluntarily terminates employment
with the Bank prior to Normal Retirement.
4.03 Plan Administration Restrictions. All transactions involving a
grant, award or other acquisitions from the Bank shall:
(a) be approved by the Bank's full Board or by the Committee;
(b) be approved, or ratified, in compliance with Section 14 of the
Exchange Act, by either: the affirmative vote of the holders of a majority of
the shares present, or represented and entitled to vote at a meeting duly held
in accordance with the laws under which the Bank is incorporated; or the written
consent of the holders of a majority of the securities of the issuer entitled to
vote provided that such ratification occurs no later than the date of the next
annual meeting of shareholders; or
(c) result in the acquisition of common stock that is held by the
Recipient for a period of six months following the date of such acquisition.
4.04 Limitation on Liability. No member of the Board or the Committee
shall be liable for any determination made in good faith with respect to the
Plan or any Awards granted under it. If a member of the Board or the Committee
is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of anything done or not done by him in such capacity
under or with respect to the Plan, the Bank or the Company shall indemnify such
member against expense (including attorneys' fees), judgments, fines and amounts
paid in settlement actually and reasonably incurred by him in connection with
such action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in the best interests of the Bank and the Company and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful.
B-4
<PAGE>
5. Eligibility; Awards
5.01 Eligibility. Key Employees and Outside Directors are eligible to
receive Awards.
5.02 Awards to Key Employees and Outside Directors. The Committee may
determine which of the Key Employees and Outside Directors referenced in Section
5.01 will be granted Awards and the number of shares covered by each Award;
provided, however, that in no event shall any Awards be made that will violate
the Bank's Restated Organization Certificate and Bylaws, the Company's Charter
and Bylaws, or any applicable federal or state law or regulation. Shares of
Restricted Stock that are awarded by the Committee shall, on the date of the
Award, be registered in the name of the Recipient and transferred to the
Recipient, in accordance with the terms and conditions established under the
Plan. The aggregate number of shares that shall be issued under the Plan is
35,267.
In the event Restricted Stock is forfeited for any reason, the
Committee, from time to time, may determine which of the Key Employees and
Outside Directors will be granted additional Awards to be awarded from forfeited
Restricted Stock.
In selecting those Key Employees and Outside Directors to whom Awards
will be granted and the amount of Restricted Stock covered by such Awards, the
Committee shall consider such factors as it deems relevant, which factors may
include, among others, the position and responsibilities of the Key Employees
and Outside Directors, the length and value of their services to the Bank and
its Affiliates, the compensation paid to the Key Employees or fees paid to the
Outside Directors, and the Committee may request the written recommendation of
the Chief Executive Officer and other senior executive officers of the Bank, the
Company and its Affiliates or the recommendation of the full Board. All
allocations by the Committee shall be subject to review, and approval or
rejection, by the Board.
No Restricted Stock shall be earned unless the Recipient maintains
Continuous Service with the Bank or an Affiliate until the restrictions lapse.
5.03 Manner of Award. As promptly as practicable after a determination
is made pursuant to Section 5.02 to grant an Award, the Committee shall notify
the Recipient in writing of the grant of the Award, the number of shares of
Restricted Stock covered by the Award, and the terms upon which the Restricted
Stock subject to the Award may be earned. Upon notification of an Award of
Restricted Stock, the Recipient shall execute and return to the Bank a
restricted stock agreement (the "Restricted Stock Agreement") setting forth the
terms and conditions under which the Recipient shall earn the Restricted Stock,
together with a stock power or stock powers endorsed in blank. Thereafter, the
Recipient's Restricted Stock and stock power shall be deposited with an escrow
agent specified by the Bank who shall hold such Restricted Stock under the terms
and conditions set forth in the Restricted Stock Agreement. Each certificate in
respect of shares of Restricted Stock Awarded under the Plan shall be registered
in the name of the Recipient.
5.04 Treatment of Forfeited Shares. In the event shares of Restricted
Stock are forfeited by a Recipient, such shares shall be returned to the Bank
and shall be held and accounted for pursuant to the terms of the Plan until such
time as the Restricted Stock is re-awarded to another Recipient, in accordance
with the terms of the Plan and the applicable state and federal laws, rules and
regulations.
6. Terms and Conditions of Restricted Stock
The Committee shall have full and complete authority, subject to the
limitations of the Plan, to grant awards of Restricted Stock to Key Employees
and Outside Directors and, in addition to the terms and conditions contained in
Sections 6.01 through 6.08, to provide such other terms and conditions (which
need not be identical among Recipients) in respect of such Awards, and the
vesting thereof, as the Committee shall determine.
B-5
<PAGE>
6.01 General Rules. Subject to any such other terms and conditions as
the Committee shall provide with respect to Awards, shares of Restricted Stock
may not be sold, assigned, transferred (within the meaning of Code Section 83),
pledged or otherwise encumbered by the Recipient, except as hereinafter
provided, during the Restricted Period. The Committee shall have the authority,
in its discretion, to accelerate the time at which any or all of the
restrictions shall lapse with respect to a Restricted Stock Award, or to remove
any or all of such restrictions. No shares shall be earned for any year in which
the Bank is not meeting all of its fully phased-in capital requirements.
6.02 Continuous Service; Forfeiture. Except as provided in Section
6.03, a Recipient must maintain Continuous Service throughout the vesting period
of the award in order to vest in all shares of Restricted Stock awarded
hereunder. If a Recipient ceases to maintain Continuous Service for any reason
(other than death, Disability, Change in Control or Normal Retirement), unless
the Committee shall otherwise determine, all shares of Restricted Stock
theretofore awarded to such Recipient and which at the time of such termination
of Continuous Service are subject to the restrictions imposed by Section 6.01
shall, upon such termination of Continuous Service, be forfeited. Any stock
dividends or declared but unpaid cash dividends attributable to such shares of
Restricted Stock shall also be forfeited.
6.03 Exception for Termination Due to Death, Disability, Normal
Retirement or Following a Change in Control Notwithstanding the general rule
contained in Section 6.01, Restricted Stock awarded to a Recipient whose
employment with or service on the Board of the Bank or an Affiliate terminates
due to death, Disability, Normal Retirement or following a Change in Control
shall be deemed earned as of the Recipient's last day of employment with the
Company or an Affiliate, or last day of service on the Board of the Company or
an Affiliate; provided that Restricted Stock awarded to a Key Employee who at
any time also serves as a Director, shall not be deemed earned until both
employment and service as a Director have been terminated.
6.04 Revocation for Cause. Notwithstanding anything hereinafter to the
contrary, the Board may by resolution immediately revoke, rescind and terminate
any Award, or portion thereof, previously awarded under the Plan, to the extent
Restricted Stock has not been redelivered by the Escrow Agent to the Recipient,
whether or not yet earned, in the case of a Key Employee whose employment is
terminated by the Bank or an Affiliate or an Outside Director whose service is
terminated by the Bank or an Affiliate for Cause or who is discovered after
termination of employment or service on the Board to have engaged in conduct
that would have justified termination for Cause.
6.05 Restricted Stock Legend. Each certificate in respect of shares of
Restricted Stock awarded under the Plan shall be registered in the name of the
Recipient and deposited by the Recipient, together with a stock power endorsed
in blank, with the Escrow Agent and shall bear the following (or a similar)
legend:
"The transferability of this certificate and the
shares of stock represented hereby are subject to the terms and
conditions (including forfeiture) contained in the Oswego City
Savings Bank 1997 Recognition and Retention Plan. Copies of such
Plan are on file in the offices of the Secretary of Oswego City
Savings Bank, 214 West First Street, Oswego, New York 13126."
6.06 Payment of Dividends and Return of Capital. After an Award has
been granted but before such Award has been earned, the Recipient shall receive
any cash dividends paid with respect to such shares, or shall share in any pro-
rata return of capital to all shareholders with respect to the Common Stock.
Stock dividends declared by the Bank and paid on Awards that have not yet been
earned shall be subject to the same restrictions as the Restricted Stock and the
certificate(s) or other instruments representing or evidencing such shares shall
be legended in the manner provided in Section 6.05 and shall be delivered to the
Escrow Agent for distribution to the Recipient when the Restricted Stock upon
which such dividends were paid are earned. Unless the Recipient has made an
election under Section 83(b) of the Code, cash dividends or other amounts so
paid on shares that have not yet been earned by the Recipient shall be treated
as compensation income to the Recipient when paid. If dividends are paid with
respect to
B-6
<PAGE>
shares of Restricted Stock under the Plan that have been issued but not awarded,
or that have been forfeited and returned to the Bank or to a trust established
to hold issued and unawarded or forfeited shares, the Committee can determine to
award such dividends to any Recipient or Recipients under the Plan, to any other
employee or director of the Bank, or can return such dividends to the Bank.
6.07 Voting of Restricted Shares. After an Award has been granted, the
Recipient as conditional owner of the Restricted Stock shall have the right to
vote such shares.
6.08 Delivery of Earned Shares. At the expiration of the restrictions
imposed by Section 6.01, the Escrow Agent shall redeliver to the Recipient (or
where the relevant provision of Section 6.02 applies in the case of a deceased
Recipient, to his Beneficiary) the certificate(s) and any remaining stock power
deposited with it pursuant to Section 5.03 and the shares represented by such
certificate(s) shall be free of the restrictions referred to Section 6.01.
7. Adjustments upon Changes in Capitalization
In the event of any change in the outstanding shares subsequent to the
Effective Date by reason of any reorganization, recapitalization, stock split,
stock dividend, combination or exchange of shares, merger, consolidation or any
change in the corporate structure or shares of the Bank, the maximum aggregate
number and class of shares as to which Awards may be granted under the Plan
shall be appropriately adjusted by the Committee, whose determination shall be
conclusive. Any shares of stock or other securities received, as a result of
any of the foregoing, by a Recipient with respect to Restricted Stock shall be
subject to the same restrictions and the certificate(s) or other instruments
representing or evidencing such shares or securities shall be legended and
deposited with the Escrow Agent in the manner provided in Section 6.05.
8. Assignments and Transfers
No Award nor any right or interest of a Recipient under the Plan in
any instrument evidencing any Award under the Plan may be assigned, encumbered
or transferred (within the meaning of Code Section 83) except, in the event of
the death of a Recipient, by will or the laws of descent and distribution until
such Award is earned.
9. Key Employee Rights under the Plan
No Key Employee shall have a right to be selected as a Recipient nor,
having been so selected, to be selected again as a Recipient and no Key Employee
or other person shall have any claim or right to be granted an Award under the
Plan or under any other incentive or similar plan of the Bank or any Affiliate.
Neither the Plan nor any action taken thereunder shall be construed as giving
any Key Employee any right to be retained in the employ of the Bank or any
Affiliate.
10. Outside Director Rights under the Plan
Neither the Plan nor any action taken thereunder shall be construed as
giving any Outside Director any right to be retained in the service of the Bank
or any Affiliate.
11. Withholding Tax
Upon the termination of the Restricted Period with respect to any
shares of Restricted Stock (or at any such earlier time, if any, that an
election is made by the Recipient under Section 83(b) of the Code, or any
successor provision thereto, to include the value of such shares in taxable
income), the Bank or the Company shall have the right to require the Recipient
or other person receiving such shares to pay the Bank or the Company the amount
of any taxes
B-7
<PAGE>
that the Bank or the Company is required to withhold with respect to such
shares, or, in lieu thereof, to retain or sell without notice, a sufficient
number of shares held by it to cover the amount required to be withheld. The
Bank or the Company shall have the right to deduct from all dividends paid with
respect to shares of Restricted Stock the amount of any taxes which the Bank or
the Company is required to withhold with respect to such dividend payments.
12. Amendment or Termination
The Board of the Bank may amend, suspend or terminate the Plan or any
portion thereof at any time, provided, however, that no such amendment,
suspension or termination shall impair the rights of any Recipient, without his
consent, in any Award theretofore made pursuant to the Plan. Any amendment or
modification of the Plan or an outstanding Award under the Plan, including but
not limited to the acceleration of vesting of an outstanding Award for reasons
other than death, Disability, Normal Retirement or termination following a
Change in Control, shall be approved by the Committee, or the full Board of the
Bank.
13. Governing Law
The Plan shall be governed by the laws of the State of New York.
14. Term of Plan
The Plan shall become effective on the date of, or a date determined
by the Board of Directors following, approval of the Plan by the Bank's
stockholders. It shall continue in effect until the earlier of (i) fifteen
years from the Effective Date unless sooner terminated under Section 12 hereof,
or (ii) the date on which all shares of Common Stock available for award
hereunder, have vested in the Recipients of such Awards.
IN WITNESS WHEREOF, the Bank has caused the Plan to be executed by its
duly authorized officers and the corporate seal to be affixed and duly attested,
as of the ____ day of _________, 1997.
Date Approved by Shareholders:
------------
Effective Date:
------------
ATTEST: OSWEGO CITY SAVINGS BANK
- --------------------- -----------------------------------------
Secretary Executive Officer
B-8
<PAGE>
APPENDIX C
OSWEGO CITY SAVINGS BANK
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION, dated January 14, 1997, is
by and between OSWEGO CITY SAVINGS BANK, a New York chartered stock savings bank
(the "Bank"); PATHFINDER BANCORP, a Delaware corporation (in formation) (the
"Stock Holding Company"); and OSWEGO CITY INTERIM SAVINGS BANK, a to-be-formed
interim New York stock savings bank ("Interim").
The parties hereto desire to enter into an Agreement and Plan of
Reorganization whereby the corporate structure of the Bank will be reorganized
into the stock holding company form of ownership. The result of such
reorganization will be that immediately after the Effective Date (as defined in
Article V below), all of the issued and outstanding shares of common stock, par
value $1.00 per share, of the Bank will be held by the Stock Holding Company,
and the holders of the issued and outstanding shares of common stock of the Bank
will become the holders of the issued and outstanding shares of common stock of
the Stock Holding Company.
The reorganization of the Bank will be accomplished by the following
steps: (1) the formation of the Stock Holding Company as a wholly owned
subsidiary of the Bank; (2) the formation of an interim New York stock savings
bank ("Interim"), which will be wholly owned by the Stock Holding Company; and
(3) the merger of Interim into the Bank, with the Bank as the surviving
corporation. Pursuant to such merger: (i) each of the issued and outstanding
shares of common stock of the Bank will be converted by operation of law into an
equal number of issued and outstanding shares of common stock of the Stock
Holding Company; (ii) each of the issued and outstanding shares of common stock
of Interim will be converted automatically by operation of law into an equal
number of issued and outstanding shares of common stock of the Bank; and (iii)
the shares of common stock of the Stock Holding Company held by the Bank will be
canceled.
NOW, THEREFORE, in order to consummate this Agreement and Plan of
Reorganization, and in consideration of the mutual covenants herein set forth,
the parties agree as follows:
ARTICLE I
MERGER OF INTERIM INTO
THE BANK AND RELATED MATTERS
----------------------------
1.1 On the Effective Date, Interim will be merged with and into the
Bank (the "Merger") and the separate existence of Interim shall cease, and all
assets and property (real, personal and mixed, tangible and intangible, choses
in action, rights and credits) then owned by Interim, or which would inure to
it, shall immediately and automatically, by operation of law and without any
conveyance, transfer, or further action, become the property of the Bank. The
Bank shall be deemed to be a continuation of Interim, and the Bank shall succeed
to the rights and obligations of Interim.
1.2 Following the Merger, the existence of the Bank shall continue
unaffected and unimpaired by the Merger, with all the rights, privileges,
immunities and powers, and subject to all the duties and liabilities, of a
savings bank organized under New York law. The Organization Certificate (the
"Charter") and Bylaws of the Bank, as presently in effect, shall continue in
full force and effect and shall not be changed in any manner whatsoever by the
Merger.
<PAGE>
1.3 From and after the Effective Date, and subject to the actions of
the Board of Directors of the Bank, the business presently conducted by the Bank
(whether directly or through its subsidiaries) will continue to be conducted by
it, as a wholly owned subsidiary of Stock Holding Company, and the present
directors and officers of the Bank will continue in their present positions. The
home office and branch offices of the Bank in existence immediately prior to the
Effective Date shall continue to be the home office and branch offices,
respectively, of the Bank from and after the Effective Date.
ARTICLE II
CONVERSION OF STOCK
-------------------
2.1 The terms and conditions of the Merger, the mode of carrying the
same into effect, and the manner and basis of converting the common stock of the
Bank into common stock of the Stock Holding Company pursuant to this Agreement
shall be as follows:
A. On the Effective Date, each share of common stock, par value
$1.00 per share, of the Bank issued and outstanding immediately prior to the
Effective Date shall automatically by operation of law be converted into and
shall become one share of common stock, par value $0.10 per share, of the Stock
Holding Company (the "Stock Holding Company Common Stock"). Each share of common
stock of Interim issued and outstanding immediately prior to the Effective Date
shall, on the Effective Date, automatically by operation of law be converted
into and become one share of common stock, $.10 par value per share, of the Bank
and shall not be further converted into shares of the Stock Holding Company, so
that from and after the Effective Date all of the issued and outstanding shares
of common stock of the Bank shall be held by the Stock Holding Company.
B. On the Effective Date, any stock based benefit plans of the
Bank (the "Benefit Plans") in effect at the Effective Date shall automatically,
by operation of law, be continued as Benefit Plans of the Bank and/or the Stock
Holding Company. Each option to purchase shares of the Bank common stock under
the Bank's stock option plan outstanding at that time will be automatically
converted into an identical option, with identical price, terms and conditions,
to purchase an identical number of shares of Stock Holding Company Common Stock
in lieu of shares of the Bank common stock. The Stock Holding Company and the
Bank may make appropriate amendments to the Benefit Plans to reflect the
adoption of the Benefit Plans as the plans of the Stock Holding Company, without
adverse effect on the Benefit Plans and their participants.
C. From and after the Effective Date, each holder of an
outstanding certificate or certificates that, prior thereto, represented shares
of the Bank common stock, shall, upon surrender of the same to the designated
agent of the Bank, be entitled to receive in exchange therefor a certificate or
certificates representing the number of whole shares of Stock Holding Company
Common Stock into which the shares theretofore represented by the certificate or
certificates so surrendered shall have been converted, as provided in the
foregoing provisions of this Section 2.1. Until so surrendered, each such
outstanding certificate which, prior to the Effective Date, represented shares
of the Bank common stock shall be automatically deemed for all purposes to
evidence the ownership of the equal number of whole shares of Stock Holding
Company Common Stock. Former holders of shares of the Bank common stock will not
be required to exchange their the Bank common stock certificates for new
certificates evidencing the same number of shares of Stock Holding Company
Common Stock. If in the future the Stock Holding Company determines to effect an
exchange of stock certificates, instructions will be sent to all holders of
record of Stock Holding Company Common Stock.
2
<PAGE>
D. All shares of Stock Holding Company Common Stock into which
shares of the Bank common stock shall have been converted pursuant to this
Article II shall be deemed to have been issued in full satisfaction of all
rights pertaining to such converted shares.
E. On the Effective Date, the holders of certificates formerly
representing the Bank common stock outstanding on the Effective Date shall cease
to have any rights with respect to the common stock of the Bank, and their sole
rights shall be with respect to the Stock Holding Company Common Stock into
which their shares of the Bank common stock shall have been converted by the
Merger.
ARTICLE III
CONDITIONS
----------
3.1 The obligations of the Bank, Stock Holding Company and Interim to
effect the Merger and otherwise consummate the transactions which are the
subject matter hereof shall be subject to satisfaction of the following
conditions:
A. To the extent required by applicable law, rules, and
regulations, the holders of the outstanding shares of the Bank common stock
shall, at a meeting of the stockholders of the Bank duly called, have approved
this Agreement by the necessary required affirmative vote (under state law) of
the outstanding shares of the Bank common stock.
B. Any and all approvals from the Federal Reserve Board (the
"FRB"), the Securities and Exchange Commission and any other state or federal
governmental agency having jurisdiction necessary for the lawful consummation of
the Merger and the issuance and delivery of Stock Holding Company Common Stock
as contemplated by this Agreement shall have been obtained.
C. The Bank shall have received either (i) a ruling from the
Internal Revenue Service or (ii) an opinion from its legal counsel, to the
effect that the Merger will be treated as a non-taxable transaction under
applicable provisions of the Internal Revenue Code of 1986, as amended, and that
no gain or loss will be recognized by the stockholders of the Bank upon the
exchange of the Bank common stock held by them solely for Stock Holding Company
Common Stock.
ARTICLE IV
TERMINATION
-----------
4.1 This Agreement may be terminated at the election of any of the
parties hereto if any one or more of the conditions to the obligations of any of
them hereunder shall not have been satisfied and shall have become incapable of
fulfillment and shall not be waived. This Agreement may also be terminated at
any time prior to the Effective Date by the mutual consent of the respective
Boards of Directors of the parties.
4.2 In the event of the termination of this Agreement pursuant to any
of the foregoing provisions, no party shall have any further liability or
obligation of any nature to any other party under this Agreement.
3
<PAGE>
ARTICLE V
EFFECTIVE DATE OF MERGER
------------------------
Upon satisfaction or waiver (in accordance with the provisions of this
Agreement) of each of the conditions set forth in Article III, the parties
hereto shall execute and cause to be filed the Merger Agreement and such
certificates or further documents as shall be required by New York law to be
filed with the New York Banking Department or the New York Secretary of State.
Upon approval and filing of the Merger Agreement by the Superintendent of Banks
and the approval by the Superintendent of Banks of the Plan of Reorganization
under New York law, the Merger and other transactions contemplated by this
Agreement shall become effective.
ARTICLE VI
MISCELLANEOUS
-------------
6.1 Any of the terms or conditions of this Agreement, which may
legally be waived, may be waived at any time by any party hereto that is
entitled to the benefit thereof, or any of such terms or conditions may be
amended or modified in whole or in part at any time, to the extent authorized by
applicable law, by an agreement in writing, executed in the same manner as this
Agreement.
6.2 Any of the terms or conditions of this Agreement may be amended
or modified in whole or in part at any time, to the extent permitted by
applicable law, rules, and regulations, by an amendment in writing, provided
that any such amendment or modification is not materially adverse to the Bank,
the Stock Holding Company or their stockholders. In the event that any
governmental agency requests or requires that the transactions contemplated
herein be modified in any respect as a condition of providing a necessary
regulatory approval or favorable ruling, or that in the opinion of counsel such
modification is necessary to obtain such approval or ruling, this Agreement may
be modified, at any time before or after adoption thereof by the stockholders of
the Bank, by an instrument in writing, provided that the effect of such
amendment would not be materially adverse to the Bank, the Stock Holding Company
or their stockholders.
6.3 This Agreement shall be governed by and construed under the laws
of the State of New York.
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement and Plan of Reorganization as of the date first above written.
OSWEGO CITY SAVINGS BANK
By:/s/ Chris C. Gagas
----------------------------------------
Chris C. Gagas
President and Chief Executive Officer
PATHFINDER BANCORP
By:/s/ Chris C. Gagas
----------------------------------------
Chris C. Gagas
President and Chief Executive Officer
OSWEGO CITY INTERIM SAVINGS BANK
(information)
By:/s/ Chris C. Gagas
----------------------------------------
Chris C. Gagas
President and Chief Executive Officer
<PAGE>
APPENDIX D
(S) 6022. Procedure to enforce stockholder's right to receive
payment for shares
1. A stockholder intending to enforce his right under a section of
this chapter to receive payment for his shares if the proposed corporate action
referred to therein is taken shall file with the corporation, before the meeting
of stockholders at which the action is submitted to a vote, or at such meeting
but before the vote, written objection to the action. The objection shall
include a statement that he intends to demand payment for his shares if the
action is taken. Such objection is not required from any stockholder to whom the
corporation did not give notice of such meeting in accordance with this chapter
or where the proposed action is authorized by written consent of stockholders
without a meeting.
2. Within ten days after the stockholders' authorization date, which
term as used in this section means the date on which the stockholders' vote
authorizing such action was taken, or the date on which such consent without a
meeting was obtained from the requisite stockholders, the corporation shall give
written notice of such authorization or consent by registered mail to each
stockholder who filed written objection or from whom written objection was not
required, excepting any who voted for or consented in writing to the proposed
action.
3. Within twenty days after the giving of notice to him, any
stockholder to whom the corporation was required to give such notice and who
elects to dissent shall file with the corporation a written notice of such
election, stating his name and residence address, the number and classes of
shares as to which he dissents and a demand for payment of the fair value of his
shares.
4. A stockholder may not dissent as to less than all of the shares,
held by him of record, that he owns beneficially. A nominee or fiduciary may not
dissent on behalf of any beneficial owner as to less than all of the shares of
such owner held of record by such nominee or fiduciary.
5. Upon filing a notice of election to dissent, the stockholder
shall cease to have any of the rights of a stockholder except the right to be
paid the fair value of his shares and any other rights under this section.
Withdrawal of a notice of election shall require the written consent of the
corporation. If a notice of election is withdrawn, or the proposed corporate
action is abandoned or rescinded, or a court shall determine that the
stockholder is not entitled to receive payment for his shares, or the
stockholder shall otherwise lose his dissenter's rights, he shall not have the
right to receive payment for his shares and he shall be reinstated to all his
rights as a stockholder as of the filing of his notice of election, including
any intervening preemptive rights and the right to payment of any intervening
dividend or other distribution or, if any such rights have expired or any such
dividend or distribution other than in cash has been completed, in lieu thereof,
at the election of the corporation, the fair value thereof in cash as determined
by the board as of the time of such expiration or completion, but without
prejudice otherwise to any corporate proceedings that may have been taken in the
interim.
6. At the time of filing the notice of election to dissent or within
one month thereafter the stockholder shall submit the certificates representing
his shares to the corporation, or to its transfer agent, which shall forthwith
note conspicuously thereon that a notice of election has been filed and shall
return the certificates to the stockholder or other person who submitted them on
his behalf. Any stockholder who fails to submit his certificates for such
notation as herein specified shall, at the option of the corporation exercised
by written notice to him within fortyfive days from the date of filing of such
notice of election to dissent, lose his dissenter's rights unless a court, for
good cause shown, shall otherwise direct. Upon transfer of a certificate bearing
such notation, each new certificate issued therefor shall bear a similar
notation together with the name of the original dis-
<PAGE>
senting holder of the shares and a transferee shall acquire no rights in the
corporation except those which the original dissenting stockholder had after
filing his notice of election.
7. Within seven days after the expiration of the period within which
stockholders may file their notices of election to dissent, or within seven days
after the proposed corporate action is consummated, whichever is later, the
corporation or, in the case of a merger, the receiving corporation, shall make a
written offer by registered mail to each stockholder who has filed such notice
of election to pay for his shares at a specified price which the corporation
considers to be their fair value. Such offer shall be made at the same price per
share to all dissenting stockholders of the same class, or if divided into
series, of the same series and shall be accompanied by a balance sheet of the
corporation whose shares the dissenting stockholder holds as of the latest
available date, which shall not be earlier than twelve months before the making
of such offer, and a profit and loss statement or statements for not less than a
twelve month period ended on the date of such balance sheet or, if the
corporation was not in existence throughout such twelve month period, for the
portion thereof during which it was in existence. If within thirty days after
the making of such offer, the corporation making the offer and any stockholder
agree upon the price to be paid for his shares, payment therefor shall be made
within sixty days after the making of such offer upon the surrender of the
certificates representing such shares.
8. The following procedure shall apply if the corporation fails to
make such offer within such period of seven days, or if it makes the offer and
any dissenting stockholder or stockholders fail to agree with it within the
period of thirty days thereafter upon the price to be paid for their shares:
(a) The corporation or, in the case of a merger, the receiving
corporation shall, within twenty days after the expiration of whichever is
applicable of the two periods last mentioned, institute a special proceeding in
the supreme court in the judicial district in which the office of the
corporation is located to determine the rights of dissenting stockholders and to
fix the fair value of their shares.
(b) If the corporation fails to institute such proceeding within such
period of twenty days, any dissenting stockholder may institute such proceeding
for the same purpose not later than thirty days after the expiration of such
twenty day period. If such proceeding is not instituted within such thirty day
period, all dissenter's rights shall be lost unless the supreme court, for good
cause shown, shall otherwise direct.
(c) All dissenting stockholders, excepting those who, as provided in
subdivision seven, have agreed with the corporation upon the price to be paid
for their shares, shall be made parties to such proceeding, which shall have the
effect of an action quasi in rem against their shares. The corporation shall
serve a copy of the petition in such proceeding upon each dissenting stockholder
who is a resident of this state in the manner provided by law for the service of
a summons, and Upon each nonresident dissenting stockholder either by registered
mail and publication, or in such other manner as is permitted by law. The
jurisdiction of the court shall be plenary and exclusive.
(d) The court shall determine whether each dissenting stockholder, as
to whom the corporation requests the court to make such determination, is
entitled to receive payment for his shares. If the corporation does not request
any such determination or if the court finds that any dissenting stockholder is
so entitled, it shall proceed to fix the value of the shares, which, for the
purpose of this section, shall be the fair value as of the close of business on
the day prior to the stockholders' authorization date, excluding any
appreciation or depreciation directly or indirectly
2
<PAGE>
induced by such corporate action or its proposal. The court may, if it so
elects, appoint an appraiser to receive evidence and recommend a decision on the
question of fair value. Such appraiser shall have the power, authority and
duties specified in the order appointing him, or any amendment thereof.
(e) The final order in the proceeding shall be entered against the
corporation in favor of each dissenting stockholder who is a party to the
proceeding and is entitled thereto for the value of his shares so determined.
(f) The final order shall include an allowance for interest at such
rate as the court finds to be equitable, from the stockholders' authorization
date to the date of payment. If the court finds that the refusal of any
stockholder to accept the corporate over of payment for his shares was
arbitrary, vexatious or otherwise not in good faith, no interest shall be
allowed to him.
(g) The costs and expenses of such proceeding shall be determined by
the court and shall be assessed against the corporation, or, in the case of a
merger, the receiving corporation, except that all or any part of such costs and
expenses may be apportioned and assessed, as the court may determine, against
any or all of the dissenting stockholders who are parties to the proceeding if
the court finds that their refusal to accept the corporate offer was arbitrary,
vexatious or otherwise not in good faith. Such expenses shall include reasonable
compensation for and the reasonable expenses of the appraiser, but shall exclude
the fees and expenses of counsel for and experts employed by any party unless
the court, in its discretion, awards such fees and expenses. In exercising such
discretion, the court shall consider any of the following: (A) that the fair
value of the shares as determined materially exceeds the amount which such
corporation offered to pay; (B) that no offer was made by such corporation; and
(C) that such corporation failed to institute the special proceeding within the
period specified therefor.
(h) Within sixty days after final determination of the proceeding,
the corporation or, in the case of a merger, the receiving corporation shall pay
to each dissenting stockholder the amount found to be due him, upon surrender of
the certificates representing his shares.
9. Shares acquired by the corporation upon the payment of the agreed
value therefor or of the amount due under the final order, as provided in this
section, shall be dealt with as provided in section five thousand fourteen,
except that, in the case of a merger, they shall be disposed of as provided in
the plan of merger or consolidation.
10. The enforcement by a stockholder of his right to receive payment
for his shares in the manner provided herein shall exclude the enforcement by
such stockholder of any other right to which he might otherwise be entitled by
virtue of share ownership, except as provided in subdivision five, and except
that this section shall not exclude the right of such stockholder to bring or
maintain an appropriate action to obtain relief on the ground that such
corporate action will be or is illegal or fraudulent as to him.
11. Except as otherwise expressly provided in this section, any
notice to be given by a corporation to a stockholder under this section shall be
given in the manner provided in section six thousand five.
Added L.1964, c. 849, g Jeff. Sept. 1, 1964.
3
<PAGE>
APPENDIX E
CERTIFICATE OF INCORPORATION
OF
PATHFINDER BANCORP, INC.
FIRST: The name of the Corporation is Pathfinder Bancorp, Inc. (hereinafter
-----
referred to as the "Corporation").
SECOND: The address of the registered office of the Corporation in the
------
State of Delaware is Corporation Trust Center, 1209 Orange Street, in the City
of Wilmington, County of New Castle. The name of the registered agent at that
address is The Corporation Trust Company.
THIRD: The purpose of the Corporation is to engage in any lawful act or
-----
activity for which a corporation may be organized under the General Corporation
Law of Delaware.
FOURTH:
------
A. The total number of shares of all classes of stock which the
Corporation shall have authority to issue is six million (6,000,000) all of
which consists of shares of Common Stock, par value ten cents ($.10) per share
(the "Common Stock").
B. 1. Notwithstanding any other provision of this Certificate of
Incorporation, in no event shall any record owner of any outstanding Common
Stock which is beneficially owned, directly or indirectly, by a person who, as
of any record date for the determination of stockholders entitled to vote on any
matter, beneficially owns in excess of 10% of the then-outstanding shares of
Common Stock (the "Limit"), be entitled, or permitted to any vote in respect of
the shares held in excess of the Limit. The Limit shall not be applicable to
shares held by Pathfinder Bancorp, M.H.C. The number of votes which may be cast
by any record owner by virtue of the provisions hereof in respect of Common
Stock beneficially owned by such person owning shares in excess of the Limit
shall be a number equal to the total number of votes which a single record owner
of all Common Stock owned by such person would be entitled to cast, multiplied
by a fraction, the numerator of which is the number of shares of such class or
series which are both beneficially owned by such person and owned of record by
such record owner and the denominator of which is the total number of shares of
Common Stock beneficially owned by such person owning shares in excess of the
Limit.
2. The following definitions shall apply to this Section B of this
Article FOURTH:
(a) "Affiliate" shall have the meaning ascribed to it in Rule
12b-2 of the General Rules and Regulations under the
Securities Act of 1934, as in effect on the date of filing of
this Certificate of Incorporation. However, the term
Affiliate shall not include Pathfinder Bancorp, M.H.C.
(b) "Beneficial ownership" shall be determined pursuant to Rule
13d-3 of the General Rules and Regulations under the
Securities Exchange Act of 1934 (or any successor rule or
statutory provision), or, if said Rule 13d-3 shall be
rescinded and there shall be no successor rule or statutory
provision thereto, pursuant to said Rule 13d-3 as in effect
on the date of filing of this Certificate of Incorporation;
provided, however, that a person shall, in any event, also be
deemed the "beneficial owner" of any Common Stock:
<PAGE>
(1) which such person or any of its affiliates beneficially
owns, directly or indirectly; or
(2) which such person or any of its affiliates has (i) the
right to acquire (whether such right is exercisable
immediately or only after the passage of time), pursuant
to any agreement, arrangement or understanding (but
shall not be deemed to be the beneficial owner of any
voting shares solely by reason of an agreement,
contract, or other arrangement with this Corporation to
effect any transaction which is described in any one or
more of clauses of Section A of Article EIGHTH) or upon
the exercise of conversion rights, exchange rights,
warrants, or options or otherwise, or (ii) sole or
shared voting or investment power with respect thereto
pursuant to any agreement, arrangement, understanding,
relationship or otherwise (but shall not be deemed to be
the beneficial owner of any voting shares solely by
reason of a revocable proxy granted for a particular
meeting of stockholders, pursuant to a public
solicitation of proxies for such meeting, with respect
to shares of which neither such person nor any such
affiliate is otherwise deemed the beneficial owner); or
(3) which are beneficially owned, directly or indirectly, by
any other person with which such first mentioned person
or any of its affiliates acts as a partnership, limited
partnership, syndicate or other group pursuant to any
agreement, arrangement or understanding for the purpose
of acquiring, holding, voting or disposing of any shares
of capital stock of this Corporation;
and provided further, however, that (1) no Director or
Officer of this Corporation (or any affiliate of any such
Director or Officer) shall, solely by reason of any or all of
such Directors or Officers acting in their capacities as
such, be deemed, for any purposes hereof, to beneficially own
any Common Stock beneficially owned by another such Director
or Officer (or any affiliate thereof), and (2) neither any
employee stock ownership plan or similar plan of this
Corporation or any subsidiary of this Corporation, nor any
trustee with respect thereto or any affiliate of such trustee
(solely by reason of such capacity of such trustee), shall be
deemed, for any purposes hereof, to beneficially own any
Common Stock held under any such plan. For purposes of
computing the percentage beneficial ownership of Common Stock
of a person the outstanding Common Stock shall include shares
deemed owned by such person through application of this
subsection but shall not include any other Common Stock which
may be issuable by this Corporation pursuant to any
agreement, or upon exercise of conversion rights, warrants or
options, or otherwise. For all other purposes, the
outstanding Common Stock shall include only Common Stock then
outstanding and shall not include any Common Stock which may
be issuable by this Corporation pursuant to any agreement, or
upon the exercise of conversion rights, warrants or options,
or otherwise.
(c) A "person" shall mean any individual, firm, corporation, or
other entity.
3. The Board of Directors shall have the power to construe and apply
the provisions of this section and to make all determinations necessary or
desirable to implement such provisions, including but not limited to matters
with respect to (i) the number of shares of Common Stock beneficially owned
2
<PAGE>
by any person, (ii) whether a person is an affiliate of another, (iii) whether a
person has an agreement, arrangement, or understanding with another as to the
matters referred to in the definition of beneficial ownership, (iv) the
application of any other definition or operative provision of the section to the
given facts, or (v) any other matter relating to the applicability or effect of
this section.
4. The Board of Directors shall have the right to demand that any
person who is reasonably believed to beneficially own Common Stock in excess of
the Limit (or holds of record Common Stock beneficially owned by any person in
excess of the Limit) supply the Corporation with complete information as to (i)
the record owner(s) of all shares beneficially owned by such person who is
reasonably believed to own shares in excess of the Limit, (ii) any other factual
matter relating to the applicability or effect of this section as may reasonably
be requested of such person.
5. Except as otherwise provided by law or expressly provided in this
section, the presence, in person or by proxy, of the holders of record of shares
of capital stock of the Corporation entitling the holders thereof to cast a
majority of the votes (after giving effect, if required, to the provisions of
this section) entitled to be cast by the holders of shares of capital stock of
the Corporation entitled to vote shall constitute a quorum at all meetings of
the stockholders, and every reference in this Certificate of Incorporation to a
majority or other proportion of capital stock (or the holders thereof) for
purposes of determining any quorum requirement or any requirement for
stockholder consent or approval shall be deemed to refer to such majority or
other proportion of the votes (or the holders thereof) then entitled to be cast
in respect of such capital stock.
6. Any constructions, applications, or determinations made by the
Board of Directors pursuant to this section in good faith and on the basis of
such information and assistance as was then reasonably available for such
purpose shall be conclusive and binding upon the Corporation and its
stockholders.
7. In the event any provision (or portion thereof) of this section
shall be found to be invalid, prohibited or unenforceable for any reason, the
remaining provisions (or portions thereof) of this section shall remain in full
force and effect, and shall be construed as if such invalid, prohibited or
unenforceable provision had been stricken herefrom or otherwise rendered
inapplicable, it being the intent of this Corporation and its stockholders that
such remaining provision (or portion thereof) of this section remain, to the
fullest extent permitted by law, applicable and enforceable as to all
stockholders, including stockholders owning an amount of stock over the Limit,
notwithstanding any such finding.
FIFTH: The following provisions are inserted for the management of the
-----
business and the conduct of the affairs of the Corporation, and for further
definition, limitation and regulation of the powers of the Corporation and of
its Directors and stockholders:
A. The business and affairs of the Corporation shall be managed
by or under the direction of the Board of Directors. In addition to the
powers and authority expressly conferred upon them by statute or by this
Certificate of Incorporation or the Bylaws of the Corporation, the
Directors are hereby empowered to exercise all such powers and do all such
acts and things as may be exercised or done by the Corporation.
B. The Directors of the Corporation need not be elected by
written ballot unless the Bylaws so provide.
C. Any action required or permitted to be taken by the
stockholders of the Corporation must be effected at a duly called annual or
special meeting of stockholders of the Corporation and may not be effected
by any consent in writing by such stockholders.
3
<PAGE>
D. Special meetings of stockholders of the Corporation may be
called only by the Board of Directors pursuant to a resolution adopted by a
majority of the total number of authorized directorships (whether or not
there exist any vacancies in previously authorized directorships at the
time any such resolution is presented to the Board for adoption) (the
"Whole Board") or as otherwise provided in the Bylaws.
SIXTH:
-----
A. The number of Directors shall be fixed from time to time exclusively
by the Board of Directors pursuant to a resolution adopted by a majority of the
Whole Board. The Directors shall be divided into three classes, as nearly equal
in number as reasonably possible, with the term of office of the first class to
expire at the first annual meeting of stockholders, the term of office of the
second class to expire at the annual meeting of stockholders one year thereafter
and the term of office of the third class to expire at the annual meeting of
stockholders two years thereafter. At each annual meeting of stockholders
following such initial classification and election, Directors elected to succeed
those Directors whose terms expire shall be elected for a term of office to
expire at the third succeeding annual meeting of stockholders after their
election.
B. Newly created directorships resulting from any increase in the
authorized number of Directors or any vacancies in the Board of Directors
resulting from death, resignation, retirement, disqualification, removal from
office or other cause may be filled only by a majority vote of the Directors
then in office, though less than a quorum, and Directors so chosen shall hold
office for a term expiring at the annual meeting of stockholders at which the
term of office of the class to which they have been chosen expires. No decrease
in the number of Directors constituting the Board of Directors shall shorten the
term of any incumbent Director.
C. Advance notice of stockholder nominations for the election of
Directors and of business to be brought by stockholders before any meeting of
the stockholders of the Corporation shall be given in the manner provided in the
Bylaws of the Corporation.
D. Any Director, or the entire Board of Directors, may be removed from
office at any time, but only for cause and only by the affirmative vote of the
holders of at least 80 percent of the voting power of all of the then-
outstanding shares of capital stock of the Corporation entitled to vote
generally in the election of Directors (after giving effect to the provisions of
Article FOURTH of this Certificate of Incorporation ("Article FOURTH")), voting
together as a single class.
SEVENTH: The Board of Directors is expressly empowered to adopt, amend or
-------
repeal the Bylaws of the Corporation. Any adoption, amendment or repeal of the
Bylaws of the Corporation by the Board of Directors shall require the approval
of two-thirds of the Whole Board. The stockholders shall also have power to
adopt, amend or repeal the Bylaws of the Corporation; provided, however, that,
in addition to any vote of the holders of any class or series of stock of the
Corporation required by law or by this Certificate of Incorporation, the
affirmative vote of the holders of at least 80 percent of the voting power of
all of the then-outstanding shares of the capital stock of the Corporation
entitled to vote generally in the election of Directors (after giving effect to
the provisions of Article FOURTH), voting together as a single class, shall be
required to adopt, amend or repeal any provisions of the Bylaws of the
Corporation.
EIGHTH:
------
A. In addition to any affirmative vote required by law or this
Certificate of Incorporation, and except as otherwise expressly provided in this
section:
4
<PAGE>
1. any merger or consolidation of the Corporation or any Subsidiary
(as hereinafter defined) with (i) any Interested Stockholder (as
hereinafter defined) or (ii) any other corporation (whether or not itself
an Interested Stockholder) which is, or after such merger or consolidation
would be, an Affiliate (as hereinafter defined) of an Interested
Stockholder; or
2. any sale, lease, exchange, mortgage, pledge, transfer or other
disposition (in one transaction or a series of transactions) to or with any
Interested Stockholder, or any Affiliate of any Interested Stockholder, of
any assets of the Corporation or any Subsidiary having an aggregate Fair
Market Value (as hereinafter defined) equaling or exceeding 25% or more of
the combined assets of the Corporation and its Subsidiaries; or
3. the issuance or transfer by the Corporation or any Subsidiary (in
one transaction or a series of transactions) of any securities of the
Corporation or any Subsidiary to any Interested Stockholder or any
Affiliate of any Interested Stockholder in exchange for cash, securities or
other property (or a combination thereof) having an aggregate Fair Market
Value (as hereinafter defined) equaling or exceeding 25% of the combined
Fair Market Value of the then-outstanding common stock of the Corporation
and its Subsidiaries, except pursuant to an employee benefit plan of the
Corporation or any Subsidiary thereof; or
4. the adoption of any plan or proposal for the liquidation or
dissolution of the Corporation proposed by or on behalf of an Interested
Stockholder or any Affiliate of an Interested Stockholder; or
5. any reclassification of securities (including any reverse stock
split), or recapitalization of the Corporation, or any merger or
consolidation of the Corporation with any of its Subsidiaries or any other
transaction (whether or not with or into or otherwise involving an
Interested Stockholder) which has the effect, directly or indirectly, of
increasing the proportional share of the outstanding shares of any class of
equity or convertible securities of the Corporation or any Subsidiary which
is directly or indirectly owned by an Interested Stockholder or any
Affiliate of an Interested Stockholder;
shall require the affirmative vote of the holders of at least 80% of the voting
power of the then-outstanding shares of stock of the Corporation entitled to
vote in the election of Directors (the "Voting Stock") (after giving effect to
the provision of Article FOURTH), voting together as a single class. Such
affirmative vote shall be required notwithstanding the fact that no vote may be
required, or that a lesser percentage may be specified, by law or by any other
provisions of this Certificate of Incorporation or in any agreement with any
national securities exchange or otherwise.
The term "Business Combination" as used in this Article EIGHTH shall mean
any transaction which is referred to in any one or more of paragraphs 1 through
5 of Section A of this Article EIGHTH.
B. The provisions of Section A of this Article EIGHTH shall not be
applicable to any particular Business Combination, and such Business Combination
shall require only the affirmative vote of the majority of the outstanding
shares of capital stock entitled to vote, or such vote as is required by law or
by this Certificate of Incorporation, if, in the case of any Business
Combination that does not involve any cash or other consideration being received
by the stockholders of the Corporation solely in their capacity as stockholders
of the Corporation, the condition specified in the following paragraph 1 is met
or, in the case of any other Business Combination, all of the conditions
specified in either of the following paragraphs 1 or 2 are met:
5
<PAGE>
1. The Business Combination shall have been approved by two-thirds of
the Disinterested Directors (as hereinafter defined).
2. All of the following conditions shall have been met:
(a) The aggregate amount of the cash and the Fair Market Value as
of the date of the consummation of the Business Combination of
consideration other than cash to be received per share by the
holders of Common Stock in such Business Combination shall at
least be equal to the higher of the following:
(1) (if applicable) the Highest Per Share Price (as hereinafter
defined), including any brokerage commissions, transfer
taxes and soliciting dealers' fees, paid by the Interested
Stockholder or any of its Affiliates for any shares of
Common Stock acquired by it (i) within the two-year period
immediately prior to the first public announcement of the
proposal of the Business Combination (the "Announcement
Date"), or (ii) in the transaction in which it became an
Interested Stockholder, whichever is higher.
(2) the Fair Market Value per share of Common Stock on the
Announcement Date or on the date on which the Interested
Stockholder became an Interested Stockholder (such latter
date is referred to in this Article EIGHTH as the
"Determination Date"), whichever is higher.
(b) The aggregate amount of the cash and the Fair Market Value as
of the date of the consummation of the Business Combination of
consideration other than cash to be received per share by
holders of shares of any class of outstanding Voting Stock
other than Common Stock shall be at least equal to the highest
of the following (it being intended that the requirements of
this subparagraph (b) shall be required to be met with respect
to every such class of outstanding Voting Stock, whether or not
the Interested Stockholder has previously acquired any shares
of a particular class of Voting Stock):
(1) (if applicable) the Highest Per Share Price (as hereinafter
defined), including any brokerage commissions, transfer
taxes and soliciting dealers' fees, paid by the Interested
Stockholder for any shares of such class of Voting Stock
acquired by it (i) within the two-year period immediately
prior to the Announcement Date, or (ii) in the transaction
in which it became an Interested Stockholder, whichever is
higher;
(2) (if applicable) the highest preferential amount per share
to which the holders of shares of such class of Voting
Stock are entitled in the event of any voluntary or
involuntary liquidation, dissolution or winding up of the
Corporation; and
(3) the Fair Market Value per share of such class of Voting
Stock on the Announcement Date or on the Determination
Date, whichever is higher.
(c) The consideration to be received by holders of a particular
class of outstanding Voting Stock (including Common Stock)
shall be in cash or in the same form as the Interested
Stockholder has paid for shares of such class of Voting Stock.
If the
6
<PAGE>
Interested Stockholder has previously paid for shares of any
class of Voting Stock with varying forms of consideration, the
form of consideration to be received per share by holders of
shares of such class of Voting Stock shall be either cash or
the form used to acquire the largest number of shares of such
class of Voting Stock previously acquired by the Interested
Stockholder. The price determined in accordance with
subparagraph B.2 of this Article EIGHTH shall be subject to
appropriate adjustment in the event of any stock dividend,
stock split, combination of shares or similar event.
(d) After such Interested Stockholder has become an Interested
Stockholder and prior to the consummation of such Business
Combination: (1) except as approved by a majority of the
Disinterested Directors, there shall have been no failure to
declare and pay at the regular date therefor any full quarterly
dividends (whether or not cumulative) on any outstanding stock
having preference over the Common Stock as to dividends or
liquidation; (2) there shall have been (i) no reduction in the
annual rate of dividends paid on the Common Stock (except as
necessary to reflect any subdivision of the Common Stock),
except as approved by a majority of the Disinterested
Directors, and (ii) an increase in such annual rate of
dividends as necessary to reflect any reclassification
(including any reverse stock split), recapitalization,
reorganization or any similar transaction which has the effect
of reducing the number of outstanding shares of the Common
Stock, unless the failure to so increase such annual rate is
approved by a majority of the Disinterested Directors; and (3)
neither such Interested Stockholder or any of its Affiliates
shall have become the beneficial owner of any additional shares
of Voting Stock except as part of the transaction which results
in such Interested Stockholder becoming an Interested
Stockholder.
(e) After such Interested Stockholder has become an Interested
Stockholder, such Interested Stockholder shall not have
received the benefit, directly or indirectly (except
proportionately as a stockholder), of any loans, advances,
guarantees, pledges or other financial assistance or any tax
credits or other tax advantages provided by the Corporation,
whether in anticipation of or in connection with such Business
Combination or otherwise.
(f) A proxy or information statement describing the proposed
Business Combination and complying with the requirements of the
Securities Exchange Act of 1934 and the rules and regulations
thereunder (or any subsequent provisions replacing such Act,
rules or regulations) shall be mailed to stockholders of the
Corporation at least 30 days prior to the consummation of such
Business Combination (whether or not such proxy or information
statement is required to be mailed pursuant to such Act or
subsequent provisions).
C. For the purposes of this Article EIGHTH:
1. A "Person" shall include an individual, a group acting in concert,
a corporation, a partnership, an association, a joint venture, a pool, a
joint stock company, a trust, an unincorporated organization or similar
company, a syndicate or any other group formed for the purpose of
acquiring, holding or disposing of securities.
7
<PAGE>
2. "Interested Stockholder" shall mean any person (other than the
Corporation or any holding company or Subsidiary thereof) who or which:
(a) is the beneficial owner, directly or indirectly, of more than
10% of the voting power of the outstanding Voting Stock; or
(b) is an Affiliate of the Corporation and at any time within the
two-year period immediately prior to the date in question was the
beneficial owner, directly or indirectly, of 10% or more of the voting
power of the then-outstanding Voting Stock; or
(c) is an assignee of or has otherwise succeeded to any shares of
Voting Stock which were at any time within the two-year period
immediately prior to the date in question beneficially owned by an
Interested Stockholder, if such assignment or succession shall have
occurred in the course of a transaction or series of transactions not
involving a public offering within the meaning of the Securities Act of
1933.
3. For purposes of this Article EIGHTH, "beneficial ownership" shall
be determined in the manner provided in Section B of Article FOURTH hereof.
4. "Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations
under the Securities Exchange Act of 1934, as in effect on the date of
filing of this Certificate of Incorporation.
5. "Subsidiary" means any corporation of which a majority of any class
of equity security is owned, directly or indirectly, by the Corporation;
provided, however, that for the purposes of the definition of Interested
Stockholder set forth in paragraph 2 of this section, the term "Subsidiary"
shall mean only a corporation of which a majority of each class of equity
security is owned, directly or indirectly, by the Corporation.
6. "Disinterested Director" means any member of the Board of Directors
who is unaffiliated with the Interested Stockholder and was a member of the
Board of Directors prior to the time that the Interested Stockholder became
an Interested Stockholder, and any Director who is thereafter chosen to
fill any vacancy of the Board of Directors or who is elected and who, in
either event, is unaffiliated with the Interested Stockholder and in
connection with his or her initial assumption of office is recommended for
appointment or election by a majority of Disinterested Directors then on
the Board of Directors.
7. "Fair Market Value" means: (a) in the case of stock, the highest
closing sales price of the stock during the 30-day period immediately
preceding the date in question of a share of such stock on the National
Association of Securities Dealers Automated Quotation System or any system
then in use, or, if such stock is admitted to trading on a principal United
States securities exchange registered under the Securities Exchange Act of
1934, Fair Market Value shall be the highest sales price reported during
the 30-day period preceding the date in question, or, if no such quotations
are available, the Fair Market Value on the date in question of a share of
such stock as determined by the Board of Directors in good faith, in each
case with respect to any class of stock, appropriately adjusted for any
dividend or distribution in shares of such stock or any stock split or
reclassification of outstanding shares of such stock into a greater number
of shares of such stock or any combination or reclassification of
outstanding shares of such stock into a smaller number of shares of such
stock, and (b) in the case of property other than cash or stock, the Fair
Market
8
<PAGE>
Value of such property on the date in question as determined by the Board
of Directors in good faith.
8. Reference to "Highest Per Share Price" shall in each case with
respect to any class of stock reflect an appropriate adjustment for any
dividend or distribution in shares of such stock or any stock split or
reclassification of outstanding shares of such stock into a greater number
of shares of such stock or any combination or reclassification of
outstanding shares of such stock into a smaller number of shares of such
stock.
9. In the event of any Business Combination in which the Corporation
survives, the phrase "consideration other than cash to be received" as used
in subparagraphs (a) and (b) of paragraph 2 of Section B of this Article
EIGHTH shall include the shares of Common Stock and/or the shares of any
other class of outstanding Voting Stock retained by the holders of such
shares.
D. A majority of the Directors of the Corporation shall have the power
and duty to determine for the purposes of this Article EIGHTH, on the basis of
information known to them after reasonable inquiry (a) whether a person is an
Interested Stockholder; (b) the number of shares of Voting Stock beneficially
owned by any person; (c) whether a person is an Affiliate or Associate of
another; and (d) whether the assets which are the subject of any Business
Combination have, or the consideration to be received for the issuance or
transfer of securities by the Corporation or any Subsidiary in any Business
Combination has an aggregate Fair Market Value equaling or exceeding 25% of the
combined Fair Market Value of the Common Stock of the Corporation and its
Subsidiaries. A majority of the Directors shall have the further power to
interpret all of the terms and provisions of this Article EIGHTH.
E. Nothing contained in this Article EIGHTH shall be construed to relieve
any Interested Stockholder from any fiduciary obligation imposed by law.
F. Notwithstanding any other provisions of this Certificate of
Incorporation or any provision of law which might otherwise permit a lesser vote
or no vote, but in addition to any affirmative vote of the holders of any
particular class or series of the Voting Stock required by law, this Certificate
of Incorporation, the affirmative vote of the holders of at least 80 percent of
the voting power of all of the then-outstanding shares of the Voting Stock,
voting together as a single class, shall be required to alter, amend or repeal
this Article EIGHTH.
NINTH: The Board of Directors of the Corporation, when evaluating any
-----
offer of another Person (as defined in Article EIGHTH hereof) to (A) make a
tender or exchange offer for any equity security of the Corporation, (B) merge
or consolidate the Corporation with another corporation or entity or (C)
purchase or otherwise acquire all or substantially all of the properties and
assets of the Corporation, may, in connection with the exercise of its judgment
in determining what is in the best interest of the Corporation and its
stockholders, give due consideration to all relevant factors, including, without
limitation, the social and economic effect of acceptance of such offer on the
Corporation's present and future customers and employees and those of its
Subsidiaries (as defined in Article EIGHTH hereof); on the communities in which
the Corporation and its Subsidiaries operate or are located; on the ability of
the Corporation to fulfill its corporate objectives as a savings bank holding
company and on the ability of its subsidiary savings bank to fulfill the
objectives of a stock savings bank under applicable statutes and regulations.
TENTH:
-----
9
<PAGE>
A. Each person who was or is made a party or is threatened to be made a
party to or is otherwise involved in any action, suit or proceeding, whether
civil, criminal, administrative or investigative (hereinafter a "proceeding"),
by reason of the fact that he or she is or was a Director or an Officer of the
Corporation or is or was serving at the request of the Corporation as a
Director, Officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to an
employee benefit plan (hereinafter an "indemnitee"), whether the basis of such
proceeding is alleged action in an official capacity as a Director, Officer,
employee or agent or in any other capacity while serving as a Director, Officer,
employee or agent, shall be indemnified and held harmless by the Corporation to
the fullest extent authorized by the Delaware General Corporation Law, as the
same exists or may hereafter be amended (but, in the case of any such amendment,
only to the extent that such amendment permits the Corporation to provide
broader indemnification rights than such law permitted the Corporation to
provide prior to such amendment), against all expense, liability and loss
(including attorneys' fees, judgments, fines, ERISA excise taxes or penalties
and amounts paid in settlement) reasonably incurred or suffered by such
indemnitee in connection therewith; provided, however, that, except as provided
in Section C hereof with respect to proceedings to enforce rights to
indemnification, the Corporation shall indemnify any such indemnitee in
connection with a proceeding (or part thereof) initiated by such indemnitee only
if such proceeding (or part thereof) was authorized by the Board of Directors of
the Corporation.
B. The right to indemnification conferred in Section A of this Article
TENTH shall include the right to be paid by the Corporation the expenses
incurred in defending any such proceeding in advance of its final disposition
(hereinafter an "advancement of expenses"); provided, however, that, if the
Delaware General Corporation Law requires, an advancement of expenses incurred
by an indemnitee in his or her capacity as a Director of Officer (and not in any
other capacity in which service was or is rendered by such indemnitee,
including, without limitation, service to an employee benefit plan) shall be
made only upon delivery to the Corporation of an undertaking (hereinafter an
"undertaking"), by or on behalf of such indemnitee, to repay all amounts so
advanced if it shall ultimately be determined by final judicial decision from
which there is no further right to appeal (hereinafter a "final adjudication")
that such indemnitee is not entitled to be indemnified for such expenses under
this Section or otherwise. The rights to indemnification and to the advancement
of expenses conferred in Sections A and B of this Article TENTH shall be
contract rights and such rights shall continue as to an indemnitee who has
ceased to be a Director, Officer, employee or agent and shall inure to the
benefit of the indemnitee's heirs, executors and administrators.
C. If a claim under Section A or B of this Article TENTH is not paid in
full by the Corporation within sixty days after a written claim has been
received by the Corporation, except in the case of a claim for an advancement of
expenses, in which case the applicable period shall be twenty days, the
indemnitee may at any time thereafter bring suit against the Corporation to
recover the unpaid amount of the claim. If successful in whole or in part in
any such suit, or in a suit brought by the Corporation to recover an advancement
of expenses pursuant to the terms of an undertaking, the indemnitee shall be
entitled to be paid also the expense of prosecuting or defending such suit. In
(i) any suit brought by the indemnitee to enforce a right to indemnification
hereunder (but not in a suit brought by the indemnitee to enforce a right to an
advancement of expenses) it shall be a defense that, and (ii) in any suit by the
Corporation to recover an advancement of expenses pursuant to the terms of an
undertaking the Corporation shall be entitled to recover such expenses upon a
final adjudication that, the indemnitee has not met any applicable standard for
indemnification set forth in the Delaware General Corporation Law. Neither the
failure of the Corporation (including its Board of Directors, independent legal
counsel, or its stockholders) to have made a determination prior to the
commencement of such suit that indemnification of the indemnitee is proper in
the circumstances because the indemnitee has met the applicable standard of
conduct set forth in the Delaware General Corporation Law, nor an actual
determination by the
10
<PAGE>
Corporation (including its Board of Directors, independent legal counsel, or its
stockholders) that the indemnitee has not met such applicable standard of
conduct, shall create a presumption that the indemnitee has not met the
applicable standard of conduct or, in the case of such a suit brought by the
indemnitee, be a defense to such suit. In any suit brought by the indemnitee to
enforce a right to indemnification or to an advancement of expenses hereunder,
or by the Corporation to recover an advancement of expenses pursuant to the
terms of an undertaking, the burden of proving that the indemnitee is not
entitled to be indemnified, or to such advancement of expenses, under this
Article TENTH or otherwise shall be on the Corporation.
D. The rights to indemnification and to the advancement of expenses
conferred in this Article TENTH shall not be exclusive of any other right which
any person may have or hereafter acquire under any statute, the Corporation's
Certificate of Incorporation, Bylaws, agreement, vote of stockholders or
disinterested Directors or otherwise.
E. The Corporation may maintain insurance, at its expense, to protect
itself and any Director, Officer, employee or agent of the Corporation or
another corporation, partnership, joint venture, trust or other enterprise
against any expense, liability or loss, whether or not the Corporation would
have the power to indemnify such person against such expense, liability or loss
under the Delaware General Corporation Law.
F. The Corporation may, to the extent authorized from time to time by the
Board of Directors, grant rights to indemnification and to the advancement of
expenses to any employee or agent of the Corporation to the fullest extent of
the provisions of this Article TENTH with respect to the indemnification and
advancement of expenses of Directors and Officers of the Corporation.
ELEVENTH: A Director of this Corporation shall not be personally liable to
--------
the Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a Director, except for liability (i) for any breach of the Director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware General Corporation
Law, or (iv) for any transaction from which the Director derived an improper
personal benefit. If the Delaware General Corporation Law is amended to
authorize corporate action further eliminating or limiting the personal
liability of Directors, then the liability of a Director of the Corporation
shall be eliminated or limited to the fullest extent permitted by the Delaware
General Corporation Law, as so amended.
Any repeal or modification of the foregoing paragraph by the stockholders
of the Corporation shall not adversely affect any right or protection of a
Director of the Corporation existing at the time of such repeal or modification.
TWELFTH: The Corporation reserves the right to amend or repeal any
-------
provision contained in this Certificate of Incorporation in the manner
prescribed by the laws of the State of Delaware and all rights conferred upon
stockholders are granted subject to this reservation; provided, however, that,
notwithstanding any other provision of this Certificate of Incorporation or any
provision of law which might otherwise permit a lesser vote or no vote, but in
addition to any vote of the holders of any class or series of the stock of the
Corporation required by law or by this Certificate of Incorporation, the
affirmative vote of the holders of at least 80 percent of the voting power of
all of the then-outstanding shares of the capital stock of the Corporation
entitled to vote generally in the election of Directors (after giving effect to
the provisions of Article FOURTH), voting together as a single class, shall be
required to amend or repeal this Article TWELFTH, Section B of Article FOURTH,
Sections C or D of Article FIFTH, Article SIXTH, Article SEVENTH, Article EIGHTH
or Article TENTH.
11
<PAGE>
THIRTEENTH: The name and mailing address of the sole incorporator are as
----------
follows:
Name Mailing Address
---- ---------------
Edward A. Quint 5335 Wisconsin Avenue, N.W.
Suite 400
Washington, D.C. 20015
I, THE UNDERSIGNED, being the incorporator, for the purpose of forming a
corporation under the laws of the State of Delaware, do make, file and record
this Certificate of Incorporation, do certify that the facts herein stated are
true, and accordingly, have hereto set my hand this 5th day of August, 1997.
/s/ Edward A. Quint
----------------------
Edward A. Quint
Incorporator
12
<PAGE>
APPENDIX F
PATHFINDER BANCORP, INC.
BYLAWS
ARTICLE I - STOCKHOLDERS
--------- ------------
Section 1. Annual Meeting. An annual meeting of the stockholders, for the
election of Directors to succeed those whose terms expire and for the
transaction of such other business as may properly come before the meeting,
shall be held at such place, on such date, and at such time as the Board of
Directors shall each year fix, which date shall be within thirteen (13) months
subsequent to the later of the date of incorporation or the last annual meeting
of stockholders.
Section 2. Special Meetings. Subject to the rights of the holders of any
class or series of preferred stock of the Corporation, special meetings of
stockholders of the Corporation may be called by the Board of Directors pursuant
to a resolution adopted by a majority of the total number of Directors which the
Corporation would have if there were no vacancies on the Board of Directors
(hereinafter the "Whole Board").
Section 3. Notice of Meetings. Written notice of the place, date, and
time of all meetings of the stockholders shall be given, not less than ten (10)
nor more than sixty (60) days before the date on which the meeting is to be
held, to each stockholder entitled to vote at such meeting, except as otherwise
provided herein or required by law (meaning, here and hereinafter, as required
from time to time by the Delaware General Corporation Law or the Certificate of
Incorporation of the Corporation).
When a meeting is adjourned to another place, date or time, written notice
need not be given of the adjourned meeting if the place, date and time thereof
are announced at the meeting at which the adjournment is taken; provided,
however, that if the date of any adjourned meeting is more than thirty (30) days
after the date for which the meeting was originally noticed, or if a new record
date is fixed for the adjourned meeting, written notice of the place, date, and
time of the adjourned meeting shall be given in conformity herewith. At any
adjourned meeting, any business may be transacted which might have been
transacted at the original meeting.
Section 4. Quorum. At any meeting of the stockholders, the holders of a
majority of all of the shares of the stock entitled to vote at the meeting,
present in person or by proxy (after giving effect to the Article FOURTH of the
Corporation's Certificate of Incorporation), shall constitute a quorum for all
purposes, unless or except to the extent that the presence of a larger number
may be required by law. Where a separate vote by a class or classes is required,
a majority of the shares of such class or classes present in person or
represented by proxy shall constitute a quorum entitled to take action with
respect to that vote on that matter.
If a quorum shall fail to attend any meeting, the chairman of the meeting
or the holders of a majority of the shares of stock entitled to vote who are
present, in person or by proxy, may adjourn the meeting to another place, date,
or time.
If a notice of any adjourned special meeting of stockholders is sent to all
stockholders entitled to vote thereat, stating that it will be held with those
present constituting a quorum, then except as otherwise required by law, those
present at such adjourned meeting shall constitute a quorum, and all matters
shall be determined by a majority of the votes cast at such meeting.
<PAGE>
Section 5. Organization. Such person as the Board of Directors may have
designated or, in the absence of such a person, the Chairman of the Board of the
Corporation or, in his or her absence, the Chief Executive Officer or, in his or
her absence, such person as may be chosen by the holders of a majority of the
shares entitled to vote who are present, in person or by proxy, shall call to
order any meeting of the stockholders and act as chairman of the meeting. In the
absence of the Secretary of the Corporation, the secretary of the meeting shall
be such person as the chairman appoints.
Section 6. Conduct of Business.
(a) The chairman of any meeting of stockholders shall determine
the order of business and the procedure at the meeting, including such
regulation of the manner of voting. The rules of conduct at any meeting of
stockholders shall be determined by the Board of Directors prior to the meeting
and shall be made available for inspection at the stockholders meeting. The date
and time of the opening and closing of the polls for each matter upon which the
stockholders will vote at the meeting shall be announced at the meeting.
(b) At any annual meeting of the stockholders, only such
business shall be conducted as shall have been brought before the meeting: (i)
by or at the direction of the Board of Directors; or (ii) by any stockholder of
the Corporation who is entitled to vote with respect thereto and who complies
with the notice procedures set forth in this Section 6(b). For business to be
properly brought before an annual meeting by a stockholder, the business must
relate to a proper subject matter for stockholder action and the stockholder
must have given timely notice thereof in writing to the Secretary of the
Corporation. To be timely, a stockholder's notice must be delivered or mailed to
and received at the principal executive offices of the Corporation not less than
one hundred and twenty (120) calendar days in advance of the date of the
Corporation's proxy statement released to security holders in connection with
the previous year's annual meeting of stockholders or, in the case of the first
annual meeting of stockholders of the Corporation following its acquisition of
all of the outstanding capital stock of Oswego City Savings Bank, one hundred
and twenty (120) calendar days prior to the anniversary date of the mailing of
proxy materials by Oswego City Savings Bank in connection with the immediately
preceding annual meeting of Oswego Savings Bank prior to such acquisition. A
stockholder's notice to the Secretary shall set forth as to each matter such
stockholder proposes to bring before the annual meeting: (i) a brief description
of the business desired to be brought before the annual meeting and the reasons
for conducting such business at the annual meeting; (ii) the name and address,
as they appear on the Corporation's books, of the stockholder proposing such
business; (iii) the class and number of shares of the Corporation's capital
stock that are beneficially owned by such stockholder; and (iv) any material
interest of such stockholder in such business. Notwithstanding anything in these
Bylaws to the contrary, no business shall be brought before or conducted at an
annual meeting except in accordance with the provisions of this Section 6(b).
The Officer of the Corporation or other person presiding over the annual meeting
shall, if the facts so warrant, determine and declare to the meeting that
business was not properly brought before the meeting in accordance with the
provisions of this Section 6(b) and, if he or she should so determine, he or she
shall so declare to the meeting and any such business so determined to be not
properly brought before the meeting shall not be transacted.
At any special meeting of the stockholders, only such business shall be
conducted as shall have been brought before the meeting by or at the direction
of the Board of Directors.
(c) Only persons who are nominated in accordance with the
procedures set forth in these Bylaws shall be eligible for election as
Directors. Nominations of persons for election to the Board of Directors of the
Corporation may be made at a meeting of stockholders at which Directors are to
be elected only: (i) by or at the direction of the Board of Directors; or (ii)
by any stockholder of the Corporation entitled to vote for the election of
Directors at the meeting who complies with the notice procedures set forth in
this Section 6(c). Such nominations, other than those made by or at the
direction
2
<PAGE>
of the Board of Directors, shall be made by timely notice in writing to the
Secretary of the Corporation. To be timely, a stockholder's notice shall be
delivered or mailed to and received at the principal executive offices of the
Corporation not less than one hundred and twenty (120) calendar days in advance
of the date of the Corporation's proxy statement released to security holders in
connection with the previous year's annual meeting of stockholders. Such
stockholder's notice shall set forth: (i) as to each person whom such
stockholder proposes to nominate for election or re-election as a Director, all
information relating to such person that is required to be disclosed in
solicitations of proxies for the election of Directors, or is otherwise
required, in each case pursuant to Regulation 14A under the Securities Exchange
Act of 1934 (including such person's written consent to being named in the proxy
statement as a nominee and to serving as a Director if elected); and (ii) as to
the stockholder giving notice, (x) the name and address, as they appear on the
Corporation's books, of such stockholder and (y) the class and number of shares
of the Corporation's capital stock that are beneficially owned by such
stockholder. At the request of the Board of Directors any person nominated by
the Board of Directors for election as a Director shall furnish to the Secretary
of the Corporation that information required to be set forth in a stockholder's
notice of nomination which pertains to the nominee. No person shall be eligible
for election as a Director of the Corporation unless nominated in accordance
with the provisions of this Section 6(c). The Officer of the Corporation or
other person presiding at the meeting shall, if the facts so warrant, determine
that a nomination was not made in accordance with such provisions and, if he or
she should so determine, he or she shall declare to the meeting and the
defective nomination shall be disregarded.
Section 7. Proxies and Voting. At any meeting of the stockholders, every
stockholder entitled to vote may vote in person or by proxy authorized by an
instrument in writing or by a transmission permitted by law filed in accordance
with the procedure established for the meeting. Any copy, facsimile
telecommunication or other reliable reproduction of the writing or transmission
created pursuant to this paragraph may be substituted or used in lieu of the
original writing or transmission for any and all purposes for which the original
writing or transmission could be used, provided that such copy, facsimile
telecommunication or other reproduction shall be a complete reproduction of the
entire original writing or transmission.
All voting, including on the election of Directors but excepting where
otherwise required by law or by the governing documents of the Corporation, may
be by a voice vote; provided, however, that upon demand therefor by a
stockholder entitled to vote or by his or her proxy, a stock vote shall be
taken. Every stock vote shall be taken by ballots, each of which shall state the
name of the stockholder or proxy voting and such other information as may be
required under the procedure established for the meeting. The Corporation shall,
in advance of any meeting of stockholders, appoint one or more inspectors to act
at the meeting and make a written report thereof. The Corporation may designate
one or more persons as alternate inspectors to replace any inspector who fails
to act. If no inspector or alternate is able to act at a meeting of
stockholders, the person presiding at the meeting shall appoint one or more
inspectors to act at the meeting. Each inspector, before entering upon the
discharge of his or her duties, shall take and sign an oath faithfully to
execute the duties of inspector with strict impartiality and according to the
best of his or her ability.
All elections shall be determined by a plurality of the votes cast, and
except as otherwise required by the Certificate of Incorporation or by law, all
other matters shall be determined by a majority of the votes present and cast at
a properly called meeting of stockholders.
Section 8. Stock List. A complete list of stockholders entitled to vote
at any meeting of stockholders, arranged in alphabetical order for each class of
stock and showing the address of each such stockholder and the number of shares
registered in his or her name, shall be open to the examination of any such
stockholder, for any purpose germane to the meeting, during ordinary business
hours for a period of at least ten (10) days prior to the meeting, either at a
place within the city where the meeting is to be
3
<PAGE>
held, which place shall be specified in the notice of the meeting, or if not so
specified, at the place where the meeting is to be held.
The stock list shall also be kept at the place of the meeting during the
whole time thereof and shall be open to the examination of any such stockholder
who is present. This list shall presumptively determine the identity of the
stockholders entitled to vote at the meeting and the number of shares held by
each of them.
Section 9. Consent of Stockholders in Lieu of Meeting. Subject to the
rights of the holders of any class or series of preferred stock of the
Corporation, any action required or permitted to be taken by the stockholders of
the Corporation must be effected at an annual or special meeting of stockholders
of the Corporation and may not be effected by any consent in writing by such
stockholders.
ARTICLE II - BOARD OF DIRECTORS
---------- ------------------
Section 1. General Powers, Number and Term of Office. The business and
affairs of the Corporation shall be under the direction of its Board of
Directors. The number of Directors who shall constitute the Whole Board shall
be such number as the Board of Directors shall from time to time have
designated, except that in the absence of any such designation, such number
shall be five (5). The Board of Directors shall annually elect a Chairman of
the Board from among its members who shall, when present, preside at its
meetings.
The Directors, other than those who may be elected by the holders of any
class or series of Preferred Stock, shall be divided, with respect to the time
for which they severally hold office, into three classes, with the term of
office of the first class to expire at the first annual meeting of stockholders,
the term of office of the second class to expire at the annual meeting of
stockholders one year thereafter and the term of office of the third class to
expire at the annual meeting of stockholders two years thereafter, with each
Director to hold office until his or her successor shall have been duly elected
and qualified. At each annual meeting of stockholders, commencing with the
first annual meeting, Directors elected to succeed those Directors whose terms
then expire shall be elected for a term of office to expire at the third
succeeding annual meeting of stockholders after their election, with each
Director to hold office until his or her successor shall have been duly elected
and qualified.
Section 2. Vacancies and Newly Created Directorships. Subject to the
rights of the holders of any class or series of preferred stock, and unless the
Board of Directors otherwise determines, newly created Directorships resulting
from any increase in the authorized number of Directors or any vacancies in the
Board of Directors resulting from death, resignation, retirement,
disqualification, removal from office or other cause may be filled only by a
majority vote of the Directors then in office, though less than a quorum, and
Directors so chosen shall hold office for a term expiring at the annual meeting
of stockholders at which the term of office of the class to which they have been
elected expires and until such Director's successor shall have been duly elected
and qualified. No decrease in the number of authorized Directors constituting
the Board shall shorten the term of any incumbent Director.
Section 3. Regular Meetings. Regular meetings of the Board of Directors
shall be held at such place or places, on such date or dates, and at such time
or times as shall have been established by the Board of Directors and publicized
among all Directors. A notice of each regular meeting shall not be required.
Section 4. Special Meetings. Special meetings of the Board of Directors
may be called by one-third (1/3) of the Directors then in office (rounded up to
the nearest whole number) or by the Chairman of the Board and shall be held at
such place, on such date, and at such time as they or he or she shall fix.
Notice of the place, date, and time of each such special meeting shall be given
to each Director by whom
4
<PAGE>
it is not waived by mailing written notice not less than five (5) days before
the meeting or be telegraphing or telexing or by facsimile transmission of the
same not less than twenty-four (24) hours before the meeting. Unless otherwise
indicated in the notice thereof, any and all business may be transacted at a
special meeting.
Section 5. Quorum. At any meeting of the Board of Directors, a majority
of the Whole Board shall constitute a quorum for all purposes. If a quorum
shall fail to attend any meeting, a majority of those present may adjourn the
meeting to another place, date, or time, without further notice or waiver
thereof.
Section 6. Participation in Meetings By Conference Telephone. Members of
the Board of Directors, or of any committee thereof, may participate in a
meeting of such Board or committee by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other and such participation shall constitute presence in
person at such meeting.
Section 7. Conduct of Business. At any meeting of the Board of Directors,
business shall be transacted in such order and manner as the Board may from time
to time determine, and all matters shall be determined by the vote of a majority
of the Directors present, except as otherwise provided herein or required by
law. Action may be taken by the Board of Directors without a meeting if all
members thereof consent thereto in writing, and the writing or writings are
filed with the minutes of proceedings of the Board of Directors.
Section 8. Powers. The Board of Directors may, except as otherwise
required by law, exercise all such powers and do all such acts and things as may
be exercised or done by the Corporation, including, without limiting the
generality of the foregoing, the unqualified power:
(1) To declare dividends from time to time in accordance with
law;
(2) To purchase or otherwise acquire any property, rights or
privileges on such terms as it shall determine;
(3) To authorize the creation, making and issuance, in such
form as it may determine, of written obligations of every kind, negotiable or
non-negotiable, secured or unsecured, and to do all things necessary in
connection therewith;
(4) To remove any Officer of the Corporation with or without
cause, and from time to time to devolve the powers and duties of any Officer
upon any other person for the time being;
(5) To confer upon any Officer of the Corporation the power to
appoint, remove and suspend subordinate Officers, employees and agents;
(6) To adopt from time to time such stock, option, stock
purchase, bonus or other compensation plans for Directors, Officers, employees
and agents of the Corporation and its subsidiaries as it may determine;
(7) To adopt from time to time such insurance, retirement, and
other benefit plans for Directors, Officers, employees and agents of the
Corporation and its subsidiaries as it may determine; and
(8) To adopt from time to time regulations, not inconsistent
with these Bylaws, for the management of the Corporation's business and affairs.
5
<PAGE>
Section 9. Compensation of Directors. Directors, as such, may receive,
pursuant to resolution of the Board of Directors, fixed fees and other
compensation for their services as Directors, including, without limitation,
their services as members of committees of the Board of Directors.
ARTICLE III - COMMITTEES
----------- ----------
Section 1. Committee of the Board of Directors. The Board of Directors,
by a vote of a majority of the Whole Board, may from time to time designate
committees of the Board, with such lawfully delegable powers and duties as it
thereby confers, to serve at the pleasure of the Board and shall, for those
committees and any others provided for herein, elect a Director or Directors to
serve as the member or members, designating, if it desires, other Directors as
alternate members who may replace any absent or disqualified member at any
meeting of the committee. Any committee so designated may exercise the power
and authority of the Board of Directors to declare a dividend, to authorize the
issuance of stock or to adopt a certificate of ownership and merger pursuant to
Section 253 of the Delaware General Corporation Law if the resolution which
designates the committee or a supplemental resolution of the Board of Directors
so provides. In the absence or disqualification of any member of any committee
and any alternate member in his or her place, the member or members of the
committee present at the meeting and not disqualified from voting, whether or
not he or she or they constitute a quorum, may by unanimous vote appoint another
member of the Board of Directors to act at the meeting in the place of the
absent or disqualified member.
Section 2. Conduct of Business. Each committee may determine the
procedural rules for meeting and conducting its business and shall act in
accordance therewith, except as otherwise provided herein or required by law.
Adequate provision shall be made for notice to members of all meetings; one-
third (1/3) of the members shall constitute a quorum unless the committee shall
consist of one (1) or two (2) members, in which event one (1) member shall
constitute a quorum; and all matters shall be determined by a majority vote of
the members present. Action may be taken by any committee without a meeting if
all members thereof consent thereto in writing, and the writing or writings are
filled with the minutes of the proceedings of such committee.
Section 3. Nominating Committee. The Board of Directors shall appoint a
Nominating Committee of the Board, consisting of not less than three (3)
members, one of which shall be the Chairman of the Board. The Nominating
Committee shall have authority (a) to review any nominations for election to the
Board of Directors made by a stockholder of the Corporation pursuant to Section
6(c)(ii) of Article I of these Bylaws in order to determine compliance with such
Bylaw provision and (b) to recommend to the Whole Board nominees for election to
the Board of Directors to replace those Directors whose terms expire at the
annual meeting of stockholders next ensuing.
ARTICLE IV - OFFICERS
---------- --------
Section 1. Generally.
(a) The Board of Directors as soon as may be practicable after
the annual meeting of stockholders shall choose a Chairman of the Board, a
President and Chief Executive Officer, one or more Vice Presidents, and a
Secretary and from time to time may choose such other Officers as it may deem
proper. The Chairman of the Board shall be chosen from among the Directors. Any
number of offices may be held by the same person.
(b) The term of office of all Officers shall be until the next
annual election of Officers and until their respective successors are chosen,
but any Officer may be removed from office at any time
6
<PAGE>
by the affirmative vote of a majority of the authorized number of Directors then
constituting the Board of Directors.
(c) All Officers chosen by the Board of Directors shall each
have such powers and duties as generally pertain to their respective offices,
subject to the specific provisions of this Article IV. Such Officers shall also
have such powers and duties as from time to time may be conferred by the Board
of Directors or by any committee thereof.
Section 2. Chairman of the Board.
The Chairman of the Board shall, subject to the provisions of these Bylaws
and to the direction of the Board of Directors, serve in a general executive
capacity and, when present, shall preside at all meetings of the Board of
Directors or the stockholders of the Corporation. The Chairman of the Board
shall perform all duties and have all powers which are commonly incident to the
office of Chairman of the Board or which are delegated to him or her by the
Board of Directors. He or she shall have power to sign all stock certificates,
contracts and other instruments of the Corporation which are authorized.
Section 3. President and Chief Executive Officer.
The President and Chief Executive Officer (the "President") shall have
general responsibility for the management and control of the business and
affairs of the Corporation and shall perform all duties and have all powers
which are commonly incident to the offices of President and Chief Executive
Officer or which are delegated to him or her by the Board of Directors. Subject
to the direction of the Board of Directors, the President shall have power to
sign all stock certificates, contracts and other instruments of the Corporation
which are authorized and shall have general supervision of all of the other
Officers (other than the Chairman of the Board), employees and agents of the
Corporation.
Section 4. Vice President. The Vice President or Vice Presidents shall
perform the duties of the President in his or her absence or during his or her
disability to act. In addition, the Vice Presidents shall perform the duties
and exercise the powers usually incident to their respective offices and/or such
other duties and powers as may be properly assigned to them by the Board of
Directors, the Chairman of the Board or the President. A Vice President or Vice
Presidents may be designated as Executive Vice President or Senior Vice
President.
Section 5. Secretary. The Secretary or an Assistant Secretary shall issue
notices of meetings, shall keep their minutes, shall have charge of the seal and
the corporate books, shall perform such other duties and exercise such other
powers as are usually incident to such offices and/or such other duties and
powers as are properly assigned thereto by the Board of Directors, the Chairman
of the Board or the President.
Section 6. Assistant Secretaries and Other Officers. The Board of
Directors may appoint one or more Assistant Secretaries and such other Officers
who shall have such powers and shall perform such duties as are provided in
these Bylaws or as may be assigned to them by the Board of Directors, the
Chairman of the Board or the President.
Section 7. Action with Respect to Securities of Other Corporations.
Unless otherwise directed by the Board of Directors, the President or any
Officer of the Corporation authorized by the President shall have power to vote
and otherwise act on behalf of the Corporation, in person or in which the
Corporation may hold securities and otherwise to exercise any and all rights and
powers which the Corporation may possess by reason of its ownership of
securities in such other corporation.
7
<PAGE>
ARTICLE V - STOCK
--------- -----
Section 1. Certificates of Stock. Each stockholder shall be entitled to a
certificate signed by, or in the name of the Corporation by, the Chairman of the
Board or the President, and by the Secretary or an Assistant Secretary, or any
Treasurer or Assistant Treasurer, certifying the number of shares owned by him
or her. Any or all of the signatures on the certificate may be by facsimile.
Section 2. Transfers of Stock. Transfers of stock shall be made only upon
the transfer books of the Corporation kept at an office of the Corporation or by
transfer agents designated to transfer shares of the stock of the Corporation.
Except where a certificate is issued in accordance with Section 4 of Article V
of these Bylaws, an outstanding certificate for the number of shares involved
shall be surrendered for cancellation before a new certificate is issued
therefor.
Section 3. Record Date. In order that the Corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders, or
to receive payment of any dividend or other distribution or allotment of any
rights or to exercise any rights in respect of any change, conversion or
exchange of stock or for the purpose of any other lawful action, the Board of
Directors may fix a record date, which record date shall not precede the date on
which the resolution fixing the record date is adopted and which record date
shall not be more than sixty (60) nor less than ten (10) days before the date of
any meeting of stockholders, nor more than sixty (60) days prior to the time for
such other action as hereinbefore described; provided, however, that if no
record date is fixed by the Board of Directors, the record date for determining
stockholders entitled to notice of or to vote at a meeting of stockholders shall
be at the close of business on the day next preceding the day on which notice is
given or, if notice is waived, at the close of business on the day next
preceding the day on which the meeting is held, and, for determining
stockholders entitled to receive payment of any dividend or other distribution
or allotment of rights or to exercise any rights of change, conversion or
exchange of stock or for any other purpose, the record date shall be at the
close of business on the day on which the Board of Directors adopts a resolution
relating thereto.
A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
Section 4. Lost, Stolen or Destroyed Certificates. In the event of the
loss, theft or destruction of any certificate of stock, another may be issued in
its place pursuant to such regulations as the Board of Directors may establish
concerning proof of such loss, theft or destruction and concerning the giving of
a satisfactory bond or bonds of indemnity.
Section 5. Regulations. The issue, transfer, conversion and registration
of certificates of stock shall be governed by such other regulations as the
Board of Directors may establish.
ARTICLE VI - NOTICES
---------- -------
Section 1. Notices. Except as otherwise specifically provided herein or
required by law, all notices required to be given to any stockholder, Director,
Officer, employee or agent shall be in writing and may in every instance be
effectively given by hand delivery to the recipient thereof, by depositing such
notice in the mails, postage paid, or by sending such notice by prepaid telegram
or mailgram or other courier. Any such notice shall be addressed to such
stockholder, Director, Officer, employee or agent at his or her last known
address as the same appears on the books of the Corporation. The time when such
notice is received, if hand delivered, or dispatched, if delivered through the
mails or by telegram or mailgram or other courier, shall be the time of the
giving of the notice.
8
<PAGE>
Section 2. Waivers. A written waiver of any notice, signed by a
stockholder, Director, Officer, employee or agent, whether before or after the
time of the event for which notice is to be given, shall be deemed equivalent to
the notice required to be given to such stockholder, Director, Officer, employee
or agent. Neither the business nor the purpose of any meeting need be specified
in such a waiver.
ARTICLE VII - MISCELLANEOUS
----------- -------------
Section 1. Facsimile Signatures. In addition to the provisions for use of
facsimile signatures elsewhere specifically authorized in these Bylaws,
facsimile signatures of any Officer or Officers of the Corporation may be used
whenever and as authorized by the Board of Directors or a committee thereof.
Section 2. Corporate Seal. The Board of Directors may provide a suitable
seal, containing the name of the Corporation, which seal shall be in the charge
of the Secretary. If and when so directed by the Board of Directors or a
committee thereof, duplicates of the seal may be kept and used by the Treasurer
or by an Assistant Secretary or an assistant to the Treasurer.
Section 3. Reliance upon Books, Reports and Records. Each Director, each
member of any committee designated by the Board of Directors, and each Officer
of the Corporation shall, in the performance of his or her duties, be fully
protected in relying in good faith upon the books of account or other records of
the Corporation and upon such information, opinions, reports or statements
presented to the Corporation by any of its Officers or employees, or committees
of the Board of Directors so designated, or by any other person as to matters
which such Director or committee member reasonably believes are within such
other person's professional or expert competence and who has been selected with
reasonable care by or on behalf of the Corporation.
Section 4. Fiscal Year. The fiscal year of the Corporation shall be as
fixed by the Board of Directors.
Section 5. Time Periods. In applying any provision of these Bylaws which
requires that an act be done or not be done a specified number of days prior to
an event or that an act be done during a period of a specified number of days
prior to an event, calendar days shall be used, the day of the doing of the act
shall be excluded, and the day of the event shall be included.
ARTICLE VIII - AMENDMENT
------------ ---------
The Board of Directors may amend, alter or repeal these Bylaws at any
meeting of the Board, provided notice of the proposed change is given not less
than two days prior to the meeting. The stockholders shall also have power to
amend, alter or repeal these Bylaws at any meeting of stockholders, provided
notice of the proposed change was given in the Notice of the Meeting; provided,
however, that, notwithstanding any other provisions of these Bylaws or any
provision of law which might otherwise permit a lesser vote or no vote, but in
addition to any affirmative vote of the holders of any particular class or
series of the Voting Stock Designation or these Bylaws, the affirmative votes of
the holders of at least eighty percent (80%) of the voting power of all the
then-outstanding shares of the Voting Stock, voting together as a single class,
shall be required to alter, amend or repeal any provisions of these Bylaws.
9
<PAGE>
1996 Annual Report
Financial Highlights
APPENDIX G
On November 15, 1995, the Bank completed its reorganization into a mutual
holding company. As part of the reorganization, the Bank organized a new
state-chartered stock savings bank (the "Savings Bank") and transferred
substantially all its assets and liabilities to the Savings Bank in exchange for
a majority of the common stock of the Savings Bank outstanding upon consummation
of the reorganization. The Savings Bank retained the name Oswego City Savings
Bank.
Concurrent with the reorganization, 881,666 shares of the Savings Bank's common
stock were sold at $7.50 per share. As of December 31, 1996, the Savings Bank's
total assets and shareholders' equity were $189.9 million and $21.4 million,
respectively.
Oswego City Savings Bank's common stock currently trades on the Electronic
Bulletin Board under symbol "PBHC".
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR (In thousands)
Interest Income $13,213 $12,205 $10,443 $9,858 $10,074
Interest Expense 6,414 6,259 4,697 4,062 5,204
Net Interest Income 6,799 5,946 5,746 5,796 4,870
Net Income 1,272 990 1,146 1,802 1,301
PER COMMON SHARE
Net Income:
Primary 0.68 0.10(a) NA NA NA
Fully diluted 0.68 0.10(a) NA NA NA
Book Value 10.83 10.50 NA NA NA
Stock Price:
IOP 7.500 7.500
High 10.650 10.750 NA NA NA
Low 8.000 8.375 NA NA NA
Close 9.375 10.500 NA NA NA
YEAR END (In Thousands)
Total assets $189,937 $180,752 $170,715 $129,270 $126,757
Interest-earning deposits at
other financial institutions 1,550 8,200 13,627 7,962 3,213
Investment securities 36,673 41,932 48,135 33,776 31,427
Mortgage-backed securities 22,829 7,953 992 1,408 2,542
Loans Receivable, net:
Real estate 99,047 91,023 83,563 74,150 74,710
Consumer and other 9,695 9,126 6,105 4,663 3,656
Total loans receivable, net 108,742 100,149 89,668 78,813 78,366
Intangible assets 3,921 4,236 4,552 -- --
Deposits 158,998 158,324 155,764 115,344 114,605
Borrowed funds 7,610 -- -- -- --
Notes Payable ESOP 486 425 -- -- --
Equity 21,390 20,751 13,990 12,953 11,151
SELECTED PERFORMANCE RATIOS
Return on average assets 0.69% 0.56% 0.74% 1.40% 1.05%
Return on average equity 6.09 6.31 8.20 14.99 12.26
Return on tangible equity 7.28 5.99 12.14 13.91 11.67
Average equity to average assets 11.32 8.84 9.00 9.33 8.58
Equity to total assets 11.26 11.47 8.19 10.02 8.80
Net interest rate spread 3.88 3.72 4.01 4.68 4.10
Noninterest expense to total assets 2.82 2.94 2.83 2.72 2.70
Nonperforming loans to
net loans receivable 0.92 0.92 1.24 1.00 1.12
Nonperforming assets to
total assets 0.83 0.83 1.01 1.24 1.62
Allowance for loan losses
to net loans receivable 0.83 0.35 0.35 0.36 0.38
Number of full service offices 5 5 5 3 3
</TABLE>
(a) Earnings per share for 1995 are based on the period from November 15,
1995 to December 31, 1995.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Article Tenth of the Registrant's Certificate of Incorporation provides
for the following indemnification for Directors and Officers.
A. Each person who was or is made a party or is threatened to be made a
party to or is otherwise involved in any action, suit or proceeding, whether
civil, criminal, administrative or investigative (hereinafter a "proceeding"),
by reason of the fact that he or she is or was a Director or an Officer of the
Corporation or is or was serving at the request of the Corporation as a
Director, Officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to an
employee benefit plan (hereinafter an "indemnitee"), whether the basis of such
proceeding is alleged action in an official capacity as a Director, Officer,
employee or agent or in any other capacity while serving as a Director, Officer,
employee or agent, shall be indemnified and held harmless by the Corporation to
the fullest extent authorized by the Delaware General Corporation Law, as the
same exists or may hereafter be amended (but, in the case of any such amendment,
only to the extent that such amendment perm its the Corporation to provide
broader indemnification rights than such law permitted the Corporation to
provide prior to such amendment), against all expense, liability and loss
(including attorneys' fees, judgments, fines, ERISA excise taxes or penalties
and amounts paid in settlement) reasonably incurred or suffered by such
indemnitee in connection therewith; provided, however, that, except as provided
in Section C hereof with respect to proceedings to enforce rights to
indemnification, the Corporation shall indemnify any such indemnitee in
connection with a proceeding (or part thereof) initiated by such indemnitee only
if such proceeding (or part thereof) was authorized by the Board of Directors of
the Corporation.
B. The right to indemnification conferred in Section A of this Article
TENTH shall include the right to be paid by the Corporation the expenses
incurred in defending any such proceeding in advance of its final disposition
(hereinafter an "advancement of expenses"); provided, however, that, if the
Delaware General Corporation Law requires, an advancement of expenses incurred
by an indemnitee in his or her capacity as a Director of Officer (and not in any
other capacity in which service was or is rendered by such indemnitee,
including, without limitation, service to an employee benefit plan) shall be
made only upon delivery to the Corporation of an undertaking (hereinafter an
"undertaking"), by or on behalf of such indemnitee, to repay all amounts so
advanced if it shall ultimately be determined by final judicial decision from
which there is no further right to appeal (hereinafter a "final adjudication")
that such indemnitee is not entitled to be indemnified for such expenses under
this Section or otherwise. The rights to indemnification and to the advancement
of expenses conferred in Sections A and B of this Article TENTH shall be
contract rights and such rights shall continue as to an indemnitee who has
ceased to be a Director, Officer, employee or agent and shall inure to the
benefit of the indemnitee's heirs, executors and administrators.
C. If a claim under Section A or B of this Article TENTH is not paid in
full by the Corporation within sixty days after a written claim has been
received by the Corporation, except in the case of a claim for an advancement of
expenses. in which case the applicable period shall be twenty days, the
indemnitee may at any time thereafter bring suit against the Corporation to
recover the unpaid amount of the claim. If successful in whole or in part in any
such suit, or in a suit brought by the Corporation to recover an advancement of
expenses pursuant to the terms of an undertaking, the indemnitee shall be
entitled to be paid also the expense of prosecuting or defending such suit. In
(i) any suit brought by the indemnitee to enforce a right to indemnification
hereunder (but not in a suit brought by the indemnitee to enforce a right to an
<PAGE>
advancement of expenses) it shall be a defense that, and (ii) in any suit by
the Corporation to recover an advancement of expenses pursuant to the terms of
an undertaking the Corporation shall be entitled to recover such expenses upon a
final adjudication that, the indemnitee has not met any applicable standard for
indemnification set forth in the Delaware General Corporation Law. Neither the
failure of the Corporation (including its Board of Directors, independent legal
counsel, or its stockholders) to have made a determination prior to the
commencement of such suit that indemnification of the indemnitee is proper in
the circumstances because the indemnitee has met the applicable standard of
conduct set forth in the Delaware General Corporation Law, nor an actual
determination by the Corporation (including its Board of Directors, independent
legal counsel, or its stockholders) that the indemnitee has not met such
applicable standard of conduct, shall create a presumption that the indemnitee
has not met the applicable standard of conduct or, in the case of such a suit
brought by the indemnitee, be a defense to such suit. In any suit brought by the
indemnitee to enforce a right to indemnification or to an advancement of
expenses hereunder, or by the Corporation to recover an advancement of expenses
pursuant to the terms of an undertaking, the burden of proving that the
indemnitee is not entitled to be indemnified, or to such advancement of
expenses, under this Article TENTH or otherwise shall be on the Corporation.
D. The rights to indemnification and to the advancement of expenses
conferred In this Article TENTH shall not be exclusive of any other right which
any person may have or hereafter acquire under any statute, the Corporation's
Certificate of Incorporation, Bylaws, agreement, vote of stockholders or
disinterested Directors or otherwise.
E. The Corporation may maintain insurance, at its expense, to protect
itself and any Director, Officer, employee or agent of the Corporation or
another corporation, partnership, joint venture, trust or other enterprise
against any expense, liability or loss, whether or not the Corporation would
have the power to indemnify such person against such expense, liability or loss
under the Delaware General Corporation Law.
F. The Corporation may, to the extent authorized from time to time by the
Board of Directors, grant rights to indemnification and to the advancement of
expenses to any employee or agent of the Corporation to the fullest extent of
the provisions of this Article TENTH with respect to the indemnification and
advancement of expenses of Directors and Officers of the Corporation.
Item 21. Exhibits and Financial Statement Schedules
The exhibits and financial statements filed as part of this Registration
Statement arc as follows.
(a) Exhibits
The Index of Exhibits immediately precedes the attached Exhibits.
(b) Financial Statements
Not applicable.
(c) Report or Appraisal
Not applicable.
<PAGE>
Item 22. Undertakings
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement; (i) to include
any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii)
to reflect in the prospectus any facts or events arising after the effective
date of the registration statement (or most recent post effective amendment
thereof) which individually or in the aggregate, represent a fundamental change
in the information set forth in tile registration statement; (iii) to include
any material information with respect to the plan of distribution not previously
disclosed in the registration statement or any material change to such
information in the registration statement.
(2) That, for purposes of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be a bona fide
offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(b)(l) The undersigned registrant hereby undertakes as follows: that
prior to any public reoffering of the securities registered hereunder through
use of a prospectus which is a part of this registration statement, by any
person or party who is deemed to be an underwriter within the meaning of Rule
145(c), the issuer undertakes that such reoffering prospectus will contain tile
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form.
(2) The registrant undertakes that every prospectus (i) that is
filed pursuant to paragraph (1) immediately preceding, or (ii) that purports to
meet the requirements of section 10(a)(3) of the Act and is used in connection
with an offering of securities subject to Rule 415, will be filed as a part of
an amendment to the registration statement and will not be used until such
amendment is effective, and for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof
(c) The undersigned registrant hereby undertakes to supply by means
of a post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of, and
included in the registration statement when it became effective.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Oswego, New York, on September 17,
1997.
PATHFINDER BANCORP
By: /s/ Chris C. Gagas
------------------------------------
Chris C. Gagas, President and
Chief Executive Officer
POWER OF ATTORNEY
We, the undersigned Directors of Pathfinder Bancorp severally constitute
and appoint Chris C. Gagas with full power of substitution, our true and lawful
attorney and agent, to do any and all things and acts in our names in the
capacities indicated below which said Chris C. Gagas may deem necessary or
advisable to enable Pathfinder Bancorp to comply with the Securities Act of
1933, and any rules, regulations and requirements of the Securities and Exchange
Commission, in connection with the Registration Statement on Form S-4 relating
to the offering of Pathfinder Bancorp Common Stock, including specifically, but
not limited to, power and authority to sign for us or any of us in our names in
the capacities indicated below the Registration Statement and any and all
amendments (including post-effective amendments) thereto; and we hereby ratify
and confirm all that said Chris C. Gagas shall do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<S> <C>
By: /s/ Chris C, Gagas By: /s/ Thomas W. Schneider
----------------------------------------- -------------------------------------------
Chris C. Gagas, President, Chief Executive Thomas w. Schneider, Vice President
Officer and Chairman of the Board and Chief Financial Officer
(Principal Executive Officer) (Principal Financial Officer)
Date: September 17, 1997 Date: September 17,1997
By: /s/ James A. Dowd By: /s/ Bruce E. Manwaring
----------------------------------------- -------------------------------------------
James A. Dowd, Controller Bruce E. Manwaring, Director
(Principal Accounting Officer)
Date: September 17, 1997 Date: September 17, 1997
By: /s/ Chris R. Burritt By: /s/ L. William Nelson. Jr.
----------------------------------------- -------------------------------------------
Chris R. Burritt, Director L. William Nelson, Jr., Director
Date: September 17, 1997 Date: September 17, 1997
By: /s/ Raymond W. Jung By: /s/ Lawrence W. O'Brien
----------------------------------------- -------------------------------------------
Raymond W. Jung, Director Lawrence W. O'Brien, Director
Date: September 17, 1997 Date: September 17,1997
</TABLE>
<PAGE>
By: /s/Victor S. Oakes By: /s/Corte J. Spencer
--------------------------------- -------------------------------
Victor S. Oakes, Director Corte J. Spencer, Director
Date: September 17, 1997 Date: September 17, 1997
By: /s/Janette Resnick
---------------------------------
Janette Resnick, Director
Date: September 17,1997
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------ -----------------------
<C> <S>
2 Agreement and Plan of Reorganization (Incorporated herein by
reference to Appendix C of Prospectus/Proxy Statement)
3.1 Certificate of Incorporation of Pathfinder Bancorp, Inc.
(Incorporated herein by reference of Appendix E to
Prospectus/Proxy Statement)
3.2 Bylaws of Pathfinder Bancorp, Inc. (Incorporated herein by
reference to Appendix F of Prospectus/Proxy Statement)
4 Form of Stock Certificate of Pathfinder Bancorp, Inc.
5.1 Opinion of Luse Lehman Gorman Pomerenk & Schick, A Professional
Corporation regarding legality of securities
5.2 Tax Opinion of Luse Lehman Gorman Pomerenk & Schick, A
Professional Corporation
10.1 Form of Oswego City Savings Bank 1997 Stock Option Plan
(Incorporated by reference to Appendix A of Prospectus/Proxy
Statement
10.2 Form of Oswego City Savings Bank 1997 Recognition and Retention
Plan (Incorporated by reference to Appendix B of Prospectus/Proxy
Statement
10.3 Employment Agreement between the Bank and Chris C. Gagas,
President and Chief Executive Officer
10.4 Employment Agreement between the Bank and Thomas W.
Schneider, Vice President and Chief Financial Officer
10.5 Employment Agreement between the Bank and W. David
Schermerhorn, Vice President - Loan Administration
23.1 Consent of Luse Lehman Gorman Pomerenk & Schick, A Professional
Corporation (Contained in its opinion filed as Exhibit 5.1)
23.2 Consent of Coopers & Lybrand, L.L.P.
24.1 Power of Attorney (Incorporated herein by reference to the
signature page of this registration statement)
99.1 Oswego City Savings Bank Annual Report on Form F-2 for fiscal
year ended December 31, 1996.
99.2 Oswego City Savings Bank quarterly report on Form F-4 for fiscal
quarter ended March 31, 1997.
99.3 Oswego City Savings Bank quarterly report on Form F-4 for fiscal
quarter ended June 30, 1997.
99.4 Form of Proxy to be distributed to shareholders of Oswego City
Savings Bank.
99.5 Form 8-K Current Report of Oswego City Savings Bank filed with
the Federal Deposit Insurance Corporation on September 11, 1997.
</TABLE>
<PAGE>
EXHIBIT 4
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
Pathfinder Bancorp, Inc.
Oswego, New York
$.10 par value common stock--fully paid and non assessable
This certifies that _____________________________ is the owner of __________
shares of the common stock of Pathfinder Bancorp, Inc. (the "Corporation"), a
Delaware corporation.
The shares evidenced by this certificate are transferable only on the stock
transfer books of the Corporation by the holder of record hereof, in person or
by his duly authorized attorney or legal representative, upon surrender of this
certificate properly endorsed. This Certificate in not valid until
countersigned and registered by the Corporation's transfer agent and registrar.
This security is not a deposit or account and is not federally insured or
guaranteed.
In Witness Whereof, the Corporation has caused this certificate to be executed
by the facsimile signatures of its duly authorized officers and has caused its
seal to be affixed hereto.
Dated:____________________
- ---------------------------------- ----------------------------------
Secretary (SEAL) President
<PAGE>
PATHFINDER BANCORP, INC.
The shares evidenced by this Certificate are subject to a limitation
contained in the Certificate of Incorporation to the effect that in no event
shall any record owner of any outstanding Common Stock which is beneficially
owned, directly or indirectly, by a person who beneficially owns in excess of
10% of the outstanding shares of Common Stock (the "Limit") be entitled or
permitted to any vote in respect of shares held in excess of the Limit. The
Limit shall not be applicable to shares held by Pathfinder Bancorp, M.H.C.
The Board of Directors of the Corporation is authorized by resolution or
resolutions, from time to time adopted, to provide for the issuance of serial
preferred stock in series and to fix and state the voting powers, designations,
preferences, limitations and restrictions thereof. The Corporation will furnish
to any shareholder upon request and without charge a full description of each
class of stock and any series thereof.
The shares represented by this Certificate may not be cumulatively voted on
any matter. The Certificate of Incorporation requires the affirmative vote of
the holders of at least 80% of the voting stock of the Corporation, voting
together as a single class, to approve certain business combinations and other
transactions and to amend certain provisions of the Certificate of
Incorporation.
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT - Custodian
----------- ------------
(Cust) (Minor)
TEN ENT - as tenants by the entireties Under Uniform Gifts to Minors Act
------------------------------------
JT TEN - as joint tenants with right (State)
of survivorship and not as
tenants in common
</TABLE>
Additional abbreviations may also be used though not in the above list
For value received, _____________________________ hereby sell, assign and
transfer unto
- ---------------------------------------------
- ---------------------------------------------
PLEASE INSERT SOCIAL SECURITY NUMBER OR OTHER IDENTIFYING NUMBER
- --------------------------------------------------------------------------------
(please print or typewrite name and address including postal zip code of
assignee)
- --------------------------------------------------------------------------------
Shares of
- ---------------------------------------------------------------------
the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint ___________________________________ Attorney
to transfer the said shares on the books of the within named corporation with
full power of substitution in the premises.
Dated, _____________________________
In the presence of Signature:
- ------------------------------ ------------------------------------
NOTE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME OF THE
STOCKHOLDER(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE, IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATEVER.
<PAGE>
[LETTERHEAD OF LUSE LEHMAN GORMAN POMERENK & SCHICK APPEARS HERE]
EXHIBIT 5.1
September 17, 1997
Board of Directors
Pathfinder Bancorp, Inc.
214 West First Street
Oswego, New York 13126
Re: Pathfinder Bancorp, Inc.
Registration Statement on Form S-4
Ladies and Gentlemen:
We have served as special counsel for Pathfinder Bancorp, Inc., a Delaware
corporation, in connection with the registration under the Securities Act of
1933 of 881,666 shares of Common Stock, par value $0.10 per share.
Based upon the foregoing and having regard for such legal considerations as
we have deemed relevant, it is our opinion that:
(1) the shares of Common Stock have been duly authorized;
(2) upon issuance, sale and delivery of the shares as contemplated in the
Registration Statement, the shares will be legally issued, fully paid
and non-assessable.
We hereby consent to the reference to our firm under the heading "Proposed
Formation of Stock Holding Company--Legal Opinion" in the Prospectus and Proxy
Statement in the Registration Statement (and all amendments thereto) and to the
filing of this opinion as Exhibit 5.1 thereto.
Very truly yours,
LUSE LEHMAN GORMAN POMERENK & SCHICK
A Professional Corporation
By: /s/ Alan Schick
-----------------------------------
Alan Schick
<PAGE>
[LETTERHEAD OF LUSE LEHMAN GORMAN POMERENK & SCHICK APPEARS HERE]
EXHIBIT 5.2
(202) 274-2000
September 17, 1997
Board of Directors
Pathfinder Bancorp, Inc.
214 West First Street
Oswego, New York 13126
Board of Directors
Oswego City Savings Bank
214 West First Street
Oswego, New York 13126
Re: Federal Income Tax Opinion Relating to the Exchange of the Common
Stock of Oswego City Savings Bank, for All the Common Stock of a
Newly Created Bank Holding Company under Internal Revenue Code
Sections 368(a)(1)(A) and 368(a)(2)(E)/1/
-----------------------------
Gentlemen:
We are rendering this opinion to you in our capacity as special counsel to
Oswego City Savings Bank (the "Bank") in connection with its proposed
reorganization into a two-tier holding company structure (the "Reorganization")
by creating Pathfinder Bancorp, Inc., a Delaware corporation (the "Stock Holding
Company") which will be the stock holding company of the Bank and a majority
owned subsidiary of Pathfinder Bancorp, MHC (the "Mutual Holding Company").
For purposes of this opinion, we have examined such documents and questions
of law as we have considered necessary or appropriate, including, but not
limited to the Agreement and Plan of Reorganization adopted by the Bank's Board
of Directors on January 14, 1997 (the "Plan of Reorganization"); Form FR Y-3
together with exhibits filed by the Stock Holding Company with the Board of
Governors of the Federal Reserve System ("FRB") on July 2, 1997, in connection
with the Reorganization; the Application for a Merger or Other Transaction
together with exhibits filed by the Bank with the Federal Deposit Insurance
Corporation ("FDIC") on July 2, 1997 in connection with the Reorganization; the
Charter and Bylaws of the Mutual Holding Company; the Restated Organization
Certificate and Bylaws of the Bank; the Certificate of Incorporation and Bylaws
of the Stock Holding Company; the Affidavit of Representations dated September
15, 1997, provided to us
- -------------------------
/1/ All Section references herein are to the Internal Revenue Code of 1986, as
amended (the "Code").
<PAGE>
Boards of Directors
Pathfinder Bancorp, Inc.
Oswego City Savings Bank
September 17, 1997
Page 2
by the Bank in connection with this opinion (the "Affidavit"). In such
examination, we have assumed, and have not independently verified, the
genuineness of all signatures on original documents where due execution and
delivery are requirements to the effectiveness thereof. Terms used but not
defined herein, whether capitalized or not, shall have the same meaning as
defined in the Plan.
BACKGROUND
The Bank is a New York chartered stock savings bank with savings deposits
insured by the FDIC. The authorized capital stock of the Bank consists of
2,500,000 shares of common stock with a par value of $1.00 per share. On
November 15, 1995, the Bank reorganized from a mutual savings bank to become the
majority-owned stock subsidiary of the Mutual Holding Company. As of September
8, 1997, the Bank had approximately 1,916,666 shares of Bank common stock issued
and outstanding of which 1,035,000 shares were held by the Mutual Holding
Company. The Bank common stock is listed on the Nasdaq SmallCap Market under
the symbol "PBHC". As of December 31, 1996, the Bank had total assets of
approximately $189.9 million, total deposits of $159.0 million and stockholders'
equity of approximately $21.4 million.
The Bank common stock possesses voting rights, dividend rights, and the
residual equity of the Bank in the event of liquidation. Savings depositors
receive a fixed rate of return; in the event of liquidation they are only
entitled to receive the face amount of their accounts plus accrued interest. The
savings accounts do not possess voting rights. In accordance with the tax law
changes enacted in the Small Business Job Protection Act of 1996 (P.L. 104-188),
for its 1996 fiscal year, the Bank will employ either the experience method of
providing for bad debt deductions as computed under Code Section 585 or the
specific-charge off method.
The business of the Bank consists primarily of attracting savings deposits
from the general public in the Bank's market area and the origination of first
mortgage loans secured by one-to four-family residential properties.
PROPOSED TRANSACTION
The Board of Directors of the Bank adopted the Plan of Reorganization on
January 14, 1997, pursuant to which the Bank will reorganize to form a two-tier
holding company structure with the Bank becoming the wholly-owned subsidiary of
the Stock Holding Company, which will be a majority owned subsidiary of the
Mutual Holding Company. Under the terms of the proposed reorganization, each
outstanding share of Bank common stock, par value $1.00 per share, will be
<PAGE>
Boards of Directors
Pathfinder Bancorp, Inc.
Oswego City Savings Bank
September 17, 1997
Page 3
converted into one share of common stock of the Stock Holding Company, par value
$.10 per share ("Common Stock"), and the holders of Bank common stock will
become the holders of all of the outstanding Common Stock of the Stock Holding
Company (the "Reorganization"). The Stock Holding Company was incorporated
under Delaware law, solely for the purpose of becoming a bank holding company
and has no prior operating history. Following the Reorganization, the Bank will
continue its operations at the same locations, with the same management, and
subject to all the rights, obligations and liabilities of the Bank existing
immediately prior to the Reorganization.
Reasons for the Stock Holding Company Reorganization
- ----------------------------------------------------
The Board of Directors of the Bank believes that a stock holding company
structure will provide the Bank with greater operating flexibility than is
currently available under the existing mutual holding company structure. New
York law and regulations and federal regulations applicable to state-chartered
savings banks and bank holding companies limit both the types of businesses in
which the Bank may engage and the amount which may be invested by the Bank in
subsidiaries. Establishing the Stock Holding Company will provide greater
flexibility in structuring and completing the acquisition of other financial
institutions. In addition, in the current structure, if the Mutual Holding
Company wishes to acquire another financial institution and hold it as a
separate entity from the Bank, it would be difficult to do so in a way that
benefits minority stockholders and the Mutual Holding Company in proportion to
their respective ownership interests. The Reorganization will also enable the
Stock Holding Company to repurchase its outstanding Common Stock as market
conditions permit without causing a recapture into income of all or a portion of
the Bank's existing tax bad debt reserves.
The Reorganization will be structured as follows:
(i) The Bank will organize the Stock Holding Company as a wholly-
owned subsidiary of the Bank. The Stock Holding Company will
form Oswego City Interim Savings Bank ("Interim"), an interim
New York stock savings bank, as a wholly-owned subsidiary of
the Stock Holding Company solely to facilitate the
Reorganization.
(ii) Pursuant to the Plan of Reorganization and in accordance with
applicable New York and federal law, Interim will be merged
with and into the Bank, with the Bank as the surviving
entity. As a result, the Bank will acquire all of the assets
and assume all of the liabilities
<PAGE>
Boards of Directors
Pathfinder Bancorp, Inc.
Oswego City Savings Bank
September 17, 1997
Page 4
of Interim. Upon completion of the merger, the separate
corporate existence of Interim will cease.
(iii) As part of the merger, each share of the Bank common stock
held immediately prior to the effective date of the merger by
stockholders of the Bank shall automatically be converted by
operation of law into one share of Common Stock of the Stock
Holding Company.
(iv) Upon the effective date of the merger, all of the previously
issued and outstanding shares of common stock of Stock
Holding Company owned by the Bank will be cancelled. All of
the issued and outstanding shares of common stock of Interim
will automatically be converted by operation of law into an
equal number of issued and outstanding shares of Bank common
stock, which will be all of the issued and outstanding stock
of the Bank.
(v) All unexercised stock options to acquire the Bank common
stock existing prior to the merger shall upon the
consummation of the merger be and become stock options to
acquire shares of Common Stock of Stock Holding Company.
Further, the stock option plan of the Bank shall become the
stock option plan of the Stock Holding Company. Lastly, any
stock option agreement of the Bank shall become the stock
option agreement of the Stock Holding Company.
(vi) As a result of the proposed transaction, all stockholders of
the Bank will become the stockholders of Stock Holding
Company, and the Bank will become a wholly-owned subsidiary
of Stock Holding Company.
(vii) After the Reorganization is consummated, the Bank and Interim
will constitute a single corporation and the separate
existence of Interim will cease by operation of law. All
assets and liabilities of Interim will be transferred to and
assumed by the Bank as of the date of the Reorganization. The
Bank will continue to operate as a savings bank and retain
its present name and bylaws. Directors of the Bank will
continue as Directors of the Bank after the Reorganization is
consummated.
<PAGE>
Boards of Directors
Pathfinder Bancorp, Inc.
Oswego City Savings Bank
September 17, 1997
Page 5
Consummation of the Reorganization requires that the Plan of Reorganization
receive the approval of at least two-thirds of the issued and outstanding shares
of Bank common stock and the approval of the FRB, the FDIC and the State of New
York Banking Department upon appropriate application for approval.
REPRESENTATIONS
The following statements and representations have been made by management
of the Bank regarding the treatment of the Reorganization as a merger under
Sections 368(a)(1)(A) and 368(a)(2)(E):
(a) The fair market value of Stock Holding Company Common Stock to be
received by each Bank shareholder will be approximately equal to the
fair market value of the Bank common stock surrendered in the
exchange.
(b) The management of the Bank has no knowledge of any plan or intention
on the part of its shareholders who own 5 percent or more of Bank
common stock, and to the best of the knowledge of management of the
Bank, there is no plan or intention on the part of the remaining
shareholders of the Bank to sell, exchange, or otherwise dispose of a
number of shares of Stock Holding Company Stock received in the
Reorganization that would reduce the Bank shareholders' ownership of
Stock Holding Company Common Stock to a number of shares having a
value, as of the date of the Reorganization, of less than 50 percent
of the value of all of the formerly outstanding Bank common stock as
of the same date. For purposes of this representation, shares of Bank
common stock exchanged for cash or other property or exchanged for
cash in lieu of fractional shares of Stock Holding Company Common
Stock will be treated as outstanding Bank common stock on the date of
the transaction. Moreover, shares of Bank common stock and shares of
Stock Holding Company Common Stock held by Bank shareholders and
otherwise sold, redeemed, or disposed of prior or subsequent to the
transaction as part of the Plan of Reorganization will be considered
in making this representation.
(c) Following the Reorganization, the Bank will hold at least 90 percent
of the fair market value of its net assets and at least 70 percent of
the fair market value of its gross assets and at least 90 percent of
the fair market value of Interim's net assets and at least 70 percent
of the fair market value of Interim's gross assets held immediately
prior to the Reorganization. For purposes of this representation,
amounts paid by the
<PAGE>
Boards of Directors
Pathfinder Bancorp, Inc.
Oswego City Savings Bank
September 17, 1997
Page 6
Bank or Interim to shareholders who receive cash or other property,
amounts used by the Bank or Interim to pay reorganization expenses,
and all redemptions and distributions (except for regular, normal
dividends) made by the Bank will be included as assets of the Bank or
Interim, respectively, immediately prior to the Reorganization.
(d) Prior to the transaction, Stock Holding Company will be in control of
Interim within the meaning of Section 368(c).
(e) As of the date of the execution of the Plan of Reorganization, the
Bank has no plan or intention to issue additional shares of its stock
that would result in Stock Holding Company losing control of the Bank
within the meaning of Section 368(c).
(f) As of the date of the Plan of Reorganization, Stock Holding Company
has no plan or intention to reacquire any of its stock issued in the
transaction.
(g) Stock Holding Company has no plan or intention to liquidate the Bank;
to merge the Bank with or into another corporation; to sell or
otherwise dispose of the stock of the Bank except for transfers of
stock to corporations controlled by Stock Holding Company; or to
cause the Bank to sell or otherwise dispose of any of its assets or
of any of the assets acquired from Interim, except for dispositions
made in the ordinary course of business or transfers of assets to a
corporation controlled by the Bank.
(h) The liabilities of Interim, if any, assumed by the Bank and the
liabilities to which the transferred assets of Interim are subject
were incurred by Interim in the ordinary course of its business.
(i) Following the transaction, the Bank will continue its historic
business or use a significant portion of its historic business assets
in a business.
(j) Stock Holding Company, Interim, the Bank, and the shareholders of the
Bank will pay their respective expenses, if any, incurred in
connection with the Reorganization. The Bank will pay or assume only
those expenses of Interim, if any, that are solely and directly
related to the transaction in accordance with the guidelines
established in Rev. Rul. 73-54, 1973-1 C.B. 187.
<PAGE>
Boards of Directors
Pathfinder Bancorp, Inc.
Oswego City Savings Bank
September 17, 1997
Page 7
(k) There is no intercorporate indebtedness existing between Stock
Holding Company and the Bank or between Interim and the Bank that was
issued, acquired, or will be settled at a discount.
(l) In the Reorganization, shares of Bank common stock representing
control of the Bank, as defined in Section 368(c), will be exchanged
solely for voting stock of Stock Holding Company. For purposes of
this representation, shares of Bank stock exchanged for cash or other
property originating with Stock Holding Company will be treated as
outstanding Bank common stock on the date of the Reorganization.
(m) At the time of the Reorganization, the Bank will not have outstanding
any warrants, options, convertible securities or any other type of
right pursuant to which any person could acquire stock in the Bank
that, if exercised or converted, would affect Stock Holding Company's
acquisition or retention of control of the Bank, as defined in
Section 368(c).
(n) Stock Holding Company does not own, nor has it owned during the past
five years, any shares of the stock of the Bank, nor will Stock
Holding Company acquire any such stock prior to the proposed
transaction.
(o) No two parties to the transaction are investment companies as defined
in Section 368(a)(2)(F)(iii) and (iv) of the Code.
(p) On the date of the Reorganization, the fair market value of the
assets of the Bank on a going concern basis will exceed the sum of
its liabilities, plus the amount of liabilities, if any, to which the
assets are subject.
(q) The Bank is not under the jurisdiction of a court in a Title 11 or
similar case within the meaning of Section 368(a)(3)(A).
(r) None of the compensation received by any of the shareholder-employees
of the Bank will be separate consideration for, or allocable to, any
of their shares of Bank common stock; none of the shares of Stock
Holding Company Common Stock received by any shareholder-employees
will be separate consideration for, or allocable to, any employment
agreement; and the compensation paid to any shareholder-employees
will be for services actually rendered and will be
<PAGE>
Boards of Directors
Pathfinder Bancorp, Inc.
Oswego City Savings Bank
September 17, 1997
Page 8
commensurate with amounts paid to third parties bargaining at arm's-
length for similar services.
OPINION
Based solely upon the terms of the proposed transaction described herein
and the representations set forth, it is our opinion that the following federal
income tax consequences will result from the Reorganization.
(1) Provided that the merger of Interim with and into the Bank qualifies
as a statutory merger under applicable law, and after the
Reorganization the Bank will hold substantially all of the assets of
Interim, and in the Reorganization, Bank shareholders exchange solely
for voting Stock Holding Company Common Stock an amount of Bank
common stock constituting "control" of the Bank within the meaning of
Section 368(c), the Reorganization will constitute a reorganization
within the meaning of Section 368(a)(1)(A)./2/ The Reorganization
will not be disqualified by reason of the fact that Common Stock of
Stock Holding Company is used in the transaction (Section
368(a)(2)(E)). The Bank, Stock Holding Company and Interim will each
be a party to the Reorganization within the meaning of Section
368(b).
(2) Interim will not recognize any gain or loss on the transfer of its
assets to the Bank in exchange for Bank common stock and the
assumption by the Bank of the liabilities, if any, of Interim
(Sections 361(a) and 357(a)).
(3) The Bank will not recognize any gain or loss on the receipt of the
assets of Interim in exchange for Bank common stock (Section
1032(a)).
(4) The Bank's basis in the assets received from Interim in the exchange
will, in each case, be the same as the basis of such assets in the
hands of Interim immediately prior to the Reorganization (Section
362(b)).
- -------------------
/2/ For purposes of this opinion, "substantially all" means at least 90
percent of the fair market value of the net assets and at least 70 percent of
the fair market value of the gross assets of the Bank and Interim.
<PAGE>
Boards of Directors
Pathfinder Bancorp, Inc.
Oswego City Savings Bank
September 17, 1997
Page 9
(5) Stock Holding Company will not recognize any gain or loss upon its
receipt of Bank common stock solely in exchange for Interim stock
(Section 354(a)).
(6) The Bank's holding period for the assets received from Interim in the
exchange will, in each instance, include the period during which such
assets were held by Interim (Section 1223(2)).
(7) Bank shareholders will not recognize any gain or loss upon their
exchange of Bank common stock solely for shares of Stock Holding
Company Common Stock (Section 354(a)).
(8) A Bank shareholder's basis in his or her Stock Holding Company Common
Stock received in the exchange will be the same as the basis of the
Bank common stock surrendered in the exchange therefor (Section
358(a)).
(9) A Bank shareholder's holding period in his or her Stock Holding
Company Common Stock received in the exchange will include the period
during which the Bank common stock surrendered was held, provided
that the Bank common stock surrendered is a capital asset in the
hands of the Bank shareholder on the date of the exchange (Section
1223(1)).
(10) Bank shareholders will not recognize any gain or loss as a result of
the conversion of their Bank stock options into options to purchase
stock of the Stock Holding Company (Treasury Regulation Section 1.83-
8(b)(6)).
SCOPE OF OPINION
Our opinion is limited to the federal income tax matters described above
and does not address any other federal income tax considerations or any federal,
state, local, foreign or other tax considerations. If any of the information
upon which we have relied is incorrect, or if changes in the relevant facts
occur after the date hereof, our opinion could be affected thereby. Moreover,
our opinion is based on the case law, Code, Treasury Regulations thereunder and
Internal Revenue Service rulings as they now exist. These authorities are all
subject to change, and such change may be made with retroactive effect. We can
give no assurance that, after such change, our opinion would not be different.
We undertake no responsibility to update or supplement our opinion. This
opinion is not binding on the Internal Revenue Service and there can be no
assurance, and none is hereby given, that the Internal Revenue Service will not
take a position contrary to one or more of
<PAGE>
Boards of Directors
Pathfinder Bancorp, Inc.
Oswego City Savings Bank
September 17, 1997
Page 10
the positions reflected in the foregoing opinion, or that our opinion will be
upheld by the courts if challenged by the Internal Revenue Service.
CONSENT
We hereby consent to the references to us under the heading "Approval of
the Plan of Reorganization - Tax Consequences" in the Proxy Statement/Prospectus
constituting a part of the Registration Statement on Form S-4 filed on behalf of
the Stock Holding Company with the Securities and Exchange Commission.
USE OF OPINION
This opinion is rendered solely for the benefit of Oswego City Savings
Bank, in connection with the proposed transaction and is not to be relied upon
or used for any other purpose without our prior written consent.
Very truly yours,
LUSE LEHMAN GORMAN POMERENK & SCHICK,
A Professional Corporation
By: /s/ Beverly J. White
----------------------------------------------
Beverly J. White
<PAGE>
EXHIBIT 10.3
OSWEGO CITY SAVINGS BANK
EMPLOYMENT AGREEMENT
This Agreement is made effective as of the 1st day of January, 1996, by and
between Oswego City Savings Bank (the "Bank"), a New York chartered stock
savings bank, with its principal administrative office at 214 West First Street,
Oswego, New York 13126-2547 and Chris C. Gagas (the "Executive"). Any reference
to "Company" herein shall mean Pathfinder Bancorp, MHC or any successor thereto.
WHEREAS, the Bank wishes to assure itself of the services of Executive for
the period provided in this Agreement; and
WHEREAS, Executive is willing to serve in the employ of the Bank on a full-
time basis for said period.
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
and upon the other terms and conditions hereinafter provided, the parties hereby
agree as follows:
1. POSITION AND RESPONSIBILITIES
During the period of his employment hereunder, Executive agrees to serve as
President and Chief Executive Officer of the Bank. During said period,
Executive also agrees to serve, if elected, as an officer and director of any
subsidiary or affiliate of the Bank. Failure to reelect Executive as President
and Chief Executive Officer of the Bank without the consent of the Executive
during the term of this Agreement shall constitute a breach of this Agreement.
2. TERMS AND DUTIES
(a) The period of Executive's employment under this Agreement shall begin
as of the date first above written and shall continue for a period of thirty-six
(36) full calendar months thereafter. Commencing on the first anniversary date
of this Agreement, and continuing at each anniversary date thereafter, the
Agreement shall renew for an additional year such that the remaining term shall
be three (3) years unless written notice is provided to Executive at least ten
(10) days and not more than thirty (30) days prior to any such anniversary date,
that his employment shall cease at the end of twenty-four (24) months following
such anniversary date. Prior to each notice period for non-renewal, the
disinterested members of the Board of Directors of the Bank ("Board") will
conduct a comprehensive performance evaluation and review of the Executive for
purposes of determining whether to extend the Agreement, and the results thereof
shall be included in the minutes of the Board's meeting.
(b) During the period of his employment hereunder, except for periods of
absence occasioned by illness, reasonable vacation periods, and reasonable
leaves of absence, Executive shall devote substantially all his business time,
attention, skill, and efforts to the faithful performance of his duties
hereunder including activities and services related to the organization,
operation and management of the Bank; provided, however, that, with the approval
of the Board, as evidenced by a resolution of such Board, from time to time,
Executive may serve, or continue to serve, on the boards of directors of, and
hold any other offices or positions in, companies or organizations, which, in
such Board's judgment, will not present any conflict of interest with the Bank,
or materially affect the performance of Executive's duties pursuant to this
Agreement.
<PAGE>
3. COMPENSATION AND REIMBURSEMENT
(a) The compensation specified under this Agreement shall constitute the
salary and benefits paid for the duties described in Section 2(b). The Bank
shall pay Executive as compensation a salary of not less than $175,000 per year
("Base Salary"). Such Base Salary shall be payable biweekly. During the period
of this Agreement, Executive's Base Salary shall be reviewed at least annually;
the first such review will be made no later than December 31, 1996. Such
review shall be conducted by a Committee designated by the Board, and the Board
may increase Executive's Base Salary. In addition to the Base Salary provided
in this Section 3(a), the Bank shall provide Executive at no cost to Executive
with all such other benefits as are provided uniformly to permanent full-time
employees of the Bank.
(b) The Bank will provide Executive with employee benefit plans,
arrangements and perquisites substantially equivalent to those in which
Executive was participating or otherwise deriving benefit from immediately prior
to the beginning of the term of this Agreement, and the Bank will not, without
Executive's prior written consent, make any changes in such plans, arrangements
or perquisites which would adversely affect Executive's rights or benefits
thereunder. Without limiting the generality of the foregoing provisions of this
Subsection (b), Executive will be entitled to participate in or receive benefits
under any employee benefit plans including but not limited to, retirement plans,
supplemental retirement plans, pension plans, profit-sharing plans, health-and-
accident plans, medical coverage or any other employee benefit plan or
arrangement made available by the Bank in the future to its senior executives
and key management employees, subject to and on a basis consistent with the
terms, conditions and overall administration of such plans and arrangements.
Executive will be entitled to incentive compensation and bonuses as provided in
any plan of the Bank in which Executive is eligible to participate. Nothing
paid to the Executive under any such plan or arrangement will be deemed to be
in lieu of other compensation to which the Executive is entitled under this
Agreement.
(c) In addition to the Base Salary provided for by paragraph (a) of this
Section 3, the Bank shall pay or reimburse Executive for all reasonable travel
and other reasonable expenses incurred by Executive performing his obligations
under this Agreement and may provide such additional compensation in such form
and such amounts as the Board may from time to time determine.
(d) Compensation and reimbursement to be paid pursuant to paragraphs (a),
(b) and (c) of this Section 3 shall be paid by the Bank and the Company,
respectively on a pro rata basis based upon the amount of service the Executive
devotes to the Bank and Company, respectively.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION
The provisions of this Section shall in all respects be subject to the
terms and conditions stated in Sections 8 and 15.
(a) The provisions of this Section shall apply upon the occurrence of an
Event of Termination (as herein defined) during the Executive's term of
employment under this Agreement. As used in this Agreement, an "Event of
Termination" shall mean and include any one or more of the following: (i) the
termination by the Bank or the Company of Executive's full-time employment
hereunder for any reason other than, (A) Disability or Retirement as defined in
Section 6 below, (B) a Change in Control, as defined in Section 5(a) hereof, or
(C) Termination for Cause as defined in Section 7 hereof; or (ii) Executive's
resignation from the Bank's employ, upon any (A) failure to elect or reelect or
to appoint or reappoint Executive as President and Chief Executive Officer, (B)
material change in Executive's function, duties, or responsibilities, which
change would cause Executive's position to become one of
2
<PAGE>
lesser responsibility, importance, or scope from the position and attributes
thereof described in Section 1, above, (C) a relocation of Executive's principal
place of employment by more than 30 miles from its location at the effective
date of this Agreement, or a material reduction in the benefits and perquisites
to the Executive from those being provided as of the effective date of this
Agreement, (D) liquidation or dissolution of the Bank or Company other than
liquidations or dissolutions that are caused by reorganizations that do not
affect the status of Executive, or (E) breach of this Agreement by the Bank.
Upon the occurrence of any event described in clauses (ii)(A), (B), (C), (D) or
(E), above, Executive shall have the right to elect to terminate his employment
under this Agreement by resignation upon sixty (60) days prior written notice
given within a reasonable period of time not to exceed four calendar months
after the initial event giving rise to said right to elect. Notwithstanding the
preceding sentence, in the event of a continuing breach of this Agreement by the
Bank, the Executive, after giving due notice within the prescribed time frame of
an initial event specified above, shall not waive any of his rights solely under
this Agreement and this Section 4 by virtue of the fact that Executive has
submitted his resignation but has remained in the employment of the Bank and is
engaged in good faith discussions to resolve any occurrence of an event
described in clauses (A), (B), (C), (D) and (E) above.
(b) Upon the occurrence of an Event of Termination, on the Date of
Termination, as defined in Section 8, the Bank shall pay Executive, or, in the
event of his subsequent death, his beneficiary or beneficiaries, or his estate,
as the case may be, as severance pay or liquidated damages, or both, a sum
equal to the greater of the payments due for the remaining term of the Agreement
or three (3) times the average of the three preceding years' Base Salary,
including bonuses and any other cash compensation paid to the Executive during
such years, and the amount of any benefits received pursuant to any employee
benefit plans on behalf of the Executive, maintained by the Bank during such
years; provided, however, that if the Bank is not in compliance with its minimum
-------- -------
capital requirements or if such payments would cause the Bank's capital to be
reduced below its minimum capital requirements, such payments shall be deferred
until such time as the Bank is in capital compliance, and provided further, that
in no event shall total severance compensation from all sources exceed three
times the Executive's Base Salary for the immediately preceding year. At the
election of the Executive, which election is to be made on an annual basis
during the month of January, and which election is irrevocable for the year in
which made and upon the occurrence of an Event of Termination, such payments
shall be made in a lump sum or paid monthly during the remaining term of the
Agreement following the Executive's termination. In the event that no election
is made, payment to the Executive will be made on a monthly basis during the
remaining term of the Agreement. Such payments shall not be reduced in the
event the Executive obtains other employment following termination of
employment.
(c) Notwithstanding the provisions of Sections 4(a) and (b), and in the
event that there has not been a Change in Control as defined in Section 5(a),
upon the voluntary termination by the Executive upon giving sixty days notice to
the Bank (which shall not be deemed to constitute an "Event of Termination" as
defined herein), the Bank, at the discretion of the Board of Directors, shall
pay Executive, or in the event of his subsequent death, his beneficiary or
beneficiaries, or his estate, as the case may be, a severance payment in an
amount to be determined by the Board of Directors at the time of such voluntary
termination by the Executive. Such severance payment shall not exceed three (3)
times the average of the three preceding years' Base Salary, including bonuses
and any other cash compensation paid to the Executive during such years, and the
amount of any benefits received pursuant to any employee benefit plans, on
behalf of the Executive, maintained by the Bank during such years; provided,
--------
however, that if the Bank is not in compliance with its minimum capital
- -------
requirements or if such payments would cause the Bank's capital to be reduced
below its minimum capital requirements, such payments shall be deferred until
such time as the Bank is in capital compliance, and provided further, that in no
event shall total severance compensation from all sources exceed three times the
Executive's Base Salary
3
<PAGE>
for the immediately preceding year. At the election of the Executive, which
election is to be made on an annual basis during the month of January, and which
election is irrevocable for the year in which made and upon the Executive's
voluntary termination, any payments shall be made in a lump sum or paid monthly
during the remaining term of the Agreement following the Executive's
termination. In the event that no election is made, any payment to the Executive
will be made on a monthly basis during the remaining term of the agreement. Such
payments shall not be reduced in the event the Executive obtains other
employment following termination of employment.
(d) Upon the occurrence of an Event of Termination, the Bank will cause to
be continued life, medical, dental and disability coverage substantially
identical to the coverage maintained by the Bank for Executive prior to his
termination, provided that such benefits shall not be provided in the event they
should constitute an unsafe or unsound banking practice relating to executive
compensation and employment contracts pursuant to applicable regulations, as is
now or hereafter in effect. Such coverage shall cease upon the expiration of
the remaining term of this Agreement.
5. CHANGE IN CONTROL
(a) No benefit shall be payable under this Section 5 unless there shall
have been a Change in Control of the Bank or Company, as set forth below. For
purposes of this Agreement, a "Change in Control" of the Bank or Company shall
mean:
(1) a reorganization, merger, merger conversion, consolidation or sale of
all or substantially all of the assets of the Bank, the Company or the Stock
Holding Company, or a similar transaction in which the Bank, the Company or the
Stock Holding Company is not the resulting entity and that is not approved by a
majority of the Board of Directors of the Bank, the Company or the Stock Holding
Company;
(2) individuals who constitute the Incumbent Board of the Bank, the
Company, or the Stock Holding Company cease for any reason to constitute a
majority thereof; provided that any person becoming a director subsequent to the
date hereof whose election was approved by a vote of at least three-fourths of
the directors composing the Incumbent Board or whose nomination for election by
the Bank's or Company's stockholders or members was approved by the same
nominating committee serving under the Incumbent Board shall be, for purposes of
this Section 5, considered as though he were a member of the Incumbent Board; or
(3) an acquisition of "control" of the Bank or the Company as defined in
the Bank Holding Company Act of 1956, as amended and applicable rules and
regulations promulgated thereunder as in effect at the time of the Change in
Control (collectively, the "BHCA"), as determined by the Board of Directors of
the Bank or the Company; or
(4) an acquisition of the Bank's stock requiring submission of notice under
the change in Bank Control Act; provided, however, that a Change in Control
shall not be deemed to have occurred under (1), (3) or (4) of this section if
the transaction(s) constituting a Change in Control is approved by a majority of
the Board of Directors of the Bank or the Company, as the case may be.
(5) In the event that the Company converts to the Stock Holding Company on
a stand-alone basis, a "Change in Control" of the Bank or the Stock Holding
Company (a) shall mean an event of a nature that would be required to be
reported in response to Item 1 of the current report on Form 8-K, as in effect
on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
4
<PAGE>
(the "Exchange Act"), or results in a Change in Control of the Bank or the Stock
Holding Company within the meaning of the BHCA; or (b) without limitation shall
be deemed to have occurred at such time as (i) any "person" (as the term is used
in Section 13(d) and 14(d) of the Exchange Act) other than the Stock Holding
Company is or becomes a "beneficial owner" (as defined in Rule 13-d under the
Exchange Act) directly or indirectly, of securities of the Bank representing 25%
or more of the Bank's outstanding securities ordinarily having the right to vote
at the election of directors except for any securities of the Bank received by
the Stock Holding Company in connection with the Reorganization and any
securities purchased by the Bank's employee stock ownership plan and trust shall
not be counted in determining whether such plan is the beneficial owner of more
than 25% of the Bank's securities, (ii) a proxy statement soliciting proxies
from stockholders of the Bank, by someone other than the current management of
the Bank, seeking stockholder approval of a plan of reorganization, merger or
consolidation of the Stock Holding Company of the Bank or similar transaction
with one or more corporations as a result of which the outstanding shares of the
class of securities then subject to the plan or transaction are exchanged or
converted into cash or property or securities not issued by the Bank or the
Stock Holding Company, or (iii) a tender offer is made for 25% or more of the
voting securities of the Bank and the shareholders owning beneficially or of
record 25% or more of the outstanding securities of the Bank have tendered or
offered to sell their shares pursuant to such tender offer and such tendered
shares have been accepted by the tender offeror.
Notwithstanding, the foregoing, a "Change in Control" of the Bank or the
Company shall not be deemed to have occurred if the Company ceases to own at
least 51% of all outstanding shares of stock of the Bank in connection with a
conversion of the Company from mutual to stock form.
For these purposes, "Incumbent Board" means, in the case of (i) the
Company or the Stock Holding Company, or (ii) the Bank, the Board of Directors
of the Company or the Bank, respectively, on the date hereof, provided that any
person becoming a director subsequent to the date hereof whose election was
approved by a vote of at least three-quarters of the directors comprising the
Incumbent Board, or whose nomination for election by members or stockholders was
approved by the same nominating committee serving under an Incumbent Board,
shall be considered as though he were a member of the Incumbent Board.
Also for these purposes, Stock Holding Company means the holding company
resulting from a stock conversion of the Company from the mutual to stock form
of organization either on a stand-alone basis or in the context of a merger
conversion, as provided by regulations or the regulatory policy of the New York
State Banking Department.
(b) If any of the events described in Section 5(a) hereof constituting a
Change in Control have occurred, Executive shall be entitled to the benefits
provided in paragraphs (c), (d), (e), (f), (g) and (h) of this Section 5 upon
his subsequent termination of employment at any time during the term of this
Agreement, regardless of whether such termination results from (i) his
resignation or (ii) his dismissal upon the Change in Control.
(c) Upon the occurrence of a Change in Control followed by the Executive's
termination of employment, the Bank shall pay Executive, or in the event of his
subsequent death, his beneficiary or beneficiaries, or his estate, as the case
may be, as severance pay or liquidated damages, or both, a sum equal to the
greater of the payments due for the remaining term of the Agreement or 2.99
times the average of the five preceding years' Base Salary, including bonuses
and any other cash compensation paid to the Executive during such years, and the
amount of any contributions made to any employee benefit plans, on behalf of the
Executive, maintained by the Bank during such years. Such payment shall be
5
<PAGE>
made by the Bank on the Date of Termination. At the election of the Executive,
which election shall be made on an annual basis during the month of January, and
which election is irrevocable for the year in which made and upon the occurrence
of a Change in Control, such payment may be made in a lump sum or paid in equal
monthly installments during the thirty-six (36) months following the Executive's
termination. In the event that no election is made, payment to the Executive
will be made on a monthly basis during the remaining term of the Agreement.
(d) Upon the occurrence of a Change in Control followed by the Executive's
termination of employment, the Bank will cause to be continued life, medical,
dental and disability coverage substantially identical to the coverage
maintained by the Bank for Executive prior to his severance. Such coverage and
payments shall cease upon the expiration of thirty-six (36) months.
(e) Upon the occurrence of a Change in Control, Executive will be entitled
to any benefits granted to him pursuant to any Stock Option Plan of the Bank or
Holding Company.
(f) Upon the occurrence of a Change in Control the Executive will be
entitled to any benefits awarded to him under the Bank's Recognition and
Retention Plan or any restricted stock plan in effect.
(g) Notwithstanding the preceding paragraphs of this Section 5, in the
event that:
(i) the aggregate payments or benefits to be made or afforded to
Executive under said paragraphs (the "Termination Benefits")
would be deemed to include an "excess parachute payment" under
Section 280G of the Code or any successor thereto, and
(ii) if such Termination Benefits were reduced to an amount (the
"Non-Triggering Amount"), the value of which is one dollar
($1.00) less than an amount equal to the total amount of
payments permissible under Section 280G of the Code or any
successor thereto,
then the Termination Benefits to be paid to Executive shall be so
reduced so as to be a Non-Triggering Amount.
(h) Notwithstanding the foregoing, there will be no reduction in the
compensation otherwise payable to Executive during any period during which
Executive is incapable of performing his duties hereunder by reason of temporary
disability.
(i) Any payments made to Executive pursuant to this Agreement or otherwise,
are subject to and conditioned upon their compliance with 12 U.S.C. (S) 1818(k)
and any applicable regulations promulgated thereunder.
(j) The Executive shall not be entitled to any payments pursuant to this
Section 5 if the Bank is not in compliance with its minimum capital requirements
or if such payments would cause the Bank's capital to be reduced below its
minimum capital requirements, such payments shall be deferred until such times
as the Bank is in capital compliance and provided further, that in no event
shall total severance compensation from all sources exceed three times the
Executive's Base Salary for the immediately preceding year.
6. TERMINATION UPON RETIREMENT OR DISABILITY
6
<PAGE>
Termination by the Bank of the Executive based on "Retirement" shall mean
termination in accordance with the Bank's retirement policy or in accordance
with any retirement arrangement established with Executive's consent with
respect to him. Upon termination of Executive upon Retirement, Executive shall
be entitled to all benefits under any retirement plan of the Bank and other
plans to which Executive is a party.
Termination by the Bank of Executive's employment based on "Disability"
shall mean termination because of any physical or mental impairment which
qualifies the Executive for disability benefits under the applicable long-term
disability plan maintained by the Bank or, if no such plan applies, which would
qualify the Executive for disability benefits under the federal social security
system.
7. TERMINATION FOR CAUSE
The term "Termination for Cause' shall mean termination because of the
Executive's personal dishonesty, incompetence, willful misconduct, any breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule, or regulation (other than traffic
violations or similar offenses) or final cease-and-desist order, or material
breach of any provision of this Agreement. In determining incompetence, the
acts or omissions shall be measured against standards generally prevailing in
the savings institutions industry. For purposes of this paragraph, no act or
failure to act on the part of Executive shall be considered "willful" unless
done, or omitted to be done, by the Executive not in good faith and without
reasonable belief that the Executive's action or omission was in the best
interest of the Bank. Notwithstanding the foregoing, Executive shall not be
deemed to have been Terminated for Cause unless and until there shall have been
delivered to him a copy of a resolution duly adopted by the affirmative vote of
not less than three-fourths of the members of the Board at a meeting of the
Board called and held for that purpose (after reasonable notice to Executive and
an opportunity for him, together with counsel, to be heard before the Board),
finding that in the good faith opinion of the Board, Executive was guilty of
conduct justifying Termination for Cause and specifying the particulars thereof
in detail. The Executive shall not have the right to receive compensation or
other benefits for any period after Termination for Cause. Any stock options
granted to Executive under any stock option plan of the Bank, the Company or any
subsidiary or affiliate thereof, shall become null and void effective upon
Executive's receipt of Notice of Termination for Cause pursuant to Section 8
hereof, and shall not be exercisable by Executive at any time subsequent to such
Termination for Cause.
8. NOTICE
(a) Any purported termination by the Bank or by Executive shall be
communicated by Notice of Termination to the other party hereto. For purposes
of this Agreement, a "Notice of Termination" shall mean a written notice which
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the provision so
indicated.
(b) "Date of Termination" shall mean the date specified in the Notice of
Termination (which, in the case of a Termination for Cause, shall not be less
than thirty (30) days from the date such Notice of Termination is given).
(c) If, within thirty (30) days after any Notice of Termination is given,
the party receiving such Notice of Termination notifies the other party that a
dispute exists concerning the termination, except upon the occurrence of a
Change in Control and voluntary termination by the Executive in which case the
Date of Termination shall be the date specified in the Notice, the Date of
Termination shall be the
7
<PAGE>
date on which the dispute is finally determined, either by mutual written
agreement of the parties, by a binding arbitration award, or by a final
judgment, order or decree of a court of competent jurisdiction (the time for
appeal having expired and no appeal having been perfected) and provided further
that the Date of Termination shall be extended by a notice of dispute only if
such notice is given in good faith and the party giving such notice pursues the
resolution of such dispute with reasonable diligence. Notwithstanding the
pendency of any such dispute, the Bank will continue to pay Executive his full
compensation in effect when the notice giving rise to the dispute was given
(including, but not limited to, Base Salary) and continue Executive as a
participant in all compensation, benefit and insurance plans in which he was
participating when the notice of dispute was given, until the dispute is finally
resolved in accordance with this Agreement, provided such dispute is resolved
within nine months after the Date of Termination specified in the Notice or
Termination; notwithstanding the foregoing no compensation or benefits shall be
paid to Executive in the event the Executive is Terminated for Cause. In the
event that such Termination for Cause is found to have been wrongful or such
dispute is otherwise decided in Executive's favor, the Executive shall be
entitled to receive all compensation and benefits which accrued for up to a
period of nine months after the Termination for Cause. If such dispute is not
resolved within such nine- month period, the Bank shall not be obligated, upon
final resolution of such dispute, to pay Executive compensation and other
payments accruing more than nine months from the Date of the Termination
specified in the Notice of Termination. Amounts paid under this Section are in
addition to all other amounts due under this Agreement and shall not be offset
against or reduce any other amounts due under this Agreement.
9. POST-TERMINATION OBLIGATIONS
(a) All payments and benefits to Executive under this Agreement shall be
subject to Executive's compliance with paragraph (b) of this Section 9 during
the term of this Agreement and for one (1) full year after the expiration or
termination hereof.
(b) Executive shall, upon reasonable notice, furnish such information and
assistance to the Bank as may reasonably be required by the Bank in connection
with any litigation in which it or any of its subsidiaries or affiliates is, or
may become, a party.
10. NON-COMPETITION
(a) Upon any termination of Executive's employment hereunder pursuant to
Section 4(c) hereof, Executive agrees not to compete with the Bank and/or the
Company for a period of one (1) year following such termination in any city,
town or county in which the Bank and/or the Company has an office or has filed
an application for regulatory approval to establish an office, determined as of
the effective date of such termination, except as agreed to pursuant to a
resolution duly adopted by the Board. Executive agrees that during such period
and within said cities, towns and counties, Executive shall not work for or
advise, consult or otherwise serve with, directly or indirectly, any entity
whose business materially competes with the depository, lending or other
business activities of the Bank and/or the Company. The parties hereto,
recognizing that irreparable injury will result to the Bank and/or the Company,
its business and property in the event of Executive's breach of this Subsection
10(a) agree that in the event of any such breach by Executive, the Bank and/or
the Company will be entitled, in addition to any other remedies and damages
available, to an injunction to restrain the violation hereof by Executive,
Executive's partners, agents, servants, employers, employees and all persons
acting for or with Executive. Nothing herein will be construed as prohibiting
the Bank and/or the Company from pursuing any other remedies available to the
Bank and/or the Company for such breach or threatened breach, including the
recovery of damages from Executive.
8
<PAGE>
(b) Executive recognizes and acknowledges that the knowledge of the
business activities and plans for business activities of the Bank and affiliates
thereof, as it may exist from time to time, is a valuable, special and unique
asset of the business of the Bank. Executive will not, during or after the term
of his employment, disclose any knowledge of the past, present, planned or
considered business activities of the Bank or affiliates thereof to any person,
firm, corporation, or other entity for any reason or purpose whatsoever.
Notwithstanding the foregoing, Executive may disclose any knowledge of banking,
financial and/or economic principles, concepts or ideas which are not solely and
exclusively derived from the business plans and activities of the Bank, and
Executive may disclose any information regarding the Bank or the Company which
is otherwise publicly available. In the event of a breach or threatened breach
by the Executive of the Provisions of this Section 10, the Bank will be entitled
to an injunction restraining Executive from disclosing, in whole or in part, the
knowledge of the past, present, planned or considered business activities of the
Bank or affiliates thereof, or from rendering any services to any person, firm,
corporation, other entity to whom such knowledge, in whole or in part, has been
disclosed or is threatened to be disclosed. Nothing herein will be construed as
prohibiting the Bank from pursuing any other remedies available to the Bank for
such breach or threatened breach, including the recovery of damages from
Executive.
11. SOURCE OF PAYMENTS
All payments provided in this Agreement shall be timely paid in cash or
check from the general funds of the Bank. The Company, however, guarantees
payment and provision of all amounts and benefits due hereunder to Executive
and, if such amounts and benefits due from the Bank are not timely paid or
provided by the Bank, such amounts and benefits shall be paid or provided by the
Company.
12. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS
This Agreement contains the entire understanding between the parties hereto
and supersedes any prior employment agreement between the Bank or any
predecessor of the Bank and Executive, except that this Agreement shall not
affect or operate to reduce any benefit or compensation inuring to the Executive
of a kind elsewhere provided. No provision of this Agreement shall be
interpreted to mean that Executive is subject to receiving fewer benefits than
those available to him without reference to this Agreement.
13. NO ATTACHMENT
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive and the Bank and their respective successors and assigns.
14. MODIFICATION AND WAIVER
(a) This Agreement may not be modified or amended except by an instrument
in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written
9
<PAGE>
instrument of the party charged with such waiver or estoppel. No such written
waiver shall be deemed a continuing waiver unless specifically stated therein,
and each such waiver shall operate only as to the specific term or condition
waived and shall not constitute a waiver of such term or condition for the
future as to any act other than that specifically waived.
15. REQUIRED PROVISIONS
(a) The Bank may terminate the Executive's employment at any time, but any
termination by the Bank, other than Termination for Cause, shall not prejudice
Executive's right to compensation or other benefits under this Agreement.
Executive shall not have the right to receive compensation or other benefits for
any period after Termination for Cause as defined in Section 7 hereinabove.
(b) If the Executive is suspended from office and/or temporarily prohibited
from participating in the conduct of the Bank's affairs by a notice served under
Section 8(e)(3) (12 U.S.C. (S)(S) 1818(e)(3)) or 8(g) (12 U.S.C. (S) 1818(g)) of
the Federal Deposit Insurance Act, as amended by the Financial Institutions
Reform, Recovery and Enforcement Act of 1989, the Bank's obligations under this
contract shall be suspended as of the date of service, unless stayed by
appropriate proceedings. If the charges in the notice are dismissed, the Bank
may in its discretion (i) pay the Executive all or part of the compensation
withheld while their contract obligations were suspended and (ii) reinstate (in
whole or in part) any of the obligations which were suspended.
(c) If the Executive is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Section 8(e) (12 U.S.C. (S)(S) 1818(e)) or 8(g) (12 U.S.C. (S) 1818(g)) of the
Federal Deposit Insurance Act, as amended by the Financial Institutions Reform,
Recovery and Enforcement Act of 1989, all obligations of the Bank under this
contract shall terminate as of the effective date of the order, but vested
rights of the contracting parties shall not be affected.
(d) If the Bank is in default as defined in Section 3(x) (12 U.S.C. (S)
1813(x)(1)) of the Federal Deposit Insurance Act, as amended by the Financial
Institutions Reform, Recovery and Enforcement Act of 1989, all obligations of
the Bank under this contract shall terminate as of the date of default, but this
paragraph shall not affect any vested rights of the contracting parties.
(e) All obligations of the Bank under this contract shall be terminated,
except to the extent determined that continuation of the contract is necessary
for the continued operation of the institution, (i) by the Federal Deposit
Insurance Corporation ("FDIC"), at the time FDIC enters into an agreement to
provide assistance to or on behalf of the Bank under the authority contained in
Section 13(c) (12) U.S.C. (S) 1823(c)) of the Federal Deposit Insurance Act, as
amended by the Financial Institutions Reform, Recovery and Enforcement Act of
1989; or (ii) when the Bank is determined by the FDIC to be in an unsafe or
unsound condition. Any rights of the parties that have already vested, however,
shall not be affected by such action.
16. SEVERABILITY
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
10
<PAGE>
17. HEADINGS FOR REFERENCE ONLY
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
18. GOVERNING LAW
This Agreement shall be governed by the laws of the State of New York, but
only to the extent not superseded by federal law.
19. ARBITRATION
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration in accordance with the
rules of the American Arbitration Association then in effect. Judgment may be
entered on the arbitrator's award in any court having jurisdiction; provided,
however, that Executive shall be entitled to seek specific performance of his
right to be paid until the Date of Termination during the pendency of any
dispute or controversy arising under or in connection with this Agreement.
20. PAYMENT OF LEGAL FEES
All reasonable legal fees paid or incurred by Executive pursuant to any
dispute or question of interpretation relating to this Agreement shall be paid
or reimbursed by the Bank, provided that the dispute or interpretation has been
settled by Executive and the Bank or resolved in the Executive's favor.
21. INDEMNIFICATION
The Bank shall provide Executive (including his heirs, executors and
administrators) with coverage under a standard directors' and officers'
liability insurance policy at its expense, or in lieu thereof, shall indemnify
Executive (and his heirs, executors and administrators) to the fullest extent
permitted under federal law against all expenses and liabilities reasonably
incurred by him in connection with or arising out of any action, suit or
proceeding in which he may be involved by reason of his having been a director
or officer of the Bank (whether or not he continues to be a director or officer
at the time of incurring such expenses or liabilities), such expenses and
liabilities to include, but not be limited to, judgments, court costs and
attorneys' fees and the cost of reasonable settlements (such settlements must be
approved by the Board of Directors of the Bank). If such action, suit or
proceeding is brought against Executive in his capacity as an officer or
director of the Bank, however, such indemnification shall not extend to matters
as to which Executive is finally adjudged to be liable for willful misconduct in
the performance of his duties. No Indemnification shall be paid that would
violate 12 U.S.C. 1828(K) or any regulations promulgated thereunder.
22. SUCCESSOR TO THE BANK
The Bank shall require any successor or assignee, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Bank or the Company, expressly
and unconditionally to assume and agree to perform the Bank's obligations under
this Agreement, in the same manner and to the same extent that the Bank would be
required to perform if no such succession or assignment had taken place.
11
<PAGE>
SIGNATURES
IN WITNESS WHEREOF, the Bank has caused this Agreement to be executed and
its seal to be affixed hereunto by its duly authorized officer, and Executive
has signed this Agreement, on the day and date first above written.
ATTEST: OSWEGO CITY SAVINGS BANK
/s/ Melissa A. Dashnau By: /s/ W. David Schermerhorn
- ---------------------- ------------------------------------
[SEAL]
WITNESS:
/s/ Melissa A. Dashnau By: /s/ Chris C. Gagas
- ---------------------- ------------------------------------
EXECUTIVE
<PAGE>
EXHIBIT 10.4
OSWEGO CITY SAVINGS BANK
SEVERANCE AGREEMENT
This AGREEMENT is made effective as of the 1st day of January, 1996 by and
between Oswego City Savings Bank, a New York chartered stock savings bank (the
"Bank"), and Thomas W. Schneider ("Executive"). Any reference to "Company"
herein shall mean Pathfinder Bancorp, MHC or any successor thereto.
WHEREAS, the Bank recognizes the substantial contribution Executive has
made to the Bank and wishes to protect his position therewith for the period
provided in this Agreement; and
WHEREAS, Executive has been elected to, and has agreed to serve in the
position of Vice President and Chief Financial Officer for the Bank, a position
of substantial responsibility;
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
and upon the other terms and conditions hereinafter provided, the parties hereto
agree as follows:
1. TERM OF AGREEMENT
The term of this Agreement shall be deemed to have commenced as of the date
first above written and shall continue for a period of thirty-six (36) full
calendar months thereafter. Commencing on the first anniversary date of this
Agreement and continuing at each anniversary date thereafter, the Board of
Directors of the Bank ("Board") may extend the Agreement for an additional year.
The Board will conduct a performance evaluation of the Executive for purposes of
determining whether to extend the Agreement, and the results thereof shall be
included in the minutes of the Board's meeting. If Executive is also a director
then he or she shall abstain from any and all voting with respect to the
extension of the term of such Executive's Agreement.
2. PAYMENTS TO EXECUTIVE UPON CHANGE IN CONTROL
(a) Upon the occurrence of a Change in Control of the Bank (as herein
defined) followed at any time during the term of this Agreement by the voluntary
or involuntary termination of Executive's employment, other than for Cause, as
defined in Section 2(c) hereof, the provisions of Section 3 shall apply. Upon
the occurrence of a Change in Control, Executive shall have the right to elect
to voluntarily terminate his employment at any time during the term of this
Agreement following any demotion, loss of title, office or significant
authority, reduction in his annual compensation or benefits, or relocation of
his principal place of employment by more than 30 miles from its location
immediately prior to the Change in Control.
(b) A "Change in Control" of the Bank or the Company shall mean:
(1) a reorganization, merger, merger conversion, consolidation or sale of
all or substantially all of the assets of the Bank, the Company or the Stock
Holding Company, or a similar transaction in which the Bank, the Company or the
Stock Holding Company is not the resulting entity and that is not approved by a
majority of the Board of Directors of the Bank, the Company or the Stock Holding
Company;
(2) individuals who constitute the Incumbent Board of the Bank, the
Company, or the Stock Holding Company cease for any reason to constitute a
majority thereof; provided that any person becoming a director subsequent to the
date hereof whose election was approved by a vote of at least
<PAGE>
three-fourths of the directors composing the Incumbent Board or whose nomination
for election by the Bank's or Company's stockholders or members was approved by
the same nominating committee serving under the Incumbent Board shall be, for
purposes of this Section, considered as though he were a member of the Incumbent
Board; or
(3) an acquisition of "control" of the Bank or the Company as defined in
the Bank Holding Company Act of 1956, as amended and applicable rules and
regulations promulgated thereunder as in effect at the time of the Change in
Control (collectively, the "BHCA"), as determined by the Board of Directors of
the Bank or the Company; or
(4) an acquisition of the Bank's stock requiring submission of notice under
the change in Bank Control Act; provided, however, that a Change in Control
shall not be deemed to have occurred under (1), (3) or (4) of this section if
the transaction(s) constituting a Change in Control is approved by a majority of
the Board of Directors of the Bank or the Company, as the case may be.
(5) In the event that the Company converts to the Stock Holding Company on
a stand-alone basis, a "Change in Control" of the Bank or the Stock Holding
Company (a) shall mean an event of a nature that would be required to be
reported in response to Item 1 of the current report on Form 8-K, as in effect
on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (the "Exchange Act"), or results in a Change in Control of the Bank
or the Stock Holding Company within the meaning of the BHCA; or (b) without
limitation shall be deemed to have occurred at such time as (i) any "person" (as
the term is used in Section 13(d) and 14(d) of the Exchange Act) other than the
Stock Holding Company is or becomes a "beneficial owner" (as defined in Rule 13-
d under the Exchange Act) directly or indirectly, of securities of the Bank
representing 25% or more of the Bank's outstanding securities ordinarily having
the right to vote at the election of directors except for any securities of the
Bank received by the Stock Holding Company in connection with the Reorganization
and any securities purchased by the Bank's employee stock ownership plan and
trust shall not be counted in determining whether such plan is the beneficial
owner of more than 25% of the Bank's securities, (ii) a proxy statement
soliciting proxies from stockholders of the Bank, by someone other than the
current management of the Bank, seeking stockholder approval of a plan of
reorganization, merger or consolidation of the Stock Holding Company of the Bank
or similar transaction with one or more corporations as a result of which the
outstanding shares of the class of securities then subject to the plan or
transaction are exchanged or converted into cash or property or securities not
issued by the Bank or the Stock Holding Company, or (iii) a tender offer is made
for 25% or more of the voting securities of the Bank and the shareholders owning
beneficially or of record 25% or more of the outstanding securities of the Bank
have tendered or offered to sell their shares pursuant to such tender offer and
such tendered shares have been accepted by the tender offeror.
Notwithstanding, the foregoing, a "Change in Control" of the Bank or the
Company shall not be deemed to have occurred if the Company ceases to own at
least 51% of all outstanding shares of stock of the Bank in connection with a
conversion of the Company from mutual to stock form.
For these purposes, "Incumbent Board" means, in the case of (i) the Company
or the Stock Holding Company, or (ii) the Bank, the Board of Directors of the
Company or the Bank, respectively, on the date hereof, provided that any person
becoming a director subsequent to the date hereof whose election was approved by
a vote of at least three-quarters of the directors comprising the Incumbent
Board, or whose nomination for election by members or stockholders was approved
by the same nominating committee serving under an Incumbent Board, shall be
considered as though he were a member of the Incumbent Board.
2
<PAGE>
Also for these purposes, Stock Holding Company means the holding company
resulting from a stock conversion of the Company from the mutual to stock form
of organization either on a stand-alone basis or in the context of a merger
conversion, as provided by regulations or regulatory policy of the New York
State Banking Department.
(c) Executive shall not have the right to receive termination benefits
pursuant to Section 3 hereof upon Termination for Cause. The term "Termination
for Cause" shall mean termination because of the Executive's intentional failure
to perform stated duties, personal dishonesty, incompetence, willful misconduct,
any breach of fiduciary duty involving personal profit, willful violation of any
law, rule, regulation (other than traffic violations or similar offenses) or
final cease and desist order, or any material breach of any material provision
of this Agreement. In determining incompetence, the acts or omissions shall be
measured against standards generally prevailing in the savings institution
industry. Notwithstanding the foregoing, Executive shall not be deemed to have
been terminated for Cause unless and until there shall have been delivered to
him a copy of a resolution duly adopted by the affirmative vote of not less than
three-fourths of the members of the Board at a meeting of the Board called and
held for that purpose (after reasonable notice to Executive and an opportunity
for him, together with counsel, to be heard before the Board), finding that in
the good faith opinion of the Board, Executive was guilty of conduct justifying
Termination for Cause and specifying the particulars thereof in detail. The
Executive shall not have the right to receive compensation or other benefits for
any period after Termination for Cause.
3. TERMINATION
(a) Upon the occurrence of a Change in Control, followed at any time during
the term of this Agreement by the voluntary or involuntary termination of the
Executive's employment other than for Termination for Cause, the Bank shall be
obligated to pay the Executive, or in the event of his subsequent death, his
beneficiary or beneficiaries, or his estate, as the case may be, as severance
pay, a sum equal to three times the average of the three preceding years' annual
base salary, including bonuses and any other cash compensation paid or accrued
by the executive during such years, and the amount of any benefits received
pursuant to any employee benefit plans on behalf of the Executive maintained by
the Bank during such years, excluding benefits continued pursuant to (b) below.
If the Executive has been employed by the Bank for less than one year, then the
severance pay shall be a sum equal to thirty-six times the average monthly
salary, including bonuses and any other cash compensation paid or accrued by the
Executive during such period, and the amount of any benefits received pursuant
to any employee benefit plans on behalf of the Executive maintained by the Bank
during such period, excluding benefits continued pursuant to (b) below, for the
period over which the Executive has been employed by the Bank. At the election
of the Executive, which election is to be made on an annual basis during the
month of January, and which election is irrevocable for the year in which made
and upon the occurrence of a Change in Control, such payment may be made in a
lump sum or paid in equal monthly installments during the thirty-six (36) months
following the Executive's termination. In the event that no election is made,
payment to the Executive will be made on a monthly basis during the remaining
term of this Agreement.
(b) Upon the occurrence of a Change in Control of the Bank followed at any
time during the term of this Agreement by the Executive's voluntary or
involuntary termination of employment, other than for Termination for Cause, the
Bank shall cause to be continued life, medical, dental and disability coverage
substantially identical to the coverage maintained by the Bank for the Executive
prior to his severance. Such coverage and payments shall cease upon expiration
of thirty-six (36) months.
3
<PAGE>
(c) Upon the occurrence of a Change in Control, the Executive will have
such rights as specified in the Bank's Stock Option Plan, if any, or any other
employee benefit plan with respect to options and such other rights as may have
been granted to the Executive under such plans.
(d) Upon a Change in Control, the Executive will be entitled to the
benefits under the Bank's Recognition and Retention Plan, if any, or any other
such plan.
(e) In the event that the Executive is receiving monthly payments pursuant
to Section 3(a) hereof, on an annual basis, thereafter, the Executive shall
elect whether the balance of the amount payable under the Agreement at that time
shall be paid in a lump sum or on a pro rata basis. Such election shall be
irrevocable for the year for which such election is made.
(f) Notwithstanding the preceding paragraphs of this Section 3, in no event
shall the aggregate payments or benefits to be made or afforded to Executive
under said paragraphs (the "Termination Benefits") constitute an "excess
parachute payment" under Section 280G of the Code or any successor thereto, and
in order to avoid such a result Termination Benefits will be reduced, if
necessary, to an amount (the "Non-Triggering Amount"), the value of which is one
dollar ($1.00) less than an amount equal to three (3) times Executive's "base
amount", as determined in accordance with said Section 280G. The allocation of
the reduction required hereby among Termination Benefits provided by the
preceding paragraphs of this Section 3 shall be determined by the Executive.
4. NOTICE OF TERMINATION
(a) Any purported termination by the Bank or by Executive shall be
communicated by Notice of Termination to the other party hereto. For purposes
of this Agreement, a "Notice of Termination" shall mean a written notice which
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the provision so
indicated.
(b) "Date of Termination" shall mean (A) if Executive's employment is
terminated for Disability, thirty (30) days after a Notice of Termination is
given (provided that he shall not have returned to the performance of his duties
on a full-time basis during such thirty (30) day period), and (B) if his
employment is terminated for any other reason, the date specified in the Notice
of Termination (which, in the case of a Termination for Cause, shall be
immediate). Except as set forth below in paragraph (c), in no event shall the
Date of Termination exceed 30 days from the date Notice of Termination is given.
(c) If, within thirty (30) days after any Notice of Termination is given,
the party receiving such Notice of Termination notifies the other party that a
dispute exists concerning the termination, except upon the occurrence of a
Change in Control and voluntary termination by the Executive in which case the
date of termination shall be the date specified in the Notice, the Date of
Termination shall be the date on which the dispute is finally determined, either
by mutual written agreement of the parties, by a binding arbitration award, or
by a final judgment, order or decree of a court of competent jurisdiction (the
time for appeal there from having expired and no appeal having been perfected)
and provided further that the Date of Termination shall be extended by a notice
of dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute, the Bank will continue to pay
Executive his full compensation in effect when the notice giving rise to the
dispute was given (including, but not limited to, Base Salary) and continue him
as a participant in all compensation, benefit and insurance plans in
4
<PAGE>
which he was participating when the notice of dispute was given, until the
earlier of 120 days from the date of the Notice of Termination or the date upon
which the dispute is finally resolved in accordance with this Agreement. Amounts
paid under this Section are in addition to all other amounts due under this
Agreement and shall not be offset against or reduce any other amounts due under
this Agreement. Notwithstanding the foregoing, no compensation or benefits shall
be paid to the Executive in the event the Executive is Terminated for Cause. In
the event that such Termination for Cause is found to have been wrongful or such
dispute is otherwise decided in the Executive's favor, the Executive shall be
entitled to receive all compensation and benefits which accrued for up to a
period of nine months after the Termination for Cause.
5. SOURCE OF PAYMENTS
It is intended by the parties hereto that all payments provided in this
Agreement shall be paid in cash or check from the general funds of the Bank.
6. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFIT PLANS
This Agreement contains the entire understanding between the parties hereto
and supersedes any prior agreement between the Bank and Executive, except that
this Agreement shall not affect or operate to reduce any benefit or compensation
inuring to Executive of a kind elsewhere provided. No provision of this
Agreement shall be interpreted to mean that Executive is subject to receiving
fewer benefits than those available to him without reference to this Agreement.
7. NO ATTACHMENT
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive, the Bank and their respective successors and assigns.
8. MODIFICATION AND WAIVER
(a) This Agreement may not be modified or amended except by an instrument
in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future or as to any act other than that
specifically waived.
9. REQUIRED PROVISIONS
(a) The Bank may terminate the Executive's employment at any time.
Executive shall not have the right to receive compensation or other benefits for
any period after Termination for Cause as defined in Section 2(c) hereinabove.
(b) If the Executive is suspended from office and/or temporarily prohibited
from participating in the conduct of the Bank's affairs by a notice served under
Section 8(e)(3) (12 USC (S)1818(e)(3)) or 8(g) (12 USC (S)1818(g)) of the
Federal Deposit Insurance Act, as amended by the Financial Institutions Reform,
Recovery and Enforcement Act of 1989, the Bank's obligations under this contract
shall be suspended as of the date of service, unless stayed by appropriate
proceedings. If the charges in the notice are dismissed, the Bank may in its
discretion (i) pay the Executive all or part of the compensation withheld while
their contract obligations were suspended and (ii) reinstate (in whole or in
part) any of the obligations which were suspended.
(c) If the Executive is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Section 8(e) (12 USC (S)1818(e)) or 8(g) (12 USC (S)1818(g)) of the Federal
Deposit Insurance Act, as amended by the Financial Institutions Reform, Recovery
and Enforcement Act of 1989, all obligations of the Bank under this contract
shall terminate as of the effective date of the order, but vested rights of the
contracting parties shall not be affected.
(d) If the Bank is in default as defined in Section 3(x) (12 USC
(S)1813(x)(1)) of the Federal Deposit Insurance Act, as amended by the Financial
Institutions Reform, Recovery and Enforcement Act of 1989, all obligations of
the Bank under this contract shall terminate as of the date of default, but this
paragraph shall not affect any vested rights of the contracting parties.
(e) All obligations of the Bank under this contract shall be terminated,
except to the extent determined that continuation of the contract is necessary
for the continued operation of the Bank, (i) by the Federal Deposit Insurance
Corporation, at the time the Resolution Trust Corporation or FDIC enters into an
agreement to provide assistance to or on behalf of the Bank under the authority
contained in Section 13(c) (12 USC (S)1823(c)) of the Federal Deposit Insurance
Act, as amended by the Financial Institutions Reform, Recovery and Enforcement
Act of 1989; or (ii) when the Bank is determined by the FDIC to be in an unsafe
or unsound condition. Any rights of the parties that have already vested,
however, shall not be affected by such action.
10. SEVERABILITY
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
11. HEADINGS FOR REFERENCE ONLY
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
12. GOVERNING LAW
The validity, interpretation, performance, and enforcement of this
Agreement shall be governed by the laws of the State of New York, unless
preempted by Federal law as now or hereafter in effect.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by the employee within fifty
(50) miles from the location of the Bank, in accordance with the rules of the
American Arbitration Association then in effect. Judgment may be entered on the
arbitrator's award in any court having jurisdiction; provided, however, that
subject to Section 3(c) hereof, Executive shall be entitled to seek specific
performance of his right to be paid until the Date of Termination during the
pendency of any dispute or controversy arising under or in connection with this
Agreement.
13. PAYMENT OF LEGAL FEES
All reasonable legal fees paid or incurred by Executive pursuant to any
dispute or question of interpretation relating to this Agreement shall be paid
or reimbursed by the Bank if Executive is successful on the merits pursuant to a
legal judgment, arbitration or settlement.
14. INDEMNIFICATION
The Bank shall provide the Executive (including his heirs, executors and
administrators) with coverage under a standard directors' and officers'
liability insurance policy at its expense, or in lieu thereof, shall indemnify
the Executive (and his heirs, executors and administrators) to the fullest
extent permitted under federal law and as provided in the Bank's Charter and
Bylaws against all expenses and liabilities reasonably incurred by him in
connection with or arising out of any action, suit or proceeding in which he may
be involved by reason of his having been a director or officer of the Bank
(whether or not he continues to be a director or officer at the time of
incurring such expenses or liabilities), such expenses and liabilities to
include, but not be limited to, judgments, court costs and attorneys' fees and
the cost of reasonable settlements (such settlements must be approved by the
Board of Directors of the Bank). If such action, suit or proceeding is brought
against Executive in his capacity as an officer or director of the Bank,
however, such indemnification shall not extend to matters as to which Executive
is finally adjudged to be liable for willful misconduct in the performance of
his duties. No indemnification shall be paid that would violate 12 U.S.C.
1828(k) or any regulations promulgated thereunder.
15. SUCCESSOR TO THE BANK
The Bank shall require any successor or assignee, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Bank, expressly and
unconditionally to assume and agree to perform the Bank's obligations under this
Agreement, in the same manner and to the same extent that the Bank would be
required to perform if no such succession or assignment had taken place.
16. SIGNATURES
IN WITNESS WHEREOF, the Bank has caused this Agreement to be executed by
its duly authorized officer, and Executive has signed this Agreement, on the day
and date first above written.
ATTEST: OSWEGO CITY SAVINGS BANK
/s/ Melissa A. Dashnau By: /s/ Chris C. Gagas
- --------------------------- -------------------------------
Chris C. Gagas, Chairman of the
Board, President and Chief
Executive Officer
WITNESS:
/s/ Joyce Iamaio By: /s/ Thomas W. Schneider
- --------------------------- ---------------------------
Thomas W. Schneider, Executive
5
<PAGE>
EXHIBIT 10.5
OSWEGO CITY SAVINGS BANK
SEVERANCE AGREEMENT
This AGREEMENT is made effective as of the 1st day of January, 1996 by and
between Oswego City Savings Bank, a New York chartered stock savings bank (the
"Bank"), and W. David Schermerhorn ("Executive"). Any reference to "Company"
herein shall mean Pathfinder Bancorp, MHC or any successor thereto.
WHEREAS, the Bank recognizes the substantial contribution Executive has
made to the Bank and wishes to protect his position therewith for the period
provided in this Agreement; and
WHEREAS, Executive has been elected to, and has agreed to serve in the
position of Vice President -Lending for the Bank, a position of substantial
responsibility;
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
and upon the other terms and conditions hereinafter provided, the parties hereto
agree as follows:
1. TERM OF AGREEMENT
The term of this Agreement shall be deemed to have commenced as of the date
first above written and shall continue for a period of thirty-six (36) full
calendar months thereafter. Commencing on the first anniversary date of this
Agreement and continuing at each anniversary date thereafter, the Board of
Directors of the Bank ("Board") may extend the Agreement for an additional year.
The Board will conduct a performance evaluation of the Executive for purposes of
determining whether to extend the Agreement, and the results thereof shall be
included in the minutes of the Board's meeting. If Executive is also a director
then he or she shall abstain from any and all voting with respect to the
extension of the term of such Executive's Agreement.
2. PAYMENTS TO EXECUTIVE UPON CHANGE IN CONTROL
(a) Upon the occurrence of a Change in Control of the Bank (as herein
defined) followed at any time during the term of this Agreement by the voluntary
or involuntary termination of Executive's employment, other than for Cause, as
defined in Section 2(c) hereof, the provisions of Section 3 shall apply. Upon
the occurrence of a Change in Control, Executive shall have the right to elect
to voluntarily terminate his employment at any time during the term of this
Agreement following any demotion, loss of title, office or significant
authority, reduction in his annual compensation or benefits, or relocation of
his principal place of employment by more than 30 miles from its location
immediately prior to the Change in Control.
(b) A "Change in Control" of the Bank or the Company shall mean:
(1) a reorganization, merger, merger conversion, consolidation or sale of
all or substantially all of the assets of the Bank, the Company or the Stock
Holding Company, or a similar transaction in which the Bank, the Company or the
Stock Holding Company is not the resulting entity and that is not approved by a
majority of the Board of Directors of the Bank, the Company or the Stock Holding
Company;
(2) individuals who constitute the Incumbent Board of the Bank, the
Company, or the Stock Holding Company cease for any reason to constitute a
majority thereof; provided that any person becoming a director subsequent to the
date hereof whose election was approved by a vote of at least
<PAGE>
three-fourths of the directors composing the Incumbent Board or whose nomination
for election by the Bank's or Company's stockholders or members was approved by
the same nominating committee serving under the Incumbent Board shall be, for
purposes of this Section, considered as though he were a member of the Incumbent
Board; or
(3) an acquisition of "control" of the Bank or the Company as defined in
the Bank Holding Company Act of 1956, as amended and applicable rules and
regulations promulgated thereunder as in effect at the time of the Change in
Control (collectively, the "BHCA"), as determined by the Board of Directors of
the Bank or the Company; or
(4) an acquisition of the Bank's stock requiring submission of notice under
the change in Bank Control Act; provided, however, that a Change in Control
shall not be deemed to have occurred under (1), (3) or (4) of this section if
the transaction(s) constituting a Change in Control is approved by a majority of
the Board of Directors of the Bank or the Company, as the case may be.
(5) In the event that the Company converts to the Stock Holding Company on
a stand-alone basis, a "Change in Control" of the Bank or the Stock Holding
Company (a) shall mean an event of a nature that would be required to be
reported in response to Item 1 of the current report on Form 8-K, as in effect
on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (the "Exchange Act"), or results in a Change in Control of the Bank
or the Stock Holding Company within the meaning of the BHCA; or (b) without
limitation shall be deemed to have occurred at such time as (i) any "person" (as
the term is used in Section 13(d) and 14(d) of the Exchange Act) other than the
Stock Holding Company is or becomes a "beneficial owner" (as defined in Rule 13-
d under the Exchange Act) directly or indirectly, of securities of the Bank
representing 25% or more of the Bank's outstanding securities ordinarily having
the right to vote at the election of directors except for any securities of the
Bank received by the Stock Holding Company in connection with the Reorganization
and any securities purchased by the Bank's employee stock ownership plan and
trust shall not be counted in determining whether such plan is the beneficial
owner of more than 25% of the Bank's securities, (ii) a proxy statement
soliciting proxies from stockholders of the Bank, by someone other than the
current management of the Bank, seeking stockholder approval of a plan of
reorganization, merger or consolidation of the Stock Holding Company of the Bank
or similar transaction with one or more corporations as a result of which the
outstanding shares of the class of securities then subject to the plan or
transaction are exchanged or converted into cash or property or securities not
issued by the Bank or the Stock Holding Company, or (iii) a tender offer is made
for 25% or more of the voting securities of the Bank and the shareholders owning
beneficially or of record 25% or more of the outstanding securities of the Bank
have tendered or offered to sell their shares pursuant to such tender offer and
such tendered shares have been accepted by the tender offeror.
Notwithstanding, the foregoing, a "Change in Control" of the Bank or the
Company shall not be deemed to have occurred if the Company ceases to own at
least 51% of all outstanding shares of stock of the Bank in connection with a
conversion of the Company from mutual to stock form.
For these purposes, "Incumbent Board" means, in the case of (i) the Company
or the Stock Holding Company, or (ii) the Bank, the Board of Directors of the
Company or the Bank, respectively, on the date hereof, provided that any person
becoming a director subsequent to the date hereof whose election was approved by
a vote of at least three-quarters of the directors comprising the Incumbent
Board, or whose nomination for election by members or stockholders was approved
by the same nominating committee serving under an Incumbent Board, shall be
considered as though he were a member of the Incumbent Board.
2
<PAGE>
Also for these purposes, Stock Holding Company means the holding company
resulting from a stock conversion of the Company from the mutual to stock form
of organization either on a stand-alone basis or in the context of a merger
conversion, as provided by regulations or regulatory policy of the New York
State Banking Department.
(c) Executive shall not have the right to receive termination benefits
pursuant to Section 3 hereof upon Termination for Cause. The term "Termination
for Cause" shall mean termination because of the Executive's intentional failure
to perform stated duties, personal dishonesty, incompetence, willful misconduct,
any breach of fiduciary duty involving personal profit, willful violation of any
law, rule, regulation (other than traffic violations or similar offenses) or
final cease and desist order, or any material breach of any material provision
of this Agreement. In determining incompetence, the acts or omissions shall be
measured against standards generally prevailing in the savings institution
industry. Notwithstanding the foregoing, Executive shall not be deemed to have
been terminated for Cause unless and until there shall have been delivered to
him a copy of a resolution duly adopted by the affirmative vote of not less than
three-fourths of the members of the Board at a meeting of the Board called and
held for that purpose (after reasonable notice to Executive and an opportunity
for him, together with counsel, to be heard before the Board), finding that in
the good faith opinion of the Board, Executive was guilty of conduct justifying
Termination for Cause and specifying the particulars thereof in detail. The
Executive shall not have the right to receive compensation or other benefits for
any period after Termination for Cause.
3. TERMINATION
(a) Upon the occurrence of a Change in Control, followed at any time during
the term of this Agreement by the voluntary or involuntary termination of the
Executive's employment other than for Termination for Cause, the Bank shall be
obligated to pay the Executive, or in the event of his subsequent death, his
beneficiary or beneficiaries, or his estate, as the case may be, as severance
pay, a sum equal to three times the average of the three preceding years' annual
base salary, including bonuses and any other cash compensation paid or accrued
by the executive during such years, and the amount of any benefits received
pursuant to any employee benefit plans on behalf of the Executive maintained by
the Bank during such years, excluding benefits continued pursuant to (b) below.
If the Executive has been employed by the Bank for less than one year, then the
severance pay shall be a sum equal to thirty-six times the average monthly
salary, including bonuses and any other cash compensation paid or accrued by the
Executive during such period, and the amount of any benefits received pursuant
to any employee benefit plans on behalf of the Executive maintained by the Bank
during such period, excluding benefits continued pursuant to (b) below, for the
period over which the Executive has been employed by the Bank. At the election
of the Executive, which election is to be made on an annual basis during the
month of January, and which election is irrevocable for the year in which made
and upon the occurrence of a Change in Control, such payment may be made in a
lump sum or paid in equal monthly installments during the thirty-six (36) months
following the Executive's termination. In the event that no election is made,
payment to the Executive will be made on a monthly basis during the remaining
term of this Agreement.
(b) Upon the occurrence of a Change in Control of the Bank followed at any
time during the term of this Agreement by the Executive's voluntary or
involuntary termination of employment, other than for Termination for Cause, the
Bank shall cause to be continued life, medical, dental and disability coverage
substantially identical to the coverage maintained by the Bank for the Executive
prior to his severance. Such coverage and payments shall cease upon expiration
of thirty-six (36) months.
3
<PAGE>
(c) Upon the occurrence of a Change in Control, the Executive will have
such rights as specified in the Bank's Stock Option Plan, if any, or any other
employee benefit plan with respect to options and such other rights as may have
been granted to the Executive under such plans.
(d) Upon a Change in Control, the Executive will be entitled to the
benefits under the Bank's Recognition and Retention Plan, if any, or any other
such plan.
(e) In the event that the Executive is receiving monthly payments pursuant
to Section 3(a) hereof, on an annual basis, thereafter, the Executive shall
elect whether the balance of the amount payable under the Agreement at that time
shall be paid in a lump sum or on a pro rata basis. Such election shall be
irrevocable for the year for which such election is made.
(f) Notwithstanding the preceding paragraphs of this Section 3, in no event
shall the aggregate payments or benefits to be made or afforded to Executive
under said paragraphs (the "Termination Benefits") constitute an "excess
parachute payment" under Section 280G of the Code or any successor thereto, and
in order to avoid such a result Termination Benefits will be reduced, if
necessary, to an amount (the "Non-Triggering Amount"), the value of which is one
dollar ($1.00) less than an amount equal to three (3) times Executive's "base
amount", as determined in accordance with said Section 280G. The allocation of
the reduction required hereby among Termination Benefits provided by the
preceding paragraphs of this Section 3 shall be determined by the Executive.
4. NOTICE OF TERMINATION
(a) Any purported termination by the Bank or by Executive shall be
communicated by Notice of Termination to the other party hereto. For purposes
of this Agreement, a "Notice of Termination" shall mean a written notice which
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the provision so
indicated.
(b) "Date of Termination" shall mean (A) if Executive's employment is
terminated for Disability, thirty (30) days after a Notice of Termination is
given (provided that he shall not have returned to the performance of his duties
on a full-time basis during such thirty (30) day period), and (B) if his
employment is terminated for any other reason, the date specified in the Notice
of Termination (which, in the case of a Termination for Cause, shall be
immediate). Except as set forth below in paragraph (c), in no event shall the
Date of Termination exceed 30 days from the date Notice of Termination is given.
(c) If, within thirty (30) days after any Notice of Termination is given,
the party receiving such Notice of Termination notifies the other party that a
dispute exists concerning the termination, except upon the occurrence of a
Change in Control and voluntary termination by the Executive in which case the
date of termination shall be the date specified in the Notice, the Date of
Termination shall be the date on which the dispute is finally determined, either
by mutual written agreement of the parties, by a binding arbitration award, or
by a final judgment, order or decree of a court of competent jurisdiction (the
time for appeal there from having expired and no appeal having been perfected)
and provided further that the Date of Termination shall be extended by a notice
of dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute, the Bank will continue to pay
Executive his full compensation in effect when the notice giving rise to the
dispute was given (including, but not limited to, Base Salary) and continue him
as a participant in all compensation, benefit and insurance plans in
4
<PAGE>
which he was participating when the notice of dispute was given, until the
earlier of 120 days from the date of the Notice of Termination or the date upon
which the dispute is finally resolved in accordance with this Agreement. Amounts
paid under this Section are in addition to all other amounts due under this
Agreement and shall not be offset against or reduce any other amounts due under
this Agreement. Notwithstanding the foregoing, no compensation or benefits shall
be paid to the Executive in the event the Executive is Terminated for Cause. In
the event that such Termination for Cause is found to have been wrongful or such
dispute is otherwise decided in the Executive's favor, the Executive shall be
entitled to receive all compensation and benefits which accrued for up to a
period of nine months after the Termination for Cause.
5. SOURCE OF PAYMENTS
It is intended by the parties hereto that all payments provided in this
Agreement shall be paid in cash or check from the general funds of the Bank.
6. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFIT PLANS
This Agreement contains the entire understanding between the parties hereto
and supersedes any prior agreement between the Bank and Executive, except that
this Agreement shall not affect or operate to reduce any benefit or compensation
inuring to Executive of a kind elsewhere provided. No provision of this
Agreement shall be interpreted to mean that Executive is subject to receiving
fewer benefits than those available to him without reference to this Agreement.
7. NO ATTACHMENT
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive, the Bank and their respective successors and assigns.
8. MODIFICATION AND WAIVER
(a) This Agreement may not be modified or amended except by an instrument
in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future or as to any act other than that
specifically waived.
5
<PAGE>
9. REQUIRED PROVISIONS
(a) The Bank may terminate the Executive's employment at any time.
Executive shall not have the right to receive compensation or other benefits for
any period after Termination for Cause as defined in Section 2(c) hereinabove.
(b) If the Executive is suspended from office and/or temporarily prohibited
from participating in the conduct of the Bank's affairs by a notice served under
Section 8(e)(3) (12 USC (S)1818(e)(3)) or 8(g) (12 USC (S)1818(g)) of the
Federal Deposit Insurance Act, as amended by the Financial Institutions Reform,
Recovery and Enforcement Act of 1989, the Bank's obligations under this contract
shall be suspended as of the date of service, unless stayed by appropriate
proceedings. If the charges in the notice are dismissed, the Bank may in its
discretion (i) pay the Executive all or part of the compensation withheld while
their contract obligations were suspended and (ii) reinstate (in whole or in
part) any of the obligations which were suspended.
(c) If the Executive is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Section 8(e) (12 USC (S)1818(e)) or 8(g) (12 USC (S)1818(g)) of the Federal
Deposit Insurance Act, as amended by the Financial Institutions Reform, Recovery
and Enforcement Act of 1989, all obligations of the Bank under this contract
shall terminate as of the effective date of the order, but vested rights of the
contracting parties shall not be affected.
(d) If the Bank is in default as defined in Section 3(x) (12 USC
(S)1813(x)(1)) of the Federal Deposit Insurance Act, as amended by the Financial
Institutions Reform, Recovery and Enforcement Act of 1989, all obligations of
the Bank under this contract shall terminate as of the date of default, but this
paragraph shall not affect any vested rights of the contracting parties.
(e) All obligations of the Bank under this contract shall be terminated,
except to the extent determined that continuation of the contract is necessary
for the continued operation of the Bank, (i) by the Federal Deposit Insurance
Corporation, at the time the Resolution Trust Corporation or FDIC enters into an
agreement to provide assistance to or on behalf of the Bank under the authority
contained in Section 13(c) (12 USC (S)1823(c)) of the Federal Deposit Insurance
Act, as amended by the Financial Institutions Reform, Recovery and Enforcement
Act of 1989; or (ii) when the Bank is determined by the FDIC to be in an unsafe
or unsound condition. Any rights of the parties that have already vested,
however, shall not be affected by such action.
10. SEVERABILITY
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
11. HEADINGS FOR REFERENCE ONLY
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
6
<PAGE>
12. GOVERNING LAW
The validity, interpretation, performance, and enforcement of this
Agreement shall be governed by the laws of the State of New York, unless
preempted by Federal law as now or hereafter in effect.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by the employee within fifty
(50) miles from the location of the Bank, in accordance with the rules of the
American Arbitration Association then in effect. Judgment may be entered on the
arbitrator's award in any court having jurisdiction; provided, however, that
subject to Section 3(c) hereof, Executive shall be entitled to seek specific
performance of his right to be paid until the Date of Termination during the
pendency of any dispute or controversy arising under or in connection with this
Agreement.
13. PAYMENT OF LEGAL FEES
All reasonable legal fees paid or incurred by Executive pursuant to any
dispute or question of interpretation relating to this Agreement shall be paid
or reimbursed by the Bank if Executive is successful on the merits pursuant to a
legal judgment, arbitration or settlement.
14. INDEMNIFICATION
The Bank shall provide the Executive (including his heirs, executors and
administrators) with coverage under a standard directors' and officers'
liability insurance policy at its expense, or in lieu thereof, shall indemnify
the Executive (and his heirs, executors and administrators) to the fullest
extent permitted under federal law and as provided in the Bank's Charter and
Bylaws against all expenses and liabilities reasonably incurred by him in
connection with or arising out of any action, suit or proceeding in which he may
be involved by reason of his having been a director or officer of the Bank
(whether or not he continues to be a director or officer at the time of
incurring such expenses or liabilities), such expenses and liabilities to
include, but not be limited to, judgments, court costs and attorneys' fees and
the cost of reasonable settlements (such settlements must be approved by the
Board of Directors of the Bank). If such action, suit or proceeding is brought
against Executive in his capacity as an officer or director of the Bank,
however, such indemnification shall not extend to matters as to which Executive
is finally adjudged to be liable for willful misconduct in the performance of
his duties. No indemnification shall be paid that would violate 12 U.S.C.
1828(k) or any regulations promulgated thereunder.
15. SUCCESSOR TO THE BANK
The Bank shall require any successor or assignee, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Bank, expressly and
unconditionally to assume and agree to perform the Bank's obligations under this
Agreement, in the same manner and to the same extent that the Bank would be
required to perform if no such succession or assignment had taken place.
7
<PAGE>
16. SIGNATURES
IN WITNESS WHEREOF, the Bank has caused this Agreement to be executed by
its duly authorized officer, and Executive has signed this Agreement, on the day
and date first above written.
ATTEST: OSWEGO CITY SAVINGS BANK
/s/ Melissa A. Dashnau By: /s/ Chris C. Gagas
- ------------------------------- ---------------------------------------
Chris C. Gagas, Chairman of the Board,
President and Chief Executive Officer
WITNESS:
/s/ Domenica A. Azzareli By: /s/ W. David Schernerhorn
- ------------------------------- ---------------------------------------
W. David Schermerhorn, Executive
<PAGE>
[LETTERHEAD OF COOPERS AND LYBRAND APPEARS HERE]
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-4 of our
report dated February 7, 1997, on our audits of the financial statements of
Oswego City Savings Bank. We also consent to the reference to our firm under the
caption "Experts."
/s/ Coopers & Lybrand L.L.P.
Syracuse, New York
September 18, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 4,157
<INT-BEARING-DEPOSITS> 150,793
<FED-FUNDS-SOLD> 2,510
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 50,430
<INVESTMENTS-CARRYING> 9,036
<INVESTMENTS-MARKET> 9,084
<LOANS> 112,791
<ALLOWANCE> 1,027
<TOTAL-ASSETS> 190,899
<DEPOSITS> 158,415
<SHORT-TERM> 8,050
<LIABILITIES-OTHER> 1,392
<LONG-TERM> 0
1,917
0
<COMMON> 0
<OTHER-SE> 188,982
<TOTAL-LIABILITIES-AND-EQUITY> 190,899
<INTEREST-LOAN> 4,899
<INTEREST-INVEST> 1,172
<INTEREST-OTHER> 901
<INTEREST-TOTAL> 6,972
<INTEREST-DEPOSIT> 3,142
<INTEREST-EXPENSE> 3,366
<INTEREST-INCOME-NET> 3,478
<LOAN-LOSSES> 127
<SECURITIES-GAINS> 172
<EXPENSE-OTHER> 2,594
<INCOME-PRETAX> 1,603
<INCOME-PRE-EXTRAORDINARY> 1,603
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,137
<EPS-PRIMARY> .61
<EPS-DILUTED> 0
<YIELD-ACTUAL> 7.99
<LOANS-NON> 1,708
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,678
<ALLOWANCE-OPEN> 907
<CHARGE-OFFS> 13
<RECOVERIES> 6
<ALLOWANCE-CLOSE> 1,027
<ALLOWANCE-DOMESTIC> 1,027
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<PAGE>
EXHIBIT 99.1
FEDERAL DEPOSIT INSURANCE CORPORATION
1776 F Street, N.W.
Washington, D.C. 20429
FORM F-2 ANNUAL REPORT UNDER SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
FDIC Certificate Number 15977-8
OSWEGO CITY SAVINGS BANK
----------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 15-0408130
------------------------------ --------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
214 West First Street, Oswego, New York 13126
--------------------------------------- ------
(Address of Principal Office) (Zip Code)
(315) 343-0057
------------------------------------------------------
(Bank's telephone number including area code)
<TABLE>
<S> <C>
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, par value $1.00 per share
---------------------------------------
(Title of Class)
</TABLE>
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 10 is not contained herein, and will not be contained, to the best of the
Bank's knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form F-2 or any amendment to this Form F-2. [X].
Not Applicable.
Indicate by check mark whether the Bank (1) has filed all reports
required to be filed by Section 13 of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Bank was required
to file such reports) and (2) has been subject to such requirements for the past
90 days. YES X NO .
--- ---
The aggregate market value of the voting stock held by non-affiliates
of the Registrant, computed by reference to the price at which such stock was
traded on the NASDAQ Electronic Bulletin Board on March 21, 1997, was
approximately $10.6 million. This amount excludes shares held by the
Registrant's directors, executive officers, and Pathfinder Bancorp, M.H.C.
As of March 21, 1997, there were issued and outstanding 1,916,666
shares of the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Sections of Annual Report to Stockholders for the fiscal year ended
December 31, 1996. (Parts II and IV).
2. Proxy Statement for the 1996 Annual Meeting of Stockholders. (Parts I
and III).
<PAGE>
PART I
------
ITEM 1. Business
- ------------------------
General
Oswego City Savings Bank (the "Bank") is a New York-chartered savings
bank headquartered in Oswego, New York. The Bank has five full-service offices
located in its market area consisting of Oswego County. The Bank's deposits are
insured by the Federal Deposit Insurance Corporation ("FDIC"). The Bank was
chartered as a New York savings bank in 1859 as Oswego City Savings Bank. The
Bank is a consumer-oriented institution dedicated to providing mortgage loans
and other traditional financial services to its customers. The Bank is
committed to meeting the financial needs of its customers in Oswego County, New
York, the county in which it operates. At December 31, 1996, the Bank had total
assets of $189.9 million, total deposits of $168.5 million, and shareholders'
equity of $21.4 million.
The Bank is primarily engaged in the business of attracting deposits
from the general public in the Bank's market area, and investing such deposits,
together with other sources of funds, in loans secured by one- to four-family
residential real estate. At December 31, 1996, $99.7 million, or 90.65%, of the
Bank's total loan portfolio consisted of loans secured by real estate, of which
$74.9 million, or 68.05%, were loans secured by one- to four-family residences,
$13.5 million, or 12.25% of total loans, were secured by commercial real estate,
$2.3 million, or 2.09% of total loans, were secured by multi-family properties
and $9.1 million, or 8.26% of total real estate loans, were secured by second
liens on residential properties. The Bank also originates consumer and other
loans which totalled $10.3 million, or 9.35%, of the Bank's total loan
portfolio. The Bank invests a portion of its assets in securities issued by the
United States Government, state and municipal obligations, corporate debt
securities, mutual funds, and equity securities. The Bank also invests in
mortgage-backed securities primarily issued or guaranteed by the United States
Government or agencies thereof. The Bank's principal sources of funds are
deposits and principal and interest payments on loans. The principal source of
income is interest on loans and investment securities. The Bank's principal
expenses are interest paid on deposits and employee compensation and benefits.
On November 15, 1995, Oswego City Savings Bank reorganized from a New
York chartered mutual savings bank into the mutual holding company form of
ownership, chartering Pathfinder Bancorp, M.H.C., the "Holding Company", a New
York mutual holding company as its mutual holding company, and concurrently
amending its charter to read as a stock charter. As part of the reorganization,
the Bank issued 881,666 shares of common stock to the public; 1,035,000 shares
were issued to the Holding Company.
The Bank's executive office is located at 214 West First Street,
Oswego, New York, and its telephone number at that address is (315) 343-0057.
Recent Developments
On January 14, 1997, the Bank's Board of Directors adopted an
Agreement and Plan of Reorganization (the "Plan of Reorganization") providing
for the establishment of Pathfinder Bancorp, a Delaware corporation, as a stock
holding company parent of the Bank which stock holding company will be majority
owned by the Holding Company. The Plan of Reorganization is subject to
regulatory and stockholder approval.
1
<PAGE>
Market Area and Competition
The economy in the Bank's market area is manufacturing-oriented and is
also significantly dependent upon the State University of New York College at
Oswego. The major manufacturing employers in the Bank's market area are Niagara
Mohawk, Alcan Aluminum, the New York Power Authority, Nestle and Sealright, a
food container manufacturer. The Bank is the second largest financial
institution headquartered in Oswego County. However, the Bank encounters
competition from a variety of sources. The Bank's business and operating
results are significantly affected by the general economic conditions prevalent
in its market areas.
The Bank encounters strong competition both in attracting deposits and
in originating real estate and other loans. Its most direct competition for
deposits has historically come from commercial and savings banks, savings
associations and credit unions in its market area. Competition for loans comes
from such financial institutions as well as mortgage banking companies. The
Bank expects continued strong competition in the foreseeable future, including
increased competition from "super-regional" banks entering the market by
purchasing large banks and savings banks. Many such institutions have greater
financial and marketing resources available to them than does the Bank. The
Bank competes for savings deposits by offering depositors a high level of
personal service and a wide range of competitively priced financial services.
The Bank competes for real estate loans primarily through the interest rates and
loan fees it charges and advertising.
Lending Activities
Loan Portfolio Composition. The Bank's loan portfolio primarily
consists of one- to four-family mortgage loans secured by residential and
investment properties, as well as mortgage loans secured by multi-family
residences and commercial real estate. To a lesser extent the Bank's loan
portfolio also includes consumer and business loans. The Bank generally
originates loans for retention in its portfolio. In recent years, the Bank has
not purchased loans originated by other lenders. At December 31, 1996, 39.1% of
the Bank's loan portfolio consisted of one- to four-family adjustable rate
mortgage ("ARM") loans.
2
<PAGE>
Analysis of Loan Portfolio. The following table sets forth the composition
of the Bank's loan portfolio in dollar amounts and in percentages of the
portfolio at the dates indicated.
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1996 1995 1994 1993
-------------------- ------------------- -------------------- -------------------
Amount Percent Amount Percent Amount Percent Amount Percent
---------- -------- --------- -------- ---------- -------- --------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
First mortgage loans (1). $ 90,655 83.4% $ 83,325 83.2% $76,275 85.1% $67,824 86.1%
Second mortgage loans(2). 9,082 8.3 8,303 8.3 7,931 8.8 7,025 8.9
-------- ------ -------- ----- ------- ----- ------- -----
Total real estate loans.... 99,737 91.7 91,628 91.5 84,206 93.9 74,849 95.0
-------- ------ -------- ----- ------- ----- ------- -----
Consumer loans and other
loans:
Consumer................. 3,481 3.2 3,286 3.1 3,258 3.6 2,563 3.2
Student.................. 58 0.1 63 0.1 1,085 1.3 864 1.1
Lease financing.......... 1,153 1.1 2,013 2.0 835 0.9 708 0.9
Commercial business
loans.................. 5,588 5.1 3,860 3.9 1,028 1.2 616 0.8
-------- ------ -------- ----- ------- ----- ------- -----
Total consumer and
other loans........... 10,280 9.5 9,222 9.2 6,206 7.0 4,751 6.0
-------- ------ -------- ----- ------- ----- ------- -----
Total loans
receivable............ 110,017 101.2 100,850 100.7 90,412 100.9 79,600 101.0
Less:
Unearned discount and
origination fees....... (368) (0.4) (355) (0.4) (429) (0.5) (507) (0.6)
Allowance for loan
losses................. (907) (0.8) (346) (0.3) (315) (0.4) (280) (0.4)
-------- ------ -------- ----- ------- ----- ------- -----
Total loans
receivable, net....... $108,742 100.00% $100,149 100.0% $89,668 100.0% $78,813 100.0%
======== ====== ======== ===== ======= ===== ======= =====
<CAPTION>
Years Ended December 31,
------------------------
1992 1991
------------------- -------------------
Amount Percent Amount Percent
--------- -------- --------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Real estate loans:
First mortgage loans (1). $68,390 87.3% $62,350 85.8%
Second mortgage loans(2). 7,168 9.1 7,857 10.8
------- ----- ------- -----
Total real estate loans.... 75,558 96.4 70,207 96.6
------- ----- ------- -----
Consumer loans and other
loans:
Consumer................. 2,812 2.3 2,186 3.0
Student.................. 823 1.1 525 0.7
Lease financing.......... 663 0.8 642 0.9
Commercial business
loans.................. 439 .6 -- --
------- ----- ------- -----
Total consumer and
other loans........... 3,737 4.8 3,353 4.6
------- ----- ------- -----
Total loans
receivable............ 72,295 101.2 73,560 101.2
Less:
Unearned discount and
origination fees....... (633) (0.8) (720) (1.1)
Allowance for loan
losses................. (296) (0.4) (189) (0.3)
------- ----- ------- -----
Total loans
receivable, net....... $78,366 100.0% $72,651 100.0%
======= ===== ======= =====
</TABLE>
- ------------------------------------
(1) Includes 74.9 million, $13.5 million and $2.3 million of one- to four-
family residential loans, commercial real estate and multi-family loans,
respectively, at December 31, 1996.
(2) Includes $4.2 million and $4.9 million of home equity line of credit loans
and home equity fixed rate, fixed term loans, respectively, at December 31,
1996.
3
<PAGE>
Loan Maturity Schedule. The following table sets forth certain
information as of December 31, 1996, regarding the dollar amount of loans
maturing in the Bank's portfolio based on their contractual terms to maturity.
Demand loans having no stated schedule of repayments and no stated maturity, and
overdrafts are reported as due in one year or less. Adjustable and floating
rate loans are included in the period in which interest rates are next scheduled
to adjust rather than the period in which they contractually mature, and fixed
rate loans are included in the period in which the final contractual repayment
is due.
<TABLE>
<CAPTION>
One Three Five Ten Beyond
Within Through Through Through Through Twenty
One Year Three Years Five Years Ten Years Twenty Years Years Total
-------- ----------- ---------- --------- ------------ ------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
First mortgage loans...... $47,214 $6,348 $4,273 $ 6,901 $21,510 $4,409 $ 90,655
Second mortgage loans..... 4,232 376 884 3,383 207 -- 9,082
Consumer and other loans.. 4,996 2,278 1,960 935 97 14 10,280
------- ------ ------ ------- ------- ------ --------
Total loans............. $56,442 $9,002 $7,117 $11,219 $21,814 $4,423 $110,017
======= ====== ====== ======= ======= ====== ========
</TABLE>
The following table sets forth at December 31, 1996, the dollar amount
of all fixed rate and adjustable rate loans due or repricing after December 31,
1997.
<TABLE>
<CAPTION>
Fixed Adjustable Total
------- ---------- -------
(In Thousands)
<S> <C> <C> <C>
Real estate loans:
First mortgage loans......................... $33,297 $10,144 $43,441
Second mortgage loans........................ 4,850 -- 4,850
Consumer and other loans..................... 5,284 -- 5,284
------- ---------- -------
Total loans.............................. $43,431 $10,144 $53,575
======= ========== =======
</TABLE>
One- to Four-Family Residential Mortgage Loans. The Bank's primary
lending activity is the origination of first mortgage loans secured by one- to
four-family residential properties. A portion of one-to four-family mortgage
loans originated by the Bank are secured by non-owner occupied homes which are
primarily used to furnish housing to students attending the SUNY College at
Oswego. The Bank generally retains in its portfolio all fixed rate and ARM
loans that it originates. However, the Bank generally underwrites its loans so
as to be eligible for resale in the secondary mortgage market. At December 31,
1996, approximately 87.7% of the Bank's one- to four-family residential real
estate loans were secured by owner-occupied properties.
Fixed-rate one- to four-family residential mortgage loans originated
by the Bank are generally for terms of up to 20 years, amortize on a monthly
basis, and have principal and interest due each month. Such real estate loans
often remain outstanding for significantly shorter periods than their
contractual terms to maturity, particularly in a declining interest rate
environment. Borrowers may refinance or prepay loans at their option. One- to
four-family residential mortgage loans originated by the Bank customarily
contain "due-on-sale" clauses which permit the Bank to accelerate the
indebtedness of the loan upon transfer of ownership of the mortgaged property.
Due-on-sale clauses are an important means of increasing the interest rate on
existing mortgage loans during periods of rising interest rates. An origination
fee of up to 5% is charged on fixed-rate mortgage loans. As a result of the low
interest rate environment that has existed in recent years, many of the Bank's
borrowers have refinanced their mortgage loans with the Bank at lower interest
rates. During years ended December 31, 1996 and 1995, 49.2% and 23.1%,
respectively, of the Bank's one- to four-family mortgage loan originations
consisted of fixed-rate loans.
4
<PAGE>
The Bank also originates ARM loans which serve to reduce interest rate
risk. The Bank currently originates one-year ARM loans which adjust each year
at 275 basis points (100 basis points equal 1%) above the adjusted six month
moving average of the six-month Treasury bill auction discount rate. The Bank
has recently started offering a loan product whereby the interest is fixed for
the first five years and adjusts annually thereafter. This loan product
typically is originated with terms up to 30 years. ARM loans are originated
with terms ranging from 5 to 30 years. ARM loans originated by the Bank provide
for maximum periodic interest rate adjustment of 2 percent per year and an
overall maximum interest rate increase which is determined at the time the loan
is originated. However, ARM loans may not adjust to a level below the initial
rate. ARMs may be offered at an initial one-year rate below the prevailing
market rate. The Bank's one- to four-family ARM loan originations totalled $8.7
million, $8.2 million, $15.1 million and $5.2 million, during the fiscal years
1996, 1995, 1994, and 1993, respectively. The Bank requires that borrowers
qualify for ARM loans based upon the loan's fully indexed rate.
At December 31, 1996, $43.0 million, or 57.4%, of the Bank's one- to
four-family loan portfolio consisted of ARM loans. ARM loans generally pose a
credit risk in that as interest rates rise, the amount of a borrower's monthly
loan payment also rises, thereby increasing the potential for delinquencies and
loan losses. At the same time, the marketability of such loans may be adversely
affected by higher rates.
The Bank also originates loans to finance the construction of one- to
four-family owner-occupied residences. Such loans are generally made to
individuals with whom the Bank has a pre-existing customer relationship. Funds
are disbursed as construction progresses. Loans to finance one- to four-family
construction typically provide for a six-month construction phase during which
interest accrues and which is deducted from the funds disbursed. Upon
completion of the construction phase the loan automatically converts to
permanent financing. At December 31, 1996, the Bank held $2.5 million of one-
to four-family construction loans.
The Bank's lending policies require private mortgage insurance for
loan to value ratios in excess of 80%.
Commercial Real Estate Loans. Loans secured by commercial real estate
constituted approximately $13.5 million, or 12.4%, of the Bank's total loan
portfolio at December 31, 1996. At December 31, 1996, substantially all of the
Bank's commercial real estate loans were secured by properties located within
the Bank's market area. At December 31, 1996, the Bank's commercial real estate
loans had an average principal balance of $231,000. At that date, the largest
commercial real estate loan had a principal balance of $1.5 million, and was
secured by a health care facility. This loan is currently performing in
accordance with the original terms. Commercial real estate loans are generally
offered with adjustable interest rates tied to a market index which currently is
the adjusted six month moving average of the six month Treasury bill auction
discount rate, with a 200 basis point cap on interest rate increases per
adjustment and an overall interest rate cap which is determined at the time the
loan is originated. Commercial real estate loans may not adjust to a level below
the initial rate. The Bank generally offers commercial real estate loans with
one year adjustment periods. The Bank generally makes commercial real estate
loans up to 75% of the appraised value of the property securing the loan. An
origination fee of up to 2% of the principal balance of the loan is typically
charged on commercial real estate loans. Commercial real estate loans originated
by the Bank generally are underwritten to mature between 5 and 20 years with an
amortization schedule of between 10 and 30 years. The Bank has in the past sold
loan participations to other financial institutions and expects to do so in the
future as opportunities arise.
5
<PAGE>
In underwriting commercial real estate loans the Bank reviews the
expected net operating income generated by the real estate to support debt
service, the age and condition of the collateral, the financial resources and
income level of the borrower and the borrower's experience in owning or managing
similar properties. The Bank generally obtains personal guarantees from all
commercial borrowers. Loans secured by commercial real estate generally involve
a greater degree of risk than one- to four-family residential mortgage loans and
carry larger loan balances. This increased credit risk is a result of several
factors, including the concentration of principal in a limited number of loans
and borrowers, the effects of general economic conditions on income producing
properties, and the increased difficulty of evaluating and monitoring these
types of loans. Furthermore, the repayment of loans secured by commercial real
estate is typically dependent upon the successful operation of the related real
estate. If the cash flow from the property is reduced, the borrower's ability
to repay the loan may be impaired.
Multi-Family Real Estate Loans. Loans secured by multi-family real
estate (real estate containing five or more dwellings) constituted approximately
$2.3 million, or 2.1%, of the Bank's total loan portfolio at December 31, 1996.
At December 31, 1996, the Bank had a total of 14 loans secured by multi-family
real estate properties. The Bank's multi-family real estate loans are secured
by multi-family rental properties (primarily townhouses and walk-up apartments).
At December 31, 1996, substantially all of the Bank's multi-family real estate
loans were secured by properties located within the Bank's market area. At
December 31, 1996, the Bank's multi-family real estate loans had an average
principal balance of approximately $165,000 and the largest multi-family real
estate loan had a principal balance of $374,000, and was performing in
accordance with its terms. Multi-family real estate loans generally are offered
with adjustable interest rates tied to the adjusted six month moving average of
the six month Treasury Bill auction discount rate index with a 200 basis point
cap on interest rate increases per adjustment and an overall interest rate cap
which is determined at the time the loan is originated. Multi-family real
estate loans may not adjust below the initial rate. Multi-family real estate
loans are underwritten to mature between 5 and 20 years, and to amortize over 10
to 30 years. An origination fee of 1% is generally charged on multi-family real
estate loans.
In underwriting multi-family real estate loans, the Bank reviews the
expected net operating income generated by the real estate to support the debt
service, the age and condition of the collateral, the financial resources and
income level of the borrower and the borrower's experience in owning or managing
similar properties. The Bank generally requires a debt service coverage ratio
of at least 120% (net of operating expenses) of the monthly loan payment. The
Bank makes multi-family real estate loans up to 75% of the appraised value of
the property securing the loan. The Bank generally obtains personal guarantees
from all multi-family real estate borrowers.
Loans secured by multi-family real estate generally involve a greater
degree of credit risk than one-to four-family residential mortgage loans and
carry larger loan balances. This increased credit risk is a result of several
factors, including the concentration of principal in a limited number of loans
and borrowers, the effects of general economic conditions on income producing
properties, and the increased difficulty of evaluating and monitoring these
types of loans. Furthermore, the repayment of loans secured by multi-family
real estate and commercial real estate is typically dependent upon the
successful operation of the related real estate property. If the cash flow from
the project is reduced, the borrower's ability to repay the loan may be
impaired.
6
<PAGE>
Second Mortgage Loans. The Bank also offers home equity loans and
equity lines of credit collateralized by a second mortgage on the borrower's
principal residence. The Bank's home equity lines of credit are secured by the
borrower's principal residence with a maximum loan-to-value ratio, including the
principal balances of both the first and second mortgage loans of 80%, or up to
90% where the Bank has made the first mortgage loan. At December 31, 1996, the
disbursed portion of home equity lines of credit totalled $4.2 million. Home
equity lines of credit are offered on an adjustable rate basis with interest
rates tied to the prime rate as published in The Wall Street Journal, plus up to
175 basis points and with terms of up to 15 years.
Home equity loans are fixed rate loans with terms generally up to 10
years, although on occasion the Bank may originate a home equity loan with a
term of up to 15 years.
Consumer Loans. As of December 31, 1996, consumer loans totalled $3.5
million, or 3.2%, of the Bank's total loan portfolio. The principal types of
consumer loans offered by the Bank are unsecured personal loans, and loans
secured by deposit accounts and lease financing. Other consumer loans are
offered on a fixed rate basis with maturities generally of less than five years.
Lease financing arrangements are loans which are secured by pools of leases for
medical or dental equipment or general business office equipment.
The underwriting standards employed by the Bank for consumer loans
include a determination of the applicant's credit history and an assessment of
ability to meet existing obligations and payments on the proposed loan. The
stability of the applicant's monthly income may be determined by verification of
gross monthly income from primary employment, and additionally from any
verifiable secondary income. Creditworthiness and the employment history of the
applicant are of primary consideration in originating consumer loans, and in the
case of home equity lines of credit, the Bank obtains a title guarantee, title
search, or an opinion as to the validity of title.
Commercial Business Loans. The Bank currently offers commercial
business loans on a limited basis as a customer service to businesses in its
market area and to deposit account holders. At December 31, 1996, the Bank had
commercial business loans outstanding with an aggregate balance of $5.5 million,
of which $2.7 million consisted of commercial lines of credit. The average
commercial business loan balance was approximately $33,000. Commercial business
loans generally have fixed rates of interest. The loans are generally of short
duration with average terms of five years, but which may range up to 15 years.
Underwriting standards employed by the Bank for commercial business
loans include a determination of the applicant's ability to meet existing
obligations and payments on the proposed loan from normal cash flows generated
by the applicant's business. The financial strength of each applicant also is
assessed through a review of financial statements provided by the applicant.
Commercial business loans generally bear higher interest rates than
residential loans, but they also may involve a higher risk of default since
their repayment is generally dependent on the successful operation of the
borrower's business. The Bank generally obtains guarantees from the borrower, a
third party, or the Small Business Administration, as a condition to originating
its commercial business loans.
Loan Originations, Solicitation, Processing, and Commitments. Loan
originations are derived from a number of sources such as existing customers,
developers, walk-in customers and real estate broker referrals. Upon receiving
a loan application, the Bank obtains a credit report and employment verification
to verify specific information relating to the applicant's employment, income,
and credit standing. In the
7
<PAGE>
portfolio, SFAS 91 requires that the Bank defer loan origination fees and costs
and amortize such amounts as an adjustment of yield over the life of the loan by
use of the level yield method. ARM loans originated below the fully indexed
interest rate will have a substantial portion of the deferred amount recognized
as income in the initial adjustment period. Fees deferred under SFAS 91 are
recognized into income immediately upon prepayment or the sale of the related
loan. At December 31, 1996, the Bank had $389,000 of net deferred loan
origination fees. Loan origination fees vary with the volume and type of loans
and commitments made and purchased, principal repayments, and competitive
conditions in the mortgage markets, which in turn respond to the demand for and
availability of money.
In addition to loan origination fees, the Bank also receives other
fees, service charges, and other income that consist primarily of deposit
transaction account service charges, late charges and income from REO
operations. The Bank recognized fees and service charges of $873,000, $771,000,
$551,000, and $450,000, for the fiscal years ended December 31, 1996, 1995, 1994
and 1993, respectively.
Loans-to-One Borrower. With certain limited exceptions, a New York
chartered savings bank may not make unsecured loans or extend unsecured credit
for commercial, corporate or business purposes (including lease financing) to a
single borrower, which in the aggregate exceed 15% of the Bank's net worth. At
December 31, 1996, the Bank's largest lending relationship totalled $2.5 million
and consisted of loans secured by retail businesses and properties. The Bank's
second largest lending relationship totalled $2.3 million and consisted of loans
secured by retail businesses and residence. The Bank's third largest lending
relationship totalled $1.5 million and consisted of loans secured by a health
care facility. The Bank's fourth largest lending relationship totalled $1.3
million and was secured by a retail office plaza and residence. The Bank's
fifth largest lending relationship totalled $1.2 million and consisted of loans
secured by multi-family residential housing. At December 31, 1996 all of the
aforementioned loans were performing in accordance with their terms.
Delinquencies and Classified Assets
Delinquencies. The Bank's collection procedures provide that when a
loan is 15 days past due, a computer-generated late notice is sent to the
borrower requesting payment. If the delinquency continues, at 30 days a
delinquent notice is sent and personal contact efforts are attempted, either in
person or by telephone, to strengthen the collection process and obtain reasons
for the delinquency. Also, plans to arrange a repayment plan are made. If a
loan becomes 60 days past due, and no progress has been made in resolving the
delinquency, the Bank will send a 10-day demand letter and personal contact is
attempted, and the loan becomes subject to possible legal action if suitable
arrangements to repay have not been made. When a loan continues in a delinquent
status for 90 days or more, and a repayment schedule has not been made or kept
by the borrower, generally a notice of intent to foreclose is sent to the
borrower for mortgage loans, and a final demand letter is presented to the
borrower of non-real estate loans, giving 30 days to repay all outstanding
interest and principal. If not cured, foreclosure proceedings or other
appropriate legal actions are initiated to minimize any potential loss.
Non-Performing Assets. Loans are reviewed on a regular basis and are
placed on a non-accrual status when, in the opinion of management, the
collection of additional interest is doubtful. Loans are placed on non-accrual
status when either principal or interest is 90 days or more past due or less
than 90 days, in the event the loan has been referred to the Bank's legal
counsel for foreclosure. Interest accrued and unpaid at the time a loan is
placed on non-accrual status is charged against interest income. At December
31, 1996, the Bank had non-performing assets of $2.7 million, and a ratio of
non-performing loans and real estate owned ("REO") of 1.4% total assets.
9
<PAGE>
Real estate acquired by the Bank as a result of foreclosure or by the
deed in lieu of foreclosure is classified as REO until such time as it is sold.
These properties are carried at the lower of their recorded amount or estimated
fair value less estimated costs to sell the property. REO totalled $700,000,
$586,000, $610,000 and $809,000 at December 31, 1996, 1995, 1994, and 1993,
respectively.
The largest component of REO consists of a real estate development
project which had a net book value of $250,000 at December 31, 1996. The Bank
originally entered into a $570,000 commercial real estate loan in 1988 for the
development of 49 single family residences. This loan was made under the
"leeway provision" of the New York State Banking Law. Under this provision of
the Banking Law the lending relationship was originally structured so that the
Bank held title to the property securing the loan subject to the fulfillment of
the borrower's obligations under the loan. In 1990, the developer became
insolvent, was unable to satisfy the terms of the loan and the Bank assumed
control of the project. The Bank has developed and sold 25 lots at December 31,
1996. The proceeds from the sale of the lots are used to reduce the outstanding
balance of REO. The Bank believes it will fully recover its investment in this
property.
Delinquent Loans and Non-Performing Assets
The following table sets forth information regarding the Bank's loans
delinquent 90 days or more, and real estate acquired or deemed acquired by
foreclosure at the dates indicated. When a loan is delinquent 90 days or more,
the Bank reverses all accrued interest thereon and ceases to accrue interest
thereafter. For all the dates indicated, the Bank did not have any material
restructured loans within the meaning of SFAS 15 and SFAS 114.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------
1996 1995 1994 1993 1992 1991
--------- --------- --------- --------- --------- ---------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans delinquent 90 days or more:
Real estate loans......................... $ 1,953 $ 849 $ 1,045 $ 745 $ 727 $ 922
Consumer loans............................ 45 70 69 43 150 165
-------- -------- -------- -------- -------- --------
Total delinquent loans.................. 1,998 919 1,114 788 877 1,087
Total REO................................... 700 586 610 809 1,179 1,326
-------- -------- -------- -------- -------- --------
Total nonperforming assets (1)........ $ 2,698 $ 1,505 $ 1,724 $ 1,597 $ 2,056 $ 2,413
======== ======== ======== ======== ======== ========
Total loans delinquent 90 days or more
to total loans receivable (2)............. 1.8% .9% 1.2% 1.0% 1.1% 1.5%
Total loans delinquent 90 days or more
to total assets........................... 1.1% .5% 0.7% 0.6% 0.7% 1.0%
Total nonperforming assets to total assets.. 1.4% .8% 1.0% 1.2% 1.6% 2.1%
Net loans receivable........................ 108,742 100,149 89,668 78,813 78,366 72,651
-------- -------- -------- -------- -------- --------
Total assets................................ $189,937 $180,952 $170,715 $129,270 $126,757 $113,892
======== ======== ======== ======== ======== ========
</TABLE>
- ------------------------------------
(1) Net of specific valuation allowances.
(2) Net of unearned discount, and the allowance for loan losses.
During the year ended December 31, 1996, and year ended December 31,
1995, respectively, additional gross interest income of $81,000 and $55,000
would have been recorded on loans accounted for on a non-accrual basis if the
loans had been current throughout the period. No interest income on non-accrual
loans was included in income during the same periods.
10
<PAGE>
The following table sets forth information with respect to loans past
due 30-89 days in the Bank's portfolio at the dates indicated.
<TABLE>
<CAPTION>
At or for the Period Ended December 31,
----------------------------------------------
1996 1995 1994 1993 1992 1991
------ ------ ------ ------ ------ ------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans past due 30-89 days:
Real estate loans........................ $1,867 $2,465 $1,503 $1,537 $1,552 $1,060
Consumer and other loans................. 249 133 137 423 423 488
------ ------ ------ ------ ------ ------
Total past due 30-89 days............ $2,116 $2,598 $1,640 $1,960 $1,975 $1,548
====== ====== ====== ====== ====== ======
</TABLE>
The following table sets forth information regarding the Bank's
delinquent loans 60 days and greater and REO at December 31, 1996.
<TABLE>
<CAPTION>
At December 31, 1996
---------------------------
Balance Number
----------- ----------
(Dollars in Thousands)
<S> <C> <C>
Residential real estate:
Loans 60 to 89 days delinquent.................... $ 443 11
Loans more than 90 days delinquent................ 1,953 52
Consumer and commercial business loans
60 days or more delinquent....................... 77 21
Real estate owned................................... 700 6
------ ----
Total.......................................... $3,173 90
====== ====
</TABLE>
Classification of Assets. Federal regulations provide for the
classification of loans and other assets such as debt and equity securities
considered to be of lesser quality as "substandard," "doubtful," or "loss"
assets. An asset is considered "substandard" if it is inadequately protected by
the current net worth and paying capacity of the obligor or of the collateral
pledged, if any. "Substandard" assets include those characterized by the
"distinct possibility" that the savings institution will sustain "some loss" if
the deficiencies are not corrected. Assets classified as "doubtful" have all of
the weaknesses inherent in those classified "substandard," with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable." Assets classified as "loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. Assets
that do not expose the savings institution to risk sufficient to warrant
classification in one of the aforementioned categories, but which possess some
weaknesses, are required to be designated "special mention" by management.
When a savings institution classifies problem assets as either
substandard or doubtful, it is required to establish general allowances for loan
losses in an amount deemed prudent by management. General allowances represent
loss allowances that have been established to recognize the inherent risk
associated with lending activities, but which, unlike specific allowances, have
not been allocated to particular problem assets. When a savings institution
classifies problem assets as "loss," it is required either to establish a
specific allowance for losses equal to 100% of the amount of the assets so
classified, or to charge off such amount. A savings institution's determination
as to the classification of its assets and the amount of its valuation
allowances is subject to review by federal and state regulatory authorities,
which can order the establishment of additional general or specific loss
allowances. The Bank regularly reviews the problem
11
<PAGE>
loans in its portfolio to determine whether any loans require classification in
accordance with applicable regulations.
The following table sets forth the aggregate amount of the Bank's
internally classified assets at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
------------------------------
1996 1995 1994 1993
------ ------ ------ ------
(In Thousands)
<S> <C> <C> <C> <C>
Substandard assets (1).................... $1,980 $1,163 $1,534 $1,190
Doubtful assets........................... 59 34 11 --
Loss assets............................... 6 5 2 38
------ ------ ------ ------
Total classified assets................ $2,045 $1,202 $1,547 $1,228
====== ====== ====== ======
</TABLE>
- ------------------------
(1) Includes $250,000, $292,000, $421,000 and $669,000 for a real estate
development project classified as REO at December 31, 1996, 1995, 1994 and
1993, respectively.
Allowance for Loan Losses. Management's policy is to provide for
estimated losses on the Bank's loan portfolio based on management's evaluation
of the potential losses that may be incurred. The Bank reviews on a quarterly
basis the loans in its portfolio which have demonstrated delinquencies,
including problem loans, to determine whether any loans require classification
or the establishment of appropriate reserves or allowances for losses. Such
evaluation, which includes a review of all loans of which full collectibility of
interest and principal may not be reasonably assured, considers, among other
matters, past loss experience, present economic conditions and other factors
deemed relevant by management. Management calculates the general allowance for
loan losses on past experience as well as current delinquencies and the
composition of the Bank's loan portfolio. While both general and specific loss
allowances are charged against earnings, general loan loss allowances are
included, subject to certain limitations, as capital in computing risk-based
capital under federal regulations.
In accordance with SFAS 114, a loan is considered impaired when each
of the following criteria are met: the loan is of a material size, the loan is
considered to be non-performing, and a loss is probable. The measurement of
impaired loans is generally based upon the present value of expected future cash
flows discounted at the historic effective interest rate, except that all
collateral-dependent loans are measured for impairment based on the fair value
of the collateral.
Management will continue to review the entire loan portfolio to
determine the extent, if any, to which further additional loan loss provisions
may be deemed necessary. Management believes that the Bank's current allowance
for loan losses is adequate, however, there can be no assurance that the
allowance for loan losses will be adequate to cover losses that may in fact be
realized in the future or that additional provisions for loan losses will not be
required.
12
<PAGE>
Analysis of the Allowance for Loan Losses. The following table sets
forth the analysis of the allowance for loan losses at or for the periods
indicated.
<TABLE>
<CAPTION>
At or for the Period Ended December 31,
------------------------------------------------------------
1996 1995 1994 1993 1992 1991
--------- --------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Total loans receivable, net......................... $108,742 $100,149 $89,668 $78,813 $78,366 $72,651
Average loans outstanding........................... 104,354 95,979 84,596 78,355 75,906 70,661
Allowance balance (at beginning of period).......... 346 315 280 296 189 150
Provision for losses:
Real estate....................................... 90 53 30 10 107 100
Consumer and other loans.......................... 546 50 35 23 24 10
Charge-offs:
Real estate....................................... -- 17 14 -- -- 44
Consumer and other loans.......................... 93 64 80 146 62 37
Recoveries:
Real estate....................................... -- -- 6 -- -- --
Consumer and other loans.......................... 17 9 58 97 38 10
-------- -------- ------- ------- ------- -------
Allowance balance (at end of period)................ $ 906 $ 346 $ 315 $ 280 $ 296 $ 189
======== ======== ======= ======= ======= =======
Allowance for loan losses as a percent
of net loans receivable at end of period.......... 0.8% 0.3% 0.4% 0.4% 0.4% 0.3%
Loans charged off as a percent of average
loans outstanding................................. 0.1% 0.1% 0.1% 0.2% 0.1% 0.1%
Ratio of allowance for loan losses to total
nonperforming loans at end of period (1).......... 45.3% 37.6% 28.3% 35.5% 33.8% 17.4%
Ratio of allowance for loan losses to total
nonperforming assets at end of period (1)......... 33.6% 23.0% 18.3% 17.5% 14.4% 7.8%
</TABLE>
- ------------------------------------
(1) Net of specific reserves.
13
<PAGE>
Allocation of Allowance for Loan Losses. The following table sets
forth the allocation of allowance for loan losses by loan category for the
periods indicated. The allocation of the allowance by category is not
necessarily indicative of future losses and does not restrict the use of the
allowance to absorb losses in any category.
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------------
1996 1995 1994
--------------------- -------------------- --------------------
% of Loans % of Loans % of Loans
In Each In Each In Each
Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at end of period applicable to:
Real estate loans...................................... $ 340 90.66% $ 250 90.86% $ 215 93.14%
Consumer and other loans............................... 566 9.34 96 9.14 100 6.86
----- ------ ----- ------ ----- ------
Total allowance for loan losses (1).................. $ 906 100.00% $ 346 100.00% $ 315 100.00%
===== ====== ===== ====== ===== ======
<CAPTION>
At December 31,
---------------------
1993
---------------------
% of Loans
In Each
Category To
Amount Total Loans
------ -----------
(Dollars in Thousands)
<S> <C> <C>
Balance at end of period applicable to:
Real estate loans...................................... 184 94.03%
Consumer and other loans............................... 96 5.97
----- ------
Total allowance for loan losses (1).................. $ 280 100.00%
===== ======
</TABLE>
- ------------------------------------
(1) Percentages include unearned discount and origination fees.
14
<PAGE>
Investment Activities
The investment policy of the Bank established by the Board of
Directors attempts to provide and maintain liquidity, maintain a high quality
diversified investment portfolio in order to obtain a favorable return on
investment without incurring undue interest rate and credit risk, provide
collateral for pledging requirements, and to complement the Bank's lending
activities. The Bank has not engaged in any hedging activities or invested in
any derivative securities, and the Bank has no current intent to engage in such
activities. At December 31, 1996, the Bank had investment securities with an
aggregate amortized cost value of $59.5 million and a market value of $59.6
million. At December 31, 1996, the Bank's carrying value of investment
securities consisted of $22.1 million of corporate debt issues and $12.1 million
of securities issued or guaranteed by the United States Government or agencies
thereof and state and municipal obligations. The corporate debt issues primarily
consist of financial corporation debt and industrial debentures. These issues
generally have maturities of between two and five years. All corporate debt
investments have been rated as investment grade by either Moody's or Standard &
Poor's. Typically, such investments yield 30-50 basis points more than Treasury
securities with comparable maturities. To a lesser extent, the Bank also invests
in mutual funds and equity securities. At December 31, 1996, the Bank held
$557,000 in common stock and $1.2 million in an equity mutual fund. At December
31, 1996, the Bank had invested $23.0 million in mortgage-backed securities,
net. The value of the mortgage-backed securities fluctuates with changes in the
value of the underlying securities. However, the Bank believes that the risk of
loss on this investment is not material given the type of securities underlying
the mortgage-backed securities. Such investments are liquid, and therefore allow
the Bank to respond more readily to changing market conditions. The investment
portfolio is accounted for in accordance with FASB Statement 115. At December
31, 1996, the Bank's available-for-sale and held-to-maturity portfolios had
carrying values of $49.2 million and $9.6 million, respectively.
The Bank generally has maintained a portfolio of liquid assets that
exceeds regulatory requirements. Liquidity levels may be increased or decreased
depending upon the yields on investment alternatives and upon management's
judgment as to the attractiveness of the yields then available in relation to
other opportunities and its expectation of the yield that will be available in
the future, as well as management's projections as to the short term demand for
funds to be used in the Bank's loan origination and other activities. For
further information regarding the Bank's investments see Note 3 to the Notes to
Financial Statements.
15
<PAGE>
Investment Portfolio. The following table sets forth the carrying
value of the Bank's investment portfolio at the dates indicated. At December 31,
1996, the market value of the Bank's investments was approximately $59.6
million. The market value of investments includes interest-earning deposits, and
mortgage-backed securities.
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------
1996 1995 1994 1993
-------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C>
Investment securities:
U.S. Government and agency obligations..... $ 5,879 $ 8,171 $ 6,070 $ 4,377
State and municipal obligations............ 6,172 5,297 3,072 2,963
Corporate debt issues...................... 22,060 28,533 33,192 25,163
Equity securities.......................... 557 69 87 99
Mutual funds............................... 1,178 1,865 5,872 1,175
------ ------ ------ ------
35,846 43,935 48,293 33,777
Unrealized gain on available for sale portfolio 827 996 (158) --
------ ------ ------ ------
Total investment securities............ 36,673 $44,931 $48,135 $33,777
------ ------- ------- -------
Interest-earning deposits in other institutions -- -- 2,043 1,000
Federal funds sold............................. 1,550 8,200 11,584 6,962
------ ------ ------ ------
Total investments.............. $38,223 $53,131 $61,762 $41,739
======= ======= ======= =======
Mortgage-backed securities, net:
Adjustable rate............................ 4,787 2,812 247 251
Fixed rate................................. 18,179 5,100 769 1,157
------- ------- ------- -------
22,966 7,912 1,016 1,408
Unrealized loss on available for sale portfolio (137) 41 (24) --
------- ------- ------- -------
Total mortgage-backed securities, net $ 22,829 $ 7,953 $ 992 $ 1,408
======== ======= ======= =======
</TABLE>
Investment Portfolio Maturities. The following table sets forth the
carrying value, market value, average life in years, and annualized weighted
average yield of the Bank's investment portfolio at December 31, 1996.
<TABLE>
<CAPTION>
Annualized
Average Weighted
Carrying Market Life Average
Value Value Years Yield
-------- ------- ------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Investment securities:
U.S. Government treasury........................... $ 221 $ 222 3.28 6.82%
U.S. Government agency............................. 5,658 5,671 8.02 6.99
State and municipal obligations.................... 6,172 6,493 7.87 5.72
Corporate debt issues.............................. 22,060 22,307 2.79 7.07
Marketable equity securities....................... 1,735 2,074 -- 7.69
------- ------- ------- ------
Total.......................................... $35,846 $36,767 6.85%
======= ======= ======
Unrealized gain on available for sale portfolio.. 827
Carrying value of investment securities.............. $36,673
=======
Investment securities held to maturity: (1)
Corporate debt obligations......................... $ 9,629 $ 9,724 1.41 6.93%
======= ======= ======= ======
</TABLE>
- -------------------------------------
(1) The information is included above as a component of corporate debt issues.
16
<PAGE>
Securities Portfolio Maturities. The following table sets forth the
scheduled maturities, carrying values, market values and average yields for the
Bank's investment securities at December 31, 1996. Yield is calculated on the
amortized cost to maturity.
<TABLE>
<CAPTION>
At December 31, 1996
-----------------------------------------------------------------------------
One Year or Less One to Five Years Five to Ten Years
------------------------ ------------------------ ------------------------
Annualized Annualized Annualized
Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield
--------- ---------- --------- ----------- -------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Debt investment securities:
U.S. Agency securities.................. $ -- --% $ 837 6.40% $4,363 7.01%
U.S. Government securities.............. -- -- 202 6.40% -- --
State and municipal obligations......... -- -- 1,021 6.25% 3,747 5.54%
Corporate debt issues................... 5,887 6.58% 11,149 7.37% 3,824 6.83%
------ ---- ------- ----- ------- ------
Total............................. $5,887 6.58% $13,209 7.21% $11,934 6.49%
====== ==== ======= ===== ======= ======
Equity and mortgage-backed securities:
Mutual funds............................ $1,178 1.98% -- --
Mortgage-backed securities.............. 186 6.21 1,327 6.50% 1,986 6.99%
Preferred stock......................... -- --
Common stock............................ 557 5.72%
------ ---- ------- ----- ------- ------
Total............................. $1,921 3.47% $ 1,327 6.50% $ 1,986 6.99%
====== ==== ======= ===== ======= ======
Total investment securities....... $7,808 5.81% $14,536 7.14% $13,920 6.56%
====== ==== ======= ===== ======= ======
Unrealized gain on available for sale
portfolio................................
Total carrying value..............
Investment securities held to maturity: (1)
Corporate debt obligations.............. $4,809 6.66 $ 4,261 7.35% $ 499 6.3%
------ ---- ------- ----- ------- ------
Total securities.............. $4,809 6.66% $ 4,261 7.35% $ 499 6.3%
====== ======= ===== ======= ======
<CAPTION>
At December 31, 1996
------------------------------------------------------------------------
More than Ten Years Total Investment Securities
------------------------ -----------------------------------------
Annualized Annualized
Weighted Weighted
Carrying Average Carrying Market Average
Value Yield Value Value Yield
-------- ---------- -------- -------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Debt investment securities:
U.S. Agency securities.................. $ 457 7.61% $ 5,658 $ 5,671 6.97%
U.S. Government securities.............. 19 11.19% 221 222 6.82%
State and municipal obligations......... 1,404 5.79% 6,172 6,493 5.72%
Corporate debt issues................... 1,200 7.30% 22,060 22,307 7.07%
------- ------ ------- ------- ----
Total............................. $ 3,081 6.68% $39,111 $34,693 6.81%
======= ====== ======= ======= ====
Equity and mortgage-backed securities:
Mutual funds............................ $ 1,178 $ 1,178 1.98%
Mortgage-backed securities.............. 19,466 6.95% 22,966 22,829 6.92%
Preferred stock......................... -- -- --
Common stock............................ 557 896 5.72%
------- ------ ------- -------
Total............................. $19,466 6.95% $24,701 $24,903 6.66%
======= ------ ======= ======= ====
Total investment securities....... $22,547 6.91% $58,812 $59,596 6.74%
======= ====== ======= ======= ====
Unrealized gain on available for sale
portfolio................................ 690
-------
Total carrying value.............. $59,502
=======
Investment securities held to maturity: (1)
Corporate debt obligations.............. $ 61 4.10% $ 9,629 $ 9,724 6.93%
------- ------ ------- -------
Total securities.............. $ 61 4.10% $ 9,629 $ 9,724 6.93%
======= ====== ======= ======= ====
</TABLE>
- ------------------------------------
(1) The information is included as a component of debt investment securities.
17
<PAGE>
Sources of Funds
General. Deposits are the primary source of the Bank's funds for
lending and other investment purposes. In addition to deposits, the Bank derives
funds from the amortization and prepayment of loans and mortgage-backed
securities, the maturity of investment securities and operations and from other
borrowings. Scheduled loan principal repayments are a relatively stable source
of funds, while deposit inflows and outflows and loan prepayments are influenced
significantly by general interest rates and market conditions. Borrowings may be
used on a short-term basis to compensate for reductions in the availability of
funds from other sources or on a longer term basis for general business
purposes.
Deposits. Consumer and commercial deposits are attracted principally
from within the Bank's market area through the offering of a broad selection of
deposit instruments including noninterest-bearing demand accounts, NOW accounts,
passbook and club accounts, money market deposit, term certificate accounts and
individual retirement accounts. While the Bank accepts deposits of $100,000 or
more, it does not currently offer premium rates for such deposits. Deposit
account terms vary according to the minimum balance required, the period of time
during which the funds must remain on deposit, and the interest rate, among
other factors. The Bank has a committee which meets weekly to evaluate the
Bank's internal cost of funds, surveys rates offered by competing institutions,
reviews the Bank's cash flow requirements for lending and liquidity and the
number of certificates of deposit maturing in the upcoming week. This committee
executes rate changes when deemed appropriate. The Bank does not obtain funds
through brokers, nor does it solicit funds outside its market area.
Deposit Portfolio. The following table sets forth information
regarding interest rates, terms, minimum amounts and balances of the Bank's
savings and other deposits as of December 31, 1996:
<TABLE>
<CAPTION>
Weighted Percentage
Average Minimum of Total
Interest Rate Minimum Term Checking and Savings Deposits Amount Balances Deposits
- -------------- ------------ ----------------------------- ------ -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
0.000% None Non-interest demand account $ 50 $ 7,341 4.63
None NOW accounts 500 13,082 8.24
None Passbook and club accounts 100 65,634 41.36
2.852 None Money market accounts 2,500 174 .11
<CAPTION>
Certificates of Deposit
-----------------------
<S> <C> <C> <C> <C> <C>
- -- 91 days Fixed term, fixed rate $1,000 $ -- --
4.956 6 months Fixed term, fixed rate 2,500 8,196 5.16
5.405 9 months Fixed term, fixed rate 1,000 50 .03
- -- 10 months Fixed term, fixed rate 1,000 -- --
- -- 11 months Fixed term, fixed rate 1,000 -- --
5.321 12 months Fixed term, fixed rate 1,000 19,131 12.06
5.360 12 months Fixed term, fixed rate-deferred 1,000 59 .04
- -- 12 months Fixed term, variable rate 1,000 -- --
6.181 15 months Fixed term, fixed rate 1,000 6,773 4.27
4.969 18 months Fixed term, variable rate 1,000 1,988 1.25
5.322 18 months Fixed term, fixed rate 1,000 2,737 1.75
5.872 24 months Fixed term, fixed rate 1,000 3,515 2.21
6.127 30 months Fixed term, fixed rate 1,000 8,864 5.59
5.835 36 months Fixed term, fixed rate (1) 1,000 3,075 1.94
6.234 48 months Fixed term, fixed rate (1) 1,000 8,597 5.42
5.987 60 months Fixed term, fixed rate 1,000 1,648 1.04
6.830 84 months Fixed term, fixed rate 1,000 6,964 4.39
6.342 60 through 120 months Fixed term, fixed rate 1,000 869 .55
--------
$158,697
========
</TABLE>
- -------------------------------
(1) This deposit product allows the depositor to elect to adjust the interest
rate paid once during the initial term of the deposit to the then
prevailing rate.
18
<PAGE>
The following table sets forth the change in dollar amount of savings
deposits in the various types of savings accounts offered by the Bank between
the dates indicated.
<TABLE>
<CAPTION>
Balance Percent Balance Percent
at of Incr. at of Incr.
12/31/96 Deposits (Decr) 12/31/95 Deposits (Decr)
-------- -------- ---------- -------- -------- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Club accounts $ 661 0.42 110 $ 551 0.3% $ (67)
Noninterest accounts 7,341 4.63 129 7,212 4.6 1,124
NOW accounts 13,082 8.24 917 12,165 7.7 (912)
Passbooks 64,973 40.94 (5,495) 70,468 44.6 (7,027)
Money market deposit
accounts 174 0.11 (78) 252 0.2 (532)
Time deposits which mature:
Within 12 months 52,935 33.36 15,011 37,924 24.0 10,762
Within 12-36 months 14,933 9.41 (5,968) 20,901 13.2 (1,977)
Beyond 36 months 4,598 2.90 (3,914) 8,512 5.4 850
-------- ----- -------- -------- ----- ---------
Total $158,697 100.0% 712 $157,985 100.0% $ 2,221
======== ===== ======== ======== ===== =========
<CAPTION>
Balance Percent Balance Percent Balance
at of Incr. at of Incr. at
12/31/94 Deposits (Decr) 12/31/93 Deposits (Decr) 12/31/92
-------- -------- --------- -------- -------- ---------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Club accounts $ 618 0.4% $ 304 $ 314 0.3% $ 20 $ 294
Noninterest accounts 6,088 3.9 1,056 5,032 4.4 228 4,804
NOW accounts 13,077 8.4 6,208 6,869 5.9 (392) 7,261
Passbooks 77,495 49.8 8,911 68,584 59.4 (1,661) 70,245
Money market deposit
accounts 784 0.5 546 238 0.2 (14) 252
Time deposits which mature:
Within 12 months 27,162 17.4 9,104 18,058 15.7 (5,397) 23,455
Within 12-36 months 22,878 14.7 15,718 7,160 6.2 3,610 3,550
Beyond 36 months 7,662 4.9 (1,427) 9,089 7.9 4,345 4,744
-------- ----- --------- -------- ----- --------- --------
Total $155,764 100.0% $ 40,420 $115,344 100.0% $ 739 $114,605
======== ===== ========= ======== ===== ========= ========
</TABLE>
19
<PAGE>
The following table sets forth the certificates of deposit in the Bank
classified by rates as of the dates indicated:
<TABLE>
<CAPTION>
At December 31,
----------------------------------------
1996 1995 1994 1993
------- ------- ------- -------
Rate (In Thousands)
- ----
<S> <C> <C> <C> <C>
3.00% or less ................... $ 180 $ 274 $ 136 $ --
3.01 - 4.99% ................... 10,665 3,601 24,210 21,090
5.00 - 6.99% ................... 57,128 58,313 28,010 8,875
7.00 - 8.99% ................... 4,667 5,347 5,009 4,079
9.00 - 10.99% ................... -- 53 337 263
------- ------- ------- -------
$72,640 $67,588 $57,702 $34,307
======= ======= ======= =======
</TABLE>
- -----------------------------------
* The breakout by rate of certificates of deposit was unavailable at December
31, 1992.
The following table sets forth the amount and maturities of
certificates of deposit at December 31, 1996.
<TABLE>
<CAPTION>
Amount Due
------------------------------------------------------------------------
Less Than 1-2 2-3 3-4 4-5 After 5
One Year Years Years Years Years Years Total
-------- -------- ------- ------- ------- ------- -------
Rate (In Thousands)
- ----
<S> <C> <C> <C> <C> <C> <C> <C>
3.00% or less ............... $ 180 -- -- -- -- -- 179
3.01 - 3.99% ............... 66 11 11 -- -- -- 88
4.00 - 4.99% ............... 9,685 873 13 6 -- -- 10,577
5.00 - 5.99% ............... 31,593 10,537 2,898 1,040 533 996 47,596
6.00 - 6.99% ............... 5,185 2,068 816 514 52 895 9.532
7.00 - 7.99% ............... 151 -- 3,624 -- -- 754 4,529
8.00% and above ............. 8 14 117 -- -- -- 139
------- ------- ------ ------ ------- ------ -------
$46,868 $13,503 $7,479 $1,560 $585 $2,645 $72,640
======= ======= ====== ====== ======= ====== =======
</TABLE>
The following table indicates the amount of the Bank's certificates of
deposit of $100,000 or more by time remaining until maturity as of December 31,
1996.
<TABLE>
<CAPTION>
Certificates
of Deposit
of $100,000
Remaining Maturity or More
------------------ --------------
(In Thousands)
<S> <C>
Three months or less.......................... $ 418
Three through six months...................... 3,719
Six through twelve months..................... 3,416
Over twelve months............................ 3,662
--------
Total....................................... $ 11,215
========
</TABLE>
The following table sets forth the net changes in the deposit
activities of the Bank for the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1996 1995 1994 1993
-------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C>
Balance at beginning of period.................... $157,985 $155,734 $115,344 $114,605
Net deposits (withdrawals)........................ (5,611) (4,004) 35,727 (3,325)
Interest credited................................. 6,323 6,255 4,693 4,064
-------- -------- -------- --------
Ending balance.................................... 158,697 157,985 155,764 115,344
-------- -------- -------- --------
Net increase in deposits.......................... $ 712 $ 2,251 $ 40,420 $ 739
======== ======== ======== ========
</TABLE>
20
<PAGE>
Borrowings
Savings deposits are the primary source of funds of the Bank's lending
and investment activities and for its general business purposes. At December
31, 1996, the Bank had 7,610,000 in funds obtained from repurchase agreements
outstanding. The Bank is a member of the Federal Home Loan Bank System.
Personnel
As of December 31, 1996, the Bank had 60 full-time and 14 part-time
employees. None of the Bank's employees is represented by a collective
bargaining group. The Bank believes its relationship with its employees to be
good.
REGULATION AND SUPERVISION
General
The Bank is a New York State chartered stock savings bank and its
deposit accounts are insured up to applicable limits by the FDIC. The Bank is
subject to extensive regulation by the State of New York Banking Department (the
"Department") as its chartering agency, and by the FDIC, as the deposit insurer.
The Bank must file reports with the Department and the FDIC concerning its
activities and financial condition, in addition to obtaining regulatory
approvals prior to entering into certain transactions such as establishing
branches and mergers with, or acquisitions of, other depository institutions.
There are periodic examinations by the Department and the FDIC to assess the
Bank's compliance with various regulatory requirements. This regulation and
supervision establishes a comprehensive framework of activities in which a
savings bank may engage, and is intended primarily for the protection of the
insurance fund and depositors. The regulatory structure also gives the
regulatory authorities extensive discretion in connection with their supervisory
and enforcement activities and examination policies, including policies with
respect to the classification of assets and the establishment of adequate loan
loss reserves for regulatory purposes. Any change in such regulation, whether by
the Department, the FDIC or through legislation, could have a material adverse
impact on the Holding Company, the Bank, and their operations and stockholders.
The Holding Company is also required to file certain reports with, and otherwise
comply with the rules and regulations of, the FRB and the Department and the
FDIC which administers the provisions of the Securities Exchange Act of 1934.
Certain of the regulatory requirements applicable to the Bank and to the Holding
Company are referred to below or elsewhere herein.
New York State Law
The exercise by an FDIC-insured savings bank of the lending and
investment powers of a savings bank under the New York State Banking Law is
limited by FDIC regulations and other federal law and regulations. In
particular, the applicable provisions of New York State Banking Law and
regulations governing the investment authority and activities of an FDIC insured
state-chartered savings bank have been substantially limited by the Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") and the FDIC
regulations issued pursuant thereto.
The Bank derives its lending, investment and other authority primarily
from the applicable provisions of New York State Banking Law and the regulations
of the Banking Department, as limited by FDIC regulations. Under these laws and
regulations, savings banks, including the Bank, may invest in real estate
mortgages, consumer and commercial loans, certain types of debt securities,
including certain corporate debt securities and obligations of federal, state
and local governments and agencies, certain types
21
<PAGE>
of corporate equity securities and certain other assets. Under the statutory
authority for investing in equity securities, a savings bank may invest up to
7.5% of its assets in corporate stock, with an overall limit of 5% of its assets
invested in common stock. Investment in the stock of a single corporation is
limited to the lesser of 2% of the outstanding stock of such corporation or 1%
of the savings bank's assets, except as set forth below. Such equity securities
must meet certain earnings ratios and other tests of financial performance. A
savings bank's lending powers are not subject to percentage of assets
limitations, although there are limits applicable to single borrowers. A
savings bank may also, pursuant to the "leeway" power, make investments not
otherwise permitted under the New York State Banking Law. This power permits
investments in otherwise impermissible investments of up to 1% of assets in any
single investment, subject to certain restrictions and to an aggregate limit for
all such investments of up to 5% of assets. Additionally, in lieu of investing
in such securities in accordance with and reliance upon the specific investment
authority set forth in the New York State Banking Law, savings banks are
authorized to elect to invest under a "prudent person" standard in a wider range
of debt and equity securities as compared to the types of investments
permissible under such specific investment authority. However, in the event a
savings bank elects to utilize the "prudent person" standard, it will be unable
to avail itself of the other provisions of the New York State Banking Law and
regulations which set forth specific investment authority. The Bank has not
elected to conduct its investment activities under the "prudent person"
standard. A savings bank may also exercise trust powers upon approval of the
Department.
New York State chartered savings banks may also invest in subsidiaries
under their service corporation investment authority. A savings bank may use
this power to invest in corporations that engage in various activities
authorized for savings banks, plus any additional activities which may be
authorized by the Banking Department. Investment by a savings bank in the
stock, capital notes and debentures of its service corporations is limited to 3%
of the bank's assets, and such investments, together with the bank's loans to
its service corporations, may not exceed 10% of the savings bank's assets.
Furthermore, New York banking regulations impose requirements on loans which a
bank may make to its executive officers and directors and to certain
corporations or partnerships in which such persons have equity interests. These
requirements include, but are not limited to, requirements that (i) certain
loans must be approved in advance by a majority of the entire board of directors
and the interested party must abstain from participating directly or indirectly
in the voting on such loan, (ii) the loan must be on terms that are not more
favorable than those offered to unaffiliated third parties, and (iii) the loan
must not involve more than a normal risk of repayment or present other
unfavorable features.
Under the New York State Banking Law, the Superintendent of Banks (the
"Superintendent") may issue an order to a New York State chartered banking
institution to appear and explain an apparent violation of law, to discontinue
unauthorized or unsafe practices and to keep prescribed books and accounts.
Upon a finding by the Department that any director, trustee or officer of any
banking organization has violated any law, or has continued unauthorized or
unsafe practices in conducting the business of the banking organization after
having been notified by the Superintendent to discontinue such practices, such
director, trustee or officer may be removed from office after notice and an
opportunity to be heard. The Bank does not know of any past or current
practice, condition or violation that might lead to any proceeding by the
Superintendent or the Department against the Bank or any of its trustees or
officers.
Federal Deposit Insurance Corporation Improvement Act of 1991
FDICIA primarily addressed the recapitalization of the Bank Insurance
Fund ("BIF"), which insures the deposits of commercial banks and savings
institutions. In addition, FDICIA established a number of new mandatory
supervisory measures for savings institutions and banks.
22
<PAGE>
Standards for Safety and Soundness. FDICIA requires the federal bank
regulatory agencies to prescribe regulatory standards for all insured depository
institutions and depository institution holding companies relating to: (i)
internal controls, information systems and audit systems; (ii) loan
documentation; (iii) credit underwriting; (iv) interest rate risk exposure; (v)
asset growth; and (vi) compensation, fees and benefits. The compensation
standards would prohibit employment contracts, compensation or benefit
arrangements, stock option plans, fee arrangements or other compensatory
arrangements that provide excessive compensation, fees or benefits or could lead
to material financial loss. In addition the federal banking regulatory agencies
are required to prescribe by regulation standards specifying: (i) maximum
classified assets to capital ratios; (ii) minimum earnings sufficient to absorb
losses without impairing capital; and (iii) to the extent feasible, a minimum
ratio of market value to book value for publicly traded shares of depository
institutions and depository institution holding companies. In November 1993,
the federal banking agencies, including the FDIC, proposed regulations regarding
the implementation of these standards.
Other Deposit Insurance Reforms. FDICIA amended the FDI Act to
prohibit insured depository institutions that are not well-capitalized from
accepting brokered deposits unless a waiver has been obtained from the FDIC.
Deposit brokers are required to register with the FDIC.
Consumer Protection Provisions. FDICIA enacted consumer oriented
provisions including a requirement of notice to regulators and customers for any
proposed branch closing and provisions intended to encourage the offering of
"lifeline" banking accounts and lending in distressed communities. FDICIA also
requires depository institutions to make additional disclosures to depositors
with respect to the rate of interest and the terms of their deposit accounts.
Uniform Lending Standard. Under FDICIA, the federal banking agencies
are required to adopt uniform regulations prescribing standards for extensions
of credit that are secured by liens on interests in real estate or made for the
purpose of financing the construction of a building or other improvements to
real estate. Insured depository institutions must adopt and maintain written
policies that establish appropriate limits and standards for extensions of
credit that are secured by liens or interests in real estate or are made for the
purpose of financing permanent improvements to real estate. These policies must
establish loan portfolio diversification standards, prudent underwriting
standards (including loan-to-value limits) that are clear and measurable, loan
administration procedures, and documentation, approval and reporting
requirements. The real estate lending policies must reflect consideration of
the Interagency Guidelines for Real Estate Lending Policies (the "Interagency
Guidelines") that have been adopted by the federal banking regulators.
The Interagency Guidelines, among other things, require depository
institutions to establish internal loan-to-value limits for real estate loans
that are not in excess of the following supervisory limits: (i) for loans
secured by undeveloped land, the supervisory loan-to-value limit is 65% of the
value of the collateral; (ii) for land development loans, the supervisory limit
is 75%; (iii) for loans for the construction of commercial, multi-family or
other nonresidential property, the supervisory limit is 80%; (iv) for loans for
the construction of one- to four- family properties, the supervisory limit is
85%; and (v) for loans secured by other improved property (e.g. farmland,
commercial property and other income-producing property including non-owner-
occupied, one- to four- family property) the supervisory limit is 85%.
The Interagency Guidelines indicate that on a case-by-case basis it
may be appropriate to originate or purchase loans with loan-to-value ratios in
excess of the supervisory loan-to-value limits, based on the support provided by
other credit factors. The aggregate amount of loans in excess of the
supervisory loan-to-value limits, however, should not exceed 100% of total
capital and the total of such loans secured by
23
<PAGE>
commercial, agricultural, multi-family and other non-one- to four- family
residential properties should not exceed 30% of total capital.
The supervisory loan-to-value limits do not apply to certain
categories of loans including loans insured or guaranteed by the United States
Government and its agencies or by financially capable state, local or municipal
governments or agencies, loans backed by the full faith and credit of state
governments, loans that are to be sold promptly after origination without
recourse to a financially responsible party, loans that are renewed, refinanced
or restructured in connection with a workout, loans to facilitate sales of real
estate acquired by the institution in the ordinary course of collecting a debt
previously contracted and loans where the real estate is not the primary
collateral.
Insurance of Deposit Accounts
The BIF has achieved the required reserve ratio of 1.25% of insured
reserve deposits. Because of the recapitalization of the BIF, most BIF-insured
savings banks and banks are paying insurance premiums of approximately 4 basis
points or less. In addition, at December 31, 1996 the Bank held $31.9 million
in deposits which are insured by the Savings Association Insurance Fund. The
Bank paid $236,000 in federal deposit insurance premiums for the fiscal year
ended December 31, 1996, as compared to $326,000 in 1995.
Under the FDI Act, insurance of deposits may be terminated by the FDIC
upon a finding that the institution has engaged in unsafe or unsound practices,
is in an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC. The
management of the Bank does not know of any practice, condition or violation
that might lead to termination of deposit insurance. At December 31, 1996, the
Bank's capital exceeded the capital requirements imposed by the FDIC.
Capital Maintenance
The FDIC has issued regulations that require BIF-insured banks, such
as the Bank, to maintain minimum levels of capital. The regulations establish a
minimum leverage capital ratio requirement of not less than 3.0% for banks in
the strongest financial and managerial condition, with a CAMEL Rating of 1 (the
highest examination rating of the FDIC for banks). For all other banks, the
minimum leverage capital requirement is 3% plus additional capital of at least
100 to 200 basis points. Core capital (also referred to as "Tier 1 capital") is
comprised of the sum of common stockholders' equity, non-cumulative perpetual
preferred stock (including any related surplus) and minority interests in
consolidated subsidiaries, minus all intangible assets (other than qualifying
servicing rights).
The FDIC also requires that savings banks meet a risk-based capital
standard. The risk-based capital standard requires the maintenance of total
capital (which is defined as core capital and supplementary capital) to risk-
weighted assets of at least 8% and core capital to risk-weighted assets of at
least 4%. In determining the amount of risk-weighted assets, all assets, plus
certain off-balance sheet items, are multiplied by a risk-weight of 0% to 100%,
based on the risks the FDIC believes are inherent in the type of asset or off-
balance sheet item. The components of core capital are equivalent to those
discussed above under the leverage capital ratio requirement. The components of
supplementary capital currently include cumulative perpetual preferred stock,
perpetual preferred stock, mandatory convertible securities, subordinated debt,
intermediate preferred stock and allowance for possible loan and lease losses.
Allowance for possible loan and lease losses includable in supplementary capital
is limited to a maximum
24
<PAGE>
of 1.25% of risk-weighted assets. Overall, the amount of capital counted toward
supplementary capital cannot exceed 100% of core capital.
Loans-to-One-Borrower Limitations
With certain limited exceptions, a New York State chartered savings
bank may not make unsecured loans or extend credit for commercial, corporate or
business purposes (including lease financing) to a single borrower, the
aggregate amount of which would be in excess of 15% of the bank's net worth. In
addition, the Bank may make secured loans or extensions of credit to a single
borrower which aggregate 25% of the Bank's net worth provided that the
underlying collateral is valued in an amount equal to at least 10% of the Bank's
net worth. The Bank currently complies with all applicable loans-to-one-
borrower limitations.
Community Reinvestment Act
Federal Regulation. Under the Community Reinvestment Act ("CRA"), as
implemented by FDIC regulations, a savings institution has a continuing and
affirmative obligation consistent with its safe and sound operation to help meet
the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the FDIC, in connection with its examination of a savings institution,
to assess the institution's record of meeting the credit needs of its community
and to take such record into account in its evaluation of certain applications
by such institution. The Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA") amended the CRA to require, effective July 1,
1990, public disclosure of an institution's CRA rating and require the FDIC to
provide a written evaluation of an institution's CRA performance utilizing a
four-tiered descriptive rating system which replaced the five-tiered numerical
rating system.
New York State Regulation. The Bank is also subject to provisions of
the New York State Banking Law which impose continuing and affirmative
obligations upon banking institutions organized in New York State to serve the
credit needs of its local community ("NYCRA") which are substantially similar to
those imposed by the CRA. Pursuant to the NYCRA, a bank must file an annual
NYCRA report and copies of all federal CRA reports with the Banking Department.
The NYCRA requires the Banking Department to make an annual written assessment
of a bank's compliance with the NYCRA, utilizing a four-tiered rating system,
and make such assessment available to the public. The NYCRA also requires the
Superintendent to consider a bank's NYCRA rating when reviewing a bank's
application to engage in certain transactions, including mergers, asset
purchases and the establishment of branch offices or automated teller machines,
and provides that such assessment may serve as a basis for the denial of any
such application. At December 31, 1996, the Bank complied with its NYCRA
requirements.
The Bank's CRA rating as of its latest examination was satisfactory.
Federal Reserve System
Under Federal Reserve Board regulations, the Bank is required to
maintain noninterest-earning reserves against its transaction accounts
(primarily NOW and regular checking accounts). The Federal Reserve Board
regulations generally require that reserves of 3% must be maintained against
aggregate transaction accounts of $49.8 million or less (subject to adjustment
by the Federal Reserve Board) and an initial reserve of $1.4 million plus 10%
(which is subject to adjustment by the Federal Reserve Board between 8% and 14%)
against that portion of total transaction accounts in excess of $49.8 million.
The
25
<PAGE>
first $4.2 million of otherwise reservable balances (subject to adjustment by
the Federal Reserve Board) are exempted from the reserve requirements. The Bank
is in compliance with the foregoing requirements. Because required reserves must
be maintained in the form of either vault cash, a noninterest-bearing account at
a Federal Reserve Bank or a pass-through account as defined by the Federal
Reserve Board, the effect of this reserve requirement is to reduce the Bank's
interest-earning assets. FHLB System members are also authorized to borrow from
the Federal Reserve Bank's "discount window," but Federal Reserve Board
regulations require institutions to exhaust all FHLB sources before borrowing
from a Federal Reserve Bank.
Holding Company Regulation
The Holding Company is a registered bank holding company pursuant to
the Bank Holding Company Act of 1956, as amended (the "BHCA"), after acquiring a
majority of the common stock of the Bank issued in connection with the
Reorganization. The Holding Company is subject to examination, regulation and
periodic reporting under the BHCA, as administered by the FRB. The FRB has
adopted capital adequacy guidelines for bank holding companies (on a
consolidated basis) substantially similar to those of the FDIC for the Bank.
The Holding Company's capital exceeds these requirements.
A bank holding company is generally prohibited from engaging in, or
acquiring direct or indirect control of any company engaged in, non-banking
activities. One of the principal exceptions to this prohibition is for
activities found by the FRB to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto. Some of the principal
activities that the FRB has determined by regulation to be so closely related to
banking are: (i) making or servicing loans; (ii) performing certain data
processing services: (iii) providing securities brokerage services; (iv) acting
as fiduciary, investment or financial advisor; (v) leasing personal or real
property; (vi) making investments in corporations or projects designed primarily
to promote community welfare; and (vii) acquiring a savings and loan
association. It is not clear to what extent, if any, the FRB will condition the
approval of the Holding Company's ownership of a majority of the Bank's shares
on the divestiture of all or part of any activities conducted through
subsidiaries of the Bank. In the event that any activities require divestiture,
it is likely that the Bank will discontinue such activities within a period of
time following the closing of the Reorganization.
Subsidiary banks of a bank holding company are subject to certain
restrictions imposed by the FRA on any extension of credit to the bank holding
company or its subsidiaries, and on the acceptance of stocks or securities of
such holding company or its subsidiaries as collateral, and on the acceptance of
such stocks or securities as collateral for loans. In addition, related
provisions of the FRA and FRB regulations limit the amount of, and establish
required procedures and credit standards with respect to, loans and other
extensions of credit to officers, directors and principal stockholders of the
Bank, the Holding Company, any subsidiary of the Holding Company and related
interests of such persons. Moreover, subsidiaries of bank holding companies are
prohibited from engaging in certain tie-in arrangements (with the Holding
Company or any of its subsidiaries) in connection with any extension of credit,
lease or sale of property or furnishing of services.
The Holding Company and the Bank will be affected by the monetary and
fiscal policies of various agencies of the United States Government, including
the Federal Reserve System. In view of changing conditions in the national
economy and in the money markets, it is impossible for management of the Holding
Company to accurately predict future changes in monetary policy or the effect of
such changes on the business or financial condition of the Holding Company.
26
<PAGE>
FEDERAL AND STATE TAXATION
Federal Taxation
For federal income tax purposes, the Bank files a federal income tax return
on a calendar year basis. Following the completion of the Reorganization, the
Holding Company will own less than 80% of the outstanding Common Stock of the
Bank. As such, the Holding Company will not be permitted to file a consolidated
federal income tax return with the Bank. Because the Holding Company has
nominal assets other than the stock of the Bank, it will initially have no
material federal income tax liability.
The Holding Company and the Bank are subject to the rules of federal income
taxation generally applicable to corporations under the Internal Revenue Code of
1986, as amended (the "Code"). Most corporations are not permitted to make
deductible additions to bad debt reserves under the Code. However, savings and
loan associations and savings banks such as the Bank, which meet certain tests
prescribed by the Code may benefit from favorable provisions regarding
deductions from taxable income for annual additions to their bad debt reserve.
For purposes of the bad debt reserve deduction, loans are separated into
"qualifying real property loans," which generally are loans secured by interests
in real property, and non-qualifying loans, which are all other loans. The bad
debt reserve deduction with respect to non-qualifying loans must be based on
actual loss experience. The amount of the bad debt reserve deduction with
respect to qualifying real property loans may be based upon actual loss
experience (the "experience method") or a percentage of taxable income
determined without regard to such experience (the "percentage of taxable income
method").
The Bank has elected to use the method that results in the greatest
deduction for federal income tax purposes, which historically had been the
percentage of taxable income method. The amount of the bad debt deduction that
a thrift institution may claim with respect to additions to its reserve for bad
debts is subject to certain limitations. First, the full deduction is available
only if at least 60% of the institution's assets fall within certain designated
categories. Second, under the percentage of taxable income method the bad debt
deduction attributable to "qualifying real property loans" cannot exceed the
greater of (i) the amount deductible under the experience method or (ii) the
amount which, when added to the bad debt deduction for non-qualifying loans,
equals the amount by which 12% of the sum of the total deposits and the advance
payments by borrowers for taxes and insurance at the end of the taxable year
exceeds the sum of the surplus, undivided profits, and reserves at the beginning
of the taxable year. Third, the amount of the bad debt deduction attributable
to qualifying real property loans computed using the percentage of taxable
income method is permitted only to the extent that the institution's reserve for
losses on qualifying real property loans at the close of the taxable year does
not exceed 6% of such loans outstanding at such time.
Deferred income taxes arise from the recognition of certain items of income
and expense for tax purposes in years different from those in which they are
recognized in the financial statements. In February 1992, the FASB issued SFAS
109 "Accounting for Income Taxes." The Bank currently is accounting for income
taxes in accordance with SFAS No. 109. The liability method accounts for
deferred income taxes by applying the enacted statutory rates in effect at the
balance sheet date to differences between the book cost and the tax cost of
assets and liabilities. The resulting deferred tax liabilities and assets are
adjusted to reflect changes in tax laws. SFAS 109 was implemented by the Bank,
effective January 1, 1993.
The Bank is subject to the corporate alternative minimum tax which is
imposed to the extent it exceeds the Bank's regular income tax for the year.
The alternative minimum tax will be imposed at the rate of 20% of a specially
computed tax base. Included in this base will be a number of preference items,
27
<PAGE>
including the following: (i) 100% of the excess of a thrift institution's bad
debt deduction over the amount that would have been allowable on the basis of
actual experience; and (ii) interest on certain tax-exempt bonds issued after
March 7, 1986. In addition, for purposes of the new alternative minimum tax,
the amount of alternative minimum taxable income that may be offset by net
operating losses is limited to 90% of alternative minimum taxable income.
The Internal Revenue Service has examined the federal income tax return for
the fiscal year ended 1992; the fiscal year-end tax returns for 1991, 1993, 1994
and 1995 remain open. See Note 12 to the Financial Statements.
State Taxation
The Bank is subject to the New York State Franchise Tax on Banking
Corporations in an annual amount equal to the greater of (i) 9% of the Bank's
"entire net income" allocable to New York State during the taxable year, or (ii)
the applicable alternative minimum tax. The alternative minimum tax is
generally the greater of (a) 0.01% of the value of the Bank's assets allocable
to New York State with certain modifications, (b) 3% of the Bank's "alternative
entire net income" allocable to New York State, or (c) $250. Entire net income
is similar to federal taxable income, subject to certain modifications
(including the fact that net operating losses cannot be carried back or carried
forward) and alternative entire net income is equal to entire net income without
certain modifications.
ITEM 2. Properties
- ------- ----------
The Bank conducts its business through its main office located in Oswego,
New York, and four full service branch offices located in Oswego County. The
following table sets forth certain information concerning the main office and
each branch office of the Bank at December 31, 1996. The aggregate net book
value of the Bank's premises and equipment was $3.4 million at December 31,
1996. For additional information regarding the Bank's properties, see Note 6 to
Notes to Financial Statements.
<TABLE>
<CAPTION>
LOCATION OPENING DATE OWNED/LEASED ANNUAL RENT
- ------------------------- ------------ ------------- -----------
<S> <C> <C> <C>
Main Office 1874 Owned --
- -------------------------
214 West First Street
Oswego, New York 13126
Plaza Branch 1989 Owned (1) --
- -------------------------
Route 104, Ames Plaza
Oswego, New York 13126
Mexico Branch 1978 Owned --
- -------------------------
Norman & Main Streets
Mexico, New York 13114
Oswego East Branch 1994 Owned --
- -------------------------
34 East Bridge Street
Oswego, New York 13126
Fulton Branch 1994 Owned --
- -------------------------
114 Oneida Street
Fulton, New York 13068
</TABLE>
- ------------------------------------
(1) The property is owned; the underlying land is leased.
28
<PAGE>
ITEM 3. Legal Proceedings
- -------------------------
There are various claims and lawsuits to which the Bank is periodically
involved incident to the Bank's business. In the opinion of management, such
claims and lawsuits in the aggregate are immaterial to the Bank's financial
condition and results of operations.
ITEM 4. Security Ownership of Certain Beneficial Owners and Management
- ----------------------------------------------------------------------
The information contained under the sections captioned "Stock Ownership of
Management" is incorporated by reference to the Bank's Proxy Materials for its
Annual Meeting of Stockholders.
PART II
ITEM 5. Market for Bank's Common Stock and Related Security Holder Matters
- --------------------------------------------------------------------------
The "Market for Common Stock" section of the Bank's Annual Report to
Stockholders is incorporated herein by reference.
ITEM 6. Selected Financial Data
- -------------------------------
The Financial Statements for the year ended December 31, 1996 are filed as
a part of this Form F-2.
ITEM 7. Management's Discussion and Analysis of Financial Condition and
- -----------------------------------------------------------------------
Results of Operations
---------------------
The "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section of the Bank's Annual Report to Stockholders is
incorporated herein by reference.
ITEM 8. Financial Statements and Supplementary Data
- ---------------------------------------------------
The material identified in Item 11(a)(1) hereof is incorporated herein by
reference.
29
<PAGE>
PART III
--------
ITEM 9. Directors and Principal Officers of the Bank
- ----------------------------------------------------
(a) Information concerning the directors of the Bank is incorporated by
reference hereunder in the Bank's Proxy Materials for the Annual Meeting of
Stockholders.
(b) Set forth below is information concerning the Principal Officers of the
Bank.
<TABLE>
<CAPTION>
Name Age Positions Held With the Bank
- ----------- --- ---------------------------------------------
<S> <C> <C> <C>
Chris C. Gagas 65 Chairman of the Board, President
and Chief Executive Officer
Anita J. Austin 47 Internal Auditor
Melissa A. Dashnau 39 Vice President, Secretary
James A. Dowd, CPA 29 Controller
Edgar J. Manwaring 51 Vice President--Lending
Gregory L. Mills 36 Vice President, Director of Marketing,
Branch Administrator
W. David Schermerhorn 36 Vice President-Lending
Thomas W. Schneider 35 Vice President and Chief Financial Officer
Barry S. Thompson 42 Senior Vice President, Compliance Officer
and Security Officer
</TABLE>
ITEM 10. Management Compensation and Transactions
- -------------------------------------------------
Information with respect to management compensation and transactions
required under this item is incorporated by reference hereunder in the Bank's
Proxy Materials for the Annual Meeting of Stockholders under the caption
"Compensation".
30
<PAGE>
PART IV
-------
1. Exhibits, Financial Statement Schedules, and Reports on Form F-3
- ------------------------------------------------------------------------
(a)(1) Financial Statements
--------------------
The exhibits and financial statement schedules filed as a part of this Form F-2
are as follows:
(A) Independent Auditors' Report;
(B) Consolidated Balance Sheets - December 31, 1996 and 1995.
(C) Consolidated Statements of Income - years ended December 31,
1996, 1995 and 1994;
(D) Consolidated Statements of Stockholders' Equity - years ended
December 31, 1996, 1995 and 1994
(F) Consolidated Statements of Cash Flows - years ended December
31, 1996, 1995 and 1994; and
(G) Notes to Consolidated Financial Statements.
(a)(2) Financial Statement Schedules
-----------------------------
All financial statement schedules have been omitted as the required
information is inapplicable or has been included in the Notes to Financial
Statements.
(b) Reports on Form F-3
-------------------
The Bank has not filed a Current Report on Form F-3 during the fourth
quarter of the fiscal year ended December 31, 1995.
(c) Exhibits
--------
(1) Articles of Incorporation and Bylaws (incorporated by reference to
Exhibits (1)(C) and (1)(D) of the Bank's Form F-1 Registration
Statement filed with the FDIC on December 9, 1994, the "Form F-1
Registration Statement")
(2) Instruments defining the rights of security holders, including
debentures (Not Applicable).
(3) Material contracts
(A) Employment Agreement (incorporated by reference to Exhibit
(7)(D) of the Bank's Form F-1 Registration Statement)
31
<PAGE>
(4) Statements re: computation of per share earnings (Not Applicable)
(5) Statements re: computation of ratios (Not Applicable)
(6) 1996 Annual Report to Stockholders
(7) Letter re: change in accounting principals (Not Applicable)
(8) Previously unfiled documents (None)
(9) Subsidiaries of the Bank (Not Applicable)
32
<PAGE>
Signatures
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Bank has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Oswego City Savings Bank
Date: March 29, 1997 By: /s/ Chris C. Gagas
-----------------------
Chris C. Gagas
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/ Chris C. Gagas By: /s/ Thomas W. Schneider
-------------------------- -----------------------------
Chris C. Gagas, President, Thomas W. Schneider,
Chief Executive Officer and Vice President,
Chairman of the Board and Chief Financial Officer
(Principal Executive Officer) (Principal Financial Officer)
Date: March 29, 1997 Date: March 29, 1997
By: /s/ James A. Dowd By: /s/ Chris R. Burritt
-------------------------- -----------------------------
James A. Dowd, Controller Chris R. Burritt, Director
(Principal Accounting Officer)
Date: March 29, 1997 Date: March 29, 1997
By: /s/ Bruce E. Manwaring By: /s/ Raymond W. Jung
-------------------------- -----------------------------
Bruce E. Manwaring., Director Raymond W. Jung, Director
Date: March 29, 1997 Date: March 29, 1997
By: /s/ L. William Nelson, Jr. By: /s/ Victor S. Oakes
-------------------------- -----------------------------
L. William Nelson, Jr., Director Victor S. Oakes, Director
Date: March 29, 1997 Date: March 29, 1997
By: /s/ Lawrence W. O'Brien By: /s/ Corte J. Spencer
------------------------------ -----------------------------
Lawrence W. O'Brien, Director Corte J. Spencer, Director
Date: March 29, 1997 Date: March 29, 1997
33
<PAGE>
EXHIBIT 6
EXHIBIT 6
1996 ANNUAL REPORT TO STOCKHOLDERS
<PAGE>
1996 Annual Report
Oswego City Savings Bank
[PHOTOS APPEAR HERE]
Looking
Forward
To Your
Future
<PAGE>
1996 Annual Report
About the Cover
In 1996, Oswego City Savings Bank adopted the slogan: "Looking Forward To Your
Future." The photos on the cover are from three new television commercials that
depict "slice of life" situations where City Savings provides services and
benefits to our customers.
Mission Statement
Oswego City Savings Bank is an independent growth-oriented Bank. Our goal is to
serve the needs of our clients, community, and employees by being the best
provider of banking services. We are committed to being the leader in community
development, employee excellence, and assisting our clients in achieving their
financial objectives.
<TABLE>
<CAPTION>
Table of Contents
<S> <C>
Letter to Shareholders...................................................... 1
Progressive, Supportive, Reliable........................................... 2
Financial Highlights........................................................ 4
Management Discussion and Analysis.......................................... 5
Independent Auditors' Report................................................ 13
Financial Statements
Statements of Conditions.................................................... 14
Statements of Income....................................................... 15
Statements of Changes in Shareholders' Equity.............................. 16
Statements of Cash Flows................................................... 17
Notes to Financial Statements............................................... 18
Officers, Directors and Managers............................................ 28
Services and Shareholder Information........................................ 29
</TABLE>
<PAGE>
Looking Forward To Your Future
A Letter to Our Shareholders
[PHOTO APPEARS HERE]
It is my pleasure to present Oswego City Savings Banks second Annual Report to
Shareholders. In our first full year as a publicly-owned stock bank, Oswego City
Savings Bank has continued its tradition of growth and success.
The Bank was enlarged by the addition of three new offices to the Loan
Department during a complete remodeling of the Second Street entrance, marking
the completion of our 10-year plan to remodel the Main Office. At the same time,
the parking lot was enlarged and reconfigured to include new lighting, signage
and improved aesthetics.
Advertising and marketing of Bank services has also expanded into new forms
of media. For the first time, the Bank utilized television advertising. In
addition, we will be adding a web site for the convenience of customers.
In our 138th year, we look forward to continuing to offer the latest in
financial services in an efficient and customer-friendly manner. This year, we
increased our electronic banking facilities with the addition of an ATM in
Mexico, N.Y. Our Commercial Loan Department has been very successful with total
commercial real estate loans increasing approximately $4 million to $13.5
million and commercial business loans increasing approximately $1.7 million to
$5.6 million. In our ongoing effort to expand the availability of services, we
were successful in becoming a member of the Federal Home Loan Bank of New York.
Also, in the Spring of 1996, we started our Investment Center. We were very
pleased with the success, reception and contribution to profits of our first
seven months of operation.
We conduct our Investment Center operations in conjunction with
Linsco/Private Ledger, a registered broker/dealer, investment advisor and member
NASD/SIPS.
Our efforts to expand products and services to the communities we serve
earned a much coveted "Business of the Month" award from the Greater Oswego
Chamber of Commerce. We continue to strengthen our leadership role in the
community through the success of these efforts and in our responsiveness in
supporting community needs and projects.
The Board of Directors of the Bank has announced its intention to file for
admission to the NASDAQ Over the Counter Small Capitalization Market. Also
announced was the Adoption of Agreement and Plan of Reorganization to form a
Mid-Tier Stock Holding Company. The Mid-Tier Holding Company structure will
allow Oswego City Savings Bank to retain the benefits of a mutual holding
company structure and, at the same time, afford the Bank many of the
opportunities available to stock holding companies that are not currently
available in a mutual holding company structure.
The Mid-Tier structure will offer the Bank and the holding company greater
flexibility to structure and complete mergers and acquisitions, to diversify
operations, and to repurchase outstanding shares of common stock.
The financial details in this Annual Report reflect our operating results
and our financial condition for the fiscal year ended December 31, 1996. Your
Bank continued to grow through emphasis on recurring core earnings and high
asset quality. Total assets increased $9.2 million to $189 million, while
shareholders' equity grew to $21.4 million. Net income for the year was $1.3
million, an increase of $282,000. Earnings were impacted by two significant
events. A reserve was established in the amount of $420,000 in recognition of
possible loan losses resulting from the bankruptcy of Bennett Funding Group, and
an FDIC imposed settlement of SAIF insurance premium of $160,000.
With another year of success and growth behind us, we look forward to
continuing the Bank's long record of achievement in the next year. The Bank
reaffirms its commitment to creating enhanced value for its customers,
employees, shareholders and the community it serves. Toward that end, our goals
in 1997 include continued growth in assets, expansion of products and services,
increased employee and customer pride, and enhanced return to shareholders. We
are confident that we will continue to grow and succeed in the next year.
Sincerely,
/s/ Chris C. Gagas
Chris C. Gagas
Chairman, President
and Chief Executive Officer
1
<PAGE>
1996 Annual Report
Progressive, Supportive, Reliable
[PHOTO APPEARS HERE]
Chuck Handley, owner of Burke's Home Centers, discovered the convenience and
benefits of our Business Manager program.
[PHOTO APPEARS HERE]
As part of our Young Investors savings account promotion in Fulton, we opened
128 new accounts in six weeks. Chris Gagas, center, joined Fulton Branch Manager
Jeannine Crahan (l) and Fulton Branch Assistant Manager Tona Kempston(r) to
award prizes in a drawing that was part of the promotion.
[PHOTO APPEARS HERE]
Prestige Plus accounts helped make higher interest on checking more easily
accessible for our senior banking customers while providing support for
businesses and community organizations in each office location.
Building Business...
In addition to the growth we experienced as a bank, we are literally "building
businesses" with extensive commercial financing activity. In fact, the bank's
commercial loan department provided more than $5 million in financing for a
variety of projects in Oswego County during 1996.
In Mexico, we enabled the construction of a McDonald's Restaurant and
Sunrise Food Store-right at the village's busiest four corners and right across
the street from our Mexico office. In fact, the Sunrise-Mexico is our first off-
site ATM location.
In Fulton, we financed construction of a Rite Aid Drug Store that brought
new jobs and a welcome addition to the local landscape.
In Oswego, we worked with Oswego County Opportunities to provide financing
for the construction of an urgently needed health center; and we also financed
the construction of a nearby Dairy Queen Restaurant.
Making Dreams Come True...
We've been making dreams come true for families in Oswego County for nearly 138
2
<PAGE>
Looking Forward To Your Future
[PHOTO APPEARS HERE]
Tona Kempston, left, Fulton branch assistant manager, joins Chris Gagas, far
right, in congratulating the Canham family on winning a pair of Syracuse
University Football season tickets.
[PHOTO APPEARS HERE]
Elmer Little, one of our most treasured, long-standing customers, has seen us
grow and strengthen both our assets and presence in our local community.
[PHOTO APPEARS HERE]
A cooperative promotion with Sunrise Food Stores drove traffic to the bank to
open checking or savings accounts.
years. During that time we've issued hundreds of home mortgages, auto loans,
college loans and helped many a new business get started or a successful
business expand.
Planning Financial Security...
We've made it easier than ever for our customers to get sensible investment
advice and get them started on a secure financial future. Every City Savings
Bank office is home to "The Investment Center"-offering a FREE consultation with
an investment professional. Our customers don't have to wait for approval calls
from Cleveland or New York to get things started. Their personal investment
advisor is right where they do their banking.
Oswego City Savings Bank is more than a source of funding and investment.
We are an integral part of the lives of our investors and shareholders. Whether
it's commercial financing for a new or growing enterprise; investment services
to help make futures bright; or reaching out to our communities-City Savings is
there with the heart, hands and capital for success.
3
<PAGE>
1996 Annual Report
Financial Highlights
On November 15, 1995, the Bank completed its reorganization into a mutual
holding company. As part of the reorganization, the Bank organized a new state-
chartered stock savings bank (the "Savings Bank") and transferred substantially
all its assets and liabilities to the Savings Bank in exchange for a majority of
the common stock of the Savings Bank outstanding upon consummation of the
reorganization. The Savings Bank retained the name Oswego City Savings Bank.
Concurrent with the reorganization, 881,666 shares of the Savings Bank's common
stock were sold at $7.50 per share. As of December 31, 1996, the Savings Bank's
total assets and shareholders' equity were $189.9 million and $21.4 million,
respectively.
Oswego City Savings Bank's common stock currently trades on the Electronic
Bulletin Board under symbol "PBHC".
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR (In Thousands)
Interest Income $13,213 $12,205 $10,443 $9,858 $10,074
Interest Expense 6,414 6,259 4,697 4,062 5,204
Net Interest Income 6,799 5,946 5,746 5,796 4,870
Net Income 1,272 990 1,146 1,802 1,301
PER COMMON SHARE
Net Income:
Primary 0.68 0.10(a) NA NA NA
Fully diluted 0.68 0.10(a) NA NA NA
Book Value 10.83 10.50 NA NA NA
Stock Price:
IOP 7.500 7.500
High 10.650 10.750 NA NA NA
Low 8.000 8.375 NA NA NA
Close 9.375 10.500 NA NA NA
YEAR END (In Thousands)
Total assets $189,937 $180,752 $170,715 $129,270 $126,757
Interest-earning deposits at
other financial institutions 1,550 8,200 13,627 7,962 3,213
Investment securities 36,673 44,932 48,135 33,776 31,427
Mortgage-backed securities 22,829 7,953 992 1,408 2,542
Loans Receivable, net:
Real estate 99,047 91,023 83,563 74,150 74,710
Consumer and other 9,695 9,126 6,105 4,663 3,656
Total loans receivable, net 108,742 100,149 89,668 78,813 78,366
Intangible assets 3,921 4,236 4,552 -- --
Deposits 158,998 158,324 155,764 115,344 114,605
Borrowed funds 7,610 -- -- -- --
Notes Payable ESOP 486 425 -- -- --
Equity 21,390 20,751 13,990 12,953 11,151
SELECTED PERFORMANCE RATIOS
Return on average assets 0.69% 0.56% 0.74% 1.40% 1.05%
Return on average equity 6.09 6.31 8.20 14.99 12.26
Return on tangible equity 7.28 5.99 12.14 13.91 11.67
Average equity to average assets 11.32 8.84 9.00 9.33 8.58
Equity to total assets 11.26 11.47 8.19 10.02 8.80
Net interest rate spread 3.88 3.72 4.01 4.68 4.10
Noninterest expense to total assets 2.82 2.94 2.83 2.72 2.70
Nonperforming loans to
net loans receivable 0.92 0.92 1.24 1.00 1.12
Nonperforming assets to
total assets 0.83 0.83 1.01 1.24 1.62
Allowance for loan losses
to net loans receivable 0.83 0.35 0.35 0.36 0.38
Number of full service offices 5 5 5 3 3
</TABLE>
(a) Earnings per share for 1995 are based on the period from November 15,1995 to
December 31, 1995.
4
<PAGE>
Looking Forward To Your Future
Management's Discussion and Analysis
General
The Bank's net income is primarily dependent on its net interest income, which
is the difference between interest income earned on its investments in mortgage
loans, investment securities and other loans, and its cost of funds consisting
of interest paid on deposits and other borrowings. The Bank's net income also is
affected by its provision for loan losses, as well as by the amount of
noninterest income, including income from fees and service charges, net gains
and losses on sales of securities, and noninterest expense such as employee
compensation and benefits, deposit insurance premiums, occupancy and equipment
costs, data processing costs and income taxes. Earnings of the Bank also are
affected significantly by general economic and competitive conditions,
particularly changes in market interest rates, government policies and actions
of regulatory authorities, which events are beyond the control of the Bank. In
particular, the general level of market interest rates tends to be highly
cyclical.
On January 14, 1997, the Board of Directors adopted an Agreement and Plan of
Reorganization to reorganize the Bank and its existing mutual holding company
into a two-tier mutual holding company structure (the "Reorganization") with the
establishment of a state chartered corporation as the stock holding company
parent of the Bank. Upon completion of the Reorganization, Pathfinder Bancorp,
MHC, the Bank's existing mutual holding company, will own a majority of the
common stock of the new stock holding company, which will own 100% of the common
stock of the Bank. The Reorganization would be implemented pursuant to an
Agreement and Plan of Reorganization which must be approved by the Bank's
stockholders and regulatory authorities. Pursuant to the Reorganization, each
share of Bank common stock held by existing stockholders of the Bank would be
exchanged for a share of common stock of the stock holding company. The
Reorganization of the Bank would be structured as a tax-free reorganization and
would be accounted for in a manner similar to a pooling of interests.
On February 6, 1995, the New York Superintendent of Banks ("Superintendent") was
appointed conservator of Nationar, a New York chartered commercial bank owned by
savings banks throughout the state. At February 6, 1995, the Bank was a
stockholder and customer of Nationar. Nationar performed correspondent banking
services including check clearing, demand deposits, and overnight interest-
bearing deposits. The Superintendent froze all assets of Nationar at the time he
was appointed conservator. At February 6, 1995, the Bank had a total of $3.0
million on deposit with Nationar of which $1.7 million was used to fund check
clearing and $1.2 million was recorded as federal funds sold. The Superintendent
has been actively liquidating the businesses and affairs of Nationar. A
provision for possible losses of $240,000 was made for the year ended December
31, 1995. On June 27, 1996, and on December 20, 1996, distributions of $1.4
million and $979,000 were made from the Nationar estate to settle all accepted
claims of the Bank. The distribution represents a 100% settlement on all
accepted claims, either accorded priority or characterized as a general claim,
and a settlement of post-possession amounts due to the estate of Nationar by the
Bank (including $92,000 for debenture claims, unpaid fees, and interest). In
connection with this settlement, the Bank charged $177,000 against the $240,000
reserve established during 1995, and recognized income of $65,000 associated
with the remaining reserve recovery during 1996. At December 31, 1996, the Bank
had outstanding claims against the Nationar estate of $92,000 for capital
debentures. On February 5, 1997, motion papers filed with the court indicated
that the Superintendent is seeking to pay interim dividends of an unspecified
amount to accepted claims for subordinated debentures.
In June 1994 the Bank entered into an agreement with the RTC whereby it assumed
deposits totaling $42.3 million that are insured by the Savings Association
Insurance Fund ("SAIF"), and acquired net assets totaling $118,000 (consisting
of cash on hand and consumer and other loans) (the "Acquisition"). As part of
the Acquisition, the Bank exercised its option to purchase the physical
facilities of two branch locations in Oswego and Fulton, New York. Of the $42.3
million in deposit liabilities assumed, $24.5 million consisted of noninterest
bearing checking, interest bearing checking and savings deposit accounts, and
$17.8 million consisted of certificates of deposit. The average weighted yield
of the deposit liabilities assumed was 3.0%. In connection with this transaction
the Bank paid to the RTC a premium of $4.7 million. The premium, recorded as
goodwill, is being amortized over a 15 year period. Consequently, the Bank
received cash totaling $37.4 million. Management believes that the Acquisition
has helped the Bank to increase its presence in its local market by increasing
its depositors and customer base.
As a result of the Acquisition, the Bank's customer deposits are comprised of
funds insured by either the Bank Insurance Fund ("BIF") or the Savings
Association Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation
(FDIC"). At December 31, 1996, approximately $127.1 million and $31.9 million of
the Bank's deposits were insured by the BIF and SAIF, respectively. Both the BIF
and the SAIF are statutorily required to be recapitalized to a 1.25% of insured
reserve deposits ratio. While the BIF has reached the required reserve ratio,
the SAIF was not expected to be recapitalized, through normal assessments, until
2002 at the earliest. Consequently, BIF assessments were significantly lower
than SAIF assessments. On September 30, 1996, President Clinton signed the
Omnibus Consolidated Appropriations Act. Among the law's many provisions, is the
Deposit Insurance Funds Act of 1996 which provides a resolution of the BIF-SAIF
premium disparity. As part of that resolution, the Bank was charged a one-time
special assessment of $167,000 on it's SAIF deposits. The Bank's total deposit
insurance assessments for 1997 is expected to be approximately $35,000.
On March 29, 1996, Bennett Funding Group, Inc., head-quartered in Syracuse, NY
filed for Chapter 11 bankruptcy protection from its creditors. At March 29,
1996, Oswego City Savings Bank had credit extended on lease financing
investments through Bennett Funding Group, Inc. and its affiliates of
approximately $1.1 million, in the aggregate. The credit was extended through
the purchase of three separate pools of lease financing packages. One package,
an insured consumer receivable pool of approximately $470,000 secured by
timeshare financing contracts, was paid in full satisfaction in November 1996. A
second package is an interim financing contract for $500,000 to provide pipeline
financing for leases which have yet to be packaged and sold. The third package,
for approximately $175,000, is a pool collateralized by individual equipment
leases. Based upon media reports of alleged charges by the Securities and
Exchange Commission, the U.S. Attorney's office in New York City, and the
trustee appointed to administer the affairs of Bennett Funding Group
(the "Trustee") some of the underlying collateral for the lease financing may be
fraudulent. Based upon reports published by the Trustee, the Bank has made a
specific provision for loan
5
<PAGE>
1996 Annual Report
Management's Discussion and Analysis
losses for 1996 to cover potential losses associated with the Bennett lease
investments of $420,000. Based on preliminary settlement discussions with the
trustee, management believes no additional reserves are necessary.
Business Strategy
The Bank's business strategy is to operate as a well-capitalized, profitable and
independent community-oriented savings bank dedicated to providing quality
customer service. Generally, the Bank has sought to implement this strategy by
emphasizing retail deposits as its primary source of funds and maintaining a
substantial part of its assets in locally-originated residential first mortgage
loans and in investment securities. Specifically, the Bank's business strategy
incorporates the following elements: (i) operating as a community-oriented
financial institution, maintaining a strong customer base; (ii) maintaining
capital in excess of regulatory requirements; (iii) emphasizing investment in
one-to-four family residential mortgage loans, and investment securities; and
(iv) maintaining a strong retail deposit base.
Highlights of the Bank's business strategy are as follows:
Community-Oriented Institution.
The Bank is committed to meeting the financial needs of its customers in Oswego
County, New York, the county in which it operates. The Bank believes it is large
enough to provide a full range of personal and business financial services, and
yet is small enough to be able to provide such services on a personalized and
efficient basis. Management believes that the Bank can be more effective in
servicing its customers than many of its non-locally headquartered competitors
because of the Bank's ability to quickly and effectively provide senior
management responses to customer needs and inquiries. The Bank's ability to
provide these services is enhanced by the stability of the Bank's senior
management, which has an average tenure with the Bank of over 14 years.
Management believes that the June 1994 acquisition of two branches has enhanced
the Bank's ability to serve the communities of Oswego County. The Bank intends
to use the two-tier holding company structure to maintain the Bank as a
community-oriented, independent savings institution.
Capital and Asset Growth.
The Bank's shareholders' equity has increased from $11.2 million at December 31,
1992 to $21.4 million at December 31, 1996. The Bank's ratio of shareholders'
equity to total assets was 11.3% at December 31, 1996. The Bank's total assets
have increased by $63.2 million, or 49.8%, since December 31, 1992.
Emphasis on Residential Mortgage Lending and Investment Securities.
Since its inception, the Bank has emphasized residential real estate financing
and anticipates a continued commitment to financing the purchase or improvement
of residential real estate in its market area. Historically, the Bank has not
been an active purchaser of loans or loan participations. To supplement local
mortgage loan originations, the Bank invests in investment securities consisting
primarily of investment grade corporate debt instruments, securities issued by
the United States Government, state and municipal obligations, mutual funds,
equity securities, and mortgage-backed securities. By investing in these types
of assets, the bank has reduced the credit risk of its asset base in exchange
for lower yields than would typically be available on commercial real estate
loans and multi-family real estate loans.
At December 31, 1996, 90.7% of the Bank's total loan portfolio consisted of
loans secured by real estate. In addition, at December 31, 1996, 31.3% of the
Bank's total assets consisted of investment securities. Generally, the yield on
mortgage loans originated by the Bank is greater than that of investment
securities and mortgage-backed securities purchased by the Bank.
Strong Retail Deposit Base.
The Bank has a relatively strong retail base drawn from the five full-service
offices (including branches acquired in the Acquisition) in its market area. At
December 31, 1996, 54.2% of the Bank's deposit base of $159.0 million consisted
of core deposits, which included non-interest-bearing demand account, NOW
accounts, passbook and club savings accounts and money market deposit accounts.
In connection with the Acquisition, the Bank assumed $42.3 million of deposit
liabilities of which $24.5 million consisted of non-interest bearing checking,
interest-bearing checking and savings deposit accounts, and $17.8 million
consisted of certificates of deposit. Core deposits are considered to be a more
stable and lower cost source of funds than certificates of deposit or outside
borrowings. The Bank will continue to emphasize retail deposits by maintaining
its network of full service offices, and providing depositors with a full range
of accounts.
Asset and Liability Management-Interest Sensitivity Analysis
The extent to which such assets and liabilities are "interest rate sensitive" is
measured by an institution's interest rate sensitivity "gap". An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest rate sensitivity
gap is defined as the difference between the amount of interest-earning assets
maturing or repricing within a specific time period and that amount of interest-
bearing liabilities maturing or repricing within that time period. A gap is
considered positive when the amount of interest rate sensitive assets exceeds
the amount of interest rate sensitive liabilities. A gap is considered negative
when the amount of interest rate sensitive liabilities exceeds the amount of
interest rate sensitive assets. During a period of rising interest rates, a
negative gap would tend to adversely affect net interest income while a positive
gap would tend to positively affect net interest income. Conversely, during a
period of falling interest rates, a negative gap would tend to positively affect
net interest income while a positive gap would tend to adversely affect net
interest income.
The Bank does not originate fixed interest rate loans with terms exceeding 20
years. In addition, ARM loans are originated with terms that provide that the
interest rate on such loans cannot adjust below the initial rate. The Bank has
attempted to increase the interest rate sensitivity of its investment portfolio
by staggering the maturity dates of its investments and by purchasing investment
securities with maturities generally between two and five years. In addition,
the Bank has sought to extend the terms of its liabilities. In this regard, the
Bank has on occasion offered certificates of
6
<PAGE>
Looking Forward To Your Future
Management's Discussion and Analysis
deposits with three and four year terms which allow depositors to make a one-
time election, at any time during the term of the certificate of deposit, to
adjust the rate of the certificate of deposit to the then prevailing rate for a
certificate of deposit with the same term.
At December 31, 1996, the total interest bearing liabilities maturing or
repricing within one year exceeded total interest-earning assets maturing or
repricing in the same period by $12.3 million, representing a cumulative one-
year gap ratio of a negative 7.02%. The Bank has an Asset-Liability Management
Committee which is responsible for reviewing the Bank's assets and liability
policies. The Committee meets monthly on a formal basis and reports to the Board
of Directors on interest rate risks and trends, as well as liquidity and capital
ratios and requirements.
Gap Table
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1996, expected to
reprice or mature based upon certain assumptions in each of the future time
periods shown.
<TABLE>
<CAPTION>
Amounts Maturing or Repricing
Within 3 to 12 1 to 3 3 to 5 5 to 10 More than
3 Months Months Years Years Years 10 Years Total
- ------------------------------------------------------------------------------------------------------------------------
( Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Real estate loans:
Residential one-to-four family:
Market index ARM's $17,927 $ 21,461 $ 2,771 $ 847 $ 471 -- $ 43,477
Fixed rate 376 1,737 7,787 6,864 9,573 2,640 28,977
Commercial and multi-family:
ARM's 3,028 4,726 2,469 319 -- -- 10,542
Fixed 74 341 1,507 1,375 2,623 1,739 7,659
Home equity fixed rate loans 117 367 1,121 1,352 1,923 -- 4,880
Home equity line of credit 4,203 -- -- -- -- -- 4,203
Consumer loans 339 802 2,480 36 -- -- 3,657
Commercial business loans 822 2,523 2,754 524 -- -- 7,052
Mortgage-backed securities 3,037 3,829 3,714 3,848 4,818 3,720 22,966
Investment securities (1) 2,758 5,845 12,148 1,664 11,306 2,119 35,054
Interest earning deposits at other
financial institutions 1,550 -- -- -- -- -- 1,550
- ------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $34,231 $ 41,631 $ 36,751 $ 16,829 $ 30,714 $10,218 $170,017
========================================================================================================================
Interest-bearing liabilities:
Passbook accounts $ 4,922 $ 15,424 $ 22,972 $ 22,316 -- -- $ 65,634
NOW accounts 1,940 5,734 5,408 -- -- -- 13,082
Money market accounts 174 -- -- -- -- -- 174
Certificate accounts 14,890 37,476 15,504 1,981 2,615 -- 72,466
Repurchase agreements 7,610 -- -- -- -- -- 7,610
- ------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities $29,536 $ 58,634 $ 43,884 $ 24,297 $ 2,615 -- $158,966
========================================================================================================================
Interest-earning assets less interest-
bearing liabilities ("interest rate
sensitivity gap") 4,695 (17,003) (7,133) (7,468) 28,099 10,218
Cumulative excess (deficiency) of
interest-sensitive assets over
interest-sensitive liabilities 4,695 (12,308) (19,441) (27,266) 833 11,051
Interest sensitivity gap
to total assets 2.68% (9.70%) (4.07%) (4.26%) 16.02% 5.83%
Cumulative interest sensitivity gap
to total assets 2.68% (7.02%) (11.09%) (15.55%) 0.48% 6.30%
Ratio of interest-earning assets to
interest-bearing liabilities 115.90% 71.00% 83.75% 69.26% 1174.53% --
Cumulative ratio of interest-earning
assets to interest-bearing liabilities 115.90% 86.04% 85.28% 82.56% 100.52% 106.95%
</TABLE>
(1) Investment securities are presented at amortized cost.
7
<PAGE>
1996 Annual Report
Management's Discussion and Analysis
Changes in Financial Condition
Comparison at December 31, 1996 and December 31, 1995.
Total assets increased $9.0 million, or 5.0%, to $189.9 million at December 31,
1996 from $180.9 million at December 31, 1995. The increase in assets is
primarily the result of increases in the balance of net loans receivable to
$108.7 million from $100.1 million and mortgage-backed securities to $22.8
million from $8.0 million. These increases were primarily attributable to the
continued deployment of maturing short term investments and excess liquidity
into higher yielding assets. These increases were partially offset by decreases
in interest-earning deposits at other financial institutions to $1.6 million
from $8.2 million, and investment securities to $36.7 million from $44.9
million.
Total liabilities increased $8.3 million, or 5.2%, to $168.5 million from $160.2
million. The increase was primarily attributable to $7.6 million in borrowed
funds, and a $674,000, or .4%, increase in deposits. The bank had no borrowed
funds at December 31, 1995. The borrowed funds were obtained from a repurchase
agreement with Morgan Stanley and Company. The total contractual line with
Morgan Stanley and Company was $10 million at December 31, 1996. The increase in
total liabilities was also attributable to an increase in notes payable on an
ESOP loan of $61,000, or 14.4%, to $486,000 and an increase of $2,000 in other
liabilities to $1.4 million at December 31, 1996.
Shareholder's equity increased $639,000 to $21.4 million at December 31, 1996
from $20.8 million at December 31, 1995. The increase is attributable to net
income of $1.3 million, partially offset by a decrease in the unrealized
appreciation on investment securities available for sale of $209,000, dividend
distributions of $373,000, and a net increase in unearned ESOP shares of
$53,000.
Comparison at December 31, 1995 and December 31, 1994
Total assets increased $10.0 million, or 6.0%, to $180.9 million at December 31,
1995 from $170.7 million at December 31, 1994. The increase in assets is
primarily the result of increases in the balance of net loans receivable to
$100.1 million from $89.7 million and mortgage-backed securities to $8.0 million
from $1.0 million. These increases were primarily attributable to a the
deployment of short term investments entered into subsequent to the Acquisition,
into higher yielding assets. These increases were partially offset by decreases
in interest-earning deposits at other financial institutions to $8.2 million
from $13.6 million ($1.2 million of which was a reclassification of frozen
federal funds at Nationar to other assets), and investment securities to $44.9
million from $48.1 million. The Bank had approximately $3.0 million on deposit
at Nationar at the time it was placed into conservatorship. At that time, such
deposits, together with other assets, were frozen and ceased accruing interest.
Total liabilities increased $3.5 million, or 2.1%, to $160.0 million from $156.7
million. Deposits increased $2.2 million to $158.3 million from $155.8 million.
Other liabilities increased $1.0 million, or 165.6%, to $1.7 million from
$631,000. The increase in other liabilities is the result of increases in taxes
payable of $110,000, deferred taxes of $152,000, accrued deferred compensation
of $135,000, notes payable on ESOP loan of $425,000, and an accrued capital
contribution to Pathfinder Bancorp, M.H.C. of $200,000.
Shareholders' equity increased $6.8 million to $20.8 million at December 31,
1995 from $14.0 million at December 31, 1994. The increase is attributable to
net proceeds from the Bank's stock offering of $5.7 million, net income of
$990,000, and appreciation on investment securities available for sale of
$732,000, which increases were partially offset by an adjustment of $425,000 to
reflect the costs of unearned ESOP shares.
Results of Operations
General
The Bank had net income of $1.3 million, $990,000, and $1.1 million for the
fiscal years ended December 31, 1996, 1995 and 1994, respectively. The increase
in net income for the year ended December 31, 1996, compared to 1995 resulted
primarily from increases in net interest income of $853,000, or 14.4%, to $6.8
million, and non-interest income of $164,000, or 20.0%, to $979,000. The
increases were partially offset by increases in the provision for loan losses of
$533,000, non-interest expense of $55,000, and provision for income taxes of
$146,000.
Comparison of Operating Results for the Years Ended December 31, 1996, 1995,
and 1994
Interest Income
Interest income increased by $1.0 million, or 8.3%, to $13.2 million for the
year ended December 31, 1996 from $12.2 million for the year ended December 31,
1995. The increase in interest income was principally attributable to an
increase of $7.8 million, or 5.0%, in the average balance of interest earning-
assets, to $166.0 million from 158.1 million, and an increase in the average
yield on interest-earning assets to 8.06% from 7.81%. The increase in average
interest-earning assets was primarily attributable to the deployment of $7.6
million in borrowed funds and increased deposits of $674,000. The utilization of
these additional funds, and a re-deployment of short term investments resulted
in a $5.9 million increase in the average balance of real estate loans, a $2.4
million increase in the average balance of consumer and other loans, a $13.0
million increase in the average balance of mortgage-backed securities, and
decreases of $11.3 million in the average balance of investment securities and
$2.2 million in the average balance of interest-earning deposits in other
financial institutions. The increase in the average yield on interest-earning
assets was primarily attributable to this deployment of short term investments
into higher yielding investments, upward rate increases on adjustable rate
mortgages, and the origination of commercial loans at rates higher than the
existing real estate loan portfolio. The interest income and average yield on
investment securities are shown on a fully tax equivalent basis.
Interest income on real estate loans increased $717,000, or 9.5%, to $8.3
million for the year ended December 31, 1996, from $7.5 million for the year
ended December 31, 1995. The increase was due to a $6.0 million, or 6.8%,
increase in the average balance of real estate loans, combined with an increase
in the average yield on real estate loans to 8.76% from 8.54%. The increase in
the average balance on real estate loans was principally due to the origination
of fixed rate
8
<PAGE>
Looking Forward To Your Future
Management's Discussion and Analysis
mortgages with terms from 10 to 20 years and commercial real estate loans.
Interest income on consumer and other loans increased $214,000, or 27.0%, to
$1.0 million for the year ended December 31, 1996 from $792,000 for the year
ended December 31, 1995. The increase was due to an increase in the average
balance on consumer and other loans of $2.4 million, or 30.9%, partially offset
by a decrease in the average yield to 9.84% from 10.13%. The increase in the
average balance on consumer and other loans reflects the Bank's continuing
efforts to provide lending to qualified local businesses and an increased focus
on the consumer loan portfolio. The decrease in the average yield on these loans
reflects the competitive rates provided on business loans in response to the
interest rate environment in the market area. Interest income on mortgage-backed
securities increased $864,000, or 374.5%, to $1.1 million from $231,000. The
increase was attributable to a $13.0 million, or 395.5%, increase in the average
balance on mortgage-backed securities to $16.3 million from $3.3 million,
partially offset by a decrease in the average yield on mortgage-backed
securities to 6.71% from 7.02%. The increase in the average balance on mortgage-
backed securities was due to the deployment of borrowed funds and cash flows
from maturing short term corporate and government agency bonds, into higher
yielding asset-backed securities. The emphasis on mortgage-backed securities is
part of a strategic realignment and diversification of the securities portfolio
to utilize loan surrogate products to increase interest income without accepting
undue interest rate risk. Interest income on investment securities decreased
$642,000, or 20.6%, to $2.5 million for the year ended December 31, 1996 from
$3.1 million for the year ended December 31, 1995, notwithstanding an increase
in the average yield on investment securities to 6.91% from 6.58%, on a tax
equivalent basis. The decrease in interest income was primarily attributable to
an $11.3 million, or 22.9%, decrease in the average balance on investment
securities to $38.1 million at December 31, 1996 from $49.4 million at the end
of the prior year. The decrease in the average balance of investment securities
and the increase in the average yield earned on investment securities is
consistent with the Bank's strategy of divesting the portfolio of shorter term,
lower yielding corporate and agency bonds. Interest income on interest-earning
deposits decreased $145,000, or 26.9%, to $394,000 for the year ended December
31, 1996 from $539,000 for the prior year. The decrease was due to a $2.2
million, or 23.7%, decrease in the average balance on interest-earning deposits
and a decrease in the average yield on such deposits to 5.47% from 5.71%.
Interest income increased by $1.8 million, or 16.9%, to $12.2 million for the
year ended December 31, 1995 from $10.4 million for the year ended December 31,
1994. The increase in interest income was principally attributable to an
increase of $15.8 million, or 11.1%, in the average balance of interest earning-
assets, to $158.1 million from $142.3 million, and an increase in the average
yield on interest-earning assets to 7.81% from 7.5%. The increase in average
interest-earning assets was primarily attributable to the Acquisition which
resulted in an increase in cash in June 1994 of $37.4 million, which subsequent
deployment resulted in an $8.4 million increase in the average balance of real
estate loans, a $10.0 million increase in the average balance of investment
securities, a $3.0 million increase in the average balance of consumer and other
loans, a $2.2 million increase in the average balance of mortgage-backed
securities, and a $7.8 million decrease in the average balance of interest-
earning deposits in other financial institutions. The increase in the average
yield on interest-earning assets was primarily attributable to this deployment
of cash in higher yielding investments throughout the year, partially offset by
the absence of earnings of the $3.0 million frozen at Nationar.
Interest income on real estate loans increased $740,000, or 10.9%, to $7.5
million for the year ended December 31, 1995, from $6.8 million for the year
ended December 31, 1994. The increase was due to an $8.4 million, or 10.5%,
increase in the average balance of real estate loans, combined with a modest
increase in the average yield on real estate loans to 8.54% from 8.52%. The
increase in the average balance on real estate loans was principally due to
attracting local residents through emphasis on quality service portfolio
lending, and niche-market lending in construction, multi-family, and commercial
real estate loans. Interest income on consumer and other loans increased
$270,000, or 34.1%, to $792,000 for the year ended December 31, 1995 from
$522,000 for the year ended December 31, 1994. The increase was due to an
increase in the average balance on consumer and other loans of $3.0 million, or
62.0%, partially offset by a decrease in the average yield to 10.13% from
10.82%. The increase in the average balance on consumer and other loans is
reflective of the bank's efforts to provide lending to qualified local
businesses. Interest income on mortgage-backed securities increased $149,000, or
181.7%, to $231,000 from $82,000. The increase was attributable to a $2.2
million, or 197.6%, increase in the average balance on mortgage-backed
securities to $3.3 million from $1.1 million, partially offset by a decrease in
the average yield on mortgage-backed securities to 7.02% from 7.41%. The
increase in the average balance on mortgage-backed securities was due to
deployment of a portion of the Acquisition proceeds, as well as, slowing demand
in the residential mortgage market, which led to an increased emphasis on
mortgage-backed securities. Interest income on investment securities increased
$891,000, or 40.2%, to $3.1 million for the year ended December 31, 1995 from
$2.2 million for the year ended December 31, 1994. The increase in interest
income was primarily attributable to a $10.0 million, or 25.5%, increase in the
average balance on investment securities, combined with an increase in the
average yield on investment securities to 6.29% from 5.63%. The increase in the
average balance of investment securities and the average yield earned on
investment securities is consistent with the Bank's strategy of investing a
portion of the cash received in the Acquisition into medium-term securities (up
to seven-year term), thereby lengthening the overall maturity of the Bank's
investment portfolio. Interest income on interest-earning deposits decreased
$289,000, or 34.9%, to $539,000 for the year ended December 31, 1995 from
$828,000 for the prior year. The decrease was caused by a $7.8 million, or
45.3%, decrease in the average balance on interest-earning deposits, partially
offset by an increase in the average yield on such deposits to 5.71% from 4.80%.
Interest Expense
Interest expense increased $155,000, or 2.5%, to $6.4 million for the year ended
December 31 1996, from $6.3 million for the prior year. The increase was
primarily attributable to an increase in interest expense on borrowings. The
borrowings consist of a loan by another financial institution to finance the
purchase of shares of the Bank's common stock for the Employee Stock Ownership
Plan ("ESOP"), and funds obtained through repurchase agreements ("repos"). The
average balance on the repos for the year ended December 31, 1996 was $1.5
million, at an average cost of 5.90%, resulting in interest expense of $87,000.
The ESOP loan had an average balance of $422,000, at an average rate of 7.34%,
resulting in $31,000 in interest expense for the year. Interest expense on
9
<PAGE>
1996 Annual Report
Management's Discussion and Analysis
deposits increased $40,000, or .6%. The decrease in the average balance on
deposits of $1.6 million to $151.5 million at December 31, 1996 from $153.1
million for the prior year, was more than offset by an increase in the average
cost of deposits to 4.15% from 4.08%.
Interest expense, consisting primarily of the cost of deposits, increased $1.6
million, or 33.3%, to $6.3 million for the year ended December 31, 1995, from
$4.7 million for the prior year. The increase was attributable to an increase in
the average balance of deposits to $159.9 million from $140.0 million, as well
as an increase in the average cost of the Bank's deposits to 3.91% from 3.35%.
The increase in the average balance reflects the effects of a full year of
servicing the $42.3 million the Bank assumed in deposit liabilities as a result
of the Acquisition. The increase in the average rate is attributable to a shift
of deposits from lower cost savings accounts to higher cost term deposits. For
the year ended December 31, 1995, the Bank's savings accounts decreased by $7.1
million, while certificates of deposit increased by $9.6 million. The Bank also
incurred $3,000 in interest expense on it's ESOP loan.
Average Balance Sheet
The following table sets forth certain information concerning average interest
earning assets and interest-bearing liabilities and the yields and rates
thereon. Interest income and resultant yield information in the table is on a
fully tax-equivalent basis for the three years ended December 31, 1996, using
marginal federal income tax rates of 34%. Averages are computed on the daily
average balance for each month in the period divided by the number of days in
the period. Yields and amounts earned include loan fees. Non-accrual loans have
been included in interest-earning assets for purposes of these calculations.
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Earning Assets:
Real Estate Loans $ 94,126 $ 8,250 8.76% $ 88,163 $ 7,533 8.54% $ 79,771 $ 6,793 8.52%
Consumer & Other Loans 10,228 1,006 9.84% 7,816 792 10.13% 4,825 522 10.82%
Mortgage-backed Securities 16,312 1,095 6.71% 3,292 231 7.02% 1,106 82 7.41%
Taxable investment
securities 32,643 2,148 6.58% 44,865 2,834 6.32% 36,739 2,218 6.04%
Non-taxable investment
securities 5,471 485 8.86% 4,561 417 9.14% 2,638 239 9.06%
Interest-earning deposits 7,206 394 5.47% 9,445 539 5.71% 17,257 828 4.80%
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning
assets $165,986 $ 13,378 8.06% $158,142 $12,346 7.81% $142,336 $10,682 7.50%
=========================== ====================== ===================== ======================
Non Interest Earning Assets:
Other assets 18,671 19,240 13,175
Allowance for loan losses (492) (329) (292)
Net unrealized gains
(losses)
on available for sale
portfolio 366 402 137
- ------------------------------------------------------------------------------------------------------------------------------------
Total Assets $184,531 $177,455 $155,356
====================================================================================================================================
Interest-bearing
Liabilities:
Interest-bearing deposits $151,533 $ 6,296 4.15% $153,147 $ 6,256 4.08% $134,401 $ 4,697 3.49%
Borrowings 1,894 118 6.23% 35 3 8.57% -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities $153,427 $ 6,414 4.18% $153,182 $ 6,259 4.09% $134,401 $ 4,697 3.49%
=========================== ====================== ===================== ======================
Non-Interest-Bearing
Liabilities:
Demand deposits 7,869 6,789 5,612
Other liabilities 2,345 1,793 1,361
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 163,641 161,764 141,374
Shareholder's equity 20,890 15,691 13,982
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities &
shareholder's equity $184,531 $177,455 $155,356
====================================================================================================================================
Net interest income $ 6,964 $ 6,087 $ 5,985
====================================================================================================================================
Net interest rate spread 3.88% 3.72% 4.01%
====================================================================================================================================
Net interest margin 4.20% 3.85% 4.20%
====================================================================================================================================
Ratio of average
interest-earning assets
to average interest-bearing
liabilities 108.19% 103.24% 105.90%
====================================================================================================================================
</TABLE>
10
<PAGE>
Looking Forward To Your Future
Management's Discussion and Analysis
Rate/Volume Analysis
Net interest income can also be analyzed in terms of the impact of changing
interest rates on interest earning assets and interest-bearing liabilities and
changing the volume or amount of these assets and liabilities. The following
table represents the extent to which changes in interest rates and changes in
the volume of interest earning assets and interest-bearing liabilities have
affected the Bank's interest income and interest expense during the periods
indicated. Information is provided in each category with respect to: (i) changes
attributable to changes in volume (change in volume multiplied by prior rate);
(ii) changes attributable to changes in rate (changes in rate multiplied by
prior volume); and (iii) the net change. Changes caused by a combination of
volume and rate have been allocated to volume and rate in proportion to the
relationship of the absolute dollar amounts of change in each.
<TABLE>
<CAPTION>
Year Ended December 31,
- ---------------------------------------------------------------------------------------------------------------------
1996 vs. 1995 1995 vs. 1994
Increase (Decrease) Due to Increase (Decrease) Due to
- ---------------------------------------------------------------------------------------------------------------------
Total Total
Increase Increase
Volume Rate (Decrease) Volume Rate (Decrease)
- ---------------------------------------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Real estate loans $519 $198 $717 $717 $23 $740
Consumer and other loans 238 (24) 214 305 (35) 270
Mortgage-backed securities 875 (11) 864 153 (4) 149
Taxable investment securities (800) 114 (686) 510 106 616
Non-taxable investment securities 82 (14) 68 176 2 178
Interest-earning deposits (123) (22) (145) (427) 138 (289)
- ---------------------------------------------------------------------------------------------------------------
Total interest earning 791 241 1,032 1,434 230 1,664
Interest expense: 49 106 155 720 842 1,562
- ---------------------------------------------------------------------------------------------------------------
Net change in interest
income $742 $135 $877 $714 ($612) $102
===============================================================================================================
</TABLE>
Net Interest Income
Net interest income increased $877,000 for the year ended December 31, 1996 as
compared to December 31, 1995. The increase in net interest income resulted from
a $7.8 million increase in average interest-earning assets, and an increase in
the average yield on interest-earning assets to 8.06% from 7.81%. These
increases were offset in part by an increase in the average cost on interest
bearing liabilities to 4.18% from 4.09%. The result is that the Bank's net
interest rate spread rose to 3.88% from 3.72%
Net interest income increased $102,000 for the year ended December 31, 1995 as
compared to the prior year. The increase in net interest income resulted from a
$15.8 million increase in interest-earning assets offset in part by a decrease
in the bank's interest rate spread to 3.72% from 4.01%
Provision for Loan Losses.
The Bank maintains an allowance for loan losses based upon a quarterly
evaluation of known and inherent risks in the loan portfolio, which includes a
review of the balances and composition of the loan portfolio as well as
analyzing the level of delinquencies in each segment of the loan portfolio. Loan
loss provisions are based upon management's estimate of the fair value of the
collateral and the bank's actual loss experience, as well as standards applied
by the FDIC. The Bank established a provision for possible loan losses for the
year ended December 31, 1996 of $636,000 as compared to a provision $103,000 for
the year ended December 31, 1995. The increase in the provision for loan losses
was partly attributable to a $420,000 specific reserve established for the
Bank's investments in lease finance packages acquired from the Bennett Funding
Group. The Bank's allowance for loan losses as a percentage of net loans
receivable at December 31, 1996 was .83%.
The Bank's provision for possible loan losses was $103,000 for the year ended
December 31, 1995 compared to $65,000 for the year ended December 31, 1994. The
increase in the provision for loan losses reflected management's decision to
increase the allowance for loan losses in response to the increase in the size
of the Bank's total loans receivable portfolio to $100.8 million at December 31,
1995 from $90.4 million at December 31, 1994.
Non Interest Income
Noninterest income consists of servicing income and fee income and, to a lesser
extent, gain (loss) on sale of investment securities and other operating income.
Noninterest income increased $164,000, or 20.0%, to $979,000 for the year ended
December 31, 1996, as compared to $816,000 for the year ended December 31, 1995.
The increase in noninterest income was primarily attributable to an increase in
fees and service charges to $608,000 from $472,000, an increase of 28.8%,
additional gains on the sale of investment securities of $62,000, and an
increase in other charges, commissions, and fees to $265,000 from $245,000.
These increases for the year ended December 31, 1996 were partially offset by a
rebate received on FDIC insurance of $54,000 in the prior year. The overall
increase in noninterest income reflects the Bank's strategy to diversify and
increment its sources of income. One such strategy was the introduction of
investment services, initiated in June 1996, which resulted in additional income
of $53,000 for the year ended December 31, 1996.
Noninterest income increased $342,000, or 72.1%, to $816,000 for the year ended
December 31, 1995, as compared to $474,000 for the prior year. The increase in
noninterest income was primarily attributable to an increase in fees and service
charges to $472,000 from $436,000, a gain on the sale of investment securities
of $44,000 as compared to loss of $77,000 in the prior year, an increase in
other charges, commissions, and fees to $245,000 from $115,000, and a rebate
received on FDIC insurance of $54,000.
Non Interest Expense
Noninterest expense increased $55,000, or 1.0%, to $5.4 million for the year
ended December 31, 1996 from $5.3 million for the prior year. The increase in
noninterest expense was primarily attributable to increases in employee
compensation and benefits of
11
<PAGE>
1996 Annual Report
Management's Discussion and Analysis
$64,000, or 2.8%, building occupancy expense increases of $31,000, professional
service expense increases of $226,000, and other expense increases of $98,000.
The increases in the professional service expenses were the result of additional
attorney fees, consulting fees and advertising expense. A portion of these
additional fees are attributable to events which are not considered to be
recurring. These increase were partially offset by reductions in expense
associated with data processing of $34,000, and a reduction of deposit insurance
premiums of $90,000 to $236,000 from $325,000. Noninterest expense for the year
ended December 31, 1995 was also impacted by a $240,000 reserve against possible
losses due to the liquidation of Nationar. The Bank's overhead ratio for the
year ended December 31, 1996 improved to 2.82% from 2.93%. Continued reduction
of the overhead ratio is a primary strategic objective of the Bank.
Noninterest expense increased $906,000, or 20.6%, to $5.3 million for the year
ended December 31, 1995 from $4.4 million for the prior year. The increase in
noninterest expense was primarily attributable to increases in employee
compensation and benefits of $502,000, building occupancy expense increases of
$188,000, amortization of goodwill increases of $132,000, and deposit insurance
premium increases of $37,000. The increases in these expense categories is a
result of operating two additional branches and servicing the additional
deposits of $42.3 million as a result of the Acquisition. Furthermore,
noninterest expense increased by $240,000 as a result of the Bank establishing a
reserve against possible losses due to the liquidation of Nationar.
Income Tax Expense
Income tax expense increased $146,000, or 40.5% to $506,000 for the year ended
December 31, 1996 from $360,000 for the prior year. The increase in income tax
expense reflected higher pre-tax income during the year. Income tax expense
decreased $246,000, or 40.6%, to $360,000 for the year ended December 31, 1995
from $606,000 for the prior year. The decrease in income tax expense reflected
lower pre-tax income, as well as a reduction in the effective tax rate caused by
the effect of an increase in tax-exempt income.
Liquidity and Capital Resources
The Bank's primary sources of funds are deposits, borrowed funds, amortization
and prepayment of loans and maturities of investment securities and other short-
term investments, and earnings and funds provided from operations. While
scheduled principal repayments on loans are a relatively predictable source of
funds, deposit flows and loan prepayments are greatly influenced by general
interest rates, economic conditions, and competition. The Bank manages the
pricing of deposits to maintain a desired deposit balance. In addition, the
Bank invests excess funds in short-term interest-bearing and other assets, which
provide liquidity to meet lending requirements. For additional information about
cash flows from the Bank's operating, financing, and investing activities, see
Statements of Cash Flows included in the Financial Statements. The Bank adjusts
its liquidity levels in order to meet funding needs of deposit overflows,
payment of real estate taxes on mortgage loans and loan commitments. The Bank
also adjusts liquidity as appropriate to meet its asset and liability management
objectives. The Bank's liquidity has been enhanced by its membership in the
Federal Home Loan Bank of New York, whose competitive advance programs and lines
of credit will provide the Bank with a reliable and convenient source of funds.
A major portion of the Bank's liquidity consists of cash and cash equivalents,
which are a product of operating, investing, and financing activities. The
primary source of cash were net income, principal repayments on loans and
increases in deposit accounts and borrowed funds.
At December 31, 1996, the Bank had outstanding loan commitments of $6.4 million.
This amount includes the unfunded portion of loans in process. Certificates of
deposit scheduled to mature in less that one year at December 31, 1996, totaled
$52.9 million. Based on prior experience, management believes that a significant
portion of such deposits will remain with the Bank.
Impact of New Accounting Standards
Earnings Per Share
SFAS No. 128 iEarnings Per Shares specifies the computation, presentation, and
disclosure requirements for EPS. This statement is designed to improve the EPS
information provided in financial statements by simplifying the existing
computational guidelines, revising the disclosure requirements, and increasing
the comparability of EPS data. The statement is effective for financial
statements issued for periods ending after December 15, 1997 including interim
periods. Management believes this standard will have no material impact on the
Bank's financial statements.
Impact of Inflation and Changing Prices
The financial statements of the Bank and notes thereto, presented elsewhere
herein, have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position of money over
time due to inflation. The impact of inflation is reflected in the increased
cost of the Bank's operations. Unlike most industrial companies, nearly all the
assets and liabilities of the Bank are monetary. As a result, interest rates
have a greater impact of the Bank's performance that 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 price of goods and services.
Common Stock and Related Matters
The common stock of Oswego City Savings Bank is traded in the over-the-counter
market and is listed for quotation on the Electronic Bulletin Board under the
symbol "PBHC". The stock was issued on November 15, 1995 at $7.50 per share. As
of February 18, 1997, there were 449 shareholders of record and 1,916,666
outstanding shares of common stock.
The following table sets forth the high and low closing bid prices and dividends
paid per share of common stock for the periods indicated.
<TABLE>
<CAPTION>
Dividends
Quarter ended High Low Paid
-----------------------------------------------------------------------
<S> <C> <C> <C>
December 31, 1995 10.750 8.375 --
March 31, 1996 10.250 8.750 $.05
June 30, 1996 9.000 8.250 $.05
September 30, 1996 9.000 8.000 $.05
December 30, 1996 10.625 8.750 $.05
</TABLE>
Payment of dividends on the common stock is subject to determination and
declaration by the Board of Directors and will depend upon a number of factors,
including capital requirements, regulatory limitations on the payment of
dividends, Oswego City Savings Bank's results of operations and financial
condition, tax considerations, and general economic conditions. No assurance can
be given that dividends will be declared or, if declared, what the amount of
dividends will be, or whether such dividends, once declared, will continue.
12
<PAGE>
Coopers
& Lybrand
Board of Directors and Shareholders
Oswego City Savings Bank
Oswego, New York
We have audited the accompanying statements of condition of Oswego City Savings
Bank as of December 31, 1996 and 1995, and the related statements of income,
changes in shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1996. These financial statements are the
responsibility of the Bank's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial condition of Oswego City Savings Bank as
of December 31, 1996 and 1995 and the results of operations and cash flows for
each of the three years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Syracuse, New York
February 7, 1997
13
<PAGE>
1996 Annual Report
Statements of Condition
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1996 1995
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash and due from banks $ 6,802,959 $ 4,367,271
Federal funds sold 1,550,000 8,200,000
- ----------------------------------------------------------------------------------------------------
Total cash and cash equivalents 8,352,959 12,567,271
Investment securities
(approximate fair value $59,597,000 and $53,116,000) 59,502,156 52,884,811
Loans:
Real estate 99,737,273 91,628,003
Consumer and other 10,280,125 9,221,667
- ----------------------------------------------------------------------------------------------------
Total loans 110,017,398 100,849,670
Less: Unearned discounts and origination fees 368,885 354,855
Allowance for loan losses 906,567 345,660
- ----------------------------------------------------------------------------------------------------
108,741,946 100,149,155
Premises and equipment, net 3,384,480 2,819,499
Accrued interest receivable 1,466,003 1,469,662
Other real estate 699,921 586,383
Intangible assets 3,920,632 4,236,388
Other assets 3,869,108 6,238,498
- ----------------------------------------------------------------------------------------------------
$189,937,205 $180,951,667
====================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits $158,997,838 $158,323,936
Borrowed Funds 7,610,000 ----
Note payable - ESOP 485,926 424,678
Other liabilities 1,453,357 1,451,675
- ----------------------------------------------------------------------------------------------------
Total liabilities 168,547,121 160,200,289
Shareholder's equity:
Common stock, par value $1.00 per share;
authorized 2,500,000 shares; 1,916,666
shares issued and outstanding 1,916,666 1,916,666
Additional paid-in-capital 3,750,726 3,748,279
Retained earnings 15,787,666 14,889,375
Unrealized appreciation on securities
available-for-sale 412,934 622,358
Unearned ESOP shares (477,908) (425,300)
- ----------------------------------------------------------------------------------------------------
Total shareholders equity 21,390,084 20,751,378
- ----------------------------------------------------------------------------------------------------
$189,937,205 $180,951,667
====================================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements
14
<PAGE>
Looking Forward To Your Future
Statements of Income
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME:
Loans $ 9,256,360 $ 8,325,213 $ 7,314,915
Interest and dividends on investments:
U.S. Treasury and agencies 509,275 718,924 286,972
State and political subdivisions 320,192 274,681 158,485
Corporate 1,610,326 2,008,538 1,630,700
Marketable equity 27,857 107,337 141,854
Mortgage-backed 1,094,837 230,721 82,745
Federal funds sold and
interest-bearing deposits 393,871 539,109 827,807
- ----------------------------------------------------------------------------------------------------
Total interest income 13,212,718 12,204,523 10,443,478
INTEREST EXPENSE:
Interest on deposits 6,295,592 6,255,020 4,696,952
Interest on borrowed funds 118,132 3,846 ---
- ----------------------------------------------------------------------------------------------------
Net interest income 6,798,994 5,945,657 5,746,526
Provision for loan losses 636,410 102,500 65,000
- ----------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 6,162,584 5,843,157 5,681,526
- ----------------------------------------------------------------------------------------------------
OTHER INCOME:
Service charges on deposit accounts 570,464 436,574 409,493
Mortgage servicing fees 37,364 35,645 26,949
Net securities gains (losses) 106,638 44,397 (77,088)
Deposit insurance refund --- 54,318 ---
Other charges, commissions and fees 264,871 244,842 114,662
- ----------------------------------------------------------------------------------------------------
Total other income 979,337 815,776 474,016
- ----------------------------------------------------------------------------------------------------
OTHER EXPENSES:
Salaries and employee benefits 2,344,218 2,280,656 1,778,999
Building occupancy 691,101 659,774 471,703
Data processing expenses 375,557 409,400 477,677
Professional and other services 522,800 297,040 476,828
Deposit insurance premiums 235,843 325,735 289,014
Amortization 315,755 315,755 184,191
Provision for loss contingency --- 240,000 ---
Other expenses 879,049 780,684 724,490
- ----------------------------------------------------------------------------------------------------
Total other expenses 5,364,323 5,309,044 4,402,902
- ----------------------------------------------------------------------------------------------------
Income before income taxes 1,777,598 1,349,889 1,752,640
Provision for income taxes 505,838 360,000 606,388
- ----------------------------------------------------------------------------------------------------
Net income $ 1,271,760 $ 989,889 $ 1,146,252
====================================================================================================
Primary Earnings per share $0.68 $0.10 N/A
====================================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements
15
<PAGE>
1996 Annual Report
Statements of Changes in Shareholders' Equity
Years ended December 31, 1996, 1995, 1994
<TABLE>
<CAPTION>
Unrealized
Appreciation
Common Stock Additional (Depreciation) Unearned
----------------------- Paid in Retained on Investment ESOP
Shares Amount Capital Earnings Securities Shares Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 $12,953,234 $12,953,234
Unrealized net appreciation
in investment securities,
at January 1, 1994 $491,419 491,419
Net income 1,146,252 1,146,252
Change in unrealized
net appreciation
(depreciation) on
investment securities (600,782) (600,782)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 14,099,486 (109,363) 13,990,123
Net income 989,889 989,889
Net proceeds from
issuance of
common stock 1,916,666 $1,916,666 $3,748,248 5,664,914
Acquisition of unearned
ESOP shares ($436,250) (436,250)
ESOP shares earned 31 10,950 10,981
Capital contribution to
Pathfinder Bancorp,
M.H.C. (200,000) (200,000)
Change in unrealized
net appreciation
(depreciation) on
investment securities 731,721 731,721
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 1,916,666 1,916,666 3,748,279 14,889,375 622,358 (425,300) 20,751,378
Net Income 1,271,760 1,271,760
Acquisition of unearned
ESOP shares (110,047) (110,047)
ESOP shares earned 2,447 57,439 59,886
Change in unrealized
net appreciation
(depreciation) on
investment securities (209,424) (209,424)
Dividends declared
($0.20 per share) (373,469) (373,469)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 1,916,666 $1,916,666 $3,750,726 $15,787,666 $412,934 ($477,908) $21,390,084
===================================================================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements
16
<PAGE>
Looking Forward To Your Future
Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income $1,271,760 $989,889 $1,146,252
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan, investment and other real estate losses 675,152 136,754 65,000
Provision for Nationar Loss -- 240,000 --
Deferred compensation 164,926 160,075 93,173
ESOP shares earned 59,886 10,981 --
Deferred income taxes (62,775) (58,434) 35,319
Realized and unrealized losses (gains)
on investment securities (6,640) 15,601 77,088
Net loss on sale of other real estate 3,602 29,783 --
Depreciation 248,105 327,827 259,869
Amortization of intangibles 315,755 315,755 184,191
Net amortization of premiums and discounts on
investment securities 114,115 348,485 533,602
Net amortization of premiums and discounts on loans 14,030 (74,062) (77,865)
(Increase) decrease in interest receivable 3,659 (69,291) (276,945)
Decrease (increase) in other assets (234,633) 307,135 (469,966)
Increase (decrease) in other liabilities (106,771) 308,012 (155,783)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,460,171 2,988,510 1,413,935
- -------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of investment securities held-to-maturity -- -- (14,087,767)
Purchase of investment securities available for sale (28,604,061) (23,346,873) (9,811,074)
Proceeds from maturities and principle reductions of
investment securities held to maturity 250,000 1,104,302 --
Proceeds from maturities and principle reductions of
investment securities available for sale 10,895,834 11,692,557 8,050,290
Proceeds from sale of investment securities available for sale 10,393,686 7,624,121 1,113,558
Net increase in loans (9,688,266) (11,154,769) (10,961,257)
Purchase of premises and equipment (813,086) (1,135,676) (536,491)
Proceeds from sale of other real estate owned 289,153 628,486 317,990
Increase in surrender value of life insurance (138,210) (142,970) (2,752,338)
Premium paid for branch acquisitions -- -- (4,736,334)
- -------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (17,414,950) (14,730,822) (33,403,423)
- -------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net decrease in demand deposits,
NOW accounts, savings accounts,
money market deposit accounts and escrow deposits ($4,454,805) ($7,404,864) ($7,461,696)
Net increase in time deposits 5,128,707 9,635,211 5,637,845
Deposits acquired through branch acquisitions -- -- 42,294,107
Proceeds from borrowings 7,720,047 436,250 --
Repayments of borrowings (48,799) (11,572) --
Cash Dividends (277,636) -- --
Common stock acquired by ESOP (110,047) (436,250) --
Proceeds from the sale of common stock -- 5,664,914 --
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 7,957,467 7,883,689 40,470,256
- -------------------------------------------------------------------------------------------------------------------
Recovery (reclass) of Nationar deposits to (from)
cash equivalents from (to) other assets 2,783,000 (2,960,000) --
- -------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalent (4,214,312) (6,818,623) 8,480,768
Cash and cash equivalents at beginning of year 12,567,271 19,385,894 10,905,126
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $8,352,959 $12,567,271 $19,385,894
===================================================================================================================
CASH PAID DURING THE PERIOD FOR:
Interest $6,285,566 $6,255,153 $4,691,038
Income Taxes Paid 529,477 215,000 802,138
NON-CASH INVESTING ACTIVITY:
Transfer of loans to other real estate $445,035 644,936 119,943
Change in unrealized appreciation (depreciation)
in securities available for sale (349,040) 1,219,540 (182,174)
NON-CASH FINANCING ACTIVITY:
Dividends declared and unpaid $95,833 -- --
</TABLE>
The accompanying notes are an integral part of the financial statements
17
<PAGE>
1996 Annual Report
Notes to Financial Statements
Year ended December 31, 1996
Note 1: Summary of Significant Accounting Policies
Nature of operations
The accompanying financial statements include the accounts of Oswego City
Savings Bank (the "Bank") a New York chartered stock savings bank headquartered
in Oswego, New York. The Bank has five full service offices located in its
market area consisting of Oswego County. The Bank is primarily engaged in the
business of attracting deposits from the general public in the Bank's market
area, and investing such deposits, together with other sources of funds, in
loans secured by one-to-four family residential real estate and investment
securities.
The Pathfinder Bancorp, M.H.C. (the "Company"), whose activity is not included
in the accompanying financial statements, owns approximately 54% of the
outstanding common stock of the Bank (see Note 2).
During 1997, the Bank and the Company expect to form a mid-tier stock holding
company whereby outstanding shares of the Bank will be exchanged for shares of a
newly formed stock holding company. Pathfinder Bancorp, M.H.C. will maintain
majority ownership of the stock holding company in the same proportion it holds
in the Bank prior to the exchange. The Bank will become a wholly owned
subsidiary of the stock holding company.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, amounts due from banks,
interest-bearing deposits (with original maturity of three months or less) and
federal funds sold. Generally, federal funds are purchased and sold for one-day
periods. Short-term cash investments include certificates of deposit and money
market funds. The estimated fair value of cash and cash equivalents approximates
carrying value.
Investment Securities
The Bank classifies investment securities as held-to-maturity or available-for-
sale. Held-to-maturity securities are those which the Bank has the positive
intent and ability to hold to maturity, and are reported at cost, adjusted for
amortization of premiums and accretion of discounts. Investment securities not
classified as held-to-maturity are classified as available-for-sale and are
reported at fair value, with net unrealized gains and losses reflected as a
separate component of net worth, net of the applicable income tax affect. None
of the Banks investment securities have been classified as trading securities.
Gains or losses on investment security transactions are based on the amortized
cost of the specific securities sold. Fair values for investment securities are
based on quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments.
Loans
Loans are stated at unpaid principal balances, less the allowance for loan
losses and deferred loan fees. Interest income is generally recognized when
income is earned using the interest method. Nonrefundable loan fees received and
related direct costs incurred are deferred and amortized over the life of the
loan using the interest method, resulting in a constant effective yield over the
loan term. Deferred fees are recognized into income immediately upon prepayment
of the related loan.
For variable rate loans that reprice frequently and with no significant credit
risk, fair values are based on carrying values. Fair values for fixed rate loans
are estimated using discounted cash flow analysis, using interest rates
currently being offered for loans with similar terms to borrowers of similar
credit quality. The carrying amount of accrued interest approximates its fair
value.
Allowance for Possible Loan Losses
The Bank adopted SFAS No. 114, "Accounting by Creditors for Impairment of a
Loan," on January 1, 1995. Under this new standard, a loan is considered
impaired, based on current information and events, if it is probable that the
Bank will be unable to collect the scheduled payments of principle or interest
when due according to the contractual terms of the loan agreement. The
measurement of impaired loans is generally based upon the present value of
expected future cash flows discounted at the historical effective interest rate,
except that all collateral-dependent loans are measured for impairment based on
the fair value of the collateral. Adoption of this pronouncement had no effect
on the Banks financial statements for 1995.
The allowance for loan losses is maintained at a level considered adequate to
provide for potential loan losses. The allowance is increased by provisions
charged to expense and reduced by net charge-offs. The level of the allowance is
based upon management's evaluation of potential losses related to outstanding
loans, as well as prevailing economic conditions.
Income Recognition on Impaired and Nonaccrual Loans
Loans, including impaired loans, are generally classified as nonaccrual if they
are past due as to maturity or payment of principle or interest for a period of
more than 90 days. When a loan is classified as nonaccrual and the future
collectibility of the recorded loan balance is doubtful, collections of interest
and principal are generally applied as a reduction to principal outstanding.
When future collectibility of the recorded loan balance is expected, interest
income may be recognized on a cash basis. In the case where a nonaccrual loan
had been partially charged off, recognition of interest on a cash basis is
limited to that which would have been recognized on the recorded loan balance at
the contractual interest rate. Cash interest receipts in excess of that amount
are recorded as recoveries to the allowance for possible credit losses until
prior charge-offs have been fully recovered.
18
<PAGE>
Looking Forward To Your Future
Notes to Financial Statements
Year ended December 31, 1996
Premises and Equipment
Premises and equipment are stated at cost, less accumulated depreciation.
Depreciation is computed generally on a straight-line basis over the estimated
useful lives of the related assets. Maintenance and repairs are charged to
operating expenses as incurred.
Other Real Estate
Properties acquired through foreclosure, or by deed in lieu of foreclosure, are
carried at the lower of cost (fair value at the date of foreclosure) or fair
value less estimated disposal costs.
Intangible Assets
Intangible assets represent goodwill arising from branch acquisitions and are
being amortized on a straight-line basis over a 15-year period. The Bank
periodically reviews the carrying value of intangible assets using fair value
methodologies. Accumulated amortization totaled approximately $816,000 and
$500,000 at December 31, 1996 and 1995, respectively.
Deposits
Interest on deposits is accrued and paid to the depositors or credited to the
depositors accounts monthly, quarterly or annually.
Fair values disclosed for demand, savings, and variable rate money market
accounts and certificates of deposit approximate their carrying values at the
reporting date. Fair values for fixed rate certificates of deposit are estimated
using a discounted cash flow calculation that applies interest rates currently
being offered on similar certificates to a schedule of aggregated expected
monthly maturities on time deposits. The carrying value of accrued interest
approximates fair value.
During 1996, the Bank recognized a one time deposit insurance expense of
approximately $160,000 in connection with the recapitalization of the SAIF
insurance fund.
Income Taxes
Provisions for income taxes are based on taxes currently payable or refundable
and deferred income taxes on temporary differences between the tax basis of
assets and liabilities and their reported amounts in the financial statements.
Deferred tax assets and liabilities are reported in the financial statements at
currently enacted income tax rates applicable to the period in which the
deferred tax assets and liabilities are expected to be realized or settled.
Earnings per Share
Earnings per share are based on the weighted average number of common shares
outstanding throughout each year (1,867,669 in 1996 and 1,877,519 in 1995 for
the period November 15, 1995 to December 31, 1995.)
Fair Values of Financial Instruments
Financial Accounting Standards Board Statement No. 107, "Disclosure About Fair
Value of Financial Instruments,i requires disclosure of fair value information
of financial instruments, whether or not recognized in the balance sheet, for
which it is practicable to estimate that value. In cases where quoted market
prices are not available, fair values are based on estimates using present value
or other valuation techniques. Those techniques are significantly affected by
the assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair values estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instrument. Statement No. 107 excludes certain
financial instruments and all nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Bank. The carrying amounts and estimated
fair values of financial instruments at December 31, are as follows:
<TABLE>
<CAPTION>
1996 1995
Carrying Estimated Carrying Estimated
Amounts Fair Values Amounts Fair Values
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents 8,352,959 8,352,959 $12,567,271 $12,567,271
Investment Securities 59,502,156 59,597,113 52,884,811 53,116,129
Loans 108,741,946 113,046,793 100,149,155 100,570,328
Accrued interest receivable
& other assets 1,466,003 1,446,003 1,469,662 1,469,662
Deposits 158,997,838 154,887,772 158,323,936 154,412,010
Borrowed Funds 7,610,000 7,610,000 -- --
Note payable 485,926 485,926 424,678 424,678
</TABLE>
The fair value of commitments to extend credit is not significant.
Reclassification
Certain amounts from 1995 and 1994 have been reclassified to conform to the
current years presentation. These reclassifications had no affect on net income
as previously reported.
Note 2: Corporate Reorganization and Stock Issuance
On May 10, 1994, the board of trustees of the Bank adopted a plan of
reorganization whereby the Bank would reorganize from a mutual savings bank into
a New York chartered mutual holding company.
The organization was effective on November 15, 1995, at which time the mutual
holding company, Pathfinder Bancorp, M.H.C. was formed. Concurrent with
formation of the mutual holding company, 881,666 shares, or 46% of the Banks
common stock was sold in an initial public offering. Pathfinder Bancorp, M.H.C.
maintains ownership of 1,035,000 shares, or 54% of the Banks remaining common
shares.
19
<PAGE>
1996 Annual Report
Notes to Financial Statements
Year ended December 31, 1996
Pursuant to the reorganization, the Bank may exercise all powers and is subject
to all limitations applicable to capital stock savings banks under New York law.
As long as Pathfinder Bancorp, M.H.C. is in mutual form, the Company is required
to own at least 51% of the issued and outstanding voting stock of the Bank.
As a result of the stock offering, the Bank received gross proceeds of
approximately $6,612,000; expenses associated with the offering totaled
$947,000, resulting in net capital additions to the Bank of approximately
$5,665,000. Subsequent to the initial offering and through December 31, 1996,
the Banks Employee Stock Ownership Plan acquired 61,716 shares of the Banks
common stock in the secondary market.
Note 3: Investment Securities
The amortized cost and estimated fair value of investment securities are
summarized as follows:
<TABLE>
<CAPTION>
December 31, 1996
Gross Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Held-to-maturity:
Corporate debt $9,629,303 $110,966 $16,009 $9,724,260
- ------------------------------------------------------------=====================================
Available-for-sale:
Bond investments:
U.S. Treasury and agencies 5,879,451 40,018 25,733 5,893,736
State and political subdivision 6,172,638 333,556 12,761 6,493,433
Corporate 12,430,395 192,478 40,292 12,582,581
Mortgage-backed 22,965,752 69,397 206,082 22,829,067
- -------------------------------------------------------------------------------------------------
Total 47,448,236 635,449 284,868 47,798,817
Stock investments:
Marketable equity securities 1,727,942 346,094 -- 2,074,036
- -------------------------------------------------------------------------------------------------
Total available-for-sale $49,176,178 $981,543 $284,868 $49,872,853
- ------------------------------------------------------------=====================================
Net unrealized gain on available-for-sale 696,675
- -------------------------------------------------------
Grand total carrying value $59,502,156
=======================================================
<CAPTION>
December 31, 1995
Gross Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Held-to-maturity:
Corporate debt $9,866,224 $234,866 $3,548 $10,097,542
- ------------------------------------------------------------=====================================
Available-for-sale:
Bond investments:
U.S. Treasury and agencies 8,171,251 117,713 17,167 8,271,797
State and political subdivision 5,296,445 373,576 2,535 5,667,486
Corporate 18,667,202 318,149 16,784 18,968,567
Mortgage-backed 7,911,933 70,370 29,226 7,953,077
- -------------------------------------------------------------------------------------------------
Total 40,046,831 879,808 65,712 40,860,927
Stock investments:
Marketable equity securities 1,934,390 242,646 19,376 2,157,660
- -------------------------------------------------------------------------------------------------
Total available-for-sale $41,981,221 $1,122,454 $85,088 $43,018,587
=================================================================================================
Net unrealized gain on available-for-sale 1,037,366
- -------------------------------------------------------
Grand total carrying value $52,884,811
=======================================================
</TABLE>
20
<PAGE>
Looking Forward To Your Future
Notes to Financial Statements
Year ended December 31, 1996
The amortized cost and estimated fair value of debt investments at December 31,
1996 by contractual maturity are shown below. Expected maturities may differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without penalties.
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
December 31, 1996 December 31, 1996
---------------------------------------------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 1,081,059 $ 1,085,956 $4,808,773 $4,834,787
Due after one year through five years 8,947,476 9,161,662 4,260,687 4,329,630
Due after five years through ten years 11,434,233 11,643,075 498,814 498,814
Due after ten years 3,019,716 3,079,057 61,029 61,029
Mortgage-backed securities 22,965,752 22,829,067 ---- ----
- ------------------------------------------------------------------------------------------------------
Totals $47,448,236 $47,798,817 $9,629,303 $9,724,260
======================================================================================================
</TABLE>
Proceeds from the sales of debt securities at December 31, 1996, 1995, and 1994
were $10,393,686, $7,624,121, and $1,113,558, respectively. Gross gains of
$3,643, $31,040 and $41,704 and gross losses of $49,996, $58,563 and $32,678
were realized on these sales as of December 31, 1996, 1995, and 1994,
respectively. The sale of marketable equity securities resulted in realized
loses of $38,078 as of December 31, 1995.
In December 1995, the Bank transferred investment securities having an amortized
cost of $10,405,991 and net unrealized gains of $270,016 from held-to-maturity
to available-for-sale. These transfers were made pursuant to the FASB's
"Implementation Guide to Statement Notes" and the Bank's prevailing financial
management objectives.
Note 4: Loans
<TABLE>
<CAPTION>
Major classifications of loans at December 31, are as follows:
1996 1995
- --------------------------------------------------------------
<S> <C> <C>
Real estate mortgages:
Conventional $ 87,920,094 $ 80,933,677
FHA insured 115,576 195,217
VA guaranteed 122,298 147,380
Second mortgage loans 9,082,632 8,303,068
Construction 2,496,673 2,048,661
- --------------------------------------------------------------
99,737,273 91,628,003
==============================================================
Other loans:
Student 34,320 63,062
Consumer 3,416,752 3,014,540
Passbook loans 206,133 271,244
Lease financing 1,152,521 2,012,708
Commercial 5,470,399 3,860,113
- --------------------------------------------------------------
10,280,125 9,221,667
- --------------------------------------------------------------
$110,017,398 $100,849,670
==============================================================
</TABLE>
The Bank grants mortgage and consumer loans to customers throughout Oswego and
parts of Onondaga counties. Although the Bank has a diversified loan portfolio,
a substantial portion of its debtors ability to honor their contracts is
dependent upon the counties employment and economic conditions.
At December 31, 1996, loans to officers and directors were not significant.
21
<PAGE>
1996 Annual Report
Notes to Financial Statements
Year ended December 31, 1996
Note 5: Allowances for Loan Losses
Changes in the allowance for loan losses are presented in the following summary:
<TABLE>
<CAPTION>
1996 1995 1994
-----------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of period $345,660 $315,050 $279,848
Recoveries credited 17,498 8,631 64,639
Provision for loan losses 636,410 102,500 65,000
Loans charged off (93,001) (80,521) (94,437)
----------------------------------------------------------------
Balance at end of period $906,567 $345,660 $315,050
================================================================
</TABLE>
During March of 1996, the Bank had approximately $1.1 million of collateralized
loans which were determined to be impaired under SFAS No. 114. The borrower, a
lease financing company and its' affiliates, subsequently filed for Chapter 11
bankruptcy. In November 1996, the Bank received approximately $425,000 in full
settlement of one of the loans. Based on information provided by the bankruptcy
trustee in the third quarter of 1996, the Bank recognized a specific reserve of
approximately $420,000 on the remaining outstanding loan balances of $675,000.
Based on preliminary settlement discussions with the trustee, management
believes that no additional reserves are necessary.
For the year ended December 31, 1996, the average recorded investment in
impaired loans was approximately $1,036,000, with $29,000 of interest income
recognized on these loans on a cash basis. At December 31, 1996, the Bank had no
loans for which specific valuation allowances were recorded.
Note 6: Premises and Equipment
A summary of premises and equipment is as follows:
<TABLE>
<CAPTION>
1996 1995
----------------------------------------------------------
<S> <C> <C>
Land $ 416,993 $ 416,993
Buildings 2,532,626 2,499,012
Furniture, fixture and equipment 1,781,615 1,614,509
Construction in progress 635,611 23,245
----------------------------------------------------------
5,366,845 4,553,759
Less: Accumulated depreciation 1,982,365 1,734,260
----------------------------------------------------------
$3,384,480 $2,819,499
==========================================================
</TABLE>
Note 7: Deposits
A summary of amounts due to depositors is shown as follows:
<TABLE>
<CAPTION>
1996 1995
-----------------------------------------------------------------
<S> <C> <C>
Savings accounts $ 65,634,242 $ 71,018,738
Money market accounts 173,758 251,581
Time accounts 72,466,425 67,337,718
Demand deposits interest bearing 13,081,669 12,164,725
Demand deposits noninterest bearing 7,341,096 7,212,662
Mortgages escrow funds 300,648 338,512
-----------------------------------------------------------------
$158,997,838 $158,323,936
=================================================================
</TABLE>
Note 8: Borrowed Funds
The Bank has available a $550,870 line of credit in connection with the Employee
Stock Ownership Plan, of which $485,926 was outstanding at December 31, 1996.
Principal and interest are payable quarterly at prime minus one over 10 years.
At December 31, 1996, funds borrowed under repurchase agreements totaled $7.6
million. These obligations mature within 90 days and carry interest rates
varying from 5.42% to 5.57%. Repurchase agreements are collateralized by
mortgage backed securities.
22
<PAGE>
Looking Forward To Your Future
Notes to Financial Statements
Year ended December 31, 1996
Note 9: Employee Benefits
The Bank has a noncontributory defined benefit pension plan covering
substantially all employees. Under the plan, retirement benefits are primarily a
function of both the years of service and level of compensation. It is the
Bank's policy to fund the plan in amounts sufficient to pay liabilities.
Plan assets consist primarily of temporary cash investments and listed stocks
and bonds. The following table represents a reconciliation of the funded status
of the plan at October 1 (date of the most recent actuarial study):
<TABLE>
<CAPTION>
1996 1995
- ------------------------------------------------------------------------------
<S> <C> <C>
Plan assets at fair value $2,627,000 $2,359,400
- ------------------------------------------------------------------------------
Actuarial present value of benefit obligations
Vested benefits 1,755,900 1,623,900
Nonvested benefits 87,500 92,200
- ------------------------------------------------------------------------------
Accumulated benefit obligations 1,843,400 1,716,100
Effect of future salary increases 366,800 456,500
- ------------------------------------------------------------------------------
Projected benefit obligation 2,210,200 2,172,600
- ------------------------------------------------------------------------------
Plan assets in excess of projected
benefit obligation 416,800 186,800
Unrecognized net loss 147,400 320,700
Unrecognized past service liability 6,600 7,700
Unrecognized transition obligation (34,200) (77,400)
- ------------------------------------------------------------------------------
Prepaid pension asset included in other
assets $ 536,600 $ 437,800
==============================================================================
Net periodic pension cost for the years ended December 31 is as follows:
<CAPTION>
1996 1995 1994
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost benefits earned during the year $ 94,076 $ 99,664 $ 94,753
Interest cost on projected benefit
obligations 162,256 148,160 131,659
Estimated Return on plan assets (314,657) (377,065) 28,880
Net amortization and deferral 99,445 203,924 (184,633)
- ------------------------------------------------------------------------------
Net periodic pension expense $ 41,120 $ 74,683 $ 70,659
==============================================================================
</TABLE>
The actuarial present value of the projected benefit obligation shown in the
above table is based on a discount rate of 7.75% and 7.5% for 1996 and 1995,
respectively and an assumed rate of increase in future compensation levels of
5.5%. The expected long-term rate of return on assets was 8% for 1996 and 1995.
The Bank provides certain health and life insurance benefits for eligible
retired employees. Employees with less than 14 years of service as of January 1,
1995 are not eligible for these benefits. The cost of postretirement health and
life insurance benefits are accrued for during the service lives of employees.
The Bank elected the prospective transition approach, and is amortizing the
transition obligation over a 20 year period. The effect of this accounting
change in 1995 was to decrease net income by approximately $34,000.
Net periodic postretirement benefit cost at December 31, includes the following
components:
<TABLE>
<CAPTION>
1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Service Cost $ 3,748 $ 3,344
Amortization of transition obligation 18,978 18,978
Interest on APBO less interest on expected benefit payments 24,976 26,238
- --------------------------------------------------------------------------------
Net periodic postretirement benefit costs $ 47,702 $ 48,560
- --------------------------------------------------------------------------------
</TABLE>
A 10 percent annual rate of increase in the per capita costs of covered health
care benefits was assumed for 1996, gradually decreasing to 5.5 percent by the
year 2005. Increasing the assumed health care cost trend rates by one percentage
point would increase the accumulated postretirement benefit obligation as of
December 31, 1996 by $23,000 and increase the aggregate of the service cost and
interest cost components of net periodic post retirement benefit cost for 1996
by $11,300. A discount rate of 7.25% was used to determine the accumulated
postretirement obligation.
23
<PAGE>
1996 Annual Report
Notes to Financial Statements
Year ended December 31, 1996
The funded status of the plan as of December 31, is as follows:
<TABLE>
<CAPTION>
1996 1995
-------------------------------------------------------------------------------------
Accumulated Postretirement Benefit Obligation (APBO):
<S> <C> <C>
Retirees $ 277,142 $ 289,967
Other active plan participants 92,110 89,137
-------------------------------------------------------------------------------------
Total APBO 369,252 379,104
Plan Assets 0 0
-------------------------------------------------------------------------------------
APBO in excess of plan assets (369,252) (379,104)
Unrecognized portion of net obligation at transition 292,887 311,865
Unrecognized net loss 12,779 33,515
-------------------------------------------------------------------------------------
Accrued postretirement benefit cost $ (63,586) $ (33,724)
=====================================================================================
</TABLE>
The Bank has a Salary Deferral Program which covers employees who have completed
one year of service (1,000 hours per year) and are 21 years of age. The plan
includes a Section 401(k) provision as defined under the Internal Revenue Code.
The 401(k) provision permits employees to contribute the lessor of $9,500, or
15% of their total compensation on a pretax basis for the plan year ended
December 31, 1996. The Bank's contributions are at the discretion of the board
of directors. Bank contributions associated with the Plan amounted to $35,400,
$0 and $23,193 for the years ended December 31, 1996, 1995, and 1994,
respectively.
Note 10: Deferred Compensation and Supplemental Retirement Plans
The Bank maintains optional deferred compensation plans for its directors
whereby fees normally received are deferred and paid by the Bank based upon a
payment schedule commencing at age 65 and continue monthly for 10 years.
Directors must serve on the board for a minimum of 5 years to be eligible for
the Plan. At December 31, 1996 and 1995, other liabilities include approximately
$539,000 and $497,000, respectively, relating to deferred compensation. Deferred
compensation expense for the years ended December 31, 1996, 1995 and 1994
amounted to approximately $49,000, $39,000 and $40,000, respectively.
The Bank has a supplemental executive retirement plan and a director emeritus
plan for the benefit of directors and certain executive officers. The plans have
been funded with single premium life insurance policies on the participating
directors and officers, with the Bank as owner and beneficiary of the policies.
Cash surrender value related to these policies approximates $3,190,171 at
December 31, 1996 and $3,052,000 at December 31, 1995 and is included in other
assets. At December 31, 1996 and 1995, other liabilities include approximately
$280,853 and $164,000 accrued under these plans. Compensation expense includes
approximately $131,000, $121,000 and $53,000 relating to the supplemental
executive retirement plan and director emeritus plan for 1996, 1995 and 1994,
respectively.
Note 11: Employee Stock Ownership Plan
Concurrent with formation of the mutual holding company in 1995, the Bank
established an externally leveraged Employee Stock Ownership Plan (ESOP) for
employees who have attained age 21 and who have completed a 12 month period of
employment with the Bank during which they worked at least 1,000 hours. Unearned
ESOP shares are pledged as collateral on the borrowings. As the debt is repaid,
earned shares are released from collateral and become eligible for allocation.
Cash dividends received on unearned shares are allocated among participants and
are reported as compensation expense. Shares are allocated among participants on
the basis of compensation subject to limitations.
The Bank accounts for its ESOP in accordance with AICPA Statement of Position
93-6. Accordingly, the debt of the ESOP is recorded as a liability of, and
guaranteed by, the Bank and the shares pledged as collateral are reported as
unearned ESOP shares in the Banks statement of financial condition. As shares
are earned, the Bank reports compensation expense equal to the current market
price of the shares, and the shares become outstanding for earnings per share
computations. ESOP compensation expense approximated $69,700 and $11,000 for the
fiscal years ended December 31, 1996 and 1995, respectively. Of the 61,716
shares acquired on behalf of the ESOP, 7,815 shares were released at December
31, 1996. The estimated fair value of the remaining 53,901 shares at December
31, 1996 is $505,300.
24
<PAGE>
Looking Forward To Your Future
Notes to Financial Statements
Year ended December 31, 1996
Note 12: Income Taxes
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
1996 1995 1994
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current $568,613 $418,434 $571,069
Deferred (62,775) (58,434) 35,319
-------------------------------------------------------------------------------------
$505,838 $360,000 $606,388
=====================================================================================
</TABLE>
The components of deferred income taxes, included in other assets or
(liabilities), consist of the following:
<TABLE>
<CAPTION>
December 31,
1996 1995
-------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Loan origination fees $147,333 $143,310
Deferred compensation 327,411 264,945
Allowance for loan losses 102,547 --
Valuation reserves -- 129,876
ESOP 7,824 --
Postretirement benefits 21,700 --
Other 6,091 23,930
-------------------------------------------------------------------------------------
612,906 562,061
Liabilities
Allowance for loan losses 0 88,161
Pension benefits 165,081 124,198
Depreciation 21,784 33,770
Investments 377,675 468,288
-------------------------------------------------------------------------------------
564,540 714,417
-------------------------------------------------------------------------------------
Net deferred tax asset (liability) $48,366 $(152,356)
=====================================================================================
</TABLE>
The Bank has determined that no valuation allowance is necessary as it is more
likely than not deferred tax assets will be realized through carryback to
taxable income in prior years, future reversals of existing temporary
differences and through future taxable income.
A reconciliation of the federal statutory income tax rate to the effective
income tax rate at December 31, is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
------------------------------------------------------------------------------------------
Federal statutory income tax rate 34.0% 34.0% 34.0%
State tax, net of federal benefit 2.7 3.8 4.5
Tax-exempt interest income (8.0) (9.7) (3.9)
Dividends received deduction (0.3) (1.7) (0.4)
Other 0.1 0.1 0.4
------------------------------------------------------------------------------------------
Effective income tax rate 28.5% 26.5% 34.6%
==========================================================================================
</TABLE>
25
<PAGE>
1996 Annual Report
Notes to Financial Statements
Year ended December 31, 1996
Note 13: Commitments
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 primarily of commitments to extend credit, which
involve, to varying degrees, elements of credit risk in excess of the amount
recognized in the statement of condition. The contract amount of those
commitments to extend credit reflects the extent of involvement the Bank has in
this particular class of financial instrument. The Banks exposure to credit loss
in the event of nonperformance by the other party to the financial instrument
for commitments to extend credit is represented by the contractual amount of the
instrument. The Bank uses the same credit policies in making commitments as it
does for on-balance sheet instruments.
<TABLE>
<CAPTION>
Contract Amount
---------------------------------------------------------------------------
<S> <C>
Financial instruments whose contract amounts represent
credit risk at December 31:
1996 $6,399,157
1995 5,465,672
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since some of the commitment amounts are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The 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 managements
credit evaluation of the counter party. Collateral held varies but may include
residential real estate and income-producing commercial properties.
The Bank leases land for a branch under an operating lease expiring in 2013.
Rent expense totaled approximately $14,000 in 1996, and $13,000 in 1995 and
1994. The lease provides for renewal options for two 10 year periods at
specified amounts ranging from $18,000 to $24,000 per year. Rental payments are
subject to increases based upon the preceding years Revised Consumer Price
Index, but limited to 5% in any one year. Approximate minimum rental commitments
for the noncancelable operating lease is as follows:
<TABLE>
<S> <C>
Year ending December 31:
1997 $ 14,200
1998 15,200
1999 15,200
2000 15,200
2001 15,200
Thereafter 216,800
---------------------------------------------------------------------------
Total minimum lease payments $291,800
===========================================================================
</TABLE>
Note 14: Dividends and Restrictions
The board of trustees of the Holding Company will determine whether the Holding
Company will waive the receipt of dividends declared by the Bank each time the
Bank declares a dividend, which is expected to be on a quarterly basis. The
Holding Company may elect to receive dividends and utilize such funds to pay
expenses and purchase common stock in the open market. The Federal Reserve Bank
(the "FRB") has indicated that (i) the Holding Company shall provide the FRB
annually with written notice of its intent to waive its dividends prior to the
proposed date of the dividend, and the FRB shall have the authority to approve
or deny any dividend waiver request; (ii) if a waiver is granted, dividends
waived by the Holding Company will not be available for payment to the minority
shareholders and such amounts will be excluded from the Banks capital accounts
for purposes of calculating dividend payments to minority shareholders; (iii)
the Bank shall establish a restricted capital account in the amount of any
dividends waived by the Holding Company, and such restricted capital account
would be added to any liquidation account in the Bank established in connection
with a conversion of the Holding Company to stock form and would be maintained
in accordance with OTS requirements. During 1996, the Bank paid cash dividends
totaling $155,250 to the Holding Company.
Retained earnings of the Bank are subject to certain restrictions under New York
State Banking regulations. The amount of retained earnings restricted under
these regulations approximated $3,204,000 as of December 31, 1996.
Note 15: Branch Acquisition
In June 1994, the Bank purchased certain assets and deposits of two branches
which were being held in receivership by the Resolution Trust Corporation. The
total purchase price was allocated, on the basis of relative fair value, to all
identifiable assets and liabilities acquired, as follows:
26
<PAGE>
Looking Forward To Your Future
Notes to Financial Statements
<TABLE>
<CAPTION>
Year ended December 31, 1996
<S> <C>
Cash acquired $37,594,000
Loans 135,000
Other 8,000
Intangible assets 4,736,000
Other liabilities (179,000)
-----------------------------------------------------------------------
Deposit liabilities assumed $42,294,000
=======================================================================
</TABLE>
In 1995, the Bank exercised an option to purchase premises and certain other
assets of these branches for approximately $796,000.
Note 16: Contingencies
On February 6, 1995, the New York Superintendent of Banks ("Superintendent") was
appointed conservator of Nationar, a New York chartered commercial bank owned by
savings banks throughout the state. At February 6, 1995, the Bank was a
stockholder and customer of Nationar. Nationar performed correspondent banking
services including check clearing, demand deposits, and overnight interest-
bearing deposits. The Superintendent froze all assets of Nationar at the time he
was appointed conservator. At February 6, 1995, the Bank had a total of $3.0
million on deposit with Nationar of which $1.7 million was used to fund check
clearing and $1.2 million was recorded as federal funds sold. The Superintendent
has been actively liquidating the businesses and affairs of Nationar. A
provision for possible losses of $240,000 was made for the year ended December
31, 1995. On June 27, 1996, and on December 20, 1996, distributions of $1.4
million and $979,000 were made from the Nationar estate to settle all accepted
claims. The distribution represents a 100% settlement on all accepted claims,
either accorded priority or characterized as a general claim, and a settlement
of post-possession amounts due to the estate of Nationar by the bank (including
$92,000 for debenture claims, unpaid fees, and interest). In connection with
this settlement, the Bank charged $177,000 against the $240,000 reserve
established during 1995, and recognized income of $63,000 associated with the
remaining reserve recovery during 1996. At December 31, 1996, the Bank had
outstanding claims against the Nationar estate of $92,000 for subordinated
debentures. On February 5, 1997, motion papers filed with the court indicated
that the Superintendent is seeking to pay interim dividends of an unspecified
amount to accepted claims for subordinated debentures.
Note 17: Regulatory Matters
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guideline and the regulatory
framework for prompt corrective action, the Bank must meet specific capital
guidelines that involve quantitative measures of the Bank's assets, liabilities,
and certain off-balance sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classifications are also subject to
qualitative 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 amounts and ratios (set forth in the table below)
of total and Tier 1 capital (as defined in the regulations) to risk-weighted
assets (as defined), and of Tier 1 capital (as defined) to average assets (as
defined). Management believes, as of December 31, 1996, that the Bank meets all
capital adequacy requirements to which it is subject and is "well capitalized"
under the regulatory framework for prompt corrective action. To be categorized
as "well Capitalized" the Bank must maintain minimum total risk-based, Tier 1
risk based, and Tier 1 leverage ratios as set forth in the following table.
<TABLE>
<CAPTION>
To be "Well
Capitalized"
For Capital Under Prompt
Adequacy Corrective Action
Actual Purposes Provisions
- ------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total Core Capital
(to Risk Weighted Assets) $21,390,084 18.2% $9,383,121 8.0% $11,728,901 10.0%
Tier 1 Capital
(to Risk Weighted assets) $17,469,452 14.9% $4,691,560 4.0% $ 7,037,340 6.0%
Tier 1 Capital
(to Average Assets) $17,469,452 9.5% $7,381,240 4.0% $ 9,226,550 5.0%
As of December 31, 1995:
Total Core Capital
(to Risk Weighted Assets) $20,751,378 19.5% $8,520,780 8.0% $10,650,975 10.0%
Tier 1 Capital
(to Risk Weighted Assets) $16,514,990 15.5% $4,260,390 4.0% $ 6,390,585 6.0%
Tier 1 Capital
(to Average Assets) $16,514,990 9.3% $7,098,200 4.0% $ 8,872,750 5.0%
</TABLE>
27
<PAGE>
1996 Annual Report
Officers, Directors and Managers
[PHOTO APPEARS HERE]
Chris C. Gagas
[PHOTO APPEARS HERE]
Chris R. Burritt
[PHOTO APPEARS HERE]
Raymond W. Jung
[PHOTO APPEARS HERE]
Bruce E. Manwaring
[PHOTO APPEARS HERE]
L. William Nelson
[PHOTO APPEARS HERE]
Lawrence W. O'Brien
[PHOTO APPEARS HERE]
Victor S. Oakes
[PHOTO APPEARS HERE]
Janette Resnick
[PHOTO APPEARS HERE]
Corte J. Spencer
City Savings Board of Directors
Chris R. Burritt
Chris C. Gagas
Raymond W. Jung
Bruce E. Manwaring
L. William Nelson
Victor S. Oakes
Lawrence W. O'Brien
Janette Resnick
Corte J. Spencer
City Savings Officers:
Chris C. Gagas
Chairman, President
Chief Executive Officer
Barry S. Thompson
Senior Vice President
Thomas W. Schneider
Vice President
Chief Financial Officer
W. David Schermerhorn
Vice President, Loan Administration
Edgar J. Manwaring
Vice President, Loan Origination
Melissa A. Dashnau
Vice President, Corporate Secretary
Gregory L. Mills
Vice President, Marketing,
Branch Administration
James A. Dowd
Controller
Laurie Lockwood
Assistant Controller
Anita A. Austin
Auditor
Pamela S. Knox
Assistant Vice President, Lending
Michele Torbitt
Assistant Vice President
City Savings Branch Managers
Charlene M. Himple
Assistant Vice President,
Plaza Office
Cynthia L. Claflin, Mexico Office
Joyce E. Daniels, Eastside Office
Jeannine M. Crahan, Fulton Office
28
<PAGE>
Looking Forward To Your Future
Services and Shareholder information
City Savings Services
Savings Accounts
Young Investors Club
Prestige Plus Accounts
Prestige Personal Accounts
Business Manager Program
Christmas Club Accounts
Certificates of Deposit
Money Management Accounts
Checking Accounts
NOW Accounts
Business Checking
Check Protection
Checking Line-of-Credit
Home Mortgage Loans
Home Improvement Loans
Home Equity Loans/Lines of Credit
Passbook Loans
Automatic Loan Payments
Commercial Loans
Commercial Lines-of-Credit
Consumer Loans
Education Loans
Safety Deposit Boxes
Money Orders
Travelers Checks
Savings Bank Life Insurance
Investment Services
IRAs
Direct Deposit
Bank-by-Mail
Credit Cards
Free Notary Service
Corporate Headquarters
214 West First Street
Oswego, NY 13126
(315) 343-0057
Annual Meeting
Wednesday, April 30, 1997
10:00 AM
Oswego City Savings Bank Board Room
214 West First St.
Oswego, NY 13126
Stock Listing
Electronic Bulletin Board
Symbol: PBHC
Counsel
Doren P. Norfleet
Oswego City Savings Bank
214 West First Street, Third Floor
Oswego, NY 13126
Special Counsel
Luse Lehman Gorman Pomerenk & Schick
5335 Wisconsin Avenue N.W.
Suite 400
Washington, DC 20015
Independent Auditors
Coopers & Lybrand L.L.P.
One Lincoln Center
Syracuse, NY 13202
Transfer Agent
Chemical Mellon Shareholder
Services L.L.C.
85 Challenger Road
Ridgefield Park, NJ 07660
Investor Relations
Chris C. Gagas
Chairman, President,
Chief Executive Officer
Thomas W. Schneider
Vice President,
Chief Financial Officer
214 West First Street
Oswego, NY 13126
(315) 343-0057
General Inquiries and Reports
A copy of the Bank's 1996 Annual Report to the Federal Deposit Insurance
Corporation, Form F-2, may be obtained without charge by written request of
shareholders to:
Melissa A. Dashnau
Vice President, Corporate Secretary
Oswego City Savings Bank
214 West First Street
Oswego, NY 13126
FDIC Disclaimer
This Annual Report has not been reviewed, or confirmed for accuracy or
relevance, by the FDIC.
29
<PAGE>
1996 Annual Report
Looking
Forward
To Your
Future
Oswego
City
Savings
Bank
MEMBER F.D.I.C
"Looking Forward To Your Future"
OSWEGO: . Main: 343-0057 . Plaza: 343-4483 . East: 343-2577
MEXICO: 963-7248 FULTON: 592-9545
<PAGE>
EXHIBIT 99.2
FEDERAL DEPOSIT INSURANCE CORPORATION
Washington, D.C. 20429
-------------------------------------
FORM F-4
QUARTERLY REPORT UNDER SECTION 13 OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE QUARTER ENDED MARCH 31, 1997
FDIC Certificate No. 36-15977
--------
Oswego City Savings Bank
------------------------------------------------
(Exact name of bank as specified in its charter)
New York
--------------------------------------------------------
(State or jurisdiction of incorporation or organization)
15-0408130
---------------------------------------
(I.R.S. Employer Identification Number)
214 W. 1st Street
Oswego, New York 13126
- --------------------------------------- ----------
(Address of principal executive office) (Zip Code)
Bank's telephone number, including area code: (315) 343-0057
--------------
Not Applicable
--------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Bank (1) has filed all reports required to
be filed by Section 13 of the Securities Exchange Act of 1934 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 No
----- ------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: There were 1,916,666 shares of
the Bank's common stock outstanding as of May 31, 1997.
<PAGE>
OSWEGO CITY SAVINGS BANK
INDEX
PART I FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
- Consolidated Balance Sheets 1
- Consolidated Statements of Income 2
- Consolidated Statement of Shareholder's Equity 3
- Consolidated Statements of Cash Flows 4,5
- Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 7-13
Condition and Results of Operations
PART II OTHER INFORMATION 14,15
SIGNATURES
<PAGE>
OSWEGO CITY SAVINGS BANK
STATEMENTS OF CONDITION
March 31, 1997 (unaudited) and December 31, 1996
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1997 1996
------ ------------- -------------
<S> <C> <C>
Cash and due from banks $ 3,332,731 $ 6,802,959
Federal funds sold 4,745,000 1,550,000
------------- -------------
Total cash and cash equivalents 8,077,731 8,352,959
Investment securities 36,450,707 36,673,089
Mortgage-backed securities 22,990,165 22,829,067
Loans receivable:
Real Estate 100,752,629 99,737,273
Consumer and Other 10,239,312 10,280,125
------------- -------------
Total Loans 110,991,941 110,017,398
Less: Unearned discounts and origination fees 365,431 368,885
Allowance for loan losses 966,567 906,567
------------- -------------
Loans receivable, net 109,659,943 108,741,946
Premises and equipment 3,414,645 3,384,480
Accrued interest receivable 1,402,764 1,466,003
Other real estate 404,071 699,921
Intangible assets 3,841,693 3,920,632
Other assets 4,135,562 3,869,108
------------- -------------
Total Assets $ 190,377,281 $ 189,937,205
============= =============
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Due to depositors $ 158,333,336 $ 158,697,190
Borrowed Funds 8,320,000 7,610,000
Mortgagors' escrow funds 250,808 300,648
Note payable - ESOP 471,976 485,926
Other liabilities 1,531,593 1,453,357
------------- -------------
Total liabilities 168,907,713 168,547,121
Shareholders' equity:
Common stock, par value $1.00 per share; authorized
2,500,000 shares; 1,916,666 shares issued and
outstanding 1,916,666 1,916,666
Paid in Capital 3,754,871 3,750,726
Retained earnings 16,189,731 15,787,666
Unrealized appreciation in securities available for sale 69,053 412,934
Unearned ESOP shares (460,753) (477,908)
------------- -------------
Total shareholders' equity 21,469,568 21,390,084
------------- -------------
$ 190,377,281 $ 189,937,205
============= =============
</TABLE>
The accompanying notes are an integral part of the financial statements
1
<PAGE>
OSWEGO CITY SAVINGS BANK
STATEMENTS OF INCOME
March 31, 1997 and March 31, 1996
(unaudited)
<TABLE>
<CAPTION>
For the three Months Ended
March 31,
--------------------------
1997 1996
---- ----
<S> <C> <C>
Interest and dividend income:
Loans receivable $2,450,032 $2,261,828
Mortgage-backed securities 385,724 169,194
Investment securities 579,789 649,673
Interest-earning deposits 57,008 146,948
----------- -----------
Total interest income 3,472,553 3,227,643
Interest Expense:
Savings and checking deposits 1,569,382 1,569,218
Borrowed Funds 112,875 7,941
----------- -----------
Total interest expense 1,682,257 1,577,159
----------- -----------
Net interest income 1,790,296 1,650,484
Provision for loan losses 61,471 30,000
----------- -----------
Net interest income after provision
for loan losses 1,728,825 1,620,484
----------- -----------
Noninterest Income:
Service charges on deposit accounts 154,316 119,607
Mortgage servicing fees 11,560 10,741
Gain on sale of mortgage-backed
and investment securities and
loans, net -- 3,197
Other charges, commissions & fees 69,246 51,951
----------- -----------
Total noninterest income 235,122 185,496
----------- -----------
Noninterest Expense:
Compensation and employee benefits 618,600 603,601
Occupancy costs 180,489 192,491
Data processing 85,192 86,474
Professional and other services 111,024 96,785
Deposit insurance premiums 8,381 20,099
Amortization 78,939 78,939
Other expenses 190,571 180,056
----------- -----------
Total noninterest expense 1,273,196 1,258,445
----------- -----------
Income before income taxes 690,751 547,535
Income taxes 195,450 153,303
----------- -----------
Net income $495,301 $394,232
=========== ===========
Earnings per share:
Net income $0.26 $0.21
=========== ===========
Dividends declared per share $0.05 $0.05
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements
2
<PAGE>
OSWEGO CITY SAVINGS BANK
STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY
THREE MONTHS ENDED MARCH 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Unrealized
Appreciation
Additional on Unearned
Common Stock Paid in Retained Investment ESOP
Shares Amount Capital Earnings Securities Shares Total
------------ ----------- --------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 1,916,666 $1,916,666 $3,750,726 $15,787,666 $412,934 ($477,908) $21,390,084
Net Income 495,301 495,301
ESOP shares earned 4,145 17,155 21,300
Change in unrealized net appreciation on
investment securities (343,881) (343,881)
Dividends declared (93,236) (93,236)
---------- ----------- ---------- ----------- -------- --------- -----------
Balance, March 31, 1997 1,916,666 $1,916,666 $3,754,871 $16,189,731 $69,053 ($460,753) $21,469,568
========== =========== ========== =========== ======== ========= ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements
3
<PAGE>
OSWEGO CITY SAVINGS BANK
STATEMENTS OF CASH FLOWS
March 31, 1997 and March 31, 1996
(unaudited)
<TABLE>
<CAPTION>
March 31, March 31,
1997 1996
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $495,301 $394,232
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan, investment and other real estate losses 61,471 30,000
Deferred compensation 40,797 40,106
ESOP shares earned 21,300 15,908
Deferred income taxes (24,402) 49,571
Realized gains on investment securities -- (3,197)
Net gain on sale of other real estate -- (1,351)
Depreciation 63,243 64,449
Amortization of intangibles 78,939 78,939
Net amortization of premiums and discounts on
investment securities 19,017 46,546
Net amortization of premiums and discounts on loans (3,454) (1,061)
Decrease (increase) in interest receivable 63,239 (153,779)
Decrease (increase) in other assets 1,076 (232,239)
Increase in other liabilities 76,251 27,889
----------- -----------
Net cash provided by operating activities 892,778 356,013
----------- -----------
INVESTING ACTIVITIES
Purchase of investment securities available for sale (2,358,717) (11,235,552)
Proceeds from maturities and principle reductions of
investment securities held to maturity 600,000 250,000
Proceeds from maturities and principle reductions of
investment securities available for sale 1,227,849 2,725,374
Proceeds from sale of investment securities -- 6,159,783
Net increase in loans (1,042,046) (901,519)
Purchase of premises and equipment (93,408) (74,049)
Proceeds from sale of other real estate owned 361,882 83,878
Increase in surrender value of life insurance (52,685) (32,414)
----------- -----------
Net cash used in investing activities (1,357,125) (3,024,499)
----------- -----------
FINANCING ACTIVITIES
Net increase in demand deposits, NOW accounts savings accounts,
money market deposit accounts and escrow deposits 289,761 1,970,468
Net decrease in time deposits (703,456) (995,956)
Proceeds from borrowings 710,000 --
Repayments of borrowings (13,950) (11,572)
Cash Dividends (93,236) (93,333)
----------- -----------
Net cash provided by financing activities 189,119 869,607
Decrease in cash and cash equivalents (275,228) (1,798,879)
Cash and cash equivalents at beginning of year 8,352,959 12,567,271
----------- -----------
Cash and cash equivalents at end of year $8,077,731 $10,768,392
=========== ===========
</TABLE>
4
<PAGE>
STATEMENTS OF CASH FLOWS
(Continued)
<TABLE>
<CAPTION>
March 31, March 31
1997 1996
------------- ------------
<S> <C> <C>
CASH PAID DURING THE PERIOD FOR:
Interest $1,674,182 $1,576,456
Income Taxes Paid 86,912 0
NON-CASH INVESTING ACTIVITY:
Transfer of loans to other real estate $66,032 $0
Change in unrealized depreciation in
securities available for sale (573,135) (559,473)
</TABLE>
The accompanying notes are an integral part of the financial statements
5
<PAGE>
Oswego City Savings Bank
Notes to Financial Statements
(1) Basis of Presentation
---------------------
The accompanying unaudited financial statements were prepared in accordance
with the instructions for Form F-4 and, therefore, do not include
information for footnotes necessary for a complete presentation of financial
position, results of operations, and cash flows in conformity with generally
accepted accounting principles. The following material under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" is written with the presumption that the users of the interim
financial statements have read, or have access to, the Bank's latest audited
financial statements and notes thereto, together with Management's
Discussion and Analysis of Financial Condition and Results of Operations as
of December 31, 1996 and for the three year period then ended. Therefore,
only material changes in financial condition and results of operations are
discussed in the remainder of part 1.
All adjustments (consisting of only normal recurring accruals) which, in the
opinion of management, are necessary for a fair presentation of the
financial statements have been included in the results of operations for the
three months ended March 31, 1997 and 1996.
Operating results for the three months ended March 31, 1997 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 1997.
(2) Earnings per Share
------------------
Earnings per share are based on the weighted average number of common shares
outstanding during the period. For purposes of computing earnings per share,
only Employee Stock Option Plan ("ESOP") shares that have been committed to
be released are considered outstanding.
Earnings per share have been computed based upon net income for the three
months ended March 31, 1997 and 1996, using 1,862,786 and 1,867,975 weighted
average common shares outstanding, respectively.
6
<PAGE>
OSWEGO CITY SAVINGS BANK
Management's Discussion and Analysis of
Financial Condition and Results of Operation
General
The Bank's net income is primarily dependent on its net interest income, which
is the difference between interest income earned on its investments in mortgage
loans, investment securities and other loans, and its cost of funds consisting
of interest paid on deposits and borrowed funds. The Bank's net income also is
affected by its provision for loan losses, as well as by the amount of
noninterest income, including income from fees and service charges, net gains
and losses on sales of securities, and noninterest expense such as employee
compensation and benefits, deposit insurance premiums, occupancy and equipment
costs, data processing and income taxes. Earnings of the Bank also are affected
significantly by general economic and competitive conditions, particularly
changes in market interest rates, government policies and actions of regulatory
authorities, which events are beyond the control of the Bank. In particular, the
general level of market rates tends to be highly cylical.
For other matters which may affect the Bank's operations and financial
performance, see "Recent Events".
The following discussion reviews the financial condition and the results of
operations of the Bank for the three months ended March 31, 1997.
Financial Condition
Assets
- ------
Total assets increased approximately $440,000, or .2%, to $190.4 million at
March 31, 1997 from $189.9 million at December 31, 1996. For the three months
ended March 31, 1997, loans receivable increased $975,000, or .9%, to $111.0
million from $110.0 at December 31, 1996. The increase in loans is primarily the
result of originations in 1 to 4 family real estate loans and expanded
commercial real estate activities.
Investment securities decreased by approximately $222,000, or .6%, to $36.5
million at March 31, 1997, from $36.7 million at December 31, 1996.
Mortgage-backed securities increased approximately $161,000, or .7%, to $23.0
million from $22.8 million for the same period. Federal funds sold increased
$3.2 million, or 206.1%, to $4.7 million at March 31, 1997, from $1.6 million at
December 31, 1996. The increase in mortgage-backed securities and the
corresponding decreases in investment securities reflects a continuing strategy
to increase the yield in the Bank's securities portfolio by extending maturities
and increasing cash flow through the utilization of real estate backed
amortizing securities.
7
<PAGE>
OSWEGO CITY SAVINGS BANK
Management's Discussion and Analysis of
Financial Condition and Results of Operation
Liabilities
- -----------
Total liabilities increased $361,000, or .2%, to $168.9 million at March 31,
1997 from $168.5 million at December 31, 1996. The increase is primarily
attributable to a $710,000, or 9.3% increase in borrowed funds to $8.3 million
at March 31, 1997 from $7.6 million for the prior year end, as well as a $78,000
increase in other liabilities, partially offset by a reduction in deposits of
$414,000 to $158.6 million from $160.0 million. The growth in borrowed funds is
attributable to the extension of an existing 90 day reverse repurchase agreement
with Morgan Stanley & Company. The borrowed funds are part of a strategy to
leverage the Bank's capital and provide incremental income through the use of
wholesale deposits. The decrease in deposits consist mainly of net withdrawal in
the Bank's passbook savings accounts. Other liabilities increases were the
result of payments made to various vendors in January for normal annual
services. Such payments are accrued against expense over the year.
Liquidity and Capital Resources
- -------------------------------
Shareholders' equity increased $79,000 to $21.5 million at March 31, 1997 from
$21.4 million at December 31, 1996. Increases in shareholder's equity resulted
from net income for the three months ended March 31, 1997 of $495,000, and a
decrease of $21,000 resulting from ESOP shares earned, partially offset by
reductions from dividends declared amounting to $93,000, and a decrease of
$344,000 in the unrealized appreciation on investment securities available for
sale.
The Bank's primary sources of funds are deposits, amortization and prepayment of
loans and maturities of investment securities and other short-term investments,
earnings and funds provided from operations, and borrowings. While scheduled
principal repayments on loans are a relatively predictable source of funds,
deposit flows and loan prepayments are greatly influenced by general interest
rates, economic conditions, and competition. The Bank manages the pricing of
deposits to maintain a desired deposit balance. In addition, the Bank invests
excess funds in short-term interest-bearing instruments and other assets, which
provide liquidity to meet lending requirements. For additional information about
cash flows from the Bank's operating, financing, and investing activities, see
Statements of Cash Flows included in the Financial Statements. The Bank adjusts
its liquidity levels in order to meet funding needs of deposit overflows,
payment of real estate taxes on mortgage loans and loan commitments. The Bank
also adjusts liquidity as appropriate to meet its assets and liability
management objectives. The bankruptcy filing of Bennett Funding Group is not
expected to adversely affect the Bank's liquidity or capital resources, (see
"Recent Events").
8
<PAGE>
OSWEGO CITY SAVINGS BANK
Management's Discussion and Analysis of
Financial Condition and Results of Operation
Results of Operations
The Bank had net income of approximately $495,000, and $394,000 for the three
months ended March 31, 1997, and 1996, respectively. The increase in net income
for the quarter ended March 31, 1997, resulted primarily from an increase in net
interest income of $140,000, or 8.5%, to $1.8 million for the three months ended
March 31, 1997, from $1.7 million for the prior period, as well as a $50,000
increase in noninterest income, partially offset by increases in operating
expenses of $15,000, loan loss provisions of $31,000, and tax expense of
$42,000.
Return on average assets and return on average shareholders' equity were 1.05%
and 9.22%, respectively, for the three months ended March 31, 1997 compared to
.86% and 7.63% for the first quarter of 1996.
Interest Income
- ---------------
Interest income totaled $3.5 million for the quarter ended March 31, 1996, as
compared to $3.2 million for the quarter ended March 31, 1996, an increase of
$245,000, or 7.6%. The increase resulted primarily from an increase of $7.8
million in average interest-earning assets as well as an increase in the yield
on average interest-earning assets to 8.03% from 7.82%.
Interest income on loans receivable totaled $2.5 million and $2.3 million for
the three months ended March 31, 1997 and 1996, respectively. The $188,000, or
8.3%, increase resulted primarily from an increase in the average balance of
loans receivable of $9.7 million, partially offset by a decrease in the average
yield on loans receivable to 8.86% from 8.96%. The increase in the average
balance in loans receivable was primarily due to the origination of one-to-four
family mortgage, commercial real estate and business loans. The decrease in the
yield on average loans receivable was attributable to the lower rates charged on
commercial loans, as compared to consumer loans, as well as downward repricing
of the adjustable rate mortgage portfolio.
Interest income on the mortgage-backed securities portfolio increased by
$217,000 to $386,000 for the three months ended March 31, 1997, from $169,000
for the three months ended March 31, 1996. The increase in interest income on
mortgage-backed securities resulted generally from an increase in the average
balance on mortgage-backed securities of $11.8 million and an increase in the
average yield on mortgage-backed securities to 6.75% from 6.14%. The increase in
the average balance of mortgage-backed securities resulted from a strategy to
redirect the securities portfolio into longer term, real estate backed,
amortizing investments. The increase in the average yield on mortgage-backed
securities resulted from the generally higher interest rates on newly acquired
securities in 1997 compared to those acquired in 1996. The higher yields on
newly acquired securities are generally associated with extension of maturity
duration.
9
<PAGE>
OSWEGO CITY SAVINGS BANK
Management's Discussion and Analysis of
Financial Condition and Results of Operation
Interest income on investment securities decreased for the three months ended
March 31, 1997 to $580,000 from $650,000 for the same period in 1996, a decrease
of 10.8%. The decrease resulted primarily from a decrease in the average balance
of investment securities of $6.2 million partially offset by an increase in the
average yield on investment securities to 6.47% from 6.19% for the quarters
ended March 31, 1997 and 1996, respectively. The decrease in the average balance
of investment securities resulted from the reinvestment of maturing and called
securities primarily into mortgage-backed securities, as well as the sale of
certain lower yielding corporate bonds. The increase in the average yield on
average investment securities was generally attributable to the sale of
investment securities yielding less than 5.50%, which securities lowered the
overall rate of return on the portfolio.
Interest income on interest-earning deposits decreased $90,000, or 61.2%, to
$57,000 from $147,000 for the three months ended March 31, 1997 and 1996,
respectively. The decrease was primarily the result of a decrease of $7.5
million in the average balance of interest-earning deposits, partially offset by
an increase in the average yield on interest earning deposits to 6.22% from
5.25%.
Interest Expense
- ----------------
Interest expense for the quarter ended March 31, 1997 increased by $105,000, or
6.7%, to 1.7 million when compared to the same quarter for 1996. The increase in
interest expense for the period was the result of a $7.8 million increase in the
average balance on borrowed funds. The bank had no borrowings at March 31, 1996.
The average cost of the borrowed funds for the first quarter of 1997 was 5.77%.
Net interest income
- -------------------
Net interest income totaled $1.8 million and $1.7 million for the three months
ended March 31, 1997 and 1996, respectively. The increase of approximately
$140,000, or 8.5%, reflects the increased ratio of average interest-earning
assets to average interest-bearing liabilities to 109.32% from 103.49%,
partially offset by a decrease in the Bank's net interest rate spread to 3.78%
from 3.86%.
10
<PAGE>
OSWEGO CITY SAVINGS BANK
Management's Discussion and Analysis of
Financial Condition and Results of Operation
Provision for Loan Losses
- -------------------------
The Bank maintains an allowance for loan losses based upon a quarterly
evaluation of known and inherent risks in the loan portfolio, which includes a
review of the balances and composition of the loan portfolio as well as
analyzing the level of delinquencies in each segment of the loan portfolio. Loan
loss provisions are based upon management's estimate of the fair value of the
collateral and the Bank's actual loss experience, as well as standards applied
by the FDIC. The Bank established a provision for possible loan losses for the
three months ended March 31, 1997 of $61,000 as compared to a provision of
$30,000 for the three months ended March 31, 1996. The Bank's ratio of allowance
for loan losses to total loans receivable at March 31, 1997 was .87%.
Noninterest Income
- ------------------
Noninterest income consists of servicing income, fee income and gain (loss) on
sales of investment securities and other operating income. Noninterest income
increased approximately $50,000, or 26.7% to $235,000 for the three months ended
March 31, 1997 as compared to $185,000 for the prior year period. This increase
is primarily attributable to an increase of $35,000 in service charges on
deposit accounts, and $17,000 derived from commissions on investment services.
Noninterest Expense
- -------------------
Noninterest expense increased $15,000, or 1.2% to $1.3 million for the three
months ended March 31, 1997, as compared to the same period in 1996. This
increase was primarily attributable to a $15,000, or 2.5%, increase in
compensation and employee benefits.
Income Taxes
- ------------
Income taxes increased approximately $42,000 for the quarter ended March 31,
1997 as compared to the same period in the prior year. This increase was
directly attributable to a $143,000 increase in the Bank's pretax income.
Recent Events
- -------------
On January 14, 1997, the Board of Directors adopted an Agreement and Plan of
Reorganization to reorganize the Bank and its existing mutual holding company
into a two-tier mutual holding
11
<PAGE>
OSWEGO CITY SAVINGS BANK
Management's Discussion and Analysis of
Financial Condition and Results of Operation
company structure (the "Reorganization") with the establishment of a state
chartered corporation as the stock holding company parent of the Bank. Upon
completion of the Reorganization, Pathfinder Bancorp, MHC, the Bank's existing
mutual holding company, will own a majority of the common stock of the new stock
holding company, which will own 100% of the common stock of the Bank. The
Reorganization would be implemented pursuant to an Agreement and Plan of
Reorganization which must be approved by the Bank's stockholders and regulatory
authorities. Pursuant to the Reorganization, each share of Bank common stock
held by existing stockholders of the Bank would be exchanged for a share of
common stock of the stock holding company. The Reorganization of the Bank would
be structured as a tax-free reorganization and would be accounted for in the
same manner as a pooling of interests.
On February 6, 1995, the New York Superintendent of Banks ("Superintendent") was
appointed conservator of Nationar, a New York chartered commercial bank owned by
savings banks throughout the state. At February 6, 1995, the Bank was a
stockholder and customer of Nationar. Nationar performed correspondent banking
services including check clearing, demand deposits, and overnight
interest-bearing deposits. The Superintendent froze all assets of Nationar at
the time he was appointed conservator. At February 6, 1995, the Bank had a total
of $3.0 million on deposit with Nationar of which $1.7 million was used to fund
check clearing and $1.2 million was recorded as federal funds sold. The
Superintendent has been actively liquidating the businesses and affairs of
Nationar. A provision for possible losses of $240,000 was made for the year
ended December 31, 1995. On June 27, 1996, and on December 20, 1996,
distributions of $1.4 million and $979,000 were made from the Nationar estate to
settle all accepted claims. The distribution represents a 100% settlement on all
accepted claims, either accorded priority or characterized as a general claim,
and a settlement of post-possession amounts due to the estate of Nationar by the
Bank (including $92,000 for debenture claims, unpaid fees, and interest). In
connection with this settlement, the Bank charged $177,000 against the $240,000
reserve established during 1995, and accepted into income a recovery of $63,000
for 1996. At December 31, 1996, the Bank had outstanding claims against the
Nationar estate of $92,000 for capital debentures. On April 21, 1997, a
distribution of $23,000 was made to the Bank representing approximately 25% of
the claim for capital debentures. The $23,000 is a recovery for the current year
since the $92,000 was charged off in prior years. The distribution represents
the final settlement of the Nationar bankruptcy with the Bank.
On March 29, 1996, Bennett Funding Group, Inc., head-quartered in Syracuse, NY
filed for Chapter 11 bankruptcy protection from its creditors. At March 29,
1996, Oswego City Savings Bank had credit extended on lease financing
investments through Bennett Funding Group, Inc. and its affiliates of
approximately $1.1 million, in the aggregate. The credit was extended through
the purchase of three separate pools of lease financing packages. One package,
an insured consumer receivable pool of approximately $470,000 secured by
timeshare financing contracts,
12
<PAGE>
OSWEGO CITY SAVINGS BANK
Management's Discussion and Analysis of
Financial Condition and Results of Operation
was paid in full satisfaction in November 1996. A second package is an interim
financing contract for $500,000 to provide pipeline financing for leases which
have yet to be packaged and sold. The third package, for approximately $175,000,
is a pool secured by individual equipment leases. Based upon media reports of
alleged charges by the Securities and Exchange Commission the U.S. Attorney's
office in New York City, and the trustee appointed to administer the affairs of
Bennett Funding Group (the "Trustee") some of the underlying collateral for the
lease financing may be fraudulent. Bank management is closely monitoring the
situation and is diligently pursuing all avenues available to protect its
interest in order to recover its investment to the fullest extent possible. The
current total exposure with Bennett Funding Group and its affiliates, is
approximately $650,000. Based upon reports published by the Trustee, the Bank
has made a specific provision for loan losses for 1996 to cover potential losses
associated with the Bennett lease investments of $420,000. Based upon
preliminary settlement discussions with the trustee, management believes no
additional reserves are necessary.
13
<PAGE>
Part II - Other Information
---------------------------
Legal Proceedings
- -----------------
From time to time, the Bank is involved as a plaintiff or defendant in
various legal actions incident to its business. None of these actions
individually or in the aggregate is believed to be material to the financial
condition of the Bank
Changes in Securities
- ---------------------
Not applicable
Defaults upon Senior Securities
- -------------------------------
Not applicable
Submission of Matters to a Vote of Security Holders
- ---------------------------------------------------
The Bank's Meeting of shareholders was held on April 30, 1997. The
following are the items voted on and the results of the shareholder voting.
1. The election of Bruce E. Manwaring, L. William Nelson, and Victor S.
Oakes to serve as directors of the Bank each for a term of three years or until
his successor has been elected and qualified.
<TABLE>
<CAPTION>
For Withheld
--------- --------
<S> <C> <C>
Bruce Manwaring 1,548,252 189,497
L. William Nelson 1,548,252 189,497
Victor S. Oakes 1,548,252 189,497
</TABLE>
Set forth below are the names of the other directors of the Bank and
their terms of office.
<TABLE>
<CAPTION>
Name Term Expires
------------------- ------------
<S> <C>
Lawrence W. O'Brien 1998
Corte J. Spencer 1998
Janette Resnick 1998
Chris C. Gagas 1998
Chris R. Burritt 1999
Raymond W. Jung 1999
</TABLE>
14
<PAGE>
2. The ratification of the appointment of Coopers and Lybrand, L.L.P. as
auditors for the fiscal year ending December 31, 1997.
<TABLE>
<CAPTION>
For Against Abstain
--------- ------- -------
<S> <C> <C> <C>
Number of Votes 1,548,252 10,125 179,372
</TABLE>
15
<PAGE>
SIGNATURES
Under the requirements of the Securities Exchange Act of 1934, the bank has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
OSWEGO CITY SAVINGS BANK
Date: 13 May 97 /s/ Chris C. Gags
-------------- --------------------------------------------
Chris C. Gagas
Chairman, President, Chief Executive Officer
Date: 13 May 97 /s/ Thomas W. Schneider
-------------- --------------------------------------------
Thomas W. Schneider
Vice President, Chief Financial Officer
<PAGE>
EXHIBIT 99.3
FEDERAL DEPOSIT INSURANCE CORPORATION
Washington, D.C. 20429
-------------------------------------
FORM F-4
QUARTERLY REPORT UNDER SECTION 13 OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE QUARTER ENDED JUNE 30, 1997
FDIC Certificate No. 36-15977
--------
Oswego City Savings Bank
---------------------------------------------
(Exact name of bank as specified in its charter)
New York
----------------------------------------------------------
(State or jurisdiction of incorporation or organization)
15-0408130
---------------------------------------
(I.R.S. Employer Identification Number)
214 W. 1st Street
Oswego, New York 13126
- -------------------------------------- ---------
(Address of principal executive office) (Zip Code)
Bank's telephone number, including area code: (315) 343-0057
--------------
Not Applicable
-------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Bank (1) has filed all reports required to
be filed by Section 13 of the Securities Exchange Act of 1934 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
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: There were 1,916,666 shares of
the Bank's common stock outstanding as of August 13, 1997.
<PAGE>
OSWEGO CITY SAVINGS BANK
INDEX
PART I FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
- Consolidated Balance Sheets 1
- Consolidated Statements of Income 2
- Consolidated Statement of Shareholder's Equity 3
- Consolidated Statements of Cash Flows 4, 5
- Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 7 - 14
Condition and Results of Operations
PART II OTHER INFORMATION 15
SIGNATURES
<PAGE>
OSWEGO CITY SAVINGS BANK
STATEMENTS OF CONDITION
June 30, 1997 (unaudited) and December 31, 1996
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1997 1996
------ ------------- -------------
<S> <C> <C>
Cash and due from banks $4,156,902 $6,802,959
Federal funds sold 2,510,000 1,550,000
------------- -------------
Total cash and cash equivalents 6,666,902 8,352,959
Investment securities 36,787,595 36,536,404
Mortgage-backed securities 22,678,576 22,965,752
Loans:
Real Estate 102,682,774 99,737,273
Consumer and Other 10,108,078 10,280,125
------------- -------------
Total Loans 112,790,852 110,017,398
Less: Unearned discounts and origination fees 364,221 368,885
Allowance for loan losses 1,026,567 906,567
------------- -------------
Loans receivable, net 111,400,064 108,741,946
Premises and equipment 3,544,747 3,384,480
Accrued interest receivable 1,548,939 1,466,003
Other real estate 533,433 699,921
Intangible assets 3,762,754 3,920,632
Other assets 3,976,413 3,869,108
------------- -------------
$190,899,423 $189,937,205
============= =============
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Due to depositors 158,414,968 158,697,190
Borrowed funds 8,050,000 7,610,000
Mortgagors' escrow funds 199,393 300,648
Note payable - ESOP 458,026 485,926
Other liabilities 1,392,195 1,453,357
------------- -------------
Total liabilities 168,514,582 168,547,121
Shareholders' equity:
Common stock, par value $1.00 per share; authorized
2,500,000 shares; 1,916,666 shares issued and outstanding 1,916,666 1,916,666
Paid in Capital 3,762,530 3,750,726
Retained earnings 16,700,983 15,787,666
Unrealized appreciation (depreciation) in securities available for sale 448,685 412,934
Unearned ESOP shares (444,023) (477,908)
------------- -------------
Total shareholders' equity 22,384,841 21,390,084
------------- -------------
$190,899,423 $189,937,205
============= =============
</TABLE>
The accompanying notes are an integral part of the financial statements
1
<PAGE>
OSWEGO CITY SAVINGS BANK
STATEMENTS OF INCOME
For the three months and six months ended
June 30, 1997 (unaudited) and 1996 (unaudited)
<TABLE>
<CAPTION>
For the three Months Ended For The Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest and dividend Income:
Loans receivable $2,448,881 $2,308,041 $4,898,913 $4,569,869
Mortgage-backed securities 389,630 259,068 775,354 428,262
Investment securities 591,902 614,461 1,171,691 1,264,134
Interest-earning deposits 68,752 116,028 125,760 262,976
---------- ---------- ---------- ----------
Total interest income 3,499,164 3,297,598 6,971,717 6,525,241
Interest Expense:
Savings and checking deposits 1,572,159 1,560,180 3,141,541 3,137,339
Borrowed funds 111,929 7,684 224,804 15,625
---------- ---------- ---------- ----------
Total interest expense 1,684,088 1,567,864 3,366,345 3,152,965
Provision for loan losses 65,880 45,000 127,351 75,000
---------- ---------- ---------- ----------
Net Interest Income after provision
for loan losses 1,749,196 1,684,734 3,478,021 3,297,276
Noninterest Income:
Service charges on deposit accounts 184,324 136,409 338,640 256,016
Mortgage servicing fees 11,579 9,682 23,139 20,423
Gain(loss) on sale of mortgage-backed
and investment securities and loans, net 172,053 34,081 172,053 37,278
Other charges, commissions & fees 115,602 51,258 184,848 103,209
---------- ---------- ---------- ----------
Total noninterest income 483,557 231,430 718,679 416,926
---------- ---------- ---------- ----------
Noninterest Expense:
Compensation and employee benefits 610,420 595,663 1,229,020 1,199,264
Occupancy costs 158,078 161,136 338,567 353,627
Data processing 94,944 79,147 180,136 165,621
Professional and other services 152,288 121,846 263,312 218,631
Deposit insurance premiums 9,237 30,031 17,618 50,130
Amortization 78,939 78,939 157,878 157,878
Other expenses 216,420 194,532 406,991 366,647
---------- ---------- ---------- ----------
Total noninterest expense 1,320,325 1,261,294 2,593,521 2,511,798
---------- ---------- ---------- ----------
Income before income taxes 912,428 654,870 1,603,179 1,202,404
Income taxes 270,515 183,364 465,965 336,667
---------- ---------- ---------- ----------
Net income $641,914 $471,506 $1,137,215 $865,737
========== ========== ========== ==========
Earnings per share:
Net income $0.34 $0.25 $0.61 $0.46
========== ========== ========== ==========
Dividends declared per share $0.07 $0.05 $0.12 $0.10
========== ========== ========== ==========
</TABLE>
2
<PAGE>
OSWEGO CITY SAVINGS BANK
STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY
SIX MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Unrealized
Common Stock Additional Appreciation Unearned
------------------------- Paid in Retained on Investment ESOP
Shares Amount Capital Earnings Securities Shares Total
------------ ----------- ----------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 1,916,666 $1,916,666 $3,750,726 $15,787,666 $412,934 ($477,908) $21,390,084
Net Income 1,137,215 1,137,215
Acquisition of unearned ESOP shares 0
ESOP shares earned 11,804 33,885 45,689
Change in unrealized net appreciation on
investment securities 35,751 35,751
Dividends declared (223,898) (223,898)
---------- ----------- ---------- ----------- -------- --------- -----------
Balance, June 30, 1997 1,916,666 $1,916,666 $3,762,530 $16,700,983 $448,685 ($444,023) $22,384,841
========== =========== ========== =========== ======== ========= ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements
3
<PAGE>
OSWEGO CITY SAVINGS BANK
STATEMENTS OF CASH FLOWS
Six months ended June 30, 1997 and 1996
(unaudited)
<TABLE>
<CAPTION>
June 30, June 30,
1997 1996
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $1,137,215 $865,738
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan, investment and other real estate losses 127,351 75,000
Deferred compensation 80,706 79,910
ESOP shares earned 45,689 29,933
Deferred income taxes (121,286) 49,571
Realized (gains)losses on investment securities 12,009 (37,278)
Net gain on sale of other real estate -- 3,602
Depreciation 126,281 127,322
Amortization of intangibles 157,878 157,878
Net amortization of premiums and discounts on
investment securities 39,096 82,772
Net amortization of premiums and discounts on loans (4,664) 6,239
Increase in interest receivable (82,936) (39,653)
(Increase)decrease in other assets (38,301) 1,674,482
(Decrease)increase in other liabilities (180,113) 110,637
------------ ------------
Net cash provided by operating activities 1,298,925 3,186,153
------------ ------------
INVESTING ACTIVITIES
Purchase of investment securities available for sale (4,280,146) (16,796,834)
Proceeds from maturities and principle reductions of
investment securities held to maturity 200,000 250,000
Proceeds from maturities and principle reductions of
investment securities available for sale 3,761,487 5,928,127
Proceeds from sale of investment securities 547,187 9,110,855
Net increase in loans (3,055,595) (4,022,924)
Purchase of premises and equipment (286,548) (174,485)
Proceeds from sale of other real estate owned 441,278 173,610
Increase in surrender value of life insurance (117,370) (64,883)
------------ ------------
Net cash used in investing activities (2,789,707) (5,596,534)
------------ ------------
FINANCING ACTIVITIES
Net (decrease)increase in demand deposits, NOW accounts
savings accounts, money market deposit accounts
and escrow deposits (50,811) 154,556
Net (decrease)increase in time deposits (332,666) 1,976,769
Proceeds from borrowings 440,000 17,030
Repayments of borrowings (27,900) (23,277)
Cash Dividends (223,898) (186,791)
Common stock acquired by ESOP -- (17,030)
------------ ------------
Net cash (used in) provided by financing activities (195,275) 1,921,257
Decrease in cash and cash equivalents (1,686,057) (489,124)
Cash and cash equivalents at beginning of year 8,352,959 12,567,271
------------ ------------
Cash and cash equivalents at end of year $6,666,902 $12,078,147
============ ============
</TABLE>
4
<PAGE>
OSWEGO CITY SAVINGS BANK
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
June 30, June 30,
1997 1996
---------- ----------
<S> <C> <C>
CASH PAID DURING THE PERIOD FOR:
Interest $3,331,996 $3,141,430
Income Taxes Paid 636,912 106,000
NON-CASH INVESTING ACTIVITY:
Transfer of loans to other real estate $274,790 $24,242
Change in unrealized depreciation in
securities available for sale 59,585 (1,171,253)
</TABLE>
The accompanying notes are an integral part of the financial statements
5
<PAGE>
Oswego City Savings Bank
Notes to Financial Statements
(1) Basis of Presentation
---------------------
The accompanying unaudited financial statements were prepared in accordance
with the instructions for Form F-4 and, therefore, do not include
information for footnotes necessary for a complete presentation of financial
position, results of operations, and cash flows in conformity with generally
accepted accounting principles. The following material under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" is written with the presumption that the users of the interim
financial statements have read, or have access to, the Bank's latest audited
financial statements and notes thereto, together with Management's
Discussion and Analysis of Financial Condition and Results of Operations as
of December 31, 1996 and for the three year period then ended. Therefore,
only material changes in financial condition and results of operations are
discussed in the remainder of part 1.
All adjustments (consisting of only normal recurring accruals) which, in the
opinion of management, are necessary for a fair presentation of the
financial statements have been included in the results of operations for the
six months ended June 30, 1997 and 1996.
Operating results for the six months ended June 30, 1997 are not necessarily
indicative of the results that may be expected for the year ending December
31, 1997.
(2) Earnings per Share
------------------
Earnings per share are based on the weighted average number of common shares
outstanding during the period. For purposes of computing earnings per share,
only Employee Stock Option Plan ("ESOP") shares that have been committed to
be released are considered outstanding.
Earnings per share have been computed based upon net income for the six
months ended June 30, 1997 and 1996, using 1,863,761 and 1,868,228 weighted
average common shares outstanding, respectively.
6
<PAGE>
OSWEGO CITY SAVINGS BANK
Management's Discussion and Analysis of
Financial Condition and Results of Operation
General
The Bank's net income is primarily dependent on its net interest income, which
is the difference between interest income earned on its investments in mortgage
loans, investment securities and other loans, and its cost of funds consisting
of interest paid on deposits and borrowed funds. The Bank's net income also is
affected by its provision for loan losses, as well as by the amount of
noninterest income, including income from fees and service charges, net gains
and losses on sales of securities, and noninterest expense such as employee
compensation and benefits, deposit insurance premiums, occupancy and equipment
costs, data processing and income taxes. Earnings of the Bank also are affected
significantly by general economic and competitive conditions, particularly
changes in market interest rates, government policies and actions of regulatory
authorities, which events are beyond the control of the Bank.
In particular, the general level of market rates tends to be highly cyclical.
For other matters which may affect the Bank's operations and financial
performance, see "Recent Events".
The following discussion reviews the financial condition and the results of
operations of the Bank for the three months and six months ended June 30, 1997.
Financial Condition
Assets
- ------
Total assets increased approximately $962,000, or .5%, to $190.9 million at June
30, 1997 from $189.9 million at December 31, 1996. For the six months ended June
30, 1997, loans receivable increased $2.8 million, or 2.5%, to $112.8 million
from $110.0 at December 31, 1996. The increase in loans is primarily the result
of originations in 1 to 4 family real estate loans and commercial real estate
loans.
Investment securities increased by approximately $251,000, or .7%, to $36.8
million at June 30, 1997, from $36.5 million at December 31, 1996.
Mortgage-backed securities decreased approximately $287,000, or 1.3%, to $22.7
million from $23.0 million for the same period. Federal funds sold increased
$960,000, or 61.9%, to $2.5 million at June 30, 1997, from $1.6 million at
December 31, 1996. The increase in investment securities and the corresponding
decrease in mortgage-backed investment securities results from the reinvestment
of principal amortization on mortgage-backed securities into medium term US
agency and corporate debt obligations.
7
<PAGE>
OSWEGO CITY SAVINGS BANK
Management's Discussion and Analysis of
Financial Condition and Results of Operation
Liabilities
- -----------
Total liabilities remained relatively unchanged at $168.5 million at June 30,
1997 compared to December 31, 1996. Deposit decreases were offset by increases
in wholesale borrowings. Deposits decreased by $383,000, or .2%, to $158.6
million at June 30, 1997 from $159.0 million at December 31, 1996. The reduction
in deposits occurred primarily in passbook savings accounts. Borrowed funds
increased $440,000, or 5.8%, to $8.1 million at June 30, 1997 from $7.6 million
December 31, 1996. The growth in borrowed funds is attributable to the extension
of an existing 90 day reverse repurchase agreement. Other liabilities decreased
approximately $61,000 from December 31, 1996 to June 30, 1997. The change in
other liabilities is primarily the result of a reduction in taxes payable.
Liquidity and Capital Resources
- -------------------------------
Shareholders' equity increased $995,000 to $22.4 million at June 30, 1997 from
$21.4 million at December 31, 1996. Increases in shareholder's equity resulted
from net income for the six months ended June 30, 1997 of $1.1 million, a
decrease of $34,000 in unearned ESOP shares, and an increase of $36,000 in the
unrealized appreciation on investment securities available for sale, partially
offset by reductions from dividends declared amounting to $230,000.
The Bank's primary sources of funds are deposits, amortization and prepayment of
loans and maturities of investment securities and other short-term investments,
earnings and funds provided from operations, and borrowings. While scheduled
principal repayments on loans are a relatively predictable source of funds,
deposit flows and loan prepayments are greatly influenced by general interest
rates, economic conditions, and competition. The Bank manages the pricing of
deposits to maintain a desired deposit balance. In addition, the Bank invests
excess funds in short-term interest-bearing instruments and other assets, which
provide liquidity to meet lending requirements. For additional information about
cash flows from the Bank's operating, financing, and investing activities, see
Statements of Cash Flows included in the Financial Statements. The Bank adjusts
its liquidity levels in order to meet funding needs of deposit overflows,
payment of real estate taxes on mortgage loans and loan commitments. The Bank
also adjusts liquidity as appropriate to meet its assets and liability
management objectives.
Results of Operations
- ---------------------
The Bank had net income of approximately $642,000, and $472,000 for the three
months ended June 30, 1997, and 1996, respectively. Net income for the six
months ended June 30, 1997 and 1996 amounted to $1.1 million and $866,000,
respectively. The increase in net income for the
8
<PAGE>
OSWEGO CITY SAVINGS BANK
Management's Discussion and Analysis of
Financial Condition and Results of Operation
six months ended June 30, 1997, resulted primarily from an increase in net
interest income of $233,000, or 6.9%, to $3.6 million for the six months ended
June 30, 1997, from $3.4 million for the prior period, as well as a $302,000
increase in noninterest income, partially offset by increases in operating
expenses of $82,000, loan loss provisions of $52,000, and tax expense of
$129,000.
Return on average assets and return on average shareholders' equity were 1.35%
and 11.79%, respectively, for the three months ended June 30, 1997 compared to
1.03% and 9.02% for the second quarter of 1996.
Interest Income
- ---------------
Interest income totaled $3.5 million for the quarter ended June 30, 1997, as
compared to $3.3 million for the quarter ended June 30, 1996, an increase of
$202,000, or 6.1%. The increase resulted primarily from an increase of $10.0
million in average interest-earning assets while the yield on average
interest-earning assets was 7.99% for both periods.
Interest income totaled $7.0 million for the six months ended June 30, 1997, as
compared to $6.5 million for the same period in 1996, an increase of $447,000,
or 6.9%. The increase resulted primarily from an increase of $9.6 million in
average interest-earning assets as well as an increase in the yield on average
interest-earning assets to 7.99% from 7.91%.
Interest income on loans receivable totaled $2.5 million and $2.3 million for
the three months ended June 30, 1997 and 1996, respectively. The $191,000, or
8.3%, increase resulted primarily from an increase in the average balance of
loans receivable of $7.9 million, partially offset by a decrease in the average
yield on loans receivable to 8.84% from 8.97%. For the six months ended June 30,
1997 and 1996, interest income on loans receivable increased $329,000, or 7.2%.
Average loans receivable increased $8.6 million while the yield on average loans
receivable decreased to 8.84% from 8.97% for the six months ended June 30, 1997
compared to the same period in 1996. The increase in the average balance in
loans receivable was primarily due to the origination of one-to-four family
mortgage, commercial real estate and business loans. The decrease in the yield
on average loans receivable was attributable to the lower rates charged on
commercial loans, as compared to consumer loans, as well as downward repricing
of the adjustable rate mortgage portfolio caused by the relatively lower
interest rate environment.
Interest income on the mortgage-backed securities portfolio increased by
$130,000 to $389,000 for the three months ended June 30, 1997, from $259,000 for
the three months ended June 30,
9
<PAGE>
OSWEGO CITY SAVINGS BANK
Management's Discussion and Analysis of
Financial Condition and Results of Operation
1996. The increase in interest income on mortgage-backed securities resulted
generally from an increase in the average balance on mortgage-backed securities
of $7.3 million and an increase in the average yield on mortgage-backed
securities to 6.84% from 6.70%. For the six months ended June 30, 1997 and 1996,
interest income on mortgage-backed securities was $775,000 and $428,000,
respectively. The increase in interest income resulted primarily from an
increase of $9.4 million in the average balance of mortgage-backed securities
and an increase in the average yield on mortgage-backed securities of 6.83% from
6.38%. The increase in the average balance of mortgage-backed securities
resulted from a strategy to utilize borrowed funds for the direct purchase of
mortgage-backed securities to enhance incremental interest income. The increase
in the average yield on mortgage-backed securities resulted from the extension
of the average duration of the investments.
Interest income on investment securities decreased for the three months ended
June 30, 1997 to $592,000 from $614,000 for the same period in 1996, a decrease
of 3.6%. The decrease resulted primarily from a decrease in the average balance
of investment securities of $1.3 million, as well as, a slight decrease in the
average yield on investment securities to 6.50% from 6.51% for the quarters
ended June 30, 1997 and 1996, respectively. The decrease in the average balance
of investment securities resulted from the reinvestment of maturing and called
securities primarily into the loan portfolio. The average yield on investment
securities remained relatively stable for the three months ended June 30, 1997
when compared to the same period in 1996.
For the six months ended June 30, 1997, interest income on investment securities
decreased $92,000, or 7.3%, to $1.2 million compared to $1.3 million for the
same period in 1995. The decrease resulted primarily from a decrease in the
average balance of investment securities of $3.1 million, partially offset by an
increase in the yield on average investments to 6.42% from 6.38%.
Interest income on interest-earning deposits decreased $47,000, or 40.5%, to
$69,000 from $116,000 for the three months ended June 30, 1997 and 1996,
respectively. The decrease was primarily the result of a decrease of $3.9
million in the average balance of interest-earning deposits, partially offset by
an increase in the average yield on interest-earning deposits to 5.48% from
5.20%. For the six months ended June 30, 1997 and 1996, interest income on
interest-earning deposits decreased $137,000, or 52.1%, to $126,000 compared to
$263,000 for the same period in 1996. The decrease in interest income on
interest-earning deposits was primarily the result of a $5.3 million decrease in
the average balance of interest-earning deposits, partially offset by an
increase in the average yield on interest-earning deposits to 5.33% from 5.23%.
The decrease in the average balance on interest-earning deposits was primarily
due to loan demand exceeding deposit inflows, while the increase in the average
yield on interest-earning deposits was principally due to the increase in the
federal funds rate brought about by the Federal Reserve Banks Open Market
Committee activity in the first quarter of 1997.
10
<PAGE>
OSWEGO CITY SAVINGS BANK
Management's Discussion and Analysis of
Financial Condition and Results of Operation
Interest Expense
- ----------------
Interest expense for the quarter ended June 30, 1997 increased by approximately
$130,000, or 8.3%, to 1.7 million when compared to the same quarter for 1996.
The increase in interest expense for the period was the result of a $6.8 million
increase in the average balance on interest-bearing liabilities, as well as an
increase on the average cost of interest-bearing liabilities to 4.26% from
4.11%. For the six months ended June 30, 1997, interest expense increased
$236,000, or 7.5%, to $3.4 million from $3.1 million for the same period in
1996. The increase in interest expense for the period was the result of a $6.9
million increase in the average balance on interest-bearing liabilities, as well
as an increase on the average cost of interest-bearing liabilities to 4.26% from
4.14%. The increase in the average balance and average cost on interest-bearing
liabilities was principally the result of the use of borrowed funds. For the six
months ended June 30, 1997 the average balance of borrowed funds was $7.9
million and the average cost of the borrowed funds was 5.85%. The bank had no
borrowings at June 30, 1996.
Net interest income
- -------------------
Net interest income totaled $1.8 million and $1.7 million for the three months
ended June 30, 1997 and 1996, respectively. The increase of approximately
$72,000, or 4.1%, reflects the increased ratio of average interest-earning
assets to average interest-bearing liabilities to 110.40% from 108.76%,
partially offset by a decrease in the Bank's net interest rate spread to 3.73%
from 3.88%.
For the six months ended June 30, 1997 and 1996, respectively, net interest
income was $3.6 million and $3.4 million, an increase of $211,000, or 6.2%. The
ratio of average interest earning assets to average interest-bearing liabilities
improved to 110.21% from 108.87%, which more than offset the decrease in the net
interest rate spread to 3.73% from 3.77% when comparing the six months ended
June 30, 1997 to the same period in 1996.
Provision for Loan Losses
- -------------------------
The Bank maintains an allowance for loan losses based upon a quarterly
evaluation of known and inherent risks in the loan portfolio, which includes a
review of the balances and composition of the loan portfolio as well as
analyzing the level of delinquencies in each segment of the loan portfolio. Loan
loss provisions are based upon management's estimate of the fair value of the
collateral and the Bank's actual loss experience, as well as standards applied
by the FDIC. The Bank established a provision for possible loan losses for the
three months ended June 30, 1997 of
11
<PAGE>
OSWEGO CITY SAVINGS BANK
Management's Discussion and Analysis of
Financial Condition and Results of Operation
$66,000 as compared to a provision of $45,000 for the three months ended June
30, 1996. For the six months ended June 30, 1997 and 1996, the provision for
possible loan losses was
$127,000 and $75,000, respectively. The Bank's ratio of allowance for loan
losses to total loans receivable at June 30, 1997 was .91%.
Noninterest Income
- ------------------
Noninterest income consists of servicing income, fee income, net securities
gains (losses) and other operating income. Noninterest income increased
approximately $252,000, or 52.1%, to $484,000 for the three months ended June
30, 1997 as compared to $231,000 for the prior year period. This increase is
primarily attributable to an increase of $48,000 in service charges on deposit
accounts, $65,000 derived from commissions on investment services, and a
$138,000 increase in net securities gains. The gain on securities is unrealized
and results from marking to market holdings in an equity mutual fund.
Noninterest income increased approximately $302,000, or 72.4%, to $719,000 for
the six months ended June 30, 1997 when compared to $417,000 for the same period
in 1996. This increase is primarily comprised of an increase of $83,000 in
service charges on deposit accounts, $82,000 from commissions on investment
services, and the aforementioned increase in net securities gains.
Noninterest Expense
- -------------------
Noninterest expense increased $59,000, or 4.7%, to $1.3 million for the three
months ended June 30, 1997, as compared to the same period in 1996. This
increase was primarily attributable to a $15,000, or 2.5%, increase in
compensation and employee benefits, a $30,000, or 25.0%, increase in
professional services, a $16,000 increase in data processing costs, and a
$22,000 increase in other expenses, partially offset by expense reductions of
$21,000 on deposit insurance premiums.
For the six months ended June 30, 1997, noninterest expense increased $82,000,
or 3.3% to $2.6 million from $2.5 million for the six months ended June 30,
1996. This increase was primarily attributable to a $30,000, or 2.5%, increase
in compensation and employee benefits, a $45,000, or 20.4%, increase in
professional services, a $15,000 increase in data processing costs, and a
$40,000 increase in other expenses, partially offset by expense reductions of
$33,000 on deposit insurance premiums and $15,000 on occupancy expense.
12
<PAGE>
OSWEGO CITY SAVINGS BANK
Management's Discussion and Analysis of
Financial Condition and Results of Operation
Income Taxes
- ------------
Income taxes increased approximately $87,000 for the quarter ended June 30, 1997
as compared to the same period in the prior year. This increase was directly
attributable to a $258,000 increase in the Bank's pretax income.
For the six months ended June 30, 1997 and 1996, income tax expense was $466,000
and $337,000, respectively.
Recent Events
- -------------
On January 14, 1997, the Board of Directors adopted an Agreement and Plan of
Reorganization to reorganize the Bank and its existing mutual holding company
into a two-tier mutual holding company structure (the "Reorganization") with the
establishment of a state chartered corporation as the stock holding company
parent of the Bank. Upon completion of the Reorganization, Pathfinder Bancorp,
MHC, the Bank's existing mutual holding company, will own a majority of the
common stock of the new stock holding company, which will own 100% of the common
stock of the Bank. The Reorganization would be implemented pursuant to an
Agreement and Plan of Reorganization which must be approved by the Bank's
stockholders and regulatory authorities. Pursuant to the Reorganization, each
share of Bank common stock held by existing stockholders of the Bank would be
exchanged for a share of common stock of the stock holding company. The
Reorganization of the Bank would be structured as a tax-free reorganization and
would be accounted for as a pooling of interests.
On March 29, 1996, Bennett Funding Group, Inc., head-quartered in Syracuse, NY
filed for Chapter 11 bankruptcy protection from its creditors. At March 29,
1996, Oswego City Savings Bank had credit extended on lease financing
investments through Bennett Funding Group, Inc. and its affiliates of
approximately $1.1 million, in the aggregate. The credit was extended through
the purchase of three separate pools of lease financing packages. One package,
an insured consumer receivable pool of approximately $470,000 secured by
timeshare financing contracts, was paid in full satisfaction in November 1996. A
second package is an interim financing contract for $500,000 to provide pipeline
financing for leases which have yet to be packaged and sold. The third package,
for approximately $175,000, is a pool secured by individual equipment leases.
Based upon media reports of alleged charges by the Securities and Exchange
Commission the U.S. Attorney's office in New York City, and the trustee
appointed to administer the affairs of Bennett Funding Group (the "Trustee")
some of the underlying collateral for the lease financing may be fraudulent.
Bank management is closely monitoring the situation and is diligently pursuing
all avenues available to protect its interest in order to recover its investment
to the fullest extent possible. The current total exposure with Bennett Funding
Group and its affiliates, is
13
<PAGE>
OSWEGO CITY SAVINGS BANK
Management's Discussion and Analysis of
Financial Condition and Results of Operation
approximately $650,000. Based upon reports published by the Trustee, the Bank
has made a specific provision for loan losses for 1996 to cover potential losses
associated with the Bennett lease investments of $420,000. On August 6, 1997,
the bank received a distribution from the Trustee of $134,000 as a preliminary
settlement of the secured equipment leases. Future receipts will occur as the
lease principal amounts are paid by the lessors up to a maximum of 82% of the
total principal over no greater than five years. Preliminary indications are
that the $500,000 of interim financing contracts will be settled on a $.38 per
dollar basis. Based upon the settlement events and preliminary settlement
discussions with the trustee, management believes no additional reserves are
necessary.
14
<PAGE>
Part II - Other Information
---------------------------
Legal Proceedings
- -----------------
From time to time, the Bank is involved as a plaintiff or defendant in
various legal actions incident to its business. None of these actions
individually or in the aggregate is believed to be material to the financial
condition of the Bank
Changes in Securities
- ---------------------
Not applicable
Defaults upon Senior Securities
- -------------------------------
Not applicable
Submission of Matters to a Vote of Security Holders
- ---------------------------------------------------
None
Other Information
- -----------------
On June 10, 1997, the Board of Directors of the Bank declared a $.07 cash
dividend to shareholders of record as of June 30, 1997, payable on July 15,
1997.
Exhibits and Reports
- --------------------
None
15
<PAGE>
SIGNATURES
Under the requirements of the Securities Exchange Act of 1934, the bank has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
OSWEGO CITY SAVINGS BANK
Date: 13 Aug, 97 /s/ Chris C. Gagas
-------------- --------------------------------------------
Chris C. Gagas
Chairman, President, Chief Executive Officer
Date: 13 Aug, 97 /s/ Thomas W. Schneider
---------------- --------------------------------------------
Thomas W. Schneider
Vice President, Chief Financial Officer
<PAGE>
EXHIBIT 99.4
REVOCABLE PROXY
OSWEGO CITY SAVINGS BANK
SPECIAL MEETING OF SHAREHOLDERS
__________ ___, 1997
The undersigned hereby appoints the official proxy committee consisting of
the Board of Directors with full powers of substitution to act as attorneys and
proxies for the undersigned to vote all shares of Common Stock of the Bank which
the undersigned is entitled to vote at the Special Meeting of Shareholders
("Special Meeting") to be held at the Bank's main office, 214 West First Street
on ___________ ___, 1997, at _____.m. Eastern Standard Time. The official proxy
committee is authorized to cast all votes to which the undersigned is entitled
as follows:
FOR AGAINST ABSTAIN
--- ------- -------
1. Approval of the Oswego City Savings Bank
1997 Stock Option Plan. [_] [_] [_]
2. Approval of the Oswego City Savings Bank [_] [_] [_]
1997 Recognition and Retention Plan.
3. Approval of an Agreement and Plan of [_] [_] [_]
Reorganization providing for the
establishment of Pathfinder Bancorp, as a
stockholding company parent of the Bank
which stock holding company will be
majority owned by Pathfinder Bancorp, MHC,
the Bank's mutual holding company.
The Board of Directors recommends a vote "FOR" each of the listed proposals.
THIS PROXY WILL BE VOTED AS DIRECTED, BUT IF NO INSTRUCTIONS ARE SPECIFIED, THIS
PROXY WILL BE VOTED FOR EACH OF THE PROPOSITIONS STATED ABOVE. IF ANY OTHER
BUSINESS IS PRESENTED AT SUCH SPECIAL MEETING, THIS PROXY WILL BE VOTED AS
DIRECTED BY A MAJORITY OF THE BOARD OF DIRECTORS. AT THE PRESENT TIME, THE BOARD
OF DIRECTORS KNOWS OF NO OTHER BUSINESS TO BE PRESENTED AT THE SPECIAL MEETING.
<PAGE>
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
Should the undersigned be present and elect to vote at the Special Meeting or at
any adjournment thereof and after notification to the Secretary of the Bank at
the Special Meeting of the shareholder's decision to terminate this proxy, then
the power of said attorneys and proxies shall be deemed terminated and of no
further force and effect. This proxy may also be revoked by sending written
notice to the Secretary of the Bank at the address set forth on the Notice of
Special Meeting of Shareholders, or by the filing of a later proxy prior to a
vote being taken on a particular proposal at the Special Meeting.
The undersigned acknowledges receipt from the Bank prior to the execution of
this proxy of a notice of the Special Meeting and a Prospectus/Proxy Statement
dated __________ ___, 1997.
Dated: Check Box if You Plan
------------------------- [_] to Attend Special Meeting
- ------------------------- -----------------------------
PRINT NAME OF SHAREHOLDER PRINT NAME OF SHAREHOLDER
- ------------------------- -----------------------------
SIGNATURE OF SHAREHOLDER SIGNATURE OF SHAREHOLDER
Please sign exactly as your name appears on this card. When signing as
attorney, executor, administrator, trustee or guardian, please give your full
title.
- --------------------------------------------------------------------------------
Please complete and date this proxy and return it promptly
in the enclosed postage-prepaid envelope.
- --------------------------------------------------------------------------------
<PAGE>
EXHIBIT 99.5
FEDERAL DEPOSIT INSURANCE CORPORATION
WASHINGTON, D.C. 20429
Form 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): September 5, 1997
Oswego City Savings Bank
------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 15977-8 15-0408130
- ----------------------------- ---------------------- -----------------------
(State or other jurisdiction (FDIC Certificate No.) (I.R.S. Employer
of incorporation) Identification No.)
Registrant's telephone number, including area code: (315)343-0057
-------------
Not Applicable
------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE>
Item 2. Acquisition or Disposition of Assets.
------------------------------------
On September 5, 1997, Oswego City Savings Bank (the "Bank"), entered into
an Agreement and Plan of Merger (the "Agreement") with Oswego County Savings
Bank which provides, for the combination of the Bank and Oswego County Savings
Bank. As part of the Merger, the Bank will issue to its mutual holding company
parent, Pathfinder Bancorp, MHC additional shares of common stock equal to the
fair value of Oswego County Savings Bank. The number of shares to be issued will
be based on the average bid and asked price of the Bank's common stock over the
ten trading days immediately preceding the closing date.
Consummation of the Acquisition is subject to certain conditions, including
the approval of the Bank's stockholders and receipt of all regulatory approvals.
With those approvals, it is expected that the Acquisition will be completed
during the first half of calendar year 1998. For further information see
Exhibits 2 and 99 which are incorporated by reference.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
------------------------------------------------------------------
The financial statements and pro forma information required to be filed by
this Item are not available at this time. Such information will be filed as an
amendment to this Form 8-K Current Report when the information becomes
available; however, in no event will such information be filed any later than 60
days from the last date on which this Form 8-K was required to be filed.
The following Exhibits are filed as part of this report:
Exhibit 2 Agreement and Plan of Merger between Oswego City Savings Bank
and Oswego County Savings Bank.
Exhibit 99 Joint Press Release of Oswego City Savings Bank and Oswego
County Savings Bank.
2
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Bank has duly caused this report to be signed on its behalf by the undersigned,
hereunto duly authorized.
OSWEGO CITY SAVINGS BANK
DATE: September 5, 1997 By: /s/ Thomas Schneider
------------------------------
3
<PAGE>
Exhibit 2
Agreement and Plan of Merger
Between
Oswego City Savings Bank
and
Oswego County Savings Bank
Dated: September 5, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I
THE MERGER.............................................................. 1
1.1. The Merger........................................................ 1
----------
1.2. Effective Time of the Merger...................................... 2
----------------------------
1.3. Closing........................................................... 2
-------
1.4. Modification of Structure......................................... 2
-------------------------
1.5. Issuance of Common Stock to Bancorp, MHC.......................... 2
----------------------------------------
1.6. Formation of a "Mid-Tier" Stock Holding Company................... 3
-----------------------------------------------
ARTICLE II
EFFECT OF THE MERGER; CERTAIN ACTIONS IN CONNECTION THEREWITH........... 3
2.1. Effect of the Merger.............................................. 3
--------------------
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF CITY SAVINGS AND BANCORP MHC.......... 4
3.1. Corporate Organization............................................ 4
----------------------
3.2. Capitalization.................................................... 5
--------------
3.3. Authorization..................................................... 5
-------------
3.4. No Violation...................................................... 5
------------
3.5. Consents and Approvals............................................ 6
----------------------
3.6. Information Supplied for Inclusion in the OCSB Proxy Statement ... 6
--------------------------------------------------------------
3.7. City Savings Information.......................................... 6
------------------------
3.8. Absence of Certain Changes........................................ 7
--------------------------
3.9. Employee and Employee Benefits Matters............................ 8
--------------------------------------
3.10. Litigation........................................................ 10
----------
3.11. Tax Matters....................................................... 10
-----------
3.12. Environmental Matters............................................. 11
---------------------
3.13. Compliance with Laws and Orders................................... 12
-------------------------------
3.14. Governmental Regulation........................................... 13
-----------------------
3.15. Contracts and Commitments......................................... 13
-------------------------
3.16. Accuracy of Information........................................... 13
-----------------------
3.17. Supplement to City Savings Disclosure Schedule.................... 14
----------------------------------------------
3.18. Title to Assets; Leases........................................... 14
-----------------------
3.19. Reports........................................................... 14
-------
</TABLE>
<PAGE>
<TABLE>
<S> <C>
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF OCSB.................................. 15
4.1. Corporate Organization............................................ 15
----------------------
4.2. Capitalization.................................................... 16
--------------
4.3. Authorization..................................................... 16
-------------
4.4. No Violation...................................................... 16
------------
4.5. Reports and Financial Statements.................................. 17
--------------------------------
4.6. Consents and Approvals............................................ 17
----------------------
4.7. Information Supplied for Inclusion in the City Savings
------------------------------------------------------
Proxy Statement................................................. 17
---------------
4.8. Absence of Certain Changes........................................ 18
--------------------------
4.9. Employee and Employee Benefits Matters............................ 18
--------------------------------------
4.10. Litigation........................................................ 20
----------
4.11. Tax Matters....................................................... 20
-----------
4.12. Environmental Matters............................................. 21
---------------------
4.13. Compliance with Laws and Orders................................... 23
-------------------------------
4.14. Governmental Regulation........................................... 23
-----------------------
4.15. Contracts and Commitments......................................... 23
-------------------------
4.16. Accuracy of Information........................................... 24
-----------------------
4.17. Supplement to OCSB Disclosure Schedule............................ 24
--------------------------------------
4.18. Title to Assets; Leases........................................... 24
-----------------------
ARTICLE V
COVENANTS OF CITY SAVINGS............................................... 25
5.1. Affirmative Covenants............................................. 25
---------------------
5.2. Negative Covenants................................................ 26
------------------
5.3. Report to OCSB.................................................... 28
--------------
5.4. Breaches.......................................................... 28
--------
5.5. Employee Benefit Plans; Employment Arrangements................... 28
-----------------------------------------------
5.6. Filing of Applications............................................ 30
----------------------
5.7. Supplement to City Savings Disclosure Schedule.................... 30
----------------------------------------------
5.8. Confidentiality................................................... 30
---------------
ARTICLE VI.
COVENANTS OF OCSB....................................................... 31
6.1. Affirmative Covenants............................................. 31
---------------------
6.2. Negative Covenants................................................ 31
------------------
6.3. Report to City Savings............................................ 33
----------------------
6.4. Breaches.......................................................... 33
--------
6.5. Supplement to Disclosure Schedule................................. 34
---------------------------------
6.6. Consents and Approvals............................................ 34
----------------------
6.7. OCSB Financial Statements......................................... 34
-------------------------
6.8. Confidentiality................................................... 34
---------------
</TABLE>
<PAGE>
<TABLE>
<S> <C>
ARTICLE VII
ADDITIONAL AGREEMENTS................................................... 34
7.1. OCSB Depositors' Meeting.......................................... 34
------------------------
7.2. Proxy Statement for OCSB Depositors' Meeting...................... 35
--------------------------------------------
7.3. City Savings Stockholders' Meeting................................ 35
----------------------------------
7.4. Proxy Statement for City Savings Stockholders' Meeting............ 35
------------------------------------------------------
7.5. Cooperation: Regulatory Approvals................................. 35
---------------------------------
7.6. Brokers or Finders................................................ 35
------------------
7.7. Additional Agreements: Reasonable Efforts......................... 35
-----------------------------------------
7.8. Release of Information............................................ 36
----------------------
7.9. Executive Officers of Resulting Institution....................... 36
-------------------------------------------
7.10. Indemnification and Insurance Coverage............................ 36
--------------------------------------
7.11. Access to Properties and Records: Confidentiality................. 37
-------------------------------------------------
7.12. Certain Policies.................................................. 38
----------------
7.13. Independent Appraisal of OCSB..................................... 38
-----------------------------
7.14. Bancorp MHC and Stock Holding Company Directors................... 38
-----------------------------------------------
7.15. Charitable Foundation............................................. 38
---------------------
ARTICLE VIII
CONDITIONS TO THE OBLIGATIONS OF CITY SAVINGS........................... 39
8.1. No Material Adverse Effect........................................ 39
--------------------------
8.2. Representations and Warranties.................................... 39
------------------------------
8.3. Performance and Compliance........................................ 39
--------------------------
8.4. No Proceeding or Litigation....................................... 39
---------------------------
8.5. Consents Under Agreements......................................... 39
-------------------------
8.6. No Amendments to Resolutions...................................... 40
----------------------------
8.7. Certificate of OCSB Officers...................................... 40
----------------------------
8.8. Corporate Proceedings............................................. 40
---------------------
ARTICLE IX
CONDITIONS TO THE OBLIGATIONS OF OCSB................................... 40
9.1. No Material Adverse Effect........................................ 40
--------------------------
9.2. Representations and Warranties.................................... 40
------------------------------
9.3. Performance and Compliance........................................ 41
--------------------------
9.4. No Proceeding or Litigation....................................... 41
---------------------------
9.5. Consents Under Agreements......................................... 41
-------------------------
9.6. No Amendments to Resolutions...................................... 41
----------------------------
9.7. Corporate Proceedings............................................. 41
---------------------
9.8. Certificate of City Savings Officers.............................. 41
------------------------------------
9.9. Employee Benefit Plans............................................ 42
----------------------
</TABLE>
<PAGE>
<TABLE>
<S> <C>
ARTICLE X
CONDITIONS TO THE OBLIGATIONS OF ALL.................................... 42
10.1. Governmental Approvals........................................... 42
----------------------
10.2. No Injunctions or Restraints..................................... 42
----------------------------
10.3. Depositor and Stockholder Approvals.............................. 43
-----------------------------------
10.4. Corporate Proceedings............................................ 43
---------------------
10.5. Federal Tax Ruling............................................... 43
------------------
10.6. Pooling of Interests............................................. 43
--------------------
ARTICLE XI
TERMINATION............................................................. 43
11.1. Reasons for Termination.......................................... 43
-----------------------
11.2. Effect of Termination............................................ 45
---------------------
ARTICLE XII
MISCELLANEOUS.......................................................... 46
12.1. Nonsurvival of Representations, Warranties and Agreements........ 46
---------------------------------------------------------
12.2. Expenses......................................................... 46
--------
12.3. Waivers: Amendments.............................................. 46
-------------------
12.4. Assignment: Parties in Interest.................................. 46
-------------------------------
12.5. Entire Agreement................................................. 46
----------------
12.6. Captions and Counterparts........................................ 47
-------------------------
12.7. Certain Definitions.............................................. 47
-------------------
12.8. Governing Law.................................................... 47
-------------
12.9. Severability..................................................... 47
------------
12.10. Notices.......................................................... 47
-------
</TABLE>
<PAGE>
SCHEDULES
Schedule 2.1(d)(i) Schedule 4.12(c)
Schedule 2.1(d)(ii) Schedule 4.12(d)
Schedule 2.1(d)(iii) Schedule 4.12(e)
Schedule 2.1(d)(iv) Schedule 4.12(f)
Schedule 3.1 Schedule 4.13
Schedule 3.8 Schedule 4.14
Schedule 3.9(a) Schedule 4.15
Schedule 3.9(b) Schedule 4.16
Schedule 3.11 Schedule 4.17
Schedule 3.12 Schedule 4.18
Schedule 3.12(a) Schedule 4.19(a)
Schedule 3.12(b) Schedule 4.19(b)
Schedule 3.12(c) Schedule 5.2(b)
Schedule 3.12(d) Schedule 5.5(b)
Schedule 3.12(e) Schedule 7.14
Schedule 3.12(f)
Schedule 3.13
Schedule 3.14
Schedule 3.15
Schedule 3.18
Schedule 3.20(a)
Schedule 3.20(b)
Schedule 4.4
Schedule 4.5
Schedule 4.6
Schedule 4.7
Schedule 4.8
Schedule 4.8(a)
Schedule 4.8(b)
Schedule 4.9
Schedule 4.9(a)
Schedule 4.9(b)
Schedule 4.10
Schedule 4.11
Schedule 4.11(a)
Schedule 4.11(b)
Schedule 4.11(c)
Schedule 4.11(d)
Schedule 4.11(e)
Schedule 4.11(f)
Schedule 4.12
Schedule 4.12(a)
Schedule 4.12(b)
<PAGE>
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger, dated as of September 5, 1997 (the
"Agreement"), is entered into by and between Oswego City Savings Bank ("City
Savings"), Pathfinder Bancorp, M.H.C. ("Bancorp MHC"), Pathfinder Bancorp, Inc.,
("Stock Holding Company") and Oswego County Savings Bank ("OCSB").
R E C I T A L S:
- - - - - - - -
1. City Savings is a New York-chartered stock savings bank
headquartered in Oswego, New York, approximately 54.0% of the issued and
outstanding capital stock of which is owned on the date hereof by Bancorp MHC, a
New York-chartered mutual savings bank holding company;
2. The Stock Holding Company is a Delaware corporation that will own
100% of the outstanding common stock of City Savings upon the completion of the
reorganization of City Savings and Bancorp MHC into a two-tier mutual holding
company;
3. OCSB is a New York-chartered mutual savings bank headquartered in
Oswego, New York;
4. The parties desire to provide for a merger (the "Merger") of OCSB
with and into City Savings on or after the Effective Time (as defined in Section
1.2 hereof); and
5. It is intended that OCSB will be merged into City Savings, such
that City Savings will be the surviving institution as a result of the Merger.
In consideration of the premises and the mutual covenants,
representations, warranties, and agreements herein contained, and in order to
set forth the conditions upon which the Merger will be carried out, the parties,
intending to be legally bound, hereby agree as follows:
ARTICLE I
THE MERGER
1.1. The Merger. Subject to the terms and conditions of this Agreement,
----------
and in accordance with the provisions of Section 18(c) of the Federal Deposit
Insurance Act (12 U.S.C. 1828(c)), as amended (the "Bank Merger Act"), and,
Sections 293 and 601 of the New York Banking Law ("NYBL"), and the rules,
regulations and policies promulgated under each of the Bank Merger Act, the
Federal Deposit Insurance Act, and the NYBL (the "Regulations"), at the
Effective Time, OCSB shall merge with and into City Savings, with City Savings
as the surviving institution (the "Merger"), all pursuant to the terms and
conditions set forth herein. Upon the consummation of the Merger, the separate
existence of OCSB shall cease, and City Savings shall continue as the surviving
institution in the Merger.
<PAGE>
1.2. Effective Time of the Merger. As soon as practicable after each of
----------------------------
the conditions set forth in Articles VIII, IX and X hereof have been satisfied
-----------------------
or waived, City Savings and OCSB will file, or cause to be filed, articles of
merger with the New York Banking Department ("Department") for the Merger. The
foregoing articles of merger shall in each case be in the form required by and
executed in accordance with the applicable provisions of the NYBL and the
Regulations. The Merger shall become effective at the time specified by the New
York Banking Department and the New York Secretary of State in its endorsement
of the articles of merger (the "Effective Time").
1.3. Closing. If (a) the Agreement and the transactions contemplated
-------
hereby have been duly approved by the shareholders of City Savings and if
required under the NYBL and the Regulations, the depositors of OCSB, and (b) all
relevant conditions of the Agreement have been satisfied or waived, the closing
(the "Closing") shall take place as promptly as practicable thereafter at the
executive offices of City Savings. At the Closing, the parties hereto will
exchange certificates, letters and other documents as required hereby and will
cause the filing described in Section 1.2 hereof with respect to the Merger to
-----------
be made. Such Closing will take place within five (5) business days of the
satisfaction or waiver of all conditions and/or obligations contained in
Articles VIII, IX and X of this Agreement or such other mutually agreed time.
The date on which the Closing occurs is hereinafter referred to as the "Closing
Date." Notwithstanding the foregoing, in no event shall the Closing Date occur
prior to January 1, 1998.
1.4. Modification of Structure. Notwithstanding any provision of this
-------------------------
Agreement to the contrary, City Savings may elect, subject to the filing of all
necessary applications and the receipt of all required regulatory approvals, to
modify the structure of the transactions contemplated hereby so long as (i)
there are no material adverse federal income tax consequences to OCSB or the
depositors of OCSB as a result of such modification, and (ii) such modification
will not be likely to materially delay or jeopardize receipt of any required
regulatory approvals or of the tax ruling or opinion required hereunder.
1.5. Issuance of Common Stock to Bancorp, MHC. The parties hereto
----------------------------------------
recognize that it is the intent of this Agreement that additional shares of City
Savings common stock equal to the fair value of OCSB shall be transferred to
Bancorp, MHC in connection with the Merger. Accordingly, at the Effective Time,
City Savings shall issue to Bancorp MHC a number of shares of City Savings
common stock equal to the result obtained by dividing the fair value of OCSB by
the market price of City Savings common stock. The market price of City Savings
common stock shall be the average of the bid and asked price as reported on the
Nasdaq Small Cap Market during the ten (10) trading days preceding the Closing
Date. The fair value of OCSB shall be determined by an independent appraisal
firm retained by OCSB, and such fair value shall be determined in accordance
with the FDIC's Regulations and the related policies of the Department and the
FDIC as if OCSB were forming a mutual holding company and conducting a minority
stock offering of 46% of the shares of OCSB (the "OCSB Fair Value").
2
<PAGE>
1.6. Formation of a "Mid-Tier" Stock Holding Company. Nothing in this
-----------------------------------------------
Agreement shall prohibit City Savings and Bancorp MHC from reorganizing into a
mid-tier stock holding company structure (the "Mid-Tier Reorganization") by
establishing the Stock Holding Company which will become the owner of 100% of
the outstanding shares of common stock of City Savings by exchanging one share
of its common stock for each issued and outstanding share of common stock of
City Savings. If the Mid-Tier Reorganization is consummated prior to the
Effective Time, all references to shares issued by City Savings to Bancorp MHC
shall mean shares of the Stock Holding Company.
ARTICLE II
EFFECT OF THE MERGER; CERTAIN ACTIONS IN CONNECTION THEREWITH
2.1. Effect of the Merger.
--------------------
(a) City Savings, as the surviving institution in the Merger, shall
possess all of the properties and rights and shall be subject to all of the
liabilities and obligations of OCSB, all as more fully described in the
Regulations.
(b) The Restated Organization Certificate and Bylaws of City Savings, as
in effect immediately prior to the Effective Time, shall be the Restated
Organization Certificate and Bylaws of City Savings, as the surviving
institution of the Merger.
(c) The officers of City Savings immediately prior to the Effective Time
and the officers of OCSB designated by City Savings, giving effect to Section
-------
7.9 hereof, shall be the officers of City Savings, as the surviving institution
- ---
of the Merger, and shall continue in office until their successors are duly
elected or otherwise duly selected.
(d) The directors of City Savings immediately prior to the Effective
Time and the trustees of OCSB immediately prior to the Effective Time shall be
the directors of City Savings as the surviving institution of the Merger as set
forth at Schedule 2.1(d)(i), and such persons shall serve as directors for the
------------------
terms set forth therein, and shall continue in office until their successors are
duly elected or otherwise selected. The trustees of Bancorp MHC following the
Effective Time shall be those persons set forth at Schedule 2.1(d)(ii) and such
persons shall serve as trustees for the terms set forth therein. In the event
the Bank completes its Mid-Tier Reorganization prior to the Effective Time, the
directors of the Stock Holding Company shall be those persons set forth at
Schedule 2.1(d)(iii) and such persons shall serve as directors for the terms set
- --------------------
forth therein. Directors of City Savings, following the Effective Time, shall
initially receive compensation as set forth at Schedule 2.1(d)(iv).
-------------------
(e) All deposit accounts of OCSB existing immediately prior to the
Merger shall, upon consummation of the Merger, remain insured by the Federal
Deposit Insurance Corporation ("FDIC") to the fullest extent permitted by law
and regulation, and shall become deposit accounts
3
<PAGE>
in City Savings without change in their respective terms, maturity, minimum
required balances or withdrawal value and with the same rights as other deposit
accounts in City Savings.
(f) As depositors of City Savings, all depositors of OCSB as of the
Effective Time shall have the same rights in Bancorp MHC as other depositors of
City Savings, including any right to have priority subscription rights (provided
that such former OCSB depositors otherwise satisfy all criteria to receive such
priority subscription rights) to purchase additional shares of common stock that
may be issued in connection with a mutual-to-stock conversion of Bancorp MHC, or
in any stock offering where subscription rights are granted to depositors of
City Savings.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF CITY SAVINGS AND BANCORP MHC
City Savings and Bancorp MHC hereby represents and warrants to OCSB as
follows:
3.1. Corporate Organization.
----------------------
(a) City Savings is a stock savings bank duly organized and validly
existing and in good standing under the laws of the State of New York. City
Savings has no direct or indirect subsidiaries and, other than City Savings,
Bancorp MHC has no direct or indirect subsidiaries. The activities of Bancorp
MHC are limited solely to holding its investment in (i) City Savings and (ii)
bank accounts. Bancorp MHC is a mutual savings bank holding company duly
organized and validly existing and in good standing under the laws of the State
of New York. All eligible accounts issued by City Savings are insured by the
FDIC to the maximum extent permitted under applicable law. Bancorp MHC is duly
registered as a bank holding company under the Bank Holding Company Act of 1956,
as amended ("BHCA"). Each of City Savings and Bancorp MHC has all requisite
corporate power and authority to own, operate and lease its properties as
presently owned, operated and leased and to engage in the activities and
business now being conducted by it. City Savings is qualified to do business in
each jurisdiction in which the nature of business conducted or assets owned or
leased by it makes such qualification necessary and where a failure to do so
would have a Material Adverse Effect. The Stock Holding Company is duly
organized and validly existing and in good standing in the State of Delaware.
Upon completion of the Mid-Tier Reorganization, the Stock Holding Company shall
have all requisite corporate power and authority to own, operate and lease
properties necessary for its business and to engage in the activities and
business of a bank holding company. The Stock Holding Company will, upon
completion of the Mid-Tier Reorganization, be qualified to do business in each
jurisdiction in which the nature of the business conducted or assets owned or
leased by it makes such qualification necessary and where a failure to do so
will have a Material Adverse Effect.
(b) City Savings and Bancorp MHC have heretofore delivered to OCSB true
and complete copies of their Restated Organization Certificate, Articles of
Incorporation and bylaws in effect on the date hereof. The minute books of City
Savings and Bancorp MHC contain
4
<PAGE>
accurate minutes of all meetings and accurate consents in lieu of meetings of
the Board of Directors (and any committee thereof) of City Savings and Bancorp
MHC recorded therein, and as of the Effective Time such minute books will
contain accurate minutes of all such meetings and such consents in lieu of
meetings respectively held or executed prior thereto. The minute books
accurately reflect all transactions referred to in such minutes and consents in
lieu of meetings and disclose all material corporate actions of the Board of
Directors of City Savings and Bancorp MHC, as the case may be, and all
respective committees thereof. Except as reflected in such minute books, there
are no minutes of meetings or consents in lieu of meetings of the Board of
Directors (or any committee thereof) of City Savings.
3.2. Capitalization. City Savings has authorized capital consisting of
---------------
2,500,000 shares of common stock, par value $1.00 per share ("City Savings
Common Stock") of which 1,916,666 shares are issued and outstanding. Bancorp MHC
owns 1,035,000 shares of City Savings Common Stock. All outstanding shares of
City Savings Common Stock have been duly authorized and validly issued and are
fully paid and nonassessable, and none of the outstanding shares of City Savings
Common Stock has been issued in violation of the preemptive rights of any
person, firm or entity. Except for 88,167 shares of City Savings Common Stock
issuable upon exercise of stock options which have been granted pursuant to the
1997 Oswego City Savings Bank Stock Option Plan, there are no authorized, issued
or outstanding warrants, options, rights, convertible securities, calls,
commitments, subscriptions or agreements of any kind with respect to the
purchase or issuance of any capital stock of City Savings.
3.3. Authorization. The Board of Directors of City Savings and the Board
-------------
of Trustees of Bancorp MHC (as majority stockholder of City Savings) have
approved the Agreement and the transactions contemplated hereby and have
authorized the execution, delivery and performance by City Savings of the
Agreement. Other than the approval by stockholders of City Savings, no other
corporate proceeding on the part of City Savings is necessary to authorize the
Agreement or to consummate the transactions contemplated thereby. City Savings
has full corporate power and authority to enter into the Agreement and to
consummate the transactions contemplated hereby subject to the conditions set
forth in Articles VIII and X of this Agreement. This Agreement has been duly and
-------------------
validly executed and delivered by City Savings and Bancorp MHC and constitutes
the valid and binding obligation of City Savings and Bancorp MHC, enforceable
against them in accordance with its terms, subject to (a) all applicable
bankruptcy, insolvency, moratorium or other similar laws affecting the
enforcement of creditors' rights generally, and (b) the application of equitable
principles if equitable remedies are sought, and (c) the provisions of this
Agreement providing that the Merger will be enforceable only upon approval of
stockholders of City Savings as described in Section 7.3 hereof. Upon
-----------
completion of the Mid-Tier Reorganization, the Board of Directors of the Stock
Holding Company shall ratify this Agreement and take all corporate actions
necessary to complete the transactions contemplated hereby.
3.4. No Violation. Neither the execution and delivery of the Agreement
------------
nor, subject to the receipt of the consents and approvals contemplated by
Section 3.5, the consummation of the transactions contemplated herein will, (a)
- -----------
conflict with, result in the breach of, constitute a
5
<PAGE>
violation of, constitute a default under or accelerate the performance of the
terms of any judgment, order or decree of any court or other governmental agency
to which City Savings or Bancorp MHC may be subject, or any contract, agreement
or instrument to which City Savings or Bancorp MHC is a party or by which City
Savings or Bancorp MHC are bound or committed, or Restated Organization
Certificate of City Savings or the Articles of Incorporation of Bancorp MHC, or
the bylaws of City Savings or Bancorp MHC or, any law, or any rule or regulation
of any governmental agency or authority, or (b) constitute an event that with
the lapse of time or action by a third party could result in a default under any
of the foregoing, or (c) result in the creation of any lien, charge or
encumbrance upon any of the assets or properties of City Savings or Bancorp MHC.
3.5. Consents and Approvals. Other than the receipt of approvals required
----------------------
by the NYBL, the Bank Merger Act, the BHCA and the Regulations, no filing or
registration with, no notice to and no permit, authorization, consent or
approval of the depositors of City Savings or any public or governmental body or
authority or any third party is necessary for the consummation by City Savings
of the transactions contemplated by the Agreement or to enable the parties to
continue the conduct of their business after the Effective Time in a manner
which is consistent with that in which it is presently conducted, except where
the failure to make such filing or obtain such permit, authorization, consent or
approval will not in the aggregate have a Material Adverse Effect. City Savings
knows of no reason (including those relating to fair lending laws or other laws
relating to discrimination, including, without limitation, the Equal Credit
Opportunity Act, the Fair Housing Act, the Community Reinvestment Act and the
Home Mortgage Disclosure Act, and anti-trust or consumer disclosure laws and
regulations) why the regulatory approvals necessary to permit consummation of
the transactions contemplated by this Agreement should not be obtained.
3.6. Information Supplied for Inclusion in the OCSB Proxy Statement. Any
--------------------------------------------------------------
information regarding City Savings or Bancorp MHC supplied by City Savings to
OCSB specifically for inclusion in the OCSB Proxy Statement (as defined in
Section 7.2 hereof) will not contain any untrue statement of a material fact or
- -----------
omit to state a material fact necessary to make the statements therein, in light
of the circumstances in which they were made, not misleading.
3.7. City Savings Information.
------------------------
(a) City Savings has previously delivered or made available to OCSB
accurate and complete copies of the statements of financial condition of City
Savings as of December 31, 1996 and 1995, and the related statements of income,
stockholders' equity and cash flows for the years ended December 31, 1996, 1995
and 1994, in each case accompanied by the audit report of Coopers & Lybrand,
LLP, independent public accountants with respect to City Savings, and the
unaudited statement of financial condition of City Savings as of June 30, 1997
and the related unaudited statements of income and cash flows for the six months
ended June 30, 1997 and the unaudited statement of changes in stockholders'
equity for the six months ended June 30, 1997. The statements of financial
condition of City Savings referred to herein (including the related
6
<PAGE>
notes, where applicable), as well as the statements of financial condition of
City Savings to be delivered pursuant to Section 3.7 hereof, fairly present or
-----------
will fairly present, as the case may be, the condition of City Savings as of the
respective dates set forth therein, and the related statements of income,
stockholders' equity and cash flows (including the related notes, where
applicable) fairly present or will fairly present, as the case may be, the
results of operations, stockholders' equity and cash flows of City Savings for
the respective periods or as of the respective dates set forth therein, subject
in the case of the unaudited interim financial statements, to normal year end
audit adjustments, and any other adjustments described therein, and the absence
of certain footnotes. Except as set forth in Section 3.7 to the City Savings
-----------
Disclosure Schedule, since December 31, 1996 City Savings has not suffered a
Material Adverse Effect and City Savings is not aware of any event or
circumstance, or series of events and circumstances, which is reasonably likely
to result in a Material Adverse Effect to City Savings. The books and records of
City Savings have been, and are being, maintained in accordance with applicable
legal and accounting requirements and reflect only actual transactions. As of
December 31, 1996, except and to the extent: (i) reflected, disclosed or
provided for in the financial statements referred to above, and; (ii) of
liabilities incurred since December 31, 1996 in the ordinary course of business
and consistent with prudent banking practice, City Savings does not have any
liabilities, whether absolute, accrued, contingent or otherwise, material to the
business, operations, assets or financial condition of City Savings.
(b) Each of the financial statements referred to in Section 3.7(a) has
--------------
been or will be, as the case may be, prepared in accordance with generally
accepted accounting principles consistently applied during the periods involved.
The audits of City Savings have been conducted in accordance with generally
accepted auditing standards. The books and records of City Savings are being
maintained in material compliance with applicable legal and accounting
requirements, and such books and records accurately reflect in all material
respects all dealings and transactions regarding the business, assets,
liabilities and affairs of City Savings.
3.8. Absence of Certain Changes. Since December 31, 1996, and except as
--------------------------
otherwise permitted by this Agreement, City Savings has not, except as set forth
in Schedule 3.8 to the City Savings Disclosure Schedule, (a) incurred any
------------
material obligation or liability (absolute or contingent), except obligations or
liabilities incurred in the ordinary course of business in accordance with past
practices; (b) mortgaged, pledged or subjected to lien or encumbrance (other
than statutory liens for taxes not yet delinquent and landlord liens) any of its
material assets or properties except pledges to secure government deposits and
in connection with repurchase or reverse repurchase agreements; (c) discharged
or satisfied any material lien or encumbrance or paid any obligation or
liability (absolute or contingent), other than current liabilities included in
City Savings's balance sheet as of December 31, 1996, and current liabilities
incurred since the date thereof in the ordinary course of business in accordance
with past practices; (d) sold, exchanged or otherwise disposed of any of its
material capital assets other than in the ordinary course of business in
accordance with past practices; (e) made or modified any wage or salary increase
other than routine periodic increases in salary for employees in the ordinary
course of business and in accordance with past practices or as required by law,
entered into or modified any
7
<PAGE>
employment contract with any officer or salaried employee or instituted any
employee welfare, bonus, stock option, profit sharing, retirement or similar
plan or arrangement; (f) suffered any damage, destruction or loss, whether or
not covered by insurance, materially and adversely affecting its business,
property or assets or waived any rights of value that are material in the
aggregate, considering its business taken as a whole; (g) except in the ordinary
course of business in accordance with past practices, entered, or agreed to
enter, into any agreement or arrangement granting any preferential right to
purchase any of its assets, properties or rights or requiring the consent of any
party to the transfer and assignment of any such assets, properties or rights;
(h) entered into any material transaction outside the ordinary course of its
business in accordance with past practices, except as expressly contemplated by
the Agreement or (i) except in the ordinary course of business in accordance
with past practices or as reflected in the City Savings Financial Statements,
sold or otherwise disposed of any of its material investment securities.
3.9. Employee and Employee Benefits Matters.
--------------------------------------
(a) Schedule 3.9(a) to the City Savings Disclosure Schedule lists (i)
---------------
each pension, profit sharing, bonus, thrift, savings program or arrangement,
which constitutes an "employee pension plan" within the meaning of Section 3(2)
of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
which is maintained by City Savings or to which City Savings contributes for the
benefit of any current or former employee, officer, trustee, consultant or
agent; (ii) each plan, program or arrangement for the provision of medical,
surgical, or hospital care or benefits, benefits in the event of sickness,
accident, disability, death, unemployment, severance, vacation, apprenticeship,
day care, scholarship, prepaid legal services or other-benefits which constitute
an "employee welfare benefit plan" within the meaning of Section 3(1) of ERISA,
which is maintained by City Savings to which City Savings contributes for the
benefit of any current or former employee, officer, trustee, consultant or
agent; and (iii) every other retirement or deferred compensation plan, bonus or
incentive compensation plan or arrangement, severance or vacation pay
arrangement, or other fringe benefit plan, program or arrangement through which
City Savings provides benefits for or on behalf of any current or former
employee, officer, trustee, consultant or agent. City Savings has delivered or
made available to OCSB a true and correct copy of (a) each City Savings Benefit
Plan, (b) the most recent annual report (Form 5500) filed with the Internal
Revenue Service ("IRS") with respect to each City Savings Benefit Plan, if
applicable, (c) each trust agreement and group annuity contract, if any,
relating to such City Savings Benefit Plan, (d) the most recent actuarial report
or valuation relating to a City Savings Benefit Plan subject to Title IV of
ERISA and (e) all rulings and determination letters and any open requests for
rulings or letters that pertain to any City Savings Benefit Plan.
(b) All of the plans, programs and arrangements described in this
Section 3.9 or listed in Schedule 3.9(a) to the City Savings Disclosure Schedule
- ----------- ---------------
(hereinafter referred to as the "City Savings Benefit Plans") that are subject
to ERISA and the Internal Revenue Code ("Code") are in material compliance with
all applicable requirements of ERISA and the Code and all other applicable
federal and state laws, including, without limitation, the reporting and
disclosure requirements of Part I of Title I of ERISA. Each of the City Savings
Benefit Plans that is intended
8
<PAGE>
to be a pension, profit sharing, thrift, or savings plan that is qualified under
Section 401(a) of the Code satisfies the applicable requirements of such
provision and there exist no circumstances that would adversely affect the
qualified status of any such Plan under that section, except with respect to any
required retroactive amendment for which the remedial amendment period has not
yet expired. Except as set forth in Schedule 3.9(b) to the City Savings
---------------
Disclosure Schedule, there is no pending or, to the knowledge of City Savings,
threatened litigation, claim, action, governmental proceeding or investigation
against or relating to any City Savings Benefit Plan which could give rise to
any material liability, and there is no reasonable basis for any material
litigation, claims, actions or proceedings against any such City Savings Benefit
Plan. No City Savings Benefit Plan (or City Savings Benefit Plan fiduciary) has
engaged in a non-exempt "Prohibited Transaction" (as defined in Section 406 of
ERISA and Section 4975(c) of the Code) since the date on which said sections
became applicable to such Plan. There have been no acts or omissions by City
Savings that have given rise to any fines, penalties, taxes or related charges
under Sections 502(c), 502(i) or 4071 of ERISA or Chapter 43 of the Code, or
that may give rise to any material fines, penalties, taxes or related damages
under such laws for which City Savings may be liable. City Savings has no
knowledge of, or any reasonable basis to believe, that any material liability
under Title IV of ERISA has been incurred by City Savings, any former Affiliates
of City Savings or the City Savings Benefit Plans since the effective date of
ERISA that has not been satisfied in full, and that any condition exists that
presents a material risk of incurring a liability under such Title, other than
liability for premiums due the Pension Benefit Guaranty Corporation ("PBGC"),
which payments have been made or will be made when due. With respect to each of
the City Savings Benefit Plans which is subject to Title IV of ERISA, the
present value of accrued benefits under such Plan or Plans, based upon the
actuarial assumptions used for funding purposes in the most recent actuarial
report prepared by such Plan's actuary with respect to such Plan, did not, as of
its latest valuation date, exceed the then current value of the assets of such
Plan allocable to such accrued benefits and City Savings is not aware of any
facts or circumstances that would materially change the funded status of any
such ERISA Plan. Other than as set forth in Schedule 3.9(a), none of the City
---------------
Savings Benefit Plans is a "multi-employer pension plan" as such term is defined
in section 3(37) of ERISA. Except as listed on Schedule 3.9(b) of the City
---------------
Savings Disclosure Schedule, no employee of City Savings will be entitled to any
additional benefits or any acceleration of the time of payment or vesting of any
benefits under any City Savings Benefit Plan as a result of the transactions
contemplated by this Agreement. Other than current or contingent liabilities
previously disclosed on Schedule 3.9(b) of the City Savings Disclosure Schedule,
---------------
neither City Savings nor any City Savings Benefit Plan will have any material
current or contingent liability with respect to any Plan. All group health plans
of City Savings, including any plans of current and former Affiliates of City
Savings that must be taken into account under Section 4980B of the Code or
Section 601 of ERISA or the requirements of any similar state law regarding
insurance continuation, have been operated in material compliance with the group
health plan continuation coverage requirements of Section 4980B of the Code and
Section 601 of ERISA to the extent such requirements are applicable. All
payments due from any City Savings Benefit Plan (or from City Savings with
respect to any City Savings Benefit Plan) have been made, and all amounts
properly accrued to date as liabilities of City Savings that have not yet been
paid have been properly recorded on the books of City Savings.
9
<PAGE>
(c) No amounts payable under the City Savings Benefit Plans, or any
employment, severance or termination agreement between City Savings and any
employee or officer will fail to be deductible for federal income tax purposes
by virtue of section 280G of the Code.
3.10. Litigation. No claims have been asserted and no relief has been
----------
sought against Bancorp MHC or City Savings in any pending litigation or
governmental proceedings or otherwise which would be reasonably likely to result
in City Savings becoming unable to perform its obligations under, and consummate
the transactions contemplated by, this Agreement, or which would be expected to
result in damages or relief which would reasonably likely to have a Material
Adverse Effect .
3.11. Tax Matters. City Savings and Bancorp MHC have timely filed
-----------
(inclusive of applicable extension periods) with the appropriate governmental
agencies all material federal, state and local income, franchise, excise, sales,
use, real and personal property and other tax returns and reports (including
information returns and reports) that are required to be filed, and City Savings
and Bancorp MHC are not materially delinquent in the payment of any taxes shown
on such returns or reports or on any assessments for any such taxes received by
City Savings. There are included in the City Savings Financial Statements
adequate reserves for the payment of all accrued but unpaid material federal,
state and local taxes of City Savings, including interest and penalties, whether
or not disputed for such fiscal years as reflected therein and all fiscal years
prior thereto. City Savings and Bancorp MHC have not executed or filed with the
Internal Revenue Service ("IRS") or any state tax authority any agreement
extending the period for assessment and collection of any federal or state tax,
nor is City Savings or Bancorp MHC a party to any action or proceeding by any
governmental authority for assessment or collection of taxes. There are no
outstanding material assessments or claims for collection of taxes against City
Savings or Bancorp MHC. Except as set forth in Schedule 3.11 to the City Savings
-------------
Disclosure Schedule, the federal income tax returns of City Savings and Bancorp
MHC have been audited by the IRS (or are closed to examination due to the
expiration of the applicable statute of limitations) and no deficiencies were
asserted as a result of such audit which have not been resolved and paid in full
or adequate reserves or accruals established in accordance with generally
accepted accounting principles with respect thereto.
City Savings has not, during the past five (5) years, and Bancorp MHC has
not since its incorporation, received any notice of deficiency, proposed
deficiency or assessment from the IRS or any other governmental agency, with
respect to any federal, state, county or local taxes. No federal or state tax
return of City Savings or Bancorp MHC is currently the subject of any audit by
the IRS or any other governmental agency. During the past five (5) years, in the
case of City Savings, and since its incorporation, in the case of Bancorp MHC,
no material deficiencies have been asserted in connection with the federal and
state income tax returns of City Savings or Bancorp MHC and City Savings and
Bancorp MHC have no reason to believe that any material deficiency would be
asserted relating thereto. Except as disclosed in Schedule 3.11 to the City
-------------
Savings Disclosure Schedule, neither City Savings nor Bancorp MHC is a party to
any agreement providing for allocation or sharing of taxes. Neither City Savings
nor Bancorp MHC has been a
10
<PAGE>
member of an "affiliated group of corporations" (within the meaning of Section
1504(a) of the Code) filing consolidated returns.
3.12. Environmental Matters. For purposes of this Section 3.12, the
--------------------- ------------
following terms shall have the indicated meaning:
"Environmental Law" means any federal, state or local law, statute,
ordinance, rule, regulation, code, license, permit, authorization, approval,
consent, order, judgment, decree, injunction or agreement with any governmental
entity relating to (1) the protection, preservation or restoration of the
environment (including, without limitation, air, water vapor, surface water,
groundwater, drinking water supply, surface soil, subsurface soil, plant and
animal life or any other natural resource), and/or (2) the use, storage,
recycling, treatment, generation, transportation, processing, handling,
labeling, production, release or disposal of Materials of Environmental Concern.
The term Environmental Law includes without limitation (1) the Comprehensive
Environmental Response, Compensation and Liability Act, as amended, 42 U.S.C.
(S)9601, et seq; the Resource Conservation and Recovery Act, as amended, 42
-- ---
U.S.C. (S)6901, et seq; the Clean Air Act, as amended, 42 U.S.C. (S)7401, et
-- --- --
seq; the Federal Water Pollution Control Act, as amended, 33 U.S.C. (S)1251, et
- --- --
seq; the Toxic Substances Control Act, as amended, 15 U.S.C. (S)9601, et seq;
- --- -- ---
the Emergency Planning and Community Right to Know Act, 42 U.S.C. (S)11001, et
--
seq; the Safe Drinking Water Act, 42 U.S.C. (S)300f, et seq; and all comparable
- --- -- ---
state and local laws, and (2) any common law (including without limitation
common law that may impose strict liability) that may impose liability or
obligations for injuries or damages due to, or threatened as a result of, the
presence of or exposure to any Materials of Environmental Concern.
"Environmental Claim" means any written notice from any governmental
authority or third party alleging potential liability (including, without
limitation, potential liability for investigatory costs, cleanup costs,
governmental response costs, natural resources damages, property damages,
personal injuries or penalties) arising out of, based on, or resulting from the
presence, or release into the environment, of any Materials of Environmental
Concern.
"Materials of Environmental Concern" means pollutants, contaminants,
wastes, toxic substances, petroleum and petroleum products and any other
materials regulated under Environmental Laws.
"Loan Portfolio Properties and Other Properties Owned" means those
properties owned, leased or operated by City Savings, including those properties
serving as collateral for any loans made and retained by City Savings or for
which City Savings serves in a trust relationship for the loans retained in
portfolio.
(a) Other than as set forth on Schedule 3.12(a) to the City Savings
----------------
Disclosure Schedule, to the knowledge of City Savings it is in compliance with
all Environmental Laws, except for any violations of any Environmental Law which
would not, singly or in the aggregate, have a material adverse effect on the
business, operations, assets, financial condition or prospects of City Savings.
11
<PAGE>
Other than as set forth on Schedule 3.12 to the City Savings Disclosure
-------------
Schedule, since June 30, 1990, City Savings has not received any communication
alleging that City Savings is not in such compliance and, to the knowledge of
City Savings, there are no present circumstances that would prevent or interfere
with the continuation of such compliance.
(b) Other than as set forth on Schedule 3.12(b) to the City Savings
----------------
Disclosure Schedule, to the knowledge of City Savings, it has not been nor is it
in violation of, or liable under any Environmental Law, except any such
violations or liabilities which would not singly or in the aggregate have a
material adverse effect on the business, operations, assets or financial
condition of City Savings.
(c) Other than as set forth on Schedule 3.12(c) to the City Savings
----------------
Disclosure Schedule, to the knowledge of City Savings, none of the Loan
Portfolio Properties and Other Properties Owned by it has been or is in
violation of or liable under any Environmental Law, except any such violations
or liabilities which singly or in the aggregate would not have a material
adverse effect on the business, operations, assets or financial condition of
City Savings.
(d) Other than as set forth on Schedule 3.12(d) to the City Savings
----------------
Disclosure Schedule, to the knowledge of City Savings, there are no actions,
suits, demands, notices, claims, investigations or proceedings pending or
threatened relating to the liability of the Loan Portfolio Properties and Other
Properties Owned by City Savings under any Environmental Law, including without
limitation any notices, demand letters or requests for information from any
federal or state environmental agency relating to any such liabilities under or
violations of Environmental Law, except such which would not have or result in a
material adverse effect on the business, operations, assets or financial
condition of City Savings.
(e) Other than as set forth on Schedule 3.12(e) to the City Savings
----------------
Disclosure Schedule, to the knowledge of City Savings, there are no past or
present actions, activities, circumstances, conditions, events or incidents that
could reasonably form the basis of any Environmental Claim or other claim or
action or governmental investigation that could result in the imposition of any
liability arising under any Environmental Law against City Savings or against
any person or entity whose liability for any Environmental Claim City Savings
has or may have retained or assumed either contractually or by operation of law,
except such which would not have a material adverse effect on the business,
operations, assets, financial condition or prospects of City Savings.
(f) City Savings has set forth on Schedule 3.12(f) to the City Savings
----------------
Disclosure Schedule, any environmental studies conducted by it during the past
five years with respect to any properties owned by it as of the date hereof.
3.13. Compliance with Laws and Orders. Except as set forth in Schedule
------------------------------- --------
3.13 to the City Savings Disclosure Schedule, neither City Savings nor Bancorp
- ----
MHC has received notice of any violation or alleged material violation of, or,
to the knowledge of City Savings or Bancorp MHC, is subject to any liability
(whether accrued, absolute, contingent, direct or indirect) for past or
12
<PAGE>
continuing material violations of, any law, statute or regulation. Neither City
Savings or Bancorp MHC is in default under, and no event has occurred that, with
the lapse of time or action by a third party or both, could result in a default
under the terms of any judgment, decree, order, writ, rule or regulation of any
governmental authority or court, whether federal, state or local and whether at
law or in equity, where the failure to be in full compliance would reasonably be
expected to result alone or in the aggregate in damages, which would be
reasonably likely to have a Material Adverse Effect.
3.14. Governmental Regulation. City Savings and Bancorp MHC each holds all
-----------------------
material licenses, certificates, permits, franchises and rights from all
appropriate federal, state and other public authorities necessary for the
conduct of their respective businesses; and, between the date hereof and the
Closing Date, City Savings and Bancorp MHC will use their best efforts to
maintain all such licenses, certificates, permits, franchises and rights in
effect. Except as set forth in Schedule 3.14 to the City Savings Disclosure
-------------
Schedule, neither City Savings nor Bancorp MHC is a party or subject to any
agreements, directives, orders or similar arrangements between or involving City
Savings, Bancorp MHC and any federal or state government or regulatory
authority.
3.15. Contracts and Commitments. Except as set forth in Schedule 3.15 to
------------------------- -------------
the City Savings Disclosure Schedule, City Savings is not a party to or bound by
any (a) material lease or license with respect to any property, real or
personal; (b) material contract or commitment for capital expenditures; (c)
material contract or commitment for total expenses for the purchase of
materials, supplies or for the performance of services by third parties for a
period of more than 60 days from the date of this Agreement; (d) material
contract or option for the purchase or sale of any real or personal property
other than in the ordinary course of business; or (e) agreement, arrangement or
understanding relating to the employment, election, retention in office or
severance of any present or former director, officer or employee of City
Savings. To its knowledge, City Savings has performed in all material respects
all obligations required to be performed by them to date and are not in default
under, and no event has occurred which, with the lapse of time or action by a
third party or both, could result in a default resulting in material damages or
other material default under any outstanding mortgage, lease, contract,
commitment or agreement to which City Savings is a party or by which City
Savings is bound or under any provision of its charter or bylaws. Each such
outstanding material mortgage, lease, contract, commitment or agreement is a
valid and legally binding obligation of City Savings subject to (x) all
applicable bankruptcy, insolvency, moratorium or other similar laws affecting
the enforcement of creditors rights generally or the rights of creditors of
savings associations the accounts of which are insured by the FDIC, and (y) the
application of equitable principles if equitable remedies are sought.
3.16. Accuracy of Information. The statements made by City Savings in the
-----------------------
Agreement and in any other written documents executed and/or delivered by or on
behalf of City Savings pursuant to the terms of the Agreement are true and
correct in all material respects. The statements contained in such other
documents or specifically referred to in the Agreement will
13
<PAGE>
be deemed to constitute representations and warranties of City Savings under
this Agreement to the same extent as if set forth herein in full.
3.17. Supplement to City Savings Disclosure Schedule. City Savings will
----------------------------------------------
promptly supplement or amend the City Savings Disclosure Schedule with respect
to any matter hereafter arising that, if existing or occurring at the date of
this Agreement, would have been required to be set forth or described in the
City Savings Disclosure Schedule. No supplement or amendment to the City Savings
Disclosure Schedule will have any effect for the purpose of determining
satisfaction of the condition set forth in Section 9.1 hereof.
-----------
3.18. Title to Assets; Leases.
------------------------
(a) Except for (i) liens and encumbrances specifically disclosed in any
of the financial statements of City Savings referred to in Section 3.7 hereof,
-----------
(ii) landlords' or statutory liens or other liens incurred in the ordinary
course of business and not securing indebtedness for borrowed money and not yet
delinquent, and (iii) liens and encumbrances which are not material in amount
and do not materially impair the value of any property subject thereto or the
use of such property for the purposes for which it is presently used or intended
to be used, City Savings has good and marketable title, free and clear of all
security interests, encumbrances, trust agreements, liens or other adverse
claims, to all its assets and property, real and personal, reflected in the
financial statements referred to in Section 3.7 hereof or acquired thereafter,
-----------
which includes all property and assets used by City Savings that are material to
the conduct of its businesses, except for assets and property disposed of in the
ordinary course of business after December 31, 1996.
(b) City Savings, as lessee, has the right under valid and existing
leases to occupy, use, possess and control all property leased by it in all
material respects as presently occupied, used, possessed and controlled by City
Savings and such leases will not terminate or lapse prior to the Effective Time
or be affected in any material respect by consummation of the transactions
contemplated hereby. Schedule 3.18 contains an accurate listing of each lease
-------------
pursuant to which City Savings acts as lessor or lessee, including the
expiration date and the terms of any renewal options which relate to the same,
as well as a listing of each material real property owned by City Savings and
used in the conduct of its business.
(c) All material real and personal property owned by City Savings or
presently used by it are in an adequate condition (ordinary wear and tear
excepted) and are sufficient to carry on the business of City Savings.
3.19. Reports. City Savings has previously delivered or made available
-------
to OCSB a complete copy of each annual, quarterly or special report and
definitive proxy statement or other communication (other than general
advertising material) provided by City Savings to its stockholders since January
1, 1996, and each such annual, quarterly or special report, definitive proxy
statement or communication, as of its date, complied in all material respects
with any applicable statutes, rules and regulations enforced or promulgated by
any applicable regulatory
14
<PAGE>
agency, and did not contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements made therein, in light of the circumstances under which they
were made, not misleading; provided that information as of a later date shall be
deemed to modify information as of an earlier date. Since January 1, 1996, City
Savings and Bancorp MHC have fully filed with the FRB, the Department and the
FDIC in correct form the monthly, quarterly and annual reports required to be
filed under applicable laws and regulations, and City Savings and Bancorp MHC
have previously delivered or made available to OCSB accurate and complete copies
of all such reports. (The reports and other documents delivered to stockholders
and to the FRB, the Department and the FDIC referenced in this Section 3.19 are
------------
referred to collectively as the "City Savings Reports.")
3.20. Loans, Real Estate Owned, Etc. Except as disclosed in Schedule
----------------------------- --------
3.20(a) of the City Savings Disclosure Schedule, each loan on the books of City
- -------
Savings, including unfunded portions of outstanding lines of credit and loan
commitments, was made and has been serviced in all material respects in
accordance with customary lending standards in the ordinary course of business
and to the best knowledge of City Savings, constitutes the legal, valid and
binding obligation of the obligor named therein, subject to bankruptcy,
insolvency, fraudulent conveyance and other laws of general applicability
relating to or affecting creditors' rights and to general equity principles.
Schedule 3.20(b) discloses: (i) any written or, to the knowledge of City
----------------
Savings, oral loan or similar agreement under the terms of which the obligor is
60 or more days delinquent in payment of principal or interest, or to the best
of City Savings knowledge, in default of any other provision thereof; (ii) a
listing of the real estate owned by City Savings; (iii) unfunded commercial loan
commitments and letters of credit; and (iv) each loan or similar agreement which
has been classified or designated "special mention," "substandard," "doubtful,"
or "loss" by City Savings.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF OCSB
OCSB hereby represents and warrants to City Savings as follows:
4.1. Corporate Organization.
----------------------
(a) OCSB is a mutual savings bank duly organized, validly existing and
in good standing under the laws of the State of New York. All eligible accounts
issued by OCSB are insured by the FDIC to the maximum extent permitted under
applicable law. OCSB has all requisite corporate power and authority to own,
operate and lease its properties as presently owned, operated or leased and to
engage in the activities and business now conducted by it. OCSB is qualified to
do business in each jurisdiction in which the nature of business conducted or
assets owned or leased by it makes such qualification necessary and where a
failure to do so would have a Material Adverse Effect.
15
<PAGE>
(b) OCSB has heretofore delivered to City Savings true and complete
copies of its organization certificate or other chartering instrument and bylaws
in effect on the date hereof. The minute books of OCSB contain accurate minutes
of all meetings and accurate consents in lieu of meetings of the Board of
Trustees (and any committee thereof) of OCSB recorded therein, and as of the
Effective Time such minute books will contain accurate minutes of all such
meetings and such consents in lieu of meetings respectively held or executed
prior thereto. The minute books accurately reflect all transactions referred to
in such minutes and consents in lieu of meetings and disclose all material
corporate actions of the Board of Trustees of OCSB and all committees thereof.
Except as reflected in such minute books, there are no minutes of meetings or
consents in lieu of meetings of the Board of Trustees (or any committee thereof)
of OCSB.
4.2. Capitalization. As of the date hereof, OCSB is a mutual savings bank
--------------
and has no authorized shares of capital stock whatsoever.
4.3. Authorization. The Board of Trustees of OCSB has approved the
-------------
Agreement and the transactions contemplated thereby and authorized the
execution, delivery and performance by OCSB of the Agreement. No other corporate
proceeding on the part of OCSB is necessary to authorize the Agreement or to
consummate the transactions contemplated thereby other than any approval of the
depositors of OCSB as provided in Section 7.1 hereof. OCSB has full corporate
-----------
power and authority to enter into the Agreement and, upon approval of the
depositors of OCSB, if required, in accordance with law and subject to the
additional conditions set forth in Articles IX and X of this Agreement, to
-----------------
consummate the transactions contemplated hereby. This Agreement has been duly
and validly executed and delivered by OCSB and constitutes the valid and binding
obligations of OCSB, enforceable against it in accordance with its terms,
subject to (a) all applicable bankruptcy, insolvency, moratorium, or other
similar laws affecting the enforcement of creditors' rights generally or the
rights of creditors of savings associations the accounts of which are insured by
the FDIC, (b) the application of equitable principles if equitable remedies are
sought, and (c) the provisions of this Agreement providing that the Merger will
be enforceable only upon approval by the depositors of OCSB as described in
Section 7.1 hereof.
- -----------
4.4. No Violation. Neither the execution and delivery of this Agreement
------------
nor, subject to the receipt of the consents and approvals contemplated by
Section 4.6, the consummation of the transactions contemplated herein will (a)
- -----------
conflict with, result in the breach of, constitute a default under or accelerate
the performance of the terms of any judgment, order or decree of any court or
other governmental agency to which OCSB may be subject, or any contract,
agreement or instrument to which OCSB is a party or by which OCSB is bound or
committed, or the charter or the bylaws of OCSB, or, to the knowledge of OCSB
(as defined in Section 12.7(e) hereof), any law, or any rule or regulation of
---------------
any governmental agency or authority, or (b) constitute an event that with the
lapse of time or action by a third party, or both, could result in a default
under any of the foregoing or (c) result in the creation of any material lien,
charge or encumbrance upon any of the assets or properties of OCSB.
16
<PAGE>
4.5. Reports and Financial Statements. OCSB has previously furnished City
--------------------------------
Savings with true and complete copies of its (a) Balance Sheet as of the years
ended September 30, 1996 and 1995, and the related Statements of Income,
Retained Earnings and Cash Flows for the years ended September 30, 1996, 1995,
and 1994, and (b) all other reports filed by OCSB with the FDIC or the
Department since September 30, 1996 (including call reports). The financial
statements and interim financial statements of OCSB included in such reports or
otherwise delivered to City Savings (collectively referred to herein as the
"OCSB Financial Statements") have been prepared in accordance with generally
accepted accounting principles applied on a consistent basis (except as may be
indicated therein or in the notes thereto) and fairly present the financial
position of OCSB as of the dates thereof and the results of its operations and
changes in financial position for the periods then ended, subject, in the case
of the unaudited interim financial statements, to normal year-end audit
adjustments, any other adjustments described therein, and the absence of certain
footnotes. Except as set forth in Schedule 4.5 to the OCSB Disclosure Schedule,
------------
since September 30, 1996 OCSB has not suffered a Material Adverse Effect and
OCSB is not aware of any event or circumstance, or series of events and
circumstances, which is reasonably likely to result in a Material Adverse Effect
to OCSB. The books and records of OCSB have been, and are being, maintained in
accordance with applicable legal and accounting requirements and reflect only
actual transactions. As of September 30, 1996, except and to the extent (i)
reflected, disclosed or provided for in the financial statements referred to
above and (ii) of liabilities incurred since September 30, 1996 in the ordinary
course of business and consistent with prudent banking practice, OCSB does not
have any liabilities, whether absolute, accrued, contingent or otherwise,
material to the business, operations, assets or financial condition of OCSB.
4.6. Consents and Approvals. Other than the receipt of approvals required
----------------------
by the NYBL, the Bank Merger Act, the BHCA the Regulations, and any required
approval of the OCSB depositors as described in Section 7.1 hereof, no filing or
-----------
registration with, no notice to and no permit, authorization; consent or
approval of any public or governmental body or authority or any third party is
necessary for the consummation by OCSB of the transactions contemplated by this
Agreement or to enable the parties to continue the conduct of their business
after the Effective Time in a manner which is consistent with that in which it
is presently conducted, except where the failure to make such filing or obtain
such permit, authorization, consent or approval will not in the aggregate have a
Material Adverse Effect. OCSB knows of no reason (including those relating to
fair lending laws or other laws relating to discrimination, including without
limitation, the Equal Credit Opportunity act, the Fair Housing Act, the
Community Reinvestment Act and the Home Mortgage Disclosure Act, and anti-trust
or consumer disclosure laws and regulations) why the regulatory approvals should
not be obtained.
4.7. Information Supplied for Inclusion in the City Savings Proxy
------------------------------------------------------------
Statement. Any information regarding OCSB supplied by OCSB specifically for
- ---------
inclusion in the City Savings Proxy Statement (as defined in Section 7.3 hereof)
-----------
will not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading.
17
<PAGE>
4.8. Absence of Certain Changes. Since September 30, 1996, and except as
--------------------------
otherwise permitted by this Agreement, OCSB has not, except as set forth in
Schedule 4.8 to the OCSB Disclosure Schedule, (a) incurred any material
- ------------
obligation or liability (absolute or contingent), except obligations or
liabilities incurred in the ordinary course of business in accordance with past
practices; (b) mortgaged, pledged or subjected to lien or encumbrance (other
than statutory liens for taxes not yet delinquent and landlord liens) any of its
material assets or properties except pledges to secure government deposits and
in connection with repurchase or reverse repurchase agreements; (c) discharged
or satisfied any material lien or encumbrance or paid any obligation or
liability (absolute or contingent), other than current liabilities included in
OCSB's balance sheet as of December 31, 1996, and current liabilities incurred
since the date thereof in the ordinary course of business in accordance with
past practices; (d) sold, exchanged or otherwise disposed of any of its material
capital assets other than in the ordinary course of business in accordance with
past practices; (e) made or modified any wage or salary increase other than
routine periodic increases in salary for employees in the ordinary course of
business and in accordance with past practices or as required by law, entered
into or modified any employment contract with any officer or salaried employee
or instituted any employee welfare, bonus, stock option, profit sharing,
retirement or similar plan or arrangement; (f) suffered any damage, destruction
or loss, whether or not covered by insurance, materially and adversely affecting
its business, property or assets or waived any rights of value that are material
in the aggregate, considering its business taken as a whole; (g) except in the
ordinary course of business in accordance with past practices, entered, or
agreed to enter, into any agreement or arrangement granting any preferential
right to purchase any of its assets, properties or rights or requiring the
consent of any party to the transfer and assignment of any such assets,
properties or rights; (h) entered into any material transaction outside the
ordinary course of its business in accordance with past practices, except as
expressly contemplated by the Agreement or (i) except in the ordinary course of
business in accordance with past practices or as reflected in the OCSB Financial
Statements, sold or otherwise disposed of any of its material investment
securities.
4.9. Employee and Employee Benefits Matters.
--------------------------------------
(a) Schedule 4.9(a) to the OCSB Disclosure Schedule lists (i) each
---------------
pension, profit sharing, bonus, thrift, savings program or arrangement, which
constitutes an "employee pension plan" within the meaning of Section 3(2) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), which is
maintained by OCSB or to which OCSB contributes for the benefit of any current
or former employee, officer, trustee, consultant or agent; (ii) each plan,
program or arrangement for the provision of medical, surgical, or hospital care
or benefits, benefits in the event of sickness, accident, disability, death,
unemployment, severance, vacation, apprenticeship, day care, scholarship,
prepaid legal services or other-benefits which constitute an "employee welfare
benefit plan" within the meaning of Section 3(1) of ERISA, which is maintained
by OCSB to which OCSB contributes for the benefit of any current or former
employee, officer, trustee, consultant or agent; and (iii) every other
retirement or deferred compensation plan, bonus or incentive compensation plan
or arrangement, severance or vacation pay arrangement, or other fringe benefit
plan, program or arrangement through which OCSB
18
<PAGE>
provides benefits for or on behalf of any current or former employee, officer,
trustee, consultant or agent. OCSB has delivered or made available to City
Savings a true and correct copy of (a) each OCSB Benefit Plan, (b) the most
recent annual report (Form 5500) filed with the Internal Revenue Service ("IRS")
with respect to each OCSB Benefit Plan, if applicable, (c) each trust agreement
and group annuity contract, if any, relating to such OCSB Benefit Plan, (d) the
most recent actuarial report or valuation relating to a OCSB Benefit Plan
subject to Title IV of ERISA and (e) all rulings and determination letters and
any open requests for rulings or letters that pertain to any OCSB Benefit Plan.
(b) All of the plans, programs and arrangements described in this Section
-------
4.9 or listed in Schedule 4.9(a) to the OCSB Disclosure Schedule (hereinafter
- --- ---------------
referred to as the "OCSB Benefit Plans") that are subject to ERISA and the
Internal Revenue Code ("Code") are in material compliance with all applicable
requirements of ERISA and the Code and all other applicable federal and state
laws, including, without limitation, the reporting and disclosure requirements
of Part I of Title I of ERISA. Each of the OCSB Benefit Plans that is intended
to be a pension, profit sharing, thrift, or savings plan that is qualified under
Section 401(a) of the Code satisfies the applicable requirements of such
provision and there exist no circumstances that would adversely affect the
qualified status of any such Plan under that section, except with respect to any
required retroactive amendment for which the remedial amendment period has not
yet expired. Except as set forth in Schedule 4.9(b) to the OCSB Disclosure
---------------
Schedule, there is no pending or, to the knowledge of OCSB, threatened
litigation, claim, action, governmental proceeding or investigation against or
relating to any OCSB Benefit Plan which could give rise to any material
liability, and there is no reasonable basis for any material litigation, claims,
actions or proceedings against any such OCSB Benefit Plan. No OCSB Benefit Plan
(or OCSB Benefit Plan fiduciary) has engaged in a non-exempt "Prohibited
Transaction" (as defined in Section 406 of ERISA and Section 4975(c) of the
Code) since the date on which said sections became applicable to such Plan.
There have been no acts or omissions by OCSB that have given rise to any fines,
penalties, taxes or related charges under Sections 502(c), 502(i) or 4071 of
ERISA or Chapter 43 of the Code, or that may give rise to any material fines,
penalties, taxes or related damages under such laws for which OCSB may be
liable. OCSB has no knowledge of, or any reasonable basis to believe, that any
material liability under Title IV of ERISA has been incurred by OCSB, any former
Affiliates of OCSB or the OCSB Benefit Plans since the effective date of ERISA
that has not been satisfied in full, and that any condition exists that presents
a material risk of incurring a liability under such Title, other than liability
for premiums due the Pension Benefit Guaranty Corporation ("PBGC"), which
payments have been made or will be made when due. With respect to each of the
OCSB Benefit Plans which is subject to Title IV of ERISA, the present value of
accrued benefits under such Plan or Plans, based upon the actuarial assumptions
used for funding purposes in the most recent actuarial report prepared by such
Plan's actuary with respect to such Plan, did not, as of its latest valuation
date, exceed the then current value of the assets of such Plan allocable to such
accrued benefits and OCSB is not aware of any facts or circumstances that would
materially change the funded status of any such ERISA Plan. Other than as set
forth in Schedule 4.9(a), none of the OCSB Benefit Plans is a "multi-employer
pension plan" as such term is defined in section 3(37) of ERISA. Except as
listed on Schedule 4.9(b) of the OCSB Disclosure Schedule, no
19
<PAGE>
employee of OCSB will be entitled to any additional benefits or any acceleration
of the time of payment or vesting of any benefits under any OCSB Benefit Plan as
a result of the transactions contemplated by this Agreement. Other than current
or contingent liabilities previously disclosed on Schedule 4.9(b) of the OCSB
Disclosure Schedule, neither OCSB nor any OCSB Benefit Plan will have any
material current or contingent liability with respect to any Plan. All group
health plans of OCSB, including any plans of current and former Affiliates of
OCSB that must be taken into account under Section 4980B of the Code or Section
601 of ERISA or the requirements of any similar state law regarding insurance
continuation, have been operated in material compliance with the group health
plan continuation coverage requirements of Section 4980B of the Code and Section
601 of ERISA to the extent such requirements are applicable. All payments due
from any OCSB Benefit Plan (or from OCSB with respect to any OCSB Benefit Plan)
have been made, and all amounts properly accrued to date as liabilities of OCSB
that have not yet been paid have been properly recorded on the books of OCSB.
(c) No amounts payable under the OCSB Benefit Plans, or any employment,
severance or termination agreement between OCSB and any employee or officer will
fail to be deductible for federal income tax purposes by virtue of section 280G
of the Code.
4.10. Litigation. No claims have been asserted and no relief has been
----------
sought against OCSB in any pending litigation or governmental proceedings or
otherwise which would be reasonably likely to result in OCSB becoming unable to
perform its obligations under, and consummate the transaction contemplated by
this Agreement, or which would be expected to result in damages or other relief
which would be reasonably likely to have a Material Adverse Effect.
4.11. Tax Matters. OCSB has timely filed (inclusive of applicable
-----------
extension periods) with the appropriate governmental agencies all material
federal, state and local income, franchise, excise, sales, use, real and
personal property and other tax returns and reports (including information
returns and reports) that are required to be filed, and OCSB is not materially
delinquent in the payment of any taxes shown on such returns or reports or on
any assessments for any such taxes received by OCSB. There are included in the
OCSB Financial Statements adequate reserves for the payment of all accrued but
unpaid material federal, state and local taxes of OCSB, including interest and
penalties, whether or not disputed for such fiscal years as reflected therein
and all fiscal years prior thereto. OCSB has not executed or filed with the
Internal Revenue Service ("IRS") or any state tax authority any agreement
extending the period for assessment and collection of any federal or state tax,
nor is OCSB a party to any action or proceeding by any governmental authority
for assessment or collection of taxes. There is no outstanding material
assessment or claim for collection of taxes against OCSB. Except as set forth in
Schedule 4.11 to the OCSB Disclosure Schedule, the federal income tax returns of
- -------------
OCSB have been audited by the IRS (or are closed to examination due to the
expiration of the applicable statute of limitations) and no deficiencies were
asserted as a result of such audit which have not been resolved and paid in full
or adequate reserves or accruals established in accordance with generally
accepted accounting principles with respect thereto.
20
<PAGE>
OCSB has not, during the past five (5) years, except as disclosed in
Schedule 4.11 to the OCSB Disclosure Schedule, received any notice of
- -------------
deficiency, proposed deficiency or assessment from the IRS or any other
governmental agency, with respect to any federal, state, county or local taxes.
No federal or state tax return of OCSB is currently the subject of any audit by
the IRS or any other governmental agency. During the past five (5) years, no
material deficiencies have been asserted in connection with the federal and
state income tax returns of OCSB and OCSB has no reason to believe that any
material deficiency would be asserted relating thereto. Except as disclosed in
Schedule 4.11 to the OCSB Disclosure Schedule, OCSB is not a party to any
- -------------
agreement providing for allocation or sharing of taxes. OCSB has never been a
member of an "affiliated group of corporations" (within the meaning of Section
1504(a) of the Code) filing consolidated returns, other than the affiliated
group of which OCSB is or OCSB was the common parent.
4.12. Environmental Matters. For purposes of this Section 4.12, the
--------------------- ------------
following terms shall have the indicated meaning:
"Environmental Law" means any federal, state or local law, statute,
ordinance, rule, regulation, code, license, permit, authorization, approval,
consent, order, judgment, decree, injunction or agreement with any governmental
entity relating to (1) the protection, preservation or restoration of the
environment (including, without limitation, air, water vapor, surface water,
groundwater, drinking water supply, surface soil, subsurface soil, plant and
animal life or any other natural resource), and/or (2) the use, storage,
recycling, treatment, generation, transportation, processing, handling,
labeling, production, release or disposal of Materials of Environmental Concern.
The term Environmental Law includes without limitation (1) the Comprehensive
Environmental Response, Compensation and Liability Act, as amended, 42 U.S.C.
(S)9601, et seq; the Resource Conservation and Recovery Act, as amended, 42
-- ---
U.S.C. (S)6901, et seq; the Clean Air Act, as amended, 42 U.S.C. (S)7401, et
-- --- --
seq; the Federal Water Pollution Control Act, as amended, 33 U.S.C. (S)1251, et
- --- --
seq; the Toxic Substances Control Act, as amended, 15 U.S.C. (S)9601, et seq;
- --- -- ---
the Emergency Planning and Community Right to Know Act, 42 U.S.C. (S)11001, et
--
seq; the Safe Drinking Water Act, 42 U.S.C. (S)300f, et seq; and all comparable
- --- -- ---
state and local laws, and (2) any common law (including without limitation
common law that may impose strict liability) that may impose liability or
obligations for injuries or damages due to, or threatened as a result of, the
presence of or exposure to any Materials of Environmental Concern.
"Environmental Claim" means any written notice from any governmental
authority or third party alleging potential liability (including, without
limitation, potential liability for investigatory costs, cleanup costs,
governmental response costs, natural resources damages, property damages,
personal injuries or penalties) arising out of, based on, or resulting from the
presence, or release into the environment, of any Materials of Environmental
Concern.
"Materials of Environmental Concern" means pollutants, contaminants,
wastes, toxic substances, petroleum and petroleum products and any other
materials regulated under Environmental Laws.
21
<PAGE>
"Loan Portfolio Properties and Other Properties Owned" means those
properties owned, leased or operated by OCSB, including those properties serving
as collateral for any loans made and retained by OCSB or for which OCSB serves
in a trust relationship for the loans retained in portfolio.
(a) Other than as set forth on Schedule 4.12(a) to the OCSB Disclosure
----------------
Schedule, to the knowledge of OCSB it is in compliance with all Environmental
Laws, except for any violations of any Environmental Law which would not, singly
or in the aggregate, have a material adverse effect on the business, operations,
assets, financial condition or prospects of OCSB. Other than as set forth on
Schedule 4.12 to the OCSB Disclosure Schedule, since June 30, 1990, OCSB has not
- -------------
received any communication alleging that OCSB is not in such compliance and, to
the knowledge of OCSB, there are no present circumstances that would prevent or
interfere with the continuation of such compliance.
(b) Other than as set forth on Schedule 4.12(b) to the OCSB Disclosure
----------------
Schedule, to the knowledge of OCSB, it neither is, nor has been in violation of,
or liable under any Environmental Law, except any such violations or liabilities
which would not singly or in the aggregate have a material adverse effect on the
business, operations, assets or financial condition of OCSB.
(c) Other than as set forth on Schedule 4.12(c) to the OCSB Disclosure
Schedule, to the knowledge of OCSB, none of the Loan Portfolio Properties and
Other Properties Owned by it has been or is in violation of or liable under any
Environmental Law, except any such violations or liabilities which singly or in
the aggregate would not have a material adverse effect on the business,
operations, assets or financial condition of OCSB.
(d) Other than as set forth on Schedule 4.12(d) to the OCSB Disclosure
----------------
Schedule, to the knowledge of OCSB, there are no actions, suits, demands,
notices, claims, investigations or proceedings pending or threatened relating to
the liability of the Loan Portfolio Properties and Other Properties Owned by
OCSB under any Environmental Law, including without limitation any notices,
demand letters or requests for information from any federal or state
environmental agency relating to any such liabilities under or violations of
Environmental Law, except such which would not have or result in a material
adverse effect on the business, operations, assets or financial condition of
OCSB.
(e) Other than as set forth on Schedule 4.12(e) to the OCSB Disclosure
----------------
Schedule, to the knowledge of OCSB, there are no past or present actions,
activities, circumstances, conditions, events or incidents that could reasonably
form the basis of any Environmental Claim or other claim or action or
governmental investigation that could result in the imposition of any liability
arising under any Environmental Law against OCSB or against any person or entity
whose liability for any Environmental Claim OCSB has or may have retained or
assumed either contractually or by operation of law, except such which would not
have a material adverse effect on the business, operations, assets, financial
condition or prospects of OCSB.
22
<PAGE>
(f) OCSB has set forth on Schedule 4.12(f) to the OCSB Disclosure
----------------
Schedule, any environmental studies conducted by it during the past five years
with respect to any properties owned by it as of the date hereof.
4.13. Compliance with Laws and Orders. Except as set forth in Schedule
------------------------------- --------
4.13 to the OCSB Disclosure Schedule, OCSB has not received notice of any
- ----
violation or alleged material violation of, or, to the knowledge of OCSB, is
subject to any liability (whether accrued, absolute, contingent, direct or
indirect) for past or continuing material violations of, any law, statute or
regulation. OCSB is not in default under, and no event has occurred that, with
the lapse of time or action by a third party or both, could result in a default
under the terms of any judgment, decree, order, writ, rule or regulation of any
governmental authority or court, whether federal, state or local and whether at
law or in equity, where the failure to be in full compliance would reasonably be
expected to result alone or in the aggregate in damages, which would be
reasonably likely to have a Material Adverse Effect.
4.14. Governmental Regulation. OCSB holds all material licenses,
-----------------------
certificates, permits, franchises and rights from all appropriate federal, state
and other public authorities necessary for the conduct of its business; and,
between the date hereof and the Closing Date, OCSB will use its best efforts to
maintain all such licenses, certificates, permits, franchises and rights in
effect. Except as set forth in Schedule 4.14 to the OCSB Disclosure Schedule,
-------------
OCSB is not a party or subject to any agreements, directives, orders or similar
arrangements between or involving OCSB and any federal or state government or
regulatory authority.
4.15. Contracts and Commitments. Except as set forth in Schedule 4.15 to
------------------------- -------------
the OCSB Disclosure Schedule, OCSB is not a party to or bound by any (a)
material lease or license with respect to any property, real or personal; (b)
material contract or commitment for capital expenditures; (c) material contract
or commitment for total expenses for the purchase of materials, supplies or for
the performance of services by third parties for a period of more than 60 days
from the date of this Agreement; (d) material contract or option for the
purchase or sale of any real or personal property other than in the ordinary
course of business; or (e) agreement, arrangement or understanding relating to
the employment, election, retention in office or severance of any present or
former trustee, officer or employee of OCSB. To its knowledge, OCSB has
performed in all material respects all obligations required to be performed by
them to date and are not in default under, and no event has occurred which, with
the lapse of time or action by a third party or both, could result in a default
resulting in material damages or other material default under any outstanding
mortgage, lease, contract, commitment or agreement to which OCSB is a party or
by which OCSB is bound or under any provision of its charter or bylaws. Each
such outstanding material mortgage, lease, contract, commitment or agreement is
a valid and legally binding obligation of OCSB subject to (x) all applicable
bankruptcy, insolvency, moratorium or other similar laws affecting the
enforcement of creditors rights generally or the rights of creditors of savings
associations the accounts of which are insured by the FDIC, and (y) the
application of equitable principles if equitable remedies are sought.
23
<PAGE>
4.16. Accuracy of Information. The statements made by OCSB in the
-----------------------
Agreement and in any other written documents executed and/or delivered by or on
behalf of OCSB pursuant to the terms of the Agreement are true and correct in
all material respects. The statements contained in such other documents or
specifically referred to in the Agreement will be deemed to constitute
representations and warranties of OCSB under this Agreement to the same extent
as if set forth herein in full.
4.17. Supplement to OCSB Disclosure Schedule. OCSB will promptly
--------------------------------------
supplement or amend the OCSB Disclosure Schedule with respect to any matter
hereafter arising that, if existing or occurring at the date of this Agreement,
would have been required to be set forth or described in the OCSB Disclosure
Schedule. No supplement or amendment to the OCSB Disclosure Schedule will have
any effect for the purpose of determining satisfaction of the condition set
forth in Section 8.2 hereof.
-----------
4.18. Title to Assets; Leases.
-----------------------
(a) Except for (i) liens and encumbrances specifically disclosed in any
of the financial statements of OCSB referred to in Section 4.5 hereof, (ii)
-----------
landlords' or statutory liens or other liens incurred in the ordinary course of
business and not securing indebtedness for borrowed money and not yet
delinquent, and (iii) liens and encumbrances which are not material in amount
and do not materially impair the value of any property subject thereto or the
use of such property for the purposes for which it is presently used or intended
to be used, OCSB has good and marketable title, free and clear of all security
interests, encumbrances, trust agreements, liens or other adverse claims, to all
its assets and property, real and personal, reflected in the financial
statements referred to in Section 4.5 hereof or acquired thereafter, which
-----------
includes all property and assets used by OCSB that are material to the conduct
of its businesses, except for assets and property disposed of in the ordinary
course of business after December 31, 1996.
(b) OCSB, as lessee, has the right under valid and existing leases to
occupy, use, possess and control all property leased by it in all material
respects as presently occupied, used, possessed and controlled by OCSB and such
leases will not terminate or lapse prior to the Effective Time or be affected in
any material respect by consummation of the transactions contemplated hereby.
Schedule 4.18 contains an accurate listing of each lease pursuant to which OCSB
- -------------
acts as lessor or lessee, including the expiration date and the terms of any
renewal options which relate to the same, as well as a listing of each material
real property owned by OCSB and used in the conduct of its business.
(c) All material real and personal property owned by OCSB or presently
used by it are in an adequate condition (ordinary wear and tear excepted) and
are sufficient to carry on the business of OCSB.
4.19. Loans, Real Estate Owned, Etc. Except as disclosed in Schedule
----------------------------- --------
4.19(a) of the OCSB Disclosure Schedule, each loan on the books of OCSB,
- -------
including unfunded portions of
24
<PAGE>
outstanding lines of credit and loan commitments, was made and has been serviced
in all material respects in accordance with customary lending standards in the
ordinary course of business and to the best knowledge of OCSB, constitutes the
legal, valid and binding obligation of the obligor named therein, subject to
bankruptcy, insolvency, fraudulent conveyance and other laws of general
applicability relating to or affecting creditors' rights and to general equity
principles.
Schedule 4.19(b) discloses: (i) any written or, to the knowledge of OCSB,
----------------
oral loan or similar agreement under the terms of which the obligor is 60 or
more days delinquent in payment of principal or interest, or to the best of OCSB
knowledge, in default of any other provision thereof; (ii) a listing of the real
estate owned by OCSB; (iii) unfunded commercial loan commitments and letters of
credit; and (iv) each loan or similar agreement which has been classified or
designated "special mention," "substandard," "doubtful," or "loss" by OCSB.
ARTICLE V
COVENANTS OF CITY SAVINGS
City Savings hereby agrees that from the date of this Agreement until the
Effective Time:
5.1. Affirmative Covenants. Unless the prior written consent of OCSB
---------------------
shall have been obtained (which shall not be unreasonably withheld), City
Savings will:
(a) operate its business in the ordinary course in accordance with past
business practices;
(b) use its best efforts to preserve intact its business organization
and assets, maintain its rights and franchises, retain the services of its
officers and key employees (except that it shall have the right to terminate the
employment of any officer or key employee in accordance with established
employment procedures) and maintain its relationships with customers:
(c) maintain its corporate existence in good standing and file all
required City Savings Reports;
(d) use its best efforts to maintain and keep its properties in as good
repair and condition as at present, except for ordinary wear and tear;
(e) use its best efforts to keep in full force and effect insurance and
bonds comparable in amount and scope of coverage to that now maintained by it
and, in the event that City Savings is unable to keep such insurance and bonds
in full force and effect, to provide prompt notice of such failure to OCSB;
(f) perform all obligations required to be performed by it under all
material contracts, leases, and documents relating to or affecting its assets,
properties, and business;
25
<PAGE>
(g) use its best efforts to comply with and perform in all material
respects all obligations and duties imposed upon it by all applicable laws and
regulations; and
(h) as soon as reasonably practicable, furnish OCSB with copies of all of
City Saving's reports filed with the FDIC and the Department subsequent to the
date hereof.
5.2. Negative Covenants. Except as specifically contemplated by this
------------------
Agreement, City Savings shall not do, or agree or commit to do, without the
prior written consent of OCSB (which shall not be unreasonably withheld), any of
the following:
(a) incur any material liabilities or material obligations, whether
directly or by way of guaranty, including any obligation for borrowed money
whether or not evidenced by a note, bond, debenture or similar instrument or
enter into or extend any material agreement or lease, except in the ordinary
course of business consistent with prudent business practices or in connection
with the transactions contemplated and permitted by the Agreement;
(b) (i) grant any bonus or material increase in compensation to its
directors or grant any bonus or any increase in compensation to its officers and
employees either individually or as a class, except routine periodic increases
in salary for employees in the ordinary course of business or in accordance with
past practices, or as previously approved by City Savings Board of Directors, or
as required by law; (ii) effect any change in retirement benefits to any class
of employees or officers (unless any such change shall be required by applicable
law) that would increase its retirement benefit liabilities except as disclosed
in Schedule 5.2(b); (iii) adopt, enter into, amend or modify any of the City
Savings' plans, as hereinafter defined; or (iv) enter into or amend any
employment, severance or similar agreements or arrangements with any directors
or officers, except as contemplated by this Agreement and except with respect to
the implementation of the 1997 Oswego City Savings Bank Stock Option Plan and
1997 Oswego City Savings Bank Recognition and Retention Plan;
(c) declare or pay any special dividend on, or make any other
distribution in respect of, its deposit accounts;
(d) (i) merge with or into any other corporation, savings institution or
bank, permit any other corporation, savings institution or bank to merge into it
or consolidate with any other corporation or bank, in either case, unless the
fiduciary duties of City Savings' Board of Directors require it to do so, or
effect any reorganization or recapitalization; (ii) purchase or otherwise
acquire any assets, or shares of any class of stock, of any corporation, savings
institution, bank or other business other than in connection with City Savings'
reorganization into a mid-tier stock holding company; or (iii) liquidate, sell,
dispose of, or encumber any assets or acquire any assets, other than in the
ordinary course of its business consistent with past practices;
(e) initiate, solicit or encourage, or take any other action to
facilitate, any inquiries or the making of any proposal for a merger or sale of
assets of City Savings (a "City Savings
26
<PAGE>
Proposal"), or negotiate with any person in, or agree to or endorse any, or
authorize or permit any of its officers, directors or employees or any
investment banker, financial advisor, accountant or other representative
retained by it to take any such action, except as required by the fiduciary
duties of the City Savings' Board of Directors under applicable law, and City
Savings shall promptly notify OCSB orally and in writing of all of the relevant
details relating to all inquiries and proposals which it may receive relating to
any of such matters;
(f) propose or adopt any amendments to its charter or by-laws, except
such amendments as may be required to consummate the transactions contemplated
by this Agreement;
(g) enter into an agreement in principle with respect to any acquisition
of a material amount of assets or securities or any release or relinquishment of
any material contract rights not in the ordinary course of business;
(h) change any of its methods of accounting in effect at December 31,
1996, except as required by changes in laws or regulations or generally accepted
accounting principles concurred in by City Savings' independent certified public
accountants, or change any of its methods of reporting income or deductions for
federal income tax purposes from those employed in the preparation of the
federal income tax returns for the taxable year ending December 31, 1996, except
as may be required by law, regulations, or generally accepted accounting
principles;
(i) take action which would or is reasonably likely to (i) adversely
affect the ability of either City Savings or OCSB to obtain any necessary
approvals of governmental authorities required for the transactions contemplated
hereby; (ii) adversely affect City Savings's ability to perform its covenants
and agreements under this Agreement; or (iii) result in any of the conditions to
the Merger set forth in Articles IX and X not being satisfied; or
----------- -
(j) change in any material respect the lending, investment, deposit,
asset and liability management and other material policies concerning the
business of City Savings, unless required by law or regulation or, with respect
to lending or depository activities, unless such change is made in response to
market conditions as they relate to presently offered products subject to
prudent and regulatory risk management;
(k) sell or otherwise dispose of any loan, mortgage-backed security or
investment security except in the ordinary course of business consistent with
prudent banking practices and policies;
(l) modify or restructure the terms of any loans except in the ordinary
course of business consistent with prudent banking practices;
(m) acquire in any manner whatsoever (other than to realize upon
collateral for a defaulted loan) any business or entity;
27
<PAGE>
(n) declare, set aside, make or pay any dividend or other distribution
(whether in cash, stock or property or any combination thereof) in respect of
City Savings Common Stock except for regular quarterly cash dividends at a rate
per share of City Savings Common Stock not in excess of $.09 per share;
(o) issue any shares of its capital stock, other than pursuant to options
which have been granted as of the date of this Agreement under the 1997 Oswego
City Savings Bank Stock Option Plan and pursuant to awards under the 1997 Oswego
City Savings Bank Recognition and Retention Plan; issue, grant, modify or
authorize any warrants, options, rights, convertible securities or commitments
to acquire shares of City Savings Common Stock; purchase any shares of City
Savings Common Stock; or effect any recapitalization, reclassification, stock
dividend, stock split or like change in capitalization other than in connection
with the Mid-Tier Reorganization;
(p) take or cause to be taken any action which would disqualify the
Merger as a "pooling of interests" for accounting purposes or a tax free
reorganization under Section 368 or the Code; or
(q) agree in writing or otherwise to do any of the foregoing.
5.3. Report to OCSB. City Savings will use its best efforts to keep OCSB
--------------
fully informed concerning all trends and developments of which it becomes aware
that may have a material effect upon the business, any properties or condition
(either financial or otherwise) of City Savings.
5.4. Breaches. City Savings shall, in the event it becomes aware of the
--------
impending or threatened occurrence of any event or condition which would cause
or constitute a material breach (or would have caused or constituted a breach
had such event occurred or been known prior to the date hereof) of any of its
representations or agreements contained or referred to herein, give prompt
written notice thereof to OCSB and use its best efforts to prevent or promptly
remedy the same.
5.5. Employee Benefit Plans; Employment Arrangements.
-----------------------------------------------
(a) City Savings shall use reasonable efforts to offer continued
employment to all employees of OCSB as of the Effective Time at the salary
levels in effect at the Effective Time, subject to the provisions of this
Section 5.5. Employees of OCSB who continue employment with City Savings on or
- -----------
after the Effective Time (all such persons referred to herein as "Continuing
Employees") shall be eligible to participate in such employee benefit plans as
may be in effect generally for employees of City Savings from time to time (the
"City Savings Plans"), if such Continuing Employee shall be eligible for
participation therein based on length of service, compensation, job
classification and position. Notwithstanding the foregoing, City Savings may
determine to continue any OCSB benefit plans for Continuing Employees in lieu of
offering participation in City Savings benefit plans providing similar benefits
(e.g., medical and hospitalization benefits), or terminate any OCSB benefit
plans, or merge any such benefit plans
28
<PAGE>
with City Savings benefit plans. Except as specifically set forth in this
Section 5.5, Continuing Employees who are entitled to participate in City
- -----------
Savings benefit plans, shall be entitled to participate on the same basis as
similarly situated employees of City Savings, except that Continuing Employees
shall be entitled to full credit for each year of service (in which 1,000 hours
of service are performed) with OCSB for purposes of determining eligibility for
participation and vesting, but not for purposes of benefit accruals, in the City
Savings Plans, subject to applicable break in service rules. In addition, City
Savings shall use its best efforts subsequent to the Closing Date, to cause the
City Savings Employee Stock Ownership Plan ("ESOP") to purchase additional City
Savings common stock in an amount equal to the quotient of (i) 8% of the OCSB
Fair Value and (ii) the average of the bid and asked price of City Savings
Common Stock as reported on the Over the Nasdaq Small Cap Market during the ten
(10) trading days preceding the Closing Date. Such purchases shall be made over
such time period as determined by the Board of Directors, consistent with the
provisions of the Internal Revenue Code of 1986, as amended. Notwithstanding
anything in this Section 5.5(a) to the contrary, participation by Continuing
--------------
Employees in employee benefit plans of City Savings with respect to which
eligibility and participation is at the discretion of the employer, such as non-
qualified deferred compensation plans, and other such similar plans (but not
including employee benefit plans generally available to all full-time employees
of City Savings) shall be discretionary with City Savings. Nothing in this
Section 5.5 shall be construed to establish an employment contract relationship
- -----------
between City Savings and any OCSB employee except with respect to any agreement
listed in Schedule 4.15 of the OCSB Disclosure Schedule.
-------------
(b) City Savings shall use its best efforts to award persons who are
currently trustees and officers of OCSB with aggregate shares of restricted
stock equal to 4% of the shares that OCSB would have issued to public
stockholders if it had reorganized into a mutual holding company and sold to the
public 46% of the shares issued. Further, City Savings will use its best efforts
to grant persons who are currently trustees and officers of OCSB options to
purchase a number of shares of City Savings Common Stock equal to 10% of the
shares that OCSB would have issued to public stockholders if it had reorganized
into a mutual holding company and sold to the public 46% of the shares issued.
Such options shall have an exercise price equal to the fair market value of the
City Savings Common Stock at the time the options are awarded. All restricted
stock awards and stock option grants shall vest no later than five years from
the date of award, at a rate of no less than 20% per year. In determining the
number of shares that OCSB would have issued to the public (and the number of
options and restricted stock awards hereunder), OCSB and City Savings shall rely
on the appraisal prepared by an independent third party appraisal firm pursuant
to Section 1.5 hereof, and shall further assume that the shares would be issued
-----------
at a price equal to the average of the bid and asked price of the City Savings
Common Stock during the ten (10) trading day prior to the Effective Time. Any
such restricted stock or stock option plans shall be established in accordance
with rules and policy of the Department and the FDIC. The parties agree that
the allocation of grants of stock options and restricted stock awards to the
current trustees and officers of OCSB shall be made in accordance with Schedule
5.5(b).
29
<PAGE>
(c) With respect to Continuing Employees who were covered under a group
health plan maintained by OCSB, there shall be no waiting period or preexisting
condition exclusions applicable under the health benefits coverage to be
provided following the Effective Time to such persons, but the benefits
previously received by such persons will not count toward the maximum benefit
coverages provided by City Savings.
(d) City Savings shall assume the assets and liabilities of OCSB's
defined benefit plan and 401(k) plan. Benefits under the City Savings defined
benefit plan and 401(k) plan shall be provided to Continuing Employees.
(e) Following the Effective Time, City Savings shall honor, in accordance
with their terms, all of the employment or other compensation plan, contract,
agreements or arrangements set forth in Schedule 4.15 of the OCSB Disclosure
-------------
Schedule and assume all duties, liabilities and obligations under such
agreements and arrangements; provided, however, that the foregoing shall not
prevent City Savings from amending or terminating any such plan, contract,
agreement or arrangement in accordance with its terms, following the Effective
Time.
5.6. Filing of Applications. City Savings shall use its best efforts
----------------------
promptly to prepare, submit, publish and file: (a) an application to the
Department pursuant to Section 601 of the NYBL; (b) an application to the FDIC
under the Bank Merger Act; and (c) any other applications, notices or statements
required to be filed in connection with the transactions contemplated hereby.
City Savings shall provide OCSB with a copy of all such application for their
review prior to filing.
5.7. Supplement to City Savings Disclosure Schedule. City Savings will
----------------------------------------------
promptly supplement or amend the City Savings Disclosure Schedule with respect
to any matter hereafter arising that, if existing or occurring at the date of
this Agreement, would have been required to be set forth or described in the
City Savings Disclosure Schedule. No supplement or amendment to the City Savings
Disclosure Schedule will have any effect for the purpose of determining
satisfaction of the condition set forth in Section 9.1 hereof.
-----------
5.8. Confidentiality. City Savings agrees to treat as strictly
---------------
confidential and agrees not to disclose to any other person, natural or
corporate (other than employees of, and attorneys and accountants for, City
Savings) any proprietary financial statements, schedules, contracts, agreements,
instruments, papers, documents and other information relating to OCSB by which
it may come to know or which may come into its possession during the course of
its due diligence investigation of OCSB and, if the transactions contemplated
hereby are not consummated for any reason, City Savings agrees promptly to
return to OCSB all written proprietary material furnished in connection with
such investigation. This Section 5.8 shall supplement the Confidentiality
-----------
Agreement between City Savings and OCSB dated July 10, 1997.
30
<PAGE>
ARTICLE VI.
COVENANTS OF OCSB
OCSB hereby agrees that from the date of this Agreement until the Effective
Time:
6.1. Affirmative Covenants. Unless the prior written consent of City
---------------------
Savings shall have been obtained (which shall not be unreasonably withheld) and
except as otherwise contemplated herein, OCSB will:
(a) operate its business in the ordinary course in accordance with past
business practices;
(b) use its best efforts to preserve intact its business organization and
assets, maintain its rights and franchises, retain the services of its officers
and key employees (except that it shall have the right to terminate the
employment of any officer or key employee in accordance with established
employment procedures) and maintain its relationships with customers:
(c) maintain its corporate existence in good standing and file all
required OCSB Reports (as defined in such Section 12.7(c) hereof);
---------------
(d) use its best efforts to maintain and keep its properties in as good
repair and condition as at present, except for ordinary wear and tear;
(e) use its best efforts to keep in full force and effect insurance and
bonds comparable in amount and scope of coverage to that now maintained by it
and, in the event that OCSB is unable to keep such insurance and bonds in full
force and effect, to provide prompt notice of such failure to City Savings;
(f) perform all obligations required to be performed by it under all
material contracts, leases, and documents relating to or affecting its assets,
properties, and business;
(g) use its best efforts to comply with and perform in all material
respects all obligations and duties imposed upon it by all applicable laws and
regulations; and
(h) as soon as reasonably practicable, furnish City Savings copies of all
of OCSB's reports filed with the FDIC and the Department subsequent to the date
hereof.
6.2. Negative Covenants. Except as specifically contemplated by this
------------------
Agreement, from the date hereof until the Effective Time, OCSB shall not,
without the prior written consent of City Savings (which shall not be
unreasonably withheld), do any of the following:
31
<PAGE>
(a) incur any material liabilities or material obligations, whether
directly or by way of guaranty, including any obligation for borrowed money
whether or not evidenced by a note, bond, debenture or similar instrument or
enter into or extend any material agreement or lease, except in the ordinary
course of business consistent with prudent business practices or in connection
with the transactions contemplated and permitted by the Agreement;
(b) (i) grant any bonus or material increase in compensation to its
trustees or grant any bonus or any increase in compensation to its officers and
employees either individually or as a class, except routine periodic increases
in salary for employees in the ordinary course of business and in accordance
with past practices or as required by law; (ii) effect any change in retirement
benefits to any class of employees or officers (unless any such change shall be
required by applicable law) that would increase its retirement benefit
liabilities; (iii) adopt, enter into, amend or modify any OCSB Benefit Plan; or
(iv) enter into or amend any employment, severance or similar agreements or
arrangements with any trustees or officers, except as contemplated by this
Agreement;
(c) declare or pay any special dividend on, or make any other
distribution in respect of, its deposit accounts;
(d) (i) merge with or into any other corporation, savings institution or
bank, permit any other corporation, savings institution or bank to merge into it
or consolidate with any other corporation or bank, in either case, unless the
fiduciary duties of OCSB's Board of Trustees require it to do so, or effect any
reorganization or recapitalization; (ii) purchase or otherwise acquire any
assets, or shares of any class of stock, of any corporation, savings
institution, bank or other business; (iii) liquidate, sell, dispose of, or
encumber any assets or acquire any assets, other than in the ordinary course of
its business consistent with past practices or (iv) reorganize into another
corporate form;
(e) initiate, solicit or encourage, or take any other action to
facilitate, any inquiries or the making of any proposal for a merger or sale of
assets of OCSB (a "Proposal"), or negotiate with any person in, or agree to or
endorse any, or authorize or permit any of its officers, trustees or employees
or any investment banker, financial advisor, accountant or other representative
retained by it to take any such action, except as required by the fiduciary
duties of the OCSB's Board of Trustees under applicable law, and OCSB shall
promptly notify City Savings orally and in writing of all of the relevant
details relating to all inquiries and proposals which it may receive relating to
any of such matters;
(f) propose or adopt any amendments to its charter or by-laws, except
such amendments as may be required to consummate the transactions contemplated
by this Agreement;
(g) enter into an agreement in principle with respect to any acquisition
of a material amount of assets or securities or any release or relinquishment of
any material contract rights not in the ordinary course of business;
32
<PAGE>
(h) change any of its methods of accounting in effect at December 31,
1996, except as required by changes in laws or regulations or generally accepted
accounting principles concurred in by OCSB's independent certified public
accountants, or change any of its methods of reporting income or deductions for
federal income tax purposes from those employed in the preparation of the
federal income tax returns for the taxable year ending December 31, 1996 except
as may be required by law, regulations, or generally accepted accounting
principles;
(i) take action which would or is reasonably likely to (i) adversely
affect the ability of either of City Savings or OCSB to obtain any necessary
approvals of governmental authorities required for the transactions contemplated
hereby; (ii) adversely affect OCSB's ability to perform its covenants and
agreements under this Agreement; or (iii) result in any of the conditions to the
Merger set forth in Articles VIII and X not being satisfied;
-------------------
(j) change in any material respect the lending, investment, deposit,
asset and liability management and other material policies concerning the
business of OCSB, unless required by law or regulation or, with respect to
lending or depository activities, unless such change is made in response to
market conditions as they relate to presently offered products subject to
prudent and regulatory risk management;
(k) sell or otherwise dispose of any loan, mortgage-backed security or
investment security except in the ordinary course of business consistent with
prudent banking practices and policies;
(l) modify or restructure the terms of any loans except in the ordinary
course of business consistent with prudent banking practices;
(m) acquire in any manner whatsoever (other than to realize upon
collateral for a defaulted loan) any business or entity;
(n) take or cause to be taken any action which would disqualify the
Merger as a "pooling of interests" for accounting purposes or a tax free
reorganization under Section 368 of the Code; or
(o) agree in writing or otherwise to do any of the foregoing.
6.3. Report to City Savings. OCSB will use its best efforts to keep City
----------------------
Savings fully informed concerning all trends and developments of which it
becomes aware that may have a material effect upon the business, any properties
or condition (either financial or otherwise) of OCSB.
6.4. Breaches. OCSB shall, in the event it becomes aware of the impending
--------
or threatened occurrence of any event or condition which would cause or
constitute a material breach (or would have caused or constituted a breach had
such event occurred or been known prior to the date
33
<PAGE>
hereof) of any of its representations or agreements contained or referred to
herein, give prompt written notice thereof to City Savings and use its best
efforts to prevent or promptly remedy the same.
6.5. Supplement to Disclosure Schedule. OCSB will promptly supplement or
---------------------------------
amend the OCSB Disclosure Schedule with respect to any matter hereafter arising
that, if existing or occurring at the date of this Agreement, would have been
required to be set forth or described in the OCSB Disclosure Schedule. No
supplement or amendment to the OCSB Disclosure Schedule will have any effect for
the purpose of determining satisfaction of the condition set forth in Section
-------
8.2 hereof.
- ---
6.6. Consents and Approvals. OCSB shall use its best efforts to assist
----------------------
City Savings in obtaining the consents and approvals referenced in Section 8.5
-----------
hereof.
6.7. OCSB Financial Statements. Prior to the Closing Date OCSB shall have
--------------------------
its balance sheet, and the related statements of income, retained earnings and
cash flows at and for the year ended December 31, 1996, audited by a nationally
recognized accounting firm or such other accounting firm as may be mutually
agreed upon by the parties hereto. Such audit shall result in the auditor
providing an unqualified opinion with respect to the year ended December 31,
1996. In the event the Closing Date occurs after OCSB's 1997 fiscal year end,
OCSB shall have its balance sheet and related statements of income, retained
earnings and cash flows at and for the year ended December 31, 1997 audited, and
such audit shall result in the auditor providing an unqualified opinion.
6.8. Confidentiality. OCSB agrees to treat as strictly confidential and
---------------
agrees not to disclose to any other person, natural or corporate (other than
employees of, and attorneys and accountants for, OCSB) any proprietary financial
statements, schedules, contracts, agreements, instruments, papers, documents and
other information relating to City Savings by which it may come to know or which
may come into its possession during the course of its due diligence
investigation of City Savings and, if the transactions contemplated hereby are
not consummated for any reason, OCSB agrees promptly to return to City Savings
all written proprietary material furnished in connection with such
investigation. This Section 6.8 shall supplement the Confidentiality Agreement
-----------
between OCSB and City Savings dated July 10, 1997.
ARTICLE VII
ADDITIONAL AGREEMENTS
7.1. OCSB Depositors' Meeting. If required by the NYBL or the Regulations,
------------------------
OCSB shall, as soon as is reasonably practicable, call and hold a meeting of its
depositors (the "OCSB Depositors' Meeting") to submit for depositor approval
this Agreement. The OCSB Board of Trustees will recommend that depositors of
OCSB vote in favor of and approve this Agreement at the OCSB Depositors'
Meeting.
34
<PAGE>
7.2. Proxy Statement for OCSB Depositors' Meeting. For the purposes of
--------------------------------------------
holding the OCSB Depositors' Meeting, and if required by the Department or the
FDIC, OCSB shall prepare an appropriate proxy statement, being herein referred
to as the "OCSB Proxy Statement," which shall be subject to the prior review of
City Savings and Bancorp MHC.
7.3. City Savings Stockholders' Meeting. If required by the NYBL or the
----------------------------------
Regulations, City Savings shall, as soon as reasonably practicable, call and
hold a meeting of its stockholders (the "Stockholders' Meeting") to submit for
stockholder approval this Agreement. The City Savings Board of Directors will
recommend that stockholders vote in favor of and approve this Agreement at the
City Savings Stockholders' Meeting, and the Bancorp MHC shall vote its shares in
favor of this Agreement.
7.4. Proxy Statement for City Savings Stockholders' Meeting. For the
------------------------------------------------------
purposes of holding the City Savings Stockholders Meeting and, if required by
the Department or the FDIC, City Savings shall prepare an appropriate proxy
statement which shall be subject to the prior review of OCSB.
7.5. Cooperation: Regulatory Approvals. The parties shall cooperate in the
---------------------------------
preparation and submission by them, as promptly as reasonably practicable, of
such applications, petitions, and other documents and materials as any of them
may reasonably deem necessary or desirable to the Department, the FDIC, the
Federal Reserve Board, the Securities and Exchange Commission, other regulatory
authorities, and any other persons for the purpose of obtaining any approvals or
consents necessary to consummate the transactions contemplated by the Agreement.
Each party will have the right to review and comment on such applications,
petitions and other documents and materials and shall furnish to the other
copies thereof promptly after filing or submission thereof. At the date hereof,
none of the parties is aware of any reason that the regulatory approvals
required to be obtained by it would not be obtained. The obligation to take
action as provided in this Section 7.3 shall not be construed as including an
-----------
obligation to accept any terms of or conditions to a consent, authorization,
order or approval of, or any exemption by, any party that are unduly burdensome
as reasonably determined by both the Board of Directors of City Savings and the
Board of Trustees of OCSB. In the event of a restraining order or injunction
which prevents the Closing by reason of the operation of Section 10.2, each of
------------
the parties hereto shall use its respective best efforts to cause such order or
injunction to be lifted and the Closing to be consummated as soon as reasonably
practicable.
7.6. Brokers or Finders. Each of City Savings and OCSB represents that no
------------------
agent, broker, investment banker, financial advisor or other firm or person
other than Northeast Capital & Advisory, Inc. is or will be entitled to any
broker's or finder's fee or any other commission or similar fee in connection
with any of the transactions contemplated by this Agreement.
7.7. Additional Agreements: Reasonable Efforts. Subject to the terms and
-----------------------------------------
conditions of this Agreement, each of the parties hereto agrees to use all
reasonable efforts to take, or cause to be taken, all action and to do, or cause
to be done, all things necessary, proper or advisable under
35
<PAGE>
applicable laws and regulations to consummate and make effective the
transactions contemplated by this Agreement, including cooperating fully with
the other party. In case at any time after the Effective Time any further action
is necessary or desirable to carry out the purposes of this Agreement or to vest
City Savings with full title to all properties, assets, rights, approvals,
immunities and franchises of OCSB, the proper officers and directors/trustees of
each party to this Agreement shall take all such necessary action.
7.8. Release of Information. OCSB and City Savings agree that prior to
----------------------
making any public announcement with respect to the transactions contemplated by
this Agreement, each party will consult with the other and will use its best
efforts either to agree upon the text of the proposed joint announcement to be
made by both parties or to obtain the other's approval (which approval shall not
be unreasonably withheld) of the text of an announcement to be made solely on
behalf of such party. In the event that the parties do not ultimately agree on
the text of any proposed public announcement, no such disclosure shall be made
unless the party seeking to make an announcement is advised by counsel that its
failure to do so would be reasonably likely to constitute a violation of law.
7.9. Executive Officers of Resulting Institution. City Savings, Bancorp
-------------------------------------------
MHC and the Stock Holding Company shall take all necessary action in order that
the executive officers of the Resulting Institution, Bancorp MHC and the Stock
Holding Company immediately following the Effective Time shall be: Chris C.
Gagas--Chairman of the Board and Chief Executive Officer; Gregory J. Kreis--
President and Chief Operating Officer; Thomas W. Schneider--Executive Vice
President and Chief Financial Officer; and W. David Schermerhorn--Executive Vice
President and Chief Lending Officer.
7.10. Indemnification and Insurance Coverage.
--------------------------------------
(a) City Savings agrees that all rights to indemnification or
exculpation now existing in favor of the trustees, officers, employees and
agents of OCSB as provided under applicable law or in its charter, bylaws,
indemnification agreements or otherwise in effect as of the date hereof with
respect to matters occurring prior to the Effective Time shall survive the
Merger and shall continue in full force and effect thereafter until such time as
the applicable statute of limitations has expired. Thereafter, such persons
shall be indemnified to the extent permitted by City Savings's Restated
Organization Certificate and bylaws. In the event of any claim or litigation
giving rise to such indemnification, City Savings will provide the indemnified
party with reasonable access to and the right to copy all documents and other
information relating to the subject matter of the litigation and will reasonably
cooperate in the defense of such litigation. An employee, agent, trustee or
officer of OCSB seeking indemnification pursuant to the provisions of OCSB's
charter or bylaws shall be entitled to have the resolution of any dispute
regarding the right to and the extent of the indemnification, including without
limitation the right to the advancement of or the reimbursement of legal fees
and expenses related to such claim or litigation, resolved by an arbitrator
selected by City Savings and the indemnified party in accordance with the rules
of the American Arbitration Association.
36
<PAGE>
(b) City Savings shall maintain the OCSB's existing directors' and
officers' liability insurance policy (or a policy providing coverage on
substantially the same terms and conditions) for acts or omissions occurring
prior to the Effective Time by persons who are currently covered by such
insurance policy maintained by OCSB for a period of three years following the
Effective Time; provided, however, that in no event shall City Savings be
required to expend on an annual basis more than $10,000 (the "Insurance Amount")
to maintain or procure insurance coverage, and further provided that if City
Savings is unable to maintain or obtain the insurance called for by this Section
-------
7.10 City Savings shall use all reasonable efforts to obtain as much comparable
- ----
insurance as available for the Insurance Amount.
(c) In the event City Savings or any of its successors or assigns (i)
consolidates with or merges into any other person and shall not be the
continuing or surviving corporation or entity of such consolidation or merger,
or (ii) transfers or conveys all or substantially all of its properties and
assets to any person, then, and in each such case, proper provision shall be
made so that the successors and assigns of City Savings assume the obligations
set forth in this Section.
(d) The provisions of this Section 7.10 are intended to be for the
------------
benefit of, and shall be enforceable by, each indemnified party and his or her
heirs and representatives.
7.11. Access to Properties and Records: Confidentiality.
-------------------------------------------------
(a) OCSB and City Savings shall each permit the representatives of City
Savings and OCSB, respectively, reasonable access to its properties, and shall
disclose and make available to them all books, papers and records relating to
the assets, stock ownership, properties, operations, obligations and liabilities
of OCSB and City Savings, including, but not limited to, all books of account
(including the general ledger), tax records, minute books of meetings of the
board of trustees (and any committees thereof), organizational documents,
bylaws, material contracts and agreements, filings with any regulatory
authority, accountants' work papers, litigation files, plans affecting
employees, and any other business activities or prospects in which OCSB or City
Savings may have a reasonable interest. OCSB and City Savings shall make their
officers, employees and agents and authorized representatives (including counsel
and independent public accountants) available to confer with each other, as
necessary. OCSB and City Savings shall permit the President of OCSB and the
President of City Savings, or their designee, to attend regular meetings of
OCSB's Board of Trustees and City Savings' Board of Directors, including,
without limitation, the loan committee or asset/liability committee meetings of
OCSB and City Savings.
(b) All information furnished previously in connection with the
transactions contemplated by this Agreement or pursuant hereto shall be treated
as the sole property of the party furnishing the information until consummation
of the transactions contemplated hereby and, if such transactions shall not
occur, the party receiving the information shall, upon request, return to the
party which furnished such information all documents or other materials
containing, reflecting or referring to such information, shall use its best
efforts to keep confidential all such information, and shall not directly or
indirectly use such information for any competitive or other
37
<PAGE>
commercial purposes. The obligation to keep such information confidential shall
continue for three years from the date the proposed transactions are abandoned
but shall not apply to (i) any information which (x) the party receiving the
information can establish by convincing evidence was already in its possession
prior to the disclosure thereof by the party furnishing the information; (y) was
then generally known to the public; or (z) became known to the public through no
fault of the party receiving the information; or (ii) disclosures pursuant to a
legal requirement or in accordance with an order of a court of competent
jurisdiction, provided that the party which is the subject of any such legal
requirement or order shall use its best efforts to give the other party at least
ten business days prior notice thereof.
7.12. Certain Policies. At the request of City Savings, OCSB shall, no
----------------
earlier than five business days prior to the Effective Time, (i) establish such
reserves and accruals as City Savings shall reasonably request to conform, on a
mutually satisfactory basis, OCSB's loan, real estate, accrual and reserve
policies to City Savings's policies and (ii) establish and take such accruals,
reserves and charges in order to implement such policies in respect of severance
costs, write-off or write-down of various assets and other appropriate
accounting adjustments, and to recognize for financial accounting purposes such
expenses incurred in connection with the Merger, provided, however, that OCSB
shall not be obligated to take any such action pursuant to this Section 7.12
------------
unless and until (x) City Savings specifies its request in a writing delivered
to OCSB, and acknowledges that all conditions to the obligations of City Savings
to consummate the Merger set forth in Articles VIII and X have been waived (if
available) or satisfied. OCSB shall not be required to take any such action that
is not consistent with generally accepted accounting principles, as determined
by OCSB's independent auditors, or any requirement applicable to OCSB by any
bank regulatory agency. The representations, warranties and covenants of OCSB
contained in this Agreement shall not be deemed to be untrue or breached in any
respect for any purpose as a consequence of any action undertaken on account of
Section 7.12 and shall not constitute grounds for termination of the Agreement
- ------------
by City Savings.
7.13. Independent Appraisal of OCSB. OCSB shall engage an independent
-----------------------------
appraisal firm satisfactory to City Savings to determine the OCSB Fair Value.
The OCSB Fair Value shall be determined as if OCSB were forming a mutual holding
company and conducting a minority stock offering of 46% of the shares of OCSB.
Upon completion of the independent appraisal, OCSB shall promptly provide a copy
of the independent appraisal to City Savings for review by its Board of
Directors.
7.14. Bancorp MHC and Stock Holding Company Directors. Bancorp MHC and
-----------------------------------------------
the Stock Holding Company shall take all necessary and appropriate action in
order to, effective as of the Effective Time, (i) increase the number of
directors of their respective Boards of Directors by five and (ii) elect five of
the then OCSB trustees (as determined by OCSB) to fill the resulting vacancies.
7.15. Charitable Foundation. OCSB shall establish a Charitable Foundation
---------------------
pursuant to the terms and conditions set forth at Schedule 7.15.
-------------
38
<PAGE>
7.16. Schedules. Each party agrees to deliver to the other party
---------
complete Schedules as required pursuant to this Agreement no later than seven
days from the date hereof.
ARTICLE VIII
CONDITIONS TO THE OBLIGATIONS OF CITY SAVINGS
The obligations of City Savings under this Agreement to cause the
transactions contemplated herein to be consummated shall be subject to the
satisfaction or written waiver by City Savings of the following conditions:
8.1. No Material Adverse Effect. Except as disclosed in Schedule 4.5
-------------------------- ------------
to the OCSB Disclosure Schedule and except for general changes in market
interest rates, payments due under any employment agreements or benefit plans
and the transactions contemplated hereby, costs and expenses relating to this
Agreement and the transactions contemplated hereby, there shall not have been
any Material Adverse Effect, or discovery of a condition or the occurrence of
any event that has or is likely to result in such a Material Adverse Effect, in
the financial condition, results of operations or business of OCSB from June 30,
1997 to the Closing Date; provided, however, that there shall not have occurred
a Material Adverse Effect for purposes of this Section 8.1 if such action that
-----------
would have given rise to a Material Adverse Effect was taken by OCSB at the
request of City Savings.
8.2. Representations and Warranties. Each of the representations and
------------------------------
warranties by OCSB contained in this Agreement shall be true and correct in all
material respects (or where any statement in a representation or warranty
expressly contains a standard of materiality, such statement shall be true and
correct in all respects taking into consideration the standard of materiality
contained therein) at, or as of, the date of this Agreement and (except to the
extent such representation speaks as of an earlier date) and as of any date
subsequent, until and including the Closing Date (except as otherwise
contemplated or permitted by this Agreement) as though such representations and
warranties were made on and as of said date. Any information provided by OCSB
pursuant to Section 6.5 hereof as a supplement to the OCSB Schedule shall be
-----------
true and correct in all material respects as of the date such information is
supplied to City Savings.
8.3. Performance and Compliance. OCSB shall have performed or
--------------------------
complied in all material respects with all covenants and agreements required by
the Agreements to be performed and satisfied by it on or prior to the Closing
Date.
8.4. No Proceeding or Litigation. On the Closing Date, no
---------------------------
governmental suit, action or proceeding shall be pending or overtly threatened,
and no liability or claim shall have been asserted against OCSB involving any of
the assets, properties, business or operations of OCSB that would reasonably be
expected to have a Material Adverse Effect.
39
<PAGE>
8.5. Consents Under Agreements. OCSB shall have received the consent
-------------------------
or approval of each person whose consent or approval shall be required in order
to permit consummation of the Merger under any loan or credit agreement, note,
mortgage, indenture, lease or other agreement or instrument to which OCSB is a
party or to which its property is subject, except those for which failure to
obtain such consents and approvals would not, individually or in the aggregate,
have a Material Adverse Effect on OCSB, whether prior to (if applicable) or
following the consummation of the transactions contemplated hereby.
8.6. No Amendments to Resolutions. Neither the Board of Trustees of
----------------------------
OCSB nor any committee thereof shall have amended, modified, rescinded or
repealed the resolutions adopted by such Board of Trustees with respect to the
Agreement or shall have adopted any other resolutions in connection with the
Agreement and the transactions contemplated hereby which are inconsistent with
such resolutions, except resolutions adopted consistent with the express rights
of OCSB under this Agreement.
8.7. Certificate of OCSB Officers. OCSB shall have furnished City
----------------------------
Savings a certificate, signed by its Chief Executive Officer, dated the Closing
Date, to the effect, based on his knowledge, that the conditions described in
Sections 8.1, 8.2, 8.3, 8.4, 8.5 and 8.6 of this Agreement have been fully
- ----------------------------------------
satisfied.
8.8. Corporate Proceedings. All action required to be taken by, or on
---------------------
the part of OCSB to authorize the execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated by this
Agreement shall have been duly and validly taken by OCSB.
ARTICLE IX
CONDITIONS TO THE OBLIGATIONS OF OCSB
The obligations of OCSB under this Agreement to cause the transactions
contemplated herein to be consummated shall be subject to the satisfaction or
written waiver by OCSB of the following conditions:
9.1. No Material Adverse Effect. Except as disclosed in Schedule 3.8
-------------------------- ------------
to the City Savings Disclosure Schedule and except for general changes in market
interest rates, payments due under any employment agreements or benefit plans
and the transactions contemplated hereby, costs and expenses relating to this
Agreement and the transactions contemplated hereby, there shall not have been
any Material Adverse Effect, or discovery of a condition or the occurrence of
any event that has or is likely to result in such a Material Adverse Effect, in
the financial condition, results of operations or business of City Savings from
June 30, 1997 to the Closing Date; provided, however, that there shall not have
occurred a Material Adverse Effect for purposes of this Section 9.1 if such
-----------
action that would have given rise to a Material Adverse Effect was taken by City
Savings at the request of OCSB.
40
<PAGE>
9.2. Representations and Warranties. Each of the representations and
------------------------------
warranties of City Savings contained in this Agreement shall be true and correct
in all material respects (or where any statement in a representation or warranty
expressly contains a standard of materiality, such statement shall be true and
correct in all respects taking into consideration the standard of materiality
contained therein) at, or as of, the date of this Agreement and (except to the
extent such representation speaks as of an earlier date) and as of any date
subsequent, until and including the Closing Date (except as otherwise
contemplated or permitted by this Agreement) as though such representations were
made on and as of said date. Any information provided by City Savings pursuant
to Section 5.7 hereof as a supplement to the City Savings Disclosure Schedule
-----------
shall be true and correct in all material respects as of the date such
information is supplied to OCSB.
9.3. Performance and Compliance. City Savings shall have performed or
--------------------------
complied in all material respects with all covenants and agreements required by
this Agreement to be performed and satisfied by it on or prior to the Closing
Date.
9.4. No Proceeding or Litigation. On the Closing Date, no
---------------------------
governmental suit, action or proceeding shall be pending or overtly threatened,
and no liability or claim shall have been asserted against City Savings
involving any of the assets, properties, business or operations of City Savings
that would reasonably be expected to have a Material Adverse Effect.
9.5. Consents Under Agreements. City Savings shall have received the
-------------------------
consent or approval of each person whose consent or approval shall be required
in order to permit consummation of the Merger under any loan or credit
agreement, note, mortgage, indenture, lease or other agreement or instrument to
which OCSB is a party or to which its respective property is subject, except
those for which failure to obtain such consents and approvals would not,
individually or in the aggregate, have a Material Adverse Effect on Bancorp MHC
or City Savings, whether prior to (if applicable) or following the consummation
of the transactions contemplated hereby.
9.6. No Amendments to Resolutions. Neither the Board of Directors of
----------------------------
City Savings nor any committee thereof shall have amended, modified, rescinded
or repealed the resolutions adopted by such Board of Directors with respect to
the Agreement or shall have adopted any other resolutions in connection with the
Agreement and the transactions contemplated hereby which are inconsistent with
such resolutions, except resolutions adopted consistent with the express rights
of City Savings under this Agreement.
9.7. Corporate Proceedings. All action required to be taken by, or on
---------------------
the part of Bancorp MHC and City Savings to authorize the execution, delivery
and performance of this Agreement and the consummation of the transactions
contemplated by this Agreement shall have been duly and validly taken by Bancorp
MHC and City Savings.
9.8. Certificate of City Savings Officers. City Savings shall have
------------------------------------
furnished to OCSB a certificate, signed by its Chief Executive Officer and its
Chief Financial Officer and dated the
41
<PAGE>
Closing Date, to the effect, based on their best knowledge, that the conditions
described in Sections 9.1, 9.2, 9.3, 9.4, 9.5 and 9.6 of this Agreement have
----------------------------------------
been satisfied.
9.9. Employee Benefit Plans. City Savings shall have (i) taken all
----------------------
necessary corporate action to permit its ESOP to purchase the number of
additional shares of City Common Stock provided by Section 5.5(a) hereof and
--------------
(ii) taken all necessary action by its Board of Directors to revise the 1997
Oswego City Savings Bank Stock Option Plan and the 1997 Oswego City Savings Bank
Recognition and Retention Plan and/or adopt additional plans in order to make
the grants and awards provided for by Section 5.5(b) and 5.5(c).
-------------------------
ARTICLE X
CONDITIONS TO THE OBLIGATIONS OF ALL PARTIES
In addition to the provisions of Articles VIII and IX hereof, the
obligations of City Savings and OCSB to cause the transactions contemplated
herein to be consummated, shall be subject to the satisfaction or written waiver
by both City Savings and OCSB of the following conditions:
10.1. Governmental Approvals. The parties hereto shall have received
----------------------
all necessary approvals of the transactions contemplated by the Agreements from
governmental agencies and authorities, including, without limitation, those of
the Department, the FDIC, the DOJ, the Federal Reserve Board and each of such
approvals shall remain in full force and effect and all statutory waiting
periods in connection therewith shall have expired at the Closing Date and such
approvals and the transactions contemplated thereby shall not have been
contested by any federal or state governmental authority by formal proceeding.
Provided, however, that no approval or consent referred to in this Section 10.1
------------
shall be deemed to have been received by City Savings or OCSB if it shall
include any term, condition or requirement that, individually or in the
aggregate, (i) would result in a Material Adverse Effect on the results,
business, operations, assets, or financial condition of OCSB or City Savings, or
(ii) would reduce the economic or business benefits of the transactions
contemplated by this Agreement to OCSB or City Savings in so material a manner
that OCSB or City Savings, in its reasonable judgment, would not have entered
into this Agreement; provided further, that no condition or requirement which
does no more than subject OCSB, City Savings or Bancorp MHC to legal
requirements generally applicable to entities and transactions of the same type
as a matter of law shall be deemed to affect materially the economic benefits of
the transactions contemplated by this Agreement. City Savings shall notify OCSB
in writing of its intention to terminate this Agreement pursuant to Section
-------
11.1(b) hereof as a result of the receipt by City Savings of any such term,
- -------
condition or requirement within five business days of the written receipt of
such term, condition or requirement, or the condition set forth in the second
sentence of this Section 10.1 shall be deemed waived by City Savings. OCSB shall
------------
notify City Savings in writing of its intention to terminate this Agreement
pursuant to Section 11.1(c) hereof as a result of the receipt by OCSB of any
---------------
such term, condition or requirement within 5 business days of the written
receipt of such term, condition or requirement, or the condition set forth in
the second sentence of this Section 10.1 shall be deemed waived by OCSB.
------------
42
<PAGE>
10.2. No Injunctions or Restraints. No suit, action or proceeding
----------------------------
shall be pending or overtly threatened before any court or other governmental
agency by the federal or any state government in which it is sought to restrain
or prohibit the consummation of the Merger and no temporary restraining order,
preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition preventing the
consummation of the Merger shall be in effect.
10.3. Depositor and Stockholder Approvals. To the extent required by
-----------------------------------
the FDIC or the Department, this Agreement shall have been duly approved by the
requisite affirmative vote of the depositors of OCSB and/or by the requisite
affirmative vote of the stockholders of City Savings.
10.4. Corporate Proceedings. The obligations of the parties to this
---------------------
Agreement required to be performed at or prior to the Closing Date shall have
been duly performed and complied with in all material respects. All action
required to be taken by, or on the part of, the parties to this Agreement to
authorize the execution, delivery and performance of this Agreement, and the
consummation of the transactions contemplated hereby, shall have been duly and
validly taken by the parties hereto.
10.5. Federal Tax Ruling. City Savings shall have received a revenue
------------------
ruling from the IRS or a legal opinion, in form and substance reasonably
satisfactory to OCSB and City Savings, substantially to the effect that, on the
basis of facts, representations and assumptions described which are consistent
with the state of facts existing at the Effective Time, the Merger will be
treated as a reorganization within the meaning of Section 368(a) of the Code and
that, accordingly, for federal income tax purposes:
(i) no gain or loss will be recognized by OCSB or City Savings as a
result of the Merger; and
(ii) no gain or loss will be recognized by Bancorp MHC upon
consummation of the Merger and the transfer of additional shares of City Savings
Common Stock.
10.6. Pooling of Interests. City Savings shall have received a
--------------------
letter from Coopers & Lybrand L.L.P. addressed to City Savings, dated as of the
Effective Time, to the effect that, based on a review of this Agreement and
related agreements and the facts and circumstances then known to it, the Merger
shall be accounted for as a pooling-of-interests under GAAP.
43
<PAGE>
ARTICLE XI
TERMINATION
11.1. Reasons for Termination. This Agreement may be terminated and
-----------------------
the Merger abandoned at any time before the Closing Date, whether before or
after the approval or adoption of the Agreements by the depositors of OCSB or
the stockholders of City Savings:
(a) By mutual written consent of the Board of Directors of City
Savings and the Board of Trustees of OCSB;
(b) By written notice from City Savings to OCSB if:
(i) any condition set forth in Article VIII of this Agreement
------------
shall have become impossible to substantially satisfy at any time or has not
been substantially satisfied or waived in writing; or
(ii) any condition set forth in Article X of this Agreement
---------
shall have become impossible to substantially satisfy at any time or has not
been substantially satisfied or waived in writing, provided, however, City
Savings shall not have the right to terminate this Agreement pursuant to this
Section 11.1(b)(ii) if any condition imposed by Section 10.1 hereof was not met
- ------------------- ------------
due to the failure of City Savings to perform or observe the covenants and
agreements set forth in this Agreement; or
(iii) any warranty or representation as set forth in Article IV
----------
hereof made by OCSB shall be discovered to be or to have become untrue or
incorrect in any material respect, or where any statement in a representation or
warranty expressly includes a standard of materiality, such statement shall be
discovered to be or to have become untrue or incorrect in any respect taking
into consideration the standard of materiality contained therein and which
results in a Material Adverse Effect, in either case where any such breach has
not been cured within thirty (30) days following receipt by OCSB of written
notice of such discovery;
(iv) OCSB shall have breached one or more provisions of this
Agreement in any material respect considering all such breaches in the
aggregate, where such breach has not been cured within thirty (30) days
following receipt by OCSB of written notice of such breach; or
(v) Upon receipt of the independent appraisal from OCSB, the
Board of Directors of City Savings shall have ten business days to terminate
this Agreement if the Board concludes, based upon its review of the appraisal
that the Merger is not in the best interests of City Savings, its stockholders
and Bancorp MHC.
(c) By written notice from OCSB to City Savings, which has been
approved by the Board of Trustees of OCSB, if
44
<PAGE>
(i) any condition set forth in Article IX of this Agreement
----------
has not been substantially satisfied or waived in writing; or
(ii) any condition set forth in Article X of this Agreement
---------
has not been substantially satisfied or waived in writing; provided, however,
OCSB shall not have the right to terminate this Agreement pursuant to this
Section 11.1(c)(ii) if any condition imposed by Section 10.1 hereof was not met
- ------------------- ------------
due to the failure of OCSB to perform or observe the covenants and agreements
set forth in this Agreement; or
(iii) any warranty or representation as set forth in
Article III hereof made by City Savings shall be discovered to be or to have
- -----------
become untrue or incorrect in any material respect, or where any statement in a
representation or warranty expressly includes a standard of materiality, such
statement shall be discovered to be or to have become untrue or incorrect in any
respect taking into consideration the standard of materiality contained therein,
and which results in a Material Adverse Effect, in either case where any such
breach has not been cured within thirty (30) days following receipt by City
Savings of written notice of such discovery;
(iv) City Savings shall have breached one or more provisions
of this Agreement in any material respect considering all such breaches in the
aggregate, where such breach has not been cured within thirty (30) days
following receipt by City Savings of written notice of such breach; or
(v) Within ten business days after receipt of the independent
appraisal of OCSB's market value if the Board of Trustees concludes based on its
review of the independent appraisal that the Merger is not in the best interests
of OCSB.
(d) By the Board of Directors of City Savings if the Board of
Trustees of OCSB shall not recommend, or shall withdraw or modify in a manner
adverse to City Savings, its recommendation to the OCSB depositors to approve
this Agreement.
(e) By the Board of Directors of City Savings or Board of Trustees
of OCSB at any time if the depositors of OCSB have not approved this Agreement
by the requisite affirmative vote (if such depositors approval is required by
the FDIC or the Department) or if stockholders of City Savings have not approved
this Agreement by the requisite affirmative vote (if such stockholder vote is
required by the FDIC or the Department).
(f) By the Board of Directors of City Savings or Board of Trustees
of OCSB if the Merger has not been consummated on or before August 31, 1998.
(g) By the Board of Trustees of OCSB if the Board of Directors of
City Savings shall not recommend, or shall withdraw or modify in a manner
adverse to OCSB, its recommendation to City Savings stockholders to approve this
Agreement.
45
<PAGE>
11.2. Effect of Termination. In the event of termination of this
---------------------
Agreement by either OCSB or City Savings as provided in Section 11.1, this
------------
Agreement shall forthwith become void, and there shall be no obligation on the
part of City Savings or OCSB or their respective officers, trustees or directors
except with respect to Sections 5.7. 6.8, 7.8 and 12.2 hereof.
-------------------------------
ARTICLE XII
MISCELLANEOUS
12.1. Nonsurvival of Representations, Warranties and Agreements. None
---------------------------------------------------------
of the representations, warranties, covenants and agreements in this Agreement
or in any instrument delivered pursuant to this Agreement shall survive the
Effective Time, except for the covenants and agreements which by their terms are
contemplated to be performed after the Effective Time.
12.2. Expenses. Except as otherwise provided herein, all expenses
--------
incurred by City Savings and OCSB in connection with or related to the
authorization, preparation and execution of the Agreement, the solicitation of
any required depositor approvals and all other matters related to the closing of
the transactions contemplated thereby, including, without limitation of the
generality of the foregoing, all fees and expenses of agents, representatives,
counsel and accountants employed by either such party or its Affiliates, shall
be borne solely and entirely by the party that has incurred the same; provided,
however, that if either party unilaterally elects to terminate the Agreement for
a reason not set forth at Section 11.1, the terminating party shall promptly
------------
reimburse the non-terminating party for its reasonable expenses; provided
further, however, that nothing contained herein shall limit either party's right
to recover any liabilities or damages arising out of the other party's willful
breach of any provision of this Agreement.
12.3. Waivers: Amendments. At any time prior to the Closing Date,
-------------------
either City Savings, by action taken by its Board of Directors, or any committee
or officers hereunto authorized, or OCSB, by action taken by its Board of
Trustees, or any committee or officers hereunto authorized, may waive the
performance of any of the obligations of the other or waive compliance by the
other with any of the covenants or conditions contained in the Agreement or
agree to the amendment or modification of the Agreement by an agreement in
writing executed in the same manner as the Agreement.
12.4. Assignment: Parties in Interest. The Agreement shall be binding
-------------------------------
upon and inure solely to the benefit of the parties hereto and their respective
successors and assigns, but shall not be assigned by the parties hereto, by
operation of law or otherwise, without the prior written consent of the other
parties. Other than Sections 7.9 and 7.10, nothing in the Agreement, express or
---------------------
implied, is intended to confer upon any third party any rights or remedies of
any nature whatsoever under or by reason of the Agreement.
12.5. Entire Agreement. This Agreement supersedes any other
----------------
agreement, whether written or oral, that may have been made or entered into by
OCSB or City Savings or by any
46
<PAGE>
officer or officers of such parties relating to the acquisition of the business
or assets of OCSB by City Savings. The aforementioned agreements constitute the
entire agreement by the respective parties, and there are no agreements or
commitments except as set forth herein and therein.
12.6. Captions and Counterparts. The captions in this Agreement are
-------------------------
for convenience only and shall not be considered a part of or affect the
construction or interpretation of any provision of this Agreement. This
Agreement may be executed in several counterparts, each of which shall
constitute one and the same instrument.
12.7. Certain Definitions. For purposes of this Agreement, the term:
-------------------
(a) "Affiliate" means a person that directly or indirectly, through
one or more intermediaries, controls, is controlled by, or is under common
control with, another person;
(b) "Material Adverse Effect" shall mean any material adverse
change in or material adverse effect on the business, operations, assets, or
financial condition of the parties to this Agreement.
(c) "OCSB Reports" shall mean all reports, registrations, and
statements, together with any amendments required to be made with respect
thereto that were and are required to be filed with the Department or the FDIC,
or any other applicable savings institution regulatory authority.
(d) "to the knowledge of City Savings" or "to the best knowledge of
City Savings" shall mean the actual knowledge of any member of the Board of
Directors or of any senior officer of City Savings.
(e) "to the knowledge of OCSB" or "to the best knowledge of OCSB"
shall mean the actual knowledge of any member of the Board of Trustees or of any
senior officer of OCSB.
12.8. Governing Law. The Agreement shall be construed and interpreted
-------------
in accordance with the laws of the State of New York, without regard to the
conflicts of laws rules.
12.9. Severability. Any provision hereof prohibited by or unlawful
------------
or unenforceable under any applicable law or any jurisdiction shall as to such
jurisdiction be ineffective, without affecting any other provision of this
Agreement, or shall be deemed to be severed or modified to conform with such
law, and the remaining provisions of this Agreement shall remain in force,
provided that the purpose of the Agreement can be effected. To the full extent,
however, that the provisions of such applicable law may be waived, they are
hereby waived, to the end that this Agreement be deemed to be a valid and
binding agreement enforceable in accordance with its terms.
47
<PAGE>
12.10. Notices. All notices given hereunder shall be in writing and
-------
shall be mailed by first class mail, postage prepaid, or sent by facsimile
transmission or by nationally recognized overnight delivery service, addressed
as follows:
(a) If to City Savings to:
Oswego City Savings Bank
214 West First Street
Oswego, NY 13126-2547
Attention: Mr. Chris C. Gagas, President
Facsimile No.: (315) 342-9403
With A Copy To:
Luse Lehman Gorman Pomerenk & Schick
5335 Wisconsin Avenue, N.W.
Suite 400
Washington, D.C. 20015
Attention: Eric Luse, Esq. or
Alan Schick, Esq.
Facsimile No. (202) 362-2902
(b) If to OCSB to:
Oswego County Savings Bank
44 East Bridge Street
Oswego, New York 13126-2547
Attention: Gregory J. Kreis
Facsimile No.: (315) 342-2586
With a Copy to:
Elias, Matz, Tiernan & Herrick, L.L.P.
734 15th Street, N.W.
Washington, D.C. 20005
Attention: Timothy B. Matz, Esq.
48
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
ATTEST: OSWEGO CITY SAVINGS BANK
By: /s/ Melissa A. Dashnau By: /s/ Chris C. Gagas
------------------------------ ---------------------------
Chris C. Gagas, President
ATTEST: PATHFINDER BANCORP, M.H.C.
By: /s/ Melissa A. Dashnau By: /s/ Chris C. Gagas
------------------------------ ---------------------------
Chris C. Gagas, President
ATTEST: OSWEGO COUNTY SAVINGS BANK
By: /s/ Melissa A. Dashnau By: /s/ Gregory J. Kreis
----------------------------- ---------------------------
Gregory J. Kreis, President
49
<PAGE>
EXHIBIT 99
For Details, Contact:
Chris Gagas Gregory Kreis
Oswego City Savings Bank Oswego Country Savings Bank
Phone (315)343-0057 Phone (315)342-4100
Press Release
OSWEGO CITY SAVINGS BANK AND OSWEGO COUNTY SAVINGS BANK AGREE TO MERGE
Both organizations recognize benefits of combination and create a foundation for
the community.
- --------------------------------------------------------------------------------
Oswego, September 5, 1997: Oswego City Savings Bank and Oswego County Savings
Bank jointly announced that they have signed a definitive merger agreement under
which the banks will be combined. On Friday, September 5, 1997, the Boards of
Directors/Trustees of each bank approved the merger agreement.
The proposed transaction is subject to state and federal regulatory approvals,
the approval of Oswego County Savings Bank's depositors, as well as approval of
the shareholders of Oswego City Savings Bank. Chris Gagas, President of Oswego
City Savings Bank, stated "We are committed to assuring the County of Oswego
that an independent bank will be headquartered in, and dedicated to, enhancing
the economic vitality of this market area. We are delighted to merge with
another highly regarded community bank that has a strong management team,
dedicated employees and the reputation as an excellent corporate citizen. This
merger will benefit all the communities served by the two banks by providing the
customers we serve with increased lending capabilities and a greater menu of
products and services at our expanded locations. We are confident that the
management teams and staffs of both institutions will work together to provide
our combined customers with outstanding service."
Mr. Gagas added, "The Board of Directors determined that this merger with Oswego
County Savings Bank would be in the best interest of the shareholders of City
Savings and would provide the customers and communities served by our Bank with
continued high quality financial products and services."
Gregory Kreis, President of Oswego County Savings Bank further stated, "We are
pleased to be merging with an institution whose board of directors, management
and staff share our commitment to community banking in Oswego County. The
combined institution will be better able to absorb the significant future
expenditures on technology and regulatory compliance in order to provide the
innovative and value added products and services our two customers bases
deserve. We expect that all employees will be retained."
In connection with the merger, Oswego County and Oswego City have agreed to
create a charitable foundation to benefit the local community. While the exact
assets to be contributed have not yet been identified, the charitable foundation
will be funded with up to $2.0 million in gross assets of Oswego County Savings
Bank to support the civic needs of the County. Chris Gagas said, "Both boards
felt that this was a great way to show our support for the community."
Oswego City Savings Bank will issue to its mutual holding company parent,
Pathfinder Bancorp, MHC additional shares of Oswego City common stock equal to
the fair value of Oswego County Savings Bank. The number of shares issued will
be based on the average of the bid and asked price of Oswego City over the ten
trading days immediately preceding the Closing Date. This transaction is not
expected to interfere with or alter the previously announced plans of Oswego
City to reorganize into a mid-tier stock holding company structure. The mid-
tier reorganization is expected to occur prior to the completion of the merger
with Oswego County.
For Release 1 p.m. EDT
September 5, 1997
