<PAGE>
FILED PURSUANT TO RULE 424(b)(3)
REGISTRATION NO. 333-42977
PROSPECTUS
LOGO
(PROPOSED HOLDING COMPANY FOR LOCKPORT SAVINGS BANK)
UP TO 13,501,554 SHARES OF COMMON STOCK
Lockport Savings Bank is reorganizing from the mutual to the mutual holding
company form of organization. Lockport Savings Bank will become a wholly-owned
subsidiary of Niagara Bancorp, Inc., and Niagara Bancorp, Inc. will issue a
majority of its common stock to Niagara Bancorp, MHC, a mutual holding
company, and sell a minority of its common stock to the public. Niagara
Bancorp, Inc. is offering shares of common stock to depositors (pursuant to
subscription rights) and to the public under the terms of a plan of
reorganization. The plan of reorganization must be approved by the depositors
of Lockport Savings Bank and by federal and state banking regulators. The
reorganization will not go forward if Lockport Savings Bank does not receive
these approvals, or if Niagara Bancorp, Inc. does not sell at least a minimum
number of shares of common stock. Because the names of Niagara Bancorp, Inc.
and Niagara Bancorp, MHC are so similar, we will refer to Niagara Bancorp,
Inc. as "Niagara Bancorp" and we will refer to Niagara Bancorp, MHC as the
"Mutual Company."
------------------
TERMS OF OFFERING
An independent appraiser has estimated that the pro forma market value of
Niagara Bancorp to be between $191.2 million to $258.8 million. Based on this
estimate, Niagara Bancorp will issue between 19,125,000 and 25,875,000 shares
of common stock. We are selling 45.4% of these shares, or between 8,677,747
and 11,740,482 shares, to depositors and the public, and issuing 53.3% of
these shares, or between 10,186,921 and 13,782,304 shares, to the Mutual
Company. We may increase the shares we issue in the reorganization to up to
29,756,250 shares and increase the shares we sell in the offering to up to
13,501,554 shares, subject to regulatory approvals. As part of the
reorganization, up to 405,046 shares, or 1.3% of the shares to be outstanding,
are being issued to a charitable foundation. After the reorganization is
completed, stockholders other than the Mutual Company will own 46.7% of the
shares of the common stock outstanding. Based on these estimates, we are
making the following offering of shares of common stock.
<TABLE>
<CAPTION>
MINIMUM MIDPOINT MAXIMUM ADJUSTED MAXIMUM
------------ ------------ ------------ ----------------
<S> <C> <C> <C> <C>
Price per share......... $ 10.00 $ 10.00 $ 10.00 $ 10.00
Number of shares........ 8,677,747 10,209,115 11,740,482 13,501,554
Reorganization
expenses............... $ 1,455,352 $ 1,575,105 $ 1,694,858 $ 1,800,000
Net Proceeds............ $ 85,322,118 $100,516,045 $115,709,962 $133,215,540
Net Proceeds per share.. $ 9.83 $ 9.85 $ 9.86 $ 9.87
</TABLE>
------------------
PLEASE REFER TO RISK FACTORS BEGINNING ON PAGE 17 OF THIS PROSPECTUS.
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 Niagara Bancorp 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. Niagara Bancorp has received conditional approval to list the
common stock on the National Market System of the Nasdaq Stock Market under
the symbol "NBCP."
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.Niagarabancorp.com.
------------------
CIBC OPPENHEIMER CORP. TRIDENT SECURITIES, INC.
THE DATE OF THIS PROSPECTUS IS FEBRUARY 17, 1998
<PAGE>
Our
Mission
To excel as an independent,
profitable and growing
Western New York community bank.
To exceed the expectations
of our customers by building relationships
through products and service
of high quality and value.
To attract and retain employees
who demonstrate a genuine commitment
to our core values.
To enhance the quality of life
in the communities we serve.
<PAGE>
[LOGO OF LOCKPORT SAVINGS BANK APPEARS HERE]
[MAP APPEARS HERE]
Main Office Niagara Falls Office
55 East Avenue Tops International Super Center
Lockport, NY 14094 7200 Niagara Falls Blvd.
Niagara Falls, NY 14304
Town of Lockport Office
5737 South Transit Road North Buffalo Office
Lockport, NY 14094 2141 Elmwood Avenue
Buffalo, NY 14207
Batavia Office
401 West Main Street North Tonewanda Office
Batavia, NY 14020 100 River Road
North Tonewanda, NY 14131
Clarence Office
6409 Transit Road Tonawanda Office
East Amhorst, NY 14051 Sheridan/Delaware Plaza
Tonawanda, NY 14223
Depew Office
570 Dick Road West Amherst Office
Depew, NY 14043 Tops Super Center
3035 Niagara Falls Blvd.
Amherst, NY 14228
Hamburg Office
5751 South Park Avenue
Hamburg, NY 14075 West Seneca Office
1251 Union Road
West Seneca, NY 14224
Medina Office
327 Main Street
Medina, NY 14103
Administrative Center
6950 South Transit Road
Lockport, NY 14094
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE STOCK OFFERING.......................... 1
SUMMARY AND OVERVIEW.................................................... 3
SELECTED FINANCIAL INFORMATION.......................................... 9
RECENT DEVELOPMENTS..................................................... 11
RISK FACTORS............................................................ 17
NIAGARA BANCORP......................................................... 21
LOCKPORT SAVINGS BANK................................................... 21
REGULATORY CAPITAL COMPLIANCE........................................... 22
USE OF PROCEEDS......................................................... 23
DIVIDEND POLICY......................................................... 24
MARKET FOR COMMON STOCK................................................. 24
CAPITALIZATION.......................................................... 25
PRO FORMA DATA.......................................................... 26
COMPARISON OF VALUATION AND PRO FORMA
INFORMATION WITHOUT FOUNDATION..................................... 33
PARTICIPATION BY MANAGEMENT............................................. 34
THE REORGANIZATION AND OFFERING......................................... 35
CONSOLIDATED STATEMENTS OF INCOME....................................... 52
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................... 53
BUSINESS OF NIAGARA BANCORP............................................. 70
BUSINESS OF THE BANK.................................................... 70
FEDERAL AND STATE TAXATION.............................................. 104
REGULATION.............................................................. 105
MANAGEMENT OF NIAGARA BANCORP........................................... 114
</TABLE>
(i)
<PAGE>
<TABLE>
<S> <C>
MANAGEMENT OF THE BANK.................................................. 115
RESTRICTIONS ON ACQUISITION OF NIAGARA BANCORP.......................... 125
DESCRIPTION OF CAPITAL STOCK OF NIAGARA BANCORP......................... 126
TRANSFER AGENT AND REGISTRAR............................................ 127
LEGAL AND TAX MATTERS................................................... 128
EXPERTS................................................................. 128
ADDITIONAL INFORMATION.................................................. 128
CONSOLIDATED FINANCIAL STATEMENTS....................................... F-1
GLOSSARY................................................................ G-1
</TABLE>
This document contains forward-looking statements which involve risks and
uncertainties. Niagara Bancorp'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 17 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: We are conducting the stock offering to become a stock organization and
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 bank operating through a
holding company structure, we will improve our future access to the capital
markets. As part of the reorganization, you will have the opportunity to
become a shareholder of Niagara Bancorp, which will allow you to share
indirectly in the future of our Bank. We are also establishing a charitable
foundation that will be dedicated exclusively to supporting charitable
causes and community development activities in Western New York.
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 12:00 Noon, on March 24, 1998.
Q: HOW MUCH STOCK MAY I ORDER?
A: The minimum order is 25 shares (or $250). The maximum order is 20,000
shares (or $200,000) for any individual person or persons ordering through
a single account. No person, related person, or persons acting together may
order more than 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: WHO WILL BE PERMITTED TO PURCHASE STOCK?
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:
. Niagara Bancorp'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
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 HAPPENS IF THERE ARE NOT ENOUGH SHARES TO FILL ALL ORDERS?
A: If the offering is oversubscribed in any of the categories listed above,
then shares will be allocated among all subscribers in that category based
on a formula that is described in detail in "The Reorganization and
Offering."
<PAGE>
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: 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, particularly the section titled "Risk Factors."
Q: WHO CAN HELP ANSWER ANY QUESTIONS I MAY HAVE ABOUT THE OFFERING?
If you have questions about the offering, you may contact:
STOCK INFORMATION CENTER
LOCKPORT SAVINGS BANK
55 EAST AVENUE
P.O. BOX 908
LOCKPORT, NEW YORK 14095-0908
(716) 438-1198
2
<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 "Niagara Bancorp" refer to Niagara Bancorp,
Inc. References to the "Mutual Company" refer to Niagara Bancorp, MHC.
THE REORGANIZATION
The reorganization involves a number of steps, including the following:
. The Bank will establish Niagara Bancorp and the Mutual Company,
neither of which will have any assets prior to the completion of the
reorganization.
. The Bank will convert from the mutual form of organization to the
capital stock form of organization and issue 100% of its capital stock
to Niagara Bancorp.
. Niagara Bancorp will issue between 19,125,000 and 25,875,000 shares of
common stock in the reorganization: 53.3% of these shares (or between
10,186,921 and 13,782,304 shares) will be issued to the Mutual
Company, 45.4% (or between 8,677,747 and 11,740,482 shares) will be
sold to depositors and the public, and 1.3% of these shares (or
between 260,332 shares and 352,214) will be issued to a newly formed
charitable foundation.
. Interests that depositors had in the Bank will become interests in the
Mutual Company, which will own 53.3% of the shares of common stock of
Niagara Bancorp and indirectly of the Bank.
THE MUTUAL HOLDING COMPANY STRUCTURE
The mutual holding company structure differs in significant respects from
the bank holding company structure that is used in a standard mutual to stock
conversion. A savings bank that converts to the stock form using the mutual
holding company structure sells only a minority of its shares and raises less
proceeds than would be raised in a mutual to stock conversion in which 100% of
the shares are sold to depositors and the public. If additional capital is
needed in the future, the shares that are issued to the Mutual Company may be
subsequently sold to depositors. See "Regulation - Holding Company Regulation -
Mutual Holding Company Regulation." In addition, because the Mutual Company
controls a majority of Niagara Bancorp's common stock, we believe that the
structure will permit the Bank to achieve the benefits of a stock company
without a loss of control that often follows a complete conversion from mutual
to stock form. Sales of locally based, independent savings institutions to
larger, regional financial institutions can result in closed branches, fewer
choices for consumers, employee layoffs and the loss of community support for
and involvement by financial institutions.
In making business decisions, the Mutual Company's board of trustees will
consider a variety of constituencies, including the depositors and employees of
the Bank, and the communities in which the Bank operates. As the majority
stockholder of Niagara Bancorp, the Mutual Company is also interested in the
continued success and profitability of the Bank and Niagara Bancorp.
Consequently, the Mutual 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 Niagara Bancorp. The Mutual Company believes
that the interests of the stockholders of Niagara Bancorp, and those of the
Mutual
3
<PAGE>
Company's other constituencies, are in many circumstances the same, such as the
increased profitability of Niagara Bancorp and the Bank and continued service to
the communities in which the Bank operates.
NIAGARA BANCORP
Niagara Bancorp, Inc.
6950 South Transit Road
P.O. Box 514
Lockport, New York 14095-0514
(716) 625-7500
Niagara Bancorp is a Delaware corporation, formed to be the holding company
of the Bank. After the reorganization, Niagara Bancorp will own all of the
Bank's common stock. Purchasers in the offering will own 45.4% of Niagara
Bancorp's common stock, the charitable foundation will own 1.3% of the shares of
Niagara Bancorp common stock, and the Mutual Company will own 53.3% of the
shares of Niagara Bancorp common stock. Although these percentages may change in
the future, the Mutual Company must always own a majority of Niagara Bancorp
common stock. The holding company structure will provide us greater flexibility
in terms of operations, expansion and diversification. See page 21.
THE BANK
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.
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, 1997 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.
4
<PAGE>
Since 1990, when we acquired the savings bank life insurance operations of
another Western New York savings bank, our life insurance department has grown
to become one of the largest servicers of savings bank life insurance 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 our position as a full service provider of financial services.
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 net 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.
. 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.
5
<PAGE>
THE STOCK OFFERING
Niagara Bancorp 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. We may increase the
offering to up to 13,501,554 shares ,without further notice to you, if the New
York State Banking Department approves the increase and the FDIC does not
object.
STOCK PURCHASE PRIORITIES
We are offering shares of common stock on the basis of purchase priorities.
Certain depositors of the Bank and the ESOP will receive subscription rights to
purchase shares. 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. 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. See pages 39 to 40.
PROHIBITION ON TRANSFER OF SUBSCRIPTION RIGHTS
You may not sell or assign your subscription rights. Any transfer of
subscription rights is illegal.
STOCK PRICING AND NUMBER OF SHARES TO BE ISSUED
Niagara Bancorp's board of directors set the purchase price per share at
$10.00, the price most commonly used in stock offerings involving mutual to
stock conversions of mutual savings institutions. The number of shares of common
stock issued in the offering is based on the independent valuation prepared by
RP Financial, an appraisal firm experienced in appraisals of savings
institutions The independent valuation states that as of November 28, 1997, the
estimated pro forma market value of Niagara Bancorp ranged from a minimum of
$191,250,000 to a maximum of $258,750,000, with a midpoint of $225,000,000.
Based on this valuation and the $10.00 per share price, the number of shares of
common stock that Niagara Bancorp will issue will range from between 19,125,000
shares to 25,875,000 shares. Niagara Bancorp and the Bank have decided to offer
45.4% of such shares, or between 8,677,747 shares and 11,740,482 shares, to
depositors and the public. In addition, we will issue between 260,332 shares and
352,214 shares (together with cash) to a charitable foundation. The board of
directors determined to sell 45.4% of the stock to depositors and the public in
order to raise the maximum amount of proceeds while permitting Niagara Bancorp
to issue additional shares to the charitable foundation and additional shares of
common stock in the future pursuant to the restricted stock plan and stock
option plan that Niagara Bancorp intends to adopt after the reorganization and
offering. The 53.3% of the shares of Niagara Bancorp's common stock that are not
sold in the offering or issued to the charitable foundation will be issued to
the Mutual Company. The establishment of the charitable foundation had the
effect of reducing the valuation of Niagara Bancorp. See "Comparison of
Valuation and Pro Forma Information Without Foundation."
Changes in market and financial conditions and demand for the common stock
may cause the estimated valuation range to increase by up to 15%, to up to
$297,562,500. If this occurs, the maximum number of shares that can be sold to
depositors and the public can increase to up to 13,501,554 shares, and the
number of shares to be issued to the foundation can increase to 405,046. We will
not notify subscribers if the maximum number of shares to be sold increases by
15% or less. We will, however, notify subscribers if the estimated valuation
range and the maximum number of shares to be sold is increased by more than 15%
or if the minimum of the estimated valuation range is decreased. THE INDEPENDENT
VALUATION IS NOT A RECOMMENDATION AS TO THE ADVISABILITY OF PURCHASING SHARES,
AND YOU SHOULD NOT BUY STOCK BASED ON THE INDEPENDENT VALUATION.
6
<PAGE>
TERMINATION OF THE OFFERING
The offering to depositors will terminate at 12:00 Noon, New York time, on
March 24, 1998. The community offering may terminate on or after March 24, 1998,
but in any event, no later than May 8, 1998, without regulatory approvals. If
the reorganization and offering is not completed by May 8, 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 the employee stock ownership
plan, which is a form of retirement plan that will purchase shares of common
stock in the offering. We also intend to implement a restricted stock plan and a
stock option plan following completion of the reorganization, which will benefit
our officers and directors. The restricted stock plan will acquire a number of
shares equal to 4% of the shares sold in the offering to be awarded to directors
and officers at no cost to them. The option plan will provide Niagara Bancorp
with the ability to grant options to purchase common stock to directors and
officers in an amount equal to 10% of the shares sold in the offering. However,
the restricted stock plan and stock option plan may not be adopted until at
least six months after completion of the reorganization and are subject to
stockholder approval. In addition, the Bank intends to enter into employment
agreements with certain executive officers following completion of the
reorganization. See pages 119 to 124.
THE CHARITABLE FOUNDATION
To further our commitment to our local community, we intend to establish a
charitable 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 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
(between 260,332 and 352,214 shares). The balance of the contribution will
consist of cash (between $1.7 million and $2.3 million). The foundation will be
dedicated exclusively to supporting charitable causes and community development
activities in Western New York. 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 Niagara Bancorp diluted by 1.3%.
Niagara Bancorp will incur an expense equal to the full amount of the
contribution to the foundation, offset in part by a corresponding tax benefit,
during the quarter in which the contribution is made. Such expense will reduce
Niagara Bancorp's earnings. 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."
USE OF THE PROCEEDS RAISED FROM THE SALE OF COMMON STOCK
Niagara Bancorp 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 employee stock ownership plan 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 the opening of new branches,
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 23 to 24.
7
<PAGE>
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. NIAGARA BANCORP 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. WE ARE NOT REQUIRED TO DELIVER A PROSPECTUS AND ORDER FORM BY
ANY MEANS OTHER THAN THE U.S. POSTAL SERVICE.
DIVIDENDS
Niagara Bancorp 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 offering. For a
discussion of Niagara Bancorp's anticipated dividend policy, including
restrictions on its ability to pay dividends, see "Dividend Policy."
MARKET FOR THE COMMON STOCK
Niagara Bancorp 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 NIAGARA BANCORP'S COMMON STOCK
Before you decide to purchase stock in the offering, you should read the
Risk Factors section on pages 17 to 21 of this prospectus, in addition to the
other sections of this prospectus.
The shares of common stock offered hereby:
. Are not deposit accounts;
. Are not insured or guaranteed by the FDIC, or any other government
agency; and
. Are not guaranteed by Niagara Bancorp, the Mutual Company, or the
Bank.
The common stock is subject to investment risk, including the possible loss
of principal invested.
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, YEAR ENDED DECEMBER 31,
------------------------ ------------------------------------------------------
1997 1996 1996 1995 1994 1983 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 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 YEAR 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 (2):
- ---------------------------------------------
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 (3)........................... 3.38 3.38 3.38 3.44 3.50 3.49 3.64
Operating income to
average total assets (4)......................... 0.48 0.49 0.50 0.41 0.35 0.40 0.25
Operating expenses to
average total assets............................. 2.16 1.94 2.01 2.10 1.99 1.92 2.05
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
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%
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) Averages presented are monthly averages.
(3) Net interest income divided by average interest-earning assets.
(4) Operating income excludes net gain(loss) on sale of securities available
for sale.
10
<PAGE>
RECENT DEVELOPMENTS
The selected data presented below under the captions "Selected Financial
Condition Data" and "Selected Operations Data" as of and for the year ended
December 31, 1996 are derived from the audited consolidated financial statements
of Lockport Savings Bank and subsidiaries. Information at December 31, 1997 and
September 30, 1997, the three months ended December 31, 1997 and 1996, and the
year ended December 31, 1997 are unaudited, but, in the opinion of management,
contain all adjustments (none of which were other than normal recurring entries)
necessary for a fair presentation of the results of such periods. This
information should be read in conjunction with the Consolidated Financial
Statements and Notes thereto presented elsewhere in this prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, DECEMBER 31,
1997 1997 1996
------------- -------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
SELECTED FINANCIAL CONDITION DATA:
- ----------------------------------
Total assets........................ $1,179,026 $1,176,451 $1,093,358
Loans, net.......................... 635,396 622,487 598,486
Securities available for sale:
Mortgage related securities........ 272,955 285,762 284,860
Other securities................... 182,718 179,211 130,269
Securities held to maturity......... 17,000 37,500 38,000
Deposits............................ 986,875 992,219 920,072
Other borrowed funds................ 33,717 28,740 32,008
Net worth........................... 130,471 126,720 115,664
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS YEAR
ENDED DECEMBER 31, ENDED DECEMBER 31,
--------------------- -------------------
1997 1996 1997 1996
-------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
SELECTED OPERATIONS DATA:
- -------------------------
Interest income..................... $ 21,053 $ 19,604 $ 82,363 $ 75,062
Interest expense.................... 11,643 10,631 44,978 40,655
---------- ---------- -------- --------
Net interest income................ 9,410 8,973 37,385 34,407
Provision for loan losses........... 518 326 1,493 2,187
---------- ---------- -------- --------
Net interest income after
provision for loan losses.......... 8,892 8,647 35,892 32,220
Fees and service charges............ 1,195 931 4,232 3,495
Net gain on sale of
securities available for sale...... 35 44 910 576
Other operating income.............. 610 458 1,654 1,681
---------- ---------- -------- --------
Total operating income.............. 1,840 1,433 6,796 5,752
---------- ---------- -------- --------
Operating and other expenses........ 6,762 5,927 25,178 20,926
---------- ---------- -------- --------
Income before taxes................. 3,970 4,153 17,510 17,046
Income taxes........................ 1,354 1,611 6,259 6,278
---------- ---------- -------- --------
Net income.......................... $ 2,616 $ 2,542 $ 11,251 $ 10,768
========== ========== ======== ========
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE AT OR FOR THE
THREE MONTHS YEAR ENDED
ENDED DECEMBER 31, DECEMBER 31,
-------------------------- -------------------
1997 (1) 1996 (1) 1997 1996
----------- --------- ------ ------
<S> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS AND OTHER DATA (2):
- -----------------------------------------------
PERFORMANCE RATIOS:
Return on assets (ratio of net
income to average total assets)............... 0.89% 0.94% 0.98% 1.03%
Return on net worth (ratio of net
income to average net worth).................. 8.14 8.90 9.20 9.84
Interest rate spread information:
Average during period......................... 2.88 2.87 2.83 2.82
End of period................................. 2.87 3.03 2.87 3.03
Net interest margin (3)........................ 3.36 3.40 3.37 3.38
Operating income to
average total assets (4)...................... 0.62 0.51 0.51 0.50
Operating expense to
average total assets.......................... 2.31 2.18 2.20 2.01
Average interest-earning
assets to average interest-
bearing liabilities........................... 112.68 114.04 113.42 113.93
ASSET QUALITY RATIOS:
Non-performing loans to total loans............ 0.47% 0.78% 0.47% 0.78%
Non-performing assets to total assets.......... 0.28 0.48 0.28 0.48
Allowance for loan losses to non-
performing loans.............................. 227.14 138.60 227.14 138.60
Allowance for loan losses to total loans....... 1.08 1.09 1.08 1.09
Net charge-offs during the
period to average loans outstanding
during the period............................. (0.03%) 0.07% 0.18% 0.06%
CAPITAL RATIOS:
Net worth to total assets...................... 11.07% 10.58% 11.07% 10.58%
Average net worth to average assets............ 10.97 10.53 10.70 10.49
</TABLE>
________________________
(1) Ratios for three month period have been annualized.
(2) Averages presented are monthly averages.
(3) Net interest income divided by average interest-earning assets.
(4) Operating income excludes net gains on sales of securities available for
sale.
12
<PAGE>
REGULATORY CAPITAL
The table below sets forth the Bank's capital position relative to its
regulatory capital requirements at December 31, 1997. The definitions of the
terms used in the table are those provided in the capital regulations issued by
the FDIC. See "Regulation - Regulatory Capital Requirements."
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
----------------------
PERCENT OF
AMOUNT ASSETS (1)
--------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Leverage Capital:
Capital level................................................... $127,999 10.96%
Requirement (2)................................................. 35,050 3.00
-------- -----
Excess......................................................... $ 92,949 7.96%
======== =====
Risk-based capital:
Tier 1 capital level............................................ $127,999 20.69%
Requirement..................................................... 24,745 4.00
-------- -----
Excess......................................................... $103,254 16.69%
======== =====
Total capital level............................................. $134,920 21.81%
Requirement..................................................... 49,490 8.00
-------- -----
Excess......................................................... $ 85,430 13.81%
======== =====
</TABLE>
____________________________
(1) Leverage capital levels are shown as a percentage of tangible assets.
Risk-based capital levels are calculated on the basis of a percentage of
risk-weighted assets.
(2) The current leverage capital requirement is 3% of total adjusted assets for
banks that receive the highest supervisory rating for safety and soundness
and that are not experiencing or anticipating significant growth. The
current leverage capital ratio applicable to all other banks is 4% to 5%.
See "Regulation - Regulatory Capital Requirements."
NONPERFORMING ASSETS AND DELINQUENCIES
At December 31, 1997, the Bank had $3.0 million of non-performing loans
($1.1 million in one- to four-family real estate loans, $1.4 million in
commercial and multi-family real estate loans, $235,000 in consumer and other
loans, and $322,000 in commercial business loans) compared to $1.9 million at
September 30, 1997. At September 30, 1997, the Bank also had $312,000 in 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.
At December 31, 1997, there were no loans in this category. At December 31,
1997, the Bank had $223,000 in real estate owned, compared to $268,000 at
September 30, 1997.
The allowance for loan losses was $6.9 million at December 31, 1997.
Charge-offs for the three months ended December 31, 1997 were $91,000, compared
to $149,000 for the three months ended December 31, 1996. Charge-offs were $1.4
million for the year ended December 31, 1997, compared to $436,000 in 1996.
There were $141,000 in recoveries for the three months ended December 31, 1997,
compared to $44,000 for the three months ended December 31, 1996. Recoveries
were $251,000 for the year ended December 31, 1997, compared to $81,000 in 1996.
13
<PAGE>
The following table sets forth the allocation of the allowance for loan
losses by category at December 31, 1997.
<TABLE>
<CAPTION>
AMOUNT PERCENT OF
OF ALLOWANCE LOANS IN EACH
FOR LOAN CATEGORY TO
LOSSES TOTAL LOANS
------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Real Estate Loans:
One- to four-family............... $ 443 61.96%
Home equity....................... 33 2.12
Commercial and multi-family....... 390 24.46
Consumer and other................. 359 10.70
Commercial business................ 218 0.76
Unallocated (1).................... 5,478 --
------ ------
Total allowance for loan losses.. $6,921 100.00%
====== ======
</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.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1997 AND SEPTEMBER 30, 1997.
Total assets increased 0.2% from $1.176 billion at September 30, 1997 to
$1.179 billion at December 31, 1997 primarily as a result of an increase in cash
and cash equivalents resulting from an increase in other borrowed funds. Other
borrowed funds increased 17.3% from $28.7 million to $33.7 million. Management
attributes the increase in other borrowed funds to the favorable borrowing rates
in this low rate environment. Net worth increased 3.0% from $126.7 million to
$130.5 million as a result of net income and a $1.1 million increase in the
after tax unrealized gain on securities available for sale.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED DECEMBER 31, 1997 AND
DECEMBER 31, 1996.
GENERAL. Net income increased 2.9% from $2.5 million for the three months
ended December 31, 1996 to $2.6 million for the three months ended December 31,
1997 primarily as a result of an increase in net interest income, increased fees
and other operating income, and a lower effective tax rate. These increases
were partially offset by increases in the provision for loan losses and in
operating and other expenses.
NET INTEREST INCOME. Net interest income increased to $9.4 million for the
three months ended December 31, 1997, compared to $9.0 million for the 1996
quarter.
Interest income increased 7.4% from $19.6 million for the three months
ended December 31, 1996 to $21.1 million for the three months ended December 31,
1997 primarily as a result of an increase in the average balance of loans from
$591.2 million to $634.9 million due to increased loan demand. The average
balance of debt and equity securities also increased from $160.7 million to
$190.6 million. The average yield earned on loans decreased from 8.38% for the
three months ended December 31, 1996 to 8.32% for the three months ended
December 31, 1997 primarily because of a decline in market interest rates. The
average yield on debt and equity securities increased from 5.53% for the three
months ended December 31, 1996 to 6.07% for the three months ended December 31,
1997 primarily because of investments in higher yielding asset-backed
securities.
Total interest expense increased 9.5% from $10.6 million for the three
months ended December 31, 1996 to $11.6 million for the three months ended
December 31, 1997 primarily as a result of an increase in the average balance of
interest-bearing liabilities from $924.9 million to $993.1 million.
Interest rate spread for the 1997 period remained consistent at 2.88%,
compared to 2.87% for the three months ended December 31, 1996.
14
<PAGE>
PROVISION FOR LOAN LOSSES. The provision for loan losses increased from
$326,000 for the three months ended December 31, 1996 to $518,000 for the three
months ended December 31, 1997, as a result of a slight change in the loan
portfolio mix to include a larger percentage of commercial real estate loans,
which are inherently riskier than one- to four-family real estate loans. As a
result, the allowance for loan losses as a percentage of total loans, which
stood at 1.02% at September 30, 1997, increased to 1.08% at December 31, 1997.
See "Business of the Bank - Lending Activities - Delinquencies and Classified
Assets."
OPERATING INCOME. Total operating income increased 28.4% from $1.4 million
for the three months ended December 31, 1996 to $1.8 million for the three
months ended December 31, 1997. The increase resulted primarily from greater
customer usage of debit cards and fees for insufficient funds in checking
accounts.
OPERATING AND OTHER EXPENSE. Total operating and other expenses increased
14.1% from $5.9 million for the three months ended December 31, 1996 to $6.8
million for the three months ended December 31, 1997. Salaries and benefits
increased $346,000 and occupancy expenses increased $209,000, both as a result
of the opening of two new branch offices and the Bank's new Administrative
Center. Operating and other expenses can be expected to increase in subsequent
periods following the consummation of the reorganization as a result of
increased costs associated with operating as a public company and increased
compensation expense as a result of the adoption of the ESOP and, if approved by
the stockholders, the restricted stock plan. See "Risk Factors - Decreased
Return on Average Equity Immediately After Reorganization" and "Potential
Increased Compensation Expenses After the Reorganization."
INCOME TAXES. The provision for income taxes decreased from $1.6 million
for the three months ended December 31, 1996 to $1.4 million for the three
months ended December 31, 1997. This decrease was a result of a lower effective
tax rate of 34.1% in the three months ended December 31, 1997, compared to 38.8%
in the three months ended December 31, 1996, and was primarily attributable to
tax planning strategies implemented during 1997.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND
DECEMBER 31, 1996
GENERAL. Net income increased 4.5% from $10.8 million for the year ended
December 31, 1996 to $11.3 million for the year ended December 31, 1997
primarily as a result of increased net interest income, increased service
charges and fees on deposit accounts, net gain on sale of securities available
for sale, and lower provisions for loan losses. These were partially offset by
increases in operating and other expenses.
NET INTEREST INCOME. Net interest income increased from $34.4 million for
the year ended December 31, 1996 to $37.4 million for the year ended December
31, 1997 as a result of interest income increasing more than interest expense.
Interest income increased 9.7% from $75.1 million for the year ended
December 31, 1996 to $82.4 million for the year ended December 31, 1997
primarily as a result of an increase in the average balance of loans from $564.0
million to $617.4 million attributable to increased loan demand. The average
yield earned on loans receivable decreased slightly from 8.38% for the year
ended December 31, 1996 to 8.35% for the year ended December 31, 1997 primarily
because of a decline in market interest rates, but benefitted from a decrease in
the balance of non-performing loans. See "Business of the Bank - Lending
Activities - Delinquencies and Classified Assets."
Total interest expense increased 10.6% from $40.7 million for the year
ended December 31, 1996 to $45.0 million for the year ended December 31, 1997
primarily as a result of an increase in the average balance of interest-bearing
liabilities from $893.3 million to $977.0 million.
The interest rate spread increased slightly from 2.82% for the year ended
December 31, 1996 to 2.83% for the year ended December 31, 1997 primarily as a
result of higher returns on interest-earning assets such as mortgage related
securities and debt and equity securities, which were partially offset by higher
rates paid on interest-bearing checking accounts, such as the new Money Market
Deposit Account, and the borrowing costs of the FHLB advances and securities
sold under repurchase agreements.
15
<PAGE>
PROVISION FOR LOAN LOSSES. The provision for loan losses decreased from
$2.2 million for the year ended December 31, 1996 to $1.5 million for the year
ended December 31, 1997. As discussed in "Management's Discussion and Analysis
for Financial Condition and Results of Operations - Comparison of Operating
Results for the Nine Months Ended September 30, 1997 and September 30, 1996",
during 1996, management provided additional provisions for a borrower that had
filed for bankruptcy protection. For the year ended December 31, 1996, $1.2
million of the $2.2 million provision for loan losses related specifically to
this one borrower. Subsequently in 1997, after a settlement was reached with
the bankruptcy trustee, the Bank charged-off $486,000 of this loan. This amount
is reflected in the increase in net charge-offs to average loans outstanding
from 0.06% to 0.18% for the years ended December 31, 1996 and December 31, 1997,
respectively.
OPERATING INCOME. Total operating income increased 18.2% from $5.8 million
for the year ended December 31, 1996 to $6.8 million for the year ended December
31, 1997. The increase resulted primarily from net gain on sale of securities
available for sale and bank service charges and fees on deposit accounts. Fee
income from the Bank's debit card increased $212,000 from the year ended
December 31, 1996 to the year ended December 31, 1997. In addition, service
charges on checking accounts and charges for insufficient funds increased
$313,000 from the year ended December 31, 1996 to the year ended December 31,
1997.
OPERATING AND OTHER EXPENSES. Total operating and other expenses increased
20.3% from $20.9 million for the year ended December 31, 1996 to $25.2 million
for the year ended December 31, 1997. Salaries and benefits increased $1.6
million and occupancy expense increased $571,000, both as a result of the
opening of two new branch offices and the Bank's new Administrative Center. In
addition, technology costs and network interchange fees increased primarily as a
result of the installation of the Bank's new mainframe computer and increased
usage of ATM and debit cards. Other expenses such as 1997 professional fees and
the 1996 benefit obtained from the reversal of the Nationar reserve also
contributed to the 1997 increase.
PROVISION FOR INCOME TAXES. The provision for income taxes remained at
$6.3 million for the year ended December 31, 1996 and December 31, 1997. The
effective tax rate was 36.8% in 1996 and 35.8% in 1997.
16
<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
valuation range, Niagara Bancorp's consolidated ratio of equity to assets would
be approximately 17.0%. We currently anticipate that it will take time to
prudently deploy such capital. As a result, until we have leveraged the capital
we receive in the offering by increasing our interest-earning assets (and our
interest-bearing liabilities) and thereby reducing our equity as a percentage of
assets, our return on average equity is expected to be below the industry
average. There can be no assurance that we will be able to successfully
leverage our capital, or that we will be successful in generating future returns
on equity equal to our historical returns or industry averages.
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 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 Company. Under New York law, the Bank's Plan
of Reorganization from a Mutual Savings Bank to a Mutual Holding Company and
Stock Issuance Plan (the "Plan of Reorganization"), and our governing corporate
instruments, at least 51% of Niagara Bancorp's voting shares must be owned by
the Mutual
17
<PAGE>
Company. The Mutual Company will be controlled by its board of trustees, who
will consist of persons who are members of the board of directors of Niagara
Bancorp and the Bank. The Mutual Company will elect all members of the board of
directors of Niagara Bancorp, and as a general matter, will control the outcome
of all matters presented to the stockholders of Niagara Bancorp for resolution
by vote, except for matters that require a vote greater than a majority. The
Mutual Company, acting through its board of trustees, will be able to control
the business and operations of Niagara Bancorp and the Bank and will be able to
prevent any challenge to the ownership or control of Niagara Bancorp by
stockholders other than the Mutual Company ("Minority Stockholders").
Accordingly, a change in control of Niagara Bancorp and the Bank cannot occur
unless the Mutual Company first converts to the stock form of organization.
Although New York law, applicable regulations and the Plan of Reorganization
permit the Mutual Company to convert from the mutual to the capital stock form
of organization, it is not anticipated that a conversion of the Mutual Company
will occur in the foreseeable future. There can be no assurance when, if ever, a
conversion of the Mutual Company will occur.
Provisions in Niagara Bancorp's and the Bank's Governing Instruments. In
addition, certain provisions of Niagara Bancorp's certificate of incorporation
and bylaws, particularly a provision limiting voting rights, as well as certain
federal and state regulations, assist Niagara Bancorp 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
stockholders, 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 Company). The regulations of the New York State Banking
Department (the "Department") prohibit, except with the prior approval of the
Superintendent of Banks of the State of New York (the "Superintendent"), 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 equity
securities of the Bank or Niagara Bancorp. 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
Niagara Bancorp's equity securities.
DIVIDEND WAIVERS BY THE MUTUAL 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") is expected to impose certain
conditions on the waiver by the Mutual Company of dividends paid on the common
stock. In particular, it is expected that the Mutual Company will be required
to 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 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--Holding Company Regulation--Mutual Holding
Company Regulation." It is not currently intended that the Mutual Company will
waive dividends declared by Niagara Bancorp.
POSSIBLE DILUTIVE EFFECT OF ISSUANCE OF ADDITIONAL SHARES
Various possible and planned issuances of common stock could dilute the
interests of prospective stockholders of Niagara Bancorp following consummation
of the reorganization and offering, as noted below.
The number of shares to be sold in the offering may be increased to up to
13,501,554 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
common stock following the commencement of the offering. 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 Niagara Bancorp's consolidated
stockholders' equity and net income. See "Capitalization" and "Pro Forma Data."
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<PAGE>
The restricted stock plan intends to acquire an amount of common stock
equal to 4% of the shares of common stock sold in the offering (469,619 shares,
based on the maximum of the estimated valuation range). Such shares of common
stock may be acquired in the open market with funds provided by Niagara Bancorp,
if permissible, or from authorized but unissued shares of common stock. The
issuance of authorized but unissued shares of common stock to the restricted
stock 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 of
the Bank--Benefit Plans--Recognition and Retention Plan."
Niagara Bancorp'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 of Reorganization, 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 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 Niagara Bancorp 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 Niagara Bancorp 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 1.3% of the
total shares of the common stock to be issued and outstanding (including shares
to be owned by the Mutual 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 employee stock ownership plan that Niagara Bancorp
intends to establish (the "ESOP"). It is impossible to determine at this time
the extent of such impact on future net income. See "Pro Forma Data." In
addition, after completion of the reorganization, Niagara Bancorp intends to
implement, subject to stockholder approval (which approval cannot be obtained
earlier than six months subsequent to the reorganization), the restricted stock
plan. Upon implementation, the award of shares of common stock from the
restricted stock 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
19
<PAGE>
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
Department (our chartering authority), and by the Federal Deposit Insurance
Corporation (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, Niagara Bancorp and the Mutual 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, Niagara Bancorp, 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 Niagara Bancorp. 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
Niagara Bancorp, as a newly organized company, has never issued capital
stock and, consequently, there is no established market for the common stock at
this time. Niagara Bancorp has received conditional approval to have its 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.
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
Niagara Bancorp 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. 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,
20
<PAGE>
and we have been advised by our information systems providers that the issue is
being addressed. We are also in the process of reviewing internally developed
programs to assure year 2000 compliance. Based on information currently
available, management does not believe that significant additional costs will be
incurred in connection with the year 2000 issue.
ROLE OF THE FINANCIAL ADVISORS/BEST EFFORTS OFFERING
The Bank and Niagara Bancorp have engaged CIBC Oppenheimer Corp. and
Trident Securities, Inc. as financial and marketing advisors, and they have
agreed to use their best efforts to solicit subscriptions and purchase orders
for common stock in the offering. The financial advisors have not prepared any
report or opinion constituting a recommendation or advice to the Bank or Niagara
Bancorp, nor have they prepared an opinion as to the fairness of the purchase
price or the terms of the offering. CIBC Oppenheimer Corp. and Trident
Securities, Inc. have not verified the accuracy or completeness of the
information contained in this Prospectus. See "The Reorganization and Offering-
- -Plan of Distribution and Selling Commissions."
NIAGARA BANCORP
Niagara Bancorp was organized for the purpose of acquiring all of the
capital stock of the Bank upon completion of the reorganization of the Bank from
the mutual to the mutual holding company form of organization and the issuance
of common stock to certain depositors and the public (the "Reorganization").
Niagara Bancorp has applied to 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." Final approval from the Federal Reserve Board has not been
received as of the date of this Prospectus. Upon completion of the
Reorganization, Niagara Bancorp 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. Niagara Bancorp 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 to certain depositors and the public in the offering (the
"Offering"). See "Use of Proceeds." The management of Niagara Bancorp is set
forth under "Management of Niagara Bancorp." Initially, Niagara Bancorp will
neither own nor lease any property, but will instead use the premises, equipment
and furniture of the Bank. At the present time, Niagara Bancorp 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 Niagara Bancorp
expands its business in the future.
Management believes that the holding company structure will provide Niagara
Bancorp 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, Niagara Bancorp
will be in a position, subject to regulatory limitations and Niagara Bancorp's
financial position, to take advantage of any such acquisition and expansion
opportunities that may arise. The initial activities of Niagara Bancorp are
anticipated to be funded by the proceeds to be retained by Niagara Bancorp,
income thereon and through dividends from the Bank.
Niagara Bancorp'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.
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 ("BIF"), 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
21
<PAGE>
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, P.O. Box 514, 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 restricted stock plan are deducted from pro
forma regulatory capital. The Federal Reserve Board has adopted capital adequacy
guidelines for bank holding companies (on a consolidated basis) substantially
similar to the FDIC capital requirements for the Bank. On a pro forma
consolidated basis after the Reorganization and Offering, Niagara Bancorp's pro
forma stockholders' equity will exceed these requirements. See "Regulation--
Holding Company Regulation."
<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 13,501,554
SEPTEMBER 30, 1997 SHARES SHARES SHARES SHARES(1)
------------------ ------------------ ----------------- -------------------- ----------------
PERCENT PERCENT PERCENT PERCENT PERCENT
OF OF OF OF OF
AMOUNT ASSETS (2) AMOUNT ASSETS (2) AMOUNT ASSETS (2) AMOUNT (2) ASSETS AMOUNT ASSETS(2)
------ ----------- ------ ---------- ------ ---------- ---------- ------ ------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <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% $175,271 14.18%
========== ====== ========= ====== ======== ====== ======== ====== ======== ======
Leverage capital:
Capital level (3)...... $ 125,383 10.75% $ 156,403 12.99% $161,963 13.37% $167,523 13.76% $173,934 14.19%
Requirement(4)......... 34,990 3.00 36,129 3.00 36,333 3.00 36,537 3.00 36,771 3.00
---------- ------ --------- ------ -------- ------ -------- ------ -------- ------
Excess............... $ 90,393 7.75% $ 120,274 9.99% $125,630 10.37% $130,986 10.76% $137,163 11.19%
========== ====== ========= ====== ======== ====== ======== ====== ======== ======
Risk-based capital:
Tier 1 capital level
(3)(5)................ $ 125,383 20.69% $ 156,403 25.01% $161,963 25.75% $167,523 26.49% $173,934 27.33%
Requirement............ 24,235 4.00 25,017 4.00 25,156 4.00 25,296 4.00 25,457 4.00
---------- ------ --------- ------ -------- ------ -------- ------ -------- ------
Excess............... $ 101,148 16.69% $ 131,386 21.01% $136,807 21.75% $142,227 22.49% $148,477 23.33%
========== ====== ========= ====== ======== ====== ======== ====== ======== ======
Total capital level
(3)(5)............... $ 131,736 21.74% $ 162,756 26.02% $168,316 26.76% $173,876 27.49% $180,287 28.33%
Requirement........... 48,470 8.00 50,033 8.00 50,313 8.00 50,592 8.00 50,915 8.00
---------- ------ --------- ------ -------- ------ -------- ------ -------- ------
Excess................ $ 83,266 13.74% $ 112,723 18.02% $118,003 18.76% $123,284 19.49% $129,372 20.33%
========== ====== ========= ====== ======== ====== ======== ====== ======== ======
</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 conditions or general financial and economic conditions
following the commencement of the Offering.
22
<PAGE>
(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 restricted
stock plan to enable the plan to acquire in the open market a number of
shares equal to 4% of the common stock sold in the Offering; the purchase
by the ESOP of 8% of the shares sold in the Offering; and the
capitalization of the Mutual Company by the Bank with $100,000. See
"Management of the Bank--Benefit Plans" for a discussion of the restricted
stock plan and ESOP.
(4) The current leverage capital requirement is 3% of total adjusted assets for
banks that receive the highest supervisory rating for safety and soundness
and that are not experiencing or anticipating significant growth. The
current leverage capital ratio applicable to all other banks is 4% to 5%.
See "Regulation--Regulatory Capital Requirements.
(5) Assumes net proceeds are invested in assets that carry a risk-weighting
equal to the average risk weighting of the Bank's risk-weighted assets as
of September 30, 1997.
USE OF PROCEEDS
Although the actual net proceeds from the sale of the common stock of
Niagara Bancorp (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. Niagara
Bancorp will be unable to utilize any of the net proceeds of the Offering until
the consummation of the Reorganization.
Niagara Bancorp 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 Niagara Bancorp 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 Niagara Bancorp intends to adopt subsequent to the
Offering are not funded with authorized but unissued shares of Common Stock of
Niagara Bancorp, Niagara Bancorp 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."
Niagara Bancorp 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 Estimated Valuation 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 Niagara Bancorp will initially
be invested in short- and medium-term debt obligations, mortgage related
securities and other marketable equity securities.
The net proceeds retained by Niagara Bancorp 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, Niagara
Bancorp and the Bank have no current arrangements, understandings or agreements
regarding any such transactions. Upon completion of the Reorganization, Niagara
Bancorp 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 Board. See
"Regulation -- Holding Company Regulation" for a description of certain
regulations applicable to Niagara Bancorp.
Upon completion of the Reorganization, the board of directors of Niagara
Bancorp 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, Niagara Bancorp may not repurchase
any Common Stock, in the first year
23
<PAGE>
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 completion of its stock offering, 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 Niagara Bancorp'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 Niagara Bancorp and its
stockholders. In the event Niagara Bancorp determines to repurchase stock, such
repurchases may be made at market prices which may be in excess of the $10.00
per share purchase price in the Offering (the "Subscription Price"). Any stock
repurchases will be subject to the determination of Niagara Bancorp's board of
directors that both Niagara Bancorp and the Bank will be capitalized in excess
of all applicable regulatory requirements after any repurchases and that such
capital will be adequate, taking into account, among other things, the level of
non-performing and other risk assets, Niagara Bancorp'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 Niagara Bancorp
will have the authority to declare dividends on the Common Stock, subject to
statutory and regulatory requirements. Niagara Bancorp intends to pay an annual
cash dividend of $0.12 per share, 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, Niagara Bancorp 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 Niagara Bancorp (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.
Niagara Bancorp'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."
MARKET FOR COMMON STOCK
Niagara Bancorp was recently formed and has never issued capital stock. The
Bank, as a mutual institution, has never issued capital stock. Niagara Bancorp
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. 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.
24
<PAGE>
CAPITALIZATION
The following table presents the historical capitalization of the Bank at
September 30, 1997, and the pro forma consolidated capitalization of Niagara
Bancorp after giving effect to the Offering and the Reorganization, 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."
<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
BANK 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, 5,000,000
shares authorized;
none to be issued............. $ -- $ -- $ -- $ -- $ --
Common Stock, $.01 par
value, 45,000,000
shares authorized;
shares to be issued
as reflected(3)............... -- 191 225 259 298
Additional paid-in
capital(4).................... -- 87,735 103,354 118,973 136,968
Retained earnings(5)............ 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 (6)................ -- 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(7)................ -- (6,942) (8,167) (9,392) (10,801)
Common Stock
acquired by the
restricted stock
plan(8)....................... -- (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, which would reduce pro forma deposits by the amount of such
withdrawals.
(3) Includes shares to be issued to depositors and the public in the Offering,
as indicated herein, and 10,447,253, 12,290,885, 14,134,518 and 16,254,696
shares to be issued to the Mutual Company and the foundation at the
minimum, midpoint, maximum and adjusted maximum of the Estimated Valuation
Range, respectively.
(4) 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 Niagara Bancorp 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."
(5) The retained earnings of the Bank will be substantially restricted after
the Offering. See "The Reorganization and Offering--Liquidation Rights."
Assumes that the Mutual Company will be capitalized by the Bank with
$100,000.
(6) 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 Niagara Bancorp's annual taxable income, subject to the
ability of Niagara Bancorp to carry forward any unused portion of the
deduction for five years following the year in which the contribution is
made.
25
<PAGE>
(7) 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 Niagara Bancorp. 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."
(8) 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 restricted
stock plan through open market purchases at $10.00 per share. The actual
purchase price per share may be more or less than $10.00. The Common Stock
to be purchased by the restricted stock plan is reflected as a reduction to
stockholders' equity. See "Risk Factors-Possible Dilutive Effect of
Issuance of Additional Shares," footnote 3 to the tables under "Pro Forma
Data," and "Management of the Bank--Benefit Plans--Recognition and
Retention Plan."
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) $3.5 million will be sold to
executive officers and trustees of the Bank and Niagara Bancorp, 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 purchase 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 Company will be capitalized by the
Bank with $100,000. Actual expenses may vary from those estimated.
Pro forma consolidated net income of Niagara Bancorp 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 Niagara
Bancorp 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," Niagara Bancorp 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 Niagara
Bancorp. 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 Niagara Bancorp 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 tables 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 restricted stock plan, which is expected to be adopted by Niagara
Bancorp 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 Niagara Bancorp 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."
26
<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 restricted
stock 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(1):
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 restricted
stock plan
adjustment(3)............................... (338) (398) (450) (527)
---------- ----------- ----------- -----------
Pro forma net income(1)........................ $ 10,009 $ 10,256 $ 10,510 $ 10,786
========== =========== =========== ===========
Per share net income(1):
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(2)............................... (0.01) (0.01) (0.01) (0.01)
Pro forma restricted
stock plan
adjustment (3).............................. (0.02) (0.02) (0.02) (0.02)
---------- ----------- ----------- -----------
Pro forma net income
per share(1)................................. $ 0.55 $ 0.48 $ 0.43 $ 0.38
========== =========== =========== ===========
Stockholders' equity:
Historical..................................... $ 126,720 $ 126,720 $ 126,720 $ 126,720
Estimated net proceeds......................... 83,586 98,474 113,362 130,516
Capitalization of the Mutual
Company...................................... (100) (100) (100) (100)
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 acquired by ESOP(2) (6,942) (8,167) (9,392) (10,801)
Common Stock
acquired by restricted
stock 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
========== =========== =========== ===========
</TABLE>
27
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
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
Capitalization of the Mutual
Company............................... (.01) (.01) (.01) (.01)
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 restricted
stock plan(3)................... (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(6).............................. 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. Niagara Bancorp
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
issued in the Reorganization, shares contributed to the foundation and
shares to be allocated or distributed under the ESOP and restricted stock
plan for the period presented.
(2) It is assumed that 8% of the shares sold in the Offering will be purchased
by the ESOP. The funds used to acquire such shares are assumed to have been
borrowed by the ESOP from Niagara Bancorp. 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 restricted stock plan expected to be adopted by Niagara
Bancorp 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 Niagara Bancorp, if any. Funds used by the
restricted stock plan to purchase the shares will be contributed to the
plan by the Bank. In calculating the pro forma effect of the restricted
stock plan, it is assumed that the shares were acquired by the restricted
stock 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 Niagara Bancorp's Common Stock to the restricted stock
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 $0.38 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
restricted stock plan will be equal to the Subscription Price. See
"Management of the Bank--Benefit Plans--Recognition and Retention Plan."
28
<PAGE>
(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 Niagara
Bancorp 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" and "The
Reorganization and Offering-- Liquidation Rights."
(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 issued
in the Reorganization, shares purchased by the ESOP and the restricted
stock 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 Offering.
29
<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 98,474 113,362 130,516
Less: Common Stock pur-chased by ESOP......... (6,942) (8,167) (9,392) (10,801)
Common Stock purchased by restricted
stock 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(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 restricted stock plan
adjustment(3)............................. (451) (531) (611) (702)
---------- ----------- ---------- -----------
Pro forma net income(1)....................... $ 12,624 $ 12,956 13,289 $ 13,674
========== =========== ========== ===========
Per share net income(1):
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(2)............................... (0.02) (0.02) (0.02) (0.02)
Pro forma restricted stock plan
adjustment(3)............................... (0.02) (0.02) (0.02) (0.02)
---------- ----------- ---------- -----------
Pro forma net income
per share(1)................................ $ 0.68 $ 0.60 0.53 $ 0.48
========== =========== ========== ===========
Stockholders' equity:
Historical.................................. $ 115,664 $ 115,664 115,664 $ 115,664
Estimated net proceeds...................... 83,587 98,474 113,362 130,515
Capitalization of the Mutual
Company..................................... (100) (100) (100) (100)
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 acquired by ESOP(2)...... (6,942) (8,167) (9,392) (10,801)
Less: Common Stock acquired by
restricted stock plan(3)................... (3,471) (4,084) (4,696) (5,401)
---------- ----------- ---------- -----------
Pro forma stockholders' equity(3)(4)(5)...... $ 190,257 $ 203,574 $ 216,893 $ 232,240
========== =========== ========== ===========
</TABLE>
30
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Stockholders' equity per share(6):
Historical....................................... $ 6.05 $ 5.15 $ 4.48 $ 3.89
Estimated net proceeds............................. 4.37 4.38 4.38 4.39
Capitalization of the Mutual
Company.......................................... (.01) (.01) (.01) (.01)
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 restricted
stock 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 percentage 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 restricted stock 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. The funds used to acquire such shares are assumed to have been
borrowed by the ESOP from Niagara Bancorp. 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 restricted stock plan expected to be adopted by Niagara
Bancorp 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 Niagara Bancorp, if any. Funds used by the
restricted stock plan to purchase the shares will be contributed to the
plan by the Bank. In calculating the pro forma effect of the restricted
stock plan, it is assumed that the shares were acquired by the restricted
stock 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 Common Stock to the restricted stock 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 restricted stock 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 Niagara
Bancorp 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'
31
<PAGE>
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 $0.67, $0.58, $0.52 and $0.47, respectively, and the pro forma
stockholders' equity per share would be $9.95, $9.09, $8.46 and $7.91,
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 issued
in the Reorganization, shares purchased by the ESOP and restricted stock
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 Offering.
32
<PAGE>
COMPARISON OF VALUATION AND PRO FORMA INFORMATION WITHOUT FOUNDATION
In the event that the foundation was not established as part of the
Reorganization, RP Financial has estimated that the pro forma aggregate market
capitalization of Niagara Bancorp would be approximately $110.4 million at the
midpoint, which is approximately $5.2 million greater than the pro forma
aggregate market capitalization of Niagara Bancorp 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
Niagara Bancorp 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 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 Niagara Bancorp 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. The valuation amounts referred to in the table
below relate to the value of the shares sold to the depositors and the public,
excluding shares issued to the Mutual Holding Company.
<TABLE>
<CAPTION>
Minimum Midpoint Maximum
------------------------ ----------------------- ------------------------
With Without With Without With Without
Foundation Foundation Foundation Foundation Foundation Foundation
----------- ----------- ----------- ----------- ----------- -----------
(Dollars in Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C> <C> <C>
Estimated offering amount............ $ 86,777 93,840 102,091 110,400 117,405 126,960
Pro forma market
capitalization...................... 89,380 93,840 105,154 110,400 120,927 126,960
Total assets......................... 1,251,043 1,257,419 1,264,361 1,271,863 1,277,679 1,286,306
Total liabilities.................... 1,049,731 1,049,731 1,049,731 1,049,731 1,049,731 1,049,731
Pro forma stockholders'
equity.............................. 201,313 207,688 214,630 222,132 227,949 236,575
Pro forma net income................. 10,009 10,172 10,256 10,447 10,510 10,723
Pro forma stockholders'
equity per share.................... 10.53 10.19 9.55 9.26 8.81 8.58
Pro forma net income per
share............................... 0.55 0.52 0.48 0.45 0.43 0.40
PRO FORMA PRICING RATIOS:
- -------------------------
Offering price as a percentage
of pro forma stockholders'
equity per share................... 94.97% 98.14% 104.71% 107.99% 113.51% 116.55%
Offering price to pro forma
net income per share (1)............ 13.64x 14.42x 15.63x 16.67x 17.44x 18.75x
Pro forma market
capitalization to assets............ 7.14% 7.46% 8.32% 8.68% 9.46% 9.87%
PRO FORMA FINANCIAL RATIOS:
- ---------------------------
Return on assets (2)................. 1.07% 1.08% 1.08% 1.10% 1.10% 1.11%
Return on equity (3)................. 6.63% 6.53% 6.37% 6.27% 6.14% 6.04%
Equity to assets..................... 16.09% 16.52% 16.98% 17.47% 17.84% 18.39%
<CAPTION>
Adjusted Maximum
------------------------
With Without
Foundation Foundation
----------- -----------
<S> <C> <C>
Estimated offering amount............ 135,016 146,004
Pro forma market
capitalization...................... 139,066 146,004
Total assets......................... 1,293,027 1,303,035
Total liabilities.................... 1,049,731 1,049,731
Pro forma stockholders'
equity.............................. 243,296 253,304
Pro forma net income................. 10,786 11,043
Pro forma stockholders'
equity per share.................... 8.19 7.98
Pro forma net income per
share............................... 0.38 0.36
PRO FORMA PRICING RATIOS:
- ---------------------------
Offering price as a percentage
of pro forma stockholders'
equity per share................... 122.10% 125.31%
Offering price to pro forma
net income per share (1)............ 19.74x 20.83x
Pro forma market
capitalization to assets............ 10.76% 11.20%
PRO FORMA FINANCIAL RATIOS:
- ---------------------------
Return on assets (2)................. 1.11% 1.13%
Return on equity (3)................. 5.91% 5.81%
Equity to assets..................... 18.82% 19.44%
</TABLE>
____________________
(1) If the contribution to the foundation had been incurred during the nine
months ended September 30, 1997, pro forma net income per share would have
been $0.39, $0.32, $0.27 and $0.22, and the offering price to pro forma net
income per share would have been 26.04x, 31.28x, 37.33x, 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.
33
<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
associates, 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 restricted stock 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 $3.5 million of Common Stock, equal to 4.0%, 3.4%, 2.9%, and
2.5% of the number of shares to be issued in the 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 400,000 40,000 .4
B. Thomas Mancuso 200,000 20,000 .2
James Miklinski 250,000 25,000 .2
Kathleen P. Monti 200,000 20,000 .2
Barton G. Smith 400,000 40,000 .4
William E. Swan 400,000 40,000 .4
Robert G. Weber 200,000 20,000 .2
---------- ------- ---
All trustees and executive officers
as a group $3,485,000 348,500 3.4%
========== ======= ===
</TABLE>
_____________________
*less than .1%
(1) Includes purchases by associates.
34
<PAGE>
THE REORGANIZATION AND OFFERING
THE SUPERINTENDENT HAS APPROVED THE PLAN OF REORGANIZATION 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 of Reorganization and
the Superintendent has approved the Plan of Reorganization. Pursuant to our
Plan of Reorganization, 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 of Reorganization
(i) we will form Niagara Bancorp as a Delaware corporation; (ii) we will form
the Mutual 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 Niagara Bancorp; and (iv) Niagara Bancorp
will issue shares of Common Stock to the public and the Mutual 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 Company will be
equal to 53.3% of the shares issued in the Reorganization. In addition, we will
issue 1.3% of the shares to be outstanding to a newly established charitable
foundation. The two-tier mutual holding company structure is most easily
understood by considering the following schematic:
------------------ ------------
The Mutual Company Public
(a New York mutual Stockholders
holding company) (including
the
foundation)
------------------ ------------
53.3% of 46.7% of
the the
Common Common
Stock Stock
-------------------------------------------------
Niagara Bancorp (a Delaware
corporation)
-------------------------------------------------
100% of the
Common Stock
-------------------------------------------------
The Bank
(a New York stock savings bank)
-------------------------------------------------
In adopting the Plan of Reorganization, 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 Niagara Bancorp 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 Niagara Bancorp is not offering all of
35
<PAGE>
its Common Stock for sale to depositors and the public in the Offering (but is
issuing a majority of its stock to the Mutual 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
Company will be available for sale in the future in the event of the Mutual
Company decides to convert to the capital stock form of organization. See
"Regulation-Holding Company 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,
Niagara Bancorp will be in a position after the Reorganization, subject to
regulatory limitations and Niagara Bancorp'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 Niagara Bancorp in the form of dividends and stock
repurchases. 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 Company to obtain majority
ownership of Niagara Bancorp and the Bank, which may result in the perpetuation
of the management and board of directors of the Bank and Niagara Bancorp; 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 Company that may be adopted from time-to-time may have an adverse
impact on Minority Stockholders. A majority of the voting stock of Niagara
Bancorp will be owned by the Mutual 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 Niagara Bancorp'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 Company will be able to elect
all members of the board of directors of Niagara Bancorp, and will be able to
control the outcome of all matters presented to the stockholders of Niagara
Bancorp for resolution by vote, except for certain matters that must be approved
by more than a majority of stockholders of Niagara Bancorp. No assurance can be
given that Niagara Bancorp will not take action adverse to the interests of the
Minority Stockholders. For example, Niagara Bancorp 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 Company
from the mutual to stock form of organization which would be effected through a
merger of the Mutual Company into Niagara Bancorp or the Bank and the concurrent
sale of the shares held by the Mutual Company in a subscription offering. A
conversion of the Mutual 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 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
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
Company.
All insured deposit accounts of 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
36
<PAGE>
long as the Mutual Company is in existence, the Mutual Company will be required
to own at least 51% of the voting stock of Niagara Bancorp, and Niagara Bancorp
will own 100% of the voting stock of the Bank. The Bank and Niagara Bancorp may
issue any amount of non-voting stock or debt to persons other than the Mutual
Company.
THE OFFERING
Niagara Bancorp is offering shares of Common Stock to persons other than
the Mutual 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 ) 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. Following the
Reorganization and the Offering, Niagara Bancorp also will be authorized to
issue additional Common Stock or preferred stock to persons other than the
Mutual Company, without prior approval of the holders of the Common Stock.
The shares of Common Stock are being offered for sale at a fixed
Subscription Price of $10.00 per share in the subscription offering pursuant to
subscription rights (the "Subscription Offering") 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 tax-qualified
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 first given to
natural persons residing in Niagara, Orleans, Erie and Genesee Counties, and
secondly to natural persons residing in the remaining four counties of Western
New York, Wyoming, Allegany, Cattaraugus and Chautauqua Counties (the "Community
Offering"). Subscription rights will expire if not exercised by 12:00 Noon, New
York time, on March 24, 1998 unless extended by the Bank and Niagara Bancorp.
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, L.C. 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 Niagara Bancorp 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 market 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 subsidiaries of 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 Niagara Bancorp; 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
$191,250,000 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, the price most commonly
used in stock offerings involving mutual to stock conversions. Based on the
Estimated Valuation Range and the Subscription Price of $10.00 per share, the
number of
37
<PAGE>
shares of Common Stock that Niagara Bancorp 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,
up to 352,214 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 Niagara Bancorp's Common Stock that are not sold in
the Offering or contributed to the foundation will be issued to the Mutual
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 subsidiaries of 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.
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 market and financial
conditions, without the resolicitation of subscribers (in which event up to
405,046 shares may be issued to the foundation). 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 Upon Purchases of Common Stock" 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
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 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 Niagara Bancorp,
after consulting with the Superintendent and the FDIC, may terminate the Plan of
Reorganization and return all funds promptly, with 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 March 30, 2000.
38
<PAGE>
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
Niagara Bancorp'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 Niagara Bancorp'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 each 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 Financial 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 Financial to conclude
that the Independent Valuation is incompatible with its estimate of the pro
forma market value of the Common Stock of Niagara Bancorp 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 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 of Reorganization and in interpreting any and all other
provisions of the Plan of Reorganization. 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 shall be
given the opportunity to purchase up to 20,000 shares, or $200,000, of Common
Stock; provided that Niagara Bancorp 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 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 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.
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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, 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 Niagara Bancorp 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 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 of Reorganization provides that the Bank and
Niagara Bancorp 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 Niagara Bancorp. 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 Niagara Bancorp 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 Niagara Bancorp 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 Niagara Bancorp is a means of
enabling the communities served by us to share in the growth and success of
Niagara Bancorp 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 Niagara Bancorp and the Bank to develop a
unified charitable donation strategy and will centralize the responsibility for
administration and allocation of corporate charitable funds. Charitable
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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 Niagara Bancorp. 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 Internal Revenue Code of 1986 (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 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 Niagara Bancorp and the cash
held by the foundation. However, as a condition to receiving the non-objection
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 Niagara Bancorp's Common Stock
(other than shares held by the Mutual Company) on all proposals considered by
stockholders of Niagara Bancorp; provided, however, that, consistent with such
condition, the FDIC and the Department would waive this voting restriction under
certain circumstances (and subject to certain additional conditions) 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 (the "IRS") 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, Niagara Bancorp'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 Niagara Bancorp 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 Niagara Bancorp 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 Niagara Bancorp 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
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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, Niagara Bancorp 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 Niagara Bancorp will have an
increased number of shares outstanding, the voting and ownership interests of
stockholders in Niagara Bancorp's Common Stock would be diluted by 1.3%, as
compared to their interests in Niagara Bancorp if the foundation was not
established. For additional discussion of the dilutive effect, see "Pro Forma
Data."
Impact on Earnings. The contribution of cash and Common Stock to the
foundation will have an adverse impact on Niagara Bancorp's and the Bank's
earnings in the year in which the contribution is made. Niagara Bancorp 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 aggregate 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 (or up to $6.8 million at the adjusted
maximum of the Estimated Valuation Range). The number of shares to be
contributed to the foundation will range from 260,332 to 352,214, and the amount
of cash to be contributed will range from $1.7 million to $2.3 million, based on
the minimum and maximum of the Estimated Valuation Range, respectively (or up to
405,046 shares, and $2.7 million in cash, at the adjusted maximum of the
Estimated Valuation Range). The contribution expense will be partially offset by
the tax benefit related to the expense. Niagara Bancorp 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 Niagara Bancorp's annual taxable income. Assuming an aggregate contribution
of $5.9 million (based on the maximum of the Estimated Valuation Range), Niagara
Bancorp 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
Niagara Bancorp'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.
Tax Considerations. Niagara Bancorp 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 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. Niagara Bancorp
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 Niagara Bancorp's Common Stock
(other than shares held by the Mutual Company) on all proposals considered by
stockholders of Niagara Bancorp. Consistent with this condition, in the event
that Niagara Bancorp 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 and the Superintendent
shall waive such voting restriction upon submission of a legal opinion by
Niagara Bancorp or the foundation that is satisfactory to them. The independent
tax advisors' opinion further provides that there is substantial authority for
the position that Niagara Bancorp's contribution of its own stock to the
foundation would not constitute an act of self-dealing, and that Niagara Bancorp
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 Niagara Bancorp for such stock, subject to an
annual limitation based on 10% of Niagara Bancorp's annual taxable income.
Niagara Bancorp, 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, Niagara
Bancorp estimates that all of the deduction should be deductible over the six-
year period. Although Niagara Bancorp and the Bank have received an opinion of
their independent tax advisors that Niagara Bancorp 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
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event, Niagara Bancorp'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 Niagara Bancorp. The aggregate price of the
shares of Common Stock being offered in the Offering is based upon the
independent appraisal conducted by RP Financial of the estimated pro forma
market value of the Common Stock of Niagara Bancorp. 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 Offering at the 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 Niagara Bancorp 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 13.4% and 26.8%, respectively. On a
consolidated basis, Niagara Bancorp's pro forma stockholders' equity would be
$214.6 million, or approximately 17.0% 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, Niagara Bancorp'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
estimated value, 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 Without Foundation."
Regulatory Conditions Imposed on the Foundation. Establishment of the
foundation is subject to certain conditions agreed to by the foundation in
writing as a condition to receiving the FDIC's non-objection to and
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Superintendent's approval of the Reorganization, including the following: (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 (other than
shares held by the Mutual Company) on all proposals considered by stockholders
of Niagara Bancorp; provided, however, that, consistent with the condition, the
FDIC and the Department would waive this voting restriction under certain
circumstances (and subject to additional conditions) 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 to obtain a waiver, 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 Niagara Bancorp 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 Niagara Bancorp or the Bank. Additionally, if
Niagara Bancorp and the Bank are forced to eliminate the foundation, Niagara
Bancorp may be required to resolicit subscribers in the offerings.
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 Niagara Bancorp 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, Niagara Bancorp 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, Niagara Bancorp 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 , 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
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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 Niagara Bancorp, in their sole discretion, may reject
subscriptions, in whole or in part, received from any person in the Community
Offering.
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 Niagara
Bancorp in a manner that is intended to achieve the widest distribution of the
Common Stock, subject to the rights of Niagara Bancorp to accept or reject in
whole or in part any order in the Syndicated Community Offering. It is expected
that the Syndicated Community Offering, if any, 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 Niagara Bancorp 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.
RESTRICTIONS ON SALE OF STOCK BY TRUSTEES AND OFFICERS
All shares of the Common Stock purchased by trustees and officers of the
Bank 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 Niagara Bancorp'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."
Each certificate for restricted shares will bear a legend prominently
stamped on its face giving notice of the restrictions on transfer, and
instructions will be issued to Niagara Bancorp'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.
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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 12:00 Noon, New York Time
on March 24, 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 May 8, 1998, in which event purchasers will be given the right to increase,
decrease, confirm, or rescind their orders. If the minimum number of shares sold
in the Offering (8,677,747 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 12:00 Noon, New York Time on March 24, 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 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. Third party checks will not be
accepted as payment for a subscriber's order. 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 of deposit
accounts will not apply to withdrawals authorized for the purchase of shares;
however, if a withdrawal results in a certificate of deposit account with a
balance less than the applicable minimum balance requirement, the certificate of
deposit 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. Payments made by check or money order will be placed in a
segregated savings account and will be paid interest at the Bank's passbook rate
of 3.2% (calculated using the simple interest method), 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 following 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 May 8, 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 a Syndicated Community Offering by
a selling group of broker-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 broker-dealers as to the number of
shares to be allocated to each selected broker-dealer.
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<PAGE>
Only upon allocation of shares to selected broker-dealers may they take orders
from their customers. Investors who desire to purchase shares in the Community
Offering directly through a selected broker-dealer, which may include CIBC
Oppenheimer Corp. and Trident Securities, Inc., will be 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 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.
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 savings 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 (provided that the total fee payable
to CIBC Oppenheimer Corp. and Trident Securities, Inc. shall not exceed $1.0
million). 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 broker-dealer
agreements.
47
<PAGE>
The Bank also will reimburse CIBC Oppenheimer Corp. and Trident Securities,
Inc. for its reasonable out-of-pocket expenses associated with its marketing
effort, up to a maximum of $65,000 (including legal fees and expenses ). The
Bank has made an advance payment of $10,000 to each of CIBC Oppenheimer Corp.
and Trident Securities, Inc. If the Plan of Reorganization is terminated by the
Bank, if the Offering is not completed by May 8, 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 Securities Exchange Act of 1934, as amended (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.
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 Niagara Bancorp
owned or controlled by persons other than Mutual Company at the close
of the Offering shall not exceed 49% of Niagara Bancorp's total
outstanding Common Stock.
B. No person or group of persons acting in concert, together with their
associates, may purchase more than 40,000 shares, or $400,000, of
Common Stock in the Offering, except that: (i) Niagara Bancorp 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 sold in the
Offering; (ii) Tax-Qualified Employee Plans may purchase up to 10% of
the shares sold 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 Niagara Bancorp 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.
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<PAGE>
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 Niagara Bancorp 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 Niagara
Bancorp 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 Niagara Bancorp, 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) in the event that there is an oversubscription at the Eligible
Account Holder category, to fill the unfulfilled subscriptions of
Eligible Account Holders, (ii) if there are any shares remaining, to
fill the Tax-Qualified Employee Plans' subscription to the Adjusted
Maximum; and (ii) in the event that there is an oversubscription at
the Supplemental Eligible Account Holder category, and if there are
shares remaining, to fill unfulfilled subscriptions of Supplemental
Eligible Account Holders.
G. Notwithstanding any other provision of the Plan of Reorganization, 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. ("NASD"), particularly those
regarding free riding and withholding. Niagara Bancorp 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 Niagara Bancorp 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 of Reorganization.
Niagara Bancorp will make reasonable efforts to comply with the securities
laws of all states in the United States in which persons entitled to subscribe
for stock pursuant to the Plan of Reorganization reside. However, Niagara
Bancorp and the Bank are not required to offer stock to any person who resides
in a foreign country.
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 or her 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
49
<PAGE>
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 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 of Reorganization 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 or she were to continue to maintain his or her 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 or her 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.
Neither the Bank nor Niagara Bancorp shall be required to set aside funds
for the purpose of establishing the liquidation account, and the creation and
maintenance of the account will not operate to restrict the use or application
of any of the net worth accounts of the Bank, except that neither the Bank nor
Niagara Bancorp shall declare or pay a cash dividend on, or repurchase any of,
its capital stock if the effect would cause its net worth to be reduced below
the amount required for the liquidation 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 State of New York Department of Taxation and Finance 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 State of New York Department of Taxation and Finance,
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
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
Company in exchange for equity interests in the Mutual Company qualifies as a
tax-free reorganization described in Code Sections 368(a)(1)(A)
50
<PAGE>
and 368(a)(2)(D). The Bank, Stock Bank and Mutual 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 Company and the Stock Bank's assumption of its
liabilities, if any; (4) neither the Stock Bank nor the Mutual 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 Company
and the Stock Bank's assumption of the Bank's liabilities; (5) the Mutual
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
Company in exchange for their equity interests surrendered therefor; (10) each
depositor's aggregate basis, if any, in the Mutual 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
Company equity interests received by the depositors of Bank will include the
period during which the Bank equity interests surrendered in exchange therefore
were held; (12) the Mutual Company and the Minority Stockholders will recognize
no gain or loss upon the transfer of the Stock Bank stock and cash,
respectively, to Niagara Bancorp in exchange for stock of Niagara Bancorp; (13)
Niagara Bancorp will recognize no gain or loss upon its receipt of property from
the Mutual Company and Minority Stockholders in exchange for Common Stock of
Niagara Bancorp; and (14) the Mutual Company will increase its basis in its
shares of Niagara Bancorp Common Stock by the Mutual Company's basis in its
Stock Bank stock.
The tax opinions set forth above are based in part on the letter from RP
Financial stating its belief 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. If the subscription
rights granted to eligible subscribers are deemed to have an ascertainable
value, receipt of such rights would be taxable probably only to those eligible
subscribers who exercise the subscription rights (either as a capital gain or
ordinary income) in an amount equal to such value, and Niagara Bancorp and the
Bank could recognize gain on such distribution. Eligible subscribers are
encouraged to consult with their own tax advisor as to the tax consequences in
the event that such subscription rights are deemed to have an ascertainable
value.
Unlike private rulings, the letter of RP Financial is not binding on the
IRS, and the IRS could disagree with conclusions reached therein. In the event
of such disagreement, there can be no assurance that the IRS would not prevail
in a judicial or administrative proceeding.
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<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
------- ------- ------- ------- -------
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 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.
52
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Our results of operations are dependent primarily on net interest income,
which is the difference between the income earned on our loan and securities
portfolios and our cost of funds, consisting of the interest paid on deposits
and borrowings. Results of operations are also affected by the provision for
loan losses, securities and loan sale activities, loan servicing activities and
service charges and fees collected on our deposit accounts. Our non-interest
expense primarily consists of salaries and employee benefits, occupancy and
equipment expense, federal deposit insurance premiums, marketing expenses and
other expenses. Results of operations are also significantly affected by general
economic and competitive conditions, particularly changes in interest rates,
government policies and actions of regulatory authorities.
Our equity position (as well as our regulatory capital) will significantly
increase as a result of the net proceeds that we receive in the Offering, and we
anticipate that it will take time to prudently deploy such capital. Although our
earnings are expected to increase as a result of the investment of the net
proceeds, until we have leveraged the capital we receive in the Offering by
increasing our interest-earning assets (and our interest-bearing liabilities)
and thereby reducing our equity as a percentage of assets, our return on average
equity is expected to be below our historical levels and the industry average.
Moreover, Niagara Bancorp's earnings in 1998 will be adversely affected by the
funding of the charitable foundation. The net proceeds will be used 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.
MANAGEMENT OF INTEREST RATE RISK
The principal objective of our interest rate risk management is to evaluate
the interest rate risk inherent in certain assets and liabilities, determine the
appropriate level of risk given our business strategy, operating environment,
capital and liquidity requirements and performance objectives, and manage the
risk consistent with the board's approved guidelines to reduce the vulnerability
of our operations to changes in interest rates. The asset/liability committee is
comprised of senior management under the direction of the Board, with senior
management responsible for reviewing with the Board its activities and
strategies, the effect of those strategies on our net interest margin, the fair
value of the portfolio and the effect that changes in interest rates will have
on the portfolio and our exposure limits. 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
53
<PAGE>
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 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 twelve months, one to three
years, three to five years, five to ten years and more than ten years,
respectively. Prepayment and deposit decay rates can have a significant impact
on the Bank's estimated gap. While the Bank believes such assumptions to be
reasonable, there can be no assurance that assumed prepayment rates and decay
rates will approximate actual future loan prepayment and deposit withdrawal
activity. See "Business of the Bank - Lending Activities", "-- Securities
Investment Activities" and "-- Sources of Funds".
54
<PAGE>
<TABLE>
<CAPTION>
AMOUNTS MATURING OR REPRICING AS OF SEPTEMBER 30, 1997
------------------------------------------------------------------------------------------------
LESS THAN
THREE 3-6 6 MONTHS TO OVER 10
THREE MONTHS MONTHS 1 YEAR 1-3 YEARS 3-5 YEARS 5-10 YEARS YEARS TOTAL
------------ ------ ----------- ---------- --------- ---------- ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold............... $ 2,200 - - - - - - $ 2,200
Mortgage related
securities (1).................. 10,883 11,538 25,536 117,436 84,516 35,095 - 285,004
Investment securities (1)........ 58,956 6,700 19,092 101,801 21,627 - 6,892 215,068
Loans (2)........................ 80,597 50,228 95,074 156,079 94,751 119,235 30,861 626,825
--------- ------- --------- --------- --------- -------- --------- ---------
Total interest-earning
assets......................... 152,636 68,466 139,702 375,316 200,894 154,330 37,753 1,129,097
--------- -------- --------- --------- --------- -------- --------- ---------
Interest-bearing liabilities:
Savings accounts................. 32,680 31,273 62,544 36,581 28,975 48,750 61,644 302,447
Interest-bearing checking 52,361 17,948 35,897 33,667 1,186 1,996 2,524 145,579
Certificate accounts 107,203 92,612 164,641 138,500 11,530 2,382 - 516,868
Mortgagor's payments held
in escrow....................... 269 2,424 2,694 - - - 3,000 8,387
Other borrowed funds............. 9,906 8,935 105 454 5,518 1,637 2,185 28,740
--------- -------- --------- ---------- --------- -------- --------- ---------
Total interest-bearing liabilities 202,419 153,192 265,881 209,202 47,209 54,765 69,353 1,002,02
--------- -------- --------- --------- --------- -------- -------- ---------
Interest sensitivity gap.......... ($49,783) ($84,726) ($126,179) $ 166,114 $ 153,685 $ 99,565 ($31,600) $127,076
========= ======== ======== ========= ========= ======== ======== =========
Cumulative interest rate sensitivity
gap.............................. ($49,783) ($134,509) ($260,688) ($94,574) $ 59,111 $158,676 $127,076
======= ========= ========== ========= ======== ======== ========
Ratio of cumulative gap to total
interest- earning assets......... (4.41)% (11.91)% (23.09)% (8.38)% 5.24% 14.05% 11.26%
Ratio of cumulative gap to
total assets..................... (4.23)% (11.43)% (22.16)% (8.04)% 5.02% 13.49% 10.80%
Ratio of interest-earning
assets to interest-bearing
liabilities..................... 75.41% 44.69% 52.54% 179.40% 425.54% 281.80% 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.
As a result of these shortcomings, the Bank focuses more attention on
simulation modeling, such as the Net Income and Portfolio Value Analysis
discussed below, rather than Gap Analysis. Even though the Gap Analysis
reflects a ratio of cumulative gap to total assets within the Bank's
targeted range of acceptable limits, the net income and net portfolio value
simulation modeling is considered by management to be more informative in
forecasting future income and economic value trends.
Net Income and Portfolio Value Analysis. The Bank's interest rate
sensitivity is also monitored by management through the use of a net income
model and a net portfolio value model which generates estimates of the
change in the Bank's net income and net portfolio value ("NPV") over a
range of interest rate scenarios. NPV is the present value of expected cash
flows from assets and liabilities. The model assumes estimated loan
prepayment rates, reinvestment rates and deposit decay rates similar to the
assumptions utilized for the GAP Table. The following sets forth the Bank's
net income and NPV as of September 30, 1997.
55
<PAGE>
<TABLE>
<CAPTION>
NET INCOME NET PORTFOLIO VALUE
CHANGE IN ---------------------------------- -----------------------------------------
INTEREST RATES
IN BASIS POINTS
(RATE SHOCK) $ AMOUNT $CHANGE % CHANGE $ AMOUNT $ CHANGE % CHANGE
------------ -------- ------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
400....... 8,214 (2,890) (26.0)% 105,002 (44,100) (29.6)%
300....... 8,805 (2,299) (20.7)% 116,614 (32,488) (21.8)%
200....... 9,434 (1,670) (15.0)% 127,969 (21,133) (14.2)%
100....... 10,272 (832) (7.5)% 139,230 (9,872) (6.6)%
Static...... 11,104 -- -- 149,102 -- --
(100)...... 11,529 425 3.8% 156,097 6,995 4.7%
(200)...... 11,939 835 7.5% 157,353 8,251 5.5%
(300)...... 12,309 1,205 10.9% 162,851 13,749 9.2%
(400)...... 12,622 1,518 13.7% 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 Net Income and NPV requires the making of certain assumptions which may or
may not reflect the manner in which actual yields and costs respond to changes
in market interest rates. In this regard, the Net Income and NPV Table presented
assumes that the composition of the Bank's interest sensitive assets and
liabilities existing at the beginning of a period remains constant over the
period being measured and also assumes that a particular change in interest
rates is reflected uniformly across the yield curve regardless of the duration
to maturity or repricing of specific assets and liabilities. Accordingly,
although the Net Income and NPV Table provides an indication of the Bank's
interest rate risk exposure at a particular point in time, such measurements are
not intended to and do not provide a precise forecast of the effect of changes
in market interest rates on the Bank's net interest income and will differ from
actual results.
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.
56
<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 $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... 113.63%
=======
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------
1996
---------------------------------
AVERAGE INTEREST
OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE
----------- -------- -------
<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........................
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)
57
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------------
1996 1995 1994
------------------------------ --------------------------------- -----------------------------
AVERAGE INTEREST AVERAGE INTEREST AVERAGE INTEREST
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE BALANCE PAID RATE
----------- ------- -------- ----------- -------- ------- ----------- ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold........ $ 24,683 $ 1,313 5.32% $ 31,357 $ 1,726 5.50% $ 20,740 $ 849 4.09%
Investment securities(1).. 147,220 7,916 5.38 119,100 6,843 5.75 124,155 6,317 5.09
Mortgage related
securities(1)............ 281,843 18,547 6.58 275,448 17,939 6.51 302,430 18,274 6.04
Loans (2)................. 564,049 47,286 8.38 506,600 43,348 8.56 448,902 37,704 8.40
---------- ------- ----- -------- ------- ------- ------- ------
Total interest-earning
assets.................. 1,017,795 75,062 7.37 932,505 69,856 7.49 896,227 63,144 7.05
---------- ------- ------- --------- ------- ------- -------- ------- ----
Interest-bearing
liabilities:
Savings accounts (3)...... 307,530 10,353 3.37 326,125 11,154 3.42 415,843 12,869 3.09
Interest-bearing checking
(3)...................... 105,717 2,871 2.72 96,551 2,909 3.01 86,057 2,283 2.65
Certificates of deposit
(3)...................... 455,230 26,432 5.81 386,648 23,546 6.09 287,661 16,443 5.72
Mortgagor's payments held
in escrow................ 8,174 158 1.93 9,222 174 1.89 8,471 159 1.88
Other borrowed funds...... 16,674 841 5.04 - - - - - -
---------- ------- ------- --------- ------- ----- --------- ------- ----
Total interest-bearing
liabilities............. 893,325 40,655 4.55 818,546 37,783 4.61 798,032 31,754 3.98
---------- ------- ------- --------- ------- ----- --------- ------- ----
Net interest income........ $34,407 $32,073 $31,390
======= ======= =======
Net interest rate spread... 2.82% 2.88% 3.07%
===== ===== =====
Net earning assets......... $ 124,470 $113,959 $98,195
========== ======== =======
Net interest income as a
percentage of
average interest-earning
assets................... 3.38% 3.44% 3.50%
==== ==== ====
Ratio of average
interest-earning assets
to average interest-bearing
liabilities.............. 113.93% 113.92% 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.
58
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31.
----------------------------------- -----------------------------------------------------------------
1997 VS. 1996 1996 VS. 1995 1995 VS. 1994
----------------------------------- ---------------------- -----------------------------------------
INCREASE (DECREASE) TOTAL INCREASE (DECREASE) TOTAL INCREASE (DECREASE) TOTAL
DUE TO INCREASE DUE TO INCREASE DUE TO INCREASE
---------------------- ---------------------- -----------------
VOLUME RATE (DECREASE) VOLUME RATE (DECREASE) VOLUME RATE (DECREASE)
----------- --------- ----------- --------- ----------- ---------- ------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Federal funds sold........ $ (330) $ 68 $ (262) $ (280) $ (133) $ (413) $ 410 $ 467 $ 877
Investment securities..... 1,793 328 2,121 1,535 (461) 1,074 (265) 791 526
Mortgage related
securities............... 335 198 533 419 189 608 (1,698) 1,363 (335)
Loans..................... 3,683 (223) 3,460 4,830 (893) 3,937 4,925 719 5,644
------ ----- ------ ------ ------- ------ ------- ------ -------
Total interest-earning
assets.................. 5,481 371 5,852 6,504 (1,298) 5,206 3,372 3,340 6,712
------ ----- ------ ------ ------- ------ ------- ------ -------
Interest-bearing
liabilities:
Savings accounts.......... (149) (39) (188) (628) (173) (801) (2,973) 1,258 (1,715)
Interest-bearing checking. 332 (43) 289 263 (301) (38) 296 330 626
Certificates of deposit... 2,888 (391) 2,497 4,022 (1,136) 2,886 5,969 1,134 7,103
Mortgagors' payments held
in escrow................ (3) (1) (4) (20) 4 (16) 14 1 15
Other borrowed funds...... 631 86 717 841 - 841 - - -
------ ----- ------ ------ ------- ------ ------- ------ -------
Total interest-bearing
liabilities............. $3,699 $(388) $3,311 $4,478 $(1,606) $2,872 $ 3,306 $2,723 $ 6,029
====== ===== ====== ====== ======= ====== ======= ====== =======
Net interest income........ $2,541 $2,334 $ 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
59
<PAGE>
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 $24.1 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.
60
<PAGE>
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, asset-backed
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.
Operating Income. Operating income is composed of fee income for bank
services and profits from the sale of loans and securities. Total 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
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 the anticipated settlement of
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 four 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
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also reflects 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 125/th/ 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.
Operating Income. Total operating income was $5.8 million for the year
ended December 31, 1996, a $346,000, or 6.4%, increase from $5.4 million for the
year ended December 31, 1995. Banking service charges and fees on deposit
accounts increased $631,000 for the year ended December 31, 1996, from $1.8
million for 1995 to $2.5 million for 1996. The increase was primarily
attributable to a $222,000 increase in fees charged for insufficient funds on
the Bank's checking accounts resulting from modifications to the Bank's
insufficient funds policy, $220,000 in additional revenue generated because of
the increased usage of the Bank's new debit card product, and $138,000 of
additional service charges received due to the growth in the Bank's interest-
bearing checking accounts. Loan origination and servicing fees increased
$172,000 for the year ended December 31, 1996, to $1.0 million from $855,000 for
1995, reflective of the Bank's increased loan origination activity.
Additionally, all other operating income increased $444,000, from $1.2 million
for 1995 to $1.7 million for 1996. This increase was primarily due to an
additional $218,000 of commissions received on increased sales of annuity
products during 1996. The 1995 amount 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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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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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.
Operating Income. Total 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 gain on sale 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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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.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of funds are deposits, proceeds from the principal and
interest payments on loans, mortgage related and debt and equity securities, and
to a lesser extent, borrowings and proceeds from the sale of fixed rate mortgage
loans to the secondary market. While maturities and scheduled amortization of
loans and securities are predictable sources of funds, deposit outflows,
mortgage prepayments, mortgage loan sales, and borrowings are greatly influenced
by general interest rates, economic conditions and competition.
Our primary investing activities are the origination of both residential
one- to four-family and commercial real estate loans and the purchase of
mortgage related and debt and equity securities. During the nine months ended
September 30, 1997 and the years ended December 31, 1996, 1995, and 1994, our
loan originations totaled $122.0 million, $177.1 million, $161.2 million and
$141.2 million, respectively. Purchases of mortgage related securities totaled
$67.3 million, $85.5 million, $46.4 million and $112.3 million for the nine
months ended September 30, 1997 and the years ended December 31, 1996, 1995, and
1994, respectively. These activities were funded primarily by deposit growth,
principal repayments on loans, mortgage related securities and debt and equity
securities. Loan sales provided an additional source of liquidity, totaling
$27.3 million, $30.9 million, $35.1 million and $23.2 million for the nine
months ended September 30, 1997 and the years ended December 31, 1996, 1995 and
1994, respectively.
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We experienced a net increase in total deposits of $72.1 million, $59.0
million, $41.4 million, and $6.8 million for the nine months ended September 30,
1997 and the years ended December 31, 1996, 1995, and 1994, respectively.
Deposit flows are affected by the level of interest rates, the interest rates
and products offered by local competitors, and other factors.
We closely monitor our liquidity position on a daily basis. Excess short-
term liquidity is usually invested in overnight federal funds sold. In the
event we require funds beyond our ability to generate them internally,
additional sources of funds are available through the use of reverse repurchase
agreements and short-term Federal Home Loan Bank advances. At September 30,
1997, we had only $18.7 million outstanding in short-term reverse repurchase
agreements with third parties.
Loan commitments totaled $46.5 million at September 30, 1997, comprised of
$18.9 million at variable rates and $27.6 million at fixed rates. We anticipate
that we will have sufficient funds available to meet current loan commitments.
Certificates of deposit which are scheduled to mature in one year or less from
September 30, 1997, totaled $364.5 million. From January 1, 1997 to September
30, 1997, we experienced a 77.3% retention rate of funds maturing from
certificates of deposit. Based upon this experience and our current pricing
strategy, we believe that a significant portion of such deposits will remain
with the Bank.
In 1998, we plan to continue expanding our retail banking franchise by
opening three new branch offices in Erie County. The renovating and equipping
of these offices, which will be in leased facilities, is expected to cost
approximately $2.4 million. Additional 1998 capital funding needs are estimated
to total $1.2 million, mainly involving the upgrading of computer systems and
hardware. Management anticipates it will have sufficient funds available to
meet its planned capital expenditures throughout 1998.
At September 30, 1997, we exceeded all of our regulatory capital
requirements with a leverage capital level of $125.4 million, or 10.75% of
adjusted assets, which is above the required level of $35.0 million, or 3.00%
and risk-based capital of $131.7 million, or 21.74% of adjusted assets, which is
above the required level of $48.5 million, or 8.00%. See "Regulatory Capital
Compliance" and "Regulation - Regulatory Capital Requirements."
Our most liquid assets are cash and interest-bearing demand accounts. The
levels of these assets are dependent on our operating, financing, lending and
investing activities during any given period. At September 30, 1997, cash and
interest-bearing demand accounts totaled $17.0 million, or 1.4% of total assets.
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 stockholders. 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 NIAGARA BANCORP
GENERAL
In October 1997, the board of trustees of the Bank adopted the Plan of
Reorganization. Under the Plan of Reorganization, the Bank organized Niagara
Bancorp. The Bank will be a wholly-owned subsidiary of Niagara Bancorp, the
majority of whose shares will be held by the Mutual Company. See "Niagara
Bancorp, Inc." and "Regulation - Holding Company Regulation."
Niagara Bancorp is currently not an operating company. Following the
Reorganization, in addition to directing, planning and coordinating the business
activities of the Bank, Niagara Bancorp will initially invest net proceeds it
retains primarily in short and medium-term debt securities and marketable equity
securities. Niagara Bancorp 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, Niagara Bancorp 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 Niagara Bancorp's operations. Initially, Niagara Bancorp 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, Niagara
Bancorp does not intend to employ any persons other than certain officers of the
Bank, who will not be separately provided cash compensation by Niagara Bancorp.
Niagara Bancorp may utilize support staff of the Bank from time to time, if
needed. Additional employees will be hired as appropriate to the extent Niagara
Bancorp 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
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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.
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. 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 Niagara Bancorp'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. 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 1993
------------------- ------------------- ------------------- ------------------- -------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
--------- -------- --------- -------- --------- -------- -------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family........ $386,494 61.79% $360,573 59.85% $319,340 59.31% $277,010 58.12% $248,324 58.66%
Home equity................ 13,047 2.09 11,337 1.88 10,234 1.90 10,729 2.25 10,832 2.56
Multi-family............... 72,843 11.64 71,397 11.85 71,489 13.28 66,972 14.05 59,943 14.16
Commercial real estate..... 69,571 11.12 68,601 11.38 62,005 11.52 55,946 11.74 42,326 10.00
Construction (1)........... 13,964 2.23 12,493 2.07 7,891 1.47 3,454 0.72 6,910 1.63
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total real estate loans... 555,919 88.87 524,401 87.03 470,959 87.48 414,111 86.88 368,335 87.01
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Consumer and Other Loans:..
Mobile home................ 22,675 3.63 21,406 3.55 20,630 3.83 20,662 4.33 19,785 4.68
Vehicle.................... 7,326 1.17 18,747 3.11 12,591 2.34 9,391 1.97 7,275 1.72
Personal................... 14,776 2.37 13,596 2.26 11,485 2.13 10,213 2.14 8,402 1.98
Home improvement........... 7,725 1.23 6,879 1.14 7,046 1.31 6,517 1.37 6,028 1.42
Other consumer............. 1,964 0.31 1,937 0.32 1,698 0.32 1,841 0.39 2,059 0.49
Guaranteed student......... 10,907 1.74 10,702 1.78 9,874 1.83 9,951 2.09 8,123 1.92
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total consumer and
other loans............. 65,373 10.45 73,267 12.16 63,324 11.76 58,575 12.29 51,672 12.21
Commercial business loans.. 4,275 0.68 4,895 0.81 4,085 0.76 3,948 0.83 3,321 0.78
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans............... 625,567 100.00% 602,563 100.00% 538,368 100.00% 476,634 100.00% 423,328 100.00%
-------- ====== -------- ====== -------- ====== -------- ====== -------- ======
Net deferred costs......... 3,376 2,809 2,349 1,749 1,763
Unearned discounts......... (103) (347) (39) -- --
Allowance for losses....... (6,353) (6,539) (4,707) (4,192) (4,030)
-------- -------- -------- -------- ------
Loans, net................. $622,487 $598,486 $535,971 $474,191 $421,061
======== ======== ======== ======== ========
<CAPTION>
AT DECEMBER 31,
-----------------------------
1992
-----------------------------
AMOUNT PERCENT
------------ -----------
<S> <C> <C>
Real Estate Loans:
One- to four-family........ $202,230 56.02%
Home equity................ 11,902 3.30
Multi-family............... 62,909 17.43
Commercial real estate..... 30,825 8.54
Construction (1)........... 3,740 1.04
-------- --------
Total real estate loans... 311,606 86.33
-------- --------
Consumer and Other Loans:..
Mobile home................ 15,992 4.43
Vehicle.................... 7,992 2.21
Personal................... 7,450 2.06
Home improvement........... 5,822 1.61
Other consumer............. 2,163 0.60
Guaranteed student......... 6,517 1.81
-------- --------
Total consumer and
other loans............. 45,936 12.72
Commercial business loans. 3,432 0.95
-------- ========
Total loans............... 360,974 100.00%
--------
Net deferred costs......... 1,157
Unearned discounts......... --
Allowance for losses....... (2,689)
--------
Loans, net................. $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
(2,689)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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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 and 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 the 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 participate 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,
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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
four-family one year adjustable-rate loans are qualified at the rate which would
be 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.
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<PAGE>
Construction/permanent loans are 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 our 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.
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<PAGE>
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.
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 our lien, fire and extended coverage casualty insurance, and flood insurance,
if appropriate, in order to protect our 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, employ consulting firms to review the economic feasibility of the
project, and employ 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
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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 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 we 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 require
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.
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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 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 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 the 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
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is also analyzed to determine its marketability and liquidity. Commercial
business loans generally bear higher interest rates than residential loans, but
they also may involve a higher risk of default since their repayment is
generally dependent on the successful operation of the borrower's business.
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 we originate 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 our 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 a qualified loan servicer for both FNMA and Freddie Mac. For all
loans sold, we retain the servicing rights and will continue to collect payments
on the loans, maintain tax escrows and applicable fire and flood insurance
coverage, and 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 our servicing activities.
The following table sets forth the loan origination, purchase and repayment
activities of the Bank for the periods indicated.
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<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.
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 board of
trustees. In particular, to assure the maximum salability of our residential
loan products for possible resale into the secondary mortgage markets, we
83
<PAGE>
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 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 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.
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.
84
<PAGE>
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%.
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>
(Footnotes on next page)
85
<PAGE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1995 AT DECEMBER 31, 1994
---------------------------------------------- -----------------------------------------------------
60-89 DAYS 90 DAYS OR 60-89 DAYS 90 DAYS OR
---------------------- ---------------------- ------------------------ ---------------------------
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.
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.
86
<PAGE>
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 non-accrual 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 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>
<CAPTION>
<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
87
<PAGE>
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.
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.
88
<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%
====== ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C>
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.
89
<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.
90
<PAGE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30, AT DECEMBER 31,
------------------------------------------------------------------------
1997 1996 1995 1994
---------------------- -------------------- -------------------------- ----------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE COST VALUE
---------- ---------- ---------- -------- --------- --------------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <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 $ 28,836 $ 28,836
States and political
subdivisions................... -- -- -- -- -- -- 15,002 15,484
---------- -------- ---------- -------- ---------- -------- ---------- --------
Total securities held to
maturity..................... 37,500 37,500 38,000 38,000 46,700 46,700 43,838 44,320
---------- -------- ---------- -------- ---------- -------- ---------- --------
Debt securities available for
sale:
U.S. Treasury................... 84,856 85,531 84,716 85,220 54,839 55,745 49,878 47,877
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 5,173 5,002
---------- -------- ---------- -------- ---------- -------- ---------- --------
Total debt securities
available for sale........... 98,552 99,437 92,669 93,265 69,992 71,097 55,051 52,879
---------- -------- ---------- -------- ---------- -------- ---------- --------
Equity securities available for
sale:
Common stock.................... 5,391 6,139 3,115 3,612 3,382 3,566 8,486 8,315
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 8,486 8,315
---------- -------- ---------- -------- ---------- -------- ---------- --------
Asset-backed securities available
for sale......................... 67,270 67,243 28,090 27,998 5,350 5,278 4,888 4,539
---------- -------- ---------- -------- ---------- -------- ---------- --------
Total investment securities... $215,105 $216,711 $167,268 $168,269 $130,350 $131,567 $112,263 $110,053
========== ======== ========== ======== ========== ======== ========== ========
Average remaining life of
investment
securities (2)................. 1.51 years 1.97 years 1.38 years 3.96 years
========== ========== ========== ==========
Mortgage related securities:
Available for sale:
Freddie Mac................... $118,469 $118,639 $109,903 $108,832 $ 43,000 $ 43,392 $ 35,157 $ 33,000
GNMA.......................... 33,461 34,542 44,966 45,780 51,104 52,984 61,199 58,462
FNMA.......................... 25,330 25,393 28,487 28,256 33,170 33,575 46,730 43,898
CMOs.......................... 107,744 107,188 104,244 101,992 132,550 131,592 151,000 137,920
---------- -------- ---------- -------- ---------- -------- ---------- --------
Total mortgage related
securities
available for sale:......... $285,004 $285,762 $287,600 $284,860 $259,824 $261,543 $294,086 $273,280
========== ======== ========== ======== =========== ======== ========== ========
Average remaining life of
mortgage related securities...... 5.69 years 7.56 years 6.21 years 4.73 years
========== ========== ========== ==========
Net unrealized gains (losses) on
securities available for sale... $ 2,364 $ -- $ (1,739) $ -- $ 2,936 $ -- $(23,498) $ --
Total securities.................. $502,473 $502,473 $453,129 $453,129 $393,110 $393,110 $382,851 $383,333
========== ======== ========== ======== ========== ======== ========== ========
Average remaining life of
securities (2)................... 3.94 years 5.60 years 4.64 years 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.
91
<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 AFTER TEN YEARS
--------------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
--------- --------- --------- -------- ------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AVAILABLE FOR SALE:
Mortgage related
securities:
Freddie Mac.............. $ -- --% $ 18,394 6.20 % $45,447 6.83% $ 54,798 7.07%
GNMA..................... -- -- 54 6.78 386 7.92 34,102 8.09
FNMA..................... -- -- 3,475 6.88 16,761 6.80 5,157 6.31
CMOs..................... -- -- 3,282 5.66 1,540 4.98 102,366 6.40
--------- -------- ------- --------
Total mortgage related
securities............. -- -- 25,205 6.23 64,134 6.78 196,423 6.88
--------- -------- ------- --------
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 -- -- 598 8.30
Corporate bonds.......... -- -- 7,034 6.84 -- -- -- --
--------- -------- ------- --------
Total debt securities... 10,924 5.40 87,915 6.37 -- -- 598 8.30
--------- -------- ------- --------
Equity securities:
Common stock............. -- -- -- -- -- -- -- --
FHLB stock............... -- -- -- -- -- -- -- --
--------- -------- ------- --------
Total equity securities. -- -- -- -- -- -- -- --
--------- -------- ------- --------
Asset-backed securities... -- -- 8,833 6.41 18,162 5.87 40,248 6.36
Total securities
available for sale..... 10,924 5.40 121,953 6.34 82,296 6.58 237,269 6.79
--------- -------- ------- --------
HELD TO MATURITY:
Money market preferred
stock................... 37,500 4.10 -- -- -- -- -- --
--------- -------- ------- --------
Total securities.......... $48,424 $121,953 $82,296 $237,269
========= ======== ======= ========
<CAPTION>
--------------------
TOTAL
--------------------
WEIGHTED
CARRYING AVERAGE
VALUE YIELD
-------- ---------
<S> <C> <C>
AVAILABLE FOR SALE:
Mortgage related
securities:
Freddie Mac.............. $118,639 6.84%
GNMA..................... 34,542 8.09
FNMA..................... 25,393 6.71
CMOs..................... 107,188 6.36
--------
Total mortgage related
securities............. 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............ 1,870 5.58
Corporate bonds.......... 7,034 6.84
--------
Total debt securities... 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... 67,243 6.23
Total securities
available for sale..... 464,973 6.54
--------
HELD TO MATURITY:
Money market preferred
stock................... 37,500 4.10
--------
Total securities.......... $502,473
========
</TABLE>
92
<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
93
<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, YEAR 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.
94
<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
95
<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. Asset-backed
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 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 money
market preferred stock 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 our deposit product offerings, we provide 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
96
<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 our 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 we
generally do not solicit deposits from outside our 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, YEAR 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>
97
<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%
======== ====== ======== ======
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
1997 1996
------------------------------ --------------------------------------
PERCENT PERCENT
OF TOTAL WEIGHTED OF TOTAL WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE
-------- -------- -------- ------- ------------- -----------
(DOLLARS IN THOUSANDS)
<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.
98
<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 AT DECEMBER 31,
-------------------------------------------------------- ---------------------------------
LESS THREE FOUR
THAN ONE TO TWO TO TO TO FIVE AT
ONE TWO THREE FOUR FIVE YEARS OR SEPT. 30,
YEAR YEARS YEARS YEARS YEARS MORE 1997 1996 1995 1994
--------- ----- ----- ----- ----- ---- ---- ------ ---- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Rate:
0 to 4.00%................ $ 1,142 $ -- $ 2 $ -- $ -- $ 4 $ 1,148 $ 1,567 $ 5,222 $ 63,605
4.01 to 5.00%............. 22,935 496 65 -- -- 103 23,599 57,140 46,340 64,416
5.01 to 6.00%............. 322,677 79,103 13,173 4,397 877 1,758 421,985 351,270 202,715 107,776
6.01 to 7.00%............. 11,670 4,136 1,141 211 30 413 17,601 23,173 94,957 5,922
7.01 to 8.00%............. 1,948 327 111 4,415 -- -- 6,801 7,456 10,662 11,195
8.01 to 9.00%............. 4,069 10,406 3,084 1,600 -- -- 19,159 18,775 19,765 19,209
Over 9.01%................ 15 26,455 -- -- -- 105 26,575 25,340 42,875 48,296
-------- -------- ------- ------- ----- ------ -------- -------- -------- --------
Total.................... $364,456 $120,923 $17,576 $10,623 $907 $2,383 $516,868 $484,721 $422,536 $320,419
======== ======== ======= ======= ===== ====== ======== ======== ======== ========
</TABLE>
99
<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>
100
<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 annuities 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.
101
<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:
Main Office (1)
55 East Avenue
Lockport, NY 14094 Owned 1968 N/A $1,385
Main Office Annex
Drive Thru Facility
80 Washburn Street
Lockport, NY 14094 Owned 1968 N/A $ 538
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>
102
<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 Road
Depew, 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 International Super Center
7200 Niagara Falls Blvd.
Niagara Falls, NY 14304 Leased 1993 3/31/08 $ 124
North Buffalo Office
2141 Elmwood Avenue
Buffalo, NY 14207 Leased 1997 3/31/17 $ 292
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
West Seneca, NY 14224 Leased 1996 8/31/06 $ 254
</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.
103
<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 Company, Niagara Bancorp 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.
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.
104
<PAGE>
Corporate Dividends-Received Deduction. Niagara Bancorp 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 Company will own less than 80% of
the outstanding Common Stock of Niagara Bancorp. As such, the Mutual Company
will not be permitted to file a consolidated federal income tax return with
Niagara Bancorp 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. Niagara Bancorp 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, Niagara Bancorp 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 FDIC through the BIF. 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 banking 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 Niagara Bancorp and the Mutual
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,
Niagara Bancorp, or the Mutual Company.
Certain of the regulatory requirements applicable to the Bank, Niagara
Bancorp and the Mutual 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 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 Department, as limited by FDIC regulations. Under these laws and
regulations, savings banks, including the Bank, may invest in real estate
mortgages, consumer and commercial loans,
105
<PAGE>
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 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.
106
<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 Savings Association Insurance Fund ("SAIF"), from 1997 through 1999,
FDIC-insured institutions will pay an insurance premium of approximately 1.3
basis points of their BIF-assessable deposits. 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 off-balance 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 by federal
law. The final regulations establish deadlines for the submission and review of
such safety and soundness compliance plans.
107
<PAGE>
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 the
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. As of September 30, 1997, the Bank had $6.1 million of securities
pursuant to this exception. As a savings bank, the Bank may also continue to
sell savings bank life insurance.
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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 stockholders 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 stockholders 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, Niagara Bancorp, as the sole shareholder of the Bank, and the
Mutual 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 Bank
Holding Company Act of 1956, as amended (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.
After consummation of the Reorganization and Offering, Niagara Bancorp will
be subject to capital adequacy guidelines for bank holding companies (on a
consolidated basis) which are substantially similar to those of the FDIC for the
Bank. On a pro forma consolidated basis after the Reorganization and Offering,
Niagara Bancorp's pro forma stockholders' equity will exceed these requirements.
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.
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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 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.
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 branch, 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
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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 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 Niagara Bancorp 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 Company
may exercise all powers and privileges of a New York chartered mutual savings
bank, except for the power of accepting deposits. As a bank holding company,
the Mutual Company is also authorized to exercise all powers and engage in all
activities permitted to a bank holding company under the BHCA.
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, it is expected that the Federal Reserve Board will
impose certain conditions on the waiver by the Mutual Company of dividends paid
on the common stock. In particular, the Mutual Company is expected to be
required to obtain prior Federal Reserve Board approval before it may waive any
dividends. As of the date hereof,
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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 terms of the Federal Reserve Board approval of the Reorganization are
also expected to require that the amount of any waived dividends will not be
available for payment to Minority Stockholders and 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 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 Company will initially waive
dividends declared by Niagara Bancorp. If the Mutual Company decides that it is
in its best interest to waive a particular dividend to be paid by Niagara
Bancorp, and the Federal Reserve Board approves such waiver, then Niagara
Bancorp would pay such dividend only to Minority Stockholders, and the amount of
the dividend waived by the Mutual Company would be treated in the manner
described above. The Mutual 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 Company's capital
needs, the investment alternatives available to the Mutual Company as compared
to those available to Niagara Bancorp, and regulatory approvals. There can be no
assurance (i) that after the Reorganization the Mutual Company will waive
dividends paid by Niagara Bancorp, (ii) that the Federal Reserve Board will
approve any dividend waivers by the Mutual 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
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 Company would merge with and into the Bank or Niagara Bancorp, with the
Bank or Niagara Bancorp 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 Company would be automatically converted into and
become the right to receive a number of shares of common stock of the resulting
entity determined pursuant to an exchange ratio that ensures that after the
Conversion Transaction, subject to the Dividend Waiver Adjustment described
below and any 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
Company and (ii) assets other than Common Stock held by the Mutual 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 Niagara Bancorp's
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stockholders' equity at the time of the Conversion Transaction less the
aggregate amount of dividends waived by the Mutual Company and the denominator
is equal to Niagara Bancorp'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 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 Niagara Bancorp to be issued in the Offering will be
registered with the Securities and Exchange Commission ("SEC") under the
Exchange Act. Niagara Bancorp will be subject to the information, proxy
solicitation, insider trading restrictions and other requirements of the SEC
under the Exchange Act.
Niagara Bancorp Common Stock held by persons who are affiliates (generally
officers, directors and principal stockholders) of Niagara Bancorp may not be
resold without registration or unless sold in accordance with certain resale
restrictions. If Niagara Bancorp meets specified current public information
requirements, each affiliate of Niagara Bancorp 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."
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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 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 NIAGARA BANCORP
DIRECTORS OF NIAGARA BANCORP
The board of directors of Niagara Bancorp consists of eleven members, each
of whom is currently serving as a trustee of the Bank. Directors of Niagara
Bancorp 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
stockholders 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 stockholders 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
stockholders 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 NIAGARA BANCORP
The following individuals are executive officers of Niagara Bancorp 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 Niagara Bancorp are elected annually and hold
office until their respective successors have been elected or until death,
resignation, retirement or removal by the board.
Since the formation of Niagara Bancorp, none of the executive officers has
received remuneration from Niagara Bancorp. It is not anticipated that the
executive officers of Niagara Bancorp 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 Niagara Bancorp provides that a
director or officer of Niagara Bancorp shall be indemnified by Niagara Bancorp
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 or her 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 Niagara Bancorp. 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 Niagara Bancorp 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 or her
conduct was unlawful.
In addition, the certificate of incorporation and Delaware law also provide
that Niagara Bancorp may maintain insurance, at its expense, to protect itself
and any director, officer, employee or agent of Niagara Bancorp or another
corporation, partnership, joint venture, trust or other enterprise against any
expense, liability or loss, whether or not Niagara Bancorp has the power to
indemnify such person against such expense, liability or loss under the DGCL.
Niagara Bancorp intends to obtain such insurance.
The certificate of incorporation also provides that directors of Niagara
Bancorp shall not be personally liable to Niagara Bancorp 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 Niagara
Bancorp 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 Niagara Bancorp as
sole stockholder of the Bank. The proposed directors of the Bank are as
follows:
DIRECTOR AGE* OCCUPATION TERM EXPIRES
- -------- --- ---------- ------------
Gordon P. Assad 49 President and Chief Executive Officer, 2001
Erie & Niagara Insurance Association
Christa R. Caldwell 63 Director (Retired), 2000
Lockport Public Library
James W. Currie 56 President, 1999
Ag Pak, Inc.
Gary B. Fitch 62 Owner-Manager, 2000
Ontario Orchards, Inc.
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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
_____________
*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.
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 and Chief Lending Officer
Kathleen P. Monti 49 Senior Vice President / Human Resources
and Administration
Diane Allegro 42 Senior Vice President / Retail Banking
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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David W. Heinrich served as a trustee of the Bank from 1969 to 1991. He was
re-elected to the board in June of 1993. Mr. Heinrich is the President of
Heinrich Chevrolet Corp.
Daniel W. Judge has served as a trustee of the Bank since 1992. Mr. Judge
is the President and Chief Executive Officer of I.D. ONE, Inc., a purchasing and
marketing cooperative of independent industrial distributors, and has served in
that position since 1996. Mr. Judge served as the Executive Director of I.D.
ONE, Inc. from 1993 to 1996. Mr. Judge has also served as President and Manager
of Dansam, Inc., a business management services company, since 1990.
B. Thomas Mancuso has served as a trustee of the Bank since 1990. Mr.
Mancuso is the President of Joseph L. Mancuso & Sons, Inc., a real estate
development company.
James Miklinski has served as a trustee of the Bank since 1996. Mr.
Miklinski is the General Manager of Niagara Milk Cooperative, and has served in
that position since 1990.
Barton G. Smith has served as a trustee of the Bank since 1986. Mr. Smith
is retired from Paul Garrick, Inc., an insurance agency.
William E. Swan has served as a trustee of the Bank since 1996. Mr. Swan is
the President and Chief Executive Officer of 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 twelve 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, investment committee and executive committee.
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BOARD OF DIRECTORS AND COMMITTEES OF NIAGARA BANCORP AFTER REORGANIZATION
Following the Reorganization, the board of directors of Niagara Bancorp 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 Niagara Bancorp: 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 Niagara Bancorp, 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
Niagara Bancorp: Messrs. 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 Niagara Bancorp, to review
the internal audit function and internal accounting controls of Niagara Bancorp,
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 Niagara Bancorp 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
set forth above. In the event of an unforeseeable emergency which will result in
a severe financial hardship, the trustee may request a distribution of all or
part of his or her benefits or may request an acceleration of benefits that are
being 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").
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<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
-------------------------- -------------------------------------
AWARDS PAYOUTS
---------- -------------------- -----------
OTHER
YEAR ANNUAL RESTRICTED OPTIONS/ ALL OTHER
ENDED COMPENSATION STOCK SARS LTIP COMPENSATION
NAME AND PRINCIPAL POSITION 12/31(1) SALARY BONUS(2) (3) AWARDS(4) (#)(5) PAYOUTS (6)
- ----------------------------- ----------- -------- ---------- --------- ------ --------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
William E. Swan 1996 $239,194 $93,764 -- -- -- -- $74,259
President and Chief
Executive Officer
Paul J. Kolkmeyer 1996 135,034 46,286 -- -- -- -- 38,867
Executive Vice President and
Chief Financial Officer
G. Gary Berner 1996 108,534 37,653 -- -- -- -- 38,261
Senior Vice President and
Chief Lending Officer
Kathleen P. Monti 1996 80,464 28,519 12,317 -- -- -- 30,536
Senior Vice President--
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 restricted stock plan, as such
awards were not earned, vested or granted in 1996. For a discussion of the
terms of the restricted stock plan which are intended to be adopted by
Niagara Bancorp, 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 Niagara
Bancorp, see "--Benefit Plans--Stock Option Plan."
(6) Includes the following: the Bank's contributions pursuant to the 401(k)
Plan of $4,750, $4,051, $3,256, and $2,414 with respect to Messrs. Swan,
Kolkmeyer and Berner and Ms. Monti, respectively; $27,486, $11,354,
$11,505, and $7,643 credited to the account of Messrs. Swan, Kolkmeyer and
Berner and Ms. Monti, respectively, pursuant to the non-qualified deferred
compensation plan; split dollar life insurance premiums paid by the Bank of
$39,750, $19,875, $19,875, and $19,875 with respect to Messrs. Swan,
Kolkmeyer and Berner and Ms. Monti; income imputed on group term life
insurance in excess of $50,000 per employee of $1,187, $473, $511, and $604
with respect to Messrs. Swan, Kolkmeyer and Berner and Ms. Monti; and
$1,086, $3,114 and $3,114 for Messrs. Swan, Kolkmeyer and Berner,
respectively, relating to medical insurance premiums.
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 and
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 restricted stock 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
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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. Allegro will be $317,000, $159,000, $139,500,
$116,500, and 107,100, 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 during the term of 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,
Niagara Bancorp 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 restricted stock 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
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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 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 April 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>
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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 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 Niagara Bancorp 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 20 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
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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.
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 Niagara Bancorp's stockholders 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 Niagara Bancorp. If approved
by the stockholders, Common Stock in an aggregate amount equal to 10% of the
shares sold in the Offering would be reserved for issuance by Niagara Bancorp
upon the exercise of the stock options granted under the Stock Option Plan. Ten
percent of the shares sold in the Offering would amount to 867,774 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. In the event that additional authorized but unissued shares are
used to satisfy the exercise of options granted under the Stock Option Plan, the
interests of existing stockholders would be diluted. 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 Niagara
Bancorp. Under FDIC and Department 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. No determination has been made as to the specific terms of the
plan or as to awards thereunder.
The Stock Option Plan would be administered by a committee of non-employee
members of Niagara Bancorp's board of directors. Options granted under the Stock
Option Plan to employees could be "incentive" stock options designed to result
in beneficial tax treatment to the employee but no tax deduction to Niagara
Bancorp. 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. The Stock Option Plan will terminate ten years
following its adoption, unless earlier terminated by Niagara Bancorp.
RECOGNITION AND RETENTION PLAN. At a meeting of the Company's stockholders
to be held no earlier than six months after the completion of the
Reorganization, the board of directors also intends to submit a restricted stock
plan for shareholder approval. The restricted stock plan will provide the Bank's
directors and officers an ownership interest in the Company in a manner designed
to encourage them to continue their service with the Bank. The Bank will
contribute funds to the restricted stock plan from time to time to enable it to
acquire an aggregate amount of Common
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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 restricted
stock plan after the Offering, the interests of existing stockholders would be
diluted. The executive officers and directors will be awarded Common Stock under
the restricted stock 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 restricted stock plan would be made until the date the restricted stock plan
is approved by the Company's stockholders.
Awards under the restricted stock plan would be nontransferable and
nonassignable, and during the lifetime of the recipient could only be earned by
the director or officer. If the restricted stock 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 restricted stock 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 restricted stock plan), shares not already delivered under the
restricted stock plan would be forfeited. Under FDIC and Department rules, if
the restricted stock 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 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. No determination
has been made as to the specific terms of the plan or as to awards thereunder.
The restricted stock plan would be administered by a committee of non-employee
members of Niagara Bancorp's board of directors. The restricted stock plan will
terminate ten years following its adoption, unless earlier terminated by Niagara
Bancorp.
When shares become vested under the restricted stock 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 (S) 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 restricted stock 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
restricted stock plan is adopted within one year following completion of the
Reorganization and Offering, shares not yet vested under the restricted stock
plan will be voted by the trustee of the restricted stock plan, taking into
account the best interests of the recipients of the restricted stock plan
awards. If the restricted stock 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.
124
<PAGE>
RESTRICTIONS ON ACQUISITION OF NIAGARA BANCORP
The Mutual Holding Company Structure. Under New York law, the Plan of
Reorganization, and our governing corporate instruments, at least 51% of Niagara
Bancorp's voting shares must be owned by the Mutual Company. The Mutual Company
will be controlled by its board of trustees, who will consist of persons who
also are members of the board of directors of Niagara Bancorp and the Bank. The
Mutual Company will be able to elect all members of the board of directors of
Niagara Bancorp, and as a general matter, will be able to control the outcome of
all matters presented to the stockholders of Niagara Bancorp for resolution by
vote, except for matters that require a vote greater than a majority. The Mutual
Company, acting through its board of trustees, will be able to control the
business and operations of Niagara Bancorp and the Bank, and will be able to
prevent any challenge to the ownership or control of Niagara Bancorp by Minority
Stockholders. Accordingly, a change in control of Niagara Bancorp and the Bank
cannot occur unless the Mutual Company first converts to the stock form of
organization. Although New York law, applicable regulations and the Plan of
Reorganization permit the Mutual Company to convert from the mutual to the
capital stock form of organization, it is not anticipated that a conversion of
the Mutual Company will occur in the foreseeable future.
In addition to the anti-takeover aspects of the Mutual Company structure,
the following is a general summary of certain provisions of Niagara Bancorp'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 Niagara Bancorp'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 Niagara Bancorp'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.
PROVISIONS OF NIAGARA BANCORP'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 Niagara Bancorp 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 preferred stock, par value $0.01
per share. Niagara Bancorp 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 Niagara Bancorp 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 Niagara Bancorp 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 Niagara
Bancorp, inclusive of shares of such class held by the Mutual Company (provided
that such limitation shall not apply to the Mutual Company or any tax-qualified
employee stock benefit plans maintained by Niagara Bancorp); and that (ii)
shares beneficially owned in violation of the stock ownership restriction
described above shall not be entitled to vote
125
<PAGE>
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 Niagara Bancorp's board of
directors and also by a majority of the outstanding shares of Niagara Bancorp'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 Niagara Bancorp 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 holding 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 Niagara Bancorp's Common Stock will be registered under Section 12 of the
Exchange Act, any acquisition of 10% or more of Niagara Bancorp's Common Stock
will give rise to a rebuttable presumption that the acquiror of such stock
controls Niagara Bancorp, 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 Niagara Bancorp. 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 NIAGARA BANCORP
GENERAL
Niagara Bancorp 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. Niagara Bancorp 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 price for the Common Stock, in
accordance with the Plan of Reorganization, all such stock will be duly
authorized, fully paid, validly issued, and non-assessable.
126
<PAGE>
THE COMMON STOCK OF NIAGARA BANCORP WILL REPRESENT NONWITHDRAWABLE CAPITAL,
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 Niagara Bancorp. 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 Acquisition of Niagara
Bancorp--Provisions of Niagara Bancorp's Certificate of Incorporation and
Bylaws--Limitation on Voting Rights." There will be no right to cumulate votes
in the election of directors. If Niagara Bancorp issues preferred stock,
subsequent to the Reorganization, holders of the preferred stock may also
possess voting rights.
Dividends. Upon consummation of the Reorganization, Niagara Bancorp's only
asset will be the net proceeds, the ESOP loan and the Bank's common stock. The
payment of dividends by Niagara Bancorp is subject to limitations which are
imposed by law and applicable regulation. Niagara Bancorp's source for the
payment of cash dividends may in the future depend on the receipt of dividends
from the Bank. 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 Niagara Bancorp out of funds legally available
therefore. If Niagara Bancorp 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 Niagara Bancorp, the holders of the Common Stock will be entitled
to receive -- after payment or provision for payment of all debts and
liabilities of Niagara Bancorp (including all deposits in the Bank and accrued
interest thereon) and after distribution of the liquidation account established
upon completion of the Offering for the benefit of Eligible Account Holders and
Supplemental Eligible Account Holders who continue their deposit accounts at the
Bank -- all assets of Niagara Bancorp 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 Niagara
Bancorp 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 Niagara Bancorp will be issued in the Reorganization. Niagara Bancorp'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.
127
<PAGE>
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 Niagara Bancorp by the
firm of Luse Lehman Gorman Pomerenk & Schick, P.C., Washington, D.C., special
counsel to Niagara Bancorp and the Bank. The New York income tax consequences of
the Reorganization will be passed upon for Niagara Bancorp 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 Niagara
Bancorp 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 Niagara Bancorp setting forth its belief 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, Niagara Bancorp will register the Common
Stock with the SEC under Section 12(g) of the Exchange Act; and, upon such
registration, Niagara Bancorp 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, Niagara Bancorp 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 Niagara Bancorp,
as well as the Plan of Reorganization, are available without charge from the
Bank by contacting Robert Murphy, Corporate Secretary, 6950 South Transit Road,
P.O. Box 514, 14095-0514, Lockport, New York, (716) 625-7500. Copies of the
Independent Valuation are available for inspection at each of the Bank's
offices.
128
<PAGE>
LOCKPORT SAVINGS BANK
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' 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........................ 52
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
- ------ -------------- --------- ----------
(UNAUDITED)
<S> <C> <C> <C>
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, YEAR 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)
--------- -------- -------- -------- --------
</TABLE>
F-4
<PAGE>
LOCKPORT SAVINGS BANK
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
----------------- ------------------------------------------
1997 1996 1996 1995 1994
---------- --------- --------- --------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from financing activities:
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 YEAR 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. Loans are generally
returned to accrual status when principal and interest payments are
current, full collectibility of principal and interest is reasonably
assured and a consistent record of performance, generally six months,
has been demonstrated.
Purchased loans are recorded at cost with related premiums or
discounts amortized to expense or accreted to income using the
interest method over the estimated life of the loans. Mortgage loans
originated and intended for sale in the secondary market are carried
at the lower of cost or market. Net unrealized losses are recognized
through a valuation allowance by charges to earnings.
F-6
<PAGE>
LOCKPORT SAVINGS BANK
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(1) Summary of Significant Accounting Policies, Continued
- --- -----------------------------------------------------
(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.
(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
("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan",
as amended by SFAS 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 No. 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 No. 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 is 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) Mortgage Servicing Rights
--- -------------------------
In 1996, the Bank adopted SFAS No. 122, "Accounting for Mortgage
Servicing Rights", an amendment to SFAS No. 65. Accordingly, the
rights to service mortgage loans for others are carried as separate
assets at fair value, whether acquired through purchase transactions
or through loan originations. The adoption of this standard did not
have a material impact on the Bank's consolidated financial
statements.
F-7
<PAGE>
LOCKPORT SAVINGS BANK
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(1) Summary of Significant Accounting Policies, Continued
--- -----------------------------------------------------
(g) 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.
(h) Employee Benefits
--- -----------------
The Bank maintains a non-contributory, qualified, defined benefit
pension plan that covers substantially all full time employees. The
actuarially determined pension benefits in the form of a life annuity
are based on the employee's combined years of service, age and
compensation. The Bank's policy is to fund the minimum amount required
by government regulations.
The Bank also provides certain post-retirement benefits, principally
health care and group life insurance, to employees and their
beneficiaries and dependents. The Bank accrues for the expected cost
of providing these post-retirement benefits during an employee's
active years of service.
(i) 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.
(j) 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.
(k) 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
======== ====== ====== =======
</TABLE>
Scheduled contractual maturities of debt securities at December 31, 1996 are
as follows (in thousands):
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
-------- -------
<S> <C> <C>
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, YEAR 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>
LOCKPORT SAVINGS BANK
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(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 YEAR ENDED DECEMBER 31,
---------------------------------------------
1997 1996 1995
-------------------- ------------------- --------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Amortized Fair Amortized Fair Amortized Fair
cost value cost value cost value
-------- -------- --------- -------- --------- -------
$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.
Mortgage loans sold amounted to $23.2 million and $19.3 million for the nine
month periods ended September 30, 1997 and 1996 (unaudited) respectively,
and $26.1 million, $30.1 million and $19.5 million for the years ended
December 31, 1996, 1995 and 1994, respectively. Servicing fee income
included in loan fees in the consolidated statements of income amounted to
$313,000 and $268,000 during the nine month periods ended September 30, 1997
and 1996 (unaudited) respectively, and $363,000, $274,000 and $223,000 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 YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
------------------- ----------------------------
1997 1996 1996 1995 1994
------ ---- ---- ---- ----
(unaudited)
<S> <C> <C> <C> <C> <C>
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 amortizatio 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 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 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 TO 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 TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(7) Deposits, Continued
- -----------------------
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------------
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 TO 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 TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(8) Other Borrowed Funds
- -------------------------
The Bank has a $127.8 million line of credit with the Federal Home Loan
Bank (FHLB), secured by FHLB stock and the residential mortgage portfolio,
which 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 the FHLB $ -- 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 TO 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 TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(9) Net Worth, Continued
- -------------------------
The Bank's actual capital amounts and ratios are presented in the following
table (in thousands):
<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
risk-weighted assets $131,736 21.74% greater than or equal to $48,470 greater than or equal to 8.00%
Tier 1 capital to
risk-weighted assets 125,383 20.69 greater than or equal to 24,235 greater than or equal to 4.00
Tier 1 capital to
average assets 125,383 10.75 greater than or equal to 34,990 greater than or equal to 3.00
As of December 31, 1996:
Total capital to
risk-weighted assets 123,229 22.84 greater than or equal to 43,160 greater than or equal to 8.00
Tier 1 capital to
risk-weighted assets 116,690 21.63 greater than or equal to 21,580 greater than or equal to 4.00
Tier 1 capital to
average assets 116,690 10.77 greater than or equal to 32,492 greater than or equal to 3.00
As of December 31, 1995:
Total capital to
risk-weighted assets 110,778 22.34 greater than or equal to 39,672 greater than or equal to 8.00
Tier 1 capital to
risk-weighted assets 106,071 21.39 greater than or equal to 19,836 greater than or equal to 4.00
Tier 1 capital to
average assets 106,071 10.86 greater than or equal to 29,292 greater than 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
risk-weighted assets greater than or equal to $60,588 greater than or equal to 10.00%
Tier 1 capital to
risk-weighted assets greater than or equal to 36,353 greater than or equal to 6.00
Tier 1 capital to
average assets greater than or equal to 58,316 greater than or equal to 5.00
As of December 31, 1996:
Total capital to
risk-weighted assets greater than or equal to 53,950 greater than or equal to 10.00
Tier 1 capital to
risk-weighted assets greater than or equal to 32,370 greater than or equal to 6.00
Tier 1 capital to
average assets greater than or equal to 54,154 greater than or equal to 5.00
As of December 31, 1995:
Total capital to
risk-weighted assets greater than or equal to 49,590 greater than or equal to 10.00
Tier 1 capital to
risk-weighted assets greater than or equal to 29,754 greater than or equal to 6.00
Tier 1 capital to
average assets greater than or equal to 48,820 greater than 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 ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
----------------- ------------------------------
1997 1996 1996 1995 1994
------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
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 ENDED YEAR ENDED
SEPTEMBER 31, 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 ENDED YEAR 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 2,681 1,930
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 3,952
Non-vested 467 376
====== =====
Total accumulated benefit obligation $4,641 4,328
====== =====
Projected benefit obligation for service rendered to date $6,084 5,652
Plan assets at fair value 7,602 6,664
------ -----
Plan assets in excess of projected benefit obligation 1,518 1,012
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) (1,133) (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 No. 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
<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 CONSOLIDATED 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 $ 39,423 39,423
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 CONSOLIDATED 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 CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(13) Plan of Reorganization and Stock Issuance
- ---- -----------------------------------------
On September 15, 1997, the Board of Trustees of LSB unanimously adopted a
Plan of Reorganization (the Plan) whereby LSB will be reorganized into a
New York chartered two-tiered mutual holding company.
The Reorganization will be accomplished in the following manner: (i) LSB
will organize an interim stock savings bank as a wholly-owned subsidiary
("Interim One"); (ii) Interim One will organize an interim stock savings
bank as a wholly-owned subsidiary ("Interim Two"); (iii) Interim One will
organize Niagara Bancorp, Inc. (the Company) as a wholly-owned subsidiary;
(iv) LSB will exchange its charter for a New York stock savings bank
charter to become the Stock Bank and Interim One will exchange its charter
for a New York mutual holding company charter to become the mutual holding
company (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 a stock offering shares of common stock representing the
pro forma market value of the Company and the Bank. Each savings account of
LSB at the time of Reorganization will become a savings account in the
newly-formed bank in the same amount and upon the same terms and
conditions, except the holder of each such deposit account will have
liquidation rights with respect to the MHC rather than the Bank.
LSB 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 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
Reorganization. Such contribution, once made, will not be recoverable by
the Company or the Bank. The Company will recognize expense equal to the
fair value of the stock, cash, securities or other assets in the quarter in
which the contribution occurs, which is expected to be the first or second
quarter of 1998. Such expense will reduce earnings and have a material
impact on the Company's earnings for such quarter and for 1998.
The costs of the Reorganization and Offering will be deferred and reduce
the proceeds from the shares sold in the offering. If the Reorganization
and Offering are not completed, all costs will be charged to expense.
F-35
<PAGE>
GLOSSARY
ABS Asset-backed securities
ARM Adjustable rate mortgage loan
Associate The term "Associate" of a person is defined to mean
(i) any corporation or organization (other than the
Bank or its subsidiaries or Niagara Bancorp) 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 Niagara Bancorp
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 Niagara Bancorp
ATM Automated Teller Machine
Bank Lockport Savings Bank
BHCA Bank Holding Company Act of 1956, as amended
BIF Bank Insurance Fund of the FDIC
CMO Collateralized mortgage obligations
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
first to natural persons residing in Niagara,
Orleans, Erie and Genesee Counties, New York, and
secondly to natural persons residing in Wyoming,
Allegany, Cattaraugus and Chautauqua Counties, New
York
Common Stock Common Stock, par value of $.01 per share, offered
by Niagara Bancorp in connection with the
Reorganization
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 Employee Stock Ownership Plan
and Trust
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Estimated Valuation Range Estimated pro forma market value of the Common
Stock ranging from $191,250,000 to $258,750,000.
The estimated valuation range may be increased to
$297,562,500 without a resolicitation of
subscribers
Exchange Act Securities Exchange Act of 1934, as amended
Expiration Date 12:00 Noon, New York Time, on March 24, 1998
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
FHA Federal Housing Administration
FHLB Federal Home Loan Bank
FNMA Federal National Mortgage Association
Foundation The Lockport Savings Bank Charitable Foundation to
be established by Lockport Saving Bank and Niagara
Bancorp, Inc. and to which the Bank and Niagara
Bancorp will contribute cash and shares of Common
Stock
Independent Valuation The appraisal of the pro forma market value of
Niagara Bancorp's Common Stock as determined by RP
Financial, LC as of November 28, 1997
IRA Individual retirement account or arrangement
IRS Internal Revenue Service
Minority Stockholders Stockholders of Niagara Bancorp other than the
Mutual Company
MMDA Money Market Demand Account
Mutual 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
Niagara Bancorp
NASD National Association of Securities Dealers, Inc.
Nasdaq System National Association of Securities Dealers
Automated Quotation System
Niagara Bancorp Niagara Bancorp, Inc., the parent holding company
for Lockport Savings Bank, and the issuer of the
shares of Common Stock in the Offering
NOW account Negotiable Order of Withdrawal Account
NPV Net portfolio value
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<PAGE>
<TABLE>
<S> <C>
Offering The offer and sale of Common Stock to depositors
and the public pursuant to the Prospectus
Offering Range The offer and sale by Niagara Bancorp 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
PMI Private mortgage insurance
Reorganization The reorganization of the Bank from the mutual to
the stock form of organization, the organization of
Niagara Bancorp, the issuance of all of the Bank's
common stock to Niagara Bancorp, the issuance of a
majority of the Niagara Common Stock to the
Mutual Company, and the offer and sale of the
Minority Shares to depositors and the public
pursuant to the Prospectus
REO Real Estate Owned
Sallie Mae Student Loan Marketing Association
SEC Securities and Exchange Commission
Special Meeting Special Meeting of depositors of the Bank called
for the purpose of approving the Plan of
Reorganization
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
Subscription Price The $10.00 purchase price per share for the Common
Stock in the Offering
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 31, 1998, the date
for determining depositors entitled to vote at the
Special Meeting
</TABLE>
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<PAGE>
Lockport Savings Bank is a company of people committed OUR
to being the best in all we do. It is a company where all VALUES
employees have an opportunity to grow, learn and contribute
to our success.
Our corporate values and beliefs are:
. WE BELIEVE that people are our most important asset.
. WE BELIEVE that people should be respected, treated fairly, listened to and
involved.
. WE BELIEVE that diversity is a strength and we will be successful through the
contribution of men and women of diverse backgrounds, talents and
perspectives.
. WE BELIEVE that encouraging creativity and innovation and increasing
responsibility through empowerment are essential elements in developing
people to their full potential.
. WE BELIEVE that open, non-threatening and responsible communication among
people at all levels is vital to our success.
. WE BELIEVE that our organization should be managed through a participative,
teamwork-oriented process.
. WE BELIEVE that providing superior customer service is the reason why we
exist as a community bank.
. WE BELIEVE in celebration, having fun and recognition of people and their
excellent work.
. WE BELIEVE that a commitment to excellence and striving to be the best in all
we do is the way to differentiate ourselves from the competition.
. WE BELIEVE that being open to change, being accountable for our actions and
learning from our mistakes is fundamental to our future success.
. WE BELIEVE in a balanced personal and business life.
. WE BELIEVE in encouraging worthwhile community involvement allowing us to
share our financial and human resources to enrich the communities we live and
work in.
. WE BELIEVE that integrity is the most important ingredient in all we do.
Lockport Savings Bank is a community bank which expects excellence and, through
our Person to Person Commitment, promotes respect of each and everyone, both
customer and employee alike. That's what makes this bank different!
<PAGE>
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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 NIAGARA BANCORP 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.
LOGO
(PROPOSED HOLDING COMPANY FOR LOCKPORT SAVINGS BANK)
UP TO 13,501,554 SHARES
COMMON STOCK
----------------
PROSPECTUS
----------------
CIBC OPPENHEIMER CORP.
TRIDENT SECURITIES, INC.
FEBRUARY 17, 1998
THESE SECURITIES ARE NOT DEPOSITS OR ACCOUNTS
AND ARE NOT FEDERALLY INSURED OR GUARANTEED
UNTIL MARCH 23, 1998 OR 25 DAYS AFTER THE COMMENCEMENT OF THE SYNDICATED
COMMUNITY OFFERING, IF ANY, WHICHEVER IS LATER, 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.
================================================================================
