SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED] For the Fiscal Year Ended
December 31, 1998
OR
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transaction period
from ___________________ to ______________________
Commission File Number: 000-25101
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(Exact Name of Registrant as Specified in its Charter)
Oneida Financial Corp.
------------------------------------------------------
Delaware 16-1561678
------------------------------- ---------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
182 Main Street, Oneida, New York 13421-1676
- ---------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
(313) 363-2000
------------------------------------------------
(Registrant's Telephone Number including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
None
----
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.10 per share
---------------------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file reports) and (2) has been subject to such
requirements for the past 90 days.
YES [ X ] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [X]
As of March 15, 1999, there were issued and outstanding 3,580,200 shares of
the Registrant's Common Stock. The aggregate value of the voting stock held by
non-affiliates of the Registrant, computed by reference to the average bid and
asked prices of the Common Stock as of March 15, 1999 ($9.8125) was $13,209,754.
DOCUMENTS INCORPORATED BY REFERENCE
1. Sections of Annual Report to Stockholders for the fiscal year ended
December 31, 1998 (Parts II and IV).
2. Proxy Statement for the 1999 Annual Meeting of Stockholders (Parts I and
III).
3. Exhibit Index on page 35.
Total number of pages in Document is 41.
<PAGE>
PART I
ITEM 1. BUSINESS
Oneida Financial Corp.
Oneida Financial Corp. (the "Company") was organized in September 1998,
for the purpose of acquiring all of the capital stock of The Oneida Savings Bank
(the "Bank") upon completion of the Bank's reorganization into the two-tier form
of mutual holding company ownership and the minority stock offering. The Company
is majority owned by Oneida Financial, MHC, a New York-chartered mutual holding
company (the "Mutual Holding Company"). The Company is a bank holding company
subject to regulation by the Board of Governors of the Federal Reserve System
(the "Federal Reserve Board"). The Company's only assets consist of shares of
the Bank's common stock and net proceeds of the Offering which it retained. The
Company neither owns nor leases any property, but uses the premises, equipment
and furniture of the Bank. At the present time, the Company does not employ any
persons other than certain officers of the Bank and will use the support staff
of the Bank from time to time.
At December 31, 1998 the Company had consolidated assets and
consolidated stockholders' equity of $248.8 million and $44.1 million,
respectively. Through the Bank, the Company has deposits totaling $194.2
million.
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 and borrowing
proceeds 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 December 31, 1998, $106.7 million, or 79.8%, of the Bank's loans
were secured by real estate, $82.4 million, or 61.6%, of the Bank's loans were
secured by one-to-four family residential real estate, $15.0 million, or 11.2%,
of the Bank's loans were secured by commercial real estate, and $9.4 million, or
7.0%, of the Bank's loans were home equity loans. Consumer loans totaled $15.6
million, or 11.6% of the Bank's total loans, at December 31, 1998. The Bank also
originates commercial business loans which totaled $11.5 million, or 8.6%, of
total loans at December 31, 1998. The Bank's investment securities and
mortgage-backed securities portfolios totaled $62.7 million and $20.0 million,
respectively, at December 31, 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.
1
<PAGE>
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 December 31, 1998, there was a total of 97
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.
Lending Activities
General. The principal lending activity of the Bank has been the
origination, for retention in its portfolio, of ARM 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.
2
<PAGE>
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 December 31,
1998 1997 1996 1995 1994
---------------- ----------------- ------------------ ---------------- ----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
One-to-four family ........... $82,353 61.6% $96,792 67.0% $100,557 73.1% $108,397 76.0% $109,441 76.0%
Multi-family.................. 1,468 1.1 2,714 1.9 2,972 2.2 3,240 2.3 3,735 2.5
Home equity................... 9,377 7.0 8,829 6.1 7,983 5.8 7,207 5.1 6,851 4.8
Commercial real estate........ 13,499 10.1 13,868 9.6 12,686 9.1 11,603 8.0 11,033 7.7
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total real estate loans..... 106,697 79.8 122,203 84.6 124,198 90.2 130,447 91.4 131,060 91.0
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Consumer loans:
Automobile loans.............. 10,405 7.8 6,683 4.6 2,701 2.0 2,108 1.5 1,799 1.2
Mobile home................... 717 0.5 784 0.5 914 0.7 1,162 0.8 1,384 1.0
Personal loans................ 2,438 1.8 2,580 1.8 1,719 1.3 1,831 1.3 1,689 1.2
Guaranteed student loans...... 446 0.3 1,659 1.2 1,981 1.4 2,943 2.1 3,443 2.4
Other consumer loans.......... 1,547 1.2 1,017 0.7 879 0.6 766 0.5 894 0.6
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total consumer loans........ 15,553 11.6 12,723 8.8 8,194 6.0 8,810 6.2 9,209 6.4
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Commercial business loans...... 11,549 8.6 9,587 6.6 5,241 3.8 3,424 2.4 3,764 2.6
Total consumer and
commercial business loans . 27,102 20.2 22,310 15.4 13,435 9.8 12,234 8.6 12,973 9.0
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total loans................ $133,799 100.0% $144,513 100.0% $137,633 100.0% $142,681 100.0% $144,033 100.0%
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Less:
Loans in process.............. -- 352 215 223 626
Allowance for losses.......... 1,543 1,793 1,546 1,781 2,117
------- -------- -------- -------- --------
Total loans receivable, net. $132,256 $142,368 $135,872 $140,677 $141,290
======== ======== ======== ======== ========
3
</TABLE>
<PAGE>
The following table sets forth the composition of the Bank's loan
portfolio by fixed and adjustable rates at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
1998 1997 1996 1995 1994
---------------- ------------------ ----------------- ----------------- -----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FIXED-RATE LOANS:
Real estate loans:
One-to-four family ............. $12,879 9.6% $11,563 8.0% $ 9,678 7.0% $ 8,652 6.1% $10,909 7.6%
Multi-family.................... -- -- -- -- -- -- -- -- -- --
Home equity..................... 4,626 3.5 2,804 1.9 1,679 1.2 871 0.5 686 0.5
Commercial real estate.......... 1,138 0.9 1,213 0.8 1,350 1.0 1,380 1.0 1,627 1.1
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total real estate loans....... 18,643 14.0 15,580 10.7 12,707 9.2 10,903 7.6 13,222 9.2
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Consumer loans:
Total consumer loans............ 14,475 10.8 12,723 8.8 8,194 6.0 8,810 6.2 9,209 6.4
Commercial business loans:
Total commercial loans.......... 5,355 4.0 1,628 1.1 748 0.5 484 0.3 882 0.6
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total fixed-rate loans.......... $38,473 28.8 $29,931 20.6 $21,649 15.7 $20,197 14.1 $23,313 16.2
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
ADJUSTABLE RATE LOANS:
Real estate loans:
One-to-four family.............. $69,474 51.9% $85,229 59.0% $90,879 66.0% $99,745 69.9% $98,532 68.4%
Multi-family.................... 1,468 1.1 2,714 1.9 2,972 2.2 3,240 2.3 3,735 2.6
Home equity..................... 4,751 3.6 6,025 4.2 6,304 4.6 6,336 4.4 6,165 4.3
Commercial real estate.......... 12,361 9.2 12,655 8.8 11,336 8.2 10,223 7.2 9,406 6.5
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total real estate loans....... 88,054 65.8 106,623 73.9 111,491 81.0 119,544 83.8 117,838 81.8
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Consumer loans:
Total consumer loans............ $ 1,078 0.8
Commercial business loans:
Total commercial business loans. 6,194 4.6 7,959 5.5 4,493 3.3 2,940 2.1 2,882 2.0
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total adjustable-rate loans..... $95,326 71.2 $114,582 79.4 $15,984 84.3 $122,484 85.9 $120,720 83.8
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total loans..................... $133,799 100.0% $144,513 100.0% $137,633 100.0% $142,681 100.0% $144,033 100.0%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
Less:
Loans in process................ -- 352 215 223 626
Allowance for losses............ 1,543 1,793 1,546 1,781 2,117
-------- -------- -------- -------- --------
Total loans receivable, net....... $132,256 $142,368 $135,872 $140,677 $141,290
======== ======== ======== ======== ========
</TABLE>
4
<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 December 31, 1998, loans serviced by
the Bank for others totaled $37.4 million. During the year ended December 31,
1998 and December 31, 1997, the Bank sold $16.5 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 December 31,
1998, 51.9% 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.
<PAGE>
At December 31, 1998, approximately $82.4 million, or 61.6% of the
Bank's loan portfolio, consisted of one-to-four family residential loans.
Approximately $1.0 million of such loans (representing 23 loans) were included
in nonperforming loans as of that date.
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
5
<PAGE>
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 Directors. 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 December 31, 1998, the outstanding balances of home equity
loans totaled $9.4 million, or 7.0% of the Bank's loan portfolio.
Commercial Real Estate Loans. At December 31, 1998, $15.0 million, or
11.2% 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 December 31, 1998, the largest commercial real estate loan had a
principal balance of $1.3 million and was secured by a medical building. As of
December 31, 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.
<PAGE>
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 December 31, 1998, consumer loans
totaled $15.6 million, or 11.6% 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 underwriting 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 December 31, 1998, loans secured by automobiles totaled
$10.4 million, of which $6.1 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.
6
<PAGE>
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 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 December 31, 1998,
the Bank had $11.5 million of commercial business loans which represented 8.6%
of the total loan portfolio. On such date, the average balance of the Bank's
commercial business loans was $37,100, and the largest commercial business
lending relationship totaled $1.1 million, which consisted of 24 loans secured
by equipment and assignment of leases. As of December 31, 1998, unsecured
commercial business loans totaled $987,000.
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.
7
<PAGE>
Loan Maturity Schedule. The following table sets forth certain
information as of December 31, 1998, 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-FiveTwenty-Five
Year Years Years Years Years Years Total
------- ------- ------- ------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to-four family.............. $ 537 $ 725 $ 2,521 $14,638 $48,875 $15,057 $82,353
Home equity...................... 442 688 1,163 6,551 533 -- 9,377
Commercial real estate........... 17 35 911 3,755 10,249 -- 14,967
------- ------- ------- ------- ------- ------- -------
Total real estate loans........ 996 1,448 4,595 24,944 59,657 15,057 106,697
------- ------- ------- ------- ------- ------- -------
Consumer and other loans............ 1,110 4,138 8,947 1,358 -- -- 15,553
Commercial business loans........... 3,444 1,558 3,925 1,418 1,204 -- 11,549
------- ------- ------- ------- ------- ------- -------
Total loans.................... $ 5,550 $ 7,144 $17,467 $27,720 $60,861 $15,057 $133,799
======= ======= ======= ======= ======= ======= ========
</TABLE>
Fixed- and Adjustable-Rate Loan Schedule. The following table sets
forth at December 31, 1998, the dollar amount of all fixed-rate and
adjustable-rate loans due after December 31, 1999. Adjustable- and floating-rate
loans are included based on contractual maturities.
<TABLE>
<CAPTION>
Due After December 31, 1999
----------------------------------------------
Fixed Adjustable Total
---------- ---------- -----------
(In thousands)
<S> <C> <C> <C>
Real estate loans:
One-to-four family........................ $ 12,392 $ 69,424 $ 81,816
Home equity............................... 4,605 4,330 8,935
Commercial real estate.................... 1,138 13,812 14,950
---------- ---------- -----------
Total real estate loans............... 18,135 87,566 105,701
---------- ---------- -----------
Consumer and other loans ...................... 13,771 672 14,443
Commercial business loans...................... 4,644 3,461 8,105
---------- ---------- -----------
Total loans........................... $ 36,550 $ 91,699 $ 128,249
========== ========== ===========
</TABLE>
8
<PAGE>
Loan Origination, Sales and Repayments. 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>
Year Ended December 31,
---------------------------------------------------------
1998 1997 1996 1995
--------- --------- --------- ------
(In thousands)
<S> <C> <C> <C> <C>
Originations by Type:
Adjustable Rate:
Real estate:
One-to-four family......................... $ 5,417 $ 11,812 $ 10,806 $ 14,261
Home equity................................ 2,883 1,825 2,281 2,800
Commercial real estate..................... 2,294 2,363 2,641 1,691
--------- --------- --------- --------
Total real estate loans.................. 10,594 16,000 15,728 18,752
Consumer loans................................ 770 -- -- --
Commercial business loans..................... 5,364 6,395 5,274 930
--------- --------- --------- --------
Total adjustable rate loans.............. 16,728 22,395 21,002 19,682
--------- --------- --------- --------
Fixed Rate:
Real estate:
One-to-four family......................... 19,113 4,113 5,492 3,128
Home equity................................ 1,656 1,744 1,141 388
Commercial real estate..................... 165 67 -- 60
--------- --------- --------- --------
Total real estate loans.................. 20,934 5,924 6,633 3,576
Consumer loans................................ 13,327 11,051 4,334 3,737
Commercial business loans..................... 7,173 6,800 2,000 1,021
--------- --------- --------- --------
Total fixed-rate loans................... 41,434 23,775 12,967 8,334
--------- --------- --------- --------
Total loans originated........................... 58,162 46,170 33,969 28,016
--------- --------- --------- --------
</TABLE>
(Comtinued)
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------
1998 1997 1996 1995
--------- --------- --------- ------
(In thousands)
<S> <C> <C> <C> <C>
Sales:
Real estate:
One-to-four family......................... 16,523 3,988 5,504 3,069
--------- --------- --------- --------
Consumer loans............................. 2,027 -- -- --
--------- --------- --------- --------
Total loans sold.............................. 18,550 3,988 5,504 3,069
========= ========= ========= ========
Repayments:
Real estate:
One-to-four family......................... 22,446 15,702 18,633 15,365
Home equity................................ 3,991 2,723 2,647 2,832
Commercial real estate..................... 4,074 1,506 1,826 1,676
--------- --------- --------- --------
Total real estate loans.................. 30,511 19,931 23,106 19,873
Consumer loans................................ 9,240 6,522 4,951 4,136
Commercial business loans..................... 10,575 8,849 5,456 2,290
--------- --------- --------- --------
Total repayments......................... 50,326 35,302 33,513 26,299
--------- --------- --------- --------
Total reductions......................... 68,876 39,290 39,017 29,368
--------- --------- --------- --------
Net increases/(decreases)................ $ (10,714) $ 6,880 $ (5,048) $ (1,352)
========= ========= ========= ========
</TABLE>
- -----------------------------
* Includes charge offs, discounts and premiums
Loan Approval Procedures and Authority. The Board of Directors
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
9
<PAGE>
borrower's primary residence) must be approved by the Executive Committee of the
Board of Directors. All lending relationships in excess of $1.0 million must be
approved by the Board of Directors.
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 December 31, 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 December 31, 1998, the Bank had
nonperforming loans of $1.1 million and a ratio of nonperforming loans to total
assets of 0.43%. At December 31, 1998, the Bank's ratio of nonperforming assets
to total assets was 0.52%.
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
10
<PAGE>
foreclosure, it is recorded at its fair value, less estimated costs of disposal.
If the value of the property is less than the loan, less any related specific
loan loss provisions, the difference is charged against the allowance for loan
losses. Any subsequent write-down of REO is charged against earnings.
The following table sets forth delinquencies in the Bank's loan
portfolio as of December 31, 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.................. 7 $ 485 11 $ 430 18 $ 915
Home Equity......................... 2 42 -- -- 2 42
Commercial real estate.............. -- -- 1 86 1 86
Consumer Loans...................... 2 13 2 8 4 21
Commercial Loans.................... 1 51 1 40 2 91
------ ------- ------- ------- ------- ------
Total ........................... 12 $ 591 15 $ 564 27 $1,155
====== ======= ======= ======= ======= ======
</TABLE>
<PAGE>
Nonaccrual Loans and Nonperforming Assets. The following table sets
forth information regarding nonaccrual loans and other nonperforming assets.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- -------- -------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
One-to-four family...................................... $ 1,010 $ 588 $ 735 $ 820 $ 902
Multi-family............................................ -- -- -- -- --
Commercial real estate.................................. -- 242 274 346 634
Construction and land loans............................. -- -- -- -- --
Consumer................................................ 8 2 18 49 36
Commercial business..................................... 40 -- -- 7 551
------- ------- ------- ------- -------
Total................................................. 1,058 832 1,027 1,222 2,123
------- ------- ------- ------- -------
Accruing loans delinquent more than 90 days:
One-to-four family...................................... $ -- 60 63 148 --
Multi-family............................................ -- -- -- -- --
Commercial real estate.................................. -- -- -- -- --
Construction and land loans............................. -- -- -- -- --
Consumer................................................ -- -- -- -- --
Commercial business..................................... -- 1 3 1 --
------- ------- ------- ------- -------
Total................................................. -- 61 66 149 --
------- ------- ------- ------- -------
Total nonperforming loans................................. $ 1,058 $ 893 $ 1,093 $ 1,371 $ 2,123
======= ======= ======= ======= =======
Foreclosed assets:
One-to-four family...................................... $ 179 $ 263 $ 712 $ 613 $ 597
Multi-family............................................ -- -- -- -- 56
Commercial real estate.................................. 45 45 147 367 31
Construction and land loans............................. -- -- -- 10 10
Consumer................................................ -- -- -- -- --
Commercial business..................................... -- -- -- -- --
------- ------- ------- ------- -------
Total................................................. $ 224 $ 308 $ 859 $ 990 $ 694
======= ======= ======= ======= =======
Total nonperforming loans as a percentage of total assets. 0.43% 0.42% 0.52% 0.67% 1.06%
======= ======= ======= ======= =======
Total nonperforming assets................................ $ 1,282 $ 1,201 $ 1,952 $ 2,361 $ 2,817
======= ======= ======= ======= =======
Total nonperforming assets as a percentage of total assets 0.52% 0.57% 0.92% 1.15% 1.40%
======= ======= ======= ======= =======
</TABLE>
11
<PAGE>
During the years ended December 31, 1998 and 1997, respectively, gross
interest income of $41,000 and $40,000 would have been recorded on nonaccruing
loans under their original terms, if the loans had been current throughout the
period. No interest income was recorded on nonaccruing loans during the years
ended December 31, 1998 and 1997.
Classification of Assets. On the basis of management's review of its
assets, at December 31, 1998, the Bank had classified a total of $3.2 million of
loans as follows (in thousands):
<TABLE>
<S> <C>
Special Mention......................... $ 1,299
Substandard............................. 1,869
Doubtful assets......................... --
Loss assets............................. --
---------
Total ............................. $ 3,168
=========
General loss allowance.................. $ 1,193
=========
Specific loss allowance................. 350
=========
Charge-offs............................. --
=========
</TABLE>
<PAGE>
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 in 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, considering 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. At December 31,
1998, the total allowance was $1.5 million, which amounted to 1.17% of total
loans, net and 145.84% 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 years ended December 31, 1998 and
1997, the Bank had charge-offs of $348,000 and $299,000, respectively, against
this allowance.
The Bank employed a new method at year-end 1997 of 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
12
<PAGE>
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.
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>
December 31,
--------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- -------- -------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at the beginning of period........................ $1,793 $1,546 $1,781 $2,117 $2,045
Charge-offs:
One-to-four family..................................... 117 72 112 360 58
Commercial real estate................................. -- 118 -- 150 166
Construction and land loans............................ -- -- -- -- --
Consumer............................................... 196 82 64 38 119
Commercial business.................................... 35 27 -- 11 51
------ ------ ------ ------ ------
Total................................................ 348 299 176 559 394
------ ------ ------ ------ ------
Recoveries:
One-to-four family..................................... 15 14 7 99 --
Commercial real estate................................. 12 2 -- -- --
Construction and land loans............................ -- -- -- -- --
Consumer............................................... 71 53 28 38 50
Commercial business.................................... -- -- 9 6 3
------ ------ ------ ------ ------
Total................................................ 98 69 44 143 53
------ ------ ------ ------ ------
Net charge-offs........................................... (250) (230) (132) (416) (341)
Additions charged to operations........................... -- 477 (103) 80 413
------ ------ ------ ------ ------
Balance at end of period.................................. $1,543 $1,793 $1,546 $1,781 $2,117
====== ====== ====== ====== ======
Allowance for loan losses as a percentage of total loans,
receivable, net........................................ 1.17% 1.26% 1.14% 1.27% 1.50%
===== ===== ===== ===== =====
Ratio of net charge-offs to average loans................. 0.18% 0.16% 0.10% 0.29% 0.24%
===== ===== ===== ===== =====
Ratio of net charge-offs to average nonperforming loans... 23.63% 25.76% 12.08% 30.34% 16.06%
===== ===== ===== ===== =====
</TABLE>
13
<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,
1998 1997
-------------------------------------- ------------------------------------
Percent Percent
of Loans of Loans
Amount of Loan in Each Amount of Loan In Each
Loan Loss Amounts Category to Loan Loss Amounts Category
Allowance by Category Total Loans Allowances by Category Total Loans
--------- ----------- ----------- ---------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Residential mortgages................... $ 610 $ 91,730 68.56% $ 455 $ 105,621 73.09%
Commercial real estate.................. 231 14,967 11.19 260 16,582 11.47
Consumer................................ 249 15,553 11.62 138 12,723 8.80
Commercial business..................... 250 11,549 8.63 171 9,587 6.64
Unallocated............................. 203 -- -- 769 -- --
--------- --------- -------- -------- --------- ---------
Total.......................... $ 1,543 $ 133,799 100.00% $ 1,793 $ 144,513 100.00%
========= ========= ======== ======== ========= =========
(continued)
</TABLE>
<TABLE>
<CAPTION>
1996
-------------------------------------
Percent
of Loans
Amount of Loan In Each
Loan Loss Amounts Category to
Allowance by Category Total Loans
--------- ----------- -----------
<S> <C> <C> <C>
Residential mortgages................... $ 467 $ 108,540 78.86%
Commercial real estate.................. 343 15,658 11.38
Consumer................................ 82 8,194 5.95
Commercial business..................... 137 5,241 3.81
Unallocated............................. 517 -- --
--------- --------- --------
Total.......................... $ 1,546 $ 137,633 100.00%
========= ========= ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------------------
1995 1994
----------------------------------- ------------------------------------
Percent Percent
of Loans of Loans
Amount of Loan in Each Amount of Loan In Each
Loan Loss Amounts Category to Loan Loss Amounts Category
Allowance by Category Total Loans Allowances by Category Total Loans
--------- ----------- ----------- ---------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Residential mortgages...................... $ 426 $115,604 81.02% $ 375 $116,292 80.74%
Commercial real estate..................... 410 14,843 10.40 725 14,768 10.25
Consumer................................... 73 8,810 6.17 74 9,209 6.39
Commercial business........................ 140 3,424 2.41 223 3,764 2.62
Unallocated................................ 732 -- -- 720 -- --
--------- --------- --------- -------- --------- ---------
Total............................. $ 1,781 $142,681 100.00% $ 2,117 $144,033 100.00%
========= ========= ========= ======== ========= =========
</TABLE>
14
<PAGE>
Securities Investment Activities
The securities investment policy is established by the Board of
Directors. 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 December 31, 1998, the Bank had $62.7
million, or 25.2% 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
December 31, 1998, the Bank's investment securities portfolio had a weighted
average life of 3.92 years.
15
<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>
December 31,
-------------------------------------------------------------
1998 1997 1996
------------------ ----------------- -----------------
Book Percent of Book Percent of Book Percent of
Value Total Value Total Value Total
------------------ ----------------- -----------------
(Dollars in thousands)
<S> <C> <C> <C>
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 1.63 2,002 4.67 5,013 9.52
Federal agency securities............................ 37,346 60.93 24,504 57.19 21,503 40.84
Corporate debt securities............................ 15,580 25.42 11,833 27.62 21,882 41.56
Tax exempt bonds..................................... 3,919 6.40 2,162 5.05 2,207 4.19
Public utilities..................................... 300 0.49 750 1.75 848 1.61
Equity securities.................................... 1,918 3.13 1,288 3.02 1,194 2.28
-------- ----- -------- ------ --------- ------
Subtotal........................................... 60,063 98.00 42,539 99.30 52,647 100.00
FHLB stock........................................... 1,228 2.00 306 0.70 -- --
-------- ----- -------- ------ --------- ------
Total.............................................. $ 61,291 100.00% $ 42,845 100.00% $ 52,647 100.00%
======== ====== ======== ====== ========= ======
Average remaining life of investment securities........ 3.92 Years 1.89 Years 1.51 Years
Other interest earning assets:
Interest-bearing deposits with banks................. 261 1.17 115 6.34 1,778 20.73
Federal funds sold................................... 22,100 98.83 1,700 93.66 6,800 79.27
-------- ----- -------- ------ --------- ------
Total............................................ $ 22,361 100.00% $ 1,815 100.00% $ 8,578 100.00%
======== ====== ======== ====== ========= ======
</TABLE>
(continued)
16
<PAGE>
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1995 1994
----------------- ----------------
Book Percent of Book Percent of
Value Total Value Total
----------------- ----------------
(Dollars in thousands)
<S> <C> <C>
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........................... 5,584 11.82 5,706 11.70
Federal agency securities............................ 3,000 6.35 491 1.01
Corporate debt securities............................ 34,350 72.74 36,408 74.67
Tax exempt bonds..................................... 2,258 4.78 -- --
Public utilities..................................... 1,246 2.64 -- --
Equity securities.................................... 788 1.67 1,690 3.47
--------- ------ --------- ------
Subtotal........................................... 47,226 100.00 44,295 90.85
FHLB stock........................................... -- -- -- --
--------- ------ --------- ------
Total.............................................. $ 47,226 100.00% $ 48,758 100.00%
========= ====== ========= ======
Average remaining life of investment securities........ 1.80 Years 2.00 Years
Other interest earning assets:
Interest-bearing deposits with banks................. 1,972 28.28 -- --
Federal funds sold................................... 5,000 71.72 1,800 100.00
--------- ------ --------- ------
Total............................................ $ 6,972 $100.00% $ 1,800 100.00%
========= ======= ========= ======
</TABLE>
<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 December 31, 1998.
<TABLE>
<CAPTION>
December 31, 1998
------------------------------------------------------------------------------
Less Than 1 to 5 5 to 10 Over
1 Year 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 $ 1,009
Federal agency obligations.......... 1,208 12,957 19,901 3,280 37,346 37,371
Corporate bonds..................... 9,487 5,051 1,042 -- 15,580 16,016
Public utilities.................... -- -- 300 -- 300 303
Tax exempt bonds.................... 104 465 3,107 243 3,919 4,054
Other .............................. -- -- -- 3,146 3,146 3,915
------- -------- --------- -------- -------- -------
Total securities.................. $11,799 $ 18,473 $ 24,350 $ 6,669 $ 61,291 $62,668
======= ======== ========= ======== ======== =======
Weighted average yield(1)........... 7.14% 5.72% 6.13% 6.27% 6.22% 6.39%
</TABLE>
- ----------------
(1) Weighted average yield has not been adjusted to reflect tax equivalent
adjustments.
<PAGE>
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 December 31,
1998, mortgage-backed securities totaled $20.0 million or 8.0% of total assets,
all of which were classified as available for sale. At December 31, 1998, all of
the mortgage-backed securities were fixed-rate. The mortgage-backed securities
portfolio had coupon rates ranging from 6.0% to 9.5%, a weighted average yield
of 7.2% and a weighted average life (including payment assumption) of 5.5 years
at December 31, 1998. The estimated fair value of the Bank's mortgage-backed
securities at December 31, 1998 was $20.0 million which was $159,000 greater
than the amortized cost of $19.9 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 $20.0 million mortgage-backed securities
portfolio at December 31, 1998, $3.9 million with a weighted average yield of
6.6% had contractual maturities within five years,
17
<PAGE>
$5.4 million with a weighted average yield of 6.6% had contractual maturities of
five to ten years and $10.7 million with a weighted average yield of 6.5% 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 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.
18
<PAGE>
Mortgage-Backed Securities. Set forth below is information relating to
the Bank's mortgage-backed securities for the periods indicated.
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------
1998 1997 1996
-------------------- -------------------- -------------------
Book Percent of Book Percent of Book Percent of
Value Total Value Total Value Total
-------------------- -------------------- -------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities available for sale:
GNMA......................................... $ 12 0.06% $ 16 0.14% $ 19 0.40%
FNMA......................................... 13,851 69.74 7,752 66.40 3,540 75.11
FHLMC........................................ 5,924 29.82 3,808 32.61 1,035 21.97
CMOs......................................... 76 0.38 99 0.85 119 2.52
------- ------ ------- ------ ------- ------
Subtotal................................. 19,863 100.00 11,675 100.00 4,713 100.00
Unamortized premium/discount................... -- -- -- -- -- --
------- ------ ------- ------ ------- ------
Total.................................... $19,863 100.00% $11,675 100.00% $ 4,713 100.00%
======= ====== ======= ====== ======= ======
(continued)
</TABLE>
<TABLE>
<CAPTION>
December 31,
---------------------------------------
1995 1994
------------------ ------------------
Book Percent of Book Percent of
Value Total Value Total
------------------ ------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Mortgage-backed securities available for sale:
GNMA......................................... $ 25 9.80% $ 29 10.21%
FNMA......................................... -- -- -- --
FHLMC........................................ 75 30.20 88 30.99
CMOs......................................... 153 60.00 167 58.80
------- ------ ------- ------
Subtotal................................. 253 100.00 284 100.00
Unamortized premium/discount................... -- -- -- --
------- ------ ------- ------
Total.................................... $ 253 100.00% $ 284 100.00%
======= ====== ======= ======
</TABLE>
19
<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 December 31, 1998, deposits totaled $194.2 million. At December 31,
1998, the Bank had a total of $108.9 million in certificates of deposit, of
which $65.5 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 December 31, 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. 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.
<PAGE>
The following table sets forth the deposit activities of the Bank for
the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1998 1997 1996
--------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Opening balance............................... $ 182,961 $ 185,508 $181,385
Deposits...................................... 843,441 678,376 606,912
Withdrawals................................... (840,130) (688,820) (610,684)
Interest credited............................. 7,933 7,897 7,895
--------- --------- --------
Ending balance................................ $ 194,205 $ 182,961 $185,508
--------- --------- --------
Net increase (decrease)....................... $ 11,244 $ (2,547) $ 4,123
========= ========= ========
Percent increase (decrease)................... 6.15% (1.37%) 2.27%
========= ========= ========
</TABLE>
20
<PAGE>
The following table indicates the amount of the Bank's certificates of
deposit by time remaining until maturity as of December 31, 1998.
<TABLE>
<CAPTION>
Maturity
------------------------------------------------------------
3 Months Over 3 to 6 Over 6 to 12 Over 12
or Less Months Months Months Total
-------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit less than $100,000........ $ 16,104 $ 13,521 $ 24,314 $ 33,797 $ 87,736
-------- -------- -------- -------- --------
Certificates of deposit of $100,000 or more....... 4,939 3,350 3,308 9,540 21,137
Total of certificates of deposit.................. $ 21,043 $ 16,871 $ 27,622 $ 43,337 $108,873
======== ======== ======== ======== ========
</TABLE>
<PAGE>
The following tables set forth information, by various rate categories,
regarding the average balance of deposits by types of deposit for the periods
indicated.
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------
1998 1997 1996
-------------------- ------------------- ------------------
Amount Percent Amount Percent Amounts Percent
------ ------- ------ ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Transactions and savings deposits:
Noninterest-bearing......................... $20,564 10.59% $13,947 7.62% $12,113 6.53%
Savings accounts............................ 43,069 22.18 41,924 22.92 42,454 22.88
NOW accounts................................ 7,145 3.68 5,677 3.10 5,984 3.22
Money market accounts....................... 14,554 7.49 10,600 5.79 14,096 7.59
------- ----- ------- ----- ------- -----
Total..................................... 85,332 43.94 72,148 39.43 74,647 40.24
------- ----- ------- ----- ------- -----
Certificates of deposit:
0.00-3.99%.................................. 3,184 1.64 2,464 1.35 2,985 1.62
4.00-5.99%.................................. 88,583 45.61 85,121 46.52 79,892 43.06
6.00-7.99%.................................. 17,106 8.81 23,228 12.70 27,984 15.08
8.00-9.99%.................................. -- -- -- -- -- --
10.00% and over............................. -- -- -- -- -- --
------- ----- ------- ----- ------- -----
Total certificates of deposit............... 108,873 56.06 110,813 60.57 110,861 59.76
------- ----- ------- ----- ------- -----
Total deposits.............................. $194,205 100.00% $182,961 100.00% $185,508 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
<PAGE>
The following table sets forth the amount and remaining maturities of
the Bank's certificates of deposit accounts at December 31, 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> <C> <C>
Certificate accounts maturing in quarter ending:
December 31, 1998........................... $ 2,335 $ -- $ -- $ 2,335 2.14%
March 31, 1999.............................. 800 16,788 1,120 18,708 17.18
June 30, 1999............................... -- 14,973 1,898 16,871 15.50
September 30, 1999.......................... -- 14,305 463 14,768 13.56
December 31, 1999........................... -- 10,469 2,385 12,854 11.81
March 31, 2000 ............................. -- 2,561 4,535 7,096 6.52
June 30, 2000............................... -- 2,595 2,407 5,002 4.59
September 30, 2000.......................... -- 5,321 1,089 6,410 5.89
December 31, 2000........................... -- 4,565 16 4,581 4.21
March 31, 2001.............................. -- 2,387 721 3,108 2.85
June 30, 2001............................... -- 2,324 100 2,424 2.23
September 30, 2001.......................... -- 1,745 -- 1,745 1.60
December 31, 2001........................... -- 1,838 88 1,926 1.77
Thereafter.................................. 49 8,712 2,284 11,045 10.15
------- ------- ------- ------- -------
Total .................................... 3,184 88,583 17,106 108,873 100.00%
======= ======= ======= ======= =======
Percent of total............................ 2.92% 81.36% 15.71% 100.00%
======= ======= ======= =======
</TABLE>
21
<PAGE>
Borrowed Funds. Set forth below is a schedule detailing the Bank's borrowings.
<TABLE>
<CAPTION>
At December 31,
----------------------------------
1998 1997 1996
-------- -------- -------
(In Thousands)
Short-Term Borrowings:
<S> <C> <C> <C>
Repurchase Agreements - FHLB......................................... $ 5,000 $ -- $ --
Overnight Advances - FHLB............................................ -- -- $ --
Long-Term Borrowings:
Term Advances - FHLB................................................. 5,000 -- --
-------- -------- -------
Total Borrowings................................................... $ 10,000 $ -- $ --
-------- -------- -------
Weighted Average interest cost of borrowings during the year........... 5.22% --% --%
-------- -------- -------
Average Balance of borrowings outstanding during the year.............. $ 1,264 $ -- $ --
-------- -------- -------
</TABLE>
<PAGE>
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 December 31, 1998, the Bank maintained 111
trust/fiduciary accounts, with total assets of $18.9 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 entered into an agreement with a third
party provider whereby the Bank will be able to offer investment and brokerage
services to its customers. The Bank intends to begin offering such services
during the second quarter of 1999.
Competition
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.
Personnel
As of December 31, 1998, the Bank had 82 full-time employees and 17
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.
Regulation
General. The Bank is a New York-chartered stock 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
22
<PAGE>
companies, are subject to regulation by the Federal Reserve Board and 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 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.
<PAGE>
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
23
<PAGE>
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 directors, 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 of 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., 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.
<PAGE>
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.
24
<PAGE>
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 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.
<PAGE>
Limitations on Dividends and Other Capital Distributions. The FDIC has
the authority to use its enforcement powers to prohibit a savings bank from
paying dividends if, in its opinion, the payment of dividends would constitute
an unsafe or unsound practice. Federal law also prohibits the payment of
dividends by a bank that will result in the bank failing to meet its applicable
capital requirements on a pro forma basis. New York law also restricts the Bank
from declaring a dividend which would reduce its capital below (i) the amount
required to be maintained by state law and regulation, or (ii) the amount of the
Bank's liquidation account established in connection with the Reorganization.
Prompt Corrective Action. The federal banking agencies have promulgated
regulations to implement the system of prompt corrective action required by
federal law. Under the regulations, a bank shall be deemed to be (i) "well
capitalized" if it has total risk-based capital of 10.0% or more, has a Tier 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)
25
<PAGE>
"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.
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 December 31, 1998, the Bank had $8.2 million of securities
pursuant to this exception. As a savings bank, the Bank may also continue to
sell savings bank life insurance.
<PAGE>
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
26
<PAGE>
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.
Federal Bank Holding Company Regulation. The Company, as the sole
stockholder of the Bank, and the Mutual Holding Company, as indirect controlling
stockholder of the Bank, are 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.
The Company is subject to capital adequacy guidelines for bank holding
companies (on a consolidated basis) which are substantially similar to those of
the FDIC for the Bank. The Company's total stockholders' equity exceeds 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.
<PAGE>
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
27
<PAGE>
state which may be held or controlled by a bank or bank holding company to the
extent such limitation does not discriminate against out-of-state banks or bank
holding companies. Individual states may also waive the 30% state-wide
concentration limit referred to above.
Additionally, beginning on June 1, 1997, the federal banking agencies
were authorized to approve interstate merger transactions without regard to
whether such transaction is prohibited by the law of any state, unless the home
state of one of the banks "opted out" by adopting a law which applies equally to
all out-of-state banks and expressly prohibits merger transactions involving
out-of-state banks. Interstate acquisitions of branches are permitted only if
the law of the state in which the branch is located permits such acquisitions.
In response to Riegle-Neal, the State of New York enacted laws allowing
interstate mergers and branching on a reciprocal basis.
Federal law authorizes the FDIC to approve interstate branching de novo
by national and state banks, respectively, only in states which specifically
allow for such branching. The appropriate federal banking agencies are required
to prescribe regulations which prohibit any out-of-state bank from using the
interstate branching authority primarily for the purpose of deposit production.
The FDIC and Federal Reserve Board have adopted such regulations. These
regulations include guidelines to ensure that interstate branches operated by an
out-of-state bank in a host state are reasonably helping to meet the credit
needs of the communities which they serve. Should the FDIC determination that a
bank interstate branch is not reasonably helping to meet the credit needs of the
communities serviced by an interstate branch, the FDIC is authorized to close
the interstate branch or not permit the bank to open a new branch in the state
in which the bank previously opened an interstate branch.
Dividends. The Federal Reserve Board has issued a policy statement on
the payment of cash dividends by bank holding companies, which expresses the
Federal Reserve Board's view that a bank holding company should pay cash
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."
<PAGE>
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;
28
<PAGE>
(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.
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 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.
<PAGE>
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 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
29
<PAGE>
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 and MHC Assets Adjustment described below (if required by
the applicable federal banking regulators) 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 also would be affected by any
purchases by such persons in the offering that would be conducted as part of the
Conversion Transaction.
As set forth in the Plan, the Dividend Waiver and MHC Assets 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 Dividend
Waiver and MHC Assets 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 in the Conversion Transaction minus the value of the Mutual Holding
Company's assets other than Common Stock and the denominator is equal to the
appraised pro forma market value of the resulting entity in the Conversion
Transaction.
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.
<PAGE>
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 December 31, 1998, the Bank was in compliance with these
reserve requirements.
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."
30
<PAGE>
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."
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 December 31, 1998, the Bank had $1.2 million of FHLB
stock. The dividend yield from FHLB stock was 7.0% at December 31, 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.
Federal Taxation
General. The Mutual Holding Company, the Company and the Bank are
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.
<PAGE>
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.
31
<PAGE>
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 December 31, 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 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.
<PAGE>
Executive Officers of the Registrant
Listed below is information, as of December 31, 1998, concerning the
Company's executive officers. There are no arrangements or understandings
between the Registrant and any of persons named below with respect to which he
or she was or is to be selected as an officer.
<TABLE>
<CAPTION>
Name Age Position and Term
---- --- --------------------------------------------------------------
<S> <C> <C>
Michael R. Kallet 48 President and Chief Executive Officer since 1990
Eric E. Stickels 37 Senior Vice President and Chief Financial Officer since 1998
Thomas H. Dixon 44 Senior Vice President\Credit Administration since 1996
</TABLE>
32
<PAGE>
ITEM 2. PROPERTIES
The Bank conducts its business through its main office located in
Oneida, New York, and five additional full service branch offices. The following
table sets forth certain information concerning the main office and each branch
office of the Bank at December 31, 1998. The aggregate net book value of the
Bank's premises and equipment was $4.9 million at December 31, 1998.
<TABLE>
<CAPTION>
Original Date of Net Book Value
Year Lease of Property
Location Acquired Expiration at December 31, 1998
- --------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Main Office:
182 Main Street 1889 N/A $2,931
Oneida, New York 13421
Branch Offices:
Camden Branch 1997 N/A 1,004
41 Harden Boulevard
Camden, New York 13316
Cazenovia Branch 1971 N/A 226
42 Albany Street
Cazenovia, New York 13035
Hamilton Branch 1976 N/A 70
35 Broad Street
Hamilton, New York 13346
Convenience Center 1988 N/A 273
585 Main Street
Oneida, New York 13421
Operations Center
126 Lenox Avenue 1989 N/A 350
Oneida, New York 13421
</TABLE>
ITEM 3. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of the year ended
December 31, 1998 to a vote of securityholders.
33
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
For information concerning the market for the Company's common stock,
the section captioned "Stockholder Information" in the Company's Annual Report
to Stockholders for the Year Ended December 31, 1998 (the "Annual Report to
Stockholders") is incorporated herein by reference.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The "Selected Consolidated Financial and Other Data" section of the
Company's Annual Report to Stockholders is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section of the Company's Annual Report to Stockholders is
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS
The financial statements identified in Item 14(a)(1) hereof are
incorporated by reference hereunder.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There were no changes in or disagreements with accountants in the
Company's accounting and financial disclosure during 1998.
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
Information concerning Directors of the Company is incorporated herein
by reference from the Company's definitive Proxy Statement dated March 29, 1999,
(the "Proxy Statement"), specifically the section captioned "Proposal
I--Election of Directors." In addition, see Item 1. "Executive Officers of the
Registrant" for information concerning the Company's executive officers.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated herein by
reference from the Registrant's Proxy Statement, specifically the sections
captioned "Proposal I--Election of Directors--Executive Compensation,"
"--Directors' Compensation," and "--Benefits."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
Information concerning security ownership of certain owners and
management is incorporated herein by reference from the Company's Proxy
Statement.
34
<PAGE>
ITEM 13. CERTAIN TRANSACTIONS
Information concerning relationships and transactions is incorporated
herein by reference from the Company's Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
The exhibits and financial statement schedules filed as a part of this
Form 10-K are as follows:
(a)(1) Financial Statements
o Report of Independent Accountants
o Consolidated Statements of Financial Condition,
December 31, 1998 and 1997
o Consolidated Statements of Income,
Years Ended December 31, 1998, 1997 and 1996
o Consolidated Statements of Comprehensive Income,
Years Ended December 31, 1998, 1997 and 1996
o Consolidated Statements of Changes in Stockholders'
equity, Years Ended December 31, 1998, 1997 and 1996
o Consolidated Statements of Cash Flows,
Years Ended December 31, 1998, 1997 and 1996
o Notes to Consolidated Financial Statements.
(a)(2) 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.
(a)(3) Exhibits
3.1 Certificate of Incorporation of Oneida Financial Corp.**
3.2 Bylaws of Oneida Financial Corp.**
4 Form of Stock Certificate.**
10.1 Employee Stock Ownership Plan.**
13 Annual Report to Stockholders.
21 Subsidiaries of the Company.
- ----------------------
** Incorporated by Reference to the Company's Registration Statement on Form S-1
filed on September 1998.
35
<PAGE>
(b) Reports on Form 8-K:
None
(c) The exhibits listed under (a)(3) above are filed herewith.
(d) Not applicable.
36
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ONEIDA FINANCIAL CORP.
Date: March 22, 1999 By: /s/ Michael R. Kallet
---------------------------------
Michael R. Kallet
President and Chief Executive Officer
<PAGE>
Pursuant to the requirements of the Securities Exchange of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/ Michael R. Kallet By: /s/ Eric E. Stickels
--------------------------------- ---------------------------------
Michael R. Kallet, President Eric E. Stickels, Senior Vice
and Chief Executive Office President and Chief
(Principal Executive Officer) Financial Officer
(Principal Financial and
Accounting Officer)
Date: March 22, 1999 Date: March 22, 1999
By: /s/ Thomas H. Dixon By: /s/ Nicholas J. Christakos
--------------------------------- ---------------------------------
Thomas H. Dixon, Senior Vice Nicholas J. Christakos, Director
President
Date: March 22, 1999 Date: March 22, 1999
By: /s/ Patricia D. Caprio By: /s/ Edward J. Clarke
--------------------------------- ---------------------------------
Patricia D. Caprio, Director Edward J. Clarke, Director
Date: March 22, 1999 Date: March 22, 1999
By: /s/ James J. Devine, Jr. By: /s/John E. Haskell
--------------------------------- ---------------------------------
James J. Devine, Jr., Director John E. Haskell, Director
Date: March 22, 1999 Date: March 22, 1999
By: /s/ Rodney D. Kent By: /s/ William D. Matthews
--------------------------------- ---------------------------------
Rodney D. Kent, Director William D. Matthews, Director
Date: March 22, 1999 Date: March 22, 1999
By: /s/ Michael W. Milmoe By: /s/ Richard B. Myers
--------------------------------- ---------------------------------
Michael W. Milmoe, Director Richard B. Myers, Director
Date: March 22, 1999 Date: March 22, 1999
By: /s/ Frank O. White, Jr.
---------------------------------
Frank O. White, Jr., Director
Date: March 22, 1999
EXHIBIT 13
1998 ANNUAL REPORT TO STOCKHOLDERS
<PAGE>
Annual Report 1998
<PAGE>
2
Table of Contents
President's Message to Shareholders
"Your Link to a Brighter Future"
Selected Consolidated Financial Data
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Report of Independent Accountants
Consolidated Financial Statements
Notes to Consolidated Financial Statements
Officers and Board of Directors
Corporate Information
<PAGE>
3
from left to right:
Thomas H. Dixon,
Senior Vice President, Credit Administration
Michael R. Kallet,
President, Chief Executive Officer & Trust Officer
Eric E. Stickels,
Senior Vice President, Chief Financial Officer,
Corporate Secretary & Trust Officer
{GRAPHIC-PHOTO OF ABOVE]
<PAGE>
A Message to our Shareholders:
We are pleased to present you with the "first" Annual Report of Oneida Financial
Corp., the stock holding corporation of Oneida Savings Bank. It is a unique
honor for me to write this initial message to shareholders. Our reorganization
to stock ownership after 133 years as a mutual savings bank, was a historic
event for the Bank and our communities.
As one of Central New York's oldest, continuously operating businesses, this new
form of ownership has allowed many of our loyal customers to become proud
owners. Our Oneida Savings Bank family is truly bigger and better.
In light of the changes in the industry, our reorganization from a mutual
savings bank to a state-chartered stock savings bank, gave us the
control we needed to continue to be customer and community oriented. We feel the
reorganization is the ultimate reinforcement of our independence and protects
this institution as an asset to the communities we serve.
To demonstrate that commitment even further, we established The Oneida Savings
Bank Charitable Foundation that is dedicated exclusively to supporting
charitable causes and community development activities in the Bank's market
area. This will help to support many worthy community activities for generations
to come.
During our first full year's presence in Camden, we hit our corporate target of
$3.5 million in deposits and became the Camden area's primary lending source,
exceeding $6.2 million in loans. The Camden Branch Community Room has become an
active home to many civic groups, confirming our belief that we have positive
effects on the communities we serve.
In May, we celebrated the Grand Re-Opening of the Main Office. The renovation of
our Main Office and Operations Center further allows us to deliver a new level
of service. By restructuring our interior floor plan of the Main Office, we
increased speed of interdepartmental communication and delivery of services. In
the end, the result has been increased customer convenience with the
improvements well received by everyone.
In the first quarter of 1998 the Bank made a commitment to expand our Trust
Department with the appointment of staff dedicated exclusively to enhancing
product offerings and providing a high level of service. We are pleased to
report that the department exceeded expectations for 1998 and will become an
increasingly important part of our financial products.
In October, we launched the One Card, our debit card entry into the market. This
product allows customers to access their OSB accounts through MasterCard
acceptance at over 15 million merchants worldwide. We look forward to checking
account growth, cross-selling new accounts and increasing fee revenue over the
next year due to this new product offering.
The Bank has maintained its own "in-house" data processing center for over a
decade. This past year we upgraded our system to a state-of-the-art
client-server based platform. The upgrade allows for potential expansion, new
products and addresses Y2K concerns. In particular, this platform upgrade
prepares us for the world of internet banking, which we will embrace in 1999.
All of these accomplishments in 1998 could not have occurred without the
outstanding efforts put forth by our Oneida Savings Bank team of dedicated
employees.
<PAGE>
4
As Oneida Financial Corp. begins its first full year, we can only look forward
to the positive effects that our solid preparations will bring to everyone
involved. The high level of commitment by our employees, the strength of our
communities and our loyal shareholders and customer base will continue to
strengthen Oneida Financial Corp. in the years to come. We look forward to
welcoming the challenges of expansion and growth and renew our pledge to
continue being the leading community bank in the areas we serve.
/S/Michael R. Kallet
- --------------------
Michael R. Kallet
President and Chief Executive Officer
<PAGE>
5
[graphic-photo]
<PAGE>
6
"Your Link to A Brighter Future"
Oneida Savings has taken on many challenges in the past year, in part to prepare
for the new century and in part to counter the many changes the banking industry
has undergone.
We took our physical changes one step further. We adopted a new logo and slogan
to reinforce our mission to our customers. This new icon, two interlocking "O"s,
represents the symbol of our philosophy, which is our devoted partnership with
the communities we serve. It is our promise of continued strength, unity and
unwavering commitment to our customers. "Your Link to a Brighter Future" further
signifies our pledge to our customers. Both the icon and the slogan were
carefully selected to strengthen our relationship with our customers, and
reassure them that in light of all the changes taking place, our loyalty lies
with them.
Oneida Savings also met the demands of our customers when the One Card was
launched, which is Oneida Savings entry into the debit card arena. This allows
our customers the ultimate in purchasing convenience. Our advertising theme
"Gotta Get One!" is a consumer-friendly call to action to increase brand
awareness and market demand for this exciting new fee generating product.
Another consumer demand in our market area proved to be an opportunity for
Oneida Savings as we enhanced our Trust Services Department. Now we offer a
fully-staffed, full service Trust department that is headed by Charles R.
Stevens, CTFA, Vice President, Trust & Investment Services. So far, this fee
generating service has proven successful. Under Stevens, Trust Assets are now at
$18.9 million, an increase of nearly $15.0 million with 111 accounts.
More market opportunities arose and new efforts have been focused on our
Business Banking Services. This department generates low cost-of-funds deposits
as well as higher yielding assets such as business loans. Oneida Savings has
promoted James L. Lacy to Senior Business Banking Officer, to oversee Business
Banking development. His 30 years of Commercial Banking experience in our market
area, made him the ideal candidate.
Since we have effective sales teams in place, our computer platform upgrade
provides the opportunity to focus on the future-- internet banking. The
internet's purpose is to provide information to those who seek it, therefore we
feel this new service delivery option will be an effective tool for Oneida
Savings' growth. Our internet presence will also show we offer both high-tech
and the personal touch.
In keeping true to our roots, a prime focus remains in Residential Mortgage
Lending. Over the past twelve months, the low interest rate environment led to
an increase in fixed-rate one-to-four family loan originations, which were
originated for resale in the secondary market on a servicing retained basis.
Rick Lounsbury, former Senior Vice President at Onbank, has been hired for his
significant experience in marketing loans in the secondary market. We are
looking forward to increased growth in this area, thereby increasing shareholder
value.
Enormous changes and preparations continue, which will amount to growth and
prosperity in the future. Our diligence in seeking and recognizing opportunities
will increase shareholder value moving forward. As we begin to realize our full
potential we hope to continue with a full speed ahead approach to doing business
that will build stronger customer relationships and increase shareholder value.
6
<PAGE>
7
blank page
<PAGE>
8
Selected Consolidated Financial Data
The following table sets forth selected consolidated historical financial data
of the Company as of and for each of the years in the five-year period ended
December 31, 1998. The historical "Selected Financial Condition Data" and
historical "Selected Operations Data" are derived from the audited financial
statements. The "Selected Financial Ratios" and other data for all periods are
unaudited. All financial information in these tables should be read in
conjunction with the information contained in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and with the
Consolidated Financial Statements and the related notes thereto included
elsewhere in this annual report.
<TABLE>
<CAPTION>
At December 31,
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
Selected Financial Condition Data: (in thousands)
<S> <C> <C> <C> <C> <C>
Total assets $248,781 $210,637 $211,095 $205,531 $201,120
Loans receivable, net 132,256 142,368 135,872 140,677 141,290
Mortgage-backed securities 20,022 11,780 4,725 280 410
Investment securities 62,669 43,525 52,926 47,758 47,381
Deposits 194,205 182,961 185,508 181,385 179,725
Borrowed funds 10,000 - - - -
Retained earnings 27,710 26,649 25,364 23,616 21,997
Paid in capital and common stock 15,903 - - - -
Stockholders' equity 44,134 27,120 25,538 23,951 21,249
<CAPTION>
Years ended December 31,
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
Selected Operations Data: (in thousands)
<S> <C> <C> <C> <C> <C>
Total interest income $16,236 $15,863 $15,154 $14,584 $13,844
Total interest expense 7,999 7,897 7,895 7,628 6,777
Net interest income 8,237 7,966 7,259 6,956 7,067
Provision for loan losses - 477 (103) 80 412
Net interest income after provision
for loan losses 8,237 7,489 7,362 6,876 6,655
Non-interest income 966 822 801 910 727
Non-interest expense 7,379 6,145 5,390 5,270 5,479
Income before income taxes 1,824 2,166 2,773 2,516 1,903
Income taxes 762 881 1,025 898 667
Net income $1,062 $1,285 $1,748 $1,618 $1,236
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Years ended December 31,
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
Selected Financial Ratios:
<S> <C> <C> <C> <C> <C>
Performance ratios:
Return on average assets 0.49% 0.61% 0.84% 0.80% 0.60%
Return on average equity 3.54% 4.83% 7.10% 7.13% 5.85%
Net interest margin 4.01% 3.97% 3.66% 3.62% 3.57%
Efficiency ratio 80.18% 69.93% 66.87% 67.00% 70.29%
Ratio of average interest-earning assets
to average interest-bearing liabilities 118.21% 117.89% 116.27% 114.83% 113.26%
Asset quality ratios:
Nonperforming assets to total assets 0.52% 0.57% 0.92% 1.15% 1.40%
Nonperforming loans to total assets 0.43% 0.42% 0.52% 0.67% 1.06%
Allowance for loan losses to loans receivable,
net 1.17% 1.26% 1.14% 1.27% 1.50%
Allowance for loan losses to nonperforming
loans 145.84% 200.75% 141.80% 130.02% 96.23%
Capital ratios:
Total capital to total assets 17.74% 12.88% 12.10% 11.65% 10.57%
Average equity to average assets 13.82% 12.69% 11.88% 11.21% 10.26%
Number of full-service offices 5 5 4 4 4
</TABLE>
<PAGE>
9
Management's
Discussion and Analysis
of Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
This section presents Management's discussion and analysis of and changes to the
Company's consolidated financial results of operations and
condition and should be read in conjunction with the Company's financial
statements and notes thereto included herein.
When used in this Annual Report the words or phrases "will likely result," "are
expected to," "will continue," "is anticipated," "estimate," "project" or
similar expressions are intended to identify "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to certain risks and uncertainties, including, among
other things, changes in economic conditions in the Company's market area,
changes in policies by regulatory agencies, fluctuations in interest rates,
demand for loans in the Company's market area and competition, that could cause
actual results to differ materially from historical earnings and those presently
anticipated or projected. The Company wishes to caution readers not to place
undue reliance on any such forward-looking statements, which speak only as of
the date made. The Company wishes to advise readers that the factors listed
above could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from any
opinions or statements expressed with respect to future periods in any current
statements.
The Company does not undertake, and specifically declines any obligation, to
publicly release the result of any revisions, which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
Operating Strategy
- --------------------------------------------------------------------------------
In guiding the Bank's operations, Management has implemented various strategies
designed to enhance the institution's profitability consistent with safety and
soundness consideration. These strategies include: (i) operating as a
community-bank that provides quality service by monitoring the needs of its
customers and offering customers personalized service; (ii) originating
fixed-rate 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; (v) improving return on equity
through the use of wholesale arbitrage transactions; and (vi) increasing fee
income.
Community Banking. The Oneida Savings Bank, the wholly owned subsidiary
of Oneida Financial Corp., 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. The
group has an average tenure with the Bank of over ten years and each individual
who comprises Senior Management has experience in the banking industry of
<PAGE>
approximately 20 years. In addition, the Bank intends to use the mutual holding
company structure to maintain the institution as an independent community bank.
The Oneida Savings Bank Charitable Foundation has been established as a means of
furthering the Company'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 the surrounding counties. During the year ended December 31,
1998 and the year ended December 31, 1997, the Bank originated $24.5 million and
$15.9 million, respectively, of one-to-four family mortgage loans. As of
December 31, 1998, approximately $82.4 million or 61.6% of the loan portfolio
consisted of one-to-four family residential mortgage loans, of which $69.5
million were ARM loans and $12.9 million had fixed rates of interest. During the
past year, and as a result of the current low interest rate environment, most of
the Bank's
<PAGE>
10
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 $24.5 million of one-to-four family loans
originated during the twelve months ended December 31, 1998, $19.1 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 is a
qualified FHA lender.
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 December 31, 1998, the Bank's portfolio of consumer, commercial real
estate and commercial business loans totaled $15.6 million, $13.5 million and
$11.5 million, respectively. In the aggregate, these loans totaled $40.6
million, or 30.3%, 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 FHLMC, FNMA 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 Moody's Investment Rating Service. At December 31, 1998, the Bank's
ratio of nonperforming loans to total assets was 0.43% compared to 0.42% and
0.52% at December 31, 1997 and 1996, respectively. At December 31, 1998, the
Bank's ratio of allowance for loan losses to total loans was 1.17% compared to
1.26% and 1.14% for the prior periods.
Improving Return on Equity Through Wholesale Arbitrage Transactions. As
a complement to the Bank's lending activities, the Bank buys investment
securities. In order to enhance return on equity, the Bank has entered into
wholesale borrowing transactions with the Federal Home Loan Bank of New York
("FHLB") as a funding source for the purchase of investment securities and
mortgage-backed securities. The arbitrage transaction results in the leveraging
of capital to increase net revenues through the positive spread between the
borrowing rate and investment returns. The Bank enters into these transactions
in order to put capital to work rather than force the origination of loans that
do not fit the Bank's risk profile. Due to the narrow interest margins
attainable through wholesale arbitrage transactions, as compared with
traditional retail bank operations, the Company's net interest margins will
decrease. In addition, the transactions increase total assets and reduce the
return on assets in favor of improved return on equity and enhanced shareholder
value. At December 31, 1998, the Bank had total borrowings of $10.0 million at
an average cost of 5.14%. Due to the fact that the arbitrage transactions were
executed during the fourth quarter of 1998, the incremental revenue for the year
was not significant.
<PAGE>
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 enhance the visibility of the
Trust Department. Consequently, the Bank expects that fees generated by the
Trust Department will increase as the assets under management grow. At December
31, 1998, the Trust Department had $18.9 million in assets under management. In
addition, the Bank receives fee income from the servicing of loans sold in the
secondary market. At December 31, 1998, loans serviced by the Bank for others
totaled $37.4 million. Finally, beginning in 1999, the Bank intends to offer
investment products and brokerage services to its customers, and realize the
financial impact of the late 1998 introduction of the Bank's new Debit Card
Program, which will be additional sources of fee income.
Financial Condition
- --------------------------------------------------------------------------------
Assets. Total Assets at December 31, 1998 were $248.8 million, an
increase of $38.2 million or 18.1%, from $210.6 million at December 31, 1997.
The increase in total assets was primarily attributable to an increase of $27.4
million in investment and mortgage-backed securities and an increase of $20.4
million in federal funds sold. The
<PAGE>
11
increase in assets reflects the Bank's leveraging strategy in contemplation of
completing the company's stock offering as well as internal growth. The asset
growth was partially offset by a decrease of $10.1 million in net loans
receivable as a result of 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 December 31, 1998 a total of $16.5 million in fixed-rate
residential mortgage loans were sold.
Management has sought to increase the Bank's consumer and commercial business
loan portfolios with the intent of increasing the average yield on the Bank's
interest-earning assets. Total consumer and commercial business loans increased
by $4.8 million during 1998.
Liabilities. Total liabilities increased by $21.1 million or 11.5% to
$204.6 million at December 31, 1998 from $183.5 million at December 31, 1997.
The increase was the result of an increase in total deposits of $11.2 million
and an increase in borrowings of $10.0 million. The deposit increase occurred in
savings, money market and both interest and non-interest-bearing checking
accounts. All of the Bank's branches experienced deposit growth. The Bank's
newest branch, which opened in December 1997, contributed $2.9 million of the
deposit volume increase. The Bank emphasized attracting low cost of funds
deposit accounts during 1998. While certificates of deposit accounts decreased
by $1.9 million or 1.7%, all other deposit accounts increased by $13.1 million,
to $85.3 million at December 31, 1998 from $72.2 million at December 31, 1997,
an increase of 18.1%. The increase in deposits partially reflects the receipt of
stock subscription. The increase in borrowings reflects the Bank's strategy of
leveraging its capital in contemplation of completion of the stock offering.
Stockholders' Equity. Total Stockholders' equity at December 31, 1998
was $44.1 million, an increase of $17.0 million from $27.1 million at December
31, 1997. The increase in stockholders' equity is primarily a result of the net
proceeds received from the stock offering completed on December 30, 1998
providing a total of $15.9 million additional capital. After-tax net income of
$1.1 million also contributed to the increase in stockholders' equity. The
Company completed its reorganization on December 30, 1998, as such, no cash
dividend has been declared. It is the intention of the Company to pay an annual
cash dividend of $.30 per share, payable semi-annually. The payment of dividends
is expected to begin following the second quarter of 1999.
Analysis of Net Interest Income
- --------------------------------------------------------------------------------
The Bank's principal business has historically
consisted of offering savings accounts, 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 interest paid on interest-bearing
liabilities, such as deposits and borrowings. Net interest income is directly
affected by changes in volume and mix of interest-earning assets and
interest-bearing liabilities which support those assets, as well as the changing
interest rates when differences exist in the repricing of assets and
liabilities.
<PAGE>
12
Average Balance Sheet. The following table sets forth certain information
relating to the Bank for the years ending December 31, 1998, 1997 and 1996. 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. Income on non-accruing loans has been excluded from the
yield calculations in this table.
Table I. Average Balance Sheets and Interest Margins
<TABLE>
<CAPTION>
For the Years Ending December 31,
1998 1997 1996
--------------------------- --------------------------- --------------------------
Average Yield/ Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
(dollars in thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans receivable $138,953 $12,063 8.68% $138,549 $11,973 8.64% $137,030 $11,507 8.40%
Investment and MBS securities 56,646 3,736 6.60% 56,153 3,638 6.48% 53,578 3,281 6.12%
Federal funds 7,274 347 4.77% 4,526 241 5.32% 6,697 357 5.33%
Equity securities 2,550 90 3.53% 1,205 11 0.91% 900 9 1.00%
- --------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets $205,423 $16,236 7.90% $200,433 $15,863 7.91% $198,205 $15,154 7.65%
- --------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Money market deposits $12,519 $407 3.25% $10,905 $349 3.20% $12,001 $404 3.37%
Savings accounts 44,481 1,295 2.91% 44,148 1,302 2.95% 45,422 1,342 2.95%
Interest-bearing checking 6,091 121 1.99% 5,632 111 1.97% 5,399 108 2.00%
Time deposits 109,419 6,110 5.58% 109,326 6,135 5.61% 107,654 6,041 5.61%
Borrowings 1,264 66 5.22% 0 0 0.00% 0 0 0.00%
- --------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $173,774 $7,999 4.60% $170,011 $7,897 4.64% $170,476 $7,895 4.63%
- --------------------------------------------------------------------------------------------------------------------------
Net interest income $8,237 $7,966 $7,259
- --------------------------------------------------------------------------------------------------------------------------
Net interest spread 3.30% 3.27% 3.02%
- --------------------------------------------------------------------------------------------------------------------------
Net earning assets $31,649 $30,422 $27,729
- --------------------------------------------------------------------------------------------------------------------------
Net interest margin 4.01% 3.97% 3.66%
- --------------------------------------------------------------------------------------------------------------------------
Ratio of interest-earning assets
to interest-bearing liabilities 118.21% 117.89% 116.27%
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
13
Rate and Volume Analysis. The following table presents the extent to which
changes in interest rates and changes in 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 II. Rate and Volume Analysis
<TABLE>
<CAPTION>
Years Ended December 31,
1998 vs. 1997 1997 vs. 1996
Increase/(Decrease) Increase/(Decrease)
------------------------------- ------------------------------
Total Total
Due to Increase/ Due to Increase/
Volume Rate (Decrease) Volume Rate (Decrease)
(dollars in thousands) (dollars in thousands)
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Loans receivable $35 $55 $90 $131 $335 $466
Investment and
mortgage-backed securities 33 65 98 167 190 357
Federal funds 131 (25) 106 (116) - (116)
Equity securities 47 32 79 3 (1) 2
- ----------------------------------------------------------------------------------------------------
Total interest-earning assets $246 $127 $373 $185 $524 $709
- ----------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Money market deposits $52 $6 $58 $(35) $(20) $(55)
Savings accounts 10 (17) (7) (38) (2) (40)
Interest-bearing checking 9 1 10 5 (2) 3
Time deposits 5 (30) (25) 94 - 94
Borrowings 66 - 66 - - -
- ----------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $142 $(40) $102 $26 $(24) 2
- ----------------------------------------------------------------------------------------------------
Net change in interest income $271 $707
====================================================================================================
</TABLE>
Comparison of Operating Results for the Years Ended December 31, 1998 and
December 31, 1997.
- --------------------------------------------------------------------------------
General. Net income for the year-ended December 31, 1998 decreased by
$222,000 or 17.3%, to $1.1 million for the fiscal year ended 1998 from $1.3
million for the year ended December 31, 1997. The decrease was due primarily to
an increase in operating and other expense as a result of the expense
recognition for the establishment of The Oneida Savings Bank Charitable
Foundation concurrent with the recent stock offering and the expenses resulting
from the expansion of the Bank's branch network, trust services and mortgage
operations. The increase in operating and other expenses was partially offset by
increasing interest income through portfolio yield improvements in the loans and
investments of the Bank due to portfolio diversification, improved other income
and a reduction in the income tax provisions made through December 31, 1998 as
compared with the same period in 1997.
<PAGE>
14
Interest Income. Interest income increased by $373,000, or 2.4%, to
$16.2 million for the year ended December 31, 1998 from $15.9 million for the
year ended December 31, 1997. The increase in interest income was derived from
increases in the average balance of all interest-earning assets. Income on loans
increased by $90,000; income on investments, including mortgage-backed
securities, increased by $98,000; federal funds sold generated an additional
$106,000 in income; and a $79,000 increase in income on equity securities.
The increase in income on loans resulted from an increase of $404,000 in the
average balance of loans to $139.0 million in 1998 from $138.5 million in 1997,
and a 4 basis point increase in the average yield on loans to 8.68% from 8.64%.
Management's strategy is to emphasize the origination of consumer and commercial
business loans for retention in the Bank's portfolio while originating for sale
in the secondary market substantially all fixed-rate residential real estate
loans. As of December 31, 1998 residential real estate loans totaled $82.4
million, a decrease of $14.4 million from December 31, 1997. During the same
period a total of $16.5 million in fixed-rate residential real estate loans were
sold in the secondary market. The decrease in loans resulting from the sales
activity was partially offset by an increase in consumer and commercial business
loans of $4.8 million during the period to $27.1 million at December 31, 1998
from $22.3 million at December 31, 1997.
Other interest-earning assets also contributed to the increase in interest
income. The increase in income from investment and mortgage-backed securities
was a result of an increase of $493,000 in the average balance of investments
and mortgage-backed securities and an increase of 12 basis points in the average
yield on investments and mortgage-backed securities. The increase in average
yield resulted from an increase in mortgage-backed securities, particularly
FHLMC and FNMA balloon investments, GNMA pooled securities, which provide higher
returns due to longer terms to maturity, and the maintenance of investments in
federal agency callable securities, which provide improved returns in the short
term. The increase in income on federal funds sold is the result of an increase
in the average balance of $2.7 million to $7.3 million during 1998 as compared
with $4.5 million during 1997. This increase was partially offset by a decrease
of 55 basis points in the average yield earned on federal funds sold as a result
of the Federal Reserve Bank's decrease in short term rates during 1998. The
increase in income from equity securities was attributable to a $1.3 million
increase in the average balance of equity investments and an increase in the
average yield of 262 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 dividends throughout 1998 at rates at or exceeding
7.00%. At December 31, 1998 the Bank held $1.2 million in FHLB stock as compared
with $306,000 at December 31, 1997 which was acquired just prior to year-end
1997.
Interest Expense. Interest expense was $8.0 million for the year ended
December 31, 1998; an increase of $101,000 or 1.3% from $7.9 million for the
year ended December 31, 1997. The increase in interest expense was primarily due
to an increase in the average balance of interest-bearing liabilities in the
1998 period of $3.8 million as compared with the same period in 1997. This
increase in average balance was partially offset by a 4 basis point decrease in
the average interest rate paid on interest-bearing liabilities. The volume
increase is primarily a result of an increase of $1.6 million in the average
balance of money market accounts and $1.3 million on average for the year 1998
in borrowings outstanding as compared with no borrowings in the prior period.
The decrease in the average rate paid on interest-bearing liabilities is
primarily due to a decrease of 3 basis points in the average rate paid on time
deposits to 5.58% during 1998, from 5.61% during 1997.
<PAGE>
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
that may occur 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 methodology 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
<PAGE>
15
changes in the loan portfolio mix in response to the redirection of loan asset
origination and retention toward consumer 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
residential 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
resulting in net provisions for the year ended December 31, 1997 of $477,000.
The quarterly assessment of allowance adequacy has not resulted in the need for
additional provisions to the allowance for loan losses during 1998 due primarily
to the reduction in total loans of $10.7 million to $133.8 million at December
31, 1998 and a consistent level of nonperforming assets between the two periods.
The balance of the allowance for loan losses decreased to $1.5 million at
December 31, 1998, from $1.8 million at December 31, 1997.
Operating Income. Operating income increased by $144,000 or 17.5%, to
$966,000 for the year ended December 31, 1998 from $822,000 for the year ended
December 31, 1997. The increase was primarily the result of an improved capital
gains distribution received on an institutional mutual fund held by the Bank,
which increased by $111,000 to $194,000 for 1998 from $83,000 for 1997. Revenue
improved on the Bank's secondary market loan sales and servicing activities,
which increased by $76,000 to $193,000 in income through December 31, 1998 from
$117,000 through December 31, 1997. Other operating income decreased in 1998 to
$579,000 from $622,000 in 1997, a decrease of $43,000 or 6.9%.
Operating and Other Expenses. Operating and other expenses increased by
$1.2 million, or 20.1%, to $7.4 million for the year ended December 31, 1998
from $6.1 million for the year ended December 31, 1997. The increase was due to
the recognition of additional contribution expense of $386,000, an increase in
salaries and employee benefits of $591,000, an increase of $249,000 in occupancy
and equipment, an increase of $57,000 in travel and meeting expenses, and an
increase of $51,000 in professional fees. These increases were partially offset
by a decrease of $100,000 during 1998 in other operating expenses.
Salaries and employee benefits increased to $3.7 million for the year ended
December 31, 1998 from $3.1 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 to support the expansion of the branch network, trust services
and mortgage operations. In addition, an ESOP contribution and modest merit
increases made in 1998 contributed to the increase in salary and benefit
expense. Occupancy and equipment expenses increased to $1.4 million for 1998
from $1.2 million for 1997, this is a result of the opening of a new branch
office and the renovation of the Bank's main office and operations center.
Contribution expense for the year ended December 31, 1998 was $825,000 compared
with $440,000 for the same period in 1997. The increased expense level was a
result of the creation of a charitable foundation in connection with the
reorganization and stock offering. Contribution expense of $802,000 was
recognized as a result of the foundation on a pre-tax basis during 1998. Travel
and meeting expenses increased during 1998 as a result of the installation,
training and conversion of the Bank's new in-house data processing system.
Professional fees increased as a result of additional legal and audit fees
incurred relating to the Bank's corporate and strategic planning prior to
reorganization.
Income Tax. Income tax expense was $762,000 for the year ended December 31,
1998, a reduction of $119,000 from the 1997 income tax provision of $881,000.
The effective tax rate increased to 41.8% for 1998 from 40.7% for 1997.
<PAGE>
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 primarily due 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 that 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 $466,000
increase in income from loans and a $359,000 increase in
<PAGE>
16
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 the likelihood that
the call provisions or expected prepayments would shorten the average life of
the securities.
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.
<PAGE>
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 an 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
<PAGE>
17
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 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. The opening of a new branch during 1997 impacted both
expense categories. 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.
Management of Market 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. Ongoing monitoring and management of this risk is an important
component of the Company's asset and liability management process. 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
<PAGE>
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.
Concentration Risk. The Bank's lending activities are primarily
conducted in Madison County, New York and the towns and villages in adjacent
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.
Much of the Bank's market area is included in the 270,000-acre land claim of the
Oneida Indian Nation ("Oneidas"). Over 13 years ago the United States Supreme
Court ruled in favor of the Oneidas in a lawsuit which Management believes was
intended to encourage the State of New York to negotiate an equitable settlement
in a land dispute that has existed for 200 years. In December 1998,
<PAGE>
18
the Oneidas and the U.S. Justice Department filed motions to amend the long
outstanding claim against the State of New York. If the motion were granted to
amend the claim, various named and 20,000 unnamed additional defendants, who own
real property in parts of Madison and Oneida Counties, would be included in the
original suit. Neither the Bank nor the Company is a named defendant in the
motion. The United States District Court is scheduled to hear arguments on the
matter in late March 1999.
To date neither the original claim nor the motion to amend has had an adverse
impact on the local economy or real property values. In addition, title
insurance companies continue to underwrite policies in the land claim area with
no change in premiums or underwriting standards. The Bank requires title
insurance on all residential real estate loans, excluding home equity loans.
Both the State of New York and the Oneidas have indicated in their respective
communications that individual landowners will not be adversely affected by the
ongoing litigation. The Company continues to monitor the situation.
Interest Rate Risk. 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 December 31, 1998 totaled $65.5
million, or 35.7% 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 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 December
31, 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 8.79%. 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 increases 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.
<PAGE>
19
The following table sets forth the amounts of all interest-earning assets and
interest-bearing liabilities outstanding at December 31, 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 December 31, 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.
<PAGE>
Table III. Gap Analysis
<TABLE>
<CAPTION>
At December 31, 1998
------------------------------------------------------------------------------
1999 2000 2001 2002 2003 Thereafter Total Fair Value
- -------------------------------------------------------------------------------------------------------------------
Interest earning assets: (dollars in thousands)
Fixed rate:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans receivable $9,680 $7,342 $ 5,688 $ 3,990 $2,530 $9,243 $38,473 $38,972
Average interest rate 7.93% 8.85% 8.98% 8.94% 8.54% 8.39% 8.84%
Investment and MBS 8,100 5,624 4,278 6,035 10,944 36,162 71,143 71,548
Average interest rate 6.36% 6.25% 6.52% 6.54% 6.10% 6.28% 6.35%
Variable rate:
Loans receivable 66,704 13,860 3,210 5,839 3,071 2,642 95,326 97,915
Average interest rate 8.26% 8.51% 8.82% 8.12% 7.47% 9.23% 8.27%
Investment securities 6,865 - - - - - 6,865 7,228
Average interest rate 5.78% - - - - - 5.88%
Federal funds 22,100 - - - - - 22,100 22,100
Average interest rate 5.50% - - - - - 5.50%
Equity Securities - - - - - 3,146 3,146 3,915
Average interest rate - - - - - 6.32% 6.32%
- -------------------------------------------------------------------------------------------------------------------
Total interest-earning assets$ 113,449 $26,826 $ 13,176 $15,864 $16,545 $51,193 $237,053 $241,678
- -------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities
Fixed rate:
Certificate accounts $65,537 $23,267 $ 9,967 $ 5,580 $4,432 $90 $108,873 $110,426
Average interest rate 5.15% 5.93% 5.62% 5.87% 5.61% 4.44% 5.41%
Variable Rate:
Savings deposits 43,069 - - - - - 43,069 43,077
Average interest rate 3.00% - - - - - 3.00%
Money market and NOW 21,700 - - - - - 21,700 21,706
Average interest rate 2.88% - - - - 2.88%
Borrowings 5,000 - - - 5,000 - 10,000 9,991
Average interest rate 5.28% - - - 4.99% - 5.14%
- -------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $135,306 $23,267 $ 9,967 $ 5,580 $9,432 $90 $183,642 $185,200
- -------------------------------------------------------------------------------------------------------------------
Interest sensitivity gap per period $(21,857) $3,559 $ 3,209 $10,284 $7,113 $51,103 $53,411
- -------------------------------------------------------------------------------------------------------------------
Cumulative interest sensitivity gap $(21,857) $(18,298) $(15,089) $(4,805) $2,308 $53,411 $53,411
- -------------------------------------------------------------------------------------------------------------------
Ratio of interest-earning assets to
interest-bearing liabilities 83.85% 115.30% 132.20% 284.30% 175.41% 56881.11% 129.08%
- -------------------------------------------------------------------------------------------------------------------
Cumulative interest sensitivity gap
as a percentage of total assets -8.79% -7.36% -6.07% -1.93% 0.93% 21.47% 21.47%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
20
The Gap table shown 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 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 nor
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 may react in different
degrees to changes in market
interest rates. The change in interest rates on certain types of 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.
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 utilizes an in-house data processing service 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 and
the FDIC's recent examination of the software for year 2000 compliancy, that the
internal deposit and loan data processing system is year 2000 compliant. The
Bank also updated the software for its check processing and check clearing
systems, which was completed in December 1998. In addition, the Bank utilizes
third party processors to support its ATM, ACH and wire transfer systems.
Internal testing of these systems has not resulted in problems handling the
century change.
<PAGE>
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 fail. At this phase, Bank personnel were assigned to determine the
specified remediation that was necessary to address each year 2000 problem;
(iii) an assessment phase, during which all vendors, associated 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 are year 2000 compliant, (v) the
testing phase, during which the Bank seeks to ensure that its computer systems
are year 2000 compliant and (vi) the contingency planning phase, during which
the Bank prepares a Contingency and Business Resumption Plan should
circumstances warrant.
<PAGE>
21
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 December 31, 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 March
1999. 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. Management will continue to monitor this issue and report to the Board
of Directors on a monthly basis until full compliance is obtained from all
vendors.
Through December 31, 1998, the cost incurred to address the year 2000 issue or
otherwise upgrade and test the Bank's computer capabilities have been
approximately $225,000. Additional 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. 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. System replacement and testing has not delayed other
information technology projects to date.
Liquidity. The Bank's primary sources of funds are deposits; proceeds
from the principal and interest payments on loans; mortgage related, debt and
equity securities; and to a lesser extent, proceeds from the sale of fixed-rate
residential real estate loans and additional 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 and borrowings are greatly influenced by general interest rates,
economic conditions and competition.
Liquidity management is both a short-term and long-term responsibility of
Management. The Bank adjusts its investments in liquid assets based upon
Management's assessment of (i) expected loan demand, (ii) projected purchases of
investment and mortgage-backed securities, (iii) expected deposit flows, (iv)
yields available on interest-bearing deposits, and (v) liquidity of its
asset/liability management program. Excess liquidity is generally invested in
interest-earning overnight deposits, federal funds sold and other short-term
U.S. agency obligations. At December 31, 1998, cash and interest-bearing
deposits totaled $26.2 million, or 10.5% of total assets.
If the Bank requires funds beyond its ability to generate them internally, it
has the ability to borrow funds from the Federal Home Loan Bank of New York
("FHLB"). The Bank may borrow from the FHLB under a blanket agreement, which
assigns all investments in FHLB stock as well as qualifying first mortgage loans
equal to 150% of the outstanding balance as collateral to secure the amounts
borrowed. At December 31, 1998, the Bank had approximately $20.9 million
available to it under the FHLB borrowing agreement. In addition, the Bank can
utilize investment and mortgage-backed securities as collateral for repurchase
agreements. At December 31, 1998, the Bank had $10.0 million in borrowings
outstanding with the FHLB in repurchase agreements.
<PAGE>
The Bank must also maintain adequate levels of liquidity to satisfy loan
commitments. At December 31, 1998, the Bank had outstanding commitments to
originate loans of $10.3 million. The Bank anticipates that it will have
sufficient funds to meet current loan commitments.
Certificates of Deposit, which are scheduled to mature in one year or less from
December 31, 1998, totaled $65.5 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, the Bank plans to continue renovating and expanding the Bank's retail
banking franchise. The construction costs and equipment 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.
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
<PAGE>
22
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.
Based on the foregoing, the Bank is currently classified as a "well capitalized"
savings institution.
Minimum
Required Actual
-------- ------
Tier I Capital to
Average Assets 4% 15.85%
Tier I Capital to Risk-
Weighted Assets 4% 26.95%
Total Capital to Risk-
Weighted Assets 8% 28.37%
Impact of New Accounting Standards. In June 1998, the FASB issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," 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 designed as a
fair value hedge, a cash flow hedge, or a foreign currency hedge. SFAS No. 133
is effective for all fiscal quarters of fiscal years beginning after June 15,
1999 and, accordingly, would apply to the Company beginning on January 1, 2000.
The Company 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
Company's financial statements.
In October, 1998 the FASB issued SFAS No. 134, "Accounting for Mortgage-backed
Securities retained after the Securitization of Mortgage Loans held for sale by
a Mortgage Banking Enterprise", which require that after the securitization of
mortgage loans held for sale, the entity classify the resulting mortgage-backed
security or other retained interests based on its ability and intent to sell or
hold those investments. SFAS No. 134 is effective for the first quarter
beginning after December 15, 1998 and accordingly would apply to the Company for
the quarter ended March 31, 1999. The Company has not engaged in retaining
securities after the securitization of its mortgage loans held for sale and does
not expect to do so in the foreseeable future. Accordingly, SFAS No. 134 is not
expected to have a material impact on the Company's financial statements.
<PAGE>
Report of Independent Accountants
The Board of Directors
Oneida Financial Corporation
Oneida, New York
In our opinion, the accompanying consolidated statements of condition and the
related consolidated statements of income, comprehensive income, changes in
stockholders' equity and of cash flows present fairly, in all material respects,
the financial position of Oneida Financial Corporation and its subsidiary at
December 31, 1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company'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
- -----------------------------
PricewaterhouseCoopers LLP
Syracuse, New York
January 19, 1999
<PAGE>
24
<TABLE>
<CAPTION>
Oneida Financial Corporation
Consolidated Statements of Condition
December 31, 1998 and 1997
Assets
1998 1997
------------ ------------
<S> <C> <C>
Cash and due from banks $4,056,047 $4,364,055
Federal funds sold 22,100,000 1,700,000
Total cash and cash equivalents 26,156,047 6,064,055
Investment securities, at fair value 62,668,656 43,525,625
Mortgage-backed securities, at fair value 20,022,420 11,779,690
Mortgage loans held for sale 1,862,923 191,517
Loans receivable 131,935,891 143,969,053
Allowance for credit losses (1,542,542) (1,792,715)
------------ ------------
Net loans receivable 130,393,349 142,176,338
Premises and equipment, net 4,853,534 3,811,533
Accrued interest receivable 1,600,342 1,567,629
Refundable income taxes 420,946 144,946
Other real estate 224,193 308,000
Other assets 578,725 1,067,713
------------ ------------
TOTAL ASSETS $248,781,135 $210,637,046
============ ============
Liabilities and Stockholders' Equity
Due to depositors $193,398,105 $182,044,928
Mortgagors' escrow funds 806,777 915,956
Borrowings 10,000,000
Other liabilities 442,287 556,175
------------ ------------
Total liabilities 204,647,169 183,517,059
Stockholders' equity:
Common stock, $.10 par value, 8,000,000 shares
authorized; 3,580,200 shares issued and
outstanding 358,020
Additional paid-in capital 15,545,422
Retained earnings 27,709,840 26,648,512
Common shares issued under employee
stock plans-unearned (401,322)
Accumulated other comprehensive income 922,006 471,475
------------ ------------
Total stockholders' equity 44,133,966 27,119,987
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $248,781,135 $210,637,046
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
25
<TABLE>
<CAPTION>
Oneida Financial Corporation
Consolidated Statements of Income
Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
----------- ----------- -----------
Interest and dividend income:
<S> <C> <C> <C>
Interest and fees on loans $12,063,146 $11,973,668 $11,507,029
Interest and dividends on investment securities:
U. S. Government and agency obligations 2,246,841 2,323,169 1,351,938
Corporate obligations 667,594 1,087,658 1,684,530
Mortgage-backed securities 654,794 13,436 14,670
Other 255,833 224,687 239,384
Interest on federal funds sold
and interest-bearing deposits 347,470 240,597 356,664
----------- ----------- -----------
Total interest and dividend income 16,235,678 15,863,215 15,154,215
----------- ----------- -----------
Interest expense:
Savings deposits 1,295,386 1,240,791 1,273,426
Money market and Super NOW 527,857 460,486 511,611
Time deposits 6,109,874 6,196,440 6,110,432
Short-term borrowings 51,353
Long-term borrowings 14,452
----------- ----------- -----------
Total interest expense 7,998,922 7,897,717 7,895,469
----------- ----------- -----------
Net interest income 8,236,756 7,965,498 7,258,746
Provision for credit losses 0 476,886 (103,215)
----------- ----------- -----------
Net interest income after
provision for credit losses 8,236,756 7,488,612 7,361,961
Other income 965,934 821,530 800,741
Other expenses 7,378,945 6,144,510 5,389,622
----------- ----------- -----------
Income before income taxes 1,823,745 2,165,632 2,773,080
Provision for income taxes 761,417 881,000 1,025,300
----------- ----------- -----------
NET INCOME $1,062,328 $1,284,632 $1,747,780
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
26
<TABLE>
<CAPTION>
Oneida Financial Corporation
Consolidated Statements of Comprehensive Income
Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net income $1,062,328 $1,284,632 $1,747,780
Other comprehensive income, net of tax
Unrealized gains on securities:
Unrealized holding gains (losses)
arising during period 917,537 531,867 (142,363)
Less: Reclassification adjustment for
gains included in net income (207,642) (81,750) (100,419)
---------- ---------- ----------
709,895 450,117 (242,782)
Net income (tax) benefit effect (259,364) (153,040) 82,546
Other comprehensive income (loss),
net of tax 450,531 297,077 (160,236)
---------- ---------- ----------
COMPREHENSIVE INCOME 1,512,859 $1,581,709 $1,587,544
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
27
<TABLE>
<CAPTION>
Oneida Financial Corporation
Consolidated Statements of Changes in Stockholders' Equity
Years Ended December 31, 1998, 1997 and 1996
Common Stock
Issued Under
Additional Employee
Common Stock Paid-In Retained Stock Plans -
Shares Amount Capital Earnings Unearned
------ ------ ------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $23,616,100
Net income 1,747,780
Other comprehensive income, net of tax:
Unrealized losses on securities
net of reclassification adjustment
--------- -------- ----------- ----------- ---------
Balance at December 31, 1996 25,363,880
Net income 1,284,632
Other comprehensive income, net of tax:
Unrealized gains on securities
net of reclassification adjustment
--------- -------- ----------- ----------- ---------
Balance at December 31, 1997 26,648,512
Net proceeds from sale of common stock 3,510,038 $351,004 $14,848,996
Issuance of common stock to
Charitable Foundation 70,162 7,016 694,604
Capital contribution to Oneida Financial, MHC (1,000)
ESOP shares committed to be released $(549,500)
Shares issued under stock plans 1,822 148,178
Net income 1,062,328
Other comprehensive income, net of tax:
Unrealized gains on securities
net of reclassification adjustment
--------- -------- ----------- ----------- ---------
Balance at December 31, 1998 3,580,200 $358,020 $15,545,422 $27,709,840 $(401,322)
========= ======== =========== =========== =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive
Income Total
------ -----
<S> <C> <C>
Balance at December 31, 1995 $334,634 $23,950,734
Net income 1,747,780
Other comprehensive income, net of tax:
Unrealized losses on securities
net of reclassification adjustment (160,236) (160,236)
--------- --------
Balance at December 31, 1996 174,398 25,538,278
Net income 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 471,475 27,119,987
Net proceeds from sale of common stock 15,200,000
Issuance of common stock to
Charitable Foundation 701,620
Capital contribution to Oneida Financial, MHC (1,000)
ESOP shares committed to be released (549,500)
Shares issued under stock plans 150,000
Net income 1,062,328
Other comprehensive income, net of tax:
Unrealized gains on securities
net of reclassification adjustment 450,531 450,531
--------- --------
Balance at December 31, 1998 $922,006 $44,133,966
======== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
28
<TABLE>
<CAPTION>
Oneida Financial Corporation
Consolidated Statements of Cash Flows
Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
Operating activities:
<S> <C> <C> <C>
Net income ........................................................ $ 1,062,328 $ 1,284,632 $ 1,747,780
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation .................................................. 531,517 416,649 321,060
Amortization of premiums and discounts on securities, net ..... 83,929 150,991 426,881
Provision for credit and other real estate losses ............. 704,144 175,727
Provision for deferred income taxes ........................... 89,493 (204,493) 185,846
Gain on calls of securities, net .............................. (207,642) (81,750) (100,419)
ESOP shares earned ............................................ 150,000
Contribution of common stock to Charitable Foundation ......... 701,620
Loss on sale of other real estate owned ....................... 86,523 47,513 4,300
(Gain) loss on sale of loans .................................. (152,883) (32,522) 10,910
Income taxes refundable ....................................... (276,000) (70,507) (161,492)
Accrued interest receivable ................................... (32,713) 86,640 45,898
Other assets .................................................. 215,141 (4,399) 17,086
Other liabilities ............................................. (54,260) 330,978 (22,012)
Origination of loans held for sale ............................ (18,194,662) (3,976,263) (5,573,334)
Proceeds from sale of loans ................................... 16,676,139 3,987,657 5,504,087
Reclassification of Nationar balances to cash
and due from banks from other assets ......................... 687,338
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities ..................... 678,530 2,639,270 3,269,656
- --------------------------------------------------------------------------------------------------------------------
Investing activities:
Purchase of investment securities ................................ (49,117,396) (11,315,373) (29,921,615)
Principal collected on and proceeds of maturities
or calls from investment ...................................... 30,819,734 21,048,740 19,671,647
Purchase of mortgage-backed securities ........................... (13,347,640) (7,960,459)
Principal collected from mortgage-backed securities .............. 5,134,139 998,195 44,339
Net decrease (increase) in loans ................................. 11,020,798 (7,265,279) 4,304,486
Purchase of bank premises and equipment .......................... (1,573,518) (2,100,884) (259,626)
Proceeds from sale of other real estate .......................... 759,475 589,494 510,370
- --------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities ......................... (16,304,408) (6,005,566) (5,650,399)
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Financing activities:
Net increase (decrease) in demand deposits, savings, money market,
Super NOW and mortgagor's escrow accounts ..................... 13,007,104 (2,320,962) 3,007,720
Net (decrease) increase in time deposits ......................... (1,939,734) (49,374) 1,114,917
Proceeds from borrowings ......................................... 10,000,000
Net proceeds from sale of common stock ........................... 15,200,000
Common stock acquired by ESOP .................................... (549,500)
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities ........... 35,717,870 (2,370,336) 4,122,637
- --------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents .............. 20,091,992 (5,736,632) 1,741,894
Cash and cash equivalents at beginning of year ...................... 6,064,055 11,800,687 10,058,793
- --------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR ...................... $ 26,156,047 $ 6,064,055 $ 11,800,687
====================================================================================================================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest on deposits and obligations .......................... $ 7,972,081 $ 7,900,471 $ 7,899,555
Income taxes .................................................. 993,674 1,198,025 1,015,744
Non-cash investing activities:
Unrealized gain (loss) on investment and mortgage-backed
securities designated as available for sale ................... $ 709,895 $ 450,117 $ (242,782)
Transfer of loans to other real estate ......................... 762,191 313,576 662,593
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
29
Oneida Financial Corporation
Notes to Consolidated Financial Statements
1. REORGANIZATION AND STOCK OFFERING
Oneida Financial Corporation (the "Company") is a Delaware corporation organized
in December 1998 by Oneida Savings (the "Bank") in connection with the
conversion of the Bank from a New York chartered mutual savings bank to a New
York chartered stock savings bank and reorganization to a two-tiered mutual
holding company. The Company was formed for the purpose of acquiring all of the
capital stock of the Bank upon completion of the reorganization. As part of the
reorganization, the Company offered for sale approximately 44.5% of the shares
of its common stock to eligible depositors of the Bank (the "offering") and
issued approximately 53.5% of the Company's shares of common stock to Oneida
Financial, MHC (the "MHC"), a state-chartered mutual holding company
incorporated in New York. Concurrent with the close of the offering, the
remaining 2% of the Company's shares of common stock were issued to The Oneida
Savings Charitable Foundation (the "Foundation"). The reorganization and
offering were completed on December 30, 1998. Prior to that date, the Company
had no assets and no liabilities. The financial statements presented for periods
prior to the reorganization are for the Bank as the predecessor entity to the
Company.
Completion of the offering resulted in the issuance of 3,580,200 shares of
common stock, 1,915,445 shares (53.5%) of which were issued to the MHC,
1,594,593 shares (44.5%) of which were sold to eligible depositors of the Bank,
and 70,162 shares (2%) of which were issued to the Foundation, at $10.00 per
share. Costs related to the offering, primarily marketing fees paid to
investment banking firms, professional fees, registration fees, and printing and
mailing costs, were $745,930 and have been deducted to arrive at net proceeds of
$15,200,000. Subsequent to the offering, the Bank's Employee Stock Ownership
Plan acquired 133,180 shares in the secondary market.
Charitable Foundation
As part of the reorganization and Conversion, the Company established the
Foundation which is dedicated exclusively to supporting charitable causes and
community development activities in Central New York. The Foundation was funded
in December 1998 with $701,620 (70,162 shares) of common stock and $100,000 cash
contributed by the Company. A one-time charge of $801,620 is reflected in 1998
for this contribution. The contribution will be fully tax deductible, subject to
an annual limitation based upon the Company's taxable income.
<PAGE>
30
Oneida Financial Corporation
Notes to Consolidated Financial Statements
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
The Bank is located in Central Upstate New York with offices in the City of
Oneida and the Villages of Cazenovia, Hamilton and Camden. The Bank is engaged
primarily in accepting deposits and providing various types of loans to the
community. The Bank also provides trust and brokerage services.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary. All intercompany accounts and transactions have
been eliminated in consolidation.
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.
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
stockholder's equity, net of the applicable income tax effect. None of the
Bank's securities have been classified as trading or held-to-maturity
securities.
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.
<PAGE>
31
Oneida Financial Corporation
Notes to Consolidated Financial Statements
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
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.
A loan is considered impaired, based on current information and events, if it is
probable that the Bank will be unable 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.
Mortgage loans held for sale are carried at the lower of cost or market. Market
value is determined in the aggregate.
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.
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.
<PAGE>
32
Oneida Financial Corporation
Notes to Consolidated Financial Statements
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)
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 the 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.
Earnings Per Share
Earnings per share is not presented since the Company completed its offering on
December 30, 1998 and, accordingly, such data would not be meaningful.
3. INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES
Investment securities and mortgage-backed securities consist of the following at
December 31:
<PAGE>
<TABLE>
<CAPTION>
1998
-----------------------------------------------------------
Amortized Gross Unrealized
Cost Gains Losses Fair Value
----------- ----------- ----------- -----------
Investment Securities Available for sale portfolio:
Debt securities:
<S> <C> <C> <C> <C>
U. S. Agencies ............................. $37,346,182 $ 48,823 $ 24,225 $37,370,780
U. S. Government ........................... 1,000,476 8,904 1,009,380
Corporate .................................. 15,579,538 438,565 2,403 16,015,700
State and municipals ....................... 3,918,540 139,879 4,112 4,054,307
Public utilities ........................... 300,000 3,152 303,152
----------- ----------- ----------- -----------
58,144,736 639,323 30,740 58,753,319
Stock investments:
Mutual funds and other stocks .............. 1,917,831 769,106 2,686,937
Federal Home Loan Bank stock ............... 1,228,400 1,228,400
----------- ----------- ----------- -----------
$61,290,967 $ 1,408,429 $ 30,740 $62,668,656
=========== =========== =========== ===========
Mortgage-Backed Securities Available for sale portfolio:
Federal National Mortgage Association$13,850,563 $ 112,032 $ 5,297 $13,957,298
Federal Home Loan Mortgage Corp. ............... 5,924,288 44,818 3,614 5,965,492
Government National Mortgage Assoc ............. 12,586 2 12,584
Collateral Mortgage Obligations ................ 75,991 11,055 87,046
----------- ----------- ----------- -----------
$19,863,428 $ 167,905 $ 8,913 $20,022,420
=========== =========== =========== ===========
</TABLE>
<PAGE>
33
Oneida Financial Corporation
Notes to Consolidated Financial Statements
3. INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES (cont.)
<TABLE>
<CAPTION>
1997
-----------------------------------------------------------
Amortized Gross Unrealized
Cost Gains Losses Fair Value
----------- -------- ------- -----------
Investment Securities
Available for sale portfolio:
Debt securities:
<S> <C> <C> <C> <C>
U. S. Agencies $24,504,368 $52,548 $43,587 $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 other stocks 1,287,570 447,238 1,734,808
Federal Home Loan Bank stock 306,100 306,100
----------- -------- ------- -----------
$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>
The amortized cost and approximate fair value of available-for-sale securities
(other than equity securities) at December 31, 1998 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.
<PAGE>
<TABLE>
<CAPTION>
Amortized
Cost Fair Value
------------ ------------
<S> <C> <C>
Due in one year or less $ 4,683,185 $ 4,709,985
Due after one year through five years 19,553,410 19,629,784
Due after five years through ten years 22,789,598 22,925,873
Due after ten years 11,118,543 11,487,677
Total 58,144,736 58,753,319
Mortgage-backed securities 19,863,428 20,022,420
------------ ------------
Total $ 78,008,164 $ 78,775,739
============ ============
</TABLE>
Proceeds from maturities and calls of available-for-sale securities for 1998,
1997 and 1996 were $30,784,772, $21,013,593 and $19,581,306, respectively. Gross
gains of $207,642, $83,156 and $100,419 for 1998, 1997 and 1996, respectively,
and gross losses of $1,406 for 1997 were realized on these calls.
Investment securities with a carrying value of $10,384,882 at December 31, 1998
were pledged to collateralize borrowing arrangements.
<PAGE>
34
Oneida Financial Corporation
Notes to Consolidated Financial Statements
4. LOANS RECEIVABLE
The components of loans receivable are as follows:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Residential $91,730,772 $105,269,408
Consumer loans 15,552,517 12,722,039
Commercial real estate 14,966,946 16,581,665
Commercial loans 11,548,579 9,587,458
133,798,814 144,160,570
Allowance for credit losses (1,542,542) (1,792,715)
------------ ------------
Net loans $132,256,272 $142,367,855
============ ============
</TABLE>
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of condition. The unpaid principal balances of mortgage
loans serviced for others was $37,429,837, $26,288,271 and $25,087,490 at
December 31, 1998, 1997 and 1996, respectively.
Custodial escrow balances maintained in connection with the foregoing loan
servicing, and included in demand deposits were approximately $265,600, $176,600
and $173,000 at December 31, 1998, 1997 and 1996, respectively.
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
December 31, 1998 and 1997 loans to officers and directors were not significant.
An analysis of the change in the allowance for credit losses for the years ended
December 31 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Balance at beginning of year $1,792,715 $1,545,649 $1,781,292
Loans charged off (347,707) (299,356) (176,487)
Recoveries 97,534 69,536 44,059
Provision for credit losses 0 476,886 (103,215)
---------- ---------- ----------
Balance at end of year $1,542,542 $1,792,715 $1,545,649
========== ========== ==========
</TABLE>
As of December 31, 1998 and 1997, the Bank had no impaired loans for which
specific valuation allowances were recorded.
Loans having carrying values of $762,191 and $313,576 were transferred to other
real estate in 1998 and 1997, respectively.
<PAGE>
35
Oneida Financial Corporation
Notes to Consolidated Financial Statements
5. PREMISES AND EQUIPMENT
Premises and equipment consist of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Land and buildings $5,836,561 $5,282,831
Equipment and fixtures 3,364,691 2,364,479
Construction in progress 19,576
9,220,828 7,647,310
Accumulated depreciation (4,367,294) (3,835,777)
---------- ----------
Net book value $4,853,534 $3,811,533
========== ==========
</TABLE>
Depreciation expense was $531,517, $416,649 and $321,060 in 1998, 1997 and 1996,
respectively.
6. DUE TO DEPOSITORS
Amounts due to depositors at December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Non-interest bearing demand $20,563,532 $13,947,070
Savings 42,262,425 41,008,299
Money market and Super NOW 21,699,634 16,277,310
Time deposit 108,872,514 110,812,249
------------ ------------
Total due to depositors $193,398,105 $182,044,928
============ ============
</TABLE>
At December 31, 1998 and 1997, time deposits with balances in excess of $100,000
totalled $21,136,600 and $21,012,173, respectively.
The contractual maturity of time deposits as of December 31, are as follows:
<TABLE>
<CAPTION>
1998 1997
--------------------------- -----------------------------
Maturity Amount Percent Amount Percent
<S> <C> <C> <C> <C>
One year or less $65,688,000 60.3 $68,959,000 62.2
Over one year to
three years 31,259,000 28.7 36,817,000 33.2
Over three years 11,926,000 11.0 5,036,000 4.6
------------ ----- ------------ -----
$108,873,000 100.0 $110,812,000 100.0
============ ===== ============ =====
</TABLE>
<PAGE>
36
Oneida Financial Corporation
Notes to Consolidated Financial Statements
7. BORROWINGS
At December 31, 1998, outstanding borrowings were as follows:
<TABLE>
<CAPTION>
<S> <C>
Short-term borrowings:
Federal Home Loan Bank repurchase $5,000,000
Long-term borrowings:
Federal Home Loan Bank advance 5,000,000
$10,000,000
</TABLE>
Borrowings at December 31, 1998 have maturity dates as follows:
<TABLE>
<CAPTION>
Weighted
Average Rate
<S> <C> <C>
January 20, 1999 5.28% $5,000,000
December 20, 2008 4.995% 5,000,000
----- -----------
5.14% $10,000,000
====== ===========
</TABLE>
Both borrowings are collateralized by pledged securities which had a carrying
value of $10,384,882 at December 31, 1998.
8. INCOME TAXES
The components of deferred income taxes included in other assets in the
statements of condition are approximately as follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Asset (Liability)
Allowance for loan losses $507,000 $574,000
Depreciation 269,000 226,000
Investment securities (615,000) (314,000)
Pension benefits (203,000) (205,000)
Other (74,000) (7,000)
--------- ---------
Total deferred income tax
asset (liability), net $(116,000) 274,000
========= ========
</TABLE>
<PAGE>
The provision for income taxes for the years ended December 31, consists of the
following:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- ----------
<S> <C> <C> <C>
Current:
Federal $488,216 $869,413 $668,237
State 183,708 216,080 171,217
Deferred:
Federal 85,733 (158,413) 145,763
State 3,760 (46,080) 40,083
-------- -------- ----------
$761,417 $881,000 $1,025,300
======== ======== ==========
</TABLE>
<PAGE>
37
Oneida Financial Corporation
Notes to Consolidated Financial Statements
8. INCOME TAXES (cont.)
A reconciliation of the federal statutory rate to the effective income tax rate
for the years ended December 31, is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Federal statutory income tax rate 34% 34% 34%
State tax, net of federal benefit 6 6 5
Tax exempt investment income (3) (3) (2)
Other 4 3
---- ---- ----
Effective tax rate 41% 40% 37%
---- ---- ----
</TABLE>
9. BENEFIT PLANS
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.
Plan assets consist primarily of temporary cash investments, and listed stocks
and bonds. The following table represents a reconciliation of the change in
benefit obligation, plan assets and funded status of the plan at October 1, 1998
(date of the most recent actuarial study) and October 1, 1997:
<PAGE>
<TABLE>
<CAPTION>
1998 1997
----------- -----------
Change in benefit obligation:
<S> <C> <C>
Benefit obligation at beginning of year ............. $ 2,986,124 $ 2,758,400
Service cost ........................................ 124,508 127,246
Interest cost ....................................... 214,675 200,960
Actuarial loss ...................................... 368,367 51,492
Benefit payments .................................... (148,779) (151,974)
----------- -----------
Benefit obligation at end of year ................ $ 3,544,895 $ 2,986,124
=========== ===========
Change in plan assets:
Fair value of plan assets at
beginning of year ................................ $ 3,943,463 $ 3,336,429
Actual return on plan assets ........................ (8,149) 719,067
Benefit payments .................................... (148,779) (112,033)
----------- -----------
Fair value of plan assets at end of year ......... $ 3,786,535 $ 3,943,463
=========== ===========
Funded status .......................................... $ 241,640 $ 957,339
Unrecognized transition asset .......................... (20,283) (48,447)
Unrecognized (gain)/loss ............................... 301,606 (384,483)
Unrecognized past service liability .................... (10,462) (11,763)
----------- -----------
Prepaid benefit expense ........................... $ 512,501 $ 512,646
=========== ===========
</TABLE>
<PAGE>
38
Oneida Financial Corporation
Notes to Consolidated Financial Statements
9. BENEFIT PLANS (cont.)
The weighted average assumptions used in determining the actuarial present value
of the projected benefit obligation are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Discount rate 6.50 % 7.25%
Expected return on plan assets 8.00 % 8.00%
Rate of compensation increase 4.50 % 5.00%
</TABLE>
The net periodic pension cost for the years ended December 31 includes the
following components:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Service cost benefits earned during the period $124,508 $127,246 $138,470
Interest cost on projected benefit obligation 214,675 200,960 193,466
Actual return on plan assets (309,573) (261,541) (403,078)
Net amortization and deferral (29,465) (29,465) 139,904
-------- --------- --------
Net periodic pension cost $ 145 $ 37,200 $ 68,762
======== ========= ========
</TABLE>
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 $66,288,
$56,167 and $58,311 at December 31, 1998, 1997 and 1996, respectively.
In connection with the reorganization (Note 1), the Bank established The Oneida
Savings Employee Stock Ownership Plan with all employees meeting the age and
service requirements eligible to participate in the Plan. Employees are eligible
for the Plan if they are twenty-one years of age and have one year of service
with at least 1,000 hours. The ESOP was authorized to purchase up to 8%, or
133,180 shares of common stock in the offering. Since no shares were available
to the ESOP in the offering, the ESOP subsequently purchased the shares. The
purchase of the shares are funded by a loan from the Company payable in ten
equal installments over 10 years bearing a variable interest rate of prime plus
1%, 8.75% at December 31, 1998. Loan payments are to be funded by cash
contributions from the Bank. The loan can be prepaid without penalty. Shares
purchased by the ESOP are maintained in a suspense account and held for
allocation among the participants. As loan payments are made, shares will be
committed to be released and subsequently allocated to employee accounts at each
calendar year end. Compensation expense is recognized related to the committed
to be released shares based on the average market price during the period. At
December 31, 1998, the Plan has 36,517 shares held in suspense with a fair value
of approximately $410,800. In addition, the Plan has allocated to Plan
participants a total of 13,483 shares through December 31, 1998 and recorded
compensation expense of approximately $150,000.
<PAGE>
39
Oneida Financial Corporation
Notes to Consolidated Financial Statements
10. OTHER INCOME AND EXPENSES
Other income and other expenses for the years ended December 31 consist of the
following:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Other income:
Net investment security gains $207,642 $81,750 $100,419
Service charges on deposit accounts 419,398 438,122 453,550
Other 338,894 301,658 246,772
---------- ---------- ----------
Total other income $965,934 $821,530 $800,741
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Other expenses:
Salaries and employee benefits $3,684,556 $3,093,679 $2,883,788
Building occupancy and equipment 1,419,757 1,171,020 1,014,222
FDIC and N.Y.S. assessment 24,889 28,010 6,171
Advertising 194,341 153,792 174,926
Postage and telephone 165,040 123,132 120,334
Printing and supplies 104,306 71,676 69,612
Trustees compensation 122,950 90,700 88,350
Professional fees 191,327 140,438 110,159
Travel and meetings 176,433 119,219 85,395
Insurance 67,795 63,661 70,201
Dues and subscriptions 61,841 57,495 47,742
Service fees 100,397 76,480 82,286
ORE expenses 91,640 374,426 385,058
Contributions 825,469 439,629 101,429
Sales tax 49,262 33,320 30,762
Other 98,942 107,833 119,187
---------- ---------- ----------
Total other expenses $7,378,945 $6,144,510 $5,389,622
========== ========== ==========
</TABLE>
11. 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 Company.
<PAGE>
40
Oneida Financial Corporation
Notes to Consolidated Financial Statements
11. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (cont.)
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.
Mortgage Loans Held for Sale
The carrying amounts reported in the statements of condition for
mortgage loans held for sale are a reasonable estimate of fair value.
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.
Borrowings
The carrying amount of repurchase agreements and other short-term
borrowings approximate their fair values. Fair values of long-term
borrowings are estimated using discounted cash flows, based on current
market rates for similar borrowings.
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.
<PAGE>
41
Oneida Financial Corporation
Notes to Consolidated Financial Statements
11. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (cont.)
The estimated fair values of the Company's financial instruments at December 31:
<TABLE>
<CAPTION>
(Amounts in Thousands)
1998 1997
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents ............ $ 26,156 $ 26,156 $ 6,064 $ 6,064
Investment securities ................ 62,369 62,369 43,526 43,526
Mortgage-backed securities ........... 20,022 20,022 11,780 11,780
Mortgage loans held for sale ......... 1,863 1,863 192 192
Loans receivable ..................... 131,936 135,024 143,969 143,813
Allowance for credit losses .......... (1,543) (1,793)
--------- --------- --------- ---------
Net loans ......................... 130,393 135,024 142,176 143,813
Accrued interest receivable .......... 1,600 1,600 1,568 1,568
--------- --------- --------- ---------
Total financial assets ............ $ 242,403 $ 247,034 $ 205,306 $ 206,943
========= ========= ========= =========
Financial liabilities:
Due to depositors .................... $ 193,398 $ 194,964 $ 182,045 $ 184,149
Borrowings ........................... 10,000 9,991
Total financial liabilities ....... $ 203,398 $ 204,955 $ 182,045 $ 184,149
========= ========= ========= =========
</TABLE>
12. 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.
<PAGE>
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:
Commitments to extend credit $2,415,912
Letters of credit 7,855,649
<PAGE>
42
Oneida Financial Corporation
Notes to Consolidated Financial Statements
12. COMMITMENTS (cont.)
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 $20,898,000 line of credit with the Federal Home Loan
Bank of which $0 is outstanding at December 31, 1998.
The Bank is required to maintain a reserve balance, as established by the
Federal Reserve Bank of New York. The required average total reserve for the
14-day maintenance period ended December 31, 1998 was $493,000 which was
represented by cash on hand.
13. 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 December 31, 1998 and 1997, that
the Bank meets all capital adequacy requirements to which it is subject.
<PAGE>
43
Oneida Financial Corporation
Notes to Consolidated Financial Statements
13. REGULATORY MATTERS (cont.)
As of December 31, 1997 the most recent notification from the New York State
Banking Department 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 December 31, 1998:
Total Capital
(to Risk Weighted Assets) $37,290,106 28.81% $10,354,577 8% $12,943,222 10%
Tier I Capital
(to Risk Weighted Assets) $35,823,879 27.67% 5,177,289 4% $7,765,933 6%
Tier I Capital
(to Average Assets) $35,823,879 16.48% $8,695,116 4% $10,868,895 5%
As of December 31, 1997:
Total Capital
(to Risk Weighted Assets) $28,189,650 22.9% $9,843,159 8% $12,303,949 0%
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%
</TABLE>
<PAGE>
14. PARENT COMPANY STATEMENTS
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEET
DECEMBER 31, 1998
Assets:
<S> <C>
Investments in and advances to subsidiary $43,798,205
Other assets 436,761
-----------
Total assets $44,234,966
===========
Liabilities:
Due to related parties $101,000
Shareholders' equity 44,133,966
-----------
Total liabilities and shareholders' equity $44,234,966
===========
</TABLE>
<PAGE>
44
Oneida Financial Corporation
Notes to Consolidated Financial Statements
14. PARENT COMPANY STATEMENTS (cont.)
<TABLE>
<CAPTION>
CONDENSED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1998
Revenue:
<S> <C>
Interest on investments and deposits $ 0
----------
Total revenue 0
----------
Expenses:
Contribution expense 801,620
----------
Total expenses 801,620
----------
Loss before tax benefit and equity
in undistributed net income of subsidiary (801,620)
Income tax 288,583
----------
Loss before equity in undistributed net
income of subsidiary (513,037)
Equity in undistributed net income:
Subsidiary bank 1,575,365
----------
Net income $1,062,328
==========
<CAPTION>
CONDENSED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1998
Operating activities:
Net income $1,062,328
Adjustments to reconcile net income to
net cash provided by operating activities:
Contributions to Charitable Foundation 801,620
Income taxes refundable (288,583)
Equity in undistributed net income of
subsidiary bank (1,575,365)
----------
Net cash provided by operating activities 0
Cash and cash equivalents at beginning of year 0
----------
Cash and cash equivalents at end of year $ 0
----------
</TABLE>
<PAGE>
As part of the Reorganization (see Note 1), the Company received capital
contributions from the MHC in the form of stock of the Bank. Upon issuance of
common stock of the Company, net proceeds from the offering were deposited with
the subsidiary. Both transactions are reflected in the investment in and
advances to subsidiary.
<PAGE>
45
Office of the President
Michael R. Kallet, President, Chief Executive Officer & Trust Officer
Officers
William J. Baldwin, Vice President, Business Banking Officer
Scott R. Bobo, Collection Department Manager
Vicky L. Brigham, Branch Officer, Hamilton Office
Mark A. Cavanagh, Vice President, Mortgage Banking Officer
Wendy J. Chandler, Branch Operations Officer
Gail R. Crumb, Auditor
Thomas H. Dixon, Senior Vice President, Credit Administration
Kathleen J. Donegan, Branch Manager, Main Office
Robert W. Fox, Vice President, Consumer Banking Officer
Shane P. Hennessy, Assistant Vice President, Systems Group
Randall R. Kennedy, Vice President, Collections
James L. Lacy, Vice President, Senior Business Banking Officer
Thomas W. Lewin, Assistant Vice President, Business Banking Officer
Frederick S. Lounsbury, Vice President, Mortgage Administrator
Jonathan Maisey, Vice President, Bank Operations
Bernard G. Mathews, II, Assistant Vice President, Consumer Banking Officer
Joanne W. Mobriant, Assistant Vice President & Human Resources Director
Deresa F. Rich, Comptroller
George A. Sawner, Vice President, Regional Lender
Charles R. Stevens, Vice President, Trust & Investment Services
Eric E. Stickels, Senior Vice President, Chief Financial Officer,
Corporate Secretary & Trust Officer
Robert L. Stinson, Vice President, Regional Lender
Deborah S. Strauss, Assistant Vice President & Branch Manager, Camden Office
Claudia J. Tavernese, Branch Manager, Cazenovia Office
Susan T. Urben, Assistant Vice President & Branch Manager, Hamilton Office
Sally W. West, Compliance Officer & Branch Manager, Convenience Office
Cynthia F. Whipple, Vice President, Mortgage Banking Officer
Patricia A. Zupan, Administrative Assistant & Marketing Officer
<PAGE>
46
Board of Directors
Oneida Savings
Chairman of the Board
Nicholas J. Christakos, Investor and Consultant
Directors
Patricia D. Caprio, Director of Development Programs, Colgate University
Edward J. Clarke, President, Kennedy & Clarke, Inc.
James J. Devine, President, Kiley Law Firm, PC
John E. Haskell, President, Bailey & Haskell Associates, Inc.
Michael R. Kallet, President & Chief Executive Officer, Oneida Savings
Rodney D. Kent, President, Chief Executive Officer, & Chairman, Omega Wire, Inc.
William D. Matthews, Chairman of the Board and Retired Chief Executive Officer,
Oneida Ltd.
Michael W. Milmoe, Retired President, Canastota Publishing Co., Inc.
Richard B. Myers, Orthodontist, Orthodontic Associates of CNY
Frank O. White, Jr., Assistant Athletic Director, Colgate University
Board of Directors
Oneida Financial Corp.
Chairman of the Board
Nicholas J. Christakos, Investor and Consultant
Directors
Patricia D. Caprio, Director of Development Programs, Colgate University
Edward J. Clarke, President, Kennedy & Clarke, Inc.
James J. Devine, President, Kiley Law Firm, PC
John E. Haskell, President, Bailey & Haskell Associates, Inc.
Michael R. Kallet, President & Chief Executive Officer, Oneida Savings
Rodney D. Kent, President, Chief Executive Officer, & Chairman, Omega Wire, Inc.
William D. Matthews, Chairman of the Board and Retired Chief Executive Officer,
Oneida Ltd.
Michael W. Milmoe, Retired President, Canastota Publishing Co., Inc.
Richard B. Myers, Orthodontist, Orthodontic Associates of CNY
Frank O. White, Jr., Assistant Athletic Director, Colgate University
<PAGE>
47
Corporate Information
Executive Office
182 Main Street
Oneida, New York 13421
(315) 363-2000
Investor Relations
Michael R. Kallet, President & CEO
Eric E. Stickels, Senior Vice President & CFO
The Oneida Savings Bank
P.O. Box 240
182 Main Street
Oneida, New York 13421
(315) 363-2000
Annual Report On Form 10-K
A copy of the Company's report on Form 10-K, as filed with the Securities and
Exchange Commission is available without charge by written request addressed to
Eric E. Stickels, Senior Vice President & CFO at the address above.
Date & Place Of
Annual Meeting
April 27, 1999, 4 P.M. (EDT)
The Oneida Savings Bank
182 Main Street
Oneida, New York 13421
General Counsel
Kiley Law Firm, PC
108 Lenox Avenue
Oneida, New York 13421
Special Counsel
Luse Lehman Gorman Pomerenk & Schick, PC
5335 Wisconsin Avenue, NW
Suite 400
Washington, D.C. 20015
Independent Accountants
PricewaterhouseCoopers, LLP
One Lincoln Center
Syracuse, New York 13202
Stock Transfer Agent
Registrar & Transfer Company, Inc.
10 Commerce Drive
Cranford, New Jersey 07016-3572
(800) 866-1340
<PAGE>
Stock Price Information
Oneida Financial Corp., Inc.'s common stock is traded on the Nasdaq Smallcap
Market under the symbol "ONFC". Newspaper stock tables list the holding company
as "Oneida F".
1998 High Low Cash Dividend
Paid Per Share
- --------------------------------------------------------------------------------
First Quarter N/A N/A N/A
Second Quarter N/A N/A N/A
Third Quarter N/A N/A N/A
Fourth Quarter * 11 1/2 10 $.00
*The Company's stock began trading on December 30, 1998
Stockholders
The number of common stockholders of record as of December 31, 1998 was 1,115.
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Parent Company Subsidiary Company State of Incorporation
-------------- ------------------ ----------------------
Oneida Financial Corp. The Oneida Savings Bank New York
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,795
<INT-BEARING-DEPOSITS> 261
<FED-FUNDS-SOLD> 22,100
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 82,691
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 133,799
<ALLOWANCE> (1,543)
<TOTAL-ASSETS> 248,781
<DEPOSITS> (94,205)
<SHORT-TERM> 5,000
<LIABILITIES-OTHER> 442
<LONG-TERM> 5,000
358
0
<COMMON> 0
<OTHER-SE> 44,134
<TOTAL-LIABILITIES-AND-EQUITY> 248,781
<INTEREST-LOAN> 12,063
<INTEREST-INVEST> 3,825
<INTEREST-OTHER> 248
<INTEREST-TOTAL> 16,236
<INTEREST-DEPOSIT> 7,933
<INTEREST-EXPENSE> 7,999
<INTEREST-INCOME-NET> 8,237
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 208
<EXPENSE-OTHER> 6,577
<INCOME-PRETAX> 2,625
<INCOME-PRE-EXTRAORDINARY> 1,575
<EXTRAORDINARY> (513)
<CHANGES> 0
<NET-INCOME> 1,062
<EPS-PRIMARY> 0.30
<EPS-DILUTED> 0.30
<YIELD-ACTUAL> 4.01
<LOANS-NON> 1,058
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 3,168
<ALLOWANCE-OPEN> 1,793
<CHARGE-OFFS> 348
<RECOVERIES> 98
<ALLOWANCE-CLOSE> 1,543
<ALLOWANCE-DOMESTIC> 1,340
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 203
</TABLE>
