-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Td2fko0XuUDuZhvn27uR7ViVhZzQnKs++1O5UyamuLvrwrpk4UcTQ+q9JXgmbAyD vt3cUyNidyMtjMoskXtTdA== 0000914317-00-000229.txt : 20000329 0000914317-00-000229.hdr.sgml : 20000329 ACCESSION NUMBER: 0000914317-00-000229 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000328 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ONEIDA FINANCIAL CORP CENTRAL INDEX KEY: 0001070190 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTIONS, NOT FEDERALLY CHARTERED [6036] IRS NUMBER: 000000000 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-25101 FILM NUMBER: 581491 BUSINESS ADDRESS: STREET 1: 182 MAIN STREET CITY: ONEIDA STATE: NY ZIP: 13421 BUSINESS PHONE: 3153632000 10-K 1 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] 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). 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. 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 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.
At December 31, -------------------------------------------------------------------------- 1999 1998 1997 ------------------ -------------------- ------------------- Amount Percent Amount Percent Amount Percent ------ ------- ------ ------- ------ ------- (Dollars in thousands) 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 ======== ======== ========
1996 1995 ------------------ ------------------- Amount Percent Amount Percent ------ ------- ------ ------- 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 ======== ========
3 The following table sets forth the composition of the Bank's loan portfolio by fixed and adjustable rates at the dates indicated.
At December 31, -------------------------------------------------------------------------------------------------- 1999 1998 1997 1996 1995 ----------------- ---------------- ---------------- ----------------- ---------------- Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent ------- ------- ------- ------ ------- ------- ------- ------- ------ ------- (Dollars in thousands) 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% ======== ====== ======== ===== ======== ====== ======== ====== ======== ======
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 ======== ======== ======== ======== ========
4 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 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 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 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 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.
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) 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 ======= ======= ======= ======= ======= ======= ========
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.
Due After December 31, 2000 ---------------------------------------------- Fixed Adjustable Total ---------- ---------- ----------- (In thousands) 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 ========== ========== ===========
8 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.
Year Ended December 31, ----------------------------------------------------------- 1999 1998 1997 1996 --------- --------- --------- -------- (In thousands) 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 --------- ========= ========= ========
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) ========= ========= ========= ========
- ----------------------------- * 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 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 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.
Loans Delinquent for: ------------------------------------------------------------------------- 60-89 Days 90 Days or More Total delinquent Loans Number Amount Number Amount Number Amount ------ ------ ------ ------ ------ ------ (Dollars in thousands) 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 ====== ======= ======= ======= ======= ======
Nonaccrual Loans and Nonperforming Assets. The following table sets forth information regarding nonaccrual loans and other nonperforming assets.
At December 31, -------------------------------------------------- 1999 1998 1997 1996 1995 --------- --------- -------- -------- ------ (Dollars in thousands) 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 ------- ------- ------- ------- -------
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% ======= ======= ======= ======= =======
11 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. 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 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.
December 31, -------------------------------------------------- 1999 1998 1997 1996 1995 ------ ------ ------ ------ ------ (Dollars in thousands) 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% ====== ====== ====== ====== ======
13 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.
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) 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% ========= ========= ======== ======== ========= ========= 1997 -------------------------------------- Percent of Loans Amount of Loan In Each Loan Loss Amounts Category to Allowance by Category Total Loans --------- ----------- ----------- 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% ========= ========= ========
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) 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% ========= ========= ========= ======== ========= =========
14 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 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.
December 31, ---------------------------------------------------------------- 1999 1998 1997 -------------------- ------------------ ------------------- Book Percent of Book Percent of Book Percent of Value Total Value Total Value Total ----- ----- ----- ----- ----- ----- (Dollars in thousands) 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% ======== ====== ======== ====== ========= ======
December 31, ------------------------------------------ 1996 1995 ------------------- ------------------- Book Percent of Book Percent of Value Total Value Total ----- ----- ----- ----- 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% ========= ====== ========= =======
16 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.
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) 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%
- ---------------- (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 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 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 Mortgage-Backed Securities. Set forth below is information relating to the Bank's mortgage-backed securities for the periods indicated.
December 31, --------------------------------------------------------------- 1999 1998 1997 -------------------- ------------------- ------------------- Book Percent of Book Percent of Book Percent of Value Total Value Total Value Total --------- --------- --------- -------- -------- -------- (Dollars in thousands) 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% ======= ====== ======= ====== ======= ====== 1996 1995 -------------------- -------------------- Book Percent of Book Percent of Value Total Value Total -------- -------- -------- ------- 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% ======= ====== ======= ======
19 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.
Year Ended December 31, ---------------------------------- 1999 1998 1997 --------- --------- ------ (Dollars in thousands) 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)% ======== ======== =======
20 The following table indicates the amount of the Bank's certificates of deposit by time remaining until maturity as of December 31, 1999.
Maturity ----------------------------------------------- 3 Months Over 3 to 6 Over 6 to 12 Over 12 or Less Months Months Months Total ------- ------ ------ ------ ----- (In thousands) 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 ======== ======== ======= ======= ========
The following tables set forth information, by various rate categories, regarding the average balance of deposits by types of deposit for the periods indicated.
December 31, ------------------------------------------------------------ 1999 1998 1997 ----------------- ----------------- ----------------- Amount Percent Amount Percent Amounts Percent ------ ------- ------ ------- ------- ------- (Dollars in thousands) 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% ======== ====== ======== ====== ======== ======
The following table sets forth the amount and remaining maturities of the Bank's certificates of deposit accounts at December 31, 1999.
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: 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% ======= ======= ======= =======
21 Borrowed Funds. Set forth below is a schedule detailing the Bank's borrowings.
At December 31, ---------------------------------- 1999 1998 1997 --------- --------- ------- (In Thousands) 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 $ -- -------- -------- -------
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. 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 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 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 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. 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 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. 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 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. 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 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 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 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 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 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. 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 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. 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 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. 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 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 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 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.
Name Age Position and Term ---- --- ----------------- 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
33 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.
Original Date of Net Book Value Year Lease of Property Location Acquired Expiration at December 31, 1999 - ---------------------------------------------------------------------------------------------- (In thousands) 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
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 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 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 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 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 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.
At December 31, 1999 ------------------------------------------------------------------------- Fair Thereafter Total Value ------- ------- ------- ------- ------- ----------------- ------- 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% -------- -------- -------- -------- -------- -------- ---------
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 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.
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) +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%
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 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 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 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.
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
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
EX-13 2 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 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 [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 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 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 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. 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.
At December 31, ------------------------------------------------------- 1999 1998 1997 1996 1995 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 At December 31, ------------------------------------------------------- 1999 1998 1997 1996 1995 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
At December 31, ------------------------------------------------------- 1999 1998 1997 1996 1995 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
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. 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 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 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 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. 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.
For the Years Ending December 31, 1999 1998 --------------------------------- ----------------------------------- Average Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate (dollars in thousands) 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% ------ ------
December 31, --------------------------------- 1997 --------------------------------- Average Yield/ Balance Interest Rate 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% ------
10
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) 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 ------- ----
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%. 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 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. 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%. 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. 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 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 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. 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 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 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 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 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. 1999 Consolidated Financial Statements 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 20
Consolidated Statements of Condition December 31, 1999 and 1998 Assets 1999 1998 ----------- ----------- 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 ============ ============
The accompanying notes are an integral part of the consolidated financial statements. 21
Consolidated Statements of Income Years Ended December 31, 1999, 1998 and 1997 1999 1998 1997 ---------- ---------- ---------- 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 $ - $ - ---------- ---------- ----------
The accompanying notes are an integral part of the consolidated financial statements. 22
Consolidated Statements of Comprehensive Income Years Ended December 31, 1999, 1998 and 1997 1999 1998 1997 ----------- ---------- --------- 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 ========== ========= ===========
The accompanying notes are an integral part of the consolidated financial statements. 23
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 ------ ------ ------- -------- 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 ========= ======== =========== ============
Common Stock Accumulated Issued Under Other Employee Comprehensive Treasury Stock Plans - Income Stock Unearned Total ------ ----- -------- ----- 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 =========== =========== =========== ============
The accompanying notes are an integral part of the consolidated financial statements. 24
Consolidated Statements of Cash Flows Years Ended December 31, 1999, 1998 and 1997 1999 1998 1997 ----------- ----------- ---------- 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) ----------- ----------- ----------
The accompanying notes are an integral part of the consolidated financial statements. 25
Consolidated Statements of Cash Flows (cont.) Years Ended December 31, 1999, 1998 and 1997 1999 1998 1997 ---------- ----------- ----------- 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
The accompanying notes are an integral part of the consolidated financial statements. 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. 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. 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. 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:
1999 ---------------------------------------------------------- Amortized Gross Unrealized Cost Gains Losses Fair Value ------------ -------- ---------- ------------ 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 ============ ======== ========== ============
30 Notes to Consolidated Financial Statements 3. Investment Securities and Mortgage-Backed Securities (cont.)
1998 ---------------------------------------------------------- Amortized Gross Unrealized Cost Gains Losses Fair Value ----------- ----------- -------- ------------ 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 =========== =========== ======== ===========
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. 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. 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:
1999 1998 1997 --------- --------- --------- 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 ========== ========== ==========
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. 32 Notes to Consolidated Financial Statements 5. Premises and Equipment Premises and equipment consist of the following at December 31:
1999 1998 ---------- --------- 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 ========== ==========
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:
1999 1998 ----------- ----------- 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 ============ ============
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:
1999 1998 ------------------------ --------------------------- 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 ============= ===== ============= =====
33 Notes to Consolidated Financial Statements 7. Borrowings Outstanding borrowings as of December 31 are as follows:
1999 1998 ----------- ----------- 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 =========== ===========
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. 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:
1999 1998 ----------- ---------- Asset (Liability) 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) =========== ==========
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:
1999 1998 1997 ----------- ----------- ----------- 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 =========== =========== ===========
A reconciliation of the federal statutory rate to the effective income tax rate for the years ended December 31, is as follows:
1999 1998 1997 ---- ---- ---- 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 % === === ===
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:
1999 1998 ----------- ----------- 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 =========== ===========
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% 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:
1999 1998 1997 -------- -------- -------- 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 ======== ======== ========
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. 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:
1999 1998 1997 ---------- ---------- ---------- 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 ========== ========== ==========
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. 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.) 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:
(Amounts in Thousands) 1999 1998 -------------------------- ------------------------ Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value --------- --------- --------- --------- 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 ========= ========= ========= =========
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. 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 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. 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:
To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions -------------------- -------------------- ----------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- 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%
42 Notes to Consolidated Financial Statements 15. Parent Company Statements
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 =========== =========== Condensed Statements of Income Years Ended December 31, 1999 1998 ----------- ----------- 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 =========== ===========
43 15. Parent Company Statements (cont.)
Condensed Statements of Cash Flow Years Ended December 31, ------------------------ 1999 1998 ----------- ----------- 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 $ - =========== ===========
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 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 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 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".
Cash Dividends Cash Dividends 1998* High Low Paid per Share 1999 High Low Paid per Share - --------------------------------------------------------------------------------------------------------- 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
* 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 EX-21 3 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT
EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT Parent Company Subsidiary Company State of Incorporation -------------- ------------------ ---------------------- Oneida Financial Corp The Oneida Savings Bank New York The Oneida Savings Bank Oneida Preferred Funding Corp. Delaware
EX-27 4
9 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. 1,000 YEAR DEC-31-1999 DEC-31-1999 8,579 236 0 0 111,897 0 0 150,669 (1,523) 280,212 189,120 14,200 941 36,000 0 0 358 39,593 280,212 11,358 6,901 323 18,582 7,216 8,985 9,597 229 463 6,882 3,818 2,507 0 0 2,507 0.73 0.73 3.82 132 0 0 912 1,543 338 89 1,523 1,357 0 166
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