<PAGE>
As filed with the Securities and Exchange Commission on December 22, 1997
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
NIAGARA BANCORP, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 6712 (TO BE APPLIED FOR)
(State or other jurisdiction of (Primary standard (I.R.S Employer
incorporation or organization) industry classification) indentification number)
</TABLE>
6950 SOUTH TRANSIT ROAD, P.O. BOX 514
LOCKPORT, NEW YORK 14095-0514
(716) 625-7500
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
WILLIAM E. SWAN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
NIAGARA BANCORP, INC.
6950 SOUTH TRANSIT ROAD, P.O. BOX 514
LOCKPORT, NEW YORK 14095-0514
(716) 625-7500
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
JOHN J. GORMAN, ESQ.
KENNETH R. LEHMAN, ESQ.
LUSE LEHMAN GORMAN POMERENK & SCHICK
5335 WISCONSIN AVENUE, N.W.
SUITE 400
WASHINGTON, D.C. 20015
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this registration statement becomes effective.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 of the Securities Act of 1933,
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, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(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 this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [_]
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<CAPTION>
CALCULATION OF REGISTRATION FEE
====================================================================================================================================
PROPOSED PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE MAXIMUM OFFERING AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PRICE PER SHARE OFFERING PRICE (1) REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value per share 13,501,554 shares $10.00 $135,015,540 $39,830
====================================================================================================================================
</TABLE>
__________________________
(1) Estimated solely for the purpose of calculating the registration fee.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION 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 SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(A), MAY DETERMINE.
<PAGE>
PROSPECTUS SUPPLEMENT
NIAGARA BANCORP, INC.
LOCKPORT SAVINGS BANK
LOCKPORT SAVINGS BANK
401(K) PLAN
(Participation Interests)
This Prospectus Supplement relates to the offer and sale to members (the
"Members") in the Lockport Savings Bank 401(k) Plan (the "Plan") of
participation interests and shares of common stock, par value $.01 per share
(the "Common Stock"), of Niagara Bancorp, Inc. (the "Company"), in connection
with the proposed conversion ("Conversion") of the Lockport Savings Bank (the
"Bank") from a New York state chartered mutual savings bank to a New York State
chartered stock savings bank, and the issuance of the Bank's capital stock to
the Company pursuant to the Bank's Plan of Conversion and Reorganization (the
"Plan of Conversion") and the related Subscription Offering and Direct Community
Offering (collectively, the "Offering").
The Plan permits the investment of Plan assets in Common Stock of the
Company. The Plan permits Members to direct the trustee of the Plan (the
"Trustee") to invest in Common Stock with amounts in the Plan attributable to
such Members. Such investments in Common Stock would be by means of the Niagara
Bancorp, Inc. Stock Fund ("Employer Stock Fund"). This Prospectus Supplement
relates to the initial election of Members to direct that all or a portion of
their accounts be invested in the Employer Stock Fund in connection with the
Conversion and Offering and also to elections by Members to direct that all or a
portion of their accounts be invested in the Employer Stock Fund after the
Conversion. A Member will be able to provide alternative investment instructions
to the Trustee in the event that the Offering is oversubscribed and the total
amount allocated by a Member cannot be used by the Trustee to purchase Common
Stock.
The Prospectus of the Company dated ____________, 1998 (the "Prospectus")
which is attached to this Prospectus Supplement includes detailed information
with respect to the Conversion, the Common Stock and the financial condition,
results of operations and business of the Bank. This Prospectus Supplement,
which provides detailed information with respect to the Plan, should be read
only in conjunction with the Prospectus.
THESE PARTICIPATION INTERESTS HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION, THE SUPERINTENDENT OF BANKS OF THE STATE OF
NEW YORK, THE NEW YORK STATE BANKING BOARD, THE NEW YORK STATE BANKING
DEPARTMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION OR BY ANY OTHER FEDERAL
AGENCY, OR BY ANY STATE SECURITIES BUREAU OR OTHER STATE AGENCY, NOR HAS ANY
SUCH OFFICE, CORPORATION, COMMISSION, BUREAU OR OTHER
<PAGE>
AGENCY PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
No person has been authorized to give any information or to make any
representations other than those contained in the Prospectus or this Prospectus
Supplement, and, if given or made, such information or representations must not
be relied upon as having been authorized by the Bank or the Plan. This
Prospectus Supplement does not constitute an offer to sell or solicitation of an
offer to buy any securities in any jurisdiction to any person to whom it is
unlawful to make such offer or solicitation in such jurisdiction. Neither the
delivery of this Prospectus Supplement and the Prospectus nor any sale made
hereunder shall under any circumstances create any implication that there has
been no change in the affairs of the Bank or the Plan since the date hereof, or
that the information herein contained or incorporated by reference is correct as
of any time subsequent to the date hereof. This Prospectus Supplement should be
read only in conjunction with the Prospectus that is attached hereto and should
be retained for future reference.
The date of this Prospectus Supplement is__________, 1998.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
THE OFFERING..................................................................... 1
Securities Offered.......................................................... 1
Election to Purchase Common Stock in the Offering; Priorities............... 1
Value of Participation Interests............................................ 2
Method of Director Transfer................................................. 2
Time for Directing Transfer................................................. 2
Irrevocability of Transfer Direction........................................ 2
Direction to Purchase Common Stock After the Offering....................... 2
Purchase Price of Common Stock.............................................. 3
Nature of a Members Interest in Common Stock................................ 3
Voting Rights of Common Stock............................................... 3
DESCRIPTION OF THE PLAN.......................................................... 3
Introduction................................................................ 3
Eligibility and Participation............................................... 4
Contributions Under the Plan................................................ 4
Limitations on Contributions................................................ 5
Investment of Contributions and Account Balances............................ 7
Benefits Under the Plan..................................................... 9
Withdrawals and Distributions From the Plan................................. 9
Trustee..................................................................... 10
Plan Administrator.......................................................... 10
Reports to Plan Members..................................................... 11
Amendment and Termination................................................... 11
Merger, Consolidation or Transfer........................................... 11
Federal Income Tax Consequences............................................. 11
ERISA and Other Qualifications.............................................. 14
SEC Reporting and Short-Swing Profit Liability.............................. 14
Financial Information Regarding Plan Assets................................. 15
LEGAL OPINION.................................................................... 15
</TABLE>
1
<PAGE>
THE OFFERING
SECURITIES OFFERED
The securities offered hereby are participation interests in the Plan. Up
to 480,000 shares (assuming a purchase price of $10.00 per share) of Common
Stock may be acquired by the Plan to be held in the Employer Stock Fund. The
Company is the issuer of the Common Stock. Only employees of the Bank may become
Members in the Plan. The Common Stock to be issued hereby is conditioned on the
consummation of the Conversion. A Member's investment in the Employer Stock Fund
in the Conversion is subject to the priority set forth in the Plan of
Conversion. Information with regard to the Plan is contained in this Prospectus
Supplement and information with regard to the Conversion and the financial
condition, results of operation and business of the Bank is contained in the
attached Prospectus. The address of the principal executive office of the Bank
is 6950 South Transit Road, Lockport, New York 14095-0514. The Bank's telephone
number is (716) 625-7500.
ELECTION TO PURCHASE COMMON STOCK IN THE OFFERING; PRIORITIES
The Plan permits each Member to direct that all or part of the funds which
represent his or her beneficial interest in the assets of the Plan may be
transferred to the Employer Stock Fund, an investment fund in the Plan, that
will invest in Common Stock and will be used to purchase Common Stock issued in
connection with the Offering. The Trustee of the Plan will purchase Common Stock
offered for sale in connection with the Offering in accordance with each
Member's directions. Members will be provided the opportunity to elect
alternative investments from among the six other funds offered. In the event the
Offering is oversubscribed and the Trustee is unable to use the full amount
allocated by a Member to purchase Common Stock in the Offering, Members may
either (i) elect alternative investments from among the six other funds offered,
or (ii) direct the Trustee to hold the funds transferred to the Employer Stock
Fund and purchase Common Stock in the open market after the Offering. If a
Member fails to direct the investment of his or her account balance, the
Member's account balance will remain in the other investment funds of the Plan
as directed by the Member.
The shares of Common Stock to be sold in the Offering are being offered in
accordance with the following priorities: (i) holders of deposit accounts of the
Bank totaling $100 or more as of August 31, 1996 ("Eligible Account Holders");
(ii) the Employee Stock Ownership Plan ("ESOP"); (iii) holders of deposit
accounts of the Bank totaling $100 or more as of December 31, 1997
("Supplemental Eligible Account Holders"); (iv) certain members of the general
public with preference given to matured persons residing in Niagara, Erie,
Orleans and Genesee Counties, New York. To the extent that Members fall into one
of these categories, they are being permitted to use funds in their Plan account
to subscribe or pay for the Common Stock being acquired. Common Stock so
purchased will be placed in the Member's Employer Stock Fund within his Plan
account.
1
<PAGE>
VALUE OF PARTICIPATION INTERESTS
The assets of the Plan were valued at approximately $3.7 million as of
December 31, 1996. Each Member was informed of the value of his or her
beneficial interest in the Plan as of September 30, 1997. The $3.7 million value
represents the aggregate market value as of December 31, 1996, of all Members'
accounts and earnings thereon, less previous withdrawals.
METHOD OF DIRECTING TRANSFER
Each Member shall receive a form which provides for a Member to direct that
all or a portion of his or her beneficial interest in the Plan be transferred to
the Employer Stock Fund (the "Contribution and Investment Form") or to the other
investment options established under the Plan. The Member's investment in the
other investment options set forth in the Plan may be in any whole percentage
from 0% to 100%. If a Member wishes to invest all or part of his or her
beneficial interest in the assets of the Plan to the purchase of Common Stock
issued in connection with the Offering, he or she should indicate that decision
on the Contribution and Investment Form.
TIME FOR DIRECTING TRANSFER
Directions to transfer amounts to the Employer Stock Fund in order to
purchase Common Stock issued in connection with the Offering must be returned to
the Stock Information Center at 55 East Avenue, P.O. Box 886, Lockport, New York
14095 no later than _:00 p.m. on ______________, 1998.
IRREVOCABILITY OF TRANSFER DIRECTION
A Member's direction to transfer amounts credited to such Member's account
in the Plan to the Employer Stock Fund in order to purchase shares of Common
Stock in connection with the Offering is irrevocable. Members, however, will be
able to direct the investment of their accounts under the Plan as explained
below.
DIRECTION TO PURCHASE COMMON STOCK AFTER THE OFFERING
After the Offering, a Member will continue to be able to direct that a
certain percentage of his or her interest in the Plan be transferred to the
Employer Stock Fund and invested in Common Stock, or to the other investment
funds available under the Plan (amounts invested in the investment funds may be
invested in any whole percentage from 0% to 100%). The allocation of a Member's
interest in a Plan Fund may be changed on a monthly basis. Special restrictions
may apply to transfers directed to and from the Employer Stock Fund by those
Members who are officers, directors and principal shareholders of the Company
who are subject to the provisions of Section 16(b) of the Securities and
Exchange Act of 1934 (the "Exchange Act"), as amended.
2
<PAGE>
PURCHASE PRICE OF COMMON STOCK
The funds transferred to the Employer Stock Fund for the purchase of Common
Stock in connection with the Offering will be used by the Trustee to purchase
shares of Common Stock, except in the event of an oversubscription, as discussed
above. The price paid for such shares of Common Stock will be the same price as
is paid by all other persons who purchase shares of Common Stock in the
Offering.
Subsequent to the Offering, Common Stock purchased by the Trustee will be
acquired in open market transactions. The prices paid by the Trustee for shares
of Common Stock will not exceed "adequate consideration" as defined in Section
3(18) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA").
NATURE OF A MEMBER'S INTEREST IN THE COMMON STOCK
The Common Stock will be held in the name of the Trustee for the Plan, as
Trustee. Shares of Common Stock acquired at the direction of a Member will be
allocated to the Member's account under the Plan. Therefore, earnings with
respect to a Member's account should not be affected by the investment
designations (including investments in Common Stock) of other Members. The
Trustee as record holder will vote such allocated shares, if any, as directed by
Members.
VOTING RIGHTS OF COMMON STOCK
The Trustee generally will exercise voting rights attributable to all
Common Stock held by the Employer Stock Fund as directed by Members with
interests in the Employer Stock Fund. With respect to each matter as to which
holders of Common Stock have a right to vote, each Member will be allocated
voting instruction rights reflecting such Member's proportionate interest in the
Employer Stock Fund. The number of shares of Common Stock held in the Employer
Stock Fund that are voted in the affirmative and negative on each matter shall
be proportionate to the number of voting instruction rights exercised by Members
in the affirmative and negative respectively.
DESCRIPTION OF THE PLAN
INTRODUCTION
The Bank adopted a prototype plan effective January 1, 1990, which Plan and
related Adoption Agreement were amended, effective January 1, 1998, to include
the Employer Stock Fund as an investment alternative. The amendment transformed
the Plan into an individually designed plan. The Plan is a profit sharing plan
with a cash or deferred compensation feature established in accordance with the
requirements under Section 401(a) and Section 401(k) of the Internal Revenue
Code of 1986, as amended (the "Code"). The Plan has applied for a ruling from
the Internal Revenue Service that the Plan is qualified under Section 401(a) of
the Code, and its related trust is qualified
3
<PAGE>
under Section 501(a) of the Code.
The Bank intends that the Plan, in operation, will comply with the
requirements under Section 401(a) and Section 401(k) of the Code. The Bank will
adopt any amendments to the Plan that may be necessary to ensure the qualified
status of the Plan under the Code and applicable Treasury Regulations.
Employee Retirement Income Security Act. The Plan is an "individual
----------------------------------------
account plan" other than a "money purchase pension plan" within the meaning of
ERISA. As such, the Plan is subject to all of the provisions of Title I
(Protection of Employee Benefit Rights) and Title II (Amendments to the Internal
Revenue Code Relating to Retirement Plans) of ERISA, except the funding
requirements contained in Part 3 of Title I of ERISA which by their terms do not
apply to an individual account plan (other than a money purchase plan). The Plan
is not subject to Title IV (Plan Termination Insurance) of ERISA. The funding
requirements contained in Title IV of ERISA are not applicable to Members (as
defined below) or beneficiaries under the Plan.
Reference to full Text of Plan. The following statements are summaries of
------------------------------
certain provisions of the Plan. They are not complete and are qualified in their
entirety by the full text of the Plan. Words capitalized but not defined in the
following discussion have the same meaning as set forth in the Plan. Copies of
the Plan are available to all employees by filing a request with the Plan
Administrator, c/o Lockport Savings Bank, 6950 South Transit Road, Lockport, New
York 14095-0514. Each employee is urged to read carefully the full text of the
Plan.
ELIGIBILITY AND PARTICIPATION
Any employee of the Employer is eligible to become a member in the Plan on
the first day of the month following completion of one (1) year of Entry
Service, as defined, with the Bank, provided he or she has reached age 21 at
such time. A year of Entry Service is defined as the 12 month period during
which an employee completes at least 1000 hours of service with the Bank. The
plan year is January 1 to December 31 (the "Plan Year").
As of December 31, 1996, there were approximately 314 employees eligible to
participate in the Plan, and 277 employees participating by making elective
deferral contributions.
CONTRIBUTIONS UNDER THE PLAN
401(k) Plan Contributions. Each Member of the Plan is permitted to elect to
-------------------------
defer such Member's Pay (as defined below) on a pre-tax basis up to the lesser
of 15% of annual Pay (expressed in terms of whole percentages) or the applicable
limit under the Code (for 1998, the applicable limit is $10,000) and subject to
certain other restrictions imposed by the Code, and to have that amount
contributed to the Plan on such Member's behalf. For purposes of the Plan, "Pay"
means, generally, a Member's total pay received from the Bank as reported on IRS
Form W-2 for purposes of income-tax withholding. In 1998, the annual Pay of each
Member taken into account under the Plan was and
4
<PAGE>
is limited to $160,000. (Limits established by the IRS are subject to increase
pursuant to an annual cost of living adjustment, as permitted by the Code). A
Member may elect to modify the amount contributed to the Plan by filing a new
elective deferral agreement with the Plan Administrator on a bi-weekly basis.
Employer Contributions. The Bank makes matching contributions to the Plan
----------------------
equal to 50% of the elective deferral contributions, up to a maximum of 6% of
the Member's Pay for the Plan Year.
LIMITATIONS ON CONTRIBUTIONS
Limitation on Employee Salary Deferrals. The annual amount of deferred
-----------------------------------------
Pay of a Member (when aggregated with any elective deferrals of the Member under
a simplified employee pension plan or a tax-deferred annuity) may not exceed the
limitation contained in Section 402(g) of the Code, adjusted for increases in
the cost of living as permitted by the Code (the limitation for 1998 is
$10,000). Contributions in excess of this limitation ("excess deferrals") will
be included in the Member's gross income for federal income tax purposes in the
year they are made. In addition, any such excess deferral will again be subject
to federal income tax when distributed by the Plan to the Member, unless the
excess deferral (together with any income allocable thereto) is distributed to
the Member not later than the first April 15th following the close of the
taxable year in which the excess deferral is made. Any income on the excess
deferral that is distributed not later than such date shall be treated, for
federal income tax purposes, as earned and received by the Member in the taxable
year in which the distribution is made.
Limitations on Annual Additions and Benefits. Pursuant to the
---------------------------------------------
requirements of the Code, the Plan provides that the amount of contributions and
forfeitures allocated to each Member's account during any Plan Year may not
exceed the lesser of $30,000 or 25% of the Member's Compensation (as defined)
for the Plan Year. In addition, annual additions are limited to the extent
necessary to prevent contributions on behalf of any employee from exceeding the
employee's combined plan limit, i.e., a limit that takes into account the
contributions and benefits made on behalf of an employee to all plans of the
Bank. To the extent that these limitations have been exceeded with respect to a
Member, the Plan Administrator shall:
(i) return any elective deferral contributions to the extent that the
return would reduce the excess amount in the Member's accounts;
(ii) if the Member is covered by the Plan at the end of the Plan Year, any
excess amount remaining will be used to reduce Employer Contributions for such
Member in the next Plan Year, and each succeeding Plan Year if necessary;
(iii) if an excess amount still exists, and the Member is not covered by
the Plan at the end of a Plan Year, the Excess Amount will be held unallocated
in a suspense account. The suspense account will be applied to reduce future
Employer Contributions for all remaining Members in the
5
<PAGE>
next Plan Year, and each succeeding Plan Year if necessary;
(iv) if a suspense account is in existence at any time during a Plan Year,
it will participate in the allocation of the trust's investment gains or losses.
If a suspense account is in existence at any time during a particular Plan Year,
all amounts in the suspense accounts must be allocated and reallocated to
Member's Accounts before any employer or any Member contributions may be made to
the Plan for that Plan Year. Excess amounts may not be distributed to Members or
former Members.
If, in addition to this Plan, the Member is covered under other defined
contribution plans and welfare benefit funds maintained by the Bank and annual
additions exceed the maximum permissible amount, the amount contributed or
allocated under this Plan will be reduced so that the annual additions under all
such plans and funds equal the maximum permissible amount.
Limitation on Plan Contributions for Highly Compensated Employees.
-----------------------------------------------------------------
Sections 401(k) and 401(m) of the Code limits the amount of elective deferral
contributions and matching contributions that may be made to the Plan in any
Plan Year on behalf of Highly Compensated Employees (defined below) in relation
to the amount of elective deferral contributions made by or on behalf of all
other employees eligible to participate in the Plan. Specifically, the "actual
deferral percentage" ("ADP") (i.e., the average of the actual deferral ratios,
expressed as a percentage, of each eligible employee's elective deferral
contribution if any, for the Plan Year over the employee's Pay), of the Highly
Compensated Employees must meet either of the following tests: (i) the ADP of
the eligible Highly Compensated Employees is not more than 125% of the ADP of
all other eligible employees, or (ii) the ADP of the eligible Highly Compensated
Employees is not more than 200% of the ADP of all other eligible employees, and
the excess of the ADP for the eligible Highly Compensated Employees over the ADP
of all other eligible employees is not more than two percentage points.
Similarly, the actual contribution percentage ("ACP") (i.e., the average of the
actual contribution ratios, expressed as a percentage, of each eligible
employee's matching contributions, if any, for the Plan Year over the employees
Pay) of the Highly Compensated Employees must meet either of the following
tests: (i) the ACP of the eligible Highly Compensated Employees is not more than
125% of the ACP of all other eligible employees, or (ii) the ACP of the eligible
Highly Compensated Employees is not more than 200% of the ACP of all other
eligible employees, and the excess of the ACP for the eligible Highly
Compensated Employees over the ACP of all other employees is not more than two
percentage points.
In general, for Plan Years beginning in 1998, a Highly Compensated
Employee includes any employee, who, (1) during the Plan Year or the preceding
Plan Year, was at any time a 5% owner (i.e., owns directly or indirectly more
than 5% of the stock of an employer, or stock possessing more than 5% of the
total combined voting power of all stock of an employer), or (2) for the
preceding Plan Year, received Pay from an employer in excess of $80,000 (in
1998), and (if the employer elects for a Plan Year) was in the group consisting
of the top 20% of employees when ranked on the basis of Pay paid during the Plan
Year. The dollar amounts set forth above are adjusted annually to reflect
increases in the cost of living.
6
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In order to prevent the disqualification of the Plan, any amount
contributed by Highly Compensated Employees that exceed the ADP limitation in
any Plan Year ("excess contributions"), together with any income allocable
thereto, must be distributed first to Highly Compensated Employees with the
greatest dollar amount deferrals, and so on, until the Plan satisfies the ADP
test, before the close of the following Plan Year. Moreover, the Bank will be
subject to a 10% excise tax on any excess contributions unless such excess
contributions, together with any income allocable thereto, either are re-
characterized or are distributed before the close of the first 2-1/2 months
following the Plan Year to which such excess contributions relate. In addition,
in order to avoid disqualification of the Plan, any contributions by Highly
Compensated Employees that exceed the average contribution limitation in any
Plan Year ("excess aggregate contributions") together with any income allocable
thereto, must be distributed to such Highly Compensated Employees before the
close of the following Plan Year. However, the 10% excise tax will be imposed on
the Bank with respect to any excess aggregate contributions, unless such
amounts, plus any income allocable thereto, are distributed within 2-1/2 months
following the close of the Plan Year in which they arose.
INVESTMENT OF CONTRIBUTIONS AND ACCOUNT BALANCES
All amounts credited to Members' accounts under the Plan are held in the
Plan Trust (the "Trust") which is administered by the Trustee appointed by the
Bank's Board of Directors.
Prior to the effective date of the Offering, Members have been provided the
opportunity to direct the investment of their accounts into one of the following
funds (the "Funds"):
A. Guaranteed Interest Account
B. Money Market Account
C. Bond and Mortgage Account
D. Stock Index 500 Account
E. U.S. Stock Account
F. Small Company Blend Account
The Plan now provides that in addition to the Funds specified above, a
Member may direct the Trustee to invest all or a portion of his account in the
Employer Stock Fund.
A Member may elect to have both past contributions (and earnings), as well
as future contributions to the Member's account invested either in the Employer
Stock Fund or among the Funds listed above. Transfers of past contributions (and
the earnings thereon) do not affect the investment mix of future contributions.
These elections will be effective on the effective date of the Member's notice
to the Plan Administrator. Any amounts credited to a Member's account for which
investment directions are not given will be invested in the Guaranteed Interest
Account.
A. PREVIOUS FUNDS.
Prior to the effective date of the Offering, contributions under the Plan
have been invested
7
<PAGE>
in the six funds specified above. The annual percentage return on these funds
for the prior three years was:
<TABLE>
<CAPTION>
9/30/1997* 1996 1995 1994
--------- ----- ----- -----
<S> <C> <C> <C> <C>
A. Guaranteed Interest Account -- 5.7 5.96 6.23
B. Money Market Account 3.88 5.11 5.65 4.01
C. Bond and Mortgage Account 7.34 3.94 18.41 -2.05
D. Stock Index 500 Account 29.27 22.50 37.07 1.05
E. U.S. Stock Account 22.98 24.13 33.10 0.29
F. Small Company 28.69 18.01 29.44 3.05
</TABLE>
*Unannualized rate of return since January 1, 1997.
The following is a description of each of the Plan's six investment funds:
Account A (Guaranteed Interest Account) This Account earns a guaranteed
--------------------------------------
interest rate for a specific number of years; it offers low risk and low
earnings.
Account B (Money Market Account) This Account invests in high-quality
--------------------------------
commercial paper (short-term, unsecured corporate loans). The average maturity
is usually less than one month; it offers low risk and low earnings.
Account C (Bond and Mortgage Account) This Account makes loans to
-------------------------------------
companies, most of which are bonds and commercial mortgages; it offers moderate
risk and earnings.
Account D (Stock Index 500 Account) This Account invests in the common
-----------------------------------
stocks of those companies listed in the Standard & Poor's 500 Stock Index; it
offers a chance for greater reward in return for a higher degree of risk.
Account E (U.S. Stock Account) This Account invests money in stocks of
------------------------------
U.S. companies of all sizes; it offers a chance for greater reward in return for
a higher degree of risk.
Account F (Small Company Blend Account) This Account invests in stocks of
---------------------------------------
smaller seasoned companies where potential for long-term growth is expected to
be above-average. This Account combines growth and value in a "blend" portfolio.
B. THE EMPLOYER STOCK FUND.
The Employer Stock Fund will consist of investments in Common Stock made on
and after the effective date of the Offering. After the Offering, the Trustee
will, to the extent practicable, use all amounts held by it in the Employer
Stock Fund, including cash dividends paid on Common Stock held in the Employer
Stock Fund, to purchase shares of Common Stock of the Company. It is expected
that all purchases will be made at prevailing market prices. Under certain
circumstances,
8
<PAGE>
the Trustee may be required to limit the daily volume of shares purchased.
Pending investment in Common Stock, assets held in the Employer Stock Fund will
be placed in money market accounts.
As of the date of this Prospectus Supplement, none of the shares of Common
Stock have been issued or are outstanding and there is no established market for
the Common Stock. Accordingly, there is no record of the historical performance
of the Employer Stock Fund. Performance will be dependent upon a number of
factors, including the financial condition and profitability of the Company and
the Bank and market conditions for the Common Stock generally.
INVESTMENT IN THE EMPLOYER STOCK FUND MAY INVOLVE CERTAIN RISKS IN
INVESTMENT IN COMMON STOCK OF THE COMPANY. FOR A DISCUSSION OF THESE RISK
FACTORS, SEE THE PROSPECTUS.
BENEFITS UNDER THE PLAN
Vesting. A Member, at all times, has a fully vested, nonforfeitable
--------
interest in his or her account under the Plan.
WITHDRAWALS AND DISTRIBUTIONS FROM THE PLAN
APPLICABLE FEDERAL LAW REQUIRES THE PLAN TO IMPOSE SUBSTANTIAL RESTRICTIONS
ON THE RIGHT OF A PLAN MEMBER TO WITHDRAW AMOUNTS HELD FOR HIS OR HER BENEFIT
UNDER THE PLAN PRIOR TO THE MEMBER'S TERMINATION OF EMPLOYMENT WITH THE BANK. A
SUBSTANTIAL FEDERAL TAX PENALTY MAY ALSO BE IMPOSED ON WITHDRAWALS MADE PRIOR TO
THE MEMBER'S ATTAINMENT OF AGE 59-1/2, REGARDLESS OF WHETHER SUCH A WITHDRAWAL
OCCURS DURING HIS OR HER EMPLOYMENT WITH THE BANK OR AFTER TERMINATION OF
EMPLOYMENT.
Withdrawals Prior to Termination of Employment. A Member may make a
-----------------------------------------------
withdrawal from his or her elective deferral contributions (and earnings
thereon) prior to termination of employment only in the event of financial
hardship, subject to the hardship distribution rules under the Plan. These
requirements insure that Members have a true financial need before a withdrawal
may be made.
Distribution Upon Retirement or Disability. Unless an optional form of
-------------------------------------------
benefit has been elected, the automatic form of benefit payable to a Member who
retires, incurs a disability, or otherwise terminates employment shall be a
qualified joint and survivor annuity. In the case of a Member who dies before
the Annuity Starting Date, the automatic form of benefit to such Member's
Beneficiary shall be a qualified pre-retirement survivor annuity if the Member
is married and a lump sum payment if a Member is unmarried. The optional forms
of retirement benefit shall be the following: a straight life annuity; single
life annuities with certain periods of five, ten or fifteen years; a single life
annuity with installment refund; survivorship life annuities with installment
refund and survivor percentages of 50, 66 2/3, or 100; fixed period annuities
for any period of whole
9
<PAGE>
months which is not less than sixty and does not exceed the Life Expectancy of
the Member and the named Beneficiary where the Life Expectancy is not
recalculated; a series of installments chosen by the Member with a minimum
payment each year beginning with the year the Member turns age 70-1/2; or a
single sum payment. Benefit payments ordinarily shall commence as soon as
practicable following termination of service upon (i) retirement on or after
attainment of normal retirement age; (ii) retirement due to disability; or (iii)
death of the Member. With respect of a 5% owner, benefit payments must commence
in no event later than April 1 following the calendar year in which the Member
attains age 70-1/2.
Distribution Upon Death. A Member who dies prior to the benefit
------------------------
commencement date for retirement, disability or termination of employment shall
have his or her benefits paid to the surviving spouse or beneficiary under one
or more of the forms available under the Plan.
Distribution Upon Termination for Any Other Reason. Distribution of
---------------------------------------------------
benefits to a Member who terminates employment for any other reason will not be
made to the Member at the time of termination but shall be made on the
occurrence of an event which would result in a distribution had the Member
remained in the employ of the Bank (i.e., upon the Member's death, disability,
or attainment of early or normal retirement age). Alternatively, at the Member's
election, a Member may receive a distribution of his account after he ceases to
be an employee.
Nonalienation of Benefits. Except with respect to federal income tax
-------------------------
withholding and as provided with respect to a qualified domestic relations order
(as defined in the Code), benefits payable under the Plan shall not be subject
in any manner to anticipation, alienation, sale, transfer, assignment, pledge,
encumbrance, charge, garnishment, execution, or levy of any kind, either
voluntary or involuntary, and any attempt to anticipate, alienate, sell,
transfer, assign, pledge, encumber, charge or otherwise dispose of any rights to
benefits payable under the Plan shall be void.
TRUSTEE
The Trustee is appointed by the Board of Directors of the Bank to serve at
its pleasure. Delaware Charter Guarantee and Trust Company has been appointed as
trustee of the Employer Stock Fund of the Plan.
The Trustee receives, holds and invests the contributions to the Employer
Stock Fund of the Plan in trust and distributes them to Members and
beneficiaries in accordance with the terms of the Plan and the directions of the
Plan Administrator. The Trustee is responsible for investment of the assets of
the Trust.
PLAN ADMINISTRATOR
Pursuant to the terms of the Plan, the Plan is administered by the plan
administrator (the "Plan Administrator"). The Bank is the Plan Administrator and
has designated Kathleen P. Monti, Senior Vice President, Human Resources and
Administration, to supervise its responsibilities as such. The address and
telephone number of the Plan Administrator is c/o Lockport Savings Bank,
Attention: Ms. Kathleen P. Monti, Senior Vice President, 6950 South Transit
Road, Lockport, New York 14095-0514, Telephone number (716) 625-7500. The Plan
Administrator is responsible for the
10
<PAGE>
administration of the Plan, interpretation of the provisions of the Plan,
prescribing procedures for filing applications for benefits, preparation and
distribution of information explaining the Plan, maintenance of plan records,
books of account and all other data necessary for the proper administration of
the Plan, and preparation and filing of all returns and reports relating to the
Plan which are required to be filed with the U.S. Department of Labor and the
IRS, and for all disclosures required to be made to Members, beneficiaries, and
others under Sections 104 and 105 of ERISA.
REPORTS TO PLAN MEMBERS
The Plan Administrator will furnish to each Member a statement quarterly
showing (i) the balance in the Member's account as of the end of that period,
(ii) the amount of contributions allocated to such Member's account for that
period, and (iii) the adjustments to such Member's account to reflect earnings
or losses (if any).
AMENDMENT AND TERMINATION
It is the intention of the Bank to continue the Plan indefinitely.
Nevertheless, the Bank may terminate the Plan at any time. If the Plan is
terminated in whole or in part, then regardless of other provisions in the Plan,
each employee affected by such termination shall have a fully vested interest in
his or her accounts. The Bank reserves the right to make, from time to time, any
amendment or amendments to the Plan which do not cause any part of the Trust to
be used for, or diverted to, any purpose other than the exclusive benefit of
Members or their beneficiaries; provided, however, that the Bank may make any
amendment it determines necessary or desirable, with or without retroactive
effect, to comply with ERISA.
MERGER, CONSOLIDATION OR TRANSFER
In the event of the merger or consolidation of the Plan with another plan,
or the transfer of the Trust assets to another plan, the Plan requires that each
Member would (if either the Plan or the other plan then terminated) receive a
benefit immediately after the merger, consolidation or transfer which is equal
to or greater than the benefit he or she would have been entitled to receive
immediately before the merger, consolidation or transfer (if the Plan had then
terminated).
FEDERAL INCOME TAX CONSEQUENCES
The following is only a brief summary of certain federal income tax aspects
of the Plan which are of general application under the Code and is not intended
to be a complete or definitive description of the federal income tax
consequences of participating in or receiving distributions from the Plan. The
summary is necessarily general in nature and does not purport to be complete.
Moreover, statutory provisions are subject to change, as are their
interpretations, and their application may vary in individual circumstances.
Finally, the consequences under applicable state and local income tax laws may
not be the same as under the federal income tax laws. Members are urged to
consult their tax advisors with respect to any distribution from the Plan and
transactions involving the Plan.
The Plan is qualified under Section 401(a) and 401(k) of the Code and the
related Trust is
11
<PAGE>
exempt from tax under Section 501(a) of the Code. A plan that is qualified under
these sections of the Code is afforded special tax treatment which include the
following: (1) the Bank is allowed an immediate tax deduction for the amount
contributed to the Plan each year; (2) Members pay no current income tax on
amounts contributed by the Bank on their behalf; and (3) Earnings of the Plan
are tax-exempt thereby permitting the tax-free accumulation of income and gains
on investments. The Plan will be administered to comply in operation with the
requirements of the Code as of the applicable effective date of any change in
the law. The Bank expects to timely adopt any amendments to the Plan that may be
necessary to maintain the qualified status of the Plan under the Code.
Assuming that the Plan is administered in accordance with the requirements
of the Code, participation in the Plan under existing federal income tax laws
will have the following effects:
(a) Amounts contributed to a Member's account and the investment earnings
on the account are not includable in a Member's federal taxable income until
such contributions or earnings are actually distributed or withdrawn from the
Plan. Special tax treatment may apply to the taxable portion of any distribution
that includes Common Stock or qualifies as a Lump Sum Distribution (as described
below).
(b) Income earned on assets held by the Trust will not be taxable to the
Trust.
Lump Sum Distribution. A distribution from the Plan to a Member or the
---------------------
beneficiary of a Member will qualify as a lump sum distribution ("Lump Sum
Distribution") if it is made: (i) within one taxable year of the Member or
beneficiary; (ii) on account of the Member's death, disability or separation
from service, or after the Member attains age 59-1/2; and (ii) consists of the
balance to the credit of the Member under this Plan and all other profit sharing
plans, if any, maintained by the Bank. The portion of any Lump Sum Distribution
that is required to be included in the Member's or beneficiary's taxable income
for federal income tax purposes (the"total taxable amount") consists of the
entire amount of such Lump Sum Distribution less the amount of after-tax
contributions, if any, made by the Member to any other profit sharing plan
maintained by the Bank which is included in such distribution.
Averaging Rules. The portion of the total taxable amount of a Lump Sum
----------------
Distribution that is attributable to participation after 1973 in the Plan or in
any other profit-sharing plan maintained by the Bank (the "ordinary income
portion") will be taxable generally as ordinary income for federal income tax
purposes. However, a Member who has completed at least five years of
participation in the Plan before the taxable year in which the distribution is
made, or a beneficiary who receives a Lump Sum Distribution on account of the
Member's death (regardless of the period of the Member's participation in the
Plan or any other profit-sharing plan maintained by the Bank), may elect to have
the ordinary income portion of such Lump Sum Distribution taxed according to a
special averaging rule ("five-year averaging"). The election of the special
averaging rules may apply only to one Lump Sum Distribution received by the
Member or beneficiary, provided such amount is received on or after the Member
turns 59-1/2 and the recipient elects to have any other Lump Sum Distribution
from a qualified plan received in the same taxable year taxed under the special
averaging rule. Under a special grandfather rule, individuals who turned 50 by
1985 may elect to have their Lump Sum Distribution taxed under either the five-
year averaging rule or under the prior law ten-year averaging
12
<PAGE>
rule. Such individuals also may elect to have that portion of the Lump Sum
Distribution attributable to the Member's pre-1974 participation in the Plan
taxed at a flat 20% rate as gain from the sale of a capital asset.
Common Stock Included in Lump Sum Distribution. If a Lump Sum Distribution
-----------------------------------------------
includes Common Stock, the distribution generally will be taxed in the manner
described above, except that the total taxable amount will be reduced by the
amount of any net unrealized appreciation with respect to such Common Stock,
i.e., the excess of the value of such Common Stock at the time of the
distribution over the cost or other basis to the Trust. The tax basis of such
Common Stock to the Member or beneficiary for purposes of computing gain or loss
on its subsequent sale will be the value of the Common Stock at the time of
distribution less the amount of net unrealized appreciation. Any gain on a
subsequent sale or other taxable disposition of such Common Stock, to the extent
of the amount of net unrealized appreciation at the time of distribution, will
be considered long-term capital gain regardless of the holding period of such
Common Stock. Any gain on a subsequent sale or other taxable disposition of the
Common Stock in excess of the amount of net unrealized appreciation at the time
of distribution will be considered short-term, mid-term or long-term capital
gain depending upon the length of the holding period of the Common Stock. The
recipient of a distribution may elect to include the amount of any net
unrealized appreciation in the total taxable amount of such distribution to the
extent allowed by the regulations to be issued by the IRS.
Contribution to Another Qualified Plan or to an IRA. A Member may defer
----------------------------------------------------
federal income taxation of all or any portion of the total taxable amount of a
Lump Sum Distribution (including the proceeds from the sale of any Common Stock
included in the Lump Sum Distribution) to the extent that such amount, or a
portion thereof, is contributed, within 60 days after the date of its receipt by
the Member, to another qualified plan or to an individual retirement account
("IRA"). If less than the total taxable amount of a Lump Sum Distribution is
contributed to another qualified plan or to an IRA within the applicable 60-day
period, the amount not so contributed must be included in the Member's income
for federal income tax purposes and will not be eligible for the special
averaging rules or for capital gains treatment. Additionally, a Member may defer
the federal income taxation of any portion of an amount distributed from the
Plan on account of the Member's disability or separation from service,
generally, if the amount is distributed within one taxable year of the Member,
and such amount is contributed, within 60 days after the date of its receipt by
the Member, to an IRA. Prior to 1993, following the partial distribution of a
Member's account, any remaining balance under the Plan (and the balance to the
credit of the Member under any other profit sharing plan sponsored by the Bank)
would not be eligible for the special averaging rules or for capital gains
treatment. For these purposes, a "partial distribution" is a distribution within
one taxable year of the Member equal to at least 50% of the balance of a
Member's account ("Partial Distribution").
Pursuant to a change in the law, effective January 1, 1993, virtually all
distributions from the Plan may be rolled over to another qualified Plan or to
an IRA without regard to whether the distribution is a Lump Sum Distribution or
a Partial Distribution. Effective January 1, 1993, Members have the right to
elect to have the Trustee transfer all or any portion of an "eligible rollover
distribution" directly to another plan qualified under Section 401(a) of the
Code or to an IRA. If the Member does not elect to have an "eligible rollover
distribution" transferred directly to another qualified plan or to an IRA, the
distribution will be subject to a mandatory federal withholding tax equal to 20%
of the taxable distribution. An "eligible rollover distribution" means any
amount
13
<PAGE>
distributed from the Plan except: (1) a distribution that is (a) one of a series
of substantially equal periodic payments made (not less frequently than
annually) over the Member's life or the joint life of the Member and the
Member's designated beneficiary, or (b) for a specified period of ten years or
more; (2) any amount that is required to be distributed under the minimum
distribution rules; and (3) any other distributions excepted under applicable
federal law.
The beneficiary of a Member who is the Member's surviving spouse also may
defer federal income taxation of all or any portion of a distribution from the
Plan to the extent that such amount, or a portion thereof, is contributed within
60 days after the date of its receipt by the surviving spouse, to an IRA. If all
or any portion of the total taxable amount of a Lump Sum Distribution is
contributed by the surviving spouse of a Member to an IRA within the applicable
60-day period, any subsequent distribution from the IRA will not be eligible for
the special averaging rules or for capital gains treatment. Any amount received
by the Member's surviving spouse that is not contributed to another qualified
plan or to an IRA within the applicable 60-day period, and any amount received
by a nonspouse beneficiary will be included in such beneficiary's income for
federal tax purposes in the year in which it is received.
Additional Tax on Early Distributions. A Member who receives a
--------------------------------------
distribution from the Plan prior to attaining age 59 1/2 will be subject to an
additional income tax equal to 10% of the taxable amount of the distribution.
The 10% additional income tax will not apply, however, to the extent the
distribution is rolled over into an IRA or another qualified plan or the
distribution is (i) made to a beneficiary (or to the estate or a Member) on or
after the death of the Member, (ii) attributable to the Member's being disabled
within the meaning of Section 72(m)(7) of the Code, (iii) part of a series of
substantially equal periodic payments (not less frequently than annually) made
for the life (or life expectancy) of the Member or the joint lives (or joint
life expectancies) of the Member and his beneficiary, (iv) made to the Member
after separation from service on account of early retirement under the Plan
after attainment of age 55, (v) made to pay medical expenses to the extent
deductible for federal income tax purposes, (vi) payments made to an alternate
payee pursuant to a qualified domestic relations order, or (vii) made to effect
the distribution of excess contributions or excess deferrals.
ERISA AND OTHER QUALIFICATIONS
As noted above, the Plan is subject to certain provisions of the ERISA and
has applied for a favorable determination that it is qualified under Section
401(a) of the Code.
The foregoing is only a brief summary of certain federal income tax aspects
of the Plan which are of general application under the Code and is not intended
to be a complete or definitive description of the federal income tax
consequences of participating in or receiving distributions from the Plan.
Accordingly, each Member is urged to consult a tax advisor concerning the
federal, state and local tax consequences of participating in and receiving
distributions from the Plan.
SEC REPORTING AND SHORT-SWING PROFIT LIABILITY
Section 16 of the Exchange Act imposes reporting and liability requirements
on officers, directors, and persons beneficially owning more than 10% of public
companies such as the
14
<PAGE>
Company. Section 16(a) of the Exchange Act requires the filing of reports of
beneficial ownership. Within 10 days of becoming a person subject to the
reporting requirements of Section 16(a), a Form 3 reporting initial beneficial
ownership must be filed with the Securities and Exchange Commission ("SEC") .
Certain changes in beneficial ownership, such as purchases, sales and gifts must
be reported periodically, either on a Form 4 within 10 days after the end of the
month in which a change occurs, or annually on a Form 5 within 45 days after the
close of the Company's fiscal year. Certain discretionary transactions in and
beneficial ownership of the Common Stock through the Employer Stock Fund of the
Plan by officers, directors and persons beneficially owning more than 10% of the
Common Stock of the Company must be reported to the SEC by such individuals.
In addition to the reporting requirements described above, Section 16(b) of
the Exchange Act as provides for the recovery by the Company of profits realized
by an officer, director or any person beneficially owning more than 10% of the
Company's Common Stock ("Section 16(b) Persons") resulting from non-exempt
purchases and sales of the Company's Common Stock within any six-month period.
The SEC has adopted rules that provide exemption from the profit recovery
provisions of Section 16(b) for all transactions in employer securities within
an employee benefit plan, such as the Plan, provided certain requirements are
met. These requirements generally involve restrictions upon the timing of
elections to acquire or dispose of employer securities for the accounts of
Section 16(b) Persons.
Except for distributions of Common Stock due to death, disability,
retirement, termination of employment or under a qualified domestic relations
order, Section 16(b) Persons are required to hold shares of Common Stock
distributed from the Plan for six months following such distribution and are
prohibited from directing additional purchases of units within the Employer
Stock Fund for six months after receiving such a distribution.
FINANCIAL INFORMATION REGARDING PLAN ASSETS
Financial statements for the Plan for the year ending December 31, 1996 are
attached to the Prospectus.
LEGAL OPINION
The validity of the issuance of the Common Stock will be passed upon by
Luse Lehman Gorman Pomerenk & Schick, A Professional Corporation, Washington,
D.C., which firm acted as special counsel to the Bank in connection with the
Company's Conversion from a mutual savings bank to a stock based organization
and the concurrent formation of the Company.
15
<PAGE>
LOCKPORT SAVINGS BANK
401(k) PLAN
Financial Statements and Schedules
December 31, 1996 and 1995
(With Independent Auditors' Report Thereon)
<PAGE>
LOCKPORT SAVINGS BANK
401(K) PLAN
INDEX
Independent Auditors' Report
Statement of Net Assets Available for Plan Benefits
with Fund Information as of December 31, 1996
Statement of Net Assets Available for Plan Benefits
with Fund Information as of December 31, 1995
Statement of Changes in Net Assets Available for Plan
Benefits with Fund Information for the year ended
December 31, 1996
Statement of Changes in Net Assets Available for Plan
Benefits with Fund Information for the year ended
December 31, 1995
Notes to Financial Statements
Schedule
--------
Item 27a - Schedule of Assets Held for Investment Purposes 1
as of December 31, 1996
Item 27d - Schedule of Reportable Transactions for the 2
year ended December 31, 1996
* * * * *
<PAGE>
[LETTERHEAD OF KPMG PEAT MARWICK LLP APPEARS HERE]
Independent Auditors' Report
----------------------------
The Employee Benefits Committee of
Lockport Savings Bank:
We have audited the accompanying statements of net assets available for plan
benefits of Lockport Savings Bank 401(k) Plan as of December 31, 1996 and 1995,
and the related statements of changes in net assets available for plan benefits
for the years then ended. These financial statements are the responsibility of
the Plan'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 net assets available for plan benefits of Lockport
Savings Bank 401(k) Plan as of December 31, 1996 and 1995, and the changes in
net assets available for plan benefits for the years then ended, in conformity
with generally accepted accounting principles.
Our audits were performed for the purpose of forming an opinion on the basic
financial statements taken as a whole. Supplemental schedules 1 and 2 are
presented for the purpose of additional analysis and are not a required part of
the basic financial statements but are supplementary information required by the
Department of Labor's Rules and Regulations for Reporting and Disclosure under
the Employee Retirement Income Security Act of 1974. The fund information in the
statements of net assets available for plan benefits and the statements of
changes in net assets available for plan benefits is presented for purposes of
additional analysis rather than to present the net assets available for plan
benefits and changes in net assets available for plan benefits of each fund. The
supplemental schedules and fund information have been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, are fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
/s/ KPMG Peat Marwick LLP
August 26, 1997
<PAGE>
LOCKPORT SAVINGS PLAN
401(k) PLAN
Statement of Net Assets Available for Plan Benefits
with Fund Information
December 31, 1996
<TABLE>
<CAPTION>
Guaranteed U.S. Money Bond and Stock
Interest Stock Market Mortgage Index
Account Account Account Account Account Total
---------- ------- ------- -------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Investments under group
annuity contract with
insurance company (note 3) $ 1,424,167 1,767,188 99,217 139,919 257,326 3,687,817
---------- --------- ------ ------- ------- ---------
Contributions receivable:
Employee 7 23 -- -- -- 30
Employer 3 10 -- -- -- 13
---------- --------- ------ ------- ------- ---------
Total Contributions receivable 10 33 -- -- -- 43
---------- --------- ------ ------- ------- ---------
Net assets available for plan
benefits $ 1,427,177 1,767,221 99,217 139,919 257,326 3,687,860
========== ========= ====== ======= ======= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
LOCKPORT SAVINGS PLAN
401(k) PLAN
Statement of Net Assets Available for Plan Benefits
with Fund Information
December 31, 1995
<TABLE>
<CAPTION>
Guaranteed U.S. Money Bond and Stock
Interest Stock Market Mortgage Index
Account Account Account Account Account Total
---------- ------- ------- -------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Investments under group
annuity contract with
insurance company (note 3) $ 1,285,051 1,148,101 57,957 85,276 120,865 2,697,250
--------- --------- ------ ------ ------- ---------
Net assets available for plan
benefits $ 1,285,051 1,148,101 57,957 85,276 120,865 2,697,250
========= ========= ====== ====== ======= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
LOCKPORT SAVINGS BANK
401(k) PLAN
Statement of Changes in Net Assets
Available for Plan Benefits with Fund Information
December 31, 1996
<TABLE>
<CAPTION>
GUARANTEED U.S. MONEY BOND AND STOCK
INTEREST STOCK MARKET MORTGAGE INDEX
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT TOTAL
---------- ------- ------- ---------- ---------- -----
Contributions:
<S> <C> <C> <C> <C> <C> <C>
Employer $ 59,467 69,830 4,922 14,324 20,568 169,111
Employee 179,283 208,766 15,353 43,835 61,520 508,757
----------- ----------- --------- ----------- ----------- -----------
238,750 278,596 20,275 58,159 82,088 677,868
----------- ----------- --------- ----------- ----------- -----------
Investment income:
Interest 79,970 - - - - 79,970
Net appreciation (depreciation) in fair
value of investments, including
realized gains and losses (3,893) 317,414 4,187 4,984 40,445 363,137
----------- ----------- --------- ----------- ----------- -----------
76,077 317,414 4,187 4,984 40,445 443,107
----------- ----------- --------- ----------- ----------- -----------
Total contributions and
investment income 314,827 596,010 24,462 63,143 122,533 1,120,975
Benefits paid to participants (65,586) (43,286) (2,390) (4,401) (14,702) (130,365)
Transfers among funds (110,115) 66,396 19,188 (4,099) 28,630 -
----------- ----------- --------- ----------- ----------- -----------
Net increase 139,126 619,120 41,260 54,643 136,461 990,610
Net assets available for plan benefits:
Beginning of year 1,285,051 1,148,101 57,957 85,276 120,865 2,697,250
----------- ----------- --------- ----------- ----------- -----------
End of year $ 1,424,177 1,767,221 99,217 139,919 257,326 3,687,860
=========== =========== ========= =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
LOCKPORT SAVINGS PLAN
401(k) PLAN
Statement of Changes in Net Assets
Available for Plan Benefits with Fund Information
December 31, 1996
<TABLE>
<CAPTION>
Guaranteed U.S. Money Bond and Stock
Interest Stock Market Mortgage Index
Account Account Account Account Account Total
---------- ------- ------- -------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Contributions:
Employer $ 59,946 56,911 3,171 10,469 12,525 143,022
Employee 150,426 215,196 7,502 27,205 31,036 431,365
---------- --------- ------- -------- ------- --------
210,372 272,107 10,673 37,674 43,561 574,387
---------- --------- ------- -------- ------- --------
Investment income:
Interest 77,159 -- -- -- -- 77,159
Net appreciation (depreciation)
in fair value of investments,
including realized gains and
losses (6) 245,443 3,207 9,026 23,004 280,674
---------- --------- ------- -------- ------- ---------
77,153 245,443 3,207 9,026 23,004 357,833
---------- --------- ------- -------- ------- ---------
Total contributions and
investment income 287,525 517,550 13,880 46,700 66,565 932,220
Benefits paid to participants (37,320) (18,207) (4,811) -- (109) (60,447)
Transfers among funds (25,700) 3,477 13,633 3,239 5,351 --
---------- --------- ------- -------- ------- ---------
Net increase 224,505 502,820 22,702 49,939 71,807 871,773
Net assets available for plan
benefits:
Beginning of year 1,060,546 645,281 35,255 35,337 49,058 1,825,477
---------- --------- ------- -------- ------- ---------
End of year $ 1,285,051 1,148,101 57,957 85,276 120,865 2,697,250
========== ========= ======= ======== ======= =========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
LOCKPORT SAVINGS BANK
401(K) PLAN
Notes to Financial Statements
December 31, 1996 and 1995
(1) Description of Plan
-------------------
The following description of Lockport Savings Bank 401(k) Plan (the Plan)
is provided for general information purposes only. Participants should
refer to the Plan document for more complete information.
(a) General
-------
The Plan is a defined contribution plan covering all employees of
Lockport Savings Bank (the Bank). The Plan is subject to the
provisions of the Employee Retirement Income Security Act of 1974
(ERISA).
(b) Eligibility
-----------
Employees are eligible to participate in the Plan when they reach age
21 and have completed one year of service during which they
worked at least 1,000 hours.
(c) Contributions
-------------
Participants may make contributions to the Plan in the form of salary
reductions of up to 15% of their total compensation, excluding
bonuses. The Bank makes matching contributions of 50% of employee
contributions, up to a maximum of 6% of the employee's total
compensation, excluding bonuses. Participant contributions are
limited by the maximum allowable contribution under the Internal
Revenue Code.
(d) Participants' Accounts
----------------------
Each participant's account is credited with contributions and a pro
rata share of investment income.
(e) Vesting
-------
Participant and Bank matching contributions immediately vest 100% to
the participant.
(f) Distributions
-------------
Participants or their beneficiaries are entitled to their entire
account balance upon death, disability or retirement, payable in
a single sum or in an annuity.
(g) Administrative Expenses
-----------------------
All the costs of administering the Plan are borne by the Bank.
1 (Continued)
<PAGE>
LOCKPORT SAVINGS BANK
401(k) PLAN
Notes to Financial Statements
(2) Summary of Significant Accounting Policies
------------------------------------------
(a) Basis of Presentation
---------------------
The accompanying financial statements have been prepared on the
accrual basis of accounting.
(b) Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and
assumptions that affect the reported amounts of net assets
available for plan benefits and changes therein. Actual results
could differ from those estimates.
(c) Investments
-----------
Investments in the pooled separate accounts of the Principal Mutual
Life Insurance Company (Principal) are carried at fair value
based on the fair values of the underlying assets. The Guaranteed
Interest Account is carried at fair value, which approximates
contract value (original investment plus accrued interest).
Investment income includes unrealized appreciation or
depreciation in the value of the investments.
(3) Investments
-----------
Contributions to the Plan are invested under a group annuity contract with
Principal. Plan participants may allocate their funds among one or
more of the following investment accounts under the contract:
. Guaranteed Interest - A general investment account comprised of
guaranteed interest contracts.
. U.S. Stock - A pooled separate account which is comprised of equity
securities.
. Money Market - A pooled separate account which is comprised of
commercial paper, U.S. government and agency securities and other
short-term, interest-bearing securities.
. Bond and Mortgage - A pooled separate account which is comprised of
intermediate-term, commercial mortgages and mortgage-backed
securities.
. Stock Index - A pooled separate account which is comprised of the
stocks included in the Standard & Poor's 500 Stock Index.
2 (Continued)
<PAGE>
LOCKPORT SAVINGS BANK
401(K) PLAN
Notes to Financial Statements, Continued
(3) Investments, Continued
----------------------
Individual investments held by Principal that comprise 5% or more of the
Plan's net assets available for plan benefits at December 31, 1996 and
1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Principal Mutual Life Insurance Company:
Guaranteed Interest Account $ 1,424,167 1,285,051
U.S. Stock Account 1,767,188 1,148,101
Stock Index Account 257,326 -
========== =========
</TABLE>
(4) Federal Income Taxes
--------------------
The Internal Revenue Service has issued a determination letter that the
Plan is qualified under the provisions of Sections 401(a) and 401(k)
of the Internal Revenue Code (the "Code") and is therefore exempt from
federal income taxes under Section 501(a) of the Code. The Plan
sponsor has represented that the Plan has operated in conformity with
applicable laws and regulations to maintain its tax qualified status.
(5) Plan Termination
----------------
Although it has not expressed any intent to do so, the Bank has the right
to discontinue its matching contribution at any time and to terminate
the Plan subject to the provisions of ERISA. In the event of a
termination of the Plan, participants will be entitled to the entire
amount credited to their accounts.
3
<PAGE>
Schedule 1
----------
LOCKPORT SAVINGS BANK
401(k) PLAN
Item 27a - Schedule of Assets Held for Investment Purposes
December 31, 1996
<TABLE>
<CAPTION>
Fair
Identity of issue Description Cost Value
----------------- ----------- ---- -----
<S> <C> <C> <C>
Group annuity contract with Principal
Mutual Life Insurance Company:*
Guaranteed Interest Account General investment
account comprised
of guaranteed
interest contracts $ 1,428,065 1,424,167
U.S. Stock Account Pooled separate account
investing in equity
securities 1,176,808 1,767,188
Money Market Account Pooled separate account
investing in money
market instruments 93,889 99,217
Bond and Mortgage Account Pooled separate account
investing in fixed
income securities 127,170 139,919
Stock Index Account Pooled separate account
investing in corporate
stocks 197,921 257,326
----------- -----------
$ 3,023,853 3,687,817
=========== ===========
</TABLE>
*Person named is a party-in-interest.
<PAGE>
SCHEDULE 2
----------
LOCKPORT SAVINGS BANK
401(k) PLAN
Item 27d - Schedule of Reportable Transactions
Year ended December 31, 1996
<TABLE>
<CAPTION>
Expense
Number Number incurred
Identity of Description of units Purchase of units Selling Lease with
party involved of asset purchased price sold price rental transaction
-------------- ----------- --------- -------- -------- ------- ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Group Annuity
contract with
Principal Mutual
Life Insurance
Company:*
Guaranteed General investment
Interest account comprised
Account** of guaranteed
interest contracts - $ 380,814 - $317,775 - -
U.S Stock Pooled separate
Account** account investing
in equity
securities 1519.4946 405,909 397.5914 104,235 - -
Money Market Pooled separate
Account** account investing
in money
market
instruments 2681.8994 86,982 1533.2210 49,909 - -
Stock Index Pooled separate
Account** account investing
in corporate
stocks 5559.6847 122,841 1210,7832 26,825 - -
========== ========== ========= ======== ========= =========
<CAPTION>
Fair
value of
asset on
Identity of Description Cost of transaction Net
party involved of asset asset date gain
-------------- ----------- ------- ----------- ----
<S> <C> <C> <C> <C>
Group Annuity
contract with
Principal Mutual
Life Insurance
Company:*
Guaranteed General investment
Interest account comprised
Account** of guaranteed
interest contracts 317,775 317,775 -
U.S Stock Pooled separate
Account** account investing
in equity
securities 76,642 76,642 27,593
Money Market Pooled separate
Account** account investing
in money
market
instruments 47,428 47,428 2,481
Stock Index Pooled separate
Account** account investing
in corporate
stocks 22,156 22,156 4,669
======== ======== =======
</TABLE>
*Person named is a party-in-interest.
**Series of transactions
<PAGE>
PROSPECTUS
UP TO 13,501,554 SHARES OF COMMON STOCK
NIAGARA BANCORP, INC.
6950 SOUTH TRANSIT ROAD
P.O. BOX 514
LOCKPORT, NEW YORK 14095-0514
(716) 625-7500
================================================================================
Lockport Savings Bank, Lockport, New York is reorganizing from the mutual
form of organization to the mutual holding company form of organization. As part
of the Reorganization, Lockport Savings Bank will become a wholly-owned
subsidiary of Niagara Bancorp, Inc., a Delaware corporation, and Niagara
Bancorp, Inc. will issue a majority of its common stock to Niagara Bancorp, MHC,
a New York-chartered mutual holding company, and sell a minority of its common
stock to the public pursuant to this Prospectus. The shares of common stock of
Niagara Bancorp, Inc. are being offered to depositors and the public under the
terms of a Plan of Reorganization which must be approved by depositors of
Lockport Savings Bank and by the New York State Banking Department. In addition,
the Federal Deposit Insurance Corporation must issue a letter of nonobjection to
the Reorganization. The Reorganization will not go forward if Lockport Savings
Bank does not receive these approvals and nonobjections, or if Niagara Bancorp,
Inc. does not sell at least a minimum number of shares of its common stock.
Because the names of Niagara Bancorp, Inc. and Niagara Bancorp, MHC are so
similar, we will refer to Niagara Bancorp, Inc. as the "Company" and we will
refer to Niagara Bancorp, MHC as the "Mutual Holding Company."
================================================================================
TERMS OF OFFERING
An independent appraiser has estimated that as of November 28, 1997, the
pro forma market value of the Common Stock of the Company ranged from $191.1
million to $258.8 million. Based on the valuation, the Company will issue
between 19,125,000 and 25,875,000 shares of Common Stock in the Reorganization.
The Company intends to sell 45.4% of such shares, or between 8,677,747 and
11,740,482 shares, to depositors and the public pursuant to this Prospectus, and
issue 53.3% of such shares, or between 10,186,921 and 13,782,304 shares, to the
Mutual Holding Company. In addition, shares are being issued to a charitable
foundation as part of the Reorganization, which will result in stockholders
other than the Mutual Holding Company owning 46.7% of the shares of the Common
Stock outstanding at the conclusion of the Reorganization. Subject to the
approval of the New York State Banking Department and the nonobjection of the
Federal Deposit Insurance Corporation, an additional 15% above the maximum
number of shares, or a total of 29,756,250 shares, may be issued in the
Reorganization, and up to 13,501,554 shares may be sold in the Offering pursuant
to this Prospectus, in the event of an increase in the estimated pro forma
market value of the common stock of the Company. Based on these estimates, we
are making the following offering of shares of Common Stock pursuant to this
Prospectus.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
. Price Per Share: $10.00
. Number of Shares
Minimum/Maximum/Adjusted Maximum: 8,677,747 11,740,482 13,501,554
. Reorganization Expenses
Minimum/Maximum/Adjusted Maximum: $1,455,352,352 $1,694,858 $1,800,000
. Net Proceeds to Niagara Bancorp, Inc.
Minimum/Maximum/Adjusted Maximum: $85,322,118 $115,709,962 $133,215,540
. Net Proceeds per share to Niagara Bancorp, Inc.
Minimum/Maximum/Adjusted Maximum: $9.83 $9.86 $9.87
</TABLE>
PLEASE REFER TO RISK FACTORS BEGINNING ON PAGE _____ OF THIS DOCUMENT.
<PAGE>
THESE SECURITIES ARE NOT DEPOSITS OR ACCOUNTS AND ARE NOT INSURED OR GUARANTEED
BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION, THE NEW YORK STATE BANKING
DEPARTMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, NOR ANY STATE SECURITIES
REGULATOR HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
CIBC Oppenheimer Corp. and Trident Securities, Inc. will use their best
efforts to assist the Company in selling at least the minimum number of shares
but do not guarantee that this number will be sold. All funds received from
subscribers will be held in an interest bearing savings account at Lockport
Savings Bank until the completion or termination of the Reorganization.
For information on how to subscribe, call the Stock Information Center at
(716) 438-1198. For additional information about the Bank, please visit our
Website at http://www.__________.com.
CIBC OPPENHEIMER CORP. TRIDENT SECURITIES, INC.
PROSPECTUS DATED FEBRUARY ___, 1997
<PAGE>
MAP
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE STOCK OFFERING....................................... 1
SUMMARY AND OVERVIEW................................................................. 4
SELECTED FINANCIAL INFORMATION....................................................... 8
RISK FACTORS......................................................................... 11
NIAGARA BANCORP, INC................................................................. 15
LOCKPORT SAVINGS BANK................................................................ 15
REGULATORY CAPITAL COMPLIANCE........................................................ 16
USE OF PROCEEDS...................................................................... 17
DIVIDEND POLICY...................................................................... 18
MARKET FOR THE COMMON STOCK.......................................................... 19
CAPITALIZATION....................................................................... 19
PRO FORMA DATA....................................................................... 20
COMPARISON OF VALUATION AND PRO FORMA
INFORMATION WITHOUT FOUNDATION.................................................. 28
PARTICIPATION BY MANAGEMENT.......................................................... 29
CONSOLIDATED STATEMENTS OF INCOME.................................................... 30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS................................... 31
BUSINESS OF THE COMPANY.............................................................. 47
BUSINESS OF THE BANK................................................................. 47
FEDERAL AND STATE TAXATION........................................................... 82
REGULATION........................................................................... 83
MANAGEMENT OF THE COMPANY............................................................ 92
MANAGEMENT OF THE BANK............................................................... 93
THE REORGANIZATION AND OFFERING...................................................... 102
</TABLE>
(i)
<PAGE>
<TABLE>
<S> <C>
RESTRICTIONS ON ACQUISITION OF THE COMPANY........................................... 118
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY.......................................... 120
TRANSFER AGENT AND REGISTRAR......................................................... 121
LEGAL AND TAX MATTERS................................................................ 121
EXPERTS.............................................................................. 122
ADDITIONAL INFORMATION............................................................... 122
CONSOLIDATED FINANCIAL STATEMENTS.................................................... F-1
</TABLE>
This document contains forward-looking statements which involve risks and
uncertainties. Niagara Bancorp, Inc.'s actual results may differ significantly
from the results discussed in the forward-looking statements. Factors that might
cause such a difference include, but are not limited to, those discussed in
"Risk Factors" beginning on page 11 of this Prospectus.
Please see the Glossary beginning on page G-l for the meaning of capitalized
terms that are used in this Prospectus.
(ii)
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE STOCK OFFERING
Q: WHAT IS THE PURPOSE OF THE OFFERING?
A: The Offering is being made in connection with the Reorganization of
Lockport Savings Bank from a New York-chartered mutual savings bank into
the mutual holding company form of ownership. As part of the
Reorganization, you will have the opportunity to become a shareholder of
the Company, a Delaware corporation, which will allow you to share in the
future of our savings bank. By converting to the stock form of ownership,
the Bank will be structured in the form used by virtually all commercial
banks and a large number of savings banks. The Offering will increase our
capital for lending and investment activities. This will better enable us
to continue the expansion of our retail banking franchise and to diversify
operations. Further, as a stock savings bank operating through a holding
company structure, we will improve our ability to access the capital
markets. As part of the Reorganization, we are also establishing a
Charitable Foundation that will be dedicated exclusively to supporting
charitable causes and community development activities in Western New York
State.
Q: HOW DO I ORDER THE STOCK?
A: You must complete and return the stock order form and certification to us
together with your payment, on or before March _____, 1998.
Q: HOW MUCH STOCK MAY I ORDER?
A: The minimum order is 25 shares (or $250). The maximum order is 20,000
shares for a purchase price of $200,000. In certain instances, your order
may be grouped together with orders by other persons who are associated
with you (such as your spouse, child or relative living in your home), or
with whom you are acting in concert, and, in that event, you would be
subject to an aggregate purchase limit of 40,000 shares, or $400,000. We
may decrease or increase the maximum purchase limitation without notifying
you. However, if we increase the maximum purchase limitation, and you
previously subscribed for the maximum number of shares, you will be given
the opportunity to subscribe for additional shares.
Q: WHAT HAPPENS IF THERE ARE NOT ENOUGH SHARES TO FILL ALL ORDERS?
A: If the Offering is oversubscribed, shares will be allocated based upon a
formula set forth in the Plan of Reorganization and in accordance with New
York law and regulations, and policies of the FDIC and New York State
Banking Department.
Q: WHO WILL RECEIVE SUBSCRIPTION RIGHTS?
A: The stock will be offered on a priority basis to the following persons:
. Persons who had deposit accounts of at least $100 with us on August
31, 1996. Any remaining shares will be offered to:
. The Company's employee stock ownership plan. Any remaining shares will
be offered to:
. Persons who had deposit accounts of at least $100 with us on December
31, 1997.
If the above persons do not subscribe for all of the shares, the remaining
shares will be offered to certain members of the general public, with
preference given first to natural persons residing in the Western New York
<PAGE>
counties of Niagara, Erie, Orleans and Genesee, and secondly to natural
persons residing in the remaining four counties of Western New York,
Wyoming, Allegany, Cattaraugus and Chautauqua counties.
Q: WHAT PARTICULAR FACTORS SHOULD I CONSIDER WHEN DECIDING WHETHER OR NOT TO
BUY THE STOCK?
A: Before you decide to purchase stock, you should read the entire Prospectus,
including the Risk Factors section on pages _____ of this document.
Q: AS A DEPOSITOR OF LOCKPORT SAVINGS BANK, WHAT WILL HAPPEN IF I DO NOT ORDER
ANY STOCK?
A: You are not required to purchase Common Stock. Your deposit accounts and
any loans you may have with us will not be affected by the Reorganization.
Q: WHAT IS A MUTUAL HOLDING COMPANY REORGANIZATION?
A: Lockport Savings Bank will convert from the mutual form of organization to
the capital stock form of organization, and establish the Company. The
Company will issue between 19,125,000 and 29,756,250 shares of Common Stock
in the Reorganization; 53.3% of the shares will be issued to the Mutual
Holding Company, and 45.4% will be sold to depositors and the public
pursuant to this Prospectus. In addition, shares are being issued to a
charitable foundation as part of the Reorganization, which will result in
stockholders other than the Mutual Holding Company owning 46.7% of the
shares of the Common Stock outstanding at the conclusion of the
Reorganization. The Mutual Holding Company is a New York-chartered mutual
corporation without shares of capital stock, which will be regulated by the
New York State Banking Department and the Federal Reserve Board. As part of
the Reorganization, any liquidation or ownership-type interest that a
depositor had in Lockport Savings Bank will become a similar interest in
the Mutual Holding Company. Based upon the Independent Valuation, 53.3% of
the shares of Common Stock to be issued in the Reorganization will range
from a minimum of 10,186,921 shares to an adjusted maximum of 15,849,649
shares, and 45.4% of the shares of Common Stock to be sold pursuant to this
Prospectus will range from a minimum of 8,677,747 shares to an adjusted
maximum of 13,501,554 shares.
Q: IS A MUTUAL HOLDING COMPANY REORGANIZATION DIFFERENT FROM OTHER MUTUAL TO
STOCK HOLDING COMPANY CONVERSIONS?
A: The mutual holding company structure differs in significant respects from
an ordinary savings and loan or bank holding company. The Mutual Holding
Company is a mutual corporation without shares of capital stock.
Furthermore, the Mutual Holding Company's Board of Trustees, in making
certain business decisions, considers the impact of its action on a variety
of constituencies, including the depositors of the Bank, the employees of
the Bank, and the communities in which the Bank operates. As the majority
stockholder of the Company, the Mutual Holding Company is also interested
in the continued success and profitability of the Bank and the Company.
Consequently, the Mutual Holding Company will act in a manner which
furthers the general interest of all of its constituencies, including, but
not limited to, the interest of the stockholders of the Company. The Mutual
Holding Company believes that the interests of the stockholders of the
Company, and those of the Mutual Holding Company's other constituencies,
are in many circumstances the same, such as the increased profitability of
the Company and the Bank and continued service to the communities in which
the Bank operates.
Q: CAN THE MUTUAL HOLDING COMPANY CONVERT TO STOCK FORM?
A: Although New York law and regulations and the Plan of Reorganization permit
the Mutual Holding Company to convert from the mutual to the capital stock
form of organization, the Board of Trustees has no current intention or
plan to undertake such a transaction. Moreover, there can be no assurance
that such a transaction
2
<PAGE>
will ever occur. If the Mutual Holding Company were to convert to the
capital stock form of organization, certain depositors would receive the
right to subscribe for additional shares of the resulting entity. In such a
transaction, each share of Common Stock outstanding and held by persons
other than the Mutual Holding Company would be automatically converted into
shares of common stock of the resulting entity.
Q: HOW DO I DECIDE WHETHER TO BUY STOCK IN THE OFFERING?
A: In order to make an informed investment decision, you should read this
entire Prospectus. This section highlights selected information and may not
contain all of the information that is important to you. If you have
questions about the Offering, you may contact:
STOCK INFORMATION CENTER
LOCKPORT SAVINGS BANK
55 EAST AVENUE
P.O. BOX 886
LOCKPORT, NEW YORK 14095-0886
(716) 438-1198
3
<PAGE>
SUMMARY AND OVERVIEW
GENERALLY, this summary highlights selected information from this document
and does not contain all the information that you need to know before making an
informed investment decision. To understand the Offering fully, you should read
carefully this entire Prospectus, including the consolidated financial
statements and the notes to the consolidated financial statements of Lockport
Savings Bank. References in this document to "we", "us", or "our" refer to
Lockport Savings Bank. In certain instances where appropriate, "us" or "our"
refers collectively to Niagara Bancorp, Inc. and Lockport Savings Bank.
References in this document to the "Bank" refer to Lockport Savings Bank.
References in this document to the "Company" refer to Niagara Bancorp, Inc.
References to the "Mutual Holding Company" refer to Niagara Bancorp, MHC.
USE OF DEFINED TERMS. You should note as you read this Prospectus that at
times we use capitalized terms. These capitalized terms are generally defined in
the Glossary that appears at the back of this Prospectus. We use these defined
terms so that we can clearly differentiate between various components of the
transaction, and so that we don't have to describe exactly what we mean each
time we use a term. For example, to avoid confusion, we refer to all of the
steps that are part of this transaction as the "Reorganization," and we refer to
the issuance of 45.4% of the Company's Common Stock pursuant to this Prospectus
as the "Offering." The term "Reorganization" includes the Offering, but the term
"Offering" does not include the Reorganization. To further assist you, in
addition to including a Glossary of all defined terms, we usually will define
each term the first time that it is used in the Prospectus.
THE COMPANIES
Niagara Bancorp, Inc.
6950 South Transit Road
P.O. Box 514
Lockport, New York 14095-0514
(716) 625-7500
The Company was formed to be our holding company, and has not had any
operations to date. Upon completion of the Reorganization, the Company will own
all of Lockport Savings Bank's common stock, the public (including depositors
and the Foundation) will own a minority of the shares of Common Stock of the
Company, and the Mutual Holding Company will be the Company's majority
stockholder. The holding company structure will provide us greater flexibility
in terms of operations, expansion and diversification. See page _____.
Lockport Savings Bank
6950 South Transit Road
P.O. Box 514
Lockport, New York 14095-0514
(716) 625-7500
The Bank was organized in 1870 as a New York-chartered mutual savings bank.
At September 30, 1997, we had total assets of $1.2 billion, total deposits of
$992.2 million, and net worth of $126.7 million. We are a community- and
customer-oriented savings bank that operates fifteen full-service branch offices
in the Western New York counties of Niagara, Orleans, Erie and Genesee, which we
consider to be our primary market area. We also consider the remaining four
counties of Western New York, Wyoming, Allegany, Cattaraugus and Chautauqua
counties, as our market area. Through our "Person to Person Commitment" approach
to retail banking, we emphasize personal service and customer convenience in
serving the financial needs of the individuals, families and businesses residing
in Western New York. We offer the convenience and product mix of a larger, super
regional bank while providing the responsiveness and community orientation of a
smaller, local institution.
4
<PAGE>
Lockport is located on the historic Erie Canal and is 20 miles northeast
of Buffalo and 15 miles east of Niagara Falls. More than 9 million people reside
within the 125-mile radius of the city of Buffalo and the region is the 45th
largest metropolitan area in the nation and the 3rd largest in New York State.
Based on FDIC-published data, as of June 30, 1996 we had the second largest
deposit market share in each of Niagara and Orleans counties, the fifth largest
share in Genesee county, and the eighth largest share in Erie County. We have
customer relationships with over 76,000 households in our primary market area,
representing approximately 17% of all households therein. For 1996, we were the
fourth leading originator of residential mortgage loans in Erie County. In the
eight county Western New York region, we had the fifth largest aggregate deposit
market share. Those banks having a larger aggregate market share in Western New
York are significantly larger, super regional financial institutions. Management
considers the Bank to be the dominant independent community bank focused
exclusively on serving the banking needs of the Western New York region.
Since 1990, when the Bank acquired the savings bank life insurance ("SBLI")
operations of another Western New York savings bank, the Bank's life insurance
department has grown to become one of the largest servicers of SBLI in New York
State. These insurance products, along with the sale of various annuity
products, were expanded in 1997 as the Bank added the sale of mutual funds to
its non-deposit product line. Additional opportunities in the non-deposit field,
such as the sale of property and casualty insurance, should continue to enhance
the Bank's position as a full service provider of financial services in the near
future.
Our business strategy is designed to enhance our profitability and
strengthen our position as the dominant, independent community bank in Western
New York. The highlights of our strategy include the following:
. Expansion of the retail banking franchise. We are continuing to focus
on expanding our retail banking franchise and increasing the number of
households served within our market area and the number of bank
products used per customer. Since 1994 we have opened five full-
service branch offices and our Board has authorized the establishment
of three additional branch offices in 1998. We operate two full-
service supermarket branch offices, provide customer access to ATMs,
including the Bank's fourteen ATMs, without a service charge, provide
telephone customer service, and provide 24-hour telephone account
access. We have established a Website and are developing plans to
introduce home computer banking services. Under the direction of our
new head of retail banking, hired in 1997, additional emphasis and
training is being directed toward greater cross-selling of bank
products.
. Loan portfolio growth. Our loan portfolio consists of one- to four-
family residential mortgage loans, commercial and multi-family real
estate loans, consumer and other loans, and commercial business loans.
At September 30, 1997, our loan portfolio totaled $622.5 million, an
increase of $263.0 million, or 73.2%, since December 31, 1992. The
loan portfolio represented 52.9% of total assets and 62.7% of total
deposits at September 30, 1997, compared to 43.1% of total assets and
48.2% of deposits at December 31, 1992. We intend to continue to
increase our loan portfolio as a percentage of assets. Further, while
maintaining our position as a leading originator of residential loans
in our market, we plan to build upon our position as the dominant
independent community bank to increase our market share of higher
margin multi-family, commercial real estate, consumer and commercial
business loans.
. Maintaining asset quality. Because we believe that asset quality is a
critical component of long-term financial success, we have remained
committed to a conservative credit culture. During the past five
years, and including the nine month period ended September 30, 1997,
non-performing assets have averaged 0.59% of total assets. At
September 30, 1997, our non-performing loans totaled $1.9 million,
representing 0.31% of the loan portfolio, and our non-performing
assets totaled $2.2 million, representing 0.19% of assets. Our
allowance for loan losses amounted to $6.4 million at September 30,
1997, and represented 1.02% of our loan portfolio and 330.0% of non-
performing loans.
5
<PAGE>
. Managing interest rate risk. Although our liabilities are more
sensitive to changes in interest rates than our assets, we seek to
manage our exposure to interest rate risk by originating and retaining
adjustable-rate loans in both the residential and commercial real
estate loan portfolios, and by originating short-term and medium-term
fixed-rate consumer loans. We also use our investment and mortgage
related securities portfolios to manage our interest rate risk
exposure. As of September 30, 1997, our securities available for sale
totaled $465.0 million, or 39.5% of total assets, with an average life
of 4.27 years, and our securities held to maturity totaled $37.5
million, or 3.2% of total assets, with an average life of .07 years.
THE STOCK OFFERING
The Company is offering for sale between 8,677,747 and 11,740,482 shares of
its Common Stock, for a price per share of $10.00 (the "Subscription Price"),
pursuant to this Prospectus. This Offering may be increased to 13,501,554 shares
without further notice to you if market or financial conditions change prior to
the completion of this Offering.
STOCK PURCHASE PRIORITIES
The Company will offer shares of its Common Stock to the Bank's depositors
who held deposit accounts as of certain dates and to the ESOP (the "Subscription
Offering"). Any shares not subscribed for will be offered to certain members of
the general public in a community offering, with preference given first to
natural persons residing in the Western New York counties of Niagara, Erie,
Orleans and Genesee, and secondly to natural persons residing in the remaining
four counties of Western New York, Wyoming, Allegany, Cattaraugus and Chautauqua
counties (the "Community Offering"). See pages _____ to _____. We have engaged
CIBC Oppenheimer Corp. and Trident Securities, Inc. to assist us on a best
efforts basis in selling the Common Stock in the Offering.
PROHIBITION ON TRANSFER OF SUBSCRIPTION RIGHTS
Selling or assigning your subscription rights is illegal. All persons
exercising their subscription rights will be required to certify that they are
purchasing shares solely for their own account and that they have no agreement
or understanding regarding the sale or transfer of such shares. We intend to
pursue any and all legal and equitable remedies in the event we become aware of
the transfer of subscription rights and we will not honor orders known by us to
involve the transfer of such rights. In addition, persons who violate the
purchase limitations may be subject to sanctions and penalties imposed by the
New York State Banking Department (the "Department").
STOCK PRICING AND NUMBER OF SHARES TO BE ISSUED
The Plan of Reorganization and federal and state regulations require that
the aggregate purchase price of the Common Stock sold in the Offering must be
based on the appraised pro forma market value of the Company's Common Stock, as
determined by an independent valuation (the "Independent Valuation"). The Bank
has retained RP Financial, LC, Arlington, Virginia to make such valuation. The
Independent Valuation prepared by RP Financial states that as of November 28,
1997, the estimated pro forma market value of the Company's Common Stock to be
issued in the Reorganization ranged from a minimum of $191,250,000 to a maximum
of $258,750,000 with a midpoint of $225,000,000. To avoid confusion, we will
refer to this range of estimated values as the "Estimated Valuation Range."
Based on the Estimated Valuation Range and the $10 per share Subscription Price,
the number of shares of Common Stock that the Company will issue will range from
between 19,125,000 shares and 25,875,000 shares, with a midpoint of 22,500,000
shares. We have determined to offer 45.4% of such shares, or between 8,677,747
shares and 11,740,482 shares with a midpoint of 10,209,115 shares (the "Offering
Range"), to depositors and the public pursuant to this Prospectus. In addition,
shares are being issued to the Foundation as part of the Reorganization, which
will result in stockholders other than the Mutual Holding Company ("Minority
Stockholders") owning 46.7% of the shares of the
6
<PAGE>
Common Stock outstanding at the conclusion of the Reorganization. The 53.3% of
the shares of the Company's Common Stock that are not sold in the Offering or
contributed to the Foundation will be issued to the Mutual Holding Company.
Following commencement of the Offering, the maximum of the Estimated
Valuation Range may be increased by up to 15% to up to $297,562,500, which will
result in a corresponding increase in the maximum of the Offering Range to up to
13,501,554 shares, to reflect changes in the market and financial conditions and
demand for the Common Stock following commencement of the Offering, without the
resolicitation of subscribers. The minimum of the Estimated Valuation Range and
the minimum of the Offering Range may not be decreased without a resolicitation
of subscribers. THE INDEPENDENT VALUATION, HOWEVER, IS NOT INTENDED, AND MUST
NOT BE CONSTRUED, AS A RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF
PURCHASING SHARES. 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 SUCH SHARES IN
THE OFFERING WILL THEREAFTER BE ABLE TO SELL SUCH SHARES AT PRICES AT OR ABOVE
THE SUBSCRIPTION PRICE.
TERMINATION OF THE OFFERING
The Subscription Offering will terminate at ___________, New York time, on
March __, 1998. The concurrent Community Offering may terminate on or after
March ___, 1998, but in any event, no later than May ___, 1998, unless an
extension is granted by the FDIC and the Department. If the Reorganization and
Offering is not completed by May ___, 1998 all subscribers will be notified and
will be given the opportunity to cancel or modify their order.
BENEFITS TO MANAGEMENT FROM THE OFFERING
Our full-time employees will participate in our employee stock ownership
plan (the "ESOP"), which is a form of retirement plan that will purchase shares
of Common Stock in the Offering. We also intend to implement a recognition and
retention plan and a stock option plan following completion of the
Reorganization, which will benefit our officers and directors. If we adopt the
recognition and retention plan, certain officers and directors will be awarded
shares of Common Stock without paying for the shares. However, the recognition
and retention plan and stock option plan may not be adopted until at least six
months after completion of the Reorganization and are subject to shareholder
approval. See pages _____ to _____.
THE CHARITABLE FOUNDATION
In furtherance of our commitment to our local community, we intend to
establish a charitable foundation (the "Foundation") as part of the
Reorganization. We will make a contribution to the Foundation, in the form of
shares of Common Stock and cash, in a total amount equal to 5% of the aggregate
Subscription Price of the shares of Common Stock sold in the Offering. The
number of shares of Common Stock to be contributed to the Foundation will equal
3% of the shares sold in the Offering. The balance of the contribution will
consist of cash. Due to the issuance of additional shares of Common Stock to the
Foundation, persons purchasing shares in the Offering will have their ownership
and voting interests in the Company diluted by 1.3%. As a result of the
establishment and funding of the Foundation, the Company will recognize an
expense equal to the full amount of the contribution, offset in part by a
corresponding tax benefit, during the quarter in which the contribution is made,
which is expected to be the first or second quarter of 1998. Such expense will
reduce earnings and have a material impact on the Company's earnings for such
quarter and for the year. The board of directors of the Foundation initially
will consist of persons who are also directors of the Company and the Bank. See
"Risk Factors--The Expense and Dilutive Effect of the Contribution of Shares and
Cash to the Charitable Foundation," "Pro Forma Data," and "The Reorganization
and Offering--Establishment of the Charitable Foundation."
7
<PAGE>
USE OF THE PROCEEDS RAISED FROM THE SALE OF COMMON STOCK
The Company will use the net proceeds from the Offering as follows. The
percentages we use are estimates:
. 50% will be used to buy all the capital stock of Lockport Savings
Bank.
. 8% will be loaned to the ESOP to fund its purchase of Common Stock.
. 42% will be retained as a possible source of funds for the payment of
dividends to shareholders, the repurchase of stock, and for other
general corporate purposes.
The proceeds to be received by the Bank will be available for continued
expansion of the retail banking franchise through de novo branching or deposit
or bank acquisitions, continued growth in the loan portfolio, and the purchase
of investment and mortgage related securities, in addition to general corporate
purposes.
See pages _____ to _____.
PROSPECTUS DELIVERY AND PROCEDURE FOR PURCHASING COMMON STOCK
To ensure that eligible account holders and supplemental eligible account
holders are properly identified as to their stock purchase priorities, such
parties must list all deposit accounts on the order form, giving all names on
each deposit account and the account numbers at the applicable date. THE FAILURE
TO PROVIDE ACCURATE AND COMPLETE ACCOUNT INFORMATION ON THE ORDER FORM MAY
RESULT IN A REDUCTION OR ELIMINATION OF YOUR ORDER.
Full payment by check, cash (except by mail), money order, bank draft or
withdrawal authorization (payment by wire transfer will not be accepted) must
accompany an original order form. THE COMPANY IS NOT OBLIGATED TO ACCEPT AN
ORDER SUBMITTED ON PHOTOCOPIED OR TELECOPIED ORDER FORMS. WE WILL NOT ACCEPT
ORDER FORMS IF THE CERTIFICATION APPEARING ON THE REVERSE SIDE OF THE ORDER FORM
IS NOT EXECUTED.
DIVIDENDS
Niagara Bancorp, Inc. intends to pay an annual cash dividend of $0.12
payable quarterly at $0.03 per share. The payment of dividends is expected to
commence following the first full quarter after completion of the
Reorganization.
MARKET FOR THE COMMON STOCK
The Company has never issued capital stock. Consequently, there is no
current market for the Common Stock. The Company has received conditional
approval to have the Common Stock quoted on the Nasdaq National Market under the
symbol "NBCP." CIBC Oppenheimer Corp. and Trident Securities, Inc. intend to
make a market in the Common Stock, and we expect that additional market makers
will be identified.
IMPORTANT RISKS IN PURCHASING AND OWNING THE COMPANY'S COMMON STOCK
Before you decide to purchase stock in the Offering, you should read the
Risk Factors section on pages _____ of this Prospectus, in addition to the other
sections of this Prospectus.
8
<PAGE>
SELECTED FINANCIAL INFORMATION
The selected data presented below under the captions "Selected Financial
Condition Data" and "Selected Operations Data" for, and as of the end of, each
of the years in the five-year period ended December 31, 1996, are derived from
the audited consolidated financial statements of Lockport Savings Bank and
subsidiaries. The consolidated financial statements as of December 31, 1996 and
1995 and for each of the years in the three-year period ended December 31, 1996
are included elsewhere in this prospectus. The selected data presented below as
of and for the nine-month periods ended September 30, 1997 and 1996 are derived
from the unaudited consolidated financial statements of Lockport Savings Bank
and subsidiaries included elsewhere in this prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
-----------------------------------------------------------
1997 1996 1995 1994 1993 1992
----------- ----------- ----------- ---------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
SELECTED FINANCIAL CONDITION DATA:
- ---------------------------------
Total assets.............................. $ 1,176,451 $ 1,093,358 $ 994,291 $ 916,185 $ 914,910 $ 834,764
Loans, net................................ 622,487 598,486 535,971 474,191 421,061 359,442
Securities available for sale(1):
Mortgage related securities............. 285,762 284,860 261,543 273,280 300,582 323,105
Other securities........................ 179,211 130,269 84,867 65,733 67,903 27,520
Securities held to maturity............... 37,500 38,000 46,700 43,838 51,927 33,809
Deposits.................................. 992,219 920,072 861,065 819,690 812,939 746,345
Other borrowed funds...................... 28,740 32,008 - - - -
Net worth................................. 126,720 115,664 107,653 81,322 87,195 75,722
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30, YEARS ENDED DECEMBER 31,
----------------------- --------------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---------- ---------- ----------- ----------- ---------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED OPERATIONS DATA:
- ------------------------
Interest income......................... $ 61,310 $ 55,458 $ 75,062 $ 69,856 $ 63,144 $ 61,681 $ 61,096
Interest expense........................ 33,335 30,024 40,655 39,034(2) 31,754 32,597 34,281
---------- ---------- ---------- --------- ---------- ---------- ----------
Net interest income................... 27,975 25,434 34,407 30,822 31,390 29,084 26,815
Provision for loan losses............... 975 1,861 2,187 1,016 948 1,522 1,398
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income after
provision for loan losses............. 27,000 23,573 32,220 29,806 30,442 27,562 25,417
---------- ---------- ---------- --------- ---------- ---------- ----------
Fees and service charges................ 3,037 2,564 3,495 2,692 2,283 2,293 1,774
Net gain (loss) on sale of
securities available for sale......... 875 532 576 1,477 (849) 3,601 5,732
Other operating income.................. 1,044 1,223 1,681 1,237 952 1,149 172
---------- ---------- ---------- --------- ---------- ---------- ----------
Total other operating income............ 4,956 4,319 5,752 5,406 2,386 7,043 7,678
---------- ---------- ---------- --------- ---------- ---------- ----------
Operating and other expenses............ 18,416 14,999 20,926 20,143 18,399 16,666 15,689
---------- ---------- ---------- --------- ---------- ---------- ----------
Income before taxes and cumulative
effect of change in accounting
principle............................. 13,540 12,893 17,046 15,069 14,429 17,939 17,406
Income taxes............................ 4,905 4,667 6,278 5,144 4,704 6,595 6,184
Cumulative effect of change in
accounting principle.................. - - - - (924)(3) 129(4) -
---------- ---------- ---------- --------- ---------- ---------- ----------
Net income.............................. $ 8,635 $ 8,226 $ 10,768 $ 9,925 $ 8,801 $ 11,473 $ 11,222
========== ========== ========== ========= ========== ========== ==========
</TABLE>
__________________________
(1) The Bank adopted the provisions set forth in SFAS No. 115 on January 1,
1994, which requires securities available for sale to be carried at fair
value. At December 31, 1993 and 1992, securities held for sale were
carried at amortized cost.
(2) Includes $1.25 million paid as a special interest payment in 1995, which
was paid on a prorata basis on all interest-bearing savings, NOW, money
market and certificate of deposit accounts in recognition of the Bank's
125th anniversary.
(3) Cumulative effect of change in accounting for postretirement health care
and life insurance benefits.
(4) Cumulative effect of change in accounting for income taxes.
9
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE NINE MONTHS
ENDED SEPTEMBER 30, AT OR FOR THE YEARS ENDED DECEMBER 31,
----------------------- -----------------------------------------------------------
1997(1) 1996(1) 1996 1995 1994 1993 1992
---------- ---------- ----------- ----------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS AND OTHER DATA:
- ----------------------------------------
PERFORMANCE RATIOS:
Return on assets (ratio of net
income to average total assets)......... 1.01% 1.06% 1.03% 1.04% 0.95% 1.31% 1.47%
Return on net worth (ratio
of net income to average net worth)..... 9.58 10.20 9.84 10.25 10.41 14.01 16.02
Interest rate spread information:
Average during period.................... 2.83 2.83 2.82 2.88 3.07 3.10 3.17
End of period............................ 2.84 2.97 3.03 2.83 3.18 3.04 3.25
Net interest margin (2)..................... 3.38 3.38 3.38 3.44 3.50 3.49 3.64
Ratio of operating expenses to
average total assets..................... 2.16 1.94 2.01 2.10 1.99 1.92 2.05
Ratio of average interest-earning assets
to average interest- bearing liabilities 113.63 113.80 113.93 113.92 112.30 109.95 110.27
ASSET QUALITY RATIOS:
Non-performing loans to total loans......... 0.31% 0.91% 0.78% 0.74% 0.89% 1.10% 0.75%
Non-performing assets to total
assets................................... 0.19 0.54 0.48 0.97 0.56 0.69 0.70
Allowance for loan losses to non-
performing loans......................... 330.03 118.58 138.60 119.01 99.29 88.61 102.20
Allowance for loan losses to total loans.... 1.02 1.08 1.09 0.88 0.88 0.96 0.75
CAPITAL RATIOS:
Net worth to total assets................... 10.77% 10.15% 10.58% 10.92% 8.88% 9.53% 9.07%
Average net worth to
average assets........................... 10.60 10.43 10.49 10.11 9.17 9.37 9.15
OTHER DATA:
Number of full-service offices.............. 15 12 13 11 10 10 8
Number of deposit accounts.................. 141,088 127,843 129,087 122,464 114,464 107,242 108,146
Loans serviced for others................... $145.7 $123.8 $129.0 $110.4 $85.1 $69.5 $35.6
(in millions)
Residential loan originations............... $77.4 $83.0 $110.9 $107.6 $84.1 $134.5 $110.3
(in millions)
Full time equivalent employees.............. 353.0 312.0 325.0 276.5 243.5 238.5 224.0
</TABLE>
___________________________
(1) Ratios for nine month periods have been annualized.
(2) Net interest income divided by average interest earning assets.
(3) Averages presented are monthly averages.
10
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, you should
consider carefully the following risk factors in evaluating an investment in the
Common Stock.
DECREASED RETURN ON AVERAGE EQUITY IMMEDIATELY AFTER REORGANIZATION
At September 30, 1997, Lockport Savings Bank's ratio of net worth to total
assets was 10.77%. Our equity position will significantly increase as a result
of the net proceeds that we receive in the Offering. On a pro forma basis as of
September 30, 1997, assuming the sale of Common Stock at the midpoint of the
Offering Range, the Company's consolidated ratio of equity to assets would be
approximately 16.8%. We currently anticipate that it will take time to prudently
deploy such capital. As a result, our return on average equity (net income
divided by average equity) is expected to be significantly below the industry
average initially after the Reorganization.
POTENTIAL EFFECTS OF CHANGES IN INTEREST RATES AND THE CURRENT INTEREST RATE
ENVIRONMENT
Our results of operations and financial condition are significantly
affected by changes in interest rates. Our results of operations are
substantially dependent on our net interest income, which is the difference
between the interest income earned on our interest-earning assets and the
interest expense paid on our interest-bearing liabilities. Because as a general
matter our interest-bearing liabilities reprice or mature more quickly than our
interest-earning assets, an increase in interest rates generally would result in
a decrease in our average interest rate spread and net interest income. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-- Management of Interest Rate Risk."
Changes in interest rates also affect the value of our interest-earning
assets, and in particular our investment securities portfolio. Generally, the
value of investment securities fluctuates inversely with changes in interest
rates. At September 30, 1997, our securities portfolio totaled $502.5 million,
including $465.0 million of securities available for sale. Unrealized gains and
losses on securities available for sale are reported on a quarterly basis as a
separate component of equity. Decreases in the fair value of securities
available for sale therefore could have an adverse affect on stockholders'
equity. See "Business of the Bank--Securities Investment Activities."
We are also subject to reinvestment risk relating to interest rate
movements. Changes in interest rates can affect the average life of loans and
mortgage related securities. Decreases in interest rates can result in increased
prepayments of loans and mortgage related securities, as borrowers refinance to
reduce borrowing costs. Under these circumstances, we are subject to
reinvestment risk to the extent that we are not able to reinvest such
prepayments at rates that are comparable to the rates on the maturing loans or
securities.
LENDING RISKS ASSOCIATED WITH COMMERCIAL REAL ESTATE, MULTI-FAMILY AND CONSUMER
LENDING
At September 30, 1997, our portfolio of multi-family loans totaled $72.8
million, or 11.6% of total loans, our portfolio of commercial real estate loans
totaled $69.6 million, or 11.1% of total loans, and our portfolio of consumer
and other loans totaled $65.4 million, or 10.5% of total loans. Most industry
experts believe that multi-family, commercial real estate and consumer loans
expose a lender to a greater risk of loss than one- to four-family residential
loans. See "Business of the Bank -Lending Activities" and "-Delinquencies and
Classified Assets."
MINORITY PUBLIC OWNERSHIP AND CERTAIN ANTI-TAKEOVER PROVISIONS
Voting Control of the Mutual Holding Company. Under New York law, the Plan
of Reorganization, and our governing corporate instruments, at least 51% of the
Company's voting shares must be owned by the Mutual Holding Company. The Mutual
Holding Company will be controlled by its Board of Trustees, who will consist of
persons who are members of the Board of Directors of the Company and the Bank.
The Mutual Holding Company will elect all
11
<PAGE>
members of the Board of Directors of the Company, and as a general matter, will
control the outcome of all matters presented to the stockholders of the Company
for resolution by vote, except for matters that require a vote greater than a
majority. 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 ("Minority Stockholders").
Accordingly, a change in control of the Company and the Bank cannot occur unless
the Mutual Holding Company first converts to the stock form of organization.
Although New York law, applicable regulations and the Plan of Reorganization
permit the Mutual Holding Company to convert from the mutual to the capital
stock form of organization, it is not anticipated that a conversion of the
Mutual Holding Company will occur in the foreseeable future. There can be no
assurance when, if ever, a conversion of the Mutual Holding Company will occur.
Provisions in the Company's and the Bank'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, assist the Company in maintaining its status as
an independent publicly owned corporation. These provisions provide for, among
other things, supermajority voting, staggered boards of directors, noncumulative
voting for directors, limits on the calling of special meetings of shareholders,
and limits on the ability of Minority Stockholders to vote Common Stock in
excess of 5% of the issued and outstanding shares (inclusive of shares issued to
the Mutual Holding Company). The New York State Banking Regulations prohibit,
for a period of one year following the date of the Reorganization, offers to
acquire or the acquisition of beneficial ownership of more than 10% of the
outstanding stock of the Bank or the Company. The Bank's restated organization
certificate also prohibits, for three years, the acquisition, directly or
indirectly, of the beneficial ownership of more than 10% of the Bank's or the
Company's equity securities.
DIVIDEND WAIVERS BY THE MUTUAL HOLDING COMPANY
It has been the policy of many mutual holding companies to waive the
receipt of dividends declared by its subsidiary. In connection with its approval
of the Reorganization, however, the Board of Governors of the Federal Reserve
System (the "Federal Reserve Board") 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 Federal Reserve Board approval
before it may waive any dividends. As of the date hereof, management does not
believe that the Federal Reserve Board has given its approval to any waiver of
dividends by any mutual holding company that has requested its approval. The
cumulative amount of waived dividends, if any, 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 Plan of Reorganization also provides that if the Mutual Holding Company
converts to stock form in the future, any waived dividends would reduce the
percentage of the converted company's shares of Common Stock issued to Minority
Stockholders in connection with any such transaction. See "Regulation--Mutual
Holding Company Regulation--Conversion of the Mutual Holding Company to Stock
Form." It is not currently intended that the Mutual Holding Company will waive
dividends declared by the Company.
POSSIBLE DILUTIVE EFFECT OF ISSUANCE OF ADDITIONAL SHARES
Various possible and planned issuances of Common Stock could dilute the
interests of prospective stockholders of the Company following consummation of
the Reorganization, as noted below.
The number of shares to be sold in the Reorganization may be increased as a
result of an increase in the Estimated Valuation Range of up to 15% to reflect
changes in the market and financial conditions and demand for the stock
following the commencement of the Offering. In the event that the Estimated
Valuation Range is so increased, it is expected that the Company will issue up
to 29,756,250 shares of Common Stock, including 13,501,554 shares of Common
Stock to depositors and the public pursuant to this Prospectus. An increase in
the number of shares will decrease net income per share and stockholders' equity
per share on a pro forma basis and will increase the Company's consolidated
stockholders' equity and net income. See "Capitalization" and "Pro Forma Data."
12
<PAGE>
The ESOP intends to purchase 8.0% of the Common Stock sold in the Offering.
In the event that there are insufficient shares available to fill the ESOP's
order due to an oversubscription by eligible account holders, the Company may
issue authorized but unissued shares of Common Stock to the ESOP in an amount
sufficient to fill the ESOP's order and/or the ESOP may purchase such shares in
the open market. In the event that additional shares of Common Stock are issued
to the ESOP to fill its order, stockholders would experience dilution of their
ownership interests (by up to 3.6% at the adjusted maximum of the Estimated
Valuation Range, assuming the ESOP purchased no shares in the Offering and
excluding shares expected to be issued to the Foundation) and per share
stockholders' equity and per share net income would decrease. See "Management of
the Bank--Benefit Plans--Employee Stock Ownership Plan and Trust" and "The
Reorganization and Offering--The Offering."
The recognition and retention plan intends to acquire an amount of Common
Stock equal to 4.0% of the shares of Common Stock sold in the Offering. Such
shares of Common Stock may be acquired in the open market with funds provided by
the Company, if permissible, or from authorized but unissued shares of Common
Stock. The issuance of authorized but unissued shares of Common Stock to the
recognition and retention plan in an amount equal to 4% of the Common Stock sold
in the Offering would dilute the voting interests of existing stockholders by
approximately 1.8%, and net income per share and stockholders' equity per share
would be decreased by a corresponding amount. See "Pro Forma Data" and
"Management the Bank--Benefit Plans--Recognition and Retention Plan."
The Company's stock option plan will reserve for future issuance pursuant
to such plan a number of shares of Common Stock equal to an aggregate of 10% of
the Common Stock sold in the Offering (1,174,048 shares, based on the maximum of
the Estimated Valuation Range). The issuance of authorized but unissued shares
of Common Stock pursuant to the stock option plan in an amount equal to 10% of
the Common Stock sold in the Offering would dilute the voting interests of
existing stockholders by approximately 4.5%, and net income per share and
stockholders' equity per share would be decreased by a corresponding amount. See
"Pro Forma Data" and "Management of the Bank--Benefit Plans--Stock Option Plan."
THE EXPENSE AND DILUTIVE EFFECT OF THE CONTRIBUTION OF SHARES AND CASH TO THE
CHARITABLE FOUNDATION
Pursuant to the Plan, we intend to establish a Charitable Foundation in
connection with the Reorganization. We will make a contribution to the
Foundation, in the form of shares of Common Stock and cash, in a total amount
equal to 5% of the aggregate Subscription Price of the shares of Common Stock
sold in the Offering. The number of shares of Common Stock to be contributed to
the Foundation will equal 3% of the shares sold in the Offering. The balance of
the contribution will consist of cash. Due to the issuance of additional shares
of Common Stock to the Foundation, persons purchasing shares in the Offering
will have their ownership and voting interests in the Company diluted by 1.3%.
The contribution of Common Stock to the Foundation will be dilutive to the
interests of stockholders and the aggregate contribution will have an adverse
impact on the reported earnings of the Company in 1998, the fiscal year in which
the Foundation is to be established and the contribution made. If the Foundation
had been established and the contribution made at September 30, 1997, and
assuming the sale of the Common Stock at the midpoint of the Estimated Valuation
Range, we would have reported net income of $5.3 million, rather than reporting
net income of $8.6 million for the nine months ended September 30, 1997. Upon
completion of the Reorganization, the Foundation will own 1.4% of the total
shares of the Common Stock to be issued and outstanding (including shares to be
owned by the Mutual Holding Company). See "The Reorganization and Offering--
Establishment of the Charitable Foundation."
POTENTIAL INCREASED COMPENSATION EXPENSES AFTER THE REORGANIZATION
In November 1993, the American Institute of Certified Public Accountants
issued Statement of Position 93-6 entitled "Employers' Accounting for Employee
Stock Ownership Plans," which requires an employer to record compensation
expense in an amount equal to the fair market value of shares committed to be
released to employees from an employee stock ownership plan, instead of an
amount equal to the cost basis of such shares. If the shares of Common Stock
appreciate in value over time, this will result in increased compensation
expense with respect to the ESOP. It
13
<PAGE>
is impossible to determine at this time the extent of such impact on future net
income. See "Pro Forma Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Recent Accounting
Pronouncements." In addition, after completion of the Reorganization, the
Company intends to implement, subject to stockholder approval (which approval
cannot be obtained earlier than six months subsequent to the Reorganization),
the Recognition and Retention Plan. Upon implementation, the award of shares of
Common Stock from the Recognition and Retention Plan will result in significant
additional compensation expense. See "Pro Forma Data" and "Management of the
Bank--Benefit Plans--Recognition and Retention Plan."
STRONG COMPETITION WITHIN THE BANK'S MARKET AREA
Competition in the banking and financial services industry is intense. In
our market area, we compete with commercial banks, savings institutions,
mortgage brokerage firms, credit unions, finance companies, mutual funds,
insurance companies, and brokerage and investment banking firms operating
locally and elsewhere. Many of these competitors have substantially greater
resources and lending limits than Lockport Savings Bank and may offer certain
services that we do not or cannot provide. Our profitability depends upon our
continued ability to successfully compete in our market area.
REGULATORY OVERSIGHT AND LEGISLATION
We are subject to extensive regulation, supervision and examination by the
New York State Banking Department (our chartering authority), and by the FDIC as
insurer of deposits up to applicable limits. We are also a member of the Federal
Home Loan Bank System and are subject to certain limited regulations promulgated
by the Federal Home Loan Bank. As bank holding companies, the Company and the
Mutual Holding Company also will be subject to regulation and oversight by the
Federal Reserve Board. Such regulation and supervision govern the activities in
which an institution and its holding company may engage and are intended
primarily for the protection of the insurance fund and depositors. Regulatory
authorities have extensive discretion in connection with their supervisory and
enforcement activities which are intended to strengthen the financial condition
of the banking and thrift industries, including the imposition of restrictions
on the operation of an institution, the classification of assets by the
institution and the adequacy of an institution's allowance for loan losses. Any
change in such regulation and oversight whether in the form of regulatory
policy, regulations, or legislation, could have a material impact on Lockport
Savings Bank, the Company, and our operations. See "Regulation."
UNCERTAINTY AS TO FUTURE GROWTH OPPORTUNITIES
In an effort to fully deploy the capital we raise in the Offering, and to
increase our loan and deposit growth, we may seek to further expand our banking
franchise by acquiring other financial institutions or branches in Western New
York. Our ability to grow through selective acquisitions of other financial
institutions or branches of such institutions will depend on successfully
identifying, acquiring and integrating such institutions or branches. We can not
assure prospective purchasers of Common Stock that we will be able to generate
internal growth or identify attractive acquisition candidates, make acquisitions
on favorable terms or successfully integrate any acquired institutions or
branches into the Company. We currently have no specific plans, arrangements or
understandings regarding any such expansions or acquisitions, nor have we
established criteria to identify potential candidates for acquisition.
ABSENCE OF MARKET FOR COMMON STOCK
The Company, as a newly organized company, has never issued capital stock
and, consequently, there is no established market for the Common Stock at this
time. The Company has received approval to have its Common Stock quoted on the
Nasdaq National Market under the symbol "NBCP" conditioned on the consummation
of the Offering. CIBC Oppenheimer Corp. and Trident Securities, Inc. intend to
make a market in the Common Stock, and we expect that additional market makers
will be identified.
14
<PAGE>
IRREVOCABILITY OF ORDERS; POTENTIAL DELAY IN COMPLETION OF OFFERINGS
Orders submitted in the Offering are irrevocable. Funds submitted in
connection with any purchase of Common Stock in the Offering will be held by the
Company until the completion or termination of the Reorganization, including any
extension of the expiration date. Because completion of the Reorganization will
be subject to an update of the independent appraisal prepared by RP Financial,
among other factors, there may be one or more delays in the completion of the
Reorganization. Subscribers will have no access to subscription funds and/or
shares of Common Stock until the Reorganization is completed or terminated.
CAPABILITY OF THE BANK'S DATA INFORMATION SYSTEMS TO ACCOMMODATE THE YEAR 2000
Like many financial institutions, the Bank relies upon computers for the
daily conduct of its business and for information systems processing generally.
There is concern among industry experts that on January 1, 2000 computers will
be unable to "read" the new year and there may be widespread computer
malfunctions. The Bank generally relies on software and hardware developed by
independent third parties to provide the information systems used by the Bank,
and we have been advised by our information systems providers that the issue is
being addressed. Based on these representations, management does not believe
that significant additional costs will be incurred in connection with the year
2000 issue.
NIAGARA BANCORP, INC.
Niagara Bancorp, Inc. was recently organized for the purpose of acquiring
all of the capital stock of Lockport Savings Bank upon completion of the
Reorganization. The Company has received approval from the Federal Reserve Board
to become a bank holding company and, upon completion of the Reorganization,
will be subject to regulation by the Federal Reserve Board. See "The
Reorganization and Offering--Description of and Reasons for the Reorganization"
and "Regulation--Holding Company Regulation." Upon completion of the
Reorganization, the Company will have no significant assets other than the
shares of the Bank's common stock and an amount equal to 50% of the net proceeds
of the Offering, including the loan to the ESOP, and will have no significant
liabilities. The Company intends to use a portion of the net proceeds it retains
to loan to the ESOP funds to enable the ESOP to purchase up to 8% of the stock
sold in the Offering. See "Use of Proceeds." The management of the Company is
set forth under "Management of the Company." Initially, the Company will neither
own nor lease any property, but will instead use the premises, equipment and
furniture of the Bank. At the present time, the Company does not intend to
employ any persons other than certain officers who are currently officers of the
Bank and will utilize the support staff of the Bank from time to time.
Additional employees will be hired as appropriate to the extent the Company
expands its business in the future.
Management believes that the holding company structure will provide the
Company additional flexibility to diversify its business activities through
existing or newly formed subsidiaries, or through acquisitions of, or mergers
with, other financial institutions and financial services related companies.
There are no current arrangements, understandings or agreements regarding any
such opportunities. However, subsequent to the Reorganization, the Company will
be in a position, subject to regulatory limitations and the Company's financial
position, to take advantage of any such acquisition and expansion opportunities
that may arise. The initial activities of the Company are anticipated to be
funded by the proceeds to be retained by the Company, income thereon and through
dividends from the Bank.
The Company's executive office is located at the administrative offices of
the Bank, at 6950 South Transit Road, P.O. Box 514, Lockport, New York 14095-
0514. Its telephone number is (716) 625-7500.
15
<PAGE>
LOCKPORT SAVINGS BANK
The Bank was organized in 1870 as a New York-chartered mutual savings bank.
The Bank's deposits are insured by the Bank Insurance Fund, as administered by
the FDIC, up to the maximum amount permitted by law. We are a community-oriented
savings bank engaged primarily in the business of accepting deposits from
customers through our fifteen branch offices in the Western New York counties of
Niagara, Orleans, Erie and Genesee, and investing those deposits, together with
funds generated from operations and borrowings, in one-to four-family
residential, multi-family residential and commercial real estate loans,
commercial business loans, consumer and other loans, and investment and mortgage
related securities.
Through our "Person to Person Commitment" approach to retail banking, we
emphasize personal service and customer convenience in serving the financial
needs of the individuals, families and businesses residing in Western New York.
Our business strategy is designed to improve our profitability, expand our
retail banking franchise, and remain an independent community bank.
At September 30, 1997, the Bank had total assets of $1.2 billion, total
deposits of $992.2 million and net worth of $126.7 million. At September 30,
1997, $386.5 million, or 61.8%, of the Bank's total loans were collateralized by
one- to four-family residential real estate. The Bank also originates multi-
family residential and commercial real estate loans, which totaled $72.8 million
and $69.6 million, or 11.6% and 11.1%, respectively, of the Bank's total loans
at September 30, 1997. Consumer and other loans totaled $65.4 million, or 10.5%
of the Bank's total loans, at September 30, 1997. The Bank's investment and
mortgage related securities portfolios totaled $502.5 million at September 30,
1997, representing 42.7% of total assets at such date.
The Bank's executive office is located at 6950 South Transit Road,
Lockport, New York 14095-0514. The Bank's telephone number is (716) 625-7500.
REGULATORY CAPITAL COMPLIANCE
At September 30, 1997, the Bank exceeded each of its regulatory capital
requirements. Set forth below is a summary of the Bank's compliance with the
FDIC capital standards as of September 30, 1997, on a historical and pro forma
basis assuming that the indicated number of shares were sold as of such date and
receipt by the Bank of 50% of the net proceeds. For purposes of the table below,
the amount expected to be borrowed by the ESOP and the cost of the shares
expected to be acquired by the Recognition and Retention Plan are deducted from
pro forma regulatory capital.
<TABLE>
<CAPTION>
PRO FORMA AT SEPTEMBER 30, 1997, BASED UPON THE SALE AT $10.00 PER SHARE OF
-----------------------------------------------------------------------------
HISTORICAL AT 8,677,747 10,209,115 11,740,482
SEPTEMBER 30, 1997 SHARES SHARES SHARES
----------------------- ------------------------ ------------------ ------------------
PERCENT PERCENT PERCENT PERCENT
OF OF OF OF
AMOUNT ASSETS (2) AMOUNT ASSETS (2) AMOUNT ASSETS (2) AMOUNT ASSETS (2)
------ ---------- ----------- ---------- ------ ---------- ------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
GAAP capital................. $ 126,720 10.77% $ 157,740 12.99% $ 163,300 13.37% $ 168,860 13.75%
========= ======== ========== ======== ========== ======= =========== ========
Leverage capital:
Capital level (3).......... $ 125,383 20.69% $ 156,403 25.01% $ 161,963 25.75% $ 167,523 26.49%
Requirement(4)............. 24,235 4.00% 25,017 4.00% 25,156 4.00% 25,296 4.00%
--------- -------- ---------- -------- ---------- ------- ----------- --------
Excess................... $101,148 16.69% $ 131,386 21.01% $ 136,806 21.75% $ 142,227 22.49%
======== ======== ========== ======== ========== ======= =========== ========
Risk-based capital:
Tier 1 Capital level (3)(5) $ 131,736 21.74% $ 162,756 26.02% $ 168,316 26.76% $ 173,876 27.49%
Requirement................ 48,469 8.00% 50,033 8.00% 50,313 8.00% 50,592 8.00%
--------- -------- ---------- -------- ---------- ------- ----------- --------
Excess................... $ 83,267 13.74% $ 112,722 18.02% $ 118,003 18.76% $ 123,284 19.49%
========= ======== ========== ======== ========== ======= =========== ========
Total capital level (3)(5). $ 125,383 10.75% $ 156,403 12.99% $ 161,963 13.37% $ 167,523 13.76%
Requirement................ 34,991 3.00% 36,129 3.00% 36,333 3.00% 36,537 3.00%
--------- -------- ---------- -------- ---------- ------- ----------- --------
Excess..................... $ 90,392 7.75% $ 120,273 9.99% $ 125,630 10.37% $ 130,986 10.76%
========= ======== ========== ======== ========== ======= =========== ========
<CAPTION>
13,501,554
SHARES(1)
-------------------
PERCENT
OF
AMOUNT ASSETS(2)
------ ---------
<S> <C> <C>
GAAP capital................. $ 175,271 14.18%
========= ======
Leverage capital:
Capital level (3).......... $ 173,934 27.33%
Requirement(4)............. 25,457 4.00%
--------- ------
Excess................... $ 148,476 23.33%
========= ======
Risk-based capital:
Tier 1 Capital level (3)(5) $ 180,287 28.33%
Requirement................ 50,915 8.00%
--------- ------
Excess................... $ 129,372 20.33%
========= ======
Total capital level (3)(5). $ 173,934 14.19%
Requirement................ 36,771 3.00%
--------- ------
Excess..................... $ 137,163 11.19%
========= ======
</TABLE>
16
<PAGE>
___________________________
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated 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 Subscription and Community Offerings.
(2) 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 Recognition
and Retention Plan to enable the plan to acquire 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; and the capitalization of the
Mutual Holding Company by the Bank with $100,000. See "Management of the
Bank--Benefit Plans" for a discussion of the Recognition and Retention
Plan and ESOP.
(4) The current leverage capital requirement for savings banks is 3% of total
adjusted assets for savings 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 savings banks is 4% to 5%. See "Regulation--FDIC
Regulations--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 September 30, 1997.
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 from the sale of the Common Stock will be between $85.3 million
and $115.7 million (or $133.2 million if the Estimated Valuation Range is
increased by 15%). See "Pro Forma Data" and "The Reorganization and Offering--
Stock Pricing and Number of Shares to Be Issued" as to the assumptions used to
arrive at such amounts. The Company will be unable to utilize any of the net
proceeds of the Offering until the consummation of the Reorganization.
The Company will contribute approximately 50% of the net proceeds of the
Offering to the Bank, or approximately $42.7 million to $66.6 million at the
minimum and adjusted maximum of the Estimated Valuation Range, respectively.
Such portion of net proceeds received by the Bank from the Company will be used
by the Bank for general corporate purposes, including investments in short- and
medium-term, investment grade debt securities, mortgage related securities and
marketable equity securities, and to increase the origination of mortgage,
consumer and commercial business loans. The Bank may also use such funds for the
continued expansion of its retail banking franchise, and to expand operations
through acquisitions of other financial institutions, branch offices or other
financial services companies. To the extent that the stock-based benefit
programs which the Company intends to adopt subsequent to the Offering are not
funded with authorized but unissued shares of Common Stock of the Company, the
Company or Bank may use net proceeds from the Offering to fund the purchase of
stock to be awarded under such stock benefit programs. See "Risk Factors--
Possible Dilutive Effect of Issuance of Additional Shares" and "Management of
the Bank--Benefit Plans--Stock Option Plan" and "--Recognition and Retention
Plan. "
The Company intends to use a portion of the net proceeds it retains to make
a loan directly to the ESOP to enable the ESOP to purchase 8% of the shares sold
in the Offering. Based upon the sale of 8,677,747 shares or 11,740,482 shares at
the minimum and maximum of the Offering Range, the amount of the loan to the
ESOP would be $6.9 million or $9.4 million, respectively (or $10.8 million if
the Estimated Valuation Range is increased by 15%). See "Management of the
Bank--Benefit Plans--Employee Stock Ownership Plan and Trust." The remaining net
proceeds retained by the Company will initially be invested in short- and
medium- term debt obligations, mortgage related securities and other marketable
equity securities.
The net proceeds retained by the Company may also be used to support the
future expansion of operations through the acquisition of financial institutions
or their assets, including those located within the Bank's market area, or
diversification into other banking related businesses. However, the Company and
the Bank have no current arrangements, understandings or agreements regarding
any such transactions. Upon completion of the Reorganization, the Company will
be a bank holding company, and will be permitted to engage only in those
activities that are permissible for bank holding companies under the Bank
Holding Company Act, as administered by the Federal Reserve
17
<PAGE>
Board. See "Regulation --Bank Holding Company Regulation" for a description of
certain regulations applicable to the Company.
Upon completion of the Reorganization, the Board of Directors of the
Company will have the authority to adopt stock repurchase plans, subject to
statutory and regulatory requirements. Pursuant to New York regulations, and
without the prior approval of the Department, the Company may not repurchase any
Common Stock, in the first year after the Reorganization, and during each of the
next two following years, may not repurchase more than 5% of its shares
outstanding. In addition, the FDIC prohibits an insured savings bank which has
converted from the mutual to stock form of ownership from repurchasing its
capital stock within one year following the date of its Offering to stock form,
except that stock repurchases of no greater than 5% of a bank's outstanding
capital stock may be repurchased during this one-year period where compelling
and valid business reasons are established to the satisfaction of the FDIC.
Based upon facts and circumstances following completion of the Reorganization
and subject to applicable regulatory requirements, the Board of Directors may
determine to repurchase stock in the future. Such facts and circumstances may
include but not be limited to: (i) market and economic factors such as the price
at which the stock is trading in the market, the volume of trading, the
attractiveness of other investment alternatives in terms of the rate of return
and risk involved in the investment, the ability to increase the book value
and/or earnings per share of the remaining outstanding shares, and the
opportunity to improve the Company's return on equity; (ii) the avoidance of
dilution to stockholders by not having to issue additional shares to cover the
exercise of stock options or to fund employee stock benefit plans; and (iii) any
other circumstances in which repurchases would be in the best interests of the
Company and its shareholders. In the event the Company determines to repurchase
stock, such repurchases may be made at market prices which may be in excess of
the Subscription Price in the Offering. Any stock repurchases will be subject to
the determination of the Company's Board of Directors that both the Company and
the Bank will be capitalized in excess of all applicable regulatory requirements
after any such repurchases and that such capital will be adequate, taking into
account, among other things, the level of non-performing and other risk assets,
the Company's and the Bank's current and projected results of operations and
asset/liability structure, the economic environment, tax and other
considerations.
DIVIDEND POLICY
Upon completion of the Offering, the Board of Directors of the Company will
have the authority to declare dividends on the Common Stock, subject to
statutory and regulatory requirements. The Company intends to pay an annual cash
dividend of $0.12, payable quarterly at $0.03 per share. The payment of
dividends is expected to begin following the first full quarter after the
completion of the Reorganization.
Under Delaware law, the Company is permitted to pay cash dividends,
provided that the amount of cash dividends paid may not exceed that amount by
which the net assets of the Company (the amount by which total assets exceed
total liabilities) exceeds its statutory capital, or if there is no such excess,
the net profits for the current and/or immediately preceding fiscal year. The
Company's source for the payment of cash dividends may in the future depend on
the receipt of cash dividends from the Bank. The Bank will not be permitted to
pay dividends on its common stock or repurchase shares of its common stock if
its stockholders' equity would be reduced below the amount required for the
liquidation account. See "The Reorganization and Offering--Liquidation Rights."
Under New York Banking Law, dividends may be declared and paid only out of the
net profits of the Bank. The approval of the Superintendent is required if the
total of all dividends declared in any calendar year will exceed net profits for
that year plus the retained net profits of the preceding two years, less any
required transfer to surplus or a fund for the retirement of any preferred
stock. In addition, no dividends may be declared, credited or paid if the effect
thereof would cause the Bank's capital to be reduced below the amount required
by the Superintendent or the FDIC. See "Regulation." Subsequent to the Offering,
the availability of the Bank's funds for the payment of dividends may be limited
by the liquidation account. See "The Reorganization and Offering--Liquidation
Rights." Dividends in excess of the Bank's current and accumulated earnings
could result in the realization by the Bank of taxable income. See "Federal and
State Taxation--Federal Taxation."
18
<PAGE>
Additionally, in connection with the Reorganization, the Company and Bank
have committed to the FDIC that during the one-year period following the
consummation of the Reorganization, the Company will not declare an
extraordinary dividend to stockholders which would be treated by recipient
stockholders as a tax-free return of capital for federal income tax purposes
without prior approval of the FDIC.
MARKET FOR COMMON STOCK
The Company was recently formed and has never issued capital stock. The
Bank, as a mutual institution, has never issued capital stock. The Company has
received conditional approval to have its Common Stock quoted on the Nasdaq
National Market under the symbol "NBCP" subject to the completion of the
Offering and compliance with certain conditions including the presence of at
least three registered and active market makers. The Company will seek to
encourage and assist at least three market makers to make a market in its Common
Stock. CIBC Oppenheimer Corp. and Trident Securities, Inc. intend to make a
market in the Common Stock and we expect that additional market makers will be
identified .
CAPITALIZATION
The following table presents the historical capitalization of the Bank at
September 30, 1997, and the pro forma consolidated capitalization of the Company
after giving effect to the Offering, including the issuance of shares to the
Foundation, based upon the sale of the number of shares indicated in the table
and the other assumptions set forth under "Pro Forma Data."
19
<PAGE>
<TABLE>
<CAPTION>
COMPANY PRO FORMA BASED UPON THE SALE AT $10.00 PER SHARE
---------------------------------------------------------------------------------------------
13,501,554
8,677,747 10,209,115 11,740,482 SHARES
SHARES SHARES SHARES (ADJUSTED
HISTORICAL (MINIMUM) (MIDPOINT) (MAXIMUM) MAXIMUM)(1)
----------- ----------- ------------ ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Deposits(2)................ $ 992,219 $ 992,219 $ 992,219 $ 992,219 $ 992,219
Other borrowings........... 28,740 28,740 28,740 28,740 28,740
----------- ----------- ------------ ----------- ------------
Total deposits and
other borrowed funds...... $ 1,020,959 $ 1,020,959 $ 1,020,959 $ 1,020,959 $ 1,020,959
=========== =========== ============ =========== ============
Stockholders' equity:
Preferred Stock, $.01
par value, 1,000,000
shares authorized;
none to be issued..... $ -- $ -- $ -- $ -- $ --
Common Stock, $.01 par
value, ___,000,000
shares authorized;
shares to be issued
as reflected.......... -- 191 225 259 298
Additional paid-in
capital(3)............ -- 87,735 103,354 118,973 136,968
Retained earnings(4).... 125,325 125,225 125,225 125,225 125,225
Less:
Expenses of contribution to
Foundation............ -- (4,339) (5,105) (5,870) (6,751)
Plus:
Tax benefit of contribution to
Foundation (5)........ -- 1,519 1,787 2,055 2,363
Net unrealized gain on
securities available-
for-sale, net of taxes 1,395 1,395 1,395 1,395 1,395
Less:
Common Stock acquired
by the ESOP(6)........ -- (6,942) (8,167) (9,392) (10,801)
Common Stock
acquired by the
Recognition and Retention
Plan(7).............. -- (3,471) (4,084) (4,696) (5,401)
----------- ---------- ---------- ----------- -----------
Total stockholders'
equity.................... $ 126,720 $ 201,313 $ 214,630 $ 227,949 $ 243,296
=========== ========== ========== =========== ============
</TABLE>
________________
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Valuation Range of up to
15% as a result of regulatory considerations, demand for the shares, or
changes in market or general financial and economic conditions following
the commencement of the Offering.
(2) Does not reflect withdrawals from deposit accounts for the purchase of
Common Stock in the Offering. Such withdrawals would reduce pro forma
deposits by the amount of such withdrawals.
(3) Reflects the sale of shares in the Offering. No effect has been given to
the issuance of additional shares of Common Stock pursuant to the stock
option plan to be adopted by the Company and presented for approval of
stockholders following the Offering. The stock option plan would provide
for the grant of stock options to purchase a number of shares of Common
Stock equal to 10% of the shares of Common Stock sold in the Offering. See
"Management of the Bank--Benefit Plans--Stock Option Plan."
(4) The retained earnings of the Bank will be substantially restricted after
the Offering. See "The Reorganization and Offering--Liquidation Rights."
Assumes that the Mutual Holding Company will be capitalized by the Bank
with $100,000.
(5) Represents the tax effect of the contribution to the Foundation based on a
35% tax rate. The realization of the deferred tax benefit is limited
annually to 10% of the Company's annual taxable income, subject to the
ability of the Company to carry forward any unused portion of the deduction
for five years following the year in which the contribution is made.
(6) Assumes that 8% of the shares sold in the Offering will be purchased by the
ESOP and that the funds used to acquire the ESOP shares will be borrowed
from the Company. The Common Stock acquired by the ESOP is reflected as a
reduction of stockholders' equity. See "Management of the Bank--Benefit
Plans--Employee Stock Ownership Plan and Trust."
(7) Assumes that, subsequent to the Offering, an amount equal to 4% of the
shares of Common Stock sold in the Offering is purchased by the Recognition
and Retention Plan through open market purchases at $10.00 per share. The
Common Stock to be purchased by the Recognition and Retention Plan is
reflected as a reduction to stockholders' equity. See "Risk Factors--
Dilutive Effect of Issuance of Additional Shares," and Footnote 3 to the
tables under "Pro Forma Data" and "Management of the Bank--Benefit Plans--
Stock Plans."
20
<PAGE>
PRO FORMA DATA
The actual net proceeds from the sale of the Common Stock cannot be
determined until the Offering is completed. However, net proceeds are currently
estimated to be between $85.3 million and $115.7 million (or up to $133.2
million) based upon the following assumptions: (i) $3.0 million will be sold to
executive officers and trustees of the Bank and Company, the ESOP will purchase
8% of the Common Stock sold in the Offering, and the remaining shares will be
sold in the Subscription and Community Offerings; (ii) CIBC Oppenheimer Corp.
and Trident Securities, Inc. will receive an aggregate fee equal to .95% of the
aggregate Subscription Price of shares sold to persons other than directors,
executive officers and the ESOP; (iii) the Foundation will be funded with a
total contribution equal to 5% of the aggregate Subscription Price of the Common
Stock sold in the Offering, consisting of 3% of the shares of Common Stock sold
in the Offering and 2% in cash; (iv) Reorganization expenses, excluding the fees
payable to CIBC Oppenheimer Corp. and Trident Securities, Inc., will be
approximately $800,000; and (v) the Mutual Holding Company will be capitalized
by the Bank with $100,000. Actual expenses may vary from those estimated.
Pro forma consolidated net income of the Company for the nine months ended
September 30, 1997 and for the year ended December 31, 1996 have been calculated
as if the Common Stock had been sold at the beginning of the respective periods
and the net proceeds had been invested at 5.44% and 5.49% (the one year U.S.
Treasury bill rate as of September 30, 1997 and December 31, 1996). The tables
do not reflect the effect of withdrawals from deposit accounts for the purchase
of Common Stock. The pro forma after-tax yield for the Company and the Bank is
assumed to be 3.54% for the nine months ended September 30, 1997, and 3.57% for
the year ended December 31, 1996 (based on an assumed tax rate of 35%).
Historical and pro forma per share amounts have been calculated by dividing
historical and pro forma amounts by the indicated number of shares of Common
Stock, as adjusted to give effect to the purchase of shares by the ESOP. No
effect has been given in the pro forma stockholders' equity calculations for the
assumed earnings on the net proceeds. As discussed under "Use of Proceeds," the
Company will retain 50% of the net proceeds from the Offering.
The following pro forma information may not be representative of the
financial effects of the foregoing transactions at the dates on which such
transactions actually occur and should not be taken as indicative of future
results of operations. Pro forma consolidated stockholders' equity represents
the difference between the stated amount of assets and liabilities of the
Company. The pro forma stockholders' equity is not intended to represent the
fair market value of the Common Stock and may be greater than amounts that would
be available for distribution to stockholders in the event of liquidation.
The following tables summarize historical data of the Bank and pro forma
data of the Company at or for the nine months ended September 30, 1997, and at
or for the year ended December 31, 1996, based on the assumptions set forth
above and in the table and should not be used as a basis for projections of
market value of the Common Stock following the Offering. The tables below give
effect to the Recognition and Retention Plan, which is expected to be adopted by
the Company following the Offering and presented to stockholders for approval.
See Footnote 3 to the tables and "Management of the Bank--Benefit Plans--
Recognition and Retention Plan." No effect has been given in the tables to the
possible issuance of additional shares reserved for future issuance pursuant to
the stock option plan to be adopted by the Board of Directors of the Company and
presented to stockholders for approval, nor does book value as presented give
any effect to the liquidation account to be established for the benefit of
Eligible Account Holders or Supplemental Eligible Account Holders or, in the
event of liquidation of the Bank, to the tax effect of the bad debt reserve and
other factors. See Footnote 4 to the tables below, "The Reorganization and
Offering--Liquidation Rights" and "Management of the Bank--Benefit Plans--Stock
Option Plan."
21
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
-----------------------------------------------------------------------------------------
8,677,747 10,209,115 11,740,482 13,501,554
SHARES SOLD AT SHARES SOLD AT SHARES SOLD AT SHARES SOLD AT
$10.00 PER SHARE $10.00 PER SHARE $10.00 PER SHARE $10.00 PER SHARE
(MINIMUM) (MIDPOINT) (MAXIMUM) (ADJUSTED MAXIMUM)(8)
---------------- ---------------- ---------------- ---------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Gross proceeds...................... $ 86,777 $ 102,091 $ 117,405 $ 135,016
Plus: Shares acquired by
Foundation..................... 2,603 3,063 3,522 4,050
---------- ---------- ---------- ----------
Pro forma market capitalization..... $ 89,380 $ 105,154 $ 120,927 $ 139,066
========== ========== ========= =========
Gross proceeds...................... $ 86,777 $ 102,091 $ 117,405 $ 135,016
Less: Cash contribution
to Foundation............... 1,736 2,042 2,348 2,700
Expenses...................... 1,455 1,575 1,695 1,800
---------- ---------- ---------- ----------
Estimated net proceeds.............. 83,586 98,474 113,362 130,516
Less: Common Stock pur-
chased by ESOP............... (6,942) (8,167) (9,392) (10,801)
Common Stock purchased
by recognition
and retention plan............ (3,471) (4,084) (4,696) (5,401)
---------- ---------- ---------- ----------
Estimated net proceeds,
as adjusted...................... $ 73,173 $ 86,223 $ 99,274 $ 114,314
========== ========== ========== ==========
Consolidated net income:
Historical....................... $ 8,635 $ 8,635 $ 8,635 $ 8,635
Pro forma income on net
proceeds, as adjusted.......... 1,938 2,284 2,630 3,029
Pro forma ESOP
adjustment(2).................. (226) (265) (305) (351)
Pro forma recognition
and retention plan
adjustment(3).................. (338) (398) (450) (527)
---------- ---------- ---------- ----------
Pro forma net income(1)............. $ 10,009 $ 10,256 $ 10,510 $ 10,786
========== ========== ========== ==========
Per share net income(6):
Historical....................... $ 0.47 $ 0.40 $ 0.35 $ 0.30
Pro forma income on net
proceeds, as adjusted.......... 0.11 0.11 0.11 0.11
Pro forma ESOP
adjustment(1).................. (0.01) (0.01) (0.01) (0.01)
Pro forma recognition and
retention plan
adjustment..................... (0.02) (0.02) (0.02) (0.02)
---------- ---------- ---------- ----------
Pro forma net income
per share........................ $ 0.55 $ 0.48 $ 0.43 $ 0.38
========== ========== ========== ==========
</TABLE>
22
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Stockholders' equity:
Historical.......................... $ 126,720 $ 126,670 $ 126,720 $ 126,720
Estimated net proceeds.............. 83,587 98,474 113,362 130,515
Plus: Shares issued to Foundation. 2,603 3,063 3,522 4,050
Less: Contribution to Foundation.. (2,603) (3,063) (3,522) (4,050)
Plus: Tax benefit of contribution to
Foundation................ 1,519 1,787 2,055 2,363
Less: Common Stock ac-
quired by ESOP(2).......... (6,942) (8,167) (9,392) (10,801)
Common Stock
acquired by
recognition and
retention plan(3).......... (3,471) (4,084) (4,696) (5,401)
---------- ---------- ---------- ----------
Pro forma stockholders'
equity(3)(4)(5).................. $ 201,313 $ 214,630 $ 227,949 $ 243,296
========== ========== ========== ==========
Stockholders' equity per
share(6):
Historical.......................... $ 6.63 $ 5.64 $ 4.90 $ 4.27
Estimated net proceeds.............. 4.37 4.38 4.38 4.39
Plus: Shares issued to Foundation 0.14 0.14 0.14 0.14
Less: Contribution to Foundation. (0.14) (0.14) (0.14) (0.14)
Plus: Tax benefit of contribution to
Foundation................ 0.08 0.08 0.08 0.08
Less: Common Stock
acquired by ESOP(2)....... (0.36) (0.36) (0.36) (0.36)
Common Stock acquired
by recognition and
retention plan ............ (0.18) (0.18) (0.18) (0.18)
---------- ---------- ---------- ----------
Pro forma stockholders'
equity per
share(3)(4)(5)................... $ 10.53 $ 9.55 $ 8.81 $ 8.19
========== ========== ========== ==========
Offering price to pro
forma net income per
share(7)......................... 13.64x 15.63x 17.44x 19.74x
Offering price as a per-
centage of pro forma
stockholders' equity
per share........................ 94.97% 104.71% 113.51% 122.10%
</TABLE>
___________________
(1) Does not give effect to the non-recurring expense that will be recognized
in 1998 as a result of the establishment of the Foundation. The Company
will recognize an after-tax expense for the amount of the contribution to
the Foundation which is expected to be $2.8 million, $3.3 million, $3.8
million and $4.4 million at the minimum, midpoint, maximum and adjusted
maximum of the Estimated Valuation Range, respectively. Assuming the
contribution to the Foundation was incurred during the nine months ended
September 30, 1997, pro forma net income per share would be $0.38, $0.32,
$0.27 and $0.22 at the minimum, midpoint, maximum and adjusted maximum,
respectively. Per share net income data is based on 18,448,136,
21,703,689,24,959,243 and 28,703,128 shares outstanding, which represents
shares sold in the Reorganization, shares contributed to the Foundation and
shares to be allocated or distributed under the ESOP and Recognition and
Retention Plan for the period presented.
(2) It is assumed that 8% of the shares sold in the Offering will be purchased
by the ESOP. For purposes of this table, the funds used to acquire such
shares are assumed to have been borrowed by the ESOP from the Company. The
amount to be borrowed is reflected as a reduction to stockholders' equity.
The Bank intends to make annual contributions to the ESOP in an amount at
least equal to the principal and interest requirement of the debt. The
Bank's total annual payment of the ESOP debt is based upon fifteen equal
annual installments of principal, with an assumed interest rate at 8.5%.
The pro forma net income assumes: (i) that the Bank's contribution to the
ESOP is equivalent to the debt service requirement for the nine months
ended September 30, 1997, and was made at the end of the period; (ii) that
17,355, 20,418, 23,481 and 27,003 shares at the minimum, midpoint, maximum
and adjusted maximum of the Estimated Valuation Range, respectively, were
committed to be released during the nine months ended September 30, 1997,
at an average fair value of $10.00 per share in accordance with Statement
of Position ("SOP") 93-6; and (iii) only the ESOP shares committed to be
released were considered outstanding for purposes of the net income per
share calculations. See "Management of the Bank--Benefit Plans--Employee
Stock Ownership Plan and Trust."
(3) Gives effect to the Recognition and Retention Plan expected to be adopted
by the Company following the Offering. This plan intends to acquire a
number of shares of Common Stock equal to 4% of the shares of Common Stock
sold in the Offering or 347,110, 408,365, 469,619 and 540,061
23
<PAGE>
shares of Common Stock at the minimum, midpoint, maximum and adjusted
maximum of the Estimated Valuation Range, respectively, either through open
market purchases, if permissible, or from authorized but unissued shares of
Common Stock or treasury stock of the Company, if any. Funds used by the
Recognition and Retention Plan to purchase the shares will be contributed
to the plan by the Bank. In calculating the pro forma effect of the
Recognition and Retention Plan, it is assumed that the shares were acquired
by the Recognition and Retention Plan at the beginning of the period
presented in open market purchases at the Subscription Price and that 20%
of the amount contributed was an amortized expense during such period. The
issuance of authorized but unissued shares of the Company's Common Stock to
the Recognition and Retention Plan instead of open market purchases would
dilute the voting interests of existing stockholders by approximately 1.88%
and pro forma net income per share would be $0.54, $0.47, $0.42 and $0.32
at the minimum, midpoint, maximum and adjusted maximum of the Estimated
Valuation Range, respectively, and pro forma stockholders' equity per share
would be $10.51, $9.55, $8.83 and $8.21 at the minimum, midpoint, maximum
and adjusted maximum of the Estimated Valuation Range, respectively. There
can be no assurance that the actual purchase price of the shares granted
under the Recognition and Retention Plan will be equal to the Subscription
Price. See "Management of the Bank--Benefit Plans--Recognition and
Retention Plan."
(4) No effect has been given to the issuance of additional shares of Common
Stock pursuant to the stock option plan expected to be adopted by the
Company following the Offering. Under the stock option plan, an amount
equal to 10% of the Common Stock sold in the Offering, or 867,775,
1,020,912, 1,174,048 and 1,350,155 shares at the minimum, midpoint, maximum
and adjusted maximum of the Estimated Valuation Range, 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 all options were exercised at
the end of the period at an exercise price of $10.00 per share, the pro
forma net income per share would be $0.53, $0.46, $0.41 and $0.37,
respectively, and the pro forma stockholders' equity per share would be
$10.50, $9.56, $8.87 and $8.26, respectively. See "Management of the Bank--
Benefit Plans--Stock Option Plan."
(5) The retained earnings of the Bank will continue to be substantially
restricted after the Offering. See "Dividend Policy," "The Reorganization
and Offering-- Liquidation Rights" and "Regulation--New York Bank
Regulation."
(6) Stockholders' equity per share data is based upon 19,125,000, 22,500,000,
and 25,875,000 and 29,756,250 shares outstanding representing shares sold
in the Offering, shares purchased by the ESOP and the Recognition and
Retention Plan, and shares contributed to the Foundation.
(7) Based on pro forma net income for the nine months ended September 30, 1997
that have been annualized.
(8) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Valuation Range of up to
15% as a result of regulatory considerations, demand for the shares, or
changes in market or general financial and economic conditions following
the commencement of the Subscription and Community Offerings.
24
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31, 1996
-------------------------------------------------------------------------------------------------
8,677,747 10,209,115 11,740,482 13,501,554
SHARES SOLD AT SHARES SOLD AT SHARES SOLD AT SHARES SOLD AT
$10.00 PER SHARE $10.00 PER SHARE $10.00 PER SHARE $10.00 PER SHARE
(MINIMUM) (MIDPOINT) (MAXIMUM) (ADJUSTED MAXIMUM)(7)
---------------- ---------------- ------------------ ---------------------
(Dollars in Thousands, Except per Share Amounts)
<S> <C> <C> <C> <C>
Gross proceeds............ $ 86,777 $ 102,091 $ 117,405 $ 135,016
Plus: Shares acquired by
Foundation...... 2,603 3,063 3,522 4,050
---------- ---------- ---------- -----------
Pro forma market capitalization $ 89,380 $ 105,154 $ 120,927 $ 139,066
---------- ========== ========= ===========
Gross proceeds............ $ 86,777 $ 102,091 $ 117,405 $ 135,016
Less: Cash contribution to
Foundation ....... 1,736 2,042 2,348 2,700
Expenses........... 1,455 1,575 1,695 1,800
---------- ---------- ---------- -----------
Estimated net proceeds.... 83,586 98,474 113,362 130,515
Less: Common Stock pur-
chased by ESOP.. (6,942) (8,167) (9,392) (10,801)
Common Stock purchased
by recognition and
retention plan.... (3,471) (4,084) (4,696) (5,401)
---------- ---------- ---------- -----------
Estimated net proceeds,
as adjusted............ $ 73,143 $ 86,223 $ 99,274 $ 114,314
========== ========== ========== ===========
Consolidated net income(1):
Historical............. $ 10,768 $ 10,768 $ 10,768 $ 10,768
Pro forma income on net
proceeds, as adjusted 2,608 3,073 3,539 4,076
Pro forma ESOP
adjustment(2)........ (301) (354) (407) (468)
Pro forma recognition and
retention plan
adjustment(3)........ (451) (531) (611) (702)
---------- ---------- ---------- -----------
Pro forma net income(1)... $ 12,624 $ 12,956 $ 13,289 $ 13,674
========== ========== ========== ===========
Per share net income:
Historical............. $ 0.58 $ 0.50 $ 0.43 $ 0.38
Pro forma income on net
proceeds, as adjusted.. 0.14 0.14 0.14 0.14
Pro forma ESOP
adjustment(1).......... (0.02) (0.02) (0.02) (0.02)
Pro forma recognition and
retention plan
adjustment............. (0.02) (0.02) (0.02) (0.02)
---------- ---------- ---------- -----------
Pro forma net income
per share.............. $ 0.68 $ 0.60 $ 0.53 $ 0.48
========== ========== ========== ===========
Stockholders' equity:
Historical............. $ 115,564 $ 115,564 $ 115,564 $ 115,564
Estimated net proceeds. 83,587 98,474 113,362 130,515
Plus: Shares issued to Foundation 2,603 3,063 3,522 4,050
Less: Contribution to Foundation (2,603) (3,063) (3,522) (4,050)
Plus: Tax benefit of contribution to
Foundation............ 1,519 1,787 2,055 2,363
Less: Common Stock ac-
quired by ESOP(2)...... (6,942) (8,167) (9,392) (10,801)
Less: Common Stock
acquired by recognition and
retention plan(3)...... (3,471) (4,084) (4,696) (5,401)
---------- ---------- ---------- -----------
Pro forma stockhold-
ers' equity(3)(4)(5)... $ 190,257 $ 203,574 $ 216,893 $ 232,240
========== ========== ========== ===========
</TABLE>
25
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Stockholders' equity per
share(6):
Historical............. $ 6.04 $ 5.14 $ 4.47 $ 3.88
Estimated net proceeds.... 4.37 4.38 4.38 4.39
Plus: Shares issued to Foundation 0.14 0.14 0.14 0.14
Less: Contributions to Foundation (0.14) (0.14) (0.14) (0.14)
Plus: Tax benefit of contribution to
Foundation...... 0.08 0.08 0.08 0.08
Less: Common Stock
acquired by ESOP(2) (0.36) (0.36) (0.36) (0.36)
Common Stock acquired
by recognition and
retention plan(3) (0.18) (0.18) (0.18) (0.18)
---------- ---------- ---------- -----------
Pro forma stockholders'
equity per
share(3)(4)(5)......... $ 9.95 $ 9.06 $ 8.39 $ 7.81
========== ========== ========== ===========
Offering price to pro
forma net income per
share.................. 14.71x 16.67x 18.87x 20.83x
Offering price as a per-
centage of pro forma
stockholders' equity
per share(6)........... 100.50% 110.38% 119.19% 128.04%
</TABLE>
__________________________
(1) Does not give effect to the non-recurring expense that will be recognized
in 1998 as a result of the establishment of the Foundation. The Company
will recognize an after-tax expense for the amount of the contribution to
the Foundation which is expected to be $2.8 million, $3.3 million, $3.8
million and $4.4 million at the minimum, midpoint, maximum and adjusted
maximum of the Estimated Valuation Range, respectively. Assuming the
contribution to the Foundation was incurred during the year ended December
31, 1996, pro forma net income per share would be $0.52, $0.44, $0.38 and
$0.32, at the minimum, midpoint, maximum and adjusted maximum,
respectively. Per share net income data is based on 18,453,921, 21,710,495,
24,967,070 and 28,712,129 shares outstanding which represents shares issued
in the Reorganization, shares contributed to the Foundation and shares to
be allocated or distributed under the ESOP and recognition and retention
plan to the for the period presented.
(2) It is assumed that 8% of the shares sold in the Offering will be purchased
by the ESOP. For purposes of this table, the funds used to acquire such
shares are assumed to have been borrowed by the ESOP from the Company. The
amount to be borrowed is reflected as a reduction of stockholders' equity.
The Bank intends to make annual contributions to the ESOP in an amount at
least equal to the principal and interest requirement of the debt. The
Bank's total annual payment of the ESOP debt is based upon fifteen equal
annual installments of principal, with an assumed interest rate at 8.5%.
The pro forma net income assumes: (i) that the Bank's contribution to the
ESOP is equivalent to the debt service requirement for the year ended
December 31, 1996, and was made at the end of the period; (ii) that 23,141,
27,224, 31,308 and 36,004 shares at the minimum, midpoint, maximum and
adjusted maximum of the Estimated Valuation Range, respectively, were
committed to be released during the year ended December 31, 1996, at an
average fair value of $10.00 per share in accordance with Statement of
Position ("SOP") 93-6; and (iii) only the ESOP shares committed to be
released were considered outstanding for purposes of the net income per
share calculations. See "Management of the Bank--Benefit Plans--Employee
Stock Ownership Plan and Trust."
(3) Gives effect to the Recognition and Retention Plan expected to be adopted
by the Company following the Offering. This plan intends to acquire a
number of shares of Common Stock equal to 4% of the shares of Common Stock
sold in the Offering, or 347,110, 408,365, 469,619 and 540,062 shares of
Common Stock at the minimum, midpoint, maximum and adjusted maximum of the
Estimated Valuation Range, respectively, either through open market
purchases, if permissible, or from authorized but unissued shares of Common
Stock or treasury stock of the Company, if any. Funds used by the
Recognition and Retention Plan to purchase the shares will be contributed
to the plan by the Bank. In calculating the pro forma effect of the
Recognition and Retention Plan, it is assumed that the shares were acquired
by the Recognition and Retention Plan at the beginning of the period
presented in open market purchases at the Subscription Price and that 20%
of the amount contributed was an amortized expense during such period. The
issuance of authorized but unissued shares of the Company's Common Stock to
the recognition and retention plan instead of open market purchases would
dilute the voting interests of existing stockholders by approximately 1.88%
and pro forma net income per share would be $0.68, $0.60, $0.53 and $0.48
at the minimum, midpoint, maximum and adjusted maximum of the Estimated
Valuation Range, respectively, and pro forma stockholders' equity per share
would be $9.94, $9.06, $8.41 and $7.84 at the minimum, midpoint, maximum
and adjusted maximum of the Estimated Valuation Range, respectively. There
can be no assurance that the actual purchase price of the shares granted
under the Recognition and Retention Plan will be equal to the Subscription
Price. See "Management of the Bank--Benefit Plans--Recognition and
Retention Plan."
(4) No effect has been given to the issuance of additional shares of Common
Stock pursuant to the stock option plan expected to be adopted by the
Company following the Offering. Under the stock option plan, an amount
equal to 10% of the Common Stock sold in the Offering, or 867,775,
1,020,912, 1,174,048 and 1,350,155 shares at the minimum, midpoint, maximum
and adjusted maximum of the Estimated Valuation Range, 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 all
26
<PAGE>
options were exercised at the end of the period at an exercise price of
$10.00 per share, the pro forma net income per share would be $0.53, $0.46,
$0.41 and $0.37, respectively, and the pro forma stockholders' equity per
share would be $10.50, $9.56, $8.87 and $8.26, respectively. See
"Management of the Bank--Benefit Plans--Stock Option Plan."
(5) The retained earnings of the Bank will continue to be substantially
restricted after the Offering. See "Dividend Policy," "The Reorganization
and Offering-- Liquidation Rights" and "Regulation--New York Bank
Regulation."
(6) Stockholders' equity per share data is based upon 19,125,000, 22,500,000,
and 25,875,000 and 29,756,250 shares outstanding representing shares sold
in the Offering, shares purchased by the ESOP and retention and Recognition
and Retention Plan, and shares contributed to the Foundation.
(7) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Valuation Range of up to
15% as a result of regulatory considerations, demand for the shares, or
changes in market or general financial and economic conditions following
the commencement of the Subscription and Community Offerings.
27
<PAGE>
COMPARISON OF VALUATION AND PRO FORMA INFORMATION WITHOUT FOUNDATION
In the event that the Foundation was not being established as part of the
Reorganization, RP Financial has estimated that the pro forma aggregate market
capitalization of the Company would be approximately $110.4 million at the
midpoint, which is approximately $5.2 million greater than the pro forma
aggregate market capitalization of the Company if the Foundation is included,
and would result in an approximately $8.3 million increase in the amount of
Common Stock offered for sale in the Reorganization. The pro forma price to book
ratio and pro forma price to earnings ratio would be approximately the same
under both the current appraisal and the estimate of the value of the Company
without the Foundation. Further, assuming the midpoint of the Estimated
Valuation Range, pro forma stockholders' equity per share and pro forma net
income per share would be substantially the same at $9.55 and $9.26,
respectively, and $0.48 and $0.45, respectively, with the Foundation or without
the Foundation. The pro forma price to book ratio and the pro forma price to
earnings ratio are substantially the same with and without the Foundation at the
midpoint at 104.71% and 107.99%, respectively, and 15.63x and 16.67x,
respectively. There is no assurance that in the event the Foundation was not
formed that the appraisal prepared at the time would have concluded that the pro
forma market value of the Company would be the same as that estimated herein.
Any appraisals prepared at that time would be based on the facts and
circumstances existing at that time, including, among other things, market and
economic conditions.
For comparative purposes only, set forth below are certain pricing ratios
and financial data and ratios, at the minimum, midpoint, maximum and adjusted
maximum of the Estimated Valuation Range, assuming the Reorganization was
completed at September 30, 1997.
<TABLE>
<CAPTION>
Minimum Midpoint
-------------------------- -------------------------
With Without With Without
Foundation Foundation Foundation Foundation
----------- ---------- ---------- ----------
(Dollars in Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C>
Estimated offering amount............................................. $ 86,777 93,840 102,091 110,400
Pro forma market capitalization....................................... 89,380 93,840 105,154 110,400
Total assets.......................................................... 1,251,043 1,257,419 1,264,361 1,271,863
Total liabilities..................................................... 1,049,731 1,049,731 1,049,731 1,049,731
Pro forma stockholders' equity........................................ 201,313 207,688 214,630 222,132
Pro forma net income.................................................. 10,009 10,172 10,256 10,447
Pro forma stockholders' equity per share.............................. 10.53 10.19 9.55 9.26
Pro forma net income per share........................................ 0.55 0.52 0.48 0.45
Pro forma pricing ratios:
- ------------------------
Offering price as a percentage of pro forma stockholders' equity per
share................................................................ 94.97% 98.14% 104.71% 107.99%
Offering price to pro forma net income per share (1).................. 13.64 14.42 15.63 16.67
Pro forma market capitalization to assets............................. 7.14% 7.46% 8.32% 8.68%
Pro forma financial ratios:
- --------------------------
Return on assets (2).................................................. 1.07% 1.08% 1.08% 1.10%
Return on equity (3).................................................. 6.63% 6.53% 6.37% 6.27%
Equity to assets...................................................... 16.09% 16.52% 16.98% 17.47%
<CAPTION>
Maximum Adjusted Maximum
------------------------- --------------------------
With Without With Without
Foundation Foundation Foundation Foundation
---------- ---------- ---------- ----------
(Dollars in Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C>
Estimated offering amount............................................. 117,405 126,960 135,016 146,004
Pro forma market capitalization....................................... 120,927 126,960 139,066 146,004
Total assets.......................................................... 1,277,697 1,286,306 1,293,027 1,303,035
Total liabilities..................................................... 1,049,731 1,049,731 1,049,731 1,049,731
Pro forma stockholders' equity........................................ 227,949 236,575 243,296 253,304
Pro forma net income.................................................. 10,510 10,723 10,786 11,043
Pro forma stockholders' equity per share.............................. 8.81 8.58 8.19 7.98
Pro forma net income per share........................................ 0.43 0.40 0.38 0.36
Pro forma pricing ratios:
- ------------------------
Offering price as a percentage of pro forma stockholders' equity per
share................................................................ 113.51% 116.55% 122.10% 125.31%
Offering price to pro forma net income per share (1).................. 17.44 18.75 19.74 20.83
Pro forma market capitalization to assets............................. 9.46% 9.87% 10.76% 11.20%
Pro forma financial ratios:
- --------------------------
Return on assets (2).................................................. 1.10% 1.11% 1.11% 1.13%
Return on equity (3).................................................. 6.14% 6.04% 5.91% 5.81%
Equity to assets...................................................... 17.84% 18.39% 18.82% 19.44%
</TABLE>
- ----------
(1) If the contribution to the Foundation had been incurred during the nine
months ended September 30, 1997, the offering price to pro forma net income
per share would have been 26.04x,31.28x,37.83x, and 44.86x at the minimum,
midpoint, maximum and adjusted maximum, respectively.
(2) If the contribution to the Foundation had been incurred during the nine
months ended September 30, 1997, return on assets would have been 0.79%,
0.73%, 0.70%, and 0.66% at the minimum, midpoint, maximum and adjusted
maximum, respectively.
(3) If the contribution to the Foundation had been incurred during the nine
months ended September 30, 1997, return on equity would have been
4.71%,4.31%, 3.91%, and 3.51%, respectively.
28
<PAGE>
PARTICIPATION BY MANAGEMENT
The following table sets forth information regarding intended Common Stock
purchases by each of the Trustees and executive officers of the Bank and their
families, and by all Trustees and executive officers as a group. In the event
the individual maximum purchase limitation is increased, persons subscribing for
the maximum amount may increase their purchase order. This table excludes shares
to be purchased by the ESOP, as well as any Recognition and Retention Plan
awards or stock option grants that may be made no earlier than six months after
the completion of the Reorganization. See "Management of the Bank--Benefit
Plans--Recognition and Retention Plan" and "--Stock Option Plan." The Trustees
and officers of the Bank have indicated their intention to purchase in the
Offering an aggregate of $3.0 million of Common Stock, equal to 3.4%, 2.9%,
2.5%, and 2.2% of the number of shares to be issued in the Subscription and
Community Offering, at the minimum, midpoint, maximum and adjusted maximum of
the Estimated Valuation Range, respectively.
<TABLE>
<CAPTION>
AGGREGATE NUMBER PERCENT
PURCHASE OF AT
NAME PRICE (1) SHARES (1) MIDPOINT
- ---- --------- ---------- --------
<S> <C> <C> <C>
Gordon P. Assad $ 50,000 5,000 *
Diane Allegro 200,000 20,000 .2
G. Gary Berner 100,000 10,000 .1
Christa R. Caldwell 75,000 7,500 .1
James W. Currie 400,000 40,000 .4
Gary B. Fitch 10,000 1,000 *
David W. Heinrich 400,000 40,000 .4
Daniel W. Judge 200,000 20,000 .2
Paul J. Kolkmeyer 300,000 30,000 .3
B. Thomas Mancuso 200,000 20,000 .2
James Miklinski 200,000 20,000 .2
Kathleen P. Monti 200,000 20,000 .2
Barton G. Smith 50,000 5,000 *
William E. Swan 400,000 40,000 .4
Robert G. Weber 200,000 20,000 .2
----------- ---------- --------
All Trustees and executive officers
as a group $ 2,985,000 298,500 3.0%
=========== ========== ========
</TABLE>
________________
*less than 1%
(1) Includes purchases by associates.
29
<PAGE>
LOCKPORT SAVINGS BANK
CONSOLIDATED STATEMENTS OF INCOME
The following Consolidated Statements of Income of the Bank for each of the
years in the three year period ended December 31, 1996 have been audited by KPMG
Peat Marwick LLP, independent certified public accountants, whose report thereon
appears elsewhere in this Prospectus. With respect to information for the nine
months ended September 30, 1997 and 1996, which is unaudited, in the opinion of
management, all adjustments necessary for a fair presentation of such periods
have been included and are of a normal recurring nature. Results for the nine
months ended September 30, 1997 are not necessarily indicative of the results
that may be expected for the year ended December 31, 1997. These statements
should be read in conjunction with the Consolidated Financial Statements and
Notes thereto and Management's Discussion and Analysis of Financial Condition
and Results of Operations included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
--------------------- --------------------------------
1997 1996 1996 1995 1994
-------- -------- ------ ------- -------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest income:
Federal funds sold.................................................. $ 825 $ 1,087 $ 1,313 $ 1,726 $ 849
Securities available for sale....................................... 20,866 18,177 24,766 22,002 22,197
Securities held to maturity......................................... 1,258 1,293 1,698 2,780 2,394
Real estate loans................................................... 33,072 29,844 40,440 36,948 31,985
Other loans......................................................... 5,289 5,057 6,845 6,400 5,719
-------- -------- -------- -------- --------
Total interest income............................................. 61,310 55,458 75,062 69,856 63,144
Interest expense:
Deposits (note 7)................................................... 32,145 29,551 39,814 39,034 31,754
Other borrowed funds (note 8)....................................... 1,190 473 841 -- --
-------- -------- -------- -------- --------
Total interest expense............................................ 33,335 30,024 40,655 39,034 31,754
-------- -------- -------- -------- --------
Net interest income............................................... 27,975 25,434 34,407 30,822 31,390
Provision for loan losses (note 4).................................... 975 1,861 2,187 1,016 948
-------- -------- -------- -------- --------
Net interest income after provision for loan losses............... 27,000 23,573 32,220 29,806 30,442
-------- -------- -------- -------- --------
Other operating income:
Banking service charges and fees.................................... 2,223 1,785 2,468 1,837 1,567
Loan fees........................................................... 814 779 1,027 855 716
Net gain (loss) on sale of securities available for sale (note 2)... 875 532 576 1,477 (849)
Other............................................................... 1,044 1,223 1,681 1,237 952
-------- -------- -------- -------- --------
Total other operating income...................................... 4,956 4,319 5,752 5,406 2,386
-------- -------- -------- -------- --------
Operating and other expenses:
Salaries and employee benefits (note 11)............................ 9,735 8,439 11,477 9,706 9,259
Occupancy and equipment (note 5).................................... 2,689 2,327 3,178 2,635 2,298
Network interchange fees............................................ 882 730 984 877 723
Deposit insurance................................................... 90 2 2 983 1,873
Marketing and advertising........................................... 1,017 934 1,355 978 951
Other (note 6)...................................................... 4,003 2,567 3,930 4,964 3,295
-------- -------- -------- -------- --------
Total operating and other expenses................................ 18,416 14,999 20,926 20,143 18,399
-------- -------- -------- -------- --------
Income before income taxes and cumulative effect
of change in accounting principle................................ 13,540 12,893 17,046 15,069 14,429
Income taxes (note 10)................................................ 4,905 4,667 6,278 5,144 4,704
-------- -------- -------- -------- --------
Income before cumulative effect of change in accounting principle. 8,635 8,226 10,768 9,925 9,725
Cumulative effect of change in accounting principle (note 11)......... -- -- -- -- (924)
-------- -------- -------- -------- --------
Net income........................................................ $ 8,635 $ 8,226 $ 10,768 $ 9,925 $ 8,801
======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company has only recently been formed and accordingly, has no results
of operations. Our results of operations are dependent primarily on net interest
income, which is the difference between the income earned on its loan and
securities portfolios and its cost of funds, consisting of the interest paid on
deposits and borrowings. Results of operations are also affected by the
provision for loan losses, securities and loan sale activities, loan servicing
activities and service charges and fees collected on its deposit accounts. Our
non-interest expense primarily consists of salaries and employee benefits,
occupancy and equipment expense, federal deposit insurance premiums, marketing
expenses and other expenses. Results of operations are also significantly
affected by general economic and competitive conditions, particularly changes in
interest rates, government policies and actions of regulatory authorities.
MANAGEMENT OF INTEREST RATE RISK
The principal objective of our interest rate risk management is to evaluate
the interest rate risk inherent in certain assets and liabilities, determine the
appropriate level of risk given our business strategy, operating environment,
capital and liquidity requirements and performance objectives, and manage the
risk consistent with the Board's approved guidelines to reduce the vulnerability
of its operations to changes in interest rates. The Asset/Liability Committee is
comprised of senior management under the direction of the Board, with senior
management responsible for reviewing with the Board its activities and
strategies, the effect of those strategies on our net interest margin, the fair
value of the portfolio and the effect that changes in interest rates will have
on the portfolio and our exposure limits. See "Risk Factors --Potential Effects
of Changes in Interest Rates and the Current Interest Rate Environment."
In recent years, we have used the following strategies to manage interest
rate risk: (1) emphasizing the origination and retention of residential monthly
and bi-weekly fixed-rate mortgage loans having terms to maturity of not more
than twenty years, residential and commercial adjustable-rate mortgage loans,
and consumer loans consisting primarily of mobile home loans, home equity loans
and student loans; (2) selling substantially all newly originated 25-30 year
fixed-rate, residential mortgage loans into the secondary market without
recourse and on a servicing retained basis (except for such loans with interest
rates of 9% or greater, which the Bank retains in its portfolio); and (3)
investing in shorter term securities which generally bear lower yields as
compared to longer term investments, but which better position the Bank for
increases in market interest rates. Shortening the maturities of our interest-
earning assets by increasing shorter term investments better matches the
maturities of our deposit accounts, in particular our certificates of deposit
that mature in one year or less, which, at September 30, 1997 totaled $364.5
million, or 36.4% of total interest-bearing liabilities. These strategies may
adversely impact net interest income due to lower initial yields on these
investments in comparison to longer term, fixed rate loans and investments.
However, management believes that reducing the exposure to interest rate
fluctuations will enhance long-term profitability.
Gap Analysis. The matching of assets and liabilities may be analyzed by
examining the extent to which such assets and liabilities are "interest rate
sensitive" and by monitoring a bank's interest rate sensitivity "gap." An asset
or liability is said to be interest rate sensitive within a specific time period
if it will mature or reprice within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of interest-
earning assets maturing or repricing within a specific time period and the
amount of interest-bearing liabilities maturing or repricing within that same
time period. At September 30, 1997, the Bank's one-year gap position, the
difference between the amount of interest-earning assets maturing or repricing
within one year and interest-bearing liabilities maturing or repricing within
one year, was a negative 22.2%. A gap is considered positive when the amount of
interest rate sensitive assets exceeds the amount of interest rate sensitive
liabilities. A gap is considered negative when the amount of interest rate
sensitive liabilities exceeds the amount of interest rate sensitive assets.
Accordingly, during a period of rising interest rates, an institution with a
negative gap position is likely to experience a decline in net interest income
as the
31
<PAGE>
cost of its interest-bearing liabilities increase at a rate faster than its
yield on interest-earning assets. In comparison, an institution with a positive
gap is likely to realize an increase in its net interest income in a rising
interest rate environment. Given the Bank's existing liquidity position and its
ability to sell securities from its available for sale portfolio, management
believes that its negative gap position will not have a material adverse effect
on its operating results or liquidity position. If interest rates decrease,
there may be a positive effect on the Bank's interest rate spread and
corresponding operating results.
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at September 30, 1997, which are
anticipated by the Bank, based upon certain assumptions, to reprice or mature in
each of the future time periods shown (the "GAP Table"). Except as stated below,
the amount of assets and liabilities shown which reprice or mature during a
particular period were determined in accordance with the earlier of the
repricing date or the contractual maturity of the asset or liability. The table
sets forth an approximation of the projected repricing of assets and liabilities
at September 30, 1997, on the basis of contractual maturities, anticipated
prepayments, and scheduled rate adjustments within the selected time intervals.
For adjustable and fixed-rate loans on residential properties, prepayment rates
were assumed to range from 3.6% to 10.44% annually. Mortgage related securities
were assumed to prepay at rates between 7.56% and 12.00% annually. Savings
accounts were assumed to decay at 10.24%, 10.24%, 20.48%, 12.28%, 9.72%, 16.36%
and 20.69%; NOW checking accounts were assumed to decay at 22.14%, 22.14%,
44.28%, 2.38%, 1.89%, 3.17% and 4.01%; and money market savings accounts were
assumed to decay at 46.49%, 4.86%, 9.73%, 38.92%, 0%, 0%, and 0% for the periods
of three months or less, three to six months, six to 12 months, one to three
years, three to five years, five to ten years and more than ten years,
respectively. Prepayment and deposit decay rates can have a significant impact
on the Bank's estimated gap. While the Bank believes such assumptions to be
reasonable, there can be no assurance that assumed prepayment rates and decay
rates will approximate actual future loan prepayment and deposit withdrawal
activity. See "Business of the Bank - Lending Activities", "-Securities
Investment Activities" and "-- Sources of Funds".
32
<PAGE>
<TABLE>
<CAPTION>
Amounts Maturing or Repricing as of September 30, 1997
-----------------------------------------------------------------------------
Less Than
Three 3-6 6 Months to
Three Months Months 1 Year 1-3 Years 3-5 Years 5-10 Years
-------------------------- ----------- ---------- --------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold.......................... $ 2,200 - - - - -
Mortgage related securities (1)............. 10,883 11,538 25,536 117,436 84,516 35,095
Investment securities (1)................... 58,956 6,700 19,092 101,801 21,627 -
Loans (2) ............................... 80,597 50,228 95,074 156,079 94,751 119,235
---------- --------- --------- --------- -------- ---------
Total interest-earning assets.......... 152,636 68,466 139,702 375,316 200,894 154,330
---------- --------- --------- --------- -------- ---------
Interest-bearing liabilities:
Savings accounts............................ 32,680 31,273 62,544 36,581 28,975 48,750
Interest-bearing checking................... 52,361 17,948 35,897 33,667 1,186 1,996
Certificate accounts........................ 107,203 92,612 164,641 138,500 11,530 2,382
Mortgagor's payments held in escrow......... 269 2,424 2,694 - - -
Other borrowed funds........................ 9,906 8,935 105 454 5,518 1,637
---------- --------- --------- --------- -------- ---------
Total interest-bearing liabilities..... 202,419 153,192 265,881 209,202 47,209 54,765
---------- --------- --------- --------- -------- ---------
Interest sensitivity gap....................... ($49,783) ($84,726) ($126,179) $166,114 $153,685 $99,565
=========== ========== ========== ========= ======== =========
Cumulative interest rate sensitivity gap....... ($49,783) ($134,509) ($260,688) ($94,574) $59,111 $158,676
=========== ========== ========== ========== ======== =========
Ratio of cumulative gap to total assets........ (4.23)% (11.43)% (22.16)% (8.04)% 5.02% 13.49%
Ratio of interest-earning assets to
interest-bearing liabilities................ 75.41% 44.69% 52.54% 179.40% 425.54% 281.80%
<CAPTION>
Amounts Maturing or Repricing as of September 30, 1997
-----------------------------------------------------------------------------
Over 10
Years Total
--------- ---------
<S> <C> <C>
Interest-earning assets:
Federal funds sold.......................... - $ 2,200
Mortgage related securities (1)............. - 285,004
Investment securities (1)................... 6,892 215,068
Loans (2) ............................... 30,861 626,825
--------- ---------
Total interest-earning assets.......... 37,753 1,129,097
--------- ---------
Interest-bearing liabilities:
Savings accounts............................ 61,644 302,447
Interest-bearing checking................... 2,524 145,579
Certificate accounts........................ - 516,868
Mortgagor's payments held in escrow......... 3,000 8,387
Other borrowed funds........................ 2,185 28,740
--------- ---------
Total interest-bearing liabilities..... 69,353 1,002,021
--------- ---------
Interest sensitivity gap....................... ($31,600) $127,076
========== =========
Cumulative interest rate sensitivity gap....... $127,076
=========
Ratio of cumulative gap to total assets........ 10.80%
Ratio of interest-earning assets to
interest-bearing liabilities................ 54.44% 112.68%
</TABLE>
_____________________
(1) Amounts shown are amortized cost.
(2) Amounts shown include principal balance net of deferred loan fees and
expenses, unamortized premiums and discounts, and non-accruing loans.
Certain shortcomings are inherent in the method of analysis presented in
the GAP Table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets, such as adjustable-rate loans, have
features which restrict changes in interest rates, both on a short-term basis
and over the life of the asset. Further, in the event of changes in interest
rates, prepayment and early withdrawal levels would likely deviate significantly
from those assumed in calculating the table. Finally, the ability of many
borrowers to service their adjustable-rate loans may decrease in the event of an
interest rate increase.
Net Portfolio Value. The Bank's interest rate sensitivity is also monitored
by management through the use of a net portfolio value model which generates
estimates of the change in the Bank's net portfolio value ("NPV") over a range
of interest rate scenarios. NPV is the present value of expected cash flows from
assets and liabilities. The NPV ratio, under any interest rate scenario, is
defined as the NPV in that scenario divided by the fair value of assets in the
same scenario. The model assumes estimated loan prepayment rates, reinvestment
rates and deposit decay rates similar to the assumptions utilized for the GAP
Table. The following sets forth the Bank's NPV as of September 30, 1997.
33
<PAGE>
<TABLE>
<CAPTION>
CHANGE IN NET PORTFOLIO VALUE
-----------------------------------------------------
INTEREST RATES
IN BASIS POINTS AMOUNT $ CHANGE % CHANGE
------------- ------------ ------------
(RATE SHOCK) (DOLLARS IN THOUSANDS)
--------------
<S> <C> <C> <C>
400 .......................... 105,002 (44,100) (29.6)%
300 .......................... 116,614 (32,488) (21.8)%
200 .......................... 127,969 (21,133) (14.2)%
100 .......................... 139,230 (9,872) (6.6)%
Static .......................... 149,102 -- --
(100) .......................... 156,097 6,995 4.7%
(200) .......................... 157,353 8,251 5.5%
(300) .......................... 162,851 13,749 9.2%
(400) .......................... 174,889 25,787 17.3%
</TABLE>
As is the case with the GAP Table, certain shortcomings are inherent in the
methodology used in the above interest rate risk measurements. Modeling changes
in NPV requires the making of certain assumptions which may or may not reflect
the manner in which actual yields and costs respond to changes in market
interest rates. In this regard, the NPV Table presented assumes that the
composition of the Bank's interest sensitive assets and liabilities existing at
the beginning of a period remains constant over the period being measured and
also assumes that a particular change in interest rates is reflected uniformly
across the yield curve regardless of the duration to maturity or repricing of
specific assets and liabilities. Accordingly, although the NPV Table provides an
indication of the Bank's interest rate risk exposure at a particular point in
time, such measurements are not intended to and do not provide a precise
forecast of the effect of changes in market interest rates on the Bank's net
interest income and will differ from actual results.
ANALYSIS OF NET INTEREST INCOME
Net interest income represents the difference between income on interest-
earning assets and expense on interest-bearing liabilities. Net interest income
also depends on the relative amounts of interest-earning assets and interest-
bearing liabilities and the interest rate earned or paid on them, respectively.
Average Balance Sheet. The following table sets forth certain information
relating to the Bank at September 30, 1997 and for the nine months ended
September 30, 1997 and 1996 and for the years ended December 31, 1996, 1995 and
1994. For the periods indicated, the total dollar amount of interest income from
average interest-earning assets and the resultant yields, as well as the
interest expense on average interest-bearing liabilities, is expressed both in
dollars and rates. No tax equivalent adjustments were made. The average balance
for federal funds sold is an average daily balance, while all other average
balances are monthly averages. Non-accruing loans have been excluded from the
yield calculations in this table.
34
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------
AT SEPTEMBER 30, 1997 1997
---------------------- ----------------------------------
AVERAGE INTEREST
OUTSTANDING YIELD/ OUTSTANDING EARNED/ YIELD/
BALANCE RATE BALANCE PAID RATE
----------- ------ ----------- -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold...................... $ 2,200 6.50% $ 19,936 $ 825 5.52%
Investment securities (1)............... 215,068 5.78 185,660 7,816 5.61
Mortgage related securities (1)......... 285,004 6.81 286,991 14,308 6.65
Loans (2)............................... 626,825 8.39 611,517 38,361 8.36
------------ ----------- --------
Total interest-earning assets......... 1,129,097 7.49 1,104,104 61,310 7.40
------------ ----- ----------- -------- -----
Interest-bearing liabilities:
Savings accounts (3).................... 302,447 3.34 304,106 7,626 3.34
Interest-bearing checking (3)........... 145,579 3.19 120,413 2,436 2.70
Certificates of deposit (3)............. 516,868 5.82 510,124 21,964 5.74
Mortgagor's payments held in escrow..... 8,387 1.55 8,116 119 1.95
Other borrowed funds.................... 28,740 5.85 28,919 1,190 5.49
------------ ----------- --------
Total interest-bearing liabilities.... 1,002,021 4.65 971,678 33,335 4.57
------------ ---- ----------- -------- -----
Net interest income....................... $ 27,975
========
Net interest rate spread.................. 2.84% 2.83%
===== =====
Net earning assets........................ $ 127,076 $ 132,426
============ ===========
Net interest income as a percentage
of average interest-earning assets...... 3.38%
========
Ratio of average interest-earning assets
to average interest-bearing
liabilities........................... 113.63%
========
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------
1996
---------------------------------------
AVERAGE INTEREST
OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE
------------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Interest-earning assets:
Federal funds sold...................... $ 27,420 $ 1,087 5.29%
Investment securities (1)............... 142,727 5,695 5.32
Mortgage related securities (1)......... 280,241 13,775 6.55
Loans (2)............................... 554,199 34,901 8.40
------------ --------
Total interest-earning assets......... 1,004,587 55,458 7.36
------------ -------- -----
Interest-bearing liabilities:
Savings accounts (3).................... 310,040 7,814 3.36
Interest-bearing checking (3)........... 104,782 2,147 2.73
Certificates of deposit (3)............. 446,521 19,467 5.81
Mortgagor's payments held in escrow..... 8,308 123 1.97
Other borrowed funds.................... 13,147 473 4.80
------------ --------
Total interest-bearing liabilities.... 882,798 30,024 4.53
------------ -------- ----
Net interest income....................... $ 25,434
========
Net interest rate spread.................. 2.83%
=====
Net earning assets........................ $ 121,789
============
Net interest income as a percentage
of average interest-earning assets...... 3.38%
========
Ratio of average interest-earning assets
to average interest-bearing
liabilities........................... 113.80%
========
</TABLE>
(Footnotes on next page)
35
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1996 1995
----------------------------------- ------------------------------------
AVERAGE INTEREST AVERAGE INTEREST
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE
----------- -------- ------- ------------ -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold................ $ 24,683 $ 1,313 5.32% $ 31,357 $ 1,726 5.50%
Investment securities(1).......... 147,220 7,916 5.38 119,100 6,843 5.75
Mortgage related securities(1).... 281,843 18,547 6.58 275,448 17,939 6.51
Loans (2)......................... 564,049 47,286 8.38 506,600 43,348 8.56
---------- ----------- ---------- ----------
Total interest-earning assets... 1,017,795 75,062 7.37 932,505 69,856 7.49
---------- ----------- ----- ---------- ---------- ------
Interest-bearing liabilities:
Savings accounts (3).............. 307,530 10,353 3.37 326,125 11,154 3.42
Interest-bearing checking (3)..... 105,717 2,871 2.72 96,551 2,909 3.01
Certificates of deposit (3)....... 455,230 26,432 5.81 386,648 23,546 6.09
Mortgagor's payments held
in escrow....................... 8,174 158 1.93 9,222 174 1.89
Other borrowed funds.............. 16,674 841 5.04 - - -
---------- ----------- ---------- ----------
Total interest-bearing
liabilities................... 893,325 40,655 4.55 818,546 37,783 4.61
---------- ----------- ----- ---------- ---------- ------
Net interest income................. $ 34,407 $ 32,073
=========== ==========
Net interest rate spread............ 2.82% 2.88%
===== ======
Net earning assets.................. $ 124,470 $ 113,959
========== ==========
Net interest income as a percentage of
average interest-earning assets... 3.38% 3.44%
==== ====
Ratio of average interest-earning assets
to average interest-bearing liabilities 113.93% 113.92%
====== ======
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1994
----------------------------------
AVERAGE INTEREST
OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE
----------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Interest-earning assets:
Federal funds sold................ $ 20,740 $ 849 4.09%
Investment securities(1).......... 124,155 6,317 5.09
Mortgage related securities(1).... 302,430 18,274 6.04
Loans (2)......................... 448,902 37,704 8.40
---------- ---------
Total interest-earning assets... 896,227 63,144 7.05
---------- --------- -----
Interest-bearing liabilities:
Savings accounts (3).............. 415,843 12,869 3.09
Interest-bearing checking (3)..... 86,057 2,283 2.65
Certificates of deposit (3)....... 287,661 16,443 5.72
Mortgagor's payments held
in escrow....................... 8,471 159 1.88
Other borrowed funds.............. - - -
---------- ---------
Total interest-bearing
liabilities................... 798,032 31,754 3.98
---------- --------- ----
Net interest income................. $ 31,390
=========
Net interest rate spread............ 3.07%
=====
Net earning assets.................. $ 98,195
==========
Net interest income as a percentage of
average interest-earning assets... 3.50%
====
Ratio of average interest-earning assets
to average interest-bearing liabilities 112.30%
======
</TABLE>
__________________________
(1) Amounts shown are amortized cost.
(2) Net of deferred loan fees and expenses, loan discounts, loans in process
and non-accruing loans.
(3) Excludes $1.25 million paid for a special interest payment in 1995 which
was approved by the Bank's Board of Trustees and paid on a pro rata basis
on all interest-bearing savings, NOW, money market, and certificate
accounts in recognition of the Bank's 125th anniversary.
Rate/Volume Analysis. The following table presents the extent to
which changes in interest rates and changes in the volume of interest-earning
assets and interest-bearing liabilities have affected the Bank's interest income
and interest expense during the periods indicated. Information is provided in
each category with respect to : (i) changes attributable to changes in volume
(changes in volume multiplied by prior rate); (ii) changes attributable to
changes in rate (changes in rate multiplied by prior volume); and (iii) the net
change. The changes attributable to the combined impact of volume and rate have
been allocated proportionately to the changes due to volume and the changes due
to rate.
36
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------------------------ ------------------------------------
1997 VS. 1996 1996 VS. 1995
------------------------------------ ------------------------------------
INCREASE (DECREASE) TOTAL INCREASE (DECREASE) TOTAL
DUE TO INCREASE DUE TO INCREASE
----------------------- -----------------------
VOLUME RATE (DECREASE) VOLUME RATE (DECREASE)
----------- ---------- ---------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold.................. $ (330) $ 68 $ (262) $ (280) $ (133) $ (413)
Investment securities............... 1,793 328 2,121 1,535 (461) 1,074
Mortgage related securities......... 335 198 533 419 189 608
Loans............................... 3,683 (223) 3,460 4,830 (893) 3,937
------- --------- -------- -------- -------- --------
Total interest-earning assets.... 5,481 371 5,852 6,504 (1,298) 5,206
------- -------- -------- -------- -------- --------
Interest-bearing liabilities:
Savings accounts.................... (149) (39) (188) (628) (173) (801)
Interest-bearing checking........... 332 (43) 289 263 (301) (38)
Certificates of deposit............. 2,888 (391) 2,497 4,022 (1,136) 2,886
Mortgagors' payments held in escrow. (3) (1) (4) (20) 4 (16)
Other borrowed funds................ 631 86 717 841 - 841
------- -------- -------- -------- -------- --------
Total interest-bearing
liabilities.................... $ 3,699 $ (388) $ 3,311 $ 4,478 $ (1,606) $ 2,872
======= ========= ======== ======== ======== ========
Net interest income.................... $ 2,541 $ 2,334
======== ========
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1995 VS. 1994
-------------------------------------
INCREASE (DECREASE) TOTAL
DUE TO INCREASE
---------------------
VOLUME RATE (DECREASE)
----------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest-earning assets:
Federal funds sold.................. $ 410 $ 467 $ 877
Investment securities............... (265) 791 526
Mortgage related securities......... (1,698) 1,363 (335)
Loans............................... 4,925 719 5,644
------- ------- --------
Total interest-earning assets.... 3,372 3,340 6,712
------- ------- --------
Interest-bearing liabilities:
Savings accounts.................... (2,973) 1,258 (1,715)
Interest-bearing checking........... 296 330 626
Certificates of deposit............. 5,969 1,134 7,103
Mortgagors' payments held in escrow. 14 1 15
Other borrowed funds................ - - -
------- ------- --------
Total interest-bearing
liabilities.................... $ 3,306 $ 2,723 $ 6,029
======= ======= ========
Net interest income.................... $ 683
========
</TABLE>
Calculations for the above table exclude $1.25 million paid as a special
interest payment in 1995, which was paid on a pro rata basis on all interest-
bearing savings, NOW, money market and certificate accounts in recognition of
the Bank's 125th anniversary.
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
Total assets increased by $83.1 million, or 7.6%, from $1.093 billion at
December 31, 1996 to $1.176 billion at September 30, 1997. The growth in assets
is primarily attributable to a $48.9 million increase in debt, equity and asset-
backed securities available for sale, a $31.5 million increase in real estate
loans and a $9.0 million increase in accrued interest receivable, premises and
equipment, and other assets, primarily the building of the Bank's new
administrative center. Asset growth was funded through deposit inflows resulting
from the continued expansion of the Bank's branch network. The asset growth was
partially offset by a $7.9 million decrease in consumer loans which resulted
from a $12.5 million early repayment of the automobile lease portfolio.
Investment securities at September 30, 1997, totaled $216.7 million, an increase
of $48.4 million, compared to $168.3 million at December 31, 1996. Substantially
all the increase in these securities was attributable to purchases of one- to
three-year weighted average life, fixed-rate corporate bonds and asset-backed
securities, as well as common stock of corporate issuers. While the rates earned
on these securities is lower than rates earned on longer-term securities, the
Bank was specifically looking to shorten its interest rate risk exposure and
obtain more consistent cash flows in this low rate, flat yield curve
environment. Real estate loans increased from $524.4 million at December 31,
1996 to $555.9 million at September 30, 1997, primarily due to increased one- to
four-family, bi-weekly residential mortgage loans, an enhanced home equity loan
product, and increased originations in commercial real estate loans as we
continued to emphasize the expansion of our real estate lending. Premises and
equipment increased by $8.8 million, or 66.3%, primarily due to the construction
of a new building which was occupied in August 1997 and provides office space
for our administrative functions and lending departments.
At September 30, 1997, the Bank's allowance for possible loan losses as a
percentage of total non-performing loans was 330.0%, compared to 118.6% at
September 30, 1996, due to a slight increase in the provision and a significant
decrease in non-performing loans from $5.3 million at September 30, 1996 to $1.9
million at September 30, 1997. This decrease was attributable to repayments,
writedowns to net realizable values, a settlement with a bankruptcy trustee and
an aggressive approach to address past due and non-performing loans. At
September 30, 1997, the Bank's allowance for possible loan losses as a
percentage of total loans was 1.02%. While management uses available information
to
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recognize losses on loans, future loan loss provisions may be necessary based on
changes in economic conditions. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the allowance
for loan losses and may require the Bank to recognize additional provisions
based on their judgement of information available to them at the time of their
examination. See "Risk Factors - Lending Risks Associated With Commercial Real
Estate, Multi-Family and Consumer Lending" and "Business of the Bank -
Delinquencies and Classified Assets" and "- Allowance for Possible Loan Losses".
Total deposits at September 30, 1997 were $992.2 million, an increase of
$72.1 million, or 7.8%, compared to $920.1 million at December 31, 1996. The
increase was primarily due to the introduction of a new money market deposit
account, which from a rate perspective competes against mutual fund money market
accounts, and grew to $34.4 million by September 30, 1997. The Bank's
certificates of deposit grew from $484.7 million at December 31, 1996 to $516.9
million at September 30, 1997. The increase in certificates of deposit was
primarily attributable to the Bank's strategy of offering introductory rates on
certain certificates of deposit whenever a new branch is opened, as was the case
in both March and May of 1997. Offsetting these increases, borrowed funds
decreased $3.3 million, or 10.3%, from $32.0 million at December 31, 1996 to
$28.7 million at September 30, 1997. This decrease was primarily attributable to
the payment of a short-term FHLB advance of $7.0 million, which matured in early
January. Another $5.0 million, fifteen year, amortizing FHLB borrowing was
obtained in July 1997 at a rate of 6.59%. Other borrowings, primarily in the
form of reverse repurchase agreements, declined $1.3 million. These borrowings
are used to fund the Bank's borrowing/reinvestment program which takes advantage
of low rate short-term borrowings, typically three- to six- month repos, and
invests in one- to two-year securities, primarily U.S. Treasury securities, to
earn additional net interest income. The relatively flat yield curve in 1997
made it less attractive to enter into more borrowing/reinvestment transactions
due to the very low spreads the Bank could earn.
Net worth increased to $126.7 million at September 30, 1997 from $115.7
million at December 31, 1996. This increase was the result of net income of $8.6
million and a $2.4 million increase in the after-tax net unrealized gain on
available for sale securities due to the lower market interest rates at
September 30, 1997 which positively affected the market value of the Bank's
securities.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1996 AND DECEMBER 31, 1995
Total assets at December 31, 1996 were $1.093 billion as compared to total
assets of $994.3 million at December 31, 1995, an increase of $99.1 million, or
10.0%. The asset growth was primarily attributable to a $63.4 million increase
in real estate and consumer loans, and a $60.0 million increase in securities.
Asset growth was funded with a $59.0 million increase in deposits and a $32.0
million increase in other borrowings. Federal funds sold decreased $20.6 million
as proceeds were invested in loans and securities. Asset growth during the year
ended December 31, 1996 was concentrated in one- to four-family and commercial
real estate loans, vehicle loans, mortgage related securities and U.S. Treasury
securities. Net loans increased $62.5 million, from $536.0 million at December
31, 1995 to $598.5 million on December 31, 1996. One- to four-family real estate
loans increased $41.2 million, commercial real estate loans increased $6.5
million, and vehicle loans increased $6.2 million. The increase in the one- to
four-family real estate loans was primarily the result of $13.9 million in
additional adjustable rate loans and $19.1 million in additional bi-weekly fixed
rate loans, as we continued to originate and hold in portfolio one- to four-
family real estate loans which meet the asset/liability management objectives of
either variable rate or shorter term mortgage loans. The commercial real estate
loan portfolio increased from $62.0 million at December 31, 1995 to $68.6
million at December 31, 1996, as the Bank continued its emphasis on originating
assets which provide higher yields and are more sensitive to current market
interest rates than those obtainable on one- to four-family, long term, fixed
rate real estate loans. Consumer and other loans increased $10.0 million from
$63.3 million at December 31, 1995 to $73.3 million at December 31, 1996. This
increase was primarily the result of the $6.2 million increase in vehicle loans
and auto lease financing. While consumer loans generally entail greater credit
risk than one- to four-family real estate loans, they are also shorter term,
higher yielding assets which also meet the asset/liability objectives of the
Bank.
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The securities portfolio increased by $60.0 million, from $393.1 million at
December 31, 1995 to $453.1 million at December 31, 1996. The growth in the
securities portfolio was primarily in U.S. Treasury securities, assetbacked
securities and mortgage related securities. The $29.5 million increase in U.S.
Treasury securities was a result of the Bank's continued development of a five
year laddered portfolio of U.S. Treasuries and the start-up of the Bank's
borrowing/reinvestment program. The $22.7 million increase in asset-backed
securities was required to meet the need for shorter term average life
securities with tighter payment windows than most mortgage related securities.
The $23.3 million increase in mortgage related assets was largely funded with
deposits and borrowings during 1996. It represented a repositioning of assets
from the lower yielding, short-term CMO sector and federal funds sold into
mortgage related securities.
The increase in deposit growth was attributable to the net deposit inflows
of $19.9 million and interest credited to deposit accounts of $39.1 million
during the period. The composition of the Bank's deposits continued to change,
as reflected in the shift out of lower yielding savings accounts and into higher
yielding certificates of deposit as the Bank paid slightly lower rates on
transaction accounts in 1996. The Bank's cost of funds for certificates of
deposit was also lower in 1996 than 1995 although the balances increased from
$422.5 million at December 31, 1995 to $484.7 million at December 31, 1996. The
generally lower interest rate environment in 1996, as well as approximately
$19.0 million in long-term, high interest rate (9.00%-10.00%) certificates of
deposit maturities in the first four months of 1996 assisted in lowering the
overall cost of funds. On the other hand, two new branch openings in 1996
increased the cost of funds as the Bank used certificates of deposit promotions
to attract new customers. In 1996, we initiated a wholesale borrowing strategy
on two fronts. After joining the FHLB in 1995, the Bank entered into its first
$5.0 million, 5-year FHLB advance at 5.72% in January 1996. By year end, $12.0
million in FHLB advances were recorded on the Bank's books. In June 1996, we
initiated a borrowing/reinvestment program and entered into $20.0 million in
reverse repurchase agreements by December 31, 1996. See "Management of Interest
Rate Risk".
Net worth increased to $115.7 million at December 31, 1996 from $107.7
million at December 31, 1995. This increase was the result of net income of
$10.8 million, partially offset by a $2.8 million decrease in the after-tax net
unrealized gain on available for sale securities. As interest rates increased at
December 31, 1996, the market value of the Bank's securities was negatively
affected.
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND
SEPTEMBER 30, 1996.
General. The earnings of the Bank depend primarily on its level of net
interest income, which is the difference between interest earned on the Bank's
interest-earning assets, consisting primarily of residential and commercial real
estate loans, consumer loans, securities available for sale and securities held
to maturity, and the interest paid on interest-bearing liabilities, consisting
primarily of deposits and other borrowed funds. Net interest income is a
function of the Bank's interest rate spread, which is the difference between the
average yield earned on interest-earning assets and the average rate paid on
interest-bearing liabilities, as well as a function of the average balance of
interest-earning assets as compared to interest-bearing liabilities. The Bank's
earnings also are affected by its level of service charges and gains on sale of
loans and securities, as well as its level of operating and other expenses,
including salaries and employee benefits, occupancy and equipment costs, and
marketing and advertising costs.
Net income for the nine months ended September 30, 1997 increased by
$409,000, or 5.0%, from $8.2 million for the nine months ended September 30,
1996 to $8.6 million for the same period in 1997. The increase was due primarily
to an increase in interest income which resulted from an increase in the average
balance of interest-earning assets, as well as an increase in other operating
income related to fees and service charges on deposits, increased gains on the
sale of securities available for sale, and lower provisions for loan losses. The
increases were partially offset by increased interest expense which resulted
primarily from an increase in average interest-bearing liabilities and a $3.4
million increase in operating and other expenses reflecting the expansion of the
Bank's branch network.
Interest Income. Interest income increased by $5.8 million, or 10.6%, to
$61.3 million for the nine months ended September 30, 1997 from $55.5 million
for the nine months ended September 30, 1996. The increase was
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primarily due to a $3.5 million increase in income from loans, a $2.1 million
increase in income from investment securities, and a $533,000 increase in income
from mortgage related securities. These increases were partially offset by a
$262,000 decrease in income from federal funds sold. The increase in income from
loans was attributable to a $57.3 million increase in the average balance of
loans to $611.5 million from $554.2 million, partially offset by a 4 basis point
decrease in the average yield on loans from 8.40% to 8.36%. The continued
origination and portfolio growth of the Bank's one- to four-family real estate
loans was responsible for over 60% of the loan increase. The increase in income
from investment securities was attributable to a $42.9 million increase in the
average balance of investment securities to $185.6 million from $142.7 million,
and a 29 basis point increase in the average yield on investment securities to
5.61% from 5.32%. The Bank invested in U.S. Treasury securities and asset-backed
securities during the first nine months of 1997 to take advantage of their
shorter weighted average lives and their 6.00% or higher yields which increased
the Bank's overall yield on its investment securities. The increase in income
from mortgage related securities was attributable to a $6.8 million increase in
the average balance of mortgage related securities to $287.0 million from $280.2
million, and a 10 basis point increase in the average yield on mortgage related
securities to 6.65% from 6.55%. As interest rates increased during the first
four months of 1997, the Bank invested in CMO's, 7-year balloons and 30-year
mortgage related securities which provided yields of 6.93% to 7.03% and
increased the Bank's overall yield on its mortgage related securities. The
decrease in income from federal funds sold was due to a $7.5 million decrease in
the average balance of federal funds sold to $19.9 million from $27.4 million,
partially offset by a 23 basis point increase in the yield on the Bank's federal
funds sold to 5.52% from 5.29%. This decrease was the result of the redeployment
of excess funds, mainly in investment securities.
Interest Expense. Interest expense increased by $3.3 million, or 11.0%, to
$33.3 million for the nine months ended September 30, 1997 from $30.0 million
for the nine months ended September 30, 1996. This increase was the result of an
$88.9 million increase in the average balance of interest-bearing liabilities in
the 1997 period compared to the 1996 period, and a 4 basis point increase in the
average rate paid on such liabilities over the same period. In particular, the
increase resulted primarily from a $2.5 million increase in interest expense on
certificates of deposit, a $717,000 increase in interest expense on other
borrowings, and a $289,000 increase in interest expense on interest-bearing
checking accounts. These increases were partially offset by a $188,000 decrease
in interest expense on savings accounts. The increase in interest expense
attributable to certificates of deposit resulted from a $63.6 million increase
in the average balance of certificates of deposit to $510.1 million in 1997 from
$446.5 million in 1996, which was partially offset by a 7 basis point decrease
in the average cost of certificates of deposit from 5.81% to 5.74%. Assisting
the decline was the slightly lower interest rate environment during the 1997
period, as well as the Bank closely monitoring maturing certificates of deposit
with high rates and promoting alternative certificates of deposit to lower the
overall rate paid on these accounts. Two new branch openings in early 1997 and
one new branch opening in late 1996 contributed to the large increase in average
certificates of deposit balances. The increase in interest expense attributable
to other borrowings resulted from a $15.8 million increase in the average
balance of other borrowings to $28.9 million in 1997 from $13.1 million in 1996
and a 69 basis point increase in the average borrowing cost to 5.49% from 4.80%.
The increase in other borrowed funds in 1997 reflects management's decision to
implement a borrowing/reinvestment program which utilizes reverse repurchase
agreements to fund investments in securities as long as such agreements are a
cost effective source of funds. As short-term interest rates increased and the
yield curve flattened in mid-1997, the rates being paid on these borrowings
increased and the spread earned on the transactions began to narrow, thus
reducing the attractiveness of these transactions. The increase in interest
expense attributable to interest-bearing checking accounts resulted from a $15.6
million increase in the average balance of interest-bearing checking accounts to
$120.4 million in 1997 from $104.8 million in 1996, partially offset by a 3
basis point decrease in the average cost of interest-bearing checking accounts
to 2.70% from 2.73%. The decrease in interest expense attributable to savings
accounts resulted from a $5.9 million decrease in the average balance of total
savings accounts to $304.1 million from $310.0 million, and a 2 basis point
decrease in the average cost of savings accounts to 3.34% from 3.36%. See
"Business of the Bank - Source of Funds -Borrowed Funds".
Provision for Loan Losses. The Bank establishes provisions for loan losses,
which are charged to operations, in order to maintain the allowance for loan
losses at a level which is deemed appropriate to absorb future charge-offs of
loans deemed uncollectible. In determining the appropriate level of the
allowance for loan losses, management
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considers past and anticipated loss experience, evaluations of real estate
collateral, current and anticipated economic conditions, volume and type of
lending and the levels of non-performing and other classified loans. The amount
of the allowance is based on estimates and the ultimate losses may vary from
such estimates. Management of the Bank assesses the allowance for loan losses on
a quarterly basis and makes provisions for loan losses in order to maintain the
adequacy of the allowance.
The Bank provided $975,000 and $1.9 million in loan loss provisions during
the nine months ended September 30, 1997 and September 30, 1996, respectively.
During the first nine months of 1996, management provided $800,000 of provisions
for potential losses on approximately $1.8 million of loans to a borrower that
had filed for bankruptcy protection. The Bank charged-off $486,000 of this loan
during 1997 after a settlement was reached with the bankruptcy trustee. This
amount is reflected in the increase in the net charge-offs to average loans
outstanding to .19% from .04% during the nine months ending September 30, 1997
and September 30, 1996, respectively.
Other Operating Income. Other operating income is composed of fee income
for bank services and profits from the sale of loans and securities. Total other
operating income for the nine months ended September 30, 1997 increased
$637,000, or 14.7%, from $4.3 million for the nine months ended September 30,
1996 to $5.0 million for the nine months ended September 30, 1997. The primary
reasons for the improvement were net gains of $875,000 on the sale of securities
available for sale during the nine months ended September 30, 1997 as compared
to net gains of $532,000 in the comparable period for 1996. The increases are
primarily reflective of the Bank's desire to realize some of the gains on
marketable equity securities which occurred in 1997 as a result of the strong
performance of the stock market. Bank service charges and fees on deposit
accounts increased $438,000 for the nine months ending September 30, 1997 to
$2.2 million from $1.8 million for the nine months ending September 30, 1996.
This increase was primarily the result of increased fee income of $148,000 on
the Bank's debit card which was introduced in 1995 and continues to see
significant growth in customer acceptance and usage. In addition, service
charges and charges for insufficient funds on checking accounts increased
$267,000 from September 30, 1996 to September 30, 1997 as a result of the Bank's
continued promotion of its low fee checking account products. Other changes in
other operating income included a $35,000 increase in loan origination and
servicing fees and increased commissions of $38,000 on the sale of annuities and
mutual funds. These increases were partially offset by writedowns taken in 1997,
on real estate owned ("REO") and investments in real estate development
projects, which totaled $387,000 in 1997 in comparison to $18,000 in 1996. These
properties were written-down to their revised net realizable values.
Operating and Other Expenses. Operating and other expenses increased by
$3.4 million, or 22.8%, to $18.4 million for the nine months ended September 30,
1997 from $15.0 million for the nine months ended September 30, 1996. The
increase was due to a $1.4 million increase in other expenses, a $1.3 million
increase in salaries and employee benefits, a $362,000 increase in occupancy and
equipment, a $152,000 increase in network interchange fees, an $88,000 increase
in deposit insurance and an $83,000 increase in marketing and advertising.
Other expenses increased to $4.0 million for the nine months ended
September 30, 1997 from $2.6 million for the nine months ended September 30,
1996. The September 30, 1996 other expenses reflects the benefit recognized for
the reversal of a $600,000 provision for possible loss on demand balances held
at Nationar, Inc. ("Nationar"), which had originally been made in 1995. This is
discussed further in the comparison of operating results for fiscal years 1996
and 1995. Without this reversal, the net increase in other expenses would have
been $836,000 including professional fees mainly associated with the
implementation of various tax planning strategies, additional charitable
contributions, additional costs incurred as a result of the growth in the number
of checking accounts, and expenses associated with settling a real estate tax
escrow lawsuit. Salaries and employee benefits increased to $9.7 million for the
nine months ended September 30, 1997 from $8.4 million for the same period in
1996. The increase is primarily a result of an additional 41 full time
equivalent employees hired by the Bank, primarily at the three new branch
locations established by the Bank since August of 1996. These new branches also
contributed to the increase in occupancy and equipment to $2.7 million for the
nine months ended September 30, 1997 from $2.3 million for the same period in
1996. Included in occupancy and equipment is $417,000 of depreciation on the
furniture and equipment and leasehold improvements for the new facilities and
$234,000 of building-related operating expenses. Occupancy and equipment also
reflects
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approximately $79,000 of technology equipment writedowns related to the Bank's
continued upgrading of its technology, communications and information systems,
primarily personal computers and related software. Network interchange fees
increased to $882,000 for the nine months ended September 30, 1997 from $730,000
for the same period in 1996 reflecting the costs associated with the continued
growth in the number of customer transactions performed utilizing the Bank's
debit card product. Deposit insurance increased to $90,000 for the nine months
ended September 30, 1997 from $2,000 for the same period in 1996, resulting from
the FDIC's decision to raise the assessment for deposit insurance in 1997 to
$0.013/per one hundred dollars of deposits from the minimal assessment in 1996.
Marketing and advertising costs increased to $1.0 million for the nine months
ended September 30, 1997 from $934,000 for the nine months ended September 30,
1996 and was primarily due to promotional costs relating to the Bank's opening
of the new branches.
Income Taxes. Income tax expense was $4.9 million for the nine months ended
September 30, 1997 compared to $4.7 million for the same period in 1996.
The effective tax rate was 36.2% for both periods.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND
DECEMBER 31, 1995
General. Net income for the year ended December 31, 1996 increased by
$843,000, or 8.5%, from $9.9 million for the year ended December 31, 1995 to
$10.8 million for the fiscal year 1996. The increase was due primarily to an
increase in interest income which primarily resulted from an increase in the
average balance of interest-earning assets and an increase in other operating
income related to fees and service charges on deposits. The increases were
partially offset by increased interest expense which resulted primarily from an
increase in average interest-bearing liabilities, decreased gains on the sale of
securities available for sale, higher provisions for loan losses, increases in
operating and other expenses, and increased income taxes.
Interest Income. Interest income increased by $5.2 million, or 7.5%, to
$75.1 million for the year ended December 31, 1996 from $69.9 million for the
year ended December 31, 1995. The increase was primarily due to a $3.9 million
increase in income from loans, a $1.1 million increase in income from investment
securities, and a $608,000 increase in income from mortgage related securities.
These increases were partially offset by a $413,000 decrease in income from
federal funds sold. The increase in income from loans was attributable to a
$57.4 million increase in the average balance of loans to $564.0 million from
$506.6 million, partially offset by an 18 basis point decrease in the average
yield on loans from 8.56% to 8.38%. The origination and portfolio growth of the
Bank's one- to four-family real estate loans was responsible for over 64% of the
total loan growth. Since interest rates decreased throughout 1995, refinancings
increased during the last quarter of 1995 and into early 1996 which assisted in
lowering the total portfolio yield in 1996. The increase in income from
investment securities was attributable to a $28.1 million increase in the
average balance of investment securities to $147.2 million from $119.1 million,
partially offset by a 37 basis point decrease in the average yield on investment
securities to 5.38% from 5.75%. The $1.1 million increase in 1996 interest
income was the result of the development of a five year laddered portfolio of
U.S. Treasury securities and the start-up of the Bank's borrowing/reinvestment
program which was initiated in 1996 and mainly invested in two year U.S.
Treasury securities. The increase in income from mortgage related securities was
attributable to a $6.4 million increase in the average balance of mortgage
related securities to $281.8 million from $275.4 million, and a 7 basis point
increase in the average yield on mortgage related securities to 6.58% from
6.51%. The $608,000 increase in 1996 interest income is attributable to the
repositioning of the Bank's mortgage related securities in early 1996 to achieve
a higher yielding portfolio. The decrease in income from federal funds sold was
due to a $6.7 million decrease in the average balance of federal funds sold to
$24.7 million from $31.4 million, and an 18 basis point decrease in the yield on
the Bank's federal funds sold to 5.32% from 5.50%. This decrease was the result
of our continuing deployment of excess funds, mainly in investment securities.
Interest Expense. Interest expense increased by $1.7 million, or 4.2%, to
$40.7 million for the year ended December 31, 1996 from $39.0 million for the
year ended December 31, 1995. Interest expense for the year ended December 31,
1995 includes a special interest payment of $1.25 million paid in connection
with our 125th anniversary. Excluding this special interest payment, interest
expense increased by $2.9 million, or 7.6%, to $40.7 million from $37.8
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million for the prior year. Overall, the average balance of interest-bearing
liabilities increased by $74.8 million in 1996, while the average rate paid on
these liabilities decreased 6 basis points since year end 1995. In particular,
this increase resulted primarily from a $2.9 million increase in interest
expense on certificates of deposit, and an $841,000 increase in interest expense
on other borrowings. These were partially offset by an $801,000 decrease in
interest expense on savings accounts and a decrease of $38,000 in interest
expense on interest-bearing checking accounts. The increase in interest expense
attributable to certificates of deposit resulted from a $68.6 million increase
in the average balance of certificates of deposit to $455.2 million in 1996 from
$386.6 million in 1995 which was partially offset by a 28 basis point decrease
in the average cost of certificates of deposit to 5.81% from 6.09%. The Bank's
customers continued to move deposits from core savings accounts into
certificates of deposit as a result of the higher rates being paid on
certificates of deposit. The Bank benefitted from $19.0 million of matured 9% to
10% interest-bearing certificates of deposit which occurred in early 1996 and
helped to reduce the Bank's overall cost of funds. The increase in interest
expense on other borrowings was due to the Bank's average borrowings of $16.7
million during 1996, as compared to no borrowings during 1995. The Bank's first
FHLB advance, a 5-year advance, was recorded in January 1996 when interest rates
declined to their lowest point since late 1993. In addition, the Bank initiated
a short-term borrowing/reinvestment program during 1996 which included
borrowings with reverse repurchase agreements and corresponding investments
mainly in short-term U.S. Treasury securities. By year end 1996, the Bank had
averaged over $11.1 million in reverse repurchase agreements. The decrease in
interest expense attributable to savings accounts was due to an $18.6 million
decrease in the average balance of total savings accounts to $307.5 million in
1996 from $326.1 million in 1995, and a 5 basis point decrease in the average
cost of savings accounts to 3.37% from 3.42%.
Provision for Loan Losses. The Bank's provision for loan losses increased
by $1.2 million, from $1.0 million for the year ended December 31, 1995 to $2.2
million for the year ended December 31, 1996. As previously indicated, the
increase in the provision was due primarily to management's assessment of the
potential losses that ultimately would be recognized on the $1.8 million of
loans to a borrower that had filed for bankruptcy protection. The increase is
also reflective of management's objective to increase the allowance for loan
losses as a percentage of total loans due to the growth in the loan portfolios.
Other Operating Income. Total other operating income was $5.8 million for
the year ended December 31, 1996, a $346,000, or 6.4%, increase from $5.4
million for the year ended December 31, 1995. Banking service charges and fees
on deposit accounts increased $631,000 for the year ended December 31, 1996,
from $1.8 million for 1995 to $2.5 million for 1996. The increase was primarily
attributable to a $222,000 increase in fees charged for insufficient funds on
the Bank's checking accounts resulting from modifications to the Bank's
insufficient funds policy, $220,000 in additional revenue generated because of
the increased usage of the Bank's new debit card product, and $138,000 of
additional service charges received due to the growth in the Bank's interest-
bearing checking accounts. Loan origination and servicing fees increased
$172,000 for the year ended December 31, 1996, to $1.0 million from $855,000 for
1995, reflective of the Bank's increased loan origination activity.
Additionally, all other operating income increased $444,000, from $1.2 million
for 1995 to $1.7 million for 1996. This increase was primarily due to an
additional $218,000 of commissions received on increased sales of annuity
products during 1996. The 1995 amount is also reflective of $200,000 in reserves
that were charged to operations in connection with the Bank's investments in
real estate development projects. These increases were partially offset by a
$901,000 decline in net gains on the sale of securities available for sale from
$1.5 million during 1995 to $576,000 during 1996 due to the market driven
reduced sales opportunities in 1996.
Operating and Other Expenses. Operating and other expenses increased by
$783,000, or 3.9%, to $20.9 million for the year ended December 31, 1996 from
$20.1 million for the year ended December 31, 1995. The increase was due to a
$1.8 million increase in salaries and employee benefits, a $543,000 increase in
occupancy and equipment, a $377,000 increase in marketing and advertising and a
$107,000 increase in network interchange fees. These increases were partially
offset by a $981,000 decrease in deposit insurance and a $1.0 million decrease
in other expenses.
Salaries and employee benefits increased to $11.5 million for 1996 from
$9.7 million for 1995. Occupancy and equipment expenses increased to $3.2
million in 1996 from $2.6 million for 1995. Both expense categories were
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<PAGE>
impacted by the opening of two new branch locations during 1996. Besides the
costs related to expansion, salaries and employee benefits and occupancy and
equipment reflects the first full year of operating costs related to the 1995
start up and implementation of the Bank's new item processing center and
telephone service center. The item processing center, designed to be the first
area bank to utilize imaging technology, was established to perform check
clearing and statement rendering functions previously outsourced to a third
party. The telephone service center was established to enhance the Bank's retail
delivery system by minimizing the number of telephone calls into the branches
thereby enabling branch personnel to focus on more personalized service and
cross selling opportunities to branch walk-in customers.
The increase in marketing and advertising, to $1.4 million for 1996 from
$978,000 for 1995, was attributable to the Bank's efforts to expand its
marketing coverage area to include localities where the Bank had opened new
branches, primarily in Erie County. The significant decrease in deposit
insurance, from $983,000 for 1995 to $2,000 for 1996, reflects the FDIC's
decision to lower the insurance premiums paid by BIF-insured institutions to the
legal minimum effective January 1, 1996. The Bank's "well capitalized" risk
classification allowed the Bank to pay the minimum annual assessment during
1996.
Other operating expenses decreased from $5.0 million for 1995 to $3.9
million for 1996. The significant decrease was related to circumstances
involving the Bank's relationship with Nationar. On February 6, 1995, the
Superintendent of Banks for the State of New York seized Nationar, a checking-
clearing and trust company, placing it in receivership, and freezing all of its
assets. The Bank and its Savings Bank Life Insurance affiliate had $5.8 million
of demand deposits at Nationar frozen by this action. Since there were numerous
uncertainties regarding the total amount of claims filed against Nationar, the
priorities thereof, the proceeds remaining after disposition of assets and the
ultimate cost of the liquidation, management believed there to be reasonable
likelihood that the Bank would not recover all amounts due it from Nationar.
Because of these uncertainties, a $600,000 loss provision was reflected in other
operating expenses for 1995. However, during 1996 the Bank received all funds
due from Nationar and therefore reversed the allowance for possible loss with
the benefit reflected as a reduction in other operating expenses.
Income Taxes. Income tax expense was $6.3 million for the year ended
December 31, 1996 compared to $5.1 million for the year ended December 31, 1995.
The effective tax rate increased from 34.1% for 1995 to 36.8% for 1996,
primarily related to a decrease in tax-exempt income and an increase in the
valuation allowance on its deferred tax assets.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1995 AND
DECEMBER 31, 1994
General. Net income for the year ended December 31, 1995 was $9.9 million,
compared to $8.8 million for the year ended December 31, 1994. Interest rates
rose sharply in early 1994, then gradually declined after January 1995,
resulting in a higher yield on interest-earning assets and a higher cost of
interest-bearing liabilities in 1995 than in 1994. In addition, the yield curve
narrowed significantly from December 31, 1994 to December 31, 1995, which caused
added pressure on spreads during 1995. The increase in net income for 1995 as
compared to 1994 resulted primarily from increases in interest income, other
operating income, and gains on the sale of securities available for sale, which
were partially offset by increases in interest expense and operating and other
expenses. Additionally, net income in 1994 was negatively impacted by the
recognition of the cumulative effect of implementing the provisions of SFAS 106,
"Employers' Accounting for Post Retirement Benefits Other Than Pensions".
Interest Income. Interest income increased by $6.7 million, or 10.6%, to
$69.9 million for the year ended December 31, 1995 from $63.2 million for the
year ended December 31, 1994. The increase was primarily due to a $5.6 million
increase in income from loans, an $877,000 increase in income from federal funds
sold, and a $526,000 increase in income from investment securities. These
increases were partially offset by a $335,000 decease in income from mortgage
related securities. The increase in income from loans was attributable to a
$57.7 million increase in the average balance of loans to $506.6 million from
$448.9 million, and a 16 basis point increase in the average yield on loans to
8.56% from 8.40%. The Bank continued its focus on growing the loan portfolio in
1995 as one- to four-family,
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<PAGE>
multi-family and commercial real estate loans, and consumer loans had 7% to 15%
increases in year end portfolios, which combined with the higher rates in early
1995, assisted in increasing the overall yields on all loans. The increase in
income from federal funds sold was attributable to a $10.7 million increase in
the average balance of federal funds sold to $31.4 million from $20.7 million,
and a 141 basis point increase in the average yield on federal funds sold to
5.50% from 4.09%. The increase in income from investment securities was
attributable to a 66 basis point increase in the average yield on investment
securities to 5.75% from 5.09%, partially offset by a $5.1 million decrease in
the average balance of investment securities to $119.1 million from $124.2
million. The decrease in income from mortgage related securities was due to a
$27.0 million decrease in the average balance of mortgage related securities to
$275.4 million from $302.4 million, partially offset by a 47 basis point
increase in the average yield for mortgage related securities to 6.51% from
6.04%. Both investment securities as well as mortgage related securities
decreased during 1995 as the Bank sold securities to assist in funding its loan
portfolio growth. In addition, as spreads narrowed throughout 1995, the risk was
greater than the reward for investing long-term, so the Bank maintained higher
balances in federal funds sold which were earning close to 6.00% at year end.
Interest Expense. Interest expense increased by $7.3 million, or 22.9%, to
$39.0 million for the year ended December 31, 1995 from $31.8 million for the
year ended December 31, 1994. Excluding the $1.25 million special interest
payment in 1995, interest expense increased $6.0 million to $37.8 million for
the year ended December 31, 1995 from $31.8 million for the year ended December
31, 1994. This increase resulted primarily from a $7.1 million increase in
interest expense on certificates of deposit, and a $626,000 increase in interest
expense on interest-bearing checking accounts. These increases were partially
offset by a $1.7 million decrease in interest expense on savings accounts. The
increase in interest expense on certificates of deposit was the result of a
$98.9 million increase in the average balance of certificates of deposit to
$386.6 million from $287.7 million, and a 37 basis point increase in the average
cost of certificates of deposit to 6.09% from 5.72%,. The increase in interest
expense on interest-bearing checking accounts was the result of a $10.5 million
increase in the average balance of interest-bearing checking accounts to $96.6
million from $86.1 million, and a 36 basis point increase in the average cost of
interest-bearing checking accounts to 3.01% from 2.65%. The decrease in interest
expense on savings accounts was due to an $89.7 million decrease in the average
balance of total savings accounts to $326.1 million from $415.8 million,
partially offset by a 33 basis point increase in the average cost of savings
accounts to 3.42% from 3.09%. The increase in the average balance of
certificates of deposit accounts and the decrease in the average balance of
savings accounts was due primarily to customers shifting funds from lower
yielding savings accounts to higher yielding certificates of deposit.
Provision for Loan Losses. The Bank's provision for loan losses increased
from $948,000 for the year ended December 31, 1994 to $1.0 million for the year
ended December 31, 1995. This increase enabled the Bank to maintain an adequate
ratio of allowance for loan losses to total loans at the end of each period.
Other Operating Income. Total other operating income was $5.4 million for
the year ended December 31, 1995, a $3.0 million increase from $2.4 million for
the year ended December 31, 1994. This increase was primarily due to a $2.3
million increase in net gains on sales of securities available for sale. For the
year ended December 31, 1994, $849,000 of net securities losses were recognized
as the Bank repositioned its securities portfolio to provide more consistent
cash flows and to increase the yield. During 1995, the Bank took advantage of
market conditions and recognized $1.5 million in net securities gains. Banking
service charges and fees on deposit accounts increased $270,000, from $1.6
million for 1994 to $1.8 million for 1995. This increase was primarily
attributed to an additional $230,000 in service fees and charges collected on
the Bank's checking accounts as the Bank promoted its various checking account
products and introduced the Bank's debit card product. Loan origination and
servicing fees increased $139,000, from $716,000 for 1994 to $855,000 for 1995.
This increase reflects an additional $52,000 in service fee income collected for
servicing loans sold on the secondary market and increased service charges
collected due to the restructuring of the Bank's variable rate line-of-credit
product. All other operating income increased $285,000, from $952,000 for 1994
to $1.2 million for 1995. This increase resulted primarily from $134,000 in
additional fees received for providing various management services to the Bank's
Savings Bank Life Insurance Department and an increase of $87,000 for
commissions received on sales of annuities.
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<PAGE>
Operating and Other Expenses. Operating and other expenses increased by
$1.7 million, or 9.5%, to $20.1 million for the year ended December 31, 1995
from $18.4 million for the year ended December 31, 1994. The increase was due to
a $1.7 million increase in other expenses, a $447,000 increase in salaries and
employee benefits, a $337,000 increase in occupancy and equipment, a $154,000
increase in network interchange fees, and a $27,000 increase in marketing and
advertising. These increases were partially offset by an $890,000 decrease in
deposit insurance.
Other expenses increased from $3.3 million for the year ended December 31,
1994 to $5.0 million for 1995. As previously discussed, the increase in
operating and other expenses for fiscal 1995 reflect the $600,000 provision for
possible loss on the Bank's demand deposits held by Nationar. In addition to the
provision for possible loss, the Bank incurred increased charges for the various
services formerly performed by Nationar as the Bank was required to contract
with various other third party servicers. As a result, the Bank accelerated its
plans to bring in-house many of the previously outsourced check clearing and
statement rendering functions. In August 1995, the Bank opened its item
processing center incurring costs associated with the implementation of this new
operation, including expenses relating to a reissuance of checks to all of our
checking account customers. Additionally, in June of 1995, the Bank introduced
its new debit card product, requiring the Bank to incur costs associated with
the reissue of all of its account access cards. Salaries and employee benefits
increased from $9.3 million for 1994 to $9.7 million for 1995. Occupancy and
equipment increased from $2.3 million for 1994 to $2.6 million for 1995. The
increases in both of these expense categories reflect the costs related to the
establishment of the item processing center, telephone service center and one
additional new branch. The increase in network interchange fees, from $723,000
for 1994 to $877,000 for 1995, reflect the transactional costs incurred related
to the customer usage of the new debit card product. The marketing and
advertising increase, from $951,000 for 1994 to $978,000 for 1995, resulted from
the promotional activity relating to the debit card product and new branch
opening. The significant decrease in deposit insurance, from $1.9 million for
1994 to $983,000 for 1995, reflects a 50% reduction in the insurance premium
charged by the FDIC, which impacted most BIF-insured banks.
Income Taxes. Income tax expense was $5.1 million for the year ended
December 31, 1995 compared to $4.7 million for the year ended December 31, 1994.
The effective tax rate increased from 32.6% for 1994 to 34.1% for 1995.
Cumulative Effect of Change in Accounting Principle. As of January 1, 1994,
the Bank adopted SFAS 106, "Employers' Accounting for Post Retirement Benefits
Other Than Pensions". The transition obligation related to the adoption of this
standard of $1,224,000 was recognized in the 1994 Consolidated Statement of
Income, net of $300,000 previously accrued for this liability.
IMPACT OF NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128 "Earnings Per Share". SFAS No. 128 supersedes APB Opinion No. 15
"Earnings Per Share" and specifies the computation, presentation and disclosure
requirements for earnings per share ("EPS") for entities with publicly held
stock or potential common stock. Essentially, this standard replaces the primary
EPS and fully diluted EPS presentations under APB Opinion No. 15 with a basic
EPS and diluted EPS presentation. SFAS No. 128 is effective for financial
statements for both interim and annual periods ending after December 15, 1997,
earlier application is not permitted.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information
about Capital Structure". SFAS No. 129 summarizes previously issued disclosure
guidance contained within APB Opinions Nos. 10 and 15 as well as SFAS No. 47.
There will be no changes to the Bank's disclosures pursuant to the adoption of
SFAS No. 129. This statement is effective for financial statements for periods
ending after December 15, 1997.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements.
The comprehensive income and related cumulative equity impact of comprehensive
income items will be required to be disclosed prominently as part of the notes
to the financial statements. Only the impact of
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<PAGE>
unrealized gains or losses on securities available for sale is expected to be
disclosed as an additional component of the Bank's income under the requirements
of SFAS No. 130. This statement is effective for fiscal years beginning after
December 15, 1997.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which changes the way public companies
report information about segments of their business on their annual financial
statements and requires them to report selected segment information in their
quarterly reports issued to shareholders. It also requires entity wide
disclosures about the products and services an entity provides, the foreign
countries in which it holds assets and reports revenues, and its major
customers. This statement is effective for fiscal years beginning after December
15, 1997.
BUSINESS OF THE COMPANY
GENERAL
In October 1997, the Board of Trustees of the Bank adopted the Plan of
Reorganization. Under the Plan, the Bank organized the Company. The Bank will be
a wholly-owned subsidiary of the Company, the majority of whose shares will be
held by the Mutual Holding Company. See "Niagara Bancorp, Inc." and
"Regulation -Holding Company Regulation."
The Company is currently not an operating company. Following the
Reorganization, in addition to directing, planning and coordinating the business
activities of the Bank, the Company will initially invest net proceeds it
retains primarily in short and medium-term debt securities and marketable equity
securities. The Company also intends to fund the loan to the ESOP to enable the
ESOP to purchase 8% of the Common Stock sold in the Offering. In the future, the
Company may acquire or organize other operating subsidiaries, including other
financial institutions and financial services companies. See "Use of Proceeds."
Presently, there are no agreements or understandings for an expansion of the
Company's operations. Initially, the Company will neither own nor lease any
property from any third party, but will instead use the premises, equipment and
furniture of the Bank. At the present time, the Company does not intend to
employ any persons other than certain officers of the Bank, who will not be
separately provided cash compensation by the Company. The Company may utilize
support staff of the Bank from time to time, if needed. Additional employees
will be hired as appropriate to the extent the Company expands its business in
the future.
BUSINESS OF THE BANK
GENERAL
The Bank's principal business consists of attracting retail deposits from
the general public in the areas surrounding its branches and investing those
deposits, together with funds generated from operations and borrowings,
primarily in one- to four-family residential mortgage loans, multi-family and
commercial real estate loans, mortgage related securities and various other
investment securities. The Bank also invests in consumer and other loans,
including home equity and second mortgage loans, mobile home loans, student
loans and commercial business loans. The Bank's revenues are derived principally
from the interest on its mortgage, consumer and commercial loans, securities,
loan origination and servicing fees and service charges and fees collected on
its deposit accounts. The Bank's primary sources of funds are deposits, other
borrowings and principal and interest payments on loans and securities.
MANAGEMENT STRATEGY
The Bank was organized in 1870 as a New York-chartered mutual savings bank.
At September 30, 1997, we had total assets of $1.2 billion, total deposits of
$992.2 million, and net worth of $126.7 million. We are a community-and
customer-oriented savings bank that operates fifteen full-service branch offices
in the Western New York counties of Niagara, Orleans, Erie and Genesee, which we
consider to be our primary market area. We also consider the
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<PAGE>
remaining four counties of Western New York, Wyoming, Allegany, Cattaraugus and
Chautauqua counties, as our market area. Through our "Person to Person
Commitment" approach to retail banking, we emphasize personal service and
customer convenience in serving the financial needs of the individuals, families
and businesses residing in Western New York State. We offer the convenience and
product mix of a larger, super regional bank while providing the responsiveness
and community orientation of a smaller, local institution.
Lockport is located on the historic Erie Canal and is 20 miles northeast of
Buffalo and 15 miles east of Niagara Falls. Within the Buffalo Standard
Metropolitan Statistical Area, which includes Erie and Niagara Counties, there
is a population of approximately 1.2 million people. More than 9 million people
reside within the 125-mile radius of the city of Buffalo and the region is the
45th largest metropolitan area in the nation and the 3rd largest in New York
State.
Based on FDIC-published data, as of June 30, 1996 we had the second largest
deposit market share in each of Niagara and Orleans counties, the fifth largest
deposit market share in Genesee county, and the eighth largest deposit market
share in Erie County. In the eight county Western New York region, we had the
fifth largest deposit market share. For 1996, we were the fourth leading
originator of residential mortgage loans in Erie County. Those banks having
larger market shares in Western New York are significantly larger, multi-
regional financial institutions. Management considers the Bank to be the
dominant independent community bank focused exclusively on serving the banking
needs of the Western New York region.
Our business strategy is designed to enhance our profitability and
strengthen our position as the dominant, independent community bank in Western
New York. We offer the convenience and product mix of a larger, super regional
bank while providing the responsiveness and community orientation of a small,
local institution. The highlights of our strategy include the following:
. Expansion of the retail banking franchise. We are continuing to focus on
expanding our retail banking franchise and increasing the number of
households served within our market area. Since 1994 we have opened five
full-service branch offices and our Board has authorized the establishment
of three additional branch offices in 1998. We operate two full-service
supermarket branch offices, provide customer access to ATMs, including the
Bank's fourteen ATMs, without a service charge, provide telephone customer
service, and provide 24-hour telephone account access. We have customer
relationships with over 76,000 households in our primary market area,
representing approximately 16.9 % of all households therein. Our goal is to
increase the number of Bank products used per customer.
. Loan portfolio growth. Our loan portfolio consists of one- to four-family
residential mortgage loans, commercial and multi-family real estate loans,
consumer and other loans, and commercial business loans. At September 30,
1997, our loan portfolio totaled $622.5 million, an increase of $263.0
million, or 73.2%, since December 31, 1992. The loan portfolio represented
52.9% of total assets and 62.7% of total deposits at September 30, 1997,
compared to 43.1% of total assets and 48.2% of deposits at December 31,
1992. We intend to continue to increase our loan portfolio as a percentage
of assets , and to continue our origination of higher margin multi-family,
commercial real estate and consumer loans.
. Maintaining asset quality. Because we believe that asset quality is a
critical component of long-term financial success, we have remained
committed to a conservative credit culture. During the past five years, and
including the nine month period ended September 30, 1997, non-performing
assets have averaged 0.59% of total assets. At September 30, 1997, our non-
performing loans totaled $1.9 million, representing 0.31% of the loan
portfolio, and our non-performing assets totaled $2.2 million, representing
0.19% of assets. Our allowance for loan losses amounted to $6.4 million at
September 30, 1997, and represented 1.02% of our loan portfolio and 330.0%
of non-performing loans.
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. Managing interest rate risk. Although our liabilities are more sensitive to
changes in interest rates than our assets, we seek to manage our exposure
to interest rate risk by originating and retaining adjustable-rate loans in
both the residential and commercial real estate loan portfolios, and by
originating short-term and medium-term fixed-rate consumer loans. We also
use our investment and mortgage related securities portfolios to manage our
interest rate risk exposure. As of September 30, 1997, our securities
available for sale totaled $465.0 million, or 39.5% of total assets, and
had an average life of 4.27 years and our securities held to maturity
totaled $37.5 million, or 3.2% of total assets, and had an average life of
.07 years.
MARKET AREA
The Bank has been, and intends to continue to be, a community-oriented
institution offering a variety of financial services to meet the needs of the
communities it serves. The Bank currently operates fifteen full service banking
offices in Erie, Niagara, Orleans and Genesee Counties, of Western New York, and
has authorized the establishment of three additional branch offices to be
located in Erie County in 1998. The Bank's primary deposit gathering area is
currently concentrated around the areas where its full service banking offices
are located. The Bank's primary lending area has also historically been
concentrated in the same Western New York counties.
Within the Buffalo Standard Metropolitan Statistical Area, which includes
Erie and Niagara Counties, there is a population of approximately 1.2 million
people. Within a five-hundred mile radius of the region lies 62% of the Canadian
and 55% of the United States population. More than 9 million people reside
within the 125-mile radius of the City of Buffalo and the region is the 45th
largest metropolitan area in the nation and the 3rd largest in New York State.
Historically an industrial-based economy, the Buffalo/Niagara region has
experienced significant job losses in the manufacturing sector since the 1970s.
The decline in manufacturing jobs has slowed in recent years, and there has been
significant growth in retail trade, financial services, health services and in
the auto parts manufacturing industry. The United States - Canadian trading
relationship is the largest of its kind in the world, and thirty percent of that
trade is handled by the region's six international bridges.
FUTURE ACQUISITION AND EXPANSION ACTIVITY
Both nationally and in New York, the banking industry is undergoing a
period of consolidation marked by numerous mergers and acquisitions. Although we
do not have a formal program to acquire other banking or thrift institutions, we
may from time to time be presented with opportunities to acquire institutions or
bank branches that could expand and strengthen our market position. If such an
opportunity arises, we may from time to time engage in discussions or
negotiations and we may conduct a business investigation of a target
institution. Acquisitions typically involve the payment of a premium over book
and market values, and therefore, some dilution of the Company's book value and
net income per share may occur in connection with a future acquisition.
LENDING ACTIVITIES
General. Historically, the principal lending activity of the Bank has been
the origination, for retention in its portfolio, of fixed-rate and adjustable-
rate mortgage loans collateralized by one- to four-family residential real
estate located within its primary market area. The Bank also originates multi-
family residential real estate loans, commercial real estate loans and consumer
loans. To a lesser extent the Bank also originates construction, home equity and
commercial business loans.
In an effort to manage interest rate risk, the Bank has sought to make its
interest-earning assets more interest rate sensitive by originating adjustable-
rate loans in both the residential and commercial real estate loan portfolios,
and by originating variable rate, short-term and medium-term fixed-rate consumer
loans. In originating residential fixed-rate loans, the Bank has successfully
marketed to its customers, the attractive shorter-term maturity features of its
various
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bi-weekly mortgage programs where the accelerated principal amortization
schedules of these loans have played a significant role in ameliorating the
traditional interest rate risk that is inherent in a community based Bank's
residential lending portfolio. The Bank currently sells in the secondary market
a limited amount of 20-30 year monthly and 25-30 year bi-weekly residential
mortgage loans, and retains for portfolio all adjustable-rate mortgage loans and
fixed-rate monthly residential mortgage loans with maturities of 15 years or
less, together with all fixed-rate bi-weekly mortgage loans with maturities of
20 years or less. However, the Bank is primarily a portfolio lender and at any
one time the Bank holds only a nominal amount of loans identified as held-for-
sale. The Bank has historically retained the servicing rights on all mortgage
loans it sells and realizes monthly service fee income. The Bank retains in its
portfolio all multi-family residential loans, commercial real estate loans,
commercial business loans, and consumer loans that it originates with the
exception of student loans which, as they enter their repayment phase, are sold
to the Student Loan Marketing Association ("Sallie Mae").
Bi-weekly Lending. We have been extremely successful in marketing our bi-
weekly mortgage/loan product, which we introduced in early 1992 and which has a
significantly shorter repayment schedule than a conventional monthly loan. The
accelerated repayment schedule that accompanies a bi-weekly loan results in
significant savings to the borrower, and allows for a more rapid increase in
home equity. The bi-weekly mortgage reduces interest payments and shortens the
repayment time in two ways. First, a borrower makes the equivalent of an extra
monthly payment per year by paying half the monthly mortgage payment every two
weeks. The borrower makes the equivalent of 13 monthly payments per year instead
of 12. Also, in paying half the payment two weeks in advance, the borrower
reduces the mortgage interest that is paid over the life of the loan. For
example, an 8%, $100,000, 20-year bi-weekly mortgage loan is fully repaid in
16.2 years. An additional benefit is that repayment of the loan is made through
an automatic deduction from the borrower's savings or checking account, which
enables us to avoid the cost of processing payments. As of September 30, 1997,
$165.7 million or 42.9% of the Bank's residential loan portfolio was comprised
of bi-weekly loans.
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Loan Portfolio Composition. Set forth below is selected information
concerning the composition of the Bank's loan portfolio in dollar amounts and in
percentages (before deductions for deferred fees and costs, unearned discounts
and allowances for losses) as of the dates indicated.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, AT DECEMBER 31,
----------------------- ---------------------------------------------------------------------------
1997 1996 1995 1994
----------------------- ----------------------- ----------------------- ------------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
----------- ---------- ---------- ---------- ---------- ---------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One-to four-family ........ $ 386,494 61.79% $ 360,573 59.85% $ 319,340 59.31% $ 277,010 58.12%
Home equity................ 13,047 2.09 11,337 1.88 10,234 1.90 10,729 2.25
Multi-family............... 72,843 11.64 71,397 11.85 71,489 13.28 66,972 14.05
Commercial real estate..... 69,571 11.12 68,601 11.38 62,005 11.52 55,946 11.74
Construction (1)........... 13,964 2.23 12,493 2.07 7,891 1.47 3,454 0.72
--------- -------- --------- -------- --------- ------- --------- --------
Total real estate loans.. 555,919 88.87 524,401 87.03 470,959 87.48 414,111 86.88
--------- -------- --------- -------- --------- ------- --------- --------
Consumer and Other Loans:....
Mobile home................ 22,675 3.63 21,406 3.55 20,630 3.83 20,662 4.33
Vehicle.................... 7,326 1.17 18,747 3.11 12,591 2.34 9,391 1.97
Personal................... 14,776 2.37 13,596 2.26 11,485 2.13 10,213 2.14
Home improvement........... 7,725 1.23 6,879 1.14 7,046 1.31 6,517 1.37
Other consumer............. 1,964 0.31 1,937 0.32 1,698 0.32 1,841 0.39
Guaranteed student......... 10,907 1.74 10,702 1.78 9,874 1.83 9,951 2.09
--------- -------- --------- -------- --------- ------- --------- --------
Total consumer and
other loans.......... 65,373 10.45 73,267 12.16 63,324 11.76 58,575 12.29
Commercial business loans.... 4,275 0.68 4,895 0.81 4,085 0.76 3,948 0.83
--------- -------- --------- -------- --------- ------- --------- --------
Total loans.............. 625,567 100.00% 602,563 100.00% 538,368 100.00% 476,634 100.00%
--------- ======== --------- ======== --------- ======= --------- ========
Net deferred costs......... 3,376 2,809 2,349 1,749
Unearned discounts......... (103) (347) (39) --
Allowance for losses....... (6,353) (6,539) (4,707) (4,192)
--------- --------- --------- ---------
Loans, net................. $ 622,487 $ 598,486 $ 535,971 $ 474,191
========= ========= ========= =========
<CAPTION>
AT DECEMBER 31,
------------------------------------------------
1993 1992
----------------------- ----------------------
Amount Percent Amount Percent
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Real Estate Loans:
One-to four-family ........ $ 248,324 58.66% $ 202,230 56.02%
Home equity................ 10,832 2.56 11,902 3.30
Multi-family............... 59,943 14.16 62,909 17.43
Commercial real estate..... 42,326 10.00 30,825 8.54
Construction (1)........... 6,910 1.63 3,740 1.04
--------- -------- --------- -------
Total real estate loans.. 368,335 87.01 311,606 86.33
--------- -------- --------- -------
Consumer and Other Loans:....
Mobile home................ 19,785 4.68 15,992 4.43
Vehicle.................... 7,275 1.72 7,992 2.21
Personal................... 8,402 1.98 7,450 2.06
Home improvement........... 6,028 1.42 5,822 1.61
Other consumer............. 2,059 0.49 2,163 0.60
Guaranteed student......... 8,123 1.92 6,517 1.81
--------- -------- --------- -------
Total consumer and
other loans.......... 51,672 12.21 45,936 12.72
Commercial business loans.... 3,321 0.78 3,432 0.95
--------- -------- --------- -------
Total loans.............. 423,328 100.00% 360,974 100.00%
--------- ======== --------- =======
Net deferred costs......... 1,763 1,157
Unearned discounts......... -- --
Allowance for losses....... (4,030) (2,689)
--------- ---------
Loans, net................. $ 421,061 $ 359,442
========= =========
</TABLE>
____________________
(1) Includes loans for the construction of one-to-four family residential,
multi-family and commercial real estate properties. At September 30, 1997,
construction loans included $4,046,000 of one-to-four family loans and
$9,918,000 of commercial real estate and multi-family loans.
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Loan Maturity and Repricing Schedule. The following table sets forth
certain information as of September 30, 1997, regarding the amount of loans
maturing or repricing in the Bank's portfolio. Demand loans having no stated
schedule of repayment and no stated maturity, and overdrafts are reported as due
in one year or less. Adjustable- and floating-rate loans are included in the
period in which interest rates are next scheduled to adjust rather than the
period in which they contractually mature, and fixed-rate loans are included in
the period in which the final contractual repayment is due.
<TABLE>
<CAPTION>
ONE THREE FIVE TEN
WITHIN THROUGH THROUGH THROUGH THROUGH BEYOND
ONE THREE FIVE TEN TWENTY TWENTY
YEAR YEARS YEARS YEARS YEARS YEARS TOTAL
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family.................... $ 88,513 $ 13,436 $ 6,309 $ 23,558 $ 185,517 $ 69,161 $ 386,494
Home equity............................ 8,815 146 648 1,987 1,451 -- 13,047
Multi-family........................... 26,785 23,184 21,583 732 559 -- 72,843
Commercial............................. 21,045 25,817 15,668 4,453 2,588 -- 69,571
Construction........................... 10,402 167 - 1,743 430 1,222 13,964
--------- --------- --------- --------- --------- --------- ---------
Total real estate loans............. 155,560 62,750 44,208 32,473 190,545 70,383 555,919
--------- --------- --------- --------- --------- --------- ---------
Consumer and other loans.................. 17,407 8,732 9,931 11,323 17,584 396 65,373
Commercial business loans................. 2,949 323 340 545 -- 118 4,275
--------- --------- --------- --------- --------- --------- ---------
Total loans......................... $ 175,916 $ 71,805 $ 54,479 $ 44,341 $ 208,129 $ 70,897 $ 625,567
========= ========= ========= ========= ========= ========= =========
</TABLE>
Fixed- and Adjustable-Rate Loan Schedule. The following table sets forth at
September 30, 1997, the dollar amount of all fixed-rate and adjustable-rate
loans due after September 30, 1998. Adjustable- and floating-rate loans are
included based on contractual maturities.
<TABLE>
<CAPTION>
DUE AFTER SEPTEMBER 30, 1998
------------------------------------------------------
FIXED ADJUSTABLE TOTAL
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Real Estate Loans:
One- to four-family............................. $ 284,306 $ 13,675 $ 297,981
Home equity..................................... 4,232 -- 4,232
Multi-family.................................... 13,823 32,235 46,058
Commercial...................................... 11,080 37,446 48,526
Construction.................................... 3,395 167 3,562
------------ ------------ ------------
Total real estate loans.................... 316,836 83,523 400,359
------------ ------------ ------------
Consumer and other loans ............................. 47,966 -- 47,966
Commercial business loans............................. 1,326 -- 1,326
------------ ------------ ------------
Total loans................................ $ 366,128 $ 83,523 $ 449,651
============ ============ ============
</TABLE>
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<PAGE>
One- to Four-Family Real Estate Lending. The Bank's primary lending
activity has been the origination, for retention in the Bank's portfolio, of
mortgage loans to enable borrowers to purchase one- to four-family, owner-
occupied properties located in our primary market area. We offer conforming and
non-conforming, fixed-rate and adjustable-rate, residential mortgage loans with
maturities up to 30 years and maximum loan amounts generally up to $500,000. The
Bank's residential mortgage loan originations are generally obtained from our
loan representatives operating in our branch offices through their contacts with
local realtors, existing or past loan customers, depositors of the Bank, and
referrals from attorneys, accountants and independent mortgage brokers who refer
loan applications from the general public.
We currently offer both fixed and adjustable rate conventional and
government guaranteed (Federal Housing Administration ("FHA"), Veterans
Administration ("VA"), Farmers Home Assistance ("FMHA")) mortgage loans with
terms of 10-30 years that are fully amortizing with monthly or bi-weekly loan
payments. One- to four-family residential loans are generally underwritten
according to the Federal National Mortgage Association ("FNMA"), and Freddie Mac
uniform guidelines. The Bank generally originates both fixed-rate and
adjustable-rate loans in amounts up to the maximum conforming loan limits as
established by FNMA and Freddie Mac secondary market standards, currently
$214,600 for one-family homes up to a maximum of $412,450 for four-family homes.
Private mortgage insurance ("PMI") is required for loans with loan-to-value
ratios in excess of 80%. Loans in excess of conforming loan limits, in amounts
up to $500,000, are also underwritten to both FNMA and Freddie Mac secondary
market standards, and are eligible for sale to various conduit firms that
specialize in the purchase of such non-conforming loans.
Fixed-rate mortgage loans originated by the Bank include due-on-sale
clauses which provide the Bank with the contractual right to deem our loan
immediately due and payable in the event the borrower transfers ownership of the
property without the Bank's consent. Due-on-sale clauses are an important means
of adjusting the yields on our Bank's fixed-rate portfolio, and we generally
exercise our rights under these clauses.
The Bank generally sells its newly originated conventional, conforming 20-
30 year monthly fixed, and 25-30 year bi-weekly, loans in the secondary market
to government sponsored enterprises such as FNMA and Freddie Mac, and its non-
conforming, fixed-rate mortgage loans to private sector secondary market
purchasers. To reinforce its commitment to customer service and also to generate
fee income, as a matter of policy we retain the servicing rights on all such
loans sold. For the nine months ended September 30, 1997 and for the year ended
December 31, 1996, the Bank sold mortgage loans totaling $23.2 million and $26.1
million, respectively. As of September 30, 1997, our portfolio of fixed-rate
loans serviced for others totaled $139.8 million. We intend to continue to sell
into the secondary market our newly originated, 25-30 year fixed-rate mortgage
loans to assist in our asset/liability management.
In an effort to provide financing for low and moderate income buyers, we
actively participates in residential mortgage programs and products sponsored by
FNMA, Freddie Mac, and the State of New York Mortgage Agency ("SONYMA"). The
SONYMA mortgage programs provide low and moderate income households with fixed-
rate loans which are generally set below prevailing fixed-rate mortgage loans
and which allow below-market down payments. These loans are sold by the Bank to
SONYMA, with the Bank retaining the contractual servicing rights.
We currently offer several one- to four-family, adjustable-rate mortgage
loan ("ARM") products secured by residential properties with rates that adjust
every one, three, or seven years. The one- to four-family ARMs are offered with
terms of up to 30 years. After origination, the interest rate on one- to four-
family ARMs currently offered is reset based upon a contractual spread or margin
above the average yield on United States Treasury Securities, adjusted to a
Constant Maturity (the "U.S. Treasury Constant Maturity Index"), as published
weekly by the Federal Reserve Board. The appropriate index utilized at each
interest rate change date corresponds to the initial one, three, or seven year
adjustment period of the loan.
ARMs are generally subject to limitations on interest rate increases of 2%
per adjustment period, and an aggregate adjustment of 6% over the life of the
loan. The ARMs require that any payment adjustment resulting from a change in
the interest rate be sufficient to result in full amortization of the loan by
the end of the loan term, and thus,
53
<PAGE>
do not permit any of the increased payment to be added to the principal amount
of the loan, commonly referred to as negative amortization.
The retention of ARMs, as opposed to longer term, fixed-rate residential
mortgage loans, in the Bank's portfolio helps reduce our exposure to interest
rate risk. However, ARMs generally pose credit risks different from the credit
risks inherent in fixed-rate loans primarily because as interest rates rise, the
underlying debt service payments of the borrowers rise, thereby increasing the
potential for default. In order to minimize this risk, borrowers of one- to
family one year adjustable-rate loans are qualified at the rate which would be
four-in effect after the first interest rate adjustment, if that rate is higher
than the initial rate. We believe that these risks, which have not had a
material adverse effect on the Bank to date, generally are less onerous than the
interest rate risks associated with holding 25-30 year fixed-rate loans. Certain
of the Bank's conforming ARMs can be converted at a later date to a fixed-rate
mortgage loan with interest rates based upon the then-current market rates plus
a predetermined margin or spread that was established at the loan closing. The
Bank sells ARM loans which are converted to 25-30 year fixed-rate term loans, to
either FNMA or Freddie Mac.
While one- to four-family residential loans typically are originated with
20-30 year terms, the Bank permits its ARM loans to be assumed throughout the
life of the loan by qualified buyers. Such loans generally remain outstanding in
our loan portfolio for substantially shorter periods of time because borrowers
often prepay their loans in full upon sale of the property pledged as security
or upon refinancing the loan. Thus, average loan maturity is a function of,
among other factors, the level of purchase and sale activity in the Western New
York real estate market, prevailing interest rates, and the interest rates
payable on outstanding loans. As of September 30, 1997, over 97%, of our total
residential real estate loan portfolio was secured by properties that are
located within the eight county area that comprises Western New York State.
We require title insurance on all of our one- to four- family mortgage
loans, and also require that fire and extended coverage casualty insurance (and,
if appropriate, flood insurance) be maintained in an amount at least equal to
the lesser of the loan balance or the replacement cost of the improvements.
Loans with loan-to-value ratios in excess of 80% must have a mortgage escrow
account from which disbursements are made for real estate taxes, hazard and
flood insurance, and PMI.
We also originate two types of residential constructions loans: (i)
construction/spec loans, and (ii) construction/permanent loans. Annual
originations of residential construction loans have averaged $4.7 million over
the past five years. At September 30, 1997, our residential construction loan
portfolio consisted of 16 construction/spec loans with an aggregate outstanding
balance of $2.0 million and 31 construction/permanent loans with an aggregate
outstanding balance of $3.8 million.
Construction/spec loans are made to area home builders who do not have, at
the time of loan origination, a signed contract with a home buyer who has a
commitment for permanent financing with either the Bank or another lender for a
finished home. The home buyer may be identified either during or after the
construction period, with the risk that the builder will have to carry the debt
service payments and finance real estate taxes and other holding costs of the
completed home for a significant time after the completion of construction and
until the home buyer is identified. We lend on an ongoing basis to approximately
ten local area residential home builders who, at any given time, may have one or
two construction/spec loans outstanding from the Bank. All construction/spec
loans carry the full personal guaranty of the builder, who must have a previous
satisfactory history of completing construction/permanent loans with the Bank.
These loans are generally originated for a term of twelve months, with interest
rates ranging from 1.0% to 1.5% above the prime lending rate, and with a
loan-to-value ratio of no more than 75% of the lower of cost or the appraised
estimated value of the completed property. Loan advances are disbursed on a
three-draw basis as construction is completed. At September 30, 1997, the
largest outstanding concentration of credit to one builder consisted of 2
construction/spec loans with an aggregate balance of $421,200, which were
performing in accordance with their terms.
54
<PAGE>
Construction/permanent loans are also made to either a home builder or a
home owner who, at the time of construction, has a signed contract together with
a commitment for permanent financing from the Bank for the finished home. The
construction phase of a loan generally lasts 4-6 months, and the interest rate
charged generally corresponds to the rate of the committed permanent loan, with
loan-to-value ratios of up to 80% (or up to 90% with PMI) of the appraised
estimated value of the completed property or cost, whichever is less. When we
issue the corresponding commitment to provide permanent financing upon
completion of construction, the interest rate charged on the construction loan
generally includes an additional 1/8% to 1/4% rate premium as protection against
the construction loan risk and the additional rate exposure to the Bank of an
increase in interest rates before the permanent loan is funded and eligible for
sale to either FNMA or Freddie Mac. At September 30, 1997, the largest single
outstanding construction loan of this type had an outstanding balance of
$560,000 and was performing in accordance with its terms.
Construction lending generally involves a greater degree of risk than other
one- to four-family mortgage lending. The repayment of the construction loan is,
to a great degree, dependent upon the successful and timely completion of the
construction of the subject property. Construction delays or the financial
impairment of the builder may further impair the borrower's ability to repay the
loan.
In order to facilitate a competitive relationship with several of the
Bank's major residential builders, we will, on an exception basis, originate
land development loans to area home builders that are secured by individual
unimproved or improved residential building lots. Land loans are generally
offered with variable prime based rates with terms of up to two years. The
maximum loan-to-value ratio is 65% of the lower of cost or appraised value.
Home Equity Lending. We offer both fixed-rate, fixed-term, home equity and
second mortgage loans, and prime rate, variable rate home equity lines of credit
(HELOCs) in its market area. Both fixed rate and floating rate home equity loans
are offered in amounts up to 80% of the appraised value of the property
(including the first mortgage) with a maximum loan amount of $100,000. Fixed-
rate home equity loans are offered with repayment terms of up to fifteen years
and HELOCs are offered for terms up to thirty years, with interest-only payments
during the first ten years and repayment of principal and interest during the
final twenty years. As of September 30, 1997, fixed-rate second mortgage and
home equity loans totaled $4.2 million or 0.7% of the Bank's total loan
portfolio. The disbursed portion of home equity lines of credit totaled $8.8
million or 1.4% of the Bank's loan portfolio, with $6.3 million remaining
undisbursed.
As is the case with residential one- to four-family first mortgage lending,
the underwriting standards employed by the Bank for both fixed-rate second
mortgage loans and HELOCs are formatted to the standard secondary marketing
guidelines as established by FNMA and Freddie Mac.
Commercial Real Estate and Multi-family Lending. We originate real estate
loans secured predominantly by first liens on apartment houses, office
complexes, and commercial and industrial real estate. Loans collateralized by
commercial real estate totaled $69.6 million, or 11.1% of our total loan
portfolio as of September 30, 1997. Loans collateralized by multi-family
residential real estate totaled $72.8 million, or 11.6%, of the total loan
portfolio as of September 30, 1997, and consisted of 207 loans outstanding with
an average loan balance of $351,898. Our largest multi-family real estate loan
relationship at September 30, 1997 had a principal balance of $2.2 million, and
was performing in accordance with its terms. The commercial real estate loans
are predominately secured by nonresidential properties such as office buildings,
shopping centers, retail strip centers, industrial and warehouse properties and
to a lesser extent by more specialized properties such as churches, mobile home
parks, restaurants, motel/hotels and auto dealerships. At September 30, 1997, we
had 196 non-multi-family commercial real estate loans outstanding with an
average loan balance of approximately $354,954. Our largest commercial real
estate loan at September 30, 1997 had a principal balance of $4.1 million and
was collateralized by an office building located in our primary lending area.
This loan is performing in accordance with its terms.
At September 30, 1997, approximately 74% of our commercial real estate and
multi-family loans were secured by properties located in our primary market
area. Our current policy with regard to such loans is to emphasize geographic
distribution within our primary market area, diversification of property type
and minimization of credit risk.
55
<PAGE>
As part of our ongoing strategic initiatives to minimize interest rate
risk, commercial and multi-family real estate loans originated for the Bank's
portfolio are generally limited to one, three or five year ARM products which
are priced at prevailing market interest rates. The initial interest rates are
subsequently reset after completion of the initial one, three or five year
adjustment period at new market rates that generally range between 200 and 300
basis points over the then current one, three or five year United States
Treasury Constant Maturity Index. The maximum term for commercial real estate
loans is generally not more than 10 years, with a prepayment schedule based on
not more than a 25 year amortization schedule for multi-family loans, and 20
years for commercial real estate loans.
In our underwriting of commercial real estate loans, we may lend up to 80%
of the property's appraised value on apartments, and up to 75% on other
commercial properties. Appraised values initially are estimated by staff
underwriters and confirmed by independent, professionally designated qualified
appraisers, to determine that the property to be mortgaged satisfies the Bank's
loan-to-value requirements. Decisions to lend are based on the economic
viability of the property and the creditworthiness of the borrower.
Creditworthiness is determined by considering the character, experience,
management and financial strength of the borrower, and the ability of the
property to generate adequate funds to cover both operating expenses and debt
service. In evaluating a commercial real estate loan, we place primary emphasis
on the ratio of net cash flow to debt service for the property, generally
requiring a ratio of at least 1.20%, computed after deduction for a vacancy
factor and property expenses deemed appropriate by the Bank. In addition, we
generally require a personal guarantee of the loan principal from the borrower.
On all real estate loans, we require title insurance insuring the priority
of its lien, fire and extended coverage casualty insurance, and flood insurance,
if appropriate, in order to protect its security. In connection with
substantially all commercial real estate lending, in addition to staff review,
we employ independent engineering firms to review plans, specifications and draw
disbursements, employs consulting firms to review the economic feasibility of
the project, and employs environmental assessment firms to evaluate the
environmental risks that may be associated with either the building or the site.
We also offer commercial real estate and multi-family construction mortgage
loans. Most construction loans are made as "construction/permanent" loans, which
provide for disbursement of loan funds during construction and automatic
conversion to permanent loans upon completion of construction and the attainment
of either tenant lease-up provisions or prescribed debt service coverage ratios.
The construction phase of the loan is made on a short-term basis, usually not
exceeding two years, with floating interest rate levels generally established at
a spread in excess of the prime rate. The construction loan application process
includes the same criteria which are required for permanent commercial mortgage
loans, as well as a submission to the Bank of completed plans, specifications
and cost estimates related to the proposed construction. These items are used as
an additional basis to determine the appraised value of the subject property.
Appraisal reports are completed by independent, professionally designated
appraisers. All appraisal reports are reviewed by our commercial loan
underwriting staff. Loans are based on the lesser of the current appraised value
of loan and improvements or the cost of construction. Generally, the loan-to-
value ratio for construction loans does not exceed 75%. At September 30, 1997,
$13.8 million was committed for commercial real estate and multi-family
construction loans, of which $3.4 million was outstanding.
Among the reasons for our continued emphasis on commercial real estate and
multi-family lending is a desire to invest in assets bearing interest rates
which are generally higher than those obtainable on residential mortgage loans
and which are more rate sensitive to changes in market interest rates.
Commercial real estate and multi-family loans, however, entail significant
additional risk as compared with one- to four-family residential mortgage
lending, as they typically involve large loan balances concentrated with single
borrowers 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. Construction loans involve additional risks attributable to
the fact that loan funds are advanced upon the security of the project under
construction, which is of uncertain value prior to the completion of
construction. Moreover, because of the uncertainties inherent in estimating
construction costs, delays
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<PAGE>
arising from labor problems, material shortages, and other unpredictable
contingencies, it is relatively difficult to evaluate accurately the total loan
funds required to complete a project and the related loan-to-value ratios.
Consumer and Other Loans. We originate a variety of consumer and other
loans, including home improvement loans, new and used automobile loans, mobile
home loans, student loans, boat and RV loans, personal unsecured loans,
including both fixed-rate installment loans and prime floating variable rate
lines-of-credit, and savings account "passbook" loans. As of September 30, 1997,
consumer loans totaled $65.4 million, or 10.5% of the total loan portfolio.
At September 30, 1997, the largest group of consumer loans consisted of
$22.7 million of loans secured by mobile homes owned by individuals,
representing 34.7% of the consumer loan portfolio. We have been engaged in
mobile home lending for over eight years. While we generally lend throughout the
State of New York with respect to mobile homes, the majority of the portfolio,
$12.0 million, or 54%, is located within the Bank's primary market area. The
mobile home units (both new and used) are primarily located in well-managed
mobile home parks reviewed and inspected by our management team as part of its
ongoing underwriting process. Mobile home loans have shorter terms to maturity
than traditional 30-year residential loans and higher yields than single-family
residential mortgage loans. Although we generally offer mobile home loans with
fixed-rate, fully amortizing loan terms for 10-20 years, mobile home units
manufactured prior to 1991 are restricted to a maximum term of no more than
fifteen years. We anticipate that it will continue to be an active originator of
mobile home loans.
We will generally finance up to 90% of the purchase price of a new mobile
home unit, not to exceed 140% of the dealer invoice. We also require a UCC-1
filing perfecting the Bank's lien for all mobile home loans, and requires
homeowner's insurance at least equal to the amount financed. We have contracted
with an independent third-party to generate all mobile home loan applications
but, prior to funding, all mobile home loan originations must be underwritten
and approved by designated Bank underwriters. As part of a negotiated servicing
contract, the third party originator will at the request of the Bank, contact
borrowers who become delinquent in their payments to the Bank and, when
necessary, will oversee the repossession and sale of mobile homes on our behalf.
For such services, and as part of the origination and servicing contract, we pay
the originator a fee at loan funding, of which generally one-half is deposited
into a non-interest bearing escrow loss account, and is under the sole control
of the Bank to absorb future losses which may be incurred on the loans.
Mobile home lending generally entails greater risk than traditional single-
family residential mortgage lending, due to the type and nature of the
collateral, which may depreciate over time as compared to the typical
appreciation of houses securing single-family residential loans, and because
mobile home borrowers often have lower income levels than single-family
residential mortgage loan borrowers. In many cases, repossessed collateral for a
defaulted mobile home loan will not provide an adequate source of repayment of
the outstanding loan balance because of depreciation or improper repair and
maintenance of the underlying security. The Bank attempts to minimize such risk
through the loss escrow arrangement with the third-party originator.
The next largest group of loans in the consumer loan portfolio are $14.8
million of personal loans, $9.3 million of which are secured and unsecured
installment loans, and $5.5 million of which are prime based variable rate
lines-of-credit. Unsecured installment loans generally have shorter terms than
secured consumer loans and generally have higher interest rates than rates
charged on secured installment loans with comparable terms.
The next largest group of consumer loans are home improvement loans, the
total of which amounted to $7.7 million at September 30, 1997. We offer fully
amortizing, fixed-rate property improvement loans for terms of up to 15 years
and with loan-to-value ratios of up to 80% (or 100% as to FHA loans) when taking
into account any outstanding first mortgage loan balance. For property
improvement loans in excess of $7,500, the Bank generally obtains a second lien
position as additional collateral security.
The next largest group of consumer loans are loans secured by new or used
automobiles which, as of September 30, 1997, totaled $7.3 million. We originate
automobile loans directly to our customers and we have no outstanding
57
<PAGE>
agreement with automobile dealerships to generate indirect loans. The maximum
term for an automobile loan is generally 60 months for a new car, and 36-48
months for a used car. We will generally lend up to 90% of the purchase price of
a new car, and, with respect to used cars, up to 90% of the lesser of the
purchase price or the National Automobile Dealers' Association book rate. We
require all borrowers to maintain collision insurance on automobiles securing
loans in excess of $5,000, with the Bank listed as loss payee. In those
instances where the borrower fails to maintain adequate insurance coverage, the
Bank is further protected against loss by vendors single interest insurance
coverage.
We have been, and continue to be, an active originator of student loans. As
of September 30, 1997, the Bank had $10.9 million of variable-rate student loans
in its portfolio. Substantially all of the loans are originated under the
auspices of the New York State Higher Education Services Corporation
("NYSHESC"). Under the terms of these loans, no repayment is due until the
student graduates, with 98% of the principal guaranteed by NYSHESC. Our general
practice is to sell these student loans to the Student Loan Marketing
Association ("Sallie Mae") as the loans reach repayment status. The Bank
generally receives a premium of .25% to 1% on the sale of these loans.
Our procedures for underwriting consumer loans include an assessment of the
applicant's payment history on other debts and the ability to meet existing
obligations and payments on the proposed loans. Although the applicant's
creditworthiness is a primary consideration, the underwriting process also
includes a comparison of the value of the collateral security, if any, to the
proposed loan amount.
Consumer loans generally entail greater risk than residential mortgage
loans, particularly in the case of consumer loans that are unsecured or secured
by assets that tend to depreciate, such as automobiles, boats, recreational
vehicles and mobile homes. In such cases, repossessed collateral for a defaulted
consumer loan may not provide an adequate source of repayment for the
outstanding loan and the remaining deficiency often does not warrant further
substantial collection efforts against the borrower. In addition, consumer loan
collections are dependent on the borrower's continued financial stability, and
this is more likely to be adversely affected by job loss, divorce, illness or
personal bankruptcy. Furthermore, the application of various Federal and State
laws including Federal and State bankruptcies and insolvency laws may limit the
amount which can be recovered on such loans. We add a general provision on a
regular basis to its consumer loan loss allowance, based on general economic
conditions and prior loss experience.
Commercial Business Loans. We currently offer commercial business loans to
existing customers in our market area, some of which are secured in part by
additional real estate collateral. In an effort to expand our customer account
relationships and develop a broader base of more interest rate sensitive assets,
we make various types of secured and unsecured commercial loans for the purpose
of financing equipment acquisition, expansion, working capital and other general
business purposes. The terms of these loans generally range from less than one
year to seven years. The loans are either negotiated on a fixed-rate basis or
carry variable interest rates indexed to the prime rate. At September 30, 1997,
we had 83 commercial business loans outstanding with an aggregate balance of
$4.3 million, or .68%, of the total loan portfolio. As of September 30, 1997,
the average commercial business loan balance was approximately $51,506. The
largest commercial business loan had a principal balance of $300,000 and is
performing in accordance with its terms.
Commercial credit decisions are based upon a complete credit appraisal of
the loan applicant. A determination is made as to the applicant's ability to
repay in accordance with the proposed terms as well as an overall assessment of
the risks involved. An investigation is made of the applicant to determine
character and capacity to manage. Personal guarantees of the principals are
generally required. In addition to an evaluation of the loan applicant's
financial statements, a determination is made of the probable adequacy of the
primary and secondary sources of repayment to be relied upon in the transaction.
Credit agency reports of the applicant's credit history as well as bank checks
and trade investigations supplement the analysis of the applicant's
creditworthiness. Collateral supporting a secured transaction is also analyzed
to determine its marketability and liquidity. Commercial business loans
generally bear higher interest
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<PAGE>
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.
Loan Originations, Purchases, Sales and Servicing. While we originate both
fixed-rate and adjustable-rate loans, our ability to generate each type of loan
depends upon relative borrower demand and the pricing levels as set in the local
marketplace by competing banks, thrifts, credit unions, and mortgage banking
companies, as well as life insurance companies, and Wall Street conduits who
also actively compete for local product in the commercial real estate loan area.
Loan originations are derived from a number of sources, such as real estate
broker referrals, existing customers, borrowers, builders, attorneys, and walk-
in customers. In addition, the residential lending area currently employs seven
loan originators to augment our traditional sources of loan applications. All of
our loan originators are on a base salary plus commission. We also rely on a
small number of select area mortgage brokers, who are authorized to accept and
process residential mortgage loan applications on our behalf. All completed loan
applications are forwarded to our centralized residential loan origination area
for underwriting, approval, commitment, and closing.
In the past, to augment our direct origination of loans in our primary
lending area, we have purchased one- to four-family residential whole loans and
commercial real estate whole loans and participations which are originated and
serviced by other financial institutions. As of September 30, 1997, the Bank's
combined commercial real estate, multi-family and residential portfolio of loans
serviced by other financial institutions consisted of 230 loans with an
aggregate outstanding balance of $7.6 million. Although we have not actively
purchased residential loans since 1986, we may from time to time purchase loans
from the secondary market to supplement our origination of local mortgage loans,
particularly in the residential loan area.
We generally sell the conforming, residential conventional monthly fixed-
rate loans that it originates with maturities of 20 years or more, and
conventional bi-weekly fixed-rate loans with maturities of 25 years or more to
both FNMA and Freddie Mac as part of its ongoing asset/liability management
strategy. Non-conforming fixed-rate loans with principal balances in excess of
the maximum limits as established annually by FNMA and Freddie Mac, currently
$214,600 for single-family homes, are sold to private sector secondary market
purchasers. In addition to removing a level of interest rate risk from the
balance sheet, the operation of a secondary marketing function within the
lending area allows us the flexibility to continue to make loans available to
customers when savings flows decline or funds are not otherwise available for
lending purposes. However, we assume an increased level of risk if such loans
cannot be sold in a timely basis in a rapidly rising interest rate environment.
Changes in the level of interest rates and the condition of the local and
national economies also affect the amount of loans originated by the Bank and
impact the level of buying demand by investors to whom the loans are sold.
Generally, our loan origination and sale activity, and therefore, our
results of operations, may be adversely affected by an increasing rate
environment to the extent that such environment results in a decreased level of
loan demand by borrowers. Accordingly, the volume of loan originations and the
profitability of this activity can vary from period to period. One- to four-
family residential mortgage loans are generally underwritten to current FNMA and
Freddie Mac seller/servicer guidelines. One- to four-family loans are also
closed on standard FNMA/Freddie Mac documents and sales are conducted utilizing
standard FNMA/Freddie Mac purchase contracts and master commitments as
applicable. Mortgage loans are sold both to FNMA and Freddie Mac on a non-
recourse basis whereby foreclosure losses are generally the responsibility of
either FNMA or Freddie Mac and not the Bank.
We are qualified loan servicer for both FNMA and Freddie Mac. For all loans
sold, we will retain the servicing rights and will continue to collect payments
on the loans, maintain tax escrows and applicable fire and flood insurance
coverage, and to supervise foreclosure proceedings if necessary. We retain a
portion of the interest paid by the borrower on the loans, generally 1/4% - 3/8%
as consideration for its servicing activities.
The following table sets forth the loan origination, purchase and repayment
activities of the Bank for the periods indicated.
59
<PAGE>
<TABLE>
<CAPTION>
Nine Months
ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31,
-------------------- ----------------------------------------
1997 1996 1996 1995 1994
------ ------ --------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Originations by Type:
- --------------------
Real estate:
One- to four-family............................... $ 77,381 $ 82,951 $ 110,894 $ 107,618 $ 84,096
Home equity....................................... 2,334 1,070 1,357 852 404
Commercial and multi-family....................... 18,012 17,570 27,168 24,880 27,462
Consumer and other................................... 20,323 23,784 31,688 25,053 26,507
Commercial business.................................. 3,991 4,693 5,972 2,767 2,684
---------- ---------- ------------ ----------- -----------
Total loans originated......................... 122,041 130,068 177,079 161,170 141,153
---------- ---------- ------------ ----------- -----------
Sales:
- -----
Real estate:
One- to four- family.............................. 23,191 19,290 26,148 30,141 19,527
Consumer and other................................... 4,126 3,871 4,749 4,948 3,679
---------- ---------- ------------ ----------- -----------
Total loans sold............................... 27,317 23,161 30,897 35,089 23,206
---------- ---------- ------------ ----------- -----------
Repayments:
- ----------
Real estate:
One- to four-family............................... 29,755 32,920 42,323 32,959 36,911
Home equity....................................... 624 400 254 1,347 507
Commercial and multi-family....................... 12,225 14,619 17,066 11,716 8,558
Consumer and other................................... 25,247(1) 12,295 16,247 15,141 15,783
Commercial business.................................. 4,058 3,526 5,169 2,630 2,057
---------- ---------- ------------ ----------- -----------
Total repayments............................... 71,909 63,760 81,059 63,793 63,816
---------- ---------- ------------ ----------- -----------
Total reductions............................... 99,226 86,921 111,956 98,882 87,022
Increase (decrease) in other items, net (2).............. 1,000 (420) (776) 7 (839)
---------- ---------- ------------ ----------- -----------
Net increase................................... $ 23,815 $ 42,727 $ 64,347 $ 62,295 $ 53,292
========== ========== ============ =========== ===========
</TABLE>
________________________________
(1) Includes the early repayment of loans secured by pledges and assignments of
automobile leases.
(2) Other items include charge-offs, deferred fees and expenses, and discounts
and premiums.
60
<PAGE>
Loan Approval Authority and Underwriting. The Board establishes
lending authorities for individual officers and certain delegated underwriters
as to the various types of residential and consumer loan products. In the
commercial real estate and business lending area, the Board has authorized
specific lending officers to individually approve loans and/or concentrations of
credit not to exceed $250,000. Loans in excess of $250,000, up to $750,000, may
be approved by the President or Chief Lending Officer plus one additional
authorized lending officer. Loan approvals in excess of $750,000, and up to $2.0
million, require the approval of both the President and the Chief Lending
Officer, plus one additional authorized lending officer. All individual loans
and or aggregate concentrations of credit to one borrower which exceed $2.0
million must be approved by the Loan Committee of the Board. In addition, our
loan policy limits the amount of credit that can be extended to any one borrower
to 10% of total capital. See "Loans-to-One Borrower".
The lending activities of the residential, consumer, commercial and
multi-family real estate, and commercial business lending areas of the Bank are
subject to written underwriting standards and loan origination procedures that
are updated and separately reviewed annually by both management and the Bank's
Board of Trustees. In particular, to assure the maximum salability of our
residential loan products for possible resale into the secondary mortgage
markets, we have formally adopted both the underwriting, appraisal, and
servicing guidelines of FNMA and Freddie Mac as part of our standard loan policy
and procedures manual.
We require that a property appraisal be obtained in connection with
all mortgage loans. Property appraisals in both the residential and commercial
and multi-family real estate areas are performed by an independent appraiser
from a list approved by the Bank's Board of Trustees. The appraisals are then
reviewed for accuracy and completeness by the appropriate loan underwriting
areas of the Bank. In conformity with secondary market guidelines, the Bank
requires that title insurance (except for home equity lines of credit) and
hazard insurance be maintained on all security properties and that flood
insurance be maintained if the property is within a designated flood plain.
We currently maintain escrows for the payment of real estate taxes on
approximately 70% of all mortgage loans currently held in portfolio. If an
escrow waiver is granted, the borrower must pay a one-time fee at loan closing
for the property to be enrolled in a tax service which reports the tax payment
status of these loans on an annual basis to the Bank for the life of the loan.
Loan Origination Fees and Other Income. In addition to interest earned
on loans, we also receive loan origination fees. To the extent that loans are
originated or acquired for the Bank's portfolio, Statement of Financial
Accounting Standards (SFAS) No. 91 requires that we 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. At September 30, 1997, we had $3.4
million of net deferred loan origination costs. Such fees and costs 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 and availability of money.
In addition to loan origination fees, we also receive other fees,
service charges, and other income that consist primarily of deposit transaction
account service charges, late charges and credit card fees.
Loans-to-One Borrower. Savings banks are subject to the same loans-to-
one borrower limits as those applicable to national banks, which under current
regulations restrict loans to one borrower to an amount equal to 15% of
unimpaired net worth on an unsecured basis, and an additional amount equal to
10% of unimpaired net worth if the loan is secured by readily marketable
collateral (generally, financial instruments and bullion, but not real estate).
Our policy provides that loans to one borrower (or related borrowers) should not
exceed 10% of the Bank's capital.
At September 30, 1997, the largest aggregate amount loaned by the Bank
to one borrower consisted of seven commercial mortgage loans in an amount of
$9.6 million and was secured by eight suburban office park properties.
61
<PAGE>
The second largest aggregate amount loaned by the Bank to one borrower
consisted of one commercial mortgage and one business loan, in the aggregate
amount of $5.1 million, secured by two suburban office park properties.
The third largest aggregate amount loaned by the Bank to one borrower
consisted of four commercial mortgage loans in the amount of $4.9 million,
secured by two retail centers, one office building and one restaurant.
The fourth largest aggregate amount loaned by the Bank to one borrower
consisted of one commercial mortgage loan in an amount of $4.1 million and was
secured by a medical office building.
The fifth largest aggregate amount loaned by the Bank to one borrower
consisted of four commercial mortgage loans in the amount of $2.9 million and
was secured by four apartment projects.
All of the loans discussed above are performing in accordance with
their terms.
DELINQUENCIES AND CLASSIFIED ASSETS
Collection Procedures. A computer generated late notice is sent by the
17th day of the month requesting the payment due plus the late charge that was
assessed. After the late notices have been mailed, accounts are assigned to
collectors by the automated collection system for follow-up to determine reasons
for delinquency and explore payment options. Additional system-generated
collection letters are sent to customers on the 30th and 45th days for consumer
loans, and by the 45th day for mortgage loans. Notwithstanding ongoing
collection efforts, all consumer loans are fully charged-off after 210 days.
These mortgage loan collection procedures pertain to loans held in the
Bank's portfolio. All of the residential mortgage loan servicing performed for
both government issued FHA and VA loans, together with residential loans sold in
the secondary market, are in full compliance with their own respective loan
servicing requirements.
Loans Past Due and Non-performing Assets. Loans are reviewed on a
regular basis and are placed on nonaccrual status when, in the opinion of
management, the collection of additional interest is doubtful. Loans are placed
on nonaccrual status when either principal or interest is 90 days or more past
due. Interest accrued and unpaid at the time a loan is placed on a nonaccrual
status is reversed from interest income. At September 30, 1997, we had non-
performing loans of $1.9 million, and a ratio of non-performing loans to total
loans of 0.31%.
Real estate acquired as a result of foreclosure or by deed in lieu of
foreclosure is classified as REO until such time as it is sold. When real estate
is acquired through foreclosure or by deed in lieu of foreclosure, it is
recorded at its fair value, less estimated costs of disposal. If the value of
the property is less than the loan, less any related specific loan loss
provisions, the difference is charged against the allowance for loan losses. Any
subsequent write-down of REO is charged against earnings. At September 30, 1997,
we had REO, net of allowances, of approximately $268,000. At September 30, 1997,
we had total non-performing assets of $2.2 million and a ratio of non-performing
assets to total assets of 0.19%.
62
<PAGE>
The following table sets forth delinquencies in the Bank's loan
portfolio as of the dates indicated. When a loan is delinquent 90 days or more,
the Bank fully reverses all accrued interest thereon and ceases to accrue
interest thereafter. For all the dates indicated, the Bank did not have any
material restructured loans within the meaning of SFAS 114.
<TABLE>
<CAPTION>
At September 30, 1997 At December 31, 1996
-------------------------------------------- -------------------------------------------
60-89 Days 90 Days or More 60-89 Days 90 Days or More
---------------------- --------------------- --------------------- ---------------------
Principal Principal Principal Principal
Number Balance Number Balance Number Balance Number Balance
of Loans of Loans of Loans of Loans of Loans of Loans of Loans of Loans
---------- ----------- ---------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family.................... 12 $ 493 16 $ 659 9 $ 373 17 $ 473
Home equity............................ 1 15 1 57 1 13 1 58
Commercial real estate and multi-family 3 567 4 692 -- -- 8 1,822
Consumer and other..................... 56 221 55 123 73 296 89 257
Commercial business.................... 5 84 10 394 -- -- 13 2,108
------ -------- ------- -------- ------ -------- ------ -------
Total ............................ 77 $ 1,380 86 $ 1,925 83 $ 682 128 $ 4,718
====== ======== ======= ======== ====== ======== ====== =======
Delinquent loans to total loans (1) (2) 0.22% 0.31% 0.11% 0.78%
======== ======== ======== =======
</TABLE>
<TABLE>
<CAPTION>
At December 31, 1995 At December 31, 1994
------------------------------------------- ------------------------------------------
60-89 Days 90 Days or More 60-89 Days 90 Days or More
-------------------- ---------------------- -------------------- ---------------------
Principal Principal Principal Principal
Number Balance Number Balance Number Balance Number Balance
of Loans of Loans of Loans of Loans of Loans of Loans of Loans of Loans
---------- --------- ----------- ---------- ---------- --------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family.................... 6 $ 147 25 $ 1,100 16 $ 344 17 $ 715
Home equity............................ 2 21 1 34 4 86 1 12
Commercial real estate and multi-family -- -- 10 2,436 2 613 9 3,133
Consumer and other..................... 70 212 60 166 29 108 39 117
Commercial business.................... -- -- 1 219 -- -- 1 245
------ ------- ------- -------- ------ -------- ------ -------
Total ............................ 78 $ 380 97 $ 3,955 51 $ 1,151 67 $ 4,222
====== ======= ======= ======== ====== ======== ====== =======
Delinquent loans to total loans (1) (2) 0.07% 0.74% 0.24% 0.89%
======= ======== ======== =======
</TABLE>
___________________________________
(1) Total loans include principal balance net of the deferred loan fees and
expenses and unamortized premiums and discounts.
(2) Excludes loans that had matured and as to which the Bank had not formally
extended the maturity date. Regular principal and interest payments
continued in accordance with the original terms of the loan. The Bank
continued to accrue interest on these loans as long as regular payments
received were less than 90 days delinquent. These loans totaled $312,000,
$3.9 million, $3.1 million and $2.7 million at September 30, 1997 and
December 31, 1996, 1995 and 1994, respectively.
63
<PAGE>
Non-Accrual Loans and Non-Performing Assets. The following table sets
forth information regarding nonaccrual loans and other non-performing assets.
<TABLE>
<CAPTION>
At Sept. 30, At December 31,
----------------------------------------------------------
1997 1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Non-accruing loans (1):
One- to four-family.............................. $ 659 $ 473 $ 1,100 $ 715 $ 689 $ 342
Home equity...................................... 57 58 34 12 9 --
Commercial real estate and multi-family.......... 692 1,822 2,436 3,133 3,611 2,094
Consumer and other............................... 123 257 166 117 140 129
Commercial business.............................. 394 2,108 219 245 99 66
--------- --------- --------- --------- --------- ---------
Total......................................... 1,925 4,718 3,955 4,222 4,548 2,631
--------- --------- --------- --------- --------- ---------
Non-performing assets:
Other real estate owned (2):
One- to four-family.............................. 22 155 -- -- 15 51
Commercial real estate and multi-family.......... 246 162 257 259 922 2,281
Other non-performing assets:
Investments in affiliates........................ -- 157 264 629 789 920
Nationar receivable (3).......................... -- -- 5,053 -- -- --
--------- --------- --------- --------- --------- ---------
Total......................................... 268 474 5,574 888 1,726 3,252
--------- --------- --------- --------- --------- ---------
Total non-performing assets......................... $ 2,193 $ 5,192 $ 9,529 $ 5,110 $ 6,274 $ 5,883
========= ========= ========= ========= ========= =========
Total non-performing assets as a percentage of total
assets ............................................ 0.19% 0.48% 0.97% 0.56% 0.69% 0.70%
========= ========= ========= ========= ========= =========
Total non-performing loans to total loans (4)....... 0.31% 0.78% 0.74% 0.89% 1.10% 0.75%
========= ========= ========= ========= ========= =========
</TABLE>
_______________________
(1) Loans are placed on non-accrual status when they become 90 days or more
past due or if they have been identified by the Bank as presenting
uncertainty with respect to the collectibility of interest or principal.
(2) Other real estate owned balances are shown net of related allowances.
(3) On February 6, 1995, the Superintendent seized Nationar, a check-clearing
and trust company, freezing all of Nationar's assets. As of December 31,
1995, the Bank had $5.7 million in demand deposits held in receivership by
the New York State Banking Department. As of December 31, 1996, the Bank
had received all funds due from Nationar.
(4) Excludes loans that had matured and the Bank had not formally extended the
maturity date. Regular principal and interest payments continued in
accordance with the original terms of the loan. The Bank continued to
accrue interest on these loans as long as regular payments received were
less than 90 days delinquent. These loans totaled $312,000, $3.9 million,
$3.1 million, $2.7 million, $1.5 million and $245,000 at September 30,
1997 and December 31, 1996, 1995, 1994, 1993 and 1992, respectively.
For the nine months ended September 30, 1997 and for the year ended
December 31, 1996, gross interest income which would have been recorded had the
non-accruing loans been current in accordance with their original terms amounted
to $133,000 and $325,000, respectively. No interest income on nonaccrual loans
was included in income during such periods except for $22,000 and $39,000 of
cash interest payments received for the Bank's largest non-performing loan for
the nine months ended September 30, 1997 and the year ended December 31, 1996,
respectively.
Classification of Assets. Our policies, consistent with regulatory
guidelines, provide for the classification of loans and other assets such as
investment 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
64
<PAGE>
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 we classify problem assets as either substandard or doubtful, we
establish general valuation allowances or "loss reserves" 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 the Bank 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. The Bank's
determination as to the classification of its assets and the amount of its
valuation allowance is subject to review by its regulatory agencies, which can
order the establishment of additional general or specific loss allowances. We
regularly review our asset portfolio to determine whether any assets require
classification in accordance with applicable regulations.
On the basis of management's review of its assets, at September 30,
1997, we had classified a total of $6.7 million of loans as follows (in
thousands):
<TABLE>
<S> <C>
Special Mention............................... $ 3,891
Substandard................................... 2,765
Doubtful...................................... -
Loss.......................................... -
-------------
Total classified......................... $ 6,656
=============
Allowance for loan losses..................... $ 6,353
=============
</TABLE>
Allowance for Loan Losses. The allowance for loan losses is
established through a provision for loan losses based on management's evaluation
of the risk inherent in the loan portfolio and current economic conditions. Such
evaluation, which includes a review of all loans on which full collectibility
may not be reasonably assured, considers among other matters, the estimated net
realizable value or the fair value of the underlying collateral, economic
conditions, historical loan loss experience and other factors that warrant
recognition in providing for an adequate loan loss allowance. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses and valuation of REO.
Such agencies may require us to recognize additions to the allowance based on
their judgment about information available to them at the time of their
examination. The Bank's provisions for loan losses are described in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." At September 30, 1997, the total allowance was $6.4 million, which
amounted to 1.02% of total loans and 330.0% of non-performing loans which have
decreased to $1.9 million at this date. The allowance is established based upon
our evaluation of the risks inherent in the loan portfolio, the general economy
and the general trend within the savings industry to increase allowances for
losses as a percentage of total loans. We will continue to monitor and modify
the level of the allowance for loan losses in order to maintain it at a level
which management considers adequate to provide for potential loan losses. For
the nine months ended September 30, 1997 and the years ended December 31, 1996
and 1995, the Bank had charge-offs of $1.3 million, $436,000 and $556,000,
respectively, against this allowance.
65
<PAGE>
Analysis of the Allowance For Loan Losses. The following table sets forth
the analysis of the allowance for loan losses for the periods indicated.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
----------------------- -----------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ---------- ----------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at the beginning of period........ $ 6,539 $ 4,707 $ 4,707 $ 4,192 $ 4,030 $ 2,689 $ 1,888
Charge-offs:
One- to four-family.................... 43 28 28 17 -- -- --
Multi-family........................... 265 39 122 215 223 -- --
Commercial real estate................. 107 35 35 108 460 -- --
Construction or development............ -- -- -- -- -- -- 526
Consumer and other..................... 303 185 251 216 142 160 123
Commercial business (1)................ 553 -- -- -- -- 66 --
-------- -------- -------- ------- ------- -------- --------
1,271 287 436 556 825 226 649
-------- --------- -------- ------- ------- -------- --------
Recoveries:
One- to four-family.................... -- -- -- -- -- -- --
Multi-family........................... 33 -- -- -- -- -- --
Commercial real estate................. -- -- 25 -- -- -- --
Construction or development............ -- -- -- -- -- -- --
Consumer and other..................... 68 37 56 55 30 42 52
Commercial business.................... 9 -- -- -- 9 3 --
-------- --------- -------- ------- ------- -------- --------
110 37 81 55 39 45 52
-------- --------- -------- ------- ------- -------- --------
Net charge-offs........................... 1,161 250 355 501 786 181 597
Provision for loan losses................. 975 1,861 2,187 1,016 948 1,522 1,398
-------- --------- -------- ------- ------- -------- --------
Balance at end of period.................. $ 6,353 $ 6,318 $ 6,539 $ 4,707 $ 4,192 $ 4,030 $ 2,689
======== ========= ======== ======= ======= ======== ========
Ratio of net charge-offs during the period
to average loans outstanding during
the period............................ 0.19% 0.04% 0.06% 0.10% 0.17% 0.05% 0.18%
======== ========= ======== ======= ======= ======== ========
Allowance for loan losses to total loans.. 1.02% 1.08% 1.09% 0.88% 0.88% 0.96% 0.75%
======== ========= ======== ======= ======= ======== ========
Allowance for loan losses to
non-performing loans.................... 330.03% 118.58% 138.60% 119.01% 99.29% 88.61% 102.20%
======== ========= ======== ======= ======= ======== ========
</TABLE>
_____________________
(1) Included in commercial business loan charge-offs for 1997 is $486,000
related to a settlement that the Bank had reached with the bankruptcy
trustee relating to loans to a borrower that had filed for bankruptcy
protection.
66
<PAGE>
Allocation of Allowance for Loan Losses. The following table sets forth the
allocation of the allowance for loan losses by loan category for the periods
indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------
AT SEPTEMBER 30, 1997 1996 1995
----------------------- ----------------------------------------------
PERCENT PERCENT PERCENT
OF LOANS OF LOANS OF LOANS
AMOUNT IN EACH AMOUNT IN EACH AMOUNT IN EACH
OF ALLOWANCE CATEGORY OF ALLOWANCE CATEGORY OF ALLOWANCE CATEGORY
FOR TO TOTAL FOR TO TOTAL FOR TO TOTAL
LOAN LOSSES LOANS LOAN LOSSES LOANS LOAN LOSSES LOANS
------------ --------- ------------ --------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
One- to four-family................................. $ 436 62.43% $ 412 60.77% $ 367 60.14%
Home equity......................................... 31 2.09 27 1.88 24 1.90
Commercial real estate and multi-family............. 356 24.35 374 24.38 630 25.44
Consumer and other.................................. 342 10.45 385 12.16 302 11.76
Commercial business................................. 421 0.68 1,432 0.81 164 0.76
Unallocated (1)..................................... 4,767 -- 3,909 -- 3,220 --
-------- -------- ------- ------- -------- --------
Total................................... $ 6,353 100.00% $ 6,539 100.00% $ 4,707 100.00%
======== ======== ======= ======= ======== ========
AT DECEMBER 31,
-------------------------------------------------------------------------
1994 1993 1992
----------------------- ----------------------- ----------------------
PERCENT PERCENT PERCENT
OF LOANS OF LOANS OF LOANS
AMOUNT IN EACH AMOUNT IN EACH AMOUNT IN EACH
OF ALLOWANCE CATEGORY OF ALLOWANCE CATEGORY OF ALLOWANCE CATEGORY
FOR TO TOTAL FOR TO TOTAL FOR TO TOTAL
LOAN LOSSES LOANS LOAN LOSSES LOANS LOAN LOSSES LOANS
------------ -------- ------------ -------- ----------- -------
(DOLLARS IN THOUSANDS)
One- to four-family................................. $ 350 58.59% $ 290 59.43% $ 235 56.67%
Home equity......................................... 26 2.25 26 2.56 29 3.30
Commercial real estate and multi-family............. 736 26.04 1,367 25.02 993 26.35
Consumer and other.................................. 298 12.29 286 12.21 233 12.73
Commercial business................................. 164 0.83 119 0.78 68 0.95
Unallocated (1)..................................... 2,618 - 1,942 - 1,131 -
-------- -------- ------- ------- -------- -------
Total................................... $ 4,192 100.00% $ 4,030 100.00% $ 2,689 100.00%
======== ======== ======= ======= ======== =======
</TABLE>
- ---------------------
(1) The unallocated amount represents the amount of the allowance for loan
losses that is in excess of the minimum amount required as calculated by
the Bank. As our non-performing and classified loans decrease as a
percentage of total loans, this unallocated amount becomes a larger
percentage of the loan loss allowance.
67
<PAGE>
Securities Investment Activities
Our securities investment policy is established by the Board of Trustees.
This policy dictates that investment decisions will be made based on the safety
of the investment, liquidity requirements, potential returns, cash flow targets,
and desired risk parameters. In pursuing these objectives, we consider the
ability of an investment to provide earnings consistent with factors of quality,
maturity, marketability and risk diversification. The Finance Committee of the
Board supervises the Bank's securities investment program. This supervision
entails the evaluation of all investment activities for safety and soundness and
the ongoing evaluation of investment policy and objectives. The Treasurer is
responsible for making securities investment portfolio decisions in accordance
with established policies. While the Treasurer has the authority to conduct
trades within specific guidelines established by the investment policy, all
transactions are reviewed and approved by the Finance Committee of the Board on
a monthly basis.
Our current policies generally limit securities investments to U.S.
Government and agency securities, municipal bonds, corporate debt obligations
and corporate equity securities. In addition, our policy permits investments in
mortgage related securities, including securities issued and guaranteed by FNMA,
Freddie Mac, GNMA and privately-issued collateralized mortgage obligations
(CMOs). Also permitted are investments in asset-backed securities ("ABS"),
backed by auto loans, credit card receivables, home equity and home improvement
loans. Our current securities investment strategy utilizes a risk management
approach of diversified investing between three categories: short-,
intermediate-and long-term. The emphasis of this approach is to increase overall
investment securities yields while managing interest rate risk. To accomplish
these objectives, we focus on investments in mortgage related securities, CMOs
and ABSs. In addition, U.S. Government and other non-amortizing securities are
utilized for call protection and liquidity.
At September 30, 1997, we had $502.5 million in investment securities,
consisting primarily of U.S. Government obligations, mortgage related
securities, municipal, public utility and corporate obligations, preferred and
common stocks, and asset-backed securities. SFAS No. 115 requires the Bank to
designate its securities as held to maturity, available for sale or trading,
depending on the Bank's ability and intent regarding its investments. We do not
have a trading portfolio. As of September 30, 1997, $465.0 million of the
securities portfolio, or 39.5% of total assets, was classified as available for
sale, with a weighted average life of 4.27 years. At such date, $37.5 million of
the securities portfolio, or 3.2% of total assets, was classified as held to
maturity, with a fair value of $37.5 million and a weighted average life of .07
years. Since December 1995, the Bank has only designated money market preferred
stock as held to maturity due to its 49 and 90 day maturities. All other
securities have been classified as available for sale.
Amortized Cost and Fair Value of Investment and Mortgage Related
Securities. The following table sets forth certain information regarding the
amortized cost and fair values of the Bank's debt, equity, asset-backed and
mortgage related securities as of the dates indicated.
68
<PAGE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT SEPTEMBER 30, -----------------------------------------------
1997 1996 1995
---------------------- ----------------------- ----------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
--------- ----- --------- ----- --------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Investment Securities:
Securities held to maturity:
Money market preferred stock................. $ 37,500 $ 37,500 $ 38,000 $ 38,000 $ 46,700 $ 46,700
States and political subdivisions............ -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Total securities held to maturity......... 37,500 37,500 38,000 38,000 46,700 46,700
--------- --------- --------- --------- --------- ---------
Debt securities available for sale:
U.S. Treasury................................ 84,856 85,531 84,716 85,220 54,839 55,745
U.S. government agencies..................... 5,008 5,002 5,012 5,004 -- --
States and political subdivisions............ 1,761 1,870 1,942 2,041 9,118 9,317
Corporate bonds.............................. 6,927 7,034 999 1,000 6,035 6,035
--------- --------- --------- --------- --------- ---------
Total debt securities available for sale.. 98,552 99,437 92,669 93,265 69,992 71,097
--------- --------- --------- --------- --------- ---------
Equity securities available for sale:
Common stock................................. 5,391 6,139 3,115 3,612 3,382 3,566
FHLB stock................................... 6,392 6,392 5,394 5,394 4,926 4,926
--------- --------- --------- --------- --------- ---------
Total equity securities available for sale 11,783 12,531 8,509 9,006 8,308 8,492
--------- --------- --------- --------- --------- ---------
Asset-backed securities available for sale...... 67,270 67,243 28,090 27,998 5,350 5,278
--------- --------- --------- --------- --------- ---------
Total investment securities............... $ 215,105 $ 216,711 $ 167,268 $ 168,269 $ 130,350 $ 131,567
========= ========= ========= ========= ========= =========
Average remaining life of investment
securities (2)................................ 1.51 years 1.97 years 1.38 years
========== ========== ==========
Mortgage related securities:
Available for sale:
Freddie Mac............................... $ 118,469 $ 118,639 $ 109,903 $ 108,832 $ 43,000 $ 43,392
GNMA...................................... 33,461 34,542 44,966 45,780 51,104 52,984
FNMA...................................... 25,330 25,393 28,487 28,256 33,170 33,575
CMOs...................................... 107,744 107,188 104,244 101,992 132,550 131,592
--------- --------- --------- --------- --------- ---------
Total mortgage related securities
available for sale:.................. $ 285,004 $ 285,762 $ 287,600 $ 284,860 $ 259,824 $ 261,543
========= ========= ========= ========= ========= =========
Average remaining life of
mortgage related securities.................... 5.69 years 7.56 years 6.21 years
========== ========== ==========
Net unrealized gains (losses) on
securities available for sale................ $ 2,364 $ -- $ (1,739) $ -- $ 2,936 $ --
Total securities................................ $ 502,473 $ 502,473 $ 453,129 $ 453,129 $ 393,110 $ 393,110
========= ========= ========= ========= ========= =========
Average remaining life of securities (2)........ 3.94 years 5.60 years 4.64 years
========== ========== ==========
<CAPTION>
At December 31,
---------------------
1994
---------------------
Amortized Fair
Cost Value
---------- ------
<S> <C> <C>
Investment Securities:
Securities held to maturity:
Money market preferred stock................. $ 28,836 $ 28,836
States and political subdivisions............ 15,002 15,484
--------- ---------
Total securities held to maturity......... 43,838 44,320
--------- ---------
Debt securities available for sale:
U.S. Treasury................................ 49,878 47,877
U.S. government agencies..................... -- --
States and political subdivisions............ -- --
Corporate bonds.............................. 5,173 5,002
--------- ---------
Total debt securities available for sale.. 55,051 52,879
--------- ---------
Equity securities available for sale:
Common stock................................. 8,486 8,315
FHLB stock................................... -- --
--------- ---------
Total equity securities available for
sale...................................... 8,486 8,315
--------- ---------
Asset-backed securities available for sale...... 4,888 4,539
--------- ---------
Total investment securities............... $ 112,263 $ 110,053
========= =========
Average remaining life of investment
securities (2)................................ 3.96 years
==========
Mortgage related securities:
Available for sale:
Freddie Mac............................... $ 35,157 $ 33,000
GNMA...................................... 61,199 58,462
FNMA...................................... 46,730 43,898
CMOs...................................... 151,000 137,920
--------- ---------
Total mortgage related securities
available for sale:.................. $ 294,086 $ 273,280
========= =========
Average remaining life of
mortgage related securities.................... 4.73 years
==========
Net unrealized gains (losses) on
securities available for sale................ $ (23,498) $ --
Total securities................................ $ 382,851 $ 383,333
========= =========
Average remaining life of securities (2)........ 4.52 years
==========
</TABLE>
_______________________
(1) The Bank adopted the provisions set forth in SFAS No. 115 on January 1,
1994, which requires entities to carry securities available for sale at
their fair value.
(2) Average remaining life does not include common stock and FHLB stock.
69
<PAGE>
The following table sets forth certain information regarding the carrying
value, weighted average yields and contractual maturities of the Bank's
securities portfolio as of September 30, 1997. Adjustable-rate mortgage related
securities are included in the period in which interest rates are next scheduled
to adjust. No tax equivalent adjustments were made to the weighted average
yields. Amounts are shown at amortized cost for held to maturity securities and
at fair value for available for sale securities.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1997
------------------------------------------------------------------------------
MORE THAN ONE MORE THAN FIVE
ONE YEAR OR LESS YEAR TO FIVE YEARS YEARS TO TEN YEARS
------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD
----------- --------- -------- --------- -------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Available for sale:
Mortgage related securities:
Freddie Mac................................... $ -- --% $ 18,394 6.20% $ 45,447 6.83%
GNMA.......................................... -- -- 54 6.78 386 7.92
FNMA.......................................... -- -- 3,475 6.88 16,761 6.80
CMOs.......................................... -- -- 3,282 5.66 1,540 4.98
--------- --------- ---------
Total mortgage related securities........... -- -- 25,205 6.23 64,134 6.78
--------- --------- ---------
Debt securities:
U.S. treasury................................. 9,983 5.52 75,548 6.31 -- --
U.S. government agencies...................... -- -- 5,002 6.63 -- --
States and political subdivisions............. 941 4.07 331 4.94 -- --
Corporate bonds............................... -- -- 7,034 6.84 -- --
--------- --------- ---------
Total debt securities....................... 10,924 5.40 87,915 6.37 -- --
--------- --------- ---------
Equity securities:
Common stock.................................. -- -- -- -- -- --
FHLB stock.................................... -- -- -- -- -- --
--------- --------- ---------
Total equity securities..................... -- -- -- -- -- --
--------- --------- ---------
Asset-backed securities.......................... -- -- 8,833 6.41 18,162 5.87
Total securities available for sale......... 10,924 5.40 121,953 6.34 82,296 6.58
--------- --------- ---------
Held to maturity:
Money market preferred stock.................. 37,500 4.10 -- -- -- --
--------- --------- ---------
Total securities................................. $ 48,424 $ 121,953 $ 82,296
========= ========= =========
<CAPTION>
AT SEPTEMBER 30, 1997
------------------------------------------------------
AFTER TEN YEARS TOTAL
------------------------------------------------------
WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD
----------- -------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Available for sale:
Mortgage related securities:
Freddie Mac................................... $ 54,798 7.07% $ 118,639 6.84%
GNMA.......................................... 34,102 8.09 34,542 8.09
FNMA.......................................... 5,157 6.31 25,393 6.71
CMOs.......................................... 102,366 6.40 107,188 6.36
--------- ---------
Total mortgage related securities........... 196,423 6.88 285,762 6.80
--------- ---------
Debt securities:
U.S. treasury................................. -- -- 85,531 6.22
U.S. government agencies...................... -- -- 5,002 6.63
States and political subdivisions............. 598 8.30 1,870 5.58
Corporate bonds............................... -- -- 7,034 6.84
--------- ---------
Total debt securities....................... 598 8.30 99,437 6.27
--------- ---------
Equity securities:
Common stock.................................. -- -- 6,139 2.14
FHLB stock.................................... -- -- 6,392 6.75
--------- ---------
Total equity securities..................... -- -- 12,531 4.49
--------- ---------
Asset-backed securities.......................... 40,248 6.36 67,243 6.23
Total securities available for sale......... 237,269 6.79 464,973 6.54
--------- ---------
Held to maturity:
Money market preferred stock.................. -- -- 37,500 4.10
--------- ---------
Total securities................................. $ 237,269 $ 502,473
========= =========
</TABLE>
70
<PAGE>
Mortgage Related Securities. We purchase mortgage related securities in
order to: (i) generate positive interest rate spreads with minimal
administrative expense; (ii) lower our credit risk as a result of the guarantees
provided by Freddie Mac, FNMA, and GNMA; (iii) utilize these securities as
collateral for borrowing; and (iv) increase liquidity. We also invest primarily
in mortgage related securities issued or sponsored by FNMA, Freddie Mac, and
GNMA. We also invest in CMOs issued or sponsored by FNMA and Freddie Mac as well
as private issuers. At September 30, 1997, mortgage related securities totaled
$285.8 million or 24.3% of total assets, all of which were classified as
available for sale. At September 30, 1997, all of the mortgage related
securities were fixed rate. The mortgage related securities portfolio had coupon
rates ranging from 5.0% to 10.0%, a weighted average yield of 6.80% and a
weighted average life of 5.69 years at September 30, 1997. The estimated fair
value of the Bank's mortgage related securities at September 30, 1997 was $285.8
million which was $758,000 greater than the amortized cost of $285.0 million.
Mortgage related securities are created by the pooling of mortgages and the
issuance of a security with an interest rate that is less than the interest rate
on the underlying mortgages. Mortgage related securities typically represent a
participation interest in a pool of single-family or multi-family mortgages,
although the Bank focuses its investments on mortgage related securities backed
by single-family mortgages. The issuers of such securities (generally U.S.
Government agencies and government sponsored enterprises, including FNMA,
Freddie Mac and GNMA) pool and resell the participation interests in the form of
securities to investors, such as the Bank, and guarantee the payment of
principal and interest to these investors. Mortgage related securities generally
yield less than the loans that underlie such securities because of the cost of
payment guarantees and credit enhancements. In addition, mortgage related
securities are usually more liquid than individual mortgage loans and may be
used to collateralize certain liabilities and obligations of the Bank.
Investments in mortgage related securities involve a risk that actual
prepayments will be greater than estimated over the life of the security, which
may require adjustments to the amortization of any premium or accretion of any
discount relating to such instruments thereby reducing the net yield on such
securities. There is also reinvestment risk associated with the cash flows from
such securities or in the event such securities are redeemed by the issuer. In
addition, the market value of such securities may be adversely affected by
changes in interest rates. We review prepayment estimates for our mortgage
related securities at purchase to ensure that prepayment assumptions are
reasonable considering the underlying collateral for the securities at issue and
current interest rates and to determine the yield and estimated maturity of our
mortgage related security portfolio. Of the Bank's $285.7 million mortgage
related securities portfolio at September 30, 1997, $25.2 million with a
weighted average yield of 6.23% had contractual maturities within five years,
$64.1 million with a weighted average yield of 6.78% had contractual maturities
of five to ten years, and $196.4 million with a weighted average yield of 6.88%
had contractual maturities of over ten years. However, the actual maturity of a
mortgage related security may be less than its stated maturity due to
prepayments of the underlying mortgages. Prepayments that are faster than
anticipated may shorten the life of the security and may result in a loss of any
premiums paid and thereby reduce the net yield on such securities. Although
prepayments of underlying mortgages depend on many factors, the difference
between the interest rates on the underlying mortgages and the prevailing
mortgage interest rates generally is the most significant determinant of the
rate of prepayments. During periods of declining mortgage interest rates,
refinancing generally increases and accelerates the prepayment of the underlying
mortgages and the related security. Under such circumstances, we may be subject
to reinvestment risk because, to the extent that the Bank's mortgage related
securities prepay faster than anticipated, we may not be able to reinvest the
proceeds of such repayments and prepayments at a comparable rate of return.
Conversely, in a rising interest rate environment prepayments may decline,
thereby extending the estimated life of the security and depriving the Bank of
the ability to reinvest cash flows at the increased rates of interest.
CMOs are a type of debt security issued by a special-purpose entity that
aggregates pools of mortgages and mortgage related securities and creates
different classes of CMO securities with varying maturities and amortization
schedules as well as a residual interest with each class possessing different
risk characteristics. The cash flows from the underlying collateral are
generally divided into "tranches" or classes whereby tranches have descending
priorities with respect to the distribution of principal and interest repayment
of the underlying mortgages and mortgage related securities, as opposed to pass
through mortgage-backed securities where cash flows are distributed pro rata to
all security holders. In contrast to mortgage-backed securities from which cash
flow is received (and hence, prepayment risk is shared) pro rata by all
securities holders, the cash flow from the mortgages or mortgage related
securities underlying
71
<PAGE>
CMOs is paid in accordance with predetermined priority to investors holding
various tranches of such securities or obligations. A particular tranche of CMOs
may therefore carry prepayment risk that differs from that of both the
underlying collateral and other tranches. Accordingly, CMOs attempt to moderate
risks associated with conventional mortgage related securities resulting from
unexpected prepayment activity. Investments in CMOs involve a risk that actual
prepayments will differ from those estimated in pricing the security, which may
result in adjustments to the net yield on such securities. Additionally, the
market value of such securities may be adversely affected by changes in the
market interest rates. Management believes these securities may represent
attractive alternatives relative to other investments due to the wide variety of
maturity, repayment and interest rate options available.
At September 30, 1997, our CMO portfolio totaled $107.2 million, or 9.1%,
of total assets and 9.5% of total interest-earning assets, and consisted of
$10.4 million of CMOs issued by private issuers and $96.8 million issued by
government sponsored agencies such as FNMA and Freddie Mac. The entire CMO
portfolio is classified as available for sale and had an estimated weighted
average life of 3.31 years and a weighted average yield of 6.36% at September
30, 1997. It is our practice to limit purchases of privately issued CMOs to non-
high risk securities rated "AAA" by a nationally recognized credit rating
agency, investing primarily in the early to intermediate tranches which have the
greatest credit support. Our current policy with respect to CMOs limits
investments to non-high risk securities unless approval is given by the Board of
Trustees and an analysis is provided on how a high risk CMO will improve the
overall interest rate risk of the Bank. High risk CMOs are defined as those
securities exhibiting significantly greater volatility of estimated average life
and price relative to interest rates than do 30-year, fixed rate securities. We
also limit the amount of investment in CMOs per issue to 15% of our net worth,
and in conjunction with ABSs, to 20% of assets in the aggregate.
Purchases, Sales, and Repayments of Mortgage Related Securities. Set forth
below is information relating to the Bank's purchases, sales and repayments of
principal of mortgage related securities for the periods indicated.
<TABLE>
<CAPTION>
Nine Months
Ended September 30, Years Ended December 31,
--------------------- ------------------------------------------
1997 1996 1996 1995 1994
------- --------- ----------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C>
Purchases:
Adjustable-rate (1)............................. $ 7,918 $ -- $ -- $ -- $ 10,104
Fixed-rate (1).................................. 23,563 65,729 85,506 32,885 44,164
CMOs............................................ 35,859 -- -- 13,490 58,027
---------- ---------- ---------- ----------- ----------
Total purchases.............................. 67,340 65,729 85,506 46,375 112,295
Sales:
Adjustable-rate (1)............................. (15,726) -- -- (16,110) --
Fixed-rate (1).................................. (8,409) (4,590) (11,421) (17,964) (16,507)
CMOs............................................ (20,354) (1,941) (13,125) (18,377) (24,951)
----------- ---------- ---------- ----------- ----------
Total sales.................................. (44,489) (6,531) (24,546) (52,451) (41,458)
Principal Repayments:
Principal repayments............................ (25,359) (25,466) (33,026) (28,056) (76,816)
Increase in other items, net (2)................ (88) (118) (158) (130) (517)
Change in unrealized gains (losses)
on mortgage related securities............... 3,498 (8,184) (4,459) 22,525 (20,806)
---------- ---------- ---------- ----------- ----------
Net increase (decrease)................... $ 902 $ 25,430 $ 23,317 $ (11,737) $ (27,302)
========== ========== ========== =========== ==========
</TABLE>
___________________
(1) Consists of pass-through securities.
(2) Other items represent amortization and accretion of premiums and discounts.
72
<PAGE>
U.S. Government and Agency Obligations. At September 30, 1997, our U.S.
Treasury securities portfolio totaled $85.5 million, all of which was classified
as available for sale. This portfolio consists primarily of short- to medium-
term (maturities of one to five years) securities. The current investment
strategy, however, is to maintain investments in such instruments to such extent
as can be used for liquidity purposes, as collateral for borrowings, and for
prepayment protection. At September 30, 1997, the agency securities portfolio
totaled $5.0 million, all of which was classified as available for sale and
consisted of agency callable debentures. The agency debentures are callable on a
semi-annual basis following a holding period of twelve months. We do not
generally purchase structured notes.
Corporate Bonds. The corporate bond portfolio, which at September 30, 1997
totaled $7.0 million, all of which was classified as available for sale, was
composed primarily of short- and medium-term, fixed-rate investment grade
corporate and utility issues. At September 30, 1997, the portfolio had an
average life of approximately 2.9 years and a weighted average yield of 6.84%.
Our policy limits investments in corporate bonds with maturities of twelve years
or less to bonds rated "BBB/Baa" or better by at least one nationally recognized
rating agency and to a total investment of 15% of the Bank's assets, with a 6%
of Bank net worth limitation per issue. Our policy limits investments in
corporate bonds with maturities over twelve years to bonds rated "BBB/Baa" or
better by at least one nationally recognized rating agency and a total
investment of no more than 15% of the Bank's assets with a limitation of 4% of
Bank net worth per issue. Consistent with the Bank's current securities
investment strategy, the Bank has not emphasized investments in corporate debt
obligations.
States and Political Subdivisions. At September 30, 1997 we had a portfolio
of bonds issued by states and political subdivisions consisting of 10 bonds
totaling $1.8 million, which had an estimated fair value of $1.9 million. All of
such securities were classified as available for sale and were comprised of
general obligation bonds (i.e., obligations backed by the general credit of the
issuer). All of the bonds are currently rated "AAA" with the exception of two
non-rated local bonds with an estimated fair value of $194,130. At September 30,
1997 the average life of the portfolio was approximately 5.65 years and the
portfolio had a weighted average yield of 5.58%, before tax equivalent yield
adjustments. Interest earned on municipal bonds is exempt from federal income
taxes. Some of the bonds additionally benefit from state income tax exemptions.
Equity Securities. At September 30, 1997, our equity securities portfolio
totaled $12.5 million, all of which was classified as available for sale. The
portfolio consisted of $6.1 million of common stock issued by nationally
recognized companies and $6.4 million of stock issued by the FHLB as a condition
of membership. The Bank benefits from its investment in common and preferred
stock due to a tax deduction the Bank receives with regard to dividends paid by
domestic corporate issuers on equity securities held by other corporate
entities, such as the Bank. The Bank's policy limit for common stock investments
is 7.5% of total assets and the amount invested in any single issuer may not
exceed 4% of net worth. The Bank's current policies permit the purchase of
common stock rated "B+" or better.
Asset-Backed Securities. Our ABS portfolio at September 30, 1997 totaled
$67.2 million, all of which were classified as available or sale, representing
5.72% of total assets and 5.96% of total interest-earning assets. The Bank
purchases shorter average life tranches with pass-through or sequential
structures, tight payment windows and senior positions. Issues will generally
have third party guarantees by monoline credit insurers and/or some form of
internal credit protection (i.e., reserve funds, excess spread accounts or
subordination). The Bank's current policy limits investment in ABSs in
conjunction with non-high risk mortgage derivative products to 20% of the Bank's
total assets.
ABSs are a type of debt security collateralized by various loans and assets
including; automobile loans, equipment leases, credit card receivables, home
equity and improvement loans, manufactured housing, student loans and other
consumer loans. Issuance of an ABS begins with creation of a special purpose
bankruptcy-remote trust to hold collateral on behalf of investors and to
administer the distribution of cash flows. The business of a bankruptcy-remote
ABS trust is restricted to the purchase of loans and issuance of debt
collateralized by those loans. Because consumer loans are amortizing, alternate
principal cash flow structures can be created and tranched in a very similar
manner as CMOs. There are several typical structures available to investors in
the ABS market. They are excess spread, senior/subordinated, reserve funds and
surety bond guaranteed. Excess spread is the first line of protection for most
ABS
73
<PAGE>
and is the difference between interest cash flow from the underlying loans and
the combined investor coupon, servicing fee, charge-offs and trust costs.
Senior/subordinated structures are internal credit support designating one
portion of the transaction as junior to the remaining portion. Obligations to
the senior class are honored prior to junior class obligations in the event of a
cash flow shortfall from the collateral. A reserve fund is, in effect, part of
the subordinated piece retained, in a declining balance, by the trust so that a
portion of the junior class may be rated investment grade. Surety bond or
guarantee structures are guarantees by third party AAA-rated monoline insurance
companies. Insurers generally guarantee (or wrap) the principal and interest
payments of 100% of a transaction, not just the subordinated class. Assetbacked
securitizations provide the Bank with a broad selection of fixed-income
alternatives, most with higher credit ratings and less downgrade risk than
corporate bonds and more stable cash flows than mortgage related securities.
Prepayments and structure risk of ABSs are less of a concern than CMO securities
due to the shorter maturities of the underlying collateral promoting greater
stability of payments.
Money Market Preferred Stock. At September 30, 1997, the Bank held $37.5
million of money market preferred stock ("MMPS") exclusively in its held to
maturity portfolio. The portfolio represents 3.19% of total assets and 3.32% of
total interest-earning assets, and has a weighted average rate of 4.10%. The
portfolio consisted primarily of shares of major utility companies. Investments
in these securities are used by the Bank as a higher yielding cash alternative
to federal funds sold and as a source of second-tier liquidity due to their 49
and 90 day maturities (dividend resets). Rates are set on these securities by
means of Dutch Auction, are priced on a predetermined formula at a percentage of
commercial paper and are used by corporations as a lower rate funding
alternative. We benefit from an investment in common and preferred stock due to
the 70% dividends- received tax deduction we recognize with regard to dividends
paid by U.S. corporate issuers on equity securities held by other corporate
entities, such as the Bank. The yield is therefore higher on these securities on
an after-tax basis than the quoted yield. The Bank's policy limit for its MMPS
investments is $5 million per issue and $50 million in aggregate.
SOURCES OF FUNDS
General. Deposits, repayments and prepayments of loans and securities,
proceeds from sales of loans and securities, and proceeds from maturing
securities and cash flows from operations are the primary sources of our funds
for use in lending, investing and for other general purposes. To a lesser extent
we use borrowed funds, primarily FHLB advances, to fund our operations.
Deposits. We offer a variety of deposit accounts with a range of interest
rates and terms. Our deposit accounts consist of savings, NOW accounts, checking
accounts, money market accounts, school savings and club accounts and
certificates of deposit. We offer certificates of deposit with balances in
excess of $100,000 at preferential rates (jumbo certificates) and also offer
Individual Retirement Accounts ("IRAs") and other qualified plan accounts. To
enhance the deposit products it offers, we offer commercial checking accounts
for small to moderately-sized commercial businesses, as well as a low-cost
checking account services for low-income customers.
At September 30, 1997, our deposits totaled $992.2 million or 99.0% of
interest-bearing liabilities. For the nine months ended September 30, 1997, the
average balance of savings and transaction account deposits totaled $452.1
million, or 47.0% of total average deposits. At September 30, 1997, we had a
total of $516.9 million in certificates of deposit, of which $364.5 million had
maturities of one year or less, reflecting the shift in deposit accounts from
savings accounts to shorter-term certificates of deposit that has occurred in
the last three years. In 1996, the average balance of savings and transaction
account deposits represented approximately 49.1% of total deposits and
certificates of deposit represented 50.9%. Although the Bank has a significant
portion of its deposits in shorter term certificates of deposit, management
monitors activity on these accounts and, based on historical experience and the
Bank's current pricing strategy, believes it will retain a large portion of such
accounts upon maturity.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market rates, prevailing interest rates and
competition. Our deposits are obtained predominantly from the areas in which its
branch offices are located. We rely primarily on competitive pricing of our
deposit products and customer service and
74
<PAGE>
long-standing relationships with customers to attract and retain these deposits;
however, market interest rates and rates offered by competing financial
institutions significantly affect the Bank's ability to attract and retain
deposits. In addition, the Bank has periodically paid a special interest payment
on all deposit accounts, ranging from 10 to 25 basis points. For the year ended
December 31, 1995, we paid a special interest payment of 15 basis points on all
deposit accounts in commemoration of its 125th anniversary, which totaled $1.25
million. While 1995 was the most recent year in which a special interest payment
was paid, the Bank has made no decision as to whether such special interest
payments will occur in any future year. The Bank uses traditional means of
advertising its deposit products, including radio and print media and generally
does not solicit deposits from outside its market area. While certificates of
deposit in excess of $100,000 are accepted by the Bank, and may be subject to
preferential rates, we do not actively solicit such deposits as they are more
difficult to retain than core deposits. Historically, the Bank has not used
brokers to obtain deposits.
The following table sets forth the deposit activities of the Bank for the
periods indicated.
<TABLE>
<CAPTION>
Nine Months
Ended September 30, Years Ended December 31,
-------------------------- -----------------------------------------
1997 1996 1996 1995 1994
---------- ------------- ---------- ----------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Opening balance..................................... $ 920,072 $ 861,065 $ 861,065 $ 819,690 $ 812,939
Deposits............................................ 1,751,818 1,244,359 1,736,655 1,508,173 1,182,400
Withdrawals......................................... (1,711,656) (1,215,860) (1,716,709) (1,502,621) (1,207,280)
Interest credited................................... 31,985 29,489 39,061 35,823 31,631
----------- ----------- ---------- ----------- ----------
Ending balance...................................... 992,219 919,053 920,072 861,065 819,690
----------- ----------- ---------- ----------- ----------
Net increase........................................ $ 72,147 $ 57,988 $ 59,007 $ 41,375 $ 6,751
=========== =========== ========== =========== ==========
Percent increase.................................... 7.84% 6.73% 6.85% 5.05% 0.83%
=========== =========== ========== =========== ==========
</TABLE>
The following table indicates the amount of the Bank's certificates of
deposit by time remaining until maturity as of September 30, 1997.
<TABLE>
<CAPTION>
Maturity
----------------------------------------------------------
3 Months Over 3 to 6 Over 6 to 12 Over 12
or Less Months Months Months Total
----------- ----------- ----------- ------------ ------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit less than $100,000.......... $ 89,252 $ 81,223 $ 142,291 $ 113,661 $ 426,427
Certificates of deposit of $100,000 or more......... 17,951 11,389 22,350 38,751 90,441
----------- ----------- ----------- ------------ ------------
Total of certificates of deposit.................... $ 107,203 $ 92,612 $ 164,641 $ 152,412 $ 516,868
=========== =========== =========== ============ ============
</TABLE>
75
<PAGE>
The following tables set forth information, by various rate categories,
regarding the average balance of deposits by types of deposit for the periods
indicated.
<TABLE>
<CAPTION>
For the Nine Months Ended For the Year Ended
September 30, December 31,
------------------------------------ ----------------------------------
1997 1996
------------------------------------ ----------------------------------
Percent Percent
of Total Weighted of Total Weighted
Average Average Average Average Average Average
Balance Deposits Rate Balance Deposits Rate
--------- --------- --------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Money market accounts................................. $ 60,173 6.25% 3.57% $ 53,999 6.04% 3.55%
Savings accounts...................................... 304,106 31.60 3.34 307,530 34.36 3.37
NOW accounts.......................................... 60,240 6.26 1.82 51,718 5.78 1.85
Non-interest-bearing accounts......................... 27,629 2.87 -- 26,273 2.94 --
---------- ---------- ----------- --------
Total.............................................. 452,148 46.98 2.96 439,520 49.12 3.01
---------- ---------- ------------ --------
Certificates of deposit:
Less than six months.................................. 188,291 19.58 -- 176,787 19.76 --
Over six through 12 months............................ 124,360 12.92 -- 106,793 11.94 --
Over 12 through 24 months............................. 81,310 8.45 -- 53,409 5.97 --
Over 24 months........................................ 28,417 2.95 -- 38,486 4.30 --
Certificates over $100,000............................ 87,746 9.12 -- 79,755 8.91 --
---------- ---------- ---------- ---------
Total certificates of deposit...................... 510,124 53.02 5.74 455,230 50.88 5.81
---------- ---------- ---------- ---------
Total average deposits.......................... $ 962,272 100.00% 4.44% $ 894,750 100.00% 4.43%
========== ========= ========== =========
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------------------------------------------
1995//1// 1994
------------------------------ ----------------------------------
Percent Percent
of Total Weighted of Total Weighted
Average Average Average Average Average Average
Balance Deposits Rate Balance Deposits Rate
------- -------- -------- ------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Money market accounts................................. $ 52,528 6.27% 3.96% $ 49,671 6.05% 3.09%
Savings accounts...................................... 326,125 38.91 3.42 415,843 50.68 3.09
NOW accounts.......................................... 44,023 5.25 1.89 36,386 4.43 2.06
Non-interest-bearing accounts......................... 28,720 3.43 -- 30,996 3.78 --
---------- --------- ---------- --------
Total.............................................. 451,396 53.86 3.12 532,896 64.94 2.84
---------- -------- ---------- --------
Certificates of deposit:
Less than six months.................................. 117,584 14.03 -- 64,323 7.85 --
Over six through 12 months............................ 94,366 11.26 -- 56,520 6.89 --
Over 12 through 24 months............................. 55,039 6.57 -- 46,226 5.63 --
Over 24 months........................................ 50,891 6.07 -- 62,147 7.57 --
Certificates over $100,000............................ 68,768 8.21 -- 58,445 7.12 --
---------- -------- ---------- --------
Total certificates of deposit...................... 386,648 46.14 6.09 287,661 35.06 5.72
---------- -------- ---------- --------
Total average deposits.......................... $ 838,044 100.00% 4.49% $ 820,557 100.00% 3.85%
========== ======== ========== ========
</TABLE>
___________________________
(1) Calculations for this table exclude a $1.25 million special interest
payment in 1995 which was approved by the Bank's Board of Trustees and
paid on a pro rata basis on all interest-bearing savings, NOW, money
market and certificate of deposit accounts in recognition of the Bank's
125th anniversary.
76
<PAGE>
Certificates of Deposit Maturities. The following table sets forth the
amount and maturities of certificates of deposit at September 30, 1997
<TABLE>
<CAPTION>
Period to Maturity from September 30, 1997
---------------------------------------------------------------------------
Less Three Four
Than One to Two to to to Five
One Two Three Four Five Years or
Year Years Years Years Years More
----------- ----------- ---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Rate:
0 to 4.00%.......................................... $ 1,142 $ -- $ 2 $ -- $ -- $ 4
4.01 to 5.00%....................................... 22,935 496 65 -- -- 103
5.01 to 6.00%....................................... 322,677 79,103 13,173 4,397 877 1,758
6.01 to 7.00%....................................... 11,670 4,136 1,141 211 30 413
7.01 to 8.00%....................................... 1,948 327 111 4,415 -- --
8.01 to 9.00%....................................... 4,069 10,406 3,084 1,600 -- --
Over 9.01%.......................................... 15 26,455 -- -- -- 105
----------- ----------- ---------- ---------- ---------- ----------
Total ........................................... $ 364,456 $ 120,923 $ 17,576 $ 10,623 $ 907 $ 2,383
=========== =========== ========== ========== ========== ==========
<CAPTION>
At December 31
-------------------------
At
Sept. 30,
1997 1996 1995 1994
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Rate:
0 to 4.00%.......................................... $ 1,148 $ 1,567 $ 5,222 $63,605
4.01 to 5.00%....................................... 23,599 57,140 46,340 64,416
5.01 to 6.00%....................................... 421,985 351,270 202,715 107,776
6.01 to 7.00%....................................... 17,601 23,173 94,957 5,922
7.01 to 8.00%....................................... 6,801 7,456 10,662 11,195
8.01 to 9.00%....................................... 19,159 18,775 19,765 19,209
Over 9.01%.......................................... 26,575 25,340 42,875 48,296
---------- ---------- ---------- --------
Total ........................................... $ 516,868 $ 484,721 $ 422,536 $302,419
========== =========== =========== ========
</TABLE>
77
<PAGE>
Borrowed Funds. At September 30, 1997, the Bank had $28.7 million of
borrowed funds, which primarily consisted of FHLB advances and reverse
repurchase agreements entered into with nationally recognized securities
brokerage firms. Reverse repurchase agreements are contracts for the sale of
securities owned or borrowed by the Bank, with an agreement to repurchase those
securities at an agreed upon price and date. We use reverse repurchase
agreements in periods when we can generate securities investments with yields in
excess of the cost of such borrowings. Our policies limit the use of reverse
repurchase agreements to collateral consisting of U.S. Treasury obligations,
U.S. agency obligations or mortgage related securities. Securities brokers
utilized by the Bank in these agreements must meet the Securities Exchange Act
Uniform Net Capital Rule 15c3-1 requirements with a public securities
association master repurchase agreement on file. There was $20.0 million of
reverse repurchase agreements outstanding as of December 31, 1996, and the Bank
averaged approximately $11.1 million outstanding pursuant to such agreements
during the year ended December 31, 1996. At September 30, 1997, $18.7 million of
reverse repurchase agreements were outstanding. In 1994, the Bank became
eligible to obtain advances from the FHLB of New York upon the security of the
common stock it owns in that bank and certain of its residential mortgage loans,
provided certain standards related to credit worthiness have been met. Such
advances are available pursuant to several credit programs, each of which has
its own interest rate and range of maturities. There were $12.0 million of FHLB
advances outstanding as of December 31, 1996, and the Bank averaged
approximately $5.6 million of FHLB advances during the year ended December 31,
1996. As of September 30, 1997, $10.0 million of FHLB advances were outstanding.
At September 30, 1997, the Bank had $117.8 million available under a line of
credit with the FHLB of New York.
The following table sets forth the maximum month-end balance and average
monthly balance of FHLB advances and securities sold under agreements to
repurchase for the periods indicated. The Bank had no outstanding borrowings at
December 31, 1995 and 1994.
<TABLE>
<CAPTION>
Nine Months Year Ended
Ended September 30, December 31,
------------------
1997 1996 1996
---------- ---------- ---------
(Dollars in thousands)
<S> <C> <C> <C>
Maximum Balance:
- ---------------
FHLB advances....................................... $ 10,000 $ 5,000 $ 12,000
Securities sold under agreements
to repurchase...................................... 28,961 24,675 24,675
Average Balance:
- ---------------
FHLB advances....................................... 6,889 5,000 5,583
Securities sold under agreements
to repurchase...................................... 22,030 8,147 11,091
Weighted Average Interest Rate:
- ------------------------------
FHLB advances....................................... 5.93% 5.72% 5.78%
Securities sold under agreements
to repurchase...................................... 5.59 5.35 5.38
</TABLE>
78
<PAGE>
The following table sets forth certain information as to the Bank's
borrowings at the dates indicated.
<TABLE>
<CAPTION>
At At
September 30, December 31,
1997 1996
------------ -----------
(In thousands)
<S> <C> <C>
FHLB advances...................................................................... $ 10,000 $ 12,000
Securities sold under agreements to repurchase..................................... 18,740 20,008
----------- ----------
Total borrowings............................................................... $ 28,740 $ 32,008
=========== ==========
Weighted average interest rate of FHLB advances.................................... 6.16% 6.03%
Weighted average interest rate of securities sold
under agreements to repurchase................................................. 5.68% 5.42%
</TABLE>
SAVINGS BANK LIFE INSURANCE
The Bank, through its Savings Bank Life Insurance ("SBLI") department,
engages in group life insurance coverage for individuals under the SBLI
Financial Institution Group Life insurance policy. The SBLI department's
activities are segregated from the Bank and, while they do not materially affect
the Bank's earnings, management believes that offering SBLI is beneficial to the
Bank's relationship with its depositors and the general public. The SBLI
department pays its own expenses and reimburses the Bank for expenses incurred
on its behalf. At September 30, 1997, the SBLI Department had policies totaling
$1.7 billion in force.
OTHER FEE BASED ACTIVITIES
We offer annuity and mutual fund products through designated employees who
are registered representatives. The annuity and mutual funds, which are products
of unrelated insurance and mutual fund companies, are offered to customers and
to members of the general public who are interested in non-deposit investments.
We began offering mutual fund products in 1997. We earn fees from the annuity
and mutual fund providers for attracting and retaining these customers. During
the nine months ended September 30, 1997, and the years ended December 31, 1996,
1995 and 1994, we had revenues of $339,000, $448,000, $230,000 and $143,000,
respectively from annuity and mutual fund sales.
SUBSIDIARY ACTIVITIES
LSB Realty, Inc. LSB Realty, Inc. is a wholly-owned real estate development
subsidiary of the Bank which was established in 1984 for the purpose of
investing in and lending to real estate development projects. At this time, the
subsidiary is in the process of divesting its last five projects and selling the
remaining properties it has developed. The portfolio was developed in the 1980's
with other New York State savings banks and invested primarily in residential
real estate development partnerships in the Hudson Valley region of New York
State. As of September 30, 1997, there is no remaining asset value reflected in
the financial statements for these projects.
LSB Associates, Inc. LSB Associates, Inc., a wholly-owned subsidiary of the
Bank incorporated in 1984, is engaged in the sale of annuities, life insurance,
and mutual funds. LSB Associates, Inc. acts as an agent for third party
insurance companies to sell their products.
79
<PAGE>
Other Subsidiaries. The Bank has two other wholly-owned subsidiaries. LSB
Funding, Inc. is a real estate investment trust ("REIT") and LSB Securities,
Inc. is a New York State Article 9A company which is primarily involved in the
investment in U.S. Treasury obligations.
COMPETITION
The Bank faces significant competition in both making loans and attracting
deposits. The Western New York area has a high density of financial
institutions, most of which are branches of significantly larger institutions
which have greater financial resources than the Bank, and all of which are
competitors of the Bank to varying degrees. The Bank's competition for loans
comes principally from commercial banks, savings banks, savings and loan
associations, mortgage banking companies, credit unions and insurance companies
and other financial service companies. Its most direct competition for deposits
has historically come from savings and loan associations, savings banks,
commercial banks and credit unions. The Bank faces additional competition for
deposits from non-depository competitors such as the mutual fund industry,
securities and brokerage firms and insurance companies. Further competition may
arise as restrictions on the interstate operations of financial institutions are
removed.
PROPERTIES
The Bank currently conducts its business through fifteen full service
banking offices. The following table sets forth the Bank's offices as of
September 30, 1997 and does not include the three branch office facilities which
the Bank plans to initiate subsequent to such date, which are expected to open
in the first or second quarter of 1998.
<TABLE>
<CAPTION>
LOCATION LEASED ORIGINAL DATE OF NET BOOK VALUE
OR YEAR LEASE OF PROPERTY OR
OWNED LEASED OR EXPIRATION LEASEHOLD
ACQUIRED IMPROVEMENTS AT
SEPTEMBER 30,1997
- --------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
ADMINISTRATIVE/HOME OFFICE:
Administrative Center
6950 South Transit Road
Lockport, NY 14094 Owned 1996 N/A $7,986
BRANCH OFFICES:
Loan Center Office
80 Washburn Street
Lockport, NY 14094 Owned 1968 N/A $538
Main Office (1)
55 East Avenue
Lockport, NY 14094 Owned 1968 N/A $1,385
Town of Lockport Office (2)
5737 South Transit Road
Lockport, NY 14094 Leased 1973 4/30/12 $639
Town of Lockport Office (2)
Drive Thru Facility
6210 Shimer Drive
Lockport, NY 14094 Leased 1993 9/30/12 $218
Batavia Office
401 West Main Street
Batavia, NY 14020 Owned 1977 N/A $413
</TABLE>
80
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Cheektowaga Office
1455 French Road
Depew, NY 14043 Owned 1991 N/A $813
Clarence Office
6409 Transit Road
East Amherst, NY 14051 Leased 1989 12/31/09 $25
Depew Office
570 Dick Roadb
NY 14043 Leased 1996 12/31/99 $208
Hamburg Office
5751 South Park Avenue
Hamburg, NY 14075 Owned 1995 N/A $897
Medina Office
327 Main Street
Medina, NY 14103 Owned 1975 N/A $319
Niagara Falls Office
Tops Int'l Super Center
7200 Niagara Falls Blvd.
Niagara Falls, NY 14304 Leased 1993 3/31/08 $124
North Tonawanda Office
100 River Road
North Tonawanda, NY 14120 Owned 1994 N/A $728
Ransomville Office
2547 Youngstown/Lockport Rd.
Ransomville, NY 14131 Owned 1985 N/A $71
Tonawanda Office
Sheridan/Delaware Plaza
Tonawanda, NY 14223 Leased 1997 3/31/17 $336
West Amherst Office
Tops Super Center
3035 Niagara Falls Blvd.
Amherst, NY 14228 Leased 1993 9/30/08 $137
West Seneca Office
1251 Union Road Leased 1996 8/31/06 $254
West Seneca, NY 14224
North Buffalo Office
2141 Elmwood Avenue
Buffalo, NY 14207 Leased 1997 3/31/17 $292
</TABLE>
________________
(1) The Main Office Branch building also houses certain administrative offices.
(2) The Bank owns the building but leases the land.
LEGAL PROCEEDINGS
The Bank is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business which, in
the aggregate, involve amounts which are believed by management to be immaterial
to the financial condition or operations of the Bank.
81
<PAGE>
PERSONNEL
As of September 30, 1997, the Bank had 305 full-time employees and 96 part-
time employees. The employees are not represented by a collective bargaining
unit and the Bank considers its relationship with its employees to be good. See
"Management of the Bank - Benefit Plans" for a description of certain
compensation and benefit programs offered to the Bank's employees.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
General. The Mutual Holding Company, the Company and the Bank will be
subject to federal income taxation in the same general manner as other
corporations, with some exceptions discussed below. 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 Bank.
Method of Accounting. For federal income tax purposes, the Bank currently
reports its income and expenses on the accrual method of accounting and uses a
tax year ending December 31 for filing its consolidated federal income tax
returns. The Small Business Protection Act of 1996 (the "1996 Act") eliminated
the use of the reserve method of accounting for bad debt reserves by savings
institutions, effective for taxable years beginning after 1995.
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. The amount of
such reserve subject to recapture as of September 30, 1997, was approximately
$4.2 million
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 or cease to maintain a bank
charter.
At September 30, 1997, the Bank's total federal pre-1988 reserve was
approximately $6.9 million. This reserve reflects the cumulative effects of
federal tax deductions by the Bank for which no Federal income tax provision has
been made.
Minimum Tax. The Code imposes an alternative minimum tax ("AMT") at a rate
of 20% on a base of regular taxable income plus certain tax preferences
("alternative minimum taxable income" or "AMTI"). The AMT is payable to the
extent such AMTI is in excess of an exemption amount. Net operating losses can
offset no more than 90% of AMTI. Certain payments of alternative minimum tax may
be used as credits against regular tax liabilities in future years. The Bank has
not been subject to the alternative minimum tax and has no such amounts
available as credits for carryover.
Net Operating Loss Carryovers. A financial institution may carry back net
operating losses to the preceding two taxable years and forward to the
succeeding 20 taxable years. This provision applies to losses incurred in
taxable years beginning after August 5, 1997. At September 30, 1997, the Bank
had no net operating loss carryforwards for federal income tax purposes.
82
<PAGE>
Corporate Dividends-Received Deduction. The Company may exclude from its
income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. Following completion of the Reorganization and
Offering, it is expected that the Mutual Holding Company will own less than 80%
of the outstanding Common Stock of the Company. As such, the Mutual Holding
Company will not be permitted to file a consolidated federal income tax return
with the Company and the Bank. The corporate dividends-received deduction is 80%
in the case of dividends received from corporations with which a corporate
recipient does not file a consolidated return, and corporations which own less
than 20% of the stock of a corporation distributing a dividend may deduct only
70% of dividends received or accrued on their behalf.
STATE TAXATION
New York State Taxation. The Company and the Bank will report income on a
combined calendar year basis to New York State. New York State Franchise Tax on
corporations is imposed in an amount equal to the greater of (a) 9% of "entire
net income" allocable to New York State (b) 3% of "alternative entire net
income" allocable to New York State (c) 0.01% of the average value of assets
allocable to New York State or (d) nominal minimum tax. Entire net income is
based on federal taxable income, subject to certain modifications. 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.
REGULATION
GENERAL
The Bank is a New York-chartered mutual savings bank and its deposit
accounts are insured up to applicable limits by the Bank Insurance Fund ("BIF")
of the FDIC. The Bank is subject to extensive regulation by the Department, as
its chartering agency; and by the FDIC, as its deposit insurer. The Bank is
required to file reports with, and is periodically examined by, the FDIC and the
Superintendent concerning its activities and financial condition and must obtain
regulatory approvals prior to entering into certain transactions, including, but
not limited to, mergers with or acquisitions of other savings institutions. The
Bank is a member of the FHLB of New York and is subject to certain regulations
by the Federal Home Loan Bank System. Both the Company and the Mutual Holding
Company, as bank holding companies, will be subject to regulation by the Federal
Reserve Board and will be required to file reports with the Federal Reserve
Board. Any change in such regulations, whether by the Department, the FDIC, or
the Federal Reserve Board could have a material adverse impact on the Bank, the
Company, or the Mutual Holding Company.
Certain of the regulatory requirements applicable to the Bank, the Company
and the Mutual Holding Company are referred to below or elsewhere
herein.
NEW YORK BANK REGULATION
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
83
<PAGE>
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 investment 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 Trustees
and the interested party must abstain from participating directly or indirectly
in the voting on such loan, (ii) the loan must be on terms that are not more
favorable than those offered to unaffiliated third parties, and (iii) the loan
must not involve more than a normal risk of repayment or present other
unfavorable features.
Under the New York State Banking Law, the Superintendent may issue an order
to a New York State chartered banking institution to appear and explain an
apparent violation of law, to discontinue unauthorized or unsafe practices and
to keep prescribed books and accounts. Upon a finding by the Department that any
director, trustee or officer of any banking organization has violated any law,
or has continued unauthorized or unsafe practices in conducting the business of
the banking organization after having been notified by the Superintendent to
discontinue such practices, such director, trustee or officer may be removed
from office after notice and an opportunity to be heard. The Bank does not know
of any past or current practice, condition or violation that might lead to any
proceeding by the Superintendent or the Department against the Bank or any of
its trustees or officers.
INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC
The Bank is a member of the BIF, which is administered by the FDIC.
Deposits are insured up to applicable limits by the FDIC and such insurance is
backed by the full faith and credit of the U.S. Government. As insurer, the FDIC
imposes deposit insurance premiums and is authorized to conduct examinations of
and to require reporting by FDIC-insured institutions. It also may prohibit any
FDIC-insured institution from engaging in any activity the FDIC determines by
regulation or order to pose a serious risk to the FDIC. The FDIC also has the
authority to initiate enforcement actions against savings banks, after giving
the Superintendent an opportunity to take such action, and may terminate the
deposit insurance if it determines that the institution has engaged or is
engaging in unsafe or unsound practices, or is in an unsafe or unsound
condition.
84
<PAGE>
In late 1995, the FDIC approved a final rule regarding deposit insurance
premiums which, effective with respect to the semi-annual premium assessment
beginning January 1, 1996, reduced deposit insurance premiums for BIF member
institutions to zero basis points (subject to an annual minimum of $2,000) for
institutions in the lowest risk category.
As a result of legislation passed in 1996, relating to the recapitalization
of the SAIF, from 1997 through 1999, FDIC-insured institutions will pay an
insurance premium of approximately 1.3 basis points of their BIF-assessable
deposits. The Bank's insurance premiums, which had amounted to the minimum
$2,000 annual fee for its BIF-insured deposits, were increased to 1.3 basis
points. Based upon assessable deposits at September 30, 1997, the Bank would
expect to pay $31,400 in insurance premiums per quarter during 1998.
REGULATORY CAPITAL REQUIREMENTS
The FDIC has adopted risk-based capital guidelines to which the Bank is
subject. The guidelines establish a systematic analytical framework that makes
regulatory capital requirements more sensitive to differences in risk profiles
among banking organizations. The Bank is required to maintain certain levels of
regulatory capital in relation to regulatory risk-weighted assets. The ratio of
such regulatory capital to regulatory risk-weighted assets is referred to as the
Bank's "risk-based capital ratio." Risk-based capital ratios are determined by
allocating assets and specified offbalance sheet items to four risk-weighted
categories ranging from 0% to 100%, with higher levels of capital being required
for the categories perceived as representing greater risk.
These guidelines divide a savings bank's capital into two tiers. The first
tier ("Tier I") includes common equity, retained earnings, certain non-
cumulative perpetual preferred stock (excluding auction rate issues) and
minority interests in equity accounts of consolidated subsidiaries, less
goodwill and other intangible assets (except mortgage servicing rights and
purchased credit card relationships subject to certain limitations).
Supplementary ("Tier II") capital includes, among other items, cumulative
perpetual and long-term limited-life preferred stock, mandatory convertible
securities, certain hybrid capital instruments, term subordinated debt and the
allowance for loan and lease losses, subject to certain limitations, less
required deductions. Savings banks are required to maintain a total risk-based
capital ratio of 8%, of which at least 4% must be Tier I capital.
In addition, the FDIC has established regulations prescribing a minimum
Tier I leverage ratio (Tier I capital to adjusted total assets as specified in
the regulations). These regulations provide for a minimum Tier I leverage ratio
of 3% for banks that meet certain specified criteria, including that they have
the highest examination rating and are not experiencing or anticipating
significant growth. All other banks are required to maintain a Tier I leverage
ratio of 3% plus an additional cushion of at least 100 to 200 basis points. The
FDIC may, however, set higher leverage and risk-based capital requirements on
individual institutions when particular circumstances warrant. Savings banks
experiencing or anticipating significant growth are expected to maintain capital
ratios, including tangible capital positions, well above the minimum levels.
STANDARDS FOR SAFETY AND SOUNDNESS
The federal banking agencies have adopted a final regulation and
Interagency Guidelines Prescribing Standards for Safety and Soundness
("Guidelines") to implement the safety and soundness standards required under
federal law. The Guidelines set forth the safety and soundness standards that
the federal banking agencies use to identify and address problems at insured
depository institutions before capital becomes impaired. The standards set forth
in the Guidelines address internal controls and information systems; internal
audit system; credit underwriting; loan documentation; interest rate risk
exposure; asset growth; and compensation, fees and benefits. The agencies also
adopted additions to the Guidelines which require institutions to examine asset
quality and earnings standards. If the appropriate federal banking agency
determines that an institution fails to meet any standard prescribed by the
Guidelines, the agency may require the institution to submit to the agency an
acceptable plan to achieve compliance with the standard, as required
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by federal law. The final regulations establish deadlines for the submission and
review of such safety and soundness compliance plans.
LIMITATIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS
The FDIC has the authority to use its enforcement powers to prohibit a
savings bank from paying dividends if, in its opinion, the payment of dividends
would constitute an unsafe or unsound practice. Federal law also prohibits the
payment of dividends by a bank that will result in the bank failing to meet its
applicable capital requirements on a pro forma basis. New York law also
restricts the Bank from declaring a dividend which would reduce its capital
below (i) the amount required to be maintained by state and federal law and
regulations, or (ii) the amount of the Bank's liquidation account established in
connection with the Reorganization.
PROMPT CORRECTIVE ACTION
The federal banking agencies have promulgated regulations to implement the
system of prompt corrective action required by federal law. Under the
regulations, a bank shall be deemed to be (i) "well capitalized" if it has total
risk-based capital of 10.0% or more, has a Tier 1 risk-based capital ratio of
6.0% or more, has a Tier I leverage capital ratio of 5.0% or more and is not
subject to any written capital order or directive; (ii) "adequately capitalized"
if it has a total risk-based capital ratio of 8.0% or more, a Tier I risk-based
capital ratio of 4.0% or more and a Tier I leverage capital ratio of 4.0% or
more (3.0% under certain circumstances) and does not meet the definition of
"well capitalized"; (iii) "undercapitalized" if it has a total risk-based
capital ratio that is less than 8.0%, a Tier I risk-based capital ratio that is
less than 4.0% or a Tier I leverage capital ratio that is less than 4.0% (3.0%
under certain circumstances); (iv) "significantly undercapitalized" if it has a
total risk-based capital ratio that is less than 6.0%, a Tier I risk-based
capital ratio that is less than 3.0% or a Tier I leverage capital ratio that is
less than 3.0%; and (v) "critically undercapitalized" if it has a ratio of
tangible equity to total assets that is equal to or less than 2.0%. Federal law
and regulations also specify circumstances under which a federal banking agency
may reclassify a well capitalized institution as adequately capitalized and may
require an adequately capitalized institution to comply with supervisory actions
as if it were in the next lower category (except that the FDIC may not
reclassify a significantly undercapitalized institution as critically
undercapitalized).
Based on the foregoing, the Bank is currently classified as a "well
capitalized" savings institution.
ACTIVITIES AND INVESTMENTS OF INSURED STATE-CHARTERED BANKS
Federal law generally limits the activities and equity investments of FDIC-
insured, state-chartered banks to those that are permissible for national banks,
notwithstanding state laws. Under regulations dealing with equity investments,
an insured state bank generally may not, directly or indirectly, acquire or
retain any equity investment of a type, or in an amount, that is not permissible
for a national bank. An insured state bank is not prohibited from, among other
things, (i) acquiring or retaining a majority interest in a subsidiary; (ii)
investing as a limited partner in a partnership the sole purpose of which is
direct or indirect investment in the acquisition, rehabilitation, or new
construction of a qualified housing project, provided that such limited
partnership investments may not exceed 2% of the bank's total assets; (iii)
acquiring up to 10% of the voting stock of a company that solely provides or
reinsures directors', trustees', and officers' liability insurance coverage or
bankers' blanket bond group insurance coverage for insured depository
institutions; and (iv) acquiring or retaining the voting shares of a depository
institution if certain requirements are met.
Federal law and FDIC regulations permit certain exceptions to the foregoing
limitation. For example, certain state-chartered banks, such as the Bank, may
continue to invest in common or preferred stock listed on a National Securities
Exchange or the National Market System of NASDAQ, and in the shares of an
investment company registered under the Investment Company Act of 1940, as
amended. Such banks may also continue to sell savings bank life insurance. As of
September 30, 1997, the Bank had $6.1 million of securities pursuant to this
exception.
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TRANSACTIONS WITH AFFILIATES
Under current federal law, transactions between depository institutions and
their affiliates are governed by Sections 23A and 23B of the Federal Reserve
Act. An affiliate of a savings bank is any company or entity that controls, is
controlled by, or is under common control with the savings bank, other than a
subsidiary. In a holding company context, at a minimum, the parent holding
company of a savings bank and any companies which are controlled by such parent
holding company are affiliates of the savings bank. Generally, Section 23A
limits the extent to which the savings bank or its subsidiaries may engage in
"covered transactions" with any one affiliate to an amount equal to 10% of such
savings bank's capital stock and surplus, and contains an aggregate limit on all
such transactions with all affiliates to an amount equal to 20% of such capital
stock and surplus. The term "covered transaction" includes the making of loans
or other extensions of credit to an affiliate; the purchase of assets from an
affiliate, the purchase of, or an investment in, the securities of an affiliate;
the acceptance of securities of an affiliate as collateral for a loan or
extension of credit to any person; or issuance of a guarantee, acceptance, or
letter of credit on behalf of an affiliate. Section 23A also establishes
specific collateral requirements for loans or extensions of credit to, or
guarantees, acceptances on letters of credit issued on behalf of an affiliate.
Section 23B requires that covered transactions and a broad list of other
specified transactions be on terms substantially the same, or no less favorable,
to the savings bank or its subsidiary as similar transactions with
nonaffiliates.
Further, Section 22(h) of the Federal Reserve Act restricts a savings bank
with respect to loans to directors, executive officers, and principal
stockholders. Under Section 22(h), loans to directors, executive officers and
stockholders who control, directly or indirectly, 10% or more of voting
securities of a savings bank, and certain related interests of any of the
foregoing, may not exceed, together with all other outstanding loans to such
persons and affiliated entities, the savings bank's total capital and surplus.
Section 22(h) also prohibits loans above amounts prescribed by the appropriate
federal banking agency to directors, executive officers, and shareholders who
control 10% or more of voting securities of a stock savings bank, and their
respective related interests, unless such loan is approved in advance by a
majority of the Board of Directors of the savings bank. Any "interested"
director may not participate in the voting. The loan amount (which includes all
other outstanding loans to such person) as to which such prior board of director
approval is required, is the greater of $25,000 or 5% of capital and surplus or
any loans over $500,000. Further, pursuant to Section 22(h), loans to directors,
executive officers and principal shareholders must generally be made on terms
substantially the same as offered in comparable transactions to other persons.
Section 22(g) of the Federal Reserve Act places additional limitations on loans
to executive officers.
HOLDING COMPANY REGULATION
FEDERAL BANK HOLDING COMPANY REGULATION. Upon consummation of the
Reorganization, the Company, as the sole shareholder of the Bank, and the Mutual
Holding Company, as indirect controlling shareholder of the Bank, will become
bank holding companies. Bank holding companies are subject to comprehensive
regulation and regular examinations by the Federal Reserve Board under the BHCA,
and the regulations of the Federal Reserve Board. The Federal Reserve Board also
has extensive enforcement authority over bank holding companies, including,
among other things, the ability to assess civil money penalties, to issue cease
and desist or removal orders and to require that a holding company divest
subsidiaries (including its bank subsidiaries). In general, enforcement actions
may be initiated for violations of law and regulations and unsafe or unsound
practices.
Under Federal Reserve Board policy, a bank holding company must serve as a
source of strength for its subsidiary bank. Under this policy the Federal
Reserve Board may require, and has required in the past, a holding company to
contribute additional capital to an undercapitalized subsidiary bank.
Under the BHCA, a bank holding company must obtain Federal Reserve Board
approval before: (i) acquiring, directly or indirectly, ownership or control of
any voting shares of another bank or bank holding company if, after such
acquisition, it would own or control more than 5% of such shares (unless it
already owns or controls the majority of such
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shares); (ii) acquiring all or substantially all of the assets of another bank
or bank holding company; or (iii) merging or consolidating with another bank
holding company.
The BHCA also prohibits a bank holding company, with certain exceptions,
from acquiring direct or indirect ownership or control of more than 5% of the
voting shares of any company which is not a bank or bank holding company, or
from engaging directly or indirectly in activities other than those of banking,
managing or controlling banks, or providing services for its subsidiaries. The
principal exceptions to these prohibitions involve certain non-bank activities
which, by statute or by Federal Reserve Board regulation or order, have been
identified as activities closely related to the business of banking or managing
or controlling banks. The list of activities permitted by the Federal Reserve
Board includes, among other things, operating a savings association, mortgage
company, finance company, credit card company or factoring company; performing
certain data processing operations; providing certain investment and financial
advice; underwriting and acting as an insurance agent for certain types of
credit-related insurance; leasing property on a full-payout, non-operating
basis; selling money orders, travelers' checks and United States Savings Bonds;
real estate and personal property appraising; providing tax planning and
preparation services; and, subject to certain limitations, providing securities
brokerage services for customers. The Company and the Mutual Holding Company
have no present plans to engage in any of these activities.
Interstate Banking and Branching. Federal law allows the Federal Reserve
Board to approve an application of an adequately capitalized and adequately
managed bank holding company to acquire control of, or acquire all or
substantially all of the assets of, a bank located in a state other than such
holding company's home state, without regard to whether the transaction is
prohibited by the laws of any state. The Federal Reserve Board may not approve
the acquisition of the bank that has not been in existence for the minimum time
period (not exceeding five years) specified by the statutory law of the host
state. The Federal Reserve Board is prohibited from approving an application if
the applicant (and its depository institution affiliates) controls or would
control more than 10% of the insured deposits in the United States or 30% or
more of the deposits in the target bank's home state or in any state in which
the target bank maintains a branch. Individual states continue to have authority
to limit the percentage of total insured deposits in the state which may be held
or controlled by a bank or bank holding company to the extent such limitation
does not discriminate against out-of-state banks or bank holding companies.
Individual states may also waive the 30% state-wide concentration limit referred
to above.
Additionally, beginning on June 1, 1997, the federal banking agencies were
authorized to approve interstate merger transactions without regard to whether
such transaction is prohibited by the law of any state, unless the home state of
one of the banks "opted out" by adopting a law which applies equally to all out-
of-state banks and expressly prohibits merger transactions involving out-of-
state banks. Interstate acquisitions of branches are permitted only if the law
of the state in which the branch is located permits such acquisitions. In
response to Riegle-Neal, the State of New York enacted laws allowing interstate
mergers and branching on a reciprocal basis.
Federal law authorizes the FDIC to approve interstate branching de novo by
national and state banks, respectively, only in states which specifically allow
for such branching. The appropriate federal banking agencies are required to
prescribe regulations which prohibit any out-of-state bank from using the
interstate branching authority primarily for the purpose of deposit production.
The FDIC and Federal Reserve Board have adopted such regulations. These
regulations include guidelines to ensure that interstate branches operated by an
out-of-state bank in a host state are reasonably helping to meet the credit
needs of the communities which they serve. Should the FDIC determination that a
bank interstate branch is not reasonably helping to meet the credit needs of the
communities serviced by an interstate, the FDIC is authorized to close the
interstate branch or not permit the bank to open a new branch in the state in
which the bank previously opened an interstate branch.
Dividends. The Federal Reserve Board has issued a policy statement on the
payment of cash dividends by bank holding companies, which expresses the Federal
Reserve Board's view that a bank holding company should pay cash dividends only
to the extent that the holding company's net income for the past year is
sufficient to cover both the cash dividends and a rate of earning retention that
is consistent with the holding company's capital needs, asset quality and
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overall financial condition. The Federal Reserve Board also indicated that it
would be inappropriate for a company experiencing serious financial problems to
borrow funds to pay dividends. Furthermore, under the prompt corrective action
regulations adopted by the Federal Reserve Board, the Federal Reserve Board may
prohibit a bank holding company from paying any dividends if the holding
company's bank subsidiary is classified as "undercapitalized."
Bank holding companies are required to give the Federal Reserve Board prior
written notice of any purchase or redemption of its outstanding equity
securities if the gross consideration for the purchase or redemption, when
combined with the net consideration paid for all such purchases or redemptions
during the preceding 12 months, is equal to 10% or more of their consolidated
net worth. The Federal Reserve Board may disapprove such a purchase or
redemption if it determines that the proposal would constitute an unsafe or
unsound practice or would violate any law, regulation, Federal Reserve Board
order, or any condition imposed by, or written agreement with, the Federal
Reserve Board. This notification requirement does not apply to any company that
meets the well-capitalized standard for commercial banks, has a safety and
soundness examination rating of at least a "2" and is not subject to any
unresolved supervisory issues.
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 upon the Effective Date of
the Reorganization, 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.
MUTUAL HOLDING COMPANY REGULATION. Under New York law, the Mutual Holding
Company may exercise all powers and privileges of a New York chartered mutual
savings bank. As a bank holding company, the Mutual Holding Company is also
authorized to exercise all powers and in engage in all activities permitted to a
bank holding company under the Bank Holding Company Act, except that it may not
directly or indirectly engage in the sale or underwriting of insurance.
Dividend Waivers by the Mutual Holding Company. It has been the policy of
many mutual holding companies to waive the receipt of dividends declared by any
savings institution subsidiary. In connection with its approval of the
Reorganization, however, the Federal Reserve Board 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 Federal Reserve
Board approval before it may waive any dividends. As of the date hereof,
management does not believe that the Federal Reserve Board has given its
approval to any waiver of dividends by any mutual holding company that has
requested its approval.
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The terms of the Federal Reserve Board approval of the Reorganization also
require that 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 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 except that such rules would be administered by the Federal Reserve
Board, and any other rules and regulations adopted by the Federal Reserve Board.
The Plan of Reorganization also provides that if the Mutual Holding Company
converts to stock form in the future, any waived dividends would reduce the
percentage of the converted company's shares of common stock issued to Minority
Stockholders in connection with any such transaction. See "Conversion of the
Mutual Holding Company to Stock Form."
Management does not believe that the Mutual Holding Company will initially
waive dividends declared by the Company. If the Mutual Holding Company decides
that it is in its best interest to waive a particular dividend to be paid by the
Company, and the Federal Reserve Board approves such waiver, then the Company
would pay such dividend only to Minority Stockholders, and the amount of the
dividend waived by the Mutual Holding Company would be treated in the manner
described above. The Mutual Holding Company's decision as to whether or not to
waive a particular dividend, if such waiver is approved by the Federal Reserve
Board, will depend on a number of factors, including the Mutual Holding
Company's capital needs, the investment alternatives available to the Mutual
Holding Company as compared to those available to the Company, and regulatory
approvals. There can be no assurance (i) that after the Reorganization the
Mutual Holding Company will waive dividends paid by the Company, (ii) that the
Federal Reserve Board will approve any dividend waivers by the Mutual Holding
Company or (iii) of the terms that may be imposed by the Federal Reserve Board
on any dividend waiver.
Conversion of the Mutual Holding Company to Stock Form. New York law,
regulations of the Department and the Plan of Reorganization permit the Mutual
Holding Company to convert from the mutual to the capital stock form of
organization (a "Conversion Transaction"). There can be no assurance when, if
ever, a Conversion Transaction will occur, and the Board of Trustees has no
current intention or plan to undertake a Conversion Transaction. In a Conversion
Transaction, the Mutual Holding Company would merge with and into the Bank or
the Company, with the Bank or the Company as the resulting entity, and certain
depositors of the Bank would receive the right to subscribe for additional
shares of the resulting entity. In a Conversion Transaction, each share of
Common Stock outstanding immediately prior to the completion of the Conversion
Transaction held by persons other than the Mutual Holding Company (a "Minority
Share") would be automatically converted into and become the right to receive a
number of shares of common stock of the resulting entity determined pursuant an
exchange ratio that ensures that after the conversion transaction, subject to
the Dividend Waiver Adjustment described below and a slight adjustment to
reflect the receipt of cash in lieu of fractional shares, the percentage of the
to-be outstanding shares of the resulting entity issued to Minority Stockholders
in exchange for their Common Stock would be equal to the percentage of the
outstanding shares of Common Stock held by Minority Stockholders immediately
prior to the Conversion Transaction. The total number of shares held by Minority
Stockholders after the Conversion Transaction would also be affected by any
purchases by such persons in the offering that would be conducted as part of the
Conversion Transaction.
The Dividend Waiver Adjustment would adjust the percentage of the to-be
outstanding shares of the resulting entity issued in exchange for minority
shares to reflect (i) the aggregate amount of dividends waived by the Mutual
Holding Company and (ii) assets other than Common Stock held by the Mutual
Holding Company. Pursuant to the Dividend Waiver Adjustment, the percentage of
the to-be outstanding shares of the resulting entity issued to Minority
Stockholders in exchange for their minority shares (the "Adjusted Minority
Ownership Percentage") is equal to the percentage of the outstanding shares of
Common Stock held by Minority Stockholders multiplied by the Dividend Waiver
Fraction. The Dividend Waiver Fraction is equal to the product of (a) a
fraction, of which the numerator is equal to the Company's stockholders' equity
at the time of the Conversion Transaction less the aggregate amount of dividends
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waived by the Mutual Holding Company and the denominator is equal to the
Company's stockholders' equity at the time of the Conversion Transaction, and
(b) a fraction, of which the numerator is equal to the appraised pro forma
market value of the resulting entity minus the value of the Mutual Holding
Company's assets other than Common Stock and the denominator is equal to the pro
forma market value of the resulting entity.
FEDERAL SECURITIES LAW
The Common Stock of the Company to be issued in the Offering will be
registered with the Securities and Exchange Commission ("SEC") under the
Exchange Act. The Company will be subject to the information, proxy
solicitation, insider trading restrictions and other requirements of the SEC
under the Exchange Act.
Company Common Stock held by persons who are affiliates (generally
officers, directors and principal stockholders) of the Company may not be resold
without registration or unless sold in accordance with certain resale
restrictions. If the Company meets specified current public information
requirements, each affiliate of the Company is able to sell in the public
market, without registration, a limited number of shares in any three-month
period.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board requires all depository institutions to maintain
noninterest-bearing reserves at specified levels against their transaction
accounts (primarily checking, NOW and Super NOW checking accounts). At September
30, 1997, the Bank was in compliance with these reserve requirements.
COMMUNITY REINVESTMENT ACT
Under the Community Reinvestment Act, as amended (the "CRA"), as
implemented by FDIC regulations, a savings bank 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 CRA requires the FDIC to provide a written evaluation
of an institution's CRA performance utilizing a four-tiered descriptive rating
system. The Bank's latest CRA rating was "satisfactory."
New York State Regulation. The Bank is also subject to provisions of the
New York State Banking Law which impose continuing and affirmative obligations
upon banking institutions organized in New York State to serve the credit needs
of its local community ("NYCRA") which are substantially similar to those
imposed by the CRA. Pursuant to the NYCRA, a bank must file an annual NYCRA
report and copies of all federal CRA reports with the Banking Department. The
NYCRA requires the Banking Department to make an annual written assessment of a
bank's compliance with the NYCRA, utilizing a four-tiered rating system, and
make such assessment available to the public. The NYCRA also requires the
Superintendent to consider a bank's NYCRA rating when reviewing a bank's
application to engage in certain transactions, including mergers, asset
purchases and the establishment of branch offices or automated teller machines,
and provides that such assessment may serve as a basis for the denial of any
such application.
The Bank's NYCRA rating as of its latest examination was "satisfactory."
FEDERAL HOME LOAN BANK SYSTEM
The Bank is a member of the FHLB of New York, which is one of 12 regional
FHLBs, that administers the home financing credit function of savings
institutions. Each FHLB serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from proceeds derived from
the sale of consolidated obligations of the
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FHLB System. It makes loans to members (i.e., advances) in accordance with
policies and procedures established by the board of directors of the FHLB. These
policies and procedures are subject to the regulation and oversight of the
Federal Housing Finance Board. All advances from the FHLB are required to be
fully secured by sufficient collateral as determined by the FHLB. In addition,
all long-term advances are required to provide funds for residential home
financing.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of New York. At September 30, 1997, the Bank had $6.4 million of FHLB
stock. In past years, the Bank has received dividends on its FHLB stock. The
dividend yield from FHLB stock was 6.75% at September 30, 1997. No assurance can
be given that such dividends will continue in the future at such levels.
Under federal law, the FHLBs are required to provide funds for the
resolution of troubled savings institutions and to contribute to low and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of the Bank's FHLB stock may result in a corresponding
reduction in the Bank's capital.
MANAGEMENT OF THE COMPANY
DIRECTORS OF THE COMPANY
The Board of Directors of the Company consists of eleven members, each of
whom is currently serving as a Trustee of the Bank. Directors of the Company
will serve three-year staggered terms so that approximately one-third of the
Directors will be elected at each annual meeting of stockholders. The class of
directors whose term of office expires at the first annual meeting of
shareholders following completion of the Reorganization consists of Directors
Currie, Heinrich, Mancuso and Weber. The class of directors whose term expires
at the second annual meeting of shareholders following completion of the
Reorganization consists of Directors Caldwell, Fitch, Judge and Miklinski. The
class of directors whose term of office expires at the third annual meeting of
shareholders following the completion of the Reorganization consists of
Directors Assad, Smith and Swan. The biographical information regarding these
individuals is set forth under "Management of the Bank-Biographical
Information."
EXECUTIVE OFFICERS OF THE COMPANY
The following individuals are executive officers of the Company and hold
the offices set forth below opposite their names. The biographical information
for each executive officer is set forth under "Management of the Bank--
Biographical Information."
Name Age* Position
- ----------------- --------- -------------------------------------
William E. Swan 50 President and Chief Executive Officer
Paul J. Kolkmeyer 44 Executive Vice President and Chief
Financial Officer
G. Gary Berner 49 Senior Vice President
Kathleen P. Monti 49 Senior Vice President
Diane Allegro 42 Senior Vice President
_________________________
*As of September 30, 1997
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The executive officers of the Company are elected annually and hold office
until their respective successors have been elected and qualified or until
death, resignation, retirement or removal by the Board.
Since the formation of the Company, none of the executive officers has
received remuneration from the Company. It is not anticipated that the executive
officers of the Company will initially receive any remuneration in his or her
capacity as an executive officer. For information concerning compensation of
executive officers of the Bank, see "Management of the Bank."
INDEMNIFICATION AND LIMITATION OF LIABILITY
The certificate of incorporation of the Company provides that a director or
officer of the Company shall be indemnified by the Company to the fullest extent
authorized by the Delaware General Corporation Law ("DGCL") against all
expenses, liability and loss reasonably incurred or suffered by such person in
connection with his activities as a director or officer or as a director or
officer of another company, if the director or officer held such position at the
request of the Company. Delaware law requires that such director, officer,
employee or agent, in order to be indemnified, must have acted in good faith and
in a manner reasonably believed to be not opposed to the best interests of the
Company and, with respect to any criminal action or proceeding, either had
reasonable cause to believe such conduct was lawful or did not have reasonable
cause to believe his conduct was unlawful.
In addition, the certificate of incorporation and Delaware law also provide
that the Company may maintain insurance, at its expense, to protect itself and
any director, officer, employee or agent of the Company or another corporation,
partnership, joint venture, trust or other enterprise against any expense,
liability or loss, whether or not the Company has the power to indemnify such
person against such expense, liability or loss under the DGCL. The Company
intends to obtain such insurance.
The certificate of incorporation also provides that directors of the
Company shall not be personally liable to the Company or its stockholders for
monetary damages for breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to the Company or
its stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174 of
the Delaware General Corporation Law (which relates to unlawful dividends or
stock purchases or redemptions), or (iv) for any transaction from which the
director derived an improper personal benefit.
MANAGEMENT OF THE BANK
Directors of the Bank
Upon completion of the Reorganization, the initial directors of the Bank
will consist of those persons who currently serve on the Board of Trustees of
the Bank. The directors of the Bank will have three year terms which will be
staggered to provide for the election of approximately one-third of the board
members each year. Directors of the Bank will be elected by the Company as sole
stockholder of the Bank. The proposed directors of the Bank are as follows:
<TABLE>
<CAPTION>
Director Age* Occupation Term Expires
- -------- ---- ---------- ------------
<S> <C> <C> <C>
Gordon P. Assad 49 President and Chief Executive Officer, 2001
Erie & Niagara Insurance Association
Christa R. Caldwell 63 Director (Retired), 2000
Lockport Public Library
James W. Currie 56 President, 1999
Ag Pak, Inc.
Gary B. Fitch 62 Owner-Manager, 2000
Ontario Orchards, Inc.
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C> <C>
David W. Heinrich 61 President, 1999
Heinrich Chevrolet Corp.
Daniel W. Judge 55 President and Chief Executive Officer, 2000
I.D. ONE, Inc.
B. Thomas Mancuso 41 President, 1999
Joseph L. Mancuso & Sons, Inc.
James Miklinski 54 General Manager, 2000
Niagara Milk Cooperative
Barton G. Smith 67 Paul Garrick, Inc. (Retired) 2001
William E. Swan 50 President and Chief Executive Officer, 2001
Lockport Savings Bank
Robert G. Weber 60 Managing Partner (Retired), 1999
KPMG Peat Marwick LLP
</TABLE>
________________
* As of September 30, 1997
EXECUTIVE OFFICERS OF THE BANK
The following table sets forth certain information (as of September 30,
1997) regarding the executive officers of the Bank, all of whom currently serve
in their indicated position as executive officers of the Bank.
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
William E. Swan 50 President and Chief Executive Officer
Paul J. Kolkmeyer 44 Executive Vice President and Chief
Financial Officer
G. Gary Berner 49 Senior Vice President and Chief Lending Officer
Kathleen P. Monti 49 Senior Vice President/HR & Administration
Diane Allegro 42 Senior Vice President / Retail Banking
</TABLE>
The executive officers of the Bank will be elected annually and will hold
office until the next annual meeting of the Board of Directors of the Bank held
immediately after the annual meeting of stockholders of the Bank, and until
their successors are elected and qualified, or until death, resignation,
retirement or removal by the Board of Directors.
BIOGRAPHICAL INFORMATION
Directors of the Bank
Gordon P. Assad has served as a Trustee of the Bank since 1995. Mr. Assad
is the President and Chief Executive Officer of Erie & Niagara Insurance
Association and has served in that position since 1972.
Christa R. Caldwell has served as a Trustee of the Bank since 1986. Ms.
Caldwell is retired and was the Director of the Lockport Public Library from
1967 to 1996.
James W. Currie has served as a Trustee of the Bank since 1987. Mr. Currie
is the President of Ag Pak, Inc., a manufacturer of produce packaging machines,
and has served in that position since 1974.
Gary B. Fitch has served as a Trustee of the Bank since 1981. Mr. Fitch is
the Owner-Manager of Ontario Orchards, Inc., and has served in that position
since 1976. Mr. Fitch also serves as the Executive Secretary of Agricultural
Affiliates, Inc. and has served in that position since 1991.
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<PAGE>
David W. Heinrich served as a Trustee of the Bank from 1969 to 1991. He was
re-elected to the Board in June of 1993. Mr. Heinrich is the President of
Heinrich Chevrolet Corp.
Daniel W. Judge has served as a Trustee of the Bank since 1992. Mr. Judge
is the President and Chief Executive Officer of I.D. ONE, Inc., a purchasing and
marketing cooperative of independent industrial distributors, and has served in
that position since 1996. Mr. Judge served as the Executive Director of I.D.
ONE, Inc. from 1993 to 1996. Mr. Judge has also served as President and Manager
of Dansam, Inc., a business management services company, since 1990.
B. Thomas Mancuso has served as a Trustee of the Bank since 1990. Mr.
Mancuso is the President of Joseph L. Mancuso & Sons, Inc., a real estate
development company.
James Miklinski has served as a Trustee of the Bank since 1996. Mr.
Miklinski is the General Manager of Niagara Milk Cooperative, and has served in
that position since 1990.
Barton G. Smith has served as a Trustee of the Bank since 1986. Mr. Smith
is retired from Paul Garrick, Inc.
William E. Swan has served as a Trustee of the Bank since 1996. Mr. Swan is
the President and Chief Executive Officer of Lockport Savings Bank, and has
served in that position since 1989. Prior to joining the Bank in 1988, he served
as an Administrative Vice President of Manufacturers and Traders Trust Company.
Robert G. Weber has served as a Trustee of the Bank since 1996. Mr. Weber
is a retired Buffalo Office Managing Partner of KPMG Peat Marwick LLP where he
served from 1959 to 1995.
Executive Officers of the Bank Who Are Not Directors
Paul J. Kolkmeyer has served as Executive Vice President and Chief
Financial Officer of the Bank since 1995. Prior to that time, Mr. Kolkmeyer
served as Senior Vice President and Chief Financial Officer of the Bank. He has
worked for the Bank since 1990. Prior to 1990, he served as a Vice President at
Morgan Guaranty Trust Company.
Kathleen P. Monti has served as Senior Vice President of Human Resources
and Administration of the Bank since 1995. From 1993 to 1995 Ms. Monti served as
Vice President of Human Resources of the Bank. Prior to 1993, she served as an
Administrative Vice President-Regional Human Resource Manager at Marine Midland
Bank.
G. Gary Berner has served as Senior Vice President and Chief Lending
Officer of the Bank since 1992. Prior to joining the Bank in 1992, he was Vice
President, Asset Management Group at Key Bank of New York, N.A.
Diane Allegro has been Senior Vice President of Retail Banking since
October 1997. From 1994 to October 1997, she was Vice President-Retail Sales &
Delivery Systems at Rochester Community Savings Bank. Prior to 1994, she was
employed by First Federal Savings and Loan Association of Rochester.
MEETINGS AND COMMITTEES OF THE BANK'S BOARD
The Board of Trustees of the Bank meets monthly and may have additional
special meetings as may be called by the Chairman or as otherwise provided by
law. During the year ended December 31, 1996, the Board held ___ meetings. No
trustee attended fewer than 75% in the aggregate of the total number of meetings
of the Board or Board Committees on which such Trustee served during 1996. The
Board of Trustees of the Bank has the following standing committees: Loan
Committee, Audit Committee, CRA Committee, Finance Committee and Board Affairs
Committee.
95
<PAGE>
BOARD OF DIRECTORS AND COMMITTEES OF THE COMPANY AFTER REORGANIZATION
Following the Reorganization, the Board of Directors of the Company is
expected to meet quarterly, or more often as may be necessary. The Board of
Directors initially is expected to have a standing Executive Committee and an
Audit Committee. The Board of Directors may, by resolution, designate one or
more additional committees.
The Executive Committee initially will consist of the following five
Directors of the Company: Messrs. Heinrich, Swan, Assad, Judge and Weber. The
Executive Committee is expected to meet as necessary when the Board is not in
session to exercise general control and supervision in all matters pertaining to
the interests of the Company, subject at all times to the direction of the Board
of Directors. The Executive Committee may also serve as the nominating committee
for the purpose of identifying, evaluating and recommending potential candidates
for election to the Board.
The Audit Committee initially will consist of the following Directors of
the Company: Weber, Currie, Mancuso, Miklinski and Heinrich. The Audit Committee
is expected to meet at least quarterly to examine and approve the audit report
prepared by the independent auditors of the Bank, to review and recommend the
independent auditors to be engaged by the Company, to review the internal audit
function and internal accounting controls of the Company, and to review and
approve audit policies.
COMPENSATION OF TRUSTEES AND DIRECTORS
Directors of the Bank receive a retainer fee of $12,000 ($17,000 for the
Chairman), plus a fee of $700 per Board meeting attended and $400 per meeting
for attendance at committee meetings. Directors who are also employees of the
Bank are not eligible to receive Board fees. Directors of the Company will
receive an annual retainer fee of $5,000 and a fee of $400 per meeting for
attendance at Board and committee meetings.
TRUSTEES DEFERRED FEES PLAN. The Trustees Deferred Fee Plan ("Trustees
Plan") is a non-qualified deferred compensation plan into which a Trustee can
defer up to 100% of his or her Board fees earned during the calendar year. All
amounts deferred by a Trustee are fully vested at all times. Amounts credited to
a deferred fee account are invested in equity securities, fixed income
securities, money market accounts, and cash, at the sole discretion of the Bank.
Upon cessation of a Trustee's service with the Bank, the Bank will pay the
Trustee the amounts credited to their account. The amounts will be paid in five
to ten substantially equal annual installments, as selected by the Trustee,
provided, however, that the annual payments will not be less than $25,000, and
if necessary, the number of payments and the amount of the final payment will be
adjusted accordingly.
If the Trustee dies before all payments have been made, the remaining
payments will be made to the Trustee's designated beneficiary. In the event of
the Trustee's death prior to commencement of benefits, the Bank shall pay the
Trustee's beneficiary the amounts credited to the benefit of the Trustee under
the Trustee's Plan, in five substantially equal annual payments of not less than
$25,000, and if necessary, the payments will be adjusted in the same manner as
paid, as applicable.
EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth for the year
ended December 31, 1996, certain information as to the total remuneration paid
by the Bank to the Chief Executive Officer of the Bank, as well as to the four
most highly compensated executive officers of the Bank at December 31, 1996
other than the Chief Executive Officer who received total annual compensation in
excess of $100,000 (together, the "Named Executive Officers").
96
<PAGE>
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
------------------------------- ------------------------------------
Awards Payouts
-------------------- ---------------
Other
Year Annual Restricted Options/
Ended Compensation Stock SARS LTIP
Name and Principal Position 12/31(1) Salary Bonus(2) (3) Awards(4) (#)(5) Payouts
- ------------------------------- ---------- -------- ----------- ----------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
William E. Swan 1996 $239,194 $93,764 -- -- -- --
President and Chief Executive
Officer
Paul J. Kolkmeyer 1996 135,034 46,286 -- -- -- --
Executive Vice President and
Chief Financial Officer
G. Gary Berner 1996 108,534 37,653 -- -- -- --
Senior Vice President and
Chief Lending Officer
Kathleen Monti 1996 80,464 28,519 12,317 -- -- --
Senior Vice President--
Human Resources and Administration
<CAPTION>
All Other
Compensation
Name and Principal Position (6)
- ------------------------------- -------------
<S> <C>
William E. Swan
President and Chief Executive $74,259
Officer
Paul J. Kolkmeyer
Executive Vice President and 38,867
Chief Financial Officer
G. Gary Berner
Senior Vice President and 38,261
Chief Lending Officer
Kathleen Monti
Senior Vice President-- 30,536
Human Resources and Administration
</TABLE>
___________________________________
(1) In accordance with the rules on executive officer and director compensation
disclosure adopted by the SEC, Summary Compensation information is excluded
for the fiscal years ended December 31, 1995 and 1994, as the Bank was not
a public company during such periods.
(2) Includes payments under the Bank's Management Incentive Program.
(3) The Bank also provides certain members of senior management with the use of
an automobile, club membership dues, and certain other personal benefits.
Except in the case of Ms. Monti, the aggregate value of such personal
benefits did not exceed the lesser of $50,000 or 10% of the total annual
salary and bonus reported for each officer.
(4) Does not include awards pursuant to the Recognition and Retention Plan, as
such awards were not earned, vested or granted in 1996. For a discussion of
the terms of the Recognition Plan which are intended to be adopted by the
Company, see "--Benefit Plans--Recognition and Retention Plan."
(5) No stock options or SARs were earned or granted in 1996. For a discussion
of the Stock Option Plan which is intended to be adopted by the Company,
see "--Benefit Plans--Stock Option Plan."
(6) Includes the Bank's contributions or allocations (but not earnings)
pursuant to the Bank's 401(k) Plan, non-qualified deferred compensation
plan, split dollar life insurance plans, and income imputed on group term
life insurance in excess of $50,000 per employee.
REPORT OF INDEPENDENT COMPENSATION CONSULTANT
Pursuant to regulations of the Department applicable to the Reorganization,
the Bank must obtain the opinion of an independent compensation consultant as to
whether or not the total compensation for the executive officers and
Trustees/Directors of the Bank, viewed as a whole and on an individual basis, is
reasonable and proper in comparison to the compensation provided to executive
officers and directors of similar publicly-traded financial institutions. The
Bank has obtained an opinion from William M. Mercer, Incorporated, which
indicates that, based upon published professional survey data of similarly
situated publicly-traded financial institutions operating in the relevant
markets as of August 1, 1997, with respect to the total cash compensation (base
salary and annual incentive) for executive officers and total compensation for
Trustees of the Bank, such compensation, viewed as a whole on an individual
basis, is reasonable and proper in comparison to the compensation provided to
similarly situated publicly-traded financial institutions, and that, with
respect to the amount of shares of Common Stock expected to be reserved under
the ESOP, the Recognition and Retention Plan and Stock Option Plan as a whole,
such amounts reserved for granting are reasonable in comparison to similar
publicly-traded financial institutions.
EMPLOYMENT AGREEMENTS
The Bank intends to enter into employment agreements with the Named
Executive Officers and Diane Allegro. The employment agreements will have terms
ranging from twelve to thirty-six months. On each anniversary date, an
employment agreement may be extended for an additional twelve months, so that
the remaining term shall be from twelve to thirty-six months. If the agreement
is not renewed, the agreement will expire at the end of its term. Under the
employment agreements, the current Base Salary for Messrs. Swan, Kolkmeyer,
Berner and for Ms. Monti and Ms.
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<PAGE>
Allegro will be $____________, $ ____________, $ __________, $ __________, and
__________, respectively. The Base Salary may be increased but not decreased.
The employment agreements also provide that the executive will be entitled to
participate in an equitable manner with other executive officers in
discretionary bonuses declared by the Board. In addition to the Base Salary and
bonus, the employment agreements provide for, among other things, participation
in retirement plans and other employee and fringe benefits applicable to
executive personnel. The agreements provide for termination by the Bank for
cause at any time. In the event the Bank involuntarily terminates the
executive's employment for reasons other than for cause, the executive, or in
the event of death, his or her beneficiary would be entitled to severance pay in
an amount equal to three times Base Salary (in the case of Messrs. Swan and
Kolkmeyer), two times Base Salary (in the case of Mr. Berner and Ms. Monti), and
one times Base Salary (in the case of Ms. Allegro). For these purposes,
involuntary termination includes a constructive termination where the Bank (i)
fails to appoint or reappoint the executive to his or her present position, (ii)
materially changes the executive's functions, duties or responsibilities, which
change would cause the executive's position to become one of lesser
responsibility, importance or scope, (iii) relocates the executive's place of
employment by more than 100 miles, (iv) liquidates or dissolves other than in
connection with a reorganization that does not affect the executive's status, or
(v) a breach of the employment agreement. The Bank would also continue the
executive's health coverage through the remaining term of the employment
agreement. In the event the payments to the executive would include an "excess
parachute payment" as defined by Code Section 280G (relating to payments made in
connection with a change in control), the payments would be reduced in order to
avoid having an excess parachute payment.
In the event of an executive's death while employed under an employment
agreement, the Bank will pay the executive's estate the executive's salary
through the end of the calendar month in which the executive dies. If the
executive becomes disabled (as defined in the Bank's disability plan), the
employment agreement will remain in effect through the term of the agreement,
except that the executive's salary payments will be reduced by any disability
insurance payments made to the executive.
BENEFIT PLANS
The Bank's current tax-qualified employee pension benefit plans consist of
a defined benefit pension plan and a profit sharing plan with a salary deferral
feature under section 401(k) of the Code. As a result of the Reorganization, the
Company and the Bank will be able to compensate employees with stock-based
compensation pursuant to the ESOP, and employees, officers and directors with
stock-based compensation pursuant to a Recognition and Retention Plan and the
Stock Option Plan described below.
DEFERRED COMPENSATION PLAN. The Bank has adopted the Lockport Savings Bank
Deferred Compensation Plan ("Non-qualified Plan") for the benefit of certain
senior executives of the Bank that it has designated to participate in the plan.
Under the Non-qualified Plan, the Bank annually credits an executive's deferred
compensation account with an amount determined in the sole discretion of the
Board. The amounts credited to the executive's deferred compensation account are
annually credited with earnings, at a rate determined in the sole discretion of
the Board. An executive will vest in amounts credited to his account at the rate
of 20% per year, beginning in the second year of participation in the Non-
qualified Plan until the executive is fully vested after 6 years of
participation. For these purposes, an executive's years of participation will be
equal to the executive's number of whole years of employment with the Bank
measured from the date that an Executive becomes a participant under the Plan.
Notwithstanding the above, an Executive shall be fully vested in his deferred
compensation account upon attaining age 60 with five years of participation or
in the event of a change in control of the Bank. Benefits are payable to the
executive in fifteen substantially equal annual payments commencing (i) 30 days
after the executive has attained age 60, or (ii) 30 days after the executive
terminates employment, if after age 60, or due to disability. In the event of
the executive's death after benefits commence, the Bank will pay the remaining
benefits to the executive's beneficiary over the remainder of the payment term.
In the event of the executive's death after termination of employment but prior
to commencement of benefit payments, the Bank will pay the executive's benefit
to the executive's beneficiary in fifteen substantially equal annual payments
commencing within 30 days of the executive's death. In the event of the
executive's death prior to termination of employment, the executive will forfeit
all benefits under the Non-qualified Plan. In the event of an unforeseeable
emergency which will result in a severe financial
98
<PAGE>
hardship, the executive may request a distribution of all or part of his
benefits or may request an acceleration of benefits that are being paid to him,
as applicable.
Messrs. Swan, Kolkmeyer, and Berner and Ms. Monti are participants in the
Non-qualified Plan. As of December 31, 1996, Messrs. Swan, Kolkmeyer, and Berner
and Ms. Monti, had $102,380, $41,754, and $21,396 and $7,643, respectively,
credited to their deferred compensation accounts.
Defined Benefit Pension Plan. The Bank maintains the Retirement Plan of
Lockport Savings Bank in RSI Retirement Trust ("Retirement Plan") which is a
qualified, tax-exempt defined benefit plan. Employees age 21 or older who have
worked at the Bank for a period of one year and have been credited with 1,000 or
more hours of service with the Bank during the year are eligible to accrue
benefits under the Retirement Plan, provided, however that leased employees,
employees paid on an hourly or contract basis, and employees employed off-site
in connection with the operation or maintenance of properties acquired through
foreclosure or deed are not eligible to participate. The Bank contributes each
year, if necessary, an amount to the Retirement Plan to satisfy the actuarially
determined minimum funding requirements in accordance with the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"). For the plan year
ending September 30, 1997, a contribution of $105,827 was required to be made to
the Retirement Plan. At September 30, 1997, the market value of the Retirement
Plan trust fund equaled approximately $9.2 million.
In the event of retirement at normal retirement age (i.e., the later of age
65 or the 5th anniversary of participation in the Retirement Plan), the plan is
designed to provide a single life annuity. For a married participant, the normal
form of benefit is an actuarially reduced joint and survivor annuity where, upon
the participant's death, the participant's spouse is entitled to receive a
benefit equal to 50% of that paid during the participant's lifetime.
Alternatively, a participant may elect (with proper spousal consent, if
necessary) a joint and 100% survivor annuity, or an annuity payable for a period
certain and life. All forms in which a participant's benefit may be paid will be
actuarially equivalent to the single life annuity. The retirement benefit
provided is an amount equal to 2% (1.25% as of October 1, 1998) of a
participant's average annual earnings multiplied by the participant's years of
credited service (up to a maximum of 30 years). Retirement benefits are also
payable upon retirement due to early and late retirement or death. A reduced
benefit is payable upon early retirement at age 60, at or after age 55 and the
completion of 20 years of vested service with the Bank, or after completion of
30 years of vested service. Upon termination of employment other than as
specified above, a participant who has five years of vested service after age 18
is eligible to receive his or her accrued benefit commencing, generally, on such
participant's normal retirement date.
The following table indicates the annual retirement benefit that would be
payable under the Retirement Plan upon retirement at age 65 in calendar year
1997, expressed in the form of a single life annuity for the final average
salary and benefit service classifications specified below.
<TABLE>
<CAPTION>
Final
Average Years of Service and Benefit Payable at Retirement
--------------------------------------------------
Compensation 15 20 25 30
------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
$50,000 $ 15,000 $ 20,000 $ 25,000 $ 30,000
$75,000 $ 22,500 $ 30,000 $ 37,500 $ 45,000
$100,000 $ 30,000 $ 40,000 $ 50,000 $ 60,000
$125,000 $ 37,500 $ 50,000 $ 62,500 $ 75,000
$160,000 and above $ 48,000 $ 64,000 $ 80,000 $ 96,000
</TABLE>
As of September 30, 1997, Messrs. Swan, Kolkmeyer and Berner and Ms. Monti
had 10, 7, 6 and 4 years of credited service (i.e., benefit service) under the
Retirement Plan, respectively.
401(K) PLAN. The Bank maintains the Lockport Savings Bank 401(k) Plan (the
"401(k) Plan") which is a qualified, tax-exempt profit sharing plan with a
salary deferral feature under Section 401(k) of the Code. All employees
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<PAGE>
who have attained age 21 and have completed one year of employment during which
they worked at least 1,000 hours are eligible to participate. Eligible employees
are entitled to enter the 401(k) Plan on a monthly basis.
Under the 401(k) Plan, participants are permitted to make salary reduction
contributions (in whole percentages) equal to the lesser of (i) from 1% to 15%
of compensation or (ii) $9,500 (as indexed annually). For these purposes,
"compensation" includes wages reported on federal income tax form W-2, excluding
bonuses, but does not include compensation in excess of the Code Section
401(a)(17) limits (i.e., $160,000 in 1997). The Bank will match 50% of the first
6% of salary that a participant contributes to the 401(k) Plan. All
contributions and earnings are fully and immediately vested. A participant may
withdraw salary reduction contributions (and earnings) in the event the
participant suffers a financial hardship.
The 401(k) Plan permits employees to direct the investment of his or her
own accounts into various investment options. In connection with the Offering,
the 401(k) Plan intends to offer participants the opportunity to invest in an
"Employer Stock Fund" which intends to purchase Common Stock in the Offering.
Each participant who directs the Trustee to invest all or part of his or her
account in the Employer Stock Fund will have assets in his or her account
applied to the purchase of shares of Common Stock. Participants will be entitled
to direct the Trustee as to how to vote his or her allocable shares of Common
Stock.
Plan benefits will be paid to each participant in the form of a single life
annuity (or joint and survivor annuity if married) upon retirement unless an
alternate form of distribution (single sum annuity for a period certain or life,
or equal payments over a fixed period) is selected. Normal retirement age under
the plan is age 65. Early retirement age is the earliest of age 59 1/2 or the
date on which a participant ceases working for the Bank.
At December 31, 1996, the market value of the 401(k) Plan equaled
approximately $3.7 million. The Bank's matching contribution to the 401(k) Plan
for the Plan year ended December 31, 1996, was approximately $169,000.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST. The Bank intends to implement an
Employee Stock Ownership Plan (the "ESOP") in connection with the
Reorganization. Employees with at least one year of employment with the Bank and
who have attained age 21 are eligible to participate. As part of the
Reorganization, the ESOP intends to borrow funds from the Company and use those
funds to purchase a number of shares equal to up to 8.0% of the Common Stock to
be sold in the Offering. Collateral for the loan will be the Common Stock
purchased by the ESOP. The loan will be repaid principally from the Bank's
discretionary contributions to the ESOP over a period of up to 30 years. It is
anticipated that the interest rate for the loan will be equal to the prime rate
published in The Wall Street Journal at the time of the Offering. Shares
purchased by the ESOP will be held in a suspense account for allocation among
participants as the loan is repaid.
Contributions to the ESOP and shares released from the suspense account in
an amount proportional to the repayment of the ESOP loan will be allocated among
ESOP participants on the basis of compensation in the year of allocation. For
this purpose, compensation is defined as wages reported on federal income tax
form W-2 but not in excess of the Code Section 401(a)(17) limit. Participants in
the ESOP will receive credit for up to 2 years of service prior to the effective
date of the ESOP. Benefits generally vest over a six year period at the rate of
20% per year, beginning in the second year of service, until a participant is
100% vested after six years or upon normal retirement (as defined in the ESOP),
disability, or death of the participant. A participant who terminates employment
for reasons other than death, retirement, or disability prior to six years of
credited service will forfeit the nonvested portion of his benefits under the
ESOP. Benefits will be payable in the form of Common Stock and cash upon death,
retirement, early retirement, disability or separation from service. The Bank's
contributions to the ESOP are discretionary, subject to the loan terms and tax
law limits, and, therefore, benefits payable under the ESOP cannot be estimated.
In November 1993, the American Institute of Certified Public Accountants (the
"AICPA") issued Statement of Position ("SOP") 93-6, which requires the Bank to
record compensation expense in an amount equal to the fair market value of the
shares released from the suspense account each year.
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<PAGE>
In connection with the establishment of the ESOP, the Bank will establish a
committee of non-employee directors to administer the ESOP. The Bank will either
appoint its non-employee directors or an independent financial institution to
serve as trustee of the ESOP. The ESOP committee may instruct the trustee
regarding investment of funds contributed to the ESOP. The ESOP trustee, subject
to its fiduciary duty, must vote all allocated shares held in the ESOP in
accordance with the instructions of participating employees. Under the ESOP,
nondirected shares, and shares held in the suspense account, will be voted in a
manner calculated to most accurately reflect the instructions it has received
from participants regarding the allocated stock so long as such vote is in
accordance with the provisions of ERISA.
STOCK OPTION PLAN. At a meeting of the Company's shareholders to be held no
earlier than six months after the completion of the Reorganization, the Board of
Directors intends to submit for shareholder approval a Stock Option Plan for
directors and officers of the Bank and of the Company. If approved by the
shareholders, Common Stock in an aggregate amount equal to 10% of the shares
sold in the Offering would be reserved for issuance by the Company upon the
exercise of the stock options granted under the Stock Option Plan. Ten percent
of the shares sold in the Offering would amount to867,747 shares, 1,020,911
shares, 1,174,048 shares or 1,350,155 shares at the minimum, mid-point, maximum
and adjusted maximum of the Estimated Valuation Range, respectively. If the plan
is approved within one year of the completion of the Reorganization, no options
would be granted under the Stock Option Plan until the date on which shareholder
approval is received.
The exercise price of the options granted under the Stock Option Plan will
be equal to the fair market value of the shares on the date of grant of the
stock options. If the Stock Option Plan is adopted within one year following the
Offering, options will become exercisable at a rate of 20% at the end of each
twelve (12) months of service with the Bank after the date of grant, subject to
early vesting in the event of death or disability. Options granted under the
Stock Option Plan would be adjusted for capital changes such as stock splits and
stock dividends. Notwithstanding the foregoing, awards will be 100% vested upon
termination of employment due to death or disability, and if the Stock Option
Plan is adopted more than 12 months after the Offering, awards would be 100%
vested upon normal retirement or a change in control of the Bank or the Company.
Under FDIC rules, if the Stock Option Plan is adopted within the first 12 months
after completion of the Offering, no individual officer can receive more than
25% of the awards under the plan, no outside director can receive more than 5%
of the awards under the plan, and all outside directors as a group can receive
no more than 30% of the awards under the plan in the aggregate.
The Stock Option Plan would be administered by a Committee of non-employee
members of the Company's Board of Directors. Options granted under the Stock
Option Plan to employees could be "incentive" stock options designed to result
in a beneficial tax treatment to the employee but no tax deduction to the
Company. Non-qualified stock options could also be granted under the Stock
Option Plan, and will be granted to the non-employee directors who receive
grants of stock options. In the event an option recipient terminated his
employment or service as an employee or director, the options would terminate
during certain specified periods.
RECOGNITION AND RETENTION PLAN. At a meeting of the Company's shareholders
to be held no earlier than six months after the completion of the
Reorganization, the Board of Directors also intends to submit a Recognition and
Retention Plan for shareholder approval. The Recognition and Retention Plan will
provide the Bank's directors and officers an ownership interest in the Company
in a manner designed to encourage them to continue his or her service with the
Bank. The Bank will contribute funds to the Recognition and Retention Plan from
time to time to enable it to acquire an aggregate amount of Common Stock equal
to up to 4% of the shares of Common Stock sold in the Offering, either directly
from the Company or in open market purchases. Four percent of the shares sold in
the Offering would amount to 347,109 shares, 408,364 shares, 469,619 shares or
540,062 shares at the minimum, midpoint, maximum and adjusted maximum of the
Estimated Valuation Range, respectively. In the event that additional authorized
but unissued shares would be acquired by the Recognition and Retention Plan
after the Offering, the interests of existing shareholders would be diluted. The
executive officers and directors will be awarded Common Stock under the
Recognition and Retention Plan without having to pay cash for the shares. If the
plan is adopted within one year of completion of the Reorganization, no awards
under the Recognition and Retention Plan would be made until the date the
Recognition and Retention Plan is approved by the Company's shareholders.
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Awards under the Recognition and Retention Plan would be nontransferable
and nonassignable, and during the lifetime of the recipient could only be earned
by the director or officer. If the Recognition and Retention Plan is adopted
within one year following completion of the Offering, the shares which are
subject to an award would vest and be earned by the recipient at a rate of 20%
of the shares awarded at the end of each full twelve (12) months of service with
the Bank after the date of grant of the award. Awards would be adjusted for
capital changes such as stock dividends and stock splits. Notwithstanding the
foregoing, awards would be 100% vested upon termination of employment or service
due to death or disability, and if the Recognition and Retention Plan is adopted
more than 12 months after completion of the Reorganization, awards would be 100%
vested upon normal retirement or a change in control of the Bank or the Company.
If employment or service were to terminate for other reasons, the award
recipient would forfeit any nonvested award. If employment or service is
terminated for cause (as would be defined in the Recognition and Retention
Plan), shares not already delivered under the Recognition and Retention Plan
would be forfeited. Under FDIC rules, if the Recognition and Retention Plan is
adopted within the first 12 months after completion of the Reorganization and
Offering, no individual officer can receive more than 25% of the awards under
the plan, no outside Trustee can receive more than 5% of the awards under the
plan, and all outside Trustees as a group can receive no more than 30% of the
awards under the plan in the aggregate.
When shares become vested under the Recognition and Retention Plan, the
participant will recognize income equal to the fair market value of the Common
Stock earned, determined as of the date of vesting, unless the recipient makes
an election under ss. 83(b) of the Code to be taxed earlier. The amount of
income recognized by the participant would be a deductible expense for tax
purposes for the Company. If the Recognition and Retention Plan is adopted
within one year following completion of the Reorganization and Offering,
dividends and other earnings will accrue and be payable to the award recipient
when the shares vest. If the Recognition and Retention Plan is adopted within
one year following completion of the Reorganization and Offering, shares not yet
vested under the Recognition and Retention Plan will be voted by the trustee of
the Recognition and Retention Plan, taking into account the best interests of
the recipients of the Recognition and Retention Plan awards. If the Recognition
and Retention Plan is adopted more than one year following completion of the
Reorganization and Offering, dividends declared on unvested shares will be
distributed to the participant when paid, and the participant will be entitled
to vote the unvested shares.
INDEBTEDNESS OF MANAGEMENT
Under New York Banking law, the Bank, as a mutual institution, cannot make
a loan to a Trustee or a person who is an "executive officer" for regulatory
purposes, except for loans made to executive officers that are secured by a
first mortgage on a primary residence or by a deposit account at the Bank. Any
such loans that are outstanding have been made in the ordinary course of
business on the same terms and conditions as the Bank would make to any other
customer and do not involve more than a normal risk of collectibility or present
other unfavorable features. Following the Reorganization, the Bank will not be
subject to this restriction in connection with loans to Directors and executive
officers.
THE REORGANIZATION AND OFFERING
THE SUPERINTENDENT HAS APPROVED THE PLAN AND THE OFFERING OF THE
COMMON STOCK SUBJECT TO THE APPROVAL OF THE BANK'S DEPOSITORS AND THE
SATISFACTION OF CERTAIN CONDITIONS IMPOSED BY THE SUPERINTENDENT. HOWEVER, SUCH
APPROVAL DOES NOT CONSTITUTE A RECOMMENDATION OR ENDORSEMENT OF THE OFFERING OR
THE PLAN BY THE SUPERINTENDENT.
DESCRIPTION OF AND REASONS FOR THE REORGANIZATION
Our Board of Trustees unanimously adopted the Plan and the Superintendent
has approved the Plan of Reorganization (the "Plan"). Pursuant to our Plan, we
will reorganize into what we call a "two-tier" mutual holding company structure.
We call it a two-tier structure because we will have two levels of holding
companies--a "mid-tier" stock holding company and a "top-tier" mutual holding
company. Under the terms of the Plan (i) we will form the Company as a Delaware
corporation; (ii) we will form the Mutual Holding Company as a New York mutual
holding
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company; (iii) we will reorganize the Bank into a capital stock form of
organization and issue 100% of our to-be outstanding common stock to the
Company; and (iv) the Company will issue shares of Common Stock to the public
and the Mutual Holding Company. The number of shares of Common Stock sold to
depositors and the public pursuant to this Prospectus will be equal to 45.4% of
the shares issued in the Reorganization and the number of shares issued to the
Mutual Holding Company will be equal to 53.3% of the shares issued in the
Reorganization. In this Prospectus we will refer to all of these steps that are
part of this transaction as the "Reorganization," and we will refer to the
issuance of 45.4% of the Company's Common Stock pursuant to this Prospectus as
the "Offering." The two-tier mutual holding company structure is most easily
understood by considering the following schematic:
------------------------ ----------------------
The Mutual Holding Public
Company Stockholders
(a New York mutual
holding company)
------------------------ -----------------------
54% of the 46% of the
Common Common
Stock Stock
-----------------------------------------------------------
The Company (a Delaware corporation)
-----------------------------------------------------------
100% of the
Common Stock
-----------------------------------------------------------
The Bank
(a New York stock savings bank)
----------------------------------------------------------
In adopting the Plan, our Board of Trustees determined that the
Reorganization is in the best interest of the Bank. The primary purpose of the
Reorganization is to establish a structure that will enable us to compete and
expand more effectively in the financial services marketplace, and that will
enable our depositors, employees, management and trustees to obtain an equity
ownership interest in the Bank. Our new structure will permit the Company to
issue capital stock, which is a source of capital not available to a mutual
savings bank, and we will take advantage of this new ability by issuing Common
Stock in the Offering. Since the Company is not offering all of its Common Stock
for sale to depositors and the public in the Offering (but is issuing a majority
of its stock to the Mutual Holding Company), the Reorganization will result in
less capital raised in comparison to a standard mutual-to-stock conversion. The
Reorganization, however, will also offer the Bank the opportunity to raise
additional capital since the stock held by the Mutual Holding Company will be
available for sale in the future in the event of the Mutual Holding Company
decides to convert to the capital stock form of organization. See "Regulation--
Mutual Holding Company Regulation." The Reorganization will also give us greater
flexibility to structure and finance the expansion of our operations, including
the potential acquisition of other financial institutions, and to diversify into
other financial services. The holding company form of organization is expected
to provide additional flexibility to diversify the Bank's business activities
through existing or newly formed subsidiaries, or through acquisitions of or
mergers with other financial institutions, as well as other companies. Although
we have no current arrangements, understandings or agreements regarding any such
opportunities, the Company will be in a position after the Reorganization,
subject to regulatory limitations and the Company's financial position, to take
advantage of any such opportunities that may arise. Lastly, the Reorganization
will enable us to better manage our capital by giving us broader investment
opportunities through the holding company structure, and enable us to distribute
capital to stockholders of the Company in the form of dividends and stock
repurchases. Because only a minority of the Common
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Stock will be offered for sale in the Offering, our current mutual form of
ownership and our ability to remain an independent savings bank and to provide
community-oriented financial services will be preserved through the mutual
holding company structure.
The Board of Trustees believes that these advantages outweigh the potential
disadvantages of the mutual holding company structure, which may include: (i)
the inability of stockholders other than the Mutual Holding Company to obtain
majority ownership of the Company and the Bank, which may result in the
perpetuation of the management and Board of Directors of the Bank and the
Company; and (ii) that the mutual holding company structure is a relatively new
form of corporate ownership, and new regulatory policies relating to the mutual
interest in the Mutual Holding Company that may be adopted from time-to-time may
have an adverse impact on minority stockholders. A majority of the voting stock
of the Company will be owned by the Mutual Holding Company, which is a mutual
institution that will be controlled by the existing Board of Trustees of the
Bank. While this structure will permit management to focus on the Company's and
the Bank's long-term business strategy for growth and capital redeployment
without undue pressure from stockholders, it will also serve to perpetuate the
existing management and trustees of the Bank. The Mutual Holding Company will be
able to elect all members of the Board of Directors of the Company, and will be
able to control the outcome of all matters presented to the stockholders of the
Company for resolution by vote except for certain matters that must be approved
by more than a majority of stockholders of the Company. No assurance can be
given that the Company will not take action adverse to the interests of the
minority stockholders. For example, the Company could revise the dividend policy
or defeat a candidate for the Board of Directors of the Bank or other proposals
put forth by the minority stockholders.
The Reorganization does not preclude the conversion of the Mutual Holding
Company from the mutual to stock form of organization which would be effected
through a merger of the Mutual Holding Company into the Company or the Bank and
the concurrent sale of the shares held by the Mutual Holding Company in a
subscription offering. A conversion of the Mutual Holding Company from the
mutual to stock form of organization is not anticipated for the foreseeable
future.
Following the completion of the Reorganization, all depositors who had
liquidation rights with respect to the Bank as of the effective date of the
Reorganization will continue to have such rights solely with respect to the
Mutual Holding Company so long as they continue to hold deposit accounts with
the Bank. In addition, all persons who become depositors of the Bank subsequent
to the Reorganization will have such liquidation rights with respect to the
Mutual Holding Company. Borrowers currently do not have ownership or voting
rights in the Bank and will not receive ownership or voting rights with respect
to the Mutual Holding Company.
All insured deposit accounts of the Bank that are transferred to the Bank
will continue to be federally insured by the FDIC and the BIF up to the legal
maximum limit in the same manner as deposit accounts existing in the Bank
immediately prior to the Reorganization. Upon completion of the Reorganization,
the Bank may exercise any and all powers, rights and privileges of, and shall be
subject to all limitations applicable to, capital stock savings banks under New
York law. As long as the Mutual Holding Company is in existence, the Mutual
Holding Company will be required to own at least 51% of the voting stock of the
Company, and the Company will own 100% of the voting stock of the Bank. The Bank
and the Company may issue any amount of non-voting stock or debt to persons
other than the Mutual Holding Company.
THE OFFERING
Concurrent with the Reorganization, the Company is offering shares of
Common Stock to persons other than the Mutual Holding Company. An offering of
between 8,677,747 and 11,740,482 shares of the Common Stock (subject to
adjustment to up to pursuant to this Prospectus is being made concurrently with
the Reorganization. The shares of Common Stock that will be sold in the Offering
will constitute no more than 45.4% of the shares that will be outstanding after
the Offering (the "Minority Ownership Interest"). Following the Reorganization
and the Offering, the Company also will be authorized to issue additional Common
Stock or preferred stock to persons other than the Mutual Holding Company,
without prior approval of the holders of the Common Stock.
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The shares of Common Stock are being offered for sale at a fixed price of
$10.00 per share in the Subscription Offering pursuant to subscription rights in
the following order of priority to: (i) holders of deposit accounts with a
balance of $100 or more on August 31, 1996 ("Eligible Account Holders"); (ii)
the Bank's Employee Plans, including the ESOP; and (iii) depositors whose
accounts in the Bank totaled $100 or more on December 31, 1997 ("Supplemental
Eligible Account Holders"). Concurrently, and subject to the prior rights of
holders of subscription rights, any shares of Common Stock not subscribed for in
the Subscription Offering are being offered in the Community Offering at $10.00
per share to certain members of the general public, with a preference given to
natural persons residing in Niagara, Orleans, Erie and Genesee Counties, New
York. Subscription rights will expire if not exercised by 5:00 p.m., New York
time, on March _____, 1998 unless extended by the Bank and the Company.
STOCK PRICING AND NUMBER OF SHARES TO BE ISSUED
The Plan of Reorganization and Federal and state regulations require that
the aggregate purchase price of the Common Stock sold in the Offering must be
based on the appraised pro forma market value of the Common Stock, as determined
by an independent valuation. The Bank has retained RP Financial to make such
valuation. For its services in making such appraisal, RP Financial will receive
a fee of $55,000 (which amount does not include a fee of $7,500 to be paid to RP
Financial for assistance in preparation of a business plan). The Bank and the
Company have agreed to indemnify RP Financial 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
RP Financial's liability results from its negligence or bad faith.
The Independent Valuation was prepared by RP Financial in reliance upon the
information contained in the Prospectus, including the Consolidated Financial
Statements. RP Financial also considered the following factors, among others:
the present and projected operating results and financial condition of the Bank
and the economic and demographic conditions in the Bank's existing marketing
area; certain historical, financial and other information relating to the Bank;
a comparative evaluation of the operating and financial statistics of the Bank
with those of other publicly traded savings mutual holding companies; the
aggregate size of the Offering; the impact of the Reorganization on the Bank's
stockholders' equity and earnings potential; the proposed dividend policy of the
Company; and the trading market for securities of comparable institutions and
general conditions in the market for such securities.
The Independent Valuation states that as of November 28, 1997, the
estimated pro forma market value of the Common Stock ranged from a minimum of
$191,125,000 to a maximum of $258,750,000 with a midpoint of $225,000,000 (the
Estimated Valuation Range). The Board determined to offer the shares in the
Offering at the Subscription Price of $10.00 per share. Based on the Estimated
Valuation Range and the Subscription Price, the number of shares of Common Stock
that the Company will issue will range from between 19,125,000 shares to
25,875,000 shares, with a midpoint of 22,500,000 shares. The Board determined to
offer 45.4% of such shares, or between 8,677,747 shares and 11,740,482 shares
with a midpoint of 10,209,115 shares (the Offering Range), to depositors and the
public pursuant to this Prospectus. In addition, shares are being issued to the
Foundation as part of the Reorganization, which will result in Minority
Stockholders owning 46.7% of the shares of the Common Stock outstanding at the
conclusion of the Reorganization. The 53.3% of the shares of the Company's
Common Stock that are not sold in the Offering or contributed to the Foundation
will be issued to the Mutual Holding Company.
The Board reviewed the Independent Valuation and, in particular, considered
(i) the Bank's financial condition and results of operations for the nine months
ended September 30, 1997, and the year ended December 31, 1996, (ii) financial
comparisons of the Bank in relation to other financial institutions primarily
including other publicly traded mutual holding companies, and (iii) stock market
conditions generally and in particular for financial institutions, all of which
are set forth in the Independent Valuation. The Board also reviewed the
methodology and the assumptions used by RP Financial in preparing the
Independent Valuation. The Estimated Valuation Range may be amended with the
approval of the Superintendent and the FDIC (if required), if necessitated by
subsequent developments in the financial condition of the Bank or market
conditions generally.
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Following commencement of the Subscription Offering, the maximum of the
Estimated Valuation Range may be increased by up to 15% to up to $297,562,500,
which will result in a corresponding increase in the maximum of the Offering
Range to up to 13,501,554 shares to reflect changes in the market and financial
conditions, without the resolicitation of subscribers. The minimum of the
Estimated Valuation Range and the minimum of the Offering Range may not be
decreased without a resolicitation of subscribers. The Subscription Price of
$10.00 per share will remain fixed. See "--Limitations on Common Stock
Purchases" as to the method of distribution and allocation of additional shares
that may be issued in the event of an increase in the Offering Range to fill
unfilled orders in the Subscription and Community Offerings.
The Independent Valuation, however, is not intended, and must not be
construed, as a recommendation of any kind as to the advisability of purchasing
such shares. RP Financial did not independently verify the Consolidated
Financial Statements and other information provided by the Bank, nor did RP
Financial value independently the assets or liabilities of the Bank. The
Independent Valuation considers the Bank as a going concern and should not be
considered as an indication of the liquidation value of 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 such shares in the Offering will
thereafter be able to sell such shares at prices at or above the Subscription
Price.
The Independent Valuation will be updated at the time of the completion of
the Offering. If the update to the Independent Valuation at the conclusion of
the Offering results in an increase in the maximum of the Estimated Valuation
Range to more than $297,562,500 and a corresponding increase in the Offering
Range to more than 13,501,554 shares, or a decrease in the minimum of the
Estimated Valuation Range to less than $191,250,000 and a corresponding decrease
in the Offering Range to fewer than 8,677,747 shares, then the Company, after
consulting with the Superintendent and the FDIC, may terminate the Plan and
return all funds promptly with interest at the Bank's passbook rate of interest
on payments made by check, certified or teller's check, bank draft or money
order, extend or hold a new Subscription Offering, Community Offering, or both,
establish a new Offering Range, commence a resolicitation of subscribers or take
such other actions as permitted by the Superintendent and the FDIC in order to
complete the Reorganization and 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 Offerings would not exceed 45 days unless further extended by the
Superintendent and the FDIC for periods of up to 90 days not to extend beyond 24
months following the special meeting of depositors, or ____________, 2000.
An increase in the Independent Valuation and the number of shares to be
issued in the Offering would decrease both a subscriber's ownership interest and
the Company's pro forma earnings and stockholders equity on a per share basis
while increasing pro forma earnings and stockholder's equity on an aggregate
basis. A decrease in the Independent Valuation and the number of shares to be
issued in the Offering would increase both a subscriber's ownership interest and
the Company's pro forma earnings and stockholder's equity on a per share basis
while decreasing pro forma net income and stockholder's equity on an aggregate
basis. For a presentation of the effects of such changes, see "Pro Forma Data."
Copies of the appraisal report of RP Financial 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 the Bank and the other locations
specified under "Additional Information."
No sale of shares of Common Stock may be consummated unless, prior to such
consummation, RP confirms to the Bank and the Superintendent that, to the best
of its knowledge, nothing of a material nature has occurred that, taking into
account all relevant factors, would cause RP to conclude that the Independent
Valuation is incompatible with its estimate of the pro forma market value of the
Common Stock of the Company at the conclusion of the Offering. Any change that
would result in an aggregate purchase price that is below the minimum or above
the maximum of the Estimated Valuation Range would be subject to
Superintendent's approval. If such confirmation is not received, the Bank may
extend the Offering, reopen or commence a new offering, establish a new
Estimated Valuation Range and commence
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a resolicitation of all purchasers with the approval of the Superintendent or
take such other actions as permitted by the Superintendent in order to complete
the Offering.
PURCHASE PRIORITIES AND METHOD OF OFFERING SHARES
The Bank shall have the right, in its sole discretion, to determine whether
prospective purchasers are "residents," "associates," or "acting in concert" as
defined by the Plan and in interpreting any and all other provisions of the
Plan. All such determinations are in the sole discretion of the Bank, and may be
based on whatever evidence the Bank chooses to use in making any such
determination.
Subject to the preceding paragraph and the limitations set forth in the "--
Limitations upon Purchases of Common Stock" section, the priorities for the
purchase of shares are as follows:
PRIORITY 1: ELIGIBLE ACCOUNT HOLDERS. Each Eligible Account Holder be given
the opportunity to purchase up to 20,000 shares, or $200,000, of Common Stock;
provided that 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 up to 5% of the maximum number of shares issued
in the Offering or decrease such maximum purchase limitation to as low as 0.1%
of the maximum number of shares issued in the Offering, subject to the overall
purchase limitation set forth in the section herein titled "Limitations upon
Purchases of Common Stock." 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 aggregate deposit account balances
as of the Eligibility Record Date ("Qualifying Deposits") bears to the total
amount of Qualifying Deposits of all subscribing Eligible Account Holders whose
subscriptions remain unfilled. Subscription rights to purchase Common Stock
received by executive officers and trustees of the Bank including associates of
executive officers and trustees, based on their increased deposits in the Bank
in the one year preceding the Eligibility Record Date, shall be subordinated to
the subscription rights of other Eligible Account Holders. To ensure proper
allocation of stock, each Eligible Account Holder must list on their
subscription order form all deposit accounts in which they 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 as
set forth in the section herein titled "Limitations Upon Purchases of Common
Stock," 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 up to 20,000 shares, or
$200,000, of Common Stock; provided that 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 up to 5% of
the maximum number of shares issued in the Offering or decrease such maximum
purchase limitation to as low as 0.1% of the maximum number of shares issued in
the Offering subject to the overall purchase limitations set forth in the
section herein titled "Limitations Upon Purchases of Common Stock." 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, exceed available shares, 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 their 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
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same proportion that such subscriber's aggregate deposit account balances as of
the Supplemental Eligibility Record Date ("Supplemental Qualifying Deposits")
bear to the total amount of Supplemental Qualifying Deposits of all subscribing
Supplemental Eligible Account Holders whose subscriptions remain unfilled.
ESTABLISHMENT OF THE CHARITABLE FOUNDATION
General. In furtherance of our commitment to the communities that we serve,
we intend to voluntarily establish a charitable foundation in connection with
the Reorganization. The Plan provides that the Bank and the Company will
establish the Foundation, which will be incorporated under Delaware law as a
non-stock corporation and will be funded with cash and shares of Common Stock
contributed by the Company. We will make a contribution to the Foundation, in
the form of shares of Common Stock and cash, in a total amount equal to 5% of
the aggregate Subscription Price of the shares of Common Stock sold in the
Offering. The number of shares of Common Stock to be contributed to the
Foundation will equal 3% of the shares sold in the Offering. The balance of the
contribution will consist of cash. The contribution of Common Stock to the
Foundation will be dilutive to the interests of stockholders and will have an
adverse impact on the reported earnings of the Company in 1998, the year in
which the Foundation is established.
Purpose of the Foundation. The purpose of the Foundation is to provide
funding to support charitable causes and community development activities. In
recent years, the Bank has emphasized community lending and development
activities within the communities that we serve. The Foundation is being formed
as a complement to our existing community activities, not as a replacement for
such activities. While we intend to continue to emphasize community lending and
development activities following the Reorganization, such activities are not our
sole corporate purpose. The Foundation, conversely, will be completely dedicated
to community activities and the promotion of charitable causes, and may be able
to support such activities in ways that are not currently available to the Bank.
We believe that the Foundation will enable the Company and the Bank to assist
our local community in areas beyond community lending and development. We
believe the establishment of a charitable foundation is consistent with the
Bank's commitment to community service. The Board further believes that the
funding of the Foundation with Common Stock of the Company is a means of
enabling the communities served by us to share in the growth and success of the
Company long after completion of the Reorganization. The Foundation will
accomplish that goal by providing for continued ties between the Foundation and
Bank, thereby forming a partnership with the Bank's community. The establishment
of the Foundation will also enable the Company and the Bank to develop a unified
charitable donation strategy and will centralize the responsibility for
administration and allocation of corporate charitable funds. Charitable
foundations have been formed by other financial institutions for this purpose,
among others. We do not, however, expect the contribution to the Foundation to
take the place of our traditional community lending activities.
Structure of the Foundation. The Foundation will be incorporated under
Delaware law as a non-stock corporation. Pursuant to the Foundation's Bylaws,
the Foundation's initial board of directors will be comprised of persons who are
existing directors and officers of the Company. Subsequent to the
Reorganization, other individuals may be chosen in light of their commitment and
service to charitable and community purposes. The members of the Foundation, who
are comprised of its board members, will elect the directors at the annual
meeting of the Foundation from those nominated by the Nominating Committee. Only
persons serving as directors of the Foundation qualify as members of the
Foundation, with voting authority. Directors will be divided into three classes
with each class appointed for three-year terms. The certificate of incorporation
of the Foundation provides that the corporation is organized exclusively for
charitable purposes, including community development, as set forth in Section
501(c)(3) of the Code. The Foundation's certificate of incorporation further
provides that no part of the net earnings of the Foundation will inure to the
benefit of, or be distributable to its directors, officers or members.
The authority for the affairs of the Foundation will be vested in the board
of directors of the Foundation. The directors of the Foundation will be
responsible for establishing the policies of the Foundation with respect to
grants or donations by the Foundation, consistent with the purpose for which the
Foundation was established. Although no formal policy governing Foundation
grants exists at this time, the Foundation's board of directors will adopt such
a policy upon establishment of the Foundation. As directors of a nonprofit
corporation, directors of the Foundation will at all times be
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bound by their fiduciary duty to advance the Foundation's charitable goals, to
protect the assets of the Foundation and to act in a manner consistent with the
charitable purpose for which the Foundation is established. The directors of the
Foundation will also be responsible for directing the activities of the
Foundation, including the management of the Common Stock of the Company and the
cash held by the Foundation. However, as a condition to receiving the
nonobjection of the Reorganization, the Foundation has been required to commit
to the FDIC and the Department that all shares of Common Stock held by the
Foundation will be voted in the same ratio as all other shares of the Company's
Common Stock on all proposals considered by stockholders of the Company;
provided, however, that, consistent with such condition, the FDIC and the
Department would waive this voting restriction under certain circumstances if
compliance with the voting restriction would: (i) cause a violation of the law
of the State of Delaware; (ii) would cause the Foundation to lose its tax-exempt
status, or cause the Internal Revenue Service to deny the Foundation's request
for a determination that it is an exempt organization or otherwise have a
material and adverse tax consequence on the Foundation; or (iii) would cause the
Foundation to be subject to an excise tax under Section 4941 of the Code. In
order for the FDIC and the Department to waive such voting restriction, the
Company's or the Foundation's legal counsel would be required to render an
opinion satisfactory to the FDIC and the Department that compliance with the
voting requirement would have the effect described in clauses (i), (ii) or (iii)
above. Under those circumstances, the FDIC and the Department would grant
waivers of the voting restriction upon submission of such legal opinion(s) by
the Company or the Foundation that are satisfactory to the FDIC and the
Department. In the event that the FDIC and the Department were to waive the
voting requirement, the directors would direct the voting of the Common Stock
held by the Foundation.
The Foundation's place of business will be located at the Bank's
administrative offices and initially the Foundation is expected to have no
employees but will utilize the members of the staff of the Company or the Bank.
The board of directors of the Foundation will appoint such officers as may be
necessary to manage the operation of the Foundation. In this regard, it is
expected that the Bank will be required to provide the FDIC with a commitment
that, to the extent applicable, the Bank will comply with the affiliate
restrictions set forth in Sections 23A and 23B of the Federal Reserve Act with
respect to any transactions between the Bank and the Foundation.
As a private foundation under Section 501(c)(3) of the Code, the Foundation
will be required to distribute annually in grants or donations, a minimum of 5%
of the average fair market value of its net investment assets. One of the
conditions imposed on the gift of Common Stock by the Company is that the amount
of Common Stock that may be sold by the Foundation in any one year shall not
exceed 5% of the average market value of the assets held by the Foundation,
except where the board of directors of the Foundation determines that the
failure to sell an amount of common stock greater than such amount would result
in a longer-term reduction of the value of the Foundation's assets and as such
would jeopardize the Foundation's capacity to carry out its charitable purposes.
Upon completion of the Reorganization and the contribution of shares to the
Foundation, the Company would have 19,125,000, 22,500,000 and 25,875,000 shares
issued and outstanding at the minimum, midpoint and maximum of the Estimated
Valuation Range. Because the Company will have an increased number of shares
outstanding, the voting and ownership interests of shareholders in the Company's
Common Stock would be diluted by 1.3%, as compared to their interests in the
Company if the Foundation was not established. For additional discussion of the
dilutive effect, see "Pro Forma Data."
Impact on Earnings. The contribution of Common Stock to the Foundation will
have an adverse impact on the Company's and the Bank's earnings in the year in
which the contribution is made. The Company will recognize the full expense in
the amount of the contribution of cash and Common Stock to the Foundation in the
quarter in which it occurs, which is expected to be the second quarter of 1998.
The amount of the contribution will range from $4.3 million to $5.9 million,
based on the minimum and maximum of the Estimated Valuation Range, respectively.
The contribution expense will be partially offset by the tax benefit related to
the expense. The Company and the Bank have been advised by their independent tax
advisors that the contribution to the Foundation will be tax deductible, subject
to an annual limitation based on 10% of the Company's annual taxable income.
Assuming an aggregate contribution of $5.8 million (based on the maximum of the
Estimated Valuation Range), the Company estimates a net tax effected expense of
$3.8 million (based upon a 35% tax rate). Management cannot predict earnings for
1998, but expects that the establishment and funding of the Foundation will have
an adverse impact on the Company's earnings for the year. In addition to the
contribution to the Foundation, the Bank expects in the future to continue
making ordinary charitable contributions within its community
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but the Company and the Bank do not currently anticipate making additional
contributions to the Foundation within the first five years following the
initial contribution.
Tax Considerations. The Company and the Bank have been advised by their
independent tax advisors that an organization created for the above purposes
would qualify as a Section 501(c)(3) exempt organization under the Internal
Revenue Code of 1986, as amended (the "Code"), and would be classified as a
private foundation. The Foundation will submit a request to the IRS to be
recognized as an exempt organization. The Company and the Bank have received an
opinion of their independent tax advisors that the Foundation would qualify as a
Section 501(c)(3) exempt organization under the Code, except that such opinion
does not consider the impact of the condition to be agreed to by the Foundation
that Common Stock issued to the Foundation be voted in the same ratio as all
other shares of the Company's Common Stock on all proposals considered by
stockholders of the Company. Consistent with this condition, in the event that
the Company or the Foundation receives an opinion of their legal counsel that
compliance with the voting restriction would have the effect of causing the
Foundation to lose its tax-exempt status, or otherwise have a material and
adverse tax consequence on the Foundation or subject the Foundation to an excise
tax under Section 4941 of the Code, the FDIC shall waive such voting restriction
upon submission of a legal opinion by the Company or the Foundation that is
satisfactory to the FDIC. The independent tax advisors' opinion further provides
that there is substantial authority for the position that the Company's
contribution of its own stock to the Foundation would not constitute an act of
self-dealing, and that the Company would be entitled to a deduction in the
amount of the fair market value of the stock at the time of the contribution
less the nominal par value that the Foundation is required to pay to the Company
for such stock, subject to an annual limitation based on 10% of the Company's
annual taxable income. The Company, however, would be able to carry forward any
unused portion of the deduction for five years following the contribution.
Assuming the sale of Common Stock at the adjusted maximum of the Estimated
Valuation Range, the Company estimates that all of the deduction should be
deductible over the six-year period. Although the Company and the Bank have
received an opinion of their independent tax advisors that the Company will be
entitled to the deduction for the charitable contribution, there can be no
assurances that the IRS will recognize the Foundation as a Section 501(c)(3)
exempt organization or that the deduction will be permitted. In such event, the
Company's tax benefit related to the Foundation would have to be fully expensed,
resulting in a further reduction in earnings in the year in which the IRS makes
such a determination.
As a private foundation, earnings and gains, if any, from the sale of
Common Stock or other assets are generally exempt from federal and state
corporate income taxation. However, investment income, such as interest,
dividends and capital gains, of a private foundation will generally be subject
to a federal excise tax of 2.0%. The Foundation will be required to make an
annual filing with the IRS within four and one-half months after the close of
the Foundation's fiscal year to maintain its tax-exempt status. The Foundation
will be required to publish a notice that the annual information return will be
available for public inspection for a period of 180 days after the date of such
public notice. The information return for a private foundation must include,
among other things, an itemized list of all grants made or approved, showing the
amount of each grant, the recipient, any relationship between a grant recipient
and the Foundation's managers and a concise statement of the purpose of each
grant. The Foundation will also be required to file an annual report with the
Charities Bureau of the Office of the Attorney General of the State of New York.
Comparison of Valuation and Other Factors Assuming the Foundation is Not
Established as Part of the Reorganization. The establishment of the Foundation
was taken into account by RP Financial in determining the estimated pro forma
market value of the Common Stock of the Company. The aggregate price of the
shares of Common Stock being offered in the subscription and community offerings
is based upon the independent appraisal conducted by RP Financial of the
estimated pro forma market value of the Common Stock of the Company. The pro
forma aggregate price of the Common Stock being offered for sale in the
Reorganization is currently estimated to be between $86.8 million and $117.4
million, with a midpoint of $102.1 million. The pro forma price to book ratio
and the pro forma price to earnings ratio, at and for the nine months ended
September 30, 1997, are 104.7% and 15.6x, respectively, at the midpoint of the
Estimated Valuation Range. In the event that the Reorganization did not include
the Foundation, RP Financial has estimated that the estimated pro forma market
value of the Common Stock being offered for sale in the Offering would be $110.4
million at the midpoint based on a pro forma price to book ratio and the pro
forma price to earnings ratio that of 108.0% and 16.7x, respectively. The amount
of Common Stock being offered for sale in the Reorganization at the
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midpoint of the Estimated Valuation Range is approximately $8.3 million less
than the estimated amount of Common Stock that would be sold in the Offering
without the Foundation based on the estimate provided by RP Financial.
Accordingly, certain accountholders of the Bank who subscribe to purchase Common
Stock in the Subscription Offering would receive fewer shares depending on the
size of a depositor's stock order and the amount of his or her qualifying
deposits in the Bank and the overall level of subscriptions. See "Comparison of
Valuation and Pro Forma Information Without Foundation." This estimate by RP
Financial was prepared solely for purposes of providing subscribers with
information with which to make an informed decision on the Reorganization.
The decrease in the amount of Common Stock being offered as a result of the
contribution of Common Stock to the Foundation will not have a significant
effect on the Company or the Bank's capital position. The Bank's regulatory
capital is significantly in excess of its regulatory capital requirements and
will further exceed such requirements following the Reorganization. The Bank's
leverage and risk-based capital ratios at September 30, 1997 were 10.75% and
21.74%, respectively. Assuming the sale of shares at the midpoint of the
Estimated Valuation Range, the Bank's pro forma leverage and risk-based capital
ratios at September 30, 1997 would be 13.5% and 26.9%, respectively. On a
consolidated basis, the Company's pro forma stockholders' equity would be $214.6
million, or approximately 17.3% of pro forma consolidated assets, assuming the
sale of shares at the midpoint of the Estimated Price Range. Pro forma
stockholders' equity per share and pro forma net income per share would be $9.55
and $0.48, respectively. If the Foundation was not being established in the
Reorganization, based on the RP Financial estimate, the Company's pro forma
stockholders' equity would be approximately $222.1 million, or approximately
17.5% of pro forma consolidated assets at the midpoint of the estimate, and pro
forma stockholder's equity per share and pro forma net income per share would be
substantially similar with the Foundation as without the establishment of the
Foundation. See "Comparison of Valuation and Pro Forma Information with No
Foundation."
Regulatory Conditions Imposed on the Foundation. Establishment of the
Foundation is subject to the following conditions agreed to by the Foundation in
writing as a condition to receiving the FDIC's non-objection to and
Superintendent's approval of the Reorganization: (i) the Foundation will be
subject to examination by the FDIC and the Department; (ii) the Foundation must
comply with supervisory directives imposed by the FDIC and the Department; (iii)
the Foundation will operate in accordance with written policies adopted by the
board of directors, including a conflict of interest policy; and (iv) any shares
of Common Stock held by the Foundation must be voted in the same ratio as all
other outstanding shares of Common Stock on all proposals considered by
stockholders of the Company; provided, however, that, consistent with the
condition, the FDIC and the Department would waive this voting restriction under
certain circumstances if compliance with the voting restriction would: (a) cause
a violation of the law of the State of Delaware; (b) would cause the Foundation
to lose its tax-exempt status or otherwise have a material and adverse tax
consequence on the Foundation; or (c) would cause the Foundation to be subject
to an excise tax under Section 4941 of the Code. In order for the Foundation's
legal counsel would be required to render an opinion satisfactory to the FDIC
and the Department. There can be no assurances that a legal opinion addressing
these issues could be rendered, or if rendered, that the FDIC and the Department
would grant unconditional waivers of the voting restriction. In no event would
the voting restriction survive the sale of shares of the Common Stock held by
the Foundation.
Potential Challenges. The establishment and funding of a charitable
foundation as part of a conversion of a mutual savings institution to stock form
has only recently occurred. As such, the Foundation, and the Superintendent's
approval of the Reorganization and the FDIC's nonobjection to the Reorganization
may be subject to potential challenges notwithstanding that the Board of
Directors of the Company and the Board of Trustees of the Bank have carefully
considered the various factors involved in the establishment of the Foundation
in reaching their determination to establish the Foundation as part of the
Reorganization. If challenges were to be instituted seeking to require the Bank
to eliminate establishment of the Foundation in connection with the
Reorganization, no assurances can be made that the resolution of such challenges
would not result in a delay in the consummation of the Reorganization or that
any objecting persons would not be ultimately successful in obtaining such
removal or other relief against the Company or the Bank. Additionally, if the
Company and the Bank are forced to eliminate the Foundation, the Company may be
required to resolicit subscribers in the Offerings.
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COMMUNITY OFFERING
Any shares of Common Stock not subscribed for in the Subscription Offering
will be offered for sale in a Community Offering. This will involve an offering
of all unsubscribed shares directly to the general public. The Community
Offering, if any, shall be for a period of not more than 45 days unless extended
by the Company and the Bank, and shall commence concurrently with, during or
promptly after the Subscription Offering. The Common Stock will be offered and
sold in the Community Offering, in accordance with FDIC and Department
regulations, so as to achieve the widest distribution of the Common Stock. No
person, by himself or herself, or with an associate or group of persons acting
in concert, may subscribe for or purchase more than $200,000 of Common Stock
offered in the Community Offering. Further, the Company may limit total
subscriptions 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. Finally, the Company may reserve shares offered in the Community Offering
for sales to institutional investors.
In the event of an oversubscription for shares in the Community Offering,
shares will be allocated (to the extent shares remain available) first to
natural persons residing in Niagara, Orleans, Erie and Genesee Counties, New
York and secondly to natural persons residing in the remaining four counties of
Western New York, Wyoming, Allegany, Cattaraugus and Chautauqua counties (the
"Community"), and then to cover any reservation of shares for institutional
orders, and then to cover the orders of any other person subscribing for shares
in the Community Offering so that each such person may receive 1,000 shares, and
thereafter, on a pro rata basis to such persons based on the amount of their
respective subscriptions.
The terms "residence," "reside," "resided" or "residing" as used herein
with respect to any person shall mean any person who occupied a dwelling within
the Bank's Community, has an intent to remain within the Community for a period
of time, and manifests the genuineness of that intent by establishing an ongoing
physical presence within the Community together with an indication that such
presence within the Community is something other than merely transitory in
nature.
The Bank may utilize deposit or loan records or such other evidence
provided to it to make a determination as to whether a person is a resident. In
all cases, however, such a determination shall be in the sole discretion of the
Bank.
The Bank and the Holding Company, in their sole discretion, may reject
subscriptions, in whole or in part, received from any person.
SYNDICATED COMMUNITY OFFERING
Any shares of Common Stock not sold in the Subscription Offering or in the
Community Offering, if any, may be offered for sale to the general public by a
selling group of broker-dealers in a Syndicated Community Offering, subject to
terms, conditions and procedures as may be determined by the Bank and the
Company in a manner that is intended to achieve the widest distribution of the
Common Stock subject to the rights of the Company to accept or reject in whole
or in part all order in the Syndicated Community Offering. It is expected that
the Syndicated Community Offering will commence as soon as practicable after
termination of the Subscription Offering and the Community Offering, if any. The
Syndicated Community Offering shall be completed within 45 days after the
termination of the Subscription Offering, unless such period is extended as
provided herein.
If for any reason a Syndicated Community Offering of unsubscribed shares of
Common Stock cannot be effected and any shares remain unsold after the
Subscription Offering and the Community Offering, if any, the Boards of
Directors of the Company and the Bank will seek to make other arrangements for
the sale of the remaining shares. Such other arrangements will be subject to the
approval of the Department and the FDIC and to compliance with applicable state
and federal securities laws.
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RESTRICTIONS ON SALE OF STOCK BY TRUSTEES AND OFFICERS
All shares of the Common Stock purchased by Trustees and officers of the
Bank or the Company in the Offering will be subject to the restriction that such
shares may not be sold or otherwise disposed of for value for a period of one
year following the date of purchase, except for any disposition of such shares
(i) following the death of the original purchaser or (ii) by reason of an
exchange of securities in connection with a merger or acquisition approved by
the applicable regulatory authorities. Sales of shares of the Common Stock by
the Company's directors and officers will also be subject to certain insider
trading and other transfer restrictions under the federal securities laws. See
"Regulation--Federal Securities Laws" and "Description of Capital Stock."
Each certificate for such restricted shares will bear a legend prominently
stamped on its face giving notice of the restrictions on transfer, and
instructions will be issued to the Company's transfer agent 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 pursuant to a stock dividend, stock split or
otherwise with respect to restricted shares will be subject to the same
restrictions on sale.
RESTRICTIONS ON AGREEMENTS OR UNDERSTANDINGS REGARDING TRANSFER OF COMMON STOCK
TO BE PURCHASED IN THE OFFERING
Prior to the completion of the Offering, no depositor or borrower may
transfer or enter into an agreement or understanding to transfer the legal or
beneficial ownership of the shares of Common Stock to be purchased by such
person in the Offering. Each depositor and borrower who submits an Order Form
will be required to certify that the purchase of Common Stock by such person is
solely for the purchaser's own account and there is no agreement or
understanding regarding the sale or transfer of such shares. The Bank intends to
pursue any and all legal and equitable remedies in the event it becomes aware of
any such agreement or understanding, and will not honor orders reasonably
believed by the Bank to involve such an agreement or understanding.
PROCEDURE FOR PURCHASING SHARES
To ensure that each purchaser receives a Prospectus at least 48 hours
before the Expiration Date, Prospectuses may not be mailed any later than five
days prior to such date or be hand delivered any later than two days prior to
such date. Order forms may only be distributed with a Prospectus.
Expiration Date. The Offering will terminate at 5:00 p.m. New York Time on
March __, 1998, unless extended by the Bank for up to an additional 45 days or,
if approved by the Superintendent, for an additional period after such 45- day
extension (as so extended, the "Expiration Date"). The Bank is not required to
give purchasers notice of any extension unless the Expiration Date is later than
__________, 1998, in which event purchasers will be given the right to increase,
decrease, confirm, or rescind their orders. If the minimum number of shares
issued in the Offering (_________ shares) is not sold by the Expiration Date,
the Bank may terminate the Offering and promptly refund all orders for Common
Stock. A reduction in the number of shares below the minimum of the Estimated
Valuation Range will not require the approval of depositors or an amendment to
the Independent Valuation. If the number of shares is reduced below the minimum
of the Estimated Valuation Range, purchasers will be given an opportunity to
increase, decrease, or rescind their orders.
Use of Order Forms. In order to purchase the Common Stock, each purchaser
must complete an Order Form except for certain persons purchasing in the
Syndicated Community Offering as more fully described below. Any person
receiving an Order Form who desires to purchase Common Stock may do so by
delivering (by mail or in person) to the Bank a properly executed and completed
Order Form, together with full payment for the shares purchased. The Order Form
must be received prior to 5:00 p.m. New York Time on March __, 1998. Once
tendered, an Order Form cannot be modified or revoked without the consent of the
Bank. Each person ordering shares is required to represent that they
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are purchasing such shares for their own account. The interpretation by the Bank
of the terms and conditions of the Plan and of the acceptability of the Order
Forms will be final. The Bank is not required to accept copies of Order Forms.
Payment for Shares. Payment for all shares will be required to accompany
all completed Order Forms for the purchase to be valid. Payment for shares may
be made by (i) check or money order, or (ii) authorization of withdrawal from a
deposit account maintained with the Bank. Appropriate means by which such
withdrawals may be authorized are provided in the Order Forms. Once such a
withdrawal amount has been authorized, a hold will be placed on such funds,
making them unavailable to the depositor until the Offering has been completed
or terminated. In the case of payments authorized to be made through withdrawal
from deposit accounts, all funds authorized for withdrawal will continue to earn
interest at the contract rate until the Offering is completed or terminated.
Interest penalties for early withdrawal applicable to certificate accounts will
not apply to withdrawals authorized for the purchase of shares; however, if a
withdrawal results in a certificate account with a balance less than the
applicable minimum balance requirement, the certificate shall be canceled at the
time of withdrawal without penalty, and the remaining balance will earn interest
at the Bank's passbook rate subsequent to the withdrawal. In the case of
payments made by check or money order, such funds will be placed in a segregated
savings account and interest will be paid by the Bank at the Bank's passbook
rate, which was 3.4% on the date of this Prospectus, from the date payment is
received until the Offering is completed or terminated. Such interest will be
paid by check, on all funds held, including funds accepted as payment for shares
of Common Stock, promptly upon completion or termination of the Offering. An
executed Order Form, once received by the Bank, may not be modified, amended or
rescinded without the consent of the Bank, unless the Offering is not completed
by __________, 1998, in which event purchasers may be given the opportunity to
increase, decrease, confirm or rescind their orders for a specified period of
time.
Depending on market conditions, the Common Stock may be offered for sale to
the general public on a best efforts basis in the Syndicated Community Offering
by a selling group (the "Selling Group") of broker-dealers ("Selected Dealers")
to be managed by CIBC Oppenheimer Corp. and Trident Securities, Inc. CIBC
Oppenheimer Corp. and Trident Securities, Inc., in their discretion, will
instruct Selected Dealers as to the number of shares to be allocated to each
Selected Dealer. Only upon allocation of shares to Selected Dealers may Selected
Dealers take orders from their customers. Investors who desire to purchase
shares in the Community Offering directly through a Selected Dealer, which may
include CIBC Oppenheimer Corp. and Trident Securities, Inc., are advised that
the members of the Selling Group are required either (a) upon receipt of an
executed Order Form or direction to execute an Order Form on behalf of an
investor, to forward the appropriate purchase price to the Bank for deposit in a
segregated account on or before twelve noon, prevailing time, of the business
day next following such receipt or execution; or (b) upon receipt of
confirmation by such member of the Selling Group of an investor's interest in
purchasing shares, and following a mailing of an acknowledgment by such member
to such investor on the business day next following receipt of confirmation, to
debit the account of such investor on the fifth business day next following
receipt of confirmation and to forward the appropriate purchase price to the
Bank for deposit in the segregated account on or before twelve noon, prevailing
time, of the business day next following such debiting. Payment for any shares
purchased pursuant to alternative (a) above must be made by check in full
payment therefor. Payment for shares purchased pursuant to alternative (b) above
may be made by wire transfer to the Bank.
Owners of self-directed IRAs may use the assets of such IRAs to purchase
shares of Common Stock in the Offering. Individuals who are participants in
self-directed tax qualified plans maintained by self-employed individuals
("Keogh Plans") may use the assets in their self-directed Keogh Plan accounts to
purchase shares of Common Stock in the Offering. In addition, the provisions of
ERISA and IRS regulations require that executive officers, trustees, and 10%
stockholders who use self-directed IRA funds and/or Keogh Plan accounts to
purchase shares of Common Stock in the Offering, make such purchase for the
exclusive benefit of the IRA and/or Keogh Plan participant.
If the ESOP purchases shares of the Common Stock, such plan will not be
required to pay for such shares until consummation of the Offering.
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Delivery of Stock Certificates. Certificates representing Common Stock
issued in the Offering will be mailed by the Bank to the persons entitled
thereto at the registration address noted on the Order Form, as soon as
practicable following consummation of the Offering. Any certificates returned as
undeliverable will be held by the Bank until claimed by persons legally entitled
thereto or otherwise disposed of in accordance with applicable law. Until
certificates for the Common Stock are available and delivered to purchasers,
purchasers may not be able to sell the shares of stock which they ordered.
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 the Bank's
offices and by CIBC Oppenheimer Corp. and Trident Securities, Inc. All
prospective purchasers are to send payment directly to the Bank, 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 Bank has retained CIBC
Oppenheimer Corp. and Trident Securities, Inc., both of which are broker-dealers
registered with the NASD. CIBC Oppenheimer Corp. and Trident Securities, Inc.
will assist the Bank in the Offering as follows: (i) in training and educating
the Bank's employees regarding the mechanics and regulatory requirements of the
Offering; (ii) in conducting informational meetings for employees, customers and
the general public; (iii) in coordinating the selling efforts in the Bank's
local communities; and (iv) in soliciting orders for Common Stock. For these
services, CIBC Oppenheimer Corp. and Trident Securities, Inc. will receive an
aggregate fee of .95% of the dollar amount of the Common Stock sold in the
Offering to residents of Niagara, Orleans, Erie and Genesee Counties, New York
(and counties contiguous thereto) and .75% of the dollar amount of the Common
Stock sold in the Offering to other persons. If there is a Syndicated Community
Offering, the aggregate fee shall not exceed 4.5% of the Common Stock sold by
CIBC Oppenheimer Corp. and Trident Securities, Inc. and other NASD member firms
under selected dealer agreements.
The Bank also will reimburse CIBC Oppenheimer Corp. and Trident Securities,
Inc. for its reasonable out-of-pocket expenses (including legal fees and
expenses up to a maximum of $85,000) associated with its marketing effort. The
Bank has made an advance payment of $10,000 to each of CIBC Oppenheimer Corp.
and Trident Securities, Inc. If the Plan is terminated by the Bank, the Offering
is not completed by __________, 1998, or if CIBC Oppenheimer Corp. and Trident
Securities, Inc. terminate their agreement with the Bank in accordance with the
provisions of the agreement, CIBC Oppenheimer Corp. and Trident Securities, Inc.
will only receive reimbursement of their reasonable out-of-pocket expenses. The
Bank will indemnify CIBC Oppenheimer Corp. and Trident Securities, Inc. 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.
Trustees and executive officers of the Bank may participate in the
solicitation of offers to purchase Common Stock. Other trained employees of the
Bank may participate in the Offering in ministerial capacities, providing
clerical work in effecting a sales transaction or answering questions of a
ministerial nature. Other questions of prospective purchasers will be directed
to executive officers or registered representatives. The Bank will rely on Rule
3a4-1 of the Exchange Act, so as to permit officers, trustees, and employees to
participate in the sale of the Common Stock. No officer, trustee, or employee of
the Bank will be compensated for his participation by the payment of commissions
or other remuneration based either directly or indirectly on the transactions in
the Common Stock.
A Stock Information Center will be established at the Bank's main office,
in an area separated from the Bank's banking operations. Employees will inform
prospective purchasers to direct their questions to the Stock Information Center
and will provide such persons with the telephone number of the Center.
Other Restrictions. Notwithstanding any other provision of the Plan, no
person is entitled to purchase any Common Stock to the extent such purchase
would be illegal under any federal or state law or regulation (including state
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"blue-sky" laws and regulations), or would violate regulations or policies of
the NASD, particularly those regarding free riding and withholding. The Bank
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 such purchase order
if such opinion is not timely furnished. The Plan prohibits the Bank from
lending funds or extending credit to any persons to purchase Common Stock in the
Offering.
LIMITATIONS UPON PURCHASES OF COMMON STOCK
The following additional limitations have been imposed upon purchases of
shares of Common Stock. Defined terms used in this section and not otherwise
defined in this Prospectus shall have the meaning set forth in the Plan.
A. 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 not exceed 49% of the Company's total
outstanding Common Stock.
B. No Person or group of persons Acting in Concert, may purchase more
than 40,000 shares, or $400,000, of Common Stock 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 up to 5% of
the number of shares issued in the Offering; (ii) Tax-Qualified
Employee Plans may purchase up to 10% of the shares issued in the
Offering; and (iii) for purposes of this paragraph 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.
C. 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 25%
of the outstanding shares of Common Stock of the Company sold in the
Offering. In calculating the number of shares held by Management
Persons and their Associates under this paragraph or under the
provisions of paragraph D below, shares held by any Tax-Qualified
Employee Benefit Plan or any Non-Tax-Qualified Employee Benefit Plan
of the Bank that are attributable to such persons shall not be
counted.
D. The aggregate amount of Common Stock acquired in the Offering by all
Management Persons and their Associates, exclusive of any Common Stock
acquired by such persons in the secondary market, shall not exceed 25%
of the stockholders' equity of the Bank. In calculating the number of
shares held by Management Persons and their Associates under this
paragraph or under the provisions of paragraph C of this section,
shares held by any Tax-Qualified Employee Benefit Plan or any Non-Tax-
Qualified Employee Benefit Plan of the Bank that are attributable to
such persons shall not be counted.
E. The Boards of Directors of the Bank and the Company may, in their sole
discretion, increase the maximum purchase limitation set forth in
paragraph B to up to 9.9%, provided that orders for Common Stock in
excess of 5% of the number of shares of Common Stock issued in the
Offering shall not in the aggregate exceed 10% of the total shares of
Common Stock issued 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 the Bank 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.
F. In the event of an increase in the total number of shares offered in
the Subscription Offering due to an increase in the maximum of the
Estimated Valuation Range of up to 15% (the "Adjusted Maximum"), the
additional shares will be issued in the following order of priority:
(i) to fill the Employee Plans' subscription to the Adjusted Maximum;
(ii) in the event that there is an oversubscription at the Eligible
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<PAGE>
Account Holder, Supplemental Eligible Account Holder, or employee,
officer and trustee categories, to fill unfulfilled subscriptions of
such subscribers according to their respective priorities set forth in
the Plan.
G. Notwithstanding any other provision of the 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.
H. 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 the Plan.
The Company, in its sole discretion, may make reasonable efforts to comply
with the securities laws of any state in the United States in which its
depositors reside, and will only offer and sell the Common Stock in states in
which the offers and sales comply with such states' securities laws. However, no
person will be offered or allowed to purchase any Common Stock under the Plan if
they resides in a foreign country or in a state of the United States with
respect to which any of the following apply: (i) a small number of persons
otherwise eligible to purchase shares under the Plan reside in such state or
foreign county; (ii) the offer or sale of shares of Common Stock to such persons
would require the Bank or its employees to register, under the securities laws
of such state or foreign country, as a broker or dealer or to register or
otherwise qualify its securities for sale in such state or foreign country; or
(iii) such registration or qualification would be impracticable for reasons of
cost or otherwise.
LIQUIDATION RIGHTS
In the unlikely event of a complete liquidation of the Bank in its present
mutual form, each depositor would have a claim to receive his pro rata share of
any assets of the Bank 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 assets, a depositor may have a
claim to receive a pro rata share of the remaining assets in the same proportion
as the value of such depositor's deposit accounts to the total value of all
deposit accounts in the Bank at the time of liquidation, subject to the right of
the State of New York to garnish such assets. After the Reorganization, each
depositor, in the event of a complete liquidation, would have a claim as a
creditor of the same general priority as the claims of all other general
creditors of the Bank. However, except as described below, 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 the
Bank above that amount.
The Plan provides for the establishment, upon the completion of the
Reorganization, of a special "liquidation account" for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders in an amount equal to
the surplus and reserves of the Bank as of the date of its latest balance sheet
contained in the final Offering Circular used in connection with the
Reorganization. Each Eligible Account Holder and Supplemental Eligible Account
Holder, if he were to continue to maintain his deposit account at the Bank,
would, on a complete liquidation of the Bank, have a claim to an interest in the
liquidation account after payment of all creditors prior to any payment to the
stockholders of the Bank. Each Eligible Account Holder and Supplemental Eligible
Account Holder would have an initial interest in such liquidation account for
each deposit account, with a balance of $100 or more held in the Bank on August
31, 1996 and December 31, 1997, respectively ("Deposit Account"). Each Eligible
Account Holder and Supplemental Eligible Account Holder will have a claim to a
pro rata interest in the total liquidation account for each of his Deposit
Accounts based on the proportion that the balance of each such Deposit Account
on August 31, 1996 and December 31, 1997, respectively, bore to the balance of
all Deposit Accounts in the Bank on such date.
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<PAGE>
If, however, on any December 31 annual closing date of the Bank, commencing
after December 31, 1996, the amount in any Deposit Account is less than the
amount in such Deposit Account on December 31, 1996 or any other annual closing
date, then such person's interest in the liquidation account relating to such
Deposit Account would be reduced from time to time by the proportion of any such
reduction, 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.
FEDERAL AND STATE TAX CONSEQUENCES OF THE REORGANIZATION
Consummation of the Reorganization is conditioned on prior receipt by the
Bank of (i) either an IRS ruling or an opinion of counsel with respect to the
federal income tax consequences of the Reorganization, and (ii) either a ruling
from the New York Department of Revenue or an opinion of counsel or tax advisor
with respect to the New York tax consequences of the Reorganization. Unlike
private letter rulings, opinions of counsel are not binding on the IRS or the
New York Department of Revenue, and either agency could disagree with such
opinions. In the event of such disagreement, there can be no assurance that the
Bank or the depositors would prevail in a judicial proceeding.
In the following discussion, "Mutual Bank" refers to the Bank before the
Reorganization and "Stock Bank" refers to the Bank after the Reorganization. The
Mutual Bank will receive an opinion of counsel from Luse Lehman Gorman Pomerenk
& Schick, A Professional Corporation, to the effect that, for federal income tax
purposes, (1) the conversion of the De Novo Bank into the Mutual Holding
Company, a New York mutual holding company, will qualify as a tax-free
Reorganization under Code Section 368(a)(1)(F); (2) provided that the merger of
the Mutual Bank into the Stock Bank qualifies as a merger under New York law,
the merger of the Bank into the Stock Bank with the Stock Bank as the survivor
and the transfer of the depositors' equity interest in the Bank to the Mutual
Holding Company in exchange for equity interests in the Mutual Holding Company
qualifies as a tax-free reorganization described in Code Sections 368(a)(1)(A)
and 368(a)(2)(D). The Bank, Stock Bank and Mutual Holding Company are each "a
party to the reorganization," as defined in Code Section 368(b); (3) the Bank
will recognize no gain or loss upon the transfer of substantially all its assets
to the Stock Bank solely in exchange for equity interests (voting and
liquidation rights) in the Mutual Holding Company and the Stock Bank's
assumption of its liabilities, if any; (4) neither the Stock Bank nor the Mutual
Holding Company will recognize gain or loss upon the receipt by the Stock Bank
of substantially all of the assets of the Bank in exchange for equity interests
in the Mutual Holding Company and the Stock Bank's assumption of the Bank's
liabilities; (5) the Mutual Holding Company's basis in the stock of the Stock
Bank will increase by an amount equal to the Bank's net basis in the property
transferred to the Stock Bank; (6) the Stock Bank's basis in the property
received from the Bank will be the same as the basis of such property in the
hands of the Bank immediately prior to the Reorganization; (7) the Stock Bank's
holding period for the property received from the Bank will include the period
during which such property was held by the Bank; (8) subject to the conditions
and limitations set forth in Code Sections 381, 382, 383, and 384 and the
Treasury regulations promulgated thereunder, the Stock Bank will succeed to and
take into account the items of the Bank described in Code Section 381(c); (9) no
gain or loss will be recognized by the depositors of the Bank on the receipt of
equity interests with respect to the Mutual Holding Company in exchange for
their equity interests surrendered therefor; (10) each depositor's aggregate
basis, if any, in the Mutual Holding Company equity interest received in the
exchange will equal the aggregate basis, if any, of each depositor's equity
interest in the Bank; (11) the holding period of the Mutual Holding Company
equity interests received by the depositors of Bank will include the period
during which the Bank equity interests surrendered in exchange therefor were
held; (12) the Mutual Holding Company and the minority stockholders of the
Company ("Minority Stockholders") will recognize no gain or loss upon the
transfer of the Stock Bank stock and cash, respectively, to the Company in
exchange for stock of the Company; (13) the Company will recognize no gain or
loss upon its receipt of property from the Mutual Holding Company and Minority
Stockholders in exchange for Common Stock of the Company; (14) the Mutual
Holding Company will increase its basis in its shares of the Company Common
Stock by the Mutual Holding Company's basis in its Stock Bank stock. The tax
opinions set forth above are based in part on the letter from RP Financial
concluding that the subscription rights to be received by eligible account
holders and supplemental eligible account holders do not have any economic value
at the time of distribution or the time the subscription rights are exercised,
and are given in reliance thereon.
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<PAGE>
RESTRICTIONS ON ACQUISITION OF THE COMPANY
The Mutual Holding Company Structure. Under New York law, the Plan of
Reorganization, and our governing corporate instruments, at least 51% of the
Company's voting shares must be owned by the Mutual Holding Company. The Mutual
Holding Company will be controlled by its Board of Trustees, who will consist of
persons who also are members of the Board of Directors of the Company and the
Bank. The Mutual Holding Company will be able to elect all members of the Board
of Directors of the Company, and as a general matter, will be able to control
the outcome of all matters presented to the stockholders of the Company for
resolution by vote, except for matters that require a vote greater than a
majority. 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 Minority Stockholders. Accordingly, a change in control of the Company and
the Bank cannot occur unless the Mutual Holding Company first converts to the
stock form of organization. Although New York law, applicable regulations and
the Plan of Reorganization permit the Mutual Holding Company to convert from the
mutual to the capital stock form of organization, it is not anticipated that a
conversion of the Mutual Holding Company will occur in the foreseeable future.
In addition to the anti-takeover aspects of the Mutual Holding Company
structure, the following is a general summary of certain provisions of the
Company's certificate of incorporation and bylaws and certain other regulatory
provisions which will restrict the ability of stockholders to influence
management policies, and which may be deemed to have an "anti-takeover" effect.
The following description of certain of these provisions is necessarily general
and, with respect to provisions contained in the Company's certificate of
incorporation and bylaws and the Bank's proposed stock charter and bylaws,
reference should be made in each case to the document in question, each of which
is part of the Bank's application to the Superintendent and the Company's
Registration Statement filed with the SEC. See "Additional Information." The
following discussion does not reflect the powers and provisions of the Bank's
charter following the Bank offering.
PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
Restrictions on Call of Special Meetings. The certificate of incorporation
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 of stockholders.
Absence of Cumulative Voting. The certificate of incorporation provides
that there shall be no cumulative voting rights in the election of directors.
Authorization of Preferred Stock (the "Preferred Stock"). The certificate
of incorporation authorizes 5,000,000 shares of serial preferred stock, par
value $0.01 per share. The Company is authorized to issue Preferred Stock from
time to time in one or more series subject to applicable provisions of law; and
the Board of Directors is authorized to fix the designations, and relative
preferences, limitations, voting rights, if any, including without limitation,
offering rights of such shares (which could be a multiple or as a separate
class). In the event of a proposed merger, tender offer or other attempt to gain
control of the Company that the Board of Directors does not approve, it might be
possible for the Board of Directors to authorize the issuance of a series of
Preferred Stock with rights and preferences that would impede the completion of
such a transaction. An effect of the possible issuance of Preferred Stock,
therefore, may be to deter a future takeover attempt. The Board of Directors has
no present plans or understandings for the issuance of any Preferred Stock but
it may issue any Preferred Stock on terms which the Board deems to be in the
best interests of the Company and its stockholders.
Limitation on Voting Rights. The certificate of incorporation provides that
(i) no person shall directly or indirectly offer to acquire or acquire the
beneficial ownership of more than 5% of any class of equity security of the
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<PAGE>
Company, inclusive of shares of such class held by the Mutual Holding Company
(provided that such limitation shall not apply to the Mutual Holding Company or
any tax-qualified employee stock benefit plans maintained by the Company); and
that (ii) shares beneficially owned in violation of the stock ownership
restriction described above shall not be entitled to vote and shall not be voted
by any person or counted as voting stock in connection with any matter submitted
to a vote of stockholders. 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.
Amendments to Certificate of Incorporation and Bylaws. Amendments to the
certificate of incorporation 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 the call of special stockholder meetings, cumulative
voting, limitation on voting rights and director liability).
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.
FEDERAL RESERVE BOARD REGULATIONS
The Change in Bank Control Act and the BHCA, together with the Federal
Reserve Board regulations under those acts, require that the consent of the
Federal Reserve Board be obtained prior to any person or company acquiring
"control" of a bank holding company. Control is conclusively presumed to exist
if an individual or company acquires more than 25% of any class of voting stock
of the bank holding company. Control is rebuttably presumed to exist if the
person acquires more than 10% of any class of voting stock of a bank holding
company if either (i) the Company has registered securities under Section 12 of
the Exchange Act or (ii) no other person will own a greater percentage of that
class of voting securities immediately after the transaction. The regulations
provide a procedure to rebut the rebuttable control presumption. Since the
Company's Common Stock will be registered under Section 12 of the Exchange Act,
any acquisition of 10% or more of the Company's Common Stock will give rise to a
rebuttable presumption that the acquiror of such stock controls the Company,
requiring the acquiror, prior to acquiring such stock, to rebut the presumption
of control to the satisfaction of the Federal Reserve Board or obtain Federal
Reserve Board approval for the acquisition of control. Restrictions applicable
to the operations of bank holding companies may deter companies from seeking to
obtain control of the Company. See "Regulation."
NEW YORK BANKING LAW
In addition to federal law, the New York State Banking Law generally
requires prior approval of the New York State Banking Board before any action is
taken that causes any entity or person to acquire direct or indirect control of
a banking institution which is organized in New York State. Control is presumed
to exist if any company or person directly or indirectly owns, controls or holds
with power to vote 10% or more of the voting stock of a banking institution or
of any company or person that owns, controls or holds with power to vote 10% or
more of the voting stock of a banking institution.
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
GENERAL
The Company is authorized to issue 45,000,000 shares of Common Stock having
a par value of $.01 per share and 5,000,000 shares of serial Preferred Stock
having a par value of $.01 per share. The Company currently expects to issue
between 19,125,000 and 25,875,000 shares, with an adjusted maximum of 29,756,250
shares, of Common Stock and no shares of Preferred Stock in the Reorganization.
Each share of the Common Stock will have the same relative rights as, and will
be identical in all respects with, each other share of the Common Stock. Upon
payment of the purchase
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price for the Common Stock, in accordance with the Plan, all such stock will be
duly authorized, fully paid, validly issued, and non-assessable.
The Common Stock of the Company will represent nonwithdrawable will not be
an account of an insurable type, and will not be insured by the FDIC.
COMMON STOCK
Voting Rights. Under Delaware law, the holders of the Common Stock will
possess exclusive voting power in the Company. Each stockholder will be entitled
to one vote for each share held on all matters voted upon by stockholders,
except as discussed in Restrictions on Acquisitions of the Company--Limitations
on Voting Rights." If the Company issues Preferred Stock, subsequent to the
Reorganization, holders of the Preferred Stock may also possess voting rights.
Dividends. Upon consummation of the Reorganization, the Company's only
asset will be the net proceeds, the ESOP loan and the Bank's Common Stock. The
payment of dividends by the Company is subject to limitations which are imposed
by law and applicable regulation. See "Dividend Policy." 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
therefore. If the Company issues Preferred Stock, the holders thereof may have a
priority over the holders of the Common Stock with respect to dividends.
Liquidation or Dissolution. In the unlikely event of the liquidation or
dissolution of the Company, the holders of the Common Stock will be entitled to
receive -- after payment or provision for payment of all debts and liabilities
of the Company (including all deposits in the Bank and accrued interest thereon)
and after distribution of the liquidation account established upon stock
offering for the benefit of Eligible Account Holders and Supplemental Eligible
Account Holders who continue their deposit accounts at the Bank -- all assets of
the Company available for distribution, in cash or in kind. See "The
Reorganization and Offering--Liquidation Rights." If preferred stock is issued
subsequent to the Offering, the holders thereof may have a priority over the
holders of Common Stock in the event of liquidation or dissolution.
No 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 will not be subject to call for redemption, and, upon receipt by the
Company of the full purchase price therefor, each share of the Common Stock will
be fully paid and nonassessable.
Preferred Stock. None of the 5,000,000 authorized shares of Preferred Stock
of the Company will be issued in the Reorganization. The Company's Board of
Directors is authorized, without stockholder approval, to issue serial preferred
stock and to fix and state voting powers, designations, preferences or other
special rights of such shares. If and when issued, the serial preferred stock
may rank senior to the Common Stock as to dividend rights, liquidation
preferences, or both, and may have full, limited or no voting rights.
Accordingly, the issuance of preferred stock could adversely affect the voting
and other rights of holders of Common Stock.
TRANSFER AGENT AND REGISTRAR
Chase Mellon Shareholder Services, L.L.C. will act as the transfer agent
and registrar for the Common Stock.
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LEGAL AND TAX MATTERS
The legality of the Common Stock and the federal income tax consequences of
the Reorganization will be passed upon for the Bank and the Company by the firm
of Luse Lehman Gorman Pomerenk & Schick, P.C., Washington, D.C., special counsel
to the Company and the Bank. The New York income tax consequences of the
Reorganization will be passed upon for the Company and the Bank by KPMG Peat
Marwick LLP. The federal income tax consequences of certain matters relating to
the establishment of the Foundation will be passed upon for the Company and the
Bank by KPMG Peat Marwick LLP. Certain legal matters will be passed upon for
CIBC Oppenheimer Corp. and Trident Securities, Inc. by Silver, Freedman & Taff,
L.L.C., Washington, D.C.
EXPERTS
The consolidated financial statements of Lockport Savings Bank and
subsidiaries as of December 31, 1996 and 1995 and for each of the years in the
three-year period ended December 31, 1996 have been 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.
RP Financial has consented to the publication herein of the summary of its
report to the Bank and the Company setting forth its opinion as to the estimated
pro forma market value of the Common Stock upon Reorganization and its valuation
with respect to Subscription Rights.
ADDITIONAL INFORMATION
We have filed with the SEC a registration statement under the Securities
Act with respect to the Common Stock offered hereby. As permitted by the rules
and regulations of the SEC, this Prospectus does not contain all the information
set forth in the registration statement. Such information can be examined
without charge at the public reference facilities of the SEC located at 450
Fifth Street, NW, Washington, D.C. 20549, and copies of such material can be
obtained from the SEC at prescribed rates. The SEC maintains a web site that
contains reports, proxy and information statements and other information
regarding issuers that file electronically with the SEC. The address of this web
site is http://www.sec.gov. The statements contained herein as to the contents
of any contract or other document filed as an exhibit to the registration
statement are, of necessity, brief descriptions thereof and are not necessarily
complete but do contain all material information regarding such documents; each
such statement is qualified by reference to such contract or document.
We have filed an Application with the Department with respect to the
Reorganization. Pursuant to the rules and regulations of the Department, this
Prospectus omits certain information contained in that Application. The
Application may be examined at the office of the Department, 2 Rector Street,
New York, New York, and at our Administrative Center, at 6950 South Transit
Road, Lockport, New York, 14095-0514 without charge.
In connection with the Offering, the Company will register the Common Stock
with the SEC under Section 12(g) of the Exchange Act; and, upon such
registration, the Company and the holders of its Common Stock will become
subject to the proxy solicitation rules, reporting requirements and restrictions
on stock purchases and sales by directors, officers and greater than 10%
stockholders, the annual and periodic reporting and certain other requirements
of the Exchange Act. Under the Plan, the Company has undertaken that it will not
terminate such registration for a period of at least three years following the
Reorganization.
A copy of the certificate of incorporation and bylaws of the Company are
available without charge from the Bank.
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LOCKPORT SAVINGS BANK
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
------
<S> <C>
Independent Auditor's Report................................................................. F-2
Consolidated Statements of Condition as of September 30, 1997 (unaudited) and
December 31, 1996 and 1995.............................................................. F-3
Consolidated Statements of Income for the nine months ended September 30, 1997 and 1996
(unaudited) and the years ended December 31, 1996, 1995 and 1994........................ 30
Consolidated Statements of Cash Flows for the nine months ended September 30, 1997 and 1996
(unaudited) and the years ended December 31, 1996, 1995 and 1994........................ F-4
Notes to Consolidated Financial Statements................................................... F-6
</TABLE>
All schedules are omitted because they are not required or applicable, or
the required information is shown in the consolidated financial statements or
notes thereto.
The financial statements of Niagara Bancorp, Inc. have been omitted because
Niagara Bancorp, Inc. has not yet issued any stock, has no assets and no
liabilities, and has not conducted any business other than of an organizational
nature.
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees
Lockport Savings Bank:
We have audited the accompanying consolidated statements of condition of
Lockport Savings Bank and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income and cash flows for each of the years
in the three-year period ended December 31, 1996. These consolidated financial
statements are the responsibility of the Bank's management. Our responsibility
is to express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Lockport
Savings Bank and subsidiaries as of December 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Buffalo, New York
January 17, 1997
F-2
<PAGE>
LOCKPORT SAVINGS BANK
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
SEPTEMBER 30, 1997 AND DECEMBER 31, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------------------
Assets 1997 1996 1995
- ------ ------------ ---------- ----------
<S> <C> <C> <C>
(UNAUDITED)
Cash and cash equivalents:
Cash and due from banks $ 14,804 11,219 13,873
Federal funds sold 2,200 5,000 25,550
---------- --------- -------
Total cash and cash equivalents 17,004 16,219 39,423
Securities available for sale (note 2) 464,973 415,129 346,410
Securities held to maturity (note 3) 37,500 38,000 46,700
Loans, net (note 4) 622,487 598,486 535,971
Accrued interest receivable 7,343 6,348 5,622
Premises and equipment, net (note 5) 22,022 13,240 11,377
Other assets (notes 6, 10 and 11) 5,122 5,936 8,788
---------- --------- -------
$1,176,451 1,093,358 994,291
========== ========= =======
Liabilities and Net Worth
- -----------------------------------------------------
Liabilities:
Deposits (note 7) $ 992,219 920,072 861,065
Mortgagors' payments held in escrow 8,387 8,773 10,189
Other borrowed funds (note 8):
Short-term 18,740 27,008 --
Long-term 10,000 5,000 --
Other liabilities (notes 10 and 11) 20,385 16,841 15,384
---------- --------- -------
1,049,731 977,694 886,638
---------- --------- -------
Commitments and contingencies (notes 4 and 5)
Net worth (note 9):
Surplus and undivided profits 125,325 116,690 105,921
Net unrealized gain (loss) on securities available
for sale, net of deferred income taxes 1,395 (1,026) 1,732
---------- --------- -------
126,720 115,664 107,653
---------- --------- -------
$1,176,451 1,093,358 994,291
========== ========= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
LOCKPORT SAVINGS BANK
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
AND YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
--------------------- -------------------------------------
1997 1996 1996 1995 1994
---------- --------- ------------ ------------ ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $ 8,635 8,226 10,768 9,925 8,801
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation of premises and equipment 1,635 1,400 1,911 1,607 1,256
Amortization and accretion of fees and discounts (312) (513) (717) 554 653
Provision for loan losses 975 1,861 2,187 1,016 948
Other provisions for losses 336 20 23 834 380
Net (gain) loss on sale of securities available for sale (875) (532) (576) (1,477) 849
Deferred income taxes (164) (449) (387) (253) 43
(Increase) decrease in:
Accrued interest receivable (995) (733) (726) (198) (345)
Other assets (1,040) 3,657 3,824 (5,464) 767
Increase (decrease) in other liabilities 3,544 8,343 2,661 8,607 (508)
--------- -------- -------- -------- --------
Net cash provided by operating activities 11,739 21,280 18,968 15,151 12,844
--------- -------- -------- -------- --------
Cash flows from investing activities:
Purchase of investment securities available for sale (85,275) (75,453) (91,772) (16,696) (39,870)
Proceeds from sales of investment securities available for sale 22,326 6,695 16,803 11,892 35,470
Purchase of mortgage-backed securities available for sale (67,340) (65,729) (85,506) (46,375) (112,295)
Proceeds from sales of mortgage-backed securities available for sale 44,513 6,981 24,924 50,755 41,072
Principal payments on mortgage-backed securities available for sale 29,729 27,111 35,522 29,780 80,142
Proceeds from maturities of investment securities available for sale 11,175 22,215 27,215 -- --
Purchase of securities held to maturity (177,100) (185,700) (249,700) (239,100) (244,179)
Proceeds from maturities of securities held to maturity 177,600 193,400 258,400 227,368 252,257
Net increase in loans (22,815) (43,147) (65,123) (62,288) (54,131)
Other (12,260) (1,056) (2,534) (3,647) (2,290)
--------- -------- -------- -------- --------
Net cash used by investing activities $ (79,447) (114,683) (131,771) (48,311) (43,824)
--------- -------- -------- -------- --------
Cash flows from financing activities:
</TABLE>
F-4
<PAGE>
LOCKPORT SAVINGS BANK
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
--------------------- -------------------------------------
1997 1996 1996 1995 1994
---------- --------- ------------ ------------ ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net increase in deposits $ 72,147 57,988 59,007 41,375 6,751
Net increase (decrease) in mortgagors' payments held in escrow (386) (3,153) (1,416) 589 905
Proceeds from (repayment of) short-term borrowings (8,268) 24,675 27,008 -- --
Proceeds from long-term borrowings 5,000 5,000 5,000 -- --
--------- -------- -------- -------- --------
Net cash provided by financing activities 68,493 84,510 89,599 41,964 7,656
--------- -------- -------- -------- --------
Net increase (decrease) in cash and cash equivalents 785 (8,893) (23,204) 8,804 (23,324)
Cash and cash equivalents at beginning of period 16,219 39,423 39,423 30,619 53,943
--------- -------- -------- -------- --------
Cash and cash equivalents at end of period $ 17,004 30,530 16,219 39,423 30,619
========= ======== ======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the year:
Income taxes $ 3,850 4,942 6,597 4,110 5,283
Interest expense 33,107 29,851 40,485 38,972 31,361
========= ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
LOCKPORT SAVINGS BANK
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
AND YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(1) Summary of Significant Accounting Policies
- -----------------------------------------------
The accounting and reporting policies of Lockport Savings Bank, a New York
State chartered FDIC insured mutual savings bank, and its subsidiaries
conform to general practices within the banking industry and to generally
accepted accounting principles. The following is a description of the more
significant accounting policies.
(a) Principles of Consolidation
--------------------------------
The consolidated financial statements include the accounts of
Lockport Savings Bank (LSB) and its subsidiaries (the Bank), LSB
Associates, Inc., an agent for third party mutual fund and
annuity sales; LSB Realty, Inc., a real estate development
company; LSB Funding, Inc., a real estate investment trust; and
LSB Securities, Inc., a securities investment company. All
significant intercompany balances and transactions have been
eliminated in consolidation.
(b) Investment Securities
--------------------------
Debt securities and marketable equity securities are classified
as either available for sale or held to maturity. Held to
maturity securities are those that the Bank has the positive
intent and ability to hold to maturity. All other securities are
classified as available for sale.
Securities available for sale are carried at fair value with
unrealized gains and losses, net of the related deferred tax
effect, excluded from earnings and reported as a separate
component of net worth. Realized gains and losses are determined
using the specific identification method.
Securities held to maturity are recorded at cost with discounts
accreted and premiums amortized to maturity using a method that
approximates the level-yield method. If permanent impairment of a
security exists, that security is written down to fair value with
a charge to earnings.
(c) Loans
----------
Loans are stated at the principal amount outstanding, adjusted
for net unamortized deferred fees and costs which are accrued to
income on the interest method. Accrual of interest income on
loans is discontinued after payments become more than ninety days
delinquent, unless the status of a particular loan clearly
indicates earlier discontinuance is more appropriate. All
uncollected interest income previously recognized on non-accrual
loans is reversed and subsequently recognized only to the extent
payments are received. In those instances where there is doubt as
to the collectibility of principal, interest payments are applied
to principal.
(d) Real Estate Owned
----------------------
Real estate owned consists of property acquired in settlement of
loans which are initially valued at the lower of cost or fair
value based on appraisals at foreclosure and are periodically
adjusted to the lower of adjusted cost or net realizable value
throughout the remaining period.
F-6
<PAGE>
LOCKPORT SAVINGS BANK
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(1) Summary of Significant Accounting Policies, Continued
- ----------------------------------------------------------
(e) Allowance for Loan Losses
------------------------------
The allowance for loan losses is established through charges to
earnings. Management's determination of the balance of the
allowance is based on many factors including credit evaluation of
the loan portfolio, current and expected economic conditions and
past loss experience. While management uses available information
to recognize losses on loans, future additions to the allowance
may be necessary based on changes in economic conditions. In
addition, various regulatory agencies, as an integral part of
their examination process, periodically review the allowance for
loan losses and may require the Bank to recognize additions to
the allowance based on their judgment of information available to
them at the time of their examination.
In 1995, the Bank adopted Statement of Financial Accounting
Standards No. 114, "Accounting by Creditors for Impairment of a
Loan", as amended by Statement of Financial Accounting Standards
No. 118, "Accounting by Creditors for Impairment of a Loan -
Income Recognition Disclosures". These new standards require that
an impaired loan be measured based on the present value of
expected future cash flows discounted at the loan's effective
interest rate or, as a practical expedient, the loan's observable
market price or the fair value of the underlying collateral if
the loan is collateral dependent. These new standards also made
certain changes to existing accounting principles applicable to
in-substance foreclosures (ISF) and troubled debt restructurings
involving modifications of terms. SFAS 114 generally does not
apply to those smaller-balance homogeneous loans that are
collectively evaluated for impairment which for the Bank, include
one- to four-family residential mortgage loans, student loans and
consumer loans, other than those modified in a troubled debt
restructuring. The adoption of these standards did not have a
material impact on the Bank's consolidated financial statements.
In accordance with SFAS 114, the Bank considers a loan impaired
when, based upon current information and events, it is possible
that it will be unable to collect all amounts due, both principal
and interest. The measurement value of the Bank's impaired loans
was based on the fair value of the underlying collateral. The
Bank identifies and measures impaired loans in conjunction with
its review of the adequacy of its allowance for loan losses.
Specific factors utilized in the identification of impaired loans
include, but are not limited to, delinquency status, loan-to-
value ratio, the condition of the underlying collateral, credit
history and debt coverage.
(f) Premises and Equipment
---------------------------
Premises and equipment are carried at cost, net of accumulated
depreciation and amortization. Depreciation is computed on the
straight-line method over the estimated useful lives of the
assets. Leasehold improvements are amortized on the straight-line
method over the lesser of the life of the improvements or the
lease term.
(g) Employee Benefits
----------------------
The Bank maintains a non-contributory, qualified, defined benefit
pension plan that covers substantially all full time employees.
The actuarially determined pension benefits in the form of a life
annuity are based on the employee's combined years of service,
age and compensation. The Bank's policy is to fund the minimum
amount required by government regulations.
F-7
<PAGE>
LOCKPORT SAVINGS BANK
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(1) Summary of Significant Accounting Policies, Continued
- ----------------------------------------------------------
(g) Employee Benefits (continued)
----------------------------------
The Bank also provides certain post-retirement benefits,
principally health care and group life insurance, to employees
and their beneficiaries and dependents. The Bank accrues for the
expected cost of providing these post-retirements benefits during
an employee's active years of service.
(h) Income Taxes
-----------------
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are reflected at
currently enacted income tax rates applicable to the period in
which the deferred tax assets or liabilities are expected to be
realized or settled. As changes in tax laws or rates are enacted,
deferred tax assets and liabilities are adjusted through the
provision for income taxes.
(i) Transfers and Servicing of Financial Assets and Extinguishments
---------------------------------------------------------------
of Liabilities
- --------------
In June 1996, the Financial Accounting Standards Board issued
SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." SFAS No.
125 provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities
based on consistent application of a financial-components
approach that focuses on control. It distinguishes transfers of
financial assets that are sales from transfers that are secured
borrowings. The adoption of SFAS No. 125 as of January 1, 1997
did not have a material impact on the Bank's financial position,
results of operations, or liquidity.
(j) Use of Estimates
---------------------
Management of the Bank has made a number of estimates and
assumptions relating to the reporting of assets and liabilities
and disclosure of contingent assets and liabilities to prepare
these financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those
estimates.
F-8
<PAGE>
LOCKPORT SAVINGS BANK
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(2) Securities Available for Sale
- ----------------------------------
The amortized cost and approximate fair value of securities available for
sale at September 30, 1997 (unaudited) are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ----------- ----------- -------
<S> <C> <C> <C> <C>
Debt securities:
U.S. Treasury $ 84,856 776 (101) 85,531
U.S. government agencies 5,008 -- (6) 5,002
States and political subdivisions 1,761 109 -- 1,870
Corporate 6,927 107 -- 7,034
-------- ------ ------- -------
98,552 992 (107) 99,437
-------- ------ ------- -------
Mortgage-backed securities:
Collateralized mortgage obligations 107,744 522 (1,078) 107,188
Government National Mortgage Association 33,461 1,095 (14) 34,542
Federal National Mortgage Association 25,330 136 (73) 25,393
Freddie Mac 118,469 717 (547) 118,639
-------- ------ ------- -------
285,004 2,470 (1,712) 285,762
-------- ------ ------- -------
Asset-backed securities:
Home equity 53,482 54 (72) 53,464
Student Loans 9,741 -- (27) 9,714
Auto 4,047 18 -- 4,065
-------- ------ ------- -------
67,270 72 (99) 67,243
-------- ------ ------- -------
Equity securities:
FHLB stock 6,392 -- -- 6,392
Common stock 5,391 909 (161) 6,139
-------- ------ ------- -------
11,783 909 (161) 12,531
-------- ------ ------- -------
$462,609 4,443 (2,079) 464,973
======== ====== ======= =======
</TABLE>
Scheduled contractual maturities of securities, other than equity securities, at
September 30, 1997 (unaudited) are as follows (in thousands):
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
--------- -------
<S> <C> <C>
Within one year $ 10,932 10,924
After one year through five years 121,266 121,953
After five years through ten years 82,012 82,296
After ten years 236,616 237,269
-------- -------
$450,826 452,442
======== =======
</TABLE>
F-9
<PAGE>
LOCKPORT SAVINGS BANK
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(2) Securities Available for Sale, Continued
- ---------------------------------------------
The amortized cost and approximate fair value of securities available for
sale at December 31, 1996 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -----
<S> <C> <C> <C> <C>
Debt securities:
U.S. Treasury $ 84,716 723 (219) 85,220
U.S. government agencies 5,012 -- (8) 5,004
States and political subdivisions 1,942 99 -- 2,041
Corporate 999 1 -- 1,000
-------- ------- ------- -------
92,669 823 (227) 93,265
-------- ------- ------- -------
Mortgage-backed securities:
Collateralized mortgage obligations 104,244 133 (2,385) 101,992
Government National Mortgage Association 44,966 931 (117) 45,780
Federal National Mortgage Association 28,487 20 (251) 28,256
Freddie Mac 109,903 475 (1,546) 108,832
-------- ------- ------- -------
287,600 1,559 (4,299) 284,860
-------- ------- ------- -------
Asset-backed securities:
Home equity 28,090 36 (128) 27,998
-------- ------- ------- -------
Equity securities:
FHLB stock 5,394 -- -- 5,394
Common stock 3,115 594 (97) 3,612
-------- ------- ------- -------
8,509 594 (97) 9,006
-------- ------- ------- -------
$416,868 3,012 (4,751) 415,129
======== ======= ======= =======
Scheduled contractual maturities of debt securities at December 31, 1996 are as
follows (in thousands):
AMORTIZED FAIR
COST VALUE
--------- ---------
Within one year $16,167 16,177
After one year through five years 76,002 76,497
After ten years 500 591
-------- -------
$ 92,669 93,265
======== =======
</TABLE>
F-10
<PAGE>
LOCKPORT SAVINGS BANK
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(2) Securities Available for Sale, Continued
- ---------------------------------------------
The amortized cost and approximate fair value of securities available for
sale at December 31, 1995 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ----------- ----------- -------
<S> <C> <C> <C> <C>
Debt securities:
U.S. Treasury $ 54,839 1,005 (99) 55,745
U.S. government agencies -- -- -- --
States and political subdivisions 9,118 200 (1) 9,317
Corporate 6,035 5 (5) 6,035
-------- ------ ------- -------
69,992 1,210 (105) 71,097
-------- ------ ------- -------
Mortgage-backed securities:
Collateralized mortgage obligations 132,550 714 (1,672) 131,592
Government National Mortgage Association 51,104 1,881 (1) 52,984
Federal National Mortgage Association 33,170 415 (10) 33,575
Freddie Mac 43,000 456 (64) 43,392
-------- ------ ------- -------
259,824 3,466 (1,747) 261,543
-------- -------- ------- -------
Asset-backed securities:
Home equity 5,350 -- (72) 5,278
-------- ------ ------- -------
Equity securities:
FHLB stock 4,926 -- -- 4,926
Common stock 3,382 396 (212) 3,566
-------- ------ ------- -------
8,308 396 (212) 8,492
-------- -------- ------- -------
$343,474 5,072 (2,136) 346,410
======== ======== ======= =======
</TABLE>
F-11
<PAGE>
LOCKPORT SAVINGS BANK
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(2) Securities Available for Sale, Continued
- ---------------------------------------------
Gross realized gains (losses) on sales of securities available for sale are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------------ ------------------------
1997 1996 1996 1995 1994
------- ------- ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Realized gains $1,152 646 896 2,442 617
Realized losses (277) (114) (320) (965) (1,466)
====== ==== ==== ===== ======
</TABLE>
At September 30, 1997, approximately $5.0 million of U.S. Treasury Notes were
pledged under a collateral agreement with the Federal Reserve Treasury, Tax and
Loan Program and $20 million of U.S. Treasury Notes were pledged as collateral
under repurchase agreements.
In November 1995, the Financial Accounting Standards Board issued a Special
Report, "A Guide to Implementation of Statement 115 on Accounting for Certain
Investments in Debt and Equity Securities". This supplemental guidance provided
a one-time opportunity to reassess the appropriateness of the Bank's
classifications of all securities held at that time with any resulting
reclassifications being accounted for at fair value and occurring on a single
date no later than December 31, 1995, without calling into question the intent
of the Bank to hold other debt securities to maturity in the future. As a
result of this one-time reassessment the Bank reclassified $9.2 million of state
and political subdivision debt securities as available for sale securities from
the held to maturity portfolio and recognized $199,000 of net unrealized
appreciation on these securities, net of related deferred taxes, as an increase
to net worth on December 31, 1995.
F-12
<PAGE>
(3) Securities Held To Maturity
- --------------------------------
The Bank's held to maturity securities consist of money market preferred
stock. The amortized cost and approximate fair value of the money market
preferred stock at September 30, 1997 and December 31, 1996 and 1995, are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER YEARS ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
------------------ -------------------------------------
(UNAUDITED)
Amortized Fair Amortized Fair Amortized Fair
cost value cost value cost value
<S> <C> <C> <C> <C> <C>
-------- -------- -------- ------- -------- --------
$ 37,500 37,500 38,000 38,000 46,700 46,700
======== ======== ======== ======= ======== ========
</TABLE>
The money market preferred stock held by the Bank matures approximately
every 49 days. Each maturity and subsequent reinvestment in the stock
during the year is included in the accompanying consolidated statements of
cash flows as maturities and purchases, respectively, of securities held to
maturity. Aside from the rollover of that investment, there were no
maturities of held to maturity securities for the nine months ended
September 30, 1997 and the year ended December 31, 1996. There were
$5,152,000 of maturities of held to maturity securities in 1995. There were
no sales of, or transfers to or from, securities classified as held to
maturity other than those described in Note 2 in any of the periods.
F-13
<PAGE>
LOCKPORT SAVINGS BANK
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(4) Loans
- ------------
Loans receivable at September 30, 1997, December 31, 1996 and 1995 consist
of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------------
1997 1996 1995
---- ---- ----
(UNAUDITED)
<S> <C> <C> <C>
Real Estate:
Residential conventional $359,628 337,402 301,327
Residential FHA insured and
VA guaranteed 26,866 23,171 18,013
Residential home equity 13,047 11,337 10,234
Commercial 142,414 139,998 133,494
Construction 13,964 12,493 7,891
-------- ------- -------
555,919 524,401 470,959
-------- ------- -------
Other:
Mobile home 22,675 21,406 20,630
Vehicle 7,326 18,747 12,591
Other consumer 24,465 22,412 20,229
Guaranteed student 10,907 10,702 9,874
Commercial 4,275 4,895 4,085
-------- ------- -------
69,648 78,162 67,409
-------- ------- -------
Total loans 625,567 602,563 538,368
Net deferred costs 3,376 2,809 2,349
Unearned discount (103) (347) (39)
Allowance for loan losses (6,353) (6,539) (4,707)
-------- ------- -------
Loans, net $622,487 598,486 535,971
======== ======= =======
</TABLE>
F-14
<PAGE>
LOCKPORT SAVINGS BANK
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(4) Loans, Continued
- ---------------------
Non-accrual loans amounted to $1,925,000 (unaudited), $4,718,000 and
$3,955,000 at September 30, 1997 and December 31, 1996 and 1995,
respectively, representing .31%, .78% and .74% of total loans at such
dates, respectively. Interest income that would have been recorded if the
loans had been performing in accordance with their original terms amounted
to $133,000 and $318,000 during the nine month periods ended September 30,
1997 and 1996 (unaudited) respectively, and $325,000, $367,000 and $315,000
in 1996, 1995 and 1994, respectively.
Mortgages serviced for others by the Bank amounted to $145.7 million
(unaudited), $129.0 million and $110.4 million at September 30, 1997 and
December 31, 1996 and 1995, respectively. At September 30, 1997, the Bank
maintained $3 million in fidelity blanket bond coverage and under its
mortgage impairment insurance policy, maintained errors and omissions
coverage of $2 million per commercial and residential mortgage occurrence.
At September 30, 1997 (unaudited), the Bank had outstanding commitments to
originate mortgage and other loans of approximately $46.5 million with
$18.9 million at fixed rates and $27.6 million at variable rates.
Changes in the allowance for loan losses for the nine months ended
September 30, 1997 and 1996 and the years ended December 31, 1996, 1995 and
1994 were as follows (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 31, DECEMBER 31,
------------------- ---------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(unaudited)
Balance, beginning of period $ 6,539 4,707 4,707 4,192 4,030
Provision for loan losses 975 1,861 2,187 1,016 948
Charge-offs (1,271) (287) (436) (556) (825)
Recoveries on loans previously
charged-off
110 37 81 55 39
------- ----- ----- ----- -----
Balance, end of period $ 6,353 6,318 6,539 4,707 4,192
======= ===== ===== ===== =====
</TABLE>
Approximately 96% of the Bank's loans are mortgage and consumer loans in
New York State. Accordingly, the ultimate collectibility of a substantial
portion of the Bank's loan portfolio is susceptible to changes in market
conditions in this primary market area.
F-15
<PAGE>
LOCKPORT SAVINGS BANK
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(5) Premises and Equipment
- ---------------------------
A summary of premises and equipment at September 30, 1997, December 31,
1996 and 1995 follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
--------------
1997 1996 1995
-------------- ------ ------
(UNAUDITED)
<S> <C> <C> <C>
Land $ 1,049 1,049 771
Buildings and improvements 20,027 10,996 8,943
Furniture and equipment 11,128 9,785 8,893
------- ------ ------
32,204 21,830 18,607
Less accumulated depreciation and amortization 10,182 8,590 7,230
------- ------ ------
$22,022 13,240 11,377
======= ====== ======
</TABLE>
Minimum rental commitments for premises and equipment under noncancellable
operating leases at December 31, 1996 follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31:
------------------------
<S> <C>
1997 $ 586
1998 522
1999 523
2000 514
2001 519
Later years 5,193
------
Total minimum lease payments $7,857
======
</TABLE>
Real estate taxes, insurance and maintenance expenses related to these
leases are obligations of the Bank. Rent expense was $419,000 and $325,000
during the nine months ended September 30, 1997 and 1996 (unaudited) and
$414,000, $271,000 and $251,000 in 1996, 1995 and 1994, respectively, and
is included in occupancy expense.
During 1997, the Bank completed construction of a new Administrative
Center. Buildings and improvements at September 30, 1997 and December 31,
1996 include $10.2 million (unaudited) and $1.8 million, respectively, of
costs relating to this new facility.
F-16
<PAGE>
LOCKPORT SAVINGS BANK
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(6) Other Assets
- -----------------
The significant components of other assets at September 30, 1997, December
31, 1996 and 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------
1997 1996 1995
-------------- ----- -----
(UNAUDITED)
<S> <C> <C> <C>
Deferred income taxes, net (note 10) $ 685 2,204 -
Nationar receivable - - 5,053
Investments in affiliates - 157 264
Real estate owned, net of allowance for losses 268 317 257
Prepaid expenses 1,577 1,165 1,383
Other 2,592 2,093 1,831
------ ----- -----
$5,122 5,936 8,788
====== ===== =====
</TABLE>
On February 6, 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. As of December 31, 1995, the Bank had $5.7 million in
demand deposits held in receivership by the New York State Banking
Department. Management established a $600,000 allowance for possible loss
as of December 31, 1995, the provision for which was reflected in other
operating expenses in the 1995 Consolidated Statement of Income. During
1996, the Bank received all funds due from Nationar and therefore reversed
the allowance for possible loss, with the benefit reflected as a reduction
of other operating expenses.
F-17
<PAGE>
LOCKPORT SAVINGS BANK
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(7) Deposits
- -------------
Deposits consist of the following at September 30, 1997, December 31, 1996
and 1995 (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-----------------------
WEIGHTED
AVERAGE
RATE BALANCE
--------- -------
(UNAUDITED)
<S> <C> <C>
Savings accounts 3.34% $302,447
---- --------
Certificates maturing:
Within one year 5.45 364,456
After one year, through two years 6.80 120,923
After two years, through three years 6.21 17,576
After three years, through four years 6.75 10,623
After four years, through five years 5.77 907
After five years 6.05 2,383
---- --------
5.82 516,868
---- --------
Checking accounts:
Non-interest bearing - 27,325
Interest-bearing:
NOW accounts 2.00 62,913
Money market accounts 4.10 82,666
--------
172,904
--------
4.52% $992,219
==== ========
</TABLE>
F-18
<PAGE>
LOCKPORT SAVINGS BANK
AND SUBSIDIARIES
NOTES OF CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(7) Deposits, Continued
- ------------------------
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------
WEIGHTED
AVERAGE
RATE BALANCE
----------- -----------
<S> <C> <C>
Savings accounts 3.34% $300,747
---- --------
Certificates maturing:
Within one year 5.33 356,401
After one year, through two years 6.01 69,923
After two years, through three years 8.16 42,054
After three years, through four years 6.96 8,992
After four years, through five years 6.89 5,905
After five years 6.17 1,446
---- --------
5.72 484,721
---- --------
Checking accounts:
Non-interest bearing - 25,382
Interest-bearing:
NOW accounts 2.00 55,901
Money market accounts 3.54 53,321
--------
134,604
--------
4.43% $920,072
==== ========
</TABLE>
F-19
<PAGE>
LOCKPORT SAVINGS BANK
AND SUBSIDIARIES
NOTES OF CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(7) Deposits, Continued
- ------------------------
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------
WEIGHTED
AVERAGE
RATE BALANCE
----------- -----------
<S> <C> <C>
Savings accounts 3.34% $308,842
---- --------
Certificates maturing:
Within one year 5.90 293,987
After one year, through two years 5.55 60,712
After two years, through three years 6.92 26,659
After three years, through four years 8.88 30,735
After four years, through five years 7.88 5,111
After five years 7.17 5,332
---- --------
6.17 422,536
---- --------
Checking accounts:
Non-interest bearing - 28,374
Interest-bearing:
NOW accounts 2.00 47,995
Money market accounts 3.68 53,318
--------
129,687
--------
4.57% $861,065
==== ========
</TABLE>
F-20
<PAGE>
LOCKPORT SAVINGS BANK
AND SUBSIDIARIES
NOTES OF CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(7) Deposits, Continued
- ------------------------
Generally, interest rates on certificates of deposit range from 3.34% to
9.50% at September 30, 1997 (unaudited).
Interest expense for the nine months ended September 30, 1997 and 1996 and
the years ended December 31, 1996, 1995 and 1994 is summarized as follows
(in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
----------------- -----------------------
1997 1996 1996 1995 1994
------ ------ ------ ------ ------
(unaudited)
<S> <C> <C> <C> <C> <C>
Savings accounts $ 7,626 7,814 10,353 11,636 12,869
Certificates 21,964 19,467 26,432 24,159 16,443
Money market accounts 1,612 1,443 1,916 2,164 1,533
NOW accounts 824 704 955 901 750
Mortgagors' payments held in escrow 119 123 158 174 159
------- ------ ------ ------ ------
$32,145 29,551 39,814 39,034 31,754
======= ====== ====== ====== ======
</TABLE>
Included in 1995 interest expense is a special interest payment of
$1,251,000 which was approved by the Board of Trustees of the Bank and paid
on a pro rata basis on all interest-bearing accounts in recognition of the
Bank's 125th anniversary.
Certificates issued in amounts over $100,000 amounted to $90.4 million and
$83.3 million at September 30, 1997 and 1996 (unaudited), respectively, and
$83.9 million, $75.2 million and $62.3 million at December 31, 1996, 1995
and 1994, respectively. Interest expense thereon approximated $3.8 million
and $3.4 million during the nine month periods ended September 30, 1997 and
1996 (unaudited) and $4.6 million, $4.2 million and $3.2 million in 1996,
1995 and 1994, respectively.
F-21
<PAGE>
LOCKPORT SAVINGS BANK
AND SUBSIDIARIES
NOTES OF CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(8) Other Borrowed Funds
- -------------------------
The Bank has a $127.8 million line of credit with the Federal Home Loan
Bank (FHLB), secured by FHLB stock and the residential mortgage portfolio,
which was established in 1995. This borrowing capacity provides a secondary
funding source for real estate lending, liquidity, and asset/liability
management. The Bank also pledged, to broker-dealers, U.S. Treasury Notes
as collateral under agreements to repurchase. Under these agreements, the
broker-dealers are required to transfer securities to the Bank upon
maturity of the agreements, generally within 90 to 180 days after the
transaction date. Information relating to the borrowings and repurchase
agreements at September 30, 1997 and December 31, 1996 is summarized as
follows (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
(unaudited)
<S> <C> <C>
Short-term advances from Federal Home Loan Bank $ - 7,000
Reverse repurchase agreements 18,740 20,008
------- ------
18,740 27,008
Long-term advances from the FHLB bearing fixed interest rates:
5.72%, maturing on January 29, 2001 5,000 5,000
6.59%, amortizing through July 31, 2012 5,000 --
------- ------
$28,740 32,008
======= ======
</TABLE>
The aggregate maturities of FHLB advances for each of the five years
subsequent to September 30, 1997 are as follows (unaudited): 1998,
$206,000; 1999, $220,000; 2000, $235,000; 2001, $5,251,000; and 2002,
$268,000.
Information relating to the repurchase agreements at September 30, 1997
(unaudited) and December 31, 1996 is summarized as follows:
<TABLE>
<S> <C> <C>
Weighted average interest rate of reverse repurchase agreements 5.68% 5.42
Maximum outstanding at any month end $28,961 24,675
Average amount outstanding during the period 22,030 11,091
======= ======
</TABLE>
The average amounts outstanding are computed using weighted monthly
averages. Related interest expense for the nine month periods ended
September 30, 1997 and 1996 (unaudited) was $916,000 and $281,000,
respectively, and $576,000 for the year ended December 31, 1996. The Bank
had no outstanding borrowings at December 31, 1995 and 1994.
F-22
<PAGE>
LOCKPORT SAVINGS BANK
AND SUBSIDIARIES
NOTES OF CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(9) Net Worth
- --------------
The changes in net worth for the nine months ended September 30, 1997 and
for the years ended December 31, 1996, 1995 and 1994 follow (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
-----------------------
1997 1996 1995 1994
---- ------ ------ ------
(unaudited)
<S> <C> <C> <C> <C>
Net worth, beginning of period $115,664 107,653 81,322 87,195
Net income 8,635 10,768 9,925 8,801
Net unrealized gain (loss)
on securities available for sale, net of taxes 2,421 (2,757) 16,406 (14,674)
-------- ------- -------
Net worth, end of period $126,720 115,664 107,653 81,322
======== ======= ======= =======
</TABLE>
The Bank is subject to various regulatory capital requirements administered
by the Federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory - and possibly additional
discretionary - actions by regulators that, if undertaken, could have a
direct material effect on the Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific guidelines that involve quantitative
measures of the Bank's assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The Bank's
capital amounts and classifications are also subject to qualitative
judgements by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier 1 capital to risk-weighted assets and of
Tier 1 capital to average assets. As of September 30, 1997, the Bank meets
all capital adequacy requirements to which it is subject.
As of September 30, 1997, the most recent notification from the Federal
Deposit Insurance Corporation categorized the Bank as well capitalized
under the regulatory framework for prompt corrective action. To be
categorized as adequately capitalized the Bank must maintain minimum total
risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in
the following table. There are no conditions or events since that
notification that management believes have changed the Bank's category.
F-23
<PAGE>
LOCKPORT SAVINGS BANK
AND SUBSIDIARIES
NOTES OF CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(9) Net Worth
- --------------
The Bank's actual capital amounts and ratios are presented in the following
table (in thousands):
<TABLE>
<CAPTION>
FOR CAPITAL
ADEQUACY
ACTUAL PURPOSES
-------------- --------------------------------------
AMOUNT RATIO AMOUNT RATIO
------ ----- ------ -----
<S> <C> <C> <C> <C>
As of September 30, 1997:
(unaudited):
Total capital to greater than greater than
brisk-weighted assets $131,736 21.74% or equal to $48,470 or equal to 8.00%
Tier 1 capital to greater than greater than
risk-weighted assets 125,383 20.69 or equal to 24,235 or equal to 4.00%
Tier 1 capital to greater than greater than
average assets 125,383 10.75 or equal to 34,990 or equal to 3.00
As of December 31, 1996:
Total capital to greater than greater than
risk-weighted assets 123,229 22.84 or equal to 43,160 or equal to 8.00
Tier 1 capital to greater than greater than
risk-weighted assets 116,690 21.63 or equal to 21,580 or equal to 4.00
Tier 1 capital to greater than greater than
average assets 116,690 10.77 or equal to 32,492 or equal to 3.00
As of December 31, 1995:
Total capital to greater than greater than
risk-weighted assets 110,778 22.34 or equal to 39,672 or equal to 8.00
Tier 1 capital to greater than greater than
risk-weighted assets 106,071 21.39 or equal to 19,836 or equal to 4.00
Tier 1 capital to greater than greater than
average assets 106,071 10.86 or equal to 29,292 or equal to 3.00
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
PROMPT CORRECTIVE
ACTION PROVISIONS
-----------------------------------
AMOUNT RATIO
------- -----
<S> <C> <C>
As of September 30, 1997:
(unaudited):
Total capital to greater than greater than
brisk-weighted assets or equal to $60,588 or equal to 10.00%
Tier 1 capital to greater than greater than
risk-weighted assets or equal to 36,353 or equal to 6.00
Tier 1 capital to greater than greater than
average assets or equal to 58,316 or equal to 5.00
As of December 31, 1996:
Total capital to greater than greater than
risk-weighted assets or equal to 53,950 or equal to 10.00
Tier 1 capital to greater than greater than
risk-weighted assets or equal to 32,370 or equal to 6.00
Tier 1 capital to greater than greater than
average assets or equal to 54,154 or equal to 5.00
As of December 31, 1995:
Total capital to greater than greater than
risk-weighted assets or equal to 49,590 or equal to 10.00
Tier 1 capital to greater than greater than
risk-weighted assets or equal to 29,754 or equal to 6.00
Tier 1 capital to greater than greater than
average assets or equal to 48,820 or equal to 5.00
</TABLE>
F-24
<PAGE>
LOCKPORT SAVINGS BANK
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(10) Income Taxes
- -----------------
Total income taxes for the nine months ended September 30, 1997 and 1996,
and for the years ended December 31, 1996, 1995 and 1994 were allocated as
follows (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
---------------- ---------------------------
1997 1996 1996 1995 1994
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Income from operations $4,905 4,667 6,278 5,144 4,704
Net worth, for unrealized gain/loss
on securities available for sale 1,682 (3,719) (1,917) 10,028 (8,824)
====== ====== ====== ====== ======
</TABLE>
The components of income taxes attributable to income from operations for
the nine months ended September 30, 1997 and 1996 and for the years ended
December 31, 1996, 1995 and 1994 are as follows (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
---------------- ---------------------------
1997 1996 1996 1995 1994
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current:
Federal $4,356 4,316 5,640 4,353 3,729
State 713 800 1,025 1,044 932
------ ----- ----- ----- -----
5,069 5,116 6,665 5,397 4,661
------ ----- ----- ----- -----
Deferred:
Federal (164) (449) (387) (253) 43
------ ----- ----- ----- -----
$4,905 4,667 6,278 5,144 4,704
====== ===== ===== ===== =====
</TABLE>
F-25
<PAGE>
LOCKPORT SAVINGS BANK
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(10) Income Taxes, Continued
- ----------------------------
Income tax expense attributable to income from operations for the nine
months ended September 30, 1997 and 1996 and the years ended December 31,
1996, 1995 and 1994 differs from the expected tax expense (computed by
applying the Federal corporate tax rate of 35% to income before income
taxes) as follows (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
---------------- ---------------------------
1997 1996 1996 1995 1994
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Expected tax expense $4,739 4,513 5,966 5,274 5,050
Increase (decrease) attributable to:
State income taxes, net of
Federal benefit 463 520 666 679 606
Dividends received deduction (326) (331) (434) (436) (411)
Non-taxable interest income (25) (59) (68) (386) (400)
Other 15 (142) (116) (31) (342)
Increase in valuation allowance
for deferred tax assets allocated
to income tax expense 39 166 264 44 201
----- ----- ----- ----- -----
$4,905 4,667 6,278 5,144 4,704
===== ===== ===== ===== =====
</TABLE>
F-26
<PAGE>
LOCKPORT SAVINGS BANK
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(10) Income Taxes, Continued
- ----------------------------
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
September 30, 1997 and December 31, 1996 and 1995 are presented below:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
----------------
1997 1996 1995
-------------- ------- -------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
Financial reporting allowance for loan losses $ 2,605 2681 1930
Deferred compensation 701 576 501
Post-retirement benefits obligations 670 638 587
Losses on investments in affiliates 540 490 405
Net unrealized loss on securities available for sale - 713 -
Deferred mortgage fees 218 283 371
Excess of financial reporting depreciation over tax
depreciation 178 - -
Other 342 376 659
------- ------ ------
Total gross deferred tax assets 5,254 5,757 4,453
Less valuation allowance (1,341) (1,302) (1,038)
------- ------ ------
Net deferred tax assets 3,913 4,455 3,415
------- ------ ------
Deferred tax liabilities:
Tax allowance for loan losses, in excess of base
year amount (1,884) (1,790) (1,768)
Net unrealized gain on securities available for sale (969) - (1,204)
Prepaid pension costs (285) (301) (287)
Excess of tax depreciation over financial reporting
depreciation - (56) (119)
Other (90) (104) (137)
------- ------ ------
Total gross deferred tax liabilities (3,228) (2,251) (3,515)
------- ------ ------
Net deferred tax asset (liability) $ 685 2,204 (100)
======= ====== ======
</TABLE>
F-27
<PAGE>
LOCKPORT SAVINGS BANK
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(10) Income Taxes, Continued
- ----------------------------
The net increase in the total valuation allowance for the nine month period
ended September 30, 1997 and the year ended December 31, 1996 of $39,000
and $264,000, respectively, is attributable to income from operations. The
net decrease in the total valuation allowance for the year ended December
31, 1995 of $766,000 includes an increase of $44,000 attributable to income
from operations, net of a decrease of $810,000 related to the unrealized
gain on securities available for sale.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, availability
of operating loss carrybacks, projected future taxable income, and tax
planning strategies in making this assessment. Based upon the level of
historical taxable income, the opportunity for net operating loss
carrybacks, and projections for future taxable income over the periods
which deferred tax assets are deductible, management believes it is more
likely than not the Bank will realize the benefits of these deductible
differences, net of the existing valuation allowance, at September 30,
1997.
At December 31, 1996, net worth includes approximately $11.1 million
representing bad debt deductions taken under the provisions of the Internal
Revenue Code. Recent Federal legislation repealed this provision of the Tax
Code thereby requiring the Bank to recapture $4.2 million in additions to
the tax bad debt reserve for periods after the 1987 base year. At December
31, 1996, the deferred tax liability related to the tax allowance for loan
losses in excess of the base year amount includes $1.5 million of Federal
income taxes which the Bank will repay over tax years 1998 through 2003.
F-28
<PAGE>
LOCKPORT SAVINGS BANK
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(11) Benefit Plans
- ------------------
Pension Plan
------------
The funded status of the Bank's pension plan and the amounts recognized in
the financial statements as of December 31, 1996 and 1995 follow (in
thousands):
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested $4,174 3952
Non-vested 467 376
------ -----
Total accumulated benefit obligation $4,641 4,328
====== =====
Projected benefit obligation for service rendered to date $6,084 5652
Plan assets at fair value 7602 6664
------ -----
Plan assets in excess of projected benefit obligation 1518 1012
Unrecognized net asset being recognized over 10 years 122 184
Unrecognized net gain 799 258
Prior service cost not yet recognized in net periodic
pension costs 14 18
------ -----
Prepaid pension costs, included in other assets $ 611 588
====== =====
</TABLE>
Net pension cost for years ended December 31, 1996, 1995 and 1994 is
comprised of the following (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
----- ---- -----
<S> <C> <C> <C>
Service cost, benefits earned during the period $ 340 277 286
Interest cost on projected benefit obligation 422 385 346
Actual return on plan assets 949 1133 7
Net amortization and deferral 366 640 (476)
----- ---- ----
Net periodic pension cost $ 179 169 149
===== ==== ====
</TABLE>
F-29
<PAGE>
LOCKPORT SAVINGS BANK
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(11) Benefit Plans, Continued
- -----------------------------
The principal actuarial assumptions used in 1996, 1995 and 1994 were as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
----- ---- ----
<S> <C> <C> <C>
Discount rate 7.75% 7.50 8.25
Expected long-term rate of return on assets 8.00 8.00 8.00
Assumed rate of future compensation increase 5.50 5.50 6.00
==== ==== ====
</TABLE>
The plan assets are in mutual funds consisting primarily of listed stocks
and bonds, government securities and cash equivalents.
401(k) Plan
-----------
All employees are also eligible to participate in a Bank sponsored 401(k)
plan. Participants may make contributions to the Plan in the form of salary
reductions of up to 15% of their eligible compensation subject to the
Internal Revenue Code limit. The Bank contributes an amount to the Plan
equal to 50% of employee contributions, up to a maximum of 6% of the
employee's eligible compensation. The Bank's contribution was $143,000 and
$123,000 for the nine month periods ended September 30, 1997 and 1996
(unaudited), respectively, and $169,000, $143,000 and $128,000 in 1996,
1995 and 1994, respectively.
Other Post-retirement Benefits
------------------------------
In addition to providing pension benefits, the Bank provides post-
retirement health care and life insurance benefits for substantially all of
the Bank's full-time employees and their beneficiaries and dependents if
they reach normal retirement age while working for the Bank.
The components of net periodic post-retirement benefit cost for the years
ended December 31, 1996, 1995, and 1994 are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
----- ---- ----
<S> <C> <C> <C>
Service cost $ 64 49 52
Interest cost 105 101 96
----- ---- ----
Total cost $ 169 150 148
===== ==== ====
</TABLE>
F-30
<PAGE>
LOCKPORT SAVINGS BANK
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(11) Benefit Plans, Continued
- -----------------------------
The accumulated post-retirement benefit obligation recognized as of
December 31, 1996 and 1995 is as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
------- -----
<S> <C> <C>
Fully eligible active participants $ 45 113
Active participants not yet eligible 427 423
Retirees 798 894
Unrecognized net gain 285 2
----- -----
Total accumulated post-retirement benefit obligation,
included in other liabilities $ 1,555 1,432
====== =====
</TABLE>
The post-retirement benefit obligation was determined using a discount rate
of 8.0% for 1996 and 7.5% for 1995. The assumed health care cost trend rate
used in measuring the accumulated post-retirement benefit obligation was
10% in 1997, decreasing by 1% per year to an ultimate rate of 5.0% in 2002
and thereafter, over the projected payout of benefits. The health care cost
trend rate assumption can have a significant effect on the amounts
reported. If the health care cost trend rate were increased one percent,
the accumulated post-retirement benefit obligation as of December 31, 1996
would have increased by 2.3% and the aggregate of service and interest cost
would increase by 2.6%. However, the plan limits the increase in the Bank's
annual contributions to the plan for most participants to the increase in
base compensation for active employees.
As of January 1, 1994, the Bank adopted SFAS 106 "Employers' Accounting for
Post-retirement Benefits Other Than Pensions". The transition obligation
related to the adoption of this standard of $1,224,000 was recognized in
the 1994 Consolidated Statement of Income, net of $300,000 previously
accrued for this liability.
Other Plans
-----------
The Bank also sponsors two non-qualified compensation plans, one for
officers and one for employees. Awards are payable if certain earnings and
performance objectives are met. The Bank had accrued $886,000 and $890,000
for awards under these plans for the nine month periods ended September 30,
1997 and 1996 (unaudited), respectively. Awards under these plans were
$1,202,000, $1,173,000 and $1,363,000 in 1996, 1995 and 1994, respectively.
The Bank also maintains a supplemental benefit plan for certain executive
officers that is funded by the Bank through life insurance contracts.
F-31
<PAGE>
LOCKPORT SAVINGS BANK
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(12) Fair Value of Financial Instruments
- ----------------------------------------
The carrying value and estimated fair values of the Bank's financial
instruments, all of which are non-trading, are as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------
ESTIMATED
CARRYING FAIR
VALUE VALUE
----- -----
(UNAUDITED)
<S> <C> <C>
Financial assets:
Cash and cash equivalents $ 17,004 17,004
Securities available for sale 464,973 464,973
Securities held to maturity 37,500 37,500
Loans 622,487 628,908
Accrued interest receivable 7,343 7,343
Financial liabilities:
Deposits $992,219 995,217
Mortgagors' payments held in escrow 8,387 8,387
Other borrowed funds 28,740 28,688
Accrued interest payable 558 558
Unrecognized financial instruments:
Commitments to extend credit $ 46,513 46,513
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------
ESTIMATED
CARRYING FAIR
VALUE VALUE
----- -----
<S> <C> <C>
Financial assets:
Cash and cash equivalents $ 16,219 16,219
Securities available for sale 415,129 415,129
Securities held to maturity 38,000 38,000
Loans 598,486 604,000
Accrued interest receivable 6,348 6,348
Financial liabilities:
Deposits $920,072 923,796
Mortgagors' payments held in escrow 8,773 8,773
Other borrowed funds 32,008 31,863
Accrued interest payable 330 330
Unrecognized financial instruments:
Commitments to extend credit $34,193 34,193
</TABLE>
F-32
<PAGE>
LOCKPORT SAVINGS BANK
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(12) Fair Value of Financial Instruments, Continued
- ---------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------
ESTIMATED
CARRYING FAIR
VALUE VALUE
-------- -------
<S> <C> <C>
Financial assets:
Cash and cash equivalents $ 31,374 31,374
Securities available for sale 346,410 346,410
Securities held to maturity 46,700 46,700
Loans 535,971 546,592
Accrued interest receivable 5,622 5,622
Nationar receivable 5,053 N/A
Financial liabilities:
Deposits $861,065 869,265
Mortgagors' payments held in escrow 10,189 10,189
Accrued interest payable 160 160
Unrecognized financial instruments:
Commitments to extend credit $30,583 30,583
</TABLE>
Fair value estimates are based on existing on and off balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that
are not considered financial instruments. In addition, the tax
ramifications related to the realization of the unrealized gains and losses
can have a significant effect on fair value estimates and have not been
considered in these estimates. Fair value estimates, methods, and
assumptions are set forth below for each type of financial instrument.
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument,
including judgments regarding future expected loss experience, current
economic conditions, risk characteristics of various financial instruments,
and other factors. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot be
determined with precision. Changes in assumptions could significantly
affect the estimates.
Cash and Cash Equivalents
-------------------------
The carrying value approximates the fair value because the instruments
mature in 90 days or less.
Securities
----------
The fair values are estimated based on quoted market prices supplied by the
Bank's custody agent and investment broker (notes 2 and 3).
F-33
<PAGE>
LOCKPORT SAVINGS BANK
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(12) Fair Value of Financial Instruments, Continued
- ---------------------------------------------------
Loans
-----
Residential revolving home equity and personal and commercial open ended
lines of credit reprice as the prime rate changes. Therefore, the carrying
values of such loans, totaling $15.4 million (unaudited), $14.0 million and
$12.2 million at September 30, 1997, December 31, 1996 and 1995,
respectively, approximate their fair value.
The fair value of fixed-rate performing loans is calculated by discounting
scheduled cash flows through the estimated maturity using the Bank's
current origination rates. The estimate of maturity is based on the Bank's
contractual cash flows adjusted for prepayment estimates based on current
economic and lending conditions. Fair value for significant nonperforming
loans is based on carrying value which does not exceed recent external
appraisals of any underlying collateral.
Deposits
--------
The fair value of deposits with no stated maturity, such as savings, money
market, checking, as well as mortgagors' payments held in escrow, is equal
to the amount payable on demand as of September 30, 1997, December 31, 1996
and 1995. The fair value of certificates of deposit is based on the
discounted value of contractual cash flows, using rates currently offered
for deposits of similar remaining maturities.
Other Borrowed Funds
--------------------
The fair value of the Bank's other borrowed funds is calculated by
discounting scheduled cash flows through the estimated maturity using
current market rates.
Other Assets and Liabilities
----------------------------
The fair value of the Bank's accrued interest receivable on loans and
investments and accrued interest payable to depositors approximates the
carrying value because all interest is payable or receivable in 90 to 120
days.
Commitments to Extend Credit
----------------------------
The fair value of the Bank's commitments to extend credit approximates the
notional amount of the agreements because of the short-term (90 to 120
days) commitment period or because they reprice as market rates change.
F-34
<PAGE>
LOCKPORT SAVINGS BANK
AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, CONTINUED
(13) Plan of Reorganization and Stock Issuance
- ---------------------------------------------
On September 15, 1997, the Board of Trustees of LSB unanimously adopted a
Plan of Reorganization (the Plan) whereby LSB will be reorganized into a
New York chartered two-tiered mutual holding company.
The Reorganization will be accomplished in the following manner: (i) LSB
will organize an interim stock savings bank as a wholly-owned subsidiary
("Interim One"); (ii) Interim One will organize an interim stock savings
bank as a wholly-owned subsidiary ("Interim Two"); (iii) Interim One will
organize Niagara Bancorp, Inc. (the Company) as a wholly-owned subsidiary;
(iv) LSB will exchange its charter for a New York stock savings bank
charter to become the Stock Bank and Interim One will exchange its charter
for a New York mutual holding company charter to become the MHC; (v)
simultaneously with step (iv), Interim Two will merge with and into the
Stock Bank with the Stock Bank as the resulting institution; (vi) all of
the initially issued stock of the Stock Bank will be transferred to the MHC
in exchange for membership interests in the MHC; and (vii) the MHC will
contribute the capital stock of the Stock Bank to the Company, and the
Stock Bank will become a wholly-owned subsidiary of the Company.
Contemporaneously with the Reorganization, the Company will offer for sale
in the Stock Offering shares of Common Stock representing the pro forma
market value of the Company and the Bank. Each savings account of LSB at
the time of Reorganization will become a savings account in the newly-
formed bank in the same amount and upon the same terms and conditions,
except the holder of each such deposit account will have liquidation rights
with respect to the Mutual Holding Company rather than the Bank.
LSB will be applying to the Federal Reserve Board, the New York State
Banking Department, the FDIC and the SEC for approval of transactions
contemplated by the Plan. The Plan authorizes the stock holding company to
offer stock in one or more stock offerings up to a maximum of 49% of the
issued and outstanding shares of its common stock. The common stock will be
offered on a priority basis to depositors, employee benefit plans of LSB,
certain other eligible subscribers, the community and a charitable
foundation to be established pursuant to the Plan.
The Company proposes to fund the foundation by contributing a number of
authorized but unissued shares of common stock or grants of cash,
securities or other assets to the foundation, immediately following the
conversion. Such contribution, once made, will not be recoverable by the
Company or the Stock Bank. The Company will recognize expense equal to the
fair value of the stock, cash, securities or other assets in the quarter in
which the contribution occurs, which is expected to be the first or second
quarter of 1998. Such expense will reduce earnings and have a material
impact on the Company's earnings for such quarter and for 1998.
Conversion costs will be deferred and reduce the proceeds from the shares
sold in the conversion. If the conversion is not completed, all costs will
be charged to expense.
F-35
<PAGE>
GLOSSARY
1933 Act Securities Act of 1933, as amended
1934 Act Securities Exchange Act of 1934, as amended
Associate The term "Associate" of a person is defined to mean
(i) any corporation or organization (other than the
Bank or its subsidiaries or the Company) of which
such person is a director, officer, partner or 10%
shareholder;
(ii) any trust or other estate in which such person
has a substantial beneficial interest or serves as
trustee or in a similar fiduciary capacity;
provided, however that such term shall not include
any employee stock benefit plan of the Company or
the Bank in which such a person has a substantial
beneficial interest or as a trustee or in a similar
fiduciary capacity, and
(iii) any relative or spouse of such person, or
relative of such spouse, who either has the same
home as such person or who is a director or officer
of the Bank or its subsidiaries or the Company
ATM Automated Teller Machine
Bank Lockport Savings Bank
BIF Bank Insurance Fund of the FDIC
Code The Internal Revenue Code of 1986, as amended
Community Offering Offering for sale to members of the general public
of any shares of common stock not subscribed for in
the Subscription Offering, with preference given to
natural persons residing in Niagara, Orleans, Erie
and Genesee Counties, New York
Common Stock Common Stock, par value of $.01 per share, offered
by Niagara Bancorp, Inc. in connection with the
Reorganization
Company Niagara Bancorp, Inc., the parent holding company
for Lockport Savings Bank, and the issuer of the
shares of Common Stock in the Offering
Department The New York State Banking Department
Eligible Account Holders Holders of deposit accounts with Lockport Savings
Bank with account balances of at least $100 as of
the close of business on August 31, 1996
ERISA Employee Retirement Income Security Act of 1974, as
amended
ESOP The Niagara Bancorp, Inc. Employee Stock Ownership
Plan and Trust
Estimated Valuation Range Estimated pro forma market value of the Common
Stock ranging from
G-1
<PAGE>
$191,250,000 to $258,750,000. The estimated
valuation range may be increased to $297,562,500
without a resolicitation of subscribers
Expiration Date ______ noon, New York Time, on March ___, 1997
FASB Financial Accounting Standards Board
Federal Reserve Board Board of Governors of the Federal Reserve System
FDIC Federal Deposit Insurance Corporation
FDICIA Federal Deposit Insurance Corporation Improvement
Act of 1991, as amended
Freddie Mac Freddie Mac
FHLB of New York Federal Home Loan Bank of New York
Foundation The Lockport Savings Bank Charitable Foundation to
be established by Lockport Saving Bank and Niagara
Bancorp, Inc. and to which the Bank and the Company
will contribute cash and shares of Common Stock
FNMA Federal National Mortgage Association
Independent Valuation The appraisal of the pro forma market value of the
Company's Common Stock as determined by RP
Financial, LC as of November __, 1997
IRA Individual retirement account or arrangement
IRS Internal Revenue Service
Minority Shares The shares of Common Stock sold to the depositors
and the public in the Offering pursuant to the
Prospectus, which will represent, in the aggregate,
a minority ownership position in the Company
MMDA Money Market Demand Account
Mutual Holding Company Niagara Bancorp, MHC, a New York chartered mutual
corporation, which will own, and which by law must
own, a majority of the shares of Common Stock of
the Company
NASD National Association of Securities Dealers, Inc.
Nasdaq System National Association of Securities Dealers
Automated Quotation System
NOW account Negotiable Order of Withdrawal Account
NPV Net portfolio value
Offering The offer and sale of Common Stock to depositors
and the public pursuant to the Prospectus
G-2
<PAGE>
Offering Range The offer and sale by the Company of between
8,677,747 and 11,740,482 shares (subject to
adjustment to 13,501,554 shares) of Common Stock
pursuant to the Prospectus
Order Form Form for ordering stock accompanied by a
certification concerning certain matters
Plan Reorganization Lockport Savings Bank Plan of Reorganization from a
Mutual Savings Bank to a Mutual Holding Company and
Stock Issuance Plan
Reorganization The reorganization of the Bank from the mutual to
the stock form of organization, the organization of
the Company, the issuance of all of the Bank's
common stock to the Company, the issuance of a
majority of the Company's Common Stock to the
Mutual Holding Company, and the offer and sale of
the Minority Shares to depositors and the public
pursuant to the Prospectus
REO Real Estate Owned
Recognition and
Retention Plan The Recognition and Retention Plan to be submitted
for approval at a meeting of the Company's
shareholders to be held no earlier than six months
after the completion of the Reorganization
SAIF Savings Association Insurance Fund of the FDIC
SEC Securities and Exchange Commission
Special Meeting Special Meeting of depositors of the Bank called
for the purpose of approving the Plan of
Reorganization
Stock Option Plan The Stock Option Plan for directors and officers to
be submitted for approval at a meeting of the
Company' shareholders to be held no earlier than
six months after the completion of the conversion
Subscription Offering Offering of non-transferable rights to subscribe
for the common stock, in order of priority, to
eligible account holders, the ESOP, and
supplemental eligible account holders
Supplemental Eligible
Account Holders Depositors of the Bank, who are not eligible
account holders, with account balances of at least
$100 on December 31, 1997
Superintendent The Superintendent of Banks of the State of New
York
Voting Record Date The close of business on January __, 1998, the date
for determining depositors entitled to vote at the
Special Meeting
G-3
<PAGE>
================================================================================
No person has been authorized to give any information or to make any
representation other than as contained in this prospectus and, if given or made,
such information or representation must not be relied upon as having been
authorized by the Company or the Bank. This prospectus does not constitute an
offer to sell or the solicitation of an offer to buy any security other than the
shares of common stock offered hereby to any person in any jurisdiction in which
such offer or solicitation is not authorized, or in which the person making such
offer or solicitation is not qualified to do so, or to any person to whom it is
unlawful to make such offer or solicitation. Neither the delivery of this
prospectus nor any sale hereunder shall, under any circumstances, create any
implication that information herein is correct as of any time subsequent to the
date hereof.
NIAGARA BANCORP, INC.
(Proposed Holding Company for
Lockport Savings Bank)
Up to 13,501,55482,125 Shares
Common Stock
($.01 par value per share)
_________________
PROSPECTUS
_________________
CIBC OPPENHEIMER CORP.
TRIDENT SECURITIES, INC.
February , 1998
THESE SECURITIES ARE NOT DEPOSITS OR ACCOUNTS
AND ARE NOT FEDERALLY INSURED OR GUARANTEED
Until March __, 1998 or 25 days after the commencement of the Offering, all
dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a prospectus.
This is in addition to the obligation of dealers to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
<PAGE>
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<CAPTION>
Amount
------
<S> <C>
* Legal fees and Expenses................................... $ 165,000
* Printing, Postage and Mailing............................. 300,000
* Appraisal and Business Plan Fees and Expenses............. 67,500
* Accounting Fees and Expenses.............................. 100,000
** Marketing Fees and Expenses............................... 1,060,000
* Filing Fees (SEC, NASD and New York State
Department of Banking)................................... 60,000
* Other Expenses............................................ 137,500
------------
** Total..................................................... $ 1,800,000
============
</TABLE>
__________________
* Estimated
** The Bank and the Company have retained CIBC Oppenheimer Corp. and Trident
Securities, Inc. to assist in the sale of common stock on a best efforts
basis in the Subscription and Community Offerings. For purposes of
computing estimated expenses, it has been assumed that CIBC Oppenheimer
Corp. and Trident Securities, Inc. will receive fees of approximately
$1,000,000, exclusive of attorneys' fees and expenses of $60,000.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article NINTH of the Certificate of Incorporation of Niagara Bancorp,
Inc. (the "Corporation") sets forth circumstances under which directors,
officers, employees and agents of the Corporation may be insured or indemnified
against liability which they incur in their capacities as such:
NINTH:
-----
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
NINTH 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, if required under
the Delaware General Corporation Law, that an advancement of expenses incurred
by an indemnitee in his or her capacity as a Director of Officer (and not in
any other capacity in which service was or is rendered by such indemnitee,
including, without limitation, service to an employee benefit plan) shall be
made only upon delivery to the Corporation of and 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 appeal (hereinafter a "final)
<PAGE>
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 NINTH
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 NINTH 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 is 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 NINTH or otherwise, shall be on the Corporation.
D. The rights to indemnification and to the advancement of expenses
conferred in this Article NINTH 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 NINTH with respect to the indemnification and
advancement of expenses of Directors and Officers of the Corporation.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Not Applicable
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 Form of Agency Agreement among Niagara Bancorp, Inc., Lockport Savings
Bank, Trident Securities, Inc. and CIBC Oppenheimer Corp.*
<PAGE>
2 Plan of Reorganization
3.1 Certificate of Incorporation of Niagara Bancorp, Inc. (Incorporated herein
by reference to Exhibit B of the Plan of Reorganization)
3.2 Bylaws of Niagara Bancorp, Inc. (Incorporated herein by reference to
Exhibit B of the Plan of Reorganization)
4 Form of Common Stock Certificate of Niagara Bancorp, Inc.
5 Opinion of Luse Lehman Gorman Pomerenk & Schick, P.C. regarding legality
of securities being registered
8.1 Form of Federal Tax Opinion of Luse Lehman Gorman Pomerenk & Schick, P.C.
8.2 Form of State Tax Opinion.*
8.3 Letter from RP Financial, Inc. with respect to Subscription Rights
10.1 Form of Employment Agreement
10.2 Lockport Savings Bank Deferred Compensation Plan
10.3 Employee Stock Ownership Plan
21 Subsidiaries of the Registrant*
23.1 Consent of Luse Lehman Gorman Pomerenk & Schick, P.C. (contained in opinion
filed as Exhibit 5)
23.2 Consents of KPMG Peat Marwick LLP
23.3 Consent of RP Financial, Inc.
24 Power of Attorney (set forth on Signature Page)
27 EDGAR Financial Data Schedule
99.1 Appraisal Report of RP Financial, Inc.*
99.2 Marketing Materials
99.3 Order and Acknowledgment Form*
__________________
*To be filed supplementally or by amendment.
(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:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
<PAGE>
(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;
(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 post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(4) To provide to the underwriter at the closing specified in the
underwriting agreements, certificates in such denominations and registered in
such names as required by the underwriter to permit prompt delivery to each
purchaser.
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
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Lockport, New York on December 16,
1997.
NIAGARA BANCORP, INC.
By: /s/ William E. Swan
-------------------
William E. Swan
President and Chief Executive Officer
(Duly Authorized Representative)
POWER OF ATTORNEY
We, the undersigned directors and officers of Niagara Bancorp, Inc. (the
"Company") hereby severally constitute and appoint William E. Swan as our true
and lawful attorney and agent, to do any and all things in our names in the
capacities indicated below which said William E. Swan may deem necessary or
advisable to enable the Company 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-1 relating
to the offering of the Company's Common Stock, including specifically, but not
limited to, power and authority to sign for 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 approve, ratify and confirm
all that said William E. Swan shall do or cause to be done by virtue thereof.
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 as of the dates indicated.
Signatures Title Date
---------- ----- ----
/s/ William E. Swan President, and Chief Executive December 16, 1997
- ------------------- Officer (Principal Executive
William E. Swan Officer) and Director
/s/ Paul J. Kolkmeyer Executive Vice President and December 16, 1997
- --------------------- Chief Financial Officer
Paul J. Kolkmeyer
/s/ Gordon P. Assad Director December 16, 1997
- -------------------
Gordan P. Assad
/s/ Christa P. Caldwell Director December 16, 1997
- -----------------------
Christa P. Caldwell
/s/ James W. Currie Director December 16, 1997
- -------------------
James W. Currie
<PAGE>
Signatures Title Date
---------- ----- ----
/s/ Gary B. Fitch Director December 16, 1997
- ---------------------
Gary B. Fitch
/s/ David W. Heinrich Director December 16, 1997
- ---------------------
David W. Heinrich
/s/ Daniel W. Judge Director December 16, 1997
- ---------------------
Daniel W. Judge
/s/ B. Thomas Mancuso Director December 16, 1997
- ---------------------
B. Thomas Mancuso
/s/ James Miklinski Director December 16, 1997
- ---------------------
James Miklinski
/s/ Barton G. Smith Director December 16, 1997
- ---------------------
Barton G. Smith
/s/ Robert G. Weber Director December 16, 1997
- ---------------------
Robert G. Weber
<PAGE>
As filed with Securities and Exchange Commission on December 22, 1997
Registration No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________
EXHIBITS
TO
REGISTRATION STATEMENT
ON
FORM S-1
_________________________
NIAGARA BANCORP, INC.
================================================================================
<PAGE>
EXHIBIT INDEX
1.1 Form of Agency Agreement among Niagara Bancorp, Inc., Lockport Savings
Bank, Trident Securities, Inc. and CIBC Oppenheimer Corp.*
2 Plan of Reorganization
3.1 Certificate of Incorporation of Niagara Bancorp, Inc. (incorporated herein
by reference to Exhibit B of the Plan of Reorganization)
3.2 Bylaws of Niagara Bancorp, Inc. (Incorporated herein by reference to
Exhibit B of the Plan of Reorganization)
4 Form of Common Stock Certificate of Niagara Bancorp, Inc.
5 Opinion of Luse Lehman Gorman Pomerenk & Schick, P.C. regarding legality
of securities being registered
8.1 Form of Federal Tax Opinion of Luse Lehman Gorman Pomerenk & Schick, P.C.
8.2 Form of State Tax Opinion.*
8.3 Letter from RP Financial, Inc. with respect to Subscription Rights
10.1 Form of Employment Agreement
10.2 Lockport Savings Bank Deferred Compensation Plan
10.3 Employee Stock Ownership Plan
21 Subsidiaries of the Registrant*
23.1 Consent of Luse Lehman Gorman Pomerenk & Schick, P.C. (contained in
opinion filed as Exhibit 5)
23.2 Consents of KPMG Peat Marwick LLP
23.3 Consent of RP Financial Inc.
24 Power of Attorney (set forth on Signature Page)
27 EDGAR Financial Data Schedule
99.1 Appraisal Report of RP Financial, Inc.*
99.2 Marketing Materials
99.3 Order and Acknowledge Form*
___________________________
*To be filed supplementally or by amendment.
<PAGE>
Exhibit 2
LOCKPORT SAVINGS BANK
PLAN OF REORGANIZATION
FROM A MUTUAL SAVINGS BANK
TO A MUTUAL HOLDING COMPANY
AND STOCK ISSUANCE PLAN
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C> <C>
1. Introduction - Business Purpose........................................ 1
2. Definitions............................................................ 2
3. The Reorganization..................................................... 7
4. Conditions to Implementation of the Reorganization..................... 10
5. Special Meeting and Vote Required to Approve the Plan.................. 11
6. Charters and Bylaws.................................................... 12
7. Liquidation and Voting Rights.......................................... 12
8. Conversion of MHC to a Federal MHC..................................... 12
9. Conversion of MHC to Stock Form........................................ 12
10. Timing of the Reorganization and Sale of Capital Stock................. 13
11. Number of Shares to be Offered......................................... 14
12. Independent Valuation and Purchase Price of Shares..................... 14
13. Method of Offering Shares and Rights to Purchase Stock................. 15
14. Additional Limitations on Purchases of Common Stock.................... 17
15. Payment for Stock...................................................... 19
16. Manner of Exercising Subscription Rights Through Order Forms........... 20
17. Undelivered, Defective or Late Order Form; Insufficient Payment........ 21
18. Completion of the Stock Offering....................................... 21
19. Market for Common Stock................................................ 21
20. Stock Purchases by Management Persons After the Stock Offering......... 21
21. Resales of Stock by Management Persons................................. 22
22. Stock Certificates..................................................... 22
23. Restriction on Financing Stock Purchases............................... 22
24. Stock Benefit Plans.................................................... 22
25. Post-Reorganization Filing and Market Making........................... 23
26. Liquidation Account.................................................... 23
27. Employment and Other Severance Agreements.............................. 24
28. Payment of Dividends and Repurchase of Stock........................... 24
29. Establishment and Funding of Charitable Foundation..................... 25
30. Interpretation......................................................... 25
31. Reorganization and Stock Offering Expenses............................. 25
32. Amendment or Termination of the Plan................................... 25
</TABLE>
Exhibits
- --------
Exhibit A Restated Organization Certificate and Bylaws of the Bank
Exhibit B Certificate of Incorporation and Bylaws of the Holding Company
Exhibit C Organization Certificate and Bylaws of the Mutual Holding Company
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1. Introduction - Business Purpose
The Board of Trustees of Lockport Savings Bank (the "Bank") has adopted
this Plan of Reorganization from Mutual Savings Bank to Mutual Holding Company
and Stock Issuance Plan (the "Plan") pursuant to which the Bank proposes to
reorganize from a state-chartered mutual savings bank into the mutual holding
company structure (the "Reorganization") under the laws of the State of New York
and the regulations of the Banking Board and the FDIC, and other applicable
Federal laws and regulations. As part of the Reorganization and the Plan, the
Bank will convert to a New York stock savings bank (the "Stock Bank"), and will
establish Niagara Bancorp, MHC (the "MHC") as a New York corporation and Niagara
Bancorp, Inc. (the "Holding Company") as a Delaware corporation. The Holding
Company will be a majority-owned subsidiary of the MHC at all times so long as
the MHC remains in existence, and the Stock Bank will become a wholly-owned
subsidiary of the Holding Company. Concurrently with the Reorganization, the
Holding Company intends to offer for sale up to 49.0% of its Common Stock in the
Stock Offering on a priority basis to qualifying depositors and Tax-Qualified
Employee Plans of the Bank, with any remaining shares offered to the public in a
Community Offering. In the event the Holding Company is not established as part
of the Reorganization, the Board of Trustees may elect to proceed with the
Reorganization by forming the Stock Bank as a direct majority-owned subsidiary
of the MHC. In such event, any reference in this Plan to a Stock Offering by
the Holding Company shall mean a stock offering by the Stock Bank directly, and
the terms and conditions of the Stock Offering described herein shall apply to a
stock offering by the Stock Bank unless clearly inapplicable.
The primary purpose of the Reorganization is to establish a holding company
and stock savings bank charter which will enable the Bank to compete and expand
more effectively in the financial services marketplace. The Reorganization will
permit the Holding Company to issue Capital Stock, which is a source of capital
not available to mutual savings banks. Since the Holding Company will not be
offering all of its common stock for sale to depositors and the public in the
Stock Offering, the Reorganization will result in less capital raised in
comparison to a standard mutual-to-stock conversion. The Reorganization also
will offer the Bank more capital raising opportunities to effect future
transactions, including the acquisition of banks and other financial services
companies, since a majority of the Holding Company's common stock will be
available for sale in the future. It will also provide the Bank with greater
flexibility to structure and finance the expansion of its operations, including
the potential acquisition of other financial institutions. Lastly, the
Reorganization will enable the Bank to better manage its capital by providing
broader investment opportunities through the holding company structure and by
enabling the Bank to distribute excess capital to stockholders of the Holding
Company. Although the Reorganization and Stock Offering will create a stock
savings bank and stock holding company, only a minority of the Common Stock will
be offered for sale in the Stock Offering. As a result, the Bank's mutual form
of ownership and its ability to remain an independent savings bank and to
provide community-oriented financial services will be preserved through the
mutual holding company structure.
As part of the Reorganization, and consistent with the Bank's ongoing
commitment to remain an independent community-oriented savings bank, the Bank
will establish a charitable foundation or trust. The charitable foundation is
intended to compliment the Bank's existing community reinvestment and charitable
activities in a manner that will allow the local community to share in the
growth and success of the Bank. The Holding Company intends to donate to the
charitable foundation or trust immediately following the Reorganization cash,
securities or Common Stock in an amount equal to up to 5% of the Common Stock
issued in the Stock Offering.
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This Plan has been unanimously approved by the Board of Trustees of the
Bank and must be approved by the affirmative vote of at least (i) a majority of
the eligible votes of Voting Depositors, and (ii) 75% of the aggregate dollar
amount of deposits of the Voting Depositors represented at the Special Meeting
either in person or by valid proxy and entitled to vote thereat. Each Voting
Depositor shall be entitled to cast one vote for each $100 or fraction thereof
of deposits in the Bank on the Voting Record Date. No Voting Depositor may cast
more than 1,000 votes at the Special Meeting. By approving the Plan, the Voting
Depositors will also be approving all steps necessary and incidental to the
formation of the Stock Bank, the Holding Company and the MHC, including any
merger necessary to consummate the Reorganization. The Reorganization is
subject to the approval of the Superintendent, the Federal Reserve Board and the
FDIC.
2. Definitions
As used in this Plan, the terms set forth below have the following
meanings:
Acting in Concert: Means (i) knowing participation in a joint activity or
interdependent conscious parallel action towards a common goal whether or not
pursuant to an express agreement; (ii) a combination or pooling of votes or
other interests in the securities of an issuer for a common purpose pursuant to
any contract, understanding, relationship, agreement or other arrangement,
whether written or otherwise; or (iii) a person or company which acts in concert
with another persons or company ("other party") shall also be deemed to be
acting in concert with any person or company who is also acting in concert with
the other party, except that any Tax-Qualified Employee Benefit Plan or Non-
Tax-Qualified Employee Benefit Plan will not be deemed to be acting in concert
with any other Tax-Qualified Employee Benefit Plan or Non-Tax-Qualified
Employee Benefit Plan or with its trustee or a person who serves in a similar
capacity solely for the purpose of determining whether stock held by the trustee
and stock held by the plan will be aggregated. The determination of whether a
group is acting in concert shall be made solely by the Board of Trustees of the
Bank or officers delegated by such Board, and may be based on any evidence upon
which the Board or such delegatee chooses to rely.
Actual Subscription Price: The price per share, determined as provided in
this plan, at which the Common Stock will be sold in the Subscription Offering.
Affiliate: Any Person that controls, is controlled by, or is under common
control with another person.
Associate: The term "Associate," when used to indicate a relationship with
any Person, means: (i) any corporation or organization (other than the Bank, the
Holding Company, the MHC or a majority-owned subsidiary of any thereof) of which
such Person is a director, officer or partner or is, directly or indirectly, the
beneficial owner of 10% or more of any class of equity securities; (ii) any
trust or other estate in which such Person has a substantial beneficial interest
or as to which such Person serves as trustee or in a similar fiduciary capacity;
(iii) any relative or spouse of such Person or any relative of such spouse, who
has the same home as such Person or who is a director or officer of the Bank,
the MHC, the Stock Holding Company or any subsidiary of the MHC or the Holding
Company or any affiliate thereof; and (iv) any person acting in concert with any
of the persons or entities specified in clauses (i) through (iii) above;
provided, however, that any Tax-Qualified or Non-Tax-Qualified Employee Plan
shall not be deemed to be an associate of any trustee, director or officer of
the MHC, the Holding Company or the Bank, to the extent provided in Sections 11-
13 hereof. When used to refer to a Person other than an officer or director of
the Bank, the Bank in its sole discretion may determine the Persons that are
Associates of other Persons.
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Bank: Lockport Savings Bank in its pre-Reorganization form and post-
Reorganization stock form, as indicated by the context.
Banking Board: The Banking Board of the New York State Banking Department.
Banking Law: The Banking Law of the State of New York.
BHCA: The Bank Holding Company Act of 1956, as amended.
BIF: The Bank Insurance Fund.
BMA: The Bank Merger Act.
Capital Stock: Any and all authorized stock of the Bank or the Holding
Company.
Common Stock: Common stock issuable by the Holding Company in connection
with the Reorganization, including securities convertible into Common Stock,
pursuant to its certificate of incorporation.
Community Offering: The offering to certain members of the general public
of any unsubscribed shares in the Subscription Offering which may be effected
pursuant to this Plan. The Community Offering may include a syndicated
community offering or public offering.
Department: The State of New York Banking Department.
Deposit Account(s): All withdrawable deposits of the Bank as defined in
Section 9019 of the Banking Law, including, without limitation, savings, time,
demand, NOW accounts, money market, certificate and passbook accounts maintained
by the Bank.
Community Offering: The offering to certain members of the general public
of any unsubscribed shares in the Subscription Offering which may be effected
pursuant to this Plan. The Community Offering may include a syndicated
community offering or public offering.
Effective Date: The date upon which all necessary approvals have been
obtained to consummate the Reorganization, and the transfer of assets and
liabilities of the Bank to the Stock Bank is completed.
Eligible Account Holder: Any person holding a Qualifying Deposit on the
Eligibility Record Date.
Eligibility Record Date: August 31, 1996, the date for determining who
qualifies as an Eligible Account Holder.
ESOP: The Bank's employee stock ownership plan.
Estimated Valuation Range: The range of the estimated pro forma market
value of the total number of shares of Common Stock to be issued by the Holding
Company to the MHC and to Minority Stockholders, as determined by the
Independent Appraiser prior to the Subscription Offering and as it may be
amended from time to time thereafter.
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Exchange Act: The Securities Exchange Act of 1934, as amended.
FDIC: The Federal Deposit Insurance Corporation.
FRB: The Board of Governors of the Federal Reserve System.
Holding Company: Niagara Bancorp, Inc., the Delaware corporation which will
be majority-owned by the MHC and which will own 100% of the common stock of the
Bank.
Holding Company Application: The holding company application to be
submitted by the MHC and the Holding Company to the FRB to have the MHC and the
Holding Company acquire direct and indirect control of the Bank.
Independent Appraiser: The appraiser retained by the Bank to prepare an
appraisal of the pro forma market value of the Bank and the Holding Company.
Independent Valuation: The estimated pro forma market value of the Holding
Company and the Bank as determined by the Independent Appraiser.
Liquidation Account: The liquidation account established pursuant to this
Plan.
Management Person: Any Officer or Trustee of the Bank or any Affiliate of
the Bank, and any person acting in concert with any such Officer or Trustee.
Marketing Agent: The broker-dealer responsible for organizing and managing
the Stock Offering and sale of the Common Stock.
Market Maker: A dealer (i.e., any person who engages directly or
indirectly as agent, broker, or principal in the business of offering, buying,
selling or otherwise dealing or trading in securities issued by another person)
who, with respect to a particular security, (i) regularly publishes bona fide
competitive bid and offer quotations on request, and (ii) is ready, willing and
able to effect transactions in reasonable quantities at the dealer's quoted
prices with other brokers or dealers.
MHC: Niagara Bancorp, MHC, the mutual holding company resulting from the
Reorganization.
Minority Ownership Interest: The shares of the Holding Company's Common
Stock owned by persons other than the MHC.
Minority Stockholder: Any owner of the Holding Company's Common Stock,
other than the MHC.
Minority Stock Offering: One or more offerings of up to 49% in the
aggregate of the outstanding Common Stock of the Holding Company to persons
other than the MHC.
Non-Voting Stock: Any Capital Stock other than Voting Stock.
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Notice: The Notice of Mutual Holding Company Reorganization to be
submitted by the Bank to the FDIC and the Department to notify the FDIC and the
Department of the Reorganization and the Stock Offering.
Offering Range: The aggregate purchase price of the Common Stock to be sold
in the Stock Offering based on the Independent Valuation expressed as a range
which may vary within 15% above or 15% below the midpoint of such range, with a
possible adjustment by up to 15% above the maximum of such range. The Offering
Range will be based on the Estimated Valuation Range, but will represent a
Minority Ownership Interest equal to up to 49% of the Common Stock.
Officer: An executive officer of the Holding Company or the Bank,
including the Chief Executive Officer, President, Executive Vice President,
Senior Vice Presidents, Vice Presidents in charge of principal business
functions, Secretary, Treasurer and any other employee participating in major
policy making functions of the institution.
Parent: A company that controls another company, either directly or
indirectly through one or more subsidiaries.
Person: An individual, corporation, partnership, association, joint-stock
company, trust (including Individual Retirement Accounts and KEOGH Accounts),
unincorporated organization, government entity or political subdivision thereof
or any other entity.
Plan: This Plan of Reorganization from Mutual Savings Bank to Mutual
Holding Company and Stock Issuance Plan.
Qualifying Deposit: The aggregate of one or more Deposit Accounts with an
aggregate balance of $100 or more as of the close of business on the Eligibility
Record Date or as of the close of business on the Supplemental Eligibility
Record Date, as the case may be. Deposit Accounts with aggregate total deposit
balances of less than $100 shall not constitute a Qualifying Deposit.
Regulations: The regulations of the Banking Board regarding mutual holding
companies and conversion to stock form, and the regulations of the FDIC, but
only to the extent the regulations of the FDIC conflict with Parts 86 and 111 of
the General Regulations of the New York Banking Board.
Reorganization: The reorganization of the Bank into the mutual holding
company structure including the organization of the MHC, the Holding Company and
the Stock Bank pursuant to this Plan.
Resident: The terms "resident" "residence," "reside," or "residing" as
used herein with respect to any person shall mean any person who occupies a
dwelling within the Bank's Community, has an intent to remain with the Community
for a period of time, and manifests the genuineness of that intent by
establishing an ongoing physical presence within the Community together with an
indication that such presence within the Community is something other than
merely transitory in nature. To the extent the Person is a corporation or other
business entity, the principal place of business or headquarters shall be in the
Community. To the extent a person is a personal benefit plan, the circumstances
of the beneficiary shall apply with respect to this definition. In the case of
all other benefit plans, the circumstances of the trustee shall be examined for
purposes of this definition. The Bank may utilize deposit or loan records or
such other evidence provided to it to make a determination as to whether a
person is a resident. In all cases, however, such a determination shall be in
the sole discretion of the Bank.
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SEC: The Securities and Exchange Commission.
Special Meeting: The Special Meeting of Depositors, and any adjournment
thereof, called for the purpose of considering and voting on the Plan.
Stock Bank: The New York chartered stock savings bank resulting from the
Reorganization in accordance with the Plan.
Stock Offering: The offering of Common Stock of the Holding Company to
persons other than the MHC, in a Subscription Offering and, to the extent shares
remain available, in a Community Offering.
Subscription Offering: The offering of Common Stock of the Holding Company
for subscription and purchase pursuant to this Plan.
Subsidiary: A company that is controlled by another company, either
directly or indirectly through one or more subsidiaries.
Superintendent: The Superintendent of Banks of the State of New York.
Supplemental Eligible Account Holder: Any Person holding a Qualifying
Deposit on the Supplemental Eligibility Record Date, who is not an Eligible
Account Holder, a Tax-Qualified Employee Plan or an Officer or Trustee of the
Bank.
Supplemental Eligibility Record Date: The supplemental record date for
determining who qualifies as a Supplemental Eligible Account Holder. The
Supplemental Eligibility Record Date shall be the last day of the calendar
quarter preceding the Superintendent's approval of the Reorganization.
Syndicated Community Offering: At the discretion of the Bank and the
Holding Company, the offering of Common Stock following or contemporaneously
with the Community Offering through a syndicate of broker-dealers.
Tax-Qualified Employee Plan: Any defined benefit plan or defined
contribution plan (including any employee stock ownership plan, stock bonus
plan, profit-sharing plan, or other plan) of the Bank, the Holding Company, the
MHC or any of their affiliates, which, with its related trusts, meets the
requirements to be qualified under Section 401 of the Internal Revenue Code.
The term Non-Tax-Qualified Employee Benefit Plan means any defined benefit plan
or defined contribution plan which is not so qualified.
Trustee: A trustee of the Bank on or before the Effective Date.
Voting Depositor: A person holding a Deposit Account as of the Voting
Record Date.
Voting Record Date: The date established by the Bank for determining
eligibility to vote on the Plan at the Special Meeting.
Voting Stock:
(1) Voting Stock means common stock or preferred stock, or similar
interests if the shares by statute, charter or in any manner, entitle the
holder:
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(i) To vote for or to select directors of the Bank or the Holding
Company; and
(ii) To vote on or to direct the conduct of the operations or other
significant policies of the Bank or the Holding Company.
(2) Notwithstanding anything in paragraph (1) above, preferred stock is
not "Voting Stock" if:
(i) Voting rights associated with the preferred stock are limited
solely to the type customarily provided by statute with regard
to matters that would significantly and adversely affect the
rights or preferences of the preferred stock, such as the
issuance of additional amounts or classes of senior securities,
the modification of the terms of the preferred stock, the
dissolution of the Bank or the Holding Company, or the payment
of dividends by the Bank or the Holding Company when preferred
dividends are in arrears;
(ii) The preferred stock represents an essentially passive
investment or financing device and does not otherwise provide
the holder with control over the issuer; and
(iii) The preferred stock does not at the time entitle the holder, by
statute, charter, or otherwise, to select or to vote for the
selection of directors of the Bank or the Holding Company.
(3) Notwithstanding anything in paragraphs (1) and (2) above, "Voting
Stock" shall be deemed to include preferred stock and other securities that,
upon transfer or otherwise, are convertible into Voting Stock or exercisable to
acquire Voting Stock where the holder of the stock, convertible security or
right to acquire Voting Stock has the preponderant economic risk in the
underlying Voting Stock. Securities immediately convertible into Voting Stock
at the option of the holder without payment of additional consideration shall be
deemed to constitute the Voting Stock into which they are convertible; other
convertible securities and rights to acquire Voting Stock shall not be deemed to
vest the holder with the preponderant economic risk in the underlying Voting
Stock if the holder has paid less than 50% of the consideration required to
directly acquire the Voting Stock and has no other economic interest in the
underlying Voting Stock.
3. The Reorganization
A. Organization of the Holding Companies and the Bank
As part of the Reorganization, the Bank will convert to a New York stock
savings bank and will establish the Holding Company as a Delaware corporation
and the MHC as a New York corporation. The Reorganization will be effected as
follows, or in any manner approved by the Superintendent that is consistent with
the purposes of this Plan and applicable laws and regulations.
As part of the Reorganization: (i) the Bank will organize an interim stock
savings bank as a wholly-owned subsidiary ("Interim One"); (ii) Interim One will
organize an interim stock savings bank as a wholly-owned subsidiary ("Interim
Two"); (iii) Interim One will organize the Holding Company as a wholly-owned
subsidiary; (iv) the Bank will exchange its charter for a New York stock savings
bank charter to become the Stock Bank and Interim One will exchange its charter
for a New York mutual holding company
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charter to become the MHC; (v) simultaneously with step (iv), Interim Two will
merge with and into the Stock Bank with the Stock Bank as the resulting
institution; (vi) all of the initially issued stock of the Stock Bank will be
transferred to the MHC in exchange for membership interests in the MHC; and
(vii) the MHC will contribute the capital stock of the Bank to the Holding
Company, and the Stock Bank will become a wholly-owned subsidiary of the Holding
Company.
Upon completion of the Reorganization and Stock Offering, the MHC, the
Holding Company and the Stock Bank will be structured as follows:
[FLOW CHART APPEARS HERE]
------------ ----------------
The MHC Public
Stockholders
------------ ----------------
53.3% of 46.7% of
the the
Common Common
Stock Stock
----------------------------------
The Holding Company
----------------------------------
100% of the
Common Stock
----------------------------------
The Stock Bank
----------------------------------
Contemporaneously with the Reorganization, the Holding Company will offer
for sale in the Stock Offering shares of Common Stock representing the pro forma
market value of the Holding Company and the Bank. Upon consummation of the
Reorganization, the legal existence of the Bank will not terminate, but the
Stock Bank will be a continuation of the Bank, and all property of the Bank,
including its right, title, and interest in and to all property of whatsoever
kind and nature, interest and asset of every conceivable value or benefit then
existing or pertaining to the Bank, or which would inure to the Bank immediately
by operation of law and without the necessity of any conveyance or transfer and
without any further act or deed, will vest in the Stock Bank. The Stock Bank
will have, hold, and enjoy the same in its right and fully and to the same
extent as the same was possessed, held, and enjoyed by the Bank. The Stock Bank
will continue to have, succeed to, and be responsible for all the rights,
liabilities and obligations of the Bank and will maintain its headquarters and
operations at the Bank's present locations.
Upon consummation of the Reorganization, substantially all of the assets
and liabilities (including all savings accounts and demand deposit accounts) of
the Bank shall be become the assets and liabilities of the Stock Bank, which
will thereupon become an operating savings bank subsidiary of the Holding
Company and of the MHC. The Holding Company expects to receive or retain (as
the case may be) up to 50% of the net proceeds of the Stock Offering. The Stock
Bank may distribute additional capital to the Holding Company following the
Reorganization, subject to the applicable regulations governing capital
distributions.
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B. Effect on Deposit Accounts and Borrowings
Upon consummation of the Reorganization each deposit account in the Bank on
the Effective Date will become a deposit account in the Stock Bank in the same
amount and upon the same terms and conditions, and will continue to be federally
insured up to the legal maximum by the FDIC in the same manner, as the deposit
account existed in the Bank immediately prior to the Reorganization. Upon
consummation of the Reorganization, all loans and other borrowings from the Bank
shall retain the same status with the Stock Bank after the Reorganization as
they had with the Bank immediately prior to the Reorganization.
C. The Bank
Upon completion of the Reorganization the Stock Bank will be authorized to
exercise any and all powers, rights and privileges of, and will be subject to
all limitations applicable to, capital stock savings banks under New York law.
A copy of the proposed Restated Organization Certificate and Bylaws of the Stock
Bank is attached as Exhibit A and is made a part of this Plan. The
Reorganization will not result in any reduction of the amount of retained
earnings (other than the assets of the Bank retained by or distributed to the
Holding Company or the MHC), undivided profits, and general loss reserves that
the Bank had prior to the Reorganization. Such retained earnings and general
loss reserves will be accounted for by the MHC, the Holding Company and the
Stock Bank on a consolidated basis in accordance with generally accepted
accounting principles.
The initial members of the Board of Directors of the Stock Bank will be the
members of the existing Board of Trustees of the Bank. The Stock Bank will be
wholly-owned by the Holding Company. The Holding Company will be wholly-owned by
its stockholders who will consist of the MHC and the persons who purchase Common
Stock in the Stock Offering and any subsequent Minority Stock Offering. Upon the
Effective Date of the Reorganization, any liquidation rights of Depositors under
New York law will be transferred to the MHC and/or the Stock Bank and the
Holding Company, subject to the conditions specified below.
D. The Holding Company
The Holding Company will be a Delaware corporation and will be authorized
to exercise any and all powers, rights and privileges, and will be subject to
all limitations applicable to bank holding companies and savings bank holding
companies under applicable federal and New York laws and regulations. The
initial members of the Board of Directors of the Holding Company will be the
members of the existing Board of Trustees of the Bank. Thereafter, the voting
stockholders of the Holding Company will elect annually approximately one-third
of the Holding Company's directors. A copy of the Certificate of Incorporation
and Bylaws of the Holding Company is attached as Exhibit B and is made part of
this Plan.
The Holding Company will have the power to issue shares of Capital Stock to
persons other than the MHC. However, so long as the MHC is in existence, the
MHC will be required to own at least 51% of the Voting Stock of the Holding
Company. The Holding Company may issue any amount of Non-Voting Stock to
persons other than the MHC. The Holding Company will be authorized to undertake
one or more Minority Stock Offerings of up to 49% in the aggregate of the total
outstanding Common
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Stock of the Holding Company, and the Holding Company intends to offer for sale
up to 49% of its Common Stock in the Stock Offering.
E. The Mutual Holding Company
As a mutual corporation, the MHC will have no stockholders. The trustees
of the MHC will have exclusive voting authority as to all matters relating to
the MHC other than any conversion of the MHC to stock form. Any liquidation
rights of depositors that existed under New York law prior to the Reorganization
shall continue in the MHC following the Reorganization. The rights and powers
of the MHC will be defined by the MHC's Organization Certificate and Bylaws (a
copy of which is attached as Exhibit C and made a part of this Plan) and by
applicable statutory and regulatory provisions of Federal and New York law. The
MHC may elect to be regulated by the Office of Thrift Supervision as a savings
and loan holding company, in which case it would be subject to the limitations
and restrictions imposed on savings and loan holding companies by Section
10(o)(5) of the Home Owners' Loan Act.
The New York Banking Law requires that the Board of Directors of a
subsidiary savings bank of a mutual holding company include at least one
director who is not an officer, employee or director of the mutual holding
company or an officer or employee of the stock subsidiary bank, who will
represent the interests of minority stockholders of the subsidiary stock bank.
Accordingly, the initial members of the Board of Trustees of the MHC will
consist of all but one member of the existing Board of Trustees of the Bank.
Thereafter, approximately one-third of the trustees of the MHC will be elected
annually by the members of the Board of Trustees of the MHC.
4. Conditions to Implementation of the Reorganization
Consummation of the Reorganization is conditioned upon the following:
A. Approval of the Plan by a majority of the Board of Trustees of the
Bank.
B. Approval of the Plan by the affirmative vote of at least (i) a majority
of the total eligible votes of the Voting Depositors, and (ii) 75% of
the aggregate dollar amount of deposits of Voting Depositors
represented at the Special Meeting either in person or by valid proxy
and entitled to vote at the Special Meeting.
C. Approval by the Superintendent of the Plan, the Restated Organization
Certificate and Bylaws of the Stock Bank and the MHC, and the Banking
Board's approval of the Organization Certificate of the MHC, and all
other transactions contemplated by the Plan for which approval is
required by the Superintendent.
D. Submission of the Notice to the FDIC, and the Bank either (i) receives
a notice of intent not to object from the FDIC, or (ii) 60 days
(subject to extension for an additional 60 days) have passed following
the acceptance of a complete Notice by the FDIC.
E. Approval by the FRB pursuant to the BHCA for the MHC and the Holding
Company to become bank holding companies by owning or acquiring,
directly or indirectly, the majority of the Stock Bank's common stock
to be issued in connection with the Reorganization.
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F. Approval by the FDIC pursuant to the BMA of any merger or transfer of
assets and liabilities involving the Bank or an interim savings bank in
connection with the Reorganization.
G. Receipt by the Bank of either a private letter ruling from the Internal
Revenue Service or an opinion of the Bank's counsel as to the federal
income tax consequences of the Reorganization to the MHC, the Holding
Company and the Bank.
H. Receipt by the Bank of either a private letter ruling of the New York
State Department of Revenue or an opinion of counsel or of the Bank's
independent public accountants as to the New York income tax
consequences of the Reorganization to the MHC, the Holding Company and
the Bank.
5. Special Meeting and Vote Required to Approve the Plan
Subsequent to the approval of the Plan by the Superintendent, the Special
Meeting shall be scheduled in accordance with the Bank's Bylaws. Promptly after
receipt of approval and at least 20 days but not more than 45 days prior to the
Special Meeting, the Bank shall distribute proxy solicitation materials to all
Voting Depositors. The proxy solicitation materials shall include a proxy card
and proxy statement and other documents authorized for use by the regulatory
authorities. A copy of the Plan will be made available to all Voting Depositors
upon request. Pursuant to the Regulations, an affirmative vote of at least (i)
a majority of the total eligible votes of Voting Depositors, and (ii) 75% of the
aggregate dollar amount of deposits of the Voting Depositors represented at the
Special Meeting either in person or by valid proxy and entitled to vote thereat
shall be required for approval of the Plan. The Board of Trustees shall appoint
an independent custodian and tabulator to receive and hold the proxy cards and
to count the votes cast in favor of and in opposition to the Plan. Within five
days after the Special Meeting, the President and Secretary of the Bank will
certify to the Superintendent the result of the vote taken at the Special
Meeting. Each Voting Depositor shall be entitled to cast one vote for each $100
or fraction thereof of deposits in the Bank on the Voting Record Date. No
Voting Depositor may cast more than 1,000 votes at the Special Meeting.
6. Charters and Bylaws
Copies of the proposed Charter and Bylaws of the Stock Bank, the proposed
Certificate of Incorporation and Bylaws of the Holding Company and the proposed
Charter and Bylaws of the MHC are attached hereto as Exhibits A, B and C,
respectively, and are made a part of this Plan. By their approval of this Plan,
the Voting Depositors shall have approved and adopted the Charter and Bylaws of
the Bank, the Holding Company and the MHC.
The total shares of Common Stock authorized under the Holding Company
Charter will exceed the shares of Common Stock to be issued to the MHC and the
minority stockholders in the Reorganization. In addition, the Certificate of
Incorporation of the Holding Company will include provisions that: (i) eliminate
cumulative voting for the election of directors; (ii) prohibit any person or
group acting in concert (other than the MHC) from voting shares in excess of 10%
of the Common Stock of the Holding Company; and (iii) prohibit persons other
than the Board of Directors of the Stock Bank or committees of the Board of
Directors of the Stock Bank from calling special meetings of the stockholders of
the Stock Bank.
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7. Liquidation and Voting Rights
Following the Reorganization, each Eligible Account Holder and each
Supplemental Eligible Account Holder will have an interest in the Liquidation
Account established pursuant to this Plan so long as such person remains a
depositor of the Stock Bank after the Reorganization. In addition, following
the Reorganization, all depositors who had liquidation rights with respect to
the Bank as of the date of the Reorganization will continue to have such rights
solely with respect to the MHC for so long as they remain depositors of the
Stock Bank. In addition, all persons who become depositors of the Stock Bank
subsequent to the Reorganization also will have liquidation rights with respect
to the MHC. In each case, no person who ceases to be the holder of a Deposit
Account with the Bank after the Reorganization shall have any liquidation rights
with respect to the MHC.
8. Conversion of MHC to a Federal MHC
Upon completion of the Reorganization, the MHC will be chartered under New
York law. The MHC, however, may elect to convert its charter to a federal
mutual holding company charter in the future, in which case the MHC would be
regulated by the Office of Thrift Supervision ("OTS") or any successor thereto.
Such a charter conversion would be subject to the approval of the Board of
Trustees of the MHC, the OTS and applicable regulatory authority.
9. Conversion of MHC to Stock Form
Following the completion of the Reorganization, the MHC may elect to
convert to stock form in accordance with applicable law (a "Conversion
Transaction"). There can be no assurance when, if ever, a Conversion
Transaction will occur, and the Board of Trustees has no intent or plan to
undertake a Conversion Transaction. If the Conversion Transaction does not
occur, the MHC will always own a majority of the Common Stock of the Holding
Company.
In a Conversion Transaction, the MHC would merge with and into the Stock
Bank or the Holding Company (at the discretion of the MHC), and certain
depositors of the Stock Bank would receive the right to subscribe for a number
of shares of common stock of the Holding Company, as determined by the formula
set forth in the following paragraphs. The additional shares of Common stock of
the Holding Company issued in the Conversion Transaction would be sold at their
aggregate pro forma market value.
Any Conversion Transaction shall be fair and equitable to Minority
Stockholders. In any Conversion Transaction, Minority Stockholders, if any,
will be entitled to maintain the same percentage ownership interest in the
Holding Company after the Conversion Transaction as their ownership interest in
the Holding 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
MHC; and (ii) the market value of assets of the MHC (other than common stock of
the Holding Company).
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The adjustment referred to in clause (i) of the preceding paragraph above
would require that the Minority Ownership Interest be adjusted by multiplying
the Minority Ownership Interest by the following fraction:
(Holding Company stockholders' equity immediately preceding the Conversion
--------------------------------------------------------------------------
Transaction) - (aggregate amount of dividends waived by MHC)
------------------------------------------------------------
Holding Company stockholders' equity immediately preceding the Conversion
Transaction
The adjustment referred to in clause (ii) above would further adjust the
Minority Ownership Interest by multiplying the result obtained in the preceding
paragraph by the following fraction:
(pro forma market value of Holding Company) - (market value of assets of MHC
----------------------------------------------------------------------------
other than Holding Company common stock)
----------------------------------------
pro forma market value of Holding Company
At the sole discretion of the Board of Trustees of the MHC and the Board of
Directors of the Holding Company, a Conversion Transaction may be effected in
any other manner necessary to qualify the Conversion Transaction as a tax-free
reorganization under applicable federal and state tax laws, provided such
Conversion Transaction does not diminish the rights and ownership interest of
Minority Stockholders as set forth in the preceding paragraphs. If a Conversion
Transaction does not occur, the MHC will always own a majority of the voting
stock of the Holding Company.
A Conversion Transaction would require the approval of applicable federal
bank regulators, and would be presented to a vote of the depositors of the Stock
Bank and the stockholders of the Holding Company as of a voting record date
prior to the completion of the Conversion Transaction. Federal and state
regulatory policy requires that in any Conversion Transaction the depositors of
the MHC will be accorded the same stock purchase priorities as if the MHC were a
mutual savings bank converting to stock form.
10. Timing of the Reorganization and Sale of Capital Stock
The Bank intends to consummate the Reorganization as soon as feasible
following the receipt of all approvals referred to in Section 4 of the Plan.
Subject to the approval of the FDIC, the FRB and the Superintendent, the Holding
Company intends to commence the Stock Offering concurrently with the proxy
solicitation of Voting Depositors. The Holding Company may close the Stock
Offering before the Special Meeting, provided that the offer and sale of the
Common Stock shall be conditioned upon approval of the Plan by the Voting
Depositors at the Special Meeting. The Bank's proxy solicitation materials may
permit certain Voting Depositors to return to the Bank by a reasonable date
certain a postage paid card or other written communication requesting receipt of
the prospectus if the prospectus is not mailed concurrently with the proxy
solicitation materials. The Stock Offering shall be conducted in compliance
with the securities offering regulations of the FDIC, the SEC and the Banking
Board. The Bank will not finance or loan funds to any person to purchase Common
Stock.
11. Number of Shares to be Offered
The total number of shares (or range thereof) of Common Stock to be issued
and offered for sale pursuant to the Plan shall be determined initially by the
Board of Trustees of the Bank and the Board of Directors of the Holding Company
in conjunction with the determination of the Independent Appraiser. The number
of shares to be offered may be adjusted prior to completion of the Stock
Offering. The total
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number of shares of Common Stock that may be issued to persons other than the
MHC at the close of the Stock Offering must be no greater than 49.0% of the
issued and outstanding shares of Common Stock of the Holding Company.
12. Independent Valuation and Purchase Price of Shares
The total number of shares (and a range thereof) (the "Offering Range") of
Common Stock to be issued and offered for sale in the Stock Offering will be
determined jointly by the Board of Trustees of the Bank and the Board of
Directors of the Holding Company immediately prior to the commencement of the
Subscription and Community Offerings, subject to adjustment thereafter if
necessitated by market or financial conditions, with the approval of the FDIC
and the Superintendent, if necessary. In particular, the total number of shares
may be increased by up to 15% of the number of shares offered in the
Subscription and Community Offerings if the Estimated Valuation Range is
increased subsequent to the commencement of the Subscription and Community
Offerings to reflect changes in market and financial conditions.
All shares sold in the Stock Offering will be sold at a uniform price per
share referred to in this Plan as the Actual Subscription Price. The aggregate
purchase price for all shares of Common Stock will not be inconsistent with the
estimated consolidated pro forma market value of the Holding Company and the
Bank. The estimated consolidated pro forma market value of the Holding Company
and the Bank will be determined for such purpose by the Independent Appraiser.
Prior to the commencement of the Subscription and Community Offerings, an
Estimated Valuation Range will be established, which range will vary within 15%
above to 15% below the midpoint of such range. The shares of Common Stock being
sold in the Stock Offering will represent a minority ownership interest in the
outstanding Common Stock of the Holding Company equal to up to 49% of the
estimated pro forma market value of the Common Stock based upon the Independent
Valuation. The percentage of Common Stock offered for sale in the Stock
Offering and the Offering Range shall be determined by the Board of Directors of
the Holding Company and the Board of Trustees of the Bank prior to commencement
of the Subscription and Community Offerings, and will be confirmed upon
completion of the Stock Offering.
The number of shares of Common Stock to be issued in the Stock Offering and
the purchase price per share may be increased or decreased by the Holding
Company. In the event that the aggregate purchase price of the Common Stock is
below the minimum of the Estimated Valuation Range, or materially above the
maximum of the Estimated Valuation Range, resolicitation of purchasers may be
required, provided that up to a 15% increase above the maximum of the Estimated
Valuation Range will not be deemed material so as to require a resolicitation.
Any such resolicitation shall be effected in such manner and within such time as
the Bank shall establish, with the approval of the FDIC and the Superintendent,
if required. Up to a 15% increase in the number of shares to be issued which
is supported by an appropriate change in the estimated pro forma market value of
the Holding Company will not be deemed to be material so as to require a
resolicitation of subscriptions. Based upon the Independent Valuation as
updated prior to the commencement of the Subscription and Community Offerings,
the Board of Directors of the Holding Company will fix the Actual Subscription
Price. If there is a Syndicated Community Offering of shares of Common Stock
not subscribed for in the Subscription and Community Offerings, the price per
share at which the Common Stock is sold in such Syndicated Community Offering
shall be equal to the Actual Subscription Price.
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<PAGE>
Notwithstanding the foregoing, no sale of Common Stock may be consummated
unless, prior to such consummation, the Independent Appraiser confirms to the
Holding Company, the Bank and to the FDIC and the Department that, to the best
knowledge of the Independent Appraiser, nothing of a material nature has
occurred which, taking into account all relevant factors, would cause the
Independent Appraiser to conclude that the aggregate value of the Common Stock
at the purchase price per share is incompatible with its estimate of the
aggregate consolidated pro forma market value of the Holding Company and the
Bank. An increase in the aggregate value of the Common Stock by up to 15% would
not be deemed to be material. If such confirmation is not received, the Holding
Company may cancel the Stock Offering, extend the Stock Offering and establish a
new Actual Subscription Price and/or Estimated Valuation Range, extend, reopen
or hold a new Stock Offering or take such other action as the FDIC and the
Department may permit. The estimated market value of the Holding Company and
the Bank shall be determined for such purpose by an Independent Appraiser on the
basis of such appropriate factors as are not inconsistent with FDIC and
Department regulations. The Common Stock to be issued in the Stock Offering
shall be fully paid and nonassessable.
13. Method of Offering Shares and Rights to Purchase Stock
In descending order of priority, the opportunity to purchase Common Stock
shall be given in the Subscription Offering to: (1) Eligible Account Holders;
(2) Tax-Qualified Employee Plans; and (3) Supplemental Eligible Account Holders.
Any shares of Common Stock that are not subscribed for in the Subscription
Offering may be offered for sale in a Community Offering. The minimum purchase
by any Person shall be 25 shares. The Bank may use its discretion in
determining whether prospective purchasers are "residents," "associates," or
"acting in concert", and in interpreting any and all other provisions of the
Plan. All such determinations are in the sole discretion of the Bank, and may
be based on whatever evidence the Bank chooses to use in making any such
determination.
In addition to the priorities set forth below, the Board of Directors may
establish other priorities for the purchase of Common Stock, subject to the
approval of the Banking Board and the FDIC. The priorities for the purchase of
shares in the Stock Offering are as follows:
A. Subscription Offering
Priority 1: Eligible Account Holders. Each Eligible Account Holder shall
receive non-transferrable subscription rights to subscribe for shares of Common
Stock offered in the Stock Offering in an amount equal to the greater of
$200,000, one-tenth of one percent (.10%) of the total shares offered in the
Stock Offering, or 15 times the product (rounded down to the nearest whole
number) obtained by multiplying the total number of shares of Common Stock to be
issued in the Stock Offering by a fraction, of which the numerator is the
Qualifying Deposit of the Eligible Account Holder and the denominator is the
total amount of Qualifying Deposits of all Eligible Account Holders. 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.
Subscription rights to purchase Common Stock received by Officers and trustees
of the Bank including associates of Officers and trustees, based on their
increased
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<PAGE>
deposits in the Bank in the one year preceding the Eligibility Record Date,
shall be subordinated to the subscription rights of other Eligible Account
Holders. To ensure proper allocation of stock, each Eligible Account Holder must
list on his or her subscription order form all Deposit 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 Stock Offering. In the event of an
oversubscription in the Stock 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 Holding Company subject to the maximum
purchase limitations applicable to such plans and set forth in Section 13, 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 Stock Offering. If
the final valuation exceeds the maximum of the Offering Range, up to 10% of
Common Stock issued in the Stock Offering may be sold to the Tax Qualified
Employee Plans notwithstanding any oversubscription by Eligible Account Holders.
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 receive non-transferable subscription rights to subscribe
for shares of Common Stock offered in the Stock Offering in an amount equal to
the greater of $200,000, one-tenth of one percent (.10%) of the total shares
offered in the Stock Offering, or 15 times the product (rounded down to the
nearest whole number) obtained by multiplying the total number of shares of
Common Stock to be issued in the Stock Offering by a fraction, of which the
numerator is the Qualifying Deposit of the Supplemental Eligible Account Holder
and the denominator is the total amount of Qualifying Deposits of all
Supplemental Eligible Account Holders. 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,
exceed available shares, 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.
B. Community Offering/Public Offering
Any shares of Common Stock not subscribed for in the Subscription Offering
may be offered for sale in a Community Offering. This will involve an offering
of all unsubscribed shares directly to the general public with a preference
given to those natural persons who are residents of the western New York
counties of Niagara, Erie, Orleans and Genesee, and secondarly to natural
persons who are residents of Wyoming, Allegany, Cattaraugus and Chautauqua
counties. The Community Offering, if any, shall be for a period of not more
than 45 days unless extended by the Holding Company and the Bank, and shall
commence concurrently with, during or promptly after the Subscription Offering.
The Holding Company and the Bank may use an investment banking firm or firms on
a best efforts basis to sell the unsubscribed shares in the Subscription and
Community Offering. The Holding Company and the Bank may pay a commission or
other fee to such investment banking firm or firms as to the shares sold by such
firm or firms in the Subscription and Community Offering and may also reimburse
such firm or firms for expenses
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<PAGE>
incurred in connection with the sale. The Community Offering may include a
syndicated community offering managed by such investment banking firm or firms.
The Common Stock will be offered and sold in the Community Offering, in
accordance with FDIC and Banking Board regulations, so as to achieve the widest
distribution of the Common Stock. No Person, by himself or herself, or with an
Associate or group of Persons acting in concert, may subscribe for or purchase
more than $200,000 of Common Stock offered in the Community Offering. Further,
the Holding Company may limit total subscriptions under this Section 13(B) 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. Finally, the
Holding Company may reserve shares offered in the Community Offering for sales
to institutional investors.
In the event of an oversubscription for shares in the Community Offering,
shares may be allocated (to the extent shares remain available) first to cover
any reservation of shares for a public offering or institutional orders, next to
cover orders of natural persons residing in the counties in which the Bank
maintains its offices, then to cover the orders of any other person subscribing
for shares in the Community Offering so that each such person may receive 1,000
shares, and thereafter, on a pro rata basis to such persons based on the amount
of their respective subscriptions.
The Bank and the Holding Company, in their sole discretion, may reject
subscriptions, in whole or in part, received from any Person under this Section
13(B).
Any shares of Common Stock not sold in the Subscription Offering or in the
Community Offering, if any, shall then be sold to the underwriters for resale to
the general public in a public offering. It is expected that the public
offering will commence as soon as practicable after termination of the
Subscription Offering and the Community Offering, if any. The public offering
shall be completed within 45 days after the termination of the Subscription
Offering, unless such period is extended as provided herein. The public
offering price and the underwriting discount shall be determined by an
underwriting agreement between the Holding Company, the Bank and the
underwriters. Such underwriting agreement shall be filed with the FDIC, the
Banking Board and the SEC.
If for any reason a public offering of unsubscribed shares of Common Stock
cannot be effected and any shares remain unsold after the Subscription Offering
and the Community Offering, if any, the Boards of Directors of the Holding
Company and the Bank will seek to make other arrangements for the sale of the
remaining shares. Such other arrangements will be subject to the approval of
the Banking Board and the FDIC and to compliance with applicable securities
laws.
Depending upon market and financial conditions, the Board of Directors of
the Holding Company and the Board of Trustees of the Bank, with the approval of
the Department and FDIC, may increase or decrease any of the purchase
limitations set forth in this Section 13.
14. Additional Limitations on Purchases of Common Stock
Purchases of Common Stock in the Stock Offering will be subject to the
following purchase limitations:
A. The aggregate amount of outstanding Common Stock of the Holding
Company owned or controlled by persons other than MHC at the close of
the Stock Offering shall not exceed 49% of the Holding Company's total
outstanding Common Stock.
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<PAGE>
B. No Person, Associate thereof, or group of persons acting in concert,
may purchase more than $400,000 of Common Stock offered in the Stock
Offering to persons other than the MHC, except that: (i) the Holding
Company may, in its sole discretion and without further notice to or
solicitation of subscribers or other prospective purchasers, increase
such maximum purchase limitation up to 5% of the number of shares
offered in the Stock Offering; (ii) Tax-Qualified Employee Plans may
purchase up to 10% of the shares offered in the Stock Offering; and
(iii) for purposes of this subsection 13(B) 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.
C. The aggregate amount of Common Stock acquired in the Stock Offering by
all Management Persons and their Associates, exclusive of any stock
acquired by such persons in the secondary market, shall not exceed 25%
of the outstanding shares of Common Stock of the Holding Company held
by persons other than the MHC at the close of the Stock Offering. In
calculating the number of shares held by Management Persons and their
Associates under this paragraph or under the provisions of paragraph D
of this section, shares held by any Tax-Qualified Employee Benefit
Plans of the Bank that are attributable to such persons shall not be
counted.
D. The aggregate amount of Common Stock acquired in the Stock Offering by
all Management Persons and their Associates, exclusive of any Common
Stock acquired by such plans or persons in the secondary market, shall
not exceed 25% of the stockholders' equity of the Holding Company at
the close of the Stock Offering.
E. 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 Holding 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.
F. The Board of Directors of the Holding 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.
G. The Holding Company, in its sole discretion, may make reasonable
efforts to comply with the securities laws of any state in the United
States in which depositors of the Bank reside, and will only offer and
sell the Common Stock in states in which the offers and sales comply
with such states' securities laws. However, no person will be offered
or allowed to purchase any Common Stock under the Plan if such person
resides in a foreign country or in a state of the United States with
respect to which any of the following apply: (i) a small number of
persons otherwise eligible to purchase shares under the Plan reside in
such state or foreign county; (ii) the offer or sale of shares of
Common Stock to such persons would require the Bank or its employees
to register, under the securities laws of
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such state or foreign country, as a broker or dealer or to register or
otherwise qualify its securities for sale in such state or foreign
country; or (iii) such registration or qualification would be
impracticable for reasons of cost or otherwise.
Prior to the consummation of the Stock Offering, no Person shall offer to
transfer, or enter into any agreement or understanding to transfer the legal or
beneficial ownership of any subscription rights or shares of Common Stock,
except pursuant to this Plan.
EACH PERSON PURCHASING COMMON STOCK IN THE STOCK OFFERING WILL BE DEEMED TO
CONFIRM THAT SUCH PURCHASE DOES NOT CONFLICT WITH THE PURCHASE LIMITATIONS IN
THIS PLAN. ALL QUESTIONS CONCERNING WHETHER ANY PERSONS ARE ASSOCIATES OR A
GROUP ACTING IN CONCERT OR WHETHER ANY PURCHASE CONFLICTS WITH THE PURCHASE
LIMITATIONS IN THIS PLAN OR OTHERWISE VIOLATES ANY PROVISION OF THIS PLAN SHALL
BE DETERMINED BY THE BANK IN ITS SOLE DISCRETION. SUCH DETERMINATION SHALL BE
CONCLUSIVE, FINAL AND BINDING ON ALL PERSONS AND THE BANK MAY TAKE ANY REMEDIAL
ACTION, INCLUDING WITHOUT LIMITATION REJECTING THE PURCHASE OR REFERRING THE
MATTER TO THE DEPARTMENT FOR ACTION, AS IN ITS SOLE DISCRETION THE BANK MAY DEEM
APPROPRIATE.
15. Payment for Stock
All payments for Common Stock subscribed for or ordered in the Stock
Offering must be delivered in full to the Bank, together with a properly
completed and executed order form, or purchase order in the case of the
Syndicated Community Offering, on or prior to the expiration date specified on
the order form or purchase order, as the case may be, unless such date is
extended by the Bank; provided, that if the Employee Plans subscribe for shares
during the Subscription Offering, such plans will not be required to pay for the
shares at the time they subscribe but rather may pay for such shares of Common
Stock subscribed for by such plans at the Actual Subscription Price upon
consummation of the Stock Offering, provided that, in the case of the ESOP there
is in force from the time of its subscription until the consummation of the
Stock Offering, a loan commitment to lend to the ESOP, at such time, the
aggregated Actual Subscription Price of the shares for which it subscribed. The
Holding Company or the Bank may make scheduled discretionary contributions to an
Employee Plan provided such contributions from the Bank, if any, do not cause
the Bank to fail to meet its regulatory capital requirement.
Payment for Common Stock shall be made either by check or money order, or
if a purchaser has a Deposit Account in the Bank, such purchaser may pay for the
shares subscribed for by authorizing the Bank to make a withdrawal from the
purchaser's passbook, money market or certificate account at the Bank in an
amount equal to the purchase price of such shares. Such authorized withdrawal,
whether from a savings passbook or certificate account, shall be without penalty
as to premature withdrawal. If the authorized withdrawal is from a certificate
account, and the remaining balance does not meet the applicable minimum balance
requirements, the certificate shall be canceled at the time of withdrawal,
without penalty, and the remaining balance will earn interest at the passbook
rate. Funds for which a withdrawal is authorized will remain in the purchaser's
Deposit Account but may not be used by the purchaser until the Common Stock has
been sold or the 45-day period (or such longer period as may be approved by the
Commissioner) following the Stock Offering has expired, whichever occurs first.
Thereafter, the withdrawal will be given effect only to the extent necessary to
satisfy the subscription (to the extent it can be filled) at the purchase price
per share. Interest will continue to be earned on any amounts authorized
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<PAGE>
for withdrawal until such withdrawal is given effect. Interest will be paid by
the Bank at a rate established by the Bank on payment for Common Stock received
in cash or by check. Such interest will be paid from the date payment is
received by the Bank until consummation or termination of the Stock Offering. If
for any reason the Stock Offering is not consummated, all payments made by
subscribers in the Stock Offering will be refunded to them with interest. In
case of amounts authorized for withdrawal from Deposit Accounts, refunds will be
made by canceling the authorization for withdrawal.
16. Manner of Exercising Subscription Rights Through Order Forms
As soon as practicable after the prospectus prepared by the Holding Company
and the Bank has been declared effective by the Department and the SEC, copies
of the prospectus and order forms will be distributed to all Eligible Account
Holders and Supplemental Eligible Account Holders at their last known addresses
appearing on the records of the Bank for the purpose of subscribing for shares
of Common Stock in the Subscription Offering and will be made available for use
by those Persons entitled to purchase in the Direct Community Offering.
Each order form will be preceded or accompanied by the prospectus
describing the Holding Company, the Bank, the Common Stock and the Subscription
and Community Offerings. Each order form will contain, among other things, the
following:
A. A specified date by which all order forms must be received by the
Bank, which date shall be not less than 20, nor more than 45 days,
following the date on which the order forms are mailed by the Bank,
and which date will constitute the termination of the Subscription
Offering;
B. The purchase price per share for shares of Common Stock to be sold in
the Subscription and Community Offerings;
C. A description of the minimum and maximum number of shares of Common
Stock that may be subscribed for pursuant to the exercise of
Subscription Rights or otherwise purchased in the Community Offering;
D. Instructions as to how the recipient of the order form is to indicate
thereon the number of shares of Common Stock for which such Person
elects to subscribe and the available alternative methods of payment
therefor;
E. An acknowledgment that the recipient of the order form has received a
final copy of the prospectus prior to execution of the order form;
F. A statement indicating the consequences of failing to properly
complete and return the order form, including a statement to the
effect that all subscription rights are nontransferable, will be void
at the end of the Subscription Offering, and can only be exercised by
delivering to the Bank within the subscription period such properly
completed and executed order form, together with cash (if delivered in
person), check or money order in the full amount of the purchase price
as specified in the order form for the shares of Common Stock for
which the recipient elects to subscribe in the Subscription Offering
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(or by authorizing on the order form that the Bank withdraw said
amount from the subscriber's Deposit Account at the Bank); and
G. A statement to the effect that the executed order form, once received
by the Bank, may not be modified or amended by the subscriber without
the consent of the Bank.
Notwithstanding the above, the Bank and the Holding Company reserve the
right in their sole discretion to accept or reject orders received on
photocopied or facsimilied order forms.
17. Undelivered, Defective or Late Order Form; Insufficient Payment
In the event order forms (a) are not delivered and are returned to the Bank
by the United States Postal Service or the Bank is unable to locate the
addressee, (b) are not received back by the Bank or are received by the Bank
after the expiration date specified thereon, (c) are defectively filled out or
executed, (d) are not accompanied by the full required payment for the shares of
Common Stock subscribed for (including cases in which Deposit Accounts from
which withdrawals are authorized are insufficient to cover the amount of the
required payment), or (e) are not mailed pursuant to a "no mail" order placed
in effect by the account holder, the subscription rights of the Person to whom
such rights have been granted will lapse as though such Person failed to return
the order form within the time period specified thereon; provided, that the Bank
may, but will not be required to, waive any immaterial irregularity on any order
form or require the submission of corrected order forms or the remittance of
full payment for subscribed shares by such date as the Bank may specify. The
interpretation by the Bank of terms and conditions of this Plan and of the order
forms will be final, subject to the authority of the Department and the FDIC.
18. Completion of the Stock Offering
The Stock Offering will be terminated if not completed within 90 days from
the date of approval by the Superintendent, unless an extension is approved by
the Superintendent.
19. Market for Common Stock
If at the close of the Stock Offering the Holding Company has more than 100
shareholders of any class of stock, the Holding Company shall use its best
efforts to:
(i) encourage and assist a market maker to establish and maintain a
market for that class of stock; and
(ii) list that class of stock on a national or regional securities
exchange, or on the Nasdaq system.
20. Stock Purchases by Management Persons After the Stock Offering
For a period of three years after the proposed Stock Offering, no
Management Person or his or her Associates may purchase, without the prior
written approval of the Superintendent, any Common Stock of the Holding Company,
except from a broker-dealer registered with the SEC. The foregoing shall not
apply to purchases of stock made by and held by any Tax-Qualified or Non-Tax
Qualified Employee Plan
21
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of the Stock Bank or the Holding Company even if such stock is attributable to
Management Persons or their Associates.
21. Resales of Stock by Management Persons
Common Stock purchased by Management Persons and their Associates in the
Stock Offering may not be resold for a period of at least one year following the
date of purchase, except in the case of death of the Management Person or
Associate.
22. Stock Certificates
Each stock certificate shall bear a legend giving appropriate notice of the
restrictions set forth in Sections 20 and 21 above. Appropriate instructions
shall be issued to the Holding Company's transfer agent with respect to
applicable restrictions on transfers of such stock. Any shares of stock issued
as a stock dividend, stock split or otherwise with respect to such restricted
stock, shall be subject to the same restrictions as apply to the restricted
stock.
23. Restriction on Financing Stock Purchases
The Holding Company will not knowingly offer or sell any of the Common
Stock proposed to be issued to any person whose purchase would be financed by
funds loaned to the person by the Holding Company, the Bank or any of their
Affiliates.
24. Stock Benefit Plans
The Board of Directors of the Stock Bank and/or the Holding Company intend
to adopt for the benefit of employees, officers and directors of the Stock Bank,
one or more stock benefit plans, including an ESOP, stock award plans and stock
option plans, which will be authorized to purchase Common Stock and grant
options for Common Stock. However, only the Tax-Qualified Employee Plans will
be permitted to purchase Common Stock in the Stock Offering subject to the
purchase priorities set forth in this Plan. Subject to the approval of the
Superintendent and the FDIC, the Board of Directors of the Bank intends to
establish the ESOP and authorize the ESOP and any other Tax-Qualified Employee
Plans to purchase in the aggregate up to 10% of the Common Stock issued in the
Stock Offering. The Stock Bank or the Holding Company may make scheduled
discretionary contributions to one or more Tax-Qualified Employee Plans to
purchase Common Stock issued in the Stock Offering or to purchase issued and
outstanding shares of Common Stock or authorized but unissued shares of Common
Stock subsequent to the completion of the Stock Offering, provided such
contributions do not cause the Stock Bank to fail to meet any of its regulatory
capital requirements. This Plan shall specifically authorize the grant and
issuance by the Holding Company of (i) awards of Common Stock after the Stock
Offering pursuant to one or more stock recognition and award plans (the
"Recognition Plans") in an amount equal to up to 4% of the number of shares of
Common Stock issued in the Stock Offering, (ii) options to purchase a number of
shares of Common Stock in an amount equal to up to 10% of the number of shares
of Common Stock issued in the Stock Offering and shares of Common Stock issuable
upon exercise of such options, and (iii) Common Stock to one or more Tax
Qualified Employee Plans, including the ESOP, at the closing of the Stock
Offering or at any time thereafter, in an amount equal to up to 10% of the
number of shares of Common Stock issued in the Stock Offering. Shares awarded
to the Tax Qualified Employee Plans or pursuant to the Recognition Plans, and
shares issued upon exercise of options may be authorized but unissued shares
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of the Holding Company's Common Stock, or shares of Common Stock purchased by
the Holding Company or such plans in the open market. Any Recognition Plan or
stock option plan will be subject to stockholder approval.
25. Post-Reorganization Filing and Market Making
It is likely that there will be a limited market for the Common Stock sold
in the Stock Offering, and purchasers must be prepared to hold the Common Stock
for an indefinite period of time. If the Holding Company has more than 35
stockholders of any class of stock, the Holding Company shall register its
Common Stock with the SEC pursuant to the Exchange Act, and shall undertake not
to deregister such Common Stock for a period of three years thereafter.
26. Liquidation Account
The Stock Bank or the Holding Company shall establish at the completion of
the Reorganization a Liquidation Account in an amount equal to its net worth
(determined in accordance with generally accepted accounting principles) as set
forth in the latest statement of financial condition contained in the proxy
statement used in connection with obtaining approval of the Reorganization. The
Liquidation Account will be maintained by the Stock Bank and/or the Stock
Holding Company for the benefit of the Eligible Account Holders and Supplemental
Eligible Account Holders who continue to maintain Deposit Accounts with the
Stock Bank following the Reorganization. Each Eligible Account Holder and
Supplemental Eligible Account Holder shall, with respect to each Deposit
Account, hold a related inchoate interest in a portion of the Liquidation
Account balance, in relation to each Deposit Account balance at the Eligibility
Record Date or Supplemental Eligibility Record Date, as the case may be, or to
such balance as it may be subsequently reduced, as hereinafter provided. The
initial Liquidation Account balance shall not be increased, and shall be subject
to downward adjustment to the extent of any downward adjustment of any
subaccount balance of any Eligible Account Holder or Supplemental Eligible
Account Holder in accordance with Section 86.4(f)(5) of the Regulations.
In the unlikely event of a complete liquidation of the Stock Bank and the
Holding Company (and only in such event), following all liquidation payments to
creditors (including those to depositors to the extent of their Deposit
Accounts) each Eligible Account Holder and Supplemental Eligible Account Holder
shall be entitled to receive a liquidating distribution from the Liquidation
Account, in the amount of the then-adjusted subaccount balance for his Deposit
Account then held, before any liquidation distribution may be made to any
holders of the Stock Bank's capital stock. No Conversion Transaction and no
merger, consolidation, purchase of bulk assets with assumption of Deposit
Accounts and other liabilities, or similar transactions with an FDIC-insured
institution, in which the Stock Bank or the Holding Company is not the surviving
institution, shall be deemed to be a complete liquidation for this purpose. In
such transactions, the Liquidation Account shall be assumed by the surviving
institution.
The initial subaccount balance for a Deposit Account held by an Eligible
Account Holder or Supplemental Eligible Account Holder shall be determined by
multiplying the opening balance in the Liquidation Account by a fraction, the
numerator of which is the amount of such Eligible Account Holder's or
Supplemental Eligible Account Holder's Qualifying Deposit and the denominator of
which is the total amount of all Qualifying Deposits of all Eligible Account
Holders and Supplemental Eligible Account Holders in the Stock Bank. Such
initial subaccount balance shall not be increased, but shall be subject to
downward adjustment as described below.
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If, at the close of business on the last day of any period for which the
Stock Bank or the Holding Company, as the case may be, has prepared audited
financial statements subsequent to the effective date of the Reorganization, the
deposit balance in the Deposit Account of an Eligible Account Holder or
Supplemental Eligible Account Holder is less than the lesser of (i) the balance
in the Deposit Account at the close of business on the last day of any period
for which the Stock Bank or the Holding Company, as the case may be, has
prepared audited financial statements subsequent to the Eligibility Record Date
or Supplemental Eligibility Record Date, or (ii) the amount in such Deposit
Account as of the Eligibility Record Date or Supplemental Eligibility Record
Date, the subaccount balance for such Deposit Account shall be adjusted by
reducing such subaccount balance in an amount proportionate to the reduction in
such deposit balance. In the event of such downward adjustment, the subaccount
balance shall not be subsequently increased, notwithstanding any subsequent
increase in the deposit balance of the related Deposit Account. If any such
Deposit Account is closed, the related subaccount shall be reduced to zero. For
purposes of this Section and Section 86.4(f)(5) of the Regulations, a time
account shall be deemed to be closed upon its maturity date regardless of any
renewal thereof. A distribution of each subaccount balance may be made only in
the event of a complete liquidation of the Stock Bank and the Holding Company
subsequent to the Reorganization and only out of funds available for such
purpose after payment of all creditors.
Neither the Stock Bank nor the Holding Company shall be required to set
aside funds for the purpose of establishing the Liquidation Account, and the
creation and maintenance of the Liquidation Account shall not operate to
restrict the use or application of any of the net worth accounts of the Stock
Bank or the Stock Holding Company, except that neither the Stock Bank nor the
Holding Company shall declare or pay a cash dividend on, or repurchase any of,
its capital stock if the effect thereof would cause its net worth to be reduced
below the amount required for the Liquidation Account.
27. Employment and Other Severance Agreements
Following or contemporaneously with the Reorganization, the Stock Bank
and/or the Holding Company may enter into employment and/or severance
arrangements with one or more executive officers of the Stock Bank and/or the
Holding Company. It is anticipated that any employment contracts entered into
by the Stock Bank and/or the Holding Company will be for terms not exceeding
three years and that such contracts will provide for annual renewals of the term
of the contracts, subject to approval by the Board of Directors. The Stock Bank
and/or the Holding Company also may enter into severance arrangements with one
or more executive officers which provide for the payment of severance
compensation in the event of a change in control of the Stock Bank and/or the
Holding Company. The terms of such employment and severance arrangements have
not been determined as of this time, but will be described in any prospectus
circulated in connection with the Stock Offering and will be subject to and
comply with all regulations of the Banking Board.
28. Payment of Dividends and Repurchase of Stock
The Holding Company may not declare or pay a cash dividend on, or
repurchase any of, its Common Stock if the effect thereof would cause its
regulatory capital or the regulatory capital of the Bank to be reduced below the
amount required (i) to maintain the Liquidation Account or (ii) under FDIC rules
and regulations. Otherwise, the Holding Company may declare dividends or make
other capital distributions in accordance with applicable laws and regulations.
Subject to any applicable regulatory approvals the MHC may waive its right to
receive dividends declared by the Holding Company.
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<PAGE>
29. Establishment and Funding of Charitable Foundation
As part of the Reorganization, the Holding Company and the Bank intend to
establish a charitable foundation that will qualify as an exempt organization
under Section 501(c)(3) of the Internal Revenue Code (the "Charitable
Foundation") or a charitable trust that will not so qualify but that is intended
to be a grantor trust under Sections 671-679 of the Internal Revenue Code (the
"Charitable Trust"), and to donate to the Charitable Foundation or Charitable
Trust cash, securities, or Common Stock in an amount up to 5% of the number of
shares of Common Stock sold in the Stock Offering. The Charitable Foundation or
Charitable Trust is being formed in connection with the Reorganization in order
to complement the Bank's existing community reinvestment activities and to share
with the Bank's local community a part of the Bank's financial success as a
locally headquartered, community-oriented, financial services institution. The
Charitable Foundation will be dedicated to, and the Charitable Trust will be
primarily dedicated to, the promotion of charitable purposes including community
development, grants or donations to support housing assistance, not-for-profit
community groups and other types of organizations or civic-minded projects. It
is expected that the Charitable Foundation will annually distribute total grants
to assist charitable organizations or to fund projects within its local
community of not less than 5% of the average fair value of Charitable Foundation
assets each year. The Charitable Trust, if established, is not required to
distribute a specific percentage of its assets annually towards any charitable
purpose. In order to serve the purposes for which it was formed and maintain
its Section 501(c)(3) qualification, the Charitable Foundation may sell, on an
annual basis, a limited portion of any securities contributed to it by the
Holding Company.
The board of directors of the Charitable Foundation or the trustees of the
Charitable Trust will be comprised of individuals who are officers or trustees
of the Bank. The board of directors of the Charitable Foundation or the
trustees of the Charitable Trust will be responsible for establishing the
policies of the Charitable Foundation or Charitable Trust with respect to grants
or donations, consistent with the stated purposes of the Charitable Foundation
or Charitable Trust, respectively. The establishment and funding of the
Charitable Foundation or Charitable Trust as part of the Reorganization is
subject to the approval of the Superintendent and, if applicable, the FDIC.
30. Interpretation
All interpretations of this Plan and application of its provisions to
particular circumstances by a majority of the Board of Trustees of the Bank
shall be final, subject to the authority of the Superintendent.
31. Reorganization and Stock Offering Expenses
The Regulations require that the expenses of any Stock Offering must be
reasonable. The Bank will use its best efforts to assure that the expenses
incurred by the Bank and the Holding Company in effecting the Reorganization and
the Stock Offering will be reasonable.
32. Amendment or Termination of the Plan
If necessary or desirable, the terms of the Plan may be substantially
amended by a majority vote of the Bank's Board of Trustees as a result of
comments from regulatory authorities or otherwise, at any time prior to
submission of the Plan and proxy materials to the Voting Depositors. At any
time after submission of the Plan and proxy materials to the Voting Depositors,
the terms of the Plan that relate to the Reorganization may be amended by a
majority vote of the Board of Trustees only with the concurrence
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<PAGE>
of the Superintendent. Terms of the Plan relating to the Stock Offering
including, without limitation, Sections 10 through 31, may be amended by a
majority vote of the Bank's Board of Trustees as a result of comments from
regulatory authorities or otherwise at any time prior to the approval of the
Plan by the Superintendent and at any time thereafter with the concurrence of
the Superintendent. The Plan may be terminated by a majority vote of the Board
of Trustees at any time prior to the earlier of approval of the Plan by the
Superintendent and the date of the Special Meeting, and may be terminated by a
majority vote of the Board of Trustees at any time thereafter with the
concurrence of the Superintendent. In its discretion, the Board of Trustees may
modify or terminate the Plan upon the order of the regulatory authorities
without a resolicitation of proxies or another meeting of the Voting Depositors;
however, any material amendment of the terms of the Plan that relate to the
Reorganization which occur after the Special Meeting shall require a
resolicitation of Voting Depositors.
The Plan shall be terminated if the Reorganization is not completed within
24 months from the date upon which the Voting Depositors of the Bank approve the
Plan, and may not be extended by the Bank or the Superintendent.
Dated: September 15, 1997 and amended on November 16, 1997.
26
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Exhibit B
CERTIFICATE OF INCORPORATION
OF
NIAGARA BANCORP, INC
Article 1. Corporate Title. The name of the Corporation is Niagara
Bancorp, Inc (hereinafter referred to as (the "Corporation").
Article 2. Registered Office. The address of the registered office of the
Corporation in the State of Delaware is Corporation Trust Center, 1209 Orange
Street, in the City of Wilmington, County of New Castle. The name of the
registered agent at that address is The Corporation Trust Company.
Article 3. Purpose. The purpose of the Corporation is to engage in any
lawful act or activity for which a corporation may be organized under the
General Corporation Law of Delaware.
Article 4. Capital Stock.
A. The total number of shares of all classes of stock which the
Corporation shall have authority to issue is twenty-four million (24,000,000)
consisting of:
1. Five million (5,000,000) shares of Preferred Stock, par value one
cent ($.01) per share (the "Preferred Stock"); and
2. Forty-five million (45,000,000) shares of Common Stock, par value
one cent ($.01) per share (the "Common Stock").
B. The Board of Directors is authorized, subject to any limitations
prescribed by law, to provide for the issuance of the shares of Preferred Stock
in series, and by filing a certificate pursuant to the applicable law of the
State of Delaware (such certificate being hereinafter referred to as a
"Preferred Stock Designation"), to establish from time to time the number of
shares to be included in each such series, and to fix the designation, powers,
preferences, and rights of the shares of each such series and any
qualifications, limitations or restrictions thereof. The number of authorized
shares of Preferred Stock may be increased or decreased (but not below the
number of shares thereof then outstanding) by the affirmative vote of the
holders of a majority of the Common Stock, without a vote of the holders of the
Preferred Stock, or of any series thereof, unless a vote of any such holders is
required pursuant to the terms of any Preferred Stock Designation.
C. 1. Notwithstanding any other provision of this Certificate of
Incorporation, in no event shall any record owner of any outstanding Common
Stock which is beneficially owned, directly or indirectly, by a person who, as
of any record date for the determination of stockholders entitled to vote on any
matter, beneficially owns in excess of 5% 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
<PAGE>
the Limit, except that such restriction and all restrictions set forth in this
subsection "C"shall not apply to Niagara Bancorp MHC (the "Mutual Holding
Company"), or any tax qualified employee stock benefit plan established by the
Corporation, which shall be able to vote in respect to shares held in excess of
the Limit. The number of votes which may be cast by any record owner by virtue
of the provisions hereof in respect of Common Stock beneficially owned by such
person owning shares in excess of the Limit shall be a number equal to the total
number of votes which a single record owner of all Common Stock owned by such
person would be entitled to cast, multiplied by a fraction, the numerator of
which is the number of shares of such class or series which are both
beneficially owned by such person and owned of record by such record owner and
the denominator of which is the total number of shares of Common Stock
beneficially owned by such person owning shares in excess of the Limit.
2. The following definitions shall apply to this Section C of this
Article 4:
(a) "Affiliate" shall have the meaning ascribed to it in Rule 12b-2
of the General Rules and Regulations under the Securities
Exchange Act of 1934, as in effect on the date of filing of this
Certificate of Incorporation.
(b) "Beneficial ownership" shall be determined pursuant to Rule 13d-3
of the General Rules and Regulations under the Securities
Exchange Act of 1934 (or any successor rule or statutory
provision), or, if said Rule 13d-3 shall be rescinded and there
shall be no successor rule or statutory provision thereto,
pursuant to said Rule 13d-3 as in effect on the date of filing of
this Certificate of Incorporation; provided, however, that a
person shall, in any event, also be deemed the "beneficial owner"
of any Common Stock:
(1) which such person or any of its affiliates beneficially
owns, directly or indirectly; or
(2) which such person or any of its affiliates has (i) the right
to acquire (whether such right is exercisable immediately or
only after the passage of time), pursuant to any agreement,
arrangement or understanding (but shall not be deemed to be
the beneficial owner of any voting shares solely by reason
of an agreement, contract, or other arrangement with this
Corporation to effect any transaction which is described in
any one or more clauses of Section A of Article 8) or upon
the exercise of conversion rights, exchange rights,
warrants, or options or otherwise, or (ii) sole or shared
voting or investment power with respect thereto pursuant to
any agreement, arrangement, understanding, relationship or
otherwise (but shall not be deemed to be the beneficial
owner of any voting shares solely by reason of a revocable
proxy granted for a particular meeting of stockholders,
pursuant to a public solicitation of proxies for such
meeting, with respect to shares of which neither such person
nor any such affiliate is otherwise deemed the beneficial
owner); or
2
<PAGE>
(3) which are beneficially owned, directly or indirectly, by any
other person with which such first mentioned person or any
of its affiliates acts as a partnership, limited
partnership, syndicate or other group pursuant to any
agreement, arrangement or understanding for the purpose of
acquiring, holding, voting or disposing of any shares of
capital stock of this Corporation; and provided further,
however, that (1) no Director or Officer of this Corporation
(or any affiliate of any such Director or Officer) shall,
solely by reason of any or all of such Directors or Officers
acting in their capacities as such, be deemed, for any
purposes hereof, to beneficially own any Common Stock
beneficially owned by another such Director or Officer (or
any affiliate thereof), and (2) neither any employee stock
ownership plan or similar plan of this Corporation or any
subsidiary of this Corporation, nor any trustee with respect
thereto or any affiliate of such trustee (solely by reason
of such capacity of such trustee), shall be deemed, for any
purposes hereof, to beneficially own any Common Stock held
under any such plan. For purposes of computing the
percentage beneficial ownership of Common Stock of a person
the outstanding Common Stock shall include shares deemed
owned by such person, through application of this subsection
but shall not include any other Common Stock which may be
issuable by this Corporation pursuant to any agreement, or
upon exercise of conversion rights, warrants or options, or
otherwise. For all other purposes, the outstanding Common
Stock shall include only Common Stock then outstanding and
shall not include any Common Stock which may be issuable by
this Corporation pursuant to any agreement, or upon the
exercise of conversion rights, warrants or options, or
otherwise.
(c) A "person" shall include an individual, firm, a group acting
in concert, a corporation, a partnership, an association, a
joint venture, a pool, a joint stock company, a trust, an
unincorporated organization or similar company, a syndicate
or any other group formed for the purpose of acquiring,
holding or disposing of securities or any other entity.
3. The Board of Directors shall have the power to construe and
apply the provisions of this section and to make all determinations necessary or
desirable to implement such provisions, including but not limited to matters
with respect to (i) the number of shares of Common Stock beneficially owned by
any person, (ii) whether a person is an affiliate of another, (iii) whether a
person has an agreement, arrangement, or understanding with another as to the
matters referred to in the definition of beneficial ownership, (iv) the
application of any other definition or operative provision of the section to the
given facts, or (v) any other matter relating to the applicability or effect of
this section.
4. The Board of Directors shall have the right to demand that any
person who is reasonably believed to beneficially own Common Stock in excess of
the Limit (or holds of record Common Stock beneficially owned by any person in
excess of the Limit) supply the Corporation
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<PAGE>
with complete information as to (i) the record owner(s) of all shares
beneficially owned by such person who is reasonably believed to own shares in
excess of the Limit, (ii) any other factual matter relating to the applicability
or effect of this section as may reasonably be requested of such person.
5. Except as otherwise provided by law or expressly provided in this
section, the presence, in person or by proxy, of the holders of record of shares
of capital stock of the Corporation entitling the holders thereof to cast a
majority of the votes (after giving effect, if required, to the provisions of
this section) entitled to be cast by the holders of shares of capital stock of
the Corporation entitled to vote shall constitute a quorum at all meetings of
the stockholders, and every reference in this Certificate of Incorporation to a
majority or other proportion of capital stock (or the holders thereof) for
purposes of determining any quorum requirement or any requirement for
stockholder consent or approval shall be deemed to refer to such majority or
other proportion of the votes (or the holders thereof) then entitled to be cast
in respect of such capital stock, after giving effect to the provisions of this
section.
6. Any constructions, applications, or determinations made by the Board
of Directors pursuant to this section in good faith and on the basis of such
information and assistance as was then reasonably available for such purpose
shall be conclusive and binding upon the Corporation and its stockholders.
7. In the event that any provision (or portion thereof) of this section
shall be found to be invalid, prohibited or unenforceable for any reason, the
remaining provisions (or portions thereof) of this section shall remain in full
force and effect, and shall be construed as if such invalid, prohibited or
unenforceable provision had been stricken herefrom or otherwise rendered
inapplicable, it being the intent of this Corporation and its stockholders that
such remaining provision (or portion thereof) of this section remain, to the
fullest extent permitted by law, applicable and enforceable as to all
stockholders, including stockholders owning an amount of stock over the Limit,
notwithstanding any such finding.
Article 5. Management of Corporation. The following provisions are
inserted for the management of the business and the conduct of the affairs of
the Corporation, and for further definition, limitation and regulation of the
powers of the Corporation and of its Directors and stockholders:
A. The business and affairs of the Corporation shall be managed by or
under the direction of the Board of Directors. In addition to the powers and
authority expressly conferred upon them by statute or by this Certificate of
Incorporation or the Bylaws of the Corporation, the Directors are hereby
empowered to exercise all such powers and do all such acts and things as may be
exercised or done by the Corporation.
B. The Directors of the Corporation need not be elected by written ballot
unless the Bylaws so provide.
4
<PAGE>
C. Any action required or permitted to be taken by the stockholders of
the Corporation must be effected at a duly called annual or special meeting of
stockholders of the Corporation and may be effected by the unanimous consent in
writing by such stockholders.
D. Special meetings of stockholders of the Corporation may be called only
by the Board of Directors pursuant to a resolution adopted by a majority of the
total number of Directors the Corporation would have if there were no vacancies
on the Board of Directors (the "Whole Board") or as otherwise provided in the
Bylaws.
Article 6. Directors
A. The number of Directors shall be fixed from time to time exclusively
by the Board of Directors pursuant to a resolution adopted by a majority of the
Whole Board. The Directors shall be divided into three classes, with the term of
office of the first class to expire at the first annual meeting of stockholders,
the term of office of the second class to expire at the annual meeting of
stockholders one year thereafter, and the term of office of the third class to
expire at the annual meeting of stockholders two years thereafter. At each
annual meeting of stockholders following such initial classification and
election, Directors elected to succeed those Directors whose terms expire shall
be elected for a term of office to expire at the third succeeding annual meeting
of stockholders after their election.
B. Subject to the rights of the holders of any series of Preferred Stock
then outstanding, newly created directorships resulting from any increase in the
authorized number of Directors or any vacancies in the Board of Directors
resulting from death, resignation, retirement, disqualification, removal from
office or other cause may be filled only by a majority vote of the Directors
then in office, though less than a quorum, and Directors so chosen shall hold
office for a term expiring at the annual meeting of stockholders at which the
term of office of the class to which they have been chosen expires. No decrease
in the number of Directors constituting the Board of Directors shall shorten the
term of any incumbent Director.
C. Advance notice of stockholder nominations for the election of
Directors and of business to be brought by stockholders before any meeting of
the stockholders of the Corporation shall be given in the manner provided in the
Bylaws of the Corporation.
D. Subject to the rights of the holders of any series of Preferred Stock
then outstanding, any Director, or the entire Board of Directors, may be removed
from office at any time, but only for cause and only by the affirmative vote of
the holders of at least 80% of the voting power of all of the then-outstanding
shares of capital stock of the Corporation entitled to vote generally in the
election of Directors (after giving effect to the provisions of Article 4 of
this Certificate of Incorporation ("Article 4")), voting together as a single
class.
Article 7. Bylaws. The Board of Directors is expressly empowered to adopt,
amend or repeal the Bylaws of the Corporation. Any adoption, amendment or repeal
of the Bylaws of the
5
<PAGE>
Corporation by the Board of Directors shall require the approval of a majority
of the Whole Board. The stockholders shall also have power to adopt, amend or
repeal the Bylaws of the Corporation; provided, however, that, in addition to
any vote of the holders of any class or series of stock of the Corporation
required by law or by this Certificate of Incorporation, the affirmative vote of
the holders of at least 80% of the voting power of all of the then-outstanding
shares of the capital stock of the Corporation entitled to vote generally in the
election of Directors (after giving effect to the provisions of Article 4),
voting together as a single class, shall be required to adopt, amend or repeal
any provisions of the Bylaws of the Corporation.
Article 8. Evaluation of Offers. The Board of Directors of the
Corporation, when evaluating any offer of another Person (as defined in Article
4 hereof) to (A) make a tender or exchange offer for any equity security of the
Corporation, (B) merge or consolidate the Corporation with another corporation
or entity or (C) purchase or otherwise acquire all or substantially all of the
properties and assets of the Corporation, may, in connection with the exercise
of its judgment in determining what is in the best interest of the Corporation
and its stockholders, give due consideration to all relevant factors, including,
without limitation, the social and economic effect of acceptance of such offer
on the Corporation's present and future customers and employees and those of its
subsidiaries; on the communities in which the Corporation and its subsidiaries
operate or are located; on the ability of the Corporation to fulfill its
corporate objectives as a savings bank holding company; and on the ability of
its subsidiary savings bank to fulfill the objectives of a stock savings bank
under applicable statutes and regulations.
Article 9. Indemnification.
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.
6
<PAGE>
B. The right to indemnification conferred in Section A of this Article 9
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, if required under the Delaware
General Corporation Law, that an advancement of expenses incurred by an
indemnitee in his or her capacity as a Director of Officer (and not in any other
capacity in which service was or is rendered by such indemnitee, including,
without limitation, service to an employee benefit plan) shall be made only upon
delivery to the Corporation of an undertaking (hereinafter an "undertaking"), by
or on behalf of such indemnitee, to repay all amounts so advanced if it shall
ultimately be determined by final judicial decision from which there is no
further right to appeal (hereinafter a "final adjudication") that such
indemnitee is not entitled to be indemnified for such expenses under this
Section or otherwise. The rights to indemnification and to the advancement of
expenses conferred in Sections A and B of this Article 9 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 9 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 9 or otherwise, shall be on the Corporation.
D. The rights to indemnification and to the advancement of expenses
conferred in this Article 9 shall not be exclusive of any other right which any
person may have or hereafter acquire
7
<PAGE>
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 9 with respect to the indemnification and
advancement of expenses of Directors and Officers of the Corporation.
Article 10. Limitation of Liability. A Director of this Corporation shall
not be personally liable to the Corporation or its stockholders for monetary
damages for breach of fiduciary duty as a Director, except for liability (i) for
any breach of the Director's duty of loyalty to the Corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174 of
the Delaware General Corporation Law, or (iv) for any transaction from which the
Director derived an improper personal benefit. If the Delaware General
Corporation Law is amended to authorize corporate action further eliminating or
limiting the personal liability of Directors, then the liability of a Director
of the Corporation shall be eliminated or limited to the fullest extent
permitted by the Delaware General Corporation Law, as so amended.
Any repeal or modification of the foregoing paragraph by the stockholders
of the Corporation shall not adversely affect any right or protection of a
Director of the Corporation existing at the time of such repeal or modification.
Article 11. Mutual Holding Company. At all times so long as the Mutual
Holding Company shall be in existence the Mutual Holding Company shall own at
least a majority of the Voting Stock of this Corporation and the Corporation
shall not be authorized to issue any shares of Voting Stock or take any action
while the Mutual Holding Company is in existence if after such issuance or
action the Mutual Holding Company shall own less than the majority of the
Corporation's Voting Stock. For these purposes, "Voting Stock" means common
stock or preferred stock, or similar interests if the shares by statute, charter
or in any manner, entitle the holder: (i) to vote for or to select Directors of
the Corporation; and (ii) to vote on or to direct the conduct of the operations
or other significant policies of the Corporation. Notwithstanding anything in
the preceding sentence, preferred stock is not "Voting Stock" if: (i) voting
rights associated with the preferred stock are limited solely to the type
customarily provided by statute with regard to matters that would significantly
and adversely affect the rights or preferences of the preferred stock, such as
the issuance of additional amounts or classes of senior securities, the
modification of the terms of the preferred stock, the dissolution of the
Corporation, or the payment of dividends by the
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<PAGE>
Corporation when preferred dividends are in arrears; (ii) the preferred stock
represents an essentially passive investment or financing device and does not
otherwise provide the holder with control over the Corporation; and (iii) the
preferred stock does not at the time entitle the holder, by statute, charter, or
otherwise, to select or to vote for the selection of Directors of the
Corporation. Notwithstanding anything in the preceding two sentences, "Voting
Stock" shall be deemed to include preferred stock and other securities that,
upon transfer or otherwise, are convertible into Voting Stock or exercisable to
acquire Voting Stock where the holder of the stock, convertible security or
right to acquire Voting Stock has the preponderant economic risk in the
underlying Voting Stock. Securities immediately convertible into Voting Stock at
the option of the holder without payment of additional consideration shall be
deemed to constitute the Voting Stock into which they are convertible; other
convertible securities and rights to acquire Voting Stock shall not be deemed to
vest the holder with the preponderant economic risk in the underlying Voting
Stock if the holder has paid less than 50% of the consideration required to
directly acquire the Voting Stock and has no other economic interest in the
underlying Voting Stock.
Article 12. Conversion of Mutual Holding Company. The Mutual Holding
Company may elect to convert to stock form in accordance with applicable law and
regulation (a "Conversion Transaction"). In a Conversion Transaction, the
Mutual Holding Company will merge with and into Lockport Savings Bank (the
"Bank") or the Corporation (or an affiliate of either), with the Bank or the
Corporation, respectively, as the resulting entity, and the depositors of the
Bank will receive the right to subscribe for a number of shares of common stock
of the Corporation, as determined by the formula set forth in the following
paragraphs. The additional shares of Common Stock of the Corporation issued in
the Conversion Transaction shall be sold at their aggregate pro forma market
value. In the event that the Mutual Holding Company merges into the
Corporation, a liquidation account may be established and maintained in the
Corporation.
In any Conversion Transaction, stockholders of the Corporation other than
the Mutual Holding Company ("Minority Stockholders"), if any, will be entitled
to maintain the same percentage ownership interest in the Corporation after the
Conversion Transaction as their ownership interest in the Corporation
immediately prior to the Conversion Transaction (i.e., the "Minority Ownership
Interest"), subject only to adjustment (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 Corporation).
The adjustment referred to in clause (i) above would require that the
Minority Ownership Interest be adjusted by multiplying the Minority Ownership
Interest by a fraction, the numerator of which is equal to the Corporation's
stockholders' equity at the time of the Conversion Transaction less the
aggregate amount of dividends waived by the Mutual Holding Company, and the
denominator of which is equal to the Corporation's stockholders' equity at the
time of the Conversion Transaction.
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<PAGE>
The adjustment referred to in clause (ii) above would further adjust the
Minority Ownership Interest by multiplying it by a fraction, the numerator of
which is equal to the pro forma market value of the Corporation less the market
value of assets of the Mutual Holding Company other than Corporation Common
Stock, and the denominator of which is equal to the pro forma market value of
the Corporation.
At the sole discretion of the Board of Directors of the Mutual Holding
Company and the Corporation, a Conversion Transaction may be effected in any
other manner necessary to qualify the Conversion Transaction as a tax-free
reorganization under applicable federal and state tax laws, provided such
Conversion Transaction does not diminish the rights and ownership interest of
Minority Stockholders as set forth in the preceding paragraphs of this Section.
If a Conversion Transaction does not occur, the Mutual Holding Company will
always own a majority of the Voting Stock of the Corporation.
Article 13. Amendments. The Corporation reserves the right to amend or
repeal any provision contained in this Certificate of Incorporation in the
manner prescribed by the laws of the State of Delaware and all rights conferred
upon stockholders are granted subject to this reservation; provided, however,
that, notwithstanding any other provision of this Certificate of Incorporation
or any provision of law which might otherwise permit a lesser vote or no vote,
but in addition to any vote of the holders of any class or series of the stock
of the Corporation required by law or by this Certificate of Incorporation, the
affirmative vote of the holders of at least 80% of the voting power of all of
the then-outstanding shares of the capital stock of the Corporation entitled to
vote generally in the election of Directors (after giving effect to the
provisions of Article 4), voting together as a single class, shall be required
to amend or repeal this Article 13, Section C of Article 4, Sections C or D of
Article 5, Article 6, Article 7, Article 8 or Article 10.
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I, THE UNDERSIGNED, being the President and Chief Executive Officer of this
Corporation, do make, file and record this Certificate of Incorporation, do
certify that the facts herein stated are true, and accordingly, have hereto set
my hand this _____ day of _________, 1998.
-----------------------------------------
William E. Swan
ATTEST: President and Chief Executive Officer
- ----------------------------
- -----------------------
Corporate Secretary
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Exhibit B
BYLAWS
OF
NIAGARA BANCORP, INC
ARTICLE I - STOCKHOLDERS
Section 1. Annual Meeting. An annual meeting of the stockholders, for
--------- ---------------
the election of Directors to succeed those whose terms expire and for the
transaction of such other business as may properly come before the meeting,
shall be held at such place, on such date, and at such time as the Board of
Directors shall each year fix, which date shall be within thirteen (13) months
subsequent to the later of the date of incorporation or the last annual meeting
of stockholders.
Section 2. Special Meetings. Subject to the rights of the holders of any
--------- ----------------
class or series of preferred stock of the Corporation, special meetings of
stockholders of the Corporation may be called by the Board of Directors pursuant
to a resolution adopted by a majority of the total number of Directors which the
Corporation would have if there were no vacancies on the Board of Directors
(hereinafter the "Whole Board").
Section 3. Notice of Meetings. Written notice of the place, date, and
--------- ------------------
time of all meetings of the stockholders shall be given, not less than ten (10)
nor more than sixty (60) days before the date on which the meeting is to be
held, to each stockholder entitled to vote at such meeting, except as otherwise
provided herein or required by law (meaning, here and hereinafter, as required
from time to time by the Delaware General Corporation Law or the Certificate of
Incorporation of the Corporation).
When a meeting is adjourned to another place, date or time, written
notice need not be given of the adjourned meeting if the place, date and time
thereof are announced at the meeting at which the adjournment is taken;
provided, however, that if the date of any adjourned meeting is more than thirty
(30) days after the date for which the meeting was originally noticed, or if a
new record date is fixed for the adjourned meeting, written notice of the place,
date, and time of the adjourned meeting shall be given in conformity herewith.
At any adjourned meeting, any business may be transacted which might have been
transacted at the original meeting.
Section 4. Quorum. At any meeting of the stockholders, the holders of
--------- ------
a majority of all of the shares of the stock entitled to vote at the meeting,
present in person or by proxy (after giving effect to the Article 4 of the
Corporation's Certificate of Incorporation), shall constitute a quorum for all
purposes, unless or except to the extent that the presence of a larger number
may be required by law. Where a separate vote by a class or classes is
required, a majority of the shares of such class or classes present in person or
represented by proxy shall constitute a quorum entitled to take action with
respect to that vote on that matter.
<PAGE>
If a quorum shall fail to attend any meeting, the chairman of the meeting
or the holders of a majority of the shares of stock entitled to vote who are
present, in person or by proxy, may adjourn the meeting to another place, date,
or time.
If a notice of any adjourned special meeting of stockholders is sent to
all stockholders entitled to vote thereat, stating that it will be held with
those present constituting a quorum, then except as otherwise required by law,
those present at such adjourned meeting shall constitute a quorum, and all
matters shall be determined by a majority of the votes cast at such meeting.
Section 5. Organization. Such person as the Board of Directors may have
--------- -------------
designated or, in the absence of such a person, the Chairman of the Board of the
Corporation or, in his or her absence, the Chief Executive Officer or, in his or
her absence, such person as may be chosen by the holders of a majority of the
shares entitled to vote who are present, in person or by proxy, shall call to
order any meeting of the stockholders and act as chairman of the meeting. In
the absence of the Secretary of the Corporation, the secretary of the meeting
shall be such person as the chairman appoints.
Section 6. Conduct of Business. (a) The chairman of any meeting of
--------- ---------------------
stockholders shall determine the order of business and the procedure at the
meeting, including such regulation of the manner of voting and the conduct of
discussion as seem to him or her in order. The date and time of the opening and
closing of the polls for each matter upon which the stockholders will vote at
the meeting shall be announced at the meeting.
(b) At any annual meeting of the stockholders, only such business
shall be conducted as shall have been brought before the meeting: (i) by or at
the direction of the Board of Directors; or (ii) by any stockholder of the
Corporation who is entitled to vote with respect thereto and who complies with
the notice procedures set forth in this Section 6(b). For business to be
properly brought before an annual meeting by a stockholder, the business must
relate to a proper subject matter for stockholder action and the stockholder
must have given timely notice thereof in writing to the Secretary of the
Corporation. To be timely, a stockholder's notice must be delivered or mailed
to and received at the principal office of the Corporation not less than ninety
(90) days prior to the date of the annual meeting; provided, however, that in
the event that less than one hundred (100) days' notice or prior public
disclosure of the date of the meeting is given or made to stockholders, notice
by the stockholder to be timely must be received not later than the close of
business on the 10th day following the day on which such notice of the date of
the annual meeting was mailed or such public disclosure was made. A
stockholder's notice to the Secretary shall set forth as to each matter such
stockholder proposes to bring before the annual meeting: (i) a brief description
of the business desired to be brought before the annual meeting and the reasons
for conducting such business at the annual meeting; (ii) the name and address,
as they appear on the Corporation's books, of the stockholder proposing such
business; (iii) the class and number of shares of the Corporation's capital
stock that are beneficially owned by such stockholder; and (iv) any material
interest of such stockholder in such business. Notwithstanding anything in
these Bylaws to the contrary, no business shall be brought before or conducted
at an annual meeting except in
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<PAGE>
accordance with the provisions of this Section 6(b). The Officer of the
Corporation or other person presiding over the annual meeting shall, if the
facts so warrant, determine and declare to the meeting that business was not
properly brought before the meeting in accordance with the provisions of this
Section 6(b) and, if he or she should so determine, he or she shall so declare
to the meeting and any such business so determined to be not properly brought
before the meeting shall not be transacted.
At any special meeting of the stockholders, only such business shall be
conducted as shall have been brought before the meeting by or at the direction
of the Board of Directors.
(c) Only persons who are nominated in accordance with the procedures
set forth in these Bylaws shall be eligible for election as Directors.
Nominations of persons for election to the Board of Directors of the Corporation
may be made at a meeting of stockholders at which Directors are to be elected
only: (i) by or at the direction of the Board of Directors or; (ii) by any
stockholder of the Corporation entitled to vote for the election of Directors at
the meeting who complies with the notice procedures set forth in this Section
6(c). Such nominations, other than those made by or at the direction of the
Board of Directors, shall be made by timely notice in writing to the Secretary
of the Corporation. To be timely, a stockholder's notice shall be delivered or
mailed to and received at the principal office of the Corporation not less than
ninety (90) days prior to the date of the meeting; provided, however, that in
the event that less than one hundred (100) days' notice or prior disclosure of
the date of the meeting is given or made to stockholders, notice by the
stockholder to be timely must be so received not later than the close of
business on the 10th day following the day on which such notice of the date of
the meeting was mailed or such public disclosure was made. Such stockholder's
notice shall set forth: (i) as to each person whom such stockholder proposes to
nominate for election or re-election as a Director, all information relating to
such person that is required to be disclosed in solicitations of proxies for the
election of Directors, or is otherwise required, in each case pursuant to
Regulation 14A under the Securities Exchange Act of 1934 (including such
person's written consent to being named in the proxy statement as a nominee and
to serving as a Director if elected); and (ii) as to the stockholder giving
notice of nomination (x) the name and address, as they appear on the
Corporation's books, of such stockholder and (y) the class and number of shares
of the Corporation's capital stock that are beneficially owned by such
stockholder. At the request of the Board of Directors any person nominated by
the Board of Directors for election as a Director shall furnish to the Secretary
of the Corporation that information required to be set forth in a stockholder's
notice of nomination which pertains to the nominee. No person shall be eligible
for election as a Director of the Corporation unless nominated in accordance
with the provisions of this Section 6(c). The Officer of the Corporation or
other person presiding at the meeting shall, if the facts so warrant, determine
that a nomination was not made in accordance with such provisions and, if he or
she should so determine, he or she shall declare to the meeting and the
defective nomination shall be disregarded.
Section 7. Proxies and Voting. At any meeting of the stockholders, every
--------- ------------------
stockholder entitled to vote may vote in person or by proxy authorized by an
instrument in writing or by a transmission permitted by law filed in accordance
with the procedure established for the meeting. Any copy, facsimile
telecommunication or other reliable reproduction of the writing or transmission
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<PAGE>
created pursuant to this paragraph may be substituted or used in lieu of the
original writing or transmission for any and all purposes for which the original
writing or transmission could be used, provided that such copy, facsimile
telecommunication or other reproduction shall be a complete reproduction of the
entire original writing or transmission.
All voting, including on the election of Directors but excepting where
otherwise required by law or by the governing documents of the Corporation, may
be by a voice vote; provided, however, that upon demand therefor by a
stockholder entitled to vote or by his or her proxy, a stock vote shall be
taken. Every stock vote shall be taken by ballots, each of which shall state
the name of the stockholder or proxy voting and such other information as may be
required under the procedure established for the meeting. The Corporation
shall, in advance of any meeting of stockholders, appoint one or more inspectors
to act at the meeting and make a written report thereof. The Corporation may
designate one or more persons as alternate inspectors to replace any inspector
who fails to act. If no inspector or alternate is able to act at a meeting of
stockholders, the person presiding at the meeting shall appoint one or more
inspectors to act at the meeting. Each inspector, before entering upon the
discharge of his or her duties, shall take and sign an oath faithfully to
execute the duties of inspector with strict impartiality and according to the
best of his or her ability.
All elections shall be determined by a plurality of the votes cast, and
except as otherwise required by the Certificate of Incorporation or by law, all
other matters shall be determined by a majority of the votes present and cast at
a properly called meeting of stockholders.
Section 8. Stock List. A complete list of stockholders entitled to vote
--------- ----------
at any meeting of stockholders, arranged in alphabetical order for each class of
stock and showing the address of each such stockholder and the number of shares
registered in his or her name, shall be open to the examination of any such
stockholder, for any purpose germane to the meeting, during ordinary business
hours for a period of at least ten (10) days prior to the meeting, either at a
place within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting, or if not so specified, at the place
where the meeting is to be held.
The stock list shall also be kept at the place of the meeting during the
whole time thereof and shall be open to the examination of any such stockholder
who is present. This list shall presumptively determine the identity of the
stockholders entitled to vote at the meeting and the number of shares held by
each of them.
Section 9. Consent of Stockholders in Lieu of Meeting. Subject to the
--------- ------------------------------------------
rights of the holders of any class or series of preferred stock of the
Corporation, any action required or permitted to be taken by the stockholders of
the Corporation must be effected at an annual or special meeting of stockholders
of the Corporation and may not be effected by any consent in writing by such
stockholders.
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<PAGE>
ARTICLE II - BOARD OF DIRECTORS
Section 1. General Powers, Number and Term of Office. The business and
--------- -----------------------------------------
affairs of the Corporation shall be under the direction of its Board of
Directors. The number of Directors who shall constitute the Whole Board shall
be such number as the Board of Directors shall from time-to-time by resolution
so designate. The Board of Directors shall annually elect a Chairman of the
Board from among its members who shall, when present, preside at its meetings.
The Directors, other than those who may be elected by the holders of any
class or series of Preferred Stock, shall be divided, with respect to the time
for which they severally hold office, into three classes, with the term of
office of the first class to expire at the first annual meeting of stockholders,
the term of office of the second class to expire at the annual meeting of
stockholders one year thereafter and the term of office of the third class to
expire at the annual meeting of stockholders two years thereafter, with each
Director to hold office until his or her successor shall have been duly elected
and qualified. At each annual meeting of stockholders, commencing with the
first annual meeting, Directors elected to succeed those Directors whose terms
then expire shall be elected for a term of office to expire at the third
succeeding annual meeting of stockholders after their election, with each
Director to hold office until his or her successor shall have been duly elected
and qualified.
Section 2. Chairman of the Board. The Chairman of the Board shall,
--------- ---------------------
subject to the provisions of these Bylaws and to the direction of the Board of
Directors, serve in a general executive capacity and, when present, shall
preside at all meetings of the Board of Directors or the stockholders of the
Corporation. The Chairman of the Board shall perform all duties and have all
powers which are commonly incident to the office of Chairman of the Board or
which are delegated to him or her by the Board of Directors. He or she shall
have power to sign all stock certificates, contracts and other instruments of
the Corporation which are authorized.
Section 3. Vacancies and Newly Created Directorships. Subject to the
--------- -----------------------------------------
rights of the holders of any class or series of preferred stock, and unless the
Board of Directors otherwise determines, newly created Directorships resulting
from any increase in the authorized number of Directors or any vacancies in the
Board of Directors resulting from death, resignation, retirement,
disqualification, removal from office or other cause may be filled only by a
majority vote of the Directors then in office, though less than a quorum, and
Directors so chosen shall hold office for a term expiring at the annual meeting
of stockholders at which the term of office of the class to which they have been
elected expires and until such Director's successor shall have been duly elected
and qualified. No decrease in the number of authorized Directors constituting
the Board shall shorten the term of any incumbent Director.
Section 4. Regular Meetings. Each regular meetings of the Board of
--------- ----------------
Directors shall be held at such place, on such date, and at such time as shall
have been established by the Board of Directors and publicized among all
Directors. A notice of each regular meeting shall not be required.
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<PAGE>
Section 5. Special Meetings. Special meetings of the Board of Directors
--------- ----------------
may be called by one-third (1/3) of the Directors then in office (rounded up to
the nearest whole number) or by the Chairman of the Board and shall be held at
such place, on such date, and at such time as they or he or she shall fix.
Notice of the place, date, and time of each such special meeting shall be given
to each Director by whom it is not waived by mailing written notice not less
than five (5) days before the meeting or by facsimile transmission of the same
not less than twenty-four (24) hours before the meeting. Unless otherwise
indicated in the notice thereof, any and all business may be transacted at a
special meeting.
Section 6. Quorum. At any meeting of the Board of Directors, a majority
--------- ------
of the Whole Board shall constitute a quorum for all purposes. If a quorum
shall fail to attend any meeting, a majority of those present may adjourn the
meeting to another place, date, or time, without further notice or waiver
thereof.
Section 7. Participation in Meetings By Conference Telephone. Members of
--------- -------------------------------------------------
the Board of Directors, or of any committee thereof, may participate in a
meeting of such Board or committee by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other and such participation shall constitute presence in
person at such meeting.
Section 8. Conduct of Business. At any meeting of the Board of
--------- -------------------
Directors, business shall be transacted in such order and manner as the Board
may from time to time determine, and all matters shall be determined by the vote
of a majority of the Directors present, except as otherwise provided herein or
required by law. Action may be taken by the Board of Directors without a
meeting if all members thereof consent thereto in writing, and the writing or
writings are filed with the minutes of proceedings of the Board of Directors.
Section 9. Powers. The Board of Directors may, except as otherwise
--------- ------
required by law, exercise all such powers and do all such acts and things as may
be exercised or done by the Corporation, including, without limiting the
generality of the foregoing, the unqualified power:
(1) To declare dividends from time to time in accordance with law;
(2) To purchase or otherwise acquire any property, rights or privileges
on such terms as it shall determine;
(3) To authorize the creation, making and issuance, in such form as it
may determine, of written obligations of every kind, negotiable or
non-negotiable, secured or unsecured, and to do all things necessary
in connection therewith;
(4) To remove any Officer of the Corporation with or without cause, and
from time-to-time to devolve the powers and duties of any Officer
upon any other person;
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<PAGE>
(5) To confer upon any Officer of the Corporation the power to appoint,
remove and suspend subordinate Officers, employees and agents;
(6) To adopt from time-to-time such stock, option, stock purchase, bonus
or other compensation plans for Directors, Officers, employees and
agents of the Corporation and its subsidiaries as it may determine;
(7) To adopt from time-to-time such insurance, retirement, and other
benefit plans for Directors, Officers, employees and agents of the
Corporation and its subsidiaries as it may determine; and
(8) To adopt from time-to-time regulations, not inconsistent with these
Bylaws, for the management of the Corporation's business and affairs.
Section 10. Compensation of Directors. Directors, as such, may receive,
---------- -------------------------
pursuant to resolution of the Board of Directors, fixed fees and other
compensation for their services as Directors, including, without limitation,
their services as members of committees of the Board of Directors.
Section 11. Directors' Age Limitation and Directors Emeriti. No
---------- -----------------------------------------------
person shall be eligible for initial election as a Director who is sixty-five
(65) years of age or more. The office of a director shall become vacant on the
last day of the month in which such director reaches his or her seventieth
(70th) birthday.
ARTICLE III - COMMITTEES
----------- ----------
Section 1. Committee of the Board of Directors. The Board of Directors,
--------- -----------------------------------
by a vote of a majority of the Whole Board, may from time-to-time designate
committees of the Board, with such lawfully delegable powers and duties as it
thereby confers, to serve at the pleasure of the Board and shall, for those
committees and any others provided for herein, elect a Director or Directors to
serve as the member or members, designating, if it desires, other Directors as
alternate members who may replace any absent or disqualified member at any
meeting of the committee. Any committee so designated may exercise the power
and authority of the Board of Directors to declare a dividend, to authorize the
issuance of stock or to adopt a certificate of ownership and merger pursuant to
the Delaware General Corporation Law if the resolution which designates the
committee or a supplemental resolution of the Board of Directors shall so
provide. In the absence or disqualification of any member of any committee and
any alternate member in his or her place, the member or members of the committee
present at the meeting and not disqualified from voting, whether or not he or
she or they constitute a quorum, may by unanimous vote appoint another member of
the Board of Directors to act at the meeting in the place of the absent or
disqualified member.
Section 2. Conduct of Business. Each committee may determine the
--------- -------------------
procedural rules for meeting and conducting its business and shall act in
accordance therewith, except as otherwise
7
<PAGE>
provided herein or required by law. Adequate provision shall be made for notice
to members of all meetings; one-third (1/3) of the members shall constitute a
quorum unless the committee shall consist of one (1) or two (2) members, in
which event one (1) member shall constitute a quorum; and all matters shall be
determined by a majority vote of the members present. Action may be taken by any
committee without a meeting if all members thereof consent thereto in writing,
and the writing or writings are filed with the minutes of the proceedings of
such committee.
Section 3. Nominating Committee. The Board of Directors shall appoint a
--------- --------------------
Nominating Committee of the Board, consisting of not less than three (3)
members, one of which shall be the Chairman of the Board. The Nominating
Committee shall have authority (a) to review any nominations for election to the
Board of Directors made by a stockholder of the Corporation pursuant to Section
6(c)(ii) of Article I of these Bylaws in order to determine compliance with such
Bylaw provision and (b) to recommend to the Whole Board nominees for election to
the Board of Directors to replace those Directors whose terms expire at the
annual meeting of stockholders next ensuing.
ARTICLE IV - OFFICERS
---------- --------
Section 1. Generally. (a) The Board of Directors as soon as may be
--------- ---------
practicable after the annual meeting of stockholders, shall choose a President
and Chief Executive Officer, one or more Vice Presidents, and a Secretary and
from time to time may choose such other Officers as it may deem proper. Any
number of offices may be held by the same person.
(b) The term of office of all Officers shall be until the next annual
election of Officers and until their respective successors are chosen, but any
Officer may be removed from office at any time by the affirmative vote of a
majority of the authorized number of Directors then constituting the Board of
Directors.
(c) All Officers chosen by the Board of Directors shall each have such
powers and duties as generally pertain to their respective offices, subject to
the specific provisions of this Article IV. Such Officers shall also have such
powers and duties as from time to time may be conferred by the Board of
Directors or by any committee thereof.
Section 2. President and Chief Executive Officer. The President and
--------- -------------------------------------
Chief Executive Officer (the "President") shall have general responsibility for
the management and control of the business and affairs of the Corporation and
shall perform all duties and have all powers which are commonly incident to the
offices of President and Chief Executive Officer or which are delegated to him
or her by the Board of Directors. Subject to the direction of the Board of
Directors, the President shall have power to sign all stock certificates,
contracts and other instruments of the Corporation which are authorized and
shall have general supervision of all of the other Officers, employees and
agents of the Corporation.
8
<PAGE>
Section 3. Vice President. The Vice President or Vice Presidents shall
--------- --------------
perform the duties of the President in his or her absence or during his
disability to act. In addition, the Vice Presidents shall perform the duties
and exercise the powers usually incident to their respective offices and/or such
other duties and powers as may be properly assigned to them by the Board of
Directors, the Chairman of the Board or the President. A Vice President or Vice
Presidents may be designated as Executive Vice President or Senior Vice
President.
Section 4. Secretary. The Secretary or an Assistant Secretary shall
--------- ---------
issue notices of meetings, shall keep their minutes, shall have charge of the
seal and the corporate books, shall perform such other duties and exercise such
other powers as are usually incident to such offices and/or such other duties
and powers as are properly assigned thereto by the Board of Directors, the
Chairman of the Board or the President.
Section 5. Assistant Secretaries and Other Officers. The Board of
--------- ----------------------------------------
Directors may appoint one or more Assistant Secretaries and such other Officers
who shall have such powers and shall perform such duties as are provided in
these Bylaws or as may be assigned to them by the Board of Directors, the
Chairman of the Board or the President.
Section 6. Action with Respect to Securities of Other Corporations.
--------- -------------------------------------------------------
Unless otherwise directed by the Board of Directors, the President or any
Officer of the Corporation authorized by the President shall have power to vote
and otherwise act on behalf of the Corporation, in person or by proxy, at any
meeting of stockholders of or with respect to, any action of stockholders of any
other corporation in which the Corporation may hold securities and otherwise to
exercise any and all rights and powers which the Corporation may possess by
reason of its ownership of securities in such other corporation.
ARTICLE V - STOCK
--------- -----
Section 1. Certificates of Stock. Each stockholder shall be entitled to
--------- ---------------------
a certificate signed by, or in the name of the Corporation by, the Chairman of
the Board or the President, and by the Secretary or an Assistant Secretary, or
any Treasurer or Assistant Treasurer, certifying the number of shares owned by
him or her. Any or all of the signatures on the certificate may be by
facsimile.
Section 2. Transfers of Stock. Transfers of stock shall be made only
--------- ------------------
upon the transfer books of the Corporation kept at an office of the Corporation
or by transfer agents designated to transfer shares of the stock of the
Corporation. Except where a certificate is issued in accordance with Section 4
of Article V of these Bylaws, an outstanding certificate for the number of
shares involved shall be surrendered for cancellation before a new certificate
is issued therefor.
Section 3. Record Date. In order that the Corporation may determine
--------- -----------
the stockholders entitled to notice of or to vote at any meeting of
stockholders, or to receive payment of any dividend or other distribution or
allotment of any rights or to exercise any rights in respect of any change,
conversion or exchange of stock or for the purpose of any other lawful action,
the Board of Directors
9
<PAGE>
may fix a record date, which record date shall not precede the date on which the
resolution fixing the record date is adopted and which record date shall not be
more than sixty (60) nor less than ten (10) days before the date of any meeting
of stockholders, nor more than sixty (60) days prior to the time for such other
action as hereinbefore described; provided, however, that if no record date is
fixed by the Board of Directors, the record date for determining stockholders
entitled to notice of or to vote at a meeting of stockholders shall be at the
close of business on the day next preceding the day on which notice is given or,
if notice is waived, at the close of business on the day next preceding the day
on which the meeting is held, and, for determining stockholders entitled to
receive payment of any dividend or other distribution or allotment of rights or
to exercise any rights of change, conversion or exchange of stock or for any
other purpose, the record date shall be at the close of business on the day on
which the Board of Directors adopts a resolution relating thereto.
A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
Section 4. Lost, Stolen or Destroyed Certificates. In the event of the
--------- --------------------------------------
loss, theft or destruction of any certificate of stock, another may be issued in
its place pursuant to such regulations as the Board of Directors may establish
concerning proof of such loss, theft or destruction and concerning the giving of
a satisfactory bond or bonds of indemnity.
Section 5. Regulations. The issue, transfer, conversion and
--------- ------------
registration of certificates of stock shall be governed by such other
regulations as the Board of Directors may establish.
ARTICLE VI - NOTICES
---------- -------
Section 1. Notices. Except as otherwise specifically provided herein
--------- -------
or required by law, all notices required to be given to any stockholder,
Director, Officer, employee or agent shall be in writing and may in every
instance be effectively given by hand delivery to the recipient thereof, by
depositing such notice in the U.S. mails, postage prepaid, or by sending such
notice by facsimile transmission or by courier. Any such notice shall be
addressed to such stockholder, Director, Officer, employee or agent at his or
her last known address as the same appears on the books of the Corporation. The
time when such notice is received, if hand delivered, or dispatched, if
delivered through the mails or by facsimile transmission or other courier, shall
be the time of the giving of the notice.
Section 2. Waivers. A written waiver of any notice, signed by a
--------- -------
stockholder, Director, Officer, employee or agent, whether before or after the
time of the event for which notice is to be given, shall be deemed equivalent to
the notice required to be given to such stockholder, Director, Officer, employee
or agent. Neither the business nor the purpose of any meeting need be specified
in such a waiver.
10
<PAGE>
ARTICLE VII - MISCELLANEOUS
----------- -------------
Section 1. Facsimile Signatures. In addition to the provisions for use
--------- --------------------
of facsimile signatures elsewhere specifically authorized in these Bylaws,
facsimile signatures of any Officer or Officers of the Corporation may be used
whenever and as authorized by the Board of Directors or a committee thereof.
Section 2. Corporate Seal. The Board of Directors may provide a
--------- --------------
suitable seal, containing the name of the Corporation, which seal shall be in
the charge of the Secretary. If and when so directed by the Board of Directors
or a committee thereof, duplicates of the seal may be kept and used by the Chief
Financial Officer or by an Assistant Secretary or an assistant to the Chief
Financial Officer.
Section 3. Reliance upon Books, Reports and Records. Each Director, each
--------- ----------------------------------------
member of any committee designated by the Board of Directors, and each Officer
of the Corporation shall, in the performance of his or her duties, be fully
protected in relying in good faith upon the books of account or other records of
the Corporation and upon such information, opinions, reports or statements
presented to the Corporation by any of its Officers or employees, or committees
of the Board of Directors so designated, or by any other person as to matters
which such Director or committee member reasonably believes are within such
other person's professional or expert competence and who has been selected with
reasonable care by or on behalf of the Corporation.
Section 4. Fiscal Year. The fiscal year of the Corporation shall be as
--------- -----------
fixed by the Board of Directors.
Section 5. Time Periods. In applying any provision of these Bylaws
--------- ------------
which requires that an act be done or not be done a specified number of days
prior to an event or that an act be done during a period of a specified number
of days prior to an event, calendar days shall be used, the day of the doing of
the act shall be excluded, and the day of the event shall be included.
ARTICLE VIII - AMENDMENT
------------ ---------
The Board of Directors may amend, alter or repeal these Bylaws at any
meeting of the Board, provided notice of the proposed change is given not less
than two days prior to the meeting. The stockholders shall also have power to
amend, alter or repeal these Bylaws at any meeting of stockholders, provided
notice of the proposed change was given in the Notice of the Meeting; provided,
however, that, notwithstanding any other provisions of these Bylaws or any
provision of law which might otherwise permit a lesser vote or no vote, but in
addition to any affirmative vote of the holders of any particular class or
series of the Voting Stock Designation or these Bylaws, the affirmative votes of
the holders of at least 80% of the voting power of all the then-outstanding
shares of the Voting Stock, voting together as a single class, shall be required
to alter, amend or repeal any provisions of these Bylaws.
11
<PAGE>
Exhibit 4
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
Niagara Bancorp, Inc.
Lockport, New York
$.01 par value common stock--fully paid and non-assessable
This certifies that _____________________________ is the owner of __________
shares of the common stock of Niagara Bancorp, Inc. (the "Corporation"), a
Delaware corporation.
The shares evidenced by this certificate are transferable only on the stock
transfer books of the Corporation by the holder of record hereof, in person or
by his duly authorized attorney or legal representative, upon surrender of this
certificate properly endorsed. This Certificate in not valid until
countersigned and registered by the Corporation's transfer agent and registrar.
This security is not a deposit or account and is not federally insured or
guaranteed.
In Witness Whereof, the Corporation has caused this certificate to be executed
by the facsimile signatures of its duly authorized officers and has caused its
seal to be affixed hereto.
Dated:____________________
___________________________________ ___________________________________
Secretary (SEAL) President
<PAGE>
The shares evidenced by this Certificate are subject to a limitation
contained in the Certificate of Incorporation to the effect that in no event
shall any record owner of any outstanding Common Stock which is beneficially
owned, directly or indirectly, by a person who beneficially owns in excess of 5%
of the outstanding shares of Common Stock (the "Limit") be entitled or permitted
to any vote in respect of shares held in excess of the Limit, except that such
restriction shall not apply to Niagara Bancorp, MHC.
The Board of Directors of the Corporation is authorized by resolution or
resolutions, from time to time adopted, to provide for the issuance of serial
preferred stock in series and to fix and state the voting powers, designations,
preferences, limitations and restrictions thereof. The Corporation will furnish
to any shareholder upon request and without charge a full description of each
class of stock and any series thereof.
The shares represented by this Certificate may not be cumulatively voted on
any matter. The Certificate of Incorporation requires the affirmative vote of
the holders of at least 80% of the voting stock of the Corporation, voting
together as a single class, to approve certain business combinations and other
transactions and to amend certain provisions of the Certificate of
Incorporation.
The following abbreviations when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations.
<TABLE>
<CAPTION>
<S> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT - _____________ Custodian __________________
(Cust) (Minor)
TEN ENT - as tenants by the entireties
Under Uniform Gifts to Minors Act
JT TEN - as joint tenants with right
of survivorship and not as __________________________________________
tenants in common (State)
</TABLE>
Additional abbreviations may also be used though not in the above list
For value received, _____________________________ hereby sell, assign and
transfer unto
PLEASE INSERT SOCIAL SECURITY NUMBER OR OTHER IDENTIFYING NUMBER
____________________________________________________________________
____________________________________________________________________
________________________________________________________________________________
(please print or typewrite name and address including postal zip code of
assignee)
________________________________________________________________________________
______________________________________________________________________ Shares of
the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint _________________________________________
Attorney to transfer the said shares on the books of the within named
corporation with full power of substitution in the premises.
Dated, ___________________
In the presence of Signature:
_________________________________ _____________________________
NOTE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME OF THE
STOCKHOLDER(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE, IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATEVER.
<PAGE>
Exhibit 5
(202) 274-2000
December 19, 1997
The Board of Trustees
Lockport Savings Bank
6950 South Transit Road, P.O. Box 514
Lockport, New York 14095-0514
RE: NIAGARA BANCORP, INC.
COMMON STOCK PAR VALUE $.01 PER SHARE
-------------------------------------
Ladies and Gentlemen:
You have requested the opinion of this firm as to certain matters in
connection with the offer and sale (the "Offering") of Niagara Bancorp, Inc.
(the "Company") common stock, par value $.01 per share ("Common Stock"). We
have reviewed the Company's Certificate of Incorporation, Registration Statement
on Form S-1 ("Form S-1"), 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-1, the Common Stock, when sold, will be legally issued, fully paid and
non-assessable.
This Opinion has been prepared solely for the use of the Company in
connection with the Form S-1. We hereby consent to our firm being referenced
under the caption "Legal and Tax Matters."
Very truly yours,
____________________________________
LUSE LEHMAN GORMAN POMERENK & SCHICK
A PROFESSIONAL CORPORATION
<PAGE>
Exhibit 8.1
FORM OF
FEDERAL TAX OPINION
__________, 1997
Boards of Trustees
Lockport Savings Bank
Board of Directors
Niagara Bancorp, Inc.
Board of Trustees
Niagara Bancorp, MHC
6950 South Transit Road
Lockport, New York 14095-0514
Re: MUTUAL HOLDING COMPANY FORMATION AND STOCK ISSUANCE
---------------------------------------------------
Ladies and Gentlemen:
We have been requested as special counsel to Lockport Savings Bank, a New
York-chartered mutual savings bank (the "Bank" or the "Stock Bank", as the
context requires), Niagara Bancorp, MHC, a New York-chartered mutual holding
company ("Mutual Holding Company") and Niagara Bancorp, a Delaware corporation
("Stock Holding Company"), to express our opinion concerning certain Federal
income tax matters relating to the Plan of Reorganization (as defined herein).
In connection therewith, we have examined the Plan of Reorganization and
certain other documents of or relating to the Reorganization (as defined below),
some of which are described or referred to in the Plan of Reorganization and
which we deemed necessary to examine in order to issue the opinions set forth
below. Unless otherwise defined, all terms used herein have the meanings given
to such terms in the Plan of Reorganization.
In our examination, we have assumed the authenticity of original documents,
the accuracy of copies and the genuineness of signatures. We have further
assumed the absence of adverse facts not apparent from the face of the
instruments and documents we examined.
In issuing our opinions, we have assumed that the Plan of Reorganization
has been duly and validly authorized and has been approved and adopted by the
board of directors of the Bank at a meeting duly called and held; that the Bank
will comply with the terms and conditions of the Plan of Reorganization, and
that the various representations and warranties which are provided to us are
accurate, complete, true and correct. Accordingly, we express no opinion
concerning the effect, if
<PAGE>
Boards of Trustees
Lockport Savings Bank
Board of Directors
Niagara Bancorp, Inc.
Board of Trustees
Niagara Bancorp, MHC
__________, 1997
Page 2
any, of variations from the foregoing. We specifically express no opinion
concerning tax matters relating to the Plan of Reorganization under state and
local tax laws and under Federal income tax laws except on the basis of the
documents and assumptions described above.
For purposes of this opinion, we are relying on the representations
provided to us by the Bank, which are incorporated herein by reference.
In issuing the opinions set forth below, we have referred solely to
existing provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), existing and proposed Treasury Regulations thereunder, current
administrative rulings, notices and procedures and court decisions. Such laws,
regulations, administrative rulings, notices and procedures and court decisions
are subject to change at any time. Any such change could affect the continuing
validity of the opinions set forth below. This opinion is as of the date
hereof, and we disclaim any obligation to advise you of any change in any matter
considered herein after the date hereof.
In rendering our opinions, we have assumed that the persons and entities
identified in the Plan of Reorganization will at all times comply with the
requirements of Code sections 368 and 351, the other applicable state and
Federal laws and the representations of the Bank. In addition, we have assumed
that the activities of the persons and entities identified in the Plan of
Reorganization will be conducted strictly in accordance with the Plan of
Reorganization. Any variations may affect the opinions we are rendering.
We emphasize that the outcome of litigation cannot be predicted with
certainty and, although we have attempted in good faith to opine as to the
probable outcome of the merits of each tax issue with respect to which an
opinion was requested, there can be no assurance that our conclusions are
correct or that they would be adopted by the IRS or a court.
SUMMARY OF OPINIONS
-------------------
Based on the facts, representations and assumptions set forth herein, we
are of the opinion that:
<PAGE>
Boards of Trustees
Lockport Savings Bank
Board of Directors
Niagara Bancorp, Inc.
Board of Trustees
Niagara Bancorp, MHC
__________, 1997
Page 3
WITH RESPECT TO THE EXCHANGE OF THE BANK'S CHARTER FOR A STOCK CHARTER
("BANK CONVERSION"):
1. Bank's exchange of its charter for a federal stock savings association
charter is a mere change in identity and form and therefore qualifies as a
reorganization within the meaning of Section 368(a)(1)(F) of the Internal
Revenue Code.
2. No gain or loss will be recognized by Bank upon the transfer of its
assets to Stock Bank solely in exchange for shares of Stock Bank stock and the
assumption by Stock Bank of the liabilities of Bank. (Code Sections 361(a) and
357(a)).
3. No gain or loss will be recognized by Stock Bank upon the receipt of
the assets of Bank in exchange for shares of Stock Bank common stock. (Code
Section 1032(a)).
4. Stock Bank's holding period in the assets received from Bank will
include the period during which such assets were held by the Bank. (Code
Section 1223(2)).
5. Stock Bank's basis in the assets of Bank will be the same as the basis
of such assets in the hands of Bank immediately prior to the proposed
transaction. (Code Section 362(b)).
6. Bank members will recognize no gain or loss upon the constructive
receipt of Stock Bank common stock solely in exchange for their membership
interests in Bank. (Code Section 354(a)(1)).
7. The basis of the Stock Bank common stock to be constructively received
by the Bank's members will be the same as their basis in their membership
interests in the Bank surrendered in exchange therefor. (Code Section
358(a)(1)).
8. The holding period of the Stock Bank common stock constructively
received by the members of the Bank will include the period during which the
Bank members held their membership interests, provided that the membership
interests were held as capital assets on the date of the exchange. (Code
Section 1223(1)).
<PAGE>
Boards of Trustees
Lockport Savings Bank
Board of Directors
Niagara Bancorp, Inc.
Board of Trustees
Niagara Bancorp, MHC
__________, 1997
Page 4
9. The Stock bank will succeed to and take into account the Bank's
earnings and profits or deficit in earnings and profits, as of the date of the
proposed transaction. (Code Section 381).
WITH RESPECT TO THE TRANSFER OF STOCK BANK STOCK TO MUTUAL HOLDING COMPANY
FOR MEMBERSHIP INTERESTS (THE A351 TRANSACTION"):
10. The exchange of stock by the Stock Bank stockholders in exchange for
membership interests in the Mutual Holding Company will constitute a tax-free
exchange of property solely for voting "stock" pursuant to Section 351 of the
Internal Revenue Code.
11. Stock Bank's stockholders will recognize no gain or loss upon the
transfer of the Stock Bank stock they constructively received in the Bank
conversion to the Mutual Holding Company solely in exchange for membership
interests in the Mutual Holding Company. (Code Section 351).
12. Stock Bank stockholder's basis in the Mutual Holding Company
membership interests received in the transaction will be the same as the basis
of the property transferred in exchange therefor, reduced by the sum of the
liabilities assumed by Mutual Holding Company or to which assets transferred are
taken subject. (Code Section 358(a)(1)).
13. Stock Bank stockholder's holding period for the membership interests
in Mutual Holding Company received in the transaction will include the period
during which the property exchanged was held by Stock Bank stockholders,
provided that such property was a capital asset on the date of the exchange.
(Code Section 1223(1)).
14. Mutual Holding Company will recognize no gain or loss upon the receipt
of property from Stock Bank stockholders in exchange for membership interests in
the Mutual Holding Company. (Code Section 1032(a)).
<PAGE>
Boards of Trustees
Lockport Savings Bank
Board of Directors
Niagara Bancorp, Inc.
Board of Trustees
Niagara Bancorp, MHC
__________, 1997
Page 5
15. Mutual Holding Company's basis in the property received from Stock
Bank stockholders will be the same as the basis of such property in the hands of
Stock Bank stockholders immediately prior to the transaction. (Code Section
362(a)).
16. Mutual Holding Company's holding period for the property received from
Stock Bank's stockholders will include the period during which such property was
held by Stock Bank stockholders. (Code Section 1223(2)).
17. Stock Bank depositors will recognize no gain or loss solely by reason
of the transaction.
WITH RESPECT TO THE TRANSFERS TO THE STOCK HOLDING COMPANY IN EXCHANGE FOR
COMMON STOCK IN THE STOCK HOLDING COMPANY
18. The Mutual Holding Company and the persons who purchased Common Stock
of the Stock Holding Company in the Subscription and Community Offering
("Minority Stockholders") will recognize no gain or loss upon the transfer of
Stock Bank stock and cash, respectively, to the Stock Holding Company in
exchange for stock in the Stock Holding Company. Code Sections 351(a) and
357(a).
19. Stock Holding Company will recognize no gain or loss on its receipt of
Stock Bank stock and cash in exchange for Stock Holding Company Stock. (Code
Section 1032(a)).
20. The basis of the Stock Holding Company Common Stock to the Minority
Stockholders will be the actual purchase price thereof, and a shareholders
holding period for Common Stock acquired through the exercise of subscription
rights will begin on the date the rights are exercised.
<PAGE>
Boards of Trustees
Lockport Savings Bank
Board of Directors
Niagara Bancorp, Inc.
Board of Trustees
Niagara Bancorp, MHC
__________, 1997
Page 6
PROPOSED TRANSACTION
--------------------
On September 15, 1997, the board of trustees of the Bank adopted that
certain Plan of Reorganization From A Mutual Savings Bank to A Mutual Holding
Company and Stock Issuance Plan (the "Plan of Reorganization"). For what are
represented to be valid business purposes, the Bank's board of directors has
decided to convert to a mutual holding company structure pursuant to statutes.
The following steps are proposed:
(i) The Bank will organize an interim New York-chartered stock savings
bank (Interim One) as its wholly-owned subsidiary;
(ii) Interim One will organize a Delaware mid-tier holding company as its
wholly-owned subsidiary (Stock Holding Company); and
(iii) Interim One will also organize another interim New York-chartered
stock savings bank as its wholly-owned subsidiary (Interim Two).
The following transactions will occur simultaneously:
(iv) The Bank will exchange its charter for a New York stock savings bank
charter and become a stock savings bank that will constructively
issue its common stock to members of the Bank;
(v) Interim One will cancel its outstanding stock and exchange its
charter for a New York mutual holding company charter and thereby
become the Mutual Holding Company;
(vi) Interim Two will merge with and into the Bank with the Bank as the
surviving entity, the former members of the Bank who constructively
hold stock in the Bank will exchange their stock in the Bank for
membership interests in the Mutual Holding Company; and
<PAGE>
Boards of Trustees
Lockport Savings Bank
Board of Directors
Niagara Bancorp, Inc.
Board of Trustees
Niagara Bancorp, MHC
__________, 1997
Page 7
(vii) The Mutual Holding Company will contribute the Bank's stock to the
Stock Holding Company, a wholly-owned subsidiary of the Mutual
Holding Company, for additional shares of Bank Stock.
(viii) Contemporaneously, with the contribution set forth in "(vii)" the
Stock Holding Company will offer to sell up to 49.9% of its Common
Stock in the Subscription Offering and, if applicable, the Direct
Community Offering.
These transactions are referred to herein collectively as the
"Reorganization."
Those persons who, as of the date of the Bank Conversion (the "Effective
Date"), hold depository rights with respect to the Bank will thereafter have
such rights solely with respect to the Stock Bank. Each deposit account with
the Bank at the time of the exchange will become a deposit account in the Stock
Bank in the same amount and upon the same terms and conditions. Following the
completion of the Reorganization, all depositors who had liquidation rights with
respect to the Bank immediately prior to the Reorganization will continue to
have such rights solely with respect to the Mutual Holding Company so long as
they continue to hold deposit accounts with the Stock Bank. All new depositors
of the Stock Bank after the completion of the Reorganization will have
liquidation rights solely with respect to the Mutual Holding Company so long as
they continue to hold deposit accounts with the Stock Bank.
The shares of Interim Two common stock owned by the Mutual Holding Company
prior to the Reorganization shall be converted into and become shares of common
stock of the Stock Bank on the Effective Date. The shares of Stock Bank common
stock constructively received by the Stock Bank stockholders (formerly the
members holding liquidation rights of the Bank) will be transferred to the
Mutual Holding Company by such persons in exchange for liquidation rights in the
Mutual Holding Company.
The Stock Holding Company will have the power to issue shares of capital
stock (including common and preferred stock) to persons other than the Mutual
Holding Company. So long as the Mutual Holding Company is in existence,
however, it must own a majority of the voting stock of Stock Holding Company.
Stock Holding Company may issue any amount of non-voting stock to
<PAGE>
Boards of Trustees
Lockport Savings Bank
Board of Directors
Niagara Bancorp, Inc.
Board of Trustees
Niagara Bancorp, MHC
__________, 1997
Page 8
persons other than Mutual Holding Company. No such non-voting stock will be
issued as of the date of the Reorganization.
* * *
The opinions set forth above represent our conclusions as to the
application of existing Federal income tax law to the facts of the instant
transaction, and we can give no assurance that changes in such law, or in the
interpretation thereof, will not affect the opinions expressed by us. Moreover,
there can be no assurance that contrary positions may not be taken by the IRS,
or that a court considering the issues would not hold contrary to such opinions.
All of the opinions set forth above are qualified to the extent that the
validity of any provision of any agreement may be subject to or affected by
applicable bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting the rights of creditors generally. We do not express any opinion as
to the availability of any equitable or specific remedy upon any breach of any
of the covenants, warranties or other provisions contained in any agreement. We
have not examined, and we express no opinion with respect to the applicability
of, or liability under, any Federal, state or local law, ordinance, or
regulation governing or pertaining to environmental matters, hazardous wastes,
toxic substances, asbestos, or the like.
It is expressly understood that the opinions set forth above represent our
conclusions based upon the documents reviewed by us and the facts presented to
us. Any material amendments to such documents or changes in any significant fact
would affect the opinions expressed herein.
<PAGE>
Boards of Trustees
Lockport Savings Bank
Board of Directors
Niagara Bancorp, Inc.
Board of Trustees
Niagara Bancorp, MHC
__________, 1997
Page 9
We have not been asked to, and we do not, render any opinion with respect
to any matters other than those expressly set forth above. This opinion is
rendered for your use only, and may not be delivered to or relied upon by any
other person or entity without our express written consent.
Very truly yours,
LUSE LEHMAN GORMAN POMERENK & SCHICK
A Professional Corporation
<PAGE>
EXHIBIT 8.3
RP FINANCIAL, LC.
- -------------------------------------------
Financial Services Industry Consultants
November 28, 1997
Board of Trustees
Lockport Savings Bank
6950 South Transit Road
Lockport, New York 14095-0514
Re: Plan of Conversion: Subscription Rights
Gentlemen:
All capitalized terms not otherwise defined in this letter have the
meanings given such terms in the Plan of Conversion and Reorganization (the
"Plan of Conversion") adopted by the Board of Trustees of Lockport Savings Bank
("Lockport Savings" or the "Bank"). Pursuant to the Plan of Conversion, Lockport
Savings will become a wholly-owned subsidiary of Niagara Bancorp, Inc. (the
"Holding Company"), a Delaware Corporation, and Niagara Bancorp, Inc. will issue
a majority of its common stock to Niagara Bancorp, M.H.C. (the "MHC"), and sell
a minority of its common stock to the public.
We understand that in accordance with the Plan of Conversion,
Subscription Rights to purchase shares of Common Stock in the Holding Company
are to be issued to: (1) Eligible Accounts Holders; (2) the Bank's Employee
Plans including the ESOP; and (3) Supplemental Eligible Account Holders. Based
solely upon our observation that the Subscription Rights will be available to
such parties without cost, will be legally non-transferable and of short
duration, and will afford such parties the right only to purchase shares of
Common Stock at the same price as will be paid by members of the general public
in the Community Offering, but without undertaking any independent investigation
of state or federal law or the position of the Internal Revenue Service with
respect to this issue, we are of the belief that, as a factual matter:
(1) the Subscription Rights will have no ascertainable market value;
and,
(2) the price at which the Subscription Rights are exercisable will not
be more or less than the pro forma market value of the shares upon
issuance.
Changes in the local and national economy, the legislative and regulatory
environment, the stock market, interest rates, and other external forces (such
as natural disasters or significant world events) may occur from time to time,
often with great unpredictability and may materially impact the value of thrift
stocks as a whole or the Holding Company's value alone. Accordingly, no
assurance can be given that persons who subscribe to shares of Common Stock in
the conversion will thereafter be able to buy or sell such shares at the same
price paid in the Subscription Offering.
Very truly yours,
RP FINANCIAL, LC.
/s/ James P. Hennessey
--------------------------
James P. Hennessey
Senior Vice President
________________________________________________________________________________
WASHINGTON HEADQUARTERS
Rosslyn Center
1700 North Moore Street, Suite 2210 Telephone: (703) 528-1700
Arlington, VA 22209 Fax No.: (703) 528-1788
<PAGE>
EXHIBIT 10.1
FORM OF
LOCKPORT SAVINGS BANK
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of this ___
day of __________, 199_, by and between Lockport Savings Bank (hereinafter
referred to as the "Bank" whether in mutual or stock form), and ______________
(the "Employee").
WHEREAS, the Employee is currently serving as ___________________ of the
Bank; and
WHEREAS, the Bank has adopted a plan of conversion whereby the Bank will
convert to capital stock form as the subsidiary of Niagara Bancorp MHC (the
"Mutual Holding Company") and Niagara Bancorp Inc. (the "Holding Company"),
subject to the approval of the Bank's depositors and the New York Banking
Department, the Federal Reserve Board and the Federal Deposit Insurance
Corporation (the "Conversion"); and
WHEREAS, the board of trustees of the Bank ("Board of Trustees") recognizes
that, as is the case with publicly held corporations generally, the possibility
of a change in control of the Holding Company and/or the Bank may exist and that
such possibility, and the uncertainty and questions which it may raise among
management, may result in the departure or distraction of key management
personnel to the detriment of the Bank, the Holding Company and their respective
stockholders; and
WHEREAS, the Board of Trustees believes it is in the best interests of the
Bank to enter into this Agreement with the Employee in order to assure
continuity of management of the Bank and to reinforce and encourage the
continued attention and dedication of the Employee to the Employee's assigned
duties without distraction in the face of potentially disruptive circumstances
arising from the possibility of a change in control of the Holding Company or
the Bank, although no such change is now contemplated; and
WHEREAS, the Board of Trustees has approved and authorized the execution of
this Agreement with the Employee to take effect as stated in Section 2 hereof;
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein, it is AGREED as follows:
1. Definitions.
-----------
(a) The term "Change in Control" of the Bank or the Company shall
mean an event 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 of 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
<PAGE>
Section 13(d) and 14(d) of the Exchange Act) other than the Company is or
becomes a "beneficial owner" (as defined in Rule 13-d under the Exchange Act)
directly or indirectly, of securities of the Bank or the Company representing
25% or more of the Bank's or the Company's outstanding securities except for any
securities purchased by the Bank's employee stock ownership plan and 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, however, that this subsection (b) shall not apply if the Incumbent
Board is replaced by the appointment by a Federal banking agency or conservator
or receiver for the Bank and provided further that any person becoming a
director subsequent to the date hereof whose election was approved by a vote of
at least two-thirds of the 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 (a), considered as though he were a member of the Incumbent Board;
or (c) a reorganization, merger, consolidation, sale of all or substantially all
the assets of the Bank or the Company or similar transaction occurs in which the
Bank or the Company is not the resulting entity and to which the Incumbent Board
does not consent; (d) a proxy statement soliciting proxies from stockholders of
the Bank, by someone other than the current management of the Bank, seeking
stockholder approval of a plan of reorganization, merger or consolidation of the
Company or the Bank or similar transaction with one or more corporations as a
result of which solicitation the outstanding shares of the class of securities
then subject to the plan or transaction are exchanged or converted into cash or
property or securities not issued by the Bank or the Company and the requisite
number of proxies approving such plan of reorganization, merger or consolidation
of the Company or the Bank are received and voted in favor of such transaction;
or (e) a tender offer is made for 25% or more of the voting securities of the
Bank and the shareholders owning beneficially or of record 25% or more of the
outstanding securities of the Bank have tendered or offered to sell their shares
pursuant to such tender offer and such tendered shares have been accepted by the
tender offer.
(b) The term "Commencement Date" means the date of completion of
Conversion.
(c) The term "Date of Termination" means the date upon which the
Employee ceases to serve as an employee of the Bank.
(d) The term "Involuntarily Termination" means termination of the
employment of Employee without the Employee's express written consent, and shall
include a material diminution of or interference with the Employee's duties,
responsibilities and benefits as _________ of the Bank, including (without
limitation) any of the following actions unless consented to in writing by the
Employee: (1) a change in the principal workplace of the Employee to a location
outside of a 100 mile radius from the Bank's headquarters office as of the date
hereof; (2) a material demotion of the Employee; (3) a material reduction in the
number or seniority of other Bank personnel reporting to the Employee or a
material reduction in the frequency with which, or in the nature of the matters
with respect to which, such personnel are to report to the Employee, other than
as part of a Bank- or Holding Company-wide reduction in staff; (4) a material
adverse change in the Employee's salary, perquisites, benefits, contingent
benefits or vacation, other than as part of an overall program applied uniformly
and with equitable effect to all members of the senior management of the Bank or
the Holding Company; and (5) a material
2
<PAGE>
permanent increase in the required hours of work or the workload of the
Employee. The term "Involuntary Termination" does not include Termination for
Cause or termination of employment due to retirement, death, disability or
suspension or temporary or permanent prohibition from participation in the
conduct of the Bank's affairs under Section 8 of the Federal Deposit Insurance
Act ("FDIA").
(e) The terms "Termination for Cause" and "Terminated For Cause" mean
termination of the employment of the Employee because of the Employee's personal
dishonesty, willful misconduct, breach of a 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. The Employee shall not be deemed to have been Terminated for Cause
unless and until there shall have been delivered to the Employee a copy of a
resolution, duly adopted by the affirmative vote of not less than a majority of
the entire membership of the Board of Trustees of the Bank at a meeting of the
Board called and held for such purpose (after reasonable notice to the Employee
and an opportunity for the Employee, together with the Employee's counsel, to be
heard before the Board), stating that in the good faith opinion of the Board the
Employee has engaged in conduct described in the preceding sentence and
specifying the particulars thereof in detail.
2. Term. The term of this Agreement shall be a period of [UP TO THREE]
----
years commencing on the Commencement Date, subject to earlier termination as
provided herein. Beginning on the first anniversary of the Commencement Date,
and on each anniversary thereafter, the term of this Agreement shall be extended
for a period of one year in addition to the then-remaining term, provided that
-------------
(1) the Bank has not given notice to the Employee in writing at least 90 days
prior to such anniversary that the term of this Agreement shall not be extended
further; and (2) prior to such anniversary, the Board of Trustees of the Bank
explicitly reviews and approves the extension. Reference herein to the term of
this Agreement shall refer to both such initial term and such extended terms.
3. Employment. The Employee is employed as _____________ of the Bank. As
----------
such, the Employee shall render administrative and management services as are
customarily performed by persons situated in similar executive capacities, and
shall have such other powers and duties of an officer of the Bank as the Board
of Trustees may prescribe from time to time.
4. Compensation.
------------
(a) Salary. The Bank agrees to pay the Employee during the term of
------
this Agreement, not less frequently than monthly, the salary established by the
Board of Trustees, which shall be at least the Employee's salary in effect as of
the Commencement Date. The amount of the Employee's salary shall be reviewed by
the Board of Trustees, beginning not later than the first anniversary of the
Commencement Date. Adjustments in salary or other compensation shall not limit
or reduce any other obligation of the Bank under this Agreement. The Employee's
salary in effect from time to time during the term of this Agreement shall not
thereafter be reduced.
3
<PAGE>
(b) Discretionary Bonuses. The Employee shall be entitled to
---------------------
participate in an equitable manner with all other executive officers of the Bank
in discretionary bonuses as authorized and declared by the Board of Trustees to
its executive employees. No other compensation provided for in this Agreement
shall be deemed a substitute for the Employee's right to participate in such
bonuses when and as declared by the Board of Trustees.
(c) Expenses. The Employee shall be entitled to receive prompt
--------
reimbursement for all reasonable expenses incurred by the Employee in performing
services under this Agreement in accordance with the policies and procedures
applicable to the executive officers of the Bank, provided that the Employee
-------- ----
accounts for such expenses as required under such policies and procedures.
5. Benefits.
--------
(a) Participation in Retirement and Employee Benefit Plans. The
------------------------------------------------------
Employee shall be entitled to participate in all plans relating to pension,
thrift, profit-sharing, group life and disability insurance, medical and dental
coverage, education, cash bonuses, and other retirement or employee benefits or
combinations thereof, in which the Bank's executive officers participate.
(b) Fringe Benefits. The Employee shall be eligible to participate
---------------
in, and receive benefits under, any fringe benefit plans which are or may become
applicable to the Bank's executive officers.
6. Vacations; Leave. The Employee shall be entitled to annual paid
----------------
vacation in accordance with the policies established by the Bank's Board of
Trustees for executive employees and to voluntary leave of absence, with or
without pay, from time to time at such times and upon such conditions as the
Board of Trustees of the Bank may determine in its discretion.
7. Termination of Employment.
-------------------------
(a) Involuntary Termination. The Board of Trustees may terminate the
-----------------------
Employee's employment at any time, but, except in the case of Termination for
Cause, termination of employment shall not prejudice the Employee's right to
compensation or other benefits under this Agreement. In the event of
Involuntary Termination other than in connection with or within twelve (12)
months after a Change in Control, (1) the Bank shall pay to the Employee during
the remaining term of this Agreement, the Employee's salary at the rate in
effect immediately prior to the Date of Termination, payable in such manner and
at such times as such salary would have been payable to the Employee under
Section 4 if the Employee had continued to be employed by the Bank, and (2) the
Bank shall provide to the Employee during the remaining term of this Agreement
substantially the same health benefits as the Bank maintained for its executive
officers immediately prior to the Date of Termination.
(b) Termination for Cause. In the event of Termination for Cause,
---------------------
the Bank shall pay the Employee the Employee's salary through the Date of
Termination, and the Bank shall have no further obligation to the Employee under
this Agreement.
4
<PAGE>
(c) Voluntary Termination. The Employee's employment may be
---------------------
voluntarily terminated by the Employee at any time upon 90 days written notice
to the Bank or upon such shorter period as may be agreed upon between the
Employee and the Board of Trustees of the Bank. In the event of such voluntary
termination, the Bank shall be obligated to continue to pay to the Employee the
Employee's salary and benefits only through the Date of Termination, at the time
such payments are due, and the Bank shall have no further obligation to the
Employee under this Agreement.
(d) Change in Control. In the event of Involuntary Termination in
-----------------
connection with or within 12 months after a Change in Control which occurs at
any time while the Employee is employed under this Agreement, the Bank shall,
subject to Section 8 of this Agreement, (1) pay to the Employee in a lump sum in
cash within 25 business days after the Date of Termination an amount equal to
299% of the Employee's "base amount" as defined in Section 280G of the Internal
Revenue Code of 1986, as amended (the "Code"); and (2) provide to the Employee
during the remaining term of this Agreement substantially the same health
benefits as the Bank maintained for its executive officers immediately prior to
the Change in Control.
(e) Death; Disability. In the event of the death of the Employee
-----------------
while employed under this Agreement and prior to any termination of employment,
the Employee's estate, or such person as the Employee may have previously
designated in writing, shall be entitled to receive from the Bank the salary of
the Employee through the last day of the calendar month in which the Employee
died. If the Employee becomes disabled as defined in the Bank's then current
disability plan, if any, or if the employee is otherwise unable to serve as
______________, this Agreement shall continue in full force and effect, except
that the salary paid to the Employee shall be reduced by any disability
insurance payments made to Employee on policies of insurance maintained by the
Bank at its expense.
(f) Temporary Suspension or Prohibition. If the Employee is
-----------------------------------
suspended and/or temporarily prohibited from participating in the conduct of the
Bank's affairs by a notice served under Section 8(e)(3) or (g)(1) of the FDIA,
12 U.S.C. (S) 1818(e)(3) and (g)(1), the Bank's obligations under this Agreement
shall be suspended as of the date of service, unless stayed by appropriate
proceedings. If the charges in the notice are dismissed, the Bank may in its
discretion (1) pay the Employee all or part of the compensation withheld while
its obligations under this Agreement were suspended and (ii) reinstate in whole
or in part any of its obligations which were suspended.
(g) Permanent Suspension or Prohibition. If the Employee is removed
-----------------------------------
and/or permanently prohibited from participating in the conduct of the Bank's
affairs by an order issued under Section 8(e)(4) or (g)(1) of the FDIA, 12
U.S.C. (S) 1818(e)(4) and (g)(1), all obligations of the Bank under this
Agreement shall terminate as of the effective date of the order, but vested
rights of the contracting parties shall not be affected.
(h) Default of the Bank. If the Bank is in default (as defined in
-------------------
Section 3(x)(1) of the FDIA), all obligations under this Agreement shall
terminate as of the date of default, but this provision shall not affect any
vested rights of the contracting parties.
5
<PAGE>
(i) Termination by Regulators. All obligations under this Agreement
-------------------------
shall be terminated, except to the extent determined that continuation of this
Agreement is necessary for the continued operation of the Bank: (1) by the
Federal Deposit Insurance Corporation (the "FDIC") at the time the FDIC enters
into an agreement to provide assistance to or on behalf of the Bank under the
authority contained in Section 13(c) of the FDIA; or when the Bank is determined
by the FDIC to be in an unsafe or unsound condition. Any rights of the parties
that have already vested, however, shall not be affected by any such action.
8. Certain Reduction of Payments by the Bank.
-----------------------------------------
(a) Notwithstanding any other provision of this Agreement, if
payments under this Agreement, together with any other payments received or to
be received by the Employee in connection with a Change in Control would be
deemed to include an "excess parachute payment" pursuant to Section 280G of the
Code, then benefits under this Agreement shall be reduced (not less than zero)
to the extent necessary to avoid the payment of an excess parachute payment by
the Bank. The Employee shall determine the allocation of such reduction among
payments to the Employee.
(b) Any payments made to the Employee pursuant to this Agreement, or
otherwise, are subject to and conditioned upon their compliance with 36 U.S.C.
(S) 1828(k) and any regulations promulgated thereunder.
9. No Mitigation. The Employee shall not be required to mitigate the
-------------
amount of any salary or other payment or benefit provided for in this Agreement
by seeking other employment or otherwise, nor shall the amount of any payment or
benefit provided for in this Agreement be reduced by any compensation earned by
the Employee as the result of employment by another employer, by retirement
benefits after the Date of Termination, or otherwise.
10. Attorneys Fees. In the event the Bank exercises its right of
--------------
Termination for Cause, but it is determined by a court of competent jurisdiction
or by an arbitrator pursuant to Section 17 that cause did not exist for such
termination, or if in any event it is determined by any such court or arbitrator
that the Bank has failed to make timely payment of any amounts owed to the
Employee under this Agreement, the Employee shall be entitled to reimbursement
for all reasonable costs, including attorneys' fees, incurred in challenging
such termination or collecting such amounts. Such reimbursement shall be in
addition to all rights to which the Employee is otherwise entitled under this
Agreement.
11. No Assignments.
--------------
(a) This Agreement is personal to each of the parties hereto, and
neither party may assign or delegate any of its rights or obligations hereunder
without first obtaining the written consent of the other party; provided,
however, that the Bank shall require any successor or assign (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Bank, by an assumption
agreement in form and substance satisfactory to the Employee, to expressly
assume and agree to perform this Agreement in the
6
<PAGE>
same manner and to the same extent that the Bank would be required to perform it
if no such succession or assignment had taken place. Failure of the Bank to
obtain such an assumption agreement prior to the effectiveness of any such
succession or assignment shall be a breach of this Agreement and shall entitle
the Employee to compensation from the Bank in the same amount and on the same
terms as the compensation pursuant to Section 7(d) hereof. For purposes of
implementing the provisions of this Section 11(a), the date on which any such
succession becomes effective shall be deemed the Date of Termination.
(b) This Agreement and all rights of the Employee hereunder shall
inure to the benefit of and be enforceable by the Employee's personal and legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees. If the Employee should die while any amounts would still
be payable to the Employee hereunder, all such amounts, unless otherwise
provided herein, shall be paid in accordance with the terms of this Agreement to
the Employee's devisee, legatee or other designee or if there is no such
designee, to the Employee's estate.
12. Notice. For the purposes of this Agreement, notices and all other
------
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when personally delivered or sent by certified
mail, return receipt requested, postage prepaid, to the Bank at its home office,
to the attention of the Board of Trustees with a copy to the Secretary of the
Bank, or, if to the Employee, to such home or other address as the Employee has
most recently provided in writing to the Bank.
13. Amendments. No amendments or additions to this Agreement shall be
----------
binding unless in writing and signed by both parties, except as herein otherwise
provided.
14. Headings. The headings used in this Agreement are included solely for
--------
convenience and shall not affect, or be used in connection with, the
interpretation of this Agreement.
15. Severability. The provisions of this Agreement shall be deemed
------------
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
16. Governing Law. This Agreement shall be governed by the laws of the
-------------
United States to the extent applicable and otherwise by the laws of the State of
New York.
17. Arbitration. Any dispute or controversy arising under or in
-----------
connection with this Agreement shall be settled exclusively by arbitration in
accordance with the rules of the American Arbitration Association then in
effect. Judgment may be entered on the arbitrator's award in any court having
jurisdiction.
[Remainder of Page Intentionally Left Blank]
7
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written.
THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE
ENFORCED BY THE PARTIES.
Attest: LOCKPORT SAVINGS BANK
_____________________ By: __________________________________
Secretary William E. Swan, President
EMPLOYEE
______________________________________
8
<PAGE>
EXHIBIT 10.2
LOCKPORT SAVINGS BANK
DEFERRED COMPENSATION PLAN
ARTICLE I
BACKGROUND, PURPOSE, AND EFFECTIVE DATE
---------------------------------------
SECTION 1.01 BACKGROUND AND PURPOSE OF THE PLAN
- ------------ ----------------------------------
The Lockport Savings Bank (the "Bank") wishes to provide certain key
members of its management with deferred compensation as an inducement to
continued employment.
SECTION 1.02 EFFECTIVE DATE AND TERM
- ------------ -----------------------
The Bank hereby adopts the Lockport Savings Bank Deferred Compensation
Plan (the "Plan"). The Plan shall become effective as of January 1, 1993, upon
adoption by the Board of Trustees of the Bank (the "Board"), and shall continue
until such time as it is terminated by resolution of the Board in accordance
with Article V.
SECTION 1.03 PARTICIPATION
- ------------ -------------
From time to time, the Board, in its sole discretion, may name certain
of its key members of management to become participants in the Plan (each such
person is referred to herein as the "Executive"). The Executive shall commence
participation in the Plan on the date the Board first declares a contribution
for such Executive under Section 2.01.
<PAGE>
ARTICLE II
CONTRIBUTIONS
-------------
SECTION 2.01 DEFERRED COMPENSATION
- ------------ ---------------------
For each calendar year, commencing with January 1, 1993 and continuing
for each calendar year during which this Plan remains in effect, the Bank shall
credit the Executive's Deferred Compensation Account, as hereinafter defined,
with an amount that shall be determined in the sole discretion of the Board. Any
annual credit hereunder shall be made as of the first day following the close of
the calendar year with respect to which such credit is made.
ARTICLE III
ACCOUNT AND INVESTMENT
----------------------
SECTION 3.01 THE DEFERRED COMPENSATION ACCOUNT
- ------------ ---------------------------------
A. Maintenance of the Account. The Bank shall maintain for each
Executive an account ("Deferred Compensation Account") to which it shall credit
all amounts allocated thereto in accordance with Section 2.01. Each Executive's
Deferred Compensation Account shall be adjusted no less often than annually,
beginning December 31, 1993, to reflect the credits made to the Deferred
Compensation Account and hypothetical earnings thereon pursuant to Section 3.02.
Such adjustments shall be made as long as any amount remains credited to the
Deferred Compensation Account. The amounts allocated and the
<PAGE>
adjustments made shall comprise the Deferred Compensation Account at any time.
B. A Deferred Compensation Account does not constitute a trust fund
or escrow.
C. Each Executive's interest in his or her Deferred Compensation
Account is limited to the right to receive payments under this Plan, and the
Executive's position is that of a general unsecured creditor of the Bank.
SECTION 3.02 EARNINGS
- ------------ --------
Any amounts represented by a Deferred Compensation Account shall be
credited with hypothetical earnings at a rate that shall be determined, no less
often than annually, in the sole discretion of the Board. Earnings shall accrue
annually on the balance as of the first day of each calendar year and shall be
credited annually as of the last day of the calendar year during which such
interest accrued.
SECTION 3.03 VESTING
- ------------ -------
A. Except as otherwise provided in this Section, at any time the
Executive shall have a nonforfeitable right in the portion of the Deferred
Compensation Account given by the following schedule:
<PAGE>
<TABLE>
<CAPTION>
Number of Years Nonforfeitable
of Participation Percentage
---------------- --------------
<S> <C>
Less than 6 0%
6 but less than 7 20%
7 but less than 8 40%
8 but less than 9 60%
9 but less than 10 80%
10 or more 100%
</TABLE>
An Executive's Years of Participation at any time shall be equal to the number
of whole years of employment with the Bank measured from the date that an
Executive becomes a participant under Section 1.03. Notwithstanding the
preceding sentence, for an Executive who becomes a participant in the Plan on or
before December 31, 1993, years of participation shall be measured from January
1, 1993.
B. Subsection A notwithstanding, and except as provided in
Subsection C and D, each Executive shall have a nonforfeitable right to all
amounts represented by his or her Deferred Compensation Account either upon (i)
the Executive's attaining age 60, and completion of five Years of Participation,
if the Executive has not severed his employment with the Bank prior to that
date, or (ii) upon a Change of Control of the Bank, as hereafter defined.
C. If the Executive shall die before separation from service with
the Bank, the Executive and his or her Beneficiary shall forfeit all rights to
amounts represented by the Deferred Compensation Account.
<PAGE>
D. Notwithstanding the foregoing provisions of this Section, the
Executive or his or her beneficiary shall forfeit all rights to amounts
represented by the Deferred Compensation Account if it shall be determined at
any time that the Executive engaged in a dishonest act in the Executive's
relationship with the Bank.
ARTICLE IV
BENEFITS
--------
SECTION 4.01 UPON TERMINATION OF EMPLOYMENT.
- ------------ -----------------------------
Upon an Executive's severance of service with the Bank for any reason
other than death (the date of which shall be referred to as the "Date of
Severance"), the Bank shall pay to the Executive the vested value of the
Deferred Compensation Account (the "Benefit") as hereinafter provided.
A. If on the Date of Severance the Executive has attained age 60, or
if severance is because of Permanent Disability, the Benefit shall be paid to
the Executive in fifteen substantially equal annual payments commencing 30 days
after the Executive's Date of Severance.
B. If on the Date of Severance the Executive has not attained age
60, the Benefit shall be paid to the Executive in fifteen substantially equal
annual payments commencing 30 days after the Executive has attained age 60.
<PAGE>
C. Subsection A and B notwithstanding, if the Date of Severance is
the result of the involuntary termination of the Executive within two years
after a Change of Control, the Benefit shall be paid to the Executive within 10
days of the Date of Severance as a lump-sum settlement of the economic
obligations of the Bank under this Agreement.
SECTION 4.02 UPON DEATH AFTER SEVERANCE FROM SERVICE.
- ------------ ---------------------------------------
A. Prior to Commencement of Payment of the Benefit. In the event of
-----------------------------------------------
an Executive's death prior to the commencement of payment of the Benefit under
Section 4.01, the Bank shall pay to his or her Beneficiary the Benefit in
fifteen substantially equal annual payments commencing 30 days after the
Executive's death.
B. After Commencement of Payment of the Benefit. In the event of an
--------------------------------------------
Executive's death after commencement of the payment of the Benefit under Section
4.01, the Bank shall continue payment of the remaining balance of the Benefit to
his or her Beneficiary in the same manner and at the same times as if the
Executive had not died.
SECTION 4.03 UNFORESEEABLE EMERGENCY
- ------------ -----------------------
A. In the case of an unforeseeable emergency, as defined below, an
Executive may submit a written request to the Bank for (1) a distribution of
all or a part of his or her Deferred Compensation Account prior to the date
benefits otherwise would be payable, or (2) an acceleration of the payment
<PAGE>
of installment payments that have already begun. Withdrawals or acceleration
because of an unforeseeable emergency shall be permitted only to the extent
reasonably necessary to satisfy the emergency.
B. An unforeseeable emergency is a severe financial hardship
resulting from extraordinary and unforeseeable circumstances arising as a result
of one or more recent events beyond the control of the Executive. The need to
send the Executive's child to college or the desire to purchase a residence will
not be considered unforeseeable emergencies. Withdrawals or acceleration will
not be permitted to the extent such emergency is or may be relieved: (1) through
reimbursement or compensation by insurance or otherwise, or (2) by liquidation
of the Executive's assets, to the extent the liquidation of such assets would
not itself cause severe financial hardship.
ARTICLE V
AMENDMENT, SUSPENSION, OR TERMINATION
-------------------------------------
SECTION 5.01 AMENDMENT, SUSPENSION, OR TERMINATION
- ------------ -------------------------------------
The Board may amend, suspend or terminate the Plan, in whole or in
part, at any time and from time to time by resolution adopted at a regular or
special meeting of the Board, and only in such manner.
<PAGE>
SECTION 5.02 NO REDUCTION
- ------------ ------------
No amendment, suspension or termination of the Plan shall operate to
adversely affect the Benefit otherwise available to an Executive as if the
Executive's employment by the Bank had terminated as of the effective date of
such amendment, suspension, or termination. Any Benefit determined as of such
date shall continue to be adjusted as provided in Article III and shall be
payable as provided in Article IV.
ARTICLE VI
MISCELLANEOUS PROVISIONS
------------------------
SECTION 6.01 DEFINITIONS
- ------------ -----------
A. "Beneficiary" shall mean any one or more persons, corporations or
trusts, or any combination thereof, last designated by an Executive to receive
the Benefit provided under this Plan. Any designation made hereunder shall be
revocable, shall be in writing either on a facsimile of the form annexed hereto
as Schedule 1 or in a written instrument containing the information requested in
Schedule 1, and shall be effective when delivered to the Bank at its principal
office. If the Bank, in its sole discretion, determines that there is not a
valid designation, the Beneficiary shall be the executor or administrator of the
Executive's estate.
B. "Permanent Disability" shall be deemed to exist if, in the
opinion of a licensed practicing physician selected by
<PAGE>
the Bank, the Executive has been rendered permanently unable to perform the
duties assigned to him or her. The determination by such physician as to the
fact of Permanent Disability shall be made in writing to the Bank. If there is a
dispute as to the fact of Permanent Disability, Permanent Disability shall be
determined by a panel of three licensed practicing physicians, one chosen by the
Executive, one chosen by the Bank, and one chosen by the two so selected
physicians.
C. There shall be a "Change of Control" if any of the following
events occur:
1. The Bank enters into a merger, consolidation, or other
business combination with another entity (including a merger with another mutual
or stock form bank), regardless of whether the Bank is the survivor, and a
majority of the directors or trustees of the surviving entity are not Continuing
Directors.
2. 50% or more of the assets of the Bank are sold, transferred
or exchanged, regardless of the consideration received by the Bank.
3. The Bank converts from mutual to stock form after which--
a. any Person acquires beneficial ownership of 25% or more
of the Voting Stock of the Bank, unless such acquisition is approved in advance
by a majority of the Board of Directors or, if there is an Interested
Stockholder, by a majority of the Continuing Directors;
<PAGE>
b. there is an Interested Stockholder and a contested
election (or series of contested elections) of Directors of the Bank occurs
which results in a majority of the Board of Directors who are not Continuing
Directors;
3. For purposes of this Subsection, the following definitions
shall apply:
a. An "Interested Stockholder" shall mean any Person who
is a Beneficial Owner of more than ten percent of the then outstanding shares of
Voting Stock.
b. A "Continuing Director" means any member of the board
of directors who is not an Affiliate or Associate of (i) an entity effecting a
merger, consolidation or other business combination with the Bank, or (ii) an
Interested Stockholder.
c. "Affiliate" and "Associate" shall have the respective
meanings ascribed to these terms in Rule 12b-2 promulgated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act").
d. A "Beneficial Owner" of any shares of Voting Stock
shall mean any Person who or which, alone or with any Affiliate or Associate:
(i) directly or indirectly has or shares (a) the right
to acquire or direct the acquisition of such shares (whether such right is
exercisable immediately or only after the passage of time or in the satisfaction
of any conditions or both), pursuant to any agreement, arrangement or
understanding or upon the exercise of any conversion rights,
<PAGE>
warrants or options or otherwise; (b) the right to vote, or direct the voting
of, such shares pursuant to any agreement, arrangement, or understanding or
otherwise; or (c) the right to dispose of or transfer or direct the disposition
or transfer of such shares, pursuant to any agreement, arrangement,
understanding or otherwise;
(ii) has any agreement, arrangement or understanding
for the purpose of acquiring, holding, voting or disposing of any shares of
Voting Stock with any person who beneficially owns, directly or indirectly, any
such shares; or
(iii) would otherwise be characterized as a "beneficial
owner" of such Voting Stock under Rule 13d-3 of the General Rules and
Regulations under the Exchange Act.
e. A "Person" means an individual, a group acting in
concert, a corporation, a partnership, an association, a joint stock company, a
trust, a business trust, any unincorporated organization, or any similar
association or entity.
f. A "Group Acting in Concert" means any Persons seeking
to combine or pool their voting or other interests in the securities of the Bank
for a common purpose, pursuant to any contract, understanding, relationship,
agreement or other arrangement, whether written or oral or otherwise, or any
"group of persons" as defined under Section 13(d) of the Exchange Act.
<PAGE>
g. "Voting Stock" shall mean any capital stock of the Bank
entitling its holder to vote in the election of directors of the Bank.
SECTION 6.02 NONASSIGNABILITY
- ------------ ----------------
The interest of any person under this Plan (other than the Bank) shall
not be subject in any manner to anticipation, alienation, sale, transfer,
assignment, pledge, attachment or encumbrance, or to the claims of creditors of
such person, and any attempt to effectuate any such actions shall be void.
SECTION 6.03 INTEREST OF EXECUTIVE
- ------------ ---------------------
The Executive and any Beneficiary shall, in respect to the Deferred
Compensation Account and any Benefit to be paid, shall be and remain simply a
creditor of the Bank in the same manner as any other creditor having a general
claim for compensation, if and when the Executive's or Beneficiary's rights to
receive payments shall mature and become payable. At no time shall the Executive
be deemed to have any right, title or interest, legal or equitable, in any asset
of the Bank.
SECTION 6.04 SIMULTANEOUS DEATH
- ------------ ------------------
If the Executive (or the primary Beneficiary) and any other person who
would become entitled to receive any distribution hereunder by reason of the
death of the Executive (or primary Beneficiary) shall die in a common accident
or disaster or under such circumstances that it is difficult to
<PAGE>
determine which died first, then for all purposes of this Agreement the primary
Beneficiary (or secondary Beneficiary) shall be treated as having predeceased
the Executive (or the primary Beneficiary).
SECTION 6.05 EXCLUSIVITY OF PLAN
- ------------ -------------------
This Plan is intended solely for the purpose of deferring compensation
to the Executives to the mutual advantage of the parties. Nothing contained in
this Plan shall in any way affect or interfere with the right of an Executive to
participate in any other benefit plan in which he or she may be entitled to
participate.
SECTION 6.06 NO RIGHT TO CONTINUED SERVICE
- ------------ -----------------------------
This Plan shall not confer any right to continued service with the
Bank on an Executive.
SECTION 6.07 NOTICE
- ------------ ------
Each notice and other communication to be given pursuant to this Plan
shall be in writing and shall be deemed given only when (a) delivered by hand,
(b) transmitted by telex or telecopier, provided that a copy is sent at
approximately the same time by registered or certified mail (return receipt
requested) to the Bank at its principal office and to an Executive at the last
known address of such Executive (c) received by the addressee, if sent by
registered or certified mail (return receipt requested), or by Express Mail,
Federal
<PAGE>
Express or other overnight delivery service, to an address as specified in
paragraph (b) or to such other address or to such other address or telecopier
number as a party may specify by notice given to the party pursuant to this
Section.
SECTION 6.08 NEW YORK LAW CONTROLLING
- ------------ ------------------------
This Plan shall be construed in accordance with the laws of the State
of New York.
SECTION 6.09 BINDING ON SUCCESSORS
- ------------ ---------------------
This Plan shall be binding upon the Executives and the Bank, their
heirs, successors, legal representatives and assigns.
LOCKPORT SAVINGS BANK
Dated: October 4, 1993 By: /s/ William E. Swan
--------- -------------------
Title President & Ceo
<PAGE>
EXHIBIT 10.3
LOCKPORT SAVINGS BANK
EMPLOYEE STOCK OWNERSHIP PLAN
(adopted effective ___________, 1998)
<PAGE>
LOCKPORT SAVINGS BANK
EMPLOYEE STOCK OWNERSHIP PLAN
This Employee Stock Ownership Plan, executed on the ____ day of
_____________, 1998, by Lockport Savings Bank, a New York chartered stock
savings bank (the "Bank"),
W I T N E S S E T H T H A T
WHEREAS, the board of directors of the Bank has resolved to adopt an
employee stock ownership plan for eligible employees in accordance with the
terms and conditions presented to the directors;
NOW, THEREFORE, the Bank hereby adopts the following Plan setting forth the
terms and conditions pertaining to contributions by the Employer and the payment
of benefits to Participants and Beneficiaries.
IN WITNESS WHEREOF, the Bank has adopted this Plan and caused this
instrument to be executed by its duly authorized officers as of the above date.
ATTEST:
_________________________ By:________________________________
Secretary President
<PAGE>
C 0 N T E N T S
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Section 1. Plan Identity..................................................................-1-
-------------
1.1 Name........................................................................-1-
----
1.2 Purpose.....................................................................-1-
-------
1.3 Effective Date..............................................................-1-
--------------
1.4 Fiscal Period...............................................................-1-
-------------
1.5 Single Plan for All Employers...............................................-1-
-----------------------------
1.6 Interpretation of Provisions................................................-1-
----------------------------
Section 2. Definitions....................................................................-1-
-----------
Section 3. Eligibility for Participation...............................................-8-
-----------------------------
3.1 Initial Eligibility.........................................................-8-
-------------------
3.2 Definition of Eligibility Year..............................................-8-
------------------------------
3.3 Terminated Employees........................................................-8-
--------------------
3.4 Certain Employees Ineligible................................................-8-
----------------------------
3.5 Participation and Reparticipation...........................................-8-
---------------------------------
3.6 Omission of Eligible Employee...............................................-8-
-----------------------------
3.7 Inclusion of Ineligible Employee............................................-9-
--------------------------------
Section 4. Contributions and Credits...................................................-9-
-------------------------
4.1 Discretionary Contributions.................................................-9-
---------------------------
4.2 Contributions for Stock Obligations.........................................-9-
-----------------------------------
4.3 Definitions Related to Contributions........................................-9-
------------------------------------
4.4 Conditions as to Contributions.............................................-10-
------------------------------
4.5 Transfers..................................................................-10-
---------
Section 5. Limitations on Contributions and Allocations...............................-10-
--------------------------------------------
5.1 Limitation on Annual Additions.............................................-10-
------------------------------
5.2 Coordinated Limitation With Other Plans....................................-12-
---------------------------------------
5.3 Effect of Limitations......................................................-12-
---------------------
5.4 Limitations as to Certain Participants.....................................-13-
--------------------------------------
Section 6. Trust Fund and Its Investment..............................................-13-
-----------------------------
6.1 Creation of Trust Fund.....................................................-13-
----------------------
6.2 Stock Fund and Investment Fund.............................................-13-
------------------------------
6.3 Acquisition of Stock.......................................................-14-
--------------------
6.4 Participants' Option to Diversify..........................................-14-
---------------------------------
Section 7. Voting Rights and Dividends on Stock.......................................-15-
------------------------------------
7.1 Voting and Tendering of Stock..............................................-15-
-----------------------------
7.2 Dividends on Stock.........................................................-16-
------------------
</TABLE>
(i)
<PAGE>
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Section 8. Adjustments to Accounts....................................................-16-
-----------------------
8.1 Adjustments for Transactions...............................................-16-
----------------------------
8.2 Valuation of Investment Fund...............................................-16-
----------------------------
8.3 Adjustments for Investment Experience......................................-17-
-------------------------------------
Section 9. Vesting of Participants' Interests.........................................-17-
----------------------------------
9.3 Full Vesting Upon Certain Events...........................................-18-
--------------------------------
9.4 Full Vesting Upon Plan Termination.........................................-19-
----------------------------------
9.5 Forfeiture, Repayment, and Restoral........................................-19-
-----------------------------------
9.6 Accounting for Forfeitures.................................................-19-
--------------------------
9.7 Vesting and Nonforfeitability..............................................-19-
-----------------------------
Section 10. Payment of Benefits........................................................-19-
-------------------
10.1 Benefits for Participants..................................................-19-
-------------------------
10.2 Time for Distribution......................................................-20-
---------------------
10.3 Marital Status.............................................................-21-
--------------
10.4 Delay in Benefit Determination.............................................-21-
------------------------------
10.5 Accounting for Benefit Payments............................................-21-
-------------------------------
10.6 Options to Receive and Sell Stock..........................................-21-
---------------------------------
10.7 Restrictions on Disposition of Stock.......................................-22-
------------------------------------
10.8 Continuing Loan Provisions; Creations of Protections and Rights............-23-
---------------------------------------------------------------
10.9 Direct Rollover of Eligible Distribution...................................-23-
----------------------------------------
10.10 In Service Distribution of Roll-over Account..............................-23-
--------------------------------------------
10.11 Waiver of 30 Day Period After Notice of Distribution......................-24-
----------------------------------------------------
Section 11. Rules Governing Benefit Claims and Review of Appeals.......................-24-
----------------------------------------------------
11.1 Claim for Benefits.........................................................-24-
------------------
11.2 Notification by Committee..................................................-24-
-------------------------
11.3 Claims Review Procedure....................................................-24-
-----------------------
Section 12. The Committee and Its Functions............................................-25-
-------------------------------
12.1 Authority of Committee.....................................................-25-
----------------------
12.2 Identity of Committee......................................................-25-
---------------------
12.3 Duties of Committee........................................................-25-
-------------------
12.4 Valuation of Stock.........................................................-25-
------------------
12.5 Compliance with ERISA......................................................-26-
---------------------
12.6 Action by Committee........................................................-26-
-------------------
12.7 Execution of Documents.....................................................-26-
----------------------
12.8 Adoption of Rules..........................................................-26-
-----------------
12.9 Responsibilities to Participants...........................................-26-
--------------------------------
12.10 Alternative Payees in Event of Incapacity..................................-26-
-----------------------------------------
12.11 Indemnification by Employers...............................................-26-
----------------------------
12.12 Nonparticipation by Interested Member......................................-27-
-------------------------------------
</TABLE>
(ii)
<PAGE>
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Section 13. Adoption, Amendment, or Termination of the Plan............................-27-
-----------------------------------------------
13.1 Adoption of Plan by Other Employers........................................-27-
-----------------------------------
13.2 Adoption of Plan by Successor..............................................-27-
-----------------------------
13.3 Plan Adoption Subject to Qualification.....................................-27-
--------------------------------------
13.4 Right to Amend or Terminate................................................-27-
---------------------------
Section 14. Miscellaneous Provisions...................................................-28-
------------------------
14.1 Plan Creates No Employment Rights..........................................-28-
---------------------------------
14.2 Nonassignability of Benefits...............................................-28-
----------------------------
14.3 Limit of Employer Liability................................................-28-
---------------------------
14.4 Treatment of Expenses......................................................-28-
---------------------
14.5 Number and Gender..........................................................-28-
-----------------
14.6 Nondiversion of Assets.....................................................-28-
----------------------
14.7 Separability of Provisions.................................................-28-
--------------------------
14.8 Service of Process.........................................................-29-
------------------
14.9 Governing State Law........................................................-29-
-------------------
14.10 Employer Contributions Conditioned on Deductibility........................-29-
---------------------------------------------------
14.11 Unclaimed Accounts.........................................................-29-
------------------
14.12 Qualified Domestic Relations Order.........................................-29-
----------------------------------
Section 15. Top-Heavy Provisions.......................................................-30-
--------------------
15.1 Top-Heavy Plan.............................................................-30-
--------------
15.2 Super Top-Heavy Plan.......................................................-30-
--------------------
15.3 Definitions................................................................-31-
-----------
15.4 Top-Heavy Rules of Application.............................................-32-
------------------------------
15.5 Top-Heavy Ratio............................................................-33-
---------------
15.6 Minimum Contributions......................................................-33-
---------------------
15.7 Minimum Vesting............................................................-34-
---------------
15.8 Top-Heavy Provisions Control in Top-Heavy Plan.............................-34-
----------------------------------------------
</TABLE>
(iii)
<PAGE>
LOCKPORT SAVINGS BANK
EMPLOYEE STOCK OWNERSHIP PLAN
SECTION 1. PLAN IDENTITY.
-------------
1.1 NAME. The name of this Plan is "Lockport Savings Bank Employee Stock
----
Ownership Plan."
1.2 PURPOSE. The purpose of this Plan is to describe the terms and
-------
conditions under which contributions made pursuant to the Plan will be credited
and paid to the Participants and their Beneficiaries.
1.3 EFFECTIVE DATE. The Effective Date of this Plan is __________ ,1998.
--------------
1.4 FISCAL PERIOD. This Plan shall be operated on the basis of a January
-------------
1 to December 31 fiscal year for the purpose of keeping the Plan's books and
records and distributing or filing any reports or returns required by law.
1.5 SINGLE PLAN FOR ALL EMPLOYERS. This Plan shall be treated as a single
-----------------------------
plan with respect to all participating Employers for the purpose of crediting
contributions and forfeitures and distributing benefits, determining whether
there has been any termination of Service, and applying the limitations set
forth in Section 5.
1.6 INTERPRETATION OF PROVISIONS. The Employers intend this Plan and the
----------------------------
Trust to be a qualified stock bonus plan under Section 401(a) of the Code and an
employee stock ownership plan within the meaning of Section 407(d)(6) of ERISA
and Section 4975(e)(7) of the Code. The Plan is intended to have its assets
invested primarily in qualifying employer securities of one or more Employers
within the meaning of Section 407(d)(3) of ERISA, and to satisfy any requirement
under ERISA or the Code applicable to such a plan.
Accordingly, the Plan and Trust Agreement shall be interpreted and applied
in a manner consistent with this intent and shall be administered at all times
and in all respects in a nondiscriminatory manner.
SECTION 2. DEFINITIONS.
-----------
The following capitalized words and phrases shall have the meanings
specified when used in this Plan and in the Trust Agreement, unless the context
clearly indicates otherwise:
"ACCOUNT" means a Participant's interest in the assets accumulated under
this Plan as expressed in terms of a separate account balance which is
periodically adjusted to reflect his Employer's contributions, the Plan's
investment experience, and distributions and forfeitures.
"ACTIVE PARTICIPANT" means any Employee who has satisfied the eligibility
requirements of Section 3 and who qualifies as an Active Participant for a
particular Plan Year under Section 4.3.
"BANK" means Lockport Savings Bank and any entity which succeeds to the
business of Lockport Savings Bank and adopts this Plan as its own pursuant to
Section 14.2.
<PAGE>
"BENEFICIARY" means the person or persons who are designated by a
Participant to receive benefits payable under the Plan on the Participant's
death. In the absence of any designation or if all the designated Beneficiaries
shall die before the Participant dies or shall die before all benefits have been
paid, the Participant's Beneficiary shall be his surviving Spouse, if any, or
his estate if he is not survived by a Spouse. The Committee may rely upon the
advice of the Participant's executor or administrator as to the identity of the
Participant's Spouse.
"BREAK IN SERVICE" means any Plan Year in which an Employee has 500 or
fewer Hours of Service. Solely for this purpose, an Employee shall be considered
employed for his normal hours of paid employment during a Recognized Absence
(said Employee shall not be credited with more than 501 Hours of Service to
avoid a Break in Service), unless he does not resume his Service at the end of
the Recognized Absence. Further, if an Employee is absent for any period
beginning on or after January 1, 1985, (i) by reason of the Employee's
pregnancy, (ii) by reason of the birth of the Employee's child, (iii) by reason
of the placement of a child with the Employee in connection with the Employee's
adoption of the child, or (iv) for purposes of caring for such child for a
period beginning immediately after such birth or placement, the Employee shall
be credited with the Hours of Service which would normally have been credited
but for such absence, up to a maximum of 501 Hours of Service.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COMMITTEE" means the committee responsible for the administration of this
Plan in accordance with Section 12.
"COMPANY" means Niagara Bancorp Inc., the stock holding company of the
Bank.
"DISABILITY" means only a disability which renders the Participant totally
unable, as a result of bodily or mental disease or injury, to perform any duties
for an Employer for which he is reasonably fitted, which disability is expected
to be permanent or of long and indefinite duration. However, this term shall
not include any disability directly or indirectly resulting from or related to
habitual drunkenness or addiction to narcotics, a criminal act or attempt,
service in the armed forces of any country, an act of war, declared or
undeclared, any injury or disease occurring while compensation to the
Participant is suspended, or any injury which is intentionally self-inflicted.
Further, this term shall apply only if (i) the Participant is sufficiently
disabled to qualify for the payment of disability benefits under the federal
Social Security Act or Veterans Disability Act, or (ii) the Participant's
disability is certified by a physician selected by the Committee. Unless the
Participant is sufficiently disabled to qualify for disability benefits under
the federal Social Security Act or Veterans Disability Act, the Committee may
require the Participant to be appropriately examined from time to time by one or
more physicians chosen by the Committee, and no Participant who refuses to be
examined shall be treated as having a Disability. In any event, the Committee's
good faith decision as to whether a Participant's Service has been terminated by
Disability shall be final and conclusive.
"EARLY RETIREMENT" means retirement on or after a Participant's attainment
of age 55 and the completion of ten years of Service for an Employer. If the
Participant separates from Service before satisfying the age requirement, but
has satisfied the Service requirement, the Participant will be entitled to elect
early retirement upon satisfaction of the age requirement.
-2-
<PAGE>
"EMPLOYEE" means any individual who is or has been employed or self-
employed by an Employer. "Employee" also means an individual employed by a
leasing organization who, pursuant to an agreement between an Employer and the
leasing organization, has performed services for the Employer and any related
persons (within the meaning of Section 414(n)(6) of the Code) on a substantially
full-time basis for more than one year, if such services are performed under the
primary direction or control of the Employer. However, such a "leased employee"
shall not be considered an Employee if (i) he participates in a money purchase
pension plan sponsored by the leasing organization which provides for immediate
participation, immediate full vesting, and an annual contribution of at least 10
percent of the Employee's 415 Compensation, and (ii) leased employees do not
constitute more than 20 percent of the Employer's total work force (including
leased employees, but excluding Highly Paid Employees and any other employees
who have not performed services for the Employer on a substantially full-time
basis for at least one year).
"EMPLOYER" means the Bank or any affiliate within the purview of section
414(b), (c) or (m) and 415(h) of the Code, any other corporation, partnership,
or proprietorship which adopts this Plan with the Bank's consent pursuant to
Section 13.1, and any entity which succeeds to the business of any Employer and
adopts the Plan pursuant to Section 13.2.
"ENTRY DATE" means the Effective Date of the Plan and each January 1 and
July 1 of each Plan Year after the Effective Date.
"ERISA" means the Employee Retirement Income Security Act of 1974 (P.L. 93-
406, as amended).
"415 COMPENSATION"
(a) shall mean wages, as defined in Code Section 3401(a) for
purposes of income tax withholding at the source.
(b) For Plan Years beginning after December 31, 1997, any elective
deferral as defined in Code Section 402(g)(3) (any Employer contributions
made on behalf of a Participant to the extent not includible in gross
income and any Employer contributions to purchase an annuity contract under
Code Section 403(b) under a salary reduction agreement) and any amount
which is contributed or deferred by the Employer at the election of the
Participant and which is not includible in gross income of the Participant
by reason of Code Section 125 (Cafeteria Plan) shall also be included in
the definition of 415 Compensation.
(c) 415 Compensation in excess of $160,000 (as indexed) shall be
disregarded for all Participants. For purposes of this sub-section, the
$160,000 limit shall be referred to as the "applicable limit" for the Plan
Year in question. The $160,000 limit shall be adjusted for increases in
the cost of living in accordance with Section 401(a)(17)(B) of the Code,
effective for the Plan Year which begins within the applicable calendar
year. For purposes of the applicable limit, 415 Compensation shall be
prorated over short Plan Years.
"HIGHLY PAID EMPLOYEE" for any Plan Year means an Employee who, during
either of that or the immediately preceding Plan Year was at any time a five
percent owner of the Employer (as defined in
-3-
<PAGE>
Code Section 416(i)(1)) or had 415 Compensation exceeding $80,000 and was among
the most highly compensated one-fifth of all Employees. For this purpose:
(a) "415 Compensation" shall include any amount which is
excludable from the Employee's gross income for tax purposes pursuant to
Sections 125, 402(a)(8), 402(h)(1)(B), or 403(b) of the Code.
(b) The number of Employees in "the most highly compensated one-
fifth of all Employees" shall be determined by taking into account all
individuals working for all related Employer entities described in the
definition of "Service", but excluding any individual who has not completed
six months of Service, who normally works fewer than 17-1/2 hours per week
or in fewer than six months per year, who has not reached age 21, whose
employment is covered by a collective bargaining agreement, or who is a
nonresident alien who receives no earned income from United States sources.
"HOURS OF SERVICE" means hours to be credited to an Employee under the
following rules:
(a) Each hour for which an Employee is paid or is entitled to be
paid for services to an Employer is an Hour of Service.
(b) Each hour for which an Employee is directly or indirectly
paid or is entitled to be paid for a period of vacation, holidays, illness,
disability, lay-off, jury duty, temporary military duty, or leave of
absence is an Hour of Service. However, except as otherwise specifically
provided, no more than 501 Hours of Service shall be credited for any
single continuous period which an Employee performs no duties. No more
than 501 Hours of Service will be credited under this paragraph for any
single continuous period (whether or not such period occurs in a single
computation period). Further, no Hours of Service shall be credited on
account of payments made solely under a plan maintained to comply with
worker's compensation, unemployment compensation, or disability insurance
laws, or to reimburse an Employee for medical expenses.
(c) Each hour for which back pay (ignoring any mitigation of
damages) is either awarded or agreed to by an Employer is an Hour of
Service. However, no more than 501 Hours of Service shall be credited for
any single continuous period during which an Employee would not have
performed any duties. The same Hours of Service will not be credited both
under paragraph (a) or (b) as the case may be, and under this paragraph
(c). These hours will be credited to the employee for the computation
period or periods to which the award or agreement pertains rather than the
computation period in which the award agreement or payment is made.
(d) Hours of Service shall be credited in any one period only
under one of the foregoing paragraphs (a), (b) and (c); an Employee may not
get double credit for the same period.
(e) If an Employer finds it impractical to count the actual Hours
of Service for any class or group of non-hourly Employees, each Employee in
that class or group shall be credited with 45 Hours of Service for each
weekly pay period in which he has at least one Hour of Service. However, an
Employee shall be credited only for his normal working hours during a paid
absence.
(f) Hours of Service to be credited on account of a payment to an
Employee (including back pay) shall be recorded in the period of Service
for which the payment was made. If the period overlaps two or more Plan
Years, the Hours of Service credit shall be allocated in
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<PAGE>
proportion to the respective portions of the period included in the several
Plan Years. However, in the case of periods of 31 days or less, the
Administrator may apply a uniform policy of crediting the Hours of Service
to either the first Plan Year or the second.
(g) In all respects an Employee's Hours of Service shall be
counted as required by Section 2530.200b-2(b) and (c) of the Department of
Labor's regulations under Title I of ERISA.
"INVESTMENT FUND" means that portion of the Trust Fund consisting of assets
other than Stock. Notwithstanding the above, assets from the Investment Fund may
be used to purchase Stock in the open market or otherwise, or used to pay on the
Stock Obligation, and shares so purchased will be allocated to a Participant's
Stock Fund.
"NORMAL RETIREMENT" means retirement on or after the later of a
Participant's 65th birthday or fifth year of Service.
"NORMAL RETIREMENT DATE" means the later of the date on which a Participant
attains age 65 or completes five years of Service.
"PARTICIPANT" means any Employee who is participating in the Plan, or who
has previously participated in the Plan and still has a balance credited to his
Account.
"PLAN YEAR" means the twelve month period commencing January 1 and ending
December 31, 199_ and each period of 12 consecutive months beginning on January
1 of each succeeding year.
"RECOGNIZED ABSENCE" means a period for which --
(a) an Employer grants an Employee a leave of absence for a
limited period, but only if an Employer grants such leave on a
nondiscriminatory basis; or
(b) an Employee is temporarily laid off by an Employer because of
a change in business conditions; or
(c) an Employee is on active military duty, but only to the
extent that his employment rights are protected by the Military Selective
Service Act of 1967 (38 U.S.C. Sec. 2021).
"ROLL OVER ACCOUNT" means the separate account established to hold a
Participant's roll-over contributions and direct transfers.
"SERVICE" means an Employee's period(s) of employment or self-employment
with an Employer, excluding for initial eligibility purposes any period in which
the individual was a nonresident alien and did not receive from an Employer any
earned income which constituted income from sources within the United States.
An Employee's Service shall include any service which constitutes service with a
predecessor employer within the meaning of Section 414(a) of the Code. An
Employee's Service shall also include any service with an entity which is not an
Employer, but only either (i) for a period after 1975 in which the other entity
is a member of a controlled group of corporations or is under common control
with other trades and businesses within the meaning of Section 414(b) or 414(c)
of the Code, and a member of the controlled group or one of the trades and
businesses is an Employer, (ii) for a period after 1979 in which the other
entity is a member of an affiliated service group within the meaning of Section
414(m) of the Code, and a member of the affiliated service group is an Employer,
or (iii) all employers aggregated
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<PAGE>
with the Employer under Section 414(o) of the Code (but not until the Proposed
Regulations under Section 414(o) become effective).
"SPOUSE" means the individual, if any, to whom a Participant is lawfully
married on the date benefit payments to the Participant are to begin, or on the
date of the Participant's death, if earlier. A former spouse shall be treated
as the Spouse or surviving Spouse to the extent provided under a qualified
domestic relations order as described in section 414(p) of the Code.
"STOCK" means shares of the Company's voting common stock or preferred
stock meeting the requirements of Section 409(e)(3) of the Code issued by an
Employer which is a member of the same controlled group of corporations within
the meaning of Code Section 414(b).
"STOCK FUND" means that portion of the Trust Fund consisting of Stock.
"STOCK OBLIGATION" means an indebtedness arising from any extension of
credit to the Plan or the Trust which satisfies the requirements set forth in
Section 6.3 and which was obtained for any or all of the following purposes:
(i) to acquire qualifying employer securities as defined in
Treasury Regulations (S) 54.4975-12
(ii) to repay such Stock Obligation; or
(iii) to repay a prior exempt loan.
"TRUST" OR "TRUST FUND" means the trust fund created under this Plan.
"TRUST AGREEMENT" means the agreement between the Bank and the Trustee
concerning the Trust Fund. If any assets of the Trust Fund are held in a co-
mingled trust fund with assets of other qualified retirement plans, "Trust
Agreement" shall be deemed to include the trust agreement governing that co-
mingled trust fund. With respect to the allocation of investment responsibility
for the assets of the Trust Fund, the provisions of Article II of the Trust
Agreement are incorporated herein by reference.
"TRUSTEE" means one or more corporate persons or individuals selected from
time to time by the Bank to serve as trustee or co-trustees of the Trust Fund.
"UNALLOCATED STOCK FUND" means that portion of the Stock Fund consisting of
the Plan's holding of Stock which have been acquired in exchange for one or more
Stock obligations and which have not yet been allocated to the Participant's
Accounts in accordance with Section 4.2
"VALUATION DATE" means the last day of the Plan Year and each other date as
of which the Committee shall determine the investment experience of the
Investment Fund and adjust the Participants' Accounts accordingly.
"VALUATION PERIOD" means the period following a Valuation Date and ending
with the next Valuation Date.
"VESTING YEAR" means a unit of Service credited to a Participant pursuant
to Section 9.2 for purposes of determining his vested interest in his Account.
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SECTION 3. ELIGIBILITY FOR PARTICIPATION.
-----------------------------
3.1 INITIAL ELIGIBILITY. An Employee shall enter the Plan as of the Entry
-------------------
Date coincident with or next following the later of the following dates:
(a) the last day of the Employee's first Eligibility Year, and
(b) the Employee's 21st birthday. However, if an Employee is not in
active Service with an Employer on the date he would otherwise first enter
the Plan, his entry shall be deferred until the next day he is in Service.
3.2 DEFINITION OF ELIGIBILITY YEAR. An "Eligibility Year" means an
------------------------------
applicable eligibility period (as defined below) in which the Employee has
completed 1,000 Hours of Service for the Employer. For this purpose:
(a) an Employee's first "eligibility period" is the 12-consecutive
month period beginning on the first day on which he has an Hour of Service,
and
(b) his subsequent eligibility periods will be 12-consecutive month
periods beginning on each January 1 after that first day of Service.
3.3 TERMINATED EMPLOYEES. No Employee shall have any interest or rights
--------------------
under this Plan if he is never in active Service with an Employer on or after
the Effective Date.
3.4 CERTAIN EMPLOYEES INELIGIBLE. No Employee shall participate in the
----------------------------
Plan while his Service is covered by a collective bargaining agreement between
an Employer and the Employee's collective bargaining representative if (i)
retirement benefits have been the subject of good faith bargaining between the
Employer and the representative and (ii) the collective bargaining agreement
does not provide for the Employee's participation in the Plan.
3.5 PARTICIPATION AND REPARTICIPATION. Subject to the satisfaction of the
---------------------------------
foregoing requirements, an Employee shall participate in the Plan during each
period of his Service from the date on which he first becomes eligible until his
termination. For this purpose, an Employee who returns before five (5)
consecutive Breaks in Service who previously satisfied the initial eligibility
requirements or who returns after 5 consecutive one year Breaks in Service with
a vested Account balance in the Plan shall re-enter the Plan as of the date of
his return to Service with an Employer.
3.6 OMISSION OF ELIGIBLE EMPLOYEE. If, in any Plan Year, any Employee who
-----------------------------
should be included as a Participant in the Plan is erroneously omitted and
discovery of such omission is not made until after a contribution by his
Employer for the year has been made, the Employer shall make a subsequent
contribution with respect to the omitted Employee in the amount which the said
Employer would have contributed shall be made regardless of whether or not it is
deductible in whole or in part in any taxable year under applicable provisions
of the Code.
3.7 INCLUSION OF INELIGIBLE EMPLOYEE. If, in any Plan Year, any person
--------------------------------
who should not have been included as a Participant in the Plan is erroneously
included and discovery of such incorrect inclusion is not made until after a
contribution for the year has been made, the Employer shall not be entitled to
recover the contribution made with respect to the ineligible person regardless
of whether or not a deduction
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<PAGE>
is allowable with respect to the ineligible person shall constitute a forfeiture
for the Plan Year in which the discovery is made.
SECTION 4. CONTRIBUTIONS AND CREDITS.
-------------------------
4.1 DISCRETIONARY CONTRIBUTIONS. The Employer shall from time to time
---------------------------
contribute, with respect to a Plan Year, such amounts as it may determine from
time to time. The Employer shall have no obligation to contribute any amount
under this Plan except as so determined in its sole discretion. The Employer's
contributions and available forfeitures for a Plan Year shall be credited as of
the last day of the year to the Accounts of the Active Participants in
proportion to their amounts of Cash Compensation.
4.2 CONTRIBUTIONS FOR STOCK OBLIGATIONS. If the Trustee, upon
-----------------------------------
instructions from the Committee, incurs any Stock Obligation upon the purchase
of Stock, the Employer may contribute for each Plan Year an amount sufficient to
cover all payments of principal and interest as they come due under the terms of
the Stock Obligation. If there is more than one Stock Obligation, the Employer
shall designate the one to which any contribution is to be applied. Investment
earnings realized on Employer contributions and any dividends paid by the
Employer on Stock held in the Unallocated Stock Account, shall be applied to the
Stock Obligation related to that Stock, subject to Section 7.2.
In each Plan Year in which Employer contributions, earnings on
contributions, or dividends on unallocated Stock are used as payments under a
Stock Obligation, a certain number of shares of the Stock acquired with that
Stock Obligation which is then held in the Unallocated Stock Fund shall be
released for allocation among the Participants. The number of shares released
shall bear the same ratio to the total number of those shares then held in the
Unallocated Stock Fund (prior to the release) as (i) the principal and interest
payments made on the Stock Obligation in the current Plan Year bears to (ii)
the sum of (i) above, and the remaining principal and interest payments required
(or projected to be required on the basis of the interest rate in effect at the
end of the Plan Year) to satisfy the Stock Obligation.
At the direction of the Committee, the current and projected payments of
interest under a Stock Obligation may be ignored in calculating the number of
shares to be released in each year if (i) the Stock Obligation provides for
annual payments of principal and interest at a cumulative rate that is not less
rapid at any time than level annual payments of such amounts for 10 years, (ii)
the interest included in any payment is ignored only to the extent that it would
be determined to be interest under standard loan amortization tables, and (iii)
the term of the Stock Obligation, by reason of renewal, extension, or
refinancing, has not exceeded 10 years from the original acquisition of the
Stock.
For these purposes, each Stock Obligation, the Stock purchased with it, and
any dividends on such Stock, shall be considered separately. The Stock released
from the Unallocated Stock Fund in any Plan Year shall be credited as of the
last day of the year to the Accounts of the Active Participants in proportion to
their amounts of Cash Compensation.
4.3 DEFINITIONS RELATED TO CONTRIBUTIONS. For the purposes of this Plan,
------------------------------------
the following terms have the meanings specified:
"ACTIVE PARTICIPANT" means a Participant who has satisfied the eligibility
requirements under Section 3 and who has at least 1000 Hours of Service during
the current Plan Year. However, a Participant shall not qualify as an Active
Participant unless (i) he is in active Service with an Employer as of the last
day of the Plan Year, or (ii) he is on a Recognized Absence as of that date, or
(iii) his Service terminated during the Plan Year by reason of Disability,
death, Early or Normal Retirement.
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<PAGE>
"CASH COMPENSATION" means a Participant's 415 Compensation as defined in
Section 2 of the Plan and shall also include amounts contributed under a salary
reduction agreement pursuant to Section 401(k) or Section 125 of the Code.
In the event a Plan Year is a period of less than 12 months for any reason,
then Cash Compensation for the short period shall not exceed the pro rata
portion of this limit created by multiplying a fraction which is the number of
months in the short period divided by twelve times the annual compensation
limit.
4.4 CONDITIONS AS TO CONTRIBUTIONS. Employers' contributions shall in all
------------------------------
events be subject to the limitations set forth in Section 5. Contributions may
be made in the form of cash, or securities and other property to the extent
permissible under ERISA, including Stock, and shall be held by the Trustee in
accordance with the Trust Agreement. In addition to the provisions of Section
13.3 for the return of an Employer's contributions in connection with a failure
of the Plan to qualify initially under the Code, any amount contributed by an
Employer due to a good faith mistake of fact, or based upon a good faith but
erroneous determination of its deductibility under Section 404 of the Code,
shall be returned to the Employer within one year after the date on which the
contribution was originally made, or within one year after its nondeductibility
has been finally determined. However, the amount to be returned shall be
reduced to take account of any adverse investment experience within the Trust
Fund in order that the balance credited to each Participant's Account is not
less that it would have been if the contribution had never been made.
4.5 TRANSFERS. This Plan shall accept direct and indirect transfers,
---------
including roll-over contributions from other tax-qualified plans, provided,
however, that this Plan shall not accept any direct or indirect transfers from
any other retirement plan that is tax-qualified under Section 401(a) of the Code
and which is subject to the survivor annuity requirements of section 401(a)(11)
and section 417 of the Code.
SECTION 5. LIMITATIONS ON CONTRIBUTIONS AND ALLOCATIONS.
--------------------------------------------
5.1 LIMITATION ON ANNUAL ADDITIONS. Notwithstanding anything herein to
------------------------------
the contrary, allocation of Employer contributions for any Plan Year shall be
subject to the following:
5.1-1 If allocation of Employer contributions in accordance with
Section 4.1 will result in an allocation of more than one-third the total
contributions for a Plan Year to the Accounts of Highly Paid Employees,
then allocation of such amount shall be adjusted so that such excess will
not occur.
5.1-2 After adjustment, if any, required by the preceding
paragraph, the annual additions during any Plan Year to any Participant's
Account under this and any other defined contribution plans maintained by
the Employer or an affiliate (within the purview of Section 414(b), (c) and
(m) and Section 415(h) of the Code, which affiliate shall be deemed the
Employer for this purpose) shall not exceed the lesser of $30,000 (or such
other dollar amount which results from cost-of-living adjustments under
Section 415(d) of the Code) or "25 percent of the Participant's 415
Compensation for such limitation year." In the event that annual additions
exceed the aforesaid limitations, they shall be reduced in the following
priority:
(i) If the Participant is covered by the Plan at the end of the
Plan Year, any excess amount at the end of the Plan Year that cannot be
allocated to the Participant's Account shall be
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<PAGE>
used to reduce the Employer contribution for such Participant in the next
limitation year and any succeeding limitation years if necessary.
(ii) If the Participant is not covered by the Plan at the end of
the Plan Year, the excess amount will be held unallocated in a suspense
account. The suspense account will be applied to reduce future Employer
contributions for all remaining Participants in the next limitation year
and each succeeding limitation year if necessary.
(iii) If a suspense account is in existence at any time during a
limitation year, it will not participate in any allocation of investment
gains and losses. All amounts held in suspense accounts must be allocated
to Participant's Accounts before any contributions may be made to the Plan
for the limitation year.
(iv) If a suspense account exists at the time of Plan
termination, amounts held in the suspense account that cannot be allocated
shall revert to the Employer.
5.1-3 For purposes of this Section 5.1 and the following Section
5.2, the "annual addition" to a Participant's accounts means the sum of (i)
Employer contributions, (ii) Employee contributions, if any, and (iii)
forfeitures. Annual additions to a defined contribution plan also include
amounts allocated, after March 31, 1984, to an individual medical account,
as defined in Section 415(l)(2) of the Internal Revenue Code, which is part
of a pension or annuity plan maintained by the Employer, amounts derived
from contributions paid or accrued after December 31, 1985, in taxable
years ending after such date, which are attributable to post-retirement
medical benefits allocated to the separate account of a Key Employee under
a welfare benefit fund, as defined in Section 419A(d) of the Internal
Revenue Code, maintained by the Employer. For these purposes, annual
additions to a defined contribution plan shall not include the allocation
of the excess amounts remaining in the Unallocated Stock Fund subsequent to
a sale of stock from such fund in accordance with a transaction described
in Section 8.1 of the Plan. The $30,000 limitations referred to shall, for
each limitation year ending after 1988, be automatically adjusted to the
new dollar limitations determined by the Commissioner of Internal Revenue
for the calendar year beginning in that limitation year.
5.1-4 Notwithstanding the foregoing, if no more than one-third
of the Employer contributions to the Plan for a year which are deductible
under Section 404(a)(9) of the Code are allocated to Highly Paid Employees
(within the meaning of Section 414(q) of the Internal Revenue Code), the
limitations imposed herein shall not apply to:
(i) forfeitures of Employer securities (within the meaning of
Section 409 of the Code) under the Plan if such securities were acquired
with the proceeds of a loan described in Section 404(a)(9)(A) of the Code),
or
(ii) Employer contributions to the Plan which are deductible
under Section 404(a)(9)(B) and charged against a Participant's Account.
5.1-5 If the Employer contributes amounts, on behalf of
Employees covered by this Plan, to other "defined contribution plans" as
defined in Section 3(34) of ERISA, the limitation on annual additions
provided in this Section shall be applied to annual additions in the
aggregate to this Plan and to such other plans. Reduction of annual
additions, where required, shall be accomplished first by reductions under
such other plan pursuant to the directions of the named
-10-
<PAGE>
fiduciary for administration of such other plans or under priorities, if
any, established under the terms of such other plans and then by allocating
any remaining excess for this Plan in the manner and priority set out above
with respect to this Plan.
5.1-6 A limitation year shall mean each 12 consecutive month
period beginning each January 1.
5.2 COORDINATED LIMITATION WITH OTHER PLANS. Aside from the limitation
---------------------------------------
prescribed by Section 5.1 with respect to the annual addition to a Participant's
Accounts for any single limitation year, if a Participant has ever participated
in one or more defined benefit plans maintained by an Employer or an affiliate,
then the accrued benefit shall be limited so that the sum of his defined plan
fraction and his defined contribution plan fraction does not exceed one. For
this purpose:
5.2-1 A Participant's defined contribution plan fraction with
respect to a Plan Year shall be a fraction, (i) the numerator of which is
the sum of the annual additions to his Accounts through the current year,
and (ii) the denominator of which is the sum of the lesser of the following
amounts -A- and -B- determined for the current limitation year and each
prior limitation year of Service with an Employer: -A- is 1.25 times the
dollar limit in effect for the year under Section 415(c)(1)(A) of the Code,
or 1.0 times such dollar limitation if the Plan is top-heavy, and -B- is 35
percent of the Participant's 415 Compensation for such year. Further, if
the Participant participated in any related defined contribution plan in
any years beginning before 1976, any excess of the sum of the actual annual
additions to the Participant's Accounts for those years over the maximum
annual additions which could have been made in accordance with Section 5.1
shall be ignored, and voluntary contributions by the Participant during
those years shall be taken into account as to each such year only to the
extent that his average annual voluntary contribution in those years
exceeded 10 percent of his average annual 415 Compensation in those years.
5.2-2 A Participant's defined benefit plan fraction with respect
to a limitation year shall be a fraction, (i) the numerator of which is his
projected annual benefit payable at normal retirement under the Employers'
defined benefit plans, and (ii) the denominator of which is the lesser of
(a) 1.25 times $90,000, or 1.0 times such dollar limitation if the Plan is
top-heavy, and (b) 1.4 times the Participant's average 415 Compensation
during his highest-paid three consecutive limitation years.
5.3 EFFECT OF LIMITATIONS. The Committee shall take whatever action may
---------------------
be necessary from time to time to assure compliance with the limitations set
forth in Section 5.1 and 5.2. Specifically, the Committee shall see that each
Employer restrict its contributions for any Plan Year to an amount which, taking
into account the amount of available forfeitures, may be completely allocated to
the Participants consistent with those limitations. Where the limitations would
otherwise be exceeded by any Participant, further allocations to the Participant
shall be curtailed to the extent necessary to satisfy the limitations. Where an
excessive amount is contributed on account of a mistake as to one or more
Participants' compensation, or there is an amount of forfeitures which may not
be credited in the Plan Year in which it becomes available, the amount shall be
corrected in accordance with Section 5.1-2 of the Plan.
5.4 LIMITATIONS AS TO CERTAIN PARTICIPANTS. Aside from the limitations
--------------------------------------
set forth in Section 5.1 and 5.2, if the Plan acquires any Stock in a
transaction as to which a selling shareholder or the estate of a deceased
shareholder is claiming the benefit of Section 1042 of the Code, the Committee
shall see that none of such Stock, and no other assets in lieu of such Stock,
are allocated to the Accounts of certain Participants in order to comply with
Section 409(n) of the Code.
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This restriction shall apply at all times to a Participant who owns (taking
into account the attribution rules under Section 318(a) of the Code, without
regard to the exception for employee plan trusts in Section 318(a)(2)(B)(i) more
than 25 percent of any class of stock of a corporation which issued the Stock
acquired by the Plan, or another corporation within the same controlled group,
as defined in Section 409(l)(4) of the Code (any such class of stock hereafter
called a "Related Class"). For this purpose, a Participant who owns more than
25 percent of any Related Class at any time within the one year preceding the
Plan's purchase of the Stock shall be subject to the restriction as to all
allocations of the Stock, but any other Participant shall be subject to the
restriction only as to allocations which occur at a time when he owns more than
25 percent of any Related Class.
Further, this restriction shall apply to the selling shareholder claiming
the benefit of Section 1042 and any other Participant who is related to such a
shareholder within the meaning of Section 267(b) of the Code, during the period
beginning on the date of sale and ending on the later of (1) the date that is
ten years after the date of sale, or (2) the date of the Plan allocation
attributable to the final payment of acquisition indebtedness incurred in
connection with the sale.
This restriction shall not apply to any Participant who is a lineal
descendant of a selling shareholder if the aggregate amounts allocated under the
Plan for the benefit of all such descendants do not exceed five percent of the
Stock acquired from the shareholder.
SECTION 6. TRUST FUND AND ITS INVESTMENT.
-----------------------------
6.1 CREATION OF TRUST FUND. All amounts received under the Plan from
----------------------
Employers and investments shall be held as the Trust Fund pursuant to the terms
of this Plan and of the Trust Agreement between the Bank and the Trustee. The
benefits described in this Plan shall be payable only from the assets of the
Trust Fund, and none of the Bank, any other Employer, its board of directors or
trustees, its stockholders, its officers, its employees, the Committee, and the
Trustee shall be liable for payment of any benefit under this Plan except from
the Trust Fund.
6.2 STOCK FUND AND INVESTMENT FUND. The Trust Fund held by the Trustee
------------------------------
shall be divided into the Stock Fund, consisting entirely of Stock, and the
Investment Fund, consisting of all assets of the Trust other than Stock. The
Trustee shall have no investment responsibility for the Stock Fund, but shall
accept any Employer contributions made in the form of Stock, and shall acquire,
sell, exchange, distribute, and otherwise deal with and dispose of Stock in
accordance with the instructions of the Committee. The Trustee shall have full
responsibility for the investment of the Investment Fund, except to the extent
such responsibility may be delegated from time to time to one or more investment
managers pursuant to Section 2.2 of the Trust Agreement, or to the extent the
Committee directs the Trustee to purchase Stock with the assets in the
Investment Fund.
6.3 ACQUISITION OF STOCK. From time to time the Committee may, in its
--------------------
sole discretion, direct the Trustee to acquire Stock from the issuing Employer
or from shareholders, including shareholders who are or have been Employees,
Participants, or fiduciaries with respect to the Plan. The Trustee shall pay
for such Stock no more than its fair market value, which shall be determined
conclusively by the Committee pursuant to Section 12.4. The Committee may direct
the Trustee to finance the acquisition of Stock by incurring or assuming
indebtedness to the seller or another party which indebtedness shall be called a
"Stock Obligation". The term "Stock Obligation" shall refer to a loan made to
the Plan by a disqualified person within the meaning of Section 4975(e)(2) of
the Code, or a loan to the Plan which is guaranteed by a disqualified person. A
Stock Obligation includes a direct loan of cash, a purchase-money transaction,
and an assumption of an obligation of a tax-qualified employee stock ownership
plan under
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<PAGE>
Section 4975(e)(7) of the Code ("ESOP"). For these purposes, the term
"guarantee" shall include an unsecured guarantee and the use of assets of a
disqualified person as collateral for a loan, even though the use of assets may
not be a guarantee under applicable state law. An amendment of a Stock
Obligation in order to qualify as an "exempt loan" is not a refinancing of the
Stock Obligation or the making of another Stock Obligation. The term "exempt
loan" refers to a loan that satisfies the provisions of this paragraph. A "non-
exempt loan" fails to satisfy this paragraph. Any Stock Obligation shall be
subject to the following conditions and limitations:
6.3-1 A Stock Obligation shall be for a specific term, shall not
be payable on demand except in the event of default, and shall bear a
reasonable rate of interest.
6.3-2 A Stock Obligation may, but need not, be secured by a
collateral pledge of either the Stock acquired in exchange for the Stock
Obligation, or the Stock previously pledged in connection with a prior
Stock Obligation which is being repaid with the proceeds of the current
Stock Obligation. No other assets of the Plan and Trust may be used as
collateral for a Stock Obligation, and no creditor under a Stock Obligation
shall have any right or recourse to any Plan and Trust assets other than
Stock remaining subject to a collateral pledge.
6.3-3 Any pledge of Stock to secure a Stock Obligation must
provide for the release of pledged Stock in connection with payments on the
Stock obligations in the ratio prescribed in Section 4.2.
6.3-4 Repayments of principal and interest on any Stock
Obligation shall be made by the Trustee only from Employer cash
contributions designated for such payments, from earnings on such
contributions, and from cash dividends received on Stock, in the last case,
however, subject to the further requirements of Section 7.2.
6.3-5 In the event of default of a Stock Obligation, the value
of Plan assets transferred in satisfaction of the Stock Obligation must
not exceed the amount of the default. If the lender is a disqualified
person within the meaning of Section 4975 of the Code, a Stock Obligation
must provide for a transfer of Plan assets upon default only upon and to
the extent of the failure of the Plan to meet the payment schedule of said
Stock Obligation. For purposes of this paragraph, the making of a
guarantee does not make a person a lender.
6.4 PARTICIPANTS' OPTION TO DIVERSIFY. The Committee shall provide for a
---------------------------------
procedure under which each Participant may, during the qualified election
period, elect to "diversify" a portion of the Employer Stock allocated to his
Account, as provided in Section 401(a)(28)(B) of the Code. An election to
diversity must be made on the prescribed form and filed with the Committee
within the period specified herein. For each of the first five (5) Plan years
in the qualified election period, the Participant may elect to diversify an
amount which does not exceed 25% of the number of shares allocated to his
Account since the inception of the Plan, less all shares with respect to which
an election under this Section has already been made. For the last year of the
qualified election period, the Participant may elect to have up to 50 percent of
the value of his Account committed to other investments, less all shares with
respect to which an election under this Section has already been made. The term
"qualified election period" shall mean the six (6) Plan Year period beginning
with the first Plan Year in which a Participant has both attained age 55 and
completed 10 years of participation in the Plan. A Participant's election to
diversify his Account may be made within each year of the qualified election
period and shall continue for the 90-day period immediately following the last
day of each year in the qualified election period. Once a Participant makes
such election, the Plan must complete diversification in accordance with such
election within 90 days after
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the end of the period during which the election could be made for the Plan Year.
In the discretion of the Committee, the Plan may satisfy the diversification
requirement by any of the following methods:
6.4-1 The Plan may distribute all or part of the amount subject
to the diversification election.
6.4-2 The Plan may offer the Participant at least three other
distinct investment options, if available under the Plan. The other
investment options shall satisfy the requirements of Regulations under
Section 404(c) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA").
6.4-3 The Plan may transfer the portion of the Participant's
Account subject to the diversification election to another qualified
defined contribution plan of the Employer that offers at least three
investment options satisfying the requirements of the Regulations under
Section 404(c) of ERISA.
SECTION 7. VOTING RIGHTS AND DIVIDENDS ON STOCK.
------------------------------------
7.1 VOTING AND TENDERING OF STOCK. The Trustee generally shall vote all
-----------------------------
shares of Stock held under the Plan in accordance with the written instructions
of the Committee. However, if any Employer has registration-type class of
securities within the meaning of Section 409(e)(4) of the Code, or if a matter
submitted to the holders of the Stock involves a merger, consolidation,
recapitalization, reclassification, liquidation, dissolution, or sale of
substantially all assets of an entity, then (i) the shares of Stock which have
been allocated to Participants' Accounts shall be voted by the Trustee in
accordance with the Participants' written instructions, and (ii) the Trustee
shall vote any unallocated Stock and allocated Stock for which it has received
no voting instructions in the same proportions as it votes the allocated Stock
for which it has received instructions from Participants; provided, however,
that if an exempt loan, as defined in Section 4975(d) of the Code, is
outstanding and the Plan is in default on such exempt loan, as default is
defined in the loan documents, then to the extent that such loan documents
require the lender to exercise voting rights with respect to the unallocated
shares, the loan documents will prevail. In the event no shares of Stock have
been allocated to Participants' Accounts at the time Stock is to be voted and
any exempt loan which may be outstanding is not in default, each Participant
shall be deemed to have one share of Stock allocated to his or her Account for
the sole purpose of providing the Trustee with voting instructions.
Notwithstanding any provision hereunder to the contrary, all unallocated
shares of Stock must be voted by the Trustee in a manner determined by the
Trustee to be for the exclusive benefit of the Participants and Beneficiaries.
Whenever such voting rights are to be exercised, the Employers shall provide the
Trustee, in a timely manner, with the same notices and other materials as are
provided to other holders of the Stock, which the Trustee shall distribute to
the Participants. The Participants shall be provided with adequate opportunity
to deliver their instructions to the Trustee regarding the voting of Stock
allocated to their Accounts. The instructions of the Participants' with respect
to the voting of allocated shares hereunder shall be confidential.
7.1-1 In the event of a tender offer, Stock shall be tendered by
the Trustee in the same manner as set forth above with respect to the
voting of Stock. Notwithstanding any provision hereunder to the contrary,
Stock must be tendered by the Trustee in a manner determined by the Trustee
to be for the exclusive benefit of the Participants and Beneficiaries.
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7.2 DIVIDENDS ON STOCK. Dividends on Stock which are received by the
------------------
Trustee in the form of additional Stock shall be retained in the Stock Fund, and
shall be allocated among the Participant's Accounts and the Unallocated Stock
Fund in accordance with their holdings of the Stock on which the dividends have
been paid. Dividends on Stock credited to Participants' Accounts which are
received by the Trustee in the form of cash shall, at the direction of the
Employer paying the dividends, either (i) be credited to the Accounts in
accordance with Section 8.3 and invested as part of the Investment Fund, (ii) be
distributed immediately to the Participants in proportion with the Participants'
Stock Fund Account balance (iii) be distributed to the Participants within 90
days of the close of the Plan Year in which paid in proportion with the
Participants' Stock Fund Account balance or (iv) be used to make payments on the
Stock Obligation. If dividends on Stock allocated to a Participant's Account
are used to repay the Stock Obligation, Stock with a fair market value equal to
the dividends so used must be allocated to such Participant's Account in lieu of
the dividends. Dividends on Stock held in the Unallocated Stock Fund which are
received by the Trustee in the form of cash shall be allocated to Participants'
Investment Fund Accounts (pro rata based on the Participant's Account balance in
relation to all Participants' Account balances) and shall be applied as soon as
practicable to payments of principal and interest under the Stock Obligation
incurred with the purchase of the Stock.
SECTION 8. ADJUSTMENTS TO ACCOUNTS.
-----------------------
8.1 ADJUSTMENTS FOR TRANSACTIONS. An Employer contribution pursuant to
----------------------------
Section 4.1 shall be credited to the Participants' Accounts as of the last day
of the Plan Year for which it is contributed, in accordance with Section 4.1.
Stock released from the Unallocated Stock Fund upon the Trust's repayment of a
Stock Obligation pursuant to Section 4.2 shall be credited to the Participants'
Accounts as of the last day of the Plan Year in which the repayment occurred,
pro rata based on the cash applied from such Participant's Account relative to
the cash applied from all Participants' Accounts. Any excess amounts remaining
from the use of proceeds of a sale of Stock from the Unallocated Stock Fund to
repay a Stock Obligation shall be allocated as earnings of the Plan as of the
last day of the Plan Year in which the repayment occurred among the
Participants' Accounts in proportion to the opening balance in each Account.
Any benefit which is paid to a Participant or Beneficiary pursuant to Section 10
shall be charged to the Participant's Account as of the first day of the
Valuation Period in which it is paid. Any forfeiture or restoral shall be
charged or credited to the Participant's Account as of the first day of the
Valuation Period in which the forfeiture or restoral occurs pursuant to Section
9.6.
8.2 VALUATION OF INVESTMENT FUND. As of each Valuation Date, the Trustee
----------------------------
shall prepare a balance sheet of the Investment Fund, recording each asset
(including any contribution receivable from an Employer) and liability at its
fair market value. Any liability with respect to short positions or options and
any item of accrued income or expense and unrealized appreciation or
depreciation shall be included; provided, however, that such an item may be
estimated or excluded if it is not readily ascertainable unless estimating or
excluding it would result in a material distortion. The Committee shall then
determine the net gain or loss of the Investment Fund since the preceding
Valuation Date, which shall mean the entire income of the Investment Fund,
including realized and unrealized capital gains and losses, net of any expenses
to be charged to the general Investment Fund and excluding any contributions by
the Employer. The determination of gain or loss shall be consistent with the
balance sheets of the Investment Fund for the current and preceding Valuation
Dates.
8.3 ADJUSTMENTS FOR INVESTMENT EXPERIENCE. Any net gain or loss of the
-------------------------------------
Investment Fund during a Valuation Period, as determined pursuant to Section
8.2, shall be allocated as of the last day of the Valuation Period among the
Participants' Accounts in proportion to the opening balance in each Account, as
adjusted for benefit payments and forfeitures during the Valuation Period,
without regard to
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whatever Stock may be credited to an Account. Any cash dividends received on
Stock credited to Participant's Accounts shall be allocated as of the last day
of the Valuation Period among the Participants' Accounts based on the opening
balance in each Participant's Stock Fund Account.
SECTION 9. VESTING OF PARTICIPANTS' INTERESTS.
----------------------------------
9.1 DEFERRED VESTING IN ACCOUNTS. A Participant's vested interest in his
----------------------------
Account shall be based on his Vesting Years in accordance with the following
Table, subject to the balance of this Section 9:
Vesting Percentage of
Years Interest Vested
------- ---------------
Fewer than 2 0%
2 20%
3 40%
4 60%
5 80%
6 100%
9.2 COMPUTATION OF VESTING YEARS. For purposes of this Plan, a "Vesting
----------------------------
Year" means generally a calendar year in which an Employee has at least 1,000
Hours of Service, beginning with the first Plan Year in which the Employee has
completed an Hour of Service with the Employer, including Service with other
employers as provided in the definition of "Service". Notwithstanding the
above, an Employee who was employed with Lockport Savings Bank, a New York
mutual bank (the "Mutual Bank") which is the predecessor to the Bank, shall
receive credit for vesting purposes for each calendar year of continuous
employment with the Mutual Bank in which such Employee completed 1,000 Hours of
Service, not to exceed two (2) years of credit for vesting purpose (such years
shall also be referred to as "Vesting Years"). However, a Participant's Vesting
Years shall be computed subject to the following conditions and qualifications:
9.2-1 A Participant's Vesting Years shall not include any Service
prior to the date on which an Employee attains age 18.
9.2-2 A Participant's vested interest in his Account accumulated
before five (5) consecutive Breaks in Service shall be determined without
regard to any Service after such five consecutive Breaks in Service.
Further, if a Participant has five (5) consecutive Breaks in Service before
his interest in his Account has become vested to some extent, pre-Break
years of Service shall not be required to be taken into account for
purposes of determining his post-Break vested percentage.
9.2-3 In the case of a Participant who has 5 or more consecutive 1-
year Breaks in Service, the Participant's pre-break Service will count in
vesting of the Employer-derived post-break accrued benefit only if either:
(i) such Participant has any nonforfeitable interest in the accrued
benefit attributable to Employer contributions at the time of
separation from Service , or
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(ii) upon returning to Service the number of consecutive 1-year
Breaks in Service is less than the number of years of Service.
9.2-4 Unless otherwise specifically excluded, a Participant's
Vesting Years shall include any period of active military duty to the
extent required by the Military Selective Service Act of 1967 (38 U.S.C.
Section 2021).
9.2-5 If any amendment changes the vesting schedule, including an
automatic change to or from a top-heavy vesting schedule, any Participant
with three (3) or more Vesting Years may, by filing a written request with
the Employer, elect to have his vested percentage computed under the
vesting schedule in effect prior to the amendment. The election period
must begin not later than the later of sixty (60) days after the amendment
is adopted, the amendment becomes effective, or the Participant is issued
written notice of the amendment by the Employer or the Committee.
9.3 FULL VESTING UPON CERTAIN EVENTS.
--------------------------------
9.3-1 Notwithstanding Section 9.1, a Participant's interest in his Account
shall fully vest on the Participant's Normal Retirement Date. The Participant's
interest shall also fully vest in the event that his Service is terminated by
Early Retirement, Disability or by death.
9.3-2 The Participant's interest in his Account shall also fully vest
in the event of a "Change in Control" of the Bank, or the Company. For these
purposes, "Change in Control" shall mean a change in control 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, as amended ("BHCA"), and applicable rules and
regulations promulgated thereunder, as in effect at the time of the Change in
Control; 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
director subsequent to the date hereof whose election was approved by a vote of
at least three-quarters of the directors comprising the Incumbent Board, or
whose nomination for election by 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 as a result of
which the outstanding shares of the class of securities then subject to the Plan
are to be exchanged for or converted into cash or property or securities not
issued by the Company; 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.
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<PAGE>
9.4 FULL VESTING UPON PLAN TERMINATION. Notwithstanding Section 9.1, a
----------------------------------
Participant's interest in his Account shall fully vest if he is in active
Service upon termination of this Plan or upon the permanent and complete
discontinuance of contributions by his Employer. In the event of a partial
termination, the interest of each affected Participant who is in Service shall
fully vest with respect to that part of the Plan which is terminated.
9.5 FORFEITURE, REPAYMENT, AND RESTORAL. If a Participant's Service
-----------------------------------
terminates before his interest in his Account is fully vested, that portion
which has not vested shall be forfeited if he either (i) receives a distribution
of his entire vested interest pursuant to Section 10.1, or (ii) incurs five (5)
consecutive one year Breaks In Service. If a Participant's Service terminates
prior to having any portion of his Account become vested, such Participant shall
be deemed to have a received a distribution of his vested interest as of the
Valuation Date next following his termination of Service.
If a Participant who has received his entire vested interest returns to
Service before he has five (5) consecutive Breaks in Service, he may repay to
the Trustee an amount equal to the distribution. The Participant may repay such
amount at any time within five years after he has returned to Service. The
amount shall be credited to his Account at the time it is repaid; an additional
amount equal to that portion of his Account which was previously forfeited shall
be restored to his Account at the same time from other Employees' forfeitures
and, if such forfeitures are insufficient, from a special contribution by his
Employer for that year. A Participant who was deemed to have received a
distribution of his vested interest in the Plan shall have his Account restored
as of the first day on which he performs an Hour of Service after his return.
9.6 ACCOUNTING FOR FORFEITURES. If a portion of a Participant's Account
--------------------------
is forfeited, Stock allocated to said Participant's Account shall be forfeited
only after other assets are forfeited. If interests in more than one class of
Stock have been allocated to a Participant's account, the Participant must be
treated as forfeiting the same proportion of each class of Stock. A forfeiture
shall be charged to the Participant's Account as of the first day of the first
Valuation Period in which the forfeiture becomes certain pursuant to Section
9.5. Except as otherwise provided in that Section, a forfeiture shall be added
to the contributions of the terminated Participant's Employer which are to be
credited to other Participants pursuant to Section 4.1 as of the last day of the
Plan Year in which the forfeiture becomes certain.
9.7 VESTING AND NONFORFEITABILITY. A Participant's interest in his
-----------------------------
Account which has become vested shall be nonforfeitable for any reason.
SECTION 10. PAYMENT OF BENEFITS.
-------------------
10.1 BENEFITS FOR PARTICIPANTS. For a Participant whose Service ends for
-------------------------
any reason, distribution will be made to or for the benefit of the Participant
or, in the case of the Participant's death, his Beneficiary, by payment in a
lump sum, in accordance with Section 10.2.
Notwithstanding the foregoing, if the balance credited to his Account
exceeds $5,000, his benefits shall not be paid before the latest of his 65th
birthday or the tenth anniversary of the year in which he commenced
participation in the Plan unless he elects an early payment date in a written
election filed with the Committee. A Participant may modify such an election at
any time, provided any new benefit payment date is at least 30 days after a
modified election is delivered to the Committee, subject to the provisions of
Section 10.11 hereof.
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<PAGE>
10.2 TIME FOR DISTRIBUTION.
---------------------
10.2.1 Distribution of the balance of a Participant's Account
generally shall commence as soon as practicable after the last day of the
Plan Year next following his termination of Service for any reason, but no
later than one year after the close of the Plan Year:
(i) in which the Participant separates from Service by
reason of Normal Retirement, Disability, or death; or
(ii) which is the fifth Plan Year following the year in
which the Participant resigns or is dismissed, unless he is reemployed
before such date.
10.2.2 Unless the Participant elects otherwise, the distribution of
the balance of a Participant's Account shall commence not later than the 60th
day after the latest of the close of the Plan Year in which -
(i) the Participant attains the age of 65;
(ii) occurs the tenth anniversary of the year in which the
Participant commenced participation in the Plan; or
(iii) the Participant terminates his Service with the
Employer.
10.2.3 Notwithstanding anything to the contrary, (1) with respect to
a 5-percent owner (as defined in Code Section 416), distribution of a
Participant's Account shall commence (whether or not he remains in the
employ of the Employer) not later than the April 1 of the calendar year
next following the calendar year in which the Participant attains age 70-
1/2, and (2) with respect to all other Participants, payment of a
Participant's benefit will commence not later than April 1 of the calendar
year following the calendar year in which the Participant attains age 70-
1/2, or, if later, the year in which the Participant retires. A
Participant's benefit from that portion of his Account committed to the
Investment Fund shall be calculated on the basis of the most recent
Valuation Date before the date of payment.
10.2.4 Distribution of a Participant's Account balance after his
death shall comply with the following requirements:
(i) If a Participant dies before his distributions have
commenced, distribution of his Account to his Beneficiary shall commence
not later than one year after the end of the Plan Year in which the
Participant died, however, if the Participant's Beneficiary is his
surviving Spouse, distributions may commence on the date on which the
Participant would have attained age 70-1/2.
(ii) If a married Participant dies before his benefit
payments begin, then unless he has specifically elected otherwise the
Committee shall cause the balance in his Account to be paid to his Spouse.
No election by a married Participant of a different Beneficiary shall be
valid unless the election is accompanied by the Spouse's written consent,
which (i) must acknowledge the effect of the election, (ii) must explicitly
provide either that the designated Beneficiary may not subsequently be
changed by the Participant without the Spouse's further consent, or that it
may be changed without such consent, and (iii) must
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<PAGE>
be witnessed by the Committee, its representative, or a notary public.
(This requirement shall not apply if the Participant establishes to the
Committee's satisfaction that the Spouse may not be located.)
10.3 MARITAL STATUS. The Committee shall from time to time take whatever
--------------
steps it deems appropriate to keep informed of each Participant's marital
status. Each Employer shall provide the Committee with the most reliable
information in the Employer's possession regarding its Participants' marital
status, and the Committee may, in its discretion, require a notarized affidavit
from any Participant as to his marital status. The Committee, the Plan, the
Trustee, and the Employers shall be fully protected and discharged from any
liability to the extent of any benefit payments made as a result of the
Committee's good faith and reasonable reliance upon information obtained from a
Participant and his Employer as to his marital status.
10.4 DELAY IN BENEFIT DETERMINATION. If the Committee is unable to
------------------------------
determine the benefits payable to a Participant or Beneficiary on or before the
latest date prescribed for payment pursuant to Section 10.1 or 10.2, the
benefits shall in any event be paid within 60 days after they can first be
determined, with whatever makeup payments may be appropriate in view of the
delay.
10.5 ACCOUNTING FOR BENEFIT PAYMENTS. Any benefit payment shall be
-------------------------------
charged to the Participant's Account as of the first day of the Valuation Period
in which the payment is made.
10.6 OPTIONS TO RECEIVE AND SELL STOCK. Unless ownership of virtually
---------------------------------
all Stock is restricted to active Employees and qualified retirement plans for
the benefit of Employees pursuant to the certificates of incorporation or by-
laws of the Employers issuing Stock, a terminated Participant or the Beneficiary
of a deceased Participant may instruct the Committee to distribute the
Participant's entire vested interest in his Account in the form of Stock. In
that event, the Committee shall apply the Participant's vested interest in the
Investment Fund to purchase sufficient Stock from the Stock Fund or from any
owner of Stock to make the required distribution. Alternatively, a terminated
Participant or the Beneficiary of a deceased Participant may instruct the
Committee to distribute the Participant's entire vested interest in his Account
in cash. In all other cases, the Participant's vested interest in the Stock
Fund shall be distributed in shares of Stock, and his vested interest in the
Investment Fund shall be distributed in cash.
Any Participant who receives Stock pursuant to Section 10.1, and any person
who has received Stock from the Plan or from such a Participant by reason of the
Participant's death or incompetency, by reason of divorce or separation from the
Participant, or by reason of a rollover contribution described in Section
402(a)(5) of the Code, shall have the right to require the Employer which issued
the Stock to purchase the Stock for its current fair market value (hereinafter
referred to as the "put right"). The put right shall be exercisable by written
notice to the Committee during the first 60 days after the Stock is distributed
by the Plan, and, if not exercised in that period, during the first 60 days in
the following Plan Year after the Committee has communicated to the Participant
its determination as to the Stock's current fair market value. However, the put
right shall not apply to the extent that the Stock, at the time the put right
would otherwise be exercisable, may be sold on an established market in
accordance with federal and state securities laws and regulations. Similarly,
the put option shall not apply with respect to the portion of a Participant's
Account which the Employee elected to have reinvested under Code Section
401(a)(28)(B). If the put right is exercised, the Trustee may, if so directed
by the Committee in its sole discretion, assume the Employer's rights and
obligations with respect to purchasing the Stock. Notwithstanding anything
herein to the contrary, in the case of a plan established by a Bank (as defined
in Code Section 581), the put option shall not apply if prohibited by a federal
or state law and Participants are entitled to elect their benefits be
distributed in cash.
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The Employer or the Trustee, as the case may be, may elect to pay for the
Stock in equal periodic installments, not less frequently than annually, over a
period not longer than five years from the day after the put right is exercised,
with adequate security and interest at a reasonable rate on the unpaid balance,
all such terms to be set forth in a promissory note delivered to the seller with
normal terms as to acceleration upon any uncured default.
Nothing contained herein shall be deemed to obligate any Employer to
register any Stock under any federal or state securities law or to create or
maintain a public market to facilitate the transfer or disposition of any Stock.
The put right described herein may only be exercised by a person described in
the second preceding paragraph, and may not be transferred with any Stock to any
other person. As to all Stock purchased by the Plan in exchange for any Stock
Obligation, the put right shall be nonterminable. The put right for Stock
acquired through a Stock Obligation shall continue with respect to such Stock
after the Stock Obligation is repaid or the Plan ceases to be an employee stock
ownership plan.
10.7 RESTRICTIONS ON DISPOSITION OF STOCK. Except in the case of Stock
------------------------------------
which is traded on an established market, a Participant who receives Stock
pursuant to Section 10.1, and any person who has received Stock from the Plan or
from such a Participant by reason of the Participant's death or incompetency, by
reason of divorce or separation from the Participant, or by reason of a rollover
contribution described in Section 402(a)(5) of the Code, shall, prior to any
sale or other transfer of the Stock to any other person, first offer the Stock
to the issuing Employer and to the Plan at the greater of (i) its current fair
market value, or (ii) the purchase price offered in good faith by an independent
third party purchaser. This restriction shall apply to any transfer, whether
voluntary, involuntary, or by operation of law, and whether for consideration or
gratuitous. Either the Employer or the Trustee may accept the offer within 14
days after it is delivered. Any Stock distributed by the Plan shall bear a
conspicuous legend describing the right of first refusal under this Section
10.7, as well as any other restrictions upon the transfer of the Stock imposed
by federal and state securities laws and regulations.
10.8 CONTINUING LOAN PROVISIONS; CREATIONS OF PROTECTIONS AND RIGHTS.
---------------------------------------------------------------
Except as otherwise provided in Sections 10.6 and 10.7 and this Section, no
shares of Employer Stock held or distributed by the Trustee may be subject to a
put, call or other option, or buy-sell arrangement. The provisions of this
Section shall continue to by applicable to such Stock even if the Plan ceases to
be an employee stock ownership plan under Section 4975(e)(7) of the Code.
10.9 DIRECT ROLLOVER OF ELIGIBLE DISTRIBUTION. A Participant or
----------------------------------------
distributee may elect, at the time and in the manner prescribed by the Trustee
or the Committee, to have any portion of an eligible rollover distribution paid
directly to an eligible retirement plan specified by the Participant or
distributee in a direct rollover.
10.9-1 An "eligible rollover" is any distribution that does not
include: any distribution that is one of a series of substantially equal
periodic payments (not less frequently than annually) made for the life (or
life expectancy) of the distributee or the joint lives (or joint life
expectancies) of the Participant and the Participant's Beneficiary, or for
a specified period of ten years or more; any distribution to the extent
such distribution is required under Code Section 401(a)(9); and the portion
of any distribution that is not included in gross income (determined
without regard to the exclusion for net unrealized appreciation with
respect to employer securities).
10.9-2 An "eligible retirement plan" is an individual retirement
account described in Code Section 401(a), an individual retirement annuity
described in Code Section 408(b), an annuity plan described in Code Section
403(a), or a qualified trust described in Code Section 401(a), that
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accepts the distributee's eligible rollover distribution. However, in the
case of an eligible rollover distribution to the surviving Spouse, an
eligible retirement plan is an individual retirement account or individual
retirement annuity.
10.9-3 A "direct rollover" is a payment by the Plan to the eligible
retirement plan specified by the distributee.
10.9-4 The term "distributee" shall refer to a deceased
Participant's Spouse or a Participant's former Spouse who is the alternate
payee under a qualified domestic relations order, as defined in Code
Section 414(p).
10.10 IN SERVICE DISTRIBUTION OF ROLL-OVER ACCOUNT. Upon the written
--------------------------------------------
election of a Participant delivered to the Committee, all or any portion of the
amounts held in the Participant's Roll-over Account, shall be distributed to the
Participant at any time within 30 days or as soon thereafter as is reasonably
practicable.
10.11 WAIVER OF 30 DAY PERIOD AFTER NOTICE OF DISTRIBUTION. If a
----------------------------------------------------
distribution is one to which Sections 401(a)(11) and 417 of the Code do not
apply, such distribution may commence less than 30 days after the notice
required under Section 1.411(a)-11(c) of the Income Tax Regulations is given,
provided that:
(i) the Trustee or Administrative Committee, as applicable,
clearly informs the Participant that the Participant
has a right to a period of at least 30 days after
receiving the notice to consider the decision of
whether or not to elect a distribution (and, if
applicable, a particular option), and
(ii) the Participant, after receiving the notice,
affirmatively elects a distribution.
SECTION 11. RULES GOVERNING BENEFIT CLAIMS AND REVIEW OF APPEALS.
----------------------------------------------------
11.1 CLAIM FOR BENEFITS. Any Participant or Beneficiary who qualifies
------------------
for the payment of benefits shall file a claim for his benefits with the
Committee on a form provided by the Committee. The claim, including any
election of an alternative benefit form, shall be filed at least 30 days before
the date on which the benefits are to begin. If a Participant or Beneficiary
fails to file a claim by the day before the date on which benefits become
payable, he shall be presumed to have filed a claim for payment for the
Participant's benefits in the standard form prescribed by Sections 10.1 or 10.2
11.2 NOTIFICATION BY COMMITTEE. Within 90 days after receiving a claim
-------------------------
for benefits (or within 180 days, if special circumstances require an extension
of time and written notice of the extension is given to the Participant or
Beneficiary within 90 days after receiving the claim for benefits), the
Committee shall notify the Participant or Beneficiary whether the claim has been
approved or denied. If the Committee denies a claim in any respect, the
Committee shall set forth in a written notice to the Participant or Beneficiary:
(i) each specific reason for the denial;
(ii) specific references to the pertinent Plan provisions on which
the denial is based;
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<PAGE>
(iii) a description of any additional material or information which
could be submitted by the Participant or Beneficiary to support his claim,
with an explanation of the relevance of such information; and
(iv) an explanation of the claims review procedures set forth in
Section 11.3.
11.3 CLAIMS REVIEW PROCEDURE. Within 60 days after a Participant or
-----------------------
Beneficiary receives notice from the Committee that his claim for benefits has
been denied in any respect, he may file with the Committee a written notice of
appeal setting forth his reasons for disputing the Committee's determination.
In connection with his appeal the Participant or Beneficiary or his
representative may inspect or purchase copies of pertinent documents and records
to the extent not inconsistent with other Participants' and Beneficiaries'
rights of privacy. Within 60 days after receiving a notice of appeal from a
prior determination (or within 120 days, if special circumstances require an
extension of time and written notice of the extension is given to the
Participant or Beneficiary and his representative within 60 days after receiving
the notice of appeal), the Committee shall furnish to the Participant or
Beneficiary and his representative, if any, a written statement of the
Committee's final decision with respect to his claim, including the reasons for
such decision and the particular Plan provisions upon which it is based.
SECTION 12. THE COMMITTEE AND ITS FUNCTIONS.
-------------------------------
12.1 AUTHORITY OF COMMITTEE. The Committee shall be the "plan
----------------------
administrator" within the meaning of ERISA and shall have exclusive
responsibility and authority to control and manage the operation and
administration of the Plan, including the interpretation and application of its
provisions, except to the extent such responsibility and authority are otherwise
specifically (i) allocated to the Bank, the Employers, or the Trustee under the
Plan and Trust Agreement, (ii) delegated in writing to other persons by the
Bank, the Employers, the Committee, or the Trustee, or (iii) allocated to other
parties by operation of law. The Committee shall have exclusive responsibility
regarding decisions concerning the payment of benefits under the Plan. The
Committee shall have no investment responsibility with respect to the Investment
Fund except to the extent, if any, specifically provided in the Trust Agreement.
In the discharge of its duties, the Committee may employ accountants, actuaries,
legal counsel, and other agents (who also may be employed by an Employer or the
Trustee in the same or some other capacity) and may pay their reasonable
expenses and compensation.
12.2 IDENTITY OF COMMITTEE. The Committee shall consists of three or
---------------------
more individuals selected by the Bank. Any individual, including a director,
trustee, shareholder, officer, or Employee of an Employer, shall be eligible to
serve as a member of the Committee. The Bank shall have the power to remove any
individual serving on the Committee at any time without cause upon 10 days
written notice, and any individual may resign from the Committee at any time
upon 10 days written notice to the Bank. The Bank shall notify the Trustee of
any change in membership of the Committee.
12.3 DUTIES OF COMMITTEE. The Committee shall keep whatever records may
-------------------
be necessary to implement the Plan and shall furnish whatever reports may be
required from time to time by the Bank. The Committee shall furnish to the
Trustee whatever information may be necessary to properly administer the Trust.
The Committee shall see to the filing with the appropriate government agencies
of all reports and returns required of the Plan Committee under ERISA and other
laws.
Further, the Committee shall have exclusive responsibility and authority
with respect to the Plan's holdings of Stock and shall direct the Trustee in all
respects regarding the purchase, retention, sale, exchange, and pledge of Stock
and the creation and satisfaction of Stock Obligations. The Committee shall
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at all times act consistently with the Bank's long-term intention that the Plan,
as an employee stock ownership plan, be invested primarily in Stock. Subject to
the direction of the Board as to the application of Employer contributions to
Stock Obligations, and subject to the provisions of Sections 6.4 and 10.6 as to
Participants' rights under certain circumstances to have their Accounts invested
in Stock or in assets other than Stock, the Committee shall determine in its
sole discretion the extent to which assets of the Trust shall be used to repay
Stock Obligations, to purchase Stock, or to invest in other assets to be
selected by the Trustee or an investment manager. No provision of the Plan
relating to the allocation or vesting of any interests in the Stock Fund or the
Investment Fund shall restrict the Committee from changing any holdings of the
Trust, whether the changes involve an increase or a decrease in the Stock or
other assets credited to Participants' Accounts. In determining the proper
extent of the Trust's investment in Stock, the Committee shall be authorized to
employ investment counsel, legal counsel, appraisers, and other agents to pay
their reasonable expenses and compensation.
12.4 VALUATION OF STOCK. If the valuation of any Stock is not
------------------
established by reported trading on a generally recognized public market, the
Committee shall have the exclusive authority and responsibility to determine its
value for all purposes under the Plan. Such value shall be determined as of
each Valuation Date, and on any other date as of which the Plan purchases or
sells such Stock. The Committee shall use generally accepted methods of valuing
stock of similar corporations for purposes of arm's length business and
investment transactions, and in this connection the Committee shall obtain, and
shall be protected in relying upon, the valuation of such Stock as determined by
an independent appraiser experienced in preparing valuations of similar
businesses.
12.5 COMPLIANCE WITH ERISA. The Committee shall perform all acts
---------------------
necessary to comply with ERISA. Each individual member or employee of the
Committee shall discharge his duties in good faith and in accordance with the
applicable requirements of ERISA.
12.6 ACTION BY COMMITTEE. All actions of the Committee shall be governed
-------------------
by the affirmative vote of a number of members which is a majority of the total
number of members currently appointed, including vacancies. The members of the
Committee may meet informally and may take any action without meeting as a
group.
12.7 EXECUTION OF DOCUMENTS. Any instrument executed by the Committee
----------------------
shall be signed by any member or employee of the Committee.
12.8 ADOPTION OF RULES. The Committee shall adopt such rules and
-----------------
regulations of uniform applicability as it deems necessary or appropriate for
the proper administration and interpretation of the Plan.
12.9 RESPONSIBILITIES TO PARTICIPANTS. The Committee shall determine
--------------------------------
which Employees qualify to enter the Plan. The Committee shall furnish to each
eligible Employee whatever summary plan descriptions, summary annual reports,
and other notices and information may be required under ERISA. The Committee
also shall determine when a Participant or his Beneficiary qualifies for the
payment of benefits under the Plan. The Committee shall furnish to each such
Participant or Beneficiary whatever information is required under ERISA (or is
otherwise appropriate) to enable the Participant or Beneficiary to make whatever
elections may be available pursuant to Sections 6 and 10, and the Committee
shall provide for the payment of benefits in the proper form and amount from the
assets of the Trust Fund. The Committee may decide in its sole discretion to
permit modifications of elections and to defer or accelerate benefits to the
extent consistent with applicable law and the best interests of the individuals
concerned.
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12.10 ALTERNATIVE PAYEES IN EVENT OF INCAPACITY. If the Committee finds at
-----------------------------------------
any time that an individual qualifying for benefits under this Plan is a minor
or is incompetent, the Committee may direct the benefits to be paid, in the case
of a minor, to his parents, his legal guardian, or a custodian for him under the
Uniform Gifts to Minors Act, or, in the case of an incompetent, to his spouse,
or his legal guardian, the payments to be used for the individual's benefit. The
Committee and the Trustee shall not be obligated to inquire as to the actual use
of the funds by the person receiving them under this Section 12.10, and any such
payment shall completely discharge the obligations of the Plan, the Trustee, the
Committee, and the Employers to the extent of the payment.
12.11 INDEMNIFICATION BY EMPLOYERS. Except as separately agreed in writing,
----------------------------
the Committee, and any member or employee of the Committee, shall be indemnified
and held harmless by the Employer, jointly and severally, to the fullest extent
permitted by law against any and all costs, damages, expenses, and liabilities
reasonably incurred by or imposed upon it or him in connection with any claim
made against it or him or in which it or he may be involved by reason of its or
his being, or having been, the Committee, or a member or employee of the
Committee, to the extent such amounts are not paid by insurance.
12.12 NONPARTICIPATION BY INTERESTED MEMBER. Any member of the Committee
-------------------------------------
who also is a Participant in the Plan shall take no part in any determination
specifically relating to his own participation or benefits, unless his
abstention would leave the Committee incapable of acting on the matter.
SECTION 13. ADOPTION, AMENDMENT, OR TERMINATION OF THE PLAN.
-----------------------------------------------
13.1 ADOPTION OF PLAN BY OTHER EMPLOYERS. With the consent of the Bank,
-----------------------------------
any entity may become a participating Employer under the Plan by (i) taking such
action as shall be necessary to adopt the Plan, (ii) becoming a party to the
Trust Agreement establishing the Trust Fund, and (iii) executing and delivering
such instruments and taking such other action as may be necessary or desirable
to put the Plan into effect with respect to the entity's Employees.
13.2 ADOPTION OF PLAN BY SUCCESSOR. In the event that any Employer shall
-----------------------------
be reorganized by way of merger, consolidation, transfer of assets or otherwise,
so that an entity other than an Employer shall succeed to all or substantially
all of the Employer's business, the successor entity may be substituted for the
Employer under the Plan by adopting the Plan and becoming a party to the Trust
Agreement. Contributions by the Employer shall be automatically suspended from
the effective date of any such reorganization until the date upon which the
substitution of the successor entity for the Employer under the Plan becomes
effective. If, within 90 days following the effective date of any such
reorganization, the successor entity shall not have elected to become a party to
the Plan, or if the Employer shall adopt a plan of complete liquidation other
than in connection with a reorganization, the Plan shall be automatically
terminated with respect to Employees of the Employer as of the close of business
on the 90th day following the effective date of the reorganization, or as of the
close of business on the date of adoption of a plan of complete liquidation, as
the case may be.
13.3 PLAN ADOPTION SUBJECT TO QUALIFICATION. Notwithstanding any other
--------------------------------------
provision of the Plan, the adoption of the Plan and the execution of the Trust
Agreement are conditioned upon their being determined initially by the Internal
Revenue Service to meet the qualification requirements of Section 401(a) of the
Code, so that the Employers may deduct currently for federal income tax purposes
their contributions to the Trust and so that the Participants may exclude the
contributions from their gross income and recognize income only when they
receive benefits. In the event that this Plan is held by the
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<PAGE>
Internal Revenue Service not to qualify initially under Section 401(a), the Plan
may be amended retroactively to the earliest date permitted by U.S. Treasury
Regulations in order to secure qualification under Section 401(a). If this
Plan is held by the Internal Revenue Service not to qualify initially under
Section 401(a) either as originally adopted or as amended, each Employer's
contributions to the Trust under this Plan (including any earnings thereon)
shall be returned to it and this Plan shall be terminated. In the event that
this Plan is amended after its initial qualification and the Plan as amended is
held by the Internal Revenue Service not to qualify under Section 401(a), the
amendment may be modified retroactively to the earliest date permitted by U.S.
Treasury Regulations in order to secure approval of the amendment under Section
401(a).
13.4 RIGHT TO AMEND OR TERMINATE. The Bank intends to continue this Plan
---------------------------
as a permanent program. However, each participating Employer separately
reserves the right to suspend, supersede, or terminate the Plan at any time and
for any reason, as it applies to that Employer's Employees, and the Bank
reserves the right to amend, suspend, supersede, merge, consolidate, or
terminate the Plan at any time and for any reason, as it applies to the
Employees of each Employer. No amendment, suspension, supersession, merger,
consolidation, or termination of the Plan shall (i) reduce any Participant's or
Beneficiary's proportionate interest in the Trust Fund, (ii) reduce or restrict,
either directly or indirectly, the benefit provided any Participant prior to the
amendment, or (iii) divert any portion of the Trust Fund to purposes other than
the exclusive benefit of the Participants and their Beneficiaries prior to the
satisfaction of all liabilities under the Plan. Moreover, there shall not be
any transfer of assets to a successor plan or merger or consolidation with
another plan unless, in the event of the termination of the successor plan or
the surviving plan immediately following such transfer, merger, or
consolidation, each participant or beneficiary would be entitled to a benefit
equal to or greater than the benefit he would have been entitled to if the plan
in which he was previously a participant or beneficiary had terminated
immediately prior to such transfer, merger, or consolidation. Following a
termination of this Plan by the Bank, the Trustee shall continue to administer
the Trust and pay benefits in accordance with the Plan as amended from time to
time and the Committee's instructions.
SECTION 14. MISCELLANEOUS PROVISIONS.
------------------------
14.1 PLAN CREATES NO EMPLOYMENT RIGHTS. Nothing in this Plan shall be
---------------------------------
interpreted as giving any Employee the right to be retained as an Employee by an
Employer, or as limiting or affecting the rights of an Employer to control its
Employees or to terminate the Service of any Employee at any time and for any
reason, subject to any applicable employment or collective bargaining
agreements.
14.2 NONASSIGNABILITY OF BENEFITS. No assignment, pledge, or other
----------------------------
anticipation of benefits from the Plan will be permitted or recognized by the
Employer, the Committee, or the Trustee. Moreover, benefits from the Plan shall
not be subject to attachment, garnishment, or other legal process for debts or
liabilities of any Participant or Beneficiary, to the extent permitted by law.
This prohibition on assignment or alienation shall apply to any judgment,
decree, or order (including approval of a property settlement agreement) which
relates to the provision of child support, alimony, or property rights to a
present or former spouse, child or other dependent of a Participant pursuant to
a State domestic relations or community property law, unless the judgment,
decree, or order is determined by the Committee to be a qualified domestic
relations order within the meaning of Section 414(p) of the Code, as more fully
set forth in Section 14.12 hereof.
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14.3 LIMIT OF EMPLOYER LIABILITY. The liability of the Employer with
---------------------------
respect to Participants under this Plan shall be limited to making contributions
to the Trust from time to time, in accordance with Section 4.
14.4 TREATMENT OF EXPENSES. All expenses incurred by the Committee and
---------------------
the Trustee in connection with administering this Plan and Trust Fund shall be
paid by the Trustee from the Trust Fund to the extent the expenses have not been
paid or assumed by the Employer or by the Trustee.
14.5 NUMBER AND GENDER. Any use of the singular shall be interpreted to
-----------------
include the plural, and the plural the singular. Any use of the masculine,
feminine, or neuter shall be interpreted to include the masculine, feminine, or
neuter, as the context shall require.
14.6 NONDIVERSION OF ASSETS. Except as provided in Sections 5.3 and
----------------------
13.3, under no circumstances shall any portion of the Trust Fund be diverted to
or used for any purpose other than the exclusive benefit of the Participants and
their Beneficiaries prior to the satisfaction of all liabilities under the Plan.
14.7 SEPARABILITY OF PROVISIONS. If any provision of this Plan is held
--------------------------
to be invalid or unenforceable, the other provisions of the Plan shall not be
affected but shall be applied as if the invalid or unenforceable provision had
not been included in the Plan.
14.8 SERVICE OF PROCESS. The agent for the service of process upon the
------------------
Plan shall be the president of the Bank, or such other person as may be
designated from time to time by the Bank.
14.9 GOVERNING STATE LAW. This Plan shall be interpreted in accordance
-------------------
with the laws of the State of New York to the extent those laws are applicable
under the provisions of ERISA.
14.10 EMPLOYER CONTRIBUTIONS CONDITIONED ON DEDUCTIBILITY. Employer
---------------------------------------------------
Contributions to the Plan are conditioned on deductibility under Code Section
404. In the event that the Internal Revenue Service shall determine that all or
any portion of an Employer Contribution is not deductible under that Section,
the nondeductible portion shall be returned to the Employer within one year of
the disallowance of the deduction.
14.11 UNCLAIMED ACCOUNTS. Neither the Employer nor the Trustees shall be
------------------
under any obligation to search for, or ascertain the whereabouts of, any
Participant or Beneficiary. The Employer or the Trustees, by certified or
registered mail addressed to his last known address of record with the Employer,
shall notify any Participant or Beneficiary that he is entitled to a
distribution under this Plan, and the notice shall quote the provisions of this
Section. If the Participant or Beneficiary fails to claim his benefits or make
his whereabouts known in writing to the Employer or the Trustees within seven
(7) calendar years after the date of notification, the benefits of the
Participant or Beneficiary under the Plan will be disposed of as follows:
(a) If the whereabouts of the Participant is unknown but the
whereabouts of the Participant's Beneficiary is known to the Trustees,
distribution will be made to the Beneficiary.
(b) If the whereabouts of the Participant and his Beneficiary are
unknown to the Trustees, the Plan will forfeit the benefit, provided that
the benefit is subject to a claim for reinstatement if the Participant or
Beneficiary make a claim for the forfeited benefit.
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Any payment made pursuant to the power herein conferred upon the Trustees
shall operate as a complete discharge of all obligations of the Trustees, to the
extent of the distributions so made.
14.12 QUALIFIED DOMESTIC RELATIONS ORDER. Section 14.2 shall not apply
----------------------------------
to a "qualified domestic relations order" defined in Code Section 414(p), and
such other domestic relations orders permitted to be so treated by Administrator
under the provisions of the Retirement Equity Act of 1984. Further, to the
extent provided under a "qualified domestic relations order", a former Spouse of
a Participant shall be treated as the Spouse or surviving Spouse for all
purposes under the Plan.
In the case of any domestic relations order received by the Plan:
(a) The Employer or the Plan Committee shall promptly notify the
Participant and any other alternate payee of the receipt of such order and
the Plan's procedures for determining the qualified status of domestic
relations orders, and
(b) Within a reasonable period after receipt of such order, the
Employer or the Plan Committee shall determine whether such order is a
qualified domestic relations order and notify the Participant and each
alternate payee of such determination. The Employer or the Plan Committee
shall establish reasonable procedures to determine the qualified status of
domestic relations orders and to administer distributions under such
qualified orders.
During any period in which the issue of whether a domestic relations order
is a qualified domestic relations order is being determined (by the Employer or
Plan Committee, by a court of competent jurisdiction, or otherwise), the
Employer or the Plan Committee shall segregate in a separate account in the Plan
or in an escrow account the amounts which would have been payable to the
alternate payee during such period if the order had been determined to be a
qualified domestic relations order. If within eighteen (18) months the order
(or modification thereof) is determined to be a qualified domestic relations
order, the Employer or the Plan Committee shall pay the segregated amounts (plus
any interest thereon) to the person or persons entitled thereto. If within
eighteen (18) months it is determined that the order is not a qualified domestic
relations order, or the issue as to whether such order is a qualified domestic
relations order is not resolved, then the Employer or the Plan Committee shall
pay the segregated amounts (plus any interest thereon) to the person or persons
who would have been entitled to such amounts if there had been no order. Any
determination that an order is a qualified domestic relations order which is
made after the close of the eighteen (18) month period shall be applied
prospectively only. The term "alternate payee" means any Spouse, former Spouse,
child or other dependent of a Participant who is recognized by a domestic
relations order as having a right to receive all, or a portion of, the benefit
payable under a Plan with respect to such Participant.
SECTION 15. TOP-HEAVY PROVISIONS.
--------------------
15.1 TOP-HEAVY PLAN. For any Plan Year beginning after December 31,
--------------
1983, this Plan is top-heavy if any of the following conditions exist:
(a) If the top-heavy ratio for this Plan exceeds sixty percent (60%)
and this Plan is not part of any required aggregation group or permissive
aggregation group;
(b) If this Plan is a part of a required aggregation group (but is
not part of a permissive aggregation group) and the aggregate top-heavy ratio
for the group of Plans exceeds sixty percent (60%); or
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(c) If this Plan is a part of a required aggregation group and part
of a permissive aggregation group and the aggregate top-heavy ratio for the
permissive aggregation group exceeds sixty percent (60%).
15.2 SUPER TOP-HEAVY PLAN For any Plan Year beginning after December 31,
--------------------
1983, this Plan will be a super top-heavy Plan if any of the following
conditions exist:
(a) If the top-heavy ratio for this Plan exceeds ninety percent
(90%) and this Plan is not part of any required aggregation group or permissive
aggregation group.
(b) If this Plan is a part of a required aggregation group (but is
not part of a permissive aggregation group) and the aggregate top-heavy ratio
for the group of Plans exceeds ninety percent (90%), or
(c) If this Plan is a part of a required aggregation group and part
of a permissive aggregation group and the aggregate top-heavy ratio for the
permissive aggregation group exceeds ninety percent (90%).
15.3 DEFINITIONS.
-----------
In making this determination, the Committee shall use the following definitions
and principles:
15.3-1 The "Determination Date", with respect to the first Plan Year
of any plan, means the last day of that Plan Year, and with respect to each
subsequent Plan Year, means the last day of the preceding Plan Year. If
any other plan has a Determination Date which differs from this Plan's
Determination Date, the top-heaviness of this Plan shall be determined on
the basis of the other plan's Determination Date falling within the same
calendar years as this Plan's Determination Date.
15.3-2 A "Key Employee", with respect to a Plan Year, means an
Employee who at any time during the five years ending on the top-heavy
Determination Date for the Plan Year has received compensation from an
Employer and has been (i) an officer of the Employer having 415
Compensation greater than 50 percent of the limit then in effect under
Section 415(b)(1)(A) of the Code, (ii) one of the 10 Employees owning the
largest interests in the Employer having 415 Compensation greater than the
limit then in effect under Section 415(c)(1)(A), (iii) an owner of more
than five percent of the outstanding equity interest or the outstanding
voting interest in any Employer, or (iv) an owner of more than one percent
of the outstanding equity interest or the outstanding voting interest in an
Employer whose annual compensation exceeds $150,000. For purposes of
determining whether an Employee is a Key Employee, annual compensation
means compensation as defined in Section 415(c)(3) of the Code, but
including amounts contributed by the Employee pursuant to a salary
reduction agreement which are excludable from the Employee's gross income
under Section 125, Section 402(e)(3), Section 402(H)(1)(B) or Section
403(b) of the Code. The Beneficiary of a Key Employee shall also be
considered a Key Employee.
15.3-3 A "Non-key Employee" means an Employee who at any time during
the five years ending on the top-heavy Determination Date for the Plan Year
has received compensation from an Employer and who has never been a Key
Employee, and the Beneficiary of any such Employee.
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<PAGE>
15.3-4 A "required aggregation group" includes (a) each qualified
Plan of the Employer in which at least one Key Employee participates in the
Plan Year containing the Determination Date and any of the four (4)
preceding Plan Years, and (b) any other qualified Plan of the Employer
which enables a Plan described in (a) to meet the requirements of Code
Sections 401(a)(4) and 410. For purposes of the preceding sentence, a
qualified Plan of the Employer includes a terminated Plan maintained by the
Employer within the five (5) year period ending on the Determination Date.
In the case of a required aggregation group, each Plan in the group will be
considered a top-heavy Plan if the required aggregation group is a top-
heavy group. No Plan in the required aggregation group will be considered
a top-heavy Plan if the required aggregation group is not a top-heavy
group. All Employers aggregated under Code Sections 414(b), (c) or (m) or
(o) (but only after the Code Section 414(o) regulations become effective)
are considered a single Employer.
15.3-5 A "permissive aggregation group" includes the required
aggregation group of Plans plus any other qualified Plan(s) of the Employer
that are not required to be aggregated but which, when considered as a
group with the required aggregation group, satisfy the requirements of Code
Sections 401(a)(4) and 410 and are comparable to the Plans in the required
aggregation group. No Plan in the permissive aggregation group will be
considered a top-heavy Plan if the permissive aggregation group is not a
top-heavy group. Only a Plan that is part of the required aggregation
group will be considered a top-heavy Plan if the permissive aggregation
group is top-heavy.
15.4 TOP-HEAVY RULES OF APPLICATION.
------------------------------
For purposes of determining the value of Account balances and the
present value of accrued benefits the following provisions shall apply:
15.4-1 The value of Account balances and the present value of
accrued benefits will be determined as of the most recent Valuation Date
that falls within or ends with the twelve (12) month period ending on the
Determination Date.
15.4-2 For purposes of testing whether this Plan is top-heavy, the
present value of an individual's accrued benefits and an individual's
Account balances is counted only once each year.
15.4-3 The Account balances and accrued benefits of a Participant
who is not presently a Key Employee but who was a Key Employee in a Plan
Year beginning on or after January 1, 1984 will be disregarded.
15.4-4 Employer contributions attributable to a salary reduction or
similar arrangement will be taken into account.
15.4-5 When aggregating Plans, the value of Account balances and
accrued benefits will be calculated with reference to the Determination
Dates that fall within the same calendar year.
15.4-6 The present value of the accrued benefits or the amount of
the Account balances of an Employee shall be increased by the aggregate
distributions made to such Employee from a Plan of the Employer. No
distribution, however, made from the Plan to an individual (other than the
beneficiary of a deceased Employee who was an Employee within the five (5)
year period ending on the Determination Date) who has not been an Employee
at any time during the five (5)
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<PAGE>
year period ending on the Determination Date shall be taken into account in
determining whether the Plan is top-heavy. Also, any amounts recontributed
by an Employee upon becoming a Participant in the Plan shall no longer be
counted as a distribution under this paragraph.
15.4-7 The present value of the accrued benefits or the amount of
the Account balances of an Employee shall be increased by the aggregate
distributions made to such Employee from a terminated Plan of the Employer,
provided that such Plan (if not terminated) would have been required to be
included in the aggregation group.
15.4-8 Accrued benefits and Account balances of an individual shall
not be taken into account for purposes of determining the top-heavy ratios
if the individual has performed no services for the Employer during the
five (5) year period ending on the applicable Determination Date.
Compensation for purposes of this subparagraph shall not include any
payments made to an individual by the Employer pursuant to a qualified or
non-qualified deferred compensation plan.
15.4-9 The present value of the accrued benefits or the amount of
the Account balances of any Employee participating in this Plan shall not
include any rollover contributions or other transfers voluntarily initiated
by the Employee except as described below. If a rollover was received by
this Plan after December 31, 1983, the rollover or transfer voluntarily
initiated by the Employee was received prior to January 1, 1984, then the
rollover or transfer shall be considered as part of the accrued benefit by
the Plan receiving such rollover or transfer. If this Plan transfers or
rolls over funds to another Plan in a transaction voluntarily initiated by
the Employee after December 31, 1983, then this Plan shall count the
distribution for purposes of determining Account balances or the present
value of accrued benefits. A transfer incident to a merger or consolidation
of two or more Plans of the Employer (including Plans of related Employers
treated as a single Employer under Code Section 414), or a transfer or
rollover between Plans of the Employer, shall not be considered as
voluntarily initiated by the Employee.
15.5 TOP-HEAVY RATIO.
---------------
If the Employer maintains one (1) or more defined contribution plans
(including any simplified Employee pension plan) and the Employer has never
maintained any defined benefit plans which have covered or could cover a
Participant in this Plan, the top-heavy ratio is a fraction, the numerator of
which is the sum of the Account balances of all Key Employees as of the
Determination Date, and the denominator of which is the sum of the Account
balances of all Employees as of the Determination Date. Both the numerator and
denominator of the top-heavy ratio shall be increased to reflect any
contribution which is due but unpaid as of the Determination Date.
If the Employer maintains one (1) or more defined contribution plans
(including any simplified Employee pension plan) and the Employer maintains or
has maintained one (1) or more defined benefit plans which have covered or could
cover a Participant in this Plan, the top-heavy ratio is a fraction, the
numerator of which is the sum of Account balances under the defined contribution
plans for all Key Employees and the present value of accrued benefits under the
defined benefit plans for all Key Employees, and the denominator of which is the
sum of the Account balances under the defined contribution plans for all
Employees and the present value of accrued benefits under the defined benefit
plans for all Employees.
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<PAGE>
15.6 MINIMUM CONTRIBUTIONS. For any Top-Heavy Year, each Employer shall
---------------------
make a special contribution on behalf of each Participant to the extent that the
total allocations to his Account pursuant to Section 4 is less than the lesser
of:
(i) three percent of his 415 Compensation for that year, or
(ii) the highest ratio of such allocation to 415 Compensation
received by any Key Employee for that year. For purposes of the special
contribution of this Section 15.2, a Key Employee's 415 Compensation shall
include amounts the Key Employee elected to defer under a qualified 401(k)
arrangement. Such a special contribution shall be made on behalf of each
Participant who is employed by an Employer on the last day of the Plan
Year, regardless of the number of his Hours of Service, and shall be
allocated to his Account.
For any Plan Year when (1) the Plan is top-heavy and (2) a Non-key Employee
is a Participant in both this Plan and a defined benefit plan included in the
plan aggregation group which is top heavy, the sum of the Employer contributions
and forfeitures allocated to the Account of each such Non-key Employee shall be
equal to at least five percent (5%) of such Non-key Employee's 415 Compensation
for that year.
15.7 MINIMUM VESTING. If a Participant's vested interest in his Account
---------------
is to be determined in a Top-Heavy Year, it shall be based on the following
"top-heavy table":
Vesting Percentage of
Years Interest Vested
------- ---------------
Fewer than 2 0%
2 20%
3 40%
4 60%
5 80%
6 100%
15.8 TOP-HEAVY PROVISIONS CONTROL IN TOP-HEAVY PLAN. In the event this
----------------------------------------------
Plan becomes top-heavy and a conflict arises between the top-heavy provisions
herein set forth and the remaining provisions set forth in this Plan, the top-
heavy provisions shall control.
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EXHIBIT 23.2
The Board of Trustees
Lockport Savings Bank
We consent to the use of our independent auditors' report dated January 17,
1997, on the consolidated financial statements of Lockport Savings Bank and
subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of income and cash flows for each of the years in the three-year
period ended December 31, 1996 included herein, and to the reference to our firm
under the heading "Experts" in the prospectus.
KPMG Peat Marwick LLP
Buffalo, New York
December 18, 1997
<PAGE>
EXHIBIT 23.2
The Employee Benefits Committee of
Lockport Savings Bank
We consent to the use of our independent auditors' report dated August 26,
1997, on the statements of net assets available for plan benefits of Lockport
Savings Bank 401(k) Plan as of December 31, 1996 and 1995, and the related
statements of changes in net assets available for plan benefits for each of the
years in the two year period then ended included in the prospectus supplement.
KPMG Peat Marwick LLP
Buffalo, New York
December 22, 1997
<PAGE>
EXHIBIT 23.3
RP FINANCIAL, LC.
- ---------------------------------------------
FINANCIAL SERVICES INDUSTRY CONSULTANTS
December 18, 1997
Board of Trustees
Lockport Savings Bank
6950 South Transit Road
Lockport, New York 14095-0514
Gentlemen:
We hereby consent to the use of our firm's name in the Application for
Conversion of Lockport Savings Bank, Lockport, New York, and any amendments
thereto, and in the Form S-1 Registration Statement and any amendments thereto
for Niagara Bancorp, Inc. We also hereby consent to the inclusion of, summary of
references to our Appraisal Report and our statement concerning subscription
rights in such filings including the Prospectus of Niagara Bancorp, Inc.
Sincerely,
RP FINANCIAL, LC.
/s/ James P. Hennessey
James P. Hennessey
Senior Vice President
================================================================================
WASHINGTON HEADQUARTERS
Rosslyn Center Telephone:(703) 528-1700
1700 North Moore Street, Suite 2210 Fax No:(703) 528-1788
Arlington, VA 22209
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-END> SEP-30-1997 DEC-31-1996
<CASH> 14,804 11,219
<INT-BEARING-DEPOSITS> 0 0
<FED-FUNDS-SOLD> 2,200 5,000
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 464,973 415,129
<INVESTMENTS-CARRYING> 37,500 38,000
<INVESTMENTS-MARKET> 37,500 38,000
<LOANS> 622,487 598,486
<ALLOWANCE> 6,353 6,539
<TOTAL-ASSETS> 1,176,451 1,093,358
<DEPOSITS> 992,219 920,072
<SHORT-TERM> 18,740 27,008
<LIABILITIES-OTHER> 28,772 25,614
<LONG-TERM> 10,000 5,000
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 126,720 115,664
<TOTAL-LIABILITIES-AND-EQUITY> 1,176,451 1,093,358
<INTEREST-LOAN> 38,361 47,285
<INTEREST-INVEST> 26,464 22,124
<INTEREST-OTHER> 1,313 825
<INTEREST-TOTAL> 75,062 61,310
<INTEREST-DEPOSIT> 39,814 32,145
<INTEREST-EXPENSE> 40,655 33,335
<INTEREST-INCOME-NET> 34,407 27,975
<LOAN-LOSSES> 2,187 975
<SECURITIES-GAINS> 576 875
<EXPENSE-OTHER> 20,926 18,416
<INCOME-PRETAX> 17,046 13,540
<INCOME-PRE-EXTRAORDINARY> 17,046 13,540
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 10,768 8,635
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
<YIELD-ACTUAL> 7.37 7.40
<LOANS-NON> 4,718 1,925
<LOANS-PAST> 0 312
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 1,838 6,656
<ALLOWANCE-OPEN> 4,707 6,539
<CHARGE-OFFS> 436 1,271
<RECOVERIES> 81 110
<ALLOWANCE-CLOSE> 6,539 6,353
<ALLOWANCE-DOMESTIC> 2,630 1,586
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 3,909 4,767
</TABLE>
<PAGE>
EXHIBIT 99.4
NIAGARA BANCORP, INC.
PROPOSED HOLDING COMPANY FOR
LOCKPORT SAVINGS BANK
LOCKPORT, NEW YORK
PROPOSED MARKETING MATERIALS
<PAGE>
Marketing Materials for
Niagara Bancorp, Inc.
Lockport, New York
Table of Contents
-----------------
I. Press Release
A. Explanation
B. Schedule
C. Distribution List
D. Press Release Examples
II. Advertisements
A. Explanation
B. Schedule
C. Advertisement Examples
III. Question and Answer Brochure
A. Explanation
B. Quantity and Method of Distribution
C. Example
IV. Officer and Director Support Brochure
A. Explanation
B. Method of Distribution
C. Example
V. IRA Mailing
A. Explanation
B. Quantity and Method of Distribution
C. IRA Mailing Example
VI. Counter Cards and Lobby Posters
A. Explanation
B. Quantity
VII. Invitations
A. Explanation
B. Quantity - Method of Distribution
C. Examples
VIII. Letters
A. Explanation
B. Method of Distribution
C. Examples
<PAGE>
IX. Proxygram
A. Explanation
B. Example
<PAGE>
I. Press Releases
A. Explanation
In an effort to assure that all customers, community members and other
interested investors receive prompt accurate information in a simultaneous
manner, the Bank will forward press releases to area newspapers, radio
stations, etc. at various points during the Conversion and Reorganization
process.
Only press releases approved by Issuer's Counsel, and the FDIC and the New
York State Banking Department will be forwarded for publication in any
manner.
B. Schedule
1. Approval of Conversion and Reorganization
2. Close of Stock Offering
<PAGE>
National and Local Distribution List
------------------------------------
The Bank should provide a supplemental distribution list that includes all local
newspapers that it considers to be within its market area.
(TO BE PROVIDED)
<PAGE>
Press Release FOR IMMEDIATE RELEASE
---------------------
For More Information Contact:
William E. Swan
President and Chief Executive Officer
Lockport Savings Bank
(716) 625-7500
LOCKPORT SAVINGS BANK
---------------------
REORGANIZATION FROM MUTUAL HOLDING COMPANY TO STOCK
---------------------------------------------------
HOLDING COMPANY APPROVED
-------------------------
William E. Swan, President and Chief Executive Officer of Lockport Savings
Bank (the "Bank"), Lockport, New York-, announced today that the Bank has
received approval from the Federal Deposit Insurance Corporation and the New
York State Banking Department to reorganize from the mutual form of ownership to
the mutual holding company form of organization. As part of the Reorganization,
the Bank will become a wholly-owned subsidiary of Niagara Bancorp, Inc.
("Niagara Bancorp"), to serve as the holding company of the Bank.
Pursuant to a plan of conversion and reorganization, Niagara Bancorp is
offering up to ________ shares, subject to adjustment, of its common stock, at a
price of $10.00 per share. The stock will be offered on a priority basis to
depositors of the bank as of August 31, 1996, Niagara Bancorp's Employee Stock
Ownership Plan and depositors of the Bank as of December 31, 1997. Concurrent
with the Subscription Offering, and subject to availability, stock will be
offered to persons who reside in Niagara, Erie, Orleans and Genessee Counties in
Western New York State. The Subscription and Community Offering (together, the
"Offering") will be managed by CIBC Oppenheimer Corp. of New York City and
Trident Securities, Inc. of Raleigh, North Carolina. Prospectuses describing,
among other things, the terms of the Offering will be mailed to eligible
depositors of the Bank on or about February _____, 1998.
<PAGE>
As a result of the reorganization, the Bank will operate as a subsidiary of
Niagara Bancorp. According to Mr. Swan, "Our day to day operations will not
change as a result of the reorganization and deposits will continue to be
insured by the FDIC up to the applicable legal limits."
Customers or members of the community with questions concerning the
reorganization should call the Stock Information Center at (716)
________________, or visit the Bank's main office at 55 East Avenue in
Lockport.
This is neither an offer to sell nor a solicitation of an offer to buy the stock
of Niagara Bancorp, Inc. The offer is made only by the Prospectus. The shares
of Common Stock are not deposits or savings accounts and will not be insured by
---
the Federal Deposit Insurance Corporation or any other government agency.
<PAGE>
Press Release FOR IMMEDIATE RELEASE
---------------------
For More Information Contact:
William E. Swan
President and Chief Executive Officer
Lockport Savings Bank
(716) 625-7500
NIAGARA BANCORP, INC. COMPLETES REORGANIZATION AND STOCK SALE
-------------------------------------------------------------
Lockport, New York - (_______, 1998) William E. Swan, President and Chief
Executive Officer of Lockport Savings Bank (the "Bank"), announced today that
Niagara Bancorp, Inc. (the "Company"), the holding company for the Bank, will
complete its stock offering on _________, 1998 in connection with the Bank's
Conversion and Reorganization from the mutual form of organization to the mutual
holding company form of organization. __________ shares were sold at $10.00 per
share in connection with the stock offering.
On ________, 1998, the Bank's Plan of Conversion and Reorganization was
approved by the Bank's voting depositors at a Special Meeting.
Mr. Swan indicated that the board of trustees of the Bank want to express
their thanks for the response to the stock offering and that the Bank looks
forward to continuing to serve the needs of its customers and the community as a
stock institution. The offering was managed by CIBC Oppenheimer Corp. and
Trident Securities, Inc. The stock is expected to commence trading on the Nasdaq
National Market System under the symbol "______" on ___________, 1998.
<PAGE>
II. Advertisements
A. Explanation
The intended use of the attached advertisement "A" is to notify the Bank's
customers and members of the local community that the Conversion and
Reorganization offering is underway.
The intended use of advertisement "B" is to remind the Bank's customers and
members of the local community of the closing date of the stock offering.
B. Media Schedule
1. Advertisement A - To be run immediately following regulatory approval
and run as often as weekly thereafter.
2. Advertisement B - To be run during the last week of the subscription
offering.
The Bank may, depending upon the response from customers and the community,
choose to run fewer ads or no ads at all.
<PAGE>
Advertisement (A)
- --------------------------------------------------------------------------------
This announcement is neither an offer to sell nor a solicitation of an offer to
buy these securities. The offer is made only by the Prospectus. These shares
have not been approved or disapproved by the Securities and Exchange Commission,
the Federal Deposit Insurance Corporation, nor has such commission, or
corporation passed upon the accuracy or adequacy of the prospectus. Any
representation to the contrary is unlawful.
NEW ISSUE _______, 1998
- ---------
________ SHARES
These shares are being offered pursuant
to a Plan of Conversion and Reorganization whereby
LOCKPORT SAVINGS BANK
Lockport, New York will
convert from the mutual form of ownership
to the mutual holding company form of organization
and become a wholly-owned subsidiary of
NIAGARA BANCORP, INC.
COMMON STOCK
_______________
PRICE $10.00 PER SHARE
_______________
CIBC OPPENHEIMER CORP. TRIDENT SECURITIES, INC.
For a copy of the prospectus call (716) ________.
Copies of the Prospectus may be obtained in any State in which this announcement
is circulated from the undersigned or such other brokers and dealers
as may legally offer these securities in such state.
- --------------------------------------------------------------------------------
<PAGE>
Advertisement (B)
- --------------------------------------------------------------------------------
ATTENTION: LOCKPORT SAVINGS BANK'S ELIGIBLE
DEPOSITORS AND MEMBERS OF OUR LOCAL COMMUNITY
_____________, IS THE DEADLINE TO
ORDER STOCK OF NIAGARA BANCORP, INC.
Eligible depositors of Lockport Savings Bank
and members of our local community have the opportunity
to invest in Lockport Savings Bank by subscribing
for common stock in its proposed holding company
NIAGARA BANCORP, INC.
A Prospectus relating to these securities is
available at our office or by calling our
Stock Information Center at (716) _____________.
This announcement is not an offer to sell or a
solicitation of an offer to buy the stock of Niagara Bancorp, Inc. The offer is
made only by the Prospectus. The shares of Common Stock are not deposits or
savings accounts and will not be insured
by the Federal Deposit Insurance Corporation
or any other government agency.
- --------------------------------------------------------------------------------
<PAGE>
III. Question and Answer Brochure
A. Explanation
The Question and Answer brochure is an essential marketing piece in any
Conversion and Reorganization. It serves to answer some of the most
commonly asked questions in "plain, everyday language". Although most of
the answers are taken verbatim from the Prospectus, it saves a prospective
investor from searching for the answer to a simple question.
B. Method of Distribution
There are four primary methods of distribution of the Question and Answer
brochure. However, regardless of the method the brochures are always
accompanied by a Prospectus.
1. A Question and Answer brochure is sent out in the initial mailing to
all eligible account holders of the Bank.
2. Question and Answer brochures are available at the Bank.
3. Question and Answer brochures are distributed in information packets
at community meetings.
4. Question and Answer brochures are sent out in a standard information
packet to all interested investors who phone the Stock Information
Center requesting information.
<PAGE>
QUESTIONS AND ANSWERS CONCERNING
THE PLAN OF MUTUAL HOLDING
COMPANY REORGANIZATION
Lockport Savings Bank
Lockport, New York
Questions and Answers Regarding the Subscription and Community Offering
MUTUAL HOLDING COMPANY REORGANIZATION
Lockport Savings Bank's Board of Trustees have unanimously adopted a Plan
of Reorganization pursuant to which Lockport Savings Bank (the "Bank") will
reorganize from a New York chartered mutual savings bank into a New York
chartered stock savings bank. As part of the Reorganization, the Bank will
become a wholly owned subsidiary of a stock holding company (the "Holding
Company") and the Holding Company will become a subsidiary of the Mutual Holding
Company. In conjunction with this Reorganization, the Holding Company will offer
up to 49% of its common stock in a stock offering to the depositors of the Bank.
The remaining stock, which will not constitute less than a majority of the
common stock, will be owned by the Mutual Holding Company.
The Reorganization is subject to approval by the Bank's depositors and the
appropriate regulatory authorities. Complete details on the Reorganization are
contained in the Prospectus and Proxy Statement.
1. Q. WHAT WILL BE THE EFFECT OF THE REORGANIZATION?
A. $ The Bank will create a Holding Company named Niagara Bancorp,
Inc. ("Niagara Bancorp") and a Mutual Holding Company as part of
the Reorganization.
. Niagara Bancorp, Inc. will own 100% of the Bank's stock.
. The Mutual Holding Company will own no less than 51% of the stock
of Niagara Bancorp.
. Stockholders will own no more than 49% of Niagara Bancorp.
. Qualifying depositors will receive subscription rights to
purchase stock in Niagara Bancorp.
2. Q. WHAT IS THE REASON FOR THE CONVERSION AND REORGANIZATION?
A. The Board of Trustees of Lockport Savings Bank has studied the issue
of Mutual Holding Company Reorganizations for quite some time. With
the many regulatory changes our industry faces today, the Board felt
that being in the Mutual Holding Company form of ownership provided us
with greater regulatory and capital structure flexibility to meet our
future challenges.
<PAGE>
The Reorganization will permit the Holding Company to issue capital
stock, which is a source of capital not available to mutual savings
banks. If the Bank elected to undertake a standard conversion,
applicable regulations would have required a greater amount of stock
to be sold, resulting in the raising of an amount of capital that
could not be effectively utilized by the Bank.
The Reorganization will also provide the Bank with additional
flexibility to structure and finance the expansion of it's operations
including the possible acquisition of other financial institutions.
At the same time, Lockport Savings Bank's mutual form of ownership and
it's desire to remain an independent savings bank will be preserved.
It is very important to the Bank to remain a community oriented
institution focused on providing a high quality of service to our
customers.
3. Q. WILL THE REORGANIZATION HAVE ANY EFFECT ON MY SAVINGS ACCOUNT OR LOAN
ACCOUNT WITH THE BANK?
A. No. CUSTOMERS WILL BE SERVED IN THE SAME OFFICES BY THE SAME STAFF.
The Reorganization will not affect the amount, interest rate or
withdrawal rights of deposit accounts, which will continue to be
insured by the Federal Deposit Insurance Corporation to the maximum
legal limit. Likewise, the loan accounts and rights of borrowers will
not be affected.
4. Q. WILL THERE BE CHANGES IN TRUSTEES, OFFICERS OR EMPLOYEES OF THE BANK
AS A RESULT OF THE REORGANIZATION?
A. No. Officers and employees of the Bank will continue in their current
capacities. The trustees of the Bank will serve as the initial
directors of the Holding Company.
5. Q. DOES THE COMPANY ANTICIPATE PAYING CASH DIVIDENDS ON THE HOLDING
COMPANY'S COMMON STOCK?
A. Niagara Bancorp intends to pay cash dividends at an initial annual
rate of $___ per share. The Holding Company's ability to pay dividends
will depend on the net proceeds retained from the Offerings and on
dividends received from the Bank, which is subject to various
regulatory restrictions on the payment of dividends.
6. Q. HOW WILL THE PROCEEDS FROM THE OFFERINGS BE USED?
A. Net proceeds from the sale of the Stock are estimated to be between
$____ million and $____ million. The Holding Company plans to
contribute to the Bank ____% or $_______ of the net proceeds (at the
midpoint) from the Offerings and retain the remainder of the net
proceeds. The Holding Company intends to use a portion of the net
proceeds retained by it to make a loan directly to an employee stock
ownership plan (the "ESOP") to enable the ESOP to purchase ___% of the
common stock. The remainder of the net proceeds retained by the
Holding Company will initially be invested in short-term interest-
bearing deposits and marketable securities.
<PAGE>
Funds retained by the Holding Company may be used to support the
future expansion of operations and for other business or investment
purposes, including the acquisition of other financial institutions
and/or branch offices, although there are no current plans,
arrangements, understandings or agreements regarding such expansion or
acquisitions. Subject to applicable limitations, such funds also may
be used in the future to repurchase shares of common stock. Funds
contributed to the Bank from the Holding Company will be used for
general business purposes. The proceeds will be used to support the
Bank's lending and investment activities and thereby enhance the
Bank's capabilities to service the borrowing and other financial needs
of the communities it serves.
7. Q. HOW WILL THE COMMUNITY BENEFIT FROM THE REORGANIZATION?
A. In conjunction with the Reorganization, the Board of Trustees expects
to create a community foundation dedicated to the promotion of
charitable purposes including community development, grants or
donations to support housing assistance, not-for-profit community
groups and other similar community minded projects and organizations.
The Bank expects to contribute to the Foundation an amount equal to 5%
of the aggregate subscription price of the shares sold in the
Offering. The foundation, which is subject to regulatory approval, is
being created by the Bank to share the Bank's success with the local
communities it serves.
VOTING - YOUR VOTE IS IMPORTANT
LOCKPORT SAVINGS BANK'S DEPOSITORS (AS DEFINED BELOW) ARE BEING ASKED TO APPROVE
THE PLAN OF REORGANIZATION, WHICH WAS ADOPTED BY THE BOARD OF TRUSTEES OF THE
BANK AND APPROVED BY STATE AND FEDERAL REGULATORS. A COPY OF THE PLAN OF
REORGANIZATION MAY BE OBTAINED FROM ANY BANK OFFICE OR BY CALLING THE STOCK
INFORMATION CENTER.
VOTING ON THE PLAN DOES NOT AFFECT DEPOSIT OR LOAN ACCOUNTS AT THE BANK, AND
DOES NOT OBLIGATE DEPOSITORS TO PURCHASE STOCK IN THE OFFERINGS.
8. Q. WHICH CUSTOMERS OF THE BANK ARE BEING ASKED TO VOTE ON THE PLAN?
A. Depositors of the Bank, as of the Voting Record Date, will be eligible
to vote on the Plan. The Voting Depositors have been provided with
Proxy Cards and Proxy Statements describing the Plan.
Each depositor, as of the Voting Record Date, will be entitled to cast
one vote for each $100 or fraction thereof of the withdrawable value
of any savings accounts in the Bank as of _____________, 1998, the
Voting Record Date. Depositors eligible to vote are called "Voting
Depositors". The maximum number of votes eligible to be cast by any
depositor may not exceed 1,000. Approval of the Plan requires the
affirmative vote of a majority of the total votes eligible to be cast,
and 75% of the aggregate dollar amount of deposits of Voting
Depositors entitled to vote at the Special Meeting of Depositors.
<PAGE>
THE BOARD OF TRUSTEES URGE DEPOSITORS TO VOTE FOR THE PLAN. NOT VOTING
WILL HAVE THE SAME EFFECT AS A VOTE AGAINST THE PLAN. Without
sufficient favorable votes, the Reorganization cannot be completed. In
that event, funds submitted by investors in connection with the
Offerings would be promptly returned, with interest.
9. Q. HOW DO I VOTE BY PROXY?
A. Please read the Proxy Statement that you receive. You may vote by
completing, signing and returning the Proxy Card in the Proxy Return
Envelope provided. PLEASE RESPOND PROMPTLY.
10. Q. WHY HAVE I RECEIVED MORE THAN ONE PROXY CARD?
A. If you have more than one deposit account at the Bank, you could
-----
receive more than one informational packet and each packet should
contain a separate Proxy Card, depending on the ownership structure of
your accounts. PLEASE VOTE, SIGN AND PROMPTLY RETURN ALL PROXY CARDS.
11. Q. AM I OBLIGATED TO PURCHASE STOCK IF I VOTE IN FAVOR OF THE PLAN?
A. No. Voting in no way obligates you to subscribe for stock. To
subscribe for stock, you must submit your order on a separate order
form along with the appropriate payment.
THE OFFERINGS
INVESTMENT IN COMMON STOCK INVOLVES CERTAIN RISKS. BEFORE MAKING AN INVESTMENT
DECISION, PLEASE CAREFULLY READ THE ENCLOSED PROSPECTUS, INCLUDING THE SECTION
ENTITLED "RISK FACTORS."
12. Q. WHO MAY PURCHASE CONVERSION STOCK IN THE OFFERINGS?
A. The Offerings consist of (i) a SUBSCRIPTION OFFERING to certain past
and current depositors of the Bank and (ii) COMMUNITY OFFERING,
INITIALLY, to certain residents of Niagara, Genessee, Erie and Orleans
Counties in Western New York State.
The common stock is being offered in the following order of priority:
(i) depositors of the Bank with account balances of $100 or more as
of the close of business on August 31, 1996 ("Eligible Account
Holders"); (ii) the ESOP; and (iii) depositors of the Bank with
account balances of $100 or more as of the close of business on
________, __, 1998 ("Supplemental Eligible Account Holders").
To the extent that shares remain available for purchase, a Community
Offering, if any, may commence without notice at any time after the
commencement of the Subscription Offering and may terminate at any
time without notice but may not terminate later than _______, 1998.
The right of any person to purchase shares in
<PAGE>
the Community Offering, if any, is subject to the absolute right of
the Board to accept or reject such purchases in whole or in part.
Preference will be given in the Community Offering to permanent
residents of Niagara, Genessee, Erie, Orleans, Wyoming, Cattaraugus,
Chautauqua and Allegheny Counties.
13. Q. WHAT IS THE PRICE PER SHARE?
A. The shares of Conversion Stock are being offered at a Purchase Price
of $_____ per share. All subscribers will pay the same price per
share.
14. Q. WHEN MUST ONE PLACE AN ORDER FOR SHARES OF STOCK?
A. Eligible depositors wishing to exercise their subscription rights must
return a completed Stock Order Form to LOCKPORT SAVINGS BANK, together
with full payment or appropriate instructions authorizing a withdrawal
from a LOCKPORT SAVINGS BANK deposit account, on or prior to the close
of the Subscription Offering which will be 12:00 noon, Eastern time on
_________, 1998, the expiration date of the Subscription Offering.
15. Q. HOW DOES ONE PAY FOR STOCK DURING THE OFFERING?
A. First, one may pay for stock with cash (if delivered in person to a
LOCKPORT SAVINGS BANK office) or by check or money order. Subscription
funds will earn interest at the Bank's passbook rate from the day the
Bank receives them until the completion or termination of the
Reorganization.
Second, one may authorize the bank to withdraw funds from a LOCKPORT
SAVINGS BANK savings account or certificate of deposit without early
withdrawal penalty. These funds will continue to earn interest at the
rate in effect for the account until completion of the offering at
which time funds will be withdrawn for the stock purchase. Funds
remaining in this account (if any) will continue to earn at the
contractual rate unless the withdrawal reduces the account balance
below the applicable minimum in which case the depositor will receive
interest at the passbook rate. A hold will be placed on the
depositor's account for the amount specified for stock payment. Such
subscribers will not have access to these funds from the day the Bank
receives the stock order until the completion or termination of the
Reorganization.
16. Q. HOW MANY SHARES OF STOCK WILL BE OFFERED?
A. Niagara Bancorp is offering between _____ and _____ shares of its
common stock at a price of $10.00 per share. The Offering may be
increased to ______ shares without notice to you if market or
financial conditions change prior to completion of the offering.
17. Q. WHAT IS THE MINIMUM AND MAXIMUM NUMBER OF SHARES WHICH MAY BE
<PAGE>
SUBSCRIBED FOR DURING THE OFFERING PERIOD?
A. The minimum number of shares that may be purchased is ______________.
The maximum number of shares will not exceed a total aggregate
purchase price equal to about 1% of the offering. The exact amount
will be determined after completion of the appraisal. [TO BE REVISED.]
18. Q. MUST ONE PAY A COMMISSION ON THE STOCK SUBSCRIBED FOR DURING THIS
OFFERING?
A. No. Subscribers will not pay a commission on stock purchased in the
Subscription Offering, the Community Offering, if any, or Syndicated
Community Offering, if any.
19. Q. WILL SUBSCRIBERS RECEIVE INTEREST ON FUNDS SUBMITTED FOR STOCK
SUBSCRIPTIONS?
A. Yes. LOCKPORT SAVINGS BANK will pay its current passbook rate from the
date funds are received (with a completed Stock Order Form) during the
Subscription and Community Offerings until completion of the
Reorganization.
20. Q. HOW MUCH STOCK DO THE TRUSTEES AND OFFICERS OF LOCKPORT SAVINGS BANK
INTEND TO SUBSCRIBE FOR THROUGH THE SUBSCRIPTION OFFERING?
A. Trustees and executive officers intend to subscribe for $________ in
stock. The purchase price paid by trustees and officers will be the
same as that paid by customers and the general public.
21. Q. ARE THE SUBSCRIPTION RIGHTS TRANSFERABLE TO ANOTHER PARTY?
A. No. Pursuant to federal regulations, Subscription Rights granted to
Eligible Account Holders and Supplemental Eligible Account Holders may
be exercised only by the person(s) to whom they are granted. Any
person found to be transferring or selling Subscription Rights will be
subject to forfeiture of such rights and other penalties.
22. Q. IF A DEPOSITOR CLOSED AN ACCOUNT SEVERAL MONTHS AGO WILL THEY STILL BE
ELIGIBLE TO SUBSCRIBE FOR STOCK?
A. If they were an account holder with at least $100 on deposit on August
31, 1996, the Eligibility Record Date, or the Supplemental Eligibility
Record Date, they may be eligible to subscribe for stock regardless of
whether or not they continue to hold a LOCKPORT SAVINGS BANK account.
23. Q. MAY ONE OBTAIN A LOAN FROM LOCKPORT SAVINGS BANK USING STOCK AS
COLLATERAL TO PAY FOR SHARES?
A. No. Federal regulations do not allow the Bank to make loans for this
purpose, but
<PAGE>
other financial institutions may make a loan for this purpose.
24. Q. WILL THE FDIC (FEDERAL DEPOSIT INSURANCE CORPORATION) INSURE THE
SHARES OF STOCK?
A. No. The shares will not be insured by the FDIC. No stock is insured.
However, the FDIC will continue to insure savings accounts and
certificates of deposit up to the applicable limits allowed by law.
25. Q. WILL THERE BE A MARKET FOR THE STOCK FOLLOWING THE CONVERSION?
A. LOCKPORT SAVINGS BANK has never issued stock before, and consequently
there is no established market for its common stock. The Bank intends
to seek approval to have the common stock listed on the NASDAQ
National Market System. CIBC Oppenheimer Corp. and Trident Securities,
Inc. intend to make a market in the common stock. However, purchasers
of common stock should recognize that no assurance can be given that
an active and liquid trading market will develop or, if developed,
will be maintained.
26. Q. CAN ONE PURCHASE STOCK USING FUNDS IN A LOCKPORT SAVINGS BANK IRA
ACCOUNT?
A. If one wishes to utilize Individual Retirement Account deposits held
at LOCKPORT SAVINGS BANK to subscribe for stock, potential subscribers
are encouraged to call the LOCKPORT SAVINGS BANK Stock Information
Center for assistance. There will be no early withdrawal or IRS
penalties incurred by these transactions, but additional paperwork
will be necessary. The deadline for using a Lockport IRA will be one
week prior to the expiration of the offering.
27. Q. HOW DOES ONE OBTAIN FURTHER INFORMATION CONCERNING THE STOCK OFFERING?
A. All interested investors are invited to call the Stock Information
Center for further information or for a copy of the Prospectus, Stock
Order Form, Proxy Statement and Proxy Card. The Stock Information
Center will be set up so that it can assist customers in their
purchase of stock and answer their questions concerning the
Reorganization.
THIS INFORMATION DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF
AN OFFER TO BUY NIAGARA BANCORP, INC. COMMON STOCK. OFFERS TO BUY OR TO SELL MAY
BE MADE ONLY BY THE PROSPECTUS. IF YOU ARE CONSIDERING PURCHASING STOCK, YOU
SHOULD READ THE PROSPECTUS PRIOR TO MAKING AN INVESTMENT DECISION. COPIES OF THE
PROSPECTUS MAY BE OBTAINED BY CALLING THE STOCK INFORMATION CENTER AT (716)
_______________.
<PAGE>
THE SHARES OF NIAGARA BANCORP, INC. COMMON STOCK BEING OFFERED IN THE
OFFERINGS AND THE EXCHANGE ARE NOT SAVINGS OR DEPOSIT ACCOUNTS AND ARE NOT
INSURED BY THE SAVINGS BANK INSURANCE FUND OF THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY.
<PAGE>
IV. Officer and Trustee Brochure
A. Explanation
An Officer and Trustee Brochure merely highlights in brochure form the
purchase commitments shown in the Prospectus.
B. Quantity
An Officer and Trustee brochure is proposed to be sent out in the initial
mailing to all the customers and stockholders of the Bank along with the
Prospectus. Alternatively, the information contained in this brochure may
be combined with the Question and Answer brochure.
<PAGE>
TRUSTEE AND EXECUTIVE OFFICER
INTENDED PURCHASES
<TABLE>
<CAPTION>
Number of Percent
Name Aggregate Purchase Price Shares at Midpoint
- ---- ------------------------ ------ -----------
<S> <C> <C> <C>
All trustees and
executive officers of
the Bank as a
group (___ persons)
</TABLE>
<PAGE>
V. IRA Mailing
A. Explanation
A special IRA mailing is proposed to be sent to all IRA customers of the
Bank in order to alert the customers that funds held in an IRA can be used
to purchase stock. Since this transaction is not as simple as designating
funds from a certificate of deposit like a normal stock purchase, this
letter informs the customer that this process is slightly more detailed and
involves a personal visit to the Bank.
B. Quantity
One IRA letter is proposed to be mailed to each IRA customer of the Bank.
These letters would be mailed following regulatory approval of the
Conversion and Reorganization and after each customer or stockholder has
received the initial mailing containing a Proxy Statement and a Prospectus.
C. Example - See following page.
<PAGE>
Lockport Savings Bank Letterhead
________, 1998
Dear Individual Retirement Account Participant:
As you know, Lockport Savings Bank (the "Bank") is in the process of
converting from the mutual form of ownership to the stock form of ownership
whereby the Bank will become a wholly-owned subsidiary of Niagara Bancorp, Inc.
(the "Company") which will own all of the stock of the Bank. Through the
Conversion and Reorganization, certain current and former customers have a
priority right to purchase shares of common stock of the Company in a
Subscription Offering. The Company currently is offering up to __________
shares, subject to adjustment, of the Company at a price of $10.00 per share.
As the holder of an individual retirement account ("IRA") at the Bank, you
have an opportunity to become a stockholder in the Company using some or all of
the funds being held in your IRA. If you desire to purchase shares of common
stock of the Company through your IRA, the Bank can assist you in self-directing
those funds. This process can be done without an early withdrawal penalty and
generally without a negative tax consequence to your retirement account.
If you are interested in receiving more information on self-directing your
IRA, please contact our Stock Information Center at (716) ____________. Because
it may take several days to process the necessary IRA forms, a response is
requested (but not required) by _______, 1998 to accommodate your interest.
Sincerely,
William E. Swan
President and Chief Executive Officer
This letter is neither an offer to sell nor a solicitation of an offer to buy
Niagara Bancorp, Inc. Common Stock. The offer is made only by the Prospectus,
which was recently mailed to you. THE SHARES OF NIAGARA BANCORP, INC. COMMON
STOCK ARE NOT DEPOSITS AND WILL NOT BE INSURED BY THE FEDERAL DEPOSIT INSURANCE
---
CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY.
<PAGE>
VI. Counter Cards and Lobby Posters
A. Explanation
Counter cards and lobby posters serve two purposes: (1) As a notice to the
Bank's customers and members of the local community that the stock sale is
underway and (2) to remind customers and members of the local community of
the end of the Subscription and Community Offerings.
B. Quantity
Approximately 2 - 3 Counter cards may be used in each branch location.
Approximately 1 - 2 Lobby posters may be used at each branch office.
C. Example
<PAGE>
C. POSTER
OR
COUNTER CARD
Niagara Bancorp, Inc.
Proposed Holding Company for
Lockport Savings Bank
"STOCK OFFERING MATERIALS
AVAILABLE HERE"
Subscription and Community Offerings End
_______, 1998
<PAGE>
VII. Invitations
A. Explanation
In order to educate customers and the public about the stock offering, the
Bank may hold several Community Meetings in various locations. In an effort
to target a group of interested investors Trident will request that each
Trustee and Officer of the Bank submit a list of prospective investors that
he/she would like to invite to a Community Meeting.
Prospectuses are given to each prospect at the Community meeting.
B. Quantity and Method of Distribution
An invitation is mailed to each prospect.
<PAGE>
The Trustees, Officers & Employees
of
Lockport Savings Bank
cordially invite you
to attend a brief presentation
regarding the stock offering of
Niagara Bancorp, Inc.
Please join us at
Place
Address
on
Date
at Time
for hors d'oeuvres
R.S.V.P.
(716) _________________
<PAGE>
VIII. Letters
A. Explanation
Once the application for Conversion and Reorganization has received
regulatory approval, the Bank may send out a series of up to three letters
to targeted prospects. These letters are used to help facilitate the
marketing effort to this group. All prospects will receive a Prospectus as
soon as they are available.
B. Method of Distribution
Each prospect is sent a series of up to three letters during the
Subscription and Community Offerings.
C. Examples
1. Introductory letter
2. A. Thank you letter
or
B. Sorry you were unable to attend letter
3. Final reminder letter
<PAGE>
Example 1
(Introductory Letter) (non-eligible prospects)
(Lockport Savings Bank Letterhead)
_______, 1998
Name
Address
City, State, Zip
Dear Name:
You have probably read recently in the newspaper that Lockport Savings Bank
(the "Bank") will soon be converting from the mutual holding company form of
organization to stock form as part of our Reorganization as a mutual holding
company. This Conversion and Reorganization is the biggest step in the history
of the Bank in that it allows customers, community members, employees, officers
and trustees the opportunity to subscribe for stock in our new holding company -
Niagara Bancorp, Inc. (the "Company").
I have enclosed a Prospectus and a Stock Order Form that will allow you to
subscribe for shares and possibly become a charter stockholder of the Company
should you so desire. In addition, we will be holding several presentations for
friends of the Bank in order to review the Conversion and Reorganization and the
merits of becoming a charter stockholder of the Company. You will receive an
invitation shortly.
I hope that if you have any questions you will feel free to call me or the
Bank's Stock Information Center at (716) _____________. I look forward to seeing
you at our presentation.
Sincerely,
William F. Swan
President and Chief Executive Officer
The shares of Common Stock offered in the Conversion and Reorganization are not
deposits and are not insured by the Federal Deposit Insurance Corporation or any
other governmental agency.
THIS IS NOT AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY STOCK. THE
OFFER WILL BE MADE ONLY BY THE PROSPECTUS.
<PAGE>
Example 2A
(Thank You Letter)
(Lockport Savings Bank Letterhead)
___________, 1998
Name
Address
City, State, Zip
Dear Name:
On behalf of the Board of Trustees and management of Lockport Savings Bank,
I would like to thank you for attending our recent presentation regarding the
stock offering by Niagara Bancorp, Inc. We are enthusiastic about the stock
offering and look forward to completing the Subscription and Community Offerings
on or about _______, 1998.
I hope that you will join me in being a charter stockholder, and once again
thank you for your interest.
Sincerely,
William E. Swan
President and Chief Executive Officer
The shares of Common Stock offered in the Conversion and Reorganization are not
savings accounts or deposits and are not insured by the Federal Deposit
Insurance Corporation, the Bank Insurance Fund or any other governmental agency.
THIS IS NOT AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY STOCK. THE
OFFER WILL BE MADE ONLY BY THE PROSPECTUS.
<PAGE>
Example 2B
(Sorry You Were Unable to Attend)
(Lockport Savings Bank Letterhead)
_______________, 1998
Name
Address
City, State, Zip
Dear Name:
I am sorry you were unable to attend our recent presentation regarding
Lockport Savings Bank's Conversion and Reorganization. The Board of Trustees and
management are committed to building long term stockholder value, and as a group
we are investing over $______ of our own funds in Niagara Bancorp, Inc. We are
enthusiastic about the stock offering and look forward to completing the
Subscription and Community Offerings on or about _______, 1998.
We have established a Stock Information Center to answer any questions
regarding the stock offering. Should you require any assistance between now and
_______, I encourage you either to stop by any office of Lockport Savings Bank
or to call our Stock Information Center at (716) ____________.
I hope you will join me in becoming a charter stockholder of Niagara
Bancorp, Inc.
Sincerely,
William E. Swan
President and Chief Executive Officer
The shares of Common Stock offered in the Conversion and Reorganization are not
savings accounts or deposits and are not insured by the Federal Deposit
Insurance Corporation, the Bank Insurance Fund or any other governmental agency.
THIS IS NOT AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY STOCK. THE
OFFER WILL BE MADE ONLY BY THE PROSPECTUS.
<PAGE>
Example 3
(Final Reminder Letter)
(Lockport Savings Bank Letterhead)
___________, 1998
Name
Address
City, State, Zip
Dear Name:
Just a quick note to remind you that the deadline is quickly approaching
for subscribing for stock in Niagara Bancorp, Inc., the proposed holding company
for Lockport Savings Bank. I hope you will join me in becoming a charter
stockholder in Western New York's newest publicly owned financial institution
holding company.
The deadline for subscribing for shares to become a charter stockholder is
_______, 1998. If you have any questions, I hope you will call our Stock
Information Center at (716) __________________.
Once again, I look forward to having you join me as a stockholder of
Niagara Bancorp, Inc.
Sincerely,
William E. Swan
President and Chief Executive Officer
The shares of Common Stock offered in the Conversion and Reorganization are not
savings accounts or deposits and are not insured by the Federal Deposit
Insurance Corporation, the Bank Insurance Fund or any other governmental agency.
THIS IS NOT AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY STOCK. THE
OFFER WILL BE MADE ONLY BY THE PROSPECTUS.
<PAGE>
IX. Proxygram
A. Explanation
A proxygram is used when the majority of votes needed to adopt the Plan of
Conversion and Reorganization is still outstanding. The proxygram is mailed
to those "target vote" depositors who have not previously returned their
signed proxy.
Target vote depositors are determined by the Conversion Agent.
B. Example
<PAGE>
B. Example
________________________________________________________________________________
P R O X Y G R A M
LOCKPORT SAVINGS BANK
YOUR VOTE ON OUR PLAN OF CONVERSION AND REORGANIZATION HAS NOT BEEN RECEIVED.
- --------- ---------------------
YOUR VOTE IS VERY IMPORTANT, PARTICULARLY SINCE FAILURE TO VOTE IS EQUIVALENT TO
- ---------------------------
VOTING AGAINST THE PLAN.
VOTING FOR THE CONVERSION AND REORGANIZATION WILL NOT AFFECT THE INSURANCE OF
YOUR ACCOUNT. IT WILL CONTINUE TO BE INSURED UP TO $100,000 BY THE FEDERAL
------------------------------------------------------------
DEPOSIT INSURANCE CORPORATION.
- -----------------------------
YOU MAY PURCHASE STOCK IF YOU WISH, BUT VOTING DOES NOT OBLIGATE YOU TO BUY
STOCK.
PLEASE ACT PROMPTLY! SIGN THE ENCLOSED PROXY CARD AND MAIL, OR DELIVER, THE
----------------------------
PROXY CARD TO LOCKPORT SAVINGS BANK TODAY. PLEASE VOTE ALL PROXY CARDS RECEIVED.
---
WE RECOMMEND THAT YOU VOTE "FOR" THE PLAN OF CONVERSION AND REORGANIZATION.
THANK YOU.
THE BOARD OF TRUSTEES AND MANAGEMENT OF
LOCKPORT SAVINGS BANK
________________________________________________________________________________
IF YOU RECENTLY MAILED THE PROXY,
PLEASE ACCEPT OUR THANKS AND DISREGARD THIS REQUEST.
FOR FURTHER INFORMATION CALL (716) __________.
<PAGE>
EXHIBIT 99.5
Lockport Savings Bank
6950 South Transit Road
P.O. Box 514
Lockport, New York 14095-0514
(716) 625-7500
February __, 1998
Dear Depositor:
On behalf of the Board of Trustees and management of Lockport Savings Bank
(the "Bank"), I cordially invite you to a Special Meeting of Depositors on March
__, 1998 to vote on the Lockport Savings Bank Plan of Reorganization From a
Mutual Savings Bank to a Mutual Holding Company and Stock Issuance Plan (the
"Plan"). The Board of Trustees of the Bank believes that the Plan is in the
best interests of the Bank, and urges you to vote FOR the proposal. For a
---
discussion of the reasons why the Board of Trustees recommends that you vote FOR
---
the proposal, please refer to the enclosed Proxy Statement and Prospectus.
Pursuant to the Plan, we will reorganize (the "Reorganization") into what
we call a "two-tier" mutual holding company structure. We call it a two-tier
structure because we will have two levels of holding companies--a "mid-tier"
stock holding company and a "top-tier" mutual holding company. Under the terms
of the Plan (i) we will form Niagara Bancorp, Inc. as a Delaware corporation
(the "Company") as our "mid-tier" stock holding company; (ii) we will form
Niagara Bancorp, MHC, as a New York mutual holding company (the "Mutual Holding
Company") as our "top-tier" mutual holding company; (iii) we will reorganize the
Bank into a capital stock bank (the "Stock Bank") and issue 100% of our to-be
outstanding common stock to the Company; and (iv) the Company will issue shares
of Common Stock to depositors, to our tax qualified employee plans, to the
public and to the Mutual Holding Company. The Mutual Holding Company will be
regulated by the New York State Banking Department and the Board of Governors of
the Federal Reserve System. After the consummation of the Reorganization, the
Stock Bank will be known as Lockport Savings Bank.
The Reorganization will not affect any deposit accounts or borrower
relationships that you may have with the Bank. As part of the Plan, all deposit
accounts in the Bank will become deposit accounts in the Stock Bank and will
continue to be insured by the Federal Deposit Insurance Corporation ("FDIC") on
the same terms up to the applicable limits of insurance coverage. All loans of
the Bank will become loans held by the Stock Bank, and will retain the same
status after the Reorganization as they had prior to the Reorganization.
Only the depositors of the Bank with aggregate deposits of $100 or more as
of the close of business on January __, 1998 will be entitled to vote on the
Plan.
The principal purpose of the Reorganization is to establish a structure
that will enable us to compete and expand more effectively in the financial
services marketplace, and that will enable our depositors, employees, management
and trustees to obtain an equity ownership interest in the Bank. Our new
structure will permit the Company to issue capital stock, which is a source of
capital not available to a mutual savings bank. In this regard, the Company
will issue between 19,125,000 and 25,875,000 shares of Common Stock in the
Reorganization. The Company intends to sell 45.4% of such shares, or between
8,677,747 and 11,740,482 shares, to depositors, to our tax qualified employee
plans and to the public pursuant to the Prospectus, and to issue 53.3% of such
shares, or between 10,186,921 and 13,782,304 shares, to the Mutual Holding
Company. In addition, shares are being issued to a charitable foundation as
part of the Reorganization, which will result in stockholders other than the
Mutual Holding Company owning 46.7% of the shares of the Common Stock
outstanding at the conclusion of the Reorganization. Subject to the approval of
the New York State Banking Department and the nonobjection of the Federal
Deposit Insurance Corporation (the "FDIC"), an additional 15% above the maximum
number of shares, or a total of 29,756,250 shares, may be issued in the
<PAGE>
Reorganization, and up to 13,501,554 shares may be sold in the Offering pursuant
to the Prospectus, in the event of an increase in the estimated pro forma market
value of the common stock of the Company.
The enclosed Proxy Statement and Prospectus contain a more detailed
analysis of the matters discussed briefly in this letter, and we urge you to
read them carefully.
Your Board of Trustees unanimously recommends that you vote FOR the Plan by
---
completing the enclosed proxy card and returning it in the enclosed envelope as
soon as possible. Your vote is very important.
Sincerely,
William E. Swan
President and Chief Executive Officer
- --------------------------------------------------------------------------------
THE SUPERINTENDENT OF BANKS OF THE STATE OF NEW YORK HAS APPROVED THE PLAN
SUBJECT TO THE APPROVAL OF THE BANK'S DEPOSITORS AND THE SATISFACTION OF CERTAIN
OTHER CONDITIONS. IN ADDITION, THE FDIC HAS ISSUED A NOTICE OF NONOBJECTION TO
THE PLAN. HOWEVER, SUCH APPROVAL AND NONOBJECTION DOES NOT CONSTITUTE A
RECOMMENDATION OF THE PLAN.
- --------------------------------------------------------------------------------
YOUR BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE
FOR APPROVAL OF THE PLAN BY COMPLETING THE
ENCLOSED PROXY CARD AND RETURNING IT IN THE ENCLOSED
POSTAGE-PAID ENVELOPE AS SOON AS POSSIBLE.
YOUR VOTE IS VERY IMPORTANT.
- --------------------------------------------------------------------------------
2
<PAGE>
Lockport Savings Bank
6950 South Transit Road
P.O. Box 514
Lockport, New York 14095-0514
(716) 625-7500
- --------------------------------------------------------------------------------
NOTICE OF SPECIAL MEETING OF DEPOSITORS
To Be Held On March __, 1998
- --------------------------------------------------------------------------------
A Special Meeting of the Depositors (the "Meeting") of Lockport Savings
Bank (the "Bank"), will be held at the __________________, Lockport, New York on
________, March ___, 1998, at ____ p.m., New York Time.
A Proxy Card and a Proxy Statement for the Meeting are enclosed.
The Meeting is for the purpose of considering and acting upon:
1. The approval of a Plan of Reorganization from a Mutual Savings Bank to
a Mutual Holding Company and Stock Issuance Plan (the "Plan") whereby
(i) we will form Niagara Bancorp, Inc. as a Delaware corporation (the
"Company"); (ii) we will form Niagara Bancorp, MHC, as a New York
mutual holding company (the "Mutual Holding Company"); (iii) we will
reorganize the Bank into a capital stock bank (the "Stock Bank") and
issue 100% of our to-be outstanding common stock to the Company; and
(iv) the Company will issue shares of Common Stock to depositors, to
our tax qualified employee plans, to the public and to the Mutual
Holding Company.
2. Such other matters as may properly come before the Meeting or any
adjournment thereof. The Board of Trustees is not aware of any other
matters to come before the Meeting.
Any action may be taken on the foregoing proposal at the Meeting on the
date specified above or on any date or dates to which, by original or later
adjournment, the Meeting may be adjourned. Depositors of the Bank at the close
of business on January __, 1998, (the "Record Date") will be entitled to vote at
the Meeting.
Your Board of Trustees unanimously recommends that you vote for approval of
the Plan by completing the enclosed proxy card and returning it in the enclosed
postage-paid envelope as soon as possible. The proxy will not be used if you
attend and vote at the Meeting in person. Your vote is very important.
BY ORDER OF THE BOARD OF TRUSTEES
Robert Murphy
Secretary
Lockport, New York
February __, 1998
This Proxy Statement is neither an offer to sell nor a solicitation of an
offer to buy Common Stock. The offer is made only through the Prospectus to
certain individuals. The shares of Common Stock are not savings accounts or
savings deposits and are not insured by the Federal Deposit Insurance
Corporation or any other government agency.
3
<PAGE>
Lockport Savings Bank
6950 South Transit Road
P.O. Box 514
Lockport, New York 14095-0514
(716) 625-7500
PROXY STATEMENT
SPECIAL MEETING OF DEPOSITORS
To Be Held On March __, 1998
- --------------------------------------------------------------------------------
INTRODUCTION
- --------------------------------------------------------------------------------
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Trustees of Lockport Savings Bank (the "Bank") to be
used at the Special Meeting of Depositors (the "Meeting") to be held at the
________________, ___________, Lockport New York, on _________, March __, 1998,
at ______ p.m., New York time, and of any adjournments thereof. The
accompanying Notice of Meeting and this Proxy Statement are first being mailed
to depositors on or about February __, 1998. The meeting is being held for the
purpose of considering and voting upon a Plan of Reorganization from a Mutual
Savings Bank to a Mutual Holding Company and Stock Issuance Plan (the "Plan"),
pursuant to which we will reorganize the Bank into a "two-tier" mutual holding
company structure. Under the terms of the Plan (i) we will form Niagara Bancorp,
Inc. as a Delaware corporation (the "Company); (ii) we will form Niagara
Bancorp, MHC, as a New York mutual holding company (the "Mutual Holding
Company"); (iii) we will reorganize the Bank into a capital stock bank (the
"Stock Bank") and issue 100% of our to-be outstanding common stock to the
Company; and (iv) the Company will issue shares of Common Stock to depositors,
to our tax qualified employee plans, to the public and to the Mutual Holding
Company.
- --------------------------------------------------------------------------------
REVOCABILITY OF PROXIES
- --------------------------------------------------------------------------------
Depositors who execute proxies for the Meeting retain the right to revoke
them at any time before voting on the Plan at the Meeting or any adjournment
thereof. Proxies may be revoked by sending written notice of revocation to the
Secretary of the Bank at the address of the Bank shown above or sending a later-
dated proxy which is received no later than March ___ 1998. The presence at the
Meeting of any depositor who had given a proxy shall not revoke such proxy
unless the member delivers his or her ballot in person at the Meeting or
delivers a written revocation to the Secretary of the Bank prior to the voting
of such proxy. Proxies solicited by the Board of Trustees of the Bank will be
voted in accordance with the directions given therein. Where no instructions
are indicated, proxies will be voted FOR the proposal set forth in this Proxy
Statement. If any other matters are properly presented at the Meeting, proxies
will be voted on such matters in accordance with the directions of a majority of
the Board of Trustees. Management is not aware of any other matters to be
presented at the Meeting.
It is important that you review these materials to inform yourself fully
and adequately as to the matters to be considered and acted upon at the Meeting.
After you have reviewed the enclosed materials, you should then consider
carefully and act upon the matter proposed. If you wish to vote by proxy you
may do so by signing the enclosed proxy and returning it to the Bank. Remember
that the proxy solicited herein is valid only for the Meeting, and any
adjournment thereof, and will not be used for any other meeting.
<PAGE>
- --------------------------------------------------------------------------------
VOTING RIGHTS AND VOTE REQUIRED FOR APPROVAL
- --------------------------------------------------------------------------------
All persons who were holders of authorized deposit accounts ("Depositors")
on January __, 1998 (the "Record Date") will be eligible to vote on the Plan at
the Meeting. Each Depositor will be entitled to cast one vote for each $100 in
withdrawable accounts or fraction thereof. No Depositor may cast more than
1,000 votes. Voting may be in person or by proxy.
A savings, demand or other authorized account will create a single
membership for voting purposes, even though more than one person has an interest
in such account. An affirmative vote by (i) 75% of the total deposits present
in person or by proxy at the Meeting and (ii) at least 50% of the votes eligible
to be cast at the Meeting by Depositors is required to approve the Plan. Any
questions as to the eligibility of a Depositor to vote or as to any matters
relating to voting, will be resolved by the Secretary of the Bank at the time of
the Meeting, and the records of the Bank will be determinative in resolving such
questions. According to the records of the Bank, as of the Record Date there
were approximately _______________ votes entitled to be cast at the Meeting, of
which ________________ votes represents a majority.
The cost of solicitation of proxies will be borne by the Bank. Management
may use the services of its trustees, officers and other employees to solicit
proxies personally, or by telephone, telegraph or mail, without additional
compensation. Proxies may also be solicited by representatives of Trident
Securities, Inc. and CIBC Oppenheimer Corp., who will be compensated by the Bank
in connection with their services as financial advisors in the Offering. See
the "Reorganization and Offering-Plan of Distribution and Selling Commissions"
in the Prospectus.
THE BOARD OF TRUSTEES OF THE BANK UNANIMOUSLY RECOMMENDS THAT YOU VOTE TO
APPROVE THE PLAN.
- --------------------------------------------------------------------------------
THE MUTUAL HOLDING COMPANY REORGANIZATION
- --------------------------------------------------------------------------------
The Superintendent has approved the Plan and the offering of the Common
Stock subject to the approval of the Bank's depositors and the satisfaction of
certain conditions imposed by the Superintendent. The FDIC has issued a notice
of nonobjection to the Plan and the Offering. However, such regulatory approval
and nonobjection does not constitute a recommendation or endorsement of the
Plan or the Offering.
Description of and Reasons for the Reorganization
Our Board of Trustees unanimously adopted the Plan and the Superintendent
has approved the Plan. Pursuant to the Plan, we will reorganize into what we
call a "two-tier" mutual holding company structure. We call it a two-tier
structure because we will have two levels of holding companies--a "mid-tier"
stock holding company and a "top-tier" mutual holding company. Under the terms
of the Plan (i) we will form the Company as a Delaware corporation; (ii) we will
form the Mutual Holding Company as a New York mutual holding company; (iii) we
will reorganize the Bank into a capital stock form of organization and issue
100% of our to-be outstanding common stock to the Company; and (iv) the Company
will issue shares of Common Stock to depositors, to our tax qualified employee
plans, to the public and to the Mutual Holding Company. The number of shares of
Common Stock sold to depositors and the public pursuant to the Prospectus will
be equal to 45.4% of the shares issued in the Reorganization and the number of
shares issued to the Mutual Holding Company will be equal to 53.3% of the shares
issued in the Reorganization. In this Proxy Statement we will refer to all of
these steps that are part of this transaction as the "Reorganization," and we
will refer
2
<PAGE>
to the issuance of 45.4% of the Company's Common Stock pursuant to the
Prospectus as the "Offering." The two-tier mutual holding company structure is
most easily understood by considering the following schematic:
------------------ ------------------
The Mutual Holding Public
Company Stockholders
(a New York mutual (including the
holding company) Charitable
Foundation)
------------------ ------------------
53.3% of 46.7% of
the the
Common Common
Stock Stock
------------------------------------------------
The Company (a Delaware corporation)
------------------------------------------------
100% of the
Common Stock
------------------------------------------------
The Bank
(a New York stock savings bank)
------------------------------------------------
In adopting the Plan, our Board of Trustees determined that the
Reorganization is in the best interest of the Bank. The primary purpose of the
Reorganization is to establish a structure that will enable us to compete and
expand more effectively in the financial services marketplace, and that will
enable our depositors, employees, management and trustees to obtain an equity
ownership interest in the Bank. Our new structure will permit the Company to
issue capital stock, which is a source of capital not available to a mutual
savings bank, Stock in the Offering. Since the Company is not offering all of
its Common Stock for sale to depositors and the public in the Offering (but is
issuing a majority of its stock to the Mutual Holding Company), the
Reorganization will result in less capital raised in comparison to a standard
mutual-to-stock conversion. The Reorganization, however, will also offer the
Bank the opportunity to raise additional capital since the stock held by the
Mutual Holding Company will be available for sale in the future in the event of
the Mutual Holding Company decides to convert to the capital stock form of
organization. See "Regulation--Mutual Holding Company Regulation" in the
Prospectus. The Reorganization will also give us greater flexibility to
structure and finance the expansion of our operations, including the potential
acquisition of other financial institutions, and to diversify into other
financial services. The holding company form of organization is expected to
provide additional flexibility to diversify the Bank's business activities
through existing or newly formed subsidiaries, or through acquisitions of or
mergers with other financial institutions, as well as other companies. Although
we have no current arrangements, understandings or agreements regarding any such
opportunities, the Company will be in a position after the Reorganization,
subject to regulatory limitations and the Company's financial position, to take
advantage of any such opportunities that may arise. Lastly, the Reorganization
will enable us to better manage our capital by giving us broader investment
opportunities through the holding company structure, and enable us to distribute
capital to stockholders of the Company in the form of dividends. Because only a
minority of the Common Stock will be offered for sale in the Offering, our
current mutual form of ownership and our ability to remain an independent
savings bank and to provide community-oriented financial services will be
preserved through the mutual holding company structure.
The Board of Trustees believes that these advantages outweigh the potential
disadvantages of the mutual holding company structure, which may include: (i)
the inability of stockholders other than the Mutual Holding Company
3
<PAGE>
to obtain majority ownership of the Company and the Bank, which may result in
the perpetuation of the management and Board of Directors of the Bank and the
Company; and (ii) that the mutual holding company structure is a relatively new
form of corporate ownership, and new regulatory policies relating to the mutual
interest in the Mutual Holding Company that may be adopted from time-to-time may
have an adverse impact on stockholders of the Company other than the Mutual
Holding Company ("Minority Stockholders"). A majority of the voting stock of the
Company will be owned by the Mutual Holding Company, which is a mutual
institution that will be controlled by the existing Board of Trustees of the
Bank. While this structure will permit management to focus on the Company's and
the Bank's long-term business strategy for growth and capital redeployment
without undue pressure from stockholders, it will also serve to perpetuate the
existing management and trustees of the Bank. The Mutual Holding Company will be
able to elect all members of the Board of Directors of the Company, and will be
able to control the outcome of all matters presented to the stockholders of the
Company for resolution by vote except for certain matters that must be approved
by more than a majority of stockholders of the Company. No assurance can be
given that the Company will not take action adverse to the interests of the
Minority Stockholders. For example, the Company could revise the dividend policy
or defeat a candidate for the Board of Directors of the Bank or other proposals
put forth by the Minority Stockholders.
The Reorganization does not preclude the conversion of the Mutual Holding
Company from the mutual to stock form of organization which would be effected
through a merger of the Mutual Holding Company into the Company or the Bank and
the concurrent sale of the shares held by the Mutual Holding Company in a
subscription offering. A conversion of the Mutual Holding Company from the
mutual to stock form of organization is not anticipated for the foreseeable
future.
Following the completion of the Reorganization, all depositors who had
liquidation rights with respect to the Bank as of the effective date of the
Reorganization will continue to have such rights solely with respect to the
Mutual Holding Company so long as they continue to hold deposit accounts with
the Bank. In addition, all persons who become depositors of the Bank subsequent
to the Reorganization will have such liquidation rights with respect to the
Mutual Holding Company. Borrowers currently do not have ownership or voting
rights in the Bank and will not receive ownership or voting rights with respect
to the Mutual Holding Company.
All insured deposit accounts of the Bank that are transferred to the Bank
will continue to be federally insured by the FDIC up to the legal maximum limit
in the same manner as deposit accounts existing in the Bank immediately prior to
the Reorganization. Upon completion of the Reorganization, the Bank may
exercise any and all powers, rights and privileges of, and shall be subject to
all limitations applicable to, capital stock savings banks under New York law.
As long as the Mutual Holding Company is in existence, the Mutual Holding
Company will be required to own at least 51% of the voting stock of the Company,
and the Company will own 100% of the voting stock of the Bank. The Bank and the
Company may issue any amount of non-voting stock or debt to persons other than
the Mutual Holding Company.
The Offering
Concurrent with the Reorganization, the Company is offering shares of
Common Stock to persons other than the Mutual Holding Company. An offering of
between 8,677,747 and 11,740,482 shares of the Common Stock (subject to
adjustment to up to 13,501,554 shares is being made concurrently with the
Reorganization. The shares of Common Stock that will be sold in the Offering
will constitute no more than 45.4% of the shares that will be outstanding after
the Offering (the "Minority Ownership Interest"). Following the Reorganization
and the Offering, the Company also will be authorized to issue additional Common
Stock or preferred stock to persons other than the Mutual Holding Company,
without prior approval of the holders of the Common Stock.
The shares of Common Stock will be offered for sale at a fixed price of
$10.00 per share in the Subscription Offering pursuant to subscription rights in
the following order of priority to: (i) holders of deposit accounts with a
balance of $100 or more on August 31, 1996 ("Eligible Account Holders"); (ii)
the Bank's Employee Plans, including the ESOP; and (iii) depositors whose
accounts in the Bank totaled $100 or more on December 31, 1997 ("Supplemental
Eligible Account Holders"). Concurrently, and subject to the prior rights of
holders of subscription rights, any shares of Common Stock not subscribed for in
the Subscription Offering will be offered in the Community Offering at $10.00
4
<PAGE>
per share to certain members of the general public, with a preference given to
natural persons residing in Niagara, Orleans, Erie and Genesee Counties, New
York. Subscription rights will expire if not exercised by 5:00 p.m., New York
time, on March _____, 1998 unless extended by the Bank and the Company. The
maximum purchase limitation in the Subscription and Community Offerings will be
$200,000, except that the Bank's tax qualified employee plans may purchase up to
10% of the Common Stock issued in the Offering. The maximum purchase limitation
for persons acting in concert is $400,000.
Stock Pricing and Number of Shares to be Issued
The Plan of Reorganization and federal and state regulations require that
the aggregate purchase price of the Common Stock sold in the Offering must be
based on the appraised pro forma market value of the Common Stock, as determined
by an independent valuation (the "Independent Valuation"). The Bank has
retained RP Financial LC ("RP Financial") to make such valuation. For its
services in making such appraisal, RP Financial will receive a fee of $55,000
(which amount does not include a fee of $7,500 to be paid to RP Financial for
assistance in preparation of a business plan). The Bank and the Company have
agreed to indemnify RP Financial 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 RP
Financial's liability results from its negligence or bad faith.
The Independent Valuation was prepared by RP Financial in reliance upon the
information contained in the Prospectus, including the Consolidated Financial
Statements of the Bank. RP Financial also considered the following factors,
among others: the present and projected operating results and financial
condition of the Bank and the economic and demographic conditions in the Bank's
existing marketing area; certain historical, financial and other information
relating to the Bank; a comparative evaluation of the operating and financial
statistics of the Bank with those of other publicly traded savings institutions,
particularly those that were majority-owned by mutual holding companies; the
aggregate size of the Offering; the impact of the Reorganization on the Bank's
equity and earnings potential; the proposed dividend policy of the Company; and
the trading market for securities of comparable institutions and general
conditions in the market for such securities.
The Independent Valuation states that as of November 28, 1997, the
estimated pro forma market value of the Common Stock ranged from a minimum of
$191,125,000 to a maximum of $258,750,000 with a midpoint of $225,000,000 (the
"Estimated Valuation Range"). The Board determined to the offer the shares in
the Offering at the Subscription Price of $10.00 per share. Based on the
Estimated Valuation Range and the Subscription Price, the number of shares of
Common Stock that the Company will issue will range from between 19,125,000
shares to 25,875,000 shares, with a midpoint of 22,500,000 shares. The Board
determined to offer 45.4% of such shares, or between 8,677,747 shares and
11,740,482 shares with a midpoint of 10,209,115 shares (the "Offering Range"),
to depositors and the public pursuant to the Prospectus. In addition, shares
are being issued to the Foundation as part of the Reorganization, which will
result in Minority Stockholders owning 46.7% of the shares of the Common Stock
outstanding at the conclusion of the Reorganization. The 53.3% of the shares of
the Company's Common Stock that are not sold in the Offering or contributed to
the Foundation will be issued to the Mutual Holding Company.
Following commencement of the Subscription Offering, the maximum of the
Estimated Valuation Range may be increased by up to 15% to up to $297,562,500,
which will result in a corresponding increase in the maximum of the Offering
Range to up to 13,501,554 shares to reflect changes in the market and financial
conditions, without the resolicitation of subscribers. The minimum of the
Estimated Valuation Range and the minimum of the Offering Range may not be
decreased without a resolicitation of subscribers. The Subscription Price of
$10.00 per share will remain fixed. See "Reorganization and Offering--
Limitations on Common Stock Purchases" in the Prospectus as to the method of
distribution and allocation of additional shares that may be issued in the event
of an increase in the Offering Range to fill unfilled orders in the Subscription
and Community Offerings.
5
<PAGE>
Purchase Priorities and Method of Offering Shares
The Bank shall have the right, in its sole discretion, to determine whether
prospective purchasers are "residents," "associates," or "acting in concert" as
defined by the Plan and in interpreting any and all other provisions of the
Plan. All such determinations are in the sole discretion of the Bank, and may
be based on whatever evidence the Bank chooses to use in making any such
determination.
Establishment of the Charitable Foundation
In furtherance of our commitment to the communities that we serve, we
intend to voluntarily establish a charitable foundation in connection with the
Reorganization. The Plan provides that the Bank and the Company will establish
the Foundation, which will be incorporated under Delaware law as a non-stock
corporation and will be funded with cash and shares of Common Stock contributed
by the Company. We will make a contribution to the Foundation, in the form of
shares of Common Stock and cash, in a total amount equal to 5% of the aggregate
Subscription Price of the shares of Common Stock sold in the Offering. The
number of shares of Common Stock to be contributed to the Foundation will equal
3% of the shares sold in the Offering. The balance of the contribution will
consist of cash. The contribution of Common Stock to the Foundation will be
dilutive to the interests of stockholders and will have an adverse impact on the
reported earnings of the Company in 1998, the year in which the Foundation is
established.
Effects of Reorganization
Continuity. While the Reorganization is being accomplished, the normal
business of the Bank of accepting deposits and making loans will continue
without interruption. During and after the completion of the Reorganization,
the Stock Bank will continue to be subject to regulation by the Department and
the FDIC. After the Reorganization, the Stock Bank will continue to provide
services for depositors and borrowers under current policies by its present
management and staff.
The Trustees serving the Bank at the time of the Reorganization will serve
as Directors of the Stock Bank and the Company after the Reorganization. As
required by New York law, the Trustees of the Mutual Holding Company will
consist initially of all but one of the individuals currently serving on the
Board of Trustees of the Bank. All officers of the Bank at the time of the
Reorganization will retain their positions with the Stock Bank after the
Reorganization.
Effect on Deposit Accounts. Under the Plan, each depositor in the Bank at
the time of the Reorganization will automatically continue as a depositor in the
Stock Bank after the Reorganization, and each such deposit account will remain
the same with respect to deposit balance, interest rate and other terms. Each
such account will be insured by the FDIC to the same extent as before the
Reorganization (i.e., up to $100,000 per depositor). Depositors will continue
to hold their existing certificates, passbooks and other evidences of their
accounts.
Effect on Loans. No loan outstanding from the Bank will be affected by the
Reorganization, and the amount, interest rate, maturity and security for each
loan will remain as they were contractually established prior to the
Reorganization.
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 Reorganization, each depositor, in the event of
a complete liquidation, would have a claim as a creditor of the same general
priority as the claims of all other general creditors of the Bank. 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 the
Bank above that amount.
6
<PAGE>
Liquidation Rights
In the unlikely event of a complete liquidation of the Bank in its present
mutual form, each depositor would have a claim to receive his pro rata share of
any assets of the Bank 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 assets, a depositor may have a
claim to receive a pro rata share of the remaining assets in the same proportion
as the value of such depositor's deposit accounts to the total value of all
deposit accounts in the Bank at the time of liquidation, subject to the right of
the State of New York to garnish such assets. After the Reorganization, each
depositor, in the event of a complete liquidation, would have a claim as a
creditor of the same general priority as the claims of all other general
creditors of the Bank. However, except as described below, 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 the
Bank above that amount.
The Plan provides for the establishment, upon the completion of the
Reorganization, of a special "liquidation account" for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders in an amount equal to
the surplus and reserves of the Bank as of the date of its latest balance sheet
contained in the final Prospectus used in connection with the Reorganization.
Each Eligible Account Holder and Supplemental Eligible Account Holder, if he
were to continue to maintain his deposit account at the Bank, would, on a
complete liquidation of the Bank, have a claim to an interest in the liquidation
account after payment of all creditors prior to any payment to the stockholders
of the Bank. Each Eligible Account Holder and Supplemental Eligible Account
Holder would have an initial interest in such liquidation account for each
deposit account, with a balance of $100 or more held in the Bank on August 31,
1996 and December 31, 1997, respectively ("Deposit Account"). Each Eligible
Account Holder and Supplemental Eligible Account Holder will have a claim to a
pro rata interest in the total liquidation account for each of his Deposit
Accounts based on the proportion that the balance of each such Deposit Account
on August 31, 1996 and December 31, 1997, respectively, bore to the balance of
all Deposit Accounts in the Bank on such date.
If, however, on any December 31 annual closing date of the Bank, commencing
after December 31, 1996, the amount in any Deposit Account is less than the
amount in such Deposit Account on December 31, 1996 or any other annual closing
date, then such person's interest in the liquidation account relating to such
Deposit Account would be reduced from time to time by the proportion of any such
reduction, 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.
- --------------------------------------------------------------------------------
MANAGEMENT OF THE BANK
- --------------------------------------------------------------------------------
Trustees and Executive Officers
The Board of Trustees consists of eleven persons. Upon completion of the
Reorganization, the directors of the Bank will consist of those persons who
currently serve on the Board of Trustees of the Bank. The directors of the Bank
will have three year terms which will be staggered to provide for the election
of approximately one-third of the board members each year. Directors of the
Bank will be elected by the Company as sole stockholder of the Bank. The
directors of the Bank are as follows:
<TABLE>
<CAPTION>
Director Age* Term Expires
-------- ---- ------------
<S> <C> C>
Gordon P. Assad 49 2001
Christa R. Caldwell 63 2000
James W. Currie 56 1999
Gary B. Fitch 62 2000
David W. Heinrich 61 1999
Daniel W. Judge 55 2000
B. Thomas Mancuso 41 1999
James Miklinski 54 2000
Barton G. Smith 67 2001
</TABLE>
7
<PAGE>
<TABLE>
<S> <C> <C>
William E. Swan 50 2001
Robert G. Weber 60 1999
</TABLE>
______________
*As of September 30, 1997
Executive Officers of the Bank
The following table sets forth certain information (as of September 30,
1997) regarding the executive officers of the Bank, all of whom currently serve
in their indicated position as executive officers of the Bank.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
William E. Swan 50 President and Chief Executive Officer
Paul J. Kolkmeyer 44 Executive Vice President and Chief
Financial Officer
G. Gary Berner 49 Senior Vice President and Chief Lending Officer
Kathleen P. Monti 49 Senior Vice President/HR & Administration
Diane Allegro 42 Senior Vice President / Retail Banking
</TABLE>
Biographical Information
Trustees/Directors of the Bank
Gordon P. Assad has served as a Trustee of the Bank since 1995. Mr. Assad
is the President and Chief Executive Officer of Erie & Niagara Insurance
Association and has served in that position since 1972.
Christa R. Caldwell has served as a Trustee of the Bank since 1986. Ms.
Caldwell is retired and was the Director of the Lockport Public Library from
1967 to 1996.
James W. Currie has served as a Trustee of the Bank since 1987. Mr. Currie
is the President of Ag Pak, Inc., a manufacturer of produce packaging machines,
and has served in that position since 1974.
Gary B. Fitch has served as a Trustee of the Bank since 1981. Mr. Fitch is
the Owner-Manager of Ontario Orchards, Inc., and has served in that position
since 1976. Mr. Fitch also serves as the Executive Secretary of Agricultural
Affiliates, Inc. and has served in that position since 1991.
David W. Heinrich served as a Trustee of the Bank from 1969 to 1991. He
was re-elected to the Board in June of 1993. Mr. Heinrich is the President of
Heinrich Chevrolet Corp.
Daniel W. Judge has served as a Trustee of the Bank since 1992. Mr. Judge
is the President and Chief Executive Officer of I.D. ONE, Inc., a purchasing and
marketing cooperative of independent industrial distributors, and has served in
that position since 1996. Mr. Judge served as the Executive Director of I.D.
ONE, Inc. from 1993 to 1996. Mr. Judge has also served as President and Manager
of Dansam, Inc., a business management services company, since 1990.
B. Thomas Mancuso has served as a Trustee of the Bank since 1990. Mr.
Mancuso is the President of Joseph L. Mancuso & Sons, Inc., a real estate
development company.
James Miklinski has served as a Trustee of the Bank since 1996. Mr.
Miklinski is the General Manager of Niagara Milk Cooperative, and has served in
that position since 1990.
Barton G. Smith has served as a Trustee of the Bank since 1986. Mr. Smith
is retired from Paul Garrick, Inc.
9
<PAGE>
William E. Swan has served as a Trustee of the Bank since 1996. Mr. Swan
is the President and Chief Executive Officer of Lockport Savings Bank, and has
served in that position since 1989. Prior to joining the Bank in 1988, he served
as an Administrative Vice President of Manufacturers and Traders Trust Company.
Robert G. Weber has served as a Trustee of the Bank since 1996. Mr. Weber
is a retired Buffalo Office Managing Partner of KPMG Peat Marwick LLP where he
served from 1959 to 1995.
Executive Officers of the Bank Who Are Not Directors
Paul J. Kolkmeyer has served as Executive Vice President and Chief
Financial Officer of the Bank since 1995. Prior to that time, Mr. Kolkmeyer
served as Senior Vice President and Chief Financial Officer of the Bank. He has
worked for the Bank since 1990. Prior to 1990, he served as a Vice President at
Morgan Guaranty Trust Company.
Kathleen P. Monti has served as Senior Vice President of Human Resources
and Administration of the Bank since 1995. From 1993 to 1995 Ms. Monti served
as Vice President of Human Resources of the Bank. Prior to 1993, she served as
an Administrative Vice President-Regional Human Resource Manager at Marine
Midland Bank.
G. Gary Berner has served as Senior Vice President and Chief Lending
Officer of the Bank since 1992. Prior to joining the Bank in 1992, he was Vice
President, Asset Management Group at Key Bank of New York, N.A.
Diane Allegro has been Senior Vice President of Retail Banking since
October 1997. From 1994 to October 1997, she was Vice President-Retail Sales &
Delivery Systems at Rochester Community Savings Bank. Prior to 1994, she was
employed by First Federal Savings and Loan Association of Rochester.
Meetings and Committees of the Bank's Board
The Board of Trustees of the Bank meets monthly and may have additional
special meetings as may be called by the Chairman or as otherwise provided by
law. During the year ended December 31, 1996, the Board held ___ meetings. No
trustee attended fewer than 75% in the aggregate of the total number of meetings
of the Board or Board Committees on which such Trustee served during 1996. The
Board of Trustees of the Bank has the following standing committees: Loan
Committee, Audit Committee, CRA Committee, Finance Committee and Board Affairs
Committee.
Transactions With Certain Related Persons
Under New York Banking law, the Bank, as a mutual institution, cannot make
a loan to a Trustee or a person who is an "executive officer" for regulatory
purposes, except for loans made to executive officers that are secured by a
first mortgage on a primary residence or by a deposit account at the Bank. Any
such loans that are outstanding have been made in the ordinary course of
business on the same terms and conditions as the Bank would make to any other
customer and do not involve more than a normal risk of collectibility or present
other unfavorable features. Following the Reorganization, the Bank will not be
subject to this restriction in connection with loans to Directors and executive
officers.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
The Bank has filed an Application with the Department with respect to the
Reorganization. Pursuant to the rules and regulations of the Department, the
Proxy Statement and Prospectus omit certain information contained in that
Application. The Application may be examined at the office of the Department, 2
Rector Street, New York, New York, and at our administrative offices, at 6950
South Transit Road, Lockport, New York, 14095-0514 without charge. The Plan may
be obtained without charge, together with the Restated Organization Certificate
and Bylaws of the Stock Bank and the Certificate of Incorporation and Bylaws of
Company, by contacting the Bank's Corporate Secretary at (716) 625-7500. In the
alternative, please sign, complete and return the enclosed postage-prepaid
Information Request Card by April __, 1998, and the Bank will provide you with a
copy of the Plan. You do not need to return the Information Request Card to
vote on the Reorganization. Copies of the Independent Valuation are available
for inspection at each of the Bank's offices.
9
<PAGE>
This Proxy Statement does not include all of the information regarding the
Reorganization and Offering that is set forth in the Prospectus, which is
enclosed with this Proxy Statement. The following sections of the Prospectus
are specifically incorporated into this Proxy Statement by reference hereto:
<TABLE>
<CAPTION>
PROSPECTUS SECTION PAGE IN PROSPECTUS
------------------ ------------------
<S> <C>
SELECTED FINANCIAL DATA
LOCKPORT SAVINGS BANK
REGULATORY CAPITAL COMPLIANCE
USE OF PROCEEDS
PRO FORMA DATA
CAPITALIZATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
BUSINESS OF THE COMPANY
BUSINESS OF THE BANK
FEDERAL AND STATE TAXATION
REGULATION
MANAGEMENT OF THE BANK
THE REORGANIZATION AND OFFERING
DESCRIPTION OF CAPITAL STOCK
CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>
- --------------------------------------------------------------------------------
OTHER MATTERS
- --------------------------------------------------------------------------------
The Board of Trustees is not aware of any business to come before the
Meeting other than those matters described above in this Proxy Statement.
However, if any other matters should properly come before the Meeting (which
matters are expected to consist of procedural matters and a vote to adjourn the
Meeting, if necessary), it is intended that proxies in the accompanying form
will be voted in respect thereof in accordance with the judgment of the person
or persons voting the proxies.
BY ORDER OF THE BOARD OF TRUSTEES
Robert Murphy
Secretary
Lockport, New York
February ___, 1998
- --------------------------------------------------------------------------------
YOUR BOARD OF TRUSTEES RECOMMENDS THAT YOU VOTE
FOR APPROVAL OF THE PLAN BY COMPLETING THE
ENCLOSED PROXY CARD AND RETURNING IT IN THE ENCLOSED
POSTAGE-PAID ENVELOPE AS SOON AS POSSIBLE.
YOUR VOTE IS VERY IMPORTANT
- --------------------------------------------------------------------------------
10
