SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[X] Preliminary Proxy Statement [_] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[_] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
CNY FINANCIAL CORPORATION
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[_] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[X] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
Notes:
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CNY FINANCIAL CORPORATION
One North Main Street
Cortland, New York 13045
(607) 756-5643
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To be Held on May __, 2000
Please take notice that a Special Meeting of Stockholders of CNY
Financial Corporation will be held at ___ p.m., New York time, on May __, 2000
at ____________________________________________.
A Proxy Card and a Proxy Statement for the meeting are included with
this notice.
The meeting is for the purpose of considering and acting upon the
approval of an Agreement and Plan of Merger with Niagara Bancorp, Inc. and
Niagara Merger Corp and such other matters as may properly come before the
meeting or any adjournments. The Board of Directors is not aware of any other
business to come before the meeting.
Action may be taken on the foregoing proposal at the meeting on the
date specified above, or on any date or dates to which the meeting may be
adjourned. Stockholders of record at the close of business on March 24, 2000
are the stockholders entitled to vote at the meeting and any adjournments.
Please complete and sign the enclosed form of proxy and mail it
promptly in the enclosed envelope. The proxy will not be used if you attend and
vote at the meeting in person. Each of our stockholders has one vote for each
share of common stock owned.
BY ORDER OF THE BOARD OF DIRECTORS
Cortland, New York
April__, 2000
IMPORTANT: PLEASE RETURN YOUR PROXY PROMPTLY, WHICH WILL SAVE US THE EXPENSE OF
FURTHER REQUESTS FOR PROXIES TO ENSURE A QUORUM AT THE MEETING. A SELF ADDRESSED
ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE. NO POSTAGE IS REQUIRED IF MAILED
WITHIN THE UNITED STATES.
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CNY FINANCIAL CORPORATION
One North Main Street
Cortland, New York 13045
(607) 756-5643
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PROXY STATEMENT
Special Meeting of Stockholders
to be held on April ___, 2000 at ____:00 pm
at ________________________________________
CNY Financial Corporation (referred to as "CNY" or the "Company" in
this Proxy Statement) is holding a special meeting of stockholders to vote on an
Agreement and Plan of Merger with Niagara Bancorp, Inc. and Niagara Merger Corp.
If stockholders approve the Agreement and the other conditions described below
are met, CNY will merge with Niagara Merger Corp and each stockholder of CNY
will receive $18.75 per share in cash for each share of CNY common stock that
the stockholder owns.
There were 4,601,373 shares of CNY common stock outstanding and
entitled to vote on the Record Date. Each share is entitled to one vote on the
approval of the Agreement. A majority vote of the shares entitled to vote is
necessary to approve the Agreement. The merger cannot occur unless the Board of
Governors of the Federal Reserve System and the New York State Banking Board
approve the merger.
CNY has granted to Niagara Bancorp an option to purchase up to 919,814
shares of CNY common stock at $16.75 per share in connection with the Agreement.
In addition, the directors and executive officers of CNY and Cortland Savings
Bank have agreed to vote all their shares of stock in favor of the approval of
the Agreement.
CNY is first furnishing this Proxy Statement to its stockholders on
approximately April ____, 2000. The Record Date to determine who may vote at the
meeting is March 24, 2000. Please see the "Glossary" on page 4 for definitions
of capitalized terms used in this Proxy Statement.
PLEASE SIGN AND RETURN THE ENCLOSED PROXY CARD AS SOON
AS POSSIBLE TO SIGNIFY HOW YOU WANT TO VOTE YOUR SHARES.
THE BOARD OF DIRECTORS OF CNY FINANCIAL CORPORATION UNANIMOUSLY RECOMMENDS
THAT YOU VOTE IN FAVOR OF THE AGREEMENT AND PLAN OF MERGER.
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SUMMARY OF TERMS
This is a summary of the most material terms of the transaction between
CNY, Niagara Bancorp, Inc. and Niagara Merger Corp.
o If the merger occurs, each stockholder of CNY will receive
$18.75 per share in cash for each share of CNY common stock.
See the discussion under the caption "Description of the
Agreement" beginning at page ____ for more information.
o The merger cannot occur unless CNY stockholders approve the
merger by a majority of the total shares outstanding AND both
the Federal Reserve Board of Governors and the New York State
Banking Board approve the merger. See the discussion under the
caption "Regulatory Approval" beginning at page ____ for more
information.
o The Board of Directors of CNY has approved the merger and has
unanimously recommended that CNY stockholders vote in favor of
it. See the discussion under the caption "Background and
Reasons for the Merger" beginning at page ____ for more
information.
o CIBC World Markets Corp. has issued a fairness opinion dated
December 28, 1999 that, as of that date, the amount which will
be paid to CNY stockholders in the merger is fair from a
financial point of view. See the discussion under the caption
"Opinion of the Financial Advisor to CNY" beginning at page
____ for more information.
o CNY has given Niagara Bancorp an option to purchase 919,814
shares of CNY common stock for $16.75 per share. See the
discussion under the caption "Niagara's Option to Purchase
919,814 Shares of CNY Common Stock" beginning at page ____ for
more information.
o CNY has agreed that it will not seek or encourage a competing
transaction to acquire CNY or Cortland Savings Bank, except in
very limited situations in which an unsolicited offer is made.
See the discussion under the caption "Other Acquisition
Proposals" beginning at page ____ for more information.
o The directors and executive officers of CNY and Cortland
Savings Bank have agreed to vote their shares of CNY stock in
favor of the merger. See the discussion under the caption
"Voting Agreement" beginning at page ____ for more
information.
o Niagara has stated that it intends to keep Cortland Savings
Bank as a separate institution for at least two years after
the merger with most of the current members of the Cortland
Savings Bank directors remaining as directors of Cortland
Savings Bank after the merger. See the discussion under the
caption "Background and Reasons for the Merger" beginning at
page ____ for more information.
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o The directors and executive officers of CNY and Cortland
Savings Bank who have stock options and restricted stock
awards under the CNY stock benefit plans will receive payment
for their awards based upon the $18.75 price per share. They
will also receive continued directors and officers liability
insurance and indemnification from Niagara. CNY anticipates
that most employees, including at least one executive officer,
whose employment will terminate in connection with the merger
will receive severance payments. See page ___ under the
caption "Benefits of the Merger to Directors and Executive
Officers" for more information.
o Stockholders who disagree with the merger have the right to
receive the appraised value of the shares if the merger is
consummated, provided that they satisfy the requirements of
Delaware Law. See the discussion under the caption "Appraisal
Rights" beginning at page ____ for more information.
TABLE OF CONTENTS
Page
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Summary of Terms...............................................................4
Glossary.......................................................................6
Risk Factors...................................................................7
General Information About the Meeting, Proxies and Voting......................8
The Agreement and the Merger..................................................10
Principal Owners of CNY Common Stock..........................................26
Information Regarding the Market for CNY Common Stock and Related Matters.....28
Financial Information Regarding CNY Financial Corporation ....................29
Selected Financial Data.......................................................29
The Business of CNY Financial.................................................31
Management's Discussion and Analysis of Financial
Condition and Results of Operations........................................44
CNY Financial Corporation Index to Financial Statements......................F-1
Exhibit A - Agreement and Plan of Merger.....................................A-1
Exhibit B - Opinion Letter of CIBC World Markets Corp........................B-1
Exhibit C - Delaware General Corporation Law Section 262.....................C-1
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GLOSSARY
The following definitions are used in this Proxy Statement.
The "Agreement" means the Agreement and Plan of Merger among CNY, Niagara and
Niagara Merger Corp dated December 28, 1999. A copy of the Agreement is attached
as Exhibit A to this Proxy Statement.
"CIBC" means CIBC World Markets Corp., the financial advisor to CNY.
"CNY" means CNY Financial Corporation.
"Cortland Savings" means Cortland Savings Bank, a wholly-owed subsidiary of CNY.
The "ESOP" means the CNY Employee Stock Ownership Plan.
The "meeting" means the meeting of stockholders of CNY to be held on May ___,
and any adjournments or postponements of the meeting, at which CNY will present
the Agreement to its stockholders for approval.
The "merger" means the transaction in which CNY will merge into Niagara Merger
Corp (a subsidiary of Niagara) and each stockholder of CNY will be entitled to
receive $18.75 for each share of CNY common stock that the stockholder owns.
"Niagara" means Niagara Bancorp, Inc., a federally registered bank holding
company which now owns First Niagara Bank, formerly known as Lockport Savings
Bank.
The "PRRP" means the CNY Financial Corporation Personnel Recognition and
Retention Plan which the Board of Directors adopted and which stockholders
approved at a meeting held on April 28, 1999, including the amendment which
stockholders approved on October 18, 1999.
The "Record Date" means March 24, 2000, which is the date which CNY will use to
determine which CNY stockholders of record are entitled to vote at the meeting.
The "Stock Option Plan" means the CNY Financial Corporation Stock Option Plan
which the Board of Directors adopted and which stockholders approved at a
meeting held on April 28, 1999, including the amendment which stockholders
approved on October 18, 1999.
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RISK FACTORS
THE TRANSACTION MAY NOT OCCUR EVEN IF STOCKHOLDERS VOTE IN FAVOR.
The completion of the merger and the payment of $18.75 per share is
subject to many conditions discussed in this proxy statement. Perhaps the most
significant of these conditions is that CNY and Niagara must obtain approval
from the New York State Banking Board and the Board of Governors of the Federal
Reserve System. In addition, Niagara is not required to complete the merger
unless detailed conditions described in the Agreement are met. For example,
Niagara is not required to complete the merger if there is a material adverse
effect on CNY's assets, financial condition, or results of operations, or if CNY
breaches any of the representations or warranties contained in the Agreement. If
the merger does not occur, CNY will still have to record the merger-related
expenses as reductions of income, adversely affecting income per share. In
addition, CNY's stock price, which appears to currently reflect a value based
upon the consummation of the merger, may decline.
MOST STOCKHOLDERS MUST PAY TAX ON THE RECEIPT OF THE MERGER CONSIDERATION.
For most stockholders, the merger and the receipt of $18.75 per share
will be treated for tax purposes substantially the same as if the stockholder
had sold his or her shares for $18.75 per share. Therefore, unless exempt from
the payment of tax, the stockholder must pay federal income tax on the gain, and
may also have to pay state income tax depending upon the state of residence. If
the stock is a capital asset in the hands of the stockholder, then the
stockholder must pay a tax on the capital gain equal to the difference between
the stockholder's basis in the stock and the $18.75 received. Whether the tax
will be at long term or short term capital gains rates will depend upon how long
the stockholder owned the stock. If the stock is not a capital asset, then the
stockholder will probably be required to pay tax at ordinary income rates on the
gain.
THE CONSUMMATION OF THE MERGER MAY BE DELAYED.
The Agreement provides that either party has the right to terminate the
Agreement if the merger does not occur by September 30, 2000. However, that does
not mean that the merger must be either completed or abandoned by that date. CNY
could agree with Niagara to complete the merger after that date, and no
additional stockholder approval would be required to do so. The merger
consideration of $18.75 per share is payable without interest. Therefore, a
delay in the consummation of the merger would have the effect of making the
merger consideration less valuable on a present value basis.
STOCKHOLDERS MUST AFFIRMATIVELY REQUEST PAYMENT FOR THEIR SHARES - THEY WILL NOT
AUTOMATICALLY RECEIVE PAYMENT.
When and if CNY and Niagara consummate the merger, stockholders will
receive a notice and they will be required to submit their share certificates to
obtain payment. People who own their stock in street name through a broker must
rely on their broker to submit the necessary paperwork. People who own their
stock in their own name must submit a transmittal form and their original stock
certificate. If the stock certificate has been lost, there will be a delay in
receiving payment and the stockholder may be required to pay the cost of an
insurance bond to protect against the possibility that someone else will claim
to own the same shares. In addition, if a stockholder moves to a different
address from that shown on the CNY stockholder records, the stockholder may not
receive a transmittal letter and there may be a delay in receiving payment.
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GENERAL INFORMATION ABOUT THE MEETING, PROXIES AND VOTING
The Board of Directors of CNY is circulating this Proxy Statement and
is soliciting stockholder votes with the accompanying proxy card. If you sign
and return that proxy card so CNY receives it before the polls close at the
meeting, your votes will be cast as you mark on the proxy card. If you sign and
return your proxy card but you do not mark how you want to vote, then your
shares will be voted in favor of the Agreement.
If you want to revoke the proxy you submit in response to this proxy
solicitation, you must: (i) sign and deliver a written notice with a later date
to the Secretary of CNY at or before the meeting stating that you want to revoke
the proxy, (ii) sign and deliver to the Secretary of CNY at or before the
meeting a later-dated proxy card relating to the same shares, or (iii) attend
the meeting and vote in person. Revoking a proxy is effective only if it occurs
before the polls close at the meeting. Attending the meeting does not
automatically revoke a proxy. You must deliver written notice revoking a proxy
to Sandy Samson, Secretary, CNY Financial Corporation, One North Main Street,
Cortland, New York 13045; telephone number (607) 756-5643.
There were 4,601,373 shares of CNY common stock outstanding on the
Record Date. A majority of those shares, represented in person or by proxy, is a
quorum which allows CNY to begin the meeting. Once a quorum is present, the
meeting can continue even if some stockholders leave the meeting. If a
stockholder is present in person or by proxy but abstains from voting any
shares, or if a broker submits a proxy for shares but does not vote those
shares, then the shares are counted as present for purposes of determining a
quorum.
The approval of the Agreement requires the affirmative vote of a
majority of all shares outstanding. Therefore, an abstention, a failure to vote,
or a broker non-vote, has the same effect as a vote against the Agreement.
The CNY bylaws provide that no matters other than those proposed by the
CNY Board of Directors may be voted upon at a special meeting of stockholders.
CNY does not anticipate that any other matter will be presented for a vote at
the meeting. If stockholders vote on any other matter at the meeting, including
a proposal to adjourn the meeting, the Board of Directors as the holder of the
proxies which the Board is soliciting may vote on those matters based on their
judgment.
IMPORTANT INFORMATION FOR STOCKHOLDERS WHOSE STOCK IS HELD IN STREET NAME
If you hold your stock in street name, which means that your stock is
held for you in a brokerage account and is not registered on CNY's stock records
in your own name, your broker will not vote your shares on the Agreement unless
you instruct your broker how you want your votes to be cast. Please tell your
broker as soon as possible how to vote your shares to make sure that your broker
has enough time to vote your shares before the polls close at the meeting. If
your broker does not vote your shares, that will have the same effect as a vote
against the Agreement. If your stock is held in street name, you do not have the
direct right to vote your shares or to revoke a proxy for your shares unless the
record holder of your stock gives you that right in writing.
CNY is a Delaware corporation and Delaware law governs its corporate
proceedings. Delaware law provides that stockholders of CNY may elect to have
their shares appraised by the Delaware Court of Chancery. See the discussion
below under the caption "The Agreement and the Merger - Appraisal Rights" for
more information.
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CNY will pay its costs of soliciting proxies. In addition, directors,
officers and regular employees of CNY and its subsidiary, Cortland Savings, may
solicit proxies personally, by telephone or by other means without additional
compensation. CNY will, upon the request of brokers, dealers, banks and voting
trustees, and their nominees, who were holders of record or participants in
depositories on the Record Date, bear their reasonable expenses for mailing
copies of this Proxy Statement, the notice of meeting and the form of proxy card
to beneficial owners. CNY has retained Regan & Associates, Inc., to assist in
the solicitation of proxies, for a fee of $4,250 plus expenses of not more than
$2,000, to assist in the proxy solicitation process. The $4,250 fee is not
payable unless stockholders approve the Agreement.
If CNY completes the merger promptly, then there may not be a 2000
annual meeting of stockholders of CNY. In order for a stockholder to be
entitled, under the regulations of the Securities and Exchange Commission, to
have a stockholder proposal included in CNY's Proxy Statement for the 2000
annual meeting, if such a meeting is held, the proposal must have been received
by CNY at its principal executive offices, One North Main Street, Cortland, New
York 13045, Attention: Sandy Samson, Secretary, no later than November 15, 1999,
which is 120 days in advance of the date in 2000 which corresponds to the date
in 1999 on which CNY released the proxy materials for its 1999 annual meeting.
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THE AGREEMENT AND THE MERGER
DESCRIPTION OF THE AGREEMENT
CNY, Niagara and Niagara Merger Corp entered into the Agreement on
December 28, 1999. The Agreement provides that if the conditions described below
are met, CNY will merge into Niagara Merger Corp, a wholly owned subsidiary of
Niagara. Each stockholder of CNY will then receive $18.75 in cash for each share
of CNY common stock owned. The CNY stockholders will cease to be stockholders of
CNY and will not become stockholders of Niagara. Cortland Savings will become a
subsidiary of Niagara. A copy of the Agreement is attached as Exhibit A to this
Proxy Statement.
CNY has also granted Niagara an option to purchase 919,814 shares of
CNY common stock at a price of $16.75 per share. The directors and executive
officers of CNY and Cortland Savings have agreed to vote their shares of stock
in favor of the Agreement. The form of option and voting agreement are included
as attachments to the Agreement and are reproduced as part of Exhibit A to this
Proxy Statement.
Niagara is the holding company for First Niagara Bank, formerly known
as Lockport Savings Bank, a New York chartered savings bank with nineteen
offices in western New York. Niagara also owns subsidiaries involved in
insurance brokerage and providing financial services. The address and telephone
number of the principal executive offices of Niagara and Niagara Merger Corp are
6950 South Transit Road, Lockport, New York 14095-0514; (716) 625-7500.
The consummation of the merger will only occur if all of the following
conditions are met:
o The stockholders of CNY approve the Agreement.
o The Board of Governors of the Federal Reserve System and the
New York Banking Board approve the merger.
o No event occurs which causes a material adverse effect on CNY
between the date of the Agreement and the closing date, other
than material adverse effects caused by (i) any change in the
value of assets resulting from a change in interest rates
generally, (ii) any change in any federal or state law, rule
or regulation or in generally accepted accounting principles
which change affects financial institutions generally, or
(iii) any action taken by CNY or any of its subsidiaries at
the request of Niagara.
o The representations and warranties of all the parties to the
Agreement are true and correct on the closing date.
o There is no court or agency order, injunction or decree which
enjoins or prohibits the merger.
o Niagara deposits funds with the Exchange Agent sufficient to
pay the amount that the stockholders of CNY are entitled to
receive.
o The stockholders' equity of CNY has not declined below $67.6
million, except as a result of actions taken at the request of
Niagara or changes in the net unrealized gain or loss in
securities available for sale.
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o Other customary closing conditions are met, such as the
requirements for the delivery of customary officers'
certificates and attorneys' opinion letters.
Either CNY or Niagara may terminate the Agreement if one or more of the
following happens:
o The merger does not occur by September 30, 2000.
o There is a material uncured breach of any representation,
warranty or covenant of the other party under the Agreement.
o There is a court order enjoining or prohibiting the
consummation of the transactions described in the Agreement.
o Any regulatory authority which must approve or consent to the
merger informs either party in writing that its approval or
consent is unlikely to be granted.
o There has been no "Superior Proposal" and the stockholders of
CNY do not approve the Agreement. See page under the caption
"Other Acquisition Proposals" for an explanation of Superior
Proposals.
In addition, CNY can terminate the Agreement if CNY receives a Superior
Proposal and the CNY Board of Directors determines that it would be in
accordance with its fiduciary duties, based upon the advice of its outside legal
counsel, to accept the Superior Proposal. Niagara can terminate the Agreement if
the CNY Board withdraws, modifies or qualifies its recommendation that
stockholders approve the Agreement after receiving a Superior Proposal or CNY
enters into an agreement to be acquired by, merge with or combine with a third
party in connection with a Superior Proposal. Any termination for this reason
will not affect Niagara's rights under the option to purchase CNY common stock
that CNY has granted to Niagara.
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BACKGROUND AND REASONS FOR THE MERGER
Cortland Savings converted from the mutual to the stock form of
ownership on October 6, 1998, and became a wholly-owned subsidiary of CNY. The
Board of Directors of CNY worked to implement a vision in which CNY would become
the holding company for not only Cortland Savings, but also other
community-based financial institutions. Despite efforts to locate other
financial institutions in the Central New York region which were interested in
such an approach, CNY was unable to find other partners to join with it. This
adversely affected the ability of CNY to leverage the capital it obtained in its
stock offering.
As a result, the Board of Directors decided to consider the possibility
of redirecting its efforts towards finding an appropriate merger partner with a
similar vision regarding community banking that would be willing to acquire CNY.
The Board's principal reasons for pursuing an acquisition transaction were the
following:
o Attempts to leverage CNY's capital and grow its franchise
through acquisitions of other institutions had not been
successful.
o The prospects for growth through internal expansion in CNY's
local market are limited while growth through opening new
branches in adjoining communities is expensive and is likely
to adversely affect earnings in the initial period after
branches are opened.
o CNY's prospects for reaching a satisfactory return on equity
without significant growth are limited due to its high capital
level combined with regulatory restrictions which limit its
ability to reduce capital through stock repurchases.
o A business combination with a larger institution will allow
Cortland Savings to expand its product offerings throughout
its existing community and provide better service to its
customers while, if properly structured, allow it to maintain
its local focus with a locally-based Board of Directors.
The Board began to explore whether it could identify a potential
transaction in which CNY stockholders would realize a fair price for their
shares and Cortland Savings would become part of a holding company but remain a
vibrant part of the local community. At CNY's request, CIBC analyzed potential
acquirors to identify which institutions, based primarily upon financial
resources and geographic and strategic fit, would be most likely to be
interested in and able to engage in a transaction with CNY meeting those
criteria. Following the Board's consideration of this analysis, the Board
identified one institution as the most likely to be both interested in and
capable of completing a transaction. CNY commenced discussions with that
institution and the institution conducted due diligence. The language of a
proposed definitive agreement was negotiated during the last ten days of
November, 1999, based upon an offer price of $18.70 per share. In early
December, immediately prior to the signing of a definitive agreement, the
potential acquiror advised CNY that due to a change in its economic analysis, it
was withdrawing its offer. After further discussions with CNY, the potential
acquiror then made a new offer for $0.30 per share less.
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CNY's Board decided to reject the reduced offer and seek another
transaction. During this period, CNY had received indications of interest from
three other financial institutions, including Niagara, regarding a potential
acquisition of CNY. In the judgment of the CNY Board, after consultation with
CIBC, one of the two other institutions clearly lacked the financial resources
to consummate an acquisition of CNY using either cash or stock at a price
comparable to the amount being discussed with the initial potential acquiror.
Accordingly, CNY decided not to pursue further discussions with that
institution. After a meeting with the second institution and consultations with
CIBC, the CNY Board came to the same conclusion regarding the second
institution. In addition, after CNY had advised the second institution that its
indicated offer price of $18.60 per share was lower than the price then under
discussion with another institution, the second institution submitted an offer
to acquire CNY at a price of $18.00 per share. The CNY Board determined not to
pursue this offer because it was lower than the offer then under discussion and
because of the significant doubts about the ability of the offeror to complete a
transaction at an acceptable price.
CNY received the indication of interest from Niagara in mid-November.
Following discussions between senior management of the two companies, Niagara
indicated that it was interested in pursuing a possible acquisition of CNY at a
price of $18.25 to $18.50 per share in cash. CNY told Niagara that this price
was not competitive with another offer that CNY was considering. However,
Niagara declined to increase its offer and CNY terminated discussions with
Niagara.
After the negotiations with the first potential acquiror terminated in
early December, CNY asked CIBC to approach Niagara to determine whether there
was interest in resuming discussions. After receiving an affirmative response,
the parties discussed the business terms of a proposed transaction. Niagara
initially proposed an acquisition price of $18.70 per share in cash. After
negotiation, Niagara increased its offer to $18.75 per share. CNY then allowed
Niagara to conduct a full due diligence review of CNY. The parties also
proceeded to negotiate the details of the Agreement and Niagara conducted due
diligence. Between December 22 and December 28, 1999, the parties agreed on the
remaining terms of the transaction. The parties finalized the text of the
Agreement on December 28, 1999.
When evaluating the proposed transaction with Niagara, the Board
considered the following negative factors:
o The possibility that regulatory approval might not be obtained,
with the result that we would have substantial merger-related
expenses that would adversely affect earnings.
o The fact that the Agreement imposes immediate operating
restrictions on CNY and Cortland Savings, which could have a
negative effect on them if the transaction is not consummated.
o The decreased likelihood that a competing acquiror would seek to
offer a higher price for CNY stock because of the stock option
given to Niagara and restrictions on CNY's ability to negotiate
with other potential acquirors.
o The likelihood of job losses in the local community as some
employees were let go, and the possibility that resulting adverse
community reaction could affect market share.
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However, the Board continues to believe that the positive
considerations mitigating in favor of the transaction with Niagara far outweigh
these negative factors. The Board also noted that in addition to the positive
economic consequences to stockholders, Niagara's approach to operating
successful community-based financial service providers is consistent with the
vision of the CNY Board as discussed above. The Agreement confirms that it is
the intent of Niagara to keep Cortland Savings as a separate entity for at least
two years, with a Board of Directors which will include at least seven current
directors of Cortland Savings.
In making its final decision, the CNY Board considered all of these
factors. The Board also heard a presentation from its financial advisor, and
received a written opinion from its financial advisor to the effect that the
$18.75 merger consideration payable to its stockholders was fair from a
financial point of view. Detailed information regarding that opinion is set
forth in the following section. The Board did not expressly adopt the
conclusions in the fairness opinion, but considered the opinion as one of the
important factors in its final decision to approve the Agreement. The Board
approved the agreement and recommended to stockholders that they vote in favor
of it on December 28, 1999.
THE CNY BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS OF CNY
VOTE IN FAVOR OF THE AGREEMENT AND THE MERGER.
THE OPINION OF THE FINANCIAL ADVISOR TO CNY
CNY retained CIBC World Markets Corp. as its financial advisor in
connection with the merger. CIBC is an investment banking firm which regularly
provides financial valuations and analyses of business enterprises and
securities in connection with mergers, acquisitions, mutual-to-stock
conversions, initial and secondary stock offerings and other corporate
transactions. CNY retained CIBC based upon its reputation, its substantial
experience in merger and acquisition matters, and CNY's prior satisfactory
experience with CIBC.
At a meeting of the Board of Directors of CNY held on December 28,
1999, CIBC rendered its opinion to the Board that, as of that date and subject
to limitations set forth in the opinion, the merger consideration of $18.75 per
share was fair to the stockholders of CNY from a financial point of view. CNY
and its affiliates imposed no limitations on CIBC with respect to the
investigation made or procedures followed by it in rendering its opinion.
CIBC delivered a written opinion dated December 28, 1999, and updated
as of the date of this proxy statement. In delivering the opinion dated as of
the date of this proxy statement, CIBC updated selected analyses it performed in
connection with its December 28, 1999 opinion and reviewed the assumptions on
which those analyses were based and the factors considered in connection with
those analyses. CNY does not currently intend to request that CIBC update its
fairness opinion as of any date subsequent to the date of this proxy statement.
However, if CNY does request such an update, CIBC will have to evaluate whether
it would be able to reaffirm its opinion based on then-prevailing facts and
circumstances. If a revised fairness opinion is requested by CNY as a result of
a material amendment to the Agreement, CIBC will have to evaluate whether it
would be able to reaffirm its opinion based on then-prevailing facts and
circumstances.
CIBC's opinion and the financial analysis that CIBC presented to the
CNY Board of Directors were among the many factors that the CNY Board considered
in its evaluation of the merger. Stockholders should not treat the opinion as
determinative of the Board's decision regarding the merger.
The full text of the CIBC opinion, which sets forth assumptions made,
matters considered and limits on the review undertaken by CIBC, is included as
Exhibit B to this Proxy Statement. CNY urges its stockholders to read the
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<PAGE>
opinion in its entirety before deciding how to vote on the Agreement. CIBC's
opinion relates only to the fairness from a financial point of view of the
merger consideration which the stockholders of CNY will receive. It does not
address any other aspect of the merger or any related transaction and does not
constitute a recommendation to any CNY stockholder as to how to vote at the
meeting. The summary of the CIBC opinion in this Proxy Statement is qualified in
its entirety by reference to the full text of the opinion attached as Exhibit B.
In connection with its fairness opinion, CIBC reviewed:
1. The Agreement, the option granted to Niagara and the director and
officer voting agreements;
2. Audited consolidated financial statements and management's discussions
and analysis of the financial condition and results of operations for
CNY and for Niagara for the three fiscal years ended December 31, 1998;
3. Unaudited consolidated financial statements for CNY and for Niagara for
the nine months ended September 30, 1999;
4. Certain other publicly available business and financial information
relating to CNY and to Niagara;
5. The views of senior management of CNY of the past and current business
operations, results thereof, financial condition and future prospects
of CNY;
6. A comparison of certain financial information for CNY with similar
information for certain other companies CIBC considered comparable to
CNY;
7. The financial terms of certain recent business combinations in the
banking industry;
8. The current market environment generally and the banking environment in
particular; and
9. Such other information, financial studies, analyses and investigations
and financial, economic and market criteria as CIBC considered
appropriate in the circumstances.
The fairness opinion states that CIBC has relied on the accuracy and
completeness of the information provided by the parties to the Agreement and
obtained by it from public sources and the representations and warranties in the
Agreement, without independent verification. CIBC did not make an independent
evaluation or appraisal of the assets and liabilities of CNY and neither CNY nor
anyone else furnished CIBC with such an appraisal. CIBC's opinion was based upon
economic, market and other conditions as in effect on, and the information made
available to it as of, the date of the fairness opinion.
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<PAGE>
CIBC believes that its analyses must be considered as a whole and that
selecting portions of its analyses, without considering the analyses taken as a
whole, would create an incomplete view of the process underlying the analyses
set forth in its opinion. In addition, CIBC considered the results of all such
analyses and, except as discussed below, did not assign relative weights to any
of the analyses, so that the ranges of valuations resulting from any particular
analysis described below should not be taken to be CIBC's view of the actual
value of CNY or the combined entity. The analyses performed by CIBC did not
indicate any material factors which did not support its fairness opinion.
In performing its analyses, CIBC made numerous assumptions, primarily
with respect to industry performance and general business and economic
conditions, factors which are beyond the control of CNY. No company or
transaction used in these analyses is identical to CNY, Niagara or the merger.
The analyses performed by CIBC are not necessarily indicative of actual values,
which may be significantly more or less favorable than suggested by such
analyses. Such analyses were prepared solely as part of CIBC's December 28, 1999
opinion; the analyses do not purport to be appraisals or to reflect the prices
at which a company might actually be sold. CIBC was not requested to, and did
not, determine or recommend the specific consideration payable in the merger,
which consideration was determined by arms'-length negotiations between CNY and
Niagara.
The following is a summary of the material analyses performed,
procedures followed, findings and recommendations made, and the bases for and
methods of arriving at such findings and recommendations, and presented by CIBC
to the CNY Board at its meeting on December 28, 1999 in connection with CIBC's
opinion. It is not a complete description of the analyses performed by CIBC.
COMPARABLE COMPANIES ANALYSIS. CIBC analyzed selected operating and
stock market data for a group of peer companies that CIBC selected and deemed to
be relevant for this purpose. The peer group consisted of 26 publicly traded
thrifts located in the Northeast with assets of between $200 million and $1
billion. For each of these companies in the peer group CIBC calculated the
multiple of market price (based on the closing price on December 22, 1999) to
book value, tangible book value, estimated 1999 earnings and estimated 2000
earnings. Estimated earnings were based on consensus earnings per share
estimates published by First Call, Inc. as of December 22, 1999. First Call is
an industry service provider of global earnings information based on an average
of earnings estimates published by various investment banking firms.
The results of this analysis for the peer group are summarized in the
following table:
Multiple Range
---------------------------------------------------
Per Share: Low (x) Mean (x) High (x)
- ---------- ------- -------- --------
Book value 0.66 1.10 1.90
Tangible book value 0.68 1.11 1.90
1999 estimated earnings 6.15 11.50 19.13
2000 estimated earnings 5.85 10.81 18.21
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CIBC then applied the range of multiples derived from the analysis of
1999 and 2000 estimated earnings for the peer group to corresponding estimated
earnings data for CNY and derived an imputed valuation range for CNY's common
stock of $4.17 to $14.17 per share. CIBC did not use the multiples based on book
value or tangible book value to derive an imputed valuation range for CNY's
common stock because of the significant difference in equity to asset levels
between CNY and the peer group.
PRECEDENT TRANSACTION ANALYSIS. CIBC compared the financial terms of
the merger to the financial terms, to the extent publicly available, of
acquisitions of other comparable companies during recent time periods. These
companies were divided into three categories for purposes of the analysis: (1)
five thrift institutions in New York State outside of the New York City
metropolitan area with total assets of less than $1.0 billion which were
acquired in transactions announced or completed from January 1, 1998 to December
28, 1999; (2) eight thrift institutions nationwide with total assets from $200
to $500 million which were acquired in transactions announced or completed from
January 1, 1999 to December 28, 1999, in which the acquisition value was greater
than $30 million; (3) fourteen thrift institutions nationwide with an equity to
assets ratio in excess of 20% which were acquired in transactions announced or
completed from January 1, 1997 to December 28, 1999. For each of the
transactions in the first two categories, CIBC calculated, among other things,
the multiples of the transaction value to book value, tangible book value and
last twelve months net income. CIBC also calculated the core deposit premium
(defined as the transaction value minus tangible book value divided by core
deposits, excluding certificates of deposit with balances equal to or greater
than $100,000). For transactions in the third category, CIBC calculated, among
other things, the multiples of transaction value to book value. CIBC then
compared these multiples to comparable data for CNY as shown in the following
table:
<TABLE>
<CAPTION>
Acquired New York Thrifts With U.S. Acquired Thrifts With Acquired
Niagara/ Assets Less Assets From $200 Thrifts With Capital
CNY Than $1.0 Billion to $500 Million Ratios >20%
------- ------------------------------ --------------------------- --------------------------
Low Mean High Low Mean High Low Mean High
--- ---- ---- --- ---- ---- --- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Price to Book Value 1.30x 1.28x 1.67x 2.15x 1.06x 1.96x 2.98x 1.04x 1.25x 1.54x
Price to Tangible Book
Value 1.30x 1.28x 1.68x 2.20x 1.06x 2.09x 3.61x - - -
Price to Last Twelve
Months Earnings 36.01x1 13.72x 30.20x 47.77x 16.54x 23.38x 28.01x - - -
Core Deposit Premium 11.13% 6.00% 9.59% 11.53% 9.13% 13.19%2 18.07% - - -
</TABLE>
1 - Price to earnings ratio for CNY based upon then projected 1999 full year
earnings was 28.17x.
2 - Excludes three transactions which CIBC deemed not meaningful for
comparative purposes.
CIBC then applied these ranges of multiples derived from these analyses
to comparable data for CNY and derived the following imputed valuation ranges
for CNY's common stock:
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<PAGE>
<TABLE>
<CAPTION>
Acquired New York Thrifts U.S. Acquired Thrifts With
With Assets Less Than $1.0 Assets From $200 to $500 Acquired Thrifts With
Billion Million Capital Ratios >20%
-------------------------- -------------------------- -------------------
<S> <C> <C> <C>
Imputed Valuation Range $13.79-$19.42 $11.28 - $25.52 $15.35 - $22.75
Mean Imputed Valuation $17.69 $17.76 $18.45
</TABLE>
DISCOUNTED CASH FLOW ANALYSIS. CIBC performed a discounted cash flow
analysis of future income streams of CNY, based on management's internal
projections of net income for 2000 and 2001, followed by assumed annual
percentage increases in net income of 5%, 8% and 10%, in all cases adjusted for
the excess of the provision for loan losses over actual projected charge offs.
This analysis assumed CNY was not acquired but remained independent for five
years.
Based on these assumptions, CIBC determined the theoretical value of a
share of CNY common stock at the end of the five year period by applying
terminal multiples (ranging from 12x to 15x terminal year adjusted earnings) and
discount rates (ranging from 10-13%) that CIBC viewed as appropriate for a
company with CNY's particular risk characteristics. The following table sets
forth the imputed valuation ranges that CIBC calculated for CNY's common stock
using these discounted cash flow analyses:
Case Imputed Valuation Range
---------------------- -----------------------
5.00% Estimated Growth $9.11 - $11.97
8.00% Estimated Growth $9.81 - $12.92
10.00% Estimated Growth $10.30 - $13.58
PREMIUMS PAID ANALYSIS. CIBC analyzed the premiums paid in selected
recent acquisitions compared to the trading price of the target company's common
stock one day, one week and four weeks prior to the transaction date. For
purposes of this analysis, CIBC reviewed all 28 acquisitions announced between
January 1, 1998 and December 23, 1999 in which the target company was a thrift
institution with assets of $200 million to $500 million. This analysis indicated
a range of premiums paid from 4.52% to 69.24% over the pre-announcement trading
price. Applying these premiums to CNY's stock price at comparable times prior to
the announcement of the signing of the Agreement, CIBC derived an implied
valuation of CNY's common stock of $18.03 to $29.19. CIBC noted, however, that
CNY's stock price appeared to reflect a significant element of takeover
speculation in recent periods (particularly after Seidman and Associates, LLC,
acquired 10% of CNY's stock and a board seat in March 1999) and therefore its
pre-announcement trading prices might not necessarily be comparable to those of
the companies involved in the precedent transactions. CIBC accordingly gave less
weight to this analysis than to the other analyses described above.
CIBC has from time to time in the past provided investment banking
services to both Niagara and CNY. In 1998, CIBC acted as lead advisor in the
mutual to stock conversions of both Lockport Savings Bank, the principal
subsidiary of Niagara, and Cortland Savings, the principal subsidiary of CNY.
CNY paid CIBC $481,245 for its services in connection with it stock conversion
and $50,000 for investment banking services during 1999. In the ordinary course
of its market making and other trading activities, CIBC may buy or sell
securities of CNY and Niagara both for its own account and for the accounts of
customers and, accordingly, may at any time hold a long or short position in
these securities. CIBC has acted as financial advisor to CNY in connection with
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the merger and will receive a fee of approximately $1.1 million, which is 1.2%
of the total merger consideration. Approximately $755,000 of this fee is
contingent on the consummation of the merger. CNY has also agreed to indemnify
CIBC against certain liabilities which may arise in connection with its service
as an advisor to CNY.
If CIBC withdraws its fairness opinion, which the CNY Board has no
reason to believe will occur, then the CNY Board, in the exercise of its
fiduciary duties, would have to evaluate whether to withdraw its recommendation
to stockholders that they approve the Agreement. In its evaluation, the Board
would consider such factors as the reasons for the withdrawal, the market price
of financial institution stocks, any competing offers to acquire CNY, the
progress of regulatory applications and the likelihood that the transaction with
Niagara can be consummated. If the CNY Board withdraws its recommendation, and
if any person other than Niagara or its subsidiaries acquires 25% or more of
CNY's outstanding common stock within 18 months after the Agreement terminates,
then Niagara would have the right to exercise its option to acquire 919,814
shares of CNY common stock, as described below.
PAYMENT PROCEDURES
CNY and Niagara will appoint an Exchange Agent to facilitate the
payment for shares of CNY stock. On the closing date of the merger, Niagara will
pay the Exchange Agent sufficient funds so that the Exchange Agent can pay the
merger consideration to all remaining stockholders of CNY. No later than five
days after the merger is consummated, the Exchange Agent will mail transmittal
letters and instructions to all CNY stockholders at their addresses as shown on
CNY's official stock records. Stockholders can then use the transmittal letters
to submit their stock certificates for payment. Within three business days after
the Exchange Agent receives a properly completed transmittal letter and the
applicable stock certificate, the Exchange Agent will mail the payment to the
stockholder. If a stockholder has lost his or her stock certificate, the
Agreement requires that the stockholder submit an affidavit and a lost
certificate indemnity bond in order to receive payment.
The merger consideration of $18.75 per share will be paid without
interest. Therefore, stockholders of CNY should promptly complete and return
their transmittal letters as quickly as possible. The Exchange Agent will no
longer process requests for payment one year after the merger is effective. Any
CNY stockholders who submit their shares for payment more than one year after
the merger is consummated must submit their share certificates and transmittal
letters to Niagara Bancorp.
Transmittal letters will be sent to the addresses used to mail this
proxy statement. If you own your stock directly in your own name and you want to
update your address, you should immediately contact our transfer agent,
Registrar and Transfer Company at 1-800-368-5948. If you own your stock in
"street name" through a broker, the Exchange Agent will send the transmittal
letter to the record owner of your shares and you will not submit your shares
yourself for payment. Instead, you should contact your broker to receive
payment.
OTHER ACQUISITION PROPOSALS
The Agreement provides that CNY, Cortland Savings, their subsidiaries
and their officers, directors, employees, representatives, agents, affiliates,
investment bankers, attorneys or accountants may not, directly or indirectly,
initiate, solicit or knowingly encourage or facilitate any inquiries or the
making of any proposal that is or could lead to a competing proposal to acquire
CNY. The Agreement also prohibits an extensive list of related activities in
support of or in furtherance of any competing proposal.
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<PAGE>
However, the Board of Directors of CNY may furnish information to, or
enter into discussions or negotiations with, any person or entity if it receives
a "Superior Proposal" from that person or entity before the meeting. A "Superior
Proposal" is an unsolicited, written, bona fide proposal to acquire CNY or
Cortland Savings, if, and only to the extent that, (a) the Board of Directors of
CNY receives a written opinion from its independent financial advisor that the
proposal may be superior to the transactions contemplated by the Agreement from
a financial point of view to CNY's stockholders; (b) the Board of Directors of
CNY, upon the advice of independent legal counsel, determines in good faith that
furnishing information or entering into discussions or negotiations is necessary
for the Board of Directors of CNY to comply with its fiduciary duties to
stockholders; and (c) the CNY stockholders' meeting to approve the Agreement has
not yet been held. The person or entity making the Superior Proposal must also
enter into a confidentiality agreement with CNY. The Board of Directors of CNY
may withdraw or modify its recommendation that stockholders approve the
Agreement, and may enter into an agreement to implement a Superior Proposal, if
the Board of Directors, after consultation with and based upon the advice of
independent legal counsel, determines in good faith that such action is
necessary for the Board of Directors to comply with its fiduciary duties to
stockholders.
CNY did not receive a Superior Proposal from any person or entity
either before or after entering into the Agreement with Niagara.
BENEFITS OF THE MERGER TO DIRECTORS AND EXECUTIVE OFFICERS
Each director and executive officer of CNY or Cortland Savings who owns
stock of CNY will receive the same payment per share as all other stockholders.
When and if the stockholders approve the Agreement, all existing awards to
directors, officers and employees under the PRRP and the Stock Option Plan will
automatically vest in full. Directors and officers who have received awards of
stock under the PRRP will receive $18.75 per share, just like other
stockholders. The holders of options under the Stock Option Plan will receive,
for each share subject to an option, a payment equal to the difference between
$18.75 and the exercise price of the option.
The following table sets forth the amounts which directors and
executive officers will be entitled to receive for their awards under the PRRP
and the Stock Option Plan.
<TABLE>
<CAPTION>
Stock Plan Benefits for Directors and Executive Officers
--------------------------------------------------------------------------------
Payments for PRRP Shares at Payments for Options at
$18.75 $18.75 Per Share Minus the
Per Share Exercise Price Total
--------------------------- -------------------------- ---------------
<S> <C> <C> <C>
Each 10 Non-Employee
Directors of CNY or
Cortland Savings*................. $ 133,912 $ 116,500 $ 250,412
Wesley D. Stisser, Director and
President ........................ $ 750,000 $ 362,500 $ 1,112,500
Michael Stapleton................. $ 468,750 $ 181,250 $ 650,000
Steven A. Covert.................. $ 375,000 $ 181,250 $ 556,250
Kerry D. Meeker................... $ 375,000 $ 145,000 $ 520,000
All Directors and Executive
Officers as a Group............... $ 3,173,962 $ 2,035,003 $ 5,208,965
</TABLE>
* - Director Lawrence Seidman declined to accept awards under the PRRP, and thus
he will receive only the payment on account of stock options granted to him.
After the merger, at least seven existing directors of Cortland Savings
will continue to be directors and Harvey Kaufman will continue to be the
chairman of the board of Cortland Savings. Directors fees will continue at
current levels - an annual retainer of $3,000 plus $250 for each board meeting
and $400 for each committee meeting. The chairman of the board will receive a
$12,000 annual retainer plus per meeting fees, but no fees will be paid to the
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chairman of the board for attendance at a committee meeting in an ex officio
capacity. The chair of each committee receives an additional $100 per committee
meeting. Per meeting fees are paid only for actual attendance at a meeting but
not for attendance by conference telephone call. In addition, Mr. Kaufman, will
become a director of Niagara and will be entitled to receive the same directors
fees as other non-employee directors of Niagara. Niagara has also agreed to
continue to honor all of CNY's or Cortland Savings' obligations to pay
previously-earned directors fees which were deferred under existing deferral
plans.
When CNY completes the merger, its president, Wesley D. Stisser, will
retire. He has waived his right to receive any severance payment or payment upon
change in control under his employment contract with Cortland Savings. The
Agreement provides that Michael Stapleton, now the executive vice president of
Cortland Savings, will be elected chief executive officer of Cortland Savings
and will be appointed to its board of directors. The Agreement provides that Mr.
Stapleton will be offered a one year employment agreement at an unspecified
salary. Cortland Savings anticipates that it will continue to employ Senior Vice
President Kerry D. Meeker after the merger. Therefore, Messrs. Stapleton and
Meeker will not be entitled to any severance payment. The employment of
Executive Vice President and Chief Financial Officer Steven A. Covert will
terminate when the merger is completed, and he will receive a severance payment
under his employment contract equal to approximately $348,000. All four
executive officers will be entitled to receive payment for their stock options
and PRRP awards as set forth in the table above. In addition, the CNY ESOP will
terminate once the merger is effective and the four executive officers, as well
as all other employees of CNY and Cortland Savings, will share in the
distribution of the assets of the ESOP.
Niagara has agreed, for six years after the merger is consummated, to
indemnify present and former directors and officers of CNY and its subsidiaries
from liabilities, judgments or amounts paid in settlement in connection with any
matter existing or occurring at or prior to the consummation of the merger. The
indemnification applies to claims based in whole or in part or arising in whole
or in part out of the fact that the indemnified person is or was a director or
officer of CNY or one of its subsidiaries. The indemnification applies to the
fullest extent that the indemnified directors and officers are entitled to
indemnification under the Delaware General Corporation Law, CNY's certificate of
incorporation and bylaws, the Federal Deposit Insurance Act and any other law
that now exists. In addition, for three years after the merger is consummated,
Niagara has agreed to maintain in effect CNY's current directors' and officers'
liability insurance policy or provide a substitute policy that is not materially
less favorable.
Cortland Savings has an Employee Severance Plan which provides for
severance benefits for any employee who is terminated within one year after the
merger. The severance benefit is two weeks of salary for each year of service
with a minimum of eight weeks and a maximum of 26 weeks of salary. The Agreement
provides that if it is necessary to retain any Cortland Savings back office
personnel for longer periods, they will still be entitled to benefits under the
Employee Severance Plan if they are terminated within 18 months after the
merger. The four executive officers of CNY and Cortland Savings, Messrs.
Stisser, Stapleton, Covert and Meeker, are not eligible to participate in the
Employee Severance Plan.
THE CLOSING DATE
The merger will be consummated on the Closing Date, which will be a
date selected by Niagara not more than 15 days after the last condition
precedent to the merger has been satisfied, or on any other date that Niagara
and CNY agree upon.
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RESTRICTIONS ON OPERATIONS
CNY has agreed to restrictions on its operations pending completion of
the merger. The primary restrictions include limits on the size of loans that
CNY or Cortland Savings may make without the approval of Niagara, restrictions
on modifying employee plans and contracts, restrictions on dividends and limits
on the issuance of stock, options or stock-based compensation awards. However,
the Agreement preserves the ability of CNY to declare and pay a quarterly cash
dividend of $0.10 per quarter in accordance with existing practice.
REPRESENTATIONS AND WARRANTIES
CNY has given extensive representations and warranties in the
Agreement. If any of these is materially false on the Closing Date, Niagara has
the right to terminate the Agreement and not proceed with the merger. The
principal representations and warranties provide that, except as CNY has
disclosed to Niagara, CNY and its subsidiaries (i) have properly approved the
Agreement; (ii) are legally organized and in good standing; (iii) have
accurately disclosed financial information and information about outstanding
contracts and arrangements; (iv) have paid their taxes; (v) have not suffered a
material adverse effect; (vi) own their property free of liens and with adequate
insurance; (vii) are not involved in any material legal proceedings; (viii) have
complied with applicable laws; (ix) have not employed any broker, finder or
business advisor other than CIBC; (x) do not have any environmental
contamination on their properties and are not aware of any environmental
contamination on any property mortgaged to them as security for a loan; (xi)
have valid and enforceable legal documents for all loans on their books; (xii)
have an adequate allowance for loan losses; (xiii) have not engaged in any
transactions with affiliates except as disclosed to Niagara and all transactions
which were disclosed were on the same terms and conditions as those prevailing
at the same time for comparable transactions with persons who were not
affiliates; (xiv) do not have any brokered deposits; and (xv) are Year 2000
compliant.
REGULATORY APPROVAL
In order for the merger to occur, the Board of Governors of the Federal
Reserve System must approve the acquisition of CNY by Niagara under the federal
Bank Holding Company Act because the merger will cause Niagara, a registered
bank holding company, to acquire control of CNY, another bank holding company,
and Cortland Savings. Similarly, the New York State Banking Board must approve
the transaction because Banking Board approval is required for Niagara to
control Cortland Savings. Niagara has filed applications for those approvals.
The merger can not be consummated unless and until Niagara and CNY obtain these
approvals. In addition, there is a thirty day waiting period after the Federal
Reserve approves the merger, which the Federal Reserve has the authority to
shorten to 15 days, before the merger can be effective.
APPRAISAL RIGHTS
Stockholders of CNY have what are commonly known as appraisal rights or
dissenters' right under Section 262 of the Delaware General Corporation Law. A
copy of Section 262 is attached to this proxy statement as Exhibit C for the
information of stockholders.
Section 262 provides that a stockholder has the right to receive the
value of his or her stock of CNY, as the Court of Chancery of the State of
Delaware determines, instead of receiving $18.75 per share. In order to exercise
appraisal rights, a CNY stockholder must:
1. Not vote in favor of the Agreement and not consent to the
Agreement (a stockholder is not required to vote against the
Agreement in order to preserve appraisal rights);
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2. Deliver to CNY, before the vote is taken on the Agreement, written
demand for an appraisal which sets forth the name of the
stockholder and that the stockholder intends to demand the
appraisal of his or her stock (a proxy or vote against the
Agreement is not sufficient to constitute a demand for appraisal);
and
3. Continue to own the stock of CNY from the date the demand is made
under item 2 until the merger is consummated.
Within 10 days after the merger is effective, Niagara Merger Corp must
send notice to all stockholders who have properly exercised appraisal rights
that the merger has occurred. Within 120 days after merger is effective, any
stockholder who has satisfied these requirements, or Niagara Merger Corp as the
survivor of the merger, has the right to file a petition in the Delaware Court
of Chancery demanding a determination of the value of the stock of all
stockholders who have properly demanded appraisal rights. A stockholder has the
right to withdraw a demand for appraisal within 60 days after the merger is
effective.
Section 262 states that the Chancery Court's appraisal of the stock
must exclude "any element of value arising from the accomplishment or
expectation of the merger . . .." Section 262 also provides that the costs of
the proceeding shall be determined by the Court and charged to the parties in
such manner as the court deems equitable. The Court may require that the
expenses of any stockholder in the proceeding, such as attorneys fees and expert
fees, be charged against the value of all shares being appraised.
TAX CONSEQUENCES
In general, stockholders who hold their shares of CNY common stock as
capital assets will have a capital gain for tax purposes when and if the merger
is consummated equal to the difference between the cash price paid in the merger
and the stockholder's basis in the stock. Whether this capital gain is taxed at
long-term or short-term capital gain rates generally depends upon how long the
stockholder has owned the shares. The tax treatment for stockholders who
exercise appraisal rights will be substantially the same as for other
stockholders.
The transmittal letters that the Exchange Agent will send to
stockholders will include a certification as to the accuracy of the
stockholder's taxpayer identification number (social security number or employer
identification number). Unless the stockholder signs the certification or
establishes to the Exchange Agent that there is a valid exemption, the Exchange
Agent must withhold 31% of the amount payable to the stockholder. The
withholding is also required if the stockholder has been notified by the IRS
that he or she is subject to back up withholding.
The federal income tax consequences described above are generally
applicable to stockholders, but may not apply to all stockholders depending upon
their individual circumstances. In addition, stockholders may be liable for
state or local income taxation on the gain they receive depending upon the
residence of the stockholders. Therefore, CNY urges stockholders to consult with
their tax advisors about their individual circumstances.
NIAGARA'S OPTION TO PURCHASE 919,814 SHARES OF CNY COMMON STOCK
When CNY signed the Agreement, CNY also gave Niagara an option to
purchase 919,814 shares of CNY common stock, equal to 19.99% of the shares then
outstanding. The exercise price of the option is $16.75 per share. Niagara
-23-
<PAGE>
cannot exercise the option at this time. Niagara can exercise the option only if
an "Initial Triggering Event" occurs and additional conditions are met. An
Initial Triggering Event includes any one of the following:
(i) CNY participates in negotiations regarding a Superior Proposal;
(ii) CNY or any of its subsidiaries enters into an agreement to engage
in a merger, sale of substantially all of its assets, or sale of 15% or more of
the voting power of CNY or any of its significant subsidiaries;
(iii) Any person or group other than Niagara or its subsidiaries
acquires beneficial ownership or the right to acquire beneficial ownership of
15% or more of the outstanding shares of CNY's common stock;
(iv) CNY's Board of Directors withdraws, modifies or changes its
recommendation that stockholders approve the Agreement in a manner adverse to
Niagara;
(v) A competing proposal is made by a third party and either (A) CNY
intentionally and knowingly breaches any representation, warranty, covenant or
agreement contained in the Agreement and such breach would entitle Niagara to
terminate the Agreement but is not cured before Niagara exercises the option, or
(B) the CNY stockholders fail to approve the Agreement; or
(vi) Any person other than Niagara or its subsidiaries, files an
application or notice with any federal or state bank regulatory authority for
approval to engage in a competing transaction.
Once an Initial Triggering Event occurs, Niagara may exercise the
option, in whole or in part, and has 180 days to do so, if and only if the
Initial Triggering Event is of the type described in item (ii) or if any person
other than Niagara or its subsidiaries acquires beneficial ownership of 25% or
more of CNY's outstanding common stock.
The option terminates and is no longer exercisable by Niagara if (A)
the Agreement terminates for any reason and there has not then been an Initial
Triggering Event or (B) 18 months have passed since the Agreement was terminated
and the termination was at the same time as or followed an Initial Triggering
Event.
The option includes extensive provisions designed to avoid
circumvention of the option, such as anti-dilution provisions and provisions
regarding the continuance of the option if CNY engages in a business combination
with a third party. If (i) a person or group acquires or obtains the right to
acquire beneficial ownership of 25% or more of CNY's common stock, or (ii) CNY
enters into an agreement (A) to permit another person to merge with CNY so that
either CNY is not the surviving corporation or CNY is the survivor but CNY's
stockholders own less than 50% of the surviving entity, or (B) to sell all or
substantially all of its assets to any person, and such agreement is
consummated, then in any of those events Niagara may require that CNY pay the
economic benefit of the option to Niagara instead of Niagara exercising the
option and receiving stock of CNY, or repurchase stock which Niagara has already
acquired upon exercise of the option. The amount payable by CNY is based upon
the higher of (i) the highest price paid by the person or group acquiring or
having the right to acquire beneficial ownership of 25% or more of the CNY
common stock; (ii) the price paid in the consummated transaction described in
alternative (ii) described previously in this paragraph; or (iii) the highest
closing bid price as reported by on the Nasdaq system during the 40 business
days prior to Niagara's exercise of the right to receive cash.
The purpose of the option is to increase the likelihood that the merger
as described in the Agreement will occur. The option may discourage third
parties from proposing competing proposals even if the competing proposal might
otherwise involve a higher payment to CNY stockholders. The existence of the
option could significantly increase the cost of acquiring CNY to a potential
acquiror, other than Niagara.
-24-
<PAGE>
VOTING AGREEMENT
The directors and executive officers of CNY and Cortland Savings have
all signed letters to Niagara which provide that they will vote all their shares
of stock of CNY in favor of the Agreement. The letters prohibit the directors
and executive officers from selling any of their shares of CNY prior to the
stockholders meeting to approve the Agreement over which they or members of
their immediate family have sole or shared voting power. The letter agreements
cover, in the aggregate, approximately 760,000 shares of CNY common stock,
including shares owned by directors and executive officers, shares allocated to
them under the ESOP, shares awarded to them under the CNY PRRP, and shares owned
by members of their immediate families. These shares represent approximately
16.5% of the total shares outstanding and entitled to vote on the Agreement.
-25-
<PAGE>
PRINCIPAL OWNERS OF CNY COMMON STOCK
The following table provides you with information, to the best of CNY's
knowledge, about stock ownership by directors, executive officers, and any
person or group CNY knows to beneficially own more than 5% of its outstanding
common stock. The information is as of the Record Date. Information about
persons or groups who own beneficially more than 5% of our common stock is based
on filings with the Securities and Exchange Commission on or before the Record
Date.
<TABLE>
<CAPTION>
Shares Beneficially Percent of total
Owned shares
Beneficial Owner at _______ 2000(1) outstanding(2)
- ---------------- ------------------ --------------
<S> <C> <C>
CNY Employee Stock Ownership Plan
One North Main Street, Cortland, New York 13045 401,696(3) 8.62%
Wesley D. Stisser, President and Chief Executive Officer 67,140(4) 1.44%
Joseph H. Compagni, Director 39,355(5) *
Patrick J. Hayes, M.D., Director 46,355(6) 1.00%
Robert S. Kashdin, CPA., Director 27,355(7) *
Harvey Kaufman, Director and Chairman of the Board 30,355(8) *
Donald P. Reed, Director 26,355(9) *
Lawrence B. Seidman, Esq., Director 463,882(10) 9.96%
Terrance D. Stalder, Director 20,395(11) *
Steven A. Covert, Executive Vice President and Chief Financial Officer 36,278(12) *
Directors and Executive Officers of CNY and Executive Officers of
Cortland Savings, as a group (11 persons) 834,171(13) 17.91%
</TABLE>
- --------------------------------
NOTES TO THE STOCK OWNERSHIP TABLE:
An asterisk ("*") means that the percentage is less than 1%.
(1) Amount includes shares held directly, as well as shares allocated to such
individuals under the CNY ESOP, and other shares with respect to which a person
may be deemed to have sole voting or investment power. The table also includes
7,142 shares awarded in April 1999 to each non-employee director (except for
Lawrence B. Seidman) pursuant to the PRRP. The table also includes 3,213 options
awarded to each of the ten non-employee directors, 10,000 options for Mr.
Stisser, 5,000 options for Mr. Covert and 9,000 options for other executive
officers. These options, representing 20% of the options awarded to such persons
under the CNY Stock Option Plan, will become exercisable on April 28, 2000 and
hence are includable in the table.
(2) Based upon 4,601,373 shares outstanding on the Record Date plus 56,130
options exercisable on April 28 as described in note 1.
(3) Excludes 26,836 shares allocated to ESOP participants. HSBC Bank, the
trustee of the ESOP, may be deemed to own beneficially the unallocated shares
held by the ESOP. Unallocated shares and allocated shares for which no voting
instructions are received are voted in the same proportion as allocated shares
voted by participants.
-26-
<PAGE>
(4) Includes 40,000 unvested PRRP shares, 14,972 shares owned by Mr. Stisser
through CNY's 401(k) Plan; 500 shares in custodial accounts for the benefit of
his grandchildren; and 2,168 shares allocated to Mr. Stisser in the CNY ESOP.
(5) Includes 1,000 shares owned by a testamentary trust of which Mr. Compagni is
the trustee and his mother is a beneficiary.
(6) Includes 36,000 shares owned by Dr. Hayes' Individual Retirement Account.
(7) Includes 2,500 shares owned by Mr. Kashdin's Individual Retirement Account
and 1,000 shares owned by his wife.
(8) Includes 15,000 shares owned by Mr. Kaufman's Individual Retirement Account.
(9) Includes 3,100 shares owned by Mr. Reed's Individual Retirement Account. The
amount shown excludes 15,000 shares owned by Dryden Mutual Insurance Company.
Mr. Reed is the Chairman of the Board of Dryden Mutual Insurance Company but is
not an employee of it. He has no ownership interest in Dryden Mutual except for
a minuscule interest as a policy holder. Mr. Reed disclaims any ownership
interest in those shares and does not vote as a director of Dryden Mutual on any
matters related to the investment in or the voting of those shares.
(10) The shares shown include all shares listed on a report filed under Section
13(d) of the Securities Exchange Act of 1934 by Lawrence B. Seidman, 100 Misty
Lane, Parsippany, New Jersey 07054, jointly with Seidman and Associates L.L.C.
("SAL"), Seidman and Associates II, L.L.C. ("SALII"), Seidman Investment
Partnership, L.P. ("SIP"); Seidman Investment Partnership II, L.P. ("SIPII")
(the address of the last three named entities is 19 Veteri Place, Wayne, New
Jersey 07470); Kerrimatt, LP ("Kerrimatt"), 80 Main Street, West Orange, New
Jersey 07052; Federal Holdings L.L.C. ("Federal"), One Rockefeller Plaza, 31st
Floor, New York, NY 10020; The Benchmark Company, Inc. ("TBCI"); Benchmark
Partners, LP ("Partners"); Richard Whitman; Lorraine DiPaolo (the address of the
last two named individuals and the previous two named entities is 750 Lexington
Avenue, New York, NY 10022); and Dennis Pollack, 47 Blueberry Drive, Woodcliff
Lakes, NJ 07675. Not all of the shares shown are reported to be owned
beneficially by Mr. Seidman, but all are reported to be owned beneficially by
the individuals and entities filing the Schedule 13D as a group. According to
the Schedule 13D, the following is a breakdown of the ownership of the shares
shown: (a) Mr. Seidman has sole investment discretion and voting authority for
374,400 shares of CNY owned by SAL, SALII, SIP, SIPPII, Kerrimatt, Federal and
various individual clients of Mr. Seidman; (b) Mr. Whitman and Ms. DiPaola share
the investment discretion and voting authority for 72,400 shares of CNY owned by
TBCI and Partners, and each of them has sole investment discretion and voting
authority for an additional 1,000 shares each; (c) Mr. Pollack has the sole
investment discretion and voting authority over 11,869 shares owned by him.
(11) Includes 8,540 shares owned by Mr. Stalder's Individual Retirement Account.
(12) Includes 20,000 unvested PRRP shares. Also includes 1,278 shares allocated
to Mr. Covert in the CNY ESOP.
(13) This total includes shares beneficially owned by all directors and
executive officers listed in the table plus two executive officers not
separately listed. The total also includes 45,000 unvested PRRP shares awarded
to the two executive officers of CNY and Cortland Savings who are not separately
named and 2,449 shares allocated to those officers in the CNY ESOP. The total
also includes 86,269 shares reported in the Schedule 13D filed by Mr. Seidman
and others, over which other persons are reported to have investment discretion
and voting authority (see note 9).
-27-
<PAGE>
INFORMATION REGARDING THE MARKET FOR
CNY COMMON STOCK AND RELATED MATTERS
CNY's common stock is traded on the Nasdaq National Market System under
the symbol "CNYF". At December 31, 1999, there were 4,601,373 shares of CNY
Financial Corporation common stock issued and outstanding, and there were
approximately 1,500 holders of record. The table below shows the high and low
bid price of the common stock and cash dividends per share declared during the
last two years. The share prices shown do not represent actual transactions and
do not include retail markups, markdowns or commissions.
<TABLE>
<CAPTION>
Bid
------------------------------ Dividends
High Low Per Share
--------------------------------------------
<S> <C> <C> <C> <C>
1998:
October 6 - December 31 (1) $ 10.19 $ 8.88 $ --
1999 quarter ended:
------------------
March 31 $ 12.13 $ 9.88 $ 0.04
June 30 12.06 11.25 0.05
September 30 15.63 11.88 0.08
December 31 17.94 13.94 0.10
</TABLE>
(1) The Company's common stock began trading on October 6, 1998.
The stock price information set forth in the table above was provided
by the National Association of Securities Dealers, Inc.
-28-
<PAGE>
FINANCIAL INFORMATION REGARDING CNY FINANCIAL CORPORATION
CNY is providing the following financial information to its
stockholders as part of this proxy statement to assist stockholders in making
their decision on whether to vote in favor of the Agreement and the merger. CNY
urges stockholders to please review the following information carefully before
deciding how to vote.
SELECTED FINANCIAL DATA
The following selected balance sheet and income statement data are
derived from the audited consolidated financial statements of CNY Financial
Corporation and Subsidiary. The consolidated financial statements as of December
31, 1999 and 1998 and for each of the years in the three-year period ended
December 31, 1999 are included in this Proxy Statement beginning at page F-1.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------------
SELECTED BALANCE SHEET DATA: 1999 1998 1997 1996 1995
--------------------------------------------------------------------------
(In thousands, except share data)
<S> <C> <C> <C> <C> <C>
Total assets $ 287,445 $ 281,186 $ 233,729 $ 238,100 $ 235,681
Loans receivable, net 166,657 159,207 155,422 158,611 158,507
Allowance for loan losses 2,430 2,494 2,143 1,952 2,002
Loans held-for-sale -- -- 2,541 -- --
Securities available-for-sale 97,560 88,437 44,140 45,594 41,777
Securities held-to-maturity 7,103 10,318 12,550 11,757 11,188
Cash & cash equivalents 6,272 14,536 8,079 12,536 14,176
Real estate owned 309 260 964 563 374
Deposits 195,470 196,014 199,770 204,640 203,110
Borrowings 19,200 1,000 -- -- --
Total stockholders' equity $ 67,700 $ 79,070 $ 30,740 $ 30,345 $ 29,030
Book value per share(1) $ 15.43 $ 15.06 N/A N/A N/A
Book value per share, excluding
unallocated ESOP shares(2) $ 16.99 $ 16.38 $ N/A $ N/A N/A
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
SELECTED OPERATIONS DATA: 1999 1998 1997 1996 1995
---------------------------------------------------------------------------
(In thousands, except share data)
<S> <C> <C> <C> <C> <C>
Interest income $ 19,770 $ 18,003 $ 17,667 $ 17,787 $ 17,811
Interest expense 7,607 7,986 8,328 8,758 8,613
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income 12,163 10,017 9,339 9,029 9,198
Provision for loan losses 100 325 3,300 1,380 600
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 12,063 9,692 6,039 7,649 8,598
Other non-interest income 1,078 1,583 889 770 671
- ----------------------------------------------------------------------------------------------------------------------------------
10,985 11,275 6,928 8,419 9,269
Other non-interest expense 7,874 8,326 6,872 6,201 5,945
- ----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 5,267 2,949 56 2,218 3,324
Income tax expense (benefit) 2,295 1,270 (16) 853 1,400
- ----------------------------------------------------------------------------------------------------------------------------------
Net income $ 2,972 $ 1,679 $ 72 $ 1,365 $ 1,924
Basic earnings per share(3) $ 0.67 $ -- N/A N/A N/A
Diluted earnings per share(3) $ 0.66 $ -- N/A N/A N/A
- ----------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share, excluding contribution
to Foundation(4) $ 0.66 $ 0.13 N/A N/A N/A
==================================================================================================================================
Weighted average diluted shares outstanding 4,496,584 4,928,044 N/A N/A N/A
==================================================================================================================================
</TABLE>
-29-
<PAGE>
<TABLE>
<CAPTION>
SELECTED FINANCIAL RATIOS AND OTHER DATA: AT OR FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
1999 1998 1997 1996 1995
================================================================================================================================
<S> <C> <C> <C> <C> <C>
PERFORMANCE RATIOS:
Return on average assets 1.04% 0.64% 0.03% 0.58% 0.82%
Return on average assets, excluding
contribution to Foundation(4) 1.04% 0.87% 0.03% 0.58% 0.82%
Return on average equity 3.96% 3.21% 0.23% 4.64% 6.85%
Return on average equity, excluding
contribution to Foundation(4) 3.96% 4.38% 0.23% 4.64% 6.85%
Net interest rate spread 3.36% 3.52% 3.58% 3.48% 3.70%
Net interest margin 4.46% 4.28% 4.17% 4.02% 4.18%
Efficiency ratio 59.57% 72.00% 67.49% 63.38% 60.34%
Efficiency ratio, excluding
contribution to Foundation(4) 59.57% 63.15% 67.49% 63.38% 60.34%
STOCKHOLDERS' EQUITY AND ASSET QUALITY RATIOS:
Average equity to average total assets 26.31% 19.86% 13.04% 12.40% 12.00%
Total equity to assets end of period 23.55% 28.12% 13.15% 12.74% 12.32%
Non-performing assets to total assets 0.32% 0.42% 2.04% 1.78% 1.00%
Non-performing loans to total loans 0.36% 0.58% 2.37% 2.28% 1.24%
Allowance for loan losses to total loans 1.44% 1.54% 1.34% 1.22% 1.25%
Allowance for loan losses to non-performing loans 399.01% 266.74% 56.48% 53.23% 100.40%
OTHER DATA:
Full service offices 3 3 3 3 3
Full-time equivalent employees 98 91 93 95 96
================================================================================================================================
</TABLE>
(1) Book value per share is equal to total stockholders' equity divided by the
common shares outstanding at December 31.
(2) Equal to stockholders' equity divided by common shares outstanding, less
unallocated ESOP shares.
(3) Earnings per share for 1998 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, in 1998.
-30-
<PAGE>
THE BUSINESS OF CNY FINANCIAL
CNY, a Delaware corporation, is a bank holding company headquartered in
Cortland, New York with total assets of over $287 million at December 31, 1999.
Through its wholly owned subsidiary, Cortland Savings, which was founded in
1866, CNY engages in full service community banking. Cortland Savings is also
headquartered in Cortland, New York, and has three full service offices in
Cortland County, and loan production offices in Ithaca, Tompkins County, and
Liverpool, Onondaga County.
CNY 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. CNY 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.
CNY commenced operations on October 6, 1998, when Cortland Savings
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 CNY prior to October 6, 1998 refer to Cortland Savings, while
references to CNY on or after that date refer to both CNY and Cortland Savings
as consolidated, unless the context indicates otherwise.
The following discussion should be read in conjunction with CNY's
Consolidated Financial Statements, including the accompanying notes, which
appear in Item 8 of this Form 10-K.
INVESTMENT ACTIVITIES
GENERAL. The investment policy of CNY, 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. CNY 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 are reported to
the Board of Directors each month. CNY generally classifies its new securities
investments as available-for-sale in order to maintain flexibility in satisfying
future investment and lending requirements.
-31-
<PAGE>
The following table sets forth information with respect to CNY's
securities portfolio.
<TABLE>
<CAPTION>
---------------------------------------------------------------
AT DECEMBER 31,
---------------------------------------------------------------
1999 1998 1997
---------------------------------------------------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SECURITIES AVAILABLE-FOR-SALE: (Dollars in thousands)
U.S. Treasury securities $ 3,016 $ 3,021 $ 8,041 $ 8,136 $ 15,045 $ 15,141
U.S. Government agencies 11,453 11,225 4,996 5,028 996 1,005
Corporate debt obligations 20,553 20,328 27,649 27,822 13,819 13,861
State and municipal sub-divisions 1,865 1,804 917 927 -- --
Mortgage-backed securities 58,684 56,437 42,801 43,041 12,144 12,211
- ----------------------------------------------------------------------------------------------------------
Total debt securities 95,571 92,815 84,404 84,954 42,004 42,218
Equity securities 2,827 4,745 2,072 3,483 1,192 1,922
- ----------------------------------------------------------------------------------------------------------
Total available-for-sale 98,398 97,560 86,476 88,437 43,196 44,140
- ----------------------------------------------------------------------------------------------------------
SECURITIES HELD-TO-MATURITY:
U.S. Government agencies 1,000 989 1,505 1,507 1,992 1,995
Corporate debt obligations 1,853 1,850 2,858 2,878 1,854 1,870
State and municipal sub-divisions 742 737 747 764 425 430
Mortgage-backed securities 3,508 3,450 5,208 5,255 8,279 8,274
- ----------------------------------------------------------------------------------------------------------
Total held-to-maturity 7,103 7,026 10,318 10,404 12,550 12,569
- ----------------------------------------------------------------------------------------------------------
TOTAL SECURITIES $105,501 $104,586 $ 96,794 $ 98,841 $ 55,746 $ 56,709
==========================================================================================================
</TABLE>
DEBT SECURITIES. The carrying value of CNY's debt securities totaled
$99.9 million at December 31, 1999. It is the policy of CNY to invest in debt
securities issued by the United States Government, its agencies, municipalities
and corporations. CNY purchases only investment grade debt securities for its
investment portfolio and at December 31, 1999, none of its debt securities were
in default or classified for any other reason. CNY 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, CNY limits its investment in corporate debt securities to those rated in
the three highest grades by a nationally recognized rating organization.
CNY 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 CNY.
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.
CNY began an investment program in 1999 to increase CNY's investment in
mortgage-backed securities. The purchases were funded through Federal Home Loan
Bank of New York borrowings and a reduction in short-term investments. The
amortized cost of mortgage-backed securities was $62.2 million at December 31,
1999, compared with $48.0 million at the end of 1998. One effect of this program
has been a lengthening of the stated maturity of CNY's investment portfolio as
shown in the table below.
Debt securities are generally purchased with a remaining term to
maturity of two to three years, with the exception of mortgage-backed
securities, which
-32-
<PAGE>
have amortization schedules as long as thirty years and municipal bonds with
maturity dates as great as 10 years. At December 31, 1999, more than 95.0% of
the carrying value of CNY's debt securities, excluding mortgage-backed
securities, had remaining terms to maturity of five years or less.
SECURITIES, MATURITIES AND YIELDS. The following table sets forth
contractual maturities and the weighted average yields of CNY's debt securities
portfolio at December 31, 1999 and the comparable total at December 31, 1998.
<TABLE>
<CAPTION>
MORE THAN
ONE YEAR OR LESS ONE TO FIVE YEARS FIVE TO TEN YEARS 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)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities $ 3,007 6.22% $ 14 5.25% $ -- --% $ -- --% $ 3,021 6.21%
U.S. Government agencies 500 6.19% 11,725 5.94% -- --% -- --% 12,225 5.95%
Corporate debt 8,334 5.95% 13,847 5.98% -- --% -- --% 22,181 5.97%
State and municipal
subdivisions 176 4.14% 358 4.50% 2,012 4.39% -- --% 2,546 4.39%
Mortgage-backed securities 252 6.99% 1,233 6.22% 3,723 6.17% 54,737 6.40% 59,945 6.39%
- --------------------------------------------------------------------------------------------------------------------------------
Total 1999 $ 12,269 $27,177 $ 5,735 $54,737 $99,918
================================================================================================================================
Total 1998 $ 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.
EQUITY SECURITIES. CNY and Bank invest a limited amount of their assets
in corporate equity securities. These investments are made to diversify CNY's
investments and provide opportunities for capital appreciation as well as
dividend income. All equity securities are classified as available-for-sale. CNY
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 $4.7
million at December 31, 1999.
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, 1999.
LENDING ACTIVITIES
The loan portfolio is the largest category of CNY's interest earning
assets.
LOAN PORTFOLIO COMPOSITION. The following table sets forth the
composition of CNY's loan portfolio in dollar amounts and in percentages at the
dates indicated.
-33-
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
AT DECEMBER 31,
---------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---------------------------------------------------------------------------------------------------------
PERCENT PERCENT PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
- ----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential $ 104,494 61.76% $101,885 62.96% $ 97,303 61.66% $ 96,097 59.73% $ 95,854 59.57%
Construction 1,790 1.06 145 0.09 316 0.20 528 0.33 155 0.10
Home equity 6,520 3.85 6,804 4.20 5,924 3.75 5,882 3.66 6,344 3.94
Commercial mortgages 31,864 18.83 29,224 18.06 30,867 19.56 35,119 21.83 35,165 21.86
- ----------------------------------------------------------------------------------------------------------------------------------
Total real estate loans 144,668 85.50 138,058 85.31 134,410 85.17 137,626 85.55 137,518 85.47
- ----------------------------------------------------------------------------------------------------------------------------------
Other loans:
Guaranteed student
loans 741 0.44 1,016 0.63 1,507 0.96 1,552 0.96 1,747 1.09
Property improvement
loans 661 0.39 709 0.44 907 0.57 1,031 0.64 916 0.57
Automobile loans 12,641 7.47 10,854 6.71 8,902 5.64 6,378 3.96 5,510 3.42
Other consumer loans 4,208 2.49 4,597 2.84 5,031 3.19 6,289 3.91 6,174 3.84
Commercial loans 6,278 3.71 6,588 4.07 7,049 4.47 8,020 4.98 9,023 5.61
- ----------------------------------------------------------------------------------------------------------------------------------
Total other loans 24,529 14.50 23,764 14.69 23,396 14.83 23,270 14.45 23,370 14.53
- ----------------------------------------------------------------------------------------------------------------------------------
Total loans 169,197 100.00% 161,822 100.00% 157,806 100.00% 160,896 100.00% 160,888 100.00%
Less:
Deferred loan fees, net 110 121 241 333 379
Allowance for loan 2,430 2,494 2,143 1,952 2,002
losses
- ----------------------------------------------------------------------------------------------------------------------------------
Total loans, net $ 166,657 $159,207 $155,422 $158,611 $158,507
==================================================================================================================================
</TABLE>
RESIDENTIAL MORTGAGE LOANS. CNY offers both adjustable-rate and
fixed-rate mortgage loans. The relative proportion of fixed versus adjustable
mortgage loans originated by CNY depends principally upon customer preferences,
which are generally driven by general economic and interest rate conditions and
the pricing offered by CNY'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. CNY offers
promotional rate loans with low initial interest rates that are not based upon
the index plus the margin for determining future rate adjustments; however, CNY
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, CNY obtains
independent appraisals on all residential first mortgage loans and attorney's
opinions of title are required at closing. CNY 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. 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%.
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 CNY's net
interest income in periods of rising interest rates, CNY originates such loans
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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 CNY generally include due-on-sale
clauses which permit CNY to demand payment in full if the borrower sells the
property without CNY's consent. Due-on-sale clauses are an important means of
adjusting the rates of CNY's fixed-rate mortgage loan portfolio, and CNY has
generally exercised its rights under these clauses.
HOME EQUITY LOANS. CNY 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. CNY 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. CNY 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 CNY's market area or in nearby areas of Central New
York State.
CNY 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
CNY's recent fixed-rate commercial mortgage loans mature after five years, which
allows CNY to adjust the interest rate after five years if appropriate.
For commercial mortgage loans, CNY generally requires a debt service
coverage ratio of at least 120% and the personal guarantee of the principals of
the borrower. CNY also requires an appraisal by an independent appraiser. Title
insurance is required for loans in excess of $500,000. Attorneys' opinions of
title are used instead of title insurance for smaller commercial mortgage loans,
but CNY 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. CNY seeks to minimize these
risks through its underwriting policies. CNY 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 CNY 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, CNY considers the resources and income level of
the borrower, the borrower's experience in owning or managing similar property
and CNY's lending experience with the borrower. CNY'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, CNY 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 CNY and the borrower
and through automobile dealers who refer the borrowers to CNY. CNY 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
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installment sales contracts between the dealer and the purchaser which are
immediately assigned to CNY. The dealers receive fees from CNY for the
referrals.
CNY offers automobile loans for both new and used cars. The loans have
fixed rates with maturities not more than five and a half 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, CNY 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. CNY 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 terms 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 CNY's interest rate risk. Applications
for these loans are evaluated based upon the borrowers' 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. CNY 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, CNY
evaluates these loans based upon the borrower's ability to repay the loan from
ongoing operations. CNY 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 contractual maturities of commercial
and real estate construction loans outstanding at December 31, 1999. Also set
forth are the amounts of such loans due after one year, classified according to
sensitivity to changes in interest rates.
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C>
Commercial and real estate construction loans $ 4,230 $ 2,404 $ -- $ 1,434 $ -- $ 8,068
===============================================================================================================================
</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
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<PAGE>
days or more as to interest or principal payments; and (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.
The following table provides information on CNY's non-performing loans
at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------
1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
NON-ACCRUAL LOANS: (1)
Residential mortgages $ 539 $ 667 $2,010 $1,069 $ 772
Commercial mortgages -- 167 1,235 1,416 421
- ----------------------------------------------------------------------------------------------------------
Total real estate loans 539 834 3,245 2,485 1,193
Commercial loans 57 71 331 790 739
Other loans 7 15 209 358 62
- ----------------------------------------------------------------------------------------------------------
Total non-accrual loans 603 920 3,785 3,633 1,994
Accruing loans past due 90 days or more:
Residential mortgages -- -- 2 1 --
Commercial mortgages -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------
Total real estate loans -- -- 2 1 --
Commercial loans -- 11 -- -- --
Other loans 6 4 7 33 --
- ----------------------------------------------------------------------------------------------------------
Total loans past due 90 days or more
and still accruing 6 15 9 34 --
Total non-performing loans 609 935 3,794 3,667 1,994
Real estate owned 309 260 964 563 374
- ----------------------------------------------------------------------------------------------------------
Total non-performing assets $ 918 $1,195 $4,758 $4,230 $2,368
==========================================================================================================
Non-performing loans as a percent of total loans 0.36% 0.58% 2.37% 2.28% 1.24%
Non-performing assets as a percent of total assets 0.32% 0.42% 2.04% 1.78% 1.00%
==========================================================================================================
</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, 1999 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, CNY 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. CNY 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 CNY
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, CNY 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.
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<PAGE>
If an automobile loan becomes 60 days past due, CNY seeks to repossess
the collateral. If the default is not cured, then upon repossession CNY sells
the automobile as soon as practicable through a local automobile auction. When
other types of non-mortgage loans become past due, CNY 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 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.
The analysis of the adequacy of the allowance is reported to and
reviewed by the Loan Committee of the Board of Directors of Cortland Savings
monthly. Management believes it uses a reasonable and prudent methodology to
measure the inherent risk in the current 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
CNY'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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Allowance for loan losses,
beginning of year $ 2,494 $ 2,143 $ 1,952 $ 2,002 $ 1,752
Provision for loan loss 100 325 3,300 1,380 600
- --------------------------------------------------------------------------------------------------------
Charge-offs:
Real estate 145 16 2,484 264 478
Commercial -- 52 395 898 31
Other 135 112 400 551 96
- --------------------------------------------------------------------------------------------------------
Total charge-offs 280 180 3,279 1,713 605
Recoveries:
Real estate 20 96 9 24 161
Commercial 17 40 61 190 --
Other 79 70 100 69 94
- --------------------------------------------------------------------------------------------------------
Total recoveries 116 206 170 283 255
- --------------------------------------------------------------------------------------------------------
Net charge-offs (recoveries) 164 (26) 3,109 1,430 350
- --------------------------------------------------------------------------------------------------------
Allowance for loan losses, end of year $ 2,430 $ 2,494 $ 2,143 $ 1,952 $ 2,002
========================================================================================================
Allowance for loan losses as a
percent of total loans 1.44% 1.54% 1.34% 1.22% 1.25%
Allowance for loan losses as a
percent of non-performing loans 399.01% 266.74% 56.48% 53.23% 100.40%
Ratio of net charge-offs (recoveries)
to average loans outstanding 0.10% (0.02)% 1.97% 0.90% 0.22%
========================================================================================================
</TABLE>
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<PAGE>
The following table presents the allocation of the allowance for loan
losses.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
-----------------------------------------------------------------------------------------------
PERCENT PERCENT PERCENT PERCENT PERCENT
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
- ----------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ALLOWANCE FOR LOAN
LOSSES
ALLOCATED TO:
Residential mortgages $ 1,276 62.82% $ 1,187 67.25% $ 661 65.61% $ 389 63.72% $ 112 63.61%
Commercial mortgages 503 18.83 617 18.06 638 19.56 818 21.83 753 21.86
Commercial loans 296 3.71 279 4.07 183 4.47 478 4.98 961 5.61
Other loans 355 14.64 411 10.62 192 10.36 267 9.47 176 8.92
Unallocated -- -- -- -- 469 -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
Total allowance $ 2,430 100.00% $ 2,494 100.00% $ 2,143 100.00% $ 1,952 100.00% $ 2,002 100.00%
============================================================================================================================
</TABLE>
SOURCES OF FUNDS
GENERAL. CNY's primary source of funds is deposits. In addition, CNY
derives funds for loans and investments from loan and security repayments and
prepayments, borrowings, 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. CNY 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 primarily because of different minimum balance
requirements, the time periods the funds must remain on deposit and the interest
rate. CNY's deposits are obtained predominantly from its Cortland County market
area. CNY 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
CNY's ability to attract and retain deposits. CNY does not use brokers to obtain
deposits and has no brokered deposits.
CNY 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. CNY 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, 1999.
December 31, 1999
---------------------------------------------------------------
(Dollars in thousands)
Maturing within three months $ 1,491
After three but within six months 2,293
After six but within twelve months 3,277
After twelve months 6,940
---------------------------------------------------------------
Total $ 14,001
===============================================================
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<PAGE>
BORROWINGS. CNY 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, CNY may borrow term advances for the FHLB. CNY had $19.2 million
of borrowings from the FHLB at December 31, 1999, compared with $1.0 million at
the end of 1998. This $18.2 million increase is primarily attributed to the
mortgage-backed securities investment program previously discussed as well as
general cash flow requirements.
SUPERVISION AND REGULATION
Federal and state laws and the regulations of federal and state bank
regulatory agencies have substantial effects on CNY and Cortland Savings. The
following is a brief summary of laws and regulations material to CNY and
Cortland Savings. Any change in applicable laws or regulations may have a
material adverse effect on the business of CNY and Cortland Savings.
BANK HOLDING COMPANY REGULATION. CNY is a bank holding company subject
to supervision by the Federal Reserve. The Federal Reserve has the authority to
examine CNY and may also examine Cortland Savings.
A bank holding company, such as CNY or Niagara Bancorp, Inc., must
obtain prior Federal Reserve approval to acquire direct or indirect ownership or
control of more than 5% of the voting stock of any other bank holding company.
Therefore, Niagara Bancorp must obtain Federal Reserve approval before it
acquires CNY. In addition, any company, person or group acting in concert that
is not already a bank holding company may be required to obtain prior approval
of the Federal Reserve before acquiring 10% or more of the stock of CNY. New
York State law similarly requires approval from the New York State Banking
Board. These approval requirements could discourage other companies, persons or
groups from attempting to acquire CNY in competition to the currently pending
transaction with Niagara Bancorp.
The Federal Reserve requires that bank holding companies maintain
minimum capital levels. CNY's capital ratios substantially exceed Federal
Reserve requirements. At December 31, 1999, CNY had a ratio of total capital to
risk-weighted assets of 42.81% compared to a Federal Reserve minimum requirement
of 8%, at least 4% of which must be core capital. CNY also had a ratio of core
capital to total average assets (the "leverage ratio") of 23.91%, compared to a
minimum requirement of from 4% to 6%. Substantially all of CNY's capital is core
capital.
TRANSACTIONS WITH AFFILIATES. Federal and state laws and regulations
restrict transactions between a bank and its holding company or other
affiliates, such as loans, purchases of assets, and payments of fees or other
distributions. These restrictions limit the amount of transactions between an
institution and the affiliate, as well as the aggregate amount of transactions
between an institution and all of its affiliates. Transactions with affiliates
must generally be on terms comparable to those for transactions with
unaffiliated entities.
DIVIDEND LIMITATIONS. 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
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<PAGE>
and its subsidiaries. Under Delaware law, CNY may not pay dividends to its
stockholders if, after giving effect to the dividend, CNY would not be able to
pay its debts as they become due.
Under the New York Banking Law, Cortland Savings may pay dividends out
of its net profits unless there is an impairment of capital. Cortland Savings
may not declare dividends in any year which exceed its total net profits of that
year combined with its retained net profits of the preceding two years, after
making adjustments primarily for actual loan losses and tax expenses, without
the approval of the New York Superintendent of Banks. Furthermore, Cortland
Savings 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 when Cortland Savings converted
from a mutual to a stock institution.
CNY and Cortland Savings have satisfied these rules regarding dividend
payments.
The FDIC and the New York Superintendent of Banks may prohibit Cortland
Savings 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 Cortland Savings to be undercapitalized.
BANK REGULATIONS. Cortland Savings is subject to extensive regulation,
examination, and supervision by the New York State Banking Department and the
FDIC. Cortland Savings' deposit accounts are insured up to applicable limits by
the Bank Insurance Fund of the FDIC. Cortland Savings must get regulatory
approvals before entering into most major corporate transactions, such as
mergers with other banks. The Banking Department and the FDIC conduct periodic
examinations of Cortland Savings to determine the safety and soundness of
Cortland Savings and whether Cortland Savings is complying with regulatory
requirements.
BUSINESS ACTIVITIES. Cortland Savings 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. Cortland Savings may
make investments and engage in activities only as permitted under specific laws
and regulations which grant powers to Cortland Savings. Cortland Savings 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. Cortland Savings 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 Cortland Savings' assets, except as set forth below. In
order to qualify for investment by Cortland Savings, the equity securities must
meet certain tests of financial performance. Cortland Savings may also make
investments not otherwise permitted under the Banking Law. This authority
permits investments in otherwise impermissible investments of up to 1% of
Cortland Savings' assets in any single investment, subject to certain
restrictions, and to an aggregate limit for all such investments of up to 5% of
assets.
Under FDIC regulations, Cortland Savings generally may not directly or
indirectly acquire or retain any equity investment that is not permissible for a
national bank. In addition, Cortland Savings 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 Cortland
Savings is in compliance with applicable regulatory capital requirements.
Savings bank life insurance activities are permitted if (i) the FDIC
does not decide that such activities pose a significant risk to the applicable
deposit insurance fund, (ii) the insurance underwriting is conducted through a
division
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<PAGE>
of Cortland Savings that meets the definition of a separate department under
FDIC regulations, and (iii) Cortland Savings discloses to purchasers of life
insurance policies and other non-deposit investment 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. Cortland
Savings' total investment in such securities may not exceed 100% of the Tier 1
capital as calculated under FDIC regulations. Cortland Savings 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
Cortland Savings or if Cortland Savings converts its charter or undergoes a
change in control.
LOANS TO ONE BORROWER. Generally, Cortland Savings 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
Cortland Savings' stockholders' equity, plus an additional 10% of Cortland
Savings' stockholders' equity if such amount is secured by certain types of
readily marketable collateral. Cortland Savings currently complies with these
limits.
CAPITAL REQUIREMENTS. The FDIC regulates the capital adequacy of
Cortland Savings. At December 31, 1999, Cortland Savings' leverage capital ratio
was 22.43% compared to a minimum requirement of from 4% to 5%. At December 31,
1999, Cortland Savings' total risk-based capital ratio was 39.29%, compared to a
minimum requirement of 8%, at least 4% of which must be core capital.
Substantially all of Cortland Savings' capital is core capital.
COMMUNITY REINVESTMENT. Under the Community Reinvestment Act, Cortland
Savings 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
Cortland Savings' discretion to develop products and services that it believes
are best suited to its particular community. The FDIC periodically assesses
Cortland Savings' record of meeting the credit needs of its community and must
take such record into account in its evaluation of certain applications made by
Cortland Savings. Cortland Savings 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 Cortland Savings. Cortland Savings received a satisfactory rating
from the New York Banking Department at its last state community reinvestment
examination.
STANDARDS FOR SAFETY AND SOUNDNESS. The Federal Reserve and the FDIC,
together with the other federal bank regulatory agencies, have established
guidelines 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. 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. The FDIC has various enforcement powers if
Cortland Savings violates these guidelines. If non-compliance continues, the
FDIC may proceed as in the case of an undercapitalized bank under the "prompt
corrective action" requirements described below. The FDIC may also seek judicial
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<PAGE>
enforcement and civil money penalties. The FDIC has not asserted any material
violations of these guidelines by Cortland Savings.
PROMPT CORRECTIVE ACTION. 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. They must 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 CNY). 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.
The capital ratios of CNY and Cortland Savings are high enough that the prompt
corrective action requirements have not had any effect on either of them.
PERSONNEL
At December 31, 1999, CNY employed 98 full-time equivalent employees.
The employees are not represented by a collective bargaining unit, and CNY
considers its relationship with its employees to be good.
COMPETITION
CNY's principal competitors for deposits are other savings banks,
savings and loan associations, commercial banks and credit unions in CNY'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
CNY. CNY'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 CNY
have much greater financial and marketing resources than CNY. CNY'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.
PROPERTIES
CNY 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. CNY also has representative offices in Ithaca and Liverpool
for the origination of loans. CNY believes that these properties are adequate
for current needs. The following table sets forth certain information regarding
CNY's deposit-taking and loan production offices at December 31, 1999.
<TABLE>
<CAPTION>
DATE OWNED/ NET BOOK
LOCATION ACQUIRED LEASED VALUE
- -----------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
One North Main Street, Cortland, NY 13045
and nearby drive through facility at 29-31 North Main Street Various Owned $ 843
12 South Main Street, Homer, NY 13077 Various Owned $ 922
860 Route 13, Cortlandville, NY 13045 Various Owned $ 475
200 East Buffalo Street, Ithaca, NY 14850 1998 Leased None
290 Elwood Davis Rd, Liverpool, NY 13088 1999 Leased None
- -----------------------------------------------------------------------------------------------------
</TABLE>
LEGAL PROCEEDINGS
CNY and Cortland Savings are from time to time parties in routine legal
actions arising in the normal course of business. Management believes that there
is no proceeding threatened or pending against CNY or Cortland Savings which, if
determined adversely, would materially adversely affect the consolidated
financial position or operations of CNY.
-43-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements of CNY, including the accompanying notes,
appearing later in this proxy statement.
GENERAL
CNY's principal business is conducted by its wholly-owned subsidiary,
Cortland Savings. Cortland Savings' 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 CNY'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 CNY.
CNY commenced operations on October 6, 1998, when Cortland Savings
converted from a state chartered mutual savings bank to a state chartered stock
savings bank (the "Conversion"). On that date, CNY 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 into mortgage-backed
securities and investment grade corporate bonds. The shares sold included
428,532 shares purchased by CNY's Employee Stock Ownership Plan, which purchase
was funded by a loan from CNY. CNY contributed an additional 105,033 shares to
the Cortland Savings Foundation as part of the Conversion and recorded an
expense of $1.0 million, or approximately $614,000 after taxes, in October 1998
due to this donation.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1999 AND DECEMBER 31, 1998
Total assets at December 31, 1999 were $287.4 million, compared to
$281.2 million at December 31, 1998. The primary cause of the $6.3 million
increase was increased investing and lending activity by CNY.
CNY repositioned a portion of its invested funds in 1999 to take
advantage of higher rates available by extending the average maturity of
investments. CNY also expanded its investment program to enhance net interest
income. CNY concentrated its new securities investments in mortgage-backed
securities which tend to have higher yields than government and corporate debt
securities. The mortgage-backed securities had contractual terms to maturity of
15 to 30 years, and were funded by a reduction in cash and short-term
investments of $8.3 million and an increase in borrowings.
Net loans were $166.7 million at December 31, 1999, an increase of $7.5
million from the end of 1998. This growth occurred as CNY maintained its
emphasis in residential lending and increased its level of loan originations.
Loan closings, including undisbursed funds and refinancings, totaled $41.3
million in 1999, an increase of 4.8% from the 1998 total of $39.4 million.
-44-
<PAGE>
Total deposits were $195.5 million at the end of 1999, compared to
$196.0 million at December 31, 1998. This $544,000 reduction is attributed to a
$3.9 million reduction in certificates of deposit and a $711,000 decline in
savings accounts, partially offset by a $1.3 million increase in demand accounts
and a $2.8 million increase in money market accounts. During 1999, management
chose to reduce CNY's reliance on higher cost certificates of deposit and
actively promote CNY's checking account and money market products.
Borrowings were $19.2 million and $1.0 million at December 31, 1999 and
1998, respectively. This $18.2 million increase was required to fund the growth
in assets, and the stock repurchases discussed in the following paragraph.
Stockholders' equity was $67.7 million on December 31, 1999 compared to
$79.1 million at the end of 1998. The primary contributor to this $11.4 million
decline was completion of CNY's share repurchase programs. 649,664 shares of
CNY's common stock were purchased during 1999 at an aggregate price of $9.4
million. Additionally, CNY repurchased 214,266 shares in May 1999 at a price of
$12.00 per share to be used for grants under CNY's Personnel Recognition and
Retention Plan. As of December 31, 1999, a total of 181,278 shares have been
granted to participants in this plan.
-45-
<PAGE>
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 CNY's earning assets and
interest bearing liabilities for the indicated periods. No tax-equivalent
adjustments were made.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1999 1998 1997
------------------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
INTEREST BALANCE COST INTEREST BALANCE COST INTEREST BALANCE COST
------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans(1) $ 13,183 $161,371 8.17% $13,420 $156,649 8.57% $13,582 $157,713 8.61%
Securities(2) 6,429 107,571 5.98% 4,016 66,228 6.06% 3,769 60,226 6.26%
Other short-term investments 158 3,615 4.37% 567 11,387 4.98% 316 6,019 5.25%
- ----------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 19,770 272,557 7.25% 18,003 234,264 7.68% 17,667 223,958 7.89%
Non-interest-earning assets 12,697 29,141 12,254
- ----------------------------------------------------------------------------------------------------------------------------
Total assets $285,254 $263,405 $236,212
============================================================================================================================
Savings accounts(3) 1,517 $ 63,853 2.38% 1,851 $ 66,709 2.77% 1,936 $ 64,576 3.00%
Money market accounts 256 9,211 2.78% 220 8,176 2.69% 243 8,643 2.81%
NOW accounts 133 10,747 1.24% 167 10,015 1.67% 166 9,457 1.76%
Certificates of deposit 5,140 102,470 5.02% 5,723 106,860 5.36% 5,983 110,728 5.40%
Borrowings 561 9,237 6.07% 25 430 5.81% -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing 195,518 3.89%
liabilities 7,607 7,986 192,190 4.16% 8,328 193,404 4.31%
Non-interest-bearing liabilities 14,684 18,900 12,002
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities 210,202 211,090 205,406
Stockholders' equity 75,052 52,315 30,806
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities and equity $285,254 $263,405 $236,212
============================================================================================================================
Net interest income/spread $ 12,163 3.36% $10,017 3.53% $ 9,339 3.58%
Net earning assets/net
interest margin $ 77,039 4.46% $ 42,074 4.28% $ 30,554 4.17%
Ratio of average interest-earning assets
to average interest-bearing liabilities 1.39x 1.22x 1.16x
</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).
-46-
<PAGE>
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 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,
--------------------------------------------------------------
1999 VS. 1998 1998 VS. 1997
--------------------------------------------------------------
INCREASE (DECREASE) DUE TO: INCREASE (DECREASE) DUE TO:
VOLUME RATE TOTAL VOLUME RATE TOTAL
--------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans $ 398 $ (635) $ (237) $ (91) $ (71) $ (162)
Securities 2,472 (59) 2,413 367 (120) 247
Other short-term investments (347) (62) (409) 268 (17) 251
- ---------------------------------------------------------------------------------------------------------------
Total interest-earning assets $ 2,523 $ (756) $ 1,767 $ 544 $ (208) $ 336
===============================================================================================================
INTEREST-BEARING LIABILITIES:
Savings accounts $ (76) $ (258) $ (334) $ 62 $ (147) (85)
Money market accounts 29 7 36 (13) (10) (23)
NOW accounts 11 (45) (34) 9 (8) 1
Certificates of deposit (229) (354) (583) (207) (53) (260)
Borrowings 535 1 536 25 -- 25
- ---------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 270 $ (649) $ (379) $ (124) $ (218) $ (342)
===============================================================================================================
Net change in net interest income $ 2,253 $ (107) $ 2,146 $ 668 $ 10 $ 678
===============================================================================================================
</TABLE>
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1999 AND
DECEMBER 31, 1998
GENERAL. Net income for 1999 was $3.0 million compared to net income of
$1.7 million in 1998. The primary reason for the improvement was an increase in
net interest income of $2.1 million and a $452,000 decrease in other operating
expenses. These improvements were partially offset by a $505,000 reduction in
non-interest income and a $1.0 million increase in income tax expense
NET INTEREST INCOME. Net interest income increased by $2.1 million or
24.5% from 1998 to 1999. This improvement occurred primarily due to a $38.3
million increase in average total earning assets as a result of CNY's stock
offering on October 6, 1998, offset partially by a reduction in the average rate
earned on assets of 43 basis points. The reduction in rate is attributable to an
increase in securities as a percentage of total earning assets and a reduction
in the rate earned on loans due to competitive pressures and market interest
rates in general. Securities increased as CNY invested the proceeds of its stock
offering in such investments pending redeployment in loans as appropriate
opportunities arise and due to the investment program previously discussed.
Loans generally have higher yields than CNY's other investments.
CNY also experienced a decline in the cost of interest-bearing
liabilities to 3.89% in 1999 compared to 4.16% in 1998. The decline in market
interest rates at the end of 1998 allowed CNY to reduce its savings and NOW
-47-
<PAGE>
account pricing while remaining competitive in its market. Furthermore, the
infusion of capital from CNY's conversion allowed CNY to be more conservative in
pricing its certificates of deposit. The investment of the additional capital
resulted in an increase in average net earning assets of $35.0 million in 1999,
which resulted in an improvement in CNY's net interest margin to 4.46% in 1999,
compared to 4.28% in 1998.
PROVISION FOR LOAN LOSSES. The provision for loan losses results from
management's analysis of the adequacy of CNY'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 CNY's consolidated income statement. The provision for loan
losses was $100,000 for the year ended December 31, 1999 compared to $325,000 in
1998. A lower provision was appropriate in 1999 due to CNY's improved asset
quality.
NON-INTEREST INCOME. CNY's primary source of recurring non-interest
income is service charges, principally on deposit accounts. Service charges
increased by $117,000 in 1999 versus 1998, which increase related primarily to
the implementation of ATM surcharges and increased debit card usage by CNY's
customers.
CNY began surcharging persons other than Cortland Savings depositors
for using its ATMs in April 1999. A total of $61,000 of income was recognized
for this service during the year. Additionally, through a customer awareness
campaign, debit card usage increased, resulting in a $44,000 improvement in
income from this product.
During 1998, CNY also received $658,000 in settlement of its insurance
claim related to an officer defalcation which was discovered in 1996. The
settlement brought this matter to a close.
NON-INTEREST EXPENSE. Non-interest expense decreased $452,000 from 1998
to 1999. The primary reasons for the decrease were a $415,000 decrease in
salaries and employee benefits and the $1.0 million contribution to the Cortland
Savings Foundation in 1998. Partially reducing the impact of these items was
$315,000 of expenses incurred related to the announced merger with Niagara
Bancorp, Inc. These merger expenses are not tax deductible, and thus net income
was reduced by that amount.
The decrease in salaries and employee benefits included a $516,000
reduction of expense related to the termination of CNY's defined benefit pension
plan, versus an expense of $377,000 in 1998. This reduction was partially offset
by increased expense of CNY's ESOP and stock grant plan, increased medical
claims of $85,000 and normal merit increases.
The fluctuation in the impact of the defined benefit plan termination
between 1998 and 1999 was caused by the settlement gain on the termination of
the plan in 1999 of $394,000 combined with a $122,000 reduction in the actual
contribution to CNY's 401(k) plan in 1999 from the estimate recorded in 1998.
Expense related to the allocation of ESOP shares was $279,000 for the
year ended December 31, 1999, compared with $51,000 in 1998. The primary cause
of this $228,000 increase was a full year of allocation in 1999 versus one
quarter in 1998. The higher average per share price of CNY's common stock in
1999 versus 1998 also contributed to this increase.
Shareholders of CNY approved the Personnel Recognition and Retention
Plan in April 1999 and stock grants were made to officers and directors of CNY
under this plan. Expense of $288,000 was recorded in 1999 for this plan, and
there was no such expense in 1998.
-48-
<PAGE>
During the fourth quarter of 1998, CNY 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 pre-tax $1.0
million financial statement expense during 1998.
Professional fees increased by $213,000 from 1998 to 1999, due to a
variety of matters, including the establishment of a real estate investment
trust in 1999.
CNY recorded net expense of $83,000 from its real estate owned in 1999
compared with net revenue of $72,000 in 1998. This $155,000 increase in expense
occurred because CNY recorded a gain of $209,000 on the sale of one property in
1998 which gain exceeded the aggregate other expenses incurred on real estate
owned during that year.
Other non-interest expense increased $412,000 from 1998 to 1999,
reflecting increased costs associated with being a publicly-traded company for a
full year in 1999 versus less than one quarter in 1998. Adding to the increase
in other expense was a $51,000 increase in the costs of upgrading personal
computers in 1999, and a $55,000 increase in the costs associated with ATM and
debit cards due to higher volume levels as previously discussed. Furthermore,
CNY experienced a $74,000 increase in foreclosure expenses as the number of
actions increased compared with 1998. This increased activity did not, however,
result in an increase in the level of other real estate owned because CNY
aggressively worked to manage its level of nonperforming assets.
INCOME TAXES. Income tax expense increased $1.0 million from 1998 to
1999, primarily reflecting the improved earnings of CNY.
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 CNY'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 other
operating income and a $1.5 million increase in other operating expenses.
During the fourth quarter of 1997, CNY 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 CNY in a profitable manner. Therefore, in order to improve overall asset
quality and free management from less productive tasks associated with the
resolution of problem loans, CNY decided to seek to sell a substantial portion
of its non-performing loans to a single unrelated purchaser which was completed
in the first quarter of 1998. The decision to sell the loans resulted in a $1.7
million charge against the allowance for loan losses.
NET INTEREST INCOME. Net interest income increased by $678,000 or 7.3%
form 1997 to 1998. This improvement occurred primarily due to a $10.3 million
increase in average total earning assets as a result of CNY'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.
CNY 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 CNY to reduce its deposit pricing while remaining
-49-
<PAGE>
competitive in its market. The infusion of capital from Cortland Savings'
conversion, and related increase in average net earning assets of $11.5 million
in 1998, resulted in an improvement in CNY's net interest margin to 4.28% for
1998, compared to 4.17% in 1997.
PROVISION FOR LOAN LOSSES. 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 CNY's
asset quality. 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.
NON-INTEREST INCOME. CNY'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, CNY also received $658,000 from the insurance claim
settlement previously discussed.
NON-INTEREST EXPENSES. Non-interest expense increased $1.4 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
$377,000 expense related to the termination of CNY'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 CNY's ESOP, representing ESOP
expense for approximately one quarter of the year, and normal merit increases.
The $377,000 expense related to the termination of CNY's defined
benefit plan represents the estimated plan curtailment expense of $35,000
combined with an estimated expense of $437,000 for CNY's commitment to
contribute 25% of the excess of plan assets over the cost of annuities to be
purchased at the time of settlement of the plan (which occurred in 1999) to
CNY's 401(k) plan. These amounts are partially offset by the $95,000 benefit of
the pension plan prior to termination.
Professional fees increased by $257,000 from 1997 to 1998, reflecting
$210,000 of expenses related to CNY's unsuccessful attempt to acquire another
financial institution during the fourth quarter of 1998.
Directors' fees increased $189,000, primarily the effect of a $150,000
retirement benefit for three retired directors in 1998.
CNY 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 CNY
continued its efforts to resolve and reduce non-performing assets. CNY 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 CNY, as well as an $80,000 excise tax
recorded for the termination of the defined benefit plan.
LIQUIDITY AND CAPITAL
CNY's primary sources of funds are deposits, borrowings, and payments
received on loans and securities. While scheduled payments on loans and
securities, either installment payments or payments at maturity, are relatively
-50-
<PAGE>
predictable sources of funds, deposit outflows and loan prepayments can
fluctuate and are influenced by market interest rates, economic conditions and
competition.
CNY's primary investing activities are the origination of loans and the
purchase of securities. CNY's loans, net, after payments and charge-offs,
increased by $7.5 million during 1999 and $4.1 million during 1998, and
decreased by $3.1 million during 1997. Securities, excluding the effect of
unrealized gains and losses, increased by $8.7 million in 1999 and $41.0 million
during 1998 and decreased by $1.2 million during 1997.
In general, CNY 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, provides sufficient funds to fund new loan
originations. CNY 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, CNY 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, Cortland Savings has available lines of credit and borrowing
capabilities to provide additional funds if the need arises. At December 31,
1999, CNY had available lines of credit and borrowing capabilities with the
Federal Home Loan Bank of New York of $27.3 million.
At December 31, 1999, CNY and Cortland Savings 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 affect on Cortland Savings or CNY. Cortland
Savings was classified as "well capitalized" at December 31, 1999 under FDIC
regulations.
IMPACT OF INFLATION AND CHANGING PRICES
CNY 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
CNY'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.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ASSET/LIABILITY MANAGEMENT AND MARKET RISK. As a continuing part of its
financial strategy, CNY 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 Cortland
Savings, subject to general oversight by CNY Financial Corporation'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.
-51-
<PAGE>
CNY'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 income.
The following table illustrates CNY's estimated interest rate
sensitivity and periodic and cumulative gap positions as calculated as of
December 31, 1999.
<TABLE>
<CAPTION>
AMOUNTS ESTIMATED TO MATURE OR REPRICE WITHIN
------------------------------------------------------------------------------
LESS THAN
THREE 3 - 6 6 MONTHS 1 - 2 3 - 5 OVER 5
MONTHS MONTHS TO 1 YEAR YEARS YEARS YEARS TOTAL
- ------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Short-term investments $ 221 $ -- $ -- $ -- $ -- $ -- $ 221
Securities, including FHLB stock 3,082 7,864 8,593 18,290 39,123 29,348 106,300
Loans 13,672 8,636 13,207 18,762 45,237 67,143 166,657
- ------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 16,975 16,500 21,800 37,052 84,360 96,491 273,178
- ------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Savings accounts, including escrow 1,493 2,986 4,479 8,958 26,873 17,915 62,704
Money market accounts 360 719 1,079 2,158 6,473 -- 10,789
NOW accounts 370 740 1,110 2,220 6,661 -- 11,101
Certificates of deposit 9,114 18,983 29,408 24,400 18,533 -- 100,438
Borrowings 1,200 2,000 8,000 1,000 7,000 -- 19,200
- ------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 12,537 25,428 44,076 38,736 65,540 17,915 204,232
Interest sensitivity gap $ 4,438 $ (8,928) $(22,276) $ (1,684) $ 18,820 $ 78,576 $ 68,946
==================================================================================================================
Cumulative interest
sensitivity gap $ 4,438 $ (4,490) $(26,766) $(28,450) $ (9,630) $ 68,946
==================================================================================================================
Ratio of cumulative gap to total
interest-earning assets 1.62% (1.64%) (9.80%) (10.41%) (3.53%) 25.24%
==================================================================================================================
Ratio of interest-earnings assets
To interest-bearing liabilities 135.40% 64.89% 49.46% 95.65% 128.72% 538.60% 133.76%
==================================================================================================================
</TABLE>
While the gap position illustrated above is a useful tool that management
can assess for general positioning of CNY's balance sheet, management uses an
additional measurement tool to evaluate its asset/liability sensitivity which
determines exposure to changes in interest rates by estimating the percentage
change in net interest income due to changes in rates over a one-year time
horizon. Management measures the estimated 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 borrower's optional right to
prepay the loan. 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 1% to 39% CPR (Constant Repayment Rate) as of December 31, 1999. 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.
-52-
<PAGE>
Utilizing this measurement concept, the estimated interest rate risk of
CNY, expressed as a percentage change in net interest income over a one-year
time horizon due to changes in interest rates, at December 31, 1999, was as
follows:
<TABLE>
<CAPTION>
BASIS POINT CHANGE
--------------------------------------------------
+200 +100 -100 -200
--------------------------------------------------
<S> <C> <C> <C> <C>
Estimated percentage change in net interest income due to an
immediate change in interest rates over a one-year time horizon ........ (3.55%) (1.09%) 3.87% 3.95%
</TABLE>
Actual results may differ from these estimates 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.
CNY does not currently engage in trading activities or use instruments
such as swaps, collars or floors to control interest rate risk. Even though such
activities may be permitted with the approval of the Board of Directors, CNY
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. CNY'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 CNY's business activities.
FORWARD-LOOKING STATEMENTS
In this Proxy Statement, CNY, when discussing the future, has used
words like "will probably result", "are expected to", "may cause", "is
anticipated", "estimate", "project", or similar words. These words and the
related discussions represent forward-looking statements. In addition, any
analysis of the adequacy of the allowance for loan losses, or the interest rate
sensitivity of CNY's assets and liabilities, represent attempts to predict
future events and circumstances which are 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. The consummation of the proposed transaction with Niagara
Bancorp could be affected by many conditions and contingencies discussed in this
proxy statement, such as the ability to obtain regulatory approval and whether
CNY's stockholders approve the Agreement and the merger.
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 CNY's
financial performance and could cause CNY's actual results or circumstances for
future periods to be materially different from what has been anticipated or
projected.
-53-
<PAGE>
CNY FINANCIAL CORPORATION
AND SUBSIDIARY
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report .............................................. F-2
Consolidated Balance Sheets at December 31, 1999 and 1998 ................. F-3
Consolidated Statements of Income for the Years Ended
December 31, 1999, 1998 and 1997 ........................................ F-4
Consolidated Statements of Stockholders' Equity and Comprehensive
Income for the Years Ended December 31, 1999, 1998 and 1997 ............. F-5
Consolidated Cash Flow Statements for the Years Ended
December 31, 1999, 1998 and 1997 ........................................ F-6
Notes to Consolidated Financial Statements ................................ F-8
F-1
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
CNY Financial Corporation
We have audited the accompanying consolidated balance sheets of CNY
Financial Corporation and subsidiary as of December 31, 1999 and 1998
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, 1999. 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, 1999 and 1998, and
the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1999, in conformity
with generally accepted accounting principles.
/s/ KPMG, LLP
Syracuse, New York
January 14, 2000
F-2
<PAGE>
<TABLE>
<CAPTION>
CNY Financial Corporation and Subsidiary
Consolidated Balance Sheets
December 31, 1999 and 1998
(In thousands, except share data)
1999 1998
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 6,051 $ 4,432
Interest-bearing balances at financial institutions 221 6,104
Federal funds sold -- 4,000
Securities available-for-sale, at fair value 97,560 88,437
Securities held-to-maturity (fair value of $7,026 in 1999 and
$10,404 in 1998) 7,103 10,318
Loans, net of deferred fees 169,087 161,701
Less allowance for loan losses 2,430 2,494
- ------------------------------------------------------------------------------------------------
Net loans 166,657 159,207
Premises and equipment, net 3,084 3,243
Federal Home Loan Bank stock, at cost 1,637 1,303
Other assets 5,132 4,142
- ------------------------------------------------------------------------------------------------
$ 287,445 $ 281,186
================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Non-interest bearing demand accounts $ 12,033 $ 10,780
Savings accounts 61,109 61,820
Certificates of deposit 100,438 104,317
Money market accounts 10,789 7,975
NOW accounts 11,101 11,122
- ------------------------------------------------------------------------------------------------
Total deposits 195,470 196,014
Advance payments by borrowers for property taxes and insurance 1,595 1,450
Borrowings 19,200 1,000
Other liabilities 3,480 3,652
- ------------------------------------------------------------------------------------------------
Total liabilities 219,745 202,116
- ------------------------------------------------------------------------------------------------
Commitments and contingencies (note 13)
Stockholders' equity
Common Stock, $0.01 par value, 20,000,000 shares authorized,
5,356,662 shares issued 54 54
Additional paid-in capital 51,353 51,289
Retained earnings, substantially restricted 33,554 31,848
Accumulated other comprehensive income (loss) (503) 1,178
Treasury stock, at cost 788,277 shares in 1999 and 105,625
in 1998 (10,908) (1,067)
Unallocated shares of Employer Stock Ownership Plan (ESOP),
401,749 shares in 1999 and 423,175 in 1998 (4,017) (4,232)
Unearned common stock for PRRP (1,833) --
- ------------------------------------------------------------------------------------------------
Total stockholders' equity 67,700 79,070
- ------------------------------------------------------------------------------------------------
$ 287,445 $ 281,186
================================================================================================
See accompanying notes to consolidated financial statements
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
CNY Financial Corporation and Subsidiary
Consolidated Statements of Income
Years Ended December 31, 1999, 1998 and 1997
(In thousands, except share data)
1999 1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income
Loans $ 13,183 $ 13,420 $ 13,582
Securities 6,429 4,016 3,769
Other short-term investments 158 567 316
- --------------------------------------------------------------------------------------------------------
Total interest income 19,770 18,003 17,667
Interest expense
Deposits 7,046 7,961 8,328
Borrowings 561 25 --
- --------------------------------------------------------------------------------------------------------
Total interest expense 7,607 7,986 8,328
- --------------------------------------------------------------------------------------------------------
Net interest income 12,163 10,017 9,339
Provision for loan losses 100 325 3,300
- --------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 12,063 9,692 6,039
Non-interest income
Service charges 840 723 636
Net gain on sale of securities 23 6 46
Gain on loan sales -- 30 --
Insurance proceeds -- 658 --
Other 215 166 207
- --------------------------------------------------------------------------------------------------------
Total non-interest income 1,078 1,583 889
Non-interest expense
Salaries and employee benefits 3,431 3,846 2,928
Building, occupancy and equipment 822 905 981
Postage and supplies 337 349 323
Professional fees 738 525 361
Directors fees 297 311 122
Real estate owned 83 (72) 500
Contribution to charitable foundation -- 1,023 --
Merger related expenses 315 -- --
Other 1,851 1,439 1,657
- --------------------------------------------------------------------------------------------------------
Total non-interest expenses 7,874 8,326 6,872
- --------------------------------------------------------------------------------------------------------
Income before income tax expense (benefit) 5,267 2,949 56
Income tax expense (benefit) 2,295 1,270 (16)
Net income $ 2,972 $ 1,679 $ 72
========================================================================================================
Earnings per share (for 1998 calculated using post
conversion net income) (see note 2)
Basic $ 0.67 $ -- N/A
Diluted $ 0.66 $ -- N/A
Weighted average diluted shares outstanding 4,496,584 4,928,044 N/A
========================================================================================================
See accompanying notes to consolidated financial statements
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
CNY Financial Corporation and Subsidiary
Consolidated Statements of Stockholders' Equity and Comprehensive Income
Years Ended December 31, 1999, 1998 and 1997
(In thousands, except share data)
Accumulated Unearned
Additional Other Unallocated Common
Common Paid-in Retained Comprehensive Treasury ESOP Stock
Stock Capital Earnings Income Stock Shares For PRRP Total
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $ -- $ -- $ 30,097 $ 248 $ -- $ -- $ -- $ 30,345
Comprehensive income:
Other comprehensive income -- -- -- 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:
Other comprehensive income -- -- -- 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
- ---------------------------------------------------------------------------------------------------------------------------------
Treasury stock purchased (863,930 shares) -- -- -- -- (12,016) -- -- (12,016)
ESOP shares released for allocation
(21,426 shares) -- 64 -- -- -- 215 -- 279
Stock awarded under Personal Recognition and
Retention Plan (PRRP) (181,278 shares) -- -- (54) -- 2,175 -- (2,121) --
Expense of PRRP -- -- -- -- -- -- 288 288
Dividend payments ($0.27 per share) -- -- (1,212) -- -- -- -- (1,212)
Comprehensive income:
Other comprehensive loss -- -- -- (1,681) -- -- -- (1,681)
Net income -- -- 2,972 -- -- -- -- 2,972
- ---------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income -- -- 2,972 (1,681) -- -- -- 1,291
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 $ 54 $ 51,353 $ 33,554 $ (503) $(10,908) (4,017) $ (1,833) $67,700
=================================================================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CNY Financial Corporation and Subsidiary
Consolidated Cash Flow Statements
Years Ended December 31, 1999, 1998 and 1997
(In thousands)
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flow from operating activity:
Net income $ 2,972 $ 1,679 $ 72
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 474 487 579
(Increase) decrease in accrued interest receivable 40 (306) 233
Provision for loan losses 100 325 3,300
Write-down of real estate owned 10 50 365
Net gains on sales of securities (23) (6) (46)
Nationar recovery -- -- (45)
Net gain on sale of real estate owned (7) (192) (11)
Net amortization of premiums and discounts (98) 55 104
Net gain on sale of loans held-for-sale -- (30) --
Proceeds from sale of loans held-for-sale -- 3,131 --
Increase in other liabilities 853 807 148
Deferred tax expense (benefit) 86 277 (869)
Decrease (increase) in other assets 51 1,032 (709)
Donation to charitable foundation -- 997 --
PRRP expense 288 -- --
ESOP shares released for allocation 279 51 --
Gain on curtailment of postretirement benefit plan (70) -- --
- -------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 4,955 8,357 3,121
- -------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Net increase in loans (7,816) (4,744) (3,746)
Proceeds from recovery of Nationar -- -- 45
Proceeds from sales of securities available-for-sale 6,108 2,006 3,121
Proceeds from maturities and principle reductions of
securities available-for-sale 53,297 18,337 18,040
Purchases of securities available-for-sale (71,686) (63,237) (19,237)
Purchase of securities held-to-maturity -- (2,484) (3,847)
Proceeds from maturities and principle reductions
of securities held-to-maturity 3,196 4,780 3,054
Proceeds from sale of real estate owned 214 920 340
Additions to premises and equipment (315) (283) (371)
Purchase of FHLB stock (334) (12) (63)
- -------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (17,336) (44,717) (2,664)
- -------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Decrease in deposits (544) (3,756) (4,870)
Net increase in Federal Home Loan Bank advances 18,200 1,000 --
Increase (decrease) in advance payments by borrowers for
property taxes and insurance 145 121 (44)
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 (12,472) (611) --
Dividends paid (1,212) -- --
- -------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (4,117) 42,817 (4,914)
- -------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (8,264) 6,457 (4,457)
Cash and cash equivalents at beginning of year 14,536 8,079 12,536
- -------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 6,272 $ 14,536 $ 8,079
=============================================================================================================
</TABLE>
F-6
<PAGE>
<TABLE>
<CAPTION>
CNY Financial Corporation and Subsidiary
Consolidated Cash Flow Statements (Continued)
Years Ended December 31, 1999, 1998 and 1997
(In thousands)
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Non-cash investing activities:
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-for-maturity -- 101 --
Additions to real estate owned 266 74 1,095
Cash paid during the year for:
Interest 7,568 7,991 8,321
Income taxes $ 1,854 $ 105 $ 1,125
=============================================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
F-7
<PAGE>
CNY Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
(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.
On December 28, 1999, the Company signed a definitive agreement with
Niagara Bancorp, Inc. under which Niagara Bancorp, Inc. will acquire all
of the outstanding shares of the Company for $18.75 per share. Cortland
Savings Bank will become a wholly-owned subsidiary of Niagara Bancorp,
Inc. Included in non-interest expenses is $315,000 in merger related
expenses consisting primarily of the fees for the fairness opinion
delivered by the Company's investment banker. This transaction is
expected to close during the second quarter of 2000.
(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.
F-8
<PAGE>
CNY Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(c) SECURITIES, CONTINUED
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 the security.
Purchases and sales are recorded on a trade date basis with
settlement occurring shortly thereafter. Premiums and discounts are
amortized or accreted over the life of the related security as an
adjustment to yield using the interest method. Dividend and interest
income are recognized when earned. Realized gains and losses on
securities are included in earnings and are calculated using the
specific identification method, for determining the cost of the
securities sold.
(d) LOANS
Loans are reported at the principal amount outstanding, net of
deferred fees. Fees and certain direct origination costs related to
lending activities are recognized 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 judgment of management,
collectibility becomes uncertain. Subsequent recognition of income
occurs only to the extent that payment is received. Loans are
returned to an accrual status when both principal and interest are
current and the loan is determined to be performing in accordance
with the applicable loan terms.
(e) ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses consists of the provision charged to
operations based upon past loan loss experience, management's
evaluation of the loan portfolio under current economic conditions
and such other factors that require current recognition in
estimating loan losses. Loan losses and recoveries of loans
previously written-off are charged or credited to the allowance as
incurred or realized, respectively.
The allowance for loan losses is maintained at a level believed by
management to be sufficient to absorb probable 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 judgment of information available to them at the time of their
examination.
F-9
<PAGE>
CNY Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(e) ALLOWANCE FOR LOAN LOSSES, CONTINUED
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.
(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 is recognized in
income in the period that includes the enactment date.
(i) PENSION AND OTHER POSTRETIREMENT PLANS
The Company 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.
The Company also 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.
F-10
<PAGE>
CNY Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(j) OTHER EMPLOYEE BENEFIT PLANS
The Company sponsors a non-contributory Employee Stock Ownership
Plan (ESOP) covering substantially all employees. 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, EMPLOYERS'
ACCOUNTING FOR EMPLOYEE STOCK OWNERSHIP PLANS. Accordingly, as
shares are committed to be released to participants, the Company
reports compensation expense equal to the average market price of
the shares and the shares become outstanding for earnings per share
computations.
The Company's Personal Recognition and Retention Plan ("PRRP") is
accounted for in accordance with APB Opinion No. 25. The fair value
of the shares awarded, measured as of the grant date, is recognized
as unearned compensation (a component of stockholders' equity) and
amortized to compensation expense as the shares become vested.
(k) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
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. The Company's policy is to record such
instruments when funded.
(l) 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. Stock options and unvested stock
grants are regarded as common stock equivalents and are considered
in earnings per share calculations if dilutive. 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. The following
table summarizes the computation of earnings per share for the years
ended December 31:
<TABLE>
<CAPTION>
1999 1998
------------------------------------------------------------------------------------
Per Per
Income Shares Share Income Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Net income $ 2,972 4,465 $ 0.67 $ 7 4,928 $ --
Effect of Dilutive
Securities
Options 9 --
Unearned stock grants 23 --
----------------------- ---------------------
Diluted EPS $ 2,972 4,497 $ 0.66 $ 7 4,928 $ --
=================================================================================================================
</TABLE>
(m) COMPREHENSIVE INCOME
Comprehensive income represents net income and the net change in
unrealized gains or losses on securities available for sale, net of
taxes, and is presented in the Consolidated Statements of
Stockholders' Equity and Comprehensive Income.
F-11
<PAGE>
CNY Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(n) SEGMENT REPORTING
The Company's operations are solely in the financial services
industry and include the provision of traditional banking services.
The Company operates primarily in Cortland County and surrounding
areas in New York State. The Company has determined that it has no
reportable segments.
(3) SECURITIES
Securities are summarized as follows (in thousands):
<TABLE>
<CAPTION>
December 31, 1999
-----------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Government and sponsored
Enterprise securities $14,469 $ 5 $ 228 $14,246
Mortgage-backed securities 58,684 39 2,286 56,437
State and municipal sub-divisions 1,865 -- 61 1,804
Corporate debt securities 20,553 -- 225 20,328
----------------------------------------------------------------------------------
Total debt securities 95,571 44 2,800 92,815
Equity securities 2,827 2,066 148 4,745
----------------------------------------------------------------------------------
$98,398 $ 2,110 $ 2,948 $97,560
==================================================================================
Held-to-maturity:
U.S. Government and sponsored
Enterprise securities $ 1,000 $ -- $ 11 $ 989
Mortgage-backed securities 3,508 20 78 3,450
State and municipal sub-divisions 742 1 6 737
Corporate debt securities 1,853 -- 3 1,850
----------------------------------------------------------------------------------
$ 7,103 $ 21 $ 98 $ 7,026
==================================================================================
December 31, 1998
-----------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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 debt 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-divisions 747 17 -- 764
Corporate debt securities 2,858 21 1 2,878
----------------------------------------------------------------------------------
$10,318 $ 109 $ 23 $ 10,404
==================================================================================
</TABLE>
F-12
<PAGE>
CNY Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
(3) SECURITIES, CONTINUED
The following table presents the amortized cost and fair value of debt
securities at December 31, 1999, based on the earlier of call or maturity
date. Actual 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):
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
--------------------------------------------------------------------------------------------------------
<S> <C> <C>
Available-for-sale
Due within one year $ 10,005 $ 9,989
Due after one year through five years 25,017 24,586
Due after five years through ten years 1,865 1,803
Due after ten years -- --
Mortgage-backed securities 58,684 56,437
--------------------------------------------------------------------------------------------------------
$ 95,571 $ 92,815
========================================================================================================
Held-to-maturity:
Due within one year $ 2,028 $ 2,025
Due after one year through five years 1,358 1,348
Due after five years through ten years 209 203
Due after ten years -- --
Mortgage-backed securities 3,508 3,450
--------------------------------------------------------------------------------------------------------
$ 7,103 $ 7,026
========================================================================================================
</TABLE>
Gross gains of $41,000, $6,000 and $46,000 were realized on sales of
securities in 1999, 1998 and 1997, respectively. Gross losses of $18,000
were realized on sales of securities in 1999. There were no gross losses
in 1998 and 1997.
Securities carried at $30.4 million at December 31, 1999 were pledged for
borrowings and other purposes required by law. There were no securities
of a single issuer (other than the U.S. Government and sponsored
enterprises) that exceeded 10% of stockholders' equity at December 31,
1999 or 1998.
(4) LOANS
Loans are summarized as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1999 1998
--------------------------------------------------------------------------------------------------------
<S> <C> <C>
Mortgage loans:
Residential $ 105,407 $ 100,976
Commercial 31,864 29,224
Partially guaranteed by VA 246 337
Insured by FHA 631 717
--------------------------------------------------------------------------------------------------------
138,148 131,254
--------------------------------------------------------------------------------------------------------
Other loans:
Commercial 6,278 6,588
Automobile 12,641 10,854
Home equity line of credit 6,520 6,804
Property improvement 661 709
Guaranteed student 741 1,016
Other consumer 4,208 4,597
--------------------------------------------------------------------------------------------------------
31,049 30,568
--------------------------------------------------------------------------------------------------------
Total loans 169,197 161,822
--------------------------------------------------------------------------------------------------------
Less: Net deferred origination fees 110 121
--------------------------------------------------------------------------------------------------------
$ 169,087 $ 161,701
========================================================================================================
</TABLE>
F-13
<PAGE>
CNY Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
(4) LOANS, CONTINUED
Changes in the allowance for loan losses are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
Years Ended
December 31,
-----------------------------------------
1999 1998 1997
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 2,494 $ 2,143 $ 1,952
Provision charged to operations 100 325 3,300
Recoveries 116 206 170
Loans charged off (280) (180) (3,279)
-------------------------------------------------------------------------------------
Balance at end of year $ 2,430 $ 2,494 $ 2,143
=====================================================================================
</TABLE>
At December 31, 1999 and 1998, impaired loans totaled $49,000 and
$736,000, respectively. At December 31, 1999, impaired loans included
$49,000 of loans for which the related allowance for loan losses was
$25,000. At December 31, 1998, impaired loans included $736,000 of loans
for which the related allowance for loan losses was $194,000. The average
recorded investment in impaired loans was $564,000, $1.1 million and $2.7
million during the years ended December 31, 1999, 1998 and 1997,
respectively. Interest income recognized on impaired loans was $7,000,
$147,000 and $290,000 during the years ended December 31, 1999, 1998 and
1997, respectively, all of which was recognized using the cash basis of
income recognition.
The principal balances of loans not accruing interest amounted to
approximately $603,000 and $920,000 at December 31, 1999 and 1998,
respectively. Interest income that would have been recorded if the
non-accruing loans had been performing in accordance with their original
terms was approximately $44,000, $115,000 and $402,000 during the years
ended December 31, 1999, 1998 and 1997, 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 End
December 31,
------------------------------
1999 1998
-------------------------------------------------------------------------
Balance at beginning of year $ 2,151 $ 2,207
New loans and increase in existing loans 731 521
Loan principal repayments (808) (577)
-------------------------------------------------------------------------
Balance at end of year $ 2,074 $ 2,151
=========================================================================
F-14
<PAGE>
CNY Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
(5) PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------------------------
1999 1998
----------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 886 $ 886
Buildings and furniture 2,978 2,901
Furniture and equipment 1,805 1,962
----------------------------------------------------------------------------------------
5,669 5,749
Less accumulated depreciation and amortization 2,585 2,506
----------------------------------------------------------------------------------------
$ 3,084 $ 3,243
========================================================================================
</TABLE>
Depreciation and amortization expense amounted to $474,000, $487,000 and
$579,000 during the years ended December 31, 1999, 1998 and 1997,
respectively.
(6) DEPOSITS
At December 31, 1999 and 1998, the aggregate amounts of time deposits in
denominations of $100,000 or more were approximately $14.0 million and
$13.0 million, respectively.
Contractual maturities of certificates of deposit at December 31, are
summarized as follows (in thousands):
1999
------------------------------------------------------------------
Within one year $ 57,505
One through two years 24,400
Two through three years 9,612
Three through four years 6,439
Four through five years 2,482
Five years and over --
------------------------------------------------------------------
Total certificates of deposit $ 100,438
==================================================================
Interest expense on deposits is summarized as follows (in thousands):
Years Ended
December 31,
--------------------------------------------
1999 1998 1997
-------------------------------------------------------------------------
Savings accounts $ 1,517 $ 1,861 $ 1,936
Certificates of deposit 5,140 5,713 5,983
Money market accounts 256 220 243
NOW accounts 133 167 166
-------------------------------------------------------------------------
$ 7,046 $ 7,961 $ 8,328
=========================================================================
(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.
F-15
<PAGE>
CNY Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
(7) BORROWINGS, CONTINUED
At December 31, 1999 and 1998, advances from the FHLB were as follows (in
thousands):
<TABLE>
<CAPTION>
Advance Amount
-------------------------------
Maturity Date Interest Rate Fixed or Variable 1999 1998
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1/03/00 5.60% Fixed $ 1,200 $ --
3/24/00 6.08% Fixed 2,000 --
9/20/00 5.92% Fixed 5,000 --
9/27/00 5.96% Fixed 3,000 --
6/25/01 5.99% Fixed 1,000 --
7/30/01 5.52% Fixed -- 1,000
6/17/02 6.23% Fixed 3,000 --
6/23/04 6.53% Fixed 4,000 --
----------------------------------------------------------------------------------------------------
Total $ 19,200 $ 1,000
====================================================================================================
</TABLE>
Under 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 31,1999
the Company may borrow up to an additional $27.3 million from the FHLB.
(8) INCOME TAXES
The components of income tax expense (benefit) attributable to income
from operations are (in thousands):
Years Ended
December 31,
----------------------------------------------
1999 1998 1997
-------------------------------------------------------------------------
Current:
Federal $ 1,761 $ 799 $ 672
State 448 194 181
-------------------------------------------------------------------------
2,209 993 853
Deferred:
Federal 53 207 (698)
State 33 70 (171)
-------------------------------------------------------------------------
86 277 (869)
-------------------------------------------------------------------------
$ 2,295 $ 1,270 $ (16)
=========================================================================
Actual tax expense (benefit) attributable to income before income taxes
differed from "expected" tax expense (benefit), computed by applying the
U.S. Federal statutory tax rate of 34% to income before income tax as
follows (in thousands):
<TABLE>
<CAPTION>
Years Ended
December 31,
---------------------------------------------
1999 1998 1997
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Computed "expected" tax expense $ 1,791 $ 1,003 $ 19
Increase (decrease) in income taxes resulting from:
State taxes, net of Federal tax benefits 310 175 7
Non-taxable interest income (40) (21) (35)
Non-deductible merger expenses 107 -- --
Other non-deductible expenses 35 48 16
Pension termination excise tax 109 80 --
Other items, net (17) (15) (23)
----------------------------------------------------------------------------------------------------
$ 2,295 $ 1,270 $ (16)
====================================================================================================
</TABLE>
F-16
<PAGE>
CNY Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
(8) INCOME TAXES, CONTINUED
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are (in
thousands):
<TABLE>
<CAPTION>
December 31,
-------------------------------
1999 1998
----------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 946 $ 986
Net deferred loan fees 99 98
Postretirement benefit obligation 663 669
Deferred director fees 143 92
Foundation contribution carryforward 115 329
Personnel Recognition and Retention Plan vesting 112 --
Unrealized loss on securities, net 335 --
Other 36 56
----------------------------------------------------------------------------------------------------
Total gross deferred tax assets 2,449 2,230
----------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Accumulated depreciation on premises and equipment (115) (101)
Unrealized gains on securities, net -- (783)
Tax allowance for loan losses in excess of base year amount (43) (105)
Other (38) (20)
----------------------------------------------------------------------------------------------------
Total gross deferred tax liabilities (196) (1,009)
----------------------------------------------------------------------------------------------------
Net deferred tax assets $ 2,253 $ 1,221
====================================================================================================
</TABLE>
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.
In accordance with SFAS No. 109, the Company has not recognized deferred
tax liabilities with respect to the Bank's Federal and state base-year
reserve of approximately $3.7 million at December 31, 1999, since the
Company does not expect that these amounts will become taxable in the
forseeable future. Under the tax laws, as amended, events that would
result in taxation of these reserves include redemptions of the Bank's
stock or certain excess distributions to the Company. The unrecognized
deferred tax liability at December 31, 1999 with respect to the base-year
reserve was approximately $1.4 million.
(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. (in thousands):
F-17
<PAGE>
CNY Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
(9) PENSION AND OTHER POSTRETIREMENT PLANS, CONTINUED
Pension Benefits Other Benefits
---------------- --------------
1999 1998 1999 1998
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Change in benefit obligations:
Benefit obligation at beginning of year $ 4,075 $ 3,490 $ 1,890 $ 1,597
Service cost -- 84 47 42
Interest cost -- 244 121 108
Amendments -- 60 -- --
Curtailment -- (591) (264) --
Actuarial loss (gain) 610 938 (86) 238
Benefits paid (3,032) (150) (87) (95)
Settlement gain (394) -- -- --
Paid to Company (1,259) -- -- -
-------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $ -- $ 4,075 $ 1,621 $ 1,890
=============================================================================================================
Change in plan assets:
Fair value of plan assets at beginning of year $ 4,940 $ 5,083 $ -- $ --
Actual return on plan assets (649) 7 -- --
Employer contribution -- -- 87 95
Benefits paid (3,032) (150) (87) (95)
Paid to Company (1,259) -- -- --
-------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ -- $ 4,940 $ -- $ --
=============================================================================================================
Funded status $ -- $ 865 $ (1,621) $ (1,890)
Unrecognized net actuarial (gain) loss -- -- (50) 235
-------------------------------------------------------------------------------------------------------------
Prepaid (accrued) benefit cost $ -- $ 865 $ (1,671) $ (1,655)
=============================================================================================================
Weighted average assumptions:
Discount rate N/A 5.00% 7.75% 6.50%
Expected return on plan assets N/A 7.00% --% --%
Rate of compensation increase N/A 4.00% 5.50% 4.50%
</TABLE>
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 5.00% 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>
Pension Benefits Other Benefits
---------------- --------------
1999 1998 1997 1999 1998 1997
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Components of net periodic benefit cost: (in thousands)
Service cost $ -- $ 84 $ 87 $ 47 $ 42 $ 37
Interest cost -- 244 242 121 108 107
Expected return on plan assets -- (391) (350) -- -- --
Recognized net actuarial gain (39) (32) -- -- -- --
Curtailment charge -- 35 -- (70) -- --
Settlement gain (394) -- -- -- -- --
-------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ (433) $ (60) $ (21) $ 98 $ 150 $ 144
=============================================================================================================
</TABLE>
F-18
<PAGE>
CNY Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
(9) PENSION AND OTHER POSTRETIREMENT PLANS, CONTINUED
In 1998, the Company recorded a curtailment expense of $35,000 related to
the termination of its defined benefit pension plan. The settlement of
the plan's obligations was expected to occur in 1999 through the purchase
of annuities for the plan participants. In 1998, the Company also
committed to contribute 25% of the excess of the plan's assets over the
cost of purchasing annuities to the Company's 401(k) plan. An estimated
accrual of $437,000 was recorded related to this commitment.
During 1999, the Company recorded a settlement gain on the termination of
its defined benefit pension plan of $394,000, as well as a $122,000
reduction in the actual contribution to the Company's 401(k) from the
estimate recorded in 1998.
(10) STOCK OPTION PLAN
On April 28, 1999, the Company's shareholders approved the CNY Financial
Corporation Stock Option Plan ("Stock Option Plan"). The primary
objective of the Stock Option Plan is to provide officers and directors
with a proprietary interest in the Company and an incentive to encourage
such persons to remain with the Company.
Under the Stock Option Plan, 535,662 shares of authorized but unissued
common stock are reserved for issuance upon option exercises. The Company
also has the alternative to fund the Stock Option Plan with treasury
stock. Options under the plan may be either non-qualified stock options
or incentive stock options. Each option entitles the holder to purchase
one share of common stock at an exercise price equal to the fair market
value on the date of grant. On April 28, 1999, 280,690 options were
awarded at an exercise price of $11.50 per share and on September 8,
1999, 60,000 shares were awarded at an exercise price of $14.50 per
share. These options have a ten year term and vest at a rate of 20% per
year from the grant date.
A summary of the status of the Company's Stock Option Plan as of December
31, 1999 and changes during the year ended December 31, 1999 is presented
below:
<TABLE>
<CAPTION>
Weighed-Average
Shares Exercise Price
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPTIONS
Outstanding at beginning of year -- $
Granted 340,690 12.03
Exercised --
Forfeited --
-------------------------------------------------------------------------------------------------------------
Outstanding at end of year 340,690 12.03
=============================================================================================================
Exercisable at end of year -- N/A
=============================================================================================================
Estimated weighted-average fair value of options granted on December 31, 1999 $ 3.81
=============================================================================================================
</TABLE>
The Company applies APB Option No. 25 and related Interpretations in
accounting for its Stock Option Plan. Accordingly, no compensation cost
has been recognized for its Stock Option Plan. SFAS No. 123 requires
companies not using a fair value based method of accounting for stock
options or similar plans, to provide pro forma disclosure of net income
and earnings per shares as if that method of accounting had been applied.
The fair value of each option grant is estimated on the dates of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in the year ended December
31, 1999; dividend yield of 2.00%; expected volatility of 30.20%; risk
free interest rate of 6.70%; expected lives of five years.
F-19
<PAGE>
CNY Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
(10) STOCK OPTION PLAN, CONTINUED
Pro forma disclosures for the Company for the year ended December 31,
1999 utilizing the estimated fair value of the options granted and an
assumed 5% forfeiture rate are as follows:
Basic Diluted
Net Earnings Earnings
Income Per Share Per Share
-------------------------------------------------------------------------
(in thousands, except per share data)
As reported $ 2,972 $ 0.67 $ 0.66
Pro Forma $ 2,876 $ 0.64 $ 0.64
=========================================================================
Because the Company's stock options have characteristics significantly
different from those of traded options for which the Black-Scholes model
was developed, and because changes in the subjective input assumptions
can materially affect the fair value estimate, the existing models, in
management's option, do not necessarily provide a reliable single measure
of the fair value of its stock options. In addition, the effect on
reported net income and earnings per share for the year ended December
31, 1999 may not be representative of the effects on reported net income
or earnings per share for future years.
(11) PERSONNEL RECOGNITION AND RETENTION PLAN
The Company's shareholders also approved the CNY Financial Corporation
Personnel Recognition and Retention Plan ("PRRP") on April 28, 1999. The
purpose of the plan is to promote the long-term interests of the Company
and its shareholders by providing a stock-based compensation program to
attract and retain officers and directors.
During 1999, 181,278 shares were awarded under the PRRP. The shares vest
over a period of equal installments commencing one year from the date of
grant. The fair market value of the shares awarded under the plan was
$2.1 million at the grant date, and is being amortized to compensation
expense on a straight-line basis over the vesting periods of the
underlying shares. Compensation expense of $288,000 was recorded in 1999,
with the remaining unearned compensation cost of $1.8 million shown as a
reduction of stockholders' equity at December 31, 1999. The shares
awarded under the PRRP were transferred from treasury stock at cost with
the difference between the fair market value on the grant date and the
cost of the shares recorded as a reduction of retained earnings.
(12) 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 employee contribution up to 6%.
Contributions to the defined contribution 401(k) Savings Plan were
approximately $44,000, $60,000 and $64,000 during the years ended
December 31, 1999, 1998 and 1997, 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, 1999,
26,783 shares were released or committed to be released and 401,749
remained as unallocated shares. The fair value of the unallocated shares
on December 31, 1999 was $7.2 million. The Company recognized
compensation expense of $279,000 and $51,000 in 1999 and 1998,
respectively.
F-20
<PAGE>
CNY Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
(13) COMMITMENTS AND CONTINGENCIES
The Company is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments consist 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, plant and
equipment and income-producing commercial properties. Substantially all
commitments to extend credit, if exercised, will represent loans secured
by real estate.
The Company was committed to originate fixed and adjustable rate
mortgages of approximately $7.3 million and $3.9 million at December 31,
1999 and 1998, respectively. Unused lines of credit, which includes home
equity, consumer, commercial and credit cards, amounted to $11.8 million
and $10.7 million at December 31, 1999 and 1998, 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.
(14) 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.
F-21
<PAGE>
CNY Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
(15) COMPREHENSIVE INCOME
The following summarizes the components of other comprehensive income (in
thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1999 1998 1997
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Other comprehensive income, before tax:
Net unrealized holding gain (loss) on securities $(2,776) $ 1,023 $ 575
Reclassification adjustment for net gains realized on the sale of
securities (23) (6) (46)
-------------------------------------------------------------------------------------------------------------
Other comprehensive income, before tax (2,799) 1,017 529
Income tax expense (benefit) related to items of other comprehensive
income (1,118) 410 206
-------------------------------------------------------------------------------------------------------------
Other comprehensive income, net of tax $(1,681) $ 607 $ 323
=============================================================================================================
</TABLE>
(16) STOCKHOLDERS' EQUITY AND CAPITAL STANDARDS
The Company's ability to pay dividends is primarily dependent upon the
ability of its subsidiary bank to pay dividends to the Company. The
payment of dividends by the Bank is subject to continued compliance with
minimum regulatory capital requirements. In addition, regulatory approval
is generally required prior to the Bank declaring dividends in an amount
in excess of net income for that year plus net income retained in the
preceding two years.
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.
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, 1999 and 1998, 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, 1999, that the Company and Bank meet all
capital adequacy requirements to which they are subject.
F-22
<PAGE>
CNY Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
(16) STOCKHOLDERS' EQUITY AND CAPITAL STANDARDS, CONTINUED
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>
To be classified as
Minimum capital well capitalized under
adequacy prompt corrective
Actual requirements action provisions
------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
At December 31, 1999:
TOTAL CAPITAL (TO RISK WEIGHTED ASSETS):
Company $ 71,149 42.81% $ 13,295 =>8.00% N/A
Bank $ 64,415 39.29% $ 13,116 =>8.00% $ 16,394 => 10.00%
TIER 1 CAPITAL (TO RISK WEIGHTED ASSETS):
Company $ 68,204 41.04% $ 6,648 =>4.00% N/A
Bank $ 61,487 37.51% $ 6,558 =>4.00% $ 9,837 => 6.00%
TIER I CAPITAL (TO AVERAGE ASSETS):
Company $ 68,204 23.91% $ 11,410 =>4.00% N/A
Bank $ 61,487 22.43% $ 10,965 =>4.00% $ 13,706 => 5.00%
At December 31, 1998:
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 I 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%
</TABLE>
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 and no shares may be
repurchased by the Company if such actions would reduce the Bank's
stockholders' equity below the amount required for the special account.
At December 31, 1999, the amount remaining in this liquidation account
was $14.4 million.
(17) 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 on the consolidated
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.
F-23
<PAGE>
CNY Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
(17) FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED
LOANS AND ACCRUED INTEREST 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.
DEPOSITS: The fair values of demand deposits (interest and
non-interest checking), passbook, statement savings, club and money
market accounts are, by definition, equal to the amount payable on
demand at the reporting date (i.e., their carrying amounts). Fair
values for fixed-rate certificates of deposits and individual
retirement accounts are estimated using a discounted cash flow
calculation that applies interest rates currently being offered on
these products to a schedule of aggregated expected monthly
maturities on time deposits.
ADVANCE PAYMENTS BY BORROWERS FOR PROPERTY TAXES AND INSURANCE: The
fair value of advance payments by borrowers for property taxes and
insurance is, by definition, equal to the amount payable at the
reporting date (i.e., its carrying amount).
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.
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.
The estimated carrying values and fair values of the Company's financial
instruments are as follows: (in thousands):
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------
1999 1998
-----------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 6,272 $ 6,272 $ 14,536 $ 14,536
Securities 104,663 104,586 98,755 98,841
Loans, net 166,657 165,478 159,207 166,435
FHLB stock 1,637 1,637 1,303 1,303
Accrued interest receivable 1,945 1,945 1,985 1,985
Financial liabilities:
Deposits:
Demand accounts 12,033 12,033 10,780 10,780
Savings accounts 61,109 61,109 61,820 61,820
Certificates of deposits 100,438 99,523 104,317 104,575
Money market accounts 10,789 10,789 7,975 7,975
NOW accounts 11,101 11,101 11,122 11,122
Advance payments by borrowers
for property taxes and
insurance 1,595 1,595 1,450 1,450
Borrowings $ 19,200 $ 19,153 $ 1,000 $ 997
=================================================================================================
</TABLE>
F-24
<PAGE>
CNY Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
(17) FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instrument. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and, therefore, cannot
be determined with precision. Changes in assumptions could significantly
affect the estimates.
(18) CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
Presented below are the condensed balance sheets as of December 31, 1999
and 1998 and statements of income and statements of cash flows for the
year ended December 31, 1999 and for the period from October 6, 1998 to
December 31, 1998 for CNY Financial Corporation (in thousands):
<TABLE>
<CAPTION>
Condensed Balance Sheets 1999 1998
-------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Cash and cash equivalents $ 1,951 $ 11,929
Securities available-for-sale, at fair value 5,399 8,238
Investment in bank subsidiary 61,037 58,939
Other assets 368 712
-------------------------------------------------------------------------------
$ 68,755 $ 79,818
===============================================================================
Liabilities:
Other liabilities $ 1,055 $ 748
-------------------------------------------------------------------------------
Total liabilities 1,055 748
-------------------------------------------------------------------------------
Total stockholders' equity 67,700 79,070
-------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 68,755 $ 79,818
===============================================================================
Condensed Statements of Income 1999 1998
-------------------------------------------------------------------------------
Interest from securities available-for-sale $ 532 $ --
-------------------------------------------------------------------------------
Total operating income 532 --
Donation to charitable foundation -- (1,023)
Other operating expenses (1,536) (192)
-------------------------------------------------------------------------------
Total operating expenses (1,536) (1,215)
-------------------------------------------------------------------------------
Loss before undistributed income of subsidiary (1,004) (1,215)
Applicable income tax benefit (240) (485)
Equity in undistributed income of subsidiary bank 3,736 2,409
-------------------------------------------------------------------------------
Net income $ 2,972 $ 1,679
===============================================================================
</TABLE>
(CONTINUED ON FOLLOWING PAGE)
F-25
<PAGE>
CNY Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
(18) CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS, CONTINUED
1999 1998
---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Condensed Statements of Cash Flows
Operating activities:
Net income $ 2,972 $ 1,679
Adjustments to reconcile net income to cash provided by
(used in) operating activities:
Equity in undistributed earnings of subsidiary bank (3,736) (2,409)
Decrease (increase) in other assets 372 (712)
Increase in other liabilities 763 292
ESOP shares released for allocation 279 51
Donation to charitable foundation -- 997
PRRP expense 288 --
---------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 938 (102)
Investing activities:
Purchase of securities available-for-sale (38,105) (33,421)
Proceeds from sales of securities available-for-sale 4,563 --
Proceeds from maturities of securities available-for-sale 36,310 --
---------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 2,768 (33,421)
Financing activities:
Par value of donation of stock to charitable foundation -- 1
Purchase of shares of common stock by ESOP -- (4,285)
Payments on ESOP loan --
Treasury stock purchases (12,472) (611)
Dividends (1,212) --
Net proceeds from issuance of common stock -- 50,347
---------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (13,684) 45,452
Net (decrease) increase in cash (9,978) 11,929
Cash at beginning of year 11,929 --
---------------------------------------------------------------------------------------------------------
Cash at December 31 $ 1,951 $ 11,929
=========================================================================================================
</TABLE>
F-26
<PAGE>
CNY Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
(19) UNAUDITED INTERIM FINANCIAL INFORMATION
The following table summarizes the Company's quarterly results for the
years ended December 31, 1999 and 1998 (in thousands, except share data):
<TABLE>
<CAPTION>
1999
----------------------------------------------------------
First Second Third Fourth
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $ 4,816 $ 4,861 $ 5,074 $ 5,019
Interest expense 1,792 1,822 1,966 2,027
-------------------------------------------------------------------------------------------------------------
Net interest income 3,024 3,039 3,108 2,992
Provision for loan losses 75 25 -- --
Total non-interest income 216 291 285 286
Total non-interest expenses 1,830 1,862 2,092 2,090
-------------------------------------------------------------------------------------------------------------
Income before income taxes 1,335 1,443 1,301 1,188
-------------------------------------------------------------------------------------------------------------
Net income $ 749 $ 893 $ 740 $ 590
=============================================================================================================
Net income per diluted common share $ 0.16 $ 0.19 $ 0.16 $ 0.14
=============================================================================================================
1998
----------------------------------------------------------
First Second Third Fourth
-------------------------------------------------------------------------------------------------------------
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
Total non-interest income 245 278 817 243
Total non-interest expenses 1,645 1,693 1,953 3,035
-------------------------------------------------------------------------------------------------------------
Income before income taxes 826 844 1,142 137
-------------------------------------------------------------------------------------------------------------
Net income $ 493 $ 561 $ 566 $ 59(2)
=============================================================================================================
Net income per common share (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.
Summation of the quarterly net income per diluted common share does not
necessarily equal the annual amount due to the averaging effect of the
number of shares throughout the year.
F-27
Exhibit A - Agreement and Plan of Merger
AGREEMENT AND PLAN OF MERGER
BY AND BETWEEN
NIAGARA BANCORP, INC.
NIAGARA MERGER CORP
AND
CNY FINANCIAL CORPORATION
DATED AS OF DECEMBER 28, 1999
A-1
<PAGE>
<TABLE>
<CAPTION>
AGREEMENT AND PLAN OF MERGER
TABLE OF CONTENTS
Page
ARTICLE I
CERTAIN DEFINITIONS
<S> <C>
Section 1.01 Definitions.................................................................2
ARTICLE II
THE MERGER AND EXCHANGE OF SHARES
Section 2.01 Effects of Merger; Surviving Corporation....................................7
Section 2.02 Conversion of Shares........................................................7
Section 2.03 Exchange Procedures.........................................................8
Section 2.04 Stock Options and PRRP Shares..............................................10
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF CNYF
Section 3.01 Organization...............................................................11
Section 3.02 Capitalization.............................................................12
Section 3.03 Authority; No Violation....................................................12
Section 3.04 Consents...................................................................13
Section 3.05 Financial Statements.......................................................13
Section 3.06 Taxes......................................................................14
Section 3.07 No Material Adverse Effect.................................................15
Section 3.08 Contracts..................................................................15
Section 3.09 Ownership of Property; Insurance Coverage..................................16
Section 3.10 Legal Proceedings..........................................................17
Section 3.11 Compliance With Applicable Law.............................................17
Section 3.12 ERISA......................................................................18
Section 3.13 Brokers, Finders and Financial Advisors....................................19
Section 3.14 Environmental Matters......................................................19
Section 3.15 Loan Portfolio.............................................................21
Section 3.16 Securities Documents.......................................................22
Section 3.17 Related Party Transactions.................................................22
Section 3.18 Schedule of Termination Benefits...........................................22
Section 3.19 Deposits...................................................................23
Section 3.20 Antitakeover Provisions Inapplicable.......................................23
Section 3.21 Fairness Opinion...........................................................23
Section 3.22 Year 2000..................................................................23
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF NIAGARA BANCORP
<S> <C>
Section 4.01 Organization...............................................................24
Section 4.02 Capitalization.............................................................24
Section 4.03 Authority; No Violation....................................................25
Section 4.04 Consents...................................................................25
Section 4.05 Compliance with Applicable Law.............................................26
Section 4.06 Information to be Supplied.................................................26
Section 4.07 Year 2000..................................................................26
Section 4.08 Financing..................................................................27
ARTICLE V
COVENANTS OF THE PARTIES
Section 5.01 Conduct of CNYF's Business.................................................27
Section 5.02 Access; Confidentiality....................................................30
Section 5.03 Regulatory Matters and Consents............................................31
Section 5.04 Taking of Necessary Action.................................................32
Section 5.05 Certain Agreements.........................................................32
Section 5.06 No Other Bids and Related Matters..........................................34
Section 5.07 Duty to Advise; Duty to Update CNYF Disclosure Schedules...................35
Section 5.08 Conduct of Niagara Bancorp's Business......................................35
Section 5.09 Board and Committee Minutes................................................35
Section 5.10 Undertakings by CNYF and Niagara Bancorp...................................35
Section 5.11 Employee and Termination of Benefits; Directors and Management.............38
Section 5.12 Duty to Advise; Duty to Update Niagara Bancorp's Disclosure Schedule.......39
Section 5.13 Governance and Related Matters.............................................39
ARTICLE VI
CONDITIONS
Section 6.01 Conditions to CNYF's Obligations under this Agreement......................40
Section 6.02 Conditions to Niagara Bancorp's Obligations under this Agreement...........41
Section 6.03 Environmental Condition....................................................42
ARTICLE VII
TERMINATION, WAIVER AND AMENDMENT
Section 7.01 Termination................................................................43
Section 7.02 Effect of Termination......................................................44
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ARTICLE VIII
MISCELLANEOUS
<S> <C>
Section 8.01 Expenses...................................................................44
Section 8.02 Non-Survival of Representations and Warranties.............................44
Section 8.03 Amendment, Extension and Waiver............................................44
Section 8.04 Entire Agreement...........................................................45
Section 8.05 No Assignment..............................................................45
Section 8.06 Notices....................................................................45
Section 8.07 Captions...................................................................46
Section 8.08 Counterparts...............................................................46
Section 8.09 Severability...............................................................46
Section 8.10 Specific Performance.......................................................46
Section 8.11 Governing Law..............................................................46
</TABLE>
EXHIBITS:
Exhibit A Stock Option Agreement
Exhibit B Form of CNYF Voting Agreement
Exhibit 6.1 Form of Opinion of Counsel for Niagara Bancorp
Exhibit 6.2 Form of Tax Opinion of Counsel for Niagara Bancorp
Exhibit 6.3 Form of Opinion of Counsel for CNYF
<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of
December 28, 1999, is by and among Niagara Bancorp, Inc., a Delaware corporation
("Niagara Bancorp"), Niagara Merger Corp, a wholly-owned subsidiary of Niagara
Bancorp incorporated under the laws of the State of Delaware, and CNY Financial
Corporation, a Delaware corporation ("CNYF"). Each of Niagara Bancorp, Niagara
Merger Corp and CNYF is sometimes individually referred to herein as a "party,"
and Niagara Bancorp, Niagara Merger Corp and CNYF are sometimes collectively
referred to herein as the "parties."
RECITALS
WHEREAS, Niagara Bancorp, a registered bank holding company, with
principal offices in Lockport, New York, owns all of the issued and outstanding
capital stock of Lockport Savings Bank, a New York chartered savings bank
("Lockport Savings"), with principal offices in Lockport, New York.
WHEREAS, CNYF, a registered bank holding company, with principal
offices in Cortland, New York, owns all of the issued and outstanding capital
stock of Cortland Savings Bank ("CSB"), a New York chartered savings bank, with
principal offices in Cortland, New York.
WHEREAS, the Boards of Directors of the respective parties hereto deem
it advisable and in the best interests of the respective stockholders to
consummate the business combination transaction contemplated herein in which
CNYF, subject to the terms and conditions set forth herein, shall be merged with
and into Niagara Merger Corp, with CNYF surviving the merger, to be followed by
the merger of CNYF with and into Niagara Bancorp, with Niagara Bancorp surviving
the merger (collectively referred to as the "Merger"), with the result that CSB
shall be, and shall operate as, a wholly-owned subsidiary of Niagara Bancorp;
and
WHEREAS, in connection with the execution of this Agreement, as an
inducement to Niagara Bancorp to enter into this Agreement, CNYF and Niagara
Bancorp have entered into a Stock Option Agreement dated as of even date
herewith pursuant to which CNYF will grant Niagara Bancorp the right to purchase
certain shares of CNYF Common Stock; and
WHEREAS, the parties hereto desire to provide for certain undertakings,
conditions, representations, warranties and covenants in connection with the
Merger, and the other transactions contemplated by this Agreement, and the Stock
Option Agreement (collectively, the "Merger Documents").
NOW, THEREFORE, in consideration of the premises and of the mutual
representations, warranties and covenants herein contained and intending to be
legally bound hereby, the parties hereto do hereby agree as follows:
<PAGE>
ARTICLE I
CERTAIN DEFINITIONS
SECTION 1.01 DEFINITIONS. Except as otherwise provided herein, as used
in this Agreement, the following terms shall have the indicated meanings (such
meanings to be equally applicable to both the singular and plural forms of the
terms defined):
"Affiliate" means, with respect to any Person, any Person who
directly, or indirectly, through one or more intermediaries, controls,
or is controlled by, or is under common control with, such Person and,
without limiting the generality of the foregoing, includes any
executive officer or director of such Person and any Affiliate of such
executive officer or director.
"Agreement" means this agreement, and any amendment or
supplement hereto, which constitutes a "plan of merger" between Niagara
Bancorp, Niagara Merger Corp and CNYF.
"Applications" means the applications for regulatory approval
which are required by the transactions contemplated hereby.
"BIF" means the Bank Insurance Fund administered by the FDIC.
"BHCA" means the Bank Holding Company Act of 1956, as amended.
"Closing Date" means the date determined by Niagara Bancorp,
in its sole discretion, upon five (5) days prior written notice to
CNYF, but in no event later than fifteen (15) days after the last
condition precedent pursuant to this Agreement has been fulfilled or
waived (including the expiration of any applicable waiting period), or
such other date as to which Niagara Bancorp and CNYF shall mutually
agree.
"CNYF Common Stock" means the common stock of CNYF described
in Section 3.02(a).
"CNYF Disclosure Schedules" means the Disclosure Schedules
delivered by CNYF to Niagara Bancorp pursuant to Article III of this
Agreement.
"CNYF Financials" means (i) the audited consolidated financial
statements of CNYF as of December 31,1998 and1997 and for the three
years ended December 31,1998, including the notes thereto, and (ii) the
unaudited interim consolidated financial statements of CNYF as of each
calendar quarter thereafter included in Securities Documents filed by
CNYF.
"CNYF Stock Option Plan" means the CNY Financial Corporation
Stock Option Plan for Directors, Officers and Employees.
2
<PAGE>
"CNYF Regulatory Reports" means the Call Reports of CSB and
accompanying schedules, as filed with the FDIC, for each calendar
quarter beginning with the quarter ended March 31, 1998, through the
Closing Date, and all Annual Reports on Form FR Y-6, any Current Report
on Form FR Y-6A filed with the FRB by CNYF from December 31,1998
through the Closing Date.
"CNYF Subsidiary" means any corporation, 50% or more of the
capital stock of which is owned, either directly or indirectly, by
CNYF, except any corporation the stock of which is held in the ordinary
course of the lending activities of CNYF.
"Code" means the Internal Revenue Code of 1986, as amended.
"Merger" means the merger of CNYF with and into Niagara Merger
Corp, with CNYF surviving the merger, to be followed by the merger of
CNYF, as a wholly-owned subsidiary of Niagara Bancorp, with and into
Niagara Bancorp, with Niagara Bancorp being the surviving corporation.
"Department" means the Banking Department of the State of New
York.
"DGCL" means the Delaware General Corporation Law.
"DOL" means the U.S. Department of Labor.
"Environmental Laws" means any Federal or state law, statute,
rule, regulation, code, order, judgement, decree, injunction, common
law or agreement with any Federal or state governmental authority
relating to (i) the protection, preservation or restoration of the
environment (including air, water vapor, surface water, groundwater,
drinking water supply, surface land, subsurface land, plant and animal
life or any other natural resource), (ii) human health or safety
relating to the presence of Hazardous Material, or (iii) exposure to,
or the use, storage, recycling, treatment, generation, transportation,
processing, handling, labeling, production, release or disposal of,
Hazardous Material, in each case as amended and now in effect.
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated from time to time
thereunder.
"Exchange Agent" means the entity selected by Niagara Bancorp
and agreed to by CNYF, as provided in Section 2.01(b) of this
Agreement.
"FDIA" means the Federal Deposit Insurance Act, as amended.
"FDIC" means the Federal Deposit Insurance Corporation.
3
<PAGE>
"FRB" means the Board of Governors of the Federal Reserve
System.
"GAAP" means generally accepted accounting principles as in
effect at the relevant date and consistently applied.
"Hazardous Material" means any substance (whether solid,
liquid or gas) which is or could be detrimental to human health or
safety or to the environment, currently or hereafter listed, defined,
designated or classified as hazardous, toxic, radioactive or dangerous,
or otherwise regulated, under any Environmental Law, whether by type or
by quantity, including any substance containing any such substance as a
component. Hazardous Material includes, without limitation, any toxic
waste, pollutant, contaminant, hazardous substance, toxic substance,
hazardous waste, special waste, industrial substance, oil or petroleum,
or any derivative or by-product thereof, radon, radioactive material,
asbestos, asbestos-containing material, urea formaldehyde foam
insulation, lead and polychlorinated biphenyl.
"IRC" means the Internal Revenue Code of 1986, as amended.
"IRS" means the Internal Revenue Service.
"Loan Property" shall have the meaning given to such term in
Section 3.14(b) of this Agreement.
"Lockport Savings" means Lockport Savings Bank, Lockport, New
York.
"Material Adverse Effect" shall mean, with respect to CNYF,
any adverse effect on its assets, financial condition or results of
operations which is material to its assets, financial condition or
results of operations on a consolidated basis, except for any material
adverse effect caused by (i) any change in the value of the assets of
CNYF resulting from a change in interest rates generally, (ii) any
individual or combination of changes occurring after the date hereof in
any federal or state law, rule or regulation or in GAAP, which
change(s) affect(s) financial institutions generally, including any
changes affecting the Bank Insurance Fund, or (iii) any action taken by
CNYF or any CNYF Subsidiary at the request of Niagara Bancorp.
"Merger Effective Date" means that date upon which the
certificate of merger as to the merger of CNYF with and into Niagara
Merger Corp is filed with the Delaware Office of the Secretary of
State, or as otherwise stated in the certificate of merger, in
accordance with the of the DGCL.
"Niagara Bancorp Common Stock" has the meaning given to that
term in Section 4.02(a) of this Agreement.
4
<PAGE>
"Niagara Bancorp Disclosure Schedules" means the Disclosure
Schedules delivered by Niagara Bancorp to CNYF pursuant to Article IV
of this Agreement.
"Niagara Bancorp Financials" means (i) the audited
consolidated financial statements of Niagara Bancorp as of December 31,
1998 and 1997 and for the three years ended December 31, 1998,
including the notes thereto, and (ii) the unaudited interim
consolidated financial statements of Niagara Bancorp as of each
calendar quarter thereafter included in Securities Documents filed by
Niagara Bancorp
"Niagara Bancorp Regulatory Reports" means the Call Reports of
Lockport Savings and accompanying schedules, as filed with the FDIC,
for each calendar quarter beginning with the quarter ended March 31,
1999, through the Closing Date, and all Annual Reports on Form FR Y-6,
any Current Report of on Form FR Y-6A filed with the FRB by Niagara
Bancorp from April 17, 1998 through the Closing Date.
"Niagara Bancorp Option" means the option granted to Niagara
Bancorp to acquire shares of CNYF Common Stock pursuant to the Stock
Option Agreement.
"Niagara Bancorp Subsidiary" means any corporation, 50% or
more of the capital stock of which is owned, either directly or
indirectly, by Niagara Bancorp or Lockport Savings, except any
corporation the stock of which is held as security by Lockport Savings
in the ordinary course of its lending activities.
"Participation Facility" shall have the meaning given to such
term in Section 3.14(b) of this Agreement.
"Person" means any individual, corporation, partnership, joint
venture, association, trust or "group" (as that term is defined under
the Exchange Act).
"PRRP" means the CNYF Personnel Recognition and Retention
Plan.
"Proxy Statement" means the proxy statement, together with any
supplements thereto, to be transmitted to holders of CNYF Common Stock
in connection with the transactions contemplated by this Agreement.
"Regulatory Agreement" has the meaning given to that term in
Section 3.11 of this Agreement.
"Regulatory Authority" means any agency or department of any
federal or state government, including without limitation the
Superintendent, the OCC, the FDIC, the FRB, the SEC or the respective
staffs thereof.
"REIT Preferred Stock" means the preferred stock of Cortland
REIT Corp., a New York corporation.
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"Rights" means warrants, options, rights, convertible
securities and other capital stock equivalents which obligate an entity
to issue its securities.
"SBLI" means Savings Bank Life Insurance.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended,
and the rules and regulations promulgated from time to time thereunder.
"Securities Documents" means all registration statements,
schedules, statements, forms, reports, proxy material, and other
documents required to be filed under the Securities Laws.
"Securities Laws" means the Securities Act and the Exchange
Act and the rules and regulations promulgated from time to time
thereunder.
"Stock Option Agreement" means the Stock Option Agreement
dated as of even date herewith pursuant to which CNYF has granted
Niagara Bancorp the right to purchase certain shares of CNYF Common
Stock and which is attached to this Agreement as Exhibit A thereto.
"Subsidiary" means any corporation, 50% or more of the capital
stock of which is owned, either directly or indirectly, by another
entity, except any corporation the stock of which is held as security
by either Niagara Bancorp or CNYF, as the case may be, in the ordinary
course of its lending activities.
"Superintendent" means the Superintendent of Banks of the
State of New York, and where appropriate includes the State of New York
Banking Department and the Banking Board of the State of New York.
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ARTICLE II
THE MERGER AND EXCHANGE OF SHARES
SECTION 2.01 EFFECTS OF MERGER; SURVIVING CORPORATION.
(a) (i) On the Merger Effective Date, Niagara Merger Corp shall
merge with and into CNYF; the separate existence of Niagara Merger Corp shall
cease; CNYF shall be the surviving corporation in the Merger (the "Surviving
Corporation") and a wholly-owned subsidiary of Niagara Bancorp; and all of the
property (real, personal and mixed), rights, powers and duties and obligations
of Niagara Merger Corp shall be taken and deemed to be transferred to and vested
in CNYF, as the Surviving Corporation in the Merger, without further act or
deed; all in accordance with the applicable laws of the State of Delaware.
(ii) On the Merger Effective Date: the Certificate of
Incorporation of the Surviving Corporation shall be amended and restated to read
in its entirety as the Certificate of Incorporation of Niagara Merger Corp, as
in effect immediately prior to the Merger Effective Date; and the Bylaws of the
Surviving Corporation shall be amended and restated to read in their entirety as
the Bylaws of Niagara Merger Corp, as in effect immediately prior to the Merger
Effective Date, until thereafter altered, amended or repealed in accordance with
applicable law.
(iii) On the Merger Effective Date, the directors of Niagara
Merger Corp duly elected and holding office immediately prior to the Effective
Date shall be the directors of the Surviving Corporation in the Merger, each to
hold office until his or her successor is elected and qualified or otherwise in
accordance with the Certificate of Incorporation and Bylaws of the Surviving
Corporation.
(iv) On the Merger Effective Date, the officers of Niagara
Merger Corp duly elected and holding office immediately prior to the Effective
Date shall be the officers of the Surviving Corporation in the Merger, each to
hold office until his or her successor is elected and qualified or otherwise in
accordance with the Certificate of Incorporation and the Bylaws of the Surviving
Corporation.
(b) Notwithstanding any provision of this Agreement to the contrary,
Niagara Bancorp may elect, subject to the filing of all necessary applications
and the receipt of all required regulatory approvals, to modify the structure of
the transactions contemplated hereby, and the parties shall enter into such
alternative transactions, so long as (i) there are no adverse tax consequences
to any of the stockholders, directors or officers of CNYF as a result of such
modification, (ii) the Merger Consideration is not thereby changed in kind or
reduced in amount because of such modification and (iii) such modification will
not be likely to materially delay or jeopardize receipt of any required
regulatory approvals.
SECTION 2.02 CONVERSION OF SHARES. Subject to Section 6.03, at the
Merger Effective Date, by virtue of the Merger and without any action on the
part of CNYF or the holders of shares of CNYF Common Stock:
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(i) Each outstanding share of CNYF Common Stock issued and outstanding
at the Merger Effective Date, except as provided in clause (ii) and (iii) of
this Section, shall cease to be outstanding, shall cease to exist and shall be
converted into the right to receive $18.75 in cash (referred to as the "Merger
Consideration).
(ii) Any shares of CNYF Common Stock which are owned or held by either
party hereto or any of their respective Subsidiaries (other than in a fiduciary
capacity or in connection with debts previously contracted) at the Merger
Effective Date shall cease to exist, the certificates for such shares shall as
promptly as practicable be canceled, such shares shall not be converted into the
Merger Consideration, and no cash or shares of capital stock of Niagara Bancorp
shall be issued or exchanged therefor.
(iii) The Surviving Corporation shall pay for any Dissenters' Shares in
accordance with Section 262 of the DGCL, and the holders thereof shall not be
entitled to receive any Merger Consideration; provided, that if appraisal rights
under Section 262 of the DGCL with respect to any Dissenters' Shares shall have
been effectively withdrawn or lost, such shares will thereupon cease to be
treated as Dissenters' Shares and shall be converted into the right to receive
the Merger Consideration pursuant to this Section 2.02.
(iv) Each share of Niagara Bancorp Common Stock issued and outstanding
immediately before the Merger Effective Date shall remain an outstanding share
of Common Stock of Niagara Bancorp
(v) The holders of certificates representing shares of CNYF Common
Stock (any such certificate being hereinafter referred to as a "Certificate")
shall cease to have any rights as stockholders of CNYF, except such rights, if
any, as they may have pursuant to applicable law.
SECTION 2.03 EXCHANGE PROCEDURES.
(a) As promptly as practicable after the Effective Date, and in any
event within five calendar days of the Merger Effective Date, an Exchange Agent
designated by Niagara Bancorp shall mail to each holder of record of an
outstanding share Certificate or Certificates a Letter of Transmittal containing
instructions for the surrender of the Certificate or Certificates held by such
holder for payment therefor. Upon surrender of the Certificate or Certificates
to the Exchange Agent in accordance with the instructions set forth in the
Letter of Transmittal, such holder shall promptly receive in exchange therefor
the Merger Consideration, without interest thereon. The Exchange Agent shall
send payments within three business days after the receipt of properly submitted
documents. Approval of this Agreement by the stockholders of CNYF shall
constitute authorization for Niagara Bancorp to designate and appoint such
Exchange Agent. Neither Niagara Bancorp nor the Exchange Agent shall be
obligated to deliver the Merger Consideration to a former stockholder of CNYF
until such former stockholder surrenders his Certificate or Certificates or, in
lieu thereof, any such appropriate affidavit of loss and indemnity agreement and
bond as may be reasonably required by Niagara Bancorp. The Exchange Agent in its
agreement shall be obligated to pay the Merger Consideration in accordance with
this Agreement.
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(b) If payment of the Merger Consideration is to be made to a person
other than the person in whose name a Certificate surrendered in exchange
therefore is registered, it shall be a condition of payment that the Certificate
so surrendered shall be properly endorsed (or accompanied by an appropriate
instrument of transfer) and otherwise in proper form for transfer, and that the
person requesting such payment shall pay any transfer or other taxes required by
reason of the payment to a person other than the registered holder of the
Certificate surrendered, or required for any other reason, or shall establish to
the satisfaction of the Exchange Agent that such tax has been paid or is not
payable.
(c) On or prior to the Merger Effective Date, Niagara Bancorp shall
deposit or cause to be deposited, in trust with the Exchange Agent, an amount of
cash equal to the aggregate Merger Consideration that the CNYF stockholders
shall be entitled to receive on the Merger Effective Date pursuant to Section
2.02 hereof.
(d) The payment of the Merger Consideration upon the conversion of CNYF
Common Stock in accordance with the above terms and conditions shall be deemed
to have been issued and paid in full satisfaction of all rights pertaining to
such CNYF Common Stock.
(e) Promptly following the date which is twelve months after the Merger
Effective Date, the Exchange Agent shall deliver to Niagara Bancorp all cash,
certificates and other documents in its possession relating to the transactions
described in this Agreement, and the Exchange Agent's duties shall terminate.
Thereafter, each holder of a Certificate formerly representing shares of CNYF
Common Stock may surrender such Certificate to Niagara Bancorp and (subject to
applicable abandoned property, escheat and similar laws) receive in
consideration therefore the Merger Consideration multiplied by the number of
shares of CNYF Common Stock formerly represented by such Certificate, without
any interest or dividends thereon.
(f) After the close of business on the Merger Effective Date, there
shall be no transfers on the stock transfer books of CNYF of the shares of CNYF
Common Stock which are outstanding immediately prior to the Merger Effective
Date, and the stock transfer books of CNYF shall be closed with respect to such
shares. If, after the Merger Effective Date, Certificates representing such
shares are presented for transfer to the Exchange Agent, they shall be canceled
and exchanged for the Merger Consideration as provided in this Article II.
(g) In the event any certificate for CNYF Common Stock shall have been
lost, stolen or destroyed, the Exchange Agent shall deliver (except as otherwise
provided in Section 2.02(iii)) in exchange for such lost, stolen or destroyed
certificate, upon the making of an affidavit of the fact by the holder thereof,
the cash to be paid in the Merger as provided for herein; provided, however,
that Niagara Bancorp may, in its sole discretion and as a condition precedent to
the delivery thereof, require the owner of such lost, stolen or destroyed
certificate to deliver a bond in such reasonable sum as Niagara Bancorp as
indemnity against any claim that may be made against CNYF, Niagara Bancorp or
any other party with respect to the certificate alleged to have been lost,
stolen or destroyed.
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(h) Niagara Bancorp is hereby authorized to adopt additional rules and
regulations with respect to the matters referred to in this Section 2.03 not
inconsistent with the provisions of this Agreement.
SECTION 2.04 STOCK OPTIONS AND PRRP SHARES. On the Merger Effective
Date, each option issued and outstanding that is unexercised pursuant to CNYF's
Stock Option Plan (options to purchase 340,690 shares, subject to reduction upon
the exercise of outstanding options) shall convert into the right to receive
cash in an amount equal to the Merger Consideration minus the exercise price of
the option, multiplied by the number of shares covered by the option. On the
Merger Effective Date, CNYF shall provide Niagara Bancorp with a schedule of all
outstanding options not exercised, the exercise price thereof, the optionee's
mailing address, and the optionees' acknowledgment that the payment pursuant to
this Section 2.04 shall be in full satisfaction of all rights under the CNYF
Stock Option Plan and any option award agreement entered into thereunder. Within
three business days after the Merger Effective Date, Niagara Bancorp shall pay
to the holders of the options, by mailing a bank check for the same to the
applicable address shown on the schedule, the amount payable with respect to the
option as set forth in this paragraph, net of any applicable withholding taxes.
Such payments shall be in full satisfaction of all the optionee's rights with
respect to the option.
All shares awarded pursuant to the PRRP which have not yet been
distributed by the PRRP trust to the beneficial owners thereof shall, on the
Merger Effective Date, convert into the right to receive the Merger
Consideration and shall be treated in the same manner as all other issued and
outstanding shares. CNYF shall take all actions necessary so that as of the
Merger Effective Date, or as soon thereafter as permitted under the PRRP trust,
all shares held by the PRRP trust which are not yet the subject of awards shall
be returned to CNYF or the Surviving Corporation and no Merger Consideration
shall be payable with respect thereto, except to the extent the Niagara Bancorp
reasonably directs CNYF to do otherwise.
CNYF hereby represents and warrants to Niagara Bancorp that the maximum
number of shares of CNYF Common Stock subject to issuance pursuant to the
exercise of stock options issued and outstanding under CNYF Stock Option Plans
is not and shall not be at or prior to the Effective Time more than 340,690 and
the maximum number of shares awarded pursuant to the PRRP is not and shall not
be at or prior to the Effective Time more than 181,278 shares.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES OF CNYF
CNYF represents and warrants to Niagara Bancorp that the statements
contained in this Article III are correct and complete as of the date of this
Agreement and will be correct and complete as of the Closing Date in all
material respects (as though made then and as though the Closing Date were
substituted for the date of this Agreement throughout this Article III), except
as set forth in the CNYF Disclosure Schedules delivered by CNYF to Niagara
Bancorp on the date hereof. CNYF has made a good faith effort to ensure that the
disclosure on each schedule of the CNYF Disclosure Schedules corresponds to the
section reference herein. However, for purposes of the CNYF Disclosure
Schedules, any item disclosed on any schedule therein is deemed to be fully
disclosed with respect to all schedules under which such item may be relevant.
SECTION 3.01 ORGANIZATION.
(a) CNYF is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware, and is duly registered as a
bank holding company under the Bank Holding Company Act of 1956, as amended (the
"BHCA"). CNYF has full corporate power and authority to carry on its business as
now conducted and is duly licensed or qualified to do business in the states of
the United States and foreign jurisdictions where its ownership or leasing of
property or the conduct of its business requires such qualification.
(b) CSB is a savings bank organized, validly existing and in good
standing under the laws of the State of New York. Except as set forth in CNYF
DISCLOSURE SCHEDULE 3.01(b), CSB is the only CNYF Subsidiary. The deposits of
CSB are insured by the FDIC through the BIF to the fullest extent permitted by
law, and all premiums and assessments required to be paid in connection
therewith have been paid when due by CSB. CSB is a member in good standing of
the Federal Home Loan Bank of New York and owns the requisite amount of stock
therein. Each other CNYF Subsidiary is a corporation duly organized, validly
existing and in good standing under the laws of its jurisdiction of
incorporation or organization. CNYF has heretofore made available to Niagara
Bancorp a complete and correct copy of the Certificate of Incorporation and
By-laws or comparable organizational documents, each as amended to the date
hereof, of each of its Subsidiaries.
(c) Except as disclosed in CNYF DISCLOSURE SCHEDULE 3.01(c), the
respective minute books of CNYF and each CNYF Subsidiary accurately record, in
all material respects, all material corporate actions of their respective
shareholders and boards of directors (including committees) through the date of
this Agreement. The CSB SBLI Department and its employees have all licenses
required in order to conduct the business of the SBLI Department as presently
conducted. Any surplus accounts required to be maintained by the Savings Bank
Life Insurance Fund of New York are properly maintained.
(d) Prior to the date of this Agreement, CNYF has delivered to Niagara
Bancorp true and correct copies of the certificate of incorporation and bylaws
of CNYF and CSB.
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SECTION 3.02 CAPITALIZATION.
(a) The authorized capital stock of the Company consists of 18,000,000
shares of Common Stock, $.01 par value per share ("CNYF Common Stock"), and
2,000,000 shares of Preferred Stock, par value $.01 per share ("CNYF Preferred
Stock"). There are 4,601,373 shares of CNYF Common Stock validly issued and
outstanding, all of which are fully paid and non-assessable, which shares
include 32,988 shares which the PRRP Trust owns but which have not yet awarded
to PRRP participants. No shares of CNYF Preferred Stock have been issued or are
outstanding. Neither CNYF nor any CNYF Subsidiary has or is bound by any Right
of any character relating to the purchase, sale or issuance or voting of, or
right to receive dividends or other distributions on, any shares of CNYF Common
Stock, or any other security of CNYF or any securities representing the right to
vote, purchase or otherwise receive any shares of CNYF Common Stock or any other
security of CNYF, other than shares issuable under the Niagara Bancorp Option
and other than as set forth in reasonable detail in the CNYF DISCLOSURE SCHEDULE
3.02(a). CNYF DISCLOSURE SCHEDULE 3.02(a) sets forth: the name of each holder of
options to purchase CNYF Common Stock, the number of shares each such individual
may acquire pursuant to the exercise of such options, and the exercise price
relating to the options held; and the name of each recipient of an award under
the PRRP, the number of unvested shares subject to such award, and the vesting
schedule.
(b) CNYF owns all of the capital stock of CSB, free and clear of any
lien or encumbrance. Except for the CNYF Subsidiaries, and as set forth in CNYF
DISCLOSURE SCHEDULE 3.02(b), CNYF does not possess, directly or indirectly, any
material equity interest in any corporation, except for equity interests held in
the investment portfolios of CNYF Subsidiaries, equity interests held by CNYF
Subsidiaries in a fiduciary capacity, equity interests held in connection with
the lending activities of CNYF Subsidiaries, and equity interests held as of the
date of this Agreement by CNYF as passive investments not representing 5% or
more of any class of stock of any issuer. Except as disclosed in the CNYF
DISCLOSURE SCHEDULE 3.02(b), all the outstanding shares of capital stock of each
CNYF Subsidiary are validly issued, fully paid and non-assessable and are owned
by CNYF or by a wholly-owned subsidiary of CNYF, free and clear of any Liens.
There are no existing options, warrants, calls or other rights, agreements or
commitments of any character relating to the sale, issuance or voting of any
shares of the issued or unissued capital stock of any CNYF Subsidiary which have
been issued, granted or entered into by CNYF or any of its Subsidiaries.
(c) To CNYF's knowledge, no Person or "group" (as that term is used in
Section 13(d)(3) of the Exchange Act), is the beneficial owner (as defined in
Section 13(d) of the Exchange Act) of 5% or more of the outstanding shares of
CNYF Common Stock, except as disclosed in the CNYF DISCLOSURE SCHEDULE 3.02(c).
SECTION 3.03 AUTHORITY; NO VIOLATION.
(a) CNYF has full corporate power and authority to execute and deliver
this Agreement and to consummate the transactions contemplated hereby. The
execution and delivery of this Agreement by CNYF and the completion by CNYF of
the transactions contemplated hereby have been duly and validly approved by the
Board of Directors of CNYF and, except for approval of the shareholders of CNYF,
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no other corporate proceedings on the part of CNYF are necessary to complete the
transactions contemplated hereby. This Agreement has been duly and validly
executed and delivered by CNYF and, subject to approval by the shareholders of
CNYF and receipt of the required approvals of Regulatory Authorities described
in Section 4.04 hereof, constitutes the valid and binding obligation of CNYF,
enforceable against CNYF in accordance with its terms, subject to applicable
bankruptcy, insolvency and similar laws affecting creditors' rights generally,
and as to CSB, the conservatorship or receivership provisions of the FDIA, and
subject, as to enforceability, to general principles of equity.
(b) (A) The execution and delivery of this Agreement by CNYF, (B)
subject to receipt of approvals from the Regulatory Authorities referred to in
Section 4.04 hereof and CNYF's and Niagara Bancorp's compliance with any
conditions contained therein, the consummation of the transactions contemplated
hereby, and (C) compliance by CNYF or CSB with any of the terms or provisions
hereof will not (i) conflict with or result in a breach of any provision of the
certificate of incorporation or bylaws of CNYF or any CNYF Subsidiary or the
charter and bylaws of CSB; (ii) violate any statute, code, ordinance, rule,
regulation, judgment, order, writ, decree or injunction applicable to CNYF or
any CNYF Subsidiary or any of their respective properties or assets; or (iii)
violate, conflict with, result in a breach of any provisions of, constitute a
default (or an event which, with notice or lapse of time, or both, would
constitute a default), under, result in the termination of, accelerate the
performance required by, or result in a right of termination or acceleration or
the creation of any lien, security interest, charge or other encumbrance upon
any of the properties or assets of CNYF or CSB under, any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, deed of trust,
license, lease, agreement or other investment or obligation to which CNYF or CSB
is a party, or by which they or any of their respective properties or assets may
be bound or affected.
SECTION 3.04 CONSENTS. Except for the consents, waivers, approvals, and
filings from or with the Regulatory Authorities referred to in Section 4.04
hereof and compliance with any conditions contained therein, and the approval of
this Agreement by the requisite vote of the shareholders of CNYF, no consents,
waivers or approvals of, or filings or registrations with, any governmental
authority are necessary, and, to CNYF's knowledge, no consents, waivers or
approvals of, or filings or registrations with, any other third parties are
necessary, in connection with (a) the execution and delivery of this Agreement
by CNYF, and (b) the completion by CNYF or CSB of the transactions contemplated
hereby. CNYF has no reason to believe that (i) any required consents or
approvals will not be received, or that (ii) any public body or authority, the
consent or approval of which is not required or any filing with which is not
required, will object to the completion of the transactions contemplated by this
Agreement.
SECTION 3.05 FINANCIAL STATEMENTS.
(a) CNYF has previously delivered to Niagara Bancorp the CNYF
Regulatory Reports. The CNYF Regulatory Reports have been, or will be, prepared
in all material respects in accordance with applicable regulatory accounting
principles and practices throughout the periods covered by such statements, and
fairly present, or will fairly present in all material respects, the
consolidated financial position, results of operations and changes in
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shareholders' equity of CNYF as of and for the periods ended on the dates
thereof, in accordance with applicable regulatory accounting principles applied
on a consistent basis.
(b) CNYF has previously delivered to Niagara Bancorp the CNYF
Financials. The CNYF Financials have been, or will be, prepared in accordance
with GAAP, and (including the related notes where applicable) fairly present, or
will fairly present, in each case in all material respects (subject in the case
of the unaudited interim statements to normal year-end adjustments), the
consolidated financial position, results of operations and cash flows of CNYF
and the CNYF Subsidiaries as of and for the respective periods ending on the
dates thereof, in accordance with GAAP applied on a consistent basis during the
periods involved, except as indicated in the notes thereto, or in the case of
unaudited statements, as permitted by Form 10-Q.
(c) At the date of each balance sheet included in the CNYF Financials
or the CNYF Regulatory Reports, CNYF did not have, or will not have any
liabilities, obligations or loss contingencies of any nature (whether absolute,
accrued, contingent or otherwise) of a type required to be reflected in such
CNYF Financials or CNYF Regulatory Reports or in the footnotes thereto which are
not fully reflected or reserved against therein or fully disclosed in a footnote
thereto, except for liabilities, obligations and loss contingencies which are
not material individually or in the aggregate and which are incurred in the
ordinary course of business, consistent with past practice and except for
liabilities, obligations and loss contingencies which are within the subject
matter of a specific representation and warranty herein and subject, in the case
of any unaudited statements, to normal, recurring audit adjustments and the
absence of footnotes.
SECTION 3.06 TAXES. CNYF and the CNYF Subsidiaries are members of the
same affiliated group within the meaning of IRC Section 1504(a). CNYF has duly
filed all federal, state and material local tax returns required to be filed by
or with respect to CNYF and all CNYF Subsidiaries on or prior to the Closing
Date (all such returns being accurate and correct in all material respects) and
has duly paid or will pay, or made or will make, provisions for the payment of
all material federal, state and local taxes which have been incurred by or are
due or claimed to be due from CNYF and any CNYF Subsidiary by any taxing
authority or pursuant to any written tax sharing agreement on or prior to the
Closing Date other than taxes or other charges which (i) are not delinquent,
(ii) are being contested in good faith, or (iii) have not yet been fully
determined. As of the date of this Agreement, there is no audit examination,
deficiency assessment, tax investigation or refund litigation with respect to
any taxes of CNYF or any of its Subsidiaries, and no claim has been made by any
authority in a jurisdiction where CNYF or any of its Subsidiaries do not file
tax returns that CNYF or any such Subsidiary is subject to taxation in that
jurisdiction. Except as set forth in CNYF DISCLOSURE SCHEDULE 3.06, CNYF and its
Subsidiaries have not executed an extension or waiver of any statute of
limitations on the assessment or collection of any material tax due that is
currently in effect. CNYF and each of its Subsidiaries has withheld and paid all
taxes required to have been withheld and paid in connection with amounts paid or
owing to any employee, independent contractor, creditor, stockholder or other
third party, and CNYF and each of its Subsidiaries has timely complied with all
applicable information reporting requirements under Part III, Subchapter A of
Chapter 61 of the Code and similar applicable state and local information
reporting requirements in all material respects.
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SECTION 3.07 NO MATERIAL ADVERSE EFFECT. CNYF and the CNYF
Subsidiaries, taken as a whole, have not suffered any Material Adverse Effect
since December 31, 1998.
SECTION 3.08 CONTRACTS.
(a) Except as set forth in CNYF DISCLOSURE SCHEDULE 3.08(a), neither
CNYF nor any CNYF Subsidiary is a party to or subject to: (i) any employment,
consulting or severance contract or material arrangement with any past or
present officer, director or employee of CNYF or any CNYF Subsidiary, except for
"at will" arrangements; (ii) any plan, material arrangement or contract
providing for bonuses, pensions, options, deferred compensation, retirement
payments, profit sharing or similar material arrangements for or with any past
or present officers, directors or employees of CNYF or any CNYF Subsidiary;
(iii) any collective bargaining agreement with any labor union relating to
employees of CNYF or any CNYF Subsidiary; (iv) any agreement which by its terms
limits the payment of dividends by CNYF; (v) any instrument evidencing or
related to material indebtedness for borrowed money whether directly or
indirectly, by way of purchase money obligation, conditional sale, lease
purchase, guaranty or otherwise, in respect of which CNYF or any CNYF Subsidiary
is an obligor to any person, which instrument evidences or relates to
indebtedness other than deposits, repurchase agreements, Federal Home Loan Bank
of New York advances, bankers' acceptances, and "treasury tax and loan" accounts
established in the ordinary course of business and transactions in "federal
funds" or which contains financial covenants or other restrictions (other than
those relating to the payment of principal and interest when due) which would be
applicable on or after the Closing Date to Niagara Bancorp or any Niagara
Bancorp Subsidiary; or (vi) any contract (other than this Agreement) limiting
the freedom, in any material respect, of CNYF or CSB to engage in any type of
banking or bank-related business which CNYF is permitted to engage in under
applicable law as of the date of this Agreement.
(b) True and correct copies of agreements, plans, contracts,
arrangements and instruments referred to in Section 3.08(a), have been provided
to Niagara Bancorp on or before the date hereof, are listed on CNYF DISCLOSURE
SCHEDULE 3.08(a) and are in full force and effect on the date hereof and neither
CNYF nor any CNYF Subsidiary (nor, to the knowledge of CNYF, any other party to
any such contract, plan, arrangement or instrument) has materially breached any
provision of, or is in default in any respect under any term of, any such
contract, plan, arrangement or instrument. Except as set forth in the CNYF
DISCLOSURE SCHEDULE 3.08(b), no party to any material contract, plan,
arrangement or instrument will have the right to terminate any or all of the
provisions of any such contract, plan, arrangement or instrument as a result of
the execution of, and the transactions contemplated by, this Agreement. Except
as set forth in CNYF DISCLOSURE SCHEDULE 3.08(b), none of the employees
(including officers) of CNYF, possess the right to terminate their employment as
a result of the execution of this Agreement. Except as set forth in CNYF
DISCLOSURE SCHEDULE 3.08(b), no plan, contract, employment agreement,
termination agreement, or similar agreement or arrangement to which CNYF or any
CNYF Subsidiary is a party or under which CNYF or any CNYF Subsidiary may be
liable contains provisions which permit an employee or independent contractor to
terminate it without cause and continue to accrue future benefits thereunder.
Except as set forth in CNYF DISCLOSURE SCHEDULE 3.08(b), no such agreement,
plan, contract, or arrangement (x) provides for acceleration in the vesting of
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benefits or payments due thereunder upon the occurrence of a change in ownership
or control of CNYF or any CNYF Subsidiary absent the occurrence of a subsequent
event; or (y) requires CNYF or any CNYF Subsidiary to provide a benefit in the
form of CNYF Common Stock or determined by reference to the value of CNYF Common
Stock. Except as set forth in CNYF DISCLOSURE SCHEDULE 3.08(b), no such
agreement, plan or arrangement with respect to officers or directors of CNYF, or
to CNYF's knowledge, to its employees, provides for benefits which will cause an
"excess parachute payment" or the disallowance of a federal income tax deduction
under IRC Section 280G.
SECTION 3.09 OWNERSHIP OF PROPERTY; INSURANCE COVERAGE.
(a) Except as disclosed in CNYF DISCLOSURE SCHEDULE 3.09, CNYF and the
CNYF Subsidiaries have good and, as to real property, marketable title to all
material assets and properties owned by CNYF or any CNYF Subsidiary in the
conduct of their businesses, whether such assets and properties are real or
personal, tangible or intangible, including assets and property reflected in the
balance sheets contained in the CNYF Regulatory Reports and in the CNYF
Financials or acquired subsequent thereto (except to the extent that such assets
and properties have been disposed of in the ordinary course of business, since
the date of such balance sheets), subject to no material encumbrances, liens,
mortgages, security interests or pledges, except (i) those items which secure
liabilities for public or statutory obligations or any discount with, borrowing
from or other obligations to any Federal Home Loan Bank, inter-bank credit
facilities, or any transaction by a CNYF Subsidiary acting in a fiduciary
capacity, (ii) statutory liens for amounts not yet delinquent or which are being
contested in good faith, and (iii) items permitted under Article V. CNYF and the
CNYF Subsidiaries, as lessee, have the right under valid and subsisting leases
of real and material personal properties used by CNYF and its Subsidiaries in
the conduct of their businesses to occupy or use all such leased properties as
presently occupied and used by each of them. Except as disclosed in CNYF
DISCLOSURE SCHEDULE 3.09(a), such existing leases and commitments to lease
constitute or will constitute operating leases for both tax and financial
accounting purposes and the lease expense and minimum rental commitments with
respect to such leases and lease commitments are as disclosed in the Notes to
the CNYF Financials.
(b) With respect to all material agreements pursuant to which CNYF or
any CNYF Subsidiary has purchased securities subject to an agreement to resell,
if any, CNYF or such CNYF Subsidiary, as the case may be, has a lien or security
interest (which to CNYF's knowledge is a valid, perfected first lien) in the
securities or other collateral securing the repurchase agreement, and the value
of such collateral equals or exceeds the amount of the debt secured thereby.
(c) CNYF and each CNYF Subsidiary currently maintains insurance
considered by CNYF to be reasonable for their respective operations and similar
in scope and coverage to that customarily maintained by other businesses
similarly engaged in a similar location, in accordance with good business
practice. CNYF has not received notice from any insurance carrier that (i) such
insurance will be canceled or that coverage thereunder will be reduced or
eliminated, or (ii) premium costs with respect to such policies of insurance
will be substantially increased. Except as disclosed in CNYF DISCLOSURE SCHEDULE
3.09(c), there are presently no material claims pending under such policies of
insurance and no notices have been given by CNYF under such policies. All such
insurance is valid and enforceable and in full force and effect, and within the
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last three years CNYF has received each type of insurance coverage for which it
has applied and during such periods has not been denied indemnification for any
material claims submitted under any of its insurance policies.
SECTION 3.10 LEGAL PROCEEDINGS. Except as disclosed in CNYF DISCLOSURE
SCHEDULE 3.10, neither CNYF nor any CNYF Subsidiary is a party to any, and there
are no pending or, to the best of CNYF's knowledge, threatened legal,
administrative, arbitration or other proceedings, claims (whether asserted or
unasserted), actions or governmental investigations or inquiries of any nature
(i) against CNYF or any CNYF Subsidiary, (ii) to which CNYF or any CNYF
Subsidiary's assets are or may be subject, (iii) challenging the validity or
propriety of any of the transactions contemplated by this Agreement, or (iv)
which could adversely affect the ability of CNYF to perform under this
Agreement, except for any proceedings, claims, actions, investigations or
inquiries referred to in clauses (i) or (ii) which, if adversely determined,
individually or in the aggregate, could not be reasonably expected to have a
Material Adverse Effect on CNYF and the CNYF Subsidiaries, taken as a whole.
SECTION 3.11 COMPLIANCE WITH APPLICABLE LAW.
(a) CNYF and the CNYF Subsidiaries hold all licenses, franchises,
permits and authorizations necessary for the lawful conduct of their respective
businesses under, and have complied in all material respects with, applicable
laws, statutes, orders, rules or regulations of any federal, state or local
governmental authority relating to them, other than where such failure to hold
or such noncompliance will neither result in a limitation in any material
respect on the conduct of their respective businesses nor otherwise have a
Material Adverse Effect on CNYF and the CNYF Subsidiaries, taken as a whole.
CNYF and its Subsidiaries, directly or indirectly, own, or are licensed or
otherwise possess legally enforceable rights to use, all patents, trademarks,
trade names, service marks, copyrights and any applications therefor,
technology, know-how and tangible or intangible proprietary information or
material that are material to the business of CNYF and its Subsidiaries.
(b) Except as disclosed in CNYF DISCLOSURE SCHEDULE 3.11(b), neither
CNYF nor any CNYF Subsidiary has received any notification or communication from
any Regulatory Authority (i) asserting that CNYF or any CNYF Subsidiary is not
in material compliance with any of the statutes, regulations or ordinances which
such Regulatory Authority enforces; (ii) threatening to revoke any license,
franchise, permit or governmental authorization which is material to CNYF or any
CNYF Subsidiary; (iii) requiring or threatening to require CNYF or any CNYF
Subsidiary, or indicating that CNYF or any CNYF Subsidiary may be required, to
enter into a cease and desist order, agreement or memorandum of understanding or
any other agreement with any federal or state governmental agency or authority
which is charged with the supervision or regulation of banks or engages in the
insurance of bank deposits restricting or limiting, or purporting to restrict or
limit, in any material respect the operations of CNYF or any CNYF Subsidiary,
including without limitation any restriction on the payment of dividends; or
(iv) directing, restricting or limiting, or purporting to direct, restrict or
limit, in any manner the operations of CNYF or any CNYF Subsidiary, including
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without limitation any restriction on the payment of dividends (any such notice,
communication, memorandum, agreement or order described in this sentence is
hereinafter referred to as a "Regulatory Agreement"). Neither CNYF nor any CNYF
Subsidiary has consented to or entered into any currently effective Regulatory
Agreement, except as set forth in CNYF DISCLOSURE SCHEDULE 3.11. The most recent
regulatory rating given to CSB as to compliance with the CRA is satisfactory or
better.
SECTION 3.12 ERISA.
(a) CNYF DISCLOSURE SCHEDULE 3.12 contains a complete and accurate list
of all pension, retirement, stock option, stock purchase, stock ownership,
savings, stock appreciation right, profit sharing, deferred compensation,
consulting, bonus, group insurance, severance and other benefit plans,
contracts, agreements and arrangements, including, but not limited to, "employee
benefit plans," as defined in Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), incentive and welfare policies,
contracts, plans and arrangements and all trust agreements related thereto with
respect to any present or former directors, officers or other employees of CNYF
or any of its Subsidiaries (hereinafter collectively referred to as the "CNYF
Employee Plans"). If the plan, contract, agreement or arrangement is funded
through a trust or third party funding vehicle, such as an insurance contract, a
copy of the trust or other funding arrangement (including all amendments
thereto) and the latest financial statements thereof have been provided to
Niagara Bancorp.
All of the CNYF Employee Plans comply in all material respects with all
applicable requirements of ERISA, the IRC and other applicable laws; there has
occurred no "prohibited transaction" (as defined in Section 406 of ERISA or
Section 4975 of the IRC) which is likely to result in the imposition of any
penalties or taxes under Section 502(i) of ERISA or Section 4975 of the IRC upon
CNYF or any of its Subsidiaries. No liability to the PBGC has been or is
expected by CNYF or any of its Subsidiaries to be incurred with respect to any
CNYF Employee Plan which is subject to Title IV of ERISA, or with respect to any
"single-employer plan" (as defined in Section 4001(a) of ERISA)(" CNYF Pension
Plan") currently or formerly maintained by CNYF or any entity which is
considered one employer with CNYF under Section 4001(b)(1) of ERISA or Section
414 of the IRC (an "ERISA Affiliate"). No CNYF Pension Plan had an "accumulated
funding deficiency" (as defined in Section 302 of ERISA), whether or not waived,
as of the last day of the end of the most recent plan year ending prior to the
date hereof; the fair market value of the assets of each CNYF Pension Plan
exceeds the present value of the "benefit liabilities" (as defined in Section
4001(a)(16) of ERISA) under such CNYF Pension Plan as of the end of the most
recent plan year with respect to the respective CNYF Pension Plan ending prior
to the date hereof, calculated on the basis of the actuarial assumptions used in
the most recent actuarial valuation for such CNYF Pension Plan as of the date
hereof; and no notice of a "reportable event" (as defined in Section 4043 of
ERISA) for which the 30-day reporting requirement has not been waived has been
required to be filed for any CNYF Pension Plan within the 12-month period ending
on the date hereof. Neither CNYF nor any of its Subsidiaries has provided, or is
required to provide, security to any CNYF Pension Plan or to any single-employer
plan of an ERISA Affiliate pursuant to Section 401(a)(29) of the IRC. Neither
CNYF, its Subsidiaries, nor any ERISA Affiliate has contributed to any
"multiemployer plan," as defined in Section 3(37) of ERISA, on or after
September 26, 1980.
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(b) Each CNYF Employee Plan that is an "employee pension benefit plan"
(as defined in Section 3(2) of ERISA) and which is intended to be qualified
under Section 401(a) of the IRC (a "CNYF Qualified Plan") has received a
favorable determination letter from the Internal Revenue Service ("IRS"), and
CNYF and its Subsidiaries are not aware of any circumstances likely to result in
revocation of any such favorable determination letter. There is no pending or,
to CNYF's knowledge, threatened litigation, administrative action or proceeding
relating to any CNYF Employee Plan. There has been no announcement or commitment
by CNYF or any of its Subsidiaries to create an additional CNYF Employee Plan,
or to amend any CNYF Employee Plan, except for amendments required by applicable
law which do not materially increase the cost of such CNYF Employee Plan; and,
except as specifically identified in CNYF DISCLOSURE SCHEDULES, CNYF and its
Subsidiaries do not have any obligations for post-retirement or post-employment
benefits under any CNYF Employee Plan that cannot be amended or terminated upon
60 days' notice or less without incurring any liability thereunder, except for
coverage required by Part 6 of Title I of ERISA or Section 4980B of the IRC, or
similar state laws, the cost of which is borne by the insured individuals. With
respect to each CNYF Employee Plan, CNYF has supplied to Niagara Bancorp a true
and correct copy of (A) the annual report on the applicable form of the Form
5500 series filed with the IRS for the most recent three plan years, if required
to be filed, (B) such CNYF Employee Plan, including amendments thereto, (C) each
trust agreement, insurance contract or other funding arrangement relating to
such CNYF Employee Plan, including amendments thereto, (D) the most recent
summary plan description and summary of material modifications thereto for such
CNYF Employee Plan, if the CNYF Employee Plan is subject to Title I of ERISA,
(E) the most recent actuarial report or valuation if such CNYF Employee Plan is
a CNYF Pension Plan and any subsequent changes to the actuarial assumptions
contained therein and (F) the most recent determination letter issued by the IRS
if such Employee Plan is a Qualified Plan.
(c) No compensation payable by CNYF and any CNYF Subsidiary to any of
their employees under any CNYF Employee Plan (including by reason of the
transactions contemplated hereby) will be subject to disallowance under Section
162(m) of the IRC.
SECTION 3.13 BROKERS, FINDERS AND FINANCIAL ADVISORS. Except for CNYF's
engagement of CIBC World Markets ("CIBC") in connection with transactions
contemplated by this Agreement, neither CNYF nor any CNYF Subsidiary, nor any of
their respective officers, directors, employees or agents, has employed any
broker, finder or financial advisor in connection with the transactions
contemplated by this Agreement, or, except for its commitments disclosed in CNYF
DISCLOSURE SCHEDULE 3.13, incurred any liability or commitment for any fees or
commissions to any such person in connection with the transactions contemplated
by this Agreement, which has not been reflected in the CNYF Financials.
SECTION 3.14 ENVIRONMENTAL MATTERS.
(a) With respect to CNYF and each of its Subsidiaries, and except as
set forth in CNYF DISCLOSURE SCHEDULE 3.14:
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(i) Each of CNYF and its Subsidiaries, the Participation
Facilities, and, to CNYF's knowledge, the Loan Properties are, and have been, in
substantial compliance with, and are not liable under, any Environmental Laws;
(ii) There is no suit, claim, action, demand, executive or
administrative order, directive, investigation or proceeding pending or, to
CNYF's knowledge, threatened, before any court, governmental agency or board or
other forum against it or any of its Subsidiaries or any Participation Facility
(x) for alleged noncompliance (including by any predecessor) with, or liability
under, any Environmental Law or (y) relating to the presence of or release (as
defined herein) into the environment of any Hazardous Material (as defined
herein), whether or not occurring at or on a site owned, leased or operated by
it or any of its Subsidiaries or any Participation Facility;
(iii) There is no suit, claim, action, demand, executive or
administrative order, directive, investigation or proceeding pending or, to
CNYF's knowledge threatened, before any court, governmental agency or board or
other forum relating to or against any Loan Property (or CNYF or any of its
Subsidiaries in respect of such Loan Property) (x) relating to alleged
noncompliance (including by any predecessor) with, or liability under, any
Environmental Law or (y) relating to the presence of or release into the
environment of any Hazardous Material, whether or not occurring at or on a site
owned, leased or operated by a Loan Property;
(iv) To CNYF's knowledge, the properties currently owned or
operated by CNYF or any of its Subsidiaries (including, without limitation,
soil, groundwater or surface water on, under or adjacent to the properties, and
buildings thereon) are not contaminated with and do not otherwise contain any
Hazardous Material other than as permitted under applicable Environmental Law;
(v) Neither CNYF nor any of its Subsidiaries has received any
notice, demand letter, executive or administrative order, directive or request
for information from any federal, state, local or foreign governmental entity or
any third party indicating that it may be in violation of, or liable under, any
Environmental Law;
(vi) To CNYF's knowledge, there are no underground storage
tanks on, in or under any properties owned or operated by CNYF or any of its
Subsidiaries or any Participation Facility, and no underground storage tanks
have been closed or removed from any properties owned or operated by CNYF or any
of its Subsidiaries or any Participation Facility; and
(vii) To CNYF's knowledge, during the period of (s) CNYF's or
any of its Subsidiaries' ownership or operation of any of their respective
current properties or (t) CNYF's or any of its Subsidiaries' participation in
the management of any Participation Facility, there has been no contamination by
or release of Hazardous Materials in, on, under or affecting such properties. To
CNYF's knowledge, prior to the period of (x) CNYF's or any of its Subsidiaries'
ownership or operation of any of their respective current properties or (y)
CNYF's or any of its Subsidiaries' participation in the management of any
Participation Facility, there was no contamination by or release of Hazardous
Material in, on, under or affecting such properties.
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(b) "Loan Property" means any property in which the applicable party
(or a Subsidiary of it) holds a security interest, and, where required by the
context, includes the owner or operator of such property, but only with respect
to such property. "Participation Facility" means any facility in which the
applicable party (or a Subsidiary of it) participates in the management
(including all property held as trustee or in any other fiduciary capacity) and,
where required by the context, includes the owner or operator of such property,
but only with respect to such property.
SECTION 3.15 LOAN PORTFOLIO.
(a) With respect to each loan owned by CNYF or its Subsidiaries in
whole or in part (each, a "Loan"), to the best knowledge of CNYF:
(i) the note and the related security documents are each legal,
valid and binding obligations of the maker or obligor thereof, enforceable
against such maker or obligor in accordance with their terms;
(ii) neither CNYF nor any of its Subsidiaries, nor any prior holder
of a Loan, has modified the note or any of the related security documents in any
material respect or satisfied, canceled or subordinated the note or any of the
related security documents except as otherwise disclosed by documents in the
applicable Loan file;
(iii) CNYF or a Subsidiary is the sole holder of legal and
beneficial title to each Loan (or CNYF's applicable participation interest, as
applicable), except as otherwise referenced on the books and records of CNYF;
(iv) the note and the related security documents, copies of which
are included in the Loan files, are true and correct copies of the documents
they purport to be and have not been suspended, amended, modified, canceled or
otherwise changed except as otherwise disclosed by documents in the applicable
Loan file;
(v) there is no pending or threatened condemnation proceeding or
similar proceeding affecting the property that serves as security for a Loan,
except as otherwise referenced on the books and records of CNYF;
(vi) there is no litigation or proceeding pending or threatened
relating to the property that serves as security for a Loan that would have a
Material Adverse Effect upon the related Loan; and
(vii) with respect to a Loan held in the form of a participation,
the participation documentation is legal, valid, binding and enforceable.
(b) The allowance for possible losses reflected in CNYF's audited
statement of condition at December 31, 1998 was, and the allowance for possible
losses shown on the balance sheets in CNYF's Securities Documents for periods
ending after December 31, 1998 have been and will be, adequate, as of the dates
thereof, under GAAP.
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(c) CNYF DISCLOSURE SCHEDULE 3.15 sets forth by category the amounts of
all loans, leases, advances, credit enhancements, other extensions of credit,
commitments and interest-bearing assets of CNYF and its Subsidiaries that have
been classified (whether regulatory or internal) as "Special Mention,"
"Substandard," "Doubtful," "Loss" or words of similar import, and CNYF and its
Subsidiaries shall promptly after the end of any month inform Niagara Bancorp of
any such classification arrived at any time after the date hereof. The other
real estate owned ("OREO") included in any non-performing assets of CNYF or any
of its Subsidiaries is carried net of reserves at the lower of cost or fair
value, less estimated selling costs, based on current independent appraisals or
evaluations or current management appraisals or evaluations; provided, however,
that "current" shall mean within the past 12 months.
SECTION 3.16 SECURITIES DOCUMENTS. CNYF has delivered to Niagara
Bancorp copies of its (i) annual reports on Form 10-K for the years ended
December 31, 1997 and 1998, (ii) quarterly reports on Form 10-Q for the quarters
ended March 31, June 30, and September 30, 1999, and (iii) proxy materials used
or for use in connection with its meetings of shareholders held in 1999. Such
reports and such proxy materials complied, at the time filed with the SEC, in
all material respects, with the Securities Laws.
SECTION 3.17 RELATED PARTY TRANSACTIONS. Except as disclosed in CNYF
DISCLOSURE SCHEDULE 3.17, or as described in CNYF's Proxy Statement distributed
in connection with the 1999 annual meeting of shareholders (which has previously
been provided to Niagara Bancorp), CNYF is not a party to any transaction
(including any loan or other credit accommodation) with any Affiliate of CNYF
(except a CNYF Subsidiary). Except as disclosed in CNYF DISCLOSURE SCHEDULE
3.17, all such transactions (a) were made in the ordinary course of business,
(b) were made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
other Persons, and (c) did not involve more than the normal risk of
collectability or present other unfavorable features. Except as set forth on
CNYF DISCLOSURE SCHEDULE 3.17, no loan or credit accommodation to any Affiliate
of CNYF is presently in default or, during the three year period prior to the
date of this Agreement, has been in default or has been restructured, modified
or extended. CNYF has not been notified that principal and interest with respect
to any such loan or other credit accommodation will not be paid when due or that
the loan grade classification accorded such loan or credit accommodation by CNYF
is inappropriate.
SECTION 3.18 SCHEDULE OF TERMINATION BENEFITS. CNYF DISCLOSURE SCHEDULE
3.18 includes a schedule of all termination benefits and related payments that
would be payable to the individuals identified thereon, excluding any options to
acquire CNYF Common Stock, and awards under the PRRP, granted to such
individuals, under any and all employment agreements, special termination
agreements, supplemental executive retirement plans, deferred bonus plans,
deferred compensation plans, salary continuation plans, or any compensation
arrangement, or other pension benefit or welfare benefit plan maintained by CNYF
solely for the benefit of officers or directors of CNYF or CNYF Subsidiaries
(the "Benefits Schedule"), assuming their employment or service is terminated as
of December 31, 1999 and the Closing Date occurs prior to such termination. No
other individuals are entitled to benefits under any such plans.
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SECTION 3.19 DEPOSITS. None of the deposits of CNYF or any of its
Subsidiaries is a "brokered" deposit.
SECTION 3.20 ANTITAKEOVER PROVISIONS INAPPLICABLE. Except as set forth
on CNYF DISCLOSURE SCHEDULE 3.20, and except for approvals required under the
federal and state banking laws, the transactions contemplated by this Agreement
are not subject to any applicable state takeover law.
Section 3.21 FAIRNESS OPINION. CNYF has received a written opinion from
CIBC to the effect that, subject to the terms, conditions and qualifications set
forth therein, as of the date thereof, the Merger Consideration to be received
by the stockholders of CNYF pursuant to this Agreement is fair to such
stockholders from a financial point of view. Such opinion has not been amended
or rescinded as of the date of this Agreement.
Section 3.22 YEAR 2000.
(a) Each of CNYF and each CNYF Subsidiary has adopted a plan (in each
case, a "YEAR 2000 PLAN") requiring testing, information-gathering and other
procedures to conform to the deadlines and material requirements and guidelines
applicable to it as a provider of services using Information Technology and
imposed by any Bank Regulator or the Federal Financial Institutions Examination
Council ("FFIEC"), to cause such Information Technology to be Year 2000
Compliant (such deadlines, material requirements and guidelines, as they may be
in effect from time to time, being referred to in this Agreement as the "YEAR
2000 REGULATORY Requirements").
(b) Each of CNYF and each CNYF Subsidiary has taken appropriate actions
and has committed the resources reasonably necessary or otherwise appropriate to
comply with its Year 2000 Plan in a timely manner. Such actions (including the
testing and information-gathering procedures) have not produced any preliminary
findings or other results which would indicate that the Information Technology
will not be Year 2000 Compliant in any material respects or that it will not be
in compliance with the Year 2000 Regulatory Requirements in any material
respects; and it has not received any written notice or preliminary oral notice
from a Regulatory Authority to one of its officers or senior executive employees
with respect to any adverse action against it relating to Year 2000 Compliance.
(c) Each of CNYF and CSB has taken appropriate actions to assure that
CSB has, and will continue to have at all relevant points in time, adequate
funds to meet anticipated loan and deposit customer demand in connection with
the Year 2000 date change and related circumstances.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF NIAGARA BANCORP
Niagara Bancorp represents and warrants to CNYF that the statements
contained in this Article IV are correct and complete as of the date of this
Agreement and will be correct and complete as of the Closing Date (as though
made then and as though the Closing Date were substituted for the date of this
Agreement throughout this Article IV), except as set forth in the Niagara
Bancorp Disclosure Schedules delivered by Niagara Bancorp to CNYF on the date
hereof. Niagara Bancorp has made a good faith effort to ensure that the
disclosure on each schedule of the Niagara Bancorp Disclosure Schedules
corresponds to the section reference herein. However, for purposes of the
Niagara Bancorp Disclosure Schedules, any item disclosed on any schedule therein
is deemed to be fully disclosed with respect to all schedules under which such
item may be relevant.
SECTION 4.01 ORGANIZATION.
(a) Niagara Bancorp is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware, and is duly
registered as a bank holding company under the BHCA. Niagara Merger Corp is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware. Niagara Bancorp has full corporate power and authority
to carry on its business as now conducted and is duly licensed or qualified to
do business in the states of the United States and foreign jurisdictions where
its ownership or leasing of property or the conduct of its business requires
such qualification.
(b) Lockport Savings is a stock savings bank duly organized, validly
existing and in good standing under the laws of the State of New York. The
deposits of Lockport Savings are insured by the FDIC through the BIF to the
fullest extent permitted by law, and all premiums and assessments required to be
paid in connection therewith have been paid when due by Lockport Savings.
(c) Prior to the date of this Agreement, Niagara Bancorp has delivered
to CNYF true and correct copies of the certificate of incorporation and bylaws
of Niagara Bancorp
SECTION 4.02 CAPITALIZATION.
(a) The authorized capital stock of Niagara Bancorp consists of (a)
45,000,000 shares of common stock, par value $0.01 per share (the "Niagara
Bancorp Common Stock"), of which, at the date of this Agreement, 29,756,250
shares are validly issued, fully paid and nonassessable (including shares are
held by Niagara Bancorp as treasury stock), and (b) 5,000,000 shares of
preferred stock, par value $0.01 per share, of which, at the date of this
Agreement, no shares of were issued and outstanding.
(b) Niagara Bancorp owns all of the capital stock of Lockport Savings,
free and clear of any lien or encumbrance.
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SECTION 4.03 AUTHORITY; NO VIOLATION.
(a) Niagara Bancorp and Niagara Merger Corp each has full corporate
power and authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
by Niagara Bancorp and Niagara Merger Corp and the completion by Niagara Bancorp
and Niagara Merger Corp of the transactions contemplated hereby have been duly
and validly approved by the Board of Directors of Niagara Bancorp and Niagara
Merger Corp, and no other corporate proceedings on the part of Niagara Bancorp
or Niagara Merger Corp are necessary to complete the transactions contemplated
hereby. This Agreement has been duly and validly executed and delivered by
Niagara Bancorp and Niagara Merger Corp and, subject to receipt of the required
approvals of Regulatory Authorities described in Section 4.04 hereof,
constitutes the valid and binding obligation of Niagara Bancorp and Niagara
Merger Corp, enforceable against them in accordance with its terms, subject to
applicable bankruptcy, insolvency and similar laws affecting creditors' rights
generally.
(b) (A) The execution and delivery of this Agreement by Niagara Bancorp
and Niagara Merger Corp, (B) subject to receipt of approvals from the Regulatory
Authorities referred to in Section 4.04 hereof and CNYF's and Niagara Bancorp's
compliance with any conditions contained therein, the consummation of the
transactions contemplated hereby, and (C) compliance by Niagara Bancorp or
Lockport Savings with any of the terms or provisions hereof will not (i)
conflict with or result in a breach of any provision of the certificate of
incorporation or bylaws of Niagara Bancorp or any Niagara Bancorp Subsidiary or
the charter and bylaws of Lockport Savings; (ii) violate any statute, code,
ordinance, rule, regulation, judgment, order, writ, decree or injunction
applicable to Niagara Bancorp or any Niagara Bancorp Subsidiary or any of their
respective properties or assets; or (iii) violate, conflict with, result in a
breach of any provisions of, constitute a default (or an event which, with
notice or lapse of time, or both, would constitute a default), under, result in
the termination of, accelerate the performance required by, or result in a right
of termination or acceleration or the creation of any lien, security interest,
charge or other encumbrance upon any of the properties or assets of Niagara
Bancorp or Lockport Savings under, any of the terms, conditions or provisions of
any note, bond, mortgage, indenture, deed of trust, license, lease, agreement or
other investment or obligation to which Niagara Bancorp or Lockport Savings is a
party, or by which they or any of their respective properties or assets may be
bound or affected, except for such violations, conflicts.
SECTION 4.04 CONSENTS. Except for consents, approvals, filings and
registrations from or with the Superintendent, FDIC, FRB, and SEC, and
compliance with any conditions contained therein, and the approval of this
Agreement by the shareholders of CNYF, and the certificate of merger with the
Secretary of State of the State of Delaware, no consents or approvals of, or
filings or registrations with, any public body or authority are necessary, and
no consents or approvals of any third parties are necessary, or will be, in
connection with (a) the execution and delivery of this Agreement by Niagara
Bancorp and Niagara Merger Corp, and (b) the completion by Niagara Bancorp and
Niagara Merger Corp of the transactions contemplated hereby. Niagara Bancorp has
no reason to believe that (i) any required consents or approvals will not be
received or will be received with conditions, limitations or restrictions
unacceptable to it or which would adversely impact Niagara Bancorp's ability to
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complete the transactions contemplated by this Agreement or that (ii) any public
body or authority, the consent or approval of which is not required or any
filing with which is not required, will object to the completion of the
transactions contemplated by this Agreement.
SECTION 4.05 COMPLIANCE WITH APPLICABLE LAW. Except as set forth in
Niagara Bancorp DISCLOSURE SCHEDULE 4.05, neither Niagara Bancorp nor any
Niagara Bancorp Subsidiary has received any notification or communication from
any Regulatory Authority (i) asserting that Niagara Bancorp or any Niagara
Bancorp Subsidiary is not in compliance in any material manner with any of the
statutes, regulations or ordinances which such Regulatory Authority enforces;
(ii) threatening to revoke any license, franchise, permit or governmental
authorization which is material to Niagara Bancorp or any Niagara Bancorp
Subsidiary; (iii) requiring or threatening to require Niagara Bancorp or any
Niagara Bancorp Subsidiary, or indicating that Niagara Bancorp or any Niagara
Bancorp Subsidiary may be required, to enter into a cease and desist order,
agreement or memorandum of understanding or any other agreement restricting or
limiting, or purporting to restrict or limit, in any manner the operations of
Niagara Bancorp or any Niagara Bancorp Subsidiary; or (iv) directing,
restricting or limiting, or purporting to direct, restrict or limit, in any
manner the operations of Niagara Bancorp or any Niagara Bancorp Subsidiary,
including without limitation any restriction on the payment of dividends (any
such notice, communication, memorandum, agreement or order described in this
sentence is hereinafter referred to as a "Regulatory Agreement"). Neither
Niagara Bancorp nor any Niagara Bancorp Subsidiary is a party to, nor has
consented to any Regulatory Agreement. The most recent regulatory rating given
to Lockport Savings as to compliance with the CRA is satisfactory or better.
SECTION 4.06 INFORMATION TO BE SUPPLIED. The information to be supplied
by Niagara Bancorp for inclusion in the Proxy Statement will not, at the time
the Proxy Statement is mailed pursuant to the Exchange Act, contain any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements therein not misleading. The information supplied,
or to be supplied, by Niagara Bancorp for inclusion in the Applications will, at
the time such documents are filed with any Regulatory Authority, be accurate in
all material aspects.
Section 4.07 YEAR 2000..
(a) Each of Niagara Bancorp and each Niagara Bancorp Subsidiary has
adopted a plan (in each case, a "YEAR 2000 PLAN") requiring testing,
information-gathering and other procedures to conform to the deadlines and
material requirements and guidelines applicable to it as a provider of services
using Information Technology and imposed by any Bank Regulator or the FFIEC, to
cause such Information Technology to be Year 2000 compliant (such deadlines,
material requirements and guidelines, as they may be in effect from time to
time, being referred to in this Agreement as the "YEAR 2000 REGULATORY
REQUIREMENTS").
(b) Each of Niagara Bancorp and each Niagara Bancorp Subsidiary has
taken appropriate actions and has committed the resources reasonably necessary
or otherwise appropriate to comply with its Year 2000 Plan in a timely manner.
Such actions (including the testing and information-gathering procedures) have
not produced any preliminary findings or other results which would indicate that
the Information Technology will not be Year 2000 Compliant in any material
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respect or that it will not be in compliance with the Year 2000 Regulatory
Requirements in any material respect; and it has not received any written notice
or preliminary oral notice from a Regulatory Authority to one of its officers or
senior executive employees with respect to any adverse action against it
relating to Year 2000 compliance.
(c) Each of Niagara Bancorp and Lockport Savings has taken appropriate
actions to assure that the Lockport Savings has, and will continue to have at
all relevant points in time, adequate funds to meet anticipated loan and deposit
customer demand in connection with the Year 2000 date change and related
circumstances.
SECTION 4.08 FINANCING. As of the date hereof Niagara Bancorp has, and
at the Merger Effective Date, Niagara Bancorp will have funds which are
sufficient and available under applicable regulatory capital standards to meet
its obligations under this Agreement and to consummate in a timely manner the
transactions contemplated hereby and thereby.
ARTICLE V
COVENANTS OF THE PARTIES
SECTION 5.01 CONDUCT OF CNYF'S BUSINESS.
(a) From the date of this Agreement to the Closing Date, CNYF and CSB
will conduct their business and engage in transactions, including extensions of
credit, only in the ordinary course and consistent with past practice and
policies, except as otherwise required or contemplated by this Agreement or with
the written consent of Niagara Bancorp. CNYF and CSB will use their reasonable
good faith efforts, to (i) preserve their business organizations intact, (ii)
maintain good relationships with employees, and (iii) preserve for themselves
the good will of their customers and others with whom business relationships
exist. From the date hereof to the Closing Date, except as otherwise consented
to or approved by Niagara Bancorp in writing or as contemplated or required by
this Agreement, CNYF will not, and CNYF will not permit any CNYF Subsidiary to:
(i) amend or change any provision of its certificate of
incorporation, charter, or bylaws;
(ii) change the number of authorized or issued shares of its
capital stock or issue or grant any Right or agreement of any character relating
to its authorized or issued capital stock or any securities convertible into
shares of such stock, or split, combine or reclassify any shares of capital
stock, or declare, set aside or pay any dividend or other distribution in
respect of capital stock, or redeem or otherwise acquire any shares of capital
stock, except that (A) CNYF may issue shares of CNYF Common Stock upon the valid
exercise, in accordance with the information set forth in CNYF DISCLOSURE
SCHEDULE 3.02(a), of presently outstanding options to acquire CNYF Common Stock
under the CNYF Stock Option Plans, and (B) CNYF many continue to pay its regular
quarterly cash dividend of $0.10 per share with payment and record dates
consistent with past practice. Notwithstanding the foregoing, the following
dividends are also permitted: a dividend by a CNYF Subsidiary to its parent(s);
and the dividends on the REIT Preferred Stock that are paid in accordance with
its terms;
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(iii) grant or agree to pay any bonus, severance or termination to,
or enter into, renew or amend any employment agreement, severance agreement
and/or supplemental executive agreement with, or increase in any manner the
compensation or fringe benefits of, any of its directors, officers or employees,
except: for salary increases for calendar 2000 approved in December 1999 (in a
manner consistent with past practice); and as may be required pursuant to
legally binding commitments existing on the date hereof and set forth on CNYF
DISCLOSURE SCHEDULES 3.08 and 3.12;
(iv) enter into or, except as may be required by law, modify any
pension, retirement, stock option, stock purchase, stock appreciation right,
stock grant, savings, profit sharing, deferred compensation, supplemental
retirement, consulting, bonus, group insurance or other employee benefit,
incentive or welfare contract, plan or arrangement, or any trust agreement
related thereto, in respect of any of its directors, officers or employees; or
make any contributions to any defined contribution or defined benefit plan not
in the ordinary course of business consistent with past practice; or materially
amend any CNYF Employee Plan except to the extent such modifications or
amendments do not result in an increase in cost;
(v) merge or consolidate CNYF or any CNYF Subsidiary with any other
corporation; sell or lease all or any substantial portion of the assets or
business of CNYF or any CNYF Subsidiary; make any acquisition of all or any
substantial portion of the business or assets of any other person, firm,
association, corporation or business organization other than in connection with
foreclosures, settlements in lieu of foreclosure, troubled loan or debt
restructuring, or the collection of any loan or credit arrangement between CNYF,
or any CNYF Subsidiary, and any other person; enter into a purchase and
assumption transaction with respect to deposits and liabilities; permit the
revocation or surrender by any CNYF Subsidiary of its certificate of authority
to maintain, or file an application for the relocation of, any existing branch
office, or file an application for a certificate of authority to establish a new
branch office;
(vi) sell or otherwise dispose of the capital stock of CNYF or sell
or otherwise dispose of any asset of CNYF or of any CNYF Subsidiary other than
in the ordinary course of business consistent with past practice; subject any
asset of CNYF or of any CNYF Subsidiary to a lien, pledge, security interest or
other encumbrance (other than in connection with deposits, repurchase
agreements, bankers acceptances, "treasury tax and loan" accounts established in
the ordinary course of business and transactions in "federal funds" and the
satisfaction of legal requirements in the exercise of trust powers) other than
in the ordinary course of business consistent with past practice; incur any
indebtedness for borrowed money (or guarantee any indebtedness for borrowed
money), except in the ordinary course of business consistent with past practice;
(vii) take any action which would result in any of the
representations and warranties of CNYF set forth in this Agreement becoming
untrue as of any date after the date hereof or in any of the conditions set
forth in Article VI hereof not being satisfied, except in each case as may be
required by applicable law;
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(viii) change any method, practice or principle of accounting,
except as may be required from time to time by GAAP (without regard to any
optional early adoption date) or any Regulatory Authority responsible for
regulating CNYF or CSB;
(ix) waive, release, grant or transfer any material rights of value
or modify or change in any material respect any existing material agreement or
indebtedness to which CNYF or any CNYF Subsidiary is a party, other than in the
ordinary course of business, consistent with past practice;
(x) purchase any equity securities, or purchase any security for
its investment portfolio not rated "A" or higher by either Standard & Poor's
Corporation or Moody's Investor Services, Inc. or otherwise alter, in any
material respect, the mix, maturity, credit or interest rate risk profile of its
portfolio of investment securities or its portfolio of mortgage-backed
securities;
(xi) except for commitments issued prior to the date of this
Agreement which have not yet expired and have disclosed on the CNYF DISCLOSURE
SCHEDULE 5.01(a)(xi), and the renewal of existing lines of credit, make any new
loan or other credit facility commitment (including without limitation, lines of
credit and letters of credit) to any borrower or group of affiliated borrowers
in excess of $250,000 in the aggregate for unsecured loans and $750,000 in the
aggregate for secured loans. In addition, the following require the prior
consent of Niagara: a residential loan of $350,000 or greater; an unsecured loan
of $100,000 or greater; and a commercial real estate loan of $500,000 or
greater;
(xii) except as set forth on the CNYF DISCLOSURE SCHEDULE
5.01(a)(xii), enter into, renew, extend or modify any other transaction with any
Affiliate;
(xiii) enter into any futures contract, option, interest rate caps,
interest rate floors, interest rate exchange agreement or other agreement or
take any other action for purposes of hedging the exposure of its
interest-earning assets and interest-bearing liabilities to changes in market
rates of interest;
(xiv) except for the execution of this Agreement, and actions taken
in accordance with this Agreement, take any action that would give rise to a
right of payment to any individual under any employment agreement;
(xv) make any change in policies with regard to the extension of
credit, the establishment of reserves with respect to the possible loss thereon
or the charge off of losses incurred thereon investment, asset/liability
management or other material banking policies in any material respect except as
may be required by changes in applicable law or regulations;
(xvi) except for the execution of this Agreement, or resulting
therefrom, take any action that would give rise to a right of payment to any
individual under any CNYF Employee Plan;
(xvii) except as set forth in CNYF DISCLOSURE SCHEDULE
5.01(a)(xvii), make any capital expenditures in excess of $50,000 individually
or $100,000 in the aggregate, other than pursuant to binding commitments
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existing on the date hereof and other than expenditures necessary to maintain
existing assets in good repair;
(xviii) purchase or otherwise acquire, or sell or otherwise dispose
of, any assets or incur any liabilities other than in the ordinary course of
business consistent with past practices and policies;
(xix) sell any loan (other than sales of loans secured by one- to
four-family real estate that are consistent with past practice) or OREO
properties (other than sales of OREO which generate a net book loss of not more
than $10,000 per property); or
(xxii) agree to do any of the foregoing.
(b) For purposes of this Section 5.01, unless provided for in a
business plan, budget or similar document delivered to Niagara Bancorp prior to
the date of this Agreement, it shall not be considered in the ordinary course of
business for CNYF or any CNYF Subsidiary to do any of the following: (i) except
as set forth in CNYF DISCLOSURE SCHEDULE 5.01(b), make any sale, assignment,
transfer, pledge, hypothecation or other disposition of any assets having a book
or market value, whichever is greater, in the aggregate in excess of $100,000,
other than pledges of assets to secure government deposits, to exercise trust
powers, sales of assets received in satisfaction of debts previously contracted
in the normal course of business, issuance of loans, sales of previously
purchased government guaranteed loans, or transactions in the investment
securities portfolio by CNYF or a CNYF Subsidiary or repurchase agreements made,
in each case, in the ordinary course of business; or (ii) undertake or enter any
lease, contract or other commitment for its account, other than in the normal
course of providing credit to customers as part of its banking business,
involving a payment by CNYF or any CNYF Subsidiary of more than $50,000
annually, or containing a material financial commitment and extending beyond 12
months from the date hereof.
SECTION 5.02 ACCESS; CONFIDENTIALITY.
(a) Each of CNYF and the CNYF Subsidiaries shall permit Niagara Bancorp
and its representatives reasonable access to its properties, and shall disclose
and make available to them all books, papers and records relating to the assets,
stock ownership, properties, operations, obligations and liabilities of CNYF and
its subsidiaries, including, but not limited to, all books of account (including
the general ledger), tax records, minute books of meetings of boards of
directors (and any committees thereof)(other than minutes of any confidential
discussion of this Agreement and the transactions contemplated hereby), and
stockholders, organizational documents, bylaws, material contracts and
agreements, filings with any regulatory authority, accountants' work papers,
litigation files, plans affecting employees, and any other business activities
or prospects in which Niagara Bancorp may have a reasonable interest. CNYF and
CSB shall make their respective officers, employees and agents and authorized
representatives (including counsel and independent public accountants) available
to confer with Niagara Bancorp and its representatives. CNYF and CSB shall
permit a representative of Niagara Bancorp to attend any meeting of CNYF and/or
CSB's Board of Directors or the Executive Committees thereof (provided that
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neither CNYF nor CSB shall be required to permit the Niagara Bancorp
representative to remain present during any confidential discussion of the
Agreement and the transactions contemplated thereby). The parties will hold all
such information delivered in confidence to the extent required by, and in
accordance with, the provisions of the confidentiality agreement, dated November
22, 1999, among CNYF and Niagara Bancorp (the "Confidentiality Agreement").
(b) Niagara Bancorp agrees to conduct such investigations and
discussions hereunder in a manner so as not to interfere unreasonably with
normal operations and customer and employee relationships of the other party.
(c) In addition to the access permitted by subparagraph (a) above, from
the date of this Agreement through the Closing Date, CNYF shall permit employees
of Niagara Bancorp reasonable access to information relating to problem loans,
loan restructurings and loan work-outs of CNYF.
(d) If the transactions contemplated by this Agreement shall not be
consummated, CNYF and Niagara Bancorp will each destroy or return all documents
and records obtained from the other party or its representatives, during the
course of its investigation and will cause all information with respect to the
other party obtained pursuant to this Agreement or preliminarily thereto to be
kept confidential, except to the extent such information becomes public through
no fault of the party to whom the information was provided or any of its
representatives or agents and except to the extent disclosure of any such
information is legally required. CNYF and Niagara Bancorp shall each give prompt
written notice to the other party of any contemplated disclosure where such
disclosure is so legally required.
SECTION 5.03 REGULATORY MATTERS AND CONSENTS.
(a) Niagara Bancorp and Lockport Savings will prepare all Applications
and make all filings for, and use their best efforts to obtain as promptly as
practicable after the date hereof, all necessary permits, consents, approvals,
waivers and authorizations of all Regulatory Authorities necessary or advisable
to consummate the transactions contemplated by this Agreement.
(b) CNYF will furnish Niagara Bancorp with all information concerning
CNYF and CNYF Subsidiaries as may be necessary or advisable in connection with
any Application or filing made by or on behalf of Niagara Bancorp to any
Regulatory Authority in connection with the transactions contemplated by this
Agreement.
(c) Niagara Bancorp and CNYF will promptly furnish each other with
copies of all material written communications to, or received by them from any
Regulatory Authority in respect of the transactions contemplated hereby, except
information which is filed by either party which is designated as confidential.
(d) The parties hereto agree that they will consult with each other
with respect to the obtaining of all permits, consents, approvals and
authorizations of all third parties and Regulatory Authorities. Niagara Bancorp
will furnish CNYF with (i) copies of all Applications prior to filing with any
Regulatory Authority and provide CNYF a reasonable opportunity to provide
changes to such Applications, and (ii) copies of all Applications filed by
Niagara Bancorp.
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(e) CNYF and Niagara Bancorp will cooperate with each other in the
foregoing matters and will furnish the responsible party with all information
concerning it and its subsidiaries as may be necessary or advisable in
connection with any Application or filing (including the Proxy Statement and any
report filed with the SEC) made by or on behalf of Niagara Bancorp or CNYF to
any Regulatory Authority in connection with the transactions contemplated by
this Agreement, and such information will be accurate and complete in all
material respects. In connection therewith, each party will provide certificates
and other documents reasonably requested by the other.
SECTION 5.04 TAKING OF NECESSARY ACTION.
(a) Niagara Bancorp and CNYF shall each use its best efforts in good
faith, and each of them shall cause its Subsidiaries to use their best efforts
in good faith, to (i) furnish such information as may be required in connection
with the preparation of the documents referred to in Section 5.03 of this
Agreement, and (ii) take or cause to be taken all action necessary or desirable
on its part using its best efforts so as to permit completion of the Merger
including, without limitation, (A) obtaining the consent or approval of each
individual, partnership, corporation, association or other business or
professional entity whose consent or approval is required or desirable for
consummation of the transactions contemplated hereby (including assignment of
leases without any change in terms), provided that neither CNYF nor any CNYF
Subsidiary shall agree to make any payments or modifications to agreements in
connection therewith without the prior written consent of Niagara Bancorp, and
(B) requesting the delivery of appropriate opinions, consents and letters from
its counsel and independent auditors. No party hereto shall take, or cause, or
to the best of its ability permit to be taken, any action that would
substantially impair the prospects of completing the Merger pursuant to this
Agreement; provided that nothing herein contained shall preclude Niagara Bancorp
or CNYF from exercising its rights under this Agreement or the Option Agreement.
(b) CNYF shall prepare, subject to the review and consent of Niagara
Bancorp with respect to matters relating to Niagara Bancorp and the transactions
contemplated by this Agreement, a Proxy Statement to be filed by CNYF with the
SEC and to be mailed to the shareholders of CNYF in connection with the meeting
of its shareholders and transactions contemplated hereby, which Proxy Statement
shall conform to all applicable legal requirements. The parties shall cooperate
with each other with respect to the preparation of the Proxy Statement.
SECTION 5.05 CERTAIN AGREEMENTS.
(a) From and after the Merger Effective Date through the sixth
anniversary thereof, Niagara Bancorp agrees to indemnify, defend and hold
harmless each present and former director and officer of CNYF and its
Subsidiaries determined as of the Closing Date (the "INDEMNIFIED PARTIES")
against all losses, claims, damages, costs, expenses (including reasonable
attorneys' fees and expenses), liabilities, judgments or amounts paid in
settlement (with the approval of Niagara Bancorp, which approval shall not be
unreasonably withheld) or in connection with any claim, action, suit, proceeding
or investigation arising out of matters existing or occurring at or prior to the
Merger Effective Date (a "CLAIM") in which an Indemnified Party is, or is
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threatened to be made, a party or a witness based in whole or in part on, or
arising in whole or in part out of, the fact that such person is or was a
director or officer of CNYF or any of its subsidiaries, regardless of whether
such Claim is asserted or claimed prior to, at or after the Closing Date, to the
fullest extent to which directors and officers of CNYF are entitled under the
DGCL, CNYF's certificate of incorporation and bylaws, or other applicable law as
in effect on the date hereof (and Niagara Bancorp shall pay expenses in advance
of the final disposition of any such action or proceeding to each Indemnified
Party to the extent permissible to a Delaware corporation under the DGCL and
CNYF's certificate of incorporation and bylaws as in effect on the date hereof;
PROVIDED, that the person to whom expenses are advanced provides an undertaking
to repay such expenses if it is ultimately determined that such person is not
entitled to indemnification). All rights to indemnification in respect of a
Claim asserted or made within the period described in the preceding sentence
shall continue until the final disposition of such Claim.
(b) Any Indemnified Party wishing to claim indemnification under
Section 5.05(a), upon learning of any Claim, shall promptly notify Niagara
Bancorp, but the failure to so notify shall not relieve Niagara Bancorp of any
liability it may have to such Indemnified Party except to the extent that such
failure materially prejudices Niagara Bancorp In the event of any Claim, (1)
Niagara Bancorp shall have the right to assume the defense thereof (with counsel
reasonably satisfactory to the Indemnified Party) and shall not be liable to
such Indemnified Parties for any legal expenses of other counsel or any other
expenses subsequently incurred by such Indemnified Parties in connection with
the defense thereof, except that, if Niagara Bancorp elects not to assume such
defense or counsel for the Indemnified Parties advises that there are issues
which raise conflicts of interest between Niagara Bancorp and the Indemnified
Parties, the Indemnified Parties may retain counsel satisfactory to them, and
Niagara Bancorp shall pay all reasonable fees and expenses of such counsel for
the Indemnified Parties promptly as statements therefor are received, provided
further that Niagara Bancorp shall in all cases be obligated pursuant to this
paragraph to pay for only one firm of counsel for all Indemnified Parties, (2)
the Indemnified Parties will cooperate in the defense of any such Claim and (3)
Niagara Bancorp shall not be liable for any settlement effected without its
prior written consent (which consent shall not unreasonably be withheld).
(c) In the event Niagara Bancorp or any of is successors or assigns (1)
consolidates with or merges into any other Person and shall not continue or
survive such consolidation or merger, or (2) transfers or conveys all or
substantially all of its properties and assets to any Person, then, and in each
such case, to the extent necessary, proper provision shall be made so that the
successors and assigns of Niagara Bancorp assume the obligations set forth in
this Section 5.05.
(d) Niagara Bancorp shall maintain in effect for three years from the
Closing Date, if available, the current directors' and officers' liability
insurance policy maintained by CNYF (PROVIDED that Niagara Bancorp may
substitute therefor policies of at least the same coverage containing terms and
conditions which are not materially less favorable) with respect to matters
occurring at or prior to the Closing Date. In connection with the foregoing,
CNYF and CSB each agrees to provide such insurer or substitute insurer with such
representations as such insurer may reasonably request with respect to the
reporting of any prior claims.
(e) The provisions of this Section 5.05 are intended to be for the
benefit of, and shall be enforceable by, each Indemnified Party and his or her
heirs and representatives.
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SECTION 5.06 NO OTHER BIDS AND RELATED MATTERS. From and after the date
hereof until the termination of this Agreement, neither CNYF, CSB or any CNYF
Subsidiary, nor any of their respective officers, directors, employees,
representatives, agents or affiliates (including, without limitation, any
investment banker, attorney or accountant retained by CNYF or any of its
Subsidiaries), will, directly or indirectly, initiate, solicit or knowingly
encourage (including by way of furnishing non-public information or assistance),
or facilitate knowingly, any inquiries or the making of any proposal that
constitutes, or may reasonably be expected to lead to, any Acquisition Proposal
(as defined below), or enter into or maintain or continue discussions or
negotiate with any person or entity in furtherance of such inquiries or to
obtain an Acquisition Proposal or agree to or endorse any Acquisition Proposal,
or authorize or permit any of its officers, directors, or employees or any of
its subsidiaries or any investment banker, financial advisor, attorney,
accountant or other representative retained by any of its subsidiaries to take
any such action, and CNYF shall notify Niagara Bancorp orally (within one
business day) and in writing (as promptly as practicable) of all of the relevant
details relating to all inquiries and proposals which it or any of its
Subsidiaries or any such officer, director employee, investment banker,
financial advisor, attorney, accountant or other representative may receive
relating to any of such matters and if such inquiry or proposal promptly,
PROVIDED, HOWEVER, that nothing contained in this Section 5.06 shall prohibit
the Board of Directors of CNYF from (i) furnishing information to, or entering
into discussions or negotiations with any person or entity that makes an
unsolicited written, bona fide proposal, to acquire CNYF or CSB pursuant to a
merger, consolidation, share exchange, business combination, tender or exchange
offer or other similar transaction, if, and only to the extent that, (A) the
Board of Directors of CNYF receives a written opinion from its independent
financial advisor that such proposal may be superior to the Merger from a
financial point-of-view to CNYF's stockholders, (B) the Board of Directors of
CNYF, after consultation with and based upon the advice of independent legal
counsel, determines in good faith that such action is necessary for the Board of
Directors of CNYF to comply with its fiduciary duties to stockholders under
applicable law (such proposal that satisfies (A) and (B) being referred to
herein as a "Superior Proposal"), (C) prior to furnishing such information to,
or entering into discussions or negotiations with, such person or entity, CNYF
(x) provides reasonable notice to Niagara Bancorp to the effect that it is
furnishing information to, or entering into discussions or negotiations with,
such person or entity and (y) receives from such person or entity an executed
confidentiality agreement in form and substance identical in all material
respects to the Confidentiality Agreement, and (D) the CNYF Special Meeting of
Stockholders convened to approve this Agreement has not occurred, (ii) complying
with Rule 14e-2 promulgated under the Exchange Act with regard to a tender or
exchange offer, or (iii) prior to the CNYF Special Meeting of Stockholders
convened to approve this Agreement, failing to make or withdrawing or modifying
its recommendation to stockholders, and entering into a Superior Proposal if
there exists a Superior Proposal and the Board of Directors of CNYF, after
consultation with and based upon the advice of independent legal counsel,
determined in good faith that such action is necessary for such Board of
Directors to comply with its fiduciary duties to stockholders under applicable
law. For purposes of this Agreement, "Acquisition Proposal" shall mean any of
the following (other than the transactions contemplated hereunder) involving
CNYF or any of its subsidiaries: (i) any merger, consolidation, share exchange,
business combination, or other similar transactions; (ii) any sale, lease,
exchange, mortgage, pledge, transfer or other disposition of 20% or more of the
assets of CNYF or CSB, taken as a whole, in a single transaction or series of
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transactions; (iii) any tender offer or exchange offer for 10% or more of the
outstanding shares of capital stock of CNYF or the filing of a registration
statement under the Securities Act in connection therewith; or (iv) any public
announcement of a proposal, plan or intention to do any of the foregoing or any
agreement to engage in any of the foregoing.
SECTION 5.07 DUTY TO ADVISE; DUTY TO UPDATE THE CNYF DISCLOSURE
SCHEDULES. CNYF shall promptly advise Niagara Bancorp of any change or event
having a Material Adverse Effect on it or on any CNYF Subsidiary or which it
believes would or would be reasonably likely to cause or constitute a material
breach of any of its representations, warranties or covenants set forth herein.
CNYF shall update the CNYF DISCLOSURE SCHEDULES as promptly as practicable after
the occurrence of an event or fact which, if such event or fact had occurred
prior to the date of this Agreement, would have been disclosed in the CNYF
DISCLOSURE SCHEDULES. The delivery of such updated Schedule shall not relieve
CNYF from any breach or violation of this Agreement and shall not have any
effect for the purposes of determining the satisfaction of the condition set
forth in Sections 6.02(c) hereof.
SECTION 5.08 CONDUCT OF NIAGARA BANCORP'S BUSINESS. From the date of
this Agreement to the Closing Date, Niagara Bancorp will use its best efforts to
(x) preserve its business organizations intact, (y) maintain good relationships
with employees, and (z) preserve for itself the goodwill of customers of
Lockport Savings and its other Subsidiaries. From the date of this Agreement to
the Closing Date, neither Niagara Bancorp will (i) amend its certificate of
incorporation, charter or bylaws in any manner inconsistent with the prompt and
timely consummation of the transactions contemplated by this Agreement, (ii)
take any action which would result in any of the representations and warranties
of Niagara Bancorp or Lockport Savings set forth in this Agreement becoming
untrue as of any date after the date hereof or in any of the conditions set
forth in Article VI hereof not being satisfied, except in each case as may be
required by applicable law, (iii) take any action which would or is reasonably
likely to adversely effect or materially delay the receipt of the necessary
approvals from the Regulatory Authorities; (iv) take action which would or is
reasonably likely to materially and adversely affect Niagara Bancorp's ability
to perform its covenants and agreements under this Agreement; (v) take any
action that would result in any of the conditions to the Merger not being
satisfied; or (vi) agree to do any of the foregoing.
SECTION 5.09 BOARD AND COMMITTEE MINUTES. CNYF and CSB shall each
provide to Niagara Bancorp, within thirty (30) days after any meeting of their
respective Board of Directors, or any committee thereof, a copy of the minutes
of such meeting, except that with respect to any meeting held within thirty (30)
days of the Closing Date, such minutes shall be provided to each party prior to
the Closing Date.
SECTION 5.10 UNDERTAKINGS BY CNYF AND NIAGARA BANCORP
(a) From and after the date of this Agreement:
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(i) VOTING BY DIRECTORS. Simultaneously with the execution of this
Agreement, or within five days thereof, each Director of CNYF and CSB shall
enter into the agreement set forth as Exhibit B to this Agreement;
(ii) PROXY SOLICITOR. CNYF shall retain a proxy solicitor in
connection with the solicitation of shareholder approval of this Agreement;
(iii) TIMELY REVIEW. If requested by Niagara Bancorp at Niagara
Bancorp's sole expense, CNYF shall cause its independent certified public
accountants to perform a review of its unaudited consolidated financial
statements as of the end of any calendar quarter, in accordance with Statement
of Auditing Standards No. 36, and to issue their report on such financial
statements as soon as is practicable thereafter;
(iv) OUTSIDE SERVICE BUREAU CONTRACTS. If requested to do so by
Niagara Bancorp, CNYF shall use its best efforts to obtain an extension of, or
termination of, any contract with an outside service bureau or other vendor of
services to CNYF, on terms and conditions mutually acceptable to CNYF and
Niagara Bancorp;
(v) BOARD MEETINGS. CNYF and CSB shall permit a representative of
Niagara Bancorp to attend any meeting of CNYF and/or CSB's Board of Directors or
the Executive Committees thereof (provided that neither CNYF nor CSB shall be
required to permit the Niagara Bancorp representative to remain present during
any confidential discussion of the Agreement and the transactions contemplated
thereby). CNYF and CSB shall effect such changes to the Restated Organization
Certificate and the Bylaws of CSB, such amendments to be effective as of the
Merger Effective Date, as Niagara Bancorp may reasonably request in order to
facilitate the operation of CSB as a wholly-owned subsidiary of Niagara Bancorp.
(vi) LIST OF NONPERFORMING ASSETS. CNYF shall provide Niagara
Bancorp, within ten (10) days of the end of each calendar month, a written list
of nonperforming assets (the term "nonperforming assets," for purposes of this
subsection, means (i) loans that are "troubled debt restructuring" as defined in
Statement of Financial Accounting Standards No. 15, "Accounting by Debtors and
Creditors for Troubled Debt Restructuring," (ii) loans on nonaccrual, (iii) real
estate owned, (iv) all loans ninety (90) days or more past due) as of the end of
such month and (iv) and impaired loans; and
(vii) RESERVES AND MERGER-RELATED COSTS. On or before the Effective
Date, CNYF shall establish such additional accruals and reserves as may be
necessary to conform the accounting reserve practices and methods (including
credit loss practices and methods) of CNYF to those of Niagara Bancorp (as such
practices and methods are to be applied to CNYF from and after the Closing Date)
and Niagara Bancorp's plans with respect to the conduct of the business of CNYF
following the Merger and otherwise to reflect Merger-related expenses and costs
incurred by CNYF, provided, however, that CNYF shall not be required to take
such action unless Niagara Bancorp agrees in writing that all conditions to
closing set forth in Section 6.02 have been satisfied or waived (except for the
expiration of any applicable waiting periods); prior to the delivery by Niagara
Bancorp of the writing referred to in the preceding clause,
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CNYF shall provide Niagara Bancorp a written statement, certified without
personal liability by the chief executive officer of CNYF and dated the date of
such writing, that the representation made in Section 3.15(b) hereof is true as
of such date or, alternatively, setting forth in detail the circumstances that
prevent such representation from being true as of such date; and no accrual or
reserve made by CNYF or any CNYF Subsidiary pursuant to this subsection, or any
litigation or regulatory proceeding arising out of any such accrual or reserve,
shall constitute or be deemed to be a breach or violation of any representation,
warranty, covenant, condition or other provision of this Agreement or to
constitute a termination event within the meaning of Section 7.01(b) hereof. No
action shall be required to be taken by CNYF pursuant to this Section 5.10(vii)
if, in the opinion of CNYF's independent auditors, such action would contravene
GAAP;
(viii) SHAREHOLDERS MEETING. CNYF shall submit this Agreement to
its shareholders for approval at a meeting to be held as soon as practicable,
and, subject to the next sentence, its Boards of Director shall recommend
approval of this Agreement to the CNYF shareholders. The Board of Directors of
CNYF may fail to make such a recommendation, or withdraw, modify or change any
such recommendation only in connection with a Superior Proposal, as set forth in
Section 5.06 of this Agreement, and only if such Board of Directors, after
having consulted with and considered the advice of outside counsel to such
Board, has determined that the making of such recommendation, or the failure so
to withdraw, modify or change its recommendation, would constitute a breach of
the fiduciary duties of such directors under Delaware law. CNYF shall take all
steps necessary in order to hold a special meeting of stockholders for the
purpose of approving this Agreement within four months of the date of this
Agreement, or as soon thereafter as is practicable. CNYF shall promptly inform
Niagara Bancorp of any shareholder who makes a written demand upon CNYF for an
appraisal of his shares of CNYF Common Stock in connection with the Merger.
(ix) SYSTEMS CONVERSIONS. CNYF and Niagara Bancorp shall meet on a
regular basis to discuss and plan for the conversion of CNYF and its
Subsidiaries' data processing and related electronic informational systems to
those used by Niagara Bancorp and its subsidiaries, which planning shall
include, but not be limited to, discussion of the possible termination by CNYF
and CSB of third-party service provider arrangements effective at the Effective
Time or at a date thereafter, non-renewal of personal property leases and
software licenses used by CNYF or any of its Subsidiaries in connection with its
systems operations, retention of outside consultants and additional employees to
assist with the conversion, and outsourcing, as appropriate, of proprietary or
self-provided system services, it being understood that CNYF shall not be
obligated to take any such action prior to the Effective Time and, unless CNYF
otherwise agrees, no conversion shall take place prior to the Effective Time. In
the event that CNYF or any of its Subsidiaries takes, at the request of Niagara
Bancorp, any action relative to third parties to facilitate the conversion that
results in the imposition of any termination fees, expenses or charges, Niagara
Bancorp shall indemnify CNYF and its Subsidiaries for any such fees, expenses
and charges, and the costs of reversing the conversion process, if for any
reason the Merger is not consummated in accordance with the terms of this
Agreement.
(b) From and after the date of this Agreement, Niagara Bancorp and CNYF
shall each:
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(i) FILINGS AND APPROVALS. Cooperate with the other in the
preparation and filing, as soon as practicable, of (A) the Applications, (B) the
Proxy Statement, (C) all other documents necessary to obtain any other approvals
and consents required to effect the completion of the Merger, and (D) all other
documents contemplated by this Agreement;
(ii) PUBLIC ANNOUNCEMENTS. Cooperate and cause their respective
officers, directors, employees and agents to cooperate in good faith, consistent
with their respective legal obligations, in the preparation and distribution of,
and agree upon the form and substance of, any press release related to this
Agreement and the transactions contemplated hereby, and any other public
disclosures related thereto, including without limitation communications to
shareholders, internal announcements and customer disclosures, but nothing
contained herein shall prohibit either party from making any disclosure which
its counsel deems necessary, provided that the disclosing party notifies the
other party reasonably in advance of the timing and contents of such disclosure;
(iii) MAINTENANCE OF INSURANCE. Maintain, and cause their
respective Subsidiaries to maintain, insurance in such amounts as are reasonable
to cover such risks as are customary in relation to the character and location
of its properties and the nature of its business;
(iv) MAINTENANCE OF BOOKS AND RECORDS. Maintain, and cause their
respective Subsidiaries to maintain, books of account and records in accordance
with generally accepted accounting principles applied on a basis consistent with
those principles used in preparing the financial statements heretofore
delivered;
(v) DELIVERY OF SECURITIES DOCUMENTS. Deliver to the other, copies
of all Securities Documents simultaneously with the filing thereof; or
(vi) TAXES. File all federal, state, and local tax returns required
to be filed by them or their respective Subsidiaries on or before the date such
returns are due (including any extensions) and pay all taxes shown to be due on
such returns on or before the date such payment is due.
SECTION 5.11 EMPLOYEE AND TERMINATION BENEFITS; DIRECTORS AND
MANAGEMENT.
(a) The CNYF Employee Stock Ownership Plan (the "CNYF ESOP") shall be
terminated as of, or prior to, the Merger Effective Date (all shares held by the
ESOP shall be converted into the right to receive the Merger Consideration), all
outstanding CNYF ESOP indebtedness shall be repaid, and the balance shall be
allocated and distributed to CNYF employees (subject to the receipt of a
determination letter from the IRS), as provided for in the CNYF ESOP and unless
otherwise required by applicable law. Niagara Bancorp will review other CNYF or
CSB employee plans to determine whether to maintain, terminate or continue such
plans. If any CNYF or CSB employee plans are consolidated with any Niagara
Bancorp (or subsidiary thereof) employee plan, credit will be given for prior
service with CNYF or CSB for determining eligibility and vesting, but not for
benefit accrual purposes.
(b) After the Merger Effective Date, any former employees of CNYF or
any CNYF Subsidiary whose employment is terminated, other than for cause, within
twelve months of the Closing Date shall be provided with severance benefits in
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accordance with the severance policy described on CNYF DISCLOSURE SCHEDULE
5.11(b). In addition, it is anticipated that in order for Niagara Bancorp to
effectuate a smooth transition of the back office operations and data processing
systems of CSB, it may be necessary to retain the services of certain CSB
back-office personnel for up to one and one-half years after the Closing Date.
Niagara Bancorp agrees that notwithstanding that such persons will not be
terminated within twelve months after the Closing Date, they will still be
entitled to receive severance payments pursuant to CSB's employee severance plan
for service with CSB prior to termination.
SECTION 5.12 DUTY TO ADVISE; DUTY TO UPDATE NIAGARA BANCORP'S
DISCLOSURE SCHEDULES. Niagara Bancorp shall promptly advise CNYF of any change
or event which it believes would or would be reasonably likely to cause or
constitute a material breach of any of its representations, warranties or
covenants set forth herein. Niagara Bancorp shall update Niagara Bancorp's
DISCLOSURE SCHEDULES as promptly as practicable after the occurrence of an event
or fact which, if such event or fact had occurred prior to the date of this
Agreement, would have been disclosed in the Niagara Bancorp DISCLOSURE SCHEDULE.
The delivery of such updated Schedule shall not relieve Niagara Bancorp from any
breach or violation of this Agreement and shall not have any effect for the
purposes of determining the satisfaction of the condition set forth in Sections
6.01(c) hereof.
SECTION 5.13 GOVERNANCE AND RELATED MATTERS.
(a) Following the Merger Effective Date, and subject to paragraph (c)
below, the Board of Directors of CSB shall consist of the seven current
directors listed on CNYF DISCLOSURE SCHEDULE 5.13. Harvey Kaufman shall remain
chairman of the board of directors of CSB. One additional person designated by
the CSB board, and reasonably acceptable to Niagara Bancorp, may be appointed to
the CSB board. The directors of CSB shall be entitled to receive attendance and
retainer fees in the same amounts as in effect on the date of this Agreement.
The retirement age for service on the CSB board shall be 70 years. Niagara
Bancorp shall have appropriate representation on the CSB board.
(b) Niagara Bancorp shall honor all obligations of the CNYF and CSB
with respect to their existing Directors Deferred Compensation Plans and shall
provide post-retirement health insurance benefits to existing retirees and
employees of CSB upon the same terms and conditions as presently exist in the
Post-Retirement Health Insurance Plan of CSB.
(c) Niagara Bancorp will honor the employment contract termination
provisions for executive officers of CNYF and CSB, except for the existing
employment contract with the President of CSB, who will retire on or before the
consummation of the Merger without further obligation under any employment or
severance agreement (and will execute an acknowledgment to this effect), except
that he shall not forfeit benefits under the ESOP, PRRP and the Stock Option
Plan. Michael Stapleton will be elected as the chief executive officer of CSB
effective as of the Merger Effective Date, and will be appointed to the CSB
board of directors. He will be offered a one year evergreen employment
agreement.
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(d) Niagara Bancorp hereby affirms that it is its present intention to
operate CSB as a separate subsidiary for at least the next two years with the
same board of directors as constituted pursuant to Section 5.13(a).
(e) The board of directors of CSB may form an outplacement committee to
oversee outplacement of those employees who will not be retained. However, it is
understood that CSB will only provide nominal funding for an outplacement
program. The chief financial officer of CSB as of the date of this Agreement
will be permitted to continue to use an office and a telephone, facsimile
machine and personal computer at the main offices of CSB for outplacement
purposes for six months after the Closing Date.
(f) Niagara Bancorp shall cause its Board of Directors to be expanded
to include Harvey Kaufman, the current chairman of the board of CNYF and, and he
shall commence service on the Niagara Bancorp Board of Directors immediately
following the Merger Effective Date.
ARTICLE VI
CONDITIONS
SECTION 6.01 CONDITIONS TO CNYF'S OBLIGATIONS UNDER THIS AGREEMENT. The
obligations of CNYF hereunder shall be subject to satisfaction at or prior to
the Closing Date of each of the following conditions, unless waived by CNYF
pursuant to Section 8.03 hereof:
(a) CORPORATE PROCEEDINGS. All action required to be taken by, or on
the part of, Niagara Bancorp and Niagara Merger Corp to authorize the execution,
delivery and performance of this Agreement, and the consummation of the
transactions contemplated by this Agreement, shall have been duly and validly
taken by Niagara Bancorp and Niagara Merger Corp; and CNYF shall have received
certified copies of the resolutions evidencing such authorizations;
(b) COVENANTS. The obligations and covenants of Niagara Bancorp
required by this Agreement to be performed by Niagara Bancorp at or prior to the
Closing Date shall have been duly performed and complied with in all material
respects;
(c) REPRESENTATIONS AND WARRANTIES. The representations and warranties
of Niagara Bancorp set forth in this Agreement shall be true and correct in all
material respects as of the date of this Agreement, and as of the Closing Date
as though made on and as of the Closing Date (except as to any representation or
warranty which specifically relates to an earlier date);
(d) APPROVALS OF REGULATORY AUTHORITIES. Niagara Bancorp shall have
received all required approvals of Regulatory Authorities of the Merger, and all
notice and waiting periods required thereunder shall have expired or been
terminated;
(e) NO INJUNCTION. There shall not be in effect any order, decree or
injunction of a court or agency of competent jurisdiction which enjoins or
prohibits consummation of the transactions contemplated hereby;
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(f) OFFICER'S CERTIFICATE. Niagara Bancorp shall have delivered to CNYF
a certificate, dated the Closing Date and signed, without personal liability, by
its chairman of the board or president, to the effect that the conditions set
forth in subsections (a) through (e) and (i) of this Section 6.01 have been
satisfied, to the best knowledge of the officer executing the same;
(g) OPINION OF NIAGARA BANCORP'S COUNSEL. CNYF shall have received an
opinion of Luse Lehman Gorman Pomerenk & Schick, P.C., counsel to Niagara
Bancorp, dated the Closing Date, in form and substance reasonably satisfactory
to CNYF and its counsel to the effect set forth on Exhibit 6.1 attached hereto;
(h) APPROVAL OF CNYF'S SHAREHOLDERS. This Agreement shall have been
approved by the shareholders of CNYF by such vote as is required under
applicable Delaware law, and CNYF's certificate of incorporation and bylaws; and
(i) FUNDS DEPOSITED WITH THE EXCHANGE AGENT. Niagara Bancorp shall have
deposited or caused to be deposited, in trust with the Exchange Agent, an amount
of cash equal to the aggregate Merger Consideration that the CNYF stockholders
shall be entitled to receive on the Merger Effective Date pursuant to Section
2.02 of this Agreement.
SECTION 6.02 CONDITIONS TO NIAGARA BANCORP'S OBLIGATIONS UNDER THIS
AGREEMENT. The obligations of Niagara Bancorp hereunder shall be subject to
satisfaction at or prior to the Closing Date of each of the following
conditions, unless waived by Niagara Bancorp pursuant to Section 8.03 hereof:
(a) CORPORATE PROCEEDINGS. All action required to be taken by, or on
the part of, CNYF to authorize the execution, delivery and performance of this
Agreement, and the consummation of the transactions contemplated by this
Agreement, shall have been duly and validly taken by CNYF; and Niagara Bancorp
shall have received certified copies of the resolutions evidencing such
authorizations;
(b) COVENANTS. The obligations and covenants of CNYF required by this
Agreement to be performed by it at or prior to the Closing Date shall have been
duly performed and complied with in all material respects;
(c) REPRESENTATIONS AND WARRANTIES. The representations and warranties
of CNYF set forth in this Agreement shall be true and correct in all material
respects as of the date of this Agreement, and as of the Closing Date as though
made on and as of the Closing Date (except as to any representation or warranty
which specifically relates to an earlier date);
(d) APPROVALS OF REGULATORY AUTHORITIES. Niagara Bancorp shall have
received all required approvals of Regulatory Authorities of the Merger (without
the imposition of any conditions that are in Niagara Bancorp's reasonable
judgment unduly burdensome); and all notice and waiting periods required
thereunder shall have expired or been terminated;
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(e) NO INJUNCTION. There shall not be in effect any order, decree or
injunction of a court or agency of competent jurisdiction which enjoins or
prohibits consummation of the transactions contemplated hereby;
(f) NO MATERIAL ADVERSE EFFECT. Since December 31, 1998, there shall
not have occurred any Material Adverse Effect with respect to CNYF;
(g) APPROVAL OF CNYF'S SHAREHOLDERS. This Agreement shall have been
approved by the shareholders of CNYF by such vote as is required under
applicable Delaware law, and CNYF's certificate of incorporation and bylaws;
(h) OFFICER'S CERTIFICATE. CNYF shall have delivered to Niagara Bancorp
a certificate, dated the Closing Date and signed, without personal liability, by
its chairman of the board or president, to the effect that the conditions set
forth in subsections (a) through (g) and (k) of this Section 6.02 have been
satisfied, to the best knowledge of the officer executing the same;
(i) OPINIONS OF CNYF'S COUNSEL. Niagara Bancorp shall have received an
opinion of Serchuk & Zelermyer, LLP, counsel to CNYF, dated the Closing Date, in
form and substance reasonably satisfactory to Niagara Bancorp and its counsel to
the effect set forth on Exhibit 6.3 attached hereto;
(j) TAX OPINION. Niagara Bancorp shall have received an opinion of Luse
Lehman Gorman Pomerenk & Schick, P.C., its counsel, substantially to the effect
set forth on Exhibit 6.2 attached hereto.
(k) EQUITY. The stockholders' equity of CNYF shall not decline below
the level set forth in the September 30, 1999 CNYF Financials, except as a
result of actions taken at the request of Niagara Bancorp pursuant to this
Agreement or due to any change in the net unrealized gain or loss in securities
available for sale or as a result of stock repurchases completed in October,
1999.
SECTION 6.03 ENVIRIONMENTAL CONDITION.
(a) With respect to a CSB-owned property located at 12 South Main
Street in the Village of Homer ("Homer Site"), a Phase II environmental
inspection has been conducted regarding underground oil tanks and a dry well. If
the cost of remediation, if any, necessary to obtain a letter from the New York
State Department of Environmental Conservation that no further action with
respect to the Homer Site is required is $100,000 or less, then the
environmental conditions at the Homer Site shall have no effect on this
Agreement and the transactions contemplated hereby. If the cost of such
remediation exceeds $100,000, then for each $50,000 that the cost exceeds
$100,000, the Merger Consideration payable hereunder shall be reduced by $0.01
per share. If the aggregate reduction in the Merger consideration pursuant to
the preceding sentence would be more than $0.10 per share, then CNYF shall have
the right to terminate this Agreement and the Niagara Option and the parties
shall have no further liability to each other hereunder.
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(b) CNYF shall have the right to purchase insurance against remediation
expenses in excess of a level specified in such insurance policy. CNYF shall use
it reasonable best efforts to obtain a letter from the New York State Department
of Environmental Conservation that no further action with respect to the Homer
Site is required prior to purchasing insurance. CNYF shall further consult with
Niagara Bancorp in connection with the purchase of any such insurance. Niagara
Bancorp agrees to accept such policy in satisfaction of any obligation to obtain
a letter from the DEC. For the purposes of the preceding paragraph, in
calculating whether the environment conditions have any effect on this
Agreement, whether there is any adjustment in the Merger Consideration, or
whether CNYF has the right to terminate this Agreement and the Option, the
premium for such insurance shall be added to any remediation expenses actually
paid by CNYF or which remains payable by CNYF in order to trigger the insurance.
ARTICLE VII
TERMINATION, WAIVER AND AMENDMENT
SECTION 7.01 TERMINATION. This Agreement may be terminated on or at any
time prior to the Closing Date:
(a) By the mutual written consent of the parties hereto;
(b) By Niagara Bancorp or CNYF:
(i) if there shall have been a material breach of any
representation, warranty, covenant or other obligation of the other party, and
the breach cannot be, or shall not have been, cured within 30 days after receipt
by such other party of notice in writing specifying the nature of such breach
and requesting that it be cured;
(ii) if the Closing Date shall not have occurred on or before
September 30, 2000, unless the failure of such occurrence shall be due to the
failure of the party seeking to terminate this Agreement to perform or observe
its obligations set forth in this Agreement required to be performed or observed
by such party on or before the Closing Date;
(iii) if either party has been informed in writing by a Regulatory
Authority whose approval or consent has been requested that such approval or
consent is unlikely to be granted, unless the failure of such occurrence shall
be due to the failure of the party seeking to terminate this Agreement to
perform or observe its agreements set forth herein required to be performed or
observed by such party on or before the Closing Date;
(iv) if there has been no Superior Proposal but the approval of the
shareholders of CNYF required for the consummation of the Merger shall not have
been obtained by reason of the failure to obtain the required vote at a duly
held meeting of shareholders or at any adjournment or postponement thereof;
(c) by CNYF if, as provided in Section 5.06, it receives a Superior
Proposal and the CNYF Board of Directors determines that it would be in
accordance with its fiduciary duties, based upon the advice of its outside legal
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counsel, to accept the third party proposal; PROVIDED, HOWEVER, that such
termination shall not effect the right of Niagara Bancorp to exercise the Stock
Option Agreement; or
(d) by Niagara Bancorp if (i) as provided in Section 5.06, the Board of
Directors of CNYF withdraws its recommendation of this Agreement, fails to make
such recommendation or modifies or qualifies its recommendation in a manner
adverse to Niagara Bancorp, or (ii) CNYF enters into an agreement to be acquired
by, or merge or combine with, a third party in connection with a Superior
Proposal. PROVIDED, HOWEVER, that such termination shall not effect the right of
Niagara Bancorp to exercise the Stock Option Agreement
SECTION 7.02 EFFECT OF TERMINATION. If this Agreement is terminated
pursuant to Section 7.01 hereof, this Agreement shall forthwith become void
(other than Section 5.02(a) and (d) and Section 8.01 hereof, which shall remain
in full force and effect), and there shall be no further liability on the part
of any of Niagara Bancorp, Niagara Merger Corp or CNYF, or their respective
officers, directors and employees.
ARTICLE VIII
MISCELLANEOUS
SECTION 8.01 EXPENSES.
(a) Whether or not the Merger is consummated, all costs and expenses
incurred in connection with this Agreement and the transactions contemplated by
this Agreement shall be paid by the party incurring such expenses, except as
this Agreement otherwise expressly provides.
(b) In the event of a willful breach of any representation, warranty,
covenant or agreement contained in this Agreement, the breaching party shall
remain liable for any and all damages, costs and expenses, including all
reasonable attorneys' fees, sustained or incurred by the non-breaching party as
a result thereof or in connection therewith or with the enforcement of its
rights hereunder.
SECTION 8.02 NON-SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All
representations, warranties and, except to the extent specifically provided
otherwise herein, agreements and covenants, other than those covenants set forth
in Article II, and Section 5.02(d), the last sentence of Section 5.02(d),
Sections 5.05, and 5.13(b), (e) and (f), which will survive the Merger, shall
terminate on the Closing Date.
SECTION 8.03 AMENDMENT, EXTENSION AND WAIVER. Subject to applicable
law, at any time prior to the consummation of the transactions contemplated by
this Agreement, the parties may (a) amend this Agreement, (b) extend the time
for the performance of any of the obligations or other acts of either party
hereto, (c) waive any inaccuracies in the representations and warranties
contained herein or in any document delivered pursuant hereto, or (d) waive
compliance with any of the agreements or conditions contained in Articles V and
VI hereof or otherwise. This Agreement may not be amended except by an
instrument in writing authorized by the respective Boards of Directors and
signed, by duly authorized officers, on behalf of the parties hereto. Any
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agreement on the part of a party hereto to any extension or waiver shall be
valid only if set forth in an instrument in writing signed by a duly authorized
officer on behalf of such party, but such waiver or failure to insist on strict
compliance with such obligation, covenant, agreement or condition shall not
operate as a waiver of, or estoppel with respect to, any subsequent or other
failure.
SECTION 8.04 ENTIRE AGREEMENT. This Agreement, including the documents
and other writings referred to herein or delivered pursuant hereto, contains the
entire agreement and understanding of the parties with respect to its subject
matter. This Agreement supersedes all prior arrangements and understandings
between the parties, both written or oral with respect to its subject matter.
This Agreement shall inure to the benefit of and be binding upon the parties
hereto and their respective successors; provided, however, that nothing in this
Agreement, expressed or implied, is intended to confer upon any party, other
than the parties hereto and their respective successors, any rights, remedies,
obligations or liabilities other than pursuant to Sections 2.02, 2.03, 2.04 and
5.05.
SECTION 8.05 NO ASSIGNMENT. Neither party hereto may assign any of its
rights or obligations hereunder to any other person, without the prior written
consent of the other party hereto.
SECTION 8.06 NOTICES. All notices or other communications hereunder
shall be in writing and shall be deemed given if delivered personally, mailed by
prepaid registered or certified mail (return receipt requested), or sent by
telecopy, addressed as follows:
(a) If to Niagara Bancorp, Inc. to:
Niagara Bancorp
6950 South Transit Road, P.O. Box 514
Lockport, New York 14095-0514
Attention: William E. Swan
President and Chief Executive Officer
with a copy to: Luse Lehman Gorman Pomerenk & Schick, PC
5335 Wisconsin Avenue, NW
Washington, D.C. 20015
Attention: John J. Gorman, Esq.
Eric Luse, Esq.
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(b) If to CNYF, to:
CNY Financial Corporation
One North Main Street
Cortland, New York 13405
Attn: Harvey Kaufman
Chairman of the Board
with a copy to: Jay Hack, Esq.
Serchuk & Zelermyer, LLP
81 Main Street
White Plains, New York 10601
Telecopy: 914-761-2299
SECTION 8.07 CAPTIONS. The captions contained in this Agreement are for
reference purposes only and are not part of this Agreement.
SECTION 8.08 COUNTERPARTS. This Agreement may be executed in any number
of counterparts, and each such counterpart shall be deemed to be an original
instrument, but all such counterparts together shall constitute but one
agreement.
SECTION 8.09 SEVERABILITY. If any provision of this Agreement or the
application thereof to any person or circumstance shall be invalid or
unenforceable to any extent, the remainder of this Agreement and the application
of such provisions to other persons or circumstances shall not be affected
thereby and shall be enforced to the greatest extent permitted by law.
SECTION 8.10 SPECIFIC PERFORMANCE. The parties hereto agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement were not performed in accordance with their specific terms or were
otherwise breached. It is accordingly agreed that the parties shall be entitled
to an injunction or injunctions to prevent breaches of this Agreement and to
enforce specifically the terms and provisions hereof, this being in addition to
any other remedy to which they are entitled at law or in equity.
SECTION 8.11 GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the domestic internal law (including the law of
conflicts of law) of the State of Delaware.
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IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their duly authorized officers as of the day and year first above
written.
NIAGARA BANCORP, INC.
By: /s/ WILLIAM E. SWAN
-----------------------------------------
William E. Swan
President and Chief Executive Officer
NIAGARA MERGER CORP
By: /s/ WILLIAM E. SWAN
-----------------------------------------
William E. Swan
President and Chief Executive Officer
CNY FINANCIAL CORPORATION
By: /s/ HARVEY KAUFMAN
-----------------------------------------
Harvey Kaufman
Chairman of the Board
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EXHIBIT A
STOCK OPTION AGREEMENT
STOCK OPTION AGREEMENT, dated December 28, 1999, between CNY Financial
Corporation., a Delaward corporation ("Issuer") and Niagara Bancorp, Inc., a
Delaware corporation ("Grantee"). Capitalized terms used herein without
definition have the meanings specified in the Merger Agreement (as hereinafter
defined).
W I T N E S S E T H:
WHEREAS, Grantee and Issuer have entered into an Agreement and Plan of
Merger dated December 28, 1999 (the "Merger Agreement"), which agreement has
been executed by the parties hereto prior to this Agreement; and
WHEREAS, as a condition to Grantee's entering into the Merger Agreement
and in consideration therefor, Issuer has agreed to grant Grantee the Option (as
hereinafter defined):
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements set forth herein and in the Merger Agreement, the
parties hereto agree as follows:
1. (a) Issuer hereby grants to Grantee an unconditional, irrevocable
option (the "Option") to purchase, subject to the terms hereof, up to 919,814
fully paid and nonassessable shares of its common stock, par value $0.01 per
share ("Common Stock"), at a price of $16.75 per share (such price, as adjusted
if applicable, the "Option Price"); provided, however, that in the event Issuer
issues or agrees to issue any shares of Common Stock (other than as permitted
under the Merger Agreement) at a price less than $16.75 per share, such Option
Price shall be equal to such lesser price. The number of shares of Common Stock
that may be received upon the exercise of the Option and the Option Price are
subject to adjustment as herein set forth.
(b) In the event that any additional shares of Common Stock are issued
or otherwise become outstanding after the date of this Agreement (other than
pursuant to this Agreement), the number of shares of Common Stock subject to the
Option shall be increased so that, after such issuance, it equals 19.99% of the
number of shares of Common Stock then issued and outstanding without giving
effect to any shares subject or issued pursuant to the Option. Nothing contained
in this Section 1(b) or elsewhere in this Agreement shall be deemed to authorize
Issuer or Grantee to breach any provision of the Merger Agreement.
2. (a) The holder or holders of the Option (including Grantee or any
subsequent transferee(s)) (the "Holder") may exercise the Option, in whole or
part, if, but only if, both an Initial Triggering Event (as hereinafter defined)
and a Subsequent Triggering Event (as hereinafter defined) shall have occurred
prior to the occurrence of an Exercise Termination Event (as hereinafter
defined), provided that the Holder shall have sent the written notice of such
exercise (as provided in subsection (e) of this Section 2) within 180 days
following the first such Subsequent Triggering Event. Each of the following
shall be an Exercise Termination Event: (i) the Merger Effective Date (as
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defined in the Merger Agreement); (ii) termination of the Merger Agreement in
accordance with the provisions thereof if such termination occurs prior to the
occurrence of an Initial Triggering Event; or (iii) the passage of eighteen
months after termination of the Merger Agreement if such termination follows or
occurs at the same time as the occurrence of an Initial Triggering Event.
(b) The term "Initial Triggering Event" shall mean any of the following
events or transactions occurring after the date hereof:
(i) Issuer participates (or authorizes participation in)
negotiations regarding a Superior Proposal, as contemplated in Sections
5.06 and 7.01(c) of the Merger Agreement.
(ii) Issuer or any of its Subsidiaries (each an "Issuer
Subsidiary"), without having received Grantee's prior written consent,
shall have entered into an agreement to engage in an Acquisition
Transaction (as hereinafter defined) with any person (the term "person"
for purposes of this Agreement having the meaning assigned thereto in
Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act of 1934,
and the rules and regulations thereunder (the "1934 Act")) other than
Grantee or any of its Subsidiaries (each a "Grantee Subsidiary"). For
purposes of this Agreement, "Acquisition Transaction" shall mean (x) a
merger or consolidation, or any similar transaction, involving Issuer
or any SIGNIFICANT Subsidiary (as defined in Rule 1-02 of Regulation
S-X promulgated by the SEC) of Issuer, (y) a purchase, lease or other
acquisition of all or substantially all of the assets of Issuer or any
Significant Subsidiary of Issuer, or (z) a purchase or other
acquisition (including by way of merger, consolidation, share exchange
or otherwise) of beneficial ownership of securities representing 15% or
more of the voting power of Issuer or any Significant Subsidiary of
Issuer, provided that the term "Acquisition Transaction" does not
include any internal merger or consolidation involving only Issuer
and/or Issuer Subsidiaries;
(iii) (A) Any person other than Grantee, or any Grantee Subsidiary,
or any Issuer Subsidiary acting in a fiduciary capacity (collectively,
"Excluded Persons"), alone or together with such person's affiliates
and associates (as such terms are defined in Rule 12b-2 under the 1934
Act) shall have acquired beneficial ownership or the right to acquire
beneficial ownership of 15% or more of the outstanding shares of Common
Stock (the term "beneficial ownership" for purposes of this Option
Agreement having the meaning assigned thereto in Section 13(d) of the
1934 Act, and the rules and regulations thereunder) or (B) any group
(as such term is defined in Section 13(d)(3) of the 1934 Act), other
than a group of which only Excluded Persons are members, shall have
been formed that beneficially owns15% or more of the shares of Common
Stock then outstanding;
(iv) The Board of Directors of Issuer shall have failed to
recommend to its stockholders the adoption of the Merger Agreement or
shall have withdrawn, modified or changed its recommendation in a
manner adverse to Grantee;
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(v) After a proposal is made by a third party (other than an
Excluded Person) to Issuer to engage in an Acquisition Transaction:
Issuer shall have intentionally and knowingly breached any
representation, warranty, covenant or agreement contained in the Merger
Agreement and such breach (x) would entitle Grantee to terminate the
Merger Agreement pursuant to Section 7.01(b)(i) therein (without regard
to any grace period provided for therein) and (y) shall not have been
cured prior to the Notice Date (as defined below); or the CNYF
stockholders shall fail to approve the Merger Agreement.
(vi) Any person other than Grantee or any Grantee Subsidiary, other
than in connection with a transaction to which Grantee has given its
prior written consent, shall have filed an application or notice with
any federal or state bank regulatory authority ("Regulatory
Authority"), for approval to engage in an Acquisition Transaction.
(c) The term "Subsequent Triggering Event" shall mean either of the
following events or transactions occurring after the date hereof:
(i) The acquisition by any person other than an Excluded Person of
beneficial ownership of 25% or more of the then outstanding Common
Stock; or
(ii) The occurrence of the Initial Triggering Event described in
subparagraph (ii) of subsection (b) of this Section 2.
(d) Issuer shall notify Grantee promptly in writing of the occurrence
of any Initial Triggering Event or Subsequent Triggering Event (together, a
"Triggering Event"), it being understood that the giving of such notice by
Issuer shall not be a condition to the right of the Holder to exercise the
Option.
(e) In the event the Holder is entitled to and wishes to exercise the
Option, it shall send to Issuer a written notice (the date of which is herein
referred to as the "Notice Date") specifying (i) the total number of shares it
will purchase pursuant to such exercise and (ii) a place and date not earlier
than three business days nor later than 60 business days from the Notice Date
for the closing of such purchase (the "Closing Date"); provided that if prior
notification to or approval of any Regulatory Authority is required in
connection with such purchase, the Holder shall promptly file the required
notice or application for approval and shall expeditiously process the same and
the period of time that otherwise would run pursuant to this sentence shall run
instead from the date on which any required notification periods have expired or
been terminated or such approvals have been obtained and any requisite waiting
period or periods shall have passed. Any exercise of the Option shall be deemed
to occur on the Notice Date relating thereto.
(f) At each closing referred to in subsection (e) of this Section 2,
the Holder shall pay to Issuer the aggregate purchase price for the shares of
Common Stock purchased pursuant to the exercise of the Option in immediately
available funds by wire transfer to a bank account designated by Issuer,
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provided that failure or refusal of Issuer to designate such a bank account
shall not preclude the Holder from exercising the Option.
(g) At such closing, simultaneously with the delivery of immediately
available funds as provided in subsection (f) of this Section 2, Issuer shall
deliver to the Holder a certificate or certificates representing the number of
shares of Common Stock purchased by the Holder and, if the Option should be
exercised in part only, a new Option evidencing the rights of the Holder thereof
to purchase the balance of the shares purchasable hereunder.
(h) Upon the giving by the Holder to Issuer of the written notice of
exercise of the Option provided for under subsection (e) of this Section 2 and
the tender of the applicable purchase price in immediately available funds, the
Holder shall be deemed to be the holder of record of the shares of Common Stock
issuable upon such exercise, notwithstanding that the stock transfer books of
Issuer shall then be closed or that certificates representing such shares of
Common Stock shall not then be actually delivered to the Holder. Issuer shall
pay all expenses, and any and all United States federal, state and local taxes
and other charges that may be payable in connection with the preparation, issue
and delivery of stock certificates under this Section 2 in the name of the
Holder or its assignee, transferee or designee.
3. Issuer agrees: (i) that it shall at all times maintain, free from
preemptive rights, sufficient authorized but unissued or treasury shares of
Common Stock so that the Option may be exercised without additional
authorization of Common Stock after giving effect to all other options,
warrants, convertible securities and other rights to purchase Common Stock; (ii)
that it will not, by charter amendment or through reorganization, consolidation,
merger, dissolution or sale of assets, or by any other voluntary act, avoid or
seek to avoid the observance or performance of any of the covenants,
stipulations or conditions to be observed or performed hereunder by Issuer;
(iii) promptly to take all action as may from time to time be required
(including (x) complying with all premerger notification, reporting and waiting
period requirements specified in 15 U.S.C. Section 18a and regulations
promulgated thereunder and (y) in the event, under the Change in Bank Control
Act of 1978, as amended, or any state banking law, prior approval of or notice
to to any state regulatory authority is necessary before the Option may be
exercised, cooperating fully with the Holder in preparing such applications or
notices and providing such information to the any Regulatory Authority as they
may require) in order to permit the Holder to exercise the Option and Issuer
duly and effectively to issue shares of Common Stock pursuant hereto; and (iv)
promptly to take all action provided herein to protect the rights of the Holder
against dilution.
4. This Agreement (and the Option granted hereby) are exchangeable,
without expense, at the option of the Holder, upon presentation and surrender of
this Agreement at the principal office of Issuer, for other Agreements providing
for Options of different denominations entitling the holder thereof to purchase,
on the same terms and subject to the same conditions as are set forth herein, in
the aggregate the same number of shares of Common Stock purchasable hereunder.
The terms "Agreement" and "Option" as used herein include any Stock Option
Agreements and related Options for which this Agreement (and the Option granted
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hereby) may be exchanged. Upon receipt by Issuer of evidence reasonably
satisfactory to it of the loss, theft, destruction or mutilation of this
Agreement, and (in the case of loss, theft or destruction) of reasonably
satisfactory indemnification, and upon surrender and cancellation of this
Agreement if mutilated, Issuer will execute and deliver a new Agreement of like
tenor and date. Any such new Agreement executed and delivered shall constitute
an additional contractual obligation on the part of Issuer, whether or not the
Agreement so lost, stolen, destroyed or mutilated shall at any time be
enforceable by anyone.
5. In addition to the adjustment in the number of shares of Common
Stock that are purchasable upon exercise of the Option pursuant to Section 1 of
this Agreement, in the event of any change in Common Stock by reason of stock
dividends, split-ups, mergers, recapitalizations, combinations, subdivisions,
conversions, exchanges of shares, distributions, or the like, the type and
number, and/or the price, of shares of Common Stock purchasable upon exercise
hereof shall be appropriately adjusted, and proper provision shall be made in
the agreements governing such transaction so that the Holder shall receive, upon
exercise of the Option (at the aggregate exercise price calculated in accordance
with Section 1 of this Agreement), the number and class of shares or other
securities or property that Holder would have received in respect of the Common
Stock if the Option had been exercised immediately prior to such event, or the
record date therefor, as applicable.
6. (a) In the event that prior to an Exercise Termination Event, Issuer
shall enter into an agreement (i) to consolidate with or merge into any person,
other than Grantee or one of its Subsidiaries, and shall not be the continuing
or surviving corporation of such consolidation or merger, (ii) to permit any
person, other than Grantee or one of its Subsidiaries, to merge into Issuer and
Issuer shall be the continuing or surviving corporation, but, in connection with
such merger, the then outstanding shares of Common Stock shall be changed into
or exchanged for stock or other securities of any other person or cash or any
other property or the then outstanding shares of Common Stock shall after such
merger represent less than 50% of the outstanding shares and share equivalents
of the merged company, or (iii) to sell or otherwise transfer all or
substantially all of its assets to any person, other than Grantee or one of its
Subsidiaries, then, and in each such case, the agreement governing such
transaction shall make proper provision so that the Option shall, upon the
consummation of any such transaction and upon the terms and conditions set forth
herein, be converted into, or exchanged for, an option (the "Substitute
Option"), at the election of the Holder, of either (x) the Acquiring Corporation
(as hereinafter defined) or (y) any person that controls the Acquiring
Corporation.
(b) The following terms have the meanings indicated:
(1) "Acquiring Corporation" shall mean (i) the continuing or
surviving corporation of a consolidation or merger with Issuer (if
other than Issuer), (ii) Issuer in a merger in which Issuer is the
continuing or surviving person, and (iii) the transferee of all or
substantially all of Issuer's assets.
(2) "Substitute Common Stock" shall mean the shares of capital
stock (or similar equity interest) with the greatest voting power with
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respect of the election of directors (or other persons similarly
responsible for direction of the business and affairs) of the issuer of
the Substitute Option.
(3) "Assigned Value" shall mean the highest of (i) the price per
share of Common Stock at which a tender offer or exchange offer
therefor has been made, (ii) the price per share of Common Stock to be
paid by any third party pursuant to an agreement with Issuer, or (iii)
in the event of a sale of all or substantially all of Issuer's assets,
the sum of the price paid in such sale for such assets and the current
market value of the remaining assets of Issuer as determined by a
nationally recognized investment banking firm selected by the Holder,
divided by the number of shares of Common Stock of Issuer outstanding
at the time of such sale. In determining the market/offer price, the
value of consideration other than cash shall be determined by a
nationally recognized investment banking firm selected by the Holder.
(4) "Average Price" shall mean the average closing price of a share
of the Substitute Common Stock for the six months immediately preceding
the consolidation, merger or sale in question, but in no event higher
than the closing price of the shares of Substitute Common Stock on the
day preceding such consolidation, merger or sale; provided that if
Issuer is the issuer of the Substitute Option, the Average Price shall
be computed with respect to a share of Common Stock issued by the
person merging into Issuer or by any company which controls or is
controlled by such person, as the Holder may elect.
(c) The Substitute Option shall have the same terms and conditions as
the Option, provided, that if any term or condition of the Substitute Option
cannot, for legal reasons, be the same as the Option, such term or condition
shall be as similar as possible and in no event less advantageous to the Holder.
The issuer of the Substitute Option shall also enter into an agreement with the
then Holder or Holders of the Substitute Option in substantially the same form
as this Agreement, which shall be applicable to the Substitute Option.
(d) The Substitute Option shall be exercisable for such number of
shares of Substitute Common Stock as is equal to (i) the product of (A) the
Assigned Value and (B) the number of shares of Common Stock for which the Option
is then exercisable, divided by (ii) the Average Price. The exercise price of
the Substitute Option per share of Substitute Common Stock shall then be equal
to the Option Price multiplied by a fraction the numerator of which shall be the
number of shares of Common Stock for which the Option is then exercisable and
the denominator of which shall be the number of shares of Substitute Common
Stock for which the Substitute Option is exercisable.
(e) In no event, pursuant to any of the foregoing paragraphs, shall the
Substitute Option be exercisable for more than 19.9% of the shares of Substitute
Common Stock outstanding prior to exercise of the Substitute Option.
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(f) Issuer shall not enter into any transaction described in subsection
(a) of this Section 7 unless the Acquiring Corporation and any person that
controls the Acquiring Corporation assume in writing all the obligations of
Issuer hereunder.
7. The 180-day period for exercise of certain rights under Section 2
shall be extended: (i) to the extent necessary to obtain all regulatory
approvals for the exercise of such rights, and for the expiration of all
statutory waiting periods; and (ii) to the extent necessary to avoid liability
under Section 16(b) of the 1934 Act by reason of such exercise.
8. Repurchase at the Option of Holder. (a) At the request of Holder at
any time commencing upon the first occurrence of a Repurchase Event (as defined
in Section 8(d)) and ending 12 months immediately thereafter, Issuer shall
repurchase from Holder (i) the Option and (ii) all shares of Issuer Common Stock
purchased by Holder pursuant hereto with respect to which Holder then has
beneficial ownership. The date on which Holder exercises its rights under this
Section 8 is referred to as the "Request Date". Such repurchase shall be at an
aggregate price (the "Section 8 Repurchase Consideration") equal to the sum of:
(i) the aggregate Option Price paid by Holder for any shares of
Issuer Common Stock acquired pursuant to the Option with respect to which Holder
then has beneficial ownership;
(ii) the excess, if any, of (x) the Applicable Price (as defined
below) for each share of Common Stock over (y) the Option Price (subject to
adjustment pursuant to Sections 1 and 5), multiplied by the number of shares of
Common Stock with respect to which the Option has not been exercised; and
(iii) the excess, if any, of the Applicable Price over the Option
Price (subject to adjustment pursuant to Sections 1 and 5) paid (or, in the case
of Option Shares with respect to which the Option has been exercised but the
Closing Date has not occurred, payable) by Holder for each share of Common Stock
with respect to which the Option has been exercised and with respect to which
Holder then has beneficial ownership, multiplied by the number of such shares.
(b) If Holder exercises its rights under this Section 8, Issuer
shall, within 10 business days after the Request Date, pay the Section 8
Repurchase Consideration to Holder in immediately available funds, and
contemporaneously with such payment, Holder shall surrender to Issuer the Option
and the certificates evidencing the shares of Common Stock purchased thereunder
with respect to which Holder then has beneficial ownership, and Holder shall
warrant that it has sole record and beneficial ownership of such shares and that
the same are then free and clear of all liens. Notwithstanding the foregoing, to
the extent that prior notification to or approval of any federal or state
regulatory authority is required in connection with the payment of all or any
portion of the Section 8 Repurchase Consideration, Holder shall have the ongoing
option to revoke its request for repurchase pursuant to Section 8, in whole or
in part, or to require that Issuer deliver from time to time that portion of the
Section 8 Repurchase Consideration that it is not then so prohibited from paying
and promptly file the required notice or application for approval and
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expeditiously process the same (and each party shall cooperate with the other in
the filing of any such notice or application and the obtaining of any such
approval). If any federal or state regulatory authority disapproves of any part
of Issuer's proposed repurchase pursuant to this Section 8, Issuer shall
promptly give notice of such fact to Holder. If any federal or state regulatory
authority prohibits the repurchase in part but not in whole, then Holder shall
have the right (i) to revoke the repurchase request or (ii) to the extent
permitted by such regulatory authority, determine whether the repurchase should
apply to the Option and/or Option Shares and to what extent to each, and Holder
shall thereupon have the right to exercise the Option as to the number of Option
Shares for which the Option was exercisable at the Request Date less the sum of
the number of shares covered by the Option in respect of which payment has been
made pursuant to Section 8(a)(ii) and the number of shares covered by the
portion of the Option (if any) that has been repurchased. Holder shall notify
Issuer of its determination under the preceding sentence within five (5)
business days of receipt of notice of disapproval of the repurchase.
Notwithstanding anything herein to the contrary, all of Holder's rights
under this Section 8 shall terminate on the date of termination of this Option
pursuant to Section 2(a).
(c) For purposes of this Agreement, the "Applicable Price" means the
highest of (i) the highest price per share of Common Stock paid for any such
share by the person or groups described in Section 8(d)(i), (ii) the price per
share of Common Stock received by holders of Common Stock in connection with any
merger or other business combination transaction described in Section 6(a)(i),
6(a)(ii) or 6(a)(iii), or (iii) the highest closing bid price per share of
Issuer Common Stock quoted on the Nasdaq System (or if Issuer Common Stock is
not quoted on the Nasdaq System, the highest bid price per share as quoted on
the principal trading market or securities exchange on which such shares are
traded as reported by a recognized source chosen by Holder) during the 40
business days preceding the Request Date; provided, however, that in the event
of a sale of less than all of Issuer's assets, the Applicable Price shall be the
sum of the price paid in such sale for such assets and the current market value
of the remaining assets of Issuer as determined by a nationally recognized
investment banking firm selected by Holder, divided by the number of shares of
Common Stock outstanding at the time of such sale. If the consideration to be
offered, paid or received pursuant to either of the foregoing clauses (i) or
(ii) shall be other than in cash, the value of such consideration shall be
determined in good faith by an independent nationally recognized investment
banking firm selected by Holder and reasonably acceptable to Issuer, which
determination shall be conclusive for all purposes of this Agreement.
(d) As used herein, "Repurchase Event" shall occur if, prior to an
Exercise Termination Event, (i) any person (other than Grantee or any subsidiary
of Grantee) shall have acquired beneficial ownership of (as such term is defined
in Rule 13d-3 promulgated under the Exchange Act), or the right to acquire
beneficial ownership of, or any "group" (as such term is defined under the
Exchange Act) shall have been formed which beneficially owns or has the right to
acquire beneficial ownership of, 25% or more of the then outstanding shares of
Issuer Common Stock, or (ii) any of the transactions described in Section
6(a)(i), 6(a)(ii) or 6(a)(iii) shall be consummated.
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9. Issuer hereby represents and warrants to Grantee as follows:
(a) Issuer has full corporate power and authority to execute and
deliver this Agreement and to consummate the transactions contemplated hereby.
The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly and validly authorized by the
Board of Directors of Issuer and no other corporate proceedings on the part of
Issuer are necessary to authorize this Agreement or to consummate the
transactions so contemplated. This Agreement has been duly and validly executed
and delivered by Issuer. This Agreement is the valid and legally binding
obligation of Issuer.
(b) Issuer has taken all necessary corporate action to authorize and
reserve and to permit it to issue, and at all times from the date hereof through
the termination of this Agreement in accordance with its terms will have
reserved for issuance upon the exercise of the Option, that number of shares of
Common Stock equal to the maximum number of shares of Common Stock at any time
and from time to time issuable hereunder, and all such shares, upon issuance
pursuant hereto, will be duly authorized, validly issued, fully paid,
nonassessable, and will be delivered free and clear of all claims, liens,
encumbrance and security interests and not subject to any preemptive rights.
(c) Issuer has taken all necessary action to exempt this Agreement, and
the transactions contemplated hereby and thereby from, and this Agreement and
the transactions contemplated hereby and thereby are exempt from, (i) any
applicable state takeover laws, (ii) any state laws limiting or restricting the
voting rights of stockholders and (iii) any provision in its or any of its
subsidiaries' articles of incorporation, certificate of incorporation, charter
or bylaws restricting or limiting stock ownership or the voting rights of
stockholders.
(d) The execution, delivery and performance of this Agreement does not
or will not, and the consummation by Issuer of any of the transactions
contemplated hereby will not, constitute or result in (i) a breach or violation
of, or a default under, its certificate of incorporation or bylaws, or the
comparable governing instruments of any of its subsidiaries, or (ii) a breach or
violation of, or a default under, any agreement, lease, contract, note,
mortgage, indenture, arrangement or other obligation of it or any of its
subsidiaries (with or without the giving of notice, the lapse of time or both)
or under any law, rule, ordinance or regulation or judgment, decree, order,
award or governmental or nongovernmental permit or license to which it or any of
its subsidiaries is subject, that would, in any case referred to in this clause
(ii), give any other person the ability to prevent or enjoin Issuer's
performance under this Agreement in any material respect.
10. Grantee hereby represents and warrants to Issuer that:
(a) Grantee has full corporate power and authority to enter into this
Agreement and, subject to any approvals or consents referred to herein, to
consummate the transactions contemplated hereby. The execution and delivery of
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this Agreement and the consummation of the transactions contemplated hereby have
been duly authorized by all necessary corporate action on the part of Grantee.
This Agreement has been duly executed and delivered by Grantee.
(b) This Option is not being acquired with a view to the public
distribution thereof and neither this Option nor any Option Shares will be
transferred or otherwise disposed of except in a transaction registered or
exempt from registration under applicable federal and state securities laws and
regulations.
11. Neither of the parties hereto may assign any of its rights or
obligations under this Option Agreement or the Option created hereunder to any
other person, without the express written consent of the other party, except (i)
to any wholly-owned Subsidiary or (ii) that in the event a Subsequent Triggering
Event shall have occurred prior to an Exercise Termination Event, Grantee,
subject to the express provisions hereof, may assign in whole or in part its
rights and obligations hereunder to one or more transferees.
12. Each of Grantee and Issuer will use its best efforts to make all
filings with, and to obtain consents of all third parties and governmental
authorities necessary to the consummation of the transactions contemplated by
this Agreement.
13. Notwithstanding anything to the contrary herein, in the event that
the Holder or any Related Person thereof is a person making an offer or proposal
to engage in an Acquisition Transaction (other than the transactions
contemplated by the Merger Agreement), then in the case of a Holder or any
Related Person thereof, the Option held by it shall immediately terminate and be
of no further force or effect. A Related Person of a Holder means any Affiliate
(as defined in Rule 12b-2 of the rules and regulations under the 1934 Act) of
the Holder and any person that is the beneficial owner of 20% or more of the
voting power of the Holder.
14. The parties hereto acknowledge that damages would be an inadequate
remedy for a breach of this Agreement by either party hereto and that the
obligations of the parties hereto shall be enforceable by either party hereto
through injunctive or other equitable relief.
15. If any term, provision, covenant or restriction contained in this
Agreement is held by a court or a federal or state regulatory agency of
competent jurisdiction to be invalid, void or unenforceable, the remainder of
the terms, provisions and covenants and restrictions contained in this Agreement
shall remain in full force and effect, and shall in no way be affected, impaired
or invalidated. If for any reason such court or regulatory agency determines
that the Holder is not permitted to acquire the full number of shares of Common
Stock provided in Section 1(a) hereof (as adjusted pursuant to Section 1(b) or
Section 5 hereof), it is the express intention of Issuer to allow the Holder to
acquire such lesser number of shares as may be permissible, without any
amendment or modification hereof.
16. All notices, requests, claims, demands and other communications
hereunder shall be deemed to have been duly given when delivered in person, by
cable, telegram, telecopy or telex, or by registered or certified mail (postage
10
<PAGE>
prepaid, return receipt requested) at the respective addresses of the parties
set forth in the Merger Agreement.
17. This Agreement shall be governed by and construed in accordance
with the laws of the State of Delaware, regardless of the laws that might
otherwise govern under applicable principles of conflicts of laws thereof.
18. This Agreement may be executed in two or more counterparts, each of
which shall be deemed to be an original, but all of which shall constitute one
and the same agreement.
19. Except as otherwise expressly provided herein, each of the parties
hereto shall bear and pay all costs and expenses incurred by it or on its behalf
in connection with the transactions contemplated hereunder, including fees and
expenses of its own financial consultants, investment bankers, accountants and
counsel. Notwithstanding anything to the contrary contained herein or in the
Merger Agreement, in the event a Subsequent Triggering Event shall occur prior
to an Exercise Termination Event, Issuer shall pay to Grantee upon demand the
amount of the expenses incurred by Grantee in connection with this Agreement and
the Merger Agreement and the transactions contemplated hereby and thereby.
20. Except as otherwise expressly provided herein, or in the Merger
Agreement, this Agreement contains the entire agreement between the parties with
respect to the transactions contemplated hereunder and supersedes all prior
arrangements or understandings with respect thereof, written or oral. The terms
and conditions of this Agreement shall inure to the benefit of and be binding
upon the parties hereto and their respective successors and permitted assigns.
Nothing in this Agreement, expressed or implied, is intended to confer upon any
party, other than the parties hereto, and their respective successors and, as
permitted herein, assignees, any rights, remedies, obligations or liabilities
under or by reason of this Agreement, except as expressly provided herein.
21. Capitalized terms used in this Agreement and not defined herein
shall have the meanings assigned thereto in the Merger Agreement.
11
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed on its behalf by its officers, all as of the date first above written.
CNY FINANCIAL CORPORATION.
BY:
-------------------------------------
Harvey Kaufman
Chairman of the Board
NIAGARA BANCORP, INC.
BY:
-------------------------------------
William E. Swan
President and Chief Executive Officer
12
<PAGE>
EXHIBIT B
December ___, 1999
Niagara Bancorp, Inc.
6950 South Transit Road
P.O. Box 514
Lockport, New York 14095-0514
Ladies and Gentlemen:
Niagara Bancorp, Inc. ("Niagara Bancorp"), Niagara Bancorp Corp
("Merger Corp"), and CNY Financial Corporation ("CNYF") have entered into an
Agreement and Plan of Merger dated as of December 28, 1999 (the "Merger
Agreement"), pursuant to which, subject to the terms and conditions set forth
therein, (a) CNYF will merge with and into Merger Corp with CNYF surviving the
merger, to be followed by the merger of CNYF with and into Niagara Bancorp, with
Niagara Bancorp surviving the merger (collectively referred to as the "Merger");
and (b) shareholders of CNYF will receive $18.75 in cash in exchange for each
share of common stock of CNYF outstanding on the closing date.
Niagara Bancorp has requested, as a condition to its execution and
delivery to CNYF of the Merger Agreement, that the undersigned, being directors
and executive officers of CNYF, execute and deliver to Niagara Bancorp this
Letter Agreement.
Each of the undersigned, in order to induce Niagara Bancorp to execute
and deliver to CNYF the Merger Agreement, and intending to be legally bound,
hereby irrevocably:
(a) Agrees to be present (in person or by proxy) at all meetings of
shareholders of CNYF called to vote for approval of the Merger so that all
shares of common stock of CNYF over which the undersigned or a member of the
undersigned's immediate family now has sole or shared voting power will be
counted for the purpose of determining the presence of a quorum at such meetings
and to vote all such shares (i) in favor of approval and adoption of the Merger
Agreement and the transactions contemplated thereby (including any amendments or
modifications of the terms thereof approved by the Board of Directors of CNYF),
and (ii) against approval or adoption of any other merger, business combination,
recapitalization, partial liquidation or similar transaction involving CNYF;
(b) Agrees not to vote or execute any written consent to rescind or
amend in any manner any prior vote or written consent, as a shareholder of CNYF,
to approve or adopt the Merger Agreement;
(c) Agrees not to sell, transfer or otherwise dispose of any common
stock of CNYF on or prior to the date of the meeting of CNYF shareholders to
vote on the Merger Agreement, except for transfers to a lineal descendant or a
<PAGE>
spouse of the undersigned, or to a trust for the benefit of one or more of the
foregoing persons, providing that the transferee agrees in writing to be bound
by the terms of this letter agreement; and
(d) Represents that the undersigned has the capacity to enter into this
Letter Agreement and that it is a valid and binding obligation enforceable
against the undersigned in accordance with its terms, subject to bankruptcy,
insolvency and other laws affecting creditors' rights and general equitable
principles.
The obligations set forth herein shall terminate concurrently with any
termination of the Merger Agreement.
----------------------------
This Letter Agreement may be executed in two or more counterparts, each
of which shall be deemed to constitute an original, but all of which together
shall constitute one and the same Letter Agreement.
----------------------------
The undersigned intend to be legally bound hereby.
Sincerely,
Name
Title
<PAGE>
EXHIBIT 6.1
[MATTERS TO BE COVERED IN OPINION OF COUNSEL TO BE DELIVERED TO CNYF PURSUANT TO
SECTION 6.01(G) OF THE AGREEMENT]
(a) Each of Niagara Bancorp and Niagara Merger Corp ("Merger Corp"), is
incorporated, validly existing and in good standing under the laws of the State
of Delaware, and has the corporate power and authority to own or lease all of
its properties and assets and to carry on its business as it is now being
conducted. All eligible accounts of depositors in Lockport are insured by the
BIF administered by the FDIC to the fullest extent permitted by law.
(b) Each of Niagara Bancorp and Merger Corp has the corporate power and
authority to adopt or execute and deliver the Agreement and the Bank Merger
Agreement included as Exhibit A thereto, as the case may be, and to consummate
the corporate transactions contemplated thereby and to carry out their
respective obligations thereunder, as applicable. The adoption or execution and
delivery of the Agreement and the Stock Option Agreement included as Exhibit A
thereto and the consummation of the transactions contemplated thereby, as
applicable, have been duly authorized by the board of directors of Niagara
Bancorp and Merger Corp, as the case may be, and no other corporate proceedings
on the part of such entities are necessary to consummate the transactions so
contemplated. The Agreement has been duly and validly executed and delivered by
Niagara Bancorp and Merger Corp, and in each case such instruments constitute
valid and legally binding obligations of Niagara Bancorp and Merger Corp,
enforceable in accordance with their terms, except as may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting creditors' rights generally, and except that the availability of
equitable remedies (including, without limitation, specific performance) is
within the discretion of the appropriate court.
(c) None of the adoption or execution and delivery of the Agreement and
the Stock Option Agreement included as Exhibit A thereto by Niagara Bancorp and
Merger Corp, or the consummation by such entities of the transactions
contemplated thereby in accordance with their respective terms, as applicable,
nor compliance by such entities with any of their respective terms, as
applicable, will (i) violate any provision of their respective Organization
Certificate, organization certificate or other chartering instrument or bylaws,
nor (ii) violate any federal or New York State banking statute, code, rule or
regulation or, to the knowledge of such counsel, any judgment, order, writ,
decree or injunction applicable to any of such entities or any of their
respective properties or assets, except, with respect to clauses (ii) above,
such as individually or in the aggregate will not have a material adverse effect
on the business, operations, assets or financial condition of Niagara Bancorp
and its subsidiaries taken as a whole and which will not prevent or delay the
consummation of the transactions contemplated by the Agreement.
(d) All regulatory or governmental approvals and consents which are
necessary to be obtained by Niagara Bancorp and Merger Corp to permit the
<PAGE>
execution, delivery and performance of the Agreement and the Stock Option
Agreement have been obtained.
(e) Assuming due authorization of the Merger by all necessary corporate
and governmental proceedings on the part of CNYF and CSB and that CNYF and CSB
have taken all action required to be taken by them prior to the Effective Time,
upon the filing of a Certificate of Merger pursuant to Section 251 of the DGCL,
the Merger will be validly consummated in accordance with the Agreement and
applicable laws and regulations and each outstanding share of Common Stock will
be converted into the right to receive a cash payment in the manner specified in
the Agreement.
(f) To the knowledge of such counsel, there are no judicial,
administrative, arbitral or other actions, suits, proceedings or investigations
pending or threatened which (i) if adversely determined, would have a material
adverse effect on the ability of Niagara Bancorp to consummate the transactions
contemplated by the Agreement or (ii) seek to restrain or prohibit the Merger or
the Bank Merger or to obtain monetary damages in connection therewith.
In rendering their opinion, such counsel may rely, to the extent such
counsel deems such reliance necessary or appropriate, upon certificates of
governmental officials and, as to matters of fact, certificates of any officer
or officers of Niagara Bancorp. The opinion of such counsel may include such
qualifications and explanations of the basis thereof as may be reasonably
acceptable to CNYF.
<PAGE>
EXHIBIT 6.2
[MATTERS TO BE COVERED IN OPINION OF COUNSEL TO BE DELIVERED TO NIAGARA BANCORP
PURSUANT TO SECTION 6.02(J) OF THE AGREEMENT]
1. The formation of Niagara Merger Corp and its merger with and into CNYF
will be disregarded for federal income tax purposes, and the
transaction will be treated as a purchase by Niagara Bancorp of the
outstanding shares of CNYF. See 90-95, 1990-2 C.B. 67; Rev. Rul. 73~27,
1973-2 C.B. 301. The purchase will be treated as a qualified stock
purchase within the meaning of Section 338(d)(3) of the IRC.
2. For federal income tax purposes, no gain or loss will be recognized by
Niagara Bancorp, Niagara Merger Corp or CNYF as a result of the Merger.
3. For federal income tax purposes, the statutory merger of CNYF into
Niagara Bancorp pursuant to applicable law (the "Merger") will be
treated as a distribution by CNYF in complete liquidation within the
meaning of Section 332 of the IRC. See Section 1.332-2(d) of the
Treasury Regulations.
4. For federal income tax purposes, no gain or loss will be recognized by
Niagara Bancorp on its receipt of the assets of CNYF distributed in the
Merger. See Section 332(a) of the IRC.
5. For federal income tax purposes, no gain or loss will be recognized by
CNYF on the distribution of its assets to Niagara Bancorp in the
Merger. See Section 337(a) of the IRC.
6. For federal income tax purposes, the basis of the assets of CNYF in the
hands of Niagara Bancorp will be the same as the basis of those assets
in the hands of CNYF immediately preceding the Merger. See Section
334(b)(1) of the IRC.
7. The holding period of the assets received by Niagara Bancorp in the
Merger will include the period during which such property was held by
CNYF. See Section 1223(2) of the IRC.
8. As provided in Section 381(c)(2) of the IRC and Section 1.381(c)(2)-1
of the Treasury Regulations, Niagara Bancorp will succeed to and take
into account the earnings and profits, or deficit in earnings and
profits, of CNYF as of the date of the Merger, subject to the
limitations of Sections 382 and 383 of the IRC.
<PAGE>
EXHIBIT 6.3
[MATTERS TO BE COVERED IN OPINION OF COUNSEL TO BE DELIVERED TO NIAGARA BANCORP
PURSUANT TO SECTION 6.02(I) OF THE AGREEMENT]
(a) Each of CNYF and CSB is incorporated, validly existing and in good
standing under the laws of its jurisdiction of incorporation. Each such entity
has the corporate power and authority to own or lease all of its properties and
assets and to carry on its business as it is now being conducted. CSB is a
member of the Federal Home Loan Bank of New York and all eligible accounts of
depositors in CSB are insured by the BIF administered by the FDIC to the fullest
extent permitted by law. CNYF is duly registered as a bank holding company under
the BHCA and the regulations of the FRB thereunder.
(b) The authorized capital stock of CNYF consists of shares of Common
Stock, $0.01 par value per share, and shares of preferred stock, $0.01 par value
per share ("Preferred Stock"). As of the date of this opinion, there were shares
of Common Stock issued and outstanding and shares of Preferred Stock issued and
outstanding. All issued and outstanding shares of Common Stock and Preferred
Stock, and all issued and outstanding shares of capital stock of each CSB
Subsidiary, have been duly authorized and validly issued and are fully paid,
nonassessable and free of preemptive rights. To the best of our knowledge, all
of the outstanding shares of CSB are owned, directly or indirectly, by CNYF free
and clear of any adverse claims, and, neither CNYF nor any of its subsidiaries
is a party to any subscription, option, warrant, call, commitment or similar
agreement providing for the transfer, purchase or issuance of any shares of
capital stock of CNYF or any of its subsidiaries or any securities representing
the right to purchase or otherwise acquire any shares of such capital stock or
any securities convertible into or representing the right to purchase or
otherwise acquire any such stock.
(c) CNYF has the corporate power and authority to execute and deliver
the Agreement and the Stock Option Agreement included as Exhibit A thereto, as
applicable, and to consummate the Merger and to carry out all of its obligations
thereunder. The execution and delivery of the Agreement and the Stock Option
Agreement included as Exhibit A thereto and the consummation of the Merger by
CNYF have been duly authorized by the boards of directors and stockholders of
each of CNYF and CSB and no other corporate proceedings on the part of CNYF or
CSB are necessary to consummate the transactions so contemplated. Each of the
Agreement and the Stock Option Agreement included as Exhibit A thereto has been
duly and validly executed and delivered by CNYF, and constitute valid and
legally binding obligations of CNYF enforceable in accordance with their terms,
except as may be limited by bankruptcy, insolvency, moratorium or other similar
laws affecting creditors' rights and except as may be limited by the exercise of
judicial discretion in applying principles of equity (regardless of whether said
Agreement or Stock Option Agreement are considered in a proceeding in equity or
at law).
(d) None of the execution and delivery of the Agreement and the
agreement included as Exhibit A thereto by CNYF, nor the consummation by CNYF of
the transactions contemplated thereby in accordance with their respective terms,
as applicable, nor compliance by CNYF or CSB with any of their respective terms,
<PAGE>
as applicable, will (i) violate any provision of CNYF's or CSB's Certificate of
Incorporation, charter or other chartering instrument or bylaws, nor (ii)
violate any federal statute, code, rule or regulation, or, to the knowledge of
such counsel, any judgment, order, writ, decree or injunction applicable to
CNYF, CSB, or any of their respective properties or assets, except, with respect
to clauses (ii) above, such as individually or in the aggregate will not have a
material adverse effect on the business, operations, assets or financial
condition of CNYF and its subsidiaries taken as a whole and which will not
prevent or delay the consummation of the transactions contemplated by the
Agreement.
(e) All regulatory or governmental approvals and consents which are
necessary to be obtained by CNYF to permit the execution, delivery and
performance of the Agreement and the Stock Option Agreement included as Exhibit
A thereto have been obtained.
(f) The Agreement, including consummation of the transactions
contemplated thereby, has been approved by the requisite vote of stockholders of
CNYF.
(g) Assuming due authorization of the Merger by all necessary corporate
and governmental proceedings on the part of parties other than CNYF and CSB and
that such other parties have taken all action required to be taken by them prior
to the Effective Time, upon the proper filing of a [REGULATORY FILINGS,] the
Merger will be validly consummated in accordance with the Agreement and
applicable laws and regulations and each outstanding share of Common Stock will
be converted into the right to receive a cash payment in the manner specified in
Agreement.
(h) To the knowledge of such counsel, there are no judicial,
administrative, arbitral or other actions, suits, proceedings or investigations
pending or threatened, which (i) if adversely determined, would result in any
material adverse change in the business, operations, assets or financial
condition of CNYF and its subsidiaries taken as a whole or (ii) seek to restrain
or prohibit the Merger or to obtain monetary damages in connection therewith.
In rendering their opinion, such counsel may rely, to the extent such
counsel deems such reliance necessary or appropriate, upon certificates of
governmental officials and, as to matters of fact, certificates of any officer
or officers of CNYF and its subsidiaries. The opinion of such counsel may
include such qualifications and explanations of the basis thereof as may be
reasonably acceptable to Niagara Bancorp.
Exhibit B - Opinion Letter of CIBC World Markets Corp.
December 28, 1999
Board of Directors
CNY Financial Corporation
1 North Main Street
Cortland, NY 13045
Directors:
You have requested our opinion as to the fairness, from a financial
point of view, to the holders of the outstanding shares of common stock of CNY
Financial Corporation (the "Company") of the consideration to be received by
such shareholders from Niagara Bancorp, Inc. ("Niagara") pursuant to the
definitive Agreement and Plan of Merger to be dated as of December 28, 1999 by
and between Niagara and the Company (the "Agreement"). Pursuant to the
Agreement, the Company will be merged with and into Niagara, the Company's sole
bank subsidiary will become a wholly owned subsidiary of Niagara and each
outstanding share of the Company's common stock will be converted into the right
to receive $18.65 - $18.75 in cash (the "Consideration").
In connection with this opinion we have reviewed, among other things:
(a) the Agreement; (b) the Stockholders Agreements and Seller Option Agreement
(as such terms are defined in the Agreement); (c) audited consolidated financial
statements and management's discussions and analysis of the financial condition
and results of operations for the Company and for Niagara for the three fiscal
years ended December 31, 1998; (d) unaudited consolidated financial statements
for the Company and for Niagara for the nine months ended September 30, 1999;
(e) certain other publicly available business and financial information relating
to the Company and to Niagara; (f) the views of senior management of the Company
of the past and current business operations, results thereof, financial
condition and future prospects of the Company; (g) a comparison of certain
financial information for the Company with similar information for certain other
companies we considered comparable to the Company; (h) the financial terms of
certain recent business combinations in the banking industry; (i) the current
market environment generally and the banking environment in particular; and (j)
such other information, financial studies, analyses and investigations and
financial, economic and market criteria as we considered appropriate in the
circumstances.
B-1
<PAGE>
We have relied, without independent verification or investigation, on
all of the financial information, analyses and other information furnished to us
for purposes of this opinion, including information relating to assets and
liabilities, contingent or otherwise, as being complete and accurate. We have
also relied upon the management of the Company as to the reasonableness and
achievability of the financial and operating forecasts and projections provided
to us. In that regard, we have assumed, with your consent, that such forecasts,
projections and estimates have been reasonably prepared and reflect the best
currently available estimates and judgments of the management of the Company as
to the future financial performance of the Company. We have not made an
independent evaluation or appraisal of the assets and liabilities of the Company
or any of its subsidiaries and we have not been furnished with any such
evaluation or appraisal. Furthermore, this opinion shall not constitute any such
evaluation or appraisal. We were not asked to, and did not, solicit indications
of interest from any other person regarding a business combination involving the
Company.
We have acted as financial advisor to the Company in connection with
the Merger and will receive a fee for our services, a portion of which is
contingent on the consummation of the Merger. In the ordinary course of our
business, we may actively trade the equity services of the Company and of
Niagara for our own account and for the accounts of customers, and accordingly
may at any time hold a long or short position in such securities. In April,
1998, we acted as lead advisor in Niagara's mutual to stock conversion. We
currently provide equity research coverage of Niagara and make a market in their
stock.
It is understood that this opinion is for the information of the Board
of Directors in connection with its consideration of the Merger and does not
constitute a recommendation to any stockholder as to how such stockholder should
vote on the merger.
Based upon and subject to the foregoing and based upon such other
matters as we consider relevant, it is our opinion that, as of the date hereof,
the Consideration to be received by the common shareholders of the Company in
the Merger is fair, from a financial point of view, to such shareholders.
Very truly yours,
/s/ CIBC WORLD MARKETS
---------------------------------
CIBC World Markets
Exhibit C - Delaware General Corporation Law Section 262
ss. 262. Appraisal rights
(a) Any stockholder of a corporation of this State who holds shares of stock on
the date of the making of a demand pursuant to subsection (d) of this section
with respect to such shares, who continuously holds such shares through the
effective date of the merger or consolidation, who has otherwise complied with
subsection (d) of this section and who has neither voted in favor of the merger
or consolidation nor consented thereto in writing pursuant to ss. 228 of this
title shall be entitled to an appraisal by the Court of Chancery of the fair
value of the stockholder's shares of stock under the circumstances described in
subsections (b) and (c) of this section. As used in this section, the word
"stockholder" means a holder of record of stock in a stock corporation and also
a member of record of a nonstock corporation; the words "stock" and "share" mean
and include what is ordinarily meant by those words and also membership or
membership interest of a member of a nonstock corporation; and the words
"depository receipt" mean a receipt or other instrument issued by a depository
representing an interest in one or more shares, or fractions thereof, solely of
stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or series of
stock of a constituent corporation in a merger or consolidation to be effected
pursuant to ss. 251 (other than a merger effected pursuant to ss. 251(g) of this
title), ss. 252, ss. 254, ss. 257, ss. 258, ss. 263 or ss. 264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which stock,
or depository receipts in respect thereof, at the record date fixed to determine
the stockholders entitled to receive notice of and to vote at the meeting of
stockholders to act upon the agreement of merger or consolidation, were either
(i) listed on a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or (ii) held of record by more than 2,000 holders;
and further provided that no appraisal rights shall be available for any shares
of stock of the constituent corporation surviving a merger if the merger did not
require for its approval the vote of the stockholders of the surviving
corporation as provided in subsection (f) of ss. 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series of
stock of a constituent corporation if the holders thereof are required by the
terms of an agreement of merger or consolidation pursuant to ss.ss. 251, 252,
254, 257, 258, 263 and 264 of this title to accept for such stock anything
except:
a. Shares of stock of the corporation surviving or resulting from such
merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts in
respect thereof, which shares of stock (or depository receipts in respect
thereof) or depository receipts at the effective date of the merger or
C-1
<PAGE>
consolidation will be either listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or held of record
by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a. and b. of this paragraph; or
d. Any combination of the shares of stock, depository receipts and cash
in lieu of fractional shares or fractional depository receipts described in the
foregoing subparagraphs a., b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation party to
a merger effected under ss. 253 of this title is not owned by the parent
corporation immediately prior to the merger, appraisal rights shall be available
for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting, shall
notify each of its stockholders who was such on the record date for such meeting
with respect to shares for which appraisal rights are available pursuant to
subsection (b) or (c) hereof that appraisal rights are available for any or all
of the shares of the constituent corporations, and shall include in such notice
a copy of this section. Each stockholder electing to demand the appraisal of
such stockholder's shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal of such
stockholder's shares. Such demand will be sufficient if it reasonably informs
the corporation of the identity of the stockholder and that the stockholder
intends thereby to demand the appraisal of such stockholder's shares. A proxy or
vote against the merger or consolidation shall not constitute such a demand. A
stockholder electing to take such action must do so by a separate written demand
as herein provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become effective;
or
(2) If the merger or consolidation was approved pursuant to ss. 228 or ss.
253 of this title, each consitutent corporation, either before the effective
date of the merger or consolidation or within ten days thereafter, shall notify
each of the holders of any class or series of stock of such constitutent
corporation who are entitled to appraisal rights of the approval of the merger
<PAGE>
or consolidation and that appraisal rights are available for any or all shares
of such class or series of stock of such constituent corporation, and shall
include in such notice a copy of this section; provided that, if the notice is
given on or after the effective date of the merger or consolidation, such notice
shall be given by the surviving or resulting corporation to all such holders of
any class or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective date
of the merger or consolidation, shall, also notify such stockholders of the
effective date of the merger or consolidation. Any stockholder entitled to
appraisal rights may, within 20 days after the date of mailing of such notice,
demand in writing from the surviving or resulting corporation the appraisal of
such holder's shares. Such demand will be sufficient if it reasonably informs
the corporation of the identity of the stockholder and that the stockholder
intends thereby to demand the appraisal of such holder's shares. If such notice
did not notify stockholders of the effective date of the merger or
consolidation, either (i) each such constitutent corporation shall send a second
notice before the effective date of the merger or consolidation notifying each
of the holders of any class or series of stock of such constitutent corporation
that are entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send such a
second notice to all such holders on or within 10 days after such effective
date; provided, however, that if such second notice is sent more than 20 days
following the sending of the first notice, such second notice need only be sent
to each stockholder who is entitled to appraisal rights and who has demanded
appraisal of such holder's shares in accordance with this subsection. An
affidavit of the secretary or assistant secretary or of the transfer agent of
the corporation that is required to give either notice that such notice has been
given shall, in the absence of fraud, be prima facie evidence of the facts
stated therein. For purposes of determining the stockholders entitled to receive
either notice, each constitutent corporation may fix, in advance, a record date
that shall be not more than 10 days prior to the date the notice is given,
provided, that if the notice is given on or after the effective date of the
merger or consolidation, the record date shall be such effective date. If no
record date is fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next preceding the day on
which the notice is given.
(e) Within 120 days after the effective date of the merger or consolidation, the
surviving or resulting corporation or any stockholder who has complied with
subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a determination
of the value of the stock of all such stockholders. Notwithstanding the
foregoing, at any time within 60 days after the effective date of the merger or
consolidation, any stockholder shall have the right to withdraw such
stockholder's demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days after
such stockholder's written request for such a statement is received by the
surviving or resulting corporation or within 10 days after expiration of the
<PAGE>
period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which shall
within 20 days after such service file in the office of the Register in Chancery
in which the petition was filed a duly verified list containing the names and
addresses of all stockholders who have demanded payment for their shares and
with whom agreements as to the value of their shares have not been reached by
the surviving or resulting corporation. If the petition shall be filed by the
surviving or resulting corporation, the petition shall be accompanied by such a
duly verified list. The Register in Chancery, if so ordered by the Court, shall
give notice of the time and place fixed for the hearing of such petition by
registered or certified mail to the surviving or resulting corporation and to
the stockholders shown on the list at the addresses therein stated. Such notice
shall also be given by 1 or more publications at least 1 week before the day of
the hearing, in a newspaper of general circulation published in the City of
Wilmington, Delaware or such publication as the Court deems advisable. The forms
of the notices by mail and by publication shall be approved by the Court, and
the costs thereof shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the stockholders
who have complied with this section and who have become entitled to appraisal
rights. The Court may require the stockholders who have demanded an appraisal
for their shares and who hold stock represented by certificates to submit their
certificates of stock to the Register in Chancery for notation thereon of the
pendency of the appraisal proceedings; and if any stockholder fails to comply
with such direction, the Court may dismiss the proceedings as to such
stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court shall
appraise the shares, determining their fair value exclusive of any element of
value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted
such stockholder's certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is finally
determined that such stockholder is not entitled to appraisal rights under this
section.
(i) The Court shall direct the payment of the fair value of the shares, together
with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
<PAGE>
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed upon
the parties as the Court deems equitable in the circumstances. Upon application
of a stockholder, the Court may order all or a portion of the expenses incurred
by any stockholder in connection with the appraisal proceeding, including,
without limitation, reasonable attorney's fees and the fees and expenses of
experts, to be charged pro rata against the value of all the shares entitled to
an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection (d) of
this section shall be entitled to vote such stock for any purpose or to receive
payment of dividends or other distributions on the stock (except dividends or
other distributions payable to stockholders of record at a date which is prior
to the effective date of the merger or consolidation); provided, however, that
if no petition for an appraisal shall be filed within the time provided in
subsection (e) of this section, or if such stockholder shall deliver to the
surviving or resulting corporation a written withdrawal of such stockholder's
demand for an appraisal and an acceptance of the merger or consolidation, either
within 60 days after the effective date of the merger or consolidation as
provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court
of Chancery shall be dismissed as to any stockholder without the approval of the
Court, and such approval may be conditioned upon such terms as the Court deems
just.
(l) The shares of the surviving or resulting corporation to which the shares of
such objecting stockholders would have been converted had they assented to the
merger or consolidation shall have the status of authorized and unissued shares
of the surviving or resulting corporation.
<PAGE>
REVOCABLE PROXY
CNY FINANCIAL CORPORATION
[X] PLEASE MARK VOTES AS IN THIS EXAMPLE
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints the Board of Directors of CNY Financial
Corporation, or their successors in office, Proxies, with full power of
substitution, to represent and vote all stock that the undersigned is entitled
to vote at the Special Meeting of Stockholders of CNY Financial Corporation, to
be held on April ___, 2000 at ____ p.m. at ______________________
_____________________________, or at any adjournments thereof upon the matter
described in the accompanying Proxy Statement and upon other business that may
properly come before the meeting or any adjournment thereof. Said Proxies are
directed to vote or refrain from voting as marked hereon upon the matter listed
herein, and otherwise in their discretion.
For Against Abstain
Approval of an Agreement and Plan
of Merger with Niagara Bancorp, Inc. and [ ] [ ] [ ]
Niagara Merger Corp.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" THE APPROVAL
OF THE AGREEMENT AND PLAN OF MERGER. PLEASE SIGN, DATE AND RETURN THIS PROXY.
THIS PROXY WILL BE VOTED AS DIRECTED, BUT IF NO DIRECTION IS SPECIFIED, THIS
PROXY WILL BE VOTED "FOR" THE PROPOSAL. IF ANY OTHER BUSINESS IS PRESENTED AT
THE MEETING, THIS PROXY WILL BE VOTED BY THOSE NAMED IN THIS PROXY IN THEIR
JUDGMENT AND DISCRETION. AT THE PRESENT TIME, THE BOARD OF DIRECTORS KNOWS OF NO
OTHER BUSINESS TO BE PRESENTED AT THE MEETING.
THIS PROXY MAY BE REVOKED AT ANY TIME BEFORE IT IS VOTED. PLEASE DATE, SIGN AND
RETURN IN THE ENCLOSED POSTAGE PAID ENVELOPE.
Date_________________________
Signature___________________Signature if held jointly___________________________
Detach above card, sign, date and mail in postage-paid envelope provided.
<PAGE>
CNY FINANCIAL CORPORATION
Please sign exactly as your name appears on this card. When shares are
held by joint tenants, both should sign. When signing as attorney, executor,
administrator, trustee or guardian, please give full title as such. If a
corporation, please sign in full corporate name by President or other authorized
officer. If a partnership, please sign in partnership name by authorized person.
PLEASE ACT PROMPTLY
SIGN, DATE & MAIL YOUR PROXY CARD TODAY
