<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 4, 1998
REGISTRATION NO. 333-57259
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
PRE-EFFECTIVE AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
CNY FINANCIAL CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 6035 REQUESTED
(State or Other (Primary Standard (I.R.S.
Jurisdiction Industry Employer
of Incorporation or Classification Code Identification
Organization) Number) No.)
</TABLE>
1 NORTH MAIN STREET, CORTLAND, NEW YORK 13045
TEL. NO. (607) 756-5643
(Address, Including Zip Code, and Telephone Number, Including
Area Code, or Registrant's Principal Executive Offices)
WESLEY D. STISSER, JR.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
CORTLAND SAVINGS BANK
1 NORTH MAIN STREET, CORTLAND, NEW YORK 13045
(607) 756-5643
(Name, Address, Including Zip Code, and Telephone Number, Including
Area Code, of Agent for Service)
--------------------------
PLEASE SEND COPIES OF ALL COMMUNICATIONS TO:
JAY L. HACK, ESQ.
CLIFFORD S. WEBER, ESQ.
Serchuk & Zelermyer, LLP
81 Main Street, White Plains, New York 10601
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
--------------------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If the delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO PROPOSED AGGREGATE AMOUNT OF
SECURITIES BEING REGISTERED BE REGISTERED OFFERING PRICE OFFERING PRICE(1) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, $0.01 Par Value......... 8,262,318 $10.00 $82,623,180 $25,035(2)
Interests in Cortland Savings Bank
401(k) Savings Plan................. N/A(3) N/A N/A N/A(3)
</TABLE>
(1) Estimated to calculate the registration fee. Includes shares to be donated
to a charitable foundation as described herein.
(2) Previously paid with the filing of Form S-1 on June 19, 1998.
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<PAGE>
(3) In addition, pursuant to Rule 416(c) under the Securities Act of 1933, as
amended, this Registration Statement also covers an indeterminate amount of
interests to be offered or sold pursuant to the employee benefit plan
described in the Prospectus Supplement. In accordance with Rule 457(h)(2),
no separate fee calculation is made for plan interests.
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
<PAGE>
Cross Reference Sheet Showing Location in the Prospectus Required by Items of
Form S-1:
<TABLE>
<CAPTION>
REGISTRATION STATEMENT ITEM AND CAPTION PROSPECTUS HEADINGS
- ---------------------------------------------------------------- -----------------------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus..................... Front Cover Page
2. Inside Front and Outside Back Cover Page of
Prospectus......................................... Inside Front and Outside Back Cover Pages
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges.......................... Summary; Risk Factors
4. Use of Proceeds...................................... Use of Proceeds
5. Determination of Offering Price...................... The Conversion-Stock Pricing and Number of Shares to
be Issued
6. Dilution............................................. Not Applicable
7. Selling Security Holders............................. Not Applicable
8. Plan of Distribution................................. Front Cover Page; The Conversion--
Subscription Offering; --Community Offering;
--Syndicated Community Offering
9. Description of Securities to be Registered........... The Conversion--Restrictions on Transferability of
Subscription Rights and Common Stock; Restrictions
on Acquisition of the Company and the Bank;
Description of Capital Stock of the Company
10. Interests of Named Experts and Counsel............... Not Applicable
11. Information with Respect to the Registrant........... Front Cover Page; The Bank and the Company--CNY
Financial Corporation; -- Cortland Savings Bank;
Regulatory Capital Compliance; Dividend Policy;
Cortland Savings Bank Statements of Income;
Management's Discussion and Analysis of Financial
Condition and Results of Operations; Business of
the Bank; Regulation; Management of the Company;
Management of the Bank; The Conversion; Description
of Capital Stock of the Company; Financial
Statements
12. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities..................... Not Applicable
</TABLE>
<PAGE>
PROSPECTUS SUPPLEMENT
CNY FINANCIAL CORPORATION
CORTLAND SAVINGS BANK
PARTICIPATION INTERESTS
THE CORTLAND SAVINGS BANK
401(K) SAVINGS PLAN
This Prospectus Supplement relates to the offer and sale to participants
(the "Participants") in the Cortland Savings Bank 401(k) Savings Plan (the
"Plan") of participation interests and shares of common stock, par value $.01
per share of CNY Financial Corporation (the "Common Stock"), as described below.
In connection with the proposed conversion of Cortland Savings Bank (the
"Bank") from a mutual savings bank to a stock savings bank (the "Conversion"),
the Plan has been amended to permit the investment of plan assets in Common
Stock of CNY Financial Corporation (the "Company"). The amendment allows each
Participant to direct the trustee of the Plan (the "Trustee") to purchase Common
Stock with amounts in the Plan attributable to that Participant. Based on the
value of the Plan assets ($2,327,263.70) at June 4, 1998, 232,726 shares of
Common Stock could be purchased with Plan assets (assuming a purchase price of
$10.00 per share). This Prospectus Supplement relates to the initial election of
a Participant to direct that all or a portion of his or her account be invested
in Common Stock in connection with the Conversion and also to elections by
Participants to direct that all or a portion of their accounts be invested in
Common Stock after the Conversion.
IMPORTANT NOTICE TO PARTICIPANTS: IF YOU INVEST A PORTION OF YOUR 401(K)
PLAN ASSETS IN COMMON STOCK OF CNY FINANCIAL CORPORATION, YOU WILL NOT BE
PERMITTED TO MAKE THE INVESTMENT AND THEN IMMEDIATELY RECEIVE A DISTRIBUTION OF
THE STOCK FROM THE 401(K) PLAN. THE TIMING OF DISTRIBUTIONS TO YOU FROM THE PLAN
WILL BE THE SAME AS FOR ALL OTHER INVESTMENTS IN THE PLAN.
The Prospectus dated , 1998 of the Company (the "Prospectus"),
which is attached to this Prospectus Supplement, includes information about the
Conversion, the Common Stock and the financial condition, results of operations
and business of the Bank. This Prospectus Supplement, which provides information
about the Plan, should be read only together with the Prospectus.
For a discussion of certain factors that should be considered by each
Participant before deciding to direct the Trustee to use Plan assets to purchase
any Common Stock, see "Risk Factors."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, THE SUPERINTENDENT OF BANKS OF THE STATE OF NEW YORK, THE
NEW YORK STATE BANKING DEPARTMENT, THE FEDERAL DEPOSIT INSURANCE CORPORATION, OR
ANY OTHER STATE OR FEDERAL AGENCY OR ANY STATE SECURITIES COMMISSION, NOR HAS
SUCH COMMISSION OR OTHER AGENCY OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
THE COMPANY'S COMMON STOCK IS NOT A SAVINGS ACCOUNT OR DEPOSIT AND IS NOT
FEDERALLY INSURED OR GUARANTEED. THE COMMON STOCK IS NOT GUARANTEED BY THE
COMPANY OR THE BANK. THE ENTIRE AMOUNT OF A PURCHASER'S INVESTMENT MAY BE LOST.
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS , 1998.
<PAGE>
No person has been authorized to give any information or to make any
representations other than those contained in the Prospectus or this Prospectus
Supplement, and, if given or made, such information or representations must not
be relied upon as having been authorized by the Bank or the Plan. This
Prospectus Supplement does not constitute an offer to sell or solicitation of an
offer to buy any securities in any jurisdiction to any person to whom it is
unlawful to make such offer or solicitation in such jurisdiction. Neither the
delivery of this Prospectus Supplement and the Prospectus nor any sale of Common
Stock shall under any circumstances create any implication that there has been
no change in the affairs of the Bank or the Plan since the date of this
Prospectus Supplement, or that the information contained in this Prospectus
Supplement is correct after the date of this Prospectus Supplement. This
Prospectus Supplement should be read only with the attached Prospectus and
should be retained for future reference.
TABLE OF CONTENTS
<TABLE>
<S> <C>
THE OFFERING.......................................................................... S-3
Securities Offered.................................................................... S-3
Election to Purchase Common Stock in the Conversion................................... S-3
Value of Participation Interests...................................................... S-3
Method of Directing Transfer.......................................................... S-3
Deadline for Directing Transfer....................................................... S-4
Transfer Direction Cannot be Revoked.................................................. S-4
Directions to Purchase Common Stock After the Conversion.............................. S-4
Purchase Price of Common Stock........................................................ S-4
Nature of a Participant's Interest in the Common Stock................................ S-4
Voting and Tender Rights.............................................................. S-4
DESCRIPTION OF THE PLAN............................................................... S-5
Introduction.......................................................................... S-5
Employee Retirement Income Security Act............................................... S-5
Reference to Full Text of Plan........................................................ S-5
Contributions Under the Plan.......................................................... S-5
Eligibility and Participation......................................................... S-5
Plan Contributions.................................................................... S-6
Bank Contributions.................................................................... S-6
Limitations on Contributions.......................................................... S-6
Investment of Contributions........................................................... S-8
Benefits Under the Plan............................................................... S-9
Withdrawals and Distributions......................................................... S-9
Administration of the Plan............................................................ S-10
Reports to Plan Participants.......................................................... S-10
Amendment and Termination............................................................. S-11
Merger, Consolidation or Transfer..................................................... S-11
Federal Income Tax Consequences....................................................... S-11
Restrictions on Resale................................................................ S-12
SEC Reporting and Short-Swing Profit Liability........................................ S-13
LEGAL OPINION......................................................................... S-13
INVESTMENT FORM....................................................................... S-14
</TABLE>
S-2
<PAGE>
THE OFFERING
SECURITIES OFFERED
The securities offered by this Prospectus Supplement are participation
interests in the Plan and up to 232,726 shares (assuming the actual purchase
price is $10.00 per share) of Common Stock which may be acquired by the Plan for
the accounts of employees participating in the Plan. The Company is the issuer
of the Common Stock. Only employees of the Bank may participate in the Plan. The
Common Stock will not be issued unless the Conversion occurs. A Participant's
ability to purchase Common Stock in the Conversion is limited by the
subscription priorities described in the Prospectus.
This Prospectus Supplement contains information about the Plan. The
Prospectus contains information about the Conversion, certain risk factors, the
financial condition, results of operations and business of the Bank and the
Company. The principal executive office of the Bank and the Company are located
at 1 North Main Street, Cortland, New York 13045. Their telephone number is
(607) 756-5643.
ELECTION TO PURCHASE COMMON STOCK IN THE CONVERSION
The Plan has been amended to allow each Participant to direct that all or
part of his or her portion of the assets of the Plan may be transferred to a
fund that will invest in Common Stock (the "Employer Stock Fund") and used to
purchase Common Stock issued in the Conversion. The Trustee of the Plan will
follow the Participants' directions. The ability of a Participant to use his or
her share of the assets of the Plan to purchase Common Stock in the Conversion
will depend upon the amount of Common Stock available and whether the
Participant is entitled to priority subscription rights because the Participant
had a deposit with the Bank with a balance of at least $100 on December 31, 1996
(first priority) or June 30, 1998 (third priority). The second priority goes to
the Employee Stock Ownership Plan of the Bank and the Company. For example, if a
Participant has only third priority subscription rights and all Common Stock
available is purchased by persons with higher priorities, none of the
Participant's funds will be transferred to the Employer Stock Fund to purchase
Common Stock.
Funds not transferred to the Employer Stock Fund will remain in the other
investment funds of the Plan as directed by the Participant. The transfer of
funds into the Employer Stock Fund will occur on or about the day the
Subscription Offering ends. If any funds transferred into the Employer Stock
fund are not used to purchase Common Stock because there is insufficient Common
Stock available or for any other reason, including inadvertent error, those
funds will be reinvested in the other funds of the Plan based upon the
Participant's prior directions.
VALUE OF PARTICIPATION INTERESTS
The assets of the Plan were valued as of June 4, 1998, at $2,327,263.70.
Each participant was last informed of the value of his or her interest in the
Plan as of , 1998. This value represented the market value of past
contributions to the Plan by the Bank and the Participants, adjusted for any
earnings, losses and withdrawals.
METHOD OF DIRECTING TRANSFER
At the end of this Prospectus Supplement there is a form to direct a
transfer to the Employer Stock Fund (the "Investment Form"). If a Participant
wants to transfer all or part of his or her interest in the assets of the Plan
to subscribe for Common Stock to be sold in the Conversion, he or she should
indicate that decision in Section 2 of the Investment Form. If a Participant
does not wish to make such an election, he or she does not need to take any
action.
S-3
<PAGE>
DEADLINE FOR DIRECTING TRANSFERS
Investment Forms must be received by the Human Resources Department of the
Bank no later than p.m. on , 1998 in order to be valid. WARNING:
This date is before the end of the subscription period in order to allow the
Trustee to submit an order form on behalf of the Plan.
TRANSFER DIRECTIONS CANNOT BE REVOKED.
A Participant may not revoke a direction to transfer amounts to the Employer
Stock Fund to purchase shares of Common Stock in the Conversion. Participants,
however, will be able to change their investment decisions from time to time, as
they have been able to do in the past, as explained below.
DIRECTIONS TO PURCHASE COMMON STOCK AFTER THE CONVERSION.
After the Conversion, a Participant may direct that part of his or her
interest in the Plan which is invested in other investment alternatives
available under the Plan be transferred to the Employer Stock Fund and invested
in Common Stock. A Participant may also direct that part of his or her interest
in the Employer Stock Fund be invested instead in other investment alternatives
available under the Plan. Participants may also direct that future contributions
to the Plan by or on their behalf be invested in Common Stock. After the initial
election, the allocation of a Participant's interest in the Employer Stock Fund
may be changed four times in any plan year by filing a written notice with the
plan administrator at least ten days before the effective date of the change.
Special restrictions apply to transfers by Participants who are officers,
directors and principal shareholders of the Company who are subject to the
provisions of Section 16(b) of the Securities Exchange Act of 1934, as amended,
as discussed below.
PURCHASE PRICE OF COMMON STOCK
The purchase price for shares of Common Stock purchased by the Trustee will
be the same price as is paid by all other persons who purchase Common Stock in
the Conversion.
Common Stock purchased by the Trustee after the Conversion will be acquired
in open market transactions. The prices paid by the Trustee for those shares
will not exceed "adequate consideration" as defined in Section 3(18) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA").
Transaction fees resulting from the purchase, sale or transfer of Common Stock
by the Employer Stock Fund will be paid by the Employer Stock Fund.
NATURE OF A PARTICIPANT'S INTEREST IN THE COMMON STOCK
The Common Stock will be held in the name of the Trustee for the Plan, as
trustee. Each Participant has an interest in the investments of the Plan but not
in any particular assets of the Plan. Accordingly, a specific number of shares
of Common Stock will not be directly attributable to the account of any
Participant. Earnings, E.G., gains and losses, are allocated to the account of a
Participant based on the investment designations of that Participant. Therefore,
earnings for a Participant's Account should not be affected by the investment
decisions of other Participants. However, in the Conversion, the investment
decisions of other Participants may affect the amount of Common Stock available
to satisfy the directions of each Participant.
VOTING AND TENDER RIGHTS
The Trustee generally will exercise voting and tender rights as directed by
Participants with interests in the Employer Stock Fund. For each matter on which
stockholders of the Company have a right to vote, each Participant will have
voting instruction rights based on that Participant's share of the Employer
Stock Fund. The vote cast by the Trustee on each matter will be proportionate to
the voting instructions received from Participants with interests in the
Employer Stock Fund. If there is a tender offer for Common Stock, each
Participant will have tender instruction rights reflecting that Participant's
share in the Employer Stock
S-4
<PAGE>
Fund. The Trustee will then tender shares of Common Stock in the Employer Stock
Fund in the same proportion as the percentage as the tender instructions in
favor of tendering. The remaining shares of Common Stock held in the Employer
Stock Fund will not be tendered. Participants may exercise their voting and
tender instruction rights confidentially.
DESCRIPTION OF THE PLAN
INTRODUCTION
The Plan was effective on June 1, 1986, and was amended and restated
effective January 1, 1987. The Plan has since been amended seven times. The
amendments have generally addressed changes in ERISA. The Plan is established in
accordance with the requirements under Section 401(a) and Section 401(k) of the
Internal Revenue Code of 1986 (referred to in this Prospectus Supplement as the
"Code"). The amendment of the Plan permitting the creation of the Employer Stock
Fund will be submitted to the IRS in a timely manner for a determination that
the Plan, as amended, is qualified under Section 401(a) of the Code, and that
its related trust is qualified under Section 501(a) of the Code.
The Bank intends that the Plan will comply with the requirements under
Section 401(a) and Section 401(k) of the Code. The Bank will adopt any
amendments to the Plan that may be necessary to ensure the qualified status of
the Plan under the Code and applicable Treasury Regulations.
EMPLOYEE RETIREMENT INCOME SECURITY ACT
The Plan is an "individual account plan" other than a "money purchase
pension plan" within the meaning of ERISA. As such, the Plan is subject to all
of the provisions of Title I (Protection of Employee Benefit Rights) and Title
II (Amendments to the Internal Revenue Code Relating to Retirement Plans) of
ERISA, except the funding requirements contained in Part 3 of Title I of ERISA
which by their terms do not apply to this type of individual account plan. The
Plan is not subject to Title IV (Plan Termination Insurance) of ERISA.
THE PLAN IMPOSES SUBSTANTIAL RESTRICTIONS ON THE RIGHT OF A PLAN PARTICIPANT
TO WITHDRAW AMOUNTS HELD FOR HIS OR HER BENEFIT UNDER THE PLAN BEFORE THE
PARTICIPANT'S TERMINATION OF EMPLOYMENT WITH THE BANK. A SUBSTANTIAL FEDERAL TAX
PENALTY MAY ALSO BE IMPOSED ON WITHDRAWALS MADE BEFORE THE PARTICIPANT REACHES
AGE 59-1/2, REGARDLESS OF WHETHER THE WITHDRAWAL OCCURS DURING EMPLOYMENT WITH
THE BANK OR AFTER TERMINATION.
REFERENCE TO FULL TEXT OF PLAN
The following statements are summaries of certain provisions of the Plan.
They are not complete and are qualified in their entirety by the full text of
the Plan. Copies of the Plan are available to all employees by filing a request
with the Plan Administrator, Wesley D. Stisser, Jr., at One North Main Street,
Cortland, New York 13045. The Plan Administrator's telephone number is (607)
756-5643. Each employee is urged to read carefully the full text of the Plan,
the Summary Plan Description for the Plan, and the summaries of all material
modifications that have been made to the Plan.
ELIGIBILITY AND PARTICIPATION
Any salaried employee of the Bank who has reached age 21 is eligible to
participate in the Plan on the first day of any calendar month following
completion of one year of service with the Bank Employer. Employees compensated
on an hourly basis and employees compensated on a daily, fee or retainer basis,
leased employees (within the meaning of Section 414(n) of the Code) and
employees covered by a collective bargaining agreement which does not expressly
provide for their coverage under the Plan, are not eligible to participate in
the Plan.
S-5
<PAGE>
As of June 11, 1998, there were approximately 75 employees eligible to
participate in the Plan, and 70 employees had elected to participate in the
Plan. There were an additional 10 former employees who have not yet received
full distribution of their Plan accounts and they will also have the right,
subject to the priority rules applicable to all subscribers, to elect to
purchase Common Stock in the Conversion through the use of their share of Plan
assets, as described above.
PLAN CONTRIBUTIONS
Each Participant in the Plan may elect to have from 2% to 10% of his or her
Compensation (as defined below) contributed to the Plan. Those amounts are
credited to the Participant's "Basic Contribution Account." For purposes of the
Plan, "Compensation" means a Participant's compensation from the Bank for the
year, before any reduction for amounts contributed to the Plan. Compensation
includes salary, wages and wage continuation to an employee who is absent due to
an illness or disability of a short-term nature and commissions paid on loan
originations. "Compensation" does not include expense allowances, commissions
other than those paid on the origination of loans, severance pay, fees, bonuses,
incentive payments, contributions other than Basic Contributions made to the
Plan and contributions made by the Bank to any other pension, insurance welfare
or other employee benefit plan. The annual compensation of each Participant
taken into account under the Plan is limited to $160,000 (adjusted for increases
in the cost of living as permitted by the Code). Generally, a Participant may
elect to modify the amount contributed to the Plan on his or her behalf not more
often than four times in any plan year by providing notice to the Plan
Administrator at least 10 days before commencement of the first day of the
payroll period for which the modification is to become effective. However,
special restrictions apply to persons subject to Section 16(b) of the Securities
Exchange Act of 1934. Basic Contributions are transferred by the Bank to the
Trustee of the Plan.
A Participant who receives a hardship distribution from the Plan may not
make Basic Contributions for twelve months after receiving the hardship
distribution.
BANK CONTRIBUTIONS
The Bank contributes to the Plan for each Plan Year 75% of the Participant's
Basic Contributions, up to 4.5% of the Participant's Compensation for the Plan
Year. The Bank's contributions are credited to the Participant's "Matching
Contribution Account." After the Conversion, at the discretion of the Bank, the
Bank's contributions made with respect to Participants who are Bank employees
will be credited to the Participant's Account in The CNY Financial Corporation
Employee Stock Ownership Plan. At its discretion, the Bank may make an
additional contribution to the Plan as of the end of the Plan Year in an amount
determined by the Bank for the purpose of ensuring that the Plan complies with
Section 401(k) of the Code. Such amounts are credited to Participants' "Special
Contribution Accounts" based on each Participant's compensation. Special
Contributions may be made only to the accounts of non-highly compensated
employees.
The Bank is currently evaluating, and expects to adopt, an amendment of the
401(k) Plan to reduce the maximum amount which an employee may defer to 6% of
compensation from 10% and reduce the Bank's matching percentage from 75% to 50%
of the first 6% of compensation that the employee defers. The Bank would not be
required to recognize any expense in connection with the amendment.
LIMITATIONS ON CONTRIBUTIONS
LIMITATIONS ON ANNUAL ADDITIONS AND BENEFITS. Contributions and forfeitures
allocated to each Participant's Basic Contribution Account and Matching
Contribution Account during any Plan Year may not exceed the lesser of 25% of
the Participant's Compensation for the Plan Year (as defined under Section 415
of the Code) or $30,000 (adjusted for increases in the cost of living as
permitted by the Code). A Participant's Section 415 Compensation is
Compensation, excluding any contribution by the Bank to the Plan or to any other
plan of deferred compensation or any distributions from a plan of deferred
S-6
<PAGE>
compensation. In addition, annual contributions and forfeitures are limited to
the extent necessary to prevent the limitations set forth in the Code for all of
the qualified defined benefit plans and defined contribution plans maintained by
the Bank from being exceeded. If these limitations would be exceeded by any
contributions or forfeitures with respect to a Participant:
(i) Any excess amount in the Participant's Account will be used to reduce
the Bank's contributions for such Participant in future years;
(ii) If an excess amount still exists, and the Participant is not covered by
the Plan, the excess will be held in a suspense account and used to
reduce future Bank contributions for all remaining Participants;
(iii) Suspense accounts will not participate in investment gains and losses.
LIMITATION ON 401(K) PLAN CONTRIBUTIONS. A Participant may not make a Basic
Contribution in excess of $10,000 in 1998, which amount is adjusted annually for
inflation. Excess contributions will be included in the Participant's gross
income for federal income tax purposes in the year they are made. Excess
contributions will again be subject to federal income tax when distributed by
the Plan to the Participant, unless the excess (together with any income
allocable to the excess) is distributed to the Participant by April 15th after
the close of the taxable year in which the excess deferral is made. Any income
on the excess deferral that is distributed not later than that date shall be
treated, for federal income tax purposes, as earned and received by the
Participant in the taxable year in which the excess deferral is made.
LIMITATION ON PLAN CONTRIBUTIONS FOR HIGHLY COMPENSATED EMPLOYEES. Under
the Code, the contributions made by or on behalf of Highly Compensated Employees
(defined below) are limited when compared to the amounts contributed by or on
behalf of all other employees eligible to participate in the Plan. Participation
in the Plan is voluntary and no employee is required to defer salary under the
Plan. If Highly Compensated Employees participate in greater numbers, or defer a
greater percentage of their salary, than other employees, then the Plan might
provide benefits to Highly Compensated Employees which are so disproportionate
when compared to other employees that limits set in the Code may be violated. In
general, a Highly Compensated Employee includes any employee who, during the
Plan Year or the preceding Plan Year, (1) at any time directly or indirectly
owned 5% of the Bank, or (2) received compensation from the Bank in excess of
$80,000. The amounts are adjusted annually to reflect increases in the cost of
living. In addition, the compensation of an employee who is a family member of a
5% owner, or one of the ten most highly compensated employees during the
relevant period, is aggregated with that of the Highly Compensated Employee. All
such family members are treated as a single employee when calculating limits on
Highly Compensated Employees.
If the Code limits are violated, excess contributions by Highly Compensated
Employees and related income are distributed to such Highly Compensated
Employees. The Bank must pay a 10% excise tax unless the excess contributions,
together with any related income, either are recharacterized or are distributed
no later than 2 1/2 months after the Plan Year to which the excess contributions
relate.
TOP-HEAVY PLAN REQUIREMENTS. If for any Plan Year the Plan is a Top-Heavy
Plan (as defined below), then (i) the Bank may be required to make certain
minimum contributions to the Plan on behalf of non-key employees (as defined
below), and (ii) certain additional restrictions would apply with respect to the
combination of annual additions to the Plan and projected annual benefits under
any defined benefit plan maintained by the Bank. In general, the Plan will be
regarded as a "Top-Heavy Plan" for any Plan Year if, as of the last day of the
preceding Plan Year, the aggregate balance of the Accounts of Participants who
are Key Employees exceeds 60% of the aggregate balance of the Accounts of all
Participants. Key Employees generally include any employee who, at any time
during the Plan Year or any of the four preceding Plan Years, is (1) an officer
of the Bank having annual compensation in excess of $45,000 who is in an
administrative or policy-making capacity; (2) one of the ten employees having
annual compensation in excess of $30,000 and owning, directly or indirectly, the
largest interests in the Bank (but excluding any
S-7
<PAGE>
employee with an ownership interest of less than 0.5%); (3) a 5% owner of the
Bank; or (4) a 1% owner of the Bank having annual compensation in excess of
$150,000.
INVESTMENT OF CONTRIBUTIONS
All amounts credited to Participants' Accounts under the Plan are held in
the Plan Trust (the "Trust") which is administered by the Trustee appointed by
the Bank's Board of Trustees. Plan assets may be invested in the following
funds:
a. Core Equity Fund;
b. Emerging Growth Equity Fund;
c. Value Equity Fund;
d. Intermediate--Term Bond Fund;
e. Actively Managed Bond Fund;
f. Short-Term Investment Fund; and
g. International Equity Fund.
In addition, as a result of the amendment of the Plan, a Participant may
also direct that all or a portion of his or her interest in the Trust be
invested in the Employer Stock Fund.
Once in each calendar quarter, a Participant may elect (in increments of
1%), to have both past and future contributions and additions to their Accounts
invested either in the Employer Stock Fund or among such other Funds. These
elections will be effective on the effective date of the Participant's written
notice to the plan administrator, provided such notice is filed with the
administrator at least 10 days before it is to become effective. Any amounts
credited to a Participant's Accounts for which investment directions are not
given will be invested in accordance with the terms of the Plan. Because
investment allocations only are required to be made in increments of 1%, lack of
diversification with respect to the investment of a Participant's Account should
not be a significant risk given the investment options available to Participants
and the ability of Participants to make investment designations four times each
year.
A Participant who receives a loan from the Plan has a separate account
established under the Plan. The balance of a Participant's loan account
represents the unpaid principal and interest (if any) of such participant's loan
from the Plan. Repayments of principal and payments of interest on loans are
invested by the Trustee as directed by the Participant or, if no investment
directions are given, in accordance with the terms of the Plan.
The net gain (or loss) of the Funds from investments (including interest
payments, dividends, realized and unrealized gains and losses on securities, and
expenses paid from the Trust) will be determined at least monthly during the
Plan Year. For purposes of allocations of investments among the Funds, all
assets of the Trust are valued at their fair market value.
A. Existing Funds.
The annual percentage return on the funds available for investment prior to
the most recent amendment of the Plan for the prior three years was:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
a. Core Equity Fund......................................... 25.32% 21.53% 40.17%
b. Emerging Growth Equity Fund.............................. 8.25% 27.09% 42.83%
c. Value Equity Fund........................................ 31.70% 25.90% 33.96%
d. Intermediate-Term Bond Fund.............................. 7.07% 27.09% 42.83%
e. Actively Managed Bond Fund............................... 9.70% 3.15% 17.70%
f. Short-Term Investment Fund............................... 4.93% 4.70% 5.39%
g. International Equity Fund................................ 0.92% 10.86% 12.46%
</TABLE>
B. The Employer Stock Fund.
S-8
<PAGE>
The Employer Stock Fund will consist of investments in Common Stock made on
and after the effective date of the Conversion. Cash dividends, if any, paid on
Common Stock held in the Employer Stock Fund will be credited to a cash dividend
subaccount for each Participant investing in the Employer Stock Fund. The Board
of Directors of the Company may consider a policy of paying cash dividends on
the Common Stock in the future; however, no decision as to the amount or timing
of cash dividends, if any, has been made. The Trustee will, to the extent
practicable, use all amounts held by it in the Employer Stock Fund (except the
amounts credited to cash dividend subaccounts) to purchase shares of Common
Stock of the Company. It is expected that all purchases will be made at
prevailing market prices. Under certain circumstances, the Trustee may be
required to limit the daily volume of shares purchased. Pending investment in
Common Stock, assets held in the Employer Stock Fund will be placed in bank
deposits and other short-term investments.
When Common Stock is purchased or sold, the cost or net proceeds are charged
or credited to the accounts of Participants affected by the purchase or sale.
Participants' Accounts will also be adjusted for any brokerage commissions,
transfer fees and other expenses incurred in the sale and purchase of Common
Stock for the Employer Stock Fund. A Participant's Account will be adjusted to
reflect changes in the value of shares of Common Stock resulting from stock
dividends, stock splits and similar changes.
As of the date of this Prospectus Supplement, no Common Stock has been
issued and there is no established market for the Common Stock. Accordingly,
there is no record of the historical performance of the Employer Stock Fund.
Performance will depend on a number of factors, including the financial
condition and profitability of the Company and the Bank and market conditions
generally.
INVESTMENTS IN THE EMPLOYER STOCK FUND MAY INVOLVE CERTAIN SPECIAL RISKS.
FOR A DISCUSSION OF THESE RISK FACTORS, SEE "RISK FACTORS" IN THE PROSPECTUS.
BENEFITS UNDER THE PLAN
VESTING. A Participant has a fully vested, nonforfeitable interest in his
or her Basic Contribution Account and all related earnings. A Participant vests
in his or her Matching Contribution Account under the Plan according to the
following schedule:
<TABLE>
<CAPTION>
PERIOD OF SERVICE VESTED PERCENTAGE
- ---------------------------------------------------------------------------- -------------------
<S> <C>
less than 1 year 0%
1 year 20%
2 years 40%
3 years 60%
4 years 80%
5 or more years 100%
</TABLE>
WITHDRAWALS AND DISTRIBUTIONS
WITHDRAWALS PRIOR TO TERMINATION OF EMPLOYMENT. A Participant may make a
withdrawal from his or her Basic Contribution Account subject to the hardship
distribution rules under the Plan. These requirements insure that Participants
have a true financial need before a withdrawal may be made. However, such
withdrawals may not be made more often than two times during any Plan Year. A
Participant may make a withdrawal from his or her Basic Contribution Account or
from funds rolled over into the Plan from another plan in which the Participant
participated after he or she turns 59 1/2.
DISTRIBUTION UPON RETIREMENT, DISABILITY OR TERMINATION OF
EMPLOYMENT. Payment of benefits to a Participant who retires, incurs a
disability, or otherwise terminates employment generally shall be made in a lump
sum cash payment as soon as administratively feasible after such termination of
employment if the vested value of the Participant's Account is $5,000 or less.
If the vested portion of the Participant's Account balance is greater than
$5,000, the Participant may request a distribution (subject to the minimum
S-9
<PAGE>
distribution rules) in a lump sum payment: (a) as soon as administratively
possible after termination, (b) as of any Valuation Date up to 13 months after
termination or (c) as of the date the Participant attains normal retirement age.
At the request of the Participant, the distribution may include an in kind
distribution of Common Stock of the Company credited to the Participant's
Account. Benefit payments ordinarily shall be paid not later than 60 days
following the end of the Plan Year in which occurs the latest of the
Participant's: (i) termination of employment; (ii) the attainment of age 65 or
(iii) 10th anniversary of commencement of participation in the Plan; but in no
event later than the April 1 following the calendar year in which the
Participant attains age 70 1/2. However, if the vested portion of the
Participant's Account balances exceeds $5,000, no distribution shall be made
from the Plan prior to the Participant's attaining age 65 unless the Participant
elects to receive an earlier distribution.
DISTRIBUTION UPON DEATH. A Participant who dies before the payment of
benefits commences and who has a surviving spouse shall have his or her benefits
paid to the surviving spouse in a lump sum as soon as administratively possible
after death, unless the Participant elected prior to his or her death or the
beneficiary so elects within 90 days of the Participant's death, to receive such
distribution in a lump sum payment as of any Valuation Date which occurs within
one year of the Participant's death. An unmarried Participant, and a married
Participant with spousal consent, may have payments made to a designated
beneficiary in a lump-sum payment in cash or in Common Stock in the same manner
described in the preceding sentence.
TRANSFER OF BENEFITS PROHIBITED. Except for federal income tax withholding
and as allowed in qualified domestic relations orders (as defined in the Code),
benefits payable under the Plan may not be sold, transferred, assigned, pledged,
encumbered, garnished, levied on, or otherwise disposed of, either voluntary or
involuntary. Any attempt to do so shall be void.
ADMINISTRATION OF THE PLAN
THE TRUSTEE. The Trustee with respect to the Plan is the named fiduciary of
the Plan for purposes of Section 402 of ERISA. The Trustee is appointed by the
Board of Directors of the Bank to serve at its pleasure. The current Trustee of
the Plan is the RSI Retirement Trust, 317 Madison Avenue, New York, New York
10017. However, an additional Trustee is being appointed to hold funds invested
in the Employer Stock Fund. The Trustee receives, holds and invests the
contributions to the Plan in trust and distributes them to Participants and
beneficiaries in accordance with the terms of the Plan and the directions of the
Plan Administrator. The Trustee is responsible for investment of the assets of
the Trust.
THE PLAN ADMINISTRATOR. The Plan is administered by one or more persons who
are appointed by and who serve at the pleasure of the Bank (the
"Administrator"). Currently, the Administrator is Wesley D. Stisser, Jr.,
President. The address and telephone number of the Administrator is c/o Cortland
Savings Bank, One North Main Street, Cortland, New York 13045, (607) 756-5643.
The Administrator administers the Plan, interprets its provisions, sets
procedures for filing applications for benefits, prepares and distributes
information explaining the Plan, maintains Plan records, books of account and
all other data necessary for the proper administration of the Plan, and prepares
and files all returns and reports relating to the Plan which are required to be
filed with the U.S. Department of Labor and the IRS, and all disclosures
required to be made to Participants, Beneficiaries and others under ERISA.
REPORTS TO PARTICIPANTS.
The Administrator will give each Participant a statement at least quarterly
showing (i) the balance in the Participant's Account as of the end of that
period, (ii) the amount of contributions allocated to that Participant's Account
for that period, and (iii) the adjustments to such that Participant's Account to
reflect earnings or losses (if any).
S-10
<PAGE>
AMENDMENT AND TERMINATION
The Bank intends to continue the Plan indefinitely, but the Bank may
terminate the Plan at any time. If the Bank terminates the Plan in whole or in
part, then each Participant will have a fully vested interest in his or her
Accounts. The Bank may amend the Plan. The amendments may not cause any part of
the Trust to be used for, or diverted to, any purpose other than the exclusive
benefit of Participants or their beneficiaries; provided, however, that the Bank
may make any amendment it determines necessary or desirable, with or without
retroactive effect, to comply with ERISA.
MERGER, CONSOLIDATION OR TRANSFER
If the Plan is merged or consolidated with another plan, or the assets of
the Trust are transferred to another plan, each Participant would (if either the
Plan or the other plan then terminated) receive a benefit immediately after the
merger, consolidation or transfer which is equal to or greater than the benefit
he or she would have been entitled to receive immediately before the merger,
consolidation or transfer (if the Plan had then terminated).
FEDERAL INCOME TAX CONSEQUENCES
The following is a brief summary of some of the federal income tax aspects
of the Plan and is not intended to be a complete or definitive description of
the federal income tax consequences of participating in or receiving
distributions from the Plan. Moreover, tax laws and their interpretations may
change, and their application may vary in individual circumstances. Finally, the
effects of state and local income tax laws may not be the same as under the
federal income tax laws.
PARTICIPANTS ARE URGED TO CONSULT THEIR TAX ADVISORS
WITH RESPECT TO ANY TRANSACTIONS INVOLVING THE PLAN.
The Plan, as amended, will be submitted to the IRS in a timely manner for a
determination that it is qualified under Section 401(a) and 401(k) of the Code,
and that the related Trust is exempt from tax under Section 501(a) of the Code.
A plan that is "qualified" has special tax benefits which include: (1) the
sponsoring employer is allowed an immediate tax deduction for the amount
contributed to the Plan each year; (2) Participants pay no current income tax on
amounts contributed by the employer on their behalf; and (3) earnings of the
plan are tax-exempt, allowing the tax-free accumulation of income and gains on
investments. The Plan will be administered to comply in operation with the
requirements of the Code as of the applicable effective date of any change in
the law. The Bank expects to timely adopt any amendments to the Plan that may be
necessary to maintain the qualified status of the Plan under the Code. Following
such an amendment, the Bank will submit the Plan to the IRS for a determination
that the Plan, as amended, continues to qualify under Sections 401(a) and 501(a)
of the Code and that it continues to satisfy the requirements for a qualified
cash or deferred arrangement under Section 401(k) of the Code. If the Plan
receives an adverse determination letter from the IRS regarding its tax exempt
status, all Participants would generally have taxable income equal to their
vested interest in the Plan; the Participants would not be permitted to transfer
amounts distributed from the Plan to an IRA or to another qualified retirement
plan, and the Bank may be denied certain deductions taken with respect to the
Plan.
LUMP SUM DISTRIBUTION. A distribution from the Plan to a Participant or the
beneficiary of a Participant will qualify as a Lump Sum Distribution if it is
made: (i) within one taxable year of the Participant or beneficiary; (ii) on
account of the Participant's death, disability or separation from service, or
after the Participant attains age 59 1/2; and (iii) consists of the balance to
the credit of the Participant under this Plan and all other profit sharing
plans, if any, maintained by the Bank. The portion of any Lump Sum Distribution
that is required to be included in the Participant's or beneficiary's taxable
income for federal income tax purposes (the "total taxable amount") consists of
the entire amount of such Lump Sum Distribution less the amount of after-tax
contributions, if any, made by the Participant to any other profit sharing plans
maintained by the Bank which is included in such distribution.
S-11
<PAGE>
AVERAGING RULES. The portion of the total taxable amount of a Lump Sum
Distribution that is attributable to participation after 1973 in the Plan or in
any other profit sharing plan maintained by the Bank (the "ordinary income
portion") will be taxable generally as ordinary income for federal income tax
purposes. However, a Participant who has completed at least five years of
participation in the Plan before the taxable year in which the distribution is
made, or a beneficiary who receives a Lump Sum Distribution on account of the
Participant's death (regardless of the period of the Participant's participation
in this Plan or any other profit-sharing plan maintained by the Employer), may
elect to have the ordinary income portion of such Lump Sum Distribution taxed
according to a special averaging rule ("five-year averaging"). The election of
the special averaging rules may apply only to one Lump Sum Distribution received
by the Participant or beneficiary, provided such amount is received on or after
the Participant turns 59 1/2 and the recipient elects to have any other Lump Sum
Distribution from a qualified plan received in the same taxable year taxed under
the special averaging rule. Under a special grandfather rule, individuals who
turned 50 by 1986 may elect to have their Lump Sum Distribution taxed under
either the five-year averaging rule or under the prior law ten-year averaging
rule. Such individuals also may elect to have that portion of the Lump Sum
Distribution attributable to the participant's pre-1974 participation in the
Plan taxed at a flat 20% rate as gain from the sale of a capital asset.
COMMON STOCK INCLUDED IN LUMP SUM DISTRIBUTION. If a Lump Sum Distribution
includes Common Stock, the distribution generally will be taxed in the manner
described above, except that the total taxable amount will be reduced by the
amount of any net unrealized appreciation with respect to such Common Stock,
i.e., the excess of the value of such Common Stock at the time of the
distribution over its cost to the Plan. The tax basis of such Common Stock to
the Participant or beneficiary for purposes of computing gain or loss on its
subsequent sale will be the value of the Common Stock at the time of
distribution less the amount of net unrealized appreciation. Any gain on a
subsequent sale or other taxable disposition of such Common Stock, to the extent
of the amount of net unrealized appreciation at the time of distribution, will
be considered long-term capital gain regardless of the holding period of such
Common Stock. Any gain on a subsequent sale or other taxable disposition of the
Common Stock in excess of the amount of net unrealized appreciation at the time
of distribution will be considered either short-term capital gain or long-term
capital gain depending upon the length of the holding period of the Common
Stock. The recipient of a distribution may elect to include the amount of any
net unrealized appreciation in the total taxable amount of such distribution to
the extent allowed by the regulations to be issued by the IRS.
ROLLOVERS AND DIRECT TRANSFERS TO ANOTHER QUALIFIED PLAN OR TO AN
IRA. Virtually all distributions from the Plan may be rolled over to another
qualified Plan or to an IRA. Participants may elect to have the Trustee transfer
all or any portion of an "eligible rollover distribution" directly to another
plan qualified under Section 401(a) of the Code or to an IRA. If the Participant
does not elect to have an "eligible rollover distribution" transferred directly
to another qualified plan or to an IRA, the distribution will be subject to a
mandatory federal withholding tax equal to 20% of the taxable distribution. An
"eligible rollover distribution" means any amount distributed from the Plan
except: (1) a distribution that is (a) one of a series of substantially equal
periodic payments made (not less frequently than annually) over the
Participant's life or the joint life of the Participant and the Participant's
designated beneficiary, or (b) for a specified period of ten years or more; (2)
any amount that is required to be distributed under the minimum distribution
rules; and (3) any other distributions excepted under applicable federal law.
RESTRICTIONS ON RESALES
Any person receiving shares of Common Stock under the Plan who is an
"affiliate" of the Company as the term "affiliate" is used in Rule 144 under the
Securities Act of 1933, as amended (the "Securities Act") may reoffer or resell
such shares only if either there is a registration statement for the securities
under the Securities Act of 1933 or, pursuant to Rule 144 or some other
exemption of the registration requirements of the Securities Act of 1933. Any
person who may be an "affiliate" of the Company should consult with counsel
before transferring any Common Stock owned by him. Persons who are not
"affiliates" of the
S-12
<PAGE>
Company may resell any shares of Common Stock distributed to them under the
Plan, either publicly or privately, without satisfying the standards applicable
to affiliates.
An affiliate will not be permitted to use this Prospectus in connection with
any resale of Common Stock. In general, under Rule 144, an Affiliate may sell,
in any three-month period, not more than the greater of one percent of the
Company's Common Stock then outstanding or the average weekly trading volume of
the Common Stock during the four calendar weeks prior to the sale. Such sales
may be made only through brokers without solicitation and only at a time when
the Company is current in filing the reports required of it under the Securities
Exchange Act of 1934.
SEC REPORTING AND SHORT SWING PROFIT LIABILITY
Section 16 of the Securities Exchange Act of 1934 imposes reporting and
liability requirements on executive officers, directors and persons beneficially
owning more than ten percent of public companies such as the Company. Section
16(a) requires that such persons file reports of beneficial ownership. Within
ten days after becoming subject to the reporting requirements of Section 16(a),
a person must file a statement of initial beneficial ownership with the
Securities and Exchange Commission. Certain changes in beneficial ownership,
such as purchases, sales, gifts and participation in savings and retirement
plans must be reported periodically, either on a Form 4 within ten days after
the end of the month in which a change occurs, or annually on a Form 5 within 45
days after the close of the Company's fiscal year. Participation in the Employer
Stock Fund of the Plan by executive officers, directors and persons beneficially
owning more than ten percent of Common Stock of the Company must be reported to
the SEC annually on a Form 5 by such individuals. At March 31, 1998, 14.5% of
the Plan assets were allocated to persons who are now executive officers and
directors of the Bank.
Section 16(b) provides for the recovery by the Company of profits realized
by any executive officer, director or any person beneficially owning more than
ten percent of the Company's Common Stock ("Section 16(b) Persons") resulting
from the purchase and sale or sale and purchase of the Company's Common Stock
within any six-month period.
The SEC has adopted rules that provide exemption from the profit recovery
provisions of Section 16(b) for participant-directed employer security
transactions within an employee benefit plan, such as the Plan, if certain
requirements are met. These requirements generally involve restrictions upon the
timing of elections to acquire or dispose of employer securities for the
accounts of Section 16(b) Persons.
Except for distributions of Common Stock due to death, disability,
retirement, termination of employment or under a qualified domestic relations
order, persons subject to Section 16(b) must hold shares of Common Stock
distributed from the Plan for six months following such distribution.
LEGAL OPINION
The validity of the issuance of the Common Stock will be passed upon by
Serchuk & Zelermyer, LLP, White Plains, New York, which firm acted as special
counsel for the Bank and the Company in connection with the Bank's Conversion
from a mutual savings bank to a stock savings bank.
S-13
<PAGE>
CORTLAND SAVINGS BANK
401(K) SAVINGS PLAN
INVESTMENT FORM
Name of Plan Participant: _______________ Social Security Number: ______________
1. INSTRUCTIONS. In connection with the proposed Conversion of Cortland
Savings Bank from a mutual savings bank to a stock savings bank (the
"Conversion"), The Cortland Savings Bank 401(k) Savings Plan ("Plan") has been
amended to permit participants to direct their current account balances for
their Basic Contribution Account, Company Contribution Account, Rollover Account
and Special Contribution Account into a new fund: the Employer Stock Fund. The
percentage of a participant's account transferred at the direction of the
participant into the Employer Stock Fund will be used to purchase shares of
common stock of CNY Financial Corporation (the "Common Stock"). To direct a
transfer of all or a part of the funds credited to your accounts to the Employer
Stock Fund, you should complete and file this form with , no later
than , 1998. A representative for the Plan Administrator will retain
a copy of this form and return a copy to you. If you need any assistance in
completing this form, please contact the Stock Center at (607) - . If you
do not complete and return this form to the Plan Administrator by ,
the funds credited to your accounts under the Plan will continue to be invested
in accordance with your prior investment direction, or in accordance with the
terms of the Plan if no investment direction has been provided.
2. INVESTMENT DIRECTIONS. I hereby direct the Plan Administrator to invest
the following percentage (in multiples of not less than 1%) of my Basic
Contribution Account, Company Contribution Account, Rollover Account and Special
Contribution Account in the:
<TABLE>
<S> <C>
Core Equity Fund....................................................%
Emerging Growth Fund................................................%
Value Equity Fund...................................................%
Intermediate-Term Investment Fund...................................%
Actively Managed Bond Fund..........................................%
Short-Term Investment Fund..........................................%
International Equity Fund...........................................%
Employer Stock Fund.................................................%
</TABLE>
NOTE: The total percentage of directed investments shown above must equal
100%.
ACKNOWLEDGMENT OF PARTICIPANT. I understand that this Investment Form shall
be subject to all of the terms and conditions of the Plan. I acknowledge that I
have received a copy of the Prospectus and the Prospectus Supplement.
<TABLE>
<S> <C>
Signature of Participant Date:
</TABLE>
ACKNOWLEDGMENT OF RECEIPT BY ADMINISTRATOR. This Investment Form was
received by the Plan Administrator on the date noted below.
Wesley D. Stisser, Jr., Plan Administrator, by his duly authorized
representative: ________________________________________________________________
Date ___________________________________________________________
S-14
<PAGE>
CNY FINANCIAL CORPORATION
(PROPOSED HOLDING COMPANY FOR CORTLAND SAVINGS BANK)
7,043,750 SHARES OF COMMON STOCK--$10.00 PER SHARE
THERE IS A GLOSSARY ON PAGE WHICH EXPLAINS SOME OF THE CAPITALIZED TERMS USED
IN THIS PROSPECTUS.
CNY Financial Corporation, also referred to as the Company, is offering up
to 7,043,750 shares of its common stock, par value $.01 per share, for $10.00
per share as part of the conversion of Cortland Savings Bank, also referred to
as the Bank, into a stock savings bank. The Company may increase the amount of
Common Stock offered to 8,100,312 shares. See footnote 4 to the table below.
(CONTINUED ON NEXT PAGE)
FOR INFORMATION ON HOW TO SUBSCRIBE FOR COMMON STOCK, CALL (607) 758-3850.
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BEFORE PURCHASING
COMMON STOCK, SEE "RISK FACTORS" BEGINNING ON PAGE 15.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, THE NEW YORK STATE BANKING DEPARTMENT, THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER FEDERAL OR STATE AGENCY OR
ANY STATE SECURITIES COMMISSION, NOR HAS SUCH COMMISSION, DEPARTMENT
OR OTHER AGENCY OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
ESTIMATED UNDERWRITING FEES ESTIMATED NET
PURCHASE PRICE(1) AND OTHER EXPENSES(2) CONVERSION PROCEEDS(3)
<S> <C> <C> <C>
Per Share........................... $10.00 $0.35 $9.65
Minimum Total....................... $52,062,500 $1,750,000 $50,312,500
Midpoint Total...................... $61,250,000 $1,750,000 $59,500,000
Maximum Total....................... $70,437,500 $1,750,000 $68,687,500
Maximum Total, as adjusted(4)....... $81,003,120 $1,837,000 $79,166,120
</TABLE>
(1) Based on an independent appraisal by RP Financial, LC., dated as of June 5,
1998. The appraisal is based upon estimates and projections that may change.
The appraisal is not a recommendation to purchase Common Stock nor an
assurance that a purchaser will be able to sell Common Stock at or above the
$10.00 per share initial purchase price. See "The Conversion--Stock Pricing
and Number of Shares to be Issued."
(2) Consists of estimated costs of the Conversion, including marketing fees to
be paid to CIBC Oppenheimer Corp. and Trident Securities, Inc., which may be
deemed to be underwriting fees. See "Pro Forma Data" for a description of
the assumptions used in these estimates. Actual fees and expenses may vary
from the estimates.
(3) Actual net proceeds may be substantially different from estimated amounts.
Net proceeds include the proceeds from the purchase of Common Stock by the
CNY Financial Corporation ESOP, which the Company intends to fund with a
loan. See "Use of Proceeds" and "Pro Forma Data." This excludes shares of
Common Stock to be contributed to the charitable foundation to be created as
part of the Conversion. See "The Conversion--Establishment of the
Foundation."
(4) This row shows the effect of selling 15% more shares of Common Stock. The
additional Common Stock may be sold, without re-solicitation of subscribers
or any right of cancellation, due to regulatory or market considerations and
general financial and economic conditions. See "Pro Forma Data" and "The
Conversion--Stock Pricing and Number of Shares to Be Issued."
THE SHARES OF COMMON STOCK OF THE COMPANY ARE NOT SAVINGS ACCOUNTS OR DEPOSITS
AND ARE NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR BY ANY OTHER GOVERNMENT AGENCY. THE COMON STOCK IS SUBJECT
TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL INVESTED.
CIBC OPPENHEIMER TRIDENT SECURITIES, INC.
The date of this Prospectus is August , 1998.
<PAGE>
(CONTINUED FROM PREVIOUS PAGE)
The conversion of the Bank from mutual to stock ownership, and the sale of
the Common Stock offered by this Prospectus, known as the "Conversion," will not
occur unless, among other things, (i) the depositors of the Bank approve the
Bank's Plan of Conversion by a majority of the votes eligible to be cast and by
75% of the dollar amount of deposit liabilities represented in person or by
proxy, (ii) all required federal and state approvals are received, and (iii) the
Company is able to sell at least $52,062,500 of Common Stock. See "The
Conversion--Conditions and Termination."
The non-transferable right to subscribe for the Common Stock has been
granted, in the following order of priority, to:
FIRST PRIORITY--Depositors of the Bank with balances of at least $100 on
December 31, 1996.
SECOND PRIORITY--Tax-qualified employee benefit plans of the Bank or the
Company.
THIRD PRIORITY--Depositors of the Bank with balances of at least $100 on
June 30, 1998.
IT IS ILLEGAL FOR ANY DEPOSITOR TO TRANSFER SUBSCRIPTION RIGHTS. PERSONS
VIOLATING THIS PROHIBITION MAY LOSE THEIR RIGHT TO SUBSCRIBE FOR COMMON STOCK
AND MAY SUFFER OTHER PENALTIES. The offer of Common Stock by the Company to the
three priority groups is referred to as the "Subscription Offering." The Company
anticipates that any shares remaining unsold after the Subscription Offering
will be sold in a direct community offering by the Company or, if any shares
remain unsold after such direct community offering, in a syndicated community
offering through a syndicate of broker-dealers organized by CIBC Oppenheimer
Corp. and Trident Securities, Inc. See "The Conversion--Community Offering" and
"--Syndicated Community Offering."
The Company anticipates that at the completion of the Conversion it will
contribute to a new charitable foundation an amount of Common Stock equal to 2%
of the Common Stock sold in the Conversion and may contribute up to $100,000 in
cash for start up expenses and initial operations. See "The
Conversion--Establishment of the Foundation."
The Company's ESOP will subscribe for 8% of the shares of Common Stock
issued in the Conversion, including the shares to be contributed to the
Foundation. If all the shares are sold to the persons with first priority
rights, the ESOP may purchase some or all of its shares in the open market after
the Conversion. Shares purchased by the ESOP are anticipated to be funded by a
loan from the Company to be repaid over a period of up to twenty years.
Except for the ESOP, no person, individually or together with associates or
other persons acting together, may purchase more than $150,000 of Common Stock
in the Conversion. This limit may be increased in the sole discretion of the
Bank or the Company. The minimum purchase is 25 shares. See "The
Conversion--Purchase Limitations."
CIBC Oppenheimer Corp. and Trident Securities, Inc. will consult with and
advise the Company and the Bank regarding the sale of Common Stock and they have
agreed to use their reasonable best efforts to assist the Company in soliciting
subscriptions. However, they are not obligated to take or purchase any Common
Stock. The Company and the Bank have agreed to indemnify them against certain
liabilities arising under the Securities Act of 1933. See "The
Conversion--Marketing Arrangements."
The Subscription Offering will terminate at 12:00 noon, New York time, on
September 16, 1998 unless extended by the Bank and the Company, with the
approval of the Superintendent and the FDIC, if necessary. The Company must
receive executed original order forms with payment in full at $10.00 per share
(or appropriate instructions authorizing withdrawal from a deposit account) by
that date for the order forms to be valid in the Subscription Offering. See "The
Conversion--Subscription Offering" and "--Purchasing Common Stock." The
Conversion must be completed by October 31, 1998, being 45 days after the close
of the Subscription Offering, provided that the Superintendent and the FDIC may
agree to one or more extensions of up to 60 days each. If an extension is
granted, subscribers will be resolicited and will have the right to maintain,
increase, reduce or cancel their subscriptions. Refunds of amounts paid, with
interest, will be made for reductions and cancellations of subscriptions.
The Company has received conditional approval from The Nasdaq Stock Market,
Inc. to have the Common Stock quoted on the Nasdaq National Market under the
symbol "CNYF" upon completion of the Conversion.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Glossary................................................................................................... 5
Summary.................................................................................................... 7
Selected Financial Information............................................................................. 13
Risk Factors............................................................................................... 15
Forward-Looking Statements................................................................................. 22
Summary of Recent Developments............................................................................. 23
The Bank and the Company................................................................................... 26
Regulatory Capital Compliance.............................................................................. 27
Use of Proceeds............................................................................................ 28
Dividend Policy............................................................................................ 29
Market for the Common Stock................................................................................ 29
Capitalization............................................................................................. 30
Pro Forma Data............................................................................................. 31
Comparison of Valuation and Pro Forma Information With and Without Foundation.............................. 35
Participation by the Board and Senior Management........................................................... 36
The Conversion............................................................................................. 36
Cortland Savings Bank Consolidated Statements of Income.................................................... 52
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 53
Business of the Company.................................................................................... 68
Business of the Bank....................................................................................... 69
Regulation................................................................................................. 90
Taxation................................................................................................... 97
Management of the Company.................................................................................. 99
Management of the Bank..................................................................................... 101
Restrictions on Acquisition of the Company and the Bank.................................................... 111
Description of Capital Stock of the Company................................................................ 116
Transfer Agent and Registrar............................................................................... 117
Experts.................................................................................................... 117
Legal and Tax Opinions..................................................................................... 117
Additional Information..................................................................................... 117
Index to Financial Statements.............................................................................. F-1
</TABLE>
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GLOSSARY
This Glossary explains some of the important capitalized terms used in this
Prospectus. At the end of the Glossary is a section entitled "Navigating Around
This Prospectus" which provides some helpful hints in reading this Prospectus.
"BANK" means Cortland Savings Bank.
"BANKING DEPARTMENT" means The New York State Banking Department.
"BANKING LAW" means the New York State Banking Law.
"COMMUNITY OFFERING" means the offer and sale of Common Stock to the general
public of shares not subscribed for in the Subscription Offering, with
preference given to natural persons residing in Cortland County, New York.
"COMMON STOCK" means the common stock, par value of $.01 per share, of CNY
Financial Corporation offered in connection with the Conversion.
"COMPANY" means CNY Financial Corporation, the proposed holding company for
Cortland Savings Bank, and the issuer of the Common Stock being offered by this
Prospectus.
"CONVERSION" means the conversion of the Bank from the mutual to the stock
form of organization, the organization of the Company, the issuance of all of
the Bank's common stock to the Company, and the sale of the Company's Common
Stock as described in this Prospectus.
"CONVERSION REGULATIONS" means Part 86 of the General Regulations of the New
York State Banking Board, which are the principal regulations which govern the
Conversion.
"DIRECTORS" means, as to the Bank, the trustees of the Bank before the
Conversion and the directors of the Bank after the Conversion.
"ELIGIBLE ACCOUNT HOLDERS" means persons with deposit accounts of at least
$100 at December 31, 1996. Eligible Account Holders have the first priority to
subscribe for Common Stock.
"ESOP" means the Employee Stock Ownership Plan of the Company.
"FDIC" means the Federal Deposit Insurance Corporation.
"FEDERAL RESERVE" means the Board of Governors of the Federal Reserve
System.
"FHLBNY" means the Federal Home Loan Bank of New York.
"FOUNDATION" means the Cortland Savings Foundation to be established by the
Bank and the Company. The Company will contribute 2% of the Common Stock sold in
the Conversion to the Foundation and may contribute up to an additional
$100,000.
"401(K) PLAN" means the Savings and Profit Sharing Plan of the Bank.
"NASD" means the National Association of Securities Dealers, Inc.
"PLAN OF CONVERSION" means the plan of conversion adopted by the Board of
Directors of the Bank which allows for the Conversion and sets forth the
procedures for the Conversion to be accomplished.
"PERSONNEL RECOGNITION AND RETENTION PROGRAM" or "PRRP" means the plan
expected to be submitted to the Company's stockholders for approval no earlier
than six months after the Conversion. The PRRP is expected to allow for grants
of stock in an aggregate amount equal to 4% of the Common Stock issued in the
Conversion, including Common Stock contributed to the Foundation.
"SEC" means the Securities and Exchange Commission.
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"STOCK OPTION PLAN" means the plan expected to be submitted to the Company's
stockholders for approval no earlier than six months after the Conversion. The
Company expects that the plan will allow for the grant of options to purchase
stock in an aggregate amount equal to 10% of the Common Stock issued in the
Conversion, including Common Stock contributed to the Foundation.
"SUBSCRIPTION EXPIRATION DATE" means 12:00 noon, New York Time, on September
16, 1998.
"SUBSCRIPTION OFFERING" means the offer and sale of Common Stock to certain
depositors of the Bank and the ESOP.
"SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS" means persons who are not Eligible
Account Holders and who had deposit accounts of at least $100 on June 30, 1998.
Supplemental Eligible Account Holders have the third priority to subscribe for
Common Stock.
"SUPERINTENDENT" means the Superintendent of Banks of the State of New York.
"VALUATION RANGE" means the estimate by RP Financial, LC. of what the total
pro forma market value of the Common Stock of the Company will be on the day the
Conversion is completed, excluding shares contributed to the Foundation. The
Valuation Range is from $52,062,500 (known as the minimum) to $70,437,500 (known
as the maximum), with a midpoint of $61,250,000.
NAVIGATING AROUND THIS PROSPECTUS
This Prospectus is divided into sections. Each section has a title, which
appears centered in the middle of a line in bold all capital letters at the
beginning of the section. The titles of the sections, and the page where each
begins, are shown in the table of contents appearing just before this Glossary.
Sections are divided with minor headings that appear before groups of related
paragraphs, printed in bold letters at the left margin. Within some of the minor
headings, there are sub-headings. The sub-headings are typed in italics and
appear at the beginning of a paragraph.
Often in a Prospectus there are cross-references, which means that in one
discussion there is a reference to another related discussion elsewhere in the
Prospectus. These are accomplished by using the word "See" followed by the title
of the section where the related information is found. If the information is
included in only a minor heading within a section, or perhaps only within a
sub-heading, then the names of the minor headings and sub-headings are also
given. However, instead of always repeating the names of the major headings, if
there is a cross reference to two minor headings in the same section, then the
name of the section is mentioned only once. For example, a reference which
reads: See "Management of the Bank--Benefits--Employee Stock Ownership Plan" and
"--Personnel Recognition and Retention Program" means that there are two
sub-headings with related information, one called "Employee Stock Ownership
Plan" and one called "Personnel Recognition and Retention Program." They both
appear in the major heading "Management of the Bank" and they both appear in the
minor heading "Benefits."
Sometimes, a cross reference does not include the name of the section, but
instead starts with a dash. That means that the related information is included
in another minor heading within the same section. For example, in the section
"Business of the Bank--General" there might be a reference like this: See "--
Lending Activities." That means that the related information is included in the
"Business of the Bank" section under the minor heading "Lending Activities."
6
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SUMMARY
The following questions and answers summarize some of the important
information in this Prospectus. Please read the questions and answers carefully,
and also read the rest of the Prospectus before deciding whether to purchase
Common Stock.
WHAT IS CNY FINANCIAL CORPORATION?
CNY Financial Corporation is a new corporation formed under Delaware law.
After the Conversion, the Company will be a bank holding company and will own
all the stock of the Bank. The stock of the Company, which is the Common Stock
that is being offered by this Prospectus, will then be owned by the public, the
ESOP, the 401(k) Plan, Directors, officers and employees of the Company and the
Bank and the Foundation. See "CNY Financial Corporation."
WHAT IS CORTLAND SAVINGS BANK?
The Bank is a mutual savings bank, which means that it has no stockholders.
It has three banking offices, all in Cortland County in central New York State.
On March 31, 1998, the Bank had total assets of $232.4 million, loans of $154.2
million, deposits of $198.2 million and net worth of $31.4 million. For the
three months ended March 31, 1998, the Bank had net income of $493,000 compared
to net income of $411,000 for the three months ended March 31, 1997.
The Bank was chartered in 1866. It obtains deposits, mainly from local
depositors, and invests those deposits, and other available funds, principally
in loans, a majority of which are secured by property located in Cortland
County, New York. It also buys securities, such as Treasury bills issued by the
United States and securities which are backed by groups of mortgages. The Bank's
income primarily comes from the difference between the rate of interest it pays
on its deposits and the rate of interest earned on its loans and other
investments. In addition to the cost of its deposits, the Bank also has expenses
for salaries and employee benefits, maintaining its banking offices and
equipment, computer data processing, insurance and other expenses.
WHAT IS THE CONVERSION?
The Conversion is a change in the Bank's form of organization so the Bank
can issue its stock to the Company, and the Company can sell its stock to
certain of its depositors, the ESOP and, if available, to other members of the
public. After the Conversion, the stockholders of the Company will indirectly
own the Bank. See "The Conversion--General."
WHY IS THE BANK CONVERTING?
The Bank is converting because, among other reasons, the Conversion will:
- Allow the Bank's customers to obtain an ownership interest in the Bank,
fostering customer loyalty and encouraging them to promote the Bank to
others in the community.
- Increase the Bank's capital, which will support the Bank's expansion
plans.
- Provide the Company with the capital and ownership structure to engage in
acquisitions and mergers through the use of cash or stock as payment for
the institution being acquired.
- Allow acquired institutions to continue to operate on a semi-autonomous
basis as subsidiaries of the Company if necessary or appropriate in order
to realize the benefits of an acquisition.
- Permit the Bank and the Company to offer stock incentives to directors,
officers and employees in order to attract and retain high quality
personnel.
- Allow the Bank to create the Cortland Savings Foundation, a charitable
foundation, to further foster a close and mutually beneficial relationship
between the Bank and the communities it serves.
See "The Conversion--Reasons for the Conversion."
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<PAGE>
WHAT IS THE BANK'S AND THE COMPANY'S POST-CONVERSION STRATEGY?
After the Conversion, the Bank and the Company intend to implement a
business strategy to seek increased strength, growth and profitability. The
foundations of that strategy include the following:
- STRENGTHEN THE BANK'S POSITION AS A DOMINANT COMMUNITY-ORIENTED FINANCIAL
INSTITUTION. The Bank currently has the largest deposit market share in
Cortland County with 42.1% of FDIC-insured deposits. Of the Bank's $198
million in deposits at March 31, 1998, approximately 81.5% were held by
persons and companies located in Cortland County. As industry
consolidation continues in the Northeast, the Bank believes it can build
its depositor base and fortify its position within the surrounding
communities by continuing to provide new and existing customers with a
higher level of service and convenience than its competitors.
- PURSUE EXPANSION OPPORTUNITIES IN CENTRAL NEW YORK. Management believes
that its operating strategy can be extended profitably into adjoining
counties with customers who share the same needs and interests as the
Bank's existing home community. To achieve this goal, management intends
to seek out opportunities for further expansion through acquisitions,
branch purchases or the opening of new offices. As evidence of this, the
Bank has recently opened a loan production office in Ithaca, the county
seat of adjoining Tompkins County.
- MAINTAIN PRE-EMINENCE IN RESIDENTIAL MORTGAGE LENDING. The Bank is, and
has been for many years, the largest residential mortgage lender in
Cortland County, with a market share that substantially exceeds any other
local bank in terms of dollar volume or number of loans. The Bank has
hired a new senior loan officer and upgraded its loan department staffing.
As the Bank expands into other central New York communities, it intends to
offer an even broader range of residential loan products. In furtherance
of this goal, the Bank plans to implement a secondary mortgage market
operation.
- DIVERSIFICATION AND GROWTH OF LOAN PORTFOLIO. Although residential
mortgage loans are expected to remain the primary component of the Bank's
loan portfolio, other types of loans have provided the Bank with
opportunities for asset growth in the past. To complement its residential
mortgage lending operations, the Bank currently offers commercial mortgage
loans, commercial loans, and a variety of consumer loans. Automobile loans
are an important growth category, increasing by $2.7 million, or 42%, over
fifteen months from $6.4 million at December 31, 1996 to $9.1 million at
March 31, 1998. The Bank plans to maintain its position as the leading
residential mortgage lender in Cortland County while building upon its
position as an independent community bank to increase its market share of
higher yielding commercial and consumer loans.
- IMPROVE EFFICIENCY. Recent changes in the Bank's staffing and
infrastructure have enabled it to serve more customers with increased
deposit and loan volumes, thus allowing its current operating expenses to
be spread over a larger asset base. In addition, the Bank anticipates that
in the future it will be required to incorporate technological
developments into its product delivery system. Future growth and expansion
will allow the Bank to spread the cost of these technological innovations
over a larger asset base.
WHAT ARE SOME OF THE RISKS I SHOULD CONSIDER WHEN I DECIDE WHETHER TO PURCHASE
COMMON STOCK?
The ability of the Bank and the Company to implement successfully the
post-Conversion strategy is subject to many uncertainties, and may be hindered
by both internal and external factors. There is a section in this Prospectus
titled "Risk Factors" beginning on page 15 which describes some of the risks
that you should consider before deciding whether to purchase Common Stock.
Please read that section carefully.
Some of the factors which could affect the ability of the Bank and the
Company to implement the post-Conversion strategy, and which could also have a
material adverse effect on their financial condition or results of operations,
include:
- the risk that fluctuating market interest rates could reduce net interest
income as the cost of funds increases more rapidly, or declines more
slowly, than the yield on assets;
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<PAGE>
- the fact that the proceeds from the sale of the Common Stock will
initially be invested in lower-yielding securities investments and that
the process of leveraging the new capital will take time, resulting in a
decline in return on equity; and
- the concentration of the Bank's loans, and its business operations, in a
community which has not benefited from the economic boom experienced by
much of the rest of the country during the past few years.
Remember that the Common Stock is not a deposit account. It is not insured
by the FDIC or any other government agency and may not pay dividends. The market
value of the Common Stock may go up or down after the Conversion, and you could
lose your investment. The appraisal by RP Financial, LC. is no assurance that
the Common Stock will be worth the estimated amount and you should not treat the
appraisal as a recommendation that you purchase any Common Stock. See "Risk
Factors."
HOW MUCH COMMON STOCK WILL BE SOLD?
Based on the independent appraisal of RP Financial, LC., the pro forma
market value of the Common Stock of the Company after completion of the
Conversion, and thus the dollar amount of Common Stock expected to be sold, will
be from $52,062,500 to $70,437,500, not including the Common Stock contributed
to the Foundation as described below. This is known as the "Valuation Range."
The Company is offering from 5,206,250 to 7,043,750 shares of Common Stock, at
$10 per share. The actual amount of Common Stock sold will depend on a number of
things, including the number of orders received and the appraiser's updated
estimate of the market value of the Common Stock. The Company may increase the
amount of Common Stock sold by an additional 15%, to $81,003,120 (or 8,100,312
shares), based upon the number of orders received, the updated appraisal,
economic conditions when the Conversion is being completed and other factors.
See "The Conversion--Stock Pricing and Number of Shares to be Issued."
WHO CAN BUY COMMON STOCK OF THE COMPANY IN THE CONVERSION?
Persons who had deposits of at least $100 on December 31, 1996 will have the
first priority to buy Common Stock. The second priority goes to the ESOP and the
third priority goes to persons who had deposits of at least $100 on June 30,
1998. Depositors who have the right to purchase Common Stock may not sell or
transfer that right to anyone else. See "The Conversion--Subscription Offering."
If all of the Common Stock is not purchased by persons with subscription rights,
then other people may be offered the opportunity to purchase Common Stock.
MAY I TRANSFER MY SUBSCRIPTION RIGHTS OR USE THEM TO BUY COMMON STOCK FOR
SOMEONE ELSE?
No. If you exercise your subscriptions rights, you may do so only for
yourself, and not for anyone else. It is illegal to transfer your subscription
rights or the benefits of your subscription rights to anyone else. If you
transfer or attempt to transfer your subscription rights, the Bank will have the
right to cancel those rights. You may also be subject to other penalties,
possibly including criminal penalties.
IF I HAVE SUBSCRIPTION RIGHTS, HOW DO I ORDER COMMON STOCK AND HOW DO I PAY FOR
IT?
To order Common Stock, you must submit an original order form to the Bank no
later than 12:00 noon, New York time, on September 16, 1998 with payment in
full. Copies of order forms will not be accepted. You may pay for Common Stock
by check, money order or, if delivered directly to the Bank, cash. You may also
pay for your Common Stock by including, in your order form, an authorization to
withdraw the purchase price from an account you have at the Bank. If you pay by
check, cash or money order, your payment will earn interest at 2.75% until the
Conversion is completed or your money is refunded. If you pay by authorizing a
withdrawal from a deposit at the Bank, your deposit will continue to earn
interest at the regular rate for your deposit until it is used to purchase
Common Stock when the Conversion is completed. However, you may not use that
part of your deposit for any other purpose from the time you submit your order
form until the Conversion is completed. If the Conversion is not completed by
October 31, 1998, you will have an opportunity to reduce or cancel your
subscription and receive a
9
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refund of amounts paid, with interest, and release any applicable hold on your
deposit account. See "The Conversion--Purchasing Common Stock."
WHAT IS THE MAXIMUM AND MINIMUM AMOUNT OF COMMON STOCK THAT CAN BE PURCHASED?
No person, related persons or persons acting together may order or purchase
more than $150,000 of Common Stock. If more than one person is named as a
depositor on any account or accounts, such as a joint account, all named
depositors on those accounts will be considered to be acting together for the
purpose of the limit so that they may not purchase, in total including their
individual orders and orders by the group, more than $150,000 of Common Stock.
The minimum purchase is 25 shares. See "The Conversion--Purchase Limitations."
WHAT HAPPENS IF THERE IS NOT ENOUGH COMMON STOCK TO FILL ALL ORDERS?
If there is not enough Common Stock to fill all orders, shares will be
allocated based on the priorities described above. See "The
Conversion--Subscription Offering."
WHAT IS THE ROLE OF THE FINANCIAL ADVISORS?
The Bank and the Company have engaged CIBC Oppenheimer Corp. and Trident
Securities, Inc. as financial and marketing advisors, and they have agreed to
use their reasonable best efforts to assist the Company in soliciting
subscriptions and purchase orders for Common Stock. CIBC Oppenheimer Corp. and
Trident Securities, Inc. are not required to take or purchase any Common Stock.
They have not prepared any report or opinion constituting a recommendation or
advice to the Bank or the Company, 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
Conversion--Marketing Arrangements."
HOW CAN I GET ANSWERS TO ADDITIONAL QUESTIONS ABOUT THE CONVERSION?
For answers to questions about purchasing stock and other matters related to
the Conversion, call or come to the Stock Information Center at One North Main
Street, Cortland, New York 13045, telephone number (607) 758-3850.
HOW WILL THE PROCEEDS FROM THE CONVERSION BE USED?
The Company will use half of the net proceeds from the sale of the Common
Stock, after paying expenses, to buy all the common stock to be issued by the
Bank. The Company will use a part of the remaining net proceeds to make a loan
to the ESOP so the ESOP can buy 8% of the Common Stock issued in the Conversion,
including Common Stock issued to the Foundation. The net proceeds will be
available to support future expansion of the Bank's business and assist the Bank
and the Company in implementing their post-Conversion business plans as outlined
above. The Company may also use the proceeds to repurchase its Common Stock in
the future.
Initially, the Company and the Bank both expect that they will use the net
proceeds to make short-term and medium-term investments, primarily in
securities. At current market rates, such investments are expected to have
yields of from 5% to 6% per year, which is less than the 8.00% average yield on
the Bank's interest-earning assets for the three months ended March 31, 1998.
See "Use of Proceeds" for a discussion of restrictions on repurchases of Common
Stock and other information regarding use of the proceeds.
WILL THE COMPANY PAY DIVIDENDS TO STOCKHOLDERS?
The Board of Directors of the Company will decide whether, when and how much
to pay in dividends with respect to the Common Stock. No assurance is given to
investors that dividends will be paid or, if they are paid, when they will start
and how much they will be. The Board of Directors does not expect that it will
pay dividends on the Company's Common Stock immediately after the Conversion.
See "Dividend Policy."
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WHAT BENEFITS WILL THE BANK'S DIRECTORS, OFFICERS AND EMPLOYEES GET FROM THE
CONVERSION?
The Company will form the ESOP as part of the Conversion and the ESOP is
expected to purchase up to 8% of the Common Stock issued in the Conversion,
including the Common Stock contributed to the Foundation. The ESOP will purchase
the Common Stock using a loan from the Company. All officers and other employees
of the Bank and the Company will be eligible to be participants in the ESOP
after satisfying certain age and length of service requirements, but directors
of the Company and the Bank who are not employees will not be eligible to
participate. As the ESOP gradually repays its loan, the Common Stock owned by
the ESOP will be gradually divided among accounts for officers and other
employees. The division of shares is generally based upon salary. See
"Management of the Bank--Benefits--Employee Stock Ownership Plan."
In addition, the Company expects to adopt the Stock Option Plan and the
Personnel Recognition and Retention Program, or PRRP, after the Conversion is
completed. The Company intends to implement the Stock Option Plan and the PRRP
within one year after the Conversion. Therefore, the Conversion Regulations
require that they must first be approved by the Company's stockholders no
earlier than six months after the Conversion. The Company expects that the Stock
Option Plan will permit the award, in the aggregate, of options for up to 10% of
the Common Stock issued in the Conversion and the PRRP will permit the award, in
the aggregate, of shares of Common Stock equal to 4% of the Common Stock issued
in the Conversion, in both cases including Common Stock contributed to the
Foundation. Directors, officers and other employees will be eligible to
participate in these plans. Directors who are not employees, as a group, may not
receive awards of more than 30% of the shares covered by each plan. No
individual director who is not an employee may receive an award of more than 5%
of the shares covered by each plan. No officer or employee may receive an award
of more than 25% of the Common Stock covered by either plan. See "Management of
the Bank--Benefits--Stock Option Plan" and "--Personnel Recognition and
Retention Program." Furthermore, in the future, the Company may consider the
adoption of other stock benefit plans, such as employee discount stock purchase
plans and stock-based directors' fee plans, which could result in additional
stock benefits for, and an increase in voting control by, employees, officers
and directors of the Bank and the Company.
The Bank has entered into employment contracts with four executive officers:
Mr. Stisser, the Bank's President, Mr. Stapleton, the Bank's Executive Vice
President and Chief Operating Officer, Mr. Covert, the Bank's Executive Vice
President and Chief Financial Officer, and Mr. Meeker, the Bank's Senior Vice
President and Senior Loan Officer, in connection with the Conversion. Mr.
Stisser's contract and Mr. Stapleton's contract have three-year terms, while Mr.
Covert's contract and Mr. Meeker's contract have two-year terms. If Mr.
Stisser's employment ends under certain circumstances, he will be paid benefits
so that he is in the same position as if he had continued to be employed until
the end of the contract. The contract will provide for other benefits such as an
initial salary of $175,000 per year and a guaranty that the salary will not
decline. Mr. Stisser did not previously have an employment contract with the
Bank. The employment contracts for the other three executive officers provide
for salary continuation or severance payments if employment ends under certain
circumstances. All contracts provide for severance payments if employment is
terminated in connection with a change in control of the Bank or the Company,
subject to certain conditions. The Company estimates that if the employment of
all four executive officers is terminated under circumstances in which the full
severance payments would be made under the contracts, the aggregate amount
payable would be $1.4 million.
In addition, the Bank has amended its 401(k) Plan to allow employees to
invest their accounts in a fund consisting of Common Stock of the Company by
using subscription rights that they may have as depositors of the Bank. In the
Conversion, each employee who has priority subscription rights because of his or
her deposits with the Bank may exercise those subscription rights using money in
his or her 401(k) Plan account, including matching contributions from the Bank.
The Bank has also adopted an Employee Severance Plan which provides for
severance payments to an employee of the Bank if his or her employment is
terminated under certain circumstances in connection with or after a change in
control. See
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"Management of the Bank--Employment Contracts" and "--Benefits" and
"Restrictions on Acquisitions of the Company and the Bank-Anti-takeover Effects
of Management Compensation Arrangements."
WHY IS THE BANK FORMING A CHARITABLE FOUNDATION AND WHAT EFFECT WILL IT HAVE?
The Bank has a strong commitment to the well-being of its local community. A
charitable foundation will be created in connection with the Conversion to
further that commitment. The Foundation is expected to provide grants for
community development, low cost housing, civic programs, education programs and
other charitable purposes in the communities served by the Bank and the Company.
The Company will contribute Common Stock to the Foundation equal to 2% of the
shares sold in the Conversion and may also contribute up to $100,000 to the
Foundation to cover initial start-up expenses and initial grants. The Foundation
is being established at this time because the Company has the ability to fund
the Foundation with its Common Stock. The Foundation is not expected to be
established if the Conversion does not occur.
The Bank and the Company believe that the Foundation will enhance the bond
between the Bank and its community. A majority of the Foundation's directors
will be officers or directors of the Bank or the Company. The Foundation must
vote all Common Stock owned by it in the same ratio as all other shares of the
Company's Common Stock are voted, unless that would cause the Foundation to lose
its tax-exempt status and the Superintendent and the FDIC agree to a change in
the voting procedure.
The Company's contribution to the Foundation will dilute the ownership
interests of other stockholders by approximately 1.96%. When the Foundation is
established, the Company's net income will be reduced by the fair market value
of the contribution, net of the related tax benefit. See "The Conversion--
Establishment of the Foundation." RP Financial, LC. has estimated that the
establishment of the Foundation has reduced the estimated pro forma market value
of the Company's Common Stock upon completion of the Conversion by approximately
2.8%. See "See Comparison of Valuation and Pro Forma Information With and
Without Foundation."
WHAT LIMITS ARE THERE ON THE ABILITY OF SOMEONE TO TAKE CONTROL OF THE COMPANY
OR THE BANK?
The Restated Organization Certificate of the Bank provides, as permitted
under the Conversion Regulations, that no person may acquire control of the
Bank, directly or indirectly, for three years after the Conversion. Furthermore,
both federal and state law require regulatory approval before any person can
acquire control of the Bank or the Company.
In addition, the Company's Certificate of Incorporation and Bylaws contain
provisions which could discourage a person from seeking to acquire control of
the Company. For example, in general, a person who beneficially owns more than
10% of the Company's Common Stock cannot vote the shares in excess of the 10%
limit. The Board of Directors of the Company is divided into three classes, so
only one-third of the directors are up for election each year. Stockholders
cannot cumulate their votes, so, for example, if there are three vacancies on
the Board which are being filled by stockholder vote, a stockholder who owns
1,000 shares may cast 3,000 total votes, but cannot cast more than 1,000 votes
for any one person. Special meetings of stockholders may only be called by the
Board of Directors. These and other provisions could discourage someone from
trying to take over the Company.
Furthermore, the four employment contracts with executive officers of the
Bank, the voting of Common Stock owned by the ESOP, and the other stock
compensation plans described above could make it more difficult, and more
costly, for any person to acquire control of the Company. The Bank has also
adopted an Employee Severance Plan which pays benefits to an employee, other
than an executive officer covered by a separate agreement, if the employee's
employment is terminated under certain circumstances in connection with or after
a change in control based on their years of service. In addition, the Common
Stock contributed to the Foundation may be freed of its voting restrictions,
which could put that stock under the effective control of the Company.
See "Restrictions on Acquisition of the Company and the Bank" for more
information on this issue.
12
<PAGE>
SELECTED FINANCIAL INFORMATION
The selected data presented below under the captions "Selected Balance Sheet
Data" and "Selected Operations Data" for, and as of the end of, each of the
years in the five-year period ended December 31, 1997, are derived from the
audited consolidated financial statements of Cortland Savings Bank and
subsidiary. The consolidated financial statements as of December 31, 1997 and
1996 and for each of the years in the three-year period ended December 31, 1997
are included elsewhere in this Prospectus. The selected data presented below as
of and for the three-month periods ended March 31, 1998 and 1997 are derived
from the unaudited consolidated financial statements of Cortland Savings Bank
and subsidiary included elsewhere in this Prospectus. Results for the three
month period ended March 31, 1998 do not necessarily indicate the results that
may be expected for the year ended December 31, 1998.
SELECTED BALANCE SHEET DATA:
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT MARCH 31, ----------------------------------------------------------
1998 1997 1996 1995 1994 1993
------------ ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Total assets................................... $ 232,388 $ 233,729 $ 238,100 $ 235,681 $ 230,339 $ 233,750
Loans receivable, net(1)....................... 154,200 155,422 158,611 158,507 152,476 142,600
Allowance for loan losses...................... 2,230 2,143 1,952 2,002 1,752 1,620
Loans held-for-sale............................ -- 2,541 -- -- -- --
Securities available-for-sale(2)............... 45,475 44,140 45,594 41,777 2,519 6,441
Securities held-to-maturity(2)................. 12,479 12,550 11,757 11,188 61,716 63,857
Cash and cash equivalents...................... 9,813 8,079 12,536 14,176 4,912 13,183
Real estate owned.............................. 760 964 563 374 572 75
Deposits....................................... 198,234 199,770 204,640 203,110 200,310 205,855
Total net worth................................ $ 31,394 $ 30,740 $ 30,345 $ 29,030 $ 26,876 $ 24,780
</TABLE>
SELECTED OPERATIONS DATA:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income................................... $ 4,311 $ 4,417 $ 17,667 $ 17,787 $ 17,811 $ 16,855 $ 17,451
Interest expense.................................. 2,010 2,064 8,328 8,758 8,613 7,915 8,580
--------- --------- --------- --------- --------- --------- ---------
Net interest income............................. 2,301 2,353 9,339 9,029 9,198 8,940 8,871
Provision for loan losses......................... 75 225 3,300 1,380 600 300 550
--------- --------- --------- --------- --------- --------- ---------
Net interest income after provision for loan
losses........................................ 2,226 2,128 6,039 7,649 8,598 8,640 8,321
Non-interest income............................... 245 219 889 770 671 478 573
Non-interest expenses............................. 1,645 1,625 6,872 6,201 5,945 5,586 5,644
--------- --------- --------- --------- --------- --------- ---------
Income before income taxes and cumulative effect
of changes in accounting principles............. 826 722 56 2,218 3,324 3,532 3,250
Income tax expense (benefit)...................... 333 311 (16) 853 1,400 1,361 1,144
--------- --------- --------- --------- --------- --------- ---------
Income before cumulative effect of changes in
accounting principles........................... 493 411 72 1,365 1,924 2,171 2,106
Cumulative effect of changes in accounting
principles(3)................................... -- -- -- -- -- -- (103)
--------- --------- --------- --------- --------- --------- ---------
Net income........................................ $ 493 $ 411 $ 72 $ 1,365 $ 1,924 $ 2,171 $ 2,003
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
NOTES APPEAR ON FOLLOWING PAGE.
13
<PAGE>
SELECTED FINANCIAL RATIOS AND OTHER DATA(4):
<TABLE>
<CAPTION>
AT OR FOR THE
THREE MONTHS
ENDED MARCH 31,
AT OR FOR THE YEAR ENDED DECEMBER 31,
-------------------- ------------------------------------------
1998 1997 1997 1996 1995 1994
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
PERFORMANCE RATIOS:
Return on average assets (net income to average total
assets)..................................................... 0.86% 0.71% 0.03% 0.58% 0.82% 0.92%
Return on average net worth (net income to average net
worth)...................................................... 6.54% 5.53% 0.23% 4.64% 6.85% 8.41%
Average interest-earning assets to average interest-bearing
liabilities................................................. 115.34% 114.97% 115.80% 113.90% 112.17% 111.39%
Net interest rate spread(5)................................... 3.70% 3.71% 3.58% 3.48% 3.70% 3.62%
Net interest margin(6)........................................ 4.27% 4.27% 4.17% 4.02% 4.18% 4.03%
Net interest income after provision for loan losses to total
other expenses.............................................. 1.35x 1.31x 0.88x 1.23x 1.45x 1.55x
NET WORTH AND ASSET QUALITY RATIOS:
Average net worth to average total assets..................... 13.16% 12.78% 13.04% 12.40% 12.00% 10.96%
Total net worth to assets end of period....................... 13.51% 12.96% 13.15% 12.74% 12.32% 11.67%
Non-performing assets to total assets......................... 0.96% 2.13% 2.04% 1.78% 1.00% 1.32%
Non-performing loans to total loans........................... 0.94% 2.84% 2.37% 2.28% 1.24% 1.60%
Allowance for loan losses to total loans...................... 1.43% 1.30% 1.34% 1.22% 1.25% 1.14%
Allowance for loan losses to non-performing loans............. 151.91% 45.73% 56.48% 53.23% 100.40% 71.13%
OTHER DATA:
Number of real estate loans outstanding....................... 2,953 3,033 3,029 3,104 3,169 2,936
Number of deposit accounts.................................... 33,548 34,031 34,069 34,213 34,710 NA
Full service offices.......................................... 3 3 3 3 3 3
<CAPTION>
1993
---------
<S> <C>
PERFORMANCE RATIOS:
Return on average assets (net income to average total
assets)..................................................... 1.03%
Return on average net worth (net income to average net
worth)...................................................... 10.16%
Average interest-earning assets to average interest-bearing
liabilities................................................. 109.31%
Net interest rate spread(5)................................... 4.41%
Net interest margin(6)........................................ 4.84%
Net interest income after provision for loan losses to total
other expenses.............................................. 1.47x
NET WORTH AND ASSET QUALITY RATIOS:
Average net worth to average total assets..................... 10.15%
Total net worth to assets end of period....................... 10.60%
Non-performing assets to total assets......................... 1.69%
Non-performing loans to total loans........................... 2.69%
Allowance for loan losses to total loans...................... 1.12%
Allowance for loan losses to non-performing loans............. 41.69%
OTHER DATA:
Number of real estate loans outstanding....................... 2,882
Number of deposit accounts.................................... NA
Full service offices.......................................... 2
</TABLE>
- ------------------------------
(1) Shown net of deferred fees and the allowance for loan losses.
(2) In December 1995, the Bank transferred securities classified as
held-to-maturity with a fair value of $31.2 million to available-for-sale.
(3) Includes the cumulative effect of changes in accounting for post-retirement
benefits other than pensions and changes in accounting for income taxes.
(4) Asset quality and net worth ratios are at end of period. All average
balances are daily average balances except for 1995 and prior, for which
monthly average balances are used because daily average balances are
unavailable. Ratios for the three-month periods have been annualized where
appropriate.
(5) The net interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(6) The net interest margin, also known as the net yield on average
interest-earning assets, represents net interest income as a percentage of
average interest-earning assets.
NA--The information is not available.
14
<PAGE>
RISK FACTORS
PLEASE REVIEW THE FOLLOWING RISK FACTORS BEFORE DECIDING WHETHER TO PURCHASE
COMMON STOCK.
INTEREST RATE RISK
The Bank's principal source of income is the difference between the interest
income it earns on interest-earning assets, such as loans and securities, and
its cost of funds, principally interest paid on deposits. The rate of interest
earned on assets or paid on liabilities changes from time to time, depending
upon a number of factors, including general market interest rates. However, the
speed of the changes varies among different types of assets and liabilities.
Interest rates on some assets and liabilities change more quickly than on
others. For example, for a thirty year loan with a fixed rate of interest, the
Bank cannot adjust the interest rate earned on its investment until principal
payments on the loan are received and reinvested at market rates, which could be
over a period of as long as thirty years. In contrast, the rate of interest paid
on a thirty-day certificate of deposit can be expected to adjust every thirty
days, based upon changes in market interest rates. If market interest rates
change, then differences in how fast assets and liabilities adjust to market
rates can have a direct effect on net interest income.
At March 31, 1998, $109.5 million, or 69.9%, of the Bank's total loans were
fixed-rate loans. The Bank generally accepts savings deposits for much shorter
terms than its fixed-rate loans. In addition, although at March 31, 1998, the
Bank had $47.1 million of adjustable-rate loans, most of these loans are
residential mortgage loans with interest rates that adjust only annually or once
every three years and with periodic and lifetime limits on interest rate
adjustments. As a result, increases in market interest rates could reduce the
Bank's net interest income because the Bank's cost of deposits would be expected
to increase faster than the yields on its loan and securities investments.
Management uses strategies to limit interest rate risk, such as making loans
with short terms to maturity and investing in adjustable-rate securities.
However, customer demand may make it difficult to implement these strategies
because when interest rates are low, customers tend to prefer fixed-rate
mortgage loans to lock in the lower rates and when interest rates are high,
customers tend to prefer adjustable-rate loans that they expect to adjust
downward as market interest rates decline. Therefore, the Bank's efforts to
reduce the risk of interest rate fluctuations are likely to be limited by the
difficulty of originating sufficient adjustable-rate loans. Furthermore, during
periods of low or declining interest rates, loan prepayment rates tend to
increase as customers seek to refinance existing higher rate loans. This
increases the volume of funds that the Bank must reinvest at a time when
investment alternatives have lower yields resulting in a decline in net interest
margin. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Management of Interest Rate Risk."
GEOGRAPHIC CONCENTRATION OF LOANS
Most of the Bank's loans are mortgage loans on property located in the
Bank's market area. At March 31, 1998, more than 70% of the Bank's mortgage
loans were secured, in whole or in part, by property located in Cortland County.
Cortland County has not, in recent years, benefited from the economic recovery
and growth which much of the rest of the country has experienced. Some major
employers have closed facilities in Cortland County. An economic slow-down or
decline in Cortland County could have a substantial adverse effect on the
ability of the Bank's borrowers to repay their loans. If housing values decline
at the same time, reductions in the value of collateral could make it more
difficult to recover the full amount due on loans in default. Furthermore,
economic difficulties can also increase deposit outflows as customers must use
savings to pay bills. This can increase the Bank's cost of funds because of the
need to replace the deposit outflow. All of these factors can combine to reduce
significantly the Bank's net income.
15
<PAGE>
LENDING RISKS
The Bank has historically employed an operating strategy that emphasized the
origination of one- to four-family residential mortgage loans. The Bank also
originates commercial mortgage, commercial, automobile and other consumer loans,
primarily in its market area. These loans are generally considered to involve a
higher degree of credit risk than one- to four-family residential mortgage
loans. This greater risk is attributable to several factors, including the
higher concentration of principal in a limited number of loans and borrowers,
the effects of general economic conditions on income-producing properties and
the increased difficulty of evaluating and monitoring these types of loans.
Commercial mortgage and other commercial loans, which comprised 23.7% of the
Bank's loan portfolio at March 31, 1998, carry greater credit risks than
residential mortgage loans because their repayment is more dependent on (i) the
underlying financial condition of the borrower and the value of, or the cash
flow from, any property securing the loan or the business being financed and
(ii) general and local economic conditions. Furthermore, the repayment of loans
secured by commercial real estate is typically dependent upon sufficient cash
flow from the related real estate project to cover operating expenses and debt
service. If the cash flow from the project is reduced (for example, if leases
are not obtained or renewed), the borrower's ability to repay the loan may be
impaired.
Furthermore, although residential mortgage loans are generally considered to
involve less credit risk than commercial and other loans, residential mortgage
lending also presents potentially significant default risks. Changes in local,
regional or national economic conditions, the relocation or closing of a major
local employer, and other factors could cause increases in delinquency and
default rates on residential mortgage loans. In at least some cases, the events
which cause an increase in default rates may also cause adverse conditions in
local real estate markets, resulting in a decline in property values and an
increase in potential losses as collateral for loans becomes less valuable.
See "Business of the Bank--Lending Activities."
COMPETITION
The Bank faces intense and increasing competition both in making loans and
in attracting deposits. The Bank had 42.1% of the total FDIC-insured deposits in
Cortland County at June 30, 1997 according to FDIC statistics and had the
largest volume of mortgage loan originations in the county in 1996 and 1997.
However, the Bank's market area and surrounding communities include branches of
many large regional and nationwide banks with the economic ability to compete
aggressively. In addition, non-bank alternatives, such as money market funds,
other mutual funds and insurance annuities, compete for deposits and mortgage
brokers, mortgage bankers, insurance companies and other finance companies
compete to originate loans. The consolidation of the banking industry, the
expansion of the powers of banks and other major financial companies, and the
lifting of interstate banking and branching restrictions may make it more
difficult for smaller institutions, such as the Bank, to compete effectively
with large national and regional banking institutions, insurance companies and
securities brokerage firms.
REDUCTION IN RETURN ON EQUITY; INVESTMENT OF PROCEEDS
After the Conversion, the Company will have substantially more total equity
than the Bank had prior to the Conversion. The Company does not expect that loan
demand will increase as quickly as its increase in capital. The Company
initially intends to invest the net proceeds from the Conversion primarily in
short-term and medium-term investments which generally have lower yields than
loans. Furthermore, although the increased capital will support additional
expansion in total assets, the Company is not expected to be able to leverage
the new capital immediately. The Company may not be able to increase net income
in future periods as fast as equity has increased in the Conversion. Therefore,
after the Conversion, return on equity (net income divided by average equity) is
expected to be lower than the annualized return on equity
16
<PAGE>
of 6.54% for the three months ended March 31, 1998 and is expected to be lower
than the average return on equity for publicly traded savings institutions and
their holding companies.
In addition, the initial investment of the net proceeds in debt securities
will substantially increase the percentage of the Bank's assets invested in
securities. Although much of the Bank's investment securities portfolio consists
of U.S. government and agency securities with negligible default rates, the Bank
also invests in corporate debt securities and mortgage-backed securities with
higher risks of default than government securities. To manage these risks, the
Bank limits its corporate debt securities to those rated in the three highest
grades by a nationally recognized rating organization and substantially all of
the mortgage-backed securities which it purchases are either issued, insured or
guaranteed by the Federal National Mortgage Association (Fannie Mae), the
Federal Home Loan Mortgage Corporation (Freddie Mac) or the Government National
Mortgage Association (Ginnie Mae). See "Use of Proceeds" and "Pro Forma Data."
INCREASED COMPENSATION AND OTHER EXPENSES AFTER THE CONVERSION
After the Conversion, the compensation expense recorded by the Company will
be substantially greater than the compensation expense of the Bank prior to the
Conversion as a result of expenses related to the ESOP and the PRRP which is
expected to be implemented by the Company. The ESOP is expected to acquire 8% of
the Common Stock issued in the Conversion, including Common Stock contributed to
the Foundation. Therefore, the amount of the Common Stock expected to be
acquired by the ESOP will have a total purchase price of up to $6,609,850, if
the ESOP purchases the Common Stock in the Subscription Offering, which will be
funded with a loan from the Company. If the ESOP is unable to obtain sufficient
Common Stock in the Subscription Offering, then it will purchase Common Stock
after the Conversion in open market or privately negotiated transactions. This
could increase the purchase price that the ESOP pays for the Common Stock and
correspondingly increase the amount of the loan from the Company. The Common
Stock that the ESOP purchases will be pledged as collateral for the loan. It is
expected that the loan will be repaid over twenty years using funds that the
Bank contributes to the ESOP.
As the ESOP repays the loan, the shares of Common Stock will be released as
collateral and the Company will record compensation expense based upon the
released shares. If the price of the Common Stock remains at $10.00 per share,
then the amount of additional compensation expense on account of the ESOP is
expected to be approximately $330,000 per year. However, under accounting rules
applicable to the ESOP, the Company must record compensation expense based on
the fair market price of the released stock. Therefore, if the market price of
the Common Stock increases, the amount of compensation expense attributable to
the ESOP will be higher.
In addition, if, as is presently intended, the Company implements the PRRP
permitting awards of Common Stock to directors, officers and employees, the
Company will record additional compensation expense. The PRRP is expected to
permit stock awards for up to approximately 330,000 shares, in the aggregate
representing 4% of the Common Stock issued in the Conversion, including Common
Stock contributed to the Foundation. If these shares are first acquired by the
Company or a trustee for the PRRP in open market purchases and then awarded to
recipients, to vest over five years, then the Company will record compensation
expense equal to one-fifth of the amount paid for the repurchased stock each
year for five years. If the stock is purchased at $10.00 per share, the annual
additional compensation expense will be approximately $661,000.
The Company also anticipates that, as a publicly traded stock corporation,
it will incur additional expenses not previously incurred by the Bank, such as
the expenses of preparing and filing periodic reports with the SEC, the cost of
holding annual and special stockholders' meetings, annual fees to maintain the
listing of the Company's Common Stock on the Nasdaq Stock Market, and other
stock-related expenses.
See "Pro Forma Data" and "Management of the Bank--Benefits."
17
<PAGE>
DILUTION, ADDITIONAL COSTS AND OTHER CONSEQUENCES OF THE FOUNDATION.
The Company intends to establish the Foundation simultaneously with the
completion of the Conversion. The establishment of the Foundation may be
challenged even though the Boards of Directors of the Company and the Bank have
carefully considered the factors involved in establishing the Foundation. If
challenges to the Foundation are raised, such challenges might delay the
Conversion and the Company and the Bank might be unsuccessful in defending
against such challenges.
DILUTION OF STOCKHOLDERS' INTERESTS. The Company proposes to fund the
Foundation with authorized but unissued Common Stock equal to 2% of the Common
Stock sold in the Conversion. Therefore, the contribution to the Foundation is
expected to range from 104,125 to 162,006 shares of Common Stock. The Foundation
would own 1.96% of the Common Stock of the Company then outstanding. Therefore,
persons purchasing Common Stock in the Conversion would have their ownership and
voting interests in the Company diluted by 1.96%. See "Pro Forma Data."
IMPACT ON EARNINGS. The contribution to the Foundation will reduce the
Company's earnings in the quarter and year in which the contribution is made.
The Company will recognize an expense for the entire amount of the contribution
in the quarter in which it occurs, which is expected to be the fourth quarter of
1998. This expense will be partially reduced by a related tax benefit because
the contribution is expected to be tax deductible. Assuming a contribution of
$1.62 million of Common Stock, the Company estimates a net after tax expense of
$988,000 (based upon a 39% tax rate and without regard to the 10% annual limit
on charitable deductions discussed below). If such expense had been recorded
during 1997, it would have reduced net income from $72,000 to a net loss of
($916,000) and if recorded during the first quarter of 1998 it would have
reduced net income from $493,000 to a net loss of ($495,000).
TAX CONSIDERATIONS. The Company may not deduct for federal income tax
purposes charitable contributions in any year which exceed 10% of the Company's
annual taxable income before deducting charitable contributions. The Company may
carry forward any unused portion of the deduction for five years, with use in
any year subject to the 10% of taxable income limitation. Therefore, whether the
Company can obtain the full tax benefit of the contribution will depend upon the
level of future income. The Company's aggregate tax deduction from the
contribution to the Foundation would be $1.62 million, assuming that the Common
Stock donated is valued at $10.00 per share. Assuming the Company makes no other
tax-deductible contributions, the Company would have to have pre-tax net income
averaging at least $2.7 million per year, before deducting the contribution, for
the next six years in order to obtain the full benefit of the tax deduction. For
the quarter ended March 31, 1998, the Bank had pre-tax net income of $826,000,
or an annualized amount of $3.3 million. If pre-tax net income does not decline,
the Company believes it will be able to obtain the tax benefit of the
contribution over the allowable six years. However, if the contribution is
valued at more than $10.00 per share because the price of the Common Stock
increases above $10.00 when trading in the Common Stock commences, or if the
Company's pre-tax net income declines, then the Company may not be able to
obtain the full tax benefit of the contribution.
Although the Company and the Bank have received the opinion of Serchuk &
Zelermyer, LLP that the Company will be entitled to the deduction for the
charitable contribution, the IRS may not recognize the Foundation as a tax
exempt organization or may disallow the deduction. If the deduction is not
permitted, the Company's tax benefit for the contribution, which will be
recognized as a deferred tax asset for financial statement purposes, will be
fully expensed, resulting in a further reduction in earnings in the year in
which the IRS makes such a determination.
POTENTIAL ANTI-TAKEOVER EFFECT. After the Conversion, the Foundation will
own 1.96% of the Company's outstanding Common Stock. The FDIC and the
Superintendent have required that the shares of Common Stock owned by the
Foundation must be voted in the same proportion as all other shares of Common
Stock on all proposals considered by stockholders of the Company. With this
voting restriction, the Company does not believe the Foundation will materially
reduce the likelihood of a takeover of the
18
<PAGE>
Company. However, if the voting restriction affects the ability of the
Foundation to remain tax exempt, the Company expects to request the FDIC and the
Superintendent of Banks to waive the restriction. The restriction may be waived
for other reasons, such as a change in the policy of the Superintendent or the
FDIC. If the restriction is eliminated, the Foundation's Board of Directors
would have the power to vote the shares owned by the Foundation in the Board's
discretion. A majority of the Foundation's Board of Directors will be comprised
of individuals who are officers or directors of the Bank or the Company.
Therefore, if the restriction is waived, the voting control of incumbent
directors and officers of the Company and the Bank would be expected to
increase.
See "The Conversion--Establishment of the Foundation."
ANTI-TAKEOVER PROVISIONS
PROVISIONS IN THE COMPANY'S AND THE BANK'S GOVERNING INSTRUMENTS. The
Company's Certificate of Incorporation and Bylaws, and the Bank's Restated
Organization Certificate and Bylaws, will assist the Company in remaining an
independent publicly owned corporation. For example, the Company's Certificate
of Incorporation requires an 80% vote to approve certain actions, such as
certain mergers; only one-third of the Board of Directors will be elected each
year; special meetings of stockholders generally may be called only by the Board
of Directors; and under certain circumstances a merger or other business
combination is permitted only if a uniform price is paid for the Company's
Common Stock. Furthermore, any person owning more than 10% of the Company's
outstanding voting stock may not cast any votes for the shares in excess of the
10% limit. See "Restrictions on Acquisition of the Company and --the Bank--
Restrictions in the Company's Certificate of Incorporation and Bylaws." The
Bank's Restated Organization Certificate also prohibits, for three years, any
person (other than the Company, the ESOP and certain related entities) from
acquiring or offering to acquire, directly or indirectly, beneficial ownership
of more than 10% of the Bank's equity securities. These provisions may
discourage potential proxy contests and other potential takeover attempts,
particularly those which have not been negotiated with the Company's Board of
Directors. Therefore, they may preserve the control of current management and
have an adverse effect on the market price of the Common Stock.
VOTING CONTROL OF OFFICERS AND DIRECTORS. Directors and executive officers
of the Bank and the Company expect to purchase from approximately 1.92% to 3.0%
of the Common Stock issued in the Conversion, including shares contributed to
the Foundation, depending on the number of shares issued. In addition, the ESOP
intends to purchase 8% of the Common Stock issued in the Conversion, including
shares contributed to the Foundation. If the Company adopts and stockholders
approve the Stock Option Plan and the PRRP, those two plans could cover 14% of
the Company's outstanding Common Stock if the plans are funded with stock
acquired in open market purchases. If all options under the Stock Option Plan
are awarded and exercised, and if all shares covered by the PRRP are awarded, in
both cases using shares purchased on the open market, then directors, executive
officers and employees could have, in total, the power to vote from
approximately 23.9% to 25.0% of the Company's outstanding Common Stock. This
voting power could further increase if the Company repurchases stock from other
stockholders. Furthermore, the Company may, in the future, implement other stock
based benefit programs, such as employee discount stock purchase plans or plans
to pay directors fees with stock rather than cash. Directors, executive officers
and employees might thus be able to prevent or hinder corporate actions
requiring more than a majority vote of stockholders, such as certain mergers and
charter amendments. This voting control may stop takeover attempts that other
stockholders believe are in their best interest and may perpetuate existing
management.
PROVISIONS IN MANAGEMENT EMPLOYMENT CONTRACTS AND BENEFIT PLANS. The four
employment contracts with executive officers of the Bank, the ESOP, and the
employee severance plan providing benefits in the event of a change in control
provide actual or potential cash payments or the vesting of benefits upon a
change of control of the Company or the Bank. This may make it less likely, or
more costly, for a person to seek to acquire the Company and stockholders might
receive less for their stock than otherwise might be
19
<PAGE>
paid if the Company is acquired. See "Management of the Bank--Employment
Contracts," and "Management of the Bank--Benefits--Employee Stock Ownership
Plan," "--Employee Severance Plan," "--Stock Option Plan" and "--Personnel
Recognition and Retention Program."
ABSENCE OF MARKET FOR COMMON STOCK
There is no established market for the Common Stock of the Company at this
time. The Company has received conditional approval from the Nasdaq Stock Market
to have its common stock quoted on the Nasdaq National Market under the symbol
"CNYF" upon completion of the Conversion. For the listing to continue, there
must be at least three market makers for the Common Stock. Market makers are
securities broker/dealers who make a market in a stock by announcing prices at
which they are willing to buy and sell the stock and who are willing to
regularly purchase and sell the stock. The Company will seek to maintain at
least three market makers to satisfy Nasdaq requirements. CIBC Oppenheimer Corp.
and Trident Securities, Inc. will assist the Company in that effort and expect
to be market makers in the Common Stock. The Company anticipates that there will
be other market makers for the Common Stock, but the Company can provide no
assurance that sufficient market makers will be available to maintain the Nasdaq
Stock Market listing.
Furthermore, an active and liquid market for the Company's Common Stock
depends upon whether there are other willing buyers and sellers. This is not in
the control of the Company or any market maker. An active and liquid trading
market for the Common Stock may not develop or continue. The absence of an
active and liquid market may reduce the price of the Company's Common Stock and,
if a market for the Common Stock does not develop, it may be difficult for
investors to sell their shares. See "Market for the Common Stock."
POSSIBLE INCREASE IN THE VALUATION RANGE AND NUMBER OF SHARES TO BE ISSUED
The number of shares to be sold in the Conversion may be increased by an
additional 15% based upon the number of orders received, the updated appraisal,
and market, financial and economic conditions when the Conversion is being
completed. If this occurs, the Company will sell 8,100,312 shares of Common
Stock in the Conversion and contribute 162,006 shares to the Foundation. An
increase in the number of shares sold can be expected to decrease net income per
share and stockholders' equity (book value) per share but can be expected to
increase the Company's consolidated stockholders' equity and net income. See
"The Conversion--Stock Pricing and Number of Shares to be Issued."
RECENTLY HIRED EXECUTIVE OFFICERS
The Bank has four executive officers. Although Wesley D. Stisser, Jr., the
President and Chief Executive Officer, has 45 years' experience with the Bank,
the Chief Operating Officer and the Chief Financial Officer have both been with
the Bank only since June of this year, and the Senior Loan Officer first joined
the Bank in October of 1996. All three of the new executive officers have
substantial prior experience in the banking industry in central New York. The
Board of Directors believes that the addition of these three officers helps to
position the Bank to implement its plans for the future. However, the successful
implementation of these plans ultimately depends, in part, on the ability of the
management team to function effectively as a collective unit. See "Management of
the Bank--Biographical Information."
POSSIBLE DILUTION FROM STOCK OPTIONS AND THE PERSONNEL RECOGNITION AND RETENTION
PROGRAM
If the Stock Option Plan is implemented after the Conversion, which is
expected, it will cover 10% of the Common Stock issued in the Conversion,
including Common Stock contributed to the Foundation. If options under the plan
are exercised and satisfied using Common Stock never previously issued, instead
of Common Stock repurchased by the Company, the ownership interests of other
stockholders would be diluted (reduced) by approximately 9.1%. Similarly, if the
PRRP is implemented for 4% of the Common Stock issued in the Conversion,
including Common Stock contributed to the Foundation, and awards
20
<PAGE>
under the plan are satisfied with Common Stock never previously issued, the
interests of existing stockholders would be diluted by approximately 3.8%. If
the plans are funded with Common Stock never previously issued, existing
stockholders will not have preemptive (first priority) rights to buy those
shares. A dilution of the interests of existing stockholders could be expected
to have an adverse effect on the market price of the Common Stock. See
"Management of the Bank--Benefits--Stock Option Plan" and "--Personnel
Recognition and Retention Program."
POSSIBLE ADVERSE INCOME TAX CONSEQUENCES OF THE DISTRIBUTION OF SUBSCRIPTION
RIGHTS
The Internal Revenue Service could take the position that the subscription
rights granted to certain depositors of the Bank have an ascertainable value and
that the value represents taxable income to those depositors. The Company has
received a letter from RP Financial, LC. that the subscription rights have no
ascertainable value, but that conclusion is not binding upon the IRS. If the
subscription rights are deemed to have value, depositors with subscription
rights could be taxed upon the receipt or exercise of the subscription rights in
an amount equal to that value. The Bank might then have taxable income on the
distribution of the subscription rights. Although the IRS is not known to have
taken the position that subscription rights represent taxable income in similar
mutual to stock conversions, the IRS may change its position in the future. See
"The Conversion--Effects of Conversion on Depositors and Borrowers."
BURDENS AND UNCERTAINTIES OF FINANCIAL INSTITUTION REGULATION
Federal and state banking laws and regulations exert substantial control on
the operations of the Bank and the Company. Federal and state regulatory
authorities have extensive discretion in connection with their supervision of
the Bank, such as the right to impose restrictions on operations and the
insistence that an institution increase its allowance for loan losses.
Regulatory authorities can also impose operating restrictions and penalties on
financial institutions. Furthermore, federal laws affecting banks are constantly
being revised, often imposing new restrictions or increasing competitive
pressures through de-regulation. Any change in the regulatory structure or
statutes or regulations applicable to banks or their competitors, whether by the
Banking Department, the FDIC, the New York State legislature or the Congress,
could have a material impact on the Company, the Bank and their operations. See
"Regulation."
MEMORANDUM OF UNDERSTANDING WITH THE FDIC
In 1995, as a result of weaknesses in the administration of part of its loan
origination function, the Bank entered into a memorandum of understanding with
the FDIC requiring the Bank to upgrade its compliance procedures regarding
consumer loans and to rectify certain past problems. The primary causes of the
memorandum of understanding were failures to satisfy certain disclosure
requirements for consumer loans, such as the requirement that redisclosure is
required when changes in market interest rates cause initially correct
disclosures to become inaccurate before a loan closes. The memorandum of
understanding, which remains in effect, requires the Bank to take remedial
action, increase employee training, upgrade future compliance, and provide
periodic reports to the FDIC. The Bank believes that it has improved its
compliance procedures and complied with the memorandum of understanding and
expects that it will be terminated in connection with the next FDIC consumer
compliance examination of the Bank, but there is no assurance that the FDIC will
agree to the termination.
DEFALCATION BY FORMER SENIOR LOAN OFFICER
During the fourth quarter of 1996, the Bank discovered that its then senior
loan officer had been involved in various schemes to defraud the Bank, which
schemes resulted in substantial losses which are the subject of a pending
insurance bond claim by the Bank. Since that time, the Bank has upgraded its
internal audit programs and adopted procedures designed to prevent any
recurrence of such problems. However, no assurance can be provided to investors
that the Bank will not suffer future losses from other fraud or embezzlement
schemes. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Special Matters Affecting Results of Operations."
21
<PAGE>
YEAR 2000 COMPLIANCE UNCERTAINTIES AND POTENTIAL COMPUTER PROBLEMS
Accurate computer record keeping and data processing is essential for the
efficient operation of the Bank. In many cases, computer software and hardware,
as well as computer chips in other equipment, have been designed so that they
will not accurately reflect dates beyond December 31, 1999. The Bank is actively
involved in reviewing all of its computer-related functions to assure that the
Bank will be able to continue to operate successfully at the beginning of the
next millennium without significant interruption. The Bank initially retained an
independent consultant to review its computer systems and develop a plan for
testing and evaluation, which has been approved by the Board. Implementation of
the plan is being overseen by a committee of officers of the Bank which meets at
least monthly and reports to the Board's Executive Committee quarterly. Testing
of core systems is expected to be complete by year end 1998, with testing of
minor systems to continue through the third quarter of 1999.
The Bank may be required to replace existing software and hardware in order
to do so. The Bank does not believe that the cost of such replacement will have
a material adverse effect on the Bank's financial condition or results of
operations because most of the costs will be encompassed by normal updates to
existing systems which are periodically updated on a regular basis. The
evaluation of the costs will not be complete until testing is completed during
1999. The Bank expects that its Year 2000 upgrading will be completed on a
timely basis. However, there can be no assurance that the systems of other
companies on which the Bank relies will also be Year 2000 compliant in a timely
fashion or that any such failure by another company would not have an adverse
affect on the Bank.
Furthermore, computer problems experienced by the Bank's commercial
borrowers could have an adverse effect on their business operations and their
ability to repay their loans when due. The Bank has recently begun evaluating
Year 2000 readiness of its commercial loan applicants as part of the loan
underwriting process and is calling upon major existing borrowers to assess
their readiness and identify potential problems.
In addition, technological advances in general may require the Bank to make
substantial capital investments in the future so it can continue to compete with
its many competitors.
FORWARD-LOOKING STATEMENTS
In this Prospectus, the Company, when discussing the future, may use words
like "will probably result," "are expected to," "may cause," "is anticipated,"
"estimate," "project," or similar words. These words represent forward-looking
statements. In addition, certain disclosures and information in this Prospectus,
such as an analysis of the adequacy of the allowance for loan losses or an
analysis of the interest rate sensitivity of the Company's assets and
liabilities, are based upon attempts to predict future events and circumstances
and also represent forward-looking statements.
Many factors could cause the Company's actual future results and future
experience to be different from what is described in the Company's
forward-looking statements. Future profitability, interest rate sensitivity, and
the adequacy of the allowance for loan losses can be affected by, for example,
(i) deterioration in local, regional, national or global economic conditions
which could cause an increase in loan delinquencies, a decrease in property
values, or a change in the housing turnover rate; (ii) changes in market
interest rates or changes in the speed at which market interest rates change;
(iii) changes in laws and regulations affecting the financial service industry;
(iv) changes in competition; and (v) changes in consumer preferences.
Please do not place unjustified or excessive reliance on any forward-looking
statements. They speak only as of the date made and should not be considered to
be guarantees, promises or assurances of what will happen in the future.
Remember that various factors, including those described above, could affect the
Company's financial performance and could cause the Company's actual results or
circumstances for future periods to be materially different from what has been
anticipated or projected.
22
<PAGE>
SUMMARY OF RECENT DEVELOPMENTS
The following tables summarize certain financial and operational information
and other data for the Bank as of or for the periods ended June 30, 1998 and
1997 and December 31, 1997. Information at June 30, 1998 and for the three and
six months ended June 30, 1998 and 1997 is unaudited, but and, in the opinion of
management, all adjustments (consisting of normal recurring accruals) necessary
for a fair presentation of the results for such unaudited periods have been
made. This information is derived in part from and should be read in conjunction
with the consolidated financial statements of the Bank included elsewhere in
this Prospectus. The results of operations for the three and six months ended
June 30, 1998 are not necessarily indicative of the results that may be expected
for the entire year or any other period.
<TABLE>
<CAPTION>
AT JUNE 30, AT DEC. 31,
SELECTED BALANCE SHEET DATA: 1998 1997
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Total assets............................................................................. $ 237,642 $ 233,729
Loans receivable, net.................................................................... 156,643 155,422
Loans held-for-sale...................................................................... -- 2,541
Securities available-for-sale............................................................ 46,409 44,140
Securities held-to-maturity.............................................................. 12,779 12,550
Deposits................................................................................. 201,951 199,770
Total net worth.......................................................................... $ 32,046 $ 30,740
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
SELECTED OPERATIONS DATA: 1998 1997 1998 1997
--------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest income............................................................ $ 4,337 $ 4,468 $ 8,648 $ 8,885
Interest expense........................................................... 2,003 2,086 4,013 4,150
--------- --------- --------- ---------
Net interest income...................................................... 2,334 2,382 4,635 4,735
Provision for loan losses.................................................. 75 225 150 450
--------- --------- --------- ---------
Net interest income after provision for loan losses...................... 2,259 2,157 4,485 4,285
Non-interest income........................................................ 278 189 523 408
Non-interest expenses...................................................... 1,693 1,555 3,338 3,180
--------- --------- --------- ---------
Income before income taxes................................................. 844 791 1,670 1,513
Income tax expense......................................................... 283 355 616 666
--------- --------- --------- ---------
Net income................................................................. $ 561 $ 436 $ 1,054 $ 847
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
AT OR FOR THE AT OR FOR THE
THREE MONTHS ENDED
JUNE 30, SIX MONTHS ENDED
JUNE 30,
----------------------------------------------
----------------------
SELECTED FINANCIAL RATIOS AND OTHER DATA: 1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
PERFORMANCE RATIOS:
Return on average assets.......................................... 0.96% 0.74% 0.91% 0.72%
Return on average net worth....................................... 7.20% 5.77% 6.88% 5.65%
Average interest-earning assets to average interest-bearing
liabilities...................................................... 116.11% 115.58% 115.36% 115.28%
Net interest rate spread.......................................... 3.64% 3.66% 3.70% 3.69%
Net interest margin............................................... 4.22% 4.25% 4.27% 4.26%
Net interest income after provision for loan losses to total non-
interest expenses................................................ 1.33 x 1.39 x 1.34 x 1.35 x
NET WORTH AND ASSET QUALITY RATIOS:
Average net worth to average total assets......................... 13.31% 12.84% 13.23% 12.82%
Total net worth to assets end of period........................... 13.48% 13.10% 13.48% 13.10%
Non-performing assets to total assets............................. 0.68% 2.76% 0.68% 2.76%
Non-performing loans to total loans............................... 0.78% 3.89% 0.78% 3.89%
Allowance for loan losses to total loans.......................... 1.46% 1.36% 1.46% 1.36%
Allowance for loan losses to non-performing loans................. 186.90% 34.99% 186.90% 34.99%
</TABLE>
23
<PAGE>
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1998 AND DECEMBER 31, 1997.
Total assets at June 30, 1998 were $237.6 million, an increase of $3.9
million, or 1.7% from total assets of $233.7 million at December 31, 1997. The
primary cause of the increase was the investment of funds received through
deposit growth.
Net loans increased $1.2 million as the Bank's residential loan originations
exceeded loan paydowns, reflecting the seasonal nature of home purchasing. There
were no loans held-for-sale at June 30, 1998, compared with $2.5 million at
December 31, 1997. The reduction is attributed to the completion of the loan
sale in the first quarter of 1998 as more fully discussed elsewhere in this
prospectus.
Securities available-for-sale increased $2.3 million, or 5.1%, from $44.1
million at December 31, 1997 reflecting the investment of the loan sale proceeds
and funds received through deposit growth.
Total deposits were $202.0 million at June 30, 1998, representing a $2.2
million increase, or 1.1%, from total deposits of $199.8 million at December 31,
1997. The increase in deposits is believed to be attributable to normal
fluctuations in customer deposits.
The Bank's equity increased $1.3 million from $30.7 million at December 31,
1997 to $32.0 million at June 30, 1998. The increase resulted from net income of
$1.1 million and a $252,000 increase in the unrealized gain on securities
available-for-sale. The Bank's capital ratios continue to exceed regulatory
requirements to be considered "well capitalized" under FDIC regulations.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND
JUNE 30, 1997.
GENERAL. Net income for the three months ended June 30, 1998 was $561,000,
an increase of $125,000 from net income of $436,000 for the three months ended
June 30, 1997. The increase was primarily attributed to a $150,000 decline in
the provision for loan losses, an $89,000 increase in non-interest income and a
$72,000 reduction in income tax expense, partially offset by a $138,000 increase
in non-interest expenses and a $48,000 decline in net interest income.
NET INTEREST INCOME. Net interest income for the three months ended June
30, 1998 was $2.3 million, representing a $48,000 decline from the $2.4 million
recorded for the three months ended June 30, 1997. The reduction is primarily
attributed to a slight decline in the Bank's net interest margin as existing
borrowers refinanced their loans into lower rate products and new borrowers
obtained loans at lower rates, in both cases due to market interest rate
conditions. The Bank's net interest margin was 4.22% for the three months ended
June 30, 1998 compared to 4.25% for the three months ended June 30, 1997,
reflecting the decline in yields, slightly offset by an increase in capital as a
no-cost funding source.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $75,000 for
the three months ended June 30, 1998, a decline of $150,000 from the $225,000
for the three months ended June 30, 1997. The decrease in the provision resulted
from a lower level of non-performing loans caused by the resolution of problem
loans through substantial charge-offs during 1997 and the loan sale during the
first quarter of 1998.
NON-INTEREST INCOME. Non-interest income for the three months ended June
30, 1998 was $278,000, an increase of $89,000 from the $189,000 for the three
months ended June 30, 1997. The Bank's primary source of non-interest income is
service charges on deposit accounts and fees related to loans. Increases in both
of these areas were due to higher transaction volumes contributed to the
increase in non-interest income.
NON-INTEREST EXPENSE. Non-interest expense increased by $138,000 for the
three months ended June 30, 1998 from the three months ended June 30, 1997.
Other than normal fluctuations in expenses, the only categories of non-interest
expenses which experienced significant percentage changes were salaries and
employee benefits, trustees fees and other real estate owned expenses. Salaries
and employee benefits
24
<PAGE>
increased by $210,000 for the three months ended June 30, 1998, compared with
the same period in 1997. This increase is attributed to normal merit increases,
a $48,000 increase in health care claims caused by the nature and timing of
employee claims, the $83,000 accrued as severance pay to the former Comptroller
who terminated employment during the quarter, and the addition of two executive
officers. Directors fees increased $170,000 for the three months ended June 30,
1998 compared with the same period in 1997. The primary cause of the increase
was the recognition of the entire cost of the $150,000 retirement benefit to be
paid to three retiring directors (see "Management of the Bank--Directors") and
an increase in the number of Board and committee meetings related to the Bank's
conversion. The costs associated with other real estate owned declined by
$207,000 reflecting a $209,000 gain recorded on the sale of one property.
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND JUNE
30, 1997.
GENERAL. Net income for the six months ended June 30, 1998 was $1.1
million, an increase of $207,000 from net income of $847,000 for the six months
ended June 30, 1997. The increase was primarily attributed to a $300,000 decline
in the provision for loan losses, a $115,000 increase in non-interest income and
a $50,000 reduction in income tax expense, partially offset by a $158,000
increase in non-interest expenses and a $100,000 decline in net interest income.
NET INTEREST INCOME. Net interest income for the six months ended June 30,
1998 was $4.6 million, representing a $100,000 decline from the $4.7 million
recorded for the six months ended June 30, 1997. The reduction is primarily
attributed to a modest reduction in the Bank's average net interest earning
assets for the six months ended June 30, 1998 compared with the same period in
1997. The Bank's net interest margin was 4.27% for the six months ended June 30,
1998 compared to 4.26% for the six months ended June 30, 1997.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $150,000 for
the six months ended June 30, 1998, a decline of $300,000 from the $450,000 for
the six months ended June 30, 1997. The decrease in the provision resulted from
a lower level of non-performing loans caused by the resolution of problem loans
through substantial charge-offs during 1997 and the loan sale during the first
quarter of 1998.
NON-INTEREST INCOME. Non-interest income for the six months ended June 30,
1998 was $523,000, an increase of $115,000 from the $408,000 for the six months
ended June 30, 1997. The Bank's primary source of non-interest income is service
charges on deposit accounts and fees related to loans. Increases in both of
these areas due to higher transaction volumes contributed to the increase in
non-interest income.
NON-INTEREST EXPENSE. Non-interest expense increased by $158,000 for the
six months ended June 30, 1998 from the six months ended June 30, 1997. The
increase was the net result of the combined effect of the factors previously
discussed with respect to the second quarter of the year, with $138,000 out of
the $158,000 increase having occurred during the second quarter.
25
<PAGE>
THE BANK AND THE COMPANY
CNY FINANCIAL CORPORATION
CNY Financial Corporation was recently organized by the Bank to acquire all
of the capital stock of the Bank to be issued in the Conversion. The Federal
Reserve has approved the Company as a bank holding company and, when the
Conversion is completed, it will be subject to Federal Reserve regulation. See
"Regulation--Holding Company Regulation." When the Conversion is complete, the
Company's significant assets will include the capital stock of the Bank acquired
in the Conversion, the loan that it makes to the ESOP so the ESOP can purchase
8% of the Common Stock issued in the Conversion, and 50% of the net proceeds of
the Conversion minus the amount of those proceeds used to fund the ESOP loan.
See "Use of Proceeds." The Company will initially have no significant
liabilities. The initial directors and executive officers of the Company are all
currently directors or executive officers of the Bank. See "Management of the
Company." At the present time, the Company does not intend to employ any other
persons, but will use the support staff of the Bank from time to time.
Additional employees will be hired as needed in the future.
The Company's executive office is located at the administrative offices of
the Bank, 1 North Main Street, Cortland, New York 13045. Its telephone number is
(607) 756-5643.
CORTLAND SAVINGS BANK
The Bank is a New York State chartered mutual savings bank. Its deposits are
insured to the maximum allowable amount by the FDIC. The Bank's market area
consists of the County of Cortland, New York. The Bank services its customers
from its main office in the city of Cortland, a nearby drive-up facility,
branches in the adjoining communities of Homer and Cortlandville, and a
representative office in Ithaca for loan originations. At March 31, 1998, the
Bank had total assets of $232.4 million, total deposits of $198.2 million and
total net worth of $31.4 million.
The Bank is a community-oriented savings bank whose business primarily
consists of accepting deposits from local customers and investing those funds in
residential mortgage loans in Cortland County.
The Bank had $103.3 million of residential one- to four-family mortgage loans at
March 31, 1998, representing 66.0% of total loans and 44.5% of total assets.
Based upon data as of June 30, 1997 published by the FDIC, the Bank's share of
total FDIC-insured deposits within Cortland County was approximately 42.1%, the
largest share of any bank in Cortland County. The Bank is the highest volume
residential mortgage lender in Cortland County, measured by number and dollar
amount of mortgage loans. The Bank also makes residential multi-family loans,
commercial mortgage loans, credit card loans, commercial business loans and
consumer loans. At March 31, 1998, the Bank's loan portfolio, net, totaled
$154.2 million, or 66.4% of total assets. The Bank's loan origination and
related loan servicing activities are conducted primarily by Bank personnel, but
from time to time the Bank obtains commercial mortgage loan opportunities and,
to a lesser extent, residential mortgage loan applications, through loan brokers
or other referral sources. The Bank also obtains automobile loan referrals from
automobile dealers.
In addition to loans, the Bank's largest investment categories are
investment and mortgage-backed securities. The Bank's investment activities
primarily consist of investing in debt securities issued by the United States
government and its agencies, corporate debt securities, mortgage-backed
securities and certain equity securities. At March 31, 1998, the Bank had $35.8
million in carrying value of U.S. Government, agency, municipal and corporate
debt securities, representing 15.4% of total assets. At March 31, 1998, the Bank
had $2.4 million in fair value of corporate equity securities, which are
included as part of securities available-for-sale at fair value.
The Bank's executive office is located at 1 North Main Street, Cortland, New
York 13045. Its telephone number is (607) 756-5643.
26
<PAGE>
REGULATORY CAPITAL COMPLIANCE
The table below shows the Bank's capital ratios at March 31, 1998 and the
related FDIC minimum capital requirements. The table also shows approximately
what the capital ratios of the Bank would have been if the Conversion had taken
place on March 31, 1998 (referred to as pro forma ratios), assuming that the
indicated number of shares of Common Stock were sold and assuming that 50% of
the net proceeds were paid to the Bank. The expected loan to the ESOP and the
cost of shares expected to be acquired by the PRRP are deducted from pro forma
regulatory capital. See "Pro Forma Data". Risk-based capital ratios are shown as
a percentage of risk weighted assets and the leverage ratio is shown as a
percentage of adjusted total assets.
<TABLE>
<CAPTION>
PRO FORMA BASED UPON NET PROCEEDS AT MARCH 31, 1998 (1)
-------------------------------------------------------------------
7,043,750
SHARES
SOLD
(MAXIMUM OF
VALUATION
5,206,250 SHARES 6,125,000 SHARES
HISTORICAL AT SOLD (MINIMUM OF SOLD (MIDPOINT OF
MARCH 31, 1998 VALUATION RANGE) VALUATION RANGE) RANGE)
-------------------------- -------------------------- -------------------------- -----------
PERCENT PERCENT PERCENT
OF OF OF
APPLICABLE APPLICABLE APPLICABLE
AMOUNT ASSETS AMOUNT ASSETS AMOUNT ASSETS AMOUNT
----------- ------------- ----------- ------------- ----------- ------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
GAAP Capital (2)............... $ 31,394 13.51% $ 50,584 19.77% $ 54,125 20.81% $ 57,666
----------- ----- ----------- ----- ----------- ----- -----------
----------- ----- ----------- ----- ----------- ----- -----------
Tier I Leverage:
Capital level.................. $ 30,662 13.26% $ 49,853 19.58% $ 53,393 20.62% $ 56,934
Requirement (3)................ 9,246 4.00% 10,184 4.00% 10,355 4.00% 10,527
----------- ----- ----------- ----- ----------- ----- -----------
Excess......................... $ 21,416 9.26% $ 39,669 15.58% $ 43,038 16.62% $ 46,407
----------- ----- ----------- ----- ----------- ----- -----------
----------- ----- ----------- ----- ----------- ----- -----------
Tier I Risk-based:
Capital Level (4).............. $ 30,662 21.94% $ 49,853 34.51% $ 53,393 36.74% $ 56,934
Requirement (3)................ 5,590 4.00% 5,778 4.00% 5,812 4.00% 5,847
----------- ----- ----------- ----- ----------- ----- -----------
Excess......................... $ 25,072 17.94% $ 44,075 30.51% $ 47,581 32.74% $ 51,087
----------- ----- ----------- ----- ----------- ----- -----------
----------- ----- ----------- ----- ----------- ----- -----------
Total Risk-based:
Capital Level (4).............. $ 32,408 23.19% $ 51,659 35.76% $ 55,209 37.99% $ 58,761
Requirement (3)................ 11,181 8.00% 11,556 8.00% 11,625 8.00% 11,693
----------- ----- ----------- ----- ----------- ----- -----------
Excess......................... $ 21,227 15.19% $ 40,103 27.76% $ 43,584 29.99% $ 47,068
----------- ----- ----------- ----- ----------- ----- -----------
----------- ----- ----------- ----- ----------- ----- -----------
<CAPTION>
8,100,312 SHARES SOLD
(15% ABOVE MAXIMUM
OF VALUATION RANGE)
--------------------------
PERCENT PERCENT
OF OF
APPLICABLE APPLICABLE
ASSETS AMOUNT ASSETS
------------- ----------- -------------
<S> <C> <C> <C>
GAAP Capital (2)............... 21.81% $ 61,694 22.91%
----- ----------- -----
----- ----------- -----
Tier I Leverage:
Capital level.................. 21.63% $ 60,962 22.74%
Requirement (3)................ 4.00% 10,722 4.00%
----- ----------- -----
Excess......................... 17.63% $ 50,240 18.74%
----- ----------- -----
----- ----------- -----
Tier I Risk-based:
Capital Level (4).............. 38.95% $ 60,962 41.43%
Requirement (3)................ 4.00% 5,886 4.00%
----- ----------- -----
Excess......................... 34.95% $ 55,076 37.43%
----- ----------- -----
----- ----------- -----
Total Risk-based:
Capital Level (4).............. 40.20% $ 62,801 42.68%
Requirement (3)................ 8.00% 11,772 8.00%
----- ----------- -----
Excess......................... 32.20% $ 51,029 34.68%
----- ----------- -----
----- ----------- -----
</TABLE>
- ------------------------
(1) Pro forma capital levels assume that one-half of the net proceeds from the
sale of the Common Stock is contributed by the Company to the Bank in
exchange for the capital stock of the Bank, but only after deducting from
the amount contributed to the Bank (i) the full amount of Common Stock
expected to be purchased by the ESOP and (ii) an additional amount
representing 4% of the Common Stock to be issued in the Conversion,
including Common Stock contributed to the Foundation, on account of the
anticipated PRRP.
(2) Capital under generally accepted accounting principles (GAAP) includes the
net unrealized gain/loss, if any, on available-for-sale securities, which is
not recognized as capital under the FDIC capital ratio rules. See
"Regulation--Banking Regulation--Capital Requirements."
(3) In order to be classified as "well-capitalized," the Bank must, in addition
to other requirements, have a Tier I risk-based capital ratio of at least
6.00%, a total risk-based capital ratio of at least 10.00% and a Tier I
leverage ratio of at least 5.00%. See "Regulation--Banking
Regulation--Capital Requirements" and "--Enforcement."
(4) Total risk-based capital includes the allowance for loan losses. Pro forma
risk-based capital data assumes the net proceeds are invested in assets that
carry a risk-weighting equal to 20%, based on the assumption that the net
proceeds will initially be invested in government and corporate debt
securities.
27
<PAGE>
USE OF PROCEEDS
Although the actual net proceeds from the sale of the Common Stock cannot be
determined until the Conversion is completed, the net proceeds are expected to
range from $50,312,500 to $79,166,120. See "Pro Forma Data" and "The
Conversion--Stock Pricing and Number of Shares to be Issued" for a discussion of
the assumptions used to estimate those amounts. The proceeds will not be
available unless and until the Conversion is completed.
The Company will use 50% of the net proceeds from the sale of the Common
Stock to purchase the capital stock of the Bank. Therefore, it is estimated that
the amount paid by the Company to the Bank, before non-cash accounting
adjustments, will range from $25,156,250 to $39,583,060. The Bank intends to
invest its share of the net proceeds in short-term and medium-term,
investment-grade debt securities. The amount received will become part of the
Bank's general funds, which the Bank currently intends to gradually deploy to
increase its levels of one- to four-family real estate lending and, to a lesser
extent, other lending, depending on market conditions as suitable opportunities
arise. The Company expects that initially it will use the net proceeds remaining
in its hands, after funding the loan to the ESOP, to make investments in short
and intermediate term investment-grade debt securities. The Company may also use
the proceeds it retains to purchase stock to fund the PRRP or to satisfy the
exercise of options issued under the Stock Option Plan. Those purchases would
generally not occur for at least six months after the Conversion and generally
not until after stockholders approve the two plans. The Company may also
contribute all or a portion of the net proceeds retained by it to the Bank as
additional capital. See "Management of the Bank--Benefits--Stock Option Plan"
and "--Benefits--Personnel Recognition and Retention Program."
If depositors with first priority subscription rights purchase all the
Common Stock available in the Conversion, the ESOP will purchase its Common
Stock of the Company in the open market after the Conversion is completed. If
the ESOP purchases 8% of the Common Stock issued in the Conversion, including
Common Stock contributed to the Foundation, at a price of $10.00 per share, the
ESOP loan will be from $4,248,300 to $6,609,850, depending upon the number of
shares sold in the Conversion. If the ESOP must purchase its Common Stock on the
open market when the price of the Company's Common Stock is more than $10.00 per
share, the amount of the ESOP loan will be more than if the ESOP is able to
purchase its Common Stock in the Subscription Offering. The Company estimates
that the term of the ESOP loan will be twenty years. The Company and Bank may
choose to fund the ESOP's stock purchases with a loan by a third party financial
institution. See "Management of the Bank--Benefits--Employee Stock Ownership
Plan."
The Bank and the Company may also use the net proceeds from the Conversion
to support future expansion through, for example, purchasing branches,
establishing new branches, acquiring other financial institutions, or expanding
into other businesses. The Company and the Bank have no current arrangements,
understandings or agreements for any such expansion. The Company, after the
Conversion, will be a bank holding company which, under existing law, may engage
in only limited types of businesses which are closely related to and a proper
incident to banking. See "Regulation--Holding Company Regulation."
After the Conversion, the Board of Directors of the Company may approve
stock repurchase plans, subject to statutory and regulatory requirements, and
use a portion of the net proceeds to implement the repurchase plans. The Company
may not repurchase any Common Stock in the first year after the Conversion and,
unless approved by the Superintendent, during the next two years may only
repurchase up to 5% of its outstanding capital stock each year. Further, the
Company may not repurchase any of its Common Stock if the repurchase would cause
the Bank to become "undercapitalized." See "Regulation-- Banking
Regulation--Enforcement." The Board of Directors may authorize the use of a
portion of the net proceeds to repurchase stock depending upon facts and
circumstances in the future. Such facts and circumstances may include, for
example: (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,
28
<PAGE>
the ability to increase the book value and/or earnings per share of the
remaining outstanding shares, and the opportunity to improve the Company's
return on equity; (ii) avoiding dilution by not having to issue additional
shares to cover the exercise of stock options or to fund employee stock benefit
plans; and (iii) capital needs of the Company and the Bank in light of the level
of non-performing loans, current and projected results of operations, the
economic environment and other considerations. If the Company repurchases stock
for more than book value per share, the book value per share for remaining
shares would be reduced. The Company will not repurchase any stock if the
repurchase would cause the Company or the Bank not to satisfy any minimum
regulatory capital ratio requirements.
DIVIDEND POLICY
After the Conversion, the Board of Directors of the Company may declare cash
or stock dividends, subject to statutory and regulatory requirements. However,
the Board has not decided the amount or timing of dividends, if any. Dividends
will depend upon a number of factors, such as profitability, available
investment opportunities, capital needs in connection with potential expansion
or acquisitions, regulatory limits, financial condition, tax considerations,
general economic conditions, industry standards and other factors. The Company
cannot assure any potential purchaser that dividends will be paid, when they
might be paid or, if paid, whether the payment of dividends will continue.
The Company is not generally subject to regulatory restrictions on the
payment of dividends to its stockholders, although the ability of the Company to
pay dividends may, depending upon its use of the portion of the net proceeds it
retains, depend, in part, on dividends from the Bank. Delaware law generally
limits the dividends which the Company may pay to the excess of its net assets
(the amount by which total assets exceed total liabilities) over its statutory
capital (number of shares outstanding multiplied by par value per share), or if
there is no excess, to its net profits for the current and/or immediately
preceding fiscal year. It is the policy of the Federal Reserve that, when making
dividend decisions, the Company, as a bank holding company, must give due
consideration to its capital position, its ability to meet its financial
obligations as they come due, and its capacity to act as a source of financial
strength to the Bank. See "Regulation--Holding Company Regulation--Federal
Holding Company Regulation." The Company has also agreed with the FDIC that it
will not pay an extraordinary dividend to its stockholders which constitutes a
tax-free return of capital for one year after the Conversion without the FDIC's
consent.
One source of funds for the Company to pay dividends is dividends from the
Bank to the Company. The Bank may not pay dividends or repurchase its common
stock if that would cause its stockholders' equity to be less than the
liquidation account required to be created for the benefit of certain
depositors. See "The Conversion--Effects of Conversion on Depositors and
Borrowers--Liquidation Rights." Under New York law, the Bank may pay dividends
to the Company, without regulatory approval, equal to its net profits for the
year in which the payment is made, plus retained net profits for the two
previous years, subject to certain limits not generally relevant. Restrictions
on the ability of the Bank to pay dividends to the Company are not expected to
have a material effect on the operations of the Company or its ability to pay
dividends in the foreseeable future.
MARKET FOR THE COMMON STOCK
The Company was recently formed and has never issued stock. Therefore, there
is currently no market for the Company's Common Stock. The Company has received
preliminary approval for listing the Common Stock on the Nasdaq National Market
under the symbol "CNYF" subject to the completion of the Conversion and
compliance with certain conditions. There must be at least three market makers
to have and maintain the listing. The Company will seek to have at least three
market makers for its Common Stock. Making a market involves maintaining bid and
ask quotations and being able, as principal, to purchase and sell stock in
reasonable quantities at those quoted prices. The Company can provide no
assurance that arrangements can be made for there to be three market makers for
the Company's Common Stock. Furthermore, the Company cannot control whether
there will be enough willing buyers
29
<PAGE>
and sellers for an active and liquid trading market. Without an active and
liquid trading market, it may be difficult for stockholders to obtain full value
for their shares. See "Risk Factors--Absence of Market for Common Stock."
CAPITALIZATION
The following table presents the historical capitalization (capital
accounts, deposits and borrowings) of the Bank at March 31, 1998 and the
estimated capitalization of the Company (consolidated with the Bank) as though
the Conversion had been completed on that date. The table is based on the same
assumptions described above under "Pro Forma Data." The number of shares shown
includes shares to be sold in the Conversion and shares intended to be
contributed to the Foundation.
<TABLE>
<CAPTION>
15% ABOVE
MINIMUM MIDPOINT MAXIMUM MAXIMUM
CORTLAND 5,310,375 6,247,500 7,184,625 8,262,318
SAVINGS SHARES AT SHARES AT SHARES AT SHARES AT
HISTORICAL $10 PER SHARE $10 PER SHARE $10 PER SHARE $10 PER SHARE
----------- ------------- ------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Deposits (1)............................. $ 198,234 $ 198,234 $ 198,234 $ 198,234 $ 198,234
Borrowings............................... -- -- -- -- --
----------- ------------- ------------- ------------- -------------
Total deposits and borrowings............ 198,234 198,234 198,234 198,234 198,234
----------- ------------- ------------- ------------- -------------
----------- ------------- ------------- ------------- -------------
Stockholders' equity:
Preferred Stock:, $0.01 par value
2,000,000 shares authorized (none
outstanding)............................. -- -- -- -- --
Common Stock, $0.01 par value(2)
18,000,000 shares authorized; shares
outstanding as shown..................... -- 53 62 72 83
Additional paid-in capital............... -- 51,301 60,663 70,025 80,703
Retained earnings--substantially
restricted (3)........................... 30,662 30,662 30,662 30,662 30,662
Plus:
Accumulated other comprehensive income... 732 732 732 732 732
Less:
Expense of Foundation contribution,
net...................................... -- (635) (747) (860) (988)
Common Stock acquired by ESOP(4)......... -- (4,248) (4,998) (5,748) (6,610)
Common Stock acquired by PRRP(5)......... -- (2,124) (2,499) (2,874) (3,305)
----------- ------------- ------------- ------------- -------------
Total stockholders' equity............... 31,394 75,741 83,875 92,009 101,277
----------- ------------- ------------- ------------- -------------
Total capitalization..................... $ 229,628 $ 273,975 $ 282,109 $ 290,243 $ 299,511
----------- ------------- ------------- ------------- -------------
----------- ------------- ------------- ------------- -------------
</TABLE>
- ------------------------
(1) Does not reflect withdrawals from deposit accounts to purchase Common Stock.
(2) The effect of issuing additional Common Stock to satisfy the exercise of
options under the intended Stock Option Plan is not shown. See "Management
of the Bank--Benefits--Stock Option Plan."
(3) The retained earnings of the Bank will be restricted after the Conversion.
See "The Conversion--Effects of Conversion on Depositors and
Borrowers--Liquidation Rights."
(4) The Common Stock acquired by the ESOP (8% of the Common Stock to be issued
including the contribution to the Foundation) is shown as a reduction of
stockholders' equity because it is assumed to be purchased with the proceeds
of a loan from the Bank. See "Management of the Bank--Benefits--Employee
Stock Ownership Plan."
(5) Assumes that the Company repurchases 4% of the shares issued in the
Conversion to fund the PRRP at $10.00 per share. The purchase price is shown
as a reduction of stockholders' equity. See "Risk Factors--Possible Dilution
from Stock Options and the Personnel Recognition and Retention Program,"
"Pro Forma Data" and "Management of the Bank--Benefits--Personnel
Recognition and Retention Program."
30
<PAGE>
PRO FORMA DATA
The tables in this section show estimated information for the Company as
though the Conversion had occurred in the past. Each table shows estimated
stockholders' equity at the end of the period as though the Conversion had
occurred at the end of the period and estimated net income for the entire period
as though the Conversion had occurred at the beginning of the period. The
amounts shown in the tables, except for historical data, are based upon
assumptions and estimates, the most significant of which are described below.
It is assumed that the ESOP will purchase 8% of the Common Stock issued in
the Conversion (including Common Stock contributed to the Foundation). The
remaining shares are assumed to be sold for $10.00 per share with CIBC
Oppenheimer Corp. and Trident Securities, Inc. receiving a fee of 1.15% of the
purchase price of those shares, except that no fee will be paid on Common Stock
purchased by the ESOP and purchases estimated at $1.6 million by officers,
employees, and directors of the Bank and Company and members of their immediate
families. CIBC Oppenheimer Corp. and Trident Securities, Inc. will receive a
minimum fee of $750,000. It is also assumed that the Company contributes Common
Stock to the Foundation equal to 2% of the Common Stock sold in the Conversion.
Other Conversion expenses are estimated to be approximately $1.0 million. Actual
expenses may vary from these estimates. Stockholders' equity has not been
reduced by the liquidation account that must be created in connection with the
Conversion for the benefit of certain depositors.
The tables assume that the net proceeds were invested at 5.39% (the one-year
U.S. Treasury constant maturity index for the week which included March 31,
1998). This rate has been used because it is believed to be a reasonable
estimate of the rate that would be obtained on an investment of net proceeds.
The after-tax yield is assumed to be 3.29% (based on an estimated tax rate of
39%). The tables do not take into account possible withdrawals of deposits to
pay for Common Stock purchases. Per share amounts have been calculated by
dividing applicable amounts by the number of shares shown, as adjusted for
estimated ESOP allocations. The calculation of pro forma stockholders' equity
does not include assumed earnings on the net proceeds during the period shown.
For the purpose of calculating the pro forma data, the Company assumes that
it will implement the PRRP and repurchase 4% of the Common Stock sold in the
Conversion at $10.00 per share to fund the program. The Company also assumes
that all the repurchased stock is awarded under the program in awards that vest
gradually over five years. See "Management of the Bank--Benefits--Personnel
Recognition and Retention Program." No adjustments have been made to estimate
the effect of the Stock Option Plan which the Company expects to implement. The
ESOP is assumed to be funded with a loan from the Company that is repaid in
substantially equal principal payments over a period of twenty years. See
"Management of the Bank--Benefits--Employee Stock Ownership Plan."
The following information is not intended to predict the future and does not
show or predict the financial effects of the Conversion when it occurs in the
future. The information should not be taken as an indication of future
profitability. The pro forma stockholders' equity does not represent the fair
market value of the Common Stock and may be more than would be distributed to
stockholders in the unlikely event of a liquidation. The pro forma data should
not be used to project the future market price of the Common Stock.
31
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE THREE MONTHS ENDED MARCH 31, 1998
--------------------------------------------------------------------------
8,262,318
5,310,375 6,247,500 7,184,625 SHARES (15%
SHARES (MINIMUM) SHARES (MIDPOINT) SHARES (MAXIMUM) ABOVE MAXIMUM)
AT $10.00 PER AT $10.00 PER AT $10.00 PER AT $10.00 PER
SHARE SHARE SHARE SHARE
----------------- ----------------- ------------------ ----------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Gross proceeds............................. $ 52,063 $ 61,250 $ 70,438 $ 81,003
Plus shares issued to the Foundation..... 1,041 1,225 1,409 1,620
----------------- ----------------- ------------------ ----------------
Pro forma market capitalization............ $ 53,104 $ 62,475 $ 71,847 $ 82,623
----------------- ----------------- ------------------ ----------------
----------------- ----------------- ------------------ ----------------
Gross proceeds............................. $ 52,063 $ 61,250 $ 70,438 $ 81,003
Less offering expenses and commissions..... (1,750) (1,750) (1,750) (1,837)
----------------- ----------------- ------------------ ----------------
Estimated net conversion proceeds........ 50,313 59,500 68,688 79,166
ESOP funding............................. (4,248) (4,998) (5,748) (6,610)
PRRP funding............................. (2,124) (2,499) (2,874) (3,305)
----------------- ----------------- ------------------ ----------------
Estimated proceeds available for
investment(1).......................... $ 43,941 $ 52,003 $ 60,066 $ 69,251
----------------- ----------------- ------------------ ----------------
----------------- ----------------- ------------------ ----------------
NET INCOME:
Historical............................... $ 493 $ 493 $ 493 $ 493
Pro forma adjustments:
Net earnings from proceeds............... 361 427 494 569
ESOP expense(2).......................... (32) (38) (44) (50)
PRRP expense(3).......................... (65) (76) (88) (101)
----------------- ----------------- ------------------ ----------------
Pro forma net income................... $ 757 $ 806 $ 855 $ 911
----------------- ----------------- ------------------ ----------------
----------------- ----------------- ------------------ ----------------
NET INCOME PER SHARE:
Historical............................... $ 0.10 $ 0.09 $ 0.07 $ 0.06
Pro forma adjustments:
Net earnings from proceeds............... 0.07 0.07 0.08 0.08
ESOP expense(2).......................... (0.01) (0.01) (0.01) (0.01)
PRRP expense(3).......................... (0.01) (0.01) (0.01) (0.01)
----------------- ----------------- ------------------ ----------------
Pro forma net income per share......... $ 0.15 $ 0.14 $ 0.13 $ 0.12
----------------- ----------------- ------------------ ----------------
----------------- ----------------- ------------------ ----------------
Weighted average shares used in
calculation............................ 4,890,855 5,753,948 6,617,040 7,609,595
STOCKHOLDERS' EQUITY (BOOK VALUE)(4)(5):
Historical............................... $ 31,394 $ 31,394 $ 31,394 $ 31,394
Pro forma adjustments:
Estimated net conversion proceeds...... 50,313 59,500 68,688 79,166
Net effect of contribution to
Foundation(6)........................ 406 478 549 632
Less Common Stock acquired by:
ESOP(2).............................. (4,248) (4,998) (5,748) (6,610)
PRRP(3).............................. (2,124) (2,499) (2,874) (3,305)
----------------- ----------------- ------------------ ----------------
Pro forma book value............... $ 75,741 $ 83,875 $ 92,009 $ 101,277
----------------- ----------------- ------------------ ----------------
----------------- ----------------- ------------------ ----------------
STOCKHOLDERS' EQUITY (BOOK VALUE) PER
SHARE:
Historical............................... $ 5.91 $ 5.03 $ 4.37 $ 3.80
Pro forma per share adjustments:
Estimated net conversion proceeds...... 9.47 9.52 9.56 9.58
Net effect of contribution to
Foundation(6)........................ 0.08 0.08 0.08 0.08
Less Common Stock acquired by:
ESOP(2).............................. (0.80) (0.80) (0.80) (0.80)
PRRP(3).............................. (0.40) (0.40) (0.40) (0.40)
----------------- ----------------- ------------------ ----------------
Pro forma book value per share..... $ 14.26 $ 13.43 $ 12.81 $ 12.26
----------------- ----------------- ------------------ ----------------
----------------- ----------------- ------------------ ----------------
Shares used in calculation......... 5,310,375 6,247,500 7,184,625 8,262,318
RATIO OF OFFERING PRICE TO PRO FORMA NET
INCOME PER SHARE....................... 16.67x 17.86x 19.23x 20.83x
----------------- ----------------- ------------------ ----------------
----------------- ----------------- ------------------ ----------------
OFFERING PRICE PER SHARE AS A PERCENTAGE OF
PRO FORMA BOOK VALUE PER SHARE........... 70.13% 74.46% 78.06% 81.57%
----------------- ----------------- ------------------ ----------------
----------------- ----------------- ------------------ ----------------
</TABLE>
NOTES APPEAR AFTER FOLLOWING PAGE.
32
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31, 1997
--------------------------------------------------------------------------
8,262,318
5,310,375 6,247,500 7,184,625 SHARES (15%
SHARES (MINIMUM) SHARES (MIDPOINT) SHARES (MAXIMUM) ABOVE MAXIMUM)
AT $10.00 PER AT $10.00 PER AT $10.00 PER AT $10.00 PER
SHARE SHARE SHARE SHARE
----------------- ----------------- ------------------ ----------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Gross proceeds............................. $ 52,063 $ 61,250 $ 70,438 $ 81,003
Plus shares issued to the Foundation..... 1,041 1,225 1,409 1,620
----------------- ----------------- ------------------ ----------------
Pro forma market capitalization............ $ 53,104 $ 62,475 $ 71,847 $ 82,623
----------------- ----------------- ------------------ ----------------
----------------- ----------------- ------------------ ----------------
Gross Proceeds............................. $ 52,063 $ 61,250 $ 70,438 $ 81,003
Less offering expenses and commissions..... (1,750) (1,750) (1,750) (1,837)
----------------- ----------------- ------------------ ----------------
Estimated net conversion proceeds........ 50,313 59,500 68,688 79,166
ESOP funding............................. (4,248) (4,998) (5,748) (6,610)
PRRP funding............................. (2,124) (2,499) (2,874) (3,305)
----------------- ----------------- ------------------ ----------------
Estimated proceeds available for
investment(1).......................... $ 43,941 $ 52,003 $ 60,066 $ 69,251
----------------- ----------------- ------------------ ----------------
----------------- ----------------- ------------------ ----------------
NET INCOME:
Historical............................... $ 72 $ 72 $ 72 $ 72
Pro forma adjustments:
Net earnings from proceeds............... 1,445 1,710 1,975 2,277
ESOP expense(2).......................... (130) (152) (175) (202)
PRRP expense(3).......................... (259) (305) (351) (403)
----------------- ----------------- ------------------ ----------------
Pro forma net income................... $ 1,128 $ 1,325 $ 1,521 $ 1,744
----------------- ----------------- ------------------ ----------------
----------------- ----------------- ------------------ ----------------
NET INCOME PER SHARE:
Historical............................... $ 0.01 $ 0.01 $ 0.01 $ 0.01
Pro forma adjustments:
Net earnings from proceeds............... 0.30 0.30 0.30 0.30
ESOP expense(2).......................... (0.03) (0.03) (0.03) (0.03)
PRRP expense(3).......................... (0.05) (0.05) (0.05) (0.05)
----------------- ----------------- ------------------ ----------------
Pro forma net income per share......... $ 0.23 $ 0.23 $ 0.23 $ 0.23
----------------- ----------------- ------------------ ----------------
----------------- ----------------- ------------------ ----------------
Weighted average shares used in
calculation............................ 4,906,787 5,772,690 6,638,594 7,634,381
STOCKHOLDERS' EQUITY (BOOK VALUE)(4)(5):
Historical............................... $ 30,740 $ 30,740 $ 30,740 $ 30,740
Pro forma adjustments:
Estimated net conversion proceeds...... 50,313 59,500 68,688 79,166
Net effect of contribution to
Foundation(6)........................ 406 478 549 632
Less Common Stock acquired by:
ESOP(2).............................. (4,248) (4,998) (5,748) (6,610)
PRRP(3).............................. (2,124) (2,499) (2,874) (3,305)
----------------- ----------------- ------------------ ----------------
Pro forma book value............... $ 75,087 $ 83,221 $ 91,355 $ 100,623
----------------- ----------------- ------------------ ----------------
----------------- ----------------- ------------------ ----------------
STOCKHOLDERS' EQUITY (BOOK VALUE) PER
SHARE:
Historical............................... $ 5.79 $ 4.92 $ 4.28 $ 3.72
Pro forma per share adjustments:
Estimated net conversion proceeds...... 9.47 9.52 9.56 9.58
Net effect of contribution to
Foundation(6)........................ 0.08 0.08 0.08 0.08
Less Common Stock acquired by:
ESOP(2).............................. (0.80) (0.80) (0.80) (0.80)
PRRP(3).............................. (0.40) (0.40) (0.40) (0.40)
----------------- ----------------- ------------------ ----------------
Pro forma book value per share..... $ 14.14 $ 13.32 $ 12.72 $ 12.18
----------------- ----------------- ------------------ ----------------
----------------- ----------------- ------------------ ----------------
Shares used in calculation......... 5,310,375 6,247,500 7,184,625 8,262,318
RATIO OF OFFERING PRICE TO PRO FORMA NET
INCOME PER SHARE....................... 43.48x 43.48x 43.48x 43.48x
----------------- ----------------- ------------------ ----------------
----------------- ----------------- ------------------ ----------------
OFFERING PRICE PER SHARE AS A PERCENTAGE OF
PRO FORMA BOOK VALUE PER SHARE........... 70.72% 75.07% 78.62% 82.10%
----------------- ----------------- ------------------ ----------------
----------------- ----------------- ------------------ ----------------
</TABLE>
NOTES APPEAR ON FOLLOWING PAGE.
33
<PAGE>
- ------------------------------
(1) Estimated net proceeds available for investment consist of estimated net
Conversion proceeds minus (i) the proceeds attributable to the purchase of
Common Stock by the ESOP; and (ii) the cost of the shares covered by the
PRRP, which, subject to receipt of stockholder approval, are assumed to be
purchased at a price of $10.00 per share.
(2) The amount estimated to be borrowed by the ESOP from the Company is shown as
a reduction of stockholders' equity. ESOP expense is based upon generally
accepted accounting principles as described in accounting Statement of
Position 93-6. Generally accepted accounting principles require that as and
when shares pledged as security for an ESOP loan are committed to be
released from the loan (i.e., as the loan is repaid), ESOP expense is
recorded based upon the fair value of the shares at that time. The ESOP loan
is assumed to have a term of twenty years. It is therefore assumed that
one-twentieth of the Common Stock acquired by the ESOP is committed to be
released from the lien of the ESOP loan each year, and one-eightieth each
calendar quarter. ESOP expense shown is equal to the number of shares so
committed to be released for the period, multiplied by the per share fair
value at that time, which is assumed to be $10.00 per share. All shares
released during the period are assumed to be outstanding for the entire
period for the purpose of calculating earnings per share and book value per
share. Shares not yet committed to be released are not deemed to be
outstanding for either purpose. See "Management of the Bank--Benefits--
Employee Stock Ownership Plan."
(3) The shares purchased by the Company to fund the anticipated PRRP are assumed
to be purchased at the beginning of the periods shown at $10.00 per share
and immediately awarded to directors, officers and employees. Because the
shares are assumed to vest gradually over five years, 20% of the purchase
price is treated as an expense for the year ended December 31, 1997 and 5%
for the quarter ended March 31, 1998. If the Company uses authorized but
unissued shares to fund the plan, the interests of existing stockholders
would be diluted by approximately 3.85%. In such event, pro forma net
earnings per share would be $0.23, $0.23, $0.23 and $0.23, and pro forma
stockholders' equity per share would be $13.98, $13.19, $12.61 and $12.09 at
the minimum, midpoint, maximum and 15% above the maximum of the Valuation
Range, respectively, for the year ended December 31, 1997. Pro forma net
earnings per share would be $0.15, $0.14, $0.13 and $0.12, and pro forma
stockholders' equity per share would be $14.10, $13.29, $12.70 and $12.17 at
the minimum, midpoint, maximum and 15% above the maximum of the Valuation
Range, respectively, for the three months ended March 31, 1998. If the per
share price paid to repurchase stock to fund the plan is greater than $10.00
per share, then net income per share and stockholders equity per share would
be lower. See "Management of the Bank--Benefits--Personnel Recognition and
Retention Program."
(4) If the Stock Option Plan covering up to 10% of the Common Stock issued in
the Conversion is implemented as planned and funded with newly issued Common
Stock, the estimated net income and book value per share for all of the
alternatives shown on the preceding tables would be reduced because of the
additional shares that would be outstanding. The effect of the
implementation of the Stock Option Plan can not be reasonably estimated
because the number of options that may be awarded cannot be determined; the
exercise price of the options will depend upon the market price on the date
the options are awarded; the options will vest gradually over five years;
and the exercise of options is at the discretion of the director, officer or
employee holding the option. See "Management of the Bank--Benefits--Stock
Option Plan."
(5) The retained earnings of the Bank will be restricted after the Conversion.
See "Dividend Policy," and "The Conversion--Effects of Conversion on
Depositors and Borrowers--Liquidation Rights."
(6) The net effect of the contribution to the Foundation as shown is the
estimated tax benefit to the Company of the contribution, equal to the
amount of the contribution multiplied by the estimated tax rate of 39%. It
is assumed that the contribution is valued at $10.00 per share of Common
Stock and that the Company will realize the full tax benefit of the
contribution over the period permitted under the Internal Revenue Code.
34
<PAGE>
COMPARISON OF VALUATION AND PRO FORMA INFORMATION
WITH AND WITHOUT FOUNDATION
RP Financial, LC. has estimated that, if the Foundation was not being
established, the aggregate market value of the Common Stock of the Company would
be approximately $1.8 million higher at the midpoint of the Valuation Range,
which would result in a $3.0 million increase in the amount of Common Stock
offered in the Conversion at the midpoint. For comparative purposes only, set
forth below are certain estimated pricing ratios and financial information,
assuming that the Foundation was not established and assuming the Conversion was
completed at March 31, 1998. However, these are just estimates and there is no
assurance that if the Foundation were not funded by the Company, an appraiser at
that time would conclude that the market value of the Company's Common Stock
would be the same as estimated by RP Financial, LC.
<TABLE>
<CAPTION>
MINIMUM MIDPOINT
------------------------ ------------------------
WITH WITH NO WITH WITH NO
FOUNDATION FOUNDATION FOUNDATION FOUNDATION
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Estimated offering amount...................................... $ 52,063 $ 54,613 $ 61,250 $ 64,250
Pro forma market capitalization................................ 53,104 54,613 62,475 64,250
Total assets............................................... 276,735 278,697 284,869 287,178
Total liabilities.......................................... 200,994 200,994 200,994 200,994
Pro forma stockholders' equity................................. 75,741 77,703 83,875 86,184
Pro forma net income(1)........................................ 757 774 806 826
Pro forma stockholders' equity per share....................... 14.26 14.23 13.43 13.42
Pro forma net income per share(1).............................. $ 0.15 $ 0.16 $ 0.14 $ 0.14
Pro forma pricing ratios (annualized)
Price/stockholders' equity..................................... 70.13% 70.27% 74.46% 74.52%
Price/net income............................................... 16.67x 16.67x 17.86x 17.86x
Price/assets................................................... 19.19% 19.60% 21.93% 22.37%
Pro forma financial ratios (annualized)
Return on assets............................................... 1.09% 1.11% 1.13% 1.15%
Return on stockholders' equity................................. 4.00% 3.98% 3.84% 3.83%
Stockholders' equity/assets.................................... 27.37% 27.88% 29.44% 30.01%
</TABLE>
<TABLE>
<CAPTION>
MAXIMUM 15% ABOVE MAXIMUM
------------------------ ------------------------
WITH WITH NO WITH WITH NO
FOUNDATION FOUNDATION FOUNDATION FOUNDATION
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Estimated offering amount...................................... $ 70,438 $ 73,888 $ 81,003 $ 84,971
Pro forma market capitalization................................ 71,847 73,888 82,623 84,971
Total assets............................................... 293,003 295,659 302,271 305,325
Total liabilities.......................................... 200,994 200,994 200,994 200,994
Pro forma stockholders' equity................................. 92,009 94,665 101,277 104,331
Pro forma net income(1)........................................ 855 878 911 937
Pro forma stockholders' equity per share....................... 12.81 12.81 12.26 12.27
Pro forma net income per share(1).............................. $ 0.13 $ 0.13 $ 0.12 $ 0.12
Pro forma pricing ratios (annualized)
Price/stockholders' equity..................................... 78.06% 78.06% 81.57% 81.50%
Price/net income............................................... 19.23x 19.23x 20.83x 20.83x
Price/assets................................................... 24.52% 24.99% 27.33% 27.83%
Pro forma financial ratios (annualized)
Return on assets............................................... 1.17% 1.19% 1.21% 1.23%
Return on stockholders' equity................................. 3.72% 3.67% 3.60% 3.59%
Stockholders' equity/assets.................................... 31.40% 32.02% 33.51% 34.17%
</TABLE>
- ------------------------
(1) If effect is given to the estimated net expense of the contribution to the
Foundation assuming a value of $10.00 per share donated and an effective tax
rate of 39% with full recognition of the tax benefit of the contribution,
estimated pro forma net income for the three months ended March 31, 1998
would have been $122,000, or $.02 per share, at the minimum; $59,000, or
$.01 per share, at the midpoint; ($4,000), or $0.00 per share, at the
maximum; and ($77,000), or ($0.01) per share, at 15% above the maximum of
the Valuation Range.
35
<PAGE>
PARTICIPATION BY THE BOARD AND SENIOR MANAGEMENT
The following table sets forth certain information as to the intended
purchases of Common Stock by each director and executive officer of the Bank and
their associates and by all directors and executive officers as a group. This
table excludes shares to be purchased by the ESOP which may be allocated to
executive officers and excludes options or shares which may be granted pursuant
to the Stock Option Plan or the PRRP. For purposes of the following table, it
has been assumed that 6,125,000 shares (the midpoint of the Valuation Range) of
Common Stock will be sold at $10.00 per share and that sufficient shares will be
available to satisfy subscriptions in all categories. The percentages assume a
contribution of 122,500 shares of Common Stock to the Foundation.
<TABLE>
<CAPTION>
AGGREGATE
NUMBER PURCHASE PERCENT
NAME POSITION OF SHARES PRICE OF SHARES
- --------------------------- ------------------------------------------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Wesley D. Stisser, Jr. President & Chief Executive
Officer, Director 15,000 $ 150,000 0.24%
Joseph H. Compagni Director 15,000 150,000 0.24%
Roland Fragnoli Director 15,000 150,000 0.24%
Edward E. Hatter, Jr. Director 15,000 150,000 0.24%
Patrick J. Hayes, M.D. Director 15,000 150,000 0.24%
Robert S. Kashdin, CPA Director 15,000 150,000 0.24%
Harvey Kaufman Director 15,000 150,000 0.24%
Donald P. Reed Director 15,000 150,000 0.24%
Judith F. Riehlman Director 1,000 10,000 0.02%
Terrance D. Stalder Director 10,000 100,000 0.16%
F. Michael Stapleton Executive Vice President
& Chief Operating Officer 15,000 150,000 0.24%
Steven A. Covert Executive Vice President 5,000 50,000 0.08%
& Chief Financial Officer
Kerry D. Meeker Senior Vice President
& Senior Loan Officer 8,000 80,000 0.13%
----------- ------------ ---
All Directors and Executive
Officers as a group 159,000 $ 1,590,000 2.55%
----------- ------------ ---
----------- ------------ ---
</TABLE>
In addition to the above purchases, three recently retired directors
(Harwood Spaulding, Edward G. Burgess and Peter A. Potter) have indicated an
intention to subscribe for 25,000 shares of Common Stock, representing 0.40% of
the stock to be issued in the Conversion at the midpoint of the Valuation Range,
including the shares contributed to the Foundation. See "Management of the
Bank--Directors."
THE CONVERSION
THE BOARD OF DIRECTORS OF THE BANK AND THE SUPERINTENDENT HAVE APPROVED THE
PLAN OF CONVERSION. THE SUPERINTENDENT'S APPROVAL DOES NOT CONSTITUTE A
RECOMMENDATION OR ENDORSEMENT OF THE PLAN OF CONVERSION. CERTAIN TERMS USED IN
THE FOLLOWING SUMMARY OF THE MATERIAL ASPECTS OF THE CONVERSION ARE DEFINED IN
THE PLAN OF CONVERSION, A COPY OF WHICH MAY BE OBTAINED FROM THE BANK.
GENERAL
On March 23, 1998, the Board of Directors of the Bank adopted a Plan of
Conversion which provides that the Bank will convert from a mutual savings bank
to a stock savings bank. All of the capital stock of the Bank will be owned by
the Company. The Company plans to keep 50% of the net proceeds from the sale of
the Common Stock and to use the remaining 50% to purchase all of the stock of
the Bank to be
36
<PAGE>
issued as part of the Conversion. The Superintendent has approved the Plan
subject to its approval by the depositors of the Bank entitled to vote at the
Special Meeting to be held on September , 1998 and subject to the
satisfaction of certain other conditions imposed by the Superintendent in such
approval.
To accomplish the Conversion, the Bank will restate its Organization
Certificate to authorize it to issue stock. The Conversion will be accounted for
as a pooling of interests, which generally means that the financial statement
entries of the Bank that existed before the Conversion will continue without
change after the Conversion. As part of the Conversion, the Company is
conducting a Subscription Offering to sell its Common Stock. Many depositors and
the Company's ESOP will have priority rights to subscribe for the Common Stock
being sold in the Conversion. Shares not subscribed for in the Subscription
Offering may be offered in a Community Offering to certain members of the
general public, with preference given to natural persons residing in Cortland
County, New York. The Company and the Bank anticipate that all shares not
subscribed for in the Subscription or Community Offering will be offered for
sale by the Company to the general public in a Syndicated Community Offering.
See "--Community Offering" and "--Syndicated Community Offering." The Conversion
must be completed within 24 months after the date of the approval of the Plan of
Conversion by the Superintendent. See "Effect of Delay in Consummating the
Conversion."
REASONS FOR THE CONVERSION
The Bank has several business purposes for the Conversion. The sale of the
Company's Common Stock will provide the Bank with additional equity capital to
support its existing operations and to provide capital for expansion
opportunities. At March 31, 1998, the Bank had Tier I capital equal to 13.26% of
applicable assets and total risk-based capital equal to 23.19% of risk-weighted
assets. See "Regulatory Capital Compliance" for discussion of the effects of the
Conversion on the Bank's capital ratios. In addition, investment of the net
proceeds from the Conversion is expected to provide additional operating income
to further increase the Bank's capital on a continuing basis.
The Conversion will structure the Bank in the stock form used in the United
States by all commercial banks, most major business corporations and many
savings institutions. The Conversion will give many of the Bank's depositors the
opportunity to become stockholders of the Company, allowing them to own stock in
the financial organization in which they maintain deposit accounts. Such
ownership may encourage depositors who become stockholders to promote the Bank
to others, thereby further contributing to the Bank's earnings potential. The
Bank also expects that the ESOP, the Stock Option Plan and the PRRP will assist
it in attracting and retaining qualified personnel and successfully competing
with other financial institutions in its principal market area.
The Board of Directors of the Bank believes that the holding company
structure will facilitate the diversification of the Bank's business activities
and the acquisition of other banks as well as other companies. The holding
company structure could enable an acquired bank to operate on a more autonomous
basis as a wholly-owned subsidiary of the Company, rather than as a division of
the Bank. For example, the acquired bank could retain its own directors,
officers and corporate name as well as have representation on the Board of
Directors of the Company. As of the date of this Prospectus, the Company has no
understandings or agreements to acquire any other institution or engage in any
activities other than holding the Bank's stock.
ESTABLISHMENT OF THE FOUNDATION
GENERAL. As part of the Bank's commitment to its local community, the Plan
of Conversion provides that a charitable foundation will be established in
connection with the Conversion. The Bank and the Company will incorporate the
Foundation under New York law as a non-stock corporation, and will fund the
Foundation with a contribution of Common Stock of the Company equal to 2% of the
Common Stock
37
<PAGE>
sold in the Conversion. The Company may also contribute or lend up to $100,000
to the Foundation for initial start up expenses and to cover initial grants by
the Foundation.
The Company and the Bank believe that the Foundation will help maintain a
bond between the Bank and its community. The community will share in the
potential growth and success of the Company over the long term. By enhancing the
Bank's visibility and reputation, the Bank believes that the Foundation will
improve goodwill and enhance the long-term value of the Bank. The Foundation
will be dedicated to charitable purposes within the Bank's local community,
including community development activities.
PURPOSE OF THE FOUNDATION. The purpose of the Foundation is to provide
funds to support charitable causes and community development activities. It is
expected that the Foundation will provide grants for community development, low
cost housing, civic and education programs, and for other charitable programs.
In recent years, the Bank has emphasized community lending and community
development activities within the Bank's local community. The Foundation is
being formed to add to the Bank's existing community activities. However, the
Foundation is expected to replace some of the Bank's existing charitable giving.
The Bank intends to continue to emphasize lending and development activities
within its market area, but the Foundation may have even greater flexibility to
foster community activities and the promotion of charitable causes because it
will not be subject to limits placed on the Bank by most banking laws and
regulations. In this regard, the Board of Directors believes that establishing a
charitable foundation is consistent with the Bank's commitment to community
service.
Although the Bank and the Company have considered the above factors, the
establishment of a charitable foundation in connection with a conversion is a
relatively new concept that has only been implemented by several other
converting banks. Accordingly, certain persons may raise challenges as to the
validity of the establishment of the Foundation that, if not resolved promptly,
could delay the consummation of the Conversion or result in the elimination of
the Foundation.
STRUCTURE OF THE FOUNDATION. The Foundation will be incorporated under New
York law as a not-for-profit corporation. The Foundation's Certificate of
Incorporation will provide that it is organized exclusively for charitable
purposes as set forth in Section 501(c)(3) of the Internal Revenue Code. No part
of the net earnings of the Foundation will benefit, or be distributed to, its
directors, officers or members. A majority of the directors of the Foundation
will be officers or directors of the Bank, and the remaining directors will
consist of civic and community leaders within the Bank's local community. Once
the initial Board of Directors of the Foundation is appointed by the Bank and
the Company, future directors will be elected by the existing board of the
Foundation. Only persons serving as directors of the Foundation will have the
authority to vote to elect new directors of the Foundation.
The Board of Directors of the Foundation will control the Foundation's
affairs. That Board will establish the Foundation's policies in making grants or
contributions, consistent with the Foundation's purpose. As directors of a
non-profit corporation, directors of the Foundation will have a 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 of the
Foundation. The directors of the Foundation will also direct the activities of
the Foundation, including the management of the Common Stock of the Company held
by the Foundation. However, the FDIC and the Superintendent have required that
the Foundation agree that all shares of Common Stock held by the Foundation will
be voted in the same ratio as all other shares of the Company's Stock on all
proposals considered by stockholders of the Company. The FDIC and the
Superintendent may waive this voting restriction under certain circumstances if
compliance with the voting restriction would: (i) cause a violation of the law
of the State of New York; (ii) cause the Foundation to lose its tax-exempt
status, or cause 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) cause the Foundation to be subject to an
excise tax under Section 4941 of the Internal Revenue Code. However, there can
be no assurance that a waiver will be granted if requested, and the failure to
grant a waiver could adversely affect the tax-exempt status of the Foundation
and the deductibility of the
38
<PAGE>
Company's contribution. If the FDIC and the Superintendent waive such voting
requirement, the directors of the Foundation would control the voting of the
Common Stock owned by the Foundation. However, if a waiver is granted, the FDIC
or the Superintendent may impose additional conditions regarding the composition
of the Board of Directors of 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 staff of the Company and the Bank. The Board of
Directors of the Foundation will appoint such officers as may be necessary to
manage the operations of the Foundation. The Bank has agreed with the Federal
Reserve and the FDIC that the Bank will comply with all applicable 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.
The Company intends to capitalize the Foundation with Common Stock of the
Company in an amount equal to 2% of the Common Stock to be sold in connection
with the Conversion and may donate or lend up to an additional $100,000 to the
Foundation. Therefore, without resoliciting subscribers, the contribution to the
Foundation could vary from 104,125 shares to 162,006 shares. The Company and the
Bank decided to fund the Foundation primarily with Common Stock rather than cash
to create a link between the future success of the Company and the benefits to
the community, and so the community can share in the potential growth and
success of the Company and the Bank over the long term. The use of Common Stock
provides a potentially larger endowment than if cash is used because the
Foundation will share in future stock price appreciation. As such, the
contribution of Common Stock may provide a self-sustaining funding, so the
Company can reduce, if not eliminate, future cash contributions to the
Foundation.
The Foundation will receive working capital from any dividends that may be
paid on the Common Stock, from loans secured by the Common Stock, or from the
proceeds of the sale of any of the Common Stock. The Foundation must distribute
annually in grants or contributions, at least 5% of the average fair market
value of its net investment assets. As a condition of its gift, the Company has
required that the Foundation not sell stock of the Company in any one year in
excess of 5% of the average market value of the assets held by the Foundation
unless the Board of Directors determines that the failure to sell more stock
would result in a long-term reduction of the value of the Foundation's assets
and thus jeopardize the Foundation's ability to carry out its purposes.
The contribution of the Common Stock to the Foundation will reduce (dilute)
the interests of the other stockholders of the Company because the contribution
will increase the number of shares outstanding. The voting and ownership
interests of the other stockholders will be diluted by 1.96%, compared to their
interests in the Company if the Foundation were not established. For additional
discussion of dilution, see "Pro Forma Data."
TAX CONSIDERATIONS. The Company and the Bank have been advised by Serchuk &
Zelermyer, LLP that an organization created for the purposes described above
would qualify as a tax-exempt organization under Section 501(c)(3) of the
Internal Revenue Code, and would likely be classified as a private foundation.
The Foundation will submit an application to the IRS to be recognized as a
tax-exempt organization. If the Foundation files the application within 15
months after it is organized, and if the IRS approves the application, the
effective date of the Foundation's status as a Section 501(c)(3) organization
will be retroactive to the date of its organization. Serchuk & Zelermyer, LLP,
however has not rendered any advice on whether the restriction on voting of the
Common Stock held by the Foundation will affect the ability of the Foundation to
qualify as a tax-exempt organization. However, as discussed above, the FDIC and
the Superintendent may waive the voting restriction under certain circumstances.
39
<PAGE>
The Company is entitled to a federal income tax deduction for charitable
contributions up to 10% of its taxable income (computed before deducting the
contributions) for the year of the contribution. Any contributions in excess of
the deductible amount may be carried forward and deducted in the Company's next
five taxable years, subject, in each such year, to the 10% of taxable income
limitation. The Company's contribution to the Foundation is likely to exceed the
10% limit for the year in which it is made. Based on the policy considerations
discussed above, the Company and Bank believe that a contribution in excess of
the 10% annual limitation is justified because of the Bank's capital position
and its earnings, the additional capital being raised in the Conversion and the
potential benefits of the Foundation to the Bank's community. See "Regulatory
Capital Compliance," "Capitalization," and "Comparison of Valuation and Pro
Forma Information With and Without Foundation." Taking into account the amount
of the contribution and its effect on the capital ratios of the Bank, the Bank
will still exceed the capital levels necessary to be classified as "well
capitalized" under federal regulations, which is the best capital category.
Thus, the amount of the contribution will not adversely impact the financial
condition of the Company and the Bank. The Company and the Bank therefore
believe that the contribution is reasonable.
The Company and the Bank have received the opinion of Serchuk and Zelermyer,
LLP that the Company's contribution of its own Common Stock would not constitute
self-dealing, and that the Company will be entitled to a deduction in the amount
of the fair market value of the Common Stock at the time of contribution, less
the $0.01 per share par value which the Foundation is required to pay to the
Company for the Common Stock contributed, subject to the annual limit based upon
10% of taxable income. As discussed above, the Company may deduct any portion of
the contribution in excess of the 10% limit for the following five years. For
the purpose of calculating the amount of the tax deduction, the fair market
value of the Common Stock will be equal to the average of the high and low
prices on the day the Company makes the contribution, which is expected to be
the first day the Common Stock opens for trading. If the contribution is made in
1998 as expected, the amount that the Company may deduct in the current year for
tax purposes will depend upon net income in 1998. The maximum permitted
deduction in future years will likewise depend upon net income in those years,
and there is no assurance that the Company will have sufficient income in future
years to reap the entire tax benefit from the contribution. Neither the Company
nor the Bank expect to make any further contributions to the Foundation during
the first five tax years after the initial contribution. After that time, the
Company and the Bank may consider future contributions to the Foundation.
The opinion of Serchuk and Zelermyer, LLP is not binding on the IRS. The IRS
may refuse to recognize the Foundation as a tax-exempt organization under
Section 501(c)(3) of the Internal Revenue Code or may refuse to permit the
deduction. If the IRS so refuses and is successful, the anticipated tax benefit
from the contribution would be charged as an expense, reducing the Company's net
income in the year in which the IRS does so. See "Risk Factors--Dilution,
Additional Costs and Other Consequences of the Foundation." Furthermore, the
statute pursuant to which the Foundation will be permitted to deduct the fair
market value of a contribution of its own Common Stock has, in the past, been
written so that it periodically expires, and is then renewed. If the statute
were to expire and not be renewed, the Company might lose the right to deduct
any remaining unused portion of its contribution.
In general, a private foundation is exempt from federal and state income
taxation. However, investment income, such as interest, dividends and capital
gains, will be subject to a federal excise tax of 2.0%. The Foundation will be
required to make various filings with the IRS to maintain its tax-exempt status
and publish related notices regarding the availability of certain information to
the public. 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.
REGULATORY CONDITIONS IMPOSED ON THE FOUNDATION. The FDIC and the
Superintendent have required that the Foundation agree to the following
conditions: (i) the Foundation will be subject to examination by the FDIC and
the Superintendent; (ii) the Foundation must comply with supervisory directives
imposed by the FDIC and the Superintendent; (iii) the Foundation will operate in
accordance with written policies
40
<PAGE>
adopted by its Board of Directors, including a conflict of interest policy; and
(iv) any shares of Common Stock of the Company held by the Foundation must be
voted in the same ratio as all other outstanding shares of Common Stock of the
Company on all proposals considered by stockholders of the Company. The voting
restriction may be waived by the FDIC and the Superintendent under certain
conditions, as described above. The voting restriction will terminate for any
shares sold by the Foundation.
EFFECTS OF CONVERSION ON DEPOSITORS AND BORROWERS
VOTING RIGHTS. Except for the right to vote on the Conversion, the Bank's
depositors currently have no voting rights in the Bank. After the Conversion,
the Bank's depositors will have no voting rights in the Bank and will not be
able to elect directors or to otherwise participate in the conduct of the
affairs of the Bank or the Company unless they own Common Stock. The Bank will
be a wholly-owned subsidiary of the Company, which will hold all voting rights
in the Bank. The Company's stockholders will have exclusive voting rights in the
Company. Stockholders may vote on any matter to be considered by the
stockholders of the Company and will generally have one vote for each share of
Common Stock owned. See "Restrictions on Acquisition of the Company and the
Bank--Restrictions in the Company's Certificate of Incorporation and
Bylaws--Limitations on Voting Rights" for a discussion of limits on the voting
rights of the Company's stockholders.
DEPOSIT ACCOUNTS AND LOANS. The terms and conditions of each depositor's
accounts with the Bank, the account balance and the existing FDIC insurance
coverage of deposit accounts will not change due to the Conversion, except to
the extent the depositor withdraws funds to purchase Common Stock. The
Conversion will not change the terms and conditions of outstanding loans, the
balances owed, or the obligations of the borrowers under their loans from the
Bank.
TAX EFFECTS. The Bank has received an opinion from its counsel, Serchuk &
Zelermyer, LLP, stating that the Conversion will constitute a nontaxable
reorganization under Section 368(a)(1)(F) of the Internal Revenue Code. Among
other things, the opinion, which is an exhibit to the registration statement
that the Company filed with the SEC, describes the material tax consequences of
the Conversion as follows: (i) the Conversion will qualify as a reorganization
under Section 368(a)(1)(F), and the Bank will not recognize any gain or loss in
either its mutual form or its stock form, nor will the Company, due to
Conversion; (ii) the Bank will not recognize any gain or loss upon the receipt
of money from the Company for stock of the Bank, and the Company will not
recognize any gain or loss upon the receipt of money for the Common Stock; (iii)
the assets of the Bank in either its mutual or its stock form will have the same
tax basis before and after the Conversion; (iv) the holding period of the assets
of the Bank will include the pre-Conversion holding period; (v) the Eligible
Account Holders and Supplemental Eligible Account Holders will not recognize any
gain or loss when they receive deposit accounts after the Conversion equal to
their existing accounts in the Bank, plus an interest in the liquidation account
of the Bank after the Conversion; (vi) the non-transferable subscription rights
given to certain depositors in the Subscription Offering are taxable to the
recipient to the extent the subscription rights have value; (vii) the tax basis
of each account holder's accounts in the Bank after the Conversion will be the
same as the tax basis before Conversion minus the fair market value of the
non-transferable subscription rights received and increased by the amount, if
any, of gain recognized on the exchange; (viii) the tax basis of each
depositor's interest in the liquidation account will be zero; (ix) the holding
period of the Common Stock acquired through the exercise of subscription rights
shall begin when the subscription rights are exercised; (x) the Bank in its
stock form will succeed to and take into account the earnings and profits or
deficit in earnings and profits of the Bank, in its mutual form, as of the date
of Conversion; (xi) the Bank, immediately after Conversion, will succeed to the
bad debt reserve accounts of the Bank, in its mutual form, and the bad debt
reserves will have the same character in the hands of the Bank after Conversion
as if no distribution or transfer had occurred; and (xii) the creation of the
liquidation account will have no effect on the Bank's taxable income,
deductions, or addition to reserve for bad debts either in its mutual or stock
form.
41
<PAGE>
The opinion of Serchuk & Zelermyer, LLP is based in part on the assumption
that the exercise price of the subscription rights to purchase Common Stock will
be approximately equal to the fair market value of that Common Stock at the time
of the completion of the Conversion. With respect to the subscription rights,
the Bank has received a letter from RP Financial, LC., which, based on certain
assumptions, concludes that the subscription rights have no economic value when
distributed or exercised, whether or not a Community Offering or other purchase
arrangement takes place. That conclusion is based on the fact that such rights
are: (i) acquired by the recipients without payment, (ii) non-transferable,
(iii) of short duration, and (iv) afford the recipients the right only to
purchase Common Stock at a price equal to its estimated fair market value, which
will be the same price at which shares of Common Stock for which no subscription
right is received in the Subscription Offering may be offered in the Community
Offering or Syndicated Community Offering. If the subscription rights are deemed
to have an ascertainable value, receipt of such rights would likely be taxable
only to those persons who exercise the subscription rights in an amount equal to
such value (either as a capital gain or ordinary income), and the Bank could
recognize gain on the distribution of subscription rights.
The Bank is subject to New York taxation and has received the opinion of
Serchuk & Zelermyer, LLP that the Conversion will be treated for New York state
tax purposes similar to the Conversion's treatment for federal tax purposes.
Unlike a private letter ruling, the opinion of Serchuk & Zelermyer, LLP and
the conclusion of RP Financial, LC. have no binding effect or official status,
and no assurance can be given that the conclusions reached in any of those
opinions would be sustained by a court if contested by the IRS or the New York
tax authorities. DEPOSITORS WITH SUBSCRIPTION RIGHTS ARE ENCOURAGED TO CONSULT
WITH THEIR OWN TAX ADVISERS AS TO THE TAX CONSEQUENCES IF THE SUBSCRIPTION
RIGHTS ARE DEEMED TO HAVE AN ASCERTAINABLE VALUE.
LIQUIDATION RIGHTS. The Bank has no plans to liquidate. However, if there
is ever a complete liquidation of the Bank, either before or after the
Conversion, deposit account holders will receive the protection of FDIC
insurance up to applicable limits. Additional liquidation rights before and
after the Conversion are described below.
No savings bank chartered under New York law has ever, to the Bank's
knowledge, liquidated and, after paying all its deposits and other debts,
distributed any remaining assets to depositors. However, it can be argued that
depositors of a mutual form savings bank would receive a share of any assets of
that Bank remaining after payment of claims of all creditors, including the
claims of all depositors for the withdrawal value of their accounts.
After the Conversion, each depositor, in the event of a complete
liquidation, would have a claim of the same general priority as the claims of
all other general creditors of the Bank. Therefore, except for the liquidation
account described below, the depositor's claim would be solely for the balance
in his or her deposit account plus accrued interest. The depositor would have no
interest in the value of the Bank above that amount.
The Plan provides that the Bank shall establish, upon the completion of the
Conversion, a "liquidation account" for the benefit of Eligible Account Holders
and Supplemental Eligible Account Holders in an amount equal to the net worth of
the Bank as of the latest practicable date prior to the Conversion. Each
Eligible Account Holder and Supplemental Eligible Account Holder will have an
initial interest in such liquidation account for each deposit account held in
the Bank on the applicable record date. An Eligible Account Holder's and
Supplemental Eligible Account Holder's interest as to each deposit account will
be in the same proportion to the total liquidation account as the balance in his
or her account on the Eligibility Record Date (December 31, 1996) and the
Supplemental Eligibility Record Date (June 30, 1998), respectively, was to the
aggregate balance in all deposit accounts of Eligible Account Holders and
Supplemental Eligible Account Holders on such date. However, if the amount in
any Eligible Account Holder's or Supplemental Eligible Account Holder's deposit
account at the close of business on any annual closing date of the Bank is less
than the lowest amount in such account on the Eligibility Record Date
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and/or the Supplemental Eligibility Record Date, as the case may be or at the
close of business on any previous annual closing date after the Eligibility
Record Date and/or the Supplemental Eligibility Record Date, then the account
holder's interest in the liquidation account will be reduced by an amount
proportionate to any such reduction. The interest of an account holder in the
liquidation account will never increase despite any increase in the balance of
the account holder's related accounts after the Conversion. The account holder's
interest will cease to exist if such deposit account is closed. Savings
certificates will be deemed closed when they mature.
Any assets remaining after the above liquidation rights of Eligible Account
Holders and Supplemental Eligible Account Holders are satisfied would be
distributed to the Company as the sole stockholder of the Bank.
No merger, consolidation, purchase of bulk assets with assumption of deposit
accounts and other liabilities, or similar transaction, whether the Bank, as
converted, or another insured savings institution is the surviving institution,
is deemed to be a complete liquidation for purposes of distribution of the
liquidation account and, in any such transaction, the liquidation account would
be assumed to the full extent required by regulations of the Banking Department
as then in effect.
SUBSCRIPTION OFFERING.
In accordance with the Conversion Regulations and FDIC policy,
non-transferable subscription rights have been granted under the Plan of
Conversion to the following persons and entities in the following order of
priority:
FIRST PRIORITY: ELIGIBLE ACCOUNT HOLDERS. Each Eligible Account Holder
(depositors of the Bank on December 31, 1996 with balances of at least $100)
will receive non-transferable subscription rights on a priority basis to
purchase up to 15,000 shares ($150,000) of Common Stock. If Eligible Account
Holders exercise subscription rights for more shares than the total number
available, shares shall be allocated first to permit each subscriber, to the
extent possible, to purchase 100 shares or the total amount of his or her
subscription, whichever is less. Remaining shares shall be allocated to each
Eligible Account Holder based on the proportion that his or her qualifying
deposits bear to the total qualifying deposits of all subscribing Eligible
Account Holders. Excess shares shall be reallocated (one or more times as
necessary) among those Eligible Account Holders whose subscriptions are still
not fully satisfied on the same principle until all available shares have been
allocated or all subscriptions satisfied. Subscription rights received by
officers and directors in this category based on their increased deposits in the
Bank in the year preceding December 31, 1996, are subordinated to the
subscription rights of other Eligible Account Holders.
SECOND PRIORITY: EMPLOYEE PLANS. Tax-qualified employee benefit plans of the
Bank or the Company have been granted subscription rights to purchase up to 10%
of the total shares issued in the Conversion. The ESOP, as such a plan, intends
to purchase up to 8% of the Common Stock issued in the Conversion, including
Common Stock contributed to the Foundation. No other employee plan will purchase
any Common Stock in the Conversion, except that employees of the Bank may
exercise their subscription rights, if they were depositors of the Bank at the
applicable dates, through the Bank's 401(k) Plan, which will then subscribe for
stock using funds allocated to those employees under the 401(k) Plan.
The right of the ESOP to purchase the Common Stock is subordinate to the
subscription rights of the Eligible Account Holders. If all the Common Stock
sold in the Conversion is purchased by subscribing Eligible Account Holders,
then the ESOP expects to purchase 8% of the Common Stock issued in the
Conversion on the open market or through privately negotiated transactions after
the Conversion.
THIRD PRIORITY: SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS. Each Supplemental
Eligible Account Holder (depositors of the Bank on June 30, 1998 with balances
of at least $100 who are not Eligible Account Holders) will receive
non-transferable subscription rights to purchase 15,000 shares ($150,000) of
Common Stock. If Supplemental Eligible Account Holders exercise subscription
rights for more shares than the total
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number of shares remaining after satisfying higher priority subscription rights,
shares shall be allocated in the same manner as described above regarding
Eligible Account Holders.
The subscription rights of Supplemental Eligible Account Holders are
subordinate to the rights of the Eligible Account Holders and the ESOP to
subscribe for Common Stock.
SUBSCRIPTION OFFERING EXPIRATION DATE. THE SUBSCRIPTION OFFERING WILL EXPIRE
AT 12:00 NOON, NEW YORK TIME, ON SEPTEMBER 16, 1998, UNLESS THE SUBSCRIPTION
OFFERING IS EXTENDED, AT THE DISCRETION OF THE BOARD OF DIRECTORS, UP TO AN
ADDITIONAL 45 DAYS WITH THE APPROVAL OF THE SUPERINTENDENT AND THE FDIC, IF
NECESSARY, BUT WITHOUT ADDITIONAL NOTICE TO SUBSCRIBERS (THE "SUBSCRIPTION
OFFERING EXPIRATION DATE"). SUBSCRIPTION RIGHTS WILL BECOME VOID IF NOT
EXERCISED ON OR PRIOR TO THE SUBSCRIPTION OFFERING EXPIRATION DATE.
SEE "--PURCHASING COMMON STOCK" FOR A DESCRIPTION OF HOW TO SUBSCRIBE FOR COMMON
STOCK. IF THE CONVERSION IS NOT COMPLETED BY OCTOBER 31, 1998 (45 DAYS AFTER
SEPTEMBER 16, 1998), THEN SUBSCRIBERS WILL BE RESOLICITED AND WILL HAVE AN
OPPORTUNITY TO RECEIVE A REFUND OF AMOUNTS PAID, WITH INTEREST.
COMMUNITY OFFERING
Any shares of Common Stock not subscribed for in the Subscription Offering
will be offered for sale in a Community Offering to the general public with a
preference to natural persons residing in Cortland County. The Community
Offering, if any, shall be for a period of not more than 45 days unless extended
by the Company and the Bank, with the approval of the Superintendent and the
FDIC, if necessary, and shall commence at the same time as, during or promptly
after the Subscription Offering. The Community Offering, if any, can be
terminated at any time without notice. The Common Stock will be offered and sold
in the Community Offering to achieve a wide 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 $150,000 of Common Stock
offered in the Community Offering. Further, the Company may limit total
subscriptions so as to assure that the number of shares available for the public
offering may be up to a specified percentage of the number of shares of Common
Stock. Finally, the Company may reserve shares offered in the Community Offering
for sales to institutional investors.
The term "residing in Cortland County" shall mean occupying a dwelling as a
primary residence within Cortland County, having an intent to remain within the
Cortland County for a period of time, and manifesting the genuineness of that
intent by establishing an ongoing physical presence together with an indication
that such presence is not transitory. The Bank may use deposit or loan records
or other evidence provided to it to make a determination as to whether a person
is residing in Cortland County. In all cases, the determination shall be in the
sole discretion of the Bank.
The Bank and the Company, in their sole discretion, may reject
subscriptions, in whole or in part, received from any person.
SYNDICATED COMMUNITY OFFERING.
Any shares of Common Stock not sold in the Subscription Offering or directly
by the Bank in the Community Offering, if any, may be offered for sale to the
general public by a selling group of broker-dealers in a Syndicated Community
Offering, subject to terms, conditions and procedures as may be determined by
the Bank and the Company in a manner that is intended to achieve a wide
distribution of the Common Stock subject to the rights of the Company to accept
or reject in whole or in part all orders in the Syndicated Community Offering.
If held, it is expected that the Syndicated Community Offering will commence as
soon as practicable after termination of the Subscription Offering and the
direct 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 by the Company and the Bank with the approval of
the Superintendent and the FDIC, if necessary.
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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 direct Community Offering, if any, the Boards of
Directors of the Company and the Bank will seek to make other arrangements for
the sale of the remaining shares. Such other arrangements will be subject to the
approval of the Banking Department and the FDIC and to compliance with
applicable state and federal securities laws.
PURCHASE LIMITATIONS
Each purchaser must purchase at least 25 shares. No person, together with
any associate or group of persons acting together, may subscribe for or purchase
more than 15,000 shares ($150,000) of Common Stock, except that the ESOP may
purchase 8% including shares contributed to the Foundation. If more than one
person is named as a depositor on any account or accounts, such as a joint
account, all named depositors on those accounts will be considered to be acting
together for the purpose of the limit so that they may not purchase, in total
including their individual orders and orders by the group, more than $150,000 of
Common Stock. The Board of Directors, in its sole discretion, may increase or
decrease the purchase limitation without the approval of the depositors of the
Bank and without resoliciting subscribers except as described below, provided
that the maximum purchase limitation may not be increased to a percentage in
excess of 5%. The maximum purchase limitation can be further increased to 9.99%
if the amount by which individual subscriptions exceed 5% does not, in the
aggregate, exceed 10%. If the maximum purchase limit is increased, subscribers
who submit orders for $150,000 of Common Stock will be resolicited by mail and
given an opportunity to increase their orders and other subscribers may also be
resolicited. The principal factor that would be considered in determining to
increase the limit is the dollar amount of subscriptions received.
The officers and directors of the Bank or their associates may not purchase
more than 25% of the shares of the Common Stock sold in the Conversion. The
directors and officers of the Bank and the Company are not deemed to be acting
in concert solely by reason of their being directors and officers of the Bank or
the Company.
The term "associate" of a person means (i) any corporation or organization
(other than the Bank, the Company or a majority-owned subsidiary of the Bank) of
which such person is an officer or partner or is, directly or indirectly, the
beneficial owner of 10% or more of any class of equity securities, (ii) any
trust or other estate in which such person has a substantial beneficial interest
or as to which such person serves as trustee or in a similar fiduciary capacity
(except that the ESOP and, in some cases, other benefit plans of the Bank or the
Company are generally not associates), and (iii) any relative or spouse of such
person or any relative of such spouse, who has the same home as such person or
who is a director or officer of the Bank or the Company, or any of its parents
or subsidiaries. For example, a corporation of which a person serves as an
officer would be an associate of such person, and therefore, all shares
purchased by such corporation would be included with the number of shares which
such person individually could purchase under the above limitations.
Persons and entities will be considered to be acting together, or acting in
concert, if they are knowingly participating in a joint activity or independent
conscious parallel action towards a common goal, even if there is no express
agreement to do so, and also if there is any combination or pooling of their
voting or other interests in the Common Stock for a common purpose under any
contract, agreement or understanding, even if not in writing. Examples of two
people or entities who will be considered to be acting together in their
purchases of Common Stock include (i) one person providing another person with
money or credit, or arranging for that person to obtain money or credit, so that
the second person can purchase Common Stock; (ii) two people agreeing to share
in the profits from the sale of Common Stock owned by one of them; (iii) an
officer, director, partner or principal owner of any business entity purchasing
stock while that business entity is itself purchasing stock; and (iv) a trustee
of a trust and the beneficiary of the trust both
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purchasing Common Stock. Any indirect purchase through a nominee, agent or
representative will be considered to be a purchase by the person appointing the
nominee, agent or representative.
Each person purchasing Common Stock in the Conversion will be deemed to
confirm that such purchase does not conflict with the maximum purchase limit. If
the purchase limit is violated by any person (including any associate or group
of persons affiliated or otherwise acting in concert with such persons), the
Company will have the right to repurchase at $10.00 per share all shares
acquired in excess of the purchase limit or, if such excess shares have been
sold, to receive the difference between the $10.00 per share and the price at
which such excess shares were sold. This right will be assignable by the
Company.
Common Stock purchased in the Conversion will be freely transferable, except
for shares purchased by directors and officers of the Bank. For certain
restrictions on the Common Stock purchased by directors and officers, see
"--Restrictions on Transferability of Subscription Rights and Stock." In
addition, members of the National Association of Securities Dealers and their
associates are subject to certain restrictions on the transfer of securities
purchased by using subscription rights and to certain reporting requirements
upon purchase of such securities.
RESTRICTIONS ON TRANSFERABILITY OF SUBSCRIPTION RIGHTS AND COMMON STOCK
DEPOSITORS WITH SUBSCRIPTION RIGHTS MAY NOT TRANSFER OR ENTER INTO ANY
AGREEMENT OR UNDERSTANDING TO TRANSFER THE LEGAL OR BENEFICIAL OWNERSHIP OF THE
SUBSCRIPTION RIGHTS THAT THEY RECEIVE IN THE SUBSCRIPTION OFFERING OR THE SHARES
OF COMMON STOCK TO BE ISSUED UPON THE EXERCISE OF THOSE RIGHTS. SUBSCRIPTION
RIGHTS MAY BE EXERCISED ONLY BY THE PERSON TO WHOM THEY ARE GRANTED AND ONLY FOR
HIS OR HER ACCOUNT. EACH PERSON SUBSCRIBING FOR SHARES WILL BE REQUIRED TO
CERTIFY THAT HE OR SHE IS PURCHASING SHARES SOLELY FOR HIS OR HER OWN ACCOUNT
AND THAT HE OR SHE HAS NO AGREEMENT OR UNDERSTANDING REGARDING THE SALE OR
TRANSFER OF SUCH SHARES. THE CONVERSION REGULATIONS ALSO PROHIBIT ANY PERSON
FROM OFFERING OR MAKING AN ANNOUNCEMENT OF AN OFFER OR INTENT TO MAKE AN OFFER
TO PURCHASE SUCH SUBSCRIPTION RIGHTS OR SHARES OF COMMON STOCK PRIOR TO THE
COMPLETION OF THE CONVERSION.
THE BANK AND THE COMPANY WILL PURSUE ANY AND ALL LEGAL AND EQUITABLE
REMEDIES IF THEY BECOME AWARE OF THE TRANSFER OF SUBSCRIPTION RIGHTS AND WILL
NOT HONOR ORDERS KNOWN BY THEM TO INVOLVE THE TRANSFER OF SUCH RIGHTS.
Shares of Common Stock purchased in the Subscription Offering by directors
and officers of the Company and the Bank may not be sold for one year after the
Conversion, except for a disposition of shares in the event of the death of the
stockholder. Common Stock issued by the Company to directors and officers in the
Conversion will bear a legend giving appropriate notice of the restriction, and,
in addition, the Company will give appropriate instructions to the transfer
agent for the Common Stock with respect to the restriction. Any shares issued to
directors and officers as a stock dividend, stock split, or otherwise with
respect to restricted stock shall be subject to the same restrictions.
For three years after the Conversion, no director or officer of the Bank,
the Company or their associates may, without the prior approval of the
Superintendent, purchase any shares of Common Stock other than from or through a
registered broker or dealer. This restriction does not apply however to the
purchase of Common Stock pursuant to the Stock Option Plan or the PRRP to be
established after the Conversion.
PURCHASING COMMON STOCK
Subscribers in the Subscription Offering must deliver to the Bank, on or
before the Subscription Offering Expiration Date, (i) an original Subscription
Offering stock order form (a "Subscription Order Form") fully completed and
signed, (ii) a certification form properly signed, and (iii) payment in full.
PHOTOCOPIES OR OTHER NON-ORIGINAL SUBSCRIPTION ORDER FORMS AND FAXED
SUBSCRIPTION ORDER FORMS WILL NOT BE ACCEPTED. The ESOP will not be required to
pay for its shares until the Conversion is completed. All
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subscription rights will expire at 12:00 noon, New York time, on September 16,
1998, whether or not the Bank has been able to locate each person entitled to
such subscription rights. ONCE SUBMITTED, SUBSCRIPTION ORDERS CANNOT BE REVOKED
WITHOUT THE CONSENT OF THE BANK AND THE COMPANY UNLESS THE CONVERSION IS NOT
COMPLETED WITHIN 45 DAYS AFTER THE SUBSCRIPTION OFFERING EXPIRATION DATE.
If an Order Form (i) is not delivered to the addressee by the United States
Postal Service or the Bank is otherwise unable to locate the addressee; (ii) is
not received by the Bank or is received after the Subscription Offering
Expiration Date; (iii) is defectively completed or executed; (iv) is not
accompanied by the full required payment (including balances in deposit accounts
covered by withdrawal authorizations which are insufficient to pay the required
payment); or (v) is not mailed pursuant to a "no mail" order placed in effect by
the account holder, then in any such event the related subscription rights will
lapse as though the person holding such rights failed to return the completed
Subscription Order Form within the time period specified. The Company may, but
will not be required to, waive any irregularity on any Order Form or require the
submission of corrected Order Forms or the remittance of full payment for
subscribed shares by such date as the Company may otherwise specify. The waiver
of an irregularity on an Order Form in no way obligates the Company to waive any
other irregularity on any other Order Form. Waivers will be considered on a case
by case basis. The interpretation by the Bank or Company of the terms and
conditions of the Plan and of the acceptability of the Order Forms will be
final, subject to the authority of the Banking Department and the FDIC.
To ensure that each purchaser receives a Prospectus at least 48 hours before
the applicable offering expires as required by Rule 15c2-8 of the Securities
Exchange Act of 1934, as amended, no Prospectus will be mailed any later than
five days prior to expiration or hand delivered any later than two days prior to
expiration. Execution of an Order Form will confirm receipt or delivery
satisfying Rule 15c2-8. Order Forms will only be distributed with a Prospectus.
Payment for shares of Common Stock at $10.00 per share may be made (i) in
cash, if delivered in person, (ii) by check or money order, or (iii) for shares
of Common Stock subscribed for in the Subscription Offering, by authorization of
withdrawal from savings accounts (including savings certificates) maintained
with the Bank. Payment by wire transfer or payment from private third parties
will not be accepted. Payments made in cash or by check or money order will be
placed in a segregated account and interest will be paid by the Bank at 2.75%
per annum from the date payment is received until the Conversion is completed or
terminated. If the Conversion is not consummated for any reason, all funds
submitted to purchase Common Stock will be refunded promptly with interest as
described above.
The Order Form provides the method for subscribers to authorize withdrawals
from deposit accounts. Once a subscriber authorizes a withdrawal to purchase
Common Stock, the withdrawal amount may not be used for any other purpose until
the Conversion has been completed or terminated. However, all sums authorized
for withdrawal will continue to earn interest at the regular rate for the
account until the Conversion has been completed or terminated. Interest
penalties for early withdrawal applicable to savings certificates will not apply
to withdrawals authorized for the purchase of shares. If a partial withdrawal
results in a certificate of deposit with a balance less than the applicable
minimum balance requirement, the certificate shall be canceled at the time of
withdrawal, without penalty, and the remaining balance will earn interest at the
passbook savings account rate after the withdrawal.
Owners of self-directed IRAs may use the assets of their IRAs to purchase
Common Stock, but only if the IRAs are not maintained at the Bank. Persons with
IRAs at the Bank must transfer their accounts to an unaffiliated institution or
broker to purchase Common Stock. Instructions on how to transfer IRAs at the
Bank can be obtained from the Stock Center located at the Bank's main office.
Depositors who want to use their IRAs at Cortland Savings Bank to purchase
Common Stock should contact the Stock Center no later than .
IT IS UNLAWFUL FOR THE BANK TO LEND FUNDS OR EXTEND CREDIT TO ANY PERSON TO
PURCHASE COMMON STOCK IN THE CONVERSION.
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DELIVERY OF STOCK CERTIFICATES. Certificates representing Common Stock
issued in the Conversion will be mailed to the persons entitled to them at the
address noted on the Order Form as soon as practicable after the Conversion. Any
certificates returned as undeliverable will be held until claimed by persons
legally entitled to them or otherwise disposed of in accordance with applicable
law. Until certificates for the Common Stock are available and delivered to
subscribers, subscribers may not be able to sell their shares of Common Stock.
MARKETING ARRANGEMENTS
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. They have agreed to use their reasonable best efforts
to assist the Company in soliciting subscriptions and purchase orders for Common
Stock. CIBC Oppenheimer Corp. and Trident Securities, Inc. will assist the Bank
as follows: (i) in training and educating the Bank's employees regarding the
mechanics and regulatory requirements of the sale of Common Stock; (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 a fee of 1.15%
of the dollar amount of the Common Stock sold in the Subscription Offering and
the Community Offering, excluding shares sold to (i) the Bank's and the
Company's directors and officers, and members of their immediate families and
any Individual Retirement Account or employee benefit plan for the benefit of
such persons and (ii) any employee benefit plan of the Bank or the Company;
provided, however, that the minimum fee payable to CIBC Oppenheimer Corp. and
Trident Securities, Inc. is $750,000. If there is a Syndicated Community
Offering through a syndicate of broker-dealers, the aggregate fee shall not
exceed 4.5% of the Common Stock sold by CIBC Oppenheimer Corp. and Trident
Securities, Inc. and other broker-dealers under selected broker-dealer
agreements.
The Bank also will reimburse CIBC Oppenheimer Corp. and Trident Securities,
Inc. for their reasonable out-of-pocket expenses associated with their marketing
effort not to exceed $25,000, excluding agreed upon disbursements, and the Bank
will pay the fees of their attorneys not to exceed $75,000 plus out-of-pocket
expenses and disbursements. The Bank has made an advance payment of $10,000 to
each of CIBC Oppenheimer Corp. and Trident Securities, Inc. 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 the services to be provided by CIBC
Oppenheimer Corp. and Trident Securities, Inc. pursuant to their engagement by
the Bank and the Company as their financial advisor in connection with the
Conversion, including liabilities under the Securities Act of 1933. See "Pro
Forma Data" for further information regarding amounts payable to CIBC
Oppenheimer Corp. and Trident Securities, Inc.
The Common Stock will be offered principally by the distribution of this
Prospectus and through activities conducted at a Stock Center located at the
Bank's main office, in an area that is not publicly accessible. The Stock Center
is expected to operate during normal business hours. It is expected that a
registered representative employed by CIBC Oppenheimer Corp. or Trident
Securities, Inc. will be working at, and supervising the operation of, the Stock
Center. CIBC Oppenheimer Corp. and Trident Securities, Inc. will be responsible
for overseeing the mailing of materials relating to the sale of Common Stock,
responding to questions regarding the Conversion and processing Order Forms. It
is expected that Bank and Company personnel will be present in the Stock Center
to assist with clerical matters and to answer questions related solely to the
business of the Bank.
Directors and executive officers of the Company may participate in the
solicitation of offers to purchase Common Stock in jurisdictions where such
participation is not prohibited. Other employees of the Company and the Bank may
participate in the sale of Common Stock in ministerial capacities or providing
clerical work in effecting a sales transaction. Such other employees have been
instructed not to solicit offers to purchase Common Stock or provide advice
regarding the purchase of Common Stock.
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Questions of prospective purchasers will be directed to executive officers of
the Company or registered representatives of CIBC Oppenheimer Corp. or Trident
Securities, Inc. The Company will rely on Rule 3a4-1 of the Securities Exchange
Act of 1934, as amended, and sales of Stock will be conducted in accordance with
Rule 3a4-1, so as to permit officers, directors, and employees to participate in
the sale of Common Stock. No officer, director, or employee of the Company or
the Bank will be compensated in connection with such person's solicitations or
other participation in the sale of Common Stock by the payment of commissions or
other remuneration based either directly or indirectly on transactions in the
Stock.
The Company will make reasonable efforts to comply with the securities laws
of all states in the United States in which persons entitled to subscribe for
the Common Stock pursuant to the Plan reside. However, no person will be offered
or allowed to purchase any Common Stock under the Plan if he or she resides in a
foreign country. No payments will be made in lieu of the granting of
subscription rights to any such person.
EFFECT OF DELAY IN CONSUMMATING THE CONVERSION
The completion of the Conversion will depend, in part, upon the Bank's
operating results, stock market conditions and general economic conditions. The
Bank and the Company anticipate completing the Conversion within 45 days after
the special meeting of depositors held to approve the Conversion. However, if
the Boards of Directors of the Bank and the Company are of the opinion that
economic conditions generally or the market for publicly traded thrift
institution stocks make it undesirable to sell the Common Stock necessary to
complete the Conversion, then the sale may be delayed until conditions improve.
A material delay in the completion of the sale of Common Stock may result in
a significant increase in the costs of completing the Conversion. Significant
changes in the Bank's operations and financial condition, the aggregate market
value of the Common Stock to be issued in the Conversion and general market
conditions may occur during such material delay. If the Conversion is not
completed within 24 months after the approval of the Plan of Conversion by the
Superintendent, the Bank would charge Conversion costs as operating expenses at
that time.
STOCK PRICING AND NUMBER OF SHARES TO BE ISSUED
RP Financial, LC., a financial consulting and appraisal firm that is
experienced in the evaluation and appraisal of business entities, including
converting thrift institutions, was retained by the Bank to prepare an appraisal
of the estimated pro forma market value, as of the completion of the Conversion,
of the Common Stock to be sold in the Conversion. RP Financial, LC. will receive
a fee of $20,000 for its appraisal and to assist in the preparation of related
material. In addition, RP Financial, LC. will receive a fee of $7,500 for its
assistance with the preparation of a business plan for the Bank and will receive
reimbursement for out-of-pocket expenses up to $5,000. The Bank has agreed to
indemnify RP Financial, LC. under certain circumstances against liabilities and
expenses (including certain legal fees) arising out of or based on any
misstatement or untrue statement of a material fact contained in the information
supplied by the Bank to RP Financial, LC., except where RP Financial, LC. is
determined to have been negligent or failed to exercise due diligence in the
preparation of its appraisal. RP Financial, LC. is independent of the Company
and the Bank.
The appraisal contains an analysis of a number of factors including, but not
limited to, the Bank's financial condition and operating trends, the competitive
environment within which the Bank operates, operating trends of certain thrift
institutions and their holding companies, relevant economic conditions, both
nationally and in the State of New York which affect the operations of thrift
institutions, and stock market values of certain institutions. In addition, RP
Financial, LC. has advised the Bank that it has considered and will consider
both the effect of the additional capital raised by the sale of the Common
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Stock and the effect of the contribution of Common Stock to the Foundation on
the estimated market value of the Common Stock. The Board of Directors has
reviewed the appraisal, including the stated methodology of RP Financial, LC.
and the assumptions used in the preparation of the appraisal. The Board of
Directors is relying upon the expertise, experience and independence of RP
Financial, LC. and is not qualified to determine the appropriateness of the
assumptions or the methodology. The appraisal has been filed as an exhibit to
the registration statement filed with the SEC in connection with the Conversion.
See "Additional Information."
On the basis of the above, RP Financial, LC. has determined, in its opinion,
that as of June 5, 1998, the estimated aggregate pro forma market value of the
Common Stock to be issued in the Conversion was within a range of from
$52,062,500 to $70,437,500 with a midpoint of $61,250,000. The Company has
determined to offer the shares in the Conversion at a price of $10.00 per share.
Therefore, the Company expects to issue, and is offering, from 5,206,250 to
7,043,750 shares of Common Stock, subject to increase to up to 8,100,312 shares
of Common Stock as described below.
RP Financial, LC. will update its appraisal prior to consummation of the
Conversion. If the final estimated aggregate pro forma market value of the
Common Stock to be issued in the Conversion is between $70,437,500 (the maximum
of the Valuation Range) and $81,003,120 (15% above the maximum of the Valuation
Range), the total number of shares to be sold may be increased without
resolicitation of subscribers and without a new vote of Bank's depositors,
unless required by the Banking Department and the FDIC. Any such increase would
be subject to review. If the final estimated value is less than $52,062,500 or
more than $81,003,120, then subscribers will be resolicited and, unless the
Banking Department and the FDIC permit otherwise, a new vote of the Bank's
depositors to approve the Conversion will be required. No sale of the shares
will take place unless RP Financial, LC. first confirms to the Banking
Department and the FDIC that, to the best of RP Financial, LC.'s knowledge and
judgment, nothing of a material nature has occurred which would cause it to
conclude that the aggregate purchase price of all shares to be sold in the
Conversion is incompatible with its estimate of the aggregate pro forma market
value of the Common Stock at the time of the sale.
THE APPRAISAL BY RP FINANCIAL, LC. IS NOT INTENDED, AND MUST NOT BE
CONSTRUED, AS A RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF PURCHASING
THE COMMON STOCK. IN PREPARING THE APPRAISAL, RP FINANCIAL, LC. HAS RELIED UPON
AND ASSUMED THE ACCURACY AND COMPLETENESS OF FINANCIAL AND STATISTICAL
INFORMATION PROVIDED BY THE BANK. RP FINANCIAL, LC. DID NOT INDEPENDENTLY VERIFY
THE FINANCIAL STATEMENTS AND OTHER INFORMATION PROVIDED BY THE BANK, NOR DID RP
FINANCIAL, LC. VALUE INDEPENDENTLY THE ASSETS AND LIABILITIES OF THE BANK. THE
APPRAISAL CONSIDERS THE BANK ONLY AS A GOING CONCERN AND SHOULD NOT BE
CONSIDERED AS AN INDICATION OF THE LIQUIDATION VALUE OF THE BANK. MOREOVER,
BECAUSE THE APPRAISAL 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 THE COMMON STOCK WILL BE ABLE TO
SELL SUCH SHARES AT PRICES AT OR ABOVE THE $10.00 PURCHASE PRICE.
An increase in the total number of shares to be issued in the Conversion
would decrease both a subscriber's ownership interest and the estimated pro
forma equity and net income on a per share basis while increasing the estimated
pro forma equity and net income on an aggregate basis. In the event of a
material reduction in the valuation, the Bank may decrease the number of shares
to reflect the reduced valuation. A decrease in the number of shares to be
issued in the Conversion would increase both a subscriber's ownership interest
and the estimated pro forma equity and net income on a per share basis while
decreasing estimated equity and net income on an aggregate basis.
RESTRICTIONS ON REPURCHASE OF COMMON STOCK
Generally, unless the Superintendent consents, within one year after the
Conversion, the Company may not repurchase Common Stock, and in the second and
third year following the Conversion, the Company may only repurchase Common
Stock as part of an open-market stock repurchase program in an
50
<PAGE>
amount up to 5% of the outstanding stock during each of those two years,
provided the repurchase does not cause the Bank to become undercapitalized.
Similarly, the FDIC does not permit repurchases during the first year after the
Conversion, except that not more than 5% of the outstanding Common Stock may be
repurchased during the first year upon a showing of a compelling and valid
business reason. In addition, SEC rules also restrict the method, time, price,
and number of shares of Common Stock that may be repurchased by the Company and
affiliated purchasers. If, in the future, the rules and regulations regarding
the repurchase of Common Stock are liberalized, the Company may utilize the
rules and regulations then in effect.
INTERPRETATION AND AMENDMENT OF THE PLAN
To the extent permitted by law, all interpretations of the Plan of
Conversion by the Board of Directors of the Bank will be final; however, such
interpretations shall have no binding effect on the Superintendent and the FDIC.
If deemed necessary or desirable by the Board of Directors, the Plan of
Conversion may be substantively amended by the Board of Directors with the
concurrence of the Superintendent and the FDIC, except that if Regulations are
liberalized after the approval of the Plan of Conversion by the Banking
Department, the FDIC and the Bank's depositors, the Board of Directors may amend
the Plan to conform to the Conversion Regulations without further depositor
approval to the extent permitted by law. An amendment to the Plan of Conversion
that would result in a material adverse change in the terms of the Conversion
would require a resolicitation of subscribers.
CONDITIONS AND TERMINATION
Completion of the Conversion requires the approval of the Plan of Conversion
by the affirmative vote of not less than a majority of the total number of votes
of the depositors of the Bank eligible to be cast and by the affirmative vote of
at least 75% in amount of deposit liabilities of the depositors represented in
person or by proxy and the sale of all shares of Common Stock within 24 months
after the Superintendent approves the Plan of Conversion. If these conditions
are not satisfied, the Conversion will not occur and the Bank will continue its
business in the mutual form of organization. The Plan of Conversion may be
terminated by the Board of Directors at any time prior to the meeting of
depositors to approve the Conversion and after such meeting with the approval of
the Superintendent.
OTHER
ALL STATEMENTS MADE IN THIS PROSPECTUS ARE QUALIFIED BY THE CONTENTS OF THE
PLAN OF CONVERSION, THE MATERIAL TERMS OF WHICH ARE SET FORTH IN THIS
PROSPECTUS. THE PLAN OF CONVERSION (WITHOUT EXHIBITS) IS ATTACHED TO THE PROXY
STATEMENT DISTRIBUTED IN CONNECTION WITH THE MEETING OF DEPOSITORS TO APPROVE
THE CONVERSION. COPIES OF THE PLAN OF CONVERSION ARE ALSO AVAILABLE FROM THE
BANK AND IT SHOULD BE CONSULTED FOR FURTHER INFORMATION.
APPROVAL OF THE PLAN OF CONVERSION BY THE BANK'S DEPOSITORS AUTHORIZES THE
BOARD OF DIRECTORS TO AMEND OR TERMINATE IT.
51
<PAGE>
CORTLAND 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, 1997 are a part of the audited
consolidated financial statements which appear beginning on page F-1 of this
Prospectus. All information contained in this Prospectus for the three months
ended March 31, 1997 and 1998 is unaudited. In the opinion of management, all
adjustments necessary for a fair presentation of those interim periods have been
included and are of a normal recurring nature. Results for the three month
period ended March 31, 1998 do not necessarily indicate the results that may be
expected for the year ended December 31, 1998. These Statements of Income should
be read with the Consolidated Financial Statements and Notes and Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
-------------------- -------------------------------
1998 1997 1997 1996 1995
--------- --------- --------- --------- ---------
(UNAUDITED) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest income:
Loans....................................................... $ 3,377 $ 3,433 $ 13,582 $ 13,805 $ 14,012
Securities.................................................. 848 898 3,769 3,620 3,404
Other short-term investments................................ 86 86 316 362 395
--------- --------- --------- --------- ---------
Total interest income..................................... 4,311 4,417 17,667 17,787 17,811
Interest expense:
Deposits.................................................... 2,010 2,064 8,328 8,758 8,562
Other....................................................... -- -- -- -- 51
--------- --------- --------- --------- ---------
Total interest expense.................................... 2,010 2,064 8,328 8,758 8,613
--------- --------- --------- --------- ---------
Net interest income....................................... 2,301 2,353 9,339 9,029 9,198
Provision for loan losses..................................... 75 225 3,300 1,380 600
--------- --------- --------- --------- ---------
Net interest income after provision for loan losses......... 2,226 2,128 6,039 7,649 8,598
Non-interest income:
Service charges............................................. 184 152 636 662 651
Net gain on sale of securities.............................. 6 7 46 15 16
Nationar recovery (provision)............................... -- -- 45 -- (100)
Other....................................................... 55 60 162 93 104
--------- --------- --------- --------- ---------
Total non-interest income................................. 245 219 889 770 671
Non-interest expenses:
Salaries and employee benefits.............................. 812 804 2,928 2,862 2,789
Building, occupancy and equipment........................... 214 277 981 990 939
Postage and supplies........................................ 96 91 323 306 333
Professional fees........................................... 64 32 268 251 83
Advertising................................................. 33 22 116 103 118
Deposit insurance premium................................... 6 7 26 2 239
Real estate owned........................................... 92 21 500 260 207
Other....................................................... 328 371 1,730 1,427 1,237
--------- --------- --------- --------- ---------
Total non-interest expenses............................... 1,645 1,625 6,872 6,201 5,945
--------- --------- --------- --------- ---------
Income before income tax expense (benefit)................ 826 722 56 2,218 3,324
Income tax expense (benefit).................................. 333 311 (16) 853 1,400
--------- --------- --------- --------- ---------
Net Income.................................................. $ 493 $ 411 $ 72 $ 1,365 $ 1,924
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements
52
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The Company has only recently been formed and, therefore, has no results of
operations. The Bank's results of operations depend principally on its net
interest income, which is the difference between the income earned on its loans
and securities and its cost of funds, principally interest paid on deposits.
Results of operations are also affected by the provision for loan losses, the
level of non-interest income, and non-interest expenses.
Sources of non-interest income include categories such as deposit account
fees and other service charges, gains on the sale of securities and fees for
banking services such as safe deposit boxes. The largest category of
non-interest expense is compensation and benefits expense. Other principal
categories of non-interest expense are occupancy expense and real estate owned
expense, which represents expenses in connection with real estate acquired in
foreclosure or in satisfaction of a debt owed to the Bank. Through the year
ended December 31, 1995, FDIC deposit insurance premiums represented a
significant category of non-interest expense, but have not been significant
since the insurance premiums were reduced in the quarter ended September 30,
1995. See "Regulation--Banking Regulation--Insurance of Accounts."
SPECIAL MATTERS AFFECTING RESULTS OF OPERATIONS
Since late 1996, two interrelated problems have had a substantial direct
effect on the Bank's results of operations. Management has worked aggressively
to identify the scope of these problems, resolve them and recognize their
financial consequences, so that management could focus its attention on future
operations and the implementation of its strategy for the future. The two
problems are as follows.
OFFICER DEFALCATION. During the fourth quarter of 1996, the Bank discovered
that its then senior loan officer had been involved in various schemes to
defraud the Bank. These schemes included, among other things, the making of
false entries in the Bank's books, the creation of loans to borrowers who either
did not exist or were unaware of the loans and the diversion of Bank funds for
personal purposes. Upon the discovery of these matters, the officer was
dismissed and he was subsequently convicted of criminal charges as a result of
his actions. Immediately after the discovery of this matter, the Bank undertook
an investigation of transactions in which the officer was involved in order to
identify uncollectable assets resulting from his activities. As a result of this
investigation, the Bank charged off $607,000 of loans during the fourth quarter
of 1996 which the Bank believed either did not exist or were otherwise
uncollectable. In addition, the Bank identified approximately $349,000 of
improper expenses and other losses attributable to the actions of the officer
which, because they had already been recognized for financial statement
purposes, did not require any additional expense. Of this $349,000,
approximately $110,000 was incurred in various years prior to 1995,
approximately $105,000 in 1995 and approximately $134,000 in 1996.
The Bank has made a claim against its fidelity bond carrier in the amount of
approximately $1.0 million as a result of this matter. The claim is currently
under discussion with the carrier and the amount recoverable on the claim is in
dispute. No asset is recorded on the books of the Bank reflecting the value of
the claim, and if the claim is denied and subsequently determined to be
unrecoverable, no additional charge-off will result.
In addition to the direct losses caused by the officer defalcation, the Bank
has incurred expenses in connection with the investigation and resolution of the
matter. These include, in addition to time expended by directors, officers and
employees of the Bank, professional fees which would not otherwise have been
incurred totaling approximately $128,000 during the eighteen months ended March
31, 1998. Furthermore, as discussed below, poor supervision while the officer in
question was in charge of lending operations is
53
<PAGE>
believed to have contributed to the large volume of non-performing loans which
were designated for sale during the fourth quarter of 1997 as described in the
following discussion.
SALE OF PROBLEM LOANS. During the fourth quarter of 1997, the Bank decided
that its non-performing loans were creating too great a strain on management
resources and the work necessary to collect those assets was diverting
management from its core goal of running the Bank in a profitable manner.
Therefore, in order to improve overall asset quality and free management from
less productive tasks associated with the resolution of problem loans, the Bank
decided to seek to sell a substantial portion of its non-performing loans to a
single purchaser. During December of 1997, the Bank identified $4.3 million of
loans as candidates for such a sale. These loans were all either non-performing
or were performing but had been identified by management as potential problem
loans. Approximately half of the loans were commercial mortgage loans and
approximately half were residential mortgage loans.
When these loans were designated for prompt disposition, the Bank charged
off $1.7 million against its allowance for loan losses to reflect the fair value
of the loans. This charge-off represented the difference between the carrying
value of the loans and the amount which the Bank believed, after consultation
with loan brokers, could be realized upon a bulk sale of the loans. The Bank had
already charged off $331,000 of such loans during 1997 as a result of its
regular evaluation of loans in its portfolio.
During the first quarter of 1998, while identifying a purchaser for the loan
package and negotiating the terms of the sale, the Bank designated $661,000 of
additional loans to include in the package being sold. The Bank consummated the
sale during the first quarter of 1998 with the proceeds of $3.1 million
approximating the carrying value of the loans sold. Four of the loans originally
designated as held for sale were not sold; three because the Bank believed that
it could obtain full recovery without undue effort and one because the purchaser
refused to accept it but which was subsequently paid in full.
ANALYSIS OF NET INTEREST INCOME
Net interest income, the Bank's primary income source, depends principally
upon (i) the amount of interest-earning assets that the Bank can maintain based
upon its funding sources; (ii) the relative amounts of interest-earning assets
versus interest-bearing liabilities; and (iii) the difference between the yields
earned on those assets and the rates paid on those liabilities. Non-performing
loans adversely affect net interest income because they must still be funded by
interest-bearing liabilities, but they do not provide interest income.
Furthermore, when the Bank designates an asset as non-performing, all interest
which has been accrued but not actually received is deducted from current period
income, further reducing net interest income.
MANAGEMENT OF INTEREST RATE RISK
The principal objective of the Bank's interest rate risk policy is to avoid
taking undue interest rate risk while continuing to satisfy customer demand for
loans and deposits. In order to manage interest rate risk, management seeks to
(i) evaluate the exposure of the Bank's principal asset and liability categories
to interest rate changes, (ii) determine the level of interest rate risk
appropriate based on the Bank's business focus, operating environment, capital
level and performance objectives, and (iii) pursue strategies to invest in
assets or generate liabilities which have interest rate risk profiles that fit
the Bank's requirements. The Bank seeks to reduce the vulnerability of its
operating results to changes in interest rates by managing the ratio of assets
to liabilities which mature or have interest rate adjustments during specified
time periods. However, future changes in market interest rates remain an
uncertainty that could have a negative impact on the earnings of the Bank.
Management seeks to limit, but not eliminate, interest rate risk by offering
adjustable-rate loans and short term commercial and consumer loans. During
periods of low interest rates as in recent years, residential mortgage loan
customers prefer fixed-rate loans. The Bank will make such loans, which can
often be made at interest rates higher than those which must then be offered to
attract borrowers willing to
54
<PAGE>
accept adjustable-rate loans. Although the Bank has not sold such loans in the
past, the Bank intends to begin selling a portion of its fixed-rate loans in the
latter part of 1998 to reduce the interest rate risk which accompanies the
making of such loans, while retaining the servicing of those loans to provide a
source of non-interest income.
The Board's Asset and Liability Committee meets quarterly for a detailed
review of interest rate risk matters based upon periodic reports prepared by
Fleet Investment Advisors, an independent consulting firm. The consultant has
been retained by the Bank to prepare a quarterly report including an estimate of
the interest rate sensitivity of the Bank's assets and liabilities and to
recommend strategies to implement the Bank's asset and liability management
goals. Interest rate pricing and interest rate risk strategy objectives are
implemented by a committee of four executive officers of the Bank. The committee
meets weekly to review the pricing of the Bank's loan and deposit products. The
Board of Directors of the Bank receives and reviews a report on the Bank's
estimated interest rate sensitivity every month. The Bank seeks to cushion its
results of operations against the effect of interest rate fluctuations by
preserving a loyal customer base with core deposits that are less prone to
gravitate to high rate deposit products as interest rates rise.
GAP ANALYSIS. The matching of assets and liabilities may be analyzed by
examining the extent to which such assets and liabilities are "interest
sensitive" and by monitoring the Bank's estimated interest sensitivity "gap." An
asset or liability is said to be interest sensitive within a specific time
period if it will mature or its interest rate will adjust (reprice) within that
time period. The interest sensitivity gap for any period of time is defined as
the difference between the amount of interest-earning assets estimated to mature
or reprice within that period and the amount of interest-bearing liabilities
estimated to mature or reprice within that same period. On a quarterly basis, an
independent, nationally-recognized consulting firm provides the Bank with an
analysis of the Bank's estimated interest rate sensitivity gap, based upon
assumptions developed by that firm. At March 31, 1998, the firm estimated that
the Bank's one-year gap, the difference between the estimated amount of
interest-earning assets versus interest-bearing liabilities maturing or
repricing within one year, as a percentage of total assets, was negative 10.51%,
as shown on the table below.
A gap is considered positive for any period when the amount of
interest-sensitive assets exceeds the amount of interest sensitive liabilities
estimated to reprice within such period. A gap is considered negative when the
amount of interest sensitive liabilities exceeds the amount of interest
sensitive assets estimated to reprice within a given period. Accordingly, during
a period of rising interest rates, an institution with a positive gap for that
period would expect its net interest income to increase as the cost of its
interest-bearing liabilities rises more slowly than the yield on its
interest-earning assets. The institution would expect net interest income to
decline during such period if interest rates fall. An institution with a
negative gap, such as the Bank, would expect its net interest income to be
affected in the opposite way, decreasing during periods of rising interest rates
and increasing during periods of declining interest rates. However, the
repricing of most assets and liabilities is discretionary and subject to
customer preference. Thus, for example, during periods of rising interest rates,
loan customers may delay the sales of their homes, resulting in reduced loan
turnover. At the same time, deposit customers with low-rate savings, demand and
NOW accounts may accelerate the migration of deposits into higher rate savings
certificates as the rates on savings certificates become more attractive.
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at March 31, 1998, which are estimated
by the Bank, based upon the assumptions developed by its independent consultant,
to reprice or mature in each of the future time periods shown. The Bank believes
that the assumptions used by the consultant, discussed in detail below, are
reasonable. However, ultimately they may not be borne out.
55
<PAGE>
The assumptions used in the preparation of the table and the calculation of
the Bank's estimated gap are as follows. Loans and mortgage-backed securities
with adjustable rates are included during the earlier of scheduled payment or
repricing. The aggregate principal outstanding on fixed-rate loans is assumed,
based upon an analysis of the difference between the Bank's average loan yield
and the federal funds interest rate, to be repaid evenly over 83 months.
Fixed-rate mortgage-backed securities are included in the table based on
commonly used independent market models for estimating mortgage-backed security
repayments. Federal funds sold and other short term investments are assumed to
be immediately interest sensitive. Of the Bank's savings accounts and NOW
accounts, 62% are assumed to be core deposits and therefore are assumed to
reprice beyond three years. The remainder of such deposits are assumed to
reprice 6% in three months, 8% in six months, 10% in one year, 8% in two years
and 6% in three years. Money Market accounts are assumed to reprice
approximately 50% within six months and the remainder within one year. Savings
certificates are included based upon their contractual maturities.
Estimates of loan prepayment rates and deposit turnover rates can have a
significant impact on the Bank's estimated gap. While the Bank believes the
assumptions used to prepare the following table are reasonable, there can be no
assurance that such estimates will approximate actual future loan repayment and
deposit withdrawal activity. See "Business of the Bank--Lending Activities,"
"--Investment Activities" and "--Sources of Funds."
<TABLE>
<CAPTION>
AMOUNTS ESTIMATED TO MATURE OR REPRICE WITHIN:
--------------------------------------------------------------------
LESS THAN
THREE 3-6 6 MONTHS TO 1-2 2-3 OVER 3
MONTHS MONTHS 1 YEAR YEARS YEARS YEARS TOTAL
----------- --------- ----------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Securities........................ $ 7,687 $ 4,068 $ 11,280 $ 17,393 $ 9,267 $ 8,341 $ 58,036
Loans............................. 14,556 7,072 14,143 31,418 31,417 55,594 154,200
Other short-term investments...... 6,791 -- -- -- -- -- 6,791
----------- --------- ----------- --------- --------- --------- ---------
Total interest-earning assets... 29,034 11,140 25,423 48,811 40,684 63,935 219,027
----------- --------- ----------- --------- --------- --------- ---------
Interest-bearing liabilities:
Passbook, statement savings and
club accounts................... 3,870 5,160 6,450 5,160 3,870 39,853 64,363
Money market accounts............. 2,744 2,744 2,826 -- -- -- 8,314
NOW accounts...................... 556 742 928 742 557 5,755 9,280
Savings certificates.............. 15,969 20,337 27,704 17,843 14,481 11,520 107,854
----------- --------- ----------- --------- --------- --------- ---------
Total interest-bearing
liabilities................... 23,139 28,983 37,908 23,745 18,908 57,128 189,811
----------- --------- ----------- --------- --------- --------- ---------
Interest sensitivity gap............ $ 5,895 $ (17,843) $ (12,485) $ 25,066 $ 21,776 $ 6,807 $ 29,216
----------- --------- ----------- --------- --------- --------- ---------
----------- --------- ----------- --------- --------- --------- ---------
Cumulative interest sensitivity
gap............................... $ 5,895 $ (11,948) $ (24,433) $ 633 $ 22,409 $ 29,216
----------- --------- ----------- --------- --------- ---------
----------- --------- ----------- --------- --------- ---------
Ratio of cumulative gap to total
interest-earning assets........... 2.69% (5.45)% (11.16)% 0.29% 10.23% 13.34%
----------- --------- ----------- --------- --------- ---------
----------- --------- ----------- --------- --------- ---------
Ratio of cumulative gap to total
assets............................ 2.54% (5.14)% (10.51)% 0.27% 9.64% 12.57%
----------- --------- ----------- --------- --------- ---------
----------- --------- ----------- --------- --------- ---------
Ratio of interest-earning assets to
interest-bearing liabilities...... 125.48% 38.44% 67.06% 205.56% 215.17% 111.92% 115.39%
----------- --------- ----------- --------- --------- --------- ---------
----------- --------- ----------- --------- --------- --------- ---------
</TABLE>
When the Conversion is completed, the Company will initially experience an
increase in investable assets approximately equal to the net proceeds from the
sale of Common Stock in the Conversion minus the loan to the ESOP. The
investment of these net proceeds can be expected initially to increase positive
gaps and reduce negative gaps because such investment will add assets estimated
to mature or reprice within each period shown while there will be no immediate
corresponding increase in liabilities estimated to mature or reprice during the
same period.
56
<PAGE>
AVERAGE BALANCES, INTEREST RATES AND YIELDS
The following tables present, for the periods indicated, the average
interest-earning assets and average interest-bearing liabilities by principal
categories, the interest income or expense for each category, and the resultant
average yields earned or rates paid. No tax equivalent adjustments were made.
All average balances are daily average balances, except for 1995, in which
monthly average balances are used because daily average balances are
unavailable. Non-interest-bearing checking accounts are included in the tables
as a component of non-interest-bearing liabilities.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------------------------------------------------
1998(6) 1997(6)
--------------------------------- -----------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
--------- ----------- --------- --------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Loans(1).......................................... $ 157,134 $ 3,377 8.72% $ 158,434 $ 3,433 8.79%
Securities(2)..................................... 54,852 848 6.27 58,393 898 6.24
Other short-term investments...................... 6,645 86 5.25 6,769 86 5.15
--------- ----------- --------- -----------
Total interest-earning assets................... 218,631 4,311 8.00 223,596 4,417 8.01
Non-interest-earning assets....................... 13,553 11,740
--------- ---------
Total assets.................................... $ 232,184 $ 235,336
--------- ---------
--------- ---------
LIABILITIES:
Passbook, statement savings and club accounts(3).. $ 63,748 474 3.02 $ 63,621 467 2.98
Savings certificates.............................. 108,067 1,439 5.40 112,578 1,494 5.38
Money market accounts............................. 8,385 57 2.76 8,985 63 2.84
NOW accounts...................................... 9,357 40 1.73 9,298 40 1.74
--------- ----------- --------- -----------
Total interest-bearing liabilities.............. 189,557 2,010 4.30 194,482 2,064 4.30
Non-interest-bearing liabilities.................. 12,076 10,772
--------- ---------
Total liabilities............................... 201,633 205,254
Net worth......................................... 30,551 30,082
--------- ---------
Total liabilities and net worth................. $ 232,184 $ 235,336
--------- ---------
--------- ---------
Net interest income/spread(4)..................... $ 2,301 3.70% $ 2,353 3.71%
----------- --------- ----------- ---
----------- --------- ----------- ---
Net earning assets/net interest margin(5)......... $ 29,074 4.27% $ 29,114 4.27%
--------- --------- --------- ---
--------- --------- --------- ---
Ratio of average interest-earning assets to
average interest-bearing liabilities............ 1.15x 1.15x
----------- -----------
----------- -----------
</TABLE>
NOTES APPEAR ON FOLLOWING PAGE.
57
<PAGE>
AVERAGE BALANCES, INTEREST RATES AND YIELDS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------------
1997 1996 1995
--------------------------------- ----------------------------------- ----------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE
BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST
--------- ----------- --------- --------- ----------- ----------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Loans(1)...................... $ 157,713 $ 13,582 8.61% $ 158,779 $ 13,805 8.69% $ 157,317 $ 14,012
Securities(2)................. 60,226 3,769 6.26 58,557 3,620 6.18 56,235 3,404
Other short-term
investments................. 6,019 316 5.25 7,300 362 4.96 6,580 395
--------- ----------- --------- ----------- --------- -----------
Total interest-earning
assets.................... 223,958 17,667 7.89 224,636 17,787 7.92 220,132 17,811
----------- ----------- -----------
Non-interest-earning assets... 12,254 12,442 14,077
--------- --------- ---------
Total assets................ $ 236,212 $ 237,078 $ 234,209
--------- --------- ---------
--------- --------- ---------
LIABILITIES:
Passbook, statement savings
and club accounts(3)........ $ 64,576 1,936 3.00 $ 64,405 1,922 2.98 $ 66,384 1,991
Savings certificates.......... 110,728 5,983 5.40 113,890 6,354 5.58 108,614 6,005
Money market accounts......... 8,643 243 2.81 9,635 288 2.99 11,242 339
NOW accounts.................. 9,457 166 1.76 9,295 194 2.09 9,134 227
Other borrowings.............. -- -- -- -- -- -- 875 51
--------- ----------- --------- ----------- --------- -----------
Total interest-bearing
liabilities............... 193,404 8,328 4.31 197,225 8,758 4.44 196,249 8,613
Non-interest-bearing
liabilities................. 12,003 10,464 9,864
--------- --------- ---------
Total liabilities........... 205,407 207,689 206,113
Net worth..................... 30,806 29,389 28,095
--------- --------- ---------
Total liabilities and net
worth..................... $ 236,213 $ 237,078 $ 234,208
--------- --------- ---------
--------- --------- ---------
Net interest
income/spread(4)............ $ 9,339 3.58% $ 9,029 3.48% $ 9,198
----------- --------- ----------- --- -----------
----------- --------- ----------- --- -----------
Net earning assets/net
interest margin(5).......... $ 30,554 4.17% $ 27,411 4.02% $ 23,883
--------- --------- --------- --- ---------
--------- --------- --------- --- ---------
Ratio of average
interest-earning assets to
average interest-bearing
liabilities................. 1.16x 1.14x 1.12x
----------- ----------- -----------
----------- ----------- -----------
<CAPTION>
AVERAGE
YIELD/
COST
-----------
<S> <C>
ASSETS:
Loans(1)...................... 8.91%
Securities(2)................. 6.05
Other short-term
investments................. 6.00
Total interest-earning
assets.................... 8.09
Non-interest-earning assets...
Total assets................
LIABILITIES:
Passbook, statement savings
and club accounts(3)........ 3.00
Savings certificates.......... 5.53
Money market accounts......... 3.02
NOW accounts.................. 2.49
Other borrowings.............. 5.83
Total interest-bearing
liabilities............... 4.39
Non-interest-bearing
liabilities.................
Total liabilities...........
Net worth.....................
Total liabilities and net
worth.....................
Net interest
income/spread(4)............ 3.70%
---
---
Net earning assets/net
interest margin(5).......... 4.18%
---
---
Ratio of average
interest-earning assets to
average interest-bearing
liabilities.................
</TABLE>
- ------------------------
(1) Average balances include loans held for sale and non-accrual loans, net of
the allowance for loan losses. Interest is recognized on non-accrual loans
only as and when received.
(2) Securities are included at amortized cost, with net unrealized gains or
losses on securities available-for-sale included as a component of
non-earning assets. Securities include FHLBNY stock.
(3) Includes advance payments by borrowers for taxes and insurance (mortgage
escrow deposits).
(4) The spread represents the difference between the weighted average yield on
interest-earning assets and the weighted average cost of interest-bearing
liabilities.
(5) The net interest margin, also known as the net yield on average
interest-earning assets, represents net interest income as a percentage of
average interest-earning assets.
(6) Yields and related ratios for the three-month periods have been annualized
when appropriate.
58
<PAGE>
RATE/VOLUME ANALYSIS OF NET INTEREST INCOME
One method of analyzing net interest income is to consider how changes in
average balances and average rates from one period to the next affect net
interest income. The following table shows changes in the dollar amount of
interest income and interest expense for major components of interest-earning
assets and interest-bearing liabilities. It shows the amount of the change in
interest income or expense caused by either changes in outstanding balances
(volume) or changes in interest rates. The effect of a change in volume is
measured by applying the average rate during the first period to the volume
change between the two periods. The effect of changes in rate is measured by
applying the change in rate between the two periods to the average volume during
the first period. Changes attributable to both rate and volume, which cannot be
segregated, have been allocated proportionately to the change due to volume and
the change due to rate.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
THREE MONTHS ENDED --------------------------------------------------
MARCH 31, 1996 VS.
--------------------------------------- 1995
-----------
1998 VS. 1997 1997 VS. 1996
--------------------------------------- ------------------------------------- INCREASE
(DECREASE)
INCREASE (DECREASE) DUE TO: INCREASE (DECREASE) DUE TO: DUE TO:
VOLUME RATE TOTAL VOLUME RATE TOTAL VOLUME
----------- ------------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans................................ $ (29) $ (27) $ (56) $ (94) $ (129) $ (223) $ 132
Securities........................... (54) 4 (50) 102 47 149 142
Other short-term investments......... (2) 2 -- (66) 20 (46) 40
--- --- --- --- ----- ----- -----
Total interest-earning assets........ (85) (21) (106) (58) (62) (120) 314
--- --- --- --- ----- ----- -----
--- --- --- --- ----- ----- -----
INTEREST-BEARING LIABILITIES:
Passbook, statement savings and club
accounts........................... 1 6 7 4 10 14 (57)
Savings certificates................. (61) 6 (55) (171) (200) (371) 295
Money market accounts................ (4) (2) (6) (29) (16) (45) (48)
NOW accounts......................... -- -- -- 3 (31) (28) 4
Other borrowing...................... -- -- -- -- -- -- (51)
--- --- --- --- ----- ----- -----
Total interest-bearing liabilities... (64) 10 (54) (193) (237) (430) 143
--- --- --- --- ----- ----- -----
--- --- --- --- ----- ----- -----
Net change in net interest income.... $ (21) $ (31) $ (52) $ 135 $ 175 $ 310 $ 171
--- --- --- --- ----- ----- -----
--- --- --- --- ----- ----- -----
<CAPTION>
RATE TOTAL
----------- -----------
<S> <C> <C>
INTEREST-EARNING ASSETS:
Loans................................ $ (339) $ (207)
Securities........................... 74 216
Other short-term investments......... (73) (33)
----- -----
Total interest-earning assets........ (338) (24)
----- -----
----- -----
INTEREST-BEARING LIABILITIES:
Passbook, statement savings and club
accounts........................... (12) (69)
Savings certificates................. 54 349
Money market accounts................ (3) (51)
NOW accounts......................... (37) (33)
Other borrowing...................... -- (51)
----- -----
Total interest-bearing liabilities... 2 145
----- -----
----- -----
Net change in net interest income.... $ (340) $ (169)
----- -----
----- -----
</TABLE>
59
<PAGE>
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 1998 AND DECEMBER 31, 1997.
Total assets at March 31, 1998 were $232.4 million, a decrease of $1.3
million, or 0.6%, from total assets of $233.7 million at December 31, 1997. The
primary cause of the decline was a $1.5 million decline in deposits as the Bank
continued to experience competitive pressures from other investment
alternatives.
Net loans declined by $1.2 million during the quarter. Principal payments on
loans exceeded new loans originated by $527,000 because normal principal
amortization, which occurs evenly throughout the year, exceeded loan
originations, which tend to be at low levels during winter months. Furthermore,
the Bank believes it did not recapture all loans refinanced by its customers
during the period due to increased competition from out-of-area secondary
mortgage market lenders. The Bank also designated an additional $661,000 of
loans for sale during the quarter. When the Bank completed its loan sale,
$101,000 of the loans designated for sale were not sold and were transferred
back to loans held-to-maturity.
Real estate owned declined by $204,000 during the quarter as the Bank sold
more real estate than it acquired through foreclosure. Real estate owned
consists of properties acquired through foreclosure or otherwise in full or
partial satisfaction of a debt, but does not include real estate used by the
Bank for its operations, such as its main office and branches. During the three
months ended March 31, 1998, the Bank decreased the level of real estate owned
by sales of properties with a carrying value of $199,000 and by $50,000 of
write-downs of property owned. Partially offsetting these declines were $45,000
of real estate acquired during the quarter upon the foreclosure of loans.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1997 AND DECEMBER 31, 1996
Total assets at December 31, 1997 were $233.7 million compared to $238.1
million at December 31, 1996. The primary cause of the $4.4 million decline in
total assets was a decline of $4.4 million in savings certificates. Management
believes the decline in savings certificates resulted from competitive pressures
as customers sought higher returns through alternative investments during a
period when the equity markets were at all time highs. The decline in deposits
as a funding source caused the Bank to reduce cash and due from banks by $5.1
million.
Contributing to the changes in the Bank's financial condition was the
designation of the group of loans for sale at year end 1997, as discussed above.
The designation did not directly affect the Bank's total assets, because the
charge-off which accompanied the designation was charged against the existing
allowance for loan losses. However, the Bank increased its provision for loan
losses to bring the allowance back to a level considered adequate by management,
which had the effect of substantially eliminating net income for the year.
Therefore, retained earnings as a funding source did not increase materially
from year end 1996 to year end 1997.
Deferred tax assets increased by $663,000 from year end 1996 to year end
1997 because for financial statement purposes the Bank recorded the charge-off
associated with the designation of loans as held for sale in 1997 but could not
deduct the charge-off for income tax purposes until the loans were sold in 1998.
Real estate owned also increased by $401,000 during 1997. This increase
represented the net effect of the acquisition of properties with a carrying
value of $1.1 million as a result of foreclosures, partially offset by the sale
of properties with a carrying value of $329,000 and write-downs in the book
value of properties owned by $365,000 to reflect the fair value of the
properties.
Net unrealized gains in securities available-for-sale, as a component of net
worth, increased by $323,000 during 1997, corresponding to a pre-tax increase of
$529,000 in the excess of fair value over amortized cost for securities
available-for-sale. The increase was caused by the improvement in market values
for equity securities coupled with lower interest rates which increased the
value of debt securities available-for-sale.
60
<PAGE>
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND
MARCH 31, 1997.
GENERAL. Net income for the three months ended March 31, 1998 was $493,000,
an increase of $82,000, or 20.0%, from net income of $411,000 during the three
months ended March 31, 1997. The primary reason for the improvement was a
decrease in the provision for loan losses of $150,000 as the Bank realized upon
its efforts in 1997 and the first quarter of 1998 to reduce the carrying value
and then sell a substantial portion of its non-accrual and potential problem
loans. A $63,000 decline in building, occupancy and equipment expense also
positively affected net income. These two factors offset a $52,000 decline in
net interest income.
NET INTEREST INCOME. Net interest income declined by $52,000, or 2.2%, when
comparing the first quarter of 1998 to the first quarter of 1997. This decline
reflects the combined effect of a decline in interest income and a smaller
decline in interest expense. The Bank's reported spread declined by one basis
point from 3.71% to 3.70% and the Bank's net interest margin remained constant
at 4.27%. However, average non-accruing loans during the quarter ended March 31,
1997 were significantly higher than during the quarter ended March 31, 1998.
Non-accruing loans have the effect of reducing reported spread because they are
a component of interest-earning assets but do not provide interest income. The
Bank estimates that if the level of non-accruing loans had remained constant,
reported spread would have declined by approximately 14 basis points and
reported net interest margin would have declined by approximately 12 basis
points from the 1997 quarter to the 1998 quarter because the average yields on
accruing loans declined due to lower market interest rates and the downward
adjustment of yields on adjustable-rate loans.
INTEREST INCOME. Interest income declined by $106,000 from the first
quarter of 1997 to the first quarter of 1998. The principal reasons for the
decline were a $3.5 million decline in the average balance of securities and a
decline in the average yield earned on performing loans. The decline in the
average balance of securities resulted from the need to fund a $4.9 million
decline in the average balance of interest-bearing deposits.
The Bank estimates that the average yield earned on accruing loans declined
by approximately 25 basis points from the first quarter of 1997 to the first
quarter of 1998, compared to the 7 basis point reported decline shown on the
Average Balances, Interest Rates and Yields table. The decline in average yield
on accruing loans resulted principally from lower market interest rates on new
residential mortgage loans and downward adjustments of rates on adjustable
mortgage loans as market interest rates declined. Due to increased competition
and generally lower market interest rates, the Bank's new residential mortgage
loans had average yields lower than either loans in the portfolio or loans being
refinanced. The 25 basis point estimated decline in yield the first quarter of
1997 to the first quarter of 1998 is greater than the 7 basis point reported
decline because of a reduction in the average level of non-accruing loans,
principally due to charge-offs. As loans were charged off, they ceased to be
outstanding for the purpose of calculating the average loan yield, without a
corresponding reduction in interest income. Therefore, the loans charged off
ceased to exert downward pressure on reported yields.
INTEREST EXPENSE. Interest expense declined by $54,000 from the first
quarter of 1997 to the first quarter of 1998. Substantially all of the decline
resulted from a $4.5 million decline in the average balance of savings
certificates from $112.6 million to $108.1 million. The decline was caused by a
conscious decision of the Bank not to pursue aggressively additional savings
certificate accounts, the Bank's highest cost funding source. The Bank offered
competitive, but not necessarily the highest, savings certificate rates in its
market area. Savings certificates, which represented 57.9% of the average
balance of interest-bearing liabilities during the quarter ended March 31, 1997,
declined to 57.0% of average interest-bearing liabilities during the quarter
ending March 31, 1998. The Bank's pricing decisions were based upon a desire not
to increase its cost of funds at a time when the cost of savings certificates
was only slightly below the yield earned on investment securities, and in some
cases was higher than the yield earned on other short term investments. The
decline in savings certificates was funded by a decline in the Bank's securities
61
<PAGE>
portfolio and a $1.3 million increase in the average balance of
non-interest-bearing liabilities, principally represented by an increase in the
average balance of non-interest bearing demand deposits as the Bank marketed its
demand deposit programs more aggressively to commercial customers.
PROVISION FOR LOAN LOSSES. The provision for loan losses results from
management's analysis of the adequacy of the Bank's allowance for loan losses.
If management determines that an increase in the allowance is warranted, then
the increase is accomplished through a provision for loan losses which is
charged as an expense on the Bank's income statement. The provision for loan
losses was $75,000 for the three months ended March 31, 1998, compared to
$225,000 for the three months ended March 31, 1997. The decrease in the
provision resulted from a lower level of non-performing loans caused by the
resolution of problem loans through substantial charge-offs during 1997 and the
loan sale during the first quarter of 1998. During the three months ended March
31, 1998, the Bank had charge-offs of $39,000 and recoveries of $51,000, for a
net recovery of $12,000. Therefore, the allowance increased by $87,000 during
the quarter, as the combined effect of the $75,000 provision and the $12,000 net
recovery. This compares with charge-offs of $202,000 and recoveries of $105,000
during the quarter ended March 31, 1997, generating net charge-offs of $97,000
and a $128,000 increase in the allowance after the $225,000 provision for loan
losses during that quarter. See "Business of the Bank--Asset Quality--Allowance
for Loan Losses."
NON-INTEREST INCOME. The Bank's primary source of non-interest income is
service charges, principally on deposit accounts. The $26,000 increase in
non-interest income between the periods was caused principally by a $32,000
increase in service charges. Service charge income increased because of an
increase in loan-related fees.
NON-INTEREST EXPENSE. Non-interest expense increased by $20,000 from the
first quarter of 1997 to the first quarter of 1998. Other than normal
fluctuations in expenses, the only categories of non-interest expenses which
experienced significant percentage changes were building, occupancy and
equipment expense, which decreased by $63,000, or 22.7%, expenses of real estate
owned, which increased from $21,000 to $92,000 and professional fees, which
doubled from $32,000 to $64,000. Building, occupancy and equipment expense
declined because of a reduction in depreciation expense and a high level of
building repairs and maintenance during the 1997 quarter. The expense of real
estate owned increased because during 1997 the Bank's level of real estate owned
increased as a number of foreclosures were completed and the Bank acquired title
to the mortgaged property. At the beginning of the quarter ended March 31, 1998,
the Bank had $964,000 of real estate owned, compared to $563,000 at the
beginning of the March 31, 1997 quarter. During the first quarter of 1998, the
$92,000 expense was comprised of $50,000 in write-downs in the value of real
estate owned and $42,000 of expenses of holding the properties, such as
insurance and real estate taxes. During the 1997 quarter, expenses of $21,000
were represented entirely by the expenses of holding the properties in the
portfolio. Professional fees increased because of additional costs incurred in
connection with the loan sale and the resolution of other problem loans.
INCOME TAXES. Income tax expense increased by $22,000 from $311,000 for the
three months ended March 31, 1997 to $333,000 for the three months ended March
31, 1998. The increase corresponded to the increase in net income between the
periods.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND
DECEMBER 31, 1996.
GENERAL. Net income for 1997 was $72,000 compared to net income of $1.4
million in 1996. The primary reason for the decline was a substantial increase
in expenses related to the resolution of the Bank's problem assets, including a
$1.9 million increase in the provision for loan losses and a $240,000 increase
in the expense of real estate owned. These factors more than offset an increase
in net interest income of $310,000.
NET INTEREST INCOME. Net interest income increased by $310,000, or 3.4%,
from 1996 to 1997. The increase reflects a decline in interest expense which was
only partially offset by a smaller decline in interest
62
<PAGE>
income. Due principally to the decline in the average cost of savings
certificates, the Bank's spread increased by 10 basis points from 3.48% to 3.58%
and the Bank's net interest margin increased by 15 basis points from 4.02% to
4.17%. Changes in the level of non-accruing loans between 1996 and 1997 had a
less significant effect on spread than when comparing the quarters ended March
31, 1998 and 1997. Interest income not recognized during the years on
non-accruing loans was $402,000 during 1997 and $307,000 during 1996.
INTEREST INCOME. Interest income declined by $120,000 from 1996 to 1997.
The decline resulted from a decline in the average balance of loans, the Bank's
highest yielding asset category, and a decline in the average yield on loans.
During the early part of 1997, the Bank's loan department focused on resolving
problem loans, solving problems arising from the defalcation by the former
senior loan officer, and restructuring and strengthening loan department
operations. In addition, during early 1997, one loan officer retired and another
resigned. Therefore, efforts to originate new loans were temporarily reduced.
During the latter part of 1997, the Bank increased its loan originations,
particularly residential mortgage loans, by hiring additional loan officers and
aggressively seeking new loans in Cortland County and nearby communities. By
year end, the Bank had originated more loans in 1997 than had been paid off, but
the increased originations during the latter part of the year had only a limited
effect on average balances.
The average yield on loans declined by eight basis points due to lower
residential mortgage loan rates which affected refinances and new loan
originations. Borrowers were motivated by low market interest rates to refinance
their higher fixed-rate mortgages while borrowers with adjustable-rate loans
also refinanced to lock in lower rates.
The decline in the average balance of loans was offset by an increase in the
average balance of securities. Management invested available funds which might
otherwise have been used to make loans in securities investments. Other short
term investments declined in order to fund a reduction in the level of
interest-bearing liabilities. In addition, the Bank experienced an eight basis
point increase in the average yield on its securities investments because
maturing securities were replaced with securities having slightly higher yields
as the Bank continued to lengthen the maturities of its debt securities, a
process which began in 1996.
INTEREST EXPENSE. Interest expense declined by $430,000 from 1996 to 1997.
The decline resulted from the combined effect of a $3.8 million decline in the
average balance of interest-bearing liabilities and a 13 basis point decline in
the average cost of funds. Most of the activity was in the savings certificate
category, with the average balance declining by $3.2 million and the average
cost declining by 18 basis points. These declines were due to the combined
effect of competitive pressures from non-deposit investment sources which
offered customers the potential for high yields, coupled with a decision by
management to offer rates on deposits which, although competitive, were not the
highest in the local market.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $3.3 million
during 1997, compared to $1.4 million in 1996. During 1997, the Bank charged off
$3.3 million of loans, compared to recoveries of $170,000. Approximately $2.0
million of the charge-offs were taken on the loan package which was ultimately
sold during the first quarter of 1998 while the remainder of the charge-offs
resulted from an aggressive review of the Bank's entire loan portfolio in light
of the credit administration problems discovered in connection with the officer
defalcation discussed above. Based on local economic conditions and the status
of the Bank's loan portfolio, during 1997 management revised the Bank's method
of calculating its allowance to increase the percentages used to determine
appropriate allowance for certain performing loans for which no problems had
been identified. The adjustment was made to reflect management's estimate of
probable losses inherent in loans in the Bank's portfolio. Taking these factors
into account, the Bank determined to provide $3.3 million for loan losses during
1997 to bring the allowance to its year-end level of $2.1 million.
63
<PAGE>
NON-INTEREST INCOME. Non-interest income increased by $119,000 from 1996 to
1997. The principal component of the increase was a $45,000 recovery of an
investment in Nationar, a former correspondent bank which was closed by the New
York Superintendent of Banks in 1995. The Bank had created a $100,000 reserve
when Nationar was closed because of the uncertainties associated with its
investment in a Nationar debenture. During 1997, the Superintendent of Banks
made a liquidating distribution to the Bank of $45,000 more than the carrying
value of the investment in Nationar, net of the reserve. Other non-interest
income increased by $69,000 because during 1997 the Bank recovered certain
expenses which had been incurred in 1996 in connection with the collection of
past due loans.
NON-INTEREST EXPENSE. Non-interest expense increased by $671,000 from 1996
to 1997. The principal causes of the increase were a $240,000 increase in the
expense of real estate owned and a $303,000 increase in other operating
expenses. Real estate owned is required to be carried on the Bank's books at the
lower of cost or fair value, representing market value less estimated costs of
sale. During 1997, the Bank decided that general economic conditions,
difficulties in disposing of real estate owned and expected costs of holding and
selling properties, based upon the nature of the specific properties owned by
the Bank during 1997, justified carrying those properties at 65% of appraised
value which resulted in a $365,000 charge to the expense of real estate owned.
Approximately $270,000 of this charge related to properties acquired in 1997.
Other operating expenses increased principally because of increases in the cost
of collecting past due loans and increases in other loan-related expenses.
INCOME TAXES. Income tax expense declined by $869,000 from an expense of
$853,000 in 1996 to a tax benefit of $16,000 in 1997. The decline was caused by
the decline in pre-tax income.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND
DECEMBER 31, 1995.
GENERAL. Net income for 1996 was $1.4 million compared to net income of
$1.9 million in 1995. The primary reason for the decline was an increase in the
provision for loan losses to replenish the Bank's allowance for loan losses
after charge-offs of $607,000 caused by the officer defalcation. Also
contributing to the decline in net income was an increase in professional fees
incurred in the investigation of the defalcation and a decline in net interest
income principally caused by a decline in the yield on the Bank's loan
portfolio. Partially offsetting these factors was a virtual elimination of
deposit insurance premiums.
NET INTEREST INCOME. Net interest income declined 169,000, or 1.8%, from
1996 to 1997. The decline reflects the combined effect of an increase in
non-accruing loans, a decline in the average yield on loans and other short term
investments, an increase in the average cost of savings certificates and a shift
in the mix of the Bank's liabilities towards higher-cost savings deposits. As a
result of these factors, the Bank's spread decreased by 22 basis points from
3.70% to 3.48% and the Bank's net interest margin decreased by 16 basis points
from 4.18% to 4.02%. The net interest margin declined less rapidly than the
spread because the retention of earnings increased capital as a no-cost funding
source. The increase in the level of non-accruing loans between 1995 and 1996 is
estimated to have caused approximately 14 basis points out of the 22 basis point
decline in the reported yield on loans.
INTEREST INCOME. Interest income declined by $24,000 from 1995 to 1996
despite an increase in the average balance of interest-earning assets by $4.5
million from $220.1 million to $224.6 million. Market interest rates began to
decline in early 1995, and the decline continued through most of 1996. As a
result, new loans originated by the Bank during that period generally had lower
interest rates than the loans in the Bank's portfolio which were being repaid.
The decline in market rates also accelerated the rate of repayment of existing
loans as borrowers refinanced those loans at lower rates. Furthermore, the
Bank's non-accruing loans increased dramatically from 1995 to 1996, with $2.0
million of non-accruing loans at December 31, 1995 increasing to $3.6 million by
December 31, 1996. Interest income not recognized on non-accruing loans
increased substantially to $307,000 in 1996 from $107,000 in 1995. The combined
effect of these factors was to reduce the average yield on loans by 22 basis
points, from 8.91% in 1995 to 8.69% in 1996.
64
<PAGE>
At the same time, the yield on the Bank's short-term investments,
principally federal funds sold, which are generally immediately sensitive to
interest rate fluctuations, declined rapidly from an average yield of 6.00% in
1995 to an average yield of 4.96% in 1996. In contrast, the average yield on
securities investments increased from 6.05% to 6.18% despite declining market
interest rates because the Bank began to increase the average maturities of its
investment debt securities to improve yields. This increase in average
maturities was partially offset by a shift in mix away from corporate debt
securities and towards U.S. government and agency securities. The Bank shifted
the mix of securities because the decline in market interest rates reduced the
yield spread between traditionally lower yielding treasury securities and higher
yielding corporate bonds.
The decline in the rate earned on loans was partially offset by an increase
in the average balance of both loans and securities. As interest rates declined
and homeowners refinanced their mortgages, the Bank sought to satisfy the
desires of its existing customers to refinance their loans and to capture
refinance business away from other lenders because low loan yields remained
higher than the yields on securities investments. As a result, residential
mortgage loans increased by $2.9 million during 1995 and by $243,000 during
1996, representing a significant component of the $1.5 million increase in the
average balance of loans from 1995 to 1996. The Bank was also able to increase
the average balance of investment securities by $2.3 million from 1995 to 1996
and the average balance of other short term investments increased by $720,000
between the periods. These increases were funded by a combination of an increase
of $1.0 million in the average balance of interest-bearing deposits, an increase
of $1.3 million in average net worth due to net income retained, and an increase
of $328,000 in the average level of non-interest-bearing demand deposits.
INTEREST EXPENSE. Interest expense increased by $145,000 from 1995 to 1996.
A shift in the mix of the Bank's liabilities away from lower cost traditional
savings accounts and money market accounts in favor of savings certificate
accounts with higher yields was the primary cause of the increase in interest
expense. The average balance of savings certificates, the Bank's highest cost
deposits with an average cost of 5.58% during 1996, increased by $5.3 million
from $108.6 million during 1995 to $113.9 million during 1996. In contrast,
lower cost traditional savings accounts, with an average cost of 2.98% during
1996, declined by $2.0 million and money market accounts, with an average cost
of 2.99% during 1996, declined by $1.6 million. Management believes that a shift
in depositor preference, resulting in the shift in mix, occurred from early 1995
through 1996 as depositors sought higher yields to compete with the yields
available in the stock market and from other investment alternatives. Publicity
regarding available investment alternatives made customers more cognizant of the
rates on their accounts and more sophisticated regarding maximizing the yields
on their bank deposits. The average rate paid on savings certificates also
increased slightly, from 5.53% in 1995 to 5.58% in 1996, principally due to
increased competition from other investment alternatives.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $1.4 million
during 1996, compared to $600,000 in 1995. During 1996, the Bank charged off
$1.7 million of loans, compared to $605,000 in 1995. The 1996 charge-offs
included $607,000 of non-existent loans, delinquent loans whose delinquencies
had been concealed, and other uncollectable loans arising out of the defalcation
by the former senior loan officer discussed above. In order to replenish the
allowance for loan losses after these unexpected charge-offs, the Bank was
required to increase its provision for loan losses.
NON-INTEREST INCOME. Non-interest income increased by $99,000 from 1995 to
1996. The increase occurred because in 1995 the Bank had provided $100,000,
recorded as a reduction of non-interest income, to create a reserve against the
Bank's investment in a Nationar debenture. Due to uncertainties regarding the
recoverability of the Nationar investment, management made the provision to
address the possibility that the final liquidation of Nationar would not
generate sufficient funds to repay the Bank. In 1997, $45,000 of the provision
was recovered.
65
<PAGE>
NON-INTEREST EXPENSE. Non-interest expense increased by $256,000 from 1995
to 1996. The principal causes of the increase were a $168,000 increase in
professional fees for compliance matters, temporary outsourcing of the internal
audit function and the investigation of the officer defalcation. In addition,
miscellaneous other operating expenses increased by $190,000 principally because
of a $94,000 increase in costs associated with collecting past due loans as the
level of non-accrual loans increased from $2.0 million at year end 1995 to $3.6
million at year end 1996. In addition, the Bank had $53,000 of investment
advisory expense in 1996 as the Bank retained an outside investment advisor.
INCOME TAXES. Income tax expense declined by $547,000 from $1.4 million in
1995 to $853,000 in 1996. The decline was caused by the decline in pre-tax
income.
LIQUIDITY AND CAPITAL
The Bank's primary sources of funds are deposits, proceeds from the
principal and interest payments on loans, mortgage-backed and debt securities,
and, during the quarter ended March 31, 1998, proceeds from the sale of loans.
While maturities and scheduled principal payments on loans and securities are
predictable sources of funds, deposit outflows and loan prepayments are greatly
influenced by general interest rates, economic conditions and competition.
The primary investing activity of the Bank is the origination of residential
one- to four-family mortgage loans and the purchase of mortgage-backed and debt
securities. During the three months ended March 31, 1998 and the years ended
December 31, 1997, 1996 and 1995, the Bank's loan originations totaled $7.8
million, $32.9 million, $31.7 million and $33.6 million, respectively. However,
loans, net, after payments and charge-offs, decreased by $1.2 million during the
three months ended March 31, 1998 and decreased by $3.1 million during 1997.
Loans increased by only $8,000 during 1996 and by $6.3 million during 1995.
Investment and mortgage-backed securities, excluding the effect of unrealized
gains and losses, increased by $4.5 million during 1996, declined by $1.2
million during 1997 and increased by $987,000 during the first quarter of 1998.
The sale of problem loans provided $3.1 million of additional liquidity during
the quarter ended March 31, 1998. Loan sales did not provide material funds
during other periods.
Deposits increased by $2.9 million in 1995 and $1.5 million in 1996. In
1997, deposits declined by $4.9 million and the Bank experienced an additional
$1.5 million decline in deposits during the first quarter of 1998. Deposit flows
are affected by the level of interest rates, the availability of alternate
investment opportunities, general economic conditions, and other factors.
The Company's cash flows are divided into three categories: cash flows from
operating activities, cash flows from investing activities, and cash flows from
financing activities. Net cash provided by operating activities, consisting
primarily of earnings and proceeds from loan sales, was $4.2 million for the
three months ended March 31, 1998 and $767,000 for the three months ended March
31, 1997. The most significant component of the difference between the periods
was the sale of loans during the three months ended March 31, 1998, which
increased cash provided by operating activities by $3.1 million. Management does
not anticipate similar transactions in the future. Net cash used in investing
activities, consisting primarily of the use of funds to make loans and purchase
securities, was $326,000 for the three months ended March 31, 1998 and $1.1
million for the three months ended March 31, 1997. Net cash used by financing
activities, consisting principally of deposit outflows, was $2.2 million for the
three months ended March 31, 1998 and $2.3 million for the three months ended
March 31, 1997, reflecting declines in deposits during the periods and decreases
in amounts held during the periods for mortgage tax escrows due to seasonal
fluctuations in real estate tax due dates.
The Bank monitors its liquidity position on a regular basis. Excess
short-term liquidity is invested in overnight federal funds sold. If the Bank
requires funds beyond its ability to generate them internally, the Bank can
borrow needed funds. At March 31, 1998, the Bank had available lines of credit
with the Federal Home Loan Bank of New York of $26.1 million. The Bank has not
needed to use borrowings as a source of
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liquidity to fund either deposit outflows or new loan opportunities. In 1995,
the Bank temporarily borrowed funds for a short time when the Bank's deposits at
Nationar, one of its correspondent banks, were temporarily frozen.
At March 31, 1998, the Bank had $3.8 million of outstanding commitments to
make first lien mortgage loans, $3.7 million of unused home equity lines of
credit, $2.8 million of unused credit card lines of credit, $2.0 million of
unused commercial lines of credit, $1.1 million of consumer overdraft checking
lines of credit and an insignificant amount of outstanding commitments to make
automobile and other small consumer loans. Management anticipates that the Bank
will have sufficient funds to meet its current loan commitments and to fund any
draw downs on outstanding lines of credit. Savings certificates which are
scheduled to mature in one year or less from March 31, 1998 totaled $64.0
million. The Bank may elect to allow some of those deposits to leave the Bank if
it can reduce its cost of funds by doing so without adversely affecting
liquidity. However, management anticipates that the Bank will be able to retain
substantially all of such deposits if the Bank needs to do so to fund loans and
other investments.
At March 31, 1998, the Bank exceeded all regulatory capital requirements of
the FDIC applicable to it, with Tier I capital of $30.7 million, or 13.26% of
average assets and 21.94% of risk-weighted assets and with total risk-based
capital of $32.4 million, or 23.19% of risk-weighted assets. The Bank was
classified as "well capitalized" at March 31, 1998 under FDIC regulations. See
"Regulatory Capital Compliance" and "Regulation--Banking Regulation-Capital
Requirements" for further information regarding FDIC capital requirements.
The Bank is not subject to any mandatory liquidity ratio requirements under
the regulations of the FDIC or the Banking Department. At March 31, 1998, the
Bank's liquid assets totaled 28.24% of deposits.
IMPACT OF INFLATION AND CHANGING PRICES
The financial information in this Prospectus has been prepared according to
Generally Accepted Accounting Principles, which require the measurement of
financial condition and operating results in terms of historical dollar amounts
without considering the changes in the relative purchasing power of money over
time due to inflation. Inflation can increase operating costs and affect the
value of collateral for loans in general, and real estate collateral in
particular. Unlike industrial companies, nearly all of the assets and
liabilities of the Bank are monetary in nature. As a result, interest rates have
a greater impact on the Bank's performance than do the effects of general levels
of inflation. Interest rates do not necessarily move in the same direction or to
the same extent as the price of goods and services. However, interest rates
generally increase during periods when the rate of inflation is increasing and
decrease during periods of decreasing inflation. Periods of high inflation are
ordinarily accompanied by high interest rates, which could have a negative
effect on the Bank's net income. Inflation can also increase the cost of the
Bank's operations. See "--Management of Interest Rate Risk" for a discussion of
the effect of changing interest rates on the Bank.
IMPACT OF NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings Per
Share". SFAS 128 requires the disclosure of basic and diluted earnings per
share. It establishes rules for calculating diluted earnings per share based
upon the effect of agreements by publicly traded companies to issue additional
stock. SFAS 128 is now effective and will require the Company, after the
Conversion, to report in addition to basic earnings per share, fully diluted
earnings per share which would show, for example, the effect on earnings per
share of the exercise of outstanding stock options, if any.
In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income,"
which requires that comprehensive income and its effect on equity must be
disclosed prominently in the notes to the financial statements. Comprehensive
income includes net income as adjusted for items that are recorded as direct
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entries to equity. Only the impact of unrealized gains or losses on securities
available-for-sale is disclosed as an additional component of the Bank's income
under the requirements of SFAS 130. SFAS 130 imposes disclosure requirements
only and does not affect the Company's financial condition or results of
operations. Comprehensive income for the three months ended March 31, 1998 was
$654,000 and was $395,000 for 1997, $1.3 million for 1996 and $2.2 million for
1995.
In June 1997, the FASB issued SFAS 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. The Company anticipates that, in the
near future, the Company's business will comprise only one segment and hence
SFAS 131 will not have a material effect on its financial disclosures. However,
if the Company engages in material non-banking business in the future, separate
segment disclosure may be required.
In February 1998, the FASB issued SFAS 132, which amends existing disclosure
rules regarding pension and other post-retirement benefits to standardize the
disclosure formats effective for fiscal years beginning after September 15,
1997. Disclosures regarding pensions and other non-pension post-retirement
benefits have been combined. SFAS 132 addresses disclosure issues only and does
not require any substantive change in accounting treatment for the benefits
covered by it. Hence, the implementation of SFAS 132 will have no effect on the
Company's financial condition or results of operations.
In June 1998, the FASB issued SFAS 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES, which establishes comprehensive accounting
and reporting requirements for derivative instruments and hedging activities.
The statement requires companies to recognize all derivatives as either assets
or liabilities, with the instruments measured at fair value. The accounting for
gains and losses resulting from changes in fair value depends on the intended
use of the derivative and the type of risk being hedged. SFAS 133 is effective
for the Company and the Bank for all fiscal quarters beginning January 1, 2000.
Earlier adoption is permitted. At the present time, the Company and the Bank
have not fully analyzed the effect or timing of the adoption of SFAS 133 on the
Company's consolidated financial statements.
BUSINESS OF THE COMPANY
GENERAL
The Company was organized as a Delaware corporation in June, 1998 in order
to acquire all the stock of the Bank to be issued in the Conversion. Upon
completion of the Conversion, the Company will become a bank holding company
subject to regulation by the Federal Reserve. See "Regulation--Holding Company
Regulation."
BUSINESS
The Company is not an operating company. After the Conversion, the Company
expects that initially it will invest 50% of the net proceeds from the sale of
the Common Stock, after contributing one-half to the Bank, primarily in
short-term and medium-term debt securities. The Company also intends to lend the
ESOP the funds needed to purchase 8% of the Common Stock issued in the
Conversion, including Common Stock contributed to the Foundation. In the future,
the Company may purchase or organize other operating subsidiaries, including
other financial institutions, or it may merge with other financial institutions
and financial services related companies. There are no current arrangements,
understandings or agreements for any such expansion. See "Use of Proceeds."
Initially, the Company will not own or lease any property but will instead use
the premises, equipment and furniture of the Bank. The Company does not
presently intend to have any employees except for certain officers of the Bank
who will not be separately paid by the Company. The Company may use the support
staff of the Bank from time to time, if needed. Additional employees may be
hired if appropriate.
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BUSINESS OF THE BANK
GENERAL
The Bank's principal business consists of gathering deposits from the
general public within its market area and investing those deposits primarily in
loans, debt obligations issued by the U.S. Government, its agencies, and
business corporations, and mortgage-backed securities. The Bank's principal loan
types are residential and commercial mortgage loans, automobile loans,
commercial loans and other consumer loans. The Bank's revenues come principally
from interest on loans and securities. The Bank's primary sources of funds are
deposits and proceeds from principal and interest payments on loans and
investment securities.
STRATEGY FOR THE FUTURE
Management recognizes that to succeed in the next millennium, the Bank and
the Company must build upon the existing strengths of the Bank while expanding
geographically and diversifying product offerings. Management has therefore
developed a strategy for success based upon the following principles:
- STRENGTHEN THE BANK'S POSITION AS A DOMINANT COMMUNITY-ORIENTED FINANCIAL
INSTITUTION. Cortland Savings Bank has been a community-oriented savings
bank for more than 125 years. Of the Bank's $198.2 million of deposits at
March 31, 1998, approximately 81.5% were held by persons and companies
located in Cortland County. Many of the remaining deposits come from
surrounding counties, and approximately 96% come from within New York
State. Deposits from out-of-state residents are concentrated in common
retirement destinations, such as Florida, and are believed to have
originated from customers who maintain their loyalty to the Bank even
after they move, for all or part of the year, to distant locations.
Likewise, the Bank's loans also come predominantly from its local
community. More than 70% of the Bank's mortgage loans are secured by
properties located in Cortland County, with most of the remainder being
located elsewhere in central New York. The largest component of the Bank's
loans are residential mortgage loans in Cortland County, which foster
long-term customer relationships and provide funds to support local
community needs. The Bank's strength comes from its ability to deliver
services within its community. As industry consolidation continues, the
Bank believes it can build its depositor base and fortify its position
within the surrounding communities by continuing to provide new and
existing customers with a higher level of service and convenience than its
competitors. The Bank's commitment to its neighbors, as evidenced by its
local focus and furthered by its establishment of the Foundation, will
continue into the future.
- PURSUE EXPANSION OPPORTUNITIES IN CENTRAL NEW YORK. Until the 1970's, the
New York State banking landscape, especially in the center of the state,
was populated by many small, locally-oriented banking institutions. When
state law was amended to broaden the geographic scope of permitted
branches, larger institutions began to spread. Throughout the state, areas
which had once been served only by local banks whose directors and
officers were members of the local communities were penetrated by larger
institutions which processed loan applications, established deposit
pricing, and made employment decisions in distant major cities. This was
followed by a period, which still continues, of consolidation in the
banking industry.
As a result, the local focus of the banking industry faded. In the name of
efficiency, branches were closed, personal service was abandoned and small
loans were removed from the product line. Cortland Savings Bank believes
there is a need for community financial institutions and seeks to maintain
good relations with its customers by providing the services they need. The
Bank's customers know their officers and directors as well as their
tellers and loan processors. The Bank believes that this approach to
banking can be extended profitably into adjoining counties that share the
same needs and interests as the Bank's existing home community. In
furtherance of this
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approach, the Bank has recently opened a loan production office in Ithaca,
the county seat of adjoining Tompkins County. In the future, the Bank and
the Company intend to seek out opportunities for further expansion through
acquisitions, branch purchases or the opening of new offices, in order to
develop additional business throughout central New York. Although the Bank
and the Company cannot assure its future stockholders that it will be able
to consummate any such transactions, the Board of Directors intends to
aggressively pursue them.
- MAINTAIN PRE-EMINENCE IN RESIDENTIAL MORTGAGE LENDING IN THE COMMUNITIES
IT SERVES. Cortland Savings Bank is, and has been for many years, the
largest residential mortgage lender in Cortland County, with a market
share that substantially exceeds any other institution when measured by
dollar volume or number of loans originated. As the Bank expands into
other communities in central New York, it intends to offer residential
mortgage loan products in those communities with the same vigor that has
allowed it to reach its current leadership position. In furtherance of
this goal, and in order to be able to offer an even broader range of
residential mortgage loan products to satisfy the diversity of customer
demand, the Bank is developing the systems and structures for a mortgage
secondary market operation, which the Bank hopes to launch before year
end. A secondary market operation will allow the Bank to offer loan
products which might not otherwise satisfy the Bank's portfolio needs or
its underwriting standards. Local customers will still be able to deal
with a local bank and in many cases the loan servicing will remain on the
local level. The Bank can thus work to build a loan servicing portfolio
which provides non-interest income while maintaining customer loyalty and
the opportunity to cross-sell other products to those same patrons.
- OFFER OTHER LOAN PRODUCTS TO CREATE LOAN PORTFOLIO GROWTH. Residential
mortgage loans are, and in the foreseeable future are expected to remain,
the primary component of the Bank's loan portfolio. However, other types
of loans have provided the Bank with opportunities for asset growth in the
past, and it is expected that they will continue to provide growth in the
future. The Bank offers commercial mortgage loans, commercial loans and a
variety of different types of consumer loans. Automobile loans are an
important growth category, increasing by $2.7 million, or 42.1%, over
fifteen months from $6.4 million at December 31, 1996 to $9.1 million at
March 31, 1998. Within the past eighteen months, the Bank has taken steps
to strengthen its loan origination staff to build up its non-residential
loan portfolios. The Bank's loan department staff has recently spent
substantial time resolving problems loans and dealing with the aftermath
of a defalcation by its former senior loan officer. However, the sale of a
package of problem loans during the first quarter of 1998 has allowed the
staff to concentrate on new loan originations. As the Bank expands its
market area in central New York, the Bank will offer a full range of loans
to its new customer base to complement its offering of those loans to its
current customers. Non-residential loans provide product diversification,
opportunities to improve interest rate sensitivity because of the normally
shorter term to maturity of such loans, and higher yields than residential
mortgage loans. The Bank plans to maintain its position as a leading
residential mortgage lender while building upon its position as an
independent community bank to increase its market share of these higher
yield loans.
- IMPROVE EFFICIENCY BY SPREADING COSTS OVER A LARGER ASSET BASE. The Bank's
staffing and infrastructure are currently able to serve more customers and
handle increased deposit and loan volumes. The Bank has recently hired a
new chief operating officer and a new chief financial officer in addition
to upgrading its loan department staffing. As a result, deposit growth and
loan growth can be accomplished without comparable increases in staff,
allowing the Bank to spread its operating expenses over a larger asset
base. In addition, technological advances are constantly changing the face
of the banking industry. In order to remain competitive and continue to
provide the services its customers need and expect, the Bank anticipates
that in the future it will be required to incorporate technological
developments into its product delivery system. Those technological
developments, some of which are not yet conceived, can be expected to
require potentially significant start-up
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costs. Asset growth will allow the Bank to spread the cost of these
technological innovations over a larger base of interest income.
OPERATING PLAN
The Bank's operating plan concentrates on investing available funds in
mortgage loans on properties located in Cortland County. The largest component
of the Bank's mortgage loans, and the Bank's primary focus, are loans secured by
one- to four-family homes, which totaled $103.3 million, or 66.0% of total
loans, at March 31, 1998. These loans consisted of approximately $94.8 million
of loans secured by first mortgages and approximately $8.5 million of loans
secured by junior mortgages. In order to increase yields, improve the interest
rate sensitivity of its assets and diversify its portfolio, management has
invested a portion of the Bank's assets in commercial mortgage loans and other
types of loans, such as commercial loans, automobile loans, home equity loans
and other consumer loans. In recent years, the Bank has sought to increase its
portfolio of automobile loans as a source of higher yielding investments during
periods of low mortgage loan rates. The Bank also provides certain loan
products, such as credit cards, in order to satisfy customer demand and maintain
customer relationships, but which do not materially contribute to net income.
In addition, to provide liquidity and improve interest rate sensitivity,
management has invested a portion of the Bank's assets in securities and short
term liquid investments such as overnight federal funds sales. More than 97% of
the Bank's securities portfolio, other than mortgage-backed securities, had a
maturity of five years or less at March 31, 1998.
The Bank has maintained a ratio of loans to total assets of approximately
66% since year end 1994. It is management's goal to increase this ratio in the
future because loans represent the highest yielding asset category for the Bank.
However, after the Conversion, this ratio will decrease, at least in the short
term, because the increase in capital can not be immediately invested in loans.
Furthermore, the availability of acceptable lending opportunities is
substantially outside the control of the Bank, being driven primarily by
economic conditions and competitive pressures. Therefore, the Bank may be unable
to achieve its goal of increasing its loans to total assets ratio.
Paralleling the Bank's strategy of concentrating on mortgage loans in its
local community, the Bank's primary source of funds for investment is deposits
from its local community and the Bank's capital. The Bank estimates that at
December 31, 1997, approximately 81.5% of its deposits were held by persons who
resided in Cortland County and approximately 96% by persons residing in New York
State. The Bank does not seek deposits from outside its market area, does not
utilize brokered deposits, and has not utilized borrowings as a material funding
source in recent years. However, after the Conversion, the Bank may use
borrowings as a tool to provide additional funding to assist in the leveraging
of the additional capital obtained in the Conversion. The Bank may also
implement a borrowing program before the completion of the Conversion in order
to establish borrowing relationships and develop systems to assist in potential
post-Conversion borrowing programs.
MARKET AREA
The Bank's primary market area is Cortland County, New York. The Bank's main
office has been located in the City of Cortland since it was chartered in 1866.
The Bank has nearby full service branches in Homer, opened in 1988 and
Cortlandville, opened in 1994. The Bank is, and has been for many years, the
largest mortgage lender by dollar volume and number of loans originated in
Cortland County based upon reported data from the Cortland County Clerk and has
the largest share of bank deposits within the County. In addition to Cortland
County, the Bank also considers adjoining townships in the counties surrounding
Cortland (Tompkins, Cayuga and Onondaga) to represent a secondary market area,
especially for mortgage loans. This year, the Bank opened a representative
office in Ithaca, the home of Cornell
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University and Ithaca College and the county seat of nearby Tompkins County, to
originate mortgage loans.
Cortland County, with a population of 48,963 according to the 1990 census,
is predominantly rural with many small towns. Approximately 80% of the County's
workforce works within the county, while others work in nearby areas such as
Syracuse to the north and Ithaca to the southwest, commuting by automobile.
Principal sources of employment for county residents include retail trades,
educational services, manufacturing, health care and other professional
services, and construction. The largest employers in Cortland County are
Buckbee-Mears Company, a manufacturer of television screen components, the State
University of New York at Cortland, and Cortland Memorial Hospital. The parent
corporation of Buckbee-Mears Company has recently announced layoffs due to a
decline in business, at least partially related to adverse economic and
financial conditions in Asia. At this time, the scope and duration of the
layoffs has not been announced and the Bank is unable to assess the effect of
the situation on the Bank's business. However, the Bank notes that although
Buckbee-Mears Company is the largest employer in the County with slightly in
excess of 1,000 employees, there are four additional employers with more than
600 employees each, and a broad diversity of smaller mid-range companies which
the Bank believes may soften the impact of the layoffs.
COMPETITION
The Bank's principal competitors for deposits are other savings banks,
savings and loan associations, commercial banks and credit unions in the Bank's
market area, as well as money market mutual funds, insurance companies and
securities brokerage firms, many of which are substantially larger in size than
the Bank. The Bank's competition for loans comes principally from savings banks,
savings and loan associations, commercial banks, mortgage bankers, finance
companies and other institutional lenders. Some of the institutions which
compete with the Bank have much greater financial and marketing resources than
the Bank. The Bank's principal methods of competition include loan and deposit
pricing, maintaining close ties with its local community, advertising and
marketing programs and the types of services provided.
LENDING ACTIVITIES
LOAN PORTFOLIO COMPOSITION. The Bank's loans consist primarily of mortgage
loans secured by one- to four-family residences. At March 31, 1998, the Bank had
total loans of $156.6 million, of which $94.8 million, or 60.5%, were one- to
four-family first lien residential mortgage loans. The Bank had an additional
$8.5 million of home equity loans and home equity lines of credit outstanding,
or 5.4% of total loans, secured by subordinate liens on one- to four-family
residences. The Bank also had $30.6 million of commercial mortgage loans, or
19.5% of total loans; $9.1 million of automobile loans, or 5.8% of total loans;
$6.5 million of commercial loans, or 4.2% of total loans. The remainder include
different types of consumer loans offered to satisfy customer demand. The Bank's
ratio of loans to total assets has been approximately 66% for more than three
years, fluctuating by less than one percentage point since year end 1994.
Interest rates on loans are affected by the demand for loans, the supply of
money available for lending, credit risks, the rates offered by competitors and
other conditions. These factors are in turn affected by, among other things,
economic conditions, monetary policies of the federal government, and
legislative tax policies.
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LOAN PORTFOLIO COMPOSITION
The following table sets forth the composition of the Bank's mortgage and
other loan portfolios in dollar amounts and in percentages at the dates
indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------------------------------------
AT MARCH 31,
1998 1997 1996 1995 1994
-------------------- -------------------- -------------------- ---------------------- ---------
PERCENT PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT
--------- --------- --------- --------- --------- --------- --------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential.................. $ 97,167 62.03% $ 97,303 61.66% $ 96,097 59.73% $ 95,854 59.57% $ 92,942
Construction................. 264 0.17 316 0.20 528 0.33 155 0.10 1,065
Home equity.................. 6,139 3.92 5,924 3.75 5,882 3.66 6,344 3.94 7,085
Commercial mortgages......... 30,560 19.51 30,867 19.56 35,119 21.83 35,165 21.86 32,756
--------- --------- --------- --------- --------- --------- --------- ----------- ---------
Total real estate loans.... 134,130 85.63 134,410 85.17 137,626 85.55 137,518 85.47 133,848
Other loans:
Guaranteed student loans..... 1,708 1.09 1,507 0.96 1,552 0.96 1,747 1.09 1,960
Property improvement loans... 828 0.53 907 0.57 1,031 0.64 916 0.57 822
Automobile loans............. 9,050 5.78 8,902 5.64 6,378 3.96 5,510 3.42 4,617
Other consumer loans......... 4,391 2.80 5,031 3.19 6,289 3.91 6,174 3.84 5,993
Commercial loans............. 6,528 4.17 7,049 4.47 8,020 4.98 9,023 5.61 7,366
--------- --------- --------- --------- --------- --------- --------- ----------- ---------
Total other loans.......... 22,505 14.37 23,396 14.83 23,270 14.45 23,370 14.53 20,758
Total loans.............. 156,635 100.00% 157,806 100.00% 160,896 100.00% 160,888 100.00% 154,606
--------- --------- --------- --------- --------- --------- --------- ----------- ---------
--------- --------- --------- -----------
Less:
Deferred loan fees, net...... 205 241 333 379 378
Allowance for loan losses.... 2,230 2,143 1,952 2,002 1,752
--------- --------- --------- --------- ---------
Total loans, net........... $ 154,200 $ 155,422 $ 158,611 $ 158,507 $ 152,476
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
<CAPTION>
1993
----------------------
PERCENT PERCENT
OF TOTAL AMOUNT OF TOTAL
----------- --------- -----------
<S> <C> <C> <C>
Real estate loans:
Residential.................. 60.12% $ 88,042 60.89%
Construction................. 0.69 534 0.37
Home equity.................. 4.58 7,141 4.94
Commercial mortgages......... 21.19 29,995 20.75
----------- --------- -----------
Total real estate loans.... 86.58 125,712 86.95
Other loans:
Guaranteed student loans..... 1.27 1,621 1.12
Property improvement loans... 0.53 824 0.57
Automobile loans............. 2.99 3,775 2.61
Other consumer loans......... 3.88 5,784 4.00
Commercial loans............. 4.75 6,867 4.75
----------- --------- -----------
Total other loans.......... 13.42 18,871 13.05
Total loans.............. 100.00% 144,583 100.00%
----------- --------- -----------
----------- -----------
Less:
Deferred loan fees, net...... 363
Allowance for loan losses.... 1,620
---------
Total loans, net........... $ 142,600
---------
---------
</TABLE>
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The following table presents the Bank's loan portfolio by fixed and
adjustable rates at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------------------------------------
AT MARCH 31,
1998 1997 1996 1995 1994
-------------------- -------------------- -------------------- ---------------------- ---------
PERCENT PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT
--------- --------- --------- --------- --------- --------- --------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FIXED-RATE LOANS:
Real estate loans:
Residential................ $ 62,475 39.89% $ 59,048 37.42% $ 49,879 31.00% $ 48,292 30.01% $ 47,433
Construction............... 264 0.17 316 0.20 528 0.33 155 0.10 1,065
Commercial mortgages....... 27,681 17.67 28,077 17.79 31,281 19.44 31,177 19.38 28,370
--------- --------- --------- --------- --------- --------- --------- ----------- ---------
Total real estate
loans.................. 90,420 57.73 87,441 55.41 81,688 50.77 79,624 49.49 76,868
Other loans.................. 19,107 12.20 19,167 12.15 17,716 11.01 16,627 10.33 14,719
--------- --------- --------- --------- --------- --------- --------- ----------- ---------
Total fixed-rate loans... 109,527 69.92 106,608 67.56 99,404 61.78 96,251 59.82 91,587
ADJUSTABLE-RATE LOANS:
Real estate loans:
Residential................ 34,692 22.15 38,255 24.24 46,218 28.73 47,562 29.56 45,509
Home equity................ 6,139 3.92 5,924 3.75 5,882 3.65 6,344 3.94 7,085
Commercial mortgages....... 2,879 1.83 2,790 1.77 3,838 2.39 3,988 2.48 4,386
--------- --------- --------- --------- --------- --------- --------- ----------- ---------
Total real estate
loans.................. 43,710 27.91 46,969 29.76 55,938 34.77 57,894 35.98 56,980
Other loans.................. 3,398 2.17 4,229 2.68 5,554 3.45 6,743 4.20 6,039
--------- --------- --------- --------- --------- --------- --------- ----------- ---------
Total adjustable-rate
loans.................... 47,108 30.08 51,198 32.44 61,492 38.22 64,637 40.18 63,019
Total loans.............. 156,635 100.00% 157,806 100.00% 160,896 100.00% 160,888 100.00% 154,606
--------- --------- --------- --------- --------- --------- --------- ----------- ---------
--------- --------- --------- -----------
Less:
Deferred loan fees, net...... 205 241 333 379 378
Allowance for loan losses.... 2,230 2,143 1,952 2,002 1,752
--------- --------- --------- --------- ---------
Total loans, net....... $ 154,200 $ 155,422 $ 158,611 $ 158,507 $ 152,476
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
<CAPTION>
1993
----------------------
PERCENT PERCENT
OF TOTAL AMOUNT OF TOTAL
----------- --------- -----------
<S> <C> <C> <C>
FIXED-RATE LOANS:
Real estate loans:
Residential................ 30.68% $ 43,281 29.93%
Construction............... 0.69 534 0.37
Commercial mortgages....... 18.35 25,403 17.57
----------- --------- -----------
Total real estate
loans.................. 49.72 69,218 47.87
Other loans.................. 9.52 12,749 8.82
----------- --------- -----------
Total fixed-rate loans... 59.24 81,967 56.69
ADJUSTABLE-RATE LOANS:
Real estate loans:
Residential................ 29.44 44,761 30.96
Home equity................ 4.57 7,141 4.94
Commercial mortgages....... 2.84 4,592 3.18
----------- --------- -----------
Total real estate
loans.................. 36.85 56,494 39.08
Other loans.................. 3.91 6,122 4.23
----------- --------- -----------
Total adjustable-rate
loans.................... 40.76 62,616 43.31
Total loans.............. 100.00% 144,583 100.00%
----------- --------- -----------
----------- -----------
Less:
Deferred loan fees, net...... 363
Allowance for loan losses.... 1,620
---------
Total loans, net....... $ 142,600
---------
---------
</TABLE>
74
<PAGE>
RESIDENTIAL MORTGAGE LOANS. The Bank offers both adjustable-rate and
fixed-rate mortgage loans. The relative proportions of fixed versus adjustable
mortgage loans originated by the Bank depends principally upon customer
preferences, which are generally driven by general economic and interest rate
conditions and the pricing offered by the Bank's competitors. In recent years,
with relatively low mortgage interest rates, customer preference has favored
fixed-rate mortgage loans. As a result, from December 31, 1993 to March 31,
1998, fixed-rate residential mortgage loans increased from 29.9% to 39.9% of the
loan portfolio while adjustable-rate residential mortgage loans declined from
31.0% to 22.2% of the loan portfolio. The adjustable-rate loans generally carry
annual or triennial caps and life-of-the-loan ceilings which limit interest rate
adjustments.
Generally, credit risks on adjustable-rate loans are somewhat greater than
on fixed-rate loans primarily because, as interest rates rise, so do borrowers'
payments, increasing the potential for default. The Bank offers teaser rate
loans with low initial interest rates that are not based upon the index plus the
margin for determining future rate adjustments; however, the Bank judges the
borrower's ability to repay based on the payment due at an interest rate 2%
higher than the initial rate.
In addition to verifying income and assets of borrowers, the Bank obtains
independent appraisals on all residential first mortgage loans and attorneys'
opinions of title are required at closing. The Bank generally uses title
opinions rather than title insurance on residential mortgage loans, but has not
experienced losses due to its reliance on title opinions instead of title
insurance. As the Bank seeks to position itself to be able to sell mortgage
loans on the secondary market towards the end of 1998, it will begin to require
title insurance on first lien residential mortgage loans. Private mortgage
insurance is required on most loans with a loan to value ratio in excess of 80%.
The Bank has $7.5 million of residential mortgage loans with loan to value
ratios of from 80% to 90% without private mortgage insurance. The Bank
originated these loans as part of a special first time home buyer program begun
in 1990. The Bank has not experienced delinquencies on those loans greater than
on other residential mortgage loans. Real estate tax escrows are generally
required on residential mortgage loans with loan to value ratios in excess of
80%.
In the past, the Bank's residential mortgage loans have not been originated
using standards, procedures and documentation customary on the secondary market.
Hence, the loans are generally not salable to regular secondary market
purchasers. The Bank anticipates that by the end of 1998, most of its new
residential mortgage loan originations will meet secondary market standards.
Adjustable-rate mortgage loans originated in recent years have interest
rates that adjust annually or every three years based on the one or three year
treasury bill index, plus 3%. Interest rate adjustments are generally limited to
2% per year for one year adjustable loans and 3% per adjustment for three year
adjustable loans. There is normally a lifetime maximum interest rate adjustment,
measured from the initial interest rate, of 6%.
Fixed-rate residential mortgage loans generally have terms of 10 to 30
years. Although fixed-rate mortgage loans may adversely affect the Bank's net
interest income in periods of rising interest rates, the Bank originates such
loans to satisfy customer demand. Such loans are generally originated at initial
interest rates which exceed the fully indexed rate on adjustable-rate mortgage
loans offered at the same time. Therefore, during periods of level interest
rates, they tend to provide higher yields than adjustable loans. Fixed-rate
residential mortgage loans originated by the Bank generally include due-on-sale
clauses which permit the Bank to demand payment in full if the borrower sells
the property without the Bank's consent. Due-on-sale clauses are an important
means of adjusting the rates of the Bank's fixed-rate mortgage loan portfolio,
and the Bank has generally exercised its rights under these clauses.
After the Conversion, management intends to continue to emphasize the
origination of mortgage loans secured by one- to four-family residences.
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<PAGE>
HOME EQUITY LOANS. The Bank offers a home equity line of credit secured by
a residential one- to four-family mortgage, usually a second lien. These loans
have adjustable rates of interest and provide for an initial advance period of
ten years, during which the borrower pays interest only and can borrow, repay,
and reborrow the principal balance. Some of the Bank's older line of credit
mortgage loans provide for minimum monthly payments which may include principal
reductions. This is followed by a repayment period, generally fifteen years,
during which the balance of the loan is repaid in principal and interest
installments. The Bank also offers home equity loans which are fully advanced at
closing and repayable in monthly principal and interest installments over a
period not to exceed 10 years. The maximum loan to value ratio, including prior
liens, is 80% for lines of credit and 85% for regular amortizing home equity
loans. At March 31, 1998, the Bank had $6.1 million in outstanding advances on
home equity lines of credit, $3.7 million of unused home equity lines of credit
and $2.4 million in regular amortizing home equity loans.
COMMERCIAL MORTGAGE LOANS. The Bank originates commercial mortgage loans
secured by office buildings, retail establishments, multi-family residential
real estate and other types of commercial property. Substantially all of the
properties are located in the Bank's market area or in nearby areas of central
New York State. At March 31, 1998, the Bank's commercial mortgage loan portfolio
was $30.6 million, or 19.5% of total loans. At March 31, 1998, the Bank's
largest such loan was a $962,000, or 50%, participation in a $1.9 million loan
to a non-profit organization secured by a light manufacturing facility in
Cortland County for developmentally disabled workers. The other participant is
another local bank. A number of directors of the Bank now serve, or have served,
as volunteer directors of the non-profit borrower. The loan is current and has
never been designated as non-accrual or otherwise classified.
The Bank makes commercial mortgage loans with loan to value ratios up to
75%, terms up to five years, and amortization periods up to 20 years. At March
31, 1998, $2.9 million of the Bank's commercial mortgage loans had adjustable
rates and $27.7 million had fixed rates. However, most of the Bank's recent
fixed-rate commercial mortgage loans mature after five years, which allows the
Bank to adjust the interest rate after five years if appropriate.
For commercial mortgage loans, the Bank generally requires a debt service
coverage ratio of at least 110% and the personal guarantee of the principals of
the borrower. The Bank also requires an appraisal by an independent appraiser.
Title insurance is required for loans in excess of $500,000, a threshold which
was recently increased from $200,000. Attorneys' opinions of title are used
instead of title insurance for smaller commercial loans, but the Bank has not
experienced losses as a result of not having title insurance.
Loans secured by commercial properties generally involve a greater degree of
risk than one- to four-family residential mortgage loans. Because payments on
such loans are often dependent on successful operation or management of the
properties, repayment may be subject, to a greater extent, to adverse conditions
in the real estate market or the economy. The Bank seeks to minimize these risks
through its underwriting policies. The Bank evaluates the qualifications and
financial condition of the borrower, including credit history, profitability and
expertise, as well as the value and condition of the underlying property. The
factors considered by the Bank include net operating income; the debt coverage
ratio (the ratio of cash net income to debt service); and the loan to value
ratio. When evaluating the borrower, the Bank considers the financial resources
and income level of the borrower, the borrower's experience in owning or
managing similar property and the Bank's lending experience with the borrower.
The Bank's policy requires borrowers to present evidence of the ability to repay
the loan without having to resort to the sale of the mortgaged property.
CONSTRUCTION LOANS. The Bank offers residential single family construction
loans to persons who intend to occupy the property upon completion of
construction and who are pre-qualified by the Bank for a permanent mortgage loan
on the property once construction is complete. Construction loans are generally
not made until construction is already 40% complete. Upon completion of
construction, these loans are automatically converted into permanent residential
mortgage loans and classified as such. The
76
<PAGE>
proceeds of the construction loan are advanced in stages on a percentage of
completion basis as construction progresses. The loans generally provide for a
construction period of not more than three months during which the borrower pays
interest only. In recognition of the risks involved in such loans, the Bank
carefully monitors construction through regular inspections and the borrower
must qualify for the permanent mortgage loan before the construction loan is
made. At March 31, 1998, the Bank had four such construction loans with an
aggregate outstanding principal balance of $264,000. Construction loan levels
tend to increase during the summer because of the seasonal nature of residential
construction, but even during the summer these loans generally do not represent
more than 1% of the Bank's loan portfolio. The Bank's delinquency experience
with its construction loans has been favorable. At March 31, 1998, the Bank had
no non-performing construction loans.
AUTOMOBILE LOANS. In recent years, the Bank has exerted efforts to increase
its level of automobile loans in order to provide improved yields, increase the
interest rate sensitivity of its assets and expand its customer base. Automobile
loans are originated both through direct contact between the Bank and the
borrower and through automobile dealers who refer the borrowers to the Bank. The
Bank conducts its own analysis of the creditworthiness of borrowers referred to
it by dealers before approving any automobile loan. The dealer loans are
represented by installment sales contracts between the dealer and the purchaser
which are immediately assigned to the Bank. Dealers receive fees from the Bank
for the referrals.
The Bank offers automobile loans for both new and used cars. The loans have
fixed rates with maturities not more than five years. At March 31, 1998, the
Bank had $9.1 million of automobile loans. Loan amounts generally equal 85% of
the purchase price of the car. These loans tend to present greater risks of loss
than mortgage loans because the collateral is rapidly depreciable and easier to
conceal. Therefore, the Bank evaluates the credit and repayment ability of the
borrower as well as the value of the collateral in determining whether to
approve a loan.
OTHER CONSUMER LOANS. The Bank also makes short-term fixed-rate consumer
loans either unsecured or secured by savings accounts or other consumer assets,
as well as adjustable-rate revolving credit card loans and overdraft checking
loans. These loans totaled $4.4 million, or 2.8% of total loans, at March 31,
1998. The fixed-rate loans generally have a term of not more than five years and
have interest rates higher than mortgage loans. The shorter terms to maturity or
adjustable rates are helpful in managing the Bank's interest rate risk.
Applications for these loans are evaluated based upon the borrower's ability to
repay and, if applicable, the value of the collateral. Collateral value, except
for loans secured by bank deposits or marketable securities, is a secondary
consideration because personal property collateral generally rapidly depreciates
in value, is difficult to repossess, and rarely generates close to full value at
a forced sale.
COMMERCIAL LOANS. The Bank makes commercial loans to businesses for
automobile dealer floor plan financing, working capital, machinery and equipment
purchases, expansion, and other business purposes. These loans generally have
higher yields than mortgages loans, with maturities that generally are not more
than seven years. Working capital lines of credit tend to provide for one year
terms with annual reviews. The Bank had $6.5 million of such loans at March 31,
1998, of which 51.6% had fixed rates and 48.4% had adjustable rates.
Commercial loans tend to present greater risks than mortgage loans because
the collateral, if any, tends to be rapidly depreciable, difficult to sell at
full value and easier to conceal. In order to limit these risks, the Bank
evaluates these loans based upon the borrower's ability to repay the loan from
ongoing operations. The Bank considers the business history of the borrower and
perceived stability of the business as important factors when considering
applications for such loans. Occasionally, the borrower provides commercial or
residential real estate collateral for such loans, in which case the value of
the collateral may be a significant factor in the loan approval process.
ORIGINATION OF LOANS. Loan originations come from a number of sources.
Residential loan originations can be attributed to depositors, retail customers,
telephone inquiries, advertising, the efforts of the
77
<PAGE>
Bank's loan officers, and referrals from other borrowers, real estate brokers
and builders. The Bank originates loans primarily through its own efforts. The
Bank has worked with independent commercial brokers and residential loan
servicers to obtain loan applications for consideration, but the Bank's present
policy requires that it conduct its own independent credit evaluation before
approving any loan. The Bank also uses referrals from automobile dealers in the
origination of automobile loans but evaluates each loan application itself in
advance of committing to any loan.
All of the Bank's lending is subject to its written, nondiscriminatory
underwriting standards and to loan origination procedures prescribed by the
Bank's Board of Directors. Officers of the Bank have the authority to approve
loans at differing levels established by the Board of Directors based upon the
position and expertise of the officer. All loans in excess of $200,000 and any
loan which, when added to existing loans to a borrower causes that loan
relationship to exceed $200,000 must be approved by the Board's Loan Committee.
The Bank is not subject to general state or federal regulations limiting the
aggregate amount of loans it is permitted to make to one borrower or an
affiliated group of borrowers, notably including mortgage loans, but is subject
to maximum loan to one borrower limits on certain types of loans, such as
commercial loans. The Bank's largest single loan is the $962,000 mortgage loan
to a non-profit organization previously described. The Bank has six different
loan relationships in which the aggregate amount outstanding to all related
borrowers exceeds $1.0 million. The largest such relationship had an aggregate
outstanding balance owed of $1.2 million at March 31, 1998, represented by five
loans secured by mortgages on commercial properties in central New York. None of
the loans in any of the six relationships are designated as non-accrual or
otherwise identified as problem loans.
The following table sets forth the Bank's loan originations, loan sales and
principal repayments for the periods indicated. All loans sold were whole loans.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
THREE MONTHS ENDED
MARCH 31, 1998 1997 1996 1995
------------------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
<CAPTION>
<S> <C> <C> <C> <C>
Total loans, beginning of period........................ $ 157,806 $ 160,896 $ 160,888 $ 154,606
-------- ---------- ---------- ----------
Loans originated:
Residential mortgages................................. 3,600 14,732 12,382 10,789
Commercial mortgages.................................. 496 1,260 2,987 5,436
Commercial loans...................................... 1,335 3,940 5,072 5,987
Other loans........................................... 2,358 12,982 11,227 11,430
-------- ---------- ---------- ----------
Total loans originated.............................. 7,789 32,914 31,668 33,642
Principal repayments.................................... (8,316) (29,089) (29,236) (26,110)
Loans transferred to held-for-sale...................... (661) (2,541) -- --
Loans transferred from held-for-sale.................... 101 -- -- --
Loans transferred to real estate owned.................. (45) (1,095) (711) (645)
Total charge-offs....................................... (39) (3,279) (1,713) (605)
-------- ---------- ---------- ----------
Net loan activity....................................... (1,171) (3,090) 8 6,282
-------- ---------- ---------- ----------
Total loans, end of period.......................... $ 156,635 $ 157,806 $ 160,896 $ 160,888
-------- ---------- ---------- ----------
-------- ---------- ---------- ----------
</TABLE>
The Bank generally does not sell loans except for the sale of problem loans
during the first quarter of 1998 and the sale of student loans when the student
leaves school and the repayment of the loan begins. The Bank does not service
loans for other investors and the Bank has never purchased loan servicing
rights. However, the Bank intends to begin selling a portion of its new
fixed-rate residential mortgage loans on the secondary market by the end of
1998, with the Bank retaining the servicing of those loans.
78
<PAGE>
From time to time, the Bank accepts loan applications through loan servicers
and other sources of loan applications. The Bank has had a relationship for more
than 10 years with a loan servicer who has referred loan applications,
principally for commercial mortgage loans, to the Bank for consideration. In
most cases, the Bank pays no fee for a loan referral from that company but when
and if the loan is closed, the company services the loan for the Bank. At March
31, 1998, the Bank had $9.6 million of loans serviced by that company, of which
28 loans, or $7.0 million, were commercial mortgage loans and 43 loans, or $2.6
million, were residential mortgage loans. The Bank had an additional $7.4
million of its loans serviced by other loan servicers, some of which are
participation loans in which the servicer is the lead participant.
LOAN MATURITY. The following table shows the contractual maturity of the
Bank's loan portfolio at March 31, 1998. Loans are shown as due based on their
contractual terms to maturity. Loans which have adjustable interest rates are
shown as maturing when the final loan payment is due without regard to rate
adjustments. The table does not show the effects of loan amortization, possible
prepayments or enforcement of due-on-sale clauses. Non-performing loans are
shown as being due based upon their contractual maturity without regard to
acceleration due to default.
<TABLE>
<CAPTION>
RESIDENTIAL HOME COMMERCIAL
MORTGAGE(1) EQUITY MORTGAGE COMMERCIAL OTHER LOANS TOTAL
----------- --------- ----------- ----------- ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Amounts due:
Within 3 months............................. $ 18 $ -- $ 923 $ 1,490 $ 167 $ 2,598
3 months to one year........................ 194 -- 3,050 1,678 1,339 6,261
1 to 3 years................................ 762 -- 9,720 1,007 5,143 16,632
3 to 5 years................................ 3,402 -- 4,998 640 6,706 15,746
5 to 10 years............................... 14,868 -- 5,071 1,665 367 21,971
10 to 20 years.............................. 43,366 2,285 5,828 -- 1,674 53,153
Over 20 years............................... 34,821 3,854 970 48 581 40,274
----------- --------- ----------- ----------- ------------ ----------
Total loans................................. $ 97,431 $ 6,139 $ 30,560 $ 6,528 $ 15,977 $ 156,635
----------- --------- ----------- ----------- ------------ ----------
----------- --------- ----------- ----------- ------------ ----------
</TABLE>
- ------------------------
(1) Includes construction loans on residential property.
The following table shows, as of March 31, 1998, the amount of loans due
after March 31, 1999, and whether they have fixed interest rates or adjustable
interest rates.
<TABLE>
<CAPTION>
FLOATING OR
FIXED ADJUSTABLE
RATES RATES TOTAL
---------- ----------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Residential mortgage......................................................... $ 62,527 $ 34,692 $ 97,219
Home equity.................................................................. -- 6,139 6,139
Commercial mortgage.......................................................... 23,784 2,803 26,587
Commercial................................................................... 3,284 76 3,360
Other loans.................................................................. 4,430 41 14,471
---------- ----------- ----------
Total........................................................................ $ 104,025 $ 43,751 $ 147,776
---------- ----------- ----------
---------- ----------- ----------
</TABLE>
ASSET QUALITY
DELINQUENCY PROCEDURES. When a borrower fails to make a required payment on
a loan, the Bank attempts to cause the deficiency to be cured by contacting the
borrower. Late notices are sent when a payment is more than 15 days past due and
a late charge is generally assessed at that time. The Bank attempts to contact
personally any borrower who is more than 20 days past due. All loans past due 90
days or more are added to a watch list and an employee of the Bank contacts the
borrower on a regular basis to
79
<PAGE>
seek to cure the delinquency. If a mortgage loan becomes past due from 90 to 120
days, the Bank refers the matter to an attorney, who first seeks to obtain
payment without litigation and, if unsuccessful, generally commences a
foreclosure action or other appropriate legal action to collect the loan. A
foreclosure action, if the default is not cured, generally leads to a judicial
sale of the mortgaged real estate. The judicial sale is delayed if the borrower
files a bankruptcy petition because the foreclosure action cannot be continued
unless the Bank first obtains relief from the automatic stay provided by the
Bankruptcy Code.
If the Bank acquires the mortgaged property at foreclosure sale or accepts a
voluntary deed in lieu of foreclosure, the acquired property is then classified
as real estate owned. At March 31, 1998, the Bank had $760,000 of real estate
owned, represented by six single family residences, one car dealership, one
bowling alley, one ice cream parlor, one commercial retail facility and one
parcel of vacant land. At March 31, 1998, the Bank had contracts to sell three
of those properties with an aggregate carrying value of $337,000. When real
estate is acquired in full or partial satisfaction of a loan, it is recorded at
the lower of the principal balance of the loan or fair value less costs of sale.
Any shortfall between that amount and the carrying value of the loan is then
charged to the allowance for loan losses. Subsequent changes in the value of the
property are charged to the expense of real estate operations. The Bank is
permitted to finance sales of real estate owned by "loans to facilitate," which
may involve a lower down payment or a longer repayment term or other more
favorable features than generally would be granted under the Bank's underwriting
guidelines. At March 31, 1998, the Bank had no "loans to facilitate."
If an automobile loan becomes 60 days past due, the Bank seeks to repossess
the collateral. If the default is not cured, then upon repossession the Bank
sells the automobile as soon as practicable through a local automobile auction.
When other types of non-mortgage loans become past due, the Bank takes measures
to cure defaults through contacts with the borrower and takes appropriate
action, depending upon the nature of the borrower and the collateral, to obtain
repayment of the loan.
The following table sets forth the Bank's loan delinquencies by type, by
amount and by percentage of type at March 31, 1998.
<TABLE>
<CAPTION>
LOANS DELINQUENT FOR:
------------------------------------------------------------------------------------
60-89 DAYS 90 DAYS OR MORE(1)
----------------------------------------- -----------------------------------------
PERCENT PERCENT
OF LOAN OF LOAN
NUMBER AMOUNT CATEGORY NUMBER AMOUNT CATEGORY
------------- ----------- ------------- ------------- ----------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Residential mortgage loans.......... 12 $ 623 0.60% 27 $ 893 0.86%
Commercial mortgage loans........... -- -- 0.00 5 363 1.19
Commercial loans.................... -- -- 0.00 5 115 1.76
Other loans......................... 13 34 0.21 30 97 0.54
-- --
----- -----------
Total............................... 25 $ 657 0.42% 67 $ 1,468 0.93%
-- --
-- --
----- --- ----------- ---
----- --- ----------- ---
<CAPTION>
TOTAL DELINQUENT LOANS
-----------------------------------------
PERCENT
OF LOAN
NUMBER AMOUNT CATEGORY
------------- ----------- -------------
<S> <C> <C> <C>
Residential mortgage loans.......... 39 $ 1,516 1.46%
Commercial mortgage loans........... 5 363 1.19
Commercial loans.................... 5 115 1.76
Other loans......................... 43 131 0.82
--
-----------
Total............................... 92 $ 2,125 1.35%
--
--
----------- ---
----------- ---
</TABLE>
- ------------------------
(1) Includes seven "Other" loans with a balance of $10,000 at March 31, 1998 for
which the Bank was still accruing interest, representing 0.06% of total
other loans and 0.01% of total loans.
The following table sets forth information with respect to the Bank's
non-performing assets (which generally includes loans that are delinquent for 90
days or more and real estate owned) at the dates indicated. At March 31, 1998,
there were no loans other than those included in the table below with regard
80
<PAGE>
to which management had information about possible credit problems of the
borrower that caused management to seriously doubt the ability of the borrower
to comply with present loan repayment terms.
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT MARCH 31, -----------------------------------------------------
1998 1997 1996 1995 1994 1993
------------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Non-accrual loans:(1)
Residential mortgages..................................... $ 893 $ 2,010 $ 1,069 $ 772 $ -- $ 299
Commercial mortgages...................................... 363 1,235 1,416 421 1,295 896
------ --------- --------- --------- --------- ---------
Total real estate loans................................. 1,256 3,245 2,485 1,193 1,295 1,195
Commercial loans.......................................... 115 331 790 739 51 243
Other loans............................................... 87 209 358 62 -- --
------ --------- --------- --------- --------- ---------
Total non-accrual loans................................. 1,458 3,785 3,633 1,994 1,346 1,438
Accruing loans past due 90 days or more:
Residential mortgages..................................... -- 2 1 -- 747 1,141
Commercial mortgages...................................... -- -- -- -- 310 1,132
------ --------- --------- --------- --------- ---------
Total real estate loans................................. -- 2 1 -- 1,057 2,273
Commercial loans.......................................... -- -- -- -- 13 67
Other loans............................................... 10 7 33 -- 47 108
------ --------- --------- --------- --------- ---------
Total loans past due 90 days or more and still
accruing.............................................. 10 9 34 -- 1,117 2,448
------ --------- --------- --------- --------- ---------
Total non-performing loans.................................. 1,468 3,794 3,667 1,994 2,463 3,886
Real estate owned........................................... 760 964 563 374 572 75
------ --------- --------- --------- --------- ---------
Total non-performing assets................................. $ 2,228 $ 4,758 $ 4,230 $ 2,368 $ 3,035 $ 3,961
------ --------- --------- --------- --------- ---------
------ --------- --------- --------- --------- ---------
Non-performing loans as a percent of total loans............ 0.94% 2.37% 2.28% 1.24% 1.60% 2.69%
Non-performing assets as a percent of total assets.......... 0.96% 2.04% 1.78% 1.00% 1.32% 1.69%
</TABLE>
- ------------------------
(1) Non-accrual loans at December 31, 1997 include $2.3 million of non-accrual
loans held for sale.
It is the Bank's policy to discontinue accruing interest on a loan when its
fourth monthly payment is due and unpaid, unless the Bank determines that the
nature of the delinquency and the collateral are such that collection of the
principal and interest on the loan in full is reasonably assured. When the
accrual of interest is discontinued, all accrued but unpaid interest is charged
against current period income. For mortgage loans, once the accrual of interest
is discontinued, the Bank records interest as and when received until the loan
is restored to accruing status. For non-mortgage loans designated as
non-accrual, amounts received are recorded as a reduction of principal until the
loan is returned to accruing status. Commercial mortgage and commercial loans
are not restored to accruing status until timely payments are made for at least
six months while residential mortgage or consumer loans are returned to accruing
status when sufficient payments are made so that they no longer meet the
standard for being initially designated as non-accrual.
The amount of additional interest income that would have been recorded on
non-accrual loans had those loans been performing in accordance with their terms
was $37,000 for the three months ended March 31, 1998, $402,000 for 1997,
$307,000 for 1996 and $107,000 for 1995.
CLASSIFIED ASSETS. FDIC regulations require that the Bank classify its
assets on a regular basis and establish prudent valuation allowances based on
such classifications. In addition, in connection with examinations, FDIC and
Banking Department examiners have the authority to identify problem assets and,
if appropriate, require that they be classified. There are three adverse
classifications for problem assets: Substandard, Doubtful and Loss. Substandard
assets have one or more defined weaknesses and are
81
<PAGE>
characterized by the distinct possibility that the Bank will sustain some loss
if the deficiencies are not corrected. Doubtful assets have the weaknesses of
Substandard assets, with the additional characteristics that the weaknesses make
collection or liquidation in full on the basis of currently existing facts,
conditions and values questionable, and there is a high probability of loss. An
asset classified Loss is considered uncollectable and of such little value that
its continuance as an asset of the Bank is not warranted.
Assets classified as Substandard or Doubtful require the Bank to establish
prudent valuation allowances. If an asset or portion thereof is classified as
Loss, the Bank must either establish a specific allowance for loss equal to 100%
of the portion of the asset classified as Loss or charge off such amount. If the
Bank does not agree with an examiner's classification of an asset, it may appeal
this determination. On the basis of management's review of its loans at March
31, 1998, the Bank had $2.1 million of assets classified as Substandard, $49,000
classified as Doubtful, and none classified as Loss. All classified loans are
non-performing and shown in the above table of non-performing loans.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the
risks inherent in the Bank's loan portfolio and the general economy. The
allowance for loan losses is maintained at an amount management considers
adequate to cover loan losses which are deemed probable and can be estimated.
The allowance is based upon a number of factors, including asset
classifications, economic trends, industry experience and trends, industry and
geographic concentrations, estimated collateral values, management's assessment
of the credit risk inherent in the portfolio, historical loan loss experience
and the Bank's underwriting policies. The Bank evaluates, on a monthly basis,
all loans identified as problem loans, including all non-accrual loans and other
loans where management has reason to doubt collection in full in accordance with
original payment terms. The Bank considers whether the allowance should be
adjusted to protect against risks associated with such loans. In addition, the
Bank applies fixed percentages for each category of performing loans not
designated as problem loans to determine an additional component of the
allowance to protect against unascertainable risks inherent in any portfolio of
performing loans. Finally, the Bank includes an unallocated component in its
allowance to address general factors and general uncertainties such as changes
in economic conditions and the inherent inaccuracy of any attempt to predict
future default rates and property values based upon past experience.
The analysis of the adequacy of the allowance is reported to and reviewed by
the Loan Committee of the Board of Directors monthly. Management believes it
uses a reasonable and prudent methodology to project potential future losses in
the loan portfolio, and hence assess the adequacy of the allowance for loan
losses. However, any such assessment is speculative and future adjustments may
be necessary if economic conditions or the Bank's actual experience differ
substantially from the assumptions upon which the evaluation of the allowance
was based. Furthermore, state and federal regulators, in reviewing the Bank's
loan portfolio as part of a future regulatory examination, may request the Bank
to increase its allowance for loan losses, thereby negatively affecting the
Bank's financial condition and earnings at that time. Moreover, future additions
to the allowance may be necessary based on changes in economic and real estate
market conditions, new information regarding existing loans, identification of
additional problem loans and other factors, both within and outside of
management's control.
82
<PAGE>
The following table summarizes the activity in the Bank's allowance for loan
losses during the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED DECEMBER 31,
MARCH 31, -----------------------------------------------------
1998 1997 1996 1995 1994 1993
------------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Allowance for loan losses, beginning
of period....................................... $ 2,143 $ 1,952 $ 2,002 $ 1,752 $ 1,620 $ 1,223
Provision for loan losses......................... 75 3,300 1,380 600 300 550
------ --------- --------- --------- --------- ---------
Charge-offs:
Real estate..................................... -- 2,484 264 478 110 25
Commercial...................................... 23 395 898 31 21 48
Other........................................... 16 400 551 96 137 205
------ --------- --------- --------- --------- ---------
Total charge-offs............................. 39 3,279 1,713 605 268 278
Recoveries:
Real estate..................................... 23 9 24 161 -- --
Commercial...................................... 9 61 190 -- -- --
Other........................................... 19 100 69 94 100 125
------ --------- --------- --------- --------- ---------
Total recoveries.............................. 51 170 283 255 100 125
Net charge-offs (recoveries)...................... (12) 3,109 1,430 350 168 153
------ --------- --------- --------- --------- ---------
Allowance for loan losses, end
of period....................................... $ 2,230 $ 2,143 $ 1,952 $ 2,002 $ 1,752 $ 1,620
------ --------- --------- --------- --------- ---------
------ --------- --------- --------- --------- ---------
Allowance for loan losses as a
percent of total loans.......................... 1.43% 1.34% 1.22% 1.25% 1.14% 1.12%
Allowance for loan losses as a
percent of non-performing loans................. 151.91% 56.48% 53.23% 100.40% 71.13% 41.69%
Ratio of net charge-offs(recoveries)
to average loans outstanding.................... (0.01%) 1.97% 0.90% 0.22% 0.12% 0.13%
</TABLE>
83
<PAGE>
The following table sets forth the breakdown of the allowance for loan
losses by loan category at the dates indicated. The allocation of the allowance
to each category is not necessarily indicative of future losses and does not
restrict the use of the allowance to absorb losses in any category.
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------
AT MARCH 31, 1998 1997 1996
---------------------- ---------------------- ----------------------
PERCENT PERCENT PERCENT
OF LOANS OF LOANS OF LOANS
TO TOTAL TO TOTAL TO TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
--------- ----------- --------- ----------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ALLOWANCE FOR LOAN LOSSES ALLOCATED TO:
Residential mortgages.............................. $ 844 66.12% $ 661 65.61% $ 389 63.72%
Commercial mortgages............................... 650 19.51 638 19.56 818 21.83
Commercial loans................................... 137 4.17 183 4.47 478 4.98
Other loans........................................ 218 10.20 192 10.36 267 9.47
Unallocated........................................ 381 N/A 469 N/A -- --
--------- ----------- --------- ----------- --------- -----------
Total allowance.................................. $ 2,230 100.00% $ 2,143 100.00% $ 1,952 100.00%
--------- ----------- --------- ----------- --------- -----------
--------- ----------- --------- ----------- --------- -----------
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------------------------------
1995 1994 1993
---------------------- ---------------------- ----------------------
PERCENT PERCENT PERCENT
OF LOANS OF LOANS OF LOANS
TO TOTAL TO TOTAL TO TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
--------- ----------- --------- ----------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ALLOWANCE FOR LOAN LOSSES ALLOCATED TO:
Residential mortgages.............................. $ 112 63.61% $ 746 65.39% $ 324 66.20%
Commercial mortgages............................... 753 21.86 341 21.19 205 20.75
Commercial loans................................... 961 5.61 331 4.75 329 4.75
Other loans........................................ 176 8.92 334 8.67 762 8.30
Unallocated........................................ -- N/A -- -- -- --
--------- ----------- --------- ----------- --------- -----------
Total allowance.................................. $ 2,230 100.00% $ 1,752 100.00% $ 1,620 100.00%
--------- ----------- --------- ----------- --------- -----------
--------- ----------- --------- ----------- --------- -----------
</TABLE>
ENVIRONMENTAL ISSUES
The Bank encounters certain environmental risks in its lending activities.
Under federal and state environmental laws, lenders may become liable for costs
of cleaning up hazardous materials found on property securing their loans. In
addition, the presence of hazardous materials may have a substantial adverse
effect on the value of such property as collateral and may cause economic
difficulties for the borrower, causing the loan to go into default. Although
environmental risks are usually associated with loans secured by commercial real
estate, risks also may exist for loans secured by residential real estate if,
for example, there is nearby commercial contamination or if the residence was
constructed on property formerly used for commercial purposes. The Bank attempts
to control its risk by requiring a phase one environmental assessment by a
Bank-approved engineer as part of its underwriting review for all mortgage loans
other than those secured by one- to four-family residences. Prior to completing
a foreclosure or acquiring title to property instead of foreclosure, the Bank
undertakes an environmental review, the nature of which depends on the nature of
the mortgaged property.
The Bank believes its procedures regarding the assessment of environmental
risk are adequate and, as of March 31, 1998, the Bank was unaware of any
environmental issues with respect to any of its mortgage loans which would
subject it to any material liability at this time. Hidden or future
environmental contamination could adversely affect the values of properties
securing loans in the Bank's portfolio.
84
<PAGE>
INVESTMENT ACTIVITIES
GENERAL. The investment policy of the Bank, which is approved by the Board
of Directors, is based upon its asset/liability management goals and is designed
primarily to provide satisfactory yields while maintaining adequate liquidity, a
balance of high quality, diversified investments, and minimal risk. The
investment policy is implemented by the President and the Chief Financial
Officer. The Bank is assisted in its investment decisions by an independent
nationally-recognized investment advisory firm. All securities purchases and
sales must be approved by at least two executive officers and the purchases are
reported to the Board of Directors each month.
As required by SFAS 115, securities are classified into three categories:
trading, held-to-maturity and available-for-sale. Securities that are bought and
held principally for the purpose of selling them in the near term are classified
as trading securities and are reported at fair value with unrealized gains and
losses included in trading account activities in the statement of income.
Securities that the Bank has the positive intent and ability to hold to maturity
are classified as held-to-maturity and reported at amortized cost. All other
securities are classified as available-for-sale. Available-for-sale securities
are reported at fair value with unrealized gains and losses included, on an
after-tax basis, as a separate component of net worth. The Bank does not have a
trading securities portfolio and has no current plans to maintain such a
portfolio in the future. At March 31, 1998, the Bank's securities portfolio
included securities with a fair value of $45.5 million which were classified as
available-for-sale and securities with amortized cost of $12.5 million which
were classified as held-to-maturity. The Bank classifies each security between
the available-for-sale and held-to-maturity categories when the security is
purchased. The Bank seeks to maintain a target ratio of approximately 80% of its
portfolio as available-for-sale and approximately 20% as held-to-maturity.
Accounting rules allowed institutions to transfer securities from
held-to-maturity to available-for-sale at the end of 1995 without any adverse
consequences. In December 1995, the Bank transferred securities held-to-maturity
with a fair value of approximately $31.2 million to the available-for-sale
classification.
INVESTMENT DEBT SECURITIES. The Bank's investment debt securities totaled
$35.8 million at March 31, 1998. It is the policy of the Bank to invest in debt
securities issued by the United States Government, its agencies, municipalities
and corporations. The Bank purchases only investment grade debt securities for
its investment portfolio and at March 31, 1998, none of its investment debt
securities were in default or otherwise classified. The Bank seeks to balance
its investment debt securities purchases between higher yielding U.S. government
and related securities which are virtually risk-free but which have lower yields
and corporate debt securities which offer higher yields. Corporate debt
securities present greater risks than U.S. Government securities because of the
increased possibility that the corporate obligor, compared to the U.S.
Government, will default. To control risks, the Bank limits its investment in
corporate debt securities to those rated in the three highest grades by a
nationally recognized rating organization.
Debt securities are generally purchased with a remaining term to maturity of
two to three years. However, recently, the Bank has begun to purchase certain
callable debt securities with terms up to five to seven years in order to
increase yields. At March 31, 1998, more than 97% of the carrying value of the
Bank's investment debt securities had remaining terms to maturity of five years
or less.
EQUITY SECURITIES. The Bank invests a limited amount of its assets in
corporate equity securities. Under New York law, a savings bank is permitted to
invest in corporate equity securities provided certain conditions are met,
including requirements that the security must be listed on a national securities
exchange and must have paid dividends at least quarterly for ten consecutive
years. These investments are made to diversify the Bank's investments and
provide opportunities for capital appreciation as well as dividend income. All
equity securities are classified as available-for-sale. The Bank does not
regularly trade such securities and does not purchase them for the purpose of
near term sale. Equity securities had a fair value of $2.4 million at March 31,
1998. The Bank intends to invest approximately an additional $50,000 per month
in equity securities.
85
<PAGE>
FEDERAL HOME LOAN BANK STOCK. At March 31, 1998, the Bank held $1.3 million
in stock of the FHLBNY, which was necessary to be a member of the FHLBNY.
Membership requires the purchase of stock equal to 1% of the Bank's residential
mortgage loans. If the Bank borrows from the FHLBNY, the Bank must own stock at
least equal to 5% of its borrowings. The yield on this stock was 7.4%
(annualized) for the three months ended March 31, 1998.
MORTGAGE-BACKED SECURITIES. The Bank invests in mortgage-backed securities
to supplement the yields on its loan portfolio. At March 31, 1998, the Bank's
mortgage-backed securities portfolio included $12.0 million in fair value
classified as available-for-sale and $7.8 million in amortized cost classified
as held-to-maturity. At March 31, 1998, more than 95% of the Bank's
mortgage-backed securities were issued or guaranteed by Fannie Mae, Freddie Mac
or Ginnie Mae. The Bank's mortgage-backed securities portfolio had a weighted
average yield of 6.49% at March 31, 1998.
Mortgage-backed securities generally have higher yields than other debt
securities because of the longer terms and the uncertainties associated with the
timing of mortgage repayments. In addition, mortgage-backed securities are more
liquid than individual mortgage loans and may be used to collateralize
borrowings of the Bank. However, these securities generally yield less than the
loans that underlie them because of the cost of payment guarantees or credit
enhancements that reduce credit risk. Mortgage-backed securities of the type
held by the Bank are generally weighted at 20%, rather than the 50% weighting
for performing residential one- to four-family mortgage loans, in determining
risk-based capital ratios.
While investment and mortgage-backed securities carry a reduced credit risk
as compared to loans, such securities remain subject to the risk that a
fluctuating interest rate environment, along with other factors such as the
geographic distribution of the underlying mortgage loans, may alter the
prepayment rate of such mortgage loans and so affect both the prepayment speed,
and value, of such securities. See "Risk Factors--Interest Rate Risk."
The following table sets forth certain information regarding the amortized
cost and fair value of the Bank's available-for-sale and held-to-maturity
securities portfolios at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------------------
AT MARCH 31,
1998 1997 1996 1995
---------------------- ---------------------- ---------------------- -----------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR AMORTIZED
COST VALUE COST VALUE COST VALUE COST
----------- --------- ----------- --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
SECURITIES AVAILABLE-FOR-SALE:
U.S. Treasury securities................. $ 12,048 $ 12,137 $ 15,045 $ 15,141 $ 14,497 $ 14,550 $ 3,053
U.S. Government agencies................. 4,495 4,485 996 1,005 4,988 4,993 5,502
Corporate debt obligations............... 14,485 14,512 13,819 13,861 13,233 13,252 24,545
Mortgage-backed securities............... 11,886 11,981 12,144 12,211 11,833 11,722 7,764
----------- --------- ----------- --------- ----------- --------- -----------
Total debt securities.................. 42,914 43,115 42,004 42,218 44,551 44,517 40,864
Equity securities........................ 1,340 2,360 1,192 1,922 628 1,077 418
----------- --------- ----------- --------- ----------- --------- -----------
Total Available-for-sale............... 44,254 45,475 43,196 44,140 45,179 45,594 41,282
----------- --------- ----------- --------- ----------- --------- -----------
SECURITIES HELD-TO-MATURITY:
U.S. Government agencies................. 2,001 1,997 1,992 1,995 -- -- --
Corporate debt obligations............... 2,359 2,376 1,854 1,870 -- -- --
State and municipal sub-divisions........ 284 288 425 430 858 867 1,472
Mortgage-backed securities............... 7,835 7,828 8,279 8,274 10,899 10,766 9,716
----------- --------- ----------- --------- ----------- --------- -----------
Total held-to-maturity................. 12,479 12,489 12,550 12,569 11,757 11,633 11,188
----------- --------- ----------- --------- ----------- --------- -----------
TOTAL SECURITIES....................... $ 56,733 $ 57,964 $ 55,746 $ 56,709 $ 56,936 $ 57,227 $ 52,470
----------- --------- ----------- --------- ----------- --------- -----------
----------- --------- ----------- --------- ----------- --------- -----------
<CAPTION>
FAIR
VALUE
---------
<S> <C>
SECURITIES AVAILABLE-FOR-SALE:
U.S. Treasury securities................. $ 3,068
U.S. Government agencies................. 5,542
Corporate debt obligations............... 24,679
Mortgage-backed securities............... 7,752
---------
Total debt securities.................. 41,041
Equity securities........................ 736
---------
Total Available-for-sale............... 41,777
---------
SECURITIES HELD-TO-MATURITY:
U.S. Government agencies................. --
Corporate debt obligations............... --
State and municipal sub-divisions........ 1,501
Mortgage-backed securities............... 9,794
---------
Total held-to-maturity................. 11,295
---------
TOTAL SECURITIES....................... $ 53,072
---------
---------
</TABLE>
86
<PAGE>
The table below sets forth certain information regarding the carrying value,
weighted average yields and stated maturity of the Bank's securities at March
31, 1998. There were no securities (exclusive of obligations of the U.S.
Government and any federal agencies) issued by any one entity with a total
carrying value in excess of 10% of the Bank's equity at that date.
<TABLE>
<CAPTION>
ONE TO FIVE YEARS MORE THAN TEN YEARS
ONE YEAR OR LESS FIVE TO TEN YEARS
------------------------ ------------------------ ------------------------ ------------------------
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>
U.S. Treasury
securities............ $ 5,501 6.10% $ 6,636 6.31% $ -- -- % $ -- -- %
U.S. Government
agencies.............. 500 6.53 4,996 6.21 990 6.06 -- --
Corporate debt
obligations........... 1,751 6.33 15,120 6.20 -- -- -- --
State and municipal..... -- -- 284 4.65 -- -- -- --
Mortgage-backed
securities............ -- -- 4,948 6.46 1,194 7.50 13,674 6.41%
----------- --- ----------- --- ----------- --- ----------- ---
Total................. $ 7,752 6.18% $ 31,984 6.25% $ 2,184 6.85% $ 13,674 6.41%
----------- --- ----------- --- ----------- --- ----------- ---
----------- --- ----------- --- ----------- --- ----------- ---
<CAPTION>
TOTAL DEBT SECURITIES
-----------------------------------
CARRYING AVERAGE MARKET
VALUE YIELD VALUE
----------- ----------- ---------
<S> <C> <C> <C>
U.S. Treasury
securities............ $ 12,137 6.21% $ 12,137
U.S. Government
agencies.............. 6,486 6.21 6,482
Corporate debt
obligations........... 16,871 6.21 16,888
State and municipal..... 284 4.65 288
Mortgage-backed
securities............ 19,816 6.49 19,809
----------- ----- ---------
Total................. $ 55,594 6.30% $ 55,604
----------- ----- ---------
----------- ----- ---------
</TABLE>
SOURCES OF FUNDS
GENERAL. The Bank's primary source of funds is deposits. In addition, the
Bank derives funds for loans and investments from loan and security repayments
and prepayments and revenues from operations. Scheduled payments on loans and
mortgage-backed and investment securities are a relatively stable source of
funds, while savings inflows and outflows and loan and mortgage-backed and
investment securities prepayments are significantly influenced by general
interest rates and money market conditions.
DEPOSITS. The Bank offers several types of deposit programs to its
customers, including passbook and statement savings accounts, NOW accounts,
money market deposit accounts, checking accounts and savings certificates.
Deposit account terms vary according to the minimum balance required, the time
periods the funds must remain on deposit and the interest rate, among other
factors. The Bank's deposits are obtained predominantly from its Cortland County
market area. The Bank relies primarily on customer service and long-standing
relationships with customers to attract and retain these savings deposits;
however, market interest rates and rates offered by competing financial
institutions significantly affect the Bank's ability to attract and retain
savings deposits. The Bank does not use brokers to obtain deposits and has no
brokered deposits. At March 31, 1998, the Bank had $198.2 million of deposits.
The Bank prices its deposit offerings based upon market and competitive
conditions in its market area. Pricing determinations are made weekly by a
committee of senior officers. The Bank seeks to price its deposit offerings to
be competitive with other institutions in its market area. Due to declining
market interest rates, savings certificates with rates of 6.00% or more totaled
$7.6 million, or 3.8%, of total deposits at March 31, 1998 compared to $44.6
million, or 22.0%, at December 31, 1995.
87
<PAGE>
The following table sets forth the distribution of the Bank's deposit
accounts at the dates indicated. Interest rates shown for non-time accounts are
the rates in effect at March 31, 1998.
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------------------------
AT MARCH 31, 1998
1997 1996 1995
---------------------- ---------------------- ---------------------- ---------
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT
--------- ----------- --------- ----------- --------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
NON-TIME ACCOUNTS:
Passbook, statement savings and club accounts
(2.75-3.0%)................................. $ 63,658 32.11% $ 62,769 31.42% $ 63,003 30.79% $ 62,138
NOW accounts (1.76%).......................... 9,280 4.69 9,704 4.86 10,089 4.93 9,638
Demand accounts............................... 9,128 4.60 10,604 5.31 9,563 4.67 8,158
Money market accounts (2.76%)................. 8,314 4.19 8,435 4.22 9,343 4.57 10,054
--------- ----- --------- ----- --------- ----- ---------
Total non-time accounts..................... $ 90,380 45.59% $ 91,512 45.81% $ 91,998 44.96% $ 89,988
--------- ----- --------- ----- --------- ----- ---------
--------- ----- --------- ----- --------- ----- ---------
TIME ACCOUNTS:
3.00--3.99%................................... $ 370 0.19% $ 164 0.08% $ 381 0.19% $ 923
4.00--4.99%................................... 7,004 3.53 8,066 4.04 20,750 10.14 8,518
5.00--5.99%................................... 92,917 46.87 90,507 45.30 70,609 34.50 59,073
6.00--6.99%................................... 7,155 3.62 9,120 4.57 20,375 9.96 37,399
7.00--7.99%................................... 406 0.20 399 0.20 525 0.25 7,207
8.00--8.99%................................... 2 -- 2 -- 2 -- 2
--------- ----- --------- ----- --------- ----- ---------
Total time accounts......................... $ 107,854 54.41% $ 108,258 54.19% $ 112,642 55.04% $ 113,122
--------- ----- --------- ----- --------- ----- ---------
--------- ----- --------- ----- --------- ----- ---------
<CAPTION>
PERCENT
OF TOTAL
-----------
<S> <C>
NON-TIME ACCOUNTS:
Passbook, statement savings and club accounts
(2.75-3.0%)................................. 30.59%
NOW accounts (1.76%).......................... 4.75
Demand accounts............................... 4.02
Money market accounts (2.76%)................. 4.95
-----
Total non-time accounts..................... 44.31%
-----
-----
TIME ACCOUNTS:
3.00--3.99%................................... 0.45%
4.00--4.99%................................... 4.20
5.00--5.99%................................... 29.08
6.00--6.99%................................... 18.41
7.00--7.99%................................... 3.55
8.00--8.99%................................... --
-----
Total time accounts......................... 55.69%
-----
-----
</TABLE>
The following table sets forth the deposit flows at the Bank during the
periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
THREE MONTHS ENDED --------------------------------
MARCH 31, 1998 1997 1996 1995
------------------- ---------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net withdrawals............................................ $ (3,557) $ (13,191) $ (7,231) $ (5,737)
Interest credited.......................................... 2,021 8,321 8,761 8,588
------- ---------- --------- ---------
Net increase (decrease) in deposits........................ $ (1,536) $ (4,870) $ 1,530 $ 2,851
------- ---------- --------- ---------
------- ---------- --------- ---------
</TABLE>
The following table sets forth the amount of savings certificates
outstanding and the remaining period to maturity of such deposits at March 31,
1998.
<TABLE>
<CAPTION>
AMOUNT DUE DURING THE
TWELVE MONTHS ENDED MARCH 31, DUE AFTER
------------------------------- MARCH 31,
INTEREST RATE 1999 2000 2001 2001 TOTAL
- --------------------------------------------------------- --------- --------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
3.00 - 3.99%............................................. $ 370 $ -- $ -- $ -- $ 370
4.00 - 4.99%............................................. 7,004 -- -- -- 7,004
5.00 - 5.99%............................................. 54,754 13,827 13,200 11,136 92,917
6.00 - 6.99%............................................. 1,882 3,608 1,281 384 7,155
7.00 - 7.99%............................................. -- 406 -- -- 406
8.00 - 8.99%............................................. -- 2 -- -- 2
--------- --------- --------- ----------- ----------
Total.................................................... $ 64,010 $ 17,843 $ 14,481 $ 11,520 $ 107,854
--------- --------- --------- ----------- ----------
--------- --------- --------- ----------- ----------
</TABLE>
88
<PAGE>
At March 31, 1998, the Bank had $13.7 million in savings certificates with
balances of $100,000 or more ("jumbo deposits"), representing 6.93% of all
deposits. The following table sets forth information regarding those deposits,
all of which had $100,000 minimum balance requirements. The interest rates shown
are rates offered on March 31, 1998 for deposits of the stated maturity with
balances of at least $100,000 and do not represent the rates payable on the
deposits outstanding. Rates offered for jumbo deposits in Individual Retirement
Accounts at certain maturities were slightly higher
<TABLE>
<CAPTION>
INTEREST PERCENTAGE OF PERCENTAGE OF
ORIGINAL TERM RATE BALANCE TOTAL DEPOSITS TOTAL JUMBO DEPOSITS
- ---------------------------------------------------- ---------- --------- ----------------- ---------------------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
1-3 Months.......................................... 3.94% $ 2,434 1.23 % 17.71 %
4-6 Months.......................................... 4.74% 2,492 1.26 18.14
7-12 Months......................................... 5.12% 2,900 1.46 21.10
Over Twelve Months.................................. 5.16-5.83 % 5,917 2.98 43.05
--------- --- ------
Totals.............................................. $ 13,743 6.93 % 100.00 %
--------- --- ------
--------- --- ------
</TABLE>
BORROWINGS. The Bank maintains an available line of credit with the Federal
Home Loan Bank of New York for use in the event of unanticipated funding needs
which cannot be satisfied from other sources. The Bank has not borrowed funds in
recent years except for a brief period after the closure of Nationar, the Bank's
correspondent bank, when demand deposits that the Bank maintained at Nationar
were temporarily frozen. After the Conversion, the Company or the Bank may used
borrowed funds to assist in the process of leveraging the capital raised in the
Conversion. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital."
SUBSIDIARY ACTIVITIES
The Bank is permitted under New York and federal law to own subsidiaries for
certain limited purposes, generally to engage in activities which are
permissible for a subsidiary of a national bank. The Bank has one subsidiary,
which was incorporated in New York in 1986 but which has been inactive for many
years and does not engage in any business at this time.
PROPERTIES
The Bank conducts its business through its headquarters in the City of
Cortland, a nearby drive-up facility, and two branches in adjacent communities
in Cortland County. The Bank also has a representative office in Ithaca for the
origination of mortgage loans. The Bank believes that these properties are
adequate for current needs. The following table sets forth certain information
regarding the Bank's deposit-taking offices at March 31, 1998.
<TABLE>
<CAPTION>
DATE OWNED/ NET BOOK
LOCATION ACQUIRED LEASED VALUE
- ----------------------------------------------------------------------------- --------- --------- ---------------
<S> <C> <C> <C>
(IN THOUSANDS)
One North Main Street, Cortland, NY 13045
and nearby drive through facility at 29-31 North Main Street............... Various Owned $ 887
12 South Main Street, Homer, NY 13077........................................ Various Owned 983
860 Route 13, Cortlandville, NY 13045........................................ Various Owned 497
200 East Buffalo Street, Ithaca, NY 14850.................................... 1998 Leased None
</TABLE>
PERSONNEL
At March 31, 1998, the Bank employed 95 full-time equivalent employees. The
employees are not represented by a collective bargaining unit, and the Bank
considers its relationship with its employees to be
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good. See "Management of the Bank--Benefits" for a description of certain
compensation and benefit programs offered to the Bank's employees.
LEGAL PROCEEDINGS
In the ordinary course of its operations, the Bank is a party to routine
litigation involving claims incidental to the savings bank business. Management
believes that no current litigation, threatened or pending, to which the Bank or
its assets is or may become a party, poses a substantial likelihood of potential
loss or exposure which would have a material adverse effect on the financial
condition or results of operations of the Bank or the Company.
REGULATION
Set forth below is a brief summary of certain laws which relate to the
regulation and supervision of the Bank.
GENERAL
The Bank is subject to extensive regulation, examination, and supervision by
the Banking Department and the FDIC. The Bank's deposit accounts are insured up
to applicable limits by the Bank Insurance Fund of the FDIC. The Bank must file
reports with the Banking Department and the FDIC concerning its activities and
financial condition, and it must get regulatory approvals before entering into
certain transactions, such as mergers with other banks. The Banking Department
and the FDIC conduct periodic examinations of the Bank to determine the safety
and soundness of the Bank and whether the Bank is complying with regulatory
requirements. The Company, as a bank holding company, will be regulated by the
Federal Reserve. The Company will be required to file reports with the Federal
Reserve and the SEC under the federal securities laws.
The laws and regulations which govern the Bank and the Company are under
regular review and revision. It is not possible to predict what changes may
occur in the future, nor is it possible to predict what effects any changes may
have on the Bank or the Company. A change by the Banking Department, the FDIC,
the Federal Reserve, Congress or the New York State legislature could have a
material adverse impact on the Company, the Bank and the operations of both.
The following discussion is intended to be a summary of the material
statutes and regulations applicable to savings banks and their holding
companies, and is not a comprehensive description of all statutes and
regulations which govern the Bank and the Company.
BANKING REGULATION
BUSINESS ACTIVITIES. The Bank derives its lending, investment and other
authority primarily from the Banking Law and the regulations of the
Superintendent and the New York State Banking Board, as limited by FDIC
regulations and other federal laws and regulations. The Bank may make
investments and engage in activities only as permitted under specific laws and
regulations which grant powers to the Bank. The Bank may invest in real estate
mortgages, consumer and commercial loans, certain types of debt securities,
including certain corporate debt securities and obligations of federal, state
and local government agencies, certain types of corporate equity securities and
certain other assets. The Bank may invest up to 7.5% of its assets in certain
corporate stock and may also invest up to 7.5% of its assets in certain mutual
fund securities. Investment in stock of a single corporation is limited to the
lesser of 2% of the outstanding stock of such corporation or 1% of the Bank's
assets, except as set forth below. In order to qualify for investment by the
Bank, the equity securities must meet certain tests of financial performance.
The Bank may also make investments not otherwise permitted under the Banking
Law. This authority permits investments in otherwise impermissible investments
of up to 1% of the Bank's 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,
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instead of investing in securities as specifically permitted in the Banking Law,
the Bank may elect to invest under a prudent person standard in a wider range of
debt and equity securities. The Bank has not exercised the right to invest under
this prudent person standard. If the Bank elects to utilize the "prudent person"
standard, it will be unable to use the other provisions of the Banking Law and
regulations which permit specific investments. New York State chartered savings
banks may also exercise trust powers upon approval of the Banking Board. The
Bank has not sought such approval.
The Bank may invest in service corporation subsidiaries that engage in
activities in which savings banks may engage directly, plus any additional
activities which may be authorized by the Banking Board. Investment in the
stock, capital notes and debentures of all 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 Bank's assets. The Bank does
not have any operating service corporation subsidiaries.
The exercise of these state-authorized powers is limited by FDIC regulations
and other federal laws and regulations. In particular, FDIC regulations limit
the investment activities of state-chartered FDIC-insured savings banks such as
the Bank.
Under FDIC regulations, the Bank generally may not directly or indirectly
acquire or retain any equity investment that is not permissible for a national
bank. In addition, the Bank may not directly or indirectly through a subsidiary,
engage as "principal" in any activity that is not permissible for a national
bank unless the FDIC has determined that such activities would pose no risk to
the applicable FDIC insurance fund and the Bank is in compliance with applicable
regulatory capital requirements.
Savings bank life insurance activities are permitted if (i) the FDIC does
not decide that such activities pose a significant risk to the applicable
deposit insurance fund, (ii) the insurance underwriting is conducted through a
division of the Bank that meets the definition of a separate department under
FDIC regulations and (iii) the Bank discloses to purchasers of life insurance
policies and other products that they are not insured by the FDIC, among other
things.
Also excluded from the prohibition on making investments not permitted for
national banks are certain investments in common and preferred stock listed on a
national securities exchange and in shares of an investment company registered
under the Investment Company Act of 1940, as amended. The Bank's total
investment in such securities may not exceed 100% of the Tier I capital as
calculated under FDIC regulations. The Bank qualifies for this exclusion and has
used its authority to invest in corporate equity securities, which had a fair
value of $2.4 million at March 31, 1998, or 7.8% of Tier I capital and 1.0% of
total assets. The authority to continue these investments may terminate if the
FDIC determines that the investments pose a safety and soundness risk to the
Bank or if the Bank converts its charter (other than a mutual to stock
conversion) or undergoes a change in control.
LOANS TO ONE BORROWER. The Bank, as a New York State chartered savings
bank, may make mortgage loans to any borrower or group of borrowers without
regard to mandatory maximum loan amount limits based upon capital or any other
measure imposed by law, except for general concepts of prudence and safety and
soundness. However, with certain exceptions, the Bank may not make non-mortgage
loans for commercial, corporate or business purposes (including lease financing)
to a single borrower, in an aggregate amount in excess of 15% of the Bank's net
worth, plus an additional 10% of the Bank's net worth if such amount is secured
by certain types of readily marketable collateral. Similar limits apply to most
other types of non-mortgage loans. The Bank currently complies with these
limits.
CAPITAL REQUIREMENTS. The FDIC regulates the capital adequacy of the Bank.
The FDIC's regulations divide 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, minus 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
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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.
The FDIC requires that the highest rated banks maintain a Tier I leverage
ratio (Tier I capital to adjusted total assets) of at least 3.0%. All other
banks subject to FDIC capital requirements must maintain a Tier I leverage ratio
of 4.0% to 5.0% or more. As of March 31, 1998, the Bank's Tier I leverage
capital ratio was 13.26%.
The Bank must also meet a risk-based capital standard. The risk-based
standard requires the Bank to maintain total capital (defined as Tier I and Tier
II capital) to risk-weighted assets of at least 8% of which at least 4% must be
Tier I capital. In determining the amount of risk-weighted assets, all assets,
plus certain off-balance sheet assets, are multiplied by a risk-weight of 0% to
100%, based on the risks the FDIC believes are inherent in the type of asset. As
of March 31, 1998, the Bank maintained a 21.94% Tier I risk-based capital ratio
and a 23.19% total risk-based capital ratio.
LIMITATIONS ON CAPITAL DISTRIBUTIONS. Under the Banking Law, a stock form
savings bank may pay dividends out of its net profits, unless there is an
impairment of capital. A savings bank may not declare dividends in any year
which exceed the total net profits of that year combined with the bank's
retained net profits of the preceding two years, subject to certain adjustments,
without the Superintendent's approval. Furthermore, after the Conversion, the
Bank may not declare a dividend which would cause it to fail to meet its capital
requirements and may not declare a dividend that would cause its capital to
decline below the liquidation account created in the Conversion.
The FDIC and the Superintendent may prohibit a savings bank from paying
dividends if, in either of their opinions, the payment of dividends would
constitute an unsafe or unsound practice.
BRANCHING. The Bank may establish branches within or outside New York State
upon written approval of the Superintendent. In general, the Bank must comply
with the laws and regulations of a host state before being permitted to
establish a branch in another state. As of June 1, 1997, the Interstate Banking
Act permits federal banking agencies to approve merger transactions between
banks located in different states, regardless of whether the merger would be
prohibited under state law. The Bank has no present plans to open branches
outside the state, but the ease of interstate branching has the effect of
increasing the number of potential competitors of the Bank.
COMMUNITY REINVESTMENT. Under the Community Reinvestment Act, the Bank
must, consistent with its safe and sound operation, help meet the credit needs
of its entire community, including low and moderate income neighborhoods. There
are no specific lending requirements or programs nor does the law limit the
Bank's discretion to develop products and services that it believes are best
suited to its particular community. The FDIC periodically assesses the Bank's
record of meeting the credit needs of its community and must take such record
into account in its evaluation of certain applications made by the Bank.
FDIC regulations provide that the Bank's performance under the Community
Reinvestment Act is evaluated based on its actual performance in meeting
community needs. In particular, the rating system focuses on three tests: (a) a
lending test, to evaluate the Bank's record of making loans in its assessment
areas; (b) an investment test, to evaluate the Bank's record of investing in
community development projects, affordable housing, and programs benefiting low
or moderate income individuals and businesses; and (c) a service test, to
evaluate the Bank's delivery of banking services. The Bank received a
satisfactory rating from the FDIC at its last examination under the Community
Reinvestment Act.
The Banking Law imposes similar community reinvestment obligations on the
Bank. The Banking Department makes an annual written assessment of the Bank's
compliance. The Banking Department considers the Bank's state community
reinvestment rating when reviewing an application to engage in certain
transactions, including mergers, asset purchases and the establishment of branch
offices or
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automated teller machines. The Bank received a satisfactory rating from the
Banking Department at its last state community reinvestment examination.
TRANSACTIONS WITH RELATED PARTIES. The Bank's authority to engage in
transactions with its "affiliates" is limited by Sections 23A and 23B of the
Federal Reserve Act. In general, an affiliate of the Bank is any company that
controls the Bank or any other company that is controlled by a company that
controls the Bank, excluding the Bank's subsidiaries other than any that are
insured depository institutions. Section 23A limits the aggregate amount of
transactions with any individual affiliate to 10% of the capital and surplus of
the Bank and also limits the aggregate amount of transactions with all
affiliates to 20% of the Bank's capital and surplus. Extensions of credit to
affiliates must be secured by certain specified collateral, and the purchase of
low quality assets from affiliates is generally prohibited. Section 23B provides
that certain transactions with affiliates, including loans and asset purchases,
must be on terms and under circumstances, including credit standards, that are
at least as favorable to the Bank as those prevailing at the time for comparable
transactions with non-affiliated companies. In the absence of comparable
transactions, such transactions may only occur under terms and circumstances,
including credit standards, that in good faith would be offered to or would
apply to non-affiliated companies.
The Bank's authority to extend credit to its directors, executive officers,
and 10% stockholders, as well as to entities controlled by such persons, is
currently governed by the requirements of Sections 22(g) and 22(h) of the
Federal Reserve Act and Regulation O of the Federal Reserve. Among other things,
these provisions require that extensions of credit to insiders (a) be made on
terms that are substantially the same as, and follow credit underwriting
procedures that are not less stringent than, those prevailing for comparable
transactions with unaffiliated persons and that do not involve more than the
normal risk of repayment or present other unfavorable features and (b) not
exceed certain limitations on the amount of credit extended to such persons,
individually and in the aggregate, which limits are based, in part, on the
amount of the Bank's capital. In addition, extensions of credit in excess of
certain limits must be approved by the Bank's Board of Directors. However,
recent legislation permits the Bank to make loans to executive officers,
directors and principal stockholders on preferential terms, provided the
extension of credit is made pursuant to a benefit or compensation program of the
Bank that is widely available to employees of the Bank or its affiliates and
does not give preference to any insider over other employees of the Bank or
affiliate. The Bank has no such benefit or compensation programs.
ENFORCEMENT. The FDIC and the Banking Department have enforcement authority
over the Bank. The Superintendent may order the Bank to appear and explain an
apparent violation of law, to discontinue unauthorized or unsafe practices and
to keep prescribed books and accounts. If any director or officer of the Bank
has violated any law, or has continued unauthorized or unsafe practices in
conducting the business of the Bank after having been notified by the
Superintendent to discontinue such practices, the New York Banking Board may
remove the individual from office after notice and an opportunity to be heard.
The Superintendent may impose civil monetary penalties and also may take
possession of the Bank under specified statutory criteria.
The FDIC's enforcement authority includes, among other things, the ability
to assess civil money penalties, to issue cease and desist orders and to remove
directors and officers. Under federal law, the FDIC is required to take prompt
action to correct deficiencies in undercapitalized banks. A bank is categorized
as "well capitalized" or "adequately capitalized" if its ratio of total capital
to risk-weighted assets is at least 10.0% or 8.0%, respectively, its ratio of
Tier I capital to risk-weighted assets is at least 6.0% or 4.0%, respectively,
its ratio of Tier I capital to total assets is at least 5.0% or 4.0% (3.0% if
the institution has the best supervisory rating), respectively, and it is not
subject to any order or directive by the FDIC to meet a specific capital level.
Banks that do not meet these standards are classified as "undercapitalized." A
bank with a total risk-based capital ratio of less than 6.0% or a ratio of Tier
I capital to risk-weighted assets or total assets of less than 3.0% is
considered to be "significantly undercapitalized." A bank with a tangible
capital to assets ratio of 2% or less is deemed to be "critically
undercapitalized."
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Dividends, other capital distributions or the payment of management fees to
any controlling person are prohibited if, following such distribution or
payment, a bank would be undercapitalized. An undercapitalized bank must file a
plan to restore its capital within 45 days after being notified that it is
undercapitalized. Undercapitalized, significantly undercapitalized and
critically undercapitalized institutions are subject to increasing prohibitions
on permitted activities, and increasing levels of regulatory supervision, based
upon the severity of their capital problems. The FDIC is required to monitor
closely the condition of an undercapitalized bank. Enforcement action taken by
the FDIC can escalate to the appointment of a conservator or receiver of a
critically undercapitalized bank.
Based upon its existing capital ratios and regulatory classification, the
Bank qualifies as "well capitalized" and the FDIC prompt corrective action
regulations are not expected to have a material effect on the Bank or the
Company.
STANDARDS FOR SAFETY AND SOUNDNESS. The FDIC, together with the other
federal bank regulatory agencies, has prescribed guidelines which establish
minimum general standards relating to internal controls and information systems,
internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth, and compensation, fees and benefits. In general, the
guidelines require, among other things, appropriate systems and practices to
identify and manage the risks and exposures specified in the guidelines. The
guidelines also cover asset quality and earnings evaluation and monitoring as
well. The guidelines prohibit excessive compensation as an unsafe and unsound
practice and describe compensation as excessive when the amounts paid are
unreasonable or disproportionate to the services performed by an executive
officer, employee, director or principal stockholder. In addition, the FDIC may
order an institution that has been given notice by the FDIC that it is not
satisfying any of such safety and soundness standards to submit a compliance
plan. If an institution then fails to submit an acceptable plan or fails in any
material respect to implement an accepted compliance plan, the FDIC must issue
an order directing action to correct the deficiency and may issue an order
directing other actions of the types to which an undercapitalized bank is
subject under the "prompt corrective action" requirements described below. If an
institution fails to comply with such an order, the FDIC may seek enforcement in
judicial proceedings and civil money penalties.
INSURANCE OF ACCOUNTS. Deposit insurance premiums payable to the FDIC are
based upon a system which categorizes insured institutions based upon their
perceived risks to the FDIC insurance fund. The FDIC assigns an institution to
one of three capital categories: (a) well capitalized, (b) adequately
capitalized or (c) undercapitalized. The FDIC also assigns an institution to one
of three supervisory categories based on an evaluation by the institution's
primary federal regulator and information that the FDIC considers relevant to
the institution's financial condition and the risk posed to the deposit
insurance funds. Deposit insurance premiums depend on an institution's capital
and supervisory categories. At present, the Bank pays no deposit insurance
premium based upon its risk-based categorization.
However, as of January 1, 1997, the Bank is required to pay a share of the
cost of the bonds issued in the late 1980s to recapitalize the now defunct
Federal Savings and Loan Insurance Corporation. The Bank must pay an annual
assessment for this purpose, which was at an annual rate of 0.0126% of its
insured deposits for the three months ended March 31, 1998. This assessment is
recorded as a deposit insurance premium expense for financial statement
purposes.
FEDERAL HOME LOAN BANK SYSTEM. The Bank is a member of the FHLBNY, which is
one of the regional Federal Home Loan Banks composing the Federal Home Loan Bank
System. Each Federal Home Loan Bank provides facilities which allow its members
to borrow funds. The Bank has not used the borrowing facilities of the FHLBNY.
The Bank must own stock in the FHLBNY at least equal to the greater of 1% of the
principal amount of its unpaid residential mortgage loans and similar
obligations at the beginning of each year or 5% of its advances from the FHLBNY.
At March 31, 1998, the Bank held $1.3 in fair value of capital stock of the
FHLBNY, which satisfied this requirement. The annualized yield on FHLBNY stock
for the quarter ended March 31, 1998 was 7.4% If the Bank materially increases
its
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residential mortgage loans, or obtains significant advances from the FHLBNY, the
Bank would be required to increase its investment in FHLBNY capital stock.
Advances from the FHLBNY must be secured by specified types of collateral, and
long-term advances may be obtained only for the purpose of providing funds for
residential housing finance.
The Federal Home Loan Banks are required to provide funds for the resolution
of insolvent thrifts and to contribute funds for affordable housing programs.
These requirements could reduce the amount of earnings that the FHLBNY can pay
as dividends to its members and could also result in the FHLBNY imposing a
higher rate of interest on advances. Further, there can be no assurance that the
impact of current or future federal laws on the FHLBNY will not also cause a
decrease in the value of FHLBNY capital stock.
THE FEDERAL RESERVE SYSTEM. The Bank is required, under the regulations of
the Federal Reserve, to maintain non-interest-earning reserves against its
transaction accounts (primarily NOW and regular checking accounts). The Bank is
generally able to satisfy the reserve requirements with cash on hand and other
non-interest bearing deposits which it maintains for other purposes, so the
reserve requirements do not impose a material financial burden on the Bank.
HOLDING COMPANY REGULATION
FEDERAL HOLDING COMPANY REGULATIONS. Upon consummation of the Conversion,
the Company will become a bank holding company. Bank holding companies are
subject to regulation and examination by the Federal Reserve under the Bank
Holding Company Act. The Federal Reserve has 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 a
bank holding company to divest subsidiaries (including bank subsidiaries). A
bank holding company must serve as a source of strength for its subsidiary bank.
The Federal Reserve may require a bank holding company to contribute additional
capital to an undercapitalized subsidiary bank. The status of the Company as a
registered bank holding company does not exempt it from federal and state laws
and regulations applicable to corporations generally, including, without
limitation, certain provisions of the federal securities laws.
The Company will be subject to capital adequacy guidelines for bank holding
companies (on a consolidated basis) which are substantially similar to the FDIC
mandated capital adequacy guidelines applicable to the Bank. On a pro forma
consolidated basis after the Conversion, the Company's capital will exceed these
requirements.
As a bank holding company, the Company must obtain Federal Reserve approval
before: (i) acquiring, directly or indirectly, ownership or control of any
voting shares of another bank or bank holding company if, after the 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.
Federal law generally prohibits a bank holding company from engaging in, or
acquiring control of any company engaged in, non-banking activities. One of the
principal exceptions to this prohibition is activities found by the Federal
Reserve to be so closely related to banking or managing or controlling banks as
to be a proper incident to banking activities. Some of the activities that have
been found to be closely related to banking are: operating a savings
association, mortgage company, finance company, credit card company or factoring
company; performing certain data processing services; providing 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 brokerage services.
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The Federal Reserve has issued a policy statement stating that a bank
holding company should pay cash dividends only to the extent that the holding
company's net income for the past year is sufficient to cover both the cash
dividends and a rate of earnings retention that is consistent with the holding
company's capital needs and overall financial condition. The Federal Reserve has
indicated that it would be inappropriate for a company experiencing financial
problems to borrow funds to pay dividends. The Federal Reserve 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 prior 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, equals 10% or more of their consolidated net worth. 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. It is
currently anticipated that the Company will qualify for this exemption from the
notice requirement.
A notice must be submitted to the Federal Reserve if any person, company, or
group acting in concert, seeks to acquire 10% or more of the Company's
outstanding Common Stock, unless the Federal Reserve has found that the
acquisition will not result in a change in control of the Company. The Federal
Reserve has 60 days within which to act on the notice, taking into account such
factors as the financial and managerial resources of the acquiror, the
convenience and needs of the communities served by the Company and the Bank, and
the anti-trust effects of the acquisition. Furthermore, any company that seeks
to obtain control of the Company must obtain the approval of the Federal
Reserve. For this purpose, control is generally defined as the ownership or
power to vote 25% or more of any class of the Company's voting stock or the
ability to control in any manner the election of a majority of the directors of
the Company.
NEW YORK STATE BANK HOLDING COMPANY REGULATION. In general, under New York
law, a company owning only one banking institution will not be deemed to be a
bank holding company. However, the Banking Law requires the prior approval of
the New York Banking Board before any action is taken that causes any company
(broadly defined) to acquire direct or indirect control of a banking institution
organized in the State of New York, such as the Bank. Control, for this purpose,
is generally defined to mean the power to direct or cause the direction of the
management and policies of the banking institution and is presumed to exist if
the company owns, controls or holds with the power to vote 10% or more of the
voting stock of the banking institution.
Furthermore, if the Company were to acquire ownership, control or the power
to vote 10% or more of the voting stock of another bank or bank holding company
it would become a bank holding company under state law. Under the 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 any of
its subsidiaries 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 with another bank holding company.
FEDERAL SECURITIES LAWS
Upon completion of the Conversion, the Company's Common Stock will be
registered with the SEC. The Company will then be subject to the information,
proxy solicitation, insider trading restrictions and other requirements under
the Securities Exchange Act of 1934. Therefore, the Company will be required,
among other things, to prepare and file quarterly and annual reports of its
financial condition and results of operations.
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Shares of Common Stock purchased by an affiliate of the Company will be
subject to the resale restrictions of SEC Rule 144. If the Company satisfies its
obligation to file certain information with the SEC, each affiliate of the
Company who complies with the other conditions of Rule 144 would be able to sell
in the public market, without registration, a number of shares not to exceed, in
any three-month period, the greater of (a) 1% of the outstanding shares of the
Company or (b) the average weekly volume of trading in such shares during the
preceding four calendar weeks. Provision may be made in the future by the
Company to permit affiliates to have their shares registered for sale under the
Securities Act of 1933 under certain circumstances.
TAXATION
GENERAL
The following is a discussion of material tax matters and does not purport
to be a comprehensive description of the Federal, New York State and Delaware
income tax rules applicable to the Bank or the Company. For a discussion of the
tax consequences of the Conversion, see "The Conversion--Effects of Conversion
on Depositors and Borrowers--Tax Effects."
FEDERAL TAXATION
GENERAL. The Bank is taxed for Federal income tax purposes in accordance
with the Internal Revenue Code of 1986, as amended, in substantially the same
manner as all other business corporations, subject to certain special provisions
applicable to financial institutions. The Bank files its Federal income tax
returns on a calendar year basis. The Bank has not been audited by the Internal
Revenue Service during the last five years. For Federal income tax purposes,
after the Conversion, the Company and the Bank will file consolidated income tax
returns and report their income on a calendar year basis using the accrual
method of accounting and will be subject to Federal income taxation in the same
manner as other corporations, but generally subject, as to the Bank, to the same
special provisions applicable to financial institutions filing tax returns on an
unconsolidated basis.
BAD DEBT DEDUCTION. In 1996, the Internal Revenue Code was amended,
effective for tax years beginning in 1996, to change the method by which the
Bank may take tax deductions for bad debts. The Bank is now required, for
Federal income tax purposes, to use the experience method in determining its tax
bad debt deduction, which generally permits tax deductions for bad debts based
upon a six year moving average of actual loan loss experience. Furthermore,
institutions which had previously used a more advantageous method must recapture
(i.e., treat as taxable income) a part of the institution's existing tax bad
debt reserve. For the Bank, the amount required to be recaptured was $378,000,
representing the excess of its tax bad debt reserve at December 31, 1995 over
the level of the reserve at December 31, 1987, referred to as the "excess
reserve." This amount is being recaptured over a period of six years beginning
in 1996. In accordance with generally accepted accounting principles, the Bank
had already established a deferred tax liability representing the tax effect of
the recapture of its excess reserve. The Bank will continue to repay the Federal
income taxes related to this recapture through tax year 2001.
DISTRIBUTIONS. If the Bank makes certain types of distributions
("non-dividend distributions") to the Company which are not in the nature of
dividends, such distributions will be considered to have been made first from
the Bank's unrecaptured tax bad debt reserves (including the balance of its
reserves as of December 31, 1987 which are not part of excess reserves). An
amount based on the non-dividend distribution will be included in the Bank's
income for tax purposes. Non-dividend distributions subject to this rule include
distributions in excess of the Bank's current and accumulated earnings and
profits, as calculated for Federal income tax purposes, distributions in
redemption of stock, and distributions in partial or complete liquidation.
Dividends paid out of the Bank's current or accumulated earnings and profits are
not subject to this rule.
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The amount of additional taxable income caused by a non-dividend
distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, if after the
Conversion, the Bank makes a non-dividend distribution to the Company,
approximately one and one-half times the amount of such non-dividend
distribution would be includable in income for Federal income tax purposes,
assuming a 34% Federal corporate income tax rate. The Company and the Bank do
not anticipate that the Bank will pay any non-dividend distributions to the
Company after the Conversion. See "Regulation" and "Dividend Policy" for limits
on the payment of dividends by the Bank. The Bank does not intend to pay
dividends that would result in a recapture of any portion of its tax bad debt
reserves.
CORPORATE ALTERNATIVE MINIMUM TAX. The Internal Revenue Code imposes a tax
on alternative minimum taxable income at a rate of 20%. In general, the
alternative minimum tax is imposed if, because of high levels of certain
deductions and tax-exempt income, there is a substantial difference between a
corporation's gross income and its taxable income. 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 to future years.
DIVIDENDS RECEIVED DEDUCTION. The Company may exclude from its income 100%
of dividends received from the Bank as a member of the same affiliated group of
corporations. A 70% dividends received deduction generally applies with respect
to dividends received from domestic corporations that are not members of such
affiliated group, except that an 80% dividends received deduction applies if the
Company and the Bank own more than 20% of the stock of a corporation paying a
dividend. Under pending legislative proposals, the 70% dividends received
deduction would be reduced to 50% with respect to dividends paid after enactment
of such legislation.
NEW YORK STATE TAXATION
GENERAL. The Bank and the Company will report income on a combined calendar
year basis to New York State. New York State franchise tax on banking
corporations is imposed in an amount equal to the greater of (i) 9% of the
Bank's "entire net income" allocable to New York State during the taxable year
or (ii) the applicable alternative minimum tax. The alternative minimum tax is
generally the greatest of (a) .01% of the value of the Bank's assets allocable
to New York State with certain modifications, (b) 3% of the Bank's "alternative
entire net income" allocable to New York State or (c) $250. Entire net income is
based on Federal taxable income, subject to certain modifications and
alternative entire net income is equal to entire net income without certain
deductions.
BAD DEBT DEDUCTION. The Bank is currently using a six year moving average
experience method, similar to the Federal method, to calculate the New York bad
debt deduction.
The Bank's New York State income tax returns have been audited by the New
York State Department of Finance through tax year 1996.
DELAWARE STATE TAXATION
As a Delaware holding company not earning income in Delaware, the Company is
exempt from Delaware corporate income tax but is required to file an annual
report with and pay an annual franchise tax to the State of Delaware. The
minimum tax is generally equal to $5,000 for each 1,000,000 shares of authorized
capital stock, regardless of whether such stock has been issued.
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MANAGEMENT OF THE COMPANY
DIRECTORS AND EXECUTIVE OFFICERS
The Board of Directors of the Company currently consists of seven members,
each of whom is also a director of the Bank. The seven directors are Joseph H.
Compagni, Patrick J. Hayes, M.D., Robert S. Kashdin, CPA, Harvey Kaufman, Donald
P. Reed, Terrance D. Stalder and Wesley D. Stisser, Jr. Each of them has served
as a director since the Company's incorporation in June 1998. The Board of
Directors of the Company is divided into three classes, each of which contains
approximately one-third of the Board. The initial terms of office of the
directors of the Company have been staggered so that the terms of office of
directors Hayes and Kashdin expire at the first annual meeting of stockholders
of the Company after the Conversion, the terms of directors Compagni and Reed
expire at the second annual meeting after the Conversion and the terms of
directors Kaufman, Stalder and Stisser expire at the third annual meeting after
the Conversion. Thereafter, directors will be elected by the stockholders of the
Company for staggered three-year terms, or until their successors are elected
and qualified.
The executive officers of the Company are Wesley D. Stisser, Jr., President
and Chief Executive Officer and Steven A. Covert, Executive Vice President and
Chief Financial Officer. See "Management of the Bank--Executive Officers." The
executive officers of the Company are elected annually and hold office until
their respective successors have been elected and qualified or until death,
resignation or removal by the Board of Directors.
Information concerning the directors and officers of the Company, principal
occupations, employment and compensation of the directors and officers of the
Company during the past five years is set forth under "Management of the
Bank--Biographical Information."
COMMITTEES OF THE COMPANY
The Company has established or plans to establish the following committees
of its Board of Directors.
THE HUMAN RESOURCES COMMITTEE. The Human Resources Committee, not yet
appointed, will function on compensation matters for the Company. The committee
will also be responsible for administering and making grants or awards under the
Stock Option Plan and the PRRP when and if approved by the stockholders, and
will oversee the Company's activities related to the ESOP.
THE AUDIT COMMITTEE. The Audit Committee, consisting of directors Compagni,
Kashdin and Stalder will function on matters related to the accounting,
bookkeeping and auditing functions of the Company and will meet periodically
with the Company's independent certified public accountants to arrange for the
Company's annual financial statement audit and to review and evaluate
recommendations made during the annual audit. The Audit Committee will also
review and approve the internal auditing procedures of the Company.
THE INVESTMENT COMMITTEE. The Investment Committee, consisting of directors
Hayes, Kashdin, Stalder and Stisser, will make decisions regarding the
securities investments of the Company and recommend related policies and
procedures to the Board.
The Bylaws of the Company provide that the Company may establish a
nominating committee to nominate persons for election to the Board of Directors.
The Board has not yet decided whether to establish a nominating committee and no
procedures have been established for submitting stockholder suggestions for
nominations to the committee or the Board of Directors. The Bylaws of the
Company provide that a stockholder may nominate a person for election as a
director only if advance notice of intent to nominate the person is provided to
the Company and certain procedural and notice provisions are followed. For the
first annual meeting of stockholders, advance notice must be given to the
Secretary of the Company not later than ten days after notice of the meeting is
sent to stockholders or the date of the meeting is publicly announced, whichever
is earlier. See "Restrictions on Acquisition of the Company and
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the Bank--Restrictions in the Company's Certificate of Incorporation and
Bylaws--Certain Bylaw Provisions."
DIRECTORS' COMPENSATION
It is anticipated that directors of the Company who are not employees of the
Company or the Bank or any of their subsidiaries shall receive an attendance fee
of $500 for each Board of Directors meeting and $400 for each committee meeting.
The chair of each committee will be entitled to an additional fee of $100 per
meeting. The Chairman of the Board, currently Mr. Kaufman, will receive an
annual retainer of $3,000 in addition to per meeting fees. Directors will also
be eligible for participation in the Stock Option Plan and the PRRP expected to
be implemented by the Company. See "Management of the Bank--Benefits-- Stock
Option Plan" and "--Personnel Recognition and Retention Program."
EXECUTIVE COMPENSATION
Since the formation of the Company, none of the officers of the Company have
received remuneration from the Company. It is currently expected that, unless
and until the Company becomes actively involved in business activities separate
from those conducted by the Bank, no separate compensation will be paid to the
officers of the Company. However, the Bank has entered into employment contracts
with four of its executive officers, including the two executive officers of the
Company. See "Management of the Bank--Employment Contracts." Decisions regarding
the Company's executive compensation will be made by the Company's Board of
Directors, acting upon the recommendations of the Human Resources Committee.
Executive Officers of the Company who are directors will not vote on their own
compensation.
INDEMNIFICATION AND LIABILITY OF DIRECTORS
The Certificate of Incorporation of the Company provides that a director,
officer, employee or agent of the Company shall be indemnified by the Company to
the fullest extent authorized by the General Corporation Law of the State of
Delaware 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 of the Company or as a director or officer of another company, if the
director or officer held such position at the request of the Company. Delaware
law requires that such director, officer, employee or agent, in order to be
indemnified, must have acted in good faith and in a manner reasonably believed
to be not opposed to the best interest of the Company and, with respect to any
criminal action or proceeding, did not have reasonable cause to believe his or
her conduct was unlawful.
The Certificate of Incorporation of the Company and Delaware law also
provide that the indemnification provisions of such certificate and the Delaware
General Corporation Law are not exclusive of any other right which a person
seeking indemnification may have or later acquire under any statute, provision
of the Certificate of Incorporation or Bylaws of the Company, agreement, vote of
stockholders or disinterested directors, or otherwise. The Certificate of
Incorporation of the Company also provides that a director shall not be
personally liable to the Company or its stockholders for monetary damages for
breach of fiduciary duty as a director except for breaches of the duty of
loyalty, acts or omissions in bad faith or involving intentional misconduct or
violation of law, liability for the unlawful payment of dividends or unlawful
stock purchases or redemptions or transactions where the director derives
improper personal benefit.
These provisions may have the effect of deterring stockholder derivative
actions, since the Company may ultimately be responsible for expenses for both
parties to the action.
In addition, the Certificate of Incorporation of the Company and Delaware
law also provide that the Company may maintain insurance, at its expense, to
protect itself and any director, officer, employee or agent of the Company or
another corporation, partnership, joint venture, trust or other enterprise
against any expense, liability or loss, whether or not the Company has the power
to indemnify such person against
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such expense, liability or loss under the Delaware General Corporation Law. The
Company intends to obtain such insurance.
MANAGEMENT OF THE BANK
DIRECTORS
There are currently ten directors of the Bank, all of whom serve for one
year terms, and seven of whom are directors of the Company. The following table
sets forth certain information regarding the Board of Directors of the Bank.
Ages are as of August 13, 1998.
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE POSITION(S) HELD WITH THE BANK SINCE
- -------------------------------------------- --- ---------------------------------------------------- -----------
<S> <C> <C> <C>
Wesley D. Stisser, Jr....................... 62 President, Chief Executive Officer and Director 1983
Edward E. Hatter, Jr........................ 60 Director 1977
Judith F. Riehlman.......................... 57 Director 1987
Terrance D. Stalder......................... 56 Director 1987
Harvey Kaufman.............................. 63 Director and Chairman of the Board 1989
Joseph H. Compagni.......................... 55 Director 1990
Donald P. Reed.............................. 57 Director 1991
Roland Fragnoli............................. 68 Director 1992
Patrick J. Hayes, M.D....................... 49 Director 1994
Robert S. Kashdin, CPA...................... 55 Director 1995
</TABLE>
Three directors of the Bank retired effective June 30, 1998. Among them,
they had approximately 97 years of service with the Bank. In recognition of
their years of service with the Bank and the goodwill that their continued
affiliation with the Bank will engender in the community, the Bank has agreed to
provide them with a retirement benefit and consulting arrangement in the amount
of $50,000 per director, payable in installments over a period of three years.
The full amount payable was accrued as an expense by the Bank during the quarter
ended June 30, 1998. In addition, the former Comptroller of the Bank also
retired in June 1998. The Bank agreed to pay him one year's salary as a
severance benefit. The full amount of the payment was accrued as an expense by
the Bank during the quarter ended June 30, 1998.
EXECUTIVE OFFICERS
The following table sets forth certain information regarding the executive
officers of the Bank. Ages are as of August 13, 1998.
<TABLE>
<CAPTION>
NAME AGE POSITION(S) HELD WITH THE BANK
- ------------------------- --- ---------------------------------------------------------------------------
<S> <C> <C>
Wesley D. Stisser, Jr.... 62 President, Chief Executive Officer and Director
F. Michael Stapleton..... 59 Executive Vice President and Chief Operating Officer
Steven A. Covert......... 36 Executive Vice President and Chief Financial Officer
Kerry D. Meeker.......... 45 Senior Vice President and Senior Loan Officer
</TABLE>
Each of the executive officers of the Bank is expected to retain his and her
office after the Conversion until the next annual meeting of the Board of
Directors of the Bank and their successors are elected and qualified or until
they are removed or replaced. Officers are re-elected by the Board of Directors
annually and serve at the pleasure of the Board.
BIOGRAPHICAL INFORMATION
The following biographical information is provided for the directors and
executive officers of the Bank. Professional background and employment history
are provided for at least the past five years.
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DIRECTORS
WESLEY D. STISSER, JR. serves as President and Chief Executive Officer of
the Bank, a position he has held since 1983. Mr. Stisser has been with the Bank
for 45 years. He is a graduate of the Graduate School of Savings Banking at
Brown University and the School for Executive Development sponsored by the
Community Bankers Association. An eagle scout and recipient of the Silver Beaver
Award B.S.A., Mr. Stisser is an active member of numerous professional, civic
and community service organizations. He is presently a member of the New York
Savings Bank Life Insurance Fund's Board of Directors and is Chairman of the
Cortland City Police Commission. He is a former member of the Board of Directors
for Cortland Memorial Hospital, serving as its Chairman, and is a member of the
SUNY Cortland College Foundation.
EDWARD E. HATTER, JR. was a principal of Hatter Fuel Co., from which he
retired in 1987. Mr. Hatter was active in several community organizations,
serving as Chairman of the Easter Seals drive and holding various offices in the
New York State Jaycees, the Rotary Club and the University Club. He is currently
active in the March of Dimes drive, the Town and River Cruise Club and the Royal
Palm Yacht Club. He was district chairman of the Tioughnioga-Baden Powell
Council, B.S.A. Mr. Hatter resides part time in Florida. Mr. Hatter established
Briarwood Estates, a development of upscale homes and continues to control
remaining unsold lots.
JUDITH F. RIEHLMAN is the Cortland County Clerk. Mrs. Riehlman and her
husband own and operate a family run farm and Birchlawn Structures, a furniture
retailer. Active in numerous community organizations, Mrs. Riehlman currently
serves as Chairperson of the Cortland County Republican Committee, President of
the American Agricultural Foundation, Inc. and as a Director of Family
Counseling Services.
TERRANCE D. STALDER is the Associate Vice President for Finance and
Management at SUNY Cortland. Mr. Stalder is a member of various community
organizations and serves on the Village of Homer Planning Board, the Board of
Trustees of the Cortland YMCA and is a member of the Cortland Rotary Club.
HARVEY KAUFMAN retired as Superintendent of the Cortland City Schools
District in 1992 and currently provides administrative consulting services in
the field of education. He was elected Chairman of the Board of Directors of the
Bank in June of 1997. He is a former Cortland City Police Commissioner, past
president of the Cortland County Chamber of Commerce, past president of the New
York State Association of Small City School Districts, and was a member of the
New York State Assembly Task Force on the Regents Action Plan. Mr. Kaufman is
also currently the Chairman of the J.M. Murray Center and Cortland Memorial
Hospital Services, a for profit affiliate of Cortland Memorial Hospital.
JOSEPH H. COMPAGNI is President of Economy Paving Co., Inc., which
constructs highways and bridges in New York State. He is currently a director of
the New York State Associated General Contractors and has been a director of the
Cortland Memorial Hospital, J.M. Murray Center, Cortland Family Health Network,
Cortland Rotary Club and Cortland YMCA.
DONALD P. REED is the principal of Reed's Seeds, a business which sells crop
seeds, farm seeds, farm chemicals and fertilizer. He is also Chairman of the
Board of Dryden Mutual Insurance Company. Mr. Reed is a former director of Key
Bank of Central New York, formerly the Homer National Bank.
ROLAND FRAGNOLI is the President of the Homer Men & Boys clothing stores, a
local retailer with which he has been associated for 50 years. He is a member of
various service and community clubs and serves on the Tompkins Cortland
Community College Foundation Board. Mr. Fragnoli is a former director of Key
Bank of Central New York, formerly the Homer National Bank.
PATRICK J. HAYES, M.D. is a practicing physician in Cortland. He is a past
president of the Cortland Memorial Hospital Medical Staff and currently serves
as Chief of Staff of Cortland Health Center. Dr. Hayes is a member of the Board
of the American Lung Association of Central New York, Inc.
ROBERT S. KASHDIN, C.P.A. has been a practicing certified public accountant
for over 30 years and is the present managing partner of the CPA firm of Port,
Kashdin and McSherry located in Cortland.
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Mr. Kashdin is a member in numerous community and professional organizations
including past chairman of the New York State Society of CPA's Agri Business
Committee and District Treasurer of Rotary District 7170. He is a former Board
member of the Jewish Homes of Central New York and the United Way of Cortland
County.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
F. MICHAEL STAPLETON joined the Bank in June 1998. From February 1986
through April 1998, Mr. Stapleton was with OnBank and Trust Co., holding
positions of Senior Vice President and Regional President. He then continued
with Manufacturers and Traders Trust Company after it acquired OnBank. He is the
Chairman of the Loretto Foundation, which provides care for the elderly, and is
a director of Meals on Wheels of Syracuse and the Mercy Health and
Rehabilitation Center. Mr. Stapleton is also the Chairman of the Cayuga County
Economic Development Council, a director of the Industrial Development
Foundation of Auburn and Cayuga County, and a member of the Auburn Industrial
Development Authority, all of which are involved in fostering economic
development in central New York.
STEVEN A. COVERT joined the Bank in June 1998. From August 1995 to June
1998, he was Executive Vice President and Chief Financial Officer of Success
Bancshares, Inc., a bank holding company in Chicago, Illinois. He was Senior
Vice President and Chief Financial Officer of Ithaca Bancorp, Inc., a savings
and loan holding company in Ithaca, New York, from July 1993 to December 1994
and was Vice President and Chief Financial Officer of Skaneateles Bancorp, Inc.,
a bank holding company in Skaneateles, New York, from January 1991 to July 1993.
Mr. Covert is a certified public accountant and prior to joining the banking
industry, he was employed by KPMG Peat Marwick LLP as an auditor. Mr. Covert has
been a member of various community organizations including the United Way and an
organization that provides food for the homeless.
KERRY D. MEEKER joined the Bank in 1996 as Senior Vice President and Senior
Loan Officer. Prior to joining the Bank, he held the position of Vice President
and Chief Loan Officer of Oneida Savings Bank since 1989. He previously served
as a Vice President and Commercial Loan Officer of Marine Midland Bank and as a
Senior Financial Analyst at Bankers Trust Company. He is a member of the Rotary
Club of Cortland; has served as President of the Greater Oneida Chamber of
Commerce, Inc.; Treasurer of the Oneida Improvement Committee, Inc.; President
of the Oneidas Club; President of the Sherrill-- Kenwood Community Chest, Inc.;
and is a past member of the Rotary Club of Oneida.
COMMITTEES AND MEETINGS OF THE BOARD OF DIRECTORS OF THE BANK
The Board of Directors of the Bank meets on a monthly basis and may have
additional special meetings from time to time. During 1997, the Board of
Directors met 14 times. No current director attended fewer than 75% of the total
number of Board meetings and meetings of committees of which such director was a
member during 1997.
The Bank has established the following committees of its Board of Directors:
THE EXECUTIVE COMMITTEE consists of directors Compagni, Hayes, Kashdin,
Kaufman, Reed, Riehlman, Stalder and Stisser. The committee meets quarterly and
functions on matters of general policy and strategy. The committee has the power
of the Board of Directors with respect to most matters. The committee met 5
times during 1997.
THE AUDIT COMMITTEE consists of directors Stalder, Kashdin and Hayes. The
committee meets periodically with the Bank's independent certified public
accountants to arrange for the Bank's annual financial statement audit and to
review and evaluate recommendations made during the annual audit. The committee
also reviews the regulatory reports of examination and reviews and approves the
Bank's internal auditing procedures. The committee met 6 times during 1997.
THE HUMAN RESOURCES COMMITTEE consists of directors Hayes, Compagni and
Kashdin. The committee reviews and makes recommendations to the Board regarding
compensation of the executive officers and
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employees of the Bank. The committee also functions on matters related to the
pension and other compensation plans of the Bank. The committee met 6 times
during 1997.
THE LOAN COMMITTEE consists of directors Fragnoli, Kaufman, Reed, Riehlman
and Stisser. The committee reviews the allowance for loan losses and approves
periodic additions to the allowance. The committee also evaluates the Bank's
problem loans and functions on matters related to the Community Reinvestment
Act. The committee must also approve all loans which, individually or with other
existing loans to the same borrower or related borrowers, exceed $200,000. The
committee met 11 times during 1997.
THE ASSET/LIABILITY COMMITTEE consists of directors Fragnoli, Hatter,
Kashdin and Stisser. The committee reviews the Bank's interest rate sensitivity
position on a quarterly basis. The committee reviews internally prepared data as
well as reports prepared by an outside firm analyzing the interest rate
sensitivity of the Bank's assets and liabilities. The committee met 4 times
during 1997.
In addition, the Board has an Operations, Systems and Security Committee and
a Marketing and Community Affairs Committee. From time to time, the Board of
Directors may appoint other special committees to address specific matters which
the Board determines should be considered at the committee level. The Chairman
of the Board is an ex officio member of all committees except for those to which
he is specifically appointed and the President is an ex officio member of all
committees except for the Human Resources Committee and the Examining Committee.
DIRECTORS' COMPENSATION
The Board of Directors of the Bank has established a revised fee structure
for directors to be implemented after the Conversion. Each director of the Bank
who is not an employee of the Company or the Bank or any of their subsidiaries
will receive an annual retainer of $3,000 plus an attendance fee of $250 for
each Board of Directors meeting and $400 for each committee meeting attended.
The Chairman of the Board will receive a $12,000 annual retainer plus attendance
fees, except that no attendance fees will be paid to the Chairman of the Board
for attendance at a committee meeting in an ex officio capacity. The chair of
each committee will be receive an additional $100 per committee meeting. It is
anticipated that directors will also receive benefits under the Stock Option
Plan and the PRRP expected to be implemented by the Company upon receipt of
stockholder approval. See "--Benefits--Stock Option Plan" and "--Personnel
Recognition and Retention Program."
Directors may defer the receipt of their fees by making annual elections.
The deferred amounts are paid by the Bank to a trust which invests the funds
among investment options selected by each director. However, the funds
contributed to the trust are subject to the claims of creditors of the Bank and
are not taxable to the director until received. The Bank expenses the amount of
the deferred fees upon payment to the trust. The director may receive the
deferred fees, together with income earned thereon, in either a lump sum or in
an annuity upon retirement or reaching age 72 1/2.
EXECUTIVE COMPENSATION
Decisions regarding the Bank's executive compensation are made by the Bank's
Board of Directors, upon the recommendations made by the Human Resources
Committee. The President and Chief Executive Officer, who is a director, does
not vote on his own compensation.
The following table sets forth the cash compensation paid by the Bank for
services rendered in all capacities during 1997 to the President and Chief
Executive Officer and all executive officers of the Bank who received
compensation in excess of $100,000.
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SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION (1)
--------------------------------------------
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($) COMPENSATION (2)
- ---------------------------------------------- --------- ---------- ----------- ------------------- -----------------
<S> <C> <C> <C> <C> <C>
Wesley D. Stisser, Jr., President and Chief
Executive Officer........................... 1997 $ 167,890 $ -- $ -- $ 7,336
</TABLE>
- ------------------------
(1) In accordance with SEC policy, summary compensation information is excluded
for 1996 and 1995 because neither the Bank nor the Company were public
companies during such years. For 1997 there were no: (a) perquisites with an
aggregate value in excess of the lesser of $50,000 or 10% of the total of
the individual's salary and bonus for the year; (b) payments of above-market
preferential earnings on deferred compensation; (c) payments of earnings
with respect to long-term incentive plans prior to settlement or maturation;
or (d) preferential discounts on stock. For 1997, the Bank had no restricted
stock or stock related plans in existence.
(2) All other compensation includes life insurance premiums of $211 and matching
contributions under the Bank's 401(k) Plan of $7,125.
TRANSACTIONS WITH CERTAIN RELATED PERSONS
The directors and executive officers of the Bank maintain normal deposit
account relationships with the Bank on terms and conditions no more favorable
than those available to the general public. The Bank does not make loans to
directors. In the ordinary course of business, the Bank makes loans to
non-director officers and employees, as well as other related parties. All such
loans to executive officers and their related parties are on substantially the
same terms, including interest rate and collateral, as those prevailing at the
same time for comparable loans to other customers and do not involve more than
the normal risk of collectibility or present other unfavorable features.
Directors Kaufman and Compagni are uncompensated volunteer members of the
Board of Directors of the J.M. Murray Center, a not-for-profit corporation
providing services to the developmentally disabled. The J.M. Murray Center has a
loan in which the Bank is a 50% participant with another local bank. The loan is
secured by a mortgage on a light manufacturing facility operated by the borrower
as a source of employment for the developmentally disabled.
REPORT OF INDEPENDENT EXECUTIVE COMPENSATION EXPERT
Pursuant to the Conversion Regulations, the Bank has obtained the opinion of
William M. Mercer, Incorporated, an independent executive compensation expert
regarding the total compensation for the executive officers and directors of the
Bank. The opinion states that the total cash compensation for executive officers
and total remuneration for directors of the Bank, viewed as a whole and on an
individual basis, is reasonable and proper in comparison to the compensation
provided to officers and directors of similarly situated publicly-traded
financial institutions. The opinion further states that the amount of shares of
Common Stock to be purchased by the ESOP, and expected to be covered by the PRRP
and the Stock Option Plan, as a whole, are reasonable in comparison to similar
publicly-traded financial institutions. These opinions are based upon published
professional survey data of similarly situated publicly-traded financial
institutions.
EMPLOYMENT CONTRACTS
The Bank has recently entered into employment contracts with Mr. Stisser,
Mr. Stapleton, Mr. Covert and Mr. Meeker. The contracts with Mr. Stisser and Mr.
Stapleton provide for three-year terms and the contracts with Mr. Covert and Mr.
Meeker provide for two-year terms. The annual salaries under the four contracts
are $175,000 for Mr. Stisser, $110,000 for Mr. Stapleton, $110,000 for Mr.
Covert and $80,000 for
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Mr. Meeker, subject to such bonuses or increases as may be approved by the Board
of Directors. The contracts also provide that each officer will be entitled to
participate in all other retirement and fringe benefit plans provided by the
Bank to employees generally, except that they are not entitled to participate in
the Employee Severance Plan because the contracts separately address the issues
covered by that plan. Mr. Covert also received an additional up front payment of
$35,000 which is refundable if he is terminated for cause, or resigns other than
after certain changes in employment conditions, within the first six months
after his employment commences.
If the Bank terminates the executive officer's employment other than for
cause, he will be entitled to a lump sum payment. For Mr. Stisser, Mr. Stapleton
and Mr. Covert, the payment is generally equal to the greater of one year's
salary or salary for the unexpired term of the contract. For Mr. Meeker, the
payment is generally equal to the lesser of one year's salary or his salary for
the remainder of the term of the contract. All the contracts provide that the
payment will also be made if the officer resigns after material breach by the
Bank or after certain adverse changes in the terms and conditions of employment.
The contracts for the executive officers further provide that, subject to
certain conditions, if employment is terminated within six months after a change
in control of the Bank or the Company, or if the executive officer resigns after
certain adverse changes in terms and conditions of employment, the officer will
be entitled to receive a lump sum payment generally equal to 299% of the annual
salary payable to the officer prior to such termination, but in no event more
than the maximum amount permitted to be paid without the imposition of an excise
tax under Section 280G of the Internal Revenue Code. Under certain
circumstances, the amount of the payment to be made to some of the executive
officers may be less. For purposes of the contracts, a "change in control" will
generally be deemed to occur when a person or group of persons acting in concert
acquires beneficial ownership of 25% or more of any class of equity security of
the Company or the Bank, upon stockholder approval of a merger or consolidation
unless certain conditions are met, upon a change of the majority of the Board of
Directors of the Company or the Bank or upon liquidation or sale of
substantially all the assets of the Company or the Bank. Under certain
circumstances, severance benefits payable under the contracts are reduced by the
value of Stock Option Plan and PRRP awards, if any, which the officer receives.
The aggregate amount payable on account of these change in control provisions
cannot be determined at this time because the amount of the payments depend upon
future salary levels, average past compensation as of the date of the payment
which determines the scope of the excise tax cap on payments, and other factors.
However, if the employment of the four executive officers of the Bank were
terminated under circumstances in which they would be entitled to receive the
entire change in control payments under their contracts at their current salary
rates without reduction based upon the application of Section 280G of the
Internal Revenue Code or any other contract provision, the aggregate amount
payable to them as a result of such provisions would be approximately $1.4
million.
BENEFITS
PENSION PLAN. The Bank maintains a non-contributory, tax-qualified defined
benefit pension plan for eligible employees. All employees and officers with
more than 1,000 hours of service per year who have attained age 21 and completed
one year of service are eligible to participate in the pension plan. The pension
plan provides a benefit for each participant. The annual benefit is equal to 2%
of the participant's average annual compensation multiplied by the participant's
number of years of service, with an offset for social security. A participant is
entitled to a maximum of 30 years of service under the pension plan.
Average annual compensation is the average annual compensation for the
highest three years during the last ten years prior to retirement. A participant
is fully vested in his or her pension after five years of service. The pension
plan is funded by the Bank on an actuarial basis, and all assets are held in
trust by the pension plan trustee. The following table illustrates the annual
benefit payable upon normal retirement at age 65 in the normal form of benefit
under the pension plan at various levels of average annual compensation and
years of service under the pension plan. The amounts in the table are subject to
social security benefit offset allowance. For the current plan year, the maximum
permitted average annual
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compensation for determining pension benefits under the Bank's pension plan was
$160,000 and the maximum annual pension benefit was $130,000.
<TABLE>
<CAPTION>
YEARS OF CREDITED SERVICE
AVERAGE ANNUAL ------------------------------------------
COMPENSATION 15 20 25 30
- ------------------------------------------------------ --------- --------- --------- ---------
<S> <C> <C> <C> <C>
$ 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
150,000.............................................. 45,000 60,000 75,000 90,000
160,000.............................................. 48,000 64,000 80,000 96,000
175,000.............................................. 48,000 64,000 80,000 96,000
200,000.............................................. 48,000 64,000 80,000 96,000
225,000.............................................. 48,000 64,000 80,000 96,000
</TABLE>
At March 31, 1998, Mr. Stisser had 44 years of credited service under the
pension plan.
The Bank is currently evaluating the termination of this pension plan and
expects to terminate the plan during the third quarter of 1998. The termination
of the plan would result in a one-time expense in an amount estimated to be
approximately $330,000, after which the Bank anticipates it would have no
further expenses under the pension plan. Upon termination, employees would be
fully vested in their existing benefits, which would be settled through the
purchase of annuities or other qualified distributions using the assets of the
pension plan.
401(K) PLAN. The Bank maintains a tax-qualified savings and profit sharing
plan under Section 401(k) of the Internal Revenue Code. Salaried employees with
at least one year of service who are at least age 21 may make pretax salary
deferrals and after tax contributions under the 401(k) Plan. Salary deferrals
are made by election and are limited to 10% of compensation up to $160,000 (for
1997), or to a limit imposed under the Internal Revenue Code ($10,000 subject to
annual adjustment). The Bank makes matching contributions equal to 75% of the
amount of salary contributions, up to 6% of salary. Employees are fully vested
in their salary deferrals and after tax contributions, and become incrementally
vested in the Bank's contribution after one year and fully vested in the Bank's
contributions after five years.
The 401(k) Plan has recently been amended to provide that one of the funds
which an employee may choose as an investment vehicle for his or her account is
a fund consisting of Common Stock of the Company. In the Conversion, each
employee who has subscription rights by virtue of his or her deposits with the
Bank will be permitted to exercise those subscription rights through the use of
money in his or her 401(k) Plan account. The 401(k) Plan will then submit
subscription forms on behalf of the employee who elects to invest in the Common
Stock funds. All shares purchased as a result of those subscription forms will
be held by the 401(k) Plan but will be voted by the employee. Whether or not a
particular employee's subscription is satisfied will depend upon whether that
employee qualifies for one of the priority groups with subscription rights.
The Bank is currently evaluating, and expects to adopt, an amendment of the
401(k) Plan to reduce the maximum amount which an employee may defer to 6% of
compensation from 10% and reduce the Bank's matching percentage from 75% to 50%
of the first 6% of compensation that the employee defers. The Bank would not be
required to recognize any expense in connection with the amendment.
EMPLOYEE STOCK OWNERSHIP PLAN. The Company has established, and the Bank
has adopted, an ESOP and related trust to become effective upon completion of
the Conversion. Substantially all employees of the Bank or the Company who have
attained age 21 and have completed one year of service are eligible to become
participants in the ESOP. The ESOP intends to purchase 8% of the Common Stock
issued in the Conversion, including shares contributed to the Foundation, using
the proceeds of a loan from the Company. If the ESOP is unable to purchase its
shares in the Subscription Offering, the ESOP intends to purchase such shares in
the open market after the Conversion. Although future contributions to the ESOP
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will be discretionary, the Company and the Bank intend to make annual
contributions to the ESOP in an aggregate amount at least equal to the payments
due on the loan. It is expected that this loan will be for a term of twenty
years and will call for level annual principal and interest payments designed to
amortize the loan over its term. The loan will permit optional pre-payment. The
Company and the Bank may contribute more to the ESOP than is necessary to
service the loan.
Shares purchased by the ESOP will be pledged as collateral for the loan from
the Company and will be allocated among participants as the loan is repaid. An
equal number of shares per year will be released over the term of the loan. The
released shares, and any subsequently acquired shares that are not pledged to
secure a loan, will be allocated among ESOP participants generally on the basis
of the participant's total taxable compensation for the year of allocation.
Benefits generally become vested at the rate of 20% per year beginning after the
participant's first year of service, with 100% vesting after five years of
service. Employees will not receive credit for service prior to the Conversion
for vesting purposes. Participants are immediately vested upon termination of
employment due to death, retirement at age 65 or older, permanent disability or
upon the occurrence of a change of control. Forfeitures (shares allocated to an
employee which are not yet vested when such employee's employment terminates)
will be reallocated among remaining participating employees, in the same
proportion as contributions. Vested benefits may be paid in a single sum or
installment payments and are payable upon death, retirement at age 65 or older,
disability or termination of employment.
A corporate trustee for the ESOP not affiliated with the Bank or the
Company, currently expected to be Marine Midland Bank, will be appointed prior
to the Conversion and will continue thereafter. The trustee, subject to its
fiduciary duty, must vote all allocated shares held in the ESOP in accordance
with instructions received from the employees to whom the shares have been
allocated. Allocated shares for which no instructions have been received and
shares not yet allocated are voted generally in the same proportion as allocated
shares for which voting instructions are received. The Human Resources Committee
of the Company will oversee the Company's activities related to the ESOP.
The ESOP may purchase additional shares of Common Stock in the future, in
the open market or otherwise, and may do so either with borrowed funds or with
cash dividends, employer contributions or other cash flow.
STOCK OPTION PLAN. After the Conversion, the Board of Directors of the
Company intends to adopt the Stock Option Plan. If implemented prior to the
first anniversary of the Conversion, the Conversion Regulations require that the
plan be first approved by stockholders at a meeting held no earlier than six
months after the Conversion. The plan is expected to allow for options covering
10% of the Common Stock issued in the Conversion, including Common Stock
contributed to the Foundation. No final determinations have been made by the
Board of Directors as to the specific terms of the Stock Option Plan or the
amount of awards thereunder. However, the Conversion Regulations provide that no
officer or employee may receive more than 25% of the options granted and that
non-employee directors may not receive more than 5% individually or more than
30% in the aggregate of the options granted, if the plan is implemented within
one year after the Conversion.
The purpose of the Stock Option Plan is to attract and retain qualified
personnel in key positions, provide directors, officers and key employees with a
proprietary interest in the Company as an incentive to contribute to the success
of the Company and its subsidiaries and reward directors, officers and key
employees for outstanding performance. Although the terms of the Stock Option
Plan have not yet been determined, it is expected that the Stock Option Plan
will provide for the grant of: (i) options to purchase the Company's Common
Stock intended to qualify for special tax benefits under Section 422 of the
Internal Revenue Code ; (ii) options that do not qualify for special tax
benefits; and (iii) rights exercisable only upon a change of control. The Stock
Option Plan is expected to be in effect for 10 years. Stock options granted to
non-employee directors will not qualify for the special tax treatment. If Mr
Stisser and the non-employee directors are granted the maximum number of options
permitted, Mr. Stisser would receive options to purchase from 132,759 to 206,557
shares and each non-employee director would receive options
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to purchase from 17,701 to 27,541 shares. No final determination regarding the
amount of options to be granted to directors, officers and employees has been
made and such determination is not currently expected to be made until just
prior to, if not after, the solicitation of proxies for the anticipated
stockholders' meeting at which the Stock Option Plan is presented for approval.
The Stock Option Plan will be administered by the Human Resources Committee
of the Board of Directors, which will determine which officers and employees
will be granted benefits under the plan, the nature and amount of the benefits,
the exercise price of any options granted, any vesting conditions in addition to
those imposed by the Conversion Regulations, and other conditions which may be
imposed. It is expected that the Stock Option Plan will permit options to be
granted for terms of up to 10 years (5 years for certain options granted to
employees who are 10% stockholders) and at exercise prices no less than the fair
market value at date of grant (110% of fair market value for certain options
granted to employees who are 10% stockholders).
The Stock Option Plan is expected to provide for the exercisability and
vesting of options granted thereunder in the manner specified by the Human
Resources Committee. The Conversion Regulations generally require that options
granted under plans implemented within one year after the Conversion begin
vesting no earlier than one year from the date of stockholder approval of the
plan and thereafter vest at a rate of no more than 20% per year. It is also
expected that, in the event of death or disability, grants would be 100% vested,
and options granted to officers or employees would terminate upon or within a
fixed period after termination of employment.
The Stock Option Plan, to the extent permitted by the Conversion Regulations
and subject to applicable vesting requirements, may provide for rights, either
attached to or independent of each option, which, upon a change of control, will
allow the holder to exercise the rights and receive a lump sum cash payment
instead of being required to exercise a stock option, pay the exercise price,
and then receive stock. See "--Employment Contracts" for a discussion of
additional amounts which may be payable upon a change in control.
An employee who receives a stock option that qualifies for special tax
benefits will not have taxable income when the option is granted or exercised,
unless shares received upon exercise are disposed of within one year after the
stock is received or within two years after the grant of the option. Likewise,
the Company gets no tax deduction as a result of the grant or exercise of that
option unless the employee disposes of the stock in violation of the limits
described in the preceding sentence. For options that do not qualify for the
special tax treatment, or if an employee with an option that does qualify
violates the restrictions on disposition, the employee will be deemed to receive
ordinary taxable income when the option is exercised in an amount equal to the
excess of the fair market value of the Common Stock on the date of exercise over
the exercise price. The amount of ordinary taxable income deemed to be received
by an optionee may be a deductible expense for tax purposes for the Company.
PERSONNEL RECOGNITION AND RETENTION PROGRAM. After the Conversion, the
Company also intends to establish the PRRP to provide officers, employees and
non-employee directors with a proprietary interest in the Company in a manner
designed to encourage such persons to remain with the Bank and the Company at no
cost to the recipients of such awards. The plan will provide for the award of
shares of Common Stock, the full ownership of which will gradually vest over
five years. If implemented prior to the first anniversary of the Conversion, the
Conversion Regulations require that the adoption of the plan be subject to
stockholder approval obtained at a meeting held at least six months after the
Conversion.
The PRRP is expected to cover 4% of the shares of Common Stock issued in the
Conversion, including Common Stock contributed to the Foundation. These shares
are expected to be acquired through open market purchases, if permitted, or from
authorized but unissued shares. The Conversion Regulations provide that no
individual employee may receive more than 25% of the shares of any plan and that
non-employee directors may not receive more than 5% of the shares individually
or 30% in the aggregate for all directors, in the case of plans implemented
within one year after the Conversion. If
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Mr. Stisser and the non-employee directors are awarded the maximum number of
shares permitted, Mr. Stisser would receive from 53,103 to 82,623 shares and
each non-employee director would receive from 7,080 to 11,016 shares. No final
determination regarding the amount of shares to be awarded to directors,
officers and employees has been made and such determination is not currently
expected to be made until just prior to, if not after, the solicitation of
proxies for the anticipated stockholders' meeting at which the PRRP is presented
for approval.
The plan will be administered by the Human Resources Committee, which will
have similar authority with respect to the plan as it will have for the Stock
Option Plan discussed above. The Conversion Regulations require gradual five
year vesting of awards, in the same manner as stock option grants.
When shares under the plan vest, the recipient will recognize income equal
to the fair market value of the Common Stock at that time. The amount of income
recognized by the participants may be a deductible expense for tax purposes for
the Company. For financial reporting purposes, the Company will record
compensation expense as and when the awards vest equal to the fair market value
of the Common Stock on the date the Company first awarded those shares. This is
expected to significantly increase compensation expense for the Company after
the plan is approved. Dividends, if any, paid on unvested shares will be held
and then distributed to the grantee as and when the shares vest. It is expected
that the plan will be structured so that persons awarded shares under the plan
will be permitted to vote those shares prior to the vesting of the shares.
If authorized but unissued shares are used to fund the PRRP after the
Conversion, the interests of existing stockholders will be diluted. See "Pro
Forma Data."
EMPLOYEE SEVERANCE PLAN. The Bank has also adopted an employee severance
plan which provides for benefits to all employees of the Bank in the event of a
change in control, other than employees who have separate contracts providing
change-in-control benefits. In general, the plan provides benefits to employees
with at least one year of service with the Bank. If the employee's employment is
terminated within one year after a change in control of the Bank or the Company,
then each covered employee is entitled to a payment equal to one week of salary
for each month of service with the Bank, up to a severance payment equal to two
years' salary, which would be the amount payable after 8 years and 8 months of
service. The employee is not entitled to a benefit under the plan if the
termination is for cause.
OTHER STOCK BENEFIT PLANS. After the Conversion, the Board of Directors may
adopt other stock benefit plans for employees, officers or directors. Examples
of such plans which the Board may consider are employee stock purchase plans
under Section 423 of the Internal Revenue Code and plans for the payment of
directors' fees in stock of the Company. Employee stock purchase plans generally
involve the grant of options to purchase stock of the employer or its holding
company at a price which is as low as 85% of the fair market value of the stock
on the date the option is granted or on the date it is exercised. Under an
employee stock purchase plan, options are generally granted to all employees who
meet certain hours and years of service standards, without discrimination in
favor of officers. Employee stock purchase plans, in order to qualify under the
Internal Revenue Code, must be approved by stockholders. Directors' fee payment
plans generally involve the use of either authorized but unissued stock or stock
repurchased on the open market to pay directors' fees, in lieu of cash payments
for such fees.
It is impossible at this time to predict whether any such plans will be
adopted and, if they are adopted, what the terms and conditions of the plans
will be. If and to the extent required under applicable laws and regulations,
the plans will be submitted to stockholders for approval.
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RESTRICTIONS ON ACQUISITION OF THE COMPANY AND THE BANK
GENERAL
Certain provisions in the Company's Certificate of Incorporation and Bylaws
and in its management remuneration provided for in the Conversion, together with
provisions of Delaware corporate law, may have anti-takeover effects. In
addition, the Bank's Restated Organization Certificate and Bylaws and management
remuneration provided for in the Conversion may have anti-takeover effects as
described below. Finally, regulatory restrictions may make it difficult for
persons or companies to acquire control of either the Company or the Bank.
RESTRICTIONS IN THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
GENERAL. The following discussion is a general summary of material
provisions of the Company's Certificate of Incorporation and Bylaws and certain
other statutory and regulatory provisions relating to stock ownership and
transfers, the Board of Directors and business combinations, which might be
deemed to have a potential "anti-takeover" effect. These provisions may have the
effect of discouraging a future takeover attempt which is not approved by the
Board of Directors but which individual Company stockholders may deem to be in
their best interests or in which stockholders may receive a substantial premium
for their shares over then current market prices. As a result, stockholders who
might desire to participate in such a transaction may not have an opportunity to
do so. Such provisions will also render the removal of the current Board of
Directors or management of the Company more difficult. The following description
of certain of the provisions of the Certificate of Incorporation and Bylaws of
the Company is necessarily general and reference should be made in each case to
such Certificate of Incorporation and Bylaws, which are incorporated herein by
reference. See "Additional Information" as to how to obtain a copy of these
documents.
LIMITATION ON VOTING RIGHTS. The Certificate of Incorporation of the
Company provides that in no event shall any record owner of any outstanding
Common Stock which is beneficially owned, directly or indirectly, by a person
who beneficially owns in excess of 10% of the then outstanding shares of Common
Stock (the "Limit") be entitled or permitted to any vote in respect of the
shares held in excess of the Limit. Beneficial ownership is determined pursuant
to Rule 13d-3 of the General Rules and Regulations promulgated pursuant to the
Securities Exchange Act of 1934, and includes shares beneficially owned by such
person or any of his affiliates (as defined in the Company's Certificate of
Incorporation), shares which such person or his affiliates have the right to
acquire pursuant to any agreement, arrangement or understanding or upon the
exercise of conversion rights, exchange rights, warrants or options or otherwise
and shares as to which such person and his affiliates have sole or shared voting
or investment power, but shall not include shares that are subject to a publicly
solicited revocable proxy and that are not otherwise deemed to be beneficially
owned by such person and his affiliates. No director or officer (or any
affiliate thereof) of the Company shall, solely by acting in such capacity, be
deemed to beneficially own any shares beneficially owned by any other director
or officer (or affiliate thereof) nor will the ESOP or any similar plan of the
Company or the Bank or any trustee with respect thereto (solely by reason of
such trustee's capacity) be deemed to beneficially own any shares held under any
such plan. The Certificate of Incorporation of the Company further provides that
the provisions limiting voting rights may only be amended upon the vote of the
holders of at least 80% of the voting power of all then outstanding shares of
capital stock entitled to vote thereon (after giving effect to the provision
limiting voting rights).
BOARD OF DIRECTORS. The Board of Directors of the Company is divided into
three classes, each of which shall contain approximately one-third of the whole
number of the members of the Board. Each class shall serve a staggered term,
with approximately one-third of the total number of directors being elected each
year. The Company's Certificate of Incorporation and Bylaws provide that the
size of the Board shall be determined by a majority of the total number of
authorized directorships, whether or not there exist any vacancies in previously
authorized directorships at the time any such resolution is presented to the
Board
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for adoption (referred to as the "Whole Board"). The Certificate of
Incorporation and the Bylaws provide that any vacancy occurring in the Board,
including a vacancy created by an increase in the number of directors or
resulting from death, resignation, retirement, disqualification, removal from
office or other cause, shall be filled for the remainder of the unexpired term
exclusively by a majority vote of the directors then in office. The division of
the Board into three classes is intended to provide for continuity of the Board
of Directors and to make it more difficult and time consuming for a stockholder
group to use its voting power to gain control of the Board of Directors without
the consent of the incumbent Board of Directors of the Company. Directors may be
removed by the stockholders only for cause by the affirmative vote of the
holders of at least 80% of the voting power of all then outstanding shares of
capital stock entitled to vote thereon.
In the absence of these provisions, the vote of the holders of a majority of
the shares could remove the entire Board, with or without cause, and replace it
with persons of such holders' choice.
CUMULATIVE VOTING, SPECIAL MEETINGS AND ACTION BY WRITTEN CONSENT. The
Certificate of Incorporation expressly provides that there shall not be
cumulative voting, which makes it more difficult for stockholders with a
minority interest in the Company to obtain representation on the Board of
Directors. Moreover, special meetings of stockholders of the Company may be
called only by a resolution adopted by a majority of the Whole Board of
Directors. The Certificate of Incorporation also provides that any action
required or permitted to be taken by the stockholders of the Company may be
taken only at an annual or special meeting and prohibits stockholder action by
written consent in lieu of a meeting.
AUTHORIZED SHARES. The Certificate of Incorporation authorizes the issuance
of 18,000,000 shares of Common Stock and 2,000,000 shares of Preferred Stock.
These shares exceed the number to be issued in the Conversion so the Company
will have the flexibility to effect, among other transactions, financings,
acquisitions, stock dividends, stock splits and employee stock options. However,
these additional authorized shares may also be used by the Board of Directors
consistent with its fiduciary duty to deter future attempts to gain control of
the Company. The Board of Directors also has sole authority to determine the
terms of any one or more series of preferred stock, including voting rights,
conversion rights, and liquidation preferences. As a result of the ability to
fix voting rights for a series of preferred stock, the Board has the power to
the extent consistent with its fiduciary duty to issue a series of preferred
stock to persons friendly to management in order to attempt to block a
post-tender offer merger or other transaction by which a third party seeks
control, and thereby assist management to retain its position. The Company's
Board currently has no plans for the issuance of additional shares, other than
the issuance of shares in the Conversion and the contribution of Common Stock to
the Foundation.
STOCKHOLDER VOTE REQUIRED TO APPROVE BUSINESS COMBINATIONS WITH INTERESTED
STOCKHOLDERS. The Certificate of Incorporation requires the approval of the
holders of at least 80% of the Company's outstanding shares of voting stock
entitled to vote thereon to approve certain "Business Combinations" with an
"Interested Stockholder," each as defined therein, and related transactions.
Under Delaware law, absent this provision, business combinations, including
mergers, consolidations and sales of all or substantially all of the assets of a
corporation must, subject to certain exceptions, be approved by the vote of the
holders of only a majority of the outstanding shares of Common Stock of the
Company and any other affected class of stock. Under the Certificate of
Incorporation, the approval of the holders of at least 80% of the shares of
capital stock entitled to vote thereon is required for any business combination
involving an Interested Stockholder (as defined below) unless (i) the proposed
transaction has been approved by a majority of those members of the Company's
Board of Directors who are unaffiliated with the Interested Stockholder and were
directors prior to the time when the Interested Stockholder became an Interested
Stockholder or (ii) the proposed transaction meets certain conditions which are
designed to afford the stockholders a fair price in consideration for their
shares. The term "Interested Stockholder" is defined to include, among others,
any individual, a group acting in concert, corporation, partnership, association
or other entity (other than the Company or its subsidiary) who or which is the
beneficial owner, directly or indirectly, of
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10% or more of the outstanding shares of voting stock of the Company. This
provision of the Certificate of Incorporation applies to any "Business
Combination," which is defined to include: (i) any merger or consolidation of
the Company or any of its subsidiaries with any Interested Stockholder or
Affiliate (as defined in the Certificate of Incorporation) of an Interested
Stockholder or any corporation which is, or after such merger or consolidation
would be, an Affiliate of an Interested Stockholder; (ii) any sale, lease,
exchange, mortgage, pledge, transfer, or other disposition to or with any
Interested Stockholder or Affiliate of 25% or more of the assets of the Company
or combined assets of the Company and its subsidiary; (iii) the issuance or
transfer to any Interested Stockholder or its Affiliate by the Company (or any
subsidiary) of any securities of the Company (or any subsidiary) in exchange for
any cash, securities or other property the value of which equals or exceeds 25%
of the fair market value of the Common Stock of the Company; (iv) the adoption
of any plan for the liquidation or dissolution of the Company proposed by or on
behalf of any Interested Stockholder or Affiliate thereof; and (v) any
reclassification of securities, recapitalization, merger or consolidation of the
Company with any of its subsidiaries which has the effect of increasing the
proportionate share of Common Stock or any class of equity or convertible
securities of the Company or subsidiary owned directly or indirectly, by an
Interested Stockholder or Affiliate thereof.
EVALUATION OF OFFERS. The Certificate of Incorporation of the Company
further provides that the Board of Directors of the Company, when evaluating any
offer to (i) make a tender or exchange offer for any equity security of the
Company, (ii) merge or consolidate the Company with another corporation or
entity or (iii) purchase or otherwise acquire all or substantially all of the
properties and assets of the Company, may, in connection with the exercise of
its judgment in determining what is in the best interest of the Company and the
stockholders of the Company, give due consideration to all relevant factors,
including, without limitation, those factors that directors of any subsidiary
(including the Bank) may consider in evaluating any action that may result in a
change or potential change of control of such subsidiary, and the social and
economic effects of acceptance of such offer on: the Company's present and
future customers and employees and those of its subsidiaries (including the
Bank); the communities in which the Company and the Bank operate or are located;
the ability of the Company to fulfill its corporate objectives as a bank holding
company; and the ability of the Bank to fulfill the objectives of a stock
savings bank under applicable statutes and regulations. By having these
standards in the Certificate of Incorporation of the Company, the Board of
Directors may be in a stronger position to oppose such a transaction if the
Board concludes that the transaction would not be in the best interest of the
Company, even if the price offered is significantly greater than the then market
price of any equity security of the Company.
AMENDMENT OF CERTIFICATE OF INCORPORATION AND BYLAWS. Amendments to the
Company's Certificate of Incorporation must be approved by a majority vote of
its Board of Directors and also by a majority of the outstanding shares of its
voting stock, provided, however, that an affirmative vote of the holders of at
least 80% of the outstanding voting stock entitled to vote (after giving effect
to the provision limiting voting rights) is required to amend or repeal certain
provisions of the Certificate of Incorporation of the Company, including the
provision limiting voting rights, the provisions relating to approval of certain
business combinations, calling special meetings, the number and classification
of directors, director and officer indemnification by the Company and amendment
of the Company's Bylaws and Certificate of Incorporation. The Company's Bylaws
may be amended by a majority of the Whole Board of Directors, or by a vote of
the holders of at least 80% (after giving effect to the provision limiting
voting rights) of the total votes eligible to be voted at a duly constituted
meeting of stockholders.
CERTAIN BYLAW PROVISIONS. The Bylaws of the Company also require a
stockholder who intends to nominate a candidate for election to the Board of
Directors, or who intends to bring on any business to be conducted at an annual
stockholders' meeting to give at least 90 days advance notice to the Secretary
of the Company. The notice provision requires a stockholder who desires to raise
such business to provide certain information to the Company concerning the
nature of the new business, the stockholder and the stockholder's interest in
the business matter. Similarly, a stockholder wishing to nominate any person for
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election as a director must provide the Company with certain information
concerning the nominee and the proposing stockholder.
ANTI-TAKEOVER EFFECTS OF MANAGEMENT COMPENSATION ARRANGEMENTS
The Company and the Bank have entered into agreements with four officers and
the Bank has adopted an Employee Severance Plan which provide payments and
benefits in connection with a change in control of the Company or the Bank. See
"Management of the Bank--Employment Contracts," and "--Employee Severance Plan."
Furthermore, in the future, the Stock Option Plan and the PRRP may provide for
accelerated benefits to participants in the event of a change in control of the
Company or the Bank or a tender or exchange offer for their stock, but such
provisions are currently not permitted. See "Management of the Bank--Benefit
Plans--Stock Option Plan," and "--Benefit Plans--Personnel Recognition and
Retention Program." These provisions could deter offers to acquire the
outstanding shares of the Company which might be viewed by stockholders to be in
their best interests.
The directors and executive officers of the Bank intend to purchase in the
aggregate from approximately 1.92% to 3.0% of the shares of Common Stock to be
issued in the Conversion, including shares issued to the Foundation. In
addition, the ESOP intends to purchase 8% of the Common Stock issued in the
Conversion, including Common Stock contributed to the Foundation. The Company
anticipates that it will reacquire 4% of the Common Stock issued in the
Conversion to fund the PRRP and expects to grant options to purchase shares
equal to 10% of the Common Stock issued in the Conversion under the Stock Option
Plan to directors and executive officers. As a result, assuming that the PRRP
awards and stock options are satisfied out of shares repurchased by the Company,
directors, executive officers and employees have the potential to control the
voting of from approximately 23.9% to 25.0% of the Company's Common Stock,
enabling them to prevent transactions requiring the approval of at least 80% of
the Company's outstanding shares of voting stock described above.
The Company's Board of Directors believes that the provisions of the
Certificate of Incorporation and Bylaws are in the best interest of the Company
and its stockholders. An unsolicited non-negotiated takeover proposal can
seriously disrupt the business and management of a corporation and cause it
great expense. Accordingly, the Board of Directors believes it is in the best
interests of the Company and its stockholders to encourage potential acquirors
to negotiate directly with management and that these provisions will encourage
such negotiations and discourage non-negotiated takeover attempts.
DELAWARE CORPORATE LAW
BUSINESS COMBINATIONS. In general, Section 203 of the Delaware General
Corporation Law ("Section 203") provides that a "Person" (as defined therein)
who owns 15% or more of the outstanding voting stock of a Delaware corporation
(an "Interested Stockholder") may not consummate a merger or other business
combination transaction with such corporation at any time during the three-year
period following the date such "Person" became an Interested Stockholder. The
term "business combination" is defined broadly to cover a wide range of
corporate transactions including mergers, sales of assets, issuances of stock,
transactions with subsidiaries and the receipt of disproportionate financial
benefits.
The statute exempts the following transactions from the requirements of
Section 203: (i) any business combination if, prior to the date a person became
an Interested Stockholder, the Board of Directors approved either the business
combination or the transaction which resulted in the stockholder becoming an
Interested Stockholder; (ii) any business combination involving a person who
acquired at least 85% of the outstanding voting stock in the transaction in
which he became an Interested Stockholder, excluding, for purposes of
determining the number of shares outstanding, shares owned by the corporation's
directors who are also officers and certain employee stock plans; (iii) any
business combination with an Interested Stockholder that is approved by the
Board of Directors and by a two-thirds vote of the outstanding voting stock not
owned by the Interested Stockholder; and (iv) certain business combinations that
are proposed
114
<PAGE>
after the corporation had received other acquisition proposals and which are
approved or not opposed by a majority of certain continuing members of the Board
of Directors. A corporation may exempt itself from the requirements of the
statute by adopting an amendment to its Certificate of Incorporation or Bylaws
electing not to be governed by Section 203. At the present time, the Board of
Directors does not intend to propose any such amendment.
RESTRICTIONS IN THE BANK'S RESTATED ORGANIZATION CERTIFICATE AND NEW BYLAWS
The Restated Organization Certificate and Bylaws of the Bank include
provisions which could have anti-takeover effects which provisions are
comparable to the provisions contained in the Company's Certificate of
Incorporation and Bylaws. These provisions include, for example, limits on
voting of more than 10% of the stock of the Bank held by a single person or
groups, super-majority stockholder voting requirement to approve certain
business combinations, no cumulative voting and a staggered Board of Directors.
REGULATORY RESTRICTIONS
The Conversion Regulations prohibit any person, prior to the completion of
the Conversion, from transferring, or from entering into any agreement or
understanding to transfer, to the account of another, legal or beneficial
ownership of the subscription rights issued under the Plan of Conversion or the
Common Stock to be issued upon their exercise. The Plan of Conversion also
prohibits any person, prior to the completion of the Conversion, from offering,
or making an announcement of an offer or intent to make an offer, to purchase
such subscription rights or Common Stock.
As permitted by the Conversion Regulations, the Restated Organization
Certificate of the Bank prohibits, for three years after the Conversion, any
person from acquiring or making an offer to acquire more than 10% of the stock
of the Bank. In addition, the Banking Law requires the approval of the New York
Banking Board before any person or company acquires the power to vote, directly
or indirectly, more than 10% of the voting stock of the Bank.
In addition, any proposal to acquire 10% of any class of equity security of
the Company generally would be subject to approval by the Federal Reserve under
the Change in Bank Control Act. Federal law generally provides that no "person,"
acting directly or indirectly or through or in concert with one or more other
persons, may acquire "control," as that term is defined in Federal Reserve
regulations, of a state bank or its holding company without giving at least 60
days written notice to the Federal Reserve and providing the Federal Reserve an
opportunity to disapprove the proposed acquisition. Such acquisitions of control
may be disapproved by the Federal Reserve if it is determined, among other
things, that (i) the acquisition would substantially lessen competition or
result in a monopoly; (ii) the financial condition of the acquiring person might
jeopardize the financial stability of the savings institution or prejudice the
interests of its depositors; or (iii) the competency, experience or integrity of
the acquiring person or the proposed management personnel indicates that it
would not be in the interest of the depositors or the public to permit the
acquisition of control by such person. Such change in control restrictions on
the acquisition of Company stock are not limited to three years after the
Conversion but will apply for as long as the regulations are in effect. Persons
holding revocable or irrevocable proxies may be deemed to be beneficial owners
of such securities under Federal Reserve regulations and therefore prohibited
from voting all or the portion of such proxies in excess of the 10% aggregate
beneficial ownership limit. Such regulatory restrictions may prevent or inhibit
proxy contests for control of the Company or the Bank which have not received
prior regulatory approval.
115
<PAGE>
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
GENERAL
The Company is authorized to issue 18,000,000 shares of Common Stock having
a par value of $.01 per share and 2,000,000 shares of preferred stock having a
par value of $.01 per share (the "Preferred Stock"). The Company currently
expects to issue up to 8,262,318 shares of Common Stock and no shares of
Preferred Stock in the Conversion, including shares contributed to the
Foundation. Except for shares issued in connection with the Conversion, the
Company presently does not have plans to issue Common Stock, except for shares
that may be issued upon the exercise of stock options which may be granted
pursuant to the Stock Option Plan. The Company may also elect to fund awards
under the PRRP with authorized but unissued Common Stock. Each share of the
Company's Common Stock will have the same relative rights as, and will be
identical in all respects with, each other share of Common Stock. Upon payment
of the purchase price for the Common Stock, in accordance with the Plan of
Conversion, all such stock will be duly authorized, fully paid and
nonassessable.
The Common Stock of the Company will represent nonwithdrawable capital, will
not be an account of an insurable type, and will not be insured by the FDIC or
any other government agency.
COMMON STOCK
DIVIDENDS. The Company can pay dividends out of statutory surplus or from
certain net profits if, as and when declared by its Board of Directors. The
payment of dividends by the Company is subject to limitations which are imposed
by law and applicable regulation. See "Dividend Policy" and "Regulation." The
holders of Common Stock of the Company will be entitled to receive and share
equally in such dividends as may be declared by the Board of Directors of the
Company out of funds legally available therefor. If the Company issues Preferred
Stock, the holders of it may have a priority over the holders of the Common
Stock with respect to dividends.
VOTING RIGHTS. Upon the Conversion, the holders of Common Stock of the
Company will possess exclusive voting rights in the Company. They will elect the
Company's Board of Directors and act on such other matters as are required to be
presented to them under Delaware law or as are otherwise presented to them by
the Board of Directors. Except as discussed in "Restrictions on Acquisition of
the Company and the Bank," each holder of Common Stock will be entitled to one
vote per share. Stockholders will not have any right to cumulate votes in the
election of directors, which means that a stockholder may not cast more votes
for any one nominee than the number of shares owned by that stockholder, even if
there is more than one seat up for election. Thus, a stockholder owning 100
shares of Common Stock may cast a total of 300 votes if there are three
vacancies being filled, but may not cast more than 100 votes for any one
nominee. If the Company issues Preferred Stock, holders of the Preferred Stock
may also possess voting rights. Certain matters require an 80% stockholder vote
(after giving effect to the provision limiting voting rights). See "Restrictions
on Acquisition of the Company and the Bank."
As a mutual savings bank, corporate powers and control of the Bank are
vested in its Board of Directors, who elect the officers of the Bank and who
fill any vacancies on the Board of Directors prior to the Conversion. Subsequent
to Conversion, voting rights will be vested exclusively in the Company as the
sole owner of the shares of capital stock of the Bank, and voting rights will be
exercised at the direction of the Company's Board of Directors. Consequently,
the holders of the Common Stock will not have direct control of the Bank.
LIQUIDATION. In the event of any liquidation, dissolution or winding up of
the Bank, the Company, as holder of the Bank's capital stock, would be entitled
to receive, after payment or provision for payment of all debts and liabilities
of the Bank (including all deposit accounts and accrued interest thereon) and
after distribution of the balance in the liquidation account (See "The
Conversion--Effects of Conversion on Depositors and Borrowers--Liquidation
Rights"), all assets of the Bank available for distribution. In the
116
<PAGE>
event of liquidation, dissolution or winding up of the Company, the holders of
its Common Stock would be entitled to receive, after payment or provision for
payment of all of its debts and liabilities, all of the assets of the Company
available for distribution. If Preferred Stock is issued, the holders thereof
may have a priority over the holders of the Common Stock in the event of
liquidation or dissolution.
PREEMPTIVE RIGHTS; REDEMPTION. Holders of the Common Stock of the Company
will not be entitled to preemptive rights with respect to any shares which may
be issued. The Common Stock is not subject to redemption.
INDEMNIFICATION AND LIMIT ON LIABILITY. The Company's Certificate of
Incorporation contains provisions which limit the liability of directors,
officers and employees of the Company and indemnify such individuals. See
"Management of the Company--Indemnification and Liability of Directors."
PREFERRED STOCK
None of the shares of the Company's authorized Preferred Stock will be
issued in the Conversion. Such stock may be issued with such designations,
powers, preferences and rights as the Board of Directors may from time to time
determine. The Board of Directors can, without stockholder approval, issue
Preferred Stock with voting, dividend, liquidation and conversion rights which
could dilute the voting strength of the holders of the Common Stock and may
assist management in impeding an unfriendly takeover or attempted change in
control. The Company presently does not have plans to issue Preferred Stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Registrar and
Transfer Company.
EXPERTS
The consolidated financial statements of Cortland Savings Bank and its
subsidiary as of December 31, 1997 and 1996, and for each of the years in the
three-year period ended December 31, 1997, have been included herein and in the
registration statement filed with the SEC 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, LC. has consented to the publication herein of the summary of
its report to the Bank and Company setting forth its opinion as to the estimated
pro forma market value of the Common Stock upon Conversion and its opinion with
respect to subscription rights.
LEGAL AND TAX OPINIONS
The legality of the Common Stock, the federal income tax consequences of the
Conversion and certain matters related to the Foundation will be passed upon for
the Bank and Company by Serchuk & Zelermyer, LLP, White Plains, New York,
counsel to the Bank and Company. Certain legal matters will be passed upon for
CIBC Oppenheimer Corp. and Trident Securities, Inc. by Thacher Proffitt & Wood,
New York, New York.
ADDITIONAL INFORMATION
The Company has filed with the SEC a registration statement under the
Securities Act of 1933 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, including the Appraisal, which is an exhibit to the registration
statement, can be examined without charge at the public reference facilities of
the SEC located at 450 Fifth Street, N.W., Washington, D.C. 20549, and copies of
such material can be obtained from the SEC at prescribed rates. In addition, the
SEC maintains a
117
<PAGE>
web site (http://www.sec.gov) that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the SEC, including the Company. The Appraisal may also be inspected by
Eligible Account Holders and Supplemental Eligible Account Holders at the
offices of the Bank during normal business hours. The statements contained in
this Prospectus as to the contents of any contract or other document filed as an
exhibit to the registration statement are, of necessity, brief descriptions
thereof and are not necessarily complete; each such statement is qualified by
reference to such contract or document.
The Bank has filed an application for Conversion with the Banking
Department. Pursuant to the rules and regulations of the Banking Department,
this Prospectus omits certain information contained in that application. The
application may be examined at the principal office of the Banking Department,
Two Rector Street, New York, New York 10006 and at the principal office of the
Bank, One North Main Street, Cortland, New York 13045.
In connection with the Conversion, the Company will register its Common
Stock with the SEC under Section 12(g) of the Securities Exchange Act of 1934
and, upon such registration, the Company and the holders of its stock will
become subject to the proxy solicitation rules, reporting requirements and
restrictions on stock purchases and sales by directors, officers and greater
than 10% stockholders, the annual and periodic reporting and certain other
requirements of the Securities Exchange Act of 1934. Under the Plan of
Conversion, the Company has undertaken that it will not terminate such
registration for a period of at least three years following the Conversion.
Copies of the Certificate of Incorporation and the Bylaws of the Company and
the Restated Organization Certificate and Bylaws of the Bank are available
without charge from the Bank upon written or oral request.
118
<PAGE>
CORTLAND SAVINGS BANK
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report.......................................................... F-2
Consolidated Balance Sheets at December 31, 1997 and 1996 and at March 31, 1998
(unaudited)......................................................................... F-3
Consolidated Statements of Income for the Years Ended December 31, 1997, 1996 and 1995
and for the three months ended March 31, 1998 and 1997 (unaudited).................. 51
Consolidated Statements of Net Worth for the Years Ended December 31, 1997, 1996 and
1995 and the three months ended March 31, 1998 (unaudited).......................... F-4
Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and
1995 and the three months ended March 31, 1998 and 1997 (unaudited)................. F-5
Notes to Financial Statements......................................................... F-7
</TABLE>
All data as of and for the three month periods ended March 31, 1998 and 1997
are unaudited
All schedules are omitted because the required information is not applicable
or is included in the Consolidated Financial Statements or related Notes.
The Financial Statements of the Company have been omitted because the
Company has not yet issued any stock, has no assets, no liabilities and has not
conducted any business other than of an organizational nature.
F-1
<PAGE>
KPMG Peat Marwick LLP
113 South Salina Street
Syracuse, NY 13202
INDEPENDENT AUDITORS' REPORT
The Board of Trustees
Cortland Savings Bank:
We have audited the accompanying consolidated balance sheets of Cortland
Savings Bank and subsidiary as of December 31, 1997 and 1996, and the related
consolidated statements of income, net worth and cash flows for each of the
years in the three-year period ended December 31, 1997. 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 Cortland
Savings Bank and subsidiary at December 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997 in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
March 19, 1998
F-2
<PAGE>
CORTLAND SAVINGS BANK AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND DECEMBER 31, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1997 1996
MARCH 31, ------------ -------------
1998
------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and due from banks........................... $ 4,613 $ 4,679 $ 9,736
Federal funds sold................................ 5,200 3,400 2,800
Securities available-for-sale, at fair value...... 45,475 44,140 45,594
Securities held-to-maturity (fair value of $12,489
(unaudited), $12,569 and $11,633 at March 31,
1998 and December 31, 1997 and 1996,
respectively)................................... 12,479 12,550 11,757
Loans held for sale............................... -- 2,541 --
Loans receivable, net of deferred fees............ 156,430 157,565 160,563
Less allowance for loan losses.................... 2,230 2,143 1,952
------------ ------------ -------------
Net loans................................... 154,200 155,422 158,611
Premises and equipment, net....................... 3,446 3,447 3,655
Federal Home Loan Bank stock, at cost............. 1,303 1,291 1,228
Accrued interest receivable....................... 1,660 1,679 1,912
Deferred income taxes............................. 1,086 1,908 1,245
Real estate owned................................. 760 964 563
Other assets...................................... 2,166 1,708 999
------------ ------------ -------------
$ 232,388 $ 233,729 $ 238,100
------------ ------------ -------------
------------ ------------ -------------
LIABILITIES AND NET WORTH
Liabilities:
Deposits:
Demand accounts............................... $ 9,128 $ 10,604 $ 9,563
Passbook, statement savings and club
accounts.................................... 63,658 62,769 63,003
Savings certificates.......................... 107,854 108,258 112,642
Money market accounts......................... 8,314 8,435 9,343
NOW accounts.................................. 9,280 9,704 10,089
------------ ------------ -------------
Total deposits.............................. 198,234 199,770 204,640
Advance payments by borrowers for property taxes
and insurance................................. 705 1,329 1,373
Other liabilities............................... 2,055 1,890 1,742
------------ ------------ -------------
Total liabilities........................... 200,994 202,989 207,755
------------ ------------ -------------
Commitments and contingencies (note 12)
Net worth:
Surplus fund.................................... 5,541 5,541 5,541
Retained earnings............................... 25,121 24,628 24,556
Accumulated other comprehensive income.......... 732 571 248
------------ ------------ -------------
Total net worth............................. 31,394 30,740 30,345
------------ ------------ -------------
$ 232,388 $ 233,729 $ 238,100
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
CORTLAND SAVINGS BANK AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF NET WORTH
THREE-MONTHS ENDED MARCH 31, 1998 AND
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
SURPLUS RETAINED COMPREHENSIVE
FUND EARNINGS INCOME TOTAL
--------- --------- ----------------- ---------
<S> <C> <C> <C> <C>
Balance at December 31, 1994...................................... $ 5,541 $ 21,267 $ 68 $ 26,876
Comprehensive income:
Change in net unrealized gain (loss) on securities, net of tax
and reclassification adjustment............................... -- -- 230 230
Net income...................................................... -- 1,924 -- 1,924
--------- --------- ----- ---------
Comprehensive income.............................................. -- 1,924 230 2,154
--------- --------- ----- ---------
Balance at December 31, 1995...................................... 5,541 23,191 298 29,030
Comprehensive income:
Change in net unrealized gain (loss) on securities, net of tax
and reclassification adjustment............................... -- -- (50) (50)
Net income...................................................... -- 1,365 -- 1,365
--------- --------- ----- ---------
Comprehensive income.............................................. -- 1,365 (50) 1,315
--------- --------- ----- ---------
Balance at December 31, 1996...................................... 5,541 24,556 248 30,345
Comprehensive income:
Change in net unrealized gain (loss) on securities, net of tax
and reclassification adjustment............................... -- -- 323 323
Net income...................................................... -- 72 -- 72
--------- --------- ----- ---------
Comprehensive income.............................................. -- 72 323 395
--------- --------- ----- ---------
Balance at December 31, 1997...................................... 5,541 24,628 571 30,740
Comprehensive income:
Change in net unrealized gain (loss) on securities, net of tax
and reclassification adjustment (unaudited)................... -- -- 161 161
Net income (unaudited).......................................... -- 493 -- 493
--------- --------- ----- ---------
Comprehensive income (unaudited).................................. -- 493 161 654
--------- --------- ----- ---------
Balance at March 31, 1998 (unaudited)............................. $ 5,541 $ 25,121 $ 732 $ 31,394
--------- --------- ----- ---------
--------- --------- ----- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
CORTLAND SAVINGS BANK AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE-MONTHS ENDED MARCH 31, 1998 AND 1997 AND
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
-------------------- -------------------------------
1998 1997 1997 1996 1995
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income.................................................. $ 493 $ 411 $ 72 $ 1,365 $ 1,924
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 118 146 579 507 497
Decrease (increase) in accrued interest receivable........ 19 (41) 233 431 23
Provision for loan losses................................. 75 225 3,300 1,380 600
Write-down of real estate owned........................... 50 -- 365 59 --
Net (gains) losses on sales of securities................. (6) (7) (46) (15) (16)
Nationar (recovery) provision............................. -- -- (45) -- 100
Net losses (gains) on sale of real estate owned........... (44) -- (11) 37 (47)
Net amortization of premiums and discounts................ 1 (55) 104 251 566
Net gain on sale of loans held for sale................... (30) -- -- -- --
Proceeds from sale of loans held for sale................. 3,131 -- -- -- --
Increase (decrease) in other liabilities.................. 165 6 148 (70) 426
Deferred income taxes..................................... 706 (9) (869) (342) (323)
(Increase) decrease in other assets....................... (458) 91 (709) 1,597 (1,715)
--------- --------- --------- --------- ---------
Net cash provided by operating activities............. 4,220 767 3,121 5,200 2,035
--------- --------- --------- --------- ---------
Cash flows from investing activities:
Net decrease (increase) in loans............................ 542 683 (3,746) (2,064) (6,654)
Proceeds from recovery of Nationar.......................... -- -- 45 -- --
Proceeds from sales of securities available-for-sale........ 2,006 1,533 3,121 1,057 3,412
Proceeds from maturities and principle reductions of
securities available-for-sale............................. 5,155 4,695 18,040 21,959 1,692
Purchases of securities available-for-sale.................. (8,214) (8,254) (19,237) (27,139) (12,985)
Purchases of securities held-to-maturity.................... (1,522) -- (3,847) (2,964) (2,991)
Proceeds from maturities and principle reductions of
securities held-to-maturity............................... 1,593 434 3,054 2,382 21,883
Proceeds from sale of real estate owned..................... 243 39 340 274 372
Additions to premises and equipment......................... (117) (215) (371) (291) (255)
Purchase of FHLB stock...................................... (12) -- (63) (1,228) --
--------- --------- --------- --------- ---------
Net cash provided (used) by investing activities...... (326) (1,085) (2,664) (8,014) 4,474
--------- --------- --------- --------- ---------
Cash flows from financing activities:
(Decrease) increase in deposits............................. (1,536) (1,648) (4,870) 1,530 2,800
Decrease in advance payments by borrowers for property taxes
and insurance............................................. (624) (684) (44) (356) (45)
--------- --------- --------- --------- ---------
Net cash (used) provided by financing activities...... (2,160) (2,332) (4,914) 1,174 2,755
--------- --------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents.......... 1,734 (2,650) (4,457) (1,640) 9,264
Cash and cash equivalents at beginning of period.............. 8,079 12,536 12,536 14,176 4,912
--------- --------- --------- --------- ---------
Cash and cash equivalents at end of period.................... $ 9,813 $ 9,886 $ 8,079 $ 12,536 $ 14,176
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
F-5
<PAGE>
CORTLAND SAVINGS BANK AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
THREE-MONTHS ENDED MARCH 31, 1998 AND 1997 AND
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
-------------------- -------------------------------
1998 1997 1997 1996 1995
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Non-cash investing activities:
Transfer of securities held-to-maturity to securities
available-for-sale...................................... $ -- $ -- $ -- $ -- $ 31,053
Transfer of loans held-to-maturity to loans
held-for-sale........................................... 661 -- 2,541 -- --
Transfer of loans held-for-sale to loans
held-to-maturity........................................ 101 -- -- -- --
Additions to real estate owned............................ 45 33 1,095 711 645
Cash paid during the three-months and year for:
Interest.................................................. 2,021 2,062 8,321 8,761 8,588
Income taxes.............................................. -- 54 1,125 1,644 1,420
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
CORTLAND SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)
AND YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(1) BUSINESS
Cortland Savings Bank and subsidiary (the "Bank") are organized under the
laws of New York. The Bank is subject to regulation by the New York State
Banking Department and the Federal Deposit Insurance Corporation (FDIC) and is a
mutual savings bank. The financial services subsidiary has been inactive since
its formation in 1986. The Bank's lending activity is concentrated in Cortland
County and surrounding areas.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Cortland
Savings Bank and its wholly-owned subsidiary, Cortland Financial Services, Inc.
All significant intercompany balances and transactions have been eliminated in
consolidation.
The balance sheet as of March 31, 1998 and the related statements of income
and cash flows for the three month periods ended March 31, 1998 and 1997 and
changes in net worth for the three month period ended March 31, 1998 are
unaudited and, in the opinion of management, all adjustments (consisting of
normal recurring accruals) necessary for a fair presentation as of March 31,
1998 and for the results for the unaudited periods have been made.
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles. Certain prior year amounts have been
reclassified to conform to the current year's classifications. A description of
the significant accounting policies is presented below. In preparing the
consolidated financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the balance
sheet and revenues and expenses for the period. Actual results could differ from
those estimates.
(B) CASH AND CASH EQUIVALENTS
Cash and cash equivalents include vault cash, amounts due from banks and
Federal funds sold which represents short-term highly liquid investments.
(C) SECURITIES
The Bank classifies its debt securities as either available-for-sale or
held-to-maturity as the Bank does not hold any securities considered to be
trading. Equity securities are classified as available-for-sale. Held-
to-maturity securities are those debt securities the Bank has the ability and
intent to hold until maturity. All other debt securities are classified as
available-for-sale.
Available-for-sale securities are recorded at fair value. Held-to-maturity
securities are recorded at amortized cost. Unrealized holding gains and losses,
net of the related tax effect, on available-for-sale securities are excluded
from earnings and reported as a separate component of net worth until realized.
Transfers of securities between categories are recorded at fair value at the
date of transfer.
F-7
<PAGE>
CORTLAND SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)
AND YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A decline in the fair value of an available-for-sale or held-to-maturity
security that is deemed to be other than temporary results in a charge to
earnings resulting in the establishment of a new cost basis for the security.
Premiums and discounts are amortized or accreted over the life of the
related security as an adjustment to yield using the interest method. Dividend
and interest income are recognized when earned. Realized gains and losses on
securities are included in earnings and are calculated using the specific
identification method, for determining the cost of the securities sold.
(D) LOANS
Loans are reported at the principal amount outstanding, net of deferred
fees. Fees and certain direct origination costs related to lending activities
are recognized using the interest method over the lives of the loans. Management
has the ability and intent to hold its loans to maturity except for education
loans which are sold to a third party upon reaching repayment status.
The accrual of interest on loans (including impaired loans) is generally
discontinued and previously accrued interest is reversed when loan payments are
90 days or more past due or when, by the judgment of management, collectibility
becomes uncertain. Subsequent recognition of income occurs only to the extent
that payment is received. Loans are returned to an accrual status when both
principal and interest are current and the loan is determined to be performing
in accordance with the applicable loan terms.
(E) ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses consists of the provision charged to
operations based upon past loan loss experience, management's evaluation of the
loan portfolio under current economic conditions and such other factors that
require current recognition in estimating loan losses. Loan losses and
recoveries of loans previously written-off are charged or credited to the
allowance as incurred or realized, respectively.
Management believes that the allowance for loan losses is adequate.
Management uses presently available information to recognize losses on loans;
however, future additions to the allowance may be necessary based on changes in
economic conditions. In addition, various regulatory agencies, as an integral
part of their examination process, periodically review the Bank's allowance for
loan losses 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.
The Bank estimates losses on impaired loans based on the present value of
expected future cash flows (discounted at the loan's effective interest rate) or
the fair value of the underlying collateral if the loan is collateral dependent.
An impairment loss exists if the recorded investment in a loan exceeds the value
of the loan as measured by the aforementioned methods. A loan is considered
impaired when it is probable that the Bank will be unable to collect all amounts
due according to the contractual terms of the loan agreement. Generally, all
commercial mortgage loans and commercial loans in a delinquent payment status
(90 days or more delinquent) are considered impaired. Residential mortgage
loans, consumer loans, home equity lines of credit and education loans are
evaluated collectively since they are homogenous and generally carry smaller
individual balances. Impairment losses are included as a component of the
allowance for loan losses. The Bank recognizes interest income on impaired loans
using the cash basis of
F-8
<PAGE>
CORTLAND SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)
AND YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
income recognition. Cash receipts on impaired loans are generally applied
according to the terms of the loan agreement, or as a reduction of principal,
based upon management judgment and the related factors discussed above.
(F) REAL ESTATE OWNED
Real estate acquired in settlement of loans is carried at the lower of the
unpaid loan balance or fair value less estimated costs to sell. Write-downs from
the unpaid loan balance to fair value at the time of foreclosure are charged to
the allowance for loan losses. Subsequent write-downs to fair value, net of
disposal costs, are charged to other expenses.
(G) PREMISES AND EQUIPMENT
Land is carried at cost and buildings and improvements and furniture and
equipment are carried at cost less accumulated depreciation. Depreciation is
computed on the straight-line method over the estimated useful lives of the
assets (3-39 years for building and improvements; 3-7 years for furniture and
equipment.)
(H) EMPLOYEE BENEFIT PLANS
The Bank maintains a non-contributory defined benefit pension plan that
covers substantially all employees. The benefits under the pension plan are
based on the employee's years of service and compensation. The Bank also has a
defined contribution 401(k) Savings Plan for all full time salaried employees.
Employees are permitted to contribute up to 10% of base pay to the Savings Plan,
subject to certain limitations. The Bank matches 75% of each employee's
contribution up to 6%.
(I) POSTRETIREMENT BENEFITS
The Bank maintains a non-contributory health and life insurance plan that
provides postretirement benefits to current and retired employees and certain
eligible dependents who meet minimum age and service requirements. The estimated
costs of providing benefits are accrued over the years the employees render
services necessary to earn those benefits.
(J) INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in the period that
includes the enactment date.
(K) COMPREHENSIVE INCOME
On January 1, 1998, the Bank adopted the provisions of Statement of
Financial Accounting Standards No. 130, REPORTING COMPREHENSIVE INCOME. This
statement establishes standards for reporting and display
F-9
<PAGE>
CORTLAND SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)
AND YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
of comprehensive income and its components. Comprehensive income includes the
reported net income of a bank adjusted for items that are currently accounted
for as direct entries to net worth, such as the mark to market adjustment on
securities available for sale, foreign currency items and minimum pension
liability adjustments. At the Bank, comprehensive income represents net income
plus other comprehensive income, which consists of the net change in unrealized
gains or losses on securities available for sale for the period. Accumulated
other comprehensive income represents the net unrealized gains or losses on
securities available for sale as of the balance sheet dates. Comprehensive
income for the three-month periods ended March 31, 1998 and 1997 (unaudited) was
$654,000 and $242,000, respectively.
The following summarizes the components of other comprehensive income (in
thousands):
<TABLE>
<CAPTION>
THREE-MONTHS
ENDED YEARS ENDED DECEMBER 31,
MARCH 31,
-------------------- -------------------------------
1998 1997 1997 1996 1995
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Other comprehensive income, before tax:
Net unrealized holding gain on securities............................... $ 283 $ (275) $ 575 $ (68) $ 398
Reclassification adjustment for (gains) losses included in net income... (6) (7) (46) (15) (16)
--------- --------- --------- --- ---------
Other comprehensive income, before tax.................................... 277 (282) 529 (83) 382
Income tax expense related to items of other comprehensive income......... 116 (114) 206 (33) 152
--------- --------- --------- --- ---------
Other comprehensive income, net of tax.................................... $ 161 $ (168) $ 323 $ (50) $ 230
--------- --------- --------- --- ---------
--------- --------- --------- --- ---------
</TABLE>
(L) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Bank does not engage in the use of derivative financial instruments. The
Bank's off-balance sheet financial instruments are limited to commitments to
extend credit.
(M) NEW ACCOUNTING STANDARDS
Effective January 1, 1998, the Bank adopted the remaining provisions of
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
which relate to the accounting for securities lending, repurchase agreements,
and other secured financing activities. These provisions, which were delayed for
implementation by SFAS No. 127, are not expected to have a material impact on
the Bank. In addition, the FASB is considering certain amendments and
interpretations of SFAS No. 125 which, if enacted in the future, could affect
the accounting for transactions within their scope.
F-10
<PAGE>
CORTLAND SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)
AND YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(3) SECURITIES
Securities are summarized as follows (in thousands):
<TABLE>
<CAPTION>
MARCH 31, 1998
--------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ----------- ------------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Government securities....................................... $ 16,543 $ 97 $ 18 $ 16,622
Mortgage-backed securities....................................... 11,886 123 28 11,981
Corporate debt securities........................................ 14,485 45 18 14,512
----------- ----------- --- ---------
Total debt securities.......................................... 42,914 265 64 43,115
Equity securities................................................ 1,340 1,031 11 2,360
----------- ----------- --- ---------
$ 44,254 $ 1,296 $ 75 $ 45,475
----------- ----------- --- ---------
----------- ----------- --- ---------
Held-to-maturity:
U.S. Government securities....................................... 2,001 1 5 1,997
Mortgage-backed securities....................................... 7,835 82 89 7,828
Corporate debt securities........................................ 2,359 18 1 2,376
State and municipal sub-divisions................................ 284 4 -- 288
----------- ----------- --- ---------
$ 12,479 $ 105 $ 95 $ 12,489
----------- ----------- --- ---------
----------- ----------- --- ---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ----------- ------------- ---------
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Government securities....................................... $ 16,041 $ 105 $ -- $ 16,146
Mortgage-backed securities....................................... 12,144 120 53 12,211
Corporate debt securities........................................ 13,819 46 4 13,861
----------- ----------- --- ---------
Total debt securities.......................................... 42,004 271 57 42,218
Equity securities................................................ 1,192 748 18 1,922
----------- ----------- --- ---------
$ 43,196 $ 1,019 $ 75 $ 44,140
----------- ----------- --- ---------
----------- ----------- --- ---------
Held-to-maturity:
U.S. Government securities....................................... $ 1,992 $ 3 $ -- $ 1,995
Mortgage-backed securities....................................... 8,279 87 92 8,274
Corporate debt securities........................................ 1,854 16 -- 1,870
State and municipal sub-divisions................................ 425 5 -- 430
----------- ----------- --- ---------
$ 12,550 $ 111 $ 92 $ 12,569
----------- ----------- --- ---------
----------- ----------- --- ---------
</TABLE>
F-11
<PAGE>
CORTLAND SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)
AND YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(3) SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ----------- ------------- ---------
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Government securities....................................... $ 19,485 $ 63 $ 5 $ 19,543
Mortgage-backed securities....................................... 11,833 56 167 11,722
Corporate debt securities........................................ 13,233 44 25 13,252
----------- ----------- ----- ---------
Total debt securities.......................................... 44,551 163 197 44,517
Equity securities................................................ 628 452 3 1,077
----------- ----------- ----- ---------
$ 45,179 $ 615 $ 200 $ 45,594
----------- ----------- ----- ---------
----------- ----------- ----- ---------
Held-to-maturity:
Mortgage-backed securities....................................... $ 10,899 $ 64 $ 197 $ 10,766
State and municipal sub-divisions................................ 858 9 -- 867
----------- ----------- ----- ---------
$ 11,757 $ 73 $ 197 $ 11,633
----------- ----------- ----- ---------
----------- ----------- ----- ---------
</TABLE>
The following table presents the carrying value and fair value of debt
securities at March 31, 1998 (unaudited), based on the earlier of call or
maturity date (in thousands):
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
----------- ---------
<S> <C> <C>
Available-for-sale:
Due within one year.................................................. $ 7,731 $ 7,752
Due after one year through five years................................ 22,300 22,392
Due after five years through ten years............................... 997 990
Due after ten years.................................................. -- --
----------- ---------
31,028 31,134
Mortgage-backed securities......................................... 11,886 11,981
----------- ---------
$ 42,914 $ 43,115
----------- ---------
----------- ---------
Held-to-maturity:
Due within one year.................................................. $ -- $ --
Due after one year through five years................................ 4,644 4,661
Due after five years through ten years............................... -- --
Due after ten years.................................................. -- --
----------- ---------
4,644 4,661
Mortgage-backed securities......................................... 7,835 7,828
----------- ---------
$ 12,479 $ 12,489
----------- ---------
----------- ---------
</TABLE>
F-12
<PAGE>
CORTLAND SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)
AND YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(3) SECURITIES (CONTINUED)
The following table presents the carrying value and fair value of debt
securities at December 31, 1997, based on the earlier of call or maturity date
(in thousands):
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
----------- ---------
<S> <C> <C>
Available-for-sale:
Due within one year.................................................. $ 11,075 $ 11,096
Due after one year through five years................................ 17,784 17,908
Due after five years through ten years............................... 1,001 1,003
Due after ten years.................................................. -- --
----------- ---------
29,860 30,007
Mortgage-backed securities......................................... 12,144 12,211
----------- ---------
$ 42,004 $ 42,218
----------- ---------
----------- ---------
Held-to-maturity:
Due within one year.................................................. $ 1,638 $ 1,639
Due after one year through five years................................ 2,633 2,656
Due after five years through ten years............................... -- --
Due after ten years.................................................. -- --
----------- ---------
4,271 4,295
Mortgage-backed securities......................................... 8,279 8,274
----------- ---------
$ 12,550 $ 12,569
----------- ---------
----------- ---------
</TABLE>
Gross gains of $6,000 and $7,000 were realized on sales of securities during
the three months ended March 31, 1998 and 1997 (unaudited), respectively. There
were no gross losses realized on sales of securities during the three months
ended March 31, 1998 and 1997 (unaudited). Gross gains of $46,000 and $15,000
were realized on sales of securities in 1997 and 1996, respectively. There were
no gross losses realized on sales of securities in 1997 and 1996. Gross gains
and losses of $47,000 and $31,000, respectively, were realized on sales of
securities in 1995.
In February 1995, the Superintendent of Banks for the State of New York
seized Nationar, a check-clearing and trust company, freezing all of Nationar's
assets. The Bank held $100,000 of Nationar capital debentures. Based on
information set forth in certain publicly available documents, at that time,
management believed that there was a reasonable likelihood that the Bank would
not recover all amounts owed by Nationar. Accordingly, management established a
reserve of $100,000 for the Nationar capital debentures as of December 31, 1995.
During 1997, the Bank recovered $45,000 on the Nationar capital debenture.
Securities carried at $511,000 at March 31, 1998 (unaudited) and December
31, 1997 were pledged for other purposes required by law.
F-13
<PAGE>
CORTLAND SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)
AND YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(4) LOANS RECEIVABLE
Loans receivable are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
MARCH 31, 1998 ---------- ----------
--------------
(UNAUDITED)
<S> <C> <C> <C>
Mortgage loans:
Residential........................................ $ 96,218 $ 96,328 $ 94,994
Partially guaranteed by VA......................... 384 444 590
Insured by FHA..................................... 829 847 1,041
Commercial......................................... 30,560 30,867 35,119
-------------- ---------- ----------
127,991 128,486 131,744
-------------- ---------- ----------
Other loans:
Commercial......................................... 6,528 7,049 8,020
Automobile......................................... 9,050 8,902 6,378
Home equity line of credit......................... 6,139 5,924 5,882
Property improvement............................... 828 907 1,031
Guaranteed student................................. 1,708 1,507 1,552
Other consumer..................................... 4,391 5,031 6,289
-------------- ---------- ----------
28,644 29,320 29,152
-------------- ---------- ----------
Total loans...................................... 156,635 157,806 160,896
Less:
Net deferred fees.................................. 205 241 333
-------------- ---------- ----------
$ 156,430 $ 157,565 $ 160,563
-------------- ---------- ----------
-------------- ---------- ----------
</TABLE>
In an effort to accelerate resolution of certain of its problem assets, in
December 1997 the Bank identified certain loans for bulk sale. Prior to December
31, 1997 the carrying value of the loans anticipated to be sold was
approximately $4,247,000, of which approximately $3,484,000 were then non-
performing and approximately $763,000 were then performing.
In anticipation of the bulk sale, the loans to be sold in such transaction
have been included on the Bank's consolidated balance sheet as of December 31,
1997 as loans held for sale at their fair value, based on an estimated sales
price. The Bank charged-off $1,698,000 against the allowance for loan losses to
reflect the fair value of the loans. In February 1998, the Bank transferred an
additional $661,000 (unaudited) of loans to loans held for sale and completed
the bulk transaction in March 1998. The proceeds of the sale approximated the
carrying value of the loans.
F-14
<PAGE>
CORTLAND SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)
AND YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(4) LOANS RECEIVABLE (CONTINUED)
Changes in the allowance for loan losses are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
-------------------- -------------------------------
1998 1997 1997 1996 1995
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period............. $ 2,143 $ 1,952 $ 1,952 $ 2,002 $ 1,752
Provision charged to operations............ 75 225 3,300 1,380 600
Recoveries................................. 51 105 170 283 255
Loans charged off.......................... (39) (202) (3,279) (1,713) (605)
--------- --------- --------- --------- ---------
Balance at end of period................... $ 2,230 $ 2,080 $ 2,143 $ 1,952 $ 2,002
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
At March 31, 1998, December 31, 1997 and 1996, impaired loans totaled
$756,000 (unaudited), $2,742,000 (of which $1,208,000 were loans held for sale)
and $3,381,000, respectively. At March 31, 1998, impaired loans included
$756,000 (unaudited) of loans for which the related allowance for loan losses
was $181,000 (unaudited). At December 31, 1997, impaired loans included $895,000
of loans for which the related allowance for loan losses was $234,000 and
$1,847,000 of impaired loans (of which $1,208,000 were loans held for sale) with
no related allowance for loan losses. At December 31, 1996, impaired loans
included $920,000 of loans for which the related allowance for loan losses was
$289,000 and $2,461,000 of impaired loans with no related allowance for loan
losses as a result of the adequacy of collateral values and cash flow analysis.
The average recorded investment in impaired loans was $1,749,000 and $3,131,000
during the three months ended March 31, 1998 and 1997 (unaudited), respectively
and $2,699,000, $3,514,000 and $3,334,000 during the years ended December 31,
1997, 1996 and 1995, respectively. Interest income recognized on impaired loans
was $52,000 and $33,000 during the three months ended March 31, 1998 and 1997
(unaudited), respectively and $290,000, $223,000 and $250,000 during the years
ended December 31, 1997, 1996 and 1995, respectively, all of which was
recognized using the cash basis of income recognition.
The principal balances of loans not accruing interest amounted to
approximately $1,458,000 (unaudited), $3,785,000 (of which $2,276,000 were loans
held for sale) and $3,633,000 at March 31, 1998, December 31, 1997 and 1996,
respectively. Interest income that would have been recorded if the non-accruing
loans had been performing in accordance with their original terms was
approximately $37,000 and $110,000 during the three month periods ended March
31, 1998 and 1997 (unaudited), respectively, and $402,000, $307,000 and $107,000
during the years ended December 31, 1997, 1996 and 1995, respectively.
In the ordinary course of business, the Bank makes loans to non-trustee
officers and employees, as well as to other related parties on substantially the
same terms, including interest rate and collateral, as those prevailing at the
same time for comparable transactions with other customers and do not involve
more than normal risk of collectibility or present other unfavorable features.
F-15
<PAGE>
CORTLAND SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)
AND YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(4) LOANS RECEIVABLE (CONTINUED)
A summary of the changes in these outstanding loans is as follows (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
--------------------
1997 1996
THREE MONTHS --------- ---------
ENDED MARCH 31,
1998
---------------
(UNAUDITED)
<S> <C> <C> <C>
Balance at beginning of period............................ $ 2,207 $ 2,459 $ 2,248
New loans and increase in existing loans.................. 269 459 587
Loan principal repayments................................. (409) (711) (376)
------ --------- ---------
Balance at end of period.................................. $ 2,067 $ 2,207 $ 2,459
------ --------- ---------
------ --------- ---------
</TABLE>
(5) PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
THREE MONTHS --------- ---------
ENDED MARCH 31,
1998
---------------
(UNAUDITED)
<S> <C> <C> <C>
Land...................................................... $ 886 $ 836 $ 836
Buildings and improvements................................ 2,772 2,937 2,914
Furniture and equipment................................... 1,924 2,825 2,495
------ --------- ---------
5,582 6,598 6,245
Less accumulated depreciation............................. 2,136 3,151 2,590
------ --------- ---------
$ 3,446 $ 3,447 $ 3,655
------ --------- ---------
------ --------- ---------
</TABLE>
Depreciation and amortization expense amounted to $118,000 and $146,000
during the three months ended March 31, 1998 and 1997 (unaudited), respectively
and $579,000, $507,000 and $497,000 during the years ended December 31, 1997,
1996 and 1995, respectively.
(6) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
MARCH 31, 1998 --------- ---------
---------------
(UNAUDITED)
<S> <C> <C> <C>
Loans..................................................... $ 1,010 $ 1,081 $ 1,248
Securities................................................ 650 598 664
------ --------- ---------
$ 1,660 $ 1,679 $ 1,912
------ --------- ---------
------ --------- ---------
</TABLE>
F-16
<PAGE>
CORTLAND SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)
AND YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(7) DEPOSITS
At March 31, 1998 and December 31, 1997 and 1996, the aggregate amounts of
time deposits in denominations of $100,000 or more were approximately
$13,744,000 (unaudited), $10,164,000 and $15,459,000, respectively.
Contractual maturities of savings certificates are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997
MARCH 31, 1998 -----------------
--------------
(UNAUDITED)
<S> <C> <C>
Within one year........................................... $ 64,010 $ 66,304
One through two years..................................... 17,843 17,125
Two through three years................................... 14,481 12,895
Three through four years.................................. 4,461 5,321
Four through five years................................... 7,059 6,530
Five years and over....................................... -- 83
-------------- --------
Total savings certificates................................ $ 107,854 $ 108,258
-------------- --------
-------------- --------
</TABLE>
Interest expense on deposits is summarized as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
-------------------- -------------------------------
1998 1997 1997 1996 1995
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Passbook, statement savings and club
accounts................................... $ 474 $ 467 $ 1,936 $ 1,922 $ 1,991
Savings certificates......................... 1,439 1,494 5,983 6,354 6,005
Money market accounts........................ 57 63 243 288 339
NOW accounts................................. 40 40 166 194 227
--------- --------- --------- --------- ---------
$ 2,010 $ 2,064 $ 8,328 $ 8,758 $ 8,562
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
(8) BORROWINGS
During 1996, the Bank became a member of the Federal Home Loan Bank (FHLB).
As a member, the Bank is required to own capital stock in the FHLB and is
authorized to apply for advances from the FHLB. At March 31, 1998 and December
31, 1997 the Bank may borrow up to $26,058,000 (unaudited) and $24,558,000,
respectively from the FHLB.
During the three-month period ended March 31, 1998 (unaudited), 1997 and
1996, the Bank did not hold borrowings with the FHLB.
F-17
<PAGE>
CORTLAND SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)
AND YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(9) INCOME TAXES
Income taxes were allocated as follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31,
MARCH 31,
-------------------- -------------------------------
1998 1997 1997 1996 1995
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Income before income tax expense (benefit)........... $ 333 $ 311 $ (16) $ 853 $ 1,400
Changes in net worth, for changes in unrealized gains
on securities...................................... 116 112 206 (33) 153
--------- --------- --------- --------- ---------
$ 449 $ 423 $ 190 $ 820 $ 1,553
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
The components of income tax expense (benefit) attributable to income from
operations are (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
-------------------- -------------------------------
1998 1997 1997 1996 1995
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current:
Federal........................................ $ (283) $ 254 $ 672 $ 989 $ 1,247
State.......................................... (90) 66 181 206 476
--------- --------- --------- --------- ---------
(373) 320 853 1,195 1,723
--------- --------- --------- --------- ---------
Deferred:
Federal........................................ 546 (41) (698) (298) (237)
State.......................................... 160 32 (171) (44) (86)
--------- --------- --------- --------- ---------
706 (9) (869) (342) (323)
--------- --------- --------- --------- ---------
$ 333 $ 311 $ (16) $ 853 $ 1,400
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
F-18
<PAGE>
CORTLAND SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)
AND YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(9) INCOME TAXES (CONTINUED)
Actual tax expense (benefit) attributable to income before income taxes
differed from "expected" tax expense (benefit), computed by applying the U.S.
Federal statutory tax rate of 34% to income before income tax as follows (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31,
MARCH 31,
-------------------- -------------------------------
1998 1997 1997 1996 1995
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Computed "expected" tax expense (benefit)................................ $ 281 $ 245 $ 19 $ 754 $ 1,130
Increase (decrease) in income taxes resulting from:
State taxes, net of Federal tax benefits............................. 47 61 7 107 257
Non-taxable interest income.......................................... (7) (10) (35) (48) (37)
Non-deductible expenses.............................................. 4 4 16 20 --
Other items, net..................................................... 8 11 (23) 20 50
--------- --------- --------- --------- ---------
$ 333 $ 311 $ (16) $ 853 $ 1,400
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
MARCH 31, 1998 --------- ---------
--------------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
Non-deductible reserves..................................................... $ 25 $ 25 $ 44
Non-accrual interest........................................................ 27 126 53
Losses on real estate owned................................................. 119 124 87
Loan bulk sale.............................................................. -- 666 --
Allowance for loan losses................................................... 1,153 1,118 1,047
Net deferred loan fees...................................................... 115 127 135
Postretirement benefit obligation........................................... 648 638 619
Deferred trustee fees....................................................... 38 30 --
Other....................................................................... 31 31 31
------- --------- ---------
Total gross deferred tax assets........................................... 2,156 2,885 2,016
------- --------- ---------
Deferred tax liabilities:
Accumulated depreciation on premises and equipment.......................... (96) (97) (122)
Prepaid pension cost........................................................ (322) (321) (292)
Unrealized gains on securities.............................................. (489) (373) (167)
Securities discount accretion............................................... (45) (62) (31)
Tax allowance for loan losses in excess of base year amount................. (118) (124) (159)
------- --------- ---------
Total gross deferred tax liabilities...................................... (1,070) (977) (771)
------- --------- ---------
Net deferred tax assets................................................... $ 1,086 $ 1,908 $ 1,245
------- --------- ---------
------- --------- ---------
</TABLE>
F-19
<PAGE>
CORTLAND SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)
AND YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(9) INCOME TAXES (CONTINUED)
Realization of deferred tax assets is dependent upon the generation of
future taxable income or the existence of sufficient taxable income within the
carryback period. A valuation allowance is provided when it is more likely than
not that some portion of the deferred tax assets will not be realized. In
assessing the need for a valuation allowance, management considers the scheduled
reversal of the deferred tax liabilities, the level of historical taxable income
and projected future taxable income over the periods in which the temporary
differences comprising the deferred tax assets will be deductible. Management
believes that no valuation allowance is necessary.
Included in the surplus fund at December 31, 1997 is approximately
$3,700,000 representing aggregate provisions for loan losses taken under the
Internal Revenue Code. Use of these reserves to pay dividends in excess of
earnings and profits or to redeem stock, or if the institution fails to qualify
as a bank for Federal income tax purposes, would result in taxable income to the
Bank.
(10) EMPLOYEE BENEFITS
The status of the pension plan at the latest valuation dates of October 1,
is as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Actuarial present value of accumulated benefit obligation:
Vested....................................................................................... $ 2,951 $ 2,492
Non-vested................................................................................... 16 113
--------- ---------
Total accumulated benefit obligation....................................................... $ 2,967 $ 2,605
--------- ---------
--------- ---------
Actuarial present value of projected benefit obligation for service rendered to date........... 3,490 3,296
Plan assets at fair value; primarily listed stocks, cash and short-term investments............ 5,068 4,194
--------- ---------
Plan assets in excess of projected benefit obligation.......................................... 1,578 898
Unrecognized transition asset.................................................................. 16 (25)
Unrecognized net gain resulting from past experience different from that assumed............... (788) (152)
--------- ---------
Prepaid pension cost (included in other assets).............................................. $ 806 $ 721
--------- ---------
--------- ---------
</TABLE>
Net pension expense for the years ended December 31, included in salaries
and employee benefits, is detailed as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Service cost--benefits earned during the period..................... $ 87 $ 84 $ 75
Interest cost on projected benefit obligation....................... 242 236 223
Actual return on plan assets........................................ (970) (497) (638)
Net amortization and deferral....................................... 620 176 371
--------- --------- ---------
Net pension (benefit) expense..................................... $ (21) $ (1) $ 31
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-20
<PAGE>
CORTLAND SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)
AND YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(10) EMPLOYEE BENEFITS (CONTINUED)
Assumptions used to develop the net periodic pension information were:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Discount rate.................................................... 7.75% 7.50% 8.25%
Expected long-term rate of return on plan assets................. 8.00% 8.00% 8.00%
Rate of increase in compensation levels.......................... 5.00% 5.50% 6.00%
</TABLE>
Contributions to the defined contribution 401(k) Savings Plan were
approximately $16,000 and $17,000 during the three months ended March 31, 1998
and 1997 (unaudited), respectively and $64,000, $63,000 and $68,000 during the
years ended December 31, 1997, 1996 and 1995, respectively.
(11) OTHER POSTRETIREMENT BENEFIT PLANS
The following table presents the plan's funded status as of October 1, the
date of the most recent valuation (in thousands):
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees and dependents................................................ $ 786 $ 567
Fully eligible active plan participants and dependents................. 137 283
Other active plan participants......................................... 674 657
--------- ---------
Total accumulated postretirement benefit obligation.................. $ 1,597 $ 1,507
--------- ---------
--------- ---------
Accumulated postretirement benefit obligation............................ (1,597) (1,507)
Plan assets at fair value................................................ -- --
--------- ---------
Funded status............................................................ (1,597) (1,507)
Unrecognized gain........................................................ (2) (19)
--------- ---------
Accrued postretirement benefit cost included in other liabilities.... $ (1,599) $ (1,526)
--------- ---------
--------- ---------
</TABLE>
Net periodic postretirement benefit cost includes the following components
(in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Service cost--benefits earned during the period....................... $ 37 $ 41 $ 34
Interest cost......................................................... 107 111 103
--------- --------- ---------
Net periodic postretirement benefit cost............................ $ 144 $ 152 $ 137
--------- --------- ---------
--------- --------- ---------
</TABLE>
The assumptions are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Discount rate.................................................. 7.75% 7.50% 8.25%
Average health care cost trend rate............................ 8.00% 10.00% 10.50%
First year ultimate trend rate (year 2005)..................... 5.00% 5.50% 5.50%
Salary increase................................................ 5.50% 5.50% 6.00%
</TABLE>
F-21
<PAGE>
CORTLAND SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)
AND YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(11) OTHER POSTRETIREMENT BENEFIT PLANS (CONTINUED)
The effect of a one percentage point increase in the assumed health care
cost trend rates for each future year on the aggregate of the service and
interest cost components of net periodic postretirement health care benefit cost
and the accumulated postretirement benefit obligation for health care benefits
would increase these amounts for 1997 by approximately 18%, to $170,000, and by
approximately 16%, to $1,853,000, respectively.
(12) COMMITMENTS AND CONTINGENCIES
The Bank is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments consist of commitments to extend credit and involve,
to varying degrees, elements of credit, market and interest rate risk in excess
of the amounts recognized in the consolidated balance sheet. Credit risk
represents the accounting loss that would be recognized at the reporting date if
obligated counterparties failed completely to perform as contracted. Market risk
represents risk that future changes in market prices make financial instruments
less valuable.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since some of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Bank upon extension of credit, is based on management's
evaluation of the customer's financial position. Collateral held varies, but may
include real estate, accounts receivable, inventory, property, plant and
equipment and income-producing commercial properties. Substantially all
commitments to extend credit, if exercised, will represent loans secured by real
estate.
The Bank was committed to originate fixed and adjustable rate mortgages of
approximately $3,809,000 (unaudited), $3,667,000 and $1,440,000 at March 31,
1998, December 31, 1997 and 1996, respectively. Unused lines of credit, which
includes home equity, consumer, commercial and credit cards, amounted to
$9,600,000 (unaudited) and $9,155,000 at March 31, 1998 and December 31, 1997,
respectively.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for loan commitments is represented by
the contractual or notional amount of these instruments. The Bank uses the same
credit policies in making commitments as it does for on-balance sheet
instruments. The Bank controls its credit risk through credit approvals, limits,
and monitoring procedures.
In the normal course of business, there are various outstanding legal
proceedings. In the opinion of management, the aggregate amount involved in such
proceedings is not material to the financial condition or results of operations
of the Bank.
(13) CONCENTRATIONS OF CREDIT
A substantial portion of the Bank's loans are mortgage and consumer loans in
Central New York State. Accordingly, the ultimate collectibility of a
substantial portion of the Bank's loan portfolio is
F-22
<PAGE>
CORTLAND SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)
AND YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(13) CONCENTRATIONS OF CREDIT (CONTINUED)
susceptible to changes in market conditions in this area. A majority of the
Bank's loan portfolio is secured by real estate.
The Bank's concentrations of credit risk are disclosed in the schedule of
loan classifications. Other than general economic risks, management is not aware
of any material concentrations of credit risk to any industry or individual
borrower.
(14) REGULATORY MATTERS
The Bank is regulated by the Federal Deposit Insurance Corporation (FDIC)
and the State of New York Banking Department and is subject to the capital
adequacy requirements of the FDIC.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific guidelines that involve
quantitative measures of assets, liabilities, and certain off-balance sheet
items as calculated under regulatory accounting practices. Capital amounts are
also subject to qualitative judgments by the FDIC about components, risk
weightings, and other factors. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary, actions by
the FDIC that, if undertaken, could have a direct material effect on the Bank's
financial statement.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA),
established capital levels for which insured institutions are categorized as
well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, or critically undercapitalized.
As of December 31, 1997 and 1996, the most recent notification from the FDIC
categorized the bank as well capitalized under the regulatory framework for
prompt corrective actions. To be categorized as well capitalized, the Bank must
meet the minimum ratios as set forth in the table. There have been no conditions
or events since that notification that management believes have changed the
Bank's category. Management believes, as of December 31, 1997, that the Bank
meets all capital adequacy requirements to which it is subject.
F-23
<PAGE>
CORTLAND SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)
AND YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(14) REGULATORY MATTERS (CONTINUED)
The following is a summary of the Bank's actual capital amounts and ratios
compared to the FDIC minimum capital adequacy requirements and the FDIC
requirements for classification as a well capitalized institution under prompt
corrective action provisions (in thousands):
<TABLE>
<CAPTION>
TO BE CLASSIFIED AS
MINIMUM CAPITAL WELL-CAPITALIZED UNDER
ADEQUACY REQUIREMENTS PROMPT CORRECTIVE
ACTUAL ACTION PROVISIONS
-------------------- --------------------- ----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------- --------- --------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
AS OF MARCH 31, 1998 (UNAUDITED)
Total capital (to risk weighted assets)................ $ 32,408 23.19% $ 11,181 a8.00% $ 13,976 a10.00%
Tier 1 Capital (to risk weighted assets)............... 30,662 21.94% 5,590 a4.00% 8,385 a6.00%
Tier 1 Capital (to average assets)..................... 30,662 13.26% 9,246 a4.00% 11,558 a5.00%
AS OF DECEMBER 31, 1997
Total capital (to risk weighted assets)................ $ 31,938 22.56% $ 11,325 a8.00% $ 14,156 a10.00%
Tier 1 Capital (to risk weighted assets)............... 30,169 21.31% 5,662 a4.00% 8,493 a6.00%
Tier 1 Capital (to average assets)..................... 30,169 12.89% 9,363 a4.00% 11,704 a5.00%
AS OF DECEMBER 31, 1996
Total capital (to risk weighted assets)................ $ 31,813 23.17% $ 10,982 a8.00% $ 13,728 a10.00%
Tier 1 Capital (to risk weighted assets)............... 30,097 21.92% 5,491 a4.00% 8,237 a6.00%
Tier 1 Capital (to average assets)..................... 30,097 12.73% 9,457 a4.00% 11,822 a5.00%
</TABLE>
On August 14, 1995, the FDIC performed a review of the Bank's compliance
with governing consumer and civil rights laws, the Community Reinvestment Act
(CRA) and the Bank Secrecy Act. The review encompassed: Truth in Lending; Truth
in Savings; Real Estate Settlement Procedures; Fair Credit Reporting; Electronic
Fund Transfers; Right to Financial Privacy; Expedited Funds Availability; Equal
Credit Opportunity; Credit Practices Rule, Preservation of Consumer Claims and
Defenses; Flood Insurance; Interest on Deposits; and Fair Housing. On December
26, 1995, the Bank received the FDIC's written report on the examination and a
related Memorandum of Understanding.
As recommended in the Memorandum of Understanding, the Board of Trustees of
the Bank developed a written compliance policy which included appropriate
training of personnel in all Bank functions related to compliance, implementing
internal review procedures to ensure ongoing compliance, providing financial
training for the compliance officer, and instituting a formal review process
whereby loan disclosure statements are reviewed prior to issuance. As a result
of the examination, the Bank is required to submit progress reports describing
specific actions taken with regard to each violation on a quarterly basis, until
further notice. No enforcement action by the FDIC is contemplated, however,
nothing contained in the Memorandum of Understanding prevents the FDIC from
taking further supervisory action it deems appropriate. The Memorandum of
Understanding did not have a material impact on the Bank's consolidated
financial statements.
F-24
<PAGE>
CORTLAND SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)
AND YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(15) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Bank in estimating
fair values of financial instruments:
CASH AND CASH EQUIVALENTS: The fair values are considered to
approximate the carrying values, as reported in the balance sheet.
SECURITIES: Fair values of securities are based on exchange
quoted market prices, where available. If quoted market prices are
not available, fair values are based on quoted market prices of
similar instruments.
LOANS AVAILABLE FOR SALE: The fair value of loans available for
sale on an aggregate basis, are based on quoted market prices.
LOANS RECEIVABLE: For variable rate loans that reprice frequently
and loans due on demand with no significant change in credit risk,
fair values are considered to approximate carrying values. The
fair values for certain mortgage loans (e.g., one-to-four family
residential) and other consumer loans are based on quoted market
prices of similar loans sold on the secondary market, adjusted for
differences in loan characteristics. The fair values for other
loans (e.g., commercial real estate and rental property mortgage
loans) are estimated using discounted cash flow analyses, using
interest rates currently being offered for loans with similar
terms to borrowers of similar credit rating. The carrying amount
of accrued interest approximates its fair value.
FHLB STOCK: The carrying value of this instrument, which is
redeemable at par, approximates fair value.
OFF-BALANCE-SHEET INSTRUMENTS: Fair values for the Bank's
off-balance-sheet instruments (lines of credit and commitments to
fund loans) are based on fees currently charged to enter into
similar agreements, taking into account the remaining terms of the
agreements and the counterparties' credit standing. The fair value
of these financial instruments is immaterial and has therefore
been excluded from the table below.
DEPOSITS: The fair values of demand deposits (interest and
non-interest checking), passbook, statement savings, club and
money market accounts are, by definition, equal to the amount
payable on demand at the reporting date (i.e., their carrying
amounts). Fair values for fixed-rate certificates of deposits and
individual retirement accounts are estimated using a discounted
cash flow calculation that applies interest rates currently being
offered on these products to a schedule of aggregated expected
monthly maturities on time deposits.
F-25
<PAGE>
CORTLAND SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)
AND YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(15) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The estimated carrying values and fair values of the Bank's financial
instruments are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------
MARCH 31, 1998 1997 1996
---------------------- ---------------------- ----------------------
CARRYING FAIR CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Financial assets:
Cash and cash equivalents............. $ 9,813 $ 9,813 $ 8,079 $ 8,079 $ 12,536 $ 12,536
Securities............................ 57,954 57,964 56,690 56,709 57,351 57,227
Loans held for sale................... -- -- 2,541 2,541 -- --
Loans receivable, net................. 154,200 154,440 155,422 155,657 158,611 158,954
FHLB stock............................ 1,303 1,303 1,291 1,291 1,228 1,228
Financial liabilities:
Deposits:
Demand accounts..................... 9,128 9,128 10,604 10,604 9,563 9,563
Passbook, statement savings and club
accounts.......................... 63,658 63,658 62,679 62,679 63,003 63,003
Savings certificates................ 107,854 107,683 108,258 108,099 112,642 112,520
Money market accounts............... 8,314 8,314 8,435 8,435 9,343 9,343
NOW accounts........................ 9,280 9,280 9,704 9,704 10,089 10,089
</TABLE>
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and, therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
(16) SUBSEQUENT EVENTS--ADOPTION OF PLAN OF CONVERSION (UNAUDITED)
On March 23, 1998, the Board of Trustees of the Bank, subject to regulatory
approval and approval by the depositors of the Bank, unanimously adopted a Plan
of Conversion (the Plan) to convert from a New York State chartered mutual
savings bank to a New York State chartered stock savings bank with the
concurrent formation of a holding company. The transaction is expected to be
accomplished through the sale of the holding company's common stock in an amount
equal to the pro forma market value of the Bank after giving effect to the
conversion. A subscription offering of the sale of the Holding Company's common
stock will be offered initially to the Bank's depositors and employee benefit
plans of the Bank. At the time of the conversion, the Bank will establish a
liquidation account in an amount equal to its total net worth as of the date of
the latest balance sheet appearing in the final prospectus. The liquidation
account will be maintained for the benefit of eligible depositors who continue
to maintain their accounts at the Bank after the conversion. The liquidation
account will be reduced annually to the extent that eligible depositors have
reduced their qualifying deposits. Subsequent increases will not restore an
eligible account holder's interest in the liquidation account. In the event of a
complete liquidation, each eligible depositor will be entitled to receive a
distribution from the liquidation account in an amount proportionate to the
F-26
<PAGE>
CORTLAND SAVINGS BANK AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)
AND YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(16) SUBSEQUENT EVENTS--ADOPTION OF PLAN OF CONVERSION (UNAUDITED) (CONTINUED)
current adjusted qualifying balances for accounts then held. The Bank may not
pay dividends that would reduce stockholders' equity below the required
liquidation account balance.
In connection with the conversion, the Bank proposes to create a charitable
foundation to be funded by the Holding Company by contributing a number of
authorized but unissued shares of common stock or grants of cash to the
charitable foundation, immediately following the conversion. Such contribution,
once made, will not be recoverable by the Bank or the Holding Company. The
Holding Company will recognize expense equal to the fair value of the stock in
the quarter in which the contribution occurs, which is expected to be the third
or fourth quarter of 1998. Such expense will reduce earnings and could have a
material impact on the Bank's earnings for such quarter and for 1998.
The cost of conversion and offering will be deferred and reduce the proceeds
from the shares sold in the offering. If the conversion and offering are not
completed, all costs will be charged to expense.
F-27
<PAGE>
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING MADE HEREBY, AND, IF GIVEN OR MADE,
SUCH OTHER INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY CNY FINANCIAL CORPORATION OR CORTLAND SAVINGS BANK. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING
SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM
IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF CNY FINANCIAL CORPORATION OR CORTLAND SAVINGS BANK SINCE ANY OF THE
DATES AS OF WHICH INFORMATION IS FURNISHED HEREIN OR SINCE THE DATE HEREOF.
CNY FINANCIAL
CORPORATION
(PROPOSED HOLDING COMPANY FOR CORTLAND SAVINGS BANK)
7,043,750 SHARES
COMMON STOCK
PROSPECTUS
CIBC OPPENHEIMER
TRIDENT SECURITIES, INC.
THESE SECURITIES ARE NOT DEPOSITS OR ACCOUNTS AND ARE NOT FEDERALLY INSURED OR
GUARANTEED
AUGUST , 1998
UNTIL THE LATER OF , 1998, OR 25 DAYS AFTER THE COMMENCEMENT OF THE
SUBSCRIPTION OFFERING, ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<CAPTION>
<S> <C>
SEC registration fee............................................................ $ 24,374
NASD filing fee(1).............................................................. $ 8,767
NASDAQ National Market Listing Fee(1)........................................... $ 80,000
Banking Department Conversion Application Fee................................... $ 5,000
Printing, postage and mailing................................................... $ 175,000
Legal fees and expenses......................................................... $ 150,000
Special Conversion Consultant Fees and expenses................................. $ 200,000
Financial advisor management fee and expenses................................... $ 865,000
Accounting fees and expenses.................................................... $ 100,000
Appraiser's fees and expenses (including business plan)......................... $ 27,500
Transfer agent and registrar fees and expenses.................................. $ 8,000
Conversion agent fees and expenses.............................................. $ 25,000
Stock Certificate printing...................................................... $ 3,000
Underwriter's legal fees and expenses........................................... $ 80,000
Blue Sky fees and expenses (including fees of counsel).......................... $ 3,000
Executive compensation consultant fees and expenses............................. $ 30,000
Miscellaneous................................................................... $ 52,364
------------
TOTAL....................................................................... $ 1,837,000
------------
------------
</TABLE>
- ------------------------
(1) Actual expenses based upon the registration of 82,623,182 shares at $10.00
per share. All other expenses are estimated.
(2) Estimated based upon the sale of 8,100,312 shares at $10.00 per share, with
no commission payable on 8% of the shares purchased by the ESOP and
$1,700,000 estimated to be purchased by directors, officers and employees.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
In accordance with the General Corporation Law of the State of Delaware
(being Chapter 1 of Title 8 of the Delaware Code), Articles 11 and 12 of the
Registrant's Certificate of Incorporation provide as follows:
ARTICLE ELEVEN
INDEMNIFICATION
A. Each person who was or is made a party or is threatened to be made a
party to or is otherwise involved in any action, suit or proceeding, whether
civil, criminal, administrative or investigative (hereinafter a "proceeding"),
by reason of the fact that he or she is or was a Director or an Officer of the
Corporation or, while a Director or Officer of the Corporation, is or was
serving at the request of the Corporation as a Director, Officer, employee or
agent of another corporation or of a partnership, joint venture, trust or other
enterprise, including service with respect to an employee benefit plan
(hereinafter an "indemnitee"), whether the basis of such proceeding is alleged
action in an official capacity or in any other capacity while serving shall be
indemnified and held harmless by the Corporation to the fullest extent
authorized by the General Corporation Law of the State of Delaware, as the same
exists or may hereafter be amended (but, in the case of any such amendment, only
to the extent that such amendment permits the Corporation to provide broader
indemnification rights than such law permitted the Corporation to provide
II-1
<PAGE>
prior to such amendment), against all expense, liability and loss (including
attorneys' fees, judgments, fines, excise taxes or penalties under the Employee
Retirement Income Security Act of 1974, as amended, and amounts paid in
settlement) reasonably incurred or suffered by such indemnitee in connection
therewith; provided, however, that, except as provided in Section C of this
Article the Corporation shall indemnify any such indemnitee in connection with a
proceeding (or part thereof) initiated by such indemnitee only if such
proceeding (or part thereof) was authorized by the Board of Directors of the
Corporation.
B. The right to indemnification conferred in Section A of this Article
shall include the right to be paid by the Corporation the expenses incurred in
defending any such proceeding in advance of its final disposition (hereinafter
an "advancement of expenses"); provided, however, that, if the General
Corporation Law of the State of Delaware requires, an advancement of expenses
incurred by an indemnitee in his or her capacity as a Director or Officer (and
not in any other capacity in which service was or is rendered by such
indemnitee, including, without limitation, services to an employee benefit plan)
shall be made only upon delivery to the Corporation of an undertaking
(hereinafter an "undertaking"), by or on behalf of such indemnitee, to repay all
amounts so advanced if it shall ultimately be determined by final judicial
decision from which there is no further right to appeal (hereinafter a "final
adjudication") that such indemnitee is not entitled to be indemnified for such
expenses under this Section or otherwise. The rights to indemnification and to
the advancement of expenses conferred in Sections A and B of this Article shall
be contract rights and such rights shall continue as to an indemnitee who has
ceased to be a Director, Officer, employee or agent and shall inure to the
benefit of the indemnitee's heirs, executors and administrators.
C. If a claim under Section A or B of this Article is not paid in full by
the Corporation within sixty days after a written claim has been received by the
Corporation, except in the case of a claim for an advancement of expenses, in
which case the applicable period shall be twenty days, the indemnitee may at any
time thereafter bring suit against the Corporation to recover the unpaid amount
of the claim. If successful in whole or in part in any such suit, or in a suit
brought by the Corporation to recover an advancement of expenses pursuant to the
terms of an undertaking, the indemnitee shall be entitled to be paid also the
expenses of prosecuting or defending such suit. In (i) any suit brought by the
indemnitee to enforce a right to indemnification hereunder (but not in a suit
brought by the indemnitee to enforce a right to an advancement of expenses) it
shall be a defense that, and (ii) in any suit by the Corporation to recover an
advancement of expenses pursuant to the terms of an undertaking the Corporation
shall be entitled to recover such expenses upon a final adjudication that, the
indemnitee has not met any applicable standard for indemnification set forth in
the General Corporation Law of the State of Delaware. Neither the failure of the
Corporation (including its Board of Directors, independent legal counsel, or its
stockholders) to have made a determination prior to the commencement of such
suit that indemnification of the indemnitee is proper in the circumstances
because the indemnitee has met the applicable standard of conduct set forth in
the General Corporation Law of the State of Delaware, nor an actual
determination by the Corporation (including its Board of Directors, independent
legal counsel, or its stockholders) that the indemnitee has not met such
applicable standard of conduct, shall create a presumption that the indemnitee
has not met the applicable standard of conduct or, in the case of such a suit
brought by the indemnitee, be a defense to such suit. In any suit brought by the
indemnitee to enforce a right to indemnification or to an advancement of
expenses hereunder, or by the Corporation to recover an advancement of expenses
pursuant to the terms of an undertaking, the burden of proving that the
indemnitee is not entitled to be indemnified, or to such advancement of
expenses, under this Article or otherwise shall be on the Corporation.
D. The rights to indemnification and to the advancement of expenses
conferred in this Article shall not be exclusive of any other right which any
person may have or hereafter acquire under any statute, the Corporation's
Certificate of Incorporation, Bylaws, agreement, vote of stockholders or
Disinterested Directors or otherwise.
II-2
<PAGE>
E. The Corporation may maintain insurance, at its expense, to protect
itself and any Director, Officer, employee or agent of the Corporation or
subsidiary or Affiliate or another corporation, partnership, joint venture,
trust or other enterprise against any expense, liability or loss, whether or not
the Corporation would have the power to indemnify such person against such
expense, liability or loss under the General Corporation Law of the State of
Delaware.
F. To the extent that any person who is or was or has agreed to become a
Director or officer of the Corporation is made a witness to any action, suit or
proceeding to which he or she is not a party by reason of the fact that he or
she was, is or has agreed to become a Director or Officer of the Corporation,
or, while a Director or Officer of the Corporation, is or was serving or has
agreed to serve as a Director, Officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, at the
request of the Corporation, such person shall be indemnified against all costs,
charges and expenses actually and reasonable incurred by such person or on such
person(1)s behalf in connection therewith. To the extent that any person who is
or was or has agreed to become an employee or agent of the Corporation is made a
witness to any action, suit or proceeding to which he or she is not a party by
reason of the fact that he or she was, is or has agreed to become an employee or
agent of the Corporation, or is or was serving or has agreed to serve as a
Director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, at the request of the Corporation, such
person may be indemnified against all costs, charges and expenses actually and
reasonable incurred by such person or on such person's behalf in connection
therewith.
G. The Corporation may, to the extent authorized from time to time by the
Board of Directors, grant rights to indemnification and to the advancement of
expenses to any employee or agent of the Corporation to the fullest extent of
the provisions of this Article with respect to the indemnification and
advancement of expenses of Directors and Officers of the Corporation.
H. If this Article or any portion shall be invalidated on any ground by any
court of competent jurisdiction, the Corporation shall nevertheless indemnify
each Director or Officer, and may indemnify each employee or agent, of the
Corporation as to any costs, charges, expenses (including attorneys' fees and
expenses), judgments, fines and amounts paid in settlement with respect to any
action, suit or proceeding, whether civil, criminal, administrative or
investigative (including an action by or in the right of the Corporation), to
the full extent permitted by any applicable portion of this Article that shall
not have been invalidated and to the fullest extent permitted by applicable law.
ARTICLE TWELVE
LIABILITY OF DIRECTORS
A Director of this Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a Director, except for liability: (i) for any breach of the Director's
duty of loyalty to the Corporation or its stockholders; (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law; (iii) under Section 174 of the General Corporation Law of the
State of Delaware; or (iv) for any transaction from which the Director derived
an improper personal benefit. If the General Corporation Law of the State of
Delaware is amended to authorize corporate action further eliminating or
limiting the personal liability of Directors, then the liability of a Director
of the Corporation shall be eliminated or limited to the fullest extent
permitted by the General Corporation Law of the State of Delaware, as so
amended. Any repeal or modification of the foregoing paragraph by the
stockholders of the Corporation shall not adversely affect any right or
protection of a Director of the Corporation existing at the time of such repeal
or modification.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
None.
II-3
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The exhibits filed as part of this Registration Statement are as follows:
(a) List of Exhibits. (Filed herewith unless otherwise noted.)
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ----------- ----------------------------------------------------------------------------------------------------
<C> <S>
1.1 Engagement Letter (proposal for marketing agent services), dated January 8, 1998 between Cortland
Savings Bank and CIBC Oppenheimer Corp. and Trident Securities, Inc.*
1.2 Form of Agency Agreement
2.1 Amended Plan of Conversion of Cortland Savings Bank
3.1 Certificate of Incorporation of CNY Financial Corporation*
3.2 Bylaws of CNY Financial Corporation*
3.3 Proposed Amended Restated Organization Certificate of Cortland Savings Bank
3.4 Proposed Stock Bylaws of Cortland Savings Bank*
4.1 Form of Stock Certificate of CNY Financial Corporation*
5.1 Opinion of Serchuk & Zelermyer, LLP regarding legality
8.1 Opinion of Serchuk & Zelermyer, LLP regarding federal and state taxation
8.2 Letter of RP Financial L.C. regarding Subscription Rights*
8.3 Opinion of Serchuk & Zelemyer regarding establishment of the Foundation
10.1 Employment Agreement between Cortland Savings Bank and Wesley D. Stisser, Jr.*
10.2 Employment Agreement between Cortland Savings Bank and F. Michael Stapleton*
10.3 Employment Agreement between Cortland Savings Bank and Steven A. Covert*
10.4 Employment Agreement between Cortland Savings Bank and Kerry D. Meeker*
10.5 Form of Employee Severance Plan*
10.6 Employee Stock Ownership Plan of CNY Financial Corporation
10.7 Cortland Savings Bank 401(k) Savings Plan
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of Serchuk & Zelermyer, LLP
23.3 Consent of RP Financial, L.C.*
24.1 Powers of Attorney*
27.1 Financial Data Schedule*
99.1 Appraisal Report of RP Financial, L.C.*
99.2 Form of Marketing Materials to be used in connection with the Offerings
99.3 Form of the Cortland Savings Foundation Gift Instrument
</TABLE>
- ------------------------
* Previously filed
(b) Financial Statement Schedules
All schedules have been omitted as not applicable or not required under the
rules of Regulation S-X.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) To include any Prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
II-4
<PAGE>
(ii) To reflect in the Prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the Registration Statement. Notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20% change int he maximum
aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective Registration Statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any change to such information in the Registration Statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof;
(3) To remove from registration by means of a post-effective amendment
any of the securities registered which remain unsold at the termination of
the Offering.
The undersigned Registrant hereby undertakes to provide to the agent at the
closing specified in the Agency Agreement, certificates in such denominations
and registered in such names as required by the agent to permit prompt delivery
to each purchaser.
Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense in connection
with the securities being registered, the Registrant will, unless in the opinion
of its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the securities Act and will be
governed by the final adjudication of such issue.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the Town of
Cortland, State of New York, on July 20, 1998.
<TABLE>
<S> <C> <C>
CNY FINANCIAL CORPORATION
By: /s/ WESLEY D. STISSER, JR.
-----------------------------------------
Wesley D. Stisser, Jr.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
(duly authorized officer)
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
President, Chief Executive
/s/ WESLEY D. STISSER, JR. Officer and Director
- ------------------------------ (Principal Executive July 20, 1998
Wesley D. Stisser, Jr. Officer)
Executive Vice President
/s/ STEVEN A. COVERT and Chief Financial
- ------------------------------ Officer July 20, 1998
Steven A. Covert (Principal Financial and
Accounting Officer)
/s/ DONALD P. REED
- ------------------------------ Director July 20, 1998
Donald P. Reed
/s/ PATRICK J. HAYES, M.D
- ------------------------------ Director July 20, 1998
Patrick J. Hayes, M.D
/s/ HARVEY KAUFMAN
- ------------------------------ Director July 20, 1998
Harvey Kaufman
II-6
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
/s/ JOSEPH H. COMPAGNI
- ------------------------------ Director July 20, 1998
Joseph H. Compagni
/s/ ROBERT S. KASHDIN
- ------------------------------ Director July 20, 1998
Robert S. Kashdin
/s/ TERRANCE D. STALDER
- ------------------------------ Director July 20, 1998
Terrance D. Stalder
</TABLE>
II-7
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ----------- ------------------------------------------------------------------------------------------------
<C> <S> <C>
1.1 Engagement Letter (proposal for marketing agent services), dated January 8, 1998 between
Cortland Savings Bank and CIBC Oppenheimer Corp. and Trident Securities, Inc.*
1.2 Form of Agency Agreement
2.1 Amended Plan of Conversion of Cortland Savings Bank
3.1 Certificate of Incorporation of CNY Financial Corporation*
3.2 Bylaws of CNY Financial Corporation*
3.3 Proposed Amended Restated Organization Certificate of Cortland Savings Bank
3.4 Proposed Stock Bylaws of Cortland Savings Bank*
4.1 Form of Stock Certificate of CNY Financial Corporation*
5.1 Opinion of Serchuk & Zelermyer, LLP regarding legality
8.1 Opinion of Serchuk & Zelermyer, LLP regarding federal and state taxation
8.2 Letter of RP Financial L.C. regarding Subscription Rights*
8.3 Opinion of Serchuk & Zelemyer regarding establishment of the Foundation
10.1 Employment Agreement between Cortland Savings Bank and Wesley D. Stisser, Jr.*
10.2 Employment Agreement between Cortland Savings Bank and F. Michael Stapleton*
10.3 Employment Agreement between Cortland Savings Bank and Steven A. Covert*
10.4 Employment Agreement between Cortland Savings Bank and Kerry D. Meeker*
10.5 Form of Employee Severance Plan*
10.6 Employee Stock Ownership Plan of CNY Financial Corporation
10.7 Cortland Savings Bank 401(k) Savings Plan
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of Serchuk & Zelermyer, LLP
23.3 Consent of RP Financial, L.C.*
24.1 Powers of Attorney*
27.1 Financial Data Schedule*
99.1 Appraisal Report of RP Financial, L.C.*
99.2 Form of Marketing Materials to be used in connection with the Offerings
99.3 Form of the Cortland Savings Foundation Gift Instrument
</TABLE>
- ------------------------
* Previously filed
<PAGE>
Exhibit 1.2
CNY FINANCIAL CORP.
CORTLAND SAVINGS BANK
5,206,250 TO 7,043,750 SHARES
(SUBJECT TO INCREASE UP TO 8,100,312 SHARES
IN THE EVENT OF AN OVERSUBSCRIPTION)
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
$10.00 PER SHARE
SALES AGENCY AGREEMENT
August ___, 1998
CIBC Oppenheimer Corp.
World Financial Center
New York, New York 10281
Trident Securities, Inc.
4601 Six Forks Road, Suite 400
Raleigh, North Carolina 27609
Ladies and Gentlemen:
CNY Financial Corp., a Delaware corporation ("Company"), and Cortland
Savings Bank, a New York State chartered mutual savings bank ("Bank"), hereby
confirm, as of August __, 1998, their respective agreements with CIBC
Oppenheimer Corp. ("CIBC") and Trident Securities, Inc. ("Trident," and together
with CIBC, the "Agents"), broker-dealers registered with the Securities and
Exchange Commission ("SEC") and members of the National Association of
Securities Dealers, Inc. ("NASD"), as follows:
INTRODUCTION.
Under the Bank's Plan of Conversion, adopted by the Board of Trustees of
the Bank on March 23, 1998 (as amended, the "Plan"), the Bank will be converted
from a New York State chartered mutual savings bank to a New York State
chartered stock savings bank and will issue all of its capital stock to the
Company (together with the Offerings, as defined below, the "Conversion"). In
accordance with the Plan, the Company is offering shares ("Shares") of its
common stock, par value $.01 per share ("Common Stock"), pursuant to
nontransferable subscription rights in a subscription offering ("Subscription
Offering") to certain depositors of the Bank and to the Company's tax-qualified
employee benefit plans (i.e., the Company's Employee Stock Ownership Plan
("ESOP") and the Bank's Savings and Profit Sharing Plan ("401(k) Plan")).
Concurrently with, during or promptly after the Subscription Offering, Shares
not sold in the Subscription Offering may be offered to certain members of the
general public in a community offering, with preference being given to natural
persons residing in Cortland County, New York ("Community Offering"). It is
currently anticipated by the Bank and the Company that any Shares not subscribed
for in the Subscription Offering and Community Offering will be offered, subject
to Section 3 hereof, in a syndicated community offering ("Syndicated Community
Offering"). The Subscription Offering, the Community Offering and the
Syndicated Community Offering are sometimes referred to collectively herein as
the "Offerings." In the Offerings, the Company is offering between 5,206,250
and 7,043,750 Shares, with the possibility of offering up to 8,100,312 Shares
without a resolicitation of subscribers in the event of an oversubscription. No
person, together with any associate or group of persons acting in concert, may
subscribe for or purchase more than 15,000 Shares in the Conversion.
<PAGE>
In connection with the Conversion and pursuant to the terms of the Plan as
described in the Prospectus (as defined below), immediately following the
consummation of the Conversion, subject to the approval of the depositors of
Bank and compliance with certain conditions as may be imposed by regulatory
authorities, the Company will contribute to the Cortland Savings Foundation, a
charitable foundation ("Foundation"), a number of shares equal to 2% of the
Shares sold in the Offerings, or between 104,125 and 140,875 Shares (subject to
increase in certain circumstances to 162,006 Shares). Such Shares are
hereinafter referred to as the "Foundation Shares."
The Company and the Bank have been advised by the Agents that they will
utilize their best efforts in assisting the Company and the Bank with the sale
of the Shares in the Subscription Offering and Community Offering and, if deemed
necessary by the Company, in the Syndicated Community Offering. Prior to the
execution of this Agreement, the Company has delivered to the Agents the
Prospectus, dated August __, 1998, and all amendments or supplements thereto, to
be used in the Offerings. Such Prospectus contains information with respect to
the Company, the Bank and the Shares.
REPRESENTATIONS AND WARRANTIES.
The Company and the Bank jointly and severally represent and warrant to the
Agents that:
i. The Company has filed with the SEC a registration statement on
Form S-1 (No. 333-57259) for the registration of the Shares and the
Foundation Shares under the Securities Act of 1933, as amended ("Securities
Act"). Such registration statement has become effective under the
Securities Act, and no stop order has been issued with respect thereto and
no proceedings therefor have been initiated or, to the knowledge of the
Company or the Bank, threatened by the SEC. Except as the context may
otherwise require, such registration statement, as amended or supplemented,
on file with the SEC at the time the registration statement became
effective, including the Prospectus, financial statements, schedules,
exhibits and all other documents filed as part thereof, is herein called
the "Registration Statement," and the prospectus, as amended or
supplemented, on file with the SEC at the time the Registration Statement
became effective is herein called the "Prospectus," except that if the
Prospectus filed by the Company with the SEC pursuant to Rule 424(b) of the
rules and regulations of the SEC under the Securities Act (together with
the enforceable published policies and actions of the SEC thereunder, the
"SEC Regulations") differs from the form of Prospectus on file at the time
the Registration Statement became effective, the term "Prospectus" shall
refer to the Rule 424(b) Prospectus from and after the time it is filed
with the SEC and shall include any amendments or supplements thereto from
and after their dates of effectiveness or use, respectively.
ii. At the date of the Prospectus and at all times subsequent
thereto, through and including the date on which the Company shall release
all of the Shares for delivery ("Closing Date") (x) the Registration
Statement and the Prospectus complied and will comply with the Securities
Act and the SEC
<PAGE>
Regulations and (y) the Registration Statement and the Prospectus did not
and will not contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading. Representations or warranties in this subsection
shall not apply to statements or omissions made in reliance upon and in
conformity with written information with respect to the Agents furnished to
the Company or the Bank by or on behalf of the Agents expressly for use in
the Registration Statement or Prospectus.
iii. Pursuant to the General Regulations of the Banking Board of the
State of New York and the rules and regulations of the Federal Deposit
Insurance Corporation ("FDIC") governing the conversion of New York State
chartered mutual savings banks to New York State chartered stock savings
banks ("Conversion Regulations"), the Bank has filed (x) an application for
conversion on Form 86-AC with the Superintendent of Banks of the State of
New York ("Superintendent") and (y) a notice of conversion, including the
Form 86-AC, with the FDIC, and such amendments thereto and supplementary
materials as may have been required to the date hereof (such application
for conversion on Form 86-AC, as amended to date, if applicable, and as
from time to time amended or supplemented hereafter, is hereinafter
referred to as the "Conversion Application"), including copies of the
Bank's Proxy Statement, dated August __, 1998, for the solicitation of
proxies from depositors for the special meeting to approve the Plan ("Proxy
Statement"), and the Prospectus. The Superintendent has approved the
Conversion Application, including the Proxy Statement and the Prospectus,
and the waiver of certain provisions of regulations specified in such
approval with respect to the establishment of and contribution of the
Foundation Shares to the Foundation and with respect to differences between
the Conversion Regulations and FDIC policy. Such approval remains in full
force and effect and no order has been issued by the Superintendent
suspending or revoking such approval, and no proceedings therefor have been
initiated or, to the knowledge of the Company or the Bank, threatened by
the Superintendent. The FDIC has issued a letter of intent not to object
to the Conversion Application, and such letter remains in full force and
effect and no order has been issued by the FDIC suspending or revoking such
letter, and no proceedings therefor have been initiated or, to the
knowledge of the Company or the Bank, threatened by the FDIC. At the date
of such approval by the Superintendent and the issuance of such letter of
intent not to object by the FDIC, and at the Closing Date, the Conversion
Application complied and will comply in all material respects with the
Conversion Regulations.
iv. The Company has filed with the Board of Governors of the Federal
Reserve System ("FRB") an application for approval of its acquisition of
the Bank ("Holding Company Application") on Form FR Y-3 promulgated under
the Bank Holding Company Act of 1956, as amended ("BHCA") and the
regulations promulgated thereunder. The Company has received written
notice from the FRB of its approval of the Holding Company Application,
such approval remains in full force and effect and no order has been issued
by the FRB suspending or revoking such approval, and no proceedings
therefor have been initiated or, to the knowledge of the Company or the
Bank, threatened by the FRB. As of the date of such approval and at the
Closing Date, the Holding Company Application complied and will comply in
all
<PAGE>
material respects with the applicable provisions of the BHCA and the
regulations promulgated thereunder.
v. At the time of their use, the Proxy Statement and any other proxy
solicitation materials will comply in all material respects with the
Conversion Regulations and will not contain an untrue statement of a
material fact or omit to state a material fact necessary in order to make
the statements therein, in light of the circumstances under which they were
made, not misleading. The Company and the Bank will promptly file the
Prospectus and any supplemental sales literature with the SEC, the
Superintendent and the FDIC. The Prospectus and all supplemental sales
literature, as of the date the Registration Statement became effective and
at the Closing Date, complied and will comply in all material respects with
the Conversion Regulations and, at or prior to the time of their first use,
will have received all required authorizations of the Superintendent and
the FDIC for use in final form.
vi. The Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the State of Delaware with
full corporate power and authority to own, lease and operate its properties
and to conduct its business as described in the Registration Statement and
the Prospectus and to enter into and perform its obligations under this
Agreement. The Company is duly qualified as a foreign corporation to
transact business and is in good standing in the State of New York and in
each jurisdiction in which such qualification is required, whether by
reason of the ownership or leasing of property or the conduct of business,
except where the failure to so qualify would not have a material adverse
effect on the assets or properties, business, results of operations,
prospects or condition (financial or otherwise) of the Company, the Bank
and their subsidiaries, considered as a whole.
vii. The Bank, as of the date hereof, has been duly organized as a New
York State chartered mutual savings bank and, upon consummation of the
Conversion, will be duly organized as a New York State chartered stock
savings bank, in both instances with full corporate power and authority to
own, lease and operate its properties and to conduct its business as
described in the Registration Statement and the Prospectus and to enter
into and perform its obligations under this Agreement. The Bank is, and
upon consummation of the Conversion will be, duly qualified as a foreign
corporation in each jurisdiction in which such qualification is required,
except where the failure to so qualify would not have a material adverse
effect on the assets or properties, business, results of operations,
prospects or condition (financial or otherwise) of the Company, the Bank
and their subsidiaries, considered as a whole. The Bank is a member in
good standing of the Federal Home Loan Bank of New York, and the deposit
accounts of the Bank are insured up to applicable limits by the Bank
Insurance Fund of the FDIC. The Bank does not own equity securities of or
an equity interest in any business enterprise except as described in the
Registration Statement and the Prospectus. Upon approval of the Bank's
Restated Organization Certificate ("Stock Charter") by the Superintendent
and completion of the sale by the Company of the Shares as contemplated by
the Prospectus, (w) the Bank will be converted pursuant to the Plan to a
New York State chartered stock savings bank with full power and authority
to own, lease and operate its properties and to conduct its business as
described in the Registration Statement
<PAGE>
and the Prospectus, (x) all of the authorized and outstanding capital stock
of the Bank will be owned of record and beneficially by the Company, (y)
the Company will issue Common Stock to the public and the Foundation and
(z) neither the Company nor the Bank will own, directly or indirectly, any
interest in, or control, directly or indirectly, any corporation,
partnership, joint venture, association or other business organization
other than as disclosed in the Registration Statement and the Prospectus.
viii. Each direct and indirect subsidiary of the Bank has been
incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation, has full corporate
power and authority to own, lease and operate its properties and to conduct
its business as described in the Registration Statement and the Prospectus
and is duly qualified as a foreign corporation in each jurisdiction in
which such qualification is required, except where the failure to so
qualify would not have a material adverse effect on the assets or
properties, business, results of operations, prospects or condition
(financial or otherwise) of the Company, the Bank and their subsidiaries,
considered as a whole. The activities of each such subsidiary are
permitted to subsidiaries of a bank holding company and of a New York State
chartered savings bank by the Banking Law of the State of New York and the
rules and regulations promulgated thereunder ("Banking Law") and by the
rules, regulations, resolutions and practices of the FRB and the FDIC. All
of the issued and outstanding capital stock of each such subsidiary has
been duly authorized and validly issued, is fully paid and nonassessable
and is owned by the Bank, directly or through subsidiaries, free and clear
of any security interest, mortgage, pledge, lien, encumbrance, claim or
equity.
ix. Each of the Company, the Bank and their subsidiaries has all
necessary authorizations, approvals, consents, orders, licenses,
certificates and permits from all governmental or regulatory bodies or any
other person or entity domestic or foreign ("Permits") to own, lease and
license their assets and properties and to conduct their businesses as now
being conducted and as described in the Registration Statement and the
Prospectus, except where the lack of such Permit would not have a material
adverse effect on the assets or properties, business, results of
operations, prospects or condition (financial or otherwise) of the Company,
the Bank and their subsidiaries, considered as a whole. Each of the
Company, the Bank and their subsidiaries has fulfilled and performed in all
material respects their obligations with respect to such Permits and, to
the knowledge of the Company and the Bank, no event has occurred which
allows, or which after notice or lapse of time, or both, would allow,
revocation or termination thereof or any material impairment of the rights
of the holder thereof.
x. Each of the Company, the Bank and their subsidiaries has good,
marketable and insurable title to all assets material to its business and
to those assets described in the Prospectus as owned by it, free and clear
of all material liens, charges, encumbrances or restrictions, except for
liens for taxes not yet due, except as described in the Prospectus and
except as could not in the aggregate have a material adverse effect on the
assets or properties, business, results of operations, prospects or
condition (financial or otherwise) of the Company, the Bank and their
subsidiaries, considered as a
<PAGE>
whole. All of the leases and subleases material to the operations or
financial condition of the Company, the Bank and their subsidiaries,
considered as a whole, under which they hold real or personal properties,
including those described in the Prospectus, are in full force and effect
as described therein. None of the Company, the Bank or their subsidiaries
owns, leases or licenses any assets or properties or conducts any business
outside of the United States.
xi. The execution, delivery and performance of this Agreement, the
consummation of the transactions contemplated hereby and all actions in
connection with the contribution of the Foundation Shares to the Foundation
have been duly and validly authorized by all necessary actions on the part
of each of the Company and the Bank, and this Agreement is a legal, valid
and binding obligation of each of the Company and the Bank, enforceable in
accordance with its terms, except as the enforceability thereof may be
limited by bankruptcy, insolvency, moratorium, reorganization or similar
laws relating to or affecting the enforcement of creditors' rights
generally or the rights of creditors of bank holding companies the accounts
of whose banking subsidiaries are insured by the FDIC, or by general equity
principles, regardless of whether such enforceability is considered in a
proceeding in equity or at law, and except to the extent that the
provisions of Section 7 hereof may be unenforceable as against public
policy or pursuant to Sections 23A or 23B of the Federal Reserve Act, as
amended ("FRA").
xii. There is no litigation or governmental or other proceeding or
investigation pending or, to the knowledge of the Company or the Bank,
threatened (and the Company and the Bank do not know of any basis therefor)
against or involving the Company, the Bank, their subsidiaries or any of
their respective assets which individually or in the aggregate would
reasonably be expected to have a material adverse effect on the assets or
properties, business, results of operations, prospects or condition
(financial or otherwise) of the Company, the Bank and their subsidiaries,
considered as a whole.
xiii. The Company and the Bank have received the opinion of Serchuk &
Zelermyer, LLP with respect to the federal and New York State income tax
consequences of the Conversion to the effect that the Conversion will
constitute a tax-free reorganization under the Internal Revenue Code of
1986, as amended ("Code"), and will not be a taxable transaction for the
Bank or the Company under the laws of the State of New York, and the facts
relied upon in such opinion are accurate and complete.
xiv. Each of the Company and the Bank has all such corporate power,
authority, authorizations, approvals, permits and orders as may be required
to enter into this Agreement and to carry out the provisions and conditions
hereof, to issue and sell the Shares in the Offerings and to issue and
contribute the Foundation Shares to the Foundation, subject to the
limitations set forth herein and subject to the satisfaction of certain
conditions imposed by the Superintendent, the FDIC and the FRB in
connection with their respective approvals of the Conversion Application
and the Holding Company Application, as the case may be, and except as may
be required under the securities or "blue sky" laws of various
jurisdictions, and, in the case of the Company, as of the Closing Date,
will have such approvals and orders to issue and sell the Shares to be sold
by the Company as provided herein, and, in the case of the Bank, as of the
Closing Date, will have such approvals and orders to issue and sell
<PAGE>
the shares of its capital stock to be sold to the Company as provided in
the Plan, subject to the approval of the Stock Charter by the
Superintendent.
xv. None of the Company, the Bank or their subsidiaries is in
violation of the Banking Law or any rule or regulation of the FDIC or the
FRB that could reasonably be expected to result in any enforcement action
against the Company, the Bank or their officers or directors that might
have a material adverse effect on the assets or properties, business,
results of operations, prospects or condition (financial or otherwise) of
the Company, the Bank and their subsidiaries, considered as a whole.
xvi. The consolidated financial statements and any related notes or
schedules which are included in the Registration Statement and the
Prospectus fairly present the consolidated financial condition, income,
retained earnings, cash flows and other information purported to be shown
therein of the Bank at the respective dates thereof and for the respective
periods covered thereby and comply as to form with the applicable
accounting requirements of the SEC Regulations and the applicable
accounting regulations under the Banking Law. Such financial statements
have been prepared in accordance with generally accepted accounting
principles consistently applied throughout the periods involved (and all
adjustments necessary for a fair presentation of the results for such
periods have been made), except as set forth therein, and such financial
statements are consistent with the financial statements and other reports
filed by the Bank with supervisory and regulatory authorities, except as
such generally accepted accounting principles may otherwise require. The
tables in the Prospectus accurately present the information purported to be
shown thereby at the respective dates thereof and for the respective
periods therein.
xvii. There has been no material change in the assets or properties,
business, results of operations, prospects or condition (financial or
otherwise) of the Company, the Bank and their subsidiaries, considered as a
whole, whether or not arising from transactions in the ordinary course of
business, since the latest date as of which such condition is set forth in
the Prospectus, except as set forth therein. The capitalization, assets,
properties and business of each of the Company and the Bank conform to the
descriptions thereof contained in the Prospectus. Neither the Company nor
the Bank has any material liabilities of any kind, contingent or otherwise,
except as set forth in the Prospectus.
xviii. There has been no breach, violation or default (or the occurrence
of any event which, with notice or lapse of time, or both, would constitute
a default) under, or creation or imposition of any lien, charge or other
encumbrance upon any of the properties or assets of the Company, the Bank
or any of their subsidiaries pursuant to any of the terms, provisions or
conditions of, any agreement, contract, indenture, bond, debenture, note,
instrument or obligation to which the Company, the Bank or any of their
subsidiaries is a party or by which any of them or any of their respective
assets or properties may be bound or is subject, or violation of any
governmental license or permit or any enforceable published law,
administrative regulation or order or court order, judgment, writ,
injunction or decree, which breach, default, encumbrance or violation would
have a material adverse effect on the assets
<PAGE>
or properties, business, results of operations, prospects or condition
(financial or otherwise) of the Company, the Bank and their subsidiaries,
considered as a whole. All agreements which are material to the assets or
properties, business, results of operations, prospects or condition
(financial or otherwise) of the Company, the Bank and their subsidiaries,
considered as a whole, are in full force and effect, and no party to any
such agreement has instituted or, to the knowledge of the Company and the
Bank, threatened any action or proceeding wherein the Company, the Bank or
their subsidiaries would be alleged to be in default thereunder.
xix. None of the Company, the Bank or their subsidiaries is in breach
or violation of its respective charter or bylaws (and the Bank will not be
in breach or violation of its organization certificate or bylaws in stock
form upon consummation of the Conversion). Neither the execution, delivery
and performance of this Agreement nor the consummation of the transactions
contemplated hereby by the Company and the Bank will conflict with or
result in a breach or violation of the charter or bylaws of the Company,
the Bank (in either mutual or stock form) or any of their subsidiaries or
conflict with or constitute a breach, violation or default (or an event
which, with notice or lapse of time, or both, would constitute a default)
under, or require any consent or waiver under, or give rise to any right of
termination, cancellation or acceleration contained in, or result in the
creation or imposition of any lien, charge or other encumbrance upon any of
the properties or assets of the Company, the Bank or any of their
subsidiaries pursuant to any of the terms, provisions or conditions of, any
agreement, contract, indenture, bond, debenture, note, instrument or
obligation to which the Company, the Bank or any of their subsidiaries is a
party or by which any of them or any of their respective assets or
properties may be bound or is subject, or violate any governmental license
or permit or any enforceable published law, administrative regulation or
order or court order, judgment, writ, injunction or decree (subject to the
satisfaction of certain conditions imposed on the Company and the Bank in
connection with the Superintendent's approval of, and the FDIC's
non-objection to, the Conversion Application), which breach, default,
encumbrance or violation would have a material adverse effect on the assets
or properties, business, results of operations, prospects or condition
(financial or otherwise) of the Company, the Bank and their subsidiaries,
considered as a whole.
xx. Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus and prior to the
Closing Date, except as otherwise may be indicated or contemplated therein,
(A) neither the Company nor the Bank has issued any securities which will
remain issued at the Closing Date or incurred any liability or obligation,
direct or contingent, or borrowed money, except borrowings in the ordinary
course of business; (B) neither the Company nor the Bank has entered into
any other transaction not in the ordinary course of business, and
consistent with prior practices, which is material in light of the business
of the Company, the Bank and their subsidiaries, considered as a whole; (C)
there has not been any material adverse change in the assets or properties,
business, results of operations, prospects or condition (financial or
otherwise) of the Company, the Bank and their subsidiaries, considered as a
whole, whether or not arising from transactions in the ordinary course of
business; and (D) none of the Company, the Bank or their subsidiaries has
sustained any material loss or interference with its assets, businesses or
properties (whether owned or leased) from
<PAGE>
fire, explosion, earthquake, flood, wind or other calamity, whether or not
covered by insurance, or from any labor dispute or any court or legislative
or other governmental action, order or decree.
xxi. Upon consummation of the Conversion and the issuance of the
Foundation Shares to the Foundation immediately upon completion thereof,
the authorized, issued and outstanding capital stock of the Company shall
be within the range as set forth in the Prospectus under the caption
"CAPITALIZATION," and no shares of Common Stock of the Company have been or
will be issued and outstanding immediately prior to the Closing Date. The
issuance and the sale of the Shares by the Company and the contribution of
the Foundation Shares have been duly authorized by all necessary action of
the Company and approved by the Superintendent and the FDIC and, when
issued and delivered in accordance with the terms of the Plan and paid for,
or contributed by the Company in the case of the Foundation Shares, will be
duly and validly issued, fully paid and nonassessable and will conform to
the description thereof contained in the Prospectus. The issuance of the
Shares and the Foundation Shares is not subject to any preemptive or
similar rights, and good title to the Shares will be transferred by the
Company upon issuance thereof against payment therefor, free and clear of
all claims, encumbrances, security interests and liens against the Company
whatsoever. The certificates representing the Shares and the Foundation
Shares will conform in all material respects to the requirements of all
applicable laws and regulations. The issuance and sale of the capital
stock of the Bank to the Company has been duly authorized by all necessary
action of the Bank and approved by the Superintendent, the FDIC and the FRB
(subject to the satisfaction of various conditions imposed in connection
with the Superintendent's approval of, and the FDIC's non-objection to, the
Conversion Application), and such capital stock, when issued in accordance
with the terms of the Plan, will be fully paid, nonassessable and free of
preemptive or similar rights and will conform in all material respects to
the description thereof contained in the Prospectus. All such capital
stock of the Bank will be owned beneficially and of record by the Company
free and clear of all claims, encumbrances, security interests and liens
against the Bank whatsoever. Except as disclosed in the Prospectus, there
is no outstanding option, warrant or other right calling for the issuance
of, and there is no commitment, plan or arrangement to issue, any share of
capital stock of the Company or the Bank or any security convertible into,
or exercisable or exchangeable for, such capital stock.
xxii. No approval of any regulatory or supervisory or other public
authority is required in connection with the execution, delivery and
performance of this Agreement or the issuance of the Shares and the
Foundation Shares that has not been obtained, except for the approval of
the Stock Charter by the Superintendent and except as may be required under
the securities laws of various jurisdictions.
xxiii. All material contracts and other documents required to be filed
as exhibits to the Registration Statement, the Conversion Application or
the Holding Company Application have been filed with the SEC, the
Superintendent, the FDIC and/or the FRB, as the case may be. Each
agreement listed in the Exhibits to the Registration Statement is in full
force and effect and is valid and enforceable by and against the Company or
the Bank, as the case may be, in accordance with its
<PAGE>
terms, assuming the due authorization, execution and delivery thereof by
each of the other parties thereto. Neither the Company or the Bank, nor,
to the Company's or the Bank's knowledge, any other party is in default in
the observance or performance of any term or obligation to be performed by
it under any such agreement, and no event has occurred which with notice or
lapse of time, or both, would constitute such a default, in any such case
which default or event would have a material adverse effect on the assets
or properties, business, results of operations, prospects or condition
(financial or otherwise) of the Company, the Bank and their subsidiaries,
considered as a whole.
xxiv. KPMG Peat Marwick LLP, which has audited the consolidated
financial statements of the Bank at December 31, 1997 and 1996 and for the
years ended December 31, 1997, 1996 and 1995 included in the Prospectus, is
an independent public accountant within the meaning of the Code of
Professional Ethics of the American Institute of Certified Public
Accountants.
xxv. The Company and the Bank have timely filed all required federal,
state and local franchise tax returns, and no deficiency has been asserted
with respect to such returns by any taxing authorities, and the Company and
the Bank have paid all taxes that have become due and, to their knowledge,
have made adequate reserves for similar future tax liabilities, except
where any failure to make such filings, payments and reserves, or the
assertion of such a deficiency, would not have a material adverse effect on
the assets or properties, business, results of operations, prospects or
condition (financial or otherwise) of the Company, the Bank and their
subsidiaries, considered as a whole.
xxvi. All of the loans represented as assets of the Bank on the most
recent financial statements of the Bank included in the Prospectus meet or
are exempt from all requirements of federal, state or local law pertaining
to lending, including, without limitation, truth in lending (including the
requirements of Regulation Z and 12 C.F.R. Part 226), real estate
settlement procedures, consumer credit protection, equal credit opportunity
and all disclosure laws applicable to such loans, except for violations
which, if asserted, would not have a material adverse effect on the assets
or properties, business, results of operations, prospects or condition
(financial or otherwise) of the Company, the Bank and their subsidiaries,
considered as a whole.
xxvii. The records of account holders, depositors and borrowers of the
Bank delivered to the Agents by the Bank or its agent for use during the
Conversion have been prepared or reviewed by the Bank and, to the knowledge
of the Company and the Bank, are reliable and accurate.
xxviii. To the knowledge of the Company and the Bank, none of the
Company, the Bank or any of the directors, trustees or employees of the
Company or the Bank have made any payment of funds of the Company or the
Bank as a loan to any person other than the ESOP Trust for the purchase of
the Shares.
xxix. To the knowledge of the Company and the Bank, each of the
Company, the Bank and their subsidiaries is in compliance with all laws,
rules and regulations relating to the discharge, storage, handling and
disposal of hazardous or
<PAGE>
toxic substances, pollutants or contaminants, and neither the Company nor
the Bank believes that the Company, the Bank or any of their subsidiaries
is in violation of or subject to liability under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended,
or any similar law, except for such violation or liability which would not
have a material adverse effect on the assets or properties, business,
results of operations, prospects or condition (financial or otherwise) of
the Company, the Bank and their subsidiaries, considered as a whole. There
are no actions, suits, regulatory investigations or other proceedings
pending or, to the knowledge of the Company or the Bank, threatened against
the Company, the Bank or their subsidiaries relating to the discharge,
storage, handling and disposal of hazardous or toxic substances, pollutants
or contaminants. To the knowledge of the Company and the Bank, no
disposal, release or discharge of hazardous or toxic substances, pollutants
or contaminants, including petroleum and gas products, as any of such terms
may be defined under federal, state or local law, has been caused by the
Company, the Bank or their subsidiaries, or, to the knowledge of the
Company or the Bank, has occurred on, in or at any of the facilities or
properties of the Company, the Bank or their subsidiaries, except such
disposal, release or discharge which would not have a material adverse
effect on the assets or properties, business, results of operations,
prospects or condition (financial or otherwise) of the Company, the Bank or
their subsidiaries, considered as a whole.
xxx. At the Closing Date, the Company and the Bank will have completed
the conditions precedent to, and shall have conducted the Conversion in all
material respects in accordance with, the Plan and all other applicable
laws, regulations, published decisions and orders, including all terms,
conditions, requirements and provisions precedent to the Conversion imposed
by the Superintendent, the FDIC or the FRB.
xxxi. The Foundation has been or will be prior to the Closing Date duly
incorporated and is validly existing as a non-stock corporation in good
standing under the laws of the State of New York with full corporate power
and authority to own, lease and operate its properties and to conduct its
business as described in the Registration Statement and the Prospectus.
The Foundation will not be a bank holding company within the meaning of the
BHCA and 12 C.F.R. Part 225 as a result of the issuance of the Foundation
Shares to it in accordance with the terms of the Plan and in the amounts as
described in the Prospectus. All approvals required to establish the
Foundation and to contribute the Foundation Shares thereto have been
received and, except as specifically disclosed in the Prospectus and the
Proxy Statement, there are no agreements or understandings, written or
oral, between the Company or the Bank and the Foundation with respect to
the control, directly or indirectly, over the voting and the acquisition or
disposition of the Foundation Shares to be contributed by the Company to
the Foundation. The Foundation Shares to be issued to the Foundation in
accordance with the Plan and as described in the Prospectus will have been
duly authorized for issuance and, when issued and contributed by the
Company pursuant to the Plan, will be duly and validly issued, fully paid
and nonassessable.
xxxii. None of the Company, the Bank or their subsidiaries is involved
in any labor dispute nor, to the knowledge of either the Company or the
Bank, is any such dispute threatened, which dispute would have a material
adverse
<PAGE>
effect on the assets or properties, business, results of operations,
prospects or condition (financial or otherwise) of the Company, the Bank
and their subsidiaries, considered as a whole.
xxxiii. No transaction has occurred between or among the Company or the
Bank and any of their officers or directors or any affiliate or affiliates
of any such officer or director that is required to be described in and is
not described in the Registration Statement and the Prospectus.
xxxiv. The Company is not required to be registered as an investment
company under the Investment Company Act of 1940, as amended.
xxxv. The Company has not taken, nor will it take, directly or
indirectly, any action designed to or which might reasonably be expected to
cause or result in, or which has constituted or which might reasonably be
expected to constitute, the stabilization or manipulation of the price of
the Common Stock to facilitate the sale or resale of any of the Shares.
EMPLOYMENT OF THE AGENTS; SALE OF THE SHARES.
Subject to the terms and conditions herein set forth, the Company and the
Bank hereby employ the Agents as their agents to consult with and advise the
Company and the Bank and to assist the Company and the Bank with the Company's
sale of the Shares in the Offerings. On the basis of the representations and
warranties herein contained, but subject to the terms and conditions herein set
forth, the Agents accept such employment and agree to use their best efforts in
assisting the Company and the Bank with the sale of the Shares in the Offerings;
PROVIDED, HOWEVER, that the Agents shall not be obligated to take any action
that is inconsistent with any applicable laws, regulations, decisions or orders.
The appointment of the Agents hereunder shall terminate upon the earliest
to occur of (a) the later of 45 days after the last day of the Subscription
Offering or, if applicable, the Community Offering, unless the Company and the
Agents agree in writing to extend such period and the Superintendent agrees to
extend the period of time in which the Shares may be sold, or (b) the receipt
and acceptance of subscriptions and purchase orders for all of the Shares, or
(c) the completion of the Syndicated Community Offering.
If any of the Shares remain available after the expiration of the
Subscription Offering and, if applicable, the Community Offering, at the request
of the Company and the Bank, the Agents will seek to form a syndicate of
registered brokers or dealers ("Selected Dealers") to assist in the solicitation
of purchase orders of such Shares on a best efforts basis. The Agents will
endeavor to limit the aggregate fees to be paid by the Company and the Bank
under any agreement with such Selected Dealers to an amount competitive with
gross underwriting discounts charged at such time for underwritings of
comparable amounts of stock sold at a comparable price per share in a similar
market
<PAGE>
environment; PROVIDED, HOWEVER, that the aggregate fees payable to the Agents
and the Selected Dealers shall not exceed 4.5% of the aggregate dollar amount of
the Shares sold by the Agents and such Selected Dealers. The Agents will
endeavor to distribute the Shares among the Selected Dealers in a fashion which
best meets the distribution objective of the Company and the requirements of the
Plan, which may result in limiting the allocation of stock to certain Selected
Dealers. It is understood that in no event shall the Agents be obligated to act
as a Selected Dealer or to take or purchase any Shares.
In the event the Company is unable to sell a minimum of 5,206,250 Shares
(or such lesser amount as the Superintendent and the FDIC may permit) within the
period herein provided, this Agreement shall terminate, and the Company and the
Bank shall refund promptly to any persons who have subscribed for any of the
Shares the full amount which they may have received from them, together with
interest as provided in the Prospectus, and no party to this Agreement shall
have any obligation to the other parties hereunder, except for the obligations
of the Company and the Bank as set forth in Sections 5, 7(a) and 7(b) and 8
hereof and the obligations of the Agents as set forth in Sections 7(c) and 8.
Appropriate arrangements for holding the funds received from subscriptions for
Shares until all Shares are sold and paid for were made prior to the
commencement of the Subscription Offering and Community Offering, with provision
for prompt refund to the purchasers as set forth above, or for delivery to the
Company if all Shares are sold.
If all conditions precedent to the consummation of the Conversion are
satisfied, including the sale of a minimum of 5,206,250 Shares, the Company
agrees to issue or have issued such Shares and to release for delivery
certificates for such Shares to subscribers thereof on the Closing Date against
payment therefor to the Company by any means authorized pursuant to the
Prospectus, at the principal office of the Company at One North Main Street,
Cortland, New York 13045, or at such other place as shall be agreed upon between
the parties hereto.
In addition to the payment or reimbursement of the expenses specified in
Section 5 hereof, the Agents shall receive the following compensation for their
services hereunder:
A commission equal to one hundred and fifteen basis points
(1.15%) of the aggregate dollar amount of the Shares sold in the Subscription
Offering and the Community Offering, excluding any Shares sold to (i) any
director, trustee or officer of the Company or the Bank, or members of their
immediate families (which term shall mean parents, grandparents, spouses,
siblings, children and grandchildren), and any individual retirement account or
employee benefit plans for the benefit of any director, trustee or officer of
the Company or the Bank, or members of their immediate families, and (ii) any
employee benefit plans of the Bank or the Company; PROVIDED, HOWEVER, that in no
event shall the commission payable pursuant to this paragraph (a) be less than
$750,000.
<PAGE>
With respect to any Shares sold by the Agents or the Selected
Dealers in the Syndicated Community Offering, the commission shall not exceed
four and one-half percent (4.5%) of the aggregate dollar amount of the Shares
sold by the Agents or the Selected Dealers.
The Agents shall be reimbursed for out-of-pocket expenses
incurred by them whether or not the Offerings are successfully completed;
PROVIDED, HOWEVER, that such out-of-pocket expenses will not exceed $25,000.
The Company and the Bank shall pay directly the expenses for the Agents' legal
fees not to exceed $75,000, exclusive of out-of-pocket expenses and
disbursements for such legal counsel, which shall also be the responsibility of
the Company and the Bank. Neither the Company nor the Bank shall pay or
reimburse the Agents for any of the foregoing expenses accrued after the Agents
shall have notified the Company or the Bank of their election to terminate this
Agreement pursuant to Section 9 hereof or after such time as the Company or the
Bank shall have given notice in accordance with Section 10 hereof that the
Agents are in breach of this Agreement.
Notwithstanding the limitations on reimbursement of the Agents
for out-of- pocket expenses as provided in the immediately preceding paragraph
(c), in the event that a resolicitation or other event causes the Offerings to
be extended beyond their original expiration date, the Agents shall be
reimbursed for their out-of-pocket expenses incurred during such extended
period, provided, that the allowance for out-of-pocket expenses provided for in
the immediately preceding paragraph (c) above have been exhausted and subject to
the following paragraph.
The Company shall pay any stock issue and transfer taxes which may be
payable with respect to the sale of the Shares. The Company and the Bank shall
also pay all expenses of the Conversion incurred by them or on their prior
approval including, but not limited to, their attorneys' fees, fees of the
independent appraiser, fees of the account consolidation agent, fees of the
independent vote tabulator, NASD filing fees, fees of attorneys relating to any
required state securities law filings, transfer agent charges, road show related
expenses, telephone charges, airfreight, rental equipment, supplies, fees
relating to auditing and accounting and the cost of printing all documents
necessary in connection with Conversion.
All fees and commissions payable to the Agents hereunder shall be payable
in next-day funds on the Closing Date or, if the Conversion is not completed and
is terminated for any reason, within 10 business days of receipt by the Company
of a written request from the Agents for reimbursement of their expenses. The
Agents each acknowledge receipt of $10,000 advance payment from the Bank, which
shall be credited against the total reimbursement due the Agents hereunder.
<PAGE>
FURTHER AGREEMENTS.
The Company and the Bank jointly and severally covenant and agree that:
(a) The Company and the Bank will prepare and file such amendments or
supplements to the Registration Statement, the Prospectus, the Conversion
Application and the Proxy Statement as may hereafter be required by the SEC
Regulations or the Conversion Regulations or as may hereafter be reasonably
requested by the Agents. If any Shares remain unsubscribed following completion
of the Subscription Offering and, if applicable, the Community Offering, the
Company (i) will promptly file with the SEC a post-effective amendment to the
Registration Statement relating to the results of the Subscription Offering and,
if applicable, the Community Offering, any additional information with respect
to the proposed plan of distribution and any revised pricing information or (ii)
if no such post-effective amendment is required, will file with the SEC a
prospectus or prospectus supplement containing information relating to the
results of the Subscription Offering and, if applicable, the Community Offering,
and pricing information pursuant to Rule 424(c) of the SEC Regulations, in
either case in a form reasonably acceptable to the Company and the Agents.
(b) The Company and the Bank will deliver to the Agents, without
charge, as many signed copies and as many conformed copies of the Conversion
Application and the Registration Statement as originally filed and of each
amendment or supplement thereto (including exhibits filed therewith or
incorporated by reference therein) as the Agents reasonably may request and as
many copies of the Prospectus (and any amendments or supplements thereto) as the
Agents reasonably may request. The Company authorizes the Agents to use the
Prospectus in any lawful manner in connection with the offer and sale of the
Shares.
(c) The Company will notify the Agents immediately, and confirm the
notice in writing, (i) when any post-effective amendment to the Registration
Statement becomes effective, when any supplement to the Prospectus has been
filed and when any amendment to the Conversion Application has been filed, (ii)
of the receipt of any comments from the SEC, the Superintendent, the FDIC or the
FRB with respect to the Registration Statement, the Conversion Application, the
Holding Company Application or the transactions contemplated by this Agreement
or the Plan, (iii) of any request by the SEC, the Superintendent, the FDIC or
the FRB for any amendment to the Registration Statement, the Conversion
Application, the Holding Company Application or any amendment or supplement to
the Prospectus or for additional information, (iv) of the issuance by the
Superintendent or the FDIC of any order preventing or suspending the Offerings
or the use of the Prospectus, or the initiation or threat of any proceeding for
that purpose, (v) of the issuance by the SEC of any stop order relating to the
Registration Statement or the initiation or threat of any proceeding for that
purpose and (vi) of the receipt of any notice with respect to the suspension of
the qualification of the Shares for offering or sale in any jurisdiction or the
initiation or threat of any proceeding for such purpose. The Company and the
Bank will make every reasonable effort to prevent the issuance of any stop order
and, if any stop order is issued, to obtain the lifting of such order at the
earliest possible time.
<PAGE>
(d) During the time when the Prospectus is required to be delivered
under the Securities Act, the Company and the Bank will comply, at their own
expense, with all requirements imposed upon them by the Superintendent, the
FDIC, the SEC, the Conversion Regulations, the Securities Act, the SEC
Regulations, the Exchange Act and the rules and regulations promulgated
thereunder so far as necessary to permit the continuance of offers and sales of
or dealings in the Shares during such period in accordance with the provisions
hereof and the Prospectus. If, during the period when the Prospectus is
required to be delivered in connection with the offer and sale of the Shares,
any event or circumstance relating to or affecting the Company, the Bank and
their subsidiaries, considered as a whole, shall occur as a result of which it
is necessary, in the opinion of counsel for the Agents, with the concurrence of
counsel to the Company, to amend or supplement the Prospectus in order to make
the Prospectus not false or misleading in light of the circumstances existing at
the time it is delivered to a purchaser of the Shares, the Company and the Bank
forthwith shall prepare and furnish to the Agents a reasonable number of copies
of an amendment or amendments or of a supplement or supplements to the
Prospectus (in form and substance satisfactory to counsel for the Agents) which
shall amend or supplement the Prospectus so that, as so amended or supplemented,
the Prospectus shall not contain an untrue statement of a material fact or omit
to state a material fact necessary in order to make the statements therein, in
light of the circumstances existing at the time the Prospectus is delivered to a
purchaser of the Shares, not misleading. The Company will not file or use any
amendment or supplement to the Registration Statement or the Prospectus which
the Agents have not first been furnished a copy of or to which the Agents shall
reasonably object after having been furnished such copy. For the purposes of
this subsection, the Company and the Bank shall furnish such information with
respect to themselves as the Agents from time to time may reasonably request.
(e) The Company and the Bank have taken or will take all reasonably
necessary action, in cooperation with the Agents, as may be required to qualify
or register the Shares for offer and sale by the Company under the securities or
"blue sky" laws of such jurisdictions as the Agents and either the Company or
its counsel may agree upon and as the Conversion Regulations may require and
shall maintain such qualifications in effect so long as required for the
distribution of the Shares; PROVIDED, HOWEVER, that the Company and the Bank
shall not be obligated to qualify as a foreign corporation to do business under
the laws of any such jurisdiction. In each jurisdiction where the Shares have
been qualified or registered, the Company and the Bank shall file and make such
statements or reports as are, or reasonably may be, required by the laws of such
jurisdiction to continue such qualification or registration in effect for a
period of not less than one year from the effective date of the Registration
Statement, unless the Agents agree that such action is not necessary or
advisable in connection with the distribution of the Shares.
(f) The Company authorizes the Agents and the Selected Dealers to act
as agent of the Company in distributing the Prospectus to persons entitled to
receive subscription rights and other persons to be offered Shares having
<PAGE>
record addresses in the states or jurisdictions set forth in a survey of the
securities or "blue sky" laws of the various jurisdictions in which the
Offerings will be made.
(g) Appropriate entries will be made in the financial records of the
Bank sufficient to establish a liquidation account for the benefit of eligible
account holders as of December 31, 1996 and supplemental eligible account
holders as of June 30, 1998 in accordance with the requirements of the
Conversion Regulations.
(h) The Company has filed a registration statement for the Shares
under Section 12(g) of the Exchange Act and such registration statement has been
declared effective. The Company shall maintain the effectiveness of such
registration for a minimum period of three years or for such shorter period as
may be required by applicable law. The Company will file with the Nasdaq Stock
Market, Inc. ("Nasdaq") all documents and notices required by Nasdaq of
companies that have issued securities that are traded in the over-the-counter
market and quotations for which are reported on the Nasdaq National Market.
(i) The Company will make generally available to its security holders
as soon as practicable, but not later than 45 days after the close of the period
covered thereby, an earnings statement (in form complying with the provisions of
Rule 158 of the SEC Regulations) covering a twelve-month period beginning not
later than the first day of the Company's fiscal quarter next following the
effective date (as defined in Rule 158) of the Registration Statement.
(j) For a period of five years from the last day of the fiscal year
during which the Closing Date occurs, the Company will furnish to its
shareholders as soon as practicable after the end of each such fiscal year an
annual report (including consolidated statements of financial condition and
consolidated statements of income, stockholders' equity and cash flows,
certified by independent public accountants). Within 45 days after the end of
each of the first three quarters of each such fiscal year (beginning with the
fiscal quarter ending after the effective date of the Registration Statement),
the Company shall provide the Agents with consolidated summary financial
information of the Company for such quarter in reasonable detail. In addition,
such annual report and quarterly consolidated summary financial information
shall be made public through the issuance of appropriate press releases at the
same time or prior to the time of the furnishing thereof to shareholders of the
Company and the Agents, as applicable.
(k) For a period of five years from the last day of the fiscal year
during which the Closing Date occurs (unless the Shares shall have been
deregistered under the Exchange Act), the Company will furnish to the Agents (i)
as soon as publicly available after the end of each fiscal year, a copy of its
annual report to shareholders for such year, (ii) as soon as publicly available,
a copy of each report or definitive proxy statement of the Company furnished to
or filed with the SEC under the Exchange Act or any national securities exchange
or other system on which any class of securities of the Company is listed, or
furnished generally to shareholders of the Company, and (iii) from time to time,
such other information concerning the Company as the Agents may reasonably
request.
<PAGE>
(l) The Company and the Bank will conduct the Conversion in all
material respects in accordance with the Plan, the Conversion Regulations and
all other applicable regulations, decisions and orders, including all applicable
terms, requirements and conditions precedent to the Conversion imposed upon the
Company or the Bank by the Superintendent, the FDIC or the FRB.
(m) The Company and the Bank will use the net proceeds received from
the sale of the Shares consistently with the manner set forth in the Prospectus
under the caption "USE OF PROCEEDS."
(n) The Company will not deliver the Shares until the Company and the
Bank have satisfied each and every condition set forth in Section 6 hereof,
unless such condition is waived in writing by the Agents.
(o) The Company will advise the Agents, if necessary, as to the
allocation of deposits, in the case of eligible account holders and supplemental
eligible account holders, and votes, in the case of other depositors, and of the
Shares in the event of an oversubscription and will provide the Agents with
final instructions as to the allocation of the Shares ("Allocation
Instructions") in such event, and such information will be accurate and
reliable. The Agents will be entitled to rely on the Allocation Instructions
and will have no liability in respect of its reasonable reliance thereon,
including, without limitation, no liability for or related to any denial or
grant of a subscription in whole or in part.
(p) The Company and the Bank will take such actions and furnish such
information as are reasonably requested by the Agents in order for the Agents to
ensure compliance with the NASD's "Interpretation Relating to Free-Riding and
Withholding."
(q) Other than in connection with any employee benefit plan or
arrangement described in the Prospectus, the Company will not, without the prior
written consent of the Agents, sell or issue, contract to sell or otherwise
dispose of any shares of Common Stock or any other equity securities of the
Company (or any securities convertible into or exercisable or exchangeable for
equity securities of the Company), other than the Shares, for a period of 180
days following the Closing Date.
(r) During the period beginning on the date hereof and ending on the
later of the third anniversary of the Closing Date or the date on which the
Agents receive full payment in satisfaction of any claim for indemnification or
contribution to which it may be entitled pursuant to Sections 7 or 8 hereof,
neither the Company nor the Bank will, without the prior written consent of the
Agents, which consent will not be unreasonably withheld, take or permit to be
taken any action that could result in the capital stock of the Bank becoming
subject to any security interest, mortgage, pledge, lien or encumbrance.
(s) The Company and the Bank will comply with the conditions imposed
by or agreed to with the FRB in connection with its approval of
<PAGE>
the Holding Company Application and with the Superintendent and the FDIC in
connection with their approval of, or non-objection to, the Conversion
Application, including those conditions relating to the establishment and
operation of the Foundation. The Company and the Bank will use their best
efforts to ensure that the Foundation submits, within the time frames required
by applicable law, a request to the Internal Revenue Service ("IRS") to be
recognized as a tax-exempt organization under Section 501(c)(3) of the Code.
The Company and the Bank will take no action that will result in the possible
loss of the Foundation's tax-exempt status, and, except for the contribution of
the Foundation Shares and the additional $100,000 cash contribution disclosed in
the Prospectus, neither the Company nor the Bank will contribute any additional
assets to the Foundation until the IRS has advised the Company and the Bank that
such contributions will be deductible for federal and state income tax purposes.
(t) The Company or the Bank will furnish to the Agents as early
as practicable prior to the Closing Date, but no later than two full business
days prior thereto, a copy of the latest available unaudited interim
consolidated financial statements of the Bank and its subsidiaries which have
been read by KPMG, as stated in their letters to be furnished pursuant to
subsections (i) and (j) of Section 6 hereof.
PAYMENT OF EXPENSES.
Whether or not the Conversion is consummated, (a) the Company and the Bank
agree jointly and severally to pay or reimburse the Agents for all filing fees
paid or incurred by the Agents in connection with all filings with the NASD with
respect to the Offerings and (b) if the Company is unable to sell a minimum of
5,206,250 Shares (or such lesser amount as the Superintendent and the FDIC may
permit) or the Conversion is otherwise terminated, the Company and the Bank will
reimburse the Agents for out-of-pocket expenses incurred by the Agents relating
to the offering of the Shares as provided in Section 3 hereof; provided,
however, that neither the Company nor the Bank will pay or reimburse the Agents
for any of the foregoing expenses accrued after the Agents shall have notified
the Company or the Bank of their election to terminate this Agreement pursuant
to Section 9 hereof or after such time as the Company or the Bank shall have
given notice in accordance with Section 10 hereof that the Agents are in breach
of this Agreement.
CONDITIONS OF THE AGENTS' OBLIGATIONS.
Except as may be waived in writing by the Agents, the obligations of the
Agents as provided herein shall be subject to the accuracy of the
representations and warranties contained in Section 2 hereof as of the date
hereof and as of the Closing Date, to the accuracy of the statements of and
certificates provided by officers, trustees and directors, as applicable, of the
Company and the Bank made pursuant to the provisions hereof, to the performance
by the Company and the Bank of their obligations hereunder and to the following
conditions:
<PAGE>
No stop order suspending the effectiveness of the
Registration Statement shall have been issued under the Securities Act or
proceedings therefor initiated or threatened by the SEC, no order suspending the
Offerings or authorization for final use of the Prospectus shall have been
issued or proceedings therefor initiated or threatened by the Superintendent or
the FDIC, no order suspending the sale of the Shares in any jurisdiction shall
have been issued and all requests for additional information by the SEC (to be
included in the Registration Statement, Prospectus or otherwise) shall have been
complied with to the satisfaction of the Agents.
At the Closing Date, the Agents shall have received:
the favorable opinion of Serchuk & Zelermyer, LLP ("S&Z"), counsel for
the Company and the Bank, dated the Closing Date, addressed to the Agents, in
form and substance reasonably satisfactory to counsel for the Agents, to the
effect that:
xxxvi. The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State of
Delaware with full corporate power and authority to own, lease and operate its
properties and to conduct its business as described in the Registration
Statement and Prospectus and to enter into and perform its obligations under
this Agreement. The Company is duly qualified as a foreign corporation to
transact business and is in good standing in the State of New York and in each
jurisdiction in which such qualification is required, whether by reason of the
ownership or leasing of property or the conduct of business, except where the
failure to so qualify would not have a material adverse effect on the assets or
properties, business, results of operations, prospects or condition (financial
or otherwise) of the Company, the Bank and their subsidiaries, considered as a
whole.
Upon consummation of the Conversion and the issuance of
the Foundation Shares to the Foundation immediately upon completion thereof, the
authorized, issued and outstanding capital stock of the Company shall be within
the range as set forth in the Prospectus under the caption "CAPITALIZATION," and
no Shares of the Company have been or will be issued and outstanding immediately
prior to the Closing Date.
The issuance and the sale of the Shares of the Company
and the contribution of the Foundation Shares have been duly authorized by all
necessary action of the Company and approved by the Superintendent and the FDIC
and, when issued and delivered in accordance with the terms of the Plan and paid
for, or contributed by the Company in the case of the Foundation Shares, will be
duly and validly issued, fully paid and nonassessable and will conform to the
description thereof contained in the Prospectus. The issuance of the Shares and
the Foundation Shares is not subject to any preemptive or similar rights, and
good title to the Shares will be transferred by the Company upon issuance
thereof against payment
<PAGE>
therefor, free and clear of all claims, encumbrances, security interests and
liens against the Company whatsoever.
The certificates representing the Shares and the
Foundation Shares will conform in all material respects to the requirements of
all applicable laws and regulations. Except as disclosed in the Prospectus,
there is no outstanding option, warrant or other right calling for the issuance
of, and there is no commitment, plan or arrangement to issue, any share of
capital stock of the Company or the Bank or any security convertible into, or
exercisable or exchangeable for, such capital stock.
The Bank, as of the date hereof, has been duly
organized as a New York State chartered mutual savings bank and, upon
consummation of the Conversion, will be duly organized as a New York State
chartered stock savings bank, in both instances with full corporate power and
authority to own, lease and operate its properties and to conduct its business
as described in the Registration Statement and Prospectus. The Bank is, and
upon consummation of the Conversion will be, duly qualified as a foreign
corporation in each jurisdiction in which such qualification is required, except
where the failure to so qualify would not have a material adverse effect on the
assets or properties, business, results of operations, prospects or condition
(financial or otherwise) of the Company, the Bank and their subsidiaries,
considered as a whole.
The Bank is a member in good standing of the Federal
Home Loan Bank of New York, and the deposit accounts of the Bank are insured up
to applicable limits by the Bank Insurance Fund of the FDIC.
Each direct and indirect subsidiary of the Bank has
been incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation, has full corporate
power and authority to own, lease and operate its properties and to conduct its
business as described in the Registration Statement and Prospectus and is duly
qualified as a foreign corporation in each jurisdiction in which such
qualification is required, except where the failure to so qualify would not have
a material adverse effect on the assets or properties, business, results of
operations, prospects or condition (financial or otherwise) of the Company, the
Bank and their subsidiaries, considered as a whole. The activities of each such
subsidiary are permitted to subsidiaries of a bank holding company and of a New
York State chartered savings bank by the Banking Law and by the rules,
regulations, resolutions and practices of the FRB and the FDIC. All of the
issued and outstanding capital stock of each such subsidiary has been duly
authorized and validly issued, is fully paid and nonassessable and is owned by
the Bank, directly or through subsidiaries, free and clear of any security
interest, mortgage, pledge, lien, encumbrance, claim or equity.
The Foundation has been duly incorporated and is
validly existing as a non-stock corporation in good standing under the laws of
the State of New York with full corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Prospectus. The Foundation is not a bank holding company within the meaning of
the BHCA and 12
<PAGE>
C.F.R. Part 225 as a result of the issuance of the Foundation Shares to it in
accordance with the terms of the Plan and in the amounts as described in the
Prospectus. No approvals are required to establish the Foundation and to
contribute the Foundation Shares thereto as described in the Prospectus other
than those set forth in the Superintendent's approval and the FDIC's notice of
intent not to object to the Conversion, copies of which have been provided to
the Agents prior to the Closing Date. The Foundation Shares to be issued to the
Foundation in accordance with the Plan and as described in the Prospectus will
have been duly authorized for issuance and, when issued and contributed by the
Company pursuant to the Plan, will be duly and validly issued, fully paid and
nonassessable and free of preemptive or similar rights.
The issuance and sale of the capital stock of the Bank
to the Company has been duly authorized by all necessary action of the Bank and
approved by the Superintendent, the FDIC and the FRB (subject to the
satisfaction of various conditions imposed in connection with the
Superintendent's approval of, and the FDIC's non-objection to, the Conversion
Application), and such capital stock, when issued in accordance with the terms
of the Plan, will be fully paid, nonassessable and free of preemptive or similar
rights and will conform in all material respects to the description thereof
contained in the Prospectus. All such capital stock of the Bank will be owned
beneficially and of record by the Company free and clear of all claims,
encumbrances, security interests and liens against the Bank.
The FRB has approved the Holding Company Application,
the Superintendent has approved the Conversion Application and the FDIC has
issued a letter of intent not to object to the Conversion Application, and no
action is pending or, to S&Z's knowledge, threatened, with respect to the
Holding Company Application, the Conversion Application (including the
establishment of the Foundation and the contribution of the Foundation Shares
thereto) or the acquisition by the Company of all of the Bank's issued and
outstanding capital stock. At the date of such approval by the FRB and the
Superintendent and the issuance of such letter of intent not to object by the
FDIC, and at the Closing Date, the Holding Company Application complied as to
form in all material respects with the applicable requirements of the FRB and
the Conversion Application complied in all material respects with the Conversion
Regulations, including the proposed amendments to the Conversion Application.
To S&Z's knowledge, all material documents and exhibits required to be filed
with the Holding Company Application and the Conversion Application have been so
filed and the descriptions in the Holding Company Application and the Conversion
Application of such documents and exhibits are accurate in all material
respects.
The execution, delivery and performance of this
Agreement, the consummation of the transactions contemplated hereby and all
actions in connection with the contribution of the Foundation Shares to the
Foundation have been duly and validly authorized by all necessary actions on the
part of each of the Company and the Bank, and this Agreement is a legal, valid
and binding obligation of each of the Company and the Bank, enforceable in
accordance with its terms, except as rights to indemnity and contribution
hereunder may be
<PAGE>
limited by applicable law (it being understood that S&Z may avail itself of
customary exceptions concerning the effect of bankruptcy, insolvency or similar
laws and the availability of equitable remedies). Neither the execution,
delivery and performance of this Agreement nor the consummation of the
transactions contemplated hereby by the Company and the Bank will conflict with
or result in a breach or violation of the charter or bylaws of the Company, the
Bank (in either mutual or stock form) or their subsidiaries or to the best of
S&Z's knowledge, conflict with or constitute a breach, violation or default (or
an event which, with notice or lapse of time, or both, would constitute a
default) under, or require any consent or waiver under, or give rise to any
right of termination, cancellation or acceleration contained in, or result in
the creation or imposition of any lien, charge or other encumbrance upon any of
the properties or assets of the Company, the Bank or their subsidiaries pursuant
to any of the terms, provisions or conditions of, any material agreement,
contract, indenture, bond, debenture, note, instrument or obligation to which
the Company, the Bank or their subsidiaries is a party or by which any of them
or any of their properties or businesses are bound or violate any governmental
license or permit or any enforceable published law, administrative regulation or
order or court order, judgment, writ, injunction or decree (subject to the
satisfaction of certain conditions imposed on the Company and the Bank in
connection with the Superintendent's approval of, and the FDIC's non-objection
to, the Conversion Application), which breach, default, encumbrance or violation
would have a material adverse effect on the assets or properties, business,
results of operations, prospects or condition (financial or otherwise) of the
Company, the Bank and their subsidiaries, considered as a whole.
The Prospectus has been duly authorized by the
Superintendent and the FDIC for final use pursuant to the Conversion Regulations
and no action is pending or, to S&Z's knowledge, threatened by the
Superintendent or the FDIC to revoke such authorization.
The Registration Statement has become effective under
the Securities Act, and no stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings therefor have been
initiated or, to S&Z's knowledge, are threatened by the SEC.
No further approval, authorization, consent or other
order of any regulatory or supervisory or other public authority is required in
connection with the execution, delivery and performance of this Agreement or the
issuance of the Shares and the Foundation Shares and the consummation of the
Conversion, except the approval of the Stock Charter by the Superintendent and
except as may be required under the securities laws of various jurisdictions.
At the time the Registration Statement became
effective, the Registration Statement, including any amendment or supplement
thereto (except for the financial statements and schedules and other financial
and statistical data included therein, as to which no opinion need be rendered),
complied as to form in all material respects with the requirements of the
Securities Act, the SEC Regulations and the Conversion Regulations. To S&Z's
knowledge, all material documents and exhibits required to be filed with the
Registration Statement have
<PAGE>
been so filed and the descriptions in the Registration Statement of such
documents and exhibits are accurate in all material respects.
To S&Z's knowledge, there is no litigation or
governmental or other proceeding or investigation pending or threatened against
or involving the assets, properties or businesses of the Company, the Bank,
their subsidiaries or any of their respective assets which individually or in
the aggregate would reasonably be expected to have a material adverse effect on
the assets or properties, business, results of operations, prospects or
condition (financial or otherwise) of the Company, the Bank and their
subsidiaries, considered as a whole.
The information in the Prospectus and incorporated by
reference in the Proxy Statement under the captions "DIVIDEND POLICY,"
"REGULATION," "TAXATION," "RESTRICTIONS ON ACQUISITION OF THE COMPANY AND THE
BANK" and "DESCRIPTION OF CAPITAL STOCK OF THE COMPANY," insofar as they are, or
refer to, statements of law or legal conclusions (excluding financial data
included therein, as to which no opinion is expressed), have been prepared or
reviewed by S&Z, are fair summaries in all material respects and are complete
and accurate in all material respects.
The Plan has been duly authorized by the Board of
Directors of the Company and the Board of Trustees of the Bank and, to S&Z's
knowledge, the Superintendent's approval and the FDIC's non-objection to the
Plan remain in full force and effect. The Bank's organization certificate has
been amended and restated, effective upon consummation of the Conversion and the
filing of such amended and restated organization certificate with the
Superintendent, to authorize the issuance of permanent capital stock. To S&Z's
knowledge, the Company and the Bank have conducted the Conversion and the
establishment and funding of the Foundation in all material respects in
accordance with the Conversion Regulations, the Plan and all other applicable
regulations, decisions and orders thereunder, including all material applicable
terms, conditions, requirements and conditions precedent to the Conversion
imposed upon the Company or the Bank by the Superintendent or the FDIC, and no
order has been issued by the Superintendent or the FDIC to suspend the
Conversion or the Offerings and no action for such purpose has been instituted
or threatened by the Superintendent, the FDIC or the FRB. To S&Z's knowledge,
no person has sought to obtain review of the final action of the Superintendent
or the FDIC in approving the Conversion Application (which includes the Plan,
which provides for the establishment of the Foundation) or the FRB in approving
the Holding Company Application.
To S&Z's knowledge, each of the Company, the Bank and
their subsidiaries has all necessary Permits to own, lease and license their
assets and properties and conduct their businesses as now being conducted and as
described in the Registration Statement and the Prospectus, except where the
lack of such Permit would not have a material adverse effect on the assets or
properties, business, results of operations, prospects or condition (financial
or otherwise) of the Company, the Bank and their subsidiaries, considered as a
whole. Each of the
<PAGE>
Company, the Bank and their subsidiaries has fulfilled and performed in all
material respects their obligations with respect to such Permits and, to S&Z's
knowledge, no event has occurred which allows, or which after notice or lapse,
or both, of time would allow, revocation or termination thereof or any material
impairment of the rights of the holder thereof.
None of the Company, the Bank or their subsidiaries is
in material breach or material violation of its respective charter, organization
certificate or bylaws (and the Bank will not be in breach or violation of its
organization certificate or bylaws in stock form upon consummation of the
Conversion). To S&Z's knowledge, there has been no breach, violation or default
(or the occurrence of any event which, with notice or lapse of time, or both,
would constitute a default) under, or creation or imposition of any lien, charge
or other encumbrance upon any of the properties or assets of the Company, the
Bank or their subsidiaries pursuant to any of the terms, provisions or
conditions of, any agreement, contract, indenture, bond, debenture, note,
instrument or obligation to which the Company, the Bank or their subsidiaries is
a party or by which either of them or any of their respective assets or
properties may be bound or is subject, or violation of any governmental license
or permit or any enforceable published law, administrative regulation or order
or court order, judgment, writ, injunction or decree, which breach, default,
encumbrance or violation would have a material adverse effect on the assets or
properties, business, results of operations, prospects or condition (financial
or otherwise) of the Company, the Bank and their subsidiaries, considered as a
whole.
Each of the Company and the Bank has all such corporate
power, authority, authorizations, approvals, permits and orders as may be
required to enter into this Agreement and to carry out the provisions and
conditions hereof and to issue and sell the Shares in the Offerings, and to
issue and contribute the Foundation Shares, subject to the limitations set forth
herein and subject to the satisfaction of certain conditions imposed by the
Superintendent, the FDIC and the FRB in connection with their respective
approvals of the Conversion Application and the Holding Company Application, as
the case may be, and except as may be required under the securities or "blue
sky" laws of various jurisdictions, and, in the case of the Company, as of the
Closing Date, will have such approvals and orders to issue and sell the Shares
to be sold by the Company as provided herein, and, in the case of the Bank, as
of the Closing Date, will have such approvals and orders to issue and sell the
shares of its capital stock to be sold to the Company as provided in the Plan,
subject to the approval of the Stock Charter by the Superintendent.
The Company is not required to be registered as an
investment company under the Investment Company Act of 1940.
xxxvii. In rendering such opinion, such counsel may rely as to matters of
fact on certificates of officers, directors and trustees of the Company and the
Bank and certificates of public officials delivered pursuant hereto. Such
counsel may assume that any agreement is the legal, valid and binding obligation
of any parties to such agreement other than the Company and the Bank. In
giving the opinion required by subsection (b)(i), S&Z shall additionally state
that nothing has come to
<PAGE>
such counsel's attention that would lead it to believe that the Registration
Statement (except for the financial statements, notes to financial statements,
financial tables and other financial and statistical data contained therein, as
to which such counsel need make no statement), at the time it became effective,
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements made
therein, in light of the circumstances under which they were made, not
misleading, or that the Prospectus (except for the financial statements, notes
to financial statements, financial tables and other financial and statistical
data contained therein as to which such counsel need make no statement), as of
the date of the Prospectus and at the Closing Date, contained any untrue
statement of a material fact or omitted to state a material fact necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading.
At Closing Date, the Company and the Bank shall have
completed in all material respects the conditions precedent to the Conversion in
accordance with the Plan, the Conversion Regulations and all other applicable
laws, regulations, decisions and orders, including all terms, conditions,
requirements and provisions precedent to the Conversion imposed upon the Company
or the Bank by the Superintendent, the FDIC, the FRB or any other regulatory
authority other than those which the Superintendent, the FDIC or the FRB permit
to be competed after the Conversion.
Counsel for the Agents shall have been furnished such
documents and opinions as they reasonably may require for the purpose of
enabling them to review or pass upon the matters required by the Agents and for
the purpose of evidencing the accuracy, completeness or satisfaction of any of
the representations, warranties or conditions herein contained, including, but
not limited to, resolutions of the Boards of Directors of the Company and the
Bank regarding the authorization of this Agreement and the transactions
contemplated hereby.
Prior to and at the Closing Date, in the reasonable opinion
of the Agents, there shall not have been any material change in the assets or
properties, business, results of operations, prospects or condition (financial
or otherwise) of the Company, the Bank and their subsidiaries, considered as a
whole, since the latest date as of which such condition is set forth in the
Prospectus, except as referred to therein, and the Agents shall have received a
certificate signed by the principal executive officer and the principal
financial officer of each of the Company and the Bank, dated as of the Closing
Date, to the effect that such persons have carefully examined the Registration
Statement and the Prospectus and: (i) there has been no such material change;
(ii) there has been no transaction entered into by the Company or the Bank after
the latest date as of which the financial condition of the Company or the Bank
is set forth in the Prospectus other than transactions referred to or
contemplated therein, transactions in the ordinary course of business and
transactions which are not material to the Company, the Bank and their
subsidiaries, considered as a whole; (iii) neither the Company nor the Bank has
received from the Superintendent, the FDIC, the FRB or the SEC any direction
(oral or written) to make any change in the method of conducting its business
(which direction, if any, shall have been disclosed to the Agents) which is
material to the business of the Company,
<PAGE>
the Bank and their subsidiaries, considered as a whole, with which it has not
complied; (iv) no action, suit or proceeding, at law or in equity or before or
by any federal or state commission, board or other administrative agency, is
pending or threatened against the Company or the Bank or affecting any of their
respective assets or properties, wherein an unfavorable decision, ruling or
finding would have a material adverse effect on the assets or properties,
business, results of operations, prospectus or condition (financial or
otherwise) of the Company, the Bank and its subsidiaries, considered as a whole;
(v) since the date the Prospectus became authorized by the Company for use, no
event has occurred which should have been set forth in an amendment or
supplement to the Prospectus which has not been so set forth, including
specifically, but without limitation, any material change in the assets or
properties, business, results of operations, prospects or condition (financial
or otherwise) of the Company or the Bank; (vi) no order has been issued by the
SEC, the Superintendent, the FDIC or the FRB to suspend the Offerings, the
effectiveness of the Registration Statement or the authorization for final use
of the Prospectus, and no proceeding for such purposes has been instituted or
threatened by the SEC, the Superintendent, the FDIC or the FRB; (vii) to the
knowledge of such officers, no person has sought to obtain review of the final
actions of the Superintendent or the FDIC approving the Plan in accordance with
the Conversion Regulations, nor has any person sought to obtain review of the
action of the FRB in approving the Holding Company Application; (viii) the
Shares have been qualified or registered for offering and sale by the Company
under the securities or "blue sky" laws of such jurisdictions as the Agents and
the Company shall have agreed upon; and (ix) all of the representations and
warranties contained in Section 2 of this Agreement are true and correct, with
the same force and effect as though expressly made on the Closing Date, and the
Company and the Bank have complied with all agreements and satisfied all
conditions on their part to be performed or satisfied at or prior to the Closing
Date.
At the Closing Date, the Agents shall receive, among other
documents, (i) copies of the letters from the Superintendent and the FDIC
authorizing the use of the Prospectus and the Proxy Statement and a copy of the
FRB's approval of the Holding Company Application; (ii) a copy of the order of
the SEC declaring the Registration Statement effective; (iii) copies of the
letters from the Superintendent evidencing the corporate existence of the Bank;
(iv) a copy of the letter from the appropriate Delaware authority evidencing the
incorporation (and, if generally available from such authority, good standing)
of the Company; and (v) a copy of the Company's corporate charter certified by
the appropriate Delaware governmental authority.
As soon as available after the Closing Date, the Agents
shall receive a copy of the Bank's certified restated organization certificate
executed by the appropriate state governmental authority.
At the time of execution of this Agreement, the Agents shall
have received from KPMG Peat Marwick LLP, independent certified public
accountants ("KPMG"), a letter dated such date, addressed to the Agents and the
Company, in form and substance satisfactory to the Agents, to the effect that:
(i) they are independent public accountants with respect to the Company, the
Bank and their subsidiaries within the meaning of the Code of Ethics of the
American Institute
<PAGE>
of Certified Public Accountants, the Securities Act, the SEC Regulations and the
Conversion Regulations; (ii) it is KPMG's opinion that the consolidated
financial statements and supporting schedules included in the Registration
Statement and covered by KPMG's opinions therein comply as to form in all
material respects with the applicable accounting requirements of the Securities
Act, the SEC Regulations and the Conversion Regulations; (iii) based upon
limited procedures as agreed upon by the Agents and KPMG set forth in detail in
such letter, nothing has come to their attention which causes them to believe
that (A) the unaudited financial statements and supporting schedules of the Bank
and its subsidiaries included in the Registration Statement do not comply as to
form in all material respects with the applicable accounting requirements of the
Securities Act, the SEC Regulations and the Conversion Regulations or are not
presented in conformity with generally accepted accounting principles applied on
a basis substantially consistent with that of the audited financial statements
included in the Registration Statement and the Prospectus, (B) the unaudited
amounts of net interest income and net income set forth under the caption
"SELECTED FINANCIAL INFORMATION" in the Registration Statement and Prospectus do
not agree with the amounts set forth in unaudited consolidated financial
statements as of and for the dates and periods presented under such captions or
such amounts were not determined on a basis substantially consistent with that
used in determining the corresponding amounts in the audited financial
statements included in the Registration Statement and the Prospectus, (C) at a
specified date not more than five days prior to the date of this Agreement,
there has been any increase in the consolidated long-term or short-term debt of
the Bank and its subsidiaries or any decrease in consolidated total assets, the
allowance for loan losses, total deposits or net worth of the Bank and its
subsidiaries, in each case as compared with the amounts shown in the December
31, 1997 balance sheet included in the Registration Statement and the Prospectus
or (D) during the period from December 31, 1997 to a specified date not more
than five days prior to the date of this Agreement, there were any decreases, as
compared with the corresponding period in the preceding year, in total interest
income, net interest income, net interest income after provision for loan
losses, income before income tax expense or net income of the Bank and its
subsidiaries, except in all instances for increases or decreases which the
Registration Statement and the Prospectus disclose, have occurred or may occur;
and (iv) in addition to the examination referred to in KPMG's opinions and the
limited procedures referred to in clause (iii) above, they have carried out
certain specified procedures, not constituting an audit, with respect to certain
amounts, percentages and financial information which are included in the
Registration Statement and Prospectus and which are specified by the Agents, and
have found such amounts, percentages and financial information to be in
agreement with the relevant accounting, financial and other records of the
Company, the Bank and their subsidiaries identified in such letter.
At the Closing Date, the Agents shall receive a letter in
form and substance satisfactory to counsel for the Agents, from KPMG, dated the
Closing Date and addressed to the Agents and the Company, confirming the
statements made by them in the letter delivered by them pursuant to the
preceding subsection as of a specified date not more than five days prior to the
Closing Date.
<PAGE>
At the Closing Date, the Shares shall have been approved for
listing on the Nasdaq Stock Market upon notice of issuance.
At the Closing Date, the Agents shall have received a letter
from RP Financial, LC., dated as of the Closing Date, confirming its appraisal.
All such opinions, certificates, letters and documents shall be in
compliance with the provisions hereof only if they are, in the reasonable
opinion of the Agents and their counsel, satisfactory to the Agents and their
counsel. Any certificates signed by an officer or director of the Company or
the Bank prepared for the Agents' reliance and delivered to the Agents or to
counsel for the Agents shall be deemed a representation and warranty by the
Company and the Bank to the Agents as to the statements made therein. If any
condition to the Agents' obligations hereunder to be fulfilled prior to or at
the Closing Date is not so fulfilled, the Agents may terminate this Agreement
or, if the Agents so elect, may waive in writing any such conditions which have
not been fulfilled or extend the time of their fulfillment. If the Agents
terminate this Agreement as aforesaid, the Company and the Bank shall reimburse
the Agents for their expenses as provided in Sections 3 and 5 hereof.
INDEMNIFICATION.
The Company and the Bank jointly and severally agree to
indemnify and hold harmless the Agents, their respective officers, directors,
employees, agents, affiliates and each person, if any, who controls either of
the Agents within the meaning of either Section 15 of the Securities Act or
Section 20(a) of the Exchange Act from and against any and all losses, claims,
damages and liabilities, joint or several (including all investigation, legal or
other expenses reasonably incurred by such persons in connection with the
preparation for or defense of any threatened or pending claim, action or
proceeding, whether or not resulting in any liability and any amount paid in
settlement of any claim, action or proceeding), arising out of or based upon (i)
any misrepresentation by the Company or the Bank in this Agreement or arising
out of or based upon any untrue or alleged untrue statement of a material fact
or the omission or alleged omission of a material fact required to be stated or
necessary to make not misleading any statements contained in (A) the
Registration Statement or the Prospectus, or any amendments or supplements
thereto, or (B) any application (including the Conversion Application and the
Holding Company Application) or other document or other communication
(collectively referred to in this Section 7 as "Applications") prepared or
executed by or on behalf of the Company or the Bank, whether or not filed in any
jurisdiction, to effect the Conversion or qualify the Shares under the
securities laws thereof or filed with the SEC, the Superintendent, the FDIC or
the FRB, unless such statement or omission was made in reliance upon and in
conformity with written information furnished to the Company or the Bank with
respect to the Agents by or on behalf of the Agents expressly for use in the
Prospectus, or any amendment or supplement thereto, or in the Applications, as
the case may be, or (ii) the participation by the Agents in the Conversion.
This indemnity shall be in addition to any liability the Company and the Bank
may otherwise have to the Agents.
<PAGE>
The Company and the Bank jointly and severally agree to
indemnify and hold the Agents harmless for any liability whatsoever arising out
of (i) the Allocation Instructions or (ii) any records of account holders,
depositors and borrowers of the Bank delivered to the Agents by the Bank or its
agents for use during the Conversion.
The Agents agree to indemnify and hold harmless the Company,
the Bank, their respective officers, directors and employees and each person, if
any, who controls the Company and the Bank within the meaning of Section 15 of
the Securities Act or Section 20(a) of the Exchange Act to the same extent as
the foregoing indemnity from the Company and the Bank to the Agents, but only
with respect to untrue statements or omissions of a material fact, if any, made
in the Prospectus, or any amendment or supplement thereto, in reliance upon, and
in conformity with, written information furnished to the Company or the Bank
with respect to the Agents by or on behalf of the Agents expressly for use in
the Prospectus. It is expressly agreed, however, that the Agents shall not be
liable for any loss, liability, claim, damage or expense which, in the
aggregate, exceeds the amount paid (excluding reimbursable expenses) to the
Agents under this Agreement.
Promptly after receipt by an indemnified party under this
Section 7 of notice of any claim or of the commencement of any action against it
in respect of which indemnity may be sought, such indemnified party will notify
the indemnifying party in writing of the receipt or commencement thereof, and
the indemnifying party shall have the right to assume the defense of such claim
or action (including the employment of counsel reasonably satisfactory to the
indemnified party and the payment of fees and expenses of such counsel);
PROVIDED, HOWEVER, that the failure of an indemnified party to so notify an
indemnifying party will relieve such indemnifying party from any liability which
it may have to any indemnified party only to the extent that such a delay in
notification materially prejudices the indemnifying party's defense of such
claim or action and will not relieve such indemnifying party from any liability
which it may have to any indemnified party otherwise than under this Section 7.
The indemnified party shall have the right to control its defense if, in the
opinion of its counsel, the indemnified party's defense is unique or separate to
it, as opposed to a defense pertaining to the indemnifying party. In any event,
the indemnified party shall have the right to retain counsel reasonably
satisfactory to the indemnifying party, at the indemnifying party's expense, to
represent the indemnified party in any claim or action in respect of which
indemnity is sought, and the indemnified party shall cooperate with the
indemnifying party and the indemnifying party's counsel in the defense of such
claim or action. The indemnifying party shall not, in connection with any one
such claim or action, or separate but substantially similar or related claims or
actions in the same jurisdiction arising out of the same general allegations or
circumstances, be liable for the reasonable fees and expenses of more than one
separate firm of attorneys for all the indemnified parties unless the defense of
one indemnified party is unique or separate from that of another indemnified
party subject to the same claim or action. In the event that the indemnifying
party does not promptly assume the defense of a claim or action, the indemnified
party shall have the right to employ counsel reasonably satisfactory
<PAGE>
to the indemnifying party, at the indemnifying party's expense, to defend such
claim or action. An indemnifying party against whom indemnity may be sought
shall not be liable to indemnify an indemnified party under this Section 7 if
any settlement of any such action is effected without such indemnifying party's
consent, which consent shall not be unreasonably withheld or delayed.
Notwithstanding the foregoing, the indemnification provided for in this Section
7 shall not apply to the Bank to the extent that such indemnification is found
in a final judgment by a court of competent jurisdiction to constitute an
impermissible covered transaction under Section 23A or Section 23B of the FRA.
CONTRIBUTION.
In order to provide for just and equitable contribution in circumstances in
which the indemnification provided for in Section 7 hereof is for any reason
held to be unenforceable by the indemnified parties although applicable in
accordance with its terms, the Company, the Bank and the Agents shall contribute
to the aggregate losses, claims, damages and liabilities (including any
investigation, legal and other expenses reasonably incurred in connection with,
and any amount paid in settlement of, any claim, action or proceeding, but after
deducting any contribution received by the Company or the Bank from persons
other than the Agents, such as persons who control the Company within the
meaning of the Securities Act, officers of the Company who signed the
Registration Statement and directors of the Company, who may also be liable for
contribution) to which the Company, the Bank and the Agents may be subject in
such proportion as is appropriate to reflect the relative benefits received by
the Company and the Bank on the one hand and the Agents on the other from the
offering of the Shares or, if such allocation is not permitted by applicable law
or indemnification is not available as a result of the indemnifying party not
having received notice as provided in Section 7 hereof, in such proportion as is
appropriate to reflect not only the relative benefits referred to above but also
the relative fault of the Company and the Bank on the one hand and the Agents on
the other in connection with the statements or omissions which resulted in such
losses, claims, damages, liabilities or expenses, as well as any other relevant
equitable considerations. The relative benefits received by the Company and the
Agents shall be deemed to be in the same proportion as (x) the total proceeds
from the offering (net of underwriting discounts but before deducting expenses)
received by the Company, as set forth in the table on the cover page of the
Prospectus, bear to (y) the underwriting discounts received by the Agents, as
set forth in the table on the cover page of the Prospectus. The relative fault
of the Company and the Bank or the Agents shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of, or an
omission of, a material fact related to information supplied by the Company and
the Bank or the Agents and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company, the Bank and the Agents agree that it would not be just and
equitable if contribution pursuant to this Section 8 were determined by pro rata
allocation (even if the Agents were treated
<PAGE>
as one entity for such purpose) or by any other method of allocation which does
not take account of the equitable considerations referred to above.
Notwithstanding the provisions of this Section 8, (i) in no case shall the
Agents be required to contribute an aggregate amount in excess of the aggregate
marketing fees to which the Agents are entitled and actually paid pursuant to
this Agreement and (ii) the Company and the Bank shall be liable and responsible
for any amount in excess of such fees; PROVIDED, HOWEVER, that no person guilty
of fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. For purposes of this Section 8,
each person, if any, who controls an Agent within the meaning of Section 15 of
the Securities Act or Section 20(a) of the Exchange Act shall have the same
rights to contribution as such Agent and each person, if any, who controls the
Company within the meaning of the Section 15 of the Securities Act or Section
20(a) of the Exchange Act, each officer of the Company who signed the
Registration Statement and each director of the Company shall have the same
rights to contribution as the Company, subject in each case to clauses (i) and
(ii) in the immediately preceding sentence of this Section 8. Any party
entitled to contribution will, promptly after receipt of notice of commencement
of any action, suit or proceeding against such party in respect of which a claim
for contribution may be made against another party or parties under this Section
8, notify such party or parties from whom contribution may be sought, but the
omission to so notify such party or parties from whom contribution may be sought
shall not relieve the party or parties from whom contribution may be sought from
any other obligation it or they may have hereunder or otherwise than under this
Section 8. No party shall be liable for contribution with respect to any
action, suit, proceeding or claim settled without its written consent. The
Agents' obligations to contribute pursuant to this Section 8 are several in
proportion to their respective underwriting commitments and not joint.
SURVIVAL OF AGREEMENTS. REPRESENTATIONS AND INDEMNITIES.
The respective indemnities of the Company and the Bank and the Agents and
the representations and warranties of the Company and the Bank set forth in or
made pursuant to this Agreement shall remain in full force and effect,
regardless of any termination or cancellation of this Agreement or any
investigation made by or on behalf of the Agents or the Company or the Bank or
any controlling person or indemnified party referred to in Section 7 hereof, and
shall survive any termination or consummation of this Agreement and/or the
issuance of the Shares, and any legal representative of the Agents, the Company,
the Bank and any such controlling persons shall be entitled to the benefit of
the respective agreements, indemnities, representations and warranties.
<PAGE>
TERMINATION.
The Agents may terminate this Agreement by giving notice to
the Bank and the Company, by telephone or telegram and confirmed by letter, at
any time after this Agreement becomes effective (i) if any domestic or
international event or act or occurrence has materially disrupted or, in the
opinion of the Agents, will in the future materially disrupt, the securities
markets such as to make it, in the Agents' opinion, impracticable to proceed
with the offering of the Shares; (ii) if trading on the New York Stock Exchange,
the American Stock Exchange or Nasdaq shall have been suspended or minimum or
maximum ranges for prices for securities shall have been fixed, or maximum
ranges for securities shall have been required, by said exchanges or by order of
the SEC or any other governmental or regulatory body; (iii) if there has
occurred any outbreak or material escalation of hostilities or other calamity or
crisis the effect of which on the financial markets of the United States is such
as to make it, in the judgment of the Agents, inadvisable to proceed with the
offering of the Shares; (iv) if a general banking moratorium has been declared
by a state or federal authority; (v) if a moratorium in foreign exchange trading
by major international associations or persons has been declared; (vi) if there
shall have been a material change in the capitalization, condition or business
of the Company or the Bank or if the Bank shall have sustained a material or
substantial loss by fire, flood, accident, hurricane, earthquake, theft,
sabotage or other calamity or malicious act, whether or not said loss shall have
been insured; (vii) if there shall have been a material change in the assets or
properties, business, results of operations, prospects or condition (financial
or otherwise) of the Company, the Bank or their subsidiaries, considered as a
whole; (viii) if there shall be such a material adverse change in general
financial, political or economic conditions or the effect of international
conditions on the financial markets in the United States is such as to make it,
in the judgment of the Agents, inadvisable or impracticable to proceed with the
offering of the Shares; or (ix) if the Company or the Bank shall have failed,
refused or been unable to perform any agreement on its part to be performed
hereunder, or because any other condition of the Agents' obligations hereunder
required to be fulfilled is not fulfilled or waived.
If this Agreement is terminated by the Agents for any of the
reasons set forth in subsection (a) above or if the Bank terminates the
Conversion in accordance with the Plan, such termination shall be without
liability of any party to any other party, except as provided in Sections 3 and
5 hereof and except that the provisions of Section 7 and 8 hereof shall survive
any termination of this Agreement.
NOTICES.
All communications hereunder, except as herein otherwise specifically
provided, shall be in writing and, if sent to the Agents, shall be mailed,
delivered or telegraphed and confirmed to CIBC Oppenheimer Corp., 200 Liberty
Street, 39th Floor, New York, New York 10281, Attention: Mary Anne Callahan,
Executive Director, and to Trident Securities, Inc., 4601 Six Forks Road, Suite
400, Raleigh, North Carolina 27609, Attention: Timothy E. Lavelle, Managing
Director, (with a copy to Thacher Proffitt & Wood, Two World Trade Center, 38th
Floor, New York, New York 10048, Attention: Douglas J. McClintock, Esq.),
<PAGE>
and if sent to the Company or the Bank, shall be mailed, delivered or
telegraphed and confirmed to CNY Financial Corp., One North Main Street,
Cortland, New York 13045, Attention: Wesley D. Stisser, President and Chief
Executive Officer (with a copy to Allister & Naudon, 57 W. 38th Street, 5th
Floor, New York, New York 10018, Attention: Carlos P. Naudon, Esq., and to
Serchuk & Zelermyer, LLP, 81 Main Street, White Plains, New York 10601,
Attention: Jay L. Hack, Esq.).
PARTIES.
This Agreement shall inure solely to the benefit of, and shall be binding
upon, the Agents, the Company, the Bank and the controlling and other persons
referred to in Section 7 hereof, and their respective successors, legal
representatives and assigns, and no other person shall have or be construed to
have any legal or equitable right, remedy or claim under or in respect of or by
virtue of this Agreement or any provision herein contained.
CONSTRUCTION.
Unless governed by preemptive federal law, this Agreement shall be governed
by and construed in accordance with the substantive laws of New York without
regard to conflicts of laws provisions.
COUNTERPARTS.
This Agreement may be executed in separate counterparts, each of which when
so executed and delivered shall be an original, but all of which together shall
constitute but one and the same instrument.
ENTIRE AGREEMENT; AMENDMENT.
This Agreement represents the entire understanding of the parties hereto
with reference to the transactions contemplated hereby and supersedes any and
all other oral or written agreements heretofore made. No waiver, amendment or
other modification of this Agreement shall be effective unless in writing and
signed by the parties hereto.
SEVERABILITY.
Any term or provision of this Agreement which is invalid or unenforceable
in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent
of such invalidity or unenforceability without rendering invalid or
unenforceable the remaining terms and provisions of this Agreement or affecting
the validity or enforceability of any of the terms or provisions of this
Agreement in any other jurisdiction. If any provision of this Agreement is so
broad as to be
<PAGE>
unenforceable, the provision shall be interpreted to be only so broad as is
enforceable.
HEADINGS.
Section headings are not to be considered part of this Agreement, are for
convenience and reference only and are not to be deemed to be full or accurate
descriptions of the contents of any paragraph or subparagraph.
<PAGE>
Please acknowledge your agreement to the foregoing by signing below and
returning to the Company one copy of this letter.
CNY FINANCIAL CORP. CORTLAND SAVINGS BANK
By: By:
---------------------------- -----------------------------
Wesley D. Stisser Wesley D. Stisser
President and Chief Executive Officer President and Chief Executive Officer
Date: Date:
-------------------------- ---------------------------
Agreed to and accepted:
CIBC OPPENHEIMER CORP. TRIDENT SECURITIES, INC.
By: By:
---------------------------------- -----------------------------
[Mary Anne Callahan]Timothy E. Lavelle
[Executive Director]Managing Director
Date: Date:
-------------------------- ---------------------------
<PAGE>
Exhibit 2.1
AMENDED PLAN OF CONVERSION
FOR
CORTLAND SAVINGS BANK
CORTLAND, NEW YORK
<PAGE>
Table of Contents
Page
1. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
3. PROCEDURE FOR APPROVAL OF THE CONVERSION . . . . . . . . . . . . . . . 7
4. SALE OF CONVERSION STOCK . . . . . . . . . . . . . . . . . . . . . . . 8
5. NUMBER OF SHARES AND PURCHASE PRICE OF CONVERSION STOCK . . . . . . . . 9
6. PURCHASE BY THE HOLDING COMPANY OF THE STOCK OF THE BANK. . . . . . . . 11
7. ESTABLISHMENT AND FUNDING OF FOUNDATION . . . . . . . . . . . . . . . . 11
8. NON-TRANSFERABLE SUBSCRIPTION RIGHTS AND SHARE ALLOCATIONS. . . . . . . 12
9. COMMUNITY OFFERING . . . . . . . . . . . . . . . . . . . . . . . . . . 13
10. PUBLIC OFFERING . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
11. LIMITATIONS ON PURCHASE AND TRANSFER OF CONVERSION
STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
12. PAYMENT FOR CONVERSION STOCK. . . . . . . . . . . . . . . . . . . . . . 15
13. MANNER OF EXERCISING SUBSCRIPTION RIGHTS THROUGH ORDER FORMS. . . . . . 16
14. UNDELIVERED, DEFECTIVE OR LATE ORDER FORMS:
INSUFFICIENT PAYMENT. . . . . . . . . . . . . . . . . . . . . . . . . . 17
15. RESTRICTIONS ON ACQUISITION OF THE BANK AND
HOLDING COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
16. EFFECT OF CONVERSION; CERTAIN COVENANTS
AND AGREEMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
17. RESTRICTIONS ON RESALE OR SUBSEQUENT DISPOSITION. . . . . . . . . . . . 19
<PAGE>
18. VOTING RIGHTS AFTER CONVERSION. . . . . . . . . . . . . . . . . . . . . 20
19. ESTABLISHMENT OF LIQUIDATION ACCOUNT. . . . . . . . . . . . . . . . . . 20
20. DEPOSIT ACCOUNTS AFTER CONVERSION . . . . . . . . . . . . . . . . . . . 21
21. STOCK REPURCHASE AND STOCK BENEFIT PLANS. . . . . . . . . . . . . . . . 21
22. AMENDMENT OF PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
23. CONSUMMATION AND COMPLETION OF CONVERSION . . . . . . . . . . . . . . . 22
24. REGISTRATION AND MARKETING. . . . . . . . . . . . . . . . . . . . . . . 22
25. RESIDENTS OF FOREIGN COUNTRIES AND CERTAIN STATES . . . . . . . . . . . 23
26. EXPENSES OF CONVERSION. . . . . . . . . . . . . . . . . . . . . . . . . 23
27. CONDITIONS TO CONVERSION. . . . . . . . . . . . . . . . . . . . . . . . 23
28. INTERPRETATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
ii
<PAGE>
1. INTRODUCTION
This Plan of Conversion ("Plan") provides for the conversion (the
"Conversion") of Cortland Savings Bank from a New York mutual savings bank to a
New York stock savings bank. The purpose of the Conversion is to increase the
Bank's capital, thereby enhancing its ability to pursue lending and investment
opportunities, diversification and growth, which may include the acquisition of
other financial institutions. The Bank's Board of Directors (which term also
includes its Board of Trustees prior to the Conversion) also believes that the
decline in the number of mutual institutions, as well as the decline in the
assets and deposits of mutual institutions, will place mutual institutions at a
disadvantage to stock institutions. Wherever appropriate for purposes of this
Plan of Conversion, capitalized terms shall have the meanings assigned to them
under Section 2 hereof.
The Board of Directors of the Bank currently contemplates that all of the
stock of the Bank shall be held by a Delaware business corporation (the "Holding
Company"). Shares of capital stock of the Bank will be sold to the Holding
Company and the Holding Company will offer the Conversion Stock, in a
Subscription Offering as described below, to Eligible Account Holders, the
Employee Plans established by the Bank or the Holding Company, which may be
funded by the Holding Company, and Supplemental Eligible Account Holders in the
priorities set forth in this Plan. Any shares of Conversion Stock not
subscribed for in the Subscription Offering will be offered for sale to certain
members of the public either directly by the Bank and the Holding Company, or
through an underwriter or syndicate of broker-dealers, in a Community Offering
or a Public Offering. If the Bank decides not to utilize the Holding Company in
the Conversion, Conversion Stock of the Bank, in lieu of the Holding Company,
will be sold in the same manner. Following the completion of the Conversion,
the Bank and the Holding Company, pursuant to applicable regulations of the
Banking Board, intend to implement stock option and other stock benefit plans
and may provide employment or severance agreements to certain management
employees and certain other benefits to the directors, officers and employees of
the Bank as described in the Prospectus.
In furtherance of the Bank's commitment to its communities, the Plan
provides for the establishment of a charitable foundation as part of the
Conversion. The Foundation is intended to complement the Bank's existing
community reinvestment activities to allow the Bank's local communities to
share over the long term in the potential growth and profitability of the
Holding Company and the Bank. Accordingly, the Holding Company intends to
donate to the Foundation from its authorized but unissued Common Stock 2% of
the Conversion Stock issued in the Conversion. The establishment of the
Foundation is subject to the approval of the Voting Depositors of the Bank.
If the Foundation is not approved, the Bank may determine to complete the
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Conversion without the Foundation.
This Plan, which has been unanimously approved by the Board of Directors of
the Bank, must also be approved by the affirmative vote of at least seventy-five
percent (75%) in amount of deposit liabilities of Voting Depositors represented
in person or by proxy and eligible to vote at the Special Meeting, and by the
affirmative vote of at least a majority of the amount of votes eligible to be
cast by Voting Depositors at the Special Meeting. Prior to the submission of
this Plan to the Voting Depositors for consideration, the Plan must be approved
by the Superintendent or his or her designees, must not be objected to by the
FDIC, and certain waivers, if required, may be granted by the Superintendent.
After the Conversion, the Bank will succeed to all the rights, interests,
duties and obligations as existed before the Conversion, including, but not
limited to, all rights and interests of the Bank in and to its assets and
properties, whether real, personal or mixed. All of the Bank's insured Deposit
Accounts will continue to be insured by the Bank Insurance Fund of the FDIC to
the extent provided by applicable law.
2. DEFINITIONS
As used in this Plan of Conversion, the following terms shall have the
following meanings:
"Account Holder" means any Person holding an Account in the Bank.
"Acting in Concert" means (i) knowing participation in a joint activity
or interdependent conscious parallel action towards a common goal, whether or
not pursuant to an express agreement or understanding; (ii) a combination or
pooling of voting or other interests in the securities of an issuer for a
common purpose pursuant to any contract, understanding, relationship,
agreement or other arrangement, whether written or otherwise; or (iii) a
Person or company which acts in concert with another Person ("other party")
shall also be deemed to be acting in concert with any Person or company who
is also acting in concert with that other party, except that any
Tax-Qualified Employee Stock Benefit Plan will not be deemed to be acting in
concert with its trustee or a Person who serves in a similar capacity solely
for the purpose of determining whether stock held by the trustee and stock
held by the plan will be aggregated, and participants or beneficiaries of any
such Tax-Qualified Employee Stock Benefit Plan will not be deemed to be
acting in concert solely as a result of their common interests as
participants or beneficiaries. Directors and Officers of the Bank and the
Holding Company shall not be deemed to be Associates or a group affiliated
with each other or otherwise acting in concert solely as a result of their
being Directors
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or Officers of the Bank or the Holding Company.
"Affiliate" means a Person who, directly or indirectly, through one or more
intermediaries, controls or is controlled by or is under common control with the
Person specified.
"Appraiser" means the independent person retained by the Bank to prepare an
appraisal of the estimated pro forma market value of the Conversion Stock. Such
Person shall be experienced and expert in the area of corporate appraisal and
acceptable to the Superintendent.
"Associate," when used to indicate a relationship with any Person, means
(a) any corporation or organization (other than the Holding Company, the Bank or
a majority-owned subsidiary of the Bank) of which such Person is an officer or
partner or is, directly or indirectly, either alone or with one or more members
of his or her immediate family, the beneficial owner of 10% or more of any class
of equity securities; (b) any trust or other estate in which such Person has a
substantial beneficial interest or as to which such Person serves as trustee or
in a similar fiduciary capacity, except that for the purposes of Section 8 and
this Section, the term "Associate" does not include any Tax-Qualified Employee
Stock Benefit Plan or any Non-Tax-Qualified Employee Stock Benefit Plan in which
a Person has a substantial beneficial interest or serves as a trustee or in a
similar fiduciary capacity, and except that, for purposes of aggregating total
shares that may be acquired or held by Officers and Directors and their
Associates, the term "Associate" does not include any Tax-Qualified Employee
Stock Benefit Plan; and (c) any relative or spouse of such Person, or any
relative of such spouse, who has the same home as such Person or who is a
Director or Officer of the Holding Company, the Bank or any of the Bank's
subsidiaries.
"Bank" means Cortland Savings Bank in its mutual form or in its stock
form, as the context of the reference requires.
"Banking Board" means the Banking Board of the State of New York.
"Banking Law" means the Banking Law of the State of New York.
"Board of Directors" means, as to the Bank, both the Board of Trustees
prior to the Conversion and the Board of Directors after the Conversion.
"Community Offering" means the offering for sale to certain members of the
general public directly by the Bank or the Holding Company, or through a
syndicate of selected broker-dealers, if utilized, of any shares of the
Conversion Stock not subscribed for in the Subscription Offering in accordance
with Section 9.
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"Conversion" means (a) the restatement of the Bank's organization
certificate to authorize the issuance of capital stock in accordance with the
Banking Law and the Conversion Regulations and to otherwise conform to the
requirements applicable to a New York stock savings bank and (b) the issuance of
the common stock of the Bank in accordance with this Plan.
"Conversion Regulations" means Part 86 of the General Regulations of the
Banking Board and the regulations of the FDIC applicable to mutual to stock
conversions, 12 C.F.R. Section 303.15, to the extent such regulations preempt or
supplement Part 86 .
"Conversion Stock" means the $.01 par value common stock offered and issued
pursuant to this Plan by the Holding Company (or by the Bank if the Holding
Company is not utilized). The Conversion Stock will not be insured by the FDIC.
"Deposit Account" means all deposits of the Bank as such term is used in
Section 9019 of the Banking Law of New York, and includes without limitation,
savings, time, demand, negotiable orders of withdrawal (NOW), money market and
passbook accounts maintained by the Bank.
"Depositor" means any Person owning a Deposit Account.
"Director" means a Trustee of the Bank prior to the Conversion, a Director
of the Bank after the Conversion or a Director of the Holding Company.
"Effective Date" means the effective date of the Conversion on which all of
the Conversion Stock is issued and sold and on which the Superintendent endorses
his or her approval on the Bank's Restated Organization Certificate and causes
such Certificate to be filed in the Office of the Superintendent.
"Eligibility Record Date" means the close of business on December 31, 1996.
"Eligible Account Holder" means any Depositor of the Bank who owned a
Qualifying Deposit on the Eligibility Record Date.
"Employee Plans" means the Tax-Qualified Employee Stock Benefit Plans and
the Non-Tax Qualified Employee Stock Benefit Plans approved by the Board of
Directors of the Bank or the Board of Directors of the Holding Company.
"Employees" means all persons who are employed by the Bank, the Holding
Company or a wholly owned subsidiary of either of them.
"Estimated Price Range" means the range of the estimated pro forma market
value of the Conversion Stock, as determined by the Appraiser, prior to the
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Subscription Offering and as it may be amended from time to time thereafter.
"FDIC" means the Federal Deposit Insurance Corporation.
"Foundation" means a non-stock corporation that is a tax-exempt
organization under Section 501(c)(3) of the Internal Revenue Code formed by the
Bank and the Holding Company to which shares of Conversion Stock shall be
transferred upon the Conversion.
"FRB" means the Board of Governors of the Federal Reserve System.
"Holders of Subscription Rights" means the Tax-Qualified Employee Stock
Benefit Plans, Eligible Account Holders and Supplemental Eligible Account
Holders who have Subscription Rights pursuant to Section 8.
"Holding Company" means the Delaware business corporation to be formed for
the purpose of acquiring all of the shares of capital stock of the Bank to be
issued the Conversion unless the Holding Company form of organization is not
utilized.
"Non-Tax-Qualified Employee Stock Benefit Plan" means any defined benefit
or defined contribution plan such as an employee stock ownership plan, bonus
stock or profit sharing plan or other employee benefit plan that is not a
"Tax-Qualified Employee Stock Benefit Plan" and that is maintained by the
Holding Company or the Bank for the benefit of Officers or Employees.
"Officer" means an executive officer of the Holding Company or the Bank and
may include the Chairman of the Board, Chief Executive Officer, President,
Senior Vice President, any vice president in charge of a principal business
functions, Secretary, Treasurer or any person performing functions similar to
those performed by the foregoing persons.
"Order Form" means the form provided by the Holding Company or the Bank
that subscribers must use to order Conversion Stock in the Subscription and
Community Offerings.
"Person" means any corporation, partnership, trust, unincorporated
association, any other entity or any natural person.
"Plan" or "Plan of Conversion" means this Plan of Conversion, including any
amendments thereto.
"Prospectus" means the principal offering document pursuant to which the
Conversion Stock is offered for sale, in accordance with the Conversion
Regulations
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and SEC rules, and may be titled either a "Prospectus" if the Holding Company is
used or an "Offering Circular" if the Holding Company is not used.
"Proxy Statement" means the document to be used to solicit proxies from
Voting Depositors to vote at the Special Meeting.
"Public Offering" means the offering for sale through the Underwriters to
the general public of any shares of Conversion Stock not subscribed for in the
Subscription Offering or Community Offering, if held.
"Purchase Order" means the document or other evidence reflecting an order
for the purchase of Conversion Stock in the Public Offering.
"Purchase Price" means the price per share at which the Conversion Stock is
ultimately sold in accordance with the terms hereof.
"Qualifying Deposit" means one or more Deposit Accounts with the Bank
totaling, in the aggregate, at least one hundred dollars ($100.00).
"SEC" means the Securities and Exchange Commission.
"Special Meeting" means the Special Meeting of Depositors and any
adjournments thereof held to consider and vote upon this Plan.
"Subaccount Balance" means, with respect to each Eligible Account Holder
and Supplemental Eligible Account Holder, the portion of the liquidation account
that such Eligible Account Holder and Supplemental Eligible Account Holder would
be entitled to receive pursuant to the Conversion Regulations in the event of a
complete liquidation of the Bank subsequent to the Conversion. The initial
Subaccount Balance of each Eligible Account Holder and Supplemental Eligible
Account Holder shall be determined in accordance with Section 86.4(g)(4) of the
Conversion Regulations.
"Subscription Offering" means the offering of the Conversion Stock to
Eligible Account Holders, Employee Plans and Supplemental Eligible Account
Holders.
"Superintendent" means the Superintendent of Banks of the State of New
York.
"Supplemental Eligibility Record Date" means the record date for
determining Supplemental Eligible Account Holders, which is the close of
business on the last day of the calendar quarter preceding the approval of the
Plan by the Superintendent.
"Supplemental Eligible Account Holder" means any depositor of the Bank
(other than an Eligible Account Holder) who owned a Qualifying Deposit, (except
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Officers, Directors and their Associates), on the Supplemental Eligibility
Record Date.
"Tax-Qualified Employee Stock Benefit Plan" means any defined benefit or
defined contribution plan, such as an employee stock ownership plan, stock bonus
plan, profit-sharing plan or other plan, which with its related trust meets the
requirements to be qualified under Section 401 of the Internal Revenue Code of
1986, as amended.
"Underwriter" means the investment banking firm or firms through which the
Conversion Stock will be offered in a Public Offering, if any.
"Voting Depositor" means any Depositor of the Bank who owns a Qualifying
Deposit on the Voting Record Date.
"Voting Record Date" means the date fixed by the Board of Directors of the
Bank as the date for determining eligibility to vote at the Special Meeting,
which date shall not be more than 60 nor less than 10 days before the date of
the Special Meeting.
3. PROCEDURE FOR APPROVAL OF THE CONVERSION
3.1 Application and Notice.
After approval by the Board of Directors of the Bank, the Bank will
cause notice of the adoption of the Plan by the Board of Directors, and of
its intention to convert to stock form to be conspicuously posted at its home
office and each of its branch offices. The Bank will also issue a press
release containing all of the material terms of the proposed Conversion and
will place an advertisement containing such material terms in a newspaper
having general circulation in the communities in which the principal office
and branches of the Bank are located. Thereafter, this Plan will be
submitted, together with an Application for Conversion and other requisite
material in the forms required by the Conversion Regulations, to the
Superintendent for approval, to the Superintendent to request certain
waivers, if required, and to the FDIC for non-objection.
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3.2 Approval of Plan by Voting Depositors; the Special Meeting.
(a) Following approval of the Bank's Application for Conversion by the
Superintendent, the non-objection of the FDIC and the receipt of all necessary
waivers of the Superintendent, the Bank shall submit the Plan to the Bank's
Voting Depositors for approval at the Special Meeting. The Bank shall mail to
each Voting Depositor, at his or her last known address appearing on the records
of the Bank, a copy of the Plan, a Notice of Special Meeting, proxy card, Proxy
Statement and such other documents as may be required, all in the form required
by the Conversion Regulations, describing the Plan and certain other matters
relating to the Bank and its Conversion. A subscription order form may be
mailed with such materials. Separate and readily distinguishable postage-paid
envelopes shall be provided for the return of proxy cards and subscription order
forms.
(b) The Special Meeting shall be held upon written notice given no less
than 20 days nor more than 45 days prior to the date of the Special Meeting. At
the Special Meeting, each Voting Depositor shall be entitled to cast one vote in
person or by proxy for every one hundred dollars ($100.00) such Voting Depositor
had on deposit with the Bank as of the Voting Record Date; provided, however,
that no Voting Depositor shall be eligible to cast more than one thousand
(1,000) votes. The Board of Directors shall appoint an independent custodian and
tabulator to receive and hold proxies to be voted at the Special Meeting and
count the votes cast in favor of and in opposition to the Plan.
(c) The Superintendent shall be notified of the results of the Special
Meeting by a certificate signed by the President and Secretary of the Bank
within five days after the Special Meeting. In order to be approved, the Plan
must receive the affirmative vote of at least seventy-five percent (75%) in
amount of deposit liabilities of the Voting Depositors represented in person or
by proxy at the Special Meeting and the affirmative vote of at least a majority
of the amount of votes entitled to be cast by Voting Depositors at the Special
Meeting. Upon such approval of the Plan, the Bank will take all other necessary
steps pursuant to applicable laws to effect the Conversion in accordance with
the terms and conditions of the Plan. If the Plan is not approved at the
Special Meeting, the Plan shall not be implemented without further vote and all
funds submitted in the Subscription Offering and Community Offering will be
returned to subscribers, with interest as provided herein, and all withdrawal
authorizations will be canceled.
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3.3 Approval of Holding Company Applications.
The Holding Company will make timely applications for any requisite
regulatory approvals, including an Application with the Superintendent, an
Application on Form FR Y-3 with the FRB, and a registration statement on Form
S-1 to be filed with the SEC. The Bank will be a wholly owned subsidiary of
the Holding Company unless the Holding Company is not utilized in the
Conversion (in which event its registration statement will be withdrawn from
the SEC and the Bank will take all necessary steps to complete the
Conversion). If the Holding Company is utilized, upon the Conversion, the
Bank will issue its capital stock to the Holding Company, and the Holding
Company will issue and sell the Conversion Stock in accordance with this Plan.
The Conversion Stock will not be insured by the FDIC. The Bank will not
knowingly lend funds or otherwise extend credit to any person to purchase
shares of Conversion Stock.
4. SALE OF CONVERSION STOCK
(a) The Conversion Stock will be offered simultaneously in a
Subscription Offering to the Eligible Account Holders, Employee Plans and
Supplemental Eligible Account Holders in the priorities set forth in Section
8 of this Plan. The Subscription Offering may be commenced as early as the
mailing of the Proxy Statement for the Special Meeting of Depositors and must
be commenced in time to complete the Conversion within the time period
specified in Section 23.
Any shares of Conversion Stock not subscribed for in the Subscription
Offering may be offered for sale in the Community Offering as provided in
Section 9 and may also be offered in a Public Offering, as provided in
Section 10, if necessary and feasible. The Subscription Offering may be
commenced prior to the Special Meeting of Depositors, and, in that event, the
Community Offering, if any, may also be commenced prior to the Special
Meeting of Depositors. The offer and sale of Conversion Stock, prior to the
Special Meeting of Depositors shall, however, be conditioned upon approval of
the Plan by the Voting Depositors.
Shares of Conversion Stock may be sold in a Public Offering in a manner
that will achieve a reasonably wide distribution of the Conversion Stock as
determined by the Bank. In the event of a Public Offering, the sale of all
Conversion Stock subscribed for will be consummated only if all unsubscribed for
Conversion Stock is sold.
(b) The Bank may elect to pay fees on either a fixed fee or commission
basis or combination thereof to one or more investment banking firms which
assist it in the sale of the Conversion Stock and may also elect to pay fees on
a per share basis to
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broker-dealers who assist Persons in determining to purchase shares of
Conversion Stock.
(c) The sales price per share of the Conversion Stock shall be a uniform
price determined in accordance with Section 86.5(c) of the Conversion
Regulations and this Plan, except that the price to be paid by or through the
Underwriter or broker-dealers in connection with a Community Offering or Public
Offering may be less a negotiated commission or discount.
5. NUMBER OF SHARES AND PURCHASE PRICE OF CONVERSION STOCK
(a) The total number of shares (or a range thereof) of Conversion Stock to
be issued and offered for sale will be determined by the Boards of Directors of
the Bank and Holding Company, immediately prior to the commencement of the
Subscription Offering, subject to adjustment thereafter if necessitated or
required by the Conversion Regulations or by market or financial conditions,
with the approval of the Superintendent, if necessary.
All shares of Conversion Stock not subscribed for at the completion of the
Subscription Offering shall be sold within 45 days after completion of the
Subscription Offering, or such longer period as the Superintendent may approve.
If all shares are not sold as provided for herein, the Bank and the Holding
Company will consult with the Superintendent to determine an alternative method
of sale. In such event and if required by the Superintendent or the SEC, a
resolicitation of those Persons who have subscribed for shares will be made. If
such an alternative method is not agreed upon, the Conversion will not be
effected, the Bank will remain in mutual form, all funds submitted to the Bank
and the Holding Company as payment for shares of the Conversion Stock will be
returned to subscribers, with interest as provided herein, and all withdrawal
authorizations will be canceled.
(b) All Conversion Stock shall be sold at a uniform price per share
referred to in this Plan as the Purchase Price. The aggregate price at which
all the Conversion Stock shall be sold shall be consistent with the estimated
pro forma market value of such Conversion Stock on the Effective Date of the
Conversion, as determined by the Appraiser. An initial estimate of such pro
forma market value determined by the Appraiser in accordance with the Conversion
Regulations shall be submitted to the Superintendent and the FDIC as part of the
Bank's Application for Conversion, such valuation to be stated in terms of an
Estimated Price Range, the maximum of which shall be no more than 15% above the
average of the minimum and maximum of such range and the minimum of which shall
be no more than 15% below such average. In the event that the aggregate
purchase price of the Conversion Stock is below the minimum of the Estimated
Price Range, or materially above the maximum of the
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Estimated Price Range, a resolicitation of purchasers may be required; provided,
that an increase up to 15% above the maximum of the Estimated Price Range which
is supported by an appropriate change in the estimated pro forma market value of
the Conversion Stock, and a resultant increase of up to 15% in the number of
shares of Conversion Stock to be sold, will not be deemed material so as to
require a resolicitation. Any such resolicitation shall be effected in such
manner and within such time as the Holding Company or the Bank shall establish,
with the approval of the Superintendent or the FDIC, if required.
(c) Based on the valuation of the Appraiser, the Boards of Directors of
the Bank and the Holding Company shall fix the price at which Conversion
Stock is to be offered and the number of shares to be offered. The total
number of shares of Conversion Stock offered shall be subject to increase or
decrease at any time prior to any Public Offering or other method of sale to
reflect changes in market and financial conditions. Subscribers shall not
have the right to modify or rescind their subscriptions as a result of any
increase or decrease in the number of shares of Conversion Stock offered,
unless otherwise required by this Plan or by the Superintendent.
(d) In the event shares of Conversion Stock are sold in excess of the
maximum of the Estimated Price Range, such shares will be allocated in the
same manner as other shares are allocated as set forth in Section 8(b) and if
there remain any shares after the satisfaction of all subscriptions in the
Subscription Offering, to fill unfulfilled subscriptions in the Community
Offering.
(e) The Boards of Directors of the Bank and the Holding Company, in
consultation with the Appraiser, shall determine the Purchase Price, with
such discounts, fees or commissions as may be allowed to the Underwriter,
subject to approval by the Superintendent.
(f) The Holding Company shall not consummate any sale unless the
Appraiser shall have confirmed to the Holding Company, the Bank and the
Superintendent that nothing of a material nature has occurred that would
cause the Appraiser to conclude that the aggregate purchase price of the
Conversion Stock is incompatible with its estimate of the aggregate pro forma
market value of the Bank at the time it is to be sold. If such confirmation
is not received, the Bank and the Holding Company may cancel the Subscription
Offering, the Community Offering or the Public Offering, extend the
Conversion, reopen or hold a new Subscription Offering, Community Offering or
Public Offering, or take such other action as the Boards of Directors of the
Bank and the Holding Company shall determine and the Superintendent shall
approve.
(g) The Conversion Stock, upon issuance, shall be fully paid and
nonassessable.
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6. PURCHASE BY THE HOLDING COMPANY OF THE STOCK OF THE BANK
Upon the consummation of the sale of the Conversion Stock, the Holding
Company will purchase from the Bank all of the capital stock of the Bank to be
issued by the Bank in the Conversion in exchange for 50% of the net proceeds
from the sale of the Conversion Stock, or such greater percentage as may be
approved by the Board of Directors of the Holding Company or required by the
Superintendent or the FDIC.
7. ESTABLISHMENT AND FUNDING OF FOUNDATION
(a) As part of the Conversion, the Holding Company and the Bank intend to
establish the Foundation and to donate to the Foundation from authorized but
unissued shares 2.0% of the number of shares of Conversion Stock sold in the
Conversion. The Foundation is being formed in connection with the Conversion in
order to complement the Bank's existing community reinvestment activities and to
share with the Bank's local communities a part of the Bank's financial success
as a locally headquartered, community-minded, financial services institution.
The funding of the Foundation in such manner accomplishes this goal as it
enables the community to share in the potential and profitability of the Holding
Company and the Bank over the long-term.
(b) The Foundation will be dedicated to the promotion of charitable
purposes including community development, grants or donations to support housing
assistance, not-for-profit community groups and other types of organizations or
civic-minded projects. The Foundation will annually distribute total grants to
assist charitable organizations or to fund projects within its local community
of not less than 5% of the average fair value of Foundation assets each year. In
order to serve the purposes for which it was formed and to maintain its
qualification under Section 501(c)(3) of the Internal Revenue Code, the
Foundation may sell, on an annual basis, a limited portion of the Conversion
Stock contributed to it by the Holding Company.
(c) A majority of the board of directors of the Foundation will be
comprised of individuals who are Officers or Directors of the Bank and the
remaining board members will be comprised of civic and community leaders from
within the Bank's local community. The board of directors of the Foundation will
be responsible for establishing the policies of the Foundation with respect to
grants or donations, consistent with the stated purposes of the Foundation. The
establishment and funding of the Foundation as part of the Conversion is subject
to the approval of the Superintendent and, if applicable, the FDIC, as more
fully described in the Prospectus.
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8. NON-TRANSFERABLE SUBSCRIPTION RIGHTS AND SHARE ALLOCATIONS
(a) Each Eligible Account Holder and Supplemental Eligible Account
Holder shall receive, without payment, the non-transferable right to
subscribe in the Subscription Offering for such number of shares of
Conversion Stock as equates to an aggregate purchase price of $150,000. The
Employee Plans shall receive, without payment, in the aggregate, the right to
subscribe for 10% of the shares of Conversion Stock, plus shares issued to
the Foundation.
(b) If subscriptions are received in the Subscription Offering for more
shares of Conversion Stock than are to be sold, then shares shall be
allocated in the following order of priority: first to Eligible Account
Holders; second to Employee Plans and third to Supplemental Eligible Account
Holders. Subscription rights received in each category shall be subordinated
to the subscription rights received in all prior categories. No Person in
any category shall be allocated any shares unless all subscriptions in all
prior categories have been filled to the maximum permitted amount. If
subscriptions received within any of the first or third categories exceed the
number of shares available for purchase by that category, then each
subscriber in that category shall first receive, to the extent practicable,
an allocation equal to the lesser of the number of shares subscribed for by
that subscriber or 100 shares. Any remaining shares shall be allocated among
members of such category, to the extent practicable, based upon the ratio
that each subscriber's Qualifying Deposit bears to the Qualifying Deposits of
all subscribers with unfilled subscriptions in that category. If the amount
so allocated to any subscriber exceeds the amount subscribed for by that
subscriber, the excess shall be reallocated (one or more times as necessary)
among those subscribers in such category whose subscriptions are still not
fully satisfied on the same principle until all available shares have been
allocated or all subscriptions satisfied. In no event shall fractional
shares be issued.
(c) Subscription rights of Eligible Account Holders received by
Directors and Officers and their Associates which are based on deposits made
by such persons during the twelve (12) months preceding the Eligibility
Record Date shall be subordinated to the Subscription Rights of all other
Eligible Account Holders.
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9. COMMUNITY OFFERING
(a) If less than the total number of shares of Conversion Stock to be
purchased in the Conversion is sold in the Subscription Offering, shares
remaining which are unsubscribed may be made available for purchase in the
Community Offering to certain members of the general public. The Bank may
establish all terms and conditions of such offer. The shares may be made
available in the Community Offering through a direct community marketing
program. The Community Offering may also be conducted, in whole or in part,
through a broker, dealer, consultant or investment banking firm, experienced
and an expert in the sale of savings institution securities, or a syndicate
thereof. In the Community Offering, if held, a preference will be given to
natural persons residing in Cortland County, New York. The Community
Offering shall be conducted in such a manner as to promote a reasonably wide
distribution of Conversion Stock.
(b) If the purchasers in the Community Offering, whose orders would
otherwise be accepted, subscribe for more shares than are available for
purchase, the shares available to them will be allocated among persons
submitting orders in the Community Offering in an equitable manner as
determined by the Boards of Directors of the Bank and the Company.
(c) The Community Offering, if held, may commence simultaneously with,
during or subsequent to the completion of the Subscription Offering and may
be limited in such manner as the Bank shall determine, subject to the
approval of the Superintendent, if required. If commenced, the Community
Offering must be completed within 45 days after the completion of the
Subscription Offering unless otherwise extended with the approval of the
Superintendent.
(d) The Bank and the Holding Company, in their absolute discretion,
reserve the right to reject any or all orders in whole or in part which are
received in the Community Offering, at the time of receipt or as soon as
practicable following the completion of the Community Offering.
10. PUBLIC OFFERING
Any shares of Conversion Stock not sold in the Subscription Offering or
in the Community Offering, if held, may then be sold through the Underwriter
to the general public at the Purchase Price in the Public Offering, subject
to such terms, conditions and procedures as may be determined by the Boards
of Directors of the Bank and the Holding Company, in a manner that will
achieve a reasonably wide distribution of the Conversion Stock and subject to
the right of the Bank and the Holding Company, in their absolute discretion,
to accept or reject in whole or in part all subscriptions in the Public
Offering.
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<PAGE>
11. LIMITATIONS ON PURCHASE AND TRANSFER OF CONVERSION STOCK
The following limitations shall apply to all purchases of shares of
Conversion Stock:
(a) The maximum number of shares of Conversion Stock which may be
subscribed for or purchased in the Conversion by any Person together with any
Associate or group of Persons Acting in Concert shall not exceed such number
of shares as shall equal $150,000 divided by the Purchase Price, except for
Employee Plans, which in the aggregate may subscribe for up to 10% of the
Conversion Stock issued.
(b) The maximum number of shares of Conversion Stock which may be
purchased in all categories of the Conversion by Officers and Directors of
the Bank and the Holding Company and their Associates, collectively, shall
not exceed 25% of the total number of shares of Conversion Stock issued. In
applying this limitation, Conversion Stock purchased by any one or more
Tax-Qualified Employee Stock Benefit Plans shall not be counted.
(c) Shares of Conversion Stock subscribed for in the Subscription
Offering, the Community Offering and any Public Offering or otherwise
purchased shall be aggregated for purposes of determining if the maximum
purchase limitations set forth in this Plan have been violated.
(d) Each person subscribing for shares must purchase, to the extent
available, the lesser of 25 shares of Conversion Stock or Conversion Stock
with an aggregate Purchase Price of at least $500.
(e) Depending upon market or financial conditions, the Boards of
Directors of the Bank and the Holding Company, without further approval of
the subscribers, may decrease or increase the purchase limitations in this
Plan, provided that the maximum purchase limitations may not be increased to
a percentage in excess of 5% of the shares being offered. If the Bank and the
Holding Company increase such maximum purchase limitations, they are only
required to resolicit Persons who subscribed for the maximum purchase amount
and may, in their sole discretion, resolicit other subscribers.
(f) Each Person purchasing Conversion Stock in the Conversion shall be
deemed to confirm that such purchase does not conflict with the purchase
limitations set forth in this Plan.
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(g) As used in this Section, Officers and Directors of the Bank and the
Holding Company shall not be deemed to be Associates or a group affiliated
with each other or otherwise Acting in Concert solely as a result of their
being Officers or Directors of the Bank or the Holding Company. Furthermore,
the Employee Plans shall not be deemed to be Associates or affiliates of or
Persons Acting in Concert with any Director or Officer of the Holding Company
or the Bank for the purpose of determining the right to purchase Conversion
Stock.
(h) For three years after the Conversion, no Officer or Director of the
Bank or the Holding Company, or their Associates, shall purchase or acquire,
without the prior written approval of the Superintendent, direct or indirect
beneficial ownership of any capital stock of the Holding Company, except from
a broker or dealer registered with the SEC. This restriction shall not apply
to purchases made by or held by any Tax-Qualified Employee Stock Benefit Plan
or Non-Tax Qualified Employee Stock Benefit Plan of the Bank or the Holding
Company (including the Employee Plans) which may be attributable to any
Officer or Director.
12. PAYMENT FOR CONVERSION STOCK
All payments for Conversion Stock subscribed for in the Subscription,
Community and Public Offerings must be delivered in full to the Bank,
together with a properly completed and executed Order Form, or Purchase Order
in the case of the Public Offering, on or prior to the expiration date
specified on the Order Form or Purchase Order, as the case may be, unless
such date is extended by the Bank; provided, however, that if the Employee
Plans subscribe for shares during the Subscription Offering, the Employee
Plans will not be required to pay for the shares at the time they subscribe
but rather may pay for such shares of Conversion Stock upon consummation of
the Conversion. The Bank and the Holding Company shall have the right to
require that payments in excess of $25,000 for Conversion Stock be made by
bank check, certified check or withdrawal authorization from an account at
the Bank with collected funds sufficient to pay for the shares ordered.
Notwithstanding the foregoing, the Bank and the Holding Company shall
have the right, in their sole discretion, to permit institutional investors
to submit contractually irrevocable orders in the Community or Public
Offering and to thereafter submit payment for the Conversion Stock for which
they are subscribing in the Community Offering or Public Offering at any time
prior to the completion of the Conversion.
Payment for Conversion Stock subscribed for shall be made either in cash
(if delivered in person), check or money order. Alternatively, subscribers
in the Subscription and Community Offerings may authorize the Bank on the
Order Form to make a withdrawal from the subscriber's Deposit Account at the
Bank in an amount
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equal to the purchase price of such shares. Such withdrawal shall be without
penalty as to premature withdrawal. If the authorized withdrawal is from a
certificate account, and the remaining balance does not meet the applicable
minimum balance requirement, the certificate shall be canceled at the time of
withdrawal, without penalty, and the remaining balance will earn interest at the
passbook rate. Funds for which a withdrawal is authorized will remain in the
subscriber's Deposit Account but may not be used by the subscriber until the
Conversion Stock has been sold or the 45-day period (or such longer period as
may be approved by the Superintendent) following the Subscription Offering has
expired, whichever occurs first. The withdrawal will be given effect only to
the extent necessary to satisfy the subscription (to the extent it can be
filled) at the Purchase Price per share. Interest will continue to be earned on
any amounts authorized for withdrawal from an account until such withdrawal is
given effect at the interest rate applicable to such account. Interest will be
paid by the Bank at not less than the passbook rate as of the date the
Subscription Offering is commenced on payments for Conversion Stock received in
cash or by money order or check. Such interest will be paid from the date
payment is received by the Bank until consummation or termination of the
Conversion. If for any reason the Conversion is not consummated, all payments
made by subscribers in the Subscription, Community and Public Offerings will be
refunded to them with interest. In case of amounts authorized for withdrawal
from Deposit Accounts, refunds will be made by canceling the authorization for
withdrawal.
13. MANNER OF EXERCISING SUBSCRIPTION RIGHTS THROUGH ORDER FORMS
After the registration statement filed with the SEC for the Conversion
Stock has been declared effective and approvals have been obtained from the
Superintendent and all other required regulatory agencies, the Holding
Company shall distribute or make available the Prospectus, together with
Order Forms for the purchase of Conversion Stock, to the Holders of
Subscription Rights for the purpose of enabling them to exercise their
respective Subscription Rights. Each Order Form must be preceded or
accompanied by the Prospectus describing the Holding Company (if utilized),
the Bank, the Conversion Stock, the Subscription Offering and the Community
Offering, and contain such information as required by the Conversion
Regulations.
Notwithstanding the above, the Bank and the Holding Company reserve the
right in their sole discretion to accept or reject orders received on
photocopied or facsimile order forms or whose payment is to be made by wire
transfer. The Holding Company may, subject to the provisions of this Plan
and any required approval of the Superintendent, extend the period during
which an Order Form must be completed and delivered. Any such extension
shall be for a period that the Boards of Directors of the Bank and the
Holding Company determine is appropriate.
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14. UNDELIVERED, DEFECTIVE OR LATE ORDER FORMS: INSUFFICIENT PAYMENT
In the event Order Forms or Purchase Orders (a) are not delivered and
are returned to the Bank by the United States Postal Service or the Bank is
unable to locate the addressee, (b) are not received back by the Bank or are
received by the Bank after the expiration date specified thereon, (c) are
defectively filled out or executed, (d) are not accompanied by the full
required payment, or, in the case of institutional investors in the Community
Offering or the Public Offering, by delivering irrevocable orders together
with a legally binding commitment to pay in cash, check, money order or wire
transfer the full amount of the purchase price prior to 48 hours before the
completion of the Conversion for the shares of Conversion Stock subscribed
for (including cases in which Deposit Accounts from which withdrawals are
authorized are insufficient to cover the amount of the required payment), or
(e) are not mailed pursuant to a "no mail" order placed in effect by the
account holder, the subscription rights of the person to whom such rights
have been granted will lapse as though such person failed to return the
completed Order Form or Purchase Order within the time period specified
thereon; provided, however, that the Bank may in its sole discretion, but
will not be required to, waive any irregularity on any Order Form or Purchase
Order or require the submission of corrected Order Forms or Purchase Orders
or the remittance of full payment for subscribed shares by such date as the
Bank may specify. The interpretation of the Bank of terms and conditions of
the Plan and of the Order Forms or Purchase Orders will be final, subject to
the authority of the Superintendent.
15. RESTRICTIONS ON ACQUISITION OF THE BANK AND HOLDING COMPANY
(a) In accordance with the Conversion Regulations, for a period of not
less than three years (or such longer period as may be subsequently
authorized under the Conversion Regulations) following the Effective Date, no
Person or group of Persons Acting in Concert shall, directly or indirectly,
offer to acquire or acquire the beneficial ownership of more than ten percent
(10%) of any class of any equity security of the Holding Company or the Bank
without the prior consent of the Superintendent.
(b) The Restated Organization Certificate of the Bank will contain a
provision stipulating that, for a period of three years following the
Effective Date, no Person or group of Persons Acting in Concert, except the
Holding Company (if a holding company form of organization is utilized) or an
Employee Plan, shall directly or indirectly offer to acquire or acquire the
beneficial ownership of more than ten percent (10%) of any class of an equity
security of the Bank, without the prior written approval of the
Superintendent. In addition, such Restated Organization Certificate may also
provide that, for a period of three years following the Conversion, shares
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beneficially owned in violation of such provision shall not be entitled to vote
and shall not be voted by any Person or counted as voting stock in connection
with any matter submitted to shareholders for a vote. In addition, the Restated
Organization Certificate will provide that special meetings of the shareholders
relating to changes in control or amendment of the Restated Organization
Certificate may only be called by the Board of Directors and that shareholders
shall not be permitted to cumulate their votes for the election of directors.
(c) The Certificate of Incorporation of the Holding Company shall
contain a provision to the effect that any record owner of any outstanding
shares of the Holding Company's common stock who beneficially owns in excess
of 10% of such outstanding shares shall not be entitled to cast any votes
with respect to any shares held in excess of such 10% limit. Such provision
shall also apply to the record owner of any shares which are beneficially
owned by any Person or group of Persons Acting in Concert who beneficially
own shares in excess of such limit, even though such beneficial owners may
not own any shares of record. In addition, the Certificate of Incorporation
and By-Laws of the Holding Company contain provisions for staggered terms of
the directors, noncumulative voting for directors, limitations on the calling
of special meetings, a fair price provision for certain business combinations
and certain notice requirements.
(d) For the purposes of this Section:
(i) The term "Person" includes an individual, a group Acting in
Concert, a corporation, a partnership, an association, a joint stock
company, a trust, an unincorporated organization or similar company, a
syndicate, or any other group formed for the purpose of acquiring, holding
or disposing, directly or indirectly, of securities of the Bank or the
Holding Company, but the term "Person" does not include the Holding Company
or any majority-owned subsidiary thereof, or any Tax-Qualified Employee
Stock Benefit Plan or any trust or custodial arrangement established in
connection with any such plan; provided, that the plan or plans do not have
beneficial ownership in the aggregate of more than twenty-five percent
(25%) of any class of equity security of the Bank or the Holding Company;
(ii) The term "offer" includes every offer to buy or acquire,
solicitation of an offer to sell, tender offer for, or request or
invitation for tenders of, a security or interest in a security for value;
(iii) The term "acquire" includes every type of acquisition,
whether effected by purchase, exchange, operation of law or otherwise; and
(iv) The term "security" includes non-transferable subscription rights
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issued pursuant to a plan of conversion as well as a "security" as defined
in 15 U.S.C. Section 78c(a)(10).
16. EFFECT OF CONVERSION; CERTAIN COVENANTS AND AGREEMENTS
(a) On the Effective Date of the Conversion, the Bank shall cease to be
a mutual institution and shall simultaneously become a stock institution.
All of the property, rights, powers, franchises, debts, liabilities,
obligations and duties of the mutual institution shall continue as such in
the stock institution and all deposits in the mutual institution shall remain
as deposits of equal character and value in the stock institution. The
corporate existence of the Bank shall not terminate, and the converted Bank
shall be a continuation of the mutual institution that existed immediately
before the filing of the Restated Organization Certificate.
The Bank shall take all appropriate steps to restate its Organization
Certificate to read in the form of an Organization Certificate for a New York
stock savings bank as specified in the Banking Law and the regulations of the
New York Banking Board and approved by the Board of Directors of the Bank. By
their approval of the Plan, the Voting Depositors of the Bank will thereby
approve and adopt such Restated Organization Certificate. The Bank shall also
take all appropriate steps to adopt by-laws sufficient and appropriate for a
New York stock savings bank.
17. RESTRICTIONS ON RESALE OR SUBSEQUENT DISPOSITION
(a) All shares of Conversion Stock purchased by Directors or Officers
of the Bank or the Holding Company in the Conversion shall be subject to the
restriction that, except as provided in Section 17(b) below, or as may be
approved by the Superintendent, no interest in such shares may be sold or
otherwise disposed of for value for a period of one (1) year following the
date of purchase.
(b) The restriction on disposition of shares of Conversion Stock set
forth in Section 17(a) above shall not apply to the following:
(i) Any exchange of such shares in connection with a merger or
acquisition involving the Bank or the Holding Company, which has been
approved by the Superintendent; and
(ii) Any disposition of such shares following the death of the person
to whom such shares were initially sold under the terms of the Plan.
(c) With respect to all shares of Conversion Stock subject to restrictions
on resale or subsequent disposition, each of the following provisions shall
apply;
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(i) Each certificate representing shares restricted within the
meaning of Section 17(b) above shall bear a legend prominently stamped on
its face giving notice of the restriction;
(ii) Appropriate instructions shall be issued to the stock transfer
agent for the Holding Company not to recognize or effect any transfer of
any certificate or record of ownership of any such shares in violation of
any of the transfer restrictions; and
(iii) Any shares of capital stock of the Holding Company issued
with respect to a stock dividend, stock split, or otherwise with respect to
any such restricted stock may not be sold until the restrictions respecting
such originally restricted stock are terminated, and any certificate for
such shares shall bear a legend advising of such restrictions.
18. VOTING RIGHTS AFTER CONVERSION
Upon Conversion, the holders of the capital stock of the Bank shall have
the exclusive voting rights with respect to the Bank as specified in its
Restated Organization Certificate and the holders of the capital stock of the
Holding Company shall have the exclusive voting rights with respect to the
Holding Company.
19. ESTABLISHMENT OF LIQUIDATION ACCOUNT
The Bank shall establish at the time of Conversion a liquidation account
in an amount equal to its net worth as of the net worth of the Bank as set
forth in the latest statement of financial condition included in the
Prospectus. The liquidation account will be maintained by the Bank for the
benefit of the Eligible Account Holders and Supplemental Eligible Account
Holders who continue to maintain their Deposit Accounts at the Bank. Each
Eligible Account Holder and Supplemental Eligible Account Holder shall, with
respect to his Deposit Account, hold a related inchoate interest in a portion
of the liquidation account balance, calculated as set forth below.
In the event of a complete liquidation of the Bank (and only in such
event), following all liquidation payments to creditors (including those to
Account Holders to the extent of their Deposit Accounts) each Eligible
Account Holder and Supplemental Eligible Account Holder shall be entitled to
receive a liquidating distribution from the liquidation account, in the
amount of the then adjusted subaccount balance for his Deposit Account then
held, before any liquidation distribution may be made to any holders of the
Bank's capital stock. No merger, consolidation, purchase of bulk assets with
assumption of Deposit Accounts and other liabilities, or similar transactions
with an FDIC insured institution, in which the Bank is not the surviving
institution, shall be
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deemed to be a complete liquidation for this purpose. In such transactions, the
liquidation account shall be assumed by the surviving institution.
The initial subaccount balance for a Deposit Account held by an Eligible
Account Holder or Supplemental Eligible Account Holder shall be determined by
multiplying the opening balance in the liquidation account by a fraction, the
numerator of which is the amount of such Eligible Account Holder's or
Supplemental Eligible Account Holder's Qualifying Deposit and the denominator
of which is the total amount of all Qualifying Deposits of all Eligible
Account Holders and Supplemental Eligible Account Holders in the Bank. Such
initial subaccount balance shall not be increased, but shall be subject to
downward adjustment as described below.
If, at the close of business on any annual closing date, commencing on
or after the effective date of the Conversion, the deposit balance in the
Deposit Account of an Eligible Account Holder or Supplemental Eligible
Account Holder is less than the lesser of (i) the balance in the Deposit
Account at the close of business on any other annual closing date subsequent
to the Eligibility Record Date or Supplemental Eligibility Record Date, as
applicable, or (ii) the amount of the Qualifying Deposit in such Deposit
Account, the subaccount balance of such Deposit Account shall be adjusted by
reducing such subaccount balance in an amount proportionate to the reduction
in such deposit balance. In the event of such downward adjustment, the
subaccount balance shall not be subsequently increased, notwithstanding any
subsequent increase in the deposit balance of the related Deposit Account.
If any such Deposit Account is closed, the related subaccount shall be
reduced to zero.
The creation and maintenance of the liquidation account shall not
operate to restrict the use or application of any of the net worth accounts
of the Bank.
20. DEPOSIT ACCOUNTS FOLLOWING CONVERSION
Each Person holding a Deposit Account at the Bank at the time of
Conversion shall retain an identical Deposit Account at the Bank following
the Conversion in the same amount and subject to the same terms and
conditions applicable to such Deposit Account at the time of Conversion
(except as to voting and liquidation rights).
21. STOCK REPURCHASE AND STOCK BENEFIT PLANS
The Holding Company, or the Bank if the Holding Company is not utilized,
will restrict repurchases of Conversion Stock and the implementation of stock
option and management and employee stock benefit plans as required by the
Conversion Regulations, unless such requirements are waived by the
appropriate regulatory agency.
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22. AMENDMENT OF PLAN
If deemed necessary or desirable, the Plan may be substantively amended
at any time prior to solicitation of proxies from Voting Depositors to vote
on the Plan by a two-thirds vote of the Bank's Board of Directors and at any
time thereafter by such vote of such Board of Directors with the concurrence
of the Superintendent. Any amendment to the Plan made after approval by the
Voting Depositors with the approval of the Superintendent shall not
necessitate further approval by the Voting Depositors unless otherwise
required by the Superintendent. The Plan may be terminated by majority vote
of the Bank's Board of Directors at any time prior to the Special Meeting and
at any time thereafter with the concurrence of the Superintendent.
By adoption of the Plan, the Voting Depositors of the Bank authorize the
Board of Directors of the Bank to amend or terminate the Plan under the
circumstances set forth in this Section.
23. CONSUMMATION AND COMPLETION OF CONVERSION
The Conversion shall be deemed to take place and be effective upon the
completion of all requisite organizational procedures for obtaining the
Restated Organization Certificate for the Bank in stock form and sale of all
Conversion Stock and the filing of the Restated Organization Certificate in
the office of the Superintendent. The Conversion shall be completed within
24 months from the date of approval of this Plan by the Superintendent.
24. REGISTRATION AND MARKETING
Within the time period required by applicable laws and regulations, the
Holding Company will register the securities issued in connection with the
Conversion pursuant to the Securities Exchange Act of 1934 and will not
deregister such securities for a period of at least three years thereafter,
except that such three year registration maintenance requirement may be
fulfilled by any successor to the Holding Company. In addition, the Holding
Company will use its best efforts to encourage and assist market-makers to
establish and maintain a market for the Conversion Stock and to list those
securities on a national or regional securities exchange or the NASDAQ Stock
Market.
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25. RESIDENTS OF FOREIGN COUNTRIES AND CERTAIN STATES
The Bank will make reasonable efforts to comply with the securities laws
of all States in the United States in which Persons entitled to subscribe for
shares of Conversion Stock pursuant to the Plan reside. However, no Person
will be issued subscription rights or be permitted to purchase shares of
Conversion Stock in the Subscription Offering if such Person resides in a
foreign country.
26. EXPENSES OF CONVERSION
The expenses incurred by the Bank and Holding Company in connection with
the Conversion shall be reasonable.
27. CONDITIONS TO CONVERSION
The Conversion is expressly conditioned upon the following:
(a) Prior receipt by the Bank of rulings of the United States Internal
Revenue Service and the State of New York taxing authorities, or opinions of
counsel, substantially to the effect that the Conversion will not result in
any adverse federal or state tax consequences to Eligible Account Holders or
Supplemental Eligible Account Holders or the Bank and the Holding Company
before or after the Conversion;
(b) The sale of Conversion Stock with an aggregate purchase price at
least equal to the minimum of the Estimated Valuation Range, except as
otherwise permitted pursuant to this Plan upon the approval of the
Superintendent;
(c) The completion of the Conversion within the time period specified
in Section 23 hereof; and
(d) The non-objection of the FDIC and the approval of the
Superintendent to the Conversion, the approval of the FRB to the Holding
Company's acquisition of the capital stock of the Bank, the declaration of
effectiveness by the SEC of the Holding Company's registration statement, and
the receipt of any other required regulatory approval.
28. INTERPRETATION
All interpretations of this Plan and application of its provisions to
particular circumstances by a majority of the Board of Directors of the Bank
shall be final, subject to the authority of the Superintendent.
24
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Exhibit 3.3
Proposed Amended
Restated Organization Certificate
Of
Cortland Savings Bank
Under Section 8007 of The Banking Law
<PAGE>
Table of Contents
Article I
Name. . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Article II
Principal Office. . . . . . . . . . . . . . . . . . . . . 1
Article III
Capital Stock
Section 1. Shares, Classes and Series Authorized. . . . . . . . . . . 1
Section 2. Designations, Powers, Preferences, Rights, Qualifications,
Limitations and Restrictions Relating to the Capital
Stock. . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Article IV
Limitation On Beneficial Ownership Of Stock
Section 1. Prohibitions Relating to Beneficial Ownership of Voting
Stock. . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 2. Excess Shares. . . . . . . . . . . . . . . . . . . . . . . 4
Section 3. Powers of the Board. . . . . . . . . . . . . . . . . . . . 5
Section 4. Severability . . . . . . . . . . . . . . . . . . . . . . . 6
Section 5. Exclusions . . . . . . . . . . . . . . . . . . . . . . . . 6
Article V
Board Of Directors
Section 1. Number of Directors. . . . . . . . . . . . . . . . . . . . 6
Section 2. Classification of Board. . . . . . . . . . . . . . . . . . 7
Section 3. Vacancies. . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 4. Removal of Directors . . . . . . . . . . . . . . . . . . . 7
Section 5. Evaluation of Acquisition Proposals. . . . . . . . . . . . 7
Article VI
Action By Shareholders By Written Consent. . . . . . . . . 8
<PAGE>
Article VII
Certain Business Combinations
Section 1. Higher Vote Required for Certain Business Combinations . . 8
Section 2. When Higher Vote is Not Required . . . . . . . . . . . . . 9
Section 3. Definitions. . . . . . . . . . . . . . . . . . . . . . . 11
Section 4. Powers of the Disinterested Directors. . . . . . . . . . 15
Section 5. Effect on Fiduciary Obligations of Interested
Shareholders. . . . . . . . . . . . . . . . . . . . . . . 15
Section 6. Amendment, Repeal, Etc.. . . . . . . . . . . . . . . . . 15
Article VIII
Indemnification
Section 1. Right to Indemnification . . . . . . . . . . . . . . . . 16
Section 2. Accrual of Right to Indemnification. . . . . . . . . . . 16
Section 3. Individual Indemnification Agreements. . . . . . . . . . 16
Section 4. Insurance. . . . . . . . . . . . . . . . . . . . . . . . 17
Section 5. Subsequent Amendment and Subsequent Legislation. . . . . 17
Article IX
Amendments
Section 1. Amendments of Restated Organization Certificate. . . . . 17
Section 2. Amendments of Bylaws . . . . . . . . . . . . . . . . . . 18
<PAGE>
Restated Organization Certificate
Of
Cortland Savings Bank
Under Section 8007 of The Banking Law
WE, Wesley D. Stisser and Sandy F. Samson, being the President and Chief
Executive Officer and the Corporate Secretary, respectively, of Cortland
Savings Bank (the "Corporation"), in accordance with Section 8007 of the
Banking Law of the State of New York (the "Banking Law"), do hereby certify
as follows:
FIRST, The name of the Corporation is Cortland Savings Bank.
SECOND, The Corporation was created under the name "Cortland Savings
Bank" by an Act of the Legislature of the State of New York, passed April 13,
1866, such Act having been amended and supplemented from time to time
thereafter. Under Section 1001(5) of the Banking Law, such Act is the
Organization Certificate of the Corporation.
THIRD, The text of the Organization Certificate of the Corporation is
hereby amended and restated in its entirety to read as follows:
Article I
Name
The name by which the Corporation is to be known is Cortland Savings Bank.
Article II
Principal Office
The principal office of the Corporation is to be located at One North
Main Street, in the City of Cortland, County of Cortland, State of New York.
Article III
Capital Stock
Section 1. Shares, Classes and Series Authorized. The total number of
shares of all classes of capital stock that the Corporation shall have
authority to issue is twenty million (20,000,000) shares, of which two
million (2,000,000) shares shall be preferred stock, par value one cent
($.01) per share (the "Preferred Stock"), and eighteen million (18,000,000)
shares shall be common stock, par value one cent ($.01) per share (the
"Common Stock"). The Preferred Stock and Common Stock are sometimes
hereinafter collectively referred to as the "Capital Stock."
Section 2. Designations, Powers, Preferences, Rights, Qualifications,
Limitations and
<PAGE>
Restrictions Relating to the Capital Stock. The following is a statement of the
designations, powers, preferences and rights in respect of the classes of the
Capital Stock, and the qualifications, limitations or restrictions thereof, and
of the authority with respect thereto expressly vested in the Board of Directors
of the Corporation (the "Board"):
(a) Preferred Stock. The Preferred Stock may be issued from time to
time in one or more series, the number of shares and any designation of each
series and the powers, preferences and rights of the shares of each series, and
the qualifications, limitations or restrictions thereof, to be as stated and
expressed in a resolution or resolutions providing for the issue of such series
adopted by the Board, subject to the limitations prescribed by law. The Board
in any such resolution or resolutions is expressly authorized to state for each
such series:
(i) the voting powers, if any, of the holders of shares of such series in
addition to any voting rights affirmatively required by law;
(ii) the rights of shareholders in respect of dividends, including,
without limitation, the rate or rates per annum and the time or times at which
(or the formula or other method pursuant to which such rates and such time or
times may be determined) and conditions upon which the holders of shares of such
series shall be entitled to receive dividends and other distributions, and
whether any such dividends shall be cumulative or non-cumulative and, if
cumulative, the terms upon which such dividends shall be cumulative;
(iii) whether the shares of each such series shall be redeemable by the
Corporation at the option of the Corporation or the holder thereof, and, if
redeemable, the terms upon which the shares of such series may be redeemed;
(iv) the amount payable and the rights or preferences to which the holders
of shares of such series shall be entitled upon any voluntary or involuntary
liquidation, dissolution or winding up of the Corporation;
(v) the terms, if any, upon which shares of such series shall be
convertible into, or exchangeable for, shares of any other class or classes or
of any other series of the same or any other class of classes, including the
price or prices or the rate or rates of conversion or exchange and the terms of
adjustment, if any; and
(vi) any other powers, designations, preferences, and relative,
participating, optional or other special rights, and qualifications, limitations
or restrictions thereof, so far as they are not inconsistent with the provisions
of this Restated Organization Certificate and to the full extent now or
hereafter permitted by the laws of the State of New York.
All shares of the Preferred Stock of any one series shall be identical
to each other in all respects, except that shares of any one series issued at
different times may differ as to the dates from which dividends thereon, if
cumulative, shall be cumulative.
Subject to any limitations or restrictions stated in the resolution or
resolutions of the Board originally fixing the number of shares constituting
a series, the Board may, by resolution
2
<PAGE>
or resolutions likewise adopted, increase or decrease (but not below the number
of shares of the series then outstanding) the number of shares of the series
subsequent to the issuance of shares of that series and in case the number of
shares of any series shall be so decreased, the shares constituting the decrease
shall resume that status that they had prior to the adoption of the resolution
originally fixing the number of shares constituting such series.
(b) Common Stock. All shares of Common Stock shall be identical to
each other in every respect. Subject to Article IV hereof, the shares of
Common Stock shall entitle the holders thereof to one vote for each share on
all matters upon which shareholders have the right to vote. The holders of
shares of Common Stock shall not be permitted to cumulate their votes for the
election of directors. Notwithstanding the foregoing, except as otherwise
required by law, holders of Common Stock, as such, shall not be entitled to
vote on any amendment to this Restated Organization Certificate (including
any Certificate of Designation relating to any series of Preferred Stock)
that relates solely to the terms of one or more outstanding series of
Preferred Stock if the holders of such affected series are entitled, either
separately or together with the holders of one or more other such series, to
vote thereon pursuant to this Restated Organization Certificate (including
any Certificate of Designation relating to any series of Preferred Stock) or
pursuant to the laws of the State of New York.
Subject to the preferences, privileges and powers with respect to each
class of Capital Stock of the Corporation having any priority over the Common
Stock, and the qualifications, limitations or restrictions thereof, the
holders of the Common Stock shall have and possess all rights pertaining to
the Capital Stock.
No holder of shares of Common Stock shall be entitled as such, as a
matter of preemptive right, to subscribe for, purchase or otherwise acquire
any part of any new or additional issue of shares of any class or series
whatsoever of the Corporation, or of securities convertible into shares of
any class or series whatsoever of the Corporation, or of any warrants or
other instruments evidencing rights or options to subscribe for, purchase or
otherwise acquire such shares or securities, whether now or hereafter
authorized or whether issued for cash or other consideration or by way of
dividend.
Article IV
Limitation On Beneficial Ownership Of Stock
Section 1. Prohibitions Relating to Beneficial Ownership of Voting
Stock. No Person, for a period of not less than three years following the
date of filing by the Superintendent of Banks of the State of New York (the
"Superintendent") of this Restated Organization Certificate, shall directly
or indirectly acquire or hold the beneficial ownership of more than ten
percent (10%) of the issued and outstanding Voting Stock of the Corporation.
Any Person so prohibited who directly or indirectly acquires or holds the
beneficial ownership of more than ten percent (10%) of the issued and
outstanding Voting Stock in violation of this Section I shall be subject to
the provisions of Sections 2 and 3 of this Article IV, below. All terms used
in this Article IV and not otherwise defined herein shall have the meanings
ascribed to such terms in Section 3 of Article VII, below, except that the
term "Person" shall not include the Corporation,
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any subsidiary of the Corporation or any pension, profit-sharing, stock bonus or
other compensation plan maintained by the Corporation or by a member of a
controlled group of corporations or trades or businesses of which the
Corporation is a member for the benefit of the employees of the Corporation,
and/or any subsidiary, or any trust or custodial arrangement established in
connection with any such plan.
Section 2. Excess Shares. The transfer of any shares of Voting Stock
that would result in a violation of Section I of this Article IV is
prohibited and shall be null and void. If, notwithstanding the foregoing
prohibition, a Person shall, voluntarily or involuntarily, become or attempt
to become the purported beneficial owner (the "Purported Owner") of shares of
Voting Stock in excess of ten percent (10%) of the issued and outstanding
shares of Voting Stock, the number of shares in excess of ten percent (10%)
shall be deemed to be "Excess Shares," and all of the following provisions
(a) through (g) shall apply to such Excess Shares:
(a) The Purported Owner shall not obtain any rights in and to the
Excess Shares, and the purported transfer of the Excess Shares to the
Purported Owner shall not be recognized by the transfer agent for such shares
(the "Transfer Agent"). Until such time as the Excess Shares are transferred
to a person whose acquisition thereof will not violate the limitation set
forth in Section 1 of this Article IV (a "Permitted Transferee"), the
transferor of the Excess Shares to the Purported Owner (the "Purported
Owner's Transferor") shall be deemed to have retained the Excess Shares and
shall hold and be entitled to exercise all rights incident to ownership of
such Excess Shares. All Excess Shares will continue to be issued and
outstanding.
(b) If the Transfer Agent obtains possession of a certificate or
certificates representing Excess Shares, the Transfer Agent shall deliver
such certificate or certificates to a trustee nominated and appointed by the
Board to hold Excess Shares (the "Share Trustee"). Upon receipt of notice
from the Corporation of the existence of Excess Shares and the identity of
the Purported Owner of such Excess Shares, the Share Trustee shall take all
lawful action to cause the Purported Owner to deliver or cause delivery of
the Excess Shares and any indicia of ownership thereof to the Share Trustee.
Upon obtaining possession of such Excess Shares, the Share Trustee shall sell
or cause the sale of the Excess Shares to a Permitted Transferee in the then
existing public market or in such other commercially reasonable fashion as
the Corporation shall direct. In performing the duties herein imposed upon
it, the Share Trustee shall act at all times as the agent for the Purported
Owner's Transferor.
(c) Upon acquisition of the Excess Shares by a Permitted Transferee,
the Permitted Transferee shall have and be entitled to exercise all rights
incident to the ownership of such Excess Shares.
(d) The proceeds realized from the sale of the Excess Shares to the
Permitted Transferee (the "Proceeds") shall be distributed as follows: (i)
first, to the Share Trustee for any costs incurred in respect of its
administration of the Excess Shares, (ii) second, to the Purported Owner, if
known, in an amount up to the amount paid by the Purported Owner, if
determinable, for the Excess Shares and (iii) the remaining Proceeds, if any,
shall be distributed to the Purported Owner's Transferor, if known, and, if
the Purported Owner's Transferor is not known, such remaining Proceeds shall
be held by the Corporation for the benefit of the
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Purported Owner's Transferor or such other persons or entities, as their
interests may appear. Notwithstanding anything in this Article IV to the
contrary, the Corporation shall at all times be entitled to make application to
any court of competent jurisdiction within the State of New York for an
adjudication of the respective rights and interests of any Person in and to the
Proceeds pursuant to this Article IV and applicable law and for leave to pay the
Proceeds into such court.
(e) Immediately upon the purported acquisition of any Excess Shares,
the Purported Owner thereof shall give, or cause to be given, written notice
of such acquisition to the Corporation. In addition, at the request of the
Corporation, each owner of shares of Voting Stock shall furnish to the
Corporation all information reasonably requested with respect to all shares
of Voting Stock directly and indirectly owned by such Person.
(f) Upon a determination by the Board that a Person has attempted or
may attempt to transfer or to acquire Excess Shares, the Board may take such
action as it deems advisable to refuse to give effect to such transfer or
acquisition on the books and records of the Corporation, including, without
limitation, any such action that shall cause the Transfer Agent to record the
Purported Owner's Transferor as the record owner of the Excess Shares, and to
institute proceedings to enjoin or rescind any such transfer or acquisition.
(g) The restrictions set forth in this Article IV shall be noted
conspicuously on all certificates evidencing ownership of shares of Voting
Stock.
Section 3. Powers of the Board.
(a) The Board may, to the extent permitted by law, from time to time
establish, modify, amend or rescind, by Bylaw or otherwise, regulations and
procedures not inconsistent with the express provisions of this Article IV
for the orderly application, administration and implementation of the
provisions of this Article IV. Such procedures and regulations shall be kept
on file with the Secretary of the Corporation and with the Transfer Agent,
shall be made available for inspection by the public and, upon request, shall
be mailed to any holder of shares of Voting Stock.
(b) When it appears that a particular Person has become a Purported
Owner of Excess Shares in violation of Section I of this Article IV and that
the provisions of this Article IV, or any of the rules and regulations of the
Board with respect to this Article IV, require application, interpretation or
construction, then a majority of the directors of the Corporation shall have
the power and duty to interpret all of the terms and provisions of this
Article IV and to determine on the basis of information known to them after
reasonable inquiry all facts necessary to ascertain compliance with this
Article IV, including, without limitation, (i) the number of shares of Voting
Stock beneficially owned by any Person or Purported Owner, (ii) whether a
Person or Purported Owner is an Affiliate or Associate of, or is acting in
concert with, any other Person or Purported Owner, (iii) whether a Person or
Purported Owner has an agreement, arrangement or understanding with any other
Person or Purported Owner as to the voting or disposition of any shares of
Voting Stock, (iv) the application of any other definition or operative
provision of this Article IV to the given facts or (v) any other matter
relating to the applicability or effect of this Article IV.
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The Board shall have the right to demand that any Person who is
reasonably believed to be a Purported Owner of Excess Shares (or who holds of
record Voting Stock beneficially owned by any Person reasonably believed to
be a Purported Owner) supply the Corporation with complete information as to
(i) the record owner(s) of all shares of Voting Stock beneficially owned by
such Person or Purported Owner and (ii) any other factual matter relating to
the applicability or effect of this Article IV as may reasonably be requested
of such Person or Purported Owner.
Any applications, interpretations, constructions or any other
determinations made by the Board pursuant to this Article IV, in good faith
and on the basis of such information and assistance as was then reasonably
available for such purpose, shall be conclusive and binding upon the
Corporation and its shareholders and neither the Corporation nor any of its
shareholders shall have the right to challenge any such application,
interpretation, construction or determination.
Section 4. Severability. In the event any provision (or portion
thereof) of this Article IV shall be found to be invalid, prohibited or
unenforceable for any reason, the remaining provisions (or portions thereof)
of this Article IV shall remain in full force and effect, and shall be
construed as if such invalid, prohibited or unenforceable provision had been
stricken herefrom or otherwise rendered inapplicable, it being the intent of
this Corporation and its shareholders that each such remaining provision (or
portion thereof) of this Article IV remain, to the fullest extent permitted
by law, applicable and enforceable as to all shareholders, including
Purported Owners, if any, notwithstanding any such finding.
Section 5. Exclusions. This Article IV shall not apply to (a) any offer
or sale with a view towards public resale made exclusively by the Corporation
to any underwriter or underwriters acting on behalf of the Corporation, or to
the selling group acting on such underwriter's or underwriters' behalf, in
connection with a public offering of the Common Stock; (b) any corporation
formed by the Corporation in connection with its conversion from mutual to
stock form to acquire all of the shares of capital stock of the Corporation
to be issued in connection with such conversion; or (c) any reclassification
of securities (including any reverse stock split), or recapitalization of the
Corporation, or any merger or consolidation of the Corporation with any of
its Subsidiaries or any other transaction or reorganization (including a
transaction in which the Corporation shall form a holding company) that does
not have the effect, directly or indirectly, of changing the beneficial
ownership interests of the Corporation's shareholders, other than pursuant to
the exercise of any appraisal rights, except as a result of immaterial
changes due to fractional share adjustments, which changes do not exceed, in
the aggregate, one percent (1%) of the issued and outstanding shares of such
class of equity or convertible securities.
Article V
Board of Directors
Section 1. Number Of Directors. The number of directors of the
Corporation shall not
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be less than seven (7) nor more than twenty (20). Within such limitations, the
number of directors shall be determined by the bylaws of the Corporation or by
resolution of the Board.
Section 2. Classification of Board. Subject to the rights of any
holders of shares of any series of Preferred Stock that may be issued by the
Corporation pursuant to a resolution or resolutions of the Board providing
for such issuance, the directors of the Corporation shall be divided into
three classes with respect to term of office, each class to contain, as near
as may be possible, one-third of the entire number of the Board, with the
terms of office of one class expiring each successive year. At each annual
meeting of shareholders, the successors to the class of directors whose term
expires at that time shall be elected by the shareholders to serve until the
annual meeting of shareholders held three years next following and until
their successors shall be elected and qualified.
In the event of any intervening changes in the authorized number of
directors, the Board shall designate the class or classes to which the
increase or decrease in directorships shall be apportioned and may designate
one or more directorships as directorships of another class in order to
achieve, as near as may be possible, equality of number of directors among
the classes; provided, however, that no such apportionment or redesignation
shall shorten the term of any incumbent director.
Unless and to the extent that the bylaws so provide, elections of
directors need not be by written ballot.
Section 3. Vacancies. Subject to the limitations prescribed by law, the
bylaws and this Restated Organization Certificate, all vacancies in the
office of director, including vacancies created by newly created
directorships resulting from an increase in the number of directors, shall be
filled by the shareholders, except that vacancies not exceeding one-third of
the entire Board may be filled by the affirmative vote of a majority of the
directors then in office. No person shall be elected a director unless
nominated at a previous regular or special meeting, called for that purpose,
upon the recommendation of the Board, or a committee appointed by the Board.
Any director so elected shall serve for the remainder of the full term of the
class of directors in which the new directorship was created or the vacancy
occurred and until his successor shall be elected and qualified.
Section 4. Removal of Directors. Any or all of the directors may be
removed at any time, but only for cause, and any such removal shall require
the vote, in addition to any vote required by law, of not less than eighty
percent (80%) of the total votes eligible to be cast by the holders of all
outstanding shares of Capital Stock entitled to vote generally in the
election of directors at a meeting of shareholders expressly called for that
purpose. For purposes of this Section 4, conduct worthy of removal for
"cause" shall mean (a) conduct as a director of the Corporation or any
subsidiary of the Corporation that involves willful material misconduct,
breach of fiduciary duty involving personal pecuniary gain or gross
negligence in the performance of duties, or (b) conduct, whether or not as a
director of the Corporation or a subsidiary of the Corporation, that involves
dishonesty or breach of fiduciary duty and is punishable by imprisonment for
a term exceeding one year under state or federal law.
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Section 5. Evaluation of Acquisition Proposals. The Board, when
evaluating any offer to the Corporation or to the shareholders of the
Corporation from another party relating to a change or potential change in
control of the Corporation, including, without limitation, any offer to (a)
purchase for cash or exchange any securities or property for any outstanding
equity securities of the Corporation, (b) merge or consolidate the
Corporation with another corporation or (c) purchase or otherwise acquire all
or substantially all of the properties and assets of the Corporation, in
connection with the exercise of its judgment in determining what is in the
best interest of the Corporation and its shareholders, may give due
consideration not only to the price or other consideration being offered, but
also to all other relevant factors, including, without limitation, (1) both
the long-term and the short-term interests of the Corporation and its
shareholders and (2) the effects that the Corporation's actions may have in
the short-term or in the long-term upon any of the following: (i) the
prospects for potential growth, development, productivity and profitability
of the Corporation; (ii) the Corporation's current employees; (iii) the
Corporation's retired employees and other beneficiaries receiving or entitled
to receive retirement, welfare or similar benefits from or pursuant to any
plan sponsored, or agreement entered into, by the Corporation; (iv) the
Corporation's customers and creditors; and (v) the ability of the Corporation
to provide, as a going concern, goods, services, employment opportunities and
employment benefits and otherwise to contribute to the communities in which
is does business.
Article VI
Action By Shareholders by Written Consent
Whenever shareholders of the Corporation are required or permitted to
take any action by vote at any annual or special meeting, such action may be
taken without a meeting upon written consent, setting forth the action so
taken, signed by the holders of all outstanding shares of Capital Stock
entitled to vote thereon.
Article VII
Certain Business Combinations
Section 1. Higher Vote Required for Certain Business Combinations.
In addition to any affirmative vote required by law or this Restated
Organization Certificate, and except as otherwise expressly provided in this
Article and subject to applicable laws:
(a) any merger or consolidation of the Corporation or any Subsidiary
with: (i) any Interested Shareholder; or (ii) any other corporation (whether
or not itself an Interested Shareholder) which is, or after such merger or
consolidation would be, an Affiliate or Associate of an Interested
Shareholder; or
(b) any sale, lease, exchange, mortgage, pledge, transfer or other
disposition (in one transaction or a series of transactions) to, with or for
the benefit of any Interested Shareholder, or any Affiliate or Associate of
any Interested Shareholder, of any assets of the Corporation or any
Subsidiary having an aggregate Fair Market Value equaling or exceeding 25% or
more of
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the combined assets of the Corporation and its Subsidiaries; or
(c) the issuance or transfer by the Corporation or any Subsidiary (in
one transaction or a series of transactions) of any securities of the
Corporation or any Subsidiary to any Interested
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Shareholder or any Affiliate or Associate of any Interested Shareholder in
exchange for cash, securities or other property (or a combination thereof)
having an aggregate Fair Market Value equaling or exceeding 25% of the combined
Fair Market Value of the outstanding Common Stock of the Corporation and its
Subsidiaries, except for any issuance or transfer pursuant to an employee
benefit plan of the Corporation or any Subsidiary thereof; or
(d) the adoption of any plan or proposal for the liquidation or
dissolution of the Corporation proposed by or on behalf of an Interested
Shareholder or any Affiliate or Associate of any Interested Shareholder; or
(e) any reclassification of securities (including any reverse stock
split), or recapitalization of the Corporation, or any merger or
consolidation of the Corporation with any of its Subsidiaries or any other
transaction (whether or not with or into or otherwise involving an Interested
Shareholder) which has the effect, directly or indirectly, of increasing the
proportionate share of the outstanding shares of any class of equity or
convertible securities of the Corporation or any Subsidiary which is directly
or indirectly owned by any Interested Shareholder or any Affiliate of any
Interested Shareholder; or
(f) any contract, agreement or other arrangement providing for any one
or more of the actions specified in (a) through (e) above, shall in any such
event require the affirmative vote of the holders of at least 80% of the
voting power of the Voting Stock, voting together as a single class. Such
affirmative vote shall be required notwithstanding the fact that no vote may
be required, or that a lesser percentage may be specified, by law or by any
other provisions of this Restated Organization Certificate or any Preferred
Stock Designation in any agreement with any national securities exchange or
otherwise.
Section 2. When Higher Vote is Not Required. The provisions of
Section A of this Article shall not be applicable to any particular Business
Combination, and such Business Combination shall require only the affirmative
vote (if any) as is required by law or by this Restated Organization
Certificate, if, in the case of any Business Combination that does not
involve any cash or other consideration being received by the stockholders of
the Corporation solely in their capacity as stockholders of the Corporation,
the condition specified in the following paragraph 1 is met or, in the case
of any other Business Combination, all of the conditions specified in either
of the following paragraphs a or b are met:
(a) The Business Combination shall have been approved by a majority of
the Disinterested Directors.
(b) All of the following conditions shall have been met:
(i) The aggregate amount of the cash and the Fair Market Value, as of
the date of the consummation of the Business Combination, of consideration other
than cash to be received per share by the holders of Common Stock in such
Business Combination shall at least be equal to the higher of the following:
(a) (if applicable) the Highest Per Share Price, including any
brokerage
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commissions, transfer taxes and soliciting dealers' fees, paid by the Interested
Shareholder or any of its Affiliates for any shares of Common Stock acquired by
it: (x) within the two-year period immediately prior to the applicable
Announcement Date; or (y) in the transaction in which it became an Interested
Shareholder, whichever is higher, plus interest compounded annually from the
Determination Date to the date the Business Combination is consummated at the
highest prime rate of interest for United States Banks as published from time to
time in the Eastern Edition of the Wall Street Journal, or if no longer so
published then such other indicator of the prime bank rate of interest as is
selected by a majority of the Disinterested Directors then in office; or
(b) the Fair Market Value per share of Common Stock on the
Announcement Date or on the Determination Date, whichever is higher;
(ii) The aggregate amount of the cash and the Fair Market Value as of
the date of the consummation of the Business Combination of consideration other
than cash to be received per share by holders of shares of any class or series
of outstanding capital stock other than Common Stock shall be at least equal to
the highest of the following (it being intended that the requirements of this
subparagraph (b) shall be required to be met with respect to every such class or
series of outstanding capital stock, whether or not the Interested Shareholder
has previously acquired any shares of a particular class or series of capital
stock):
(a) (if applicable) the Highest Per Share Price, including any
brokerage commissions, transfer taxes and soliciting dealers' fees, paid by the
Interested Shareholder for any shares of such class or series of capital stock
acquired by it: (x) within the two-year period immediately prior to the
Announcement Date; or (y) in the transaction in which it became an Interested
Shareholder, whichever is higher; plus interest compounded annually from the
Determination Date to the date the Business Combination is consummated at the
highest prime rate of interest for United States Banks as published from time to
time in the Eastern Edition of the Wall Street Journal, or if no longer so
published then such other indicator of the prime bank rate of interest as is
selected by a majority of the Disinterested Directors then in office; or
(b) (if applicable) the highest preferential amount per share to
which the holders of shares of such class or series of capital stock are
entitled in the event of any voluntary or involuntary liquidation, dissolution
or winding up of the Corporation; or
(c) the Fair Market Value per share of such class or series of
capital stock on the Announcement Date or on the Determination Date, whichever
is higher.
(iii) The consideration to be received by holders of a particular
class of outstanding capital stock (including Common Stock) shall be in cash or
in the same form as the Interested Shareholder has previously paid for shares of
such class or series of Capital stock. If the Interested Shareholder has paid
for shares of any class or series of Capital stock with varying forms of
consideration, the form of consideration to be received per share by holders of
shares of such class or series of capital stock shall be either cash or the form
used to acquire the largest number of shares of such class or series of Capital
stock previously acquired by the Interested Shareholder. The price determined in
accordance with Section 2(b) of this Article shall be subject
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to appropriate adjustment in the event of any stock dividend, stock split,
combination of shares or similar event.
(iv) After such Interested Shareholder has become an Interested
Shareholder and prior to the consummation of such Business Combination: (1)
except as approved by a majority of the Disinterested Directors there shall have
been no failure to declare and pay at the regular date therefor any full
quarterly dividends (whether or not cumulative) on any outstanding stock having
preference over the Common Stock as to dividends or liquidation; (2) there shall
have been: (x) no reduction in the annual rate of dividends paid on the Common
Stock (except as necessary to reflect any subdivision of the Common Stock),
except as approved by a majority of the Disinterested Directors; and (y) an
increase in such annual rate of dividends as necessary to reflect any
reclassification (including any reverse stock split), recapitalization,
reorganization or any similar transaction which has the effect of reducing the
number of outstanding shares of the Common Stock, unless the failure to so
increase such annual rate is approved by a majority of the Disinterested
Directors, and (3) neither such Interested Shareholder nor any of its Affiliates
shall have become the beneficial owner of any additional shares of capital stock
except as part of the transaction that results in such Interested Shareholder
becoming an Interested Shareholder and except in a transaction that, after
giving effect thereto, would not result in any increase in the Interested
Shareholder's percentage beneficial ownership of any class or series of capital
stock of the Corporation.
(v) After such Interested Shareholder has become an Interested
Shareholder, such Interested Shareholder shall not have received the benefit,
directly or indirectly (except proportionately as a stockholder), of any loans,
advances, guarantees, pledges or other financial assistance or any tax credits
or other tax advantages provided, directly or indirectly, by the Corporation,
whether in anticipation of or in connection with such Business Combination or
otherwise.
(vi) A proxy or information statement describing the proposed
Business Combination and complying with the requirements of the Securities
Exchange Act of 1934, as amended, and the rules and regulations thereunder (or
any subsequent provisions replacing such Act, and the rules or regulations
thereunder) shall be mailed to stockholders of the Corporation at least 30 days
prior to the consummation of such Business Combination (whether or not such
proxy or information statement is required to be mailed pursuant to such Act or
subsequent provisions).
Section 3. Definitions. For purposes of this Article VII, the following
terms shall have the following meanings:
(a) "Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under
the Exchange Act, as in effect on the date of filing by the Superintendent of
this Restated Organization Certificate whether or not the Corporation was then
subject to such rule.
(b) "Announcement Date" shall mean the date of the first public
announcement of the proposal of the Business Combination.
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(c) A Person shall be deemed the "beneficial owner," or to have
"beneficial ownership," of any shares of Voting Stock that:
(i) such Person or any of its Affiliates or Associates beneficially
owns, directly or indirectly;
(ii) such Person or any or its Affiliates or Associates has (A) the
right to acquire (whether such right is exercisable immediately or only after
the passage of time) pursuant to any agreement, arrangement or understanding
(but a Person shall not be deemed to be the beneficial owner of any Voting
Stock solely by reason of an agreement, arrangement or understanding with the
Corporation to effect a Business Combination) or upon the exercise of
conversion rights, exchange rights, warrants or options, or otherwise, or (B)
the right to vote, or to direct the vote of, pursuant to any agreement,
arrangement or understanding (but neither such Person nor any Affiliate or
Associate shall be deemed to be the beneficial owner of any shares of Voting
Stock solely by reason of a revocable proxy granted for a particular meeting
of shareholders, pursuant to a public solicitation of proxies for such
meeting, and with respect to which shares neither such Person nor any
Affiliate or Associate is otherwise deemed the beneficial owner); or
(iii) is beneficially owned, directly or indirectly, by any other
Person with which such first mentioned Person or any of its Affiliates or
Associates has any agreement, arrangement or understanding for the purpose of
acquiring, holding, voting (except to the extent contemplated by the
parenthetical clause of Section 3(c)(ii)(B)) or disposing of any shares of
Voting Stock; provided, however, that no director or officer of the
Corporation (nor any Affiliate or Associate of any such director or officer)
(y) shall, solely by reason of any or all of such directors or officers
acting in their capacities as such, be deemed, for any purposes hereof, to
beneficially own any Voting Stock of the Corporation beneficially owned by
any other such director or officer (or any Affiliate or Associate thereof) or
(z) shall be deemed to beneficially own any Voting Stock of the Corporation
owned by any pension, profit-sharing, stock bonus or other compensation plan
maintained by the Corporation or by a member of a controlled group of
corporations or trades or businesses of which the Corporation is a member for
the benefit of employees of the Corporation and/or any Subsidiary, or any
trust or custodial arrangement established in connection with any such plan,
not specifically allocated to such Person's personal account.
(d) The term "Business Combination" shall mean any transaction that is
referred to in any one or more of the following paragraphs (i) through (vi):
(i) any merger or consolidation of the Corporation or any Subsidiary
with (A) any Interested Shareholder or (B) any other entity (whether or not such
other entity is itself an Interested Shareholder) which is, or after such merger
or consolidation would be, an Affiliate or Associate of any Interested
Shareholder;
(ii) any sale, lease, exchange, mortgage, pledge, transfer or other
disposition (in one transaction or a series of transactions) to or with any
Interested Shareholder or any Affiliate or Associate of any Interested
Shareholder of any assets of the Corporation or any Subsidiary
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having an aggregate Fair Market Value equal to five percent (5%) or more of the
total assets of the Corporation or the Subsidiary in question as of the end of
its most recent fiscal year ending prior to the time the determination is being
made;
(iii) the issuance or transfer by the Corporation or any Subsidiary
(in one transaction or a series of transactions) of any securities of the
Corporation or any Subsidiary to any Interested Shareholder or any Affiliate or
Associate of any Interested Shareholder having an aggregate Fair Market Value
equal to twenty percent (20%) or more of the aggregate Fair Market Value of all
of the outstanding Capital Stock other than on a pro rata basis to all holders
of Voting Stock and other than in connection with the exercise or conversion of
securities issued pro rata that are exercisable for, or convertible into,
securities of the Corporation or any Subsidiary;
(iv) the adoption of any plan or proposal for the liquidation or
dissolution of the Corporation proposed by or on behalf of any Interested
Shareholder or any Affiliate or Associate of any Interested Shareholder;
(v) any reclassification of securities (including any reverse stock
split), or recapitalization of the Corporation, or any merger or consolidation
of the Corporation with any Subsidiary or any other transaction (whether or not
with or into or otherwise involving an Interested Shareholder) which has the
effect, directly or indirectly, of increasing the proportionate share of the
outstanding shares of any class or series of equity or convertible securities of
the Corporation or any Subsidiary that is directly or indirectly owned by any
Interested Shareholder or any Affiliate or Associate of any Interested
Shareholder, except as a result of immaterial changes due to fractional share
adjustments, which changes do not exceed, in the aggregate, one percent (1%) of
the issued and outstanding shares of such class or series of equity or
convertible securities; or
(vi) the acquisition by the Corporation or a Subsidiary of any
securities of an Interested Shareholder.
In the event of any Business Combination in which the Corporation
survives the phrase "consideration other than cash to be received" shall
include the shares of Common Stock and/or shares of any other class of
capital stock retained by the holder of such shares in addition to any other
consideration and securities of the corporation retained by the receipt of
such consideration.
(e) "Consummation Date" shall mean the date of the consummation of the
Business Combination.
(f) "Determination Date" shall mean the date on which the Interested
Shareholder became an Interested Shareholder.
(g) "Disinterested Director" shall mean any member of the Board of the
Corporation who is not affiliated with the Interested Shareholder and who
either was a member of the Board prior to the Determination Date or was
recommended for election by a majority of the
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Disinterested Directors in office at the time such director was nominated for
election.
(h) "Fair Market Value" shall mean (i) in the case of stock, the
highest closing price during the 30-day period immediately preceding the date
in question of a share of such stock on the Composite Tape for New York Stock
Exchange listed stocks, or, if such stock is not quoted on such Composite
Tape or if such stock is not listed on such Exchange, then on the principal
United States securities exchange registered under the Exchange Act, on which
such stock is listed, or, if such stock is not listed on any such exchange,
then the highest closing bid quotation with respect to a share of such stock
during the 30-day period preceding the date in question on the Nasdaq Stock
Market or any system then in use, or if no such quotation is available, then
the fair market value on the date in question of a share of such stock as
determined in good faith by a majority of the Disinterested Directors then in
office, in each case with respect to any class of stock, appropriately
adjusted for any dividend or distribution in shares of such stock or any
stock split or reclassification of outstanding shares of such stock into a
greater number of shares of such stock or any combination or reclassification
of outstanding shares of such stock into a smaller number of shares of such
stock; and (ii) in the case of property other than cash or stock, the fair
market value of such property on the date in question as determined in good
faith by a majority of the Disinterested Directors then in office.
(i) References to "Highest Per Share Price" shall in each case with
respect to any class of stock reflect an appropriate adjustment for any
dividend or distribution in shares of such stock or any stock split or
reclassification of outstanding shares of such stock into a greater number of
shares of such stock or any combination or reclassification of outstanding
shares of such stock into a smaller number of shares of such stock.
(j) "Interested Shareholder" shall mean any Person (other than the
Corporation, any parent of the Corporation, any Subsidiary or any pension,
profit-sharing, stock bonus or other compensation plan maintained by the
Corporation or by a member of a controlled group of corporations or trades or
businesses of which the Corporation is a member for the benefit of employees
of the Corporation, any parent of the Corporation or any Subsidiary, or any
trust or custodial arrangement established in connection with any such plan
or holding Voting Stock for the purpose of funding any such plan or funding
employee lending for employees of the Corporation or any Subsidiary) who or
which:
(i) is the beneficial owner of ten percent (10%) or more of the Voting
Stock;
(ii) is an Affiliate of the Corporation and at any time within the
two-year period immediately prior to the date in question was the beneficial
owner of ten percent (1 0%) or more of the then outstanding Voting Stock; or
(iii) is an assignee of or has otherwise succeeded to any shares of
Voting Stock that were at any time within the two-year period immediately
prior to the date in question beneficially owned by any other Interested
Shareholder, if such assignment or succession shall have occurred in the
course of a transaction or series of transactions not involving a public
offering within the meaning Of the Securities Act of 1933, as amended.
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In determining whether a Person is an Interested Shareholder pursuant to
this subsection (j), the number of shares of Voting Stock deemed to be
outstanding shall include shares deemed owned through application of
subsection (c) of this Section 3, but shall not include any other shares of
Voting Stock that may be issuable pursuant to any agreement, arrangement or
understanding, or upon exercise of conversion rights, warrants or options, or
otherwise.
(k) "Person" shall mean any corporation, partnership, trust,
unincorporated organization or association, syndicate, any other entity or a
natural person, together with any Affiliate or Associate of such person or
any other person acting in concert with such person (which shall include,
without limitation, persons seeking to combine or pool their voting or other
interests in the Voting Stock for a common purpose, pursuant to any contract,
understanding, relationship, agreement or otherwise, but shall not include
the directors or officers of the Corporation acting solely in their
capacities as such).
(l) "Subsidiary" shall mean any corporation of which a majority of any
class or series of equity security is owned, directly or indirectly, by the
Corporation; provided, however, that for the purposes of the definition of
Interested Shareholder set forth in subsection (j) of this Section 3, the
term "Subsidiary" shall mean only a corporation of which a majority of each
class or series of voting securities is owned, directly or indirectly, by the
Corporation.
(m) "Voting Stock" shall mean all of the outstanding shares of Capital
Stock entitled to vote generally in the election of directors.
Section 4. Powers of The Disinterested Directors. When it appears that
a particular Person may be an Interested Shareholder and that the provisions
of this Article VII need to be applied or interpreted, then a majority of the
directors of the Corporation who would qualify as Disinterested Directors
shall have the power and duty to interpret all of the terms and provisions of
this Article VII and to determine on the basis of information known to them
after reasonable inquiry all facts necessary to ascertain compliance with
this Article VII, including, without limitation, (a) whether a Person is an
Interested Shareholder, (b) the number of shares of Voting Stock beneficially
owned by any Person, (c) whether a Person is an Affiliate or Associate of
another, (d) the Fair Market Value of (i) the assets that are the subject of
any Business Combination, (ii) the securities to be issued or transferred by
the Corporation or any Subsidiary in any Business Combination, (iii) the
consideration other than cash to be received by holders of shares of any
class or series of Common Stock or Voting Stock other than Common Stock in
any Business Combination, (iv) the outstanding Capital Stock or (v) any other
item the Fair Market Value of which requires determination pursuant to this
Article VII and (e) whether all of the applicable conditions set forth in
Section 2 of this Article VII have been met with respect to any Business
Combination.
Any constructions, applications, or determinations made by the Board
pursuant to this Article VII, in good faith and on the basis of such
information and assistance as was then reasonably available for such purpose,
shall be conclusive and binding upon the Corporation and its shareholders,
and neither the Corporation nor any of its shareholders shall have the right
to challenge any such construction, application or determination.
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Section 5. Effect on Fiduciary Obligations of Interested Shareholders.
Nothing contained in this Article VII shall be construed to relieve any
Interested Shareholder from any fiduciary obligations imposed by law.
Section 6. Amendment, Repeal, etc. Notwithstanding any other provisions
of this Restated Organization Certificate or any provision of law which might
otherwise permit a lesser vote or no vote, but in addition to any affirmative
vote of the holders of any particular class or series of the Voting Stock
required by law, this Restated Organization Certificate or any Preferred
Stock Designation, the affirmative vote of the holders of at least 80 percent
of the voting power of all of the then-outstanding shares of the Voting
Stock, voting together as a single class or series, shall be required to
alter, amend or repeal this Article. For the purposes of the preceding
sentence, shares owned in excess of the Limit which have no voting power
pursuant to Article V shall be counted in determining the aggregate voting
power of all outstanding shares of Voting Stock but shall remain subject to
the limitations on voting set forth in Article V.
Article VIII
Indemnification
SECTION 1. Right to Indemnification. The Corporation shall, to the
maximum extent authorized or permitted and in the manner provided by the
Banking Law and any applicable federal law, indemnify any person who is made,
or threatened to be made, a party to any action, suit or proceeding, whether
civil, criminal or administrative, by reason of the fact that such person, or
such person's testator or intestate, is or was a trustee, director or officer
of the Corporation or one of the Corporation's subsidiaries, or any
predecessor of the Corporation, or serves or served any other corporation, or
any partnership, association, joint venture, trust, employee benefit plan,
conference or other group or enterprise in any capacity at the request of the
Corporation or one of the Corporation's subsidiaries, or any predecessor of
the Corporation, against judgments, fines, amounts paid in settlement and
reasonable expenses, including attorneys' fees actually and reasonably
incurred, and the Corporation shall advance any related expense in full.
Employees or agents of the Corporation may be similarly indemnified. Such
right of indemnification and advancement shall be in addition to and not
exclusive of any other rights or remedies to which such person may be or
become entitled under any statute, insurance policy, agreement, bylaw or
otherwise.
SECTION 2. Accrual of Right to Indemnification. In addition to the
Corporation's obligation to indemnify under Section 1 of this Article VIII,
the Corporation's obligation to indemnify, and any person's right to
indemnification, under this Article VIII shall accrue as of the time of the
accrual of the cause of action asserted in the threatened or pending action,
suit, or proceeding, and no subsequent change in this Restated Organization
Certificate or the bylaws of the Corporation shall have any effect on the
Corporation's obligation to indemnify or a person's right to indemnification.
The provisions of this Article VIII shall be deemed to be a contract between
the Corporation and each director, trustee and officer of the Corporation who
serves in such capacity at any time while this Article VIII is in effect, and
any subsequent change of this Article VIII shall not affect the rights or
obligations then existing with respect to any state of facts then or
theretofore existing as it relates to any action or proceeding therefore or
thereafter
17
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brought or threatened based in whole or in part upon any such state of facts.
SECTION 3. Individual Indemnification Agreements. In addition to the
Corporation's obligation to indemnify under Sections 1 and 2 of this Article
VIII, the Board may also, to the maximum extent permitted by law, in its
discretion, approve agreements between the Corporation and one or more
directors, officers or employees of the Corporation under which the
Corporation would indemnify such directors, officers and employees in the
event that any such person is made, or threatened to be made, a party to any
action or proceeding, whether civil, criminal or administrative, by reason of
the fact that such person is or was a trustee, director, officer or employee
of the Corporation or one of the Corporation's subsidiaries, or any
predecessor of the Corporation, or serves or served any other corporation, or
any partnership, association, joint venture, trust, employee benefit plan,
conference or other group or enterprise in any capacity at the request of the
Corporation or one of the Corporation's subsidiaries, or any predecessor of
the Corporation, against judgments, fines, amounts paid in settlement and
reasonable expenses, including attorneys' fees actually and reasonably
incurred.
SECTION 4. Insurance. The Corporation may, but shall not be obliged to,
purchase and maintain insurance on behalf of any person who is or was a
director, trustee or officer of the Corporation or is or was serving at the
request of the Corporation as a director, trustee or officer of another
corporation of any type or kind, domestic or foreign, against any liability
asserted against such person and incurred by such person in any such
capacity, or arising out of such person's status as such, whether or not the
Corporation would have the power to indemnify such person against such
liability under the provisions of this Article VIII.
SECTION 5. Subsequent Amendment and Subsequent Legislation. Neither the
amendment, termination or repeal of this Article VIII or of relevant
provisions of the Banking Law or any other applicable laws, nor the adoption
of any provision of this Restated Organization Certificate or the bylaws of
the Corporation or of any statute inconsistent with this Article VIII shall
eliminate, affect or diminish in any way the rights of any trustee, director,
officer, employee or agent of the Corporation to indemnification under the
provisions of this Article VIII with respect to any action, suit or
proceeding arising out of, or relating to, any actions, transactions or facts
occurring prior to the final adoption of such amendment, termination or
repeal.
If the Banking Law is amended to expand further the indemnification
permitted to trustees, directors, officers, employees or agents of the
Corporation, then the Corporation shall indemnify such persons to the fullest
extent permitted by the Banking Law as so amended.
Article IX
Amendments
SECTION 1. Amendments of Restated Organization Certificate. In addition
to any affirmative vote required by applicable law and any voting rights
granted to or held by holders of shares of Preferred Stock, any alteration,
amendment, repeal or rescission (collectively, any "Change") of any provision
of this Restated Organization Certificate must be approved by a
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<PAGE>
majority of the directors of the Corporation then in office and by the
affirmative vote of the holders of a majority (or such greater proportion as may
otherwise be required pursuant to any specific provision of this Restated
Organization Certificate) of the total votes eligible to be cast by the holders
of all outstanding shares of Capital Stock entitled to vote thereon; provided,
however, that if any such Change relates to Section 5 of Article VIII or
Articles IV, V, VI or IX of this Restated Organization Certificate, such Change
must be approved either (i) by not less than a majority of the authorized number
of directors and, if one or more Interested Shareholders (as defined in Article
VII hereof) exist, by not less than a majority of the Disinterested Directors
(as defined in Article VII hereof), or (ii) by the affirmative vote of the
holders of not less than two-thirds of the total votes eligible to be cast by
the holders of all outstanding shares of Capital Stock entitled to vote thereon
and, if the Change is proposed by or on behalf of an Interested Shareholder or a
director who is an Affiliate or Associate (as such terms are defined in Article
VII hereof) of an Interested Shareholder, by the affirmative vote of the holders
of not less than a majority of the total votes eligible to be cast by the
holders of all outstanding shares of Capital Stock entitled to vote thereon not
beneficially owned by an Interested Shareholder or an Affiliate or Associate
thereof. Subject to the foregoing, the Corporation reserves the right to amend
this Restated Organization Certificate from time to time in any and as many
respects as may be desired and as may be lawfully contained in an original
organization certificate filed at the time of making such amendment.
Except as may otherwise be provided in this Restated Organization
Certificate, the Corporation reserves the right at any time, and from time to
time, to amend, alter, change or repeal any provision contained in this
Restated Organization Certificate, and to add or insert herein any other
provisions authorized by the laws of the State of New York at the time in
force, in the manner now or hereafter prescribed by law, and all rights,
preferences and privileges of any nature conferred upon shareholders,
directors or any other persons whomsoever by and pursuant to this Restated
Organization Certificate in its present form or hereafter amended are granted
subject to the rights reserved in this Section.
Section 2. Amendments Of Bylaws. The bylaws of the Corporation, except
as provided by applicable law or this Restated Organization Certificate, or
as otherwise provided by the bylaws, may be amended or repealed by the Board
or by vote of the shareholders entitled to vote in the election of directors;
provided, however, that no amendment to the bylaws shall be made by the Board
unless notice of the proposed amendment shall have been given at the previous
meeting of the Board.
FOURTH, This amendment and restatement of the Restated Organization
Certificate was authorized by a majority vote of the members of the Board of
Trustees of the Corporation.
IN WITNESS WHEREOF, we have made, signed and acknowledged this
certificate in duplicate, this ____ day of _________________, 1998.
-----------------------------
Wesley D. Stisser
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President and
Chief Executive Officer
Acknowledged by:
-----------------------------
Sandy F. Samson
Corporate Secretary
20
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STATE OF NEW YORK )
)ss.:
COUNTY OF CORTLAND )
On the __ day of ________________, 1998, before me personally came Wesley
D. Stisser and Sandy F. Samson, to me known and known to me to be the individual
described in and who executed the foregoing instrument, and they duly
acknowledged to me that they executed the same.
-----------------------------
Notary Public
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Exhibit 5.1
Opinion of Serchuk & Zelermyer, LLP regarding legality of stock to be
issued
August 3, 1998
CNY Financial Corporation
1 North Main Street
Cortland, New York 13045
Ladies and Gentlemen:
We have acted as counsel to CNY Financial Corporation, a Delaware
corporation (the "Corporation"), in connection with the registration under the
Securities Act of 1933, as amended, by the Corporation of an aggregate of up to
8,262,318 shares of Common Stock, par value $.01 per share (the "Shares"), of
the Corporation, and the related preparation and filing by the Corporation with
the Securities and Exchange Commission of a Registration Statement on Form S-1
(the "Registration Statement"). In rendering the opinions set forth below, we do
not express any opinion concerning law other than the federal law of the United
States and the corporate law of the State of Delaware.
We have examined originals or copies, certified or otherwise identified to
our satisfaction, of such documents, corporate records and other instruments,
and have examined such matters of law, as we have deemed necessary or advisable
for purposes of rendering the opinions set forth below. As to matters of fact,
we have examined and relied upon the representations of the Corporation
contained in the Registration Statement and, where we have deemed appropriate,
representations or certificates of officers of the Corporation or public
officials. We have assumed the authenticity of all documents submitted to us as
originals, the genuineness of all signatures, the legal capacity of natural
persons and the conformity to the originals of all documents submitted to us as
copies. In making our examination of any documents, we have assumed that all
parties, other than the Corporation, had the corporate power and authority to
enter into and perform all obligations thereunder, and, as to such parties, we
have also assumed the due authorization by all requisite action, the due
execution and delivery of such documents and the validity and binding effect and
enforceability thereof.
Based on the foregoing, we are of the opinion that the Shares to be issued
and sold by the Corporation have been duly authorized and, when issued and sold
as contemplated in the Registration Statement and the Plan of Conversion of
Cortland Savings Bank (the "Bank"), will be validly issued and outstanding,
fully paid and non-assessable, provided, however, that as to Common Stock
donated to the Foundation, the par value thereof must be paid to the
Corporation.
In rendering the opinions set forth above, we have not passed upon and do
not purport to pass upon the application of securities or "blue-sky" laws of any
jurisdiction (except federal securities laws).
<PAGE>
This opinion is given solely for the benefit of the Corporation and
investors who purchase Shares pursuant to the Registration Statement and may not
be relied upon by any other person or entity, nor quoted in whole or in part, or
otherwise referred to in any document without our express written consent.
We consent to the filing of this opinion as an Exhibit to the Corporation's
Registration Statement and to the Bank's Application for Conversion on Form
86-AC (the "Form 86-AC") and any amendments to such documents, and to the
reference to our firm under the headings "Risk Factors-Dilution, Additional
Costs and Other Consequences of the Foundation-Tax Considerations", The
Conversion-Effects of Conversion on Depositors and Borrowers-Tax Effects",
"-Establishment of the Foundation-Tax Considerations", "Experts" and "Legal
and Tax Opinions" in the prospectus which is part of such Registration
Statement and to the reference to our firm in the Form 86-AC.
Very truly yours,
/s/ Serchuk & Zelermyer, LLP
Serchuk & Zelermyer, LLP
<PAGE>
Exhibit 8.1
Opinion of Serchuk & Zelermyer, LLP regarding tax matters
August 3, 1998
CNY Financial Corporation
1 North Main Street
Cortland, New York 13045
Ladies and Gentlemen:
You have requested our opinion regarding material federal income tax
consequences of the proposed conversion of Cortland Savings Bank (the "Bank")
from a state chartered mutual savings bank to a state chartered stock savings
bank (the "Conversion"), the sale of all of the outstanding capital stock of
the Bank to CNY Financial Corporation, a Delaware corporation (the "Company"),
and the sale by the Company of up to 8,100,312 shares of its common stock, par
value of $.01 per share (the "Common Stock") to the Bank's Eligible Account
Holders, Employee Plans and Supplemental Eligible Account Holders, and to
certain other parties, pursuant to the Plan of Conversion of Cortland Savings
Bank adopted by the Board of Trustees of the Bank on March 23, 1998, as amended
(the "Plan"). These and related transactions are described in the Plan and in
the prospectus included in the Company's Registration Statement filed on
Form S-1 with the Securities and Exchange Commission in connection with the
Conversion (the "Prospectus"). All capitalized terms used but not defined
in this letter shall have the meanings set forth in the Plan or Prospectus.
In connection with the opinions expressed below, we have examined and
relied upon originals, or copies certified or otherwise identified to our
satisfaction, of the Plan and the Prospectus and of such corporate records of
the Bank and the Company as we have deemed appropriate. We have also relied,
without independent verification, upon the representations of the Bank and the
Company. We have assumed that the Bank, the Company and other parties will act
in accordance with the Plan, and that the representations made by the Bank and
the Company are true. In addition, we have made such investigations of law as we
have deemed appropriate to form a basis for the opinions expressed below.
Based on and subject to the foregoing, it is our opinion that, for federal
income tax purposes, under current law:
1. The Conversion in accordance with the Plan will qualify as a
reorganization under Section 368(a)(1)(F) of the Code, and no gain or loss will
be recognized by the Bank in either its mutual form or its stock form, or by the
Company, by reason of the proposed Conversion.
<PAGE>
CNY Financial Corporation
August 3, 1998
Page 2
2. No gain or loss will be recognized by the Bank upon the receipt of
money from the Company for stock of the Bank, and no gain or loss will be
recognized by the Company upon the receipt of money for the Common Stock.
3. The assets of the Bank in either its mutual or its stock form will
have the same basis before and after the Conversion.
4. The holding period of the assets of the Bank will include the period
during which the assets were held by the Bank in its mutual form prior to the
Conversion.
5. No gain or loss will be recognized by the Eligible Account Holders and
Supplemental Eligible Account Holders upon the issuance to them of withdrawable
deposit accounts in the Bank after the Conversion in the same dollar amount as
their savings accounts in the Bank plus an interest in the liquidation account
of the Bank after the Conversion in exchange for their savings accounts in the
Bank prior to the Conversion.
6. The receipt by Eligible Account Holders and Supplemental Eligible
Account Holders of nontransferable subscription rights to purchase shares of the
Common Stock under the Plan is taxable to Eligible Account Holders and
Supplemental Eligible Account Holders to the extent the subscription rights have
value.
7. The basis of each account holder's savings accounts in the Bank after
the Conversion will be the same as the basis of his or her savings accounts in
the Bank prior to the Conversion, decreased by the fair market value of the
non-transferable subscription rights received and increased by the amount, if
any, of gain recognized on the exchange
8. The basis of each account holder's interest in the liquidation account
will be zero.
9. The holding period of the Common Stock acquired through the exercise
of subscription rights shall begin on the date on which the subscription rights
are exercised.
10. The Bank in its stock form will succeed to and take into account the
earnings and profits or deficit in earnings and profits of the Bank, in its
mutual form, as of the date of Conversion.
11. The Bank, immediately after Conversion, will succeed to the bad debt
reserve accounts of the Bank, in its mutual form, and the bad debt reserves will
have the same character in
<PAGE>
CNY Financial Corporation
August 3, 1998
Page 3
the hands of the Bank after Conversion as if no distribution or transfer had
occurred.
12. The creation of the liquidation account will have no effect on the
Bank's taxable income, deductions, or addition to reserve for bad debts either
in its mutual or stock form.
13. For purposes of the New York State banking and franchise tax, imposed
by Article 32 of the New York Tax Law, and for the purposes of the New York
personal income tax under Article 22 which may be applicable to Eligible Account
Holders, Supplemental Eligible Account Holders and other investors who purchase
shares pursuant to the Company's Registration Statement on Form S-1 (the
"Registration Statement") who receive non-transferrable subscription rights or
who purchase stock in the Conversion, the Conversion will be treated the same
for New York State tax purposes as for federal tax purposes under the Internal
Revenue Code, as set forth above.
Except as set forth above, we express no opinion to any party as to the tax
consequences, whether federal, state, local or foreign, of the Conversion or of
any transaction related thereto or contemplated by the Plan. Without limiting
the generality of the preceding sentence, no opinion is expressed herein
regarding the tax consequences of the donation of Common Stock to the Foundation
as described in the Prospectus. This opinion is given solely for the benefit of
the parties to the Plan and Eligible Account Holders, Supplemental Eligible
Account Holders and other investors who purchase shares pursuant to the
Company's Registration Statement, and may not be relied upon by any other party
or entity or referred to in any document without our express written consent. We
consent to the filing of this opinion as an exhibit to the Registration
Statement and to the Application for Conversion on Form 86-AC of the Bank.
Very truly yours,
/s/ Serchuk & Zelermyer, LLP
Serchuk & Zelermyer, LLP
<PAGE>
Exhibit 8.3
August 3, 1998
Board of Trustees
Cortland Savings Bank
1 North Main Street
Cortland, New York 13045
Board of Directors
CNY Financial Corporation
1 North Main Street
Cortland, New York 13045
Ladies and Gentlemen:
This letter constitutes our opinion as to certain federal income tax issues
related to the proposed establishment of a private foundation (the "Foundation")
in connection with the proposed conversion (the "Conversion") of Cortland
Savings Bank (the "Bank") from a federally chartered mutual savings bank to a
federally chartered stock savings bank followed by the acquisition of the Bank's
capital stock by CNY Financial Corporation (the "Company"), a Delaware
corporation, pursuant to the Plan of Conversion (the "Plan").
The opinions contained herein are based solely on the facts and
circumstances stated herein and those described in the Prospectus of CNY
Financial Corporation included in Amendment No. 1 to the Registration Statement
on Form S-1, file no. 333-57259, as filed with the Securities and Exchange
Commission on or about August 3, 1998. All Section references are to the
Internal Revenue Code of 1986, as amended (the "Code") as in effect as of the
date of this opinion.
STATEMENT OF FACTS
The Board of Trustees of the Bank has adopted a plan of conversion to
convert from a mutual savings bank to a stock savings bank. In connection with
the anticipated mutual-to-stock conversion, the Company has been formed. The
primary initial activities of the Company will be ownership of its wholly-owned
subsidiary, the Bank, and the investment of the net proceeds from the Conversion
remaining in its hands after acquiring
<PAGE>
100% of the capital stock of the Bank including the funding of a loan to its
Employee Stock Ownership Plan.
The Boards of the Company and the Bank wish to share part of the financial
success of the Company and the Bank with the communities which the Bank serves.
Therefore, the Board of the Company has decided that it would be appropriate to
establish a private foundation completely dedicated to performing charitable
causes within the Bank's market area. The Foundation will be incorporated under
New York law as a not-for-profit corporation.
The Foundation's Board of Directors will initially consist of three
members, a majority of whom will be members of the Board of Directors or
Officers of the Company, the Bank or an affiliate or subsidiary of the Company
or the Bank.
The Bank will contribute to the Foundation up to $100,000 in cash. The
Company will donate to the Foundation, at or about the time of the consummation
of the Conversion, an amount of its common stock equal to 2% of the common stock
sold in the Conversion. The Foundation will pay an amount equal to the par value
of the donated stock, which will be $0.01 per share, for an aggregate nominal
consideration of from $1,041 to $1,620, depending upon the number of shares
sold. Based upon the $10.00 per share initial offering price of the Company's
common stock, the Foundation will thus own between $1,041,250 (at the minimum)
and $1,620,062 (at the super-maximum) in shares of the common stock of the
Company based on the original purchase price of $10.00 per share, or 1.96% of
the issued and outstanding common stock of the Company.
SUMMARY OF OPINIONS
Accordingly, based upon the facts and representations stated herein, it is
the opinion of Serchuk & Zelermyer, LLP regarding the federal income tax effect
of the planned establishment of the Foundation that:
1) The Foundation will qualify as an organization described in Sec. 501(c)(3)
of the Code and will be a private foundation rather than a public charity.
2) The Company will be entitled to a charitable contribution deduction in the
manner and to the extent provided in Section 170 of the Code for its
contributions of stock to the Foundation.
3) The amount of the charitable contribution deduction will be the difference
between the amount that the Foundation is required to pay the Company
pursuant to Delaware law and the fair market value of the shares on the
date of the contribution plus the initial funding of the Foundation,
subject to the limitation imposed by Section 170(d)(2) of the Code as
discussed below.
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4) The purchase of the stock of the Company by the Foundation will not
constitute an act of self-dealing.
No opinion is expressed herein regarding whether or not the requirement
imposed by regulatory authorities that the Common Stock of the Company owned by
the Foundation must be voted in the same proportion as other shares of Common
Stock outstanding could have an adverse effect on the qualification of the
Foundation under Section 501(c)(3). Further, no opinion is expressed regarding
the effect of any other regulatory restrictions which may be imposed on the
Foundation.
DETAILED ANALYSIS
CHARITABLE CONTRIBUTION DEDUCTION
Subject to certain limitations, Section 170(a) of the Code provides for the
deduction of contributions and gifts to or for the use of organizations
described in Section 170(c) of the Code, payment of which is made within the
taxable year. The Foundation will be a private foundation organized exclusively
for charitable purposes. Contributions to the Foundation will be deductible as
charitable contributions for federal income tax purposes.
If a charitable contribution is made in property other than money, Treasury
Regulation 1.170A-1(c) provides that the amount of the deduction is the fair
market value of the property at the time of the contribution. The fair market
value of the property is the price at which the property would change hands
between a willing buyer and a willing seller.
Section 1032 of the Code provides that no gain or loss is recognized to a
corporation on the receipt of money or other property in exchange for stock
(including treasury stock) of such corporation. Thus, no gain is recognized to
the Company if it sells its stock at fair market value.
Section 170(e) of the Code provides for a reduction in the amount of
charitable contributions of property to private foundations. Treasury Regulation
1.170A-4(a) provides, in general, that the value of the contribution must be
reduced by the amount of gain that would have been recognized if the property
had been sold at its fair market value at the time of the contribution. Thus,
the amount of deduction is generally limited to the taxpayer's basis in the
property.
Rev. Rule 75-348, 1975-2 C.B. 75, holds that a corporation that pledges to
sell shares of its common stock at a specified price to a charitable
organization is entitled to a charitable contribution deduction, in the taxable
year the pledge is exercised, for the excess of the fair market value of the
shares on the date of the exercise over the exercise price. The Revenue Ruling
discussed the interplay of Section 1011(b), relating to bargain sales of
property sold to a charitable organization, and Section 1032. The Ruling states
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that Section 1011(b) is not applicable because under Section 1032, no gain would
be recognized. Accordingly, the contribution does not have to be reduced by the
potential gain if the stock had been sold.
Therefore, the Company will be entitled to a charitable contribution
deduction in the manner and to the extent provided in Section 170 of the Code
for its contribution of stock to the Foundation. Due to the provision of Section
1032, the reduction provisions found in Section 170(e) will not be applicable to
the deduction that arises upon the contribution of the stock. The amount of the
charitable contribution deduction will be the difference between the par value
that the Foundation is required to pay the Company pursuant to Delaware law and
the fair market value of the shares on the date of the contribution. Such amount
should be the mean between the highest and lowest quoted selling price on that
date less $.01 per share. For purposes of this letter, we assume that amount
will be $9.99 per share. Section 170(b)(2) limits the charitable contribution
deduction of a corporation for any taxable year to 10 percent of taxable income
computed without the charitable contribution, certain special deduction, net
operating loss carrybacks and capital loss carrybacks.
Section 170(d)(2) of the Code allows the taxpayer to carry over the excess
contribution to each of the five succeeding tax years. Any amount contributed in
the succeeding years, plus the carry over amount, is subject to the 10 percent
limitation. Accordingly, the Company has 6 years in which to use the charitable
contribution in its consolidated Federal income tax returns.
SELF-DEALING
Section 4941 of the Code imposes an excise tax on acts of self-dealing
between a disqualified person and a private foundation. Generally, a
disqualified person is someone who manages the foundation or who is considered a
"substantial contributor" to the foundation. In addition, disqualified persons
include family members, businesses, and other entities related to a foundation
manager or a substantial contributor.
Although disqualified persons may generally make gifts to private
foundations, foundations are precluded from engaging in most other transactions
with disqualified persons. It is immaterial that the foundation actually derives
a benefit from the self-dealing transaction.
Treasury Regulation 53.4941(d)-1(a) provides that an act of self-dealing
does not include a transaction whereby the disqualified person status arises
only as a result of the transaction. As an example, the regulations indicate
that a transfer of property to a private foundation is not an act of
self-dealing if the seller becomes a disqualified person only as a result of the
seller becoming a substantial contributor as a result of the bargain element of
the sale. Therefore, if the Company is not a disqualified person just prior to
the transfer, the transfer will not be an act of self-dealing.
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The opinions contained herein are rendered only with respect to the
specific matters discussed herein and we express no opinion with respect to any
other legal, federal, state or local tax aspect of these transaction. This
opinion is not binding upon any tax authority including any court and no
assurance can be given that a position contrary to that expressed herein will
not be asserted by a tax authority.
In rendering our opinions we are relying upon the relevant provisions of
the Internal Revenue Code of 1986, as amended, and the regulations, judicial and
administrative interpretations thereof, as of the date of this letter.
However, all of the foregoing authorities are subject to change or
modification which can be retroactive in effect and, therefore, could also
affect our opinions. We undertake no responsibility to update our opinion for
any subsequent change or modification.
This opinion is given solely for your benefit and may not be relied upon by
any other party or entity or referred to in any document without our express
written consent. We consent to the inclusion of this opinion as an exhibit to
Amendment No. 1 to the Registration Statement on Form S-1 referenced above as
filed with the Securities and Exchange Commission.
Very truly yours,
/s/ Serchuk & Zelermyer, LLP
SERCHUK & ZELERMYER, LLP
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Exhibit 10.6
CNY FINANCIAL CORPORATION
EMPLOYEE STOCK OWNERSHIP PLAN
EFFECTIVE AS OF _____________
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TABLE OF CONTENTS
ARTICLE I
DEFINITIONS
<TABLE>
<CAPTION>
<S> <C>
Section 1.1 Account........................................................................................1
Section 1.2 Affiliated Employer............................................................................1
Section 1.3 Allocation Compensation........................................................................1
Section 1.4 Bank...........................................................................................2
Section 1.5 Board..........................................................................................2
Section 1.6 Beneficiary....................................................................................2
Section 1.7 Change In Control..............................................................................2
Section 1.8 Code...........................................................................................2
Section 1.9 Computation Period.............................................................................2
Section 1.10 Disability....................................................................................2
Section 1.11 Domestic Relations Order......................................................................2
Section 1.12 Effective Date................................................................................2
Section 1.13 Eligibility Computation Period................................................................2
Section 1.14 Eligible Employee.............................................................................2
Section 1.15 Eligible Participant..........................................................................3
Section 1.16 Employee......................................................................................3
Section 1.17 Employer......................................................................................3
Section 1.18 Employment Commencement Date..................................................................3
Section 1.19 ERISA.........................................................................................3
Section 1.20 ESOP Contribution.............................................................................3
Section 1.21 Fair Market Value.............................................................................3
Section 1.22 Family Member.................................................................................4
Section 1.23 Financed Share............................................................................... 4
Section 1.24 Five Percent Owner........................................................................... 4
Section 1.25 Forfeitures.................................................................................. 4
Section 1.26 Former Participant............................................................................4
Section 1.27 General Investment Account................................................................... 4
Section 1.28 Highly Compensated Employee.................................................................. 4
Section 1.29 Hour of Service.............................................................................. 5
Section 1.30 Investment Account........................................................................... 5
Section 1.31 Investment Fund.............................................................................. 5
Section 1.32 Loan Repayment Account....................................................................... 5
Section 1.33 Loan Repayment Contribution.................................................................. 5
Section 1.34 Maternity or Paternity Leave................................................................. 5
Section 1.35 Military Service............................................................................. 5
Section 1.36 Named Fiduciary.............................................................................. 6
Section 1.37 Officer...................................................................................... 6
Section 1.38 One-Year Break in Service.................................................................... 6
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Section 1.39 Participant.................................................................................. 6
Section 1.40 Plan......................................................................................... 6
Section 1.41 Plan Administrator........................................................................... 6
Section 1.42 Plan Year.................................................................................... 6
Section 1.43 Qualified Domestic Relations Order........................................................... 6
Section 1.44 Qualified Participant........................................................................ 6
Section 1.45 Retirement................................................................................... 7
Section 1.46 Share........................................................................................ 7
Section 1.47 Share Acquisition Loan....................................................................... 7
Section 1.48 Share Investment Account..................................................................... 7
Section 1.49 Tender Offer................................................................................. 7
Section 1.50 Total Compensation........................................................................... 7
Section 1.51 Trust........................................................................................ 7
Section 1.52 Trust Agreement.............................................................................. 7
Section 1.53 Trust Fund................................................................................... 7
Section 1.54 Trustee...................................................................................... 8
Section 1.55 Valuation Date............................................................................... 8
Section 1.56 Vesting Computation Period................................................................... 8
Section 1.57 Year of Eligibility Service.................................................................. 8
Section 1.58 Year of Vesting Service...................................................................... 8
ARTICLE II
PARTICIPATION
Section 2.1 Eligibility For Participation................................................................. 8
Section 2.2 Commencement of Participation................................................................. 9
Section 2.3 Termination of Participation...................................................................9
ARTICLE III
SPECIAL PROVISIONS
Section 3.1 Military Service.............................................................................. 9
Section 3.2 Maternity or Paternity Leave.................................................................. 9
Section 3.3 Adjustments to Years of Eligibility Service.................................................. 10
Section 3.4 Leave of Absence............................................................................. 11
Section 3.5 Family and Medical Leave......................................................................11
ARTICLE IV
CONTRIBUTIONS BY PARTICIPANTS NOT PERMITTED
Section 4.1 Contributions by Participants not Permitted...................................................11
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ARTICLE V
CONTRIBUTIONS BY THE EMPLOYER
Section 5.1 In General................................................................................... 11
Section 5.2 Loan Repayment Contributions................................................................. 11
Section 5.3 ESOP Contributions........................................................................... 12
Section 5.4 Time and Manner of Payment....................................................................12
ARTICLE VI
SHARE ACQUISITION LOANS
Section 6.1 In General................................................................................... 13
Section 6.2 Collateral; Liability for Repayment.......................................................... 13
Section 6.3 Loan Repayment Account....................................................................... 14
Section 6.4 Release of Financed Shares................................................................... 14
Section 6.5 Restrictions on Financed Shares...............................................................15
ARTICLE VII
ALLOCATION OF CONTRIBUTIONS
Section 7.1 Allocation Among Eligible Participants....................................................... 15
Section 7.2 Allocation of Released Shares or Other Property.............................................. 16
Section 7.3 Allocation of ESOP Contributions..............................................................16
ARTICLE VIII
LIMITATIONS ON ALLOCATIONS
Section 8.1 Optional Limitations on Allocations of Contributions.
..........................................................................................................16
Section 8.2 General Limitations on Contributions..........................................................17
ARTICLE IX
VESTING
Section 9.1 Vesting...................................................................................... 20
Section 9.2 Vesting on Death, Disability, Retirement or Change in
Control.................................................................................................. 20
Section 9.3 Forfeitures on Termination of Employment..................................................... 20
Section 9.4 Amounts Credited Upon Re-Employment.......................................................... 21
Section 9.5 Allocation of Forfeitures.....................................................................21
Section 9.6 Service Prior to Effective Date...............................................................21
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ARTICLE X
THE TRUST FUND
Section 10.1 The Trust Fund.............................................................................. 21
Section 10.2 Investments................................................................................. 22
Section 10.3 Diversification of Investments.............................................................. 22
Section 10.4 Use of Commingled Trust Funds............................................................... 23
Section 10.5 Management and Control of Assets.............................................................23
ARTICLE XI
VALUATION OF INTERESTS IN THE TRUST FUND
Section 11.1 Establishment of Investment Accounts........................................................ 24
Section 11.2 Share Investment Accounts................................................................... 24
Section 11.3 General Investment Accounts................................................................. 24
Section 11.4 Valuation of Investment Accounts............................................................ 24
Section 11.5 Annual Statements............................................................................25
ARTICLE XII
SHARES
Section 12.1 Specific Allocation of Shares............................................................... 25
Section 12.2 Divide4nds...................................................................................25
Section 12.3 Voting Rights............................................................................... 25
Section 12.4 Tender Offers............................................................................... 27
Section 12.5 Dissent and Appraisal Rights.................................................................29
ARTICLE XIII
PAYMENT OF BENEFITS
Section 13.1 In General.................................................................................. 30
Section 13.2 Designation of Beneficiaries................................................................ 30
Section 13.3 Distributions to Participants and Former
Participants..............................................................................................31
Section 13.4 Manner of Payment........................................................................... 34
Section 13.5 Put Options................................................................................. 34
Section 13.6 Right of First Refusal...................................................................... 35
Section 13.7 Minimum Required Distributions.............................................................. 35
Section 13.8 Direct Rollover of Eligible Rollover Distributions.......................................... 37
Section 13.9 Valuation of Shares Upon Settlement to a Participant........................................ 38
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ARTICLE XIV
CHANGE IN CONTROL
Section 14.1 Definition of Change in Control............................................................. 38
Section 14.2 Vesting on Change of Control................................................................ 39
Section 14.3 Repayment of Loan........................................................................... 39
Section 14.4 Plan Termination After Change in Control.................................................... 40
Section 14.5 Amendment of Article XIV.....................................................................41
ARTICLE XV
ADMINISTRATION
Section 15.1 Named Fiduciaries........................................................................... 41
Section 15.2 Plan Administrator.......................................................................... 41
Section 15.3 Claims Procedure............................................................................ 43
Section 15.4 Claims Review Procedure..................................................................... 43
Section 15.5 Allocation of Fiduciary Responsibilities and
Employment of Advisors....................................................................................44
Section 15.6 Other Administrative Provisions..............................................................44
ARTICLE XVI
AMENDMENT, TERMINATION AND TAX QUALIFICATION
Section 16.1 Amendment and Termination by CNY Financial Corporation...................................... 45
Section 16.2 Amendment or Termination Other Than by CNY Financial Corporation............................ 45
Section 16.3 Conformity to Internal Revenue Code......................................................... 46
Section 16.4 Contingent Nature of Contributions...........................................................46
ARTICLE XVII
SPECIAL RULES FOR TOP HEAVY PLAN YEARS
Section 17.1 In General.................................................................................. 47
Section 17.2 Definition of Top Heavy Plan................................................................ 47
Section 17.3 Determination Date.......................................................................... 48
Section 17.4 Cumulative Accrued Benefits................................................................. 48
Section 17.5 Key Employees............................................................................... 48
Section 17.6 Required Aggregation Group.................................................................. 49
Section 17.7 Permissible Aggregation Group............................................................... 49
Section 17.8 Special Requirements During Top Heavy Plan Years.............................................50
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ARTICLE XVIII
MISCELLANEOUS PROVISIONS
Section 18.1 Governing Law............................................................................... 50
Section 18.2 No Right to Continued Employment............................................................ 51
Section 18.3 Construction of Language.................................................................... 51
Section 18.4 Headings.................................................................................... 51
Section 18.5 Merger with Other Plans..................................................................... 51
Section 18.6 Non-Alienation of Benefits.................................................................. 51
Section 18.7 Procedures Involving Domestic Relations Orders.............................................. 52
Section 18.8 Leased Employees............................................................................ 52
Section 18.9 Status as an Employee Stock Ownership Plan...................................................53
</TABLE>
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CNY FINANCIAL CORPORATION EMPLOYEE STOCK OWNERSHIP PLAN
ARTICLE I
DEFINITIONS
The following definitions shall apply for the purposes of the Plan,
unless a different meaning is clearly indicated by the context:
Section 1.1 Account means an account established for each Participant
to which is allocated such Participant's share, if any, of all Financed Shares
and other property that are released from the Loan Repayment Account in
accordance with Section 6.4, together with his share, if any, of any ESOP
Contributions that may be made by the Employer.
Section 1.2 Affiliated Employer means any corporation which is a member
of a controlled group of corporations (as defined in Section 414(b) of the Code)
that includes the Employer; any trade or business (whether or not incorporated)
that is under common control (as defined in Section 414(c) of the Code) with the
Employer; any organization (whether or not incorporated) that is a member of an
affiliated service group (as defined in Section 414(m) of the Code) that
includes the Employer; any leasing organization (as defined in Section 414(n) of
the Code) to the extent that any of its employees are required pursuant to
Section 414(n) of the Code to be treated as employees of the Employer; and any
other entity that is required to be aggregated with the Employer pursuant to
regulations under Section 414(o) of the Code.
Section 1.3 Allocation Compensation during any period means the
compensation taken into account in determining the allocation of benefits and
contributions among Participants and consists of the aggregate compensation
received by an Employee from the Employer or any Affiliated Employer with
respect to such period as reported to the Internal Revenue Service as wages for
such period pursuant to Section 6041(a) of the Code, plus the amount by which
such Employee's compensation with respect to such period has been reduced
pursuant to a compensation reduction agreement under the terms of any of the
following plans which may be maintained by the Employer:
(a) a qualified cash or deferred arrangement described in
Section 401(k) of the Code;
(b) a salary reduction simplified employee pension plan described in
Section 408(k) of the Code;
(c) a tax deferred annuity plan described in Section 403(b) of the
Code; or
(d) a cafeteria plan described in Section 125 of the Code.
In no event, however, shall an Employee's Allocation Compensation for any
calendar year include any compensation in excess of $160,000, or any such other
amount as may be prescribed in accordance with regulations prescribed under
Section 401(a)(17) of the Code. If there are less
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than twelve (12) months in the Plan Year, the $160,000 limitation (as adjusted)
shall be prorated by multiplying such limitation by a fraction, the numerator of
which is the number of months in the Plan Year and the denominator of which is
twelve (12).
Section 1.4 Bank means Cortland Savings Bank and any successor thereto.
Section 1.5 Board means the Board of Directors of CNY
Financial Corporation
Section 1.6 Beneficiary means the person or persons designated by a
Participant or Former Participant or other person entitled to a benefit under
the Plan, or otherwise determined to be entitled to a benefit under the Plan. If
more than one person is designated, each shall have an equal share unless the
person making the designation directed otherwise. The word "person" includes an
individual, a trust, an estate or any other person that is permitted to be named
as a Beneficiary.
Section 1.7 Change in Control means an event described in Section 14.1.
Section 1.8 Code means the Internal Revenue Code of 1986 (including the
corresponding provisions of any succeeding law).
Section 1.9 Computation Period means an Eligibility Computation Period
or a Vesting Computation Period.
Section 1.10 Disability means a condition of total incapacity, mental
or physical, for further performance of duty with the Employer or any Affiliated
Employer, which the Plan Administrator shall have determined, on the basis of
competent medical evidence, is likely to be permanent.
Section 1.11 Domestic Relations Order means a judgment, decree or order
(including the approval of a property settlement) that is made pursuant to a
state domestic relations or community property law and relates to the provision
of child support, alimony payments, or marital property rights to a spouse,
child or other dependent of a Participant or Former Participant.
Section 1.12 Effective Date means the first day of the calendar year in
which Cortland Savings Bank converts from a mutual savings bank to a stock
savings bank.
Section 1.13 Eligibility Computation Period means, with respect to any
person, (a) the 12-consecutive month period beginning on such person's
Employment Commencement Date and (b) each 12-consecutive month period that
begins on an anniversary of such person's Employment Commencement Date.
Section 1.14 Eligible Employee means an Employee who is eligible for
participation in the Plan in accordance with Article II.
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Section 1.15 Eligible Participant means, for any Plan Year, an Employee
who is a Participant on the last day of such Plan Year and an Employee who was a
Participant during part of such Plan Year and whose participation ceased prior
to the last day of such Plan Year on account of his Retirement, Disability or
death.
Section 1.16 Employee means any person, including an officer, who is
employed by the Employer or an Affiliated Employer.
Section 1.17 Employer means CNY Financial Corporation and any successor
thereto and any Affiliated Employer which, with the prior written approval of
the Board of Directors of CNY Financial Corporation and subject to such terms
and conditions as may be imposed by the Board of Directors of CNY Financial
Corporation, shall adopt this Plan.
Section 1.18 Employment Commencement Date means the date on which a
person first performs an Hour of Service, except that if an Employee separates
from service with the Employer, incurs a One-Year Break in Service and
subsequently returns to service with the Employer, his Employment Commencement
Date shall be the date on which he first performs an Hour of Service following
the One-Year Break in Service.
Section 1.19 ERISA means the Employee Retirement Income Security Act of
1974, as amended from time to time (including the corresponding provisions of
any succeeding law).
Section 1.20 ESOP Contribution means Shares or amounts of money
contributed to the Plan by the Employer in accordance with Section 5.3.
Section 1.21 Fair Market Value on any date means:
(a) with respect to a Share:
(i) the final quoted sale price on the date in question (or, if there
is no reported sale on such date, on the last preceding date on which any
reported sale occurred) as reported in the principal consolidated reporting
system with respect to securities listed or admitted to trading on the principal
United States securities exchange on which like Shares are listed or admitted to
trading; or
(ii) if Shares are not listed or admitted to trading on any such
exchange, the closing bid quotation with respect to a Share on such date on the
Nasdaq Stock Market, or, if no such quotation is provided, on another similar
system, selected by the Plan Administrator, then in use; or
(iii) if Sections 1.21(a)(i) and (ii) are not applicable, the fair
market value of a Share as determined by an appraiser independent of the
Employer and experienced and expert in the field of corporate appraisal.
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(b) with respect to property other than Shares, the fair market value
determined in the manner determined by the Trustee.
Section 1.22 Family Member means, with respect to any person, such
person's spouse and lineal ascendants or descendants and the spouses of such
lineal ascendants or descendants.
Section 1.23 Financed Share means: (a) a Share that has been purchased
with the proceeds of a Share Acquisition Loan, that has been allocated to the
Loan Repayment Account in accordance with Section 6.3 and that has not been
released in accordance with Section 6.4; or (b) a Share that constitutes a
dividend paid with respect to a Share described in Section 1.46, that has been
allocated to the Loan Repayment Account in accordance with Section 6.3 and that
has not been released in accordance with Section 6.4.
Section 1.24 Five Percent Owner means, for any Plan Year, a person who,
during such Plan Year, owned (or was considered as owning for purposes of
Section 318 of the Code): (a) more than 5% of the value of all classes of
outstanding stock of the Employer; or (b) stock possessing more than 5% of the
combined voting power of all classes of outstanding stock of the Employer.
Section 1.25 Forfeitures means the amounts forfeited by Participants
and Former Participants on termination of employment prior to full vesting,
pursuant to Section 9.3, less amounts credited because of re-employment,
pursuant to Section 9.4.
Section 1.26 Former Participant means a Participant whose participation
in the Plan has terminated pursuant to Section 2.3.
Section 1.27 General Investment Account means an Investment Account
established and maintained in accordance with Article XI.
Section 1.28 Highly Compensated Employee means, for any Plan Year, an
Employee who:
(a) at any time during such Plan Year or the immediately preceding Plan
Year was a Five Percent Owner; or
(b) during the immediately preceding Plan Year received Total
Compensation for such Plan Year in excess of $80,000 (or such higher amount as
may be permitted under Section 414(q) of the Code) and, if the Employer so
elects, is a member of the group consisting of the top 20% of Employees when
ranked on the basis of Total Compensation paid to Employees during such Plan
Year.
The determination of who is a Highly Compensated Employee will be made in
accordance with Section 414(q) of the Code and the regulations thereunder.
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Section 1.29 Hour of Service means:
(a) Each hour for which a person is paid, or entitled to payment, for
the performance of duties for the Bank or any Affiliated Employer. These hours
shall be credited to the person for the Computation Period or Computation
Periods in which the duties are performed; and
(b) Each hour for which a person is paid, or entitled to payment, by
the Bank or any Affiliated Employer on account of a period of time during which
no duties are performed (irrespective of whether the employment relationship has
terminated) due to vacation, holiday, illness, incapacity (including
disability), layoff, jury duty, military duty, or leave of absence. No more than
501 Hours of Service shall be credited under this Section 1.29(b) for any single
continuous period (whether or not such period occurs in a single Computation
Period). Hours under this Section 1.29(b) shall be calculated and credited
pursuant to Section 2530.200b-2 of the Department of Labor's regulations (or any
successor regulation), which are incorporated herein by reference; and
(c) Each hour for which back pay, irrespective of any mitigation of
damages, is either awarded or agreed to by the or any Affiliated Employer. The
same Hours of Service shall not be credited both under Section 1.29(a) or (b),
as the case may be, and under this Section 1.29(c). Hours under this Section
1.29(c) shall be credited to the person for the Computation Period or
Computation Periods to which the award or agreement pertains, rather than the
Computation Period in which the award, agreement or payment is made.
Section 1.30 Investment Account means either a General Investment
Account or a Share Investment Account.
Section 1.31 Investment Fund means any one of the three or more funds
as may be established from time to time by the Plan Administrator which,
together with any and all Shares and other investments held under the Plan,
constitute the Trust Fund.
Section 1.32 Loan Repayment Account means an account established and
maintained in accordance with Section 6.3.
Section 1.33 Loan Repayment Contribution means amounts of money
contributed to the Plan by the Employer in accordance with Section 5.2.
Section 1.34 Maternity or Paternity Leave means a person's absence from
work for the Employer and all Affiliated Employers: (a) by reason of the
pregnancy of such person; (b) by reason of the birth of a child of such person;
(c) by reason of the placement of a child with the person in connection with the
adoption of such child by such person; or (d) for purposes of caring for a child
of such person immediately following the birth of the child or the placement of
the child with such person.
Section 1.35 Military Service means service in the armed forces of the
United States. It may also include, if and to the extent that the Board so
provides and if all Participants and
5
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Former Participants in like circumstances are similarly treated, special service
for the government of the United States and other public service.
Section 1.36 Named Fiduciary means any person, committee, corporation
or organization as described in Section 15.1.
Section 1.37 Officer means an Employee who is an administrative
executive in regular and continued service with the Employer or any Affiliated
Employer; provided, however, that at no time shall more than the lesser of (a)
50 Employees or (b) the greater of: (i) 3 Employees or (ii) 10% of all employees
be treated as Officers. The determination of whether an employee is to be
considered an Officer shall be made in accordance with Section 416(i) of the
Code.
Section 1.38 One-Year Break in Service means, with respect to any
person: (a) for purposes of eligibility to participate, an Eligibility
Computation Period during which such person is credited with fewer than 501
Hours of Service and (b) for purposes of vesting, a Vesting Computation Period
during which such person is credited with fewer than 501 Hours of Service.
Section 1.39 Participant means any person who has satisfied the
eligibility requirements set forth in Section 2.1, who has become a Participant
in accordance with Section 2.2, and whose participation has not terminated under
Section 2.3.
Section 1.40 Plan means this CNY Financial Corporation
Employee Stock Ownership Plan, as amended from time to time. This
Plan may be referred to as the "CNY Financial Corporation
Employee Stock Ownership Plan."
Section 1.41 Plan Administrator means any person, committee,
corporation or organization designated in Section 15.2, or appointed pursuant to
Section 15.2, to perform the responsibilities of that office.
Section 1.42 Plan Year means the calendar year in which the Effective
Date occurs, and each calendar year thereafter.
Section 1.43 Qualified Domestic Relations Order means a Domestic
Relations Order that: (a) clearly specifies (i) the name and last known mailing
address of the Participant or Former Participant and of each person given rights
under such Domestic Relations Order, (ii) the amount or percentages of the
Participant's or Former Participant's benefits under this Plan to be paid to
each person covered by such Domestic Relations Order, (iii) the number of
payments or the period to which such Domestic Relations Order applies, and (iv)
the name of this Plan; and (b) does not require the payment of a benefit in a
form or amount that is (i) not otherwise provided for under the Plan, or (ii)
inconsistent with a previous Qualified Domestic Relations Order.
Section 1.44 Qualified Participant means a Participant who has attained
age 55 and who has been a Participant in the Plan for at least 10 years.
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Section 1.45 Retirement means: (a) any termination of participation in
the Plan at or after attainment of age 65; and (b) any retirement under an
applicable qualified defined benefit plan of the Employer as in effect from time
to time with entitlement to a normal or early retirement allowance.
Section 1.46 Share means a share of any class of stock issued by the
Employer or any Affiliated Employer; provided, however, that such share is a
"qualifying employer security" within the meaning Section 409(l) of the Code and
Section 407(d)(5) of ERISA.
Section 1.47 Share Acquisition Loan means a loan obtained by the
Trustee in accordance with Article VI.
Section 1.48 Share Investment Account means an Investment Account
established and maintained in accordance with Article XI.
Section 1.49 Tender Offer means a tender offer made to holders of any
one or more classes of Shares generally, or any other offer, made to holders of
any one or more classes of Shares generally, to purchase, exchange, redeem or
otherwise transfer Shares, whether for cash or other consideration.
Section 1.50 Total Compensation during any period means an Employee's
aggregate total compensation paid by the Employer and any Affiliated Employer
with respect to such period and reportable for federal income tax purposes
pursuant to Section 6041(a) of the Code. In addition, solely for purposes of
identifying those Employees who are Highly Compensated Employees, each
Employee's Total Compensation shall include any amounts by which the Employee's
compensation paid by the Employer or any Affiliated Employer has been reduced
pursuant to a compensation reduction agreement under the terms of any qualified
cash or deferred arrangement described in Section 401(k) of the Code, any salary
reduction simplified employee pension plan described in Section 408(k) of the
Code, any tax deferred annuity plan described in Section 403(b) of the Code, or
any cafeteria plan described in Section 125 of the Code. In no event, however,
shall an Employee's Total Compensation for any calendar year include any
compensation in excess of $160,000 (or such other amount as may be permitted
under Section 401(a)(17) of the Code).
Section 1.51 Trust means the legal relationship created by
the Trust Agreement pursuant to which the Trustee holds the Trust
Fund in trust. The Trust may be referred to as the "CNY Financial
Corporation Employee Stock Ownership Plan Trust."
Section 1.52 Trust Agreement means the agreement between CNY Financial
Corporation and the Trustee therein named or its successors pursuant to which
the Trust Fund shall be held in trust.
Section 1.53 Trust Fund means the corpus (consisting of contributions
paid over to the Trustee, and investments thereof), and all earnings,
appreciations or additions thereof and
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thereto, held by the Trustee under the Trust Agreement in accordance with the
Plan, less any depreciation thereof and any payments made therefrom pursuant to
the Plan.
Section 1.54 Trustee means the Trustee of the Trust Fund from time to
time in office. The Trustee shall serve as Trustee until it is removed or
resigns from office and is replaced by a successor Trustee appointed in
accordance with the terms of the Trust Agreement.
Section 1.55 Valuation Date means the last business day of March, June,
September and December.
Section 1.56 Vesting Computation Period means, with respect to any
person, the 12-month period beginning on such person's Employment Commencement
Date and each Plan Year beginning after such Employment Commencement Date.
Section 1.57 Year of Eligibility Service means, with respect to any
person, an Eligibility Computation Period during which such person receives
credit for at least 1,000 Hours of Service.
Section 1.58 Year of Vesting Service means, with respect to any person,
a Vesting Computation Period during which such person receives credit for at
least 1,000 Hours of Service, but limited by Section 9.6. If an Employee has
credit for 1,000 Hours of Service in the Vesting Computation Period that
includes his Employment Commencement Date and 1,000 Hours of Service in the
first Vesting Computation Period that begins after his Employment Commencement
Date, he shall receive credit for two Years of Vesting Service even if such
periods overlap.
ARTICLE II
PARTICIPATION
Section 2.1 Eligibility for Participation.
(a) Only Eligible Employees may be or become Participants in the Plan.
An Employee shall be an Eligible Employee if he is a common law employee of an
Employer, has completed at least one Year of Eligibility Service and is not
excluded under Section 2.1(b).
(b) An Employee is not an Eligible Employee if he:
(i) is an Employee who has waived any claim to participation
in the Plan; or
(ii) is an Employee or in a unit of Employees covered by a collective
bargaining agreement with the Employer where retirement benefits were the
subject of good faith bargaining, unless such agreement expressly provides that
Employees such as he be covered under the Plan; or
(iii) is a "leased employee" as defined in Section 18.8(a).
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Section 2.2 Commencement of Participation.
Every Employee who is an Eligible Employee on the Effective Date shall
automatically become a Participant on the Effective Date. An Employee who
becomes an Eligible Employee after the Effective Date shall automatically become
a Participant on the first day of the month following the month in which he
becomes an Eligible Employee.
Section 2.3 Termination of Participation.
Participation in the Plan shall cease, and a Participant shall become a
Former Participant, upon termination of employment with the Employer, death,
Disability or Retirement, failure to return to work upon the expiration of a
leave of absence granted by the Employer pursuant to Section 3.4 or becoming an
Employee who is excluded under Section 2.1(b) or distribution of the entire
vested interest in his Account.
ARTICLE III
SPECIAL PROVISIONS
Section 3.1 Military Service.
In the case of a termination of employment of any Employee to enter
directly into Military Service, the entire period of his absence shall be
treated, for purposes of vesting and eligibility for participation (but not,
except as required by law, for purposes of eligibility to share in allocations
of contributions in accordance with Article VII), as if he had worked for the
Employer during the period of his absence. In the event of the re-employment of
such person by the Employer within a period of not more than six months:
(a) after he becomes entitled to release or discharge, if he
has entered into the armed forces; or
(b) after such service terminates, if he has entered into other service
defined as Military Service;
such period, also, shall be deemed to be Military Service.
Section 3.2 Maternity or Paternity Leave.
(a) Subject to Section 3.2(c), in the event of an Employee's absence
from work in the service of the Employer and all Affiliated Employers for a
period:
(i) that commences on or after October 1, 1985;
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(ii) for which the person is not paid or entitled to payment by the
Employer or any Affiliated Employer; and
(iii) that constitutes Maternity or Paternity Leave;
then the rules of Section 3.2(b) shall apply.
(b) In cases of absence described in Section 3.2(a), solely for
purposes of determining whether a One-Year Break in Service has occurred, the
person shall be credited for the period of an absence described in Section
3.2(a) with the number of Hours of Service equal to the lesser of:
(i) (A) the number of Hours of Service that would have been credited to
the person if he had continued working for the Bank during the period of such
absence, or (B) if the number of Hours of Service prescribed under Section
3.2(b)(i)(A) cannot be determined, 8 Hours of Service for each working day
during the period of absence; or
(ii) 501 Hours of Service.
Such credit shall be given during the Computation Period during which
such absence began, if necessary to prevent a One- Year Break in Service from
occurring during such Computation Period, and in all other cases, such credit
shall be given during the immediately following Computation Period.
(c) Notwithstanding anything in the Plan to the contrary, this Section
3.2 shall not apply unless the person furnishes to the Plan Administrator such
information as the Plan Administrator may reasonably require in order to
establish (i) that the person's absence is one described in Section 3.2(a), and
(ii) the number of working days during such absence.
Section 3.3 Adjustments to Years of Eligibility Service.
The Years of Eligibility Service of an Employee who returns to the
employment of the Employer or any Affiliated Employer following a separation
from service shall include his Years of Eligibility Service prior to such
separation from service, and such an Employee shall be readmitted to
participation immediately upon his return to service if he is then an Eligible
Employee; provided, however, that if such separation from service includes a
One-Year Break in Service, such prior Years of Eligibility Service shall not be
included until he has completed one Year of Eligibility Service following his
return to service, and upon completion of such one Year of Eligibility Service,
he shall be readmitted to participation in the Plan with retroactive effect to
the date of his return to employment, if he is then an Eligible Employee, but he
shall not participate in any ESOP Contributions or Loan Repayment Contributions
allocated during the interim period.
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Section 3.4 Leave of Absence.
In the event of temporary absence from work in the service of the
Employer and all Affiliated Employers for any period for which a Participant
shall have been granted a leave of absence by the Employer, the entire period of
his absence shall be treated for purposes of vesting and eligibility for
participation (but not for purposes of eligibility to share in the allocation of
contributions in accordance with Article VII), as if he had worked for the
Employer during the period of his absence. Absence from work for a period
greater than, or failure to return to work upon the expiration of, the period of
leave of absence granted by the Employer shall terminate participation in the
Plan as of the date on which such period ended. In granting leaves of absence
for purposes of the Plan, all Employees in like circumstances shall be similarly
treated.
Section 3.5 Family and Medical Leave.
In the event of a leave of absence satisfying all requirements for
mandatory leave under the federal Family and Medical Leave Act of 1992, the
period of such absence shall be recognized for purposes of vesting and
eligibility to participate to the full extent required by law.
ARTICLE IV
CONTRIBUTIONS BY PARTICIPANTS NOT PERMITTED
Section 4.1 Contributions by Participants not Permitted.
Participants shall not be required, nor shall they be permitted, to
make contributions to the Plan.
ARTICLE V
CONTRIBUTIONS BY THE EMPLOYER
Section 5.1 In General.
Subject to the limitations of Article VIII, for each Plan Year, the
Employer shall contribute to the Plan the amount, if any, determined by the
Board, but in no event less than the amount described in Section 5.2(a). The
amount contributed for any Plan Year shall be treated as a Loan Repayment
Contribution, an ESOP Contribution or a combination thereof, in accordance with
the provisions of this Article V.
Section 5.2 Loan Repayment Contributions.
For each Plan Year, a portion of the Employer's contributions, if any,
to the Plan for such Plan Year equal to the sum of:
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(a) the minimum amount required to be added to the Loan Repayment
Account in order to provide adequate funds for the payment of the principal and
interest then required to be repaid under the terms of any outstanding Share
Acquisition Loan obtained by the Trustee; plus
(b) the additional amount, if any, designated by the Plan Administrator
to be applied to the prepayment of principal or interest under the terms of any
out standing Share Acquisition Loan obtained by the Trustee;
shall be treated as a Loan Repayment Contribution for such Plan Year. A Loan
Repayment Contribution for a Plan Year shall be allocated to the Loan Repayment
Account and shall be applied by the Trustee, in the manner directed by the Plan
Administrator, to the payment of accrued interest and to the reduction of the
principal balance of any Share Acquisition Loan obtained by the Trustee that is
outstanding on the date on which the Loan Repayment Contribution is made. To the
extent that a Loan Repayment Contribution for a Plan Year results in a release
of Financed Shares in accordance with Section 6.4, such Shares shall be
allocated among the Accounts of Eligible Participants for such Plan Year in
accordance with Section 7.2.
Section 5.3 ESOP Contributions.
In the event that the amount of the Employer's contributions to the
Plan for a Plan Year exceeds the amount of the Loan Repayment Contributions for
such Plan Year, such excess shall be treated as an ESOP Contribution and shall
be allocated among the Accounts of the Eligible Participants for such Plan Year
in accordance with Section 7.3.
Section 5.4 Time and Manner of Payment.
(a) Payment of contributions made pursuant to this Article V shall be
made:
(i) in cash, in the case of a Loan Repayment Contribution;
and
(ii) in cash, in Shares or in a combination of cash and Shares, in the
case of an ESOP Contribution.
(b) Contributions made pursuant to this Article V for a Plan Year shall
be paid to the Trust Fund on or before the due date (including any extensions
thereof) of the Employer's federal income tax return for its taxable year during
which such Plan Year ends. All such contributions shall be allocated to the
Accounts of the Eligible Participants, in the case of an ESOP Contribution, or
to the Loan Repayment Account, in the case of a Loan Repayment Contribution, as
soon as is practicable following the payment thereof to the Trust Fund.
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ARTICLE VI
SHARE ACQUISITION LOANS
Section 6.1 In General.
The Plan Administrator may, with the prior approval of the Board,
direct the Trustee to obtain a Share Acquisition Loan on behalf of the Plan, the
proceeds of which shall be applied on the earliest practicable date:
(a) to purchase Shares; or
(b) to make payments of principal or interest, or a combination of
principal and interest, with respect to such Share Acquisition Loan; or
(c) to make payments of principal and interest, or a combination of
principal and interest, with respect to a previously obtained Share Acquisition
Loan that is then outstanding.
Any such Share Acquisition Loan shall be obtained on such terms and conditions
as the Plan Administrator may approve; provided, however, that such terms and
conditions shall provide for the payment of interest at no more than a
reasonable rate and shall permit such Share Acquisition Loan to satisfy the
requirements of Section 4975(d)(3) of the Code and Section 408(b)(3) of ERISA.
Section 6.2 Collateral; Liability for Repayment.
(a) The Plan Administrator may direct the Trustee to pledge, at the
time a Share Acquisition Loan is obtained, the following assets of the Plan as
collateral for such Share Acquisition Loan:
(i) any Shares purchased with the proceeds of such Share Acquisition
Loan and any earnings attributable thereto;
(ii) any Financed Shares then pledged as collateral for a prior Share
Acquisition Loan which is repaid with the proceeds of such Share Acquisition
Loan and any earnings attributable thereto; and
(iii) pending the application thereof to purchase Shares or repay a
prior Share Acquisition Loan, the proceeds of such Share Acquisition Loan and
any earnings attributable thereto.
Except as specifically provided in this Section 6.2(a), no assets of the Plan
shall be pledged as collateral for the repayment of any Share Acquisition Loan.
(b) No person entitled to payment under a Share Acquisition Loan shall
have any right to the assets of the Plan except for:
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(i) Financed Shares that have been pledged as collateral for such Share
Acquisition Loan pursuant to Section 6.2(a);
(ii) Loan Repayment Contributions made pursuant to Section 5.2; and
(iii) earnings attributable to Financed Shares described in Section
6.2(b)(i) and to Loan Repayment Contributions described
in Section 6.2(b)(ii).
Except in the event of a default or a refinancing pursuant to which an existing
Share Acquisition Loan is repaid, the aggregate amount of all payments of
principal and interest made by the Trustee with respect to all Share Acquisition
Loans obtained on behalf of the Plan shall at no time exceed the aggregate
amount of all Loan Repayment Contributions theretofore made plus the aggregate
amount of all earnings (other than dividends paid in the form of Shares)
attributable to Financed Shares and to such Loan Repayment Contributions.
(c) Any Share Acquisition Loan shall be without recourse against the
Plan and Trust.
Section 6.3 Loan Repayment Account.
In the event that one or more Share Acquisition Loans shall be
obtained, a Loan Repayment Account shall be established under the Plan. The Loan
Repayment Account shall be credited with all Shares acquired with the proceeds
of a Share Acquisition Loan, all Loan Repayment Contributions and all earnings
(including dividends paid in the form of Shares) or appreciation attributable to
such Shares and Loan Repayment Contributions. The Loan Repayment Account shall
be charged with all payments of principal and interest made by the Trustee with
respect to any Share Acquisition Loan, all Shares released in accordance with
Section 6.4 and all losses, depreciation or expenses attributable to Shares or
to other property credited thereto. The Financed Shares, as well as any earnings
thereon, shall be allocated to such Loan Repayment Account and shall be
accounted for separately from all other amounts contributed under the Plan.
Section 6.4 Release of Financed Shares.
As of the last day of each Plan Year during which a Share Acquisition
Loan is outstanding, a portion of the Financed Shares purchased with the
proceeds of such Share Acquisition Loan and allocated to the Loan Repayment
Account shall be released. The number of Financed Shares released in any such
Plan Year shall be equal to the amount determined according to one of the
following methods:
(a) by computing the product of: (i) the number of Financed Shares
purchased with the proceeds of such Share Acquisition Loan and allocated to the
Loan Repayment Account immediately before the release is effected; multiplied by
(ii) a fraction, the numerator of which is the aggregate amount of the principal
and interest payments (other than payments made upon the refinancing of a Share
Acquisition Loan as contemplated by Section 6.1(c)) made with respect to
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such Share Acquisition Loan during such Plan Year, and the denominator of which
is the aggregate amount of all principal and interest remaining to be paid with
respect to such Share Acquisition Loan as of the first day of such Plan Year; or
(b) by computing the product of: (i) the number of Financed Shares
purchased with the proceeds of such Share Acquisition Loan and allocated to the
Loan Repayment Account immediately before the release is effected; multiplied by
(ii) a fraction, the numerator of which is the aggregate amount of the principal
payments (other than payments made upon the refinancing of a Share Acquisition
Loan as contemplated by Section 6.1(c)) made with respect to such Share
Acquisition Loan during such Plan Year, and the denominator of which is the
aggregate amount of all of principal remaining to be paid with respect to such
Share Acquisition Loan as of the first day of such Plan Year; provided, however,
that the method described in this Section 6.4(b) may be used only if the Share
Acquisition Loan does not extend for a period in excess of 10 years after the
date of origination and only to the extent that principal payments on such Share
Acquisition Loan are made at least as rapidly as under a loan of like principal
amount with a like interest rate and term requiring level amortization of
principal and interest.
The method to be used shall be specified in the documents governing the Share
Acquisition Loan or, if not specified therein, prescribed by the Plan
Administrator, in its discretion. In the event that property other than, or in
addition to, Financed Shares shall be held in the Loan Repayment Account and
pledged as collateral for a Share Acquisition Loan, then the property to be
released pursuant to this Section 6.4 shall be property having a Fair Market
Value determined by applying the method to be used to the Fair Market Value of
all property pledged as collateral for such Share Acquisition Loan; provided,
however, that no property other than Financed Shares shall be released pursuant
to this Section 6.4 unless all Financed Shares have previously been released.
Section 6.5 Restrictions on Financed Shares.
Except to the extent required under any applicable law, rule or
regulation, no Shares purchased with the proceeds of a Share Acquisition Loan
shall be subject to a put, call or other option, or to any buy-sell or similar
arrangement, while held by the Trustee or when distributed from the Plan. The
provisions of this Section 6.5 shall continue to apply in the event that this
Plan shall cease to be an employee stock ownership plan, within the meaning of
Section 4975(e)(7) of the Code.
ARTICLE VII
ALLOCATION OF CONTRIBUTIONS
Section 7.1 Allocation Among Eligible Participants.
Subject to the limitations of Article VIII, ESOP Contributions for a
Plan Year made in accordance with Section 5.3 and Financed Shares and other
property that are released from the Loan Repayment Account for a Plan Year in
accordance with Section 6.4 shall be allocated among the Eligible Participants
for such Plan Year, in the manner provided in this Article VII.
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Section 7.2 Allocation of Releases Shares or Other Property.
Subject to the limitations of Article VIII, in the event that Financed
Shares or other property are released from the Loan Repayment Account for a Plan
Year in accordance with Section 6.4, such released Shares or other property
shall be allocated among the Accounts of the Eligible Participants for the Plan
Year in the proportion that each such Eligible Participant's Allocation
Compensation for the calendar year ending with or within the Plan Year bears to
the aggregate Allocation Compensation of all Eligible Participants for such
calendar year.
Section 7.3 Allocation of ESOP Contributions.
Subject to the limitations of Article VIII, in the event that the
Employer makes an ESOP Contribution for a Plan Year, such ESOP Contribution
shall be allocated among the Accounts of the Eligible Participants for such Plan
Year in the proportion that each such Eligible Participant's Allocation
Compensation for the calendar year that ends with or within the Plan Year bears
to the aggregate Allocation Compensation of all Eligible Participants for such
calendar year.
ARTICLE VIII
LIMITATIONS ON ALLOCATIONS
Section 8.1 Optional Limitations on Allocations of Contributions.
If, for any Plan Year, the application of Sections 7.2 and 7.3 would
result in more than one-third of the number of Shares or of the amount of money
or property to be allocated thereunder being allocated to the Accounts of
Eligible Participants for such Plan Year who are also Highly Compensated
Employees for such Plan Year, then the Plan Administrator may, but shall not be
required to, direct that this Section 8.1 shall apply in lieu of Sections 7.2
and 7.3. If the Plan Administrator gives such a direction, then the Plan
Administrator shall impose a maximum dollar limitation on the amount of
Allocation Compensation that may be taken into account for each Eligible
Participant. The dollar limitation which shall be imposed shall be the
limitation which produces the result that the aggregate Allocation Compensation
taken into account for Eligible Participants who are Highly Compensated
Employees, constitutes exactly one-third of the aggregate Allocation
Compensation taken into account for all Eligible Participants. In determining
whether more than one-third of the number of Shares or of the amount of money or
property to be allocated under the Plan for a Plan Year would be allocated to
the Highly Compensated Employees, any allocation to be made to the Account of a
Family Member of a Highly Compensated Employee who is either a Five Percent
Owner or one of the ten Highly Compensated Employees with the highest Total
Compensation, shall be treated as an allocation to such Highly Compensated
Employee.
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Section 8.2 General Limitations on Contributions.
(a) No amount shall be allocated to a Participant's Account under this
Plan for any Limitation Year, to the extent that such an allocation would result
in an Annual Addition of an amount greater than the lesser of (i) $30,000 (or
such other amount as is permissible under Section 415(c)(1)(A) of the Code, or
(ii) 25% of the Participant's Total Compensation for such Limitation Year.
(b) In the case of a Participant who may be entitled to benefits under
any qualified defined benefit plan (whether or not terminated) now in effect or
ever maintained by the Employer, such Participant's Annual Additions under this
Plan shall, in addition to the limitations provided under Section 8.2(a), be
further limited so that for any Limitation Year beginning prior to December 31,
1999, the sum of the Participant's Defined Contribution Plan Fraction plus his
Defined Benefit Plan Fraction does not exceed 1.0 for any Limitation Year;
provided, however, that for any Limitation Year ending prior to January 1, 1983,
the sum of his Defined Contribution Plan Fraction plus his Defined Benefit Plan
Fraction shall not exceed 1.4; and provided further, that this limitation shall
only apply if and to the extent that the benefits under the Employer's
Retirement Plan or any other defined contribution plan are not limited so that
such sum is not exceeded.
(c) For purposes of this Section 8.2, the following special definitions
shall apply:
(i) Annual Addition means the sum of the following amounts allocated on
behalf of a Participant for a Limitation Year:
(A) all contributions by the Employer (including contributions made
under a salary reduction agreement pursuant to Sections 401(k), 408(k) or 403(b)
of the Code) under any qualified defined contribution plan (other than this
Plan) maintained by the Employer, as well as the Participant's allocable share,
if any, of any forfeitures under such plans; plus
(B) (I) for Limitation Years that began prior to January 1, 1987, the
lesser of (1) 50% of the Participant's voluntary nondeductible contributions to
all qualified defined contribution plans maintained by the Employer, or (2) the
amount by which the Participant's nondeductible voluntary contributions to such
plans exceeds 6% of his Total Compensation; and (II) for Limitation Years that
begin after December 31, 1986, all of the Participant's voluntary nondeductible
contributions to such plans; plus
(C) all ESOP Contributions under this Plan; plus
(D) except as hereinafter provided in this Section 8.2(c)(i), a portion
of the Employer's Loan Repayment Contributions to the Plan for such Limitation
Year which bears the same proportion to the total amount of the Employer's Loan
Repayment Contributions for the Limitation Year that the number of Shares (or
the Fair Market Value of property other than Shares) allocated to the
Participant's Account pursuant to Section 7.2 or 8.1, whichever is
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applicable, bears to the aggregate number of Shares (or Fair Market Value of
property other than Shares) so allocated to all Participants for such Limitation
Year.
Notwithstanding Section 8.2(c)(i)(D), if, for any Limitation Year, the
aggregate amount of ESOP Contributions allocated to the Accounts of the
individuals who are Highly Compensated Employees
for such Limitation Year, when added to such Highly Compensated Employees'
allocable share of any Loan Repayment Contributions for such Limitation Year,
does not exceed one-third of the total of all ESOP Contributions and Loan
Repayment Contributions for such Limitation Year, then that portion, if any, of
the Loan Repayment Contributions for such Limitation Year that is applied to the
payment of interest on a Share Acquisition Loan shall not be included as an
Annual Addition. In no event shall any Financed Shares, any dividends or other
earnings thereon, any proceeds of the sale thereof or any portion of the value
of the foregoing be included as an Annual Addition.
(ii) Employer means CNY Financial Corporation and all members of a
controlled group of corporations, as defined in Section 414(b) of the Code, as
modified by Section 415(h) of the Code, all commonly controlled trades or
businesses, as defined in Section 414(c) of the Code, as modified by Section
415(h) of the Code, all affiliated service groups, as defined in Section 414(m)
of the Code, of which CNY Financial Corporation is a member, as well as any
leasing organization, as defined in Section 18.8, that employs any person who is
considered an employee under Section 18.8 and any other entity that is required
to be aggregated with the Employer pursuant to regulations under Section 414(o)
of the Code.
(iii) Defined Benefit Plan Fraction means, for any Participant for any
Limitation Year, a fraction, the numerator of which is the Projected Annual
Benefit (determined as of the end of such Limitation Year) of the Participant
under any qualified defined benefit plans (whether or not terminated) maintained
by the Employer for the current and all prior Limitation Years, and the
denominator of which is as follows: (A) for Limitation Years ending prior to
January 1, 1983, the lesser of (I) the dollar limitation in effect under Section
415(b)(1) (A) of the Code for such Limitation Year, or (II) the amount which may
be taken into account under Section 415(b)(1)(B) of the Code with respect to
such Participant for such Limitation Year; and (B) in all other cases, the
lesser of (I) (except as provided in Section 17.8(b) for a Top Heavy Plan Year)
the product of 1.25 multiplied by the dollar limitation in effect under Section
415(b)(1)(A) of the Code for such Limitation Year, or (II) the product of 1.4
multiplied by the amount which may be taken into account under Section
415(b)(1)(B) of the Code with respect to such Participant for such Limitation
Year.
(iv) Defined Contribution Plan Fraction means, for any Participant for
any Limitation Year, a fraction (A) the numerator of which is the sum of such
Participant's Annual Additions (determined as of the end of such Limitation
Year) under this Plan and any other qualified defined contribution plans
(whether or not terminated) maintained by the Employer for the current and all
prior Limitation Years, and (B) the denominator of which is as follows: (I) for
Limitation Years ending prior to January 1, 1983, the sum of the lesser of the
following amounts for such Limitation Year and for each prior Limitation Year
during which such Participant was employed by the Employer: (1) the Maximum
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Permissible Amount for such Limitation Year (without regard to Section 415(c)(6)
of the Code), or (2) the amount which may be taken into account under Section
415(c)(1)(B) of the Code with respect to such Participant for such Limitation
Year; and (II) in all other cases, the sum of the lesser of the following
amounts for such Limitation Year and for each prior Limitation during which such
Participant was employed by the Employer: (1) (except as provided in Section
17.8(b) for a Top Heavy Plan Year) the product of 1.25 multiplied by the Maximum
Permissible Amount for such Limitation Year (determined without regard to
Section 415(c)(6) of the Code), or (2) the product of 1.4 multiplied by the
amount which may be taken into account under Section 415(c)(1)(B) of the Code
(or Section 415(c)(7) of the Code, if applicable) with respect to such
Participant for such Limitation Year; provided, however, that the Plan
Administrator may, at his election, adopt the transition rule set forth in
Section 415(e)(6) of the Code in making the computation set forth in this
Section 8.2(c)(iv). If the sum of a Participant's Defined Benefit Plan Fraction
and Defined Contribution Plan Fraction exceeded 1.0 as of September 30, 1983,
then such Participant's Defined Contribution Plan Fraction shall be determined
under regulations to be prescribed by the Secretary of the Treasury so that the
sum of the fractions does not exceed 1.0.
(v) Limitation Year means the Plan Year; provided, however, that if the
Employer changes the Limitation Year, the new Limitation Year shall begin on a
date within the Limitation Year in which the amendment is made.
(vi) Maximum Permissible Amount means (A) $25,000 (or such higher
amount as may be permitted under Section 415(d) of the Code because of cost of
living increases) for Limitation Years beginning prior to January 1, 1983, and
(B) the greater of (I) $30,000, or (II) 25% of the dollar limitation in effect
under Section 415(b)(1)(A) of the Code for Limitation Years beginning on or
after January 1, 1983.
(vii) Projected Annual Benefit means a Participant's annual retirement
benefit (adjusted to the actuarial equivalent of a straight life annuity if
expressed in a form other than a straight life or qualified joint and survivor
annuity) under any qualified defined benefit plan maintained by the Employer,
whether or not terminated, assuming that the Participant will continue
employment until the later of current age or normal retirement age under such
plan, and that the Participant's Total Compensation for the Limitation Year and
all other relevant factors used to determine benefits under such plan will
remain constant for all future Limitation Years.
(d) When a Participant's Annual Addition to this Plan must be reduced
to satisfy the limitations of Section 8.2(a) or (b), such reduction shall be
applied first to ESOP Contributions; and second, if necessary, to Shares
allocated as a result of a Loan Repayment Contribution which are included as an
Annual Addition in such order as shall result in the smallest reduction in the
number of Shares allocable to the Participant's Account. The amount by which any
Participant's Annual Addition to this Plan is reduced shall be allocated in
accordance with Articles V and VII as a contribution by the Employer in the next
succeeding Limitation Year.
(e) Prior to determining a Participant's actual Total Compensation for
a Limitation Year, the Employer may determine the limitations under this Section
8.2 for a Participant on the basis of a reasonable estimation of the
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Participant's Total Compensation for the Limitation Year that is uniformly
determined for all Participants who are similarly situated. As soon as it is
administratively feasible after the end of the Limitation Year, the limitations
of this Section 8.2 shall be determined on the basis of the Participant's actual
Total Compensation for the Limitation Year.
ARTICLE IX
VESTING
Section 9.1 Vesting.
Subject to the provisions of Section 9.2, the balance credited to each
Employee's Account shall become vested in accordance with the following
schedule:
<TABLE>
<CAPTION>
Years of Vested Service Vesting Percentage
----------------------- ------------------
<S> <C>
1 but less than 2 200%
2 but less than 3 40%
3 but less than 4 60%
4 but less than 5 80%
5 or more 100%
</TABLE>
Section 9.2 Vesting on Death, Disability, Retirement.
Any previously unvested portion of the remainder of the balance
credited to the Account of a Participant or of a person who is a Former
Participant solely because he is excluded from participation under Section
2.1(b) shall become fully vested in him immediately upon attainment of age 65,
or, if earlier, upon the termination of his participation by reason of death,
Disability, Retirement or upon the occurrence of a Change in Control of the
Employer.
Section 9.3 Forfeitures on Termination of Employment.
Upon the termination of employment of a Participant or Former
Participant for any reason other than death, Disability or Retirement, that
portion of the balance credited to his Account which is not vested at the date
of such termination shall be forfeited as of the last Valuation Date for the
Plan Year in which such termination of employment occurs. The proceeds of such
forfeitures, less amounts, if any, required to be credited because of
re-employment pursuant to Section 9.4, shall be treated as Forfeitures and shall
be disposed of as provided in Section 9.5.
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Section 9.4 Amounts Credited Upon Re-Employment.
If an Employee forfeited any amount of the balance credited to his
Account upon his termination of employment with the Employer, and is re-employed
prior to the occurrence of five consecutive One-Year Breaks in Service, then:
(i) an amount equal to the Fair Market Value of the Shares forfeited,
determined as of the date of forfeiture; and
(ii) the amount credited to his General Investment Account that was
forfeited, determined as of the date of forfeiture;
shall be credited back to his Account from the proceeds of forfeitures which are
redeemed pursuant to Section 9.3 during the Plan Year in which he is
re-employed, unless such proceeds are insufficient, in which case the Employer
shall make an additional contribution in the amount of such deficiency.
Section 9.5 Allocation of Forfeitures.
Any Forfeitures that occur during a Plan Year shall be used to reduce
the contributions required of the Employer under the Plan and shall be treated
as Loan Repayment Contributions and ESOP Contributions in the proportions
designated by the Plan Administrator in accordance with Article V.
Section 9.6 Service Prior to Effective Date.
Notwithstanding any other provision of this Plan, service or employment
with the Employer including, without limitation, Cortland Savings Bank, prior to
the calendar year in which the Effective Date occurs shall not be counted in the
determination of years of vested service for the purposes of this Plan.
ARTICLE X
THE TRUST FUND
Section 10.1 The Trust Fund.
The Trust Fund shall be held and invested under the Trust Agreement
with the Trustee. The provisions of the Trust Agreement shall vest such powers
in the Trustee as to investment, control and disbursement of the Trust Fund, and
such other provisions not inconsistent with the Plan, including provision for
the appointment of one or more "investment managers" within the meaning of
Section 3(38) of ERISA to manage and control (including acquiring and disposing
of) all or any of the assets of the Trust Fund, as the Board may from time to
time authorize. Except as required by ERISA, no bond or other security shall be
required of any Trustee at any time in office.
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Section 10.2 Investments.
Except to the extent provided to the contrary in Section 10.3, the
Trust Fund shall be invested in:
(a) Shares;
(b) such Investment Funds as may be established from time to time by
the Plan Administrator; and
(c) such other investments as may be permitted under the Trust
Agreement;
in such proportions as shall be determined by the Plan Administrator or, if so
provided under the Trust Agreement, as directed by one or more investment
managers or by the Trustee, in its discretion; provided, however, that the
investments of the Trust Fund shall consist primarily of Shares. Notwithstanding
the immediately preceding sentence, the Trustee may temporarily invest the Trust
Fund in short-term obligations of, or guaranteed by, the United States
Government or an agency thereof, or may retain uninvested, or sell investments
to provide, amounts of cash required for purposes of the Plan.
Section 10.3 Diversification of Investments.
(a) Notwithstanding Section 10.2, each Qualified Participant may:
(i) during the first 90 days of each of the first four Plan Years to
begin after the Plan Year in which he first becomes a Qualified Participant,
elect that such percentage of the balance credited to his Account as he may
specify, but in no event more than 25% of the balance credited to his Account,
be invested in one or more of the Investment Funds; and
(ii) during the first 90 days of the fifth Plan Year to begin after the
Plan Year in which he first becomes a Qualified Participant or of any Plan Year
thereafter, elect that such percentage of the balance credited to his Account as
he may specify, but in no event more than 50% of the balance credited to his
Account, be invested in one or more of the Investment Funds.
For purposes of an election under this Section 10.3, the balance credited to a
Participant's Account shall be the balance credited to his Account determined as
of the last Valuation Date to occur in the Plan Year immediately preceding the
Plan Year in which such election is made.
(b) An election made under Section 10.3(a) shall be made in writing, in
the form and manner prescribed by the Plan Administrator, and shall be filed
with the Plan Administrator during the election period specified in Section
10.3(a). As soon as is practicable following the end of the election period
during which such election is made, the Plan Administrator shall take such
actions as are necessary to cause the specified percentage of the balance
credited to the Account of the Qualified Participant making the election to be
invested in the specified
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<PAGE>
Investment Funds. Any investments made pursuant to this Section 10.3 shall be
specifically allocated to the General Investment Account of the Qualified
Participant for whom they are made.
(c) An election made under Section 10.3(a) may be changed or revoked at
any time during the election period described in Section 10.3(a) during which it
is initially made, during any subsequent election period described in Section
10.3(a) or, upon at least 15 days' advance written notice given in the form and
manner prescribed by the Plan Administrator, as of the first day of any calendar
quarter of any Plan Year that begins after the Participant first becomes a
Qualified Participant. In no event, however, shall any election under this
Section 10.3 result in more than 25% of the balance credited to the
Participant's Account being invested at the direction of the Participant, if
such election is made during a Plan Year to which Section 10.3(a)(i) applies, or
result in more than 50% of the balance credited to the Participant's Account
being invested at the direction of the Participant, if such election is made
during the Plan Year to which Section 10.3(a)(ii) applies or thereafter.
Section 10.4 Use of Commingled Trust Funds.
Subject to the provisions of the Trust Agreement, amounts held in the
Trust Fund may be invested in:
(a) any commingled or group trust fund described in Section 401(a) of
the Code and exempt under Section 501(a) of the Code; or
(b) any common trust fund exempt under Section 584 of the Code
maintained exclusively for the collective investment of the assets of trusts
that are exempt under Section 501(a) of the Code;
provided that the trustee of such commingled, group or common trust fund is a
bank or trust company.
Section 10.5 Management and Control of Assets.
All assets of the Plan shall be held by the Trustee in trust for the
exclusive benefit of Participants, Former Participants and their Beneficiaries.
No part of the corpus or income of the Trust Fund shall be used for, or diverted
to, purposes other than for the exclusive benefit of Participants, Former
Participants and their Beneficiaries, and for defraying reasonable
administrative expenses of the Plan and Trust Fund. No person shall have any
interest in or right to any part of the earnings of the Trust Fund, or any
rights in, to or under the Trust Fund or any part of its assets, except to the
extent expressly provided in the Plan.
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<PAGE>
ARTICLE XI
VALUATION OF INTERESTS IN THE TRUST FUND
Section 11.1 Establishment of Investment Accounts.
The Plan Administrator shall establish, or cause to be established, for
each person for whom an Account is maintained a Share Investment Account and a
General Investment Account. Such Share Investment Accounts and General
Investment Accounts shall be maintained in accordance with this Article XI.
Section 11.2 Share Investment Accounts.
The Share Investment Account established for a person in accordance
with Section 11.1 shall be credited with: (a) all Shares allocated to such
person's Account; (b) all Shares purchased with amounts of money or property
allocated to such person's Account; (c) all dividends paid in the form of Shares
with respect to Shares credited to his Account; and (d) all Shares purchased
with amounts credited to such person's General Investment Account. Such Share
Investment Account shall be charged with all Shares that are sold or exchanged
to acquire other investments or to provide cash and with all Shares that are
distributed in kind.
Section 11.3 General Investment Accounts.
The General Investment Account that is established for a person in
accordance with Section 11.1 shall be credited with: (a) all amounts, other than
Shares, allocated to such person's Account; (b) all dividends paid in a form
other than Shares with respect to Shares credited to such person's Share
Investment Account; (c) the proceeds of any sale of Shares credited to such
person's Share Investment Account; and (d) any earnings attributable to amounts
credited to such person's General Investment Account. Such General Investment
Account shall be charged with all amounts credited thereto that are applied to
the purchase of Shares, any losses or depreciation attributable to amounts
credited thereto, any expenses allocable thereto and any distributions of
amounts credited thereto.
Section 11.4 Valuation of Investment Accounts.
(a) The Plan Administrator shall determine, or cause to be determined,
the aggregate value of each person's Share Investment Account as of each
Valuation Date by multiplying the number of Shares credited to such Share
Investment Account on such Valuation Date by the Fair Market Value of a Share on
such Valuation Date.
(b) As of each Valuation Date, the Accounts of each Participant shall
be separately adjusted to reflect their proportionate share of any appreciation
or depreciation in the fair market value of the Investment Funds, any income
earned by the Investment Funds and any expenses incurred by the Investment
Funds, as well as any contributions, withdrawals or distributions and investment
transfers not posted as of the last Valuation Date.
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<PAGE>
Section 11.5 Annual Statements.
There shall be furnished, by mail or otherwise, at least once in each
Plan Year to each person who would then be entitled to receive all or part of
the balance credited to any Account if the Plan were then terminated, a
statement of his interest in the Plan as of such date as shall be selected by
the Plan Administrator, which statement shall be deemed to have been accepted as
correct and be binding on such person unless the Plan Administrator receives
written notice to the contrary within 30 days after the statement is mailed or
furnished to such person.
ARTICLE XII
SHARES
Section 12.1 Specific Allocation of Shares.
All Shares purchased under the Plan shall be specifically allocated to
the Share Investment Accounts of Participants, Former Participants and their
Beneficiaries in accordance with
Section 11.2, with the exception of Financed Shares, which shall be
allocated to the Loan Repayment Account.
Section 12.2 Dividends.
(a) Dividends paid with respect to Shares held under the Plan shall be
credited to the Loan Repayment Account, if paid with respect to Financed Shares.
Such dividends shall be: (i) applied to the payment of principal and accrued
interest with respect to any Share Acquisition Loan, if paid in cash; or (ii)
held in the Loan Repayment Account as Financed Shares for release in accordance
with Section 6.4, if paid in the form of Shares.
(b) Dividends paid with respect to Shares allocated to a person's Share
Investment Account shall be credited to such person's Share Investment Account.
Cash dividends credited to a person's General Investment Account shall be, at
the direction of the Board, either: (i) held in such General Investment Account
and invested in accordance with Sections 10.2 and 10.3; (ii) distributed
immediately to such person; (iii) distributed to such person within 90 days of
the close of the Plan Year in which such dividends were paid; or (iv) used to
make payments of principal or interest on a Share Acquisition Loan; provided,
however, that the Fair Market Value of Financed Shares released from the Loan
Repayment Account equals or exceeds the amount of the dividend.
Section 12.3 Voting Rights.
(a) Each person shall direct the manner in which all voting rights
appurtenant to Shares allocated to his Share Investment Account will be
exercised, provided that such Shares were allocated to his Share Investment
Account as of the applicable record date. Such person shall, for such purpose,
be deemed a "named fiduciary" within the meaning of Section 402(a)(2) of
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<PAGE>
ERISA.Such a direction shall be given by completing and filing with the
inspector of elections, the Trustee or such other person who shall be
independent of the Employer as the Plan Administrator shall designate, at least
10 days prior to the date of the meeting of holders of Shares at which such
voting rights will be exercised, a written direction in the form and manner
prescribed by the Plan Administrator. The inspector of elections, the Trustee or
such other person designated by the Plan Administrator shall tabulate the
directions given on a strictly confidential basis, and shall provide the Plan
Administrator with only the final results of the tabulation. The final results
of the tabulation shall be followed by the Plan Administrator in directing the
Trustee as to the manner in which such voting rights shall be exercised. The
Plan Administrator shall make a reasonable effort to furnish, or cause to be
furnished, to each person for whom a Share Investment Account is maintained all
annual reports, proxy materials and other information known by the Plan
Administrator to have been furnished by the issuer of the Shares, or by any
solicitor of proxies, to the holders of Shares.
(b) To the extent that any person shall fail to give instructions with
respect to the exercise of voting rights appurtenant to Shares allocated to his
Share Investment Account:
(i) the Trustee shall, with respect to each matter to be voted upon:
(A) cast a number of affirmative votes equal to the product of (I) the number of
allocated Shares for which no written instructions have been given, multiplied
by (II) a fraction, the numerator of which is the number of allocated Shares for
which affirmative votes will be cast in accordance with written instructions
given as provided in Section 12.3(a) and the denominator of which is the
aggregate number of affirmative and negative votes which will be cast in
accordance with written instructions given as aforesaid, and (B) cast a number
of negative votes equal to the excess (if any) of (I) the number of allocated
Shares for which no written instructions have been given over (II) the number of
affirmative votes being cast with respect to such allocated Shares pursuant to
Section 12.3(b)(i)(A); or
(ii) if the Trustee shall determine that it may not, consistent with
its fiduciary duties, vote the allocated Shares for which no written
instructions have been given in the manner described in Section 12.3(b)(i), it
shall vote such Shares in such manner as it, in its discretion, may determine to
be in the best interests of the persons to whose Share Investment Accounts such
Shares have been allocated.
(c) (i) The voting rights appurtenant to Financed Shares shall be
exercised as follows with respect to each matter as to which holders of Shares
may vote:
(A) a number of votes equal to the product of (I) the total number of
votes appurtenant to Financed Shares allocated to the Loan Repayment Account on
the applicable record date; multiplied by (II) a fraction, the numerator of
which is the total number of affirmative votes cast by Participants, Former
Participants and the Beneficiaries of deceased Former Participants with respect
to such matter pursuant to Section 12.3(a) and the denominator of which is the
total number of affirmative and negative votes cast by Participants, Former
Participants and the Beneficiaries of deceased Former Participants, shall be
cast in the affirmative; and
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<PAGE>
(B) a number of votes equal to the excess of (I) the total number of
votes appurtenant to Financed Shares allocated to the Loan Repayment Account on
the applicable record date, over (II) the number of affirmative votes cast
pursuant to Section 12.3(c)(i)(A) shall be cast in the negative.
To the extent that the Financed Shares consist of more than one class of Shares,
this Section 12.3(c)(i) shall be applied separately with respect to each class
of Shares.
(ii) If voting rights are to be exercised with respect to Financed
Shares as provided in Section 12.3(c)(i)(A) and (B) at a time when there are no
Shares allocated to the Share Investment Accounts of Participants, Former
Participants and the Beneficiaries of deceased Former Participants, then the
voting rights appurtenant to Financed Shares shall be exercised as follows with
respect to each matter as to which holders of Shares may vote:
(A) Each person who is a Participant on the applicable record date and
who was a Participant on the last day of the Plan Year ending on or immediately
prior to such record date will be granted a number of votes equal to the
quotient, rounded to the nearest integral number, of (I) such Participant's
Allocation Compensation for the Plan Year ending on or immediately prior to such
record date (or for the portion of such Plan Year during which he was a
Participant); divided by (II) $1,000.00; and
(B) a number of votes equal to the product of (I) the total number of
Financed Shares allocated to the Loan Repayment Account on the applicable record
date; multiplied by (II) a fraction, the numerator of which is the total number
of votes that are cast in the affirmative with respect to such matter pursuant
to Section 12.3(c)(ii)(A) and the denominator of which is the total number of
votes that are cast either in the affirmative or in the negative with respect to
such matter pursuant to Section 12.3(c)(ii)(A), shall be cast in the
affirmative; and
(C) a number of votes equal to the excess of (I) the total number of
Financed Shares allocated to the Loan Repayment Account on the applicable record
date, over (II) the number of affirmative votes cast with respect to such matter
pursuant to Section 12.3(c)(ii)(B), shall be cast in the negative. To the extent
that the Financed Shares consist of more than one class of Shares, this Section
12.3(c)(ii) shall be applied separately with respect to each class of Shares.
Section 12.4 Tender Offers.
(a) Each person shall direct whether Shares allocated to his Share
Investment Account will be delivered in response to any Tender Offer. Such
person shall, for such purpose, be deemed a "named fiduciary" within the meaning
of Section 402(a)(2) of ERISA. Such a direction shall be given by completing and
filing with the Trustee or such other person who shall be independent of the
Employer as the Plan Administrator shall designate, at least 10 days prior to
the latest date for exercising a right to deliver Shares pursuant to such Tender
Offer, a written direction in the form and manner prescribed by the Plan
Administrator. The Trustee or other person designated by the Plan Administrator
shall tabulate the directions given on a strictly confidential basis, and shall
provide the Plan Administrator with only the final results of the
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<PAGE>
tabulation. The final results of the tabulation shall be followed by the Plan
Administrator in directing the number of Shares to be delivered. The Plan
Administrator shall make a reasonable effort to furnish, or cause to be
furnished, to each person for whom a Share Investment Account is maintained, all
information known by the Plan Administrator to have been furnished by the issuer
or by or on behalf of any person making such Tender Offer, to the holders of
Shares in connection with such Tender Offer.
(b) To the extent that any person shall fail to give instructions with
respect to Shares allocated to his Share Investment Account:
(i) the Trustee shall (A) tender or otherwise offer for purchase,
exchange or redemption a number of such Shares equal to the product of (I) the
number of allocated Shares for which no written instructions have been given,
multiplied by (II) a fraction, the numerator of which is the number of allocated
Shares tendered or otherwise offered for purchase, exchange or redemption in
accordance with written instructions given as provided in Section 12.4(a) and
the denominator of which is the aggregate number of allocated Shares for which
written instructions have been given as aforesaid, and (B) withhold a number of
Shares equal to the excess (if any) of (I) the number of allocated Shares for
which no written instructions have been given over (II) the number of Shares
being tendered or otherwise offered pursuant to Section 12.4(b)(i)(A); or
(ii) if the Trustee shall determine that it may not, consistent with
its fiduciary duties, exercise the tender or other rights appurtenant to
allocated Shares for which no written instructions have been given in the manner
described in Section 12.4(b)(i), it shall tender, or otherwise offer, or
withhold such Shares in such manner as it, in its discretion, may determine to
be in the best interests of the persons to whose Share Investment Accounts such
Shares have been allocated.
(c) In the case of any Tender Offer, any Financed Shares held in the
Loan Repayment Account shall be dealt with as follows:
(i) If such Tender Offer occurs at a time when there are no Shares
allocated to the Share Investment Accounts of Participants, Former Participants
and the Beneficiaries of deceased Former Participants, then the disposition of
the Financed Shares shall be determined as follows:
(A) each person who is a Participant on the applicable record date and
who was a Participant on the last day of the Plan Year ending on or immediately
prior to such record date will be granted a number of tender rights equal to the
quotient, rounded to the nearest integral number, of (I) such Participant's
Allocation Compensation for the Plan Year ending on or immediately prior to such
record date (or for the portion of such Plan Year during which he was a
Participant), divided by (II) $1,000.00; and
(B) on the last day for delivering Shares or otherwise responding to
such Tender Offer, a number of Shares equal to the product of (I) the total
number of Financed Shares allocated to the Loan Repayment Account on the last
day of the effective period of such Tender Offer; multiplied by (II) a fraction,
the numerator of which is the total number of tender rights exercised in favor
of
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<PAGE>
the delivery of Shares in response to the Tender Offer pursuant to Section
12.4(c)(i)(A) and the denominator of which is the total number of tender rights
that are exercisable in response to the Tender Offer pursuant to Section
12.4(c)(i)(A), shall be delivered in response to the Tender Offer; and
(C) a number of Shares equal to the excess of (I) the total number of
Financed Shares allocated to the Loan Repayment Account on the last day of the
effective period of such Tender Offer; over (II) the number of Shares to be
delivered in response to the Tender Offer pursuant to Section 12.4(c)(i)(B),
shall be withheld from delivery.
(ii) If such Tender Offer occurs at a time when the voting rights
appurtenant to such Financed Shares are to be exercised in accordance with
Section 12.3(c)(i), then:
(A) on the last day for delivering Shares or otherwise responding to
such Tender Offer, a number of Financed Shares equal to the product of (I) the
total number of Financed Shares allocated to the Loan Repayment Account on the
last day of the effective period of such Tender Offer; multi plied by (II) a
fraction, the numerator of which is the total number of Shares delivered from
the Share Investment Accounts of Participants,
Former Participants and the Beneficiaries of deceased Former
Participants in response to such Tender Offer pursuant to Section 12.4(a), and
the denominator of which is the total number of Shares allocated to the Share
Investment Accounts of Participants, Former Participants and Beneficiaries of
deceased Former Participants immediately prior to the last day for delivering
Shares or otherwise responding to such Tender Offer, shall be delivered; and
(B) a number of Financed Shares equal to the excess of (I) the total
number of Financed Shares allocated to the Loan Repayment Account on the last
day for delivering Shares or otherwise responding to such Tender Offer; over
(II) the number of Financed Shares to be delivered pursuant to Section
12.4(c)(ii)(A), shall be withheld from delivery.
To the extent that the Financed Shares consist of more than one class of Shares,
this Section 12.4(c) shall be applied separately with respect to each class of
Shares.
Section 12.5 Dissent and Appraisal Rights.
(a) Each person shall have the right to direct the manner in which all
dissent and appraisal rights appurtenant to Shares allocated to his Share
Investment Account will be exercised. Such person shall, for such purpose, be
deemed a "named fiduciary" within the meaning of Section 402(a)(2) of ERISA.
Such a direction shall be given by completing and filing with the Trustee or
such other person who shall be independent of the Employer as the Plan
Administrator shall designate, at least 10 days prior to the latest date for
exercising such dissent and appraisal rights, a written direction in the form
and manner prescribed by the Plan Administrator. The Trustee or other person
designated by the Plan Administrator shall tabulate the directions given on a
strictly confidential basis, and shall provide the Plan Administrator with only
the final results of the tabulation. The final results of the tabulation shall
be followed by the Plan Administrator in
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<PAGE>
directing the Trustee as to the manner in which such dissent and appraisal
rights shall be exercised. The Plan Administrator shall make a reasonable effort
to furnish, or cause to be furnished, to each person for whom a Share Investment
Account is maintained, all information known by the Plan Administrator to have
been furnished by the issuer or by or on behalf of any person to the holders of
Shares in connection with such dissent and appraisal rights.
(b) To the extent that any person for whom a Share Investment Account
is maintained shall fail to give instructions with respect to dissent and
appraisal rights appurtenant to Shares attributable to his interest, the Plan
Administrator shall direct the Trustee to exercise dissent and appraisal rights
as to those Shares in such manner as the Plan Administrator shall determine to
be in the best interest of the person to whom such Shares are attributable.
ARTICLE XIII
PAYMENT OF BENEFITS
Section 13.1 In General.
The balance credited to a Participant's or Former Participant's Account
under the Plan shall be paid only at the times, to the extent, in the manner and
to the persons provided in this Article XIII.
Section 13.2 Designation of Beneficiaries.
(a) Subject to Section 13.2(b), any person entitled to a benefit under
the Plan may designate a Beneficiary to receive any amount to which he is
entitled that remains undistributed on the date of his death. Such person shall
designate his Beneficiary (and may change or revoke any such designation) in
writing in the form and manner prescribed by the Plan Administrator. Such
designation, and any change or revocation thereof, shall be effective only if
received by the Plan Administrator prior to such person's death and shall become
irrevocable upon such person's death.
(b) A Participant or Former Participant who is married shall
automatically be deemed to have designated his spouse as his Beneficiary,
unless, prior to the time such designation would, under Section 13.2(a), become
irrevocable:
(i) the Participant or Former Participant designates an additional or a
different Beneficiary in accordance with this Section 13.2; and
(ii) (A) the spouse of such Participant or Former Participant consents
to such designation in a writing that acknowledges the effect of such consent
and is witnessed by a Plan representative or a notary public; or (B) the spouse
of such Participant or Former Participant has previously consented to such
designation by signing a written waiver of any right to consent to any
designation made by the Participant or Former Participant, and such waiver
acknowledged the effect of the waiver and was witnessed by a Plan representative
or a notary public; or (C) it is
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established to the satisfaction of a Plan representative that the consent
required under Section 13.2(b)(ii)(A) may not be obtained because such spouse
cannot be located or because of other circumstances permitted under regulations
issued by the Secretary of the Treasury.
(c) In the event that a Beneficiary entitled to payments hereunder
shall die after the death of the person who designated him but prior to
receiving payment of his entire interest in the Account of the person who
designated him, then such Beneficiary's interest in the Account of such person,
or any unpaid balance thereof, shall be paid as provided in Section 13.3 to the
Beneficiary who has been designated by the deceased Beneficiary, or if there is
none, to the executor or administrator of the estate of such deceased
Beneficiary, or if no such executor or administrator is appointed within such
time as the Plan Administrator, in his sole discretion, shall deem reasonable,
to such one or more of the spouse and descendants and blood relatives of such
deceased Beneficiary as the Plan Administrator may select. If a person entitled
to a benefit under the Plan and any of the Beneficiaries designated by him shall
die in such circumstances that there shall be substantial doubt as to which of
them shall have been the first to die, for all purposes of the Plan, the person
who made the Beneficiary designation shall be deemed to have survived such
Beneficiary.
(d) If no Beneficiary survives the person entitled to the benefit under
the Plan or if no Beneficiary has been designated by such person, such benefit
shall be paid to the executor or administrator of the estate of such person, or
if no such executor or administrator is appointed within such time as the Plan
Administrator, in his sole discretion, shall deem reasonable, to such one or
more of the spouse and descendants and blood relatives of such deceased person
as the Plan Administrator may select.
Section 13.3 Distributions to Participants and Former
Participants.
(a)(i) Subject to the provisions of Section 13.7 with respect to
required minimum distributions, the vested portion of the balance credited to a
Participant's or a Former Participant's Account shall be distributed to him
commencing as of the last Valuation Date to occur in the Plan Year in which the
Participant or Former Participant terminates employment with the Employer or
attains age 65, whichever is later; unless the Participant or Former Participant
elects otherwise pursuant to Section 13.3(a)(ii), and the payment, or first in a
series of payments, is actually made within three months following such
Valuation Date.
(ii) A Participant or Former Participant may, upon request on a form
provided by the Plan Administrator and filed with the Plan Administrator not
later than 15 days prior to the date on which his employment with the Employer
terminates, elect that his vested interest in his Account be paid commencing as
of any earlier or later Valuation Date after his termination of employment, but
in no event later than the last Valuation Date to occur in the calendar year in
which the Participant or Former Participant attains age 70 1/2, in which case
the payment, or first in a series of payments, shall be made within three months
following such Valuation Date.
(b)(i) Subject to Section 13.3(b)(ii), the vested portion of the
balance credited to the Account of a Participant or Former Participant will be
paid to him, commencing as of the
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Valuation Date determined under Section 13.3(a), in substantially equal annual
installments over a fixed period equal to the greater of:
(A) five years; or
(B) if the vested portion of the balance credited to the Account of the
Participant or Former Participant, determined as of the Valuation Date
determined under Section 13.3(a), is greater than $500,000 (or such larger
amount as may be prescribed by the Secretary of the Treasury pursuant to Section
409(o) of the Code), the sum of five years plus the lesser of (I) five
additional years, or (II) one additional year for each $100,000 (or fraction
thereof) by which the vested portion of the balance credited to the
Participant's or Former Participant's Account exceeds $500,000 (or such larger
amount as may be prescribed by the Secretary of the Treasury pursuant to Section
409(o) of the Code).
(ii) A Participant or Former Participant may, upon request on a form
provided by the Plan Administrator and filed with the Plan Administrator not
later than 15 days prior to the date on which his employment terminates, elect
that the vested portion of the balance credited to his Account be paid,
commencing as of the Valuation Date determined under Section 13.3(a):
(A) in substantially equal annual installments over a fixed period
not to exceed the lesser of (I) 10 years, or (II) the life expectancy of the
Participant or Former Participant, or, if his Beneficiary is a natural
person, the joint life and last survivor expectancy of the Participant or
Former Participant and his Beneficiary; or
(B) subject to Section 13.4, in a lump sum payment.
(c) If any person entitled to a benefit under the Plan dies before his
entire benefit has been distributed to him, then the remainder of such benefit
shall be paid to the Beneficiary designated by him under Section 13.2 either:
(i) in a lump sum distribution as of the Valuation Date next following
the date of his death, and the amount thereof shall be based upon the vested
portion of the balance credited to his Account as of such Valuation Date; or
(ii) if, prior to the death of the Participant or Former Participant
whose vested Account is being distributed, an election pursuant to Section
13.3(b)(ii)(B) is in effect for him, in a lump sum distribution as of the
Valuation Date specified in such election, or, if earlier, as of the latest
Valuation Date that would permit payment to be made within five years after the
Participant's or Former Participant's death, and the amount thereof shall be
based upon the vested portion of the balance credited to his Account as of such
Valuation Date; or
(iii) if, prior to the death of the Participant or Former Participant
whose vested Account is being distributed, an election pursuant to Section
13.3(b)(ii)(A) is in effect for him:
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(A) over the period and at the times set forth in such election, if
distribution has begun prior to the Participant's or Former Participant's death;
or
(B) commencing at the time set forth in such election and over the
period set forth in such election (or, if less, over a period equal to the life
expectancy of the Beneficiary of the deceased Participant or Former
Participant), if the deceased Participant's or Former Participant's spouse is
his Beneficiary and distribution has not begun prior to the deceased
Participant's or Former Participant's death; or
(C) commencing on the date specified in such election (or, if earlier,
the last Valuation Date that will permit payment to begin within one year after
the deceased Participant's or Former Participant's death) and over the period
set forth in such election (or, if less, over a period equal to the life
expectancy of the Beneficiary of the deceased Participant or Former
Participant), if the deceased Participant's or Former Participant's Beneficiary
is a natural person other than his spouse and distribution has not begun prior
to the deceased Participant's or Former Participant's death;
and the amount thereof shall be based upon the vested portion of the
balance credited to his Account as of the Valuation Dates as of which payments
are determined; or
(iv) upon written application of the Beneficiary made in such form and
manner as the Plan Administrator may prescribe, at another time or in another
manner permitted under Section 13.3(a) or (b), subject to the following
limitations:
(A)(I) If such Beneficiary is a natural person other than the spouse of
the deceased Participant or Former Participant whose vested Account is being
distributed, a distribution that commences within one year after such deceased
Participant's or Former Participant's death shall be made over a fixed period
that does not exceed the life expectancy of such Beneficiary when distribution
commences.
(II) If such Beneficiary is the spouse of the deceased Participant or
Former Participant whose vested Account is being distributed, a distribution
that commences no later than the later of: (1) the date on which the deceased
Participant or Former Participant would have attained age 70 1/2 had he lived;
or (2) the first anniversary of the death of such deceased Participant or Former
Participant; shall be made over a fixed period that does not exceed the life
expectancy of such Beneficiary when distribution commences.
(III) In all other cases where the spouse of the deceased Participant
or Former Participant whose vested Account is being distributed is not the
Beneficiary, payment must be completed within five years after the death of such
deceased Participant or Former Participant.
(B) In cases where distribution has commenced prior to the death of the
deceased Participant or Former Participant whose vested Account is being
distributed, distribution must be completed as least as rapidly as under the
method in effect prior to such deceased Participant's or Former Participant's
death.
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Section 13.4 Manner of Payment.
(a) Subject to Section 13.4(b), payments of distributions made pursuant
to Section 13.3 or Section 13.7 shall be paid, in accordance with the written
direction of the person requesting the payment, in whole Shares, in cash, or in
a combination of cash and whole Shares. Such written direction shall be given in
such form and manner as the Plan Administrator may prescribe. If no such
direction is given, then payment shall be made in the maximum number of whole
Shares that may be acquired with the amount of the payment, plus, if necessary,
an amount of money equal to any remaining amount of the payment that is less
than the Fair Market Value of a whole Share.
(b) No distribution of a lump sum payment shall be made in cash to the
extent that the making of such distribution, when combined with all other
distributions to be made in cash as of the same Valuation Date, would require
the sale of Shares constituting 1% or more of all outstanding Shares; provided,
however, that this Section 13.4(b) shall not apply to or in respect of a
Participant or Former Participant:
(i) following such Participant's or Former Participant's termination of
employment with the Employer on account of his Retirement or Disability; or
(ii) following such Participant's or Former Participant's 65th
birthday; or
(iii) following the death of such Participant or Former Participant.
Section 13.5 Put Options.
(a) Except as provided otherwise in Section 13.5(b), each Participant
or Former Participant to whom Shares are distributed under the Plan, each
Beneficiary of a deceased Participant or Former Participant, including the
estate of a deceased Participant or Former Participant, to whom Shares are
distributed under the Plan, and each person to whom such a Participant, Former
Participant or Beneficiary gives Shares that have been distributed under the
Plan shall have the right to require the Employer to purchase from him all or
any portion of such Shares. A person shall exercise such right by delivering to
the Employer a written notice, in such form and manner as the Employer may by
written notice to such person prescribe, setting forth the number of Shares to
be purchased by the Employer, the number of the stock certificate evidencing
such person's ownership of such Shares, and the effective date of purchase. Such
notice shall be given, and the effective date of the purchase specified therein
shall be, no later than the last day of the fifteenth calendar month to begin
after the date on which the Shares to be purchased by the Employer were
distributed from the Plan. As soon as practicable following its receipt of such
notice, the Employer shall take such actions as are necessary to purchase the
Shares specified in such notice at a price per Share equal to the Fair Market
Value of a Share determined as of the effective date of the purchase.
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(b) The Employer shall have no obligation to purchase any Share (i)
pursuant to a notice given, or on an effective date of purchase, after the last
day of the fifteenth calendar month to begin after the date on which such Share
was distributed from the Plan; (ii) following the earliest date on which Shares
are publicly traded on an established market; or (iii) if the Employer is a
"bank" within the meaning of Section 581 of the Code and is prohibited by law
from redeeming or purchasing its own securities.
Section 13.6 Right of First Refusal.
(a) For any period during which Shares are not publicly traded on any
established market, no person who owns Shares that were distributed from the
Plan, other than a person to whom such Shares were sold in compliance with this
Section 13.6, shall sell such Shares to any person other than the Employer
without first offering to sell such Shares to the Employer (or person designated
by the Employer) in accordance with this Section 13.6.
(b) In the event that a person to whom this Section 13.6 applies shall
receive and desire to accept from a person other than the Employer a bona fide
offer to purchase Shares to which this Section 13.6 applies, he shall furnish to
the Employer a written notice which shall:
(i) include a copy of such offer to purchase;
(ii) offer to sell to the Employer the Shares subject to such offer to
purchase at a price per Share that is equal to the greater of:
(A) the price per Share specified in such offer to purchase; or
(B) the Fair Market Value of a Share as of the date of purchase;
and otherwise upon the same terms and conditions as those
specified in such offer to purchase; and
(iii) include an indication of his intention to accept such offer to
purchase if the Employer does not accept his offer to sell.
(c) The Employer shall have the right to purchase the Shares covered by
the offer to sell contained in a notice given pursuant to Section 13.6(b), on
the terms and conditions specified in such notice, by written notice given to
the party making the offer to sell not later than the fourteenth day after the
notice described in Section 13.6(b) is given. If the Employer does not give such
a notice during the prescribed fourteen day period, then the person owning such
Shares may accept the offer to purchase described in the notice.
Section 13.7 Minimum Required Distributions.
(a) Required minimum distributions of a Participant's or Former
Participant's Account shall commence no later than:
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(i) if the Participant or Former Participant is not a Five Percent
Owner at any time during the Plan Year ending in the calendar year in which he
attains age 70 1/2, the later of (A) the calendar year in which he attains or
attained age 70 1/2 or (B) the calendar year in which he terminates employment
with the Employer; or
(ii) if the Participant or Former Participant is or was a Five Percent
Owner at any time during the Plan Year ending in the calendar year in which he
attains age 70 1/2, the later of (A) the calendar year in which he attains age
70 1/2 or (B) the calendar year in which he first becomes a Five Percent Owner.
(b) The required minimum distributions contemplated by Section 13.7(a)
shall be made as follows:
(i) The minimum required distribution to be made for the calendar year
for which the first minimum distribution is required shall be no later than
April 1st of the immediately following calendar year and shall be equal to the
quotient obtained by dividing (A) the vested balance credited to the
Participant's or Former Participant's Account as of the last Valuation Date to
occur in the calendar year immediately preceding the calendar year in which the
first minimum distribution is required (adjusted to account for any additions
thereto or subtractions therefrom after such Valuation Date but on or before
December 31st of such calendar year); by (B) the Participant's or Former
Participant's life expectancy (or, if his Beneficiary is a natural person, the
joint life and last survivor expectancy of him and his Beneficiary); and
(ii) the minimum required distribution to be made for each calendar
year following the calendar year for which the first minimum distribution is
required shall be made no later than December 31st of the calendar year for
which the distribution is required and shall be equal to the quotient obtained
by dividing (A) the vested balance credited to the Participant's or Former
Participant's Account as of the last Valuation Date to occur in the calendar
year prior to the calendar year for which the distribution is required (adjusted
to account for any additions thereto or subtractions therefrom after such
Valuation Date but on or before December 31st of such calendar year and, in the
case of the distribution for the calendar year immediately following the
calendar year for which the first minimum distribution is required, reduced by
any distribution for the prior calendar year that is made in the current
calendar year); by (B) the Participant's or Former Participant's life expectancy
(or, if his Beneficiary is a natural person, the joint life and last survivor
expectancy of him and his Beneficiary).
For purposes of this Section 13.7, the life expectancy of a Participant or
Former Participant (or the joint life and last survivor expectancy of a
Participant or Former Participant and his designated Beneficiary) for the
calendar year in which the Participant or Former Participant attains age 70 1/2
shall be determined on the basis of Tables V and VI, as applicable, of Section
1.72-9 of the Income Tax Regulations as of the Participant's or Former
Participant's and Beneficiary's birthday in such year. Such life expectancy or
joint life and last survivor expectancy for any subsequent year shall be equal
to the excess of (1) the life expectancy or joint life and last survivor
expectancy for the year in which the Participant or Former Participant
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attains age 70 1/2, over (2) the number of whole years that have elapsed since
the Participant or Former Participant attained age 70 1/2.
(c) Payment of the distributions required to be made to a Participant
or Former Participant under this Section 13.7 shall be made in accordance with
Section 13.4.
Section 13.8 Direct Rollover of Eligible Rollover
Distributions.
(a) A Distributee may elect, at the time and in the manner prescribed
by the Plan Administer, to have any portion of an Eligible Rollover Distribution
paid directly to an Eligible Retirement Plan specified by the Distributee in a
Direct Rollover.
(b) The following rules shall apply with respect to Direct Rollovers
made pursuant to this Section 13.8:
(i) A Participant may only elect to make a Direct Rollover of an
Eligible Rollover Distribution if such Eligible Rollover Distribution (when
combined with other Eligible Rollover Distributions made or to be made in the
same calendar year) is reasonably expected to be at least $200;
(ii) If a Participant elects a Direct Rollover of a portion of an
Eligible Rollover Distribution, that portion must be equal to at least $500; and
(iii) A Participant may not divide his or her Eligible Rollover
Distribution into separate distributions to be transferred to two or more
Eligible Retirement Plans.
(c) For purposes of this Section 13.8 and any other applicable Section
of the Plan, the following definitions shall have the following meanings:
(i) "Direct Rollover" means a payment by the Plan to the Eligible
Retirement Plan specified by the Distributee.
(ii) "Distributee" means an Employee or former Employee. In addition,
the Employee's or former Employee's surviving spouse and the Employee's spouse
or former spouse who is the alternate payee under a Qualified Domestic Relations
Order are considered Distributees with regard to the interest of the spouse or
former spouse.
(iii) "Eligible Retirement Plan" means an individual retirement account
described in Section 408(a) of the Code, an individual retirement annuity
described in Section 408(b) or the Code, an annuity plan described in Section
403(a) of the Code, or a qualified trust described in Section 401(a) of the Code
that accepts the Distributee's Eligible Rollover Distribution. However, in the
case of an Eligible Rollover Distribution to the current or former spouse who is
the alternative payee under a Qualified Domestic Relations Order or to a
surviving spouse, an Eligible Retirement Plan is an individual retirement
account or individual retirement annuity.
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(iv) "Eligible Rollover Distribution" means any distribution of all or
any portion of the balance to the credit of the Distributee, except that an
Eligible Rollover Distribution does not include: any distribution that is one of
a series of substantially equal periodic payments (not less frequently than
annually) made for the life (or life expectancy) of the Distributee or the joint
lives (or joint life expectancies) of the Distributee's designated Beneficiary,
or for a specified period of ten years or more; any distribution to the extent
such distribution is required under Section 401(a)(9) of the Code; and the
portion of any distribution that is not includible in gross income (determined
without regard to the exclusion for net unrealized appreciation with respect to
employer securities).
Section 13.9 Valuation of Shares Upon Settlement to a
Participant.
Notwithstanding any contrary provision in this Article XIII, in the
event that all or a portion of a payment of a distribution to a Participant is
to be made in cash, such Participant shall only be entitled to receive the
proceeds of the Shares allocated to his Account that are sold in connection with
such distribution and which are valued as of the date of such sale.
ARTICLE XIV
CHANGE IN CONTROL
Section 14.1 Definition of Change in Control.
A Change in Control of the Employer shall be deemed to have occurred
upon the happening of any of the following events:
(a) the occurrence of any event upon which any "person" (as such term
is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as
amended ("Exchange Act")), other than (A) a trustee or other fiduciary holding
securities under an employee benefit plan maintained for the benefit of
employees of CNY Financial Corporation; (B) a corporation owned, directly or
indirectly, by the shareholders of CNY Financial Corporation in substantially
the same proportions as their ownership of stock of CNY Financial Corporation;
or (C) any group constituting a person in which employees of CNY Financial
Corporation are substantial members, becomes the "beneficial owner" (as defined
in Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of
securities issued by CNY Financial Corporation representing 25% or more of the
combined voting power of all of CNY Financial Corporation's then outstanding
securities; or
(b) the occurrence of any event upon which the individuals who on the
date the Plan is adopted are members of the Board, together with individuals
whose election by the Board or nomination for election by CNY Financial
Corporation's shareholders was approved by the affirmative vote of at least
two-thirds of the members of the Board then in office who were either members of
the Board on the date this Plan is adopted or whose nomination or election was
previously so approved, cease for any reason to constitute a majority of the
members of the Board, but excluding, for this purpose, any such individual whose
initial assumption of office is
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in connection with an actual or threatened election contest relating to the
election of directors of CNY Financial Corporation (as such terms are used in
Rule 14a-11 of Regulation 14A promulgated under the Exchange Act); or
(c) the shareholders of CNY Financial Corporation approve either:
(i) a merger or consolidation of CNY Financial Corporation with any
other corporation, other than a merger or consolidation following which both of
the following conditions are satisfied:
(A) either (1) the members of the Board of CNY Financial Corporation
immediately prior to such merger or consolidation constitute at least a majority
of the members of the governing body of the institution resulting from such
merger or consolidation; or (2) the shareholders of CNY Financial Corporation
own securities of the institution resulting from such merger or consolidation
representing 80% or more of the combined voting power of all such securities
then outstanding in substantially the same proportions as their ownership of
voting securities of CNY Financial Corporation before such merger or
consolidation; and
(B) the entity which results from such merger or consolidation
expressly agrees in writing to assume and perform CNY Financial Corporation's
obligations under the Plan; or
(ii) a plan of complete liquidation of CNY Financial Corporation or an
agreement for the sale or disposition by CNY Financial Corporation of all or
substantially all of its assets; and
(d) any event that would be described in Section 14.1(c)(i), or (ii) if
"Cortland Savings Bank" were substituted for "CNY Financial Corporation"
therein, and "Board of Directors of Cortland Savings Bank" were substituted for
"Board" therein; and
In no event, however, shall the transaction by which Cortland Savings Bank
converts from a mutual savings bank to a stock savings bank, or any transaction
by which a company wholly owned by Cortland Savings Bank becomes the parent
company of Cortland Savings Bank be deemed a Change in Control.
Section 14.2 Vesting on Change of Control.
Upon the effective date of a Change in Control, the Account of each person who
would then, upon termination of the Plan, be entitled to a benefit, shall be
fully vested and nonforfeitable.
Section 14.3 Repayment of Loan.
(a) Upon a Change in Control described in Section 14.1(c) (or which
would be described in Section 14.1(c) if "Cortland Savings Bank" were
substituted for "CNY Financial Corporation" thereunder), the Plan Administrator
shall direct the Trustee to sell a sufficient number of Shares to repay any
outstanding Share Acquisition Loan in full. The proceeds of such sale shall be
used to repay such Share Acquisition Loan. After repayment of the Share
Acquisition Loan, all
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remaining Shares which had been unallocated (or the proceeds thereof, if
applicable) shall be allocated among the accounts of all Participants who were
employed by an Employer on the effective date of such Change in Control. Such
allocation of Shares or proceeds shall be credited as of the date on which the
Change in Control occurs to the Accounts of each Participant who has not had a
termination of participation under Section 2.3 as of such date (each, an
"Affected Participant"), in proportion to their Allocation Compensation, for the
period, beginning on the January 1 immediately preceding the date on which the
Change in Control occurs and ending on the date on which the Change in Control
occurs. If any amount cannot be allocated to an Affected Participant in the year
of such Change in Control as a result of the limitations of Section 415 of the
Code, the amounts will be allocated in subsequent years to those persons who
were Affected Participants and who continue to be Participants in the Plan until
finally distributed to Affected Participants.
(b) In the event that the application of Section 415 of the Code
prevents the allocation of all of the Shares or other assets released from the
Loan Repayment Account as provided in Section 14.3(a) as of the effective date
of the Change in Control, each Affected Participant shall be entitled to receive
a supplemental benefit payment directly from the Employer. The supplemental
benefit payment to each Affected Participant shall be an amount equal to the
excess of:
(i) the total amount of Shares or other property that would be
allocated to such Affected Participant's Account under Section 14.3(a) if
Section 415 of the Code did not apply; over
(ii) the total of Shares or other property actually allocated to such
Affected Participant's Account under Section 14.3(a).
Such payment (without offset for any allocations which may occur under this Plan
subsequent to the Change in Control) shall be made as soon as practicable, but
in any event within ten business days, after the effective date of the Change in
Control. This Section 14.3(b) shall be treated as a separate, non-qualified
"excess benefit plan" within the meaning of Section 3(34) of ERISA and shall be
interpreted, administered and enforced in a manner consistent with this
intention. To the extent that any Affected Participant is entitled to the same
or a similar payment under any other non-qualified plan, program or arrangement
of the Employer, any payment under this Section 14.3(b) shall be coordinated
with the payments under such other non-qualified programs, plan or arrangements
in such manner as shall be determined by the Plan Administrator to be necessary
to prevent the duplication of benefits.
Section 14.4 Plan Termination After Change in Control.
After repayment of the loan and allocation of shares or proceeds as
provided in Section 14.3, the Plan shall be terminated and all amounts shall be
distributed as soon as practicable.
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Section 14.5 Amendment of Article XIV.
Article XIV of the Plan may not be amended after a Change in Control of
the Employer unless required by the Internal Revenue Service as a condition to
the continued treatment of the Plan as a tax-qualified plan under Section 401(a)
of the Code.
ARTICLE XV
ADMINISTRATION
Section 15.1 Named Fiduciaries.
The term "Named Fiduciary" shall mean (but only to the extent of the
responsibilities of each of them) the Plan Administrator, the Plan
Administrator, the Board and the Trustee. This Article XV is intended to
allocate to each Named Fiduciary the responsibility for the prudent execution of
the functions assigned to him or it, and none of such responsibilities or any
other responsibility shall be shared by two or more of such Named Fiduciaries.
Whenever one Named Fiduciary is required by the Plan or Trust Agreement to
follow the directions of another Named Fiduciary, the two Named Fiduciaries
shall not be deemed to have been assigned a shared responsibility, but the
responsibility of the Named Fiduciary giving the directions shall be deemed his
sole responsibility, and the responsibility of the Named Fiduciary receiving
those directions shall be to follow them insofar as such instructions are on
their face proper under applicable law.
Section 15.2 Plan Administrator.
There shall be a Plan Administrator, who shall be the Senior Human
Resources Officer of CNY Financial Corporation, or such Employee or officer as
may be designated by the Board, as hereinafter provided, and who shall, subject
to the responsibilities of the Plan Administrator and the Board, have the
responsibility for the day-to-day control, management, operation and
administration of the Plan (except trust duties). The Plan Administrator shall
have the following responsibilities:
(a) To maintain records necessary or appropriate for the
administration of the Plan;
(b) To give and receive such instructions, notices, information,
materials, reports and certifications to the Trustee as may be necessary or
appropriate in the administration of the Plan;
(c) To prescribe forms and make rules and regulations consistent with
the terms of the Plan;
(d) To require such proof of age or evidence of good health of an
Employee, Participant or Former Participant or the spouse of either, or of a
Beneficiary as may be necessary or appropriate in the administration of the
Plan;
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(e) To prepare and file, distribute or furnish all reports, plan
descriptions, and other information concerning the Plan, including, without
limitation, filings with the Secretary of Labor and communications with
Participants, Former Participants and other persons, as shall be required of the
Plan Administrator under ERISA;
(f) To determine any question arising in connection with the Plan, and
the Plan Administrator's decision or action in respect thereof shall be final
and conclusive and binding upon the Employer, the Trustee, Participants, Former
Participants, Beneficiaries and any other person having an interest under the
Plan;
(g) To review and dispose of claims under the Plan filed pursuant to
Section 15.3 and appeals filed pursuant to Section 15.4;
(h) If the Plan Administrator shall determine that by reason of
illness, senility, insanity, or for any other reason, it is undesirable to make
any payment to a Participant, Former Participant, Beneficiary or any other
person entitled thereto, to direct the application of any amount so payable to
the use or benefit of such person in any manner that he may deem advisable or to
direct in his discretion the withholding of any payment under the Plan due to
any person under legal disability until a representative competent to receive
such payment in his behalf shall be appointed pursuant to law;
(i) To review the performance of the Trustee and such investment
managers as may be appointed in or pursuant to the Trust Agreement in investing,
managing and controlling the assets of the Plan;
(j) To the extent required by ERISA, to establish a funding policy and
method consistent with the objectives of the Plan and the requirements of ERISA,
and to review such policy and method at least annually;
(k) To report and make recommendations to the Board regarding changes
in the Plan, including changes in the operation and management of the Plan and
removal and replacement of the Trustee and such investment managers as may be
appointed in or pursuant to the Trust Agreement;
(l) To the extent provided under and subject to the provisions of the
Trust Agreement, to appoint "investment managers" as defined in Section 3(38) of
ERISA to manage and control (including acquiring and disposing of) all or any of
the assets of the Plan;
(m) With the prior approval of the Board, to direct the Trustee to
obtain one or more Share Acquisition Loans;
(n) To develop and provide procedures and forms necessary to enable
Participants to give voting and tendering directions on a confidential basis;
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(o) To discharge such other responsibilities or follow such directions
as may be assigned or given by the Board; and
(p) To discharge such other responsibilities or follow such directions
as may be assigned or given by the Board; and
(q) To perform any duty or take any action which is allocated to the
Plan Administrator under the Plan.
The Plan Administrator shall have the power and authority necessary or
appropriate to carry out his responsibilities. The Plan Administrator may resign
only by giving at least 30 days' prior written notice of resignation to the
Board, and such resignation shall be effective on the date specified in such
notice.
Section 15.3 Claims Procedure.
Any claim relating to benefits under the Plan shall be filed with the
Plan Administrator on a form prescribed by him. If a claim is denied in whole or
in part, the Plan Administrator shall give the claimant written notice of such
denial, which notice shall specifically set forth:
(a) The reasons for the denial;
(b) The pertinent Plan provisions on which the denial was based;
(c) Any additional material or information necessary for the claimant
to perfect his claim and an explanation of why such material or information is
needed; and
(d) An explanation of the Plan's procedure for review of the denial of
the claim.
In the event that the claim is not granted and notice of denial of a
claim is not furnished by the 30th day after such claim was filed, the claim
shall be deemed to have been denied on that day for the purpose of permitting
the claimant to request review of the claim.
Section 15.4 Claims Review Procedure.
Any person whose claim filed pursuant to Section 15.3 has been denied
in whole or in part by the Plan Administrator may request review of the claim by
the Plan Administrator, upon a form prescribed by the Plan Administrator. The
claimant shall file such form (including a statement of his position) with the
Plan Administrator no later than 60 days after the mailing or delivery of the
written notice of denial provided for in Section 15.3, or, if such notice is not
provided, within 60 days after such claim is deemed denied pursuant to Section
15.3. The claimant shall be permitted to review pertinent documents. A decision
shall be rendered by the Plan Administrator and communicated to the claimant not
later than 30 days after receipt of the claimant's written request for review.
However, if the Plan Administrator finds it necessary, due to special
circumstances (for example, the need to hold a hearing), to extend this period
and so
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notifies the claimant in writing, the decision shall be rendered as soon as
practicable, but in no event later than 120 days after the claimant's request
for review. The Plan Administrator's decision shall be in writing and shall
specifically set forth:
(a) The reasons for the decision; and
(b) The pertinent Plan provisions on which the decision is based.
Any such decision of the Plan Administrator shall be binding upon the claimant
and the Employer, and the Plan Administrator shall take appropriate action to
carry out such decision.
Section 15.5 Allocation of Fiduciary Responsibilities and
Employment of Advisors.
Any Named Fiduciary may:
(a) Allocate any of his or its responsibilities (other than trustee
responsibilities) under the Plan to such other person or persons as he or it may
designate, provided that such allocation and designation shall be in writing and
filed with the Plan Administrator;
(b) Employ one or more persons to render advice to him or it with
regard to any of his or its responsibilities under the Plan; and
(c) Consult with counsel, who may be counsel to the Employer.
Section 15.6 Other Administrative Provisions.
(a) Any person whose claim has been denied in whole or in part must
exhaust the administrative review procedures provided in Section 15.4 prior to
initiating any claim for judicial review.
(b) No bond or other security shall be required of the Plan
Administrator, or any officer or Employee of the Employer to whom fiduciary
responsibilities are allocated by a Named Fiduciary, except as may be required
by ERISA.
(c) Subject to any limitation on the application of this Section
15.6(c) pursuant to ERISA, neither the Plan Administrator, nor any officer or
Employee of the Employer to whom fiduciary responsibilities are allocated by a
Named Fiduciary, shall be liable for any act of omission or commission by
himself or by another person, except for his own individual willful and
intentional malfeasance.
(d) The Plan Administrator may, except with respect to actions under
Section 15.4, shorten, extend or waive the time (but not beyond 60 days)
required by the Plan for filing any notice or other form with the Plan
Administrator, or taking any other action under the Plan.
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(e) The Plan Administrator may direct that the costs of services
provided pursuant to Section 15.5, and such other reasonable expenses as may be
incurred in the administration of the Plan, shall be paid out of the funds of
the Plan unless the Employer shall pay them.
(f) Any person, group of persons, committee, corporation or
organization may serve in more than one fiduciary capacity with respect to the
Plan.
(g) Any action taken or omitted by any fiduciary with respect to the
Plan, including any decision, interpretation, claim denial or review on appeal,
shall be conclusive and binding on all interested parties and shall be subject
to judicial modification or reversal only to the extent it is determined by a
court of competent jurisdiction that such action or omission was arbitrary and
capricious and contrary to the terms of the Plan.
ARTICLE XVI
AMENDMENT, TERMINATION AND TAX QUALIFICATION
Section 16.1 Amendment and Termination by CNY Financial
Corporation
The Employer expects to continue the Plan indefinitely, but
specifically reserves the right, in its sole discretion, at any time, by
appropriate action of the Board, to amend, in whole or in part, any or all of
the provisions of the Plan and to terminate the Plan at any time. Subject to the
provisions of Section 16.2, no such amendment or termination shall permit any
part of the Trust Fund to be used for or diverted to purposes other than for the
exclusive benefit of Participants, Former Participants, Beneficiaries or other
persons entitled to benefits, and no such amendment or termination shall reduce
the accrued benefit of any Participant, Former Participant, Beneficiary or other
person who may be entitled to benefits, without his consent. In the event of a
termination or partial termination of the Plan, or in the event of a complete
discontinuance of the Employer's contributions to the Plan, the Accounts of each
affected person shall forthwith become nonforfeitable and shall be payable in
accordance with the provisions of Article XIII.
Section 16.2 Amendment or Termination Other Than by CNY
Financial Corporation
In the event that a corporation or trade or business other than CNY
Financial Corporation shall adopt this Plan, such corporation or trade or
business shall, by adopting the Plan, empower CNY Financial Corporation to amend
or terminate the Plan, insofar as it shall cover employees of such corporation
or trade or business, upon the terms and conditions set forth in Section 16.1;
provided, however, that any such corporation or trade or business may, by action
of its board of directors or other governing body, amend or terminate the Plan,
insofar as it shall cover employees of such corporation or trade or business, at
different times and in a different manner. In the event of any such amendment or
termination by action of the board of directors or other governing body of such
a corporation or trade or business, a separate plan shall be deemed to have been
established for the employees of such corporation or trade or business, and the
assets
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of such plan shall be segregated from the assets of this Plan at the
earliest practicable date and shall be dealt with in accordance with the
documents governing such separate plan.
Section 16.3 Conformity to Internal Revenue Code.
The Employer has established the Plan with the intent that the Plan and
Trust will at all times be qualified under Section 401(a) and exempt under
Section 501(a) of the Code and with the intent that contributions under the Plan
will be allowed as deductions in computing the net income of the Employer for
federal income tax purposes, and the provisions of the Plan and Trust Agreement
shall be construed to effectuate such intentions. Accordingly, notwithstanding
anything to the contrary hereinbefore provided, the Plan and the Trust Agreement
may be amended at any time without prior notice to Participants, Former
Participants, Beneficiaries or any other persons entitled to benefits, if such
amendment is deemed by the Board to be necessary or appropriate to effectuate
such intent.
Section 16.4 Contingent Nature of Contributions.
(a) All ESOP Contributions to the Plan are conditioned upon the
issuance by the Internal Revenue Service of a determination that the Plan and
Trust are qualified under Section 401(a) of the Code and exempt under Section
501(a) of the Code. If the Employer applies to the Internal Revenue Service
for such a determination within 90 days after the date on which it files its
federal income tax return for its taxable year that includes the last day of
the Plan Year in which the Plan is adopted, and if the Internal Revenue
Service issues a determination that the Plan and Trust are not so qualified
or exempt, all ESOP Contributions made by the Employer prior to the date of
receipt of such a determination may, at the election of the Employer, be
returned to the Employer within one year after the date of such determination.
(b) All ESOP Contributions and Loan Repayment Contributions to the
Plan are made upon the condition that such ESOP Contributions and
Loan Repayment Contributions will be allowed as a deduction in
computing the net income of the Employer for federal income tax
purposes. To the extent that any such deduction is disallowed, the
amount disallowed may, at the election of the Employer, be
returned to the Employer within one year after the deduction is
disallowed.
(c) Any contribution to the Plan made by the Employer as a result of a
mistake of fact may, at the election of the Employer, be returned
to the Employer within one year after such contribution is made.
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ARTICLE XVII
SPECIAL RULES FOR TOP HEAVY PLAN YEARS
Section 17.1 In General.
As of the Determination Date for each Plan Year, the Plan Administrator
shall determine whether the Plan is a Top Heavy Plan in accordance with the
provisions of this Article XVII. If, as of such Determination Date, the Plan is
a Top Heavy Plan, then the Plan Year immediately following such Determination
Date shall be a Top Heavy Plan Year and the special provisions of this Article
XVII shall be in effect; provided, however, that if, as of the Determination
Date for the Plan Year in which the Effective Date occurs, the Plan is a Top
Heavy Plan, such Plan Year shall be a Top Heavy Plan Year, and the provisions of
this Article XVII shall be given retroactive effect for such Plan Year.
Section 17.2 Definition of Top Heavy Plan.
(a) Subject to Section 17.2(c), the Plan is a Top Heavy Plan if, as of
a Determination Date: (i) it is not a member of a Required Aggregation Group,
and (ii)(A) the sum of the Cumulative Accrued Benefits of all Key Employees
exceeds 60% of (B) the sum of the Cumulative Accrued Benefits of all Employees
(excluding former Key Employees), former Employees (excluding former Key
Employees and other former Employees who have not performed any services for the
Employer or any Affiliated Employer during the immediately preceding five Plan
Years), and their Beneficiaries.
(b) Subject to Section 17.2(c), the Plan is a Top Heavy Plan if, as of
a Determination Date: (i) the Plan is a member of a Required Aggregation Group,
and (ii)(A) the sum of the Cumulative Accrued Benefits of all Key Employees
under all plans that are members of the Required Aggregation Group exceeds 60%
of (B) the sum of the Cumulative Accrued Benefits of all Employees (excluding
former Key Employees), former Employees (excluding former Key Employees and
other former Employees who have not performed any services for the Employer or
any Affiliated Employer during the immediately preceding five Plan Years), and
their Beneficiaries under all plans that are members of the Required Aggregation
Group.
(c) Notwithstanding Sections 17.2(a) and 17.2(b), the Plan is not a Top
Heavy Plan if, as of a Determination Date: (i) the Plan is a member of a
Permissible Aggregation Group, and (ii)(A) the sum of the Cumulative Accrued
Benefits of all Key Employees under all plans that are members of the
Permissible Aggregation Group does not exceed 60% of (B) the sum of the
Cumulative Accrued Benefits of all Employees (excluding former Key Employees),
former Employees (excluding former Key Employees and other former Employees who
have not performed any services for the Employer or any Affiliated Employer
during the immediately preceding five Plan Years), and their Beneficiaries under
all plans that are members of the Permissible Aggregation Group.
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Section 17.3 Determination Date.
The Determination Date for the Plan Year in which the Effective Date
occurs shall be the last day of such Plan Year, and the Determination Date for
each Plan Year beginning after the Plan Year in which the Effective Date occurs
shall be the last day of the preceding Plan Year. The Determination Date for any
other qualified plan maintained by the Employer for a plan year shall be the
last day of the preceding plan year of each such plan, except that in the case
of the first plan year of such plan, it shall be the last day of such first plan
year.
Section 17.4 Cumulative Accrued Benefits.
(a) An individual's Cumulative Accrued Benefits under this Plan as of a
Determination Date are equal to the sum of:
(i) the balance credited to such individual's Account under this Plan
as of the most recent Valuation Date preceding the Determination Date;
(ii) the amount of any ESOP Contributions or Loan Repayment
Contributions made after such Valuation Date but on or before the Determination
Date; and
(iii) the amount of any distributions of such individual's Cumulative
Accrued Benefits under the Plan during the five year period ending on the
Determination Date.
For purposes of this Section 17.4(a), the computation of an individual's
Cumulative Accrued Benefits, and the extent to which distributions, rollovers
and transfers are taken into account, will be made in accordance with Section
416 of the Code and the regulations thereunder.
(b) For purposes of this Plan, the term "Cumulative Accrued Benefits"
with respect to any other qualified plan, shall mean the cumulative accrued
benefits determined for purposes of Section 416 of the Code under the provisions
of such plans.
(c) For purposes of determining the top heavy status of a Required
Aggregation Group or a Permissible Aggregation Group, the Cumulative Accrued
Benefits under this Plan and the Cumulative Accrued Benefits under any other
plan shall be determined as of the Determination Date that falls within the same
calendar year as the Determination Dates for all other members of such Required
Aggregation Group or Permissible Aggregation Group.
Section 17.5 Key Employees.
(a) For purposes of the Plan, the term Key Employee means any employee
or former employee of the Employer or any Affiliated Employer who is at any time
during the current Plan Year or was at any time during the immediately preceding
four Plan Years:
(i) a Five Percent Owner;
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(ii) a person who would be described in Section 1.23 if the number "1%"
were substituted for the number "5%" in Section 1.23 and who has an annual Total
Compensation from the Employer and any Affiliated Employer of more than
$150,000;
(iii) an Officer of the Employer or any Affiliated Employer who has an
annual Total Compensation greater than 50% of the amount in effect under Section
415(b)(1)(A) of the Code of any such Plan Year; or
(iv) one of the ten persons owning the largest interests in the
Employer and having an annual Total Compensation from the Employer or any
Affiliated Employer in excess of the dollar limitation in effect under Section
415(c)(1)(A) of the Code for such Plan Year.
(b) For purposes of Section 17.5(a):
(i) for purposes of Section 17.5(a)(iii), in the event the Employer or
any Affiliated Employer has more officers than are considered Officers, the term
Key Employee shall mean those officers, up to the maximum number, with the
highest annual compensation in any one of the five consecutive Plan Years ending
on the Determination Date; and
(ii) for purposes of Section 17.5(a)(iv), if two or more persons have
equal ownership interests in the Employer, each such person shall be considered
as having a larger ownership interest than any such person with a lower annual
compensation from the Employer or any Affiliated Employer.
(c) For purposes of Section 17.5(a): (i) a person's compensation from
Affiliated Employers shall be aggregated, but his ownership interests in
Affiliated Employers shall not be aggregated; (ii) an employee shall only be
deemed to be an officer if he has the power and responsibility of a person who
is an officer within the meaning of Section 416 of the Code; and (iii) the term
Key Employee shall also include the Beneficiary of a deceased Key Employee.
Section 17.6 Required Aggregation Group.
For purposes of this Article XVII, a Required Aggregation Group shall
consist of (a) this Plan; (b) any other qualified plans maintained by the
Employer and any Affiliated Employers that cover Key Employees; and (c) any
other qualified plans that are required to be aggregated for purposes of
satisfying the requirements of Sections 401(a)(4) or 410(b) of the Code.
Section 17.7 Permissible Aggregation Group.
For purposes of this Article XVII, a Permissible Aggregation Group
shall consist of (a) the Required Aggregation Group and (b) any other qualified
plans maintained by the Employer and any Affiliated Employers; provided,
however, that the Permissible Aggregation Group must satisfy the requirements of
Sections 401(a)(4) and 410(b) of the Code.
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Section 17.8 Special Requirements During Top Heavy Plan
Years.
(a) Notwithstanding any other provision of the Plan to the contrary,
for each Top Heavy Plan Year, in the case of a Participant (other than a Key
Employee) on the last day of such Top Heavy Plan Year who is not also a
participant in another qualified plan which satisfies the minimum contribution
and benefit requirements of Section 416 of the Code with respect to such
Participant, the sum of the ESOP Contributions and Loan Repayment Contributions
made with respect to such Participant, when expressed as a percentage of his
Total Compensation for such Top Heavy Plan Year, shall not be less than 3% of
such Participant's Total Compensation for such Top Heavy Plan Year or, if less,
the highest combined rate, expressed as a percentage of Total Compensation at
which ESOP Contributions and Loan Repayment Contributions were made on behalf of
a Key Employee for such Top Heavy Plan Year. The Employer shall make an
additional contribution to the Account of each Participant to the extent
necessary to satisfy the foregoing requirement.
(b) For any Top Heavy Plan Year, the number "1.0" shall be substituted
for the number "1.25" in Sections 8.2(c)(iii) and 8.2(c)(iv), except that:
(i) this Section 17.8(b) shall not apply to any individual for a Top
Heavy Plan Year that is not a Super Top Heavy Plan Year if the requirements of
Section 17.8(a) would be satisfied for such Super Top Heavy Plan Year if the
number "4%" were substituted for the number 3% in Section 17.8(a); and
(ii) this Section 17.8(b) shall not apply to an individual for a Top
Heavy Plan Year if, during such Top Heavy Plan Year, there are no ESOP
Contributions or Loan Repayment Contributions allocated to such individual under
this Plan, there are no contributions under any other qualified defined
contribution plan maintained by the Employer, and there are no accruals for such
individual under any qualified defined benefit plan maintained by the Employer.
For purposes of this Section 17.8(b), the term Super Top Heavy Plan Year means a
Top Heavy Plan Year in which the Plan would meet the definitional requirements
of Sections 17.2(a) or 17.2(b) if the term "90%" were substituted for the term
"60%" in Sections 17.2(a), 17.2(b) and 17.2(c).
ARTICLE XVIII
MISCELLANEOUS PROVISIONS
Section 18.1 Governing Law.
The Plan shall be construed, administered and enforced according to the
laws of the State of New York without giving effect to the conflict of laws
principles thereof, except to the extent that such laws are preempted by federal
law.
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Section 18.2 No Right to Continued Employee.
Neither the establishment of the Plan, nor any provisions of the Plan
or of the Trust Agreement establishing the Trust Fund nor any action of the Plan
Administrator, the Plan Administrator or the Trustee, shall be held or construed
to confer upon any Employee any right to a continuation of employment by the
Employer. The Employer reserves the right to dismiss any Employee or otherwise
deal with any Employee to the same extent as though the Plan had not been
adopted.
Section 18.3 Construction of Language.
Wherever appropriate in the Plan, words used in the singular
may be read in the plural, words used in the plural may be read in the singular,
and words importing the masculine gender may be read as referring equally to the
feminine and the neuter. Any reference to an Article or Section number shall
refer to an Article or Section of the Plan, unless otherwise indicated.
Section 18.4 Headings.
The headings of Articles and Sections are included solely for
convenience of reference. If there is any conflict between such headings and the
text of the Plan, the text shall control.
Section 18.5 Merger With Other Plans.
The Plan shall not be merged or consolidated with, nor transfer its
assets or liabilities to, any other plan unless each Participant, Former
Participant, Beneficiary and other person entitled to benefits, would (if that
plan then terminated) receive a benefit immediately after the merger,
consolidation or transfer which is equal to or greater than the benefit he would
have been entitled to receive if the Plan had terminated immediately before the
merger, consolidation or transfer.
Section 18.6 Non-Alienation of Benefits.
(a) Except as provided in Section 18.6(b), the right to receive a
benefit under the Plan shall not be subject in any manner to anticipation,
alienation or assignment, nor shall such right to be liable for or subject to
debts, contracts, liabilities or torts. Should any Participant, Former
Participant or other person attempt to anticipate, alienate or assign his
interest in or right to a benefit, or should any person claiming against him
seek to subject such interest or right to legal or equitable process, all the
interest or right of such Participant or Former Participant or other person
entitled to benefits in the Plan shall cease, and in that event such interest or
right shall be held or applied, at the direction of the Plan Administrator, for
or to the benefit of such Participant or Former Participant, other person or his
spouse, children or other dependents in such manner and in such proportions as
the Plan Administrator may deem proper.
(b) This Section 18.6 shall not prohibit the Plan Administrator from
recognizing a Domestic Relations Order that is determined to be a Qualified
Domestic Relations Order in accordance with Section 18.7.
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Section 18.7 Procedures Involving Domestic Relations Orders.
Upon receiving a Domestic Relations Order, the Plan
Administrator shall segregate in a separate account or in an escrow account or
separately account for the amounts payable to any person pursuant to such
Domestic Relations Order, pending a determination whether such Domestic
Relations Order constitutes a Qualified Domestic Relations Order, and shall give
notice of the receipt of the Domestic Relations Order to the Participant or
Former Participant and each other person affected thereby. If, within 18 months
after receipt of such Domestic Relations Order, the Plan Administrator, a court
of competent jurisdiction or another appropriate authority determines that such
Domestic Relations Order constitutes a Qualified Domestic Relations Order, the
Plan Administrator shall direct the Trustee to pay the segregated amounts (plus
any interest thereon) to the person or persons entitled thereto under the
Qualified Domestic Relations Order. If it is determined that the Domestic
Relations Order is not a Qualified Domestic Relations Order or if no
determination is made within the prescribed 18-month period, the segregated
amounts shall be distributed as though the Domestic Relations Order had not been
received, and any later determination that such Domestic Relations Order
constitutes a Qualified Domestic Relations Order shall be applied only with
respect to benefits that remain undistributed on the date of such determination.
The Plan Administrator shall be authorized to establish such reasonable
administrative procedures as he deems necessary or appropriate to administer
this Section 18.7. This Section 18.7 shall be construed and administered so as
to comply with the requirements of Section 401(a)(13) of the Code.
Section 18.8 Leased Employees.
(a) Subject to Section 18.8(b), a leased employee shall be treated as
an Employee for purposes of the Plan. For purposes of this Section 18.8, the
term "leased employee" means any person (i) who would not, but for the
application of this Section 18.8, be an Employee and (ii) who pursuant to an
agreement between the Employer and any other person ("leasing organization") has
performed for the Employer (or for the Employer and related persons determined
in accordance with Section 414(n)(6) of the Code), on a substantially full-time
basis for a period of at least one year, services of a type historically
performed by employees in the business field of the Employer.
(b) For purposes of the Plan:
(i) contributions or benefits provided to the leased employee by the
leasing organization which are attributable to services performed for the
Employer shall be treated as provided by the Employer; and
(ii) Section 18.8(a) shall not apply to a leased employee if:
(A) the number of leased employees performing services for the Employer
does not exceed 20% of the number of the Employer's Employees who are not Highly
Compensated Employees; and
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(B) such leased employee is covered by a money purchase pension plan
providing (I) a nonintegrated contribution rate of at least 10% of the leased
employee's compensation; (II) immediate participation; (III) full and immediate
vesting; and (IV) coverage for all of the employees of the leasing organization
(other than employees who perform substantially all of their services for the
leasing organization).
Section 18.9 Status as an Employee Stock Ownership Plan.
It is intended that the Plan constitute an "employee stock ownership
plan," as defined in Section 4975(e)(7) of the Code and Section 407(d)(6) of
ERISA. The Plan shall be construed and administered to give effect to such
intent.
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Exhibit 10.7
CORTLAND SAVINGS BANK
401(k) SAVINGS PLAN
In RSI Retirement Trust
<PAGE>
TABLE OF CONTENTS
Article Title Page
Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . 1
Article I Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Article II Eligibility and Participation
2.1 Eligibility. . . . . . . . . . . . . . . . . . . . . . . .10
2.2 Ineligible Employees . . . . . . . . . . . . . . . . . . .10
2.3 Participation. . . . . . . . . . . . . . . . . . . . . . .10
2.4 Termination of Participation . . . . . . . . . . . . . . .10
2.5 Eligibility upon Reemployment. . . . . . . . . . . . . . .11
Article III Contributions and Limitations on Contributions
3.1 Basic Contributions. . . . . . . . . . . . . . . . . . . .11
3.2 Limitation on Basic Contributions. . . . . . . . . . . . .11
3.3 Changes in Basic Contributions . . . . . . . . . . . . . .12
3.4 Matching Contributions . . . . . . . . . . . . . . . . . .13
3.5 Special Contributions. . . . . . . . . . . . . . . . . . .14
3.6 Cessation of Contributions . . . . . . . . . . . . . . . .14
3.7 Limitation on Matching Contributions . . . . . . . . . . .14
3.8 Aggregate Limit; Multiple Use of Alternative Limitation. .15
3.9 Interest on Excess Contributions . . . . . . . . . . . . .16
3.10 Payment of Contributions to the Trust and the
Separate Agency. . . . . . . . . . . . . . . . . . . . . .17
3.11 Rollover Contributions . . . . . . . . . . . . . . . . . .17
3.12 Section 415 Limits on Contributions. . . . . . . . . . . .18
Article IV Vesting and Forfeitures
4.1 Vesting. . . . . . . . . . . . . . . . . . . . . . . . . .20
4.2 Forfeitures. . . . . . . . . . . . . . . . . . . . . . . .21
4.3 Vesting upon Reemployment. . . . . . . . . . . . . . . . .22
Article V Trust Fund and Separate Assets
5.1 Trust Fund and Separate Assets . . . . . . . . . . . . . .23
5.2 Investment Accounts. . . . . . . . . . . . . . . . . . . .23
5.3 Interim Investments. . . . . . . . . . . . . . . . . . . .24
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5.4 Account Values . . . . . . . . . . . . . . . . . . . . . .24
5.5 Voting Rights. . . . . . . . . . . . . . . . . . . . . . .25
Article Title Page
5.6. Tender Offers and Other Offers . . . . . . . . . . . . . .25
5.7 Dissenters' Rights . . . . . . . . . . . . . . . . . . . .26
5.8 Separate Assets. . . . . . . . . . . . . . . . . . . . . .27
5.9 Power to Invest in Employer Securities . . . . . . . . . .27
Article VI Investment Directions, Changes of Investment Directions and
Transfers Between Investment Accounts
6.1 Investment Directions. . . . . . . . . . . . . . . . . . .27
6.2 Change of Investment Directions. . . . . . . . . . . . . .27
6.3 Transfers Between Investment Accounts. . . . . . . . . . .28
6.4 Employees Other than Participants. . . . . . . . . . . . .28
6.5 Restrictions on Investments in the Employer Stock Fund
for Certain Participants . . . . . . . . . . . . . . . . .29
Article VII Payment of Benefits
7.1 General. . . . . . . . . . . . . . . . . . . . . . . . . .29
7.2 Non-Hardship Withdrawals . . . . . . . . . . . . . . . . .30
7.3 Hardship Distributions . . . . . . . . . . . . . . . . . .30
7.4 Distribution of Benefits Following Retirement or
Termination of Service . . . . . . . . . . . . . . . . . .33
7.5 Payments Upon Retirement or Disability . . . . . . . . . .34
7.6 Payments Upon Termination of Service for Reasons
Other Than Retirement or Disability. . . . . . . . . . . .35
7.7 Payments Upon Death. . . . . . . . . . . . . . . . . . . .35
7.8 Direct Rollover of Eligible Rollover Distributions . . . .37
7.9 Commencement of Benefits . . . . . . . . . . . . . . . . .38
7.10 Manner of Payment of Distributions from the Employer
Stock Fund . . . . . . . . . . . . . . . . . . . . . . . .38
Article VIII Loans to Participant
8.1 Definitions and Conditions . . . . . . . . . . . . . . . .39
8.2 Loan Amount. . . . . . . . . . . . . . . . . . . . . . . .39
8.3 Term of Loan . . . . . . . . . . . . . . . . . . . . . . .39
8.4 Operational Provisions . . . . . . . . . . . . . . . . . .39
8.5 Repayments . . . . . . . . . . . . . . . . . . . . . . . .41
8.6 Default. . . . . . . . . . . . . . . . . . . . . . . . . .42
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8.7 Coordination of Outstanding Account and Payment
Of Benefits. . . . . . . . . . . . . . . . . . . . . . . .43
Article Title Page
Article IX Administration
9.1 General Administration of the Plan . . . . . . . . . . . .43
9.2 Designation of Named Fiduciaries . . . . . . . . . . . . .43
9.3 Responsibilities of Fiduciaries. . . . . . . . . . . . . .44
9.4 Plan Administrator . . . . . . . . . . . . . . . . . . . .44
9.5 Committee. . . . . . . . . . . . . . . . . . . . . . . . .45
9.6 Powers and Duties of the Committee . . . . . . . . . . . .45
9.7 Certification of Information . . . . . . . . . . . . . . .46
9.8 Authorization of Benefit Payments. . . . . . . . . . . . .46
9.9 Payment of Benefits to Legal Custodian . . . . . . . . . .46
9.10 Service in More Than One Fiduciary Capacity. . . . . . . .47
9.11 Payment of Expenses. . . . . . . . . . . . . . . . . . . .47
9.12 Administration of Separate Assets. . . . . . . . . . . . .47
Article X Benefit Claims Procedure
10.1 Definition . . . . . . . . . . . . . . . . . . . . . . . .47
10.2 Claims . . . . . . . . . . . . . . . . . . . . . . . . . .48
10.3 Disposition of Claim . . . . . . . . . . . . . . . . . . .48
10.4 Denial of Claim. . . . . . . . . . . . . . . . . . . . . .48
10.5 Inaction by Plan Administrator . . . . . . . . . . . . . .48
10.6 Right to Full Fair Review. . . . . . . . . . . . . . . . .48
10.7 Time of Review . . . . . . . . . . . . . . . . . . . . . .49
10.8 Final Decision . . . . . . . . . . . . . . . . . . . . . .49
Article XI Amendment, Termination and Withdrawal
11.1 Amendment and Termination. . . . . . . . . . . . . . . . .49
11.2 Withdrawal from the Trust Fund . . . . . . . . . . . . . .50
Article XII Top-Heavy Plan Provisions
12.1 Introduction . . . . . . . . . . . . . . . . . . . . . . .50
12.2 Definitions. . . . . . . . . . . . . . . . . . . . . . . .50
12.3 Limit on Top-Heavy Earnings. . . . . . . . . . . . . . . .53
12.4 Minimum Contributions. . . . . . . . . . . . . . . . . . .53
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12.5 Impact on Section 415 Maximum Benefits . . . . . . . . . .54
Article XIII Miscellaneous Provisions
13.1 No Right to Continued Employment . . . . . . . . . . . . .55
13.2 Merger, Consolidation, or Transfer . . . . . . . . . . . .55
13.3 Nonalienation of Benefits. . . . . . . . . . . . . . . . .55
Article Title Page
13.4 Missing Payee. . . . . . . . . . . . . . . . . . . . . . .55
13.5 Affiliated Employers . . . . . . . . . . . . . . . . . . .55
13.6 Successor Employer . . . . . . . . . . . . . . . . . . . .55
13.7 Return of Employer Contributions . . . . . . . . . . . . .55
13.8 Construction of Language . . . . . . . . . . . . . . . . .56
13.9 Headings . . . . . . . . . . . . . . . . . . . . . . . . .56
13.10 Governing Law . . . . . . . . . . . . . . . . . . . .56
iv
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INTRODUCTION
Effective as of June 1, 1986, Cortland Savings Bank ("Employer") adopted
the Cortland Savings Bank 401(k) Savings Plan in Retirement System for
Savings Institutions ("Plan") and the Retirement System for Savings
Institutions Agreement and Declaration of Trust ("Agreement").
Effective as of January 1, 1987, the Plan is amended and restated in its
entirety to comply with applicable laws. The amended and restated Plan shall
contain the terms and conditions set forth herein, and shall in all respects
be subject to the provisions of the Agreement, which are incorporated herein
and made a part hereof.
Effective as of August 1, 1990, Retirement System for Savings
Institutions effectuated a reorganization through a transfer of its operating
assets and business and certain intangible assets to subsidiaries of a newly
organized corporation, Retirement System Group Inc., in exchange for shares
of the common stock of such company and the spin-off of such company through
the allocation of such shares to the affected organizations participating in
the Trust on such date. Also effective as of August 1, 1990, (a) the Trust
became known as the RSI Retirement Trust; and (b) all investment, advisory,
administrative, distribution and consulting services previously performed by
the Trustees are performed under contracts with the newly organized
corporation and/or its subsidiaries, or such other servicing agencies as may
be selected by the Trustees from time to time.
The Plan shall constitute a profit-sharing plan within the meaning of
Section 401(a) of the Internal Revenue Code of 1986, as amended ("Code").
Subject to any amendments that may subsequently be adopted by the
Employer pursuant to Section 11.1, the provisions set forth in this Plan
shall apply to any Employee who is in the employment of the Employer on or
after January 1, 1987. Except to the extent specifically required to the
contrary under the terms of this Plan, for terminations of employment prior
to January 1, 1987, the rights and benefits of a former participant shall be
determined in accordance with the provisions of the Plan as in effect on the
date of the former participant's termination of employment.
Effective July 9, 1991, Units of Investment Account RS were sold
pursuant to the authority set forth in the Agreement and as of such date,
Investment Account RS was terminated and the value of Units held on behalf of
a Participant or Beneficiary in Investment Account RS was invested as if such
amount was a contribution to be invested in accordance with Section 6.1.
Effective as of the Conversion Date (the date of conversion of the
Employer from mutual to stock ownership), the Employer adopted resolutions
which (i) added an investment fund to the Plan consisting of common stock of
CNY Financial Corporation and (ii) established the Plan as a Plan of Partial
Participation as defined under the Agreement. In conjunction with such
resolutions, the Employer adopted a Separate Agreement to provide for the
investment of such common stock and designated a Separate Agency to act as
trustee/custodian of such Separate Assets.
The Employer has established, and from time to time amended, the Plan
with the intention that (a) the Plan shall at all times be qualified under
Section 401(a) of the Code, (b) the Agreement and the Separate Agreement
shall be tax-exempt under Section 501(a) of the Code, and (c) Employer
contributions under the Plan shall be tax deductible under Section 404 of the
Code. The provisions of the
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Plan, the Agreement and the Separate Agreement shall be construed to effectuate
such intentions.
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ARTICLE I
Definitions
The following words and phrases shall have the meanings hereinafter
ascribed to them. Those words and phrases which have limited application are
defined in the respective Articles in which such terms appear.
1.1 Accounts means the Basic Contribution Account (including Special
Contributions, if any), Matching Contribution Account and Rollover
Contribution Account established under the Plan on behalf of an Employee.
1.2 Actual Contribution Percentage means the ratio (expressed as a
percentage) of the Matching Contributions under the Plan which are made on
behalf of an Eligible Employee for the Plan Year to such Eligible Employee's
compensation (as defined under Section 414(s) of the Code) for the Plan Year.
Commencing January 1, 1989, an Eligible Employee's compensation hereunder
shall include compensation receivable from the Employer for that portion of
the Plan Year during which the Employee is an Eligible Employee, up to a
maximum of $200,000, adjusted as prescribed by the Secretary of the Treasury
under Section 401(a)(17) of the Code. Commencing January 1, 1994, the amount
of compensation taken into account for a Plan Year shall not exceed $150,000,
adjusted in multiples of $10,000 for increases in the cost-of-living as
prescribed by the Secretary of the Treasury under Section 401(a)(17)(B) of
the Code. In determining compensation, the rules of Section 414(q)(6) of the
Code shall apply except that the term "family" shall include only the spouse
and those lineal descendants of the Employee who have not attained age
nineteen (19) before the close of the Plan Year.
1.3 Actual Deferral Percentage means the ratio (expressed as a
percentage) of the sum of Basic Contributions, and those Qualified
Nonelective Contributions taken into account under the Plan for the purpose
of determining the Actual Deferral Percentage, which are made on behalf of an
Eligible Employee for the Plan Year to such Eligible Employee's compensation
(as defined under Section 414(s) of the Code) for the Plan Year. Commencing
January 1, 1989, an Eligible Employee's compensation hereunder shall include
compensation receivable from the Employer for that portion of the Plan Year
during which the Employee is an Eligible Employee, up to a maximum of
$200,000, adjusted as prescribed by the Secretary of the Treasury under
Section 401(a)(17) of the Code. Commencing January 1, 1994, the amount of
compensation taken into account for a Plan Year shall not exceed $150,000,
adjusted in multiples of $10,000 for increases in the cost-of-living as
prescribed by the Secretary of the Treasury under Section 401(a)(17)(B) of
the Code. In determining compensation, the rules of Section 414(q)(6) of the
Code shall apply except that the term "family" shall include only the spouse
and those lineal descendants of the Employee who have not attained age
nineteen (19) before the close of the Plan Year.
1.4 Affiliated Employer means a member of an affiliated service group
(as defined under Section 414(m) of the Code), a controlled group of
corporations (as defined under Section 414(b) of the Code), a group of trades
or businesses under common control (as defined under Section 414(c) of the
Code) of which the Employer is a member, any leasing organization (as defined
under Section 414(n) of the Code) providing the services of Leased Employees
to the Employer, or any other group provided for under any and all Income Tax
Regulations promulgated by the Secretary of the Treasury under Section 414(o)
of the Code.
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1.5 Affiliated Service means employment with an employer during the
period that such employer is an Affiliated Employer.
1.6 Agreement means the Retirement System for Savings Institutions
Agreement and Declaration of Trust as amended and restated August 31, 1984,
as amended from time to time. Commencing August 1, 1990, Agreement means the
RSI Retirement Trust Agreement and Declaration of Trust as amended and
restated August 1, 1990, as amended from time to time. The Agreement shall
be incorporated herein and constitute a part of the Plan.
1.7 Average Actual Contribution Percentage means the average of the
Actual Contribution Percentages of (a) the group comprised of Eligible
Employees who are Highly Compensated Employees or (b) the group comprised of
Eligible Employees who are Non-Highly Compensated Employees, whichever is
applicable.
1.8 Average Actual Deferral Percentage means the average of the Actual
Deferral Percentages of (a) the group comprised of Eligible Employees who are
Highly Compensated Employees or (b) the group comprised of Eligible Employees
who are Non-Highly Compensated Employees, whichever is applicable.
1.9 Basic Contribution Account means the separate, individual account
established on behalf of a Participant to which Basic Contributions and
Special Contributions made on his behalf are credited, together with all
earnings and appreciation thereon, and against which are charged any
withdrawals, loans and other distributions made from such account and any
losses, depreciation or expenses allocable to amounts credited to such
account.
1.10 Basic Contributions means the contributions of the Employer made In
accordance with the Compensation Reduction Agreements of Participants
pursuant to Section 3.1.
1.11 Beneficiary means any person who is receiving or is eligible to
receive a benefit under Section 7.7 of the Plan upon the death of an Employee
or former Employee.
1.12 Board means the board of trustees, directors or other governing
body of the Employer.
1.13 Code means the Internal Revenue Code of 1986, as amended from time
to time.
1.14 Committee means the person or persons appointed by the Employer in
accordance with Section 9.2(b).
1.15 Company means CNY Financial Corporation or any successor
organization.
1.16 Compensation means the base compensation receivable by an Employee
from the Employer for the calendar year prior to any reduction pursuant to a
Compensation Reduction Agreement. Base compensation shall include salary,
Basic Contributions, wages and wage continuation payments to an Employee who
is absent due to illness or disability of a short-term nature, and exclude
overtime, commissions, expense allowances, severance pay, fees, bonuses,
contributions other than Basic Contributions made by the Employer to the
Plan, and contributions made by the Employer to any other pension, insurance,
welfare, or other employee benefit plan.
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For any Plan Year commencing on or after January 1, 1989, Compensation
shall not exceed $200,000, adjusted as prescribed by the Secretary of the
Treasury under Section 401(a)(17) of the Code. Commencing January 1, 1994,
compensation shall not exceed $150,000, adjusted in multiples of $10,000 for
increases in the cost-of-living as prescribed by the Secretary of the
Treasury under Section 401(a)(17)(B) of the Code. In determining the dollar
limitation hereunder, compensation received from any Affiliated Employer
shall be recognized as Compensation and the rules of Section 414(q)(6) of the
Code shall apply except that the term "family" shall include only the Spouse
and those lineal descendants of the Employee who have not attained age
nineteen (19) before the close of the Plan Year.
1.17 Compensation Reduction Agreement means an agreement between the
Employer and an Eligible Employee whereby the Eligible Employee agrees to
reduce his Compensation during the applicable payroll period by an amount
equal to any whole percentage thereof and the Employer agrees to contribute
to the Trust, on behalf of such Eligible Employee, an amount equal to the
specified reduction In Compensation.
1.18 Conversion Date means the date of the conversion of the Employer
from mutual to stock ownership.
1.19 Disability means a physical or mental condition, determined after
review of those medical reports deemed satisfactory for this purpose, which
renders the Participant totally and permanently incapable of engaging in any
substantial gainful employment based on his education, training and
experience.
1.20 Early Retirement Date means the first day of any month coincident
with or following the date the Participant completes a minimum of five (5)
consecutive years of Credited Service, provided that (a) the Participant has
attained age sixty (60) or (b) the Participant has completed thirty (30) or
more years of Vested Service. For purposes of this Section 1.20, credited
service and vested service mean credited service and vested service as
defined in the Employer's defined benefit retirement plan.
1.21 Effective Date means June 1, 1986.
1.22 Eligible Employee means an Employee who is eligible to participate
in the Plan pursuant to the provisions of Article II.
1.23 Employee means any person employed by the Employer.
1.24 Employer means Cortland Savings Bank or any successor organization
which shall continue to maintain the Plan set forth herein.
1.25 Employer Resolutions means resolutions adopted by the Board.
1.26 Employer Stock Fund means, commencing on the Conversion Date, the
Separate Assets consisting of common stock of the Company which shall be
maintained in an Investment Account established for such purpose.
1.27 Employment Commencement Date means the date on which an Employee
first performs
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an Hour of Service for the Employer upon initial employment or, if applicable,
upon reemployment.
1.28 ERISA means the Employee Retirement Income Security Act of 1974, as
amended from time to time.
1.29 Forfeitures means any amounts forfeited pursuant to Section 4.2 by
a Participant whose Termination of Service occurs prior to such Participant's
being fully vested in the Net Value of his Account.
1.30 Hardship means the condition described in Section 7.3.
1.31 Highly Compensated Employee means, with respect to a Plan Year, an
Employee or an employee of an Affiliated Employer who is such an Employee or
employee during the Plan Year for which a determination is being made and who:
(a) during the Plan Year immediately preceding the Plan Year for which a
determination is being made:
(i) received compensation as defined under Section 414(q)(7) of the Code
("Section 414(q) Compensation") from the Employer of greater than $75,000,
adjusted as prescribed by the Secretary of the Treasury under Section
415(d) of the Code, or
(ii) received Section 414(q) Compensation from the Employer of greater than
$50,000, adjusted as prescribed by the Secretary of the Treasury under
Section 415(d) of the Code, and was a member of the top-paid group of
Employees (as defined under Section 414(q)(4) of the Code) ("Top-Paid
Group"), or
(iii) was an officer (as determined in accordance with Section 414(q)(5) of
the Code) of the Employer who received Section 414(q) Compensation from the
Employer of greater than fifty percent (50%) of the dollar limitation in
effect under Section 415(b)(1)(A) of the Code, or if no such officer of the
Employer satisfied such compensation requirement, was the highest paid
officer for such year, or
(b) during the Plan Year for which a determination is being made,
satisfies the requirements of subsection (a)(i), (ii) or (iii) above,
determined without regard to "during the Plan Year immediately preceding
the Plan Year for which a determination is made", and is a member of the
group consisting of the one-hundred (100) Employees receiving the highest
Section 414(q) Compensation from the Employer during such Plan Year ("Top
100 Employees"), or (c) at any time during the Plan Year for which a
determination is being made or at any time during the Plan Year immediately
preceding the Plan Year for which a determination is being made, was a
five-percent owner as described under Section 414(q)(3) of the Code.
Highly Compensated Employee also means a former Employee who (A)
incurred a Termination of Service prior to the Plan Year of the
determination, (B) is not credited with an Hour of Service during the Plan
Year of the determination and (C) satisfied the requirements of subsection
(a), (b) or (c) above during either the Plan Year of his Termination of
Service or any Plan Year ending coincident with or subsequent to the
Employee's attainment of age fifty-five (55).
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If, during either the Plan Year of the determination or the preceding
Plan Year, an Employee is a Family Member of either (1) a five-percent owner
(as defined under Section 414(q)(3) of the Code), or (2) a Highly Compensated
Employee who is among the ten (10) highly compensated Employees receiving the
highest Section 414(q) Compensation from the Employer during such Plan Year,
the Section 414(q) Compensation and the Accounts of the Family Member shall
be aggregated with the Section 414(q) Compensation and the Accounts of such
Highly Compensated Employee and the Family Member and the Highly Compensated
Employee shall be treated as a single Employee. For purposes of this Section
1.31, Family Member includes the Spouse, lineal ascendants and descendants of
the Employee or former Employee and the spouse of a lineal ascendant or
descendant.
The determination of the number and identity of Employees in the
Top-Paid Group, the Top 100 Employees, and the number of Employees treated as
officers shall be made in accordance with Section 414(q) of the Code and
regulations promulgated thereunder by the Secretary of the Treasury.
1.32 Hour of Service means each hour for which an Employee is paid or
entitled to be paid by the Employer for the performance of duties.
1.33 Investment Accounts means, prior to April 28, 1995, any and all of
the investment accounts described in Section 5.2. Commencing April 28, 1995,
Investment Accounts means any and all of the investment accounts established
by Board resolution and presented to the Trustees, for the purpose of
investing contributions made to the Plan Funds in accordance with the
provisions of the Agreement or Separate Agreement, as applicable. The
securities and other property in which contributions to the Investment
Accounts of the Plan Funds may be invested shall be specified in the
Agreement or the Separate Agreement, and the rights of the Trustees or
Separate Agency shall be established in accordance with the provisions of
such Agreement and Separate Agreement, respectively.
1.34 Leased Employee means any individual (other than an Employee of the
Employer or an employee of an Affiliated Employer) who, pursuant to an
agreement between the Employer or any Affiliated Employer and any other
person ("leasing organization"), has performed services for the Employer or
any Affiliated Employer on a substantially full-time basis for a period of at
least one (1) year, and such services are of a type historically performed by
employees in the business field of the Employer or any Affiliated Employer.
A determination as to whether a Leased Employee shall be treated as an
Employee of the Employer or an Affiliated Employer shall be made in
accordance with Section 414(n) of the Code and any and all Income Tax
Regulations promulgated thereunder.
1.35 Matching Contribution Account means the separate, individual
account established on behalf of a Participant to which the Matching
Contributions made on such Participant's behalf are credited, together with
all earnings and appreciation thereon, and against which are charged any
withdrawals, loans and other distributions made from such account and any
losses, depreciation or expenses allocable to amounts credited to such
account.
1.36 Matching Contributions means the contributions made by the Employer
pursuant to Section 3.4.
1.37 Named Fiduciaries means the Trustees, the Committee and commencing
on the Conversion Date, the Separate Agency and such other parties who are
designated by the Employer to
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control and manage the operation and administration of the Plan.
1.38 Net Value means the value of an Employee's Accounts as determined
as of the Valuation Date coincident with or next following the event
requiring such determination.
1.39 Non-Highly Compensated Employee means, with respect to a Plan Year, an
Employee who is neither a Highly Compensated Employee nor a family member
as provided in Section 414(q)(6) of the Code.
1.40 Normal Retirement Age means the date an Employee attains age
sixty-five (65).
1.41 Normal Retirement Date means the first day of the month coincident
with or next following the Participant's Normal Retirement Age.
1.42 One Year Period of Severance means a twelve (12) consecutive month
period following an Employee's Termination of Service with the Employer
during which the Employee did not perform an Hour of Service.
Notwithstanding the foregoing, if an Employee is absent from employment
for maternity or paternity reasons, such absence during the twenty-four (24)
month period commencing on the first date of such absence shall not
constitute a One Year Period of Severance. An absence from employment for
maternity or paternity reasons means an absence (a) by reason of pregnancy of
the Employee, or (b) by reason of a birth of a child of the Employee, or (c)
by reason of the placement of a child with the Employee in connection with
the adoption of such child by such Employee, or (d) for purposes of caring
for such child for a period beginning immediately following such birth or
placement.
1.43 Participant means an Eligible Employee who, in accordance with the
provisions of Section 2.3, has elected to participate in the Plan and whose
participation in the Plan has not been terminated in accordance with the
provisions of Section 2.4.
1.44 Period of Service means a period commencing with an Employee's
Employment Commencement Date and ending on the date such Employee first
incurs a Termination of Service.
Notwithstanding the foregoing, the period between the first and second
anniversary of the first date of a maternity or paternity absence described
under Section 1.42 shall not be included in determining a Period of Service.
A period during which an individual was not employed by the Employer
shall nevertheless be deemed to be a Period of Service if such individual
incurred a Termination of Service and:
(a) such Termination of Service was the result of resignation, discharge
or retirement and such individual is reemployed by the Employer within one
(1) year after such Termination of Service; or
(b) such Termination of Service occurred when the individual was otherwise
absent for less than one (1) year and he was reemployed by the Employer
within one (1) year after the date such absence began.
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All Periods of Service not disregarded under Sections 2.5 and 4.3 shall
be aggregated.
Wherever used in the Plan, a Period of Service means the quotient
obtained by dividing the days in all Periods of Service not disregarded
hereunder by 365 and disregarding any fractional remainder.
1.45 Plan means the Cortland Savings Bank 401(k) Savings Plan in
Retirement System for Savings Institutions, as amended from time to time.
Commencing August 1, 1990, the name of the Plan shall be the Cortland Savings
Bank 401(k) Savings Plan in RSI Retirement Trust. Commencing on the
Conversion Date, the Plan shall be a Plan of Partial Participation as defined
under the Agreement.
1.46 Plan Administrator means the person or persons who have been
designated as such by the Employer in accordance with the provisions of
Section ___.
1.47 Plan Funds means the assets of the Plan held in the Trust Fund and
Separate Assets held under any Separate Agreement.
1.48 Plan Year means the calendar year.
1.49 Postponed Retirement Date means the first day of the month
coincident with or next following a Participant's date of actual retirement
which occurs after his Normal Retirement Date.
1.50 Qualified Nonelective Contributions means contributions, other than
Matching Contributions, made by the Employer, which (a) Participants may not
elect to receive in cash in lieu of their being contributed to the Plan; (b)
are 100% nonforfeitable when made; and (c) are not distributable under the
terms of the Plan to Participants or their Beneficiaries until the earliest
of:
(i) the Participant's death, Disability or separation from service for
other reasons;
(ii) the Participant's attainment of age 59-1/2;
(iii)termination of the Plan; or
(iv) during Plan Years which commence prior to January 1, 1989, Hardship of
the Participant determined in accordance with the provisions of Section
7.3.
Special Contributions defined in Section 1.52 are Qualified Nonelective
Contributions.
1.51 Restatement Date means January 1, 1987.
1.52 Retirement Date means the Participant's Normal Retirement Date,
Early Retirement Date or Postponed Retirement Date, whichever is applicable.
1.53 Rollover Contribution means a contribution to the Plan of money
received by an Employee from a qualified plan which the Code permits to be
rolled over into the Plan.
1.54 Rollover Contribution Account means the separate, individual
account established on behalf of an Employee to which his Rollover
Contributions are credited together with all earnings and appreciation
thereon, and against which are charged any withdrawals, loans and other
distributions made
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from such account and any losses, depreciation or expenses allocable to amounts
credited to such account.
1.55 Separate Agency means a trustee or a custodian holding Plan Funds
that maintains a Separate Agreement.
1.56 Separate Agreement means the agreement between the Employer and a
trustee or a custodian to provide for the investment in common stock of the
Company. Such Separate Agreement shall be incorporated herein and constitute
a part of the Plan.
1.57 Separate Assets means assets of the Plan as described in Article V
which are held other than under the Trust.
1.58 Special Contributions means the contributions made by the Employer
pursuant to Section 3.5. Special Contributions are Qualified Nonelective
Contributions as defined in Section 1.50.
1.59 Spouse means a person to whom the Employee was legally married and
which marriage had not been dissolved by formal divorce proceedings that had
been completed prior to the date on which payments to the Employee are
scheduled to commence.
1.60 Termination of Service means the earlier of (a) the date on which
an Employee's service is terminated by reason of his resignation, retirement,
discharge, death or Disability or (b) the first anniversary of the date on
which such Employee's service is terminated for layoff or any other reason.
Service in the Armed Forces of the United States shall not constitute a
Termination of Service but shall be considered to be a period of employment
by the Employer provided that (I) such military service is caused by war or
other emergency or the Employee is required to serve under the laws of
conscription in time of peace, (II) the Employee returns to employment with
the Employer within six (6) months following discharge from such military
service and (III) such Employee is reemployed by the Employer at a time when
the Employee had a right to reemployment at his former position or
substantially similar position upon separation from such military duty in
accordance with seniority rights as protected under the laws of the United
States. A leave of absence granted to an Employee by the Employer shall not
constitute a Termination of Service provided that the Participant returns to
the active service of the Employer at the expiration of any such period for
which leave has been granted.
Notwithstanding the foregoing, an Employee who is absent from service
with the Employer beyond the first anniversary of the first date of his
absence for maternity or paternity reasons set forth in Section 1.42 shall
incur a Termination of Service for purposes of the Plan on the second
anniversary of the date of such absence.
1.61 Trust means the trust established or maintained under the Agreement
with respect to the Plan.
1.62 Trust Fund means the assets held in accordance with the Agreement.
1.63 Trustees means the Trustees of the Retirement System for Savings
Institutions. Commencing August 1, 1990, Trustees means the Trustees of the
RSI Retirement Trust.
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1.64 Units means the units of measure of an Employee's proportionate
undivided beneficial interest in one or more of the Investment Accounts,
valued as of the close of business.
1.65 Valuation Date means each business day.
ARTICLE II
Eligibility and Participation
2.1 Eligibility
(a) Every Employee who was a Participant in the Plan immediately prior to
the Restatement Date shall continue to be a Participant on the Restatement Date.
(b) Every other Employee who is not excluded under the provisions of
Section 2.2 shall become an Eligible Employee upon satisfying all of the
following conditions:
(i) completion of a Period of Service of one (1) year;
(ii) attainment of age twenty-one (21); and
(iii) classification as a salaried Employee.
(c) For purposes of determining if an Employee completed a Period of
Service of one (1) year, employment with an Affiliated Employer shall be
deemed employment with the Employer.
(d) An employee who otherwise satisfied the requirements of this
Section 2.1 but who is excluded under the provisions of Section 2.2 shall
become an Eligible Employee immediately upon classification as an Employee
under the provisions of Section 2.1(b)(iii).
2.2 Ineligible Employees
The following classes of Employees are ineligible to participate in the
Plan:
(a) Employees compensated on an hourly, daily, commission, fee, or
retainer basis;
(b) Leased Employees;
(c) Employees in a unit of Employees covered by a collective bargaining
agreement with the Employer pursuant to which employee benefits were the
subject of good faith bargaining and which agreement does not expressly
provide that Employees of such unit be covered under the Plan; and
(d) Owner-Employees. For purposes of this Section 2.2(d),
Owner-Employee means an individual who is a sole proprietor or who is a
partner owning more than ten percent (10%) of either the capital or profits
interest of a partnership which adopted the Plan.
2.3 Participation
Participation in the Plan is voluntary. An Eligible Employee may elect
to participate as of the first day of any payroll period of any calendar
month following satisfaction of the eligibility requirements set forth in
Section 2.1. Such election shall be evidenced by completing and filing the
form prescribed by the Committee not less than ten (10) days prior to the
date participation is to commence. Such form shall
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Include, but not be limited to, a Compensation Reduction Agreement, a
designation of Beneficiary, and an investment direction as described in Section
6.1. By completing and filing such form, the Eligible Employee authorizes the
Employer to make the applicable payroll deductions from Compensation, commencing
on the first applicable payday coincident with or next following the effective
date of the Eligible Employee's election to participate.
2.4 Termination of Participation
Participation in the Plan shall terminate on the earlier of the date a
Participant dies or the entire vested interest in the Net Value of such
Participant's Accounts has been distributed.
2.5 Eligibility upon Reemployment
If an Employee incurs a One Year Period of Severance prior to satisfying
the eligibility requirements of Section 2.1, service prior to such One Year
Period of Severance shall be disregarded and such Employee must satisfy the
eligibility requirements of Section 2.1 as a new Employee.
If an Employee incurs a One Year Period of Severance after satisfying
the eligibility requirements of Section 2.1 and:
(a) if such Employee is not vested in any Matching Contributions,
incurs a One Year Period of Severance and again performs an Hour of Service,
the Employee shall receive credit for Periods of Service prior to a One Year
Period of Severance only if the number of consecutive One Year Periods of
Severance is less than the greater of: (i) five (5) years or (ii) the
aggregate number of such Employee's Periods of Service credited before his
One Year Period of Severance. If such former Employee's Periods of Service
prior to his One Year Period of Severance are recredited under this Section
2.5, such former Employee shall be eligible to participate immediately upon
reemployment, provided such Employee is not excluded from participating under
the provisions of Section 2.2. If such former Employee's Periods of Service
prior to his One Year Period of Severance are not recredited under this
Section 2.5, such Employee must satisfy the eligibility requirements of
Section 2.1 as a new Employee;
(b) if such Employee is vested in any Matching Contributions, incurs a One
Year Period of Severance and again performs an Hour of Service, the
Employee shall receive credit for Periods of Service prior to his One
Year Period of Severance and shall be eligible to participate in the
Plan immediately upon reemployment, provided such Employee is not
excluded from participating under the provisions of Section 2.2.
ARTICLE III
Contributions and Limitations on Contributions
3.1 Basic Contributions
The Employer shall make Basic Contributions for each payroll period in
an amount equal to the amount by which a Participant's Compensation has been
reduced with respect to such period under his Compensation Reduction
Agreement. Subject to the limitations set forth in Sections 3.2 and 3.11, the
amount of reduction authorized by the Eligible Employee shall not be less
than 2% nor greater than 6%. Commencing January 1, 1997, subject to the
limitations set forth in Sections 3.2 and 3.12, the amount of reduction
authorized by the Eligible Employee shall not be less than two percent (2%)
nor greater than ten percent (10%). The Basic Contributions made on behalf
of a Participant shall be credited to such Participant's Basic Contribution
Account and shall be invested in accordance with Article VI of the Plan.
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3.2 Limitation on Basic Contributions
(a) The percentage of Basic Contributions made on behalf of a
Participant who is a Highly Compensated Employee shall be limited so that the
Average Actual Deferral Percentage for the group of such Highly Compensated
Employees for the Plan Year does not exceed the greater of:
(i) the Average Actual Deferral Percentage for the group of
Eligible Employees who are Non-Highly Compensated Employees for the Plan Year
multiplied by 1.25; or
(ii) the Average Actual Deferral Percentage for the group of
Eligible Employees who are Non-Highly Compensated Employees for the Plan
Year, multiplied by two (2); provided that the difference in the Average
Actual Deferral Percentage for eligible Highly Compensated Employees and
eligible Non-Highly Compensated Employees does not exceed two percent (2%).
Commencing January 1, 1989, use of this alternative limitation shall be
subject to the provisions of Income Tax Regulations Section 1.401(m)-2
regarding the multiple use of the alternative deferral tests set forth in
Sections 401(k) and 401(m) of the Code.
If the Average Actual Deferral Percentage for the group of eligible
Highly Compensated Employees exceeds the limitations set forth in the
preceding paragraph, the amount of excess Basic Contributions for a Highly
Compensated Employee shall be determined by "leveling" the highest Actual
Deferral Percentage until the Average Actual Deferral Percentage for the
group of eligible Highly Compensated Employees complies with such
limitations. For purposes of this paragraph, "leveling" means reducing the
Actual Deferral Percentage of the Highly Compensated Employee with the
highest Actual Deferral Percentage to the extent required to: (A)
enable the Average Actual Deferral Percentage limitations to be met, or
(B) cause such Highly Compensated Employee's Actual Deferral Percentage
to equal the Actual Deferral Percentage of the Highly Compensated Employee
with the next highest Actual Deferral Percentage and repeating such process
until the Average Actual Deferral Percentage for the group of eligible Highly
Compensated Employees complies with the Average Actual Deferral Percentage
limitations.
If Basic Contributions made on behalf of a Participant during any Plan
Year exceed the maximum amount applicable to a Participant as set forth
above, any such contributions, including any earnings thereon as determined
under Section 3.9, shall be characterized as Compensation payable to the
Participant and shall be paid to the Participant from his Basic Contribution
Account no later than two and one-half (271/2) months after the close of such
Plan Year.
(b) Basic Contributions made on behalf of any Participant during any
Plan Year shall not exceed $7,000, adjusted as prescribed by the Secretary of
the Treasury under Section 415(d) of the Code for Plan Years beginning after
December 31, 1987. For Plan Years commencing after December 31, 1988, Basic
Contributions and elective deferrals (as defined In Section 402(g) of the
Code) under all other plans, contracts or arrangements of the Employer shall
not exceed $7,000, adjusted as prescribed by the Secretary of the Treasury
under Section 415(d) of the Code.
(c) If Basic Contributions made on behalf of a Participant during any
Plan Year exceed the dollar limitation set forth In subsection (b), such
contributions, including any earnings thereon as determined under Section
3.9, shall be characterized as Compensation payable to the Participant and
shall be paid to the
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Participant from his Basic Contribution Account no later than April 15th of the
calendar year following the close of such Plan Year.
(d) Subject to the requirements of Sections 401(a) and 401(k) of the
Code, the maximum amounts under subsections (a) and (b) may differ in amount
or percentage as between individual Participants or classes of Participants,
and any Compensation Reduction Agreement may be terminated, amended, or
suspended without the consent of any such Participant or Participants In
order to comply with the provisions of such subsections (a) and (b).
3.3 Changes in Basic Contributions
Unless (a) an election is made to the contrary, or (b) a Participant
receives a Hardship distribution pursuant to Section 7.3(c)(iii), the
percentage of Basic Contributions made under Section 3.1 shall continue in
effect so long as the Participant has a Compensation Reduction Agreement in
force. A Participant may, by completing the applicable form, prospectively
increase or decrease the rate of Basic Contributions made on his behalf to
any of the percentages authorized under Section 3.1 or suspend Basic
Contributions without withdrawing from participation in the Plan. Such form
must be filed at least ten (10) days prior to the first day of the payroll
period with respect to which such change is to become effective. A
Participant who has Basic Contributions made on his behalf suspended may
resume such contributions by completing and filing the applicable form. Only
twice in any Plan Year may an election be made which would prospectively
increase, decrease, suspend or resume Basic Contributions made on behalf of a
Participant.
Notwithstanding the foregoing, a Participant who receives a Hardship
distribution pursuant to Section 7.3(c)(iii) shall have his Compensation
Reduction Agreement deemed null and void and all Basic Contributions made on
behalf of such Participant shall be suspended until the later to occur of:
(i) twelve (12) months after receipt of the Hardship distribution and (ii)
the first payroll period which occurs ten (10) days following the completion
and filing of a Compensation Reduction Agreement authorizing the resumption
of Basic Contributions to be made on his behalf. Basic Contributions
following a Hardship distribution made pursuant to Section 7.3(c)(iii) shall
be subject to the following limitations:
(A) Basic Contributions for the Participant's taxable year immediately
following the taxable year of the Hardship distribution shall not exceed the
applicable limit under Section 402(g) of the Code for such next taxable year
less the amount of such Participant's Basic Contributions for the taxable
year of the Hardship distribution, and
(B) the percentage of Basic Contributions for the twelve (12) month
period following the mandatory twelve (12) month suspension period shall not
exceed the percentage of Basic Contributions made on behalf of the
Participant as set forth in the last Compensation Reduction Agreement in
effect prior to the Hardship distribution.
Basic Contributions based an Compensation for the period during which
such contributions had been suspended or decreased may not be made up at a
later date.
3.4 Matching Contributions
(a) The Employer shall, out of its current or accumulated earnings or
profits, make contributions on behalf of each Participant in an amount equal
to 50% of such Participant's Basic Contributions up to a maximum of 3% of the
Participant's Compensation.
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Commencing January 1, 1989, the Employer shall make contributions on
behalf of each Participant in an amount equal to 75% of such Participant's
Basic Contributions up to a maximum of 4.5% of the Participant's Compensation.
(b) Matching Contributions shall be credited to the Participant's
Matching Contribution Account and shall be Invested in accordance with
Article VI, of the Plan.
(c) If a Participant terminates his Basic Contributions, Matching
Contributions attributable to such contributions will also cease. If Basic
Contributions are suspended, the Matching Contributions attributable to such
contributions will be suspended for the same period. Subject to the
limitations set forth in subsection (a), if Basic Contributions are increased
or decreased, Matching Contributions attributable to such contributions will
be increased or decreased during the same period. Matching Contributions for
the period during which Basic Contributions had been suspended or decreased
may not be made up at a later date.
(d) Matching Contributions will be reviewed at least once during the
Plan Year and may be modified by the Employer's Board.
3.5 Special Contributions
In addition to any other contributions, the Employer may, in its
discretion, make Special Contributions for a Plan Year, to the Basic
Contribution Account of any Eligible Employees. Such Special Contributions
may be limited to the amount necessary to insure that the Plan complies with
the requirements of Section 401(k) of the Code.
Prior to January 1, 1989, the Employer may provide that Special
Contributions be made only on behalf of each Participant who (a) is a
Non-Highly Compensated Employee, and (b) is a Participant with a Compensation
Reduction Agreement in effect on the last day of the Plan Year. Such Special
Contributions shall be allocated in proportion to each such Participant's
Basic Contributions for such Plan Year.
Commencing January 1, 1989, the Employer may provide that Special
Contributions be made only on behalf of each Eligible Employee who is a
Non-Highly Compensated Employee on the last day of the Plan Year. Such
Special Contributions shall be allocated in proportion to each such Eligible
Employee's Compensation for the Plan Year.
Any other provision of the Plan to the contrary notwithstanding, no
Matching Contributions shall be made with respect to any Special
Contributions.
3.6 Cessation of Contributions
If the Employer shall determine at any time that the current or
accumulated earnings or profits of the Employer are insufficient to pay the
full amount of contributions required under this Article III in a Plan Year,
the Employer may reduce or cease, whichever is applicable, Matching
Contributions.
3.7 Limitation on Matching Contributions
The Actual Contribution Percentage made on behalf of a Participant who
is a Highly Compensated Employee shall be limited so that the Average Actual
Contribution Percentage for the group of such Highly Compensated Employees
for the Plan Year shall not exceed the greater of:
(a) the Average Actual Contribution Percentage for the group of
Eligible Employees who are
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Non-Highly Compensated Employees for the Plan Year multiplied by 1.25; or
(b) the Average Actual Contribution Percentage for the group of Eligible
Employees who are Non-Highly Compensated Employees for the Plan Year, multiplied
by two (2); provided that the difference in the Average Actual Contribution
Percentage for Highly Compensated Employees and Non-Highly Compensated Employees
does not exceed two percent (2%). Commencing January 1, 1989, use of this
alternative limitation shall be subject to the provisions of Income Tax
Regulations Section 1.401(m)-2 regarding the multiple use of the alternative
deferral tests set forth in Sections 401(k) and 401(m) of the Code.
If the Average Actual Contribution Percentage for the group of eligible
Highly Compensated Employees exceeds the limitations set forth in the
preceding paragraph, the amount of excess Matching Contributions for a Highly
Compensated Employee shall be determined by "leveling" the highest Actual
Contribution Percentage until the Average Actual Contribution Percentage for
the group of eligible Highly Compensated Employees complies with such
limitations. For purposes of this paragraph, "leveling" means reducing the
Actual Contribution Percentage of the Highly Compensated Employee with the
highest Actual Contribution Percentage to the extent required to:
(i) enable the Average Actual Contribution Percentage limitations to be
met, or
(ii) cause such Highly Compensated Employee's Actual Contribution
Percentage to equal the Actual Contribution Percentage of the Highly
Compensated Employee with the next highest Actual Contribution Percentage and
repeating such process until the Average Actual Contribution Percentage for
the group of eligible Highly Compensated Employees complies with the Average
Actual Contribution Percentage limitations.
If Matching Contributions during any Plan Year exceed the maximum amount
applicable to a Participant as set forth above, any such contributions,
including any earnings thereon as determined under Section 3.9, shall, to the
extent vested, be characterized as Compensation payable to the Participant
and any such vested Matching Contribution, including earnings thereon as
determined under Section 3.9, shall be paid to the Participant from the
applicable Account no later than two and one-half (2-1/2) months after the
close of such Plan Year.
In the event that the Plan satisfies the requirements of Section 410(b)
of-the Code only if aggregated with one or more other plans, or if one or
more other plans satisfy the requirements of Section 410(b) of the Code only
if aggregated with the Plan, then this Section 3.7 shall be applied by
determining the Actual Contribution Percentages of Eligible Employees as if
all such plans were a single plan.
3.8 Aggregate Limit; Multiple Use of Alternative Limitation
Commencing January 1, 1989, multiple use of the alternative limitation in
determining the Average Actual Deferral Percentage and Average Actual
Contribution Percentage shall not be permitted.
Multiple use of the alternative limitation occurs if, for the group of
Eligible Employees who are Highly Compensated Employees, the sum of the Average
Actual Deferral Percentage and the Average Actual Contribution Percentage
exceeds the Aggregate Limit.
For purposes of this Section 3.8, Aggregate Limit shall mean the greater of
(a) or (b), where (a) and (b) are as follows:
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(a) the sum of:
(i) one hundred twenty-five percent (125%) of the greater of:
(A) the Average Actual Deferral Percentage for the group of Eligible
Employees who are Non-Highly Compensated Employees for the Plan Year; or
(B) the Average Actual Contribution Percentage for the group of
Eligible Employees who are Non-Highly Compensated Employees for the Plan Year;
and
(ii) two (2) plus the lesser of subsection (a)(i)(A) or (a)(i)(B),
above. In no event shall this amount exceed two hundred percent (200%) of the
lesser of subsection (a)(i)(A) or (a)(i)(B), above.
(b) the sum of:
(i) one hundred twenty-five percent (125%) of the lesser of:
(A) the Average Actual Deferral Percentage for the group of Eligible
Employees who are Non-Highly Compensated Employees for the Plan Year; or
(B) the Average Actual Contribution Percentage for the group of Eligible
Employees who are Non-Highly Compensated Employees for the Plan Year; and
(ii) two (2) plus the greater of subsection (b)(i)(A) or (b)(i)(B),
above. In no event shall this amount exceed two hundred percent (200%) of the
greater of subsection (b)(i)(A) or (b)(i)(8), above.
If multiple use of the alternative limitation occurs, the Average Actual
Deferral Percentage for all Highly Compensated Employees under the Plan shall
be reduced in accordance with the provisions of Income Tax Regulations
Section 1.401(m)-2(c).
3.9 Interest on Excess Contributions
In the event Basic Contributions and/or Matching Contributions made on
behalf of a Participant during a Plan Year exceed the maximum allowable
amount as described in Section 3.2(a), 3.2(b) or 3.7 (Excess Contributions")
and such Excess Contributions and earnings thereon are payable to the
Participant under the applicable provisions of the Plan, earnings on such
Excess Contributions for the period commencing with the first day of the Plan
Year in which the Excess Contributions were made and ending with the date of
payment to the Participant ("Allocation Period") shall be determined in
accordance with the provisions of this Section 3.9.
The earnings allocable to excess Basic Contributions and/or Special
Contributions made on behalf of the Participant during the Plan Year
beginning January 1, 1987 shall be equal to the amount of earnings
attributable to the Participant's Basic Contribution Account for the
Allocation Period multiplied by a fraction, the numerator of which is the
excess Basic Contributions, and the denominator of which is the Net Value of
the Participant's Basic Contribution Account on the first day of the Plan
Year in which the payment is made to the Participant.
The earnings allocable to excess Matching Contributions made on behalf
of the Participant during the Plan Year beginning January 1, 1987 shall be
equal to the amount of earnings attributable to the Participant's Matching
Contribution Account for the Allocation Period multiplied by a fraction, the
numerator
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of which is the excess Matching Contributions, and the denominator of which is
the Net Value of the Participant's Matching Contribution Account on the first
day of the Plan Year in which the payment is made to the Participant.
Commencing January 1, 1988, the earnings allocable to excess Basic
Contributions for an Allocation Period shall be equal to the sum of (a) plus
(b) where (a) and (b) are determined as follows:
(a) The amount of earnings attributable to the Participant's Basic
Contribution Account for the Plan Year multiplied by a fraction,
the numerator of which is the excess Basic Contributions and
Special Contributions for the Plan Year, and the denominator of
which is the sum of (i) the Net Value of the Participant's Basic
Contribution Account as of the last day of the immediately
preceding Plan Year and (ii) the contributions (including the
Excess Contributions) made to the Basic Contribution Account on
the Participant's behalf during such Plan Year.
(b) The amount of earnings attributable to the Participant's Basic
Contribution Account for the period commencing with the first day
of the Plan Year in which payment is made to the Participant and
ending with the date of payment to the Participant multiplied by
a fraction, the numerator of which is the excess Basic
Contributions and Special Contributions made to the Basic
Contribution Account on the Participant's behalf during the Plan
Year immediately preceding the Plan Year in which the payment is
made to the Participant, and the denominator of which is the Net
Value of the Participant's Basic Contribution Account on the
first day of the Plan Year in which the payment is made to the
Participant.
Commencing January 1, 1988, the earnings allocable to excess Matching
Contributions for an Allocation Period shall be equal to the sum of (A) and
(B) where (A) and (B) are determined as follows:
(A) The amount of earnings attributable to the Participant's Matching
Contribution account for the Plan Year multiplied by a fraction,
the numerator of which is the excess Matching Contributions for
the Plan Year, and the denominator of which is the sum of (I) the
Net Value of the Participant's Matching Contribution Account as
of the last day of the immediately preceding Plan Year and (II)
the contributions (including the Excess Contributions) made to
the Matching Contribution Account on the Participant's behalf
during such Plan Year.
(B) The amount of earnings attributable to the Participant's Matching
Contribution Account for the period commencing with the first day
of the Plan Year in which payment is made to the Participant and
ending with the date of payment to the Participant multiplied by
a fraction, the numerator of which is the excess Matching
Contributions made to the Matching Contribution Account on the
Participant's behalf during the Plan Year immediately preceding
the Plan Year in which the payment is made to the Participant,
and the denominator of which is the Net Value of the
Participant's Matching Contribution Account on the first day of
the Plan Year in which the payment is made to the Participant.
3.10 Payment of Contributions to the Trust and the Separate Agency
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As soon as possible after each payroll period, but not less often than
once a month, the Employer shall deliver (a) to the Trustees: (i) the Basic
Contributions required to be made to the Trust during such payroll period
under the applicable Compensation Reduction Agreements and (ii) the amount of
all Matching Contributions required to be made to the Trust for such payroll
period and (b) to the Separate Agency: (i) the Basic Contributions required
to be made to the Separate Agency during such payroll period under the
applicable Compensation Reduction Agreements and (ii) the amount of all
Matching Contributions required to be made to the Separate Agency for such
payroll period.
Special Contributions to the Trust and to the Separate Agency shall be
forwarded by the Employer to the Trustees and to the Separate Agency no later
than the time for filing the Employer's federal income tax return, plus any
extensions thereon, for the Plan Year to which they are attributable.
3.11 Rollover Contributions
Subject to such terms and conditions as may from time to time be
established by the Committee, the Trustees and the Separate Agency, an
Employee, whether or not a Participant, may contribute a Rollover
Contribution to the Plan Fund; provided, however, that (a) such Rollover
Contribution does not constitute a direct or indirect transfer from (i) any
defined benefit plan, (ii) any defined contribution plan subject to the
funding standards of Section 412 of the Code or (iii) any other defined
contribution plan as described in Section 401(a)(11)(8)(iii) of the Code; and
(b) such Employee shall submit a written certification, in form and substance
satisfactory to the Committee, that the contribution qualifies as a Rollover
Contribution. The Committee shall be entitled to rely on such certification
and shall accept the contribution on behalf of the Trustees and the Separate
Agency, as applicable. Rollover Contributions shall be credited to an
Employee's Rollover Contribution Account and shall be invested in accordance
with Article VI of the Plan.
3.12 Section 415 Limits on Contributions
(a) For purposes of this Section 3.11, the following terms and
phrases shall have the meanings hereafter ascribed to them:
(i) "Annual Additions" shall mean the sum of the following amounts
credited to a Participant's Accounts for the Limitation Year:
(A) Employer contributions, including Basic Contributions and Matching
Contributions; (6) any other Employee contributions; (C) Forfeitures; and (D)
contributions attributable to medical benefits as described in Sections
415(l)(1) and 419A(d)(2) of the Code.
Annual Additions include the following contributions credited to a
Participant's Accounts for the Limitation Year, regardless of whether such
contributions have been distributed to the Participant: (I) Basic
Contributions which exceed the limitations set forth in Section 3.2(a);
(II) Basic Contributions made on behalf of a Highly Compensated Employee
which exceed the limitations set forth in Section 3.2(b); and
(III) Matching Contributions made on behalf of a Highly Compensated
Employee which exceed the limitations set forth in Section 3.7.
(II) "Current Accrued Benefit" shall mean a Participant's annual accrued
benefit under a defined benefit plan, determined in accordance with the
meaning of Section 415(b)(2) of the Code, as if the Participant had separated
from service as of the close of the last Limitation Year beginning before
January
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1, 1987. In determining the amount of a Participant's Current Accrued Benefit,
the following shall be disregarded:
(A) any change In the terms and conditions of the defined benefit plan
after May 5, 1986; and
(B) any cost of living adjustment occurring after May 5, 1986.
"Defined Benefit Plan" and "Defined Contribution Plan" shall have the
meanings set forth in Section 415(k) of the Code.
(iv) "Defined Benefit Plan Fraction" for a Limitation Year shall mean a
fraction, (A) the numerator of which is the aggregate projected annual
benefit (determined as of the last day of the Limitation Year) of the
Participant under all defined benefit plans (whether or not terminated)
maintained by the Employer, and (B) the denominator of which is the lesser
of: (I) the product of 1.25 (or such adjustment as required under Section
12.5) and the dollar limitation in effect under Section 415(b)(1)(A) of the
Code, adjusted as prescribed by the Secretary of the Treasury under Section
415(d) or the Code, or (II) the product of 1.4 and the amount which may be
taken into account with respect to such Participant under Section
415(b)(1)(B) of the Code for such Limitation Year. Notwithstanding the
above, if the Participant was a participant In one or more defined benefit
plans of the Employer in existence on May 6, 1986, the dollar limitation of
the denominator of this fraction will not be less than the Participant's
Current Accrued Benefit.
(v) "Defined Contribution Plan Fraction" for a Limitation Year shall
mean a fraction, (A) the numerator of which is the sum of the Participant's
Annual Additions under all defined contribution plans (whether or not
terminated) maintained by the Employer for the current year and all prior
Limitation Years (including annual additions attributable to the
Participant's nondeductible employee contributions to all defined benefit
plans (whether or not terminated) maintained by the Employer), and (B) the
denominator of which is the sum of the maximum aggregate amounts for the
current year and all prior Limitation Years with the Employer (regardless of
whether a defined contribution plan was maintained by the Employer).
"Maximum aggregate amounts" shall mean the lesser of (I) the product of
1.25 (or such adjustment as required under Section 12.5) and the dollar
limitation in effect under Section 415(c)(1)(A) of the Code, adjusted as
prescribed by the Secretary of the Treasury under Section 415(d) of the Code,
or (II) the product of 1.4 and the amount that may be taken into account
under Section 415 (c)(1)(8) of the Code; provided, however, that the
Committee may elect, on a uniform and nondiscriminatory basis, to apply the
special transition rule of Section 415(e)(6) of the Code applicable to
Limitation Years ending before January 1, 1983 in determining the denominator
of the Defined Contribution Plan Fraction.
(vi) "Limitation Year" shall mean the calendar year.
(vii) "Section 415 Compensation" shall be a Participant's earned income,
wages, salaries, fees for professional services and other amounts received for
personal services actually rendered in the course of employment with the
Employer maintaining the Plan, as provided in Income Tax Regulation Section
1.415-2(d).
(b) For purposes of applying the Section 415 limitations, the
Employer and all members of a controlled group of corporations (as defined under
Section 414(b) of the Code as modified by Section 415(h) of the Code), all
commonly controlled trades or businesses (as defined under Section 414(c) of the
Code as modified by Section 415(h) of the Code), all affiliated service groups
(as defined under Section
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414(m) of the Code) of which the Employer is a member, any leasing organization
(as defined under Section 414(n) of the Code) that employs any person who is
considered an Employee under Section 414(n) of the Code and any other group
provided for under any and all Income Tax Regulations promulgated by the
Secretary of the Treasury under Section 414(o) of the Code, shall be treated as
a single employer.
(c) If the Employer maintains more than one qualified Defined Contribution
Plan on behalf of its Employees, such plans shall be treated as one Defined
Contribution Plan for purposes of applying the Section 415 limitations of the
Code.
(d) Notwithstanding anything contained in the Plan to the contrary, in no
event shall the Annual Additions to a Participant's Accounts for a Limitation
Year exceed the lesser of:
(i) $30,000 or, if greater, one-fourth of the defined benefit dollar
limitation set forth in Section 415(b)(1)(A) of the Code as in effect for the
Limitation Year; or
(ii) 25% of the Participant's Section 415 Compensation for such Limitation
Year. For purposes of this subsection (d)(ii), Section 415 Compensation shall
not include (A) any contribution for medical benefits within the meaning of
Section 419A(f)(2) of the Code after separation from service, which is otherwise
treated as an Annual Addition, and (B) any amount otherwise treated as an Annual
Addition under Section 415(l)(1) of the Code.
(e) If the Annual Additions to a Participant's Accounts for a Limitation
Year exceed the limitation set forth in subsection (d) above during the
Limitation Year, any or all of the following contributions on behalf of such
Participant shall be immediately adjusted to that amount which will result in
such Annual Additions not exceeding the limitation set forth in subsection (d):
(i) Basic Contributions;
(ii) Special Contributions; and
(iii) Matching Contributions.
(f) If the Annual Additions to a Participant's Accounts for a
Limitation Year exceed the limitations set forth in subsection (d) above at
the end of a Limitation Year, such excess amounts shall not be treated as
Annual Additions in such Limitation Year but shall instead be used to reduce
the Basic Contributions, Matching Contributions and/or Special Contributions
to be made on behalf of such Participant in the succeeding Limitation Year,
provided that such Participant is an Eligible Employee during such succeeding
Limitation Year. If such Participant is not an Eligible Employee or ceases
to be an Eligible Employee during such succeeding Limitation Year, any
remaining excess amounts from the preceding Limitation Year shall be
allocated during such succeeding Limitation Year to each Participant then
actively participating in the Plan. Such allocation shall be in proportion to
the Basic Contributions made to date on his behalf for such Limitation Year,
or the prior Limitation Year with respect to an allocation as of the
beginning of a Limitation Year, before any other contributions are made in
such succeeding Limitation Year.
(g) If a Participant participates in both (1) the Plan and/or any other
defined contribution plan maintained by the Employer and (ii) any defined
benefit plan or plans maintained by the Employer, the sum of the Defined
Contribution Plan Fraction and the Defined Benefit Plan Fraction shall not
exceed the sum of 1.0.
(h) If the sum determined under subsection (g) for any Participant
exceeds 1.0, the Defined Benefit Plan Fraction of such Participant as
provided in the defined benefit plan or plans maintained by the
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Employer shall be reduced in order that such sum shall not exceed 1.0.I v
ARTICLE IV
Vesting and Forfeitures
4.1 Vesting
(a) An Employee shall always be fully vested in the Net Value of
his Basic Contribution Account and the Net Value of his Rollover Contribution
Account.
(b) A Participant shall become fully vested in the Net Value of
his Matching Contribution Account upon the earlier of such Participant's (i)
Normal Retirement Age or (ii) termination of employment by reason of death,
Disability or reaching his Retirement Date.
(c) A Participant who is not fully vested under subsection (b)
shall be vested in the Net Value of his Matching Contribution Account in
accordance with the following schedule:
Period of Service Vested Percentage@
Less than 1 year 0%
1 year but less than 2 years 20%
2 years but less than 3 years 40%
3 years but less than 4 years 60%
4 years but less than 5 years 80%
5 or more years 100%
For purposes of determining a Participant's Period of Service,
employment with an Affiliated Employer shall be deemed employment with the
Employer.
For purposes of determining a Participant's vested percentage of the Net
Value of his Matching Contribution Account, all Periods of Service shall be
included except the following:
(i) Periods of Service during which an Eligible Employee does not have
a Compensation Reduction Agreement in force; provided, however, that if a
Participant has suspended his Basic Contributions, such Periods of Service
shall not be disregarded;
(ii) Periods of Service prior to an Employee's attainment of age
eighteen (18);
(iii) Periods of Service during which the Employer did not maintain the
Plan; provided however, that if such Eligible Employee has a Compensation
Reduction Agreement in force as of June 1, 1986, a Period of Service of one
(1) year prior to June 1, 1986 shall not be disregarded.
Notwithstanding the provisions of the immediately preceding paragraph,
the vested percentage of a Participant who is an Employee on or after January
1, 1994, shall be determined based on such Participant's total Period of
Service, except Periods of Service prior to the Employee's attainment of age
eighteen (18).
(d) The vested Net Value of a Participant's Matching Contribution
Account, shall be determined as follows:
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(i) the Participant's Matching Contribution Account shall first be
increased to include
(A) that portion of such Account which had been previously withdrawn in
accordance with Section 7.3 and (6) that portion of such Account which had been
borrowed in accordance with Article VIII and is outstanding on the date of this
determination;
(II) the applicable vested percentage determined in accordance with
subsection (c) shall then be applied to the Account as determined in accordance
with clause (I);
(III) the amount determined in accordance with clause (II) shall then be
reduced by (A) that portion of such Account which had been previously withdrawn
in accordance with Section 7.3 and (B) that portion of such Account which had
been borrowed in accordance with Article VIII and is outstanding on the date of
this determination.
4.2 Forfeitures
If a Participant who is not fully vested in the Net Value of his Accounts
terminates employment, the Units representing the nonvested portion of his
Accounts shall constitute Forfeitures. Forfeitures shall be treated as Matching
Contributions and shall be applied to reduce the amount of subsequent Matching
Contributions otherwise required to be made.
If a former Participant who is not fully vested in the Net Value of his
Accounts receives a distribution of his vested interest in the Net Value of
his Accounts and is subsequently reemployed by the Employer prior to
incurring five (5) consecutive One Year Periods of Severance, he shall have
the Net Value of his Accounts as of the date he previously terminated
employment reinstated provided he repays the full amount of his distribution
in cash or cash equivalents before the end of the five (5) consecutive One
Year Periods of Severance commencing with his termination of employment. The
reinstated amount shall be unadjusted by any gains or losses occurring
subsequent to the Participant's termination of employment and prior to
repayment of such distribution. Any forfeited amounts required to be
reinstated hereunder shall be made by an additional Employer contribution for
such Plan Year. If such former Participant does not repay the full amount of
his distribution in cash or cash equivalents before the end of the five (5)
consecutive One Year Periods of Severance commencing with his termination of
employment, the Net Value of his Accounts as of the date he previously
terminated employment shall not be reinstated.
If a former Participant who is not fully vested in the Net Value of his
Accounts elects to defer distribution of his vested account interest, the
nonvested portion of such former Participant's Account shall be forfeited as
of the date of his Termination of Service; provided, however, that if such
former Participant is reemployed before incurring five (5) consecutive One
Year Periods of Severance, the nonvested portion of his Accounts shall be
reinstated in its entirety, unadjusted by any gains or losses occurring
subsequent to the distribution.
4.3 Vesting upon Reemployment
For the purpose of determining a Participant's vested interest in the Net
Value of his Matching Contribution Account:
(a) if an Employee is not vested in any Matching Contributions,
incurs a One Year Period of Severance and again performs an Hour
of Service, such Employee shall
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receive credit for his Periods of Service prior to his One Year
Period of Severance only if the number of consecutive One Year
Periods of Severance is less than the greater of: (i) five (5)
years or (ii) the aggregate number of his Periods of Service
credited before his One Year Period of Severance.
(b) if a Participant is partially vested in any Matching
Contributions, incurs a One Year Period of Severance and again
performs an Hour of Service, such Participant shall receive
credit for his Periods of Service prior to his One Year Period of
Severance; provided, however, that after five (5) consecutive One
Year Periods of Severance, a former Participant's vested interest
in the Net Value of the Matching Contribution Account
attributable to Periods of Service prior to his One Year Period
of Severance shall not be increased as a result of his Periods of
Service following his reemployment date.
(c) if a Participant is fully vested in any Matching Contributions,
incurs a One Year Period of Severance and again performs an Hour
of Service, such Participant shall receive credit for all his
Periods of Service prior to his One Year Period of Severance.
ARTICLE V
Trust Fund, Investment Accounts and Voting Rights
5.1 Trust Fund and Separate Assets
The Employer has adopted the Agreement as the funding vehicle with respect
to Investment Accounts. Commencing on the Conversion Date, the Employer has
adopted the Separate Agreement as the funding vehicle with respect to the
Employer Stock Fund.
All contributions forwarded by the Employer to the Trustees pursuant to
the Agreement shall be held by them in trust and shall be used to purchase
Units on behalf of the Plan in accordance with the terms and provisions of
the Agreement. Contributions designated for investment in any Investment
Account of the Plan Funds shall be allocated proportionately to and among the
classes of Units so selected for such Investment Account.
Commencing on the Conversion Date, all contributions forwarded by the
Employer to the Separate Agency pursuant to the Plan and the Separate
Agreement shall be held by it in trust in accordance with the terms and
provisions of the Separate Agreement.
All assets of the Plan shall be held for the exclusive benefit of
Participants, Beneficiaries or other persons entitled to benefits. No part
of the corpus or income of the Plan Funds shall be used for, or diverted to,
purposes other than for the exclusive benefit of Participants, Beneficiaries
or other persons entitled to benefits and for defraying reasonable
administrative expenses of the Plan, Trust and the Separate Agency. No
person shall have any interest in or right to any part of the earnings of the
Plan Funds, or any rights in, to or under the Plan Funds or any part of its
assets, except to the extent expressly provided in the Plan.
The Trustees and the Separate Agency shall invest and reinvest the Plan
Funds, and the income therefrom, without distinction between principal and
income, in accordance with the terms and provisions
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of the Agreement and Separate Agreement, respectively. The Trustees and the
Separate Agency may maintain such part of the Trust Fund and the Separate
Assets, respectively, in cash uninvested as they shall deem necessary or
desirable. The Trustees shall be the owner of and have title to all the assets
of the Plan Funds other than the Separate Assets and shall have full power to
manage the same, except as otherwise specifically provided in the Agreement.
The Separate Agency shall be the owner of and shall have title to the Separate
Assets, and shall have full power to manage the same, except as otherwise
specifically provided in the Separate Agreement.
5.2 Investment Accounts
Commencing April 28, 1995, this Section 5.2 shall no longer apply.
(a) The Trust Fund shall consist of the Investment Accounts A, 6, C
and D which shall generally have the following composition:
(i) Account A - (Core Equity Fund): Primarily common stocks of
medium to large market capitalized companies and investments convertible into
common stocks of such companies.
(ii) Account B - (1/2 Emerging Growth Equity Fund; 1/2 Value
Equity Fund): Common stocks of rapidly growing, emerging companies and common
stocks of companies perceived by the investment manager to be undervalued and
investments convertible into common stocks of such companies.
(iii) Account C - (113 Intermediate-Term Bond Fund; 213
Actively Managed Bond Fund:
Bonds, notes, debentures, mortgages and other fixed income investments.
(iv) Account D - (Short-Term Investment Fund): Bonds, notes,
debentures and government securities whose dollar weighted average maturity
shall not exceed one (1) year.
(b) The securities and other property in which any contributions of the
Investment Accounts of the Trust Fund may be invested shall be specified in the
Agreement and the rights of the Trustees shall be established in accordance with
the provisions of such Agreement.
(c) Contributions designated for investment in any Investment Account of
the Trust Fund shall be allocated proportionately to and among the classes of
Units so selected for such Investment Account.
5.3 Interim Investments
Notwithstanding the provisions of Section 5.2, the Trustees may
temporarily invest any amounts designated for investment in any of the
Investment Accounts of the Trust Fund identified herein in (a) prior to April
28, 1995, Investment Account D or other Investment Accounts providing
short-term investments and (b) commencing April 28, 1995, in the Investment
Account which provides for short-term investments, and retain the value of
such contributions therein pending the allocation of such values to the
Investment Accounts designated for investment. The Separate Agency may
temporarily invest any amounts in short-term investment pending investment in
the Employer Stock Fund.
5.4 Account Values
The Net Value of the Accounts of an Employee means the sum of the total
Net Value of each
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Account maintained on behalf of the Employee in the Trust and Separate Agency as
determined as of the Valuation Date coincident with or next following the event
requiring the determination of such Net Value. The assets of any Account shall
consist of the Units credited to such Account. The applicable Units shall be
valued from time to time by the Trustees and Separate Agency, respectively, in
accordance with the Agreement and Separate Agreement, but not less often than
monthly. On the basis of such valuations, each Employee's Accounts shall be
adjusted to reflect the effect of income collected and accrued, realized and
unrealized profits and losses, expenses and all other transactions during the
period ending on the applicable Valuation Date.
Upon receipt by the Trustees of Basic Contributions, Matching
Contributions, and, if applicable, Rollover Contributions and Special
Contributions, and commencing on the Conversion Date, upon receipt by a
Separate Agency of any Basic Contributions, Matching Contributions, and, if
applicable, Rollover Contributions and Special Contributions, such
contributions shall be applied to purchase for such Employee's Account, (a)
Units other than Units of the Employer Stock Fund, using the value of such
Units as of the close of business on the date received and (b) Units of the
Employer Stock Fund, using the value of such Units as of the close of
business on the date received. Whenever a distribution or withdrawal is made
to a Participant, Beneficiary or other person entitled to benefits, the
appropriate number of Units credited to such Employee shall be reduced
accordingly and each such distribution or withdrawal shall be charged against
the Units of the Investment Accounts of such Employee pro rata according to
their respective values.
For the purposes of this Section 5.4, fractions of Units computed to
four decimal places as well as whole Units may be purchased or redeemed for
the Account of an Employee.
5.5 Voting Rights
Each Participant with Units in the Employer Stock Fund shall have the
right to participate confidentially in the exercise of voting rights
appurtenant to shares held in such Investment Account, provided that such
person had Units in such Account as of the most recent Valuation Date
coincident with or preceding the applicable record date for which records are
available. Such participation shall be achieved by completing and filing
with the inspector of elections, or such other person who shall be
independent of the issuer of shares as the Committee shall designate, at
least ten (10) days prior to the date of the meeting of holders of shares at
which such voting rights will be exercised, a written direction in the form
and manner prescribed by the Committee. The inspector of elections, or other
such person designated by the Committee shall tabulate the directions given
on a strictly confidential basis, and shall provide the Committee with only
the final results of the tabulation. The final results of the tabulation
shall be followed by the Committee in the direction as to the manner in which
such voting rights shall be exercised. As to each matter in which the
holders of shares are entitled to vote:
(a) a number of affirmative votes shall be cast equal to the product of:
(i) the total number of shares held in the Employer Stock Fund as of the
applicable record date; and
(ii) a fraction, the numerator of which is the aggregate value (as of the
Valuation Date coincident with or immediately preceding the applicable
record date) of the Units in the Employer Stock Fund of all persons
directing that an affirmative vote be cast, and the denominator of which is
the aggregate value (as of the Valuation Date coincident with or
immediately preceding the applicable record date) of the Units in the
Employer Stock Fund of all persons directing that an affirmative or
negative
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vote be cast; and
(b) a number of negative votes shall be cast equal to the product of:
(i) the total number of shares held in the Employer Stock Fund as of
the applicable record date; and
(ii) a fraction, the numerator of which is the aggregate value (as of
the Valuation Date coincident with or immediately preceding the
applicable record date) of the Units in the Employer Stock Fund of all
persons directing that a negative vote be cast, and the denominator of
which is the aggregate value (as of the Valuation Date coincident with
or immediately preceding the applicable record date) of the Units in
the Employer Stock Fund of all persons directing that an affirmative
or negative vote be cast.
The Committee shall furnish, or cause to be furnished, to each person
with Units in the Employer Stock Fund, all annual reports, proxy materials
and other information known to have been furnished by the issuer of the
shares or by any proxy solicitor, to the holders of shares.
5.6 Tender Offers and Other Offers
Each Participant with Units in the Employer Stock Fund shall have the
right to participate confidentially in the response to a tender offer, or any
other offer, made to the holders of shares generally, to purchase, exchange,
redeem or otherwise transfer shares; provided that such person has Units in
the Employer Stock Fund as of the Valuation Date coincident with or
immediately preceding the first day for delivering shares or otherwise
responding to such tender or other offer. Such participation shall be
achieved by completing and filing with the inspector of elections, or such
other person who shall be independent of the issuer of shares as the
Committee shall designate, at least ten (10) days prior to the last day for
delivering shares or otherwise responding to such tender or other offer, a
written direction in the form and manner prescribed by the Committee. The
inspector of elections, or other such person designated by the Committee
shall tabulate the directions given on a strictly confidential basis, and
shall provide the Committee with only the final results of the tabulation.
The final results of the tabulation shall be followed by the Committee in the
direction as to the number of shares to be delivered. On the last day for
delivering shares or otherwise responding to such tender or other offer, a
number of shares equal to the product of:
(a) the total number of shares held in the Employer Stock Fund; and
(b) a fraction, the numerator of which is the aggregate value (as of the
Valuation Date coincident with or immediately preceding the first day for
delivering shares or otherwise responding to such tender or other offer) of
the Units in the Employer Stock Fund of all persons directing that shares
be delivered in response to such tender or other offer, and the denominator
of which is the aggregate value (as of the Valuation Date coincident with
or immediately preceding the first day for delivering shares or otherwise
responding to such tender or other offer) of the Units in the Employer
Stock Fund of all persons directing that shares be delivered or that the
delivery of shares be withheld;
shall be delivered in response to such tender or other offer. Delivery of the
remaining shares then held in the Employer Stock Fund shall be withheld. The
Committee shall furnish, or cause to be furnished, to each
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person whose Account is invested in whole or in part in the Employer. Stock
Fund, all information concerning such tender offer furnished by the issuer of
shares, or information furnished by or on behalf of the person making the tender
or such other offer.
5.7 Dissenters' Rights
Each Participant with Units in the Employer Stock Fund shall have the
right to participate confidentially in the decision as to whether to exercise
the Dissenters' rights appurtenant to shares held in such Investment Account,
provided that such person had Units in such Account as of the most recent
Valuation Date coincident with or preceding the applicable record date for
which records are available. Such participation shall be achieved by
completing and filing with the inspector of elections, or such other person
who shall be independent of the issuer of shares as the Committee shall
designate, at least ten (10) days prior to the date of the meeting of holders
of shares at which such dissenters' rights will be exercised, a written
direction in the form and manner prescribed by the Committee. The inspector
of elections, or other such person designated by the Committee shall tabulate
the directions given on a strictly confidential basis, and shall provide the
Committee with only the final results of the tabulation. The final results
of the tabulation shall be followed by the Committee in the directions as to
the manner in which such dissenters' rights shall be exercised. As to each
matter in which the holders of shares are entitled to exercise dissenters'
rights, the number of shares for which dissenters' rights will be exercised
shall be equal to the product of:
(a) the total number of shares held in the Employer Stock Fund as of the
applicable record date; and
(b) a fraction, the numerator of which is the aggregate value (as of the
Valuation Date coincident with or immediately preceding the applicable
record date) of the Units in the Employer Stock Fund of all persons
directing that the dissenters' rights appurtenant to which shares be
exercised, and the denominator of which is the aggregate value (as of the
Valuation Date coincident with or immediately preceding the applicable
record date) of all of the Units in the Employer Stock Fund.
Dissenters' rights shall not be exercised with respect to the remaining shares
held in the Employer Stock Fund.
5.8 Separate Assets
Subject to the terms and conditions of the Agreement and upon approval
by the Trustees, a designated portion of the assets of the Plan may be held
as Separate Assets under the Separate Agreement pursuant to investment
elections made by Plan Participants from time to time. The Trustees shall
have no responsibility or liability with respect to the management and
control of any Separate Assets and shall have only those administrative
duties with respect to such Separate Assets as are set forth in the Plan and
the Agreement.
5.9 Power to Invest in Employer Securities
The Committee may direct the Separate Agency to acquire or hold any
security issued by the Employer or any Affiliated Employer which is a
"qualifying employer security" as such term is defined under ERISA and to invest
that portion of the assets of the Plan Funds in such securities.
ARTICLE VI
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Investment Directions, Changes of Investment Directions
and Transfers Between Investment Accounts
6.1 Investment Directions
Upon electing to participate, each Participant shall direct that the
contributions made to his Accounts shall be applied to purchase Units in any
one or more of the Investment Accounts of the Trust Fund and commencing on
the Conversion Date, purchase Units in the Employer Stock Fund. Such
direction, if made prior to April 28, 1995, shall indicate the percentage, in
multiples of twenty-five percent (25%), in which Basic Contributions,
Matching Contributions, Special Contributions and Rollover Contributions
shall be made to the designated Investment Accounts. Such direction, if made
on or after April 28, 1995, shall indicate the percentage, in multiples of
one percent (1%), in which such contributions shall be made to the designated
Investment Accounts.
To the extent a Participant shall fail to make an investment direction,
contributions made on his behalf shall be applied to purchase Units in the
Investment Account which provides for short-term investments.
6.2 Change of Investment Directions
A Participant may change any investment direction not more often than
two (2) times in any Plan Year by completing and filing a notice in the form
and manner prescribed by the Committee at least ten (10) days prior to the
effective date of such direction. Commencing January 1, 1994, a Participant
may change any investment direction not more often than once in any calendar
quarter by completing and filing a notice in the form and manner prescribed
by the Committee at least ten (10) days prior to the effective date of such
direction. Participants in the Plan on April 28, 1995 shall be permitted to
make one (1) additional change in investment direction within sixty (60) days
of such date and such additional election shall not count as one (1) of the
investment directions that are otherwise permitted to be made in any Plan
Year. If no change is made hereunder, such Participant shall continue in the
investment direction last effective, with respect to each Investment Account
previously elected, notwithstanding the percentage requirements for
investments set forth in Section 6.1. Participants in the Plan on the
Conversion Date shall be permitted to make one (1) additional change in
investment direction in order to invest in the Employer Stock Fund within
sixty (60) days of such date and such additional election shall not count as
one (1) of the changes in investment direction that are otherwise permitted
to be made in any Plan Year. Any such change shall be subject to the same
conditions as if it were an initial direction and shall be applied only to
any contributions to be invested on or after the effective date of such
direction.
6.3 Transfers Between Investment Accounts
By filing a notice in the form and manner prescribed by the Committee at
least ten (10) days prior tot he effective date of such change, a Participant
or Beneficiary may, not more often than once in any calendar quarter,
redirect the investment of his Investment Accounts to one or more other
Investment Accounts, such that the Net Value of any one or more of such
accounts shall be in multiples of twenty-five percent (25%). Commencing
April 28, 1995, a Participant or Beneficiary may, not more often than once in
any calendar quarter, redirect the investment of his Investment Accounts such
that a percentage of any one or more Investment Accounts may be transferred
to any one or more other Investment Accounts. Participants in the Plan on
April 28, 1995 shall be permitted to redirect the investment, as described
above, one (1) additional time within sixty (60) days of such date and such
additional transfer shall not count as one (1) of the transfers that are
otherwise permitted to be made in any Plan Year. Participants in the Plan on
the Conversion Date shall be permitted to make one (1) additional transfer in
order to invest in the Employer
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Stock Fund within sixty (60) days of such date and such additional transfer
shall not count as one (1) of the transfers that are otherwise permitted to be
made in any Plan Year. The requisite transfers shall be valued as of the
Valuation Date on which the direction is received by the Trustees and shall be
affected within seven (7) days of the Trustees' receipt of such direction.
6.4 Employees Other than Participants
(a) Investment Direction
An Employee who is not a Participant but who has made a Rollover
Contribution in accordance with the provisions of Section 3.11, shall direct,
in the form and manner prescribed by the Committee, that such contribution be
applied to the purchase of Units in any one or more of the Investment
Accounts, and commencing on the Conversion Date, to purchase Units in the
Employer Stock Fund. Such direction, if made on or after April 28, 1995,
shall indicate the percentage, in multiples of one percent (1%), in which
contributions shall be made to the designated Investment Accounts.
To the extent any Employee shall fail to make an investment direction,
the Rollover Contributions shall be applied to the purchase of Units in the
Investment Account which provides for short-term investments.
(b) Transfers Between Investment Accounts
An Employee who is not a Participant may, subject to the provisions of
Section 6.3, not more often than once in any calendar quarter, redirect the
investment of his Investment Accounts to one or more other Investment
Accounts, such that the Net Value of any one or more of such accounts shall
be in multiples of twenty-five percent (25%). Commencing April 28, 1995, an
Employee who is not a Participant may, subject to the provisions of Section
6.3, not more often than once in any calendar quarter, redirect the
investment of his Investment Accounts such that a percentage of any one or
more Investment Accounts may be transferred to any one or more other
Investment. Employees subject to this Section 6.4 on April 28, 1995 shall be
permitted to redirect the investment, as described above, one (1) additional
time within sixty (60) days of such date and such additional transfer shall
not count as one (1) of the transfers that are otherwise permitted to be made
in any Plan Year. Commencing on the Conversion Date, an Employee who is not
a Participant in the Plan shall be permitted to make one (1) additional
transfer in order to invest in the Employer Stock Fund within sixty (60) days
of such date and such additional transfer shall not count as one (1) of the
transfers that are otherwise permitted to be made in any Plan Year. The
requisite transfers shall be valued as of the Valuation Date on which the
direction is received by the Trustees and shall be affected within seven (7)
days of the Trustees' receipt of such direction.
6.5 Restrictions on Investments in the Employer Stock Fund for Certain
Participants
Notwithstanding anything in the Plan to the contrary, any Participant
subject to the provisions of Section 16(b) of the Securities Exchange Act of
1934 may be subject to Section 16(b) liability if such Participant has an
intra-plan transfer, in accordance with the provisions of Section 6.3 and/or
Section 6.4, involving the Employer Stock Fund within six (6) months of the next
preceding transfer into or out of the Employer Stock Fund. In addition, any
Participant subject to the provisions of Section 16(b) of the Securities
Exchange Act of 1934 who elects to receive a cash distribution from his Employer
Stock Fund account under the Plan, including redemption of such stock for
purposes of cash withdrawals under Section 7.2 and/or Section 7.3 and/or loans
under Article VIII, may similarly be subject to Section 16(b) liability for any
short swing profits within six (6) months of the next preceding transfer into or
out of the Employer Stock Fund.
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However, unless otherwise required by rules and regulations of the
Securities and Exchange Commission, Section 16(b) liability will not result
from distributions made in connection with a Participant's death, Disability,
termination of employment or retirement; pursuant to a domestic relations
order described under Section 414(p) of the Code; as a result of the minimum
distribution requirements described under Section 401(a)(9) of the Code; or
as a result of the limitations described under Sections 401(k), 401(m),
402(g) and 415 of the Code.
ARTICLE VII
Payment of Benefits
7.1 General
(a) The vested interest in the Net Value of any one or more of the
Accounts of a Participant, Beneficiary or any other person entitled to benefits
under the Plan shall be paid only at the times, to the extent, in the manner,
and to the persons provided in this Article.
(b) Notwithstanding the foregoing, if payments are to be made on a
monthly basis and if, in the judgment of the Committee, payments are too small
to warrant monthly payments, the Committee, in its sole discretion, may
determine to make such payments in a lump sum or in quarterly, semi-annual, or
annual installments.
(c) The Net Value of any one or more of the Accounts of a Participant
shall be subject to the provisions of Section 8.6.
(d) Notwithstanding any provisions of the Plan to the contrary, any
and all withdrawals, distributions or payments made under the provisions of this
Article VII shall be made in accordance with Section 401(a)(9) of the Code and
any and all Income Tax Regulations promulgated thereunder.
(e) Distributions from the Employer Stock Fund under this Article
VII, shall be made in accordance with Section 7.10 hereunder.
7.2 Non-Hardship Withdrawals
(a) Subject to the terms and conditions contained in this Section
7.2, upon ten (10) days prior written notice to the Committee each
Participant who has attained age 59-1/2 shall be entitled to withdraw not
more often than twice during any Plan Year all or any portion of the Net
Value of his Basic Contribution Account.
(b) Withdrawals under this Section 7.2 shall be made in the following
order of priority:
(i) by the redemption of Units from the Participant's Basic Contribution
Account in the Trust Fund, on a pro rata basis from the Investment Accounts
thereunder, as were selected by the Participant pursuant to Article VI; and
(ii) by the redemption of Units invested in the Employer Stock Fund from
the Participant's Basic Contribution Account invested under the Separate
Agreement, if selected by the Participant pursuant to Article VI.
(c) Any withdrawals under this Section 7.2 shall be subject to the
restrictions of Section
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6.5.
7.3 Hardship Distributions
(a) For purposes of this Section 7.3, a "Hardship" distribution shall
mean a distribution that is (i) made on account of a condition which has given
rise to immediate and heavy financial need of a Participant and
(ii) necessary to satisfy such financial need. A determination of the
existence of an immediate and heavy financial need and the amount necessary to
meet the need shall be made by the Committee in accordance with uniform
nondiscriminatory standards with respect to similarly situated persons.
(b) Immediate and Heavy Financial Need:
A Hardship distribution shall be deemed to be made on account of an
immediate and heavy financial need if the distribution is on account of:
(i) medical expenses described in Section 213(d) of the Code which are
incurred by the Participant, the Participant's Spouse or any of the
Participant's dependents as defined in Section 152 of the Code; provided that,
commencing January 1, 1994, such expenses shall be for medical care described
under Section 213(d) of the Code which were previously incurred by the Employee,
the Employee's Spouse or any of the Employee's dependents as defined under
Section 152 of the Code or expenses which are necessary to obtain medical care
described under Section 213(d) of the Code for the Employee, the Employee's
Spouse or any of the Employee's dependents as defined under Section 152 of the
Code; or
(ii) purchase (excluding mortgage payments) of a principal residence of
the Participant; or
(iii) payment of tuition for the next semester or quarter of
post-secondary education for the Participant, the Participant's Spouse,
children or dependents; provided that, commencing January 1, 1994, such
payments shall be for tuition and related educational fees for the next
twelve (12) months of post-secondary education for the Employee, the
Employee's Spouse, children or any of the Employee's dependents as defined
under Section 152 of the Code; or
(iv) the need to prevent the eviction of the Participant from his
principal residence or foreclosure on the mortgage of the Participant's
principal residence; or
(v) for Plan Years prior to January 1, 1989, a condition which the
Committee, in its sole and absolute discretion, determined (in accordance
with Proposed Income Tax Regulation Section 1.401(k)-I(d)(2) published on
November 10, 1981) had given rise to a hardship distribution;
(vi) any other condition which the Commissioner of Internal Revenue,
through the publication of revenue rulings, notices and other documents of
general applicability, deems to be an immediate and heavy financial need.
(c) Necessary to Satisfy Such Financial Need:
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(i) A distribution will not be treated as necessary to satisfy an
immediate and heavy financial need of a Participant to the extent the amount of
the distribution is in excess of the amount required to relieve the financial
need or to the extent such need may be satisfied from other resources that are
reasonably available to the Participant. Commencing January 1, 1994, a
distribution will be treated as necessary to satisfy an immediate and heavy
financial need of an Employee if: (A) the amount of the distribution is not in
excess of (1) the amount required to relieve the financial need of the Employee
and (2) if elected by the Employee, an amount necessary to pay any federal,
state or local income taxes or penalties reasonably anticipated to result from
such distribution, and (B) such need may not be satisfied from other resources
that are reasonably available to the Employee.
(ii) Commencing January 1, 1989, a distribution will be treated as
necessary to satisfy a financial need if the Committee reasonably relies upon
the Participant's representation that the need cannot be relieved:
(A) through reimbursement or compensation by insurance or otherwise,
(B) by reasonable liquidation of the Participant's assets, to the
extent such liquidation would not itself cause an immediate and heavy financial
need,
(C) by cessation of Basic Contributions or Employee contributions, if
any, under the Plan, or
(D) by other distributions or nontaxable loans from plans maintained by
the Employer or by any other employer, or by borrowing from commercial
sources on reasonable commercial terms.
For purposes of this subsection (c)(ii), the Participant's resources
shall be deemed to include those assets of his Spouse and minor children that
are reasonably available to the Participant.
(iii) Alternatively, commencing January 1, 1989, a Hardship
distribution will be deemed to be necessary to satisfy an immediate and heavy
financial need of a Participant if
(A) or (B) are met:
(A) all of the following requirements are satisfied:
(I) the distribution is not in excess of the amount of the immediate
and heavy financial need of the Participant; and commencing January 1, 1994,
the distribution is not in excess of (1) the amount of the immediate and
heavy financial need of the Employee and (2) if elected by the Employee, an
amount necessary to pay any federal, state or local income taxes or penalties
reasonably anticipated to result from such distribution;
(II) the Participant has obtained all distributions, other than Hardship
distributions, and all nontaxable loans currently available under all plans
maintained by the Employer;
(III) the Plan, and all other plans maintained by the Employer, provide
that the Participant's elective contributions and Employee contributions, if
any, will be suspended for at least twelve (12) months after receipt of the
Hardship distribution; and
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(IV) the Plan, and all other plans maintained by the Employer, provide
that the Participant may not make elective contributions for the
Participant's taxable year immediately following the taxable year of the
Hardship distribution in excess of the applicable limit under Section 402(g)
of the Code for such next taxable year less the amount of such Participant's
elective contributions for the taxable year of the Hardship distribution; or
(B) the requirements set forth in additional methods, if any,
prescribed by the Commissioner of Internal Revenue (through the publication
of revenue rulings, notices and other documents of general applicability) are
satisfied.
(d) A Participant who has withdrawn the maximum amounts available to
such Participant under Section 7.2 or a Participant who is not eligible for a
withdrawal thereunder, may, In case of Hardship (as defined in this Section
7.3), apply not more often than twice in any Plan Year to the Committee for a
Hardship distribution. Any application for a Hardship distribution shall be
made in writing to the Committee at least ten (10) days prior to the
requested date of payment. Prior to January 1, 1989, Hardship distributions
shall be made by a distribution of all or a portion of the Net Value of his
Basic Contribution Account, plus all or a portion of the vested Net Value of
his Matching Contribution Account. Commencing January 1, 1989, Hardship
distributions may be made by a distribution of all or a portion of (i) an
Employee's Basic Contributions, (ii) earnings on Basic Contributions which
accrued prior to January 1, 1989, and (iii) all or a portion of his vested
interest in the Net Value of his Matching Contribution Account.
(e) Prior to January 1, 1989, distributions under this Section 7.3
shall be made in the following order of priority:
(i) the Net Value of the Participant's Basic Contribution Account; and
(ii) the vested interest in the Net Value of the Participant's Matching
Contribution Account.
Commencing January 1, 1989 and, distributions under this Section 7.3
shall be made in the following order of priority:
(A) Participant's Basic Contributions and earnings on Basic
Contributions which accrued prior to January 1, 1989; and
(B) the vested interest in the Net Value of the Participant's Matching
Contribution Account.
(f) Distributions under this Section 7.3 shall be made in the following
order of priority:
(i) by the redemption of Units from that portion of the applicable
Employee's Accounts which are specified in Section 7.3(d), above, in the
order set forth in Section 7.3(e), on a pro rata basis from among the
Investment Accounts, thereunder, other than the Employer Stock Fund,
selected by the Employee pursuant to Article VI; and
(ii) by the redemption of Units invested in the Employer Stock Fund from
that portion of the applicable Participant's Accounts which are specified
in Section 7.3(d), above, invested under the Separate Agreement, in the
order set forth in Section 7.3(e), as selected by the Employee pursuant to
Article VI.
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(g) A Participant who receives a Hardship distribution under this
Section 7.3 may have his Basic Contributions suspended in accordance with
Section 3.3.
(h) Any withdrawals under this Section 7.3 shall be subject to the
restrictions of Section 6.5.
7.4 Distribution of Benefits Following Retirement or Termination of
Service
(a) if an Employee incurs a Termination of Service for any reason other
than death, a distribution of the. vested interest in the Net Value of his
Accounts shall be made to the Employee in accordance with the provisions of
Section 7.5 or 7.6. The amount of such distribution shall be the vested
interest in the Net Value of his Accounts as of the Valuation Date coincident
with the date of receipt by the Trustees of the proper documentation
acceptable to the Trustees for such purpose.
(b) An election by an Employee to receive the vested interest in the
Net Value of his Accounts in a form other than in the normal form of benefit
payment set forth in Sections 7.5(a) and (b) and Sections 7.6(a) and (b) may
not be revoked or amended by him after he terminates his employment.
Notwithstanding the foregoing, an Employee who elected to receive payment of
benefits as of a deferred Valuation Date or in the form of installments, may,
by completing and filing the form prescribed by the Committee, change to
another form of benefit payment.
(c) An Employee who incurs a Termination of Service and is reemployed
by the Employer prior to the distribution of All or part of the entire vested
interest in the Net Value of his Accounts in accordance with the provisions
of Section 7.5 or 7.6, shall not be eligible to receive or to continue to
receive such distribution during his period of reemployment with the
Employer. Upon such Employee's subsequent Termination of Service, his prior
election to receive a distribution in a form other than the normal form of
benefit payment shall be null and void and the vested interest in the Net
Value of his Accounts shall be distributed to him in accordance with the
provisions of Section 7.5 or 7.6.
(d) An Employee's vested interest in the Net Value of his Accounts in
the Employer Stock Fund shall be distributed to the Participant, in
accordance with the provisions of Sections 7.5 and 7.6, by the Separate
Agency as soon as administratively possible following the date the Employer
is informed by the Trustees of the Participant's vested interest in such
Investment Accounts. The distribution shall be made in accordance with
Section 7.10 and the terms and provisions of the Separate Agreement.
7.5 Payments Upon Retirement Or Disability
(a) If an Employee incurs a Termination of Service as of a Retirement
Date or if an Employee incurs a Termination of Service due to Disability and
the vested Interest in the Net Value of the Employee's Accounts is equal to
or less than $3,500, a lump sum distribution of the vested interest in the
Net Value of his Accounts shall be made to the Employee within seven (7) days
of the Valuation Date coincident with the date of receipt by the Trustees of
the proper documentation indicating the date the Employee incurred a
Termination of Service.
(b) If an Employee incurs a Termination of Service as of his Normal
Retirement Date or his Postponed Retirement Date and the vested interest in
the Net Value of the Employee's Accounts exceeds $3,500, a lump sum
distribution of the Net Value of his Accounts shall be made to the Employee
within seven (7) days of the Valuation Date coincident with the date of
receipt by the Trustees of the proper documentation indicating that the
Employee incurred a Termination of Service as of such Retirement
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Date.
(c) If an Employee incurs a Termination of Service as of his Early
Retirement Date or if an Employee incurs a Termination of Service due to
Disability, has not elected to receive his benefit pursuant to an optional
form of benefit payment in accordance with the provisions of subsection (d)
or (e) and the vested interest in the Net Value of the Employee's Accounts
exceeds $3,500, a lump sum distribution of the vested interest in the Net
Value of his Accounts shall be made to the Employee within seven (7) days of
the Valuation Date coincident with the date of receipt by the Trustees of the
proper documentation indicating the date the Employee would have attained his
Normal Retirement Date if he were still employed by the Employer.
(d) In lieu of the normal form of benefit payment set forth in
subsections (b) and (c), an Employee who incurs a Termination of Service as
of a Retirement Date or incurs a Termination of Service due to Disability
may, subject to the provisions of Sections 7.9(b) and 7.9(c), file an
election form to receive the vested interest in the Net Value of his Accounts
as a lump sum distribution as of some other Valuation Date following his
termination; provided, however, that the Valuation Date may not be later than
thirteen (13) months following his Termination of Service. Subject to the
required minimum distribution provisions of Sections 7.9(b) and 7.9(c), the
vested interest in the Net Value of his Accounts shall be distributed to such
Employee as a lump sum distribution within seven (7) days of the Valuation
Date coincident with the date of receipt by the Trustees of the proper
documentation indicating the Employee's distribution date.
(e) In lieu of the normal form of benefit payment set forth in
subsections (b) and (c), an Employee who incurs a Termination of Service as
of a Retirement Date or incurs a Termination of Service due to Disability
may, subject to the required minimum distribution provisions of Sections
7.9(b) and 7.9(c), file an election form to receive the vested interest in
the Net Value of his Accounts in the form of installments over a period not
to exceed twenty (20) years. The vested interest in the Net Value of his
Accounts shall be determined as of such Valuation Date or Valuation Dates in
each such Plan Year as may be elected by such Employee and shall be based on
the respective values of the Employee's Units in each Investment Account as
of such Valuation Date or Valuation Dates. The amount of the installment
payment shall be distributed by the redemption of Units from the Employee's
Accounts on a pro-rata basis among such Employee's Investment Accounts. Any
portion of the vested interest in the Net Value of the Accounts of such
former Employee which shall not have been so paid shall continue to be held
for his benefit or for the benefit of his Beneficiary in the Employee's
Investment Accounts. If an Employee elects to receive his benefit pursuant
to this subsection (e), the installment period may not extend beyond the life
expectancy of such Employee or the life expectancy of such Employee and his
Beneficiary.
7.6 Payments Upon Termination of Service For Reasons Other Than
Retirement or Disability
(a) If an Employee Incurs a Termination of Service as of a date other
than a Retirement Date or for reasons other than Disability, and the vested
interest in the Net Value of the Employee's Accounts is equal to or less than
$3,500, a lump sum distribution of the vested interest in the Net Value of
his Accounts shall be made to the Employee within seven (7) days of the
Valuation Date coincident with the date of receipt by the Trustees of the
proper documentation indicating the date the Employee incurred a Termination
of Service.
(b) If an Employee incurs a Termination of Service as of a date other
than a Retirement Date or for reasons other than Disability, has not elected
to receive his benefit pursuant to an optional form
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of benefit payment in accordance with the provisions of subsection
(c) and the vested interest in the Net Value of the Employee's Accounts
exceeds $3,500, a lump sum distribution of the vested interest in the Net
Value of his Accounts shall be made to the Employee within seven (7) days of
the Valuation Date coincident with the date of receipt by the Trustees of the
proper documentation indicating the date the Employee would have attained his
Normal Retirement Date if he were still employed by the Employer.
(c) In lieu of the normal form of benefit payment set forth in
subsection (b), an Employee who incurs a Termination of Service as of a date
other than a Retirement Date or for reasons other than Disability may file an
election form to receive the vested interest in the Net Value of his Accounts
as an immediate lump sum distribution following his termination. The vested
interest in the Net Value of his Accounts shall be distributed to such
Employee as a lump sum distribution within seven (7) days of the Valuation
Date coincident with the date of receipt by the Trustees of the proper
documentation Indicating the Employee's distribution date.
7.7 Payments upon Death
(a) In the case of a married Participant, the Spouse shall be the
designated Beneficiary. Notwithstanding the foregoing, such Participant may
effectively elect to designate a person or persons other than the Spouse as
Beneficiary. Such an election shall not be effective unless (I) such
Participant's Spouse irrevocably consents to such election in writing, (II) such
election designates a Beneficiary which may not be changed without spousal
consent or the consent of the Spouse expressly permits designation by the
Participant without any requirement of further consent by the Spouse, (III) the
Spouse's consent acknowledges understanding of the effect of such election and
(iv) the consent is witnessed by a Plan representative or acknowledged before a
notary public. Notwithstanding this consent requirement, if the Participant
establishes to the satisfaction of the Plan representative that such written
consent cannot be obtained because there is no Spouse or the Spouse cannot be
located, the consent hereunder shall not be required. Any consent necessary
under this provision shall be valid only with respect to the Spouse who signs
the consent.
(b) In the case of a single Participant, Beneficiary means a person or
persons who have been designated under the Plan by such Participant or who
are otherwise entitled to a benefit under the Plan.
(c) The designation of a Beneficiary who is other than a Participant's
Spouse and the designation of any contingent Beneficiary shall be made in
writing by the Participant in the form and manner prescribed by the Committee
and shall not be effective unless filed prior to the death of such person.
If more than one person is designated as a Beneficiary or a contingent
Beneficiary, each designated Beneficiary in such Beneficiary classification
shall have an equal share unless the Participant directs otherwise. For
purposes of this Section, "person" includes an individual, a trust, an
estate, or any other person or entity designated as a Beneficiary.
(d) A married Participant who has designated a person or persons other
than the Spouse as Beneficiary may, without the consent of such Spouse,
revoke such prior election by submitting written notification of such
revocation. Such revocation shall result in the reinstatement of the Spouse
as the designated Beneficiary unless the Participant effectively designates
another person as Beneficiary in accordance with the provisions of subsection
(a). The number of election forms and revocations shall not
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be limited.
(e) Upon the death of a Participant the remaining vested interest in
the Net Value of his Accounts shall become payable, in accordance with the
provisions of subsection (g), to his Beneficiary or contingent Beneficiary.
If there is no such Beneficiary, the remaining vested interest in the Net
Value of his Accounts shall be payable to the executor or administrator of
his estate, or, if no such executor or administrator is appointed and
qualifies within a time which the Committee shall, in its sole and absolute
discretion, deem to be reasonable, then to such one or more of the
descendants and blood relatives of such deceased Participant as the
Committee, in its sole and absolute discretion, may select.
(f) If a designated Beneficiary entitled to payments hereunder shall
die after the death of the Participant but before the entire vested interest
in the Net Value of Accounts of such Participant has been distributed, then
the remaining vested interest in the Net Value of Accounts of such
Participant shall be paid, in accordance with the provisions of subsection
(g), to the surviving Beneficiary who is not a contingent Beneficiary, or, if
there are no such surviving Beneficiaries then living, to the designated
contingent Beneficiaries as shall be living at the time such payment is to be
made. If there is no designated contingent Beneficiary then living, the
remaining interest in the Net Value of his Accounts shall be paid to the
executor or administrator of the estate of the last to die of the
Beneficiaries who are not contingent Beneficiaries.
(g) If a Participant dies before his entire vested interest in the Net
Value of his Accounts has been distributed to him, the remainder of such
vested interest shall be paid to his Beneficiary or, if applicable, his
contingent Beneficiary, in a lump sum distribution as soon as practicable
following the date of the Participant's death. Notwithstanding the
foregoing, if, prior to the Participant's death:
(i) the Participant had elected to receive a deferred lump sum
distribution and had not yet received such distribution, such Beneficiary
shall receive a lump sum distribution as of the earlier of: (A) the Valuation
Date set forth in the Participant's election or (8) the last Valuation Date
which occurs within one (1) year of the Participant's death; or
(ii) the Participant had elected to receive and had begun receiving a
distribution in the form of installments, such Beneficiary shall receive
distributions over the remaining installment period, at the times set forth
in such election.
If the Beneficiary is the Participant's Spouse and if benefits are
payable to such Beneficiary as an immediate or deferred lump sum
distribution, such Spouse may defer the distribution up to the date on which
the Participant would have attained age seventy and one-half (70-1/2). If
such Spouse dies prior to such distribution, the prior sentence shall be
applied as if the Spouse were the Participant.
(h) Anything in the Plan to the contrary notwithstanding, the
provisions of Sections 7.7(a) through (g) shall also apply to a person who is
not a Participant but who has made a contribution to and maintains a Rollover
Contribution Account under the Plan.
7.8 Direct Rollover of Eligible Rollover Distributions
For purposes of this Section 7.8, the following definitions shall apply:
(a) "Direct Rollover" means a payment by the Plan to the Eligible
Retirement
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Plan specified by the Distributee.
(b) "Distributee" means an Employee or former Employee. In addition,
the Employee's or former Employee's surviving Spouse and the
Employee's or former Employee's Spouse or former spouse who is
the alternate payee under a qualified domestic relations order,
as defined in Section 414(p) of the Code, are Distributees with
regard to the interest of the Spouse or former spouse.
(c) "Eligible Retirement Plan" means an individual retirement account
described in Section 408(a) of the Code, an individual retirement
annuity described in Section 408(b) of the Code, an annuity plan
described in Section 403(a) of the Code, or a qualified trust
described in Section 401(a) of the Code, that accepts the
Distributee's Eligible Rollover Distribution. However, in the
case of an Eligible Rollover Distribution to the surviving
Spouse, an Eligible Retirement Plan is an individual retirement
account or individual retirement annuity.
(d) "Eligible Rollover Distribution" means any distribution of all or
any portion of the balance to the credit of the Distributee,
except that an Eligible Rollover Distribution does not include:
any distribution that is one of a series of substantially equal
periodic payments (not less frequently than annually) made for
the life (or life expectancy) of the Distributee or the joint
lives (or joint life expectancies) of the Distributee and the
Distributee's designated Beneficiary, or for a specified period
of ten (10) years or more; any distribution to the extent such
distribution is required under Section 401(a)(9) of the Code; and
the portion of any distribution that is not includable in gross
income (determined without regard to the exclusion for net
realized appreciation with respect to employer securities). This
Section 7.8 applies to distributions made on or after January 1,
1993. Notwithstanding any provision of the Plan to the contrary
that would other wise limit a Distributee's election under this
Section, a Distributee may elect, at the time and in the manner
prescribed by the Committee to have any portion of an Eligible
Rollover Distribution paid directly to an Eligible Retirement
Plan specified by the Distributee in a Direct Rollover.
7.9 Commencement of Benefits
(a) Unless the Employee elects otherwise in accordance with the Plan,
in no event shall the payment of benefits commence later than the sixtieth
(60th) day after the close of the Plan Year in which the latest of the
following events occur: (I) the attainment by the Employee of age sixty-five
(65), (II) the tenth (10th) anniversary of the year in which the Participant
commenced participation in the Plan, or (III) the termination of the
Employee's employment with the Employer; provided, however, that if the
amount of the payment required to commence on the date determined under this
sentence cannot be ascertained by such date, a payment retroactive to such
date may be made no later than sixty (60) days after the earliest date on
which the amount of such payment can be ascertained under the Plan.
(b) Distributions to five-percent owners:
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The vested interest in the Net Value of the Accounts of a five-percent
owner (as described in Section 416(i) of the Code and determined with respect
to the Plan Year ending in the calendar year in which such individual attains
age seventy and one-half (70-1/2)) must be distributed or commence to be
distributed no later than the first day of April following the calendar year
in which such individual attains age seventy and one-half (70-1/2). The
vested interest in the Net Value of the Accounts of an Employee who Is not a
five-percent owner (as described in Section 416(i) of the Code) for the Plan
Year ending In the calendar year in which such person attains age seventy and
one-half (70-1/2) but who becomes a five-percent owner (as described in
Section 416(i) of the Code) for a later Plan Year must be distributed or
commence to be distributed no later than the first day of April following the
last day of the calendar year that includes the last day of the first Plan
Year for which such individual is a five-percent owner (as described in
Section 416(i) of the Code).
(c) Distributions to other than five-percent owners:
The vested interest in the Net Value of the Accounts of an Employee who
is not a five-percent owner and who attained age seventy and one-half
(70-1/2) prior to January 1, 1988 must be distributed or commence to be
distributed no later than the first day of April following the calendar year
in which occurs the later of: (ii) his termination of employment or (ii) his
attainment of age seventy and one-half (70-1/2).
Commencing January 1, 1989, by Notice issued by the Internal Revenue
Service, the vested interest in the Net Value of the Accounts of any Employee
who attains age seventy and one-half (70-1/2) after December 31, 1987, must
be distributed or commence to be distributed no later than the first day of
April following the later of (A) the 1989 calendar year or
(B) the calendar year in which such individual attains age seventy and
one-half (70-1/2).
7.10 Manner of Payment of Distributions from the Employer Stock Fund
Distributions from the Employer Stock Fund shall be made to Participants
and Beneficiaries in cash. Notwithstanding the foregoing and except for
withdrawals under Sections 7.2 and 7.3 and loans under Article VIII, the
Participant or Beneficiary may elect that such distributions be made wholly
or partially in shares. If the Participant or Beneficiary elects that such
distributions may be made wholly or partially in shares, subject to such
terms and conditions as may be established from time to time by the
Committee, the maximum number of shares to be distributed shall be equal to
the number of whole shares that could be purchased on the date of
distribution based on the fair market value of shares determined as of the
date of payment and on the fair market value of the Participant's Units in
the Employer Stock Fund on the valuation date preceding the distribution. An
amount of money equal to any remaining amount of the payment that is less
than the fair market value of a whole share shall be distributed in cash.
For purposes of this Section 7.10, the fair market value of a share shall be
determined on a uniform and nondiscriminatory basis in such manner as the
Separate Agency may, in its discretion, prescribe.
ARTICLE VIII
Loans to Participant
8.1 Definitions and Conditions
(a) For purposes of this Article, the following terms and phrases shall
have the
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meanings hereafter ascribed to them:
(i) "Borrower" means a Participant. Commencing October 18, 1989,
"Borrower" shall mean a Participant or a "Party in Interest" (as defined in
Section 3(14) of ERISA) who maintains an Account, provided such Participant
or Party in Interest is not receiving a benefit payment in accordance with
the provisions of Section 7.5(e) or 7.7.
(ii) "Loan Account" means the separate, individual account established
on behalf of a Borrower in accordance with the provisions of Section 8.4(d).
(b) To the extent permitted under the provisions of this Article and
subject to the terms and conditions set forth herein, a Borrower may request
a loan from his Accounts. Any loans made in accordance with this Article
shall not be subject to the provisions of Article VI.
8.2 Loan Amount
Upon a finding by the Committee that all requirements hereunder have
been met, a Borrower may request a loan from his Accounts in an amount up to
the lesser of: (a) fifty percent (50%) of the Net Value as of the close of
business on the date the loan is processed of the Basic Contribution Account,
vested Matching Contribution Account and Rollover Contribution Account, or
(b) $50,000, reduced by the highest outstanding loan balance during the
preceding twelve (12) months. The minimum loan permitted shall be $500.
8.3 Term of Loan
All loans shall be for a fixed term of not more than five (5) years,
except that a loan which shall be used to acquire any dwelling which within a
reasonable time is to be used as the principal residence of the Participant,
may, in the discretion of the Committee, be made for a term of not more than
fifteen (15) years. Interest on a loan shall be based on a reasonable rate
of interest. The rate of interest on a loan shall be based on the rate of
interest on United States Treasury obligations for a comparable term,
increased by one percent (1%) and adjusted to the nearest quarter (1/4) of
one percent (1%). The rate shall be the rate as in effect as of the date
determined by the Committee in accordance with the provisions of Section
9.6(b). Such rate shall remain in effect until the Loan Account is closed.
8.4 Operational Provisions
(a) An application for a loan shall be filed in the form and manner
prescribed by the Committee ten (10) days prior to the Valuation Date as of
which such loan is requested. If the Committee shall approve such
application, the Committee shall establish the amount of such loan and such
loan shall be effected as of such Valuation Date.
(b) The amount of the loan shall be distributed from the Investment
Accounts in which the Borrower's Accounts are invested in the following order
of priority:
(i) Basic Contribution Account;
(ii) Rollover Contribution Account; and
(iii) Vested Matching Contribution Account.
Distributions from each of the foregoing Accounts shall be made in the
following order of
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priority:
(A) by the redemption of Units from each of the Borrower's Accounts in the
Trust Fund in the order set forth above, on a pro rata basis from the
Investment Accounts thereunder, as were selected by the Participant
pursuant to Article VI, and
(B) by the redemption of Units invested in the Employer Stock Fund from
each of the Borrower's Accounts invested under the Separate Agreement, in
the order set forth above, if selected by the Borrower pursuant to Article
VI.
(c) The proceeds of a loan shall be distributed to the Borrower as soon
as practicable after the Valuation Date as of which the loan is processed;
provided, however, that the Borrower shall have satisfied such reasonable
conditions as the Committee shall deem necessary, including, without
limitation: (i) the delivery of an executed promissory note for the amount of
the loan, including interest, payable to the order of the Trustees; (ii) an
assignment to the Plan of such Borrower's interest in his Accounts to the
extent of such loan; and (iii) if the Borrower is a Participant who is
actively employed by the Employer, an authorization to the Employer to make
payroll deductions in order to repay his loan to the Plan. The
aforementioned promissory note shall be duly acknowledged and executed by the
Borrower and shall be held by the Trustees, or the Committee as agent for the
Trustees, as an asset of the Borrower's Loan Account pursuant to subsection
(d).
(d) A Loan Account shall be established for each Borrower with an
outstanding loan pursuant to this Article. Each Loan Account shall be
comprised of a Borrower's executed promissory note and (ii) installment
payments of principal and interest made pursuant to Section 8.5(a). Upon full
payment and satisfaction of the outstanding Loan Account balance, a
Borrower's promissory note shall be marked paid in full, returned to the
Borrower, and his Loan Account thereupon closed.
(e) As of each Valuation Date coincident with or next succeeding each
payment of principal and interest on a loan, the then current balance of each
Borrower's Loan Account shall be debited by the amount of such payment and
such amount shall be transferred for investment in accordance with Section
8.5(c) to the appropriate Borrower's Account. If the Committee established a
lien against the Participant's Accounts pursuant to Section 8.6(c), and
foreclosure of such lien is deferred until the Participant's Termination of
Service pursuant to Section 8.6(c)(ii)(A), for each month that foreclosure of
the lien is deferred, the then current balance of the Participant's Loan
Account shall be charged with interest on the unpaid principal and interest
thereon.
(f) Notwithstanding the provisions of subsections (a) through (e)
above, the following provisions shall apply with respect to the Borrower of
any loans distributed during the period commencing February 1, 1989 and
ending September 30, 1989:
(i) Upon distribution of the loan proceeds to the Borrower pursuant to
subsection (c), an amount equal to said loan proceeds shall be
automatically transferred from the Borrower's current Investment Accounts
into Account D and shall constitute the Plan's security interest with
respect to such loan. Such amount shall be transferred from the Borrower's
Accounts in the order of priority and on a pro rata basis among the
Investment Accounts as set forth in subsection (b). Such transfer shall
not constitute a transfer between Investment Accounts as described in
Section 6.3 or Section 6.4(b).
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Prior to October 1, 1989, the Borrower may not make any withdrawals
under Section 7.2 or Section 7.3 which would reduce the vested portion of the
Net Value of his Accounts to an amount which is less than the amount of his
outstanding loan.
(iii) Commencing October 1, 1989, the Plan shall no longer maintain
a security interest in Fund D, and as soon as administratively practicable
thereafter, each Borrower may request that all or a portion of the amount
held in Account D constituting the Plan security interest be transferred to
any one or more of the other Investment Accounts. Such transfer shall be
subject to the provisions of Section 6.3 or Section 6.4(b) except that such
transfer shall not be counted towards the maximum number of transfers
permitted during the Plan Year.
(g) Only one (1) loan shall be outstanding to any Borrower under this
Article VIII at any time.
(h) Any loans under this Article VIII shall be subject to the
restrictions of Section 6.5.
8.5 Repayments
(a) If the Borrower is the Participant and unless otherwise agreed to
by the Committee, repayments of loan principal, or the unpaid balance
thereof, and interest thereon shall be made through payroll deductions. The
first repayment shall be deducted as of the first payroll date in the second
month following the granting of the loan. Commencing January 1, 1991, the
first repayment shall be deducted as of the first payroll date occurring no
later than three (3) weeks after the Committee submits the loan form for
processing.
If the Borrower is not on the payroll of the Employer, and unless
otherwise agreed to by the Committee, repayments of loan principal, or the
unpaid balance thereof, and interest thereon, shall be made in cash or cash
equivalencies to the Employer in equal monthly installments for payment to
his Loan Account.
(b) Any amount repaid to the Plan by a Borrower with respect to a loan,
including interest thereon, shall be invested as if such amount were a
contribution to be invested in accordance with Section 6.1.
(c) With respect to each Borrower's Loan Account, any repayment of
principal and interest made by a Borrower shall be credited, as of the
Valuation Date coincident with or next succeeding such payment, to the
Borrower's Accounts in the order of priority established under Section
8.4(b). No Account having a lesser degree of priority shall be credited
until the Account having the immediately preceding degree of priority has
been restored by an amount equal to that which had been borrowed from such
Account.
(d) A Borrower may prepay his entire loan, plus all interest accrued
and unpaid thereon, as of any Valuation Date. Alternatively and subject to
such other terms and conditions as may be established from time to time by
the Committee, a Borrower may prepay a portion of his loan on any Valuation
Date. Such prepayment shall be applied first to all accrued and unpaid
interest on the outstanding balance of the loan. After any partial
prepayment of principal, interest will only be charged on the remaining
outstanding balance of the loan. However, commencing on or after December 9,
1996, a Borrower will not be permitted to make partial prepayments to his
Loan Account.
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(e) Commencing February 1, 1989, with respect to loans (i) distributed
commencing on or after February 1, 1989 and (ii) prepaid prior to October 1,
1989, upon prepayment of all of such loan, a Borrower may, subject to the
provisions of Section 6.3 or Section 6.4(b), request that all or a portion of
the amount previously held as a Plan security interest be transferred from
Account D. Such transfer shall not be counted towards the maximum number of
transfers permitted during the Plan Year.
(f) In the event the Plan is terminated, the entire unpaid principal
amount of the loan hereunder, together with any accrued and unpaid interest
thereon, shall become immediately due and payable.
8.6 Default
(a) If a Borrower fails to make any payment on any loan when due under
this Article, the entire unpaid principal amount of such loan, together with
any accrued and unpaid interest thereon, shall be deemed in default and
become due and payable ninety (90) days after the initial date of payment
delinquency.
(b) Prior to February 1, 1989, upon direction by the Committee, any
unpaid principal and interest under subsection (a) shall be paid by applying
the value of the Borrower's Loan Account (determined as of the next following
Valuation Date) in satisfaction of said unpaid principal and interest,
whereupon the Borrower's Loan Account shall be closed. Such closing of a
Borrower's Loan Account shall be deemed to be and treated by the Committee as
a Hardship withdrawal (as defined in Section 7.3), without reference to the
amount and timing of the withdrawals otherwise permitted thereunder.
(c) Commencing February 1, 1989, if a Borrower fails to make any
payment on a loan and is deemed to be in default pursuant to subsection (a),
the Committee shall establish a lien against the Borrower's Accounts in an
amount equal to any unpaid principal and interest. The lien shall be
foreclosed by applying either (I) the value of the Borrower's Loan Account
(determined as of the next Valuation Date immediately following foreclosure)
or (II), If applicable, the Plan security interest held in Account D, In
satisfaction of said unpaid principal and interest as follows:
(A) if the Borrower is a Participant who is in the employment of the
Employer, upon the Participant's Termination of Service; or
(B) if the Borrower is not in the employment of the Employer,
immediately upon default. Thereupon, the vested interest in the balance
of the Borrower's Accounts shall be distributed in accordance with the
applicable provisions of the Plan.
(d) The Committee may, in accordance with uniform rules established by
it, restrict the right of any Borrower who has defaulted on a loan from the
Plan to: (I) make withdrawals and/or loans from his Matching Contribution
Account, Basic Contribution Account, and/or Rollover Contribution Account for
a period not exceeding twelve (12) months or (II) if the Borrower is an
Eligible Employee, authorize Basic Contributions to be made on his behalf or
make any other contributions to the Plan for a period not exceeding twelve
(12) months.
8.7 Coordination of Outstanding Account and Payment of Benefits
(a) If the Borrower has an outstanding Loan Account and is either (i)
scheduled to
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receive or elects to receive a lump sum distribution in accordance with the
provisions of Article VII, or (ii) scheduled to receive the last installment
payment under a previous election made in accordance with the provisions of
Article VII to receive payments in a form other than the normal form of benefit
payments, then, at the time of the distribution or payment under clause (i) or
(ii) above, the entire unpaid principal amount of the loan together with any
accrued and unpaid interest thereon, shall become immediately due and payable.
No Plan distribution, except as permitted under Section 7.2 or Section 7.3,
shall be made to any Borrower unless and until such Borrower's Loan Account,
including accrued interest thereunder, has been liquidated and closed.
Notwithstanding the foregoing provisions, if a Participant incurs a Termination
of Service for any reason prior to October 1, 1989, the entire unpaid principal
amount of the loan thereunder, together with any accrued and unpaid interest
thereon, shall become immediately due and payable. If a Borrower fails to pay
the outstanding balance of his Loan Account hereunder, such loan shall be
satisfied as if a default had occurred pursuant to Section 8.6.
(b) Any reference in the Plan to the Net Value of Units in a Participant's
Accounts available for distribution to any Borrower shall mean the
value after the satisfaction of the entire unpaid principal loan
amount and any accrued, unpaid interest thereon, as provided in this
Article.
ARTICLE IX
Administration
9.1 General Administration of the Plan
The operation and administration of the Plan shall be subject to the
management and control of the Named Fiduciaries and Plan Administrator
designated by the Employer. The designation of such Named Fiduciaries and
Plan Administrator, the terms of their appointment, and their duties and
responsibilities allocated among them shall be as set forth in this Article.
9.2 Designation of Named Fiduciaries
The management and control of the operation and administration of the
Plan shall be allocated in the following manner:
(a) The Employer shall designate the Trustees as a Named Fiduciary to
perform those functions set forth in the Agreement or the Plan which
are applicable to a Plan of Partial Participation.
(b) The Employer shall designate the Separate Agency to perform those
functions relating to the Separate Agency in the Plan or the Separate
Agreement.
(c) The Employer shall designate one or more individuals to serve as
member(s) of an employee benefits Committee to perform those functions
set forth in the Agreement, the Separate Agreement or the Plan that
are assigned to such Committee.
(d) A Trust Participant (as defined under the Agreement) may delegate to a
person or persons the duties and responsibilities for voting Units set
forth under the Agreement and Separate Agreement.
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(e) The Employer shall designate the Separate Agency as a Named Fiduciary
to perform those functions set forth in the Separate Agreement or the
Plan that are assigned to the Separate Agency, including the voting
and tender of shares of the Employer Stock.
9.3 Responsibilities of Fiduciaries
The Named Fiduciaries and Plan Administrator shall have only those
powers, duties, responsibilities and obligations that are specifically
allocated to them under the Plan, the Agreement or the Separate Agreement.
To the extent permitted by ERISA, each Named Fiduciary and Plan
Administrator may rely upon any direction, information or action of another
Named Fiduciary, Plan Administrator or the Employer as being proper under the
Plan, the Agreement or the Separate Agreement, and is not required to inquire
into the propriety of any such direction, information or action and no Named
Fiduciary or Plan Administrator shall be responsible for any act or failure
to act of another Named Fiduciary, Plan Administrator or the Employer.
No Named Fiduciary, Plan Administrator or the Employer guarantees the
Trust Fund or Separate Assets in any manner against investment loss or
depreciation in asset value.
The allocation of responsibility between the Trustees and the Employer
or between the Separate Agency and the Employer may be changed by written
agreement. Such reallocation shall be evidenced by Employer Resolutions and
shall not be deemed an amendment to the Plan.
To the extent permitted by ERISA, the Trustees shall have no liability
or responsibility with respect to the administration of any Separate Assets
held outside the Trust except as specifically set forth in the Agreement.
The authority and responsibility of the Trustees shall extend only to those
Plan assets held in accordance with the Agreement.
9.4 Plan Administrator
The Employer shall designate the Trustees as the Trustee Administrator
to perform those functions applicable to Plans of Partial Participation as
set forth in the Agreement. The Employer shall also designate one or more
persons to act as Plan Administrator and to perform those functions set forth
in the Agreement, the Plan or the Separate Agreement that are assigned to the
Plan Administrator.
The duties and responsibilities of a plan administrator under ERISA
shall be allocated between the Plan Administrator and the Trustee
Administrator as set forth herein or in the Agreement. Such allocation may
be changed only by written agreement between the parties and shall not be
deemed an amendment to the Plan.
The Plan Administrator shall be solely responsible for monitoring and
notifying the Trustees of an Employee's age for all purposes under the Plan.
The Plan Administrator is designated as the Plan's agent for the service
of legal process.
9.5 Committee
The members of the Committee designated by the Employer under Section
9.2(b) shall serve for such term(s) as the Employer shall determine and until
their successors are designated and qualified. The term of any member of the
Committee may be renewed from time to time without limitation as to the
number
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of renewals. Any member of the Committee may (a) resign upon at least sixty
(60) days written notice to the Employer or (b) be removed from office but only
for his failure or inability, in the opinion of the Employer, to carry out his
responsibilities in an effective manner. Termination of employment with the
Employer shall be deemed to give rise to such failure or inability.
The powers and duties allocated to the Committee shall be vested jointly
and severally in its members. Notwithstanding specific instructions to the
contrary, any instrument or document signed on behalf of the Committee by any
member of the Committee may be accepted and relied upon by the Trustees and
Separate Agency as the act of the Committee. The Trustees and Separate
Agency shall not be required to inquire into the propriety of any such action
taken by the Committee nor shall they be held liable for any actions taken by
them in reliance thereon.
The Employer may, pursuant to Employer Resolutions and upon notice to
the Trustees and Separate Agency, change the number of individuals comprising
the Committee, their terms of office or other conditions of their incumbency
provided that there shall be at all times at least one individual member of
the Committee. Any such change shall not be deemed an amendment to the Plan.
9.6 Powers and Duties of the Committee
The Committee shall have authority to perform all acts it may deem
necessary or appropriate in order to exercise the duties and powers imposed
or granted by ERISA, the Plan, the Agreement, the Separate Agreement or any
Employer Resolutions. Such duties and powers shall include, but not be
limited to, the following:
(a) Power to Construe - Except as otherwise provided in the Agreement
or the Separate Agreement, the Committee shall have the power to construe the
provisions of the Plan and to determine any questions of fact which may arise
thereunder.
(b) Power to Make Rules and Regulations - The Committee shall have the
power to make such reasonable rules and regulations as it may deem necessary
or appropriate to perform its duties and exercise its powers. Such rules and
regulations shall include, but not be limited to, those governing (I) the
manner in which the Committee shall act and manage its own affairs, (II) the
procedures to be followed In order for Employees or Beneficiaries to claim
benefits, and (III) the procedures to be followed by Participants,
Beneficiaries or other persons entitled to benefits with respect to
notifications, elections, designations or other actions required by the Plan
or ERISA. All such rules and regulations shall be applied in a uniform and
nondiscriminatory manner.
(c) Powers and Duties with Respect to Information - The Committee shall
have the power and responsibility:
(i) to obtain such information as shall be necessary for the proper
discharge of its duties;
(ii) to furnish to the Employer, upon request, such reports as are
reasonable and appropriate;
(iii) to receive, review and retain periodic reports of the
financial condition of the Plan Funds; and
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(iv) to receive, collect and transmit to the Trustees all information
required by the Trustees in the administration of the Accounts of the Employee
as contemplated in Section 9.7.
(d) Power of Delegation - The Committee shall have the power to
delegate fiduciary responsibilities (other than trustee responsibilities
defined in Section 405(c)(3) of ERISA) to one or more persons who are not
members of the Committee. Unless otherwise expressly indicated by the
Employer, the Committee must reserve the right to terminate such delegation
upon reasonable notice.
(e) Power of Allocation - Subject to the written approval of the
Employer, the Committee shall have the power to allocate among its members
specified fiduciary responsibilities (other than trustee responsibilities
defined in Section 405(c)(3) of ERISA). Any such allocation shall be in
writing and shall specify the persons to whom such allocation is made and the
terms and conditions thereof.
(f) Duty to Report - Any member of the Committee to whom specified
fiduciary responsibilities have been allocated under subsection (e) above
shall report to the Committee at least annually. The Committee shall report
to the Employer at least annually regarding the performance of its
responsibilities as well as the performance of any persons to whom any powers
and responsibilities have been further delegated.
(g) Power to Employ Advisors and Retain Services - The Committee may
employ such legal counsel, enrolled actuaries, accountants, pension
specialists, clerical help and other persons as it may deem necessary or
desirable in order to fulfill its responsibilities under the Plan.
9.7 Certification of Information
The Committee shall certify to the Trustees on such periodic or other
basis as may be agreed upon, but in no event later than ten (10) days before
any Valuation Date as of which the Trustees must effect any action with
respect to any Accounts held under the provisions of the Plan, relevant facts
regarding the establishment of the Accounts of an Employee, periodic
contributions with respect to such Accounts, investment elections and
modifications thereof and withdrawals and distributions therefrom. The
Trustees shall be fully protected in maintaining individual Account records
and in administering the Accounts of the Employee on the basis of such
certifications and shall have no duty of inquiry or otherwise with respect to
any transactions or communications between the Committee and Employees
relating to the information contained in such certifications.
9.8 Authorization of Benefit Payments
The Committee shall forward to the Trustees and, if applicable, any
Separate Agency, any application for payment of benefits within a reasonable
time after it has approved such application. The Trustees and such Separate
Agency may rely on any such information set forth in the approved application
for the payment of benefits to the Participant, Beneficiary or any other
person entitled to benefits.
9.9 Payment of Benefits to Legal Custodian
Whenever, in the Committee's opinion, a person entitled to receive any
benefit payment is a minor or deemed to be physically, mentally or legally
incompetent to receive such benefit, the Committee may direct the Trustees
and Separate Agency to make payment for his benefit to such individual or
institution having legal custody of such person or to his legal
representative. Any benefit payment made in accordance with the provisions of
this Section 9.9 shall operate as a valid and complete discharge of any
liability for
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payment of such benefit under the provisions of the Plan.
9.10 Service in More Than One Fiduciary Capacity
Any person or group of persons may serve in more than one fiduciary
capacity with respect to the Plan, regardless of whether any such person is an
officer, employee, agent or other representative of a party in interest.
9.11 Payment of Expenses
The Employer will pay the ordinary administrative expenses of the Plan
and compensation of the Trustees and the Separate Agency to the extent
required. However, any expenses directly related to the Trust Fund, such as
transfer taxes, brokers' commissions, registration charges, or administrative
expenses of the Trustees (including expenses of counsel retained by it in
accordance with the Agreement), shall be paid from the Trust Fund or from
such Investment Account to which such expenses directly relate. In addition,
any expenses directly related to the Employer Stock Fund such as transfer
taxes, brokers' commissions, registration charges, and other expenses
incurred in the sale and purchase of common stock of the Company for the
Employer Stock Fund (including expenses of counsel retained by it in
accordance with the Separate Agreement), will be paid out of a cash account
managed by the Separate Agency.
The Employer may charge Employees all or part of the reasonable expenses
associated with withdrawals and other distributions, loans or Account
transfers.
9.12 Administration of Separate Assets
The Committee and the Separate Agency shall be solely responsible for
the administration of the Separate Assets, including the administration,
collection and enforcement of any loans held therein. All contributions to
and withdrawals or disbursements from the Separate Assets shall be made
directly to or by the Separate Agency.
The Trustees may, as agreed upon with the Committee, provide such
combined or coordinated Plan records and reports, which include the Separate
Assets. The Trustees shall be fully protected in relying upon any
information provided to them by the Committee or Separate Agency with respect
to such Separate Assets. The inclusion of any information pertaining to
Separate Assets in such combined or coordinated Plan records and reports
shall not increase the responsibility or liability of the Trustees with
respect to the Separate Assets. If Plan Funds may be transferred between the
Separate Assets and the other Investment Accounts, the manner in which such
transfers may be made must be agreed to in a written instrument entered into
among the Committee, the Trustees and the Separate Agency.
ARTICLE X
Benefit Claims Procedure
10.1 Definition
For purposes of this Article, "Claimant" shall mean any Participant,
Beneficiary or any other person entitled to benefits under the Plan or his
duly authorized representative.
10.2 Claims
A Claimant may file a written claim for a Plan benefit with the Plan
Administrator on the appropriate form to be supplied by the Plan
Administrator. The Plan Administrator shall, in its sole and
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absolute discretion, review the Claimant's application for benefits and
determine the disposition of such claim.
10.3 Disposition of Claim
The Plan Administrator shall notify the Claimant as to the disposition
of the claim for benefits under this Plan within ninety (90) days after the
appropriate form has been filed unless special circumstances require an
extension of time for processing. If such an extension of time Is required,
the Plan Administrator shall furnish written notice of the extension to the
Claimant prior to the termination of the initial ninety (90) day period. The
extension notice shall indicate the special circumstances requiring the
extension of time and the date the Plan Administrator expects to render a
decision. In no event shall such extension exceed a period of one hundred
eighty (180) days from the receipt of the claim.
10.4 Denial of Claim
If a claim for benefits under this Plan is denied in whole or in part by
the Plan Administrator, a notice written in a manner calculated to be
understood by the Claimant shall be provided by the Plan Administrator to the
Claimant and such notice shall include the following:
(a) a statement that the claim for the benefits under this Plan has been
denied;
(b) the specific reasons for the denial of the claim for benefits, citing
the specific provisions of the Plan which set forth the reason or reasons
for the denial;
(c) a description of any additional material or information necessary for
the Claimant to perfect the claim for benefits under this Plan and an
explanation of why such material or information is necessary; and
(d) appropriate information as to the steps to be taken if the Claimant
wishes to appeal such decision.
10.5 Inaction by Plan Administrator
A claim for benefits shall be deemed to be denied if the Plan
Administrator shall not take any action on such claim within ninety (90) days
after receipt of the application for benefits by the Claimant or, if later,
within the extended processing period established by the Plan Administrator
by written notice to the Claimant, in accordance with Section 10.3.
10.6 Right to Full and Fair Review
A Claimant who is denied, in whole or in part, a claim for benefits under
the Plan may file an appeal of such denial.
Such appeal must be made in writing by the Claimant or his duly
authorized representative and must be filed with the Committee within sixty
(60) days after receipt of the notification under Section 10.4 or the date
his claim is deemed to be denied under Section 10.5. The Claimant or his
representative may review pertinent documents and submit issues and comments
in writing.
10.7 Time of Review
The Committee, independent of the Plan Administrator, shall conduct a
full and fair
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review of the denial of claim for benefits under this Plan to a Claimant within
sixty (60) days after receipt of the written request for review described in
Section 10.6; provided, however, that an extension, not to exceed sixty (60)
days, may apply in special circumstances. Written notice shall be furnished to
the Claimant prior to the commencement of the extension period.
10.8 Final Decision
The Claimant shall be notified in writing of the final decision of such
full and fair review by such Committee. Such decision shall be written in a
manner calculated to be understood by the Claimant, shall state the specific
reasons for the decision and shall include specific references to the
pertinent Plan provisions upon which the decision is based. In no event
shall the decision be furnished to the Claimant later than sixty (60) days
after the receipt of a request for review, unless special circumstances
require an extension of time for processing, in which case a decision shall
be rendered within one hundred-twenty (120) days after receipt of the appeal.
ARTICLE XI
Amendment, Termination and Withdrawal
11.1 Amendment and Termination
The Employer expects to continue the Plan indefinitely, but specifically
reserves the right, in its sole and absolute discretion, at any time, by
appropriate action of the Board, to terminate its Plan or to amend (subject
to the approval of the Trustees), in whole or in part, any or all of the
provisions of the Plan. Subject to the provisions of Section 13.7, no such
amendment or termination shall permit any part of the Plan Funds to be used
for or diverted to purposes other than for exclusive benefit of Participants,
Beneficiaries or other persons entitled to benefits, and no such amendment or
termination shall reduce the interest of any Participant, Beneficiary or
other person who may be entitled to benefits, without his consent. In the
event of a termination or partial termination of the Plan, or upon complete
discontinuance of contributions under the Plan, the Accounts of each affected
Participant shall become fully vested and shall be distributable in
accordance with the provisions of Article VII.
If any amendment changes the vesting schedule, any Participant who has a
Period of Service of five (5) or more years may, by filing a written request
with the Employer, elect to have his vested percentage computed under the
vesting schedule in effect prior to the amendment.
Commencing January 1, 1989, if any amendment changes the vesting
schedule, any Participant who has a Period of Service of three (3) or more
years may, by filing a written request with the Employer, elect to have his
vested percentage computed under the vesting schedule In effect prior to the
amendment.
The period during which the Participant may elect to have his vested
percentage computed under the prior vesting schedule shall commence with the
date the amendment is adopted and shall end on the latest of:
(a) sixty (60) days after the amendment is adopted;
(b) sixty (60) days after the amendment becomes effective; or
(c) sixty (60) days after the Participant is issued written notice of the
amendment from the Employer.
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11.2 Withdrawal from the Trust Fund
An Employer may withdraw its Plan from the Trust Fund in accordance with
and subject to the provisions of the Agreement.
ARTICLE XII
Top-Heavy Plan Provisions
12.1 Introduction
Any other provisions of the Plan to the contrary notwithstanding, the
provisions contained in this Article shall be effective with respect to any
Plan Year in which this Plan is a Top-Heavy Plan, as hereinafter defined.
12.2 Definitions
For purposes of this Article, the following words and phrases shall have
the meanings stated herein unless a different meaning is plainly required by
the context.
(a) "Account," for the purpose of determining the Top-Heavy Ratio,
means the sum of (i) a Participant's Accounts as of the most recent Valuation
Date and (ii) an adjustment for contributions due as of the Determination
Date.
(b) "Determination Date" means, with respect to any Plan Year, the last
day of the preceding Plan Year. With respect to the first Plan Year,
"Determination Date" means the last day of such Plan Year.
(c) "Five-Percent Owner" means, if the Employer is a corporation, any
Employee who owns (or is considered as owning within the meaning of Section
318 of the Code modified by Section 416(i)(1)(B)(iii) of the Code) more than
5% of the value of the outstanding stock of, or more than 5% of the total
combined voting power of all the stock of, the Employer. If the Employer is
not a corporation, a Five-Percent Owner means any Employee who owns more than
5% of the capital or profits interest in the Employer.
(d) "Key Employee" means any Employee or former Employee (or, where
applicable, such person's Beneficiary) in the Plan who, at any time during
the Plan Year containing the Determination Date or any of the preceding four
(4) Plan Years, is: (i) an Officer having Top-Heavy Earnings from the
Employer of greater than 50% of the dollar limitation in effect under Section
415(b)(1)(A) of the Code; (ii) one of the ten (10) Employees having Top-Heavy
Earnings from the Employer of more than the dollar limitation in effect under
Section 415(c)(1)(A) of the Code and owning (or considered as owning within
the meaning of Section 318 of the Code modified by Section 416(i)(1)(B)(iii)
of the Code) both more than a 1/2% interest in value and the largest
interests in the value of the Employer; (iii) a Five-Percent Owner of the
Employer; or (iv) a One-Percent Owner of the Employer having Top-Heavy
Earnings from the Employer greater than $150,000. For purposes of computing
the Top-Heavy Earnings in subsections (d)(i), (d)(ii) and (d)(iv) above, the
aggregation rules of Sections 414(b), (c), (m) and (o) of the Code shall
apply.
(e) "Non-Key Employee" means an Employee or former Employee (or, where
applicable, such person's Beneficiary) who is not a Key Employee.
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(f) "Officer" means an Employee who is an administrative executive in
the regular and continued service of his Employer; any Employee who has the
title but not the authority of an officer shall not be considered an Officer
for purposes of this Article. Similarly, an Employee who does not have the
title of an officer but has the authority of an officer shall be considered
an Officer. For purposes of this Article, the maximum number of Officers that
must be taken Into consideration shall be determined as follows: (I) three
(3), if the number of Employees is less than thirty (30); (II) 10% of the
number of Employees, if the number of Employees is between thirty (30) and
five hundred (500); or (III) fifty (50), if the number of Employees is
greater than five hundred (500). In determining such limit, the term
"Employer" shall be determined in accordance with Sections 414(b), (c), (m)
and (o) of the Code and "Employee" shall include Leased Employees and exclude
employees described in Section 414(q)(8) of the Code.
(g) "One-Percent Owner" means, if the Employer is a corporation, any
Employee who owns (or is considered as owning within the meaning of Section
318 of the Code modified by Section 416(i)(1)(B)(iii) of the Code) more than
1% of the value of the outstanding stock of, or more than 1% of the total
combined voting power of all the stock of, the Employer. If the Employer is
not a corporation, a One-Percent Owner means any Employee who owns more than
1% of the capital or profits interest in the Employer.
(h) A "Permissive Aggregation Group" consists of one or more plans of
the Employer that are part of a Required Aggregation Group, plus one or more
plans that are not part of a Required Aggregation Group but that satisfy the
requirements of Sections 401(a)(4) and 410 of the Code when considered
together with the Required Aggregation Group. If two (2) or more defined
benefit plans are included in the aggregation group, the same actuarial
assumptions must be used with respect to all such plans in determining the
Present Value of Accrued Benefits.
(I) "Present Value of Accrued Benefits" shall be determined in
accordance with the actuarial assumptions set forth in the defined benefit
plan and the assumed benefit commencement date shall be determined taking
into account any nonproportional subsidy.
(j) "Related Rollover Contributions" means rollover contributions
received by the Plan that are not Initiated by the Employee nor made from
another plan maintained by the Employer.
(k) A "Required Aggregation Group" consists of each plan of the
Employer (whether or not terminated) in which a Key Employee participates or
participated at any time during the Plan Year containing the Determination
Date or any of the four (4) preceding Plan Years and each other plan of the
Employer (whether or not terminated) which enables any plan in which a Key
Employee participates or participated to meet the requirements of Section
401(a)(4) or 410 of the Code. If two (2) or more defined benefit plans are
included in the aggregation group, the same actuarial assumptions must be
used with respect to all such plans in determining the Present Value of
Accrued Benefits.
(1) A "Super Top-Heavy Plan" means a Plan in which, for any Plan Year:
(i) the Top-Heavy Ratio (as defined in subsection (o)) for the Plan
exceeds 90% and the Plan is not part of any Required Aggregation Group (as
defined in subsection (k)) or Permissive Aggregation Group (as defined in
subsection (h)); or
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(ii) the Plan is a part of a Required Aggregation Group (but is not part of
a Permissive Aggregation Group) and the Top-Heavy Ratio for the group of plans
exceeds 90%; or
(iii) the Plan is a part of a Required Aggregation Group and part of
a Permissive Aggregation Group and the Top-Heavy Ratio for the Permissive
Aggregation Group exceeds 90%.
(m) "Top-Heavy Earnings" means, for any year, an individual's annual
compensation as stated on such individual's federal tax Form W-2 for the
calendar year that ends with or within the Plan Year. Commencing January 1,
1989, Top-Heavy Earnings means, for any year, compensation as defined in
Section 414(q)(7) of the Code, up to a maximum of $200,000 adjusted as
prescribed by the Secretary of the Treasury under Section 401(a)(17) of the
Code. Commencing January 1, 1994, the maximum compensation taken into
account for any year shall be $150,000, adjusted in multiples of $10,000 for
increases in the cost-of-living as prescribed by the Secretary of the
Treasury under Section 401(a)(17)(B) of the Code. In determining Top-Heavy
Earnings, the rules of Section 414(q)(6) of the Code shall apply except that
the term "family" shall include only the Spouse and those lineal descendants
of the Employee who have not attained age nineteen (19) before the close of
the Plan Year.
(n) A "Top-Heavy Plan" means a Plan in which, for any Plan Year:
(i) the Top-Heavy Ratio (as defined in subsection (o)) for the Plan
exceeds 60% and the Plan is not part of any Required Aggregation Group (as
defined in subsection (k) or Permissive Aggregation Group (as defined in
subsection (h)); or
(ii) the Plan is a part of a Required Aggregation Group but is not part
of a Permissive Aggregation Group and the Top-Heavy Ratio for the group of
plans exceeds 60%; or
(iii) the Plan is a part of a Required Aggregation Group and part of a
Permissive Aggregation Group and the Top-Heavy Ratio for the Permissive
Aggregation Group exceeds 60%.
(o) "Top-Heavy Ratio" means:
(i) if the Employer maintains one or more qualified defined
contribution plans and the Employer has not maintained any qualified defined
benefit plans which during the five (5) year period ending on the
Determination Date have or have had accrued benefits, the Top-Heavy Ratio for
the Plan alone or for the Required Aggregation Group or Permissive
Aggregation Group, as appropriate, is a fraction, the numerator of which is
the sum of the Account balances under the aggregated defined contribution
plan or plans for all Key Employees as of the Determination Date, including
any part of any Account balance distributed in the five (5) year period
ending on the Determination Date but excluding distributions attributable to
Related Rollover Contributions, if any, and the denominator of which is the
sum of all Account balances under the aggregated qualified defined
contribution plan or plans for all Participants as of the Determination Date,
including any part of any Account balance distributed in the five (5) year
period ending on the Determination Date but excluding distributions
attributable to Related Rollover Contributions, if any, determined in
accordance with Section 416 of the Code and the regulations thereunder.
(ii) if the Employer maintains one or more qualified defined
contribution plans and
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<PAGE>
the Employer maintains or has maintained one or more qualified defined benefit
plans which during the five (5) year period ending on the Determination Date
have or have had any accrued benefits, the Top-Heavy Ratio for any Required
Aggregation Group or Permissive Aggregation Group, as appropriate, is a
fraction, the numerator of which is the sum of the Account balances under the
aggregated qualified defined contribution plan or plans for all Key Employees,
determined in accordance with (I) above, and the sum of the Present Value of
Accrued Benefits under the aggregated qualified defined benefit plan or plans
for all Key Employees as of the Determination Date, and the denominator of which
Is the sum of the Account balances under the aggregated qualified defined
contribution plan or plans determined in accordance with (I) above, for all
Participants and the sum of the Present Value of Accrued Benefits under the
aggregated qualified defined benefit plan or plans for all Participants as of
the Determination Date, all determined in accordance with Section 416 of the
Code and the regulations thereunder. The accrued benefits under a qualified
defined benefit plan in both the numerator and denominator of the Top-Heavy
Ratio are adjusted for any distribution of an accrued benefit made in the five
(5) year period ending on the Determination Date.
(III) For purposes of (I) and (II) above, the value of Account
balances and the Present Value of Accrued Benefits will be determined as of
the most recent Valuation Date that falls within the' twelve (12) month
period ending on the Determination Date, except as provided in Section 416 of
the Code and the regulations thereunder for the first and second Plan Years
of a qualified defined benefit plan. The Account balances and Present Value
of Accrued Benefits of a Participant (A) who is a Non-Key Employee but who
was a Key Employee in a prior year, or (B) who has not been credited with at
least an Hour of Service with any employer maintaining the Plan at any time
during the five (5) year period ending on the Determination Date will be
disregarded. The calculation of the Top-Heavy Ratio, and the extent to which
distributions, rollovers, and transfers are taken into account will be made
in accordance with Section 416 of the Code and the regulations thereunder.
When aggregating plans, the value of Account balances and the Present Value
of Accrued Benefits will be calculated with reference to the Determination
Date that falls within the same calendar year.
(p) "Valuation Date", for the purpose of computing the Top-Heavy Ratio
as defined in subsection (o) means the last date of the Plan Year.
For purposes of subsections (h), (j) and (k), the rules of Sections
414(b), (c), (m) and (o) of the Code shall be applied in determining the
meaning of the term "Employer".
12.3 Limit on Top-Heavy Earnings
For any Plan Year commencing prior to January 1, 1989 in which the Plan
is a Top-Heavy Plan, Top-Heavy Earnings taken into account for purposes of
determining Employer contributions for such Plan Year on behalf of any
Participant shall be limited to a maximum of $200,000. This maximum shall be
subject to annual cost-of-living adjustments prescribed by the Secretary of
the Treasury or his delegate in accordance with regulations adopted by the
Secretary for such purpose.
12.4 Minimum Contributions
If the Plan becomes a Top-Heavy Plan, then any provision of Article III to
the contrary notwithstanding, the following provisions shall apply:
(a) Subject to subsection (b), the Employer shall contribute on behalf
of each Participant who is employed by the Employer on the last day of the
Plan Year and who is a Non-Key
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Employee an amount with respect to each Top-Heavy year which, when added to the
amount of Matching Contributions, Special Contributions and Forfeitures made on
behalf of such Participant, shall not be less than the lesser of: (I) 3% of such
Participant's Section 415 Compensation (as defined in Section 3.11(a)(vii) of
the Plan and modified by Section 401(a)(17) of the Code), or (II) if the
Employer has no defined benefit plan which is designated to satisfy Section 416
of the Code, the largest of Employer Contributions and forfeitures, as a
percentage of the Key Employees' Top-Heavy Earnings; provided, however, that in
no event shall any contributions be made under this Section 12.4 in an amount
which will cause the percentage of contributions made by the Employer on behalf
of any Participant who is a Non-Key Employee to exceed the percentage at which
contributions are made by the Employer on behalf of the Key Employee for whom
the percentage of Matching Contributions is highest In such Top-Heavy year. Any
such contribution shall be allocated to the Matching Contribution Account of
each such Participant and, for purposes of vesting and withdrawals only, shall
be deemed to be a Matching Contribution.
(b) Notwithstanding the foregoing, this Section shall not apply to any
Participant to the extent that such Participant is covered under any other
plan or plans of the Employer (determined in accordance with Sections 414(b),
(c), (m) and (o) of the Code) and such other plan provides that the minimum
allocation or benefit requirement will be met by such other plan should this
Plan become Top-Heavy.
(c) For purposes of this Article, prior to January 1, 1989 any amount
contributed by the Employer pursuant to a Compensation Reduction Agreement
shall be considered as a contribution made by the Employer. Commencing
January 1, 1989, the following shall be considered as a contribution made by
the Employer:
(i) Qualified Nonelective Contributions;
(ii) Matching Contributions made by the Employer on behalf of Key
Employees; and
(iii) Basic Contributions made by the Employer on behalf of Key
Employees.
(d) Subject to the provisions of subsection (b), all NonKey Employee
Participants who are employed by the Employer on the last day of the Plan
Year shall receive the defined contribution minimum provided under subsection
(a). A Non-Key Employee may not fail to accrue a defined contribution
minimum merely because such Employee was excluded from participation or
failed to accrue a benefit because (i) his Compensation is less than a stated
amount, or (ii) he failed to make Basic Contributions.
12.5 Impact on Section 415 Maximum Benefits
For any Plan Year in which the Plan is a Super Top-Heavy Plan, Section
3.11(a)(iv) and (v) shall be read by substituting the number 1.0 for the
number 1.25 wherever it appears therein. For any Plan Year in which the Plan
is a Top-Heavy Plan but not a Super Top-Heavy Plan, the Plan shall be treated
as a Super Top-Heavy Plan under this Section 12.5, unless each Non-Key
Employee who is entitled to a minimum contribution or benefit receives an
additional minimum contribution or benefit. If the Non-Key Employee is
entitled to a minimum contribution under Section 12.4(a), the Plan shall not
be treated as a Super Top-Heavy Plan under this Section 12.5 if the minimum
contribution satisfies Section 12.4(a) when 4% is substituted for 3% in
Section 12.4(a)(i).
ARTICLE XIII
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Miscellaneous Provisions
13.1 No Right to Continued Employment
Neither the establishment of the Plan, nor any provisions of the Plan,
of the Agreement establishing the Trust or of any Separate Agreement nor any
action of any Named Fiduciary, Plan Administrator or the Employer, shall be
held or construed to confer upon any Employee any right to a continuation of
his employment by the Employer. The Employer reserves the right to dismiss
any Employee or otherwise deal with any Employee to the same extent and in
the same manner that it would if the Plan had not been adopted.
13.2 Merger, Consolidation, or Transfer
The Plan shall not be merged or consolidated with, nor transfer its
assets or liabilities to, any other plan unless each Employee, Participant,
Beneficiary and other person entitled to benefits under the Plan, would (if
such other plan then terminated) receive a benefit immediately after the
merger, consolidation or transfer which is equal to or greater than the
benefit he would have been entitled to receive if the Plan had terminated
immediately before the merger, consolidation or transfer.
13.3 Nonalienation of Benefits
Benefits payable under the Plan shall not be subject in any manner to
anticipation, alienation, sale, transfer, assignment, pledge, encumbrance,
charge, garnishment, execution, or levy of any kind, either voluntary or
involuntary and any attempt to so anticipate, alienate, sell, transfer,
assign, pledge, encumber, charge, garnish, execute, levy or otherwise affect
any right to benefits payable hereunder, shall be void. Notwithstanding the
foregoing, the Plan shall permit the payment of benefits in accordance with a
qualified domestic relations order as defined in Section 414(p) of the Code.
13.4 Missing Payee
Any other provision in the Plan, Separate Agreement or Agreement to the
contrary notwithstanding, if the Trustees and, if appropriate, any Separate
Agency are unable to make payment to any Employee, Participant, Beneficiary
or other person to whom a payment is due ("Payee") under the Plan because the
identity or whereabouts of such Payee cannot be ascertained after reasonable
efforts have been made to identify or locate such person (including mailing a
certified notice of the payment due to the last known address of such Payee
as shown on the records of the Employer), such payment and all subsequent
payments otherwise due to such Payee shall be forfeited twenty-four (24)
months after the date such payment first became due. However, such payment
and any subsequent payments shall be reinstated retroactively, without
interest, no later than sixty (60) days after the date on which the Payee is
identified and located.
13.5 Affiliated Employers
All employees of all Affiliated Employers shall, for purposes of the
limitations in Article XII and for measuring Hours of Service and Periods of
Service, be treated as employed by a single employer. No employee of an
Affiliated Employer shall become a Participant of this Plan unless employed by
the Employer or an Affiliated Employer which has adopted the Plan.
13.6 Successor Employer
In the event of the dissolution, merger, consolidation or reorganization
of the Employer, the successor organization may, upon satisfying the
provisions of the Agreement and the Plan, adopt and continue this Plan. Upon
adoption, the successor organization shall be deemed the Employer with all
its
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powers, duties and responsibilities and shall assume all Plan liabilities.
13.7 Return of Employer Contributions
Any other provision of the Plan, Separate Agreement or Agreement to the
contrary notwithstanding, upon the Employer's request and with the consent of
the Trustees and, if appropriate, any Separate Agency, a contribution to the
Plan by the Employer which was (a) made by mistake of fact, or (b)
conditioned upon initial qualification of the Plan with the Internal Revenue
Service, or (c) conditioned upon the deductibility by the Employer of such
contributions under Section 404 of the Code, shall be returned to the
Employer within one (1) year after: (i) the payment of a contribution made by
mistake of fact, or (ii) the denial of such qualification or (iii) the
disallowance of the deduction (to the extent disallowed), as the case may be.
Any such return shall not exceed the lesser of (A) the amount of such
contributions (or, if applicable, the amount of such contribution with
respect to which a deduction is denied or disallowed) or (B) the amount of
such contributions net of a proportionate share of losses incurred by the
Plan during the period commencing on the Valuation Date as of which such
contributions are made and ending on the Valuation Date as of which such
contributions are returned. All such refunds shall be limited in amount,
circumstances and timing to the provisions of Section 403(c) of ERISA.
13.8 Construction of Language
Wherever appropriate in the Plan, words used in the singular may be read
in the plural; words used in the plural may be read in the singular; and
words importing the masculine gender shall be deemed equally to refer to the
female gender. Any reference to a section number shall refer to a section of
this Plan, unless otherwise indicated.
13.9 Headings
The headings of articles and sections are included solely for
convenience of reference, and if there be any conflict between such headings
and the text of the Plan, the text shall control.
13.10 Governing Law
The Plan shall be governed by and construed and enforced in accordance
with the laws of the State of New York, except to the extent that such laws
are preempted by the Federal laws of the United States of America.
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EXHIBIT 23.1
[KPMG PEAT MARWICK LLP LETTERHEAD]
INDEPENDENT AUDITORS' CONSENT
The Board of Trustees
Cortland Savings Bank:
We consent to the inclusion in the Amended Registration Statement on Form S-1 of
CNY Financial Corporation of our audit report dated March 19, 1998 on the
consolidated balance sheets of Cortland Savings Bank and Subsidiary as of
December 31, 1997 and 1996, and the related consolidated statements of income,
net worth and cash flows for each of the years in the three-year period ended
December 31, 1997.
We also consent to the reference to our firm under the heading "Experts" in the
prospectus.
/s/ KPMG Peat Marwick LLP
Syracuse, New York
August 3, 1998
<PAGE>
EXHIBIT 23.2
CONSENT OF SERCHUK & ZELERMYER, LLP
The Board of Trustees
Cortland Savings Bank
Re: The Registration Statement on Form S-1 and Application for Conversion of
Form 86-AC in connection with the conversion of Cortland Savings Bank from the
mutual to the stock form of ownership.
We hereby consent to the reference to our firm under the headings "Risk
Factors--Dilution, Additional Costs and Other Consequences of the
Foundation--Tax Considerations", "The Conversion-- Effects of Conversion on
Depositors and Borrowers--Tax Effects", "--Establishment of the Foundation-- Tax
Considerations", "Experts" and "Legal and Tax Opinions" in the prospectus which
is part of the (i) Registration Statement on Form S-1 of CNY Financial
Corporation and any amendments thereto, filed with the Securities and Exchange
Commission and (ii) the Application for Conversion on Form 86-AC of Cordland
Savings Bank filed with the New York State Banking Department and any amendments
thereto.
Very truly yours,
/s/ Serchuk & Zelermyer, LLP
Serchuk & Zelermeyer, LLP
White Plains, New York
August 3, 1998
<PAGE>
Exhibit 99.2
Press Release
FOR IMMEDIATE RELEASE
For More Information Contact:
Wesley D. Stisser, Jr., President
Telephone: (607) 756-5643
CORTLAND SAVINGS BANK STOCK SALE APPROVED
Cortland, New York, _________, 1998 - Mr. Wesley D. Stisser, Jr.,
President and Chief Executive Officer of Cortland Savings Bank, Cortland, New
York, announced today that Cortland Savings Bank has received approval from the
Federal Deposit Insurance Corporation (FDIC) and the New York State Banking
Department to convert from a state chartered savings bank to a capital stock
savings bank. In connection with the Conversion, Cortland Savings Bank has
formed a holding company, CNY Financial Corporation, to hold all of the
outstanding capital stock of Cortland Savings Bank.
A Prospectus and Proxy Statement describing the Plan of Conversion will
be mailed to certain depositors of Cortland Savings Bank in late August, 1998.
Under the Plan of Conversion, CNY Financial Corporation is offering an estimated
7,043,750 shares of common stock at $10.00 per share. Certain of Cortland
Savings Bank's past and present depositors will have the opportunity to purchase
stock through a subscription offering that closes on September 16, 1998. Shares
that are not subscribed for during the subscription offering, if any, will be
offered to the general public, with preference given to natural persons who are
residents of Cortland County, New York, in a community offering. The offerings
are being managed by CIBC Oppenheimer of New York City and Trident Securities,
Inc., of Raleigh, North Carolina.
As a result of the Conversion, Cortland Savings Bank will be structured
in the stock form, just like all commercial banks and an increasing number of
savings institutions, and will become a subsidiary of CNY Financial Corporation
According to Mr. Stisser, "Our day to day operations will not change
as a result of the Conversion and deposits will continue to be insured by the
FDIC up to the applicable legal limits".
Cortland Savings Bank is headquartered in Cortland, New York. The Bank
was organized in 1866. At June 30, 1998, Cortland Savings Bank had total assets
of $237.6 million and total equity of $32.0 million.
Customers or interested members of the community with questions
concerning the stock offering should call the Stock Information Center at
(607)_______.
<PAGE>
Brochure:
Cortland Savings Bank
Questions and Answers Regarding the Subscription Offering and the Community
Offering
MUTUAL TO STOCK CONVERSION
On March 23, 1998, the Board of Directors of Cortland Savings Bank
("Cortland Savings" or the "Company") adopted the Plan of Conversion, pursuant
to which Cortland Savings will convert from a mutual savings bank to a stock
savings bank (the "Conversion") and simultaneously become a wholly-owned
subsidiary of CNY Financial Corporation, a Delaware corporation organized by
Cortland Savings to own all of the outstanding common stock of Cortland Savings
("CNY" or the "Holding Company").
This brochure is provided to answer general questions you might have
about the Conversion. Following the Conversion, Cortland Savings will continue
to provide financial services to its depositors, borrowers and other customers
as it has in the past and will operate with its existing management and
employees. The Conversion will not affect the terms, balances, interest rates or
existing federal insurance coverage on Cortland Savings' deposits or the terms
or conditions of any loans to existing borrowers under their contract
arrangements with Cortland Savings.
For complete information regarding the Conversion, see the Prospectus
and the Proxy Statement. Copies of each of the Prospectus and the Proxy
Statement may be obtained by calling the Stock Information Center at (607)
________________.
THIS INFORMATION DOES NOT CONSTITUTE AN OFFER TO SELL NOR A SOLICITATION OF AN
OFFER TO BUY CNY FINANCIAL CORPORATION COMMON STOCK. OFFERS MAY BE MADE ONLY BY
THE PROSPECTUS. PLEASE READ THE PROSPECTUS PRIOR TO MAKING AN INVESTMENT
DECISION.
THE COMMON STOCK OF CNY FINANCIAL CORPORATION BEING OFFERED IN THE SUBSCRIPTION
OFFERING AND THE COMMUNITY OFFERING ARE NOT SAVINGS ACCOUNTS OR DEPOSIT ACCOUNTS
AND ARE NOT INSURED BY THE BANK INSURANCE FUND OR THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
1. Q. What is a "Conversion"?
A. Conversion is a change in the legal form of organization.
Cortland Savings
<PAGE>
currently operates as a state-chartered mutual
savings bank with no shareholders. Through the Conversion,
Cortland Savings will form a holding company, CNY Financial
Corporation. CNY Financial Corporation will ultimately own all of
the outstanding stock of Cortland Savings. The holding company
will issue common stock in the Conversion, as described below, and
will be a publicly-owned company.
2. Q. Why is Cortland Savings converting?
A. As a state-chartered mutual savings bank, Cortland Savings
does not have stockholders and has no authority to issue stock.
By converting to the stock form of organization, Cortland Savings
will be structured in the form used by all commercial banks, most
business entities and a growing number of savings institutions.
The conversion will be important to the future growth and
performance of Cortland Savings by providing a larger capital
base to support lending and investment activities and it will
enhance Cortland Savings' ability to diversify into other
financial service-related activities. Currently, Cortland Savings
has no specific plans, agreements, arrangements or understandings
regarding such diversification.
3. Q. How will the community as a whole benefit from the conversion?
A. In conjunction with the conversion, the holding company will
contribute shares of its common stock to a charitable foundation.
The foundation will be dedicated to the promotion of charitable
purposes including community development, grants or donations to
support housing assistance and affordable housing programs,
not-for-profit community groups and other similar types of
organizations and projects. The foundation is intended to
complement the company's existing community reinvestment
activities and to share the Bank's financial success as a
locally-based, community-oriented financial services provider
with the community it serves.
4. Q. Will the conversion have any effect on savings accounts,
certificates of deposit or loans with Cortland Savings?
A. No. The conversion will not change the amount, interest rate
or withdrawal rights of any savings and checking accounts or
certificates of deposit. The rights and obligations of borrowers
under their loan agreements will not be affected.
5. Q. Did the Board of Directors of Cortland Savings approve the
conversion?
A. Yes. The Board of Directors adopted the Plan of Conversion on
March 23, 1998.
<PAGE>
THE SUBSCRIPTION AND COMMUNITY OFFERING
Investment in the Common Stock involves certain risks. Before making an
investment decision, please carefully read the enclosed Prospectus.
6. Q. Who is entitled to purchase common stock issued by the holding
company?
A. The offering consists of (i) a Subscription Offering to certain
past and current depositors of Cortland Savings and (ii) a
Community offering to natural persons residing in Cortland
County, New York. Rights to subscribe for common stock will be
given in order of priority to (i) depositors of Cortland Savings
as of the Eligibility Record Date, which is December 31, 1996,
who had a $100.00 minimum deposit at that date ("Eligible Account
Holders"); (ii) Cortland Savings' employee stock ownership plan
(the "ESOP"), a tax qualified employee stock benefit plan; (iii)
depositors of Cortland Savings, who are not Eligible Account
Holders, who had $100.00 or more on deposit as of June 30, 1998.
It is the responsibility of each subscriber qualifying as an
Eligible Account Holder or Supplemental Eligible Account Holder
to list completely all account numbers for qualifying accounts as
of the qualifying date on the stock order form. Failure to do so
may result in a reduction or elimination of a subscriber's order.
Shares that are not subscribed for during the Subscription
Offering, if any, may be offered to the general public through a
community offering with preference given to natural persons who
are residents of Cortland County, New York (the "Local
Community"). It is anticipated that any shares not subscribed for
in the Subscription and Community Offerings will be offered to
certain members of the general public.
7. Q. What is the price per share?
A. The shares of CNY Financial Corporation are being offered at a
purchase price of $10.00 per share. All subscribers will pay
the same price.
8. Q. How do you subscribe for shares of stock?
A. Eligible customers wishing to exercise their subscription rights
must return a Stock Order Form to Cortland Savings prior to
_____, 1998 at 12:00 noon, New York time ("the Expiration Date").
The original Stock Order Form must be completed and returned
along with full payment or appropriate instructions authorizing a
withdrawal from a deposit account at Cortland Savings on or prior
to the Expiration Date.
<PAGE>
9. Q. How do you pay for stock during the offering?
A. First, you may pay for stock with cash (if delivered in person
to Cortland Savings) or by check or money order. Subscription
funds will earn interest at Cortland Savings' passbook rate from
the date of receipt until the completion or termination of the
conversion.
Second, you may authorize Cortland Savings to withdraw funds from
a Cortland Savings savings account or certificate of deposit
without early withdrawal penalty. These funds will continue to
earn interest at the rate in effect for the account until
completion of the Conversion at which time funds will be
withdrawn for the stock purchase. Funds remaining in this account
(if any) will continue to earn at the contractual rate unless the
withdrawal reduces the account balance below the applicable
minimum in which case the depositor will receive interest at the
passbook rate. A hold will be placed on the depositor's account
for the amount specified for stock payment. Subscribers will not
have access to these funds from the day Cortland Savings receives
the stock order until the completion or termination of the
conversion.
Subscribers who wish to utilize Individual Retirement Account
deposits held at Cortland Savings to subscribe for stock are
encouraged to call the Cortland Savings Stock Information Center
for assistance. There will be no early withdrawal penalty or IRS
consequences if done properly, but additional paperwork will be
necessary. Therefore, if you wish to use your Cortland IRA, you
must call the Stock Center prior to ____, 1998.
10. Q. When must an order be placed for shares of stock?
A. To exercise subscription rights in the subscription offering, a
stock order form must be actually received by Cortland Savings
with full payment for all shares subscribed for not later than
12:00 noon, New York time ________, 1998.
11. Q. How many shares of stock will be offered?
A. CNY Financial Corporation will be offering between 5,206,250 and
7,043,750 shares of its common stock at a fixed price of $10.00
per share as will be determined by an independent appraisal firm.
The number of shares may be decreased or increased within a
specified range in response to the independent appraiser's final
determination of the consolidated pro forma market value of CNY
Financial after the Conversion. The amount of stock sold may be
increased to 8,100,312 under certain circumstances.
12. Q. What is the minimum and maximum number of shares which may be
subscribed for during the offering period?
<PAGE>
A. The minimum number of shares that may be purchased will be 25
shares ($250). The maximum number of shares which may be
subscribed for by an eligible account holder, together with
others on the same account, associates and persons acting
together will be 15,000 shares ($150,000).
13. Q. Will a commission be charged on the stock subscribed for during
this offering?
A. No. Subscribers will not pay a commission on stock purchased in
the Subscription Offering.
14. Q. Will subscribers receive interest on funds submitted for stock
subscriptions?
A. Yes. Cortland Savings will pay its current passbook rate
from the date funds are received until completion of the
conversion.
15. Q. Are the Subscription Rights transferable to another party?
A. No. Pursuant to federal and state regulations, subscription
rights granted to Eligible Account Holders and Supplemental
Eligible Account Holders may be exercised only by the person(s)
to whom they are granted. Any person found to be transferring or
selling subscription rights will be subject to forfeiture of such
rights and other penalties.
16. Q. If a depositor closed an account several months ago could they
still be eligible to subscribe for stock?
A. If they were an account holder on the December 31, 1996, or June
30, 1998, they may be eligible to subscribe for stock regardless
of whether or not they continue to hold a Cortland Savings
account.
17. Q. May a loan from Cortland Savings be obtained to pay for shares?
A. No. Federal and state regulations do not allow Cortland
Savings to make loans for this purpose, but other financial
institutions may make a loan for this purpose.
18. Q. Will the FDIC (Federal Deposit Insurance Corporation) insure the
shares of stock?
A. No. The shares will not be insured by the FDIC. However, the
FDIC will continue to insure savings accounts and certificates of
deposit up to the applicable limits allowed by law.
19. Q. Will there be a market for the stock following the conversion?
A. The holding company has never issued stock before, and therefore
there is no
<PAGE>
established market for its common stock. The holding company has
received approval to have the common stock listed on the Nasdaq
National Market under the symbol "CNYF." CIBC Oppenheimer Corp.
and Trident Securities, Inc. intend to make a market in the
common stock.
20. Q. Can stock be purchased using funds in a Cortland Savings IRA
account?
A. Yes. Contact the Stock Information Center for additional
information. It takes several days to process the necessary IRA
forms and, therefore, it is necessary that you make arrangements
for this well in advance of the Expiration Date.
ABOUT VOTING "FOR" THE PLAN OF CONVERSION
Cortland Savings Bank's depositors are being asked to approve the Plan
of Conversion, which was adopted by the Board of Directors of the Bank and
approved by state and federal regulators.
Voting on the Plan does not affect deposit or loan accounts at the Bank
and does not obligate depositors to purchase stock.
21. Q. Who is eligible to vote at the Special Meeting of Depositors to
be held to consider the Plan of Conversion?
A. At the Special Meeting of Depositors, which will be held on
September __, 1998, certain depositors will be eligible to vote
if they qualify as one of the "Voting Depositors" on the Voting
Record Date established by the Board of Directors. Voting
Depositors may vote by signing the enclosed proxy card.
22. Q. How many votes does a Voting Depositor receive?
A. Each account holder is entitled to one vote for each $100,
rounded to the nearest $100, on deposit in such account, subject
to an overall maximum of 1,000 votes per account.
23. Q. Why have I received more than one proxy card?
A. If you have more than one deposit account at Cortland Savings,
you could receive more than one informational packet and each
packet should contain a separate proxy card, depending on the
ownership structure of your accounts. PLEASE VOTE, SIGN AND
PROMPTLY RETURN ALL PROXY CARDS.
24. Q. If a depositor votes "against" the Plan of Conversion and it
is approved, will such depositor be prohibited from buying stock
during the Subscription Offering?
A. No. Voting against the Plan of Conversion in no way restricts a
depositor from buying stock.
<PAGE>
25. Q. What happens if Cortland Savings does not obtain enough votes to
approve the Plan of Conversion?
A. Cortland Savings' Conversion would not take place and Cortland
Savings would remain a mutual institution.
26. Q. Are Voting Depositors required to vote?
A. No. However, failure to return a proxy card will have the same
effect as a vote "Against" the Plan of Conversion.
27. Q. What is a Proxy Card?
A. A Proxy Card gives a depositor the ability to vote without
attending the Special Meeting in person. However, a depositor may
attend the meeting and vote in person, even if they have
previously returned a proxy card.
28. Q. How can someone obtain further information concerning the stock
offering?
A. All interested investors are invited to call the Stock
Information Center at (607)___________ for further information.
The Stock Information Center will be set up so that it can assist
customers in their purchase of stock and answer their questions
concerning the offering.
These Questions and Answers are neither an offer to sell nor a solicitation of
an offer to buy common stock. The offer is made only by the Prospectus. A
Prospectus can be obtained at any Cortland Savings office or by calling the
Stock Information Center. There shall be no solicitation of an offer or sale of
stock in any jurisdiction in which any offer, solicitation of an offer or sale
of stock would be unlawful.
The common stock is not a deposit or account and is not federally
insured or guaranteed.
<PAGE>
OFFICER AND DIRECTOR STOCK PURCHASE COMMITMENTS
The following table sets forth certain information as to the intended purchases
of Common Stock by each director and executive officer of the Bank and their
associates and by all directors and executive officers as a group. This table
excludes shares to be purchased by the ESOP which may be allocated to executive
officers and excludes options or shares which may be granted pursuant to the
Stock Option Plan or the PRRP which are expected to be adopted after the
Conversion. For purposes of the following table, it has been assumed that
6,125,000 shares (the midpoint of the Valuation Range) of Common Stock will be
sold at $10.00 per share and that sufficient shares will be available to satisfy
subscriptions in all categories. The percentages assume a contribution of
122,500 shares of Common Stock to the foundation.
<TABLE>
<CAPTION>
Aggregate Percent of
Name Position Total Shares Purchase Price Total Offering (1)
- ---- -------- ------------ -------------- ------------------
<S> <C> <C> <C> <C>
Wesley D. Stisser, Jr. President, Chief Executive
Officer & Director 15,000 $150,000 .24%
Joseph H. Compagni Director 15,000 150,000 .24%
Roland Fragnoli Director 15,000 150,000 .24%
Edward E. Hatter, Jr. Director 15,000 150,000 .24%
Patrick J. Hayes, M.D. Director 15,000 150,000 .24%
Robert S. Kashdin, CPA Director 15,000 150,000 .24%
Harvey Kaufman Director 15,000 150,000 .24%
Donald P. Reed Director 15,000 150,000 .24%
Judith F. Riehlman Director 1,000 10,000 .02%
Terrance D. Stalder Director 10,000 100,000 .16%
F. Michael Stapleton Executive Vice President &
Chief Operating Officer 15,000 150,000 .24%
Steven A. Covert Executive Vice President &
Chief Financial Officer 5,000 50,000 .08%
Kerry D. Meeker Senior Vice President &
Senior Loan Officer 8,000 80,000 .13%
All Directors and Executive
Officers as a Group
159,000 $1,590,000 2.55%
------- ---------- ----
</TABLE>
(1) At the midpoint of the offering and assumes enough shares will be
available to satisfy all subscriptions.
This brochure is neither an offer to sell nor a solicitation of an offer to
buy common stock. The offer is made only by the Prospectus. There shall be no
solicitation of an offer or sale of stock in any jurisdiction in which
any offer, solicitation of an offer or sale of stock would be
unlawful.
The shares are not a deposit or account and are not federally insured or
guaranteed.
<PAGE>
POSTER
Cortland Savings Bank
STOCK OFFERING MATERIALS
AVAILABLE HERE
Customer Priority Rights for the Stock Offering
by CNY Financial Corporation
Expire on ________, 1998
<PAGE>
This announcement is neither an offer to sell nor a solicitation of an offer to
buy these securities. The offer is made only by the Prospectus . These shares
have not been approved or disapproved by the Securities and Exchange Commission,
the New York State Banking Department, the Federal Deposit Insurance Corporation
or any other federal or state agency or any state securities commission, nor has
such Commission, Department, Corporation or agency passed upon the accuracy
or adequacy of the Prospectus. Any representation to the contrary is a
criminal offense.
New Issue ________, 1998
Up to 7,043,750 Shares
These shares are being offered pursuant
to a Plan of Conversion whereby
Cortland Savings Bank
will convert from a state mutual savings bank
to a capital stock savings bank
and become the wholly-owned subsidiary of
CNY Financial Corporation
Common Stock
--------------
Price $10.00 per share
---------------
Copies of the Prospectus may be obtained in any state in which this announcement
is circulated from such of the undersigned or other brokers and dealers
as may legally offer these securities in such state.
CIBC Oppenheimer
Trident Securities, Inc.
For a copy of the Prospectus call (607) ________.
<PAGE>
PROSPECT INVITATION
The Directors and Officers
of
Cortland Savings Bank
cordially invite you to attend a brief
presentation regarding the stock offering of
CNY Financial Corporation, our proposed holding company.
Please join us at:
Place
Address
Date
at ____ p.m.
Hors d'oeuvres will be served.
Space is Limited so Please call (607) ________ if You Plan to Attend.
<PAGE>
Cortland Savings Bank Letterhead
August __, 1998
Dear Individual Retirement Account Participant:
As you know, Cortland Savings Bank ("Cortland Savings") is in the
process of converting from a state chartered mutual savings bank to a capital
stock savings bank and has formed CNY Financial Corporation ("CNY") to hold all
of the stock of Cortland Savings (the "Conversion"). Through the Conversion,
certain current and former depositors of Cortland Savings have the opportunity
to purchase shares of common stock of CNY in a Subscription Offering. CNY
currently is offering up to 7,043,750 common stock, subject to adjustment, at a
price of $10.00 per share.
As the holder of an individual retirement account ("IRA") at Cortland
Savings, you may use your IRA funds to subscribe for stock. If you desire to
purchase common stock of CNY through your IRA, please contact your broker or
Cortland Savings can assist you in self-directing those funds. This process can
be done without an early withdrawal penalty and generally without a negative tax
consequence to your IRA.
If you are interested in receiving more information on self-directing
your IRA, please contact the stock center at (607) _________. Because it takes
several days to process the necessary IRA forms, Cortland Savings must receive a
response by _________, 1998 to accommodate your interest.
Sincerely,
Wesley D. Stisser, Jr.
President and CEO
The shares offered in the Conversion are not savings accounts or deposits and
will not be insured by the Federal Deposit Insurance Corporation or any other
government agency.
This is not an offer to sell or a solicitation of an offer to buy the common
stock. The offer is made only by the Prospectus. There shall be no offer or
sale of common stock in any state in which any offer, solicitation of
an offer or sale of stock would be unlawful.
<PAGE>
(Oppenheimer/Trident Letterhead)
___________, 1998
To Members and Friends of Cortland Savings Bank:
CIBC Oppenheimer Corp. and Trident Securities, Inc., members of the
National Association of Securities Dealers, Inc., are assisting Cortland Savings
Bank of Cortland, New York ("Cortland Savings") in its Conversion from a mutual
savings bank to a capital stock savings bank and the concurrent offering of
common stock by CNY Financial Corporation (the "Company"), a New York
corporation recently formed for the purpose of acquiring all of the stock of
Cortland Savings.
At the request of Cortland Savings, we are enclosing materials
explaining the Conversion process and your right to subscribe for common stock
of the Company. Please read the enclosed offering materials carefully before
subscribing for stock.
If you have any questions, please call the Stock Information Center at
(607) ________.
Sincerely,
CIBC OPPENHEIMER, CORP.
TRIDENT SECURITIES, INC.
Enclosures
The shares offered in the Conversion are not savings accounts or deposits and
will not be insured by the Federal Deposit Insurance Corporation or any other
government agency.
This is not an offer to sell or a solicitation of an offer to buy the common
stock. The offer is made only by the Prospectus. There shall be no offer or
sale of common stock in any state in which any offer, solicitation of
an offer or sale of stock would be unlawful.
<PAGE>
(Cortland Savings Bank Letterhead)
___________, 1998
Dear Valued Customer:
Cortland Savings Bank ("Cortland Savings") is pleased to announce that
we have received regulatory approval to proceed with our plan to convert from a
mutual savings bank to a capital stock savings bank (the "Conversion"),
conditioned upon receipt of approval by Cortland Savings' depositors, among
other things. This Conversion is a significant event in the history of Cortland
Savings in that it allows customers, directors and employees an opportunity to
subscribe for common stock of CNY Financial Corporation ("CNY"), the proposed
holding company for Cortland Savings.
We want to assure you that the Conversion will not affect the terms,
balances, interest rates or existing FDIC insurance coverage on deposits at
Cortland Savings, or the terms or conditions of any loans to existing borrowers
under their individual contract arrangements with Cortland Savings. Let us also
assure you that the Conversion will not result in any changes in the management,
personnel or the Board of Directors of Cortland Savings.
A special meeting of the depositors of Cortland Savings will be held on
___________, 1998 at _______, New York Time, at Cortland Savings' main office to
consider and vote upon Cortland Savings Bank's Plan of Conversion. Enclosed is a
proxy card. The Board of Directors of Cortland Savings solicits your vote "FOR"
the Plan of Conversion. A vote in favor of the Plan of Conversion does not
obligate you to purchase common stock of CNY. If you do not plan to attend the
special meeting, please sign and return your proxy card promptly. Your vote is
important to us.
As one of our valued customers, you have the opportunity to invest in
the future of Cortland Savings by purchasing common stock of CNY during the
Subscription Offering, without paying a sales commission.
If you decide to exercise your subscription rights to purchase shares,
you must return a properly completed stock order form together with full payment
for the subscribed shares so that it is received by Cortland Savings not later
than 12:00 Noon, New York Time on _________, 1998.
We also have enclosed a Prospectus and Proxy Statement which fully
describe the Conversion and provide financial and other information about CNY
and Cortland Savings. Please review these materials carefully before you vote or
invest. For your convenience, we have established a Stock Information Center. If
you have any questions, please call the Stock Information Center at (607)
________.
We look forward to continuing to provide quality financial services to
you in the future.
Sincerely,
Wesley D. Stisser, Jr.
President and CEO
The shares offered in the Conversion are not savings accounts or deposits and
will not be insured by the Federal Deposit Insurance Corporation or any other
government agency.
This is not an offer to sell or a solicitation of an offer to buy the common
stock. The offer is made only by the Prospectus. There shall be no offer or
sale of common stock in any state in which any offer, solicitation of
an offer or sale of stock would be unlawful.
<PAGE>
(Cortland Savings Bank Letterhead)
____________, 1998
Dear Interested Investor:
Cortland Savings Bank of Cortland, New York is pleased to announce that
we have received regulatory approval to proceed with our plan to convert from a
mutual savings bank to a permanent capital stock savings bank (the
"Conversion"), conditioned upon receipt of approval by Cortland Savings'
members, among other things. This Conversion is a significant event in the
history of Cortland Savings in that it allows customers, community members,
directors and employees an opportunity to purchase common stock of CNY Financial
Corporation, the proposed holding company for Cortland Savings.
We want to assure you that the Conversion will not result in any
changes in the management, personnel or the Board of Directors of Cortland
Savings.
Enclosed is a Prospectus which fully describes Cortland Savings, its
management, board and financial condition. Please review it carefully before you
make an investment decision. If you decide to invest, please return to Cortland
Savings a properly completed stock order form together with full payment for
shares at your earliest convenience. For your convenience we have established a
Stock Information Center. If you have any questions, please call the Stock
Information Center at (607) ________.
Sincerely,
Wesley D. Stisser, Jr.
President and CEO
Enclosures
The shares offered in the Conversion are not savings accounts or deposits and
will not be insured by the Federal Deposit Insurance Corporation or any other
government agency.
This is not an offer to sell or a solicitation of an offer to buy the common
stock. The offer is made only by the Prospectus. There shall be no offer or
sale of common stock in any state in which any offer, solicitation of
an offer or sale of stock would be unlawful.
<PAGE>
(Cortland Savings Bank Letterhead)
____________, 1998
Dear Friend:
Cortland Savings Bank ("Cortland Savings") is pleased to announce that
we have received regulatory approval to proceed with our plan to convert from a
mutual savings bank to a capital stock savings bank (the "Conversion"),
conditioned upon receipt of approval by Cortland Savings' depositors, among
other things. The Conversion is a significant event in the history of Cortland
Savings in that it allows customers, directors and employees an opportunity to
subscribe for common stock of CNY Financial Corporation, the proposed holding
company for Cortland Savings.
We want to assure you that the Conversion will not affect the terms,
balances, interest rates or existing FDIC insurance coverage on deposits at
Cortland Savings, or the terms or conditions of any loans to existing borrowers
under their individual contract arrangements with Cortland Savings. Let us also
assure you that the Conversion will not result in any changes in the management,
personnel or the Board of Directors of Cortland Savings.
Our records indicate that you were a depositor of Cortland Savings on
December 31, 1996. Therefore, under applicable law, you are entitled to
subscribe for common stock of CNY Financial Corporation in the Subscription
Offering. Orders submitted by you and others in the Subscription Offering are
contingent upon the current depositors' approval of the Plan of Conversion at a
special meeting of members to be held on __________, 1998, and upon receipt of
all required regulatory approvals.
If you decide to exercise your subscription rights to purchase shares,
you must return a properly completed stock order form together with full payment
for the subscribed shares so that it is received at Cortland Savings not later
than 12:00 Noon, New York Time on __________, 1998.
Enclosed is a Prospectus which fully describes Cortland Savings, its
management, board and financial condition. Please review it carefully before you
invest. For your convenience, we have established a Stock Information Center. If
you have any questions, please call the Stock Information Center at (607)
________.
Sincerely,
Wesley D. Stisser, Jr.
President and CEO
Enclosures
The shares offered in the Conversion are not savings accounts or deposits and
will not be insured by the Federal Deposit Insurance Corporation or any other
government agency.
This is not an offer to sell or a solicitation of an offer to buy the common
stock. The offer is made only by the Prospectus. There shall be no offer or
sale of common stock in any state in which any offer, solicitation of
an offer or sale of stock would be unlawful.
<PAGE>
(Cortland Savings Bank Letterhead)
___________, 1998
Dear Member:
As a qualified member of Cortland Savings Bank ("Cortland Savings"),
you have the right to vote upon Cortland Savings' proposed Plan of Conversion
and also generally have the right to subscribe for common stock of CNY Financial
Corporation, the proposed holding company for Cortland Savings. However, the
proposed Plan of Conversion provides that CNY Financial Corporation will not
offer shares in any state in which compliance with the securities laws would be
impracticable for reasons of cost or otherwise. Unfortunately, the securities
laws of your state would require CNY Financial Corporation to register its
common stock and /or its employees in order to sell the common stock to you.
Such registration would be prohibitively expensive or otherwise impracticable in
light of the few members residing in your state.
You may vote on the proposed Plan of Conversion and we urge you to read
the enclosed Summary Proxy Statement and execute the enclosed Revocable Proxy.
Questions regarding the execution of the Revocable Proxy should be directed to
Cortland Savings' Stock Information Center at (607) ________.
Sincerely,
Wesley D. Stisser, Jr.
President and CEO
Enclosures
The common stock offered in the Conversion are not savings accounts or deposits
and will not be insured by the Federal Deposit Insurance Corporation or any
other government agency.
This is not an offer to sell or a solicitation of an offer to buy the common
stock. The offer is made only by the Prospectus. There shall be no offer or
sale of common stock in any state in which any offer, solicitation of
an offer or sale of stock would be unlawful.
<PAGE>
- -------------------------------------------------------------------------------
P R O X Y G R A M
(LOGO)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
YOUR VOTE ON OUR PLAN OF CONVERSION HAS NOT BEEN RECEIVED.
YOUR VOTE IS VERY IMPORTANT, PARTICULARLY SINCE FAILURE TO VOTE IS EQUIVALENT TO
VOTING AGAINST THE PLAN OF CONVERSION.
VOTING FOR THE PLAN OF CONVERSION WILL NOT AFFECT THE DEPOSIT INSURANCE COVERAGE
OF YOUR ACCOUNTS. ALL ACCOUNTS WILL CONTINUE TO BE INSURED UP TO THE LEGAL LIMIT
BY THE BANK INSURANCE FUND OF THE FEDERAL DEPOSIT INSURANCE CORPORATION, AN
AGENCY OF THE U.S. GOVERNMENT.
REMEMBER, VOTING FOR THE PLAN OF CONVERSION DOES NOT OBLIGATE YOU TO BUY ANY
SHARES.
PLEASE ACT PROMPTLY! SIGN THE ENCLOSED PROXY CARD AND MAIL OR
DELIVER IT TO AN OFFICE OF CORTLAND SAVINGS BANK.
WE RECOMMEND THAT YOU VOTE "FOR" THE PLAN OF CONVERSION.
THANK YOU!
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
THE BOARD OF DIRECTORS
OF CORTLAND SAVINGS BANK
<PAGE>
<TABLE>
<S> <C> <C>
CNY FINANCIAL CORPORATION
STOCK ORDER FORM
- -------------------------------------------------------------------------------------------------------------------
Cortland Savings Bank EXPIRATION DATE
1 North Main Street for Stock Order Forms:
Cortland, NY 13045 12:00 Noon, Eastern Daylight Time
(607) 756- September 16, 1998
- ---------------------------------------------------------------------------------------------------------------------------------
IMPORTANT -- PLEASE NOTE: A properly completed original stock order form must be used to subscribe for common shares. Faxes or
copies of this form will not be accepted. Please read the Stock Ownership Guide and Stock Order Form Instructions as you
complete this Form.
- ---------------------------------------------------------------------------------------------------------------------------------
(1) NUMBER OF SHARES SUBSCRIPTION PRICE (2) TOTAL PAYMENT DUE (3) EMPLOYEE/OFFICER/DIRECTOR INFORMATION
X $10.00 = / / Check here if you are a director,
officer or employee of Cortland Savings or a
member of such person's immediate
family.
-------------------------------------------------------------------------------------------------------------------------------
(4) METHOD OF PAYMENT/CHECK
Enclosed is a check, bank draft or money
order made payable to CNY Financial Corp.
in the amount of:
- ---------------------------------------------------------------------------------------------------------------------------------
(5) METHOD OF PAYMENT/WITHDRAWAL
The undersigned authorizes withdrawal from
the following account(s) at Cortland
Savings. There is no penalty for early
withdrawal for purposes of this payment.
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
----------------------------------------------------
ACCOUNT NUMBER(S) WITHDRAWAL AMOUNT(S)
- -------------------------------------------------------
- -------------------------------------------------------
- -------------------------------------------------------
- -------------------------------------------------------
TOTAL WITHDRAWAL AMOUNT
- -------------------------------------------------------
IN ORDER TO SUBSCRIBE FOR SHARES THROUGH AN INDIVIDUAL
RETIREMENT ACCOUNT ("IRA") AT CORTLAND SAVINGS, YOU
MUST CONTACT THE CONVERSION INFORMATION CENTER AT
BEFORE .
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
(6) PURCHASER INFORMATION
A. / / Eligible Account Holder -- Check here if you were a depositor of a least
$100.00 at Cortland Savings on December 31, 1996. Enter Information below for
all deposit accounts that you had at Cortland Savings on December 31, 1996.
B. / / Supplemental Eligible Account Holder -- Check here if you were a depositor of
at least $100.00 at Cortland Savings on June 30, 1998 but are not an Eligible
Account Holder. Enter information below for all deposit accounts that you had
at Cortland Savings on June 30, 1998
- ------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------
ACCOUNT TITLE (NAMES ON ACCOUNTS) ACCOUNT NUMBER(S)
- ------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C>
.
- - THESE ACCOUNT NUMBERS CORRESPOND TO THE PREPRINTED
REGISTRATION IN THE TOP LEFT HAND CORNER OF THIS
FORM.
- - THESE MAY NOT BE ALL OF YOUR QUALIFYING ACCOUNTS.
- - YOU MUST LIST ANY ACCOUNT NUMBERS FROM OTHER STOCK
ORDER FORMS YOU HAVE RECEIVED IN THE MAIL AND ANY
OTHER ACCOUNTS THAT YOU HAVE OR HAVE HAD AT
CORTLAND SAVINGS.
- - IF YOU DO NOT LIST ALL OF YOUR ACCOUNTS, YOU MAY
NOT RECEIVE ALL OF THE SHARES THAT YOU ARE
ELIGIBLE FOR.
</TABLE>
<TABLE>
<S> <C> <C> <C>
(7) STOCK REGISTRATION/FORM OF STOCK OWNERSHIP
/ / Individual / / Joint Tenants / / Tenants in Common / / Fiduciary (Under Agreement Dated
------------------------, 19 )
/ / Individual Retirement / / Corporation or / / Uniform Transfer to / / Other
Account (IRA) Partnership Minors Act ----------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
(8) NAME(S) IN WHICH SHARES ARE TO BE REGISTERED (PLEASE PRINT CLEARLY) Social Security # or Tax ID
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
Name(s) continued Telephone (Daytime)
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Street Address City State Zip Code
- -----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
(9) NASD AFFILIATION (10) ASSOCIATE--ACTING IN CONCERT
/ / Check here if you are a member of the National / / Check here, and complete the
Association of Securities Dealers, Inc. ("NASD"), a reverse side of this Form, if you or
person associated with an NASD member, a member of the any associate (as defined on the
immediate family of any such person to whose support reverse side of this Form) or
such person contributes, directly or indirectly, or persons acting in concert with you
the holder of an account in which an NASD member or have submitted other orders for
person associated with an NASD member has a beneficial shares in the Subscription
interest. To comply with conditions under which an Offering and/or the Community
exemption from the NASD's Interpretation With Respect Offering.
to Free-Riding and Withholding is available, you
agree, if you have checked the NASD Affiliation box,
(i) not to sell, transfer or hypothecate the stock for
a period of 90 days following issuance, and (ii) to
report this subscription in writing to the applicable
NASD member within one day of payment therefor.
</TABLE>
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(11) ACKNOWLEDGMENT
To be effective, this fully completed Stock Order Form must be actually
received by Cortland Savings, no later than 12:00 Noon, Eastern Daylight
Time, on September 16, 1998, unless extended; otherwise this Stock Order
Form and all subscription rights will be void. Completed Stock Order Forms,
together with the required payment or withdrawal authorization, may be
delivered to Cortland Savings or may be mailed to the Post Office Box
indicated on the enclosed business reply envelope. All rights exercisable
hereunder are not transferable and shares purchased upon exercise of such
rights must be purchased for the account of the person exercising such
rights.
It is understood that this Stock Order Form will be accepted in accordance
with, and subject to, the terms and conditions of the Amended Plan of
Conversion ("Plan") of Home Savings described in the accompanying
Prospectus. If the Plan is not approved by the members of Cortland Savings
at a Special Meeting to be held on September 23, 1998, or any adjournment
thereof, all orders will be cancelled and funds received as payment, with
accrued interest, will be returned promptly.
The undersigned agrees that after receipt by Cortland Savings, this Stock
Order Form may not be modified, withdrawn or cancelled (unless the offering
is not completed within 45 days after the completion of the Subscription
Offering) without Cortland Savings' consent, and if authorization to
withdraw from deposit accounts at Cortland Savings has been given as payment
for shares, the amount authorized for withdrawal shall not otherwise be
available for withdrawal by the undersigned.
Under penalty of perjury, I certify that the Social Security or Tax ID
Number and the other information provided under the Item 8 of this Stock
Order Form are true, correct and complete, that I am not subject to back-up
withholding, that I am purchasing for my own account and that there is no
agreement or understanding regarding the transfer of my subscription rights
or the sale or transfer to these shares.
ALL RIGHTS EXERCISABLE HEREUNDER ARE NOT TRANSFERABLE AND SHARES PURCHASED
UPON EXERCISE OF SUCH RIGHTS MUST BE PURCHASED FOR THE ACCOUNT OF THE PERSON
EXERCISING SUCH RIGHTS. CORTLAND SAVINGS BANK AND CNY FINANCIAL CORPORATION
MAY PURSUE ANY AND ALL LEGAL AND EQUITABLE REMEDIES IN THE EVENT THEY BECOME
AWARE OF THE TRANSFER OF SUBSCRIPTION RIGHTS. THE UNDERSIGNED CERTIFIES THAT
THIS STOCK ORDER IS FOR MY ACCOUNT ONLY AND THERE IS NO AGREEMENT OR
UNDERSTANDING REGARDING THE TRANSFER OF MY SUBSCRIPTION RIGHTS OR ANY
FURTHER SALES OR TRANSFER OF THESE SHARES. IF THERE IS ANY SUCH AGREEMENT OR
UNDERSTANDING, THIS SUBSCRIPTION MAY BE CANCELED BY CORTLAND SAVINGS BANK. I
ACKNOWLEDGE THAT THE COMMON SHARES OFFERED ARE NOT A SAVINGS OR DEPOSIT
ACCOUNT AND ARE NOT INSURED BY THE SAVINGS ASSOCIATION INSURANCE FUND, THE
BANK INSURANCE FUND, THE FEDERAL DEPOSIT INSURANCE FUND, OR ANY OTHER
GOVERNMENT AGENCY, MAY LOSE VALUE AND ARE NOT GUARANTEED BY CNY FINANCIAL
CORPORATION.
A VALID STOCK ORDER FORM MUST BE SIGNED AND DATED TWICE: BELOW AND ON THE FORM
OF CERTIFICATION ON THE REVERSE HEREOF.
<TABLE>
<S> <C>
SIGNATURE DATE SIGNATURE DATE
- ------------------------------------------
- ------------------------------------------
</TABLE>
<TABLE>
<S> <C>
SIGNED FORM OF CERTIFICATION MUST ACCOMPANY ALL STOCK ORDER FORMS (SEE REVERSE SIDE)
</TABLE>
<TABLE>
<S> <C>
OFFICE USE -------------
Date Received
---------------- ----------------
Batch # Order #
</TABLE>
<PAGE>
ITEM (6)a, b, c -- (CONTINUED)
<TABLE>
<CAPTION>
ACCOUNT TITLE (NAMES ON ACCOUNTS) ACCOUNT NUMBER(S)
<S> <C>
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- ---------------------------------------- -------------------------
- ---------------------------------------- -------------------------
<CAPTION>
ACCOUNT TITLE (NAMES ON ACCOUNTS) ACCOUNT TITLE (NAMES ON ACCOUNTS) ACCOUNT NUMBER(S)
<S> <C> <C>
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</TABLE>
ITEM 10 -- (CONTINUED)
<TABLE>
<C> <C> <S>
List below all other orders submitted by you "Associate" is defined as: (i) any corporation or organization (other
or your Associates (as defined) or by persons than Savings, or a majority-owned subsidiary of Cortland Savings, or
acting in concert with you. CNY Financial Corporation.) of which such person is an officer or
partner or is, directly or
indirectly, the beneficial owner of 10% or more of any class of
equity securities,
NUMBER OF (ii) any trust or other estate in which such person has a substantial
NAME(S) LISTED ON OTHER SHARES beneficial
STOCK ORDER FORMS ORDERED
interest or as to which such person serves as a trustee or in a
similar fiduciary
capacity; except for any tax-qualified employee stock benefit plan or
any
charitable trust which is exempt from federal taxation pursuant to
Section 501(c)(3) of the Code; and (iii) any relative or spouse of
such person, or any relative of such spouse, who either has the same
home as such person or who is a director or officer of Cortland
Savings, or any subsidiaries thereof.
</TABLE>
<TABLE>
<S> <C>
A VALID STOCK ORDER FORM MUST BE SIGNED AND DATED BELOW AND ON THE FRONT OF THIS FORM.
FORM OF CERTIFICATION
I/WE ACKNOWLEDGE THAT THE COMMON SHARES OF CNY FINANCIAL CORPORATION. ARE NOT DEPOSIT OR SAVINGS ACCOUNTS AND ARE
NOT FEDERALLY INSURED, AND ARE NOT GUARANTEED BY CORTLAND SAVINGS OR BY THE FEDERAL GOVERNMENT.
I/We further certify that, before purchasing the common shares, no par value per share, of the proposed holding
company for Cortland Savings, I/we received a Prospectus dated , 1998 (the "Prospectus"), which
contains disclosure concerning the nature of the common shares being offered and describes the following risks
involved in the investment under the heading "RISK FACTORS" beginning on page 18 of the Prospectus.
1. Interest Rate Risk........................................................................... (page )
2. Geographic Concentration of Loans............................................................ (page )
3. Lending Risks................................................................................ (page )
4. Competition.................................................................................. (page )
5. Reduction in Return on Equity: Investment of Proceeds........................................ (page )
6. Increased Compensation and Other Expenses After the Conversion............................... (page )
7. Establishment of Charitable Foundation....................................................... (page )
8. Anti-Takeover Provisions..................................................................... (page )
9. Absence of Market for Common Stock........................................................... (page )
10. Possible Increase in the Valuation Range and Number of Shares to be Issued................... (page )
11. Possible Dilution from Stock Options and the Personnel Recognition and Retention Program..... (page )
12. Possible Adverse Income Tax Consequences of the Distribution of Subscription Rights.......... (page )
13. Regulation of Financial Institutions.........................................................
14. Defalcation by Former Senior Loan Officer....................................................
15. Year 2000 Compliance.........................................................................
</TABLE>
<TABLE>
<S> <C> <C>
Signature Date Signature Date
Name (Please Print) Name (Please Print)
</TABLE>
<PAGE>
Exhibit 99.3
FORM OF GIFT INSTRUMENT
CHARITABLE GIFT TO THE CORTLAND SAVINGS FOUNDATION
CNY Financial Corporation, One North Main Street, Cortland, New York
13045 (the "Company"), desires to make a gift of its common stock, par value
$.01 per share ("Common Stock"), to The Cortland Savings Foundation (the
"Foundation"), a not-for-profit corporation organized under the laws of the
State of New York. The purpose of the donation is to establish a bond between
the Company and the community in which it and its affiliates operate to enable
the community to share in the potential growth and success of the Company and
its affiliates over the long term. To that end, the Company now gives,
transfers, and delivers to the Foundation ______ shares of its Common Stock for
consideration of $.01 per share, or total consideration of $__________, subject
to the following conditions:
1. The Foundation shall use the donation solely for charitable purposes
as provided by Section 501(c)(3) of the Internal Revenue Code of 1986, as
amended ("Code"), including, without limitation, various civic and educational
programs, the furtherance of community development, home ownership opportunities
and access to affordable housing in the local communities now or hereafter
served by the Company's subsidiary, Cortland Savings Bank ("Bank") and other
community welfare purposes that contribute to the quality of life in the
communities served by the Bank and the Company;
2. Consistent with the Company's intent to form a long-term bond
between the Company and the community, the Foundation must distribute annually
in grants or contributions, at least 5% of the average fair market value of its
net investment assets. 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
(measured as of the first business day of each year) of the assets held by the
Foundation or such amount as may be necessary to maintain the Foundation's
designation as a tax-exempt organization under Section 501(c) of the Code,
except that this restriction shall not prohibit the Board of Directors of the
Foundation from selling a greater amount of Common Stock in any one year if the
Board of Directors of the Foundation determines that the failure to sell a
greater amount of the Common Stock held by the Foundation would result in a
long-term reduction of the value of the Foundation's assets relative to their
then current value that would jeopardize the Foundation's capacity to carry out
its charitable purposes; and
3. The Common Stock contributed to the Foundation by the Company shall,
for so long as such shares are held by the Foundation, be voted in the same
ratio as all other shares of Common Stock of the Company which are voted on each
and every proposal considered by stockholders of the Company, provided, however,
that if this Condition No. 3 is waived by the Federal Deposit Insurance
Corporation and the New York State Superintendent of Banks, then this Condition
No. 3 shall become void and of no effect.
Dated:_________, 1998 CNY Financial Corporation
By:
___________________________________________
Wesley D. Stisser, Jr., President and Chief
Executive Officer
