<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 21, 1998
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
PATHFINDER BANCORP, INC.
------------------------
(Exact name of registrant as
specified in its charter)
DELAWARE 16-1540137
----------------------- ----------------------
(State of Incorporation (I.R.S. Employer
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 registrants' principal
executive offices)
CHRIS C. GAGAS
PRESIDENT AND CHIEF EXECUTIVE OFFICER
PATHFINDER BANCORP, INC.
214 WEST FIRST STREET
OSWEGO, NEW YORK 13126
(315) 343-0057
---------------------------------------------------------
(Name, address, including ZIP Code, and telephone number,
including area code, of agent for service)
Copies to:
ERIC LUSE, ESQ.
ALAN SCHICK, ESQ.
LUSE LEHMAN GORMAN POMERENK & SCHICK, P.C.
5335 WISCONSIN AVENUE, N.W., SUITE 400
WASHINGTON, D.C. 20015
(202) 274-2000
--------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC. As soon as
practicable after the effective date of this Registration Statement.
<PAGE>
If any of the securities being registered in this Form are being offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box [X].
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(I)
of this Form, check the following box [X].
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please 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 461(c) 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 delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box [ ].
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
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<S> <C> <C> <C> <C>
PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF SECURITY AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
TO BE REGISTERED REGISTERED PER SHARE(1) OFFERING PRICE REGISTRATION FEE
- -----------------------------------------------------------------------------------------------------------
Common Stock, par value $.10 per share 527,237 $15.00 $7,908,555 $2,350
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Determined pursuant to Rule 457(c) under the Securities Act of 1933.
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
<PAGE>
PROSPECTUS
PATHFINDER BANCORP, INC.
338,867 Shares of Common Stock (Anticipated Minimum)
458,467 Shares of Common Stock (Anticipated Maximum)
527,237 Shares of Common Stock (Adjusted Maximum)
Pathfinder Bancorp, Inc. (the "Company"), a Delaware corporation which owns
100% of the outstanding common stock of Oswego City Savings Bank ("City Savings"
or the "Bank"), a New York-chartered savings bank headquartered in Oswego, New
York, is offering up to 458,467 shares of its common stock, par value $.10 per
share (the "Common Stock") (subject to adjustment), pursuant to an Agreement and
Plan of Merger Between Oswego City Savings Bank and Oswego County Savings Bank
("County Savings"), dated as of September 5, 1997 and as amended (the
"Agreement"), and the related Pathfinder Bancorp, Inc. and Oswego County Savings
Bank Stock Issuance Plan (the "Plan"). Pursuant to the Agreement and the Plan,
the Company is offering such shares to certain depositors of County Savings and
others in a subscription offering (the "Subscription Offering") and may offer
shares to certain other persons in a community offering (the "Community
Offering" and together with the Subscription Offering, the "Offering").
Approximately __% of the currently outstanding shares of Common Stock are owned
by Pathfinder Bancorp, MHC (the "Mutual Holding Company"), a New York chartered
mutual holding company. At the time of the completion of the Offering, County
Savings, a New York-chartered savings bank headquartered in Oswego, New York
("County Savings"), will merge with and into City Savings (the "Merger") with
City Savings as the surviving institution. In order to complete the Merger,
County Savings will establish County Savings, MHC as its New York chartered
mutual holding company ("County MHC"), which will merge into the Mutual Holding
Company, followed immediately by the Merger. See "The Offering and Merger--Stock
Pricing and Number of Shares to be Issued."
In accordance with the Plan and subject to certain maximum and minimum
purchase limitations, nontransferable subscription rights to purchase Common
Stock have been granted to: (i) County Savings' account holders who had deposit
accounts totaling $100 or more as of the close of business on December 31, 1996
(the "Eligibility Record Date," and such depositors "Eligible Account Holders");
(ii) the City Savings' Employee Stock Ownership Plan; (iii) County Savings'
account holders who had deposit accounts totaling $100 or more as of the close
of business on _____________, (the "Supplemental Eligibility Record Date," and
such depositors "Supplemental Eligible Account Holders"); and (iv) employees,
officers and trustees of County Savings ("Eligible Employees, Officers and
Trustees"). Any shares of Common Stock not purchased in the Subscription
Offering will be offered for sale in the Community Offering, with a preference
given to persons residing in Oswego County, New York.
FOR ADDITIONAL INFORMATION ON HOW TO SUBSCRIBE
PLEASE CALL THE STOCK INFORMATION CENTER AT (315) ____-______
------------------------------------
THESE SECURITIES ARE SUBJECT TO INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF
THE PRINCIPAL INVESTED. FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE
CONSIDERED BY EACH PROSPECTIVE INVESTOR, SEE "SPECIAL CONSIDERATIONS" ON PAGE
___ OF THIS DOCUMENT.
------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE NEW YORK
BANKING DEPARTMENT, OR ANY OTHER FEDERAL OR STATE AGENCY OR ANY STATE SECURITIES
COMMISSION, NOR HAS SUCH COMMISSION, CORPORATION, DEPARTMENT OR OTHER AGENCY OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------------------
THESE SECURITIES ARE NOT SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. THE
COMMON STOCK IS NOT GUARANTEED BY THE COMPANY, THE MUTUAL HOLDING COMPANY OR THE
BANK. THERE CAN BE NO ASSURANCE THAT THE TRADING PRICE OF THE COMMON STOCK WILL
NOT DECREASE AT ANY TIME.
<TABLE>
<CAPTION>
=================================================================================
ESTIMATED ESTIMATED FEES ESTIMATED NET
SUBSCRIPTION PRICE (1) AND EXPENSES (2) PROCEEDS
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Minimum Per Share (3) $ $ $
- ---------------------------------------------------------------------------------
Midpoint Per Share (3) $ $ $
- ---------------------------------------------------------------------------------
Maximum Per Share (3) $ $ $
- ---------------------------------------------------------------------------------
Minimum Total (3) $ $ $
- ---------------------------------------------------------------------------------
Midpoint Total (3) $ $ $
- ---------------------------------------------------------------------------------
Maximum Total (3) $ $ $
=================================================================================
</TABLE>
(1) The Estimated Subscription Price Per Share is based on the last sale price
of Common Stock on ________, 1998, of $______ per share, as reported by the
Nasdaq SmallCap Market. The aggregate Estimated Subscription Price is based
on the Independent Valuation.
(2) Includes estimated costs and expenses incurred or expected to be incurred by
the Bank and County Savings in connection with the Offering and the Merger,
including a fee to _______________ of $_____. See "The Offering and Merger--
Plan of Distribution and Selling Commissions."
(3) Assumes that all shares are purchased by Eligible Account Holders at the
"Adjusted Price Per Share" which, for purposes of this table is assumed to
be equal to 90% of the last reported sale price of Common Stock on _______,
1998. Assumes that no shares are purchased by the ESOP.
--------------
--------------
THE DATE OF THIS PROSPECTUS IS _________ ____, 1998
<PAGE>
In connection with the Merger and the Offering, County Savings has
obtained an independent valuation (the "Independent Valuation") of its pro
forma market value which assumes that County Savings were forming a mutual
holding company and issuing common stock to depositors and the public. The
number of shares of Common Stock offered in the Offering will be equal to the
result obtained by dividing the Independent Valuation as updated at the
conclusion of the Offering by the "Unadjusted Price Per Share" which shall be
equal to the average of the bid and asked price of the Common Stock at the
close of trading during the 10 trading days prior to the date of the
completion of the Merger (the "Effective Date"). The Company will offer
shares of Common Stock to Eligible Account Holders at a 10% discount to the
Unadjusted Price Per Share (the "Adjusted Price Per Share").
The Independent Valuation has been performed by RP Financial, L.C. (the
"Independent Appraiser"), a firm experienced in the valuation and appraisal
of savings institutions. The Independent Appraiser determined that as of
____________, 1998, the appraised value of County Savings was within a range
of between $11,050,000 to $14,950,000 (the "Valuation Range") with a mid-
point of $13,000,000. The Independent Valuation will be updated and the
aggregate purchase price of the Common Stock to be sold in the Offering will
be determined immediately prior to the completion of the Offering. If the
updated appraised value of County Savings is outside the Valuation Range, the
Offering may be terminated, or a new valuation range may be established, in
which event subscribers will be resolicited and given the opportunity to
modify or rescind their order. As a condition to approving the Merger, the
New York Banking Department (the "Department") required Oswego County to
obtain an opinion as to the fairness of the Merger and Offering to Oswego
County and its depositors. The Department selected______, a firm experienced
in the valuation of financial institutions which rendered an opinion to the
Oswego County Board to the effect that the Valuation Range set forth in the
Independent Appraisal and the terms of the Offering were fair to Oswego
County and its depositors from a financial point of view. See "The Offering
and Merger; The Offering -- The Independent Valuation."
In order to purchase Common Stock each purchaser must complete and
submit an Order Form indicating the total dollar amount of Common Stock for
which he is subscribing. The subscription price per share of Common Stock
for all subscribers other than Eligible Account Holders will be equal to the
Unadjusted Price Per Share. The subscription price per share for Eligible
Account Holders will be equal to the Adjusted Price Per Share. Subject to
the applicable purchase limitations, the total number of shares that will be
issued to a subscriber whose subscription has been accepted will be equal to
the total dollar amount of stock for which such subscription has been
accepted divided by the Unadjusted Price Per Share or the Adjusted Price Per
Share, as applicable. Payment for subscriptions must accompany an order form
and may be made (i) in cash if delivered in person at the office of County
Savings, (ii) by check or money order, or (iii) by authorization of
withdrawal from deposit accounts maintained with County Savings. The Company,
County Savings and City Savings reserve the right to refund subscription
funds in lieu of issuing fractional shares, or permit subscribers to elect to
receive additional whole shares in this process.
THE MINIMUM AMOUNT OF COMMON STOCK FOR WHICH ANY PERSON MAY SUBSCRIBE IN
THE SUBSCRIPTION OFFERING OR IN THE COMMUNITY OFFERING, RESPECTIVELY, IS 25
SHARES. NO PERSON, OTHER THAN THE ESOP, DIRECTLY OR INDIRECTLY OR WITH AN
ASSOCIATE OR A GROUP ACTING IN CONCERT, MAY SUBSCRIBE FOR OR PURCHASE IN THE
AGGREGATE MORE THAN $150,000 OF COMMON STOCK BASED ON THE MAXIMUM OF THE
VALUATION RANGE. SUCH STOCK MAY BE PURCHASED AT A 10% DISCOUNT (I.E., FOR
$______) BY ELIGIBLE ACCOUNT HOLDERS. THE MAXIMUM PURCHASE LIMITATION MAY BE
INCREASED OR DECREASED AS DESCRIBED HEREIN. SEE "THE OFFERING AND MERGER--
PURCHASE LIMITATIONS."
All subscription rights will expire at _____ p.m., New York time, on
__________, 1998 (the "Expiration Date") unless extended by the Company, with
the approval of the Department if necessary, for up to an additional 45 days.
Any shares not sold in the Subscription Offering may be sold in the Community
Offering, which also is expected to terminate on __________, 1998, but which
may terminate as late as ______________, 1998. Subscriptions paid by cash,
check, or money order will be placed in a segregated account at County
Savings and will earn interest at City Savings' regular passbook rate of
interest from the date of receipt until completion or termination of the
Offering. Payments authorized by withdrawal from deposit accounts at County
Savings will continue to earn interest at the contractual rate until the
Offering is completed or terminated, and such funds will be otherwise
unavailable to the depositor until such time. Orders submitted are
irrevocable until the completion of the Offering; provided that all
subscribers will have their funds returned promptly, with interest, and all
withdrawal authorizations will be canceled if the Offering is not completed
by ___________, 1999, unless such period has been extended with the approval
of the Department, if necessary. If an extension of time has been granted,
all subscribers will be notified of such extension,
2
<PAGE>
and of any rights to confirm, modify or rescind their subscriptions and have
their funds returned promptly with interest, and of the time period within
which each subscriber must notify County Savings or the Company of his
intention to confirm, modify or rescind his subscription. If an affirmative
response to any resolicitation is not received by County Savings or the
Company from a subscriber, the subscriber's order will be rescinded and all
funds will be returned promptly with interest, and withdrawal authorizations
canceled.
Consummation of the Offering is subject to the approval of the Plan by
County Savings' depositors at a special meeting called for such purpose, the
satisfaction of conditions contained in certain regulatory approvals and
letters of nonobjection, and the satisfaction or waiver of certain conditions
contained in the Agreement.
The Common Stock is listed for quotation on the Nasdaq SmallCap Market
under the symbol "PBHC." On ________, 1998, the last reported sale price of
Common Stock, as reported on the Nasdaq SmallCap Market, was $_____ per
share. Following completion of the Offering, the Company intends to have its
Common Stock listed on the Nasdaq National Market System. THE COMPANY IS
SUBJECT TO THE INFORMATIONAL REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF
1934, AS AMENDED (THE "EXCHANGE ACT"), AND IN ACCORDANCE THEREWITH FILES
REPORTS, PROXY STATEMENTS AND OTHER INFORMATION WITH THE SECURITIES AND
EXCHANGE COMMISSION (THE "COMMISSION").
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act and, in accordance therewith, files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information can be inspected and copied at the public reference facilities of
the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549.
Copies of such materials can be obtained from the Public Reference Section of
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates. The Commission maintains an Internet web site that
contains reports, proxy and information statements and other information
regarding issuers who file electronically with the Commission. The address
of that site is http://www.sec.gov.
-------------------
Prior to the completion of the organization of the Company as the Bank's
holding company, the Bank was subject to the information, reporting and proxy
statement requirements of the Exchange Act and, in accordance therewith and
with the rules and regulations of the Federal Deposit Insurance Corporation
(the "FDIC"), filed reports, proxy statements and other information with the
FDIC. Copies of such materials may be obtained at prescribed rates from the
FDIC's Registration, Disclosure and Operations Unit, 550 17th Street, N.W.,
Washington, D.C. The statements contained herein as to the contents of any
contract or other document filed as an exhibit hereto are of necessity brief
descriptions thereof and are not necessarily complete. Each such statement
is qualified by reference to such contract or document.
The Company has filed with the Commission under the Securities Act of
1933, as amended (the "Securities Act") a registration statement on Form S-2
(the "Registration Statement"), of which this Prospectus is a part. As
permitted by the rules and regulations of the Commission, this Prospectus
does not contain all of the information set forth in the Registration
Statement. In addition, certain documents filed by the Company with the
Commission have been incorporated in this Prospectus by reference. See
"Incorporation of Certain Documents by Reference." The statements contained
herein as to the contents of any contract or other document filed as an
exhibit to the Registration Statement or incorporated by reference into the
Prospectus are of necessity brief descriptions thereof and are not
necessarily complete. Each such statement is qualified by reference to such
contract or document. The information filed with the Commission can be
examined without charge as described above and copies of all or part of the
Registration Statement may be obtained from the Commission upon payment of
the prescribed fees. The Company is providing its Annual Report on Form 10-K
for the year ended December 31, 1997 and Quarterly Report on Form 10-Q for
the quarter ended June 30, 1998 are attached as Appendix A and Appendix B,
respectively.
The Company will provide without charge to any person to whom this
Prospectus is delivered, on the written or oral request of any such person, a
copy of the Agreement and the Plan, and the Company's Certificate of
Incorporation and Bylaws. Such requests, in writing or by telephone, should
be directed to: Melissa Dashnau, Corporate Secretary. In addition, the
Agreement, the Plan and the Independent Appraisal may be inspected at the
offices of County Savings at _______________.
3
<PAGE>
County Savings will establish a stock sales center in connection with
the Offering, and the Common Stock will be marketed principally through the
distribution of this Prospectus and through the activities in the stock sales
center. Questions regarding the Offering should be addressed to the persons
at the stock center. The stock sales center will be located at Oswego County
Savings Bank, ___________________. The telephone number of the stock sales
center is (___) _________. The stock sales stock center is expected to
operate during normal business hours throughout the period of the Offering.
See "the Offering and Merger--Description of Sales Activities."
SUMMARY
The following summary does not purport to be complete, and is qualified
in its entirety by the more detailed information contained elsewhere in the
Prospectus or in the documents incorporated by reference.
PATHFINDER BANCORP, INC. Pathfinder Bancorp, Inc., is a
Delaware corporation that was
recently formed to become City
Savings' stock holding company parent
in a transaction (the "Two-Tier
Reorganization") that was approved by
City Savings' stockholders on
December 17, 1997, and was completed
on December 30, 1997. In the Two-Tier
Reorganization, each share of City
Savings common stock was exchanged
for a share of common stock of the
Company and City Savings became a
wholly-owned subsidiary of the
Company. The sole activity of the
Company is the ownership of all of
the issued and outstanding common
stock of City Savings. On February 5,
1998, the Company paid a
three-for-two stock split in the form
of a stock dividend on all of its
issued and outstanding shares. At
June 30, 1998, approximately 54% of
the shares of the Company were owned
by Pathfinder Bancorp, MHC ("Mutual
Holding Company"), a New York
chartered mutual holding company, and
46% were owned by the public. At
June 30, 1998 the Company's total
consolidated assets were $198.1
million, deposits were $157.4 million
and stockholders' equity was $23.5
million, respectively. The Company's
principal executive office is located
at 214 West First Street, Oswego, New
York and its telephone number at that
address is (315) 343-0057.
OSWEGO CITY SAVINGS City Savings is a New York chartered
BANK savings bank headquartered in Oswego,
New York. City Savings was chartered
in 1859, and its deposits are insured
by the FDIC to the maximum extent
permitted by law. In 1995 City
Savings reorganized into a mutual
holding company and sold 881,666
shares of its common stock to the
public and issued 1,035,000 shares to
the Mutual Holding Company. The only
business of Mutual Holding Company is
the ownership of a majority of the
outstanding shares of common stock of
the Company. On December 30, 1997,
City Savings established the company
as its mid-tier stock holding company
to own 100% of City Savings common
stock.
City Savings is a community-oriented
savings bank that is primarily
engaged in the business of attracting
deposits from the general public in
its market area, and investing such
deposits, together with other sources
of funds, in loans secured by
one-to-four family real estate and,
to a lesser extent, loans secured by
commercial real estate, multi-family
real estate, and consumer loans. City
Savings operates from its main office
and four branch offices in Oswego,
Mexico and Fulton, New York.
OSWEGO COUNTY SAVINGS County Savings is a New York
BANK chartered mutual savings bank
headquartered in Oswego, New York.
County Savings was chartered in 1870,
and its deposits are insured by the
FDIC to the maximum extent permitted
by law. At June 30, 1998, County
Savings had total assets of $110.3
million, deposits of $96.7 million
and net worth of $11.3 million.
4
<PAGE>
County Savings is a community-oriented
savings bank that is primarily engaged
in the business of attracting deposits
from the general public in its market
area, and investing such deposits,
together with other sources of funds, in
one-to-four family residential real
estate loans. County Savings operates
from its main office and three branch
offices in Fulton, Pulaski and Oswego,
New York.
RISK FACTORS Attention should be given to the
matters discussed under "Risk
Factors," which include a discussion
of certain federal income tax
consequences of the transaction to
Eligible Account Holders; the
potential adverse impact on City
Savings of changes in interest
rates; extensive governmental
regulation of the financial
institution industry; the possible
decline in the market price for the
Common Stock after the Offering; the
inability to sell Common Stock until
issuance and receipt of the
certificates; the highly competitive
environment in which City Savings
operates; the costs associated with
addressing the year 2000 computer
issue; control by the Mutual Holding
Company; and certain anti-takeover
provisions with respect to the
Company.
USE OF PROCEEDS Although the actual net proceeds from
the sale of the Common Stock cannot
be determined until the Offering is
completed, it is presently
anticipated that the net proceeds
will be between $_______ and $_____
million, assuming that: (i) all the
shares of Common Stock offered in
the Offering are purchased by
Eligible Account Holders at the
Adjusted Price Per Share; and (ii) a
number of shares of Common Stock
equal to 4% of the Common Stock sold
in the Offering is purchased by City
Savings' Recognition and Retention
Plan for awards to employees, such
open market purchases are funded
with proceeds from the Offering, and
the purchase price per share is
equal to the Unadjusted Price Per
Share. The net proceeds of the
Offering will be initially invested
in federal funds and investment
grade, short-term marketable
securities, or used for general
corporate purposes.
DIVIDEND POLICY City Savings, and since the Two-Tier
Reorganization, the Company, has
paid cash dividends every quarter
since the completion of the
Reorganization and minority stock
issuance in November 1995, and it is
the current policy of the Company to
pay a quarterly cash dividend of
$.05 per share of Common Stock. As
of the date hereof, the Company's
principal asset is its ownership of
100% of the common stock of City
Savings and $3.0 million in cash
which constitutes the Company's
capitalization. Accordingly, the
Company's ability to pay dividends
will depend in part on its receipt
of sufficient cash dividends from
City Savings. Under New York law,
City Savings is generally permitted
to pay dividends out of accumulated
net profits. Under certain
circumstances, New York law requires
the Bank to obtain the approval of
the New York Superintendent of Banks
prior to the payment of dividends.
See "Dividend Policy."
Whether dividends will continue to be
paid by the Company will be
determined by the Company's Board of
Directors and will be based upon its
consolidated financial condition,
results of operations, tax
considerations, economic conditions,
regulatory restrictions which affect
the payment of dividends by the Bank
to the Company, and other factors.
In addition, the Company's ability
to pay dividends is subject to
limitations under Delaware law and
regulations of the Board of
Governors of the Federal Reserve
System (the "FRB") that require the
Company to maintain minimum levels
of capital. There can be no
assurance that dividends will be
paid on Company Common Stock or
that, if paid, such dividends will
not be reduced or eliminated in the
future.
5
<PAGE>
MARKET FOR COMMON The Common Stock is listed on the
STOCK Nasdaq SmallCap Market under the
symbol "PBHC." As of June 30, 1998,
there were __ registered market
makers in the Company's Common
Stock, 197 stockholders of record
(excluding the number of persons or
entities holding stock in street
name through various brokerage
firms), and 2,782,232 shares
outstanding. Following completion
of the Offering, the Company expects
the Common Stock to be listed on the
Nasdaq National Market System.
THE OFFERING AND MERGER Pursuant to the Agreement and the
Plan, County Savings will reorganize
into a mutual holding company form
of ownership. County Savings'
mutual holding company parent,
Oswego County, MHC, will then merge
into the Mutual Holding Company with
the Mutual Holding Company as the
surviving company, followed by the
merger of County Savings with and
into the Bank with the Bank as the
surviving institution (the
"Merger"). Concurrently, the
Company will sell shares of Common
Stock in the Offering to the
depositors of County Savings and
possibly the general public, and
will issue shares to the Mutual
Holding Company. All necessary
regulatory approvals have been
obtained, subject to certain
conditions including, among other
things, approval of the Plan by
County Savings' depositors. A
special meeting of depositors for
this purpose is to be held on
__________________, 1998. See "The
Offering and Merger." The Company
has engaged ___________ to assist
the Company on a best efforts basis
in selling the Common Stock in the
Offering.
THE CHARITABLE In connection with the Merger and
FOUNDATION Offering, City Savings and County
Savings shall establish a charitable
foundation (the "Charitable
Foundation") for the purpose of
providing charitable contributions
to the communities served by City
Savings and County Savings. The
initial contribution to the
Charitable Foundation shall be $2.0
million. See "The Offering and
Merger--The Charitable Foundation."
OFFERING PRIORITIES The Plan provides that, subject to
certain maximum and minimum purchase
limitations, subscription rights to
purchase shares of Common Stock in
the Subscription Offering have been
granted to (i) Eligible Account
Holders, (ii) the ESOP, (iii)
Supplemental Eligible Account
Holders; and (iv) Eligible
Employees, Officers and Trustees.
Any shares of Common Stock for which
subscriptions have not been accepted
in the Subscription Offering will be
offered for sale in a Community
Offering. In the Community
Offering, should one be conducted,
unsubscribed shares would be offered
directly to the general public with
a preference to those natural
persons residing in the local
community of Oswego County, New
York. Additional terms and
conditions may be established at any
time prior to the closing of any
Community Offering by the Board of
Directors of the Company and the
Board of Trustees of County Savings.
If approved by the Department and
the FDIC, any shares of Common Stock
for which subscriptions have not
been subscribed for in the Community
Offering may be issued to the Mutual
Holding Company. There can be no
assurance that the Company will be
able to obtain regulatory approval
of such an issuance of unsold shares
to the Mutual Holding Company.
STOCK PRICING AND The total number of shares of Common
NUMBER OF SHARES TO BE Stock to be offered in the Offering
ISSUED will be determined jointly by the
Boards of Directors of the Company
and the Board of Trustees of County
Savings, based upon the Independent
Valuation. The number of shares of
Common Stock to be offered in the
Offering will be equal to 46% of the
quotient obtained by dividing the
Independent Valuation as updated at
the conclusion of the Offering by
the Unadjusted Price Per Share,
except that such
6
<PAGE>
number of shares may
not be more than 527,237 shares, the
adjusted maximum. See "The Offering
and Merger--Stock Pricing and Number
of Shares to be Issued."
THE INDEPENDENT The Independent Valuation was
VALUATION performed by the Independent
Appraiser, a firm experienced in the
valuation and appraisal of savings
institutions. The Independent
Appraiser determined that the
appraised value of County Savings as
of ____________ ranged from
$11,050,000 to $14,950,000. The
Independent Valuation will be updated
again immediately prior to the
completion of the Offering. Such
valuation, however, is not intended,
and must not be construed, as a
recommendation of any kind as to the
advisability of purchasing Common
Stock. THE INDEPENDENT APPRAISER
VALUED COUNTY SAVINGS, BUT DID NOT
VALUE THE SHARES OF COMMON STOCK
OFFERED IN THE OFFERING. The
Independent Appraiser did not
independently verify the financial
statements and other information
provided by County Savings, nor did
the Independent Appraiser value
independently the assets or
liabilities of County Savings, the
Bank or the Company. Moreover,
because such valuation is necessarily
based upon estimates and projections
of a number of matters, all of which
are subject to change from time to
time, no assurance can be given that
persons purchasing shares in the
Offering will thereafter be able to
sell such shares at prices at or
above the price at which they
purchased such shares.
As a condition to approving the
Merger, the Department required
Oswego County to obtain from an
independent third party chosen by the
Department an opinion as to the
fairness of the Merger and the
Offering to Oswego County and its
depositors.________________, a firm
experienced in the valuation of
financial institutions rendered an
opinion to the Oswego County Board to
the effect that the Valuation Range
set forth in the Independent
Appraisal and the terms of the
Offering were fair to Oswego County
and its depositors from a financial
point of view.
PURCHASE LIMITATIONS The minimum amount of Common Stock
for which any person may subscribe in
the Subscription Offering or in the
Community Offering, respectively, is
25 shares. No person, directly or
indirectly or with an associate or a
group acting in concert, may
subscribe for or purchase in the
aggregate more than $150,000 in
Common Stock offered in the Offering.
Such Common Stock may be purchased at
a 10% discount (i.e., for $_____) by
Eligible Account Holders. The
maximum purchase limitation may be
increased to 5% of the shares sold or
increased to 9.9% of the shares sold;
provided, that orders for Common
Stock exceeding 5% of the shares
being offered shall not exceed in the
aggregate 10% of the total offering.
Requests to purchase additional
shares of the Common Stock in the
event that the purchase limitation is
so increased will be determined by
the Company in its sole discretion.
See "The Offering and
Merger--Purchase Limitations."
EXPIRATION DATE FOR THE The Subscription Offering will expire
OFFERING on _____________, 1998, unless
extended for up to 45 days or such
additional periods by the Company
with the approval of the Department
and, if necessary, the FDIC (as
extended, the "Expiration Date").
Subscription rights which have not
been exercised prior to the
Expiration Date will become void.
Orders will not be executed until all
shares of Common Stock have been
subscribed for or otherwise sold. If
all shares have not been issued by
the Expiration Date, all funds will
be returned promptly to the
subscribers with interest and all
withdrawal authorizations will be
canceled, unless such period is
extended. If an extension is granted,
subscribers will be notified of the
extension of time and of any rights
of subscribers to modify or rescind
their subscriptions.
7
<PAGE>
COMMUNITY OFFERING Any shares of Common Stock for which
subscriptions have not been accepted
in the Subscription Offering will be
offered for sale in a Community
Offering. In the Community Offering,
should one be conducted,
unsubscribed shares would be offered
directly to the general public with a
preference to those natural persons
residing in the local community of
Oswego County, New York. Additional
terms and conditions may be
established at any time prior to the
closing of any Community Offering by
the Board of Directors of the Company
and the Board of Trustees of County
Savings. The Community Offering, if
any, shall be for a period of not
more than 45 days unless extended by
the Company and County Savings, and
shall commence concurrently with,
during or promptly after the
Subscription Offering. The
opportunity to subscribe for shares
of Common Stock in the Community
Offering category is subject to the
right of the Company and County
Savings, in their sole discretion, to
accept or reject any such orders in
whole or in part either at the time
of receipt of an order or as soon as
practicable following the Expiration
Date.
PROCEDURE FOR PURCHASING To purchase shares in the
SHARES IN SUBSCRIPTION AND COMMUNITY Subscription and Community Offering,
OFFERING an executed order form with the
required payment for the total dollar
amount of Common Stock subscribed
for, or with appropriate
authorization for withdrawal from a
County Savings' deposit account
(which may be given by completing the
appropriate blanks in the order
form), must be received by County
Savings at its office by ____ p.m.,
local time on the Expiration Date.
Order forms which are not received by
such time or are executed defectively
or are received without full payment
(or appropriate withdrawal
instructions) are not required to be
accepted. In addition, an order
submitted on photocopied or facsimile
order forms will not be accepted. The
Company has the right to waive or
permit the correction of incomplete
or improperly executed forms, but
does not represent it will do so.
Once received, an executed order form
may not be modified, amended or
rescinded without the consent of the
Company unless the Offering has not
been completed by
_____________________, 1998, unless
such period has been extended. In
order to ensure that Eligible Account
Holders and Supplemental Eligible
Account Holders are properly
identified as to their stock purchase
priorities, depositors as of the
Eligibility Record Date and
Supplemental Eligibility Record Date
must list all accounts on the stock
order form giving all names in each
account and the account number.
The subscription price per share of
Common Stock for all subscribers
other than Eligible Account Holders
will be equal to the Unadjusted Price
Per Share. The subscription price
per share for Eligible Account
Holders shall be equal to the
Adjusted Price Per Share (i.e., 90%
of the Unadjusted Price Per Share).
Subject to the applicable purchase
limitations, the total number of
shares that will be issued to a
subscriber whose subscription has
been accepted will be equal to the
total dollar amount of stock for
which such subscription has been
accepted divided by the Unadjusted
Price Per Share or the Adjusted Price
Per Share, as applicable. Payment for
subscriptions must accompany an order
form and may be made (i) in cash if
delivered in person at the office of
County Savings, (ii) by check or
money order, or (iii) by
authorization of withdrawal from
deposit accounts maintained with
County Savings. Interest will be
paid on payments made by cash, check,
or money order at the Bank's passbook
rate of interest from the date
payment is received until the
completion or termination of the
Offering. If payment is made by
authorization of withdrawal from
deposit accounts (other than checking
accounts), the funds authorized to be
withdrawn from a deposit account will
continue to accrue interest at the
contractual rates until completion or
termination
8
<PAGE>
of the Offering, but a hold will be
placed on such funds, thereby making
them unavailable to the depositor
until completion or termination of
the Offering.
RESTRICTIONS ON TRANSFER OF
SUBSCRIPTION RIGHTS AND SHARES Prior to the completion of the
Offering, persons receiving
subscription rights may not transfer
them or enter into any agreement or
understanding to transfer the legal
or beneficial ownership of the
subscription rights issued under the
Plan or the shares of Common Stock
to be issued upon their exercise.
Such rights may be exercised only by
the person to whom they are granted
and only for his account. Each
person exercising such subscription
rights will be required to certify
that he is purchasing shares solely
for his own account and that he has
no agreement or understanding
regarding the sale or transfer of
such shares. In addition, persons
may not offer or make an
announcement of an offer or intent
to make an offer to purchase such
subscription rights or shares of
Common Stock prior to the completion
of the Offering. The Company and
County Savings will pursue any and
all legal and equitable remedies in
the event they become aware of the
transfer of subscription rights and
will not honor orders known by them
to involve the transfer of such
rights.
CERTAIN FEDERAL INCOME It is a condition to the completion
TAX CONSEQUENCES OF THE of the Offering and Merger that the
MERGER AND OFFERING Bank receive a private letter ruling
from the Internal Revenue Service
("IRS") with respect to certain
significant subissues that affect
the characterization of the
transaction solely for tax purposes
and that County Savings and the Bank
receive an opinion of counsel or
independent tax advisor (the "Tax
Opinion") to the effect that the
proposed transaction will qualify
either as a reorganization within
the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as
amended (the "Code") or as a
tax-free exchange of stock under
Section 1032 of the Code followed by
a tax-free exchange of property for
stock under Section 351 and a
reorganization under Section 368(a)
of the Code, and that, accordingly,
no gain or loss will be recognized
by: (a) County Savings or the Bank
as a result of the Offering and
Merger; (b) the Company as a result
of the issuance of subscription
rights to Eligible Account Holders
and Supplemental Eligible Account
Holders ("Subscription Rights"), the
lapse of any Subscription Rights or
the receipt of money in exchange for
the issuance of Common Stock
pursuant to the Offering. The
issuance of the Tax Opinion is also
conditioned in the receipt of the
private letter ruling from the IRS.
The Tax Opinion will not express an
opinion as to the expected tax
effects to Eligible Account Holders
as a result of the Offering and
their ability to purchase Common
Stock at the Adjusted Price Per
Share. These tax effects may
include, among other things, the
recognition of gain upon receipt or
exercise of the Subscription Rights
to the extent of their fair market
value, which value may be
substantial because the Adjusted
Purchase Price is likely to be less
than the fair market value of the
Common Stock purchased pursuant to
the exercise of the Subscription
Rights. Participants will probably
not, however, recognize gain or loss
as a result of obtaining savings
accounts in the Bank after the
Offering and their interests in a
liquidation account in exchange for
their savings accounts in County
Savings as a mutual savings bank.
See "Special Considerations--Certain
Federal Income Tax Consequences" and
"The Offering and Merger--Certain
Federal Income Tax Consequences" for
a more complete description of all
anticipated material federal income
tax consequences of the Offering and
Merger.
9
<PAGE>
REQUIRED REGULATORY The Merger and the Offering are
APPROVALS AND subject to approval and/or
CONSIDERATIONS nonobjection of the Department, the
FDIC and the FRB, all of which have
been received, subject to certain
conditions. These approvals and/or
nonobjections do not constitute
recommendations or endorsements by
the Department, the FDIC or the FRB
of any of the proposed transactions
contemplated by the Plan. Further,
the Depositors of County Savings
must vote in favor of the Merger.
SPECIAL CONSIDERATIONS
The following special considerations, in addition to the information
presented in this Prospectus, should be considered by prospective investors
in deciding whether to purchase the Common Stock offered hereby.
RECENT MARKET VOLATILITY
In recent months, stock markets in the United States and worldwide have
been extremely volatile. The securities of individual companies have, in
many instances, experienced significant fluctuations in price for reasons
unrelated to the specific company's financial condition, results of
operations or business prospects. In particular, the value of securities of
financial institutions has been significantly and adversely affected in the
recent past by concerns over weakening economies overseas, and by the
relative levels of short- and long-term interest rates in the United States,
notwithstanding an individual institution's management of interest rate risk.
An investor should understand that, in the short-term, the value of an
investment in the Common Stock is subject to fluctuation, including loss, due
to volatility in stock markets generally.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The Bank expects to receive a private letter ruling from the IRS with
respect to certain significant subissues that affect the characterization of
the transaction solely for tax purposes and that the Bank and County Savings
expect to receive a Tax Opinion to the effect that: (i) the proposed
transactions including the Merger qualifies either as a reorganization
within the meaning of Section 368(a) of the Code, or as a tax-free exchange
of property for stock under Section 351 and a reorganization under Section
368(a) of the Code, and that no gain or loss will be recognized by County
Savings or the Bank as a result of such Merger; and (ii) no gain or loss will
be recognized by the Company as a result of (a) the issuance of Subscription
Rights to Eligible Account Holders, Supplemental Eligible Account Holders,
Eligible Employees and Trustees of County Savings and the ESOP (collectively,
the "Depositors"), (b) the lapse of such Subscription Rights, or (c) the
receipt of money or other property, if any, in exchange for the issuance of
Common Stock pursuant to the Offering. The foregoing is a summary of the Tax
Opinion, the issuance of which is conditioned upon the receipt of a private
letter ruling from the IRS.
Assuming that the proposed transaction qualifies as one or more
reorganizations, or in the alternative, as an exchange, transfer and
reorganization, an Eligible Account Holder or Supplemental Eligible Account
Holder should be treated for federal income tax purposes as having exchanged
his or her deposit account(s) and ownership interest in County Savings for
(i) deposit account(s) in the Bank, (ii) interest(s) in the liquidation
account in the Bank, (iii) liquidation rights in the Mutual Holding Company,
which will be subordinate to a such person's interest in the liquidation
account in the Bank, and (iv) to the extent such person actually purchases
any Common Stock in the Subscription Offering in such person's capacity as an
Eligible Account Holder or Supplemental Eligible Account Holder, rights to
purchase such shares of Common Stock ("Subscription Rights"). In addition,
each Eligible Employee and Trustee purchasing in his capacity as such should
be treated as having exchanged his or her deposit account(s), if any, and
ownership interest in County Savings, if any, for (i) deposit account(s) in
the Bank and (ii) Subscription Rights.
For tax purposes, the liquidation rights in the Mutual Holding Company
and the Subscription Rights will be considered "boot" under Code Section 356,
taxable to the Eligible Account Holder or Supplemental Eligible Account
Holder to the extent of the fair market value of such property. In the
opinion of the Independent Appraiser, which
10
<PAGE>
opinion is not binding on the Internal Revenue Service ("IRS"), the
liquidation rights, which are subordinate to the interest in the liquidation
account, and the Subscription Rights issued to Supplemental Eligible Account
Holders (which are issued at the Unadjusted Price Per Share of the Common
Stock sold in the Offering) do not have any value, and thus, Eligible Account
Holders and Supplemental Eligible Account Holders will not recognize gain or
loss upon the receipt of the liquidation rights in the Mutual Holding Company
and Supplemental Eligible Account Holders will not recognize gain or loss
upon receipt of Subscription Rights.
THE SUBSCRIPTION RIGHTS ISSUED TO ELIGIBLE ACCOUNT HOLDERS WILL PROVIDE
SUCH PERSONS THE OPPORTUNITY TO PURCHASE COMMON STOCK AT A PRICE PER SHARE
EQUAL TO THE ADJUSTED PURCHASE PRICE PER SHARE, WHICH IS 90% OF THE PRICE PER
SHARE PAID BY SUBSCRIBERS OTHER THAN ELIGIBLE ACCOUNT HOLDERS BASED ON THE
TRADING PRICE OF COMMON STOCK. THE FEDERAL INCOME TAX CONSEQUENCES OF THE
RECEIPT, EXERCISE AND LAPSE OF SUBSCRIPTION RIGHTS WHICH ARE EXERCISABLE AT A
DISCOUNT ARE UNCERTAIN, BUT THEY MAY BE SIGNIFICANT AND COULD INCLUDE THE
RECOGNITION OF GAIN EQUAL TO THE FAIR MARKET VALUE OF SUCH SUBSCRIPTION
RIGHTS. THOSE CONSEQUENCES PRESENT NOVEL ISSUES OF TAX LAW WHICH ARE NOT
ADDRESSED BY ANY DIRECT AUTHORITIES AND, TO THE EXTENT RELATED AUTHORITIES DO
EXIST, THEY APPEAR TO BE CONFLICTING AND INCONCLUSIVE. ACCORDINGLY, THE TAX
OPINION WILL NOT EXPRESS AN OPINION ON THOSE ISSUES. ELIGIBLE ACCOUNT
HOLDERS, HOWEVER, SHOULD BE AWARE OF THE FOLLOWING:
(a) Eligible Account Holders who receive and exercise Subscription
Rights may be required to recognize gain in an amount equal to the sum of:
(i) the product of (a) the number of shares of Common Stock received by the
Eligible Account Holder pursuant to the exercise of Subscription Rights,
multiplied by (b) the excess of the fair market value of a share of Common
Stock on the date such stock is purchased pursuant to the exercise of
Subscription Rights (the "Purchase Date"), over the Adjusted Price Per Share.
(b) Eligible Account Holders who do not exercise some or all of their
Subscription Rights may also be required to recognize gain as a result of the
receipt of such rights. The amount of such gain should be equal to the
product of (i) the number of Subscription Rights received and not exercised
by the Eligible Account Holders times (ii) the excess of the fair market
value of a share of Common Stock on the date the Merger and Offering is
completed over the purchase price. However, such Eligible Account Holders
should also be entitled to offset such gain with a corresponding loss upon
the lapse of such Subscription Rights.
(c) If Eligible Account Holders are required to recognize gain as the
result of the receipt of Subscription Rights, Eligible Account Holders will
be required to report such gain for federal income tax purposes, even though
Eligible Account Holders who do not exercise all or a portion of the
Subscription Rights allocated to them should be entitled to offset all or a
portion of such gain with a corresponding loss to the extent such
Subscription Rights are not exercised.
(d) It does not appear that either the Company or County Savings is
required under the Federal income tax laws as now in effect to determine or
notify the Eligible Account Holders (on Form 1099 or otherwise) of the amount
or character of the gain to be reported by each Eligible Account Holder or
the year in which such gain should be reported for Federal income tax
purposes.
The Independent Appraiser has issued a letter stating that the
Subscription Rights issued to Supplemental Eligible Account Holders and Other
Depositors do not have any value, based on the fact that such rights are
acquired by the recipients without cost, are nontransferable and of short
duration, and afford the recipients the right only to purchase the Common
Stock at a price equal to the Actual Purchase Price. Assuming that, for the
reasons set forth above, the Subscription Rights issued to Supplemental
Eligible Account Holders and Depositors have no value at the time issued, the
Supplemental Eligible Account Holders and Depositors will not recognize gain
or loss upon the receipt of Subscription Rights or upon the exercise of
Subscription Rights. No gain or loss will be required to be recognized by
Subscribers who acquire shares in the Community Offering.
ELIGIBLE ACCOUNT HOLDERS, TRUSTEES, OFFICERS AND EMPLOYEES OF COUNTY
SAVINGS, TAX-EXEMPT PERSONS AND OTHER PERSONS WHO ARE INTERESTED IN THE
MERGER, OR THE OFFERING, ARE URGED TO CONSULT THEIR TAX ADVISORS AS TO THE
SPECIFIC TAX CONSEQUENCES TO THEM OF THE MERGER AND THE OFFERING, INCLUDING
11
<PAGE>
TAX REPORTING REQUIREMENTS, THE APPLICATION AND EFFECT OF FEDERAL, STATE,
LOCAL, FOREIGN AND OTHER TAX LAWS, AND THE IMPLICATIONS OF ANY PROPOSED
CHANGES IN THE TAX LAWS.
The foregoing is a summary of all anticipated material federal income
tax consequences of the Offering. See "The Offering and Merger; The
Offering--Certain Federal Income Tax Consequences" for a more complete
description of all anticipated material federal income tax consequences of
the Offering and the Offering.
POTENTIAL ADVERSE IMPACT OF CHANGES IN INTEREST RATES
Because the Company's primary asset is 100% of the outstanding shares of
the Bank's common stock, the Company's profitability depends primarily on the
profitability of the Bank. The Bank's profitability, like that of most
financial institutions, depends to a large extent upon its net interest
income, which is the difference between interest income on interest-earning
assets, such as loans and investments, and interest expense on interest-
bearing liabilities, such as deposits and other borrowings. The Bank's net
interest income, for example, could be adversely affected if changes in
market interest rates resulted in the cost of interest-bearing liabilities
increasing faster than any increase in the yield on the Bank's interest-
earning assets. The Bank, like other financial institutions, uses a
methodology that measures its exposure to interest rate risk based on its
interest rate sensitivity gap. A gap is considered positive when the amount
of interest sensitive assets exceeds the amount of interest sensitive
liabilities. A gap is considered negative when the amount of interest
sensitive liabilities exceeds the amount of interest sensitive assets. At
June 30, 1998, the Bank's cumulative one-year interest sensitivity gap (the
difference, based on certain assumptions, between the amount of interest-
earning assets anticipated by the Bank to mature or reprice within one year
and the amount of interest-bearing liabilities anticipated by the Bank, based
on certain assumptions, to mature or reprice within one year) as a percentage
of total assets was a negative 2.52%. As a result, based upon the
methodology used by the Bank, the yield on interest-earning assets of the
Bank may adjust to changes in interest rates at a slower rate than the cost
of the Bank's interest-bearing liabilities. Consequently, the Bank's net
interest income could be adversely affected during periods of rapidly rising
interest rates. There can be no assurance, however, that the changes in the
Bank's actual net interest income will be consistent with those projected in
the methodology. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in the accompanying 1997 Annual Report
for further discussion of the Bank's exposure to interest rate risk, as well
as any shortcomings in the methodology. Changes in interest rates also may
impact the volume of mortgage loan originations as well as the value of the
Bank's investments in mortgage-backed securities, investment securities and
other interest-earning assets.
CAPABILITY OF THE BANK'S DATA PROCESSING TO ACCOMMODATE THE YEAR 2000
Like many financial institutions, the Bank and County Savings rely upon
computers for the daily conduct of their businesses and for data processing
generally. There is concern that on January 1, 2000 computers will be unable
to "read" the new year and as a consequence, there may be widespread computer
malfunctions. The Bank's and County Savings' loan portfolio primarily
consists of loans secured by real estate. Consequently, neither believe that
their lending operations are dependent on borrowers' compliance with the year
2000 issue. However, both the Bank and County Savings rely on independent
third parties to provide data processing services, and each institution has
been advised by such parties that the year 2000 issue is being addressed and
that it should not affect the respective institutions' external data
processing services. The Bank is in the process of testing its computer
applications and hardware to ensure that they will be able to read the year
2000, and intends to complete testing by December 31, 1998. At June 30, 1998,
the costs the Bank to date incurred to address the year 2000 issue have not
been significant. In connection with the Merger, the Bank will incur costs
to integrate County Savings' computer operations with the Bank's computer
system. These costs will include the costs necessary to ensure that County
Savings' computer hardware is upgraded to be year 2000 compliant. Management
of the Bank estimates that the costs to complete a comprehensive upgrading of
the Bank's computer operations and integrate County Savings computer
operations will be $750,000, of which $300,000 has been spent as of June 30,
1998. However, there can be no assurance that the Bank's third party data
service providers will be able to satisfactorily address the year 2000 issue,
or that the associated costs of integrating County Savings computer system
with the Bank's, and making sure that the integrated computer system is year
2000 compliant will not exceed management's estimate.
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<PAGE>
CONTROL BY MUTUAL HOLDING COMPANY
As the majority stockholder of the Company, the Mutual Holding Company
will be able to elect all of the directors of the Company and direct its
business and affairs. Following the Merger, the Mutual Holding Company will
be controlled by its Board of Trustees which will consist of the current
Trustees of Pathfinder Bancorp, MHC and certain of the Trustees of County
Savings. As a result, it is expected that the Board of Trustees of the
Mutual Holding Company will exercise control over the Company and,
consequently, will be capable of perpetuating the Board of Directors and
management of the Mutual Holding Company, the Company and the Bank. THE
PURCHASERS OF THE COMMON STOCK IN THE OFFERING WILL BE MINORITY STOCKHOLDERS
OF THE COMPANY AND WILL HAVE LIMITED INFLUENCE IN ELECTING DIRECTORS OR
OTHERWISE DIRECTING THE AFFAIRS OF THE COMPANY AS LONG AS THE MUTUAL HOLDING
COMPANY REMAINS IN EXISTENCE. THE COMPANY'S CERTIFICATE OF INCORPORATION
PROHIBITS CUMULATIVE VOTING. THEREFORE, THE MUTUAL HOLDING COMPANY HAS THE
POWER TO ELECT ALL THE DIRECTORS OF THE COMPANY. NO ASSURANCES CAN BE GIVEN
THAT THE MUTUAL HOLDING COMPANY WILL NOT TAKE ACTION THAT INDIVIDUAL MINORITY
STOCKHOLDERS BELIEVE TO BE CONTRARY TO THEIR INTERESTS.
MINORITY PUBLIC OWNERSHIP AND CERTAIN ANTI-TAKEOVER PROVISIONS
VOTING CONTROL BY THE MUTUAL HOLDING COMPANY. Under New York law and
regulations, 51% of the Company's voting shares must be owned by the Mutual
Holding Company, and the Mutual Holding Company will own __% of the Common
Stock outstanding at the completion of the Offering. The Mutual Holding
Company will be controlled by its executive officers and directors, who will
consist of persons who are executive officers and directors of the Company
following the Merger. The Mutual Holding Company will elect all members of
the Board of Directors of the Company and, with certain exceptions, will
control the outcome of matters presented to the stockholders of the Company
for resolution by vote. The situations in which the Mutual Holding Company
may not control the outcome of such vote include any stockholder vote to
approve a restricted stock plan or stock option plan instituted within one
year of the Offering (which would require the approval of a majority of the
shares other than shares held by the Mutual Holding Company), any stockholder
vote relating to the Mutual Holding Company's conversion from the mutual to
the stock form of organization (which would require the approval of a
majority of shares other than shares held by the Mutual Holding Company).
The Mutual Holding Company, acting through its Board of Trustees, will be
able to control the business and operations of the Company and the Bank and
will be able to prevent any challenge to the ownership or control of the
Company by stockholders other than the Mutual Holding Company. Although New
York law and regulations permit the Mutual Holding Company to convert from
the mutual to the capital stock form of organization, there can be no
assurance when, if ever, a conversion of the Mutual Holding Company will
occur.
PROVISIONS IN THE COMPANY'S GOVERNING INSTRUMENTS. In addition, certain
provisions of the Company's Certificate of Incorporation and Bylaws,
particularly a provision limiting voting rights, as well as certain federal
and state regulations will assist the Company in maintaining its status as an
independent, publicly owned corporation. These provisions provide for, among
other things, staggered boards of directors, no cumulative voting for
directors, limits on the calling of special meetings of stockholders, and
limits on the ability to vote Common Stock in excess of 10% of outstanding
shares (except as to shares held by the Mutual Holding Company and the ESOP).
CONVERSION OF MUTUAL HOLDING COMPANY TO STOCK FORM - IMPACT OF WAIVED
DIVIDENDS ON MINORITY STOCKHOLDERS AND LIMITATIONS ON STOCKHOLDER PURCHASES
IN A CONVERSION TRANSACTION
The Mutual Holding Company is authorized by New York and federal law and
regulations to convert to stock form (a "Conversion Transaction"). There can
be no assurance when, if ever, a Conversion Transaction would occur. If the
Conversion Transaction does not occur, the Mutual Holding Company will always
own a majority of the voting stock of the Company.
In a Conversion Transaction, the Mutual Holding Company would merge with
and into City Savings or the Company, with City Savings or the Company (as
the case may be) as the resulting entity, and certain depositors of City
Savings (including depositors who were depositors of County Savings prior to
the Merger) would receive the right to subscribe for all of the shares of
common stock of the Company sold for cash in the Conversion Transaction,
according
13
<PAGE>
to terms established by the Board of Directors of the Company and the Board
of Trustees of the Mutual Holding Company. Depositors of County Savings who
remain as depositors of City Savings shall have the right to subscribe for
shares in the Conversion Transaction on the same terms as depositors of City
Savings. If the right to subscribe for shares sold in the Conversion
Transaction is determined, in part, upon deposit balances at a particular
date that precedes the date of the completion of the Merger, then deposits
held at County Savings shall be considered as though such deposits were held
at City Savings. The additional shares of Common Stock of the Company issued
in the Conversion Transaction would be sold at their aggregate pro forma
market value as determined by an independent appraisal.
In any Conversion Transaction, Minority Stockholders, if any, will be
entitled without additional consideration to maintain the same percentage
ownership interest in the Company after the Conversion Transaction as their
percentage ownership interest in the Company immediately prior to the
Conversion Transaction (i.e., the "Minority Ownership Interest"), subject
only to the following adjustments (if required by federal or state law,
regulation, or regulatory policy) to reflect: (i) the cumulative effect of
the aggregate amount of dividends waived by the Mutual Holding Company and
(ii) the market value of assets of the Mutual Holding Company (other than
common stock of the Company).
The adjustment referred to in clause (i) of the preceding paragraph
above would require that the Minority Ownership Interest (expressed as a
percentage) be adjusted by multiplying the Minority Ownership Interest by the
following fraction:
(Company stockholders' equity immediately prior to Conversion Transaction) -
----------------------------------------------------------------------------
(aggregate amount of dividends waived by Mutual Holding Company)
----------------------------------------------------------------
Company stockholders' equity immediately prior to Conversion Transaction
The Minority Ownership Interest shall also be adjusted to reflect any
assets of the Mutual Holding Company other than Common Stock of the Company
by multiplying the result obtained in the immediately preceding paragraph by
the following fraction:
(pro forma market value of Company) - (market value of assets of Mutual
-----------------------------------------------------------------------
Holding Company other than Company common stock)
------------------------------------------------
pro forma market value of Company
At the sole discretion of the Board of Trustees of the Mutual Holding
Company and the Board of Directors of the Company, a Conversion Transaction
may be effected in any other manner necessary to qualify the Conversion
Transaction as a tax-free merger under applicable federal and state tax laws.
A Conversion Transaction would require the approval of applicable federal
regulators, and would be presented to a vote of the depositors of City
Savings. City Savings has no current intention to conduct a Conversion
Transaction. Further, to date the Mutual Holding Company has not waived the
receipt of dividends.
EXTENSIVE GOVERNMENTAL REGULATION OF THE FINANCIAL INSTITUTION INDUSTRY
The Bank is subject to extensive regulation by the FDIC and is
periodically examined by the FDIC to test compliance with various regulatory
requirements. Such supervision and regulation is intended primarily for the
protection of depositors and the deposit insurance fund, and not for the
maximization of shareholder value. The lending and savings activities of the
Bank are also subject to various "consumer protection" laws that impose
significant liability for noncompliance, whether intentional or not.
Accordingly, the operations and profitability of financial institutions and
their holding companies are significantly affected by legislation and the
policies of the various federal banking agencies. Since 1989, legislation has
been enacted on various occasions that imposes increased regulatory
restrictions and obligations on the operations of financial institutions and
mandates the development of regulations designed to empower regulators to
take prompt corrective action with respect to institutions that fall below
certain capital standards.
THE POSSIBLE DECLINE IN THE MARKET FOR COMMON STOCK AFTER THE OFFERING
Because the Adjusted Price Per Share may be less than the market price
of Common Stock on the date the Offering is completed, some Eligible Account
Holders may be inclined to immediately sell shares of Common Stock, purchased
at the discounted price, in order to attempt to realize any such profit. In
addition, it is possible that the receipt, exercise, or lapse of subscription
rights may result in tax liability for certain Eligible Account Holders. In
such
14
<PAGE>
case, Eligible Account Holders may also be inclined to sell Common Stock to
realize sufficient cash to pay the tax liability resulting therefrom. Any
such sales, depending on the volume and timing, could cause the market price
of Common Stock to decline. Purchasers should consider these possibilities
in determining whether to purchase Common Stock and, the timing of any sale
of Common Stock. The Common Stock is quoted on the Nasdaq SmallCap Market.
See "Market Information" and "The Offering and Merger--Stock Pricing and
Number of Shares to be Issued," "--The Independent Valuation" and "--Certain
Federal Income Tax Consequences."
INABILITY TO RESELL THE COMMON STOCK UNTIL THE ISSUANCE AND RECEIPT OF
CERTIFICATES
Except for shares issued to a person who is deemed an affiliate of
County Savings or the Company for purposes of Rule 145 under the 1933 Act,
the Common Stock purchased in the Offering will be freely transferable under
the 1933 Act. However, until certificates for Common Stock are delivered to
purchasers, purchasers may not be able to sell the shares of Common Stock for
which they subscribe. Accordingly, during such period subscribers will bear
the risk of any decline in the market price in the Common Stock. The Company
intends to mail the certificates representing Common Stock issued in the
Offering promptly following completion of the Offering. See "The Offering
and Merger--Procedure for Purchasing Shares in Subscription and Community
Offering."
THE HIGHLY COMPETITIVE ENVIRONMENT IN WHICH THE COMPANY OPERATES
The Bank faces significant competition in its market area both in
attracting deposits and in originating loans. The Bank faces direct
competition from a significant number of financial institutions, as well as
other providers of financial services, operating in its market area, many
with a state-wide or regional presence, and, in some cases, a national
presence. This competition arises from commercial banks, savings
institutions, mortgage banking companies, credit unions, brokerage firms,
mutual funds and other providers of financial services, many of which are
significantly larger than the Bank, and therefore have greater financial and
marketing resources than those of the Bank.
BEST EFFORTS OFFERING WITH NO REQUIRED MINIMUM NUMBER OF SHARES
The Company has engaged __________ as a financial and marketing advisor,
and ___________ has agreed to use its best efforts to solicit subscriptions
and purchase orders for Common Stock in the Offering. __________ has not
prepared any report or opinion constituting a recommendation or advice to the
Company, nor has it prepared an opinion as to the fairness of the terms of
the Offering. ___________ expresses no opinion as to the price at which
Common Stock to be issued in the Offering may trade. Furthermore, __________
has not verified the accuracy or completeness of the information contained in
this Prospectus. See "The Reorganization and Offering--Plan of Distribution
and Selling Commissions."
The minimum dollar amount of Common Stock that must be sold in the
Offering is $4,574,705, based on the Unadjusted Price Per Share, unless the
Company obtains Department and FDIC approval of an offering of a lesser
dollar amount of Common Stock. If the Company obtains regulatory approval of
an offering of a lesser dollar amount of Common Stock, then the remaining
unsold Common Stock will be issued to the Mutual Holding Company, which will
not pay cash consideration to the Company for such shares. There can be no
assurance that the Company will be able to obtain regulatory approval of such
an issuance of unsold shares to the Mutual Holding Company. In addition,
because the number of shares to be issued in the Offering is based on the
Unadjusted Price Per Share, which cannot be determined until the consummation
of the Offering, the Company has not established a required minimum number of
shares that must be sold in order to complete the Offering. See "The
Offering and Merger--Description of Sales Activity" and "--Stock Pricing and
Number of Shares to be Issued."
15
<PAGE>
PATHFINDER BANCORP, INC. AND SUBSIDIARY
SELECTED FINANCIAL AND OTHER DATA
Set forth below are selected consolidated financial and other data of the
Company and the Bank. For additional information about the Company, please
refer to "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the Consolidated Financial Statements of the Company
and related notes included in the 1997 Annual Report that accompanies this
Prospectus. Because the Company had insignificant assets and operations until
completion of the Two-Tier Reorganization on December 30, 1997, information as
of and for periods ending prior to such time is presented for the Bank.
<TABLE>
<CAPTION>
AT AT DECEMBER 31,
JUNE 30, -----------------------------------------------------
1998 1997 1996 1995 1994 1993
--------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Total assets........... $198,091 $196,770 $189,937 $180,752 $170,715 $129,270
Interest-earning
deposits at other
financial institutions 1,300 -- 1,550 8,200 13,627 7,962
Investment securities.. 27,129 33,663 36,673 44,932 48,135 33,776
Mortgage-backed
securities............ 19,908 23,158 22,829 7,953 992 1,408
Loans receivable net:
Real estate.......... 113,292 109,543 99,047 91,023 83,563 74,150
Consumer and other... 11,100 10,495 9,695 9,126 6,105 4,663
Total loans
receivable, net.... 124,392 120,038 108,742 100,149 89,668 78,813
Intangible assets...... 3,447 3,605 3,921 4,236 4,552 --
Deposits............... 157,399 152,399 158,998 158,324 155,764 115,344
Borrowed funds......... 14,600 18,242 7,610 -- -- --
Note payable ESOP...... 402 430 486 425 -- --
Equity................. 23,544 23,583 21,390 20,751 13,990 12,953
AT OR FOR THE
SIX MONTHS FOR THE YEARS ENDED DECEMBER 31,
ENDED JUNE 30, ----------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
-------- -------- -------- -------- -------- -------- ------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income.......... $ 7,126 $ 6,972 $ 14,168 $ 13,213 $ 12,205 $ 10,443 $9,858
Interest expense......... 3,551 3,366 6,892 6,414 6,259 4,697 4,062
Net interest income...... 3,574 3,605 7,276 6,799 5,946 5,746 5,796
Net income............... 745 1,137 1,854 1,272 990 1,146 1,802
PER COMMON SHARE (b)
Net income:
Basic................... 0.27 0.41 0.66 0.45 0.07 NA NA
Diluted................. 0.26 0.41 0.66 0.45 0.07 NA NA
Book value.............. 8.46 8.00 8.40 7.22 7.00 NA NA
Cash dividends declared 0.10 0.08 0.17 0.13 -- NA NA
Stock price:
IOP................... -- -- -- -- 5.000
High.................. 26.125 9.333 20.000 7.083 7.167 NA NA
Low................... 17.172 6.250 6.250 5.333 5.583 NA NA
Close................. 22.000 8.666 20.000 6.250 7.00 NA NA
SELECTED PERFORMANCE RATIOS (c)
Return on average assets.. 0.76% 1.19% 0.97% 0.69% 0.56% 0.74% 1.40%
Return on average equity.. 6.25 10.54 8.35 6.09 6.31 8.20 14.99
Return on tangible equity. 7.34 12.84 9.28 7.28 5.99 12.14 13.91
Dividend payout ratio..... 37.10 19.69 26.19 29.37 -- NA NA
Equity to total assets.... 11.89 11.95 11.98 11.26 11.47 8.19 10.02
Net interest rate spread.. 3.87 4.02 3.98 3.88 3.72 4.01 4.68
Noninterest expense to
total assets............. 3.15 2.72 2.94 2.82 2.94 2.83 2.72
Nonperforming loans to
net loans receivable..... 1.10 1.38 1.28 2.05 0.92 1.24 1.00
Nonperforming assets to
total assets............. 1.30 1.15 1.17 1.54 0.83 1.01 1.24
Allowance for loan losses
to net loans receivable.. 0.63 0.91 0.69 0.83 0.35 0.35 0.36
Number of full-service
offices.................. 5 5 5 5 5 5 3
</TABLE>
(a) Earnings per share for 1995 are based on the period from November 15, 1995
to December 31, 1995.
(b) Per common share data has been retroactively restated to reflect the three-
for-two stock split paid on February 5, 1998 to stockholders of record
January 26, 1998.
(c) Annualized where appropriate.
16
<PAGE>
OSWEGO COUNTY SAVINGS BANK
SELECTED FINANCIAL AND OTHER DATA
Set forth below are selected financial and other data of County Savings
at and for the years indicated. The selected financial and other data does
not purport to be complete and is qualified in its entirety by reference to
the detailed information, financial statements and notes thereto of County
Savings that are presented elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT AT DECEMBER 31,
JUNE 30, 1998 1997 1996
------------- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
SELECTED FINANCIAL CONDITION DATA:
Total assets......................................... $110,343 $112,139 $115,650
Cash and due from banks.............................. 3,299 4,083 4,723
Federal funds sold and other short-term investments.. 5,195 2,681 12,819
Securities held to maturity.......................... 10,762 10,441 10,106
Securities available for sale........................ 12,191 10,921 5
Loans, net........................................... 74,013 79,052 83,504
Deposits............................................. 96,679 97,899 102,015
Net worth............................................ 11,388 11,173 11,197
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31,
1998 1997 1997 1996
-------- -------- -------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
SELECTED OPERATIONS DATA:
Total interest income................................ $ 3,983 $ 4,139 $ 8,233 $8,169
Total interest expense............................... 1,732 1,883 3,738 3,973
-------- -------- -------- ------
Net interest income................................. 2,251 2,256 4,495 4,196
-------- -------- -------- ------
Provision for loan losses............................ 60 68 525 1,141
Other operating income............................... 224 235 535 502
Other operating expense.............................. 2,121 1,807 4,479 3,737
-------- -------- -------- ------
Income (loss) before income tax expense (benefit).... 294 616 26 (180)
Income tax expense (benefit)......................... 124 305 56 (119)
-------- -------- -------- ------
Net income (loss)................................... $ 170 $ 311 $ (30) $ (61)
======== ======== ======== ======
</TABLE>
17
<PAGE>
PATHFINDER BANCORP, INC.
The Company is a Delaware corporation that was formed to become the
stock holding company of the Bank in a transaction (the "Two-Tier
Reorganization") that was approved by the Bank's stockholders on December 17,
1997, and completed on December 30, 1997. In the Two-Tier Reorganization,
each share of the Bank's common stock was converted into and became a share
of Common Stock of the Company, and the Bank became a wholly-owned subsidiary
of the Company. The Mutual Holding Company and stockholders other than the
Mutual Holding Company, which owned approximately 54% and 46%, respectively,
of the Bank's outstanding shares of common stock immediately prior to
completion of the Two-Tier Reorganization, became the owners of the same
percentage of the outstanding shares of Common Stock of the Company
immediately following the completion of the Two-Tier Reorganization.
At June 30, 1998, the Company had total assets of $198.1 million, total
deposits of $157.4 million and stockholders' equity of $23.5 million. As of
June 30, 1998, the Company, through the Bank, operated five community banking
offices throughout its market area in Oswego County. The Bank has focused
its lending activities primarily on the origination of loans secured by first
mortgages on owner-occupied, one- to four-family real estate. At June 30,
1998, $113.3 million, or 91.1%, of the Bank's total loans receivable were
secured by real estate, of which $83.4 million or 73.6 %, were loans secured
by one- to four-family residences, $18.3 million or 16.1%, were secured by
commercial real estate, $2.0 million or 1.7% were secured by multi-family
properties and $9.7 million or 8.6% were secured by second liens on
residential properties. The Bank also originates consumer and other loans
which totaled $11.1 million, or 8.9%, of the Bank's total loans receivable.
The Bank invests a portion of its assets in securities issued by the
United States Government, state and municipal obligations, corporate debt
securities, mutual funds, and equity securities. The Bank also invests in
mortgage-backed securities primarily issued or guaranteed by the United
States Government or agencies thereof. The Bank's principal sources of funds
are deposits, principal and interest payments on loans and borrowings from
correspondent financial institutions. The principal source of income is
interest on loans and investment securities. The Bank's principal expenses
are interest paid on deposits, and employee compensation and benefits.
The Company's principal executive office is located at 214 West First
Street, Oswego, New York, and its telephone number at that address is (315)
343-0057.
USE OF PROCEEDS
Although the actual net proceeds from the sale of the Common Stock
cannot be determined until the Offering is completed, it is presently
anticipated that the net proceeds will be between $2.2 million and $3.6
million ($4.3 million at the maximum, as adjusted), assuming that: (i) all of
the Common Stock offered in the Offering is purchased by Eligible Account
Holders at the Adjusted Price Per Share; (ii) the Mutual Holding Company is
capitalized with $200,000 in cash; (iii) County Savings contributes $2.0
million in cash or other assets to the Charitable Foundation; (iv) a number
of shares equal to 8% of the Common Stock sold in the Offering is purchased
by the Bank's ESOP; and (v) a number of shares of Common Stock equal to 4% of
the Common Stock sold in the Offering is purchased by the Bank's Recognition
and Retention Plan for awards to employees, that such open market purchases
are funded with gross proceeds from the Offering, and that the purchase price
is equal to the Unadjusted Purchase Price Per Share. The net proceeds of the
Offering will be initially invested in federal funds and investment grade,
short-term marketable securities, or used for general corporate purposes.
18
<PAGE>
The following table demonstrates the estimated net proceeds of the Offering.
<TABLE>
<CAPTION>
VALUATION
VALUATION VALUATION VALUATION MAXIMUM,
MINIMUM MIDPOINT MAXIMUM AS ADJUSTED
--------- --------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Appraised value of County Savings/(1)/.............. $11,050 $13,000 $14,950 $ 17,193
Value of Common Stock offered in the Offering/(2)/.. 5,083 5,980 6,877 7,909
Eligible Account Holder discount/(3)/............... (508) (598) (688) (791)
------- ------- ------- --------
Gross proceeds from the sale of Common Stock........ 4,575 5,382 6,189 7,118
Merger and Offering expenses........................ (229) (269) (309) (356)
Funds utilized to capitalize the Mutual Holding
Company............................................ (200) (200) (200) (200)
Charitable contribution, net of tax benefit......... (1,380) (1,380) (1,380) (1,380)
Restricted stock issued to County Savings
management and Trustees/(4)/....................... (183) (215) (248) (285)
Common Stock acquired by ESOP /(5)/................. (366) (431) (495) (569)
------- ------- ------- -------
Estimated net proceeds/(5)/...................... $ 2,217 $ 2,887 $ 3,557 $ 4,328
======= ======= ======= =======
</TABLE>
- ----------------
/(1)/ The Appraisal was prepared based on the assumption that County Savings
would make a charitable contribution of $2.0 million prior to the
completion of the Merger. Offering proceeds have been reduced by the
amount of the charitable contribution, net of tax benefit. See "The
Offering and Merger-The Charitable Foundation."
/(2)/ Assumes that 46% of the Common Stock issued in the Merger is sold in the
Offerings.
/(3)/ Assumes that all shares issued in the Offering are purchased by Eligible
Account Holders at the Adjusted Price Per Share.
/(4)/ Assumes that a number of shares equal to 4% of the shares sold in the
Offering are purchased by the Bank's Recognition and Retention Plan for
awards to County Savings employees, such open market purchases are funded
with Offering proceeds, and the price paid is equal to the Unadjusted
Price Per Share. Alternatively, such shares could be issued out of the
Company's authorized but unissued shares of Common Stock, which would
result in an increase in pro forma Offering proceeds as presented. See
"The Offering and Merger--Interests of Certain Persons in the Offering."
/(5)/ Assumes the ESOP purchases 8% of the shares issued in the Offering.
MARKET INFORMATION
The Common Stock is listed on the Nasdaq SmallCap Market under the
symbol "PBHC." As of June 30, 1998, the Company had five registered market
makers, 197 stockholders of record (excluding the number of persons or
entities holding stock in street name through various brokerage firms), and
2,782,232 shares outstanding (as adjusted). The following table sets forth
market price and dividend information for the Common Stock or, prior to the
completion of the Two-Tier Reorganization, the Bank's common stock.
Information is presented for each quarter of the previous two calendar years
through June 30, 1998. All information has been revised to reflect the
Company's three-for-two stock split.
QUARTER ENDED HIGH LOW DIVIDENDS
------------------- ------- ------- ---------
1996
----
March 31 $ 6.833 $ 5.833 $.0333
June 30 6.000 5.500 .0333
September 30 6.000 5.333 .0333
December 31 7.083 5.833 .0333
1997
----
March 31 8.667 6.250 .0333
June 30 9.333 7.250 .0467
September 30 14.750 8.583 .0467
December 31 20.000 14.000 .0467
1998
----
March 31 24.625 17.172 .0500
June 30 26.125 21.000 .0500
The last trade of the Common Stock on __________, 1998 was at a price of
$_______per share. Following completion of the Offering, the Company expects
that the Common Stock will be listed on the Nasdaq National Market System.
19
<PAGE>
DIVIDEND POLICY
GENERAL
The Bank, or, since the Two-Tier Reorganization, the Company, has paid
cash dividends every quarter since the completion of its mutual holding
company reorganization and minority stock issuance in November 1995, and it
is the current policy of the Company to pay a quarterly cash dividend of $.05
per share. As of the date hereof the Company's assets consist of $3.0
million in cash and its ownership of 100% of the common stock of the Bank.
The Company's principal source of income with which to pay dividends consists
of dividends from the Bank. Accordingly, the Company's ability to pay
dividends will depend in part on its receipt of sufficient cash dividends
from the Bank, the $3.0 million in cash used to capitalize the Company and
the amount of net proceeds from the Offering retained by the Company. UNDER
DELAWARE GENERAL CORPORATE 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.
Whether dividends will be paid by the Company will be determined by the
Company's Board of Directors and will be based upon its consolidated
financial condition, results of operations, tax considerations, economic
conditions, regulatory restrictions which affect the payment of dividends by
the Bank to the Company, and other factors. In addition, the Company's
ability to pay dividends is subject to limitations under Delaware law, and
regulations of the FRB that require the Company to maintain minimum levels of
capital. There can be no assurance that dividends will be paid on Company
Common Stock or that, if paid, such dividends will not be reduced or
eliminated in the future.
The Bank's ability to pay dividends is governed by New York law. 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.
DIVIDEND WAIVERS BY THE MUTUAL HOLDING COMPANY
It is the current policy of many mutual holding companies to waive the
right to receive dividends paid by their subsidiary savings association or
savings association holding company, and in such cases dividends are paid
only to minority stockholders and not to the mutual holding company. In
connection with the FRB's approval of the Bank's formation of the Mutual
Holding Company, and the FRB's approval of the Two-Tier Reorganization, the
FRB imposed certain conditions on the waiver by the Mutual Holding Company of
dividends paid on the 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 Stockholders and will be excluded from capital for purposes of
calculating dividends payable to Minority Stockholders. 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 Stockholders. The
restricted capital account and liquidation account amounts would not be
reflected in the Bank's or the Company'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 Office of Thrift Supervision ("OTS") except that such rules
would be administered by the FRB, and any other rules and regulations adopted
by the FRB.
The Mutual Holding Company's decision as to whether or not to apply to
the FRB for approval to waive a particular dividend will depend on a number
of factors, including the Mutual Holding Company's capital needs,
20
<PAGE>
regulatory approvals and the investment alternatives available to the Mutual
Holding Company as compared to those available to the Bank and the Company.
There can be no assurance (i) that the Mutual Holding Company will apply to
the FRB for approval to waive dividends paid by the 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. As of
the date hereof, the FRB had not given its approval to any waiver, and the
Mutual Holding Company had not waived any dividends.
CAPITALIZATION
The following table presents the consolidated capitalization of the
Company at June 30, 1998 and the pro forma consolidated capitalization of the
Company at such date after giving effect to the Merger of County Savings into
the Bank and the receipt of the estimated net proceeds from the sale of the
Common Stock offered hereby at the minimum, midpoint, maximum and adjusted
maximum of the Offering Range, based on the assumptions set forth above in
"Use of Proceeds" and in the notes below.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1998
-----------------------------------------------
MAXIMUM
MINIMUM MIDPOINT MAXIMUM AS ADJUSTED
338,867 398,667 458,467 527,237
COMPANY COUNTY SAVINGS PRICE OF PRICE OF PRICE OF PRICE OF
ACTUAL, AS OF ACTUAL, AS OF $13.50 $13.50 $13.50 $13.50
JUNE 30, 1998 JUNE 30, 1998 PER SHARE PER SHARE PER SHARE PER SHARE
------------- -------------- --------- ----------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Deposits....................................... $157,399 $ 97,602 $255,001 $255,001 $255,001 $255,001
Borrowings..................................... 15,002 -- 15,002 15,002 15,002 15,002
-------- --------- -------- -------- -------- --------
Total deposits and borrowed funds............. $172,401 $ 97,602 $270,003 $270,003 $270,003 $270,003
======== ========= ======== ======== ======== ========
Stockholders' equity:
Common stock, $0.10 par value 9,000,000 shares
authorized; shares to be issued as reflected. 288 -- 361 374 387 402
Additional paid-in capital.................... 7,569 -- 17,808 19,615 21,422 23,500
Retained earnings............................. 17,625 11,338 17,005 17,005 17,005 17,005
Unearned stock-based compensation............. (1,634) -- (1,634) (1,634) (1,634) (1,634)
Plus:
Tax benefit of contribution to Charitable.... -- -- 620 620 620 620
Foundation..................................
Net unrealized gain.......................... 874 -- 874 874 874 874
Less:
Common stock acquired by ESOP................ (379) -- (745) (810) (874) (948)
Common stock acquired by Recognition and
Retention Plan.............................. -- -- (183) (215) (248) (285)
Treasury stock............................... (798) -- (798) (798) (798) (798)
-------- --------- -------- -------- -------- --------
Total stockholders' equity.................. $ 23,545 $ 11,338 $ 33,308 $ 35,031 $ 36,754 $ 38,736
======== ========= ======== ======== ======== ========
</TABLE>
PRO FORMA DATA
The following tables set forth selected unaudited pro forma financial
data for the Company reflecting the Offering and Merger, assuming that the
Merger was accounted for using the purchase method of accounting. The pro
forma statement of income information has been prepared assuming as follows:
(i) the shares of Common Stock are issued from authorized but unissued shares
at the beginning of the period and shares sold in the Offering as well as
shares issued to the Mutual Holding Company are included in per share
amounts; (ii) net proceeds from the Offering are invested at 5.37% and 5.48%
(the one year U.S. Treasury Bill yield as of June 30, 1998 and December 31,
1997, respectively; (iii) the effective tax rate of the Company for the six
months ended June 30, 1998 and the year ended December 31, 1997, was 31%;
(iv) unless otherwise noted, the shares of Common Stock are sold in the
Offering at the mid-point of the Valuation Range; (v) total expenses of the
Offering are assumed to be 5% of the offering; (vi) all of the shares of
Common Stock sold in the Offering are purchased by Eligible Account Holders
at the Adjusted Price Per Share; (vii) a number of shares of Common Stock
equal to 8% of the Common Stock sold in the Offering is purchased by the
ESOP; and (viii) a number of shares of Common Stock equal to 4% of the Common
Stock sold in the Offering
21
<PAGE>
is purchased by the Bank's Recognition and Retention Plan ("Recognition and
Retention Plan") for awards to employees, such open market purchases are
funded with gross proceeds from the Offering, and the purchase price is equal
to the Adjusted Price Per Share. No assurance can be given that the Offering
and Merger will be completed on the terms and conditions described herein.
22
<PAGE>
REGULATORY CAPITAL
Set forth below is a summary of the Bank's and the Company's historical
regulatory capital at June 30, 1998, and pro forma regulatory capital following
completion of the Merger and the Offering, based on the estimated net proceeds
from the sale of the Common Stock in the Offering at the midpoint of the
Valuation Range. The Bank and the Company exceed all regulatory capital
requirements on an historical and pro forma basis.
<TABLE>
<CAPTION>
CITY SAVINGS COUNTY SAVINGS PRO FORMA AT JUNE 30, 1998
ACTUAL, AS OF ACTUAL, AS OF --------------------------
JUNE 30, 1998 JUNE 30, 1998 MINIMUM
----------------------- ---------------------- --------------------------
PERCENT PERCENT PERCENT
OF OF OF
AMOUNT ASSETS/(2)/ AMOUNT ASSETS/(2)/ AMOUNT ASSETS/(2)/
------ ----------- ------- ----------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Capital and Retained
Earnings Under
Generally Accepted
Accounting Principles.... $20,557 10.53% $11,338 10.28% $30,321 9.77%
======= ===== ======= ===== ======= ======
Tier I Leverage/(3)/....... $16,236 8.50% $11,338 10.36% $25,999 8.52%
Requirement/(4)/........... 5,728 3.00% 3,283 3.00% 9,154 3.00%
------- ----- ------- ----- ------- ------
Excess..................... $10,508 5.50% $ 8,055 7.36% $16,845 5.52%
======= ===== ======= ===== ======= ======
Tier I Risk Based/(3), (5)/ $16,236 13.54% $11,338 16.35% $25,999 13.67%
Requirement................ 4,798 4.00% 2,774 4.00% 7,609 4.00%
------- ----- ------- ----- ------- ------
Excess..................... $11,438 9.54% $ 8,564 12.35% $18,390 9.67%
======= ===== ======= ===== ======= ======
Total Risk-Based........... $17,060 14.22% $12,210 17.61% $28,119 14.78%
Risk-Based
Requirement/(3), (5)/..... 9,595 8.00% 5,547 8.00% $15,218 8.00%
------- ----- ------- ----- ------- ------
Excess..................... $ 7,465 6.22% $ 6,663 9.61% $12,901 6.78%
======= ===== ======= ===== ======= ======
<CAPTION>
Pro Forma at June 30, 1998
---------------------------------------------------------
MIDPOINT MAXIMUM MAXIMUM, AS ADJUSTED/(1)/
------------------------ ----------------------- -------------------------
PERCENT PERCENT PERCENT
OF OF OF
AMOUNT ASSETS/(2)/ AMOUNT ASSETS/(2)/ AMOUNT ASSETS/(2)/
------- ---------- ------ ----------- ------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Capital and Retained
Earnings Under
Generally Accepted
Accounting Principles.... $32,044 10.23% $33,767 10.68% $35,749 11.20%
======= ===== ======= ===== ======= =====
Tier I Leverage/(3)/....... $27,722 9.00% $29,445 9.47% $31,427 10.01%
Requirement/(4)/........... 9,239 3.00% 9,325 3.00% 9,422 3.00%
------- ----- ------- ----- ------- -----
Excess..................... $18,483 6.00% $20,120 6.47% $22,002 7.01%
======= ===== ======= ===== ======= =====
Tier I Risk Based/(3), (5)/ $27,722 14.53% $29,445 15.39% $31,427 16.37%
Requirement................ 7,632 4.00% 7,655 4.00% 7,681 4.00%
------- ----- ------- ----- ------- -----
Excess..................... $20,090 10.53% $21,790 11.39% $23,746 12.37%
======= ===== ======= ===== ======= =====
Total Risk-Based........... $29,842 15.64% $31,565 16.49% $33,547 17.47%
Risk-Based
Requirement/(3), (5)/..... 15,264 8.00% $15,309 8.00% $15,362 8.00%
------- ----- ------- ----- ------- -----
Excess..................... $14,578 7.64% $16,256 8.49% $18,185 9.47%
======= ===== ======= ===== ======= =====
</TABLE>
___________________________
/(1)/ As adjusted to give effect to an increase in the number of shares which
would occur due to an increase in the Valuation Range of up to 15% as a
result of regulatory considerations, demand for the shares, or changes in
market conditions or general financial and economic conditions following
the commencement of the Offering.
/(2)/ Tier I Leverage capital levels are shown as a percentage of tangible
assets. Risk-based capital levels are calculated on the basis of a
percentage of risk-weighted assets.
/(3)/ Pro forma capital levels assume: funding by the Bank of the restricted
stock plan to enable the plan to acquire in the open market a number of
shares equal to 4% of the Common Stock sold in the Offering; the purchase
by the ESOP of 8% of the shares sold in the Offering.
/(4)/ The current leverage capital requirement is 3% of total adjusted assets
for banks that receive the highest supervisory rating for safety and
soundness and that are not experiencing or anticipating significant
growth. The current leverage capital ratio applicable to all other banks
is 4% to 5%. See "Regulation-Regulatory Capital Requirements.
/(5)/ Assumes net proceeds are invested in assets that carry a risk-weighting
equal to the average risk weighting of the Bank's risk-weighted assets as
of June 30, 1998.
23
<PAGE>
PRO FORMA UNAUDITED COMBINED CONDENSED BALANCE SHEET AS OF JUNE 30, 1998
The following unaudited pro forma combined balance sheet information
reflects (i) the historical consolidated balance sheets of the Company and
County Savings as of June 30, 1998, and (ii) the pro forma combined condensed
balance sheet of the Company at the respective dates after giving effect to the
Merger.
<TABLE>
<CAPTION>
AT JUNE 30, 1998
-------------------------------------------------------------
THE COMPANY
AND
THE COUNTY PRO FORMA COUNTY SAVINGS
COMPANY SAVINGS ADJUSTMENTS COMBINED
------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
ASSETS
- ------
Cash and due from banks..................................... $ 4,520,170 $ 3,298,749 $ 2,267,069 $ 10,085,988
Federal funds sold.......................................... 1,300,000 5,195,379 -- 6,495,379
------------ ------------ ------------ ----------------
Total cash and cash equivalents............................ 5,820,170 8,494,128 2,267,069 16,581,367
Investment securities....................................... 47,037,418 22,953,582 636,532 70,627,532
Mortgage loans--held for sale............................... 6,657,825 -- -- 6,657,825
Loans:
Real estate................................................ 113,292,320 73,633,934 -- 186,926,254
Consumer and other......................................... 11,099,895 1,674,958 -- 12,774,853
------------ ------------ ------------ ----------------
Total loans............................................ 124,392,215 75,308,892 -- 199,701,107
Less: Unearned discounts and origination fees.............. 240,103 -- -- 240,103
Allowance for loan losses............................ 824,161 1,296,131 2,120,292
------------ ------------ ------------ ----------------
Loans receivable, net.................................. 123,327,951 74,012,761 -- 197,340,712
Premises and equipment...................................... 4,085,244 2,255,387 6,340,631
Accrued interest receivable................................. 1,405,298 882,555 -- 2,287,853
Other real estate........................................... 1,139,517 583,344 -- 1,722,861
Intangible assets........................................... 3,446,998 -- (439,530) 3,007,468
Purchase accounting adjustments to noncurrent assets........ -- -- (2,737,786) (2,737,786)
Other assets................................................ 5,170,889 1,160,816 422,530 6,754,235
------------ ------------ ------------ ----------------
Total assets............................................... $198,091,310 $110,342,573 $ 148,815 $ 308,582,698
============ ============ ============ ================
LIABILITIES
- ------------------------------------------------------------
Due to depositors........................................... 157,398,930 97,601,999 -- 255,000,929
Borrowed funds.............................................. 14,600,000 -- -- 14,600,000
Note payable--ESOP.......................................... 402,226 -- -- 402,226
Other liabilities........................................... 2,145,835 1,402,324 -- 3,548,159
------------ ------------ ------------ ----------------
Total liabilities.......................................... 174,546,991 99,004,323 -- 273,551,314
SHAREHOLDERS' EQUITY
- --------------------
Common stock, par value $.10 per share; authorized
9,000,000 shares; 2,874,999 shares issued and outstanding.. 287,500 -- 86,667 374,167
Paid in capital............................................. 7,568,675 -- 12,046,238 19,614,913
Retained earnings........................................... 17,625,300 11,337,782 (11,337,782) 17,625,300
Unearned stock based compensation........................... (1,634,326) -- (215,280) (1,849,606)
Accumulated other comprehensive income...................... 874,482 468 (468) 874,482
Unearned ESOP shares........................................ (378,988) -- (430,560) (809,548)
Treasury stock, at cost; 43,625 shares...................... (798,324) -- -- (798,324)
------------ ------------ ------------ ----------------
Total shareholders' equity................................. 23,544,319 11,338,250 148,815 35,031,384
------------ ------------ ------------ ----------------
Total liabilities and shareholders' equity.................. $198,091,310 $110,342,573 $ 148,815 $ 308,582,698
============ ============ ============ ================
</TABLE>
ASSUMPTIONS:
/(1)/ The appraised value of County Savings at the midpoint of the Offering is
$13 million.
/(2)/ The average of the bid and ask price of the Company's Common Stock for the
ten days preceding the consummation of the Merger is $15.00 per share.
/(3)/ The Company issues 866,667 shares of Common Stock. 54%, or 468,000 shares
are issued to the Mutual Holding Company and 46%, or 398,867 shares, are
issued to eligible account holders of County Savings.
/(4)/ The book value of net assets acquired over the purchase price of
$2,737,786 will be allocated to noncurrent assets acquired.
/(5)/ The goodwill and the purchase accounting adjustment to noncurrent assets
are amortized over a 15 year period.
The preliminary analysis does not take into consideration adjustments for the
fair value of County Savings loans and deposits at the time of the consummation
of the merger.
24
<PAGE>
PRO FORMA UNAUDITED COMBINED CONDENSED STATEMENTS OF INCOME
The following unaudited pro forma combined condensed statements of
income reflect the historical statements of income of the Company and County
Savings, as indicated below, for each period presented and the pro forma
combined condensed statements of income of the Company, after giving effect to
the Merger. The Merger has been reflected using the purchase method of
accounting. The pro forma combined condensed statements of income for the six
month periods ended June 30, 1998 and 1997 and the year ended December 31, 1997
were prepared on the assumption that the Merger had been effected as of the
beginning of the applicable six month or annual period. As such, the per share
data reflects an additional number of shares issued to represent the fair value
of County Savings based upon the preliminary valuation applied retroactively to
beginning of the period book value. The earnings per share information
presented below is based upon a minimum, midpoint and maximum range of the
preliminary valuation. The midpoint represents the expected fair value and the
minimum and maximum result from 15% adjustments to the midpoint to create a
range of variance. There can be no assurance that the actual valuation will be
the same as the preliminary valuation of County Savings of $13 million as of
June 30, 1998.
PRO FORMA UNAUDITED COMBINED CONDENSED STATEMENTS OF INCOME FOR THE SIX MONTHS
ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
THE COMPANY &
COUNTY COUNTY SAVINGS
THE COMPANY SAVINGS ADJUSTMENTS COMBINED
----------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Interest income............................................... $7,125,515 $3,983,088 $ 60,871/(a)/ $11,169,474
Interest expense.............................................. 3,551,461 1,732,283 -- 5,283,744
---------- ---------- -------- -----------
Net interest income........................................ 3,574,054 2,250,805 60,871 5,885,730
Provision for possible loan losses............................ 140,541 60,000 -- 200,541
---------- ---------- -------- -----------
Net interest income after provision for possible loan losses.. 3,433,513 2,190,805 60,81 5,685,189
---------- ---------- -------- -----------
Noninterest income............................................ 710,576 224,281 -- 934,857
Noninterest expense........................................... 3,094,121 2,120,625 (62,855)/(b)(c)/ 5,151,891
---------- ---------- -------- -----------
Earnings before income tax expense............................ 1,049,968 294,461 123,726 1,468,155
Income tax expense............................................ 304,490 124,000 5,523 434,013
---------- ---------- -------- -----------
Net income.................................................... $ 745,478 $ 170,461 $118,203 $ 1,034,142
========== ========== ======== ===========
Earnings per share minimum:
Basic...................................................... $ 0.27 $ 0.30/(1)/
Diluted.................................................... $ 0.26 $ 0.30/(1)/
Earnings per share midpoint:
Basic...................................................... $ 0.27 $ 0.29/(2)/
Diluted.................................................... $ 0.26 $ 0.28/(2)/
Earnings per share maximum:
Basic...................................................... $ 0.27 $ 0.28/(3)/
Diluted.................................................... $ 0.26 $ 0.27/(3)/
</TABLE>
- ----------------------------------
/(1)/ The number of additional shares issued to represent the fair value of
County Savings is based upon a preliminary valuation of $11.1 million at
the minimum of the range and an average trading price for the Company's
stock of $15.00
/(2)/ The number of additional shares issued to represent the fair value of
County Savings is based upon a preliminary valuation of $13.0 million at
the midpoint of the range and an average trading price for the Company's
stock of $15.00.
/(3)/ The number of additional shares issued to represent the fair value of
County Savings is based upon a preliminary valuation of $15.0 million at
the maximum of the range and an average trading price for the Company's
stock of $15.00.
/(a)/ Represents the interest income earned on the net proceeds of the offering
at the mid-point ($2,267,069 at 5.37%), and for EPS calculation purposes
($1,597,010 at 5.37%) at the minimum and ($2,937,128 at 5.37%) at the
maximum of the offering range.
/(b)/ Represents the estimated impact to earnings resulting from the allocation
of the excess of the book value of net assets acquired over the purchase
price at the mid-point of the offering range of $105,911, and for EPS
calculation purposes $141,011 at the minimum and $70,811 at the maximum of
the offering range.
/(c)/ Reflects the expense associated with the amortization of shares purchased
to fund the Company's ESOP and Management and Recognition Plans ("MRP").
The ESOP amortizes over 10 years and the MRP over 5 years.
25
<PAGE>
PRO FORMA UNAUDITED COMBINED CONDENSED STATEMENTS OF INCOME FOR THE SIX MONTHS
ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
THE
COMPANY AND
THE COUNTY COUNTY SAVINGS
COMPANY SAVINGS ADJUSTMENTS COMBINED
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Interest income................................................ $6,971,717 $4,138,854 $ 64,158 /(a)/ $11,174,729
Interest expense............................................... 3,366,345 1,882,496 -- 5,248,841
---------- ---------- ----------- -----------
Net interest income........................................... 3,605,372 2,256,358 64,158 5,925,888
Provision for possible loan losses............................. 127,351 68,064 -- 195,415
---------- ---------- ----------- -----------
Net interest income after possible provision for loan losses.. 3,478,021 2,188,294 64,158 5,730,473
Noninterest income............................................. 718,680 234,963 -- 953,643
Noninterest expense............................................ 2,593,522 1,807,241 (53,889) /(b)(c)/ 4,346,874
---------- ---------- ----------- -----------
Earnings before income tax expense............................. 1,603,179 616,016 118,047 2,337,242
Income tax expense............................................. 465,965 305,000 6,542 777,507
---------- ---------- ----------- -----------
Net income..................................................... $1,137,214 $ 311,016 $ 111,505 $ 1,566,277
========== ========== =========== ===========
Earnings per share minimum
Basic and diluted............................................. $ 0.41 $0.45 /(1)/
Earnings per share midpoint
Basic and diluted............................................. $ 0.41 $0.43 /(2)/
Earnings per share maximum
Basic and diluted............................................. $ 0.41 $0.42 /(3)/
- -------------------------
</TABLE>
/(1)/ The number of additional shares issued to represent the fair value of
County Savings is based upon a preliminary valuation of $11.1 million at
the minimum of the range and an average trading price for the Company's
stock of $15.00.
/(2)/ The number of additional shares issued to represent the fair value of
County Savings is based upon a preliminary valuation of $13.0 million at
the midpoint of the range and an average trading price for the Company's
stock of $15.00.
/(3)/ The number of additional shares issued to represent the fair value of
County Savings is based upon a preliminary valuation of $15.0 million at
the maximum of the range and an average trading price for the Company's
stock of $15.00.
/(a)/ Represents the Interest Income earned on the net proceeds of the offering
at the midpoint ($2,267,069 at 5.66%), and for EPS calculation purposes
($1,597,010 at 5.66%) at the minimum and ($2,937,128 at 5.66%) at the
maximum offering range.
/(b)/ Represents the estimated impact to earnings resulting from the allocation
of the excess of book value of the net assets acquired over the purchase
price at the midpoint of the offering range of $96,945, and for EPS
calculation purposes $132,045 at the minimum and $61,845 at the maximum of
the offering range.
/(c)/ Reflects the expense associated with the amortization of shares purchased
to fund the Company's ESOP and Management and Recognition Plans ("MRP").
The ESOP amortizes over 10 years and the MRP over 5 years.
PRO FORMA UNAUDITED COMBINED CONDENSED STATEMENTS OF INCOME FOR THE YEAR ENDED
DECEMBER 31, 1997
<TABLE>
<CAPTION>
THE
COMPANY AND
THE COUNTY COUNTY SAVINGS
COMPANY SAVINGS ADJUSTMENTS COMBINED
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest income................................................ $14,167,652 $ 8,232,763 $ 124,009 /(a)/ $22,524,424
Interest expense............................................... 6,891,961 3,737,612 -- 10,629,573
----------- ----------- ----------- -----------
Net interest income........................................... 7,275,691 4,495,151 124,009 11,894,851
Provision for possible loan losses............................. 261,112 524,816 -- 785,928
----------- ----------- ----------- -----------
Net interest income after possible provision for loan losses.. 7,014,579 3,970,335 124,009 11,108,923
Noninterest income............................................. 1,379,259 535,198 -- 1,914,457
Noninterest expense............................................ 5,777,390 4,479,183 (87,670) /(b)(c)/ 10,168,903
----------- ----------- ----------- -----------
Earnings before income tax expense............................. 2,616,448 26,350 211,679 2,854,477
Income tax expense............................................. 762,087 56,350 11,748 830,185
----------- ----------- ----------- -----------
Net income..................................................... $ 1,854,361 $ (30,000) $ 199,931 $ 2,024,292
=========== =========== ============ ===========
Earnings per share minimum
Basic......................................................... $ 0.66 $ 0.59 /(1)/
Diluted....................................................... $ 0.66 $ 0.59 /(1)/
Earnings per share midpoint
Basic......................................................... $ 0.66 $ 0.56 /(2)/
Diluted....................................................... $ 0.66 $ 0.56 /(2)/
Earnings per share maximum
Basic......................................................... $ 0.66 $ 0.54 /(3)/
Diluted....................................................... $ 0.66 $ 0.53 /(3)/
</TABLE>
26
<PAGE>
_________________________
/(1)/The number of additional shares issued to represent the fair value of
County Savings is based upon a preliminary valuation of $11.1 million at the
minimum of the range and an average trading price for the Company's stock of
$15.00
/(2)/The number of additional shares issued to represent the fair value of
County Savings is based upon a preliminary valuation of $13.0 million at the
midpoint of the range and an average trading price for the Company's stock of
$15.00.
/(3)/The number of additional shares issued to represent the fair value of
County Savings is based upon a preliminary valuation of $15.0 million at the
maximum of the range and an average trading price for the Company's of $15.00.
/(a)/Represents the interest income earned on the net proceeds of the Offering
at the midpoint ($2,267,069 at 5.47%), and for EPS calculation purposes
($1,597,010 at 5.47%) at the minimum and ($2,937,128 at 5.47%) at the maximum of
the Offering Range.
/(b)/Represents the estimated impact to earnings resulting from the allocation
of the excess of book value of the net assets acquired over the purchase price
at the midpoint of the Offering Range of $173,782, and for EPS calculation
purposes $243,982 at the minimum and $103,582 at the maximum of the Offering
Range.
/(c)/Reflects the expense associated with the amortization of shares purchased
to fund the Company's ESOP and Management and Recognition Plans ("MRP"). The
ESOP amortizes over 10 years and the MRP over 5 years.
Set forth below is the pro forma information regarding net proceed the
consolidated net income, net income per share, stockholders' equity and
stockholders' equity per share at and for the year ended December 31, 1997 and
six months ended June 30, 1998 after the taking into account the affect of the
Offering at the minimum, midpoint, maximum and adjusted maximum. The actual net
proceeds from the sale of the Common Stock cannot be determined until the
Offering is complete. The following pro forma information is based on the
following assumptions: (i) historical information reflects the operations of
the Company; (ii) the pro forma effects of the Merger reflect the historical
operations of Oswego County, adjusted to reflect the purchase accounting
adjustments and the issuance of shares of Common Stock to the Mutual Holding
Company; (iii) the per share price of Common Stock sold in the Offering is
$13.50, 90% of the unadjusted price of $15.00 per share; (iv) the Charitable
Foundation is funded with assets worth $2.0 million; (v) offering expenses total
$229,000; $269,000; $309,000 and $356,000 at the minimum, midpoint, maximum and
adjusted maximum; (vi) the ESOP will purchase 8% of the shares sold in the
Offering; (vii) the Recognition and Retention Plans purchase 4% of the shares
sold in the Offering; and (viii) the Mutual Holding Company is capitalized with
an additional $200,000. Actual expenses may vary from those estimated.
Pro forma consolidated net income of the Company for the six months ended
June 30, 1998 and the year ended December 31, 1997 has been calculated as if the
Common Stock had been sold at the beginning of the period and the net proceeds
were invested at 5.37% and 5.48%, respectively which was the one year U.S.
Treasury Bill Rate as of June 30, 1998 and December 31, 1997, respectively. The
tables do not reflect the effect of withdrawals from deposit accounts in order
to purchase the Common Stock. The pro forma after tax-yield for the Company is
assumed to be 3.71% and 3.78% for the six months ended June 30, 1998 and the
year ended December 31, 1997, respectively (assuming a tax rate of 31% for each
period).
27
<PAGE>
The following pro forma information may not be representative of the
financial effects of the foregoing transactions at the dates on which the
transactions actually occur and should not be taken as indicative of future
results of operations.
<TABLE>
<CAPTION>
MAXIMUM
MINIMUM MIDPOINT MAXIMUM AS ADJUSTED
338,867 398,667 458,467 527,237
$13.50 $13.50 $13.50 $13.50
PER SHARE PER SHARE PER SHARE PER SHARE
--------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Gross proceeds......................................................... $ 4,575 $ 5,382 $ 6,189 $ 7,118
Less contribution to Charitable Foundation............................ 2,000 2,000 2,000 2,000
Less expenses.......................................................... 229 269 309 356
-------- -------- -------- --------
Estimated net proceeds................................................ $ 2,346 $ 3,113 $ 3,880 $ 4,762
Less: Common Stock purchased by ESOP................................... (366) (431) (495) (569)
Less: Common Stock purchased by Recognition and Retention Plan......... (183) (215) (248) (285)
-------- -------- -------- --------
Estimated net proceeds, as adjusted/(3)/.............................. $ 1,797 $ 2,467 $ 3,137 $ 3,908
======== ======== ======== ========
FOR THE 6 MONTHS ENDED JUNE 30, 1998
Consolidated net income/(4)/
Historical income/(1)/................................................ $ 745 $ 745 $ 745 $ 745
Pro forma impact of Merger/(2)/....................................... 311 276 241 200
Pro forma income on net proceeds...................................... 30 42 54 69
Pro forma ESOP adjustment/(5)/........................................ (13) (15) (17) (20)
Pro forma Recognition and Retention
Plan adjustment/(6)/................................................. (13) (15) (17) (20)
-------- -------- -------- --------
Pro forma net income................................................. $ 1,060 $ 1,033 $ 1,006 $ 974
======== ======== ======== ========
Per share net income (reflects SOP 93-6)/(4)/
Historical income/(1)/................................................ $ 0.21 $ 0.21 $ 0.20 $ 0.19
Pro forma impact of Merger/(2)/....................................... 0.09 0.08 0.06 0.05
Pro forma income on net proceeds...................................... 0.01 0.01 0.01 0.02
Pro forma ESOP adjustment/(5)/........................................ 0.00 0.00 0.00 (0.01)
Pro forma Recognition and Retention Plan adjustment/(6)/.............. 0.00 0.00 0.00 (0.01)
-------- -------- -------- --------
Pro forma net income per share/(6)(7)(8)/............................ $ 0.30 $ 0.29 $ 0.27 $ 0.25
======== ======== ======== ========
AT JUNE 30, 1998
Stockholders' equity:
Historical/(1)/....................................................... $ 23,544 $ 23,544 $ 23,544 $ 23,544
Pro forma impact on Merger/(2)/....................................... 6,207 7,260 8,313 9,523
Estimated net proceeds................................................ 2,346 3,113 3,880 4,762
Plus: Tax benefit of the contribution to the Charitable Foundation.... 620 620 620 620
Less: Common Stock acquired by ESOP/(5)/.............................. (366) (431) (495) (569)
Less: Common Stock acquired by Recognition and Retention Plan/(6)/.... (183) (215) (248) (285)
-------- -------- -------- --------
Pro forma stockholders' equity....................................... $ 32,168 $ 33,891 $ 35,614 $ 37,595
======== ======== ======== ========
Stockholders' equity per share (does not reflect SOP 93-6)
Historical/(1)/....................................................... $ 6.60 $ 6.37 $ 6.15 $ 5.92
Pro forma impact of the Merger/(2)/................................... 1.74 1.96 2.17 2.39
Estimated net proceeds................................................ 0.66 0.84 1.01 1.20
Plus: tax benefit of the contribution to the Charitable Foundation.... 0.17 0.17 0.16 0.16
Less: Common Stock acquired by ESOP/(5)/.............................. (0.10) (0.12) (0.13) (0.14)
Less: Common Stock acquired by Recognition and Retention Plan/(6)/.... (0.05) (0.06) (0.06) (0.07)
-------- -------- --------- --------
Pro forma stockholders' equity per share/(6)(8)/..................... $ 9.02 $ 9.16 $ 9.30 $ 9.46
======== ======== ======== ========
Offering price as a percentage of pro forma net earnings per share..... 21.77 22.50 25.00 28.13
======== ======== ======== ========
Offering price as a percentage of pro forma stockholders'
equity per share...................................................... 149.67% 147.38% 145.16% 142.71%
======== ======== ======== ========
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
MAXIMUM
MINIMUM MIDPOINT MAXIMUM AS ADJUSTED
338,867 398,667 458,467 527,237
$13.50 $13.50 $13.50 $13.50
PER SHARE PER SHARE PER SHARE PER SHARE
--------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Gross proceeds........................................................ $ 4,575 $ 5,382 $ 6,189 $ 7,118
Less Cash Contribution to Charitable Foundation....................... (2,000) (2,000) (2,000) (2,000)
Less expenses......................................................... (229) (269) (309) (356)
Estimated net proceeds............................................. $ 2,346 $ 3,113 $ 3,880 $ 4,762
Less: Common Stock purchased by ESOP.................................. (366) (431) (495) (569)
Less: Common Stock purchased by Recognition and Retention Plan........ (183) (215) (248) (285)
Estimated net proceed, as adjusted/(3)/............................ $ 1,797 $ 2,467 $ 3,137 $ 3,908
FOR THE 12 MONTHS ENDED DECEMBER 31, 1997
Consolidated net income/(4)/
Historical/(1)/.................................................... $ 1,854 $ 1,854 $ 1,854 $ 1,854
Pro forma income from Merger/(2)/.................................. 212 142 72 (9)
Pro forma income on net proceeds................................... 60 86 111 140
Pro forma ESOP adjustment/(5)/..................................... (25) (30) (34) (39)
Pro forma Recognition and Retention Plan adjustment/(6)/........... (25) (30) (34) (39)
--------- -------- --------- ---------
Pro forma net income............................................. $ 2,076 $ 2,022 $ 1,969 $ 1,907
========= ======== ========= =========
Per share net income
(reflected SOP 93-6)/(4)/
Historical/(1)/.................................................... $ 0.53 $ 0.51 $ 0.49 $ 0.49
Pro forma income from Merger/(2)/.................................. 0.06 0.04 0.02 0.00
Pro forma income on net proceeds................................... 0.02 0.02 0.03 0.04
Pro forma ESOP adjustment/(5)/..................................... (0.01) (0.01) (0.01) (0.01)
Pro forma Recognition and Retention Plan adjustment/(6)/........... (0.01) (0.01) (0.01) (0.01)
--------- -------- --------- ---------
Pro forma net income per share/(6)(7)/........................... $ 0.59 $ 0.55 $ 0.52 $ 0.51
========= ======== ========= =========
AT DECEMBER 31, 1997
Stockholders' equity:
Historical/(1)/.................................................... $ 23,583 $ 23,583 $ 23,583 $ 23,583
Pro forma impact of the Merger/(2)/................................ 5,776 6,829 7,882 9,093
Estimated net proceeds............................................. 2,346 3,113 3,880 4,762
Plus: Tax benefit of the contribution to the Charitable
Foundation........................................................ 620 620 620 620
Less: Common Stock acquired by the ESOP/(5)/....................... (366) (431) (495) (569)
Less: Common Stock acquired by Recognition and Retention Plan/(6)/. (183) (215) (248) (285)
--------- -------- --------- ---------
Pro forma stockholders' equity................................... $ 31,776 $ 33,499 $ 35,222 $ 37,204
========= ======== ========= =========
Stockholders' equity per share
Historical/(1)/.................................................... $ 6.61 $ 6.38 $ 6.16 $ 5.93
Equity Adjustments of the Merger/(2)/.............................. 1.62 1.85 2.06 2.29
Estimated net proceeds............................................. 0.66 0.84 1.01 1.20
Plus: Tax benefit of the contribution to the Charitable Foundation. 0.17 0.17 0.16 0.16
Less: Common Stock acquired by ESOP/(5)/........................... (0.10) (0.12) (0.13) (0.14)
Less: Common Stock acquired by Recognition and Retention Plan/(6)/. (0.05) (0.06) (0.06) (0.07)
--------- -------- --------- ---------
Pro forma stockholders' equity per share/(6)(8)/................. $ 8.91 $ 9.06 $ 9.20 $ 9.37
========= ======== ========= =========
Offering price as a percentage of pro forma net earnings per share.... 22.88 24.55 25.96 26.47
========= ======== ========= =========
Offering price as a percentage of pro forma stockholders' equity per
share................................................................ 151.52% 149.01% 146.74% 144.08%
========= ======== ========= =========
</TABLE>
29
<PAGE>
__________________________________
/(1)/ Historical financial information reflects the consolidated financial
information of the Company.
/(2)/ Pro forma impact of the Merger reflects the consolidated financial
information of Oswego County, adjusted to reflect purchase accounting and
the issuance of shares to the Mutual Holding Company.
/(3/ Estimated net proceeds, as adjusted, consist of the estimated net
proceeds of the Offering minus (i) the proceeds to be used to purchase
Common Stock by the ESOP, and (ii) the value of the shares of Common
Stock to be purchased in order to fund the Recognition and Retention
Plan, following receipt of stockholder approval.
/(4)/ Does not give effect to the non-recurring expense that will be recognized
in fiscal 1998 as a result of the establishment of the Charitable
Foundation.
/(5/ Assumes that 8.0% of the shares issued in the Offering will be purchased
by the ESOP with funds loaned by the Company. The Company and the Bank
intend to make annual contributions to the ESOP in an amount equal to the
interest and principal requirement of the loan. The ESOP loan is expected
to be repaid over 10 years.
/(6)/ Assumes that the Recognition and Retention Plan will purchase, following
receipt of stockholder approval, a number of shares of Common Stock equal
to 4% of the Offering. Funds used to purchase shares of Common Stock for
the Recognition and Retention Plan will be contributed by the Company. It
is assumed that shares to fund the Recognition and Retention Plan will be
acquired in open market transactions. The issuance of authorized but
unissued shares to fund the Recognition and Retention Plan would dilute
the voting and ownership interests of stockholders by 0.43%, and under
such circumstances pro forma net income per share for the (i) six months
ended June 30, 1998 would be $0.30, $0.29, $0.27 and $0.25 and (ii) year
ended December 31, 1997 would be $0.53, $0.50, $0.47 and $0.44, at the
minimum, midpoint, maximum and adjusted maximum, respectively.
Stockholders' equity per share at June 30, 1998 and December 31, 1997
would be (i) $9.03, $9.18, $9.32 and $9.47, and (ii) $8.92, $9.08, $9.22
and $9.38, at the minimum, midpoint, maximum and adjusted maximum
respectively. There can be no assurance that the actual purchase price of
shares purchased to fund the Recognition and Retention Plan will be equal
to the $15 unadjusted price per share.
/(7)/ The per share calculations are determined by adding the number of shares
assumed to be issued in the Offering, and, in accordance with SOP 93-6,
subtracting 97.5% and 95.0% of the ESOP shares which have not been
committed for release during the six months ended June 30, 1998 and year
ended December 31, 1997 3,489,792, 3,615,126, 3,740,462, and 3,884,598
shares of Common Stock are outstanding at the minimum, midpoint, maximum
and adjusted maximum of the Offering, respectively, and at June 30, 1998
and December 31, 1997 that 3,509,524, 3,634,977, 3,760,433 and 3,904,706
shares of Common Stock are outstanding at the minimum, midpoint, maximum
and adjusted maximum of the Estimated Price Range, respectively.
/(8)/ No effect has been given to the issuance of additional shares of Common
Stock pursuant to the Stock Option Plan, which will be adopted by the
Company following the Offering and presented for approval by stockholders
at an annual or special meeting of stockholders fo the Company held at
least six months following the consummation of the Offering. if the Stock
Option Plan is approved by stockholders, and amount equal to 10% of the
Common Stock issued in the Offering, or 33,887, 39,867, 45,847 and 52,724
shares at the minimum, midpoint, maximum and adjusted maximum of the
Offering, respectively, will be reserved for future issuance upon the
exercise of options to be granted under the Stock Option Plan. The
issuance of Common Stock pursuant to the exercise of options under the
Stock Option Plan will result in the dilution of existing stockholders'
interests. Assuming stockholder approval of the Stock Option Plan, that
all these options were exercised at the beginning of the period at an
exercise price of $15.00 per share and that the shares to fund the
Recognition and Retention Plan are acquired through open market purchases
at the Purchase Price, (i) pro forma net income per share for the six
months ended June 30, 1998 would be $0.31, $0.29, $0.27 and $0.26 at the
minimum, midpoint, maximum and adjusted maximum of the Offering,
respectively; (ii) pro forma net income per share for the year ended
December 31, 1997 would be $0.53, $0.50, $0.47 and $0.44 at the minimum,
midpoint, maximum and adjusted maximum of the Offering, respectively;
(iii) stockholders' equity per share at June 30, 1998 would be $9.07,
$9.23, $9.37 and $9.52 at the minimum, midpoint, maximum and adjusted
maximum of such range, respectively; and (iv) stockholders' equity per
share at December 31, 1997 would be $8.96, $9.12, $9.27 and $9.43 at the
minimum, midpoint, maximum and adjusted maximum of such range
respectively.
30
<PAGE>
OSWEGO COUNTY SAVINGS BANK
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Oswego County's results of operations depend primarily on its net
interest income, which is the difference between interest and dividend income on
interest-earning assets, which principally consist of loans, mortgage-backed
securities and investment securities, and interest expense on interest-bearing
deposits. Oswego County's results of operations also are affected by the
provision for losses on loans; the level of its noninterest income; its general,
administrative and other expenses, including compensation and benefits,
occupancy and equipment expense, real estate owned expense and other expenses;
and its income tax expense.
MARKET RISK ANALYSIS
QUALITATIVE ANALYSIS. In order to minimize the potential for adverse
effects of material fluctuations in interest rates on Oswego County's results of
operations, Oswego County has implemented and continues to monitor its asset and
liability management policies to better match the maturities and repricing terms
of Oswego County's interest-earning assets and interest-bearing liabilities.
Such policies have consisted primarily of (i) purchasing adjustable-rate
mortgage-backed securities and short-term investment securities; (ii) since
February 1998, originating 30-year fixed-rate 1-4 family residential loans for
eventual sale in the secondary market; and (iii) managing interest rate expense.
Since the early 1980s, Oswego County has originated primarily
adjustable-rate mortgage ("ARM") loans and has not originated fixed-rate
residential mortgage loans with terms of over 15 years. All of the ARMs
currently offered by Oswego County have interest rates which adjust every one or
three years, although the portfolio contains some ARMs with a fixed-rate of
interest for ten years and an annual interest rate adjustment thereafter. As
interest rates decreased during the 1990s, Oswego County's origination of ARMs
has decreased due to the preference of Oswego County's customers for fixed-rate
residential mortgage loans. In February 1998, Oswego County commenced the
origination of long-term fixed-rate 1-4 family residential loans in order to
provide a full range of products to customers, but generally only under terms,
conditions and documentation which allow their sale in the secondary market.
Oswego County's portfolio of adjustable-rate, 1-4 family residential mortgage
loans amounted to $57.2 million or 88.7% of all residential mortgage and home
equity loans at June 30, 1998.
In order to match the maturity of its interest-bearing liabilities with
the maturity of its interest-earning assets, Oswego County offers certificates
of deposit with terms in excess of one year. At June 30, 1998, $10.3 million or
27.1% of Oswego County's certificates of deposit mature in more than one year.
Oswego County considers its savings deposit and money market accounts to
be core deposits that are less likely to be withdrawn if interest rates rise,
although the amount of savings deposit and money market accounts has declined in
recent years. The savings deposits and money market accounts have variable
interest rates, and Oswego County believes that it can adjust the interest rate
on the accounts to retain a substantial portion of these deposits. Savings
deposit and money market accounts amounted to $48.0 million or 49.7% of total
deposits at June 30, 1998, compared to $48.5 million or 49.6% of total deposits
at December 31, 1997.
CHANGES IN FINANCIAL CONDITION
Oswego County's total assets decreased by $1.8 million or 1.6% to $110.3
million at June 30, 1998 from $112.1 million at December 31, 1997, primarily due
to a $5.2 million or 6.4% decline in the loan portfolio which was partially
offset by a $2.5 million or 93.8% increase in federal funds sold and other
short-term investments. Total assets also decreased in the fiscal year ended
December 31, 1997 as compared to the fiscal year ended December 31, 1996. The
decline during that period was $3.5 million or 3.0% primarily as a result of the
$10.1 million or 79.1% decrease in Oswego Country's federal funds sold and other
short-term investments and a $4.6 million or 5.4% decrease in the loan portfolio
which was substantially offset by the $10.9 million increase in the securities
available for sale portfolio.
31
<PAGE>
At June 30, 1998, loans amounted to $75.3 million or 68.2% of total
assets. Of the total loan portfolio, $64.5 million or 85.7% consisted of
residential mortgages and home equity loans, Commercial mortgages accounted for
$9.1 million or 12.1% of the total loan portfolio at June 30, 1998, while the
remainder of the portfolio consisted of $1.6 million of consumer loans and
$81,000 of commercial loans.
Securities represented 20.8% and 19.05% of total assets, respectively,
at June 30, 1998 and December 31, 1997, respectively, and cash and cash
equivalents amounted to $8.5 million or 7.7% of total assets at June 30, 1998.
Non-performing assets have increased from 2.13% of total assets at
December 31, 1997 to 2.32% of total assets at June 30, 1998. Non-accruing one-
to-four family loans [and other improved real estate loans] represented 99.8% of
the total non-performing loans at June 30, 1998. On that same date, Oswego
County had $583,000 of foreclosed assets consisting of $495,000 of one-to-four
family properties, $85,000 of multi-family properties and $3,000 of other
improved real estate. At June 30, 1998, Oswego County's allowance for loan
losses equaled $1.3 million representing 1.72% of total loans outstanding and
65.3%, of total non-performing loans.
Oswego County's total deposits decreased during 1998 to $96.7 million at
June 30, 1998 from $97.9 million at December 31, 1997. Time deposits decreased
by $1.8 million or 4.5% during the six-month period ended June 30, 1998, while
demand deposits increased by $1.1 million or 11.0% during the same period. The
decrease in total deposits is attributable to Oswego County's decision not to
renew jumbo time deposits at the current market rates which was partially offset
by the seasonal increase in demand deposits.
Total net worth was $11.3 million at June 30, 1998, an increase of
$166,000 from December 31, 1997. The increase was due to net income of $170,000
during the six month period ended June 30, 1998 offset by a decrease in other
comprehensive income of $4,000.
RESULTS OF OPERATIONS
Oswego County's net income for the six month period ended June 30, 1998
decreased by $141,000 or 45.2% as compared to the comparable six month period in
fiscal 1997. Oswego County experienced losses of $30,000 and $61,000 in fiscal
1997 and1996, respectfully, after having income of $553,000 in fiscal 1995. Net
income was primarily impacted by substantial increases in the provision for loan
losses as further described below.
NET INTEREST INCOME. Oswego County's net interest income is determined
by its average interest rate spread (i.e., the difference between the average
yields earned on its interest-earning assets and the average rates paid on its
interest-bearing liabilities), the relative amounts of interest-earning assets
and interest-bearing liabilities and the degree of mismatch in the maturity and
repricing characteristics of its interest-earning assets and interest-bearing
liabilities.
Oswego County's net interest income has remained relatively stable for
the six-month period ended June 30, 1998 and fiscal 1997 and 1996. For the six-
month period ended June 30, 1998, net interest income decreased $5,000 or 0.2%
following an increase of $299,000 or 7.1% in fiscal 1997 and a decrease of
$303,000 or 6.7% in 1996 as compared to the respective comparable periods.
INTEREST INCOME. Interest income on loans decreased by $212,000 or 6.2%
during the six-month period ended June 30, 1998, decreased by $6,000 or .09% in
fiscal 1997 and by $260,000 or 3.7% in 1996 from the respective comparable prior
periods. During the subject periods, the average balance of Oswego County's
loan portfolio has gradually decreased from $84.5 million in 1996, to $82.4
million in fiscal 1997, to $76.7 million for the six-month period ended June 30,
1998, and the average yield on the loan portfolio has increased slightly from
8.10%, to 8.31% to 8.37% during those same periods.
Income from Oswego County's securities portfolio increased during the
six-month period ended June 30, 1998 as compared to the comparable period during
fiscal 1997 as well as during both fiscal 1997 and 1996 as compared to prior
comparable periods. Such income increased by $109,000 or 19.4% during the six
months ended June 30, 1998 and by $697,000 or 153.5% and by $109,000 or 31.6%
during fiscal 1997 and 1996, respectively. The average amount of Oswego
County's investment in securities increased from $8.1 million in fiscal 1996, to
$19.1 million in fiscal 1997,
32
<PAGE>
to $21.7 million for the six-month period ended June 30, 1998, and the average
yield on the securities portfolio increased from 5.6%, to 6.0%, to 6.2%, for
those same periods.
Other interest income, which consists of interest on federal funds sold
and other short-term investments, fluctuated during the subject periods from
$108,000 for the six-month period ended June 30, 1998 as compared to $161,000 in
the comparable 1997 period and was $241,000 in fiscal 1997 compared to $868,000
in fiscal 1996. The average amount of federal funds and short-term investments
decreased from $16.5 million in fiscal 1996 to $3.7 million in fiscal 1997 and
increased slightly to $3.8 million in the six-month period ended June 30, 1998.
The average yields on these investments, which are generally more market
sensitive, fluctuated from 5.25% in fiscal 1996, to 6.44% in fiscal 1997, to
5.69% in the six-month period ended June 30, 1998. As a result of these
fluctuations in the average investment and yield in such funds, total interest
decreased by $53,000 or 32.9% during the six-month period ended June 30, 1998
compared to the comparable six-month period in fiscal 1997, decreased by
$627,000 or 72.2% during fiscal 1997 and increased by $249,000 or 40.1% during
fiscal 1996.
INTEREST EXPENSE. Interest on deposits decreased by $150,000 or 8.0% in
the six-month period ended June 30, 1998 as compared to the comparable period in
fiscal 1997 and decreased by $235,000 or 5.9% in fiscal 1997 as compared to
fiscal 1996. Interest on deposits increased by $400,000 or 11.2% in fiscal 1996
as compared to fiscal 1995. During the subject periods, the average balance and
average cost of deposits varied slightly from period to period with the average
balance decreasing from $95.4 million, to $89.5 million, to $87.1 million from
fiscal 1996, to fiscal 1997, to the six-month period ended June 30, 1998,
respectively, and the average cost increasing from 4.16% to 4.18% from fiscal
1996 to 1997 and then decreasing to 4.0% for the six-month period ended June 30,
1998.
PROVISION FOR LOAN LOSSES. The provisions for loan losses were $60,000,
$68,064, $525,000 and $1.1 million for the six-month periods ended June 30, 1998
and 1997, fiscal 1997 and 1996, respectively. These provisions were based upon,
among other variables, non-accruing loans totaling $1,984,000, $1,774,000 and
$2,180,000 December 31, 1997, and December 31, 1996, respectively.
Delinquencies in Oswego County's primary market area were at unusually high
levels during 1995 and 1996 as a result of extensive job losses in the region in
1995 as customers were unable to pay outstanding obligations and in many cases
were forced to move from the area in order to seek new employment.
OTHER OPERATING INCOME. Other operating income decreased by $11,000 or
4.7% during the six-month period ended June 30, 1998 as compared to the
comparable 1997 period. Such income increased by $34,000 or 6.8% during fiscal
1997, and by $275,000 or 121.7% during fiscal 1996 as compared to the respective
periods. The decrease in the six-month period was partially the result of a
decrease of $3,000 or 1.5% in income from service charges. The increase in
fiscal 1997 was primarily the result of a $54,000 recovery from Oswego County's
Nationar investment as compared to a $14,000 provision in fiscal 1997. This
increase was offset by a $28,000 or 38.4% decrease in other operating income.
The increase in other operating income in fiscal 1996 was primarily the result
of net losses in the sales of securities during fiscal 1996 and a substantially
lower provision for the Nationar investment. These amounts compare to a
$132,000 net loss recorded in the sales of securities in fiscal 1995 and a
provision for the Nationar investment of $120,000. The $46,000 or 11.6%
increase in income from service charges from fiscal 1995 to 1996 also
contributed to the fiscal 1996 increase in other operating income.
OTHER OPERATING EXPENSES. Other operating expenses increased during the
six-month period ended June 30, 1998 and during fiscal 1997 and 1996 as compared
to the respective prior comparable periods. The increase of $314,000 or 17.4%
during the six-month period was primarily the result of a $117,000 or 137.6%
increase expenses associated with other in professional fees, an $83,000 or 9.1%
increase in salaries and employee benefits and a $59,000 or 81.9% increase in
real estate owned. The professional fee increase during the 1998 six-month
period related to expenses associated with the merger with Oswego City and Year
2000 issues; the increase in salaries and employee benefits was primarily
related to the hiring of new staff; and real estate owned increases involving
the writedown of real estate owned and costs incurred for preparation for sale
of the real estate. The increase of $742,000 or 19.9% during fiscal 1997 was
primarily the result of an increase of $435,000 or 430.7% for trustee fees and
benefits, a $305,000 or 391.0% increase in professional fees and a $113,000 or
131.4% increase in real estate owned expensed. The increase in trustee fees and
benefits was the result of the establishment of a retirement plan for the Board
of Trustees and the accrual for vested benefits in that plan as well as an
increase in trustee fees. The increase in professional fees primarily
33
<PAGE>
resulted from costs associated with an audit and computer consultant fees
incurred in connection with the establishment of a fixed-rate mortgage program
and the increase in real estate owned expense related to expenses incurred for
the preparation on an apartment complex for sale. The increase of $401,000 or
12.0% during fiscal 1996 was primarily the result of a $411,000 or 23.2%
increase in salaries and employee benefits, a $45,000 or 80.4% increase in
trustee fees and benefits and a $29,000 or 13.2% increase in data processing
expenses. These increases were substantially offset by a $112,000 decrease in
deposit insurance premiums. The $411,000 increase in salaries and employee
benefits resulted from the funding of a deferred compensation plan for the
retiring president. The amount of trustee fees increased as a result of the
numerous meetings that were held while Oswego County recruited and interviewed
candidates for a new chief executive officer and president and the increase in
data processing fees was the result of the installation of a new automated
teller machine program. The decrease in the deposit insurance premium was the
result of deposit insurance reform.
FEDERAL INCOME TAXES. Income tax expense decreased by $181,000 or 59.3%
in the six-month period ended June 30, 1998. For fiscal 1997 Oswego County had
a $56,000 income tax expense as compared to a $119,000 income tax benefit in
fiscal 1996. The decrease in the six-month period ended June 30, 1998 resulted
from a 52.3% decrease in pre-tax income and the tax effect of non-deductible
merger-related expenses. See Note 8 of Notes to Financial Statements. The tax
expense incurred in 1997 was the result of operating income for that period.
The income tax benefit in fiscal 1996 was the result of a $180,000 pre-tax loss
experienced by Oswego County for that period.
LIQUIDITY AND COMMITMENTS
Oswego County's liquidity, represented by cash and cash equivalents,
is a product of its operating, investing and financing activities. Oswego
County's primary sources of funds are deposits, the amortization, prepayment and
maturity of outstanding loans, mortgage-backed securities, the maturity of
investment securities and other short-term investments and funds provided from
operations. While scheduled payments from the amortization of loans, maturing
investment securities and short-term investments are relatively predictable
sources of funds, deposit flows and loan prepayments are greatly influenced by
general interest rates, economic conditions and competition. In addition,
Oswego County invests excess funds in federal funds sold and other short-term
interest-earning assets which provide liquidity to meet lending requirements.
The Bank has been able to generate sufficient cash through its deposits and has
not utilized borrowings as a source of funds during the past five years.
Liquidity management is both a daily and long-term function of business
management. Excess liquidity is generally invested in short-term investments
such as federal funds sold or U.S. Treasury and agency securities. On a longer
term basis, Oswego County maintains a strategy of investing in various lending
products as described in greater detail under "Business--Lending Activities."
Most of such products have either short-terms (five years or less)or interest
rates that adjust at least every three years. Oswego County uses its sources of
funds primarily to meet its ongoing commitments, to pay maturing certificates of
deposit and savings withdrawals, fund loan commitments and maintain a portfolio
of investment securities. At June 30, 1998, there were outstanding commitments
and unused letters of credit by Oswego County to originate or acquire mortgage
loans and other loans aggregating $411,000 and $143,000, respectively,
consisting primarily of fixed and adjustable-rate residential loans that are
expected to close on or prior to December 31, 1998. Certificates of deposit
scheduled to mature in one year or less at June 30, 1998, totaled $27.6 million.
Based on historical experience, management believes that a significant portion
of maturing deposits will remain with Oswego County. Oswego County anticipates
that it will continue to have sufficient funds, together with borrowings, to
meet its current commitments.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related financial data presented herein
have been prepared in accordance with generally accepted accounting principles,
which generally require the measurement of financial position and operating
results in terms of historical dollars, without considering changes in relative
purchasing power over time due to inflation. Unlike most industrial companies,
virtually all of Oswego County's assets and liabilities are monetary in nature.
As a result, interest rates generally have a more significant impact on Oswego
County's performance than does the effect of inflation.
34
<PAGE>
BUSINESS OF OSWEGO COUNTY SAVINGS BANK
LENDING ACTIVITIES
GENERAL. At June 30, 1998, Oswego County's net loans totaled $74.0
million, which represented 67.1% of Oswego County's $110.3 million of total
assets at that date. The principal lending activity of Oswego County is the
origination of residential, home equity and commercial mortgage loans. To a
lesser extent, Oswego County also makes commercial loans and consumer loans.
At June 30, 1998, $64.5 million or 85.7% of Oswego County's total loans
consisted of residential mortgage and home equity loans. Commercial mortgage
loans totaled $9.1 million at such date, representing 12.1% of total loans.
Commercial loans totaled $81,000 and consumer loans totaled $1.6 million at June
30, 1998.
The types of loans that Oswego County may originate are subject to
federal and state laws and regulations. Interest rates charged by Oswego County
on loans are affected principally by the demand for such loans and the supply of
money available for lending purposes and the rates offered by its competitors.
These factors are, in turn, affected by general and economic conditions, the
monetary policy of the federal government, including the Federal Reserve Board,
legislative and tax policies, and governmental budgetary matters.
A New York-chartered savings bank generally may not make loans to one
borrower and related entities in an amount which exceeds 15% of its unimpaired
capital and surplus, although loans in an amount equal to an additional 10% of
unimpaired capital and surplus may be made to a borrower if the loans are fully
secured by readily marketable securities. At June 30, 1998, Oswego County's
limit on loans-to-one borrower was $1.7 million and its five largest loans or
groups of loans-to-one borrower, including related entities, aggregated
$832,000, $811,000, $768,000, $728,000 and $599,000. Three of Oswego County's
five largest loans or groups of loans were performing in accordance with their
terms at June 30, 1998. The $768,000 group of loans consists of two loans, one
of which is current and the other of which is 15 days delinquent. The $728,000
group of loans consists of seven loans. The borrower has filed bankruptcy, all
of the loans are in default and Oswego County is in the process of foreclosure.
LOAN COMPOSITION. The following table sets forth the composition of
Oswego's loan portfolio by type of loan at the dates indicated.
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31,
----------------------- --------------------------------------------
1997 1998
--------------------- ---------------------
AMOUNT % AMOUNT % AMOUNT %
------- ----- ---------- -------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Residential mortgages and home
equity loans................... $64,508 85.7% $67,405 83.8% $70,687 83.1%
Commercial mortgages............ 9,126 12.1 11,145 13.9 11,490 13.5
Commercial loans................ 81 0.1 276 0.3 589 0.7
Consumer loans.................. 1,594 2.1 1,634 2.0 2,321 2.7
------- ------- ------- ------- ------- ------
Total loans.................... 75,309 100.0% 80,460 100.0% 85,087 100.0%
======= ======= ======
Allowance for loan losses....... (1,296) (1,408) (1,583)
------- ------- -------
Net loans....................... $74,013 $79,052 $83,504
======= ======= =======
</TABLE>
ORIGINATION, PURCHASE AND SALE OF LOANS. The lending activities of
Oswego County are subject to the written, non-discriminatory, underwriting
standards and loan origination procedures established by Oswego County's Board
of Trustees, management, the secondary market investors (i.e., FHLMC, FNMA,
GNMA) and private mortgage insurance companies (PMI). Loan originations are
obtained by a variety of sources, including referrals from real estate brokers,
developers, builders, existing customers, newspaper, radio and walk-in
customers. Loan applications are taken by lending personnel, and the loan
origination department supervises the procurement of credit reports, appraisals
and other documentation involved with a loan. Property valuations are generally
performed by independent outside appraisers licensed in New York State. Hazard
insurance is required on all security property. Title insurance is required on
all newly originated mortgage loans.
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Oswego County's loan approval process is intended to assess the
borrower's ability to repay the loan, the viability of the loan and the adequacy
of the value of the property that will secure the loan. A loan application file
is first reviewed by a loan originator or branch manager and then underwritten
to established standards and policies. The Board has granted underwriting
authority to branch managers, loan underwriters, the senior loan officer and the
president in varying levels. All loans in aggregate amounts of over $100,000
are presented to either the Board of Trustees or the Board Loan Committee for
approval. (Residential real estate loans to be sold in the secondary market are
exempt from this procedure since they are subject to investor underwriting
requirements.)
Historically, Oswego County has originated substantially all of the
loans in its portfolio and held them until maturity. However, in February 1998,
Oswego County began the origination of fixed-rate residential mortgage loans
with the intention of selling those loans in the secondary market in order to
manage its interest rate risk. The residential loans are generally made on
terms, conditions and documentation which permit the sale to FHLMC. Since
February 1998 the Bank has originated $1.5 million of fixed-rate loans. The
ALCO committee has stated that up to $5 million of fixed-rate loans may be
retained in portfolio.
Historically, Oswego County has not purchased loans (excluding mortgage-
backed securities), and Oswego County does not currently intend to become an
active purchaser of loans in the foreseeable future. Oswego County has
purchased participation interests in loans with Board approval.
RESIDENTIAL MORTGAGES AND HOME EQUITY LOANS. Historically, Oswego
County has concentrated its lending activities on the origination of loans
secured primarily by first mortgage liens on existing 1-4 family residences and
home equity loans secured by second mortgages on 1-4 family residences. At June
30, 1998, $64.5 million or 85.7% of Oswego County's total loans consisted of
such loans.
Since the 1980s Oswego County has originated primarily ARM loans and has
not originated fixed-rate residential mortgages with terms over 15 years in
order to manage its interest-rate risk. However, in February 1998, Oswego
County commenced the origination of long-term, fixed-rate 1-4 family residential
loans in order to provide a full range of products to its customers, but
generally only under terms, conditions and documentation which permit the sale
thereof in the secondary market. Oswego County offers terms from 15 to 30 years
on these loans. Oswego County plans to sell its first pool of such loans late
in 1998.
From the early 1980s to February 1998, Oswego County emphasized for its
portfolio1-4 family residential mortgage loans which provide for periodic
adjustments to the interest rate. The loans emphasized by Oswego County during
this period had up to 30-year terms and an interest rate which adjusted every
year or three years in accordance with a designated index, (currently the weekly
average yield on U.S. Treasury securities adjusted to a constant comparable
maturity of one year or three years, respectively, as made available by the
Federal Reserve Board). Oswego County generally does not offer deeply discounted
interest rates on its ARMs. There is a cap on the amount of any increase or
decrease in the interest rate during the applicable adjustment period, and
various caps, depending on when the loan was originated, on the amount which the
interest rate can increase or decrease over the life of the loan. Oswego
County's adjustable-rate loans currently being originated are not assumable and
do not contain prepayment penalties. Oswego County has not engaged in the
practice of using a cap on the payments that could allow the loan balance to
increase rather than decrease, resulting in negative amortization, although it
has on a limited basis extended the maturity of the loan. Approximately $57.2
million or 88.7% of the permanent residential loans in Oswego County's loan
portfolio at June 30, 1998 had adjustable interest rates. In addition Oswego
County offered an ARM loan (10/1) fixed for the first 10 years then adjustable
every year thereafter.
The demand for adjustable-rate loans in Oswego County's primary market
area has been a function of several factors, including the level of interest
rates, the expectations of changes in the level of interest rates and the
difference between the interest rates and loan fees offered for fixed-rate loans
and adjustable-rate loans. The relative amount of fixed-rate and adjustable-
rate residential loans that can be originated at any time is largely determined
by the demand for each in a competitive environment. Due to the generally lower
rates of interest prevailing in recent periods, demand for adjustable-rate, 1-4
family residential loans in Oswego County's primary market decreased as consumer
preference for fixed-rate loans increased. In order to meet the demands of the
marketplace Oswego County initiated its fixed-rate residential loan program.
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Adjustable-rate loans decrease the risks associated with changes in
interest rates but involve other risks, primarily because as interest rates
rise, the payment by the borrower rises to the extent permitted by the terms of
the loan, thereby increasing the potential for default. At the same time, the
marketability of the underlying property may be adversely affected by higher
interest rates. Oswego County believes that these risks, which have not had a
material adverse effect on Oswego County to date, generally are less than the
risks associated with holding fixed-rate loans in an increasing interest rate
environment. In addition, Oswego County minimizes the credit risks associated
with ARMs by (i) imposing a maximum LTV ratio of 95% on such loans and (ii)
requiring that the borrower's payments based on the initial interest rate
generally not exceed 28% of the borrower's gross income.
Oswego County is permitted to lend up to 100% of the appraised value of
the real property securing a residential loan; however, if the amount of a
residential loan originated or refinanced exceeds 90% of the appraised value,
Oswego County is required by federal regulations to obtain private mortgage
insurance on the portion of the principal amount that exceeds 80% of the
appraised value of the security property. Pursuant to underwriting guidelines
adopted by the Board of Trustees, Oswego County will lend up to 95% of the
appraised value of the property securing a fixed-rate, single-family residential
loan which is being originated for sale, and generally requires borrowers to
obtain private mortgage insurance on the portion of the principal amount of the
loan that exceeds 80% of the appraised value of the security property. The
maximum LTV ratio for ARMs is 95% of the appraised value of the property.
Oswego County generally requires title insurance insuring the priority
and validity of its mortgage lien, as well as fire and extended coverage
casualty insurance in order to protect the properties securing its residential
and other mortgage loans. Borrowers may be required to advance funds, with each
monthly payment of principal and interest, to a loan escrow account from which
Oswego County makes disbursements for items such as real estate taxes, hazard
insurance premiums and mortgage insurance premiums as they become due. The
properties securing all of Oswego County's mortgage loans are appraised by
independent appraisers licensed in New York State.
Home equity loans are originated by Oswego County for up to 75% of the
appraised value, less the amount of any existing prior liens on the property.
Oswego County secures the loan with a mortgage on the property (generally a
second mortgage) and will originate the loan even if another institution holds
the first mortgage. There is a maximum term of 5 years on fixed-rate and 15
years on adjustable-rate loans. At June 30, 1998, home equity loans totaled
$2.1 million or 2.77% of Oswego County's total loans.
CONSUMER LOANS. Subject to restrictions contained in applicable federal
and state laws and regulations, Oswego County is authorized to make loans for a
wide variety of personal or consumer purposes. At June 30, 1998, $1.6 million
or 2.1% of Oswego County's total loans consisted of consumer loans. Oswego
County originates consumer loans in order to provide a full range of financial
services to its customers and because such loans generally have shorter terms
and higher interest rates than residential mortgage loans. The consumer loans
offered by Oswego County include loans secured by deposit accounts in Oswego
County, automobile loans, recreational vehicles, boats and other miscellaneous
loans.
Oswego County's loans secured by deposit accounts in Oswego County
amounted to $273,000 or .37% of Oswego County's total loans at June 30, 1998.
Such loans are originated for up to 100% of the account balance, with a hold
placed on the account restricting the withdrawal of the account balance. The
interest rate on the loan is typically equal to the interest rate paid on the
account plus 3.0%. Oswego County offers automobile loans on both new and used
vehicles, with most of the loans secured by used vehicles. The automobile loans
have terms of up to five years and have fixed interest rates. Automobile loans
amounted to $296,000 or .39% of the total loans at June 30, 1998.
Consumer loans generally have shorter terms and higher interest rates
than mortgage loans but generally involve more credit risk than mortgage loans
because of the type and nature of the collateral and, in certain cases, the
absence of collateral. In addition, consumer lending collections are dependent
on the borrower's continuing financial stability, and thus are more likely to be
adversely affected by job loss, divorce, illness and personal bankruptcy. In
most cases, any repossessed collateral for a defaulted consumer loan will not
provide an adequate source of repayment of the outstanding loan balance because
of improper repair and maintenance of the underlying security. The remaining
deficiency often does not warrant further substantial collection efforts against
the borrower. Oswego County believes that the generally higher yields earned on
consumer loans compensate for the increased credit risk associated with such
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loans and that consumer loans are important to its efforts to increase rate
sensitivity, shorten the average maturity of its loan portfolio and provide a
full range of services to its customers.
COMMERCIAL MORTGAGE LOANS. At June 30, 1998, $9.1 million or 12.1% of
Oswego County's total loans consisted of commercial mortgage loans. At June 30,
1998, Oswego County's commercial mortgage loan portfolio consisted of 78 loans
with an average balance of approximately $117,000 at June 30, 1998. A majority
of Oswego County's commercial mortgage loans are secured by apartment buildings
located in its primary market area.
Commercial mortgage lending is generally considered to involve a higher
degree of risk than single-family residential lending. Such lending typically
involves large loan balances concentrated in a single borrower or groups of
related borrowers. In addition, the payment experience on loans secured by
income-producing properties is typically dependent on the successful operation
of the related real estate project and thus may be subject to a greater extent
to adverse conditions in the real estate market or in the economy generally.
LOAN ORIGINATION AND OTHER FEES. In addition to interest earned on
loans, Oswego County receives loan origination fees or "points" for originating
loans. Loan points are a percentage of the principal amount of the mortgage
loan and are charged to the borrower in connection with the origination of the
loan.
In accordance with SFAS No. 91, which deals with the accounting for non-
refundable fees and costs associated with originating or acquiring loans, Oswego
County's loan origination fees and certain related direct loan origination costs
are offset, and the resulting net amount is deferred and amortized as interest
income over the contractual life of the related loans as an adjustment to the
yield of such loans. At June 30, 1998, Oswego County had $2,091 of loan fees
which had been deferred and are being recognized as income over the contractual
maturities of the related loans.
ASSET QUALITY
GENERAL. When a borrower fails to make a required payment on a loan,
Oswego County attempts to cure the deficiency by contacting the borrower and
seeking payment. Late charges are generally imposed following the tenth day
after a payment is due on consumer loans and the fifteenth day after a payment
is due on mortgage loans. In most cases, deficiencies are cured promptly. If a
delinquency extends beyond 30 days, the loan and payment history is reviewed and
efforts are made to collect the loan. While Oswego County generally prefers to
work with borrowers to resolve such problems, when the account becomes 60 to 90
days delinquent, Oswego County institutes foreclosure or other proceedings, as
necessary, to minimize any potential loss.
A loan is placed on non-accrual status when it is 90 days or more past
due. In addition, Oswego County places any loan on non-accrual status if any
part of it is classified as doubtful. Subsequent payments are either applied to
the outstanding principal balance, the first 90 days of interest due or recorded
as interest income, depending on the assessment of the ultimate collectibility
of the loan.
Real estate acquired by Oswego County as a result of foreclosure or by
deed-in-lieu of foreclosure under generally accepted accounting principles are
classified as real estate owned until sold. Pursuant to a statement of position
("SOP 92-3") issued by the AICPA in April 1992, which provides guidance on
determining the balance sheet treatment of foreclosed assets in annual financial
statements for periods ending on or after December 15, 1992, there is a
refutable presumption that foreclosed assets are held for sale and such assets
are recommended to be carried at the lower of fair value minus estimated costs
to sell the property, or cost (generally the balance of the loan on the property
at the date of acquisition). Writedowns from recorded investments to estimated
fair value which are required at the time of foreclosure are charged to the
allowance for loan losses. After the date of acquisition, all costs incurred in
maintaining the property are expenses and costs incurred for the improvement or
development of such property are capitalized up to the extent of their net
realizable value. Adjustments to carrying value of such properties that result
from subsequent decline in value are charged to operations in the period in
which the decline occurs. Oswego County's accounting for its real estate owned
complies with the guidance set forth in SOP 92-3.
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<PAGE>
NON-PERFORMING ASSETS. The following table, derived from information
contained in Oswego County's call report schedules filed with the Federal
Deposit Insurance Corporation, sets forth the amounts and categories of Oswego
County's non-performing assets at the dates indicated.
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997 1996
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Nonaccruing loans:
Residential mortgages and home equity loans.. $1,274 $1,323 $2,029
Commercial mortgages......................... 706 449 122
Consumer..................................... 4 2 29
Commercial................................... -- -- --
------ ------ ------
Total.................................. $1,984 $1,774 $2,180
====== ====== ======
Accruing loans delinquent more than 90 days:
Residential mortgages and home equity loans.. -- -- --
Commercial mortgages......................... -- -- --
Consumer..................................... -- -- --
Commercial................................... -- -- --
------ ------ ------
Total.................................. -- -- --
====== ====== ======
Foreclosed assets:
Foreclosed mortgages and home equity loans... 498 514 403
Commercial mortgages......................... 85 85 88
Consumer..................................... -- -- --
Commercial................................... -- -- --
------ ------ ------
Total.................................. 583 599 491
------ ------ ------
Total nonperforming assets.................... $2,567 $2,373 $2,671
====== ====== ======
Total as a percentage of total assets......... 2.32% 2.12% 2.31%
====== ====== ======
</TABLE>
__________________________
If the non-accruing loans for the six-months ended June 30, 1998 and the
years ended December 31, 1997and 1996 had been current in accordance with their
terms during such periods, the gross interest income on such loans would have
amounted to $34,000, $121,600 and $191,000, respectively. No interest income on
these non-accruing loans was recorded during such periods.
CLASSIFIED ASSETS. Federal regulations require that each insured
savings banks classify its assets on a regular basis. In addition, in
connection with examinations of insured institutions, federal examiners have
authority to identify problem assets and, if appropriate, classify them. There
are three classifications for problem assets: "substandard," "doubtful" and
"loss." Substandard assets have one or more defined weaknesses and are
characterized by the distinct possibility that the insured institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of substandard assets with the additional characteristic that the
weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a high
possibility of loss. An asset classified loss is considered uncollectible and
of such little value that continuance as an asset of the institution is not
warranted. Another category designated "special mention" also must be
established and maintained for assets which do not currently expose an insured
institution to a sufficient degree of risk to warrant classification as
substandard, doubtful or loss. Assets classified as substandard or doubtful
require the institution to establish general allowances for loan and lease
losses. If an asset or portion thereof is classified loss, the insured
institution must either establish specific allowances for loan losses in the
amount of 100% of the portion of the asset classified loss, or charge-off such
amount. General loss allowances established to cover possible losses related to
assets classified substandard or doubtful may be included in determining an
institution's regulatory capital, while specific valuation allowances for loan
losses do not qualify as regulatory capital. Federal examiners may disagree
with an insured institution's classifications and amounts reserved.
Exclusive of assets classified loss which have been fully reserved or
charged-off, Oswego County's classified assets at June 30, 1998 consisted of
$2.2 million of assets classified as substandard, which represented 2.0% of
total assets. Oswego County had no loans classified as doubtful at such date.
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ALLOWANCE FOR LOAN LOSSES. Oswego County's loan portfolio consists
primarily of residential mortgage, home equity and commercial mortgage loans
and, to a lesser extent, consumer loans and commercial loans. Oswego County
believes that there are no material elements of risk in its loan portfolio, and
total nonperforming assets are closely monitored. The classification of assets
policy is reviewed periodically by the Board of Trustees. The loan loss
allowance is maintained by management at a level considered adequate to cover
possible losses that are currently anticipated based on the past loan loss
experience, known and inherent risks in the portfolio, adverse situations that
may affect the borrower's ability to repay, the estimated value of any
underlying collateral, general economic conditions, and other factors and
estimates which are subject to change over time. Although management believes
that it uses the best information available to make such determinations, future
adjustments to allowances may be necessary, and net income could be
significantly affected, if circumstances differ substantially from the
assumptions used in making the initial determinations.
The following table presents the allocation of Oswego County's allowance
for loan losses by type of loan at each of the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ----------------------------------------------
1998 1997 1996
-------------------- -------------------- ------------------------
LOAN LOAN LOAN
CATEGORY CATEGORY CATEGORY
AMOUNT AS A % AMOUNT AS A % AMOUNT AS A %
OF OF TOTAL OF OF TOTAL OF OF TOTAL
ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE LOANS
--------- --------- --------- --------- --------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Residential mortgage and home
equity loans................ $ 695 85.7% $ 702 83.8% $ 757 83.1%
Commercial mortgages........... 493 12.1 512 13.9 738 13.5
Commercial loans............... 3 0.1 5 0.3 8 0.7
Consumer loans................. 37 2.1 38 2.0 54 2.7
Unallocated.................... 67 -- 152 -- 26 --
------ ----- ------ ----- ------ -----
Total....................... $1,295 100.0% $1,409 100.0% $1,583 100.0%
====== ===== ====== ===== ====== =====
</TABLE>
MORTGAGE-BACKED SECURITIES
Mortgage-backed securities represent a participation interest in a pool
of single-family or multi-family mortgages, the principal and interest payments
on which are passed from the mortgage originators, through intermediaries
(generally U.S. Government agencies and government-sponsored enterprises) that
pool and repackage the participation interests in the form of securities, to
investors such as Oswego County. Such U.S. Government agencies and government-
sponsored enterprises, which guarantee the payment of principal and interest to
investors, primarily include the FHLMC, the FNMA and the GNMA.
The FHLMC, which is a corporation chartered by the U.S. Government,
issues participation certificates backed principally by conventional mortgage
loans. The FHLMC guarantees the timely payment of interest and the ultimate
return of principal on participation certificates. The FNMA is a private
corporation chartered by the U.S. Congress with a mandate to establish a
secondary market for mortgage loans. The FNMA guarantees the timely payment of
principal and interest on FNMA securities. The GNMA is a government agency
within the Department of Housing and Urban Development which is intended to help
finance government-assisted housing programs. GNMA securities are backed by
FHA-insured and VA-guaranteed loans, and the timely payment of principal and
interest on GNMA securities are guaranteed by the GNMA and backed by the full
faith and credit of the U.S. Government. Because the FHLMC, the FNMA and the
GNMA were established to provide support for low- and middle-income housing,
there are limits to the maximum size of loans that qualify for these programs.
For example, the FNMA and the FHLMC currently limit their loans secured by a
single-family, owner-occupied residence to $227,000. To accommodate larger-
sized loans, and loans that, for other reasons, do not conform to the agency
programs, a number of private institutions have established their own home-loan
origination and securitization programs.
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Mortgage-backed securities typically are issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a range and have varying maturities. The
underlying pool of mortgages, i.e., fixed-rate or adjustable-rate, as well as
prepayment risk, are passed on to the certificate holder. The life of a
mortgage-backed pass-through security thus approximates the life of the
underlying mortgages.
At June 30, 1998, the amortized value of Oswego County's mortgage-backed
securities amounted $1.6 million, which represented 1.4% of Oswego County's
$110.3 million of total assets at that date. All of Oswego County's $1.6
million of mortgage-backed securities at June 30, 1998 were insured or
guaranteed by the GNMA, the FHLMC or the FNMA, and all of those securities were
held to maturity. Ninety and one-half percent of the mortgage-backed securities
had adjustable rates of interest at June 30, 1998. The amortized cost of
mortgage-backed securities at June 30, 1998 was $1.6 million with a fair value
of $1.7 million.
Mortgage-backed securities generally yield less than the loans which
underlie such securities because of their payment guarantees or credit
enhancements which offer nominal credit risk. In addition, mortgage-backed
securities are more liquid than individual mortgage loans and may be used to
collateralize borrowings or other obligations of Oswego County.
INVESTMENT SECURITIES
Oswego County has authority to invest in various types of liquid assets,
including United States Treasury obligations, securities of various federal
agencies and of state and municipal governments, corporate bonds, certificates
of deposit at federally-insured banks and savings institutions, certain bankers'
acceptances and federal funds. Each purchase of an investment security is
ratified by the Board of Trustees and the Asset Liability Committee. Oswego
County's investment securities are carried in accordance with generally accepted
accounting principles.
Oswego County's investment securities portfolio's largest component are
securities issued by U.S. government-sponsored agencies which amounted to $14.2
million or 66.4% of the portfolio as of June 30, 1998. As of that same date,
the portfolio also included $1.3 million of U.S. Treasury securities, $652,000
of general obligations of states and municipalities and $2.3 million of other
domestic debt securities.
At June 30, 1998, Oswego County's investment securities portfolio had an
amortized cost of $23.0 million or 20.8% of total assets as of such date. The
amortized cost of investment securities being held to maturity at June 30, 1998
was $9.19 million with a fair value of $11.4 million. The amortized cost and
fair value of investment securities being held for sale at June 30, 1998 was
$12.2 million.
SOURCES OF FUNDS
GENERAL. Deposits are the primary source of Oswego County's funds for
lending and other investment purposes. In addition to deposits, Oswego County
derives funds from principal and interest payments on loans and mortgage-backed
securities. Loan repayments are a relatively stable source of funds, while
deposits inflows and outflows are significantly influenced by general interest
rates and money market conditions. Borrowings may be used on a short-term basis
to compensate for reductions in the availability of funds from other sources.
They may also be used on a longer term basis for general business purposes.
DEPOSITS. Oswego County's deposit products include a broad selection of
deposit instruments, including demand deposits, money market deposits, savings
deposits and time deposits. Deposit account terms vary, with the principal
differences being the minimum balance required, the time periods the funds must
remain on deposit and the interest rate.
Oswego County's deposits are obtained primarily from residents of Oswego
County in New York State. Management of Oswego County estimates that less than
1% of Oswego County's deposits are obtained from customers residing outside of
New York State. Oswego County does not pay fees to brokers to solicit funds for
deposit with Oswego County or actively solicit negotiable-rate certificates of
deposit with balances of $100,000 or more.
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<PAGE>
Interest rates paid, maturity terms, service fees and withdrawal
penalties are established by Oswego County on a periodic basis. Determination
of rates and terms are predicated on funds acquisition and liquidity
requirements, rates paid by competitors, growth goals and federal and state
regulations.
THE OFFERING AND MERGER
THE DEPARTMENT, THE FDIC AND THE FRB HAVE APPROVED THE MERGER. SUCH
APPROVALS DO NOT CONSTITUTE RECOMMENDATIONS OR ENDORSEMENTS OF THE MERGER OR THE
OFFERING.
GENERAL
The Offering and the Merger are being conducted pursuant to the
Agreement and the Plan. The Merger has been approved by Department subject to,
among other things, approval of the Agreement by County Savings' depositors. A
special meeting of depositors has been called for this purpose to be held on
___________, 1998 (the "Special Meeting"). Copies of the Agreement and the Plan
are available without charge from the Bank by a written request addressed to the
Corporate Secretary, 214 West First Street, Oswego, New York, or by a telephone
call to (315) 343-0057.
In accordance with the Plan and subject to certain maximum and minimum
purchase limitations, subscription rights to purchase Common Stock have been
granted to (i) County Savings' Eligible Account Holders, (ii) the Bank's tax-
qualified employee plans, including the ESOP; (iii) County Savings' Supplemental
Eligible Account Holders, and (iv) Eligible Employees, Officers and Trustees.
Any shares of Common Stock for which subscriptions have not been accepted in the
Subscription Offering may, at the sole discretion of the Board of Directors of
the Company, be issued to the Mutual Holding Company or offered for sale in a
Community Offering. In the Community Offering, should one be conducted,
unsubscribed shares will be offered directly to the general public with a
preference to those natural persons residing in the local community of Oswego
County, New York. Additional terms and conditions may be established at any
time prior to the closing of any Community Offering by the Board of Directors of
the Bank and the Board of Trustees of County Savings. The Plan does not
preclude the Company from conducting a future minority stock offering, although
the Company has no current intention of doing so.
THE CHARITABLE FOUNDATION
On or prior to the Effective Time, County Savings shall establish the
Charitable Foundation for the purpose of providing charitable contributions to
the Oswego community. The contribution by County Savings to the Charitable
Foundation will be $2.0 million. The Charitable Foundation is intended to
complement County Savings' existing community reinvestment activities in a
manner that will allow the local community to share in the growth and
profitability of City Savings and the Company following the Merger. The Bank,
the Company or the Mutual Holding Company may make additional contributions to
the Charitable Foundation.
STOCK PRICING AND NUMBER OF SHARES TO BE ISSUED
The total number of shares of Common Stock of the Bank to be issued and
sold in the Offering will be determined jointly by the Boards of Directors of
the Company and the Board of Trustees of County Savings, based upon the
Independent Valuation. The number of shares of Common Stock to be offered in
the Offering will be equal to approximately 46% of the quotient obtained by
dividing the Independent Valuation as updated at the conclusion of the Offering
by the Unadjusted Price Per Share. In addition, a number of authorized but
unissued shares of Common Stock equal to 54% of such quotient will be issued to
the Mutual Holding Company. Based on the last sale price of the Common Stock on
______, 1998, at the minimum and maximum of the Valuation Range, the Company
would issue ________ and _________ shares, respectively, in the Merger. Of such
shares, ______%, or_______ and _______ shares, respectively, would be issued to
the Mutual Holding Company, and _____%, or _______ and _______ shares,
respectively, would be sold in the Offering. The number of shares that will be
issued will depend on the Unadjusted Price Per Share, provided that the total
number of shares that may be sold in the Offering may not exceed _____ shares of
Common Stock.
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<PAGE>
The minimum dollar amount of Common Stock that must be sold in the
Offering is $_________, based on the Unadjusted Price Per Share, unless the
Company obtains Department and FDIC approval of an offering of a lesser dollar
amount of Common Stock. If the Company obtains regulatory approval of an
offering of a lesser dollar amount of Common Stock, then the remaining unsold
Common Stock will be issued to the Mutual Holding Company, which will not pay
cash consideration to the Company for such shares. There can be no assurance
that the Company will be able to obtain regulatory approval of such an issuance
of unsold shares to the Mutual Holding Company. In addition, because the number
of shares to be issued in the Offering is based on the Unadjusted Price Per
Share, which cannot be determined until the consummation of the Offering, the
Company has not established a required minimum number of shares that must be
sold in order to complete the Offering.
In order to purchase Common Stock each purchaser must complete and
submit an Order Form indicating the total dollar amount of Common Stock for
which he is subscribing. The subscription price per share of Common Stock for
all subscribers other than Eligible Account Holders will be equal to the
Unadjusted Price Per Share. The subscription price per share for Eligible
Account Holders shall be equal to the Adjusted Price Per Share (i.e., 90% of the
Unadjusted Price Per Share). Subject to the applicable purchase limitations,
the total number of shares that will be issued to a subscriber whose
subscription has been accepted will be equal to the total dollar amount of stock
for which such subscription has been accepted divided by the Unadjusted Price
Per Share or the Adjusted Price Per Share, as applicable. Payment for
subscriptions must accompany an order form and may be made (i) in cash if
delivered in person at the office of County Savings, (ii) by check or money
order, or (iii) by authorization of withdrawal from deposit accounts maintained
with County Savings. County Savings and the Company reserve the right to refund
subscription funds in lieu of issuing fractional shares, or permit subscribers
to elect to receive additional whole shares in this process.
The minimum amount of Common Stock for which any person may subscribe
in the Subscription Offering or in the Community Offering, respectively, is 25
shares. No person, directly or indirectly or with an associate or a group
acting in concert, may subscribe for or purchase in the aggregate more than
$150,000 of Common Stock. Such stock may be purchased at a 10% discount (i.e.,
for $______) by Eligible Account Holders. The maximum purchase limitation may
be increased or decreased at the discretion of the Company. See "The Offering
and Merger--Purchase Limitations."
THE INDEPENDENT VALUATION
The Independent Valuation was performed by the Independent Appraiser, a
firm experienced in the valuation and appraisal of savings institutions. The
Independent Appraiser is not affiliated with the Bank or County Savings. For its
services in preparing the Independent Valuation, the Independent Appraiser will
receive a fee of $_____. The Independent Appraiser was hired by County Savings
on the basis of its reputation. County Savings has agreed to indemnify the
Independent Appraiser and its employees and affiliates against certain losses
(including any losses in connection with claims under the federal securities
laws) arising out of its services as appraiser, except where the Independent
Appraiser's liability results from its negligence or bad faith. In determining
the Independent Valuation, the Appraiser reviewed, among other factors, County
Savings' audited financial statements as of and for the two years ended December
31, 1997 and unaudited financial statements as of and for the six months ended
June 30, 1998. The Appraiser also examined the economy in County Savings'
market area and the competitive environment in which it operates, and compared
its operating performance with that of selected segments of the thrift industry
and selected publicly traded thrift institutions. The Independent Appraiser
also reviewed conditions in the securities markets in general and for thrift
institution stocks in particular. Similarly, when the Independent Appraiser
updates the Independent Valuation prior to the completion of the Offering, it
intends to consider, among other things, any new developments or changes in
County Savings' performance, financial condition and management policies, and
conditions in the equity markets for thrift institution stock.
On the basis of the foregoing, the Independent Appraiser determined the
Valuation Range as of __________, 1998 to be between $11,050,000 and
$14,950,000. The Independent Valuation will be updated prior to the completion
of the Offering. Such valuation, however, is not intended, and must not be
construed, as a recommendation of any kind as to the advisability of purchasing
Common Stock. THE INDEPENDENT APPRAISER VALUED COUNTY SAVINGS, BUT DID NOT
VALUE THE SHARES OF COMMON STOCK OFFERED IN THE OFFERING. The Independent
Appraiser did not independently verify the financial statements and other
information provided by County Savings, nor did the Independent Appraiser
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value independently the assets or liabilities of County Savings or the Bank.
Moreover, because such valuation is necessarily based upon estimates and
projections of a number of matters, all of which are subject to change from time
to time, no assurance can be given that persons purchasing shares in the
Offering will thereafter be able to sell such shares at prices at or above the
price at which they purchased such shares.
If the updated Independent Valuation is either more than the maximum of
the Valuation Range or less than the minimum of the Valuation Range, the Bank
and County Savings, after consulting with the Department and the FDIC, may
terminate the Offering and return all funds promptly with interest at the Bank's
passbook rate of interest on payments made by cash, check or money order, extend
or hold a new Subscription and Community Offering, establish a new Valuation
Range, commence a resolicitation of subscribers or take such other actions as
permitted by the Department and FDIC in order to complete the Offering. In the
event that a resolicitation is commenced, unless an affirmative response is
received within a reasonable period of time, all funds will be promptly returned
to investors as described above. A resolicitation, if any, following the
conclusion of the Subscription and Community Offering would not exceed 45 days
unless further extended by the Department or FDIC for periods of up to 90 days
not to extend beyond _________, 1998.
Notwithstanding the foregoing, no sale of Common Stock may be
consummated unless, prior to such consummation, the Independent Appraiser
confirms to County Savings, the Bank, and the Department that, to the best
knowledge of the Independent Appraiser, nothing of a material nature has
occurred that, taking into account all relevant factors, would cause the
Independent Appraiser to conclude that the actual aggregate market value of
County Savings as an entity merged with and into the Bank is incompatible with
its estimate of the aggregate pro forma market value of County Savings as an
entity merged with and into the Bank. If such confirmation is not received,
County Savings and the Bank may cancel, extend, reopen, or hold new Subscription
and Community Offerings, establish a new Valuation Range, or take such other
action as the Department may permit.
Copies of the appraisal report of the Independent Appraiser and the
detailed memorandum of the appraiser setting forth the method and assumptions
for such appraisal are available for inspection at the main office of County
Savings and the other locations specified under "Additional Information."
PURCHASE LIMITATIONS
THE MINIMUM AMOUNT OF COMMON STOCK FOR WHICH ANY PERSON MAY SUBSCRIBE IN
THE SUBSCRIPTION OFFERING OR IN THE COMMUNITY OFFERING, RESPECTIVELY, IS 25
SHARES. NO PERSON, DIRECTLY OR INDIRECTLY OR WITH AN ASSOCIATE OR A GROUP
ACTING IN CONCERT, MAY SUBSCRIBE FOR OR PURCHASE IN THE AGGREGATE MORE THAN
$150,000 OF COMMON STOCK BASED ON THE MAXIMUM OF THE VALUATION RANGE. SUCH
STOCK MAY BE PURCHASED AT A 10% DISCOUNT (I.E., FOR $________) BY ELIGIBLE
ACCOUNT HOLDERS. THE MAXIMUM PURCHASE LIMITATION MAY BE DECREASED OR INCREASED
UP TO 9.9%; PROVIDED, THAT ORDERS FOR COMMON STOCK EXCEEDING 5% OF THE SHARES
BEING OFFERED SHALL NOT EXCEED IN THE AGGREGATE 10% OF THE TOTAL OFFERING.
REQUESTS TO PURCHASE ADDITIONAL SHARES OF THE COMMON STOCK IN THE EVENT THAT THE
PURCHASE LIMITATION IS SO INCREASED WILL BE DETERMINED BY THE BOARDS OF
DIRECTORS OF THE COMPANY AND COUNTY SAVINGS IN THEIR SOLE DISCRETION.
In the event of a decrease in the Independent Valuation, the orders of
persons who subscribed for the maximum number of shares will be reduced. In the
event of a resolicitation, subscribers will be afforded the opportunity to
increase, decrease or maintain their previously submitted order. In the event
no change from the previous order is desired, no action need be taken.
If purchasers from the general public cannot be found for an
insignificant residue of unsubscribed shares, other purchase arrangements will
be made by the Boards of Directors of the Bank and County Savings, if possible.
Such other purchase arrangements will be subject to the approval of the
Department and may provide for purchases by directors, officers, their
associates and other persons in excess of the limitations provided below. If
such other purchase arrangements cannot be made, the Offering will be
terminated.
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SUBSCRIPTION OFFERING AND SUBSCRIPTION RIGHTS
In accordance with the Plan, rights to subscribe for the purchase of
Common Stock have been granted under the Plan to the following persons in the
following order of descending priority:
PRIORITY 1: ELIGIBLE ACCOUNT HOLDERS. Each Eligible Account Holder
shall be given the opportunity to purchase shares of up to $150,000 of Common
Stock offered in the Offering; provided that the Company may, in its sole
discretion and without further notice to or solicitation of subscribers or other
prospective purchasers, increase the maximum purchase limitation up to 5% of the
maximum number of shares offered in the Offering or decrease such maximum
purchase limitation to 1% of the maximum number of shares offered in the
Offering, subject to the overall purchase limitations. If there are
insufficient shares available to satisfy all subscriptions of Eligible Account
Holders, shares will be allocated to Eligible Account Holders so as to permit
each such subscribing Eligible Account Holder to purchase a number of shares
sufficient to make his total allocation equal to the lesser of 100 shares or the
number of shares subscribed for. Thereafter, unallocated shares will be
allocated pro rata to remaining subscribing Eligible Account Holders whose
subscriptions remain unfilled in the same proportion that each such subscriber's
Qualifying Deposit bears to the total amount of Qualifying Deposits of all
subscribing Eligible Account Holders whose subscriptions remain unfilled. To
ensure proper allocation of stock, each Eligible Account Holder must list on his
subscription order form all accounts in which he had an ownership interest as of
the Eligibility Record Date.
PRIORITY 2: TAX-QUALIFIED EMPLOYEE PLANS. The Tax-Qualified Employee
Plans shall be given the opportunity to purchase in the aggregate up to 10% of
the Common Stock issued in the Offering. In the event of an oversubscription in
the Offering, subscriptions for shares by the Tax-Qualified Employee Plans may
be satisfied, in whole or in part, out of authorized but unissued shares of the
Company subject to the maximum purchase limitations applicable to such plans or
may be satisfied, in whole or in part, through open market purchases by the Tax-
Qualified Employee Plans subsequent to the closing of the Offering.
PRIORITY 3: SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS. To the extent there
are sufficient shares remaining after satisfaction of subscriptions by Eligible
Account Holders and the Tax-Qualified Employee Plans, each Supplemental Eligible
Account Holder shall have the opportunity to purchase shares of Common Stock in
an amount equal to $150,000 offered in the Offering, provided that the Company
may, in its sole discretion and without further notice to or solicitation of
subscribers or other prospective purchasers, increase the maximum purchase
limitation up to 5% of the maximum shares offered in the Offering or decrease
such maximum purchase limitation to 1% of the maximum number of shares offered
in the Offering subject to the overall purchase limitations. In the event
Supplemental Eligible Account Holders subscribe for a number of shares which,
when added to the shares subscribed for by Eligible Account Holders and the Tax-
Qualified Employee Plans is in excess of the total number of shares offered in
the Offering, the shares of Common Stock will be allocated among subscribing
Supplemental Eligible Account Holders so as to permit each subscribing
Supplemental Eligible Account Holder to purchase a number of shares sufficient
to make his total allocation equal to the lesser of 100 shares or the number of
shares subscribed for. Thereafter, unallocated shares will be allocated to each
subscribing Supplemental Eligible Account Holder whose subscription remains
unfilled in the same proportion that such subscriber's Qualifying Deposits on
the Supplemental Eligibility Record Date bear to the total amount of Qualifying
Deposits of all subscribing Supplemental Eligible Account Holders whose
subscriptions remain unfilled.
PRIORITY 4: EMPLOYEES, OFFICERS AND TRUSTEES. To the extent that shares
remain available for purchase after satisfaction of all subscriptions of the
Eligible Account Holders, Tax-Qualified Employee Plans, Supplemental Eligible
Account Holders and each Employee, Officer and Trustee of County Savings shall
have the opportunity to purchase shares of Common Stock in an amount equal to
$150,000 offered in the Offering; provided that the Company may, in its sole
discretion, and without further notice to or solicitation of subscribers or
other prospective purchasers, increase the maximum purchase limitations to 5% of
the maximum shares offered in the Offering or decrease such maximum purchase
limitation to 1% of the maximum number of shares offered in the Offering,
subject to the overall purchase limitations. In the event that Employees,
Officers and Trustees, subscribe for a number of shares, which, when added to
the shares subscribed for by Eligible Account Holders, Tax-Qualified Employee
Plans, Supplemental Eligible Account Holders, and is in excess of the total
shares offered in the Offering, the subscriptions of such persons will be
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allocated among Employees, Officers and Trustees on a pro rata basis based on
the size of such person's subscription orders.
EXPIRATION DATE FOR THE SUBSCRIPTION OFFERING. All subscription rights
will expire on the Expiration Date unless extended by the Company, with the
approval of the Department, if necessary, for up to an additional 45 days. Any
shares not sold in the Subscription Offering may be sold in the Community
Offering, which also is expected to terminate on __________, 1998, but which may
terminate as late as ______________, 1998. Subscriptions paid by cash, check,
or money order will be placed in a segregated account at County Savings and will
earn interest at the Bank's regular passbook rate of interest from the date of
receipt until completion or termination of the Offering. Payments authorized by
withdrawal from deposit accounts at County Savings will continue to earn
interest at the contractual rate until the Offering is completed or terminated,
and such funds will be otherwise unavailable to the depositor until such time.
Orders submitted are irrevocable until the completion of the Offering; provided
that all subscribers will have their funds returned promptly, with interest, and
all withdrawal authorizations will be canceled if the Offering is not completed
by ___________, 1998, unless such period has been extended with the approval of
the Department, if necessary. If an extension of time has been granted, all
subscribers will be notified of such extension, and of any rights to confirm,
modify or rescind their subscriptions and have their funds returned promptly
with interest, and of the time period within which each subscriber must notify
County Savings or the Bank of his intention to confirm, modify or rescind his
subscription. If an affirmative response to any resolicitation is not received
by County Savings or the Company from a subscriber, the subscriber's order will
be rescinded and all funds will be returned promptly with interest. Such
extensions may not go beyond _____________, 2000.
The Company will not execute orders until all shares of Common Stock
have been subscribed for or otherwise issued. If all shares have not been
subscribed for or otherwise issued within 45 days after the Expiration Date,
unless such period is extended with the consent of the Department, all funds
delivered to the Company pursuant to the Subscription Offering will be returned
promptly to the subscribers with interest and all withdrawal authorizations will
be canceled. If an extension beyond the 45 day period following the Expiration
Date is granted, the Company will notify subscribers of the extension of time
and of any rights of subscribers to modify or rescind their subscriptions. Such
extensions may not go beyond ______________.
PERSONS IN NONQUALIFIED STATES OR FOREIGN COUNTRIES. The Company will
make reasonable efforts to comply with the securities laws of all states in the
United States in which persons entitled to subscribe for stock reside. However,
the Company is not required to offer stock in the Subscription Offering to any
person who resides in a foreign country or resides in a state of the United
States with respect to which (i) a small number of persons otherwise eligible to
subscribe for shares of Common Stock reside; or (ii) the Company determines that
compliance with the securities laws of such state would be impracticable for
reasons of cost or otherwise, including but not limited to a requirement that
the Company or its officers or directors, under the securities laws of such
state, register as a broker, dealer, salesman or selling agent or to register or
otherwise qualify the subscription rights or Common Stock for sale or subject
any filing with respect thereto in such state. Where the number of persons
eligible to subscribe for shares in one state is small, the Company will base
its decision as to whether or not to offer the Common Stock in such state on a
number of factors, including the size of accounts being held by account holders
in the state, the cost of registering or qualifying the shares or the need to
register the Company, its officers, directors or employees as brokers, dealers
or salesmen.
COMMUNITY OFFERING
Any shares of Common Stock for which subscriptions have not been
accepted in the Subscription Offering will be offered for sale in a Community
Offering. The Community Offering, should it be conducted, will involve an
offering of unsubscribed shares directly to the general public with a preference
to those natural persons residing in the community of Oswego County, New York.
The Community Offering, if any, shall be for a period of not more than 45 days
unless extended by the Company and County Savings, and shall commence
concurrently with, during or promptly after the Subscription Offering. The
Company may use an investment banking firm or marketing agent on a best efforts
basis to sell the shares in the Community Offering. The Company and/or County
Savings may pay a commission or other fee to such investment banking firm or
marketing agent as to the shares sold by such firm or firms in the Community
Offering and may also reimburse such firm or firms for expenses incurred in
connection with the sale. No person, by himself or herself, or with an
associate or group of persons acting in concert, may subscribe for or purchase
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more than $150,000 of Common Stock offered in the Community Offering. Further,
the Company may limit total subscriptions in the Community Offering so as to
assure that the number of shares available for the public offering may be up to
a specified percentage of the number of shares of Common Stock. If approved by
the Department and the FDIC, any shares of Common Stock for which subscriptions
have not been accepted in the Community Offering may be issued to the Mutual
Holding Company without the payment by the Mutual Holding Company of cash
consideration therefor. There can be no assurance that the Company will be able
to obtain regulatory approval of such an issuance of unsold shares to the Mutual
Holding Company.
In the event of an oversubscription for shares in the Community
Offering, shares may be allocated first to cover orders of natural persons
residing in the Community, then to cover the orders of any other Person
subscribing for shares in the Community Offering so that each such person may
receive the lesser of 100 shares and the number of shares for which he has
subscribed, and thereafter, on a pro rata basis to such persons based on the
amount of their respective subscriptions. THE OPPORTUNITY TO SUBSCRIBE FOR
SHARES OF COMMON STOCK IN THE COMMUNITY OFFERING CATEGORY IS SUBJECT TO THE
RIGHT OF THE COMPANY AND COUNTY SAVINGS, IN THEIR SOLE DISCRETION, TO ACCEPT OR
REJECT ANY SUCH ORDERS IN WHOLE OR IN PART EITHER AT THE TIME OF RECEIPT OF AN
ORDER OR AS SOON AS PRACTICABLE FOLLOWING THE EXPIRATION DATE.
If for any reason a public offering of unsubscribed shares of Common
Stock cannot be effected and shares remain unsold after the Subscription
Offering and the Community Offering, if any, and the Company is not able to
issue such shares to the Mutual Holding Company, the Boards of Directors of the
Bank and the Board of Trustees of County Savings will seek to make other
arrangements for the sale of the remaining shares. Such other arrangements will
be subject to the approval of the FDIC and the Department and to compliance with
applicable securities laws.
PLAN OF DISTRIBUTION AND SELLING COMMISSIONS
Offering materials for the Offering initially have been distributed to
certain persons by mail, with additional copies made available at County Savings
main office and the Company's main office and by____________________. All
prospective purchasers are to send payment along with a completed Order Form and
certification form directly to the Company or County Savings, where such funds
will be held in a segregated special escrow account and not released until the
Offering is completed or terminated.
To assist in the marketing of the Common Stock, the Company and County
Savings have retained __________, which is a broker-dealer registered with the
National Association of Securities Dealers, Inc. (the "NASD"). ____________ will
assist the Company and County Savings in the Offering as follows: (i) in
training and educating employees of the Company and County Savings regarding the
mechanics and regulatory requirements of the Offering; (ii) in conducting any
informational meetings for employees, customers and the general public; (iii) in
coordinating the selling efforts in the Oswego and surrounding communities; and
(iv) keeping records of all orders for Common Stock. For these services,
____________ will receive: (i) an advisory and management fee of $________; and
(ii) a marketing fee of ____% of the total dollar amount of the Common Stock
sold in the Offerings, reduced by the advisory and management fee. No fee shall
be payable in connection with the sale of Common Stock to the ESOP or the
Company's directors, officers, or employees, and such persons' immediate family
members.
The Company also will reimburse ______________ for its reasonable out-
of-pocket expenses associated with its marketing effort, up to a maximum of
$___________, including legal fees and expenses. The Company has made an
advance payment to _____________ in the amount of $___________. The Company and
County Savings will indemnify __________ against liabilities and expenses
(including legal fees) incurred in connection with certain claims or litigation
arising out of or based upon untrue statements or omissions contained in the
offering material for the Common Stock, including liabilities under the
Securities Act of 1933.
Certain Directors and executive officers of the Company and County
Savings may participate in the solicitation of offers to purchase Common Stock.
Such persons will be reimbursed by the Mutual Holding Company and/or the Company
for their reasonable out-of-pocket expenses, including, but not limited to, de
minimis telephone and postage expenses, incurred in connection with such
solicitation. Other regular, full-time employees of the Company and County
Savings may participate in the Offering but only in ministerial capacities,
providing clerical work in effecting a sales
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transaction or answering questions of a potential purchaser, provided that the
content of the employee's responses is limited to information contained in the
Prospectus or other offering documents, and no offers or sales may be made by
tellers or at the teller counter. All sales activity will be conducted in a
segregated or separately identifiable area of the Company and County Savings
offices apart from the area accessible to the general public for the purpose of
making deposits or withdrawals. Other questions of prospective purchasers will
be directed to executive officers or registered representatives. Such other
employees have been instructed not to solicit offers to purchase Common Stock or
provide advice regarding the purchase of Common Stock. The Company and County
Savings will rely on Rule 3a4-1 under the Exchange Act, and sales of Common
Stock will be conducted within the requirements of Rule 3a4-1, so as to permit
officers, directors and employees to participate in the sale of Common Stock.
No officer, director or employee of the Company or the County Savings will be
compensated in connection with his participation by the payment of commissions
or other remuneration based either directly or indirectly on the transactions in
the Common Stock.
PROCEDURE FOR PURCHASING SHARES IN SUBSCRIPTION AND COMMUNITY OFFERING
To ensure that each purchaser receives a Prospectus at least 48 hours
before the Expiration Date in accordance with Rule 15c2-8 of the 1934 Act, no
Prospectus will be mailed any later than five days prior to such date or hand
delivered any later than two days prior to such date. Execution of an order
form will confirm receipt or delivery in accordance with Rule 15c2-8. Order
Forms will only be distributed with a Prospectus.
To purchase shares in the Subscription and Community Offering, an
executed order form with the required payment for the total amount of Common
Stock subscribed for, or with appropriate authorization for withdrawal from a
County Savings' deposit account (which may be given by completing the
appropriate blanks in the order form), must be received by County Savings by
______ p.m., local time on the Expiration Date. Order forms which are not
received by such time or are executed defectively or are received without full
payment (or appropriate withdrawal instructions) are not required to be
accepted. In addition, County Savings and the Bank will not accept an order
submitted on photocopied or facsimile order forms. County Savings and the Bank
have the right to waive or permit the correction of incomplete or improperly
executed forms, but do not represent that they will do so. Once received, an
executed order form may not be modified, amended or rescinded without the
consent of the Bank and County Savings unless the Offering has not been
completed within 45 days after the end of the Subscription and Community
Offering, unless such period has been extended.
THE SUBSCRIPTION PRICE PER SHARE OF COMMON STOCK FOR ALL SUBSCRIBERS
OTHER THAN ELIGIBLE ACCOUNT HOLDERS WILL BE EQUAL TO THE UNADJUSTED PRICE PER
SHARE. THE SUBSCRIPTION PRICE PER SHARE FOR ELIGIBLE ACCOUNT HOLDERS SHALL BE
EQUAL TO THE ADJUSTED PRICE PER SHARE (I.E., 90% OF THE UNADJUSTED PRICE PER
SHARE). SUBJECT TO THE APPLICABLE PURCHASE LIMITATIONS, THE TOTAL NUMBER OF
SHARES THAT WILL BE ISSUED TO A SUBSCRIBER WHOSE SUBSCRIPTION HAS BEEN ACCEPTED
WILL BE EQUAL TO THE TOTAL DOLLAR AMOUNT OF STOCK FOR WHICH SUCH SUBSCRIPTION
HAS BEEN ACCEPTED DIVIDED BY THE UNADJUSTED PRICE PER SHARE OR THE ADJUSTED
PRICE PER SHARE, AS APPLICABLE. PAYMENT FOR SUBSCRIPTION MUST ACCOMPANY THE
ORDER FORM AND MAY BE MADE (I) IN CASH IF DELIVERED IN PERSON AT THE OFFICE OF
COUNTY SAVINGS, (II) BY CHECK OR MONEY ORDER, OR (III) BY AUTHORIZATION OF
WITHDRAWAL FROM DEPOSIT ACCOUNTS MAINTAINED WITH COUNTY SAVINGS. COUNTY SAVINGS
AND THE COMPANY RESERVE THE RIGHT TO REFUND SUBSCRIPTION FUNDS IN LIEU OF
ISSUING FRACTIONAL SHARES, OR PERMIT SUBSCRIBERS TO ELECT TO RECEIVE ADDITIONAL
WHOLE SHARES IN THIS PROCESS.
IN ORDER TO ENSURE THAT ELIGIBLE ACCOUNT HOLDERS AND SUPPLEMENTAL
ELIGIBLE ACCOUNT HOLDERS ARE PROPERLY IDENTIFIED AS TO THEIR STOCK PURCHASE
PRIORITIES, DEPOSITORS AS OF THE ELIGIBILITY RECORD DATE AND/OR SUPPLEMENTAL
ELIGIBILITY RECORD DATE MUST LIST ALL ACCOUNTS ON THE STOCK ORDER FORM GIVING
ALL NAMES IN EACH ACCOUNT AND THE ACCOUNT NUMBER.
Interest will be paid on payments made by cash, check, or money order at
the Bank's passbook rate of interest from the date payment is received until the
completion or termination of the Offering. If payment is made by authorization
of withdrawal from deposit accounts (other than checking accounts), the funds
authorized to be withdrawn from a deposit account will continue to accrue
interest at the contractual rates until completion or termination of the
Offering, but a hold will be placed on such funds, thereby making them
unavailable to the depositor until completion or termination of the Offering.
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If a subscriber authorizes County Savings to withdraw the amount of the
purchase price from his deposit account (other than checking accounts), County
Savings will do so as of the effective date of Offering. County Savings will
waive any applicable penalties for early withdrawal from certificate accounts.
If the remaining balance in a certificate account is reduced below the
applicable minimum balance requirement at the time that the funds actually are
transferred under the authorization, the certificate will be canceled at the
time of the withdrawal, without penalty, and the remaining balance will earn
interest at County Savings' passbook rate of interest.
A depositor interested in using his or her IRA funds to purchase Common
Stock must do so through a self-directed IRA. Since County Savings does not
offer such accounts, it will allow a depositor to make a trustee-to-trustee
transfer of the IRA funds to a trustee offering a self-directed IRA program
without early withdrawal penalties with the agreement that such funds will be
used to purchase the Common Stock in the Offering. There will be no early
withdrawal or IRS interest penalties for such transfers. The new trustee would
hold the Common Stock in a self-directed account in the same manner as County
Savings now holds the depositor's IRA funds. An annual administrative fee may
be payable to the new trustee. Depositors interested in using funds in a County
Savings IRA to purchase Common Stock should contact the Stock Information Center
as soon as possible so that the necessary forms may be forwarded for execution
and returned prior to the Expiration Date.
In addition, the provisions of ERISA and IRS regulations require that
executive officers, directors and 10% stockholders who use self-directed IRA
funds to purchase shares of Common Stock in the Offering, make such purchase for
the exclusive benefit of the IRA participant.
Certificates representing shares of Common Stock purchased will be
mailed to purchasers at the last address of such persons appearing on the
records of County Savings, or to such other address as may be specified in
properly completed order forms, as soon as practicable following consummation of
the Offering. Any certificates returned as undeliverable will be disposed of in
accordance with applicable law.
RESTRICTIONS ON TRANSFER OF SUBSCRIPTION RIGHTS AND SHARES
PRIOR TO THE COMPLETION OF THE OFFERING, THE PLAN PROHIBITS ANY PERSON
WITH SUBSCRIPTION RIGHTS FROM TRANSFERRING OR ENTERING INTO ANY AGREEMENT OR
UNDERSTANDING TO TRANSFER THE LEGAL OR BENEFICIAL OWNERSHIP OF THE SUBSCRIPTION
RIGHTS ISSUED UNDER THE PLAN OR THE SHARES OF COMMON STOCK TO BE ISSUED UPON
THEIR EXERCISE. SUCH RIGHTS MAY BE EXERCISED ONLY BY THE PERSON TO WHOM THEY ARE
GRANTED AND ONLY FOR HIS ACCOUNT. EACH PERSON EXERCISING SUCH SUBSCRIPTION
RIGHTS WILL BE REQUIRED TO CERTIFY THAT HE IS PURCHASING SHARES SOLELY FOR HIS
OWN ACCOUNT AND THAT HE HAS NO AGREEMENT OR UNDERSTANDING REGARDING THE SALE OR
TRANSFER OF SUCH SHARES. THE PLAN ALSO PROHIBITS ANY PERSON FROM OFFERING OR
MAKING AN ANNOUNCEMENT OF AN OFFER OR INTENT TO MAKE AN OFFER TO PURCHASE SUCH
SUBSCRIPTION RIGHTS OR SHARES OF COMMON STOCK PRIOR TO THE COMPLETION OF THE
OFFERING.
COUNTY SAVINGS AND THE BANK WILL PURSUE ANY AND ALL LEGAL AND EQUITABLE
REMEDIES IN THE EVENT THEY BECOME AWARE OF THE TRANSFER OF SUBSCRIPTION RIGHTS
AND WILL NOT HONOR ORDERS KNOWN BY THEM TO INVOLVE THE TRANSFER OF SUCH RIGHTS.
LIMITATIONS ON COMMON STOCK PURCHASES
The Plan includes the following limitations on the number of shares of
Common Stock which may be purchased during the Offering:
1. The aggregate amount of outstanding common stock of the Company owned
or controlled by persons other than Mutual Holding Company at the
close of the Offering shall be less than 50% of the Company's total
outstanding common stock.
2. No Person, Associate thereof, or group of persons acting in concert,
may purchase more than $150,000 of Common Stock offered in the
Offering, except that: (i) the Company may, in its sole discretion
and without further notice to or solicitation of subscribers or other
prospective purchasers, increase such maximum purchase limitation to
5% of the number of shares offered in the Offering;
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(ii) Tax-Qualified Employee Plans may purchase in the aggregate up to
10% of the shares offered in the Offering. Shares to be held by any
Tax-Qualified Employee Plan and attributable to a person shall not be
aggregated with other shares purchased directly by or otherwise
attributable to such person.
3. The aggregate amount of Common Stock acquired in the Offering by all
management persons and their Associates, exclusive of any stock
acquired by such persons in the secondary market, shall not exceed
33% of the shares of Common Stock offered for sale in the Offering.
In calculating the number of shares held by management persons and
their Associates under this paragraph or under the purchase
priorities set forth in the Plan, shares held by any Tax-Qualified
Employee Plan of the Bank that are attributable to such persons shall
not be counted.
4. The Board of Directors of the Company after consulting with the Board
of Trustees of County Savings may, in its sole discretion, increase
the maximum purchase limitation to up to 9.9%, provided that orders
for Common Stock in excess of 5% of the number of shares of Common
Stock offered in the Offering shall not in the aggregate exceed 10%
of the total shares of Common Stock offered in the Offering (except
that this limitation shall not apply to purchases by Tax-Qualified
Employee Plans). If such 5% limitation is increased, subscribers for
the maximum amount will be, and certain other large subscribers in
the sole discretion of the Company and County Savings may be, given
the opportunity to increase their subscriptions up to the then
applicable limit. Requests to purchase additional shares of Common
Stock under this provision will be determined by the Board of
Directors of the Company, in its sole discretion.
5. Notwithstanding any other provision of this Plan, no person shall be
entitled to purchase any Common Stock to the extent such purchase
would be illegal under any federal law or state law or regulation or
would violate regulations or policies of the National Association of
Securities Dealers, Inc., particularly those regarding free riding
and withholding. The Company and/or its agents may ask for an
acceptable legal opinion from any purchaser as to the legality of
such purchase and may refuse to honor any purchase order if such
opinion is not timely furnished.
6. The Board of Directors of the Company has the right in its sole
discretion to reject any order submitted by a person whose
representations the Board of Directors believes to be false or who it
otherwise believes, either alone or acting in concert with others, is
violating, circumventing, or intends to violate, evade or circumvent
the terms and conditions of this Plan.
The Board of Directors of the Company shall have the authority to
interpret terms used in the above limitations and terms used in the Plan in
their sole discretion.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of all anticipated material federal income
tax consequences of the proposed transaction, including the Merger and Offering,
and the possible purchase of Common Stock in the Subscription Offering or the
Community Offering. The summary is based on the federal income tax laws as now
in effect and as currently interpreted; it does not take into account possible
changes in such laws or interpretations, including amendments to applicable
statutes or regulations or changes in judicial or administrative rulings, some
of which may have retroactive effect. In addition, to the extent the discussion
is premised upon the receipt of an opinion of legal counsel or independent tax
advisors, purchasers should be aware that any such opinion will not be binding
on the IRS or the courts. The summary does not purport to address all aspects
of the possible federal income tax consequences of the Offering. In particular,
and without limiting the foregoing, this summary does not address the federal
income tax consequences of the Offering to Eligible Account Holders in light of
their particular circumstances or status (e.g., foreign persons tax-exempt
entities, etc.), nor does this summary address any consequences of the Offering
under any state, local, or foreign tax laws. SUBSCRIBERS ARE THEREFORE URGED TO
CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES TO THEM OF
THE PROPOSED TRANSACTIONS AND ANY PURCHASE OF COMMON STOCK PURSUANT TO THE
SUBSCRIPTION OFFERING OR THE COMMUNITY OFFERING, INCLUDING TAX RETURN REPORTING
REQUIREMENTS, THE APPLICATION
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AND EFFECT OF FEDERAL, FOREIGN, STATE, LOCAL AND OTHER TAX LAWS, AND THE
IMPLICATIONS OF ANY PROPOSED CHANGES IN THE TAX LAWS.
The tax consequences of the purchase of Common Stock may vary depending
on whether the purchase is by an Eligible Account Holder in his capacity as
such. All Eligible Account Holders should read carefully the entire discussion
under "Special Considerations--Certain Federal Income Tax Consequences" before
deciding whether to purchase Common Stock in such person's capacity as an
Eligible Account Holder.
REORGANIZATION STATUS. The consummation of the Offering is conditioned
upon the receipt by the Bank of a private letter ruling from the Internal
Revenue Service ("IRS") with respect to certain significant subissues that
affect the characterization of the transaction solely for tax purposes, and an
opinion of counsel or independent tax advisor (the receipt of which is also
conditioned on the Bank's receipt of the private letter ruling) to the effect
that, based on facts and representations made by the Bank, proposed transaction,
including the Merger and the Offering, will constitute one or more tax-free
reorganizations within the meaning of Section 368(a) of the Code, or, depending
on the findings of the IRS as set forth in the private letter ruling, in the
alternative, will constitute a tax-free exchange of stock under Section 1032 of
the Code followed by a tax-free exchange of property for stock under Section 351
and a reorganization under Section 368(a) of the Code.
CERTAIN TAX CONSEQUENCES OF THE PROPOSED TRANSACTIONS TO SUBSCRIBERS.
Assuming that the Offering qualifies as one or more reorganizations or, in the
alternative, as an exchange, transfer, and reorganization (as noted above), an
Eligible Account Holder or Supplemental Eligible Account Holder should be
treated for federal income tax purposes as having exchanged his or her deposit
account(s) and depositorship interest in County Savings for (i) deposit
account(s) in City Savings, (ii) interest(s) in the liquidation account in City
Savings, (iii) liquidation rights in the Mutual Holding Company, which will be
subordinate to a depositor's interest in the liquidation account in City
Savings, and (iv) to the extent such person actually purchases any Common Stock
in the Subscription Offering in such person's capacity as an Eligible Account
Holder or Supplemental Eligible Account Holder, rights to purchase such shares
of Common Stock ("Subscription Rights"). In addition, an Other Depositor and
Eligible Employee and Trustee purchasing in his or her capacity as such should
be treated as having exchanged his or her deposit account(s), if any, and
depositorship interest in County Savings, if any, for (i) deposit account(s) in
the Bank and (ii) Subscription Rights.
The federal income tax consequences of the receipt, exercise and lapse
of Subscription Rights which are exercisable at a discount are uncertain, but
they may be significant and could include the recognition of gain equal to the
fair market value of such Subscription Rights. Those consequences present novel
issues of tax law which are not addressed by any direct authorities and, to the
extent related authorities do exist, they appear to be conflicting and
inconclusive. Set forth below are two possible tax consequences of the receipt
and/or exercise of Subscription Rights.
UNDER ONE SCENARIO, ONLY THOSE ELIGIBLE ACCOUNT HOLDERS WHO ACTUALLY
EXERCISE SUBSCRIPTION RIGHTS SHOULD RECOGNIZE GAIN AS A RESULT OF THE EXCHANGES
DESCRIBED IN THE PRECEDING PARAGRAPH AND THE AMOUNT OF SUCH GAIN SHOULD BE EQUAL
TO THE FAIR MARKET VALUE OF THE SUBSCRIPTION RIGHTS EXERCISED. AS A RESULT,
ELIGIBLE ACCOUNT HOLDERS WHO DO NOT EXERCISE SUBSCRIPTION RIGHTS SHOULD NOT
RECOGNIZE GAIN FOR FEDERAL INCOME TAX PURPOSES AS A RESULT OF THE OFFERING. THE
DETERMINATION OF THE FAIR MARKET VALUE OF THE SUBSCRIPTION RIGHTS WILL DEPEND ON
A NUMBER OF FACTORS, INCLUDING THE EXCESS, IF ANY, OF THE MARKET PRICE OF THE
COMMON STOCK OVER THE ADJUSTED PURCHASE PRICE, THE PERIOD OF TIME DURING WHICH
THE SUBSCRIPTION RIGHTS WILL BE OUTSTANDING AND EXERCISABLE, THE
NONTRANSFERABILITY OF THE SUBSCRIPTION RIGHTS, AND PERHAPS OTHER FACTORS. FOR
PURPOSES OF THE INFORMATION RETURNS TO BE FILED WITH THE IRS RELATING TO THE
GAIN RECOGNIZED BY ELIGIBLE ACCOUNT HOLDERS WHO EXERCISE SUBSCRIPTION RIGHTS,
THE COMPANY AND COUNTY SAVINGS INTEND TO VALUE THE SUBSCRIPTION RIGHTS EXERCISED
BASED SOLELY ON THE DIFFERENCE BETWEEN THE ADJUSTED PRICE PER SHARE AND THE
UNADJUSTED PRICE PER SHARE.
IT IS POSSIBLE THAT, CONSISTENT WITH EARLIER PRIVATE LETTER RULINGS, ALL
ELIGIBLE ACCOUNT HOLDERS (INCLUDING THOSE WHO DO NOT EXERCISE SUBSCRIPTION
RIGHTS) WILL BE TREATED AS HAVING RECEIVED TAXABLE SUBSCRIPTION RIGHTS PURSUANT
TO THE OFFERING. SHOULD THIS BE THE CASE, EACH ELIGIBLE ACCOUNT HOLDER WILL
RECOGNIZE TAXABLE GAIN IN AN AMOUNT EQUAL TO THE FAIR MARKET VALUE OF THE
SUBSCRIPTION RIGHTS RECEIVED. IN ADDITION, THE IRS MAY TAKE THE POSITION THAT
THOSE ELIGIBLE ACCOUNT HOLDERS WHO ACTUALLY EXERCISE SUBSCRIPTION RIGHTS HAVE
ADDITIONAL INCOME THAT, WHEN ADDED TO THE INCOME RECOGNIZED ON THE RECEIPT OF
THE SUBSCRIPTION RIGHTS, GENERALLY WOULD
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INCREASE THEIR TOTAL AMOUNT OF INCOME TO APPROXIMATELY THE AMOUNT SUCH ELIGIBLE
ACCOUNT HOLDERS WOULD RECOGNIZE AS DESCRIBED ABOVE. AN ELIGIBLE ACCOUNT HOLDER
WHO DOES NOT EXERCISE SOME OR ALL OF HIS OR HER SUBSCRIPTION RIGHTS SHOULD BE
ENTITLED TO CLAIM, AT THE TIME THE UNEXERCISED SUBSCRIPTION RIGHTS EXPIRE, A
CAPITAL LOSS EQUAL TO THE AMOUNT OF GAIN ATTRIBUTABLE TO THE SUBSCRIPTION RIGHTS
NOT EXERCISED, PROVIDED THAT THE COMMON STOCK THAT WOULD HAVE BEEN ACQUIRED UPON
EXERCISE OF THE EXPIRED SUBSCRIPTION RIGHTS WOULD HAVE CONSTITUTED A CAPITAL
ASSET IN THE HANDS OF THE ELIGIBLE ACCOUNT HOLDER. THUS, IN GENERAL, AN
ELIGIBLE ACCOUNT HOLDER WHO DOES NOT EXERCISE ANY SUBSCRIPTION RIGHTS WOULD HAVE
GAIN AND AN EQUAL OFFSETTING LOSS AS A RESULT OF THE OFFERING. ALTHOUGH THE
CAPITAL LOSS SHOULD BE EQUAL IN AMOUNT TO THE RELATED GAIN RECOGNIZED, THE
CHARACTER OF THE LOSS AS A CAPITAL LOSS MAY NOT BE THE SAME AS THE CHARACTER OF
THE GAIN REQUIRED TO BE RECOGNIZED UPON RECEIPT OF THE UNEXERCISED SUBSCRIPTION
RIGHTS, CERTAIN ADDITIONAL TAX FORMS MAY HAVE TO BE FILED, AND, UNDER CERTAIN
CIRCUMSTANCES, AN ELIGIBLE ACCOUNT HOLDER MAY HAVE TO USE THE LOSS IN A LATER
TAX YEAR THAN THE YEAR IN WHICH THE GAIN FROM RECEIPT OF THE UNEXERCISED
SUBSCRIPTION RIGHTS IS RECOGNIZED. FOR MOST ELIGIBLE ACCOUNT HOLDERS, ANY GAIN
RECOGNIZED ON THE DISTRIBUTION OF THE SUBSCRIPTION RIGHTS WILL BE TREATED AS A
CAPITAL GAIN.
Based on the foregoing, if all Eligible Account Holders are treated as
having received Subscription Rights, then all Eligible Account Holders, not just
those who exercise Subscription Rights, will have to be concerned about the
value assigned to the Subscription Rights, and other questions, such as when and
how many Subscription Rights should be deemed to be received by each Eligible
Account Holder. There is no authority that clearly resolves these questions
and, in the absence of such authority, there may be several possible approaches
for determining the time at which Subscription Rights would, under these
circumstances, be deemed to be received by Eligible Account Holders.
In the opinion of the Independent Appraiser, which opinion is not
binding on the IRS, the Subscription Rights issued to Supplemental Eligible
Account Holders, County Savings officers and trustees do not have any value,
based on the fact that such rights are acquired by the recipients without cost,
are nontransferable and of short duration, and afford the recipients the right
only to purchase the Common Stock at a price equal to the Unadjusted Price Per
Share. Assuming that, for the reasons set forth above, the Subscription Rights
issued to Supplemental Eligible Account Holders, Other Depositors and County
Savings Officers have no value at the time issued, the Supplemental Eligible
Account Holders, Other Depositors and County Savings Officers will not recognize
gain or loss upon the receipt of Subscription Rights or upon the exercise of
Subscription Rights.
EXERCISE OF SUBSCRIPTION RIGHTS. An Eligible Account Holder (i) should
not recognize any taxable income as a result of the purchase of Common Stock
pursuant to the exercise of Subscription Rights (although as noted above such an
Eligible Account Holder will be required to recognize taxable gain as a result
of the receipt of exercised Subscription Rights at the Adjusted Price Per
Share), (ii) should have a basis in such Common Stock equal to the purchase
price paid therefor increased by the basis, if any, of the Subscription Rights
exercised (such an Eligible Account Holder's basis in the Subscription Rights
should be equal to the amount of gain (and any additional income) recognized on
the receipt (and exercise) of Subscription Rights), and (iii) should have a
holding period in the Common Stock purchased pursuant to the exercise of
Subscription Rights commencing on the date the Subscription Rights are
exercised, which should be the Closing Date.
PURCHASE OF COMMON STOCK BY A PURCHASER IN HIS OR HER CAPACITY AS OTHER
THAN AN ELIGIBLE ACCOUNT HOLDER. No income, gain or loss should be recognized
by Supplemental Eligible Account Holders, Other Depositors, Eligible Employees
and Trustees, or purchasers in the Community Offering, either as a result of
having the opportunity to purchase shares of Common Stock in the Offering or as
a result of the purchase of Common Stock in the Offering. Supplemental Eligible
Account Holders, Eligible Employees and Trustees, or purchasers in the Community
Offering who purchase Common Stock in the Offering should have a basis in such
stock equal to the purchase price thereof, and should have a holding period for
such stock commencing on the day following the day on which the stock is
purchased, which should be the day after the closing date. A purchaser of
shares of Common Stock in the Offering may have a tax basis in such shares that
is less than the tax basis that an Eligible Account Holder purchaser in the
Subscription Offering might have.
INDIVIDUAL RETIREMENT ACCOUNTS. Those persons who are beneficial owners
of Individual Retirement Account ("IRA"), Keogh or similar retirement accounts
are not themselves Eligible Account Holders by virtue of having such accounts,
but the account itself may be an Eligible Account Holder. Thus, the tax
consequences of the receipt and
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exercise of Subscription Rights should be applicable to the IRAs and Keogh
accounts themselves, and not the beneficial owners thereof. So long as such
accounts are tax-exempt, under Section 408 of the Code (in the case of IRAs) or
Section 501(a) of the Code (in the case of Keogh accounts), there should be no
federal income tax consequences to the accounts resulting from receipt of
Subscription Rights. In the case of an IRA, Keogh or similar retirement account
established at County Savings, or the Company, however, in order to subscribe
for shares in the Offering, the beneficial owner first must authorize and direct
such institution to transfer the account to a self-directed account at an
independent trustee that permits the account to hold stock. Payment for the
Common Stock under these circumstances should have no federal income tax
consequences to the IRA or Keogh account or to the beneficial owner of such
account. To the extent that the balance in an IRA or Keogh account is increased
as a result of the exercise of Subscription Rights, additional income generally
would be recognized upon the future withdrawal of such account balance.
CERTAIN NEW YORK INCOME TAX CONSEQUENCES OF THE OFFERING
For New York income tax purposes, the tax consequences of the Offering
and the possible purchase by Eligible Account Holders of Common Stock pursuant
to the Subscription Offering or the Community Offering are expected to be
substantially similar to the federal income tax consequences.
REQUIRED REGULATORY APPROVALS AND CONSIDERATIONS AS TO THE MERGER AND OFFERING
The Offering is subject to the receipt of a notice of non-objection from
the FDIC pursuant to 12 C.F.R. (S)303.15. The Company has received a
representation from the FDIC of its intention, subject to certain conditions, to
issue such letter of non-objection. The merger of County Savings into the
Company is also subject to approval of the Department under New York law and
regulations, and the FDIC pursuant to the Bank Merger Act. The Company has
received both such approvals. The Bank Merger Act requires that the FDIC take
into consideration the financial and managerial resources and future prospects
of the existing and proposed institutions and the convenience and needs of the
communities to be served. Further, the FDIC may not approve the merger if it
would result in a monopoly or if it would be in furtherance of any combination
or conspiracy to monopolize or to attempt to monopolize the business of banking
in any part of the United States, or if its effect in any section of the country
may be substantially to lessen competition or to tend to create a monopoly, or
if it would be in any other manner in restraint of trade, unless the FDIC finds
that the anticompetitive effects of the merger are clearly outweighed in the
public interest by the probable effect of the transaction in meeting the
convenience and needs of the communities to be served. In addition, the FDIC
must take into account the record of performance of the existing and proposed
institutions under the Community Reinvestment Act in meeting the credit needs of
the entire community, including low- and moderate-income neighborhoods, served
by such institutions. Applicable regulations also require publication of notice
of the application for approval of the merger and provide an opportunity for the
public to comment on the application in writing and to request a hearing. The
Bank Merger Act requires that any bank merger, including the merger of County
Savings into the Company, may not be consummated until the 15th day after
approval under the Bank Merger Act, during which time the United States
Department of Justice may challenge the merger on antitrust grounds.
In addition, as a condition to their approvals of the Two-Tier
Reorganization applications, the FDIC, the FRB and the Department required that
any future stock issuances by the Company be approved by such agencies. The
Company has received all such required approvals.
The approvals described above do not constitute a recommendation or
endorsement by the FDIC, the FRB or the Department of any of the proposed
transactions contemplated by the Plan.
ACCOUNTING TREATMENT
The Offering and Merger will be accounted for on a purchase accounting
basis in accordance with generally accepted accounting principles. Under
purchase accounting, the assets and liabilities of County Savings as of the
Closing Date will be recorded at their respective fair values, and added to
those of the Bank. Any excess of the fair market value of the net assets of
County Savings over the "purchase price" (i.e., the value of the stock issued to
the Mutual Holding Company) will be recorded as negative goodwill. The
consolidated financial statements of the Company issued after consummation of
the Merger and Offering will reflect these items.
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TIME LIMITS ON COMPLETION OF THE OFFERING
Applicable regulations governing mutual to stock conversion offerings
require that the sale of the Common Stock offered in connection with the
Offering be completed within 45 calendar days after the expiration of the
Subscription Offering. In the event the sale of the Common Stock cannot be
completed within the required 45-day period, one or more extensions of time to
complete the sale of the Common Stock may be granted by the Department prior to
the end of such 45-day period, but no single extension of time may exceed 90
days. No assurance can be given that an extension will be granted if requested.
The Subscription Offering is scheduled to expire at _____ p.m., local time, on
__________, 1998. Thus, unless extended by County Savings and the Company with
the approval of the Department, such sale must be completed by _______________,
1998.
The Company will not issue the shares of Common Stock until all such
shares (other than an insignificant residue) have been subscribed for or
arrangements made to issue such shares to the Mutual Holding Company. If this
has not occurred within 45 days after the expiration of the Subscription
Offering, unless such period is extended with the consent of the Department, all
funds delivered to County Savings in the Subscription Offering and the Community
Offering will be returned promptly to those who subscribed in the Subscription
Offering and the Community Offering with interest, and all withdrawal
authorizations will be canceled. If an extension beyond the 45-day period
following the expiration of the Subscription Offering is granted, County Savings
will notify those who subscribed in the Subscription Offering and the Community
Offering of the extension of time and of their rights, if any, to modify or
rescind their subscriptions. No sales of shares may be completed, either in the
Subscription Offering or the Community Offering, or otherwise, unless the Plan
is approved by the depositors of County Savings.
EFFECT OF THE PROPOSED TRANSACTIONS ON ACCOUNT HOLDERS AND BORROWERS
The Merger and the Offering will not change the amount or withdrawal
rights of savings deposits. Thus, depositors will continue to hold their
existing certificates, passbooks and other evidences of their accounts. In
addition, such accounts will continue to be insured by the FDIC up to the
maximum amount authorized by federal law; however, persons who have deposit
accounts at both the Company and County Savings prior to the Offering will
retain separate insurance coverage in those accounts only for a period of six
months from the date of the closing of the Merger as if the institutions
remained as separate entities, except in the case of certificate of deposit
accounts that will mature more than six months thereafter--in which event
separate insurance coverage will continue until the earliest maturity date.
Thereafter, such separate insurance coverage will cease and those depositors'
accounts will be insured up to the maximum amount permitted under federal law.
Depositors whose insurance coverage is affected by the Merger will be notified
in advance of any reduction in deposit insurance taking effect. The principal
amount, interest rate, maturity date and other terms of County Savings' loans
will continue under the same contractual terms as those prior to completion of
the Merger.
VOTING RIGHTS
At present, neither holders of withdrawable accounts nor borrowers at
County Savings have voting rights in County Savings, except that the Plan
requires the affirmative vote of a majority of depositors in connection with the
Offering and Merger. Subsequent to the Merger, each person who has purchased
Common Stock in the Offering or otherwise, as a holder of shares of Common
Stock, will have exclusive rights to vote on any matters to be considered by the
holders of Common Stock. A shareholder is entitled to one vote for each share
of Common Stock owned (however, the Certificate of Incorporation of the Company
provides 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 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).
LIQUIDATION RIGHTS
In the unlikely event of a complete liquidation of County Savings in its
present mutual form, each depositor would have a claim to a pro rata share of
any assets of County Savings remaining after payment of claims of all creditors
(including the claims of all depositors to the withdrawal value of their
accounts). To the extent there are remaining
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assets, a depositor may have a claim to receive a pro rata share of the
remaining assets in the same proportion as the amount of such depositor's
deposit accounts bears to the total amount of all deposit accounts in County
Savings at the time of liquidation, subject to the right of the State of New
York to garnish such assets. After the Merger, each depositor, in the event of a
complete liquidation, would have a claim as a creditor of City Savings. However,
except as described below, this claim would be solely in the amount of the
balance in such depositor's deposit account plus accrued interest. A depositor
would not have a claim or interest in the assets of City Savings above that
amount.
The Plan provides that upon the completion of the Merger, a special
"liquidation account" will be established for the benefit of Eligible Account
Holders and Supplemental Eligible Account Holders in an amount equal to the
surplus and reserves of County Savings as of the date of its latest balance
sheet contained in the final Prospectus used in connection with the Offering.
Each Eligible Account Holder and Supplemental Eligible Account Holder who
continues to maintain a deposit account in City Savings, would, on a complete
liquidation of City Savings, have a claim to an interest in the liquidation
account after payment of all creditors prior to any payment to the stockholders
of City Savings. Each Eligible Account Holder and Supplemental Eligible Account
Holder would have a claim to a pro rata interest in the total liquidation
account equal to the proportion that such Eligible Account Holder's or
Supplemental Eligible Account Holder's qualifying deposits bears to the balance
of all qualifying deposits.
If, however, on any December 31 annual closing date, commencing after
December 31, 1998, the amount in any deposit account is less than the amount in
such deposit account on December 31, 1998 or any other annual closing date, then
such person's interest in the liquidation account relating to such deposit
account would be reduced proportionately, and such interest will cease to exist
if such deposit account is withdrawn or closed. In addition, no interest in the
liquidation account would ever be increased despite any subsequent increase in
the related deposit account.
CERTAIN RESTRICTIONS ON PURCHASE OR TRANSFER OF SHARES AFTER OFFERING
All shares of Common Stock purchased in the Offering by a director or an
executive officer of County Savings will be subject to a restriction that the
shares not be sold for a period of one year following the Offering, except in
the event of the death of such director or executive officer. Each certificate
for restricted shares will bear a legend giving notice of this restriction on
transfer, and instructions will be issued to the effect that any transfer within
such time period of any certificate or record ownership of such shares other
than as provided above is a violation of the restriction. Any shares of Common
Stock issued at a later date as a stock dividend, stock split, or otherwise,
with respect to such restricted stock will be subject to the same restrictions.
THE MERGER OF CITY SAVINGS AND COUNTY SAVINGS
GENERAL. On September 5, 1997, County Savings, City Savings and Mutual
Holding Company entered into the Agreement pursuant to which County Savings will
be merged with and into City Savings with City Savings as the resulting savings
bank. The Agreement was subsequently amended on January 13, 1998 and on April
30, 1998 to, among other things, make the Company a party to the Agreement and
to provide for a minority stock offering to County Savings' depositors. The
Merger will be effected by having (i) County Savings form County MHC, (ii)
County MHC merge into Mutual Holding Company with Mutual Holding Company as the
resulting mutual holding company, and (iii) County Savings merge into City
Savings with City Savings as the resulting savings bank. City Savings is
expected to change its name to Pathfinder Bank following the Merger. The
following discussion describes the material terms of the Agreement and is
qualified in its entirety by reference to the Agreement.
BACKGROUND AND REASONS FOR THE MERGER--CITY SAVINGS. In June of 1996,
following the announcement of the retirement of William Green as Chairman,
President and Chief Executive Officer of County Savings, the Board of Directors
of City Savings invited the Board of Trustees of County Savings to a joint
meeting to explore the benefits of a merger with City Savings. The Trustees of
County Savings elected not to proceed with a merger at that time. Throughout the
latter half of 1996 and the first half of 1997, City Savings explored the
possible acquisition of certain branches of another financial institution in
City Savings' market area, although no branch purchases were made.
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In January 1997, Gregory J. Kreis became the President and Chief
Executive Officer of County Savings. In May 1997, Chris C. Gagas, Chairman,
President and Chief Executive Officer of City Savings, began discussions with
Mr. Kreis to consider a merger of the two institutions. A number of meetings
occurred in June of 1997, and at that time Northeast Capital & Advisory, Inc.
was retained to act as financial advisor during the discussions. On July 10,
1997, City Savings and County Savings entered into a confidentiality agreement.
During the following two weeks due diligence was performed at both institutions
with Northeast Capital & Advisory, Inc. providing both City Savings and County
Savings with due diligence findings and preliminary valuations leading to
parties entering into the Agreement.
BACKGROUND AND REASONS FOR THE MERGER--COUNTY SAVINGS. Since the
enactment of comprehensive Federal legislation in 1989, County Savings and other
Federal and state chartered savings banks have experienced increasing costs and
burdens associated with ongoing compliance with federal and state regulations
governing financial institutions. Moreover, the costs of upgrading and
maintaining the latest technology necessary for the delivery of competitive and
up-to-date financial services have significantly increased. In addition, the
market for deposits, loans, and other financial services products has become
increasingly competitive. County Savings has substantial competition from both
larger banks, and larger non-bank financial service providers. The Board of
Trustees of County Savings has witnessed in New York and elsewhere, increased
consolidation within the financial services industry, in large part due to the
competition, cost and technology changes described above. The Board of Trustees
believes this trend is likely to continue, especially in light of recent federal
legislation authorizing interstate banking on a national basis. These trends
have resulted in more competitors, most of which are substantially larger than
County Savings and which are able to offer a wider range of financial services.
The larger competitors are also better positioned to keep abreast of
technological developments in the delivery and types of products offered to, and
demanded by, consumers.
Following the appointment of Gregory J. Kreis as President and Chief
Executive Officer of County Savings in January 1997, Mr. Kreis began an
assessment of County Savings' strengths and weaknesses as a financial
institution. Oswego County's market area is characterized by slow growth and
significant competition from financial service providers. Mr. Kreis met with
the Board of Trustees in mid-May 1997 to begin a strategic planning process. An
in-depth assessment of County Savings' prospects in its market area was
undertaken, and Mr. Kreis reviewed with the Board of Trustees those actions a
community bank, such as County Savings, should take to compete effectively over
the next three to five years. At that time the Board also reviewed several
options for the future of County Savings, including continuing as an independent
mutual savings bank, converting to a mutual holding company, completing a full
conversion to the stock form of ownership and merging with another financial
institution.
After evaluating all of the options, County Savings' Board of Trustees
concluded that because of County Savings relatively small asset size of
approximately $110 million, a merger with City Savings would offer significant
advantages to both institutions, their customers and the Oswego community,
including a practical way of creating a larger independent community-oriented
savings bank headquartered in Oswego, New York with greater prospects for long
term growth and profitability than that which would exist for either City
Savings or County Savings operating as separate savings banks. The Board of
Trustees noted that both savings banks have overlapping markets and branch
locations. Moreover, the Board of Trustees considered that many of the
improvements in operations, equipment and personnel that County Savings would
have to undertake in order to remain profitable and competitive had already been
initiated by City Savings. The Board of Trustees determined that it was in
County Savings' best interests to consider merging the financial and human
resources of the two banks into one larger institution that would be better able
to serve the Oswego community in the future.
At the next meeting, the Board of Trustees again discussed in detail the
alternatives of County Savings and at the conclusion of that meeting Mr. Kreis
was directed to meet with Chris C. Gagas, President and Chief Executive Officer
of City Savings, to discuss a possible combination of the two savings banks.
Messrs. Gagas and Kreis invited Northeast Capital & Advisory, Inc. to assist
them in structuring a merger of the two institutions. Following an initial
meeting on June 11, 1997, with Northeast Capital & Advisory, Inc., a series of
meetings occurred between Messrs. Gagas and Kreis, with both Boards apprised of
the discussions. Following these initial discussions, the Board concluded that a
merger would be in the best interest of the communities served by County
Savings, and its management and staff, and authorized Mr. Kreis to pursue more
detailed discussions with Mr. Gagas. During July and August of 1997
representatives of County Savings and City Savings conducted due diligence
investigations of the respective institutions.
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Northeast Capital & Advisory, Inc. was retained by both banks to assist
in the discussions and evaluation of the business aspects of a business
combination and to structure the Merger in a way that would be fair to both the
mutual and stock constituencies of each institution. The negotiations between
County Savings and City Savings resulted in the signing of the Agreement on
September 5, 1997. The Agreement was subsequently amended on January 13, 1998
and April 30, 1998. The Agreement has been unanimously approved by the Board of
Directors of City Savings and the Board of Trustees of County Savings.
Among the factors that influenced the Board's decision to merge with
City Savings were the Board's favorable conclusions regarding: the positive
impact of a larger, independent savings bank on the Oswego community; the future
prospects of County Savings which, together with City Savings, would be a larger
financial institution that is better able to compete and provide the necessary
resources for expanded products and services; City Savings' past performance,
sound financial condition, strong market position and reputation as a well-
managed organization with strong ties to the same market area served by County
Savings; the benefits that would inure to County Savings employees by allowing
them to participate in the training and compensation programs of a larger,
stock-owned institution; and City Savings' agreement to continue to employ the
current personnel employed by County Savings. The Board of Trustees also
determined that the Merger would provide County Savings with the one time
opportunity to establish a charitable foundation that will be funded with $2.0
million in cash and property. The charitable foundation is intended to
complement County Savings' existing community reinvestment activities in a
manner that will allow the local community to share in the growth and
profitability of City Savings and the Company following the Merger. See "The
Charitable Foundation."
THE AGREEMENT AND THE TERMS OF THE MERGER. The Agreement provides that
County Savings will merge with and into City Savings with City Savings as the
resulting institution. Pursuant to the Agreement, all depositors of County
Savings will become depositors of City Savings and any liquidation and voting
rights of County Savings depositors will, be transferred to Mutual Holding
Company following the Merger. As part of the Merger, the Company will issue
additional shares of common stock equal to the pro forma market value of County
Savings. RP Financial, LC ("RP Financial"), a firm experienced in the valuation
and appraisal of savings institutions, has determined that as of _______, 1998
the fair value of County Savings was $13.0 million. The intent of County
Savings and City Savings is to maintain the mutual holding company structure of
Mutual Holding Company following the Merger, and, at the same time provide
County Savings depositors with an opportunity to subscribe for common stock as
if County Savings itself were conducting a minority stock offering. As a
result, it was determined that shares of common stock in an amount equal to
approximately _____% of the value of County Savings will be offered for sale in
a minority stock offering (the "Offering") by the Company, and the remaining
shares will be issued to Mutual Holding Company. The shares issued to Mutual
Holding Company will be available for issuance and sale to depositors and the
public in the future as market and other conditions warrant such sale. The
shares of Company Common Stock will be offered for sale in the Offering pursuant
to the terms and priorities discussed below. (See "--The Offering") The total
number of shares to be issued by the Company in the Offering and to Mutual
Holding Company will equal the result obtained from dividing (i) the pro forma
market value of County Savings by (ii) the average bid and asked price of the
Company's common stock as listed on the Nasdaq SmallCap Market during the ten
trading days preceding the closing date of the Merger. Shares offered to
eligible account holders of County Savings will be priced at a 10% discount to
the shares sold to others in the Offering.
As soon as practicable after all the conditions to the Merger have been
waived or satisfied, Mutual Holding Company and County MHC will file a Plan of
Merger with the New York Secretary of State, and City Savings and County Savings
will file a Plan of Merger with the Department. The Merger will become effective
at the time the Department and New York Secretary of State endorse the Plans of
Merger.
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Following the completion of the Merger, the corporate structure under
which City Savings will operate the resulting savings bank, will be as follows:
----------------------- -------------------
Pathfinder Bancorp, MHC Public Stockholders
----------------------- -------------------
____% of ___% of
the Common the
Stock Common
Stock
---------------------------------------------
Pathfinder Bancorp, Inc.
---------------------------------------------
100% of the Common Stock
----------------------------------------------------------
Resulting Savings Bank (Oswego County/City Savings)
----------------------------------------------------------
CHARITABLE FOUNDATION. On or prior to the completion of the Merger,
County Savings will establish the Charitable Foundation for the purposes of
providing charitable contributions to qualifying organizations operating in the
communities served by Oswego City and Oswego County. The contribution by County
Savings will be $2.0 million. The Charitable Foundation is intended to
complement County Savings' existing community reinvestment activities in a
manner that will allow the local community to share in the growth and
profitability of City Savings and the Company following the Merger. The Bank,
the Company or the Mutual Holding Company may make additional contributions to
the Charitable Foundation.
REPRESENTATIONS AND WARRANTIES. The Agreement contains representations
and warranties by each of County Savings and City Savings regarding, among other
things: (i) organization; (ii) capitalization; (iii) authority to enter into the
Agreement; (iv) compliance with laws and orders; (v) reports and financial
statements; (vi) consents and approvals; (vii) information to be included in
this proxy statement; (viii) absence of certain changes in the business and
financial condition of County Savings and City Savings as a condition to
closing; (ix) pending and threatened litigation; (x) employees and employee
benefits; (xi) tax matters; (xii) environmental matters; (xiii) government
regulation of each institution; and (xiv) the accuracy of the representations
and warranties.
CONDITIONS TO THE OBLIGATIONS OF COUNTY SAVINGS AND CITY SAVINGS. The
Agreement contains a number of conditions to the obligations of County Savings
and City Savings to complete the Merger including that: (i) there is no material
adverse change in the financial condition or results of operations of County
Savings and City Savings prior to the Effective Time of the Merger; (ii) the
representations and warranties of County Savings and City Savings are true and
correct in all material respects as of the date of the Agreement and as of the
Effective Time of the Merger; (iii) each party has performed or complied in all
material respects with all obligations under the Agreement; (iv) no government
lawsuit is pending or threatened and no claim that would reasonably be expected
to have a material adverse effect on either County Savings or City Savings has
been asserted; (v) each party has received all necessary consents or approvals;
(vi) the respective Boards of County Savings and City Savings have not amended,
modified or rescinded the resolutions adopting the Agreement; (vii) each
institution has furnished the other with an officer's certificate indicating
that all required actions and conditions to effect the Merger have been taken;
and (viii) all corporate actions have been taken to complete the Merger. In
addition, a condition to closing the Merger is that City Savings shall have
taken all corporate actions necessary to permit the Oswego City Savings Bank
Employees Stock Ownership Plan to acquire additional shares of Company common
stock and to increase the number of options and shares that can be awarded (or
adopt new plans) under the Oswego City Savings' Bank 1997 Stock Option Plan and
Oswego City Savings Bank 1997 Recognition and Retention Plan, respectively.
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The consummation of the Merger is also subject to the receipt of all
necessary governmental, stockholder and depositor approvals, as well as the
receipt of a federal tax ruling and/or tax opinion as to the treatment of the
Merger as a tax-free reorganization.
EFFECTS OF THE MERGER
CONTINUITY. While the Merger is being accomplished, the normal business
of County Savings of accepting deposits and making loans will continue without
interruption. After the completion of the Merger, City Savings, as the
resulting savings bank, will continue to be subject to regulation by the
Department and the FDIC. After the Merger, City Savings will continue to provide
services for depositors and borrowers under its current policies.
EFFECT ON DEPOSIT ACCOUNTS. Each deposit account in County Savings at
the time of the Merger will automatically continue as a deposit account in City
Savings after the Merger, on the same terms and conditions, including interest
rates. Each such account will be insured by the FDIC up to the maximum amount
permitted by law (i.e., up to $100,000 per depositor).
EFFECT ON LOANS. No loan outstanding from County Savings will be
affected by the Merger, and the amount, interest rate, maturity and security for
each loan will remain as they were contractually established prior to the
Merger.
EFFECT ON LIQUIDATION RIGHTS. Were a mutual savings institution to
liquidate, all claims of creditors (including those of depositors, to the extent
of deposit balances) would be paid first. Thereafter, if there were any assets
remaining, depositors may receive such remaining assets, pro rata, based upon
the deposit balances in their deposit accounts immediately prior to liquidation,
subject to the rights of the State of New York to garnish such assets. As more
fully described below, after the Merger each depositor, in the event of a
complete liquidation, would have a claim as a creditor of City Savings. However,
except as described below with respect to Liquidation Rights, this claim would
be solely in the amount of the balance in the deposit account plus accrued
interest. A depositor would not have an interest in the value or assets of City
Savings above that amount.
INTERESTS OF CERTAIN PERSONS IN THE OFFERING
In connection with the Merger, the Company will enter into an employment
agreement with Gregory J. Kreis who will become the President and Chief
Operating Officer of City Savings immediately following the completion of the
Merger. Mr. Kreis will become Chief Executive Officer of City Savings six months
and one day following the completion of the Merger upon the retirement of Chris
C. Gagas. The employment agreement will provide that Mr. Kreis will have a base
salary of $180,000 and will be eligible to receive a bonus of $20,000 for the
successful integration of County Savings and City Savings. Mr. Kreis will also
be eligible for such other compensation that is normal and customary in an
employment agreement with a chief executive officer of a financial institution.
Following the retirement of Mr. Gagas as Chief Executive Officer of City
Savings, Mr. Gagas will continue as Chairman of the Board and will have primary
authority over all merger and acquisition activities, although no other such
activities are planned at this time. From Mr. Gagas' retirement until December
31, 2000, Mr. Gagas will receive total board and consulting fees of $100,000 per
annum.
The Board of Directors of City Savings as the resulting savings bank
will consist of 16 persons and will include seven trustees who currently serve
on the Board of Trustees of County Savings. The Board of Directors of the
Company will consist initially of the same persons who will be the directors of
City Savings as the resulting institution. The Board of Trustees of Mutual
Holding Company will consist of 14 persons and will include six persons who
currently serve as trustees of County Savings and eight persons who currently
serve as trustees of Mutual Holding Company. Continuing non-management directors
of City Savings will receive an annual retainer of $6,000, and board and
committee fees.
City Savings has agreed that County Savings' trustees Robert McCormick,
Carl K. Walrath and Bernard Shapiro will be entitled to participate in the
County Savings' Trustee Emeritus Retirement Benefit Program, which
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provides trustees emeritus with an annual benefit of $15,000 until the trustee's
death. The other current trustees of County Savings will become eligible to
participate in the City Savings Director Emeritus Program.
Following the Merger, the Board of Directors of the Company will use its
best efforts to adopt an additional stock award plan and stock option plan, or
amend City Savings' existing plans, to award persons who are currently trustees
and officers of County Savings as provided below. The intent of the parties is
to provide the Trustees and officers and employees of County Savings with the
same stock awards as would be available if County Savings were to form its own
mutual holding company and conduct a minority stock offering equal to 46% of its
pro forma value. All restricted stock awards and stock option grants will vest
no later than six years from the date of award, at a rate of no less than 16.6%
per year.
The parties have agreed to use their best efforts to authorize an
increase in the number of shares underlying options that may be granted under
the existing Oswego City Savings Bank 1997 Stock Option Plan, or in the
alternative to implement a new stock option plan for the purpose of granting
options to County Savings trustees, executive officers and employees, as set
forth below.
The parties will use their best efforts to grant non-management trustees
of County Savings who become directors of City Savings, as the resulting savings
bank, with options to purchase 7,500 shares of Company common stock. In
addition, the parties will use their best efforts to grant non-management
directors who are currently trustees of County Savings additional options to be
determined based upon the price of the Company common stock and the number of
shares of common stock outstanding prior to the completion of the Merger
(excluding shares that become outstanding as a result of the exercise of options
previously granted).
The parties have agreed to use their best efforts to grant Mr. Gregory
J. Kreis options to purchase 36,000 shares of common stock with an exercise
price equal to the fair market value of the Company common stock on the date of
grant. Similarly other officers of County Savings as a group who are employed
by City Savings as the resulting savings bank will be granted options to
purchase in the aggregate 11,100 shares of Company common stock with an exercise
price equal to the fair market value of the Company common stock on the date of
grant.
The parties have agreed to use their best efforts to authorize an
increase in the number of shares that may be awarded under the existing Oswego
City Savings Bank 1997 Recognition and Retention Plan, or in the alternative to
implement a new restricted stock plan for the purpose of awarding (i) each non-
employee director a restricted stock award totaling 2,700 shares, (ii) Mr.
Gregory Kreis a restricted stock award equal to 13,200 shares and (iii) all
other employees restricted stock awards equal in the aggregate to 12,450 shares.
All stock option plans and stock award plans will be subject to the
approval of stockholders of the Company following the completion of the Merger,
which will occur no sooner than six months after the Merger.
The Company will acquire in the open market or issue from authorized but
unissued shares, shares of its common stock for the purpose of permitting the
Oswego City Savings Bank Employee Stock Ownership Plan to purchase the
equivalent of 8% of the shares that would have been purchased by an employee
stock ownership plan established by County Savings if County Savings had
reorganized into the mutual holding company form of ownership and conducted a
stock offering.
Finally, employees of County Savings will be provided credit for their
years of service with County Savings for purposes of determining eligibility and
vesting of benefits (but not for benefit accrual purposes) in the tax qualified
plans of City Savings and such plans will be amended accordingly.
MANAGEMENT OF COUNTY SAVINGS AND CITY SAVINGS FOLLOWING THE MERGER
DIRECTORS AND EXECUTIVE OFFICERS
The Board of Trustees currently consists of seven persons. Upon
completion of the Merger, the directors of City Savings as the resulting savings
bank and the directors of the Company will consist of 16 persons, seven of whom
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currently serve on the Board of Trustees of County Savings and nine of whom
currently serve on the Board of Directors of City Savings. The trustees of
Mutual Holding Company will consist of the same persons listed below with the
exception of Ms. Janette Resnick and Mr. Carl Walrath who will not be on the
Board of Trustees of Mutual Holding Company. The current trustees of County
Savings, together with information regarding their ages and occupations, are as
follows:
TRUSTEE AGE OCCUPATION
- ------------------------- --- -------------------------------------
Gregory J. Kreis 52 President and Chief Executive Officer
Bruce P. Frassinelli 58 Publisher-Oswego Palladium Times
Michael R. Brower 47 Chief Executive - Oswego
Cranberry Company, L.C.
Paul J. Heins 58 Owner-Paul's Big M Grocery Store
Paul W. Schneible 49 Certified Public Accountant
Bernard Shapiro 71 Retired
Carl Walrath 70 Retired
The Board of Directors of City Savings consists of nine persons. The
current directors of City Savings, together with information regarding their
ages and occupations, are set forth below.
DIRECTOR AGE OCCUPATION
- ------------------------- --- -------------------------------------
Chris C. Gagas 67 Chairman of the Board and Chief
Executive Officer
Chris C. Burritt 45 President and General Manager-R.M.
Burritt Motors, Inc./Chris Cross, Inc.
Raymond W. Jung 68 Retired
Bruce E. Manwaring 56 Retired
L. William Nelson, Jr. 54 Owner and Manager-Nelson Funeral Home
Victor S. Oakes 74 Retired
Lawrence W. O'Brien 73 Project Coordinator-Neal O'Brien
Building and Materials Corporation
Corte J. Spencer 55 Chief Executive Officer and
Administrator-Oswego Hospital
Janette Resnick 55 Executive Director-Oswego
Opportunities
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EXECUTIVE OFFICERS OF THE BANK WHO ARE NOT DIRECTORS
The following table sets forth certain information (as of June 30, 1998)
regarding the executive officers of City Savings following the Merger other
than those persons named in the preceding table.
DIRECTOR AGE OCCUPATION
- ------------------------- --- -------------------------------------
Thomas W. Schneider 37 Executive Vice President and Chief
Financial Officer
W. David Schermerhorn 37 Executive Vice President and Chief
Lending Officer
TRANSACTIONS WITH CERTAIN RELATED PERSONS
Under New York banking law, County Savings, as a mutual institution,
cannot make a loan to a Trustee or a person who is an "executive officer,"
except for loans made to executive officers that are secured by a first mortgage
on a primary residence or by a deposit account at County Savings. All loans
outstanding by County Savings to trustees and executive officers have been made
in the ordinary course of business and on the same terms and conditions as
County Savings would make to any other customer and do not involve more than a
normal risk of collectibility or present other unfavorable features. Following
the Merger, City Savings, as the resulting savings bank, will not be subject to
this restriction in connection with loans to its directors and executive
officers.
INDEMNIFICATION OF THE COMPANY'S OFFICERS AND DIRECTORS
AND LIMITATION OF LIABILITY
GENERAL. Certain provisions of the Company's Certificate of
Incorporation seek to ensure that directors are able to exercise their best
business judgment in managing corporate affairs, subject to their continuing
fiduciary duties, and are not unreasonably impeded by exposure to the
potentially high personal costs or other uncertainties of litigation. The nature
of the responsibilities of directors and officers often requires them to make
difficult decisions which can expose such persons to personal liability, but
from which they will acquire no personal benefit (other than as stockholders).
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 of incorporation or 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 stockholders who indirectly assume the
expense of litigation and directors and officers liability insurance. The
Company currently has insurance coverage for its directors and officers.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling the Company
pursuant to the following provisions, the Company has been informed that in the
opinion of the Commission 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 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.
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LIMITATIONS OF LIABILITY. The Company's Certificate of Incorporation
provides that a director shall not be personally liable to the Company or its
stockholders 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
Company or its stockholders, (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 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 stockholders 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 Company and its stockholders. Stockholders will thus be surrendering a
cause of action based upon negligent business decisions, including those
relating to attempts to change control of the 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 Company that might have been affected by
the limited liability provision in the Company's Certificate of Incorporation
had it been in effect at the time of the litigation.
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 COMPANY'S CERTIFICATE OF
INCORPORATION. The Certificate of Incorporation of the Company provides that any
individual who is or was a director, officer, employee or agent of the 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 Company in which the individual was
adjudged liable to the 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 Company's Certificate of Incorporation.
CERTAIN ANTITAKEOVER PROVISIONS
INTRODUCTION. A NUMBER OF PROVISIONS OF THE CERTIFICATE OF
INCORPORATION AND BYLAWS OF THE COMPANY DEAL WITH MATTERS OF CORPORATE
GOVERNANCE AND CERTAIN RIGHTS OF STOCKHOLDERS. THE FOLLOWING DISCUSSION IS A
GENERAL SUMMARY OF CERTAIN OF THESE PROVISIONS AND CERTAIN OTHER STATUTORY AND
REGULATORY PROVISIONS RELATING TO STOCK OWNERSHIP AND TRANSFERS, AND BUSINESS
COMBINATIONS. 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
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CHANGE OF CONTROL WHICH IS NOT APPROVED BY THE BOARD OF DIRECTORS BUT WHICH A
MAJORITY OF INDIVIDUAL STOCKHOLDERS MAY DEEM TO BE IN THEIR BEST INTERESTS OR IN
WHICH STOCKHOLDERS MAY RECEIVE A SUBSTANTIAL PREMIUM FOR THEIR SHARES OVER THEN
CURRENT MARKET PRICES. AS A RESULT, STOCKHOLDERS 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.
DIRECTORS. Certain provisions of the Company's Certificate of
Incorporation and Bylaws will impede changes in majority control of the Board of
Directors. Because the Mutual Holding Company must at all times own at least
51% of the Company's outstanding voting stock, the Mutual Holding Company will
be able to decide the election of persons to the Company's Board of Directors.
Furthermore, the Company's Certificate of Incorporation provides that the Board
of Directors of the Company will be divided into three classes, with directors
in each class elected for three-year staggered terms except for the initial
directors. Thus, it would take two annual elections to replace a majority of
the Company's Board. The Company's Certificate provides that the size of the
Board of Directors may be increased or decreased only by a majority vote of the
Board. The Certificate of Incorporation also provides that any vacancy
occurring in the Board of Directors, including a vacancy created by an increase
in the number of directors, shall be filled for the remainder of the unexpired
term by a majority vote of the directors then in office. Finally, the
Certificate and Bylaws impose certain notice and information requirements in
connection with the nomination by stockholders of candidates for election to the
Board of Directors or the proposal by stockholders of business to be acted upon
at an annual meeting of stockholders.
The Certificate provides that a director may only be removed for cause
by the affirmative vote of 80% of the shares eligible to vote. Removal for
"cause" is limited to the grounds for termination in the federal regulations
that applies to employment contracts of federally insured savings institutions.
RESTRICTIONS ON CALL OF SPECIAL MEETINGS. The Certificate provides that
a special meeting of stockholders may be called by the Chairman of the Board of
the Company or pursuant to a resolution adopted by a majority of the Board of
Directors. Stockholders are not authorized to call a special meeting.
ABSENCE OF CUMULATIVE VOTING. The Certificate provides that there shall
be no cumulative voting rights in the election of directors.
LIMITATION ON VOTING RIGHTS. The Certificate provides that no person
who beneficially owns more than 10% (the "Limit") of any class of equity
security of the Company (other than the Mutual Holding Company and ESOP) shall
be entitled to vote shares owned in excess of the Limit. For these purposes, a
person (including management) who has obtained the right to vote shares of the
common stock pursuant to revocable proxies shall not be deemed to be the
"beneficial owner" of those shares if that person is not otherwise deemed to be
a beneficial owner of those shares.
The Certificate further provides that the Board of Directors of the
Company, when determining to take or refrain from taking corporate action on any
matter, including making or declining to make any recommendation to the
Company's stockholders, may, in connection with the exercise of its judgment in
determining what is in the best interest of the Holding Company, the Bank, and
the stockholders of the Company, give due consideration to all relevant factors,
including, without limitation, the social and economic effects of acceptance of
such offer on the Company's customers and the Bank's present and future account
holders, borrowers and employees; the effect on the communities in which the
Company and the Bank operate or are located; and the effect on the ability of
the Company to fulfill the objectives of a financial institution holding company
and of the Bank or future subsidiaries to fulfill the objectives of a financial
institution under applicable statutes and regulations. The Certificate of the
Company also authorizes the Board of Directors to take certain actions to
encourage a person to negotiate for a change of control of the Company or to
oppose such a transaction deemed undesirable by the Board of Directors including
the adoption of so-called shareholder rights plans. By having these standards
and provisions in the Certificate, 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 Company, even if the price
offered is significantly greater than the then market price of any equity
security of the Company.
PROCEDURES FOR CERTAIN BUSINESS COMBINATIONS. The Certificate requires
that certain business combinations between the Company (or any majority-owned
subsidiary thereof) and a 10% or greater stockholder either (i) be
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approved by at least 80% of the total number of outstanding voting shares of the
Company or (ii) be approved by a majority of certain directors unaffiliated with
such 10% or greater stockholder or (iii) involve consideration per share
generally equal to the higher of (A) the highest amount paid by such 10%
stockholder or its affiliates in acquiring any shares of the common stock or (B)
the "Fair Market Value" (generally, the highest closing bid paid on the common
stock during the 30 days preceding the date of the announcement of the proposed
business combination or on the date the 10% or greater stockholder became such,
whichever is higher).
AMENDMENT TO CERTIFICATE OF INCORPORATION AND BYLAWS. Amendments to the
Certificate must be approved by the Company's board of directors and also by a
majority of the outstanding shares of the Company's voting stock; provided,
however, that approval by at least 80% of the outstanding voting stock is
generally required for certain provisions (i.e., provisions relating to number,
classification, election and removal of directors, amendment of bylaws, call of
special stockholder meetings, criteria for evaluating certain offers, offers to
acquire and acquisitions of control, director liability, certain business
combinations, power of indemnification, and amendments to provisions relating to
the foregoing in the Certificate).
The Bylaws may be amended by the affirmative vote of the total number of
directors of the Company or the affirmative vote of at least 80% of the total
votes eligible to be voted at a duly constituted meeting of stockholders.
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 Company does
not intend to propose any such amendment.
65
<PAGE>
SUBSCRIPTIONS BY MANAGEMENT AND TRUSTEES OF COUNTY SAVINGS
The following table sets forth the number of shares of Common Stock for
which County Savings' executive officers and trustees, individually and as a
group, are expected to subscribe. The table assumes that sufficient shares will
be available to satisfy their subscriptions.
Total Subscriptions
Total as a Percentage of
Amount of the Maximum of
Name Total Shares* Subscriptions the Valuation Range
- -------------------------------------------------------------------------------
_________________
*Total shares assumes that all shares are purchased at the Adjusted Price Per
Share, which is assumed to be $_____ (i.e., 90% of the Common Stock's last sale
price on ________, 1998).
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
GENERAL. The Company is authorized to issue 6,000,000 shares of Common
Stock having a par value of $.10 per share. Each share of Common Stock has the
same relative rights as, and will be identical in all respects with, each other
share of Common Stock. The Company's Certificate of Incorporation does not
authorize the issuance of preferred stock.
THE COMPANY COMMON STOCK REPRESENTS NONWITHDRAWABLE CAPITAL, ARE NOT AN
ACCOUNT OF AN INSURABLE TYPE, AND ARE NOT INSURED BY THE FDIC OR ANY GOVERNMENT
AGENCY.
COMMON STOCK
DIVIDENDS. The 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 Company is subject to limitations which are
imposed by law and applicable regulation. The holders of Common Stock will be
entitled to receive and share equally in such dividends as may be declared by
the Board of Directors of the Company out of funds legally available therefor.
VOTING RIGHTS. The holders of Common Stock will possess exclusive
voting rights in the Company. Each share of Common Stock shall be entitled to
one vote on matters to be considered and voted on by stockholders. Stockholders
will not be entitled to cumulate their votes for the election of directors. The
absence of cumulative voting means that the holders of a majority of the shares
voted at a meeting of stockholders may elect all directors of the Company
thereby precluding minority shareholder representation on the Board of
Directors. In addition, the holders of Common Stock will 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 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 (the "Liquidation Account") and
Minority Stock issuance to persons having deposits with the Bank as of September
30, 1994), all assets of the Bank available for distribution. In the event of
liquidation, dissolution or winding up of the Company, the holders of its 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 Company available for
distribution. If preferred stock is issued, the holders thereof may have a
priority over the holders of the Common Stock in the event of liquidation or
dissolution.
66
<PAGE>
PREEMPTIVE RIGHTS. Holders of the Common Stock will not be entitled to
preemptive rights with respect to any shares which may be issued. The Common
Stock is not subject to redemption.
EXPERTS
The consolidated financial statements of the Company and subsidiaries as
of December 31, 1997 and 1996 and for each of the years in the three year period
ended December 31, 1997, incorporated by reference herein, have been
incorporated by reference herein in reliance upon the report of
PricewaterhouseCoopers, LLP Independent Certified Public Accountants, which
report is incorporated by reference herein, and upon the authority of said firm
as experts in accounting and auditing.
The financial statements of Oswego County Savings Bank as of December
31, 1997 and 1996 and for each of the years in the three year period ended
December 31, 1997 included herein and in the registration statement in reliance
upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
The Independent Appraiser has consented to the publication herein of the
summary of its report to County Savings setting forth its opinion as to the
estimated pro forma market value of County Savings as an entity merged with and
into the Bank and its opinion with respect to subscription rights.
LEGAL OPINIONS
The legality of the Common Stock will be passed upon for County Savings
and the Bank by Luse Lehman Gorman Pomerenk & Schick, P.C., Washington, D.C.,
special counsel to the Bank. PricewaterhouseCoopers, LLP Independent Certified
Public Accountants will pass upon the federal income tax consequences of the
Offering. Certain legal matters will be passed upon for _______________ by
______________.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission are incorporated in
this Prospectus by reference:
1. The Company's registration statement on Form S-4 (filed on September
19, 1997, November 3, 1997 and November 10, 1997).
2. The Company's Annual Report on Form 10-K for the year ended December
31, 1997 (filed on March 30, 1998.
3. The Company's Annual Report to Stockholders for the fiscal year ended
December 31, 1997 (the "1997 Annual Report") (filed on March 30, 1998
as an exhibit to the Company's Form 10-K).
4. The Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended March 31, 1998 (filed on May 15, 1998).
5. The Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended June 30, 1998 (filed on August 13, 1998).
6. The Company's Current Report on Form 8-K (filed on May 4, 1998).
7. The Company's Current Report on Form 8-K (filed on January 8, 1998).
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 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
67
<PAGE>
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.
THIS PROSPECTUS IS ACCOMPANIED BY THE COMPANY'S ANNUAL REPORT ON FORM
10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997, AND THE COMPANY QUARTERLY
REPORT ON FORM 10-Q FOR THE FISCAL QUARTER ENDED JUNE 30, 1998. THE COMPANY
WILL PROVIDE WITHOUT CHARGE TO ANY PERSON TO WHOM THIS PROSPECTUS IS DELIVERED,
ON THE WRITTEN OR ORAL REQUEST OF ANY SUCH PERSON, A COPY OF ANY OR ALL
DOCUMENTS INCORPORATED HEREIN BY REFERENCE AND NOT DELIVERED WITH THIS
PROSPECTUS (EXCEPT EXHIBITS THERETO). SUCH REQUESTS, IN WRITING OR BY
TELEPHONE, SHOULD BE DIRECTED TO: MELISSA A. DASHNAU, SECRETARY, PATHFINDER
BANCORP, INC., 214 WEST FIRST STREET, OSWEGO, NEW YORK, (315) 343-0057.
68
<PAGE>
OSWEGO COUNTY SAVINGS BANK
Financial Statements
December 31, 1997 and 1996
(With Independent Auditors' Report Thereon)
<PAGE>
OSWEGO COUNTY SAVINGS BANK
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Auditors'.............................. F-1
Financial Statements
Statements of Financial Condition
June 30, 1998 (unaudited)
and December 31, 1997 and 1996......................... F-2
Statements of Operations
Six Months Ended June 30, 1998 and 1997 (unaudited)
and Years Ended December 31, 1997, 1996 and 1995....... F-3
Statements of Changes in Net Worth
Six Months Ended June 30, 1998 and 1997 (unaudited)
and Years Ended December 31, 1997, 1996, 1995 and 1994. F-4
Statements of Cash Flows
Six Months Ended June 30, 1998 and 1997 (unaudited)
and Years Ended December 31, 1997,1996 and 1995......F-5-F-6
Notes to Financial Statements
Six Months Ended June 30, 1998 and 1997 (unaudited)
and Years Ended December 31, 1997, 1996 and 1995.....F-7-F22
<PAGE>
KPMG Peat Marwick LLP
113 South Salina Street
Syracuse, NY 13202
INDEPENDENT AUDITORS' REPORT
The Board Trustees
Oswego County Savings Bank:
We have audited the accompanying statements of financial condition of Oswego
County Savings Bank as of December 31, 1997 and 1996, and the related
statements of operations, changes in net worth, and cash flows for each of the
years in the three-year period ended December 31, 1997. 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 position of Oswego County Savings Bank as
of December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1997,
in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
February 20, 1998
Syracuse, New York
F-1
<PAGE>
OSWEGO COUNTY SAVINGS BANK
Statements of Financial Condition
<TABLE>
<CAPTION>
June 30, December 31,
------------------------
ASSETS 1998 1997 1996
-------------- ----------- -----------
(unaudited)
<S> <C> <C> <C>
Cash and due from banks $3,298,749 4,083,082 4,723,052
Federal funds sold and other short-term
investments 5,195,379 2,681,128 12,819,078
Securities held to maturity, fair value of
$11,398,861 at June 30, 1998,
$10,474,998 at December 31, 1997
and $10,129,299 in 1996 10,762,329 10,441,133 10,105,638
Securities available for sale, at fair value 12,191,253 10,920,781 5,450
Loans: 75,308,892 80,460,302 85,086,892
Less allowance for loan losses 1,296,131 1,408,797 1,583,299
---------- ----------- -----------
Loans, net 74,012,761 79,051,505 83,503,593
---------- ----------- -----------
Real estate owned 583,344 599,387 491,521
Premises and equipment, net 2,255,387 2,324,351 2,095,089
Accrued interest receivable 882,555 925,591 746,798
Other assets 1,160,816 1,111,923 1,160,005
------------ ----------- -----------
Total assets $110,342,573 112,138,881 115,650,224
============ =========== ===========
LIABILITIES AND NET WORTH
Deposits:
Demand 10,725,720 9,665,784 8,546,276
Savings and money market 48,048,911 48,535,652 50,046,010
Time 37,904,554 39,697,366 43,422,908
---------- ----------- -----------
96,679,185 97,898,802 102,015,194
Escrow deposits 922,814 1,458,361 1,717,310
Other liabilities 1,402,324 1,608,986 720,399
---------- ----------- -----------
Total liabilities 99,004,323 100,966,149 104,452,903
---------- ----------- -----------
Commitments and contingencies (note 11)
Net worth:
Surplus 3,728,639 3,728,639 3,728,639
Undivided profits - substantially restricted 7,609,143 7,438,682 7,468,682
Accumulated other comprehensive income 468 5,411 -
---------- ----------- -----------
Total net worth 11,338,250 11,172,732 11,197,321
---------- ----------- -----------
Total liabilities and net worth $110,342,573 112,138,881 115,650,224
============ =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE>
OSWEGO COUNTY SAVINGS BANK
Statements of Operations
<TABLE>
<CAPTION>
Six months ended Years ended
June 30, December 31,
---------------------- --------------------------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Interest income:
Loans $ 3,204,816 3,416,545 6,841,171 6,847,056 7,107,196
Securities 670,223 561,375 1,151,073 454,071 345,299
Federal funds sold and
other short-term
investments 108,049 160,934 240,519 867,856 619,279
--------- --------- --------- --------- ---------
Total interest
income 3,983,088 4,138,854 8,232,763 8,168,983 8,071,774
--------- --------- --------- --------- ---------
Interest expense - deposits 1,732,283 1,882,496 3,737,612 3,972,550 3,572,768
--------- --------- --------- --------- ---------
Net interest
income 2,250,805 2,256,358 4,495,151 4,196,433 4,499,006
Provision for loan losses 60,000 68,064 524,816 1,140,670 460,000
--------- --------- --------- --------- ---------
Net interest
income after
provision for
loan losses 2,190,805 2,188,294 3,970,335 3,055,763 4,039,006
--------- --------- --------- --------- ---------
Other operating income
(expense):
Service charges 194,607 197,555 434,381 442,055 395,909
Net loss on sale of securities - - - - (131,554)
Recovery (provision) for
Nationar - - 54,400 (14,189) (120,000)
Other 29,674 37,408 46,417 73,539 81,950
--------- --------- --------- --------- ---------
Total other
operating
income 224,281 234,963 535,198 501,405 226,305
--------- --------- --------- --------- ---------
Other operating expenses:
Salaries and employee
benefits 997,909 915,034 1,923,888 2,184,883 1,773,760
Occupancy and equipment 206,798 214,236 432,506 385,716 384,004
Depreciation 119,533 85,988 167,572 152,653 186,438
Deposit insurance premiums 6,070 6,106 12,342 1,833 114,369
Data processing 110,944 117,766 221,695 247,688 218,545
Office supplies, printing and
postage 98,474 116,156 240,691 207,908 197,165
Professional fees 202,028 85,168 383,201 78,473 54,702
Real estate owned 131,457 71,771 198,545 85,933 84,965
Trustee fees and benefits 55,614 62,875 536,066 101,250 55,675
Other 191,798 132,141 362,677 290,707 266,492
--------- --------- --------- --------- ---------
Total other
operating
expenses 2,120,625 1,807,241 4,479,183 3,737,044 3,336,115
--------- --------- --------- --------- ---------
Income (loss) before income
tax expense (benefit) 294,461 616,016 26,350 (179,876) 929,196
Income tax expense (benefit) 124,000 305,000 56,350 (119,241) 376,197
--------- --------- --------- --------- ---------
Net income (loss) $ 170,461 311,016 (30,000) (60,635) 552,999
========= ========= ========= ========= =========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
OSWEGO COUNTY SAVINGS BANK
Statements of Changes in Net Worth
<TABLE>
<CAPTION>
Accumulated
Other
Undivided Comprehensive
Surplus Profits Income Total
------- ------- ------ -----
<S> <C> <C> <C> <C>
Balance, December 31, 1994 $ 3,675,489 7,029,468 (82,385) 10,622,572
Comprehensive income:
Net income 53,150 499,849 - 552,999
Change in the unrealized gain
(loss) on securities available for
sale, net of taxes - - 82,385 82,385
---------- --------- -------- ----------
Total comprehensive
income 53,150 499,849 82,385 635,384
---------- --------- -------- ----------
Balance, December 31, 1995 3,728,639 7,529,317 - 11,257,956
Comprehensive income:
Net loss - (60,635) - (60,635)
---------- --------- -------- ----------
Balance, December 31, 1996 3,728,639 7,468,682 - 11,197,321
Comprehensive income:
Net loss - (30,000) - (30,000)
Change in the unrealized gain
(loss) on securities available for
sale, net of taxes - - 5,411 5,411
---------- --------- -------- ----------
Total comprehensive
income - (30,000) 5,411 (24,589)
---------- --------- -------- ----------
Balance, December 31, 1997 3,728,639 7,438,682 5,411 11,172,732
Comprehensive income:
Net income, unaudited - 170,461 - 170,461
Other comprehensive income, net
of tax change in the unrealized
gain (loss) on securities
available for sale, net of taxes,
unaudited - - (4,943) (4,943)
---------- --------- -------- ----------
Total comprehensive income,
unaudited - 170,461 (4,943) 165,518
---------- --------- -------- ----------
Balance, June 30, 1998, unaudited $ 3,728,639 7,609,143 468 11,338,250
========== ========= ======== ==========
Disclosure of reclassification adjustments (unaudited)
- ------------------------------------------------------
Unrealized holding losses arising during
the six months end June 30, 1998 $ (4,943)
Reclassification adjustment for (gains)
losses included in net income,
net of tax -
--------
Net unrealized losses on
securities $ (4,943)
========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
OSWEGO COUNTY SAVINGS BANK
Statements of Cash Flows
<TABLE>
<CAPTION>
Six months ended Years ended
June 30, December 31,
------------------------ ----------------------------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 170,461 311,016 (30,000) (60,635) 552,999
Adjustments to reconcile net
income (loss) to net cash
provided by (used in)
operating activities:
Depreciation 119,533 85,988 167,572 152,653 186,438
Provision for loan losses 60,000 68,064 524,816 1,140,670 460,000
Provision (recovery) for
Nationar - - (54,400) 14,189 120,000
(Gain) loss on sale of real
estate owned (2,400) 8,409 162,383 78,724 102,862
Net loss on sale of
securities - - - - 131,554
Investment amortization
(accretion) 6,038 236 (14,393) 20,140 (1,494)
Deferred income taxes
(benefit) - - (134,412) (461,470) (221,208)
Change in:
Accrued interest
receivable 43,036 (283,604) (178,793) 19,620 (123,634)
Other assets (45,444) (439,860) 236,894 70,106 279,088
Escrow deposits (535,547) (593,410) (258,949) (379,925) 129,197
Other liabilities (206,662) 906,670 888,587 343,931 (306,710)
---------- ---------- ----------- ---------- ----------
Net cash provided
by (used in)
operating
activities (390,985) 63,509 1,309,305 938,003 1,309,092
---------- ---------- ----------- ---------- ----------
Cash flows from investing
activities:
Proceeds from maturity of and
principal collected on
securities held to maturity 4,750,000 1,786,659 4,167,664 4,071,905 1,973,473
Proceeds from maturity of and
principal collected on
securities available for sale 3,400,000 - 1,000,000 - -
Proceeds from the sale of
securities available for sale - - - - 357,589
Purchases of securities held
to maturity (5,079,176) (4,445,869) (4,498,070) (7,345,108) (3,523,107)
Purchases of securities
available for sale (4,676,922) (7,016,262) (11,900,616) - -
Principal collections of loans
net of loan originations 4,805,503 736,216 3,296,723 1,324,656 526,717
Proceeds from sale of real
estate owned 191,684 165,301 360,300 241,426 509,063
Capital expenditures, net of
disposals (50,569) (313,030) (396,834) (98,610) (38,399)
---------- ---------- ----------- ---------- ----------
Net cash used in
investing
activities 3,340,520 (9,086,985) (7,970,833) (1,805,731) (194,664)
---------- ---------- ----------- ---------- ----------
</TABLE>
F-5
<PAGE>
OSWEGO COUNTY SAVINGS BANK
Statements of Cash Flows, Continued
<TABLE>
<CAPTION>
Six months ended Years ended
June 30, December 31,
-------------------------- ----------------------------------------
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from financing activities:
Net (increase) decrease in demand
and savings deposits $ 573,195 418,549 (390,850) (765,670) (4,133,928)
Net increase (decrease) in time
deposits (1,792,812) (3,065,840) (3,725,542) 1,344,973 10,642,145
----------- ----------- ----------- ---------- ----------
Net cash provided
by (used in)
financing
activities (1,219,617) (2,647,291) (4,116,392) 579,303 6,508,217
----------- ----------- ----------- ---------- ----------
Net increase (decrease) in cash and
cash equivalents 1,729,918 (11,670,767) (10,777,920) (288,425) 7,622,645
Cash and cash equivalents at
beginning of period 6,764,210 17,542,130 17,542,130 17,830,555 10,207,910
----------- ----------- ----------- ---------- ----------
Cash and cash equivalents at end of
period $ 8,494,128 5,871,363 6,764,210 17,542,130 17,830,555
=========== =========== =========== ========== ==========
Supplemental disclosure of cash flow
information:
Cash paid during the period
for:
Interest $ 1,732,283 1,882,496 3,737,612 3,972,550 3,572,768
Income taxes - 173,000 243,000 403,421 623,953
=========== =========== =========== ========== ==========
Non-cash investing and
financing activities:
Change in accumulated
other comprehensive
income $ (4,943) (1,765) 5,411 - 82,385
Transfer of loans to
real estate owned 173,241 39,717 630,549 445,935 569,387
=========== =========== =========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
OSWEGO COUNTY SAVINGS BANK
Notes to Financial Statements
December 31, 1997, 1996 and 1995
(1) ORGANIZATION
Oswego County Savings Bank (the Bank) is a mutual savings bank that is
subject to regulation by the New York State Banking Department and the
Federal Deposit Insurance Corporation. The Bank provides financial services
to individuals and businesses primarily in Oswego County in New York State.
On September 4, 1997, the trustees of the Bank approved the proposed merger
with Oswego City Savings Bank, (City Savings), a publicly traded bank which
is 54% owned by Pathfinder Bancorp M.H.C. The Bank will be merged into City
Savings. The proposed transaction is subject to state and Federal regulatory
approvals. In conjunction with merger the Bank is expected to convert from a
mutual savings bank to a stock savings bank which was approved by the
trustees on February 19, 1998.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies of the Bank conform to generally accepted accounting
principles. The following is a description of the more significant
accounting policies followed by the Bank.
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 income and expenses during the reporting period.
Actual results could differ from those estimates.
SECURITIES
The Bank classifies its debt securities as either available for sale or held
to maturity as the Bank does not hold any securities considered to be
trading. Held to maturity securities are those debt securities that the Bank
has the positive intent and the ability to hold until maturity. All other
securities not included in held to maturity are classified as available for
sale.
Available for sale securities are recorded at fair value. Held to maturity
securities are recorded at cost, adjusted for the amortization or accretion
of premiums or discounts. Unrealized holding gains and losses, net of the
related tax effect, on available for sale securities are excluded from
earnings and are reported as a separate component of net worth until
realized. Transfers of securities between categories are recorded at fair
value at the date of transfer.
A decline in the fair value of any available for sale or held to maturity
security below cost, that is deemed other than temporary, is charged to
earnings resulting in the establishment of a new cost basis for the security.
Premiums and discounts are amortized or accreted over the life of the related
security as an adjustment to yield using the effective interest method.
Dividends and interest income are recognized when earned. Realized gains and
losses on securities are recognized on the trade date and are calculated
using the specific identification method for determining the cost of
securities sold.
F-7
<PAGE>
OSWEGO COUNTY SAVINGS BANK
Notes to Financial Statements, Continued
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
LOANS
Loans are reported at the principal amount outstanding. Fees and certain
direct origination costs related to lending activities are recognized as
incurred, as the amount is immaterial.
Generally, the Bank places all loans that are 90 days or more past due on
non-accrual status. In addition, the Bank places any loan on non-accrual if
any part of it is classified as doubtful or loss or if any part has been
charged off. When a loan is placed on non-accruing status, total interest
accrued and unpaid to date is reversed. Subsequent payments are either
applied to the outstanding principal balance or recorded as interest income,
depending on the assessment of the ultimate collectibility of the loan.
ALLOWANCE FOR LOAN LOSSES
The Bank's provision for loan losses charged to operations is based upon
management's evaluation of the loan portfolio. The allowance for loan losses
is maintained at an amount management deems adequate to provide for potential
loan losses considering the character of the loan portfolio, economic
conditions, analysis of specific loans and historical loss experience. While
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan
losses. Such agencies may require the Bank to recognize additions to the
allowance based on their judgments about information available to them at the
time of their examinations.
A loan is considered impaired when, based on current information and events,
it is probable that a creditor will be unable to collect all amounts of
principal and interest under the original terms of the agreement.
Accordingly, the Bank measures certain impaired commercial loans based on the
present value of future cash flows discounted at the loan's effective
interest rate, or at the loan's observable market price or the fair value of
the collateral if the loan is collateral dependent. The Bank excludes large
groups of small balance, homogeneous loans such as residential mortgages,
home equity loans and consumer loans that are collectively evaluated for
impairment.
REAL ESTATE OWNED
Real estate owned includes property acquired through, or in lieu of, formal
foreclosure. Write-downs from recorded investment to estimated fair value
which are required at the time of foreclosure are charged to the allowance
for loan losses. After transfer, the property is carried at the lower of
recorded investment or fair value, less estimated selling expenses.
Adjustments to the carrying value of such properties that result from
subsequent declines in value are charged to operations in the period in which
the declines occur.
PREMISES AND EQUIPMENT
Land is carried at cost and buildings, furniture and equipment are stated at
cost less accumulated depreciation. Depreciation is computed primarily on
the straight-line method over the estimated services lives of the assets.
F-8
<PAGE>
OSWEGO COUNTY SAVINGS BANK
Notes to Financial Statements, Continued
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
INCOME TAXES
Deferred tax assets and liabilities are recognized for the estimated future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates in effect for the year in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period
which includes the enactment date.
PENSION PLAN
The Bank has a defined benefit pension plan covering substantially all of its
employees. Benefits are based on credited years of service and the
employee's average compensation prior to retirement. The Bank's funding
policy is to contribute annually at least the minimum required by law. Plan
assets are invested in the general account of the Retirement System for
Savings Institutions.
POSTRETIREMENT BENEFITS
The Bank sponsors an unfunded defined benefit postretirement plan that covers
all of its full time employees. All employees who retire under the Bank's
defined benefit pension plan who have attained age 55 with at least 5 years
of service are eligible. Employees are required to contribute a portion of
the premium.
The Bank provides for benefits to employees and the employees' beneficiaries
during the years that the employee renders the necessary service.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand, amounts due from banks and federal funds sold and other short-term
investments with maturities less than 90 days.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Bank does not engage in the use of derivative financial instruments and
the Bank's only financial instruments with off-balance sheet risk are
commercial and residential mortgage commitments. These off-balance sheet
items are shown in the Bank's statement of financial condition upon funding.
F-9
<PAGE>
OSWEGO COUNTY SAVINGS BANK
Notes to Financial Statements, Continued
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
OTHER STANDARDS
Effective January 1, 1998 the Bank adopted the remaining provisions of
Statement of Financial Accounting Standards (SFAS) No.125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, which relates to the accounting for securities lending,
repurchase agreements, and other secured financing activities. These
provisions, which were delayed for implementation by SFAS No.127, did not
have a material impact on the Bank. In addition, the Financial Accounting
Standards Board (FASB) is considering certain amendments and interpretations
of SFAS No.125 which, if enacted in the future, could affect the accounting
for transactions within their scope.
On January 1, 1998, the Bank adopted the provisions of SFAS No.130,
Reporting Comprehensive Income. This statement establishes standards for
reporting and display of comprehensive income and its components.
Comprehensive income includes the reported net income of a company adjusted
for items that are currently accounted for as direct entries to equity, such
as the mark to market adjustment on securities available for sale, foreign
currency items and minimum pension liability adjustments. At the Bank,
comprehensive income represents net income plus other comprehensive income,
which consist of the net change in unrealized gains or losses on securities
available for sale for the period. Accumulated other comprehensive income
represents the net unrealized gains or losses on securities available for
sale as of the balance sheet dates. Comprehensive income (loss) for the six-
month periods ended June 30, 1998 and 1997 was $(4,943) and ($1,765),
respectively.
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. SFAS No. 131 requires publicly-held
companies to report financial and other information about key revenue
producing segments of the entity for which such information is available and
is utilized by the chief operation decision maker. Specific information to
be reported for individual segments included profit or loss, certain specific
revenue and expense items, and total assets. A reconciliation of segment
financial information to amounts reported in the financial statements would
be provided. SFAS No. 131, effective in 1998, will not have an impact on the
Bank's statement of financial condition and statement of operations.
The Financial Accounting Standards Board issued Statement of Financial
Standards No.132, Employers' Disclosures about Pensions and Other Post
Retirement Benefits in February 1998. This statement revises employers'
disclosures about pension and other post retirement benefit plans. It does
not change the measurement or the recognition of these plans. The statement
is effective for the Bank in 1998 and will not impact its financial position
or results of operations.
FASB Statement No.133, Accounting for Derivative Instruments and Hedging
Activities was issued in June 1998. This statement establishes accounting
and reporting standards for derivative instruments and for hedging
activities. It requires that all derivatives be recognized as either assets
or liabilities in the balance sheet and that those instruments be measured at
fair value. The accounting for changes in the fair value of a derivative
(that is, gains and losses) depends on the intended use of the derivative and
the resulting designation. This statement is effective for all fiscal
quarters beginning January 1, 2000. Earlier adoption, however, is permitted.
The Bank anticipates, based on current activities, that the adoption of SFAS
No.133 will not have an effect on the results of its operations.
F-10
<PAGE>
OSWEGO COUNTY SAVINGS BANK
Notes to Financial Statements, Continued
(3) SECURITIES
The amortized cost and fair value of securities are as follows:
<TABLE>
<CAPTION>
December 31, 1997
------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE
Debt securities:
United States Treasury $ 4,016,906 10,457 483 4,026,880
United States Government
agency obligations 6,893,178 10,765 11,568 6,892,375
---------- ------ ---------- ----------
Total debt securities 10,910,084 21,222 12,051 10,919,255
---------- ------ ---------- ----------
Equity securities:
Corporate stocks 1,526 - - 1,526
---------- ------ ---------- ----------
Total securities available
for sale $10,911,610 21,222 12,051 10,920,781
========== ====== ========== ==========
December 31, 1997
------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ---------- ---------- ----------
SECURITIES HELD TO MATURITY
Debt securities:
United States Treasury $ 3,148,730 3,804 62 3,152,472
Corporate and municipal
securities 4,809,088 15,775 1,478 4,823,385
Mortgage-backed securities:
GNMA 62,175 2,968 - 65,143
FNMA 54,115 2,001 - 56,116
FHLMC 29,068 1,005 - 30,073
United States Government
agency obligations 2,337,957 9,852 - 2,347,809
---------- ------ ---------- ----------
Total securities held
to maturity $10,441,133 35,405 1,540 10,474,998
========== ====== ========== ==========
</TABLE>
F-11
<PAGE>
OSWEGO COUNTY SAVINGS BANK
Notes to Financial Statements, Continued
(3) SECURITIES, CONTINUED
<TABLE>
<CAPTION>
December 31, 1996
----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE
Equity securities:
Corporate stocks 5,450 - - 5,450
---------- ------ ---------- ----------
Total securities available
for sale $ 5,450 - - 5,450
========== ====== ========== ==========
SECURITIES HELD TO MATURITY
Debt securities:
United States Treasury 3,644,742 9,924 1,017 3,653,649
Corporate and municipal securities 4,373,477 8,645 3,459 4,378,663
Mortgage-backed securities:
GNMA 70,601 2,850 - 73,451
FHLMC 108,140 3,705 - 111,845
United States Government
agency obligations 1,908,678 3,013 - 1,911,691
---------- ------ ---------- ----------
Total securities held to
maturity $10,105,638 28,137 4,476 10,129,299
========== ====== ========== ==========
</TABLE>
The Bank had no sales of securities during 1997 and 1996. Proceeds from the
sale of available for sale securities for the year ended December 31, 1995
was $357,589. Gross losses realized on the sales in 1995 were $131,554 with
no gains realized.
The following is a tabulation of debt securities, excluding mortgage backed
securities by the earlier of maturity or call date as of December 31, 1997:
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
---------------------- --------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
----------- --------- --------- ---------
<S> <C> <C> <C> <C>
Due in one year or less $ 5,899,729 5,895,485 7,027,843 7,032,188
Due after one year through five
years 5,010,355 5,023,770 3,017,932 3,031,771
Due after five years through ten
years - - - -
Due after ten years - - 250,000 259,707
----------- --------- --------- ---------
Total $ 10,910,084 10,919,255 10,295,775 10,323,666
========== ========== ========== ==========
</TABLE>
F-12
<PAGE>
OSWEGO COUNTY SAVINGS BANK
Notes to Financial Statements, Continued
(4) LOANS
The following is a summary of loans outstanding at December 31:
June 30, December 31,
------------------------
1998 1997 1996
------------- ----------- -----------
(unaudited)
Residential mortgages and
home equity loans $ 64,508,149 67,404,958 70,686,388
Commercial mortgages 9,125,785 11,144,890 11,490,159
Commercial loans 80,771 276,443 589,022
Consumer loans 1,594,187 1,634,011 2,321,323
---------- ---------- ----------
Total loans 75,308,892 80,460,302 85,086,892
Allowance for loan losses (1,296,131) (1,408,797) (1,583,299)
---------- ---------- ----------
Net loans $ 74,012,761 79,051,505 83,503,593
========== ========== ==========
The Bank's market area is generally Oswego County in Central New York State.
Substantially all of the Bank's portfolio is located in its market area and,
accordingly, the ultimate collectibility of the Bank's loan portfolio is
susceptible to changes in market conditions in this area. The Bank's
concentration of credit risk by loan type is shown in the above schedule of
loans outstanding. Other than general economic risks, management is not
aware of any material concentrations of credit risk to any industry or
individual borrower.
(5) ALLOWANCE FOR LOAN LOSSES
The following is a summary of changes in the allowance for loan losses
for the years ended December 31:
<TABLE>
<CAPTION>
Six months ended Years ended
June 30, December 31,
------------------------ --------------------------------------
1998 1997 1997 1996 1995
------------ ---------- ---------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Balance at beginning of
year $ 1,408,797 1,583,299 1,583,299 761,703 461,861
Provision for loan losses 60,000 68,064 524,816 1,140,670 460,000
Loan charge-offs (194,402) (244,370) (724,304) (330,198) (166,397)
Recoveries 21,736 8,131 24,986 11,124 6,239
---------- --------- --------- --------- ---------
Balance at end
of year $ 1,296,131 1,415,124 1,408,797 1,583,299 761,703
========== ========= ========= ========= =========
</TABLE>
F-13
<PAGE>
OSWEGO COUNTY SAVINGS BANK
Notes to Financial Statements, Continued
(5) ALLOWANCE FOR LOAN LOSSES, CONTINUED
The principal balance of all loans not accruing interest amounted to
approximately $1,774,000 and $2,180,000 at December 31, 1997 and 1996,
respectively. The interest income forgone for non-accruing loans was
$121,600, $191,000 and $42,000 for the years ended December 31, 1997, 1996
and 1995, respectively.
At December 31, 1997 and 1996, the recorded investment in loans that are
considered impaired totaled $1,308,793 and $1,822,763, respectively. The
impairment allowance associated with these loans was $315,900 and $569,900 at
December 31, 1997 and 1996, respectively. The average recorded investment in
impaired loans during the year was approximately $1,728,101 and $1,833,371
for 1997 and 1996, respectively. The amount of interest income recognized
for impaired loans was not significant for the years ended December 31, 1997,
1996 and 1995.
(6) PREMISES AND EQUIPMENT
Premises and equipment at December 31 consist of the following:
1997 1996
------------ ------------
Land $ 426,250 426,250
Buildings and improvements 2,556,974 2,508,252
Furniture and equipment 1,893,794 1,642,953
---------- ----------
4,877,018 4,577,455
Accumulated depreciation 2,552,667 2,482,366
---------- ----------
Net $ 2,324,351 2,095,089
========== ==========
(7) DEPOSITS
Deposit maturities are summarized as follows:
December 31,
------------
1997 1996
--------- ----------
Within one year $ 30,331,083 30,142,280
After one year and within two years 5,626,894 8,823,504
After two years and within three years 1,996,810 2,287,033
After three years and within four years 893,080 1,467,698
After four years and within five years 849,499 702,393
---------- ----------
$ 39,697,366 43,422,908
========== ==========
Certificates of deposit are included in time deposits. Certificates of
deposit of $100,000 and over were $4,218,572 and $3,429,924 at December 31,
1997 and 1996, respectively.
F-14
<PAGE>
OSWEGO COUNTY SAVINGS BANK
Notes to Financial Statements, Continued
(8) INCOME TAXES
Total income tax expense (benefit) for the years ended December 31 was
allocated as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Income (loss) before income
tax (benefit) $ 56,350 (119,241) 376,197
Change in net worth for unrealized gain
(loss) on securities available for sale 3,760 - 57,343
--------- -------- --------
Total $ 60,110 (119,241) 433,540
========= ======== ========
Income tax expense (benefit) attributable to income (loss) from operations:
Current Deferred Total
--------- -------- --------
Year ended December 31, 1997
Federal $ 141,818 (90,855) 50,963
State 48,944 (43,557) 5,387
--------- -------- --------
Total $ 190,762 (134,412) 56,350
========= ======== ========
Current Deferred Total
--------- -------- --------
Year ended December 31, 1996
Federal $ 287,030 (379,529) (92,499)
State 55,199 (81,941) (26,742)
--------- -------- --------
Total $ 342,229 (461,470) (119,241)
========= ======== ========
Current Deferred Total
--------- -------- --------
Year ended December 31, 1995
Federal $ 492,738 (204,665) 288,073
State 104,667 (16,543) 88,124
--------- -------- --------
Total $ 597,405 (221,208) 376,197
========= ======== ========
</TABLE>
F-15
<PAGE>
OSWEGO COUNTY SAVINGS BANK
Notes to Financial Statements, Continued
(8) INCOME TAXES, CONTINUED
Actual income tax expense (benefit) attributable to income (loss) before
income taxes differed from the amounts computed by applying the Federal
statutory income tax rate to pre-tax income as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Federal income tax (benefit) at
statutory rate $ 8,959 (61,163) 315,927
Increase (decrease) resulting from:
Tax-exempt interest income (2,762) (5,339) (180)
Nondeductible expenses 47,589 6,341 1,360
State taxes, net of federal
income tax benefit 3,555 (17,650) 58,162
Other, net (991) (41,430) 928
------ -------- --------
Income tax expense (benefit) $ 56,350 (119,241) 376,197
====== ======== ========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31 are presented below:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 662,535 723,841
Postretirement benefits 119,467 81,684
Deferred compensation 250,107 93,211
Other 7,530 10,880
--------- ---------
Total gross deferred tax assets 1,039,639 909,616
--------- ---------
Deferred tax liabilities:
Depreciation 116,893 103,659
Net unrealized gain on
securities available for sale 3,760 -
Prepaid pension expenses 79,592 81,589
Excess loan loss reserve over
base year 223,021 247,306
Other 8,659 -
--------- ---------
Total gross deferred tax liabilities 431,925 432,554
--------- ---------
Net deferred tax asset $ 607,714 477,062
========= =========
</TABLE>
Included in undivided profits at December 31, 1997 is approximately
$1,107,000 representing aggregate provisions for loan losses taken under the
Internal Revenue Code. The use of these reserves for purposes other than to
absorb losses on loans, or if the Bank fails to qualify as a Bank for Federal
income tax purposes, would result in taxable income to the Bank.
F-16
<PAGE>
OSWEGO COUNTY SAVINGS BANK
Notes to Financial Statements, Continued
(8) INCOME TAXES, CONTINUED
Realization of deferred tax assets is dependent upon the generation of future
taxable income or the existence of sufficient taxable income within the
carryback period. A valuation allowance is provided when it is more likely
than not that some portion of the deferred tax assets will not be realized.
In assessing the need for a valuation allowance, management considers the
scheduled reversal of the deferred tax liabilities, the level of historical
taxable income and projected future taxable income over the periods in which
the temporary differences comprising the deferred tax assets will be
deductible. Based on its assessment, management determined that no valuation
allowance is necessary.
(9) RETIREMENT PLANS
The following table sets forth the defined benefit pension plan's funded
status and amounts recognized in the Bank's financial statements, using the
most recent actuarial data measured at October 1, 1997 and 1996 follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Actuarial present value of accumulated plan benefits:
Vested $ 2,454,621 2,280,200
Nonvested 42,070 144,200
----------- -----------
$ 2,496,691 2,424,400
=========== ===========
Plan assets available at fair value 3,587,252 3,465,257
Projected benefit obligations 2,960,364 3,011,700
----------- -----------
Plan assets in excess of projected benefit obligations 626,888 453,557
Unamortized net asset at transition (83,034) (107,747)
Unrecognized net gain subsequent to transition (348,052) (107,791)
Unrecognized past service liability 3,478 4,444
----------- -----------
Net pension asset, included in other assets $ 199,280 242,463
=========== ===========
</TABLE>
Pension cost consists of the following components:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Service cost $ 67,689 76,968 69,269
Interest cost on projected benefit
obligation 221,786 212,702 201,025
Return on plan assets (751,518) (433,456) (526,766)
Net deferral and amortization 457,940 171,685 312,861
-------- -------- --------
Net periodic pension expense (credit) $ (4,103) 27,899 56,389
======== ======== ========
Weighted average discount rate 7.75% 7.50% 8.25%
==== ==== ====
Expected long term rate of return 8.00% 8.00% 8.00%
==== ==== ====
</TABLE>
F-17
<PAGE>
OSWEGO COUNTY SAVINGS BANK
Notes to Financial Statements, Continued
(9) RETIREMENT PLANS, CONTINUED
The projected benefit obligation assumed a long-term rate of increase in
future compensation levels of 5.0% for the year ended December 31, 1997 and
5.5% and 6% for the years ended December 31, 1996 and 1995. The unamortized
net asset at transition is being amortized over 12 years from inception.
The following table sets forth the defined benefit postretirement plan's
funded status reconciled with the amount shown in the Bank's financial
statements at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retired employees $ 268,909 485,017
Active employees 487,128 464,062
-------- --------
Total 756,037 949,079
Plan assets at fair value - -
Unfunded accumulated postretirement benefit
obligation in excess of plan assets 756,037 949,079
Unrecognized net gain/(loss) 168,092 (46,170)
Unamortized prior service cost 41,146 -
Unamortized transition obligation (659,662) (698,466)
-------- --------
Accrued postretirement benefit cost included in other liabilities $ 305,613 204,443
======== ========
</TABLE>
Net periodic postretirement benefit cost for the years ended December 31,
1997 and 1996 included the following components:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Service cost - benefits attributed to
service during the period $ 19,148 16,405 26,082
Interest cost 66,436 62,740 58,205
Net amortization and deferral 38,804 38,804 38,804
-------- ------- -------
Net periodic postretirement benefit
cost $ 124,388 117,949 123,091
======== ======= =======
</TABLE>
For measurement purposes, a 9.50% and 10% annual rate of increase in the per
capita cost of average health care benefits for retirees was assumed for 1997
and 1996, respectively. The rate was assumed to decrease gradually to 5.0%
by 2031 and remain at that level thereafter. The health care cost trend rate
assumption has a significant effect on the amounts reported. To illustrate,
increasing the assumed health care cost trend rates by 1% in each year would
increase the accumulated postretirement benefit obligation at December 31,
1997 by $529,000, and the net periodic postretirement benefit cost by
$791,000 for the year then ended. The weighted average discount rate used in
determining the accumulated postretirement obligation was 7.0% for 1997 and
1996.
F-18
<PAGE>
OSWEGO COUNTY SAVINGS BANK
Notes to Financial Statements, Continued
(9) RETIREMENT PLANS, CONTINUED
In 1997, the Bank instituted a deferred compensation plan for Trustees (the
"Trustees' Deferred Compensation Plan") who may elect to defer all or part of
their annual trustee fees to fund the Trustees' Deferred Compensation Plan.
The plan provides that deferred fees are to be invested in mutual funds, as
selected by the individual trustees. At December 1997, deferred trustees
fees included in other liabilities aggregated $83,569.
In 1997, the Bank also implemented a retirement plan for nonemployee trustees
(the "Plan"). The monthly basic benefit under the Plan shall be equivalent
to the regular board of trustees monthly meeting fee in effect at the end of
the month that the trustee terminates service. Each trustee shall become
fully vested upon serving the Bank for 15 years as a trustee or upon reaching
age 70. Benefit payments to a trustee will begin upon the later of either:
the first month subsequent to the date that the trustee ceases to be a
trustee; or the first month subsequent to the date that the trustee reaches
age 70. Succeeding installments shall be made monthly thereafter until death
of the trustee. The Bank recorded an expense of $363,891 for the year ended
December 31, 1997. The obligation of $363,891 at December 31, 1997 is
included in other liabilities on the statement of financial condition.
(10) REGULATORY CAPITAL REQUIREMENT
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory - and possibly additional
discretionary - actions by regulators that, if undertaken, could have a
direct material effect on the Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific 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 classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1997, that the
Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 1997, the most recent notification from the Federal
Deposit Insurance Corporation and the State of New York Banking Department
categorized the Bank as "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 I risk-based, and Tier I
leverage ratios as set forth in the table. There are no conditions or events
since that notification that management believes have changed the Bank's
category.
F-19
<PAGE>
OSWEGO COUNTY SAVINGS BANK
Notes to Financial Statements, Continued
(10) REGULATORY CAPITAL REQUIREMENT, CONTINUED
The Bank's regulatory capital amounts and ratios are presented in the
following table (in thousands):
<TABLE>
<CAPTION>
To Be "Well
Capitalized" Under
Actual Minimum Regulatory Regulatory Capital
Regulatory Capital Capital Requirement Requirement
------------------ ------------------- -----------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total Capital $ 11,167,321 21.1% 4,225,960 8.0% 5,282,450 10.0
(to Risk Weighted Assets)
Tier I Capital 10,055,398 19.0 2,112,980 4.0 3,169,470 6.0
(to Risk Weighted Assets)
Tier I Capital 10,055,398 9.0 4,466,280 4.0 2,641,225 5.0
(to Average Assets)
As of December 31, 1996:
Total Capital 11,197,321 20.8 4,315,472 8.0 5,394,340 10.0
(to Risk Weighted Assets)
Tier I Capital 10,037,316 18.6 2,157,736 4.0 3,236,604 6.0
(to Risk Weighted Assets)
Tier I Capital 10,037,316 9.0 4,441,461 4.0 5,551,826 5.0
(to Average Assets)
</TABLE>
(11) COMMITMENTS AND CONTINGENCIES
In the normal course of business, there are various outstanding commitments
and contingent liabilities, such as guarantees, and commitments to extend
credit, which are not reflected in the accompanying financial statements.
The Bank does not anticipate losses as a result of these transactions.
Mortgage and loan commitments outstanding at December 31, 1997 and 1996
amounted to $120,000 and $1,223,000, respectively. Fixed interest rates on
mortgage and other loan commitments outstanding can change prior to closing
only if interest rates decrease. Variable rate loans float prior to closing.
Outstanding commitments on letters of credit at December 31, 1997 and 1996
amounted to $90,500 and $311,300, respectively.
In February 1995, the Superintendent of Banks for the State of New York
seized Nationar, a check-clearing and trust company, freezing all of
Nationar's assets. On that date, the Bank had demand accounts of
approximately $62,700, $5,400 of Nationar capital stock, $19,200 of Nationar
preferred stock, $80,000 of a pledged security and $120,000 of Nationar
capital debentures. Based on information set forth in certain publicly
available documents, at the time, management believed that there was a
reasonable likelihood that the Bank will not recover all amounts owed by
Nationar. Accordingly, management established a provision of $120,000 and
$14,200 during 1995 and 1996, respectively. The Bank has received
distributions totaling $54,000 and $154,300 in 1997 and 1996, respectively.
Total losses, net of distributions received relating to Nationar were
approximately $80,000.
In the normal conduct of business, the Bank is currently involved in various
litigation matters. In the opinion of management, the ultimate disposition
of these matters should not have a materially adverse effect on the financial
position of the Bank.
F-20
<PAGE>
OSWEGO COUNTY SAVINGS BANK
Notes to Financial Statements, Continued
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosures About Fair Value of Financial Instruments, as
amended by SFAS No. 119, Disclosure About Derivative Financial Instruments
and Fair Value of Financial Instruments requires disclosures about the fair
value of financial instruments for which it is practicable to estimate fair
value. The definition of a financial instrument includes many of the assets
and liabilities recognized in the Bank's statement of condition, as well as
certain off-balance sheet items. Fair value is defined in SFAS Nos. 107 and
119 as the amount at which a financial instrument could be exchanged in a
current transaction between willing parties, other than in a forced or
liquidation sale.
The following methods and assumptions were used by the Bank in estimating its
fair value disclosure for financial instruments:
CASH, CASH EQUIVALENTS, FEDERAL FUNDS SOLD AND SHORT-TERM SECURITIES
For these short-term instruments that generally mature in ninety days or
less, the carrying value approximates fair value.
SECURITIES
Fair values for securities are based on quoted market prices, where
available. Where quoted market prices are not available, fair values are
based on quoted market prices of comparable instruments.
LOANS
For variable rate loans that reprice frequently and have no significant
credit risk, fair values are based on carrying values. The fair values of
fixed rate loans are estimated through discounted cash flow analyses using
interest rates currently being offered for loans with similar terms and
credit quality.
Delinquent loans are valued using the discounted cash flow methods described
above. While credit risk is a component of the discount rate used to value
loans, delinquent loans are presumed to possess additional risk. Therefore,
the calculated fair value of loans are reduced by the general allowance for
loan losses.
DEPOSITS
The fair values disclosed for demand and savings deposits are, by definition,
equal to the amounts payable on demand at the reporting date (e.g., their
carrying values). The fair value of fixed maturity time deposits is
estimated using a discounted cash flow approach. This approach applies
interest rates currently being offered on certificates to a schedule of
weighted average expected monthly maturities on time deposits.
F-21
<PAGE>
OSWEGO COUNTY SAVINGS BANK
Notes to Financial Statements, Continued
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED
DEPOSITS, CONTINUED
The estimated fair values of the Bank's financial instruments as of December
31, 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
1997
-----------------------
Carrying
Amount Fair Value
----------- ----------
<S> <C> <C>
Financial assets:
Cash and cash equivalents $ 6,764,210 6,764,210
Securities 21,361,914 21,395,779
Net loans 79,051,505 78,960,453
Financial liabilities:
Demand and savings deposits 59,659,797 59,659,797
Time deposits 39,697,366 39,693,795
</TABLE>
The fair value of commitments to extend credit are equal to the deferred fees
outstanding, as the contractual rates and fees approximates those currently
charged to originate similar commitments.
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and, therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
F-22
<PAGE>
APPENDIX A
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transaction period from ____________ to ___________
Commission File Number: 000-23601
PATHFINDER BANCORP, INC.
-------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 16-1540137
--------------------------------- -------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification
Incorporation or Organization) Number)
214 WEST FIRST STREET, OSWEGO, NY 13126
---------------------------------------- -----------
(Address of Principal Executive Office) (Zip Code)
(315) 343-0057
---------------------------------------------------
(Registrant's Telephone Number including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
----
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.10 PER SHARE
-----------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file reports) and (2) has been subject to such
requirements for the past 90 days.
YES ______ NO X
------
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [X]
As of February 28, 1998, there were issued and outstanding 2,874,999 shares
of the Registrant's Common Stock. The aggregate value of the voting stock held
by non-affiliates of the Registrant, computed by reference to the average bid
and asked prices of the Common Stock as of February 28, 1998 ($20.875) was
$22,579,820.
DOCUMENTS INCORPORATED BY REFERENCE
1. Sections of Annual Report to Stockholders for the fiscal year ended
December 31, 1997 (Parts II and IV).
2. Proxy Statement for the 1998 Annual Meeting of Stockholders (Parts I and
III).
<PAGE>
PART I
------
ITEM 1. BUSINESS
- ------- --------
GENERAL
PATHFINDER BANCORP, INC.
Pathfinder Bancorp, Inc. (the "Company") is a Delaware corporation which
was organized in September 1997. The only significant asset of the Company is
its investment in Oswego City Savings Bank (the "Bank"). The Company is majority
owned by Pathfinder Bancorp, MHC, a New York-chartered mutual holding company
(the "Mutual Holding Company"). On December 30, 1997 the Company acquired all of
the issued and outstanding common stock of the Bank in connection with the
Bank's reorganization into the two-tier form of mutual holding company
ownership. At that time, each share of outstanding Bank common stock was
automatically converted into one share of Company common stock, par value $.l0
per share (the "Common Stock"). At February 28, 1998 the Mutual Holding Company
held 1,552,500 of Common Stock and the public held 1,322,499 of Common Stock
(the "Minority Shareholders").
The Company's executive office is located at 214 West First Street, Oswego,
New York and the telephone number at that address is (315) 343-0057.
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 and the contiguous counties. The Bank's deposits are
insured by the Federal Deposit Insurance Corporation ("FDIC"). The Bank was
chartered as a New York savings bank in 1859 as Oswego City Savings Bank. The
Bank is a consumer-oriented institution dedicated to providing mortgage loans
and other traditional financial services to its customers. The Bank is committed
to meeting the financial needs of its customers in Oswego County, New York, the
county in which it operates. At December 31, 1997, the Bank had total assets of
$196.8 million, total deposits of $152.4 million, and shareholders' equity of
$23.6 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, 1997, $112.0 million, or 92.1% of the
Bank's total loan portfolio consisted of loans secured by real estate, of which
$82.7 million, or 73.8%, were loans secured by one- to four-family residences,
$17.5 million, or 15.6%, were secured by commercial real estate, $2.2 million,
or 2.0%, were secured by multi-family properties and $9.6 million, or 8.6%, of
total real estate loans, were secured by second liens on residential properties.
The Bank also originates consumer and other loans which totaled $10.8 million,
or 8.9%, of the Bank's total loan portfolio. The Bank invests a portion of its
assets in securities issued by the United States Government, state and municipal
obligations, corporate debt securities, mutual funds, and equity securities. The
Bank also invests in mortgage-backed securities primarily issued or guaranteed
by the United States Government or agencies thereof. The Bank's principal
sources of funds are deposits, principal and interest payments on loans and
borrowings from correspondent financial institutions. The principal source of
income is interest on loans and investment securities. The Bank's principal
expenses are interest paid on deposits, and employee compensation and benefits.
1
<PAGE>
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 County Savings with and into the 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 December 31, 1997,
County Savings had assets of $112.1 million, deposits of $97.9 million and net
worth of $11.2 million.
The Merger Agreement provides that additional shares of the Company's
Common Stock equal to the fair value of County Savings will be issued in
connection with the Merger. The issuance of additional shares of the Common
Stock is intended to represent the value of the interest of the depositors of
County Savings that is being transferred to the Bank. Current minority
Shareholders' existing equity ownership interests will be diluted as a result of
the Merger. At this time however, it is impossible to quantify the extent of the
dilution Minority Shareholders will experience in their equity interest. Such
dilution will depend upon the fair value of County Savings as determined by an
independent appraisal, and the market price of the Common Stock preceding the
completion of the Merger, as well as the percentage of Common Stock sold in a
subscription and community offering if one is conducted. 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 Federal Reserve Board, the Federal Deposit
Insurance Corporation, and the New York Banking Department, as well as receipt
of approval of the Company's shareholders and if necessary County Savings'
depositors. As a result of regulatory review the terms of the Merger may be
significantly modified.
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.
MARKET AREA AND COMPETITION
The economy in the Bank's market area is manufacturing-oriented and is also
significantly dependent upon the State University of New York College at Oswego.
The major manufacturing employers in the Bank's market area are Niagara Mohawk,
Alcan Aluminum, the New York Power Authority, Nestle and Sealright, a food
container manufacturer. The Bank is the second largest financial institution
headquartered in Oswego County. However, the Bank encounters competition from a
variety of sources. The Bank's business and operating results are significantly
affected by the general economic conditions prevalent in its market areas.
The Bank encounters strong competition both in attracting deposits and in
originating real estate and other loans. Its most direct competition for
deposits has historically come from commercial and savings banks, savings
associations and credit unions in its market area. Competition for loans comes
from such financial institutions as well as mortgage banking companies. The Bank
expects continued strong competition in the foreseeable future, including
increased competition from "super-regional" banks entering the market by
purchasing large banks and savings banks. Many such institutions have greater
financial and marketing resources available to them than does the Bank. The Bank
competes for savings deposits by offering depositors a high level of personal
service and a wide range of competitively priced financial services. The Bank
competes for real estate loans primarily through the interest rates and loan
fees it charges and advertising, as well as by originating and holding in its
portfolio mortgage loans which do not necessarily conform to secondary market
underwriting standards.
2
<PAGE>
LENDING ACTIVITIES
LOAN PORTFOLIO COMPOSITION. The Bank's loan portfolio primarily consists of
one- to four-family mortgage loans secured by residential and investment
properties, as well as mortgage loans secured by multi-family residences and
commercial real estate. To a lesser extent the Bank's loan portfolio also
includes consumer and business loans. The Bank generally originates loans for
retention in its portfolio, although during 1997 the Bank began originating
loans (primarily 15 year and 30 year fixed rate mortgages) for securitization
and possible sale to government sponsored enterprises. At December 31, 1997,
$1.5 million, or 1.8% of the Bank's total one- to four-family real estate
portfolio consisted of loans held for sale. In recent years, the Bank has not
purchased loans originated by other lenders. At December 31, 1997, 58.6% of the
Bank's loan portfolio consisted of one- to four-family adjustable rate mortgage
("ARM") loans.
3
<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,
---------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------------- ----------------- ---------------- ----------------- ----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
First mortgage loans(1)(3).... $102,403 84.2% $ 90,761 83.5% $ 83,325 83.2% $76,275 85.1% $67,824 86.1%
Second mortgage loans(2)..... 9,561 7.9 9,082 8.3 8,303 8.3 7,931 8.8 7,025 8.9
-------- ----- -------- ------ -------- ----- ------- ----- ------- -----
Total real estate loans........ 111,964 92.1 99,843 91.8 91,628 91.5 84,206 93.9 74,849 95.0
-------- ----- -------- ------ -------- ----- ------- ----- ------- -----
Consumer loans and other loans:
Consumer...................... 4,278 3.5 3,481 3.2 3,286 3.1 3,258 3.6 2,563 3.2
Student....................... 13 -- 58 0.1 63 0.1 1,085 1.3 864 1.1
Lease financing............... 564 0.5 1,153 1.1 2,013 2.0 835 0.9 708 0.9
Commercial business loans..... 5,908 4.9 5,482 5.0 3,860 3.9 1,028 1.2 616 0.8
-------- ----- -------- ------ -------- ----- ------- ----- ------- -----
Total consumer and other
loans....................... 10,763 8.9 10,174 9.4 9,222 9.2 6,206 7.0 4,751 6.0
-------- ----- -------- ------ -------- ----- ------- ----- ------- -----
Total loans receivable....... 122,727 101.0 110,017 101.2 100,850 100.7 90,412 100.9 79,600 101.0
Less:
Unearned discount and
origination fees............. (314) (0.3) (368) (0.4) (355) (0.4) (429) (0.5) (507) (0.6)
Allowance for loan losses..... (828) (0.7) (907) (0.8) (346) (0.3) (315) (0.4) (280) (0.4)
-------- ----- -------- ------ -------- ----- ------- ----- ------- -----
Total loans receivable,
net......................... $121,585 100.0% $108,742 100.00% $100,149 100.0% $89,668 100.0% $78,813 100.0%
======== ===== ======== ====== ======== ===== ======= ===== ======= =====
</TABLE>
_______________________
(1) Includes $82.7 million, $17.5 million and $2.2 million of one- to four-
family residential loans, commercial real estate and multi-family loans,
respectively, at December 31, 1997.
(2) Includes $4.2 million and $5.3 million of home equity line of credit loans
and home equity fixed rate, fixed term loans, respectively, at December 31,
1997.
(3) Includes $1.5 million of mortgage loans held for sale at December 31, 1997.
4
<PAGE>
LOAN MATURITY SCHEDULE. The following table sets forth certain information
as of December 31, 1997, 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...... $44,173 $4,612 $14,561 $10,431 $24,165 $4,461 $102,403
Second mortgage loans..... 4,271 338 923 3,880 149 -- 9,561
Consumer and other loans.. 4,516 1,937 2,094 1,276 940 -- 10,763
------- ------ ------- ------- ------- ------ --------
Total loans.............. $52,960 $6,887 $17,578 $15,587 $25,254 $4,461 $122,727
======= ====== ======= ======= ======= ====== ========
</TABLE>
The following table sets forth at December 31, 1997, the dollar amount of
all fixed rate and adjustable rate loans due or repricing after December 31,
1998.
<TABLE>
<CAPTION>
FIXED ADJUSTABLE TOTAL
------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Real estate loans:
First mortgage loans...... $38,282 $19,948 $58,230
Second mortgage loans..... 5,290 -- 5,290
Consumer and other loans.. 5,451 796 6,247
------- ------- -------
Total loans........... $49,023 $20,744 $69,767
======= ======= =======
</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 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, 1997,
approximately 91.1% 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 (although loans originated for
sale into the secondary market can have terms up to 30 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 3% is charged on fixed-rate mortgage loans. As a result of the low
interest rate environment that has existed in recent years, many of the Bank's
borrowers have refinanced their mortgage loans with the Bank at
5
<PAGE>
lower interest rates. During years ended December 31, 1997 and 1996, 38.2% and
49.2%, respectively, of the Bank's one- to four-family mortgage loan
originations consisted of fixed-rate loans.
The Bank also originates ARM loans which serve to reduce interest rate
risk. The Bank currently originates one-year ARM loans which adjust each year at
275 basis points (100 basis points equal 1%) above the adjusted six month moving
average of the six-month Treasury bill auction discount rate. The Bank also
offers a loan product whereby the interest is fixed for the first five years and
adjusts annually thereafter. This loan product typically is originated with
terms up to 30 years. ARM loans are originated with terms ranging from 5 to 30
years. ARM loans originated by the Bank provide for maximum periodic interest
rate adjustment of 2 percent per year and an overall maximum interest rate
increase which is determined at the time the loan is originated. However, ARM
loans may not adjust to a level below the initial rate. ARMs may be offered at
an initial rate below the prevailing market rate. The Bank's one- to four-family
ARM loan originations totaled $13.2 million, $8.7 million, and $8.2 million,
during the fiscal years 1997, 1996, and 1995, respectively. The Bank requires
that borrowers qualify for ARM loans based upon the loan's fully indexed rate.
At December 31, 1997, $48.4 million, or 58.6%, of the Bank's one- to four-
family loan portfolio consisted of ARM loans. ARM loans generally pose a credit
risk in that as interest rates rise, the amount of a borrower's monthly loan
payment also rises, thereby increasing the potential for delinquencies and loan
losses. At the same time, the marketability of such loans may be adversely
affected by higher rates.
The Bank also originates loans to finance the construction of one- to four-
family owner-occupied residences. Funds are disbursed as construction
progresses. Loans to finance one- to four-family construction typically provide
for a six-month construction phase during which interest accrues and which is
deducted from the funds disbursed. Upon completion of the construction phase the
loan automatically converts to permanent financing. At December 31, 1997, the
Bank held $1.6 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 $17.5 million, or 14.3%, of the Bank's total loan
portfolio at December 31, 1997. At December 31, 1997, substantially all of the
Bank's commercial real estate loans were secured by properties located within
the Bank's market area. At December 31, 1997, the Bank's commercial real estate
loans had an average principal balance of $203,000. At that date, the largest
commercial real estate loan had a principal balance of $1.2 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 an overall interest rate cap which is determined at the time
the loan is originated. Commercial real estate loans may not adjust to a level
below the initial rate. The Bank generally offers commercial real estate loans
with from one to five year adjustment periods. The Bank generally makes
commercial real estate loans up to 75% of the appraised value of the property
securing the loan. An origination fee of up to 2% of the principal balance of
the loan is typically charged on commercial real estate loans. Commercial real
estate loans originated by the Bank generally are underwritten to mature between
5 and 20 years with an amortization schedule of between 10 and 30 years. The
Bank has in the past sold loan participations to other financial institutions
and expects to do so in the future as opportunities arise.
6
<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 $2.2
million, or 1.8%, of the Bank's total loan portfolio at December 31, 1997. At
December 31, 1997, 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, 1997, 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, 1997, the Bank's multi-family real estate loans had an average
principal balance of approximately $159,000 and the largest multi-family real
estate loan had a principal balance of $367,000, and was performing in
accordance with its terms. Multi-family real estate loans generally are offered
with adjustable interest rates tied to the adjusted six month moving average of
the six month Treasury Bill auction discount rate index with an overall interest
rate cap which is determined at the time the loan is originated. Multi-family
real estate loans may not adjust below the initial rate. Multi-family real
estate loans are underwritten to mature between 5 and 20 years, and to amortize
over 10 to 30 years. An origination fee of 1% is generally charged on multi-
family real estate loans.
In underwriting multi-family real estate loans, the Bank reviews the
expected net operating income generated by the real estate to support the debt
service, the age and condition of the collateral, the financial resources and
income level of the borrower and the borrower's experience in owning or managing
similar properties. The Bank generally requires a debt service coverage ratio of
at least 120% (net of operating expenses) of the monthly loan payment. The Bank
makes multi-family real estate loans up to 75% of the appraised value of the
property securing the loan. The Bank generally obtains personal guarantees from
all multi-family real estate borrowers.
Loans secured by multi-family real estate generally involve a greater
degree of credit risk than one-to four-family residential mortgage loans and
carry larger loan balances. This increased credit risk is a result of several
factors, including the concentration of principal in a limited number of loans
and borrowers, the effects of general economic conditions on income producing
properties, and the increased difficulty of evaluating and monitoring these
types of loans. Furthermore, the repayment of loans secured by multi-family real
estate and commercial real estate is typically dependent upon the successful
operation of the related real estate property. If the cash flow from the project
is reduced, the borrower's ability to repay the loan may be impaired.
7
<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, 1997, the disbursed
portion of home equity lines of credit totaled $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, 1997, consumer loans totaled $4.3
million, or 3.5%, of the Bank's total loan portfolio. The principal types of
consumer loans offered by the Bank are unsecured personal loans, and loans
secured by deposit accounts. Other consumer loans are offered on a fixed rate
basis with maturities generally of less than five years.
The underwriting standards employed by the Bank for consumer loans include
a determination of the applicant's credit history and an assessment of ability
to meet existing obligations and payments on the proposed loan. The stability of
the applicant's monthly income may be determined by verification of gross
monthly income from primary employment, and additionally from any verifiable
secondary income. Creditworthiness and the employment history of the applicant
are of primary consideration in originating consumer loans, and in the case of
home equity lines of credit, the Bank obtains a title guarantee, title search,
or an opinion as to the validity of title.
COMMERCIAL BUSINESS LOANS. The Bank currently offers commercial business
loans to businesses in its market area and to deposit account holders. At
December 31, 1997, the Bank had commercial business loans outstanding with an
aggregate balance of $6.5 million, of which $3.0 million consisted of commercial
lines of credit and $564,000 were lease financing arrangements. The average
commercial business loan balance was approximately $55,000. Commercial business
loans generally have fixed rates of interest. The loans are generally of short
duration with average terms of five years, but which may range up to 15 years.
Lease financing arrangements are loans which are secured by pools of leases for
medical or dental equipment or general business office equipment.
Underwriting standards employed by the Bank for commercial business loans
include a determination of the applicant's ability to meet existing obligations
and payments on the proposed loan from normal cash flows generated by the
applicant's business. The financial strength of each applicant also is assessed
through a review of financial statements provided by the applicant.
Commercial business loans generally bear higher interest rates than
residential loans, but they also may involve a higher risk of default since
their repayment is generally dependent on the successful operation of the
borrower's business. The Bank generally obtains guarantees from the borrower, a
third party, or the Small Business Administration, as a condition to originating
its commercial business loans.
LOAN ORIGINATIONS, SOLICITATION, PROCESSING, AND COMMITMENTS. Loan
originations are derived from a number of sources such as existing customers,
developers, walk-in customers, real estate broker referrals, and commissioned
mortgage loan originators. Upon receiving a loan application, the Bank obtains a
credit report and employment verification to verify specific information
relating to the applicant's
8
<PAGE>
employment, income, and credit standing. In the case of a real estate loan, an
independent appraiser approved by the Bank appraises the real estate intended to
secure the proposed loan. A loan processor in the Bank's loan department checks
the loan application file for accuracy and completeness, and verifies the
information provided. Mortgage loans of up to $150,000 may be approved by any
designated loan officer; mortgage loans in excess of $150,000 must be approved
by the Board of Directors. Commercial loans of up to $35,000 unsecured, or
$50,000 (if secured by other than real estate) may be approved by the Bank's
President or either of the two lending Vice Presidents. These individuals may
join their limits to a total approval amount of $105,000 unsecured, and $150,000
secured. Loans in excess of these limits must be approved by either the entire
Board of Directors, or a subcommittee of the Board of Directors. The Board of
Directors, at their monthly meeting, will review and verify that management's
approvals of loans are made within the scope of management's authority. Fire and
casualty insurance is required at the time the loan is made and throughout the
term of the loan, and upon request of the Bank, flood insurance may be required.
After the loan is approved, a loan commitment letter is promptly issued to the
borrower. At December 31, 1997, the Bank had commitments to originate $14.0
million of loans.
If the loan is approved, the commitment letter specifies the terms and
conditions of the proposed loan including the amount of the loan, interest rate,
amortization term, a brief description of the required collateral, and required
insurance coverage. The borrower must provide proof of fire and casualty
insurance on the property (and, as required, flood insurance) serving as
collateral, which insurance must be maintained during the full term of the loan.
Title insurance, title search, or an opinion of counsel as to the validity of
title are required on all loans secured by real property. In recent years, the
Bank has not purchased loans originated by other lenders.
ORIGINATION, PURCHASE AND SALE OF LOANS. The table below shows the Bank's
loan origination, purchase and sales activity for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995 1994
-------- -------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Loan receivable, beginning of period.................. $110,017 $100,850 $ 90,412 $79,600
Originations:
Real estate:
First mortgage (1)(3)................................ 26,281 $ 23,496 18,219 19,739
Second mortgage (2).................................. 2,178 1,912 643 2,014
Consumer and other loans:
Consumer loans....................................... 2,306 3,442 2,747 3,510
Student.............................................. -- -- 438 954
Lease financing...................................... 300 -- 1,177 459
Commercial........................................... 3,525 1,850 2,756 716
-------- -------- -------- -------
Total originations.................................. 34,590 30,700 25,980 27,392
Transfer of mortgage loans to foreclosed real estate.. 374 445 645 120
Repayments............................................ 21,506 21,088 13,774 15,791
Loan sales............................................ -- -- 1,123 669
-------- -------- -------- -------
Net loan activity..................................... 12,710 9,167 10,438 10,812
Total loans receivable at end of period.............. $122,727 $110,017 $100,850 $90,412
======== ======== ======== =======
</TABLE>
______________
(1) Includes $21.3 million, and $5.0 million in one- to four-family residential
loans and commercial real estate loans, respectively, for the year ended
December 31, 1997.
(2) Includes $2.1 million in home equity loans and a net change of $53,000 in
home equity lines of credit for the year ended December 31, 1997.
(3) Includes $1.5 million of mortgage loans held for sale originated during the
year ended December 31, 1997.
LOAN ORIGINATION FEES AND OTHER INCOME. In addition to interest earned on
loans, the Bank generally receives loan origination fees. To the extent that
loans are originated or acquired for the Bank's
9
<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, 1997, the Bank had $314,000 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 $1.0 million, $873,000, and $771,000, for
the fiscal years ended December 31, 1997, 1996, and 1995, 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, 1997, the Bank's largest lending relationship totaled $1.6 million
and consisted of loans secured by retail businesses and properties. The Bank's
second largest lending relationship totaled $1.5 million and consisted of loans
secured by commercial real estate and marketable securities. The Bank's third
largest lending relationship totaled $1.5 million and consisted of loans secured
by retail businesses and properties. The Bank's fourth largest lending
relationship totaled $1.4 million and was secured by a retail office plaza,
retail business property and residence. The Bank's fifth largest lending
relationship totaled $1.4 million and consisted of loans secured by multi-family
residential housing and residence. At December 31, 1997 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, 1997, the Bank had non-performing assets of $2.3 million, and a ratio of
non-performing
10
<PAGE>
loans and real estate owned ("REO") of 1.2% total assets. Non-performing assets
decreased $393,000, or 14.6%, to $2.3 million in 1997 from $2.7 million in 1996.
Non-performing assets, however, have increased $800,000, or 53%, from $1.5
million in 1995. While the changes in non-performing assets tend to be cyclical,
the increase over this two-year period is primarily due to higher delinquent
payments on one- to four-family and multi-family residential loans and a
$231,000 increase in commercial business loan delinquencies. The average loan-
to-value collateral ratios of the mortgages is approximately 65%. Commercial
business loans with payments due over 90 days represent two loans, one of which
has a principal balance of $220,000. This loan is in foreclosure and is 75%
guaranteed by the Small Business Administration.
Real estate acquired by the Bank as a result of foreclosure or by the deed
in lieu of foreclosure is classified as REO until such time as it is sold. These
properties are carried at the lower of their recorded amount or estimated fair
value less estimated costs to sell the property. REO totaled $767,000.
$700,000,and $586,000 at December 31, 1997, 1996,and 1995, respectively.
The largest component of REO consists of a real estate development project
which had a net book value of $483,000 at December 31, 1997. 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.
During 1997, the Bank invested an additional $276,000 to further the land for
development. The Bank has developed and sold 25 lots through December 31, 1997.
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.
11
<PAGE>
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,
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loans delinquent 90 days or more:
Real estate loans..................................... $ 1,255 $ 1,953 $ 849 $ 1,045 $ 745
Consumer loans........................................ 283 45 70 69 43
-------- -------- -------- -------- --------
Total delinquent loans............................... 1,538 1,998 919 1,114 788
Total REO............................................... 767 700 586 610 809
-------- -------- -------- -------- --------
Total nonperforming assets (1)..................... $ 2,305 $ 2,698 $ 1,505 $ 1,724 $ 1,597
======== -------- ======== ======== ========
Total loans delinquent 90 days or more
to total loans receivable (2).......................... 1.0% 1.8% 0.9% 1.2% 1.0%
Total loans delinquent 90 days or more to total assets.. 0.8% 1.1% 0.5% 0.7% 0.6%
Total nonperforming assets to total assets.............. 1.2% 1.4% 0.8% 1.0% 1.2%
Net loans receivable(3)................................. 121,585 108,742 100,149 89,668 78,813
-------- -------- -------- -------- --------
Total assets............................................ $196,770 $189,937 $180,952 $170,715 $129,270
======== ======== ======== ======== ========
</TABLE>
_______________
(1) Net of specific valuation allowances.
(2) Net of unearned discount, and the allowance for loan losses.
(3) Includes $1.5 million of mortgage loans held for sale at December 31, 1997.
During the year ended December 31, 1997, and year ended December 31, 1996,
respectively, additional gross interest income of $117,000 and $81,000 would
have been recorded on loans accounted for on a non-accrual basis if the loans
had been current throughout the period. No interest income on non-accrual loans
was included in income during the same periods.
The following table sets forth information with respect to loans past due
30-89 days in the Bank's portfolio at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loans past due 30-89 days:
Real estate loans............ $2,232 $1,867 $2,465 $1,503 $1,537
Consumer and other loans..... 296 249 133 137 423
------ ------ ------ ------ ------
Total past due 30-89 days... $2,528 $2,116 $2,598 $1,640 $1,960
====== ====== ====== ====== ======
</TABLE>
12
<PAGE>
The following table sets forth information regarding the Bank's delinquent
loans 60 days and greater and REO at December 31, 1997.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
--------------------
BALANCE NUMBER
-------- ------
(IN THOUSANDS)
<S> <C> <C>
Residential real estate:
Loans 60 to 89 days delinquent.................................... $ 679 15
Loans more than 90 days delinquent................................ 1,255 30
Consumer and commercial business loans 60 days or more delinquent.. 404 31
Real estate owned.................................................. 767 7
------ --
Total........................................................... $3,105 83
====== ==
</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 loans in its portfolio to determine whether any
loans require classification in accordance with applicable regulations.
13
<PAGE>
The following table sets forth the aggregate amount of the Bank's
internally classified assets at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------
1997 1996 1995 1994
------ ------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Substandard assets (1)...... $1,719 $1,980 $1,163 $1,534
Doubtful assets............. 55 59 34 11
Loss assets................. 16 6 5 2
------ ------ ------ ------
Total classified assets.. $1,790 $2,045 $1,202 $1,547
====== ====== ====== ======
</TABLE>
___________
(1) Includes $483,000, $250,000, $292,000 and $421,000 for a real estate
development project classified as REO at December 31, 1997, 1996, 1995 and
1994, 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.
14
<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,
---------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total loans receivable, net................................ $121,585 $108,742 $100,149 $89,668 $78,813
Average loans outstanding.................................. 113,651 104,354 95,979 84,596 78,355
Allowance balance (at beginning of period)................. 906 346 315 280 296
Provision for losses:
Real estate............................................... 121 90 53 30 10
Consumer and other loans.................................. 140 546 50 35 23
Charge-offs:
Real estate............................................... -- -- 17 14 --
Consumer and other loans.................................. 358 93 64 80 146
Recoveries:
Real estate............................................... -- -- -- 6 --
Consumer and other loans.................................. 18 17 9 58 97
-------- -------- -------- ------- -------
Allowance balance (at end of period)....................... $ 827 $ 906 $ 346 $ 315 $ 280
======== ======== ======== ======= =======
Allowance for loan losses as a percent of net loans
receivable at end of period............................... 0.7% 0.8% 0.3% 0.4% 0.4%
Loans charged off as a percent of average loans
outstanding............................................... 0.3% 0.1% 0.1% 0.1% 0.2%
Ratio of allowance for loan losses to total nonperforming
loans at end of period (1)................................ 53.8% 45.3% 37.6% 28.3% 35.5%
Ratio of allowance for loan losses to total nonperforming
assets at end of period (1)............................... 35.9% 33.6% 23.0% 18.3% 17.5%
</TABLE>
_____________
(1) Net of specific reserves.
15
<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,
--------------------------------------------------------------------------
1997 1996 1995
------------------------- ------------------------ --------------------
% 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....................... $461 91.23% $340 90.66% $ 250 90.86%
Consumer and other loans................ 366 8.77 566 9.34 96 9.14
---- ------ ---- ------ ------ ------
Total allowance for loan losses (1).... $827 100.00% $906 100.00% $ 346 100.00%
==== ====== ==== ====== ====== ======
</TABLE>
_________________
(1) Percentages include unearned discount and origination fees.
16
<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. At December 31,
1997, the Bank had investment securities with an aggregate amortized cost value
of $55.6 million and a market value of $56.8 million. At December 31, 1997, the
Bank's carrying value of investment securities consisted of $18.3 million of
corporate debt issues and $11.9 million of securities issued or guaranteed by
the United States Government or agencies thereof and state and municipal
obligations. The corporate debt issues primarily consist of financial
corporation debt and industrial debentures (the largest single issue was $1.0
million). These issues generally have maturities 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, 1997, the Bank held $1.1 in common stock and $1.8 million in an equity
mutual fund. At December 31, 1997, the Bank had invested $23.2 million in
mortgage-backed securities, net. Mortgage-backed securities, like mortgage
loans, amortize over the life of the security as the underlying mortgages are
paid down. The speed at which principal payments above normally scheduled
amortization occurs, is generally unpredictable. Historically, the securities
have paid down more rapidly in a falling interest rate environment, thereby
shortening the life of the security. Likewise, in a rising interest rate
environment, the life of the mortgage-backed security tends to extend. The
result is that, generally, the Bank will receive more investable funds in lower
interest rate environments and less investable funds during periods of higher
interest rates. The embedded option on the part of the underlying mortgagee to
prepay the loan, therefore, tends to impact the value of the security and can
adversely impact the Bank's net interest margin. The Bank's investments are,
generally, liquid, and therefore allow the Bank to respond more readily to
changing market conditions. The investment portfolio is accounted for in
accordance with FASB Statement 115. At December 31, 1997, the Bank's available-
for-sale and held-to-maturity portfolios had carrying values of $51.7 million
and $5.1 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 2 to the Notes to
Financial Statements.
17
<PAGE>
INVESTMENT PORTFOLIO. The following table sets forth the carrying value of
the Bank's investment portfolio at the dates indicated. At December 31, 1997,
the market value of the Bank's investments was approximately $56.8 million. The
market value of investments includes interest-earning deposits, and mortgage-
backed securities.
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------
1997 1996 1995 1994
------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Investment securities:
U.S. Government and agency obligations................. $ 4,856 $ 5,879 $ 8,171 $ 6,070
State and municipal obligations........................ 6,636 6,172 5,297 3,072
Corporate debt issues.................................. 18,121 22,060 28,533 33,192
Equity securities...................................... 1,139 557 69 87
Mutual funds........................................... 1,785 1,178 1,865 5,872
------- ------- ------- -------
32,537 35,846 43,935 48,293
Unrealized gain (loss) on available for sale portfolio.. 1,126 827 996 (158)
------- ------- ------- -------
Total investment securities........................... 33,663 36,673 $44,931 $48,135
------- ------- ------- -------
Interest-earning deposits in other institutions......... -- -- -- 2,043
Federal funds sold...................................... -- 1,550 8,200 11,584
------- ------- ------- -------
Total investments.................................... $33,663 $38,223 $53,131 $61,762
======= ======= ======= =======
Mortgage-backed securities, net:
Adjustable rate........................................ 3,823 4,787 2,812 247
Fixed rate............................................. 19,200 18,179 5,100 769
------- ------- ------- -------
23,023 22,966 7,912 1,016
Unrealized gain (loss) on available for sale portfolio.. 135 (137) 41 (24)
------- ------- ------- -------
Total mortgage-backed securities, net................ $23,158 $22,829 $ 7,953 $ 992
======= ======= ======= =======
</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, 1997.
<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.............................. $ 220 $ 222 2.286 6.83%
U.S. Government agency................................ 4,636 4,662 6.480 6.97
State and municipal obligations....................... 6,636 7,060 7.433 5.73
Corporate debt issues................................. 18,121 18,345 2.791 7.07
Marketable equity securities.......................... 2,924 3,400 -- 6.85
------- ------- ----- -----
Total............................................. $32,537 $33,689 6.761
------- ======= =====
Unrealized gain on available for sale portfolio..... 1,126
-----
Carrying value of investment securities................. $33,663
=======
Investment securities held to maturity: (1)
Corporate debt obligations............................ $ 5,115 5,141 1.409 7.173
======= ======= ===== =====
</TABLE>
__________________
(1) The information is included above as a component of corporate debt issues.
18
<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, 1997. Yield is calculated on the
amortized cost to maturity.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
----------------------------------------------------------------------------------------
ONE YEAR OR LESS ONE TO FIVE YEARS FIVE TO TEN YEARS MORE THAN TEN YEARS
-------------------- -------------------- --------------------- --------------------
ANNUALIZED ANNUALIZED ANNUALIZED ANNUALIZED
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
-------- ---------- -------- ---------- -------- ---------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Debt investment securities:
U.S. Agency securities................... -- -- $1,084 7.010% $ 3,514 6.919% $ 38 9.429%
U.S. Government securities............... -- -- 201 6.420 -- -- 19 11.154
State and municipal obligations.......... 251 6.408 1,502 5.954 3,422 5.562 1,461 5.644
Corporate debt issues.................... 8,655 7.579 3,329 6.604 4,382 7.069 1,755 7.124
------- ----- ------ ----- ------- ----- ------- ------
Total.............................. $ 8,906 7.546 $6,116 6.510 $11,318 6.567 $ 3,273 6.514
======= ====== ======= =======
Equity and mortgage-backed securities:
Mutual funds............................. $ 1,785 0.700% $ -- --% $ -- --% $ -- --%
Mortgage-backed securities............... -- -- 1,249 6.789 4,236 7.048 17,538 6.957
Common stock............................. 1,139 6.153 -- -- -- -- -- --
------- ----- ------ ----- ------- ----- ------- ------
Total.............................. $ 2,924 2.824 $1,249 6.789 $ 4,236 7.048 $17,538 6.957
======= ====== ======= =======
Total investment securities........ $11,830 6.379 $7,365 6.558 $15,554 6.698 $20,811 6.887
======= ====== ======= =======
Unrealized gain on available for sale portfolio
Total carrying value.............
Investment securities held to maturity: (1)
Corporate debt obligations............... $ 4,271 7.328 -- -- $ 774 6.592 $ 70 4.131
------- ------ ------- -------
Total securities..................... $ 4,271 7.328 $ 0 0.000% $ 774 6.592 $ 70 4.131
======= ====== ======= =======
<CAPTION>
AT DECEMBER 31, 1997
--------------------------------
TOTAL INVESTMENT SECURITIES
ANNUALIZED
WEIGHTED
CARRYING MARKET AVERAGE
VALUE VALUE YIELD
-------- ------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Debt investment securities:
U.S. Agency securities.............................. $ 4,636 $ 4,662 6.975%
U.S. Government securities.......................... 220 222 6.816
State and municipal obligations..................... 6,636 7,060 5.730
Corporate debt issues............................... 18,121 18,345 7.070
------- ------- -----
Total......................................... $29,613 $30,289 6.753
======= =======
Equity and mortgage-backed securities:
Mutual funds........................................ $ 1,785 $ 1,785 0.700%
Mortgage-backed securities.......................... 23,023 23,158 6.964
Preferred stock..................................... -- -- --
Common stock........................................ 1,139 1,615 6.153
------- ------- -----
Total......................................... $25,947 $26,558 6.497
======= =======
Total investment securities................... $55,560 $56,847 6.634
======= =======
Unrealized gain on available for sale portfolio....... 1,261
-------
Total carrying value.......................... $56,821
=======
Investment securities held to maturity: (1)
Corporate debt obligations.......................... $ 5,115 $ 5,141 7.173
------- -------
Total securities................................ $ 5,115 $ 5,141 7.173
======= =======
</TABLE>
____________________________________
(1) The information is included as a component of debt investment securities.
19
<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 generally does not currently offer premium rates for such deposits.
Deposit account terms vary according to the minimum balance required, the period
of time during which the funds must remain on deposit, and the interest rate,
among other factors. The Bank has a committee which meets weekly to evaluate the
Bank's internal cost of funds, surveys rates offered by competing institutions,
reviews the Bank's cash flow requirements for lending and liquidity and the
number of certificates of deposit maturing in the upcoming week. This committee
executes rate changes when deemed appropriate. The Bank does not obtain funds
through brokers, nor does it solicit funds outside its market area.
DEPOSIT PORTFOLIO. The following table sets forth information regarding
interest rates, terms, minimum amounts and balances of the Bank's savings and
other deposits as of December 31, 1997:
<TABLE>
<CAPTION>
WEIGHTED PERCENTAGE
AVERAGE MINIMUM OF TOTAL
INTEREST RATE MINIMUM TERM CHECKING AND SAVINGS DEPOSITS AMOUNT BALANCES DEPOSITS
- ------------- ------------ ----------------------------- ------ -------- --------
(IN THOUSANDS)
<C> <S> <C> <C> <C> <C>
0.000 None Non-interest demand account $ 50 $ 7,644 5.03%
2.560 None NOW accounts 500 13,306 8.75
3.010 None Passbook and club accounts 100 63,937 42.05
2.849 None Money market accounts 2,500 113 0.07
CERTIFICATES OF DEPOSIT
-----------------------
4.942 6 months Fixed term, fixed rate 2,500 5,247 3.45%
5.653 9 months Fixed term, fixed rate 1,000 100 0.07
5.608 12 months Fixed term, fixed rate 1,000 19,423 12.77
6.091 15 months Fixed term, fixed rate 1,000 10,025 6.59
4.969 18 months Fixed term, variable rate 1,000 1,856 1.22
5.557 18 months Fixed term, fixed rate 1,000 2,617 1.72
5.640 24 months Fixed term, fixed rate 1,000 3,445 2.27
5.820 30 months Fixed term, fixed rate 1,000 4,368 2.87
6.036 36 months Fixed term, fixed rate (1) 1,000 5,443 3.58
6.064 48 months Fixed term, fixed rate (1) 1,000 4,718 3.10
6.050 60 months Fixed term, fixed rate 1,000 1,627 1.07
6.779 84 months Fixed term, fixed rate 1,000 7,641 5.03
6.194 60 through 120 months Fixed term, fixed rate 1,000 549 0.36
-------- ------
TOTAL $152,059(2) 100.00
======== ======
</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.
(2) Table excludes escrow accounts totalling $340,000 at December 31, 1997.
20
<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 BALANCE PERCENT
AT OF INCR. AT OF INCR. AT OF INCR.
12/31/97 DEPOSITS (DECR) 12/31/96 DEPOSITS (DECR) 12/31/95 DEPOSITS (DECR)
-------- -------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Club accounts................... $ 792 0.52% $ 131 $ 661 0.42% $ 110 $ 551 0.3% $ (67)
Noninterest accounts............ 7,644 5.03 303 7,341 4.63 129 7,212 4.6 1,124
NOW accounts.................... 13,306 8.75 224 13,082 8.24 917 12,165 7.7 (912)
Passbooks....................... 63,145 41.53 (1,828) 64,973 40.94 (5,495) 70,468 44.6 (7,027)
Money market deposit accounts... 113 0.07 (61) 174 0.11 (78) 252 0.2 (532)
Time deposits which mature:
Within 12 months............... 38,860 25.56 (14,075) 52,935 33.36 15,011 37,924 24.0 10,762
Within 12-36 months............ 22,611 14.87 7,679 14,933 9.41 (5,968) 20,901 13.2 (1,977)
Beyond 36 months............... 5,588 3.67 990 4,598 2.90 (3,914) 8,512 5.4 850
-------- ------ -------- -------- ----- -------- -------- ----- --------
Total........................ $152,059 100.00% $ (6,637) $158,697 100.0% $ 712 $157,985 100.0% $ 2,221
======== ====== ======== ======== ===== ======== ======== ===== ========
<CAPTION>
BALANCE PERCENT BALANCE
AT OF INCR. AT
12/31/94 DEPOSITS (DECR) 12/31/93
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Club accounts................... $ 618 0.4% $ 304 $ 314
Noninterest accounts............ 6,088 3.9 1,056 5,032
NOW accounts.................... 13,077 8.4 6,208 6,869
Passbooks....................... 77,495 49.8 8,911 68,584
Money market deposit accounts... 784 0.5 546 238
Time deposits which mature:
Within 12 months............... 27,162 17.4 9,104 18,058
Within 12-36 months............ 22,878 14.7 15,718 7,160
Beyond 36 months............... 7,662 4.9 (1,427) 9,089
-------- ----- -------- --------
Total........................ $155,764(1) 100.0% $ 40,420 $115,344
======== ===== ======== ========
</TABLE>
- ------------------
(1) Table excludes escrow accounts totalling $340,000 at December 31, 1997.
21
<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,
------------------------------------------
1997 1996 1995 1994
------- -------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
RATE
- ----
3.00% or less.......................... $ 139 $ 180 $ 274 $ 136
3.01 - 4.99%........................... 7,253 10,665 3,601 24,210
5.00 - 6.99%........................... 55,228 57,128 58,313 28,010
7.00 - 8.99%........................... 4,552 4,667 5,347 5,009
9.00 - 10.99%.......................... -- -- 53 337
-------- -------- -------- --------
$ 67,172 $ 72,640 $ 67,588 $ 57,702
======== ======== ======== ========
</TABLE>
The following table sets forth the amount and maturities of certificates of
deposit at December 31, 1997.
<TABLE>
<CAPTION>
---------------------------------------------------------------------
AMOUNT DUE
LESS THAN 1-2 2-3 3-4 4-5 AFTER 5
ONE YEAR YEARS YEARS YEARS YEARS YEARS TOTAL
---------- --------- -------- -------- ------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
RATE
3.00% or less............................. $ 139 $ -- $ -- $ -- $ -- $ -- $ 139
3.01 - 3.99%.............................. 6 10 -- -- -- -- 16
4.00 - 4.99%.............................. 6,475 755 6 -- -- -- 7,237
5.00 - 5.99%.............................. 27,770 14,113 2,609 1,645 549 1,454 48,140
6.00 - 6.99%.............................. 1,927 1,412 2,498 289 732 230 7,088
7.00 - 7.99%.............................. -- 3,669 -- -- 764 4,433
8.00% and above........................... -- 119 -- -- -- -- 119
------- ------- ------ ------ ------ ------ -------
$36,317 $20,078 $5,113 $1,934 $1,281 $2,448 $67,172
======= ======= ====== ====== ====== ====== =======
</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,
1997.
<TABLE>
<CAPTION>
CERTIFICATES
OF DEPOSIT
OF $100,000
REMAINING MATURITY OR MORE
------------------ ---------------
(IN THOUSANDS)
<S> <C>
Three months or less................................................ $ 1,768
Three through six months............................................ 1,535
Six through twelve months........................................... 2,010
Over twelve months.................................................. 3,142
--------
Total............................................................ $ 8,455
========
</TABLE>
The following table sets forth the net changes in the deposit activities of
the Bank for the periods indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------------------------
1997 1996 1995 1994
-------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at beginning of period................................................ $158,697 $157,985 $155,764 $115,344
Net deposits (withdrawals).................................................... (12,920) (5,611) (4,034) 35,727
Interest credited............................................................. 6,283 6,323 6,255 4,693
-------- -------- -------- --------
Ending balance................................................................ 152,060 158,697 157,985 155,764
-------- -------- -------- --------
Net increase (decrease) in deposits........................................... $ (6,637) $ 712 $ 2,251 $ 40,420
======== ======== ======== ========
</TABLE>
22
<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,
1997, the Bank had $7.9 million in funds obtained from repurchase agreements
outstanding, $5.8 million in an overnight line of credit, and $4.5 million in
term advances. The Bank is a member of the Federal Home Loan Bank System.
The following table summarizes the outstanding balance of short-term
borrowing of the Bank for the years indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
------------------------
1997 1996 1995
-------- ------- -----
(In thousands)
<S> <C> <C> <C>
Overnight Line of Credit $ 5,750 $ -- $ --
Term borrowings (original term)
90 days or less 7,942 7,610 --
1 year 3,550 -- --
2 year 1,000 -- --
------- ------ -----
Balance at end of period $18,242 $7,610 $ --
======= ====== =====
Daily average during the year 10,212 1,472 --
Maximum month-end balance 18,892 7,610 --
Weighted average rate during the year 5.92% 5.90% --
Year-end average rate 5.84% 5.47% --
</TABLE>
PERSONNEL
As of December 31, 1997, the Bank had 59 full-time and 18 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.
23
<PAGE>
Any change in such regulation, whether by the Department, the FDIC or through
legislation, could have a material adverse impact on the Holding Company, the
Bank, and their operations and stockholders. The Company is also required to
file certain reports with, and otherwise comply with the rules and regulations
of, the FRB and the Department and the FDIC which administers the provisions of
the Securities Exchange Act of 1934. Certain of the regulatory requirements
applicable to the Bank and to the Company are referred to below or elsewhere
herein.
The exercise by an FDIC-insured savings bank of the lending and investment
powers of a savings bank under the New York State Banking Law is limited by FDIC
regulations and other federal law and regulations. In particular, the
applicable provisions of New York State Banking Law and regulations governing
the investment authority and activities of an FDIC insured state-chartered
savings bank have been substantially limited by the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA") and the FDIC regulations issued
pursuant thereto.
The Bank derives its lending, investment and other authority primarily from
the applicable provisions of New York State Banking Law and the regulations of
the Banking Department, as limited by FDIC regulations. Under these laws and
regulations, savings banks, including the Bank, may invest in real estate
mortgages, consumer and commercial loans, certain types of debt securities,
including certain corporate debt securities and obligations of federal, state
and local governments and agencies, certain types of corporate equity securities
and certain other assets. Under the statutory 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
24
<PAGE>
participating directly or indirectly in the voting on such loan, (ii) the loan
must be on terms that are not more favorable than those offered to unaffiliated
third parties, and (iii) the loan must not involve more than a normal risk of
repayment or present other unfavorable features.
Under the New York State Banking Law, the Superintendent of Banks (the
"Superintendent") may issue an order to a New York State chartered banking
institution to appear and explain an apparent violation of law, to discontinue
unauthorized or unsafe practices and to keep prescribed books and accounts.
Upon a finding by the Department that any director, trustee or officer of any
banking organization has violated any law, or has continued unauthorized or
unsafe practices in conducting the business of the banking organization after
having been notified by the Superintendent to discontinue such practices, such
director, trustee or officer may be removed from office after notice and an
opportunity to be heard. The Bank does not know of any past or current
practice, condition or violation that might lead to any proceeding by the
Superintendent or the Department against the Bank or any of its directors or
officers.
STANDARDS FOR SAFETY AND SOUNDNESS. FDICIA requires the federal bank
regulatory agencies to prescribe regulatory standards for all insured depository
institutions and depository institution holding companies relating to: (i)
internal controls, information systems and audit systems; (ii) loan
documentation; (iii) credit underwriting; (iv) interest rate risk exposure; (v)
asset growth; and (vi) compensation, fees and benefits. The compensation
standards would prohibit employment contracts, compensation or benefit
arrangements, stock option plans, fee arrangements or other compensatory
arrangements that provide excessive compensation, fees or benefits or could lead
to material financial loss. In addition the federal banking regulatory agencies
are required to prescribe by regulation standards specifying: (i) maximum
classified assets to capital ratios; (ii) minimum earnings sufficient to absorb
losses without impairing capital; and (iii) to the extent feasible, a minimum
ratio of market value to book value for publicly traded shares of depository
institutions and depository institution holding companies. In November 1993,
the federal banking agencies, including the FDIC, proposed regulations regarding
the implementation of these standards.
OTHER DEPOSIT INSURANCE REFORMS. FDICIA amended the FDI Act to prohibit
insured depository institutions that are not well-capitalized from accepting
brokered deposits unless a waiver has been obtained from the FDIC. Deposit
brokers are required to register with the FDIC.
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
25
<PAGE>
Guidelines for Real Estate Lending Policies (the "Interagency Guidelines") that
have been adopted by the federal banking regulators.
The Interagency Guidelines, among other things, require depository
institutions to establish internal loan-to-value limits for real estate loans
that are not in excess of the following supervisory limits: (i) for loans
secured by undeveloped land, the supervisory loan-to-value limit is 65% of the
value of the collateral; (ii) for land development loans, the supervisory limit
is 75%; (iii) for loans for the construction of commercial, multi-family or
other nonresidential property, the supervisory limit is 80%; (iv) for loans for
the construction of one- to four- family properties, the supervisory limit is
85%; and (v) for loans secured by other improved property (e.g. farmland,
commercial property and other income-producing property including non-owner-
occupied, one- to four- family property) the supervisory limit is 85%.
The Interagency Guidelines indicate that on a case-by-case basis it may be
appropriate to originate or purchase loans with loan-to-value ratios in excess
of the supervisory loan-to-value limits, based on the support provided by other
credit factors. The aggregate amount of loans in excess of the supervisory
loan-to-value limits, however, should not exceed 100% of total capital and the
total of such loans secured by commercial, agricultural, multi-family and other
non-one- to four- family residential properties should not exceed 30% of total
capital.
The supervisory loan-to-value limits do not apply to certain categories of
loans including loans insured or guaranteed by the United States Government and
its agencies or by financially capable state, local or municipal governments or
agencies, loans backed by the full faith and credit of state governments, loans
that are to be sold promptly after origination without recourse to a financially
responsible party, loans that are renewed, refinanced or restructured in
connection with a workout, loans to facilitate sales of real estate acquired by
the institution in the ordinary course of collecting a debt previously
contracted and loans where the real estate is not the primary collateral.
INSURANCE OF DEPOSIT ACCOUNTS
The Bank is a member of the Bank Insurance Fund ("BIF"). The BIF has
achieved the required reserve ratio of 1.25% of insured reserve deposits. At
December 31, 1997 the Bank held $24.6 million in deposits which are insured by
the Savings Association Insurance Fund. The Bank paid $33,000 in federal
deposit insurance premiums for the fiscal year ended December 31, 1997, as
compared to $236,000 in 1996.
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, 1997, 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
26
<PAGE>
requirement is 3% plus additional capital of at least 100 to 200 basis points.
Core capital (also referred to as "Tier 1 capital") is comprised of the sum of
common stockholders' equity, non-cumulative perpetual preferred stock (including
any related surplus) and minority interests in consolidated subsidiaries, minus
all intangible assets (other than qualifying servicing rights).
The FDIC also requires that savings banks meet a risk-based capital
standard. The risk-based capital standard requires the maintenance of total
capital (which is defined as core capital and supplementary capital) to risk-
weighted assets of at least 8% and core capital to risk-weighted assets of at
least 4%. In determining the amount of risk-weighted assets, all assets, plus
certain off-balance sheet items, are multiplied by a risk-weight of 0% to 100%,
based on the risks the FDIC believes are inherent in the type of asset or off-
balance sheet item. The components of core capital are equivalent to those
discussed above under the leverage capital ratio requirement. The components of
supplementary capital currently include cumulative perpetual preferred stock,
perpetual preferred stock, mandatory convertible securities, subordinated debt,
intermediate preferred stock and allowance for possible loan and lease losses.
Allowance for possible loan and lease losses includable in supplementary capital
is limited to a maximum of 1.25% of risk-weighted assets. Overall, the amount
of capital counted toward supplementary capital cannot exceed 100% of core
capital.
LOANS-TO-ONE-BORROWER LIMITATIONS
With certain limited exceptions, a New York State chartered savings bank
may not make unsecured loans or extend credit for commercial, corporate or
business purposes (including lease financing) to a single borrower, the
aggregate amount of which would be in excess of 15% of the bank's net worth. In
addition, the Bank may make secured loans or extensions of credit to a single
borrower which aggregate 25% of the Bank's net worth provided that the
underlying collateral is valued in an amount equal to at least 10% of the Bank's
net worth. The Bank currently complies with all applicable loans-to-one-
borrower limitations.
COMMUNITY REINVESTMENT ACT
Federal Regulation. Under the Community Reinvestment Act ("CRA"), as
implemented by FDIC regulations, a savings institution has a continuing and
affirmative obligation consistent with its safe and sound operation to help meet
the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the FDIC, in connection with its examination of a savings institution,
to assess the institution's record of meeting the credit needs of its community
and to take such record into account in its evaluation of certain applications
by such institution. The Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA") amended the CRA to require, effective July 1,
1990, public disclosure of an institution's CRA rating and require the FDIC to
provide a written evaluation of an institution's CRA performance utilizing a
four-tiered descriptive rating system which replaced the five-tiered numerical
rating system.
New York State Regulation. The Bank is also subject to provisions of the
New York State Banking Law which impose continuing and affirmative obligations
upon banking institutions organized in New York State to serve the credit needs
of its local community ("NYCRA") which are substantially similar to those
imposed by the CRA. Pursuant to the NYCRA, a bank must file an annual NYCRA
report and copies of all federal CRA reports with the Banking Department. The
NYCRA requires the Banking Department to make an annual written assessment of a
bank's compliance with the NYCRA, utilizing a four-tiered rating
27
<PAGE>
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, 1997, the Bank complied with its NYCRA
requirements.
The Bank's CRA rating as of its latest examination was satisfactory.
FEDERAL RESERVE SYSTEM
Under Federal Reserve Board regulations, the Bank is required to maintain
noninterest-earning reserves against its transaction accounts (primarily NOW and
regular checking accounts). At December 31, 1997, the Bank complied with these
requirements.
HOLDING COMPANY REGULATION
The Company is a registered bank holding company pursuant to the Bank
Holding Company Act of 1956, as amended (the "BHCA"). The Company is subject to
examination, regulation and periodic reporting under the BHCA, as administered
by the FRB. The FRB has adopted capital adequacy guidelines for bank holding
companies (on a consolidated basis) substantially similar to those of the FDIC
for the Bank. The Company's consolidated capital exceeds these requirements.
A bank holding company is generally prohibited from engaging in, or
acquiring direct or indirect control of any company engaged in, non-banking
activities. One of the principal exceptions to this prohibition is for
activities found by the FRB to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto. Some of the principal
activities that the FRB has determined by regulation to be so closely related to
banking are: (i) making or servicing loans; (ii) performing certain data
processing services: (iii) providing securities brokerage services; (iv) acting
as fiduciary, investment or financial advisor; (v) leasing personal or real
property; (vi) making investments in corporations or projects designed primarily
to promote community welfare; and (vii) acquiring a savings and loan
association.
Subsidiary banks of a bank holding company are subject to certain
restrictions imposed by the FRA on any extension of credit to the bank holding
company or its subsidiaries, and on the acceptance of stocks or securities of
such holding company or its subsidiaries as collateral, and on the acceptance of
such stocks or securities as collateral for loans. In addition, related
provisions of the FRA and FRB regulations limit the amount of, and establish
required procedures and credit standards with respect to, loans and other
extensions of credit to officers, directors and principal stockholders of the
Bank, the Company, any subsidiary of the Company and related interests of such
persons. Moreover, subsidiaries of bank holding companies are prohibited from
engaging in certain tie-in arrangements (with the Company or any of its
subsidiaries) in connection with any extension of credit, lease or sale of
property or furnishing of services.
The Company and the Bank will be affected by the monetary and fiscal
policies of various agencies of the United States Government, including the
Federal Reserve System. In view of changing conditions in the national economy
and in the money markets, it is impossible for management of the Company to
accurately predict future changes in monetary policy or the effect of such
changes on the business or financial condition of the Company.
28
<PAGE>
NEW YORK STATE BANK HOLDING COMPANY REGULATION. In addition to the federal
bank holding company regulations, a bank holding company organized or doing
business in New York State also may be subject to regulation under the New York
State Banking Law. The term "bank holding company," for the purposes of the New
York State Banking Law, is defined generally to include any person, company or
trust that directly or indirectly either controls the election of a majority of
the directors or owns, controls or holds with power to vote more than 10% of the
voting stock of a bank holding company or, if the Company is a banking
institution, another banking institution, or 10% or more of the voting stock of
each of two or more banking institutions. In general, a bank holding company
controlling, directly or indirectly, only one banking institution will not be
deemed to be a bank holding company for the purposes of the New York State
Banking Law. Under New York State Banking Law, the prior approval of the
Banking Department is required before: (1) any action is taken that causes any
company to become a bank holding company; (2) any action is taken that causes
any banking institution to become or be merged or consolidated with a subsidiary
of a bank holding company; (3) any bank holding company acquires direct or
indirect ownership or control of more than 5% of the voting stock of a banking
institution; (4) any bank holding company or subsidiary thereof acquires all or
substantially all of the assets of a banking institution; or (5) any action is
taken that causes any bank holding company to merge or consolidate with another
bank holding company. Additionally, certain restrictions apply to New York
State bank holding companies regarding the acquisition of banking institutions
which have been chartered five years or less and are located in smaller
communities. Officers, directors and employees of New York State bank holding
companies are subject to limitations regarding their affiliation with securities
underwriting or brokerage firms and other bank holding companies and limitations
regarding loans obtained from its subsidiaries. Although the Company will not
be a bank holding company for purposes of New York State law, any future
acquisition of ownership, control, or the power to vote 10% or more of the
voting stock of another bank or bank holding company would cause it to become
such.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION. The following discussion of federal taxation is intended
only to summarize certain pertinent federal income tax matters and is not a
comprehensive description of the tax rules applicable to the Company or the
Bank.
BAD DEBT RESERVES. Prior to the 1996 Act, the Bank was permitted to
establish a reserve for bad debts and to make annual additions to the reserve.
These additions could, within specified formula limits, be deducted in arriving
at the Bank's taxable income. As a result of the 1996 Act, the Bank must use
the specific charge off method in computing its bad debt deduction beginning
with its 1996 Federal tax return. In addition, the federal legislation requires
the recapture (over a six year period) of the excess of tax bad debt reserves at
December 31, 1995 over those established as of December 31, 1987.
TAXABLE DISTRIBUTIONS AND RECAPTURE. Prior to the 1996 Act, bad debt
reserves created prior to January 1, 1988 were subject to recapture into taxable
income should the Bank fail to meet certain thrift asset and definitional tests.
New federal legislation eliminated these thrift related recapture rules.
However, under current law, pre-1988 reserves remain subject to recapture should
the Bank make certain non-dividend distributions.
MINIMUM TAX. The Code imposes an alternative minimum tax ("AMT") at a
rate of 20% on a base of regular taxable income plus certain tax preferences
("alternative minimum taxable income" or "AMTI"). The AMT is payable to the
extent such AMTI is in excess of an exemption amount. Net operating losses can
offset no more than 90% of AMTI. Certain payments of alternative minimum tax
may
29
<PAGE>
be used as credits against regular tax liabilities in future years. The Bank
has not been subject to the alternative minimum tax and has no such amounts
available as credits for carryover.
NET OPERATING LOSS CARRYOVERS. A financial institution may carry back net
operating losses to the preceding two taxable years and forward to the
succeeding 20 taxable years. This provision applies to losses incurred in
taxable years beginning after August 5, 1997. At December 31, 1997, the Bank had
no net operating loss carryforwards for federal income tax purposes.
The Internal Revenue Service has examined the federal income tax return for
the fiscal year ended 1992; the fiscal year-end tax returns for 1991, 1993, 1994
and 1995 remain open. See Note 12 to the Financial Statements.
STATE TAXATION
NEW YORK TAXATION. The Bank is subject to the New York State Franchise Tax
on Banking Corporations in an annual amount equal to the greater of (i) 9% of
the Bank's "entire net income" allocable to New York State during the taxable
year, or (ii) the applicable alternative minimum tax. The alternative minimum
tax is generally the greater of (a) 0.01% of the value of the Bank's assets
allocable to New York State with certain modifications, (b) 3% of the Bank's
"alternative entire net income" allocable to New York State, or (c) $250.
Entire net income is similar to federal taxable income, subject to certain
modifications (including the fact that net operating losses cannot be carried
back or carried forward) and alternative entire net income is equal to entire
net income without certain modifications.
DELAWARE STATE TAXATION. As a Delaware holding company not earning income
in Delaware, the Company is exempt from Delaware corporate income tax but is
required to file an annual report with and pay an annual franchise tax to the
State of Delaware.
ITEM 2. PROPERTIES
- --------------------
The Bank conducts its business through its main office located in Oswego,
New York, and four full service branch offices located in Oswego County. The
following table sets forth certain information concerning the main office and
each branch office of the Bank at December 31, 1997. The aggregate net book
value of the Bank's premises and equipment was $3.7 million at December 31,
1997. For additional information regarding the Bank's properties, see Note 5 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
</TABLE>
30
<PAGE>
<TABLE>
<S> <C> <C> <C>
Fulton Branch 1994 Owned --
- -------------
114 Oneida Street
Fulton, New York 13068
</TABLE>
_____________________________
(1) The property is owned; the underlying land is leased.
ITEM 3. LEGAL PROCEEDINGS
- ---------------------------
There are various claims and lawsuits to which the Company is periodically
involved incident to the Company's business. In the opinion of management, such
claims and lawsuits in the aggregate are immaterial to the Company's
consolidated financial condition and results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -------------------------------------------------------------
No matters were submitted to a vote of stockholders during the fourth
quarter of the year under report.
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
- -------------------------------------------------------------------------------
The "Market for Common Stock" section of the Company's Annual Report to
Stockholders is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
- ---------------------------------
The selected financial information for the year ended December 31, 1997 is
filed as part of the Company's Annual Report to Stockholders and is incorporated
by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- -------------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
The "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section of the Company's Annual Report to Stockholders is
incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------
The information required by this item is set forth under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Annual Report to Stockholders which is incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- -----------------------------------------------------
The financial statements are contained in the Company's Annual Report to
Stockholders and are incorporated herein by reference.
31
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- -------------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
None.
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
- ---------------------------------------------------------
(a) Information concerning the directors of the Company is incorporated by
reference hereunder in the Company's Proxy Materials for the Annual Meeting of
Stockholders.
(b) Set forth below is information concerning the Principal Officers of the
Company.
<TABLE>
<CAPTION>
NAME AGE POSITIONS HELD WITH THE COMPANY
- --------------------- --- ----------------------------------------
<S> <C> <C>
Chris C. Gagas 67 Chairman of the Board, President and Chief
Executive Officer
Anita J. Austin 48 Internal Auditor
Melissa A. Dashnau 40 Vice President, Secretary
James A. Dowd, CPA 30 Controller
Edgar J. Manwaring 52 Vice President--Lending
Gregory L. Mills 37 Vice President, Director of Marketing, Branch
Administrator
W. David Schermerhorn 37 Executive Vice President-Lending
Thomas W. Schneider 37 Executive Vice President and Chief Financial
Officer
Barry S. Thompson 43 Senior Vice President, Compliance Officer and
Security Officer
</TABLE>
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
Information with respect to management compensation and transactions
required under this item is incorporated by reference hereunder in the Company's
Proxy Materials for the Annual Meeting of Stockholders under the caption
"Compensation".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
The information contained under the sections captioned "Stock Ownership of
Management" is incorporated by reference to the Company's Proxy Materials for
its Annual Meeting of Stockholders.
32
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
The information required by this item is set forth under the caption
"Certain Transactions" in the Definitive Proxy Materials for the Annual Meeting
of Stockholders and is incorporated herein by reference.
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------
(a)(1) Financial Statements
--------------------
The exhibits and financial statement schedules filed as a part of this Form 10-
K are as follows:
(A) Independent Auditors' Report;
(B) Consolidated Statements of Condition - December 31, 1997
and 1996.
(C) Consolidated Statements of Income - years ended December 31,
1997, 1996 and 1995;
(D) Consolidated Statements of Stockholders' Equity - years ended
December 31, 1997, 1996 and 1995
(F) Consolidated Statements of Cash Flows - years ended December
31, 1997, 1996 and 1995; and
(G) Notes to Consolidated Financial Statements.
(a)(2) Financial Statement Schedules
-----------------------------
All financial statement schedules have been omitted as the required
information is inapplicable or has been included in the Notes to Consolidated
Financial Statements.
(b) Reports on Form 8-K
-------------------
The Company has not filed a Current Report on Form 8-K during the fourth
quarter of the fiscal year ended December 31, 1997.
(c) Exhibits
--------
3.1 Certificate of Incorporation of Pathfinder Bancorp, Inc.
Incorporated herein by reference to the Company's
registration statement on S-4, file no. 333-36051 (the "
S-4")
3.2 Bylaws of Pathfinder Bancorp, Inc. (Incorporated herein
by reference to the Company's S-4
33
<PAGE>
4 Form of Stock Certificate of Pathfinder Bancorp, Inc.
Incorporated by reference to the Company's S-4
10.1 Form of Oswego City Savings Bank 1997 Stock Option Plan
Incorporated by reference to the Company's S-4
10.2 Form of Oswego City Savings Bank 1997 Recognition and
Retention Plan Incorporated by reference to the Company's
S-4
10.3 Employment Agreement between the Bank and Chris C. Gagas,
President and Chief Executive Officer Incorporated by
reference to the Company's S-4
10.4 Employment Agreement between the Bank and Thomas W.
Schneider, Vice President and Chief Financial Officer
Incorporated by reference to the Company's S-4
10.5 Employment Agreement between the Bank and W. David
Schermerhorn, Vice President - Loan Administration
Incorporated by reference to the Company's S-4
13 Annual Report to Stockholders
21 Subsidiaries of Company
27 Financial Data Schedule
34
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Company has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
PATHFINDER BANCORP, INC.
Date: March 30, 1998 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, Executive
Chief Executive Officer and Vice President and Chief
Chairman of the Board Financial Officer (Principal
(Principal Executive Officer) Financial Officer)
Date: March 30, 1998 Date: March 30, 1998
By:/s/ James A. Dowd By:/s/ Chris R. Burritt
-------------------------------- ---------------------------------
James A. Dowd, Controller Chris R. Burritt, Director
(Principal Accounting Officer)
Date: March 30, 1998 Date: March 30, 1998
By:/s/ Bruce E. Manwaring By:/s/ Raymond W. Jung
-------------------------------- ---------------------------------
Bruce E. Manwaring., Director Raymond W. Jung, Director
Date: March 30, 1998 Date: March 30, 1998
By:/s/ L. William Nelson, Jr. By:/s/Victor S. Oakes
-------------------------------- ---------------------------------
L. William Nelson, Jr., Director Victor S. Oakes, Director
Date: March 30, 1998 Date: March 30, 1998
By:/s/ Lawrence W. O'Brien By:/s/ Corte J. Spencer
-------------------------------- ---------------------------------
Lawrence W. O'Brien, Director Corte J. Spencer, Director
Date: March 30, 1998 Date: March 30, 1998
By:/s/ Janette Resnick
--------------------------------
Janette Resnick, Director
Date: March 30, 1998
35
<PAGE>
EXHIBIT INDEX
-------------
3.1 Certificate of Incorporation of Pathfinder Bancorp, Inc.
Incorporated herein by reference to the Company's
registration statement on S-4, file no. 333-36051 (the "S-
4")
3.2 Bylaws of Pathfinder Bancorp, Inc. (Incorporated herein by
reference to the Company's S-4
4 Form of Stock Certificate of Pathfinder Bancorp, Inc.
10.1 Form of Oswego City Savings Bank 1997 Stock Option Plan
Incorporated by reference to the Company's S-4
10.2 Form of Oswego City Savings Bank 1997 Recognition and
Retention Plan Incorporated by reference to the Company's S-
4
10.3 Employment Agreement between the Bank and Chris C. Gagas,
President and Chief Executive Officer Incorporated by
reference to the Company's S-4
10.4 Employment Agreement between the Bank and Thomas W.
Schneider, Vice President and Chief Financial Officer
Incorporated by reference to the Company's S-4
10.5 Employment Agreement between the Bank and W. David
Schermerhorn, Vice President - Loan Administration
Incorporated by reference to the Company's S-4
13 Annual Report to Stockholders
21 Subsidiaries of Company
27 Financial Data Schedule
36
<PAGE>
EXHIBIT 13
ANNUAL REPORT TO STOCKHOLDERS
<PAGE>
<TABLE>
TABLE OF CONTENTS
<S> <C>
Letter to Shareholders 1
Progressive, Supportive, Reliable
Financial Highlights 2
Management Discussion and Analysis 3
Independent Auditors' Report.
Financial Statements
Statements of Conditions 19
Statements of Income 20
Statements of Changes in Shareholders' Equity 21
Statements of Cash Flows 22
Notes to Financial Statements 23
Officers, Directors and Managers 35
Services and Shareholder Information 36
</TABLE>
<PAGE>
It is with great pleasure that we present the Annual Report of Pathfinder
Bancorp, Inc., the newly-formed Stock Holding Company for Oswego City Savings
Bank, to our Shareholders. As we mature as a publicly owned Company, we continue
our tradition of growth and success.
The most significant change for your Bank was Shareholder approval for the
reorganization of your Bank into PATHFINDER BANCORP, INC., a Mid-Tier Holding
Company. This new form of organization will afford your Bank the expanded
ability to conduct broader activities. As a result of this advancement, our
stock is now registered as PATHFINDER BANCORP, INC. and can be found on the
NASDAQ SmallCap stock market listing as PathBcp s.
One of the many measures for the success of any investment is Total Return - or
the return to the investor, including stock price appreciation and dividends. In
recognition of the price appreciation and the desire to make more shares
available to the public, your Board of Directors on January 25, 1998 declared a
3 for 2 stock split payable February 5, 1998. The Bank not only placed in the
top 25 in the nation among Thrift Stocks for Total Return of 225% but, in fact,
we were number 3. In June 1997, the Bank increased the dividend to stockholders
by 40%.
Recognition of the efforts and the impact of individuals on our overall
performance was manifested in the promotion of Thomas Schneider and David
Schermerhorn as Executive Vice Presidents of your Bank. Tom continues as Chief
Financial Officer and David as the head of the Loan Department.
In September 1997, a Definitive Agreement was signed with Oswego County Savings
Bank whereby Oswego County Savings Bank will be merged into your Bank. We are in
the process of filing the necessary applications with the regulatory agencies
and anticipate the successful completion by early Fall 1998. This is a very
forward move and most appropriate for the Banks and the community. Your Bank
will grow in size to over $300 million in assets and eight offices as a result.
The benefits realized should manifest many times over in the future.
In our 139th year, we continue to offer the latest in financial services in an
efficient and customer-friendly manner. Again this year, we increased our
electronic banking facilities with the addition of an ATM at the newly-opened
Dunkin Donuts in Pulaski, N.Y. Our Loan Department has increased the scope and
size of its portfolio in every category including the origination of mortgages
with the intent to sell into the secondary market. Some of the new products
developed include an E-Z open CD which is our way of offering the benefits of
higher interest rates to people desirous of participating but not having the
necessary amount of money to begin. With as little as $25/month, an E-Z open CD
grows and the interest rate increases from the Regular Passbook rate plus 1% as
succeeding levels of deposit are attained.
Continuing our commitment to the economic well being of our community, your Bank
was recognized twice in 1997 - once by the Greater Oswego Chamber of Commerce
for our commitment to economic development and, again, as "The People's Choice"
as the best all around Bank by popular vote of the people conducted by The
Palladium-Times, our daily newspaper.
1998 represents our 150th year as a City (sesquicentennial) and our 139th year
as a State Chartered financial institution. We are proud to present the
financial details in this Annual Report which reflect our operating results and
our financial condition for the fiscal year ended December 3l, 1997. Total
assets increased $6.8 million to $196.8 million, while Shareholder's equity grew
to $23.6 million. Net income for the year was $1.9 million, an increase of
$583,000 or 45.8%.
While 1997 was a very successful year by all measures, we look forward to
continuing our long record of achievement in 1998. We reaffirm our commitment to
creating enhanced value for our Shareholders, employees, customers, and the
communities we serve. Our goals in 1998 include continued growth in assets,
expansion of products and services, increased employee and customer pride, and
maximum return for our Shareholders. We are confident of our success in the next
year.
Sincerely,
Chris C. Gagas
Chairman, President & CEO
1
<PAGE>
On January 14, 1997, the Board of Directors adopted an Agreement and Plan of
Reorganization to reorganize the Oswego City Savings Bank ("City Savings") and
its existing mutual holding company into a two-tier mutual holding company
structure (the "Reorganization") with the establishment of a Delaware chartered
corporation as the stock holding company parent of the Bank. Upon completion of
the Reorganization, Pathfinder Bancorp, MHC, City Savings' existing mutual
holding company, will own a majority of the common stock of the new stock
holding company (Pathfinder Bancorp,Inc., which will own 100% of the common
stock of Oswego City Savings Bank). On December 30, 1997, the Reorganization
was implemented pursuant to the Agreement and Plan of Reorganization approved by
the City Savings' stockholders and regulatory authorities. Pursuant to the
Reorganization, each share of City Savings' common stock held by existing
stockholders of City Savings was exchanged for a share of common stock of
Pathfinder Bancorp, Inc.. The Reorganization of City Savings was structured as
a tax-free reorganization and accounted for in a manner similar to a pooling of
interests.
As of December 31, 1997, the company's total assets and shareholders' equity
were $196.8 million and $23.6 million, respectively.
Pathfinder Bancorp, Inc.'s common stock currently trades on the NASDAQ SmallCap
Stock Market under the symbol "PBHC".
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR (In Thousands)
Interest Income $ 14,168 $ 13,213 $ 12,205 $ 10,443 $ 9,858
Interest Expense 6,892 6,414 6,259 4,697 4,062
Net Interest Income 7,276 6,799 5,946 5,746 5,796
Net Income 1,854 1,272 990 1,146 1,802
PER COMMON SHARE (b)
Net Income:
Basic and diluted 0.66 0.68 0.10 NA NA
Book Value 8.40 7.22 7.00 NA NA
Cash dividends declared 0.26 0.20 0.00 NA NA
Stock Price:
IOP --- --- 5.00
High 20.00 7.083 7.167 NA NA
Low 6.250 5.333 5.583 NA NA
Close 20.00 6.250 7.00 NA NA
YEAR END (In Thousands)
Total assets $196,770 $189,937 $180,752 $170,715 $129,270
Interest-earning deposits at
other financial institutions -- 1,550 8,200 13,627 7,962
Investment securities 33,663 36,673 44,932 48,135 33,776
Mortgage-backed securities 23,158 22,829 7,953 992 1,408
Loans Receivable, net:
Real estate 109,543 99,047 91,023 83,563 74,150
Consumer and other 10,495 9,695 9,126 6,105 4,663
Total loans receivable, net 120,038 108,742 100,149 89,668 78,813
Intangible assets 3,605 3,921 4,236 4,552 --
Deposits 152,399 158,998 158,324 155,764 115,344
Borrowed funds 18,242 7,610 -- -- --
Notes Payable ESOP 430 486 425 -- --
Equity 23,583 21,390 20,751 13,990 12,953
SELECTED PERFORMANCE RATIOS
Return on average assets 0.97% 0.69% 0.56% 0.74% 1.40%
Return on average equity 8.35 6.09 6.31 8.20 14.99
Return on tangible equity 9.28 7.28 5.99 12.14 13.91
Dividend payout ratio 26.19 29.37 -- N/A N/A
Average equity to average assets 11.59 11.32 8.74 9.00 9.33
Equity to total assets 11.98 11.26 11.47 8.19 10.02
Net interest rate spread 3.98 3.88 3.72 4.01 4.68
Non interest expense to total assets 2.94 2.82 2.94 2.83 2.72
Nonperforming loans to
net loans receivable 1.28 2.05 0.92 1.24 1.00
Nonperforming assets to
total assets 1.17 1.54 0.83 1.01 1.24
Allowance for loan losses
to net loans receivable 0.69 0.83 0.35 0.35 0.36
Number of full service offices 5 5 5 5 3
</TABLE>
(a) Earnings per share for 1995 are based on the period from November 15, 1995
to December 31, 1995.
(b) Per Common Share data has been retroactively restated to reflect the three
for two stock split paid on February 6, 1988 to Shareholders of record on
January 26, 1988.
2
<PAGE>
GENERAL
Throughout the Management's Discussion and Analysis the term, "the Bank", refers
to the consolidated entity of Pathfinder Bancorp, Inc. and Oswego City Savings
Bank. At December 31, 1997, Pathfinder Bancorp, Inc.'s only business was the
100% ownership of Oswego City Savings Bank.
When used in this Annual Report the words or phrases "will likely result", "are
expected to", "will continue", "is anticipated", "estimate", "project" or
similar expression are intended to identify "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to certain risks and uncertainties, including, among
other things, changes in economic conditions in the Bank's market area, changes
in policies by regulatory agencies, fluctuations in interest rates, demand for
loans in the Bank's market areas and competition, that could cause actual
results to differ materially from historical earnings and those presently
anticipated or projected. The Bank wishes to caution readers not to place undue
reliance on any such forward-looking statements, which speak only as of the date
made. The Bank wishes to advise readers that the factors listed above could
affect the Bank's financial performance and could cause the Bank's actual
results for future periods to differ materially from any opinions or statements
expressed with respect to future periods in any current statements.
The Bank does not undertake, and specifically declines any obligation, to
publicly release the result of any revisions which may be made to any forward-
looking statements to reflect events or circumstances after the date of such
statements or to reflect the occurrence of anticipated or unanticipated events.
The 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 non
interest income, including income from fees and service charges, net gains and
losses on sales of securities, and non interest expense such as employee
compensation and benefits, deposit insurance premiums, occupancy and equipment
costs, data processing costs and income taxes. Earnings of the 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.
On January 14, 1997, the Board of Directors adopted an Agreement and Plan of
Reorganization to reorganize the Oswego City Savings Bank ("City Savings") and
its existing mutual holding company into a two-tier mutual holding company
structure (the "Reorganization") with the establishment of a Delaware chartered
corporation as the stock holding company parent of the Bank. Upon completion of
the Reorganization, Pathfinder Bancorp, MHC, City Savings' existing mutual
holding company, will own a majority of the common stock of the new stock
holding company (Pathfinder Bancorp,Inc., which will own 100% of the common
stock of Oswego City Savings Bank). On December 30, 1997, the Reorganization was
implemented pursuant to the Agreement and Plan of Reorganization approved by the
City Savings' stockholders and regulatory authorities. Pursuant to the
Reorganization, each share of City Savings' common stock held by existing
stockholders of City Savings was exchanged for a share of common stock of
Pathfinder Bancorp, Inc.. The Reorganization of City Savings was structured as a
tax-free reorganization and accounted for in a manner similar to a pooling of
interests.
On September 5, 1997, the Board of Directors of the Bank, in conjunction with
the Board of Trustees of Oswego County Savings Bank, a New York State chartered
mutual savings bank headquartered in Oswego, New York, announced the adoption of
a definitive merger agreement under which the banks will be combined. The
proposed transaction is subject to regulatory approval, as well as approval of
the shareholders of Pathfinder Bancorp, Inc.. The merger is expected to be
completed prior to the end of 1998. As of December 31, 1997, Oswego County
Savings Bank had total assets of approximately $112.1 million, deposits of $97.9
million and net worth of $11.2 million.
On January 13, 1998, the Board of Directors of Pathfinder Bancorp, Inc. declared
a three for two stock split in the form of a dividend on the holdings company's
outstanding common stock. The stock split was paid on February
3
<PAGE>
5, 1998 to shareholders of record as of January 26, 1998. The stock split has
been applied retroactively to all per share data reported in the financial
statements presented in this report.
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. The Bank's computer
programs that have date sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. Left unresolved, the year 2000 issue
could result in a system failure or miscalculations causing disruptions of
operations including, but not limited to, a temporary inability to process
transactions, calculate interest, or engage in similar normal business
activities. In early 1997, the Bank formed a Year 2000 committee to address the
issues surrounding the problem. The committee has adopted a policy statement and
plan of action to identify, correct, test, and implement solutions to ensure
that the Bank's systems are ready to process in the year 2000 and beyond. The
policy statement comprises three phases: the assessment phase, the renovation
phase, and the validation phase. During 1997, the Bank completed its assessment
phase and has identified its computer and electronic software systems that will
require modification or replacement. The committee has determined that the
required changes are minimal, and that such changes will resolve the Bank's Year
2000 computer systems issues. Testing and implementation of solutions will
continue through 1998 with a goal to be fully tested by December 31, 1998. The
Bank will utilize both internal and external resources to program, replace, and
test the software for Year 2000 modifications. The Bank is also communicating
with its third party data processing vendors, as well as its significant
suppliers and commercial customers, to determine the Bank's exposure should any
of these parties fail to resolve their own significant Year 2000 issues. During
1998, the committee will evaluate the risk from these third parties and
establish action plans to reduce or eliminate the risk. In some cases, the Bank
will rely on third party information which may be inaccurate and unverifiable.
Should third party entities, including Federal and State governments and
agencies fail to resolve their own Year 2000 issues, an adverse effect on the
Bank could result. The costs of the remedial actions and the date on which the
Bank plans to complete the Year 2000 modifications, are based on management's
best estimates and assumptions including the continued availability of third
party services, their modification plans, and other factors. To date, the cost
of the project has been minimal, and the Bank expects the total cost of
completing the project to have no material affect on the Bank's results of
operations and financial condition.
On March 29, 1996, Bennett Funding Group, Inc., headquartered 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. In the third quarter of 1996, the
Bank established a specific reserve for loan losses of $420,000 to cover
potential losses associated with the Bennett lease investments. During 1996 and
1997 the Bank received payments totaling $470,000 and $356,000, respectively.
These payments reduced the Bank's outstanding balance in related lease
receivables to $319,000. This amount was charged off, in September 1997, against
the previously established reserve of $420,000. Any future receipts of
settlement funds, which are not expected to be significant, will be treated as
loan loss allowance recoveries.
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
4
<PAGE>
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 15 years.
Management believes that the following actions over the past four years have
helped to enhance and preserve its' presence as a community bank: the 1994
acquisition of two branches of the former Columbia Federal Savings located in
the cities of Oswego and Fulton (the "Acquisition"); the expansion of the Bank's
small business lending services, the introduction of an investment services
unit, the public offering and subsequent reorganization into the two-tier
holding company structure to further enhance growth and independence, and the
signing of a definitive merger agreement with Oswego County Savings Bank.
CAPITAL AND ASSET GROWTH. The Bank's net worth has increased from $13.0 million
at December 31, 1993 to $23.6 million at December 31, 1997. The Bank's ratio of
shareholders' equity to total assets was 12.0% at December 31, 1997. Total
assets have increased by $67.5 million, or 52.2%, since December 31, 1993. The
Bank's capital exceeds all regulatory capital requirements (see footnote # 13 of
the consolidated financial statements for Pathfinder Bancorp, Inc.).
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 reduces the credit risk of its asset base but must accept
lower yields than would typically be available on commercial real estate loans
and multi-family real estate loans.
At December 31, 1997, 91.2% of the Bank's total loan portfolio consisted of
loans secured by real estate. In addition, at December 31, 1997, 28.9% 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 in its market area. At December 31, 1997,
55.8% of the Bank's deposit base of $152.4 million consisted of core deposits,
which included non-interest-bearing demand accounts, NOW accounts, passbook and
club savings accounts and money market deposit accounts. In connection with the
Acquisition, in 1994 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"
can be measured by an institution's interest rate sensitivity "gap". An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest rate sensitivity
gap is defined as the difference between the amount of interest-earning assets
maturing or repricing within a specific time period and that amount of interest-
bearing liabilities maturing or repricing within that time period. A gap is
considered positive when the amount of interest rate sensitive assets exceeds
the amount of interest rate sensitive liabilities. A gap is considered negative
when the amount of interest rate sensitive liabilities exceeds the amount of
interest rate sensitive assets. During a period of rising interest rates, a
negative gap would tend to adversely affect net interest income while a positive
gap would tend to positively affect net interest income. Conversely, during a
period of falling interest rates, a negative gap would tend to positively affect
net interest income while a positive gap would tend to adversely affect net
interest income.
5
<PAGE>
The Bank does not maintain in its portfolio fixed interest rate loans with terms
exceeding 20 years. In addition, ARM loans are originated with terms that
provide that the interest rate on such loans cannot adjust below the initial
rate. Generally, the Bank tends to fund longer term loans and mortgage-backed
securities with shorter term time deposits, repurchase agreements, and advances.
The impact of this asset/liability mix creates an inherent risk to earnings in a
rising interest rate environment. In a rising interest rate environment, the
Bank's cost of shorter term deposits may rise faster than its earnings on longer
term loans and investments. Additionally, the prepayment of principal on real
estate loans and mortgage-backed securities tends to decrease as rates rise,
providing less available funds to invest in the higher rate environment.
Conversely, as interest rates decrease the prepayment of principal on real-
estate loans and mortgage-backed securities tends to increase, causing the Bank
to invest funds in a lower rate environment. The potential impact on earnings
from this mismatch, is mitigated to a large extent by the size and stability of
the Bank's savings accounts. Savings accounts have traditionally provided a
source of relatively low cost funding that have demonstrated historically a low
sensitivity to interest rate changes. The Bank generally matches a percentage of
these, which are deemed core, against longer term loans and investments. In
addition, the Bank has sought to extend the terms of its time deposits. In this
regard, the Bank has on occasion offered certificates of deposits with three and
four year terms which allow depositors to make a one-time election, at any time
during the term of the certificate of deposit, to adjust the rate of the
certificate of deposit to the then prevailing rate for a certificate of deposit
with the same term. The Bank has further sought to reduce the term of a portion
of its rate sensitive assets by originating one year ARM loans, five year/one
year ARM loans (mortgage loans which are fixed rate for the first five years and
adjustable annually thereafter), and by maintaining a relatively short term
investment securities (original maturities of three to five years) portfolio
with staggered maturities. The Bank manages its interest rate sensitivity by
monitoring (through simulation and net present value techniques) the impact on
it's GAP position, net interest income, and the market value of portfolio equity
to changes in interest rates on its current and forecast mix of assets and
liabilities. The Bank has an Asset-Liability Management Committee which is
responsible for reviewing the Bank's assets and liability policies, setting
prices and terms on rate-sensitive products, and monitoring and measuring the
impact of interest rate changes on the Bank's earnings. The Committee meets
monthly on a formal basis and reports to the Board of Directors on interest rate
risks and trends, as well as liquidity and capital ratios and requirements. The
Bank does not have a targeted gap range, rather the Board of Directors has set
parameters of percentage change by which net interest margin and the market
value of portfolio equity are affected by changing interest rates. The Board and
management deem these measures to be a more significant and realistic means of
measuring interest rate risk. The results of these techniques are outlined below
the GAP table.
At December 31, 1997, the total interest bearing liabilities maturing or
repricing within one year exceeded total interest-earning assets maturing or
repricing in the same period by $13.8 million, representing a cumulative one-
year gap ratio of a negative 7.04%.
GAP TABLE
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1997, which are
expected to reprice or mature based upon certain assumptions in each of the
future time periods shown. The Bank has assumed that its passbook savings, NOW,
and money market accounts which totalled $85.0 million at December 31, 1997 are
withdrawn at the annual percentage rates set forth below. These withdrawal rates
are based upon historical industry experience. Management believes that these
assumptions approximate actual experience and considers them appropriate and
reasonable.
<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 $19,360 $ 18,131 $ 6,555 $ 3,801 $ 579 -- $ 48,426
Fixed rate 370 1,855 8,787 7,531 10,533 5,159 34,235
Commercial and multi-family:
ARM's 3,003 4,419 4,199 536 -- -- 12,157
Fixed 105 512 2,321 1,902 2,259 486 7,585
</TABLE>
6
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Home equity fixed rate loans 101 325 1,040 1,360 2,517 5,343
Home equity line of credit 4,219 -- -- -- -- -- 4,219
Consumer loans 347 1,229 2,271 428 16 -- 4,291
Commercial business loans 396 888 3,512 1,676 -- 2,888 6,472
Mortgage-backed securities (1) 2,931 4,659 3,076 4,112 5,357 2,888 23,023
Investment securities (1) 5,532 8,104 4,589 2,990 9,429 1,893 32,537
Interest earning deposits at other
financial institutions -- -- -- -- -- -- --
Total interest-earning assets $36,364 $ 40,122 $ 36,350 $ 24,336 $30,690 $10,426 $178,288
- ------------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Passbook accounts $ 4,587 $ 14.629 $ 19,166 $ 25,555 -- -- $ 63,937
NOW accounts 2,536 6,586 4,524 -- -- -- 13,646
Money market accounts 113 -- -- -- -- -- 113
Certificate accounts 16,947 27,691 19,168 3,253 -- -- 67,059
Repurchase agreements 13,692 3,550 1,000 -- -- -- 18,242
Total interest-bearing liabilities $37,875 $ 52,456 $ 43,858 $ 28,808 $ 0 $ 0 $162,997
- ------------------------------------------------------------------------------------------------------------------------------
Interest-earning assets less interest-
bearing liabilities ("interest rate
sensitivity gap") (1,511) (12,334) (7,508) (4,472) 30,690 10,426
Cumulative excess (deficiency) of
interest-sensitive assets over
interest-sensitive liabilities (1,511) (13,845) (21,353) (25,825) 4,865 15,291
Interest sensitivity gap
to total assets -.77% -6.27% -3.82% -2.27% 15.60% 5.30%
Cumulative interest sensitivity gap
to total assets -.77% -7.04% -10.85% -13.12% 2.47% 7.77%
Ratio of interest-earning assets to
interest-bearing liabilities 96.01% 76.49% 82.88% 84.48% -- --
Cumulative ratio of interest-earning
assets to interest-bearing liabilities 96.01% 84.67% 84.09% 84.16% 102.98% 109.38%
</TABLE>
(1) Mortgage backed and Investment Securities are presented at amortized cost.
- --------------------------------------------------------------------------------
NOW, passbook and money market accounts will decay at the following rates:
<TABLE>
<CAPTION>
Over 1 Over 3
1 Year through through Over
Or Less 3 Years 5 Years 5 Years
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Now accounts..................... 66% 34% --- ---
Passbook, club account........... 30% 30% 40% ---
Money market deposit accounts.... 100% --- --- ---
</TABLE>
The above assumptions are annual percentage rates based on remaining balances
and should not be regarded as indicative of the actual withdrawals that may be
experienced by the Bank. Moreover, certain shortcomings are inherent in the
analysis presented by the foregoing table. For example, interest rates on
certain types of liabilities may fluctuate in advance of or lag behind changes
in market interest rates. Moreover, in the event of a change in interest rates,
withdrawal levels would likely deviate significantly from those assumed in
calculating the table.
CHANGES IN NET INTEREST INCOME AND NET PORTFOLIO VALUE. The following table
measures the Bank's interest rate risk exposure in terms of the percentage
change in its net interest income and net portfolio value as a result of
hypothetical changes in 100 basis point increments in market interest rates. Net
portfolio value (also referred to as market value of portfolio equity) represent
the fair value of net assets ( determined as the market value of assets minus
the market value of liabilities). The table quantifies the changes in net
interest income and net portfolio value to parallel shifts in the yield curve.
The column "Net Interest Income Percent Change" measures the change to the next
twelve month's projected net interest income, due to parallel shifts in the
yield curve. The column "Net Portfolio Value Percent Change" measures changes in
the current net mark-to-market value of
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<PAGE>
assets and liabilities due to parallel shifts in the yield curve. The base case
assumes December 31, 1997 interest rates. The Bank uses these percentage changes
as a means to measure interest rate risk exposure and quantifies those changes
against guidelines set by the Board of Directors as part of the Bank's Interest
Rate Risk policy. The bank's current interest rate risk exposure is within those
guidelines set forth.
<TABLE>
<CAPTION>
CHANGE IN INTEREST RATES
INCREASE(DECREASE)
BASIS POINTS NET INTEREST INCOME NET PORTFOLIO VALUE
(Rate Shock) PERCENTAGE CHANGE PERCENTAGE CHANGE
-------------- ------------------- -------------------
<S> <C> <C>
300 -13.47% -28.60%
200 -8.58 -19.27
100 -4.07 -9.45
Base Case - -
(100) 3.37 6.87
(200) 6.80 13.11
(300) 10.31 20.32
</TABLE>
CHANGES IN FINANCIAL CONDITION
COMPARISON AT DECEMBER 31, 1997 AND DECEMBER 31, 1996.
Total assets increased $6.8 million, or 3.6%, to $196.8 million at December 31,
1997 from $189.9 million at December 31, 1996. The increase in assets is
primarily the result of increases in the balance of net loans receivable to
$120.0 million from $108.7 million, an increase of $11.3 million, or 10.4%. This
increases was primarily attributable to the continued deployment of maturing
short term investments and excess liquidity to fund the demand for the Bank's
loan products, principally one to four family mortgage loans and commercial real
estate loans. Additionally, the Bank began originating mortgage loans
underwritten to conform to the standards of the Federal National Mortgage
Association ("FNMA") for the purpose of securitizing and selling such loans into
the secondary market. These originations consist of 15 year and 30 year fixed
rate mortgages. The purpose of undertaking this strategy is to further penetrate
the mortgage market in the Bank's market area and expand mortgage underwriting
into new geographic regions without incurring the credit risk of holding such
loans in the Banks portfolio. The Bank intends to service these mortgages and
will recognize fee income from the amortization of mortgage servicing rights. At
December 31, 1997, the Bank's mortgage loans-held for sale was $1.5 million.
Increases also occurred in the following areas: mortgage-backed securities
increased $329,000, premises and equipment increased $336,000, other real estate
owned increased $67,000, and other assets increased $626,000. These increases
were partially offset by decreases in cash and due from banks and interest-
earning deposits at other financial institutions of $4.0 million to $4.3 million
from $8.3 million, investment securities of $2.9 million to $33.7 million from
$36.5 million, and intangible assets of $316,000 to $3.6 million from 3.9
million.
Non-performing loans (defined as loans past due 90 days or more) decreased
$460,000, or 23.0%, to $1.5 million at December 31, 1997, from $2.0 million at
the end of the prior year. The non-performing loans to total loans ratio at
December 31, 1997 was 1.3% compared to 1.8% at December 31, 1996. The Bank's
allowance for loan losses to total loans and non-performing loans was .67% and
53.8%, respectively, at December 31, 1997.
Total liabilities increased $4.6 million, or 2.8%, to $173.2 million from $168.5
million. The increase was primarily attributable to a $10.6 million increase in
borrowed funds to $18.2 million at December 31, 1997, from $7.6 million at
December 31, 1996. The increase in borrowing was partially offset by a decrease
in deposits of $6.6 million, or 4.2%, to $152.4 million from $159.0 million. The
borrowings, consisting of 1 and 2 year term advances, 90 day reverse repurchase
agreements, and an overnight line of credit, were utilized to fund the Bank's
growth in its loan portfolio. The decrease in deposits is primarily attributable
to a shift in consumer preferences from lower fixed rate deposits to the higher
potential returns of equity securities. The Bank's investment unit, an agency
relationship with a third party vendor, participated in a portion of this shift.
Investments by Bank depositors in the Bank's investment unit totaled
approximately $1.5 million during 1997. The Bank recognizes fee income on these
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<PAGE>
transactions. The decrease in deposits, especially passbook savings accounts,
has caused the Bank to rely, at times, on overnight borrowings for liquidity
purposes. A significant decrease in deposits in the future could result in the
Bank having to seek other sources of funds for liquidity purposes. Such sources
could include, but are not limited to, additional borrowings, brokered deposits,
negotiated time deposits, the sale of "available-for-sale" investment
securities, the sale of securitized loans, or the sale of whole loans. Such
actions could result in higher interest expense costs and/or losses on the sale
of securities or loans. Other liabilities increased $663,000, or 45.6%, to $2.1
million at December 31, 1997 from $1.5 million at the prior fiscal year end.
Shareholders' equity increased $2.2 million, or 10.3%, to $23.6 million at
December 31, 1997 from $21.4 million at December 31, 1996. The increase is
attributable to net income of $1.9 million, an increase in the unrealized
appreciation on investment securities available for sale of $330,000, a net
decrease in unearned ESOP shares of $127,000, and in unearned stock based
compensation plans of $367,000, partially offset by dividends declared of
$486,000.
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.
Non-performing loans increased $1.1 million, or 117.4%, to $2.0 million at
December 31, 1996, from $919,000 at the end of the prior year. The increase in
non-performing loans is primarily the result of higher delinquent payments on
one-to-four family and multi-family real estate mortgages. The average loan-to-
value collateral ratios on these mortgage is approximately 65%. The non-
performing loans to total loans ratio at December 31, 1996 was 1.8% compared to
.9% at December 31, 1995. The Bank's allowance for loan losses to total loans
and non-performing loans was .82% and 45.4%, respectively, at December 31, 1996.
While it is management's intention to improve these coverage ratios, it is not
anticipated that the level of non-performing loans will significantly impact the
Bank's future earnings. Management plans to continue regular increases in the
allowance for loan loss while controlling the level of non-performing loans
through collections management.
Total liabilities increased $8.3 million, or 5.2%, to $168.5 million from $160.2
million. The increase was primarily attributable to a $7.6 million increase 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.
Shareholders' 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, dividends
declared of $373,000, and a net increase in unearned ESOP shares of $60,000.
RESULTS OF OPERATIONS
GENERAL
The Bank had net income of $1.9 million, $1.3 million, and $990,000 for the
fiscal years ended December 31, 1997, 1996 and 1995, respectively. The increase
in net income for the year ended December 31, 1997, compared to 1996 resulted
primarily from increases in net interest income of $477,000, or 7.0%, to $7.3
million, and non-interest income of $400,000, or 40.8%, to $1.4 million, as well
as a $375,000 decrease in the provision for loan losses. The increased income
was partially offset by an increase in non-interest expense of $413,000, or
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<PAGE>
7.7%, and an increase in the provision for income taxes of $256,000. The Bank's
return on average assets and return on shareholders' equity for the years ended
December 31, 1997, 1996 and 1995 were .97% and 8.35%, .69% and 6.09%, and .56%
and 6.31% , respectively. These performance ratios tend to be below the Bank's
peer group during the period. The peer group is derived from the FDIC Uniform
Bank Performance Report and comprises all FDIC insured savings banks having
assets between $100 million and $300 million. The peer groups return on average
assets for the periods ended September 30, 1997 and December 31, 1996 and 1995
were .97%, .82%, and .94%, respectively. The peer groups return on average
equity for the periods ended September 30, 1997 and December 31, 1996 and 1995
were 9.10%, 7.72%, and 8.89%, respectively. The primary reasons for lower than
peer returns are higher operating expenses, as a percent of total assets, and
higher levels of shareholders' equity to total assets. Management is committed
to decreasing it's operating expenses as a percentage of total assets and
effectively leveraging it's equity to provide results which meet or exceed the
Bank's peers group. Management believes that a well structured and executed
merger with Oswego County Savings Bank will create a combined organization with
a level of critical mass and synergies of operation to allow the Bank to achieve
these goals.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
INTEREST INCOME
Interest income increased by $955,000, or 7.2%, to $14.2 million for the year
ended December 31, 1997 from $13.2 million for the year ended December 31, 1996.
The increase in interest income was principally attributable to an increase of
$9.9 million, or 6.0%, in the average balance of interest earning-assets, to
$176.0 million from $166.0 million, and an increase in the average yield on
interest-earning assets to 8.16% from 8.06%. The increase in average interest-
earning assets was primarily attributable to the deployment of an additional
$10.6 million in borrowed funds, partially offset by a reduction in deposits of
$6.6 million. The utilization of borrowed funds, and a re-deployment of short
term investments resulted in a $9.5 million increase in the average balance of
real estate loans, a $6.9 million increase in the average balance of mortgage-
backed securities, and decreases of $2.5 million in the average balance of
investment securities and $3.8 million in the average balance of interest-
earning deposits in other financial institutions. The average balance on
consumer and other loans decreased by $177,000. The increase in the average
yield on interest-earning assets was primarily attributable to the restructuring
of the balance sheet from short term investments into higher yielding, longer
term mortgage backed securities and real estate loans, including commercial real
estate, and the origination of commercial business loans at rates higher than
the existing real estate loan portfolio. The shift in earning assets from
shorter to longer-term investments increases the Bank's interest rate
sensitivity. More specifically, in a rising rate environment, the cost of
interest-bearing liabilities is likely to rise more rapidly than the yield on
interest earning assets resulting in a compression of net interest rate spread.
(For more information regarding the impact of changes in interest rates on the
Bank's earnings see "Asset and Liability Management - Interest Sensitivity
Analysis")
Interest income on real estate loans increased $721,000, or 8.7%, to $9.0
million for the year ended December 31, 1997, from $8.3 million for the year
ended December 31, 1996. The increase was due to a $9.5 million, or 10.1%,
increase in the average balance of real estate loans, partially offset by a
decrease in the average yield on real estate loans of 10 basis points to 8.66%
from 8.76%. The increase in the average balance on real estate loans was
principally due to the origination of fixed rate mortgages with terms from 10 to
30 years, adjustable rate mortgages with a fixed rate of interest for the first
five years adjustable annually thereafter, and commercial real estate loans.
Fixed rate mortgages with terms greater than 20 years are principally originated
with the intent to sell those loans into the secondary market. The decrease in
the average yield on real estate loans was principally due to the reduction in
medium and long term market interest rates that occurred during the second half
of 1997.
Interest income on consumer and other loans increased $87,000, or 8.6%, to $1.1
million for the year ended December 31, 1997 from $1.0 million for the year
ended December 31, 1996. The increase was due to an increase in the average
yield on consumer and other loans to 10.87% from 9.84%, partially offset by a
decrease in the average balance on consumer and other loans of $177,000, or
1.7%, to $10.1 million from $10.2 million. The increase in the average yield on
consumer and other loans reflects the Bank's continuing efforts to provide
lending to qualified local businesses, which tend to carry higher interest
rates. The decrease in the average balance on consumer and other loans results
from softer demand in consumer lending for higher rate unsecured loans.
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<PAGE>
Interest income on mortgage-backed securities increased $496,000, or 45.2%, to
$1.6 million from $1.1 million. The increase was attributable to a $6.9 million,
or 42.5%, increase in the average balance on mortgage-backed securities to $23.2
million from $16.3 million, as well as an increase in the average yield on
mortgage-backed securities to 6.84% from 6.71%. The increase in the average
balance on mortgage-backed securities was due to the deployment of borrowed
funds into mortgage-backed securities as part of a strategy, during the first
half of 1997, to leverage the Bank's strong capital position to increase
incrementally net interest income. The use of short term borrowings for
investment into longer term securities, such as mortgage-backed securities,
increases the sensitivity of the Bank's earnings to future increases in interest
rates. As part of engaging in such a strategy, the Bank performed extensive
analysis on the interest rate sensitivity of its entire balance sheet.
Historically, savings account deposit interest rates have not adjusted
commensurate with market interest rate movements and, more specifically, has
tended to lag upward adjustments in market interest rates. The Bank's large base
of savings account deposits tends to mitigate the otherwise potential negative
ramifications of rising market interest rates. Bank policy on leverage
transactions dictates that such transactions be "unwound" (by selling the
security and paying down the borrowing) if interest rate movements result in a
compression of the original spread beyond certain levels. The unwinding of such
transactions during a period of sharply rising interest rates would likely
result in the realization of losses on sales of securities.
Interest income on investment securities decreased $105,000, or 4.0%, to $2.5
million for the year ended December 31, 1997 from $2.6 million for the year
ended December 31, 1996, notwithstanding an increase in the average yield on
investment securities to 7.10% from 6.91%, on a tax equivalent basis. The
decrease in interest income was primarily attributable to a $2.5 million, or
6.6%, decrease in the average balance of investment securities to $35.6 million
at December 31, 1997 from $38.1 million at the end of the prior year. The
decrease in the average balance of investment securities is the result of funds
from maturities and redemptions being reinvested in the Bank's real estate loan
portfolio rather than reinvested in investment securities. The increase in the
average yield on investment securities, on a tax equivalent basis, was primarily
due to the maturity and redemption of securities with lower interest rates than
those securities remaining in the portfolio. Interest income on interest-earning
deposits decreased $221,000, or 56.1%, to $173,000 for the year ended December
31, 1997 from $394,000 for the prior year. The decrease was due to a $3.8
million, or 52.4%, decrease in the average balance on interest-earning deposits
and a decrease in the average yield on such deposits to 5.05% from 5.47%.
INTEREST EXPENSE
Interest expense increased $478,000 or 8.0%, to $6.9 million for the year ended
December 31 1997, from $6.4 million for the prior year. The increase was
primarily attributable to a shift in passbook savings accounts to higher rate
certificates of deposit and an increase in interest expense associated with
borrowings. Interest expense on savings and club accounts decreased $117,000, or
5.6%, while the interest expense on term deposits increased $89,000, or 2.3%.
The average balance on savings and club accounts decreased $4.0 million, to
$65.4 million for the year ended December 31, 1997 from $69.4 for the prior
year, while the average cost of such deposits remained 3.01%. The average
balance on time deposits increased $1.1 million, or 1.6%, to $70.6 for the year
ended December 31, 1997 from $69.5 million at December 31, 1996, while the
average cost of time deposits increased to 5.63% from 5.59%. The Bank's
borrowings consist of term and overnight advances from the Federal Home Loan
Bank of New York, funds obtained through repurchase agreements("repos"), and 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"). The average
balance on the term and overnight advances for the year ended December 31, 1997
was $1.1 million, at an average cost of 6.93%, resulting in interest expense of
$66,000. The average balance on the repos for the year ended December 31, 1997
was $8.4 million, at an average cost of 5.68%, resulting in interest expense of
$475,000. The ESOP loan had an average balance of $465,000, at an average cost
of 7.41%, resulting in $34,000 in interest expense for the year.
11
<PAGE>
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, 1997, using
marginal federal income tax rates of 34%. Averages are computed on the daily
average balance for each month in the period divided by the number of days in
the period. Yields and amounts earned include loan fees. Non-accrual loans have
been included in interest-earning assets for purposes of these calculations.
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Average Average Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Earning Assets:
Real Estate Loans $103,600 $ 8,971 8.66% $ 94,126 $ 8,250 8.76% $ 88,163 $ 7,533 8.54%
Consumer & Other Loans 10,051 1,093 10.87% 10,228 1,006 9.84% 7,816 792 10.13%
Mortgage-backed Securities 23,244 1,591 6.84% 16,312 1,095 6.71% 3,292 231 7.02%
Taxable investment
securities 29,160 1,974 6.77% 32,643 2,148 6.58% 44,865 2,834 6.32%
Non-taxable investment
securities 6,432 554 8.61% 5,471 485 8.86% 4,561 417 9.14%
Interest-earning deposits 3,426 173 5.05% 7,206 394 5.47% 9,445 539 5.71%
- ------------------------------------------------------------------------------------------------------------------------------------
Total interest-earning
assets $175,913 $14,356 8.16% $165,986 $ 13,378 8.06% $158,142 $12,346 7.81%
Non Interest Earning Assets:
Other assets 16,017 18,671 19,240
Allowance for loan losses (936) (492) (329)
Net unrealized gains
(losses)
on available for sale
portfolio 648 366 402
Total Assets $191,642 $184,531 $177,455
- ------------------------------------------------------------------------------------------------------------------------------------
Interest-bearing
Liabilities:
Now accounts $ 13,346 $ 341 2.56% $ 12,709 $ 322 2.53% $ 12,830 $ 357 2.78%
Savings and club accounts 65,383 1,971 3.01% 69,354 2,088 3.01% 75,270 2,256 3.00%
Time deposits 70,591 3,975 5.63% 69,470 3,886 5.59% 65,047 3,643 5.60%
Borrowings 10,677 639 5.98% 1,894 118 6.23% 35 3 8.57%
Total Interest bearing
liabilities $159,997 $ 6,926 4.33% $153,427 $ 6,414 4.18% $153,182 $ 6,259 4.09%
- ------------------------------------------------------------------------------------------------------------------------------------
Non-Interest-Bearing
Liabilities:
Demand deposits 7,633 7,869 6,789
Other liabilities 1,798 2,345 1,793
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 169,428 163,641 161,764
Shareholder's equity 22,214 20,890 15,691
- ------------------------------------------------------------------------------------------------------------------------------------
Total liabilities &
shareholder's equity $191,642 $184,531 $177,455
Net interest income $ 7,430 $ 6,964 $ 6,087
Net interest rate spread 3.83% 3.88% 3.72%
Net interest margin 4.22% 4.20% 3.85%
- ------------------------------------------------------------------------------------------------------------------------------------
Ratio of average
interest-earning assets
to average
interest-bearing
liabilities 109.95% 108.19% 103.24%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
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.
<TABLE>
<CAPTION>
Year Ended December 31,
- -----------------------------------------------------------------------------------------------------------------------------
1997 vs. 1996 1996 vs. 1995
Increase (Decrease) Due to Increase (Decrease) Due to
- -----------------------------------------------------------------------------------------------------------------------------
Total
Increase
Volume Rate (Decrease) Volume Rate (Decrease)
- -----------------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Real estate loans $ 817 ($96) $ 721 $ 519 $198 $ 717
Consumer and other loans (17) 104 87 238 (24) 214
Mortgage-backed securities 474 22 496 875 (11) 864
Taxable investment securities (235) 61 (174) (800) 114 (686)
Non-taxable investment securities 83 (14) 69 82 (14) 68
Interest-earning deposits (193) (28) (221) (123) (22) (145)
- -----------------------------------------------------------------------------------------------------------------------------
Total interest income 929 49 978 791 241 1,032
Interest Expense:
Now and escrow accounts 15 4 19 (3) (32) (35)
Savings and club accounts (117) 0 (117) (181) 13 (168)
Time deposits 62 27 89 250 (7) 243
Borrowings 493 (6) 487 116 (1) 115
Total Interest expense: 453 25 478 182 (27) 155
- -----------------------------------------------------------------------------------------------------------------------------
Net change in interest
income $ 476 $ 24 $ 500 $ 609 $268 $ 877
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
NET INTEREST INCOME
Net interest income increased $478,000, on a tax equivalent basis, for the year
ended December 31, 1997 as compared to December 31, 1996. The increase occurred
due to an increase in the ratio of average interest-earning assets to average
interest bearing liabilities to 110.27% from 108.19%, partially offset by a
decrease in the Bank's net interest rate spread to 3.84% from 3.88%. These
ratios are the result of a $9.9 million, or 6.0%, increase in average interest-
earning assets, and an increase in the average yield on interest-earning assets
to 8.16% from 8.06%. These increases were offset in part by an increase in the
average balance of interest bearing liabilities of $6.1 million, or 4.0%, and an
increase in the average cost on interest bearing liabilities to 4.32% from
4.18%.
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, 1997 of $261,000 as compared to a provision of
$636,000 for the year ended December 31, 1996. The decrease in the provision
for loan losses was partially attributable to a $420,000 specific reserve
established in September 1996 for the Bank's investments in lease finance
packages acquired from the Bennett Funding Group. The Bank's loan loss
provision for 1997 increased $45,000 over the prior year, after adjusting for
the specific provision in 1996. The Bank's allowance for loan losses as a
percentage of net loans receivable at December 31, 1997 was .68%.
13
<PAGE>
NON INTEREST INCOME
Non interest income consists of servicing income and fee income, gains (losses)
on the sale of investment securities and other operating income.
Non interest income increased $400,000, or 40.8%, to $1.4 million for the year
ended December 31, 1997, as compared to $979,000 for the year ended December 31,
1996. The increase in non interest income was primarily attributable to an
increase in fees and service charges of $52,000, or 9.1%, to $622,000 from
$570,000 additional gains on the sale of investment securities of $228,000, an
increase in other charges, commissions, and fees to $371,000 from $265,000, and
an increase in mortgage servicing fees of $12,000. The increase in fees and
service charges is primarily attributable to higher fees on checking accounts
and increased mortgage servicing activity, as well as a $56,000 increase in fees
generated by the Bank's investment unit. The gains on the sale of investment
securities is the result of the recognition of the unrealized increased market
value on the Bank's investment in the IIMF mutual fund. The increase in other
charges and commissions is primarily the result of the recognition of increases
in the cash surrender value on life insurance policies used to fund deferred and
supplemental compensation plans.
NON INTEREST EXPENSE
Non interest expense increased $413,000, or 7.7%, to $5.8 million for the year
ended December 31, 1997 from $5.4 million for the prior year. The increase in
non interest expense was primarily attributable to increases in employee
compensation and benefits of $573,000, or 24.4%, data processing costs of
$12,000, or 3.2%, professional service expense increases of $7,000, and other
expense increases of $48,000, or 5.5%. The increases in the employee
compensation and benefits is primarily the result of recognition of the impact
of the increase in the market value on the Bank's common stock on the stock
based compensation plans. The increases were partially offset by a decrease in
occupancy costs of $25,000, or 3.6%, and a reduction, in deposit insurance
premiums of $203,000. The Bank's overhead and efficiency ratios for the years
ended December 31, 1996 were 3.01% and 60.45%, respectively. The stock based
compensation plan expenses and the Bank's amortization of goodwill represent
non-cash expenses. If these non-cash expenses were deducted from the Bank's
overhead and efficiency ratios, those adjusted ratios for the year ended
December 31, 1997, would be 2.69% and 51.83%, respectively. The Bank's efforts
to prepare its data processing systems for the impact of the Year 2000 were not
a significant component of expense in 1997 and are not expected to materially
impact earnings in the future.
INCOME TAX EXPENSE
Income tax expense increased $256,000, or 50.7% to $762,000 for the year ended
December 31, 1997 from $506,000 for the prior year. The increase in income tax
expense reflected higher pre-tax income during the year.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1996, AND 1995
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
14
<PAGE>
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.
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 on 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 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 Bank's pricing to 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 of mortgage-backed securities to
$13.0 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 of 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.
Mortgage-backed securities, however, do contain embedded options in that the
mortgagee may pre-pay principal at any time during the life of the loan.
Historically, prepayments have tended to occur more rapidly in lower interest
rate environments, which may cause the Bank to invest these cash flows in lower
yielding alternatives.
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 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
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%.
15
<PAGE>
NET INTEREST INCOME
Net interest income, on a tax equivalent basis, 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%.
PROVISION FOR LOAN LOSSES.
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%.
NON INTEREST INCOME
Non interest income consists of servicing income and fee income, gains (losses)
on the sale of investment securities and other operating income.
Non interest 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 non interest 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 non interest 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.
NON INTEREST EXPENSE
Non interest 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
non interest expense was primarily attributable to increases in employee
compensation and benefits of $64,000, or 2.3%, 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.
Non interest 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.
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.
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
16
<PAGE>
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 outflows, 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 safe, 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 sources of cash were net income, principal repayments on loans and
increases in deposit accounts and borrowed funds. The Bank has experienced a
decrease in savings account deposits during the past two years. Savings account
balances decreased $7.1 million, or 10.0%, from $71.0 million at December 31,
1995 to $63.9 million at December 31, 1997. The decrease in savings account
deposits has caused the Bank to rely, at times, on overnight borrowings for
liquidity purposes. A significant decrease in deposits in the future could
result in the Bank having to seek other sources of funds for liquidity purposes.
Such sources could include, but are not limited to, additional borrowings,
brokered deposits, negotiated time deposits, the sale of "available-for-sale"
investment securities, the sale of securitized loans, or the sale of whole
loans. Such actions could result in higher interest expense costs and/or losses
on the sale of securities or loans.
At December 31, 1997, the Bank had outstanding loan commitments of $14.0
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, 1997 totaled $38.9 million. Based on prior experience, management believes
that a significant portion of such deposits will remain with the Bank.
NEW ACCOUNTING PRONOUNCEMENTS
Reporting Comprehensive Income. In June 1997, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income"
effective 1998. This statement will require the Bank to report comprehensive
income. For the Bank, comprehensive income is determined by adding unrealized
investment holding gains or losses during the period to net income.
Disclosures about Segments of an Enterprise and Related Information. In June
1997, the FASB issued SFAS No. 131, "Disclosures about Segments of and
Enterprise and Related Information". This statement requires companies to
disclose financial and descriptive information about its reportable business
segments. Management believes the Bank only operates one segment, which is the
banking segment. Therefore, disclosures required under this pronouncement will
not affect the financial statements of the Bank.
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 Pathfinder Bancorp, Inc. trades and is listed on The Nasdaq
SmallCap Stock Market under the symbol "PBHC" and the short name PathBcp. The
stock was issued on November 15, 1995 at $5.00 per share (adjusted for the three
for two stock split on February 5, 1998. As of March 20, 1998, there were 449
shareholders of record and 2,874,999 outstanding shares of common stock.
17
<PAGE>
The following table sets forth the high and low closing bid prices and dividends
paid per share of common stock for the periods indicated, adjusted retroactively
for the three for two stock split paid on February 5, 1998.
<TABLE>
<CAPTION>
Dividends
Quarter ended High Low Paid
------------------- ------- ------- ---------
<S> <C> <C> <C>
December 31, 1997 $20.000 $14.000 $.0467
September 30, 1997 14.750 8.583 $.0467
June 30, 1997 9.333 7.250 $.0467
March 31, 1997 8.667 6.250 $.0333
December 30, 1996 7.083 5.833 $.0333
September 30, 1996 6.000 5.333 $.0333
June 30, 1996 6.000 5.500 $.0333
March 31, 1996 6.833 5.833 $.0333
December 31, 1995 7.167 5.583 $.0333
</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.
18
<PAGE>
<TABLE>
<CAPTION>
December 31,
-------------
1997 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash and due from banks $ 4,334,072 $ 6,802,959
Federal funds sold ---- 1,550,000
- -------------------------------------------------------------------------------------------------
Total cash and cash equivalents 4,334,072 8,352,959
Investment securities
(approximate fair value $56,847,000 and $59,597,000) 56,821,317 59,502,156
Mortgage loans held-for-sale 1,547,354 ----
Loans:
Real estate 110,416,494 99,842,835
Consumer and other 10,763,277 10,174,563
- -------------------------------------------------------------------------------------------------
Total loans 121,179,771 110,017,398
Less: Allowance for loan losses 827,521 906,567
Unearned discounts and origination fees 314,322 368,885
- -------------------------------------------------------------------------------------------------
Loans receivable, net 120,037,928 108,741,946
Premises and equipment, net 3,720,270 3,384,480
Accrued interest receivable 1,443,175 1,466,003
Other real estate 766,619 699,921
Intangible assets 3,604,876 3,920,632
Other assets 4,494,775 3,869,108
-------------------------------------------------------------------------------------------------
$196,770,386 $189,937,205
-------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits
Interest bearing $144,754,879 $151,656,742
Non-interest bearing 7,644,262 7,341,096
------------ ------------
Total deposits 152,399,141 158,997,838
Borrowed Funds 18,242,000 7,610,000
Note payable - ESOP 430,126 485,926
Other liabilities 2,116,384 1,453,357
- -------------------------------------------------------------------------------------------------
Total liabilities 173,187,651 168,547,121
Shareholders' equity:
Common stock, par value $.10 per share; authorized
9,900,000 shares; 2,874,999 shares issued and outstanding 287,500 1,916,666
Additional paid-in-capital 7,643,084 3,750,726
Retained earnings 17,156,415 15,787,666
Unearned stock based compensation (1,836,250) ----
Unearned ESOP shares (411,050) (477,908)
Unrealized appreciation on securities
available-for-sale 743,036 412,934
- -------------------------------------------------------------------------------------------------
Total shareholders' equity 23,582,735 21,390,084
-------------------------------------------------------------------------------------------------
$196,770,386 $189,937,205
-------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
19
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME:
Loans $10,063,659 $ 9,256,360 $ 8,325,213
Interest and dividends on investments:
U.S. Treasury and agencies 407,628 509,275 718,924
State and political subdivisions 372,376 320,192 274,681
Corporate 1,477,630 1,610,326 2,008,538
Marketable equity securities 82,819 27,857 107,337
Mortgage-backed 1,590,701 1,094,837 230,721
Federal funds sold and interest-bearing deposits 172,839 393,871 539,109
- ------------------------------------------------------------------------------------------------------------------
Total interest income 14,167,652 13,212,718 12,204,523
INTEREST EXPENSE:
Interest on deposits 6,287,117 6,295,592 6,255,020
Interest on borrowed funds 604,844 118,132 3,846
---------- ---------- ----------
Total interest expense 6,891,961 6,413,724 6,258,866
- ------------------------------------------------------------------------------------------------------------------
Net interest income 7,275,691 6,798,994 5,945,657
Provision for loan losses 261,112 636,410 102,500
- ------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 7,014,579 6,162,584 5,843,157
- ------------------------------------------------------------------------------------------------------------------
OTHER INCOME:
Service charges on deposit accounts 622,222 570,464 436,574
Mortgage servicing fees 49,811 37,364 35,645
Net securities gains (losses) 335,262 106,638 44,397
Deposit insurance refund ---- ---- 54,318
Other charges, commissions and fees 371,964 264,871 244,842
- ------------------------------------------------------------------------------------------------------------------
Total other income 1,379,259 979,337 815,776
- ------------------------------------------------------------------------------------------------------------------
OTHER EXPENSES:
Salaries and employee benefits 2,917,470 2,344,218 2,280,656
Building occupancy 666,082 691,101 659,774
Data processing expenses 387,741 375,557 409,400
Professional and other services 529,724 522,800 297,040
Deposit insurance premiums 33,139 235,843 325,735
Amortization 315,756 315,755 315,755
Provision for loss contingency ---- ---- 240,000
Other expenses 927,478 879,049 780,684
- ------------------------------------------------------------------------------------------------------------------
Total other expenses 5,777,390 5,364,323 5,309,044
Income before income taxes 2,616,448 1,777,598 1,349,889
Provision for income taxes 762,087 505,838 360,000
- ------------------------------------------------------------------------------------------------------------------
Net income $ 1,854,361 $ 1,271,760 $ 989,889
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
Earnings per share-basic and diluted $0.66 $0.45 $0.07
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
20
<PAGE>
<TABLE>
<CAPTION>
UNREALIZED APPRECIATION
ADDITIONAL UNEARNED (DEPRECIATION)
COMMON STOCK PAID IN RETAINED STOCK BASED ON INVESTMENT
SHARES AMOUNT CAPITAL EARNINGS COMPENSATION SECURITIES
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 $14,099,486 $(109,363)
Net income 989,889
Net proceeds from
issuance of
common stock 1,916,666 $ 1,916,666 $3,748,248
Acquisition of unearned
ESOP shares
ESOP shares earned 31
Capital contribution to
Pathfinder Bancorp,
M.H.C. (200,000)
Change in unrealized
net appreciation
(depreciation) on
investment securities 731,721
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 1,916,666 1,916,666 3,748,279 14,889,375 622,358
Net Income 1,271,760
Acquisition of unearned
ESOP shares
ESOP shares earned 2,447
Change in unrealized
net appreciation
(depreciation) on
investment securities (209,424)
Dividends declared
($0.13 per share) (373,469)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 1,916,666 1,916,666 3,750,726 15,787,666 412,934
Net Income 1,854,361
ESOP shares earned 59,692
Unearned stock-based
compensation awarded 2,203,500 (2,203,500)
Stock based compensation earned 367,250
Change in unrealized
net appreciation
(depreciation) on
investment securities 330,102
Dividends declared
($0.17 per share) (485,612)
Three-for-two stock split and reduction
in par value of common stock 958,333 (1,629,166) 1,629,166
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 2,874,999 $ 287,500 $7,643,084 $17,156,415 ($1,836,250) $ 743,036
===================================================================================================================================
<CAPTION>
Unearned
ESOP
Shares Total
- -----------------------------------------------------------------------------
<S> <C> <C>
Balance at December 31, 1994 $ 13,990,123
Net income 989,889
Net proceeds from
issuance of
common stock 5,664,914
Acquisition of unearned
ESOP shares ($436,250) (436,250)
ESOP shares earned 10,950 10,981
Capital contribution to
Pathfinder Bancorp,
M.H.C. (200,000)
Change in unrealized
net appreciation
(depreciation) on
investment securities 731,721
- -----------------------------------------------------------------------------
Balance, December 31, 1995 (425,300) 20,751,378
Net Income 1,271,760
Acquisition of unearned
ESOP shares (110,047) (110,047)
ESOP shares earned 57,439 59,886
Change in unrealized
net appreciation
(depreciation) on
investment securities (209,424)
Dividends declared
($0.13 per share) (373,469)
- -----------------------------------------------------------------------------
Balance, December 31, 1996 (477,908) 21,390,084
Net Income 1,854,361
ESOP shares earned 66,858 126,550
Unearned stock-based
compensation awarded
Stock based compensation earned 367,250
Change in unrealized
net appreciation
(depreciation) on
investment securities 330,102
Dividends declared
($0.17 per share) 485,612
Three-for-two stock split and reduction
in par value of common stock
- -----------------------------------------------------------------------------
Balance, December 31, 1997 ($411,050) $23,582,735
=============================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
21
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 1,854,361 $ 1,271,760 $ 989,889
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan, investment and other real estate losses 261,112 675,152 136,754
Provision for Nationar Loss ---- ---- 240,000
Deferred compensation 169,773 164,926 160,075
ESOP and other stock-based compensation earned 493,800 59,886 10,981
Deferred income tax provision 256,249 (62,775) (58,434)
Realized and unrealized losses (gains)
on investment securities (335,262) (106,638) (44,397)
Net loss on sale of other real estate ---- 3,602 29,783
Depreciation 235,282 248,105 327,827
Amortization of intangibles 315,756 315,755 315,755
Net amortization of premiums and discounts on
investment securities 65,923 114,115 348,485
Decrease (increase) in interest receivable 22,827 3,659 (69,291)
(Increase) decrease in other assets (437,353) (234,633) 307,135
(Decrease) Increase in other liabilities (137,440) (106,771) 308,012
- -----------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,765,028 2,346,143 3,002,574
- -----------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of investment securities available for sale (8,482,036) (28,604,061) (23,346,873)
Proceeds from maturities and principal reductions of
investment securities held to maturity 4,790,000 250,000 1,104,302
Proceeds from maturities and principal reductions of
investment securities available for sale 6,420,245 10,995,832 11,692,557
Proceeds from sale of investment securities available for sale 792,352 10,393,686 7,684,119
Net increase in loans (13,478,076) (9,674,236) (11,228,831)
Purchase of premises and equipment (571,072) (813,086) (1,135,676)
Proceeds from sale of other real estate owned 586,109 289,153 628,486
Increase in surrender value of life insurance (188,315) (138,210) (142,970)
Other investment activity (279,179) ---- ----
- -----------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (10,409,972) (17,300,922) (14,744,886)
- -----------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net decrease in demand deposits,
NOW accounts, savings accounts,
money market deposit accounts and escrow deposits (1,191,170) (4,454,805) (7,404,864)
Net (decrease)increase in time deposits (5,407,527) 5,128,707 9,635,211
Proceeds from borrowings 10,632,000 7,720,047 436,250
Repayments of borrowings (55,800) (48,799) (11,572)
Cash dividends (351,446) (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 3,626,057 7,957,467 7,883,689
- -----------------------------------------------------------------------------------------------------------------------------
Reclass of Nationar deposits from
cash equivalents to other assets (see Note 12) ---- 2,783,000 (2,960,000)
- -----------------------------------------------------------------------------------------------------------------------------
(Decrease) in cash and cash equivalent (4,018,887) (4,214,312) (6,818,623)
Cash and cash equivalents at beginning of year 8,352,959 12,567,271 19,385,894
- -----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 4,334,072 $ 8,352,959 $ 12,567,271
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
CASH PAID DURING THE PERIOD FOR:
Interest $ 6,835,301 $ 6,285,566 $ 6,255,153
Income Taxes Paid 795,705 529,477 215,000
NON-CASH INVESTING ACTIVITY:
Transfer of loans to other real estate 373,628 445,035 644,936
Gross change in unrealized appreciation (depreciation)
on securities available for sale 564,402 (349,040) 1,219,540
NON-CASH FINANCING ACTIVITY:
Dividends declared and unpaid 130,922 93,138 ----
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
22
<PAGE>
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
The accompanying consolidated financial statements include the accounts of
Pathfinder Bancorp, Inc. (the "Company") and its wholly owned subsidiary, Oswego
City Savings Bank (the "Bank"). All inter-company accounts and activity have
been eliminated in consolidation. 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.
Pathfinder Bancorp, M.H.C., (the "Holding Company") a mutual holding company
whose activity is not included in the accompanying financial statements, owns
approximately 54% of the outstanding common stock of the Company. Salaries,
employee benefits and rent approximating $48,000 were allocated from the Bank to
Pathfinder Bancorp, M.H.C. during 1997.
Effective December 1997, the Bank and Pathfinder Bancorp, M.H.C., reorganized
through the formation of Pathfinder Bancorp, Inc., a state-chartered, stock
holding company. The reorganization was effected by the exchange of outstanding
shares of the Bank for shares of Pathfinder Bancorp, Inc.
In September 1997, the Bank entered into a definitive agreement to merge with
Oswego County Savings Bank, a mutual, state-chartered savings bank with assets
of approximately $112 million. The merger requires approval of applicable
regulators, the shareholders of Pathfinder Bancorp, Inc., and the depositors of
Oswego County Savings Bank and is expected to be consummated in the second half
of 1998.
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 Company classifies investment securities as held-to-maturity or available-
for-sale. Held-to-maturity securities are those that the Company has the
positive intent and ability to hold to maturity, and are reported at cost,
adjusted for amortization of premiums and accretion of discounts. Investment
securities not classified as held-to-maturity are classified as available-for-
sale and are reported at fair value, with net unrealized gains and losses
reflected as a separate component of shareholders' equity, net of the applicable
income tax effect. None of the Company's investment securities have been
classified as trading securities.
Gains or losses on investment security transactions are based on the amortized
cost of the specific securities sold. Fair values for investment securities are
based on quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments. Premiums and discounts on securities are amortized and accreted
into income using the interest method over the period to maturity.
MORTGAGE LOANS HELD-FOR-SALE
Mortgage loans held-for-sale are carried at the lower of cost or fair value.
Fair value is determined in the aggregate.
LOANS
Loans are stated at unpaid principal balances, less the allowance for loan
losses and net deferred loan origination fees and costs. Interest income is
generally recognized when income is earned using the interest method.
Nonrefundable loan fees received and related direct origination costs incurred
are deferred and amortized over the life of the loan using the interest method,
resulting in a constant effective yield over the loan term. Deferred fees are
recognized into income immediately upon prepayment of the related loan.
23
<PAGE>
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 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 NON-ACCRUAL LOANS
Loans, including impaired loans, are generally classified as non-accrual if they
are past due as to maturity or payment of principal or interest for a period of
more than 90 days. When a loan is classified as non-accrual and the future
collectibility of the recorded loan balance is doubtful, collections of interest
and principal are generally applied as a reduction to principal outstanding.
When future collectibility of the recorded loan balance is expected, interest
income may be recognized on a cash basis. In the case where a 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.
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 Company
periodically reviews the carrying value of intangible assets using fair value
methodologies. Accumulated amortization totaled approximately $1,131,458 and
$816,000 at December 31, 1997 and 1996, 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, variable rate money market accounts
and time accounts approximate their carrying values at the reporting date. Fair
values for fixed rate time accounts 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.
INCOME TAXES
Provisions for income taxes are based on taxes currently payable or refundable
and deferred income taxes on temporary differences between the tax basis of
assets and liabilities and their reported amounts in the financial statements.
Deferred tax assets and liabilities are reported in the financial statements at
currently enacted income tax rates applicable to the period in which the
deferred tax assets and liabilities are expected to be realized or settled.
EARNINGS PER SHARE
Basic earnings per share are computed by dividing net income by the weighted
average number of common shares outstanding throughout each year (2,798,610,
2,801,503, and 2,816,279 for 1997, 1996, and November 15, 1995 through December
31, 1995, respectively as adjusted to reflect the 3 for 2 stock split). Diluted
earnings per share gives effect to weighted average shares which would be
outstanding assuming the exercise of issued stock options using the treasury
stock method (2,804,365 for 1997).
24
<PAGE>
In conjunction with the formation of Pathfinder Bancorp, Inc. in December 1997,
the Company changed the par value of its common stock from $1.00 to $.10. On
January 13, 1998, the Board of Directors declared a three-for-two stock split of
the Company's common stock to be effected in the form of a stock dividend
distributed February 5, 1998 to shareholders of record on January 26, 1998. The
effect of the stock split has been retroactively reflected as of December 31,
1997 in the consolidated statement of condition and statement of shareholders'
equity. All references to number of shares, per share amounts and stock option
data in the consolidated financial statements have been restated.
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" in 1997, which had no affect on quarterly or annual
earnings as previously reported.
FAIR VALUES OF FINANCIAL INSTRUMENTS
Financial Accounting Standards Board Statement No. 107, "Disclosure About Fair
Value of Financial Instruments," 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 non-financial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Company. The carrying amounts and
estimated fair values of financial instruments at December 31, are as follows:
<TABLE>
<CAPTION>
1997 1996
Carrying Estimated Carrying Estimated
Amounts Fair Values Amounts Fair Values
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 4,334,072 $ 4,334,000 $ 8,352,959 $ 8,353,000
Investment Securities 56,821,317 56,847,000 59,502,156 59,597,000
Mortgage loans held-for-sale 1,547,354 1,554,550 -- --
Loans 120,037,928 123,969,000 108,741,946 113,047,000
Accrued interest receivable & other assets 1,443,175 1,443,000 1,466,003 1,446,000
Deposits 152,399,141 148,044,000 158,997,838 154,888,000
Borrowed funds 18,242,000 18,242,000 7,610,000 7,610,000
Note payable - ESOP 430,126 430,000 485,926 486,000
</TABLE>
The fair value of options and commitments to extend credit is not significant.
RECLASSIFICATION
Certain amounts from 1996 and 1995 have been reclassified to conform to the
current years presentation. These reclassifications had no affect on net income
as previously reported.
NOTE 2: INVESTMENT SECURITIES
The amortized cost and estimated fair value of investment securities are
summarized as follows:
<TABLE>
<CAPTION>
December 31, 1997
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Held-to-maturity:
Corporate debt $ 5,115,232 $ 32,260 $ 6,131 $ 5,141,360
- -----------------------------------------------------------------------------------------------------
Available-for-sale:
Bond investments:
U.S. Treasury and agencies 4,856,250 36,312 8,224 4,884,338
State and political subdivision 6,635,657 424,830 545 7,059,942
Corporate 13,006,129 204,018 6,412 13,203,735
Mortgage-backed 23,023,302 189,011 54,374 23,157,939
- -----------------------------------------------------------------------------------------------------
Total 47,521,338 854,171 69,555 48,305,954
Stock investments:
Federal Home Loan Bank and Other 2,923,670 476,461 -- 3,400,131
- -----------------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Total available-for-sale $50,445,008 $1,330,632 $ 69,555 $51,706,085
- -----------------------------------------------------------------------------------------------------
Net unrealized gain on available-for-sale 1,261,077
Grand total carrying value $56,821,317
- -----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
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:
Federal Home Loan Bank and Other 1,734,623 339,413 -- 2,074,036
Total available-for-sale $49,182,859 $ 974,862 $284,868 $49,872,853
- -----------------------------------------------------------------------------------------------------
Net unrealized gain on available-for-sale 689,994
Grand total carrying value $59,502,156
- --------------------------------------------------------------------------------------------
</TABLE>
The amortized cost and estimated fair value of debt investments at December 31,
1997 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, 1997 December 31, 1997
- ----------------------------------------------------------------------------------------------------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $4,635,248 $4,678,344 $4,270,688 $4,293,934
Due after one year through five years 6,116,119 6,239,412 -- --
Due after five years through ten years 10,543,456 10,894,299 774,109 776,991
Due after ten years 3,203,213 3,335,960 70,435 70,435
Mortgage-backed securities 23,023,302 23,157,939 -- --
Totals $47,521,338 $48,305,954 $5,115,232 $5,141,360
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
Proceeds from the sales of debt securities for 1997, 1996, and 1995 were
$792,352, $10,393,686, and $7,624,121, respectively. Gross gains of $4,102,
$3,643, and $31,040 and gross losses of $15,698, $49,996 and $58,563 were
realized on these sales for 1997, 1996, and 1995, respectively. The sale of
marketable equity securities resulted in realized losses of $38,078 for 1995.
26
<PAGE>
NOTE 3: LOANS
Major classifications of loans at December 31, are as follows:
<TABLE>
<CAPTION>
1997 1996
--------------------------------------------------------------
<S> <C> <C>
Real estate mortgages:
Conventional $ 79,346,064 $ 72,357,149
Second mortgage loans 9,561,252 9,082,632
Construction 1,579,261 2,496,673
FHA insured 94,677 115,576
VA guaranteed 93,448 122,298
Commercial 19,741,792 15,668,507
--------------------------------------------------------------
110,416,494 99,842,835
--------------------------------------------------------------
Other loans:
Consumer 4,106,503 3,275,268
Lease financing 564,333 1,152,521
Passbook loans 170,854 206,133
Student 13,286 58,168
Commercial 5,908,301 5,482,472
10,763,277 10,174,563
$121,179,771 $110,017,398
--------------------------------------------------------------
</TABLE>
The Company grants mortgage and consumer loans to customers throughout Oswego
and parts of Onondaga counties. Although the Company has a diversified loan
portfolio, a substantial portion of its debtors ability to honor their contracts
is dependent upon the counties employment and economic conditions.
At December 31, 1997, loans to officers and directors were not significant.
During 1997, the Company began originating loans which conform to Federal
National Mortgage Association ("FNMA") underwriting standards with the intent to
securitize and sell such loans into the secondary market. The terms of the
loans originated for sale are limited to one-to-four family 15-year and 30-year
fixed rate mortgages.
In conjunction with the origination and pending sale of such mortgages, the
Company has engaged in certain transactions to mitigate or eliminate the impact
of changes in interest rates on the market value of the loans pending sale. At
December 31, 1997, the company had $3.0 million in notional amount outstanding
put options to hedge loans committed or loans closed and pending sale. The put
options are accounted for as hedging instruments. The put options provide the
bank the option to sell FNMA 30-year mortgage-backed securities at a specified
strike price prior to the maturity date. The unamortized carrying value of the
option premiums at December 31, 1997 was $26,000. The maturity dates on the
outstanding options are January 14 and February 5, 1998.
NOTE 4: ALLOWANCES FOR LOAN LOSSES
Changes in the allowance for loan losses are presented in the following summary:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of period $ 906,567 $345,660 $315,050
Recoveries credited 18,113 17,498 8,631
Provision for loan losses 261,112 636,410 102,500
Loans charged off (358,271) (93,001) (80,521)
Balance at end of period $ 827,521 $906,567 $345,660
--------------------------------------------------------------
</TABLE>
At December 31, 1997, the Company had no loans for which specific valuation
allowances were recorded.
During 1996, the Company had approximately $1.1 million of collateralized loans
outstanding with a lease financing company and its affiliates that were
determined to be impaired under SFAS No. 114. The Company established a
$420,000 reserve to reflect the estimated impairment. During 1996 and 1997, the
Company received payments reducing its outstanding balance in the loans
receivable to approximately $319,000. Loans charged off during 1997 of $358,271
included approximately $319,000 relating to these loans receivable.
27
<PAGE>
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.
NOTE 5: PREMISES AND EQUIPMENT
A summary of premises and equipment is as follows:
<TABLE>
<CAPTION>
1997 1996
-----------------------------------------------------------
<S> <C> <C>
Land $ 631,773 $ 416,993
Buildings 2,953,032 2,532,626
Furniture, fixture and equipment 1,839,156 1,781,615
Construction in progress 484,763 635,611
-----------------------------------------------------------
5,908,724 5,366,845
Less: Accumulated depreciation 2,188,454 1,982,365
$3,720,270 $3,384,480
-----------------------------------------------------------
</TABLE>
NOTE 6: DEPOSITS
A summary of amounts due to depositors is shown as follows:
<TABLE>
<CAPTION>
1997 1996
--------------------------------------------------------------------
<S> <C> <C>
Savings accounts $ 63,937,467 $ 65,634,242
Money market accounts 112,842 173,758
Time accounts 67,058,897 72,466,425
Demand deposits interest bearing 13,306,129 13,081,669
Demand deposits non-interest bearing 7,644,262 7,341,096
Mortgages escrow funds 339,544 300,648
$152,399,141 $158,997,838
--------------------------------------------------------------------
</TABLE>
Time deposits with balances in excess of $100,000 amounted to approximately
$8,455,000 and $11,216,000 at December 31, 1997 and 1996, respectively. The
approximate maturity of time deposits is as follows:
<TABLE>
<CAPTION>
1997 1996
- -----------------------------------------------------------------------------------
Year of Maturity Amount Percent Amount Percent
<S> <C> <C> <C> <C>
1 $38,860,000 57.9% $52,929,000 73.0%
2 17,960,000 26.8% 7,886,000 10.9%
3 to 5 8,621,000 12.9% 9,035,000 12.5%
5 and over 1,618,000 2.4% 2,616,000 3.6%
- -----------------------------------------------------------------------------------
$67,059,000 100.0% $72,466,000 100.0%
- -----------------------------------------------------------------------------------
</TABLE>
NOTE 7: BORROWED FUNDS
The Company has available a $550,870 line of credit in connection with the
Employee Stock Ownership Plan, of which $430,126 was outstanding at December 31,
1997. Principal and interest are payable quarterly at prime minus one over 10
years.
The Company maintains an unsecured overnight line of credit with the Federal
Home Loan Bank for liquidity purposes. At December 31, 1997, $9,500,000 was
available under this line of which $5,750,000 was outstanding. Interest on this
line is determined at the time of borrowing. The average rate paid on the
overnight line during 1997 approximated 5.8%. The outstanding balance is
Collateralized by Certain Mortgage loans under a pledge agreement with the
Federal Home Loan Bank.
The Company has term borrowings in the form of repurchase agreements and
advances. At December 31, 1997, repurchase agreements totalled $7.9 million and
advances totalled $4.6 million. The repurchase agreements mature within 90 days
and carry interest rates varying from 5.65% and 5.84%. The repurchase agreements
are collateralized by mortgage-backed securities which had a carrying value of
$8.3 million at December 31, 1997.
The principal balance, interest rates, and maturities on the term advances are
as follows:
Principal Rate Term Maturity Date
--------- ---- ---- -------------
$ 850,000 6.12% 1 yr. 12/29/98
$ 1,000,000 5.98% 1 yr. 8/13/98
$ 1,000,000 6.24% 2 yrs. 8/13/99
$ 1,700,000 6.96% 1 yr. 10/29/98
NOTE 8: EMPLOYEE BENEFITS
The Company 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
Company'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):
28
<PAGE>
<TABLE>
Plan assets at fair value $3,231,500 $2,627,000
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligations
Vested benefits 2,034,500 1,755,900
Nonvested benefits 54,500 87,500
- ----------------------------------------------------------------------------------------------------------------------------
Accumulated benefit obligations 2,089,000 1,843,400
Effect of future salary increases 370,200 366,800
Projected benefit obligation 2,459,200 2,210,200
- ----------------------------------------------------------------------------------------------------------------------------
Plan assets in excess of projected benefit obligation 772,400 416,800
Unrecognized net loss (173,100) 147,400
Unrecognized past service liability 5,500 6,600
Unrecognized transition obligation -- (34,200)
Prepaid pension asset included in other assets $ 604,800 $ 536,600
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Net periodic pension cost for the years ended December 31 is as follows:
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost benefits earned during the year $ 76,262 $ 94,076 $ 99,664
Interest cost on projected benefit obligations 169,405 162,256 148,160
Return on plan assets (582,197) (314,657) (377,065)
Net amortization and deferral 340,840 99,445 203,924
Net periodic pension expense $ 4,310 $ 41,120 $ 74,683
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The actuarial present value of the projected benefit obligation shown in the
above table is based on a discount rate of 7.25% and 7.75% for 1997 and 1996,
respectively and an assumed rate of increase in future compensation levels of
5.0%. The expected long-term rate of return on assets was 8% for 1997 and 1996.
The Company 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 costs of post-retirement health
and life insurance benefits are accrued for during the service lives of
employees. The Company 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 post-retirement benefit cost at December 31, includes the following
components:
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service Cost $ 3,014 $ 3,748 $ 3,344
Amortization of transition obligation 18,450 18,978 18,978
Interest on APBO less interest on expected benefit payments 24,898 24,976 26,238
Net periodic post-retirement benefit costs $46,362 $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 1997, 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 post-retirement benefit obligation as of
December 31, 1997 by $17,766, and increase the aggregate of the service cost and
interest cost components of net periodic post-retirement benefit cost for 1997
by $1,205. A discount rate of 7.00% was used to determine the accumulated post-
retirement obligation.
The funded status of the plan as of December 31, is as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Accumulated Post-retirement Benefit Obligation (APBO):
Retirees $299,681 $ 277,142
Other active plan participants 78,048 92,110
- --------------------------------------------------------------------------------------------------------------------------------
Total APBO 377,729 369,252
Plan Assets -- --
- --------------------------------------------------------------------------------------------------------------------------------
APBO in excess of plan assets (377,729) (369,252)
Unrecognized portion of net obligation at transition 273,909 292,887
Unrecognized net loss 11,594 12,779
- --------------------------------------------------------------------------------------------------------------------------------
Accrued post-retirement benefit cost $(92,226) $ (63,586)
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
29
<PAGE>
The Company 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, 1997. The Company's contributions are at the discretion of
the board of directors. Company contributions associated with the Plan amounted
to $41,400, $35,400, and $0 for the years ended December 31, 1997, 1996, and
1995, respectively.
NOTE 9: DEFERRED COMPENSATION AND SUPPLEMENTAL RETIREMENT PLANS
The Company maintains optional deferred compensation plans for its directors
whereby fees normally received are deferred and paid by the Company based upon a
payment schedule commencing at age 65 and continue monthly for 10 years.
Directors must serve on the board for a minimum of 5 years to be eligible for
the Plan. At December 31, 1997 and 1996, other liabilities include approximately
$565,000 and $539,000, respectively, relating to deferred compensation. Deferred
compensation expense for the years ended December 31, 1997, 1996 and 1995
amounted to approximately $60,000, $49,000, and $39,000, respectively.
The Company has a supplemental executive retirement plan and a director emeritus
plan for the benefit of directors and certain executive officers. Benefits under
the Supplemental executive retirement plan are intended to provide a 15 year
income stream which approximates 70-75% of final compensation including defined
benefit and defined contribution plans and social security payments. Benefits
under the director emeritus plans are provided to directors after retirement
from the Board as a defined benefit retirement plan. The plans have been funded
with single premium life insurance policies on the participating directors and
officers, with the Company as owner and beneficiary of the policies. Cash
surrender value related to these policies approximates $3,378,000 at December
31, 1997 and $3,190,171 at December 31, 1996 and is included in other assets. At
December 31, 1997 and 1996, other liabilities include approximately $425,000 and
$281,000 accrued under these plans. Compensation expense includes approximately
$136,000, $131,000, and $121,000 relating to the supplemental executive
retirement plan and director emeritus plan for 1997, 1996 and 1995,
respectively.
NOTE 10: STOCK BASED COMPENSATION PLANS
During 1997, shareholders approved the 1997 Stock Option Plan and Management
Recognition and Retention Plan for directors, officers and key employees. Under
the Stock Option Plan, up to 88,166 options have been authorized for grant of
incentive stock options and non-qualified stock options. All options have a 10-
year term and vest and become exercisable ratably over a 6-year period.
Activity in the Stock Option Plan for 1997 is as follows:
<TABLE>
<CAPTION>
Options Option Price Shares
Outstanding Per Share Exercisable
<S> <C> <C> <C>
- --------------------------------------------------------------------------------
Outstanding at December 31, 1996 0 - -
Granted 132,000 $ 6.58 0
Exercised - - -
Forfeited - - -
Outstanding at December 31, 1997 132,000 $ 6.58 0
- --------------------------------------------------------------------------------
</TABLE>
In February 1997, the Board approved option grants with an exercise price equal
to the market value of the Company's shares at the date of grant, subject to
shareholder approval. Upon shareholder approval of the plans in December 1997,
the excess of market value over exercise price for approved options approximated
$1,330,000. This amount has been recorded as unearned stock-based compensation
within the stockholders' equity section of the statement of condition and will
be recognized as compensation expense ratably over the 6-year vesting period of
the options.
During 1997, the Company awarded 52,350 shares (52,950 authorized) of restricted
stock under the Management Recognition and Retention Plan. The market value of
shares awarded at the date of grant approximated $873,000 and has been
recognized in the accompanying statement of condition as unearned stock-based
compensation, net of compensation expense of approximately $145,000 for 1997.
The market value of shares awarded will be recognized as compensation expense
ratably over the 6-year restriction period.
The Company has elected to account for its stock-based compensation plans in
accordance with Accounting Principles Board Opinion No. 25. Pro forma amounts
of net income and earnings per share under Statement of Financial Accounting
Standards No. 123 are as follows:
<TABLE>
<CAPTION>
1997
- --------------------------------------------------------------------------------
<S> <C>
Net Income:
As reported $1,854,361
Pro forma 1,804,108
</TABLE>
30
<PAGE>
Earnings per share (basic and diluted):
As reported $ .66
Pro forma .65
The fair value of these options was estimated at the date of grant using a
Black-Scholes options pricing model with the following assumptions: risk free
interest rate 5.77%; dividend yield 2.0%; market price volatility 36.95%;
weighted average option life - 6 years. For purposes of pro forma disclosures,
the estimated fair value of the options is amortized to expense over the
options' vesting period. Therefore, the foregoing pro forma results are not
likely to be representative of the effects of reported net income of future
periods due to additional years of vesting. The weighted-average fair value per
share of discounted options granted during 1997 is $13.32.
The Company sponsors 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 Company 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 debt of the ESOP is recorded as a liability of, and guaranteed by, the
Company and the shares pledged as collateral are reported as unearned ESOP
shares in the Company's statement of financial condition. As shares are earned,
the Company 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 $167,000 and $70,000 for
the fiscal years ended December 31, 1997 and 1996, respectively. Of the 92,574
shares acquired on behalf of the ESOP, 23,052 and 11,722 shares were released as
of December 31, 1997 and 1996, respectively. The estimated fair value of the
remaining 69,522 shares at December 31, 1997 is $1,390,000.
NOTE 11: INCOME TAXES
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------------------------------------------------------
<S> <C> <C> <C>
Current $839,029 $568,613 $418,434
Deferred (76,942) (62,775) (58,434
$762,087 $505,838 $360,000
- --------------------------------------------------------------------------------
</TABLE>
The components of deferred income taxes, included in other assets
(liabilities), consist of the following:
<TABLE>
<CAPTION>
December 31,
1997 1996
------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Loan origination fees $125,540 $147,333
Deferred compensation 395,218 327,411
Allowance for loan losses 144,233 102,547
Stock based compensation 146,680 --
ESOP 7,619 7,824
Postretirement benefits 34,592 21,700
Other 6,091 6,091
- -------------------------------------------------------------------------------------------------------
859,973 612,906
Liabilities
Pension benefits 198,631 165,081
Depreciation 10,845 21,784
Investments 719,167 377,675
928,643 564,540
Net deferred tax asset (liability) $(68,670) $ 48,366
- -------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
The Company has determined that no valuation allowance is necessary as it is
more likely than not deferred tax assets will be realized through carryback to
taxable income in prior years, future reversals of existing temporary
differences and through future taxable income.
A reconciliation of the federal statutory income tax rate to the effective
income tax rate at December 31, is as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal statutory income tax rate 34.0% 34.0% 34.0%
</TABLE>
31
<PAGE>
<TABLE>
<S> <C> <C> <C>
State tax, net of federal benefit 4.3 2.7 3.8
Tax-exempt interest income (6.7) (8.0) (9.7)
Dividends received deduction (0.1) (0.3) (1.7)
Other (2.4) 0.1 0.1
- --------------------------------------------------------------------------------
Effective income tax rate 29.1% 28.5% 26.5%
------------------------------------------------------------------------------
</TABLE>
NOTE 12: COMMITMENTS AND CONTINGENCIES
The Company is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments consist primarily of commitments to extend credit,
which involve, to varying degrees, elements of credit risk in excess of the
amount recognized in the statement of condition. The contract amount of those
commitments to extend credit reflects the extent of involvement the Commitment
has in this particular class of financial instrument. The Company's exposure to
credit loss in the event of nonperformance by the other party to the financial
instrument for commitments to extend credit is represented by the contractual
amount of the instrument. The Company uses the same credit policies in making
commitments as it does for on-balance sheet instruments.
<TABLE>
<CAPTION>
Contract Amount
- -----------------------------------------------------------------------------------------------
<S> <C>
Financial instruments whose contract amounts represent
credit risk at December 31:
1997 $14,009,007
1996 6,399,157
</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 Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Company upon extension of credit, is based on
management's credit evaluation of the counter party. Collateral held varies but
may include residential real estate and income-producing commercial properties.
The Company leases land for a branch under an operating lease expiring in 2013.
Rent expense totaled approximately $15,000 in 1997, $14,000 in 1996, and $13,000
in 1995. The lease provides for renewal options for two 10 year periods at
specified amounts ranging from $18,000 to $24,000 per year. Rental payments are
subject to increases based upon the preceding years Revised Consumer Price
Index, but limited to 5% in any one year. Approximate minimum rental commitments
for the non-cancelable operating lease is as follows:
<TABLE>
<CAPTION>
Year ending December 31:
<S> <C>
1998 15,200
1999 15,200
2000 15,200
2001 16,200
2002 16,200
Thereafter 199,600
- --------------------------------------------------------------------------------
Total minimum lease payments $277,600
-------------------------------------------------------------------------------
</TABLE>
During 1995, the New York Superintendent of Banks ("Superintendent") was
appointed conservator of Nationar, a New York chartered commercial Company owned
by savings banks throughout the state. The Superintendent froze all assets of
Nationar at the time he was appointed conservator. The Company had
approximately $3.0 million on deposit with Nationar against which a provision
for possible losses of $240,000 was recorded for the year ended December 31,
1995. During 1996, distributions were made from the Nationar estate to settle
all accepted claims. In connection with this settlement, the Company 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.
NOTE 13: DIVIDENDS AND RESTRICTIONS
The board of trustees of Pathfinder Bancorp, M.H.C., determines whether the
Holding Company will waive or receive dividends declared by the Company each
time the Company declares a dividend, which is expected to be on a quarterly
basis. The Holding Company may elect to receive dividends and utilize such funds
to pay expenses or for other allowable purposes. The Federal Reserve Bank (the
"FRB") has indicated that (i) the Holding Company shall provide the FRB annually
with written notice of its intent to waive its dividends prior to the proposed
date of the dividend, and the FRB shall have the authority to approve or deny
any dividend waiver request; (ii) if a waiver is granted, dividends waived by
the Holding Company will not be available for payment to the minority
shareholders and such amounts will be excluded from the
32
<PAGE>
Company's capital accounts for purposes of calculating dividend payments to
minority shareholders; (iii) the Company shall establish a restricted capital
account in the amount of any dividends waived by the Holding Company, and such
restricted capital account would be added to any liquidation account in the
Company established in connection with a conversion of the Holding Company to
stock form and would be maintained in accordance with OTS requirements. During
1997, the Company paid cash dividends totaling $248,400 to the Holding Company.
The restricted capital account has a $0 balance as of December 31, 1997.
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 $3,389,000 as of December 31, 1997.
NOTE 14: REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guideline and the regulatory
framework for prompt corrective action, the Bank must meet specific capital
guidelines that involve quantitative measures of the Bank's assets, liabilities,
and certain off-balance sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classifications are also subject to
qualitative judgements by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain amounts and ratios (set forth in the table below)
of total and Tier 1 capital (as defined in the regulations) to risk-weighted
assets (as defined), and of Tier 1 capital (as defined) to average assets (as
defined). Management believes, as of December 31, 1997, 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, 1997:
Total Core Capital
(to Risk Weighted Assets) $20,062,344 17.1% $9,428,960 8.0% $11,786,200 10.0%
Tier 1 Capital
(to Risk Weighted assets) $19,234,823 16.4% $4,714,480 4.0% $ 7,071,720 6.0%
Tier 1 Capital
(to Average Assets) $19,234,823 10.1% $7,665,120 4.0% $ 9,581,400 5.0%
- -----------------------------------------------------------------------------------------------------------------------------------
AS OF DECEMBER 31, 1996:
Total Core Capital
(to Risk Weighted Assets) $18,376,019 15.7% $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% $7,319,520 4.0% $ 9,149,400 5.0%
</TABLE>
NOTE 15: FINANCIAL CONDITION - PARENT COMPANY
As discussed in Note 1, on December 30, 1997 the Company reorganized through the
formation of Pathfinder Bancorp, Inc., a state-chartered, stock holding company.
The following represents the condensed balance sheet of Pathfinder Bancorp, Inc.
at December 31, 1997.
STATEMENT OF CONDITION
----------------------
Assets
Receivable from subsidiary $ 3,000,000
Investment in Bank subsidiary 20,582,735
==========
$ 23,582,735
============
Shareholders' equity $ 23,582,735
============
33
<PAGE>
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
34
<PAGE>
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
35
<PAGE>
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
36
<PAGE>
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 1997 Annual Report to the Federal Deposit Insurance
Corporation, Form 10-K,
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
37
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
Company Percent Owned
- ----------------------- -------------
Oswego City Savings Bank 100%
<PAGE>
APPENDIX B
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE QUARTER ENDED JUNE 30, 1998
SEC Exchange Act No. 000-23601
---------
Pathfinder Bancorp, Inc.
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(Exact name of bank as specified in its charter)
New York
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(State or jurisdiction of incorporation or organization)
16-1540137
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(I.R.S. Employer Identification Number)
214 W. 1st Street
Oswego, New York 13126
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(Address of principal executive office) (Zip Code)
Bank's telephone number, including area code: (315) 343-0057
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Not Applicable
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(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 2,874,999
shares of the Company's common stock outstanding as of August 10, 1998.
<PAGE>
OSWEGO CITY SAVINGS BANK
INDEX
PART 1 FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
. Consolidated Balance Sheets 1
. Consolidated Statements of Income 2
. Consolidated Statements of Shareholders' 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 - 15
Condition and Results of Operations
PART II OTHER INFORMATION 16
SIGNATURES
<PAGE>
PATHFINDER BANCORP, INC.
CONSOLIDATED STATEMENTS OF CONDITION
June 30, 1998 (unaudited) and December 31, 1997
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
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ASSETS
------
<S> <C> <C>
Cash and due from banks $4,520,170 $4,334,072
Federal funds sold 1,300,000 --
------------ ------------
Total cash and cash equivalents 5,820,170 4,334,072
Investment securities 47,037,418 56,821,317
Mortgage loans held-for-sale 6,657,825 1,547,354
Loans:
Real Estate 113,292,320 110,416,494
Consumer and other 11,099,895 10,763,277
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Total loans 124,392,215 121,179,771
Less: Allowance for loan losses 824,161 827,521
Unearned discounts and origination fees 240,103 314,322
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Loans Receivable, net 123,327,951 120,037,928
Premises and equipment 4,085,244 3,720,270
Accrued interest receivable 1,405,298 1,443,175
Other real estate 1,139,517 766,619
Intangible assets 3,446,998 3,604,876
Other assets 5,170,889 4,494,775
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$198,091,310 $196,770,386
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Deposits:
Interest bearing $148,146,979 $144,754,879
Non-interest bearing 9,251,951 7,644,262
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Total deposits 157,398,930 152,399,141
Borrowed funds 14,600,000 18,242,000
Note payable - ESPOP 402,226 430,126
Other liabilities 2,145,835 2,116,384
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Total liabilities 174,546,991 173,187,651
Shareholders' equity: (1)
Common stock, par value $.10 per share; authorized
9,900,000 shares; 2,874,999 shares issued
and outstanding 287,500 287,500
Additional paid in capital 7,568,675 7,643,084
Retained earnings 17,625,300 17,156,415
Unearned stock based compensation (1,634,326) (1,836,250)
Unearned ESOP shares (378,988) (411,050)
Accumulated other comprehensive income 874,482 743,036
Treasury stock, at cost; 43,625 shares (798,324) ---
------------ ------------
Total shareholders' equity 23,544,319 23,582,735
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$198,091,310 $196,770,386
============ ============
</TABLE>
(1) December 31, 1997 amounts reflect impact of reorganization for Pathfinder
Bancorp, Inc. and the retroactive effect of the 3 for 2 split declared on
January 13, 1998 and paid on February 5, 1998
The accompanying notes are an integral part of the financial statements
1
<PAGE>
PATHFINDER BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
For the three months and six months ended
June 30, 1998 and June 30, 1997
(unaudited)
<TABLE>
<CAPTION>
For the three months ended For the six months ended
--------------------------- ---------------------------
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans $2,761,930 $2,448,881 $5,438,051 $4,898,913
Interest and dividends on investments:
U.S. Treasury and agencies 60,624 104,422 136,683 208,045
State and political subdivisions 88,001 93,472 178,999 182,191
Corporate 275,385 377,538 572,878 759,634
Marketable equity securities 23,716 16,470 49,285 21,820
Mortgage-backed 341,066 389,630 712,244 775,354
Federal funds sold and interest-bearing
deposits 25,269 68,752 37,375 125,760
---------- ---------- ---------- ----------
Total interest income 3,575,991 3,499,165 7,125,515 6,971,717
INTEREST EXPENSE:
Interest on deposits 1,541,859 1,572,159 3,070,725 3,141,541
Interest on borrowed funds 226,461 111,929 480,736 224,804
---------- ---------- ---------- ----------
Total interest expense 1,768,320 1,684,088 3,551,461 3,366,345
---------- ---------- ---------- ----------
Net interest income 1,807,671 1,815,077 3,574,054 3,605,372
Provision for loan losses 65,243 65,880 140,541 127,351
---------- ---------- ---------- ----------
Net interest income after provision for
loan losses 1,742,428 1,749,197 3,433,513 3,478,021
---------- ---------- ---------- ----------
OTHER INCOME:
Service charges on deposit accounts 127,278 128,130 239,232 250,632
Mortgage servicing fees 11,422 11,579 23,997 23,139
Net securities gains 41,206 172,053 270,045 172,053
Other charges, commission and fees 105,957 171,796 177,302 272,856
---------- ---------- ---------- ----------
Total other income 285,863 483,558 710,576 718,680
---------- ---------- ---------- ----------
OTHER EXPENSES:
Salaries and employee benefits (a) 743,349 610,420 1,526,665 1,229,020
Building occupancy 159,678 158,078 321,494 338,567
Data processing expenses 111,682 94,944 224,959 180,136
Professional and other services 197,870 152,288 318,368 263,312
Deposit insurance premiums 7,732 9,237 20,046 17,618
Amortization of intangible asset (b) 78,939 78,939 157,878 157,878
Other expenses 241,990 216,420 524,711 406,991
---------- ---------- ---------- ----------
Total other expenses 1,541,240 1,320,326 3,094,121 2,593,522
---------- ---------- ---------- ----------
Income before income taxes 487,051 912,429 1,049,968 1,603,179
Provision for income taxes (c) 135,614 270,515 304,490 465,965
---------- ---------- ---------- ----------
Net income $ 351,437 $ 641,914 $ 745,478 $1,137,214
---------- ---------- ---------- ----------
Other comprehensive income, net of tax:
Unrealized gains on securities: 87,118 379,632 160,067 35,751
Unrealized holding gains arising during
period
Less: reclassification adjustment for gains included
in net income (28,621)
---------- ---------- ---------- ----------
Comprehensive income $ 438,555 $1,021,546 $ 876,924 $1,172,965
========== ========== ========== ==========
Earnings per share - basic $ .13 $ .23 $ .27 $ .41
========== ========== ========== ==========
Earnings per share - diluted $ .12 $ .23 $ .26 $ .41
========== ========== ========== ==========
</TABLE>
(a) includes non-cash expenses for stock based compensation plans of $244,000
and $103,000 for the three month period ended June 30, 1998 and 1997,
respectively, and $478,000 and $204,000 for the six month period ended June
30, 1998 and 1997, respectively.
(b) represents the non-cash amortization of premium paid on deposits acquired
(c) includes the tax benefit associated with the realization of non-cash
expenses of $73,000 and $31,000 for the three month period ended June 30,
1998 and 1997, respectively, and $143,000 and $61,000 for the six month
period ended June 30, 1998 and 1997, respectively.
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<PAGE>
PATHFINDER BANCORP, INC.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1998
(unaudited)
<TABLE>
<CAPTION>
Accum.
Common Stock Add't Unearned Other Unearned
--------------------- Paid in Retained Stock-Based Compr. ESOP Treasury
Shares Amount Capital Earnings Compensation Income Shares Stock
--------- -------- ---------- ----------- ------------ -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 2,874,999 $287,500 $7,643,084 $17,156,415 $(1,836,250) $743,036 $(411,050) $ -
Net Income 745,478
Other comprehensive income,
net of tax Unrealized gains
on securities, net of
reclassification adjustment
Comprehensive income
ESOP shares earned 85,255 32,062
Treasury stock purchased (957,988)
Stock awards granted (159,664) 159,664
Stock based compensation earned 201,924
Change in unrealized net
appreciation on investment
securities
131,446
Dividends declared (276,593)
-------- ---------- ----------- ----------- -------- --------- ---------
Balance, June 30, 1998 2,874,999 $287,500 $7,568,675 $17,625,300 $(1,634,326) $874,482 $(378,988) $(798,324)
========= ======== ========== =========== =========== ======== ========= =========
<CAPTION>
Total
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<S> <C>
Balance, December 31, 1997 $23,582,735
Net Income 745,478
Other comprehensive income,
net of tax Unrealized gains
on securities, net of
reclassification adjustment
Comprehensive income
ESOP shares earned 117,317
Treasury stock purchased (957,988)
Stock awards granted 0
Stock based compensation earned 201,924
Change in unrealized net
appreciation on investment
securities 131,446
Dividends declared (276,593)
-----------
Balance, June 30, 1998 $23,544,319
===========
</TABLE>
The accompanying notes are an integral part of the financial statements
-3-
<PAGE>
PATHFINDER BANCORP, INC.
STATEMENTS OF CASH FLOW
June 30, 1998 and June 30, 1997
(unaudited)
<TABLE>
<CAPTION>
June 30, June 30,
1998 1997
------------ -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 745,478 $ 1,137,215
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan, investment and other real estate losses 140,541 127,351
Deferred compensation 97,532 80,706
ESOP and other stock-based compensation earned 319,241 45,689
Deferred income taxes -- (121,286)
Realized (gains) losses on investment securities (270,045) 12,009
Depreciation 106,325 126,281
Amortization of intangibles 157,878 157,878
Net amortization of premiums and discounts on
investment securities 25,526 39,096
Loss on other real estate sale 7,639 --
Decrease (increase) in interest receivable 37,877 (82,936)
Increase in other assets (595,931) (38,301)
Decrease in other liabilities (269,904) (180,113)
----------- -----------
Net cash used in operating activities 502,157 1,298,925
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INVESTING ACTIVITIES:
Purchase of investment securities available for sale (1,734,488) (4,280,146)
Proceeds from maturities and principle reductions of
investment securities held to maturity 2,770,000 200,000
Proceeds from maturities and principle reductions of
investment securities available for sale 8,769,864 3,761,487
Proceeds from sale of investment securities 420,129 547,187
Net increase in loans (9,074,670) (3,060,259)
Purchase of premises and equipment (471,299) (286,548)
Proceeds from sale of other real estate owned 339,096 441,278
Increase in surrender value of life insurance (80,184) (117,370)
Other investing activities (185,998) --
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Net cash used in investing activities 752,450 (2,789,707)
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</TABLE>
-4-
<PAGE>
STATEMENT OF CASH FLOWS
(continued)
June 30, June 30,
1998 1997
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FINANCING ACTIVITIES:
Net increase (decrease) in demand deposits,
NOW accounts savings accounts, money market
deposit accounts and escrow deposits $ 3,933,120 $ (50,811)
Net increase (decrease) in time deposits 1,066,669 (332,666)
Net (repayments of) proceeds from short term
borrowings (3,642,000) 440,000
Repayments of borrowings (27,900) (27,900)
Cash dividends (140,410) (223,898)
Treasury stock acquired (957,988) --
----------- -----------
Net cash (used in) provided by financing
activities 231,491 (195,275)
Decrease in cash and cash equivalents 1,486,098 (1,686,057)
Cash and cash equivalents at beginning of period 4,334,072 8,352,959
----------- -----------
Cash and cash equivalents at end of period $ 5,820,170 $ 6,666,902
=========== ===========
CASH PAID DURING THE PERIOD FOR:
Interest $ 3,641,226 $ 3,331,996
Income taxes 441,000 636,912
NON-CASH INVESTING ACTIVITY:
Transfer of loans to other real estate $ 533,635 $ 274,790
Unrealized holding gains arising during period 219,077 59,585
NON-CASH FINANCING ACTIVITY:
Dividends declared and unpaid $ 136,188 $ 134,167
Stock awards granted 159,664 --
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 10-Q and Regulation S-X 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, 1997 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 and six months ended June 30, 1998 and 1997.
Operating results for the three months and six months ended June 30, 1998
are not necessarily indicative of the results that may be expected for the
year ending December 31, 1998.
(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 June 30, 1998 and 1997, using 2,779,556 and 2,797,086, weighted
average common shares outstanding, respectively. Year-to-date earnings per
share have been computed based upon net income for the six months ended June
30, 1998 and 1997 using 2,781,098 and 2,795,642 weighted average common
shares.
(3) New Accounting Pronouncements
- ---------------------------------
Effective January 1, 1998, the Company adopted statement of Financial
Accounting Standards No. 130 "Reporting Comprehensive Income". This
pronouncement requires the Company to report the effects of unrealized
investment holding gains or losses on comprehensive income.
-6-
<PAGE>
Pathfinder Bancorp, Inc.
Management's Discussion and Analysis of
Financial Condition and Results of Operation
General
On December 30, 1997, Oswego City Savings Bank completed its reorganization into
the mid-tier holding company form of mutual holding company ownership.
Throughout the Management's Discussion and Analysis the term, "the Company",
refers to the consolidated entity of Pathfinder Bancorp, Inc. and Oswego City
Savings Bank or the Bank for the periods prior to December 30, 1997. At June 30,
1998, Pathfinder Bancorp, Inc.'s only business was the 100% ownership of Oswego
City Savings Bank.
The Company's net income is primarily dependent on its net interest income,
which is the difference between interest income earned on its investments in
mortgage loans, investment securities and other loans, and its cost of funds
consisting of interest paid on deposits and borrowed funds. The Company's net
income also is affected by its provision for loan losses, as well as by the
amount of non interest income, including income from fees and service charges,
net gains and losses on sales of securities, and non interest expense such as
employee compensation and benefits, deposit insurance premiums, occupancy and
equipment costs, data processing and income taxes. Earnings of the Company also
are affected significantly by general economic and competitive conditions,
particularly changes in market interest rates, government policies and actions
of regulatory authorities, which events are beyond the control of the Company.
In particular, the general level of market rates tends to be highly cyclical.
Proposed Merger
- ---------------
On September 5, 1997, the Board of Directors of the Company, in conjunction with
the Board of Trustees of Oswego County Savings Bank, a New York State chartered
mutual savings bank headquartered in Oswego, New York, announced the adoption of
a definitive merger agreement under which the banks will be combined. The
proposed transaction is subject to regulatory approval, as well as approval of
the shareholders of Pathfinder Bancorp, Inc.. On May 13, 1998, applications for
the merger were file with the Federal Deposit Insurance Corporation, the Federal
Reserve Bank, and the New York State Banking Department. As of June 30, 1998,
Oswego County Savings Bank had total assets of approximately $109.7 million,
deposits of $96.7 million and net worth of $11.3 million. Upon completion of the
proposed merger, the Company's total assets and deposits will increase
commensurately. Refer to the "Recent Events" for additional information
regarding the proposed merger.
Year 2000
- ---------
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. The Company's computer
programs that have date sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. Left unresolved, the year 2000 issue
could result in a system failure or miscalculations causing disruptions of
operations including, but not limited to, a temporary inability to process
transactions, calculate interest, or engage in similar normal business
activities. In early 1997, the Company formed a Year 2000 committee to address
the issues surrounding the problem. The committee has adopted a policy statement
and plan of action to identify, correct, test, and implement solutions to ensure
that the Company's systems are ready to process in the year 2000 and beyond. The
policy statement comprises three phases: the assessment phase, the renovation
phase, and the validation phase. During 1997, the Company completed its
assessment phase and has identified its computer and electronic software systems
that will require modification or replacement. The committee has determined that
the required changes are minimal, and that such changes will resolve the
Company's Year 2000 computer systems issues. The committee has segregated the
issues between those that affect
-7-
<PAGE>
information technology ("IT") and those that do not ("non-IT"). Testing for non-
IT systems is 90% complete at June 30, 1998. Testing and implementation of
solutions for IT will continue commence in September 1998 with a goal to be
fully tested by December 31, 1998. The Company will utilize both internal and
external resources to program, replace, and test the software for Year 2000
modifications. The Company is also communicating with its third party data
processing vendors, as well as its significant suppliers and commercial
customers, to determine the Company's exposure should any of these parties fail
to resolve their own significant Year 2000 issues. The committee is evaluating
the risk from these third parties and, where appropriate, will establish action
plans to reduce or eliminate the risk. In some cases, the Company will rely on
third party information which may be inaccurate and unverifiable. Should third
party entities, including Federal and State governments and agencies fail to
resolve their own Year 2000 issues, an adverse effect on the Company could
result. The committee is also responsible for the creation and maintenance of a
contingency plan for all mission critical system application functions by which
the company would operate if remedial action is insufficient. The expected
completion date of the contingency plan is December 31, 1998. The costs of the
remedial actions and the date on which the Company plans to complete the Year
2000 modifications, are based on management's best estimates and assumptions
including the continued availability of third party services, their modification
plans, and other factors. Costs related to the Year 2000 issue will be expensed
as they are incurred, except for the cost, if any for new hardware or software
that is purchased which will be capitalized. To date, the Company has not
maintained an accounting of costs incurred separate from normal upgrades of
equipment and costs of personnel. The Company, beginning July 1, 1998 will
maintain a separate accounting of costs incurred and use such information to
project costs for completion of all remedial action. To date, the cost
attributable solely to Year 2000 compliance has not been significant. The
Company expects the total cost of completing the project to have no material
affect on the Company's results of operations and financial condition, however,
the Company will continue to assess the costs incurred and the expectations of
future costs arising from the issue.
This Quarterly Report contains certain "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such statements
are subject to certain risks and uncertainties, including, among other things,
changes in economic conditions in the Company's market area, changes in policies
by regulatory agencies, fluctuations in interest rates, demand for loans in the
Company's market areas and competition, that could cause actual results to
differ materially from historical earnings and those presently anticipated or
projected. The Company wishes to caution readers not to place undue reliance on
any such forward-looking statements, which speak only as of the date made. The
Company wishes to advise readers that the factors listed above could affect the
Company's financial performance and could cause the Company's actual results for
future periods to differ materially from any opinions or statements expressed
with respect to future periods in any current statements.
The Company does not undertake, and specifically declines any obligation, to
publicly release the result of any revisions which may be made to any forward-
looking statements to reflect events or circumstances after the date of such
statements or to reflect the occurrence of anticipated or unanticipated events.
For other matters affecting the Company, Including events which may affect the
Company's operations and financial performance, see "Recent Events".
The following discussion reviews the financial condition at June 30, 1998 and
the results of operations of the Company for the three months and six months
ended June 30, 1998.
Financial Condition
Assets
- ------
Total assets increased approximately $1.3 million, or .7%, to $198.1 million at
June 30, 1998 from $196.8 million at December 31, 1997. The relatively stable
level of assets reflects the lack of significant growth and
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<PAGE>
economic development in the Company's market area. For the six months ended June
30, 1998, loans receivable increased $3.2 million, or 2.7%, to $124.4 million
from $121.2 at December 31, 1997. Mortgage loans held-for-sale increased
approximately $5.1 million to $6.7 million from $1.5 million at December 31,
1997. Loan originations were funded from the re-deployment of maturing short
term investments, excess liquidity, and certain borrowings to fund the demand
for the Company's loan products, principally, one to four family mortgage loans
and commercial real estate loans. Additionally the Company has continued to
originate mortgage loans underwritten to conform to the standards of the Federal
National Mortgage Association for the purpose of securitizing and selling such
loans into the secondary market. In July 1998 the Company securitized and sold
$5.6 million of the loans held for sale. The proceeds from the sale were used to
pay down a $3.0 million term loan used to help fund the originations, with the
remainder placed into short-term investments for use in new originations.
Investment securities decreased by approximately $9.9 million, or 17.2%, to
$47.0 million at June 30, 1998, from $56.8 million at December 31, 1997. The
decrease in investment securities is primarily the result of utilizing maturing
investment securities to fund loan originations. The increase in total assets
was also impacted by a $1.3 million increase in federal funds sold, and a $1.2
million increase in non-earning assets. The increase in other assets is
principally due to increases in premises and equipment of $365,000, other real
estate owned of $373,000, and other assets of $676,000.
Liabilities
- -----------
Total liabilities increased by $1.4 million, to $174.5 million at June 30, 1998
from $173.2 million at December 31, 1997. The increase is primarily attributable
to a $5.0 million, or 3.3% increase in deposits, partially offset by a reduction
in borrowed funds of $3.6 million, or 20.0%. The increased deposit levels
consist mainly of inflows into the Company's passbook savings accounts and non-
interest bearing checking accounts and interest credited on existing interest-
bearing accounts. The increases in these categories are primarily the result of
deposits received in association with commercial lending activities and
increased penetration within the existing retail customer base. The reduction in
borrowed funds is attributable to the repayment of the Company's overnight
credit line facility. The borrowed funds are part of a strategy to leverage the
Company's capital and provide incremental income through the use of wholesale
deposits.
Liquidity and Capital Resources
- -------------------------------
Shareholders' equity decreased $38,000 to $23.5 million at June 30, 1998 from
$23.6 million at December 31, 1997. The decrease in shareholder's equity is
primarily the result of the acquisition of 34,900 shares of treasury stock to
fund the Company's Management Retention Plan for a total cost of approximately
$798,000, combined with dividends declared of $277,000. Partially offsetting the
decreases in shareholder's equity were increases resulting from net income
totaling $745,000, ESOP and other stock-based compensation earned of $160,000,
and net unrealized holding gains on investment securities arising during the
period totaling $131,000.
The Company'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 Company manages the
pricing of deposits to maintain a desired deposit balance. In addition, the
Company 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 Company's operating, financing,
and investing activities, see Statements of Cash Flows included in the Financial
Statements. The Company adjusts its liquidity levels in order to meet funding
needs of deposit outflows, payment of real estate taxes on mortgage loans and
loan commitments. The Company also adjusts liquidity as appropriate to meet its
assets and liability management objectives.
-9-
<PAGE>
Management of Market Risk - Interest Rate Risk
- ------------------------------------------------
The Company's most significant form of market risk is interest rate risk, as the
majority of the Company's assets and liabilities are sensitive to changes in
interest rates. The Company's mortgage loan portfolio, consisting primarily of
loans on residential real property located in Oswego County, is subject to risks
associated with the local economy. The Company's interest rate risk management
program focuses primarily on evaluating and managing the composition of the
Company's assets and liabilities in the context of various interest rate
scenarios. Factors beyond management's control, such as market interest rates
and competition, also have an impact on interest income and interest expense.
The extent to which such assets and liabilities are "interest rate sensitive"
can be measured by an institution's interest rate sensitivity "gap". An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest rate sensitivity
gap is defined as the difference between the amount of interest-earning assets
maturing or repricing within a specific time period and that amount of interest-
bearing liabilities maturing or repricing within that time period. A gap is
considered positive when the amount of interest rate sensitive assets exceeds
the amount of interest rate sensitive liabilities. A gap is considered negative
when the amount of interest rate sensitive liabilities exceeds the amount of
interest rate sensitive assets. During a period of rising interest rates, a
negative gap would tend to adversely affect net interest income while a positive
gap would tend to positively affect net interest income. Conversely, during a
period of falling interest rates, a negative gap would tend to positively affect
net interest income while a positive gap would tend to adversely affect net
interest income.
The Company does not maintain in its portfolio fixed interest rate loans with
terms exceeding 20 years. In addition, ARM loans are originated with terms that
provide that the interest rate on such loans cannot adjust below the initial
rate. Generally, the Company's tends to fund longer term loans and mortgage-
backed securities with shorter term time deposits, repurchase agreements, and
advances. The impact of this asset/liability mix creates an inherent risk to
earnings in a rising interest rate environment. In a rising interest rate
environment, the Company's cost of shorter term deposits may rise faster than
its earnings on longer term loans and investments. Additionally, the prepayment
of principal on real estate loans and mortgage-backed securities tends to
decrease as rates rise, providing less available funds to invest in the higher
rate environment. Conversely, as interest rates decrease the prepayment of
principal on real-estate loans and mortgage-backed securities tends to increase,
causing the Company to invest funds in a lower rate environment. The potential
impact on earnings from this mismatch, is mitigated to a large extent by the
size and stability of the Company's savings accounts. Savings accounts have
traditionally provided a source of relatively low cost funding that have
demonstrated historically a low sensitivity to interest rate changes. The
Company generally matches a percentage of these, which are deemed core, against
longer term loans and investments. In addition, the Company has sought to extend
the terms of its time deposits. In this regard, the Company has on occasion
offered certificates of deposits with three and four year terms which allow
depositors to make a one-time election, at any time during the term of the
certificate of deposit, to adjust the rate of the certificate of deposit to the
then prevailing rate for a certificate of deposit with the same term. The
Company has further sought to reduce the term of a portion of its rate sensitive
assets by originating one year ARM loans, five year/one year ARM loans (mortgage
loans which are fixed rate for the first five years and adjustable annually
thereafter), and by maintaining a relatively short term investment securities
(original maturities of three to five years) portfolio with staggered
maturities. The Company manages its interest rate sensitivity by monitoring
(through simulation and net present value techniques) the impact on it's GAP
position, net interest income, and the market value of portfolio equity to
changes in interest rates on its current and forecast mix of assets and
liabilities. The Company has an Asset-Liability Management Committee which is
responsible for reviewing the Company's assets and liability policies, setting
prices and terms on rate-sensitive products, and monitoring and measuring the
impact of interest rate changes on the Company's earnings. The Committee meets
monthly on a formal basis and reports to the Board of Directors on interest rate
risks and trends, as well as liquidity and capital ratios and requirements. The
Company does not have a targeted gap range, rather the Board of Directors has
set parameters of percentage change by which net interest margin and the market
value of portfolio equity are affected by changing interest rates. The Board and
management deem these measures to be a more significant and realistic means of
-10-
<PAGE>
measuring interest rate risk.
At June 30, 1998, the total interest bearing liabilities maturing or repricing
within one year exceeded total interest-earning assets maturing or repricing in
the same period by $5.0 million, representing a cumulative one-year gap ratio of
a negative 2.52%. Simulation and net present value analysis demonstrate
percentage changes to net interest income and net portfolio value of a negative
8.58% and a negative 19.27%, respectively, in an upward 200 basis point parallel
shift in the yield curve.
Results of Operations
- ---------------------
The Company had net income of approximately $351,000, and $642,000 for the three
months ended June 30, 1998, and 1997, respectively. Net income for the six
months ended June 30, 1998 and 1997 amounted to $745,000 and $1.1 million,
respectively. The decrease in net income for the three months ended June 30,
1998, resulted primarily from an increase in operating expenses of $221,000, or
16.7%, as well as a decrease in non-interest income of $197,000, or 40.7%. Net
interest income after provision for loan losses for the quarter ended June 30,
1998 remained relatively stable over the prior year quarter, decreasing .4%, or
$7,000.
As a result of the decrease in net income between the comparative periods,
return on average assets and return on average shareholders' equity were .71%
and 6.06%, respectively, for the three months ended June 30, 1998 compared to
1.34% and 11.86% for the second quarter of 1997.
Interest Income
- ---------------
Interest income totaled $3.6 million for the quarter ended June 30, 1998, as
compared to $3.5 million for the quarter ended June 30, 1997, an increase of
$77,000, or 2.2%. The increase resulted primarily from an increase of $4.3
million in average interest-earning assets, partially offset by a decrease in
the yield on average interest-earning assets to 7.98% for the three months ended
June 30, 1998 from 8.00% in the prior year period.
Interest income totaled $7.2 million for the six months ended June 30, 1998, as
compared to $7.0 million for the same period in 1997, an increase of $217,000,
or 3.1%. The increase resulted primarily from an increase of $4.7 million in
average interest-earning assets as well as an increase in the yield on average
interest-earning assets to 8.04% from 8.00%.
Interest income on loans receivable totaled $2.8 million and $2.4 million for
the three months ended June 30, 1998 and 1997, respectively. The $313,000, or
12.8%, increase resulted primarily from an increase in the average balance of
loans receivable of $17.9 million, partially offset by a decrease in the average
yield on loans receivable to 8.58% from 8.84%. For the six months ended June
30, 1998 and 1997, interest income on loans receivable increased $539,000, or
11.0%, to $5.5 million from $4.9 million. Average loans receivable increased
$16.0 million while the yield on average loans receivable decreased to 8.59%
from 8.86% for the six months ended June 30, 1998 compared to the same period in
1997. The increase in the average balance in loans receivable was primarily due
to the origination of 15 and 30 year term one-to-four family fixed rate mortgage
loans held for sale to the secondary market and one-to-four family adjustable
rate mortgage loans retained in the Company's portfolio. The origination of
mortgage loans held for sale into the secondary market is part of a new program
begun by the Company in the fourth quarter of 1997. The origination of
adjustable rate mortgage loans is primarily comprised of "5/1 ARMS" which have
interest rates which are fixed for the first five years and are adjustable
annually thereafter, and amortize over 30 years. To a lesser degree, the Company
also experienced an increase in the origination of commercial real estate and
business loans. The decrease in the yield on average loans receivable was
attributable to the lower rates charged on mortgage loans held for sale, the
initial rates charged on 5/1 ARMS, and the downward repricing of the one year
adjustable rate mortgage portfolio caused by the relatively lower interest rate
-11-
<PAGE>
environment.
Interest income on the mortgage-backed securities portfolio decreased by
$48,000, or 12.3%, to $341,000 for the three months ended June 30, 1998, from
$389,000 for the three months ended June 30, 1997. The decrease in interest
income on mortgage-backed securities resulted generally from a decrease in the
average balance on mortgage-backed securities of $2.4 million and a decrease in
the average yield on mortgage-backed securities to 6.58% from 6.75%. For the six
months ended June 30, 1998 and 1997, interest income on mortgage-backed
securities was $712,000 and $775,000, respectively, a decrease of $63,000, or
8.1%. The decrease in interest income resulted primarily from a decrease of
$1.3 million, or 5.7%, in the average balance of mortgage-backed securities and
a reduction in the average yield on mortgage-backed securities to 6.59% from
6.76%. The decrease in the average balance of mortgage-backed securities
resulted from the scheduled amortization and prepayments of principal on the
underlying mortgage loans. The cash flow from the mortgage-backed securities
portfolio was utilized to fund the origination of loans by the Company. The
decrease in the average yield on mortgage-backed securities was the result of
prepayments being more predominant on the higher coupon collateral than on those
mortgage loans with lower fixed rates.
Interest income on investment securities, on a tax equivalent basis, decreased
$144,000, or 24.3%, for the three months ended June 30, 1998 to $448,000 from
$592,000 for the same period in 1997. The decrease resulted primarily from a
decrease in the average balance of investment securities of $8.3 million, as
well as, a decrease in the average yield on investment securities to 6.45% from
6.57% for the quarters ended June 30, 1998 and 1997, respectively. The decrease
in the average balance of investment securities resulted primarily from the
reinvestment of funds from maturing and called securities into loan
originations. The average yield on investment securities declined as higher
coupon securities purchased three to five years ago were either called due to
the lower interest rate environment or matured.
For the six months ended June 30, 1998, interest income on investment securities
decreased $170,000, or 14.5%, to $1.0 million compared to $1.2 million for the
same period in 1997. The decrease resulted primarily from a decrease in the
average balance of investment securities of $6.5 million, partially offset by an
increase in yield on average investments, on a tax equivalent basis, to 6.81%
from 6.52%.
Interest income on interest-earning deposits decreased $44,000, or 63.8%, to
$25,000 from $69,000 for the three months ended June 30, 1998 and 1997,
respectively. The decrease was primarily the result of a decrease of $3.1
million in the average balance of interest-earning deposits, as well as a
reduction in the average yield on interest-earning deposits to 5.15% from 5.48%.
For the six months ended June 30, 1998 and 1997, interest income on interest-
earning deposits decreased $89,000, or 70.6%, to $37,000 compared to $126,000
for the same period in 1997. The decrease in interest income on interest-
earning deposits was primarily the result of a $3.3 million decrease in the
average balance of interest-earning deposits and a decrease in the average yield
on interest-earning deposits to 5.07% from 5.33%. The decrease in the average
balance on interest-earning deposits was primarily due to loan demand exceeding
deposit inflows and a strategy to maintain lower levels of federal funds sold
due to the availability of borrowings and a shortening in the maturity structure
of the investment portfolio. The decrease in the average yield on interest-
earning deposits was principally due the decrease in the federal funds rate
brought about by the general reduction in interest rates.
Interest Expense
- ----------------
Interest expense for the quarter ended June 30, 1998 increased by approximately
$84,000, or 5.0%, to 1.8 million when compared to the same quarter for 1997.
The increase in interest expense for the period was the result of a $4.7 million
increase in the average balance on interest-bearing liabilities, as well as an
increase on the average cost of interest-bearing liabilities to 4.32% from
4.24%. For the six months ended June 30, 1998, interest expense increased
$186,000, or 5.5%, to $3.6 million from $3.4 million for the same period in
1997. The increase in interest expense for the period was the result of a $4.5
million increase in the average balance on interest-bearing liabilities, as well
as an increase on the average cost of interest-
-12-
<PAGE>
bearing liabilities to 4.36% from 4.24%. 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, 1998 the average
balance of borrowed funds was $16.5 million and the average cost of the borrowed
funds was 5.84%. For the same period in 1997 the average balance of borrowed
funds $7.9 million and the average of the borrowings was 5.70%. The borrowed
funds are comprised of repurchase agreements and term borrowing from the Federal
Home Loan Bank of New York. The borrowings are being utilized to help fund the
growth in the Company's loan portfolio and for the purchase of mortgage-backed
and investment securities.
Net Interest Income
- -------------------
Net interest income totaled $1.8 million for the three months ended June 30,
1998 and 1997. Net interest income for the quarter ended June 30, 1998
decreased $7,000, or .4% compared to the same period in the prior year. The
relatively small decline in net interest income for the quarter ended June 30,
1998 occurred despite a sharp decline in long and intermediate term interest
rates which resulted in a compression of the Company's net interest rate spread.
The yield on the 30 year and 2 year treasury bonds declined by 112 basis points
and 56 basis points, respectively from June 30, 1997 to June 30, 1998,
demonstrating a flattening of the yield curve. In such an interest rate
environment, the Company's yield on earning assets will tend to decrease faster
than the cost of interest bearing liabilities. This is evident in the reduction
of net interest rate spread to 3.65% for the quarter ended June 30, 1998 from
3.76% at the end of the prior year period. Volume increases, particularly in
real estate loans, partially offset the decline in net interest rate spread.
For the six months ended June 30, 1998 and 1997, respectively, net interest
income was $3.64 million and $3.61 million, an increase of $31,00, or .9%. The
ratio of average interest earning assets to average interest-bearing liabilities
remained at 109.86% for the six months ended June 30, 1998 and 1997, while the
net interest rate spread fell to 3.67% from 3.76% when comparing the six months
ended June 30, 1998 to the same period in 1997.
Provision for Loan Losses
- -------------------------
The Company 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 Company's actual loss experience, as well as standards
applied by the FDIC. The Company established a provision for possible loan
losses for the three months ended June 30, 1998 of $65,000 as compared to a
provision of $66,000 for the three months ended June 30, 1997. For the six
months ended June 30, 1998 and 1997, the provision for possible loan losses was
$141,000 and $127,000, respectively. The Company's ratio of allowance for loan
losses to total loans receivable at June 30, 1998 was .63%.
Non-interest Income
- -------------------
Non-interest income consists of servicing income, fee income and gain (loss) on
sales of investment securities and other operating income. Non-interest income
decreased approximately $198,000, or 40.9%, to $286,000 for the three months
ended June 30, 1998 as compared to $484,000 for the prior year period. This
decrease is primarily attributable to a decrease of $131,000, or 76.1%, in net
securities gains, and a $66,000, or 38.3%, decrease in fees derived from
commissions on investment services and the cash surrender value of life
insurance policies. The decrease in net securities gains results from a lower
mark to market recognition of unrealized market value appreciation in the
Company's investment in the IIMF mutual fund. The decline in commissions on
investment services results from a lower value of transactions in the Company's
investment services unit for the quarter ended June 30, 1998 when compared to
the same period in 1997.
-13-
<PAGE>
Non-interest income decreased approximately $8,000, or 1.1%, to $711,000 for the
six months ended June 30, 1998 when compared to $719,000 for the same period in
1997. This decrease is primarily comprised of a decrease of $96,000 in other
commissions and fees and an $11,000, or, 4.5% decrease in service charges on
deposit accounts, partially offset by a $98,000 increase in net securities
gains. The reduction in other commissions and fees is principally caused by
lower commissions from the Company's investment services unit of $45,000,
reduced increases of $37,000 in the Company's cash surrender value on life
insurance policies, and a recovery from prior period of approximately $28,000.
The reduction of service charges on deposit accounts is primarily attributable
to lower volumes of returned non-sufficient checks. The net securities gains
are derived from the recognition of unrealized market value appreciation of the
Company's investment in a mutual fund and the sale of two general obligation
municipal bonds.
Non-interest Expense
- ---------------------
Non-interest expense increased $221,000, or 16.7% to $1.5 million for the three
months ended June 30, 1998, as compared to the same period in 1997. This
increase was primarily attributable to a $133,000, or 21.8%, increase in
compensation and employee benefits, a $47,000, or 30.6% increase in professional
services, a $17,000 increase in data processing costs, and a $26,000 increase in
other expenses. The increase in salaries and employee benefits is principally
due to the amortization of stock based compensation plans which resulted in
expense recognition for the quarter of $154,000. The increase in professional
services primarily results from increased real estate appraisal fees and costs
associated with the finalization of the formation of the mid-tier holding
company. The increase in data processing expenses and other expenses is
principally due to technological upgrades to expand mainframe capacity and the
installation of a wide area network. These upgrades are essential in order for
the Company to enhance its competitiveness and prepare for the assimilation of
Oswego County Savings Ban's operation as a result of the impending merger.
For the six months ended June 30, 1998, non-interest expense increased $501,000,
or 19.3%, to $3.1 million from $2.6 million for the six months ended June 30,
1997. This increase was primarily attributable to a $298,000, or 24.2%,
increase in compensation and employee benefits, a $55,000, or 20.9% increase in
professional services, a $45,000 increase in data processing costs, and a
$162,000 increase in other expenses, partially offset by expense reductions of
$17,000 in occupancy expense. The principal causes of these increases are the
same as those attributable to the second quarter explanations which are outlined
above. The amount of expense recognition associated with the Company's stock
based compensation plans amounted to $305,000 for the first half of 1998.
The Company's efforts to prepare its data processing systems for the impact of
the Year 2000 were not a significant component of expense in the first half of
1998 and are not expected to materially impact earning in the future. For
further information regarding the Company's efforts and costs associated with
the Year 2000 issue, see "General - Year 200".
Income Taxes
- ------------
Income taxes decreased approximately $135,000, or 49.9%, for the quarter ended
June 30, 1998 as compared to the same period in the prior year. This decrease
was directly attributable to a $425,000 decrease in the Company's pretax income.
For the six months ended June 30, 1998 and 1997, income tax expense was $305,000
and $466,000, respectively.
-14-
<PAGE>
Recent Events
Reorganization
- --------------
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 Delaware 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 (Pathfinder Bancorp, Inc., which
will own 100% of the common stock of Oswego City Savings Bank). On December 30,
1997, the Reorganization was implemented pursuant to the Agreement and Plan of
Reorganization 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 was exchanged for a share of common stock of Pathfinder
Bancorp, Inc.. The Reorganization of the Bank was structured as a tax-free
reorganization and accounted for in a manner similar to a pooling of interests.
Pending Merger
- --------------
On May 14, 1998, the Company announced the filing of regulatory applications in
connection with the merger of Oswego County Savings into Oswego City Savings
Bank. As part of the merger, the Company will offer common stock in a
subscription offering to account holders of Oswego County Savings Bank as of
December 31, 1996 (eligible account holders) and others in accordance with a
Stock issuance Plan jointly adopted by the Company and Oswego County Savings
Bank. It was further announced that the boards of the two institutions have
agreed that commensurate with the merger, Oswego City Savings Bank will change
its name to Pathfinder Bank.
Stock Split
- -----------
On January 13, 1998, the Board of Directors of Pathfinder Bancorp, Inc. declared
a three for two stock split in the form of a dividend on the holdings company's
outstanding common stock. The stock split was paid on February 5, 1998 to
shareholders of record as of January 26, 1998. The stock split has been applied
retroactively to the financial statements presented in this report.
-15-
<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
- ---------------------
On January 13, 1998 the Board of Directors of Pathfinder Bancorp, Inc. declared
a three-for-two stock split in the form of a dividend on the Bank's outstanding
common stock. The stock split was paid on February 5, 1998 to shareholders of
record January 26, 1998.
Defaults upon Senior Securities
- -------------------------------
Not applicable
Submission of Matters to a Vote of Security Holders
- ---------------------------------------------------
None
Other Information
- -----------------
On June 8, 1998, the Board of Directors declared a $.05 cash dividend to
shareholders of record as of June 30, 1998, payable on July 15, 1998.
Exhibits and Reports
- --------------------
None
-16-
<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.
PathFinder Bancorp Inc
------------------------
/s/ Chris C. Gagas
-------------------------------------------
Date: August 11, 1998 Chris C. Gagas
---------------- Chairman, President, Chief Executive Officer
/s/ Thomas W. Schneider
-------------------------------------------
Date: August 11, 1998 Thomas W. Schneider
---------------- Vice President, Chief Financial Officer
<PAGE>
- --------------------------------------------------------------------------------
No dealer, salesman or any other person has been authorized to give any
information or to make any representation other than as contained in this
Prospectus in connection with the offering made hereby, and, if given or made,
such other information or representation must not be relied upon as having been
authorized by Pathfinder Bancorp, Inc., Oswego City Savings Bank, or Oswego
County Savings Bank. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any of the securities offered hereby to any
person in any jurisdiction in which such offer or solicitation is not authorized
or in which the person making such offer or solicitation is not qualified to do
so, or to any person whom it is unlawful to make such offer or solicitation in
such jurisdiction. Neither the delivery of this Prospectus nor any sale
hereunder shall under any circumstances create any implication that there has
been no change in the affairs of Pathfinder Bancorp, Inc., Oswego City Savings
Bank or Oswego County Savings Bank since any of the dates as of which
information is furnished herein or since the date hereof.
-------------------------
TABLE OF CONTENTS
Page
----
AVAILABLE INFORMATION............................. 3
SUMMARY........................................... 4
SPECIAL CONSIDERATIONS............................ 10
PATHFINDER BANCORP, INC. AND SUBSIDIARY
SELECTED FINANCIAL AND OTHER DATA............... 16
PATHFINDER BANCORP, INC. ......................... 18
USE OF PROCEEDS................................... 18
MARKET INFORMATION................................ 19
DIVIDEND POLICY................................... 20
CAPITALIZATION.................................... 21
PRO FORMA DATA ................................... 21
OSWEGO COUNTY SAVINGS BANK MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS....................... 31
BUSINESS OF OSWEGO COUNTY SAVINGS BANK ........... 35
THE OFFERING AND MERGER........................... 42
MANAGEMENT OF COUNTY SAVINGS AND CITY
SAVINGS FOLLOWING THE MERGER.................... 60
INDEMNIFICATION OF THE COMPANY'S OFFICERS AND
DIRECTORS AND LIMITATION OF LIABILITY........... 62
CERTAIN ANTITAKEOVER PROVISIONS................... 63
SUBSCRIPTIONS BY MANAGEMENT AND TRUSTEES OF
COUNTY SAVINGS.................................. 66
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY...... 66
EXPERTS ......................................... 67
LEGAL OPINIONS .................................. 67
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE.. 67
--------------------
- --------------------------------------------------------------------------------
_____ SHARES
(ANTICIPATED MAXIMUM)
PATHFINDER BANCORP, INC.
COMMON STOCK
PAR VALUE $.10 PER SHARE
------------------------------
PROSPECTUS
------------------------------
October____, 1998
--------------
--------------
<PAGE>
ITEM 12. INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents previously filed with the Securities and
Exchange Commission are incorporated by reference in this Prospectus:
1) The Company's Form 10-K for the year ended December 31, 1997 filed
with the Securities and Exchange Commission on March 30, 1998
2) The Company's Registration Statement on Form S-4 under the
Securities Act of 1933, filed with the Securities and Exchange Commission
on September 19, 1997 (Registration No. 333-36051) and subsequently
amended.
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Amount
------
* Legal Fees and Expenses............ $150,000
* Printing and Mailing............... 75,000
* Accounting Fees and Expenses....... 75,000
* Marketing Fees and Expenses........ 100,000
Filing Fees........................ 2,350
Nasdaq Listing Fee................. 5,273
* Other Expenses..................... 10,000
--------
* Total.............................. $417,623
========
- ------------
* Estimated
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article TENTH of the Certificate of Incorporation of Pathfinder Bancorp,
Inc. (the "Corporation") provides for indemnification of directors and officers
of the Corporation as follows:
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
<PAGE>
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 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.
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES:
The exhibits and financial statement schedules filed as part of this
registration statement are as follows:
(a) LIST OF EXHIBITS
1.1 Engagement letter between Pathfinder Bancorp, Inc. and Selling Agent*
1.2 Form of Underwriting Agreement*
2 Agreement and Plan of Merger between Oswego City Savings Bank and Oswego
County Savings Bank and Stock Issuance Plan (including subsequent
amendments)**
5.1 Opinion of Luse Lehman Gorman Pomerenk & Schick, P.C. as to the validity of
the Common Stock to be issued
10.1 Form of Employment Agreement with Gregg Kreis
10.2 Employment Agreement with Chris C. Gagas***
10.3 Employment Agreement with Thomas W. Schneider**
10.4 Employment Agreement with W. David Schermerhorn**
10.5 Oswego City Savings Bank 1997 Stock Option Plan**
10.6 Oswego City Savings Bank 1997 Recognition and Retention Plan**
12 Not Applicable
13.1 Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1997
(included in Part I of the Registration Statement)
13.2 Quarterly Report on Form 10-Q for the Fiscal Quarter Ended March 31,
1998****
13.3 Quarterly Report on Form 10-Q for the Fiscal Quarter Ended June 30,
1998*****
23.1 Consent of PricewaterhouseCoopers, LLP
23.2 Consent of KPMG Peat Marwick, LLP
23.3 Consent of Luse Lehman Gorman Pomerenk & Schick, P.C. (set forth in Exhibit
5.1)
23.4 Letter regarding value of Subscription Rights*
24 Power of attorney (set forth on the signature pages to this Registration
Statement)
27 Financial Data Schedule
99.1 Valuation Report*
* To be filed.
** Filed as exhibits to the Company's Registration Statement on Form S-4 under
the Securities Act of 1933, filed with the Securities and Exchange
Commission on September 19, 1997 (Registration No. 333-36051) and
subsequently amended by Current Reports on Form 8-K dated May 4, 1998 and
August 26, 1998, respectively
<PAGE>
(Exchange Act No. 2360). The substance of the amendments is reported under
Item 2 of the Current Reports on Form 8-K. All of such previously filed
documents are hereby incorporated herein by reference in accordance with
Item 601 of Regulation S-K.
*** Filed as exhibits to the Company's Form 10-K under the Securities Act of
1934, filed with Securities and Exchange Commission on March 30, 1998. All
of such previously filed documents are hereby incorporated herein by
reference in accordance with Item 601 of Regulation S-K.
**** Filed with the Securities and Exchange Commission on May 15, 1998.
***** Filed with the Securities and Exchange Commission on August 12, 1998.
(b) FINANCIAL STATEMENT SCHEDULES
No financial statement schedules are filed because the required
information is not applicable or is included in the consolidated financial
statements or related notes.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(a)(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 the
most recent post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change in the
information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume
of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate,
the changes in volume and price represent no more than 20 percent
change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective
registration statement; and
(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 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.
(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) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the questions whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-2 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the city of Oswego, state of New York, on September 17, 1998.
PATHFINDER BANCORP, INC.
By: /s/ Chris C. Gagas
------------------------------------------
Chris C. Gagas, President and
Chief Executive Officer
POWER OF ATTORNEY
We, the undersigned Directors of Pathfinder Bancorp, Inc. 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, Inc. 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-2
relating to the offering of Pathfinder Bancorp Inc. 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.
By: /s/ Chris C. Gagas By:/s/ Thomas W. Schneider
------------------ -------------------------------
Chris C. Gagas, President, Chief Executive Thomas W. Schneider
Officer and Chairman of the Board Executive Vice President
(Principal Executive Officer) and Chief Financial Officer
(Principal Financial Officer)
Date: September 17, 1998 Date: September 17, 1998
By: /s/ James A. Dowd By: /s/ Bruce E. Manwaring
----------------- -------------------------------
James A. Dowd, Controller Bruce E. Manwaring, Director
(Principal Accounting Officer)
Date: September 17, 1998 Date: September 17, 1998
By: /s/ Christ R. Burritt By: /s/ L. William Nelson, Jr.
--------------------- --------------------------
Chris R. Burritt, Director L. William Nelson, Jr.,
Director
Date: September 17, 1998 Date: September 17, 1998
By: /s/ Raymond W. Jung By: /s/ Lawrence W. O'Brien
--------------------- ----------------------------
Raymond W. Jung, Director Lawrence W. O'Brien,
Director
Date: September 17, 1998 Date: September 17, 1998
<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 21, 1998
REGISTRATION NO. 333-
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
EXHIBITS
TO
REGISTRATION STATEMENT
ON
FORM S-2
-----------------------
PATHFINDER BANCORP, INC.
===============================================================================
<PAGE>
EXHIBIT INDEX
=============
1.1 Engagement letter between Pathfinder Bancorp, Inc. and Selling Agent*
1.2 Form of Underwriting Agreement*
2 Agreement and Plan of Merger between Oswego City Savings Bank and Oswego
County Savings Bank and Stock Issuance Plan (including subsequent
amendments)**
5.1 Opinion of Luse Lehman Gorman Pomerenk & Schick, P.C. as to the validity of
the Common Stock to be issued
10.1 Form of Employment Agreement with Gregg Kreis
10.2 Employment Agreement with Chris C. Gagas***
10.3 Employment Agreement with Thomas W. Schneider**
10.4 Employment Agreement with W. David Schermerhorn**
10.5 Oswego City Savings Bank 1997 Stock Option Plan**
10.6 Oswego City Savings Bank 1997 Recognition and Retention Plan**
12 Not Applicable
13.1 Annual Report on Form 10-K for the Fiscal Year Ended December 31, 1997
(included in Part I of the
Registration Statement)
13.2 Quarterly Report on Form 10-Q for the Fiscal Quarter Ended March 31,
1998****
13.3 Quarterly Report on Form 10-Q for the Fiscal Quarter Ended June 30,
1998*****
23.1 Consent of PricewaterhouseCoopers, LLP
23.2 Consent of KPMG Peat Marwick, LLP
23.3 Consent of Luse Lehman Gorman Pomerenk & Schick, P.C. (set forth in Exhibit
5.1)
23.4 Letter regarding value of Subscription Rights*
24 Power of attorney (set forth on the signature pages to this Registration
Statement)
27 Financial Data Schedule
99.1 Valuation Report*
* To be filed.
** Filed as exhibits to the Company's Registration Statement on Form S-4
under the Securities Act of 1933, filed with the Securities and Exchange
Commission on September 19, 1997 (Registration No. 333-36051) and
subsequently amended by Current Reports on Form 8-K dated May 4, 1998 and
August 26, 1998, respectively (Exchange Act No. 2360). The substance of
the amendments is reported under Item 2 of the Current Reports on Form 8-
K. All of such previously filed documents are hereby incorporated herein
by reference in accordance with Item 601 of Regulation S-K.
*** Filed as exhibits to the Company's Form 10-K under the Securities Act of
1934, filed with Securities and Exchange Commission on March 30, 1998.
All of such previously filed documents are hereby incorporated herein by
reference in accordance with Item 601 of Regulation S-K.
**** Filed with the Securities and Exchange Commission on May 15, 1998.
***** Filed with the Securities and Exchange Commission on August 12, 1998.
<PAGE>
LUSE LEHMAN GORMAN POMERENK & SCHICK
A PROFESSIONAL CORPORATION
ATTORNEYS AT LAW
5335 WISCONSIN AVENUE, N.W., SUITE 400
WASHINGTON, D.C. 20015
--------------------
TELEPHONE (202) 274-2000
FACSIMILE (202) 362-2902
WRITER'S DIRECT DIAL NUMBER
(202) 274-2000
September 17, 1998
The Board of Directors
Pathfinder Bancorp, Inc.
214 West First Street
Oswego, New York 13126
RE: PATHFINDER BANCORP, INC.
COMMON STOCK PAR VALUE $.10 PER SHARE
-------------------------------------
Gentlemen:
You have requested the opinion of this firm as to certain matters in
connection with the offer and sale (the "Offering") of Pathfinder Bancorp, Inc.
(the "Company") Common Stock, par value $.10 per share ("Common Stock"). We
have reviewed the Company's Certificate of Incorporation, Registration Statement
on Form S-2 ("Form S-2"), as well as applicable statutes and regulations
governing the Company and the offer and sale of the Common Stock.
We are of the opinion that upon the declaration of effectiveness of the
Form S-2, the Common Stock, when sold, will be legally issued, fully paid and
non-assessable.
This Opinion has been prepared for the use of the Company in connection
with its registration statement on Form S-2, and we hereby consent to the filing
of this Opinion as an exhibit to such registration statement and to our firm
being referenced under the caption "Legal Matters."
Very truly yours,
Luse Lehman Gorman Pomerenk & Schick
A Professional Corporation
/s/ Alan Schick
--------------------------
By: Alan Schick
<PAGE>
OSWEGO CITY SAVINGS BANK
EMPLOYMENT AGREEMENT
This Agreement is made effective as of the ____ day of _____________, 1998
(the "Commencement Date") 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 Gregory J.
Kreis (the "Executive"). Any reference to "Company" herein shall mean
Pathfinder Bancorp, Inc., a Delaware corporation which is the stock holding
company of the Bank. Any reference to "Mutual Holding Company" herein shall
mean Pathfinder Bancorp, M.H.C., a New York chartered mutual savings bank
holding company.
WHEREAS, the Bank wishes to assure itself of the continued services of
Executive for the period provided in this Agreement; and
WHEREAS, Executive is willing to continue 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
Commencing on the Commencement Date and continuing until six months and one
day after the Effective Date (as defined in the merger agreement) of the merger
between the Bank and Oswego County Savings Bank, Executive agrees to serve as
Chief Operating Officer. During the remaining period of his employment
hereunder, Executive agrees to serve as President and Chief Executive Officer of
the Bank and the Company. 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
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 Commencement Date 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 sixty (60) days prior to any such anniversary date,
that his employment shall cease at the end of thirty-six (36) 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
<PAGE>
Board's meeting. The "disinterested" members of the Board of Directors shall be
all directors other than the director who is the "Executive" under this
Agreement.
(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 faithfully perform his duties hereunder
including activities and services related to the organization, operation and
management of the Bank.
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 $180,000 per year
("Base Salary"). Such Base Salary shall be payable bi-weekly. 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 ______________, 1999.
Such review shall be conducted by a Committee designated by the Board, and the
Board may increase, but not decrease, Executive's Base Salary (any increase in
Base Salary shall become the "Base Salary" for purposes of this Agreement). In
addition to the Base Salary provided in this Section 3(a), the Bank may provide
Executive with a bonus of up to $20,000 (to be determined by the Bank, based
upon the successful integration of the Bank and Oswego County Savings Bank and
the achievement of the 1998 budget for the combined entity).
(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 (and he shall
be entitled to a pro rata distribution under any incentive compensation or bonus
plan as to any year in which a termination of employment occurs, other than
termination for Cause). 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
2
<PAGE>
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 7 and 14.
(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 5 below, or (B) Termination for Cause as defined in Section 6
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 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
3
<PAGE>
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.
(iii) Executive's voluntary resignation from the Bank's employ on the
effective date of, or at any time following a Change in Control during the term
of this Agreement. For these purposes, a Change in Control of the Bank or the
Company shall mean a change in control of the Bank or the Company following the
conversion of the Mutual Holding Company from mutual to stock form of a nature
that: (i) would be required to be reported in response to Item 1(a) 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 (ii)
results in a Change in Control of the Bank or the Company within the meaning of
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"); or (iii) without limitation such a Change in
Control shall be deemed to have occurred at such time as (a) any "person" (as
the term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes
the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Company representing 25% or more of
the combined voting power of Company's outstanding securities except for any
securities purchased by the Bank's employee stock ownership plan or trust; or
(b) individuals who constitute the Board on the date hereof (the "Incumbent
Board") cease for any reason to constitute at least a majority thereof, provided
that any person becoming a trustee or director subsequent to the date hereof
whose election was approved by a vote of at least three-quarters of the trustees
or directors comprising the Incumbent Board, or whose nomination for election by
the Company's stockholders was approved by the same Nominating Committee serving
under an Incumbent Board, shall be, for purposes of this clause (b), considered
as though he were a member of the Incumbent Board; or (c) a plan of
reorganization, merger, consolidation, sale of all or substantially all the
assets of the Bank or the Company or similar transaction in which the Bank or
Company is not the surviving institution occurs; or (d) a proxy statement
soliciting proxies from stockholders of the Company, by someone other than the
current management of the Company, seeking stockholder approval of a plan of
reorganization, merger or consolidation of the Company or similar transaction
with one or more corporations or financial institutions, and as a result such
proxy solicitation a plan of reorganization, merger consolidation or similar
transaction involving the Company is approved by the requisite vote of the
Company's stockholders; or (e) a tender offer is made for 25% or more of the
voting securities of the Company and the shareholders owning beneficially or of
record 25% or more of the outstanding securities of the Company have tendered or
offered to sell their shares pursuant to such tender offer and such tendered
shares have been accepted by the tender offeror.
4
<PAGE>
A "Change in Control" of the Bank or the Company shall not be deemed to
have occurred if the Mutual Holding Company ceases to own at least 51% of all
outstanding shares of stock of the Bank in connection with a conversion of the
Mutual Holding Company from mutual to stock form.
(b) Upon the occurrence of an Event of Termination, on the Date of
Termination, as defined in Section 7, 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 three (3) times the sum of (i) Base Salary and (ii) the highest rate of bonus
awarded to the Executive during the prior three years. 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, any payments shall be made in a lump
sum or paid monthly during the remaining term of this 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 this
Agreement. Such payments shall not be reduced in the event the Executive obtains
other employment following termination of employment.
(c) 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. Such coverage shall continue for 36 months from the Date of
Termination.
(d) Notwithstanding the preceding paragraphs of this Section 4, 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.
5. TERMINATION UPON RETIREMENT, DISABILITY OR DEATH
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
5
<PAGE>
Retirement, Executive shall be entitled to all benefits under any retirement
plan of the Bank and other plans to which Executive is a party.
In the event Executive is unable to perform his duties under this Agreement
on a full-time basis for a period of six (6) consecutive months by reason of
illness or other physical or mental disability, the Employer may terminate this
Agreement, provided that the Employer shall continue to be obligated to pay the
Executive his Base Salary for the remaining term of the Agreement, or one year,
whichever is the longer period of time, and provided further that any amounts
actually paid to Executive pursuant to any disability insurance or other similar
such program which the Employer has provided or may provide on behalf of its
employees or pursuant to any workman's or social security disability program
shall reduce the compensation to be paid to the Executive pursuant to this
paragraph.
In the event of Executive's death during the term of the Agreement, his
estate, legal representatives or named beneficiaries (as directed by Executive
in writing) shall be paid Executive's Base Salary as defined in Paragraph 3(a)
at the rate in effect at the time Executive's death for a period of one (1) year
from the date of the Executive's death, and the Employers will continue to
provide medical, dental, family and other benefits normally provided for an
Executive's family for one (1) year after the Executive's death.
6. TERMINATION FOR CAUSE
The term "Termination for Cause" shall mean termination because of the
Executive's personal dishonesty, 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 para graph, 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 Execu tive'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 7 hereof, and shall not
be exercisable by Executive at any time subsequent to such Termination for
Cause.
6
<PAGE>
7. 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 (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 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 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 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 the term of this Agreement. If such
dispute is not resolved within the term of the Agreement, the Bank shall not be
obligated, upon final resolution of such dispute, to pay Executive compensation
and other payments accruing beyond the term of the Agreement. Amounts paid
under this Section shall be offset against or reduce any other amounts due under
this Agreement.
8. 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 8 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.
7
<PAGE>
9. NON-COMPETITION
(a) Upon any termination of Executive's employment hereunder as a result of
which the Association is paying Executive benefits under Sections 4(a)(i) or
(ii) of this Agreement, 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
9(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. Executive represents and admits that Executive's
experience and capabilities are such that Executive can obtain employment in a
business engaged in other lines and/or of a different nature than the Bank
and/or the Company, and that the enforcement of a remedy by way of injunction
will not prevent Executive from earning a livelihood. 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.
(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 (except
for such disclosure as may be required to be provided to any federal banking
agency with jurisdiction over the Bank or Executive). 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 9, 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.
8
<PAGE>
10. 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.
11. 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.
12. 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.
13. 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 as to any act other than that specifically
waived.
14. 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
9
<PAGE>
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.
15. 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.
16. 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.
17. ARBITRATION
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
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.
18. 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.
19. 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, and 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
Bank's Board). 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
10
<PAGE>
misconduct in the performance of his duties.
20. 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.
SIGNATURES
IN WITNESS WHEREOF, the Bank and the Company have caused this Agreement to
be executed and their seals to be affixed hereunto by their duly authorized
officers, and Executive has signed this Agreement, on the day and date first
above written.
ATTEST: OSWEGO CITY SAVINGS BANK
- ----------------- --------------------------------
Secretary By: Chris C. Gagas
ATTEST: PATHFINDER BANCORP, INC.
- ----------------- --------------------------------
Secretary By: Chris C. Gagas
WITNESS: EXECUTIVE:
By:
- ----------------- --------------------------------
Gregory J. Kreis
11
<PAGE>
PRICEWATERHOUSECOOPERS [LOGO]
- -------------------------------------------------------------------------------
PricewaterhouseCoopers LLP
One Lincoln Center
Syracuse NY 13202-9972
Telephone (315) 474-8541
Facsimile (315) 473-1385
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference from the Company's Annual Report
on Form 10-K in the registration statement of Pathfinder Bancorp, Inc. on
Form S-2 of our report dated February 6, 1998, on our audits of the consolidated
financial statements of Pathfinder Bancorp, Inc. as of December 31, 1997 and
1996, and for the years ended December 31, 1997, 1996, and 1995, which report is
included in the Annual Report on Form 10-K. We also consent to the reference to
our Firm under the caption "Experts".
/s/ PicewaterhouseCoopers LLP
Syracuse New York
September 18, 1998
<PAGE>
KPMG Peat Marwick LLp
113 South Salina Street
Syracuse, NY 13202
INDEPENDENT AUDITORS' CONSENT
The Board of Trustees
Oswego County Savings Bank
We consent to the inclusion on Form S-2 of Pathfinder Bancorp, Inc. of our
report dated February 20, 1998 on the statements of financial condition of
Oswego County Savings Bank as of December 31, 1997 and 1996, and the related
statements of operations, changes in net worth, and cash flows for each of the
years in the three-year period ended December 31, 1997. We also consent to the
reference to our firm under the heading "Experts" in the prospectus.
/s/ KPMG Peat Marwick LLP
September 17, 1998
Syracuse, New York
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 4,520
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,300
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 44,759
<INVESTMENTS-CARRYING> 2,278
<INVESTMENTS-MARKET> 2,299
<LOANS> 129,986
<ALLOWANCE> 824
<TOTAL-ASSETS> 198,091
<DEPOSITS> 157,399
<SHORT-TERM> 14,600
<LIABILITIES-OTHER> 2,146
<LONG-TERM> 402
0
0
<COMMON> 288
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<TOTAL-LIABILITIES-AND-EQUITY> 198,091
<INTEREST-LOAN> 5,438
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<INTEREST-INCOME-NET> 3,574
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<EXPENSE-OTHER> 3,094
<INCOME-PRETAX> 1,050
<INCOME-PRE-EXTRAORDINARY> 1,050
<EXTRAORDINARY> 0
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<NET-INCOME> 746
<EPS-PRIMARY> 0.27
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<LOANS-NON> 1,431
<LOANS-PAST> 0
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<ALLOWANCE-OPEN> 828
<CHARGE-OFFS> 154
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</TABLE>
