UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31,1998
0-24739
Commission File Number
CNY Financial Corporation
(Exact name of registrant as specified in its charter)
DELAWARE 16-1557490
(State or other jurisdiction of (I.R.S. Employment Identification No.)
incorporation or organization)
ONE NORTH MAIN STREET
CORTLAND, NEW YORK 13045
(Address of principal executive offices)
(607) 756-5643
Registrant's telephone number, including area code
COMMON STOCK, $0.01 PAR VALUE
Securities registered pursuant to Section 12(g) of the Act
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 day. (X) Yes ( ) No.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. (X).
The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant was approximately $54.2 million as of March 17,
1998. As of March 17, 1998, the registrant had 5,088,829 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Annual Stockholders' Report for the year ended
December 31,1998, are incorporated by reference into Part II hereof and portions
of the Proxy Statement for the registrant's Annual Meeting of Stockholders to be
held on April 28, 1999, are incorporated by reference into Part III hereof.
<PAGE>
TABLE OF CONTENTS
PART I
ITEM 1. Business........................................................ 1-12
ITEM 2. Properties...................................................... 13
ITEM 3. Legal Proceedings............................................... 13
ITEM 4. Submission of Matters to Vote of Security Holders............... 13
PART II
ITEM 5. Market for Registrant's Common Equity and Related
Stockholder Matters.................... ........................ 13
ITEM 6. Selected Financial Data........................................... 13
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.... ........................ 13
ITEM 7A. Quantitative and Qualitative Disclosure About Market Risk......... 14
ITEM 8. Financial Statements and Supplementary Data....................... 14
ITEM 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..... ....................... 14
PART III
ITEM 10. Directors and Executive Officers of the Registrant................ 14
ITEM 11. Executive Compensation............................................ 14
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.... 14
ITEM 13. Certain Relationships and Related Transactions.................... 14
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K.............................................. 15
Signatures ............................................................... 16
<PAGE>
PART I
ITEM 1. BUSINESS
CNY Financial Corporation, a Delaware corporation incorporated in 1998
(the "Company") is a bank holding company headquartered in Cortland, New York
with total assets of over $281 million at December 31, 1998. Through its wholly
owned subsidiary, Cortland Savings Bank, which was founded in 1866 (the "Bank"),
the Company engages in full service community banking. The Bank is also
headquartered in Cortland, New York, and has three full service offices in
Cortland County, and a loan production office in Ithaca, Tompkins County.
The Company provides community banking services primarily to
individuals and small-to-medium-sized businesses, in Cortland County and the
neighboring counties. These services include traditional checking, NOW, money
market, savings and time deposit accounts. The Company offers home equity, home
mortgage, commercial real estate, commercial and consumer loans, safe deposit
facilities and other services specially tailored to meet the needs of customers
in its target markets.
The Company commenced operations on October 6, 1998, when the Bank
converted from a state chartered mutual savings bank to a state chartered stock
savings bank. References to the business activities, financial condition and
operations of the Company prior to October 6, 1998 refer to the Bank, while
references to the Company on or after that date refer to both the Company and
the Bank as consolidated, unless the context indicates otherwise.
The following discussion should be read in conjunction with the
Company's Consolidated Financial Statements, including the accompanying notes,
which appear in the Company's 1998 Annual Report, included as an exhibit to this
Form 10-K.
INVESTMENT ACTIVITIES
GENERAL. The investment policy of the Company, 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 Company 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. The Company generally classifies
its new securities investments as available-for-sale in order to maintain
flexibility in satisfying future investment and lending requirements.
The following table sets forth certain information with respect to the
Company's securities portfolio.
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AT DECEMBER 31,
----------------------------------------------------------------------------
1998 1997 1996
----------------------------------------------------------------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
- -----------------------------------------------------------------------------------------------------------------
SECURITIES AVAILABLE-FOR-SALE: (Dollars in thousands)
U.S. Treasury securities $ 8,041 $ 8,136 $ 15,045 $ 15,141 $ 14,497 $ 14,550
U.S. Government agencies 4,996 5,028 996 1,005 4,988 4,993
Corporate debt obligations 27,649 27,822 13,819 13,861 13,233 13,252
State and municipal sub-divisions 917 927 - - - -
Mortgage-backed securities 42,801 43,041 12,144 12,211 11,833 11,722
- -----------------------------------------------------------------------------------------------------------------
Total debt securities 84,404 84,954 42,004 42,218 44,551 44,517
Equity securities 2,072 3,483 1,192 1,922 628 1,077
- -----------------------------------------------------------------------------------------------------------------
Total available-for-sale 86,476 88,437 43,196 44,140 45,179 45,594
- -----------------------------------------------------------------------------------------------------------------
SECURITIES HELD-TO-MATURITY:
U.S. Government agencies 1,505 1,507 1,992 1,995 - -
Corporate debt obligations 2,858 2,878 1,854 1,870 - -
State and municipal sub-divisions 747 764 425 430 858 867
Mortgage-backed securities 5,208 5,255 8,279 8,274 10,899 10,766
- -----------------------------------------------------------------------------------------------------------------
Total held-to-maturity 10,318 10,404 12,550 12,569 11,757 11,633
- -----------------------------------------------------------------------------------------------------------------
TOTAL SECURITIES $ 96,794 $ 98,841 $ 55,746 $ 56,709 $ 56,936 $ 57,227
=================================================================================================================
</TABLE>
1
<PAGE>
DEBT SECURITIES. The Company's debt securities totaled $95.3 million at
December 31, 1998. It is the policy of the Company to invest in debt securities
issued by the United States Government, its agencies, municipalities and
corporations. The Company purchases only investment grade debt securities for
its investment portfolio and at December 31, 1998, none of its debt securities
were in default or otherwise classified. The Company seeks to balance its debt
securities purchases between 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 Company limits its investment in corporate debt securities to those
rated in the three highest grades by a nationally recognized rating
organization.
The Company also invests in mortgage-backed securities. Mortgage-backed
securities generally have higher yields than other debt securities because of
their 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
Company. 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.
While 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.
Debt securities are generally purchased with a remaining term to
maturity of two to three years, with the exception of mortgage-backed
securities, which have amortization schedules as long as thirty years. At
December 31, 1998, more than 97.5% of the carrying value of the Company's debt
securities, excluding mortgage-backed securities, had remaining terms to
maturity of five years or less.
EQUITY SECURITIES. The Company and Bank invest a limited amount of
their assets in corporate equity securities. These investments are made to
diversify the Company's investments and provide opportunities for capital
appreciation as well as dividend income. All equity securities are classified as
available-for-sale. The Company does not regularly trade such securities and
generally does not purchase them for the purpose of near term sale. Equity
securities had a fair value of $3.5 million at December 31, 1998. The Bank
intends to invest approximately an additional $50,000 per month in equity
securities.
SECURITIES OF A SINGLE ISSUER. There were no securities of any singe
issuer, other than the U.S. Treasury or U.S. government sponsored entities,
which had a book value in excess of ten percent of stockholders' equity at
December 31, 1998.
SECURITIES, MATURITIES AND YIELDS. The following table sets forth
maturities and the weighted average yields of the Company's securities portfolio
at December 31, 1998.
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ONE YEAR OR LESS ONE TO FIVE YEARS FIVE TO TEN YEARS MORE THAN TEN YEARS TOTAL DEBT SECURITIES
------------------ ------------------- ------------------- ---------------------- ---------------------
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
- ---------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
U.S. Treasury securities $ 5,066 6.17% $ 3,069 6.33% $ -- --% $ -- --% $ 8,135 6.25%
--
U.S. Government agencies 1,001 6.55% 5,533 5.90% -- --% -- --% 6,534 6.23%
Corporate debt 13,512 5.65% 17,168 6.01% -- --% -- --% 30,680 6.10%
State and municipal
subdivisions -- --% 486 4.25% 1,188 4.25% -- --% 1,674 4.28%
Mortgage-backed securities 560 6.38% 2,404 7.07% 4,611 7.31% 40,674 6.80% 48,249 6.89%
- ---------------------------------------------------------------------------------------------------------------------------------
Total $20,139 $ 28,660 $ 5,799 $ 40,674 $ 95,272
=================================================================================================================================
</TABLE>
Expected maturities may differ from contractual maturities because
issuers may have the right to call or prepay obligations with or without
prepayment penalties.
2
<PAGE>
LENDING ACTIVITIES
The loan portfolio is the largest category of the Company's interest
earning assets.
LOAN PORTFOLIO COMPOSITION. The following table sets forth the
composition of the Company's loan portfolio in dollar amounts and in percentages
at the dates indicated.
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AT DECEMBER 31,
-----------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
-----------------------------------------------------------------------------------------------------
PERCENT PERCENT PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
- ------------------------- -------- --------- --------- --------- ---------- ---------- -------- --------- -------- ----------
(Dollars in thousands)
Real estate loans:
Residential $101,885 62.96% $ 97,303 61.66% $ 96,097 59.73% $ 95,854 59.57% $ 92,942 60.12%
Construction 145 0.09 316 0.20 528 0.33 155 0.10 1,065 0.69
Home equity 6,804 4.20 5,924 3.75 5,882 3.66 6,344 3.94 7,085 4.58
Commercial mortgages 29,224 18.06 30,867 19.56 35,119 21.83 35,165 21.86 32,756 21.19
- ------------------------- -------- --------- -------- --------- --------- ---------- -------- --------- -------- ----------
Total real estate loans 138,058 85.31 134,410 85.17 137,626 85.55 137,518 85.47 133,848 86.58
- ------------------------- -------- --------- -------- --------- --------- ---------- -------- --------- -------- ----------
Other loans:
Guaranteed student loans 1,016 0.63 1,507 0.96 1,552 0.96 1,747 1.09 1,960 1.27
Property improvement
loans 709 0.44 907 0.57 1,031 0.64 916 0.57 822 0.53
Automobile loans 10,854 6.71 8,902 5.64 6,378 3.96 5,510 3.42 4,617 2.99
Other consumer loans 4,597 2.84 5,031 3.19 6,289 3.91 6,174 3.84 5,993 3.88
Commercial Loans 6,588 4.07 7,049 4.47 8,020 4.98 9,023 5.61 7,366 4.75
- ------------------------- -------- --------- -------- --------- --------- ---------- -------- --------- -------- ----------
Total other loans 23,764 14.69 23,396 14.83 23,270 14.45 23,370 14.53 20,758 13.42
- ------------------------- -------- --------- -------- --------- --------- ---------- -------- --------- -------- ----------
Total loans 161,822 100.00% 157,806 100.00% 160,896 100.00% 160,888 100.00% 154,606 100.00%
Less:
Deferred loan fees, net 121 241 333 379 378
Allowance for loan 2,494 2,143 1,952 2,002 1,752
losses
- ------------------------- -------- --------- -------- --------- --------- ---------- -------- --------- -------- ----------
Total loans, net $159,207 $155,422 $ 158,611 $158,507 $152,476
========================= ======== ========= ======== ========= ========= ========== ======== ========= ======== ==========
</TABLE>
RESIDENTIAL MORTGAGE LOANS. The Company offers both adjustable-rate and
fixed-rate mortgage loans. The relative proportion of fixed versus adjustable
mortgage loans originated by the Company depends principally upon customer
preferences, which are generally driven by general economic and interest rate
conditions and the pricing offered by the Company's competitors. In recent
years, with relatively low mortgage interest rates, customer preference has
favored fixed-rate mortgage loans. The adjustable-rate loans generally carry
annual or triennial interest rate 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 Company 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
Company 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 Company
obtains independent appraisals on all residential first mortgage loans and
attorney's opinions of title are required at closing. The Company 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 Company seeks to position itself to be able to sell
mortgage loans on the secondary market towards the middle of 1999, it will begin
to require title insurance on first lien residential mortgage loans it intends
to sell. Private mortgage insurance is required on most loans with a loan to
value ratio in excess of 80%. Real estate tax escrows are generally required on
residential mortgage loans with loan to value ratios in excess of 80%.
3
<PAGE>
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 Company's net
interest income in periods of rising interest rates, the Company 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 Company generally include
due-on-sale clauses which permit the Company to demand payment in full if the
borrower sells the property without the Company's consent. Due-on-sale clauses
are an important means of adjusting the rates of the Company's fixed-rate
mortgage loan portfolio, and the Company has generally exercised its rights
under these clauses.
HOME EQUITY LOANS. The Company 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 generally provide for an
initial advance period of ten years, during which the borrower pays interest
only and can borrower, repay, and re-borrow the principal balance. The Company
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.
COMMERCIAL MORTGAGE LOANS. The Company 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 Company's market area or in nearby
areas of Central New York State.
The Company makes commercial mortgage loans with loan to value ratios
up to 75%, terms up to five years, and amortization periods up to 20 years. Most
of the Company's recent fixed-rate commercial mortgage loans mature after five
years, which allows the Company to adjust the interest rate after five years if
appropriate.
For commercial mortgage loans, the Company generally requires a debt
service coverage ratio of at least 110% and the personal guarantee of the
principals of the borrower. The Company also requires an appraisal by an
independent appraiser. Title insurance is required for loans in excess of
$500,000. Attorney's opinions of title are used instead of title insurance for
smaller commercial loans, but the Company 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 Company seeks to
minimize these risks through its underwriting policies. The Company 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 Company 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 Company considers
the resources and income level of the borrower, the borrower's experience in
owning or managing similar property and the Company's lending experience with
the borrower. The Company'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.
AUTOMOBILE LOANS. In recent years, the Company 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
Company and the borrower and through automobile dealers who refer the borrowers
to the Company. The Company 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 Company. The dealers
receive fees from the Company for the referrals.
4
<PAGE>
The Company offers automobile loans for both new and used cars. The
loans have fixed rates with maturities not more than five years. 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 Company 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 Company 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. 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 Company'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 Company 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 mortgage 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.
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
Company evaluates these loans based upon the borrower's ability to repay the
loan from ongoing operations. The Company 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.
LOAN MATURITIES
The following table sets forth the maturities of commercial and real
estate construction loans outstanding at December 31, 1998. Also set forth are
the amounts of such loans due after one year, classified according to
sensitivity to changes in interest rates.
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MATURITY
--------------------------------------------------------------------
DUE IN ONE DUE AFTER ONE YEAR
YEAR OR LESS THROUGH FIVE YEARS DUE AFTER FIVE YEARS TOTAL
- -------------------------------------------------------------------------------------------------------------------
FLOATING FLOATING
FIXED RATE FIXED RATE
------------------------------------------
(In thousands)
Commercial and real estate construction loans $ 2,971 $ 1,918 $ -- $ 1,844 $ -- $ 6,733
===================================================================================================================
</TABLE>
ASSET QUALITY
NON-PERFORMING LOANS. Non-performing loans include: (1) loans accounted
for on a non-accrual basis; (2) accruing loans contractually past due ninety
days or more as to interest or principal payments; (3) loans whose terms have
been renegotiated to provide a reduction or deferral of interest or principal
because of a deterioration in the financial position of the borrower.
5
<PAGE>
The following table provides certain information on the Company's
non-performing loans at the dates indicated.
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AT DECEMBER 31,
------------------------------------------------------------------
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Non-accrual loans: (1)
Residential mortgages $ 667 $ 2,010 $ 1,069 $ 772 $ --
Commercial mortgages 167 1,235 1,416 421 1,295
- ----------------------------------------------------------------------------------------------------------------------------
Total real estate loans 834 3,245 2,485 1,193 1,295
Commercial loans 71 331 790 739 51
Other loans 15 209 358 62 --
- ----------------------------------------------------------------------------------------------------------------------------
Total non-accrual loans 920 3,785 3,633 1,994 1,346
Accruing loans past due 90 days or more:
Residential mortgages -- 2 1 -- 747
Commercial mortgages -- -- -- -- 310
- ----------------------------------------------------------------------------------------------------------------------------
Total real estate loans -- 2 1 -- 1,057
Commercial loans 11 -- -- -- 13
Other loans 4 7 33 -- 47
- ----------------------------------------------------------------------------------------------------------------------------
Total loans past due 90 days or more and still
accruing 15 9 34 -- 1,117
- ----------------------------------------------------------------------------------------------------------------------------
Total non-performing loans 935 3,794 3,667 1,994 2,463
Real estate owned 260 964 563 374 572
- ----------------------------------------------------------------------------------------------------------------------------
Total non-performing assets $ 1,195 $ 4,758 $ 4,230 $ 2,368 $ 3,035
=============================================================================================================================
Non-performing loans as a percent of total loans 0.58% 2.37% 2.28% 1.24% 1.60%
Non-performing assets as a percent of total assets 0.42% 2.04% 1.78% 1.00% 1.32%
=============================================================================================================================
</TABLE>
(1) Non-accrual loans at December 31, 1997 include $2.3 million of
non-accrual loans held for sale. These loans were sold during the first quarter
of 1998, representing the largest component of the decline in non-accrual loans.
At December 31, 1998 there were no loans other than those included in
the table with regard 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.
DELINQUENCY PROCEDURES. When a borrower fails to make a required
payment on a loan, the Company 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 Company
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 Company contacts the borrower on a regular basis to seek to cure the
delinquency. If a mortgage loan becomes past due from 90 to 120 days, the
Company 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.
If an automobile loan becomes 60 days past due, the Company seeks to
repossess the collateral. If the default is not cured, then upon repossession
the Company sells the automobile as soon as practicable through a local
automobile auction. When other types of non-mortgage loans become past due, the
Company 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.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is maintained
at a level considered adequate to provide for potential future losses. The level
of the allowance is based upon management's periodic and comprehensive
evaluation of the loan portfolio, as well as current and projected economic
conditions. Reports of examination furnished by state and federal banking
authorities are also considered by management in this regard. These evaluations
by management in assessing the adequacy of the allowance include consideration
of past loan loss experience, changes in the composition of the loan portfolio,
the volume and condition of loans outstanding and current market and economic
conditions.
6
<PAGE>
The analysis of the adequacy of the allowance is reported to and
reviewed by the Loan Committee of the Board of Directors of the Bank 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 Company's
actual experience differ substantially from the assumptions upon which the
evaluation of the allowance was based. 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.
Loans are charged to the allowance for loan losses when deemed
uncollectible by management, unless sufficient collateral exists to repay the
loan.
Set forth in the following table is an analysis of the allowance for
loan losses.
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YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Allowance for loan losses, beginning
of year $ 2,143 $ 1,952 $ 2,002 $ 1,752 $ 1,620
Provision for loan loss 325 3,300 1,380 600 300
- ---------------------------------------------------------------------------------------------------------------------------
Charge-offs:
Real estate 16 2,484 264 478 110
Commercial 52 395 898 31 21
Other 112 400 551 96 137
- ---------------------------------------------------------------------------------------------------------------------------
Total charge-offs 180 3,279 1,713 605 268
Recoveries:
Real estate 96 9 24 161 --
Commercial 40 61 190 -- --
Other 70 100 69 94 100
- ---------------------------------------------------------------------------------------------------------------------------
Total recoveries 206 170 283 255 100
- ---------------------------------------------------------------------------------------------------------------------------
Net charge-offs (recoveries) (26) 3,109 1,430 350 168
- ---------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses, end of year $ 2,494 $ 2,143 $ 1,952 $ 2,002 $ 1,752
===========================================================================================================================
Allowance for loan losses as a
percent of total loans 1.54% 1.34% 1.22% 1.25% 1.14%
Allowance for loan losses as a
percent of non-performing loans 266.74% 56.48% 53.23% 100.40% 71.13%
Ratio of net charge-offs (recoveries)
to average loans outstanding (0.02)% 1.97% 0.90% 0.22% 0.12%
===========================================================================================================================
</TABLE>
The following table presents the allocation of the allowance for loan
losses.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
AT DECEMBER 31,
------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------------------------------------------------------------------------------------
PERCENT PERCENT PERCENT PERCENT PERCENT
OF OF OF OF OF
LOANS LOANS LOANS LOANS LOAN
TO TO TO TO TO
TOTAL TOTAL TOTAL TOTAL TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
- ------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
ALLOWANCE FOR LOAN
LOSSES ALLOCATED TO:
Residential mortgages $1,187 67.25% $ 661 65.61% $ 389 63.72% $ 112 63.61% $ 746 65.39%
Commercial mortgages 617 18.06 638 19.56 818 21.83 753 21.86 341 21.19
Commercial loans 279 4.07 183 4.47 478 4.98 961 5.61 331 4.75
Other loans 411 10.62 192 10.36 267 9.47 176 8.92 334 8.67
Unallocated -- -- 469 -- -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Total allowance $2,494 100.00% $2,143 100.00% $1,952 100.00% $2,002 100.00% $1,752 100.00%
==============================================================================================================================
</TABLE>
7
<PAGE>
SOURCES OF FUNDS
GENERAL. The Company's primary source of funds is deposits. In
addition, the Company derives funds for loans and investments from loan and
security repayments and prepayments and revenues from operations. Scheduled
payments on loans and securities are a relatively stable source of funds, while
savings inflows and outflows and loan and securities prepayments are
significantly influenced by general interest rates and money market conditions.
DEPOSITS. The Company offers several types of deposit programs to its
customers, including passbook and statement savings accounts, NOW accounts,
money market deposit accounts, checking accounts and certificates of deposit.
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 Company's deposits are obtained predominantly from its Cortland
County market area. The Company relies primarily on customer service and
long-standing relationships with customers to attract and retain these deposits;
however, market interest rates and rates offered by competing financial
institutions significantly affect the Company's ability to attract and retain
deposits. The Company does not use brokers to obtain deposits and has no
brokered deposits.
The Company 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 Company seeks to price its deposit
offerings to be competitive with other institutions in its market area.
The following table sets forth the maturities of certificates of
deposit and other time deposits of $100,000 or more at December 31, 1998.
December 31, 1998
--------------------------------------------------------------------
(Dollars in thousands)
Maturing within three months $ 1,705
After three but within six months 1,528
After six but within twelve months 4,153
After twelve months 5,642
--------------------------------------------------------------------
Total $13,028
====================================================================
BORROWINGS. The Company maintains an available overnight line of credit
with the Federal Home Loan Bank of New York (FHLB) for use in the event of
unanticipated funding needs which cannot be satisfied from other sources.
Additionally, the Company may borrow term advances for the FHLB. The Company had
$1 million of borrowings from the FHLB at December 31, 1998.
SUPERVISION AND REGULATION
Bank holding companies and banks are extensively regulated under
federal and state law. References under this heading to applicable statues or
regulations are brief summaries of portions thereof which do not purport to be
complete and which are qualified in their entirety by reference to those
statutes and regulations. Any change in applicable laws or regulations may have
a material adverse effect on the business of savings banks and bank holding
companies, including the Company and the Bank. However, management is not aware
of any current recommendations by any regulatory authority which, if
implemented, would have or would be reasonable likely to have a material adverse
effect on liquidity, capital resources or operations of the Company or the Bank.
BANK HOLDING COMPANY REGULATION: The Company is registered as a "bank
holding company" with the Federal Reserve and accordingly, is subject to
supervision by the Federal Reserve under the Bank Holding Company Act (the "BHC
Act"). The Company is required to file with the Federal Reserve periodic reports
and such additional information as the Federal Reserve may require pursuant to
the BHC Act. The Federal Reserve has the authority to examine the Company and
may also examine the Bank.
8
<PAGE>
The BHC Act requires prior Federal Reserve approval for, among other
things, the acquisition by a bank holding company of direct or indirect
ownership or control of more than five percent of the voting shares or
substantially all the assets of any bank or bank holding company, or for a
merger or consolidation of a bank holding company with another bank holding
company. With certain exceptions, the BHC Act prohibits a bank holding company
from acquiring direct or indirect ownership or control of voting shares of any
company which is not a bank or bank holding company and from engaging directly
or indirectly in any activity other than banking or managing or controlling
banks or performing services for its authorized subsidiaries. Under the BHC Act
and Federal Reserve regulations, the Company and the Bank are prohibited from
engaging in certain tie-in arrangements in connection with an extension of
credit, lease, sale of property, or furnishing of services.
Any person, including associates and affiliates of and groups acting in
concert with such person, who purchases or subscribes for ten percent or more of
any class of the Company's voting stock may be required to obtain prior approval
of the Federal Reserve under the BHC Act. Prior regulatory approval is also
required before acquiring the power to directly or indirectly direct the
management, operations or policies of the Company or the Bank. In addition, any
corporation, partnership, trust or organized group that acquires a controlling
interest in the Company or the Bank may have to obtain approval of the Federal
Reserve to become a bank holding company and thereafter be subject to regulation
as such. Furthermore, in order for the Company to acquire control of another
bank or bank holding company so that the Company owns, directly or indirectly,
two separate banks, the advance approval of the New York Banking Board would
generally also be required.
It is the policy of the Federal Reserve that the Company is expected to
act as a source of financial strength to the Bank and to commit resources to
support the Bank. The Federal Reserve takes the position that in implementing
this policy, it may require the Company to provide such support when the Company
otherwise would not consider itself able to do so.
The Federal Reserve has adopted risk-based capital requirements for
assessing bank holding company capital adequacy. These standards define
regulatory capital and establish minimum capital standards in relation to assets
and off-balance sheet exposures, as adjusted for credit risks. Under the Federal
Reserve's risk-based guidelines, capital is classified into two categories. For
bank holding companies, Tier 1 or "core" capital consists of common
shareholders' equity, perpetual preferred stock and trust preferred stock (both
subject to certain limitations) and minority interest in the common equity
accounts of consolidated subsidiaries, and is reduced by goodwill, certain other
intangible assets and certain investments in other corporations ("Tier 1
capital"). Tier 2 capital consists of the allowance for loan and lease losses
(subject to certain conditions and limitations), perpetual preferred stock (to
the extent not included in Tier 1 capital), "hybrid capital instruments,"
perpetual debt and mandatory convertible debt securities, and term subordinated
debt and intermediate-term preferred stock.
Under the Federal Reserve's capital guidelines, bank holding companies
are required to maintain a minimum ratio of qualifying capital to risk-weighted
assets of 8.0%, of which at least 4.0% must be in the form of Tier 1 capital.
The Federal Reserve also requires a minimum leverage ratio of Tier 1 capital to
total average assets of 4.0%, except that bank holding companies not rated in
the highest category under the regulatory rating system are required to maintain
a leverage ratio of 1.0% to 2.0% above such minimum. The 4.0% Tier 1 capital to
total average assets ratio constitutes the minimum leverage standard for bank
holding companies, and will be used in conjunction with the risk-based ratio in
determining the overall capital adequacy of banking organizations. In addition,
the Federal Reserve considers the Tier 1 leverage ratio in evaluating proposals
for expansion or new activities.
As of December 31, 1998, the Company had a Tier 1 capital to
risk-weighted assets ratio ("Tier 1 Ratio") of 47.42%, total capital to
risk-weighted assets ratio ("Tier 2 Ratio") of 48.91% and a Tier 1 capital to
total average assets ratio ("leverage ratio") of 29.57%.
TRANSACTIONS WITH AFFILIATES. Transactions between a bank and its
holding company or other affiliates are subject to various restrictions imposed
by state and federal regulatory agencies. Such transactions include loans and
other extensions of credit, purchases of securities and other assets, and
payments of fees or other distributions. In general, these restrictions limit
the amount of transactions between an institution and an affiliate of such
institution, as well as the aggregate amount of transactions between an
institution and all of its affiliates, and require transactions with affiliates
to be on terms comparable to those for transactions with unaffiliated entities.
DIVIDEND LIMITATIONS. As a holding company, the Company is primarily
dependent upon dividend distributions from the Bank and interest on investments
for its income. Federal statutes and regulations impose restrictions on the
payment of dividends by the Company and the Bank.
9
<PAGE>
Federal Reserve policy provides that a bank holding company should not
pay dividends unless (i) the bank holding company's net income over the prior
year is sufficient to fully fund the dividends and (ii) the prospective rate of
earnings retention appears consistent with the capital needs, asset quality and
overall financial condition of the bank holding company and its subsidiaries.
Delaware law also places certain limitations on the ability of the
Company to pay dividends. For example, the Company may not pay dividends to its
stockholders if, after giving effect to the dividend, the Company would not be
able to pay its debts as they become due.
Under the New York 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 approval of the
Superintendent of Banks. Furthermore, 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 the Bank from paying
dividends if, in either of their opinions, the payment of dividends would
constitute an unsafe or unsound practice. Dividends are also prohibited if the
payment would cause the Bank to be undercapitalized.
BANK REGULATIONS. The Bank is subject to extensive regulation,
examination, and supervision by the New York State 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.
BUSINESS ACTIVITIES. The Bank derives its lending, investment and other
authority primarily from the New York Banking Law and the regulations of the
Superintendent of Banks 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, 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.
At December 31, 1998, the Bank did not have any operating subsidiaries.
The Bank may invest in 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 subsidiaries is limited to 3% of the Bank's assets, and such
investments, together with the Bank's loans to its subsidiaries, may not exceed
10% of the Bank's assets.
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.
10
<PAGE>
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 1 capital as
calculated under FDIC regulations. The Bank qualifies for this exclusion and has
used its authority to invest in corporate equity securities. 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 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
stockholders' equity, plus an additional 10% of the Bank's stockholders' equity
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 requires that the highest rated banks maintain a leverage ratio
of at least 3.0%. All other banks subject to FDIC capital requirements must
maintain a leverage ratio of 4.0% to 5.0% or more. As of December 31, 1998, the
Bank's leverage capital ratio was 23.40%.
The Bank must also meet a risk-based capital standard. The risk-based
standard requires the Bank to maintain total capital (defined as Tier 1 and Tier
2 capital) to risk-weighted assets of at least 8% of which at least 4% must be
Tier 1 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 December 31, 1998, the Bank maintained a 37.32% Tier 1 risk-based capital
ratio and a 38.82% total risk-based capital ratio.
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 New York 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 automated teller machines. The Bank received a satisfactory
rating from the Banking Department at its last state community reinvestment
examination.
11
<PAGE>
STANDARDS FOR SAFETY AND SOUNDNESS. The Federal Reserve and 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 an 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.
PROMPT CORRECTIVE ACTION. FDICIA requires the federal banking
regulators, including the Federal Reserve and the FDIC, to take prompt
corrective action with respect to depository institutions that fall below
certain capital standards. Institutions that are not adequately capitalized may
be subject to a variety of supervisory actions including, but not limited to,
restrictions on growth, investment activities, capital distributions and
affiliate transactions and will be required to submit a capital restoration plan
which, to be accepted by the regulators, must be guaranteed in part by any
company having control of the institution (such as the Company). Federal banking
agencies have indicated that, in regulating bank holding companies, the agencies
may take appropriate action at the holding company level based on their
assessment of the effectiveness of supervisory actions imposed upon subsidiary
insured depository institutions pursuant to the prompt corrective action rules.
FORWARD-LOOKING STATEMENTS
In this Form 10-K, 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, any analysis of the adequacy of the
allowance for loan losses or the interest rate sensitivity of the Company's
assets and liabilities, represent attempts to predict future events and
circumstances and also represent forward-looking statements.
Many factors could cause future results to differ from what is
anticipated in the forward-looking statements. For example, future financial
results could be affected by (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 are not
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.
PERSONNEL
At December 31, 1998, the Company employed 91 full-time equivalent
employees. The employees are not represented by a collective bargaining unit,
and the Company considers its relationship with its employees to be good.
COMPETITION
The Company's principal competitors for deposits are other savings
banks, savings and loan associations, commercial banks and credit unions in the
Company'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 Company. The Company'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 Company have much greater financial and
marketing resources than the Company. The Company'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.
12
<PAGE>
ITEM 2. PROPERTIES
The Company 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 Company also has a representative office in
Ithaca for the originations of mortgage loans. The Company believes that these
properties are adequate for current needs. The following table sets forth
certain information regarding the Company's deposit-taking offices at December
31, 1998.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
DATE OWNED/ NET BOOK
LOCATION ACQUIRED LEASED VALUE
- -------------------------------------------------------------------------------------------------------
(In thousands)
One North Main Street, Cortland, NY 13045
and nearby drive through facility at 29-31 North Main Street Various Owned $836
12 South Main Street, Homer, NY 13077 Various Owned $916
860 Route 13, Cortlandville, NY 13045 Various Owned $482
200 East Buffalo Street, Ithaca, NY 14850 1998 Leased None
=======================================================================================================
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
The Company and the Bank are from time to time parties in various
routine legal actions arising in the normal course of business. Management
believes that there is no proceeding threatened or pending against the Company
or the Bank which, if determined adversely, would materially adversely affect
the consolidated financial position or operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Information required in response to this item is contained in the
Company's Annual Report under the captions "Stock Listing" and "Dividends" and
is incorporated herein by reference. The Company did not engage in the sale of
any securities which were not registered under the Securities Act of 1933.
ITEM 6. SELECTED FINANCIAL DATA
Information required in response to this item is contained in the
Annual Report to Stockholders under the caption "Selected Financial Highlights"
and is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required in response to this item is contained in the
Company's Annual Report to Stockholders under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
is incorporated herein by reference. The discussion and analysis of financial
condition and results of operations should be read in conjunction with the
consolidated financial statements and supplementary data contained in the
Company's Annual Report to Stockholders.
13
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required in response to this item is contained in the
Company's Annual Report to Stockholders under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
is incorporated herein by reference. The discussion and analysis of financial
condition and results of operations should be read in conjunction with the
consolidated financial statements and supplementary data contained in the
Company's Annual Report to Stockholders.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required in response to this item is contained in the
Annual Report to Stockholders under the caption "Consolidated Financial
Statements," and is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required in response to this item is contained in the
Company's definitive Proxy Statement (the "Proxy Statement") for its Annual
Meeting of Stockholders to be held April 28, 1999 under the caption "The Board
of Directors, Nominees and Executive Officers" and is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required in response to this item is contained in the
Company's Proxy Statement under the caption "Executive Officer Compensation" and
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to security ownership of certain beneficial
owners and management is incorporated by reference to the section "Principal
Owners of Our Common Stock" in the Proxy Statement for the Annual Meeting of
Stockholders to be held on April 28, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required in response to this item is contained in the
Proxy Statement under the caption "Transactions with Directors and Officers" and
is incorporated herein by reference.
14
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of this report:
1., 2. Financial Statements and Schedules
The Consolidated Financial Statements are incorporated by
reference to the following pages from the 1998 Annual Report
to Stockholders, attached hereto as Exhibit 13.1:
Page
----
Independent Auditor's Report 14
Consolidated Balance Sheets 15
Consolidated Statements of Income 16
Consolidated Statements of Stockholders' Equity
and Comprehensive Income 17
Consolidated Cash Flow Statements 18-19
Notes to Consolidated Financial Statements 20-37
No schedules are required to be filed with this report.
3.0 Exhibits
3.1 Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 of the
Company's Form S-1 Registration Statement (No.
333-57259) filed with the Securities and Exchange
Commission on June 19, 1998).
3.2 Bylaws of the Company (incorporated by reference to
Exhibit 3.2 of the Company's Form S-1 Registration
Statement (No. 333-57259) filed with the Securities
and Exchange Commission on June 19, 1998).
10.1 Employment Agreement between Cortland Savings Bank and
Wesley D. Stisser (incorporated by reference to
Exhibit 10.1 of the Company's Form S-1 Registration
Statement (No. 333-57259) filed with the Securities
and Exchange Commission on June 19, 1998).
10.2 Employment Agreement between Cortland Savings Bank and
F. Michael Stapleton (incorporated by reference to
Exhibit 10.2 of the Company's Form S-1 Registration
Statement (No. 333-57259) filed with the Securities
and Exchange Commission on June 19, 1998).
10.3 Employment Agreement between Cortland Savings Bank and
Steven A. Covert (incorporated by reference to Exhibit
10.3 of the Company's Form S-1 Registration Statement
(No. 333-57259) filed with the Securities and Exchange
Commission on June 19, 1998).
10.4 Employment Agreement between Cortland Savings Bank and
Kerry D. Meeker (incorporated by reference to Exhibit
10.4 of the Company's Form S-1 Registration Statement
(No. 333-57259) filed with the Securities and Exchange
Commission on June 19, 1998).
13.1 1998 Annual Report to Stockholders
21.1 Subsidiaries of the Company
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
<TABLE>
<CAPTION>
CNY FINANCIAL CORP.
<S> <C> <C> <C> <C>
WESLEY D. STISSER MARCH 25, 1999
By: Wesley D. Stisser /s/ ---------------------------------------------------- -------------------
President & Chief Executive Officer (Dated)
STEVEN A. COVERT MARCH 25, 1999
Steven A. Covert /s/ ---------------------------------------------------- -------------------
Executive Vice President & Chief Financial Officer (Dated)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
JOSEPH H. COMPAGNI MARCH 25, 1999
Joseph H. Compagni /s/ ---------------------------------------------------- -------------------
Director (Dated)
PATRICK J.HAYES MARCH 25, 1999
Patrick J. Hayes /s/ ---------------------------------------------------- -------------------
Director (Dated)
ROBERT S. KASHDIN MARCH 25, 1999
Robert S. Kashdin /s/ ---------------------------------------------------- -------------------
Director (Dated)
HARVEY KAUFMAN MARCH 25, 1999
Harvey Kaufman /s/ ---------------------------------------------------- -------------------
Director (Dated)
DONALD P. REED MARCH 25, 1999
Donald P. Reed /s/ ---------------------------------------------------- -------------------
Director (Dated)
Lawrence Seidman ---------------------------------------------------- -------------------
Director (Dated)
TERRANCE D. STALDER MARCH 25, 1999
Terrance D. Stalder /s/ ---------------------------------------------------- -------------------
Director (Dated)
WESLEY D. STISSER MARCH 25, 1999
Wesley D. Stisser /s/ ---------------------------------------------------- -------------------
Director (Dated)
</TABLE>
16
<PAGE>
INDEX TO EXHIBITS
3.1 Certificate of Incorporation of the Company*
3.2 Bylaws of the Company*
10.1 Employment Agreement between Cortland Savings Bank and Wesley D.
Stisser*
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*
13.1 1998 Annual Report to Stockholders
21.1 Subsidiaries of the Company
27.1 Financial Data Schedule
*Previously filed.
DESCRIPTION OF BUSINESS
CNY FINANCIAL CORPORATION IS A PUBLICLY TRADED BANK HOLDING COMPANY
HEADQUARTERED IN CORTLAND, NEW YORK. WITH ASSETS OF $281.2 MILLION, THE COMPANY
SERVES ITS COMMUNITY THROUGH ITS WHOLLY OWNED SUBSIDIARY, CORTLAND SAVINGS BANK.
THE BANK OPERATES THREE FULL-SERVICE OFFICES IN CORTLAND COUNTY AND A LOAN
PRODUCTION OFFICE IN ITHACA, IN NEIGHBORING TOMPKINS COUNTY. CNY FINANCIAL'S
COMMON STOCK IS TRADED ON THE NASDAQ NATIONAL MARKET SYSTEM UNDER THE SYMBOL
"CNYF".
CNY FINANCIAL CORPORATION
Selected Financial Highlights
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
DECEMBER 31,
----------------------------------------------------
SELECTED BALANCE SHEET DATA: 1998 1997 1996 1995 1994
----------------------------------------------------
(In thousands, except share data)
Total assets $281,186 $ 233,729 $238,100 $235,681 $230,339
Loans receivable, net 159,207 155,422 158,611 158,507 152,476
Allowance for loan losses 2,494 2,143 1,952 2,002 1,752
Loans held-for-sale -- 2,541 -- -- --
Securities available-for-sale 88,437 44,140 45,594 41,777 2,519
Securities held-to-maturity 10,318 12,550 11,757 11,188 61,716
Cash & cash equivalents 14,536 8,079 12,536 14,176 4,912
Real estate owned 260 964 563 374 572
Deposits 196,014 199,770 204,640 203,110 200,310
Borrowings 1,000 -- -- -- --
Total stockholders' equity $ 79,070 $ 30,740 $ 30,345 $ 29,030 $ 26,876
Book value per share (1) $ 15.06 N/A N/A N/A N/A
Book value per share, excluding
unallocated ESOP shares (2) $ 16.38 N/A N/A N/A N/A
Continued page 1
</TABLE>
ON OUR COVER
POISED FOR GROWTH
From a position of recognized leadership in
community banking that spans more than 130
years, a strong, new financial services company
was created in Central New York on October 6,
1998 when the oldest and largest independent
bank in Cortland, NY converted from a
state-chartered mutual savings bank to a stock
savings bank. On that day, CNY Financial was
launched.
<PAGE>
CNY
Financial
CNY FINANCIAL CORPORATION
Selected Financial Highlights, Continue
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31
---------------------------------------------------------------
1998 1997 1996 1995 1994
---------------------------------------------------------------
SELECTED OPERATIONS DATA: (In thousands, except share data)
Interest income $ 18,003 $ 17,667 $ 17,787 $ 17,811 $ 15,855
INTEREST EXPENSE 7,986 8,328 8,758 8,613 7,915
- ---------------------------------------------------------------------------------------------------------------------
Net interest income 10,017 9,339 9,029 9,198 8,940
PROVISION FOR LOAN LOSSES 325 3,300 1,380 600 300
- ---------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 9,692 6,039 7,649 8,598 8,640
OTHER NON-INTEREST INCOME 1,583 889 770 671 478
- ---------------------------------------------------------------------------------------------------------------------
11,275 6,928 8,419 9,269 9,118
OTHER NON-INTEREST EXPENSE 8,326 6,872 6,201 5,945 5,586
- ---------------------------------------------------------------------------------------------------------------------
Income before income taxes 2,949 56 2,218 3,324 3,532
INCOME TAX EXPENSE (BENEFIT) 1,270 (16) 853 1,400 1,361
- ---------------------------------------------------------------------------------------------------------------------
Net Income $ 1,679 $ 72 $ 1,365 $ 1,924 $ 2,171
=====================================================================================================================
Basic earnings per share (3) $ -- N/A N/A N/A N/A
=====================================================================================================================
Earnings per share, excluding contribution
to Foundation (4) $ 0.13 N/A N/A N/A N/A
=====================================================================================================================
Weighted average shares outstanding 4,928,044 N/A N/A N/A N/A
=====================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS AND OTHER DATA: AT OR FOR THE YEAR ENDED DECEMBER 31
--------------------------------------------
1998 1997 1996 1995 1994
--------------------------------------------
PERFORMANCE RATIOS:
Return on average assets 0.64% 0.03% 0.58% 0.82% 0.92%
Return on average assets, excluding
contribution to Foundation (4) 0.87% 0.03% 0.58% 0.82% 0.92%
Return on average equity 3.21% 0.23% 4.64% 6.85% 8.41%
Return on average equity, excluding
contribution to Foundation (4) 4.38% 0.23% 4.64% 6.85% 8.41%
Net interest rate spread 3.52% 3.58% 3.48% 3.70% 3.62%
Net interest margin 4.28% 4.17% 4.02% 4.18% 4.03%
Efficiency ratio 72.00% 67.49% 63.38% 60.34% 59.52%
Efficiency ratio, excluding
contribution to Foundation (4) 63.15% 67.49% 63.38% 60.34% 59.52%
STOCKHOLDERS' EQUITY AND ASSET
QUALITY RATIOS:
Average equity to average total assets 19.86% 13.04% 12.40% 12.00% 10.96%
Total equity to assets end of period 28.12% 13.15% 12.74% 12.32% 11.67%
Non-performing assets to total assets 0.42% 2.04% 1.78% 1.00% 1.32%
Non-performing loans to total loans 0.58% 2.37% 2.28% 1.24% 1.60%
Allowance for loan losses to total loans 1.54% 1.34% 1.22% 1.25% 1.14%
Allowance for loan losses to
non-performing loans 266.74% 56.48% 53.23% 100.40% 71.13%
OTHER DATA:
Full service offices 3 3 3 3 3
Full-time equivalent employees 91 93 95 96 99
- ----------------------------------------
</TABLE>
(1) Book value per share is equal to total equity divided by the common shares
outstanding at December 31, 1998.
(2) Equal to stockholders' equity divided by common shares outstanding, less
423,175 unallocated ESOP shares.
(3) Earnings per share calculated on earnings from date of conversion (October
6, 1998) to December 31, 1998.
(4) Excludes contribution expense to the Cortland Savings Foundation of
$1,023,000, or $614,000 after taxes.
1
<PAGE>
CNY
Financial
A MESSAGE TO OUR SHAREHOLDERS
I am pleased to present to you the inaugural annual report of CNY
Financial. Creation of your new public holding company and conversion of its
sole subsidiary, Cortland Savings Bank, to a stock bank have enabled us to
reach historic levels of profitability and position. CNY Financial for
leadership within the industry, as evidenced by the following:
o Net income for 1998 was $2.3 million, excluding the expense of a
donation to the Company's charitable foundation, compared with net income in
1997 of $72,000. This improvement occurred primarily as the result of a
reduction in the costs associated with nonperforming assets.
NET INCOME
$ in Millions
1996 1997 1998
- ---------------------------------------------------------
$2.3 Before Foundation Contribution
-----------------------------------
Net Income After After-Tax
Foundation Foundation
Contribution Contribution
=========================================================
$1.4 $0.1 $1.7 $0.6
=========================================================
o Nonperforming assets totaled $1.2 million on December 31, 1998, or .42%
of total assets, compared to $4.8 million or 2.04% of total assets at the end of
1997. This reduction reflects the successful sale of problem assets in the first
quarter of 1998 and our loan staff's continued attention to asset quality.
NON-PERFORMING ASSETS/TOTAL ASSETS
1996 1997 1998
- ---------------------------------------------------------
1.78% 2.04% 0.42%
=========================================================
o Stockholders' equity totaled $79.1 million on December 31, 1998
reflecting a $48.3 million increase during the year. The Company is well in
excess of regulatory requirements to be "well capitalized" and, as such, is well
positioned to benefit from strategic expansion opportunities. We will work
diligently with our financial advisors to identify appropriate avenues to deploy
this new capital.
The conversion has also been beneficial in other ways. While we have
always been mindful that our employees and the communities we serve have a
direct impact on our success, creation of CNY Financial enabled us to launch two
initiatives that will underscore their continuing importance in the future. The
first is development of an employee stock ownership plan which gives our
employees a vested interest in their Company. This translates into our employees
working towards an even higher level of productivity as employee-owners. The
second is creation of a charitable entity, the Cortland Savings Foundation,
which is endowed with $1 million of common stock from the conversion. The
Foundation, which is endowed with $1 million of common stock from the
conversion. The Foundations's purpose will be to support significant housing,
community development and charitable projects that will enhance the quality of
life for people in the communities we serve.
As evidence of our commitment to enhancing shareholder value, the
Company was the first in New York State to receive approval to repurchase 5% of
its common stock less than six months after our conversion. Furthermore, we were
pleased to announce the initial quarterly cash dividend of the Company in
February of 1999. As we continue to focus on shareholder value we are currently
considering fee income enhancements and efficiency improvements through
increased utilization of existing systems and personnel, both of which
initiatives should increase the return to shareholders.
Amid consolidations of monumental proportions in our industry, CNY
Financial stands as a refreshing alternative. Your new company possesses a clear
vision for strong community banking throughout Central New York. It is a vision
that will offer a superior delivery system but will not sacrifice personal
attention and service to the customer.
2
<PAGE>
CNY
Financial
"THE EARLY SUCCESS OF OUR ITHACA LPO HAS ENABLED US TO DEVELOP A BUSINESS
STRATEGY THAT INCLUDES THE ADDITION OF SEVERAL MORE LOAN PRODUCTION OFFICES IN
SURROUNDING CITIES...THEY WILL GIVE CNY FINANCIAL A STRONG PRESENCE IN SEVERAL
NEW MARKETS WITHOUT ADDING COSTLY BRICK AND MORTAR FACILITIES."
The means toward realizing our vision is already in place with the
creation of $50.3 million of additional capital from the initial public
offering. We stand poised to benefit from strategic growth opportunities with
access to a new consumer base in a larger market area.
How will we grow? In 1999, our primary focus will be on expansion of
our residential and commercial lending capabilities. During 1998, of total loan
closings of $39.4 million, we originated $5.4 million of residential loans and
$700,000 of commercial loans from a new loan production office in Ithaca. The
early success of our Ithaca LPO has enabled us to develop a business strategy
that includes the addition of several more loan production offices in
surrounding cities. These offices will emphasize excellent turnaround and a high
degree of attention to the customer. They will give CNY Financial a strong
presence in several new markets without adding costly brick and mortar
facilities.
This is an ambitious agenda. The creation of a publicly traded company
has necessitated a major restructuring of the organization in order to meet the
challenges that will result from expansion. During the past year, we have
enhanced our senior management team to include seasoned professionals noted for
their successful careers in community banking. I am pleased to welcome them.
Chief Operating Officer F. Michael Stapleton brings to your company
significant operational and retail banking experience as well as extensive
knowledge of local markets. Chief Financial Officer Steven A. Covert, who
directed the successful conversion, adds substantial financial and investor
relations expertise. They join Senior Vice President Kerry D. Meeker who in 1996
brought breadth to our lending programs, both commercial and residential.
They, and the remainder of CNY Financial's 90 dedicated employees, have
had a busy inaugural quarter. We are already out in front of our peers on
implementation of a comprehensive Year 2000 readiness plan. While many companies
are incurring major costs to ensure a smooth transition into the next
millennium, we believe we can avoid any significant interruption of regular
business on January 1, 2000. This, along with a recently completed comprehensive
technology study, will position us to better serve the needs of our customers
far beyond the Year 2000.
Throughout our transition to a public holding company, we have been
judicious in continuing to work closely with our directors who have been
responsible for bringing us to this place. Three of them, with whom I have
worked for over 30 year, have retired. Harwood Spaulding, Ed Burgess and Peter
Potter are to be applauded for their combined wisdom in helping us make possible
the future success of CNY Financial. We wish them well.
As we approach our first full year as a publicly traded company, our
mission will remain: to profitably serve your needs and those of your fellow
shareholders and to address the needs of the customers in the communties we call
home. We will also work to continue to earn our reputation as a responsible,
community-minded corporate citizen.
On behalf of our Directors and Management Team, CNY Financial welcomes
you. I look forward to a long and mutually profitable partnership together.
Sincerely,
/s/ Wesley D. Stisser
- ---------------------
Wesley D. Stisser
President, CNY Financial Corporation
[photo omitted]
3
<PAGE>
CNY
Financial
A STRONG COMMUNITY......
A STRONGER FUTURE
CNY Financial has built lasting ties to the communities it serves, through
Cortland Savings Bank's efforts as a dedicated corporate citizen. This
involvement is one of the primary contributors to our status as the largest
independent bank in Cortland County. We continue to manifest our involvement in
two important ways; solid financial services to enhance the viability and
profitability of local businesses and industry; and civic leadership through
innovative educational, cultural and volunteer efforts that have spanned
generations.
CNY Financial shares Cortland Savings Bank's strong belief that a healthy
business environment is an integral part of a growing economy. The Company has
enhanced its ability to provide even better service to the business customer by
extending its product line and hiring additional experienced commercial loan
officers.
Below are two examples of Cortland Savings Bank's flexibility in meeting the
financial needs of varied types of business.
Financial support to Olde Homer House is just one illustration of Cortland
Savings Bank's partnership with local businesses to support economic
revitalization. Lisa Lindhorst and Jackie May, owners of Olde Homer House, are
shown at their Main Street business which sells traditional furnishings and
gifts.
Assistance from Cortland Savings Bank to the 1890 House Museum and Center for
Victorian Arts will make it possible for the Museum to expand through
acquisition of additional property. An increase in visitors is anticipated as
the Museum becomes an official New York State tourism destination. This should
help improve business for a variety of downtown merchants.
In addition to helping make a financial difference for businesses and families,
the Bank also makes a visible contribution with its involvement in community
events and sponsorships. This participation and exposure has made us the bank of
choice in the area. A sampling of the civic events and campaigns in which the
Bank has participated are; Chamber of Commerce Annual Business Showcase, the
June Dairy Parade, Downtown Business Association and Board of Realtors'
activities. This involvement provides opportunities for Bank personnel to meet
with existing and potential customers in a friendly, community arena, while
building community pride and assisting in promoting our attractive local
communities to a much larger market area.
CNY Financial's commitment to build a strong community through lending and
community involvement assists in creating a healthy business climate and an
attractive community in which to live and work.
4
<PAGE>
CNY
Financial
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with "Selected Financial
Highlights" and the Consolidated Financial Statements of CNY Financial
Corporation (the "Company"), including the accompanying notes, each appearing
elsewhere in this Annual Report.
GENERAL
The Company's principal business is conducted by its wholly-owned subsidiary,
Cortland Savings Bank (the "Bank") and consists of full service community
banking. 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. Net
interest income is dependent on the amounts and yields of interest earning
assets as compared to the amounts of and rates on interest bearing liabilities.
Net interest income is sensitive to changes in market rates of interest and the
Company's asset/liability management procedures in coping with such changes.
Results of operations are also affected by the provision for loan losses, the
volume of non-performing assets and the levels of non-interest income, and
non-interest expense.
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 Company.
SPECIAL MATTERS AFFECTING FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CONVERSION.
The Company commenced operations on October 6, 1998, when the Bank converted
from a state chartered mutual savings bank to a state chartered stock savings
bank(the "Conversion"). On that date, the Company sold 5,251,629 shares of
common stock in its initial public offering and received $50.3 million of net
proceeds from the sale, which have been invested primarily in mortgage-backed
securities and investment grade corporate bonds. The shares sold included
428,532 shares purchased by the Company's Employee Stock Ownership Plan (ESOP),
which was funded by a loan from the Company. The Company contributed an
additional 105,033 shares to the Cortland Savings Foundation as part of the
Conversion and an expense of $1.0 million or approximately $614,000 after taxes,
was recorded in October 1998 due to this donation. References to the business
activities, financial condition and operations of the Company prior to October
6, 1998 refer to the Bank, while references to the Company on or after that date
refer to both the Company and the Bank as consolidated, unless the context
indicates otherwise.
Since late 1996, two interrelated problems have had a substantial direct effect
on the Company's results of operations. Management 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. The two problems are as follows:
OFFICER DEFALCATION. During the fourth quarter of 1996, the Company discovered
that its then Senior Loan Officer had been involved in various schemes to
defraud the Company. Upon the discovery of these matters, the officer was
dismissed and subsequently convicted of criminal charges as a result of his
actions. Immediately after the discovery of this matter, the Company undertook
an investigation to identify uncollectable assets resulting from his activities.
As a result of this investigation the Company charged off $607,000 of loans
during the fourth quarter of 1996 which the Company believed either did not
exist or were otherwise uncollectable. In addition, the Company 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.
Furthermore, poor supervision while the officer in question was in charge of
lending operations is 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. The Company made a claim against
its fidelity bond carrier in the amount of approximately $1.0 million as a
result of this matter, and received $658,000 in settlement in 1998, bringing the
matter to a close.
SALE OF PROBLEM LOANS. During the fourth quarter of 1997, the Company 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 Company in a profitable manner.
Therefore, in order to improve overall asset quality and free
5
<PAGE>
CNY
Financial
management from less productive tasks associated with the resolution of problem
loans, the Company decided to seek to sell a substantial portion of its
non-performing loans to a single unrelated purchaser. During December of 1997,
the Company 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 Company 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 Company believed, after consultation with
loan brokers, could be realized upon a bulk sale of the loans.
During the first quarter of 1998, while identifying a purchaser for the loan
package and negotiating the terms of the sale, the Company designated $661,000
of additional loans to include in the package being sold. The Company
consummated the sale during the first quarter of 1998 with the proceeds of $3.1
million approximating the carrying value of the loans.
INTEREST EARNING ASSETS AND INTEREST BEARING LIABILITIES
The following table sets forth the average daily balances, net interest income,
and expense and average yields and rates for the Company's earning assets and
interest bearing liabilities for the indicated periods. No tax-equivalent
adjustments were made.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------
1998 1997
------------------------------------------------------------
Average Average
Average Yield/ Average Yield/
Interest Balance Cost Interest Balance Cost
------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans (1) $ 13,420 $ 156,649 8.57% $13,582 $ 157,713 8.61%
Securities (2) 4,016 66,228 6.06% 3,769 60,226 6.26%
Other short-term investments 567 11.387 4.98% 316 6,019 5.25%
- ---------------------------------------------------------------------------------------------
Total interest-earning assets 18,003 234,264 7.68% 17,667 223,958 7.89%
Non-interest-earning assets 29,141 12,254
- ---------------------------------------------------------------------------------------------
Total assets $ 263,405 $ 236,212
=============================================================================================
Savings accounts (3) 1,851 $ 66,709 2.77% 1,936 $ 64,576 3.00%
Money market accounts 220 8,176 2.69% 243 8,643 2.81%
NOW accounts 167 10,015 1.67% 166 9,457 1.76%
Certificates of deposit 5,723 106,860 5.36% 5,983 110,728 5.40%
Borrowings 25 430 5.81% -- -- --
- ---------------------------------------------------------------------------------------------
Total interest-bearing liabilities 7,986 192,190 4.16% 8,328 193,404 4.31%
Non-interest-bearing liabilities 18,900 12,002
- ---------------------------------------------------------------------------------------------
Total liabilities 211,090 205,406
Stockholders' equity 52,315 30,806
- ---------------------------------------------------------------------------------------------
Total liabilities and equity $ 263,405 $ 236,212
=============================================================================================
Net interest income/spread $ 10,017 3.53% $ 9,339 3.58%
Net earning assets/ net
interest margin $ 42,074 4.28% $ 30,554 4.17%
Ratio of average interest-
earning assets to interest-
bearing liabilities 1.22 x 1.16 x
</TABLE>
- ----------------------
(1) Average balances include loans held for sale and nonaccrual loans, net of
the allowance for loan losses. Interest is recognized on nonaccrual 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 Federal Home Loan Bank stock.
(3) Includes advance payments for taxes and insurance (mortgage escrow
deposits).
CHANGES IN INTEREST INCOME AND EXPENSE
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 the dollar amount of changes in
interest income and expense by major categories of interest income and expense
by major categories of interest earning assets and interest bearing liabilities
attributable to changes in volume or rate or both, for the periods indicated.
Volume variances are computed using the change in volume multiplied by the
previous year's rate. Rate variances are computed using the changes in rate
multiplied by the previous year's volume. The change in interest due to both
rate and volume has been allocated between the factors in proportion to the
relationship of the absolute dollar amounts of the change in each.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------
1998 vs. 1997 1997 vs. 1996
------------------------------- ---------------------------
Increase (Decrease) Due To: Increase (Decrease) Due To:
Volume Rate Total Volume Rate Total
------------------------------------------------------------
(In thousands)
INTEREST-EARNING ASSETS:
<S> <C> <C> <C> <C> <C> <C>
Loans $ (91) $ (71) $ (162) $ (94) $ (129) $ (223)
Securities 367 (120) 247 102 47 149
Other short-term investments 268 (17) 251 (66) 20 (46)
- ---------------------------------------------------------------------------------------------
Total interest-earning assets $ 544 $(208) $ 336 (58) $ (62) $ (120)
=============================================================================================
INTEREST-BEARING LIABILITIES:
Savings accounts $ 62 $(147) $ (85) 4 $ 10 $ 14
Money market accounts (13) (10) (23) (29) (16) (45)
NOW accounts 9 (8) 1 3 (31) (28)
Certificates of deposit (207) (53) (260) (171) (200) (371)
Borrowings 25 -- 25 -- -- --
- ---------------------------------------------------------------------------------------------
Total interest-bearing
liabilities $(124) $(218) $(342) $(193) $ (237) $ (430)
=============================================================================================
Net change in net
interest income $ 668 $ 10 $ 678 $ 135 $ 175 $ 310
=============================================================================================
</TABLE>
6
<PAGE>
CNY
Financial
COMPARISONS OF FINANCIAL CONDITION AT DECEMBER 31, 1998 AND DECEMBER 31, 1997
Total assets at December 31, 1998 were $281.2 million compared to $233.7 million
at December 31, 1997. The primary cause of the $47.5 million increase was the
investment of the $50.3 million received from the Company's initial public
offering. The majority of the proceeds were invested in investment grade
mortgage-backed securities, corporate bonds and commercial paper, resulting in a
$44.3 million increase in securities available for sale from the end of 1997.
The Company generally classifies its new securities investments as
available-for-sale in order to maintain flexibility in satisfying future
investment and lending requirements. The remainder of the net conversion
proceeds were invested in interest-bearing deposits at other banks, resulting in
a $5.5 million increase in those assets. Net loans were $159.2 million at
December 31, 1998, an increase of $3.8 million from the end of 1997. This growth
occurred as the Company maintained its emphasis in residential lending and
increased its level of loan originations. Loan closings, including undisbursed
funds and refinancings, totaled $39.4 million in 1998, an increase of 19.8% from
the 1997 total of $32.9 million.
LOAN ORGANIZATIONS
$in Millions
<TABLE>
<CAPTION>
1996 1997 1998
- ------------------------------- ------------------------------- -------------------------------
Residential Other Consumer Residential Other Consumer Residential Other Consumer
- ----------- ----- -------- ----------- ----- -------- ----------- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$12.4 $8.1 $11.2 $14.7 $5.2 $13.0 $19.7 $6.0 $13.7
=========== ===== ======== =========== ===== ======== =========== ===== ========
</TABLE>
Total deposits were $196.0 million at the end of 1998, compared to $199.8
million at December 31, 1997. This $3.8 million reduction is primarily
attributable to the withdrawal of approximately $7.0 million deposits to
purchase stock in the Company's initial public offering, partially offset by
interest credited to deposits.
Stockholders' equity increased $48.3 million during 1998 and was $79.1 million
at December 31, 1998. This increase reflects the net proceeds from the
conversion and earnings for the year, offset by the 4.2 million contra-equity
account related to unallocated ESOP shares. Book value per share outstanding at
December 31, 1998 was $15.06
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1998 AND
DECEMBER 31, 1997
GENERAL. Net income for 1998 was $1.7 million compared to net income of $72,000
in 1997. The primary reason for the improvement was the reduction in the costs
incurred to resolve the Company's problem assets, including a $3.0 million
reduction in the provision for loan losses and a $572,000 reduction in the
expense of real estate owned. Also affecting the improvement in net income was
an improvement in net interest income of $678,000, a $694,000 increase in
non-interest income and a $1.5 million increase in other operating expenses.
NET INTEREST INCOME. Net interest income increased by $678,000 or 7.3% from 1997
to 1998. This improvement occurred primarily due to a $10.3 million increase in
average total earning assets as a result of the Company's stock offering on
October 6, 1998 offset partially by a reduction in the average rate earned on
assets of 21 basis points. The reduction in rate is attributable to an increase
in securities and other short-term investments and the overall decline in market
interest rates. Securities and other short-term investments increased as the
Company invested the proceeds of its stock offering in such investments pending
redeployment in loans as appropriate opportunities arise. Loans generally have
higher yields than the Company's other investments.
The Company also experienced a decline in the cost of interest-bearing
liabilities to 4.16% in 1998 compared to 4.31% in 1997. The decline in market
interest rates allowed the Company to reduce its deposit pricing while remaining
competitive in its market. The infusion of capital from the Company's stock
offering, and related increase in average net earning assets of $11.5 million in
1998, resulted in a improvement in the Company's net interest margin to 4.28%
for 1998, compared to 4.17% in 1997. However, the investment of stock offering
proceeds in lower-yielding securities rather than loans was the principal cause
of a 6 basis point decline in the Company's interest rate spread.
PROVISION FOR LOAN LOSSES. The provision for loan losses results from
management's analysis of the adequacy of the Company'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 Company's income statement. The provision for loan
losses was $325,000 for the year ended December 31, 1998 compared to $3.3
million in 1997. A lower provision was appropriate in 1998 due to the
significant improvement in the Company's asset quality as previously discussed.
Despite the decrease in the provision, the allowance for loan losses increased
from $2.1 million at year end 1997 to $2.5 million at year end 1998, when it
represented 1.54% of total loans.
7
<PAGE>
CNY
Financial
NON-INTEREST INCOME. The Company's primary source of recurring non-interest
income is service charges, principally on deposit accounts. Service charges
increased by $87,000 in 1998 versus 1997, which increase related primarily to
fee changes on products and an increase in loan-related fees.
During 1998, the Company also received $658,000 in settlement of its insurance
claim related to the officer defalcation, discussed previously.
NON-INTEREST EXPENSE. Non-interest expense increased $1.5 million from 1997 to
1998. The primary reasons for the increase were a $918,000 increase in salaries
and employee benefits and a $1.0 million contribution to the Cortland Savings
Foundation. The increase in salaries and employee benefits included a $406,000
expense related to the termination of the Company's defined benefit pension
plan, $113,000 of severance expense for employee terminations, increased medical
claims of $82,000, $51,000 of expense related to the Company's ESOP representing
ESOP expense for approximately one quarter of the year, and normal merit
increases. During the fourth quarter of 1998, the Company donated 105,033 share
of its common stock to the Cortland Savings Foundation, a charitable foundation
created in connection with the Conversion. The donation resulted in a $1.0
million financial statement expense during 1998.
Professional fees increased by $164,000 from 1997 to 1998, reflecting $210,000
of expenses related to the Company's unsuccessful attempt to acquire another
financial institution during the fourth quarter of 1998.
Directors' fees increased $189,000, primarily due to the effect of a $150,000
retirement benefit to be paid to three directors who retired in 1998.
The Company recorded net revenues of $72,000 from its real estate owned in 1998
compared with a net expense of $500,000 in 1997. This improvement occurred as
the level of real estate owned declined significantly during 1998 as the Company
continued its efforts to resolve and reduce non-performing assets. The Company
recorded a gain of $209,000 on the sale of one property, which gain exceeded the
aggregate other expenses incurred on real estate owned.
INCOME TAXES. Income tax expense increased $1.3 million from 1997 to 1998,
reflecting the improved earnings of the Company, as well as an $80,000 excise
tax recorded for the termination of the defined benefit plan.
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 Company'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 income.
INTEREST INCOME. Interest income declined by $120,000 form 1996 to 1997. The
decline resulted from a decline in the average balance of loans, the Company's
highest yielding asset category, and a decline in the average yield on loans.
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 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.
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 certificate of
deposit category, with the average balance declining by $3.2 million and the
average cost declining by 18 basis point. 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
8
<PAGE>
CNY
Financial
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 the 1997, the Company 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 Company'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 Company's loan portfolio, during the 1997 management revised the
Company's method of calculating its allowance for loan losses to increase the
percentages used to determine the 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
Company's portfolio. Taking these factors into account, the Company determined
it needed to provide $3.3 million for loan losses during 1997 to bring the
allowance to its year-end level of $2.1 million.
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 Company's books at
the lower of cost or fair value, representing market value less estimated costs
of sale. During the 1997, the Company decided that general economic conditions,
difficulties in disposing of real estate owned and expected operating costs,
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.
ASSET/LIABILITY MANAGEMENT MARKET RISK
As a continuing part of its financial strategy, the Company attempts to manage
the impact of fluctuations in market interest rates on its net interest income.
This effort entails providing a reasonable balance between interest rate risk,
credit risk, liquidity risk and maintenance of yield. Asset/liability management
policies are established and monitored by management in conjunction with the
Board of Directors of the Bank, subject to general oversight by CNY Financial
Corporations's Board of Directors. The policies establish guidelines for
acceptable limits on the sensitivity of the market value of assets and
liabilities to changes in interest rates.
The Company's net income is dependent on its net interest income. Net interest
income is susceptible to interest rate risk to the degree that interest-bearing
liabilities mature or reprice on a different basis than interest-earning assets.
When interest-bearing liabilities mature or reprice more quickly than
interest-earning assets in a given period, a significant increase in market
rates of interest could adversely affect net interest income. Similarly, when
interest-earning assets mature or reprice more quickly than interest-bearing
liabilities, falling interest rates could result in a decrease in net interest
income.
The following table illustrates the Company's estimated interest rate
sensitivity and periodic and cumulative gap positions as calculated as of
December 31, 1998.
<TABLE>
<CAPTION>
Amounts Estimated to Mature or Reprice Within:
--------------------------------------------------------------------------------
Less Than
Three 3-6 6 Months 1-2 3-5 Over 5
Month Months to 1 Year Years Years Years Total
- ---------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Short-term investments $ 10,104 $ -- $ -- $ -- $ -- $ -- $ 10,104
Securities, including FHLB stock 13,677 5,976 9,599 17,237 25,403 28,166 100,058
Loans 16,483 10,685 15,978 18,246 36,289 61,526 159,207
- ---------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 40,264 16,661 25,577 35,483 61,692 89,692 269,369
- ---------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Savings accounts, including escrow 1,506 3,013 4,519 9,039 27,116 18,077 63,270
Money market accounts 332 665 997 1,994 3,987 -- 7,975
NOW accounts 371 741 1,112 2,224 6,674 -- 11,122
Certificates of deposit 11,678 21,277 30,758 24,383 16,221 -- 104,317
Borrowings -- -- -- -- 1,000 -- 1,000
- ---------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 13,887 25,696 37,386 37,640 54,998 18,077 187,684
- ---------------------------------------------------------------------------------------------------------------------
Interest sensitivity gap $ 26,377 $ (9,035) $(11,809) $ (2,157) $ 6,694 $ 71,615 $ 81,685
=====================================================================================================================
Cumulative interest sensitivity gap $ 26,377 $ 17,342 $ 5,533 $ 3,376 $ 10,070 $ 81,685
=========================================================================================================
Ratio of cumulative gap to total
interest-earning assets 9.79% 6.44% 2.05% 1.25% 3.74% 30.32%
=========================================================================================================
Ratio of interest-earning assets
to interest-bearing liabilities 289.94% 64.84% 68.41% 94.27% 112.17% 496.17% 143.52%
=====================================================================================================================
</TABLE>
9
<PAGE>
CNY
Financial
While the gap position illustrated is a useful tool that management can assess
for general positioning of the Company's balance sheet, management uses an
additional measurement tool to evaluate its asset/liability sensitivity which
determines exposure to changes in interest rates by measuring the estimated
future percentage change in net interest income due to changes in rates over a
one-year time horizon. Management measures such percentage change assuming an
instantaneous permanent parallel shift in the yield curve of 100 and 200 basis
points, both upward and downward. The model uses an option-based pricing
approach to estimate the sensitivity of mortgage loans. The most significant
embedded option in these types of assets is the prepayment option of the
borrowers. The model uses various prepayment assumptions depending upon the type
of mortgage instrument (residential mortgages, commercial mortgages,
mortgage-backed securities, etc.). Prepayment rates for mortgage instruments
ranged from 6% to 50% CPR (Constant Prepayment Rate) as of December 31, 1998.
For administered rate core deposits (e.g. NOW and savings accounts), the model
utilizes interest rate floors equal to 100 basis points below their current
levels.
Utilizing this measurement concept, the estimated interest rate risk of the
Company, expressed as a percentage change in projected net interest income over
a one-year time horizon due to changes in interest rates, at December 31, 1998,
was as follows:
- --------------------------------------------------------------------------------
Percentage change in net interest Basis Point Change
income due to an immediate -------------------------------
change in interest rate over a +200 +100 -100 -200
one-year time horizon -------------------------------
3.12% 1.60% 0.26% (3.45%)
- --------------------------------------------------------------------------------
Actual results may differ from simulated results due to the inherent uncertainty
of the assumptions, including the timing, magnitude and frequency of rate
changes, customer buying patterns, economic conditions, and management
strategies.
The Company does not currently engage in trading activities or use derivative
instruments to control interest rate risk. Even though such activities may be
permitted with the approval of the Board of Directors, the Company does not
intend to engage in such activities in the immediate future.
Market risk is the risk of loss from adverse changes in market prices and rates.
The Company's market risk arises primarily from interest rate risk inherent in
its lending and deposit activities. Other types of market risk, such as foreign
currency exchange rate risk and commodity price risk, do not arise in the normal
course of the Company's business activities.
YEAR 2000 CONSEQUENCES
The information contained in this section represents a Year 2000 Readiness
Disclosure under the Year 2000 Information and Readiness Disclosure Act.
The operations of the Company are substantially dependent upon computer data
processing for its deposit accounts, loans, financial records and other matters.
Many computer systems and other equipment containing microchips may not operate
accurately after January 1, 2000. The Company has undertaken a comprehensive
review of all systems believed to create potential risks in order to eliminate
any Year 2000 operating difficulties.
The Company retained the services of an independent consultant, at a cost of
$13,000 to evaluate the Company's Year 2000 risks. The Company's Board of
Directors reviewed and approved the consultant's plan. The plan calls for
comprehensive review and testing of all the Company's systems that could be
affected by Year 2000 problems.
The Company has completed a review of all major non-computer based systems, such
as vaults, building environmental systems and telephone systems, without any
significant problems being discovered. The Company's principal data processing
is performed by a Company-owned mini-computer operating software provided by an
outside vendor. The hardware has been successfully tested. The software has been
tested and modules requiring modification have been identified. The vendor is
making necessary modifications. The Company expects that all modifications will
be in place, and all testing completed, by mid-year 1999. The Company will
continue to test minor systems, and replace them, if necessary, throughout the
first three quarters of 1999.
The Company estimates that its total cost of Year 2000 compliance, excluding
internal staffing costs will not exceed $100,000. The Company has not needed to
hire additional staff to address Year 2000 compliance issues. The Company's cost
estimate assumes that a
10
<PAGE>
CNY
Financial
complete replacement of the Company's principal computer software will not be
necessary. If a complete replacement is necessary, the Company will identify
replacement software which is Year 2000 compliant during 1999 and convert to the
new software. The Company has not evaluated the costs of complete replacement
because the possibility that it will be necessary is considered to be remote. If
complete replacement is necessary, the Company anticipates that it will be able
to locate acceptable commercially-available software because the Company's
mini-computer is commonly used by financial institutions. If interim operations
are necessary before a new system is operational, the Company expects to utilize
existing personal computers, commonly available business software and manual
entries to bridge any gap. However, based upon the results of testing thus far,
the Company believes that this "most reasonably likely worst case scenario" is
unlikely to occur.
The Company has developed back-up or contingency plans for each of its mission
critical systems. Virtually all of the Company's mission critical systems are
dependent upon third party vendors or service providers; therefore, contingency
plans include selecting a new vendor or service provider and converting to their
system. In the event a current vendor's system fails during testing and it is
determined that the vendor is unable or unwilling to correct the failure, the
Company will convert to a new system from a pre-selected list of prospective
vendors. In each such case, realistic trigger dates have been established to
allow for orderly and successful conversion. For some systems, contingency plans
consist of using spreadsheet software or reverting to manual systems until
system problems can be corrected. Although the Company has been informed that
each of its primary vendors anticipates that all mission critical systems either
are or will timely be Year 2000 compliant, no warranties have been received from
such vendors.
The Company's customers may also experience Year 2000 problem, which could
adversely affect the ability of these customers to comply with their obligations
to the Company. The Company has contacted all commercial loan customers to
assess whether their Year 2000 compliance efforts are satisfactory. The Company
currently requires all new commercial loan customers to complete a Year
2000-readiness questionnaire as part of the loan underwriting process in order
to limit further exposure. Although Year 2000 readiness varies among the
Company's customers, the Company does not expect that Year 2000 problems will
have such a substantial effect on the Company's customers as to cause the
Company to suffer material adverse financial consequences.
Furthermore, substantial recent media publicity regarding potential Year 2000
problems has increased public awareness of the problem, but may cause certain
deposit customers to over-react and withdraw funds prior to the end of 1999 for
fear that ATM machines and teller systems will not be operating after December
31, 1999. The Company intends to address this issue by increasing customer
awareness of the Company's Year 2000 compliance program and also by maintaining
sufficient liquidity to allow the Company to address any unusual cash demands in
a timely fashion. The additional liquidity and cash could have an adverse effect
on the Company's level of and average yield on earning assets, but the Company
does not believe the adverse effect will be anything more than transitory.
However, if major utilities, governmental functions or other local, statewide or
national infrastructure components do not function properly, such as electric
utilities, telephone service or the mail system, the adverse effects on the
ability of the Company to continue to operate could be substantial. This could
also increase customer panic and thus increase the outflow of funds even if the
Company itself is fully Year 2000 compliant.
LIQUIDITY AND CAPITAL
The Company's primary sources of funds are deposits and payments received on
loans and securities. While scheduled payments on loans and securities, either
installment payments or payments at maturity, are relatively predictable sources
of funds, deposit outflows and loan prepayments can fluctuate and are influenced
by market interest rates, economic conditions and competition.
The Company's primary investing activities are the origination of loans and the
purchase of securities. The Company's loans, net, after payments and
charge-offs, increased by $4.1 million during 1998, decreased by $3.1 million
during 1997 and increased by only $8,000 during 1996. Securities, excluding the
effect of unrealized gains and losses,
11
<PAGE>
CNY
Financial
increased by $41.0 million during 1998, decreased by $1.2 million during 1997
and increased by $4.5 million during 1996. In general, the Company invests
available funds in securities, federal funds sold and short-term investments
pending the investment of those funds in loans. Generally, the regular flow of
deposits and loan repayments, along with payments on and maturities of
securities, provide sufficient funds for new loan originations. The Company can
also regulate the level of deposits and hence the flow of funds by adjusting the
rates it offers on deposits, especially certificates of deposit. Federal funds
sold and other short-term investments are transitory and also provide available
funds when needed for other purposes. Furthermore, as part of its management of
the loan origination process, the Company tracks the progress of loan
applications and commitments so that the volume and timing of new securities
purchases can be adjusted as funds are needed for other purposes. Finally, the
Company has available lines of credit and borrowing capabilities to provide
additional funds if the need arises. At December 31, 1998, the Company had
available lines of credit and borrowing capabilities with the Federal Home Loan
Bank of New York of $27.9 million.
At December 31, 1998, the Company and the Bank substantially exceeded all
regulatory capital requirements of the Federal Reserve Board of Governors and
the FDIC applicable to them. Compliance with minimum capital requirements does
not currently have a material effect on the Bank or the Company. The Bank was
classified as "well capitalized" at December 31, 1998 under FDIC regulations.
IMPACT OF INFLATION AND CHANGING PRICES
The Company prepares its financial statements and other financial disclosures
according to Generally Accepted Accounting Principles, which in most cases
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 Company's assets and liabilities are monetary in nature. As a result,
interest rates have a greater impact on net income 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 net income. Inflation can also increase the cost of
operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In June, 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"), SFAS 133 requires an entity to measure all
derivarives at fair value and to recognize them in the balance sheet as an asset
or liability, depending on the entity's rights or obligations under the
applicable derivative contract. The recognition of changes in fair value of a
derivative that affect the income statement will depend on the intended use of
the derivative. If the derivative does not qualify as a hedging instrument, the
gain or loss on the derivative will be recognized currently in earnings. If the
derivative qualifies for special hedge accounting, the gain or loss on the
derivative will either (1) be recognized in income along with an offsetting
adjustment to the basis of the item being hedged, or (2) be deferred in other
comprehensive income and reclassified to earnings in the same period or periods
during which the hedged transaction affects earnings. This statement is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
SFAS 133 may not be applied retroactively to financial statements of prior
periods. SFAS 133 is not expected to have material impact on the Company's
consolidated results of operations, financial position or cash flows. SFAS No.
133 also permits certain reclassifications of securities among the trading,
available-for-sale and held-to-maturity classifications. The Company has no
current intention to reclassify any securities pursuant to SFAS No. 133
FORWARD-LOOKING STATEMENTS
In this annual report, the Company, when discussing the future, may use words
like
12
<PAGE>
CNY
Financial
"will probably result", "are expected to", "may cause", "is anticipated",
"estimate", "project", or similar words. These words represent forward-looking
statements. In addition, any analysis of the adequacy of the allowance for loan
losses or the interest rate sensitivity of the Company's assets and liabilities,
represent attempts to predict future events and circumstances and also represent
forward-looking statements.
Many factors could cause future results to differ from what is anticipated in
the forward-looking statements. For example, future financial results could be
affected by (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; (v) changes in consumer preferences; and
(vi) Year 2000 compliance problems of the Company's customers and suppliers.
Please do not place unjustified or excessive reliance on any forward-looking
statements. They speak only as of the date made and are not 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.
[PHOTO OMITTED]
SENIOR MANAGEMENT TEAM
LEFT TO RIGHT:
Wesley D. Stisser,
Kerry D. Meeker,
Steven A. Covert
F. Michael Stapleton
13
<PAGE>
KPMG [GRAPHIC LOGO OMITTED]
113 South Salina Street
Syracuse, NY 13202
Independent Auditors' Report
The Board of Directors and Stockholders
CNY Financial Corporation
We have audited the accompanying consolidated balance sheets of the CNY
Financial Corporation and subsidiary as of a December 31, 1998 and 1997 and the
related consolidated statements of income, stockholders' equity and
comprehensive income and cash flows for each of the years in the three-year
period ended December 31, 1998. These consolidated financial statements are the
responsibility of the Company'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 consolidated 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 CNY Financial
Corporation and subsidiary at December 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Syracuse, New York
January 15, 1999
[LOGO OMITTED] [KPMG LLP, KPMG LLP, a U.S. limited liability partnership, is
a member of KPMG International, a Swiss association.
14
<PAGE>
CNY Financial Corporation and Subsidiary
Consolidated Balance Sheets
December 31, 1998 and 1997
(In thousands, except share data)
<TABLE>
<CAPTION>
<S> <C> <C>
1998 1997
- ----------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 4,432 $ 4,093
Interest-bearing balances at financial institutions 6,104 586
Federal Funds sold 4,000 3,400
Securities available-for-sale, at fair value 88,437 44,140
Securities held-to-maturity (fair value of $10,404 in 1998 and
$12,569 in 1997) 10,318 12,550
Loans held for sale -- 2,541
Loans, net of deferred fees 161,701 157,565
Less allowance for loan losses 2,494 2,143
- ----------------------------------------------------------------------------------------------
Net loans 159,207 155,422
Premises and equipment, net 3,243 3,447
Federal Home Loan Bank stock, at cost 1,303 1,291
Other assets 4,142 6,259
- ----------------------------------------------------------------------------------------------
$ 281,186 $ 233,729
==============================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Non-interest bearing demand accounts $ 10,780 $ 10,641
Savings accounts 61,820 62,732
Certificates of Deposit 104,317 108,258
Money Market accounts 7,975 8,435
NOW accounts 11,122 9,704
- ----------------------------------------------------------------------------------------------
Total deposits 196,014 199,770
Advance payments by borrowers for property taxes and insurance 1,450 1,329
Borrowings 1,000 --
Other liabilities 3,652 1,890
- ----------------------------------------------------------------------------------------------
Total liabilities 202,116 202,989
- ----------------------------------------------------------------------------------------------
Commitments and contingencies (note 11)
Stockholders' equity
Common Stock, $0.01 per value, 8,500,000 shares authorized,
5,356,662 shares issued and outstanding in 1998 54 --
Additional paid-in capital 51,289 --
Retained earnings 31,848 30,169
Accumulated other comprehensive income 1,178 571
Treasury stock, at cost; 105,625 shares in 1998 (1,067) --
Unallocated shares of Employee Stock Ownership Plan (ESOP)
423,175 shares in 1998 (4,232) --
- ----------------------------------------------------------------------------------------------
Total Stockholders' Equity 79,070 30,740
- ----------------------------------------------------------------------------------------------
$ 281,186 $ 233,729
==============================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
15
<PAGE>
CNY Financial Corporation and Subsidiary
Consolidated Statements of Income
Years Ended December 31, 1998, 1997
and 1996 (In thousands, except share data)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1998 1997 1996
- -------------------------------------------------------------------------------------------------
Interest income
Loans $ 13,420 $ 13,582 $ 13,805
Securities 4,016 3,769 3,620
Other short-term investments 567 316 362
- -------------------------------------------------------------------------------------------------
Total interest income 18,003 17,667 17,787
Interest expense
Deposits 7,961 8,328 8,758
Borrowings 25 -- --
- -------------------------------------------------------------------------------------------------
Total interest expense 7,986 8,328 8,758
- -------------------------------------------------------------------------------------------------
Net interest income 10,017 9,339 9,029
Provisions for loan loss 325 3,300 1,380
- -------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 9,692 6,039 7,649
Non-interest income
Service charges 723 636 662
Net gain on sale of securities 6 46 15
Gain on loan sales 30 -- --
Insurance proceeds 658 -- --
Nationar recovery -- 45 --
Other 166 162 93
- -------------------------------------------------------------------------------------------------
Total non-interest income 1,583 889 770
Non-interest expenses
Salaries and employee benefits 3,846 2,928 2,862
Building, occupancy and equipment 905 981 990
Postage and supplies 349 323 306
Professional fees 525 361 394
Directors Fees 311 122 107
Real estate owned (72) 500 260
Contribution to charitable foundation 1,023 -- --
Other 1,439 1,657 1,282
- -------------------------------------------------------------------------------------------------
Total non-interest expenses 8,326 6,872 6,201
- -------------------------------------------------------------------------------------------------
Income before income tax expense (benefit) 2,949 56 2,218
Income tax expense (benefit) 1,270 (16) 853
- -------------------------------------------------------------------------------------------------
Net income $ 1,679 $ 72 $ 1,365
=================================================================================================
Basic earnings per share (for 1998 calculated using
post conversion net income) (see note 2) $ -- N/A N/A
=================================================================================================
Weighted average shares outstanding 4,928,044 N/A N/A
=================================================================================================
</TABLE>
See accompanying notes consolidated financial statements.
16
<PAGE>
CNY Financial Corporation and Subsidiary
Consolidated Statement of Stockholders' Equity and Comprehensive Income
Years Ended December 31, 1998, 1997
and 1996 (In thousand, except share data)
<TABLE>
<CAPTION>
Accumulated
Additional Other Unallocated
Common Paid-In Retained Comprehensive Treasury ESOP
Stock Capital Earnings Income Stock Shares Total
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ -- $ -- $ 28,732 $ 298 $ -- $ -- $ 29,030
Comprehensive income:
Change in net unrealized gain
(loss) on securities, net of tax -- -- -- (50) -- -- (50)
Net income -- -- 1,365 -- -- -- 1,365
- ----------------------------------------------------------------------------------------------------------------------------
Total comprehensive income -- -- 1,365 (50) -- -- 1,315
- ----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 -- -- 30,097 248 -- -- 30,345
Comprehensive income:
Change in net unrealized gain
(loss) on securities, net of tax -- -- -- 323 -- -- 323
Net income -- -- 72 -- -- -- 72
- ----------------------------------------------------------------------------------------------------------------------------
Total comprehensive income -- -- 72 323 -- -- 395
- ----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 -- -- 30,169 571 -- -- 30,740
Net proceeds from issuance of
5,251,629 shares of common stock 53 50,294 -- -- -- -- 50,347
Common Stock acquired by ESOP
(428,532 shares) -- -- -- -- -- (4,285) (4,285)
Charitable contribution of common
stock to Cortland Savings
Foundation (105,033 shares) 1 997 -- -- -- -- 998
Treasury stock purchased (105,625
shares) -- -- -- -- (1,067) -- (1,067)
ESOP shares released for allocation
(5,357 shares) -- (2) -- -- -- 53 51
Comprehensive income
Change in net unrealized gain
(loss) on securities, net of tax -- -- -- 607 -- -- 607
Net income -- -- 1,679 -- -- -- 1,679
- ----------------------------------------------------------------------------------------------------------------------------
Total comprehensive income -- -- 1,679 607 -- -- 2,286
- ----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 $ 54 $ 51,289 $ 31,848 $ 1,178 $ (1,067) $ (4,232) $ 79,070
============================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE>
CNY Financial Corporation and Subsidiary
Consolidated Cash Flow Statements
Years Ended December 31, 1998, 1997 and 1996
(In thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1998 1997 1996
- -----------------------------------------------------------------------------------------------
Cash flow from operating activity:
Net income $ 1,679 $ 72 $ 1,365
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 487 579 507
(Increase) decrease in accrued interest receivable (306) 233 431
Provision for loan losses 325 3,300 1,380
Write-down of real estate owned 50 365 59
Net gains on sales of securities (6) (46) (15)
Nationar recovery -- (45) --
Net (gains) losses on sale of real estate owned (192) (11) 37
Net amortization of premiums and discounts 55 104 251
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 807 148 (70)
Deferred income taxes 277 (869) (342)
Decrease (increase) in other assets 1,032 (709) 1,597
Donation to charitable foundation 997 -- --
ESOP shares released for allocation 51 -- --
- -----------------------------------------------------------------------------------------------
Net cash provided by operating activities 8,357 3,121 5,200
- -----------------------------------------------------------------------------------------------
Cash flows from investing activities:
Net increase in loans (4,744) (3,746) (2,064)
Proceeds from recovery on Nationar -- 45 --
Proceeds from sales of securities available-for-sale 2,006 3,121 1,057
Proceeds from maturities and principle reductions of
securities available-for-sale 18,337 18,040 21,959
Purchases of securities available-for-sale (63,237) (19,237) (27,139)
Purchases of securities held-to-maturity (2,484) (3,847) (2,964)
Proceeds from maturities and principle reductions
of securities held-to-maturity 4,780 3,054 2,382
Proceeds from sale of real estate owned 920 340 274
Additions to premises and equipment (283) (371) (291)
Purchase of FHLB stock (12) (63) (1,228)
- -----------------------------------------------------------------------------------------------
Net cash used in investing activities (44,717) (2,664) (8,014)
- -----------------------------------------------------------------------------------------------
Cash flows from financing activities:
(Decrease) increase in deposits (3,756) (4,870) 1,530
Borrowings 1,000 -- --
Increase (decrease) in advance payments by borrowers for
property taxes and insurance 121 (44) (356)
Net Proceeds from issuance of common stock 50,347 -- --
Purchase of shares of common stock by ESOP (4,285) -- --
Par value of donation of stock to charitable foundation 1 -- --
Treasury stock purchases (611) -- --
- -----------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 42,817 (4,914) 1,174
- -----------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 6,457 (4,457) (1,640)
Cash and cash equivalents at beginning of year 8,079 12,536 14,176
- -----------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 14,536 $ 8,079 $ 12,536
===============================================================================================
</TABLE>
18
<PAGE>
CNY Financial Corporation and Subsidiary
Consolidated Cash Flow Statements
Years Ended December 31, 1998, 1997 and 1996
(In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Non-cash investing activities:
<S> <C> <C> <C>
Purchases of securities-available-for-sale not settled $ 499 $ -- $ --
Treasury stock purchases not settled 456 -- --
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 74 1,095 711
Cash paid during the year for:
Interest 7,991 8,321 8,761
Income taxes $ 105 $ 1,125 $ 1,644
===============================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
19
<PAGE>
CNY Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 1998, 1997 and 1996
(1) BUSINESS
CNY Financial Corporation (the "Company") is a registered bank holding
company, organized under the laws of Delaware and is the parent company
of Cortland Savings Bank and subsidiary (the "Bank"). The Company
commenced operations on October 6, 1998, when the Bank converted from a
state chartered mutual savings bank to a state chartered stock savings
bank (the "Conversion"). On that date, the Company sold 5,251,629
shares of common stock in its initial public offering and received
$50.3 million of net proceeds from the sale. The shares sold included
428,532 shares purchased by the Company's Employee Stock Ownership Plan
(ESOP), which was funded by a loan from the Company. The Company
contributed an additional 105,033 shares to the Cortland Savings
Foundation as part of the Conversion and an expense of $1.0 million or
approximately $614,000 after taxes, was recorded in October 1998 due to
this donation. The Company operates solely in the financial services
industry and includes the provision of traditional community banking
services primarily for individuals and small-to medium-sized businesses
concentrated in Cortland County, New York and surrounding areas. The
financial services subsidiary of the Bank has been inactive since its
formation in 1986. The Company and its subsidiary financial institution
are subject to the regulations of certain Federal and State agencies
and undergo periodic examinations by those regulatory agencies.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
(a) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiary. All significant
intercompany balances and transactions have been eliminated in
consolidation.
(b) CASH AND CASH EQUIVALENTS
Cash and cash equivalents include vault cash, amounts due from
banks and Federal funds sold which represent short-term highly
liquid investments.
(c) SECURITIES
The Company classifies its debt securities as either
available-for-sale or held-to-maturity as the Company 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 Company 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 component of accumulated other
comprehensive income in stockholders' equity until realized.
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 that security.
20
<PAGE>
CNY Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 1998, 1997 and 1996
(2) SUMMARY OF SIGNIFICANT ACCOUNT POLICIES, CONTINUED
(c) SECURITIES, CONTINUED
Purchases and sales are recorded on a trade date basis with
settlement occurring shortly thereafter. Premiums and discounts
are amortized or accredited 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 as an adjustment
of yield using the interest method over the lives of the loans.
The Company 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.
Interest on loans is accrued and included in income at
contractual rates applied to principal outstanding. 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
judgement 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.
The allowance for loan losses is maintained at a level believed
by management to be sufficient to absorb probable future losses
related to loans outstanding as of the balance sheet date.
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 Company's
allowance for loan losses and may require the Company to
recognize additions to the allowance based on their judgement
of information available to them at the time of their
examination.
The Company 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. Impairment losses are included as a component of the
allowance for loan losses. A loan is considered impaired when
it is probable that the Company 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. The
Company recognizes interest income on impaired loans using the
cash basis of 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.
21
<PAGE>
CNY Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 1998, 1997 and 1996
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(f) 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.)
(g) 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.
(h) INCOME TAXES
Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to temporary 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 isrecognized in income in the period that includes
the enactment date.
(i) PENSION AND OTHER POSTRETIREMENT PLANS
On January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No.132, EMPLOYERS' DISCLOSURES
ABOUT PENSION AND OTHER POSTRETIREMENT BENIFITS SFAS No. 132
revises employers' disclosure about pension and other
postretirement benefit plans, SFAS No. 132 does not change the
method of accounting for such plans. The Company maintained a
non-contributory defined benefit pension plan that covered
substantially all employees, but terminated the plan effective
December 31, 1998. The benefits under the pension plan were
based on the employee's years of service and compensation. The
cost of this program was funded currently.
The Company also sponsors a defined benefit health care 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) OTHER EMPLOYEE BENEFIT PLANS
The Company sponsors a defined contribution 401 (k) Savings
Plan covering substantially all employees. Employees are
permitted to contribute up to 6% of base pay to the Savings
Plan, subject to certain limitations. The Company matches 50%
of each employees contribution up to 6%.
The Company also sponsors a non-contributory Employee Stock
Ownership Plan (ESOP) covering substantially all employees. The
number of shares allocable to Plan participants is determined
by the Board of Directors. Allocations to individual
participant accounts are based on participant compensation. The
Company accounts for ESOP shares purchased in accordance with
Statement of Position No. 93-6, EMPLOYEE STOCK OWNERSHIP PLANS.
Accordingly, as shares are committed to be released to
participants, the Company reports compensation expense equal to
the current market price of the shares and the shares become
outstanding for earnings per share computations.
22
<PAGE>
CNY Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 1998, 1997 and 1996
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(k) COMPREHENSIVE INCOME
On January, 1, 1998, the Company adopted the provisions of SFAS
No. 130, REPORTING COMPREHENSIVE INCOME. This statement
establishes standards for reporting and display of
comprehensive income and its components. At the Company,
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, net of the related tax effect. Accumulated other
comprehensive income represents the net unrealized holding
gains or losses on securities available for sale as of the
balance sheet dates, net of the related tax effect. Prior year
consolidated financialstatements have been reclassified to
conform to the requirements of SFAS No. 130.
(l) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company does not engage in the use of derivative financial
instruments. The Company's only financial instruments with
off-balance sheet risk are limited to commitments to extend
credit and commitments under unused lines of credit.
(m) EARNINGS PER SHARE
Basic earnings per share is calculated by dividing net income
available to common shareholders by the weighted average number
of shares outstanding during the year. Prior to the conversion
to a stock savings bank, earnings per share are not applicable
as the mutual savings bank had no shares outstanding. After the
conversion, earnings per share is determined from October 6,
1998, the date of conversion, to the end of the reporting
period based upon the weighted average number of shares
outstanding for the period. The income included in the
computation is based on the actual results of operations only
for the post-conversion period. Unallocated shares held by the
Company's ESOP are not included in the weighted average number
of shares outstanding.
(n) SEGMENT REPORTING
Effective January 1, 1998, the Company adopted the provisions
of SFAS No. 131 DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND
RELATED INFORMATION. SFAS No.131 requires the Company to report
financial and other information about key revenue producing
segments of the Company for which such information is available
and is utilized by the chief operating decision maker. Specific
information to be reported for individual segments include
profit and loss, certain revenue and expense items, and total
assets. Reconciliation of segment financial information to
amounts reported in the financial statements is also provided.
The Company has determined that it has no reportable segments,
and as such, adoption of SFAS No. 131 did not result in
significant changes in the Company's reporting.
23
<PAGE>
CNY Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 1998, 1997 and 1996
(3) SECURITIES
Securities are summarized as follows (in thousands):
December 31, 1998
------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gain Losses Value
- --------------------------------------------------------------------------------
Available-for-sale:
U.S. Government and sponsored
enterprise securities $ 13,037 $ 128 $ 1 $ 13,164
Mortgage-backed securities 42,801 265 25 43,041
State and municipal sub-divisions 917 10 -- 927
Corporate debts securities 27,649 178 5 27,822
- --------------------------------------------------------------------------------
Total debt securities 84,404 581 31 84,954
Equity securities 2,072 1,470 59 3,483
- --------------------------------------------------------------------------------
$ 86,476 $ 2,051 $ 90 $ 88,437
================================================================================
Held-to-maturity:
U.S. Government and sponsored
enterprise securities $ 1,505 $ 2 $ -- $ 1,507
Mortgage-backed securities 5,208 69 22 5,255
State and municipal sub-division 747 l7 -- 764
Corporate debt securities 2,858 21 1 2,878
- --------------------------------------------------------------------------------
$10,318 $ 109 $ 23 $ 10,404
================================================================================
December 31, 1997
---------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- --------------------------------------------------------------------------------
Available-for-sale:
U.S. Government and sponsored
enterprise 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 and sponsored
enterprise securities $ 1,992 $ 3 $ -- $ 1,995
Mortgage-backed securities 8,279 87 92 8,274
State and municipal sub-divisions 425 5 -- 430
Corporate debt securities 1,854 16 -- 1,870
- --------------------------------------------------------------------------------
$12,550 $ 111 $ 92 $ 12,569
================================================================================
24
<PAGE>
CNY Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 1998, 1997 and 1996
(3) SECURITIES, CONTINUED
The following table presents the carrying value and fair value of debt
securities at December 31, 1998, based on the earlier of call or maturity
date. Expected maturities may differ from contractual maturities because
issuers may have the right to call or prepay obligations with or without
call or prepayment penalties. (in thousands):
Amortized
Cost Fair Value
- --------------------------------------------------------------------------------
Available-for-sale:
Due within one year $ 18,011 $ 18,078
Due after one year through five years 22,675 22,908
Due after five years through ten years 917 927
Due after ten years -- --
Mortgage-backed securities 42,801 43,041
- --------------------------------------------------------------------------------
$ 84,404 $ 84,954
================================================================================
Held-to-Maturity:
Due within one year $ 1,501 $ 1,503
Due after one year through five years 3,348 3,378
Due after five years though ten years 261 268
Due after ten years -- --
Mortgage-backed securities 5,208 5,255
- --------------------------------------------------------------------------------
$ 10,318 $ 10,404
================================================================================
Gross gains of $6,000, $46,000 and $15,000 were realized on sales of
securities in 1998, 1997 and 1996, respectively. There were no gross losses
realized on sales of securities in 1998, 1997 and 1996.
Securities carried at $2.5 million at December 31, 1998 were pledged for
other purposes required by law.
(4) LOANS
Loans are summarized as follows (in thousands):
December 31,
---------------------------
1998 1997
- --------------------------------------------------------------------------------
Mortgage loans:
Residential $ 100,976 $ 96,328
Partially guaranteed by VA 337 444
Insured by FHA 717 847
Commercial 29,224 30,867
- --------------------------------------------------------------------------------
131,254 128,486
- --------------------------------------------------------------------------------
Other loans:
Commercial 6,588 7,049
Automobile 10,854 8,902
Home equity line of credit 6,804 5,924
Property improvement 709 907
Guaranteed student 1,016 1,507
Other consumer 4,597 5,031
- --------------------------------------------------------------------------------
30,568 29,320
- --------------------------------------------------------------------------------
Total loans 161,822 157,806
- --------------------------------------------------------------------------------
Less: Net deferred origination fees 121 241
- --------------------------------------------------------------------------------
$ 161,701 $ 157,565
================================================================================
25
<PAGE>
CNY Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 1998, 1997 and 1996
(4) LOANS, CONTINUED
In an effort to accelerate resolution of certain of its problem assets, in
December 1997 the Company identified certain loans for bulk sale. Prior to
December 31, 1997 the carrying value of the loans anticipated to be sold
was approximately $4.2 million, of which approximately $3.5 million 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
were included on the Company'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 Company charged-off $1,698,000 against the allowance for
loan losses to reflect the fair value of the loans. The proceeds of the
sale approximated the carrying value of the loans.
Changes in the allowances for loan losses are summarized as follows (in
thousands).
Years Ended December 31
----------------------------------------
1998 1997 1996
---------------------------------------------------------------------------
Balance at beginning of year $ 2,143 $ 1,952 $ 2,002
Provision charged to operations 325 3,300 1,380
Recoveries 206 170 283
Loans charged off (180) (3,279) (1,713)
---------------------------------------------------------------------------
Balance at end of year $ 2,494 $ 2,143 $ 1,952
===========================================================================
At December 31, 1998 and 1997, impaired loans totaled $736,000 and $2.7
million (of which $1.2 million were loans held for sale), respectively. At
December 31, 1998, impaired loans included $736,000 of loans for which the
related allowance for loan losses was $194,000. At December 31, 1997,
impaired loans included $895,000 of loans for which the related allowance
for loan losses was $234,000. The average recorded investment in impaired
loans was $1.1 million, $2.7 million and $3.5 million during the years
ended December 31, 1998, 1997 and 1996, respectively. Interest income
recognized on impaired loans was $147,000, $290,000 and $223,000 during the
years ended December 31, 1998, 1997 and 1996, respectively, all of which
was recognized using the cash basis of income recognition.
The principal balances of loans not accruing interest amounted to
approximately $920,000, $3.8 million (of which $2.3 million were loans held
for sale) at December 31, 1998 and 1997, respectively. Interest income that
would have been recorded if the non-accruing loans had been performing in
accordance with their original terms was approximately $115,000, $402,000
and $307,000 during the years ended December 31, 1998, 1997 and 1996,
respectively.
In the ordinary course of business, the Company makes loans to directors,
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.
A summary of the changes in these outstanding loans is as follows (in
thousands):
Years Ended
December 31,
--------------------------
1998 1997
---------------------------------------------------------------------------
Balance at beginning of year $ 2,207 $ 2,459
New loans and increase in existing loans 521 459
Loan principal repayments (577) (711)
---------------------------------------------------------------------------
Balance at end of year $ 2,151 $ 2,207
===========================================================================
26
<PAGE>
CNY Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 1998, 1997 and 1996
(5) PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows (in thousands):
December 31,
----------------------
1998 1997
---------------------------------------------------------------------------
Land $ 886 $ 836
Buildings and furniture 2,901 2,937
Furniture and equipment 1,962 2,825
---------------------------------------------------------------------------
5,749 6,598
Less accumulated depreciation and amortization 2,506 3,151
---------------------------------------------------------------------------
$ 3,243 $ 3,447
===========================================================================
Depreciation and amortization expense amounted to $487,000, $579,000 and
$507,000 during the years ended December 31, 1998, 1997 and 1996,
respectively.
(6) DEPOSITS
At December 31, 1998 and 1997, the aggregate amounts of time deposits in
denominations of $100,000 or more were approximately $13.0 million and
$10.2 million, respectively.
Contractual maturities of certificates of deposit at December 31, are
summarized as follows (in thousands):
1998
---------------------------------------------------------
Within one year $ 58,441
One through two years 21,736
Two through three years 11,094
Three through four years 6,426
Four though five years 6,613
Five years and over 7
---------------------------------------------------------
Total certificates of deposit $ 104,317
=========================================================
Interest expense on deposits is summarized as follows (in thousands):
Years Ended December 31,
---------------------------------
1998 1997 1996
-------------------------------------------------------------------
Savings accounts $ 1,861 $ 1,936 $ 1,922
Certificates of deposit 5,713 5,983 6,354
Money market accounts 220 243 288
NOW accounts 167 166 194
-------------------------------------------------------------------
$ 7,961 $ 8,328 $ 8,758
===================================================================
27
<PAGE>
CNY Financial Corporation and Subsidiary
Notes to consolidated Financial Statements
Years Ended December 31, 1998, 1997 and 1996
(7) BORROWINGS
The Company is a member of the Federal Home Loan Bank (FHLB). As a member,
the Company is required to own capital stock in the FHLB and is authorized
to apply for advances from the FHLB.
At December 31, 1998 and 1997, advances from the FHLB were as follows (in
thousands):
Advance Amount
------------------
Maturity Date Interest Rate Fixed or Variable 1998 1997
-----------------------------------------------------------------------
7/30/01 5.52% Fixed $ 1,000 $ -
=======================================================================
Under the terms of a blanket collateral agreement with the FHLB, these
outstanding balances are collateralized by certain qualifying assets not
otherwise pledged (primarily first mortgage loans). At December 31, 1998
the Company may borrow up to an additional $27.9 million from the FHLB.
(8) INCOME TAXES
Income taxes were allocated as follows (in thousands):
Years Ended December 31,
--------------------------
1998 1997 1996
--------------------------------------------------------------------------
Income before income tax expense (benefit) $ 1,270 $ (16) $ 853
Changes in stockholders' equity, for
changes in unrealized gains on securities 410 206 (33)
--------------------------------------------------------------------------
$ 1,680 $ 190 $ 820
==========================================================================
The components of income tax expense (benefit) attributable to income from
operations are (in thousands):
Years Ended December 31,
----------------------------
1998 1997 1966
-------------------------------------------------------------------
Current:
Federal $ 799 $ 672 $ 989
State 194 181 206
-------------------------------------------------------------------
993 853 1,195
Deferred:
Federal 207 (698) (298)
State 70 (171) (44)
-------------------------------------------------------------------
277 (869) (342)
-------------------------------------------------------------------
$ 1,270 $ (16) $ 853
===================================================================
28
<PAGE>
CNY Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 1998, 1997 and 1996
(8) INCOME TAXES, CONTINUED
Actual tax expense (benefit) attributable to income before income taxes
differed from "expected" tax expense benefits), computed by applying the
U.S. Federal statutory tax rate of 34% to income before income tax as
follows (in thousands):
Years Ended December 31,
--------------------------
1998 1997 1996
--------------------------------------------------------------------------
Computed "expected" tax expense $ 1,003 $ 19 $ 754
Increase (decrease) in income taxes resulting from:
State taxes, net of Federal tax benefits 175 7 107
Non-taxable interest income (21) (35) (48)
Non-deductible expenses 48 16 20
Pension termination excise tax 80 -- --
Other items, net (15) (23) 20
--------------------------------------------------------------------------
$ 1,270 $ (16) $ 853
==========================================================================
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are (in
thousands):
December 31,
-----------------------
1998 1997
---------------------------------------------------------------------------
Deferred tax assets:
Non-deductible reserves $ -- $ 25
Non-accrual interest 14 126
Losses on real estate owned 27 124
Loan bulk sale -- 666
Allowance for loan losses 986 1,118
Net deferred loan fees 98 127
Postretirement benefit obligation 669 638
Deferred trustee fees 92 30
Foundation contribution carryforward 329 --
Other 15 31
---------------------------------------------------------------------------
Total gross deferred tax assets 2,230 2,885
---------------------------------------------------------------------------
Deferred tax liabilities:
Accumulated depreciation on premises and equipment (101) (97)
Prepaid pension cost -- (321)
Unrealized gains on securities (783) (373)
Securities discount accretion (20) (62)
Tax allowance for loan losses in excess
of base year amount (105) (124)
---------------------------------------------------------------------------
Total gross deferred tax liabilities (1,009) (977)
---------------------------------------------------------------------------
Net deferred tax assets $ 1,221 $ 1,908
===========================================================================
29
<PAGE>
CNY Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 1998, 1997 and 1996
(8) INCOME TAXES, CONTINUED
Realization of deferred tax assets is dependent upon the generation of
future taxable income or the existence of sufficient taxable income within
the carryback period. A valuation allowance is provided when it is more
likely than not that some portion of the deferred tax assets will not be
realized. In assessing the need for a valuation allowance, management
considers the scheduled reversal of the deferred tax liabilities, the level
of historical taxable income and projected future taxable income over the
periods in which the temporary differences comprising the deferred tax
assets will be deductible. Management believes that no valuation allowance
is necessary.
Included in retained earnings at December 31, 1998 is approximately $3.7
million 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 Company.
(9) PENSION AND OTHER POSTRETIREMENT PLANS
The following table presents changes in the Company's pension and
postretirement plans' accumulated benefit obligations and plan assets and
the plans funded status reconciled with amounts recognized in the Company's
consolidated balance sheet at December 31, 1998, 1997 (in thousands):
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Pension Benefits Other Benefits
-------------------- -------------------
1998 1997 1998 1997
---------------------------------------------------------------------------------------------
Change in benefit obligations:
Benefit obligation at beginning of year $ 3,490 $ 3,296 $ 1,597 $ 1,507
Service cost 84 87 42 37
Interest cost 244 242 108 107
Amendments 60 -- -- --
Curtailment (591) -- -- --
Contribution to qualifying replacement plan 216 -- -- --
Actuarial loss 938 9 238 17
Benefits paid (150) (144) (95) (71)
---------------------------------------------------------------------------------------------
Benefit obligation at end of year $ 4,291 $ 3,490 $ 1,890 $ 1,597
=============================================================================================
Change in plan assets:
Fair value of plan assets at beginning of year $ 5,083 $ 4,194 $ -- $ --
Actual return on plan assets 7 970 -- --
Employer contribution -- 63 95 122
Benefits paid (150) (144) (95) (122)
---------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 4,940 $ 5,083 $ -- $ --
=============================================================================================
Funded status $ 649 $ 1,593 $(1,890) $(1,597)
Unrecognized net actuarial (gain) loss -- (788) 235 (2)
---------------------------------------------------------------------------------------------
Prepaid (accrued) benefit cost $ 649 $ 805 $(1,655) $(1,599)
=============================================================================================
Weighted average assumptions:
Discount rate 5.00% 7.25% 6.50% 7.25%
Expected return on plan assets 7.00% 8.00% -- --
Rate of compensation increase 4.00% 5.00% 4.50% 5.00%
</TABLE>
30
<PAGE>
CNY Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 1998, 1997 and 1996
(9) PENSION AND OTHER POSTRETIREMENT PLANS, CONTINUED
For measurement purposes, a 6.50% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 1999. The rate was
assumed to decrease gradually to 5% for 2003 and remain at that level
thereafter. A one-percentage point increase or decrease in assumed health
care cost trend rates does not have a material effect on the benefit
obligation.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Pension Benefits Other Benefits
--------------------------- ------------------------
1998 1997 1996 1998 1997 1996
-------------------------------------------------------------------------------------------
Components of net periodic benefit cost: (in thousands)
Service cost $ 84 $ 87 $ 84 $ 42 $ 37 $ 41
Interest cost 244 242 236 108 107 111
Expected return on plan assets (391) (350) (284) -- -- --
Recognized net actuarial gain (32) -- (37) -- -- --
Curtailment charge 35 -- -- -- -- --
-------------------------------------------------------------------------------------------
Net periodic benefit cost $ (60) $ (21) $ (1) $ 150 $ 144 $ 152
===========================================================================================
</TABLE>
The pension plan was terminated effective December 31, 1998 and related
expense of $406,000 was recorded for the termination. Additionally, $80,000
of excise taxes were recorded in income tax expense for 1998.
(10) OTHER EMPLOYEE BENEFIT PLANS
Contributions to the defined contribution 401(k) Savings Plan were
approximately $60,000, $64,000 and $63,000 during the years ended December
31, 1998, 1997 and 1996, respectively.
In connection with establishing the Employee Stock Ownership Plan (ESOP) in
1998, the ESOP borrowed $4.3 million from the Company to purchase 428,532
common shares of the Company. The loan bears interest at 8.25% and is
payable in twenty equal annual installments. At December 31, 1998, 5,357
shares were released or committed to be released and 423,175 remained as
unallocated shares. The fair value of the unallocated shares on December
31, 1998 was $4.2 million. The Company recognized compensation expense of
$51,000 in 1998.
(11) COMMITMENTS AND CONTINGENCIES
The Company is a party to financial instruments with off-balance sheer 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 Company
evaluates each customer's creditworthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the Company upon
extension of credit, is based on management's evaluation of the customer's
financial position. Collateral held varies, but may include real estate
accounts receivable, inventory, property, plan and equipment and
income-producing commercial properties. Substantially all commitments to
extend credit, if exercised, will represent loans secured by real estate.
31
<PAGE>
CNY Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 1998, 1997 and 1996
(11) COMMITMENTS AND CONTINGENCIES, CONTINUED
The Company was committed to originate fixed and adjustable rate
mortgages of approximately $3.9 million and $3.7 million at December
31, 1998 and 1997, respectively. Unused lines of credit, which includes
home equity, consumer, commercial and credit cards, amounted to $10.7
million and $9.2 million at December 31, 1998 and 1997, respectively.
The Company'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 Company uses the same credit policies in making commitments as it
does for on-balance sheet instruments. The Company 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 Company.
(12) CONCENTRATIONS OF CREDIT
A substantial portion of the Company's loans are mortgage and consumer
loans in Central New York State. Accordingly, the ultimate
collectibility of a substantial portion of the Company's loan portfolio
is susceptible to changes in market conditions in this area. A majority
of the Company's loan portfolio is secured by real estate.
The Company'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.
(13) COMPREHENSIVE INCOME
The following summarizes the components of other comprehensive income
(in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------
1998 1997 1996
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Other comprehensive income, before tax:
Net unrealized holding gain (loss) on securities $ 1,023 $ 575 $ (98)
Reclassification adjustment for (gains) losses included in net income (6) (46) (15)
---------------------------------------------------------------------------------------------------------
Other comprehensive income, before tax 1,017 529 (83)
Income tax expense related to items of other comprehensive income 410 206 (33)
---------------------------------------------------------------------------------------------------------
Other comprehensive income, net of tax $ 607 $ 323 $ (50)
=========================================================================================================
</TABLE>
(14) STOCKHOLDERS' EQUITY AND CAPITAL STANDARDS
The Company and the Bank are subject to various regulatory requirements
administered by the federal banking agencies and the Bank is further
regulated by the New York State Banking Department.
Under capital adequacy guidelines the Company and 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 regulators about components, risk
weightings, and other factors. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary, actions by the regulators that, if undertaken, could
have a direct material effect on the Company's and Bank's financial
statements.
32
<PAGE>
CNY Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 1998, 1997 and 1996
(14) STOCKHOLDERS' EQUITY AND CAPITAL STANDARDS, CONTINUED
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, 1998 and 1997, 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, 1998, that the Company and Bank meet all capital
adequacy requirements to which they are subject.
The following is a summary of the Company's and Bank's actual capital
amounts and ratios compared to the regulatory minimum capital adequacy
requirements and the FDIC requirements for classification as a well
capitalized institution under prompt corrective action provisions (dollars
in thousands):
<TABLE>
<CAPTION>
To be classfied as
Minimum capital well capitalized under
adequacy prompt corrective
Actual requirements action provisions
---------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- --------------------------------------------------------------------------------------------------------------
At December 31, 1998:
<S> <C> <C> <C> <C> <C> <C>
TOTAL CAPITAL (TO RISK WEIGHTED ASSETS):
Company $80,333 48.91% $13,140 >8.00% N/A
-
Bank $60,078 38.82% $12,381 >8.00% $15,476 >10.00%
TIER 1 CAPITAL (TO RISK WEIGHTED ASSETS): - -
Company $77,892 47.42% $ 6,571 >4.00% N/A
-
Bank $57,751 37.32% $ 6,191 >4.00% $ 9,286 >6.00%
TIER 1 CAPITAL (TO AVERAGE ASSETS): - -
Company $77,892 29.57% $10,536 >4.00% N/A
-
Bank $57,751 23.40% $ 9,873 >4.00% $12,341 >5.00%
At December 31, 1997: - -
TOTAL CAPITAL (TO RISK WEIGHTED ASSETS):
Bank $31,938 22.56% $11,325 >8.00% $14,156 >10.00%
TIER 1 CAPITAL (TO RISK WEIGHTED ASSETS): - -
Bank $30,169 21.31% $ 5,662 >4.00% $ 8,493 >6.00%
TIER 1 CAPITAL (TO AVERAGE ASSETS): - -
Bank $30,169 12.89% $ 9,363 >4.00% $11,704 >5.00%
- -
</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.
33
<PAGE>
(14) STOCKHOLDERS' EQUITY AND CAPITAL STANDARDS, CONTINUED
As recommended in the Memorandum of Understanding, the Board of
Directors of the Bank developed a written compliance policy which
included appropriate training of personnel in all Bank functions
related 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 Company's consolidated financial statements.
In order to grant priority in the Conversion to the eligible
depositors, the Bank established a special account at the time of
conversion in an amount equal to its total net worth at September 30,
1998. In the event of a future liquidation of the converted bank (and
only in such event), eligible account holders who continue to maintain
accounts shall be entitled to receive a distribution from the special
account. The total amount of the special account will be decreased (as
the balances of eligible accounts are reduced) on annual determination
dates. No cash dividends may be paid to the stockholders if such
dividends reduce the Bank's stockholders' equity below the amount
required for that special account. At December 31, 1998, the amount
remaining in this liquidation account was $19.4 million.
(15) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company 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.
34
<PAGE>
CNY Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 1998, 1997 and 1996
(15) FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED
OFF-BALANCE-SHEET INSTRUMENTS: Fair values for the Company'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, statements 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.
BORROWINGS: The fair value of term advances from the Federal Home Loan
Bank is estimated using discounted cash flow analysis based on the
Company's current incremental borrowing rate for similar borrowing
arrangements.
The estimated carrying values and fair values of the Company's
financial instruments are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------
1998 1997
---------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 14,536 $ 14,536 $ 8,079 $ 8,079
Securities 98,755 98,841 56,690 56,709
Loans held for sale -- -- 2,541 2,541
Loans, net 159,207 166,435 155,422 155,657
FHLB stock 1,303 1,303 1,291 1,291
Financial liabilities:
Deposits:
Demand accounts 10,780 10,780 10,641 10,641
Savings accounts 61,820 61,820 62,732 62,732
Certificates of deposit 104,317 104,575 108,258 108,099
Money market accounts 7,975 7,975 8,435 8,435
NOW accounts 11,122 11,122 9,704 9,704
Borrowings $ 1,000 $ 997 $ -- $ --
=======================================================================================
</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 judgement and, therefore,
cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
35
<PAGE>
CNY Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 1998, 1997 and 1996
(16) CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
Presented below is the condensed balance sheet as of December 31, 1998 and
statement of income and statement of cash flows for the year ended December
31, 1998 for CNY Financial Corporation (in thousands):
<TABLE>
<CAPTION>
Condensed Balance Sheet 1998
- ---------------------------------------------------------------------------------------
<S> <C>
Assets:
Cash and due from banks $ 11,929
Securities available-for-sale, at fair value 8,238
Investment in bank subsidiary 58,939
Other assets 712
- ---------------------------------------------------------------------------------------
$ 79,818
=======================================================================================
Liabilities:
Other liabilities $ 748
- ---------------------------------------------------------------------------------------
Total liabilities 748
- ---------------------------------------------------------------------------------------
Total stockholders' equity 79,070
- ---------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 79,818
=======================================================================================
Condensed Statement of Income 1998
- ---------------------------------------------------------------------------------------
Interest from available-for-sale investments $ --
- ---------------------------------------------------------------------------------------
Total operating income --
Donation to charitable foundation (1,023)
Other operating expenses (192)
- ---------------------------------------------------------------------------------------
Total operating expenses (1,215)
- ---------------------------------------------------------------------------------------
Income before undistributed income of subsidiary (1,215)
Applicable income taxes (485)
Equity in undistrituted income of Bank 2,409
- ---------------------------------------------------------------------------------------
Net income $ 1,679
=======================================================================================
Condensed Statement of Cash Flows 1998
- ---------------------------------------------------------------------------------------
Operating activities:
Net Income $ 1,679
Adjustments to reconcile net income to cash provided by operating
activities:
Equity in undistributed earnings of Bank (2,409)
Increase in other assets (712)
Increase in other liabilities 292
ESOP shares release for allocation 51
Donation to charitable foundation 997
- ---------------------------------------------------------------------------------------
Net cash used by operating activities (102)
Investing activities;
Purchase of securities (33,421)
- ---------------------------------------------------------------------------------------
Net cash used in investing activities (33,421)
Financing activities
Par value of donation of stock to charitable foundation 1
Purchase of shares of common stock by ESOP (4,285)
Treasury stock purchases (611)
Net proceeds from issuance of common stock 50,347
- ---------------------------------------------------------------------------------------
Net cash provided by financing activities 45,452
- ---------------------------------------------------------------------------------------
Cash at December 31 $ 11,929
=======================================================================================
</TABLE>
36
<PAGE>
CNY Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 1998, 1997 and 1996
(17) UNAUDITED INTERIM FINANCIAL INFORMATION
The following table summarizes the Company's quarterly results for the
years ended December 31, 1998 and 1997 (in thousands, except share data):
<TABLE>
<CAPTION>
1998
------------------------------------------
First Second Third Fourth
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $ 4,311 $ 4,337 $ 4,442 $ 4,913
Interest expense 2,010 2,003 2,064 1,909
- -------------------------------------------------------------------------------------------------
Net interest income 2,301 2,334 2,378 3,004
Provision for loan losses 75 75 100 75
Other operating income 245 278 817 253
Other operating expenses 1,645 1,693 1,953 3,045
- -------------------------------------------------------------------------------------------------
Income before income taxes 826 844 1,142 137
- -------------------------------------------------------------------------------------------------
Net Income $ 493 $ 561 $ 566 $ 59(2)
=================================================================================================
Net income per common share (basic) (1) (1) (1) $ --
=================================================================================================
</TABLE>
<TABLE>
<CAPTION>
1997
------------------------------------------
First Second Third Fourth
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $ 4,417 $ 4,468 $ 4,434 $ 4,348
Interest expense 2,064 2,086 2,109 2,069
- -------------------------------------------------------------------------------------------------
Net interest income 2,353 2,382 2,325 2,279
Provision for loan losses 225 225 200 2,650
Other operating income 219 189 236 255
Other operating expenses 1,625 1,555 1,604 2,098
- -------------------------------------------------------------------------------------------------
Income (loss) before income taxes 722 791 757 (2,214)
- -------------------------------------------------------------------------------------------------
Net income (loss) $ 411 $ 436 $ 545 $(1,320)
=================================================================================================
Net income per common share (basic) (1) (1) (1) (1)
=================================================================================================
</TABLE>
(1)Not applicable because the Company converted from mutual to stock form of
ownership in October 1998. Income per common share is presented from October
6, 1998, the date of the conversion, based upon the weighted average number
of shares issued and outstanding since that date. The income included in the
computation is based on the actual operating results only for the
post-conversion period.
(2)The decrease in net income in the fourth quarter is related to the stock
contribution to the Cortland Savings Foundation of $614,000 after taxes.
37
<PAGE>
CNY FINANCIAL CORPORATION AND SUBSIDIARY
DIRECTORS AND OFFICERS
DIRECTORS OF CNY FINANCIAL CORPORATION
WESLEY D. STISSER,
President and Chief Executive Officer
HARVEY KAUFMAN,
Chairman
JOSEPH H. COMPAGNI
PATRICK J. HAYES, M.D.
ROBERT S. KASHDIN, CPA
DONALD P. REED
TERRACE D. STALDER
OFFICERS OF CNY FINANCIAL CORPORATION
WESLEY D. STISSER,
President and Chief Excutive Officer
STEVEN A. COVERT,
Executive Vice President and Chief Financial Officer
SANDY F. SAMSON
Corporate Secretary
F. MICHAEL STAPLETON,
Assistant Corporate Secretary
DIRECTORS OF CORTLAND SAVINGS BANK
WESLEY D. STISSER,
President and Chief Executive Officer
HARVEY KAUFMAN,
Chairman, Superintendent Emeritus Cortland City Schools
JOSEPH H. COMPAGNI,
President, Economy Paving Co., Inc.
ROLAND FRAGNOLI,
President, Homer Men & Boys Store
EDWARD E. HATTER, JR.,
Investor
PATRICK J. HAYES, M.D.,
Physician
ROBERT S. KASHDIN, CPA
Managing Partner, Port, Kashdin & McSherry, CPA
DONALD P. REED,
Owner, Reed's Seeds
JUDITH F. RIEHLMAN
Cortland County Clerk
TERRANCE D. STALDER,
Associate Vice President for Finance & Management,
State University College at Cortland
OFFICERS OF CORTLAND SAVINGS BANK
WESLEY D. STISSER,
President and Chief Executive Officer
STEVEN A. COVERT,
Executive Vice President and Chief Financial Officer
F. MICHAEL STAPLETON,
Executive Vice President and Chief Operating Officer
KERRY D. MEEKER,
Senior Vice President, Senior Loan Officer
OFFICERS OF CORTLAND SAVINGS BANK, CONTINUED
KEVIN J. BERKLEY,
Vice President and Residential Loan Officer
JOHN A. MASON,
Vice President and Commercial Loan Officer
R. DAVID PATZ,
Vice President
MARILYN S. BENTRUP,
Assistant Vice President and Banking Floor Officer
THOMAS M. CARR,
Assistant Vice President and Controller
DEBBIE M. LUCHSINGER,
Assistant Vice President and Human Resources Officer
SANDY F. SAMSON,
Assistant Vice President and Corporate Secretary
DANIEL L. WILLIAMS,
Assistant Vice President and EDP Manager
KATHERYN M. COTTERILL,
Marketing Officer
DONALD L. HAY,
Compliance Officer and Bank Secrecy Act Officer
PAUL A. MAZZONE,
Bank Security Officer
PATRICIA M. WALTER,
Homer Branch Manager
================================================================================
EQUAL OPPORTUNITY EMPLOYER
It is the policy of CNY Financial Corporation to provide equal opportunity
employment to all employees and applicants without regard to race, age,
religion, color, sex, national origin, marital status or status as an individual
with a disability and/or status as a disabled and/or Vietnam Era veteran or any
other legally protected class. This policy is implemented in all aspects of
personnel policies, programs, practices and operations and in all working
conditions and relationships with employees and applicants for employment; and
to promote the full realization of equal opportunity in employment.
================================================================================
MEMBER [LOGO OMITTED]
FDIC
38
<PAGE>
CORPORATE OFFICE
One North Main Street
Cortland, New York
Tel: (607) 756-5643 Fax: (607) 756-5839
ANNUAL REPORT ON FORM 10-K
A copy of CNY Financial Corporations's Annual Report on Form 10-K as filed with
the Securities and Exchange Commission may be obtained without charge upon
written request to Steven A. Covert, Executive Vice President & Chief Financial
Officer, CNY Financial Corporation, One North Main Street, Cortland, New York
13045, or by calling 607-758-2227.
REGISTRAR/TRANSFER AGENT
Communications regarding change of address, transfer of stock and lost
certificates should be sent to:
Registrar and Transfer Co.
10 Commerce Drive
Cranford, NJ 07016-3572
(800) 368-5948
CORPORATE COUNSEL
Serchuk and Zelermyer, LLP
81 Main Street
White Plains, New York 10601
ACCOUNTANTS
KPMG, LLP
113 South Salina Street
Syracuse, New York 13202
DIVIDENDS
There were no dividends declared in 1998. However, the company declared its
inital quarterly cash dividend of $0.04 per share in the first quarter of 1999.
STOCK LISTING
CNY Financial Corporation's common stock is traded on the Nasdaq National Market
System under the symbol CNYF. At December 31, 1998, there were 5,251,037 shares
of CNY Financial Corporation common stock issued and outstanding, and there were
approximately 1,610 holders of record. The table below shows the high and low
bid price on the common stock for each month since the common stock began
trading on October 6, 1998. These prices do not represent actual transactions
and do not include retail markups, markdowns or commissions.
Bid
----------------------
Month Ended High Low
- ----------------- ------ ------
October 31, 1998 (1) $10.00 $8.88
November 30, 1998 $10.19 $9.00
December 31, 1998 $10.06 $9.44
(1)Reflects the period from October 6 through October 31, 1998.
The stock price information set forth in the table above was provided by the
National Association of Securities Dealers, Inc. High, low and closing prices
and daily trading volume are reported in the most major newspapers.
MARKET MAKERS
CIBC Oppenhimer & Co. Inc.
Trident Securities, Inc.
Friedman Billings Ramsey & Co.
Tucker Anthony, Inc.
39
<PAGE>
DIRECTORS
Joseph H. Compagni
CNY Financial Corporation
Cortland Savings Bank
[photo omitted]
Patrick J. Hayes
CNY Financial Corporation
Cortland Savings Bank
[photo omitted]
Donald P. Reed
CNY Financial Corporation
Cortland Savings Bank
[photo omitted]
Roland Fragnoli
Cortland Savings Bank
[photo omitted]
Robert S. Kashdin
CNY Financial Corporation
Cortland Savings Bank
[photo omitted]
Judith F. Riehlman
Cortland Savings Bank
Wesley D. Stisser, President & CEO
CNY Financial Corporation
Cortland Savings Bank
[photo omitted]
Edward E. Hatter, Jr.
Cortland Savings Bank
[photo omitted]
Harvey Kaufman, Chairman
CNY Financial Corporation
Cortland Savings Bank
[photo omitted]
Terrance D. Stalder
CNY Financial Corporation
Cortland Savings Bank
[photo omitted]
40
EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
The Company has only one subsidiary, Cortland Savings Bank, which is
wholly-owned. The business address of the Cortland Savings Bank is:
Cortland Savings Bank
One North Main Street
Cortland, NY 13045
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF CNY FINANCIAL CORPORATION AND SUBSIDIARY
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> USD
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<EXCHANGE-RATE> 1 1
<CASH> 4,432 4,093
<INT-BEARING-DEPOSITS> 6,104 586
<FED-FUNDS-SOLD> 4,000 3,400
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 88,437 44,140
<INVESTMENTS-CARRYING> 10,318 12,550
<INVESTMENTS-MARKET> 10,404 12,569
<LOANS> 161,701 157,565
<ALLOWANCE> 2,494 2,143
<TOTAL-ASSETS> 281,186 233,729
<DEPOSITS> 196,014 199,770
<SHORT-TERM> 0 0
<LIABILITIES-OTHER> 5,102 3,219
<LONG-TERM> 1,000 0
0 0
0 0
<COMMON> 54 0
<OTHER-SE> 79,016 30,740
<TOTAL-LIABILITIES-AND-EQUITY> 281,186 233,729
<INTEREST-LOAN> 13,420 13,582
<INTEREST-INVEST> 4,583 4,085
<INTEREST-OTHER> 0 0
<INTEREST-TOTAL> 18,003 17,667
<INTEREST-DEPOSIT> 7,961 8,328
<INTEREST-EXPENSE> 7,986 8,328
<INTEREST-INCOME-NET> 10,017 9,339
<LOAN-LOSSES> 325 3,300
<SECURITIES-GAINS> 6 46
<EXPENSE-OTHER> 8,326 6,872
<INCOME-PRETAX> 2,949 56
<INCOME-PRE-EXTRAORDINARY> 1,679 72
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,679 72
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
<YIELD-ACTUAL> 4.28 4.17
<LOANS-NON> 920 3,785
<LOANS-PAST> 15 9
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 2,143 1,952
<CHARGE-OFFS> 180 3,279
<RECOVERIES> 206 170
<ALLOWANCE-CLOSE> 2,494 2,143
<ALLOWANCE-DOMESTIC> 2,494 2,143
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>
