<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 12, 1998
REGISTRATION NO. 333-63603
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 3
TO THE FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
ONEIDA FINANCIAL CORP.
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 6712 (TO BE APPLIED FOR)
(State or Other Jurisdiction of (Primary Standard (I.R.S. Employer
Incorporation or Organization) Industrial Classification Code Number) Identification Number)
</TABLE>
182 MAIN STREET
ONEIDA, NEW YORK 13421-1676
(315) 363-2000
(Address, including Zip Code, and Telephone Number, including
Area Code, of Registrant's Principal Executive Offices)
MICHAEL R. KALLET
PRESIDENT AND CHIEF EXECUTIVE OFFICER
ONEIDA FINANCIAL CORP.
182 MAIN STREET
ONEIDA, NEW YORK 13421-1676
(315) 363-2000
(Name, Address, including Zip Code, and Telephone Number,
including Area Code, of Agent for Service)
Copies to:
ERIC LUSE, ESQ.
ALAN SCHICK, ESQ.
LUSE LEHMAN GORMAN POMERENK & SCHICK
5335 WISCONSIN AVENUE, N.W.
SUITE 400
WASHINGTON, D.C. 20015
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this registration statement becomes effective.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 of the Securities Act of 1933,
check the following box: [X]
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [_]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
======================================================================================================
TITLE OF EACH CLASS OF AMOUNT TO PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED OFFERING PRICE AGGREGATE OFFERING REGISTRATION
PER UNIT PRICE (1) FEE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock
$.10 par Value 2,307,117 shares $10.00 $23,071,170 (2)
- ------------------------------------------------------------------------------------------------------
Participation
Interests (3) ______ _______ (4)
======================================================================================================
</TABLE>
___________________________
(1) Estimated solely for the purpose of calculating the registration fee.
(2) A Registration fee of $6,806 was previously paid with the Form S-1 on
September 17, 1998.
(3) Includes an indeterminate number of interests to purchase the Common Stock
pursuant to the Oneida Savings Bank 401(K) Savings Plan in RSI Retirement
Trust.
(4) The securities of Oneida Financial Corp. to be purchased by the Oneida
Savings Bank 401(k) Savings Plan in RSI Retirement Trust as adopted by The
Oneida Savings Bank are included in the amount shown for Common Stock.
However, pursuant to Rule 457(h) of the Securities Act of 1933, as amended,
no separate fee is required for the participation interests. Pursuant to
such rule, the amount being registered has been calculated on the basis of
the number of shares of Common Stock that may be purchased with the current
assets of such Plan.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION SHALL
THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES
ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH
DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(a), MAY DETERMINE.
<PAGE>
PROSPECTUS
UP TO 1,970,663 SHARES OF COMMON STOCK
ONEIDA FINANCIAL CORP.
182 MAIN STREET
ONEIDA, NEW YORK 13421-1676
(315) 363-2000
================================================================================
The Oneida Savings Bank, a New York-chartered savings bank (the "Bank"),
is reorganizing from the mutual form of organization into a two-tier mutual
holding company structure (the "Reorganization"). As part of the
Reorganization, the Bank will convert to stock form and will become a wholly-
owned subsidiary of Oneida Financial Corp., a Delaware corporation (the
"Company"). The Company will become the majority owned subsidiary of Oneida
Financial, MHC, a New York-chartered mutual holding company (the "Mutual Holding
Company"). Concurrent with the Reorganization, the Company is offering for sale
shares of its common stock, par value $.10 per share (the "Common Stock"), to
depositors (pursuant to subscription rights), the Bank's tax-qualified employee
benefit plans including its employee stock ownership plan, and to employees,
officers and trustees of the Bank. Any unsubscribed shares of Common Stock may
be offered for sale to the public in a community offering or syndicated
community offering (the subscription and community offerings are referred to
collectively as the "Offering"). The Reorganization and Offering are being made
pursuant to the terms of a plan of reorganization which must be approved by the
depositors of the Bank and by federal and state banking regulators. The
Reorganization will not go forward if the Bank does not receive these approvals,
or if the Company does not sell at least a minimum number of the shares of
Common Stock offered.
================================================================================
TERMS OF OFFERING
An independent appraiser has estimated that the pro forma market value of
the Company is between $28.4 million and $38.5 million. Based on this estimate,
the Company will issue between 2,843,760 and 3,847,440 shares of Common Stock.
The Company is selling between 1,266,588 and 1,713,620 shares to depositors and
the public, and is issuing between 1,521,442 and 2,058,421 shares to the Mutual
Holding Company. The Company may increase the shares it issues in the
Reorganization to up to 4,424,556 shares and increase the shares sold in the
Offering to up to 1,970,663 shares, subject to receipt of regulatory approvals.
As part of the Reorganization, 2.0% of the shares issued in the Reorganization,
or 65,565 shares at the midpoint of the estimated valuation range, are being
issued to The Oneida Savings Bank Charitable Foundation (the "Charitable
Foundation"). Consequently, following completion of the Reorganization and
Offering, the Mutual Holding Company will own 53.5% of the outstanding Common
Stock, stockholders who purchase Common Stock in the Offering will own 44.5% of
the outstanding Common Stock, and the Charitable Foundation will own 2.0% of the
outstanding Common Stock. Based on these estimates, the Company is making the
following offering of shares of Common Stock.
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<CAPTION>
Adjusted
Minimum Midpoint Maximum Maximum
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
. Price per share.................. $ 10.00 $ 10.00 $ 10.00 $ 10.00
. Number of shares offered......... 1,266,588 1,490,104 1,713,620 1,970,663
. Reorganization expenses.......... $ 695,000 $ 695,000 $ 695,000 $ 695,000
. Net Proceeds..................... $11,970,880 $14,206,040 $16,441,200 $19,011,630
. Net Proceeds per share sold...... $ 9.45 $ 9.53 $ 9.59 $ 9.64
</TABLE>
PLEASE REFER TO RISK FACTORS BEGINNING ON PAGE __ OF THIS PROSPECTUS.
THESE SECURITIES ARE NOT DEPOSITS OR ACCOUNTS AND ARE NOT INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION (THE "FDIC") OR ANY
OTHER GOVERNMENT AGENCY. AN INVESTMENT IN COMMON STOCK IS SUBJECT TO MARKET
RISK, INCLUDING A RISK OF LOSS OF PRINCIPAL INVESTED.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION (THE "SEC"), THE NEW YORK
STATE BANKING DEPARTMENT (THE "DEPARTMENT"), THE FDIC, NOR ANY STATE SECURITIES
REGULATOR HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Trident Securities, Inc. will use its best efforts to assist the Company in
selling at least the minimum number of shares but does not guarantee that this
number will be sold. All funds received from subscribers will be held in an
interest-bearing savings account at The Oneida Savings Bank until the completion
or termination of the Reorganization. The Company has received conditional
approval to list the Common Stock on the Small Cap Market of the Nasdaq Stock
Market under the symbol "ONFC." Prior to the Offering, a public market for the
Common Stock did not exist. There can be no assurance that an active and liquid
trading market for the Common Stock will develop or be maintained, or that
resales of the Common Stock will be made at or above the purchase price
following completion of the Reorganization and Offering.
For information on how to subscribe, call the Stock Information Center at
(315) 363-5088.
TRIDENT SECURITIES, INC.
PROSPECTUS DATED ___________, 1998
<PAGE>
MAP
OF NEW YORK STATE
HIGHLIGHTING MADISON AND
ONEIDA COUNTIES.
<PAGE>
TABLE OF CONTENTS
<TABLE>
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PAGE
----
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE STOCK OFFERING.............................................. 1
SUMMARY AND OVERVIEW........................................................................ 4
RISK FACTORS................................................................................ 9
SELECTED FINANCIAL INFORMATION.............................................................. 15
RECENT FINANCIAL DATA....................................................................... 17
ONEIDA FINANCIAL CORP....................................................................... 21
THE ONEIDA SAVINGS BANK..................................................................... 22
MARKET AREA................................................................................. 22
REGULATORY CAPITAL COMPLIANCE............................................................... 22
USE OF PROCEEDS............................................................................. 23
DIVIDEND POLICY............................................................................. 25
MARKET FOR COMMON STOCK..................................................................... 25
CAPITALIZATION.............................................................................. 26
PRO FORMA DATA.............................................................................. 27
COMPARISON OF VALUATION AND PRO FORMA
INFORMATION WITH AND WITHOUT FOUNDATION................................................ 32
PARTICIPATION BY MANAGEMENT................................................................. 33
THE REORGANIZATION AND OFFERING............................................................. 34
THE ONEIDA SAVINGS BANKSTATEMENTS OF INCOME................................................. 51
MANAGEMENT'S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...... 52
BUSINESS OF ONEIDA FINANCIAL CORP........................................................... 69
BUSINESS OF THE BANK........................................................................ 69
FEDERAL AND STATE TAXATION.................................................................. 90
REGULATION91
MANAGEMENT OF ONEIDA FINANCIAL CORP......................................................... 100
MANAGEMENT OF THE BANK...................................................................... 102
RESTRICTIONS ON ACQUISITION OF THE COMPANY.................................................. 110
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY................................................. 111
TRANSFER AGENT AND REGISTRAR................................................................ 112
LEGAL AND TAX MATTERS....................................................................... 112
EXPERTS..................................................................................... 112
ADDITIONAL INFORMATION...................................................................... 112
GLOSSARY.................................................................................... G-1
</TABLE>
This document contains forward-looking statements which involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in "Risk
Factors" beginning on page 16 of this Prospectus.
Please see the Glossary beginning on page G-l for the definitions of capitalized
terms that are used in this Prospectus.
(i)
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE STOCK OFFERING
Q: WHAT IS THE MUTUAL HOLDING COMPANY?
A: Oneida Financial, MHC (the "Mutual Holding Company") is a New York-
chartered mutual corporation that is being established in connection with
the mutual holding company reorganization (the "Reorganization") of The
Oneida Savings Bank (the "Bank"). The Mutual Holding Company will be
chartered under the laws of the State of New York and will be regulated by
the New York Banking Department (the "Department") and the Board of
Governors of the Federal Reserve System (the "Federal Reserve Board"). The
Mutual Holding Company will own 53.5% of the outstanding Common Stock of
Oneida Financial Corp. (the "Company"), or 1,490,104 shares at the midpoint
of the valuation range established by the independent appraisal. The
remaining 46.5% of the Common Stock of the Company will be owned by persons
who purchase Common Stock in the Offering and The Oneida Savings Bank
Charitable Foundation (the "Charitable Foundation").
Q: WHO WILL BE THE MINORITY STOCKHOLDERS OF THE COMPANY?
A: All persons who purchase Common Stock in the Offering, including the
employee stock ownership plan ("ESOP") of the Bank as well as the
Charitable Foundation will be the minority stockholders (the "Minority
Stockholders") of the Bank, and will own 46.5% of its Common Stock upon
completion of the Offering. The Mutual Holding Company will own 53.5% of
the Common Stock of the Company, and will remain its majority stockholder
as long as the Mutual Holding Company remains in existence.
Q: WHAT IS THE PURPOSE OF THE REORGANIZATION AND OFFERING?
A: The primary purpose of the Reorganization and Offering is to raise
additional equity capital to support the growth and expansion of the Bank.
The increased capital also will be used to expand the Bank's lending and
investment activities. The Reorganization will create a holding company
and a stock savings bank, which is the corporate form used by all
commercial banks and an increasing number of savings institutions. The
holding company structure will expand the investment and operating
authority currently available to the Bank. The Offering also will provide
depositors with the opportunity to become stockholders of the Company. The
Bank will also establish the Charitable Foundation that will be dedicated
exclusively to supporting charitable causes and community development
activities in the Bank's market area.
Q: WHY IS THE BANK FORMING A TWO-TIER MUTUAL HOLDING COMPANY AND CONDUCTING A
MINORITY STOCK OFFERING INSTEAD OF UNDERGOING A FULL CONVERSION TO STOCK
FORM?
A: At the present time, the Bank does not need all of the capital that would
be raised in a full stock conversion. A savings institution that converts
to stock form using the mutual holding company structure sells only a
minority of its shares to the public. By doing so, the converting
institution raises less than half the capital that would be raised in a
full conversion. However, with the mutual holding company structure the
Bank will have the flexibility to raise additional capital in the future.
Moreover, the Bank's Board of Trustees intends to maintain the independence
and community control of the Bank. Because the Mutual Holding Company will
control a majority of the Company's Common Stock, the Reorganization will
permit the Bank to achieve the benefits of being a stock company without
the loss of control by the Bank's Board of Directors. The mid-tier mutual
holding company structure will permit the Bank to achieve the benefits of
being a stock company, such as additional flexibility to diversify its
business activities through existing or newly-formed subsidiaries, or
through acquisitions of, or mergers with, other financial institutions and
financial services related to companies. The Bank may acquire or merge with
other financial institutions directly and diversify without utilizing its
bank holding company parent. The Bank currently has no specific plans,
arrangements or understandings regarding any such expansions or
acquisitions, nor has management established criteria to identify potential
candidates for acquisition.
<PAGE>
Q: HOW DO I ORDER THE COMMON STOCK?
A: You must complete and return the Stock Order Form to the Bank, together
with your payment, on or before December 21, 1998. Please review the Stock
Order Form carefully before sending us any payment.
Q: HOW MUCH STOCK MAY I ORDER?
A: The minimum order is 25 shares (or $250). The maximum order for any
individual person or persons ordering through a single account is 15,000
shares (or $150,000). In certain instances, your order may be grouped
together with orders by other persons who are associated with you (such as
your spouse, child or relatives living in your home or corporations,
partnership and trusts of which you are an officer, director or trustee),
or with whom you are acting in concert, and, in that event, the aggregate
order may not exceed 25,000 shares (or $250,000). The maximum purchase
limitation may be decreased or increased without notifying you. However,
if the maximum purchase limitation is increased, and you previously
subscribed for the maximum number of shares, you will be notified of the
increase and given the opportunity to subscribe for additional shares.
Q: WHO HAS SUBSCRIPTION RIGHTS AND WHAT ARE THE SUBSCRIPTION PRIORITIES?
A: Subscription rights to purchase Common Stock will be offered on a priority
basis to the following classes of persons:
. First, to persons who had one or more deposit accounts with the Bank
totaling at least $100 on December 31, 1996 ("Eligible Account
Holders").
. Second, up to 10% of the shares sold in the Offering, may be purchased
by the Bank's tax-qualified employee benefit plans, including the
Bank's ESOP, which intends to purchase shares equal to 8% of the
Minority Ownership Interest. In addition, participants in the Bank's
401(k) Plan will be given the opportunity to subscribe for shares of
Common Stock through their 401(k) Plan.
. Third, to persons who had one or more deposit accounts with the Bank
totaling at least $100 on September 30, 1998 ("Supplemental Eligible
Account Holders").
. Fourth, to employees, officers and trustees of the Bank, who do not
qualify in any of the above categories.
Subscription rights are not transferable. Selling or transferring
subscription rights is illegal.
Q: WHAT HAPPENS IF THERE ARE NOT ENOUGH SHARES TO FILL ALL ORDERS?
A: If the Offering is oversubscribed, shares will be allocated based upon a
deposit formula set forth in the Plan of Reorganization and described in
"The Reorganization and Offering - Purchase Priorities and Method of
Offering Shares." In recent periods a number of stock offerings by
financial institutions have been oversubscribed. There can be no assurance
that a subscriber in the Offering will have his or her subscription filled.
If insufficient shares of Common Stock are available in the first category,
the Bank will allocate shares in such a manner that will allow Eligible
Account Holders to purchase at least 100 shares. Likewise, if insufficient
shares of Common Stock are available in the third category, the Company
will allocate shares in such a manner that will allow Supplemental Eligible
Account Holders to purchase at least 100 shares.
Q: WILL SHARES BE OFFERED TO ANYONE OTHER THAN PERSONS WITH SUBSCRIPTION
RIGHTS?
A: If persons with subscription rights do not subscribe for all of the shares
offered, any remaining shares will be offered to certain members of the
general public in a community offering, with a preference for natural
persons
2
<PAGE>
residing in the Bank's community consisting of Madison county, New York,
the cities and towns of Annsville, Camden, Florence, Sherrill, Vernon,
Verona and Vienna in Oneida county, New York and the towns of Fabius,
Manlius and Pompey in Onondaga county, New York.
Q: WHAT PARTICULAR FACTORS SHOULD I CONSIDER WHEN DECIDING WHETHER OR NOT TO
BUY COMMON STOCK?
A: Before you decide to purchase Common Stock, you should read the entire
Prospectus, including the "Risk Factors" section beginning on page _____ of
the Prospectus.
Q: WHO CAN HELP ANSWER ANY OTHER QUESTIONS I MAY HAVE ABOUT THE OFFERING?
A: In order to make an informed investment decision, you should read this
entire Prospectus. This question and answer section highlights selected
information and may not contain all of the information that is important to
you. If you have any additional questions about the Offering, you may
contact:
STOCK INFORMATION CENTER
THE ONEIDA SAVINGS BANK
126 LENOX AVENUE
ONEIDA, NEW YORK 13421-1676
(315) 363 -5088
SELLING OR ASSIGNING YOUR SUBSCRIPTION RIGHTS IS ILLEGAL. ALL PERSONS
EXERCISING THEIR SUBSCRIPTION RIGHTS WILL BE REQUIRED TO CERTIFY THAT THEY ARE
PURCHASING SHARES SOLELY FOR THEIR OWN ACCOUNT AND THAT THEY HAVE NO AGREEMENT
OR UNDERSTANDING REGARDING THE SALE OR TRANSFER OF SUCH SHARES. THE BANK
INTENDS TO PURSUE ANY AND ALL LEGAL AND EQUITABLE REMEDIES IN THE EVENT IT
BECOMES AWARE OF THE TRANSFER OF SUBSCRIPTION RIGHTS. ORDERS KNOWN TO INVOLVE
THE TRANSFER OF SUBSCRIPTION RIGHTS WILL NOT BE HONORED. IN ADDITION, PERSONS
WHO VIOLATE THE PURCHASE LIMITATIONS MAY BE SUBJECT TO SANCTIONS AND PENALTIES.
3
<PAGE>
SUMMARY AND OVERVIEW
This summary highlights selected information in this Prospectus and does
not contain all the information that you need to know before making an informed
investment decision. To understand the Offering fully, you should read the
entire Prospectus carefully, including the financial statements and the notes to
the financial statements of The Oneida Savings Bank. Certain financial
information contained in the Prospectus has been derived from the audited
financial statements of The Oneida Savings Bank.
You should note as you read this Prospectus that at times capitalized terms
are used. These capitalized terms are generally defined in the glossary that
is at the end of this Prospectus. Defined terms are used to help you
differentiate between the various components of the transaction, to simplify the
discussion and to avoid unnecessary repetition by not having to define or
describe a term each time it is used. For example, to avoid confusion, all of
the steps that are part of the transactions described in this Prospectus are
referred to as the "Reorganization," and the offer and sale of 44.5% of the
Company's Common Stock is referred to as the "Offering". References to the
"Bank" refer to The Oneida Savings Bank. References to "Company" refer to
Oneida Financial Corp., and references to the "Mutual Holding Company" refer to
Oneida Financial, MHC. To further assist you in reading this Prospectus, in
addition to including a glossary at the end of this Prospectus, each term is
also defined the first time that it is used.
THE REORGANIZATION
The Reorganization involves a number of steps, including the following:
. The Bank will establish the Company and the Mutual Holding Company,
neither of which will have any assets prior to the completion of the
Reorganization.
. The Bank will convert from the mutual form of organization to the
capital stock form of organization and issue 100% of its capital stock
to the Company.
. The Company will issue between 2,843,760 shares and 3,847,440 shares
of Common Stock in the Reorganization: 53.5% of these shares (or
between 1,521,442 shares and 2,058,421 shares) will be issued to the
Mutual Holding Company, 44.5% of these shares (or between 1,266,588
shares and 1,713,620 shares) will be sold to depositors and the
public, and 2.0% of these shares (or between 55,730 shares and 75,399
shares) will be issued to the Charitable Foundation.
. Interests that depositors had in the Bank will become interests in the
Mutual Holding Company, which will own 53.5% of the shares of Common
Stock of the Company and indirectly of the Bank.
THE MUTUAL HOLDING COMPANY STRUCTURE
The mutual holding company structure differs in significant respects from
the bank holding company structure that is used in a standard mutual to stock
conversion. A savings bank that converts to the stock form using the mutual
holding company structure sells only a minority of its shares and raises less
proceeds than would be raised in a standard mutual to stock conversion in which
100% of the shares are sold to depositors and the public. If additional capital
is needed in the future, the shares that are issued to the Mutual Holding
Company may be subsequently sold to depositors. See "Regulation--Holding Company
Regulation--Mutual Holding Company Regulation." In addition, because the Mutual
Holding Company controls a majority of the Company's Common Stock, the structure
will permit the Bank to achieve the benefits of a stock company without a loss
of control that often follows a complete conversion from mutual to stock form.
In making business decisions, the Mutual Holding Company's Board of
Trustees will consider a variety of constituencies, including the depositors and
employees of the Bank, and the communities in which the Bank operates. As the
majority stockholder of the Company, the Mutual Holding Company is also
interested in the continued success
4
<PAGE>
and profitability of the Bank and the Company. Consequently, the Mutual Holding
Company will act in a manner which furthers the general interest of all of its
constituencies, including, but not limited to, the interest of the stockholders
of the Company. The Mutual Holding Company believes that the interests of the
stockholders of the Company, and those of the Mutual Holding Company's other
constituencies, are in many circumstances the same, such as the increased
profitability of the Company and the Bank and continued service to the
communities in which the Bank operates.
THE COMPANY
The Company is a Delaware corporation that was formed recently to become
the holding company of the Bank. Accordingly, the Company has no results of
operations. After the Reorganization, the Company will own all of the Bank's
common stock. Purchasers in the Offering will own 44.5% of the Company's issued
and outstanding Common Stock, the Charitable Foundation will own 2.0% of the
shares of the issued and outstanding Common Stock, and the Mutual Holding
Company will own 53.5% of the shares of the issued and outstanding Common Stock.
Although these percentages may change in the future, the Mutual Holding Company
must always own a majority of the Company's Common Stock.
Oneida Financial Corp.
182 Main Street
Oneida, New York 13421-1676
(315) 363-2000
THE BANK
The Bank was organized in 1866 as a New York-chartered mutual savings bank.
At June 30, 1998, the Bank had total assets of $217.6 million, total deposits of
$189.2 million, and retained earnings of $28.0 million. The Bank is a
community-oriented savings bank that operates from its main office and four
branch locations in Camden, Cazenovia, Hamilton and Oneida, New York.
Historically, the Bank has emphasized the origination of loans secured by
residential real estate. In recent years, the Bank also has increased its
consumer, commercial real estate and commercial business lending. At June 30,
1998, $88.0 million, or 62.0%, of the Bank's loan portfolio consisted of loans
secured by one-to-four family real estate, $16.8 million, or 11.9%, consisted of
consumer loans, $14.5 million, or 10.2%, consisted of loans secured by
commercial real estate, and $11.6 million, or 8.1%, consisted of commercial
business loans. The Bank also invests in investment securities and mortgage-
backed securities. At June 30, 1998, investment securities totaled $39.6
million and mortgage-backed securities totaled $16.6 million. In 1984, the Bank
began offering trust and estate administration services, as well as custody and
investment management services. At June 30, 1998, the Bank's trust department
had $5.5 million of assets under management.
The Oneida Savings Bank
182 Main Street
Oneida, New York 13421-1676
(315) 363-2000
THE STOCK OFFERING
The Company is offering for sale between 1,266,588 shares and 1,713,620
shares of its Common Stock, for a price of $10.00 per share. The Offering may be
increased to up to 1,970,663 shares without further notice to subscribers, if
the FDIC does not object.
STOCK PURCHASE PRIORITIES
The Common Stock is being offered for sale in the following order of
priority in a Subscription Offering:
5
<PAGE>
(i) the Bank's Eligible Account Holders (holders of deposit accounts
totaling at least $100 as of December 31, 1996);
(ii) up to 10% of the shares sold in the Offering, may be purchased by
the Bank's tax-qualified employee benefit plans, including the
Bank's ESOP, which intends to purchase shares equal to 8% of the
Minority Ownership Interest. In addition, participants in the Bank's
401(k) Plan will be given the opportunity to subscribe for shares of
Common Stock through their 401(k) Plan.
(iii) the Bank's Supplemental Eligible Account Holders (holders of deposit
accounts totaling at least $100 as of September 30, 1998); and
(iv) employees, officers and trustees of the Bank, who do not qualify in
any of the above categories.
Any shares not subscribed for will be offered to certain members of the
general public in a community offering, with preference given first to natural
persons residing in Madison county, New York, the cities and towns of Annsville,
Camden, Florence, Sherrill, Vernon, Verona and Vienna in Oneida county, New York
and the towns of Fabius, Manlius and Pompey in Onondaga county, New York. The
Company has engaged Trident Securities, Inc. to assist it on a best efforts
basis in selling the Common Stock in the Offering. See pages __ to __.
STOCK PRICING AND NUMBER OF SHARES TO BE ISSUED
The Company's Board of Directors has set the purchase price of Common Stock
at $10.00 per share, the price most commonly used in stock offerings involving
mutual to stock conversions of mutual savings institutions. The number of
shares of Common Stock issued in the Offering is based on the independent
valuation prepared by FinPro, Inc. ("FinPro"), an appraisal firm experienced in
appraisals of savings institutions. FinPro will receive a fee of $25,000 for
its services. Recent market volatility, as well as a weakening in the market
for financial institution securities generally, resulted in FinPro updating its
original appraisal, dated September 9, 1998, to decrease the pro forma market
value of the Company by 15%. Consequently, the number of shares of Common Stock
being offered to the public has been decreased by 15%. The independent
valuation states that as of October 7, 1998 the estimated pro forma market value
of the Company ranged from a minimum of $28,437,600 to a maximum of $38,474,400,
with a midpoint of $33,456,000. Based on this valuation and the $10.00 per
share price, the number of shares of Common Stock that the Company will issue
will range from between 2,843,760 shares to 3,847,440 shares. The Company and
the Bank have decided to offer between 1,266,588 shares and 1,713,620 shares of
Common Stock to depositors and the public. In addition, the Company will issue
between 55,730 shares and 75,399 shares to the Charitable Foundation. The
shares of the Common Stock that are not sold in the Offering or issued to the
Charitable Foundation will be issued to the Mutual Holding Company. The
establishment of the Charitable Foundation had the effect of reducing the
valuation of the Company. See "Comparison of Valuation and Pro Forma
Information With and Without the Foundation."
FinPro will update its appraisal of the pro forma market value of the
Company at the completion of the Offering. Based upon this update which will
consider changes in market and financial conditions and demand for the Common
Stock, the estimated valuation range may increase by up to 15%, or $44,245,560.
If this occurs, the maximum number of shares that can be sold to depositors and
the public can increase to up to 1,970,663 shares, and the number of shares to
be issued to the Charitable Foundation can increase to 86,709 shares. The
Company will not notify subscribers if the maximum number of shares to be sold
increases by 15% or less. The Company will, however, notify subscribers if the
estimated valuation range and the maximum number of shares to be sold is
increased by more than 15% or if the minimum of the estimated valuation range is
decreased. THE INDEPENDENT VALUATION IS NOT A RECOMMENDATION AS TO THE
ADVISABILITY OF PURCHASING SHARES, AND YOU SHOULD NOT BUY COMMON STOCK BASED ON
THE INDEPENDENT VALUATION.
6
<PAGE>
TERMINATION OF THE OFFERING
The Offering to depositors will terminate at __:___ New York time, on
December 15, 1998. The Community Offering may terminate on or after December 15,
1998, but in any event, no later than January 29, 1999, without regulatory
approvals. If the Reorganization and Offering are not completed by __________,
1999, all subscribers will be notified and will be given the opportunity to
cancel or modify their order.
BENEFITS TO MANAGEMENT FROM THE OFFERING
The Company intends to implement for the benefit of the employees,
directors and officers of the Company and the Bank, the ESOP, a stock option
plan ("Stock Option Plan") and a stock award plan ("Stock Award Plan"). These
benefit plans would result in employees, officers and directors being eligible
to receive in the aggregate 326,709 shares of Common Stock (at the midpoint of
the Offering Range). Assuming that the Stock Option Plan and Stock Award Plan
were funded from shares purchased in the open market, employees,
directors/trustees and officers would own (at the midpoint) 38.13% of the
outstanding shares of Common Stock owned by persons other than the Mutual
Holding Company (the "Minority Ownership Interest").
ESOP. Full-time employees of the Bank will participate in an ESOP, which
is a form of retirement plan, that will purchase up to 8% of the Common Stock
owned by persons other than the Mutual Holding Company (the "Minority Ownership
Interest"). The estimated cost to fund the ESOP is $1.1 million at the minimum
of the Offering Range and $1.4 million at the maximum of the Offering Range
assuming a price of $10.00 per share. A portion of the net proceeds of the
Offering will be used to fund the purchase of shares for the ESOP. For further
information, see "Management of the Bank--Benefit Plans--Employee Stock
Ownership Plan and Trust."
STOCK OPTION PLAN. The Stock Option Plan will provide for the grant of
options to purchase Common Stock equal to 10% of the Minority Ownership
Interest. The exercise price of each option will be equal to the closing price
of the Common Stock on the date the option is granted. No options will be
granted until after stockholders approve the Stock Option Plan. For further
information, see "Management of the Bank--Benefit Plans--Stock Option Plan."
The Board of Directors has not yet determined how many options each individual
officer, director or employee will receive.
STOCK AWARD PLAN. The Stock Award Plan expects to provide for the award of
shares of Common Stock equal to 3% of the Minority Ownership Interest to
officers, employees and directors of the Bank, if the Stock Award Plan is
implemented within one year after the completion of the Offering. If the Stock
Award Plan is implemented later than one year after the completion of the
Offering, up to 5% of the Minority Ownership Interest may be granted, subject to
stockholder approval. Shares of Common Stock awarded under the Stock Award Plan
will be at no cost to the recipient, and in the aggregate will have a value of
$396,695 at the minimum of the Offering and $536,706 at the maximum of the
Offering, assuming a value of $10.00 per share. For further information, see
"Management of the Bank--Benefit Plans--Stock Award Plan." The Board of
Directors has not yet determined how many shares of Common Stock will be awarded
to officers, directors or employees of the Bank.
The Stock Award Plan and Stock Option Plan will not be adopted until at
least six months after the completion of the Reorganization, and are subject to
stockholder approval. See pages ___ to ___.
The following table presents the dollar value of the shares to be granted
pursuant to the proposed stock benefit plans and the percentage of the Company's
outstanding Common Stock which will be represented by these shares.
PERCENTAGE OF
VALUE OF OUTSTANDING
SHARES GRANTED/(1)/ COMMON STOCK
------------------- -------------
BENEFIT PLAN:
ESOP....................... $1,244,608 3.69%
Stock Award Plan........... 466,728 1.40
Stock Option Plan.......... -- /(2)/ 4.61
---------- ----
$1,711,336 9.70%
========== ====
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- ---------------------
/(1)/ Assumes shares are granted at $10.00 per share and that shares are sold
in the Offering at the midpoint of the Offering Range.
/(2)/ Recipients of stock options realize value only in the event of an
increase in the price of the Common Stock of the Company following the
date of grant of the stock options. Options to purchase 155,557 shares
(at the midpoint of the Offering) may be granted if the Stock Option Plan
is approved by stockholders.
THE CHARITABLE FOUNDATION
To further our commitment to our local community, the Bank intends to
establish the Charitable Foundation as part of the Reorganization. The Company
will contribute to the Charitable Foundation 2.0% of the shares of Common Stock
issued in the Reorganization and $100,000 in cash. The Charitable Foundation is
being funded with shares of Common Stock because of management's belief that
over time the value of the shares of Common Stock will provide a greater
endowment to the local community than would a cash contribution. Funding the
Charitable Foundation with Common Stock also may be a means of enabling the
communities served by the Bank to share in the growth and success of the
Company. The Charitable Foundation will benefit the Company and the Bank by
allowing them to develop a unified charitable donation strategy and by
centralizing the responsibility for administration and allocation of corporate
charitable funds. The Charitable Foundation will be dedicated exclusively to
supporting charitable causes and community development activities in the Bank's
market area. Due to the issuance of additional shares of Common Stock to the
Charitable Foundation, the ownership and voting interests of all stockholders of
the Company will be diluted by approximately 2.0%. Shares of Common Stock held
by the Charitable Foundation will be voted in the same ratio as shares voted by
minority stockholders. The Company will incur an expense equal to the full
amount of the contribution to the Charitable Foundation, offset in part by a
corresponding tax benefit, during the quarter in which the contribution is made.
Such expense will reduce the Company's earnings. See "Risk Factors--The Expense
and Dilutive Effect of the Contribution of Shares and Cash to the Charitable
Foundation," "Pro Forma Data," and "The Reorganization and Offering--
Establishment of the Charitable Foundation."
USE OF THE PROCEEDS RAISED FROM THE SALE OF COMMON STOCK
The Company estimates that the net proceeds from the Offering will be used
as follows:
. 50% will be used to buy all the capital stock of the Bank.
. 8% will be loaned to the ESOP to fund its purchase of Common Stock
(assuming a purchase price of $10.00 per share).
. 42% will be retained as a possible source of funds for the payment of
dividends to stockholders, the repurchase of Common Stock, and for
other general corporate purposes.
The proceeds to be received by the Bank will be available for general
corporate purposes, the opening of new branch offices, renovation of existing
offices, branch or whole bank acquisitions, new loan originations and the
purchase of investment and mortgage-backed securities. See pages ___ to ___.
PROSPECTUS DELIVERY AND PROCEDURE FOR PURCHASING COMMON STOCK
To ensure proper identification of stock purchase priorities, Eligible
Account Holders and Supplemental Eligible Account Holders must list all deposit
accounts on their stock order forms, giving all names on each deposit account
and the account numbers at the applicable date. THE FAILURE TO PROVIDE ACCURATE
AND COMPLETE ACCOUNT INFORMATION ON THE STOCK ORDER FORM MAY RESULT IN A
REDUCTION OR ELIMINATION OF YOUR ORDER.
Full payment by check, cash (except by mail), money order, bank draft or
withdrawal authorization (payment by wire transfer will not be accepted) must
accompany an original stock order form. THE COMPANY IS NOT OBLIGATED TO ACCEPT
AN ORDER SUBMITTED ON PHOTOCOPIED OR TELECOPIED STOCK ORDER FORMS. THE COMPANY
WILL NOT ACCEPT STOCK ORDER FORMS IF THE CERTIFICATION APPEARING ON THE REVERSE
SIDE OF THE STOCK ORDER FORM IS NOT EXECUTED. THE COMPANY IS NOT REQUIRED TO
DELIVER A PROSPECTUS AND A STOCK ORDER FORM BY ANY MEANS OTHER THAN THE UNITED
STATES POSTAL SERVICE.
8
<PAGE>
DIVIDENDS
The Company intends to pay an annual cash dividend of $.30 per share,
payable semi-annually. The payment of dividends is expected to begin following
the second full quarter after completion of the Reorganization and Offering. See
pages ____ and ______.
MARKET FOR THE COMMON STOCK
The Company has never issued stock, and consequently, there is no existing
market for the Common Stock. The Company has received conditional approval to
have the Common Stock quoted on the Nasdaq Small Cap Market under the symbol
"ONFC." Trident Securities, Inc. intends to make a market in the Common Stock.
Based upon Trident's prior experience in identifying additional market makers,
the Company expects that additional market makers will be identified. There can
be no assurance that an active or liquid trading market will develop, or that if
a market develops, it will continue. A public market having the desirable
characteristics of depth, liquidity and orderliness depends upon the presence in
the marketplace of both willing buyers and sellers of the Common Stock at any
given time, which is not within the control of the Company or any market maker.
There can be no assurance that purchasers will be able to sell their shares of
Common Stock at or above the price they pay for such shares. See "Risk Factors
- - Recent Market Volatility," "--Absence of Market for Common Stock" and "Market
For Common Stock."
IMPORTANT RISKS IN PURCHASING AND OWNING THE COMPANY'S COMMON STOCK
Before deciding to purchase Common Stock in the Offering, carefully read
the "Risk Factors" section on pages __ to __ of this Prospectus, in addition to
the other sections of this Prospectus.
The shares of Common Stock offered hereby:
. Are not deposit accounts;
. Are not insured or guaranteed by the FDIC, or any other government
agency; and
. Are not guaranteed by the Company, the Mutual Holding Company or the
Bank.
The Common Stock is subject to investment risk, including the possible loss
of principal invested.
RISK FACTORS
In addition to the other information in this Prospectus, you should
consider carefully the following risk factors in evaluating an investment in the
Common Stock.
RECENT MARKET VOLATILITY--IMPACT ON COMMON STOCK PRICE
In recent months, stock markets in the United States and worldwide have
been extremely volatile. The securities of individual companies have, in many
instances, experienced significant fluctuations in price for reasons unrelated
to the specific company's financial condition, results of operations or business
prospects. In particular, the value of all financial institution securities has
been adversely affected by weakening economies worldwide, even though local
community-based financial institutions may not have any credit exposure outside
the United States. Recent market volatility, as well as a weakening in the
market for financial institution securities generally, resulted in FinPro
updating its appraisal to decrease the pro forma market value of the Company by
15%. During the period commencing June 30, 1998, and ending September 30, 1998,
the Dow Jones Industrial Average decreased by 12.4% and the S&P 500 Index
decreased by 10.3%, while the index of all publicly traded savings institutions
decreased by 21.9%. Consequently, an investor should understand that, in the
short-term, the value of an investment in the Common Stock is subject to
fluctuation, including loss, due to volatility in stock markets generally.
9
<PAGE>
REDUCED RETURN ON AVERAGE EQUITY AFTER THE REORGANIZATION - IMPACT ON COMMON
STOCK PRICE
Return on average equity (net income for a given period divided by average
equity during that period) is a ratio used by many investors to compare the
performance of a particular financial institution to its peers. The Bank's
equity as a percentage of assets will significantly increase as a result of the
net proceeds received in the Offering. The Bank anticipates that it will take
time to prudently reinvest the capital raised in the Offering. The Company and
the Bank do not have any immediate, specific plans for the investment of net
proceeds received in the Offering, although ultimately, such proceeds are
expected to be invested in loans and investment securities and may also be
utilized to help the Bank take advantage of expansion opportunities that may
arise. The Company and the Bank will have, subject to applicable law and
regulations, total discretion over the investment of the net proceeds of the
Offering. Consequently, the Company's post-Reorganization return on equity is
expected to be less than the average return on equity for publicly traded
savings institutions and their holding companies. A return on average equity
which is below that of other financial institutions may adversely affect the
Company's Common Stock price. For the six months ended June 30, 1998 and the
year ended December 31, 1997, the Bank's return on average equity was 5.80% and
4.83%, respectively. If the Reorganization and Offering had been completed as of
June 30, 1998 and December 31, 1997, the Company's return on average equity
would have been 4.58% and 3.89%, respectively. Based on information provided by
FinPro for both June 30, 1998 and December 31, 1997, the return on average
equity for all publicly traded savings banks as of October 23, 1998 was 8.23%.
See "Selected Financial Information" for numerical information regarding the
Bank's historical return on equity and "Capitalization" for a discussion of the
Company's estimated pro forma consolidated capitalization as a result of the
Reorganization and Offering. In addition, the expenses associated with the ESOP
and the Stock Award Plan (see "Pro Forma Data"), along with other ongoing post-
Reorganization expenses, are expected to contribute initially to reduced
earnings. In the short term, the Bank will have difficulty in improving its
interest rate spread and thus the return on equity to stockholders.
Consequently, management of the Bank is unable to predict when the Company's
return on equity will normalize and for the foreseeable future, investors should
not expect a return on equity that will meet or exceed the return on equity for
publicly-traded thrift institutions, and no assurances can be given that this
goal can be attained.
POTENTIAL IMPACT OF CHANGES IN INTEREST RATES AND THE CURRENT INTEREST RATE
ENVIRONMENT ON EARNINGS
The Bank's financial condition and results of operations are significantly
affected by changes in interest rates. The Bank's results of operations depend
substantially on its net interest income, which is the difference between the
interest income earned on interest-earning assets and the interest expense paid
on interest-bearing liabilities. Since the Bank's interest-bearing liabilities
generally reprice or mature more quickly than its interest-earning assets, an
increase in interest rates would result in a decrease in the Bank's average
interest rate spread and net interest income. Historically, the Bank has sought
to make its interest-earning assets more interest rate sensitive by emphasizing
the origination of adjustable rate mortgage ("ARM") loans and adjustable rate
commercial business loans. At June 30, 1998, $108.7 million, or 76.5% of the
Bank's loan portfolio consisted of loans with adjustable interest rates. In a
period of rising interest rates, the risk that borrowers may default on
adjustable rate loans increases. The Bank has also sought to reduce the
exposure of its net interest income to increases in market interest rates by
investing in readily marketable, liquid U.S. government and agency securities
with terms of five to seven years. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations-- Market Risk--Management of
Interest Rate Risk."
Changes in interest rates also affect the value of the Bank's interest-
earning assets, in particular, the Bank's investment securities portfolio.
Generally, the value of investment and mortgage-backed securities portfolios
fluctuates inversely with changes in interest rates. At June 30, 1998, the
Bank's investment and mortgage-backed securities portfolios totaled $39.6
million and $16.6 million, respectively, all of which were classified as
available for sale. Unrealized gains and losses on securities available for sale
are reported as a separate component of equity. Decreases in the fair value of
securities available for sale, therefore, could have an adverse affect on
stockholders' equity. See "Business of the Bank--Securities Investment
Activities."
The Bank is also subject to reinvestment risk relating to changes in
interest rates which can affect the average life of loans and mortgage-backed
securities. Decreases in interest rates can result in increased prepayments of
loans
10
<PAGE>
and mortgage-backed securities, as borrowers refinance to reduce borrowing
costs. Under these circumstances, the Bank is subject to reinvestment risk to
the extent that it is not able to reinvest such prepayments at rates that are
comparable to the rates on the maturing loans or securities.
LENDING RISKS ASSOCIATED WITH CONSUMER, COMMERCIAL BUSINESS AND COMMERCIAL REAL
ESTATE LENDING
At June 30, 1998, the Bank's consumer loans totaled $16.8 million, or 11.9%
of total loans, commercial real estate loans totaled $14.5 million, or 10.2% of
total loans, and commercial business loans totaled $11.6 million, or 8.1% of
total loans. Since 1996, the Bank has actively sought to increase the level of
its consumer, commercial business and commercial business lending. The Bank
intends to continue the origination of consumer, commercial real estate and
commercial business loans. Consumer, commercial real estate and commercial
business loans generally expose a lender to greater credit risk than loans
secured by one-to-four family real estate. This is so because in the case of:
(i) consumer loans, such loans are collateralized with assets that may not
provide an adequate source of payment of the loan due to depreciation, damage or
loss; (ii) commercial real estate loans, repayment of the loan is dependent on
income being generated in amounts sufficient to cover operating expenses and
debt service; and (iii) commercial business loans, repayment is generally
dependent on the successful operation of the borrower's business. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Operating Strategy--Complementing the Bank's Traditional Lending by
Growing its Portfolio of Higher Yielding Consumer, Commercial Business Loans and
Commercial Real Estate Loans."
MINORITY PUBLIC OWNERSHIP AND CERTAIN ANTI-TAKEOVER PROVISIONS--CONTROL BY THE
MUTUAL HOLDING COMPANY
VOTING CONTROL OF THE MUTUAL HOLDING COMPANY. Under New York law, the
Bank's Plan of Reorganization from a Mutual Savings Bank to a Mutual Holding
Company and Stock Issuance Plan (the "Plan of Reorganization"), and the
Company's governing corporate instruments, at least 51% of the Company's voting
shares must be owned by the Mutual Holding Company. The Mutual Holding Company
will be controlled by its board of trustees, who will consist of persons who are
members of the board of directors of the Company and the Bank. The Mutual
Holding Company will elect all members of the board of directors of the Company
and, as a general matter, will control the outcome of all matters presented to
the stockholders of the Company for resolution by vote, except for matters that
require a vote greater than a majority. The Mutual Holding Company, acting
through its board of trustees, will be able to control the business and
operations of the Company and the Bank and will be able to prevent any challenge
to the ownership or control of the Company by stockholders other than the Mutual
Holding Company ("Minority Stockholders"). Accordingly, a change in control of
the Company and the Bank cannot occur unless the Mutual Holding Company first
converts to the stock form of organization. Although New York law, applicable
regulations and the Plan of Reorganization permit the Mutual Holding Company to
convert from the mutual to the capital stock form of organization, it is not
anticipated that a conversion of the Mutual Holding Company will occur in the
foreseeable future, and there can be no assurance when, if ever, such a
conversion would occur.
PROVISIONS IN THE COMPANY'S AND THE BANK'S GOVERNING INSTRUMENTS. In
addition, certain provisions of the Company's Certificate of Incorporation and
Bylaws, particularly a provision limiting voting rights, as well as certain
federal and state regulations, assist the Company in maintaining its status as
an independent publicly owned corporation. These provisions provide for, among
other things, supermajority voting, staggered boards of directors, noncumulative
voting for directors, limits on the calling of special meetings of stockholders,
and limits on the ability of Minority Stockholders to vote Common Stock in
excess of 5% of the issued and outstanding shares (inclusive of shares issued to
the Mutual Holding Company). The regulations of the Department prohibit, except
with the prior approval of the Superintendent of Banks of the State of New York
(the "Superintendent"), for a period of one year following the date of the
Reorganization, offers to acquire or the acquisition of beneficial ownership of
more than 5% of the equity securities of the Bank or the Company. The Bank's
Restated Organization Certificate also prohibits, for three years, the
acquisition, directly or indirectly, of the beneficial ownership of more than
10% of the Bank's or Company's equity securities.
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<PAGE>
DIVIDEND WAIVERS BY THE MUTUAL HOLDING COMPANY--IMPACT ON MINORITY STOCKHOLDERS
IN THE EVENT OF A MUTUAL HOLDING COMPANY CONVERSION
It has been the policy of many mutual holding companies to waive the
receipt of dividends declared by their subsidiaries. In connection with its
approval of the Reorganization, however, the Federal Reserve Board is expected
to impose certain conditions on the waiver by the Mutual Holding Company of
dividends paid on the Common Stock. In particular, it is expected that the
Mutual Holding Company will be required to obtain prior Federal Reserve Board
approval before it may waive any dividends. As of the date hereof, management
does not believe that the Federal Reserve Board has given its approval to any
waiver of dividends by any mutual holding company that has requested its
approval. The cumulative amount of waived dividends, if any, must be maintained
in a restricted capital account which would be added to any liquidation account
of the Bank, and would not be available for distribution to Minority
Stockholders. The Plan of Reorganization also provides that if the Mutual
Holding Company converts to stock form in the future, any waived dividends would
reduce the percentage of the converted company's shares of Common Stock issued
to Minority Stockholders in connection with any such transaction. See
"Regulation--Holding Company Regulation--Mutual Holding Company Regulation." It
is not currently intended that the Mutual Holding Company will waive dividends
declared by the Company.
THE EXPENSE AND DILUTIVE EFFECT OF THE CONTRIBUTION OF SHARES AND CASH TO THE
CHARITABLE FOUNDATION--DILUTION TO PUBLIC STOCKHOLDERS
The Bank intends to establish the Charitable Foundation in connection with
the Reorganization. The Company will make a contribution to the Charitable
Foundation in the form of shares of Common Stock equal to 2.0% of the shares
outstanding after the completion of the Offering, or 65,565 shares at the
midpoint of the Offering, and a $100,000 cash contribution. Due to the issuance
of additional shares of Common Stock to the Charitable Foundation, persons
purchasing shares in the Offering will have their ownership and voting interests
in the Company diluted by 2.0%. The contribution of Common Stock to the
Charitable Foundation will be dilutive to the interests of stockholders and the
aggregate contribution will have an adverse impact on the reported earnings of
the Company in the fiscal year in which the Charitable Foundation is established
and the contribution is made. If the Charitable Foundation had been established
and the contribution made at June 30, 1998, and assuming the sale of the Common
Stock at the midpoint of the estimated valuation range, the Bank would have
reported net income of $333,000 rather than reporting net income of $802,000 for
the six months ended June 30, 1998. See "The Reorganization and Offering--
Establishment of the Charitable Foundation."
STRONG COMPETITION WITHIN THE BANK'S MARKET AREA
Competition in the banking and financial services industry is intense. The
Bank competes with commercial banks, savings institutions, mortgage banking
firms, credit unions, finance companies, mutual funds, insurance companies, and
brokerage and investment banking firms operating locally and elsewhere. Many of
these competitors have substantially greater resources and lending limits than
the Bank and may offer certain services that the Bank does not or cannot
provide. Moreover, credit unions, which offer substantially the same services
as the Bank, are not subject to federal or state income taxation. Trends toward
the consolidation of the financial services industry, and the removal of
restrictions on interstate branching and banking powers may make it more
difficult for smaller institutions such as the Bank to compete effectively with
large national and regional banking institutions. The Bank's profitability
depends upon its continued ability to successfully compete in its market area.
INTENT TO REMAIN INDEPENDENT--INABILITY TO OBTAIN A TAKEOVER PREMIUM FOR COMMON
STOCK
The Bank operates as an independent community bank, and intends to continue
to do so following the Reorganization. The Bank and the Company will be
controlled by the Mutual Holding Company, and control of the Mutual Holding
Company may not be sold to a third party. Accordingly, persons should not
subscribe for shares of Common Stock with an expectation that a sale of control
of the Bank or the Company is imminent. See "Business of the Bank."
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<PAGE>
REGULATORY OVERSIGHT AND LEGISLATION
The Bank is subject to extensive regulation, supervision and examination by
the Department and by the FDIC. The Bank is also a member of the Federal Home
Loan Bank System and is subject to certain limited regulations promulgated by
the Federal Home Loan Bank. As bank holding companies, the Company and the
Mutual Holding Company also will be subject to regulation and oversight by the
Federal Reserve Board. Such regulation and supervision govern the activities in
which an institution and its holding company may engage and are intended
primarily for the protection of the insurance fund and depositors. Regulatory
authorities have extensive discretion in connection with their supervisory and
enforcement activities, which are intended to strengthen the financial condition
of the banking industry, including the imposition of restrictions on the
operation of an institution, the classification of assets, and the adequacy of
an institution's allowance for loan losses. Any change in such regulation and
oversight whether in the form of regulatory policy, regulations, or legislation,
could have a material impact on the Bank, the Company and the Mutual Holding
Company. See "Regulation."
UNCERTAINTY AS TO FUTURE GROWTH OPPORTUNITIES
In an effort to fully deploy the capital raised in the Offering and to
increase loan and deposit growth, the Bank may seek to further expand its
banking franchise by acquiring other financial institutions, or additional
branches in central New York. The Bank's ability to grow through selective
acquisitions of other financial institutions or branches of financial
institutions will depend on successfully identifying, acquiring and integrating
such institutions or branches. The Company and the Bank cannot assure
prospective purchasers of Common Stock that they will be able to generate
internal growth or identify attractive acquisition candidates, make acquisitions
on favorable terms or successfully integrate any acquired institutions or
branches into the Bank. The Bank currently has no specific plans, arrangements
or understandings regarding any such expansions or acquisitions, nor has
management established criteria to identify potential candidates for
acquisition.
GEOGRAPHIC CONCENTRATION OF LOANS--LACK OF GEOGRAPHIC DIVERSIFICATION
The Bank's lending activities are primarily conducted in Madison County,
New York and the surrounding counties. If the local economy, national economy
or real estate market weakens, the financial condition and results of operations
of the Bank could be adversely affected. A weakening in the local real estate
market or a decline in the local economy could increase the number of delinquent
or nonperforming loans and reduce the value of the collateral securing such
loans, which would reduce the Bank's net income.
ABSENCE OF MARKET FOR COMMON STOCK
The Company, as a newly organized company, has never issued capital stock
and, consequently, there is no established market for the Common Stock at this
time. The Company has received conditional approval to have its Common Stock
quoted on the Nasdaq Small Cap Market under the symbol "ONFC." Trident
Securities, Inc. intends to make a market in the Common Stock. Based upon
Trident Securities, Inc.'s prior experience in identifying additional market
makers, the Company expects that additional market makers will be identified.
There can be no assurance that market makers will be obtained, that an active
and liquid market for the Common Stock will develop or be maintained, or that
resales of the Common Stock can be made at or above the price that is paid for
such shares.
IRREVOCABILITY OF ORDERS; POTENTIAL DELAY IN COMPLETION OF OFFERINGS
Orders submitted in the Offering are irrevocable. Funds submitted in
connection with any purchase of Common Stock in the Offering will be held by the
Company until the completion or termination of the Reorganization, including any
extension of the expiration date. Because completion of the Reorganization will
be subject to an update of the independent appraisal prepared by FinPro, among
other factors, there may be one or more delays in the completion of the
Reorganization. Subscribers will have no access to subscription funds and/or
shares of Common Stock until the Reorganization is completed or terminated.
13
<PAGE>
EXPENSES ASSOCIATED WITH THE ESOP AND STOCK AWARD PLAN
The Bank will recognize material employee compensation and benefit expenses
assuming the ESOP and the Stock Award Plan are implemented. The actual
aggregate amount of these new expenses cannot be predicted at the present time
because applicable accounting practices require that such expenses be measured
based on the fair market value of the shares of Common Stock. In the case of
the ESOP, fair market value would be measured when shares are committed to be
released for allocation to the ESOP participants; in the case of the Stock Award
Plan, fair market value would be measured at the grant date and amortized over
the award's vesting period. These expenses have been reflected in the pro forma
financial information under "Pro Forma Data" assuming the Purchase Price of
$10.00 per share represents the fair market value for accounting purposes.
Actual expenses, however, will be based on the fair market value of the Common
Stock at future dates, which may be higher or lower than the Purchase Price.
See "Management of The Bank--Benefits--Employee Stock Ownership Plan and Trust"
and "--Stock Award Plan."
DILUTIVE EFFECT OF STOCK AWARD PLAN, STOCK OPTION PLAN AND ESOP
If the Reorganization and Offering are completed and stockholders approve
the Stock Award Plan and Stock Option Plan, the Company intends to issue shares
of Common Stock to officers and directors of the Bank through these plans. If
the shares for these plans are issued from the Company's authorized but unissued
Common Stock, the book value and earnings per share of Minority Stockholders
would be diluted, and the trading price of the Company's Common Stock may be
reduced. It is expected that earnings per share would be reduced by
approximately $.02 and stockholders' equity per share would be reduced by
approximately $.19 as a result of the implementation of the Stock Award Plan.
In addition, it is expected that earnings per share would be reduced by
approximately $.02 and stockholders' equity per share would be reduced by
approximately $.37 as a result of establishing the ESOP and funding it with
shares equal to 8% of the Minority Ownership Interest. See "Pro Forma Data" and
"Executive Compensation."
RISKS ASSOCIATED WITH THE YEAR 2000 ISSUE
Like many financial institutions, the Bank relies upon computers for the
daily conduct of its business and for data processing. There is concern that on
January 1, 2000 computers will be unable to "read" the new year and as a
consequence, there may be widespread computer malfunctions. Since the Bank's
business relies on the ability of computers to track and credit deposits and
loan repayments, the failure of the Bank's computer systems would materially and
adversely affect the Bank's ability to conduct its business. The Bank's loan
portfolio primarily consists of loans secured by residential real estate.
Consequently, the Bank does not believe that its residential real estate lending
operations are dependent on borrowers' compliance with the year 2000 issue. With
respect to outstanding loans made to commercial borrowers, the Bank's loan
officers have asked their commercial borrowers to advise the Bank of the
exposure of the borrower's business to the year 2000 issue and how the borrower
is addressing the year 2000 issue. In this regard, the Bank has sent its
commercial loan customers a letter asking them if they are aware of the year
2000 issue, and of the potential exposure of the customer's business to the year
2000 issue and asking the customer to advise the Bank of the steps that have
been taken to remediate any problems the customer's business might have in
becoming year 2000 compliant. Bank personnel follow-up the letter by making a
telephone call to its customers to discuss each customer's exposure to the year
2000 and the customer's contingency plans to become year 2000 compliant. With
respect to new commercial loans, all borrowers must describe how dependent their
business is on computer technology, the actions taken by the borrower to ensure
that their business or property will not be adversely affected by the year 2000
issue and to describe the contingency planning the borrower is undertaking to
make sure their business is year 2000 compliant. As part of the loan
underwriting process, commercial borrowers must indicate in writing, to the
Bank, that they are aware of the year 2000 issue and are either year 2000
compliant, or are taking steps to become year 2000 compliant. As a result of
its actions, the Bank believes that its commercial borrowers are aware of the
year 2000 issue and are taking actions to become year 2000 compliant. The Bank
does not rely on independent third parties to provide data processing services
associated with its deposit and loan activities. In 1998, the Bank completed
installation of its internal deposit and loan data processing system.
Management believes, based upon the advanced technology of the computer hardware
installed in 1998, as well as the documented testing of the software used by the
Bank performed by the seller of the software, and the FDIC's recent examination
of the software for compatibility of the software, that the
14
<PAGE>
internal deposit and loan data processing system is year 2000 compliant. The
Bank is in the process of updating the software for its check processing and
check clearing systems, and expects this to be completed by December 1998. Upon
completion of this upgrade, the Bank's check processing and check clearing
systems will be year 2000 compliant. The Bank is in the process of testing its
other computer applications and hardware to ensure that they will be able to
read the year 2000, and intends to complete testing by December 1998. Through
June 30, 1998, the costs incurred to address the year 2000 issue and otherwise
upgrade the Bank's computer capabilities have been approximately $200,000.
Management does not expect that the additional costs to be incurred in
connection with the year 2000 issue will have a material impact on the Bank's
financial condition and results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Capability of the
Bank's Data Processing to Accommodate the Year 2000."
ROLE OF THE FINANCIAL ADVISOR/BEST EFFORTS OFFERING
The Bank and the Company have engaged Trident Securities, Inc. as their
financial and marketing advisor, and Trident has agreed to use its best efforts
to solicit subscriptions and purchase orders for Common Stock in the Offering.
Trident Securities, Inc. has not prepared any report or opinion constituting a
recommendation or advice to the Bank or the Company, nor has it prepared an
opinion as to the fairness of the purchase price or the terms of the Offering.
Trident Securities, Inc. has not verified the accuracy or completeness of the
information contained in this Prospectus. See "The Reorganization and Offering-
- -Plan of Distribution and Selling Commissions."
SELECTED FINANCIAL INFORMATION
The selected data presented below under the captions "Selected Financial
Condition Data" and "Selected Operations Data" for, and as of the end of, each
of the years in the five-year period ended December 31, 1997, are derived from
the audited financial statements of the Bank. The financial statements as of
December 31, 1997 and 1996 and for each of the years in the three-year period
ended December 31, 1997 are included elsewhere in this Prospectus. The selected
data presented below as of and for the six-month periods ended June 30, 1998 and
1997 are derived from the unaudited financial statements of the Bank included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
At December 31,
At June 30, --------------------------------------------------------------
1998 1997 1996 1995 1994 1993
-------- --------- --------- --------- -------- --------
(In thousands)
Selected Financial Condition Data:
<S> <C> <C> <C> <C> <C> <C>
Total assets...................................... $ 217,642 $ 210,637 $ 211,095 $ 205,531 $ 201,120 $ 206,685
Loans receivable, net............................. 140,043 142,368 135,872 140,677 141,290 139,431
Mortgage-backed securities available for sale..... 16,615 11,780 4,725 280 410 550
Investment securities available for sale.......... 39,570 43,525 52,926 47,758 47,381 50,759
Deposits.......................................... 189,218 183,138 185,508 181,385 179,725 185,643
Retained earnings................................. 28,031 27,120 25,538 23,951 21,249 20,761
<CAPTION>
Six Months
Ended June 30, Year Ended December 31,
----------------------- --------------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---------- --------- -------- -------- --------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Operating Data:
Interest income........................ $ 8,011 $ 7,861 $ 15,863 $ 15,154 $ 14,584 $ 13,844 $ 14,855
Interest expense....................... 3,922 3,926 7,897 7,895 7,628 6,777 7,287
---------- --------- -------- -------- --------- ---------- ----------
Net interest income.................... 4,089 3,935 7,966 7,259 6,956 7,067 7,568
Provision for loan losses.............. -- (23) 477 (103) 80 412 672
---------- --------- -------- -------- --------- ---------- ----------
Net interest income after
provision for loan losses........... 4,089 3,958 7,489 7,362 6,876 6,655 6,896
---------- --------- -------- -------- --------- ---------- ----------
Total operating and other income....... 388 368 822 801 910 727 1,097
---------- --------- -------- -------- --------- ---------- ----------
Total operating and other expense...... 3,123 2,571 6,145 5,390 5,270 5,479 5,689
---------- --------- -------- -------- --------- ---------- ----------
Income tax provision................... 552 659 881 1,025 898 667 734
Cumulative effect of change in
accounting principle................. -- -- -- -- -- -- 435
---------- --------- -------- -------- --------- ---------- ----------
Net income............................. $ 802 $ 1,096 $ 1,285 $ 1,748 $ 1,618 $ 1,236 $ 2,005
========== ========= ======== ======== ========= ========== ==========
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
At or for the Six Months
Ended June 30, At or for the Year Ended December 31,
----------------------- ---------------------------------------------------------
1998(1) 1997(1) 1997 1996 1995 1994 1993
--------- --------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other Data: (2)
- --------------------------------------------
Performance Ratios:
Return on assets (ratio of net
income to average total assets).......... 0.76% 1.05% 0.61% 0.84% 0.80% 0.60% 0.97%
Return on equity (ratio of net
income to average equity)................ 5.80% 8.44% 4.83% 7.10% 7.13% 5.85% 10.15%
Interest rate spread information:
Average during period.................... 3.39% 3.23% 3.27% 3.01% 3.03% 3.16% 3.48%
Net interest margin (3)..................... 4.08% 3.91% 3.97% 3.66% 3.62% 3.57% 3.83%
Ratio of operating expense to
average total assets..................... 2.94% 2.46% 2.93% 2.60% 2.61% 2.66% 2.75%
Efficiency ratio(4)......................... 69.75% 59.76% 69.93% 66.87% 67.00% 70.29% 62.52%
Ratio of average interest earning assets
to average interest-bearing liabilities.. 117.58% 117.68% 117.89% 116.27% 114.83% 113.26% 110.95%
Asset Quality Ratios:
Nonperforming loans to total assets......... 0.32% 0.47% 0.42% 0.52% 0.67% 1.09% 1.14%
Nonperforming assets to total assets........ 0.46% 0.81% 0.57% 0.92% 1.14% 1.40% 1.62%
Allowance for loan losses to
nonperforming loans...................... 243.42% 148.37% 200.75% 141.80% 130.02% 96.23% 86.82%
Allowance for loan losses to
loans receivable, net.................... 1.23% 1.05% 1.26% 1.14% 1.27% 1.50% 1.47%
Capital Ratios:
Retained earnings to total assets........... 12.88% 12.67% 12.88% 12.10% 11.65% 10.57% 10.04%
Average equity to average assets............ 13.03% 12.41% 12.69% 11.88% 11.21% 10.26% 9.54%
Other Data:
Number of full-service offices.............. 5 4 5 4 4 4 4
___________________________
</TABLE>
(1) Ratios for the six month periods have been annualized.
(2) Averages presented are monthly averages.
(3) Net interest income divided by average interest-earning assets.
(4) Noninterest expense to net interest and dividend income and noninterest
income excluding gains on real estate operations.
16
<PAGE>
RECENT FINANCIAL DATA
Set forth below are selected financial and other data of the Bank at and for
the periods ended September 30, 1998 and 1997, June 30, 1998 and December 31,
1997. Information at September 30, 1998 and June 30, 1998 and for the three and
nine months ended September 30, 1998 and 1997 is unaudited. In the opinion of
management of the Bank, all adjustments, consisting only of normal recurring
adjustments necessary for a fair statement of results for and as of the periods
indicated, have been included. The results of operations and other data for the
three and nine months ended September 30, 1998 are not necessarily indicative of
the results of operations to be expected for the entire year or any other
period. The selected financial and other data does not purport to be complete
and is qualified in its entirety by reference to the detailed information and
financial statements and notes included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
At At At
September 30, June 30, December 31,
1998 1998 1997
---------- ------------ -----------
(In thousands)
Selected Financial Condition Data:
- ----------------------------------
<S> <C> <C> <C>
Total assets............................................ $ 219,469 $ 217,642 $ 210,637
Loans receivable, net................................... 137,495 140,043 142,368
Mortgage-backed securities available for sale........... 18,736 16,615 11,780
Investment securities available for sale................ 44,636 39,570 43,525
Deposits................................................ 190,854 189,218 183,138
Retained earnings....................................... 28,677 28,031 27,120
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
---------------------------- ---------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
(In thousands)
<S> <C> <C> <C> <C>
Selected Operating Data:
Interest income.................................. $ 4,096 $ 4,018 $ 12,107 $ 11,879
Interest expense................................. 2,005 1,992 5,927 5,917
---------- ---------- ---------- ----------
Net interest income 2,091 2,026 6,180 5,962
Provision for loan losses........................ -- 25 -- 2
---------- ---------- ---------- ----------
Net interest income after
Provision for loan losses...................... 2,091 2,001 6,180 5,960
---------- ---------- ---------- ----------
Total operating and other income............... 149 170 537 538
---------- ---------- ---------- ----------
Total operating and other expense 1,524 1,262 4,647 3,834
---------- ---------- ---------- ----------
Income tax provision 217 344 769 1,003
---------- ---------- ---------- ----------
Net income $ 499 $ 565 $ 1,301 $ 1,661
========== ========== ========== ==========
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
At and for the At and for the
Three Months Nine Months
Ended September 30, Ended September 30,
--------------------------- -----------------------
1998(1) 1997(1) 1998(1) 1997(1)
------------ --------- ---------- --------
Selected Financial Ratios:
- -------------------------
<S> <C> <C> <C> <C>
Performance Ratios(2):
- ----------------------
Return on assets (ratio of net income to average total assets)........ 0.91% 1.07% 0.92% 1.19%
Return on equity (ratio of net income to average equity).............. 7.13% 8.37% 7.05% 9.59%
Interest rate spread information:
Average during period............................................... 3.44% 3.34% 3.41% 3.29%
Net interest margin................................................... 4.07% 4.04% 4.06% 3.98%
Ratio of operating expense to average total assets.................... 2.79% 2.40% 3.43% 2.87%
Efficiency ratio...................................................... 68.04% 58.13% 70.12% 60.06%
Ratio of average interest earning assets
to average interest-bearing liabilities............................. 117.04% 118.87% 116.54% 117.10%
Asset Quality Ratios:
- ---------------------
Nonperforming loans to total assets................................... 0.34% 0.39% 0.34% 0.39%
Nonperforming assets to total assets.................................. 0.52% 0.68% 0.52% 0.68%
Allowance for loan losses to nonperforming loans...................... 198.93% 183.68% 198.93% 183.68%
Allowance for loan losses to loans receivable, net.................... 1.23% 1.05% 1.23% 1.05%
Capital Ratios:
- ---------------
Retained earnings to total assets..................................... 13.07% 13.15% 13.07% 13.15%
Average equity to average assets...................................... 12.82% 12.83% 13.03% 12.64%
</TABLE>
- ------------------
(1) Annualized where appropriate.
(2) Averages presented are monthly averages.
<TABLE>
<CAPTION>
At
September 30, 1998
------------------------------
Amount Percent of Assets
---------- -----------------
( Dollars in thousands)
<S> <C> <C>
Regulatory and Risk-based Capital:
- ---------------------------------
Leverage capital:............................
- -----------------
Capital level.............................. $ 27,979 12.73%
Requirement................................ 6,584 3.00%
---------- ---------
Excess................................. $ 21,365 9.73%
========== =========
Risk-based Capital:
- -------------------
Tier 1capital level........................ $ 27,949 22.71%
Requirement................................ 4,924 4.00%
---------- ---------
Excess................................. $ 23,025 18.71%
========== =========
Total Capital:
- --------------
Total capital level........................ $ 28,677 23.30%
Requirement................................ 9,847 8.00%
---------- ---------
Excess................................. $ 18,830 15.30%
========== =========
</TABLE>
18
<PAGE>
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1998 AND JUNE 30, 1998
Total assets increased by $1.9 million, or 0.9%, to $219.5 million at
September 30, 1998 from $217.6 million at June 30, 1998. The increase in total
assets was primarily attributable to increases in investment securities and
mortgage-backed securities, partially offset by decreases in deposits at other
financial institutions, federal funds and loans receivable, net. Investment
securities and mortgage-backed securities increased $5.1 million, or 12.8%, to
$44.6 million at September 30 1998, from $39.5 million at June 30, 1998. The
increases in investment securities and mortgage-backed securities were primarily
due to the redeployment of deposits held at other financial institutions, the
proceeds from loan sales during the period and the reduction of federal fund
balances in order to obtain the better rates of return offered by investment
securities and mortgage-backed securities. The level of loans receivable, net
decreased $2.5 million, or 1.8%, to $137.5 million at September 30, 1998 from
$140.0 million at June 30, 1998. The decrease in loans receivable, net was due
to the sale of $1.7 million in student loans and $2.4 million of fixed-rated
residential real estate loans during the period. Federal funds decreased by
$1.8 million, or 20.7%, to $6.9 million at September 30, 1998 from $8.7 million
at June 30, 1998.
Deposits increased by $1.7 million, or 0.9%, from $189.2 million to $190.9
million.
Net worth increased 2.5% to $28.7 million at September 30, 1998 from $28.0
million at June 30, 1998. The increase in net worth was attributable to net
income of $499,000 and $147,000 in net unrealized gain on the Bank's investment
and mortgage-backed securities portfolios.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998
AND SEPTEMBER 30, 1997
GENERAL. Net income decreased 11.7% to $499,000 for the three months ended
September 30, 1998 from $565,000 for the three months ended September 30, 1997
primarily as a result of an increase in operating and other expenses and a
decrease in operating income. These were partially offset by a $65,000 increase
in net interest income, a $127,000 decrease in income tax provisions and a
$25,000 decrease in the provision for loan losses.
NET INTEREST INCOME. Net interest income increased to $2.1 million for the
three months ended September 30, 1998, compared to $2.0 million for the
comparable 1997 quarter.
Interest income increased $78,000, or 1.9%, to $4.1 million for the three
months ended September 30, 1998 from $4.0 million for the three months ended
September 30, 1997. The increase in interest income was primarily a result of an
increase in the average yield earned on interest-earning assets of 4 basis
points. The average yield earned on loans increased to 8.77% for the three
months ended September 30, 1998 from 8.64% for the three months ended September
30, 1997, reflecting management's strategy of emphasizing the origination and
retention of consumer and business loans while continuing to originate fixed-
rate one-to-four family real estate loans for sale in the secondary market. The
average yield on investment securities and mortgage-backed securities decreased
to 6.30% for the three months ended September 30, 1998 from 6.51% for the three
months ended September 30, 1997 primarily due to a decrease in market interest
rates during the 1998 period.
Total interest expense increased $13,000 or 0.7%, to $2.0 million for the
three months ended September 30, 1998 primarily as a result of an increase in
the average balance of interest-bearing liabilities to $173.5 million at
September 30, 1998 from $170.0 million at September 30, 1997. This increase was
partially offset by a decrease in the average cost of interest-bearing
liabilities to 4.58% from 4.64%.
The Bank's interest rate spread for the three month period ended September
30, 1998 increased 10 basis points to 3.44% compared with 3.34% for the three
months ended September 30, 1997.
PROVISION FOR LOAN LOSSES. The Bank did not make a provision for loan
losses during the three months ended September 30, 1998. For the three months
ended September 30, 1997, the provision for loan losses was $25,000. The Bank
instituted a more conservative method to analyze the adequacy of the allowance
for loan losses at year-end 1997.
19
<PAGE>
Notwithstanding the new methodology, the quarterly assessment of allowance
adequacy did not result in the need for additional provisions to the allowance
for loan losses during the three months ended September 30, 1998 due to a
decrease in loans receivable of $2.8 million to $139.2 million at September 30,
1998 from $142.0 million at June 30, 1998, and the continued relative low levels
of classified loans and loan delinquencies. The balance of the allowance for
loan losses increased to $1.7 million at September 30, 1998 from $1.5 million at
September 30, 1997 as a result of the method change.
OPERATING INCOME. Total operating income decreased $21,000, or 12.4%, to
$149,000 for the three months ended September 30, 1998 from $170,000 for the
three months ended September 30, 1997. The decrease in operating income resulted
primarily from a temporary reduction in checking account fee income for the
third quarter of 1998.
OPERATING AND OTHER EXPENSES. Total operating and other expenses
increased $262,000 to $1.5 million for the three months ended September 30,
1998 from $1.3 million for the three months ended September 30, 1997. Salaries
and benefits increased $109,000 and occupancy expenses increased $108,000, both
as a result of the opening of a new branch and the renovations to the main
office and operations center. Operating and other expenses can be expected to
increase in subsequent periods following the consummation of the reorganization
as a result of increased costs associated with operating as a public company and
increased compensation expense as a result of the adoption of the ESOP and, if
approved by the stockholders, the Stock Award Plan. See "Risk Factors - Reduced
Return on Average Equity After the Reorganization" and "Expenses Associated with
the ESOP and Stock Award Plans."
INCOME TAXES. The provision for income taxes decreased $127,000 to
$217,000 for the three months ended September 30, 1998 from $344,000 for the
three months ended September 30, 1997. This decrease was the result of lower
net income before taxes during the three months ended September 30, 1998 as
compared with the same period during 1997.
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND
SEPTEMBER 30, 1997
GENERAL. Net income decreased $360,000, or 21.7%, to $1.3 million for the
nine months ended September 30, 1998 from $1.7 million for the nine months ended
September 30, 1997, primarily as a result of a $813,000 increase in operating
and other expenses, partially offset by a $218,000 increase in net interest
income and a $234,000 decrease in the provision for income taxes.
NET INTEREST INCOME. Net interest income increased to $6.2 million for the
nine months ended September 30, 1998 from $6.0 million for the nine months ended
September 30, 1997.
Interest income increased $228,000, or 1.9%, to $12.1 million for the nine
months ended September 30, 1998 from $11.9 million for the nine months ended
September 30, 1997 as a result of an increase in the average balance of loans
and an increase in the average yield earned on loans receivable. The average
balance of loans increased to $141.5 million from $139.6 million due to
increased emphasis on consumer and business lending and the opening of a new
branch office in December 1997. The average yield earned on loans receivable
increased by 11 basis points to 8.65% for the nine months ending September 30,
1998 from 8.54% for the nine months period ending September 30, 1997 primarily
due to an increase in higher yielding consumer loans.
Total interest expense increased $10,000, or 0.2%, to $5.9 million for the
nine months ended September 30, 1998 primarily as a result of an increase in the
average balance of interest-bearing liabilities to $171.4 million for the nine
month period ended September 30, 1998 from $170.6 million for the nine month
period ended September 30, 1997. This increase was partially offset by a
decrease of 2 basis points in the average cost of interest-bearing liabilities
to 4.62% from 4.64%.
The Bank's net interest spread increased to 3.41% for the nine month
period ended September 30, 1998 from 3.29% for the nine month period ended
September 30, 1997. The increase in net interest spread was attributable to
increased average rates on interest-earning assets, such as loans receivable and
federal funds, and lower average costs
20
<PAGE>
for interest-bearing liabilities. This improvement was partially offset by
slightly lower returns on investment securities and mortgage-backed securities
as market interest rates declined during the 1998 period.
PROVISION FOR LOAN LOSSES. The provision for loan losses decreased to no
provisions made during the nine months ended September 30, 1998 from a net
provision of $2,000 for the nine month period ended September 30, 1997.
Following the adoption of a new method of determining the adequacy of the
allowance for loan losses, a large provision was made in December 1997.
Consequently, no additional provisions to the allowance for loan losses was
deemed necessary by management during 1998 due to a reduction of classified
loans and a reduction in total loans at September 30, 1998 and as compared to
December 31, 1997. At September 30, 1998 the allowance for loan losses was $1.7
million, or 1.23% of loans receivable, net as compared with $1.5 million, or
1.05 %, of loans receivable, net at September 30, 1997.
OPERATING INCOME. Operating income decreased slightly by $1,000, or 0.2%,
to $537,000 for the nine months ended September 30, 1998 from $538,000 for the
nine months ended September 30, 1997. The decrease resulted primarily from the
recent reduction of checking account and ATM fee revenue, which decreased
$25,000 during the nine months ended September 30, 1998 as compared with the
same period in 1997. This was partially offset by an increase in the revenue
derived from the Bank's secondary market loan sales, which recorded additional
revenue of $24,000 during the 1998 period as compared with the nine months ended
September 30, 1997.
OPERATING AND OTHER EXPENSES. Operating and other expenses increased
$813,000, or 21.2%, to $4.6 million for the nine months ended September 30,
1998 from $3.8 million for the nine months ended September 30, 1997. Salaries
and benefits increased $314,000 and occupancy expenses increased $305,000, both
as a result of the opening of a new branch office and the renovation of the
Bank's main office and operations center. In addition, other expenses such as
professional fees and expenses related to the installation, training and
conversion of the Bank's new in-house data processing system have contributed to
the increased level of operating and other expenses for the nine month period
ended September 30, 1998 as compared with the same period in 1997.
PROVISION FOR INCOME TAXES. The provision for income taxes decreased to
$769,000 for the nine months ended September 30, 1998 from $1.0 million for the
nine months ended September 30, 1997. The effective tax rate was 37.1% during
1998 and 37.6% during the 1997 period.
ONEIDA FINANCIAL CORP.
The Company was organized for the purpose of acquiring all of the capital
stock of the Bank upon completion of the Reorganization and the Offering. The
Company has applied to the Federal Reserve Board to become a bank holding
company and, upon completion of the Reorganization, will be subject to
regulation by the Federal Reserve Board. See "The Reorganization and Offering--
Description of and Reasons for the Reorganization" and "Regulation--Holding
Company Regulation." Final approval from the Federal Reserve Board has not been
received as of the date of this Prospectus. Upon completion of the
Reorganization, the Company will have no significant assets other than the
shares of the Bank's common stock and an amount equal to 50% of the net proceeds
of the Offering, and will have no significant liabilities. The Company intends
to use a portion of the net proceeds that it retains to loan to the ESOP funds
to enable the ESOP to purchase up to 8% of the Minority Ownership Interest. See
"Use of Proceeds." The management of the Company is set forth under "Management
of the Company." Initially, the Company will neither own nor lease any property,
but will instead use the premises, equipment and furniture of the Bank. At the
present time, the Company does not intend to employ any persons other than
certain officers of the Bank and will utilize the support staff of the Bank from
time to time. Additional employees will be hired as appropriate to the extent
the Company expands its business in the future.
Management believes that the holding company structure will provide the
Company additional flexibility to diversify its business activities through
existing or newly formed subsidiaries, or through acquisitions of, or mergers
21
<PAGE>
with, other financial institutions and financial services related companies.
There are no current arrangements, understandings or agreements regarding any
such opportunities. However, subsequent to the Reorganization, the Company will
be in a position, subject to regulatory limitations and the Company's financial
position, to take advantage of any such acquisition and expansion opportunities
that may arise. The initial activities of the Company are anticipated to be
funded by the proceeds to be retained by the Company, income thereon and through
dividends from the Bank.
The Company's executive office is located at the main office of the Bank,
at 182 Main Street, Oneida, New York 13421-1676. The Company's telephone number
is (315) 363-2000.
THE ONEIDA SAVINGS BANK
The Bank was organized in 1866 as a New York-chartered mutual savings bank.
The Bank's deposits are insured by the Bank Insurance Fund ("BIF"), as
administered by the FDIC, up to the maximum amount permitted by law. The Bank
is a community bank engaged primarily in the business of accepting deposits from
customers through its main office and four full service branch offices and using
those deposits, together with funds generated from operations, to make one-to-
four family residential and commercial real estate loans, commercial business
loans, consumer loans and to invest in mortgage-backed and other securities.
At June 30, 1998, the Bank had total assets of $217.6 million, total
deposits of $189.2 million and retained earnings of $28.0 million. At June 30,
1998, $113.6 million, or 80.0%, of the Bank's loans were secured by real estate,
$88.0 million, or 62.0%, of the Bank's loans were secured by one-to-four family
residential real estate, $14.5 million, or 10.2%, of the Bank's loans were
secured by commercial real estate, and $9.2 million, or 6.5%, of the Bank's
loans were home equity loans. Consumer loans totaled $16.8 million, or 11.9% of
the Bank's total loans, at June 30, 1998. The Bank also originates commercial
business loans which totaled $11.6 million, or 8.1%, of total loans at June 30,
1998. The Bank's investment securities and mortgage-backed securities
portfolios totaled $39.6 million and $16.6 million, respectively, at June 30,
1998.
The Bank's main office is located at 182 Main Street, Oneida, New York
13421-1676. The Bank's telephone number is (315) 363-2000.
MARKET AREA
The Bank is a community-based savings institution that offers a variety of
financial products and services. The Bank's primary lending area is Madison
county, New York and surrounding counties, and most of the Bank's deposit
customers reside in Madison county and surrounding counties. The City of Oneida
is located approximately 30 miles from Syracuse and 20 miles from Utica. The
Bank's market area is characterized as rural, although the local economy is also
affected by economic conditions in Syracuse and Utica, New York. As of 1997, the
average household income of persons residing in Oneida and Madison counties was
below that of New York State and the United States. During the period 1980-1990
the population of Oneida county decreased by 1.04% while the population of
Madison county grew by 6.09%.
The Bank competes with commercial banks, savings banks and credit unions
for deposits and loans. At June 30, 1998, there was a total of 96 commercial
bank, savings bank and credit union branches operating in Madison and Oneida
counties. In addition to the financial institutions operating in Madison and
Oneida counties, the Bank competes with a number of mortgage bankers for the
origination of loans. The largest employers in the Bank's market area are Oneida
Limited and The Oneida Indian Nation of New York.
REGULATORY CAPITAL COMPLIANCE
At June 30, 1998, the Bank exceeded each of its regulatory capital
requirements. Set forth below is a summary of the Bank's compliance with FDIC
capital standards as of June 30, 1998, on a historical and pro forma basis
assuming that the indicated number of shares were sold as of such date and the
Bank received 50% of the net proceeds. For
22
<PAGE>
purposes of the table below, the amount expected to be borrowed by the ESOP and
the cost of the shares expected to be acquired by the Stock Award Plan are
deducted from pro forma regulatory capital. The Federal Reserve Board has
adopted capital adequacy guidelines for bank holding companies (on a
consolidated basis) substantially similar to the FDIC capital requirements for
the Bank. On a pro forma consolidated basis after the Reorganization and
Offering, the Company's pro forma stockholders' equity will exceed these
requirements. See "Regulation--Holding Company Regulation."
<TABLE>
<CAPTION>
PRO FORMA AT JUNE 30, 1998,
BASED UPON THE SALE AT $10.00
PER SHARE OF
-----------------------------
HISTORICAL AT 1,266,588
JUNE 30, 1998 SHARES
----------------------- ------------------------
PERCENT PERCENT
OF OF
AMOUNT ASSETS/(2)/ AMOUNT ASSETS/(2)/
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
GAAP capital.............. $ 28,031 12.88% $ 32,379 14.59%
========== ========= ========== =========
Leverage capital:
Capital level/(3)/...... $ 27,451 12.61% $ 31,799 14.32%
Requirement/(4)/....... 6,529 3.00 6,660 3.00
---------- --------- ---------- ---------
Excess............... $ 20,922 9.61% $ 25,139 11.32%
========== ========= ========== =========
Risk-based capital:
Tier 1 capital
level/(3)(5)/........... $ 27,451 21.90% $ 31,799 24.94%
Requirement.............. 5,014 4.00 5,101 4.00
---------- --------- ---------- ---------
Excess............... $ 22,437 17.90% $ 26,698 20.94%
========== ========= ========== =========
Total capital
level/(3)(5)/............ 28,031 22.36% 32,379 25.39%
Requirement............... 10,028 8.00 10,202 8.00
---------- --------- ---------- ---------
Excess................ $ 18,003 14.36% $ 22,177 17.39%
========== ========= ========== =========
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA AT JUNE 30, 1998, BASED UPON THE SALE AT $10.00 PER SHARE OF
-----------------------------------------------------------------------
1,490,104 1,713,620 1,970,663
SHARES SHARES SHARES/(1)/
-------------------- ---------------------- -----------------------
PERCENT PERCENT PERCENT
OF OF OF
AMOUNT ASSETS/(2)/ AMOUNT ASSETS/(2)/ AMOUNT ASSETS/(2)/
------- ------ ------- ------ ------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
GAAP capital.............. $33,216 14.91% $34,054 15.23% $35,017 15.59%
======= ===== ======= ===== ======= =====
Leverage capital:
Capital level/(3)/...... $32,637 14.65% $33,474 14.97% $34,438 15.33%
Requirement/(4)/....... 6,685 3.00 6,710 3.00 6,739 3.00
------- ----- ------- ----- ------- -----
Excess............... $25,952 11.65% $26,764 11.97% $27,699 12.33%
======= ===== ======= ===== ======= =====
Risk-based capital:
Tier 1 capital
level/(3)(5)/........... $32,637 25.51% $33,474 26.08% $34,438 26.73%
Requirement.............. 3,838 3.00 3,851 3.00 3,865 3.00
------- ----- ------- ----- ------- -----
Excess............... $28,798 22.51% $29,623 23.08% $30,573 23.73%
======= ===== ======= ===== ======= =====
Total capital
level/(3)(5)/............ 33,217 25.96% 34,054 26.53% 35,018 27.18%
Requirement............... 10,235 8.00 10,269 8.00 10,307 8.00
------- ----- ------- ----- ------- -----
Excess................ $22,982 17.96% $23,875 18.53% $24,711 19.18%
======= ===== ======= ===== ======= =====
- ---------------------------
</TABLE>
footnotes on the following page
/(1)/ As adjusted to give effect to an increase in the number of shares that
could occur due to an increase in the Estimated Valuation Range of up to
15% as a result of regulatory considerations, demand for the shares, or
changes in market conditions or general financial and economic conditions
following the commencement of the Offering.
/(2)/ Leverage capital levels are shown as a percentage of tangible assets.
Risk-based capital levels are calculated on the basis of a percentage of
risk-weighted assets.
/(3)/ Pro forma capital levels assume: funding by the Bank of the Stock Award
Plan to enable the plan to acquire in the open market a number of shares
equal to 4% of the Minority Ownership Interest; the purchase by the ESOP
of 8% of the Minority Ownership Interest; and the capitalization of the
Mutual Holding Company by the Bank with $1,000. See "Management of the
Bank- Benefit Plans" for a discussion of the Stock Award Plan and ESOP.
/(4)/ The current leverage capital requirement is 3% of total adjusted assets
for banks that receive the highest supervisory rating for safety and
soundness and that are not experiencing or anticipating significant
growth. The current leverage capital ratio applicable to all other banks
is 4% to 5%. See "Regulation--Regulatory Capital Requirements.
/(5)/ Assumes net proceeds are invested in assets that carry a risk-weighting
equal to the average risk weighting of the Bank's risk-weighted assets as
of June 30, 1998.
USE OF PROCEEDS
Although the actual net proceeds from the sale of the Common Stock cannot
be determined until the Offering is completed, it is presently anticipated that
the net proceeds from the sale of the Common Stock will be between $12.0 million
and $16.4 million (or $19.0 million if the Estimated Valuation Range is
increased by 15%). See "Pro Forma Data" and "The Reorganization and Offering--
Stock Pricing and Number of Shares to Be Issued" as to the assumptions used to
arrive at such amounts. The Company will be unable to utilize any of the net
proceeds of the Offering until the consummation of the Reorganization. The
primary reason for conducting the Offering at this time is to have the Company
and the Bank well positioned for future expansion of the Bank's retail banking
franchise and to expand operations through acquisitions of other financial
institutions, branch offices or other financial service companies, although the
Company and the Bank have no specific expansion or acquisition plans at this
time. While the Bank does not have a specific need to raise additional capital
at this time, the Reorganization will establish a structure that will enable the
Bank to compete and expend more effectively in the financial services
marketplace and that will enable the Bank's depositors, employees, management
and trustees to obtain an equity ownership in the Bank. For further information
regarding the reasons for conducting the Reorganization and Offering, see "The
Reorganization and Offering--Description and Reasons for the Reorganization."
23
<PAGE>
The Company will contribute approximately 50% of the net proceeds of the
Offering to the Bank, or approximately $6.0 million to $8.2 million at the
minimum and adjusted maximum of the Offering, respectively. The Company and the
Bank do not have any immediate, specific plans for the investment of the net
proceeds received in the Offering. Furthermore, neither the Company nor the
Bank have specified any allocations for the net proceeds. The portion of net
proceeds received by the Bank from the Company will be used by the Bank for
general corporate purposes, including investments in short- and medium-term,
investment grade debt securities, mortgage-backed securities and marketable
equity securities and to increase the origination of mortgage, consumer and
commercial business loans. The Bank may also use such funds for the continued
expansion of its retail banking franchise and to expand operations through
acquisitions of other financial institutions, branch offices or other financial
services companies. To the extent that the stock-based benefit programs that the
Company intends to adopt subsequent to the Offering are not funded with
authorized but unissued shares of Common Stock, the Company or Bank may use net
proceeds from the Offering to fund the purchase of stock to be awarded under
such stock benefit programs. See "Risk Factors--Possible Dilutive Effect of
Stock Award Plan, Stock Option Plan and ESOP" and "Management of the Bank--
Benefit Plans--Stock Option Plan" and "--Stock Award Plan."
The Company intends to use a portion of the net proceeds it retains to make
a loan directly to the ESOP to enable the ESOP to purchase Common Stock equal to
8% of the Minority Ownership Interest. Based upon the sale of 1,266,588 shares
or 1,713,620 shares at the minimum and maximum of the Offering and the
contribution of between 55,730 shares and 75,399 shares to the Charitable
Foundation, the amount of the loan to the ESOP would be $1.1 million or $1.4
million, respectively. See "Management of the Bank--Report of Independent
Compensation Consultant--Employee Stock Ownership Plan and Trust." The
remaining net proceeds retained by the Company, or $5.0 million to $8.0 million
at the minimum and adjusted maximum of the Offering, will be invested initially
in U.S. government and agency securities, short- and medium-term debt
obligations, mortgage-backed securities and other marketable equity securities.
The net proceeds retained by the Company may also be used to support the
future expansion of operations through the acquisition of financial institutions
or their assets, including those located within the Bank's market area, or
diversification into other banking related businesses. However, the Company and
the Bank have no current arrangements, understandings or agreements regarding
any such transactions. Upon completion of the Reorganization, the Company will
be a bank holding company, and will be permitted to engage only in those
activities that are permissible for bank holding companies under the Bank
Holding Company Act, as administered by the Federal Reserve Board. See
"Regulation--Holding Company Regulation" for a description of certain
regulations applicable to the Company. Because the Company and the Bank do not
have any immediate, specific plans for the use of the net proceeds, the
Company's return on equity will initially be below that of other publicly traded
financial institutions. See "Risk Factors - Reduced Return on Average Equity
After the Reorganization".
Upon completion of the Reorganization, the board of directors of the
Company will have the authority to adopt stock repurchase plans, subject to
statutory and regulatory requirements. Pursuant to New York regulations, and
without the prior approval of the Department, the Company may not repurchase any
Common Stock in the first year after the Reorganization, and during each of the
next two following years, may not repurchase more than 5% of its shares
outstanding. Based upon facts and circumstances following completion of the
Reorganization and subject to applicable regulatory requirements, the board of
directors may determine to repurchase stock in the future. Such facts and
circumstances may include but not be limited to: (i) market and economic factors
such as the price at which the stock is trading in the market, the volume of
trading, the attractiveness of other investment alternatives in terms of the
rate of return and risk involved in the investment, the ability to increase the
book value and/or earnings per share of the remaining outstanding shares and the
opportunity to improve the Company's return on equity; (ii) the avoidance of
dilution to stockholders by not having to issue additional shares to cover the
exercise of stock options or to fund employee stock benefit plans; and (iii) any
other circumstances in which repurchases would be in the best interests of the
Company and its stockholders. In the event the Company determines to repurchase
stock, such repurchases may be made at market prices which may be in excess of
the $10.00 per share purchase price in the Offering. Any stock repurchases will
be subject to the determination of the Company's Board of Directors that both
the Company and the Bank will be capitalized in excess of all applicable
regulatory requirements after any repurchases and that such capital
24
<PAGE>
will be adequate, taking into account, among other things, the level of non-
performing and other risk assets, the Company's and the Bank's current and
projected results of operations and asset/liability structure, the economic
environment, tax and other considerations.
DIVIDEND POLICY
Upon completion of the Offering, the Board of Directors of the Company will
have the authority to declare dividends on the Common Stock, subject to
statutory and requlatory requirements. The Company intends to pay an annual
cash dividend of $.30 per share payable semi-annually. The payment of dividends
is expected to begin following the second full quarter after completion of the
Reorganization and Offering.
Under Delaware law, the Company is permitted to pay cash dividends,
provided that the amount of cash dividends paid may not exceed that amount by
which the net assets of the Company (the amount by which total assets exceed
total liabilities) exceeds its statutory capital, or if there is no such excess,
the net profits for the current and/or immediately preceding fiscal year. The
Company's source of funds for the payment of cash dividends may in the future
depend on the receipt of cash dividends from the Bank. The Bank will not be
permitted to pay dividends on its Common Stock or repurchase shares of its
Common Stock if its stockholders' equity would be reduced below the amount
required for the liquidation account. See "The Reorganization and Offering--
Liquidation Rights." Under New York Banking Law, dividends may be declared and
paid only out of the net profits of the Bank. The approval of the Superintendent
is required if the total of all dividends declared in any calendar year will
exceed net profits for that year plus the retained net profits of the preceding
two years, less any required transfer to surplus or a fund for the retirement of
any preferred stock. In addition, no dividends may be declared, credited or paid
if the effect thereof would cause the Bank's capital to be reduced below the
amount required by the Superintendent or the FDIC. The liquidation account is
expected to initially total $28.0 million. Management does not intend to pay a
distribution that might be deemed a return of capital or liquidation dividend.
See "Regulation." Subsequent to the Offering, the availability of the Bank's
funds for the payment of dividends may be limited by the liquidation account.
See "The Reorganization and Offering--Liquidation Rights." Dividends in excess
of the Bank's current and accumulated earnings could result in the realization
by the Bank of taxable income. See "Federal and State Taxation--Federal
Taxation."
MARKET FOR COMMON STOCK
The Company was recently formed and has never issued capital stock.
Consequently, there is no existing market for the Common Stock and no assurance
can be given that an established and liquid trading market for the Common Stock
will develop. The Bank, as a mutual institution, has never issued capital
stock. The Company has received conditional approval to have its Common Stock
quoted on the Nasdaq Small Cap Market under the symbol "ONFC" subject to the
completion of the Offering and compliance with certain conditions including the
presence of at least three registered and active market makers. Trident
Securities, Inc. intends to make a market in the Common Stock. Based upon
Trident Securities Inc.'s prior experience in identifying additional market
makers, the Company expects that additional market makers will be identified.
The development of a public market that has depth, liquidity and
orderliness depends upon the presence in the marketplace of a sufficient number
of willing buyers and sellers at any given time, over which neither Company nor
any market maker has any control. Accordingly, there can be no assurance that
an active or liquid trading market for the Common Stock will develop, or that if
a market develops, it will continue. Furthermore, there can be no assurance
that purchasers will be able to sell their shares at or above the price at which
the Common Stock was purchased.
25
<PAGE>
CAPITALIZATION
The following table presents the historical capitalization of the Bank at
June 30, 1998, and the pro forma consolidated capitalization of the Company
after giving effect to the Offering and the Reorganization, including the
issuance of shares to the Charitable Foundation, based upon the sale of the
number of shares indicated in the table and the other assumptions set forth
under "Pro Forma Data."
<TABLE>
<CAPTION>
COMPANY PRO FORMA BASED UPON THE SALE AT $10.00 PER SHARE
---------------------------------------------------------
1,970,663
1,266,588 1,490,104 1,713,620 SHARES
BANK SHARES SHARES SHARES (ADJUSTED
HISTORICAL (MINIMUM) (MIDPOINT) (MAXIMUM) MAXIMUM)/(1)/
------------ ----------- ---------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Deposits/(2)/........................................ $ 188,035 188,035 188,035 188,035 188,035
Other borrowings..................................... -- -- -- -- --
---------- ---------- -------- -------- --------
Total deposits and other borrowed funds.............. $ 188,035 $ 188,035 $188,035 $188,035 $188,035
========== ========== ======== ======== ========
Stockholders' equity:
Common Stock, $.10 par value, 8,000,000 shares
authorized; shares to be issued as reflected/(3)/.. $-- $ 289 $ 340 $ 391 $ 450
Additional paid-in capital/(4)/..................... -- 11,582 13,766 15,950 18,462
Retained earnings/(5)/.............................. 28,031 28,030 28,030 28,030 28,030
Plus:
Expenses of contribution to Charitable Foundation.. -- 657 756 854 967
Less:
After tax cost of the Charitable Foundation/(6)/.... -- 407 469 529 600
Net unrealized gain on securities available
for sale, net of taxes............................. -- -- -- -- --
Less:
Common Stock acquired by the ESOP/(7)/.............. -- 1,058 1,245 1,431 1,646
Common Stock acquired by the Stock Award Plan/(8)/.. -- 529 622 716 823
---------- ---------- -------- -------- --------
Total stockholders' equity........................... $ 28,031 $ 38,564 $ 40,556 $ 42,549 $ 44,840
========== ========== ======== ======== ========
- ---------------------
</TABLE>
/(1)/ As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Valuation Range of up to
15% as a result of regulatory considerations, demand for the shares, or
changes in market or general financial and economic conditions following
the commencement of the Offering.
/(2)/ Does not reflect withdrawals from deposit accounts for the purchase of
Common Stock, which would reduce pro forma deposits by the amount of such
withdrawals.
/(3)/ Includes shares to be issued to depositors and the public in the Offering,
as indicated herein, and shares to be issued to the Mutual Holding Company
and the Charitable Foundation.
/(4)/ Reflects the sale of shares in the Offering. No effect has been given to
the issuance of additional shares of Common Stock pursuant to the Stock
Option Plan to be adopted by the Company and presented for approval of
stockholders following the Offering. The Stock Option Plan would provide
for the grant of stock options to purchase a number of shares of Common
Stock equal to 10% of the shares of Common Stock sold in the Offering. See
"Management of the Bank--Benefit Plans."
/(5)/ The retained earnings of the Bank will be substantially restricted after
the Offering. See "The Reorganization and Offering--Liquidation Rights."
Assumes that the Mutual Holding Company will be capitalized by the Bank
with $1,000.
/(6)/ Represents the tax effect of the contribution to the Charitable Foundation
based on a 38% tax rate. The realization of the deferred tax benefit is
limited annually to 10% of the Company's annual taxable income, subject to
the ability of the Company to carry forward any unused portion of the
deduction for five years following the year in which the contribution is
made.
/(7)/ Assumes that 8% of the shares sold in the Offering will be purchased by
the ESOP and that the funds used to acquire the ESOP shares will be
borrowed from the Company. The Common Stock acquired by the ESOP is
reflected as a reduction of stockholders' equity. See "Management of the
Bank--Report of Independent Compensation Consultant--Employee Stock
Ownership Plan and Trust."
/(8)/ Assumes that, subsequent to the Offering, an amount equal to 4% of the
Minority Ownership Interest is purchased by the Stock Award Plan through
open market purchases. In the event the Stock Award Plan is implemented
more than one year after the Reorganization an amount equal to 5% of the
Minority Ownership Interest may be implemented. The actual purchase price
per share may be more or less than $10.00. The Common Stock to be
purchased by the Stock Award Plan is reflected as a reduction to
stockholders' equity. See "Risk Factors-Dilutive Effect of Stock Award
Plan, Stock Option Plan and ESOP," footnote 3 to the tables under "Pro
Forma Data," and "Management of the Bank--Report of Independent
Compensation Consultant--Stock Award Plan."
26
<PAGE>
PRO FORMA DATA
The actual net proceeds from the sale of the Common Stock cannot be
determined until the Offering is completed. However, net proceeds are currently
estimated to be between $12.0 million and $16.4 million (or up to $19.0 million)
based upon the following assumptions: (i) $1.0 million will be sold to executive
officers and trustees of the Bank and the Company, the ESOP will purchase shares
of Common Stock equal to 8% of the Minority Ownership Interest, and the
remaining shares will be sold in the Subscription and Community Offerings; (ii)
Trident Securities, Inc. will receive a fixed fee equal to $200,000 for its
services in the Offering; (iii) the Charitable Foundation will be funded with a
total contribution equal to 2.0% of the shares of Common Stock issued in the
Reorganization and a $100,000 cash contribution; (iv) Reorganization expenses,
excluding the fees payable to Trident Securities, Inc., will be approximately
$695,000; and (v) the Mutual Holding Company will be capitalized by the Bank
with $1,000. Actual expenses may vary from those estimated.
Pro forma consolidated net income of the Company for the six months ended
June 30, 1998 and for the year ended December 31, 1997 have been calculated as
if the Common Stock had been sold at the beginning of the respective periods and
the net proceeds had been invested at 5.41% (the one year U.S. Treasury bill
rate as of June 30, 1998). The tables do not reflect the effect of withdrawals
from deposit accounts for the purchase of Common Stock. The pro forma after-tax
yield for the Company and the Bank is assumed to be 3.35% for the six months
ended June 30, 1998 (based on an assumed tax rate of 38%). Historical and pro
forma per share amounts have been calculated by dividing historical and pro
forma amounts by the indicated number of shares of Common Stock, as adjusted to
give effect to the purchase of shares by the ESOP. No effect has been given in
the pro forma stockholders' equity calculations for the assumed earnings on the
net proceeds. As discussed under "Use of Proceeds," the Company will retain 50%
of the net proceeds from the Offering.
The following pro forma information may not be representative of the
financial effects of the foregoing transactions at the dates on which such
transactions actually occur and should not be taken as indicative of future
results of operations. Pro forma consolidated stockholders' equity represents
the difference between the stated amount of assets and liabilities of the
Company. The pro forma stockholders' equity is not intended to represent the
fair market value of the Common Stock and may be greater than amounts that would
be available for distribution to stockholders in the event of liquidation.
27
<PAGE>
The following tables summarize historical data of the Bank and pro forma
data of the Company at or for the six months ended June 30, 1998, and at or for
the year ended December 31, 1997, based on the assumptions set forth above and
in the tables, and should not be used as a basis for projections of market value
of the Common Stock following the Offering. The tables below give effect to the
Stock Award Plan, which is expected to be adopted by the Company following the
Offering and presented to stockholders for approval. See footnotes 2, 3 and 4 to
the Pro Forma Table and "Management of the Bank--Stock Award Plan." No effect
has been given in the tables to the possible issuance of additional shares
reserved for future issuance pursuant to the Stock Option Plan to be adopted by
the board of directors of the Company and presented to stockholders for
approval, nor does book value as presented give any effect to the liquidation
account to be established for the benefit of Eligible Account Holders or
Supplemental Eligible Account Holders or, in the event of liquidation of the
Bank, to the tax effect of the bad debt reserve and other factors. See footnote
4 to the tables below, "The Reorganization and Offering--Liquidation Rights" and
"Management of the Bank--Stock Option Plan."
<TABLE>
<CAPTION>
At or For The Six Months Ended June 30, 1998
--------------------------------------------------------------------
1,970,663
1,266,588 1,490,104 1,713,620 Shares Sold at
Shares Sold at Shares Sold at Shares Sold at $10 per Share
$10 per Share $10 per Share $10 per Share (Adjusted
(Minimum) (Midpoint) (Maximum) Maximum)(8)
------------- ----------------- --------------- --------------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Gross proceeds........................................... $ 12,666 $ 14,901 $ 17,136 $ 19,707
Plus: Shares acquired by Charitable Foundation........... 557 656 754 867
---------- ---------- ---------- ----------
Pro forma market capitalization.......................... $ 13,223 $ 15,557 $ 17,890 $ 20,574
========== ========== ========== ==========
Gross proceeds........................................... 12,666 14,901 17,136 19,707
Less: Cash contribution to Charitable Foundation......... 100 100 100 100
Capital to MHC.................................... 1 1 1 1
Expenses.......................................... 695 695 695 695
---------- ---------- ---------- ----------
Estimated net proceeds................................... 11,870 14,105 16,340 18,911
Less: Common Stock purchased by ESOP..................... 1,058 1,245 1,431 1,646
Common Stock purchased by Stock Award Plan........ 529 622 716 823
---------- ---------- ---------- ----------
Estimated net proceeds, as adjusted...................... $ 10,283 $ 12,238 $ 14,193 $ 16,442
========== ========== ========== ==========
Consolidated net income (1):
Historical............................................. 802 802 802 802
Pro forma income on net proceeds, as adjusted.......... 172 205 238 276
Pro forma ESOP adjustment (2).......................... (33) (39) (44) (51)
Pro forma Stock Award Plan adjustment (3).............. (33) (39) (44) (51)
---------- ---------- ---------- ----------
Pro forma net income (1)................................. $ 908 $ 929 $ 952 $ 976
========== ========== ========== ==========
Per share net income (1):
Historical............................................. 0.29 0.25 0.22 0.19
Pro forma income on net proceeds, as adjusted.......... 0.06 0.06 0.06 0.07
Pro forma ESOP adjustment (2).......................... (0.01) (0.01) (0.01) (0.01)
Pro forma Stock Award Plan adjustment (3).............. (0.01) (0.01) (0.01) (0.01)
---------- ---------- ---------- ----------
Pro forma net income per share (1)....................... $ 0.33 $ 0.29 0.26 $ 0.23
========== ========== ========== ==========
Stockholders' equity:
Historical............................................. 28,031 28,031 28,031 28,031
Estimated net proceeds................................. 11,870 14,105 16,340 18,911
Plus:value issued to Charitable Foundation............. 657 756 854 967
Less:after tax cost of Charitable Foundation........... (407) (469) (529) (600)
Common Stock acquired by ESOP (2)................ (1,058) (1,245) (1,431) (1,646)
Common Stock acquired by Stock Award Plan(3)..... (529) (622) (716) (823)
---------- ---------- ---------- ----------
Pro forma stockholders' equity (3)(4)(5)................. $ 38,564 $ 40,556 $ 42,549 $ 44,840
========== ========== ========== ==========
Stockholders' equity per share (6):
Historical............................................. 9.86 8.38 7.29 6.33
Estimated net proceeds................................. 4.17 4.22 4.25 4.27
Plus:Value issued to Charitable Foundation............. 0.23 0.23 0.22 0.22
Less:Contribution to Charitable Foundation............ (0.14) (0.14) (0.14) (0.14)
Less:Common Stock acquired by ESOP (2)................. (0.37) (0.37) (0.37) (0.37)
Common Stock acquired by Stock Award Plan (3) ... (0.19) (0.19) (0.19) (0.19)
---------- ---------- ---------- ----------
Pro forma stockholders' equity per share (3)(4)(5)....... $ 13.56 $ 12.13 $ 11.06 $ 10.12
========== ========== ========== ==========
Offering price to pro forma net income per share (7)..... 15.15x 17.24x 19.23x 21.74x
Offering price as a percentage of pro forma
stockholders' equity per share (6)..................... 73.75% 82.44% 90.42% 98.81%
</TABLE>
(footnotes on following page)
28
<PAGE>
________________________
/(1)/ Does not give effect to the non-recurring expense that will be recognized
in 1998 as a result of the establishment of the Charitable Foundation. The
Company will recognize an after-tax expense for the amount of the
contribution to the Charitable Foundation which is expected to be
$407,000, $469,000, $529,000 and $600,000 at the minimum, midpoint,
maximum and adjusted maximum of the Estimated Valuation Range,
respectively. Assuming the contribution to the Charitable Foundation was
incurred during the six months ended June 30, 1998, pro forma net income
per share would be $0.18, $0.14, $0.11 and $0.09 at the minimum, midpoint,
maximum and adjusted maximum, respectively. Per share net income data is
based on 2,743,264, 3,227,369, 3,711,475 and 4,268,196 shares outstanding,
which represents shares issued in the Reorganization, shares contributed
to the Charitable Foundation and shares to be allocated or distributed
under the ESOP and Stock Award Plan for the period presented.
/(2)/ It is assumed that 8% of the Minority Ownership Interest will be purchased
by the ESOP. The funds used to acquire such shares are assumed to have
been borrowed by the ESOP from the Company. The amount to be borrowed is
reflected as a reduction to stockholders' equity. The Bank intends to make
annual contributions to the ESOP in an amount at least equal to the
principal and interest requirement of the debt. The Bank's total annual
payment of the ESOP debt is based upon 10 equal annual installments of
principal, with an assumed interest rate at 8.50%. The pro forma net
income assumes: (i) that the Bank's contribution to the ESOP is equivalent
to the debt service requirement for the six months ended June 30, 1998,
and was made at the end of the period; (ii) that 5,066, 5,960, 6,854 and
7,883 shares at the minimum, midpoint, maximum and adjusted maximum of the
Estimated Valuation Range, respectively, were committed to be released
during the six months ended June 30, 1998, at an average fair value of
$10.00 per share in accordance with Statement of Position ("SOP") 93-6;
and (iii) only the ESOP shares committed to be released were considered
outstanding for purposes of the net income per share calculations. See
"Management of the Bank--Benefit Plans--Employee Stock Ownership Plan and
Trust."
/(3)/ Gives effect to the Stock Award Plan expected to be adopted by the Company
following the Offering. This plan intends to acquire a number of shares of
Common Stock equal to 4% of the Minority Ownership Interest or 50,664,
59,604, 68,545, and 78,827 shares of Common Stock at the minimum,
midpoint, maximum and adjusted maximum of the Estimated Valuation Range,
respectively, either through open market purchases or from authorized but
unissued shares of Common Stock or treasury stock of the Company, if any.
Funds used by the Stock Award Plan to purchase the shares will be
contributed to the plan by the Bank. In calculating the pro forma effect
of the Stock Award Plan, it is assumed that the shares were acquired by
the Stock Award Plan at the beginning of the period presented in open
market purchases at the Subscription Price and that 20% of the amount
contributed was an amortized expense during such period. The issuance of
authorized but unissued shares of the Company's Common Stock to the Stock
Award Plan instead of open market purchases would dilute the voting
interests of existing stockholders by approximately 1.86% and pro forma
net income per share would be $0.33, $0.29, $0.26 and $0.23 at the
minimum, midpoint, maximum and adjusted maximum of the Estimated Valuation
Range, respectively, and pro forma stockholders' equity per share would be
$13.31, $11.90, $10.86, and $9.95 at the minimum, midpoint, maximum and
adjusted maximum of the Estimated Valuation Range, respectively. There can
be no assurance that the actual purchase price of the shares granted under
the Stock Award Plan will be equal to the Subscription Price. See
"Management of the Bank--Benefit Plans--Stock Award Plan."
/(4)/ No effect has been given to the issuance of additional shares of Common
Stock pursuant to the Stock Option Plan expected to be adopted by the
Company following the Offering. Under the Stock Option Plan, an amount
equal to 10% of the Minority Ownership Interest, or 126,658, 149,010,
171,362 and 197,066 shares at the minimum, midpoint, maximum and adjusted
maximum of the Estimated Valuation Range, respectively, will be reserved
for future issuance upon the exercise of options to be granted under the
Stock Option Plan. The issuance of Common Stock pursuant to the exercise
of options under the Stock Option Plan will result in the dilution of
existing stockholders' interests. Assuming all options were exercised at
the end of the period at an exercise price of $10.00 per share, the pro
forma net income per share would be $0.32, $0.27, $0.24 and $0.22,
respectively, and the pro forma stockholders' equity per share would be
$13.40, $12.03, $11.01, and $10.13, respectively. See "Management of the
Bank--Benefit Plans--Stock Option Plan."
/(5)/ The retained earnings of the Bank will continue to be substantially
restricted after the Offering. See "Dividend Policy," "The Reorganization
and Offering--Liquidation Rights," and "Regulation - New York Banking
Regulation."
/(6)/ Stockholders' equity per share data is based upon 2,843,760; 3,345,600;
3,847,440 and 4,424,556 shares outstanding representing shares issued in
the Reorganization, shares purchased by the ESOP and the Stock Award Plan,
and shares contributed to the Charitable Foundation.
/(7)/ Based on pro forma net income for the six months ended June 30, 1998 that
have been annualized.
/(8)/ As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Valuation Range of up to
15% as a result of regulatory considerations, demand for the shares, or
changes in market or general financial and economic conditions following
the commencement of the Offering.
29
<PAGE>
<TABLE>
<CAPTION>
At or for the Year Ended December 31, 1997
----------------------------------------------------------------------
1,970,663
1,266,588 1,490,104 1,713,620 Shares Sold at
Shares Sold at Shares Sold at Shares Sold at $10 per Share
$10 per Share $10 per Share $10 per Share (Adjusted
(Minimum) (Midpoint) (Maximum) Maximum)(7)
--------------- --------------- --------------- ---------------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Gross proceeds........................................... $ 12,666 $ 14,901 $ 17,136 $ 19,707
Plus: Shares acquired by Charitable Foundation.......... 557 656 754 867
---------- ---------- ---------- ----------
Pro forma market capitalization.......................... $ 13,223 $ 15,557 $ 17,890 $ 20,574
========== ========== ========== ==========
Gross proceeds........................................... 12,666 14,901 17,136 19,707
Less: Cash contribution to Charitable Foundation ....... 100 100 100 100
Capital to MHC.................................... 1 1 1 1
Expenses.......................................... 695 695 695 695
---------- ---------- ---------- ----------
Estimated net proceeds................................... 11,870 14,105 16,340 18,911
Less: Common Stock purchased by ESOP.................... 1,058 1,245 1,431 1,646
Common Stock purchased by Stock Award Plan........ 529 622 716 823
---------- ---------- ---------- ----------
Estimated net proceeds, as adjusted...................... $ 10,283 $ 12,238 $ 14,193 $ 16,442
========== ========== ========== ==========
Consolidated net income(1):
Historical............................................ 1,285 1,285 1,285 1,285
Pro forma income on net proceeds, as adjusted......... 345 410 476 551
Pro forma ESOP adjustment (2)......................... (66) (77) (89) (102)
Pro forma Stock Award Plan adjustment (3)............. (66) (77) (89) (102)
---------- ---------- ---------- ----------
Pro forma net income (1)................................. $ 1,498 $ 1,541 $ 1,583 $ 1,632
========== ========== ========== ==========
Per share net income (1):
Historical............................................ 0.47 0.40 0.35 0.30
Pro forma income on net proceeds, as adjusted............ 0.13 0.13 0.13 0.13
Pro forma ESOP adjustment (2)............................ (0.02) (0.02) (0.02) (0.02)
Pro forma Stock Award Plan adjustment (3)................ (0.02) (0.02) (0.02) (0.02)
---------- ---------- ---------- ----------
Pro forma net income per share (1)....................... $ 0.56 $ 0.49 $ 0.44 $ 0.39
========== ========== ========== ==========
Stockholders' equity:
Historical............................................ 27,120 27,120 27,120 27,120
Estimated net proceeds................................ 11,870 14,105 16,340 18,911
Plus: Value issued to Charitable Foundation............. 657 756 854 967
After tax cost of Charitable Foundation.................. (407) (469) (529) (600)
Less: Common Stock acquired by ESOP (2)............... (1,058) (1,245) (1,431) (1,646)
Less: Common Stock acquired by Stock Award Plan(3).... (529) (622) (716) (823)
---------- ---------- ---------- ----------
Pro forma stockholders' equity (3)(4)(5)................. $ 37,653 $ 39,645 $ 41,638 $ 43,929
========== ========== ========== ==========
Stockholders' equity per share (6):
Historical............................................ 9.54 8.11 7.05 6.13
Estimated net proceeds................................... 4.17 4.22 4.25 4.27
Plus: Value issued to Charitable Foundation........... 0.23 0.23 0.22 0.22
After tax cost of Charitable Foundation............... (0.14) (0.14) (0.14) (0.14)
Less: Common Stock acquired by ESOP (2)............... (0.37) (0.37) (0.37) (0.37)
Common Stock acquired by Stock Award Plan (3)... (0.19) (0.19) (0.19) (0.19)
---------- ---------- ---------- ----------
Pro forma stockholders' equity per share (3)(4)(5)....... $ 13.24 $ 11.86 $ 10.82 $ 9.92
========== ========== ========== ==========
Offering price to pro forma net income per share......... 17.86x 20.41x 22.73x 25.64x
Offering price as a percentage of pro forma stockholders'
equity per share (6).................................. 75.53% 84.32% 92.42% 100.81%
</TABLE>
_________________________
(footnotes on following page)
30
<PAGE>
(1) Does not give effect to the non-recurring expense that will be recognized
in 1998 as a result of the establishment of the Charitable Foundation. The
Company will recognize an after-tax expense for the amount of the
contribution to the Charitable Foundation which is expected to be
$407,000, $469,000, $529,000 and $600,000 at the minimum, midpoint,
maximum and adjusted maximum of the Estimated Valuation Range,
respectively. Assuming the contribution to the Charitable Foundation was
incurred during the six months ended June 30, 1998, pro forma net income
per share would be $0.40, $0.33, $0.28 and $0.24 at the minimum, midpoint,
maximum and adjusted maximum of the Estimated Valuation Range,
respectively. Per share net income data is based on 2,748,553, 3,233,592,
3,718,631 and 4,276,425 shares outstanding, which represents shares issued
in the Reorganization, shares contributed to the Charitable Foundation and
shares to be allocated or distributed under the ESOP and Stock Award Plan
for the period presented.
(2) It is assumed that 8% of the Minority Ownership Interest will be purchased
by the ESOP. The funds used to acquire such shares are assumed to have
been borrowed by the ESOP from the Company. The amount to be borrowed is
reflected as a reduction of stockholders' equity. The Bank intends to make
annual contributions to the ESOP in an amount at least equal to the
principal and interest requirement of the debt. The Bank's total annual
payment of the ESOP debt is based upon 10 equal annual installments of
principal, with an assumed interest rate at 8.5%. The pro forma net income
assumes: (i) that the Bank's contribution to the ESOP is equivalent to the
debt service requirement for the year ended December 31, 1997, and was
made at the end of the period; (ii) that 10,132, 11,920, 13,708 and 15,765
shares at the minimum, midpoint, maximum and adjusted maximum of the
Estimated Valuation Range, respectively, were committed to be released
during the year ended December 31, 1997, at an average fair value of
$10.00 per share in accordance with Statement of Position ("SOP") 93-6;
and (iii) only the ESOP shares committed to be released were considered
outstanding for purposes of the net income per share calculations. See
"Management of the Bank--Benefit Plans--Employee Stock Ownership Plan and
Trust."
(3) Gives effect to the Stock Award Plan expected to be adopted by the Company
following the Offering. This plan intends to acquire a number of shares of
Common Stock equal to 4% of the Minority Ownership Interest, or 50,663,
59,604, 68,544 and 78,826 shares of Common Stock at the minimum, midpoint,
maximum and adjusted maximum of the Estimated Valuation Range,
respectively, either through open market purchases, or from authorized but
unissued shares of Common Stock or treasury stock of the Company, if any.
Funds used by the restricted stock plan to purchase the shares will be
contributed to the plan by the Bank. In calculating the pro forma effect
of the Stock Award Plan, it is assumed that the shares were acquired by
the Stock Award Plan at the beginning of the period presented in open
market purchases at the Subscription Price and that 20% of the amount
contributed was an amortized expense during such period. The issuance of
authorized but unissued shares of Common Stock to the Stock Award Plan
instead of open market purchases would dilute the voting interests of
existing stockholders by approximately 1.86% and pro forma net income per
share would be $0.54, $0.47, $0.42 and $0.38 at the minimum, midpoint,
maximum and adjusted maximum of the Estimated Valuation Range,
respectively, and pro forma stockholders' equity per share would be
$13.00, $11.63, $ 10.62 and $9.75 at the minimum, midpoint, maximum and
adjusted maximum of the Estimated Valuation Range, respectively. There can
be no assurance that the actual purchase price of the shares granted under
the restricted stock plan will be equal to the Subscription Price. See
"Management of the Bank--Benefit Plans--Stock Award Plan."
(4) No effect has been given to the issuance of additional shares of Common
Stock pursuant to the Stock Option Plan expected to be adopted by the
Company following the Offering. Under the Stock Option Plan, an amount
equal to 10% of the Minority Ownership Interest, or 126,659, 149,010
171,362 and 197,066 shares at the minimum, midpoint, maximum and adjusted
maximum of the Estimated Valuation Range, respectively, will be reserved
for future issuance upon the exercise of options to be granted under the
Stock Option Plan. The issuance of Common Stock pursuant to the exercise
of options under the Stock Option Plan will result in the dilution of
existing stockholders' interests. Assuming all options were exercised at
the end of the period at an exercise price of $10.00 per share, the pro
forma net income per share would be $0.52, $0.45, $0.41 and $0.36,
respectively, and the pro forma stockholders' equity per share would be
$13.10, $11.77, $10.79 and $9.93, respectively. See "Management of the
Bank--Benefit Plans--Stock Option Plan."
(5) The retained earnings of the Bank will continue to be substantially
restricted after the Offering. See "Dividend Policy," "The Reorganization
and Offering--Liquidation Rights" and "Regulation--New York Bank
Regulation."
(6) Stockholders' equity per share data is based upon 2,843,760; 3,345,600;
3,847,440; and 4,424,556 shares outstanding representing shares issued in
the Reorganization, shares purchased by the ESOP and Stock Award Plan, and
shares contributed to the Charitable Foundation.
(7) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Valuation Range of up to
15% as a result of regulatory considerations, demand for the shares, or
changes in market or general financial and economic conditions following
the commencement of the Offering.
31
<PAGE>
COMPARISON OF VALUATION AND PRO FORMA INFORMATION WITH AND WITHOUT FOUNDATION
In the event that the Charitable Foundation were not established as part of
the Reorganization, FinPro has estimated that the pro forma aggregate market
capitalization of the Company would be approximately $15.4 million at the
midpoint of the Estimated Valuation Report, which is approximately $111,000 less
than the pro forma aggregate market capitalization of the Company if the
Charitable Foundation is included, and would result in an approximately $545,000
increase in the amount of Common Stock offered for sale in the Reorganization.
The pro forma price to book ratio and pro forma price to earnings ratio would be
approximately the same under both the current appraisal and the estimate of the
value of the Company without the Charitable Foundation. Further, assuming the
midpoint of the Estimated Valuation Range, pro forma stockholders' equity per
share and pro forma net income per share would be substantially the same at
$0.29 and $12.13, respectively, and $0.29 and $12.04, respectively, with or
without the Charitable Foundation. The pro forma price to book ratio and the
pro forma price to earnings ratio are substantially the same with and without
the Charitable Foundation at the midpoint of the Estimated Valuation Range at
82.44% and 83.06%, respectively, and 17.24x and 17.24x, respectively. There is
no assurance that in the event the Charitable Foundation were not formed that
the appraisal prepared at the time would have concluded that the pro forma
market value of the Company would be the same as the above estimate. Any
appraisals prepared at that time would be based on the facts and circumstances
existing at that time, including, among other things, market and economic
conditions.
For comparative purposes only, set forth below are certain pricing ratios
and financial data and ratios, at the minimum, midpoint, maximum and adjusted
maximum of the Estimated Valuation Range, assuming the Reorganization were
completed at June 30, 1998. The valuation amounts referred to in the table below
relate to the value of the shares sold to the depositors and the public,
excluding shares issued to the Mutual Holding Company.
<TABLE>
<CAPTION>
MINIMUM MIDPOINT MAXIMUM ADJUSTED MAXIMUM
------------------------ ----------------------- ------------------------ ------------------------
WITH WITHOUT WITH WITHOUT WITH WITHOUT WITH WITHOUT
FOUNDATION FOUNDATION FOUNDATION FOUNDATION FOUNDATION FOUNDATION FOUNDATION FOUNDATION
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Estimated Offering amount.. $ 12,666 $ 13,219 $ 14,901 $ 15,446 $ 17,136 $ 17,763 $ 19,707 $ 20,428
Pro forma market
capitalization............ 13,223 13,219 15,557 15,446 17,890 17,763 20,574 20,428
Total assets............... 228,175 228,500 230,167 230,538 232,160 232,577 234,451 234,923
Total liabilities.......... 189,611 189,611 189,611 189,611 189,611 189,611 189,611 189,611
Pro forma stockholders'
equity.................... 38,564 38,889 40,556 40,927 42,549 42,966 44,840 45,312
Pro forma net income....... 908 918 929 942 952 964 976 990
Pro forma stockholders'
equity per share.......... 13.56 13.46 12.13 12.04 11.06 10.99 10.12 10.08
Pro forma net income per
share..................... 0.33 0.34 0.29 0.29 0.26 0.26 0.23 0.23
PRO FORMA PRICING RATIOS:
- --------------------------
Offering price as a
percentage of pro forma
stockholders' equity per
share..................... 73.75% 74.29% 82.44% 83.06% 90.42% 90.99% 98.81% 99.21%
Offering price to pro
forma net income per
share /(1)/............... 15.15x 14.71x 17.24x 17.24x 19.23x 19.23x 21.74x 21.74x
Pro forma market
capitalization to assets.. 12.46% 12.65% 14.54% 14.75% 16.57% 16.81% 18.87% 19.14%
PRO FORMA FINANCIAL RATIOS:
- ---------------------------
Return on assets /(2)/..... 0.80% 0.80% 0.81% 0.82% 0.82% 0.83% 0.83% 0.84%
Return on equity /(3)/..... 4.71% 4.72% 4.58% 4.60% 4.47% 4.49% 4.35% 4.37%
Equity to assets........... 16.90% 17.02% 17.62% 17.75% 18.33% 18.47% 19.13% 19.29%
Total shares............... 2,843,760 2,890,000 3,345,600 3,400,000 3,847,440 3,910,000 4,424,556 4,496,500
Minority shares............ 1,266,588 1,312,927 1,490,104 1,544,620 1,713,620 1,776,313 1,970,663 2,042,760
Share dilution............ 3.53% 46,339 3.53% 54,516 3.53% 62,693 3.53% 72,097
Voting share.............. 44.54% 45.43% 44.54% 45.43% 44.54% 45.43% 44.54% 45.43%
Dilution.................. 0.89% 0.89% 0.89% 0.89%
Foundation shares.......... 55,730 -- 65,565 -- 75,399 -- 86,709 --
Share dilution............ N/A N/A N/A N/A
Voting share.............. 1.96% -- 1.96% -- 1.96% -- 1.96% --
Dilution.................. N/A N/A N/A N/A
Mutual Holding Company
Shares.................... 1,521,442 1,577,073 1,789,931 1,855,380 2,058,421 2,133,687 2,367,184 2,453,740
Share dilution............ 3.53% 3.53% 3.53% 3.53%
Voting share.............. 53.50% 54.57% 53.50% 54.57% 53.50% 54.57% 53.50% 54.57%
Dilution.................. 1.07% 1.07% 1.07% 1.07%
</TABLE>
(footnotes on following page__________
/(1)/ If the contribution to the Charitable Foundation had been incurred during
the six months ended June 30, 1998, pro forma net income per share would
have been $0.18, $0.14, $0.11 and $0.09 and the offering price to pro
forma net income per share would have been 19.47x, 23.23x, 27.00x and
31.56x, at the minimum, midpoint, maximum and adjusted maximum,
respectively.
/(2)/ If the contribution to the Charitable Foundation had been incurred during
the six months ended June 30, 1998, return on assets would have been
0.62%,0.60%, 0.59%, and 0.58% at the minimum, midpoint, maximum and
adjusted maximum, respectively.
/(3)/ If the contribution to the Charitable Foundation had been incurred during
the six months ended June 30, 1998, return on equity would have been
3.65%, 3.43%, 3.23% and 3.02%, respectively.
32
<PAGE>
PARTICIPATION BY MANAGEMENT
The following table sets forth information regarding intended Common Stock
purchases by each of the trustees and executive officers of the Bank and their
associates, and by all trustees and executive officers as a group. In the event
the individual maximum purchase limitation is increased, persons subscribing for
the maximum amount may increase their purchase order. This table excludes
shares to be purchased by the ESOP, as well as any Stock Award Plan awards or
Stock Option Plan grants that may be made no earlier than six months after the
completion of the Reorganization. See "Management of the Bank--Benefit Plans--
Stock Award Plan" and "--Stock Option Plan." The trustees and officers of the
Bank have indicated their intention to purchase in the Offering an aggregate of
$2,035,000 of Common Stock, equal to 16.0%, 13.7%, 11.9%, and 10.3% of the
number of shares to be issued in the Offering, at the minimum, midpoint, maximum
and adjusted maximum of the Estimated Valuation Range, respectively.
<TABLE>
<CAPTION>
AGGREGATE NUMBER PERCENT OF
PURCHASE OF SHARES SOLD AT
NAME POSITION PRICE/(1)/ SHARES/(1)/ MIDPOINT
- ----- -------------------------- ---------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Nicholas J. Christakos Chairman of the Board $250,000 25,000/(2)/ 1.7%
Michael R. Kallet President, Chief Executive
Officer and Trustee 250,000 25,000/(2)/ 1.7
Patricia D. Caprio Trustee 100,000 10,000 0.7
Edward J. Clarke Trustee 5,000 500 *
James J. Devine Trustee 100,000 10,000 0.7
John E. Haskell Trustee 250,000 25,000/(2)/ 1.7
Rodney D. Kent Trustee 250,000 25,000/(2)/ 1.7
William D. Matthews Trustee 150,000 15,000 1.0
Michael W. Milmoe Trustee 30,000 3,000 0.2
Richard B. Myers Trustee 150,000 15,000 1.0
Frank O. White, Jr. Trustee 100,000 10,000 0.7
Thomas H. Dixon Senior Vice President/
Credit Administration 200,000 20,000 1.3
Eric E. Stickels Senior Vice President and
Chief Financial Officer 200,000 20,000 1.3
---------- ------- -----
All trustees and executive officers
as a group (13 persons) $2,035,000 203,500 13.7%
========== ======= =====
</TABLE>
- ---------------------
*less than .1%
/(1)/ Includes purchases by associates.
/(2)/ Represents the maximum amount that may be purchased by the trustees and
executive officers of the Bank together with their associates.
33
<PAGE>
THE REORGANIZATION AND OFFERING
THE SUPERINTENDENT HAS APPROVED THE PLAN OF REORGANIZATION AND THE OFFERING
OF THE COMMON STOCK SUBJECT TO THE APPROVAL OF THE BANK'S DEPOSITORS AND THE
SATISFACTION OF CERTAIN CONDITIONS IMPOSED BY THE SUPERINTENDENT. HOWEVER, SUCH
APPROVAL DOES NOT CONSTITUTE A RECOMMENDATION OR ENDORSEMENT OF THE OFFERING OR
THE PLAN OF REORGANIZATION BY THE SUPERINTENDENT.
DESCRIPTION OF AND REASONS FOR THE REORGANIZATION
The Board of Trustees unanimously adopted the Plan of Reorganization and
the Superintendent has approved the Plan of Reorganization. Pursuant to the
Plan of Reorganization, the Bank will reorganize into a "two-tier" mutual
holding company structure. The two-tier structure has two levels of holding
companies--a "mid-tier" stock holding company and a "top-tier" mutual holding
company. Under the terms of the Plan of Reorganization (i) the Bank will form
the Company as a Delaware corporation; (ii) the Bank will form the Mutual
Holding Company as a New York mutual holding company; (iii) the Bank will
reorganize into a capital stock form of organization and will contribute such
common stock to the Mutual Holding Company; (iv) the Mutual Holding Company will
contribute the Common Stock of the Bank to the Company; and (v) the Company will
issue shares of Common Stock to the public and the Mutual Holding Company. The
number of shares of Common Stock sold to depositors and the public pursuant to
this Prospectus will be equal to 44.5% of the shares issued in the
Reorganization, and the number of shares issued to the Mutual Holding Company
will be equal to 53.5% of the shares issued in the Reorganization. In addition,
the Company will issue 2.0% of the shares to be outstanding to a newly
established Charitable Foundation. The Charitable Foundation will also receive
$100,000 in cash. The two-tier mutual holding company structure is most easily
understood by considering the following schematic:
------------------------------ ---------------------------------
The Mutual Holding Company Public
(a New York mutual holding Stockholders
company) (including the Charitable
Foundation)
------------------------------ ---------------------------------
| 53.5% of | 46.5% of the
| the Common | Common Stock
| Stock |
--------------------------------------------------------------------------
The Company (a Delaware corporation)
--------------------------------------------------------------------------
| 100% of the
| Bank's common
| stock
--------------------------------------------------------------------------
The Bank
(a New York stock savings bank)
--------------------------------------------------------------------------
In adopting the Plan of Reorganization, the Board of Trustees determined
that the Reorganization is in the best interest of the Bank. The primary
purpose of the Reorganization is to establish a structure that will enable the
Bank to compete and expand more effectively in the financial services
marketplace, and that will enable the Bank's depositors, employees, management
and trustees to obtain an equity ownership interest in the Bank. The new
structure will permit the Company to issue capital stock, which is a source of
capital not available to a mutual savings bank. Since the Company is not
offering all of its Common Stock for sale to depositors and the public in the
Offering (but is issuing a majority of its stock to the Mutual Holding Company),
the Reorganization will result in less capital raised in comparison to a
standard mutual-to-stock conversion. The Reorganization, however, will also
offer the Bank the opportunity to raise additional capital since the stock held
by the Mutual Holding Company will be available for sale
34
<PAGE>
in the future in the event of the Company undertakes an incremental stock
offering or the Mutual Holding Company decides to convert to the capital stock
form of organization. See "Regulation-Holding Company Regulation-Mutual Holding
Company Regulation." The Reorganization will also give the Company greater
flexibility to structure and finance the expansion of its operations, including
the potential acquisition of other financial institutions and to diversify into
other financial services. The holding company form of organization is expected
to provide additional flexibility to diversify the Bank's business activities
through existing or newly formed subsidiaries or through acquisitions of or
mergers with other financial institutions, as well as other companies. Although
management has no current arrangements, understandings or agreements regarding
any such opportunities, the Company will be in a position after the
Reorganization, subject to regulatory limitations and the Company's financial
position, to take advantage of any such opportunities that may arise. Lastly,
the Reorganization will enable the Bank to better manage its capital by offering
broader investment opportunities through the holding company structure and by
enabling the Company to distribute capital to stockholders in the form of
dividends. Because only a minority of the Common Stock will be offered for sale
in the Offering, the Bank's current mutual form of ownership and its ability to
remain an independent savings bank and to provide community-oriented financial
services will be preserved through the mutual holding company structure.
The Board of Trustees believes that these advantages outweigh the potential
disadvantages of the mutual holding company structure, which may include: (i)
the inability of stockholders other than the Mutual Holding Company to obtain
majority ownership of the Company and the Bank, which may result in the
perpetuation of the management and board of directors of the Bank and the
Company; and (ii) that the mutual holding company structure is a relatively new
form of corporate ownership and new regulatory policies relating to the mutual
interest in the Mutual Holding Company that may be adopted from time-to-time may
have an adverse impact on Minority Stockholders. A majority of the voting stock
of the Company will be owned by the Mutual Holding Company, which is a mutual
institution that will be controlled by the existing Board of Trustees of the
Bank. While this structure will permit management to focus better on the
Company's and the Bank's long-term business strategy for growth and capital
redeployment without short-term pressure from stockholders, it will also serve
to perpetuate the existing management and trustees of the Bank. The Mutual
Holding Company will be able to elect all members of the board of directors of
the Company and will be able to control the outcome of all matters presented to
the stockholders of the Company for resolution by vote, except for certain
matters that must be approved by more than a majority of stockholders of the
Company. No assurance can be given that the Company will not take action
adverse to the interests of the Minority Stockholders. For example, the
Company could revise the dividend policy or defeat a candidate for the board of
directors of the Bank or other proposals put forth by the Minority Stockholders.
The Reorganization does not preclude the conversion of the Mutual Holding
Company from the mutual-to-stock form of organization which would be effected
through a merger of the Mutual Holding Company into the Company or the Bank and
the concurrent sale of the shares held by the Mutual Holding Company in a
subscription offering. A conversion of the Mutual Holding Company from the
mutual-to-stock form of organization is not anticipated for the foreseeable
future.
Following the completion of the Reorganization, all depositors who had
liquidation rights with respect to the Bank as of the effective date of the
Reorganization will continue to have such rights solely with respect to the
Mutual Holding Company so long as they continue to hold deposit accounts with
the Bank. In addition, all persons who become depositors of the Bank subsequent
to the Reorganization will have such liquidation rights with respect to the
Mutual Holding Company. Borrowers currently do not have ownership or voting
rights in the Bank and will not receive ownership or voting rights with respect
to the Mutual Holding Company.
All insured deposit accounts of the Bank will continue to be federally
insured by the FDIC and the BIF up to the legal maximum limit in the same manner
as deposit accounts existing in the Bank immediately prior to the
Reorganization. Upon completion of the Reorganization, the Bank may exercise
any and all powers, rights and privileges of, and shall be subject to all
limitations applicable to, capital stock savings banks under New York law. As
long as the Mutual Holding Company is in existence, the Mutual Holding Company
will be required to own at least 51% of the voting stock of the Company, and the
Company will own 100% of the voting stock of the Bank. The Bank and the Company
may issue any amount of non-voting stock or debt to persons other than the
Mutual Holding Company.
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THE OFFERING
The Company is offering shares of Common Stock to persons other than the
Mutual Holding Company. An Offering of between 1,266,588 and 1,713,620 shares
of the Common Stock (subject to adjustment to up to 1,970,663) is being made
pursuant to this Prospectus concurrently with the Reorganization. The shares of
Common Stock that will be sold in the Offering will constitute no more than
44.5% of the shares that will be outstanding after the Offering. Following the
Reorganization and the Offering, the Company also will be authorized to issue
additional Common Stock to persons other than the Mutual Holding Company,
without prior approval of the holders of the Common Stock.
The shares of Common Stock are being offered for sale at a fixed
Subscription Price of $10.00 per share in the Subscription Offering pursuant to
subscription rights in the following order of priority to: (i) holders of
deposit accounts with a balance of at least $100 or more on December 31, 1996
("Eligible Account Holders"); (ii) the Bank's tax-qualified employee plans,
including the ESOP; (iii) depositors whose accounts in the Bank totaled at least
$100 or more on September 30, 1998 ("Supplemental Eligible Account Holders");
and (iv) employees, officers and trustees of the Bank who do not qualify in any
of the above listed categories. Concurrently, and subject to the prior rights
of holders of subscription rights, any shares of Common Stock not subscribed for
in the Subscription Offering are being offered in the Community Offering at
$10.00 per share to certain members of the general public, with a preference
first given to natural persons residing in Madison county, New York, the cities
and towns of Annsville, Camden, Florence, Sherrill, Vernon, Verona and Vienna in
Oneida county, New York and the towns of Fabius, Manlius and Pompey in Onondaga
county, New York (the "Community Offering"). Subscription rights will expire if
not exercised by __:___, New York time, on _________ , 1998 unless extended by
the Bank and the Company.
STOCK PRICING AND NUMBER OF SHARES TO BE ISSUED
The Plan of Reorganization and federal and state regulations require that
the aggregate purchase price of the Common Stock sold in the Offering must be
based on the appraised pro forma market value of the Common Stock, as determined
by an independent valuation (the "Independent Valuation"). The Bank has
retained FinPro to make such valuation, and FinPro will receive a fee of $25,000
for its services. The Bank and the Company have agreed to indemnify FinPro and
its employees and affiliates against certain losses (including any losses in
connection with claims under the federal securities laws) arising out of its
services as appraiser, except where FinPro's liability results from its
negligence or bad faith.
The Independent Valuation was prepared by FinPro in reliance upon the
information contained in the Prospectus, including the financial statements.
FinPro also considered the following factors, among others: the present and
projected operating results and financial condition of the Bank and the economic
and demographic conditions in the Bank's existing market area; certain
historical, financial and other information relating to the Bank; a comparative
evaluation of the operating and financial statistics of the Bank with those of
other publicly traded subsidiaries of mutual holding companies; the aggregate
size of the Offering; the impact of the Reorganization on the Bank's
stockholders' equity and earnings potential; the proposed dividend policy of the
Company; and the trading market for securities of comparable institutions and
general conditions in the market for such securities. As a result of recent
market volatility as well as a weakening in the market for financial institution
securities generally, on October 7, 1998 FinPro updated its original appraisal,
dated September 9, 1998, to decrease the pro forma market value of the Company
by 15%. Consequently, the number of shares of Common Stock being offered to the
public has been decreased by 15%.
The Independent Valuation states that as of October 7, 1998, the estimated
pro forma market value of the Common Stock ranged from a minimum of $28.4
million to a maximum of $38.5 million, with a midpoint of $33.5 million (the
"Estimated Valuation Range"). The board determined to offer the shares in the
Offering at the Subscription Price of $10.00 per share, the price most commonly
used in stock offerings involving mutual-to-stock conversions. Based on the
Estimated Valuation Range and the Subscription Price of $10.00 per share, the
number of shares of Common Stock that the Company will issue will range from
between 2,843,760 shares to 3,847,440 shares, with a midpoint of 3,345,600
shares. The board determined to offer 44.5% of such shares, or between
1,266,588 shares and 1,713,620 shares with a midpoint of 1,490,104 shares (the
"Offering Range"), to depositors and the public pursuant to
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this Prospectus. In addition, up to 75,399 shares are being issued to the
Charitable Foundation as part of the Reorganization, which will result in
Minority Stockholders owning 46.5% of the shares of the Common Stock outstanding
at the conclusion of the Reorganization. The 53.5% of the shares of the
Company's Common Stock that are not sold in the Offering or contributed to the
Charitable Foundation will be issued to the Mutual Holding Company.
The board reviewed the Independent Valuation and, in particular, considered
(i) the Bank's financial condition and results of operations for the six months
ended June 30, 1998, and the year ended December 31, 1997, (ii) financial
comparisons of the Bank in relation to other financial institutions primarily
including other publicly traded subsidiaries of mutual holding companies, and
(iii) stock market conditions generally and in particular for financial
institutions, all of which are set forth in the Independent Valuation. The
board also reviewed the methodology and the assumptions used by FinPro in
preparing the Independent Valuation. The Estimated Valuation Range may be
amended with the approval of the Superintendent and the FDIC (if required), if
necessitated by subsequent developments in the financial condition of the Bank
or market conditions generally.
Following commencement of the Subscription Offering, the maximum of the
Estimated Valuation Range may be increased by up to 15%, to up to 4,424,556
shares, which will result in a corresponding increase in the maximum of the
Offering Range to up to 1,970,663 shares to reflect changes in market and
financial conditions, without the resolicitation of subscribers (in which event
up to 86,709 shares may be issued to the Charitable Foundation). The minimum of
the Estimated Valuation Range and the minimum of the Offering Range may not be
decreased without a resolicitation of subscribers. The Subscription Price of
$10.00 per share will remain fixed. See "--Limitations Upon Purchases of Common
Stock" as to the method of distribution and allocation of additional shares that
may be issued in the event of an increase in the Offering Range to fill unfilled
orders in the Subscription and Community Offerings.
THE INDEPENDENT VALUATION, HOWEVER, IS NOT INTENDED, AND MUST NOT BE
CONSTRUED, AS A RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF PURCHASING
SHARES. FINPRO DID NOT INDEPENDENTLY VERIFY THE FINANCIAL STATEMENTS AND OTHER
INFORMATION PROVIDED BY THE BANK, NOR DID FINPRO VALUE INDEPENDENTLY THE ASSETS
OR LIABILITIES OF THE BANK. THE INDEPENDENT VALUATION CONSIDERS THE BANK AS A
GOING CONCERN AND SHOULD NOT BE CONSIDERED AS AN INDICATION OF THE LIQUIDATION
VALUE OF THE BANK. MOREOVER, BECAUSE SUCH VALUATION IS NECESSARILY BASED UPON
ESTIMATES AND PROJECTIONS OF A NUMBER OF MATTERS, ALL OF WHICH ARE SUBJECT TO
CHANGE FROM TIME TO TIME, NO ASSURANCE CAN BE GIVEN THAT PERSONS PURCHASING
SHARES IN THE OFFERING WILL THEREAFTER BE ABLE TO SELL SUCH SHARES AT PRICES AT
OR ABOVE THE SUBSCRIPTION PRICE.
The Independent Valuation will be updated at the time of the completion of
the Offering. If the update to the Independent Valuation at the conclusion of
the Offering results in an increase in the maximum of the Estimated Valuation
Range to more than 4,424,556 shares and a corresponding increase in the Offering
Range to more than 1,970,663 shares, or a decrease in the minimum of the
Estimated Valuation Range to less than 2,843,760 shares and a corresponding
decrease in the Offering Range to fewer than 1,266,588 shares, then the Company,
after consulting with the Superintendent and the FDIC, may terminate the Plan of
Reorganization and return all funds promptly, with interest on payments made by
check, certified or teller's check, bank draft or money order, extend or hold a
new Subscription Offering, Community Offering, or both, establish a new Offering
Range, commence a resolicitation of subscribers or take such other actions as
permitted by the Superintendent and the FDIC in order to complete the
Reorganization and the Offering. In the event that a resolicitation is
commenced, unless an affirmative response is received within a reasonable period
of time, all funds will be promptly returned to investors as described above. A
resolicitation, if any, following the conclusion of the Subscription and
Community Offerings would not exceed 45 days unless further extended by the
Superintendent and the FDIC for periods of up to 90 days not to extend beyond 24
months following approval of the Plan by the Superintendent, or __________,
______.
An increase in the Independent Valuation and the number of shares to be
issued in the Offering would decrease both a subscriber's ownership interest and
the Company's pro forma earnings and stockholders' equity on a per share basis
while increasing pro forma earnings and stockholders' equity on an aggregate
basis. A decrease in the Independent Valuation and the number of shares to be
issued in the Offering would increase both a subscriber's ownership interest and
the Company's pro forma earnings and stockholders' equity on a per share basis
while decreasing pro forma net
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income and stockholder's equity on an aggregate basis. For a presentation of the
effects of such changes, see "Pro Forma Data."
Copies of the appraisal report of FinPro and the detailed memorandum of the
appraiser setting forth the method and assumptions for such appraisal are
available for inspection at each office of the Bank and the other locations
specified under "Additional Information."
No sale of shares of Common Stock may be consummated unless, prior to such
consummation, FinPro confirms to the Bank and the Superintendent that, to the
best of its knowledge, nothing of a material nature has occurred that, taking
into account all relevant factors, would cause FinPro to conclude that the
Independent Valuation is incompatible with its estimate of the pro forma market
value of the Common Stock of the Company at the conclusion of the Offering. Any
change that would result in an aggregate purchase price that is below the
minimum or above the adjusted maximum of the Estimated Valuation Range would be
subject to Superintendent's approval and the non-objection of the FDIC. If such
confirmation is not received, the Bank may extend the Offering, reopen or
commence a new offering, establish a new Estimated Valuation Range and commence
a resolicitation of all purchasers with the approval of the Superintendent or
take such other actions as permitted by the Superintendent in order to complete
the Offering.
PURCHASE PRIORITIES AND METHOD OF OFFERING SHARES
The Bank shall have the right, in its sole discretion, to determine whether
prospective purchasers are "residents," "associates," or "acting in concert" as
defined by the Plan of Reorganization and in interpreting any and all other
provisions of the Plan of Reorganization. All such determinations are in the
sole discretion of the Bank, and may be based on whatever evidence the Bank
chooses to use in making any such determination.
Subject to the preceding paragraph and the limitations set forth in the "--
Limitations Upon Purchases of Common Stock" section, the priorities for the
purchase of shares are as follows:
PRIORITY 1: ELIGIBLE ACCOUNT HOLDERS. Each Eligible Account Holder shall
be given the opportunity to purchase up to 15,000 shares, or $150,000, of Common
Stock; provided that the Company may, in its sole discretion and without further
notice to or solicitation of subscribers or other prospective purchasers,
increase such maximum purchase limitation to up to 5.0% of the maximum number of
shares issued in the Offering, subject to the overall purchase limitation set
forth in the section herein titled "Limitations Upon Purchases of Common Stock."
If there are insufficient shares available to satisfy all subscriptions of
Eligible Account Holders, shares will be allocated to Eligible Account Holders
so as to permit each subscribing Eligible Account Holder to purchase a number of
shares sufficient to make the total allocation equal to the lesser of 100 shares
or the number of shares subscribed for. Thereafter, unallocated shares will be
allocated pro rata to remaining subscribing Eligible Account Holders whose
subscriptions remain unfilled in the same proportion that each subscriber's
aggregate deposit account balances as of the Eligibility Record Date
("Qualifying Deposits") bears to the total amount of Qualifying Deposits of all
subscribing Eligible Account Holders whose subscriptions remain unfilled.
Subscription rights to purchase Common Stock received by executive officers and
trustees of the Bank, including associates of executive officers and trustees,
based on their increased deposits in the Bank in the one year preceding the
Eligibility Record Date, shall be subordinated to the subscription rights of
other Eligible Account Holders. To ensure proper allocation of stock, each
Eligible Account Holder must list on their subscription order form all deposit
accounts in which they had an ownership interest as of the Eligibility Record
Date.
PRIORITY 2: TAX-QUALIFIED EMPLOYEE PLANS. The Tax-Qualified Employee
Plans shall be given the opportunity to purchase in the aggregate up to 10% of
the Common Stock issued in the Offering. In the event of an oversubscription in
the Offering, subscriptions for shares by the tax-qualified employee plans may
be satisfied, in whole or in part, through open market purchases by the tax-
qualified employee plans subsequent to the closing of the Offering. The ESOP
intends to purchase shares of Common Stock equal to 8% of the Minority Ownership
Interest in the Offering.
PRIORITY 3: SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS. To the extent there
are sufficient shares remaining after satisfaction of subscriptions by Eligible
Account Holders and the Tax-Qualified Employee Plans, each Supplemental
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Eligible Account Holder shall have the opportunity to purchase up to 15,000
shares, or $150,000, of Common Stock; provided that the Company may, in its sole
discretion and without further notice to or solicitation of subscribers or other
prospective purchasers, increase such maximum purchase limitation to up to 5.0%
of the maximum number of shares issued in the Offering, subject to the overall
purchase limitations set forth in the section herein titled "Limitations Upon
Purchases of Common Stock." In the event Supplemental Eligible Account Holders
subscribe for a number of shares which, when added to the shares subscribed for
by Eligible Account Holders and the Tax-Qualified Employee Plans, exceed
available shares, the shares of Common Stock will be allocated among subscribing
Supplemental Eligible Account Holders so as to permit each subscribing
Supplemental Eligible Account Holder to purchase a number of shares sufficient
to make the total allocation equal to the lesser of 100 shares or the number of
shares subscribed for. Thereafter, unallocated shares will be allocated to each
subscribing Supplemental Eligible Account Holder whose subscription remains
unfilled in the same proportion that such subscriber's aggregate deposit account
balances as of the Supplemental Eligibility Record Date ("Supplemental
Qualifying Deposits") bear to the total amount of Supplemental Qualifying
Deposits of all subscribing Supplemental Eligible Account Holders whose
subscriptions remain unfilled.
PRIORITY 4: EMPLOYEES, OFFICERS AND TRUSTEES. Employees, officers and
trustees of the Bank who do not qualify in any of the above listed categories
will receive, without cost to them, nontransferable subscription rights to
subscribe for up to 15,000 shares or $150,000 of the Common Stock. If
sufficient shares are not available in this priority, shares will be allocated
among trustees, officers and employees on a pro rata basis based on the size of
each person's order.
COMMUNITY OFFERING
Any shares of Common Stock not subscribed for in the Subscription Offering
will be offered for sale in a Community Offering. This will involve an offering
of all unsubscribed shares directly to the general public. The Community
Offering, if any, shall be for a period of not more than 45 days unless extended
by the Company and the Bank, and will commence concurrently with, during or
promptly after the Subscription Offering. Subject to approval by the
Superintendent and nonobjection by the FDIC, the Community Offering would be
extended in the event that orders for the minimum number of shares have not been
received or if required to do so by regulatory authorities. The Common Stock
will be offered and sold in the Community Offering, in accordance with FDIC and
Department regulations, so as to achieve the widest distribution of the Common
Stock. No person, by himself or herself, or with an associate or group of
persons acting in concert, may subscribe for or purchase more than 10,000 shares
of Common Stock offered in the Community Offering. Further, the Company may
limit total subscriptions so as to assure that the number of shares available
for the public offering may be up to a specified percentage of the number of
shares of Common Stock. Finally, the Company may reserve shares offered in the
Community Offering for sales to institutional investors.
In the event of an oversubscription for shares in the Community Offering,
shares will be allocated (to the extent shares remain available) first to
natural persons residing in Madison county, New York, the cities and towns of
Annsville, Camden, Florence, Sherrill, Vernon, Verona and Vienna in Oneida
county, New York and the towns of Fabius, Manlius and Pompey in Onondaga county,
New York.
The terms "residence," "reside," "resided" or "residing" with respect to
any person shall mean any person who occupied a dwelling within the Bank's
Community, has an intent to remain within the Community for a period of time,
and manifests the genuineness of that intent by establishing an ongoing physical
presence within the Community together with an indication that such presence
within the Community is something other than merely transitory in nature. The
Bank may use deposit or loan records or such other evidence provided to it to
make a determination as to whether a person is a resident. In all cases,
however, such a determination shall be in the sole discretion of the Bank.
The Bank and the Company, in their sole discretion, may reject
subscriptions, in whole or in part, received from any person in the Community
Offering.
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SYNDICATED COMMUNITY OFFERING
Any shares of Common Stock not sold in the Subscription Offering or in the
Community Offering, if any, may be offered for sale to the general public by a
selling group of broker-dealers in a Syndicated Community Offering ("Selected
Dealers"), subject to terms, conditions and procedures as may be determined by
the Bank and the Company in a manner that is intended to achieve the widest
distribution of the Common Stock, subject to the rights of the Company to accept
or reject in whole or in part any order in the Syndicated Community Offering.
It is expected that the Syndicated Community Offering, if any, will begin as
soon as practicable after termination of the Subscription Offering and the
Community Offering, if any. The Syndicated Community Offering shall be
completed within 45 days after the termination of the Subscription Offering,
unless such period is extended as provided herein. Subject to approval by the
Superintendent and nonobjection by the FDIC, the Syndicated Community Offering
would be extended in the event that orders for the minimum number of shares
offered were not received or if required to do so by regulatory authorities. The
Company and the Bank have the right to reject orders, in whole or in part, in
their sole discretion in the Syndicated Community Offering. Neither Trident
Securities Inc. nor any registered broker-dealer shall have any obligation to
take or purchase any shares of the Common Stock in the Syndicated Community
Offering; however, Trident Securities, Inc. has agreed to use its best efforts
in the sale of shares in the Syndicated Community Offering. Common Stock sold in
the Syndicated Community Offering will be sold at the purchase price of $10.00
per share, which is the same price as all other shares being offered in the
Offering.
It is estimated that the Selected Dealers will receive a negotiated
commission based on the amount of Common Stock sold by the Selected Dealer,
payable by the Company. During the Syndicated Community Offering, Selected
Dealers may only solicit indications of interest from their customers to place
orders with the Company as of a certain date (the "Order Date") for the purchase
of shares of Common Stock. When and if Trident Securities, Inc. and the Company
believe that enough indications and orders have been received in the Offering to
consummate the Reorganization, Trident Securities, Inc. will request, as of the
Order Date, Selected Dealers to submit orders to purchase shares for which they
have received indications of interest from their customers. Selected Dealers
will send confirmations of the orders to such customers on the next business day
after the Order Date. Selected Dealers will debit the accounts of their
customers on a date which will be three business days from the Order Date
("Debit Date"). Customers who authorize Selected Dealers to debit their
brokerage accounts are required to have the funds for payment in their account
on but not before the Debit Date. One the next business day following the Debit
Date, Selected Dealers will remit funds to the account that the Company
established for each Selected Dealer. After payment has been received by the
Company from Selected Dealers, funds will earn interest at the Bank's passbook
savings rate until the consummation of the Reorganization. In the event the
Offering is not consummated as described above, funds will be returned promptly
with interest to the Selected Dealers, who, in turn, will promptly credit their
customers' brokerage accounts.
If for any reason a Syndicated Community Offering of unsubscribed shares of
Common Stock cannot be effected and any shares remain unsold after the
Subscription Offering and the Community Offering, if any, the Company and the
Bank will seek to make other arrangements for the sale of the remaining shares.
Such other arrangements will be subject to the approval of the Department and
the FDIC and to compliance with applicable state and federal securities laws.
RESTRICTIONS ON SALE OF STOCK BY TRUSTEES AND OFFICERS
All shares of the Common Stock purchased by trustees and officers of the
Bank in the Offering will be subject to the restriction that such shares may not
be sold or otherwise disposed of for value for a period of one year following
the date of purchase, except for any disposition of such shares (i) following
the death of the original purchaser or (ii) by reason of an exchange of
securities in connection with a merger or acquisition approved by the applicable
regulatory authorities. Sales of shares of the Common Stock by the Company's
directors and officers will also be subject to certain insider trading and other
transfer restrictions under the federal securities laws. See "Regulation--
Federal Securities Laws."
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Each certificate for restricted shares will bear a legend prominently
stamped on its face giving notice of the restrictions on transfer, and
instructions will be issued to the Company's transfer agent to the effect that
any transfer within such time period of any certificate or record ownership of
such shares other than as provided above is a violation of the restriction. Any
shares of Common Stock issued pursuant to a stock dividend, stock split or
otherwise with respect to restricted shares will be subject to the same
restrictions on sale.
RESTRICTIONS ON AGREEMENTS OR UNDERSTANDINGS REGARDING TRANSFER OF COMMON STOCK
TO BE PURCHASED IN THE OFFERING
Prior to the completion of the Offering, no depositor may transfer or enter
into an agreement or understanding to transfer the legal or beneficial ownership
of the shares of Common Stock to be purchased by such person in the Offering.
Each depositor who submits an order form will be required to certify that the
purchase of Common Stock by such person is solely for the purchaser's own
account and there is no agreement or understanding regarding the sale or
transfer of such shares. The Bank intends to pursue any and all legal and
equitable remedies in the event it becomes aware of any such agreement or
understanding and will not honor orders reasonably believed by the Bank to
involve such an agreement or understanding.
PROCEDURE FOR PURCHASING SHARES
To ensure that each purchaser receives a Prospectus at least 48 hours
before the Expiration Date, Prospectuses may not be mailed any later than five
days prior to such date or be hand delivered any later than two days prior to
such date. Stock order forms may only be distributed with a Prospectus.
EXPIRATION DATE. The Offering will terminate at ___:____, New York time on
__________, 1998, unless extended by the Bank for up to an additional 45 days
or, if approved by the Superintendent, for an additional period after such 45-
day extension (as so extended, the "Expiration Date"). The Bank is not required
to give purchasers notice of any extension unless the Expiration Date is later
than __________, 1998, in which event purchasers will be given the right to
increase, decrease, confirm, or rescind their orders. If the minimum number of
shares sold in the Offering (__________ shares) is not sold by the Expiration
Date, the Bank may terminate the Offering and promptly refund all orders for
Common Stock. A reduction in the number of shares below the minimum of the
Estimated Valuation Range will not require the approval of depositors or an
amendment to the Independent Valuation. If the number of shares is reduced
below the minimum of the Estimated Valuation Range, purchasers will be given an
opportunity to increase, decrease, or rescind their orders.
USE OF STOCK ORDER FORMS. In order to purchase the Common Stock, each
purchaser must complete a stock order form except for certain persons purchasing
in the Syndicated Community Offering as more fully described below. Any person
receiving a stock order form who desires to purchase Common Stock may do so by
delivering (by mail or in person) to the Bank a properly executed and completed
stock order form, together with full payment for the shares purchased. The
stock order form must be received prior to __:___, New York time on __________,
1998. ONCE TENDERED, A STOCK ORDER FORM CANNOT BE MODIFIED OR REVOKED WITHOUT
THE CONSENT OF THE BANK. Each person ordering shares is required to represent
that they are purchasing such shares for their own account. The interpretation
by the Bank of the terms and conditions of the Plan and of the acceptability of
the order forms will be final. The Bank is not required to accept copies of
stock order forms.
The stock order form includes a certification in which subscribers are
asked to acknowledge that (i) the Common Stock is not a deposit or savings
account that is federally insured or otherwise guaranteed by the Bank or the
federal government and (ii) the subscribers received a prospectus describing the
nature of the Common Stock and the risks of investing in the Common Stock. The
certification has been included so that each subscriber will acknowledge that
they have been advised to read the Prospectus in order to evaluate whether an
investment in the Common Stock is a suitable investment for him or her. The
certification is also intended to ensure that each subscriber acknowledges to
the Company that they are aware of the information contained therein prior to
making a decision to invest in the
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Common Stock. The Company intends to rely on the receipt of the signed
certification as proof that a subscriber received a prospectus prior to
completing the Stock Order Form. SIGNING THE STOCK ORDER FORM AND CERTIFICATION
WILL NOT RESULT IN INVESTORS WAIVING THEIR RIGHTS UNDER THE FEDERAL SECURITIES
LAWS.
PAYMENT FOR SHARES. Payment for all shares will be required to accompany
all completed order forms for the purchase to be valid. Payment for shares may
be made by (i) check or money order, or (ii) authorization of withdrawal from a
deposit account maintained with the Bank. Third party checks will not be
accepted as payment for a subscriber's order. Appropriate means by which such
withdrawals may be authorized are provided in the stock order forms. Once such
a withdrawal amount has been authorized, a hold will be placed on such funds,
making them unavailable to the depositor until the Offering has been completed
or terminated. In the case of payments authorized to be made through withdrawal
from deposit accounts, all funds authorized for withdrawal will continue to earn
interest at the contract rate until the Offering is completed or terminated.
Interest penalties for early withdrawal applicable to certificate of deposit
accounts with the Bank will not apply to withdrawals authorized for the purchase
of shares; however, if a withdrawal results in a certificate of deposit account
with a balance less than the applicable minimum balance requirement, the
certificate of deposit shall be canceled at the time of withdrawal without
penalty and the remaining balance will earn interest at the Bank's passbook rate
subsequent to the withdrawal. Payments made by check or money order will be
placed in a segregated savings account and will be paid interest at the Bank's
passbook rate of 3.0%, from the date payment is received until the Offering is
completed or terminated. Such interest will be paid by check, on all funds
held, including funds accepted as payment for shares of Common Stock, promptly
following completion or termination of the Offering. An executed stock order
form, once received by the Bank, may not be modified, amended or rescinded
without the consent of the Bank, unless the Offering is not completed by
__________, 1998, in which event purchasers may be given the opportunity to
increase, decrease, confirm or rescind their orders for a specified period of
time.
Depending on market conditions, the Common Stock may be offered for sale to
the general public on a best efforts basis in a Syndicated Community Offering by
a selling group of broker-dealers to be managed by Trident Securities, Inc. In
its discretion, Trident Securities, Inc. will instruct selected broker-dealers
as to the number of shares to be allocated to each selected broker-dealer. Only
upon allocation of shares to selected broker-dealers may they take orders from
their customers. Investors who desire to purchase shares in the Community
Offering directly through a selected broker-dealer, which may include Trident
Securities, Inc., will be advised that the members of the selling group are
required either (a) upon receipt of an executed stock order form or direction to
execute a stock order form on behalf of an investor, to forward the appropriate
purchase price to the Bank for deposit in a segregated account on or before
__________, prevailing time, of the business day next following such receipt or
execution; or (b) upon receipt of confirmation by such member of the selling
group of an investor's interest in purchasing shares and following a mailing of
an acknowledgment by such member to such investor on the business day next
following receipt of confirmation, to debit the account of such investor on the
fifth business day next following receipt of confirmation and to forward the
appropriate purchase price to the Bank for deposit in the segregated account on
or before 12:00 noon, prevailing time, of the business day next following such
debiting. Payment for any shares purchased pursuant to alternative (a) above
must be made by check in full payment of the purchase price. Payment for shares
purchased pursuant to alternative (b) above may be made by wire transfer to the
Bank.
Owners of self-directed Individual Retirement Accounts ("IRA") may use the
assets of such IRAs to purchase shares of Common Stock in the Offering.
Individuals who are participants in self-directed tax qualified plans maintained
by self-employed individuals may use the assets in their self-directed Keogh
Plan accounts to purchase shares of Common Stock in the Offering. In addition,
the provisions of Employee Retirement Income Securities Act of 1974, as amended
("ERISA") and Internal Revenue Service ("IRS") regulations require that
executive officers, trustees and 10% stockholders who use self-directed IRA
funds and/or Keogh Plan accounts to purchase shares of Common Stock in the
Offering, make such purchase for the exclusive benefit of the IRA and/or Keogh
Plan participant. Moreover, for IRAs where the Bank is the trustee or custodian
to the IRA, the IRA must be transferred to a new trustee or custodian in order
to use such funds for the purchase of Common Stock in the Offering.
If the ESOP subscribes for shares of the Common Stock, such plan will not
be required to pay for such shares until consummation of the Offering.
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DELIVERY OF STOCK CERTIFICATES. Certificates representing Common Stock
issued in the Offering will be mailed by the Bank to the persons entitled
thereto at the registered address noted on the order form, as soon as
practicable following consummation of the Offering. Any certificates returned
as undeliverable will be held by the Bank until claimed by persons legally
entitled thereto or otherwise disposed of in accordance with applicable law.
Until certificates for the Common Stock are available and delivered to
purchasers, purchasers may not be able to sell the shares of stock which they
ordered.
PLAN OF DISTRIBUTION AND SELLING COMMISSIONS
Offering materials for the Offering initially have been distributed to
certain persons by mail, with additional copies made available at the Bank's
offices and by Trident Securities, Inc. All prospective purchasers are to send
payment directly to the Bank, where such funds will be held in a segregated
savings account and not released until the Offering is completed or terminated.
To assist in the marketing of the Common Stock, the Bank has retained
Trident Securities, Inc., which is a broker-dealer registered with the National
Association of Securities Dealers, Inc. ("NASD"). Trident Securities, Inc. will
assist the Bank in the Offering as follows: (i) in training and educating the
Bank's employees regarding the mechanics and regulatory requirements of the
Offering; (ii) in conducting informational meetings for employees, customers and
the general public; (iii) in coordinating the selling efforts in the Bank's
local communities; and (iv) in soliciting orders for Common Stock. For these
services, Trident Securities, Inc. will receive a fixed fee of $200,000. If
there is a Syndicated Community Offering, the fixed fee shall not exceed a fee
to be agreed upon jointly by the Bank and Trident Securities, Inc.
The Bank also will reimburse Trident Securities, Inc. for its reasonable
out-of-pocket expenses associated with its marketing effort, up to a maximum of
$55,000 (including legal fees and expenses ). The Bank has made an advance
payment of $10,000 to Trident Securities, Inc. If the Plan of Reorganization is
terminated by the Bank, if the Offering is not completed by ________, 1999, or
if Trident Securities, Inc. terminates its agreement with the Bank in accordance
with the provisions of the agreement, Trident Securities, Inc. will only receive
reimbursement of its reasonable out-of-pocket expenses (including legal fees and
expenses). The Bank will indemnify Trident Securities, Inc. against liabilities
and expenses (including legal fees and expenses) incurred in connection with
certain claims or litigation arising out of or based upon untrue statements or
omissions contained in the offering material for the Common Stock, including
liabilities under the Securities Act of 1933, as amended.
Trustees and executive officers of the Bank may participate in the
solicitation of offers to purchase Common Stock. Other trained employees of the
Bank may participate in the Offering in ministerial capacities, providing
clerical work in effecting a sales transaction or answering questions of a
ministerial nature. Other questions of prospective purchasers will be directed
to executive officers or registered representatives. The Bank will rely on Rule
3a4-1 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
so as to permit officers, trustees and employees to participate in the sale of
the Common Stock. No officer, trustee or employee of the Bank will be
compensated for his participation by the payment of commissions or other
remuneration based either directly or indirectly on the transactions in the
Common Stock.
A Stock Information Center will be established at the Bank's main office,
in an area separated from the Bank's banking operations. Employees will inform
prospective purchasers to direct their questions to the Stock Information Center
and will provide such persons with the telephone number of the Stock Information
Center.
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LIMITATIONS UPON PURCHASES OF COMMON STOCK
The following additional limitations have been imposed upon purchases of
shares of Common Stock. Defined terms used in this section and not otherwise
defined in this Prospectus shall have the meaning set forth in the Plan.
A. The aggregate amount of outstanding Common Stock of the Company owned
or controlled by persons other than Mutual Holding Company at the close of
the Offering shall not exceed 49% of the Company's total outstanding Common
Stock.
B. No person or group of persons acting in concert, together with their
associates, may purchase more than 25,000 shares, or $250,000, of Common
Stock in the Offering, except that: (i) the Company may, in its sole
discretion and without further notice to or solicitation of subscribers or
other prospective purchasers, increase such maximum purchase limitation to
up to 5% of the number of shares sold in the Offering; (ii) tax-qualified
employee plans may purchase up to 10% of the shares sold in the Offering;
and (iii) for purposes of this paragraph shares to be held by any tax-
qualified employee plan and attributable to a person shall not be
aggregated with other shares purchased directly by or otherwise
attributable to such person.
C. The aggregate amount of Common Stock acquired in the Offering by all
management persons and their associates, exclusive of any stock acquired by
such persons in the secondary market, shall not exceed 25% of the
outstanding shares of Common Stock of the Company sold in the Offering.
In calculating the number of shares held by management persons and their
associates shares held by any tax-qualified employee benefit plan or any
non-tax-qualified employee benefit plan of the Bank that are attributable
to such persons shall not be counted.
D. Notwithstanding any other provision of the Plan of Reorganization, no
person shall be entitled to purchase any Common Stock to the extent such
purchase would be illegal under any federal law or state law or regulation
or would violate regulations or policies of the NASD, particularly those
regarding free riding and withholding. The Company and/or its agents may
ask for an acceptable legal opinion from any purchaser as to the legality
of such purchase and may refuse to honor any purchase order if such opinion
is not timely furnished.
E. The Board of Directors of the Company has the right in its sole
discretion to reject any order submitted by a person whose representations
the Board of Directors believes to be false or who it otherwise believes,
either alone or acting in concert with others, is violating, circumventing,
or intends to violate, evade or circumvent the terms and conditions of this
Plan.
F. The Company will make reasonable efforts to comply with the securities
laws of all states in the United States in which persons entitled to
subscribe for Common Stock pursuant to the Plan reside. However, the
Company and the Bank are not required to offer Common Stock to any person
who resides in a foreign country.
ESTABLISHMENT OF THE CHARITABLE FOUNDATION
GENERAL. In furtherance of the Bank's commitment to the communities that
it serves, the Bank intends to establish a Charitable Foundation in connection
with the Reorganization. The Plan of Reorganization provides that the Bank and
the Company may establish the Charitable Foundation, which will be incorporated
under Delaware law as a non-stock corporation and will be funded with cash and
shares of Common Stock contributed by the Company. The Company will contribute
to the Charitable Foundation 2.0% of the shares of Common Stock to be issued in
the Reorganization or 55,730, 65,565, 75,399 and 86,709 shares at the minimum,
midpoint, maximum and adjusted maximum of the Offering and a $100,000 cash
contribution. The contribution of Common Stock to the Charitable
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Foundation will be dilutive to the interests of stockholders and will have an
adverse impact on the reported earnings of the Company in 1998, the year in
which the Charitable Foundation is established.
PURPOSE OF THE CHARITABLE FOUNDATION. The purpose of the Charitable
Foundation is to provide funding to support charitable causes and community
development activities. Historically, the Bank has emphasized community lending
and development activities within the communities that it services. The
Charitable Foundation is being formed as a complement to the Bank's existing
community activities. Management believes the establishment of a Charitable
Foundation is consistent with the Bank's commitment to community service.
Funding of the Charitable Foundation with Common Stock of the Company also may
be a means of enabling the communities served by the Bank to share in the growth
and success of the Company. The Charitable Foundation will also enable the
Company and the Bank to develop a unified charitable donation strategy and will
centralize the responsibility for administration and allocation of corporate
charitable funds. Charitable foundations have been formed by other financial
institutions for this purpose, among others. The contribution to the Charitable
Foundation will not take the place of the Bank's traditional community lending
activities.
STRUCTURE OF THE CHARITABLE FOUNDATION. The Charitable Foundation will be
incorporated under Delaware law as a non-stock corporation. Pursuant to the
Charitable Foundation's Bylaws, the Charitable Foundation's initial board of
directors are expected to consist of persons who are existing directors and
officers of the Company and persons unaffiliated with the Company or the Bank
who have a business or other relationship within the Bank's community.
Subsequent to the Reorganization, other individuals may be appointed to the
board of directors of the Charitable Foundation. The members of the Charitable
Foundation, who are comprised of its board members, will elect the directors at
the annual meeting of the Charitable Foundation from those nominated by the
nominating committee. Only persons serving as directors of the Charitable
Foundation qualify as members of the Charitable Foundation, with voting
authority. Directors will be divided into three classes with each class
appointed for three-year terms. The certificate of incorporation of the
Charitable Foundation provides that the corporation is organized exclusively for
charitable purposes, including community development, as set forth in Section
501(c)(3) of the Internal Revenue Code of 1986 (the "Code"). The Charitable
Foundation's certificate of incorporation further provides that no part of the
net earnings of the Charitable Foundation will inure to the benefit of, or be
distributable to, its directors, officers or members.
The authority for the affairs of the Charitable Foundation will be vested
in its board of directors which will be responsible for establishing the
policies of the Charitable Foundation with respect to grants or donations
consistent with the purpose for which the Charitable Foundation was established.
Although no formal policy governing Charitable Foundation grants exists at this
time, the Charitable Foundation's board of directors will adopt such a policy
upon establishment of the Charitable Foundation. As directors of a nonprofit
corporation, directors of the Charitable Foundation will at all times be bound
by their fiduciary duty to advance the Charitable Foundation's charitable goals,
to protect the assets of the Charitable Foundation and to act in a manner
consistent with the charitable purpose for which the Charitable Foundation is
established. The directors of the Charitable Foundation also will be
responsible for directing the activities and managing the assets of the
Charitable Foundation. However, as a condition to receiving the non-objection
of the Reorganization, the Charitable Foundation has been required to commit to
the FDIC and the Department that all shares of Common Stock held by the
Charitable Foundation will be voted in the same ratio as all other shares of the
Company's Common Stock (other than shares held by the Mutual Holding Company) on
all proposals considered by stockholders of the Company; provided, however,
that, consistent with such condition, the FDIC and the Department may waive this
voting restriction under certain circumstances (and subject to certain
additional conditions) if compliance with the voting restriction would: (i)
cause a violation of the law of the State of Delaware; (ii) cause the Charitable
Foundation to lose its tax-exempt status, or cause the Internal Revenue Service
(the "IRS") to deny the Charitable Foundation's request for a determination that
it is an exempt organization or otherwise have a material and adverse tax
consequence on the Charitable Foundation; or (iii) cause the Charitable
Foundation to be subject to an excise tax under Section 4941 of the Code. In
order for the FDIC and the Department to waive such voting restriction, the
Company's or the Charitable Foundation's legal counsel would be required to
render an opinion satisfactory to the FDIC and the Department that compliance
with the voting requirement would have the effect described in clauses (i), (ii)
or (iii) above. Under those circumstances, the FDIC and the Department may
grant waivers of the voting restriction upon submission of such legal opinion(s)
by the Company or the Charitable Foundation that are satisfactory to the FDIC
and
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the Department. In the event that the FDIC and the Department were to waive
the voting requirement, the directors would direct the voting of the Common
Stock held by the Charitable Foundation. However, if the voting requirement is
waived, the Superintendent may impose conditions with regard to the composition
of the Board of Directors of the Charitable Foundation.
The Charitable Foundation's place of business will be located at the Bank's
administrative offices and initially the Charitable Foundation is expected to
have no employees but will utilize the members of the staff of the Company or
the Bank. The board of directors of the Charitable Foundation will appoint such
officers as may be necessary to manage the operation of the Charitable
Foundation. In this regard, it is expected that the Bank will be required to
provide the FDIC with a commitment that, to the extent applicable, the Bank will
comply with the affiliate restrictions set forth in Sections 23A and 23B of the
Federal Reserve Act with respect to any transactions between the Bank and the
Charitable Foundation.
Under Section 501(c)(3) of the Code, the Charitable Foundation will be
required to distribute annually in grants or donations, a minimum of 5% of the
average fair market value of its net investment assets. One of the conditions
imposed on the gift of Common Stock by the Company is that the amount of Common
Stock that may be sold by the Charitable Foundation in any one year shall not
exceed 5% of the average market value of the assets held by the Charitable
Foundation, except where the board of directors of the Charitable Foundation
determines that the failure to sell an amount of Common Stock greater than such
amount would result in a longer-term reduction of the value of the Charitable
Foundation's assets and as such would jeopardize the Charitable Foundation's
capacity to carry out its charitable purposes. Upon completion of the
Reorganization and the contribution of shares to the Charitable Foundation, the
Company would have 2,843,760, 3,345,600 and 3,847,440 shares issued and
outstanding at the minimum, midpoint and maximum of the Estimated Valuation
Range. Because the Company will have an increased number of shares outstanding,
the voting and ownership interests of stockholders in the Company's Common Stock
would be diluted by 2.0%, as compared to their interests in the Company if the
Charitable Foundation was not established. For additional discussion of the
dilutive effect, see "Pro Forma Data."
IMPACT ON EARNINGS. The contribution of cash and Common Stock to the
Charitable Foundation will have an adverse impact on the Company's and the
Bank's earnings in the year in which the contribution is made. The Company will
recognize the full expense in the amount of the contribution of cash and Common
Stock to the Charitable Foundation in the quarter in which it occurs, which is
expected to be the quarter ending December 31, 1998. The aggregate amount of the
contribution will range from $657,000 to $854,000, based on the minimum and
maximum of the Estimated Valuation Range, respectively (or up to $967,000 at the
adjusted maximum of the Estimated Valuation Range). The number of shares to be
contributed to the Charitable Foundation will range from 55,730 to 75,399, and
the amount of cash to be contributed will be fixed at $100,000. The
contribution expense will be partially offset by the tax benefit related to the
expense. The Company and the Bank have been advised by their independent tax
advisors that the contribution to the Charitable Foundation will be tax
deductible, subject to an annual limitation based on 10% of the Company's annual
taxable income. Assuming an aggregate contribution of $854,000 (based on the
maximum of the Estimated Valuation Range), the Company estimates a net tax
effected expense of $529,000 (based upon a 38% tax rate). Management cannot
predict earnings for 1998, but expects that the establishment and funding of the
Charitable Foundation will have an adverse impact on the Company's earnings for
the year. In addition to the contribution to the Charitable Foundation, the Bank
or the Mutual Holding Company may continue making grants and contributions to
the community that would not be permitted for the Charitable Foundation.
TAX CONSIDERATIONS. The Company and the Bank have been advised by their
independent tax advisors that an organization created for the above purposes
would qualify as a Section 501(c)(3) exempt organization under the Code, and
would be classified as a private Charitable Foundation. The Charitable
Foundation will submit a request to the IRS to be recognized as an exempt
organization. The Company and the Bank have received an opinion of their
independent tax advisors that the Charitable Foundation would qualify as a
Section 501(c)(3) exempt organization under the Code, except that such opinion
does not consider the impact of the condition to be agreed to by the Charitable
Foundation that Common Stock issued to the Charitable Foundation be voted in the
same ratio as all other shares of the Company's Common Stock (other than shares
held by the Mutual Holding Company) on all proposals considered by stockholders
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of the Company. Consistent with this condition, in the event that the Company
or the Charitable Foundation receives an opinion of their legal counsel that
compliance with the voting restriction would have the effect of causing the
Charitable Foundation to lose its tax-exempt status, or otherwise have a
material and adverse tax consequence on the Charitable Foundation or subject the
Charitable Foundation to an excise tax under Section 4941 of the Code, the FDIC
and the Superintendent shall waive such voting restriction upon submission of a
legal opinion by the Company or the Charitable Foundation that is satisfactory
to them. The independent tax advisors' opinion further provides that there is
substantial authority for the position that the Company's contribution of its
own stock to the Charitable Foundation would not constitute an act of self-
dealing, and that the Company would be entitled to a deduction in the amount of
the fair market value of the stock at the time of the contribution less the
nominal par value that the Charitable Foundation is required to pay to the
Company for such stock, subject to an annual limitation based on 10% of the
Company's annual taxable income. The Company, however, would be able to carry
forward any unused portion of the deduction for five years following the
contribution. Assuming the sale of Common Stock at the adjusted maximum of the
Estimated Valuation Range, the Company estimates that all of the deduction
should be deductible over the six-year period. Although the Company and the Bank
have received an opinion of their independent tax advisors that the Company will
be entitled to the deduction for the charitable contribution, there can be no
assurances that the IRS will recognize the Charitable Foundation as a Section
501(c)(3) exempt organization or that the deduction will be permitted. In such
event, the Company's tax benefit related to the Charitable Foundation would have
to be fully expensed, resulting in a further reduction in earnings in the year
in which the IRS makes such a determination.
As a private charitable foundation, earnings and gains, if any, from the
sale of Common Stock or other assets are generally exempt from federal and state
corporate income taxation. However, investment income, such as interest,
dividends and capital gains, of a private charitable foundation will generally
be subject to a federal excise tax of 2.0%. The Charitable Foundation will be
required to make an annual filing with the IRS within four and one-half months
after the close of the Charitable Foundation's fiscal year to maintain its tax-
exempt status. The Charitable Foundation will be required to publish a notice
that the annual information return will be available for public inspection for a
period of 180 days after the date of such public notice. The information return
for a private charitable foundation must include, among other things, an
itemized list of all grants made or approved, showing the amount of each grant,
the recipient, any relationship between a grant recipient and the Charitable
Foundation's managers and a concise statement of the purpose of each grant. The
Charitable Foundation will also be required to file an annual report with the
Charities Bureau of the Office of the Attorney General of the State of New York.
COMPARISON OF VALUATION AND OTHER FACTORS ASSUMING THE CHARITABLE
FOUNDATION IS NOT ESTABLISHED AS PART OF THE REORGANIZATION. The establishment
of the Charitable Foundation was taken into account by FinPro in determining the
estimated pro forma market value of the Common Stock of the Company. The
aggregate price of the shares of Common Stock being offered in the Offering is
based upon the independent appraisal conducted by FinPro of the estimated pro
forma market value of the Common Stock of the Company. The pro forma aggregate
price of the Common Stock being offered for sale in the Reorganization is
currently estimated to be between $12.7 million and $17.1 million, with a
midpoint of $14.9 million of the Offering. The pro forma price to book ratio and
the pro forma price to earnings ratio, at and for the six months ended June 30,
1998, are 82.44% and 17.24x, respectively, at the midpoint of the Estimated
Valuation Range. In the event that the Reorganization did not include the
Charitable Foundation, FinPro has estimated that the estimated pro forma market
value of the Common Stock being offered for sale in the Offering would be $15.4
million at the midpoint based on a pro forma price to book ratio and the pro
forma price to earnings ratio that of 83.06% and 17.24x, respectively. The
amount of Common Stock being offered for sale in the Offering at the midpoint of
the Estimated Valuation Range is approximately $545,000 less than the estimated
amount of Common Stock that would be sold in the Offering without the Charitable
Foundation based on the estimate provided by FinPro. Accordingly, certain
account holders of the Bank who subscribe to purchase Common Stock in the
Subscription Offering would receive fewer shares depending on the size of a
depositor's stock order and the amount of his or her qualifying deposits in the
Bank and the overall level of subscriptions. See "Comparison of Valuation and
Pro Forma Information With and Without Foundation." This estimate by FinPro was
prepared solely for purposes of providing subscribers with information with
which to make an informed decision on the Reorganization.
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The decrease in the amount of Common Stock being offered as a result of the
contribution of Common Stock to the Charitable Foundation will not have a
significant effect on the Company or the Bank's capital position. The Bank's
regulatory capital is significantly in excess of its regulatory capital
requirements and will further exceed such requirements following the
Reorganization. The Bank's leverage and risk-based capital ratios at June 30,
1998 were 12.6% and 21.9%, respectively. Assuming the sale of shares at the
midpoint of the Estimated Valuation Range, the Bank's pro forma leverage and
risk-based capital ratios at June 30, 1998 would be 14.65% and 25.51%,
respectively. On a consolidated basis, the Company's pro forma stockholders'
equity would be $40.6 million, or approximately 17.62% of pro forma consolidated
assets, assuming the sale of shares at the midpoint of the Estimated Valuation
Range. Pro forma stockholders' equity per share and pro forma net income per
share would be $12.13 and $0.29, respectively. If the Charitable Foundation was
not being established in the Reorganization, based on the FinPro estimate, the
Company's pro forma stockholders' equity would be approximately $40.9 million,
or approximately 17.75% of pro forma consolidated assets at the midpoint of the
Estimated Valuation Range, and pro forma stockholder's equity per share and pro
forma net income per share would be substantially similar with or without the
Foundation. See "Comparison of Valuation and Pro Forma Information With and
Without Foundation."
REGULATORY CONDITIONS IMPOSED ON THE CHARITABLE FOUNDATION. Establishment
of the Charitable Foundation is subject to certain conditions agreed to by the
Charitable Foundation in writing as a condition to receiving the FDIC's non-
objection to and Superintendent's approval of the Reorganization, including the
following: (i) the Charitable Foundation will be subject to examination by the
FDIC and the Department; (ii) the Charitable Foundation must comply with
supervisory directives imposed by the FDIC and the Department; (iii) the
Charitable Foundation will operate in accordance with written policies adopted
by its board of directors, including a conflict of interest policy; and (iv) any
shares of Common Stock held by the Charitable Foundation must be voted in the
same ratio as all other outstanding shares of Common Stock (other than shares
held by the Mutual Holding Company) on all proposals considered by stockholders
of the Company; provided, however, that, consistent with the condition, the FDIC
and the Department may waive this voting restriction under certain circumstances
(and subject to additional conditions) if compliance with the voting
restriction would: (a) cause a violation of the law of the State of Delaware;
(b) would cause the Charitable Foundation to lose its tax-exempt status or
otherwise have a material and adverse tax consequence on the Charitable
Foundation; or (c) would cause the Charitable Foundation to be subject to an
excise tax under Section 4941 of the Code. In order to obtain a waiver, the
Charitable Foundation's legal counsel would be required to render an opinion
satisfactory to the FDIC and the Department. There can be no assurances that a
legal opinion addressing these issues could be rendered, or if rendered, that
the FDIC and the Department would grant unconditional waivers of the voting
restriction. In no event would the voting restriction survive the sale of
shares of the Common Stock held by the Charitable Foundation.
POTENTIAL CHALLENGES. The establishment and funding of a Charitable
Foundation as part of a conversion of a mutual savings institution to stock form
has only recently occurred. As such, the Charitable Foundation, and the
Superintendent's approval of the Reorganization and the FDIC's nonobjection to
the Reorganization, may be subject to potential challenges notwithstanding that
the board of directors of the Company and the board of trustees of the Bank have
considered the various factors involved in the establishment of the Charitable
Foundation in reaching their determination to establish the Charitable
Foundation as part of the Reorganization. If challenges were to be instituted
seeking to prevent the Bank from establishing the Charitable Foundation in
connection with the Reorganization, no assurances could be made that the
resolution of such challenges would not result in a delay in the consummation of
the Reorganization or that any objecting persons would not be ultimately
successful in obtaining such removal or other relief against the Company or the
Bank. Additionally, if the Company and the Bank are forced to eliminate the
Charitable Foundation, the Company may be required to resolicit subscribers in
the Offerings.
LIQUIDATION RIGHTS
In the unlikely event of a complete liquidation of the Bank in its present
mutual form, each depositor would have a claim to receive his or her pro rata
share of any assets of the Bank remaining after payment of claims of all
creditors (including the claims of all depositors to the withdrawal value of
their accounts). To the extent there are remaining assets, a depositor may have
a claim to receive a pro rata share of the remaining assets in the same
proportion
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as the value of such depositor's deposit accounts to the total value of all
deposit accounts in the Bank at the time of liquidation, subject to the right of
the State of New York to garnish such assets. After the Reorganization, each
depositor, in the event of a complete liquidation, would have a claim as a
creditor of the Bank. However, except as described below, this claim would be
solely in the amount of the balance in the deposit account plus accrued
interest. A depositor would not have an interest in the value or assets of the
Bank above that amount.
The Plan of Reorganization provides for the establishment, upon the
completion of the Reorganization, of a special "liquidation account" for the
benefit of Eligible Account Holders and Supplemental Eligible Account Holders in
an amount equal to the surplus and reserves of the Bank as of the date of its
latest balance sheet contained in the final Prospectus used in connection with
the Reorganization. Each Eligible Account Holder and Supplemental Eligible
Account Holder, who continues to maintain deposit account at the Bank, would, on
a complete liquidation of the Bank, have a claim to an interest in the
liquidation account after payment of all creditors but prior to any payment to
the stockholders of the Bank. Each Eligible Account Holder and Supplemental
Eligible Account Holder would have an initial interest in such liquidation
account for each deposit account, with a balance of $100 or more held in the
Bank on December 31, 1996 and September 30, 1998, respectively ("Deposit
Account"). Each Eligible Account Holder and Supplemental Eligible Account
Holder will have a claim to a pro rata interest in the total liquidation account
for each of his or her Deposit Accounts based on the proportion that the balance
of each such Deposit Account on December 31, 1996 and September 30, 1998,
respectively, bore to the balance of all Deposit Accounts in the Bank on such
date. The liquidation account is expected to initially total $28.0 million.
If, however, on any December 31 annual closing date of the Bank, commencing
after December 31, 1998, the amount in any Deposit Account is less than the
amount in such Deposit Account on December 31, 1998 or any other annual closing
date, then such person's interest in the liquidation account relating to such
Deposit Account would be reduced from time to time by the proportion of any such
reduction, and such interest will cease to exist if such Deposit Account is
withdrawn or closed. In addition, no interest in the liquidation account would
ever be increased despite any subsequent increase in the related Deposit
Account.
The establishment of the liquidation account will be described in the notes
to the Company's consolidated financial statements. Consequently, neither the
Bank nor the Company shall be required to set aside funds for the purpose of
establishing the liquidation account, and the creation and maintenance of the
account will not operate to restrict the use or application of any of the net
worth accounts of the Bank, except that neither the Bank nor the Company shall
declare or pay a cash dividend on, or repurchase any of, its capital stock if
the effect would cause its net worth to be reduced below the amount required for
the liquidation account.
FEDERAL AND STATE TAX CONSEQUENCES OF THE REORGANIZATION
The Bank intends to proceed with the Reorganization on the basis of an
opinion from its special counsel, Luse Lehman Gorman Pomerenk & Schick, P.C.,
Washington, D.C., as to certain tax matters that are material to the
Reorganization. The opinion is based, among other things, on certain factual
representations made by the Bank, including the representation that the exercise
price of the subscription rights to purchase the Common Stock will be
approximately equal to the fair market value of the stock at the time of the
completion of the Reorganization. With respect to the subscription rights, the
Bank has received an opinion of FinPro which, based on certain assumptions,
concludes that the subscription rights to be received by Eligible Account
Holders, Supplemental Eligible Account Holders and employees, directors and
trustees do not have any economic value at the time of distribution or the time
the subscription rights are exercised, whether or not a Community Offering takes
place, and Luse Lehman Gorman Pomerenk & Schick, P.C.'s opinion is given in
reliance thereon. The opinion of Luse Lehman Gorman Pomerenk & Schick, P.C.,
provides substantially as follows:
1. The change in form from a mutual savings bank ("Mutual Bank") to a
stock savings bank (the "Stock Bank") will qualify as a reorganization
under Section 368(a)(1)(F) of the Code, and no gain or loss will be
recognized by the Bank in either its mutual form or stock form by reason of
the Reorganization.
49
<PAGE>
2. No gain or loss will be recognized by the Mutual Bank upon the transfer
of the Mutual Bank's assets to the Stock Bank solely in exchange for shares
of Stock Bank stock and the assumption by the Stock Bank of the liabilities
of the Mutual Bank.
3. No gain or loss will be recognized by Stock Bank upon the receipt of
the assets of the Mutual Bank in exchange for shares of Stock Bank common
stock.
4. Stock Bank's holding period in the assets received from the Mutual Bank
will include the period during which such assets were held by the Mutual
Bank.
5. Stock Bank's basis in the assets of the Mutual Bank will be the same as
the basis of such assets in the hands of the Mutual Bank immediately prior
to the Reorganization.
6. The Stock Bank will succeed to and take into account the Mutual Bank
earnings and profits or deficit in earnings and profits, as of the date of
the Reorganization.
7. The Stock Bank depositors will recognize no gain or loss solely by
reason of the Reorganization.
8. The Mutual Company and Minority Stockholders will recognize no gain or
loss upon the transfer of Stock Bank stock and cash, respectively, to the
Company in exchange for Common Stock.
9. The Company will recognize no gain or loss upon its receipt of Stock
Bank stock and cash from the Mutual Company and Minority Stockholders,
respectively, in exchange for Common Stock.
10. The basis of the Common Stock to Minority Stockholders will be the
Subscription Price and a stockholder's holding period for Common Stock
acquired through the exercise of subscription rights will begin on the date
the rights are exercised.
The opinion of Luse Lehman Gorman Pomerenk & Schick, P.C., unlike a letter
ruling issued by the IRS, is not binding on the IRS and the conclusions
expressed therein may be challenged at a future date. The IRS has issued
favorable rulings for transactions substantially similar to the proposed
Reorganization, but any such ruling may not be cited as precedent by any
taxpayer other than the taxpayer to whom the ruling is addressed. The Bank does
not plan to apply for a letter ruling concerning the Reorganization.
The Bank has also received an opinion from Pricewaterhouse Coopers, LLP,
that the New York State Franchise Tax on banking corporations and New York State
personal income tax consequences of the proposed transaction are consistent with
the federal income tax consequences.
50
<PAGE>
THE ONEIDA SAVINGS BANK
STATEMENTS OF INCOME
The following Statements of Income of the Bank for each of the years in the
three year period ended December 31, 1997 have been audited by
PricewaterhouseCoopers, LLP, independent certified public accountants, whose
report thereon appears elsewhere in this Prospectus. With respect to
information for the six months ended June 30, 1998 and 1997, which is unaudited,
in the opinion of management, all adjustments necessary for a fair presentation
of such periods have been included and are of a normal recurring nature.
Results for the six months ended June 30, 1998 are not necessarily indicative of
the results that may be expected for the year ended December 31, 1998. These
statements should be read in conjunction with the Financial Statements and Notes
thereto and Management's Discussion and Analysis of Financial Condition and
Results of Operations included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
--------- -----------------------
1998 1997 1997 1996 1995
------ ------ ------ ------ ------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest income:
Federal funds sold................................................. $ 148 $ 132 $ 241 $ 357 $ 228
Securities available for sale...................................... 1,770 1,885 3,649 3,290 2,608
Real estate loans.................................................. 4,513 4,742 9,484 9,513 9,667
Other loans........................................................ 1,580 1,102 2,489 1,994 2,081
------ ------ ------- ------- -------
Total interest income............................................. 8,011 7,861 15,863 15,154 14,584
Interest expense:
Deposits (note 5).................................................. 3,922 3,926 7,897 7,895 7,628
Total interest expense............................................ 3,922 3,926 7,897 7,895 7,628
------ ------ ------- ------- -------
Net interest income............................................... 4,089 3,935 7,966 7,259 6,956
Provision for losses (note 3)...................................... -- (23) 477 (103) 80
------ ------ ------- ------- -------
Net interest income after provision for losses.................... 4,089 3,958 7,489 7,362 6,876
------ ------ ------- ------- -------
Operating income:
Banking and other service charges and fees......................... 264 265 495 516 530
Loan fees.......................................................... 67 63 129 165 110
Net gain (loss) on sale of securities available for sale (note 2).. 9 -- 82 100 100
Other.............................................................. 48 40 116 20 170
------ ------ ------- ------- -------
Total operating income............................................ 388 368 822 801 910
------ ------ ------- ------- -------
Operating and other expenses:
Salaries and employee benefits (note 7)............................ 1,610 1,405 3,094 2,884 2,747
Occupancy and equipment (note 4)................................... 725 528 1,171 1,014 1,001
Deposit insurance.................................................. 11 11 23 2 211
Marketing and advertising.......................................... 80 90 154 175 183
Other (note 8)..................................................... 697 537 1,703 1,315 1,128
------ ------ ------- ------- -------
Total operating and other expenses................................ 3,123 2,571 6,145 5,390 5,270
------ ------ ------- ------- -------
Income before income taxes........................................ 1,354 1,755 2,166 2,773 2,516
Income taxes (note 6).............................................. 552 659 881 1,025 898
------ ------ ------- ------- -------
Net income........................................................ $ 802 $1,096 $ 1,285 $ 1,748 $ 1,618
====== ====== ======= ======= =======
</TABLE>
See accompanying notes to financial statements.
51
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company has been formed for the purpose of issuing the Common Stock and
owning all of the capital stock of the Bank issued in the Reorganization.
Consequently, the Company has no operating history. All information in this
section should be read in conjunction with the financial statements and notes
thereto included in this Prospectus.
The Bank's principal business has historically consisted of offering
savings and other deposits to the general public and using the funds from such
deposits to make loans secured by residential and commercial real estate, as
well as consumer and commercial business loans. The Bank also invests a
significant portion of its assets in investment securities and mortgage-backed
securities, both of which are classified as available for sale. The Bank's
results of operations depend primarily upon its net interest income, which is
the difference between income earned on interest-earning assets, such as loans
and investments, and the interest paid on deposits. The Bank's operations are
affected to a lesser degree by operating income, such as banking service charges
and fees. The Bank's net income is also affected by, among other things,
provisions for losses and operating and other expenses. The Bank's principal
operating expenses, aside from interest expense, consist of salaries and
employee benefits, occupancy and equipment, marketing and advertising, deposit
insurance costs and other expenses such as ATM expenses, professional fees and
insurance premiums. The Bank's results of operations also are affected
significantly by general economic and competitive conditions, particularly
changes in market interest rates, government legislation and policies affecting
fiscal affairs, housing and financial institutions, monetary policies of the
Federal Reserve System, and the actions of bank regulatory authorities.
Management intends to initially invest the net proceeds from the Offering in
interest-earning assets and believes that the Company and the Bank will derive
additional interest income from such sources.
CAPABILITY OF THE BANK'S DATA PROCESSING TO ACCOMMODATE THE YEAR 2000
Like many financial institutions, the Bank relies upon computers for the
daily conduct of its business and for data processing generally. There is
concern that on January 1, 2000 computers will be unable to "read" the new year
and as a consequence, there may be widespread computer malfunctions. The Bank
does not use an outside data processing servicer to process loan or deposit
information. In 1998, the Bank completed installation of a year 2000 compliant
internal deposit and loan data processing system. Management believes, based
upon the advanced technology of the computer hardware installed in 1998, as well
as the documented testing of the software used by the Bank performed by the
seller of the software, and the FDIC's recent examination of the software for
year 2000 compliant, that the internal deposit and loan data processing system
is year 2000 compliant. The Bank is in the process of updating the software
for its check processing and check clearing systems, and expects this process
to be completed by December 1998. Upon completion of this upgrade, the Bank's
check processing and check clearing systems will be year 2000 compliance.
Management has developed a formal written plan to resolve the year 2000 issue.
The Bank's written plan addresses the year 2000 issue by establishing (i) an
organizational phase in which senior bank personnel were assigned responsibility
for identifying the scope of the year 2000 problem by functional area; (ii) an
inventory phase, in which all of the Bank's systems were evaluated to determine
if a year 2000 issue existed and the potential exposure to the Bank if the
system did in fact fail. At this phase, Bank personnel were assigned to
determine the specific remediation that was necessary to address each year 2000
problem; (iii) an assessment phase, during which all vendors, assosciated with
the Bank's internal and external computer systems were contacted and asked to
advise the Bank of whether their systems hardware and software was year 2000
compliant; (iv) a remediation phase, in which the Bank took steps to ensure
that the computer systems on which the Bank relies is year 2000 compliant, and
(v) the testing phase, during which the Bank seeks to ensure that its computer
systems are year 2000 compliant. The Bank is in the process of testing its
computer applications and hardware to ensure that they will be able to read the
year 2000. Testing of the Bank's applications and hardware that has occurred
through September 30, 1998 has resulted in satisfactory progress toward the Bank
being year 2000 compliant. Based on the current timetable, testing is expected
to be completed by December 1998. The Bank is in the process of developing a
contingency plan for the year 2000 issue, and intends to have a contingency plan
established by year end. As part of the contingency plan, the Bank will
identify potential alternative suppliers of computer services (including third
party vendors) and processing methods. The Bank has contacted each of its
vendors to ensure that they will be able to provide service in light of the
year 2000 issue. 61 of 70 outside vendors have represented to management in
writing that they are addressing the year 2000 issue and they expect to be
able to provide the services for which the Bank has contracted. Third party
vendors who provide approximately 90% of the outside services to the Bank have
represented that they are year 2000 compliant. However, legal recourse against
the Bank's third party vendors may be limited to having the third party vendor
correct any service deficiency that fails in the event the service is not year
2000 compliant. Management does not believe that it would be able to obtain any
material compensatory or punitive damages in the event such vendors are not
year 2000 compliant. Management will continue to monitor this issue and report
to the Board of Directors on a quarterly basis until full compliance is obtained
from all vendors. Costs related to the year 2000 issue will be expensed as they
are incurred, except for the costs, if any, for new hardware and software that
is purchased, which will be capitalized. At June 30, 1998, the costs incurred
to address the year 2000 issue have been approximately $200,000. The funds
used to address the year 2000 issue have been obtained from operating income.
Management does not expect that the additional costs to be incurred in
connection with the year 2000 issue will have a material impact on the Bank's
financial condition or results of operations.
52
<PAGE>
The costs of the project are based on management's best estimates, which
were derived utilizing numerous assumptions of future events including the
continued availability of certain resources, third party modification plans and
other factors. However, there can be no guarantee that these estimates will be
achieved, and actual results could differ materially from those plans. Specific
factors that might cause such material differences include, but are not limited
to, the availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer codes and similar uncertainties. In
addition, there can be no guarantee that the systems of other companies on which
the Bank's systems rely, such as third party vendors who provide assistance with
respect to the wire transfer of funds and the direct deposit of funds, will be
timely converted, or that a failure to convert by another company, or a
conversion that is incompatible with the Bank's systems, would not have a
material adverse effect on the Bank. Third party vendors who provide
approximately 90% of the outside services to the Bank have represented that they
are year 2000 compliant. The services of third party vendors who have not yet
represented to the Bank that they are year 2000 compliant are not considered to
be essential to the Bank's operations and the failure of such vendors to be year
2000 compliant would not have a material impact on the financial condition or
results of operation of the Company or the Bank. As part of the Bank's
contingency planning, alternative suppliers of services are being identified in
the event the representations of current vendors prove to be incorrect. See
"Risk Factors--Risks Associated with the Year 2000 Issue."
OPERATING STRATEGY
In guiding the Bank's operations, management has implemented various
strategies designed to continue the institution's profitability consistent with
safety and soundness considerations. These strategies include: (i) operating a
community-bank that provides quality service by monitoring the needs of its
customers and offering customers personalized service; (ii) originating fixed-
rate one-to-four family residential real estate loans for resale in the
secondary market while retaining adjustable rate mortgage ("ARM") loans; (iii)
increasing the level of higher yielding consumer, commercial real estate and
commercial business loans; (iv) maintaining asset quality; and (v) increasing
fee income. It is anticipated that the strategies presently in place will be
continued following completion of the Reorganization, subject to market
conditions.
COMMUNITY BANKING. The Bank was established in Oneida, New York in 1866
and has been operating continuously since that time. Throughout its history,
the Bank has been committed to meeting the financial needs of the communities in
which it operates and providing quality service to its customers. Management
believes that the Bank can be more effective than many of its competitors in
serving its customers because of its ability to promptly and effectively provide
senior management responses to customer needs and inquiries. The Bank's ability
to provide these services is enhanced by the stability of senior management
which has an average tenure with the Bank of over ten years and experience in
the banking industry of approximately 20 years. In addition, the Bank intends
to use the mutual holding company structure to maintain the Bank as an
independent community bank and to establish the Charitable Foundation as a means
of furthering the Bank's commitment to the communities in which it conducts
business. Management intends to increase the services and products provided by
the Bank to the communities it serves by marketing its Trust Department and
offering new loan and investment products.
ORIGINATING FIXED-RATE ONE-TO-FOUR FAMILY LOANS FOR RESALE IN THE SECONDARY
MARKET AND RETAINING ARM LOANS. Historically, the Bank has emphasized the
origination of adjustable rate one-to-four family residential loans within
Madison county and surrounding counties. During the six months ended June 30,
1998 and the fiscal year ended December 31, 1997, the Bank originated $12.7
million and $15.9 million, respectively, of one-to-four family mortgage loans.
As of June 30, 1998, approximately $88.0 million or 62.0% of the loan portfolio
consisted of one-to-four family residential mortgage loans, of which $77.5
million were ARM loans and $10.5 million had fixed-rates of interest. During
the past six months, and as a result of the current low interest rate
environment, most of the Bank's one-to-four family loan originations have been
fixed-rate loans. Fixed-rate one-to-four family loans are originated for
resale in the secondary market without recourse and on a servicing retained
basis. ARM loans are retained in the Bank's portfolio. Of the $12.7 million of
one-to-four family loans originated during the six months ended June 30, 1998,
$8.9 million had fixed-rates of interest. The Bank has recently hired a
mortgage banker with significant experience marketing loans in the secondary
market. The Bank is currently developing new single-family residential loan
products, and has qualified as a FHA lender.
53
<PAGE>
COMPLEMENTING THE BANK'S TRADITIONAL MORTGAGE LENDING BY INCREASING
CONSUMER, COMMERCIAL BUSINESS AND COMMERCIAL REAL ESTATE LENDING. To complement
the Bank's traditional emphasis on one-to-four family residential real estate
lending, management has sought to increase the Bank's consumer, commercial
business and commercial real estate lending in a controlled, safe and sound
manner. At June 30, 1998, the Bank's portfolio of consumer, commercial real
estate and commercial business loans totaled $16.8 million, $14.5 million and
$11.6 million, respectively. In the aggregate, these loans totaled $42.9
million, or 30.2%, of the Bank's total loan portfolio. Because the yields on
these types of loans are generally higher than the yields on one-to-four family
residential real estate loans, the Bank's goal over the next several years is to
increase the origination of these loans consistent with safety and soundness
considerations. Although consumer, commercial real estate and commercial
business loans offer higher yields than single-family mortgage loans, they also
involve greater credit risk.
MAINTAINING ASSET QUALITY. The Bank's high asset quality is a result of
its conservative underwriting standards, the diligence of its loan collection
personnel and the stability of the local economy. In addition, the Bank also
invests in mortgage-backed securities issued by Freddie Mac, Fannie Mae and GNMA
and other investment securities, primarily U.S. Government securities and
federal agency obligations. The Bank will only purchase investment securities
which are rated A or higher by Moodys Investment Rating Service. At June 30,
1998, the Bank's ratio of nonperforming loans to total assets was 0.32% compared
to 0.42% and 0.52% at December 31, 1997 and 1996, respectively. At June 30,
1998, the Bank's ratio of allowance for loan losses to total loans was 1.23%
compared to 1.26% and 1.14%.
INCREASING FEE INCOME. The Bank has sought to increase its income by
increasing its sources of fee income. In this regard, the Bank has hired an
experienced trust officer and the Bank intends to promote the Trust Department.
Consequently, the Bank expects that fees generated by the Trust Department will
increase as the assets under management grows. At June 30, 1998, the Trust
Department had $5.5 million in assets under management. In addition, the Bank
receives fee income from the servicing of loans sold in the secondary market.
At June 30, 1998, loans serviced by the Bank for others totaled $32.7 million.
Finally, beginning in 1999, the Bank intends to offer investment products and
brokerage services to its customers, which will be an additional source of fee
income.
MANAGEMENT OF MARKET RISK--INTEREST RATE RISK
The Bank's most significant form of market risk is interest rate risk, as
the majority of the Bank's assets and liabilities are sensitive to changes in
interest rates. The Bank's mortgage loan portfolio, consisting primarily of
loans on residential real property located in its market area, is subject to
risks associated with the local economy. The Bank does not own any trading
assets. The Bank does not engage in any hedging transactions, such as interest
rate swaps and caps. The Bank's interest rate risk management program focuses
primarily on evaluating and managing the composition of the Bank's assets and
liabilities in the context of various interest rate scenarios. Factors beyond
management's control, such as market interest rates and competition, also have
an impact on interest income and interest expense. The Bank's assets consist
primarily of mortgage loans that have longer maturities than the Bank's
liabilities which consist primarily of deposits. However, management believes
that the origination of adjustable rate loans has the effect of reducing the
Bank's exposure to sudden changes in interest rates.
In recent years, the Bank has used the following strategies to manage
interest rate risk: (i) emphasizing the origination and retention of residential
monthly and bi-weekly adjustable-rate mortgage loans, commercial adjustable-rate
mortgage loans, other business purpose loans and consumer loans consisting
primarily of auto loans; (ii) selling substantially all newly originated fixed-
rate one-to-four family residential mortgage loans into the secondary market
without recourse and on a servicing retained basis; and (iii) investing in
shorter term securities which generally bear lower yields as compared to longer
term investments, but which better position the Bank for increases in market
interest rates. Shortening the maturities of the Bank's interest-earning assets
by increasing shorter-term investments better matches the maturities of the
Bank's certificate of deposit accounts. Certificates of deposit that mature in
one year or less, at June 30, 1998 totaled $67.9 million, or 39.1% of total
interest-bearing liabilities. The strategy of investing in short-term
securities may adversely impact net interest income due to lower initial yields
on these investments in
54
<PAGE>
comparison to longer term, fixed-rate loans and investments. However, management
believes that reducing the exposure to interest rate fluctuations will enhance
long-term profitability.
GAP ANALYSIS. The matching of assets and liabilities may be analyzed by
examining the extent to which such assets and liabilities are "interest rate
sensitive" and by monitoring a bank's interest rate sensitivity "gap." An asset
or liability is said to be interest rate sensitive within a specific time period
if it will mature, reprice or otherwise cash flow within that time period. The
interest rate sensitivity gap is defined as the difference between the amount of
interest earning assets maturing or repricing within a specific time period and
the amount of interest-bearing liabilities maturing or repricing within the same
time period. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities. A
gap is considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets. At June 30,
1998, the Bank's one-year gap position, the difference between the amount of
interest-earning assets maturing or repricing within one year and interest-
bearing liabilities maturing or repricing within one year, was a negative 5.79%.
During a period of rising interest rates, an institution with a negative gap
position is likely to experience a decline in net interest income as the cost of
its interest-bearing liabilities increase at a rate faster than its yield on
interest-earning assets In comparison, an institution with a positive gap is
likely to realize a decline in its net interest income in a falling interest
rate environment. Given the Bank's existing liquidity position and its ability
to sell securities from its available for sale portfolio, the Bank's negative
gap position will not have a material adverse effect on its operating results or
liquidity position.
55
<PAGE>
The following table sets forth the amounts of all interest-earning assets
and interest-bearing liabilities outstanding at June 30, 1998, which are
anticipated by the Bank, based upon certain assumptions, to mature, reprice or
cash flow in each of the future time periods shown (the "GAP Table"). Except
as stated below, the table sets forth an approximation of the projected cash
flow of assets and liabilities at June 30, 1998, on the basis of contractual
maturities, scheduled loan amortizations, and scheduled rate adjustments within
the selected time intervals. While the Bank believes the data to be reasonable,
there can be no assurance that the contractual maturity and repricing periods
will approximate actual future loan prepayment and deposit withdrawal activity.
See "Business of the Bank--Lending Activities," "--Securities Investment
Activities" and "--Sources of Funds."
<TABLE>
<CAPTION>
AT JUNE 30, 1998
------------------------------------------------------------------------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30,
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1999 2000 2001 2002 2003 THEREAFTER TOTAL FAIR VALUE
------ ------ ------ ------ ------ ------------ ------- -----------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Fixed Rate:
Loans receivable.................... $10, 108 $ 5,919 $ 4,297 $ 3,070 $ 1,898 $ 8,033 $ 33,325 $ 32,038
Average interest rate.............. 8.73% 9.20% 9.21% 9.06% 9.00% 8.49% 8.86%
Investment and mortgage-
backed securities.................. 8,879 8,028 5,350 4,704 4,675 20,860 52,496 52,785
Average interest rate.............. 6.53% 6.66% 6.71% 6.82% 6.42% 6.59% 6.61%
Variable Rate:
Loans receivable.................... 90,496 11,265 3,784 1,958 502 666 108,671 108,634
Average interest rate.............. 7.86% 7.91% 8.95% 8.98% 9.33% 9.32% 7.94%
Federal funds....................... 8,700 -- -- -- -- -- 8,700 8,700
Average interest rate.............. 5.50% -- -- -- -- -- 5.50%
Equity securities................... -- -- -- -- -- 2,723 2,723 3,401
Average interest rate.............. -- -- -- -- -- 3.90% 3.90%
-------- ------- ------- ------- ------- ------- -------- --------
Total interest-earning assets........ $118,183 $25,212 $13,431 $ 9,732 $ 7,075 $32,282 $205,915 $205,558
======== ======= ======= ======= ======= ======= ======== ========
Interest-bearing liabilities:
Fixed Rate:
Certificate accounts................ $ 67,854 $21,728 $ 6,006 $ 4,059 $ 5,857 $ 4,976 $110,480 $111,211
Average interest rate.............. 5.27% 6.12% 5.81% 5.89% 5.87% 6.23% 5.56%
Variable Rate:
Savings deposits.................... 44,008 -- -- -- -- -- 44,008 44,025
Average interest rate.............. 2.97% -- -- -- -- -- 2.97%
Money market and NOW deposits....... 18,930 -- -- -- -- -- 18,930 18,930
Average interest rate.............. 2.79% -- -- -- -- -- 2.79%
Borrowings.......................... -- -- -- -- -- -- -- --
Average interest rate.............. -- -- -- -- -- -- --
-------- ------- ------- ------- ------- ------- -------- --------
Total interest-bearing liabilities... $130,792 $21,728 $ 6,006 $ 4,059 $ 5,857 $ 4,976 $173,418 $174,166
======== ======= ======= ======= ======= ======= ======== ========
Interest sensitivity gap............. $(12,609) $ 3,484 $ 7,425 $ 5,673 $ 1,218 $27,306 $ 32,497
Cumulative interest sensitivity gap.. (12,609) (9,125) (1,700) 3,973 5,191 32,497 32,497
Ratio of interest-earning assets to
interest-bearing liabilities........ 90.36% 116.03% 223.63% 239.76% 120.80% 648.75% 118.74%
Ratio of cumulative gap to total assets (5.79%) (4.19%) (0.78%) 1.83% 2.39% 14.93% 14.93%
</TABLE>
The Gap Table above includes all interest sensitive assets and liabilities
grouped based upon instruments with common characteristics. The following
assumptions were used to prepare the table. Fixed rate loans with amortizing
payments are scheduled according to amortized cash flows, since this represents
a repricing opportunity on funds received as payments. Fixed rate demand loans,
time notes or any other fixed rate loans with no scheduled amortizing payment
are assigned by final maturity. Investment and mortgage-backed securities are
scheduled based on the earlier of their maturity date or next scheduled call
date. Variable rate loans are assumed to cash flow as of their next scheduled
repricing date since this represents a repricing opportunity. Federal funds are
assigned to immediate repricing since they represent an overnight investment and
therefore they mature and reprice daily. Equity securities have no stated
maturity and are considered by the Bank as long-term investments and therefore
are grouped in the final
56
<PAGE>
maturity category. Fixed rate certificate accounts are assigned by final
maturity dates. Variable rate savings, money market and NOW deposits have no
stated maturity date, however due to the relatively high degree of sensitivity
to interest rate changes, these instruments are assumed to cash flow within one
year. Except as described above, the GAP Table does not take into account
prepayments of loans, mortgage-backed securities or investments no does the
table assume any decay rates for deposits or early withdrawal activity for
certificate accounts.
Certain shortcomings are inherent in the methodologies used in the above
interest rate risk measurements, and the use of interest rate risk measurements
to generally measure market risks. Although certain assets and liabilities may
have similar maturities or terms to repricing, they react in different degrees
to changes in market interest rates. The interest rates on certain types of
assets and liabilities may fluctuate in advance of changes in interest rates,
while interest rates on other assets and liabilities may lag behind changes in
market rates. Certain assets, such as ARM loans have features that restrict
changes in interest rates from year to year and over the life of the loan.
Moreover, changes in interest rates, prepayments and early withdrawals of
certificates of deposits would affect the results set forth in the GAP Table.
Finally, the ability of some borrowers to service their adjustable rate loans
may decrease in the event of interest rate increases. There are no other
interest-earning assets or liabilities that have been omitted from the table.
The following table presents the Bank's net portfolio value ("NPV") based
upon calculations prepared by FinPro. These calculations were based upon
assumptions FinPro believes to be fundamentally sound, although they may vary
from assumptions utilized by other data providers. The information set forth
below is based on data provided by the Bank which included all financial
instruments as of June 30, 1998. Assumptions made by the Bank and Finpro
relating to interest rates, loan prepayment rates, core deposit duration, and
the market values of certain assets under the various interest rate scenarios
are believed to be fundamentally sound. Actual maturity dates were used for
fixed rate loans and certificate accounts. Investment securities were scheduled
at the earlier of the stated maturity date or next scheduled call date.
Variable rate loans were scheduled as of their next scheduled interest rate
repricing date. Additional assumptions made in the preparation of the NPV table
include a uniform prepayment rate on loans and mortgage-backed securities of 10%
annually, core deposits without stated maturity dates were scheduled with an
assumed term of 48 months, and money market accounts were assumed to decay in 24
months. The NPV at "PAR" represents the difference between the Bank's estimated
value of assets and estimated value of liabilities assuming no change in
interest rates. The following sets forth the Bank's NPV as of June 30,
1998.
PERCENTAGE CHANGE IN NET PORTFOLIO VALUE
----------------------------------------
<TABLE>
<CAPTION>
Changes in
Market Change in NPV
Interest Rates Bank NVP $ Change % Change NPV Ratio /(1)/ Ratio /(2)/
- ---------------- ------------- ---------- --------- ---------------- -----------
(basis points)
<S> <C> <C> <C> <C> <C>
+300 bp $32,146 -598 -1.83% 14.74% (0.27) bps.
+200 bp $32,369 -375 -1.15% 14.84% (0.17) bps.
+100 bp $32,568 -176 -0.54% 14.93% (0.08) bps.
PAR $32,744 0 0.00% 15.01% 0.00 bps.
-100 bp $32,897 153 0.47% 15.08% 0.07 bps.
-200 bp $33,026 282 0.86% 15.14% 0.13 bps.
-300 bp $33,132 388 1.18% 15.19% 0.18 bps.
- ---------------------------
</TABLE>
/(1)/ Calculated as the estimated NPV divided by present value of total assets.
/(2)/ Calculated as the excess (deficiency) of the NPV ratio assuming the
indicated change in interest rates over the estimated NPV ratio assuming
no change in interest rates.
As in the case with the Gap Table, certain shortcomings are inherent in the
methodology used in the above interest rate risk measurements. Modeling changes
in NPV require the making of certain assumptions which may or may not reflect
the manner in which actual yields and costs respond to changes in market
interest rates. In this regard,
57
<PAGE>
the NPV model presented assumes that the composition of the Bank's interest
sensitive assets and interest sensitive liabilities existing at the beginning of
a period remains constant over the period being measured and also assumes that a
particular change in interest rates is reflected uniformly across the yield
curve regardless of the duration to maturity or repricing of specific assets and
liabilities. Accordingly, although the NPV measurements and net interest income
models provide an indication of the Bank's interest rate risk exposure at a
particular point in time, such measurements are not intended to and do not
provide a precise forecast of the effect of changes in market interest rates on
the Bank's net interest income.
ANALYSIS OF NET INTEREST INCOME
Net interest income represents the difference between income on interest-
earning assets and expense on interest-bearing liabilities. Net interest income
also depends on the relative amounts of interest-earning assets and
interest-bearing liabilities and the interest rate earned or paid on them,
respectively.
AVERAGE BALANCE SHEET. The following table sets forth certain information
relating to the Bank at June 30, 1998, for the six months ended June 30, 1998
and 1997 and for the years ended December 31, 1997, 1996 and 1995. For the
periods indicated, the total dollar amount of interest income from average
interest-earning assets and the resultant yields, as well as the interest
expense on average interest-bearing liabilities, is expressed both in dollars
and rates. No tax equivalent adjustments were made. The average balance is an
average daily balance. Non-accruing loans have been excluded from the yield
calculations in this table.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------------------------------------------------------------
AT JUNE 30, 1998 1998 1997
------------------- ------------------------------- --------------------------
AVERAGE INTEREST AVERAGE INTEREST
OUTSTANDING YIELD/ OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/
BALANCE RATE BALANCE PAID RATE BALANCE PAID RATE
---------- -------- ----------- -------- ------ ----------- -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable................................ $141,996 8.58% $140,340 $6,093 8.68% $136,677 $5,844 8.55%
Investment and mortgage-backed securities/(1)/.. 52,496 6.59 52,025 1,730 6.65 58,435 1,879 6.43
Federal funds sold.............................. 8,700 6.25 5,548 148 5.34 4,860 132 5.43
Equity securities............................... 2,723 2.94 2,336 40 3.42 1,196 6 1.00
-------- ------- -------- ----- ----- -------- ------ -----
Total interest-earning assets.................. 205,915 8.15 200,249 8,011 8.00 201,168 7,861 7.82
-------- ------- -------- ----- ----- -------- ------ -----
Interest-bearing liabilities:
Money market deposits........................... $ 12,621 3.03 $ 11,705 186 3.18 $ 11,247 $ 183 3.25
Savings accounts................................ 44,008 2.84 44,278 652 2.95 44,623 652 2.92
Interest-bearing checking....................... 6,309 1.89 5,673 55 1.94 5,727 56 1.96
Time deposits................................... 110,480 5.49 108,656 3,029 5.58 109,351 3,035 5.55
-------- ------- -------- ----- ------- -------- ------ -------
Total interest-bearing liabilities............. 173,418 4.64 170,312 3,922 4.61 170,948 3,926 4.59
-------- -------- -------- ----- ------- -------- ------ -------
Net interest income.............................. $ 4,089 $ 3,935
======== ========
Net interest spread.............................. 3.51% 3.39% 3.23%
======== ===== ======
Net earning assets............................... $ 32,497 $29,937 $30,220
======== ======= =======
Net interest income as a percentage of
average interest-earning assets................. 4.08% 3.91%
===== ======
Ratio of average interest-earning assets to
average interest-bearing liabilities............ 17.58% 117.68%
======== ========
</TABLE>
_____________________________________
/(1)/ Amount shown amortized cost.
58
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------------------
1997 1996 1995
---------------------------------- --------------------------------- ----------------------------------
AVERAGE INTEREST AVERAGE INTEREST AVERAGE INTEREST
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE BALANCE PAID RATE
----------- --------- ----- ----------- -------- ------ ----------- -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable......... $138,549 $ 11,973 8.64% $137,030 $ 11,507 8.40% $142,749 $11,748 8.23%
Investment and
mortgage-backed
securities/(1)/........ 56,153 3,638 6.48 53,578 3,281 6.12 44,856 2,589 5.77
Federal funds sold....... 4,526 241 5.32 6,697 357 5.33 3,997 228 5.70
Equity securities........ 1,205 11 0.83 900 9 1.00 777 19 2.45
-------- -------- ----- -------- -------- ----- -------- ------- -----
Total interest-earning
assets................. 200,433 15,863 7.91 198,205 15,154 7.65 192,379 14,584 7.58
-------- -------- ----- -------- -------- ----- -------- ------- -----
Interest-bearing
liabilities:
Money market deposits.... $ 10,905 $ 349 3.20% $ 12,001 $ 404 3.37% $ 10,473 $ 360 3.44%
Savings accounts......... 44,148 1,302 2.95 45,422 1,342 2.95 48,055 1,418 2.95
Interest-bearing checking 5,632 111 1.97 5,399 108 2.00 5,446 120 2.20
Time deposits............ 109,326 6,135 5.61 107,654 6,041 5.61 103,553 5,730 5.53
-------- -------- ----- -------- -------- ----- -------- ------- -----
Total interest-bearing
liabilities 170,011 7,897 4.64 170,476 7,895 4.63 167,527 7,628 4.55
-------- -------- ----- -------- -------- ----- -------- ------- -----
Net interest income...... $ 7,966 $ 7,259 $ 6,956
======== ======== =======
Net interest spread...... 3.27% 3.01% 3.03%
===== ===== =====
Net earning assets....... $ 30,422 $ 27,729 $ 24,852
======== ======== ========
Net interest income as a
percentage of average
interest-earning assets 3.97% 3.66% 3.62%
======== ======== =======
Ratio of average
interest-earning assets
to average interest-
bearing liabilities 117.89% 116.27% 114.83%
======== ======== =======
- ---------------------------
</TABLE>
/(1)/ Amounts shown are amortized cost.
RATE/VOLUME ANALYSIS. The following table presents the extent to which
changes in interest rates and changes in the volume of interest-earning assets
and interest-bearing liabilities have affected the Bank's interest income and
interest expense during the periods indicated. Information is provided in each
category with respect to: (i) changes attributable to changes in volume (changes
in volume multiplied by prior rate); (ii) changes attributable to changes in
rate (changes in rate multiplied by prior volume); and (iii) the net change.
The changes attributable to the combined impact of volume and rate have been
allocated proportionately to the changes due to volume and the changes due to
rate.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
-------------------------------- --------------------------------------------------------------------
1998 VS. 1977 1997 VS. 1996 1996 VS. 1995
-------------------------------- --------------------------------- ---------------------------------
INCREASE (DECREASE) INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO TOTAL DUE TO TOTAL DUE TO
------------------ INCREASE ------------------ INCREASE --------------------- INCREASE
VOLUME RATE (DECREASE) VOLUME RATE (DECREASE) VOLUME RATE (DECREASE)
------- --------- ------------ --------- ------- ------------ --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Interest-earning assets:
Loans receivable......... $ 318 $180 $ 498 $ 131 $335 $ 466 (480) $240 (240)
Investment and
mortgage-backed
securities.............. (426) 128 (298) 167 189 356 534 158 692
Federal funds sold....... 37 (5) 32 (116) (1) (116) 144 (15) 129
Equity securities........ 39 29 68 3 -- 3 1 (12) (11)
----- ---- ----- ----- ---- ----- ----- ---- -----
Total interest-earning
assets................. $ (32) $332 $ 300 $ 185 $523 $ 709 $ 199 $371 570
----- ---- ----- ----- ---- ----- ----- ---- -----
Interest-bearing
liabilities:
Money market deposits.... $ 15 $ (9) $ 6 $ (35) $(20) $ (55) 51 $ (7) 44
Savings accounts......... (10) 10 -- (38) (2) (40) (78) 2 (76)
Interest-bearing checking (1) (1) (2) 5 (2) 3 (1) (11) (12)
Time deposits............ (39) 27 (12) 94 -- 94 230 81 311
----- ---- ----- ----- ---- ----- ----- ---- -----
Total interest-bearing
liabilities............ $ (35) $ 27 $ (8) $ 26 $(24) $ 2 $ 202 $ 65 $ 267
===== ==== ===== ===== ==== ===== ===== ==== =====
Net interest income........ $ 308 $ 707 $ 303
===== ===== =====
</TABLE>
59
<PAGE>
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1998 AND DECEMBER 31, 1997
ASSETS. Total assets increased by $7.0 million, or 3.3%, to $217.6 million
at June 30, 1998 from $210.6 million at December 31, 1997. The growth in assets
was primarily attributable to a $7.9 million increase in investment securities,
interest-bearing deposits and federal funds sold, a $4.1 million increase in
consumer loans, and a $2.0 million increase in commercial business loans. The
asset growth was partially offset by a decrease in one-to-four family
residential mortgage loans of $8.8 million. The decrease in one-to-four family
loans was due to management's decision to sell substantially all newly
originated fixed-rate residential mortgage loans into the secondary market
without recourse and on a servicing retained basis. During the period of January
1, 1998 through June 30, 1998 a total of $8.4 million in fixed-rate residential
mortgage loans were sold. Management has sought to increase the Bank's consumer,
commercial real estate and commercial business loan portfolios while decreasing
the Bank's reliance on residential real estate loans. The increase in consumer,
commercial real estate and commercial business lending is expected to increase
the average yield on the Bank's interest earning assets. Premises and equipment
increased by $1.1 million, or 28.9%, primarily due to the renovation of the
main office and operations center which was completed in April 1998. Asset
growth was entirely funded by deposit inflows.
At June 30, 1998, the Bank's allowance for possible loan losses as a
percentage of total nonperforming loans was 243.4% compared to 200.8% at
December 31, 1997. The increase in the allowance as a percentage of
nonperforming loans was due to a decrease in nonperforming loans to $707,000 at
June 30, 1998 from $893,000 at December 31, 1997. The decrease in nonperforming
loans was attributable to repayments and management's aggressive collection
procedure to bring past due and nonperforming loans current and performing in
accordance with their terms. At June 30, 1998, the Bank's allowance for possible
loan losses as a percentage of loans receivable, net was 1.23%. While management
uses available information in order to determine when it is appropriate to
recognize losses on loans, future loan loss provisions may be necessary based on
changes in economic conditions. In addition, regulatory agencies, as an
integral part of their examination process, periodically review the allowance
for loan losses and may require the Bank to recognize additional provisions.
See "Risk Factors - Lending Risks Associated With Consumer, Commercial Real
Estate and Commercial Business Loans" and "Business of the Bank - Delinquencies
and Classified Assets" and "Allowance for Possible Loan Losses."
LIABILITIES. Total deposits at June 30, 1998 were $189.2 million, an
increase of $6.1 million, or 3.3%, compared to $183.1 million at December 31,
1997. The increase occurred in savings, money market, and both interest-bearing
and noninterest-bearing checking accounts. All of the Bank's branches
experienced deposit growth. The Bank's newest branch, which opened in December
1997 contributed $1.9 million of the deposit volume increase. The Bank
emphasized attracting low cost of funds deposit accounts during the six months
ended June 30, 1998. While certificates of deposit accounts decreased by
$334,000 during the six months ended June 30, 1998, all other deposit accounts
increased by $6.4 million, to $78.7 million at June 30, 1998 from $72.3 million
at December 31, 1997, an increase of 8.9%.
NET WORTH. Net worth increased to $28.0 million at June 30, 1998 from
$27.1 million at December 31, 1997. The increase in net worth was the result of
after-tax net income of $802,000 and an increase of $109,000 in the net
unrealized gain on available for sale securities due to lower market interest
rates during the six months ended June 30, 1998 which positively affected the
market value of the Bank's investment and mortgage-backed securities portfolios.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1997 AND DECEMBER 31, 1996
ASSETS. Total assets at December 31, 1997 were $210.6 million as compared
to total assets of $211.1 million at December 31, 1996, a decrease of $500,000.
Although total assets decreased at year-end 1997, total loans receivable, net
increased by $6.5 million or 4.9%. The increase in total loans receivable, net
was funded by $7.5 million received from the sale or maturation of debt
securities and federal funds sold which decreased to $57.0 million at December
31, 1997 from $64.5 million at December 31, 1996. The loan growth was
concentrated in automobile loans, commercial real estate loans and commercial
business loans. One-to-four family real estate loans decreased by $3.8 million
due to a decrease in adjustable rate real estate loans of $5.7 million,
partially offset by an increase in fixed-rate real estate loans
60
<PAGE>
of $1.9 million after accounting for the sale of $4.0 million in fixed-rate one-
to-four family real estate loans in the secondary market. Commercial real estate
loans increased by $1.2 million to $13.9 million at December 31, 1997 from $12.7
million at December 31, 1996. Commercial business loans at December 31, 1997
totaled $9.6 million compared with $5.2 million at December 31, 1996, an
increase of $4.4 million. Consumer loans increased by $4.5 million, to $12.7
million at December 31, 1997; $4.0 million of the increase in consumer loans
resulted from the origination of automobile loans as the Bank emphasized both
direct and indirect dealer financing programs. While consumer, commercial real
estate and commercial business loans generally entail greater credit risk than
one-to-four family real estate loans, they are also shorter-term, higher
yielding assets that are consistent with the asset/liability objectives of the
Bank.
Premises and equipment increased to $3.8 million at December 31, 1997 from
$2.1 million at December 31, 1996, an increase of $1.7 million. This increase
was attributable to the construction and opening of an additional branch banking
office in Camden, New York, and the purchase of a property directly adjacent to
an existing branch facility.
The investment securities portfolio decreased by $9.4 million, to $43.5
million at December 31, 1997, from $52.9 million at December 31, 1996. The
decrease was primarily the result of maturing corporate debt securities. The
Bank reinvested the proceeds from the debt securities into loans and mortgage-
backed securities. Mortgage-backed securities increased $7.1 million, to $11.8
million from $4.7 million. The Bank joined the FHLB during 1997. At December
31, 1997, the Bank held $306,000 of FHLB stock.
LIABILITIES. Total deposits decreased to $183.1 million at December 31,
1997 from $185.5 million at December 31, 1996, a decrease of $2.4 million, or
1.3%. This reduction was a result of a temporary decrease in money market
deposits. Noninterest-bearing checking deposits increased by $1.8 million, to
$13.9 million at December 31, 1997 from $12.1 million at December 31, 1996, an
increase of 15.14%. The increase was attributable to the commencement of a
program to attract checking accounts by introducing free checking during 1997.
The program was directed at existing customers of the Bank to strengthen the
overall account relationship and increase the Bank's portfolio of a low cost
funding source. Certificates of deposit remained stable at December 31, 1997 and
December 31, 1996 at $110.8 million.
NET WORTH. Net worth increased to $27.1 million at December 31, 1997 from
$25.5 million at December 31, 1996. The increase in net worth resulted from
after-tax net income of $1.3 million and an increase of $297,000 in the net
unrealized gain on available for sale securities.
COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND JUNE
30, 1997
NET INCOME. Net income for the six months ended June 30, 1998 decreased by
$294,000 to $802,000 for the six months ended June 30, 1998 from $1.1 million
for the six months ended June 30, 1997. The decrease was due primarily to an
increase in operating and other expenses resulting from the expansion of the
Bank's branch network, additional occupancy and equipment costs associated with
renovations to the main office and operations center, expenses pertaining to the
Bank's conversion of its computer systems and increases in salaries and employee
benefits relating to the expansion of trust services and mortgage services. The
increase in operating and other expenses was partially offset by increased
interest income accomplished through portfolio yield improvement in the loans
and investments of the Bank due to portfolio diversification and a reduction in
the income tax provisions made through June 30, 1998 as compared with the same
period in 1997.
INTEREST INCOME. Interest income increased by $150,000, or 1.9%, to $8.0
million for the six months ended June 30, 1998 from $7.9 million for the six
months ended June 30, 1997. The increase was primarily due to a $249,000
increase in income on loans, and a $34,000 increase in income on equity
investments. The increases were partially offset by a decrease in income of
$149,000 from investment securities. The increase in income from loans was
attributable to a $3.6 million increase in the average balance of loans to
$140.3 million from $136.7 million, and a 13 basis point increase in the average
yield on loans to 8.68% from 8.55%. Management's strategy is to emphasize the
origination of consumer, commercial real estate and commercial business loans
for retention in the Bank's portfolio while originating for sale in the
secondary market substantially all fixed-rate one-to-four family real estate
loans. As of June
61
<PAGE>
30, 1998 one-to-four family real estate loans totaled $88.0 million, a decrease
of $12.2 million from June 30, 1997. The decrease in one-to-four family loans
was offset by an increase of $10.7 million in consumer, commercial real estate
and commercial business loans. The increase in income from equity securities was
attributable to a $1.1 million increase in the average balance of equity
investments and an increase in the average yield on equity investments of 242
basis points. The increase in the average yield on equity investments was due to
the purchase of FHLB stock as a condition of FHLB membership, which returned a
dividend rate of 7.45% during the six months ended June 30, 1998. FHLB stock
totaled $1.2 million as of June 30, 1998. The Bank did not hold any FHLB stock
during the six months ended June 30, 1997. The decrease in income on investment
and mortgage-backed securities was attributable to a decrease of $6.4 million in
the average balance of investments and mortgage-backed securities. This decrease
was partially offset by an increase in the average yield on investments and
mortgage-backed securities of 22 basis points. The yield improvement was the
result of an increase in mortgage-backed securities, particularly Freddie Mac
and Fannie Mae seven year balloon investments and GNMA mortgage pooled
investments, and the maintenance of investments in federal agency callable
securities which provide improved returns in the short term.
INTEREST EXPENSE. Interest expense decreased by $4,000 during the six
months ended June 30, 1998 as compared to the six months ended June 30, 1997.
The decrease in interest expense was primarily due to a decrease in the average
balance of interest-bearing liabilities in the 1998 period of $636,000 as
compared with the same period in 1997. The decrease was partially offset by an
increase of two basis points in the average rate paid on interest-bearing
liabilities to 4.61% at June 30, 1998 from 4.59% at June 30, 1997. The increase
in the average rate paid on interest-bearing liabilities was due primarily to an
increase of three basis points in the average rate paid on time deposits to
5.58% from 5.55%. The increase in average rate paid was partially offset by a
decrease in the average balance of time deposits which as of June 30, 1998 were
$108.7 million as compared to $109.4 million as of June 30, 1997, a decrease of
$695,000. Management's emphasis on lower cost of funds sources has resulted in
increases in money market deposits and noninterest-bearing checking deposits.
The average balance of money market deposits increased by $458,000 to $11.7
million as of June 30, 1998. In addition, the average rate paid on money market
deposits decreased by 7 basis points to 3.18% at June 30, l998 as compared with
3.25% at June 30, 1997. This average rate decrease was due to the implementation
of a tiered-rate structure employed on money market accounts which increases
with higher individual account balance levels. Savings account average
balances decreased slightly to $44.3 million during the 1998 six month period as
compared to $44.6 million during the 1997 period. The average balance of NOW
accounts remained stable at $5.7 million and represent the lowest cost source of
funds for the Bank, with an average rate paid of 1.94% for the six months ended
June 30, 1998 and an average rate paid of 1.96% during the 1997 period. The
average rate paid on NOW accounts during the six months ended June 30, 1998 was
more than a full percentage point less than the average rate paid on savings
accounts during the same period.
PROVISION FOR LOAN LOSSES. The Bank establishes provisions for loan losses,
which are charged to operations, in order to maintain the allowance for loan
losses at a level deemed appropriate to absorb future charge-offs and loans
deemed uncollectible. In determining the appropriate level of the allowance for
loan losses, management considers past and anticipated loss experience,
evaluations of collateral, current and anticipated economic conditions, volume
and type of lending activities and the levels of non-performing and other
classified loans. The allowance is based on estimates and the ultimate losses
may vary from such estimates. Management of the Bank assesses the allowance for
loan losses on a quarterly basis and makes provisions for loan losses in order
to maintain the adequacy of the allowance.
The Bank assessed the methods used to determine loan loss allowance
adequacy and implemented a new method at year-end 1997. The new method takes a
more conservative approach and is more aggressive in determining adequate
allowance levels than the earlier formula utilized by the Bank. The new method
considers volume changes in the loan portfolio mix in response to the
redirection of loan asset origination and retention toward consumer, commercial
real estate and commercial business loan assets, and provides within the
allowance adequacy formula for the higher relative degree of credit risk
associated with this activity as compared with traditional one-to-four family
real estate lending. Due to this new method employed by the Bank, a large
provision to the allowance for loan losses was charged at year-end 1997. The
quarterly assessment of allowance adequacy has not resulted in the need for
additional provisions to the allowance for loan losses during 1998 due to a
reduction of classified loans and a reduction in total loans at June 30, 1998
from December 31, 1997. The balance of the allowance for loan losses increased
$255,000, to $1.7 million
62
<PAGE>
at June 30, 1998 from $1.5 million at June 30, 1997 as a result of the method
change. At June 30, 1998, management had not identified any deterioration in
asset quality that is attributable to a borrower's possible noncompliance with
the year 2000 issue. Management will monitor its loan and investment portfolios
to determine whether asset quality is being adversely affected as a result of
the year 2000 issue. See "Risk Factors--Risks Associated with the Year 2000
Issue" and "--Capability of the Bank's Data Processing to Accommodate the Year
2000."
OPERATING INCOME. Operating income is composed of fee income for bank
services and profits from the sale of loans and securities. Total operating
income for the six months ended June 30, 1998 increased $20,000, or 5.4% to
$388,000 from $368,000 for the six months ended June 30, 1997. The increase was
primarily the result of increasing revenue on secondary market loan sales and
servicing activities which increased to $61,000 through June 30, 1998 from
$53,000 in income through June 30, 1997. Profit on the sale of investment
securities resulted in income of $9,000 through June 30, 1998 with no income
recognized during the same period of 1997. Checking account and ATM fee revenue
continued to increase during 1998 due to the Bank's marketing emphasis on
consumer and business checking products. Total income from checking accounts and
ATM fees increased to $219,000 for the six months ended June 30, 1998 from
$214,000 for the same period of 1997.
OPERATING AND OTHER EXPENSES. Operating and other expenses increased by
$552,000, or 21.4%, to $3.1 million for the six months ended June 30, 1998 from
$2.6 million for the six months ended June 30, 1997. The increase was due to a
$205,000 increase in salaries and benefits, an increase of $197,000 in occupancy
and equipment expense, a $90,000 increase in professional fees, and an increase
of $60,000 in other expenses.
Salaries and employee benefits increased to $1.6 million for the six months
ended June 30, 1998 from $1.4 million for the same period in 1997. The increase
was primarily the result of an additional 10 full-time equivalent employees
hired by the Bank, six of whom were hired to operate a new branch opened in
December 1997. The new branch also contributed to the increase in occupancy and
equipment expense to $725,000 for the six months ended June 30, 1998 from
$528,000 for the same period in 1997. For the six months ended June 30, 1998
occupancy and equipment expense included $72,000 of depreciation of building,
furniture and equipment. The new branch and renovations to the main office and
operations center resulted in $67,000 in building-related operating expenses for
the six months ended June 30, 1998. Occupancy and equipment also reflects
approximately $55,000 of expenses related to the Bank's continued upgrading of
its technology, communications and information systems, primarily the conversion
to a client server based core bank processing system. Legal fees increased to
$112,000 for 1998 as compared to $22,000 for the same period in 1997. The
increase represents legal costs incurred relating to the Bank's corporate and
strategic planning. Other operating expenses increased to $788,000 for the six
months ended June 30, 1998 as compared to $639,000 for the same period ended
June 30, 1997. The increase was primarily the result of training and
installation expenses relating to the conversion and upgrading of the Bank's
computer systems, and promotional costs and supplies relating to the opening of
the new branch office. Partially offsetting these increases was a reduction of
$50,000 in expenses on real estate owned ("REO") properties and a $31,000
decrease in contribution expense for the period.
INCOME TAXES. Income tax expense was $552,000 for the six months ended June
30, 1998 compared to $659,000 for the same period in 1997. The effective tax
rate increased to 40.8% for 1998 from 37.5% for 1997.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND
DECEMBER 31, 1996
GENERAL. Net income for the year ended December 31, 1997 decreased by
$463,000, or 26.5%, to $1.3 million for the fiscal year 1997 from $1.7 million
for the year ended December 31, 1996. The decrease was due primarily to an
increase in operating and other expense as a result of expense recognition of
various contribution pledges, construction expenses and a significant provision
for the allowance for loan losses. The decrease was partially offset by an
increase in interest income which primarily resulted from an increase in the
average balance of interest earning assets and a decrease in the average balance
of interest-bearing liabilities.
INTEREST INCOME. Interest income increased by $709,000, or 4.7%, to $15.9
million for the year ended December 31, 1997 from $15.2 million for the year
ended December 31, 1996. The increase was due primarily to a
63
<PAGE>
$466,000 increase in income from loans and a $359,000 increase in income from
investment and equity securities. These increases were partially offset by a
$116,000 decrease in income from federal funds sold. The increase in income from
loans was attributable to a $1.5 million increase in the average balance of
loans to $138.5 million from $137.0 million, and an increase of 24 basis points
in the average yield on loans from 8.40% to 8.64%. The origination and portfolio
growth of the Bank's commercial real estate, consumer and commercial loans was
responsible for the loan portfolio growth. During 1997, a total of $30.2 million
of commercial real estate, consumer and commercial business loans were
originated as compared with $17.7 million during 1996. The Bank continued to
originate and retain adjustable rate one-to-four family real estate loans and
originate for sale in the secondary market substantially all fixed-rate one-to-
four family real estate loans. Due to loan sales and repayments the portfolio of
one-to-four family real estate loans decreased by $3.8 million, although
originations of one-to-four family loans remained stable. The decrease in one-
to-four family loans was more than offset by an increase in all other loan
categories exclusive of one-to-four family residential loans of $10.3 million
during 1997. The increase in income from investment and mortgage-backed
securities was attributable to a $2.6 million increase in the average balance of
investment and mortgage-backed securities to $56.2 million from $53.6 million,
and an increase of 36 basis points in the average yield on investment securities
to 6.48% from 6.12%. The volume increase was the result of improved cash
management decreasing the level of short-term federal funds sold to longer term,
higher yielding investment securities. The reduction in federal funds sold was
attributable to 85% of the volume increase of investment securities. The yield
improvement in the investment portfolio resulted from the investment in slightly
longer term investments, primarily callable federal agency securities and short-
term and medium-term mortgage-backed securities. Given the interest rate
environment these securities provided a higher return over the short-term with
likelihood that the call provisions or expected prepayments would shorten the
average life of the security.
INTEREST EXPENSE. Interest expense remained the same at $7.9 million for
the year ended December 31, 1997 and 1996. The average rate paid on interest-
bearing liabilities increased by 1 basis point to 4.64% from 4.63%. This
increase was offset by a decrease in the average balance of interest-bearing
liabilities of $465,000, to $170.0 million in 1997 from $170.5 million in 1996.
The increase in average rate paid on interest-bearing liabilities was due to a
shift in the portfolio mix from lower yielding savings accounts and money market
deposits to certificates of deposit. The average balance of Certificate of
Deposit increased $1.7 million to $109.3 million during 1997 from $107.7 million
during 1996. Money market deposits decreased in average balance by $1.1 million
to $10.9 million for the year ended December 31, 1997. A decrease in the
interest rates paid on money market deposits resulted in some accounts
transferring into higher yielding time deposits. Savings accounts also decreased
on average by $1.3 million during 1997. This continued a trend of customers
moving from traditional core deposits to higher yielding options including time
deposits and non-bank financial products. Interest-bearing checking account
average balances increased by $233,000 during 1997 as a result of the Bank's
emphasis on all checking products.
PROVISION FOR LOAN LOSSES. The Bank's provision for loan losses increased
by $580,000, from a net recapture in the allowance for loan losses during 1996
of $103,000, to total provisions during 1997 of $477,000. The Bank instituted a
new method for evaluating the Bank's allowance for loan losses at year end 1997.
The previous method allowed for the recapture of allowance upon the specific
charge-off and disposal of collateral of a reserved loan. This prior method
resulted in the negative provision recorded for the year ended 1996. The
increase in provision expensed during 1997 is reflective of management's
objective to increase the allowance for loan losses in response to portfolio
volume increases and changes in the loan portfolio composition as the Bank
redirects loan origination and retention toward commercial real estate, consumer
and commercial business loans. Additionally, the level of provision made in
1997 reflects and increase in loan charge-offs of $123,000, to a total of
$299,000 for the year-ended December 31, 1997, from $176,000 for the year-ended
December 31, 1996. The increase in charge-offs, changes in the composition of
the loan portfolio, and an increase of $6.9 million in total loans resulted in
management's decision to increase the provision for loan losses.
OPERATING INCOME. Operating income was $822,000 for the year ended December
31, 1997, a $21,000, or 2.6% increase from $801,000 for the year ended December
31, 1996. This increase was primarily the result of improving revenue on
secondary market loan sales and servicing activities, which increased from
$71,000 in income through December 31, 1996 to $117,000 through December 31,
1997. Profit on the sale of securities decreased by $18,000
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<PAGE>
during 1997 to $82,000 for the year ended December 31, 1997 from $100,000 for
1996. Income from the Bank's checking accounts and ATM program decreased by
$14,000, or 3.2%, to $429,000 from $443,000 as a result of the Bank's re-
introduction of a free checking account into the product line. Other operating
income increased in 1997 to $194,000 from $187,000 in 1996.
OPERATING AND OTHER EXPENSES. Operating and other expenses increased by
$755,000, or 14%, to $6.1 million for the year ended December 31, 1997 from $5.4
million for the year ended December 31, 1996. The increase was due to the
recognition of additional contribution expense of $338,000, an increase of
$210,000 in salaries and employee benefits, an increase of $157,000 in occupancy
and equipment, an increase of $45,000 in legal fees and an increase in FDIC
assessments of $21,000. These increases were partially offset by a decrease of
$16,000 in other operating expenses.
Contribution expense increased to $440,000 for 1997 from $102,000 for 1996.
The additional contribution expense in 1997 was due to the recognition of
expense, on an accrual basis, of all multiple year contribution pledges
outstanding in anticipation of the formation of a charitable community
foundation concurrent with the formation of the mutual holding company and stock
issuance. Salaries and employee benefits increased to $3.1 million for 1997 from
$2.9 million for 1996. Occupancy and equipment expenses increased to $1.2
million in 1997 from $1.0 million in 1996. Both expense categories were impacted
by the opening of a new branch during 1997. The branch was our Bank's first
expansion into a new market area in over 20 years and represents a unique
opportunity in a community previously served by only large commercial banks.
Salaries and employee benefits were also impacted during 1997 by the realization
of the Bank's business banking services department. This new business unit was
developed to support all account relationships of the business customer, from
lending, to corporate cash services, to the personal banking needs of the
business owner. This additional service and the staffing to support the service,
has been well received by the business community and resulted in asset growth
along those product lines. Legal fees increased to $93,000 in 1997 from $48,000
during 1996. The increase represents legal costs incurred during 1997 related to
the Bank's corporate and strategic planning. Deposit insurance increased to
$23,000 for the year of 1997 as compared with $2,000 for the year ended December
31, 1996, resulting from the FDIC's decision to raise the assessment for deposit
insurance in 1997 to $0.013 per one hundred dollars of deposits from the minimal
assessment charged in 1996.
INCOME TAX. Income tax expense was $881,000 for the year ended December
31, 1997, a reduction of $144,000 from the 1996 income tax expense of $1.0
million. The effective tax rate increased to 40.7% for 1997 from 37.0% for 1996.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1996 AND
DECEMBER 31, 1995
GENERAL. Net income for the year ended December 31, 1996 was $1.7 million,
compared to $1.6 million for the year ended December 31, 1995. The increase was
primarily due to an increase in interest income which primarily resulted from an
increase in the average balance of interest earning assets, an increase in the
average yield of interest earning assets and a decrease in the provision for
loan losses. The increases were partially offset by increased interest expense
which resulted primarily from an increase in average balance of interest-bearing
liabilities and an increase in the average rate paid on interest-bearing
liabilities and further offset by a decrease in operating income and an increase
in operating and other expenses and income taxes.
INTEREST INCOME. Interest income increased by $570,000, or 3.9%, to $15.2
million for the year ended December 31, 1996 from $14.6 million for the year
ended December 31, 1995. The increase was due primarily to an increase of
$682,000 in income from investment and equity securities and a $129,000 increase
in income from federal funds sold. These increases were partially offset by a
$241,000 decrease in income from loans. The increase in income from investment
securities was attributable to an $8.9 million increase in the average balance
of investment and equity securities to $54.5 million from $45.6 million, and a
35 basis point increase in the average yield on investments to 6.12% from 5.77%.
During 1996, the Bank began an investment strategy of investing in callable
federal agency debt securities and purchasing mortgage-backed securities. These
portfolios increased by $18.5 million and $4.5 million, respectively, from 1995
to 1996. The growth in these investment categories was through the reinvestment
of maturities in the
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<PAGE>
corporate bond portfolio and the investment of cash resulting from deposit
growth. The agency and mortgage-backed securities were selected to enhance
short-term returns while maintaining liquidity and marketability. The increase
in income from federal funds sold was attributable to a $2.7 million increase in
the average balance of federal funds sold to $6.7 million from $4.0 million,
partially offset by a 37 basis point decrease in the average yield on federal
funds sold to 5.33% from 5.70%. The increased volume of federal funds sold was a
result of deposit balance increases during the year temporarily placed in this
short-term investment vehicle pending deployment in investment securities. The
decrease in income on loans was attributable to a decrease of $5.7 million in
the average balance of loans to $137.0 million from $142.7 million partially
offset by a 17 basis point increase in the average yield on loans to 8.40% from
8.23%. The decrease in volume was due to relatively light loan demand with one-
to-four family real estate loan originations, net of loans sales, reduced by
$3.5 million during 1996 as compared with 1995. In addition, repayments of one-
to-four family real estate loans increased by $3.3 million during 1996 as many
new residential mortgage companies entered the market soliciting fixed-rate
mortgage refinancing packages.
INTEREST EXPENSE. Interest expense increased by $267,000, or 3.5%, to $7.9
million for the year ended December 31, 1996 from $7.6 million for the year
ended December 31, 1995. The increase in interest expense was due primarily to
an increase in interest-bearing liabilities of $3.0 million, to $170.5 million
in 1996 from $167.5 million during 1995, additionally the average rate paid on
interest-bearing liabilities increased by 8 basis points to 4.63% from 4.55%. In
particular, the increase in interest expense was attributable to an increase of
$311,000 in interest expense on time deposits and a $44,000 increase in interest
expense on money market deposits. These were partially offset by decreases of
$76,000 and $12,000 in interest expense on savings accounts and interest-bearing
checking accounts, respectively. The increase in interest expense on time
deposits was the result of an increase of $4.1 million in the average balance of
$107.7 million in 1996 from $103.6 million in 1995. In addition, the average
rate paid on time deposits increased 8 basis points to 5.61% in 1996 from 5.53%
in 1995. The Bank's customers continued to move deposits from core savings to
time deposits as a result of higher rates being paid on time deposits. Money
market average balances increased by $1.5 million in 1996, this increase was
partially offset by a decrease in the average rate paid on money market deposits
of 7 basis points to 3.37% from 3.44%. The shift in savings account balances
resulted in a decrease in the average balance of $2.6 million in deposits during
1996 to $45.4 million from $48.1 million in 1995. A reduction in the rate paid
during 1996 on interest-bearing checking accounts resulted in a decrease in the
average rate of 20 basis points to 2.00% for 1996 from 2.20%, without a
corresponding reduction in average balances maintained for the product.
PROVISION FOR LOAN LOSSES. The Bank's provision for loan losses decreased
by $183,000 due to a net recapture in the allowance for loan losses during 1996
of $103,000 as compared with total provisions for 1995 of $80,000. As
previously indicated, the method employed during 1996 and prior periods to
determine the adequacy of the allowance for loan losses allowed for the
recapture of allowance upon the specific charge-off and disposal of collateral
of a reserved loan. This method resulted in the negative net provision recorded
in 1996 and the resulting expense reduction for the year.
OPERATING INCOME. Total operating income was $801,000 for the year ended
December 31, 1996, a decrease of $109,000, or 11.98%, from $910,000 for the year
ended December 31, 1995. During 1995, the Bank received a recovery of $56,000
from a participation mortgage charged-off in a prior period and recorded as
income when received during 1995. There was no similar operating income source
in 1996 recorded. Revenue from the Bank's secondary market loan sales and
servicing activities decreased by $39,000 to $71,000 through December 31, 1996.
This was primarily the result of loan sales made during rising interest rate
periods in 1996 and resulting in a loss at time of sale. Checking and ATM fees
decreased $27,000 to $443,000 in 1996 from $470,000 in 1995 as the Bank
encouraged direct deposit relationships as a method to avoid monthly maintenance
fees with local employer groups. All other operating income sources increased
by $13,000 during 1996, partially offsetting these decreases.
OPERATING AND OTHER EXPENSES. Operating and other expense increased by
$120,000, or 2.3%, to $5.4 million for the year ended December 31, 1996 from
$5.3 million for the year ended December 31, 1995. The increase was due to an
increase of $198,000 in expenses on REO properties and other charge-offs, an
increase of $137,000 in salaries and employee benefits and a $47,000 increase in
contributions. These increases were partially offset by a reduction of
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<PAGE>
$209,000 in deposit insurance, a $27,000 decrease in board member fees, and a
$26,000 decrease in all other operating expenses.
Beginning in 1996 the Bank took a more proactive position in the management
and resolution of loan delinquencies and real estate foreclosures. This
resulted in additional expense related to loan workout arrangements, property
foreclosures and related REO expenses. This activity in 1996 resulted in
$478,000 of additional operating expenses compared with $280,000 during 1995.
Salaries and employee benefits increased to $2.9 million for 1996 from $2.7
million for 1995, an increase of $137,000. Contribution expenses for 1996 was
$102,000 as compared with $55,000 for 1995. The Bank elected to provide support
for the expansion of the local YMCA which serves the entire market area as well
as continuing to support charitable activities in the area.
Deposit insurance expense decreased to $2,000 in 1996 from $211,000,
reflecting a decreased in insurance premiums. The Bank's "well capitalized"
risk classification allowed the Bank to pay the minimum annual assessment during
1996.
INCOME TAXES. Income tax expense was $1.0 million for the year ended
December 31, 1996 compared to $898,000 for the year ended December 31, 1995.
The effective tax rate increased to 37.0% for 1996 from 35.7% for 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Bank's primary sources of funds are deposits, proceeds from the
principal and interest payments on loans, mortgage related and debt and equity
securities, and to a lesser extent, proceeds from the sale of fixed-rate
mortgage loans to the secondary market with borrowing ability available as
needed. While maturities and scheduled amortization of loans and securities are
predictable sources of funds, deposit outflows, mortgage prepayments, mortgage
loan sales, borrowings are greatly influenced by general interest rates,
economic conditions and competition.
The Bank's primary investing activities are the origination of residential
one-to-four family and commercial real estate loans, other consumer and
commercial business loans, and the purchase of mortgage-backed and debt and
equity securities. During the six months ended June 30, 1998 and the years
ended December 31, 1997, 1996 and 1995, the Bank's loan originations totaled
$32.1 million, $46.2 million, $34.0 million and $28.0 million, respectively.
Purchases of mortgage-backed securities and debt and equity securities totaled
$21.5 million, $19.3 million, $29.9 million and $14.0 million for the six months
ended June 30, 1998 and the years ended December 31, 1997, 1996 and 1995,
respectively. These activities were funded primarily by deposit growth,
principal payments on loans, mortgage related securities and debt and equity
securities. Loan sales provided an additional source of liquidity, totaling
$8.4 million, $4.0 million, $5.5 million and $3.1 million for the six months
ended June 30, 1998 and the years ended December 31, 1997, 1996 and 1995,
respectively.
The Bank experienced a net increase in total deposits of $6.1 million, $4.1
million and $1.7 million for the six months ended June 30, 1998 and the years
ended December 31, 1996 and 1995, respectively, and a net deposit decrease of
$2.4 million for the year ended December 31, 1997. Deposit flows are affected
by the level of interest rates, the interest rates and products offered by local
competitors, and other factors.
The Bank monitors its liquidity position on a daily basis. Excess short-
term liquidity is usually invested in overnight federal funds sold. In the
event we require funds beyond our ability to generate them internally,
additional sources of funds are available through the use of reverse repurchase
agreements and short-term FHLB advances. There have been no borrowings
outstanding during any of the periods presented.
Loan commitments totaled $2.0 million at June 30, 1998 and were comprised
of $528,000 in commitments to originate adjustable rate loans and $1.5 million
in commitments to originate fixed rates loans. The Bank anticipates that it
will have sufficient funds available to meet current loan commitments.
Certificates of deposit which are scheduled
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<PAGE>
to mature in one year or less from June 30, 1998 totaled $67.9 million. Based
upon the Bank's experience and its current pricing strategy, management believes
that a significant portion of such deposits will remain with the Bank.
In 1999, management plans to continue renovating and expanding the Bank's
retail banking franchise. The renovating and equipping of these offices is
expected to cost approximately $2.0 million. Management anticipates it will
have sufficient funds available to meet its planned capital expenditures
throughout 1999. As a result of the Offering, the Company and the Bank will
have additional capital resources of between $12.0 million and $16.4 million.
Initially, such funds will be invested in liquid and short-term and medium-term
investments. See "Use of Proceeds."
At June 30, 1998, the Bank exceeded all of its regulatory capital
requirements. See "Regulatory Capital Compliance" and "Regulation--Regulatory
Capital Requirements."
The Bank's most liquid assets are cash and interest-bearing demand
accounts. The levels of these assets are dependent on the Bank's operating,
financing, lending and investing activities during any given period. At June
30, 1998, cash and interest-bearing demand account totaled $13.6 million, or
6.2% of total assets.
IMPACT OF NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 128 "Earnings Per Share". SFAS No. 128 supersedes APB Opinion No. 15
"Earnings Per Share" and specifies the computation, presentation and disclosure
requirements for earnings per share ("EPS") for entities with publicly held
stock or potential Common Stock. Essentially, this standard replaces the
primary EPS and fully diluted EPS presentations under APB Opinion No. 15 with a
basic EPS and diluted EPS presentation. SFAS No. 128 is effective for financial
statements for both interim and annual periods ending after December 15, 1997;
earlier application is not permitted. The Company does not expect that the
adoption of SFAS No. 128 will have a material impact.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information
about Capital Structure". SFAS No. 129 summarizes previously issued disclosure
guidance contained within APB Opinions Nos. 10 and 15 as well as SFAS No. 47.
There will be no changes to the Bank's disclosures pursuant to the adoption of
SFAS No. 129. This statement is effective for financial statements for periods
ending after December 15, 1997.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements.
The comprehensive income and related cumulative equity impact of comprehensive
income items will be required to be disclosed prominently as part of the notes
to the financial statements. Only the impact of unrealized gains or losses on
securities available for sale is expected to be disclosed as an additional
component of the Bank's income under the requirements of SFAS No. 130. This
statement is effective for fiscal years beginning after December 15, 1997.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which changes the way public companies
report information about segments of their business on their annual financial
statements and requires them to report selected segment information in their
quarterly reports issued to stockholders. It also requires entity wide
disclosures about the products and services an entity provides, the foreign
countries in which it holds assets and reports revenues, and its major
customers. This statement is effective for fiscal years beginning after
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<PAGE>
December 15, 1997. The Company does not expect that implementation of SFAS No.
131 will have a material impact on the Company's financial reporting.
In February 1998, the FASB issued SFAS No. 132 which standardizes the
disclosure requirements for pensions and other postretirement benefits; requires
additional information on changes in the benefit obligations and fair values of
plan assets; and eliminates certain present disclosure requirements. The
Statement does not change the measurement or recognition requirements for
postretirement benefits. SFAS No. 132 is effective for fiscal years beginning
after December 15, 1997 and, accordingly, will be adopted by the Bank in the
year ending December 31, 1998. Management does not expect that this standard
will significantly affect the Bank's financial reporting.
In June 1998, the FASB issued SFAS No. 133 which establishes accounting and
reporting standards for derivative instruments and for hedging activities. The
Statement requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet at fair value. If certain conditions are met,
a derivative may be specifically designated as a fair value hedge, a cash flow
hedge, or a foreign currency hedge. A specific accounting treatment applies to
each type of hedge. Entities may reclassify securities from the held-to-
maturity category to the available-for-sale category at the time of adopting
SFAS No. 133. SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999 and, accordingly, would apply to the Bank
beginning on January 1, 2000. The Bank plans to adopt the standard at that time
and does not presently intend to reclassify securities between categories. The
Bank has not engaged in derivatives and hedging activities covered by the new
standard, and does not expect to do so in the foreseeable future. Accordingly,
SFAS No. 133 is not expected to have a material impact on the Bank's financial
statements. Early adoption is permitted, but not required.
BUSINESS OF ONEIDA FINANCIAL CORP.
GENERAL
In June 1998, the Board of Trustees of the Bank adopted the Plan of
Reorganization. Under the Plan of Reorganization, the Bank organized the
Company. The Bank will be a wholly-owned subsidiary of the Company, the majority
of whose shares will be held by the Mutual Holding Company. See "Oneida
Financial Corp." and "Regulation--Holding Company Regulation."
The Company is currently not an operating company. Following the
Reorganization, in addition to directing, planning and coordinating the business
activities of the Bank, the Company will initially invest net proceeds it
retains primarily in short and medium-term debt securities and marketable equity
securities. The Company also intends to fund the loan to the ESOP to enable the
ESOP to purchase 8% of the Common Stock Minority Ownership Interest assuming a
purchase price of $10.00 per share. In the future, the Company may acquire or
organize other operating subsidiaries, including other financial institutions
and financial services companies. See "Use of Proceeds." Presently, there are no
agreements or understandings for an expansion of the Company's operations.
Initially, the Company will neither own nor lease any property from any third
party, but will instead use the premises, equipment and furniture of the Bank.
At the present time, the Company does not intend to employ any persons other
than certain officers of the Bank, who will not be separately provided cash
compensation by the Company. The Company may utilize support staff of the Bank
from time to time, if needed. Additional employees will be hired as appropriate
to the extent the Company expands its business in the future.
BUSINESS OF THE BANK
GENERAL
The Bank's principal business consists of attracting retail deposits from
the general public in the areas surrounding its branches and investing those
deposits, together with funds generated from operations and borrowings,
primarily in one-to-four family residential mortgage loans, commercial real
estate loans, home equity loans, consumer loans and commercial business loans.
In addition, the Bank invests a significant portion of its assets in investment
securities and mortgage-backed securities. The Bank's revenues are derived
principally from the interest on its mortgage, consumer and commercial loans,
securities, loan origination and servicing fees, service charges and fees
collected on its deposit accounts. The Bank's primary sources of funds are
deposits, principal and interest payments on loans, investment securities and
mortgage-backed securities. In recent years the Bank has not had any borrowings.
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LENDING ACTIVITIES
GENERAL. The principal lending activity of the Bank has been the
origination, for retention in its portfolio, of adjustable-rate mortgage loans
collateralized by one-to-four family residential real estate located within its
primary market area. In the current low interest rate environment, borrowers
have shown a preference for fixed-rate loans. Consequently, in recent periods
the Bank has originated fixed-rate one-to-four family loans for resale in the
secondary market without recourse and on a servicing retained basis. In order
to complement the Bank's traditional emphasis of one-to-four family residential
real estate lending, management has sought to increase the amount of higher
yielding commercial real estate loans, consumer loans and commercial business
loans. To a limited extent, the Bank will originate loans secured by multi-
family properties. The Bank does not view multi-family lending as a significant
aspect of its business.
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LOAN PORTFOLIO COMPOSITION. Set forth below is selected information
concerning the composition of the Bank's loan portfolio in dollar amounts and in
percentages (before deductions for loans in process and allowances for losses)
as of the dates indicated.
<TABLE>
<CAPTION>
AT JUNE 30, AT DECEMBER 31,
------------------ ----------------------------------------------------------
1998 1997 1996 1995
-------- -------- -------- -------- -------- --------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- -------- -------- -------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
One-to-four family......... $ 87,968 62.0% $ 96,792 67.0% $100,557 73.1% $108,397 76.0%
Multi-family............... 1,905 1.3 2,714 1.9 2,972 2.2 3,240 2.3
Home equity................ 9,192 6.5 8,829 6.1 7,983 5.8 7,207 5.1
Commercial real estate..... 14,493 10.2 13,868 9.6 12,686 9.1 11,603 8.0
-------- ----- -------- ----- -------- ----- -------- -----
Total real estate loans... 113,558 80.0 122,203 84.6 124,198 90.2 130,447 91.4
----- ----- ----- -----
Consumer loans:............
Automobile loans........... 9,373 6.6 6,683 4.6 2,701 2.0 2,108 1.5
Mobile home................ 746 0.5 784 0.5 914 0.7 1,162 0.8
Personal loans............. 3,670 2.6 2,580 1.8 1,719 1.3 1,831 1.3
Guaranteed student loans... 1,699 1.2 1,659 1.2 1,981 1.4 2,943 2.1
Other consumer loans....... 1,350 1.0 1,017 0.7 879 0.6 766 0.5
-------- ----- -------- ----- -------- ----- -------- -----
Total consumer loans...... 16,838 11.9 12,723 8.8 8,194 6.0 8,810 6.2
----- ----- ----- -----
Commercial business loans.. 11,600 8.1 9,587 6.6 5,241 3.8 3,424 2.4
Total consumer and
commercial business
loans................... 28,438 20.0 22,310 15.4 13,435 9.8 12,234 8.6
-------- ----- -------- ----- -------- ----- -------- -----
Total loans............... $141,996 100.0% $144,513 100.0% $137,633 100.0% $142,681 100.0%
======== ===== ======== ===== ======== ===== ======== =====
Less:
Loans in process......... 232 352 215 223
Allowance for losses..... 1,721 1,793 1,546 1,781
----- ----- ----- -----
Total loans receivable,
net................. $140,043 $142,368 $135,872 $140,677
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
1994 1993
------------------ -------------------
AMOUNT PERCENT AMOUNT PERCENT
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Real estate loans:
One-to-four family......... $109,441 76.0% $110,114 77.3%
Multi-family............... 3,735 2.5 2,540 1.8
Home equity................ 6,851 4.8 7,742 5.4
Commercial real estate..... 11,033 7.7 6,535 4.6
-------- ----- -------- --------
Total real estate loans... 131,060 91.0 126,931 89.1
----- --------
Consumer loans:............
Automobile loans........... 1,799 1.2 2,563 1.8
Mobile home................ 1,384 1.0 1,739 1.2
Personal loans............. 1,689 1.2 2,211 1.6
Guaranteed student loans... 3,443 2.4 3,192 2.2
Other consumer loans....... 894 0.6 1,411 1.0
-------- ----- -------- --------
Total consumer loans...... 9,209 6.4 11,116 7.8
----- --------
Commercial business loans.. 3,764 2.6 4,412 3.1
Total consumer and
commercial business
loans................... 12,973 9.0 15,528 10.9
-------- ----- -------- --------
Total loans............... $144,033 100.0% $142,459 100.0%
======== ===== ======== ========
Less:
Loans in process......... 626 983
Allowance for losses..... 2,117 2,045
-------- --------
Total loans receivable,
net................. $141,290 $139,431
======== ========
</TABLE>
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<TABLE>
<CAPTION>
AT JUNE 30, AT DECEMBER 31,
------------------- -------------------------------------------------------------
1998 1997 1996 1995
-------- --------- -------- --------- -------- ---------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- --------- -------- --------- -------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FIXED-RATE LOANS:
REAL ESTATE LOANS:
- -----------------
One-to-four family......... $ 10,522 7.4% $ 11,563 8.0% $ 9,678 7.0% $ 8,652 6.1%
Multi-family............... -- -- -- -- -- -- -- --
Home equity................ 3,262 2.3 2,804 1.9 1,679 1.2 871 0.5
Commercial real estate..... 1,159 0.8 1,213 0.8 1,350 1.0 1,380 1.0
-------- -------- -------- -------- -------- -------- -------- --------
Total real estate loans... 14,943 10.5 15,580 10.7 12,707 9.2 10,903 7.6
-------- -------- -------- -------- -------- -------- -------- --------
CONSUMER LOANS:
- --------------
Total consumer loans....... 16,838 11.9 12,723 8.8 8,194 6.0 8,810 6.2
COMMERCIAL BUSINESS LOANS:
- -------------------------
Total commercial loans..... 1,544 1.1 1,628 1.1 748 0.5 484 0.3
-------- -------- -------- -------- -------- -------- -------- --------
Total fixed-rate loans..... $ 33,325 23.5 $ 29,931 20.6 $ 21,649 15.7 $ 20,197 14.1
-------- -------- -------- -------- -------- -------- -------- --------
ADJUSTABLE RATE LOANS:
REAL ESTATE LOANS:
- -----------------
One-to-four family......... $ 77,446 54.5% $ 85,229 59.0% $ 90,879 66.0% $ 99,745 69.9%
Multi-family............... 1,905 1.3 2,714 1.9 2,972 2.2 3,240 2.3
Home equity................ 5,930 4.2 6,025 4.2 6,304 4.6 6,336 4.4
Commercial real estate..... 13,334 9.4 12,655 8.8 11,336 8.2 10,223 7.2
-------- -------- -------- -------- -------- -------- -------- --------
Total real estate loans... 98,615 69.4 106,623 73.9 111,491 81.0 119,544 83.8
-------- -------- -------- -------- -------- -------- -------- --------
COMMERCIAL BUSINESS LOANS:
- -------------------------
Total commercial
business loans........... 10,056 7.1 7,959 5.5 4,493 3.3 2,940 2.1
-------- -------- -------- -------- -------- -------- -------- --------
Total adjustable-rate loans $108,671 76.5 $114,582 79.4 $ 15,984 84.3 $122,484 85.9
-------- -------- -------- -------- -------- -------- -------- --------
Total loans................ $141,996 100.0% $144,513 100.0% $137,633 100.0% $142,681 100.0%
======== ======== ======== ======== ======== ======== ======== ========
LESS:
- -----
Loans in process......... 232 352 215 223
Allowance for losses..... 1,721 1,793 1,546
-------- -------- -------- --------
Total loans receivable, net $140,043 $142,368 $135,872 $140,677
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
1994 1993
------------------- -----------------------
AMOUNT PERCENT AMOUNT PERCENT
-------- --------- ------------- --------
<S> <C> <C> <C> <C>
FIXED-RATE LOANS:
REAL ESTATE LOANS:
- -----------------
One-to-four family......... $ 10,909 7.6% $ 16,663 11.8%
Multi-family............... -- -- -- --
Home equity................ 686 0.5 426 0.3
Commercial real estate..... 1,627 1.1 1,100 0.8
-------- -------- ------------- -----
Total real estate loans... 13,222 9.2 18,310 12.9
-------- -------- ------------- -----
CONSUMER LOANS:
- --------------
Total consumer loans....... 9,209 6.4 11,116 7.8
COMMERCIAL BUSINESS LOANS:
- -------------------------
Total commercial loans..... 882 0.6 1,160 0.8
-------- -------- ------------- -----
Total fixed-rate loans..... $ 23,313 16.2 $ 30,586 21.5
-------- -------- ------------- -----
ADJUSTABLE RATE LOANS:
REAL ESTATE LOANS:
- -----------------
One-to-four family......... $ 98,532 68.4% $ 93,481 65.5%
Multi-family............... 3,735 2.6 2,540 1.8
Home equity................ 6,165 4.3 7,316 5.1
Commercial real estate..... 9,406 6.5 5,435 3.8
-------- -------- ------------- -----
Total real estate loans... 117,838 81.8 108,621 76.2
-------- -------- ------------- -----
COMMERCIAL BUSINESS LOANS:
- -------------------------
Total commercial
business loans........... 2,882 2.0 3,252 2.3
-------- -------- ------------- -----
Total adjustable-rate loans 85.9 $120,720 83.8$111,873 78.5
-------- -------- ------------- -----
Total loans................ $144,033 100.0% $ 142,459 100.0%
======== ======== ============= =====
LESS:
- ----
Loans in process......... 626 983
Allowance for losses..... 2,117 2,045
-------- --------
Total loans receivable, net $141,290 $139,431
======== ========
</TABLE>
72
<PAGE>
ONE-TO-FOUR FAMILY RESIDENTIAL LOANS. The Bank's primary lending activity
is the origination of one-to-four family residential mortgage loans secured by
property located in the Bank's primary lending area. Generally, one-to-four
family residential mortgage loans are made in amounts up to 80% of the lesser of
the appraised value or purchase price of the property however the Bank will
originate one-to-four family loans with loan-to-value ratios of up to 97%, with
private mortgage insurance required. Generally, fixed-rate loans are originated
for terms of up to 30 years. One-to-four family fixed-rate loans are offered
with a monthly payment feature.
The Bank originates both adjustable rate and fixed-rate one-to-four family
loans. Historically, the Bank's emphasis has been on the origination of ARM
loans. The interest rate on ARM loans is indexed to the one year Treasury Bill
rate. The Bank's ARM loans currently provide for maximum rate adjustments of
200 basis points per year and 600 basis points over the term of the loan. The
Bank offers ARM loans with initial interest rates that are below market,
referred to as "teaser rates." Residential ARM loans amortize over a maximum
term of up to 30 years. ARM loans are offered with both monthly and bi-weekly
payment features. ARM loans are originated for retention in the Bank's
portfolio. In the current low interest rate environment, borrowers have shown a
preference for fixed-rate loans. Consequently, in recent periods the Bank has
increased its origination of fixed-rate one-to-four family mortgage loans. The
Bank generally sells its fixed-rate one-to-four family loans on a servicing
retained basis. Such loans are sold without recourse to the Bank. The Bank
recently introduced two one-to-four family residential loan products providing
for fixed-rates of interest for an initial period of either three or five years,
and which adjust annually thereafter. At June 30, 1998, loans serviced by the
Bank for others totaled $32.7 million. During the six months ended June 30,
1998 and the year ended December 31, 1997, the Bank sold $8.4 million and $4.0
million, respectively in fixed-rate one-to-four family loans.
ARM loans decrease the risk associated with changes in market interest
rates by periodically repricing, but involve other risks because as interest
rates increase, the underlying payments by the borrower increase, thus
increasing the potential for default by the borrower. At the same time, the
marketability of the underlying collateral may be adversely affected by higher
interest rates. Upward adjustment of the contractual interest rate is also
limited by the maximum periodic and lifetime interest rate adjustment permitted
by the terms of the ARM loans, and therefore, is potentially limited in
effectiveness during periods of rapidly rising interest rates. At June 30, 1998,
54.5% of the Bank's loan portfolio consisted of one-to-four family residential
loans with adjustable interest rates.
All one-to-four family residential mortgage loans originated by the Bank
include "due-on-sale" clauses, which give the Bank the right to declare a loan
immediately due and payable in the event that, among other things, the borrower
sells or otherwise disposes of the real property subject to the mortgage and the
loan is not repaid.
At June 30, 1998, approximately $88.0 million, or 62.0% of the Bank's loan
portfolio, consisted of one-to-four family residential loans. Approximately
$707,000 of such loans (representing 14 loans) were included in nonperforming
loans as of that date. See "--Nonperforming and Problem Assets."
HOME EQUITY LOANS. The Bank offers home equity loans that are secured by
the borrower's primary residence. The Bank offers a home equity line of credit
under which the borrower is permitted to draw on the home equity line of credit
during the first ten years after it is originated and repay the outstanding
balance over a term not to exceed 25 years from the date the line of credit is
originated. The interest rates on home equity lines of credit are fixed for the
first year and adjust monthly thereafter at a margin over the prime interest
rate. The Bank also offers a home equity product providing for a fixed-rate of
interest. Both adjustable rate and fixed-rate home equity loans are
underwritten under the same criteria that the Bank uses to underwrite one-to-
four family fixed-rate loans. Fixed-rate home equity loans are originated with
terms not to exceed ten years. Home equity loans may be underwritten with a
loan to value ratio of 85% when combined with the principal balance of the
existing mortgage loan. The maximum amount of a home equity loan may not exceed
$250,000 unless approved by the Board of Trustees. The Bank appraises the
property securing the loan at the time of the loan application (but not
thereafter) in order to determine the value of the property securing the home
equity loans. At June 30, 1998, the outstanding balances of home equity loans
totaled $9.2 million, or 6.5% of the Bank's loan portfolio.
73
<PAGE>
COMMERCIAL REAL ESTATE LOANS. At June 30, 1998, $14.5 million, or 10.2% of
the total loan portfolio consisted of commercial real estate loans. Commercial
real estate loans are secured by office buildings, mixed-use properties,
religious facilities and other commercial properties. The Bank originates
adjustable rate commercial mortgage loans with maximum terms of up to 20 years.
The maximum loan-to-value ratio of commercial real estate loans is 80%. At June
30, 1998, the largest commercial real estate loan had a principal balance of
$1.3 million and was secured by a medical building. As of June 30, 1998,
nonperforming loans did not include any commercial real estate loans.
In underwriting commercial real estate loans, the Bank reviews the expected
net operating income generated by the real estate to ensure that it is at least
110% of the amount of the monthly debt service; the age and condition of the
collateral; the financial resources and income level of the borrower; and the
borrower's business experience. Personal guarantees have always been obtained
from all commercial real estate borrowers.
Loans secured by commercial real estate generally are larger than one-to-
four family residential loans and involve a greater degree of risk. Commercial
mortgage loans often involve large loan balances to single borrowers or groups
of related borrowers. Payments on these loans depend to a large degree on the
results of operations and management of the properties or underlying businesses,
and may be affected to a greater extent by adverse conditions in the real estate
market or the economy in general. Accordingly, the nature of commercial real
estate loans makes them more difficult for Bank management to monitor and
evaluate.
CONSUMER LENDING. The Bank's consumer loans consist of automobile loans,
mobile home loans, secured personal loans (secured by bonds, equity securities
or other readily marketable collateral), guaranteed student loans and other
consumer loans (consisting of passbook loans, unsecured home improvement loans
and recreational vehicle loans). At June 30, 1998, consumer loans totaled $16.8
million, or 11.9% of the total loan portfolio. Consumer loans are originated
with terms to maturity of three to seven years. The Bank has sought to increase
its level of consumer loans primarily through increased automobile lending. The
Bank participates in a number of indirect automobile lending programs with local
automobile dealerships. All indirect automobile loans must satisfy the Bank's
underwritten criteria for automobile loans originated directly by the Bank to
the borrower and must be approved by one of the Bank's lending officers. At
June 30, 1998, loans secured by automobiles totaled $9.4 million, of which $5.3
million were originated through the Bank's indirect automobile lending program.
The Bank has also sought to increase its level of automobile loans directly to
borrowers by increasing its marketing efforts with existing customers.
Automobile loans generally do not have terms exceeding five years. The Bank
does not provide financing for leased automobiles.
Consumer loans generally have shorter terms and higher interest rates than
one-to-four family mortgage loans. In addition, consumer loans expand the
products and services offered by the Bank to better meet the financial services
needs of its customers. Consumer loans generally involve greater credit risk
than residential mortgage loans because of the difference in the underlying
collateral. Repossessed collateral for a defaulted consumer loan may not
provide an adequate source of repayment of the outstanding loan balance because
of the greater likelihood of damage to loss of or depreciation in the underlying
collateral. The remaining deficiency often does not warrant further substantial
collection efforts against the borrower beyond obtaining a deficiency judgment.
In addition, consumer loan collections depend on the borrower's personal
financial stability. Furthermore, the application of various federal and state
laws, including federal and state bankruptcy and insolvency laws, may limit the
amount that can be recovered on such loans.
The Bank's underwriting procedures for consumer loans include an assessment
of the applicant's credit history and the ability to meet existing and proposed
debt obligations. Although the applicant's creditworthiness is the primary
consideration, the underwriting process also includes a comparison of the value
of the security to the proposed loan amount. The Bank underwrites its consumer
loans internally, which the Bank believes limits its exposure to credit risks
associated with loans underwritten or purchased from brokers and other external
sources.
COMMERCIAL BUSINESS LOANS. The Bank also originates commercial business
loans. Commercial business loans are originated with terms of up to seven years
and provide for rates that adjust on a monthly basis. Commercial business loans
are originated to persons with a prior relationship with the Bank or referrals
from persons with a prior relationship with the Bank. The decision to grant a
commercial business loan depends primarily on the creditworthiness
74
<PAGE>
and cash flow of the borrower (and any guarantors) and secondarily on the value
of and ability to liquidate the collateral which generally consists of
receivables, inventory and equipment. The Bank generally requires annual
financial statements and tax returns from its commercial business borrowers and
personal guarantees from the commercial business borrowers. The Bank also
generally requires an appraisal of any real estate that secures the commercial
business loan. At June 30, 1998, the Bank had $11.6 million of commercial
business loans which represented 8.1% of the total loan portfolio. On such date,
the average balance of the Bank's commercial business loans was $33,800, and the
largest commercial business lending relationship totaled $1.5 million, which
consisted of 29 loans secured by equipment and assignment of leases. As of June
30, 1998, unsecured commercial business loans totaled $996,000.
Commercial business lending generally involves greater risk than
residential mortgage lending and involves risks that are different from those
associated with residential and commercial real estate lending. Real estate
lending is generally considered to be collateral based, with loan amounts based
on predetermined loan to collateral values and liquidation of the underlying
real estate collateral is viewed as the primary source of repayment in the event
of borrower default. Although commercial business loans may be collateralized by
equipment or other business assets, the liquidation of collateral in the event
of a borrower default is often an insufficient source of repayment because
equipment and other business assets may be obsolete or of limited use, among
other things. Accordingly, the repayment of a commercial business loan depends
primarily on the creditworthiness of the borrower (and any guarantors), while
liquidation of collateral is a secondary and often insufficient source of
repayment.
LOAN MATURITY SCHEDULE. The following table sets forth certain information
as of December 31, 1997, regarding the amount of loans maturing in the Bank's
portfolio. Demand loans having no stated schedule of repayment and no stated
maturity and overdrafts are reported as due in one year or less. All loans are
included in the period in which the final contractual repayment is due.
<TABLE>
<CAPTION>
ONE THREE FIVE TEN
WITHIN THROUGH THROUGH THROUGH THROUGH BEYOND
ONE THREE FIVE TEN TWENTY-FIVE TWENTY-FIVE
YEAR YEARS YEARS YEARS YEARS YEARS TOTAL
------ ------- ------- ------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Real estate loans:
One- to-four family....... $ 144 $ 607 $ 2,549 $14,655 $60,762 $18,075 $ 96,792
Home equity............... 260 458 658 5,620 1,833 -- 8,829
Commercial real estate.... 1 114 362 3,055 9,786 3,264 16,582
------ ------ ------- ------- ------- ------- --------
Total real estate loans.. 405 1,179 3,569 23,330 72,381 21,339 122,203
------ ------ ------- ------- ------- ------- --------
Consumer and other loans... 770 3,051 5,542 1,353 2,007 -- 12,723
Commercial business loans.. 2,600 1,972 3,535 1,247 233 -- 9,587
------ ------ ------- ------- ------- ------- --------
Total loans.............. $3,775 $6,202 $12,646 $25,930 $74,621 $21,339 $144,513
====== ====== ======= ======= ======= ======= ========
</TABLE>
75
<PAGE>
FIXED- AND ADJUSTABLE-RATE LOAN SCHEDULE. The following table sets forth
at December 31, 1997, the dollar amount of all fixed-rate and adjustable-rate
loans due after December 31, 1998. Adjustable- and floating-rate loans are
included based on contractual maturities.
<TABLE>
<CAPTION>
DUE AFTER DECEMBER 31, 1998
---------------------------------------
FIXED ADJUSTABLE TOTAL
-------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Real estate loans:
One-to-four family.......... $11,437 $ 85,211 $ 96,648
Home equity................. 2,792 5,777 8,569
Commercial real estate...... 1,015 15,566 16,581
------- -------- --------
Total real estate loans.. 15,244 106,554 121,798
------- -------- --------
Consumer and other loans...... 11,953 -- 11,953
Commercial business loans..... 1,118 5,869 6,987
------- -------- --------
Total loans.............. $28,315 $112,723 $140,738
======= ======== ========
</TABLE>
The following table sets forth the loan origination, sales and repayment
activities of the Bank for the periods indicated. The Bank did not purchase any
loans during the periods presented.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
---------------- ---------------------------
1998 1997 1997 1996 1995
------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ORIGINATIONS BY TYPE:
- --------------------
Adjustable Rate:
Real estate:
One-to-four family............. $ 3,725 $ 5,543 $11,812 $10,806 $14,261
Home equity.................... 2,074 1,045 1,825 2,281 2,800
Commercial real estate......... 1,210 585 2,363 2,641 1,691
------- ------- ------- ------- -------
Total real estate loans....... 7,009 7,173 16,000 15,728 18,752
Consumer loans.................. 498 -- -- -- --
Commercial business loans....... 2,861 3,169 6,395 5,274 930
------- ------- ------- ------- -------
Total adjustable rate loans.. 10,368 10,342 22,395 21,002 19,682
------- ------- ------- ------- -------
Fixed Rate:
Real estate:
One-to-four family............. 8,950 1,310 4,113 5,492 3,128
Home equity.................... 844 901 1,744 1,141 388
Commercial real estate......... 165 -- 67 -- 60
------- ------- ------- ------- -------
Total real estate loans....... 9,959 2,211 5,924 6,633 3,576
Consumer loans.................. 7,530 4,845 11,051 4,334 3,737
Commercial business loans....... 4,242 4,262 6,800 2,000 1,021
------- ------- ------- ------- -------
Total fixed-rate loans....... 21,731 11,318 23,775 12,967 8,334
------- ------- ------- ------- -------
Total loans originated........... 32,099 21,660 46,170 33,969 28,016
------- ------- ------- ------- -------
SALES:
- -----
Real estate:
One-to-four family............. 8,405 1,298 3,988 5,504 3,069
------- ------- ------- ------- -------
Total loans sold.............. 8,405 1,298 3,988 5,504 3,069
------- ------- ------- ------- -------
REPAYMENTS:
- ----------
Real estate:
One-to-four family............. 13,094 8,056 15,702 18,633 15,365
Home equity.................... 2,554 1,330 2,723 2,647 2,832
Commercial real estate......... 1,559 510 1,506 1,826 1,676
------- ------- ------- ------- -------
Total real estate loans....... 17,207 9,896 19,931 23,106 19,873
Consumer loans.................. 3,913 2,836 6,522 4,951 4,136
Commercial business loans....... 5,091 3,915 8,849 5,456 2,290
------- ------- ------- ------- -------
Total repayments............. 26,211 16,647 35,302 33,513 26,299
------- ------- ------- ------- -------
Total reductions............. 34,616 17,945 39,290 39,017 29,368
------- ------- ------- ------- -------
Net increases/(decreases)..... $(2,517) $ 3,715 $ 6,880 $(5,048) $(1,352)
======= ======= ======= ======= =======
</TABLE>
- -----------------------------
* Includes charge offs, discounts and premiums
76
<PAGE>
LOAN APPROVAL PROCEDURES AND AUTHORITY. The Board of Trustees establishes
the lending policies and loan approval limits of the Bank. Loan officers
generally have the authority to originate mortgage loans, consumer loans and
commercial business loans up to amounts established for each lending officer.
All residential loans over $250,000 must be approved by the Bank Loan Committee
(consisting of three persons; the President and/or Senior Vice President in
charge of credit administration and either one or two of the four trustees
appointed to this committee). All loan relationships in excess of $250,000 and
up to $500,000 (exclusive of residential mortgages and home equity loans secured
by a lien on the borrower's primary residence) must be approved by the Bank Loan
Committee. All lending relationships in excess of $500,000 up to $1.0 million
(exclusive of residential mortgages and home equity loans secured by a lien on
the borrower's primary residence) must be approved by the Executive Committee of
the Board of Trustees. All lending relationships in excess of $1.0 million must
be approved by the Board of Trustees.
The Board annually approves independent appraisers used by the Bank. The
Bank requires an environmental site assessment to be performed by an independent
professional for all non-residential mortgage loans. It is the Bank policy to
require hazard insurance on all mortgage loans and title insurance on fixed-rate
one-to-four family loans.
LOAN ORIGINATION FEES AND OTHER INCOME. In addition to interest earned on
loans, the Bank receives loan origination fees. Such fees and costs vary with
the volume and type of loans and commitments made and purchased, principal
repayments and competitive conditions in the mortgage markets, which in turn
respond to the demand and availability of money.
In addition to loan origination fees, the Bank also receives other fees,
service charges and other income that consist primarily of deposit transaction
account service charges and late charges.
LOANS-TO-ONE BORROWER. Savings banks are subject to the same loans-to-one
borrower limits as those applicable to national banks, which under current
regulations restrict loans to one borrower to an amount equal to 15% of
unimpaired net worth on an unsecured basis. An additional amount equal to 10%
of unimpaired net worth if the loan is secured by readily marketable collateral
(generally, financial instruments and bullion, but not real estate). The Bank's
policy provides that loans to one borrower (or related borrowers) should not
exceed 15% of the Bank's capital.
At June 30, 1998, the largest aggregate amount loaned by the Bank to one
borrower consisted of $2.1 million. The loans comprising this lending
relationship were performing in accordance with their terms.
DELINQUENCIES AND CLASSIFIED ASSETS
COLLECTION PROCEDURES. A computer generated late notice is sent when the
loan's grace period ends. After the late notice has been mailed, accounts are
assigned to collectors for follow-up to determine reasons for delinquency and
explore payment options. Generally, loans that are 30 days delinquent will
receive a default notice from the Bank. With respect to consumer loans, the
Bank will commence efforts to repossess the collateral after the loan becomes 45
days delinquent. Loans secured by real estate that are delinquent over 60 days
are turned over to the Collection Department Manager. Generally, after 90 days
the Bank will commence legal action.
LOANS PAST DUE AND NONPERFORMING ASSETS. Loans are reviewed on a regular
basis and are placed on nonaccrual status when, in the opinion of management,
the collection of additional interest is doubtful. Loans are placed on
nonaccrual status when either principal or interest is 90 days or more past due.
Interest accrued and unpaid at the time a loan is placed on a nonaccrual status
is reversed from interest income. At June 30, 1998, the Bank had non-performing
loans of $707,000 and a ratio of nonperforming loans to total assets of 0.32%.
At June 30, 1998, the Bank's ratio of nonperforming assets to total assets was
0.46%.
Real estate acquired as a result of foreclosure or by deed in lieu of
foreclosure is classified as REO until such time as it is sold. When real
estate is acquired through foreclosure or by deed in lieu of foreclosure, it is
recorded at its fair value, less estimated costs of disposal. If the value of
the property is less than the loan, less any related specific
77
<PAGE>
loan loss provisions, the difference is charged against the allowance for loan
losses. Any subsequent write-down of REO is charged against earnings.
The following table sets forth delinquencies in the Bank's loan portfolio
as of June 30, 1998. When a loan is delinquent 90 days or more, the Bank fully
reverses all accrued interest thereon and ceases to accrue interest thereafter.
For all the dates indicated, the Bank did not have any material restructured
loans within the meaning of SFAS 114.
<TABLE>
<CAPTION>
LOANS DELINQUENT FOR:
---------------------------------------------------------
60-89 DAYS 90 DAYS OR MORE TOTAL DELINQUENT LOANS
--------------- --------------- ----------------------
NUMBER AMOUNT NUMBER AMOUNT NUMBER AMOUNT
------ ------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
One-to-four family........ 3 $ 90 8 $452 11 $542
Commercial real estate.... -- -- -- -- -- --
Consumer.................. 3 55 -- -- 3 55
Commercial business....... -- -- -- -- -- --
---- ---- ------ ------ ---- ----
Total.................... 6 $145 8 $452 14 $597
==== ==== ====== ====== ==== ====
</TABLE>
NONACCRUAL LOANS AND NONPERFORMING ASSETS. The following table sets forth
information regarding nonaccrual loans and other nonperforming assets.
<TABLE>
<CAPTION>
AT JUNE 30, AT DECEMBER 31,
---------- -------------------------------------------
1998 1997 1996 1995 1994 1993
------ ------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Non-accruing loans:
One-to-four family......................................... $ 667 $ 588 $ 735 $ 820 $ 902 $ --
Multi-family............................................... -- -- -- -- -- --
Commercial real estate..................................... -- 242 274 346 634 1,277
Construction and land loans................................ -- -- -- -- -- --
Consumer................................................... -- 2 18 49 36 106
Commercial business........................................ -- -- -- 7 551 573
------ ------ ------ ------ ------ ------
Total..................................................... 667 832 1,027 1,222 2,123 1,956
------ ------ ------ ------ ------ ------
Accruing loans delinquent more than 90 days:
One-to-four family......................................... 40 60 63 148 -- 365
Multi-family............................................... -- -- -- -- -- --
Commercial real estate..................................... -- -- -- -- -- --
Construction and land loans................................ -- -- -- -- -- --
Consumer................................................... -- -- -- -- -- 35
Commercial business........................................ -- 1 3 1 -- --
------ ------ ------ ------ ------ ------
Total..................................................... 40 61 66 149 -- 400
------ ------ ------ ------ ------ ------
Total nonperforming loans................................... $ 707 $ 893 $1,093 $1,371 $2,123 $2,365
====== ====== ====== ====== ====== ======
Foreclosed assets:
One-to-four family......................................... $ 249 $ 263 $ 712 $ 613 $ 597 $ 785
Multi-family............................................... -- -- -- -- 56 --
Commercial real estate..................................... 45 45 147 367 31 177
Construction and land loans................................ -- -- -- 10 10 27
Consumer................................................... -- -- -- -- -- --
Commercial business........................................ -- -- -- -- -- --
------ ------ ------ ------ ------ ------
Total..................................................... $ 294 $ 308 $ 859 $ 990 $ 694 $ 989
====== ====== ====== ====== ====== ======
Total nonperforming loans as a percentage of total assets... 0.32% 0.42% 0.52% 0.67% 1.09% 1.14%
====== ====== ====== ====== ====== ======
Total nonperforming assets.................................. $1,001 $1,201 $1,952 $2,361 $2,817 $3,354
====== ====== ====== ====== ====== ======
Total nonperforming assets as a percentage of total assets.. 0.46% 0.57% 0.92% 1.14% 1.40% 1.62%
====== ====== ====== ====== ====== ======
</TABLE>
During the six months ended June 30, 1998, and year ended December 31,
1997, respectively, gross interest income of $39,000 and $41,000 would have been
recorded on nonaccruing loans under their original terms, if the loans
78
<PAGE>
had been current throughout the period. No interest income was recorded on
nonaccruing loans during the six months ended June 30, 1998 and year ended
December 31, 1997.
CLASSIFICATION OF ASSETS. On the basis of management's review of its
assets, at June 30, 1998, the Bank had classified a total of $2.3 million of
loans as follows (in thousands):
Special Mention.......... $ 720
Substandard.............. 1,600
Doubtful assets.......... --
Loss assets.............. --
------
Total.................. $2,320
======
General loss allowance... $1,441
======
Specific loss allowance.. 280
======
Charge-offs --
======
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the risk
inherent in the loan portfolio and current economic conditions. The allowance
is established based upon management's evaluation of the risks inherent in the
loan portfolio, the composition of the loan portfolio, the general economy and
the general trend the savings industry to increase allowances for losses as a
percentage of total loans. Such evaluation also includes a review of all loans
on which full collectibility may not be reasonably assured, considers among
other matters, the estimated net realizable value or the fair value of the
underlying collateral, economic conditions, historical loan loss experience,
geographic concentrations and other factors that warrant recognition in
providing for an adequate loan loss allowance. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the Bank's allowance for loan losses and valuation of REO. Such agencies may
require us to recognize additions to the allowance based on their judgment about
information available to them at the time of their examination. The Bank's
provisions for loan losses are described in "Management's Discussion and
Analysis of Financial Condition and Results of Operations." At June 30, 1998,
the total allowance was $1.7 million, which amounted to 1.23% of total loans and
243.42% of nonperforming loans. Management considers whether the allowance
should be adjusted to protect against risks in the loan portfolio. Management
applies fixed percentages for each category of performing loans not designated
as problem loans to determine an additional component of the allowance to
protect against unascertainable risks inherent in any portfolio of performing
loans. Finally, management includes an unallocated component in its allowance
to address general factors and general uncertainties such as changes in economic
conditions and the inherent inaccuracy of any attempt to predict future default
rates and property values based upon past experience. Management will continue
to monitor and modify the level of the allowance for loan losses in order to
maintain it at a level which management considers adequate to provide for
potential loan losses. For the six months ended June 30, 1998 and the years
ended December 31, 1997 and 1996, the Bank had charge-offs of $117,000, $299,000
and 176,000, respectively, against this allowance.
The Bank employed a new method in 1998 for evaluating the adequacy of the
allowance for loan losses and determining the appropriate level of provisions
for loan losses. The new method applies fixed percentages to each category of
performing loans and classified loans. The allowance adjustment is based upon
the net change in each portfolio category since the prior quarter to reflect the
ongoing shifts in the portfolio toward higher risk loan categories, such as
consumer loans, commercial business loans and commercial real estate loans. The
former method utilized by the Bank followed the FDIC format which considered
historic losses, peer allowance levels and current portfolio mix. Management
believes the new method of determining the adequacy of the allowance is more
prudent in light of the Bank's intention to diversify its lending operations
through the increased origination of consumer loans, commercial business loans
and commercial real estate loans.
79
<PAGE>
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES. The following table sets forth
the analysis of the allowance for loan losses for the periods indicated.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, DECEMBER 31,
---------------- -----------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
------- ------- ------- --------- ---------- ------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at the beginning of period......... $1,793 $1,546 $1,546 $1,781 $2,117 $2,045 $ 1,686
Charge-offs:
One-to-four family........................ 59 41 72 112 360 58 76
Commercial real estate.................... -- -- 118 -- 150 166 --
Construction and land loans............... -- -- -- -- -- -- --
Consumer.................................. 58 41 82 64 38 119 283
Commercial business....................... -- -- 27 -- 11 51 32
------ ------ ------ ------ ------ ------ ----------
Total.................................... 117 82 299 176 559 394 391
------ ------ ------ ------ ------ ------ ----------
Recoveries:
One-to-four family........................ 3 3 14 7 99 -- 1
Commercial real estate.................... 13 -- 2 -- -- -- 2
Construction and land loans............... -- -- -- -- -- -- --
Consumer.................................. 29 22 53 28 38 50 60
Commercial business....................... -- -- -- 9 6 3 15
------ ------ ------ ------ ------ ------ ----------
Total.................................... 45 25 69 44 143 53 78
------ ------ ------ ------ ------ ------ ----------
Net charge-offs............................ (72) (57) (230) (132) (416) (341) (313)
Additions charged to operations............ -- (23) 477 (103) 80 413 672
------ ------ ------ ------ ------ ------ ----------
Balance at end of period................... $1,721 $1,466 $1,793 $1,546 $1,781 $2,117 $ 2,045
====== ====== ====== ====== ====== ====== ==========
Allowance for loan losses as a percentage
of total loans, receivable, net........... 1.23% 1.05% 1.26% 1.14% 1.27% 1.50%1.47%
====== ====== ====== ====== ====== ==========
Ratio of net charge-offs to average
loans..................................... 0.05% 0.04% 0.16% 0.10% 0.29% 0.24% 0.22%
====== ====== ====== ====== ====== ====== ==========
Ratio of net charge-offs to average
nonperforming loans....................... 9.00% 5.49% 23.16% 10.73% 23.81% 15.20% 12.49%
====== ====== ====== ====== ====== ====== ==========
</TABLE>
80
<PAGE>
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES. The following table sets forth
the allocation of the allowance for loan losses by loan category for the periods
indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------------------------
AT JUNE 30, 1998 1997 1996
---------------------------------- -------------------------------- -------------------------------
PERCENT PERCENT PERCENT
OF LOANS OF LOANS OF LOANS
LOAN IN EACH LOAN IN EACH LOAN IN EACH
AMOUNT OF AMOUNTS CATEGORY TO AMOUNT OF AMOUNTS CATEGORY AMOUNT OF AMOUNTS CATEGORY
LOAN LOSS BY TOTAL LOAN LOSS BY TOTAL LOAN LOSS BY TO TOTAL
ALLOWANCE CATEGORY LOANS ALLOWANCES CATEGORY LOANS ALLOWANCE CATEGORY LOANS
--------- -------- ----------- ---------- -------- --------- --------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential mortgages...... $ 360 $ 97,160 68.42% $ 455 $105,621 73.09% $ 467 $108,540 78.86%
Commercial real estate..... 226 16,398 11.55 260 16,582 11.47 343 15,658 11.38
Consumer................... 325 16,838 11.86 138 12,723 8.80 82 8,194 5.95
Commercial business........ 230 11,600 8.17 171 9,587 6.64 137 5,241 3.81
Unallocated................ 580 -- -- 769 -- -- 517 -- --
------ -------- ------ ------ -------- ------ ------ -------- ------
Total..................... $1,721 $141,996 100.00% $1,793 $144,513 100.00% $1,546 $137,633 100.00%
====== ======== ====== ====== ======== ====== ====== ======== ======
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------------------------------------------------------------
1995 1994 1993
---------------------------------- -------------------------------- -------------------------------
PERCENT PERCENT
OF LOANS OF LOANS PERCENT
LOAN IN EACH LOAN IN EACH LOAN OF LOANS
AMOUNT OF AMOUNTS CATEGORY TO AMOUNT OF AMOUNTS CATEGORY AMOUNT OF AMOUNTS IN EACH
LOAN LOSS BY TOTAL LOAN LOSS BY TOTAL LOAN LOSS BY CATEGORY
ALLOWANCE CATEGORY LOANS ALLOWANCES CATEGORY LOANS ALLOWANCE CATEGORY TOTAL
--------- -------- ----------- ---------- -------- --------- --------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential mortgages...... $ 426 $115,604 81.02% $ 375 $116,292 80.74% $ 399 $117,856 82.73%
Commercial real estate..... 410 14,843 10.40 725 14,768 10.25 564 9,075 6.37
Consumer................... 73 8,810 6.17 74 9,209 6.39 121 11,116 7.80
Commercial business........ 140 3,424 2.41 223 3,764 2.62 283 4,412 3.10
Unallocated................ 732 -- -- 720 -- -- 678 -- --
------ -------- ------ ------ -------- ------ ------ -------- ------
Total..................... $1,781 $142,681 100.00% $2,117 $144,033 100.00% $2,045 $142,459 100.00%
====== ======== ====== ====== ======== ====== ====== ======== ======
</TABLE>
81
<PAGE>
SECURITIES INVESTMENT ACTIVITIES
The securities investment policy is established by the Board of Trustees.
This policy dictates that investment decisions will be made based on the safety
of the investment, liquidity requirements, potential returns, cash flow targets
and desired risk parameters. In pursuing these objectives, management considers
the ability of an investment to provide earnings consistent with factors of
quality, maturity, marketability and risk diversification.
The Bank's current policies generally limit securities investments to U.S.
Government and agency securities, tax-exempt bonds, public utilities debt
obligations, corporate debt obligations and corporate equity securities. In
addition, the Bank's policy permits investments in mortgage related securities,
including securities issued and guaranteed by Fannie Mae, Freddie Mac, GNMA. In
the past, the Bank invested in collateralized mortgage obligations ("CMOs"), but
it has not invested in CMOs in recent years. The Bank's current securities
investment strategy utilizes a risk management approach of diversified investing
between three categories: short-, intermediate- and long-term. The emphasis of
this approach is to increase overall investment securities yields while managing
interest rate risk. The Bank will only invest in securities rated as investment
grade by a nationally recognized investment rating agency. The Bank does not
engage in any hedging transactions, such as interest rate swaps or caps.
INVESTMENT SECURITIES. At June 30, 1998, the Bank had $39.6 million, or
18.2% of total assets, invested in investment securities, which consisted
primarily of U.S. Government obligations, tax-exempt securities, public utility
and corporate obligations, a mutual fund and equity investments in FHLB stock.
SFAS No. 115 requires the Bank to designate its securities as held to maturity,
available for sale or trading, depending on the Bank's ability and intent
regarding its investments. The Bank does not have a trading portfolio.
Investment securities are classified as available for sale. At June 30, 1998,
the Bank's investment securities portfolio had a weighted average life of 2.28
years.
82
<PAGE>
BOOK VALUE OF INVESTMENT SECURITIES. The following table sets forth
certain information regarding the investment securities and other interest
earning assets as of the dates indicated.
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
----------------- ---------------------------------------------------------
1998 1997 1996 1995
----------------- ----------------- ----------------- -----------------
BOOK PERCENT BOOK PERCENT BOOK PERCENT BOOK PERCENT
OF OF OF OF
VALUE TOTAL VALUE TOTAL VALUE TOTAL VALUE TOTAL
------- -------- ------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Investment securities held
for investment:
U.S. government and
agency securities....... $ -- --% $ -- --% $ -- --% $ -- --%
State and municipals..... -- -- -- -- -- -- -- --
Other.................... -- -- -- -- -- -- -- --
------- ------ ------- ------ ------- ------ ------- -------
Subtotal................ -- -- -- -- -- -- -- --
Investment securities
available for sale:
U.S. government
securities.............. 1,000 2.39 2,002 4.67 5,013 9.52 5,584 11.82
Federal agency securities 25,295 65.39 24,504 57.19 21,503 40.84 3,000 6.35
Corporate debt securities 7,647 19.77 11,833 27.62 21,882 41.56 34,350 72.74
Tax exempt bonds......... 1,620 4.89 2,162 5.05 2,207 4.19 2,258 4.78
Public utilities......... 400 1.04 750 1.75 848 1.61 1,246 2.64
Equity securities........ 1,493 3.85 1,288 3.02 1,194 2.28 788 1.67
------- ------ ------- ------ ------- ------ ------- -------
Subtotal................ 37,455 96.83 42,539 99.30 52,647 100.00 47,226 100.00
FHLB stock............... 1,228 3.17 306 0.70 -- -- -- --
------- ------ ------- ------ ------- ------ ------- -------
Total.................. $38,683 100.00% $42,845 100.00% $52,647 100.00% $47,226 100.00%
======= ====== ======= ====== ======= ====== ======= =======
Average remaining life of
investment
securities................ 2.28 1.89 1.51 Years 1.80 Years 2.00 Years
Years Years
Other interest earning
assets:
Interest-bearing
deposits with banks..... 1,373 13.63 115 6.34 1,778 20.73 1,972 28.28
Federal funds sold....... 8,700 86.37 1,700 93.66 6,800 79.27 5,000 71.72
------- ------ ------- ------ ------- ------ ------- -------
Total................. $10,073 100.00% $ 1,815 100.00% $ 8,578 100.00% $ 6,972 $100.00%
======= ====== ======= ====== ======= ====== ======= =======
</TABLE>
<TABLE>
<CAPTION>
------------------------------------
1994 1993
----------------- -----------------
BOOK PERCENT BOOK PERCENT
OF OF
VALUE TOTAL VALUE TOTAL
------- -------- ------- --------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Investment securities held
for investment:
U.S. government and
agency securities....... $ -- --% $ -- --%
State and municipals..... 2,997 6.14 -- --
Other.................... 1,466 3.01 -- --
------- ------ ------- ------
Subtotal................ $ 4,463 9.15% -- --
Investment securities
available for sale:
U.S. government
securities.............. 5,706 11.70 5,270 10.37
Federal agency securities 491 1.01 515 1.01
Corporate debt securities 36,408 74.67 37,414 73.60
Tax exempt bonds......... -- -- 3,597 7.07
Public utilities......... -- -- 2.744 5.40
Equity securities........ 1,690 3.47 1,297 2.55
------- ------ ------- ------
Subtotal................ 44,295 90.85 50,837 100.00
FHLB stock............... -- -- -- --
------- ------ ------- ------
Total.................. $48,758 100.00% $50,837 100.00%
======= ====== ======= ======
Average remaining life of
investment
securities................ 2.51 Years
Other interest earning
assets:
Interest-bearing
deposits with banks..... -- -- -- --
Federal funds sold....... 1,800 100.00 4,800 100.00
------- ------ ------- ------
Total................. $ 1,800 100.00% $ 4,800 100.00%
======= ====== ======= ======
</TABLE>
83
<PAGE>
INVESTMENT PORTFOLIO MATURITIES. The following table sets forth the
scheduled maturities, book value, market value and weighted average yields for
the Bank's investment portfolio at June 30, 1998.
<TABLE>
<CAPTION>
JUNE 30, 1998
----------------------------------------------------------------------------------
LESS THAN 1 TO 5 5 TO 10 OVER
1 YEAR YEARS YEARS YEARS 10 YEARS TOTAL SECURITIES
----------- ----------- ----------- ----------- ----------- -----------------
BOOK VALUE BOOK VALUE BOOK VALUE BOOK VALUE BOOK VALUE MARKET VALUE
----------- ----------- ----------- ----------- ----------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
U.S. government securities... $ -- $ 1,000 $ -- $ -- $ 1,000 $ 1,008
Federal agency obligations... 1,328 9,536 11,171 3,260 25,295 25,307
Corporate bonds.............. 5,000 2,647 -- -- 7,647 7,688
Public utilities............. -- -- 400 -- 400 404
Tax exempt bonds............. 42 488 800 290 1,620 1,762
Other........................ -- -- -- 2,721 2,721 3,401
------ ------- ------- ------ ------- -------
Total securities............ $6,370 $13,671 $12,371 $6,271 $38,683 $39,570
====== ======= ======= ====== ======= =======
Weighted average yield/(1)/.. 7.73% 6.21% 6.57% 6.63% 6.60% 6.45%
- ----------------
</TABLE>
/(1)/ Weighted average yield has not been adjusted to reflect tax equivalent
adjustments.
MORTGAGE-BACKED SECURITIES. The Bank purchases mortgage-backed securities
in order to: (i) generate positive interest rate spreads with minimal
administrative expense; (ii) lower the Bank's credit risk as a result of the
guarantees provided by Freddie Mac, Fannie Mae, and GNMA; and (iii) increase
liquidity. The Bank has not invested in CMOs in recent years. At June 30,
1998, mortgage-backed securities totaled $16.6 million or 7.6% of total assets,
all of which were classified as available for sale. At June 30, 1998, all of the
mortgage-backed securities were fixed-rate. The mortgage-backed securities
portfolio had coupon rates ranging from 6.00% to 9.50%, a weighted average yield
of 6.70% and a weighted average life (including payment assumption) of 6.8 years
at June 30, 1998. The estimated fair value of the Bank's mortgage-backed
securities at June 30, 1998 was $16.6 million which was $80,000 greater than the
amortized cost of $16.5 million.
Mortgage-backed securities are created by the pooling of mortgages and the
issuance of a security with an interest rate that is less than the interest rate
on the underlying mortgages. Mortgage-backed securities typically represent a
participation interest in a pool of single-family or multi-family mortgages,
although the Bank focuses its investments on mortgage related securities backed
by single-family mortgages. The issuers of such securities (generally U.S.
Government agencies and government sponsored enterprises, including Fannie Mae,
Freddie Mac and GNMA) pool and resell the participation interests in the form of
securities to investors, such as the Bank, and guarantee the payment of
principal and interest to these investors. Mortgage-backed securities generally
yield less than the loans that underlie such securities because of the cost of
payment guarantees and credit enhancements. In addition, mortgage related
securities are usually more liquid than individual mortgage loans and may be
used to collateralize certain liabilities and obligations of the Bank.
Investments in mortgage-backed securities involve a risk that actual prepayments
will be greater than estimated over the life of the security, which may require
adjustments to the amortization of any premium or accretion of any discount
relating to such instruments thereby reducing the net yield on such securities.
There is also reinvestment risk associated with the cash flows from such
securities or in the event such securities are redeemed by the issuer. In
addition, the market value of such securities may be adversely affected by
changes in interest rates. Management reviews prepayment estimates periodically
to ensure that prepayment assumptions are reasonable considering the underlying
collateral for the securities at issue and current interest rates and to
determine the yield and estimated maturity of the Bank's mortgage-backed
securities portfolio. Of the Bank's $16.6 million mortgage-backed securities
portfolio at June 30, 1998, $5.5 million with a weighted average yield of 6.7 %
had contractual maturities within five years, $3.9 million with a weighted
average yield of 6.8% had contractual maturities of five to ten years and $7.2
million with a weighted average yield of 6.7% had contractual maturities of over
ten years. However, the actual maturity of a mortgage-backed security may be
less than its stated maturity due to prepayments of the underlying mortgages.
Prepayments that are faster than anticipated may shorten the life of the
security and may result in a loss of any premiums paid and thereby reduce the
net yield on such securities. Although prepayments of underlying mortgages
depend on many factors, the difference between the interest rates on the
underlying mortgages and the prevailing mortgage interest rates generally is the
most significant determinant of the rate of prepayments. During periods of
84
<PAGE>
declining mortgage interest rates, refinancing generally increases and
accelerates the prepayment of the underlying mortgages and the related security.
Under such circumstances, the Bank may be subject to reinvestment risk because,
to the extent that the Bank's mortgage related securities prepay faster than
anticipated, the Bank may not be able to reinvest the proceeds of such
repayments and prepayments at a comparable rate of return. Conversely, in a
rising interest rate environment prepayments may decline, thereby extending the
estimated life of the security and depriving the Bank of the ability to reinvest
cash flows at the increased rates of interest.
85
<PAGE>
MORTGAGE-BACKED SECURITIES. Set forth below is information relating to the
Bank's mortgage-backed securities for the periods indicated.
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
---------------- ------------------------------------------------------
1998 1997 1996 1995
---------------- ----------------- ---------------- ---------------
PERCENT PERCENT PERCENT PERCENT
BOOK OF BOOK OF BOOK OF BOOK OF
VALUE TOTAL VALUE TOTAL VALUE TOTAL VALUE TOTAL
------- -------- ------- -------- ------ -------- ----- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities
available
for sale:
GNMA...................... $ 15 0.09% $ 16 0.14% $ 19 0.40% $ 25 9.80%
Fannie Mae................ 10,486 63.41 7,752 66.40 3,540 75.11 -- --
Freddie Mac............... 5,948 35.97 3,808 32.61 1,035 21.97 75 30.20
CMOs...................... 87 0.53 99 0.85 119 2.52 153 60.00
------- ------ ------- ------ ------ ------ ---- ------
Subtotal................. 16,536 100.00 11,675 100.00 4,713 100.00 253 100.00
Unamortized
premium/discount.......... -- -- -- -- -- -- -- --
------- ------ ------- ------ ------ ------ ---- ------
Total.................... $16,536 100.00% $11,675 100.00% $4,713 100.00% $253 100.00%
======= ====== ======= ====== ====== ====== ==== ======
</TABLE>
<TABLE>
<CAPTION>
------------------------------
1994 1993
-------------- --------------
PERCENT PERCENT
BOOK OF BOOK OF
VALUE TOTAL VALUE TOTAL
------ -------- ----- --------
<S> <C> <C> <C> <C>
Mortgage-backed securities
available
for sale:
GNMA...................... $ 29 10.21% $ 35 7.42%
Fannie Mae................ -- -- -- --
Freddie Mac............... 88 30.99 140 29.66
CMOs...................... 167 58.80 297 62.92
---- ------ ---- ------
Subtotal................. 284 100.00 472 100.00
Unamortized
premium/discount.......... -- -- -- --
---- ------ ---- ------
Total.................... $284 100.00% $472 100.00%
==== ====== ==== ======
</TABLE>
86
<PAGE>
SOURCES OF FUNDS
GENERAL. The primary sources of the Bank's funds for use in lending,
investing and for other general purposes are deposits, repayments and
prepayments of loans and securities, proceeds from sales of loans and
securities, and proceeds from maturing securities and cash flows from
operations.
DEPOSITS. The Bank offers a variety of deposit accounts with a range of
interest rates and terms. The Bank's deposit accounts consist of savings, NOW
accounts, noninterest-bearing checking accounts and money market accounts and
certificates of deposit. The Bank also offers IRAs and other qualified plan
accounts.
At June 30, 1998, deposits totaled $189.2 million. At June 30, 1998, the
Bank had a total of $110.5 million in certificates of deposit, of which $67.9
million had maturities of one year or less. Although the Bank has a significant
portion of its deposits in shorter term certificates of deposit, management
monitors activity on these accounts. Based on historical experience and the
Bank's current pricing strategy, management believes it will retain a large
portion of such accounts upon maturity. At June 30, 1998 certificates of
deposit with balances of $100,000 or more totaled $21.1 million.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market rates, prevailing interest rates and
competition. Deposits are obtained predominantly from the areas in which the
Bank's branch offices are located. The Bank relies primarily on competitive
pricing of its deposit products and customer service and long-standing
relationships with customers to attract and retain these deposits; however,
market interest rates and rates offered by competing financial institutions
significantly affect the Bank's ability to attract and retain deposits. In
addition, the Bank has periodically paid a special interest payment on all
deposit accounts, ranging from 10 to 25 basis points. The Bank uses
traditional means of advertising its deposit products, including radio and print
media and it generally does not solicit deposits from outside its market area.
While certificates of deposit in excess of $100,000 are accepted by the Bank,
and may be subject to preferential rates, the Bank does not actively solicit
such deposits as they are more difficult to retain than core deposits.
Historically, the Bank has not used brokers to obtain deposits.
The following table sets forth the deposit activities of the Bank for the
periods indicated.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
---------------------- ----------------------------------
1998 1997 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Opening balance.......... $ 183,138 $ 185,508 $ 185,508 $ 181,385 $ 179,725
Deposits................. 363,850 334,797 678,376 606,912 548,136
Withdrawals.............. (361,763) (340,309) (688,643) (610,684) (554,104)
Interest credited........ 3,992 3,926 7,897 7,895 7,628
--------- --------- --------- --------- ---------
Ending balance........... $ 189,217 $ 183,922 $ 183,138 $ 185,508 $ 181,385
--------- --------- --------- --------- ---------
Net increase............. $ 6,079 $ (1,586) $ (2,370) $ 4,123 $ 1,660
========= ========= ========= ========= =========
Percent increase 3.32% (0.86%) (1.28%) 2.27% 0.92%
========= ========= ========= ========= =========
</TABLE>
87
<PAGE>
The following table indicates the amount of the Bank's certificates of
deposit by time remaining until maturity as of June 30, 1998.
<TABLE>
<CAPTION>
MATURITY
------------------------------------------------------
3 MONTHS OVER 3 TO 6 OVER 6 TO 12 OVER 12
OR LESS MONTHS MONTHS MONTHS TOTAL
-------- ----------- ------------ ------- --------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Certificates of deposit less than $100,000... $22,361 $13,666 $19,932 $33,375 $ 89,334
Certificates of deposit of $100,000 or more.. 2,945 2,744 6,206 9,251 21,146
------- ------- ------- ------- --------
Total of certificates of deposit............. $25,306 $16,410 $26,138 $42,626 $110,480
======= ======= ======= ======= ========
</TABLE>
The following tables set forth information, by various rate categories,
regarding the average balance of deposits by types of deposit for the periods
indicated.
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
--------- ---------------------------------------------------------------
1998 1997 1996 1995
--------- --------- -------- --------
AMOUNT PERCENT AMOUNT PERCENT AMOUNTS PERCENT AMOUNT PERCENT
-------- -------- -------- --------- ------------ -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Transactions and savings
deposits:
Noninterest-bearing............ $ 15,800 8.35% $ 13,947 7.62% $ 12,113 6.53% $ 12,206 6.73%
Savings accounts............... 44,008 23.26 42,101 22.99 42,454 22.88 43,388 23.91
NOW accounts................... 6,309 3.33 5,677 3.10 5,984 3.22 5,497 3.03
Money market accounts.......... 12,621 6.67 10,600 5.79 14,096 7.59 10,549 5.83
-------- ----- -------- ----- -------- ----- -------- -----
Total......................... 78,738 41.61 72,325 39.49 74,647 40.24 71,640 39.50
-------- ----- -------- ----- -------- ----- -------- -----
Certificates of deposit:
0.00-3.99%..................... 3,408 1.80 2,464 1.35 2,985 1.62 3,445 1.89
4.00-5.99%..................... 85,943 45.42 85,121 46.48 79,892 43.06 67,156 37.02
6.00-7.99%..................... 21,129 11.17 23,228 12.68 27,984 15.08 39,125 21.57
8.00-9.99%..................... -- -- -- -- -- -- 19 0.02
10.00% and over................ -- -- -- -- -- -- -- --
-------- ----- -------- ----- -------- ----- -------- -----
Total certificates of deposit.. 110,480 58.39 110,813 60.51 110,861 59.76 109,745 60.50
-------- ----- -------- ----- -------- ----- -------- -----
Total deposits $189,218 100.00% $183,138 100.00% $185,508 100.00% $181,385 100.00%
======== ======= ======== ======= ======== ======= ======== =======
</TABLE>
The following table sets forth the amount and remaining maturities of the
Bank's certificates of deposit accounts at June 30, 1998.
<TABLE>
<CAPTION>
PERCENT
2.00-3.99% 4.00-5.99% 6.00-7.99% TOTAL OF TOTAL
----------- ---------- ---------- ------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Certificate accounts maturing in quarter ending:
June 30, 1998........................................................ $ 2,257 $ 103 $ -- $ 2,360 2.14%
September 30, 1998................................................... 778 21,626 542 22,946 20.77
December 31, 1998.................................................... 73 15,286 1,051 16,410 14.85
March 31, 1999....................................................... 250 13,215 1,161 14,626 13.24
June 30, 1999........................................................ 1 9,538 1,972 11,511 10.42
September 30, 1999................................................... -- 5,541 473 6,014 5.44
December 31, 1999.................................................... 42 2,608 2,517 5,167 4.68
March 31, 2000....................................................... -- 2,463 4,457 6,920 6.26
June 30, 2000........................................................ -- 2,885 3,495 6,380 5.77
September 30, 2000................................................... 7 3,471 1,288 4,766 4.31
December 31, 2000.................................................... -- 1,791 15 1,806 1.63
March 31, 2001....................................................... -- 2,563 824 3,387 3.07
June 30, 2001........................................................ -- 2,270 100 2,370 2.15
Thereafter........................................................... -- 2,583 3,234 5,817 5.27
---------- ---------- ------- -------- ------
Total................................................................ 3,408 85,943 21,129 110,480 100.00%
========== ========== ======= ======== ======
Percent of total..................................................... 3.08% 77.79% 19.13% 100.00%
========== ========== ======= ========
</TABLE>
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BORROWED FUNDS. At June 30, 1998, the Bank had no borrowed funds.
TRUST ACTIVITIES. The Bank provides trust and investment services, acts as
executor or administrator of estates and as trustee for various types of trusts.
Trust services are offered through the Bank's Trust Department. Services include
fiduciary services for trusts and estates, money management and custodial
services. At June 30, 1998, the Bank maintained 92 trust/fiduciary accounts,
with total assets of $5.5 million under management. The Bank recently hired an
experienced trust officer. Management anticipates that in the future the Trust
Department will become a more significant component of the Bank's business.
BROKERAGE SERVICES. The Bank recently entered into an agreement with a
third party provider whereby the Bank will be able to offer investment and
brokerage services to its customers. It is expected that the Bank will begin
offering such services during the first quarter of 1999.
PROPERTIES
The Bank currently conducts its business through five full-service banking
offices, all of which are owned. The following table sets forth the Bank's
offices as of June 30, 1998.
<TABLE>
<CAPTION>
Location Original Date of Net Book Value
Year Lease of Property
Acquired Expiration at June 30, 1998
- --------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
MAIN OFFICE:
182 Main Street 1889 N/A $2,880
Oneida, New York 13421
BRANCH OFFICES:
Camden Branch 1997 N/A 1,028
41 Harden Boulevard
Camden, New York 13316
Cazenovia Branch 1971 N/A 243
42 Albany Street
Cazenovia, New York 13035
Hamilton Branch 1976 N/A 86
35 Broad Street
Hamilton, New York 13346
Convenience Center 1988 N/A 288
585 Main Street
Oneida, New York 13421
OPERATIONS CENTER
126 Lenox Avenue 1989 N/A 358
Oneida, New York 13421
</TABLE>
LEGAL PROCEEDINGS
The Bank is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business which, in
the aggregate, involve amounts which are believed by management to be immaterial
to the financial condition or operations of the Bank.
PERSONNEL
As of June 30, 1998, the Bank had 80 full-time employees and 19 part-time
employees. The employees are not represented by a collective bargaining unit
and the Bank considers its relationship with its employees to be good.
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See "Management of the Bank--Benefit Plans" for a description of certain
compensation and benefit programs offered to the Bank's employees.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
GENERAL. The Mutual Holding Company, the Company and the Bank will be
subject to federal income taxation in the same general manner as other
corporations, with some exceptions discussed below. The following discussion of
federal taxation is intended only to summarize certain pertinent federal income
tax matters and is not a comprehensive description of the tax rules applicable
to the Bank.
METHOD OF ACCOUNTING. For federal income tax purposes, the Bank currently
reports its income and expenses on the accrual method of accounting and uses a
tax year ending December 31 for filing its consolidated federal income tax
returns. The Small Business Protection Act of 1996 (the "1996 Act") eliminated
the use of the reserve method of accounting for bad debt reserves by savings
institutions, effective for taxable years beginning after 1995.
BAD DEBT RESERVES. Prior to the 1996 Act, the Bank was permitted to
establish a reserve for bad debts and to make annual additions to the reserve.
These additions could, within specified formula limits, be deducted in arriving
at the Bank's taxable income. As a result of the 1996 Act, the Bank must use
the specific charge off method in computing its bad debt deduction beginning
with its 1996 Federal tax return. In addition, the federal legislation requires
the recapture (over a six year period) of the excess of tax bad debt reserves at
December 31, 1995 over those established as of December 31, 1987. The Bank did
not have any such reserves subject to recapture.
MINIMUM TAX. The Code imposes an alternative minimum tax ("AMT") at a rate
of 20% on a base of regular taxable income plus certain tax preferences
("alternative minimum taxable income" or "AMTI"). The AMT is payable to the
extent such AMTI is in excess of an exemption amount. Net operating losses can
offset no more than 90% of AMTI. Certain payments of alternative minimum tax
may be used as credits against regular tax liabilities in future years. The Bank
has not been subject to the alternative minimum tax and has no such amounts
available as credits for carryover.
NET OPERATING LOSS CARRYOVERS. A financial institution may carry back net
operating losses to the preceding two taxable years and forward to the
succeeding 20 taxable years. This provision applies to losses incurred in
taxable years beginning after August 5, 1997. At June 30, 1998, the Bank had no
net operating loss carryforwards for federal income tax purposes.
CORPORATE DIVIDENDS-RECEIVED DEDUCTION. The Company may exclude from its
income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. Following completion of the Reorganization
and Offering, it is expected that the Mutual Holding Company will own less than
80% of the outstanding Common Stock of the Company. As such, the Mutual Holding
Company will not be permitted to file a consolidated federal income tax return
with the Company and the Bank. The corporate dividends-received deduction is
80% in the case of dividends received from corporations with which a corporate
recipient does not file a consolidated return, and corporations which own less
than 20% of the stock of a corporation distributing a dividend may deduct only
70% of dividends received or accrued on their behalf.
STATE TAXATION
NEW YORK STATE TAXATION. The Company and the Bank will report income on a
combined calendar year basis to New York State. New York State Franchise Tax on
corporations is imposed in an amount equal to the greater of (a) 9% of "entire
net income" allocable to New York State (b) 3% of "alternative entire net
income" allocable to New York State (c) 0.01% of the average value of assets
allocable to New York State or (d) nominal minimum tax. Entire net
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income is based on federal taxable income, subject to certain modifications.
Alternative entire net income is equal to entire net income without certain
modifications.
DELAWARE STATE TAXATION. As a Delaware holding company not earning income
in Delaware, the Company is exempt from Delaware corporate income tax but is
required to file an annual report with and pay an annual franchise tax to the
State of Delaware.
The IRS and New York State Department of Taxation have recently completed
their audit of the Bank's 1993, 1994 and 1995 federal and state income tax
returns.
REGULATION
GENERAL
The Bank is a New York-chartered mutual savings bank and its deposit
accounts are insured up to applicable limits by the FDIC through the BIF. The
Bank is subject to extensive regulation by the Department, as its chartering
agency, and by the FDIC, as its deposit insurer. The Bank is required to file
reports with, and is periodically examined by, the FDIC and the Superintendent
concerning its activities and financial condition and must obtain regulatory
approvals prior to entering into certain transactions, including, but not
limited to, mergers with or acquisitions of other banking institutions. The
Bank is a member of the FHLB of New York and is subject to certain regulations
by the Federal Home Loan Bank System. Both the Company and the Mutual Holding
Company, as bank holding companies, will be subject to regulation by the Federal
Reserve Board and will be required to file reports with the Federal Reserve
Board. Any change in such regulations, whether by the Department, the FDIC, or
the Federal Reserve Board could have a material adverse impact on the Bank, the
Company, or the Mutual Holding Company.
Regulatory requirements applicable to the Bank, the Company and the Mutual
Holding Company are referred to below or elsewhere herein.
NEW YORK BANK REGULATION
The exercise by an FDIC-insured savings bank of the lending and investment
powers under the New York State Banking Law is limited by FDIC regulations and
other federal law and regulations. In particular, the applicable provisions of
New York State Banking Law and regulations governing the investment authority
and activities of an FDIC insured state-chartered savings bank have been
substantially limited by the Federal Deposit Insurance Corporation Improvement
Act of 1991 ("FDICIA") and the FDIC regulations issued pursuant thereto.
The Bank derives its lending, investment and other authority primarily from
the applicable provisions of New York State Banking Law and the regulations of
the Department, as limited by FDIC regulations. Under these laws and
regulations, savings banks, including the Bank, may invest in real estate
mortgages, consumer and commercial loans, certain types of debt securities,
including certain corporate debt securities and obligations of federal, state
and local governments and agencies, certain types of corporate equity securities
and certain other assets. Under the statutory authority for investing in equity
securities, a savings bank may invest up to 7.5% of its assets in corporate
stock, with an overall limit of 5% of its assets invested in Common Stock.
Investment in the stock of a single corporation is limited to the lesser of 2%
of the outstanding stock of such corporation or 1% of the savings bank's assets,
except as set forth below. Such equity securities must meet certain earnings
ratios and other tests of financial performance. A savings bank's lending
powers are not subject to percentage of assets limitations, although there are
limits applicable to single borrowers. A savings bank may also, pursuant to the
"leeway" power, make investments not otherwise permitted under the New York
State Banking Law. This power permits investments in otherwise impermissible
investments of up to 1% of assets in any single investment, subject to certain
restrictions and to an aggregate limit for all such investments of up to 5% of
assets. Additionally, in lieu of investing in such securities in accordance
with and reliance upon the specific investment authority set forth in the New
York State Banking Law, savings banks are authorized to elect to invest under a
"prudent person" standard in a wider range of investment securities as compared
to the types of
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investments permissible under such specific investment authority. However, in
the event a savings bank elects to utilize the "prudent person" standard, it
will be unable to avail itself of the other provisions of the New York State
Banking Law and regulations which set forth specific investment authority. The
Bank has not elected to conduct its investment activities under the "prudent
person" standard. A savings bank may also exercise trust powers upon approval of
the Department.
New York State chartered savings banks may also invest in subsidiaries
under their service corporation investment authority. A savings bank may use
this power to invest in corporations that engage in various activities
authorized for savings banks, plus any additional activities which may be
authorized by the Banking Board. Investment by a savings bank in the stock,
capital notes and debentures of its service corporations is limited to 3% of the
bank's assets, and such investments, together with the bank's loans to its
service corporations, may not exceed 10% of the savings bank's assets.
Furthermore, New York banking regulations impose requirements on loans which a
bank may make to its executive officers and directors and to certain
corporations or partnerships in which such persons have equity interests. These
requirements include, but are not limited to, requirements that (i) certain
loans must be approved in advance by a majority of the entire board of trustees
and the interested party must abstain from participating directly or indirectly
in the voting on such loan, (ii) the loan must be on terms that are not more
favorable than those offered to unaffiliated third parties, and (iii) the loan
must not involve more than a normal risk of repayment or present other
unfavorable features.
Under the New York State Banking Law, the Superintendent may issue an order
to a New York State chartered banking institution to appear and explain an
apparent violation of law, to discontinue unauthorized or unsafe practices and
to keep prescribed books and accounts. Upon a finding by the Department that
any director, trustee or officer of any banking organization has violated any
law, or has continued unauthorized or unsafe practices in conducting the
business of the banking organization after having been notified by the
Superintendent to discontinue such practices, such director, trustee or officer
may be removed from office after notice and an opportunity to be heard. The
Bank does not know of any past or current practice, condition or violation that
might lead to any proceeding by the Superintendent or the Department against the
Bank or any of its trustees or officers.
INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC
The Bank is a member of the BIF, which is administered by the FDIC.
Deposits are insured up to applicable limits by the FDIC and such insurance is
backed by the full faith and credit of the U.S. Government. As insurer, the
FDIC imposes deposit insurance premiums and is authorized to conduct
examinations of and to require reporting by FDIC-insured institutions. It also
may prohibit any FDIC-insured institution from engaging in any activity the FDIC
determines by regulation or order to pose a serious risk to the FDIC. The FDIC
also has the authority to initiate enforcement actions against savings banks,
after giving the Superintendent an opportunity to take such action, and may
terminate the deposit insurance if it determines that the institution has
engaged or is engaging in unsafe or unsound practices or is in an unsafe or
unsound condition.
Pursuant to the FDICIA, the FDIC established a system for setting deposit
insurance premiums based upon the risks a particular bank or savings association
posed to its deposit insurance funds. Under the risk-based deposit insurance
assessment system, the FDIC assigns an institution to one or three capital
categories based on the institution's financial information, as of the reporting
period ending six months before the assessment period, consisting of: (i) well
capitalized; (ii) adequately capitalized; or (iii) undercapitalized and one of
three supervisory subcategories within each capital group. With respect to the
capital ratios, institutions are classified as well capitalized or adequately
capitalized using ratios that are substantially similar to the prompt corrective
action capital ratios discussed above. Any institution that does not meet these
two definitions is deemed to be undercapitalized for this purpose. The
supervisory subgroup to which an institution is assigned is based on a
supervisory evaluation provided to the FDIC by the institution's primary federal
regulator and information that the FDIC determines to be relevant to the
institution's financial condition and the risk posed to the deposit insurance
funds (which may include, if applicable, information provided by the
institution's state supervisor). An institution's assessment rate depends on
the capital category and supervisory category to which it is assigned. Under
the final risk-based assessment system, there are nine assessment risk
classifications (i.e.,
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combinations of capital groups and supervisory subgroups) to which different
assessment rates are applied. Assessments rates for deposit insurance currently
range from 0 basis points to 27 basis points. The capital and supervisory
subgroup to which an institution is assigned by the FDIC is confidential and may
not be disclosed. The Bank's rate of deposit insurance assessments will depend
upon the category and subcategory to which the Bank is assigned by the FDIC. Any
increase in insurance assessments could have an adverse effect on the earnings
of the Bank.
Under the Deposit Insurance Funds Act of 1996 (the "Funds Act"), the
assessment base for the payments on the bonds ("FICO bonds") issued in the late
1980s by the Financing Corporation to recapitalize the now defunct Federal
Savings and Loan Insurance Corporation was expanded to include, beginning
January 1, 1997, the deposits of BIF-insured institutions, such as the Bank.
Until December 31, 1999, or such earlier date on which the last savings
association ceases to exist, the rate of assessment for BIF-assessable deposits
shall be one-fifth of the rate imposed on SAIF-assessable deposits. The annual
rate of assessments for the payments on the FICO bonds for the semi-annual
period beginning on July 1, 1998 was 0.0122% for BIF-assessable deposits and
0.0610% for SAIF-assessable deposits.
REGULATORY CAPITAL REQUIREMENTS
The FDIC has adopted risk-based capital guidelines to which the Bank is
subject. The guidelines establish a systematic analytical framework that makes
regulatory capital requirements more sensitive to differences in risk profiles
among banking organizations. The Bank is required to maintain certain levels of
regulatory capital in relation to regulatory risk-weighted assets. The ratio of
such regulatory capital to regulatory risk-weighted assets is referred to as the
Bank's "risk-based capital ratio." Risk-based capital ratios are determined by
allocating assets and specified off-balance sheet items to four risk-weighted
categories ranging from 0% to 100%, with higher levels of capital being required
for the categories perceived as representing greater risk.
These guidelines divide a savings bank's capital into two tiers. The first
tier ("Tier I") includes common equity, retained earnings, certain non-
cumulative perpetual preferred stock (excluding auction rate issues) and
minority interests in equity accounts of consolidated subsidiaries, less
goodwill and other intangible assets (except mortgage servicing rights and
purchased credit card relationships subject to certain limitations).
Supplementary ("Tier II") capital includes, among other items, cumulative
perpetual and long-term limited-life preferred stock, mandatory convertible
securities, certain hybrid capital instruments, term subordinated debt and the
allowance for loan and lease losses, subject to certain limitations, less
required deductions. Savings banks are required to maintain a total risk-based
capital ratio of at least 8%, of which at least 4% must be Tier I capital.
In addition, the FDIC has established regulations prescribing a minimum
Tier I leverage ratio (Tier I capital to adjusted total assets as specified in
the regulations). These regulations provide for a minimum Tier I leverage ratio
of 3% for banks that meet certain specified criteria, including that they have
the highest examination rating and are not experiencing or anticipating
significant growth. All other banks are required to maintain a Tier I leverage
ratio of 3% plus an additional cushion of at least 100 to 200 basis points. The
FDIC and the other federal banking regulators have proposed amendments to their
minimum capital regulations to provide that the minimum leverage capital ratio
for a depository institution that has been assigned the highest composite rating
of 1 under the Uniform Financial Institutions Rating System will be 3% and that
the minimum leverage capital ratio for any other depository institution will be
4% unless a higher leverage capital ratio is warranted by the particular
circumstances or risk profile of the depository institution. The FDIC may,
however, set higher leverage and risk-based capital requirements on individual
institutions when particular circumstances warrant. Savings banks experiencing
or anticipating significant growth are expected to maintain capital ratios,
including tangible capital positions, well above the minimum levels.
STANDARDS FOR SAFETY AND SOUNDNESS
The federal banking agencies have adopted a final regulation and
Interagency Guidelines Prescribing Standards for Safety and Soundness
("Guidelines") to implement the safety and soundness standards required under
federal law. The Guidelines set forth the safety and soundness standards that
the federal banking agencies use to identify and address problems at insured
depository institutions before capital becomes impaired. The standards set
forth in the Guidelines
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address internal controls and information systems; internal audit system; credit
underwriting; loan documentation; interest rate risk exposure; asset growth; and
compensation, fees and benefits. The agencies also adopted additions to the
Guidelines which require institutions to examine asset quality and earnings
standards. If the appropriate federal banking agency determines that an
institution fails to meet any standard prescribed by the Guidelines, the agency
may require the institution to submit to the agency an acceptable plan to
achieve compliance with the standard, as required by federal law. The final
regulations establish deadlines for the submission and review of such safety and
soundness compliance plans.
LIMITATIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS
The FDIC has the authority to use its enforcement powers to prohibit a
savings bank from paying dividends if, in its opinion, the payment of dividends
would constitute an unsafe or unsound practice. Federal law also prohibits the
payment of dividends by a bank that will result in the bank failing to meet its
applicable capital requirements on a pro forma basis. New York law also
restricts the Bank from declaring a dividend which would reduce its capital
below (i) the amount required to be maintained by state law and regulation, or
(ii) the amount of the Bank's liquidation account established in connection with
the Reorganization. The liquidation account is expected to initially total $28.0
million.
PROMPT CORRECTIVE ACTION
The federal banking agencies have promulgated regulations to implement the
system of prompt corrective action required by federal law. Under the
regulations, a bank shall be deemed to be (i) "well capitalized" if it has total
risk-based capital of 10.0% or more, has a Tier I risk-based capital ratio of
6.0% or more, has a Tier I leverage capital ratio of 5.0% or more and is not
subject to any written capital order or directive; (ii) "adequately capitalized"
if it has a total risk-based capital ratio of 8.0% or more, a Tier I risk-based
capital ratio of 4.0% or more and a Tier I leverage capital ratio of 4.0% or
more (3.0% under certain circumstances) and does not meet the definition of
"well capitalized"; (iii) "undercapitalized" if it has a total risk-based
capital ratio that is less than 8.0%, a Tier I risk-based capital ratio that is
less than 4.0% or a Tier I leverage capital ratio that is less than 4.0% (3.0%
under certain circumstances); (iv) "significantly undercapitalized" if it has a
total risk-based capital ratio that is less than 6.0%, a Tier I risk-based
capital ratio that is less than 3.0% or a Tier I leverage capital ratio that is
less than 3.0%; and (v) "critically undercapitalized" if it has a ratio of
tangible equity to total assets that is equal to or less than 2.0%. Federal law
and regulations also specify circumstances under which a federal banking agency
may reclassify a well capitalized institution as adequately capitalized and may
require an adequately capitalized institution to comply with supervisory actions
as if it were in the next lower category (except that the FDIC may not
reclassify a significantly undercapitalized institution as critically
undercapitalized).
Based on the foregoing, the Bank is currently classified as a "well
capitalized" savings institution.
ACTIVITIES AND INVESTMENTS OF INSURED STATE-CHARTERED BANKS ACTING AS PRINCIPAL
Federal law generally limits the activities and equity investments of FDIC-
insured, state-chartered banks to those that are permissible for national banks,
notwithstanding state laws. Under regulations dealing with equity investments,
an insured state bank generally may not, directly or indirectly, acquire or
retain any equity investment of a type, or in an amount, that is not permissible
for a national bank. An insured state bank is not prohibited from, among other
things, (i) acquiring or retaining a majority interest in a subsidiary, the
activities of which are limited to those permissible for a subsidiary of a
national bank; (ii) investing as a limited partner in a partnership the sole
purpose of which is the direct or indirect investment in the acquisition,
rehabilitation, or new construction of a qualified housing project, provided
that such limited partnership investments may not exceed 2% of the bank's total
assets; (iii) acquiring up to 10% of the voting stock of a company that solely
provides or reinsures directors', trustees', and officers' liability insurance
coverage or bankers' blanket bond group insurance coverage for insured
depository institutions; and (iv) acquiring or retaining the voting shares of a
depository institution if certain requirements are met.
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1 Federal law and FDIC regulations permit certain exceptions to the foregoing
limitation. For example, certain state-chartered banks, such as the Bank, may
continue to invest in common or preferred stock listed on a National Securities
Exchange or the National Market System of Nasdaq, and in the shares of an
investment company registered under the Investment Company Act of 1940, as
amended. As of June 30, 1998, the Bank had $1.5 million of securities pursuant
to this exception. As a savings bank, the Bank may also continue to sell
savings bank life insurance.
TRANSACTIONS WITH AFFILIATES
Under current federal law, transactions between depository institutions and
their affiliates are governed by Sections 23A and 23B of the Federal Reserve
Act. An affiliate of a savings bank is any company or entity that controls, is
controlled by, or is under common control with the savings bank, other than a
subsidiary of the savings bank. In a holding company context, at a minimum, the
parent holding company of a savings bank and any companies which are controlled
by such parent holding company are affiliates of the savings bank. Generally,
Section 23A limits the extent to which the savings bank or its subsidiaries may
engage in "covered transactions" with any one affiliate to an amount equal to
10% of such savings bank's capital stock and surplus and contains an aggregate
limit on all such transactions with all affiliates to an amount equal to 20% of
such capital stock and surplus. The term "covered transaction" includes the
making of loans or other extensions of credit to an affiliate; the purchase of
assets from an affiliate, the purchase of, or an investment in, the securities
of an affiliate; the acceptance of securities of an affiliate as collateral for
a loan or extension of credit to any person; or issuance of a guarantee,
acceptance, or letter of credit on behalf of an affiliate. Section 23A also
establishes specific collateral requirements for loans or extensions of credit
to, or guarantees, acceptances on letters of credit issued on behalf of an
affiliate. Section 23B requires that covered transactions and a broad list of
other specified transactions be on terms substantially the same, or no less
favorable, to the savings bank or its subsidiary as similar transactions with
nonaffiliates.
Further, Section 22(h) of the Federal Reserve Act restricts a savings bank
with respect to loans to directors, executive officers, and principal
stockholders. Under Section 22(h), loans to directors, executive officers and
stockholders who control, directly or indirectly, 10% or more of voting
securities of a savings bank and certain related interests of any of the
foregoing, may not exceed, together with all other outstanding loans to such
persons and affiliated entities, the savings bank's total capital and surplus.
Section 22(h) also prohibits loans above amounts prescribed by the appropriate
federal banking agency to directors, executive officers, and stockholders who
control 10% or more of voting securities of a stock savings bank, and their
respective related interests, unless such loan is approved in advance by a
majority of the board of directors of the savings bank. Any "interested"
director may not participate in the voting. The loan amount (which includes all
other outstanding loans to such person) as to which such prior board of director
approval is required, is the greater of $25,000 or 5% of capital and surplus or
any loans over $500,000. Further, pursuant to Section 22(h), loans to directors,
executive officers and principal stockholders must generally be made on terms
substantially the same as offered in comparable transactions to other persons.
Section 22(g) of the Federal Reserve Act places additional limitations on loans
to executive officers.
HOLDING COMPANY REGULATION
FEDERAL BANK HOLDING COMPANY REGULATION. Upon consummation of the
Reorganization, the Company, as the sole stockholder of the Bank, and the Mutual
Holding Company, as indirect controlling stockholder of the Bank, will become
bank holding companies. Bank holding companies are subject to comprehensive
regulation and regular examinations by the Federal Reserve Board under the Bank
Holding Company Act of 1956, as amended (the "BHCA"), and the regulations of the
Federal Reserve Board. The Federal Reserve Board also has extensive enforcement
authority over bank holding companies, including, among other things, the
ability to assess civil money penalties, to issue cease and desist or removal
orders and to require that a holding company divest subsidiaries (including its
bank subsidiaries). In general, enforcement actions may be initiated for
violations of law and regulations and unsafe or unsound practices.
After consummation of the Reorganization and Offering, the Company will be
subject to capital adequacy guidelines for bank holding companies (on a
consolidated basis) which are substantially similar to those of the FDIC
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for the Bank. On a pro forma consolidated basis after the Reorganization and
Offering, the Company's pro forma stockholders' equity will exceed these
requirements.
Under Federal Reserve Board policy, a bank holding company must serve as a
source of strength for its subsidiary bank. Under this policy the Federal
Reserve Board may require and has required in the past, a holding company to
contribute additional capital to an undercapitalized subsidiary bank.
Under the BHCA, a bank holding company must obtain Federal Reserve Board
approval before: (i) acquiring, directly or indirectly, ownership or control of
any voting shares of another bank or bank holding company if, after such
acquisition, it would own or control more than 5% of such shares (unless it
already owns or controls the majority of such shares); (ii) acquiring all or
substantially all of the assets of another bank or bank holding company; or
(iii) merging or consolidating with another bank holding company.
The BHCA also prohibits a bank holding company, with certain exceptions,
from acquiring direct or indirect ownership or control of more than 5% of the
voting shares of any company which is not a bank or bank holding company, from
engaging directly or indirectly in activities other than those of banking,
managing or controlling banks or providing services for its subsidiaries. The
principal exceptions to these prohibitions involve certain non-bank activities
which, by statute or by Federal Reserve Board regulation or order, have been
identified as activities closely related to the business of banking or managing
or controlling banks. The list of activities permitted by the Federal Reserve
Board includes, among other things, operating a savings association, mortgage
company, finance company, credit card company or factoring company; performing
certain data processing operations; providing certain investment and financial
advice; underwriting and acting as an insurance agent for certain types of
credit-related insurance; leasing property on a full-payout, non-operating
basis; selling money orders, travelers' checks and United States Savings Bonds;
real estate and personal property appraising; providing tax planning and
preparation services; and, subject to certain limitations, providing securities
brokerage services for customers.
INTERSTATE BANKING AND BRANCHING. Federal law allows the Federal Reserve
Board to approve an application of an adequately capitalized and adequately
managed bank holding company to acquire control of, or acquire all or
substantially all of the assets of, a bank located in a state other than such
holding company's home state, without regard to whether the transaction is
prohibited by the laws of any state. The Federal Reserve Board may not approve
the acquisition of the bank that has not been in existence for the minimum time
period (not exceeding five years) specified by the statutory law of the host
state. The Federal Reserve Board is prohibited from approving an application if
the applicant (and its depository institution affiliates) controls or would
control more than 10% of the insured deposits in the United States or 30% or
more of the deposits in the target bank's home state or in any state in which
the target bank maintains a branch. Individual states continue to have authority
to limit the percentage of total insured deposits in the state which may be held
or controlled by a bank or bank holding company to the extent such limitation
does not discriminate against out-of-state banks or bank holding companies.
Individual states may also waive the 30% state-wide concentration limit referred
to above.
Additionally, beginning on June 1, 1997, the federal banking agencies were
authorized to approve interstate merger transactions without regard to whether
such transaction is prohibited by the law of any state, unless the home state of
one of the banks "opted out" by adopting a law which applies equally to all out-
of-state banks and expressly prohibits merger transactions involving out-of-
state banks. Interstate acquisitions of branches are permitted only if the law
of the state in which the branch is located permits such acquisitions. In
response to Riegle-Neal, the State of New York enacted laws allowing interstate
mergers and branching on a reciprocal basis.
Federal law authorizes the FDIC to approve interstate branching de novo by
national and state banks, respectively, only in states which specifically allow
for such branching. The appropriate federal banking agencies are required to
prescribe regulations which prohibit any out-of-state bank from using the
interstate branching authority primarily for the purpose of deposit production.
The FDIC and Federal Reserve Board have adopted such regulations. These
regulations include guidelines to ensure that interstate branches operated by an
out-of-state bank in a host state are reasonably helping to meet the credit
needs of the communities which they serve. Should the FDIC determination
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that a bank interstate branch is not reasonably helping to meet the credit needs
of the communities serviced by an interstate branch, the FDIC is authorized to
close the interstate branch or not permit the bank to open a new branch in the
state in which the bank previously opened an interstate branch.
DIVIDENDS. The Federal Reserve Board has issued a policy statement on the
payment of cash dividends by bank holding companies, which expresses the Federal
Reserve Board's view that a bank holding company should pay cash dividends only
to the extent that the holding company's net income for the past year is
sufficient to cover both the cash dividends and a rate of earning retention that
is consistent with the holding company's capital needs, asset quality and
overall financial condition. The Federal Reserve Board also indicated that it
would be inappropriate for a company experiencing serious financial problems to
borrow funds to pay dividends. Furthermore, under the prompt corrective action
regulations adopted by the Federal Reserve Board, the Federal Reserve Board may
prohibit a bank holding company from paying any dividends if the holding
company's bank subsidiary is classified as "undercapitalized."
Bank holding companies are required to give the Federal Reserve Board prior
written notice of any purchase or redemption of its outstanding equity
securities if the gross consideration for the purchase or redemption, when
combined with the net consideration paid for all such purchases or redemptions
during the preceding 12 months, is equal to 10% or more of their consolidated
net worth. The Federal Reserve Board may disapprove such a purchase or
redemption if it determines that the proposal would constitute an unsafe or
unsound practice or would violate any law, regulation, Federal Reserve Board
order or any condition imposed by, or written agreement with, the Federal
Reserve Board. This notification requirement does not apply to any company that
meets the well-capitalized standard for commercial banks, has a safety and
soundness examination rating of at least a "2" and is not subject to any
unresolved supervisory issues.
NEW YORK STATE BANK HOLDING COMPANY REGULATION. In addition to the federal
bank holding company regulations, a bank holding company organized or doing
business in New York State also may be subject to regulation under the New York
State Banking Law. The term "bank holding company," for the purposes of the New
York State Banking Law, is defined generally to include any person, company or
trust that directly or indirectly either controls the election of a majority of
the directors or owns, controls or holds with power to vote more than 10% of the
voting stock of a bank holding company or, if the Company is a banking
institution, another banking institution, or 10% or more of the voting stock of
each of two or more banking institutions. In general, a bank holding company
controlling, directly or indirectly, only one banking institution will not be
deemed to be a bank holding company for the purposes of the New York State
Banking Law. Under New York State Banking Law, the prior approval of the
Banking Board is required before: (1) any action is taken that causes any
company to become a bank holding company; (2) any action is taken that causes
any banking institution to become or be merged or consolidated with a subsidiary
of a bank holding company; (3) any bank holding company acquires direct or
indirect ownership or control of more than 5% of the voting stock of a banking
institution; (4) any bank holding company or subsidiary thereof acquires all or
substantially all of the assets of a banking institution; or (5) any action is
taken that causes any bank holding company to merge or consolidate with another
bank holding company. Additionally, certain restrictions apply to New York
State bank holding companies regarding the acquisition of banking institutions
which have been chartered five years or less and are located in smaller
communities. Officers, directors and employees of New York State bank holding
companies are subject to limitations regarding their affiliation with securities
underwriting or brokerage firms and other bank holding companies and limitations
regarding loans obtained from its subsidiaries. Although the Company will not
be a bank holding company for purposes of New York State law upon the Effective
Date of the Reorganization, any future acquisition of ownership, control, the
power to vote 10% or more of the voting stock of another bank or bank holding
company would cause it to become such.
MUTUAL HOLDING COMPANY REGULATION. Under New York law, the Mutual Holding
Company may exercise all powers and privileges of a New York chartered mutual
savings bank, except for the power of accepting deposits. The exercise of such
powers and privileges is subject to the limitations of the BHCA.
DIVIDEND WAIVERS BY THE MUTUAL HOLDING COMPANY. It has been the policy of
many mutual holding companies to waive the receipt of dividends declared by any
savings institution subsidiary. In connection with its
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approval of the Reorganization, however, it is expected that the Federal Reserve
Board will impose certain conditions on the waiver by the Mutual Holding Company
of dividends paid on the Common Stock. In particular, the Mutual Holding Company
is expected to be required to obtain prior Federal Reserve Board approval before
it may waive any dividends. As of the date hereof, management does not believe
that the Federal Reserve Board has given its approval to any waiver of dividends
by any mutual holding company that has requested its approval.
The terms of the Federal Reserve Board approval of the Reorganization are
also expected to require that the amount of any waived dividends will not be
available for payment to Minority Stockholders and be excluded from capital for
purposes of calculating dividends payable to Minority Stockholders. Moreover,
the cumulative amount of waived dividends must be maintained in a restricted
capital account which would be added to any liquidation account of the Bank, and
would not be available for distribution to Minority Stockholders. The
restricted capital account and liquidation account amounts would not be
reflected in the Bank's financial statements or the notes thereto, but would be
considered as a notational or memorandum account of the Bank, and would be
maintained in accordance with the rules, regulations and policy of the Office of
Thrift Supervision except that such rules would be administered by the Federal
Reserve Board, and any other rules and regulations adopted by the Federal
Reserve Board. The Plan of Reorganization also provides that if the Mutual
Holding Company converts to stock form in the future, any waived dividends would
reduce the percentage of the converted company's shares of Common Stock issued
to Minority Stockholders in connection with any such transaction. See
"Conversion of the Mutual Holding Company to Stock Form."
Management does not believe that the Mutual Holding Company will initially
waive dividends declared by the Company. If the Mutual Holding Company decides
that it is in its best interest to waive a particular dividend to be paid by the
Company and the Federal Reserve Board approves such waiver, then the Company
would pay such dividend only to Minority Stockholders. The amount of the
dividend waived by the Mutual Holding Company would be treated in the manner
described above. The Mutual Holding Company's decision as to whether or not to
waive a particular dividend, if such waiver is approved by the Federal Reserve
Board, will depend on a number of factors, including the Mutual Holding
Company's capital needs, the investment alternatives available to the Mutual
Holding Company as compared to those available to the Company and regulatory
approvals. There can be no assurance (i) that after the Reorganization the
Mutual Holding Company will waive dividends paid by the Company, (ii) that the
Federal Reserve Board will approve any dividend waivers by the Mutual Holding
Company or (iii) of the terms that may be imposed by the Federal Reserve Board
on any dividend waiver.
CONVERSION OF THE MUTUAL HOLDING COMPANY TO STOCK FORM. Under New York
law, regulations of the Banking Board and the Plan of Reorganization permit the
Mutual Holding Company to convert from the mutual to the capital stock form of
organization (a "Conversion Transaction"). There can be no assurance when, if
ever, a Conversion Transaction will occur, and the board of trustees has no
current intention or plan to undertake a Conversion Transaction. In a
Conversion Transaction, the Mutual Holding Company would merge with and into the
Bank or the Company, with the Bank or the Company as the resulting entity.
Certain depositors of the Bank would receive the right to subscribe for
additional shares of the resulting entity. In a Conversion Transaction, each
share of Common Stock outstanding immediately prior to the completion of the
Conversion Transaction held by persons other than the Mutual Holding Company
would be automatically converted into and become the right to receive a number
of shares of Common Stock of the resulting entity determined pursuant to an
exchange ratio that ensures that after the Conversion Transaction. Subject to
the Dividend Waiver Adjustment described below and any adjustment to reflect the
receipt of cash in lieu of fractional shares, the percentage of the to-be
outstanding shares of the resulting entity issued to Minority Stockholders in
exchange for their Common Stock would be equal to the percentage of the
outstanding shares of Common Stock held by Minority Stockholders immediately
prior to the Conversion Transaction. The total number of shares held by Minority
Stockholders after the Conversion Transaction would also be affected by any
purchases by such persons in the offering that would be conducted as part of the
Conversion Transaction.
The Dividend Waiver Adjustment would adjust the percentage of the to-be
outstanding shares of the resulting entity issued in exchange for minority
shares to reflect (i) the aggregate amount of dividends waived by the Mutual
Holding Company and (ii) assets other than Common Stock held by the Mutual
Holding Company. Pursuant to the
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Dividend Waiver Adjustment, the percentage of the to-be outstanding shares of
the resulting entity issued to Minority Stockholders in exchange for their
minority shares (the "Adjusted Minority Ownership Percentage") is equal to the
percentage of the outstanding shares of Common Stock held by Minority
Stockholders multiplied by the Dividend Waiver Fraction. The Dividend Waiver
Fraction is equal to the product of (a) a fraction, of which the numerator is
equal to the Company's stockholders' equity at the time of the Conversion
Transaction less the aggregate amount of dividends waived by the Mutual Holding
Company and the denominator is equal to the Company's stockholders' equity at
the time of the Conversion Transaction, and (b) a fraction, of which the
numerator is equal to the appraised pro forma market value of the resulting
entity minus the value of the Mutual Holding Company's assets other than Common
Stock and the denominator is equal to the pro forma market value of the
resulting entity.
FEDERAL SECURITIES LAW
The Common Stock of the Company to be issued in the Offering will be
registered with the SEC under the Exchange Act, prior to completion of the
Offering and Reorganization. The Company will be subject to the information,
proxy solicitation, insider trading restrictions and other requirements of the
SEC under the Exchange Act.
The Company Common Stock held by persons who are affiliates (generally
officers, directors and principal stockholders) of the Company may not be resold
without registration or unless sold in accordance with certain resale
restrictions. If the Company meets specified current public information
requirements, each affiliate of the Company is able to sell in the public
market, without registration, a limited number of shares in any three-month
period.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board requires all depository institutions to maintain
noninterest-bearing reserves at specified levels against their transaction
accounts (primarily checking, NOW and Super NOW checking accounts). At June 30,
1998, the Bank was in compliance with these reserve requirements.
COMMUNITY REINVESTMENT ACT
FEDERAL REGULATION. Under the Community Reinvestment Act, as amended (the
"CRA"), as implemented by FDIC regulations, a savings bank has a continuing and
affirmative obligation, consistent with its safe and sound operation, to help
meet the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the FDIC, in connection with its examination of a savings institution,
to assess the institution's record of meeting the credit needs of its community
and to take such record into account in its evaluation of certain applications
by such institution. The CRA requires the FDIC to provide a written evaluation
of an institution's CRA performance utilizing a four-tiered descriptive rating
system. The Bank's latest CRA rating was "outstanding."
NEW YORK STATE REGULATION. The Bank is also subject to provisions of the
New York State Banking Law which impose continuing and affirmative obligations
upon banking institutions organized in New York State to serve the credit needs
of its local community ("NYCRA") which are substantially similar to those
imposed by the CRA. Pursuant to the NYCRA, a bank must file an annual NYCRA
report and copies of all federal CRA reports with the Department. The NYCRA
requires the Department to make a biennial written assessment of a bank's
compliance with the NYCRA, utilizing a four-tiered rating system and make such
assessment available to the public. The NYCRA also requires the Superintendent
to consider a bank's NYCRA rating when reviewing a bank's application to engage
in certain transactions, including mergers, asset purchases and the
establishment of branch offices or automated teller machines, and provides that
such assessment may serve as a basis for the denial of any such application.
The Bank's NYCRA rating as of its latest examination was "satisfactory."
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FEDERAL HOME LOAN BANK SYSTEM
The Bank is a member of the FHLB of New York, which is one of 12 regional
FHLBs, that administers the home financing credit function of savings
institutions. Each FHLB serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from proceeds derived from
the sale of consolidated obligations of the FHLB System. It makes loans to
members (i.e., advances) in accordance with policies and procedures established
by the board of directors of the FHLB. These policies and procedures are
subject to the regulation and oversight of the Federal Housing Finance Board.
All advances from the FHLB are required to be fully secured by sufficient
collateral as determined by the FHLB. In addition, all long-term advances are
required to provide funds for residential home financing.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of New York. As of June 30, 1998, the Bank had $1.2 million of FHLB stock.
The dividend yield from FHLB stock was 7.45% at June 30, 1998. No assurance can
be given that such dividends will continue in the future at such levels.
Under federal law, the FHLBs are required to provide funds for the
resolution of troubled savings institutions and to contribute to low and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of the Bank's FHLB stock may result in a corresponding
reduction in the Bank's capital.
MANAGEMENT OF ONEIDA FINANCIAL CORP.
DIRECTORS OF THE COMPANY
The Board of Directors of the Company consists of eleven members, each of
whom is currently serving as a trustee of the Bank. Directors of the Company
will serve three-year staggered terms so that approximately one-third of the
directors will be elected at each annual meeting of stockholders. The class of
directors whose term of office expires in 1999 consists of Directors Clarke,
Kent, Myers and Milmoe. The class of directors whose term expires in 2000
consists of Directors Christakos, Caprio and White. The class of directors
whose term of office expires in 2001 consists of Directors Kallet, Devine,
Matthews and Haskell. The biographical information regarding these individuals
is set forth under "Management of the Bank-Biographical Information."
EXECUTIVE OFFICERS OF THE COMPANY
The following individuals are executive officers of the Company and hold
the offices set forth below opposite their names. The biographical information
for each executive officer is set forth under "Management of the Bank--
Biographical Information."
<TABLE>
<CAPTION>
NAME AGE* POSITION
- -------------------- ---- -------------------------------------
<S> <C> <C>
Michael R. Kallet 47 President and Chief Executive Officer
Eric E. Stickels 36 Senior Vice President and Chief Financial Officer
Thomas H. Dixon 44 Senior Vice President\ Credit Administration
</TABLE>
- ---------------------------
*As of June 30, 1998
The executive officers of the Company are elected annually and hold office
until their respective successors have been elected or until death, resignation,
retirement or removal by the board.
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Since the formation of the Company, none of the executive officers has
received remuneration from the Company. It is not anticipated that the
executive officers of the Company will initially receive any remuneration in
their capacity as an executive officer. For information concerning compensation
of executive officers of the Bank, see "Management of the Bank."
INDEMNIFICATION AND LIMITATION OF LIABILITY
The Certificate of Incorporation of the Company provides that a director or
officer of the Company shall be indemnified by the Company to the fullest extent
authorized by the Delaware General Corporation Law ("DGCL") against all
expenses, liability and loss reasonably incurred or suffered by such person in
connection with his or her activities as a director or officer or as a director
or officer of another company, if the director or officer held such position at
the request of the Company. Delaware law requires that such director, officer,
employee or agent, in order to be indemnified, must have acted in good faith and
in a manner reasonably believed to be not opposed to the best interests of the
Company and, with respect to any criminal action or proceeding, either had
reasonable cause to believe such conduct was lawful or did not have reasonable
cause to believe his or her conduct was unlawful.
In addition, the Certificate of Incorporation and Delaware law also provide
that the Company may maintain insurance, at its expense, to protect itself and
any director, officer, employee or agent of the Company or another corporation,
partnership, joint venture, trust or other enterprise against any expense,
liability or loss, whether or not the Company has the power to indemnify such
person against such expense, liability or loss under the DGCL. The Company
intends to obtain such insurance.
The Certificate of Incorporation also provides that directors of the
Company shall not be personally liable to the Company or its stockholders for
monetary damages for breach of fiduciary duty as a director, except for
liability (i) for any breach of the director's duty of loyalty to the Company or
its stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174 of
the DGCL (which relates to unlawful dividends or stock purchases or
redemptions), or (iv) for any transaction from which the director derived an
improper personal benefit.
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MANAGEMENT OF THE BANK
DIRECTORS OF THE BANK
Upon completion of the Reorganization, the initial directors of the Bank
will consist of those persons who currently serve on the Board of Trustees of
the Bank. The directors of the Bank will have three year terms which will be
staggered to provide for the election of approximately one-third of the board
members each year. Directors of the Bank will be elected by the Company as sole
stockholder of the Bank. The proposed directors of the Bank are as follows:
<TABLE>
<CAPTION>
DIRECTOR AGE * OCCUPATION DIRECTOR SINCE TERM EXPIRES
- --------------------------- ---- ----------------------- -------------- -------------
<S> <C> <C> <C> <C>
Nicholas J. Christakos 67 Investor and Consultant 1974 2000
Michael R. Kallet 47 President and Chief
Executive Officer 1997 2001
The Oneida Savings Bank
Patricia D. Caprio 49 Director of Development 1985 2000
Programs, Colgate University
Edward J. Clarke 59 President, Kennedy & Clarke, 1987 1999
Inc.
James J. Devine, Jr. 64 Attorney, Kiley Law Firm.P.C. 1987 2001
John E. Haskell 56 President, Bailey & Haskell
Associates, Inc. 1992 2001
Rodney D. Kent 51 President, Chief Executive 1990 1999
Officer and Chairman, Omega Wire, Inc.
William D. Matthews 63 Chairman and Chief Executive 1996 2001
Officer, Oneida Ltd. and a
director of Conmed Corporation
Michael W. Milmoe 66 President, Canastota 1976 1999
Publishing Co., Inc.
Richard B. Myers 62 Orthodontist, Orthodontic Associates
of CNY 1981 1999
Frank O. White, Jr. 43 Assistant Director of Athletics, Colgate
University 1994 2000
- --------------
</TABLE>
*As of June 30, 1998
EXECUTIVE OFFICERS OF THE BANK
The following table sets forth certain information (as of June 30, 1998)
regarding the executive officers of the Bank, all of whom currently serve in
their indicated position as executive officers of the Bank.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Michael R. Kallet 47 President and Chief Executive Officer
Eric E. Stickels 36 Senior Vice President and Chief
Financial Officer
Thomas H. Dixon 44 Senior Vice President\Credit Administration
</TABLE>
The executive officers of the Bank will be elected annually and will hold
office until the next annual meeting of the board of directors of the Bank held
immediately after the annual meeting of stockholders of the Bank, and until
their successors are elected and qualified, or until death, resignation,
retirement or removal by the board of directors.
BIOGRAPHICAL INFORMATION
The following biographical information is provided for the trustees and
executive officers of the Bank. Professional background and employment history
are provided for at least the past five years.
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TRUSTEES/DIRECTORS
NICHOLAS J. CHRISTAKOS is the Chairman of the Board. Mr. Christakos is a
retired businessman.
MICHAEL R. KALLET is President and Chief Executive Officer of the Bank. Mr.
Kallet has been President and Chief Executive Officer since March 1990.
PATRICIA D. CAPRIO is the Director of Development Programs at Colgate
University.
EDWARD J. CLARKE is the President of Kennedy & Clarke, Inc., a property and
casualty insurance agency located in Cazenovia, New York.
JAMES J. DEVINE, JR. is the President of the Kiley Law Firm, P.C. located
in Oneida, New York.
JOHN E. HASKELL is the President of Bailey & Haskell Associates, Inc., an
insurance agency located in Oneida, New York.
RODNEY D. KENT is the President of Omega Wire, Inc., a copperwire
manufacturer located in Camden, New York.
WILLIAM D. MATTHEWS is the Chairman and Chief Executive Officer of Oneida,
Ltd. located in Oneida, New York. Mr. Matthews is also a director of Conmed
Corporation located in Utica, New York.
MICHAEL W. MILMOE is retired. Prior to his retirement, Mr. Milmoe was the
President of Canastota Publishing Co., Inc., located in Canastota, New York.
RICHARD B. MYERS is the President of Orthodontic Associates of C.N.Y., P.C.
a clinical orthodontics practice located in Oneida, New York.
FRANK O. WHITE, JR. is the Assistant Director of Athletics at Colgate
University. Until January 1998, Mr. White was the President and Chief Executive
Officer of Mid-State Raceway, Inc. located in Vernon, New York.
EXECUTIVE OFFICERS OF THE BANK WHO ARE NOT DIRECTORS
ERIC E. STICKELS has been Senior Vice President and Chief Financial Officer
of the Bank since May 1998. Prior to that time, Mr. Stickels held a variety of
positions at the Bank most recently as Senior Vice President-Operations and Vice
President-Chief Operations Officer. Mr. Stickels has been associated with the
Bank since 1982.
THOMAS H. DIXON has been Senior Vice President/Credit Administration since
1996. Prior to that time, Mr. Dixon was affiliated with Oneida Valley National
Bank in various capacities since 1981.
MEETINGS AND COMMITTEES OF THE BANK'S BOARD
The Board of Trustees of the Bank meets monthly and may have additional
special meetings as may be called by the Chairman or as otherwise provided by
law. During the year ended December 31, 1997, the board held 15 meetings. No
trustee attended fewer than 75% in the aggregate of the total number of meetings
of the board or board committees on which such trustee served during 1997. The
Board of Trustees of the Bank has the following standing committees: loan
committee, audit committee, investment committee and executive committee.
Following the Reorganization, the Board of Directors will meet on a monthly
basis.
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BOARD OF DIRECTORS AND COMMITTEES OF THE COMPANY AFTER REORGANIZATION
Following the Reorganization, the board of directors of the Company is
expected to meet quarterly, or more often as may be necessary. The board of
directors initially is expected to have a standing executive committee and an
audit committee. The board of directors may, by resolution, designate one or
more additional committees.
The executive committee initially will consist of the following six
directors of the Company: Messrs. Myers, Christakos, Kent, Clarke, Haskell and
Milmoe. The executive committee is expected to meet as necessary when the board
is not in session to exercise general control and supervision in all matters
pertaining to the interests of the Company, subject at all times to the
direction of the board of directors. The executive committee may also serve as
the nominating committee for the purpose of identifying, evaluating and
recommending potential candidates for election to the board.
The audit committee initially will consist of the following directors of
the Company: Messrs. Kent, Christakos, Myers, White and Milmoe. The audit
committee is expected to meet at least quarterly to examine and approve the
audit report prepared by the independent auditors of the Bank, to review and
recommend the independent auditors to be engaged by the Company, to review the
internal audit function and internal accounting controls of the Company, and to
review and approve audit policies.
COMPENSATION OF DIRECTORS
Directors of the Bank receive an annual retainer of $6,000 and a fee of
$300 for each Board meeting attended. Directors receive $200 for each committee
meeting attended. Members of the Executive Committee receive $250 for each
meeting of the Executive Committee attended. The Chairman of the Board receives
an additional $200 for every Board meeting attended and each committee chair
receives an additional $100 for every committee meeting attended.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table sets forth for the year
ended December 31, 1997, certain information as to the total remuneration paid
by the Bank to the Chief Executive Officer of the Bank, who was the only
executive officer which received annual compensation in excess of $100,000 for
the year ended December 31, 1997.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION/(1)/ LONG-TERM COMPENSATION
------------------------ ----------------------
AWARDS PAYOUTS
------------ -----------
OTHER
ANNUAL RESTRICTED OPTIONS/ ALL OTHER
COMPENSATION STOCK SARS LTIP COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS /(2)/ AWARDS/(3)/ /(#)(4)/ PAYOUTS /(5)/
- --------------------------- ---------- --------- --------- ------------ ----------- ----------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Michael R. Kallet 1997 $159,000 $30,000 -- -- -- -- $10,118
President and Chief Executive
Officer
</TABLE>
- ---------------------------
/(1)/ In accordance with the rules on executive officer and director
compensation disclosure adopted by the SEC, Summary Compensation
information is excluded for the fiscal years ended December 31, 1996 and
1995, as the Bank was not a public company during such periods.
/(2)/ The Bank also provides certain members of senior management, including Mr.
Kallet, with the use of an automobile, club membership dues, and certain
other personal benefits which have not been included in the table. The
aggregate amount of such other benefits did not exceed the lesser of
$50,000 or 10% of Mr. Kallet's cash compensation for the year .
/(3)/ Does not include awards pursuant to the Stock Award Plan, as such awards
were not earned, vested or granted in 1997. For a discussion of the terms
of the Stock Award Plan which are intended to be adopted by the Company,
see "--Benefit Plans--Stock Award Plan."
/(4)/ No stock options or SARs were earned or granted in 1997. For a discussion
of the Stock Option Plan which is intended to be adopted by the Company,
see "--Benefit Plans--Stock Option Plan."
/(5)/ Consists of the Bank's contribution to the Bank's 401(k) Plan and health,
dental and group term life insurance premiums paid by the Bank on behalf
of Mr. Kallet.
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REPORT OF INDEPENDENT COMPENSATION CONSULTANT
Pursuant to regulations of the Department applicable to the Reorganization,
the Bank must obtain the opinion of an independent compensation consultant as to
whether or not the total compensation for the executive officers and
trustees/directors of the Bank, viewed as a whole and on an individual basis, is
reasonable and proper in comparison to the compensation provided to executive
officers and directors of similar publicly-traded financial institutions. The
Bank has obtained an opinion from William M. Mercer, Incorporated, which
indicates that, based upon published professional survey data of similarly
situated publicly-traded financial institutions operating in the relevant
markets as of October 1998 with respect to the total cash compensation (base
salary and annual incentive) for executive officers and total compensation for
trustees of the Bank, such compensation, viewed as a whole and on an individual
basis, is reasonable and proper in comparison to the compensation provided to
similarly situated publicly-traded financial institutions, and that, with
respect to the amount of shares of Common Stock expected to be reserved under
the ESOP, Stock Award Plan and Stock Option Plan as a whole, such amounts
reserved for granting are reasonable in comparison to similar publicly-traded
financial institutions.
INCENTIVE COMPENSATION PLAN. The Incentive Compensation Plan (the
"Incentive Plan") was established in 1993 as a non-qualified plan. Under the
Incentive Plan, annual performance awards for the Bank's financial performance
relative to the return on average assets as reported by the FDIC, adjusted for
any one-time income or expense recognition, are made to eligible non-trustee
officers and employees designated as participants by the Human Resource and
Development Committee.
Participants are classified into four categories: Class I (CEO and EVP),
Class II (Senior Management Group), Class III (All Other Officers) and Class IV
(Supervisors and all other employees). Awards are allocated to eligible
participants within each class in accordance with the participant's base
compensation (as reported to the Internal Revenue Service on Form W-2) as a
ratio of the base compensation of the entire class. The maximum award payable to
each participant in Class I is 25%, Class II and Class III is 40% and Class IV
is 35% and the maximum total award payable to all participants is 10% of the
Bank's income. The following limitations on awards also apply: If the return on
average assets for an award year is (i) less than .75%, no award will be made to
any Class I, Class II or Class III participant, (ii) less than .75% but at least
.60%, Class IV participants will receive awards equivalent to 5% of base
compensation and (iii) less than .60%, no award shall be made to any
participant. No award shall be made to any participant if (i) average total
assets do not exceed $200 million for the award year, (ii) the most recent
Regulatory Examination Report does not reflect a Uniform Composite Rating of 1
or 2, or (iii) the allowance for possible loan losses at the end of the award
year is less than the greater of 1% of outstanding loans or the regulatory
guideline amount.
BENEFIT PLANS
DEFINED BENEFIT PENSION PLAN. The Bank maintains the Retirement Plan of The
Oneida Savings Bank in RSI Retirement Trust ("Retirement Plan") which is a
qualified, tax-exempt defined benefit plan. Employees age 21 or older who have
worked at the Bank for a period of one year and have been credited with 1,000 or
more hours of service with the Bank during the year are eligible to participate
in the Retirement Plan, provided, however, that leased employees, employees paid
on an hourly rate or contract basis and employees regularly employed outside the
Bank's offices in connection with the operation and maintenance of buildings or
other properties acquired through foreclosure or deed are not eligible to
participate. The Bank contributes each year, if necessary, an amount to the
Retirement Plan to satisfy the actuarially determined minimum funding
requirements in accordance with the ERISA. At September 30, 1997, the total
market value of the assets in the Retirement Plan trust fund was approximately
$3.9 million.
In the event of retirement on or after the normal retirement date (i.e.,
the first day of the calendar month coincident with or next following the later
of age 65 or the 5th anniversary of participation in the Retirement Plan or, for
a participant prior to October 1, 1988, age 65) the plan is designed to provide
a single life annuity. For a married participant, the normal form of benefit is
an actuarially reduced joint and survivor annuity where, upon the participant's
death, the participant's spouse is entitled to receive a benefit equal to 50% of
that paid during the participant's lifetime. Alternatively, a participant may
elect (with proper spousal consent, if necessary) from various other options,
including
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a joint and 100% survivor annuity, period certain and life option, rollover or
direct transfer to an individual retirement account. The normal retirement
benefit provided is an amount equal to 2% of a participant's average annual
earnings, multiplied times the years of a participant's credited service, not to
exceed 70% of a participant's average annual earnings during the consecutive 36
month period yielding the highest average in the participant's final 10 years of
employment. Retirement benefits are also payable upon retirement due to early
and late retirement or death. A reduced benefit is payable upon early retirement
after completion of five years of service, at age 60 or once the sum of the
participant's age and years of vested service equals 75. In the event of a
participant's pre-retirement death on or after attainment of age 60 or after the
sum of the participant's age and service (including service with certain other
employers participating in the RSI Retirement Trust) equals or exceeds 75, a
participant's beneficiary will be entitled to a special pre-retirement survivor
benefit. The special pre-retirement survivor benefit will be equal to that which
would have been available to the beneficiary if the participant had retired and
elected a 100% joint and survivor benefit. In the event of the death of a
participant prior to satisfaction of the conditions for a special pre-retirement
survivors benefit, but after having met the requirements for a vested retirement
benefit, the vested retirement benefit will be equal to that which would have
been available to the beneficiary if the participant had retired and elected a
50% joint and survivor benefit. Upon termination of employment other than as
specified above, a participant who has five years of vested service is eligible
to receive his or her accrued benefit commencing, generally, on his normal
retirement date, or, if elected, on or after his early retirement date. In
certain cases, a participant who had three years of service on or before
November 1, 1993, but not more than four years of service, will be entitled to
up to 40% of his vested accrued benefit at his normal or early retirement date.
The following table indicates the annual retirement benefit that would be
payable under the Retirement Plan upon retirement at age 65 in calendar year
1998, expressed in the form of a single life annuity for the final average
salary and benefit service classifications specified below.
<TABLE>
<CAPTION>
YEARS OF SERVICE AND BENEFIT PAYABLE AT RETIREMENT
AVERAGE ANNUAL --------------------------------------------------
EARNINGS 15 20 25 30 35
- -------------------- ------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
$50,000 15,000 20,000 25,000 30,000 35,000
$75,000 22,500 30,000 37,500 45,000 52,500
$100,000 30,000 40,000 50,000 60,000 70,000
$125,000 37,500 50,000 62,500 75,000 87,500
$160,000 and above 48,000 64,000 80,000 96,000 112,000
</TABLE>
The maximum annual compensation which may be taken into account under the
Code for calculating contributions under qualified defined benefit plans such as
the Retirement Plan is currently $160,000. As of December 31, 1997, Mr. Kallet
had 14.9 years of credited service (i.e., benefit service) under the Retirement
Plan.
401(K) PLAN. The Bank maintains the Oneida Savings Bank 401(k) Savings
Plan in RSI Retirement Trust (the "401(k) Plan") which is a qualified, tax-
exempt profit sharing plan with a salary deferral feature under Section 401(k)
of the Code. Employees who have completed one year of employment are eligible
to participate, provided, however, that leased employees, employees paid on a
daily fee or retainer basis and employees covered by a collective bargaining
agreement (unless the agreement provides for plan participation) are not
eligible to participate. Eligible employees are entitled to enter the 401(k)
Plan on the first day of any payroll period following the completion of the
eligibility requirements.
Under the 401(k) Plan, participants are permitted to make salary reduction
contributions (in whole percentages) equal to the lesser of (i) from 1% to 10%
of compensation or (ii) $10,000 (as indexed annually). For these purposes,
"compensation" includes wages, salary, fees and other amounts received for
personal services prior to reduction for the participant contribution to the
401(k) Plan, commissions, overtime, bonuses, wage continuation payments due to
illness or disability of a short-term nature, amounts paid or reimbursed for
moving expenses, and the value of any nonqualified stock option granted to the
extent includable in gross income for the year granted. Compensation does not
include contributions made by the Bank to any other pension, deferred
compensation, welfare or other employee benefit plan, amounts realized from the
exercise of a nonqualified stock option or the sale of a qualified stock option,
and other amounts which received special tax benefits. Compensation does not
include compensation in excess of the Code
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Section 401(a)(17) limits (i.e., $160,000 in 1998). The Bank will match 100% of
the first 3% of salary that a participant contributes to the 401(k) Plan. All
salary reduction contributions and rollover contributions and earnings thereon
are fully and immediately vested. Matching contributions and earnings thereon
vest at 20% per year, until a participant is 100% vested after five years of
service. A participant may withdraw salary reduction contributions, rollover
contributions and vested matching contributions in the event the participant
suffers a financial hardship. A participant may make a withdrawal from his
salary reduction contributions, rollover contributions and vested matching
contribution for any reason after age 59 1/2. A participant may request a loan
from his or her accounts in an amount up to the lesser of (i) 50% of the net
value of the Basic Contribution Account, vested Matching Contribution Account,
Voluntary Contribution Account and Rollover Contribution Account, or (ii)
$50,000 reduced by the highest outstanding loan balance during the preceding
twelve months. The minimum loan permitted is $1,000.
The 401(k) Plan permits employees to direct the investment of his or her
own accounts into various investment options. In connection with the Offering,
the 401(k) Plan intends to offer participants the opportunity to invest in an
"Employer Stock Fund" which intends to purchase Common Stock in the Offering.
Each participant who directs the trustee to invest all or part of his or her
account in the Employer Stock Fund will have assets in his or her account
applied to the purchase of shares of Common Stock. Participants will be
entitled to direct the trustee as to how to vote his or her allocable shares of
Common Stock.
Plan benefits will be paid to each participant in the form of a single cash
payment at normal retirement age unless earlier or later payment is selected. A
participant may, however, elect payment in installments, direct transfer to
another qualified plan or rollover to an Individual Retirement Account. If a
participant dies prior to receipt of the entire value of his or her 401(k) Plan
accounts, payment will generally be made to the beneficiary in a single cash
payment as soon as possible following the participant's death. Payment will be
deferred if the participant had previously elected a later payment date. If the
beneficiary is not the participant's spouse, payment will be made within one
year of the date of death. If the spouse is the designated beneficiary, payment
will be made no later than the date the participant would have attained age 70
1/2. If the participant was receiving installment payments and dies before
receiving all installments, the designated beneficiary will continue to receive
the installments in the same manner as the participant. Normal retirement age
under the 401(k) Plan is 65 with five years of service. Early retirement age is
age 60 with five years of service.
At December 31, 1997, the total market value of the assets in the 401(k)
Plan was approximately $2 million. The Bank's matching contributions to the
401(k) Plan for the Plan year ended December 31, 1997 totaled approximately
$56,000.
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST. The Bank intends to implement an
Employee Stock Ownership Plan (the "ESOP") in connection with the
Reorganization. Employees with at least one year of employment with the Bank and
who have attained age 21 are eligible to participate. As part of the
Reorganization, the ESOP intends to borrow funds from the Company and use those
funds to purchase a number of shares equal to up to 8.0% of the Minority
Ownership Interest. Collateral for the loan will be the Common Stock purchased
by the ESOP. The loan will be repaid principally from the Bank's discretionary
contributions to the ESOP over a period of up to 10 years. It is anticipated
that the interest rate for the loan will be equal to the prime rate published in
The Wall Street Journal at the time of the Offering. Shares purchased by the
ESOP will be held in a suspense account for allocation among participants as the
loan is repaid.
Contributions to the ESOP and shares released from the suspense account in
an amount proportional to the repayment of the ESOP loan will be allocated among
ESOP participants on the basis of compensation in the year of allocation. For
this purpose, compensation is defined as wages reported on federal income tax
Form W-2 and also includes amounts contributed under a salary reduction
agreement pursuant to Section 401(k) or Section 125 of the Code, but not in
excess of the Code Section 401(a)(17) limit. Participants in the ESOP will
receive credit for all years of service prior to the effective date of the ESOP
for vesting purposes. A participant will vest in 100% of his or her account
balance after five years of vesting service or upon normal or early retirement
(as defined in the ESOP), disability, death or following a change in control.
A participant who terminates employment for reasons other than
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death, retirement, disability or following a change in control, prior to five
years of credited service will forfeit the nonvested portion of his benefits
under the ESOP. Benefits will be payable in the form of Common Stock and cash
upon death, retirement, disability or separation from service. Alternatively, a
participant may request that the benefits be paid entirely in the form of Common
Stock or entirely in cash. The Bank's contributions to the ESOP are
discretionary, subject to the loan terms and tax law limits, and therefore,
benefits payable under the ESOP cannot be estimated. In November 1993, the
American Institute of Certified Public Accountants (the "AICPA") issued
Statement of Position ("SOP") 93-6, which requires the Bank to record
compensation expense in an amount equal to the fair market value of the shares
committed to be released from the suspense account each year.
In connection with the establishment of the ESOP, the Bank will establish a
committee of non-employee directors to administer the ESOP. The Bank will
either appoint its non-employee directors or an independent financial
institution to serve as trustee of the ESOP. The ESOP committee may instruct the
trustee regarding investment of funds contributed to the ESOP. The ESOP trustee,
subject to its fiduciary duty, must vote all allocated shares held in the ESOP
in accordance with the instructions of participating employees. Under the ESOP,
nondirected shares and shares held in the suspense account, will be voted in a
manner calculated to most accurately reflect the instructions it has received
from participants regarding the allocated stock so long as such vote is in
accordance with the provisions of ERISA.
STOCK OPTION PLAN. At a meeting of the Company's stockholders to be held
no earlier than six months after the completion of the Reorganization, the board
of directors intends to submit for stockholder approval a Stock Option Plan for
directors and officers of the Bank and of the Company. If approved by the
stockholders, Common Stock in an aggregate amount equal to 10% of the Minority
Ownership Interest would be reserved for issuance by the Company upon the
exercise of the stock options granted under the Stock Option Plan. If the plan
is approved within one year of the completion of the Reorganization, no options
would be granted under the Stock Option Plan until the date on which stockholder
approval is received.
The exercise price of the options granted under the Stock Option Plan will
be equal to the fair market value of the shares on the date of grant of the
stock options. If the Stock Option Plan is adopted within one year following the
Offering, options will become exercisable at a rate of 20% at the end of each
twelve (12) months of service with the Bank after the date of grant, subject to
early vesting in the event of death or disability. Options granted under the
Stock Option Plan would be adjusted for capital changes such as stock splits and
stock dividends. Notwithstanding the foregoing, awards will be 100% vested upon
termination of employment due to death or disability, and if the Stock Option
Plan is adopted more than 12 months after the Offering, awards would be 100%
vested upon normal retirement or a change in control of the Bank or the Company.
Under FDIC and Department rules, if the Stock Option Plan is adopted within the
first 12 months after completion of the Offering, no individual officer can
receive more than 25% of the awards under the plan, no outside director can
receive more than 5% of the awards under the plan, and all outside directors as
a group can receive no more than 30% of the awards under the plan in the
aggregate. No determination has been made as to the specific terms of the plan
or as to awards thereunder.
The Stock Option Plan would be administered by a committee of non-employee
members of the Company's board of directors. Options granted under the Stock
Option Plan to employees could be "incentive" stock options designed to result
in beneficial tax treatment to the employee but no tax deduction to the Company.
Non-qualified stock options could also be granted under the Stock Option Plan,
and will be granted to the non-employee directors who receive grants of stock
options. In the event an option recipient terminated his employment or service
as an employee or director, the options would terminate during certain specified
periods. The Stock Option Plan will terminate ten years following its adoption,
unless earlier terminated by the Company.
STOCK AWARD PLAN. At a meeting of the Company's stockholders to be held no
earlier than six months after the completion of the Reorganization, the board of
directors also intends to submit the Stock Award Plan for stockholder approval.
The Stock Award Plan will provide the Bank's directors and officers an ownership
interest in the Company in a manner designed to encourage them to continue
their service with the Bank. The Bank will contribute funds to the restricted
stock plan from time to time to enable it to acquire an aggregate amount of
Common Stock equal to up to 3% of the shares of the Minority Ownership Interest
in a larger percentage of the Common Stock issued in the Offering if
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the restricted stock plan is adopted more than a year after completion of the
Offering. In the event that additional authorized but unissued shares would be
acquired by the Stock Award Plan after the Offering, the interests of existing
stockholders would be diluted. The executive officers and directors will be
awarded Common Stock under the Stock Award Plan without having to pay cash for
the shares.
Awards under the Stock Award Plan would be nontransferable and
nonassignable and during the lifetime of the recipient could only be earned by
the director or officer. If the Stock Award Plan is adopted within one year
following completion of the Offering, the shares which are subject to an award
would vest and be earned by the recipient at a rate of 20% of the shares awarded
at the end of each full twelve (12) months of service with the Bank after the
date of grant of the award. Awards would be adjusted for capital changes such
as stock dividends and stock splits. Notwithstanding the foregoing, awards would
be 100% vested upon termination of employment or service due to death or
disability, and if the Stock Award Plan is adopted more than 12 months after
completion of the Reorganization, awards would be 100% vested upon normal
retirement or a change in control of the Bank or the Company. If employment or
service were to terminate for other reasons, the award recipient would forfeit
any nonvested award. If employment or service is terminated for cause (as would
be defined in the Stock Award Plan), shares not already delivered under the
Stock Award Plan would be forfeited. Under FDIC and Department rules, if the
Stock Award Plan is adopted within the first 12 months after completion of the
Reorganization and Offering, shares of Common Stock granted under the restricted
stock plan may not exceed 3% of the Minority Ownership Interest. No individual
officer can receive more than 25% of the awards under the plan, no outside
director can receive more than 5% of the awards under the plan, and all outside
directors as a group can receive no more than 30% of the awards under the plan
in the aggregate. No determination has been made as to the specific terms of
the plan or as to awards thereunder. The Stock Award Plan would be administered
by a committee of non-employee members of the Company's board of directors. The
Stock Award Plan will terminate ten years following its adoption, unless earlier
terminated by the Company.
When shares become vested under the Stock Award Plan, the participant will
recognize income equal to the fair market value of the Common Stock earned,
determined as of the date of vesting, unless the recipient makes an election
under (S) 83(b) of the Code to be taxed earlier. The amount of income recognized
by the participant would be a deductible expense for tax purposes for the
Company. If the Stock Award Plan is adopted within one year following
completion of the Reorganization and Offering, dividends and other earnings will
accrue and be payable to the award recipient when the shares vest. If the Stock
Award Plan is adopted within one year following completion of the Reorganization
and Offering, shares not yet vested under the Stock Award Plan will be voted by
the trustee of the Stock Award Plan, taking into account the best interests of
the recipients of the Stock Award Plan grants. If the Stock Award Plan is
adopted more than one year following completion of the Reorganization and
Offering, dividends declared on unvested shares will be distributed to the
participant when paid and the participant will be entitled to vote the unvested
shares.
INDEBTEDNESS OF MANAGEMENT
Under New York Banking law, the Bank, as a mutual institution, cannot make
a loan to a trustee or a person who is an "executive officer" for regulatory
purposes, except for loans made to executive officers that are secured by a
first mortgage on a primary residence or by a deposit account at the Bank. Any
such loans that are outstanding have been made in the ordinary course of
business on the same terms and conditions as the Bank would make to any other
customer and do not involve more than a normal risk of collectibility or present
other unfavorable features. Following the Reorganization, the Bank will not be
subject to this restriction in connection with loans to directors and executive
officers. Following the Reorganization, the Board of Directors of the Bank will
reconsider its policy of only making loans to executive officers that are
secured by a first mortgage on the executive's primary residence or by a deposit
account at the Bank; however, any loans to executive officers would be made on
the same terms and conditions as the Bank would make to any other unaffiliated
customer, and will be subject to any Federal and State regulations governing
transactions between executive officers, directors and the financial institution
with which they serve.
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RESTRICTIONS ON ACQUISITION OF THE COMPANY
THE MUTUAL HOLDING COMPANY STRUCTURE. Under New York law, the Plan of
Reorganization and the Company's governing corporate instruments, at least 51%
of the Company's voting shares must be owned by the Mutual Holding Company. The
Mutual Holding Company will be controlled by its board of trustees, who will
consist of persons who also are members of the board of directors of the Company
and the Bank. The Mutual Holding Company will be able to elect all members of
the board of directors of the Company, and as a general matter, will be able to
control the outcome of all matters presented to the stockholders of the Company
for resolution by vote, except for matters that require a vote greater than a
majority. The Mutual Holding Company, acting through its board of trustees,
will be able to control the business and operations of the Company and the Bank
and will be able to prevent any challenge to the ownership or control of the
Company by Minority Stockholders. Accordingly, a change in control of the
Company and the Bank cannot occur unless the Mutual Holding Company first
converts to the stock form of organization. Although New York law, applicable
regulations and the Plan of Reorganization permit the Mutual Holding Company to
convert from the mutual to the capital stock form of organization, it is not
anticipated that a conversion of the Mutual Holding Company will occur in the
foreseeable future.
In addition to the anti-takeover aspects of the Mutual Holding Company
structure, the following provisions of the Company's Certificate of
Incorporation and bylaws and certain other regulatory provisions will restrict
the ability of stockholders to influence management policies, and which may be
deemed to have an "anti-takeover" effect. The following description of certain
of these provisions is necessarily general and, with respect to provisions
contained in the Company's Certificate of Incorporation and bylaws and the
Bank's proposed Restated Organizational Certificate and bylaws, reference should
be made in each case to the document in question, each of which is part of the
Bank's application to the Superintendent and the Company's Registration
Statement filed with the SEC. See "Additional Information." The following
discussion does not reflect the powers and provisions of the Bank's charter.
PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
RESTRICTIONS ON CALL OF SPECIAL MEETINGS. The Certificate of Incorporation
provides that a special meeting of stockholders may be called by the Chairman of
the Board of the Company or pursuant to a resolution adopted by a majority of
the board of directors. Stockholders are not authorized to call a special
meeting of stockholders.
ABSENCE OF CUMULATIVE VOTING. The Certificate of Incorporation provides
that there shall be no cumulative voting rights in the election of directors.
LIMITATION ON VOTING RIGHTS. The Certificate of Incorporation provides
that (i) no person shall directly or indirectly offer to acquire or acquire the
beneficial ownership of more than 5% of any class of equity security of the
Company, inclusive of shares of such class held by the Mutual Holding Company
(provided that such limitation shall not apply to the Mutual Holding Company or
any tax-qualified employee stock benefit plans maintained by the Company); and
that (ii) shares beneficially owned in violation of the stock ownership
restriction described above shall not be entitled to vote and shall not be voted
by any person or counted as voting stock in connection with any matter submitted
to a vote of stockholders. For these purposes, a person (including management)
who has obtained the right to vote shares of the Common Stock pursuant to
revocable proxies shall not be deemed to be the "beneficial owner" of those
shares if that person is not otherwise deemed to be a beneficial owner of those
shares.
AMENDMENTS TO CERTIFICATE OF INCORPORATION AND BYLAWS. Amendments to the
Certificate of Incorporation must be approved by the Company's board of
directors and also by a majority of the outstanding shares of the Company's
voting stock; provided, however, that approval by at least 80% of the
outstanding voting stock is generally required for certain provisions (i.e.,
provisions relating to the call of special stockholder meetings, cumulative
voting, limitation on voting rights and director liability).
The bylaws may be amended by the affirmative vote of the total number of
directors of the Company or the affirmative vote of at least 80% of the total
votes eligible to be voted at a duly constituted meeting of stockholders.
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FEDERAL RESERVE BOARD REGULATIONS
The Change in Bank Control Act and the BHCA, together with the Federal
Reserve Board regulations under those acts, require that the consent of the
Federal Reserve Board be obtained prior to any person or company acquiring
"control" of a bank holding company. Control is conclusively presumed to exist
if an individual or company acquires more than 25% of any class of voting stock
of the bank holding company. Control is rebuttably presumed to exist if the
person acquires more than 10% of any class of voting stock of a bank holding
company if either (i) the holding company has registered securities under
Section 12 of the Exchange Act or (ii) no other person will own a greater
percentage of that class of voting securities immediately after the transaction.
The regulations provide a procedure to rebut the rebuttable control presumption.
Since the Company's Common Stock will be registered under Section 12 of the
Exchange Act, any acquisition of 10% or more of the Company's Common Stock will
give rise to a rebuttable presumption that the acquiror of such stock controls
the Company, requiring the acquiror, prior to acquiring such stock, to rebut the
presumption of control to the satisfaction of the Federal Reserve Board or
obtain Federal Reserve Board approval for the acquisition of control.
Restrictions applicable to the operations of bank holding companies may deter
companies from seeking to obtain control of the Company. See "Regulation."
NEW YORK BANKING LAW
In addition to federal law, the New York State Banking Law generally
requires prior approval of the New York State Banking Board before any action is
taken that causes any entity or person to acquire direct or indirect control of
a banking institution which is organized in New York State. Control is presumed
to exist if any company or person directly or indirectly owns, controls or holds
with power to vote 10% or more of the voting stock of a banking institution or
of any company or person that owns, controls or holds with power to vote 10% or
more of the voting stock of a banking institution.
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
GENERAL
The Company is authorized to issue 8 million shares of Common Stock having
a par value of $.10 per share. The Company currently expects to issue between
2,843,760 and 3,847,440 shares, with an adjusted maximum of 4,424,556 shares, of
Common Stock. Each share of the Common Stock will have the same relative rights
as, and will be identical in all respects with, each other share of the Common
Stock. Upon payment of the purchase price for the Common Stock, in accordance
with the Plan of Reorganization, all such stock will be duly authorized, fully
paid, validly issued, and non-assessable.
THE COMMON STOCK OF THE COMPANY WILL REPRESENT NONWITHDRAWABLE CAPITAL,
WILL NOT BE AN ACCOUNT OF AN INSURABLE TYPE, AND WILL NOT BE INSURED BY THE
FDIC.
COMMON STOCK
VOTING RIGHTS. Under Delaware law, the holders of the Common Stock will
possess exclusive voting power in the Company. Each stockholder will be
entitled to one vote for each share held on all matters voted upon by
stockholders, except as discussed in "Restrictions on Acquisition of the
Company--Provisions of the Company's Certificate of Incorporation and Bylaws--
Limitation on Voting Rights." There will be no right to cumulate votes in the
election of directors.
DIVIDENDS. Upon consummation of the Reorganization, the Company's only
asset will be investments made with the net proceeds of the Offering, the ESOP
loan and the Bank's common stock. The payment of dividends by the Company is
subject to limitations which are imposed by law and applicable regulation. The
Company's source for the payment of cash dividends may in the future depend on
the receipt of dividends from the Bank. See "Dividend Policy."
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The holders of Common Stock will be entitled to receive and share equally in
such dividends as may be declared by the board of directors of the Company out
of funds legally available therefore.
LIQUIDATION OR DISSOLUTION. In the unlikely event of the liquidation or
dissolution of the Company, the holders of the Common Stock will be entitled to
receive - after payment or provision for payment of all debts and liabilities of
the Company (including all deposits in the Bank and accrued interest thereon)
and after distribution of the liquidation account established upon completion of
the Offering for the benefit of Eligible Account Holders and Supplemental
Eligible Account Holders who continue their deposit accounts at the Bank - all
assets of the Company available for distribution, in cash or in kind. See "The
Reorganization and Offering--Liquidation Rights."
NO PREEMPTIVE RIGHTS. Holders of the Common Stock will not be entitled to
preemptive rights with respect to any shares which may be issued.
TRANSFER AGENT AND REGISTRAR
_________________________________________ will act as the transfer agent
and registrar for the Common Stock.
LEGAL AND TAX MATTERS
The legality of the Common Stock and the federal income tax consequences of
the Reorganization will be passed upon for the Bank and the Company by the firm
of Luse Lehman Gorman Pomerenk & Schick, P.C., Washington, D.C., special counsel
to the Company and the Bank. The New York income tax consequences of the
Reorganization will be passed upon for the Company and the Bank by
PricewaterhouseCoopers, LLP. The federal income tax consequences of certain
matters relating to the establishment of the Charitable Foundation will be
passed upon for the Company and the Bank by PricewaterhouseCoopers, LLP.
Certain legal matters will be passed upon for Trident Securities, Inc. by
Thacher Proffitt & Wood.
EXPERTS
The financial statements of The Oneida Savings Bank and subsidiaries as of
December 31, 1997 and 1996 and for each of the years in the three-year period
ended December 31, 1997 have been included herein and in the registration
statement in reliance upon the report of PricewaterhouseCoopers, LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as "Experts" in accounting and auditing.
FinPro has consented to the publication herein of the summary of its report
to the Bank and the Company setting forth its belief as to the estimated pro
forma market value of the Common Stock upon Reorganization and its valuation
with respect to Subscription Rights.
ADDITIONAL INFORMATION
The Company has filed with the SEC a registration statement under the
Securities Act with respect to the Common Stock offered hereby. As permitted by
the rules and regulations of the SEC, this Prospectus does not contain all the
information set forth in the registration statement. Such information can be
examined without charge at the public reference facilities of the SEC located at
450 Fifth Street, N.W., Washington, D.C. 20549 and copies of such material can
be obtained from the SEC at prescribed rates. The SEC maintains a web site that
contains reports, proxy and information statements and other information
regarding issuers that file electronically with the SEC. The address of this web
site is http://www.sec.gov. The statements contained herein as to the contents
of any contract or other document filed as an exhibit to the registration
statement are, of necessity, brief descriptions thereof and are not necessarily
complete but do contain all material information regarding such documents; each
such statement is qualified by reference to such contract or document.
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The Bank has filed an Application with the Department with respect to the
Reorganization. Pursuant to the rules and regulations of the Department, this
Prospectus omits certain information contained in that Application. The
Application may be examined at the office of the Department, 2 Rector Street,
New York, New York 10006, and at the Bank's main office at 182 Main Street,
Oneida, New York, 13421-1676.
In connection with the Offering, the Company will, prior to completion of
the Offering and Reorganization, register the Common Stock with the SEC under
Section 12(g) of the Exchange Act; and, upon such registration, the Company and
the holders of its Common Stock will become subject to the proxy solicitation
rules, reporting requirements and restrictions on stock purchases and sales by
directors, officers and greater than 10% stockholders, the annual and periodic
reporting and certain other requirements of the Exchange Act. Under the Plan of
Reorganization, the Company has undertaken that it will not terminate such
registration for a period of at least three years following the Reorganization.
A copy of the Certificate of Incorporation and bylaws of the Company, as
well as the Plan of Reorganization, are available without charge from the Bank
by contacting the Corporate Secretary, 182 Main Street, Oneida, New York, 13421-
1676 (315) 363-2000. Copies of the Independent Valuation are available for
inspection at each of the Bank's offices.
113
<PAGE>
THE ONEIDA SAVINGS BANK
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of Independent Accountants................................... F-1
Financial Statements
Statements of Condition,
June 30, 1998 (Unaudited)
and December 31, 1997 and 1998................................... F-2
Statements of Income,
Six Months Ended June 30, 1998 and 1997 (Unaudited)
and Years Ended December 31, 1997, 1996 and 1995................. 51
Statements of Comprehensive Income,
Six Months Ended June 30, 1998 (Unaudited)
and Years Ended December 31, 1997, 1996 and 1995................. F-3
Statements of Changes in Net Worth,
Six Months Ended June 30, 1998 (Unaudited)
and Years Ended December 31, 1997, 1996 and 1995................. F-4
Statements of Cash Flows,
Six Months Ended June 30, 1998 and 1997 (Unaudited)
and Years Ended December 31, 1997, 1996 and 1995................. F-5 - F-6
Notes to Financial Statements,
Six Months Ended June 30, 1998 and 1997 (Unaudited)
and Years Ended December 31, 1997, 1996 and 1995................. F-7 - F-22
</TABLE>
<PAGE>
PRICEWATERHOUSECOOPERS LOGO
- -------------------------------------------------------------------------------
PRICEWATERHOUSECOOPERS LLP
ONE LINCOLN CENTER
SYRACUSE NY 13202-9972
TELEPHONE (315) 474 8541
FACSIMILE (315) 473 1385
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Trustees
The Oneida Savings Bank
In our opinion, the accompanying statements of condition and the related
statements of income, changes in net worth and of cash flows present fairly,
in all material respects, the financial position of The Oneida Savings Bank at
December 31, 1997 and 1996, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Bank's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Syracuse, New York
January 16, 1998, except for
Note 12 as to which the date
is September 15, 1998
F-1
<PAGE>
THE ONEIDA SAVINGS BANK
STATEMENTS OF CONDITION
June 30, 1998 and December 31, 1997 and 1996
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
ASSETS 1998 1997 1996
(UNAUDITED)
<S> <C> <C> <C>
Cash and due from banks $4,848,364 $4,364,055 $5,000,687
Federal funds sold 8,700,000 1,700,000 6,800,000
------------ ------------ ------------
Total cash and cash equivalents 13,548,364 6,064,055 11,800,687
Investment securities 39,570,776 43,525,625 52,925,465
Mortgage-backed securities 16,614,646 11,779,690 4,725,065
Loans receivable 141,764,762 144,160,570 137,417,559
Allowance for credit losses 1,721,417 1,792,715 1,545,649
------------ ------------ ------------
140,043,345 142,367,855 135,871,910
Premises and equipment 4,883,018 3,811,533 2,127,298
Accrued interest receivable 1,585,013 1,567,629 1,654,269
Refundable income taxes 173,646 144,946 74,439
Other real estate 292,027 308,000 858,689
Other assets 931,206 1,067,713 1,056,873
------------ ------------ ------------
TOTAL ASSETS $217,642,041 $210,637,046 $211,094,695
============ ============ ============
LIABILITIES AND NET WORTH
Due to depositors $188,035,479 $182,044,928 $184,422,995
Mortgagors' escrow funds 1,181,625 1,092,584 1,084,853
Other liabilities 394,132 379,547 48,569
------------ ------------ ------------
Total liabilities 189,611,236 183,517,059 185,556,417
------------ ------------ ------------
Net worth:
Surplus 6,524,500 6,524,500 6,524,500
Undivided profits 20,926,215 20,124,012 18,839,380
Accumulated other comprehensive income 580,090 471,475 174,398
------------ ------------ ------------
Total net worth 28,030,805 27,119,987 25,538,278
------------ ------------ ------------
TOTAL LIABILITIES AND NET WORTH $217,642,041 $210,637,046 $211,094,695
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-2
<PAGE>
THE ONEIDA SAVINGS BANK
STATEMENTS OF COMPREHENSIVE INCOME
Six Months Ended June 30, 1998 and 1997
and Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31,
-------------------------- ----------------------------------
1998 1997 1997 1996 1995
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net income $ 802,203 $ 1,095,690 $1,284,632 $1,747,780 $1,618,637
----------- ------------- ---------- ---------- ----------
Other comprehensive income, net of tax
Unrealized gains on securities:
Unrealized holding gains arising during period 173,096 120,645 531,867 (142,363) 1,740,784
Less Reclassification adjustment for
gains included in net income (8,528) 0 (81,750) (100,419) (99,702)
----------- ------------- ---------- ---------- ----------
164,568 129,645 450,117 (242,782) 1,641,082
Net income tax (benefit) effect (55,953) (41,019) (153,040) 82,546 (557,968)
----------- ------------- ---------- ---------- ----------
Other comprehensive income, net of tax 108,615 79,626 297,077 (160,236) 1,083,114
----------- ------------- ---------- ---------- ----------
COMPREHENSIVE INCOME $ 910,818 $ 1,175,316 $1,581,709 $1,587,544 $2,701,751
=========== ============= ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
THE ONEIDA SAVINGS BANK
STATEMENTS OF CHANGES IN NET WORTH
Six Months Ended June 30, 1998 (Unaudited) and
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
SURPLUS UNDIVIDED COMPREHENSIVE
FUND PROFITS INCOME TOTAL
<S> <C> <C> <C> <C>
Balance at December 31, 1994 $6,524,500 $15,472,963 $(748,480) $21,248,983
Net income 1,618,637 1,618,637
Other comprehensive income,
net of tax:
Unrealized gains on
securities net of
reclassification
adjustment 1,083,114 1,083,114
---------- ----------- --------- -----------
Balance at December 31, 1995 6,524,500 17,091,600 334,634 23,950,734
Net income 1,747,780 1,747,780
Other comprehensive income,
net of tax:
Unrealized gains on
securities net of
reclassification
adjustment (160,236) (160,236)
---------- ----------- --------- -----------
Balance at December 31, 1996 6,524,500 18,839,380 174,398 25,538,278
Net income 1,284,632 1,284,632
Other comprehensive income,
net of tax:
Unrealized gains on
securities net of
reclassification
adjustment 297,077 297,077
---------- ----------- --------- -----------
Balance at December 31, 1997 6,524,500 20,124,012 471,475 27,119,987
Net income 802,203 802,203
Other comprehensive income,
net of tax:
Unrealized gains on
securities net of
reclassification
adjustment 108,615 108,615
---------- ----------- --------- -----------
Balance at June 30, 1998 $6,524,500 $20,926,215 $ 580,090 $26,030,805
========== =========== ========= ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
THE ONEIDA SAVINGS BANK
STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 1998 and 1997
and Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1998 1997
(UNAUDITED)
<S> <C> <C>
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Net income $ 802,203 $ 1,095,690
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 235,976 155,891
Provision for credit and other real estate
losses (23,114)
Provision for deferred income taxes 100,117 (39,649)
Gain on sale of securities, net (8,528)
Amortization of premiums and discounts on
securities, net 44,054 90,878
Loss on sale of other real estate owned 23,170 35,949
Loss (gain) on sale of loans 77,135 (9,924)
Income taxes refundable (28,700) 182,999
Accrued interest receivable (17,384) 50,201
Other assets (36,020) 448,297
Other liabilities 14,585 (38,297)
Origination of loans held for sale (8,438,769) (1,127,812)
Proceeds from sale of loans 8,404,850 1,308,124
------------ -------------
Net cash provided by operating activities 1,172,690 2,128,033
------------ -------------
Cash flow from investing activities:
Purchase of investment securities (14,414,958) (6,000,000)
Principal collected on and proceeds of
maturities or sales from investment 18,551,180 8,507,008
Principal collected and proceeds from
maturities of investment securities designated
as held to maturity
Purchase of mortgage-backed securities (7,076,318) (4,990,798)
Principal collected from mortgage-backed
securities 2,205,488 335,243
Net (increase) decrease in loans 1,984,725 (4,941,246)
Purchase of bank premises and equipment (1,307,461) (529,940)
Proceeds from sale of other real estate 289,371 3389,860
------------ -------------
Net cash provided by (used in) investing
activities 232,027 (7,280,873)
------------ -------------
Cash flows from financing activities:
Net increase (decrease) in demand deposits,
savings, money market, Super NOW and
mortgagor's escrow accounts 6,411,935 (2,575,558)
Net (decrease) increase in time deposits (332,343) 990,010
------------ -------------
Net cash provided by (used in) financing
activities 6,079,592 (1,585,548)
------------ -------------
Reclassification of National balances to cash
and due from banks and other assets
Increase (decrease) in cash and cash
equivalents 7,484,309 (6,737,388)
Cash and cash equivalents at beginning of period 6,064,055 11,800,687
------------ -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 13,548,364 $ 5,063,299
============ =============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest on deposits and obligations $ 3,856,291 $ 3,909,801
Income taxes 580,700 518,025
Non-cash investing activities:
Unrealized gain (loss) on investment and
mortgages-backed securities designated as
available for sale, net of tax $ 108,615 $ 132,710
Transfer of loans to other real estate 296,568 237,218
</TABLE>
Continued
F-5
<PAGE>
THE ONEIDA SAVINGS BANK
STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 1998 and 1997
and Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
<S> <C> <C> <C>
Increase (decrease) in cash and cash
equivalents:
Cash flows from operating activities:
Net income $ 1,284,632 $ 1,747,780 $ 1,618,837
Adjustments to reconcile net income
to
net cash provided by operating
activities:
Depreciation 416,649 321,060 366,608
Provision for credit and other real
estate losses 704,144 175,727 79,800
Provision for deferred income taxes (204,493) 185,846 173,726
Gain on sale of securities, net (81,750) (100,419) (99,702)
Amortization of premiums and
discounts on securities, net 150,991 426,881 685,736
Loss on sale of other real estate
owned 47,513 4,300 31,410
Loss (gain) on sale of loans (32,522) 10,910 29,585
Income taxes refundable (70,507) (161,492) 44,774
Accrued interest receivable 86,640 45,898 75,864
Other assets (4,399) 17,086 (262,458)
Other liabilities 330,978 (22,012) 9,908
Origination of loans held for sale (3,976,263) (5,573,334) (5,325,073)
Proceeds from sale of loans 3,987,657 5,504,087 5,183,437
Reclassification of Nationar balances
to (from) cash and due from
(to) banks from other assets 687,338 (687,338)
----------- -----------
Net cash provided by operating
activities 2,639,270 3,269 656 1,934,916
----------- ----------- -----------
Cash flow from investing activities:
Purchase of investment securities (11,315,373) (29,921,615) (13,908,440)
Principal collected on and proceeds
of maturities or sales from
investment 21,048,740 19,671,647 13,943,167
Principal collected and proceeds form
maturities
of investment securities designated
as held to maturity 899,782
Purchase of mortgage-backed
securities (7,980,459)
Principal collected from mortgage-
backed securities 998,195 44,339 41,788
Net (increase) decrease in loans (7,265,279) 4,304,486 (71,392)
Purchase of bank premises and
equipment (2,100,884) (259,626) (115,413)
Proceeds from sale of other real
estate 589,494 510,370 389,359
----------- ----------- -----------
Net cash provided by (used in)
investing activities (6,005,566) (5,650,399) 1,178,861
----------- ----------- -----------
Cash flows from financing activities:
Net increase (decrease) in demand
deposits, savings, money market,
Super NOW and mortgagor's escrow
accounts (2,320,962) 3,007,720 (6,462,671)
Net (decrease) increase in time
deposits (49,374) 1,114,917 8,122,781
----------- ----------- -----------
Net cash provided by (used in)
financing activities (2,370,336) 4,122,637
----------- -----------
Increase (decrease) in cash and
cash equivalents (5,736,632) 1,741,894 4,773,887
Cash and cash equivalents at beginning
of period 11,800,687 10,058,793 5,284,906
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD $ 6,064,055 $11,800,687 $10,058,793
=========== =========== ===========
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest on deposits and obligations $ 7,900,471 $ 7,899,555
Income taxes 1,198,025 1,015,744
Non-cash investing activities:
Unrealized gain (loss) on investment
and mortgage-backed
securities designated as available
for sale, net of tax $ 297,077 $ (160,236)
Transfer of loans to other real
estate 313,576 662,593
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE>
THE ONEIDA SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
Six Months Ended June 30, 1998 and 1997 (Unaudited)
and Years Ended December 31, 1997, 1996 and 1995
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
The Oneida Savings Bank (the Bank) is a mutual savings bank chartered by
the State of New York and member of the Federal Deposit Insurance
Corporation (FDIC). The Bank is located in Central Upstate New York with
offices in the City of Oneida and the Villages of Cazenovia, Hamilton, and
Camden.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities, if any, at the date of the
financial statements. Estimates also affect the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates. Significant estimates are made in the
determination of the allowance for credit losses.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, amounts due from banks,
interest-bearing deposits (with original maturity of three months or less)
and federal funds sold. Generally, federal funds are purchased and sold for
one-day periods.
INVESTMENT SECURITIES (INCLUDING MORTGAGE-BACKED SECURITIES)
Available-for-sale securities consist of securities reported at fair value,
with net unrealized gains and losses reflected as a separate component of
net worth, net of the applicable income tax effect until realized. None of
the Bank's securities have been classified as trading or held-to-maturity
securities.
On December 31, 1995, the Bank transferred all state and municipal, public
utility and Canadian issue debt securities classified as held-to-maturity
to available-for-sale. The amortized cost of the debt securities
transferred was $3,586,483 with related unrealized gains of $256,360. These
transfers were made pursuant to the Financial Accounting Standard Board's
"Guide to Implementation of Statement 115" which provided a one-time
opportunity to reassess the appropriateness of the Bank's classifications
of all securities held at that time.
Purchases and sales of securities are recorded as of the settlement date.
Premiums and discounts are amortized and accreted, respectively, on a
systematic basis over the period of maturity, or earliest call date of the
related securities. Gains or losses on securities sold are computed based
on identified cost.
F-7
<PAGE>
THE ONEIDA SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
Six Months Ended June 30, 1998 and 1997 (Unaudited)
and Years Ended December 31, 1997, 1996 and 1995
1. ORGANIZATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ORIGINATION FEES
Origination fees on mortgages are recognized as income in the period the
loan is closed. Direct origination costs are expensed when incurred. The
difference between origination fees and the related direct costs are not
material.
LOANS
Loans are reported at their outstanding principal balance net of charge-
offs and the allowance for credit losses. Interest income is generally
recognized when income is earned using the interest method.
The accrual of interest on impaired loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments as they
become due. Interest income is subsequently recognized only to the extent
cash payments are received or when the loan is no longer impaired.
Effective January 1, 1995, the Bank adopted Statement of Financial
Accounting Standard No. 114, "Accounting by Creditors for Impairment of a
Loan." Under this standard, a loan is considered impaired, based upon
current information and events, if it is probable that the Bank will not be
able to collect the scheduled payments of principal or interest when due
according to the contractual terms of the loan agreement. The measurement
of impaired loans is generally based on the present value of expected
future cash flows discounted at the historical effective interest rate,
except that all collateral-dependent loans are measured for impairment
based on the fair value of the collateral. Adoption of this pronouncement
had no effect on the Bank's reserve for possible loan losses, determined as
of January 1, 1995.
The value of servicing assets for loans sold with servicing rights retained
is not significant and has not been recorded.
ALLOWANCE FOR CREDIT LOSSES
The adequacy of the allowance for credit losses is periodically evaluated
by the Bank in order to maintain the allowance at a level that is
sufficient to absorb probable credit losses. The allowance is increased by
provisions charged to expense and decreased by charge-offs (net of
recoveries). Management's evaluation of the adequacy of the allowance is
based on the Bank's past loan loss experience, known and inherent risks in
the portfolio, adverse circumstances that may affect the borrower's ability
to repay, the estimated value of any underlying collateral, and an analysis
of the levels and trends of delinquencies, charge offs, and the risk
ratings of the various loan categories. Loans are charged against the
allowance for credit losses when management believes that the
collectibility of principal is unlikely.
F-8
<PAGE>
THE ONEIDA SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
Six Months Ended June 30, 1998 and 1997 (Unaudited)
and Years Ended December 31, 1997, 1996 and 1995
1. ORGANIZATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated depreciation.
Depreciation is computed principally by the straight-line method over the
estimated useful life of each type of asset. Maintenance and repairs are
charged to operating expense as incurred.
OTHER REAL ESTATE
Other real estate is comprised of real estate acquired through foreclosure
or acceptance of a deed in lieu of foreclosure, and is carried at the lower
of the recorded investment in the loan or fair value less estimated
disposal costs.
INCOME TAXES
Deferred income taxes are provided for revenue and expense items that are
reported in different periods for financial reporting purposes than for tax
purposes, principally depreciation allowance for credit losses, pension
benefits, and unrealized gains and losses on available-for-sale
investments. Deferred tax assets and liabilities are reflected at currently
enacted income tax rates applicable to the period in which the deferred tax
assets or liabilities are expected to be realized or settled. As changes in
tax laws or rates are enacted, deferred tax assets and liabilities are
adjusted through the provision for income taxes.
SURPLUS FUND AND UNDIVIDED PROFITS
The surplus fund of the Bank primarily represents accumulated mandatory
transfers from undivided profits required by New York State banking
regulations. Such mandatory transfer are computed at 10% of "net earnings",
as defined, and are required in each year so long as the net worth of the
Bank is less than 10% of the amount due depositors. The surplus fund is
subject to certain restrictions under New York State banking regulations.
Undivided profits represent accumulated undistributed net earnings of the
Bank which has not been allocated to the surplus fund and is not restricted
as to use under New York State banking regulations.
F-9
<PAGE>
THE ONEIDA SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
Six Months Ended June 30, 1998 and 1997 (Unaudited)
and Years Ended December 31, 1997, 1996 and 1995
2. INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES
Investment securities and mortgage-backed securities consist of the
following:
<TABLE>
<CAPTION>
JUNE 30, 1998
AMORTIZED GROSS UNREALIZED
COST GAINS LOSSES FAIR VALUE
<S> <C> <C> <C> <C>
Investment Securities
Available for sale
------------------
portfolio:
---------
Debt securities:
U.S. Agencies $ 25,295,984 $ 42,139 $ (30,244) $ 25,307,879
U.S. Government 1,000,924 7,506 0 1,008,430
Corporate 7,646,723 41,303 0 7,688,026
State and municipals 1,619,871 141,639 0 1,761,510
Public utilities 400,000 3,808 0 403,808
------------ -------- --------- ------------
35,963,502 236,395 (30,244) 36,169,653
Stock investments:
Mutual funds and stocks 2,721,495 678,628 0 3,401,123
------------ -------- --------- ------------
$ 38,684,997 $916,023 $ (30,244) $ 39,570,776
============ ======== ========= ============
Mortgage-Backed Securities
Available for sale
------------------
portfolio:
---------
Federal National
Mortgage Association $ 10,483,558 $ 56,951 $ (17,177) $ 10,523,332
Federal Home Loan
Mortgage Corp. 5,947,847 36,122 (3,527) 5,980,442
Government National
Mortgage Assoc. 14,895 278 0 15,173
Collateral Mortgage
Obligations 87,308 8,391 0 95,699
------------ -------- --------- ------------
$ 16,533,608 $101,742 $ (20,704) $ 16,614,646
============ ======== ========= ============
<CAPTION>
DECEMBER 31, 1997
AMORTIZED GROSS UNREALIZED
COST GAINS LOSSES FAIR VALUE
<S> <C> <C> <C> <C>
Investment Securities
Available for sale
------------------
portfolio:
---------
Debt securities:
U.S. Agencies $ 24,504,368 $ 52,548 $ (43,387) $ 24,513,329
U.S. Government 2,002,001 12,499 2,014,500
Corporate 11,833,769 44,226 11,877,995
State and municipals 2,162,051 162,287 2,324,338
Public utilities 749,731 4,824 754,555
------------ -------- --------- ------------
41,251,920 276,384 (43,587) 41,484,717
Stock investments:
Mutual funds and stocks 1,593,670 447,238 2,040,908
------------ -------- --------- ------------
$ 42,845,590 $723,622 $ (43,587) $ 43,525,625
============ ======== ========= ============
Mortgage-Backed Securities
Available for sale
------------------
portfolio:
---------
Federal National
Mortgage Association $ 7,752,088 $ 64,030 $ 0 $ 7,816,118
Federal Home Loan
Mortgage Corp. 3,806,988 31,162 0 3,838,150
Government National
Mortgage Assoc. 16,342 320 0 16,662
Collateral Mortgage
Obligations 98,513 10,247 0 108,760
------------ -------- --------- ------------
$ 11,673,931 $105,759 $ 0 $ 11,779,690
============ ======== ========= ============
</TABLE>
F-10
<PAGE>
THE ONEIDA SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
Six Months Ended June 30, 1998 and 1997 (Unaudited)
and Years Ended December 31, 1997, 1996 and 1995
2. INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1996
AMORTIZED GROSS UNREALIZED
COST GAINS LOSSES FAIR VALUE
<S> <C> <C> <C> <C>
INVESTMENT SECURITIES
Available for sale
------------------
portfolio:
---------
Debt securities:
U.S. Agencies $21,502,945 $ 30,390 $ (136,041) $21,397,294
U.S. Government 5,013,005 11,570 (2,689) 5,021,886
Corporate 21,886,471 63,382 (14,083) 21,931,770
State and municipals 2,206,902 173,052 2,379,954
Public utilities 848,116 5,176 (7,274) 846,018
----------- ----------- ----------- -----------
51,453,439 283,570 (160,087) 51,576,922
Stock investments:
Mutual funds and other
stocks 1,193,665 154,878 1,348,543
----------- ----------- ----------- -----------
$52,647,104 $ 438,448 $ (160,087) $52,925,465
=========== =========== =========== ===========
MORTGAGE-BACKED SECURITIES
Available for sale
------------------
portfolio:
---------
Federal National Mortgage
Association $ 3,593,885 $ 7,914 $ (14,458) $ 3,533,341
Federal Home Loan Mortgage
Corp. 1,034,691 5,775 (479) 1,039,987
Government National
Mortgage Assoc. 18,720 158 0 18,878
Collateral Mortgage
Obligations 119,464 13,395 0 132,859
----------- ----------- ----------- -----------
$ 4,712,760 $ 27,242 $ (14,937) $ 4,725,065
=========== =========== =========== ===========
The amortized cost and fair value of available-for-sale securities (other
than equity securities) at June 30, 1998 and December 31, 1997, by
contractual maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
AMORTIZED AMORTIZED
COST FAIR VALUE COST FAIR VALUE
<S> <C> <C> <C> <C>
Due in one year or less $ 7,031,381 $ 7,022,830 $ 9,719,108 $ 9,736,798
Due after one year through
five years 14,084,806 14,167,338 27,714,532 24,811,148
Due after five years
through ten years 14,575,686 14,679,874 6,030,012 6,125,765
Due after ten years 290,629 299,611 788,268 809,006
=========== =========== =========== ===========
$35,963,502 $36,169,653 $41,251,920 $41,484,717
=========== =========== =========== ===========
</TABLE>
Proceeds from sale and maturity of available-for-sale securities for the
six months ended June 30, 1998 and 1997 and the years ended December 31,
1997, 1996 and 1995 were $18,522,722, $8,490,000, $21,013,593, $19,581,306
and $13,899,861, respectively. Gross gains of $8,528, $-0-, $83,156,
$100,419 and $103,087 and gross losses of $-0-, $-0-, $1,406, $-0- and
$21,705 were realized on these sales for the six months ended June 30, 1998
and 1997 and the years ended December 31, 1997, 1996 and 1995,
respectively.
F-11
<PAGE>
THE ONEIDA SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
Six Months Ended June 30, 1998 and 1997 (Unaudited)
and Years Ended December 31, 1997, 1996 and 1995
3. LOANS RECEIVABLE
The components of loans receivable in the statements of condition are as
follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997 1996
<S> <C> <C> <C>
Residential $ 96,927,859 $105,269,408 $108,324,643
Consumer loans 16,837,781 12,722,039 8,193,509
Commercial real estate 16,397,900 16,581,665 15,658,410
Commercial loans 11,601,222 9,587,458 5,240,997
------------ ------------ ------------
141,764,762 144,160,570 137,417,559
Allowance for credit losses (1,721,417) (1,792,715) (1,545,649)
------------ ------------ ------------
Net loans $140,043,345 $142,367,855 $135,871,910
============ ============ ============
</TABLE>
The Bank grants commercial, consumer and residential loans primarily
throughout Madison County. Although the Bank has a diversified loan
portfolio, a substantial portion of its debtors' ability to honor their
contracts is dependent upon the employment and economic conditions within
the County. At June 30, 1998, December 31, 1997 and 1996 loans to officers
and trustees were not significant.
An analysis of the change in the allowance for credit losses is as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, DECEMBER 31,
1998 1997 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Balance, beginning
of period $1,792,715 $1,545,649 $1,545,649 $1,781,292 $2,117,012
Loans charged off (117,063) (82,185) (299,356) (176,487) (558,376)
Recoveries
credited 45,765 25,497 69,536 44,059 142,856
Provision for
credit losses (23,114) 476,886 (103,215) 79,800
---------- ---------- ---------- ---------- ----------
Balance, end of
period $1,721,417 $1,465,847 $1,792,715 $1,545,649 $1,781,292
========== ========== ========== ========== ==========
</TABLE>
As of June 30, 1998, December 31, 1997 and 1996, the Bank had no impaired
loans for which specific valuation allowances were recorded.
Loans having carrying values of $296,568, $313,576 and $662,593 were
transferred to other real estate as of June 30, 1998 and December 31, 1997
and 1996, respectively.
F-12
<PAGE>
THE ONEIDA SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
Six Months Ended June 30, 1998 and 1997 (Unaudited)
and Years Ended December 31, 1997, 1996 and 1995
4. BANK PREMISES AND EQUIPMENT
Bank premises and equipment consist of the following at June 30, 1998,
December 31, 1997 and 1996:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997 1996
<S> <C> <C> <C>
Land and buildings $5,998,722 $5,282,831 $3,464,008
Equipment and fixtures 2,751,397 2,364,479 2,082,418
Construction in progress 205,204
---------- ---------- ----------
8,955,323 7,647,310 5,546,426
Accumulated depreciation (4,072,305) (3,835,777) (3,419,128)
---------- ---------- ----------
Net book value $4,883,018 $3,811,533 $2,127,298
========== ========== ==========
</TABLE>
5. DUE TO DEPOSITORS
Amounts due to depositors are as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997 1996
<S> <C> <C> <C>
Demand $ 15,799,979 $ 13,947,070 $ 12,112,519
Savings 42,826,680 41,008,299 41,368,747
Money market and Super NOW 18,928,914 16,277,310 20,080,106
Time deposit 110,479,906 110,812,249 110,861,623
------------ ------------ ------------
Total due to depositors $188,035,479 $182,044,928 $184,422,995
============ ============ ============
</TABLE>
At June 30, 1998 and December 31, 1997 and 1996, time deposits with
balances in excess of $100,000 totalled $21,145,647, $21,012,173 and
$18,393,966, respectively.
The contractual maturity of time deposits are as follows:
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
-------------------- -------------------- --------------------
MATURITY AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
<S> <C> <C> <C> <C> <C> <C>
One year or less $ 67,853,000 61.4 $ 68,959,000 62.2 $ 64,160,000 57.9
Over one year to three
years 37,650,000 34.1 36,817,000 33.2 35,320,000 31.9
Over three years 4,977,000 4.5 5,036,000 4.6 11,382,000 10.2
------------ ----- ------------ ----- ------------ -----
$110,480,000 100.0 $110,812,000 100.0 $110,862,000 100.0
============ ===== ============ ===== ============ =====
</TABLE>
F-13
<PAGE>
THE ONEIDA SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
Six Months Ended June 30, 1998 and 1997 (Unaudited)
and Years Ended December 31, 1997, 1996 and 1995
6. INCOME TAXES
The components of deferred income taxes included in other assets in the
statements of condition are approximately as follows:
JUNE 30, DECEMBER 31,
1998 1997 1997 1995
ASSET (LIABILITY) ASSET (LIABILITY)
Allowance for loan losses $ 567,000 $ 461,000 $ 574,000 $ 495,000
Depreciation 256,000 272,00 226,000 188,000
Investment securities (387,000) (169,000) (314,000) (116,000)
Pension benefits (202,000) (209,000) (205,000) (220,000)
Other (133,000) (102,000) (7,000) (80,000)
--------- --------- --------- ---------
Total deferred income tax
asset, net $ 101,000 $ 253,000 $ 274,000 $ 267,000
========= ========= ========= =========
The provision (benefit) for income taxes consists of the following:
JUNE 30, DECEMBER 31,
1998 1997 1997 1996 1995
Current:
Federal $ 351,202 $ 543,462 $ 869,413 $ 668,237 $ 599,555
State 90,681 155,007 216,080 171,217 124,219
Deferred:
Federal 88,298 (15,462) (158,413) 145,763 129,545
State 11,819 (24,007) (46,080) 40,083 44,181
--------- --------- --------- ----------- ---------
$ 552,000 $ 659,000 $ 881,000 $ 1,025,300 $ 897,500
========= ========= ========= =========== =========
A reconciliation of the federal statutory rate to the effective income tax
rate is as follows;
JUNE 30, DECEMBER 31,
1998 1997 1997 1996 1995
Federal statutory income tax rate 34% 34% 34% 34% 34%
State tax, net of federal benefit 5 5 6 5 4
Tax exempt investment income 2 (1) (3) (2) (3)
Other 3 3
--- --- --- --- ---
Effective tax rate 44% 38% 40% 37% 35%
=== === === === ===
7. RETIREMENT PLAN
The Bank provides a noncontributory defined benefit plan covering
substantially all employees. Under the plan, retirement benefits are
primarily a function of the employee's years of service and level of
compensation. The Bank's policy is to fund the plan in amounts sufficient
to pay liabilities.
F-14
<PAGE>
THE ONEIDA SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
Six Months Ended June 30, 1998 and 1997 (Unaudited)
and Years Ended December 31, 1997, 1996 and 1995
7. RETIREMENT PLAN (CONTINUED)
Plan assets consist primarily of temporary cash investments, and listed
stocks and bonds. The following table represents a reconciliation of the
funded status of the plan at October 1, 1997 (date of the most recent
actuarial study) and October 1, 1996:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested $2,406,000 $2,024,500
Non-vested 16,200 142,500
---------- ----------
Accumulated benefit obligation $2,422,200 $2,167,000
========== ==========
Projected benefit obligation for service
rendered to date $2,986,100 $2,758,400
Plan assets at fair value 3,943,500 3,336,400
---------- ----------
Plan assets in excess of projected benefit
obligation 957,400 578,000
Unrecognized net (gain) loss (384,500) 21,600
Amounts contributed subsequent to October 1 39,900
Unrecognized prior service cost liability (11,800) (13,100)
Unrecognized net asset at date of adoption
being amortized over 15 years (48,400) (76,600)
---------- ----------
Prepaid pension cost at December 31 $ 512,700 $ 549,800
========== ==========
</TABLE>
The net pension cost for the years ended December 31 includes the
following components:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Service cost benefits earned during the
period $127,200 $138,470 $110,228
Interest cost on projected benefit
obligation 200,900 193,466 177,142
Actual return on plan assets (719,000) (403,078) (493,976)
Net amortization and deferral 428,000 139,904 274,635
-------- -------- --------
Net periodic pension cost $ 37,100 $ 68,762 $ 68,029
======== ======== ========
</TABLE>
The assumptions used in determining the actuarial present value of the
projected benefit obligations are as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Weighted average assumed discount rate 7.25% 7.75%
Weighted average expected long-term rate of return on assets 8.00% 8.00%
Rate of increase in future compensation 5.00% 5.50%
</TABLE>
F-15
<PAGE>
THE ONEIDA SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
Six Months Ended June 30, 1998 and 1997 (Unaudited)
and Years Ended December 31, 1997, 1996 and 1995
7. RETIREMENT PLAN (CONTINUED)
In addition to the retirement plan, the Bank sponsors a 401(k) savings plan
which enables employees who meet the plan's eligibility requirements to
defer income on a before tax basis. Under the plan, employees may elect to
contribute a portion of their compensation, with the Bank matching the
contribution up to 3% of compensation. Contributions associated with the
plan amounted to $31,422, $26,518, $56,167, $58,311 and $53,283 for the six
months ended June 30, 1998 and 1997 and the years ended December 31, 1997,
1996 and 1995, respectively.
8. OTHER OPERATING EXPENSES
Other expenses includes:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31
----------------- --------------------------------
1998 1997 1997 1996 1995
<S> <C> <C> <C> <C> <C>
FDIC and N.Y.S.
assessment $ 13,673 $ 13,950 $ 28,010 $ 6,171 $ 215,855
Advertising 80,221 89,617 153,792 174,926 183,162
Postage and telephone 83,431 62,347 123,132 120,334 113,996
Printing and supplies 44,657 33,208 71,676 69,612 71,731
Trustees compensation 62,700 39,600 90,700 88,350 115,000
Professional fees 135,886 46,403 140,438 110,159 114,665
Travel and meetings 104,415 51,020 119,219 85,395 76,113
Insurance 36,967 35,789 63,661 70,201 72,383
Dues and
subscriptions 30,226 28,110 57,495 47,742 45,526
Service fees 41,170 32,000 76,480 82,286 83,307
ORE expenses 18,847 95,805 374,426 385,058 163,437
Contributions 33,504 64,463 439,629 101,429
Sales tax 23,736 14,857 33,320 30,762 28,093
Other 78,705 31,353 107,833 119,187 237,897
-------- -------- ---------- ---------- ----------
$788,138 $638,522 $1,879,811 $1,491,612 $1,521,165
======== ======== ========== ========== ==========
</TABLE>
9. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
FASB Statement No. 107, "Disclosure about Fair Value of Financial
Instruments", requires disclosure of fair value information about financial
instruments, whether or not recognized in the balance sheet, for which it
is practicable to estimate that value. In cases where quoted market prices
are not available, fair values are based on estimates using present value
or other valuation techniques. Those techniques are significantly affected
by the assumptions used, including the discount rate and estimates of
future cash flows. In that regard, the derived fair value estimates cannot
be substantiated by comparison to independent markets and in many cases,
could not be realized in immediate settlement of the instrument. Statement
No. 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate
fair value amounts presented do not represent the underlying value of the
Bank.
F-16
<PAGE>
THE ONEIDA SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
Six Months Ended June 30, 1998 and 1997 (Unaudited)
and Years Ended December 31, 1997, 1996 and 1995
9. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to
estimate that value:
CASH AND CASH EQUIVALENTS
The carrying amounts reported in the statements of condition for cash and
cash equivalents are a reasonable estimate of fair value.
INVESTMENT SECURITIES (INCLUDING MORTGAGE-BACKED SECURITIES)
For investment securities, fair value equals quoted market price, if
available. If a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities.
LOAN RECEIVABLES
For certain homogeneous categories of loans, such as some residential
mortgages and other consumer loans, fair value is estimated using the
quoted market prices for securities backed by similar loans, adjusted for
differences in loan characteristics. The fair value of other types of loans
is estimated by discounting the future cash flows using the current rates
at which similar loans would be made to borrowers with similar credit
ratings and for the same remaining maturities. The carrying amount of
accrued interest approximates its fair value.
DEPOSIT LIABILITIES
The fair value of demand deposits, savings accounts, and certain money
market deposits is the amount payable on demand at the reporting date
(i.e., their carrying amounts). The fair value of fixed-maturity
certificates of deposit is estimated using the rates currently offered for
deposits of similar remaining maturities.
OFF-BALANCE SHEET INSTRUMENTS
Off-balance sheet financial instruments consist of letters of credit and
commitments to extend credit. The fair value of these financial instruments
is not significant.
F-17
<PAGE>
THE ONEIDA SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
Six Months Ended June 30, 1998 and 1997 (Unaudited)
and Years Ended December 31, 1997, 1996 and 1995
9. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The estimated fair values of the Bank's financial instruments are as
follows (dollars in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
-------------------- -----------------------------------------
1998 1997 1996
CARRYING ESTIMATED CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE AMOUNT FAIR VALUE
<S> <C> <C> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and cash
equivalents $ 13,548 $ 13,548 $ 6,064 $ 6,064 $ 11,801 $ 11,801
Investment
securities 39,571 39,571 55,197 55,197 57,518 57,518
Mortgage-backed
securities 16,615 16,615 109 109 133 133
Loans receivable 141,764 140,672 144,161 144,005 137,418 134,068
Allowance for credit
losses (1,721) (1,793) (1,546)
-------- -------- -------- -------- -------- --------
Net loans 140,043 140,672 142,368 144,005 135,872 134,068
Accrued interest
receivable 1,585 1,585 1,568 1,568 1,654 1,654
-------- -------- -------- -------- -------- --------
Total financial
assets $211,362 $210,406 $205,306 $206,943 $206,978 $205,174
======== ======== ======== ======== ======== ========
FINANCIAL
LIABILITIES:
Due to depositors $188,035 $189,965 $182,045 $184,149 $184,423 $188,460
-------- -------- -------- -------- -------- --------
Total financial
liabilities $188,035 $189,965 $182,045 $184,149 $184,423 $188,460
======== ======== ======== ======== ======== ========
</TABLE>
10. COMMITMENTS
The Bank is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments consist primarily of commitments to extend
credit and letters of credit, which involve, to varying degrees, elements
of credit risk in excess of the amount recognized in the statement of
condition. The contract amount of those commitments and letters of credit
reflects the extent of involvement the Bank has in those particular classes
of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the
counter party to the financial instrument for commitments to extend credit
and letters of credit is represented by the contractual amount of the
instruments. The Bank uses the same credit policies in making commitments
and letters of credit as it does for on-balance-sheet instruments. The
contract amount of these financial instruments approximates their market
value.
CONTRACT
AMOUNT
Financial instruments whose contract amounts represent
credit risk:
At June 30, 1998 $8,951,870
At December 31, 1997 $8,946,362
F-18
<PAGE>
THE ONEIDA SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
Six Months Ended June 30, 1998 and 1997 (Unaudited)
and Years Ended December 31, 1997, 1996 and 1995
10. COMMITMENTS (CONTINUED)
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.
Standby letters of credit written are conditional commitments issued by the
Bank to guarantee the performance of a customer to a third party. The
credit risk involved in issuing letters of credit is essentially the same
as that involved in extending loan facilities to customers. Since the
letters of credit are expected to expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash
requirements.
The Bank evaluates each customer's creditworthiness on a case-by-case
basis. For both commitments to extend credit and letters of credit, the
amount of collateral obtained, if deemed necessary by the Bank upon
extension of credit, is based on management's credit evaluation of the
counterparty. Collateral held varies, but includes residential and
commercial real estate.
The Bank has available a $6,122,000 line of credit with the Federal Home
Loan Bank of which $0 is outstanding at June 30, 1998 and December 31,
1997.
At December 31, 1995, the Bank had available an unused line of credit of
$3,000,000 with Key Bank of New York which is subject to renewal annually.
11. REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory--and possibly additional
discretionary--actions by regulators that, if undertaken, could have a
direct material effect on the Bank's financial statements. Under capital
adequacy guidelines and the regulatory frameworks for prompt corrective
action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's assets, liabilities, and certain off-
balance-sheet items as calculated under regulatory accounting practices.
The Bank's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings,
and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to
average assets (as defined). Management believes, as of June 30, 1998,
December 31, 1997 and 1996, that the Bank meets all capital adequacy
requirements to which it is subject.
F-19
<PAGE>
THE ONEIDA SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
Six Months Ended June 30, 1998 and 1997 (Unaudited)
and Years Ended December 31, 1997, 1996 and 1995
11. REGULATORY MATTERS (CONTINUED)
As of December 31, 1997, the most recent notification from the Federal
Deposit Insurance Corporation categorized the Bank as well capitalized
under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, the Bank must maintain minimum total risk-
based, Tier I risk-based, and Tier I leverage ratios. There are no
conditions or events since that notification that management believes have
changed the institution's category.
The Bank's actual capital amounts and ratios are as follows:
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
----------------- ----------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1998:
Total Capital
(to Risk Weighted
Assets) $29,019,180 23.1% $10,025,942 8% $12,532,427 10%
Tier I Capital
(to Risk Weighted
Assets) $27,450,715 21.0% $ 5,012,971 4% $ 7,519,456 7.6%
Tier I Capital
(to Average Assets) $27,450,715 12.0% $ 5,012,971 4% $ 6,266,213 7.5%
As of December 31,
1997:
Total Capital
(to Risk Weighted
Assets) $28,189,650 22.9% $ 9,843,159 8% $12,303,949 10%
Tier I Capital
(to Risk Weighted
Assets) $26,648,512 21.7% $ 4,921,580 4% $ 7,382,369 6%
Tier I Capital
(to Average Assets) $26,648,512 12.8% $ 4,921,580 4% $ 6,151,974 5%
As of December 31,
1996:
Total Capital
(to Risk Weighted
Assets) $26,907,072 21.8% $ 9,876,230 8% $12,315,287 10%
Tier I Capital
(to Risk Weighted
Assets) $25,363,880 20.5% $ 4,938,115 4% $ 7,407,172 6%
Tier I Capital
(to Average Assets) $25,363,880 12.1% $ 4,938,115 4% $ 6,172,643 5%
</TABLE>
12. CONTINGENCY
As of December 31, 1994, the Bank was a stockholder and customer of
Nationar, a trust company jointly owned by 67 savings banks throughout New
York State. Nationar performed the Bank's investment securities custody
functions. On February 6, 1995 the New York State Banking Department
assumed the operations of Nationar due to financial instability. All of the
Banks investment securities held in custody by Nationar on February 6 were
transferred to the Federal Home Loan Bank of New York for safekeeping.
F-20
<PAGE>
THE ONEIDA SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
Six Months Ended June 30, 1998 and 1997 (Unaudited)
and Years Ended December 31, 1997, 1996 and 1995
12. CONTINGENCY (CONTINUED)
As of February 6, the Bank had due from bank balances at Nationar with an
aggregate carrying value of $687,338. In connection with Nationar's
liquidation, management had filed claims with the State Banking Department
to recover its funds. During 1996, the Bank received in full the $687,338
due from the bank balances outstanding at Nationar.
13. RECENT DEVELOPMENTS
On June 4, 1998, the Board of Trustees of The Oneida Savings Bank adopted a
Plan of Reorganization from a Mutual Savings Bank to a Mutual Holding
Company and Stock Issuance Plan (the "Plan") pursuant to which the Bank
proposes to reorganize from a state-chartered mutual savings bank into the
mutual holding company structure (the "Reorganization") under the laws of
the State of New York and the regulations of the Banking Board and the
FDIC, and other applicable Federal laws and regulations. As part of the
Reorganization and the Plan, the Bank will convert to a New York-chartered
stock savings bank (the "Stock Bank"), and will establish Oneida Financial,
MHC (the "MHC") as a New York corporation and Oneida Financial Corp. (the
"Holding Company") as a Delaware corporation. The Holding Company will be a
majority-owned subsidiary of the MHC at all times so long as the MHC
remains in existence, and the Stock Bank will become a wholly-owned
subsidiary of the Holding Company. Concurrently with the Reorganization,
the Holding Company intends to offer for sale up to 49.0% of its Common
Stock in the Stock Offering on a priority basis to qualifying depositors
and Tax-Qualified Employee Plans of the Bank, with any remaining shares
offered to the public in a Community Offering.
The primary purpose of the Reorganization is to establish a holding company
and stock savings bank charter which will enable the Bank to compete and
expand more effectively in the financial services marketplace. The
Reorganization will permit the Holding Company to issue Capital Stock,
which is a source of capital not available to mutual savings banks. Since
the Holding Company will not be offering all of its common stock for sale
to depositors and the public in the Stock Offering, the Reorganization will
result in less capital raised in comparison to a standard mutual-to-stock
conversion. The Reorganization also will offer the Bank more capital
raising opportunities to effect future transactions, including the
acquisition of banks and other financial services companies, since a
majority of the Holding Company's common stock will be available for sale
in the future. It will also provide the Bank with greater flexibility to
structure and finance the expansion of its operations, including the
potential acquisition of other financial institutions. Lastly, the
Reorganization will enable the Bank to better manage its capital by
providing broader investment opportunities through the holding company
structure and by enabling the Bank to distribute excess capital to
stockholders of the Holding Company. Although the Reorganization and Stock
Offering will create a stock savings bank and stock
F-21
<PAGE>
THE ONEIDA SAVINGS BANK
NOTES TO FINANCIAL STATEMENTS
Six Months Ended June 30, 1998 and 1997 (Unaudited)
and Years Ended December 31, 1997, 1996 and 1995
13. RECENT DEVELOPMENTS (CONTINUED)
holding company, only a minority of the Common Stock will be offered for
sale in the Stock Offering. As a result, the Bank's mutual form of
ownership and its ability to remain an independent savings bank and to
provide community-oriented financial services will be preserved through the
mutual holding company structure.
As part of the Reorganization, and consistent with the Bank's ongoing
commitment to remain an independent community-oriented savings bank, the
Bank may establish a charitable foundation. The charitable foundation would
be intended to compliment the Bank's existing community reinvestment and
charitable activities in a manner that would allow the local community to
share in the growth and success of the Bank. The Holding Company may donate
to the charitable foundation immediately following the Reorganization cash,
securities or Common Stock in an amount equal to up to 5% of the Common
Stock issued in the Stock Offering.
The Reorganization is subject to the approval of the New York State Banking
Department, the Federal Reserve Board and the FDIC.
F-22
<PAGE>
GLOSSARY
AMT Alternative minimum tax
AMTI Alternative minimum taxable income
ARM Adjustable rate mortgage loan
Associate The term "Associate" of a person is defined to mean
(i) any corporation or organization (other than the
Bank or its subsidiaries or the Company) of which such
person is a director, officer, partner or 10%
shareholder;
(ii) any trust or other estate in which such person has
a substantial beneficial interest or serves as trustee
or in a similar fiduciary capacity; provided, however
that such term shall not include any employee stock
benefit plan of the Company or the Bank in which such a
person has a substantial beneficial interest or as a
trustee or in a similar fiduciary capacity, and
(iii) any relative or spouse of such person, or
relative of such spouse, who either has the same home
as such person or who is a director or officer of the
Bank or its subsidiaries or the Company
ATM Automated Teller Machine
Bank The Oneida Savings Bank
BHCA Bank Holding Company Act of 1956, as amended
BIF Bank Insurance Fund administered by the FDIC
Charitable Foundation The Oneida Savings Bank Charitable Foundation to be
established by The Oneida Savings Bank and Oneida
Financial Corp. to which the Bank and the Company will
contribute cash and shares of Common Stock
CMO Collateralized mortgage obligations
Code The Internal Revenue Code of 1986, as amended
Community Offering Offering for sale to members of the general public of
any shares of Common Stock not subscribed for in the
Subscription Offering, with preference given first to
natural persons residing in Madison county, New York in
the cities and towns of Annsville, Camden, Florence,
Sherrill, Vernon, Verona and Vienna in Oneida county,
New York and secondly to natural persons residing in
the towns of Fabius, Manilus, and Pompey in Onondaga
county, New York
Common Stock Common Stock, par value of $.10 per share, offered by
the Company in connection with the Reorganization
Company Oneida Financial Corp. the parent holding company for
The Oneida Savings Bank and issuer of the shares of
Common Stock in the Offering
Department The New York State Banking Department
G-1
<PAGE>
DGCL Delaware General Corporation Law
Eligible Account Holders Holders of deposit accounts with The Oneida
Savings Bank with account balances of at least
$100 as of the close of business on December 31,
1996
EPS Earnings per share
ERISA Employee Retirement Income Security Act of 1974,
as amended
ESOP The Employee Stock Ownership Plan and Trust
Estimated Valuation Range Estimated pro forma market value of the Common
Stock ranging from $28,437,600 to $38,474,400. The
Estimated Valuation Range may be increased to
$44,245,560 without a resolicitation of
subscribers
Exchange Act Securities Exchange Act of 1934, as amended
Expiration Date __:__ _______, New York Time, on _______, 1998
FASB Financial Accounting Standards Board
Federal Reserve Board Board of Governors of the Federal Reserve System
FDIC Federal Deposit Insurance Corporation
FDICIA Federal Deposit Insurance Corporation Improvement
Act of 1991, as amended
FHA Federal Housing Administration
FHLB Federal Home Loan Bank
FinPro FinPro, Inc., an independent valuation appraisal
firm
FNMA Federal National Mortgage Association
Funds Act Depositor Insurance Funds Act of 1996
GNMA Government National Mortgage Association
Guidelines Interagency Guidelines Prescribing Standards of
Safety and Soundness
Independent Valuation The appraisal of the pro forma market value of the
Company's Common Stock as determined by FinPro,
Inc. as of September 9, 1998, and updated on
October 7, 1998
IRA Individual retirement account or arrangement
IRS Internal Revenue Service
Minority Stockholders Stockholders of the Company other than the Mutual
Holding Company
MMDA Money Market Demand Account
G-2
<PAGE>
Mutual Holding Company Oneida Financial, MHC, a New York chartered mutual
corporation, which will own, and which by law must
own, a majority of the shares of Common Stock of
the Company
NASD National Association of Securities Dealers, Inc.
Nasdaq System National Association of Securities Dealers
Automated Quotation System
NOW account Negotiable Order of Withdrawal Account
NPV Net portfolio value
Offering The offer and sale of Common Stock to depositors
and the public pursuant to the Prospectus
Offering Range The offer and sale by the Company of between
1,266,588 and 1,713,620 shares (subject to
adjustment to 1,970,663 shares) of Common Stock
pursuant to the Prospectus
Plan of Reorganization The Oneida Savings Bank Plan of Reorganization from
a Mutual Savings Bank to a Mutual Holding Company
and Stock Issuance Plan
Reorganization The reorganization of the Bank from the mutual to
the stock form of organization, the organization of
the Company, the issuance of all of the Bank's
common stock to the Company, the issuance of a
majority of Company Common Stock to the Mutual
Company, and the offer and sale of the Minority
Shares to depositors and the public pursuant to the
Prospectus
REO Real estate owned
SEC Securities and Exchange Commission
Special Meeting Special Meeting of depositors of the Bank called
for the purpose of approving the Plan of
Reorganization
Stock Order Form Form for ordering stock accompanied by a
certification concerning certain matters
Subscription Offering Offering of non-transferable rights to subscribe
for the common stock, in order of priority, to
eligible account holders, the ESOP, and
supplemental eligible account holders
Subscription Price The $10.00 purchase price per share for the Common
Stock in the Offering
Supplemental Eligible Depositors of the Bank, who are not eligible
Account Holders account holders, with account balances of at least
$100 on September 30, 1998
Superintendent The Superintendent of Banks of the State of New
York
Voting Record Date The close of business on ___________, 1998, the
date for determining depositors entitled to vote at
the Special Meeting
G-3
<PAGE>
================================================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN AS CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE BANK. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE
SHARES OF COMMON STOCK OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH
OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF.
ONEIDA FINANCIAL CORP.
(Proposed Holding Company for
The Oneida Savings Bank)
UP TO 1,970,663 SHARES
Common Stock
($.10 par value per share)
-------------------------
PROSPECTUS
-------------------------
TRIDENT SECURITIES, INC.
__________, 1998
THESE SECURITIES ARE NOT DEPOSITS OR ACCOUNTS
AND ARE NOT FEDERALLY INSURED OR GUARANTEED
Until_________ 1998 or 25 days after the commencement of the Offering, all
dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
================================================================================
<PAGE>
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Amount
------
* Legal Fees and Expenses............................... $115,000
* Printing, Postage and Mailing......................... 22,000
Financial Printer..................................... 125,000
* Appraisal and Business Plan Fees and Expenses......... 25,000
* Accounting Fees and Expenses.......................... 75,000
** Marketing Fees and Expenses........................... 235,000
* Filing Fees (SEC and New York State
Department of Banking)................................ 23,000
* Miscellaneous Expenses (NASDAQ, other)................ 75,000
--------
** Total................................................. $695,000
========
* Estimated
** The Bank and the Company have retained Trident Securities, Inc. to assist
in the sale of common stock on a best efforts basis in the Subscription and
Community Offerings. For purposes of computing estimated expenses, it has
been assumed that Trident Securities, Inc. will receive fees of
approximately $200,000, exclusive of attorneys' fees and expenses of
$35,000.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article NINTH of the Certificate of Incorporation of Oneida Financial Corp.
(the "Corporation") sets forth circumstances under which directors, officers,
employees and agents of the Corporation may be insured or indemnified against
liability which they incur in their capacities as such:
NINTH:
-----
A. Each person who was or is made a party or is threatened to be made a
party to or is otherwise involved in any action, suit or proceeding, whether
civil, criminal, administrative or investigative (hereinafter a "proceeding"),
by reason of the fact that he or she is or was a Director or an Officer of the
Corporation or is or was serving at the request of the Corporation as a
Director, Officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to an
employee benefit plan (hereinafter an "indemnitee"), whether the basis of such
proceeding is alleged action in an official capacity as a Director, Officer,
employee or agent or in any other capacity while serving as a Director, Officer,
employee or agent, shall be indemnified and held harmless by the Corporation to
the fullest extent authorized by the Delaware General Corporation Law, as the
same exists or may hereafter be amended (but, in the case of any such amendment,
only to the extent that such amendment permits the Corporation to provide
broader indemnification rights than such law permitted the Corporation to
provide prior to such amendment), against all expense, liability and loss
(including attorneys' fees, judgments, fines, ERISA excise taxes or penalties
and amounts paid in settlement) reasonably incurred or suffered by such
indemnitee in connection therewith; provided, however, that, except as provided
in Section C hereof with respect to proceedings to enforce rights to
indemnification, the Corporation shall indemnify any such indemnitee in
connection with a proceeding (or part thereof) initiated by such indemnitee only
if such proceeding (or part thereof) was authorized by the Board of Directors of
the Corporation.
B. The right to indemnification conferred in Section A of this Article
NINTH shall include the right to be paid by the Corporation the expenses
incurred in defending any such proceeding in advance of its final disposition
(hereinafter an "advancement of expenses"); provided, however, if required under
the Delaware General Corporation Law, that an advancement of expenses incurred
by an indemnitee in his or her capacity as a Director of Officer (and not in any
other capacity in which service was or is rendered by such indemnitee,
including, without limitation, service to an employee benefit plan) shall be
made only upon delivery to the Corporation of an undertaking (hereinafter an
"undertaking"), by or on behalf of such indemnitee, to repay all amounts so
advanced
<PAGE>
if it shall ultimately be determined by final judicial decision from which there
is no further right to appeal (hereinafter a "final adjudication") that such
indemnitee is not entitled to be indemnified for such expenses under this
Section or otherwise. The rights to indemnification and to the advancement of
expenses conferred in Sections A and B of this Article NINTH shall be contract
rights and such rights shall continue as to an indemnitee who has ceased to be a
Director, Officer, employee or agent and shall inure to the benefit of the
indemnitee's heirs, executors and administrators.
C. If a claim under Section A or B of this Article NINTH is not paid in
full by the Corporation within sixty days after a written claim has been
received by the Corporation, except in the case of a claim for an advancement of
expenses, in which case the applicable period shall be twenty days, the
indemnitee may at any time thereafter bring suit against the Corporation to
recover the unpaid amount of the claim. If successful in whole or in part in any
such suit, or in a suit brought by the Corporation to recover an advancement of
expenses pursuant to the terms of an undertaking, the indemnitee shall be
entitled to be paid also the expense of prosecuting or defending such suit. In
(i) any suit brought by the indemnitee to enforce a right to indemnification
hereunder (but not in a suit brought by the indemnitee to enforce a right to an
advancement of expenses), it shall be a defense that, and (ii) in any suit by
the Corporation to recover an advancement of expenses pursuant to the terms of
an undertaking, the Corporation shall be entitled to recover such expenses upon
a final adjudication that, the indemnitee has not met any applicable standard
for indemnification set forth in the Delaware General Corporation Law. Neither
the failure of the Corporation (including its Board of Directors, independent
legal counsel, or its stockholders) to have made a determination prior to the
commencement of such suit that indemnification of the indemnitee is proper in
the circumstances because the indemnitee has met the applicable standard of
conduct set forth in the Delaware General Corporation Law, nor an actual
determination by the Corporation (including its Board of Directors, independent
legal counsel, or its stockholders) that the indemnitee has not met such
applicable standard of conduct, shall create a presumption that the indemnitee
has not met the applicable standard of conduct or, in the case of such a suit
brought by the indemnitee, be a defense to such suit. In any suit brought by the
indemnitee to enforce a right to indemnification or to an advancement of
expenses hereunder, or by the Corporation to recover an advancement of expenses
pursuant to the terms of an undertaking, the burden of proving that the
indemnitee is not entitled to be indemnified, or to such advancement of
expenses, under this Article NINTH or otherwise, shall be on the Corporation.
D. The rights to indemnification and to the advancement of expenses
conferred in this Article NINTH shall not be exclusive of any other right which
any person may have or hereafter acquire under any statute, the Corporation's
Certificate of Incorporation, Bylaws, agreement, vote of stockholders or
disinterested Directors or otherwise.
E. The Corporation may maintain insurance, at its expense, to protect
itself and any Director, Officer, employee or agent of the Corporation or
another corporation, partnership, joint venture, trust or other enterprise
against any expense, liability or loss, whether or not the Corporation would
have the power to indemnify such person against such expense, liability or loss
under the Delaware General Corporation Law.
F. The Corporation may, to the extent authorized from time to time by the
Board of Directors, grant rights to indemnification and to the advancement of
expenses to any employee or agent of the Corporation to the fullest extent of
the provisions of this Article NINTH with respect to the indemnification and
advancement of expenses of Directors and Officers of the Corporation.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Not Applicable.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES:
The exhibits and financial statement schedules filed as part of this
registration statement are as follows:
(a) LIST OF EXHIBITS
1.1 Form of Agency Agreement among Oneida Financial Corp., The Oneida Savings
Bank and Trident Securities, Inc.*
<PAGE>
1.2 Engagement letter between The Oneida Savings Bank and Trident Securities,
Inc.*
2 Plan of Reorganization*
3.1 Certificate of Incorporation of Oneida Financial Corp. (Incorporated herein
by reference to Exhibit B of the Plan of Reorganization)*
3.2 Bylaws of Oneida Financial Corp. (Incorporated herein by reference to
Exhibit B of the Plan of Reorganization)*
4 Form of Stock Certificate of Oneida Financial Corp.*
5 Opinion of Luse Lehman Gorman Pomerenk & Schick, P.C. regarding legality of
securities being registered*
8.1 Federal Tax Opinion of Luse Lehman Gorman Pomerenk & Schick, P.C.
8.2 Letter from FinPro, Inc. with respect to Subscription Rights*
10.1 Employee Stock Ownership Plan*
21 Subsidiaries of the Registrant*
23.1 Consent of Luse Lehman Gorman Pomerenk & Schick, P.C. (contained in opinion
filed as Exhibit 5)*
23.2 Consent of PricewaterhouseCoopers, LLP
23.3 Consent of FinPro, Inc.*
23.4 Consent of Compensation Expert*
24 Power of Attorney (set forth on Signature Page)*
27 Financial Data Schedule (In Electronic Filing Only)*
99.1 Appraisal Report of FinPro, Inc.(filed under separate cover)**
99.2 Marketing Materials*
99.3 Stock Order and Acknowledgment Forms
99.4 401(k) Prospectus Supplement*
99.5 Opinion of Compensation Expert*
_______________________________
* Previously Filed
** Filed pursuant to Rule 202 of Regulation S-T
(b) FINANCIAL STATEMENT SCHEDULES
No financial statement schedules are filed because the required
information is not applicable or is included in the consolidated financial
statements or related notes.
<PAGE>
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(4) To provide to the underwriter at the closing specified in the
underwriting agreements, certificates in such denominations and registered in
such names as required by the underwriter to permit prompt delivery to each
purchaser.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Oneida, State of New York
on November 10, 1998.
ONEIDA FINANCIAL CORP.
By: /s/ Michael R. Kallet
---------------------
Michael R. Kallet
President and Chief Executive Officer
(Duly Authorized Representative)
POWER OF ATTORNEY
We, the undersigned directors and officers of Oneida Financial Corp. (the
"Company") hereby severally constitute and appoint Michael R. Kallet as our true
and lawful attorney and agent, to do any and all things in our names in the
capacities indicated below which said Michael R. Kallet may deem necessary or
advisable to enable the Company to comply with the Securities Act of 1933, and
any rules, regulations and requirements of the Securities and Exchange
Commission, in connection with the registration statement on Form S-1 relating
to the offering of the Company's Common Stock, including specifically, but not
limited to, power and authority to sign for us in our names in the capacities
indicated below the registration statement and any and all amendments (including
post-effective amendments) thereto; and we hereby approve, ratify and confirm
all that said Michael R. Kallet shall do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities and as of the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ------ ----
<S> <C> <C>
/s/ Michael R. Kallet President, Chief Executive November 10, 1998
- -------------------------- Officer and Director (Principal
Michael R. Kallet Executive Officer)
/s/ Eric E. Stickels Senior Vice President and November 10, 1998
- -------------------------- Chief Financial Officer
Eric E. Stickels (Principal Accounting and
Financial Officer)
/s/ Nicholas J. Christakos Chairman of the Board November 10, 1998
- --------------------------
Nicholas J. Christakos
/s/ Patricia D. Caprio Director November 10, 1998
- --------------------------
Patricia D. Caprio
/s/ Edward J. Clarke Director November 10, 1998
- --------------------------
Edward J. Clarke
/s/ James J. Devine Director November 10, 1998
- --------------------------
James J. Devine
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
/s/ John E. Haskell Director November 10, 1998
- --------------------------
John E. Haskell
/s/ Rodney D. Kent Director November 10, 1998
- --------------------------
Rodney D. Kent
/s/ William D. Matthews Director November 10, 1998
- --------------------------
William D. Matthews
/s/ Michael W. Milmoe Director November 10, 1998
- --------------------------
Michael W. Milmoe
/s/ Richard B. Myers Director November 10, 1998
- --------------------------
Richard B. Myers
/s/ Frank O. White, Jr. Director November 10, 1998
- --------------------------
Frank O. White, Jr.
</TABLE>
<PAGE>
EXHIBIT INDEX
1.1 Form of Agency Agreement among Oneida Financial Corp., The Oneida Savings
Bank and Trident Securities, Inc.*
1.2 Engagement letter between The Oneida Savings Bank and Trident Securities,
Inc.*
2 Plan of Reorganization*
3.1 Certificate of Incorporation of Oneida Financial Corp. (Incorporated herein
by reference to Exhibit B of the Plan of Reorganization)*
3.2 Bylaws of Oneida Financial Corp. (Incorporated herein by reference to
Exhibit B of the Plan of Reorganization)*
4 Form of Stock Certificate of Oneida Financial Corp.*
5 Opinion of Luse Lehman Gorman Pomerenk & Schick, P.C. regarding legality of
securities being registered*
8.1 Federal Tax Opinion of Luse Lehman Gorman Pomerenk & Schick, P.C.
8.2 Letter from FinPro, Inc. with respect to Subscription Rights*
10.1 Employee Stock Ownership Plan*
21 Subsidiaries of the Registrant*
23.1 Consent of Luse Lehman Gorman Pomerenk & Schick, P.C. (contained in opinion
filed as Exhibit 5)*
23.2 Consent of PricewaterhouseCoopers, LLP
23.3 Consent of FinPro, Inc.*
23.4 Consent of Compensation Expert*
24 Power of Attorney (set forth on Signature Page)*
27 Financial Data Schedule (In Electronic Filing Only)*
99.1 Appraisal Report of FinPro, Inc.(filed under separate cover)**
99.2 Marketing Materials*
99.3 Stock Order and Acknowledgment Forms
99.4 401(k) Prospectus Supplement*
99.5 Opinion of Compensation Expert*
- ---------------
* Previously Filed.
** Filed pursuant to Rule 202 of Regulation S-T
<PAGE>
EXHIBIT 23.2
<PAGE>
[LETTERHEAD OF PRICEWATERHOUSECOOPERS APPEARS HERE]
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 of our
report dated January 16, 1998, except for Note 12 as to which the date is
September 15, 1998, on our audits of the financial statements of The Oneida
Savings Bank. We also consent to the reference to our firm under the caption
"EXPERTS".
/s/ PricewaterhouseCoopers LLP
Syracuse, New York
November 12, 1998
