SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the Fiscal Year Ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transaction period from ___________________ to __________________
Commission File Number: 000-25101
---------------------------------
ONEIDA FINANCIAL CORP.
------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 16-1561678
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification Number)
182 Main Streeet, Oneida, New York 13421-1676
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(315) 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]
<PAGE>
As of March 13, 2000, there were issued and outstanding 3,266,251
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 20, 2000 ($10-13/16) was
$14,605,590.
DOCUMENTS INCORPORATED BY REFERENCE
1. Sections of Annual Report to Stockholders for the fiscal year ended
December 31, 1999 (Parts II and IV).
2. Proxy Statement for the 2000 Annual Meeting of Stockholders (Parts I
and III).
<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, 1999 the Company had consolidated assets and
consolidated stockholders' equity of $280.2 million and $40.0 million,
respectively. Through the Bank, the Company has deposits totaling $189.1
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, 1999, $108.9 million, or 72.3%, of the Bank's loans
were secured by real estate, $81.3 million, or 53.9%, of the Bank's loans were
secured by one-to-four family residential real estate, $17.9 million, or 11.9%,
of the Bank's loans were secured by commercial real estate, and $9.7 million, or
6.5%, of the Bank's loans were home equity loans. Consumer loans totaled $26.0
million, or 17.3% of the Bank's total loans, at December 31, 1999. The Bank also
originates commercial business loans which totaled $15.7 million, or 10.4%, of
total loans at December 31, 1999. The Bank's investment securities and mortgage-
backed securities portfolios totaled $85.5 million and $26.4 million,
respectively, at December 31, 1999.
In April 1999 the Bank established Oneida Preferred Funding Corp. as
the Bank's wholly-owned real estate investment trust subsidiary. At December 31,
1999 Oneida Preferred Funding Corp. held $41.9 million in mortgage and mortgage
related assets. All disclosures in the Form 10-K relating to the Bank's loans
and investments include loans and investments that are held by Oneida Preferred
Funding Corp.
<PAGE>
The Bank's main office is located at 182 Main Street, Oneida, New York
13421-1676. The Bank's telephone number is (315) 363-2000.
Market Area
The Bank is a community-based savings institution that offers a variety
of financial products and services. The Bank's primary lending area is Madison
county, New York and surrounding counties, and most of the Bank's deposit
customers reside in Madison county and surrounding counties. The City of Oneida
is located approximately 30 miles from Syracuse and 20 miles from Utica. The
Bank's market area is characterized as rural, although the local economy is also
affected by economic conditions in Syracuse and Utica, New York. As of 1997, the
average household income of persons residing in Oneida and Madison counties was
below that of New York State and the United States. During the period 1980-1990
the population of Oneida county decreased by 1.04% while the population of
Madison county grew by 6.09%.
The Bank competes with commercial banks, savings banks and credit
unions for deposits and loans. 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 Ltd. 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,
--------------------------------------------------------------------------
1999 1998 1997
------------------ -------------------- -------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
One-to-four family ........................ $81,264 53.9% $82,353 61.6% $96,792 67.0%
Multi-family............................... 1,358 0.9 1,468 1.1 2,714 1.9
Home equity................................ 9,740 6.5 9,377 7.0 8,829 6.1
Commercial real estate..................... 16,560 11.0 13,499 10.1 13,868 9.6
------- -------- ------- -------- ------- --------
Total real estate loans.................. 108,922 72.3 106,697 79.8 122,203 84.6
-------- -------- --------
Consumer loans:
Automobile loans........................... 16,768 11.1 10,405 7.8 6,683 4.6
Mobile home................................ 595 0.4 717 0.5 784 0.5
Personal loans............................. 6,901 4.6 2,438 1.8 2,580 1.8
Guaranteed student loans................... 305 0.2 446 0.3 1,659 1.2
Other consumer loans....................... 1,451 1.0 1,547 1.2 1,017 0.7
------- ------ ------- ------ ------- ------
Total consumer loans..................... 26,020 17.3 15,553 11.6 12,723 8.8
------ ------ ------
Commercial business loans.................... 15,727 10.4 11,549 8.6 9,587 6.6
Total consumer and commercial business loans 41,747 27.7 27,102 20.2 22,310 15.4
------- ------ ------- ------ ------- ------
Total loans.............................. 150,669 100.0% $133,799 100.0% $144,513 100.0%
======= ====== ======== ====== ======== ======
Less:
Loans in process........................... -- -- 352
Allowance for loan losses.................. 1,523 1,543 1,793
------- ------- -------
Total loans receivable, net.............. $149,146 $132,256 $142,368
======== ======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1996 1995
------------------ -------------------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Real estate loans:
One-to-four family ........................ $100,557 73.1% $108,397 76.0%
Multi-family............................... 2,972 2.2 3,240 2.3
Home equity................................ 7,983 5.8 7,207 5.1
Commercial real estate..................... 12,686 9.1 11,603 8.0
------- -------- ------- --------
Total real estate loans.................. 124,198 90.2 130,447 91.4
-------- --------
Consumer loans:
Automobile loans........................... 2,701 2.0 2,108 1.5
Mobile home................................ 914 0.7 1,162 0.8
Personal loans............................. 1,719 1.3 1,831 1.3
Guaranteed student loans................... 1,981 1.4 2,943 2.1
Other consumer loans....................... 879 0.6 766 0.5
------- ------ ------- ------
Total consumer loans..................... 8,194 6.0 8,810 6.2
------ ------
Commercial business loans.................... 5,241 3.8 3,424 2.4
Total consumer and commercial business loan 13,435 9.8 12,234 8.6
------- ------ ------- ------
Total loans.............................. $137,633 100.0% $142,681 100.0%
======== ====== ======== ======
Less:
Loans in process........................... 215 223
Allowance for loan losses.................. 1,546 1,781
------- -------
Total loans receivable, net.............. $135,872 $140,677
======== ========
</TABLE>
3
<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,
--------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------------- ---------------- ---------------- ----------------- ----------------
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 ............ $18,208 12.1% $12,879 9.6% $11,563 8.0% $ 9,678 7.0% $ 8,652 6.1%
Multi-family................... -- -- -- -- -- -- -- --
Home equity.................... 5,416 3.6 4,626 3.5 2,804 1.9 1,679 1.2 871 0.5
Commercial real estate......... 1,023 0.7 1,138 0.9 1,213 0.8 1,350 1.0 1,380 1.0
------- ------ ------- ----- ------- ------ ------- ------ ------- ------
Total real estate loans...... 24,647 16.4 18,643 14.0 15,580 10.7 12,707 9.2 10,903 7.6
------- ------ ------- ----- ------- ------ ------- ------ ------- ------
Consumer loans:
- --------------
Total consumer loans........... 25,284 16.8 14,475 10.8 12,723 8.8 8,194 6.0 8,810 6.2
Commercial business loans:
- -------------------------
Total commercial loans......... 10,027 6.6 5,355 4.0 1,628 1.1 748 0.5 484 0.3
------- ------ ------- ----- ------- ------ ------- ------ ------- ------
Total fixed-rate loans......... $59,958 39.8 $38,473 28.8 $29,931 20.6 $21,649 15.7 $20,197 14.1
------- ------ ------- ----- ------- ------ ------- ------ ------- ------
ADJUSTABLE RATE LOANS:
Real estate loans:
One-to-four family............. $63,056 41.8% $69,474 51.9% $85,229 59.0% $90,879 66.0% $99,745 69.9%
Multi-family................... 1,358 0.9 1,468 1.1 2,714 1.9 2,972 2.2 3,240 2.3
Home equity.................... 4,324 2.9 4,751 3.6 6,025 4.2 6,304 4.6 6,336 4.4
Commercial real estate......... 15,537 10.3 12,361 9.2 12,655 8.8 11,336 8.2 10,223 7.2
------- ------ ------- ----- ------- ------ ------- ------ -------
Total real estate loans...... 84,275 55.9 88,054 65.8 106,623 73.9 111,491 81.0 119,544 83.8
------- ------ ------- ----- ------- ------ ------- ------ ------- ------
Consumer loans:
Total consumer loans........... 736 0.5 $ 1,078 0.8 -- -- -- -- -- --
Commercial business loans:
- -------------------------
Total commercial business loans 5,700 3.8 6,194 4.6 7,959 5.5 4,493 3.3 2,940 2.1
------- ------ ------- ----- ------- ------ ------- ------ ------- ------
Total adjustable-rate loans.... $90,711 60.2% $95,326 71.2 $114,582 79.4 $15,984 84.3 $122,484 85.9
------- ------ ------- ----- -------- ------ ------- ------ -------- ------
Total loans.................... $150,669 100.0% $133,799 100.0% $144,513 100.0% $137,633 100.0% $142,681 100.0%
======== ====== ======== ===== ======== ====== ======== ====== ======== ======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Less:
- ----
Loans in process............... -- -- 352 215 223
Allowance for loan losses...... 1,523 1,543 1,793 1,546 1,781
------- ------- ------- ------- -------
Total loans receivable, net...... $149,146 $132,256 $142,368 $135,872 $140,677
======== ======== ======== ======== ========
</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, 1999, loans serviced by
the Bank for others totaled $38.0 million. During the year ended December 31,
1999 and December 31, 1998, the Bank sold $5.1 million and $16.5 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,
1999, 41.8% of the Bank's loan portfolio consisted of one-to- four family
residential loans with adjustable interest rates.
All one-to-four family residential mortgage loans originated by the
Bank include "due-on-sale" clauses, which give the Bank the right to declare a
loan immediately due and payable in the event that, among other things, the
borrower sells or otherwise disposes of the real property subject to the
mortgage and the loan is not repaid.
At December 31, 1999, approximately $81.3 million, or 53.9% of the
Bank's loan portfolio, consisted of one-to-four family residential loans.
Approximately $132,000 of such loans (representing four 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, 1999, the outstanding balances of home equity
loans totaled $9.7 million, or 6.5% of the Bank's loan portfolio.
Commercial Real Estate Loans. At December 31, 1999, $17.9 million, or
11.9% 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, 1999, the largest commercial real estate loan had a
principal balance of $1.2 million and was secured by a medical building. As of
December 31, 1999, nonperforming loans did not include any commercial real
estate loans.
In underwriting commercial real estate loans, the Bank reviews the
expected net operating income generated by the real estate to ensure that it is
at least 110% of the amount of the monthly debt service; the age and condition
of the collateral; the financial resources and income level of the borrower; and
the borrower's business experience. Personal guarantees have always been
obtained from all commercial real estate borrowers.
Loans secured by commercial real estate generally are larger than
one-to-four family residential loans and involve a greater degree of risk.
Commercial mortgage loans often involve large loan balances to single borrowers
or groups of related borrowers. Payments on these loans depend to a large degree
on the results of operations and management of the properties or underlying
businesses, and may be affected to a greater extent by adverse conditions in the
real estate market or the economy in general. Accordingly, the nature of
commercial real estate loans makes them more difficult for Bank management to
monitor and evaluate.
Consumer Lending. The Bank's consumer loans consist of automobile
loans, mobile home loans, secured personal loans (secured by bonds, equity
securities or other readily marketable collateral), guaranteed student loans and
other consumer loans (consisting of passbook loans, unsecured home improvement
loans and recreational vehicle loans). At December 31, 1999, consumer loans
totaled $26.0 million, or 17.3% 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, 1999, loans secured by automobiles totaled
$16.8 million, of which $11.4 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
<PAGE>
efforts with existing customers. Automobile loans generally do not have terms
exceeding five years. The Bank does not provide financing for leased
automobiles. At December 31, 1999, the largest consumer loan had a principal
balance of $4 million and was secured by investments in a trust.
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, 1999,
the Bank had $15.7 million of commercial business loans which represented 10.4%
of the total loan portfolio. On such date, the average balance of the Bank's
commercial business loans was $38,900 and the largest commercial business
lending relationship totaled $1.6 million, which consisted of 29 loans secured
by equipment and assignment of leases. As of December 31, 1999, unsecured
commercial business loans totaled $452,000.
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, 1999, 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............... $ 1,646 $ 1,117 $ 2,417 $13,557 $48,521 $14,006 $81,264
Home equity...................... 118 392 728 7,510 992 -- 9,740
Commercial real estate........... 673 194 1,090 5,972 9,989 -- 17,918
------- ------- ------- ------- ------- ------- -------
Total real estate loans........ 2,437 1,703 4,235 27,039 59,502 14,006 108,922
------- ------- ------- ------- ------- ------- -------
Consumer and other loans............ 5,875 6,296 13,149 700 -- -- 26,020
Commercial business loans........... 3,137 5,039 4,930 2,174 447 -- 15,727
------- ------- ------- ------- ------- ------- -------
Total loans.................... $11,449 $13,038 $22,314 $29,913 $59,949 $14,006 $150,669
======= ======= ======= ======= ======= ======= ========
</TABLE>
Fixed- and Adjustable-Rate Loan Schedule. The following table sets
forth at December 31, 1999, the dollar amount of all fixed-rate and
adjustable-rate loans due after December 31, 2000. Adjustable- and floating-rate
loans are included based on contractual maturities.
<TABLE>
<CAPTION>
Due After December 31, 2000
----------------------------------------------
Fixed Adjustable Total
---------- ---------- -----------
(In thousands)
<S> <C> <C> <C>
Real estate loans:
One-to-four family........................ $ 16,577 $ 63,041 $ 79,618
Home equity............................... 5,408 4,214 9,622
Commercial real estate.................... 16,895 350 17,245
---------- ---------- -----------
Total real estate loans............... 38,880 67,605 106,485
---------- ---------- -----------
Consumer and other loans ...................... 19,758 387 20,145
Commercial business loans...................... 9,154 3,436 12,590
---------- ---------- -----------
Total loans........................... $ 67,792 $ 71,428 $ 139,220
========== ========== ===========
</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,
-----------------------------------------------------------
1999 1998 1997 1996
--------- --------- --------- --------
(In thousands)
<S> <C> <C> <C> <C>
Originations by Type:
Adjustable Rate:
Real estate:
One-to-four family......................... $ 5,033 $ 5,417 $ 11,812 $ 10,806
Home equity................................ 1,507 2,883 1,825 2,281
Commercial real estate..................... 2,575 2,294 2,363 2,641
--------- --------- --------- --------
Total real estate loans.................. 9,115 10,594 16,000 15,728
Consumer loans................................ 370 770 -- --
Commercial business loans..................... 4,422 5,364 6,395 5,274
--------- --------- --------- --------
Total adjustable rate loans.............. 13,907 16,728 22,395 21,002
--------- --------- --------- --------
Fixed Rate:
Real estate:
One-to-four family......................... 14,989 19,113 4,113 5,492
Home equity................................ 1,985 1,656 1,744 1,141
Commercial real estate..................... 1,748 165 67 --
--------- --------- --------- --------
Total real estate loans.................. 18,722 20,934 5,924 6,633
Consumer loans................................ 22,721 13,327 11,051 4,334
Commercial business loans..................... 10,774 7,173 6,800 2,000
--------- --------- --------- --------
Total fixed-rate loans................... 52,217 41,434 23,775 12,967
--------- --------- --------- --------
Total loans originated........................... 66,124 58,162 46,170 33,969
--------- --------- --------- --------
Sales:
Real estate:
One-to-four family......................... 5,106 16,523 3,988 5,504
--------- --------- --------- --------
Consumer loans............................. -- 2,027 -- --
--------- --------- --------- --------
Total loans sold.............................. 5,106 18,550 3,988 5,504
--------- ========= ========= ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Repayments:
Real estate:
One-to-four family......................... 16,005 22,446 15,702 18,633
Home equity................................ 3,129 3,991 2,723 2,647
Commercial real estate..................... 1,372 4,074 1,506 1,826
--------- --------- --------- --------
Total real estate loans.................. 20,506 30,511 19,931 23,106
Consumer loans................................ 12,624 9,240 6,522 4,951
Commercial business loans..................... 11,018 10,575 8,849 5,456
--------- --------- --------- --------
Total repayments......................... 44,148 50,326 35,302 33,513
--------- --------- --------- --------
Total reductions......................... 49,254 68,876 39,290 39,017
--------- --------- --------- --------
Net increases/(decreases)................ $ 16,870 $ (10,714) $ 6,880 $ (5,048)
========= ========= ========= ========
</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, 1999, the largest aggregate amount loaned by the Bank
to one borrower consisted of $4.0 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, 1999, the Bank had
nonperforming loans of $132,000 and a ratio of nonperforming loans to total
assets of 0.05%. At December 31, 1999, the Bank's ratio of nonperforming assets
to total assets was 0.08%.
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, 1999. 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.................. -- $ -- 1 $ 23 1 $ 23
Home Equity......................... -- -- 1 12 1 12
Commercial real estate.............. -- -- -- -- -- --
Consumer Loans...................... -- -- -- -- -- --
Commercial Loans.................... -- -- -- -- -- --
------ ------- ------- ------- ------- ------
Total ........................... -- $ -- 2 $ 35 2 $ 35
====== ======= ======= ======= ======= ======
</TABLE>
Nonaccrual Loans and Nonperforming Assets. The following table sets
forth information regarding nonaccrual loans and other nonperforming assets.
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- -------- -------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
One-to-four family...................................... $ 132 $ 1,010 $ 588 $ 735 $ 820
Multi-family............................................ -- -- -- -- --
Commercial real estate.................................. -- -- 242 274 346
Construction and land loans............................. -- -- -- -- --
Consumer................................................ -- 8 2 18 49
Commercial business..................................... -- 40 -- -- 7
------- ------- ------- ------- -------
Total................................................. 132 1,058 832 1,027 1,222
------- ------- ------- ------- -------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
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................................. $ 132 $ 1,058 $ 893 $ 1,093 $ 1,371
======= ======= ======= ======= =======
Foreclosed assets:
One-to-four family...................................... $ 76 $ 179 $ 263 $ 712 $ 613
Multi-family............................................ -- -- -- -- --
Commercial real estate.................................. 18 45 45 147 367
Construction and land loans............................. -- -- -- -- 10
Consumer................................................ 1 -- -- -- --
Commercial business..................................... -- -- -- -- --
------- ------- ------- ------- -------
Total................................................. $ 95 $ 224 $ 308 $ 859 $ 990
======= ======= ======= ======= =======
Total nonperforming loans as a percentage of total assets. 0.05% 0.43% 0.42% 0.52% 0.67%
======= ======= ======= ======= =======
Total nonperforming assets................................ $ 227 $ 1,282 $ 1,201 $ 1,952 $ 2,361
======= ======= ======= ======= =======
Total nonperforming assets as a percentage of total assets 0.08% 0.52% 0.57% 0.92% 1.15%
======= ======= ======= ======= =======
</TABLE>
11
<PAGE>
During the years ended December 31, 1999 and 1998, respectively, gross
interest income of $4,000 and $41,000 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, 1999 and 1998.
Classification of Assets. On the basis of management's review of its
assets, at December 31, 1999, the Bank had classified a total of $912,000 of
loans as follows (in thousands):
Special Mention......................... $ --
Substandard............................. 912
Doubtful assets......................... --
Loss assets............................. --
---------
Total ............................. $ 912
=========
General loss allowance.................. $ 1,380
=========
Specific loss allowance................. 143
=========
Charge-offs............................. --
=========
Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the risk
inherent in the loan portfolio and current economic conditions. The allowance is
established based upon management's evaluation of the risks inherent in the loan
portfolio, the composition of the loan portfolio, the general economy and the
general trend 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,
1999, the total allowance was $1.5 million, which amounted to 1.02% of total
loans, net and 1153.8% 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, 1999 and
1998, the Bank had charge-offs of $338,000 and $348,000, respectively, against
this allowance.
<PAGE>
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 current method of determining the adequacy of the
allowance is more prudent in light of the Bank's intention to continue 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,
--------------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance at the beginning of period........................ $1,543 $1,793 $1,546 $1,781 $2,117
Charge-offs:
One-to-four family..................................... 91 117 72 112 360
Commercial real estate................................. -- -- 118 -- 150
Construction and land loans............................ -- -- -- -- --
Consumer............................................... 246 196 82 64 38
Commercial business.................................... 1 35 27 -- 11
------ ------ ------ ------ ------
Total................................................ 338 348 299 176 559
------ ------ ------ ------ ------
Recoveries:
One-to-four family..................................... 3 15 14 7 99
Commercial real estate................................. -- 12 2 -- --
Construction and land loans............................ -- -- -- -- --
Consumer............................................... 85 71 53 28 38
Commercial business.................................... 1 -- -- 9 6
------ ------ ------ ------ ------
Total................................................ 89 98 69 44 143
------ ------ ------ ------ ------
Net charge-offs........................................... (249) (250) (230) (132) (416)
Additions charged to operations........................... 229 -- 477 (103) 80
------ ------ ------ ------ ------
Balance at end of period.................................. $1,523 $1,543 $1,793 $1,546 $1,781
====== ====== ====== ====== ======
Allowance for loan losses as a percentage of total loans
receivable, net........................................ 1.02% 1.17% 1.26% 1.14% 1.27%
====== ====== ====== ====== ======
Ratio of net charge-offs to average loans................. 0.18% 0.18% 0.16% 0.10% 0.29%
====== ====== ====== ====== ======
Ratio of net charge-offs to average nonperforming loans... 188.64% 23.63% 25.76% 12.08% 30.34%
====== ====== ====== ====== ======
</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,
-----------------------------------------------------------------------------
1999 1998
----------------------------------- -------------------------------------
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................... $ 469 $ 91,004 60.40% $ 610 $ 91,730 68.56%
Commercial real estate.................. 235 17,918 11.89 231 14,967 11.19
Consumer ............................... 358 26,020 17.27 249 15,553 11.62
Commercial business..................... 295 15,727 10.44 250 11,549 8.63
Unallocated............................. 166 -- -- 203 -- --
--------- --------- -------- -------- --------- ---------
Total.......................... $ 1,523 $ 150,669 100.00% $ 1,543 $ 133,799 100.00%
========= ========= ======== ======== ========= =========
<CAPTION>
1997
--------------------------------------
Percent
of Loans
Amount of Loan In Each
Loan Loss Amounts Category to
Allowance by Category Total Loans
--------- ----------- -----------
<S> <C> <C> <C>
Residential mortgages................... $ 455 $ 105,621 73.09%
Commercial real estate.................. 260 16,582 11.47
Consumer ............................... 138 12,723 8.80
Commercial business..................... 171 9,587 6.64
Unallocated............................. 769 -- --
--------- --------- --------
Total.......................... $ 1,793 $ 144,513 100.00%
========= ========= ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------------------
1996 1995
----------------------------------- --------------------------------------
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................ $ 467 $ 108,540 78.86% $ 426 $115,604 81.02%
Commercial real estate............... 343 15,658 11.38 410 14,843 10.40
Consumer ............................ 82 8,194 5.95 73 8,810 6.17
Commercial business.................. 137 5,241 3.81 140 3,424 2.41
Unallocated.......................... 517 -- -- 732 -- --
--------- --------- --------- -------- --------- ---------
Total....................... $ 1,546 $ 137,633 100.00% $ 1,781 $142,681 100.00%
========= ========= ========= ======== ========= =========
</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, 1999, the Bank had $85.5
million, or 30.5% 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 corporate and FHLB stock. The corporate debt obligations reported includes a
trust preferred investment in Citigroup with a book value of $5.2 million
returning a yield of 7.4% resulting in an estimated market value of $4.8 million
at December 31, 1999. 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, 1999, the Bank's investment securities portfolio had a weighted
average life of 5.09 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,
----------------------------------------------------------------
1999 1998 1997
-------------------- ------------------ -------------------
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>
Investment securities available for sale:
U.S. government securities........................... $ 0 0.00% 1,000 1.63 2,002 4.67
Federal agency securities............................ 54,803 61.73 37,346 60.93 24,504 57.19
Corporate debt securities............................ 11,420 12.86 15,580 25.42 11,833 27.62
Tax exempt bonds..................................... 3,624 4.08 3,919 6.40 2,162 5.05
Public utilities..................................... 200 0.23 300 0.49 750 1.75
Equity securities.................................... 16,183 18.23 1,918 3.13 1,288 3.02
-------- ----- -------- ------ --------- ------
Subtotal........................................... 86,230 97.13 60,063 98.00 42,539 99.30
FHLB stock........................................... 2,547 2.87 1,228 2.00 306 0.70
-------- ----- -------- ------ --------- ------
Total.............................................. $ 88,777 100.00% $ 61,291 100.00% $ 42,845 100.00%
======== ====== ======== ====== ========= ======
Average remaining life of investment securities........ 5.09 Years 3.92 Years 1.89 Years
Other interest earning assets:
Interest-bearing deposits with banks................. 873 100.00 261 1.17 115 6.34
Federal funds sold................................... -- -- 22,100 98.83 1,700 93.66
-------- ----- -------- ------ --------- ------
Total............................................ $ 873 100.00% $ 22,361 100.00% $ 1,815 100.00%
======== ====== ======== ====== ========= ======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
December 31,
------------------------------------------
1996 1995
------------------- -------------------
Book Percent of Book Percent of
Value Total Value Total
----- ----- ----- -----
<S> <C> <C> <C> <C>
Investment securities available for sale:
U.S. government securities........................... 5,013 9.52 5,584 11.82
Federal agency securities............................ 21,503 40.84 3,000 6.35
Corporate debt securities............................ 21,882 41.56 34,350 72.74
Tax exempt bonds..................................... 2,207 4.19 2,258 4.78
Public utilities..................................... 848 1.61 1,246 2.64
Equity securities.................................... 1,194 2.28 788 1.67
--------- ------ --------- ------
Subtotal........................................... 52,647 100.00 47,226 100.00
FHLB stock........................................... -- -- -- --
--------- ------ --------- ------
Total.............................................. $ 52,647 100.00% $ 47,226 100.00%
========= ====== ========= ======
Average remaining life of investment securities........ 1.51 Years 1.80 Years
Other interest earning assets:
Interest-bearing deposits with banks................. 1,778 20.73 1,972 28.28
Federal funds sold................................... 6,800 79.27 5,000 71.72
--------- ------ --------- ------
Total............................................ $ 8,578 100.00% $ 6,972 $100.00%
========= ====== ========= =======
</TABLE>
16
<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, 1999.
<TABLE>
<CAPTION>
December 31, 1999
---------------------------------------------------------------------------
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>
Federal agency obligations.......... $ -- $ 23,998 $ 29,796 $ 1,009 $ 54,803 $52,993
Corporate bonds..................... -- 5,199 1,035 5,186 11,420 10,723
Public utilities.................... -- -- 200 -- 200 3,469
Tax exempt bonds.................... -- 428 2,196 1,000 3,624 191
Other .............................. -- -- -- 18,730 18,730 18,167
------- -------- --------- -------- -------- -------
Total securities.................. $ -- $ 29,625 $ 33,227 $ 25,925 $ 88,777 $85,543
======= ======== ========= ======== ======== =======
Weighted average yield(1)........... % 6.00% 6.47% 6.70% 6.38% 6.46%
</TABLE>
- ----------------
(1) Weighted average yield has not been adjusted to reflect tax equivalent
adjustments.
Mortgage-Backed Securities. The Bank purchases mortgage-backed
securities in order to: (i) generate positive interest rate spreads with minimal
administrative expense; (ii) lower the Bank's credit risk as a result of the
guarantees provided by Freddie Mac, Fannie Mae, and GNMA; and (iii) increase
liquidity. The Bank has not invested in CMOs in recent years. At December 31,
1999, mortgage-backed securities totaled $26.4 million or 9.4% of total assets,
all of which were classified as available for sale. At December 31, 1999, 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 6.7% and a weighted average life (including payment assumption) of 7.1 years
at December 31, 1999. The estimated fair value of the Bank's mortgage-backed
securities at December 31, 1999 was $26.4 million which was $1.1 million lower
than the amortized cost of $27.4 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
<PAGE>
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 $26.4 million mortgage-backed securities
portfolio at December 31, 1999, $2.2 million with a weighted average yield of
6.9% had contractual maturities within five years, $2.4 million with a weighted
average yield of 6.5% had contractual maturities of five to ten years and $21.8
million with a weighted average yield of 6.6% 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
17
<PAGE>
declining mortgage interest rates, refinancing generally increases and
accelerates the prepayment of the underlying mortgages and the related security.
Under such circumstances, the Bank may be subject to reinvestment risk because,
to the extent that the Bank's mortgage related securities prepay faster than
anticipated, the Bank may not be able to reinvest the proceeds of such
repayments and prepayments at a comparable rate of return. Conversely, in a
rising interest rate environment prepayments may decline, thereby extending the
estimated life of the security and depriving the Bank of the ability to reinvest
cash flows at the increased rates of interest.
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,
---------------------------------------------------------------
1999 1998 1997
-------------------- ------------------- -------------------
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......................................... $ 7,023 25.60% $ 12 0.06% $ 16 0.14%
FNMA......................................... 14,824 54.05 13,851 69.74 7,752 66.40
FHLMC........................................ 5,518 20.12 5,924 29.82 3,808 32.61
CMOs......................................... 62 0.23 76 0.38 99 0.85
------- ----- ------- ----- ------- -----
Subtotal................................. 27,427 100.00 19,863 100.00 11,675 100.00
Unamortized premium/discount................... -- -- -- -- -- --
------- ----- ------- ----- ------- -----
Total.................................... $27,427 100.00% $19,863 100.00% $11,675 100.00%
======= ====== ======= ====== ======= ======
<CAPTION>
1996 1995
-------------------- --------------------
Book Percent of Book Percent of
Value Total Value Total
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Mortgage-backed securities available for sale:
GNMA......................................... $ 19 0.40% $ 25 9.80%
FNMA......................................... 3,540 75.11 -- --
FHLMC........................................ 1,035 21.97 75 30.20
CMOs......................................... 119 2.52 153 60.00
------- ----- ------- -----
Subtotal................................. 4,713 100.00 253 100.00
Unamortized premium/discount................... -- -- -- --
------- ----- ------- -----
Total.................................... $ 4,713 100.00% $ 253 100.00%
======= ====== ======= ======
</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, 1999, deposits totaled $189.1 million. At December 31,
1999, the Bank had a total of $103.1 million in certificates of deposit, of
which $64.5 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, 1999 certificates
of deposit with balances of $100,000 or more totaled $20.6 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.
The following table sets forth the deposit activities of the Bank for
the periods indicated.
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1999 1998 1997
--------- --------- ------
(Dollars in thousands)
<S> <C> <C> <C>
Opening balance.............................. $ 194,205 $ 182,961 $185,508
Deposits..................................... 979,766 843,441 678,376
Withdrawals.................................. (992,067) (840,130) (688,820)
Interest credited............................ 7,216 7,933 7,897
--------- --------- --------
Ending balance............................... $ 189,120 $ 194,205 $182,961
--------- --------- --------
Net increase (decrease)...................... $ (5,085) $ 11,244 $ (2,547)
========= ========= ========
Percent increase (decrease).................. (2.62)% 6.15% (1.37)%
======== ======== =======
</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, 1999.
<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........ $ 16,712 $ 12,621 $20,120 $32,994 $ 82,447
Certificates of deposit of $100,000 or more....... 5,061 3,745 6,284 5,518 20,608
-------- -------- ------- ------- --------
Total of certificates of deposit.................. $ 21,773 $ 16,366 $26,404 $38,512 $103,055
======== ======== ======= ======= ========
</TABLE>
The following tables set forth information, by various rate categories,
regarding the average balance of deposits by types of deposit for the periods
indicated.
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------
1999 1998 1997
----------------- ----------------- -----------------
Amount Percent Amount Percent Amounts Percent
------ ------- ------ ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Transactions and savings deposits:
Noninterest-bearing......................... $19,560 10.35% $20,564 10.59% $13,947 7.62%
Savings accounts............................ 43,648 23.08 43,069 22.18 41,924 22.92
NOW accounts................................ 8,120 4.29 7,145 3.68 5,677 3.10
Money market accounts....................... 14,737 7.79 14,554 7.49 10,600 5.79
------- ----- ------- ----- ------- -----
Total..................................... 86,065 45.51 85,332 43.94 72,148 39.43
------- ----- ------- ----- ------- -----
Certificates of deposit:
0.00-3.99%.................................. 3,419 1.81 3,184 1.64 2,464 1.35
4.00-5.99%.................................. 87,850 46.45 88,583 45.61 85,121 46.52
6.00-7.99%.................................. 11,786 6.23 17,106 8.81 23,228 12.70
8.00-9.99%.................................. -- -- -- -- -- --
10.00% and over............................. -- -- -- -- -- --
------- ----- ------- ----- ------- -----
Total certificates of deposit............... 103,055 54.49 108,873 56.06 110,813 60.57
------- ----- ------- ----- ------- -----
Total deposits.............................. $189,120 100.00% $194,205 100.00% $182,961 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
<PAGE>
The following table sets forth the amount and remaining maturities of
the Bank's certificates of deposit accounts at December 31, 1999.
<TABLE>
<CAPTION>
Percent
2.00-3.99% 4.00-5.99% 6.00-7.99% Total of Total
--------- --------- ---------- ----- --------
(Dollars in thousands)
Certificate accounts maturing in quarter ending:
<S> <C> <C> <C> <C> <C>
December 31, 1999........................... $ 2,670 $ -- $ -- $ 2,670 2.59%
March 31, 2000.............................. 749 13,280 5074 19,103 18.54
June 30, 2000............................... -- 13,919 2,447 16,366 15.88
September 30, 2000.......................... -- 13,395 1,110 14,505 14.08
December 31, 2000........................... -- 11,882 17 11,899 11.55
March 31, 2001 ............................. -- 4,449 767 5,216 5.06
June 30, 2001............................... -- 6,970 100 7,070 6.86
September 30, 2001.......................... -- 4,088 -- 4,088 3.97
December 31, 2001........................... -- 3,220 91 3,311 3.21
March 31, 2002.............................. -- 1,741 37 1,778 1.73
June 30, 2002............................... -- 1,198 525 1,723 1.67
September 30, 2002.......................... -- 1,560 678 2,238 2.17
December 31, 2002........................... -- 1,572 844 2,416 2.34
Thereafter.................................. -- 10,576 96 10,672 10.35
------- ------- ------- ------- -------
Total .................................... 3,419 87,850 11,786 103,055 100.00%
======= ======= ======= ======= =======
Percent of total............................ 3.32% 85.25% 11.44% 100.00%
======= ======= ======= =======
</TABLE>
21
<PAGE>
Borrowed Funds. Set forth below is a schedule detailing the Bank's borrowings.
<TABLE>
<CAPTION>
At December 31,
----------------------------------
1999 1998 1997
--------- --------- -------
(In Thousands)
<S> <C> <C> <C>
Short-Term Borrowings:
Repurchase Agreements - FHLB......................................... $ 14,000 $ 5,000 $ --
Overnight Advances - FHLB............................................ 200 -- --
Long-Term Borrowings:
Repurchase Agreements - FHLB........................................... 20,000 -- --
Term Advances - FHLB................................................. 16,000 5,000 --
-------- -------- -------
Total Borrowings................................................... $ 50,200 $ 10,000 $ --
-------- -------- -------
Weighted Average interest cost of short-term borrowings during the year 5.71% 5.27% --%
-------- -------- -------
Weighted Average interest cost of long-term borrowings during the year. 5.32% 4.73% --%
-------- -------- -------
Average Balance of borrowings outstanding during the year.............. $ 32,841 $ 1,264 $ --
-------- -------- -------
</TABLE>
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. In 1998, the Bank hired an experienced trust officer. At
December 31, 1999, the Bank maintained 208 trust/fiduciary accounts, with total
assets of $30.8 million under management as compared to 111 trust/fiduciary
accounts with $18.9 total assets at December 31, 1998. Management anticipates
that in the future the Trust Department will become a more significant component
of the Bank's business.
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, 1999, the Bank had 101 full-time employees and 13
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.
<PAGE>
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 companies, are subject to regulation by the Federal
Reserve Board and file reports with the Federal Reserve Board. Any
22
<PAGE>
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.
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
<PAGE>
corporations or partnerships in which such persons have equity interests. These
requirements include, but are not limited to, requirements that (i) certain
loans must be approved in advance by a majority of the entire board of trustees
and the interested party must abstain from participating directly or indirectly
in the voting on such loan, (ii) the loan must be on terms that are not more
favorable than those offered to unaffiliated third parties, and (iii) the loan
must not involve more than a normal risk of repayment or present other
unfavorable features.
Under the New York State Banking Law, the Superintendent may issue an
order to a New York State chartered banking institution to appear and explain an
apparent violation of law, to discontinue unauthorized or unsafe practices and
to keep prescribed books and accounts. Upon a finding by the Department that any
director, trustee or officer of any banking organization has violated any law,
or has continued unauthorized or unsafe practices in conducting the
23
<PAGE>
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.
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.
<PAGE>
Regulatory Capital Requirements. The FDIC has adopted risk-based
capital guidelines to which the Bank is subject. The guidelines establish a
systematic analytical framework that makes regulatory capital requirements more
sensitive to differences in risk profiles among banking organizations. The Bank
is required to maintain certain levels of regulatory capital in relation to
regulatory risk-weighted assets. The ratio of such regulatory capital to
regulatory risk- weighted assets is referred to as the Bank's "risk-based
capital ratio." Risk-based capital ratios are determined by allocating assets
and specified off-balance sheet items to four risk-weighted categories ranging
from 0% to 100%, with higher levels of capital being required for the categories
perceived as representing greater risk.
These guidelines divide a savings bank's capital into two tiers. The
first tier ("Tier I") includes common equity, retained earnings, certain
non-cumulative perpetual preferred stock (excluding auction rate issues) and
minority interests
24
<PAGE>
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.
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.
<PAGE>
Prompt Corrective Action. The federal banking agencies have promulgated
regulations to implement the system of prompt corrective action required by
federal law. Under the regulations, a bank shall be deemed to be (i) "well
capitalized" if it has total risk-based capital of 10.0% or more, has a Tier I
risk-based capital ratio of 6.0% or more, has a Tier I leverage capital ratio of
5.0% or more and is not subject to any written capital order or directive; (ii)
"adequately capitalized" if it has a total risk-based capital ratio of 8.0% or
more, a Tier I risk-based capital ratio of 4.0% or more and a Tier I leverage
capital ratio of 4.0% or more (3.0% under certain circumstances) and does not
meet the definition of "well capitalized"; (iii) "undercapitalized" if it has a
total risk-based capital ratio that is less than 8.0%, a Tier I risk-based
capital ratio that is less than 4.0% or a Tier I leverage capital ratio that is
less than 4.0% (3.0% under certain circumstances); (iv) "significantly
undercapitalized" if it has a total risk-based capital ratio that is less than
6.0%, a Tier I risk-based capital ratio that is less than 3.0% or a Tier I
leverage capital ratio that is less than 3.0%; and (v) "critically
undercapitalized" if it has a ratio of tangible equity to total assets that is
equal to or less than 2.0%. Federal law and regulations also specify
circumstances under which a federal banking agency may reclassify a well
capitalized
25
<PAGE>
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, 1999, the Bank had $16.2 million of securities
pursuant to this exception. As a savings bank, the Bank may also continue to
sell savings bank life insurance.
Transactions With Affiliates. Under current federal law, transactions
between depository institutions and their affiliates are governed by Sections
23A and 23B of the Federal Reserve Act. An affiliate of a savings bank is any
company or entity that controls, is controlled by, or is under common control
with the savings bank, other than a subsidiary of the savings bank. In a holding
company context, at a minimum, the parent holding company of a savings bank and
any companies which are controlled by such parent holding company are affiliates
of the savings bank. Generally, Section 23A limits the extent to which the
savings bank or its subsidiaries may engage in "covered transactions" with any
one affiliate to an amount equal to 10% of such savings bank's capital stock and
surplus and contains an aggregate limit on all such transactions with all
affiliates to an amount equal to 20% of such capital stock and surplus. The term
"covered transaction" includes the making of loans or other extensions of credit
to an affiliate; the purchase of assets from an affiliate, the purchase of, or
an investment in, the securities of an affiliate; the acceptance of securities
of an affiliate as collateral for a loan or extension of credit to any person;
or issuance of a guarantee, acceptance, or letter of credit on behalf of an
affiliate. Section 23A also establishes specific collateral requirements for
loans or extensions of credit to, or guarantees, acceptances on letters of
credit issued on behalf of an affiliate. Section 23B requires that covered
transactions and a broad list of other specified transactions be on terms
substantially the same, or no less favorable, to the savings bank or its
subsidiary as similar transactions with nonaffiliates.
<PAGE>
Further, Section 22(h) of the Federal Reserve Act restricts a savings
bank with respect to loans to directors, executive officers, and principal
stockholders. Under Section 22(h), loans to directors, executive officers and
stockholders who control, directly or indirectly, 10% or more of voting
securities of a savings bank and certain related interests of any of the
foregoing, may not exceed, together with all other outstanding loans to such
persons and affiliated entities, the savings bank's total capital and surplus.
Section 22(h) also prohibits loans above amounts prescribed by the appropriate
federal banking agency to directors, executive officers, and stockholders who
control 10% or more of voting securities of a stock savings bank, and their
respective related interests, unless such loan is approved in advance by a
majority of the board of directors of the savings bank. Any "interested"
director may not participate in the voting. The loan amount (which includes all
other outstanding loans to such person) as to which such prior board of director
approval is required, is the greater of $25,000 or 5% of capital and surplus or
any loans over $500,000. Further, pursuant
26
<PAGE>
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.
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
<PAGE>
substantially all of the assets of, a bank located in a state other than such
holding company's home state, without regard to whether the transaction is
prohibited by the laws of any state. The Federal Reserve Board may not approve
the acquisition of the bank that has not been in existence for the minimum time
period (not exceeding five years) specified by the statutory law of the host
state. The Federal Reserve Board is prohibited from approving an application if
the applicant (and its depository institution affiliates) controls or would
control more than 10% of the insured deposits in the United States or 30% or
more of the deposits in the target bank's home state or in any state in which
the target bank maintains a branch. Individual states continue to have authority
to limit the percentage of total insured deposits in the state which may be held
or controlled by a bank or bank holding company to the extent such limitation
does not
27
<PAGE>
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."
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
<PAGE>
York State Banking Law. The term "bank holding company," for the purposes of the
New York State Banking Law, is defined generally to include any person, company
or trust that directly or indirectly either controls the election of a majority
of the directors or owns, controls or holds with power to vote more than 10% of
the voting stock of a bank holding company or, if the Company is a banking
institution, another banking institution, or 10% or more of the voting stock of
each of two or more banking institutions. In general, a bank holding company
controlling, directly or indirectly, only one banking institution will not be
deemed to be a bank holding company for the purposes of the New York State
Banking Law. Under New York State Banking Law, the prior approval of the Banking
Board is required before: (1) any action is taken that causes any company to
become a bank holding company; (2) any action is taken that causes any banking
institution to become or be merged or consolidated with a subsidiary of a bank
holding company; (3) any bank holding company acquires direct or indirect
ownership or control of more than 5% of the voting stock of
28
<PAGE>
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
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.
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.
<PAGE>
Conversion of the Mutual Holding Company to Stock Form. Under New York
law, regulations of the Banking Board and the Plan of Reorganization permit the
Mutual Holding Company to convert from the mutual to the capital stock form of
organization (a "Conversion Transaction"). There can be no assurance when, if
ever, a Conversion Transaction will occur, and the board of trustees has no
current intention or plan to undertake a Conversion Transaction. In a Conversion
Transaction, the Mutual Holding Company would merge with and into the Bank or
the Company, with the Bank or the Company as the resulting entity. Certain
depositors of the Bank would receive the right to subscribe for additional
shares of the resulting entity. In a Conversion Transaction, each share of
Common Stock outstanding immediately prior to the completion of the Conversion
Transaction held by persons other than the Mutual Holding Company would be
automatically converted into and become the right to receive a number of shares
of Common Stock of the resulting entity determined pursuant to an exchange ratio
that ensures that after the Conversion Transaction,
29
<PAGE>
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.
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.
Financial Services Modernization Act. On November 12, 1999, the
Gramm-Leach-Bliley Act was signed into law, repealing provisions of the
depression-era Glass-Steagall Act, which prohibited commercial banks, securities
firms, and insurance companies from affiliating with each other and engaging in
each other's businesses. The major provisions of the Act took effect on March
12, 2000.
The Act creates a new type of financial services company called a
"Financial Holding Company" (an "FHC"), a bank holding company with dramatically
expanded powers. FHCs may offer virtually any type of financial service,
including banking, securities underwriting, insurance (both agency and
underwriting) and merchant banking. The Federal Reserve serves as the primary
"umbrella" regulator of FHCs. Balanced against the attractiveness of these
expanded powers are higher standards for capital adequacy and management, with
heavy penalties for noncompliance.
Bank holding companies that wish to engage in expanded activities but
do not wish to become financial holding companies may elect to establish
"financial subsidiaries," which are subsidiaries of national banks with expanded
powers. The Act permits financial subsidiaries to engage in the same types of
activities permissible for nonbank subsidiaries of financial holding companies,
with the exception of merchant banking, insurance underwriting and real estate
investment and development. Merchant banking may be permitted after a five-year
waiting period under certain regulatory circumstances.
<PAGE>
Implementing regulations under the Act have not yet been promulgated,
and though the Company cannot predict the full impact of the new legislation,
there is likely to be consolidation among financial services institutions and
increased competition for the Company. The Company expects to remain a bank
holding company for the time being and access its options as circumstances
change.
Federal Securities Law. The Common Stock of the Company is registered
with the SEC under the Exchange Act, prior to completion of the Offering and
Reorganization. The Company is 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
30
<PAGE>
restrictions. If the Company meets specified current public information
requirements, each affiliate of the Company is able to sell in the public
market, without registration, a limited number of shares in any three-month
period.
Federal Reserve System. The Federal Reserve Board requires all
depository institutions to maintain noninterest-bearing reserves at specified
levels against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts). At December 31, 1999, 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."
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.
<PAGE>
As a member, the Bank is required to purchase and maintain stock in the
FHLB of New York. As of December 31, 1999, the Bank had $2.5 million of FHLB
stock. The dividend yield from FHLB stock was 6.75% at December 31, 1999. 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.
31
<PAGE>
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.
Method of Accounting. For federal income tax purposes, the Bank
currently reports its income and expenses on the accrual method of accounting
and uses a tax year ending December 31 for filing its consolidated federal
income tax returns. The Small Business Protection Act of 1996 (the "1996 Act")
eliminated the use of the reserve method of accounting for bad debt reserves by
savings institutions, effective for taxable years beginning after 1995.
Bad Debt Reserves. Prior to the 1996 Act, the Bank was permitted to
establish a reserve for bad debts and to make annual additions to the reserve.
These additions could, within specified formula limits, be deducted in arriving
at the Bank's taxable income. As a result of the 1996 Act, the Bank must use the
specific charge off method in computing its bad debt deduction beginning with
its 1996 Federal tax return. In addition, the federal legislation requires the
recapture (over a six year period) of the excess of tax bad debt reserves at
December 31, 1995 over those established as of December 31, 1987. The Bank did
not have any such reserves subject to recapture.
Minimum Tax. The Code imposes an alternative minimum tax ("AMT") at a
rate of 20% on a base of regular taxable income plus certain tax preferences
("alternative minimum taxable income" or "AMTI"). The AMT is payable to the
extent such AMTI is in excess of an exemption amount. Net operating losses can
offset no more than 90% of AMTI. Certain payments of alternative minimum tax may
be used as credits against regular tax liabilities in future years. The Bank has
not been subject to the alternative minimum tax and has no such amounts
available as credits for carryover.
Net Operating Loss Carryovers. A financial institution may carry back
net operating losses to the preceding two taxable years and forward to the
succeeding 20 taxable years. This provision applies to losses incurred in
taxable years beginning after August 5, 1997. At December 31, 1999, 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
<PAGE>
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.
32
<PAGE>
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.
Executive Officers of the Registrant
Listed below is information, as of December 31, 1999, 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 49 President and Chief Executive Officer since 1990
Eric E. Stickels 38 Senior Vice President and Chief Financial Officer since 1998
Thomas H. Dixon 45 Senior Vice President\Credit Administration since 1996
</TABLE>
33
<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, 1999. The aggregate net book value of the
Bank's premises and equipment was $5.3 million at December 31, 1999.
<TABLE>
<CAPTION>
Original Date of Net Book Value
Year Lease of Property
Location Acquired Expiration at December 31, 1999
- ----------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Main Office:
182 Main Street 1889 N/A $ 2,779
Oneida, New York 13421
Branch Offices:
Camden Branch 1997 N/A 1,065
41 Harden Boulevard
Camden, New York 13316
Canastota Branch 1999 N/A 510
102 S. Peteboro St.
Canastota, New York 13032
Cazenovia Branch 1971 N/A 132
48 Albany Street
Cazenovia, New York 13035
Hamilton Branch 1976 N/A 51
35 Broad Street
Hamilton, New York 13346
Convenience Center 1988 N/A 264
585 Main Street
Oneida, New York 13421
Operations Center
126 Lenox Avenue 1989 N/A 500
Oneida, New York 13421
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
- -----------------------------------
Much of the Bank's market area is included in the 270,000-acre land
claim of the Oneida Indian Nation ("Oneidas"). Over 14 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, the Oneidas and the U.S. Justice Department filed motions to
amend the long outstanding claim against the State of New York. The motion
attempts to include in the claim, various named and 20,000 unnamed additional
<PAGE>
defendants, who own real property in parts of Madison and Oneida counties,
thereby including the additional defendants in the original suit. Neither the
Bank nor the Company is a named defendant in the motion. The United States
District Court heard arguments on the matter in late March 1999 and appointed a
"settlement master" to help the parties negotiate an agreement in lieu of
further litigation.
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
34
<PAGE>
communications that individual landowners will not be adversely affected by the
ongoing litigation. The Company continues to monitor the situation.
The Company is not involved in any other 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
Company.
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, 1999 to a vote of securityholders.
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, 1999 (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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
- ---------------------------------------------------------------------------
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 longer-term fixed-rate one-to-four family residential
mortgage loans into the secondary market without recourse and on a servicing
retained basis; and (iii) managing the Company's investment activities in a
prudent manner in the context of overall balance sheet asset/liability
management. Investing in shorter-term securities will generally bear lower
yields as compared to longer-term investments, but which better position the
Bank for increases in market interest rates and 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, 1999 totaled $64.5 million, or 29.4% of
total interest-bearing liabilities. The wholesale arbitrage strategy of
<PAGE>
investing allows the Company to invest in longer-term assets by hedging the
additional interest rate risk with liabilities of similar maturity or repricing
characteristics. Borrowed funds that mature in one year or less, at December 31,
1999 totaled $14.2 million, or 6.5% of total interest-bearing liabilities.
Management believes that this balanced approach to investing will reduce the
exposure to interest rate fluctuations will enhance long-term profitability.
35
<PAGE>
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, 1999, 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 2.65%.
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
The following table sets forth the amounts of all interest-earning
assets and interest-bearing liabilities outstanding at December 31, 1999, 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, 1999, on the basis of contractual
maturities, scheduled loan amortization, and scheduled rate adjustments within
the selected time intervals. Savings accounts were assumed to decay at 9.50%,
9.75%, 10.00%, 10.25%, 10.50% and 50.00%; NOW accounts were assumed to decay at
9.20%, 9.35%, 9.55%, 9.70%, 9.90% and 52.30%; and money market accounts were
assumed to decay at 18.65%, 19.30%, 20.00%, 20.65%, 21.40% and 0% for the
periods of one to two years, two to three years, three to four years, four to
five years and more than five years, respectively. Prepayment and deposit decay
rates can have a significant impact on the Company's estimated gap.
36
<PAGE>
While the Company believes the data to be reasonable, there can be no
assurance that the contractual maturity, repricing periods and decay rates will
approximate actual future loan prepayment and deposit withdrawal activity.
<TABLE>
<CAPTION>
At December 31, 1999
------------------------------------------------------------------------- Fair
Thereafter Total Value
------- ------- ------- ------- ------- ----------------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Earning Assets:
Fixed Rate:
Loans receivable............. $ 23,234 $ 10,441 $ 7,457 $ 5,162 $ 2,927 $ 12,985 $ 62,206 $ 62,517
Average interest rate.......... 8.22% 8.75% 8.75% 8.52% 8.13% 7.58% 8.39%
Investment and MBS........... 1,667 8,241 6,809 8,225 12,972 54,595 92,509 88,749
Average interest rate.......... 6.83% 6.11% 6.08% 5.97% 6.18% 6.52% 6.35%
Variable Rate:
Loans receivable............. 57,660 13,683 5,888 7,385 3,847 7 88,470 89,277
Average interest rate.......... 8.33% 8.08% 8.09% 7.91% 6.92% 9.00% 8.13%
Investment and MBS........... 5,000 -- -- -- -- -- 5,000 5,016
Average interest rate.......... 7.61% -- -- -- -- -- 7.61%
Federal funds................ -- -- -- -- -- -- -- --
Average interest rate.......... -- -- -- -- -- -- -- --
Equity securities............ -- -- -- -- -- 18,695 18,695 18,133
Average interest rate.......... -- -- -- -- -- 6.39% 6.39%
-------- -------- -------- -------- -------- -------- --------
Total interest-earning assets.. $ 87,561 $ 32,365 $ 20,154 $ 20,772 $ 19,746 $ 86,282 $266,880 $263,692
======== ======== ======== ======== ======== ======== ======== ========
Interest-bearing liabilities:
Fixed Rate:
Certificate accounts......... $ 66,105 $ 19,677 $ 8,118 $ 4,171 $ 3,613 $ 66 $101,750 $101,782
Average interest rate......... 4.99% 5.31% 5.60% 5.56% 5.34% 5.73% 5.14%
Borrowings.................. 9,200 -- 15,000 11,000 -- 5,000 40,200 39,151
Average interest rate......... 5.81% -- 5.33% 5.76% -- 4.94% 5.62%
Variable Rate:
Certificate accounts........ 1,305 -- -- -- -- -- 1,305 1,305
Average interest rate......... 5.12% -- -- -- -- -- 5.12%
Savings accounts............ 4,148 4,252 4,360 4,470 4,583 21,835 43,648 43,648
Average interest rate......... 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50%
Money market and NOW........ 4,233 3,529 3,641 3,757 3,876 3,821 22,857 22,869
Average interest rate......... 2.46% 2.46% 2.46% 2.46% 2.46% 2.46% 2.46%
Borrowings.................. 10,000 -- -- -- -- -- 10,000 9,739
Average interest rate......... 6.14% -- -- -- -- -- 6.14%
Total interest-bearing
liabilities................. $ 94,991 $ 27,458 $ 31,119 $ 23,398 $ 12,072 $ 30,722 $219,760 $218,494
-------- -------- -------- -------- -------- -------- -------- --------
Interest sensitivity gap/period $ (7,430) $ 4,907 $(10,965) $ (2,626) $ 7,674 $ 55,560 $ 47,120
-------- -------- -------- -------- -------- -------- --------
Cumulative sensitivity gap.... $ (7,430) $ (2,523) $(13,488) $(16,114) $ (8,440) $ 47,120 $ 47,120
-------- -------- -------- -------- -------- -------- --------
Ratio of interest-earning assets
to interest-bearing liabilities 92.18% 117.87% 64.76% 88.78% 163.57% 280.85% 121.44%
-------- -------- -------- -------- -------- -------- --------
Cumulative interest sensitivity gap
as a percentage of total assets (2.65)% (0.90)% (4.81)% (5,75)% (3.01)% 16.82% 16.82%
-------- -------- -------- -------- -------- -------- ---------
</TABLE>
<PAGE>
The Gap Table above includes all interest sensitive assets and
liabilities grouped based upon instruments with common characteristics. The
following assumptions were used to prepare the table. Fixed-rate loans with
amortizing payments are scheduled according to amortized cash flows, since this
represents a repricing opportunity on funds received as payments. Fixed-rate
demand loans, time notes or any other fixed-rate loans with no scheduled
amortizing payment are assigned by final maturity. Investment and
mortgage-backed securities are scheduled based on the earlier of their maturity
date or next scheduled call date. Variable rate loans are assumed to cash flow
as of their next scheduled repricing date since this represents a repricing
opportunity. Federal funds are assigned to immediate repricing since they
37
<PAGE>
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. Except as
described above, the GAP table does not take into account prepayments of loans,
mortgage-backed securities or investments nor early withdrawal activity for
certificate accounts.
Certain shortcomings are inherent in the methodologies used in the
above interest rate risk measurements, and the use of interest rate risk
measurements to generally measure market risks. Although certain assets and
liabilities may have similar maturities or terms to repricing, they react in
different degrees to changes in market interest rates. The interest rates on
certain types of assets and liabilities may 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. As a result of these
shortcomings, the Company focuses more attention on simulation modeling, such as
the Net Income and Portfolio Value Analysis discussed below, rather than Gap
Analysis. Even though the Gap Analysis reflects a ratio of cumulative gap to
total assets within the Company's targeted range of acceptable limits, the net
income and net portfolio value simulation modeling is considered by management
to be more informative in forecasting future income and economic value trends.
Net Income and Portfolio Value Analysis. The Company's interest rate
sensitivity is also monitored by management through the use of a net income
model and a net portfolio value ("NPV") model which generates estimates of the
change in the Company's net income and NPV over a range of interest rate
scenarios. NPV is the present value of expected cash flows from assets and
liabilities. The model assumes estimated loan prepayment rates; reinvestment
rates and deposit decay rates similar to the assumptions utilized for the GAP
Table. The following sets forth the Company's net income and NPV as of December
31, 1999.
<TABLE>
<CAPTION>
Change in
Interest Rates Net Interest Income Net Portfolio Value
In Basis Points Dollar Dollar Percent Dollar Dollar Percent
(Rate Shock) Amount Change Change Amount Change Change
-------------- ----------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
+300 $9,832 $ (349) (3.4)% $38,488 $ (11,866)(23.6)%
+200 9,986 (195) (1.9)% 42,399 (7,955)(15.8)%
+100 10,097 (84) (0.8)% 46,317 (4,037)(8.0)%
Static 10,181 -- 0.0% 50,354 -- 0.0%
-100 10,444 263 2.6% 52,629 2,274 4.5%
-200 10,399 219 2.2% 52,188 1,834 3.6%
-300 10,328 147 1.4% 50,743 389 0.8%
</TABLE>
<PAGE>
As is the case with the GAP Table, certain shortcomings are inherent in
the methodology used in the above interest rate risk measurements. Modeling
changes in Net Income and NPV requires the making of certain assumptions, which
may or may not reflect the manner in which actual yields and costs respond to
changes in market interest rates. In this regard, the Net Interest Income and
NPV Table presented assumes that the composition of the Company's interest
sensitive assets and liabilities existing at the beginning of a period remains
constant over the period being measured and also assumes that a particular
change in interest rates is reflected uniformly across the yield curve
regardless of the duration to maturity or repricing of specific assets and
liabilities. Accordingly, although the Net Income and NPV Table provides an
indication of the Company's interest rate risk exposure at a particular point in
time, such measurements are not intended to and do not provide a precise
forecast of the effect of changes in market interest rates on the Company's net
interest income and will differ from actual results.
ITEM 8. FINANCIAL STATEMENTS
- --------------------------------------
The financial statements identified in Item 14(a)(1) hereof are
incorporated by reference hereunder.
38
<PAGE>
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 1999.
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 23, 2000,
(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.
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 Condition, December 31, 1999
and 1998
o Consolidated Statements of Income, Years Ended December
31, 1999, 1998 and 1997
o Consolidated Statements of Comprehensive Income, Years
Ended December 31, 1999, 1998 and 1997
39
<PAGE>
o Consolidated Statements of Changes in Stockholders'
Equity, Years Ended December 31, 1999, 1998 and 1997
o Consolidated Statements of Cash Flows, Years Ended
December 31, 1999, 1998 and 1997
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 17, 1998.
(b) Reports on Form 8-K:
-------------------
None
(c) The exhibits listed under (a)(3) above are filed herewith.
(d) Not applicable.
40
<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, 2000 By: /s/Michael R. Kallet
--------------------
Michael R. Kallet
President and Chief Executive Officer
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.
<TABLE>
<CAPTION>
<S> <C>
By: /s/Michael R. Kallet By: /s/Eric E. Stickels
-------------------- -------------------
Michael R. Kallet, President and Chief Eric E. Stickels, Senior Vice President and Chief
Executive Officer Financial Officer
(Principal Executive Officer) (Principal Financial and Accounting Officer)
Date: March 22, 2000 Date: March 22, 2000
By: /s/Thomas H. Dixon By: /s/Nicholas J. Christakos
------------------ -------------------------
Thomas H. Dixon, Senior Vice President Nicholas J. Christakos, Director
Date: March 22, 2000 Date: March 22, 2000
By: /s/Patricia D. Caprio By: /s/Edward J. Clarke
--------------------- -------------------
Patricia D. Caprio, Director Edward J. Clarke, Director
Date: March 22, 2000 Date: March 22, 2000
By: /s/James J. Devine, Jr. By: /s/John E. Haskell
----------------------- ------------------
James J. Devine, Jr., Director John E. Haskell, Director
Date: March 22, 2000 Date: March 22, 2000
By: /s/Rodney D. Kent By: /s/William D. Matthews
----------------- ----------------------
Rodney D. Kent, Director William D. Matthews, Director
Date: March 22, 2000 Date: March 22, 2000
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
By: /s/Michael W. Milmoe By: /s/Richard B. Myers
--------------------- -------------------
Michael W. Milmoe, Director Richard B. Myers, Director
Date: March 22, 2000 Date: March 22, 2000
By: /s/Frank O. White, Jr.
----------------------
Frank O. White, Jr., Director
Date: March 22, 2000
</TABLE>
Table of Contents
2 President's Message to Shareholders
3 Your Link To A Brighter Future
5 Selected Consolidated Financial Data
6 Management's Discussion and Analysis of
Financial Condition and Results of Operation
19 Report of Independent Accountants
21 Consolidated Financial Statements
26 Notes to Consolidated Financial Statements
44 Board of Directors
45 Officers
46 Corporate Information
<PAGE>
2
A Message to our Shareholders
Oneida Financial Corp. is proud to take this opportunity to deliver our second
annual report. As we enter our second year as a public company, we are excited
to provide details of past growth as well as a more refined view of where we see
ourselves in the future. I am pleased to report that our strong local commitment
and community philosophy have allowed us to grow without compromising our
personalized service. We will maintain this local commitment as it is our
strength and furthermore the infrastructure of our business.
It is with great pleasure that we can report net earnings in the past year that
surpass previously recorded earnings. This only bolsters our confidence that
operations at the local level will continue to serve community interests as well
as ours. We have been successful in our expansion of new branches, which is why
we are confident that a new branch in Canastota will meet the strong demand for
local banking in this area. This expansion will undoubtedly further strengthen
our franchise, and it is in keeping with a local commitment, which is part of
our mission statement. We continue to look for new branch opportunities as they
arise, although only in an environment that we can provide a community banking
experience.
We will continue to develop our technological banking expertise as this market
demands, although in doing so we refuse to sacrifice the personalized service
that is the foundation of our business. In launching our Internet Banking
service we are maintaining a progressive stance toward technological market
demands, while at the same time keeping traditional customer based philosophies
intact.
Services such as the One Card have proven so successful in producing checking
account growth, and cross-selling new accounts that expansion of services in
this direction is not only timely, but also extremely promising. Also in keeping
with our dedication to convenient banking, we continue to offer extended service
hours. This has provided better service to our already loyal customers, and
attracts new friendships as well.
Another area of remarkable growth for us in the past year has been in Business
Banking. We have exceeded our expectations in Business Banking and are creating
a reputation as a major service provider in the area. The team effort at Oneida
Savings is responsible for its fantastic successes this past year, and provides
a strong sense of security for further growth. After one full year in operation
as a public company we are happy to report such successes, and are well prepared
to follow suit for exciting victories in the future.
Our careful planning and preparations have allowed an easy transition into the
next century. We took every step to ensure our systems and our vendors' systems
were year 2000 compliant. Congratulations are due for our staff who took the
care to strategize against any foreseen difficulties in the passage to the year
2000. With the great care that was taken in averting these difficulties, we were
able to ease our customers' minds as well as our own.
I am honored to thank the team at Oneida Financial Corp. for their expertise and
commitment in making 1999 a flagship year. Since we have exceeded every goal
this past year, we are able to enter the year 2000 proudly, and will realize the
vision that is Oneida Financial Corp.
/s/Michael R. Kallet
- --------------------
Michael R. Kallet
<PAGE>
[GRAPHIC]
President and Chief Executive Officer from left to right:
Eric E. Stickels
Senior Vice President,
Chief Financial Officer,
Corporate Secretary & Trust Officer
Michael R. Kallet
President, Chief Executive
Officer & Trust Officer
Thomas H. Dixon
Senior Vice President,
Credit Administration
Your Link To A Brighter Future
Increased Delivery Options
<PAGE>
3
Your Link to a Brighter Future
Oneida Savings has long held a tradition of excellence in customer
service. As we expand the delivery options available to our customers, our goal
is to continue to solidify the friendships that make our community banking
experience a success. Our expansion of delivery systems now keeps us on the
cutting edge within the rapidly evolving banking industry, and we're able to do
so without distancing ourselves from our customers.
Oneida Savings has successfully maintained rapport with our customers
throughout the historical implementation of Drive-Thru Banking, Automated Teller
Machines, Debit Cards, and Telephone Banking. We credit the success of these
services not merely on the efficiency of their usage, but primarily on the level
of customer assistance received. At Oneida Savings we strongly believe that
these services are an addition to, not a replacement of personal attention.
As we expand our delivery systems to include Internet Banking, we
continue to practice our customer-based philosophies and in the process
personalize what some erroneously conclude is an impersonal enterprise. The
option of banking from the comfortable confines of one's home with extremely
accessible and friendly support, is an appropriate addition for a bank whose
focus is on personal service. It is projected that the use of Internet Banking
services will more than triple over the next five years, proving that Oneida
Savings' entrance into this delivery area is very timely and a strategic
success. The users of our Internet Banking Service will find that the ability to
make transactions 24 hours a day from the privacy of home or office, is an
indispensable option of modern day banking. The option of paying bills
electronically is a necessity to those wishing to economize their time, and
vital for those with unconventional work schedules. The ability to shop at many
of the premier Internet retailer sites through the security of the bank's
Internet service is an added convenience and a significant source of savings for
our customers. In the customers' conversion from paper to electronic
transactions, Oneida Savings' proven expertise in providing personal assistance
will be its decided success, and will become a hallmark in helping our customers
gain confidence in this new and exciting banking service.
In demonstrating our continued commitment to banking at the personal level we
offer longer service hours in our six branches than any other financial
institution. This further reinforces the emphasis we place on maintaining a face
to face relationship with our customers, and providing the most convenient
banking available. Oneida Savings has always been, and continues to be forward
thinking in ensuring a strong foundation for our customers and ourselves.
[GRAPHIC-from left to right: Bob Stinson, Randy Kennedy, Tony Pulverenti,
George Sawner Business Banking Services]
Business Banking Services has been an area of much progress for Oneida
Savings and we continue to devote our efforts to its continued growth. We feel
that by proactively inviting business accounts to join us, we are creating
<PAGE>
opportunities to aggressively cross-sell our diverse selection of financial
products. Successes in Business Banking Services have allowed Oneida Savings to
increase its already expansive list of product offerings, which enlarges our
portfolio, and leads to greater shareholder value over the long term. Our loan
quality has also remained strong, with non-performing loans and delinquencies
below peer groups, and previous Oneida Savings' year-end levels.
Relationship banking allows Oneida Savings to
<PAGE>
4
[GRAPHIC-from left to right: Bob Stinson, Randy Kennedy, Tony Pulverenti, George
Sawner]
know the customer and broaden our relationship with each area business we serve.
Our customers have provided us with many opportunities for growth by
recommending us to their friends and business associates, thereby becoming
valuable advertisers for the bank. Oneida Savings prides itself on developing
mutually beneficial relationships with area businesses, and we have earned a
reputation as a leading commercial lender in the area.
Oneida Savings retains an experienced team of lenders who are are well
respected in the communities they serve, and known well as industry leaders in
their field. Because we take great care in hiring locally for our Business
Banking Services team, our customers are very comfortable in letting us handle
their business's needs. Our strength in Business Banking Services has been the
relationships established and maintained throughout the years, as well as the
customer tailored service that allows us to grow so steadily. We have found that
visiting our customers at their place of business is effective in solidifying
these important friendships. Our Business Banking professionals also maintain
levels of authority that allow them to respond quickly and efficiently to the
business community, which is a strong strategy for excellent customer service.
Oneida Savings believes that the economic growth that is vital to all
of our futures will be fueled by small business successes. Being a community
bank requires that we do our part to help our communities develop and prosper,
which is a responsibility that we take very seriously.
The visibility and success of Oneida Savings clearly indicates that we
are fast becoming the bank of choice for businesses and individuals in the
markets we serve. Oneida Savings will continue to reward its shareholders by
providing wise opportunities for future growth, and the confidence that comes
with the firmament of a solid past.
<PAGE>
5
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, 1999. 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,
-------------------------------------------------------
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data: (in thousands)
Total Assets $280,212 $248,781 $210,637 $211,095 $205,531
Loans receivable, net 149,146 132,256 142,368 135,872 140,677
Mortgage-backed securities 26,355 20,022 11,780 4,725 280
Investment securities 85,543 62,669 43,525 52,926 47,758
Deposits 189,120 194,205 182,961 185,508 181,385
Borrowed funds 50,200 10,000 - - -
Retained earnings 29,683 27,710 26,649 25,364 23,616
Paid in capital and common stock 15,771 15,903 - - -
Stockholders' equity 39,951 44,134 27,120 25,538 23,951
<CAPTION>
At December 31,
-------------------------------------------------------
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Selected Operations Data: (in thousands except per share data)
Total interest income $18,582 $16,236 $15,863 $15,154 $14,584
Total interest expense 8,985 7,999 7,897 7,895 7,628
Net interest income 9,597 8,237 7,966 7,259 6,956
Provision for loan losses 229 - 477 (103) 80
Net interest income after provision for loan losses 9,368 8,237 7,489 7,362 6,876
Non-interest income 1,332 966 822 801 910
Non-interest expense 6,882 7,379 6,145 5,390 5,270
Income before income taxes 3,818 1,824 2,166 2,773 2,516
Income taxes 1,311 762 881 1,025 898
Net income $2,507 $1,062 $1,285 $1,748 $1,618
Net Income per share $0.73 N/A N/A N/A N/A
Cash dividends declared $0.15 N/A N/A N/A N/A
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios:
Performance ratios:
Return on average assets 0.95% 0.49% 0.61% 0.84% 0.80%
Return on average equity 5.92% 3.54% 4.83% 7.10% 7.13%
Net interest margin 3.82% 4.01% 3.97% 3.66% 3.62%
Efficiency ratio 62.97% 80.18% 69.93% 66.87% 67.00%
Ratio of average interest-earning assets
to average interest-bearing liablitites 122.87% 118.21% 117.89% 116.27% 114.83
Asset quality ratios:
Nonperforming assets to total assets 0.08% 0.52% 0.57% 0.92% 1.15%
Nonperforming loans to total assets 0.05% 0.43% 0.42% 0.52% 0.67%
Allowance for loan losses to loans receivable, net 1.02% 1.17% 1.26% 1.14% 1.27%
Allowance for loan losses to nonperforming loans 1153.79% 145.84 200.75% 141.80% 130.02%
Capital ratios:
Total capital to total assets 14.26% 17.74% 12.88% 12.10% 11.65%
Average equity to average assets 16.00% 13.82% 12.69% 11.88% 11.21%
Number of full service offices 6 5 5 4 4
</TABLE>
<PAGE>
6
Management's Discussion and Analysis of
Financial Condition and Result 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 considerations. 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 retention or resale in the
secondary market while retaining adjustable rate mortgage ("ARM") loans and
hybrid ARM loans; (iii) increasing the level of higher yielding consumer,
commercial real estate and commercial business loans; (iv) maintaining asset
quality; (v) improving return of 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
approximately 20 years. In addition, the Bank intends to use the mutual holding
company structure to maintain the institution as an independent community bank.
<PAGE>
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. In addition, the Bank
continues to evaluate the benefits of expanding its branch network and service
delivery in contiguous market areas. During 1999 the Bank opened its sixth full
service branch office in Canastota, New York.
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,
1999 and the year ended December 31, 1998, the Bank originated $20.0 million and
$24.5 million, respectively, of one-to-four family mortgage loans. As of
December 31, 1999, approximately $81.3 million or 53.9% of the loan portfolio
consisted of one-to-four family residential mortgage loans, of which $63.1
million were ARM loans and $18.2 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 one-to-four family loan originations have been fixed-rate loans. Of
the $20.0 million in one-to-four family loans originated during the twelve
months ended December 31, 1999, $15.0 million had fixed rates of interest. The
Bank is expanding its residential lending market area through the use of outside
mortgage originators and expects to significantly increase loan origination
volume. The Bank continues 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
<PAGE>
7
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, 1999, the Bank's portfolio of
consumer, commercial real estate and commercial business loans totaled $26.0
million, $17.9 million and $15.7 million, respectively. In the aggregate, these
loans totaled $59.7 million, or 39.6% of the Bank's total loan portfolio, as
compared with $42.1 million at December 31, 1998. Because the yields on these
types of loans are generally higher than the yields on one-to-four family
residential real estate loans, the Bank's goal over the next several years is to
increase the origination of these loans consistent with safety and soundness
considerations. Although consumer, commercial real estate and commercial
business loans offer higher yields than single-family mortgage loans, they also
involve greater credit risk.
Maintaining Asset Quality. The Bank's high asset quality is a result of
its conservative underwriting standards, the diligence of its loan collection
personnel and the stability of the local economy. In addition, the Bank also
invests in mortgage-backed securities issued by Freddie Mac, Fannie Mae and
Ginnie Mae 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, 1999, the Bank's ratio of nonperforming loans to total
assets was 0.05% compared to 0.43% and 0.42% at December 31, 1998 and 1997,
respectively. At December 31, 1999, the Bank's ratio of allowance for loan
losses to total loans was 1.02% compared to 1.17% and 1.26% 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. During 1999 the Bank has been more aggressive in
utilizing this strategy to enhance earnings. 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 grow the loan
portfolio by expanding the lending area well beyond the geographic service area
of the branch network or accepting 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, this strategy will
increase total assets resulting in reduced return on assets in favor of improved
return on equity and enhanced shareholder value. At December 31, 1999, the Bank
had total borrowings of $50.2 million at an average cost of 5.62%, as compared
with $10.0 million in total borrowings at December 31, 1998 at an average cost
of 5.14%.
Increasing Fee Income. The Bank has sought to increase its income by
increasing its sources of fee income. In this regard, the Bank continues to
expand and enhance the visibility of the Trust Department. Management expects
that fees generated by the Trust Department will increase as the assets under
management grow. At December 31, 1999, the Trust Department had $30.8 million in
assets under management compared with $18.9 million at December 31, 1998. In
<PAGE>
addition, the Bank receives fee income from the servicing of loans sold in the
secondary market. At December 31, 1999, loans serviced by the Bank for others
totaled $38.0 million. Finally, beginning in 2000, the Bank intends to offer
Internet banking and e-commerce capabilities to its customers, and continue to
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, 1999 were $280.2 million, an
increase of $31.4 million or 12.6%, from $248.8 million at December 31, 1998.
The increase in total assets was primarily attributable to an increase in
investment and mortgage-backed securities of $29.2 million and an increase of
$16.9 million in loans receivable, net. In addition, cash and due from banks
increased $4.7 million as the Bank increased its liquidity position in response
to potential currency demands at year-end. The increase in investment and
mortgage-backed securities reflects the Bank's leveraging strategy and the
investment of the proceeds of the Company's stock offering which were
temporarily invested in federal funds at year-end 1998. The asset growth was
partially offset by a decrease of $22.1 million in federal funds sold as the
temporary investment of proceeds from the stock offering completed on December
30, 1998 were invested in other interest-earning assets. 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 $14.6 million during
1999. Real estate loans increased $2.2 million during 1999 while management
continues to
<PAGE>
8
sell certain long-term 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, 1999 through December 31, 1999 a total of $5.1
million in fixed-rate residential mortgage loans were sold. During 1999 the Bank
transferred a significant portion of its residential and commercial real estate
loans to a special purpose real estate investment trust subsidiary. At December
31, 1999, approximately $41.9 million in loans were held in the Bank's
subsidiary and are presented on a consolidated basis with the Company's assets.
Liabilities. Total liabilities increased by $35.7 million or 17.4% to
$240.3 million at December 31, 1999 from $204.6 million at December 31, 1998.
The increase was the result of an increase in borrowings of $40.2 million. The
increase in borrowings was to support the arbitrage investment strategy. The
increase in borrowing was partially offset by a decrease of $5.1 million in
deposits to $189.1 million at December 31, 1999 from $194.2 million at December
31, 1998. While certificates of deposit accounts decreased by $5.8 million or
5.3%, all other deposit accounts increased by $733,000, to $86.1 million at
December 31, 1999 from $85.3 million at December 31, 1998. This increase in
other deposit accounts results from the Bank's emphasis on attracting low cost
of funds deposit accounts during 1999. The Bank's newest branch, which opened in
November 1999, contributed $925,000 in new deposits by year-end. The level of
deposits reported at December 31, 1998 partially reflects the receipt of stock
subscription proceeds.
Stockholders' Equity. Total stockholders' equity at December 31, 1999
was $40.0 million, a decrease of $4.1 million from $44.1 million at December 31,
1998. The decrease in stockholders' equity is primarily the result of a
reduction in accumulated other comprehensive income, an increase in treasury
stock, an increase in unearned shares of common stock to be issued under the
Company's Employee Stock Ownership Plan ("ESOP"), and the payment of cash
dividends to stockholders. Accumulated other comprehensive income decreased $3.5
million at December 31, 1999 resulting from a valuation adjustment in the market
value of mortgage-backed and investment securities due to higher market interest
rates which increased the net unrealized loss on the Bank's available for sale
securities. The Company's stock repurchase program acquired a total of 167,100
shares of common stock recorded at cost and held as treasury stock in the amount
of $1.8 million during the second half of 1999. In addition, the Company
purchased shares of common stock in the open market to complete the funding of
the Employee Stock Ownership Plan ("ESOP") thereby increasing unearned shares
under the Plan by $766,000 net of the 1999 allocation of shares to Plan
participants. Stockholders were paid the first semi-annual dividend during 1999
equal to $.15 per share of common stock resulting in a reduction in
stockholders' equity of $534,000. After-tax net income of $2.5 million partially
offset the decreases in stockholders' equity.
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>
9
Average Balance Sheet. The following table sets forth certain information
relating to the Bank for the years ending December 31, 1999, 1998 and 1997. 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>
<CAPTION>
For the Years Ending December 31,
1999 1998
--------------------------------- -----------------------------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable $136,765 $11,358 8.30% $138,953 $12,063 8.68%
Investment and MBS securities 104,294 6,757 6.48% 56,646 3,736 6.60%
Federal funds 6,565 323 4.92% 7,274 347 4.77%
Equity securities 3,709 144 3.88% 2,550 90 3.53%
- -----------------------------------------------------------------------------------------------------------------
Total Interest-earning assets 251,333 18,582 7.39% 205,423 16,236 7.90%
- -----------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Money market deposits $ 14,985 $ 491 3.28% $ 12,519 $ 407 3.25%
Savings accounts 45,824 1,094 2.39% 44,481 1,295 2.91%
Interest-bearing checking 7,890 143 1.81% 6,091 121 1.99%
Time deposits 103,018 5,488 5.33% 109,419 6,110 5.58%
Borrowings 32,841 1,769 5.39% 1,264 66 5.22%
- -----------------------------------------------------------------------------------------------------------------
Total Interest-bearing liabilities 204,558 8,985 4.39% 173,774 7,999 4.60%
- -----------------------------------------------------------------------------------------------------------------
Net interest income $ 9,597 $ 8,237
------- -------
Net interest spread 3.00% 3.30%
Net earning assets $ 46,775 $ 31,649
Net interest margin 3.82% 4.01%
==== ====
Ratio of interest-earning assets
to interest-bearing liabilities 122.87% 118.21%
------ ------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
December 31,
---------------------------------
1997
---------------------------------
Average Yield/
Balance Interest Rate
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable $138,549 $11,973 8.64%
Investment and MBS securities 56,153 3,638 6.48%
Federal funds 4,526 241 5.32%
Equity securities 1,205 11 0.91%
-------- ------ ----
Total Interest-earning assets 200,433 15,863 7.91%
-------- ------ ----
Interest-bearing liabilities:
Money market deposits $ 10,905 $ 349 3.20%
Savings accounts 44,148 1,302 2.95%
Interest-bearing checking 5,632 111 1.97%
Time deposits 109,326 6,135 5.61%
Borrowings 0 0 0.00%
-------- ------ ----
Total Interest-bearing liabilities 170,011 7,897 4.64%
-------- ------ ----
Net interest income $7,966
Net interest spread 3.27%
====
Net earning assets $ 30,422
========
Net interest margin 3.97%
====
Ratio of interest-earning assets
to interest-bearing liabilities 117.89%
------
</TABLE>
<PAGE>
10
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------------------
1999 vs. 1998 1998 vs. 1997
Increase / (Decrease) Total Increase / (Decrease) Total
Due to Increase/ Due to Increase/
Volume Rate (Decrease) Volume Rate (Decrease)
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning Assets:
Loans receivable $ (182) $ (523) $ (705) $ 35 $ 55 $ 90
Investment and mortgage-backed securities 3,087 (66) 3,021 33 65 98
Federal funds (35) 11 (24) 131 (25) 106
Equity securities 45 9 54 47 32 79
------- ------ ------ ---- ---- ----
Total interest-earning assets $ 2,915 $ (569) $2,346 $246 $127 $373
------- ------ ------ ---- ---- ----
Interest-bearing liabilities:
Money market deposits $ 81 $ 3 $ 84 $ 52 $ 6 $ 58
Savings accounts 32 (233) (201) 10 (17) (7)
Interest-bearing checking 33 (11) 22 9 1 10
Time deposits (341) (281) (622) 5 (30) (25)
Borrowings 1,701 2 1,703 66 - 66
------- ------ ------ ---- ---- ----
Total interest-bearing liabilities $ 1,506 $ (520) $ 986 $142 $(40) $102
------- ------ ------ ---- ---- ----
Net change in interest income $ 1,360 $271
------- ----
</TABLE>
<PAGE>
11
Comparison of Operating Results for the Years Ended December 31, 1999 and
December 31, 1998
General. Net income for the year-ended December 31, 1999 increased by
$1.4 million or 136.1%, to $2.5 million for the year 1999 from $1.1 million for
the year ended December 31, 1998. The increase was due primarily to an increase
in interest income, an increase in non-interest income and a decrease in
non-interest expense. The increase in income and decrease in non-interest
expense were partially offset by an increase in interest expense, an increase in
the provision for loan losses and an increase in the provision for income taxes
made through December 31, 1999 as compared with the same period in 1998.
Interest Income. Interest income increased by $2.3 million or 14.4%, to
$18.6 million for the year ended December 31, 1999 from $16.2 million for the
year ended December 31, 1998. The increase in interest income was derived from
increases in investment activities. Income on mortgage-backed and other
investment securities increased by $3.0 million and income on equity securities
increased by $54,000 between the two periods. These increases were partially
offset by a decrease of $705,000 in income derived from loans receivable and a
decrease of $24,000 in income from federal funds sold.
The increase in interest income from investment and mortgage-backed
securities was a result of an increase of $47.6 million in the average balance
of investments and mortgage-backed securities offset in part by a decrease of 12
basis points in the average yield on investments and mortgage-backed securities.
The increase in the average balance of investment and mortgage-backed securities
was the result of management's use of wholesale arbitrage transactions employed
to improve return on equity and the investment of proceeds received from the
stock offering. Wholesale borrowing arrangements are entered into through the
Federal Home Loan Bank of New York with the proceeds used to purchase investment
and mortgage-backed securities. Borrowings increased on average $31.6 million in
1999 as compared with 1998. The net returns expected on individual wholesale
arbitrage transactions is much less than typical in retail banking operations,
therefore net interest margins are negatively impacted in favor of overall
improved profitability. The net interest margin of the Company decreased 19
basis points from 4.01% during 1998 to 3.82% during 1999. The decrease in the
average yield on investment and mortgage-backed securities is the result of
lower market interest rates available during the first half of 1999 as compared
with 1998, the period at which much of the Company's investing activity was
accomplished.
The increase in income from equity securities was attributable to a
$1.2 million increase in the average balance of equity investments and an
increase in the average yield of 35 basis points. The increase in the average
balance of equity investments was due to the continuing purchase of FHLB stock
as a condition of FHLB membership and coincident with the borrowing relationship
between the Company and FHLB. At December 31, 1999 the Bank held $2.5 million in
FHLB stock as compared with $1.2 million at December 31, 1998. The improvement
in the average yield on equity securities is also due to the additional
investment in FHLB stock, which returned dividends throughout 1999 at rates at
or exceeding 6.68%.
<PAGE>
The decrease in income on loans resulted from a decrease of $2.2
million in the average balance of loans to $136.8 million in 1999 from $139.0
million in 1998, and a 38 basis point decrease in the average yield on loans to
8.30% from 8.68%. Management's strategy is to emphasize the origination of
consumer and commercial business loans for retention in the Bank's portfolio
while maintaining a consistent level of residential real estate loans with
excess production of longer-term fixed-rate residential real estate loans sold
in the secondary market on servicing retained basis. As of December 31, 1999
residential real estate loans totaled $81.3 million, a decrease of $1.1 million
from December 31, 1998. During the same period a total of $5.1 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 $14.6 million during the
period to $41.7 million at December 31, 1999 from $27.1 million at December 31,
1998. However, much of the portfolio growth was experienced in the second half
of 1999, therefore the average balance and interest income derived from the
significant overall growth in loans is not reflected in the 1999 financial
results. At December 31, 1999 total loans receivable were $150.7 million as
compared with $133.8 million at December 31, 1998, an increase of 12.6%. The
reduction in yield on loans is a result of the lower market interest rates
available during much of 1999 as compared with 1998.
Interest income on federal funds sold decreased as a result of a
decrease in the average balance of federal funds of $709,000 to $6.6 million
during 1999 as compared with $7.3 million during 1998. This decrease was
partially offset by an increase of 15 basis points in the average yield earned
on federal
<PAGE>
12
funds sold as a result of the Federal Reserve's increases in short term rates
during 1999.
Interest Expense. Interest expense was $9.0 million for the year ended
December 31, 1999; an increase of $1.0 million or 12.3% from $8.0 million for
the year ended December 31, 1998. The increase in interest expense was primarily
due to an increase in borrowing expense which was $1.8 million for 1999 compared
with $66,000 for 1998. This increase in interest expense was partially offset by
a decrease of $717,000 in interest paid on deposit accounts during 1999 to $7.2
million from $7.9 million in 1998.
The increase in borrowing expense was due to the increase in the
average balance of borrowings outstanding in the 1999 period to $32.8 million as
compared with $1.3 million during the same 1998 period. In addition to the
increase in average balance, the average rate paid on borrowed funds increased
17 basis points. The increase in the volume of borrowings was to support the
wholesale arbitrage investment activities of the Company. The increase in the
average rate paid on borrowed funds was due to management's desire to lengthen
the maturity of the borrowed funds to take advantage of the relatively low
interest rates available at the time and to better match the maturities or other
repricing characteristics of the selected investment securities purchased.
The decrease in the average rate paid on deposits was primarily due to
a decrease of 40 basis points in the average rate paid on deposits to 4.20%
during 1999, from 4.60% during 1998. This reduction in the cost of retail
deposits is primarily a result of management's desire to attract lower cost of
funds core deposits rather than time deposits. Core deposits, including money
market accounts, savings account and interest-bearing checking accounts,
increased on average $5.6 million to $68.7 million at an average cost of 2.52%
during 1999 from $63.1 million at an average cost of 2.89% during 1998. During
the same period time deposits decreased on average $6.4 million from $109.4
million during 1998 at an average cost of 5.58% to $103.0 million at an average
cost of 5.33% during 1999.
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. The evaluation considers volume
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. 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.
<PAGE>
During the year ended December 31, 1999 provisions for loan losses of
$229,000 were made compared with no provisions made during 1998. The additions
made to the allowance for loan losses were deemed prudent due to an increase in
total loans of $16.9 million at December 31, 1999 as compared with December 31,
1998 and the increase in origination activity of commercial real estate loans,
commercial business loans and consumer loans during 1999 versus 1998. During
1999 a total of $42.6 million of these higher risk loan types were originated as
compared with $29.1 million during 1998, an increase of 46.4%. At December 31,
1999 commercial real estate loans, commercial business loans and consumer loans
totaled $59.7 million as compared with $42.1 million at December 31, 1998, an
increase of 41.8%. Nonperforming assets decreased substantially between the two
periods to $227,000 at December 31, 1999 from $1.3 million at December 31, 1998.
However, both periods experienced a similar level of net charge-off activity
with $249,000 in 1999 and $250,000 of net charge-offs during 1998. The balance
of the allowance for loan losses remained at $1.5 million at both period end
dates.
Non-interest Income. Non-interest income increased by $366,000 or
37.9%, to $1.3 million for the year ended December 31, 1999 from $966,000 for
the year ended December 31, 1998. The increase was primarily the result of an
increase in securities gains received, which totaled $463,000 during 1999 as
compared with $208,000 during 1998, an increase of $255,000. Deposit account
service fees also contributed to the improvement in non-interest income, which
increased by $77,000 to $496,000 in income through December 31, 1999 from
$419,000 through December 31, 1998. In addition, income derived from the Bank's
trust department operation increased to $71,000 during 1999 from $14,000 during
1998. The Company experienced a decrease in income on the sale of loans of
$33,000 from 1998 to 1999, due to the reduction in fixed-rate residential real
estate loan sales activity. During 1999 a total of $5.1 million in loans were
sold as compared with $16.5 million during 1998. All other sources of
non-interest income increased slightly in 1999 to $284,000 from $274,000 in
1998, an increase of $10,000 or 3.7%.
<PAGE>
13
Non-interest Expense. Non-interest expense decreased by $497,000, or
6.7%, to $6.9 million for the year ended December 31, 1999 from $7.4 million for
the year ended December 31, 1998. The decrease was primarily due to a reduction
in charitable contribution expense of $820,000, a decrease of $64,000 in travel
and meeting expenses, and a decrease of $57,000 in expenses relating to problem
loans. These decreases in expenses were partially offset by increases in
salaries and employee benefits of $277,000 and an increase of $167,000 during
1999 in all other sources of non-interest expense including the cost to
establish a real estate investment trust ("REIT") subsidiary corporation.
Salaries and employee benefits increased to $4.0 million for the year
ended December 31, 1999 from $3.7 million for the same period in 1998. The
increase was primarily the result of the additional staffing necessary to
support the expansion of the branch network, trust services and mortgage
operations. Costs incurred in the creation of a REIT subsidiary corporation,
known as Oneida Preferred Funding Corp., was approximately $86,000 during 1999.
The REIT was established to invest primarily in the real estate loans originated
by the Bank and to allow the Bank to compete more aggressively in the pricing of
real estate loans. Contribution expense for the year ended December 31, 1999 was
$5,000 compared with $825,000 for the same period in 1998. The increased expense
level in 1998 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 funding the foundation on a pre-tax basis
during 1998. Travel and meeting expenses were $112,000 for the year ended
December 31, 1999 as compared with $176,000 for the year ended December 31,
1998. Travel and meeting expenses were at increased levels during 1998 as a
result of the installation, training and conversion of the Bank's new in-house
data processing system. Expenses relating to problem loans and other real estate
were $43,000 during 1999 as compared with $92,000 during 1998. The reduction is
attributed to the improved asset quality of the Company between the two periods.
Provision for Income Taxes. Income tax expense was $1.3 million for the
year ended December 31, 1999, an increase of $550,000 from the 1998 income tax
provisions of $761,000. The increase in income tax provision is due to the
improvement in pretax net income of the Company, which was $3.8 million for year
ended December 31, 1999 compared with $1.8 million for the year ended December
31, 1998. The effective tax rate decreased to 34.3% for 1999 from 41.8% for 1998
as the Company has employed various strategies to reduce the tax burden in this
and future periods.
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 non-interest 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 non-interest 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
provisions for income taxes made through December 31, 1998 as compared with the
same period in 1997.
<PAGE>
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 all interest-earning asset types. 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
<PAGE>
14
on investments and mortgage-backed securities. The increase in average yield
resulted from an increase in mortgage-backed securities, particularly Freddie
Mac and Fannie Mae balloon investments, Ginnie Mae 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.
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 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
<PAGE>
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 did not result 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.
Non-interest Income. Non-interest 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 non-interest
income sources decreased in 1998 to $579,000 from $622,000 in 1997, a decrease
of $43,000 or 6.9%.
Non-interest Expense. Non-interest expense 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.
<PAGE>
15
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 impacted 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 funding 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.
Provisions for Income Taxes. Income tax expense was $762,000 for the
year ended December 31, 1998, a reduction of $119,000 from the 1997 provision
for income taxes of $881,000 the effective tax rate increased to 41.8% for 1998
from 40.7% for 1997.
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
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, located in central New York State, 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 14 years ago the United
States Supreme Court ruled in favor of the Oneidas in a lawsuit which Management
<PAGE>
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, the Oneidas and the U.S. Justice Department filed motions to
amend the long outstanding claim against the State of New York. The motion
attempts to include in the claim, various named and 20,000 unnamed additional
defendants, who own real property in parts of Madison and Oneida counties,
thereby including the additional defendants in the original suit. Neither the
Bank nor the Company is a named defendant in the motion. The United States
District Court heard arguments on the matter in late March 1999 and appointed a
"settlement master" to help the parties negotiate an agreement in lieu of
further litigation.
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 longer-term fixed rate one-to-four family residential
mortgage loans into the secondary market without recourse and on a servicing
retained basis; and (iii) managing the Company's investment activities in a
prudent manner in the context of overall balance sheet asset/liability
management. Investing in shorter-term securities will
<PAGE>
16
generally bear lower yields as compared to longer-term investments, but which
better position the Bank for increases in market interest rates and 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, 1999
totaled $64.5 million, or 29.4% of total interest-bearing liabilities. The
wholesale arbitrage strategy of investing allows the Company to invest in
longer-term assets by hedging the additional interest rate risk with liabilities
of similar maturity or repricing characteristics. Borrowed funds that mature in
one year or less, at December 31, 1999 totaled $14.2 million, or 6.5% of total
interest-bearing liabilities. Management believes that this balanced approach to
investing will reduce the exposure to interest rate fluctuations and will
enhance long-term profitability.
The Company uses a computer simulation model to assist in monitoring
interest rate risk. As of December 31,1999 a 200 basis point increase in market
interest rates was estimated to have a negative impact of 1.9% on net interest
income during 1999 while a 200 basis point decline in rates would have a
positive impact of 2.2% on net interest income during 1999. This analysis is
based on numerous assumptions including nature and timing of interest rate
levels, prepayment on loans and securities, deposit rate changes, pricing
decisions on loans and deposits, and other assumptions, and should not be relied
upon as being indicative of expected operating results.
Impact of the Year 2000. The Company implemented and tested all system
enhancements and remediations related to the year 2000 for compliance prior to
December 31, 1999. As a result, the Company's systems successfully transitioned
to the year 2000. Additionally, the Company experienced no significant Y2K
related deposit declines in December 1999, however, as a result of the
uninvested cash on hand for Y2K contingencies, interest income was negatively
impacted in the fourth quarter by approximately $25,000. Total costs incurred to
address the year 2000 issue or otherwise upgrade and test the Bank's computer
capabilities are estimated at $100,000 during 1999 and $225,000 during 1998. The
company has experienced no customer problems related to the Y2K issue to date.
Liquidity. The Bank's primary sources of funds are deposits; FHLB
borrowings; proceeds from the principal and interest payments on loans and
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, 1999, cash and interest-bearing
deposits totaled $8.8 million, or 3.1% of total assets. If the Bank requires
funds beyond its ability to generate them internally, it has the ability to
borrow funds from the FHLB. The Bank may borrow from the FHLB under a blanket
agreement, which assigns all investments in FHLB stock as well as qualifying
<PAGE>
first mortgage loans equal to 150% of the outstanding balance as collateral to
secure the amounts borrowed. At December 31, 1999, the Bank had approximately
$22.0 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, 1999, the Bank had $20.0 million in
borrowings outstanding with the FHLB in repurchase agreements.
The Bank must also maintain adequate levels of liquidity to satisfy
loan commitments. At December 31, 1999, the Bank had outstanding commitments to
originate loans of $12.0 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, 1999, totaled $64.5 million. Based upon the Bank's
experience and 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
<PAGE>
17
ratio." Risk-based capital ratios are determined by allocating assets and
specified off-balance sheet items to four risk-weighted categories ranging from
0% to 100%, with higher levels of capital being required for the categories
perceived as representing greater risk.
These guidelines divide a savings bank's capital into two tiers. The
first tier ("Tier I") includes common equity, retained earnings, certain
non-cumulative perpetual preferred stock (excluding auction rate issues) and
minority interests in equity accounts of consolidated subsidiaries, less
goodwill and other intangible assets (except mortgage servicing rights and
purchased credit card relationships subject to certain limitations).
Supplementary ("Tier II") capital includes, among other items, cumulative
perpetual and long-term limited-life preferred stock, mandatory convertible
securities, certain hybrid capital instruments, term subordinated debt and the
allowance for loan and lease losses, subject to certain limitations, less
required deductions.
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% 14.20%
Tier I Capital to Risk-Weighted
Assets 4% 23.15%
Total Capital to Risk-Weighted
Assets 8% 24.30%
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. In June 1999,
the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133", which
amends SFAS No. 133 so that it is effective for all fiscal quarters of all
fiscal years beginning after June 15, 2000. Accordingly, the Statement would
apply to the Company beginning on January 1, 2001. 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 June 1999, the FASB issued SFAS No. 136, "Transfers of Assets to a
Not-for-Profit Organization or Charitable Trust that Raises or Holds
Contributions for Others", which establishes standards for transactions in which
an entity ("Donor") makes a contribution by transferring assets to a
not-for-profit organization or charitable trust ("Recipient") that accepts the
assets from the Donor and agrees to use those assets on behalf of, or transfer
those assets, the return on investment of those assets, or both to another
entity ("Beneficiary") that is specified by the donor. SFAS No. 136 is effective
for the first quarter beginning after December 15, 1999 and accordingly would
apply to the Company for the quarter ended March 31, 2000. The Company does not
engage in transfers of this nature. Accordingly, SFAS No. 136 is not expected to
have a material impact on the Company's financial statements.
<PAGE>
1999
Consolidated Financial Statements
<PAGE>
19
Report of Independent Accountants
The Board of Directors
Oneida Financial Corp.
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 Corp. and its subsidiary at December
31, 1999 and 1998, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States. 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
auditing standards generally accepted in the United States 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
January 21, 2000
<PAGE>
20
<TABLE>
<CAPTION>
Consolidated Statements of Condition
December 31, 1999 and 1998
Assets 1999 1998
----------- -----------
<S> <C> <C>
Cash and due from banks $ 8,814,777 $ 4,056,047
Federal funds sold - 22,100,000
----------- -----------
Total cash and cash equivalents 8,814,777 26,156,047
Investment securities, at fair value 85,542,549 62,668,656
Mortgage-backed securities, at fair value 26,354,588 20,022,420
Mortgage loans held for sale 340,713 1,862,923
Loans receivable 150,327,854 131,935,891
Allowance for credit losses (1,522,890) (1,542,542)
----------- -----------
Net loans receivable 148,804,964 130,393,349
Premises and equipment, net 5,301,128 4,853,534
Accrued interest receivable 1,766,643 1,600,342
Refundable income taxes - 134,946
Other real estate 93,925 224,193
Other assets 3,193,041 864,725
----------- -----------
Total Assets $280,212,328 $248,781,135
============ ============
Liabilities and Stockholders' Equity
Due to depositors $188,270,946 $193,398,105
Mortgagors' escrow funds 849,548 806,777
Borrowings 50,200,000 10,000,000
Other liabilities 673,897 442,287
Income taxes payable 267,171 -
------------ ------------
Total liabilities $240,261,562 $204,647,169
------------ ------------
Stockholders' equity:
Common stock, $.10 par value, 8,000,000 shares authorized;
3,580,200 shares issued and outstanding 358,020 358,020
Additional paid-in capital 15,412,746 15,545,422
Retained earnings 29,682,707 27,709,840
Accumulated other comprehensive (loss) income (2,584,406) 922,006
Treasury stock (at cost, 167,100 shares) (1,751,137) -
Common shares issued under employee stock plans - unearned (1,167,164) (401,322)
Total stockholders' equity 39,950,766 44,133,966
----------- -----------
Total Liabilities and Stockholders' Equity $280,212,328 $248,781,135
============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
21
<TABLE>
<CAPTION>
Consolidated Statements of Income
Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans $11,358,010 $12,063,146 $11,973,668
Interest and dividends on investment securities:
U. S. Government and agency obligations 2,760,142 2,246,841 2,323,169
Corporate obligations 1,948,268 667,594 1,087,658
Mortgage-backed securities 1,842,299 654,794 13,436
Other 349,793 255,833 224,687
Interest on federal funds sold
and interest-bearing deposits 323,104 347,470 240,597
----------- ----------- -----------
Total interest and dividend income 18,581,616 16,235,678 15,863,215
----------- ----------- -----------
Interest expense:
Savings deposits 1,094,229 1,295,386 1,240,791
Money market and Super NOW 634,267 527,857 460,486
Time deposits 5,487,527 6,109,874 6,196,440
Short-term borrowings 384,548 51,353 -
Long-term borrowings 1,384,447 14,452 -
----------- ----------- -----------
Total interest expense 8,985,018 7,998,922 7,897,717
----------- ----------- -----------
Net interest income 9,596,598 8,236,756 7,965,498
Provision for credit losses 229,102 - 476,886
----------- ----------- -----------
Net interest income after
provision for credit losses 9,367,496 8,236,756 7,488,612
Other income 1,332,247 965,934 821,530
Other expenses 6,882,086 7,378,945 6,144,510
----------- ----------- -----------
Income before income taxes 3,817,657 1,823,745 2,165,632
Provision for income taxes 1,311,000 761,417 881,000
----------- ----------- -----------
Net Income $2,506,657 $1,062,328 $1,284,632
========== ========== ==========
Earnings per share - basic $ 0.73 $ - $ -
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
22
<TABLE>
<CAPTION>
Consolidated Statements of Comprehensive Income
Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997
----------- ---------- ---------
<S> <C> <C> <C>
Net income $2,506,657 $1,062,328 $1,284,632
Unrealized (losses) gains on securities:
Unrealized holding (losses) gains arising during period (5,380,993) 917,537 531,867
Less: Reclassification adjustment for
gains included in net income (463,027) (207,642) (81,750)
(5,844,020) 709,895 450,117
Net income tax effect 2,337,608 (259,364) (153,040)
Other comprehensive (loss) income, net of tax (3,506,412) 450,531 297,077
Comprehensive (loss) income $ (999,755) $1,512,859 $ 1,581,709
========== ========= ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
23
<TABLE>
<CAPTION>
Consolidated Statements of Changes in Stockholders' Equity
Years Ended December 31, 1999, 1998 and 1997
Common Stock Additional
------------------------ Paid-In Retained
Shares Amount Capital Earnings
------ ------ ------- --------
<S> <C> <C> <C> <C>
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 acquired - - - -
Shares issued under ESOP plan - - 1,822 -
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
Adjustment of net proceeds
from sale of common stock - - (123,000) -
Net income - - - 2,506,657
ESOP shares acquired - - - -
Shares issued under ESOP plan - - (9,676) -
Common stock cash dividends: $.15 per share - - - (533,790) -
Treasury stock purchased - - - -
Other comprehensive income (loss), net of tax:
Unrealized losses on securities
net of reclassification adjustment - - - - (3,506,412)
--------- -------- ----------- ------------
Balance at December 31, 1999 3,580,200 $358,020 $15,412,746 $ 29,682,707
========= ======== =========== ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Common Stock
Accumulated Issued Under
Other Employee
Comprehensive Treasury Stock Plans -
Income Stock Unearned Total
------ ----- -------- -----
<S> <C> <C> <C> <C>
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 acquired - - (549,500) (549,500)
Shares issued under ESOP plan - - 148,178 150,000
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 - (401,322) 44,133,966
Adjustment of net proceeds
from sale of common stock - - - (123,000)
Net income - - - 2,506,657
ESOP shares acquired - - (912,340) (912,340)
Shares issued under ESOP plan - - 146,498 136,822
Common stock cash dividends: $.15 per share - - - (533,790)
Treasury stock purchased - (1,751,137) - (1,751,137)
Other comprehensive income (loss), net of tax:
Unrealized losses on securities
net of reclassification adjustment - - - (3,506,412)
----------- ----------- ----------- ------------
Balance at December 31, 1999 $(2,584,406) $(1,751,137) $(1,167,164) $ 39,950,766
=========== =========== =========== ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
24
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997
----------- ----------- ----------
<S> <C> <C> <C>
Operating activities:
Net income $ 2,506,657 $1,062,328 $1,284,632
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 654,307 531,517 416,649
Amortization of premiums and
(accretion of discounts) on securities, net (9,712) 83,929 150,991
Provision for credit and other real estate losses 229,102 - 704,144
Provision for deferred income taxes (33,891) (204,493)
Gain on sales and calls of securities, net (463,027) (81,750)
ESOP shares earned 136,822 150,000 -
Contribution of common stock to Charitable Foundation - 701,620 -
Loss on sale of other real estate owned 72,189 86,523 47,513
Gain on sale of loans (17,709) (152,883) (32,522)
Income taxes refundable (payable) 402,117 10,000 (70,507)
Accrued interest receivable (166,301) (32,713) 86,640
Other assets 43,183 215,141 (4,399)
Other liabilities231,610 (54,260) 330,978
Origination of loans held for sale (3,583,913) (18,194,662) (3,976,263)
----------- ----------- ----------
Proceeds from sale of loans 5,123,832 16,676,139 3,987,657
----------- ----------- ----------
Net cash provided by operating activities 5,125,266 678,530 2,639,270
Investing activities:
Purchase of investment securities (76,040,841) (49,117,396) (11,315,373)
Proceeds of maturities, sales or calls
from investment securities 42,994,548 30,819,734 21,048,740
Purchase of mortgage-backed securities (9,221,899) (13,347,640) (7,960,459)
Principal collected on and proceeds from
sales of mortgage-backed securities 7,690,850 5,134,139 998,195
Net decrease (increase) in loans (19,108,082) 11,020,798 (7,265,279)
Purchase of bank premises and equipment (1,101,901) (1,573,518) (2,100,884)
Proceeds from sale of other real estate 525,444 759,475 589,494
----------- ----------- ----------
Net cash used in investing activities (54,261,881) (16,304,408) (6,005,566)
----------- ----------- ----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
25
<TABLE>
<CAPTION>
Consolidated Statements
of Cash Flows (cont.)
Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997
---------- ----------- -----------
<S> <C> <C> <C>
Financing activities:
Net increase (decrease) in demand deposits,
savings, money market, Super NOW and
mortgagors' escrow accounts $ 733,220 $ 13,007,104 $(2,320,962)
Net decrease in time deposits (5,817,608) (1,939,734) (49,374)
Proceeds from borrowings 54,200,000 10,000,000 -
Repayment of borrowings (14,000,000) - -
Cash dividends (533,790) - -
Purchase of treasury stock (1,751,137) - -
Net proceeds from sale of common stock - 15,200,000 -
Adjust net proceeds from sale of common stock (123,000) - -
Common stock acquired by ESOP (912,340) (549,500) -
---------- ----------- -----------
Net cash provided by (used in) financing activities 31,795,345 35,717,870 (2,370,336)
---------- ----------- -----------
Increase (decrease) in cash and cash equivalents (17,341,270) 20,091,992 (5,736,632)
Cash and cash equivalents at beginning of year 26,156,047 6,064,055 11,800,687
---------- ----------- -----------
Cash and Cash Equivalents at End of Year 8,814,777 26,156,047 6,064,055
---------- ----------- -----------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest on deposits and obligations $ 8,507,157 $ 7,972,081 $ 7,900,471
Income taxes 1,258,350 993,674 1,198,025
Non-cash investing activities:
Unrealized gain (loss) on investment and mortgage-
backed securities designated as available for sale (5,844,020) 709,895 450,117
Transfer of loans to other real estate 467,365 762,191 313,576
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
26
Notes to Consolidated
Financial Statements
1. Reorganization and Stock Offering
Oneida Financial Corp. (the "Company") is a Delaware corporation, which was
organized in December 1998 by Oneida Savings Bank (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 Bank 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 the
period 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 totaled $868,950, of which $123,000 was incurred during 1999, and
were deducted from proceeds resulting in net proceeds of approximately
$15,077,000. Subsequent to the offering, the Bank's Employee Stock Ownership
Plan (ESOP) 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 was 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.
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, Canastota and Camden and owns
one banking related subsidiary, Oneida Preferred Funding Corporation (OPFC). 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. The
Bank owns all of the outstanding common stock and 83% of the preferred stock of
OPFC. The remaining 17% of OPFC's preferred stock is owned by officers,
employees and employees' family members of the Bank. OPFC primarily engages in
investing activities of residential and commercial real estate mortgages.
<PAGE>
27
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies (cont.)
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 accounting principles
generally accepted in the United States 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.
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 estimated 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.
<PAGE>
28
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies (cont.)
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.
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 property 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.
Trust Department Assets
Assets held in fiduciary or agency capacities for customers are not included in
the accompanying consolidated statements of condition, since such items are not
assets of the Company. Fees associated with providing trust management services
are recorded on a cash basis of income recognition and are included in Other
Income.
<PAGE>
29
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies (cont.)
Earnings Per Share
Basic earnings per share represents income available to common stockholders
divided by the weighted average number of common shares outstanding during the
period. Earnings per common share have been computed based on the following at
December 31, 1999:
Net income applicable to common shares $ 2,506,657
============
Average number of common shares outstanding 3,413,506
============
Earning per share $0.73
============
Earnings per share is not presented for 1998 and 1997 since the Company
completed its offering on December 30, 1998 and, accordingly, such data would
not be meaningful. The Company has no common stock equivalents that would be
dilutive to earnings per share.
Treasury Stock
In June 1999, the Company's Board of Directors authorized the repurchase of up
to 5% of Company common stock initially offered (see Note 1). Accordingly, based
on market conditions, the Company buys its shares on the open market. Treasury
stock purchases are recorded at cost. During 1999, the Company purchased 167,100
shares of treasury stock at an average cost of $10.48 per share.
Reclassification
Certain 1998 amounts have been reclassified to conform with the 1999 financial
statement presentation.
3. Investment Securities and Mortgage-Backed Securities
Investment securities and mortgage-backed securities consist of the following at
December 31:
<PAGE>
<TABLE>
<CAPTION>
1999
----------------------------------------------------------
Amortized Gross Unrealized
Cost Gains Losses Fair Value
------------ -------- ---------- ------------
<S> <C> <C> <C> <C>
Investment Securities
Available for sale portfolio:
-----------------------------
Debt securities:
U. S. Agencies $ 54,802,956 $ 16,200 $1,826,290 $ 52,992,866
Corporate 11,420,017 - 697,151 10,722,866
State and municipals 3,624,401 1,794 156,801 3,469,394
Public utilities 200,000 - 8,741 191,259
------------ -------- ---------- ------------
70,047,374 17,994 2,688,983 67,376,385
Equity investments:
Mutual funds and other stocks 16,182,464 675,112 1,238,912 15,618,664
Federal Home Loan Bank stock 2,547,500 - - 2,547,500
------------ -------- ---------- ------------
$ 88,777,338 $693,106 $3,927,895 $ 85,542,549
============ ======== ========== ============
Mortgage-Backed Securities
Available for sale portfolio:
-----------------------------
Federal National Mortgage Association $ 14,823,919 $ 2,976 $ 532,245 14,294,650
Federal Home Loan Mortgagee Corp. 5,518,589 1,859 262,021 5,258,427
Government National Mortgage Assoc. 7,022,876 - 282,227 6,740,649
Collateral Mortgage Obligations 61,755 - 893 60,862
------------ -------- ---------- ------------
$ 27,427,139 $ 4,835 $1,077,386 $26,354,588
============ ======== ========== ============
</TABLE>
<PAGE>
30
Notes to Consolidated Financial Statements
3. Investment Securities and Mortgage-Backed Securities (cont.)
<TABLE>
<CAPTION>
1998
----------------------------------------------------------
Amortized Gross Unrealized
Cost Gains Losses Fair Value
----------- ----------- -------- ------------
<S> <C> <C> <C> <C>
Investment Securities
Available for sale portfolio:
-----------------------------
Debt securities:
U. S. Agencies $37,346,182 $ 48,823 $ 24,225 $ 37,370,780
Corporate 1,000,476 8,904 - 1,009,380
State and municipals 15,579,538 438,565 2,403 16,015,700
Public utilities 3,918,540 139,879 4,112 4,054,307
300,000 3,152 - 303,152
----------- ----------- -------- -----------
58,144,736 639,323 30,740 58,753,319
Equity 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 $ 30,74 $ 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 Mortgagee 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>
The amortized cost and approximate fair value of available-for-sale securities
(other than equity securities) at December 31, 1999 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>
Amortized
Cost Fair Value
---------- ----------
Due after one year through five years $30,625,383 $29,706,027
Due after five years through ten years 32,227,035 30,981,168
Due after ten years 7,194,956 6,689,190
----------- -----------
Total 70,047,374 67,376,385
Mortgage-backed securities 27,427,139 26,354,588
----------- -----------
Total $97,474,513 $93,730,973
=========== ===========
Gross gains of $618,052, $207,642 and $83,156 for 1999, 1998 and 1997,
respectively and gross losses of $155,025 and $1,406 for 1999 and 1997 were
realized on sales and calls of securities and the tax provision applicable to
these net realized gains and losses amounted to $185,211, $83,057 and $32,700
for 1999, 1998 and 1997, respectively.
Investment securities with a carrying value of $34,831,267 at December 31, 1999
were pledged to collateralize borrowing arrangements and other commitments.
<PAGE>
31
Notes to Consolidated Financial Statements
4. Loans Receivable
The components of loans receivable at December 31 are as follows:
1999 1998
------------ ------------
Residential $ 90,662,574 $ 89,867,849
Consumer loans 26,020,295 15,552,517
Commercial real estate 17,918,013 14,966,946
Commercial loans 15,726,972 11,548,579
------------ ------------
150,327,854 131,935,891
Allowance for credit losses (1,522,890) (1,542,542)
------------ ------------
Net loans $148,804,964 $130,393,349
============ ============
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 were $37,989,000, $37,429,837 and $26,288,271 at
December 31, 1999, 1998 and 1997, respectively.
Custodial escrow balances maintained in connection with the foregoing loan
servicing, and included in demand deposits were approximately $303,200, $265,600
and $176,600 at December 31, 1999, 1998 and 1997, 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, 1999 and 1998 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>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Balance at beginning of year $1,542,542 $1,792,715 $1,545,649
Loans charged off (337,684) (347,707) (299,356)
Recoveries 88,930 97,534 69,536
Provision for credit losses 229,102 - 476,886
---------- ---------- ----------
Balance at end of year $1,522,890 $1,542,542 $1,792,715
========== ========== ==========
</TABLE>
<PAGE>
As of December 31, 1999 and 1998, the Bank had no impaired loans for which
specific valuation allow- ances were recorded.
Loans having carrying values of $467,365 and $762,191 were transferred to other
real estate in 1999 and 1998, respectively.
<PAGE>
32
Notes to Consolidated Financial Statements
5. Premises and Equipment
Premises and equipment consist of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
---------- ---------
<S> <C> <C>
Land and buildings $6,556,194 $5,836,561
Equipment and fixtures 3,679,600 3,364,691
Construction in progress 84,253 19,576
---------- ---------
10,320,047 9,220,828
Accumulated depreciation (5,018,919) (4,367,294)
---------- ---------
Net book value $5,301,128 $4,853,534
========== ==========
</TABLE>
Depreciation expense was $654,307, $531,517 and $416,649 in 1999, 1998 and 1997,
respectively.
6. Due to Depositors
Amounts due to depositors at December 31 are as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Non-interest bearing demand $ 19,559,888 $ 20,563,532
Savings 42,799,081 42,262,425
Money market and Super NOW 22,857,071 21,699,634
Time deposit 103,054,906 108,872,514
------------ ------------
Total due to depositors $188,270,946 $193,398,105
============ ============
</TABLE>
<PAGE>
At December 31, 1999 and 1998, time deposits with balances in excess of $100,000
totaled $20,608,068 and $21,136,600, respectively.
The contractual maturity of time deposits as of December 31, are as follows:
<TABLE>
<CAPTION>
1999 1998
------------------------ ---------------------------
<S> <C> <C> <C> <C>
Maturity Amount
One year or less $ 64,543,279 62.6 $ 63,300,585 58.1
One to two years 19,684,607 19.1 23,168,268 21.3
Two to three years 8,154,603 7.9 9,246,268 8.7
Three to four years 4,710,579 4.6 5,690,782 5.2
Four to five years 5,896,232 5.7 6,861,779 6.3
Over five years 65,606 0.1 604,832 0.4
------------- ----- ------------- -----
$ 103,054,906 100.0 $ 108,872,514 100.0
============= ===== ============= =====
</TABLE>
<PAGE>
33
Notes to Consolidated Financial Statements
7. Borrowings
Outstanding borrowings as of December 31 are as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Short-term borrowings:
Federal Home Loan Bank outstanding line of credit $ 200,000 $ -
Federal Home Loan Bank advances 14,000,000 5,000,000
Long-term borrowings:
Federal Home Loan Bank advances 36,000,000 5,000,000
----------- -----------
$50,200,000 $10,000,000
=========== ===========
</TABLE>
Borrowings at December 31, 1999 have maturity dates as follows:
Weighted
Average Rate
January 3, 2000 5.60% $ 200,000
February 3, 2000 5.58% 5,000,000
June 14, 2000 5.98% 5,000,000
October 2, 2000 6.09% 4,000,000
April 29, 2002 5.48% 5,000,000
November 14, 2003 6.40% 6,000,000
January 20, 2004 6.30% 5,000,000
January 20, 2006 4.85% 5,000,000
December 10, 2008 5.00% 5,000,000
April 8, 2009 5.65% 5,000,000
April 9, 2009 4.94% 5,000,000
5.62% $50,200,000
===========
The Bank has available a $21,970,500 line of credit with the Federal Home Loan
Bank of which $200,000 is outstanding at December 31, 1999. The line of credit
is secured by mortgage loans contained within the Bank's loan portfolio.
At December 31, 1999, borrowings are secured by pledged securities, which had a
carrying value of $34,532,255 and residential mortgages in the amount of
$45,741,605 pledged under a blanket collateral agreement.
<PAGE>
34
Notes to Consolidated Financial Statements
8. Income Taxes
The components of deferred income taxes included in other assets in the
statements of condition are approximately as follows:
<TABLE>
<CAPTION>
1999 1998
----------- ----------
Asset (Liability)
<S> <C> <C>
Allowance for loan losses $ 609,000 $ 507,000
Depreciation 291,000 269,000
Investment securities 1,723,000 (615,000)
Pension benefits (193,000) (203,000)
Charitable contribution carryforward 202,000 286,000
----------- ----------
Other $ (89,000) $ (74,000)
=========== ==========
</TABLE>
Total deferred income tax asset (liability), net 2,543,000 170,000 The
provision for income taxes for the years ended December 31, consists of the
following:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal $ 1,151,300 $ 709,804 $ 869,413
State 193,591 248,120 216,080
Deferred:
Federal 9,200 (135,855) (158,413)
State (43,091) (60,652) (46,080)
----------- ----------- -----------
$ 1,311,000 $ 761,417 $ 881,000
=========== =========== ===========
</TABLE>
A reconciliation of the federal statutory rate to the effective income tax rate
for the years ended December 31, is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Federal statutory income tax rate 34 % 34 % 34 %
State tax, net of federal benefit 3 % 6 % 6 %
Tax exempt investment income (7)% (3)% (3)%
Other 1 % 4 % 3 %
---- ---- ----
Effective tax rate 31 % 41 % 40 %
=== === ===
</TABLE>
<PAGE>
35
Notes to Consolidated Financial Statements
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.
Effective October 1, 1999 the plan formula was changed to a retirement
accumulation plan (cash balance plan). For each plan year beginning October 1,
1999 for which participants earn an additional year of credited service, their
retirement accounts shall be credited with interest equal to the annual yield on
thirty year constant treasury maturities as determined at the beginning of the
plan year and with a percentage of compensation each year based on service. This
decreased the projected benefit obligation by approximately $645,000. This
decrease in the projected benefit obligation will be recognized as a credit over
the next 10 years.
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 as of December 31:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $ 3,715,869 $ 2,986,124
Service cost 163,736 124,508
Interest cost 231,972 214,675
Actuarial (gain)/loss (232,850) 576,244
Benefit payments (167,567) (185,682)
Plan amendments (645,506) -
----------- -----------
Benefit obligation at end of year $ 3,065,654 $ 3,715,869
=========== ===========
Change in plan assets:
Fair value of plan assets at beginning of year $ 4,170,335 $ 3,943,463
Actual return on plan assets 713,246 412,554
Benefit payments (167,567) (185,682)
----------- -----------
Fair value of plan assets at end of year 4,716,014 4,170,335
=========== ===========
Funded status $ 1,650,360 $ 454,466
Unrecognized transition asset - (20,283)
Unrecognized (gain)/loss (527,499) 88,780
Unrecognized past service liability (639,180) (10,462)
----------- -----------
Prepaid benefit expense $ 483,681 $ 512,501
=========== ===========
</TABLE>
<PAGE>
The weighted average assumptions used in determining the actuarial
present value of the projected benefit obligation are as follows:
1999 1998
Discount rate 8.00% 6.50%
Expected return on plan assets 8.00% 8.00%
Rate of compensation increase 5.50% 4.50%
<PAGE>
36
Notes to Consolidated Financial Statements
9. Benefit Plans (cont.)
The net periodic pension cost for the years ended December 31 includes the
following components:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Service cost benefits earned during the period 163,736 124,508 127,246
Interest cost on projected benefit obligation 231,972 214,675 200,960
Expected return on plan assets (329,817) (309,573) (261,541)
Net amortization and deferral (37,071) (29,465) (29,465)
-------- -------- --------
Net periodic pension cost 28,820 145 37,200
======== ======== ========
</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 pre-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 $74,185,
$66,288 and $56,167 at December 31, 1999, 1998 and 1997, respectively.
In connection with the reorganization (Note 1), the Bank established The Oneida
Savings Bank 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 were funded by a loan from the Company
payable in ten equal installments over 10 years bearing a variable interest rate
of prime at the beginning of the year, which was 7.75% for 1999. 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. Cash dividends, received on unallocated shares, are used to
pay debt service. For the purpose of computing earnings per share, unallocated
ESOP shares, are not considered outstanding. Compensation expense approximated
$137,000 and $150,000 for the years ended 1999 and 1998, respectively. Of the
133,180 shares acquired on behalf of the ESOP, 13,483 and 13,348 were released
as of December 31, 1999 and 1998, respectively. The estimated fair value of the
remaining 106,349 shares held in suspense at December 31, 1999 is approximately
$1,183,100.
<PAGE>
37
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>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Other income:
Net investment security gains $ 463,027 $ 207,642 $ 81,750
Service charges on deposit accounts 496,168 419,398 438,122
Other 373,052 338,894 301,658
---------- ---------- ----------
$1,332,247 $ 965,934 $ 821,530
========== ========== ==========
Other expenses:
Salaries and employee benefits 3,962,137 3,684,556 3,093,679
Building occupancy and equipment 1,406,487 1,419,757 1,171,020
FDIC and N.Y.S. assessment 29,232 24,889 28,010
Advertising 166,989 194,341 153,792
Postage and telephone 182,176 165,040 123,132
Printing and supplies 138,658 104,306 71,676
Trustees compensation 126,800 122,950 90,700
Professional fees 181,205 191,327 140,438
Travel and meetings 112,453 176,433 119,219
Insurance 58,301 67,795 63,661
Dues and subscriptions 57,791 61,841 57,495
Service fees 122,492 100,397 76,480
ORE expenses 43,219 91,640 374,426
Contributions 4,720 825,469 439,629
Sales tax 44,547 49,262 33,320
Other 244,879 98,942 107,833
---------- ---------- ----------
Total other expenses $6,882,086 $7,378,945 $6,144,510
========== ========== ==========
</TABLE>
11. Disclosures about Fair Value of Financial Instruments
In cases where quoted market prices are not available, fair values of financial
instruments, whether or not recognized in the balance sheet, for which it is
practicable to estimate that value 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. Certain financial instruments and all
nonfinancial instruments are excluded from disclosure requirements. Accordingly,
the aggregate fair value amounts presented do not represent the underlying value
of the Company.
<PAGE>
38
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 instrument 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.
Loans Receivable
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. 11. Disclosures about Fair Value of
Financial Instruments (cont.)
<PAGE>
39
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)
1999 1998
-------------------------- ------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 8,815 $ 8,815 $ 26,156 $ 26,156
Investment securities 85,543 85,543 62,669 62,669
Mortgage-backed securities 26,355 26,355 20,022 20,022
Mortgage loans held for sale 341 341 1,863 1,863
Loans receivable 150,328 151,794 131,936 135,024
Allowance for credit losses (1,523) - (1,543) -
--------- --------- --------- ---------
Net loans 148,805 151,794 130,393 135,024
========= ========= ========= =========
Accrued interest receivable 1,767 1,767 1,600 1,600
Total financial assets 271,626 274,615 242,703 247,334
Financial liabilities:
Due to depositors $ 188,271 $ 189,482 $ 193,398 $ 194,964
Borrowings 50,200 48,890 10,000 9,991
--------- --------- --------- ---------
Total financial liabilities $ 238,471 $ 238,372 $ 203,998 $ 204,955
========= ========= ========= =========
</TABLE>
12. Commitments
The Bank is a party to credit related financial instruments with
off-balance-sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments include commitments to
extend credit and letters of credit. Such commitments involve, to varying
degrees, elements of credit risk in excess of the amount recognized in the
consolidated statement of condition.
The Bank's exposure to credit loss is represented by the contractual amount of
these commitments. The Bank follows 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.
<PAGE>
At December 31, 1999 and 1998, the following financial instruments were
outstanding whose contract amount represent credit risk:
Contract Amount
1999 1998
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $ 3,572,335 $ 2,415,912
Letters of credit 8,407,759 7,855,649
<PAGE>
40
Notes to Consolidated Financial Statements
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. The commitments for equity lines of credit may expire
without being drawn upon. Therefore, 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 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, 1999 was $573,000, which was
represented by cash on hand.
13. Dividends and Restrictions
The Company's ability to pay dividends to its shareholders is largely dependent
on the Bank's ability to pay dividends to the Company. In addition to state law
requirements and the capital requirements discussed below, the circumstances
under which the Bank may pay dividends are limited by federal statutes,
regulations, and policies. Retained earnings of the Bank are subject to certain
restrictions under New York State Banking regulations. The amount of retained
earnings legally available for dividends under these regulations approximated
$4,319,827 as of December 31, 1999.
In addition, the Federal Reserve Board and the Federal Deposit Insurance
Corporation are authorized to determine under certain circumstances that the
payment of dividends would be an unsafe or unsound practice and to prohibit
payment of such dividends. The payment of dividends that deplete a bank's
capital base could be deemed to constitute such an unsafe or unsound practice.
The Federal Reserve Board has indicated that banking organizations could
generally pay dividends only out of current operating earnings.
<PAGE>
41
Notes to Consolidated Financial Statements
14. 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. Prompt corrective action provisions are not
applicable to bank holding companies.
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, 1999 and 1998, that
the Bank meets all capital adequacy requirements to which it is subject.
As of March 31, 1999, 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 as set forth in the following tables.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, 1999:
Total Capital
(to Risk Weighted Assets) 38,786,127 24.30% 12,769,743 8% 15,962,179 10%
Tier I Capital
(to Risk Weighted Assets) 36,959,437 23.15% 6,384,871 4% 9,577,307 6%
Tier I Capital
(to Average Assets) 36,959,437 14.20% 10,413,760 4% 13,017,200 5%
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 26.67% 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%
</TABLE>
<PAGE>
42
Notes to Consolidated Financial Statements
15. Parent Company Statements
<TABLE>
<CAPTION>
Condensed Balance Sheets
December 31,
1999 1998
----------- ----------
Assets:
Cash $ 321,051 $ -
Investments, fair value 4,869,726 -
Investments in and advances to subsidiary 35,635,649 43,798,205
Other assets 258,504 436,761
----------- -----------
Total assets $41,084,930 $44,234,966
=========== ===========
Liabilities:
Due to related parties $ 1,134,164 $ 101,000
Shareholders' equity 39,950,766 44,133,966
----------- -----------
Total liabilities and shareholders' equity $41,084,930 $44,234,966
=========== ===========
<CAPTION>
Condensed Statements of Income
Years Ended December 31,
1999 1998
----------- -----------
<S> <C> <C>
Revenue:
Interest on investments and deposits $ 446,517 $ -
----------- -----------
Total revenue 446,517 -
----------- -----------
Expenses:
Compensations and benefits 30,000 -
Contribution expense - 801,620
Other expenses 81,543 -
Loss on sale of securities 4,476 -
Total expenses 116,019 801,620
Income (loss) before tax benefit and equity
in undistributed net income of subsidiary 330,498 (801,620)
Income tax 126,000 288,583
Income (loss) before equity in undistributed
net income of subsidiary 204,498 (513,037)
Equity in undistributed net income:
Subsidiary bank 2,302,159 1,575,365
----------- -----------
Net income $ 2,506,657 $ 1,062,328
=========== ===========
</TABLE>
<PAGE>
43
15. Parent Company Statements (cont.)
<TABLE>
<CAPTION>
Condensed Statements of Cash Flow
Years Ended December 31,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
Operating activities:
Net income $ 2,506,657 $ 1,062,328
Adjustments to reconcile net income to
net cash provided by operating activities:
Loss on sales of investments 4,476 -
Amortization/accretion, net 2,932 -
Contributions to Charitable Foundation - 801,620
ESOP shares earned 136,822 -
Income taxes refundable - (288,583)
Other assets/liabilities, net 7,155,481 -
Equity in undistributed net income of subsidiary bank (2,302,159) (1,575,365)
----------- -----------
Net cash provided by operating activities 7,504,209 -
----------- -----------
Investing activities:
Purchase of investments (5,525,276) -
Proceeds from sales of investment securities 500,885 -
----------- -----------
Net cash used in operating activities (5,024,391) -
----------- -----------
Financing activities:
Purchase of treasury stock (1,751,137) -
Dividends paid/received 566,210 -
Common stock acquired by ESOP (912,340) -
Adjust net proceeds (61,500) -
----------- -----------
Net cash used in financing activities (2,158,767) -
----------- -----------
Net increase in cash and cash equivalents $ 321,051 $ -
=========== ===========
Cash and cash equivalents at beginning of year - -
Cash and cash equivalents at end of year $ 321,051 $ -
=========== ===========
</TABLE>
<PAGE>
44
Board of Directors
Nicholas J. Christakos
Chairman, Investor and Consultant
Michael R. Kallet
President, Chief Executive
Officer & Trust Officer
Patricia D. Caprio
Director of Development Programs,
Colgate University
Edward J. Clarke
President, Kennedy & Clarke, Inc.
Jim Devine
Former President, Kiley Law Firm, PC
Patricia D. Caprio
Director of Development Programs,
Colgate University
Edward J. Clarke
President, Kennedy & Clarke, Inc.
Jim Devine
Former President, Kiley Law Firm, PC
Michael W. Milmoe
Retired President, Canastota Publishing Co., Inc.
Dr. Richard B. Myers
President, Orthodontic Associates of CNY, PC
Frank O. White, Jr.
Assistant Director of Athletics, Colgate University
<PAGE>
45
Officers of Oneida Savings Bank
Executive
- --------------------------------------------------------------------------------
Michael R. Kallet, President, Chief Executive Officer & Trust Officer
Eric E. Stickels, Senior Vice President, Chief Financial Officer &
Corporate Secretary
Thomas H. Dixon, Senior Vice President, Credit Administration
Lending Operations
- --------------------------------------------------------------------------------
Business Banking Services
James L. Lacy, Vice President, Senior Business Banking Officer
William J. Baldwin, Vice President, Business Banking Officer
Anthony E. Pulverenti, Vice President, Regional Lender
George A. Sawner, Vice President, Regional Lender
Robert L. Stinson, Vice President, Regional Lender
Thomas W. Lewin, Assistant Vice President, Business Banking Officer
Mortgage Banking Services
Frederick S. Lounsbury, Vice President, Mortgage Administrator
Mark A. Cavanagh, Vice President, Mortgage Banking Officer
Cynthia F. Whipple, Vice President, Mortgage Banking Officer
Consumer Banking Services
Robert W. Fox, Vice President, Consumer Banking Officer
Bernard G. Mathews II, Assistant Vice President, Branch Administration
Kathleen J. Donegan, Consumer Banking Officer
Collections Administration
Randall R. Kennedy, Vice President, Collections
Scott R. Bobo, Collections Department Manager
Banking Operations
- --------------------------------------------------------------------------------
Bank Operations
Jonathan Maisey, Vice President, Operations
Wendy J. Chandler, Branch Operations Officer
Branch Administration
Deborah S. Strauss, Assistant Vice President & Branch Manager - Camden
Susan T. Urben, Assistant Vice President & Branch Manager - Hamilton
Cheri L. Osborne, Branch Manager - Cazenovia
Diane M. Petrie, Branch Manager - Canastota
Sally W. West, Branch Manager - Convenience Center & Compliance Officer
Vicky L. Brigham, Branch Officer - Hamilton
Trust and Investment Services
- --------------------------------------------------------------------------------
Charles R. Stevens, CTFA, Vice President, Trust & Investment Services
Administrative
- --------------------------------------------------------------------------------
Deresa F. Rich, CPA, Comptroller
Joanne W. Mobriant, Assistant Vice President & Human Resources Director
Gail R. Crumb, Auditor
Patricia A. Zupan, Administrative Assistant & Marketing Officer
<PAGE>
Officers of Oneida Financial Corp.
Michael R. Kallet, President & Chief Executive Officer
Eric E. Stickels, Senior Vice President, Chief Financial Officer &
Corporate Secretary
Thomas H. Dixon, Senior Vice President
<PAGE>
46
Corporate Information
Oneida Financial Corp.
Executive Office
182 Main Street
Oneida, New York 13421
(315)363-2000
Special Counsel
Luse Lehman Gorman Pomerenk & Schick, PC
5335 Wisconsin Avenue, NW
Suite 400
Washington, DC 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
Investor Relations
Michael R. Kallet, President & CEO
Eric E. Stickels, Sr. Vice President & CFO
P.O. Box 240
Oneida, New York 13421
(315)363-2000
Date & Place of Annual Meeting
April 25, 2000, 4:00 P.M. (Eastern Time)
The Greater Oneida Civic Center
159 Main Street
Oneida, New York 13421
Annual Report on Form 10-k
A copy of the Company's annual 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.
Stockholders
The number of common stockholders of record as of December 31, 1999 was 882
Stock Price Information
Oneida Financial Corp.'s common stock is traded on the Nasdaq market under the
symbol "ONFC". Newspaper stock tables generally list the Company as "Oneida Fn".
<PAGE>
<TABLE>
<CAPTION>
Cash Dividends Cash Dividends
1998* High Low Paid per Share 1999 High Low Paid per Share
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1st Quarter N/A N/A N/A 1st Quarter 11 1/4 9 $0.00
2nd Quarter N/A N/A N/A 2nd Quarter 10 1/8 5 7/8 $0.00
3rd Quarter N/A N/A N/A 3rd Quarter 10 5/8 9 7/8 $0.15
4th Quarter 11 1/2 10 $0.00 4th Quarter 11 1/4 10 1/8 $0.00
</TABLE>
* The Company's stock began trading on December 30, 1998
Office Information
Oneida Savings BankMain Office
182 Main Street
Oneida, New York 13421
(315) 363-2000
Cazenovia Branch
42 Albany Street
Cazenovia, New York 13035
(315) 655-3402
Hamilton Branch
35 Broad Street
Hamilton, New York
(315) 824-2800
Convenience Center
585 Main Street
Oneida, New York 13421
(315) 363-3335
Camden Branch
41 Harden Boulevard
Camden, New York 13316
(315) 245-4200
Canastota Branch
104 South Peterboro Street
Canastota, New York 13032
(315) 697-7450
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Parent Company Subsidiary Company State of Incorporation
-------------- ------------------ ----------------------
<S> <C> <C>
Oneida Financial Corp The Oneida Savings Bank New York
The Oneida Savings Bank Oneida Preferred Funding Corp. Delaware
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1999 AMD THE CONSOLIDATED
STATEMENT OF INCOME FOR YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 8,579
<INT-BEARING-DEPOSITS> 236
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 111,897
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 150,669
<ALLOWANCE> (1,523)
<TOTAL-ASSETS> 280,212
<DEPOSITS> 189,120
<SHORT-TERM> 14,200
<LIABILITIES-OTHER> 941
<LONG-TERM> 36,000
0
0
<COMMON> 358
<OTHER-SE> 39,593
<TOTAL-LIABILITIES-AND-EQUITY> 280,212
<INTEREST-LOAN> 11,358
<INTEREST-INVEST> 6,901
<INTEREST-OTHER> 323
<INTEREST-TOTAL> 18,582
<INTEREST-DEPOSIT> 7,216
<INTEREST-EXPENSE> 8,985
<INTEREST-INCOME-NET> 9,597
<LOAN-LOSSES> 229
<SECURITIES-GAINS> 463
<EXPENSE-OTHER> 6,882
<INCOME-PRETAX> 3,818
<INCOME-PRE-EXTRAORDINARY> 2,507
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,507
<EPS-BASIC> 0.73
<EPS-DILUTED> 0.73
<YIELD-ACTUAL> 3.82
<LOANS-NON> 132
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 912
<ALLOWANCE-OPEN> 1,543
<CHARGE-OFFS> 338
<RECOVERIES> 89
<ALLOWANCE-CLOSE> 1,523
<ALLOWANCE-DOMESTIC> 1,357
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 166
</TABLE>
