PROSPECTUS Filed pursuant to Rule 424(b)(3)
UP TO 198,375 SHARES OF COMMON STOCK File No. 333-63625
PEOPLES BANKCORP, INC.
825 STATE STREET
OGDENSBURG, NEW YORK 13669
(315) 393-4340
================================================================================
Ogdensburg Federal Savings and Loan Association is converting from a
federally chartered mutual savings and loan association to a federally chartered
stock savings and loan association. As part of the conversion, Ogdensburg
Federal Savings and Loan Association will become a wholly owned subsidiary of
Peoples Bankcorp, Inc. The Company was formed in September 1998 and upon
completion of the conversion will own all of the shares of Ogdensburg Federal
Savings and Loan Association. The common stock of the Company is being offered
to the public in accordance with a plan of conversion. The plan of conversion
must be approved by the Office of Thrift Supervision and by a majority of the
votes eligible to be cast by members of Ogdensburg Federal Savings and Loan
Association. The offering will not go forward if Ogdensburg Federal Savings and
Loan Association does not receive these approvals and the Company does not sell
at least the minimum number of shares.
The shares of common stock are first being offered pursuant to
nontransferable subscription rights in a Subscription Offering. Depositor and
borrower members as of certain eligibility dates will receive subscription
rights. Shares of common stock not subscribed for in the Subscription Offering
may be offered for sale in a community offering with preference given to
residents of St. Lawrence County, New York.
================================================================================
TERMS OF OFFERING
An independent appraiser has estimated the market value of the converted
Ogdensburg Federal Savings and Loan Association to be between $1,275,000 and
$1,725,000, which establishes the number of shares to be offered at a price of
$10 per share. Subject to Office of Thrift Supervision approval, up to 198,375
shares, an additional 15% above the maximum number of shares, may be offered.
Based on these estimates, we are making the following offering of shares of
common stock:
. Price Per Share: $ 10
. Number of Shares Minimum/
Maximum, as adjusted: 127,500 to 198,375
. Offering Expenses: $350,000
. Net Proceeds to the Company
Minimum/Maximum, as adjusted: $925,000 to $1,633,750
. Net Proceeds Per Share
Minimum/Maximum, as adjusted: $7.25 to $8.24
PLEASE REFER TO RISK FACTORS BEGINNING ON PAGE 1 OF THIS DOCUMENT.
These securities are not deposits or accounts and are not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other government agency.
Neither the Securities and Exchange Commission, the Office of Thrift
Supervision, nor any state securities commission has approved or disapproved of
these securities or determined if this prospectus is accurate or complete. Any
representation to the contrary is a criminal offense.
FOR INFORMATION ON HOW TO SUBSCRIBE, CALL THE STOCK INFORMATION CENTER AT (315)
393-8565.
TRIDENT SECURITIES, INC.
The date of this Prospectus is November 12, 1998
TABLE OF CONTENTS
Page
----
Questions and Answers About the Stock Offering......................................................... (i)
Summary................................................................................................ (iv)
Selected Financial and Other Data...................................................................... (viii)
Recent Developments.................................................................................... (xi)
Risk Factors........................................................................................... 1
Proposed Purchases by Directors and Executive Officers................................................. 6
The Company............................................................................................ 7
Ogdensburg Federal Savings and Loan Association........................................................ 7
Use of Proceeds........................................................................................ 7
Dividends.............................................................................................. 9
Market for the Common Stock............................................................................ 10
Capitalization......................................................................................... 11
Historical and Pro Forma Capital Compliance............................................................ 12
Pro Forma Data......................................................................................... 13
The Conversion......................................................................................... 18
Management's Discussion and Analysis of Financial Condition and Results of Operations.................. 32
Business of Peoples Bankcorp, Inc...................................................................... 44
Business of Ogdensburg Federal Savings and Loan Association............................................ 44
Regulation............................................................................................. 62
Taxation............................................................................................... 69
Management of the Company.............................................................................. 71
Management of Ogdensburg Federal Savings and Loan Association.......................................... 71
Restrictions on Acquisitions of the Company............................................................ 78
Description of Capital Stock........................................................................... 83
Legal and Tax Matters.................................................................................. 84
Experts................................................................................................ 85
Additional Information................................................................................. 85
Ogdensburg Federal Savings and Loan Association Index to Financial Statements.......................... F-1
Glossary............................................................................................... A-1
This document contains forward-looking statements which involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in "Risk
Factors" beginning on page 1 of this document.
Please see the Glossary beginning on page A-1 for the meaning of
capitalized terms that are not defined in this document.
[MAP TO BE INSERTED HERE]
QUESTIONS AND ANSWERS ABOUT THE STOCK OFFERING
Q: WHAT IS A MUTUAL TO STOCK CONVERSION?
A: The conversion is a change in our form of organization. Currently, we
operate as a federally chartered mutual savings and loan association with
no stockholders. As a result of the conversion, we will become a federally
chartered stock savings and loan association. As part of our conversion,
the Company is offering for sale shares of its common stock.
Q: WHAT IS THE PURPOSE OF THE CONVERSION AND THE OFFERING?
A: As a stock savings association operating through a holding company
structure, we will have the ability to plan and develop long-term growth
and improve our future access to the capital markets. The stock offering
will increase our capital and the amount of funds available to us for
lending and investment activities. This will give us greater flexibility to
diversify operations and expand into other geographic markets if we choose
to do so. If the Company's earnings are sufficient in the future, you might
also receive dividends and benefit from the long-term appreciation of our
stock price.
Q: HOW MANY SHARES OF STOCK WILL BE SOLD?
A: Between 127,500 and 172,500 shares of common stock will be sold. The number
of shares to be sold may be increased to 198,375 shares without further
notice to you, subject to receipt of approval of the Office of Thrift
Supervision, if market or financial conditions change prior to completion
of the conversion or if additional shares are needed to fill the order of
our employee stock ownership plan (the "ESOP").
Q: AT WHAT PRICE WILL THE SHARES BE SOLD?
The shares will be sold at $10.00 per share. This price was determined by
our board of directors and is the price most commonly used in stock
offerings involving conversions of mutual savings institutions. In
addition, the board believed that the price was such that many of our
depositors and borrowers would be able to participate in the Offering.
Q: HOW DO I PURCHASE THE STOCK?
A: You must complete and return the Stock Order Form to us together with your
payment or your authorization for withdrawal of the payment amount from an
account you have with us, on or before noon on December 14, 1998. See
pages 18 to 32.
(i)
Q: HOW MUCH STOCK MAY I PURCHASE?
A: The minimum purchase is 25 shares (or $250). The maximum purchase per
eligible depositor in the subscription offering is 5,000 shares (or
$50,000). We may decrease or increase the maximum purchase limitation
without notifying you. See pages 21 to 26.
If shares are sold in a Community Offering, the maximum number of shares
that may be purchased by any party in the Community Offering, when combined
with the number of shares purchased by other parties with whom your shares
may be aggregated is 5,000 shares ($50,000). See pages 24 to 26.
In certain instances, your purchase might be grouped together with
purchases by persons with other accounts with whom you are affiliated or
related and in that event the aggregate purchases may not exceed 8,000
shares ($80,000).
Q: WHAT HAPPENS IF THERE ARE NOT ENOUGH SHARES TO FILL ALL ORDERS?
A: You might not receive any or all of the shares you want to purchase. If we
receive offers for more shares than we have available to sell, the stock
will be offered on a priority basis to the following persons:
. ELIGIBLE ACCOUNT HOLDERS - Persons who had a deposit account with us
on June 30, 1997 with a balance of at least $50.00. Any remaining
shares will be offered to:
. OUR ESOP. Any remaining shares will be offered to:
. SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS - Persons who had a deposit
account with us on September 30, 1998 with a balance of at least
$50.00. Any remaining shares will be offered to:
. OTHER MEMBERS - Other depositors and borrowers of ours, as of November
12, 1998.
If the above persons do not subscribe for all of the shares, the remaining
shares will be offered to certain members of the general public with
preference given to people who live in St. Lawrence County, New York. See
page 24.
Q: WHAT PARTICULAR FACTORS SHOULD I CONSIDER WHEN DECIDING WHETHER OR NOT TO
BUY THE STOCK?
A: Because of the small size of the Offering, there may not be an active
market for the shares, which may make it difficult to resell any shares you
may own. Before you decide to purchase stock, you should also read the Risk
Factors section beginning on page 1 of this document.
(ii)
Q: AS A DEPOSITOR OR BORROWER MEMBER OF OGDENSBURG FEDERAL SAVINGS AND LOAN
ASSOCIATION, WHAT WILL HAPPEN IF I DO NOT PURCHASE ANY STOCK?
A: You presently have voting rights while we are in the mutual form; however,
once we convert to the stock form you will lose your voting rights unless
you purchase stock. You are not required to purchase stock. Your deposit
account, certificate accounts and any loans you may have with us will be
not be affected. See pages 19 to 21.
Q: WHO CAN HELP ANSWER ANY OTHER QUESTIONS I MAY HAVE ABOUT THE STOCK
OFFERING?
A: In order to make an informed investment decision, you should read this
entire document. In addition, you should contact:
STOCK INFORMATION CENTER
PEOPLES BANKCORP, INC.
825 STATE STREET
OGDENSBURG, NEW YORK
(315) 393-8565
(iii)
SUMMARY
This summary highlights selected information from this document and may not
contain all the information that is important to you. To understand the stock
offering fully, you should read carefully this entire document, including the
financial statements and the notes to the financial statements of Ogdensburg
Federal Savings and Loan Association. References in this document to "we," "us,"
and "our" refer to Ogdensburg Federal Savings and Loan Association. In certain
instances where appropriate, "us" or "our" refers collectively to Peoples
Bankcorp, Inc. and Ogdensburg Federal Savings and Loan Association. References
in this document to "the Company" refer to Peoples Bankcorp, Inc.
PEOPLES BANKCORP, INC.
Peoples Bankcorp, Inc. was formed in September 1998 as a New York
corporation to be the holding company for Ogdensburg Federal Savings and Loan
Association. The Company is not an operating company and has not engaged in any
significant business to date. The holding company structure will provide greater
flexibility in terms of operations, expansion and diversification. See page 44.
OGDENSBURG FEDERAL SAVINGS AND LOAN ASSOCIATION
We are a community and customer-oriented federal mutual savings association
with one office located in Ogdensburg, New York. We were originally founded in
1888 as a New York-chartered savings association and converted to a federally
chartered savings and loan association in 1982. Our primary market area consists
of the City of Ogdensburg and the surrounding townships of Lisbon, Oswegatchie,
Madrid, Morristown, Heuvelton, Hammond, Depeyster, Macomb and Waddington and the
village of Rennsselaer Falls in St. Lawrence County, New York. Historically, we
have emphasized residential mortgage lending, primarily originating one- to
four-family mortgage loans. We also make consumer loans and a limited number of
commercial real estate loans and commercial business loans. At June 30, 1998, we
had total assets of $24.2 million, deposits of $22.4 million, and total equity
of $1.6 million. See page 44.
THE STOCK OFFERING
The Company is offering between 127,500 and 172,500 shares of common stock
at $10.00 per share. Subject to approval by the Office of Thrift Supervision,
the number of shares to be sold may be increased to 198,375 shares without
further notice to you if market or financial conditions change prior to
completion of the conversion or if additional shares are needed to fill the
order of our ESOP.
(iv)
STOCK PURCHASES
The Company is first offering its shares of common stock in a Subscription
Offering to depositor and borrower members as of certain eligibility dates. The
shares of common stock will be offered on the basis of priorities. Any remaining
shares may be offered in a Community Offering or in a Syndicated Community
Offering. See pages 21 to 24.
SUBSCRIPTION RIGHTS
You may not sell or assign your subscription rights. Any transfer of
subscription rights is prohibited by law. All persons exercising their
subscription rights will be required to certify that they are purchasing shares
solely for their own account and that they have no agreement or understanding
regarding the sale or transfer of the shares they are purchasing. We intend to
pursue any and all remedies in the event that we become aware of the transfer of
any subscription rights. We will reject orders that we determine to involve the
transfer of such rights.
THE OFFERING RANGE AND DETERMINATION OF THE PRICE PER SHARE
The offering range is based on an independent appraisal of the pro forma
market value of the common stock by Feldman Financial Advisors, Inc.
("Feldman"), an appraisal firm experienced in appraisals of savings
institutions. The pro forma market value of the shares is our market value after
giving effect to the sale of shares in this offering. Feldman has estimated that
in its opinion as of September 4, 1998 such value ranged between $1.3 million
and $1.7 million (with a midpoint of $1.5 million) (the "Estimated Valuation
Range"). The appraisal was based in part upon our financial condition and
operations and the effect of the additional capital raised by the sale of common
stock in this offering. The $10.00 price per share was determined by our board
of directors and is the price most commonly used in stock offerings involving
conversions of mutual savings institutions. The appraisal will be updated prior
to the consummation of the conversion. If the updated pro forma market value of
the common stock is either below $1.3 million or above $2.0 million, we will
notify you and you will have the opportunity to modify or cancel your order. See
pages 29 to 30.
TERMINATION OF THE OFFERING
The Subscription Offering will terminate at 12:00 p.m., Eastern Time, on
December 14, 1998. The Community Offering, if any, may terminate at any time
without notice but no later than 45 days after the completion of the
Subscription Offering (January 28, 1999 assuming no extension of the
Subscription Offering) without approval by the OTS.
BENEFITS TO MANAGEMENT FROM THE OFFERING
ESOP. Our full-time employees will participate in the offering through
purchases of stock by our ESOP, which is a form of retirement plan. We expect
that the ESOP will purchase 8% of the shares sold in the offering (12,000 shares
at the midpoint of the Estimated Valuation Range). The
(v)
purchase price will be funded by a loan from the Company. At the midpoint of the
Estimated Valuation Range, the amount of this loan would be $120,000. As the
ESOP loan is repaid, shares will be allocated to accounts of the ESOP
participants.
EMPLOYMENT AGREEMENTS. We intend to enter into employment agreements with
Robert E. Wilson, President and Chief Executive Officer, and Todd R. Mashaw,
Vice President. The employment agreements will provide for three-year terms with
initial base salaries equal to their current base salaries.
MANAGEMENT RECOGNITION PLAN. Following the conversion, we also intend to
implement a management recognition plan ("MRP") under which certain officers and
directors will be entitled to receive awards of restricted stock at no cost to
them. We anticipate that shares equal to 4% of the number of shares to be sold
in the offering will be awarded under the MRP. At the midpoint of the Estimated
Valuation Range, a total of 6,000 shares would be eligible for award under the
MRP. The MRP would require stockholder approval before it can be implemented. In
addition, if the MRP is implemented in the first year following completion of
the conversion, awards under the MRP would have to comply with certain OTS
regulations which limit the maximum award that can be made to any one officer or
director. If the MRP is implemented in the first year following completion of
the conversion, the maximum award that could be made to any officer is 25% of
the shares held by the MRP (1,500 shares at the midpoint of the Estimated
Valuation Range which would have a value of $15,000 using the offering price).
The maximum award that could be made to any non-employee director would be 5% of
the shares held by the MRP (300 shares at the midpoint of the Estimated
Valuation Range which would have a value of $3,000 using the offering price). If
the MRP is implemented after the first year following completion of the
conversion, awards under the MRP would not be subject to such limitations. No
determination as to any awards under the MRP has been made by the Company.
STOCK OPTION PLAN. We also intend to implement a stock option and
incentive plan (the "Option Plan"), which will benefit our officers and
directors. We expect that the option plan will provide that options for up to
10% of the number of shares of stock sold in the offering may be granted (15,000
shares at the midpoint of the Estimated Valuation Range). As with the MRP, if
the Option Plan is implemented in the first year following completion of the
conversion, the maximum award that could be made to any officer is 25% of the
options available for issuance under the Option Plan (3,750 shares at the
midpoint of the Estimated Valuation Range). The maximum award that could be made
to any non-employee director would be 5% of the options available for issuance
under the Option Plan (750 shares at the midpoint of the Estimated Valuation
Range). In addition, the exercise price of any options granted could not be less
than the fair market value of the common stock on the date of grant. If the
Option Plan is implemented after the first year following completion of the
conversion, grants of options under the Option Plan would not be subject to such
limitations. No determination as to any grants of options under the Option Plan
has been made by the Company.
(vi)
USE OF THE PROCEEDS FROM THE SALE OF COMMON STOCK
The Company will use a portion of the net proceeds from the stock offering
to make a loan to our ESOP to fund its purchase of 8% of the common stock issued
in the conversion. The Company will use at least 50% of the net proceeds to
purchase all the capital stock to be issued by us in the conversion. The Company
will retain the balance of the funds as its initial capitalization. These funds
will serve as a possible source of funds for the payment of dividends to
stockholders or to repurchase shares of common stock in the future, and for
general corporate purposes. See pages 7-8.
DIVIDENDS
Management of the Company does not anticipate paying a cash dividend in the
first year following the conversion. Following that period, Management intends
to review periodically the possible adoption of a dividend policy. We cannot
assure you, however, when, or if, we will ultimately decide to establish a cash
dividend policy. See page 9.
MARKET FOR THE COMMON STOCK
The Company intends to list the common stock over-the-counter through the
OTC "Electronic Bulletin Board." The Company has requested that Trident
Securities, Inc. agree to match offers to buy and sell the common stock. Trident
Securities has no obligation to match offers to buy and sell and may cease doing
so at any time. Since the size of the offering is small, it is unlikely that an
active and liquid trading market for the shares will develop and be maintained.
Investors should therefore have a long-term investment intent. Persons
purchasing shares may not be able to sell their shares when they desire or to
sell them at a price equal to or above $10.00. See page 10.
IMPORTANT RISKS IN OWNING THE COMPANY'S COMMON STOCK
Before you decide to purchase stock in the offering, you should read the
"Risk Factors" section beginning on page one of this document.
(vii)
SELECTED FINANCIAL AND OTHER DATA
The selected data presented below under the captions "Selected Financial
Condition Data" and "Selected Operations Data" for, and as of the end of
December 31, 1997 and 1996, are derived from the audited financial statements of
Ogdensburg Federal Savings and Loan Association. The financial statements as of
December 31, 1997 and 1996 and for the years then ended are included elsewhere
in this Prospectus. The selected data presented below as of and for the six
month periods ended June 30, 1998 and 1997 are derived from the unaudited
financial statements of Ogdensburg Federal Savings and Loan Association included
elsewhere in this Prospectus. The data at June 30, 1998, and for the six months
ended June 30, 1998 and 1997 is unaudited, but in the opinion of our management
reflects all adjustments, consisting of normal recurring accruals, considered
necessary for a fair presentation. Results for the six month period ended June
30, 1998 do not necessarily indicate the results that may be expected for the
year ended December 31, 1998.
SELECTED FINANCIAL CONDITION DATA
The following table sets forth certain information concerning our financial
position at the dates indicated.
AT
JUNE 30, AT DECEMBER 31,
----------------
1998 1997 1996
-------- ------- -------
(DOLLARS IN THOUSANDS)
Total assets.............................. $24,247 $23,402 $21,998
Loans, net................................ 18,698 16,668 15,359
Cash and cash equivalents................. 1,239 1,227 1,571
Securities:
Available-for-sale....................... -- 737 804
Held-to-maturity......................... 3,546 4,031 3,561
Total deposits............................ 22,356 21,765 20,489
Total equity.............................. 1,648 1,577 1,477
(viii)
SELECTED OPERATIONS DATA
The following table sets forth certain information concerning our results
of operations for the periods shown.
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
---------------- ---------------------
1998 1997 1997 1996 (1)
------- ------- ------ -------------
(IN THOUSANDS)
Interest income.......................... $ 882 $ 812 $1,662 $ 1,592
Interest expense......................... 522 477 998 955
Net interest income...................... 360 335 664 637
Provision for loan losses................ 3 -- 57 --
Net interest income after provision for
loan losses.......................... 357 335 607 637
Non-interest income...................... 22 20 44 30
Non-interest expenses.................... 281 250 525 656
Income before income tax expense......... 98 105 126 11
Income tax expense....................... 26 28 38 3
----- ----- ------ --------
Net income.......................... $ 72 $ 77 $ 88 $ 8
===== ===== ====== ========
_____________
(1) Our results of operations for the year ended December 31, 1996 include a
special assessment of $128,000 which we were required to pay to
recapitalize the SAIF.
(ix)
SELECTED FINANCIAL RATIOS AND OTHER DATA
The table below sets forth certain performance ratios for us for the
periods indicated.
AT OR FOR THE AT OR FOR THE
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
----------------------- -------------------------
1998 1997 1997 1996
--------- ------------ ----------- -----------
PERFORMANCE RATIOS:
Return on average assets (net income divided
by average total assets)......................... 0.61% 0.69% 0.39% 0.04%
Return on average equity (net income divided
by average equity)............................... 9.04 10.42 5.82 0.53
Net interest rate spread (combined weighted
average interest rate earned less combined
weighted average interest rate cost)............. 2.97 2.96 2.86 2.90
Average interest-earning assets to
average interest-bearing liabilities............. 105.36 104.73 104.62 104.15
Noninterest expense to average total assets....... 1.18 1.12 2.30 3.00
ASSET QUALITY RATIOS:
Nonperforming assets to total assets.............. 1.41 0.11 1.42 0.04
Nonperforming loans to total loans................ 1.61 0.16 1.74 0.06
Allowance for loan losses to total loans.......... 0.87 0.72 0.97 0.75
Allowance for loan losses to nonperforming loans.. 54.46 438.46 55.97 1288.89
Provision for loan losses to loans, net........... 0.02 -- 0.34 --
Net charge-offs to average loans outstanding...... 0.01 0.01 0.06 --
EQUITY RATIOS:
Equity to total assets............................ 6.80 6.80 6.74 6.71
Average equity to average total assets............ 6.72 6.64 6.64 6.96
AT
JUNE 30, AT DECEMBER 31,
--------------------
1998 1997 1996
---------- -------- --------
OTHER DATA:
Number of real estate loans outstanding........... 548 565 554
Deposit accounts.................................. 2,576 2,637 2,757
Offices open...................................... 1 1 1
(x)
RECENT DEVELOPMENTS
The tables below set forth certain selected financial data for the
Association at the dates and for the periods indicated. The data at September
30, 1998, and for the nine months ended September 30, 1998 and 1997 is
unaudited, but in the opinion of management reflects all adjustments, consisting
of normal recurring accruals, considered necessary for a fair presentation. The
financial condition data at December 31, 1997 is derived in part from, and is
qualified in its entirety by reference to, the audited Financial Statements and
Notes thereto included elsewhere herein. The financial data for the nine months
ended September 30, 1998 is not necessarily indicative of the operating results
to be expected for the entire fiscal year.
AT AT
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- --------------
(IN THOUSANDS)
FINANCIAL CONDITION DATA:
Total assets........................... $24,522 $23,402
Loans, net............................. 19,868 16,668
Cash and cash equivalents.............. 1,319 1,227
Securities:
Available-for-sale.................. -- 737
Held-to-maturity.................... 2,482 4,031
Total deposits......................... 22,774 21,765
Total equity........................... 1,681 1,577
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1998 1997
------------- --------------
(IN THOUSANDS)
OPERATING DATA:
Interest income...................... $ 1,337 $ 1,235
Interest expense..................... 790 735
Net interest income.................. 547 500
Provision for loan losses............ 8 1
Net interest income after provision
for loan losses.................... 539 499
Non-interest income.................. 39 36
Non-interest expenses................ 432 380
Income before income tax expense..... 146 155
Income tax expense................... 38 39
------- -------
Net income........................... $ 108 $ 116
======= =======
(xi)
AT OR FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
-------------------------
1998 1997
-------- --------
SELECTED RATIOS:
Interest rate spread.............. 2.96% 2.94%
Interest rate margin (1).......... 3.23 3.14
REGULATORY CAPITAL RATIOS:
Tangible capital.................. 6.86 6.86
Core capital...................... 6.86 6.86
Total risk-based capital.......... 12.40 14.83
__________
(1) Annualized.
RESULTS OF OPERATIONS
We earned net income of $108,000 for the nine months ended September 30,
1998 as compared to net income of $116,000 for the nine month period ended
September 30, 1997. The $8,000 reduction in our net income for the first nine
months of fiscal year 1998 as compared to the first nine months of fiscal year
1997 was due primarily to the $52,000 increase in non-interest expenses during
the most recent period, partially offset by the $47,000 increase in net interest
income. The primary components of the increase in non-interest expense were
increases in compensation and related expenses, deposit insurance and postage,
supplies and other miscellaneous expenses. In addition, during the quarter ended
September 30, 1998, we sold a piece of real estate owned which resulted in a
loss of $10,000.
Net interest income during the nine months ended September 30, 1998
increased by $47,000 as compared to the same period in 1997. During the nine
months ended September 30, 1998, net loans averaged $17.9 million for the period
as compared to $15.6 during the first nine months of fiscal year 1997.
FINANCIAL CONDITION
Our total assets at September 30, 1998 were $24.5 million, an increase of
$1.1 million from December 31, 1997's level of $23.4 million. The increase was
due to a growth in our loan portfolio. Net loans receivable increased by $3.2
million, or 19.2%, which reflected our continued marketing efforts. The $104,000
increase in equity reflected our earnings for the period. At September 30, 1998,
we were in compliance with all applicable regulatory capital requirements with
tangible and core capital equal to 6.86% of adjusted total assets and total
risk-based capital equal to 12.40% of risk-weighted assets.
(xii)
RISK FACTORS
In addition to the other information in this document, you should consider
carefully the following risk factors in deciding whether to invest in the common
stock.
LACK OF ACTIVE MARKET FOR COMMON STOCK
Due to the small size of the offering, it is highly unlikely that an active
trading market will develop and be maintained. If an active market does not
develop, you may not be able to sell your shares promptly or perhaps at all, or
sell your shares at a price equal to or above the price you paid for the shares.
The common stock may not be appropriate as a short-term investment. See "Market
for the Common Stock."
BELOW AVERAGE RETURN ON AVERAGE EQUITY AND INCREASED EXPENSES IMMEDIATELY AFTER
CONVERSION
Return on average equity (net income divided by average equity) is a ratio
used by many investors to compare the performance of a savings institution to
its peers. As a result of the conversion, our equity will increase
substantially. Our expenses also will increase because of the compensation
expense associated with our ESOP and MRP, as well as the costs of being a public
company. Because of the increases in our equity and expenses, our return on
equity may decrease as compared to our performance in previous years.
Initially, we intend to invest the net proceeds in short term investments which
generally have lower yields than residential mortgage loans. At June 30, 1998
and December 31, 1997, our return on average equity was 9.04% and 5.82%,
respectively. A lower return on equity could reduce the trading price of our
shares.
IMPACT OF TECHNOLOGICAL ADVANCES; YEAR 2000 COMPLIANCE
Our industry is experiencing rapid changes in technology. Products and
services that are dependent upon technological devices such as computers are
frequently introduced. In addition to improving customer services, effective
use of technology increases efficiency and enables financial institutions to
reduce costs. Our future success will thus depend partly on our ability to
address our customers' needs by using technology. Many of our competitors have
far greater resources than we have to invest in technology. There can be no
assurance that we will be able to effectively develop new technology-driven
products and services or be successful in marketing these products to our
customers.
Our operations are also dependent on computers and computer systems,
whether we maintain them internally or they are maintained by a third party. We
have taken steps to ensure that our computer systems will properly recognize
information when the year changes to 2000. Systems that do not properly
recognize the correct year could produce faulty data or cause a system to fail.
We have also taken steps to ensure that we are in compliance with regulatory
directives in this area. There can be no assurance, however, that we and our
third party providers will be successful in
1
making all necessary changes to avoid computer system failure related to the
year 2000. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Year 2000 Compliance."
RISKS ASSOCIATED WITH NONRESIDENTIAL LENDING
Although our primary lending activity is the origination of one- to four-
family mortgage loans, approximately $6.5 million, or 34.46%, of our gross loan
portfolio at June 30, 1998 consisted of loans other than one- to four-family
mortgage loans. Such loans included $5.4 million in consumer loans, $726,000 in
commercial real estate loans and $200,000 in commercial business loans.
Following the conversion, we intend to continue to originate nonresidential
loans particularly consumer loans. Although these loans generally provide for
higher interest rates and shorter terms than one- to four-family residential
real estate loans, these loans generally have a higher degree of credit and
other risks. Consumer loans also entail greater risk than one- to four-family
residential loans, particularly in the case of consumer loans which are
unsecured or secured by rapidly depreciable assets, such as automobiles. In
such cases, any repossessed collateral for a defaulted consumer loan may not
provide an adequate source of repayment of the outstanding loan balance as a
result of the greater likelihood of damage, loss or depreciation. Commercial
business loans involve a greater degree of risk than other types of lending as
payments on such loans are often dependent on the successful operation of the
business involved which may be subject, to a greater extent, to adverse
conditions in the economy.
POTENTIAL IMPACT OF CHANGES IN INTEREST RATES AND THE CURRENT INTEREST RATE
ENVIRONMENT
Our ability to make a profit, like that of most financial institutions, is
substantially dependent on our net interest income. Net interest income is the
difference between the interest income we earn on our interest-earning assets
(such as mortgage loans and investments) and the interest expense we pay on our
interest-bearing liabilities (such as deposits). Because a portion of the loans
we originate have fixed rates of interest and have longer effective maturities
than our interest-bearing liabilities, the yield on our interest-earning assets
generally will adjust more slowly to changes in interest rates than the cost of
our interest-bearing liabilities. As a result, our net interest income will be
adversely affected by material and prolonged increases in interest rates since
our interest expense would increase at a faster rate than our interest income.
Our earnings may also be adversely affected by rising interest rates due to
decreased customer demand. Although we attempt to reduce this risk by primarily
originating adjustable-rate loans ("ARMs"), the rates on such loans are fixed
for set periods of time (e.g., one year). In addition, the terms of such loans
do not permit us to increase the rate more than 2.0% at each rate adjustment or
above a fixed "ceiling rate." We may also experience an increase in
delinquencies on our ARMs when interest rates rise since the payments that
borrowers are then required to pay will increase.
The average life of loans and mortgage-backed securities can also be
affected by changes in interest rates. As interest rates decline, borrowers
tend to refinance higher-rate, fixed rate loans at lower rates. We also
experience an increase in prepayments on mortgage-backed securities as the
2
loans underlying such securities are prepaid. Since rates will have declined, we
will not be able to reinvest such prepayments in assets earning interest rates
as high as the rates on the prepaid loans or mortgage-backed securities. As a
result our interest income could decline.
MARKET AREA AND RESOURCE LIMITATIONS
Our primary market area consists of St. Lawrence County, New York.
Population growth in St. Lawrence County is below that of the state of New York
and the United States as a whole. This trend is expected to continue in the
future. Our ability to make new loans in our market area may be limited to the
extent that the rate of population growth is flat or even declines. Further, on
average, the household income within our market area is substantially below the
average for New York as a whole and the United States. Within our market area,
we compete for loans and deposits with several other financial institutions.
Many competing institutions may have resources substantially greater than ours
and may therefore be able to offer a greater variety of loan and deposit
accounts which could give them a competitive advantage over us. Such
competition could adversely affect us in the future. See "Business of
Ogdensburg Federal Savings and Loan Association -- Competition."
DEPENDENCE ON PRESIDENT
Our successful operations depend to a considerable degree on our President,
Robert Wilson. The loss of his services could adversely affect us. We have
attempted to provide for his continued employment with us by entering into a
three-year employment agreement with Mr. Wilson. Mr. Wilson could terminate his
employment at any time, however. We do not maintain key man life insurance on
Mr. Wilson. See "Management of Ogdensburg Federal Savings and Loan Association"
and " -- Executive Compensation -- Employment Agreement."
ANTI-TAKEOVER PROVISIONS AND STATUTORY PROVISIONS THAT COULD DISCOURAGE HOSTILE
ACQUISITIONS OF CONTROL
Provisions in the Company's certificate of incorporation and bylaws, the
Business Corporation Law of the State of New York, and certain federal
regulations may make it difficult, and expensive, to pursue a tender offer,
change in control or takeover attempt which we oppose. As a result,
stockholders who might desire to participate in such a transaction may not have
an opportunity to do so. Such provisions will also render the removal of the
current board of directors or management of the Company more difficult. In
addition, these provisions may reduce the trading price of our stock. These
provisions include: restrictions on the acquisition of the Company's equity
securities and limitations on voting rights; the classification of the terms of
the members of the board of directors; certain provisions relating to meetings
of stockholders; denial of cumulative voting by stockholders in the election of
directors; the issuance of preferred stock and additional shares of common stock
without shareholder approval; and super-majority provisions for the approval of
certain business combinations. See "Restrictions on Acquisitions of the
Company."
3
POSSIBLE LIABILITY OF LARGE STOCKHOLDERS
Under New York law, the ten largest stockholders of a New York corporation,
as determined by the fair value of their stock, are jointly and severally liable
for any unpaid wages due to the corporation's laborers, servants or other
employees. Corporations whose stock is either listed on a national securities
exchange or regularly quoted in an over-the-counter market by one or more
members of a national or any affiliated securities association are exempt from
this provision. Upon completion of the Offering, the Company intends to list
the common stock over-the-counter. Trident Securities, Inc., a member of the
National Association of Securities Dealers has indicated that it will make a
market in the common stock. Trident Securities, Inc. is not obligated to do so,
however, and may stop doing so at any time. If the common stock of the Company
is not either listed on a national securities exchange or regularly quoted in an
over-the-counter market, the ten largest stockholders of the Company would be
personally liable in the event the Company failed to pay wages due to laborers,
servants or employees.
INTENTION TO REMAIN INDEPENDENT
We have operated as an independent, community-oriented savings association
since 1888. It is our intention to continue to operate as an independent
community oriented financial institution following the Conversion. Accordingly,
you are urged not to subscribe for shares of our Common Stock if you are
anticipating a rapid sale by us to a third party. See "Business of the
Company."
Also due to our intention to remain independent, we have included certain
provisions in our certificate of incorporation and bylaws which will assist us
in maintaining our status as an independent, publicly owned corporation. These
provisions as well as the New York general corporation law and certain federal
regulations may have certain anti-takeover effects which include: restrictions
on the acquisition of the Company's equity securities and limitations on voting
rights; the classification of the terms of the members of the Board of
Directors; certain provisions relating to the meeting of stockholders; denial of
cumulative voting by stockholders in the election of directors; the issuance of
preferred stock and additional shares of common stock without stockholder
approval; and super majority provisions for the approval of certain business
combinations. See "Restrictions on Acquisitions of the Company." As a result,
stockholders who might wish to participate in a change of control transaction
may not have an opportunity to do so.
POSSIBLE VOTING CONTROL BY DIRECTORS AND OFFICERS
The proposed purchases of the common stock by our directors and executive
officers (estimated to be approximately 38,000 shares, or 22.03% of the shares
to be outstanding assuming 172,500 shares are sold), as well as the potential
acquisition of common stock through the Option Plan and MRP, could make it
difficult to obtain majority support for stockholder proposals which are opposed
by us. In addition, the voting of those shares could enable us to block the
approval of transactions (i.e., business combinations and amendment to our
certificate of incorporation and bylaws) requiring the approval of 80% of the
stockholders under the Company's certificate of
4
incorporation. See "Management of Ogdensburg Federal Savings and Loan
Association -- Executive Compensation --Employee Stock Ownership Plan," " --
Proposed Future Stock Benefit Plans --Stock Option Plan," " -- Management
Recognition Plan," "Description of Capital Stock," and "Restrictions on
Acquisitions of the Company."
POSSIBLE DILUTIVE EFFECT OF MRP AND STOCK OPTIONS
If the conversion is completed and stockholders subsequently approve the
MRP and Option Plan, we will issue stock to our officers and directors through
these plans. If the shares for the MRP and Option Plan are issued from our
authorized but unissued stock, your ownership percentage could be diluted by up
to approximately 3.8% and the trading price of our stock may be reduced. See
"Pro Forma Data," "Management of Ogdensburg Federal Savings and Loan Association
- -- Proposed Future Stock Benefit Plans -- Stock Option Plan," and " --
Management Recognition Plan."
FINANCIAL INSTITUTION REGULATION OF THE THRIFT INDUSTRY
We are subject to extensive regulation, supervision, and examination by the
OTS and the Federal Deposit Insurance Corporation ("FDIC"). In the most
recently completed session of Congress, the House of Representatives passed
legislation which called for the modernization of the banking system and which,
if enacted, would significantly affect the operations and regulatory structure
of financial services industry, including savings institutions like us. While
this legislation preserved the thrift charter, it would limit the powers and
activities of new unitary thrift holding companies. While the Senate failed to
act upon the legislation prior to the end of the session, legislation very
similar to this proposal has been introduced into the current Congressional
session. At this time, we do not know if any legislation of this type will
ultimately be enacted or, if enacted, what form the final legislation might
take. If legislation similar to the pending legislation is enacted into law,
the legislation could affect our competitive environment as well as our business
and operations.
NO MODIFICATION OR CANCELLATION OF SUBSCRIPTIONS
The offering is being conducted as a minimum/maximum best efforts offering.
Therefore, once investors have submitted their subscription orders, such orders
may not be modified or canceled without our consent, unless the conversion is
not completed by January 28, 1999 (or 45 days after the completion of the
Subscription Offering if the Subscription Offering is extended to a date no
later than January 3, 1999). See "The Conversion -- Payment for Shares".
MANAGEMENT'S DISCRETION IN ALLOCATING NET PROCEEDS
While there are certain limits under federal law regarding the allocation
of the net proceeds, management has broad discretion in determining the manner
of use of the net proceeds retained by the Company. Such proceeds will
initially be invested in short-term investments and will be available for a
variety of corporate purposes, including future acquisitions and diversification
of
5
business, additional capital contributions and dividends to stockholders to the
extent permitted by applicable regulations. However, there can be no assurance
that in the future management will apply the net proceeds to these purposes.
POSSIBLE ADVERSE TAX CONSEQUENCES OF THE SUBSCRIPTION RIGHTS
We have received the opinion of Feldman that the subscription rights
granted to eligible members in connection with the conversion have no value.
This opinion is not binding on the Internal Revenue Service ("IRS"), however.
Should the IRS determine that the subscription rights do have ascertainable
value, you could be taxed as a result of your exercise of such rights in an
amount equal to such value.
RESTRICTIONS ON REPURCHASE OF SHARES
Generally, during the first year following the conversion, the Company may
not repurchase its shares. During each of the second and third years following
the conversion, the Company may generally repurchase up to 5% of its outstanding
shares as long as we give notice to the OTS of our plans and the OTS does not
object. During those periods, if we decide that additional repurchases would be
a good use of funds, we would not be able to do so, without obtaining OTS
approval. There is no assurance that OTS approval would be given. See "The
Conversion -- Restrictions on Repurchase of Shares."
PROPOSED PURCHASES BY DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the approximate purchases of common stock by
each director and executive officer and their associates in the conversion. The
table assumes that 172,500 shares (the maximum of the Estimated Valuation Range)
of the common stock will be sold at $10.00 per share and that sufficient shares
will be available to satisfy their subscriptions.
AGGREGATE
TOTAL PRICE OF PERCENT
SHARES SHARES OF SHARES
NAME POSITION PURCHASED PURCHASED PURCHASED
- ---- -------- --------- --------- -------------
Robert E. Hentschel Chairman 7,000 $ 70,000 4.06%
Anthony P. LeBarge, Sr. Director 8,000 $ 80,000 4.64%
George E. Silver Director 8,000 $ 80,000 4.64%
Wesley L. Stitt Director 7,000 $ 70,000 4.06%
Robert E. Wilson President and Chief 8,000 $ 80,000 4.64%
Executive Officer; Director
All directors and executive
officers as a group (5 persons) 38,000 $380,000 22.03%
6
THE COMPANY
The Company was formed as a New York corporation in September 1998 at our
direction for the purpose of serving as our holding company after the
conversion. Prior to the conversion, it has not engaged and is not expected to
engage in any material operations. The Company has received the approval of the
OTS to acquire control of us upon completion of the conversion. Upon
consummation of the conversion, the only assets the Company is expected to own
are the capital stock we will issue in the conversion, a note receivable from
our ESOP and any proceeds from the offering it retains.
As a holding company, the Company will have greater flexibility than we
would have to diversify its business activities through the formation of
subsidiaries or through acquisition. The Company will be classified as a unitary
savings and loan holding company after the conversion and will be required to
comply with OTS regulations and be subject to examination.
The Company's executive offices are located at 825 State Street,
Ogdensburg, New York, and its main telephone number is (315) 393-4340.
OGDENSBURG FEDERAL SAVING AND LOAN ASSOCIATION
We are a federal mutual savings and loan association operating through one
office in Ogdensburg, New York. We were founded in 1888. We are a member of
the FHLB System. Our deposits are insured up to applicable limits by the
Federal Deposit Insurance Corporation ("FDIC") under the SAIF. At June 30,
1998, we had total assets of $24.2 million, total deposits of $22.4 million and
total equity of $1.6 million.
Our principal business consists of attracting deposits from the general
public and originating residential mortgage loans. We also offer various types
of consumer loans and a limited number of commercial real estate and commercial
business loans.
Our executive offices are located at 825 State Street, Ogdensburg, New York
and our main telephone number is (315) 393-4340.
USE OF PROCEEDS
The Company will retain 50% of the net proceeds from the offering. The
balance will be used to purchase all of the capital stock we will issue in
connection with the conversion. A portion of the net proceeds to be retained by
the Company will be lent to our ESOP to fund its purchase of 8% of the shares
sold in the conversion. On a short-term basis, the balance of the net proceeds
retained by the Company initially will be invested in short-term investments.
The net proceeds subsequently may be used to fund acquisitions of other
financial services institutions or to diversify
7
into non-banking activities, although we have no current plans or agreements to
do so. Subject to applicable regulatory restrictions, the net proceeds may also
serve as a source of funds for the repurchase of shares or for the payment of
dividends to stockholders, although the Company has not yet adopted a dividend
policy. A portion of the net proceeds may also be used to fund the purchase of
4.0% of the shares for the MRP, which is anticipated to be adopted following the
conversion. See "Pro Forma Data."
The funds we receive from the sale of our capital stock to the Company will
be added to our general funds and be used for general corporate purposes
including: (i) investment in mortgages and other loans, (ii) U.S. Government
and federal agency securities, (iii) mortgage-backed securities, or (iv) funding
loan commitments. However, initially, we intend to invest the proceeds in
short-term investments until we can deploy the proceeds into higher yielding
loans. The funds added to our capital will further strengthen our capital
position.
Set forth below is our estimate of the net proceeds from the offering along
with our estimate of the portion of the net proceeds to be retained by the
Company. The net proceeds may vary because the total expenses of the conversion
may be more or less than those estimated. We expect our estimated expenses to
be $350,000.
MINIMUM MAXIMUM
OF 127,500 OF 198,375
SHARES AT SHARES AT
$10.00 PER SHARE $10.00 PER SHARE
---------------- ----------------
Gross offering proceeds.................... $1,275,000 $1,983,750
Less estimated offering expenses........... 350,000 350,000
---------- ----------
Net offering proceeds............. $ 925,000 $1,633,750
========== ==========
MINIMUM MAXIMUM
------------------- -------------------
AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
Allocation of Net Proceeds:
Purchase of Association common stock
by Company........................... $462,500 50% $816,875 50%
Loan to ESOP............................. 102,000 8% 158,700 8%
Proceeds retained by Company............. 360,500 42% 658,175 42%
The net proceeds will also vary if the number of shares to be issued in the
conversion is adjusted to reflect a change in our estimated pro forma market
value. Payments for shares made through withdrawals from existing deposit
accounts with us will not result in the receipt of new funds for investment by
us but will result in a reduction of our liabilities and interest expense as
funds are transferred from interest-bearing certificates or accounts.
For a period of one year following the completion of the conversion, we
will not pay any dividends that would be construed as a return of capital nor
take any actions to pursue or propose such dividends.
8
DIVIDENDS
The Company does not anticipate paying cash dividends during the first year
following the conversion. After such period, the Company will periodically
review the possible adoption of a dividend policy. However, declarations of
dividends by the board of directors will depend upon a number of factors,
including: (i) the amount of the net proceeds retained by the Company in the
conversion, (ii) investment opportunities available, (iii) capital
requirements, (iv) regulatory limitations, (v) results of operations and
financial condition, (vi) tax considerations, and (vii) general economic
conditions. Upon review of such considerations, the board may authorize future
dividends if it deems such payment appropriate and in compliance with applicable
law and regulation. In addition, from time to time in an effort to manage
capital at a desirable level, the board may determine to pay special cash
dividends. Special cash dividends may be paid in addition to, or in lieu of,
regular cash dividends. In addition, there can be no assurance that regular or
special dividends will be paid, or, if paid, will continue to be paid. See
"Historical and Pro Forma Capital Compliance," "The Conversion -- Effects of
Conversion to Stock Form on Depositors and Borrowers of Ogdensburg Federal
Savings and Loan Association -- Liquidation Account" and "Regulation --Dividend
and Other Capital Distribution Limitations."
The Company is not subject to OTS regulatory restrictions on the payment of
dividends to its stockholders although the source of such dividends will be
dependent in part upon the receipt of dividends from us. The Company is
subject, however, to the requirements of New York law. Under New York law, the
Company may declare and pay dividends or make other distributions which may
include cash, its bonds, its property, or shares and bonds of other
corporations, on its outstanding shares, except when (i) the Company is
insolvent or would be made insolvent by the payment of the dividend, and (ii)
when declaration, payment or distribution would be contrary to any restrictions
contained in the Company's certificate of incorporation. Dividends may be
declared and paid out of the Company's surplus only, so that the net assets
remaining after such declaration, payment or distribution will at least equal
the amount of its stated capital.
In addition to the foregoing, the portion of our earnings which have been
appropriated for bad debt reserves and deducted for federal income tax purposes
cannot be used by us to pay cash dividends to the Company without the payment of
federal income taxes by us at the then current income tax rate on the amount
deemed distributed, which would include the amount of any federal income taxes
attributable to the distribution. See "Taxation -- Federal Taxation" and Note 9
to the Financial Statements. The Company does not contemplate any distribution
by us that would result in a recapture of our bad debt reserve or otherwise
create federal tax liabilities.
9
MARKET FOR THE COMMON STOCK
The Company has never issued common stock to the public. Consequently,
there is no established market for the common stock. Following completion of
the Offering, the Company intends to list the common stock over-the-counter
through the OTC "Electronic Bulletin Board" and the Company intends to request
that Trident Securities Inc. undertake to match offers to buy and offers to sell
the common stock. Trident Securities has no obligation to match offers to buy
and offers to sell and may cease doing so at any time. In addition, the
existence of a public trading market will depend upon the presence in the market
of both willing buyers and willing sellers at any given time. The presence of a
sufficient number of buyers and sellers at any given time is a factor over which
neither the Company nor any broker or dealer has control. Due to the relatively
small number of shares of common stock being offered in the conversion and the
concentration of ownership, it is unlikely that an active or liquid trading
market will develop or be maintained. The absence of an active and liquid
trading market may make it difficult for you to sell your common stock and may
have an adverse effect on the price of the common stock. Purchasers should
consider the potentially illiquid and long-term nature of their investment in
the shares offered hereby.
The aggregate price of the common stock is based upon an independent
appraisal of the pro forma market value of the common stock. However, there can
be no assurance that you will be able to sell the common stock you purchase in
the conversion at or above the price you paid for your shares.
10
CAPITALIZATION
The following table presents our historical capitalization as of June 30,
1998 and the pro forma consolidated capitalization of the Company after giving
effect to the conversion, based upon the sale of the number of shares shown
below and the other assumptions set forth under "Pro Forma Data."
PRO FORMA CONSOLIDATED CAPITALIZATION OF
THE COMPANY BASED ON THE SALE OF
------------------------------------------------------------------
MAXIMUM,
MINIMUM OF MIDPOINT OF MAXIMUM OF AS ADJUSTED,
HISTORICAL AT 127,500 SHARES 150,000 SHARES 172,500 SHARES 198,375 SHARES
JUNE 30, AT $10.00 AT $10.00 AT $10.00 AT $10.00
1998 PER SHARE PER SHARE PER SHARE PER SHARE
---------------------------------------------------------------------------------
(IN THOUSANDS)
Deposits (1)..................................... $22,356 $22,356 $22,356 $22,356 $22,356
Borrowings....................................... -- -- -- -- --
------------- ------- ------- ------- -------
Total deposits and borrowings................. $22,356 $22,356 $22,356 $22,356 $22,356
============= ======= ======= ======= =======
Capital stock:
Preferred stock, $0.01 par value per share:
authorized - 500,000 shares;
assumed outstanding - none................... $ -- $ -- $ -- $ -- $ --
Common stock, $0.01 par value per share
authorized - 3,000,000 shares;
shares to be outstanding - as shown.......... -- 1 2 2 2
Additional paid-in capital (2)................. -- 924 1,148 1,373 1,632
Less: Common stock acquired by ESOP (3)........ -- (102) (120) (138) (159)
Common stock acquired by MRP (4)......... -- (51) (60) (69) (79)
Retained earnings.............................. 1,648 1,648 1,648 1,648 1,648
Plus: Accumulated other comprehensive income.. -- -- -- -- --
------------- ------- ------- ------- -------
Total stockholders' equity................... $ 1,648 $ 2,420 $ 2,618 $ 2,816 $ 3,044
============= ======= ======= ======= =======
------------------------
(1) Withdrawals from savings accounts for the purchase of stock have not been
reflected in these adjustments. Any withdrawals will reduce pro forma
capitalization by the amount of such withdrawals.
(2) Based upon the estimated net proceeds from the sale of capital stock less
the par value of shares sold.
(3) Assumes 8% of the shares of common stock to be sold in the conversion are
purchased by the ESOP and that the funds used to purchase such shares are
borrowed from the Company. See "Pro Forma Data" for additional details.
(4) Assumes the Company issues 4.0% of the shares sold in the offering to the
MRP and the purchase price for the shares purchased by the MRP was equal to
the purchase price of $10 per share. If the MRP were funded by authorized
but unissued shares, stockholders' interests would be diluted by
approximately 3.8%. Implementation of the MRP within one year of
conversion would require regulatory and stockholder approval at a meeting
of our stockholders to be held no earlier than six months after the
conversion.
11
HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE
The following table shows our historical capital position relative to our
regulatory capital requirements as of June 30, 1998 and on a pro forma basis
after giving effect to the conversion and based upon the sale of the number of
shares shown below and the other assumptions set forth under "Pro Forma Data."
The definitions of the terms used in the table are those provided in the capital
regulations issued by the OTS. For a discussion of the capital standards
applicable to us, see "Regulation -- Regulation of the Association -- Regulatory
Capital Requirements."
PRO FORMA AT JUNE 30, 1998 BASED ON THE SALE OF /(1)/:
--------------------------------------------------------------------------
MINIMUM OF MIDPOINT OF MAXIMUM OF MAXIMUM, AS ADJUSTED
127,500 SHARES 150,000 SHARES 172,500 SHARES 198,375 SHARES
HISTORICAL AT AT $10.00 AT $10.00 AT $10.00 AT $10.00
JUNE 30, 1998 PER SHARE PER SHARE PER SHARE PER SHARE
------------------- ----------------------------------------------------------------------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF PERCENT OF
AMOUNT ASSETS (2) AMOUNT ASSETS (2) AMOUNT ASSETS (2) AMOUNT ASSETS (2) AMOUNT ASSETS (2)
------ ----------- ------ ----------- ------ ----------- ------ ---------- ------- ----------
(DOLLARS IN THOUSANDS)
Capital under generally
accepted accounting
principles................ $1,648 6.80% $1,958 7.94% $2,043 8.25% $2,129 8.56% $2,227 8.91%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
Tangible capital........... $1,648 6.80% $1,958 7.94% $2,043 8.25% $2,129 8.56% $2,227 8.91%
Tangible capital
requirement............... 364 1.50 370 1.50 371 1.50 373 1.50 375 1.50
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Excess.................. $1,284 5.30% $1,588 6.44% $1,622 6.75% $1,756 7.06% $1,852 7.41%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
Core capital............... $1,648 6.80% $1,958 7.94% $2,043 8.25% $2,129 8.56% $2,227 8.91%
Core capital requirement... 727 3.00 740 3.00 743 3.00 746 3.00 750 3.00
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Excess.................. $ 921 5.80% $1,218 4.94% $1,300 5.25% $1,383 5.56% $1,477 5.91%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
Risk-based capital......... $1,813 13.19% $2,123 15.19% $2,208 15.73% $2,294 16.27% $2,392 16.89%
Risk-based capital
requirement............... 1,100 8.00 1,118 8.00 1,123 8.00 1,128 8.00 1,133 8.00
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Excess.................. $ 713 5.19% $1,005 7.19% $1,085 7.73% $1,166 8.27% $1,259 8.89%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
- -------------------------
(1) Assumes that the Company will retain 50% of the net proceeds at the
minimum, midpoint, maximum and maximum, as adjusted, with the remainder to
be used by the Company to purchase all of our capital stock to be issued
upon conversion. Assumes net proceeds distributed to the Company or to us
initially are invested in short-term securities that carry a risk-weight
equal to the ratio of risk-weighted assets to total assets at June 30,
1998. Assumes the ESOP purchases 8% of the shares to be sold in the
conversion and borrows the funds needed to purchase such shares from the
Company. Although repayment of such debt will be secured solely by the
shares purchased by the ESOP, we expect to make discretionary contributions
to the ESOP in an amount at least equal to the principal and interest
payments on the ESOP debt. The approximate amount expected to be borrowed
by the ESOP is not reflected in this table as borrowed funds but is
reflected as a reduction of capital. Assumes a number of issued and
outstanding shares of common stock equal to 4% of the common stock to be
sold in the conversion will be purchased by the MRP after the conversion.
The dollar amount of the common stock possibly to be purchased by the MRP
is based on the price per share in the conversion and represents unearned
compensation and is reflected as a reduction of capital. Such amounts do
not reflect possible increases or decreases in the value of such stock
relative to the price per share in the conversion. As we accrue
compensation expense to reflect the vesting of such shares pursuant to the
MRP, the charge against capital will be reduced accordingly. Does not
reflect a possible increase in capital upon the exercise of options by
participants in the Option Plan, under which directors, executive officers
and other employees could be granted options to purchase an aggregate
amount of common stock equal to 10% of the shares issued in the conversion
(15,000 shares at the midpoint of the Estimated Valuation Range) at
exercise prices equal to the market price of the common stock on the date
of grant. Under the MRP and the Option Plan, shares issued to participants
could be newly issued shares or, subject to regulatory restrictions, shares
repurchased in the market. The MRP and the Option Plan are required to be
approved by the Company's stockholders and will not be implemented until at
least six months after the conversion. See "Management of Ogdensburg
Federal Savings and Loan Association --Proposed Future Stock Benefit
Plans."
(2) Based on our total assets determined under generally accepted accounting
principles for equity purposes, adjusted total assets for the purposes of
the tangible and core capital requirements ($24.2 million, $24.7 million,
$24.8 million, $24.9 million and $25.1 million, respectively, at June 30,
1998 and on a pro forma basis at the minimum, midpoint, maximum and
maximum, as adjusted, of the Estimated Valuation Range) and risk-weighted
assets for the purpose of the risk-based capital requirement ($13.8
million, $14.0 million, $14.0 million, $14.1 million and $14.2 million,
respectively, at June 30, 1998 and on a pro forma basis at the minimum,
midpoint, maximum and maximum, as adjusted, of the Estimated Valuation
Range).
12
PRO FORMA DATA
The actual net proceeds from the sale of the common stock cannot be
determined until the conversion is completed. However, net proceeds are
currently estimated to be between $925,000 and $1.6 million at the minimum and
maximum, as adjusted, of the Estimated Valuation Range, based upon the following
assumptions: (i) all of the shares will be sold in the Subscription or Community
Offering; (ii) expenses, including the marketing fee of $60,000 to be paid to
Trident Securities, printing costs, legal and accounting fees, appraisal fees
and other miscellaneous expenses will amount to $350,000. Actual conversion
expenses may vary from this assumption.
The following tables set forth our historical net earnings and
stockholders' equity prior to the conversion and the pro forma consolidated net
income and stockholders' equity of the Company following the conversion. Pro
forma consolidated net income and stockholders' equity have been calculated as
if the common stock to be issued in the conversion had been sold at January 1,
1998 and January 1, 1997, respectively, and, in each case, the estimated net
proceeds had been invested at 5.37%, which was approximately equal to the one-
year U.S. Treasury bill rate at June 30, 1998. The one-year U.S. Treasury bill
rate, rather than an arithmetic average of the average yield on interest-earning
assets and average rate paid on deposits, has been used to estimate income on
net proceeds because it is believed that it is a more accurate estimate of the
rate that would be obtained on an investment of net proceeds from the offering.
In calculating pro forma income, an effective state and federal income tax rate
of 38% has been assumed, resulting in an after tax yield of 3.33%. Withdrawals
from deposit accounts for the purchase of shares are not reflected in the pro
forma adjustments. As discussed under "Use of Proceeds," the Company expects to
retain 50% of the net conversion proceeds, part of which will be lent to the
ESOP to fund its purchase of 8.0% of the shares issued in the conversion. No
effect has been given in the pro forma stockholders' equity calculation for the
assumed earnings on the net proceeds. Historical and pro forma per share amounts
have been calculated by dividing historical and pro forma amounts by the
indicated number of shares.
THE STOCKHOLDERS' EQUITY INFORMATION IS NOT INTENDED TO REPRESENT THE FAIR
MARKET VALUE OF THE COMMON STOCK, OR THE CURRENT VALUE OF OUR ASSETS OR
LIABILITIES, OR THE AMOUNTS, IF ANY, THAT WOULD BE AVAILABLE FOR DISTRIBUTION TO
STOCKHOLDERS IN THE EVENT OF LIQUIDATION. FOR ADDITIONAL INFORMATION REGARDING
THE LIQUIDATION ACCOUNT, SEE "THE CONVERSION -- EFFECTS OF CONVERSION TO STOCK
FORM ON DEPOSITORS AND BORROWERS OF OGDENSBURG FEDERAL SAVINGS AND LOAN
ASSOCIATION -- LIQUIDATION ACCOUNT." THE PRO FORMA INCOME DERIVED FROM THE
ASSUMPTIONS SET FORTH ABOVE SHOULD NOT BE CONSIDERED INDICATIVE OF THE ACTUAL
RESULTS OF OUR OPERATIONS FOR ANY PERIOD. SUCH PRO FORMA DATA MAY BE MATERIALLY
AFFECTED BY A CHANGE IN THE PRICE PER SHARE OR NUMBER OF SHARES TO BE ISSUED IN
THE CONVERSION AND BY OTHER FACTORS.
13
AT OR FOR THE SIX MONTHS ENDED JUNE 30, 1998
------------------------------------------------------
MAXIMUM, AS
MINIMUM OF MIDPOINT OF MAXIMUM OF ADJUSTED, OF
127,500 150,000 172,500 198,375
SHARES SHARES SHARES SHARES
AT $10.00 AT $10.00 AT $10.00 AT $10.00
PER SHARE PER SHARE PER SHARE PER SHARE
---------- ------------ ----------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Gross proceeds.............................................. $ 1,275 $ 1,500 $ 1,725 $ 1,984
Less estimated offering expenses............................ (350) (350) (350) (350)
-------- -------- -------- --------
Estimated net conversion proceeds........................ $ 925 $ 1,150 $ 1,375 $ 1,634
======== ======== ======== ========
Less: Common stock acquired by ESOP........................ $ (102) $ (120) $ (138) $ (159)
Common stock acquired by MRP......................... (51) (60) (69) (79)
-------- -------- -------- --------
Estimated investable net proceeds........................ $ 772 $ 970 $ 1,168 $ 1,396
======== ======== ======== ========
Net income:
Historical net income.................................... $ 72 $ 72 $ 72 $ 72
Pro forma adjustments:
Net income on net proceeds............................. 13 16 19 23
ESOP (1)............................................... (3) (4) (4) (5)
MRP (2)................................................ (3) (4) (4) (5)
-------- -------- -------- --------
Pro forma net income.............................. $ 79 $ 80 $ 83 $ 85
======== ======== ======== ========
Net income per share:(3)
Historical net income.................................... $ 0.61 $ 0.52 $ 0.45 $ 0.39
Pro forma adjustments:
Net income on net proceeds............................. 0.11 0.12 0.12 0.13
ESOP (1)............................................... (0.03) (0.03) (0.03) (0.03)
MRP (2)................................................ (0.03) (0.03) (0.03) (0.03)
-------- -------- -------- --------
Pro forma net income per share (3)................ $ 0.66 $ 0.58 $ 0.51 $ 0.46
======== ======== ======== ========
Number of shares............................................ 117,810 138,600 159,390 183,299
======== ======== ======== ========
Stockholders' equity (book value): (4)
Historical............................................... $ 1,648 $ 1,648 $ 1,648 $ 1,648
Estimated net conversion proceeds (2).................... 925 1,150 1,375 1,634
Less: Common stock acquired by ESOP (1).............. (102) (120) (138) (159)
Common stock acquired by MRP (2)............... (51) (60) (69) (79)
-------- -------- -------- --------
Total................................................ $ 2,420 $ 2,618 $ 2,816 $ 3,044
======== ======== ======== ========
Stockholders' equity per share:(3)(4)
Historical............................................... $ 12.93 $ 10.99 $ 9.55 $ 8.31
Estimated net conversion proceeds........................ 7.25 7.67 7.97 8.24
Less: Common stock acquired by ESOP (1).............. (0.80) (0.80) (0.80) (0.80)
Common stock acquired by MRP (2)............... (0.40) (0.40) (0.40) (0.40)
-------- -------- -------- --------
Pro forma............................................ $ 18.98 $ 17.45 $ 16.32 $ 15.34
======== ======== ======== ========
Price to pro forma earnings multiple........................ 7.58% 8.62% 9.80% 10.87%
======== ======== ======== ========
Price to pro forma book value per share(4).................. 52.69% 57.30% 61.26% 65.17%
======== ======== ======== ========
(Footnotes on succeeding page)
14
(footnotes continued from preceding page)
______________
(1) Assumes the ESOP purchases 8% of the shares sold in the conversion and the
Company lends the ESOP the funds to do so. The approximate amount expected
to be borrowed by the ESOP from the Company is reflected as a reduction of
stockholders' equity. We intend to make annual contributions to the ESOP
over a 10 year period in an amount at least equal to the principal and
interest requirement of the debt. The pro forma net income assumes: (i) the
ESOP loan is payable over 10 years, (ii) the average fair value of the ESOP
shares is $10.00 per share in accordance with Statement of Position ("SOP")
93-6 of the American Institute of Certified Public Accountants ("AICPA"),
and (iii) the effective tax rate was 38% for such period. The pro forma
stockholders' equity per share calculation assumes all ESOP shares were
outstanding, regardless of whether such shares would have been released.
ESOP expense is based upon generally accepted accounting principles as
described in accounting SOP 93-6. Generally accepted accounting principles
require that as and when shares pledged as security for an ESOP loan are
committed to be released from the loan (i.e., as the loan is repaid), ESOP
expense is recorded based upon the fair value of the shares at that time.
The ESOP loan is assumed to have a term of ten years. It is therefore
assumed that one-tenth of the Common Stock acquired by the ESOP is
committed to be released from the lien of the ESOP loan each year, and one-
fortieth each calendar quarter. ESOP expense shown is equal to the number
of shares so committed to be released for the period, multiplied by the per
share fair value at that time, which is assumed to be $10.00 per share. All
shares committed to be released during the period are assumed to be
outstanding for the entire period for the purpose of calculating earnings
per share. Shares not yet committed to be released are not deemed to be
outstanding for calculating earnings per share.
(2) Assumes the Company issues 4.0% of the shares sold in the offering to the
MRP and the purchase price for the shares purchased by the MRP was equal to
the purchase price of $10 per share and 10% of the amount contributed was
an amortized expense during such period. As we accrue compensation expense
to reflect the five-year vesting period of such shares pursuant to the MRP,
the charge against capital will be reduced accordingly. In calculating the
pro forma effect of the MRP, an effective state and federal income tax rate
of 38% has been assumed. Implementation of the MRP within one year of
conversion would require regulatory and stockholder approval at a meeting
of our stockholders to be held no earlier than six months after the
conversion. For purposes of this table, it is assumed that the MRP will be
adopted by the board of directors, reviewed by the OTS, and approved by the
stockholders, and that the MRP will purchase the shares in the open market
within the year following the conversion. If the shares to be purchased by
the MRP are assumed at January 1, 1998, to be newly issued shares purchased
from the Company at the minimum, midpoint, maximum and maximum, as
adjusted, of the Estimated Valuation Range, pro forma stockholders' equity
per share would have been $18.63, $17.17, $16.08, and $15.14 at June 30,
1998, respectively. As a result of the MRP, stockholders' interests will be
diluted by approximately 3.8%. See "Management of Ogdensburg Federal
Savings and Loan Association -- Proposed Future Stock Benefit Plans --
Management Recognition Plan."
(3) Per share data has been computed based on the assumed numbers of shares
sold in the conversion less ESOP shares. This treatment is in accordance
with SOP 93-6. No effect has been given to shares to be reserved for
issuance pursuant to the Option Plan. Accordingly, 9,690, 11,400, 13,110
and 15,076 shares have been subtracted from the shares assumed to be sold
at the minimum, midpoint, maximum, and maximum, as adjusted, of the
Estimated Valuation Range, respectively, and 117,810, 138,600, 159,390 and
183,299 shares are assumed to be outstanding at the minimum, midpoint,
maximum, and maximum, as adjusted of the Estimated Valuation Range.
(4) Consolidated stockholders' equity represents the excess of the carrying
value of the assets over its liabilities. The amounts shown do not reflect
the federal income tax consequences of the potential restoration to income
of the tax bad debt reserves for income tax purposes, which would be
required in the event of liquidation. The amounts shown also do not reflect
the amounts required to be distributed in the event of liquidation to
eligible depositors from the liquidation account which will be established
upon the consummation of the conversion. Pro forma stockholders' equity
information is not intended to represent the fair market value of the
shares, the current value of our assets or liabilities or the amounts, if
any, that would be available for distribution to stockholders in the event
of liquidation. Such pro forma data may be materially affected by a change
in the number of shares to be sold in the conversion and by other factors.
15
AT OR FOR THE YEAR ENDED DECEMBER 31, 1997
----------------------------------------------------
MAXIMUM, AS
MINIMUM OF MIDPOINT OF MAXIMUM OF ADJUSTED, OF
127,500 150,000 172,500 198,375
SHARES SHARES SHARES SHARES
AT $10.00 AT $10.00 AT $10.00 AT $10.00
PER SHARE PER SHARE PER SHARE PER SHARE
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Gross proceeds............................... $ 1,275 $ 1,500 $ 1,725 $ 1,984
Less estimated offering expenses............. (350) (350) (350) (350)
-------- -------- -------- --------
Estimated net conversion proceeds........... $ 925 $ 1,150 $ 1,375 $ 1,634
======== ======== ======== ========
Less: Common stock acquired by ESOP.......... $ (102) $ (120) $ (138) $ (159)
Common stock acquired by MRP........... (51) (60) (69) (79)
-------- -------- -------- --------
Estimated investable net proceeds........... $ 772 $ 970 $ 1,168 $ 1,396
======== ======== ======== ========
Net income:
Historical net income....................... $ 88 $ 88 $ 88 $ 88
Pro forma adjustments:
Net income on net proceeds................. 26 33 40 47
ESOP (1)................................... (6) (7) (9) (10)
MRP (2).................................... (6) (7) (9) (10)
-------- -------- -------- --------
Pro forma net income................... $ 102 $ 107 $ 110 $ 115
======== ======== ======== ========
Net income per share:(3)
Historical net income....................... $ 0.74 $ 0.63 $ 0.55 $ 0.48
Pro forma adjustments:
Net income on net proceeds................. 0.22 0.24 0.25 0.26
ESOP (1)................................... (0.05) (0.05) (0.06) (0.05)
MRP (2).................................... (0.05) (0.05) (0.06) (0.05)
-------- -------- -------- --------
Pro forma net income per share (3)...... $ 0.86 $ 0.77 $ 0.68 $ 0.64
======== ======== ======== ========
Number of shares............................. 118,320 139,200 160,080 184,092
======== ======== ======== ========
Stockholders' equity (book value): (4)
Historical.................................. $ 1,577 $ 1,577 $ 1,577 $ 1,577
Estimated net conversion proceeds (2)....... 925 1,150 1,375 1,634
Less: Common stock acquired by ESOP (1).. (102) (120) (138) (159)
Common stock acquired by MRP (2)... (51) (60) (69) (79)
-------- -------- -------- --------
Total.................................... $ 2,349 $ 2,547 $ 2,745 $ 2,973
======== ======== ======== ========
Stockholders' equity per share:(3)(4)
Historical.................................. $ 12.36 $ 10.51 $ 9.14 $ 7.95
Estimated net conversion proceeds........... 7.25 7.67 7.97 8.24
Less: Common stock acquired by ESOP (1).. (0.80) (0.80) (0.80) (0.80)
Common stock acquired by MRP (2)... (0.40) (0.40) (0.40) (0.40)
-------- -------- -------- --------
Pro forma................................ $ 18.42 $ 16.97 $ 15.91 $ 14.99
======== ======== ======== ========
Price to pro forma earnings multiple......... 11.63% 12.99% 14.71% 15.63%
======== ======== ======== ========
Price to pro forma book value per share(4)... 54.30% 58.92% 62.86% 66.75%
======== ======== ======== ========
(Footnotes on succeeding page)
16
(footnotes continued from preceding page)
________________
(1) Assumes the ESOP purchases 8% of the shares sold in the conversion and the
Company lends the ESOP the funds to do so. The approximate amount expected
to be borrowed by the ESOP from the Company is reflected as a reduction of
stockholders' equity. We intend to make annual contributions to the ESOP
over a 10 year period in an amount at least equal to the principal and
interest requirement of the debt. The pro forma net income assumes: (i)
the ESOP loan is payable over 10 years, (ii) the average fair value of the
ESOP shares is $10.00 per share in accordance with SOP 93-6 of the AICPA,
and (iii) the effective tax rate was 38% for such period. The pro forma
stockholders' equity per share calculation assumes all ESOP shares were
outstanding, regardless of whether such shares would have been released.
ESOP expense is based upon generally accepted accounting principles as
described in accounting SOP 93-6. Generally accepted accounting principles
require that as and when shares pledged as security for an ESOP loan are
committed to be released from the loan (i.e., as the loan is repaid), ESOP
expense is recorded based upon the fair value of the shares at that time.
The ESOP loan is assumed to have a term of ten years. It is therefore
assumed that one-tenth of the Common Stock acquired by the ESOP is
committed to be released from the lien of the ESOP loan each year, and one-
fortieth each calendar quarter. ESOP expense shown is equal to the number
of shares so committed to be released for the period, multiplied by the per
share fair value at that time, which is assumed to be $10.00 per share.
All shares committed to be released during the period are assumed to be
outstanding for the entire period for the purpose of calculating earnings
per share. Shares not yet committed to be released are not deemed to be
outstanding for calculating earnings per share.
(2) Assumes the Company issues 4.0% of the shares sold in the offering to the
MRP and the purchase price for the shares purchased by the MRP was equal to
the purchase price of $10 per share and 20% of the amount contributed was
an amortized expense during such period. As we accrue compensation expense
to reflect the five-year vesting period of such shares pursuant to the MRP,
the charge against capital will be reduced accordingly. In calculating the
pro forma effect of the MRP, an effective state and federal income tax rate
of 38% has been assumed. Implementation of the MRP within one year of
conversion would require regulatory and stockholder approval at a meeting
of our stockholders to be held no earlier than six months after the
conversion. For purposes of this table, it is assumed that the MRP will be
adopted by the board of directors, reviewed by the OTS, and approved by the
stockholders, and that the MRP will purchase the shares in the open market
within the year following the conversion. If the shares to be purchased by
the MRP are assumed at January 1, 1997, to be newly issued shares purchased
from the Company at the minimum, midpoint, maximum and maximum, as
adjusted, of the Estimated Valuation Range, pro forma stockholders' equity
per share would have been $18.09, $16.71, $15.68, and $14.79 at June 30,
1998, respectively. As a result of the MRP, stockholders' interests will
be diluted by approximately 3.8%. See "Management of Ogdensburg Federal
Savings and Loan Association -- Proposed Future Stock Benefit Plans --
Management Recognition Plan."
(3) Per share data has been computed based on the assumed numbers of shares
sold in the conversion less ESOP shares that have not been committed for
release. This treatment is in accordance with SOP 93-6. No effect has
been given to shares to be reserved for issuance pursuant to the Option
Plan. Pro forma net income per share calculations include the number of
shares assumed to be sold in the conversion and, in accordance with SOP 93-
6, exclude ESOP shares which would not have been released during the
period. Accordingly, 9,180, 10,800, 12,420 and 14,283 shares have been
subtracted from the shares assumed to be sold at the minimum, midpoint,
maximum, and maximum, as adjusted, of the Estimated Valuation Range,
respectively, and 118,320, 139,200, 160,080 and 184,092 shares are assumed
to be outstanding at the minimum, midpoint, maximum, and maximum, as
adjusted of the Estimated Valuation Range. See Note 1 above.
(4) Consolidated stockholders' equity represents the excess of the carrying
value of the assets over its liabilities. The calculations are based upon
the number of shares issued in the conversion, without giving effect to SOP
93-6. The amounts shown do not reflect the federal income tax consequences
of the potential restoration to income of the tax bad debt reserves for
income tax purposes, which would be required in the event of liquidation.
The amounts shown also do not reflect the amounts required to be
distributed in the event of liquidation to eligible depositors from the
liquidation account which will be established upon the consummation of the
conversion. Pro forma stockholders' equity information is not intended to
represent the fair market value of the shares, the current value of our
assets or liabilities or the amounts, if any, that would be available for
distribution to stockholders in the event of liquidation. Such pro forma
data may be materially affected by a change in the number of shares to be
sold in the conversion and by other factors.
17
THE CONVERSION
THE OTS HAS APPROVED THE PLAN SUBJECT TO THE PLAN'S APPROVAL BY OUR MEMBERS
AT A SPECIAL MEETING OF MEMBERS, AND SUBJECT TO THE SATISFACTION OF CERTAIN
OTHER CONDITIONS IMPOSED BY THE OTS IN ITS APPROVAL. OTS APPROVAL, HOWEVER,
DOES NOT CONSTITUTE A RECOMMENDATION OR ENDORSEMENT OF THE PLAN BY THE OTS.
GENERAL
On July 23, 1998, our board of directors adopted a plan of conversion,
pursuant to which we will convert from a federally chartered mutual savings and
loan association to a federally chartered stock savings and loan association and
become a wholly owned subsidiary of the Company. The conversion will include
adoption of the proposed Federal Stock Charter and Bylaws which will authorize
the issuance of capital stock by us. Under the Plan, our capital stock is being
sold to the Company and the common stock of the Company is being offered to our
customers and then to the public.
The OTS has approved the Company's application to become a savings and loan
holding company and to acquire all of our capital stock to be issued in the
conversion. Pursuant to such OTS approval, the Company plans to retain a
portion of the net proceeds from the sale of shares of common stock and to use
the remainder to purchase all of the capital stock we will issue in the
conversion.
The shares are first being offered in a Subscription Offering to holders of
subscription rights. To the extent shares of common stock remain available after
the Subscription Offering, we may offer shares of common stock in a Community
Offering. The Community Offering, if any, may begin anytime subsequent to the
beginning of the Subscription Offering. Shares not subscribed for in the
Subscription and Community Offerings may be offered for sale by the Company in a
Syndicated Community Offering. We have the right, in our sole discretion, to
accept or reject, in whole or in part, any orders to purchase shares of common
stock received in the Community and Syndicated Community Offering. See " --
Community Offering" and " -- Syndicated Community Offering."
We must sell common stock in an amount equal to our pro forma market value
as a stock savings institution in order for the conversion to become effective.
The Subscription Offering is scheduled to end on December 14, 1998 but may be
extended in the discretion of management to January 3, 1999. We must complete
the Community Offering within 45 days after the last day of the Subscription
Offering (January 28, 1999 or February 17, 1999 if the Subscription Offering is
extended to January 3, 1999), unless we extend such period and obtain the
approval of the OTS to do so. If the Company sells any shares of stock in a
Syndicated Community Offering, that offering must be completed by January 28,
1999 (or February 17, 1999 if the Subscription Offering is extended to January
3, 1999). The Plan provides that the conversion must be completed within 24
months after the date of the approval of the Plan by our members.
18
In the event that we are unable to complete the sale of common stock and
effect the conversion within 45 days after the end of the Subscription Offering,
we may request an extension of the period by the OTS. We cannot assure you that
the extension would be granted if requested, nor can we assure you that our
valuation would not substantially change during any such extension. If the
Estimated Valuation Range of the shares must be amended, we cannot assure that
the OTS would approve such amended Estimated Valuation Range. Therefore, it is
possible that if the conversion cannot be completed within the requisite period
of time, we may not be permitted to complete the conversion. A substantial
delay caused by an extension of the period may also significantly increase the
expense of the conversion. We cannot sell any shares of common stock unless the
Plan is approved by our members.
The completion of the offering is subject to market conditions and other
factors beyond our control. We cannot give you any assurances as to the length
of time following approval of the Plan at the meeting of our members that will
be required to complete the Community Offering or other sale of the shares being
offered in the conversion. If we experience delays, our estimated pro forma
market value upon conversion could change significantly, together with
corresponding changes in the offering price and the net proceeds to be realized
by us from the sale of the shares. In the event we terminate the conversion, we
would be required to charge all conversion expenses against current income and
promptly return any funds collected by us in the offering to each potential
investor, plus interest at the prescribed rate.
EFFECTS OF CONVERSION TO STOCK FORM ON DEPOSITORS AND BORROWERS OF OGDENSBURG
FEDERAL SAVINGS AND LOAN ASSOCIATION
VOTING RIGHTS. Currently in our mutual form, our depositor and borrower
members have voting rights and may vote for the election of directors.
Following the conversion, depositors and borrower members will cease to have
voting rights.
SAVINGS ACCOUNTS AND LOANS. The conversion will not affect the balances,
terms and FDIC insurance coverage of savings accounts, nor will the amounts and
terms of loans and obligations of the borrowers under their individual
contractual arrangements with us be affected.
TAX EFFECTS. We have received an opinion from our counsel, Housley
Kantarian & Bronstein, P.C. on the material federal tax consequences of the
conversion. We have filed the opinion as an exhibit to the registration
statement of which this prospectus is a part. The opinion provides, in part,
that: (i) the conversion will qualify as a reorganization under Section
368(a)(1)(F) of the Code, and we will not recognize any taxable gain in either
our mutual form or our stock form as a result of the proposed conversion; (ii)
we will not recognize any taxable gain upon the receipt of money from the
Company for our stock, nor will the Company recognize any gain upon the receipt
of money for the common stock; (iii) our assets in either our mutual or our
stock form will have the same basis before and after the conversion; (iv) the
holding period of our assets will include the period during which the assets
were held by us in our mutual form prior to conversion; (v) no gain or loss will
be recognized by the Eligible Account Holders, Supplemental Eligible Account
19
Holders, and Other Members upon the issuance to them of withdrawable savings
accounts in us in the stock form in the same dollar amount as their savings
accounts in us in the mutual form plus an interest in the liquidation account of
us in the stock form in exchange for their savings accounts in us in the mutual
form; (vi) depositors will recognize gain or loss upon the receipt of
liquidation rights and the receipt of subscription rights in the conversion, to
the extent such liquidation rights and subscription rights are deemed to have
value, as discussed below; (vii) the basis of each account holder's savings
accounts in us after the conversion will be the same as the basis of his savings
accounts in us prior to the conversion, decreased by the fair market value of
the nontransferable subscription rights received and increased by the amount, if
any, of gain recognized on the exchange; (viii) the basis of each account
holder's interest in the liquidation account will be zero; and (ix) the holding
period of the common stock acquired through the exercise of subscription rights
shall begin on the date on which the subscription rights are exercised.
With respect to the subscription rights, we have received an opinion of
Feldman which, based on certain assumptions, concludes that the subscription
rights to be received by Eligible Account Holders and other eligible subscribers
do not have any economic value at the time of distribution or at the time the
subscription rights are exercised, whether or not a public offering takes place.
Such opinion is based on the fact that such rights are: (i) acquired by the
recipients without payment therefor, (ii) non-transferable, (iii) of short
duration, and (iv) afford the recipients the right only to purchase shares at a
price equal to their estimated fair market value, which will be the same price
at which shares for which no subscription right is received in the Subscription
Offering will be offered in the Community Offering. If the subscription rights
granted to Eligible Account Holders or other eligible subscribers are deemed to
have an ascertainable value, receipt of such rights would be taxable only to
those Eligible Account Holders or other eligible subscribers who exercise the
subscription rights in an amount equal to such value (either as a capital gain
or ordinary income), and we could recognize gain on such distribution.
We are also subject to New York income taxes and have received an opinion
from Silver and Silver that the conversion will be treated for New York state
tax purposes similar to the conversion's treatment for federal tax purposes.
Unlike a private letter ruling, the opinions of Housley Kantarian &
Bronstein, P.C., Feldman and Silver and Silver have no binding effect or
official status, and we cannot give you any assurance that a court would sustain
the conclusions reached in any of those opinions if contested by the IRS or the
New York tax authorities. WE ENCOURAGE ELIGIBLE ACCOUNT HOLDERS, SUPPLEMENTAL
ELIGIBLE ACCOUNT HOLDERS, AND OTHER MEMBERS TO CONSULT WITH THEIR OWN TAX
ADVISERS AS TO THE TAX CONSEQUENCES IN THE EVENT THE SUBSCRIPTION RIGHTS ARE
DEEMED TO HAVE AN ASCERTAINABLE VALUE.
LIQUIDATION ACCOUNT. In the unlikely event of our complete liquidation in
our present mutual form, each depositor is entitled to equal distribution of any
of our assets, pro rata to the value of his accounts, remaining after payment of
claims of all creditors (including the claims of all depositors to the
withdrawal value of their accounts). Each depositor's pro rata share of such
remaining assets
20
would be in the same proportion as the value of his deposit accounts was to the
total value of all deposit accounts in us at the time of liquidation.
Upon a complete liquidation after the conversion, each depositor would have
a claim, as a creditor, of the same general priority as the claims of all other
general creditors of ours. Therefore, except as described below, a depositor's
claim would be solely in the amount of the balance in his deposit account plus
accrued interest. A depositor would not have an interest in the residual value
of our assets above that amount if any.
The Plan provides for the establishment, upon the completion of the
conversion, of a special "liquidation account" for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders in an amount equal to
our net worth as reflected in the latest statement of financial condition in the
Prospectus. Each Eligible Account Holder and Supplemental Eligible Account
Holder, if he continues to maintain his deposit account with us, would be
entitled on a complete liquidation of us after conversion, to an interest in the
liquidation account prior to any payment to stockholders. Each Eligible Account
Holder would have an initial interest in such liquidation account for each
deposit account held in us on the qualifying date, June 30, 1997. Each
Supplemental Eligible Account Holder would have a similar interest as of the
qualifying date, September 30, 1998. The interest as to each deposit account
would be in the same proportion of the total liquidation account as the balance
of the deposit account on the qualifying dates was to the aggregate balance in
all the deposit accounts of Eligible Account Holders and Supplemental Eligible
Account Holders on such qualifying dates. However, if the amount in the deposit
account on any annual closing date of ours is less than the amount in such
account on the respective qualifying dates, then the interest in this special
liquidation account would be reduced from time to time by an amount
proportionate to any such reduction, and the interest would cease to exist if
such deposit account were closed. The interest in the special liquidation
account will never be increased despite any increase in the related deposit
account after the respective qualifying dates.
No merger, consolidation, purchase of bulk assets with assumptions of
savings accounts and other liabilities, or similar transactions with another
insured institution in which transaction we, in our converted form, are not the
surviving institution shall be considered a complete liquidation. In such
transactions, the liquidation account shall be assumed by the surviving
institution.
SUBSCRIPTION RIGHTS AND THE SUBSCRIPTION OFFERING
In accordance with OTS regulations, non-transferable subscription rights to
purchase shares of the common stock have been granted to all persons and
entities entitled to purchase shares in the Subscription Offering under the
Plan. The number of shares which these parties may purchase will be determined,
in part, by the total number of shares to be issued and by the availability of
the shares for purchase under the categories set forth in the Plan. If the
Community Offering, as described below, extends beyond 45 days following the
completion of the Subscription Offering, we will resolicit subscribers and
permit them to increase, decrease or rescind their orders. Subscription
priorities have been established for the allocation of stock to the extent that
shares are available after
21
satisfaction of all subscriptions of all persons having prior rights and subject
to the maximum and minimum purchase limitations set forth in the Plan and as
described below under " -- Limitations on Purchases of Shares." The following
priorities have been established:
CATEGORY 1: ELIGIBLE ACCOUNT HOLDERS AT JUNE 30, 1997. Each Eligible
Account Holder (which collectively encompasses all names on a joint account)
will receive non-transferable subscription rights on a priority basis to
purchase up to 5,000 shares ($50,000). A minimum of 25 shares must be
subscribed for by any subscriber. If there are insufficient shares to satisfy
the orders of all Eligible Account Holders, shares shall be allocated among
subscribing Eligible Account Holders so as to permit each such account holder,
to the extent possible, to purchase the lesser of 100 shares or the total amount
of his subscription. Any shares remaining shall be allocated among the
subscribing Eligible Account Holders on an equitable basis, related to the
amounts of their respective qualifying deposits as compared to the total
qualifying deposits of all subscribing Eligible Account Holders. Subscription
rights received by officers and directors in this category based on their
increased deposits in us in the one-year period preceding June 30, 1997, are
subordinated to the subscription rights of other Eligible Account Holders. See
" -- Limitations on Purchases and Transfer of Shares."
CATEGORY 2: ESOP. The ESOP has been granted subscription rights to purchase
up to 10% of the total shares issued in the conversion.
Although the right of the ESOP to subscribe for shares is subordinate to
the right of the Eligible Account Holders, in the event the offering results in
the issuance of shares above the maximum of the Estimated Valuation Range (i.e.,
more than 172,500 shares), the ESOP has a priority right to fill its
subscription. The ESOP currently intends to purchase up to 8.0% of the common
stock issued in the conversion. The ESOP may, however, determine to purchase
some or all of the shares covered by its subscription after the conversion in
the open market or, if approved by the OTS, out of authorized but unissued
shares in the event of an over subscription.
CATEGORY 3: SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS AT SEPTEMBER 30, 1998.
Each Supplemental Eligible Account Holder (which collectively encompasses all
names on a joint account) who is not an Eligible Account Holder will receive
non-transferable subscription rights to purchase up to 5,000 shares ($50,000).
A minimum of 25 shares must be subscribed for by any subscriber. If the
allocation made in this paragraph results in an over subscription, shares shall
be allocated among subscribing Supplemental Eligible Account Holders so as to
permit each such account holder, to the extent possible, to purchase the lesser
of 100 shares or the total amount of his subscription. Any shares not so
allocated shall be allocated among the subscribing Supplemental Eligible Account
Holders on an equitable basis, related to the amounts of their respective
qualifying deposits as compared to the total qualifying deposits of all
subscribing Supplemental Eligible Account Holders. See " -- Limitations on
Purchases and Transfer of Shares."
The right of Supplemental Eligible Account Holders to subscribe for shares
is subordinate to the rights of the Eligible Account Holders and the ESOP to
subscribe for shares.
22
CATEGORY 4: OTHER MEMBERS AT NOVEMBER 12, 1998. Each Other Member (which
collectively encompasses all names on a joint account) who is not an Eligible
Account Holder or Supplemental Eligible Account Holder, will receive non-
transferable subscription rights to purchase up to 5,000 shares ($50,000) to the
extent such shares are available following subscriptions by Eligible Account
Holders, the ESOP, and Supplemental Eligible Account Holders. A minimum of 25
shares must be subscribed for by any subscriber. In the event there are not
enough shares to fill the orders of the Other Members, the subscriptions of the
Other Members will be allocated so that each subscribing Other Member will be
entitled to purchase the lesser of 100 shares or the number of shares ordered.
Any remaining shares will be allocated among Other Members whose subscriptions
remain unsatisfied on a reasonable basis. See " -- Limitations on Purchases and
Transfer of Shares."
MEMBERS IN NON-QUALIFIED STATES. We will make reasonable efforts to comply
with the securities laws of all states in the United States in which persons
entitled to subscribe for the shares pursuant to the Plan reside. However, no
person will be offered or allowed to purchase any shares under the Plan if he
resides in a foreign country or in a state with respect to which any of the
following apply: (i) a small number of persons otherwise eligible to subscribe
for shares under the Plan reside in that state or foreign country; (ii) the
granting of subscription rights or offer or sale of shares of common stock to
those persons would require either us, or our employees to register, under the
securities laws of that state or foreign country, as a broker or dealer or to
register or otherwise qualify our securities for sale in that state or foreign
country; or (iii) such registration or qualification would be impracticable for
reasons of cost or otherwise. We will not make any payment in lieu of the
granting of subscription rights to any person.
RESTRICTIONS ON TRANSFER OF SUBSCRIPTION RIGHTS AND SHARES. Persons are
prohibited from transferring or entering into any agreement or understanding to
transfer the legal or beneficial ownership of their subscription rights. Only
the person to whom they are granted may exercise subscription rights and only
for his account. Each person subscribing for shares will be required to certify
that he is purchasing shares solely for his own account and has not entered into
an agreement or understanding regarding the sale or transfer of those shares.
The regulations also prohibit any person from offering or making an announcement
of an offer or intent to make an offer to purchase subscription rights or shares
of common stock prior to the completion of the conversion.
We will pursue any and all legal and equitable remedies in the event we
become aware of the transfer of subscription rights and will not honor orders
believed by us to involve the transfer of subscription rights.
EXPIRATION DATE. The Subscription Offering will expire at 12:00 p.m.,
Eastern Time, on December 14, 1998 unless extended in the discretion of
management to no later than January 3, 1999. Subscription rights will become
void if not exercised prior to the Expiration Date (or the date to which it may
be extended).
23
COMMUNITY OFFERING
To the extent that shares remain available for purchase after filling all
orders received in the Subscription Offering, we may offer shares of common
stock to certain members of the general public residing in New York and certain
other states with a preference to natural persons and trusts of natural persons
residing in St. Lawrence County, New York under such terms and conditions as may
be established by the board of directors. In the Community Offering, the
minimum purchase is 25 shares, and no person, together with associates of and
persons acting in concert with such persons, may purchase more than 5,000 shares
($50,000).
WE MAY BEGIN THE COMMUNITY OFFERING AT ANY TIME AFTER THE SUBSCRIPTION
OFFERING HAS BEGUN. THE COMMUNITY OFFERING ONCE COMMENCED, MAY EXPIRE AT ANY
TIME WITHOUT NOTICE BUT NO LATER THAN 12:00 P.M., EASTERN TIME, ON DECEMBER 14,
1998 UNLESS WE EXTEND IT WITH THE PERMISSION OF THE OTS TO A DATE NOT LATER THAN
JANUARY 28, 1999 (OR FEBRUARY 17, 1999 IF THE SUBSCRIPTION OFFERING IS EXTENDED
TO JANUARY 3, 1999). PURCHASES OF SHARES IN THE COMMUNITY OFFERING ARE SUBJECT
TO OUR RIGHT IN OUR SOLE DISCRETION, TO ACCEPT OR REJECT SUCH PURCHASES IN WHOLE
OR IN PART EITHER AT THE TIME AND RECEIPT OF AN ORDER, OR AS SOON AS PRACTICABLE
FOLLOWING THE COMPLETION OF THE COMMUNITY OFFERING.
In the event Community Offering orders are not filled, we will promptly
refund funds received by us with interest at our passbook rate. In the event an
insufficient number of shares are available to fill all orders in the Community
Offering, the available shares will be allocated on an equitable basis
determined by the board of directors, provided however that a preference will be
given to natural persons residing in St. Lawrence County, New York. If
regulatory approval is received to extend the Community Offering beyond 45 days
following the completion of the Subscription Offering, subscribers will be
resolicited. Shares sold in the Community Offering will be sold at $10.00 per
share.
SYNDICATED COMMUNITY OFFERING
The Plan provides that, if necessary, we may offer shares of common stock
not purchased in the Subscription and Community Offerings for sale to the
general public in a Syndicated Community Offering through a syndicate of
selected dealers to be formed and managed by Trident Securities. No individual
purchaser together with any associate or group of persons acting in concert may
purchase more than 5,000 shares ($50,000). Neither Trident Securities nor any
registered broker-dealer will be obligated to take or purchase any shares in the
Syndicated Community Offering, although Trident Securities has agreed to use its
best efforts in the sales of shares in any Syndicated Community Offering.
Shares sold in the Syndicated Community Offering will be sold at the Purchase
Price. See " -- Stock Pricing."
The Syndicated Community Offering, if any, will terminate no more than 45
days following completion of the Subscription Offering, unless the Company
extends it with the approval of the OTS.
24
LIMITATIONS ON PURCHASES AND TRANSFER OF SHARES
The Plan provides for certain additional limitations to be placed upon the
purchase of the shares in the conversion. The minimum purchase is 25 shares.
No persons, together with associates, or group of persons acting in concert, may
purchase more than 8,000 shares ($80,000), except for the ESOP which may
purchase up to 10% of the shares sold. The OTS regulations governing the
conversion provide that officers and directors and their associates may not
purchase, in the aggregate, more than 35% of the shares issued pursuant to the
conversion.
Depending on market conditions and the results of the offering, the board
of directors may increase or decrease any of the purchase limitations without
the approval of our members and without resoliciting subscribers. The Plan
permits the board to increase the maximum purchase limitations in the
Subscription and/or Community Offering up to 9.9% of the shares of common stock
sold in the offering. The total number of orders for shares exceeding 5% of the
shares may not exceed, in the aggregate, 10% of the shares to be sold in the
Offering. If the maximum purchase limitation is increased, persons who ordered
the maximum amount will be given the first opportunity to increase their orders.
In doing so the preference categories in the offerings will be followed.
In the event of an increase in the total number of shares offered in the
conversion due to an increase in the Estimated Valuation Range of up to 15% (the
"Adjusted Maximum"), the additional shares will be allocated in the following
order of priority: (i) to fill the ESOP's subscription of up to 8% of the
Adjusted Maximum number of shares (the ESOP currently intends to subscribe for
8%); (ii) in the event that there is an over subscription by Eligible Account
Holders, to fill unfulfilled subscriptions of Eligible Account Holders exclusive
of the Adjusted Maximum; (iii) in the event that there is an over subscription
by Supplemental Eligible Account Holders, to fill unfulfilled subscriptions to
Supplemental Eligible Account Holders exclusive of the Adjusted Maximum; (iv) in
the event that there is an over subscription by Other Members, to fill
unfulfilled subscriptions of Other Members exclusive of the Adjusted Maximum;
and (v) to fill unfulfilled subscriptions in the Community Offering to the
extent possible, exclusive of the Adjusted Maximum.
The term "acting in concert" means (i) knowing participation in a joint
activity or interdependent conscious parallel action towards a common goal
whether or not pursuant to an express agreement; or (ii) a combination or
pooling of voting or other interests in the securities of an issuer for a common
purpose pursuant to any contract, understanding, relationship, agreement or
other arrangement, whether written or otherwise. We may presume that certain
persons are acting in concert based upon, among other things, joint account
relationships, common account and/or addresses and the fact that such persons
have filed joint Schedule 13Ds with the SEC with respect to other companies.
The term "associate" of a person means (i) any corporation or organization
(other than us or a majority-owned subsidiary of ours) of which such person is
an officer or partner or is, directly or indirectly, the beneficial owner of 10%
or more of any class of equity securities, (ii) any trust or other estate in
which such person has a substantial beneficial interest or as to which such
person
25
serves as director or in a similar fiduciary capacity (excluding tax-qualified
employee stock benefit plans and non tax-qualified employee stock benefit
plans), and (iii) any relative or spouse of such person or any relative of such
spouse, who has the same home as such person or who is a director or officer of
us, or any of our subsidiaries. For example, a corporation of which a person
serves as an officer would be an associate of that person, and therefore all
shares purchased by that corporation would be included with the number of shares
which that person individually could purchase under the above limitations.
The term "officer" may include our chairman of the board, president, vice
presidents in charge of principal business functions, Secretary and Treasurer
and any other person performing similar functions. All references herein to an
officer have the same meaning as used for an officer in the Plan.
The term "residing," as used in relation to the preference afforded natural
persons in St. Lawrence County, New York, means any natural person who occupies
a dwelling within St. Lawrence County, has an intention to remain within St.
Lawrence County (manifested by establishing a physical, on-going, non-transitory
presence within St. Lawrence County), and continues to reside in St. Lawrence
County at the time of the offering. We may utilize deposit or loan records or
such other evidence provided to us to make the determination whether a person is
residing in St. Lawrence County. Such determination will be in our sole
discretion.
TO ORDER SHARES IN THE CONVERSION, PERSONS MUST CERTIFY THAT THEIR PURCHASE
DOES NOT CONFLICT WITH THE PURCHASE LIMITATIONS. IN THE EVENT THAT THE PURCHASE
LIMITATIONS ARE VIOLATED BY ANY PERSON (INCLUDING ANY ASSOCIATE OR GROUP OF
PERSONS AFFILIATED OR OTHERWISE ACTING IN CONCERT WITH SUCH PERSONS), WE WILL
HAVE THE RIGHT TO PURCHASE FROM THAT PERSON AT $10.00 PER SHARE ALL SHARES
ACQUIRED BY THAT PERSON IN EXCESS OF THE PURCHASE LIMITATIONS. IF THE EXCESS
SHARES HAVE BEEN SOLD BY THAT PERSON, WE MAY RECOVER THE PROFIT FROM THE SALE OF
THE SHARES BY THAT PERSON. WE MAY ASSIGN OUR RIGHT EITHER TO PURCHASE THE
EXCESS SHARES OR TO RECOVER THE PROFITS FROM THEIR SALE.
Shares of common stock purchased pursuant to the conversion will be freely
transferable, except for shares purchased by our directors and officers. For
certain restrictions on the shares purchased by directors and officers, see " --
Restrictions on Sales and Purchases of Shares by Directors and Officers." In
addition, under guidelines of the NASD, members of the NASD and their associates
are subject to certain restrictions on the transfer of securities purchased in
accordance with subscription rights and to certain reporting requirements upon
purchase of such securities.
ORDERING AND RECEIVING SHARES
USE OF ORDER FORMS. Subscription rights to subscribe may only be exercised
by completion of an original order form. Facsimiles of order forms will not be
accepted. Persons ordering shares in the Subscription Offering must deliver by
mail or in person a properly completed and executed original order form to us
prior to the Expiration Date. Order forms must be accompanied by full
26
payment for all shares ordered. See " -- Payment for Shares." No wire transfers
will be accepted. Subscription rights under the Plan will expire on the
Expiration Date, whether or not we have been able to locate each person entitled
to subscription rights. ONCE SUBMITTED, SUBSCRIPTION ORDERS CANNOT BE REVOKED
WITHOUT OUR CONSENT UNLESS THE CONVERSION IS NOT COMPLETED WITHIN 45 DAYS OF THE
EXPIRATION DATE.
Persons and entities not purchasing shares in the Subscription Offering
may, subject to availability, purchase shares in the Community Offering by
returning to us a completed and properly executed order form along with full
payment for the shares ordered.
In the event an order form (i) is not delivered and is returned to us by
the United States Postal Service or we are unable to locate the addressee, (ii)
is not received or is received after the Expiration Date, (iii) is defectively
completed or executed, or (iv) is not accompanied by full payment for the shares
subscribed for (including instances where a savings account or certificate
balance from which withdrawal is authorized is insufficient to fund the amount
of such required payment), the subscription rights for the person to whom such
rights have been granted will lapse as though that person failed to return the
completed order form within the time period specified. We may, but will not be
required to, waive any irregularity on any order form or require the submission
of corrected order forms or the remittance of full payment for subscribed shares
by such date as we specify. The waiver of an irregularity on an order form in
no way obligates us to waive any other irregularity on that, or any irregularity
on any other, order form. Waivers will be considered on a case by case basis.
Photocopies of order forms, payments from private third parties, or electronic
transfers of funds will not be accepted. Our interpretation of the terms and
conditions of the Plan and of the acceptability of the order forms will be
final. We have the right to investigate any irregularity on any order form.
As part of the order form you will be required to execute a certification
stating that you are aware that the common stock is not a deposit and is not
federally insured or guaranteed. You will also be required to certify that you
have received this prospectus and you are aware that there are risks associated
with the purchase of common stock. We are required by federal regulation to
obtain this certification and we may not sell any shares to you if you are not
able or willing to execute this certification. YOU WILL NOT BE WAIVING ANY
RIGHTS UNDER THE SECURITIES ACT BY EXECUTING THIS CERTIFICATION.
To ensure that each purchaser receives a prospectus at least 48 hours
before the Expiration Date in accordance with Rule 15c2-8 of the Exchange Act,
no prospectus will be mailed any later than five days prior to such date or hand
delivered any later than two days prior to such date. Execution of the order
form will confirm receipt or delivery in accordance with Rule 15c2-8. Order
forms will only be distributed with a prospectus.
PAYMENT FOR SHARES. Payment for shares of common stock may be made (i) in
cash, if delivered in person, (ii) by check or money order, or (iii) by
authorization of withdrawal from savings accounts (including time certificates)
maintained with us or (iv) by an IRA not held by us.
27
Appropriate means by which such withdrawals may be authorized are provided in
the order form. Once such a withdrawal has been authorized, none of the
designated withdrawal amount may be used by the subscriber for any purpose other
than to purchase the shares. Where payment has been authorized to be made
through withdrawal from a savings account, the sum authorized for withdrawal
will continue to earn interest at the contract rate until the conversion has
been completed or terminated. Interest penalties for early withdrawal applicable
to certificate accounts will not apply to withdrawals authorized for the
purchase of shares; however, if a partial withdrawal results in a certificate
account with a balance less than the applicable minimum balance requirement, the
certificate evidencing the remaining balance will earn interest at the passbook
savings account rate subsequent to the withdrawal. Payments made in cash or by
check or money order, will be placed in a segregated saving account and interest
will be paid by us at our passbook savings account rate from the date payment is
received until the conversion is completed or terminated. An executed order
form, once received by us, may not be modified, amended, or rescinded without
our consent, unless the conversion is not completed within 45 days after the
conclusion of the Subscription Offering, in which case subscribers may be given
an opportunity to increase, decrease, or rescind their order. In the event that
the conversion is not consummated, all funds submitted pursuant to the offering
will be refunded promptly with interest.
Owners of self-directed IRAs may use the assets of such IRAs to purchase
shares in the offering, provided that such IRAs are not maintained on deposit
with us. Persons with IRAs maintained with us must have their accounts
transferred to an unaffiliated institution or broker to purchase shares in the
offering. The Stock Information Center can assist you in transferring your self-
directed IRA. Because of the paperwork involved, persons owning IRAs with us who
wish to use their IRA account to purchase stock in the Offering, must contact
the Stock Information Center no later than December 7, 1998.
DELIVERY OF STOCK CERTIFICATES. Certificates representing shares of common
stock issued in the conversion will be mailed to the person(s) at the address
noted on the order form, as soon as practicable following consummation of the
conversion. Any certificates returned as undeliverable will be held until
properly claimed or otherwise disposed. Persons ordering shares might not be
able to sell their shares until they receive their stock certificates.
FEDERAL REGULATIONS PROHIBIT US FROM LENDING FUNDS OR EXTENDING CREDIT TO
ANY PERSON TO PURCHASE SHARES IN THE CONVERSION.
MARKETING ARRANGEMENTS
We have engaged Trident Securities as our financial advisor in connection
with the offering. Trident Securities has agreed to exercise its best efforts to
assist us in the sale of the shares in the offering. As compensation, Trident
Securities will receive a management fee in the amount of $60,000. If shares
are offered for sale in a Syndicated Community Offering, Trident Securities will
organize and manage the syndicate of selected broker-dealers. The commission to
be paid to any such selected broker-dealers will be at a rate to be agreed to
jointly by Trident Securities and us. Fees
28
paid to Trident Securities and to any other broker-dealer may be deemed to be
underwriting fees, and Trident Securities and such broker-dealers may be deemed
to be underwriters. Trident Securities will also be reimbursed for allocable
expenses incurred by them, including legal fees. Trident Securities'
reimbursable out-of-pocket expenses other than legal fees will not exceed
$10,500 and its reimbursable legal fees will not exceed $20,000. We have agreed
to indemnify Trident Securities for reasonable costs and expenses in connection
with certain claims or liabilities which might be asserted against Trident
Securities. This indemnification covers the investigation, preparation of
defense and defense of any action, proceeding or claim relating to
misrepresentation or breach of warranty of the written agreement among Trident
Securities and us or the omission or alleged omission of a material fact
required to be stated or necessary in the prospectus or other documents.
The shares will be offered principally by the distribution of this document
and through activities conducted at a Stock Information Center located at our
office. The Stock Information Center is expected to operate during our normal
business hours throughout the offering. A registered representative employed by
Trident Securities will be working at, and supervising the operation of, the
Stock Information Center. Trident Securities will assist us in responding to
questions regarding the conversion and the offering and processing order forms.
Our personnel will be present in the Stock Information Center to assist Trident
Securities with clerical matters and to answer questions related solely to our
business.
STOCK PRICING
We have retained Feldman, an independent economic consulting and appraisal
firm, which is experienced in the evaluation and appraisal of business entities,
including savings institutions involved in the conversion process to prepare an
appraisal of our estimated pro forma market value. We will pay Feldman a fee of
$17,000 for preparing the appraisal and other services and will reimburse
Feldman up to $2,000 for reasonable out-of-pocket expenses. We have agreed to
indemnify Feldman under certain circumstances against liabilities and expenses
arising out of or based on any misstatement or untrue statement of a material
fact contained in the information supplied by us to Feldman.
Feldman prepared the appraisal in reliance upon the information contained
herein, including the financial statements. The appraisal contains an analysis
of a number of factors including, but not limited to, our financial condition
and operating trends, the competitive environment within which we operate,
operating trends of certain savings institutions and savings and loan holding
companies, relevant economic conditions, both nationally and in the state of New
York which affect the operations of savings institutions, and stock market
values of certain savings institutions. In addition, Feldman has advised us
that it has considered the effect of the additional capital raised by the sale
of the shares on our estimated aggregate pro forma market value.
On the basis of the above, Feldman has determined, in its opinion, that as
of September 4, 1998 our estimated aggregate pro forma market value was
$1,500,000. OTS regulations require, however, that the appraiser establish a
range of value for the stock to allow for fluctuations in the
29
aggregate value of the stock due to changing market conditions and other
factors. Accordingly, Feldman has established the Estimated Valuation Range from
$1,275,000 to $1,725,000 for the offering. The Estimated Valuation Range will be
updated prior to consummation of the conversion and the Estimated Valuation
Range may increase to $1,983,750.
The board of directors has reviewed the independent appraisal, including
the stated methodology of the independent appraiser and the assumptions used in
the preparation of the independent appraisal. The board of directors is relying
upon the expertise, experience and independence of the appraiser and is not
qualified to determine the appropriateness of the assumptions.
In order for stock sales to take place, Feldman must confirm to the OTS
that, to the best of Feldman's knowledge and judgment, nothing of a material
nature has occurred which would cause Feldman to conclude that the Purchase
Price on an aggregate basis was incompatible with Feldman's estimate of our pro
forma market value of us in converted form at the time of the sale. If,
however, the facts do not justify such a statement, an amended Estimated
Valuation Range may be established.
THE APPRAISAL IS NOT A RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF
PURCHASING THESE SHARES. IN PREPARING THE APPRAISAL, FELDMAN HAS RELIED UPON
AND ASSUMED THE ACCURACY AND COMPLETENESS OF FINANCIAL AND STATISTICAL
INFORMATION PROVIDED BY US. FELDMAN DID NOT INDEPENDENTLY VERIFY THE FINANCIAL
STATEMENTS AND OTHER INFORMATION PROVIDED BY US, NOR DID FELDMAN VALUE
INDEPENDENTLY OUR ASSETS AND LIABILITIES. THE APPRAISAL CONSIDERS US ONLY AS A
GOING CONCERN AND SHOULD NOT BE CONSIDERED AS OUR LIQUIDATION VALUE. MOREOVER,
BECAUSE THE APPRAISAL IS BASED UPON ESTIMATES AND PROJECTIONS OF A NUMBER OF
MATTERS WHICH ARE SUBJECT TO CHANGE, THE MARKET PRICE OF THE COMMON STOCK COULD
DECLINE BELOW $10.00.
CHANGE IN NUMBER OF SHARES TO BE ISSUED IN THE CONVERSION
Depending on market and financial conditions at the time of the completion
of the Subscription and Community Offerings, we may significantly increase or
decrease the number of shares to be issued in the conversion. In the event of
an increase in the valuation, we may increase the total number of shares to be
issued in the conversion. An increase in the total number of shares to be
issued in the conversion would decrease a subscriber's percentage ownership
interest and the pro forma net worth (book value) per share and increase the
pro forma net income and net worth (book value) on an aggregate basis. In the
event of a material reduction in the valuation, we may decrease the number of
shares to be issued to reflect the reduced valuation. A decrease in the number
of shares to be issued in the conversion would increase a subscriber's
percentage ownership interest and the pro forma net worth (book value) per share
and decrease pro forma net income and net worth on an aggregate basis.
Persons ordering shares will not be permitted to modify or cancel their
orders unless the change in the number of shares to be issued in the conversion
results in an offering which is either less than $1,275,000 or more than
$1,983,750.
30
RESTRICTIONS ON REPURCHASE OF SHARES
Generally, during the first year following the conversion, the Company may
not repurchase its shares and during each of the second and third years
following the conversion, the Company may repurchase five percent of the
outstanding shares provided they are purchased in open-market transactions.
Repurchases must not cause us to become undercapitalized and at least 10 days
prior notice of the repurchase must be provided to the OTS. The OTS may
disapprove a repurchase program upon a determination that (1) the repurchase
program would adversely affect our financial condition, (2) the information
submitted is insufficient upon which to base a conclusion as to whether the
financial condition would be adversely affected, or (3) a valid business purpose
was not demonstrated. In addition, SEC rules also govern the method, time,
price, and number of shares of common stock that may be repurchased by the
Company and affiliated purchasers. If, in the future, the rules and regulations
regarding the repurchase of stock are liberalized, the Company may utilize the
rules and regulations then in effect.
RESTRICTIONS ON SALES AND PURCHASES OF SHARES BY DIRECTORS AND OFFICERS
Shares purchased by directors and officers of the Company may not be sold
for one year following completion of the conversion. An exception to this rule
is a disposition of shares in the event of the death of the director or officer.
Any shares issued to directors and officers as a stock dividend, stock split, or
otherwise with respect to restricted stock shall be subject to the same
restrictions.
For three years following the conversion, directors and officers may
purchase shares only through a registered broker or dealer. Exceptions are
available only if the OTS has approved the purchase or the purchase is an arm's
length transaction and involves more than one percent of the outstanding shares.
INTERPRETATION AND AMENDMENT OF THE PLAN
We are authorized to interpret and amend the Plan. Our interpretations are
final. Amendments to the Plan after the receipt of member approval will not need
further member approval unless required by the OTS.
CONDITIONS AND TERMINATION
Completion of the conversion requires (i) the approval of the Plan by the
affirmative vote of not less than a majority of the total number of votes
eligible to be cast by our members; and (ii) completion of the sale of shares
within 24 months following approval of the Plan by our members. If these
conditions are not satisfied, the Plan will be terminated and we will continue
our business in the mutual form of organization. We may terminate the Plan at
any time prior to the meeting of members to vote on the Plan or at any time
thereafter with the approval of the OTS.
31
OTHER
ALL STATEMENTS MADE IN THIS DOCUMENT ARE HEREBY QUALIFIED BY THE CONTENTS
OF THE PLAN OF CONVERSION, THE MATERIAL TERMS OF WHICH ARE SET FORTH HEREIN.
THE PLAN OF CONVERSION IS ATTACHED TO THE PROXY STATEMENT. COPIES OF THE PLAN
ARE AVAILABLE FROM US AND WE SHOULD BE CONSULTED FOR FURTHER INFORMATION.
ADOPTION OF THE PLAN BY OUR MEMBERS AUTHORIZES US TO INTERPRET, AMEND OR
TERMINATE THE PLAN.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis of financial condition and results of
operations is intended to assist you in understanding our financial condition
and results of operations. The information in this section should also be read
with our Financial Statements and Notes to the Financial Statements which are
included elsewhere in this document.
The Company has recently been formed and accordingly, has no results of
operations. The following discussion relates only to our financial condition
and results of operations
Our results of operations depend primarily on net interest income, which is
determined by (i) the difference between rates of interest we earn on our
interest-earning assets and the rates we pay on interest-bearing liabilities
(interest rate spread), and (ii) the relative amounts of interest-earning assets
and interest-bearing liabilities. Our results of operations are also affected
by non-interest expense, including primarily compensation and employee benefits,
federal deposit insurance premiums and office occupancy costs. Our results of
operations also are affected significantly by general and economic and
competitive conditions, particularly changes in market interest rates,
government policies and actions of regulatory authorities, all of which are
beyond our control.
Following the conversion, we believe there will be sufficient demand in our
market area to continue our policy of emphasizing lending in the one- to four-
family real estate loan area. In addition, we hope to experience continued
growth in our consumer loan portfolio; however, there is no assurance that we
will be able to do so. See "Business of Ogdensburg Federal Savings and Loan
Association -- Lending Activities."
YEAR 2000 COMPLIANCE
A great deal of information has been disseminated about the global computer
problem that may occur in the year 2000 which would affect the speed and
accuracy of the data processing that is essential to our operations. We are
conducting a thorough review of our internal systems as well as the efforts of
our outside data processing service provider. The progress of the plan is
monitored by our board of directors. We do not expect to incur significant
costs to replace existing hardware or software. The greatest potential for
problems, however, concerns the data processing provided by
32
our third party service bureau. The service bureau with which we operate is
providing us with periodic updates of its compliance progress. We have
participated in the first phase of testing with the provider satisfactorily with
the second phase to be completed prior to December 31, 1998. The service bureau
has indicated that it will be compliant by such date. With respect to our
teller/platform computer system, we are converting to a new system that is year
2000 compliant which will be completed by April 30, 1999. We are in the process
of developing a contingency plan to deal with the potential that our service
bureau is unable to bring its systems into compliance by September 30, 1998. We
believe that we would use manual systems as a contingency plan if our current
provider is unable to resolve this problem in time. There can be no assurance in
this regard, however, and it is possible that as a result we could experience
data processing delays, errors or failures, all of which could have a material
adverse impact on our financial condition and results of operations. We estimate
that our expenses related to year 2000 compliance will be approximately $5,000.
We have also evaluated our non-information technology systems (for example,
our alarm system, our heating and air conditioning system) to determine if such
systems may have embedded technology that could also be affected by the year
2000 problem. We have determined that the only system of this type that could
be affected is our alarm system. We have been informed, however, by the vendor
that the system is year 2000 compliant and has been fully tested.
We are in the process of installing a new teller/platform computer system.
The costs of the new system will be approximately $50,000. The installation of
the new system is not a result of Year 2000 compliance. As a result, such costs
will be capitalized.
Computer problems experienced by our commercial borrowers could have an
adverse effect on their business operations and their ability to repay their
loans when due. The Company has recently begun evaluating Year 2000 readiness
of its commercial loan applicants as part of the loan underwriting process and
is calling upon major existing borrowers to assess their readiness and identify
potential problems.
MARKET/INTEREST RATE RISK DISCLOSURE
QUALITATIVE DISCLOSURE. Our assets and liabilities may be analyzed by
examining the extent to which our assets and liabilities are interest-rate
sensitive and by monitoring the expected effects of interest rate changes on our
net portfolio value.
An asset or liability is interest rate sensitive within a specific time
period if it will mature or reprice within that time period. If our assets
mature or reprice more quickly or to a greater extent than our liabilities, our
net portfolio value and net interest income would tend to increase during
periods of rising interest rates but decrease during periods of falling interest
rates. Conversely, if our assets mature or reprice more slowly or to a lesser
extent than our liabilities, our net portfolio value and net interest income
would tend to decrease during periods of rising interest rates but increase
during periods of falling interest rates. Our policy has been to mitigate the
interest rate risk
33
inherent in the historical savings institution business of originating long-term
loans funded by short-term deposits by pursuing certain strategies designed to
decrease the vulnerability of our earnings to material and prolonged changes in
interest rates.
Our primary method of managing interest rate is to emphasize the
origination of ARM loans. Our ARM loans provide that the interest rate will
adjust every year. The terms of these loans generally limit the amount of any
rate change to a maximum of 2% and also provide that the rate may not increase
above a "ceiling" rate established at the time the loan is made, nor below a
floor rate which is the initial rate on the loan. At June 30, 1998,
approximately 65% of our mortgage loan portfolio had adjustable rates. We also
purchase investment securities with relatively short maturities, normally three
years or less. At June 30, 1998, approximately 99% of our investment portfolio
had a maturity of five years or less. We also seek to cushion ourselves against
interest rate fluctuations by preserving a loyal depositor base whose accounts
are less likely to switch to institutions that may be offering higher rates. We
monitor our deposit rates on a weekly basis to ensure that we remain
competitive.
QUANTITATIVE DISCLOSURE. In recent years, we have measured our interest
rate sensitivity by computing the "gap" between the assets and liabilities which
were expected to mature or reprice within certain time periods, based on
assumptions regarding loan prepayment and the rates at which deposits will be
withdrawn by depositors over time formerly provided by the OTS. However, the
OTS now measures an institution's interest rate risk by computing the amount by
which the net present value of cash flow from assets, liabilities and off
balance sheet items (the institution's net portfolio value or "NPV") would
change in the event of a range of assumed changes in market interest rates.
These computations estimate the effect on an institution's NPV from
instantaneous and permanent 1% to 4% (100 to 400 basis points) increases and
decreases in market interest rates. The following table presents the interest
rate sensitivity of our NPV at June 30, 1998, as calculated by the OTS, which is
based upon quarterly information that we voluntarily provided to the OTS.
NPV AS % OF
CHANGE NET PORTFOLIO VALUE PORTFOLIO VALUE OF ASSETS
-------------------------------------- -------------------------------------
IN RATES $ AMOUNT $ CHANGE % CHANGE NPV RATIO BASIS POINT CHANGE
-------- -------- -------- -------- --------- ------------------
(DOLLARS IN THOUSANDS)
+ 400 bp $1,433 $(530) (27)% 6.06% (192) bp
+ 300 bp 1,618 (345) (18) 6.76 (122) bp
+ 200 bp 1,774 (188) (10) 7.33 (65) bp
+ 100 bp 1,891 (71) (4) 7.74 (23) bp
0 bp 1,962 -- -- 7.98
- 100 bp 2,076 114 6 8.36 (39) bp
- 200 bp 2,232 269 14 8.89 (92) bp
- 300 bp 2,409 447 23 9.49 (151) bp
- 400 bp 2,642 680 35 10.27 (229) bp
The board of directors has established a policy setting forth maximum NPV
variances as a result of such instantaneous and permanent changes in interest
rates. At June 30, 1998, our interest rate sensitivity was within the policy
established by the board.
34
While we cannot predict future interest rates or their effects on our NPV
or net interest income, we do not expect current interest rates to have a
material adverse effect on our NPV or net interest income in the near future.
Computations of prospective effects of hypothetical interest rate changes are
based on numerous assumptions, including relative levels of market interest
rates, prepayments and deposit runoff and should not be relied upon as
indicative of actual results. Certain shortcomings are inherent in such
computations. Although certain assets and liabilities may have similar maturity
or periods of repricing, they may react at different times and in different
degrees to changes in the market interest rates. The interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while rates on other types of assets and liabilities may lag
behind changes in market interest rates. Certain assets, such as ARM loans,
generally have features which restrict changes in interest rates on a short-term
basis and over the life of the loan. In the event of a change in interest
rates, prepayments and early withdrawal levels could deviate significantly from
those assumed in making calculations set forth above. Additionally, an
increased credit risk may result as the ability of many borrowers to service
their debt may decrease in the event of an interest rate increase.
The board of directors reviews our asset and liability policies. The board
of directors meets regularly to review interest rate risk and trends, as well as
liquidity and capital ratios and requirements. Management administers the
policies and determinations of the board of directors with respect to our asset
and liability goals and strategies. We expect that our asset and liability
policies and strategies will continue as described so long as competitive and
regulatory conditions in the financial institution industry and market interest
rates continue as they have in recent years.
35
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS
The following table sets forth certain information relating to our average
balance sheet and reflects the average yield on assets and average cost of
liabilities for the periods indicated and the average yields earned and rates
paid at the date and for the periods indicated. Such yields and costs are
derived by dividing income or expense by the average daily balance of assets or
liabilities, respectively, for the periods presented. Average balances are
derived from daily balances.
SIX MONTHS ENDED JUNE 30,
------------------------------------------------------
AT JUNE 30, 1998 1997
-------------------------- --------------------------
1998 AVERAGE AVERAGE
--------------------
YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE COST BALANCE INTEREST COST BALANCE INTEREST COST
----------- ------- ------- -------- ------- ------- -------- -------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Loans (1)............................... $18,698 8.11% $17,151 $ 727 8.55% $15,341 $ 645 8.48%
Securities (2).......................... 3,546 5.69 4,498 127 5.69 4,683 132 5.68
Other short-term investments............ 756 5.78 769 28 7.34 1,123 35 6.28
------- ------- -------- ------- -------
Total interest-earning assets.......... 23,000 7.66 22,418 882 7.93 21,147 812 7.74
Non-interest-earning assets............... 1,247 1,373 1,177
------- ------- -------
Total assets........................... $24,247 $23,791 $22,324
======= ======= =======
Interest-bearing liabilities:
Savings and club accounts............... $ 3,131 3.09 $ 2,997 40 2.69 $ 2,739 39 2.87
Time certificates....................... 16,519 5.80 16,218 465 5.78 15,450 420 5.48
NOW and money market accounts........... 1,971 1.74 2,062 17 1.66 2,002 18 1.81
Borrowings.............................. -- -- -- -- -- -- -- --
------- ------- -------- ------- -------
Total interest-bearing liabilities..... 21,621 5.04 21,277 522 4.92 20,191 477 4.76
Non-interest-bearing liabilities.......... 978 916 651
------- ------- -------
Total liabilities...................... 22,599 22,193 20,842
Total equity.............................. 1,648 1,598 1,482
------- ------- -------
Total liabilities and equity........... $24,247 $23,791 $22,324
======= ======= =======
Net interest income....................... $ 360 $ 335
======== =======
Net interest rate spread.................. 2.62% 3.01% 2.98%
======= ==== ====
Net yield on interest-earning assets...... 3.24% 3.19%
==== ====
Average interest-earning assets
to average interest-bearing liabilities.. 1.06x 1.05x 1.05x
======= ==== ====
- -------------------------
(1) Non-accrual loans are included in average balances, less allowance for loan
losses and deferred fees.
(2) Securities are included at amortized cost, with net unrealized gains or
losses on securities available-for-sale included as a component of non-
earning assets.
36
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1997 1996
--------------------------- ---------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
------- -------- -------- ------- -------- --------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Loans (1)................................ $15,824 $1,330 8.40% $15,001 $1,266 8.44%
Securities (2)........................... 4,887 277 5.67 4,593 260 5.66
Other short-term investments............. 835 55 6.59 1,024 66 6.45
------- ------ ------- ------
Total interest-earning assets......... 21,546 1,662 7.71 20,618 1,592 7.72
Non-interest-earning assets................. 1,234 1,256
------- -------
Total assets.......................... $22,780 $21,874
======= =======
Interest-bearing liabilities:
Savings and club accounts................ $ 2,747 79 2.88 $ 2,908 86 2.96
Time certificates........................ 15,824 883 5.58 14,867 832 5.60
NOW accounts and money market accounts... 2,024 36 1.78 2,016 36 1.79
Borrowings.................................. -- -- -- 5 1 5.96
------- ------ ------- ------
Total interest-bearing liabilities..... 20,595 998 4.85 19,796 955 4.82
Non-interest-bearing liabilities............ 672 555
------- -------
Total liabilities...................... 21,267 20,352
Total equity................................ 1,502 $ 1,523
------- -------
Total liabilities and equity........... $22,769 $21,874
======= =======
Net interest income......................... $ 664 $ 637
====== ======
Net interest rate spread.................... 2.86% 2.90%
==== ====
Net yield on interest-earning assets........ 3.08% 3.09%
==== ====
Average interest-earning assets
to average interest-bearing liabilities.. 1.05x 1.04x
==== ====
(Footnotes on preceding page)
37
RATE/VOLUME ANALYSIS
The table below sets forth certain information regarding changes in
interest income and interest expense for the periods indicated. For each
category of interest-earning asset and interest-bearing liability, information
is provided on changes attributable to: (i) changes in volume (changes in volume
multiplied by old rate); and (ii) changes in rate (change in rate multiplied by
old volume), and the net change in net interest income. The net change
attributable to the combined impact of volume and rate has been allocated
proportionately to the absolute dollar amounts of change in each.
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
-------------------------- -----------------------------------------------------------------------
1998 VS. 1997 1997 VS. 1996 1996 VS. 1995
-------------------------- -------------------------------- -----------------------------------
INCREASE (DECREASE) INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO DUE TO
-------------------------- -------------------------------- -----------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL VOLUME RATE TOTAL
------ ------ ------- -------- ------ ------- --------- ------ -------
(IN THOUSANDS)
Interest income:
Loans.................... $ 77 $ 5 $ 82 $ 70 $ (6) $ 64 $ (15) $ 20 $ 5
Securities............... (5) -- (5) 17 -- 17 27 (9) 18
Other short-term
investments............. (12) 5 (7) (12) 1 (11) 18 (12) 6
------ ------ ------- -------- ------ ------- --------- ------ -------
Total interest-earning
assets.............. 60 10 70 75 (5) 70 30 (1) 29
------ ------ ------- -------- ------ ------- --------- ------ -------
Interest expense:
Savings and club accounts 4 (3) 1 (5) (2) (7) (12) (3) (15)
Time certificates........ 21 24 45 54 (3) 51 55 11 66
NOW and money market
accounts................ 1 (2) (1) -- -- -- (5) 2 (3)
Borrowings............ -- -- -- (1) -- (1) -- 1 1
------ ------ ------- -------- ------ ------- --------- ------ -------
Total interest-bearing
liabilities.......... 26 19 45 48 (5) 43 38 11 49
------ ------ ------- -------- ------ ------- --------- ------ -------
Change in net interest
income.................... $ 34 $ (9) $ 25 $ 27 $ -- $ 27 $ (8) $ (12) $ (20)
====== ====== ======= ======== ====== ======= ========== ====== =======
38
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1998 AND DECEMBER 31, 1997
Total assets increased by $845,000, or 3.61%, from $23.4 million at
December 31, 1997 to $24.2 million at June 30, 1998. The increase in assets for
the period was attributable to the growth in our loan portfolio (net of
allowance for loan losses) of $2.0 million, or 12.18%, which was the result of
our capitalizing on strong loan demand in our market area, partially offset by
declines in the level of our securities designated as available for sale and
securities designated as held to maturity. Loan growth was partially funded by
the proceeds of the sale of securities designated as available for sale during
the period which amounted to $712,000, and principal repayments on held to
maturity investments. Deposits also served as a funding source. Total
liabilities increased by $774,000, or 3.55%, from $21.8 million at December 31,
1997 to $22.6 million at June 30, 1998. At June 30, 1998, our total deposits
amounted to $22.4 million, an increase of $591,000, or 2.72%, from December 31,
1998's level of $21.8 million. The deposit growth consisted primarily of
savings and club accounts and time certificates.
Total equity increased by $71,000, or 4.50%, due to net income from the
period. At June 30, 1998, we were in compliance with all applicable regulatory
capital requirements with total core and tangible capital of $1.6 million (6.8%
of adjusted total assets) and total risk-based capital of $1.8 million (13.2% of
risk-weighted assets).
COMPARISON OF RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND
1997
NET INCOME. Our net income for the six months ended June 30, 1998 was
relatively flat as compared to the six months ended June 30, 1997, decreasing by
$5,000, from $77,000 for the six months ended June 30, 1997 to $72,000 for the
six months ended June 30, 1998. The decrease in net income was due primarily to
an increased level of non-interest expenses, partially offset by an increased
level of net interest income.
NET INTEREST INCOME. Our net interest income, which is the difference
between our interest income and our interest expense, increased $25,000, or
7.46%, from $335,000 for the six months ended June 30, 1997 to $360,000 for the
six months ended June 30, 1998. The increase is due mainly to the growth in our
loan portfolio. The average balance of loans outstanding during the six months
ended June 30, 1998 was $17.2 million as compared to $15.3 million during the
first six months of 1997. Interest expense also increased over these six-month
periods due primarily to an increase in both the average balance of deposits
during the period and the average cost of our deposits. For the first six
months of 1998, our total deposits averaged $21.3 million as compared to $20.2
million for the first six months of 1997. The average cost of such deposits
amounted to 4.92% for the 1998 period, a 16 basis point increase from 4.76% for
the first half of 1997.
PROVISION FOR LOAN LOSSES. Financial institutions are required to
establish an allowance for loan losses. The balance of such allowance depends
on the risk in the institution's loan portfolio, its level of problem loans and
general economic conditions, among other factors. Loans which cannot be
collected are charged against the allowance and thereby reduce its balance. An
institution
39
adds to the allowance by making a provision for loan losses which is an expense
item. During the six months ended June 30, 1998 we made a $3,000 provision for
loan losses compared to no provision for the comparable period in fiscal year
1997. We determined, based on our analysis of all pertinent information
available to us concerning the Bank's loan portfolio, that such addition to the
loan loss allowance was necessary for this period. Net charge-offs for the six
months ended June 30, 1998 amounted to $2,000. At June 30, 1998, our allowance
for loan losses amounted to $165,000 and represented 54.46% of total
nonperforming loans and 0.87% of total gross loans.
NONINTEREST INCOME. Noninterest income (e.g., gains or losses on the sale
of securities, loan and deposit account fees) increased $2,000 over the
comparative six-month periods due to increases in the fees earned on loans and
net gain on sale of securities offset by a decrease in other noninterest income.
NONINTEREST EXPENSE. Our noninterest expenses consist mainly of salaries
and employee benefits, directors' fees, office and equipment expense, federal
deposit insurance premiums, data processing fees and other miscellaneous
expenses. Noninterest expenses increased by $31,000, or 12.40%, for the six
months ended June 30, 1998 compared to the same period in fiscal year 1997 due
to increases in compensation and related expenses, deposit insurance, postage
and supplies and other expenses, offset by decreases in building, occupancy and
equipment expense and insurance.
Our noninterest expense will increase following the conversion due to
several factors. First, we will see added expense associated with the ESOP and,
later on, the MRP. Further, we will experience the costs of being a public
company.
INCOME TAX EXPENSE. Our provision for income tax decreased $2,000 over the
comparable period due to the decrease in our pre-tax income. Our effective tax
rates for the six months ended June 30, 1998 and 1997 were 26.5% and 26.7%,
respectively.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997 AND
1996
NET INCOME. Our net income increased $80,000 from $8,000 for the fiscal
year ended December 31, 1996 to $88,000 for the fiscal year ended December 31,
1997. The primary reason for the increase was due to the absence of any SAIF
special assessment during the 1997 fiscal year. During the year ended December
31, 1996, all thrift institutions were required to pay a special assessment in
order to recapitalize the SAIF, the FDIC fund that insures our deposits. The
special assessment amounted to $128,000 for us and was paid during the quarter
ended December 31, 1996.
NET INTEREST INCOME. Our net interest income increased from $637,000 for
fiscal year 1996 to $664,000 for fiscal year 1997. The $27,000 increase was
primarily due to an increase in the average balance of our loan and securities
portfolios. During the year ended December 31, 1997, the average balance of our
loan portfolio increased by $823,000, or 5.49%, and the average balance of our
securities portfolio increased by $294,000, or 6.40%, as compared to the year
ended December 31, 1996. Total interest expense also increased during the fiscal
year by $43,000 due to
40
an increase in the volume of our deposits, primarily our time certificates,
which are the most costly component.
PROVISION FOR LOAN LOSSES. During fiscal year 1997, we decided to pursue
increases in our automobile loan portfolio which are believed to have greater
risk than one- to four-family mortgage lending. For this reason, we recorded a
$57,000 provision for loan losses as compared to no provision during the
previous fiscal year. Future additions to the loan loss allowance will be based
on the analysis of the loan portfolio as described above, and, accordingly, are
not predictable. During fiscal year 1997, we charged off a total of $9,000 in
loans as compared to no charge-offs during fiscal year 1996.
NONINTEREST INCOME. Noninterest income increased from $30,000 for fiscal
year 1996 to $44,000 for fiscal year 1997 due primarily to a $16,000 increase in
fees earned on deposit accounts.
NONINTEREST EXPENSE. For fiscal year 1997, total noninterest expenses were
$525,000 as compared to $656,000 for fiscal year 1996. The decline in this
expense level was due mainly to the absence of any special SAIF assessment in
the 1997 period. During fiscal year 1996, we were required to pay a special
assessment of $128,000 to help recapitalize the SAIF, the fund that insures our
deposits. This decline was offset by increases of $14,000 in building, occupancy
and equipment expense and $9,000 in other miscellaneous expenses. As a result
of the recapitalization of the SAIF, our deposit insurance premiums declined
significantly, resulting in a reduction of $163,000 from 1996 to 1997. We
expect our annual deposit insurance premium to remain at the current level,
.064% of total assessable deposits, in future periods though there can be no
assurance in this regard.
INCOME TAX EXPENSE. Our income tax expense for fiscal year 1997 amounted
to $38,000 as compared to $3,000 for fiscal year 1996. The $35,000 increase was
directly attributable to the increased level of pre-tax income in 1997 as
compared to 1996. Our effective tax rates for fiscal years 1997 and 1996 were
30.1% and 27.3%, respectively.
LIQUIDITY AND CAPITAL RESOURCES
We are required to maintain minimum levels of liquid assets as defined by
OTS regulations. This requirement, which varies from time to time (currently 4%)
depending upon economic conditions and deposit flows, is based upon a percentage
of our deposits and short-term borrowings. The required ratio at June 30, 1998
was 4% and our actual liquidity ratio at June 30, 1998 was 23.35%. It is our
belief that upon completion of the conversion our liquidity ratio will increase
due to the additional funds we will receive.
Our primary sources of funds are deposits, repayment of loans and mortgage-
backed securities, maturities of investments and interest-bearing deposits and
funds provided from operations. We are also able to obtain advances from the
FHLB of New York, although historically we have done this rarely. While
scheduled repayments of loans and mortgage-backed securities and maturities of
investment securities are predictable sources of funds, deposit flows and loan
41
prepayments are greatly influenced by the general level of interest rates,
economic conditions and competition. We use our liquidity resources principally
to fund existing and future loan commitments, to fund maturing time certificates
and demand deposit withdrawals, to invest in other interest-earning assets, to
maintain liquidity, and to meet operating expenses.
Liquidity may be adversely affected by unexpected deposit outflows, higher
interest rates paid by competitors, adverse publicity relating to the savings
and loan industry, and similar matters. Management monitors projected liquidity
needs and determines the level desirable, based in part on our commitments to
make loans and management's assessment of our ability to generate funds.
A major portion of our liquidity consists of cash and cash equivalents,
which include cash and interest-bearing deposits in other banks. The level of
these assets is dependent upon our operating, investing, lending and financing
activities during any given period. At June 30, 1998, cash and cash equivalents
totaled $1.2 million.
Our primary investing activities include origination of loans and purchases
of investment and mortgage-backed securities. During the six months ended June
30, 1998 and the years ended December 31, 1997 and 1996, purchases of investment
and mortgage-backed securities totaled $3.0 million, $ 8.8 million and $7.0
million, respectively, while loan originations totaled $4.1 million, $4.3
million and $3.9 million, respectively. These investments were funded in part
by loan and securities and mortgage-backed securities repayments and maturities
and an increase in time certificates received for the six months ended June 30,
1998 and the years ended December 31, 1997 and 1996.
At June 30, 1998, we had $82,000 in outstanding commitments to originate
fixed-rate loans with rates that ranged from 7% to 8.99%. We anticipate that we
will have sufficient funds available to meet our current loan origination
commitments. Time certificates which are scheduled to mature in one year or
less totaled $12.3 million at June 30, 1998. Based on historical experience
management believes that a significant portion of such deposits will remain with
us.
We are subject to federal regulations that impose certain minimum capital
requirements. For a discussion on such capital levels, see "Historical and Pro
Forma Capital Compliance" and "Regulation -- Regulation of the Bank --
Regulatory Capital Requirements."
IMPACT OF INFLATION AND CHANGING PRICES
Our financial statements and the accompanying notes presented elsewhere in
this document, have been prepared in accordance with generally accepted
accounting principles, which require the measurement of financial position and
operating results in terms of historical dollars without considering the change
in the relative purchasing power of money over time and due to inflation. The
impact of inflation is reflected in the increased cost of our operations. As a
result, interest rates have a greater impact on our performance than do the
effects of general levels of inflation. Interest
42
rates do not necessarily move in the same direction or to the same extent as the
prices of goods and services.
IMPACT OF NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 128 "Earnings Per Share."
SFAS 128 requires the disclosure of basic and diluted earnings per share. It
establishes rules for calculating diluted earnings per share based upon the
effect of agreements by publicly traded companies to issue additional stock.
SFAS 128 is now effective and will require the Company, after the conversion, to
report in addition to basic earnings per share, diluted earnings per share which
would show, for example, the effect on earnings per share of the exercise of
outstanding stock options, if any.
In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income,"
which requires that comprehensive income and its effect on equity must be
disclosed prominently in the notes to the financial statements. Comprehensive
income includes net income as adjusted for items that are recorded as direct
entries to equity. Only the impact of unrealized gains or losses on securities
available-for-sale is disclosed as an additional component of our income under
the requirements of SFAS 130. SFAS 130 imposes disclosure requirements only and
does not affect the Company's financial condition or results of operations.
Comprehensive income (loss) for the six months ended June 30, 1998 was $71,000
and was $100,000 for 1997 and ($4,000) for 1996.
In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information," which changes the way public companies
report information about segments of their business on their annual financial
statements and requires them to report selected segment information in their
quarterly reports issued to stockholders. The Company anticipates that, in the
near future, the Company's business will comprise only one segment and hence
SFAS 131 will not have a material effect on its financial disclosures. However,
if the Company engages in material non-banking business in the future, separate
segment disclosure may be required.
In February 1998, the FASB issued SFAS 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits," which amends existing disclosure
rules regarding pension and other post-retirement benefits to standardize the
disclosure formats effective for fiscal years beginning after December 15, 1997.
Disclosures regarding pensions and other non-pension post-retirement benefits
have been combined. SFAS 132 addresses disclosure issues only and does not
require any substantive change in accounting treatment for the benefits covered
by it. Hence, the implementation of SFAS 132 will have no effect on the
Company's financial condition or results of operations.
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes comprehensive accounting
and reporting requirements for derivative instruments and hedging activities.
The statement requires companies to recognize all derivatives as either assets
or liabilities, with the instruments measured at fair value. The accounting
43
for gains and losses resulting from changes in fair value depends on the
intended use of the derivative and the type of risk being hedged. SFAS 133 is
effective for the Company and the Bank for all fiscal quarters beginning January
1, 2000. Earlier adoption is permitted although we do not expect to do so. SFAS
No. 133 also permits certain reclassifications of securities among the trading,
available for sale and held to maturity classifications. We have no current
intention to reclassify any securities pursuant to SFAS 133. We do not presently
use derivatives and the adoption of SFAS 133 is not expected to have a material
impact on the Company's consolidated financial statements.
BUSINESS OF PEOPLES BANKCORP, INC.
The Company is not an operating company and has not engaged in any
significant business to date. It was formed in September 1998 as a New York-
chartered corporation to be the holding company for Ogdensburg Federal Savings
and Loan Association. The holding company structure and retention of proceeds
will facilitate: (i) diversification into non-banking activities, (ii)
acquisitions of other financial institutions, such as savings institutions,
(iii) expansion within existing and into new market areas and (iv) stock
repurchases without adverse tax consequences. There are no present plans
regarding diversification, acquisitions or expansion or stock repurchases.
Ogdensburg Federal has operated as an independent community oriented
savings institution since 1888. It is our intention to continue to operate as
an independent community oriented savings association following the conversion.
Since the Company will own only one savings association, it generally will
not be restricted in the types of business activities in which it may engage,
provided that we retain a specified percentage of our assets in housing-related
investments. The Company initially will not conduct any active business and
does not intend to employ any persons other than officers but will utilize our
support staff from time to time.
BUSINESS OF OGDENSBURG FEDERAL SAVING AND LOAN ASSOCIATION
The principal sources of funds for our activities are deposits and payments
on loans. We are also able to borrow from the FHLB of New York, although
historically we have done this rarely. Our deposits totaled $22.4 million at
June 30, 1998. Funds are used principally for the origination of loans secured
by first mortgages on one- to four-family residences which are located in our
market area. Such loans totaled $12.4 million, or 65.55%, of our total loans
receivable portfolio at June 30, 1998. We also originate other types of loans,
including loans secured by commercial real estate and consumer loans, and
purchase investment and mortgage-backed securities. Our principal source of
revenue is interest received on loans and investments and our principal expense
is interest paid on deposits.
44
MARKET AREA
We consider our primary market area to be the City of Ogdensburg, and the
surrounding townships of Lisbon, Oswegatchie, Madrid, Morristown, Heuvelton,
Hammond, Depeyster, Macomb and Waddington and the village of Rennsselaer Falls,
all of which are located in St. Lawrence County, New York. St. Lawrence County
is the largest county east of the Mississippi in terms of total acreage.
Ogdensburg is the eastern most United States port on the Great Lakes and the
northern most port in New York and is adjacent to the Montreal-Ottawa-Toronto
corridor. Although Ogdensburg is fairly rural with only approximately 13,000
residents, it is within a two hour drive of over 15 million people.
The largest employers in Ogdensburg and the surrounding communities include
the Ogdensburg Bridge and Port Authority, local government offices, U.S. Customs
Office, Mater Dei College and Wadhams Hall Seminary College, Ogdensburg School
District, Mitel Corporation, CompAS, and several local hospitals. By industry,
the largest sectors of the Ogdensburg economy are retail, services and
manufacturing. The average household income of $28,806 in 1997 for Ogdensburg
was significantly below that of New York as a whole of $57,084 and the average
for the United States of $50,540. The overall population of Ogdensburg has
declined by approximately 5% from 1990 to 1997 as compared to marginal growth of
1% for New York State and a 7.5% growth rate for the United States.
BUSINESS STRATEGY
Historically, our principal business strategy has been that of operating a
community-oriented institution which emphasizes residential real estate loans.
Our loans have typically been secured by properties located within our market
area. In recent years we have increased our originations of consumer loans,
particularly automobile loans, and have engaged in a limited amount of
commercial real estate and commercial business lending. The proceeds from the
conversion will enable us to continue growing and continue to meet the needs of
the market in which we do business. We do not anticipate that the mix of loans
that we will originate will change after conversion although we will consider
adding to our products and services as the competition within our market
demands.
LENDING ACTIVITIES
Most of our loans are mortgage loans which are secured by one- to four-
family residences. We also make consumer, residential construction and
commercial real estate and commercial business loans. Following the conversion,
we believe there will be sufficient demand in our market area to continue our
policy of emphasizing lending in the one- to four- family real estate loan area
and continue originating various types of consumer loans.
45
At June 30, 1998, our gross loans totaled $18.9 million of which $12.4
million were mortgage loans secured by one-to four-family residences. We
originate both fixed rate mortgage and ARM loans. Generally, all of the
consumer loans we originate have fixed rates, with the exception of home equity
lines of credit.
The following table sets forth information concerning the types of loans
held by us at the dates indicated.
AT JUNE 30, AT DECEMBER 31,
-------------------------------------------
1998 1997 1996
--------------------- ---------------- -------------------
AMOUNT % AMOUNT % AMOUNT %
-------- -------- ------- ------- --------- --------
(DOLLARS IN THOUSANDS)
Type of Loan:
- ------------
Real estate loans:
One- to four-family residential.. $12,377 65.55% $11,893 70.56% $11,838 76.37%
Commercial....................... 726 3.84 706 4.19 553 3.57
Construction..................... 199 1.05 67 0.40 115 0.74
Other loans:
Automobile....................... 3,299 17.47 2,121 12.58 1,400 9.03
Home equity...................... 1,061 5.62 1,226 7.27 903 5.83
Passbook......................... 219 1.16 217 1.29 270 1.74
Commercial....................... 200 1.06 100 0.59 -- --
Other consumer................... 803 4.25 526 3.12 422 2.72
------- ------ ------- ------ ------- ------
18,884 100.00% 16,856 100.00% 15,501 100.00%
====== ====== ======
Less:
Deferred fees.................... 21 24 26
Allowance for loan losses........ 165 164 116
------- ------- -------
Total......................... $18,698 $16,668 $15,359
======= ======= =======
46
The following table sets forth the estimated maturity of our loan portfolio
at December 31, 1997. The table does not include the effects of possible
prepayments or scheduled repayments. One- to four-family mortgage loans,
commercial real estate loans and home equity loans are shown as maturing based
on the earlier of the date of repricing or the date of the last payment required
by the loan agreement.
DUE AFTER DUE AFTER
DUE DURING THE YEAR ENDING 3 THROUGH 5 THROUGH DUE OVER 10
DECEMBER 31, 5 YEARS AFTER, 10 YEARS AFTER YEARS AFTER
------------------------------------ DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1999 2000 1997 1997 1997
------ ----- ----- ---------- -------------- ------------
(IN THOUSANDS)
Real Estate:
One- to four-family residential...... $7,703 $ 51 $ 27 $ 398 $ 937 $2,777
Commercial........................... 348 -- -- 271 -- 87
Construction......................... 31 -- -- -- -- 36
Automobile and other................... 51 214 437 1,726 219 --
Home equity............................ 1,226 -- -- -- -- --
Passbook............................... 89 33 55 22 18 --
Commercial............................. 100 -- -- -- -- --
------ ----- ----- ------ ------ ------
Total............................. $9,548 $ 298 $ 519 $2,417 $1,174 $2,900
====== ===== ===== ====== ====== ======
Total
---------
Real Estate:
One- to four-family residential...... $ 11,893
Commercial........................... 706
Construction......................... 67
Automobile and other................... 2,647
Home equity............................ 1,226
Passbook............................... 217
Commercial............................. 100
---------
Total............................. $ 16,856
=========
47
The next table shows at December 31, 1997, the dollar amount of all our
loans which have fixed interest rates and have floating or adjustable interest
rates.
PREDETERMINED FLOATING OR
RATES ADJUSTABLE RATES
------------- ----------------
(IN THOUSANDS)
Real Estate:
One- to four-family residential.. $3,553 $ 8,340
Commercial....................... 87 619
Construction..................... 36 31
Automobile and other............... 2,647 --
Home equity........................ -- 1,226
Passbook........................... 217 --
Commercial......................... -- 100
------ -------
Total......................... $6,540 $10,316
====== =======
ONE- TO FOUR-FAMILY RESIDENTIAL LOANS. Our primary lending activity
consists of the origination of one- to four-family residential mortgage loans
secured by property located in our primary market area. We generally originate
one- to four-family residential mortgage loans in amounts up to 80% of the
lesser of the appraised value or purchase price with a maximum loan amount of
$200,000 and a maximum term of 30 years. We also offer a first-time homebuyer
program pursuant to which loans may be made in amounts up to 90% of the lesser
of the appraised value or purchase price with the same maximum loan amount and
terms as our other mortgage loans.
We also offer ARM loans. The interest rate on ARM loans is based on an
index plus a stated margin. ARM loans provide for periodic interest rate
adjustments upward or downward of up to 2% per year. The interest rate may not
increase above a "ceiling rate" established at the time the loan is originated
and may not decrease below the original interest rate. Generally, ARM loans
typically reprice every year and provide for terms of up to 30 years with most
loans having terms of between 10 and 20 years.
ARM loans decrease the risk associated with changes in 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 loan
documents, and, therefore is potentially limited in effectiveness during periods
of rapidly rising interest rates. At June 30, 1998, approximately 65% of the
one- to four-family residential loans we held had adjustable rates of interest.
Mortgage loans originated and held by us generally include due-on-sale
clauses. This gives us the right to deem the loan immediately due and payable
in the event the borrower transfers ownership of the property securing the
mortgage loan without our consent.
48
RESIDENTIAL CONSTRUCTION LOANS. We make a limited number of residential
construction loans on one- to four-family residential properties to the
individuals who will be the owners and occupants upon completion of
construction. Borrowers are required to pay interest during the construction
period which may not last beyond 12 months. Upon completion of the
construction, the loan converts to a fully amortizing mortgage loan. Loan
proceeds are disbursed according to a draw schedule and we inspect the progress
of the construction before additional funds are disbursed. Construction loans
are offered on either a fixed or adjustable basis.
Construction lending is generally considered to involve a higher degree of
credit risk than long term financing of residential properties. Our risk of
loss on a construction loan is dependent largely upon the accuracy of the
initial estimate of the property's value at completion of construction and the
estimated cost of construction. If the estimate of construction cost and the
marketability of the property upon completion of the project prove to be
inaccurate, we may be compelled to advance additional funds to complete the
construction. Furthermore, if the final value of the completed property is less
than the estimated amount, the value of the property might not be sufficient to
assure the repayment of the loan.
COMMERCIAL REAL ESTATE LOANS. We offer limited commercial real estate loans
secured by small apartment buildings, office buildings, and other commercial
properties. Loan amounts do not exceed 75% of the appraised value of the
property. At June 30, 1998, we had a participation interest in a commercial real
estate loan originated by the Thrift Associations Service Corporation ("TASCO"),
a service corporation owned by various thrift institutions operating in New York
State. Our interest in this loan amounted to $269,000 and was secured by an
office building. This loan was on nonaccrual status at June 30, 1998 due to a
prior history of late payments. At June 30, 1998, the borrower had resumed
making payments but due to the prior history of delinquent payments, such loan
remained on nonaccrual status.
Commercial real estate lending entails significant additional risks
compared to residential property lending. These loans typically involve large
loan balances to single borrowers or groups of related borrowers. The repayment
of these loans typically is dependent on the successful operation of the real
estate project securing the loan. These risks can be significantly affected by
supply and demand conditions in the market for office and retail space and may
also be subject to adverse conditions in the economy. To minimize these risks,
we generally limit this type of lending to our market area and to borrowers who
are otherwise well known to us.
COMMERCIAL BUSINESS LOANS. We engage in a limited amount of commercial
business lending to benefit from the higher fees and interest rates and the
shorter term to maturity. Our commercial business loans consist of equipment,
lines of credit and other business purpose loans, which generally are secured by
either the underlying properties or by the personal guarantees of the borrower.
Our largest commercial business loan at June 30, 1998 had a balance of $200,000
and was made to a local auto dealer.
49
Unlike residential mortgage loans, which generally are made on the basis of
the borrower's ability to make repayment from his or her employment and other
income and which are secured by real property whose value tends to be more
easily ascertainable, commercial business loans typically are made on the basis
of the borrower's ability to make repayment from the cash flow of the borrower's
business. As a result, the availability of funds for the repayment of
commercial business loans may be substantially dependent on the success of the
business itself and the general economic environment.
CONSUMER LOANS. We offer various types of consumer loans in order to
provide a wider range of financial services to our customers. Consumer loans
totaled $5.4 million, or 28.50%, of our total loans at June 30, 1998. Our
consumer loans consist of automobile, home equity lines of credit, passbook,
personal unsecured loans, boat loans, home improvement loans and equipment
loans. Home equity lines of credit have a maximum draw period of ten years with
a maximum term of 20 years. Passbook and certificate of deposit secured loans
are offered up to the maximum of the deposit balance and are due on demand.
We offer loans for both new and used automobiles with maximum terms of five
years and maximum loan amounts of $30,000.
Consumer loans may entail greater risk than residential mortgage loans,
particularly in the case of consumer loans that are unsecured or secured by
assets that depreciate rapidly. Repossessed collateral for a defaulted consumer
loan may not be sufficient for repayment of the outstanding loan, and the
remaining deficiency may not be collectible.
LOAN APPROVAL AUTHORITY AND UNDERWRITING. Our President may approve all
consumer loans up to $30,000. All other loans require the approval of our board
of directors.
Upon receipt of a completed loan application from a prospective borrower, a
credit report is ordered. Income and certain other information is verified. If
necessary, additional financial information may be requested. An appraisal or
other estimate of value of the real estate intended to be used as security for
the proposed loan is obtained. Appraisals are prepared by outside fee
appraisers who are approved by the board of directors.
Either title insurance or a title opinion is generally required on all real
estate loans. Borrowers also must obtain fire and casualty insurance. Flood
insurance is also required on loans secured by property which is located in a
flood zone.
50
LOAN ORIGINATIONS. The following table sets forth certain information with
respect to our loan originations and purchases for the periods indicated. We
have not purchased or sold any loans in the secondary market in recent years.
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
---------------- -----------------
1998 1997 1997 1996
------- ------- ------ -------
(IN THOUSANDS)
Loans originated:
Real estate loans:
One- to four-family residential.... $1,708 $ 697 $1,501 $1,953
Commercial......................... 35 90 104 115
Automobile............................ 1,726 677 1,674 908
Home equity........................... 30 249 473 472
Passbook.............................. 36 28 64 199
Commercial............................ 100 -- 100 --
Other consumer........................ 430 152 425 224
------ ------ ------ ------
Total loans originated......... $4,065 $1,893 $4,341 $3,871
====== ====== ====== ======
LOAN COMMITMENTS. Written commitments are given to prospective borrowers
on all approved real estate loans. Generally, the commitment requires
acceptance within 30 days of the date of issuance. At June 30, 1998,
commitments to cover originations of mortgage loans were $302,000. We believe
that virtually all of our commitments will be funded.
LOANS TO ONE BORROWER. The maximum amount of loans which we may make to
any one borrower may not exceed the greater of $500,000, or 15%, of our
unimpaired capital and unimpaired surplus. We may lend an additional 10% of our
unimpaired capital and unimpaired surplus if the loan is fully secured by
readily marketable collateral. Our maximum loan-to-one borrower limit was
$500,000 at June 30, 1998. At June 30, 1998, our largest loan concentration
outstanding had a balance of $385,000.
NONPERFORMING AND PROBLEM ASSETS
LOAN DELINQUENCIES. Generally when a mortgage loan becomes 15 days past
due, a notice of nonpayment is sent to the borrower. If after 30 days payment
is still delinquent, the borrower will receive a formal delinquency notice. The
borrower will be contacted by telephone or visited personally if the loan
remains delinquent after 45 days. If the loan continues in a delinquent status
for 120 days past due and no repayment plan is in effect, the loan will be
referred to an attorney for collection, with foreclosure commenced no later than
180 days. The customer will be notified when foreclosure is commenced. At June
30, 1998, our loans past due between 30 and 89 days totaled $370,000.
Loans are reviewed on a monthly basis and are generally placed on a non-
accrual status when the loan becomes more than 90 days delinquent or when, in
our opinion, the collection of additional interest is doubtful. Interest
accrued and unpaid at the time a loan is placed on nonaccrual status is charged
against interest income. Subsequent interest payments, if any, are either
applied to the
51
outstanding principal balance or recorded as interest income, depending on the
assessment of the ultimate collectibility of the loan.
NONPERFORMING ASSETS. The following table sets forth information regarding
nonaccrual loans and real estate owned. As of the dates indicated, we had no
loans categorized as troubled debt restructurings within the meaning of SFAS 114
and no loans which were 90 days or more past due and still accruing interest.
AT
JUNE 30, AT DECEMBER 31,
---------------------
1998 1997 1996
--------- -------- ----------
(DOLLARS IN THOUSANDS)
Loans accounted for on a nonaccrual basis: (1)
Real estate:
One- to four-family residence.............. $ 31 $ 22 $ --
Commercial................................. 269 271 --
Construction............................... -- -- --
Automobile.................................... 3 -- --
Home equity................................... -- -- --
Passbook...................................... -- -- --
Commercial.................................... -- -- --
Other......................................... -- -- 9
----- ----- --------
Total...................................... $ 303 $ 293 $ 9
===== ===== ========
Accruing loans which are contractually
past due 90 days or more:
Real estate:
One- to four-family residence.............. $ -- $ -- $ --
Commercial................................. -- -- --
Construction............................... -- -- --
Automobile.................................... -- -- --
Home equity................................... -- -- --
Passbook...................................... -- -- --
Commercial.................................... -- -- --
Other......................................... -- -- --
----- ----- --------
Total...................................... $ -- $ -- $ --
===== ===== ========
Total nonperforming loans.................. $ 303 $ 293 $ 9
===== ===== ========
Percentage of total loans........................ 1.61% 1.74% 0.06%
===== ===== ========
Other non-performing assets (2).................. $ 40 $ 40 $ --
===== ===== ========
Loans modified in troubled debt restructurings... $ -- $ -- $ --
===== ===== ========
___________
(1) Non-accrual status denotes loans on which, in the opinion of management,
the collection of additional interest is unlikely. Payments received on a
nonaccrual loan are either applied to the outstanding principal balance or
recorded as interest income, depending on management's assessment of the
collectibility of the loan.
(2) Other nonperforming assets represents property acquired by us through
foreclosure or repossession. This property is carried at its fair value
less costs to sell.
52
At June 30, 1998, our largest nonaccrual loan consisted of our $269,000
participation interest in a $3.2 million loan originated by TASCO. The borrower
on such loan was making payments at such date but, due to a prior delinquency
history, the loan remained on nonaccrual status. See " -- Commercial Real Estate
Loans."
During the six months ended June 30, 1998 and the year ended December 31,
1997, we would have recorded additional interest income of approximately $1,000
and $8,000, respectively, on nonaccrual loans if such loans had been current
throughout the period. During the six months ended June 30, 1998, we recorded
income on the TASCO loan on the cash basis as payments were received. We did
not include any income on nonaccrual loans during such periods with the
exception that payments on the TASCO loan were recorded on a cash basis as they
were received during the six months ended June 30, 1998. At June 30, 1998, we
did not have any loans which were not classified as nonaccrual, 90 days past due
or restructured, but where known information causes us to have serious concerns
as to the ability of these borrowers to comply with their current loan terms.
CLASSIFIED ASSETS. OTS regulations provide for a classification system for
problem assets of savings associations which covers all problem assets. Under
this classification system, problem assets of savings associations such as ours
are classified as "substandard," "doubtful," or "loss." An asset is considered
substandard if it is inadequately protected by the current net worth and paying
capacity of the borrower or of the collateral pledged, if any. Substandard
assets include those characterized by the "distinct possibility" that the
savings association will sustain "some loss" if the deficiencies are not
corrected. Assets classified as doubtful have all of the weaknesses inherent in
those classified substandard, with the added characteristic that the weaknesses
present make "collection or liquidation in full, on the basis of currently
existing facts, conditions, and, values, "highly questionable and improbable."
Assets classified as loss are those considered "uncollectible" and of such
little value that their continuance as assets without the establishment of a
specific loss reserve is not warranted. Assets may be designated "special
mention" because of potential weakness that do not currently warrant
classification in one of the aforementioned categories.
When a savings association classifies problem assets as either substandard
or doubtful, it may establish general allowances for loan losses in an amount
deemed prudent by management. General allowances represent loss allowances
which have been established to recognize the inherent risk associated with
lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When a savings association classifies
problem assets as loss, it is required either to establish a specific allowance
for losses equal to 100% of that portion of the asset so classified or to charge
off such amount. A savings association's determination as to the classification
of its assets and the amount of its valuation allowances is subject to review by
the OTS, which may order the establishment of additional general or specific
loss allowances. A portion of general loss allowances established to cover
possible losses related to assets classified as substandard or doubtful may be
included in determining a savings association's regulatory capital. Specific
valuation allowances for loan losses generally do not qualify as regulatory
capital.
53
At June 30, 1998, none of our assets were classified as special mention,
doubtful or loss but we had $74,000 in loans classified as substandard.
FORECLOSED REAL ESTATE. Real estate acquired in settlement of loans is
carried at the lower of the unpaid loan balance or fair value less estimated
costs to sell. Write-downs from the unpaid loan balance to fair value at the
time of foreclosure are charged to the allowance for loan losses. Subsequent
write-downs to fair value, net of disposal costs, are charged to other expenses.
At June 30, 1998, we had one property which we received in lieu of foreclosure.
The property was carried on our books at $40,000 and has an appraised value in
excess of its carrying value. Subsequent to June 30, 1998, the property was
sold for $30,000.
ALLOWANCE FOR LOAN LOSSES. Our policy is to provide for losses on
unidentified loans in our loan portfolio. A provision for loan losses is
charged to operations based on management's evaluation of the potential losses
that may be incurred in our loan portfolio. The evaluation, including a review
of all loans on which full collectibility of interest and principal may not be
reasonably assured, considers: (i) our past loan loss experience, (ii) known and
inherent risks in our portfolio, (iii) adverse situations that may affect the
borrower's ability to repay, (iv) the estimated value of any underlying
collateral, and (v) current economic conditions.
We monitor our allowance for loan losses and make additions to the
allowance as economic conditions dictate. Although we maintain our allowance
for loan losses at a level that we consider adequate for the inherent risk of
loss in our loan portfolio, actual losses could exceed the balance of the
allowance for loan losses and additional provisions for loan losses could be
required. In addition, our determination as to the amount of its allowance for
loan losses is subject to review by the OTS, as part of its examination process.
After a review of the information available, the OTS might require the
establishment of an additional allowance.
54
The following table sets forth an analysis of our allowance for loan losses
for the periods indicated.
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
-------------------- -------------------
1998 1997 1997 1996
--------- --------- ------- ---------
(DOLLARS IN THOUSANDS)
Balance at beginning of period.......... $ 164 $ 116 $ 116 $ 116
Loans charged off:
Real estate mortgage:
One- to four-family residential... -- -- -- --
Commercial........................ -- -- 3 --
Construction...................... -- -- -- --
Automobile........................... 3 -- 3 --
Home equity.......................... -- -- -- --
Passbook............................. -- -- -- --
Commercial........................... -- -- -- --
Other................................ -- 2 3 --
----- ----- ----- ------
Total charge-offs....................... 3 2 9 --
----- ----- ----- ------
Recoveries:
Real estate mortgage:
One- to four-family residential... -- -- -- --
Commercial........................ -- -- -- --
Construction...................... -- -- -- --
Automobile........................... -- -- -- --
Home equity.......................... -- -- -- --
Passbook............................. -- -- -- --
Commercial........................... -- -- -- --
Other................................ 1 -- -- --
----- ----- ----- ------
Total recoveries........................ 1 -- -- --
----- ----- ----- ------
Net loans charged off................... 2 2 9 --
----- ----- ----- ------
Provision for loan losses............... 3 -- 57 --
----- ----- ----- ------
Balance at end of period................ $ 165 $ 114 $ 164 $ 116
===== ===== ===== ======
Ratio of net charge-offs to average
loans outstanding during the period.. 0.01% 0.01% 0.06% 0.00%
===== ===== ===== ======
55
The following table illustrates the allocation of the allowance for loan
losses for each category of loan. The allocation of the allowance to each
category is not necessarily indicative of future loss in any particular category
and does not restrict our use of the allowance to absorb losses in other loan
categories.
AT DECEMBER 31,
-----------------------------------------------------
AT JUNE 30, 1998 1997 1996
----------------------------- --------------------------- ------------------------
PERCENT OF PERCENT OF PERCENT OF
LOANS IN EACH LOANS IN EACH LOANS IN EACH
CATEGORY TO CATEGORY TO CATEGORY TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
------------- -------------- ------------- ------------ ------ ----------------
(DOLLARS IN THOUSANDS)
Real estate mortgage:
One- to four-family residential.... $ 32 65.55% $ 32 70.56% $ 41 76.37%
Commercial......................... 12 3.84 47 4.19 11 3.57
Construction....................... 1 1.05 1 0.40 3 0.74
Automobile............................ 85 17.47 53 12.58 29 9.03
Home equity........................... 16 5.62 18 7.27 19 5.83
Passbook.............................. -- 1.16 -- 1.29 -- 1.74
Commercial............................ -- 1.06 -- 0.59 -- --
Other................................. 19 4.25 13 3.12 13 2.72
---- ------ ---- ------ ----- ------
Total allowance for loan losses.. $165 100.00% $164 100.00% $ 116 100.00%
==== ====== ==== ====== ===== ======
INVESTMENT ACTIVITIES
SECURITIES. We are required under federal regulations to maintain a minimum
amount of liquid assets which may be invested in specified short-term securities
and certain other investments. See "Regulation -- Regulation of the
Association--Federal Home Loan Bank System" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations --Liquidity and
Capital Resources." The level of liquid assets varies depending upon several
factors, including: (i) the yields on investment alternatives, (ii) our judgment
as to the attractiveness of the yields then available in relation to other
opportunities, (iii) expectation of future yield levels, and (iv) our
projections as to the short-term demand for funds to be used in loan origination
and other activities. At June 30, 1998, our investment portfolio policy allowed
investments in instruments such as: (i) U.S. Treasury obligations, (ii) U.S.
federal agency or federally sponsored agency obligations, (iii) local municipal
obligations, (iv) mortgage-backed securities, (v) bankers' acceptances, (vi)
time certificates, (vii) federal funds, including FHLB overnight and term
deposits (up to six months), and (viii) investment grade corporate bonds,
commercial paper and mortgage derivative products. See " -- Mortgage-Backed
Securities." The board of directors may authorize additional investments.
Our securities at June 30, 1998 did not contain securities of any issuer
with an aggregate book value in excess of 10% of our equity, excluding those
issued by the United States Government or its agencies.
56
MORTGAGE-BACKED SECURITIES. To supplement lending activities, we have
invested in residential mortgage-backed securities. Mortgage-backed securities
can serve as collateral for borrowings and, through repayments, as a source of
liquidity. Mortgage-backed securities represent a participation interest in a
pool of one- to four-family or other type of mortgages. Principal and interest
payments are passed from the mortgage originators, through intermediaries
(generally quasi-governmental agencies) that pool and repackage the
participation interests in the form of securities, to investors such as us. Our
mortgage-backed securities portfolio consists of participations or pass-through
certificates issued by the Government National Mortgage Association ("GNMA").
GNMA certificates are guaranteed as to principal and interest by the full faith
and credit of the United States. Our mortgage-backed securities portfolio was
classified as "held to maturity" at June 30, 1998.
Expected maturities will differ from contractual maturities due to
scheduled repayments and because borrowers may have the right to call or prepay
obligations with or without prepayment penalties.
Mortgage-backed securities typically are issued with stated principal
amounts. The securities are backed by pools of mortgages that have loans with
interest rates that are within a set range and have varying maturities. The
underlying pool of mortgages can be composed of either fixed-rate or adjustable
mortgage loans. Mortgage-backed securities are generally referred to as
mortgage participation certificates or pass-through certificates. The interest
rate risk characteristics of the underlying pool of mortgages (i.e., fixed-rate
or adjustable-rate) and the prepayment risk, are passed on to the certificate
holder. The life of a mortgage-backed pass-through security is equal to the
life of the underlying mortgages.
The following table sets forth the carrying value (i.e., amortized cost) of
our investment securities and mortgage-backed securities, at the dates
indicated. At June 30, 1998, the market value of our investment and mortgage-
backed securities portfolio, designated held to maturity, was $3.6 million.
The following table sets forth the carrying value of our investment
securities and mortgage-backed portfolio at the dates indicated.
AT
JUNE 30, AT DECEMBER 31,
---------------
1998 1997 1996
-------- ------- ------
(DOLLARS IN THOUSANDS)
Securities available-for-sale:
Mortgage-backed securities - GNMA.. $ -- $ 737 $ 804
Securities held to maturity :
U.S. Government securities......... 3,482 3,962 3,470
Mortgage-backed securities - GNMA.. 64 69 91
------ ------ ------
Total investments................. $3,546 $4,768 $4,365
====== ====== ======
57
The following table sets forth the scheduled maturities, carrying values,
market values and average yields for our investment portfolio at June 30, 1998.
ONE YEAR OR LESS ONE TO FIVE YEARS FIVE TO TEN YEARS MORE THAN TEN YEARS
------------------ -------------------- ------------------- -------------------
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
---------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Securities held-to-maturity:
U.S. Government and
agency securities........ $1,482 5.26% $2,000 5.87% $ -- -- $ -- --%
Mortgage-backed
securities - GNMA........ -- -- -- -- 64 11.00
------ ------ ---- -----
Total.................... $1,482 $2,000 $ -- $ 64
====== ====== ==== =====
TOTAL INVESTMENT PORTFOLIO
----------------------------
CARRYING MARKET AVERAGE
VALUE VALUE YIELD
----------------------------
(DOLLARS IN THOUSANDS)
Securities
held-to-maturity:
U.S. Government and
agency securities........ $3,482 $3,481 5.59%
Mortgage-backed
securities - GNMA........ 64 71 11.00
------ ------
Total.................... $3,546 $3,552
====== ======
58
SOURCES OF FUNDS
Deposits are our major external source of funds for lending and other
investment purposes. Funds are also derived from the receipt of payments on
loans and prepayment of loans and, to a much lesser extent, maturities of
investment securities and mortgage-backed securities, borrowings and operations.
Scheduled loan principal repayments are a relatively stable source of funds,
while deposit inflows and outflows and loan prepayments are significantly
influenced by general interest rates and market conditions.
DEPOSITS. Consumer and commercial deposits are attracted principally from
within our primary market area through the offering of a selection of deposit
instruments including regular savings accounts, money market accounts, and term
certificate accounts. Deposit account terms vary according to the minimum
balance required, the time period the funds must remain on deposit, and the
interest rate. The interest rates paid by us on deposits are set weekly at the
direction of our senior management. Interest rates are determined based on our
liquidity requirements, interest rates paid by our competitors, and our growth
goals and applicable regulatory restrictions and requirements.
At June 30, 1998, time certificates in amounts of $100,000 or more
constituted $1.7 million, or 7.51%, of the deposit portfolio. The majority of
these certificates represent deposits from long-standing customers.
At June 30, 1998, our deposits were represented by the various types of
savings programs described below.
INTEREST MINIMUM BALANCES IN PERCENTAGE OF
RATE CATEGORY AMOUNT THOUSANDS TOTAL DEPOSITS
- -------- -------- ------- --------- --------------
-- % Demand accounts $ 100 $ 735 3.29%
3.09% Savings and club accounts 100 3,131 14.00
1.01%-2.57% NOW and money market accounts 100 to 2,500 1,971 8.82
TIME CERTIFICATES
-----------------
4.00-4.99% Fixed-term, fixed-rate 1,000 114 0.51%
5.00-5.99% Fixed-term, fixed-rate 1,000 13,748 70.35
6.00-6.99% Fixed-term, fixed-rate 1,000 2,657 3.03
------- ------
$22,356 100.00%
======= ======
59
The following table sets forth our time certificates classified by interest
rate at the dates indicated.
AT
JUNE 30, AT DECEMBER 31,
----------------
1998 1997 1996
---------- -------- -----
(IN THOUSANDS)
4.00 - 4.99%............................................. $ 114 $ 111 $ 2,205
5.00 - 5.99%............................................. 13,748 10,928 9,396
6.00 - 6.99%............................................. 2,657 5,267 3,757
-------- ------- -------
$ 16,519 $16,306 $15,358
======== ======= =======
The following table sets forth the amount and maturities of our time
certificates at June 30, 1998. Approximately 83.23% of such time certificates
has interest rates from 5.00% to 5.99%.
AMOUNT DUE
---------------------------------------------------------------
WITHIN
ONE YEAR 1-2 YEARS 2-3 YEARS 3-4 YEARS 4-5 YEARS TOTAL
-------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
$ 12,267 $ 3,658 $ 420 $ 160 $ 14 $ 16,519
======== ========= ========= ========= ========= =========
The following table sets forth our deposit activity for the periods
indicated:
INCREASE INCREASE
(DECREASE) (DECREASE)
BALANCE AT FROM BALANCE AT FROM BALANCE AT
JUNE 30, % OF DECEMBER DECEMBER 31, % OF DECEMBER DECEMBER 31, % OF
1998 DEPOSITS 31, 1997 1997 DEPOSITS 31, 1996 1996 DEPOSITS
------- -------- --------- ------------ ---------- --------- ----------- --------
(DOLLARS IN THOUSANDS)
Demand accounts................. $ 735 3.29% $ 97 $ 638 2.93% $ 168 $ 470 2.29%
Savings and club accounts....... 3,131 14.00 398 2,733 12.56 46 2,687 13.12
Time certificates............... 16,519 73.89 213 16,306 74.92 948 15,358 74.96
NOW and money market
accounts..................... 1,971 8.82 (117) 2,088 9.59 114 1,974 9.63
------- ------ --------- ------- ------ --------- ------- ------
Total...................... $22,356 100.00% $ 591 $21,765 100.00% $ 1,276 $20,489 100.00%
======= ====== ========= ======= ====== ========= ======= ======
60
The following table indicates the amount of our time certificates of
$100,000 or more by original maturity as of June 30, 1998.
CERTIFICATES
ORIGINAL MATURITY OF DEPOSIT
----------------- --------------
(IN THOUSANDS)
Three months or less........... $ --
Over three through six months.. 264
Over six through 12 months..... 873
Over 12 months................. 543
------
Total...................... $1,680
======
BORROWINGS. Advances (borrowings) may be obtained from the FHLB of New
York to supplement our supply of lendable funds. Advances from the FHLB of New
York are typically secured by a pledge of our stock in the FHLB of New York, a
portion of our first mortgage loans and other assets. Each FHLB credit program
has its own interest rate, which may be fixed or adjustable, and range of
maturities. At June 30, 1998, we did not have any borrowings outstanding.
COMPETITION
We compete for deposits with other insured financial institutions such as
commercial banks, thrift institutions, credit unions, finance companies, and
multi-state regional banks in our market area. We also compete for funds with
insurance products sold by local agents and investment products such as mutual
funds and other securities sold by local and regional brokers. Loan competition
varies depending upon market conditions. Our competition comes from commercial
banks, thrift institutions, credit unions and mortgage bankers, many of whom
have greater resources than we have.
PROPERTIES
The following table sets forth certain information regarding our main
office which is our only location.
BOOK VALUE AT DEPOSITS AT
YEAR OWNED OR JUNE 30, APPROXIMATE JUNE 30,
OPENED LEASED 1998 (1) SQUARE FOOTAGE 1998
------ -------- ------------- -------------- ------------
(DOLLARS IN THOUSANDS)
MAIN OFFICE: 1987 Owned $ 425 2,800 $ 22,356
825 State Street
Ogdensburg, NY 13669
_____________
(1) Cost less accumulated depreciation and amortization.
61
PERSONNEL
At June 30, 1998, we had six full-time and one part-time employees. None
of our employees are represented by a collective bargaining group. We believe
that our relationship with our employees is good.
LEGAL PROCEEDINGS
We are, from time to time, a party to legal proceedings arising in the
ordinary course of our business, including legal proceedings to enforce our
rights against borrowers. We are not currently a party to any legal proceedings
which are expected to have a material adverse effect on our financial
statements.
REGULATION
Set forth below is a brief description of certain laws which relate to us.
The description is not complete and is qualified in its entirety by references
to applicable laws and regulations.
GENERAL
As a federally chartered, SAIF-insured savings institution, we are subject
to extensive regulation by the OTS and the FDIC. Our lending activities and
other investments must comply with various federal and state statutory and
regulatory requirements, and the OTS periodically examines us for compliance
with various regulatory requirements. The FDIC also has authority to conduct
periodic examinations of us. We must file reports with the OTS describing our
activities and our financial condition and we must obtain approvals from
regulatory authorities before entering into certain transactions such as the
conversion or mergers with other financial institutions. We are also subject to
certain reserve requirements promulgated by the Board of Governors of the
Federal Reserve System ("Federal Reserve System"). Our relationship with our
depositors and borrowers is also regulated to a great extent by federal and
state law, especially in such matters as the ownership of savings accounts and
the form and content of our mortgage documents. This supervision and regulation
are primarily intended to protect depositors. The regulatory structure also
gives the regulatory authorities extensive discretion in connection with their
supervisory and enforcement activities and examination policies, including
policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes. Any change in regulations,
whether by the OTS, the FDIC or any other government agency, could have a
material adverse impact on our operations.
In addition, from time to time, there have been various legislature efforts
that, if enacted, could have a material impact on us. In the most recently
completed session of Congress, the House of Representatives passed legislation
which called for the modernization of the banking system and which, if enacted,
would significantly affect the operations and regulatory structure of financial
services industry, including savings institutions like us. While this
legislation preserved the thrift
62
charter, it would limit the powers and activities of new unitary thrift holding
companies. While the Senate failed to act upon the legislation prior to the end
of the session, legislation very similar to this proposal has been introduced
into the current Congressional session. At this time, we do not know if any
legislation of this type will ultimately be enacted or, if enacted, what form
the final legislation might take. If legislation similar to the pending
legislation is enacted into law, the legislation could affect our competitive
environment as well as our business and operations.
REGULATION OF THE ASSOCIATION
INSURANCE OF DEPOSIT ACCOUNTS. The FDIC maintains two separate funds for
the insurance of deposits up to prescribed statutory limits. The Bank Insurance
Fund ("BIF") insures the deposits of commercial banks and the SAIF insures the
deposits of savings associations. We are a member of the SAIF. The FDIC is
authorized to establish separate annual assessment rates for deposit insurance
for members of the BIF and the SAIF. The FDIC may increase assessment rates for
either fund if necessary to restore the fund's ratio of reserves to insured
deposits to its target level within a reasonable time and may decrease such
assessment rates if such target level has been met. The FDIC has established a
risk-based assessment system for both SAIF and BIF members. Under this system,
assessments are set within a range, based on the risk the institution poses to
its deposit insurance fund. This risk level is determined based on the
institution's capital level and the FDIC's level of supervisory concern about
the institution.
Because a significant portion of the assessments paid into the SAIF by
savings institutions were used to pay the cost of prior savings institution
failures, the reserves of the SAIF were below the level required by law. The
BIF, however, met its required reserve level during the third calendar quarter
of 1995. As a result, deposit insurance premiums for deposits insured by the
BIF were substantially less than premiums for deposits such as ours which are
insured by the SAIF. On September 30, 1996, President Clinton signed into law
legislation which included provisions designed to recapitalize the SAIF and to
eliminate the significant premium disparity between the BIF and the SAIF. Under
this law, institutions with deposits insured by the SAIF were required to pay a
special assessment equal to $0.657 per $100 of SAIF-assessable deposits held at
March 31, 1995. We recognized this special assessment of $128,000 during the
quarter ended September 30, 1996 and were required to pay the assessment on
November 27, 1996.
Beginning January 1, 1997, our annual deposit insurance premium was reduced
from 0.23% to 0.0644% of total assessable deposits. BIF institutions still pay
lower assessments than comparable SAIF institutions because BIF institutions pay
only 20% of the rate being paid by SAIF institutions on their deposits with
respect to obligations issued by the Financing Corp., a federally chartered
corporation which provided some of the financing required to resolve the thrift
crisis in the 1980s. The recapitalization plan also provides for the merger of
the SAIF and BIF effective January 1, 1999, assuming there are no savings
institutions under federal law.
REGULATORY CAPITAL REQUIREMENTS. OTS capital regulations require savings
institutions to meet three capital standards: (1) tangible capital equal to at
least 1.5 % of total adjusted assets, (2)
63
core capital equal to at least 3.0% of total adjusted assets, and (3) risk-based
capital equal to at least 8.0% of total risk-weighted assets. In addition, the
OTS may require that a savings institution that has a risk-based capital ratio
less than 8.0%, a ratio of Tier 1 capital to risk-weighted assets of less than
4.0% or a ratio of Tier 1 capital to adjusted total assets of less than 4.0%
(3.0% if the institution has received the highest rating on its most recent
examination) take certain actions to increase its capital ratios. If the
institution's capital is significantly below the minimum required levels or if
it is unsuccessful in increasing its capital ratios, the OTS may significantly
restrict its activities.
Tangible capital is defined as core capital less all intangible assets
(including supervisory goodwill), less certain mortgage servicing rights and
less certain investments. Core capital is defined as common stockholders'
equity (including retained earnings), non-cumulative perpetual preferred stock
and minority interests in the equity accounts of consolidated subsidiaries,
certain non-withdrawable accounts and pledged deposits of mutual savings
associations and qualifying supervisory goodwill, less non-qualifying intangible
assets, certain mortgage servicing rights and certain investments. Tier 1 has
the same definition as core capital.
Risk-based capital equals the sum of core capital plus supplementary
capital. The components of supplementary capital include, among other items,
cumulative perpetual preferred stock, perpetual subordinated debt, mandatory
convertible subordinated debt, intermediate-term preferred stock, and the
portion of the allowance for loan losses not designated for specific loan
losses. Overall, supplementary capital is limited to 100% of core capital. A
savings institution must calculate its risk-weighted assets by multiplying each
asset and off-balance sheet item by various risk factors as determined by the
OTS, which range from 0% for cash to 100% for delinquent loans, property
acquired through foreclosure, commercial loans, and other assets. At June 30,
1998, we were in compliance with all regulatory capital requirements as is shown
on the table below.
PERCENT OF
AMOUNT ASSETS (1)
-------- -------------
(DOLLARS IN THOUSANDS)
Tangible capital................ $1,648 6.8%
Tangible capital requirement.... 364 1.5
------ ----
Excess....................... $1,284 5.3%
====== ====
Core capital (2)................ $1,648 6.8%
Core capital requirement........ 727 3.0
------ ----
Excess....................... $ 921 3.8%
====== ====
Risk-based capital.............. $1,813 13.2%
Risk-based capital requirement.. 1,100 8.0
------ ----
Excess....................... $ 713 5.2%
====== ====
- ------------------
(1) Based on adjusted total assets for purposes of the tangible capital and
core capital requirements and risk-weighted assets for purpose of the risk-
based capital requirement.
(2) Reflects the capital requirement which the Bank must satisfy to avoid
regulatory restrictions that may be imposed pursuant to prompt corrective
action regulations. The core requirement applicable to the Bank may
increase if the OTS amends its capital regulations, as it has proposed, in
response to the more stringent leverage ratio adopted by the Office of the
Comptroller of the Currency for national banks.
64
The risk-based capital standards of the OTS generally require savings
institutions with more than a "normal" level of interest rate risk to maintain
additional total capital. An institution's interest rate risk will be measured
in terms of the sensitivity of its "net portfolio value" to changes in interest
rates. Net portfolio value is defined, generally, as the present value of
expected cash inflows from existing assets and off-balance sheet contracts less
the present value of expected cash outflows from existing liabilities. A
savings institution will be considered to have a "normal" level of interest rate
risk exposure if the decline in its net portfolio value after an immediate 200
basis point increase or decrease in market interest rates (whichever results in
the greater decline) is less than two percent of the current estimated economic
value of its assets. An institution with a greater than normal interest rate
risk will be required to deduct from total capital, for purposes of calculating
its risk-based capital requirement, an amount (the "interest rate risk
component") equal to one-half the difference between the institution's measured
interest rate risk and the normal level of interest rate risk, multiplied by the
economic value of its total assets.
The OTS calculates the sensitivity of an institution's net portfolio value
based on data submitted by the institution in a schedule to its quarterly Thrift
Financial Report and using the interest rate risk measurement model adopted by
the OTS. The amount of the interest rate risk component, if any, to be deducted
from an institution's total capital will be based on the institution's Thrift
Financial Report filed two quarters earlier. Savings institutions with less
than $300 million in assets and a risk-based capital ratio above 12% are
generally exempt from filing the interest rate risk schedule with their Thrift
Financial Reports. However, the OTS may require any exempt institution that it
determines may have a high level of interest rate risk exposure to file such
schedule on a quarterly basis and may be subject to an additional capital
requirement based upon its level of interest rate risk as compared to its peers.
Due to our size and risk-based capital level, we are exempt from the interest
rate risk component.
DIVIDEND AND OTHER CAPITAL DISTRIBUTION LIMITATIONS. OTS regulations
require us to give the OTS 30 days advance notice of any proposed declaration of
dividends to the Company. The OTS may prohibit the payment of dividends by us to
the Company. In addition, we may not declare or pay a cash dividend on our
capital stock if the effect would be to reduce our regulatory capital below the
amount required for the liquidation account to be established at the time of the
conversion. See "The Conversion -- Effects of Conversion to Stock Form on
Depositors and Borrowers of Ogdensburg Federal Savings and Loan Association --
Liquidation Account."
OTS regulations limit upon all capital distributions by savings
institutions, such as cash dividends, payments to repurchase or otherwise
acquire its shares, payments to stockholders of another institution in a cash-
out merger, and other distributions charged against capital. The rule
establishes three tiers of institutions based primarily on an institution's
capital level. An institution that exceeds all of its fully phased-in capital
requirements before and after a proposed capital distribution ("Tier 1
institution") and has not been advised by the OTS that it is in need of more
than the normal supervision can, after prior notice but without the approval of
the OTS, make capital distributions during a calendar year equal to the greater
of (i) 100.0% of its net income to date during the calendar year plus the amount
that would reduce by one-half its "surplus capital ratio" (the excess
65
capital over its fully phased-in capital requirements) at the beginning of the
calendar year, or (ii) 75% of its net income over the most recent four quarter
period. Any additional capital distributions require prior regulatory notice. As
of June 30, 1998, we qualified as a Tier 1 institution.
In the event our capital falls below our fully phased-in requirement or the
OTS notifies us that we are in need of more than normal supervision, we would
become a Tier 2 or Tier 3 institution and as a result, our ability to make
capital distributions could be restricted. Tier 2 institutions, which are
institutions that before and after the proposed distribution meet their current
minimum capital requirements, may only make capital distributions of up to 75%
of net income over the most recent four quarter period. Tier 3 institutions,
which are institutions that do not meet current minimum capital requirements and
propose to make a capital distribution, and Tier 2 institutions that propose to
make a capital distribution in excess of the noted safe harbor level, must
obtain OTS approval prior to making such distribution. In addition, the OTS
could prohibit a proposed capital distribution by any institution, which would
otherwise be permitted by the regulation, if the OTS determines that such
distribution would constitute an unsafe or unsound practice. The OTS has
proposed rules relaxing certain approval and notice requirements for well-
capitalized institutions.
A savings institution is prohibited from making a capital distribution if,
after making the distribution, the savings institution would be undercapitalized
(i.e., not meet any one of its minimum regulatory capital requirements).
Further, a savings institution cannot distribute regulatory capital that is
needed for its liquidation account.
QUALIFIED THRIFT LENDER TEST. Savings institutions must meet a Qualified
Thrift Lender test. We must maintain at least 65.0% of our portfolio assets
(total assets less intangible assets, property we use in conducting our business
and liquid assets in an amount not exceeding 20.0% of total assets) in Qualified
Thrift Investments to satisfy the test. Qualified Thrift Investments consist
primarily of residential mortgage loans and mortgage-backed and other securities
related to domestic, residential real estate or manufactured housing. The
shares of stock we own in the FHLB of New York also qualify as Qualified Thrift
Investments. Subject to an aggregate limit of 20.0% of portfolio assets, we may
also count the following as Qualified Thrift Investments: (i) 50.0% of the
dollar amount of residential mortgage loans originated for sale, (ii)
investments in the capital stock or obligations of any service corporation or
operating subsidiary as long as such subsidiary derives at least 80% of its
revenues from domestic housing related activities, (iii) 200% of the dollar
amount of loans and investments to purchase, construct or develop "starter
homes," subject to certain other restrictions, (iv) 200% of the dollar amount of
loans for the purchase, construction or development of domestic residential
housing or community centers in "credit needy" areas or loans for small
businesses located in such areas, (v) loans for the purchase, construction or
development of community centers, (vi) loans for personal, family, household or
educational purposes, subject to a maximum of 10% of portfolio assets, and (vii)
shares of the Federal Home Loan Mortgage Corporation or the Federal National
Mortgage Association stock.
If we satisfy the test, we will continue to enjoy full borrowing privileges
from the FHLB of New York. If we do not satisfy the test we may lose our
borrowing restrictions and be subject to
66
activities and branching restrictions applicable to national banks. Compliance
with the Qualified Thrift Lender test is determined on a monthly basis in nine
out of every 12 months. As of June 30, 1998, we were in compliance with our
Qualified Thrift Lender requirement with approximately 92.63% of our assets
invested in Qualified Thrift Investments.
TRANSACTIONS WITH AFFILIATES. Generally, transactions between a savings
institution and its affiliates are subject to certain limitations. Such
transactions must be on terms as favorable to the savings institution as
comparable transactions with non-affiliates. In addition, certain of these
transactions are restricted to an aggregate percentage of the savings
institution's capital. Collateral in specified amounts must usually be provided
by affiliates in order to receive loans from the savings institution. Our
affiliates include the Company and any company which would be under common
control with us. In addition, a savings institution may not extend credit to
any affiliate engaged in activities not permissible for a bank holding company
or acquire the securities of any affiliate that is not a subsidiary. The OTS
has the discretion to treat subsidiaries of savings institution as affiliates on
a case-by-case basis.
LOANS TO DIRECTORS, EXECUTIVE OFFICERS AND PRINCIPAL STOCKHOLDERS. Loans
from us to our directors, executive officers and, subsequent to the conversion,
our principal stockholders may not be made on terms more favorable than those
afforded to other borrowers. In addition, we cannot make loans in excess of
certain levels to directors, executive officers or 10% or greater stockholders
(or any of their affiliates) unless the loan is approved in advance by a
majority of our board of directors with any "interested" director not voting.
We are also prohibited from paying any overdraft of any of our executive
officers or directors. We are also subject to certain other restrictions on the
amount and type of loans to executive officers and directors and must annually
report such loans to our regulators.
LIQUIDITY REQUIREMENTS. All savings institutions are required to maintain
an average daily balance of liquid assets equal to a certain percentage of the
sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings institutions. At June 30, 1998, our required liquid asset
ratio was 4% and our actual ratio was 23.35%. Monetary penalties may be imposed
upon institutions for violations of liquidity requirements.
FEDERAL HOME LOAN BANK SYSTEM. We are a member of the FHLB of New York,
which is one of 12 regional FHLBs. Each FHLB serves as a reserve or central
bank for its members within its assigned region. It is funded primarily from
funds deposited by savings institutions and 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.
As a member, we are required to purchase and maintain stock in the FHLB of
New York in an amount equal to at least 1% of our aggregate unpaid residential
mortgage loans, home purchase
67
contracts or similar obligations at the beginning of each year, or 1/20 of our
advances from the FHLB of New York, whichever is greater. At June 30, 1998, we
had $139,000 in FHLB stock, at cost, which was in compliance with this
requirement.
FEDERAL RESERVE SYSTEM. The Federal Reserve System requires all depository
institutions to maintain non-interest bearing reserves at specified levels
against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts) and non-personal time certificates. The balances maintained
to meet the reserve requirements imposed by the Federal Reserve System may be
used to satisfy the liquidity requirements that are imposed by the OTS. At June
30, 1998, our reserve met the minimum level required by the Federal Reserve
System.
HOLDING COMPANY REGULATION
GENERAL. The Company will be required to register and file reports with the
OTS and will be subject to regulation and examination by the OTS. In addition,
the OTS will have enforcement authority over the Company and any non-savings
institution subsidiaries. This will permit the OTS to restrict or prohibit
activities that it determines to be a serious risk to us. This regulation is
intended primarily for the protection of our depositors and not for the benefit
of you, as stockholders of the Company.
The Company will also be required to file certain reports with, and comply
with the rules and regulations of the SEC under the federal securities laws.
ACTIVITIES RESTRICTIONS. Since the Company will only own one savings
institution, it will be able to diversify its operations into activities not
related to banking, but only so long as we satisfy the Qualified Thrift Lender
Test. If the Company controls more than one savings institution, it would lose
the ability to diversify its operations into non-banking related activities,
unless such other savings institutions each also qualify as a Qualified Thrift
Lender and were acquired in a supervised acquisition. See " -- Qualified Thrift
Lender Test."
RESTRICTIONS ON ACQUISITIONS. The Company must obtain approval from the
OTS before acquiring control of any other savings institution or savings and
loan holding company, substantially all the assets thereof or in excess of 5% of
the outstanding shares of another savings institution or savings and loan
holding company. The Company's directors and officers or persons owning or
controlling more than 25% of the Company's stock, must also obtain approval of
the OTS before acquiring control of any savings institution or savings and loan
holding company.
The OTS may only approve acquisitions that will result in the formation of
a multiple savings and loan holding company which controls savings institutions
in more than one state if: (i) the multiple savings and loan holding company
involved controls a savings institution which operated a home or branch office
in the state of the institution to be acquired as of March 5, 1987; (ii) the
acquiror is authorized to acquire control of the savings institution pursuant to
the emergency acquisition provisions of the Federal Deposit Insurance Act; or
(iii) the statutes of the state in which
68
the institution to be acquired is located specifically permit institutions to be
acquired by state-chartered institutions or savings and loan holding companies
located in the state where the acquiring entity is located (or by a holding
company that controls such state-chartered savings institutions).
FEDERAL SECURITIES LAW. The Company has filed with the SEC a Registration
Statement under the Securities Act of 1933, as amended (the "Securities Act"),
for the registration of the common stock. Upon completion of the conversion,
the common stock will be registered with the SEC under the Exchange Act and,
under OTS regulations, generally may not be deregistered for at least three
years thereafter. The Company will be subject to the information, proxy
solicitation, insider trading restrictions and other requirements of the
Exchange Act.
The registration under the Securities Act of the common stock does not
cover the resale of such shares. Shares of the common stock purchased by
persons who are not affiliates of the Company may generally be resold without
registration. Shares purchased by an affiliate of the Company will be subject
to certain resale restrictions. As long as the Company meets the current public
information requirements, each affiliate of the Company who complies with the
other conditions would be able to sell a limited number of shares based upon the
number of shares outstanding and the average trading volume for the common
stock.
TAXATION
FEDERAL TAXATION
We are subject to the provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), in the same general manner as other corporations.
However, prior to August 1996, savings institutions such as us, which met
certain definitional tests and certain other conditions prescribed by the Code
could benefit from certain favorable provisions regarding their deductions from
taxable income for annual additions to their bad debt reserve. The amount of
the bad debt deduction that a qualifying savings institution could claim for tax
purposes with respect to additions to its reserve for bad debts for "qualifying
real property loans" could be based upon our actual loss experience (the
"experience method") or as a percentage of our taxable income (the "percentage
of taxable income method"). Historically, we used the method that would allow
us to take the largest deduction.
In August 1996, the Code was revised to equalize the taxation of savings
institutions and banks. Savings institutions, such as us, no longer have a
choice between the percentage of taxable income method and the experience method
in determining additions to bad debt reserves. Thrifts with $500 million of
assets or less may still use the experience method, which is generally available
to small banks currently. Larger thrifts may only take a tax deduction when a
loan is actually charged off. Any reserve amounts added after 1987 will be
taxed over a six year period beginning in 1996; however, bad debt reserves set
aside through 1987 are generally not taxed. A savings institution may delay
recapturing into income its post-1987 bad debt reserves for an additional two
years if it meets a residential-lending test. This law is not expected to have
a material impact on us. At June 30, 1998, we had $426,000 of post-1987 bad-debt
reserves.
69
Earnings appropriated to our bad debt reserve and claimed as a tax
deduction including our supplemental reserves for losses will not be available
for the payment of cash dividends or for distribution (including distributions
made on dissolution or liquidation), unless we include the amount in income,
along with the amount deemed necessary to pay the resulting federal income tax.
If such amount is used for any purpose other than bad debt losses, including a
dividend distribution or a distribution in liquidation, it will be subject to
federal income tax at the then current rate.
The Code imposes a tax ("AMT") on alternative minimum taxable income
("AMTI") at a rate of 20%. AMTI is increased by certain preference items,
including the excess of the tax bad debt reserve deduction using the percentage
of taxable income method over the deduction that would have been allowable under
the experience method. Only 90% of AMTI can be offset by net operating loss
carryovers of which we currently have none. AMTI is also adjusted by
determining the tax treatment of certain items in a manner that negates the
deferral of income resulting from the regular tax treatment of those items.
Thus, our AMTI is increased by an amount equal to 75% of the amount by which our
adjusted current earnings exceeds our AMTI (determined without regard to this
adjustment and prior to reduction for net operating losses). In tax years
beginning after December 31, 1997, a "small" corporation will not be subject to
the AMT because its tentative minimum tax will be treated as zero. For a tax
year beginning in 1988, a corporation that has had average annual gross receipts
of $5,000,000 or less for its 1995-1997 tax years will be a small corporation.
Once a corporation is recognized as a small corporation, it will continue to be
exempt from AMT as long as its average annual gross receipts for the prior 3-
year period is not in excess of $7,500,000. If a corporation ceases to be a
small corporation, the AMT will apply prospectively only.
The Company may exclude from its income 100% of dividends received from us
as a member of the same affiliated group of corporations. A 70% dividends
received deduction generally applies with respect to dividends received from
corporations that are not members of such affiliated group, except that an 80%
dividends received deduction applies if the Company owns more than 20% of the
stock of a corporation paying a dividend. The above exclusion amounts, with the
exception of the affiliated group figure, were reduced in years in which we
availed our self of the percentage of taxable income bad debt deduction method.
Our federal income tax returns have not been audited by the IRS.
STATE TAXATION
We and the Company will report income on a combined basis to New York
State. We are subject to the New York State franchise tax on banking
corporations. The New York State tax on banking corporations is imposed in an
annual amount of the greater (i) 9% of our "Entire Net Income" allocable to New
York State during the taxable year, or (ii) the applicable alternative minimum
tax. The applicable alternative minimum tax is generally the greater of (i) a
percentage (0.01%, 0.004% or 0.002%, depending upon the nature and mix of our
assets and on the ratio of its net worth to the value of its assets) of the
value of our assets allocable to New York State with
70
certain modifications, (ii) 3 1/2% of our "Alternative Entire Net Income"
allocable to New York State or (iii) $325.00.
For purposes of the New York State tax on banking corporations, "Entire Net
Income" is similar to federal taxable income, subject to certain modifications
(including the fact that net operating losses cannot be carried back or carried
forward), and "Alternative Entire Net Income" is similar to "Entire Net Income,"
subject to certain further modifications.
MANAGEMENT OF THE COMPANY
Our board of directors consists of the same individuals who serve as
directors of Ogdensburg Federal Savings and Loan Association. Our certificate
of incorporation and bylaws require that directors be divided into three
classes, as nearly equal in number as possible. Each class of directors serves
for a three-year period, with approximately one-third of the directors elected
each year. Our officers will be elected annually by the board and serve at the
board's discretion.
The following individuals will serve as executive officers of the Company.
NAME POSITION(S) WITH THE COMPANY
---- ----------------------------
Robert E. Wilson President and Chief Executive Officer
Todd R. Mashaw Vice President, Secretary/Treasurer
MANAGEMENT OF OGDENSBURG FEDERAL SAVING AND LOAN ASSOCIATION
DIRECTORS AND EXECUTIVE OFFICERS
Our board of directors is composed of five members, each of whom serves for
a term of three years. Our proposed stock charter and bylaws require that
directors be divided into three classes, as nearly equal in number as possible.
Each class of directors serves for a three-year period, with approximately one-
third of the directors elected each year. Our officers are elected annually by
our board and serve at the board's discretion.
71
The following table sets forth information with respect to our directors and
executive officers, all of whom will continue to serve in the same capacities
after the conversion.
AGE AS OF POSITION(S)WITH DIRECTOR TERM
NAME JUNE 30, 1998 THE ASSOCIATION SINCE EXPIRES
- ---- ------------- --------------- -------- -------
Anthony P. LeBarge, Sr. 49 Director 1991 2001
Robert E. Hentschel 63 Chairman 1992 1999
Wesley L. Stitt 68 Director 1980 1999
Robert E. Wilson 60 President and Chief Executive
Officer; Director 1966 2000
George E. Silver 58 Director 1989 2001
Todd R. Mashaw 35 Vice President N/A N/A
The business experience for the past five years of each of the directors
and executive officers is as follows:
ANTHONY P. LEBARGE served as our Chairman of the Board until January 1998.
He is the general manger of Noco Energy Corp. He is a member of S.U.N.Y. Canton
College Council and the Masonic Lodge No. 128.
ROBERT E. HENTSCHEL serves as our Chairman of the Board of Directors. He
is a general surgeon in private practice and has been the Regional Medical
Director of the New York State Department of Corrections, Riverview Corrections
Facility, since 1984. He is a Board member and past president of the Remington
Art Museum and is a Board member of AAA Automobile Travel Club.
WESLEY L. STITT has been retired since 1990. Prior to his retirement, he
was the Superintendent of Schools of the Ogdensburg City Schools. He is Vice
President of Remington Endowment Board, a Trustee of the Remington Art Museum,
Chairman of S.U.N.Y. Canton College Council and Vice President of Augsbury
Institute. He is also a member of Heuvelton Development Committee, Rural
Rehabilitation Committee and the Institute of Ethical Behavior.
ROBERT E. WILSON has served as our President and Chief Executive Officer
since 1963. He is a former member of the Ogdensburg City School Board having
served 15 years with two terms as President and two terms as Vice President. He
was a member of Kiwanis International for 15 years and served on their Board of
Directors. For 25 years he participated in the Kiwanis youth activity programs.
GEORGE E. SILVER is an attorney for the law firm of Silver and Silver, and
a judge for the Office of Court Administration. He served as Chairman of the
Board from 1994 to 1995. He is a member of the Board of Directors of A. Barton
Hepburn Hospital and the Board of Directors of Ogdensburg Rescue Squad. He is
also President Emeritus of the Board of Trustees of the Remington Art Museum.
72
TODD R. MASHAW has served as our Vice President since 1989. He has been a
member of the Board of Assessment and Review for the City of Ogdensburg since
1995 and has been a member of S.U.N.Y. Canton College Business Administration
Advisory Committee since 1991. He has also coached Kiwanis Baseball and is
active in bringing a community-built playground to the City of Ogdensburg.
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
The board of directors conducts its business through meetings of the board
and through activities of its committees. During the year ended December 31,
1997, the board of directors held 12 regular meetings and two special meetings.
No director attended fewer than 75% of the total meetings of the board of
directors and committees on which such director served during the year ended
December 31, 1997.
DIRECTOR COMPENSATION
Each of the directors is paid a fee of $550 ($575 for the Chairman) per
regular monthly meeting and annual meeting of members attended and are paid for
one missed regular or annual meeting. In addition, they receive a fee of $100
per executive committee meeting attended. Total aggregate fees paid to the
current directors for the year ended December 31, 1997 were $39,000.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table sets forth the cash and
non-cash compensation awarded to or earned by our chief executive officer at
December 31, 1997. No other employee earned in excess of $100,000 for the year
ended December 31, 1997.
NAME AND FISCAL ANNUAL COMPENSATION ALL OTHER
-------------------
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1)
- -------------------- ------ ------ ----- ---------------
Robert E. Wilson 1997 $ 74,685 $3,650 $12,107
- --------------------
(1) Consists of board fees ($7,800) and matching contributions to the 401(k)
plan.
EMPLOYMENT AGREEMENT. We have entered into an employment agreement with our
President, Robert E. Wilson, and our Vice President, Todd R. Mashaw. Mr.
Wilson's base salary under the employment agreement is $78,000 and Mr. Mashaw's
base salary is $42,500. Each employment agreement has a term of three years.
Each agreement is terminable by us for "just cause" as defined in the agreement.
If we terminate Mr. Wilson or Mr. Mashaw without just cause or if Mr. Wilson or
Mr. Mashaw terminates his employment for "good reason", he will be entitled to a
continuation of his salary from the date of termination through the remaining
term of the agreement, plus an additional 12 months. The employment agreements
also contain a provision stating that in the event of the termination of
employment in connection with any change in control
73
of the Company or us, Mr. Wilson and Mr. Mashaw will be paid a lump sum amount
equal to 2.99 times their respective five year average annual taxable cash
compensation. If such payments had been made under the agreement as of June 30,
1998, such payments would have equaled approximately $221,000 and $114,000,
respectively. The aggregate payments that would have been made to them would be
an expense to us, thereby reducing our net income and our capital by that
amount. The agreements may be renewed annually by our board of directors upon a
determination of satisfactory performance within the board's sole discretion. If
Mr. Wilson or Mr. Mashaw shall become disabled during the term of his respective
agreement, he shall continue to receive payment of 100% of the base salary for a
period of up to 180 days. Such payments shall not be reduced by any other
benefit payments made under other disability program in effect for our
employees. If Mr. Wilson's or Mr. Mashaw's employment terminates for a reason
other than just cause, he will be entitled to purchase from us family medical
insurance through any group health plan maintained by us. We do not hold key man
life insurance policies on either of Mr. Wilson or Mr. Mashaw.
GUARANTY AGREEMENTS. The Company plans to enter into Guaranty Agreements
with Robert E. Wilson and Todd R. Mashaw. The agreements express the Company's
commitment to use its assets as needed to enable the Association to meet its
obligations under its employment agreements with Messrs. Wilson and Mashaw.
EMPLOYEE STOCK OWNERSHIP PLAN. We have established the ESOP for the
exclusive benefit of participating employees of ours, to be implemented upon the
completion of the conversion. Participating employees are employees who have
completed one year of service with us (including at least 1,000 hours of
service) and have attained the age of 21. An application for a letter of
determination as to the tax-qualified status of the ESOP will be submitted to
the IRS. Although no assurances can be given, we expect that the ESOP will
receive a favorable letter of determination from the IRS.
The ESOP is to be funded by contributions made by us in cash or common
stock. Benefits may be paid either in shares of the common stock or in cash.
In accordance with the Plan, the ESOP may borrow funds with which to acquire up
to 8.0% of the common stock to be issued in the conversion. The ESOP intends to
borrow funds from the Company. The loan is expected to be for a term of ten
years at an annual interest rate equal to the prime rate as published in The
---
Wall Street Journal. Presently it is anticipated that the ESOP will purchase up
- --------------------
to 8.0% of the common stock to be issued in the offering (12,000 shares based on
the midpoint of the Estimated Valuation Range). The loan will be secured by the
shares purchased and earnings of ESOP assets. Shares purchased with such loan
proceeds will be held in a suspense account for allocation among participants as
the loan is repaid. We anticipate contributing approximately $12,000 annually
(based on a 12,000 shares purchase) to the ESOP to meet principal obligations
under the ESOP loan, as proposed. It is anticipated that all such contributions
will be tax-deductible. This loan is expected to be fully repaid in
approximately 10 years. ESOP expense is based upon generally accepted
accounting principles as described in accounting SOP 93-6. Generally accepted
accounting principles require that as and when shares pledged as security for an
ESOP loan are committed to be released from the loan (i.e., as the loan is
repaid), ESOP expense is recorded based upon the fair value of the shares at
that time.
74
Shares sold above the maximum of the Estimated Valuation Range (i.e., more
than 172,500 shares) may be sold to the ESOP before satisfying remaining
unfilled orders of Eligible Account Holders to fill the ESOP's subscription or
the ESOP may purchase some or all of the shares covered by its subscription
after the conversion in the open market.
Contributions to the ESOP and shares released from the suspense account
will be allocated among participants on the basis of total compensation,
excluding bonuses. All participants must be employed at least 500 hours in a
plan year in order to receive an allocation. Participants will become 20%
vested in their ESOP account balances for each year of service beginning with
the second year of service, up to a maximum of 100% for six years of service.
Up to five years of service prior to the adoption of the ESOP shall be credited
for the purposes of vesting. Vesting will be accelerated upon retirement,
death, disability, change in control of the Company, or termination of the ESOP.
Forfeitures will be reallocated to participants on the same basis as other
contributions in the plan year. Benefits may be payable in the form of a lump
sum upon retirement, death, disability or separation from service. Our
contributions to the ESOP are discretionary and may cause a reduction in other
forms of compensation. Therefore, benefits payable under the ESOP cannot be
estimated.
In the event of a change in control of us, the outstanding balance of any
loans used to finance the purchase of shares by the ESOP will be payed off
through a transfer or sale of shares held as collateral under such loan, with
any remaining shares allocated to participant accounts pro rata based on their
account balances. Participants terminating employment on or after the change in
control will be entitled to receive a cash payment from the Company equal to the
amount, if any, which would have been allocated to the participant's account
immediately following the change in control but was precluded from allocation
based on allocation limits applicable under federal tax laws.
The board of directors has appointed non-employee directors to the ESOP
Committee to administer the ESOP and to serve as the initial ESOP Trustees. The
board of directors or the ESOP Committee may instruct the ESOP Trustees
regarding investments of funds contributed to the ESOP. The ESOP Trustees must
vote all allocated shares held in the ESOP in accordance with the instructions
of the participating employees. Unallocated shares and allocated shares for
which no timely direction is received will be voted by the ESOP Trustees in the
same proportion as participants vote allocated shares. In the absence of any
voting direction, the Company's board of directors may direct the Trustee as to
how the shares should be voted. In the absence of such direction, the Trustee
shall have sole discretion as to how the shares are voted.
Certain provisions of the ESOP, particularly the provision accelerating
vesting and requiring termination upon a change in control may be deemed to have
an anti-takeover effect in that they would increase the cost of an acquisition
of the Company.
75
PROPOSED FUTURE STOCK BENEFIT PLANS
STOCK OPTION PLAN. We intend to adopt a stock option plan (the Option
Plan) following the conversion, subject to approval by you and the Company's
stockholders, at a stockholders' meeting to be held no sooner than six months
after the conversion. If the Option Plan is adopted during the first year
following the conversion, the Option Plan would be in compliance with the OTS
conversion regulations in effect. See " -- Restrictions on Stock Benefit
Plans." If the Option Plan is implemented more than one year after the
conversion, the Option Plan will comply with OTS regulations and policies that
are applicable at such time. If the Option Plan is implemented within one year
after the conversion, in accordance with OTS regulations, a number of shares
equal to 10% of the aggregate shares of common stock to be issued in the
offering (i.e., 15,000 shares based upon the sale of 150,000 shares at the
midpoint of the Estimated Valuation Range) would be reserved for issuance by the
Company upon exercise of stock options or stock appreciation rights ("SARs") to
be granted to our officers, directors and employees from time to time under the
Option Plan. The purpose of the Option Plan would be to provide additional
performance and retention incentives to certain officers, directors and
employees by facilitating their purchase of a stock interest in the Company.
Under the OTS conversion regulations, the Option Plan, would provide for a term
of 10 years, after which no awards could be made, unless earlier terminated by
the board of directors pursuant to the Option Plan and the options would vest
over a five year period (i.e., 20% per year), beginning one year after the date
of grant of the option. Options would expire no later than 10 years from the
date granted and would expire earlier if the Option Committee so determines or
in the event of termination of employment. Options would be granted based upon
several factors, including seniority, job duties and responsibilities, job
performance, our financial performance and a comparison of awards given by other
savings institutions converting from mutual to stock form.
The Company would receive no monetary consideration for the granting of
stock options or SARs under the Option Plan. It would receive the option price
for each share issued to optionees upon the exercise of such options. Shares
issued as a result of the exercise of options will be either authorized but
unissued shares or shares purchased in the open market by the Company. However,
no purchases in the open market will be made that would violate applicable
regulations restricting purchases by the Company. The exercise of options and
payment for the shares received would contribute to the equity of the Company.
MANAGEMENT RECOGNITION PLAN. We intend to adopt the MRP following the
conversion, the objective of which is to enable us to retain personnel and
directors of experience and ability in key positions of responsibility. The
Company expects to hold a stockholders' meeting no sooner than six months after
the conversion in order for stockholders to vote to approve the MRP. If the MRP
is implemented within one year after the conversion, in accordance with
applicable OTS regulations, the shares granted under the MRP will be in the form
of restricted stock vesting over a five year period (i.e., 20% per year)
beginning one year after the date of grant of the award. Additionally, the
number of shares to be granted could not exceed 3% of the shares sold in the
conversion (4% if we had tangible capital of 10% or more) if the MRP is adopted
during the first year following conversion. If the MRP is implemented more than
one year after the conversion, the MRP will
76
comply with such OTS regulations and policies that are applicable at such time.
Compensation expense in the amount of the fair market value of the common stock
granted will be recognized pro rata over the years during which the shares are
payable. Until they have vested, such shares may not be sold, pledged or
otherwise disposed of and are required to be held in escrow. Any shares not so
allocated would be voted by the MRP Trustees. Awards would be granted based upon
a number of factors, including seniority, job duties and responsibilities, job
performance, our performance and a comparison of awards given by other
institutions converting from mutual to stock form. The MRP would be managed by a
committee of non-employee directors (the "MRP Trustees"). The MRP Trustees would
have the responsibility to invest all funds contributed by us to the trust
created for the MRP (the "MRP Trust").
We expect to contribute sufficient funds to the MRP so that the MRP Trust
can purchase, in the aggregate, up to 4% of the amount of common stock that is
sold in the conversion. The shares purchased by the MRP would be authorized but
unissued shares or would be purchased in the open market. In the event the
market price of the common stock is greater than $10.00 per share, our
contribution of funds will be increased. Likewise, in the event the market
price is lower than $10.00 per share, our contribution will be decreased. In
recognition of their prior and expected services to us and the Company, as the
case may be, the officers, other employees and directors responsible for
implementation of the policies adopted by the board of directors and our
profitable operation will, without cost to them, be awarded stock under the MRP.
Based upon the sale of 150,000 shares of common stock in the offering at the
midpoint of the Estimated Valuation Range, the MRP Trust is expected to purchase
up to 6,000 shares of common stock.
RESTRICTIONS ON STOCK BENEFIT PLANS. OTS regulations provide that in the
event we implement stock option or management and/or employee stock benefit
plans within one year from the date of conversion, such plans must comply with
the following restrictions: (1) the plans must be fully disclosed in the
prospectus, (2) for stock option plans, the total number of shares for which
options may be granted may not exceed 10% of the shares issued in the
conversion, (3) for restricted stock plans such as the MRP, the shares may not
exceed 3% of the shares issued in the conversion (4% for institutions with 10%
or greater tangible capital), (4) the aggregate amount of stock purchased by the
ESOP in the conversion may not exceed 10% (12% for well-capitalized institutions
utilizing a 4% management recognition plan), (5) no individual employee may
receive more than 25% of the available awards under the Option Plan or the MRP,
(6) directors who are not employees may not receive more than 5% individually or
30% in the aggregate of the awards under any plan, (7) all plans must be
approved by a majority of the total votes eligible to be cast at any duly called
meeting of the Company's stockholders held no earlier than six months following
the conversion, (8) for stock option plans, the exercise price must be at least
equal to the market price of the stock at the time of grant, (9) for restricted
stock plans such as the MRP, no stock issued in a conversion may be used to fund
the plan, (10) neither stock option awards nor restricted stock awards may vest
earlier than 20% as of one year after the date of stockholder approval and 20%
per year thereafter, and vesting may be accelerated only in the case of
disability or death (or if not inconsistent with applicable OTS regulations in
effect at such time, in the event of a change in control), (11) the proxy
material must clearly state that the OTS in no way endorses or approves of the
plans, and (12) prior
77
to implementing the plans, all plans must be submitted to the Regional Director
of the OTS within five days after stockholder approval with a certification that
the plans approved by the stockholders are the same plans that were filed with
and disclosed in the proxy materials relating to the meeting at which
stockholder approval was received.
We have not yet decided whether the Option Plan or the MRP will be
implemented during the first year after the conversion. If they are implemented
after the first anniversary of the conversion, the above-described limitations
and provisions will not apply and the stock benefit plans could include
provisions accelerating vesting upon a change in control or allowing for
benefits to vest over shorter periods of time. If such provisions are included,
the plans may have an anti-takeover effect in that the cost of any such takeover
attempt would be increased. Further, the potential acquisition by management of
stock under these plans could make it more difficult to obtain majority support
for stockholder proposals or transactions which are opposed by management.
CERTAIN RELATED TRANSACTIONS
During the year ended December 31, 1997, certain of our officers and
directors had loans from us in amounts exceeding $60,000. All of such loans
were made in the ordinary course of business, were made on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with other persons and did not involve more
than the normal risk of collectibility or present other unfavorable features.
RESTRICTIONS ON ACQUISITIONS OF THE COMPANY
The following discussion is a general summary of the material provisions of
the certificate of incorporation and bylaws of the Company and certain other New
York corporate law and regulatory provisions, which may be deemed to have such
an anti-takeover effect. The description of these provisions is necessarily
general and we refer you, in each case, to the certificate of incorporation and
bylaws of the Company which are incorporated herein by reference. See
"Available Information" as to how to obtain a copy of these documents.
While the board of directors is not aware of any effort that might be made
to obtain control of the Company after conversion, the board of directors
believes that it is appropriate to include certain provisions as part of the
Company's certificate of incorporation and bylaws to protect the interests of
the Company and its stockholders from hostile takeovers ("anti-
takeover"provisions) which the board of directors might conclude are not in the
best interests of us or our stockholders. These provisions may have the effect
of discouraging a future takeover attempt which is not approved by the board of
directors but which individual stockholders may deem to be in their best
interests or in which stockholders may receive a substantial premium for their
shares over the current market prices. As a result, stockholders who might
desire to participate in such a transaction may not have an opportunity to do
so. Such provisions will also render the removal of the current board of
directors or management of the Company more difficult.
78
PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
RESTRICTION ON ACQUISITION OF COMMON STOCK; LIMITATIONS ON VOTING RIGHTS.
The certificate of incorporation of the Company provides that, for a period of
five years after completion of the conversion, no person may directly or
indirectly, acquire or offer to acquire beneficial ownership of more than 10% of
any class of equity security outstanding of the Company (the "Limit"), unless
the "continuing" board of directors has first approved by a two-thirds vote the
offer or acquisition. Any shares acquired in violation of this restriction will
not be counted as shares outstanding for voting purposes, nor will the holder be
entitled to vote such shares. After five years from the date of conversion,
should any party acquire the beneficial ownership of shares in excess of 10%,
the record holders of more than 10% of any outstanding class of equity security
of the Company who obtained such shares without the requisite approval would be
entitled to cast only one-hundredth (1/100) of a vote for each share owned in
excess of 10%, and the aggregate voting power of such holders shall be allocated
proportionately among such record holders. A person is a beneficial owner of a
security if he has the power to vote or direct the voting of all or part of the
voting rights of the security, or has the power to dispose of or direct the
disposition of the security. The certificate of incorporation of the Company
further provides that this provision limiting voting rights may only be amended
upon the vote of 80% of the outstanding shares of voting stock.
ELECTION OF DIRECTORS. The Company's certificate of incorporation provides
that the board of directors of the Company will be divided into three staggered
classes, with directors in each class elected for three-year terms. As a result
of this provision, it would take two annual elections to replace a majority of
the Company's board. The Company's bylaws provide that the size of the board of
directors may be increased or decreased only if two-thirds of the directors then
in office concur in such action. The certificate of incorporation also provides
that any vacancy occurring in the board of directors, including a vacancy
created by an increase in the number of directors, shall be filled by the board.
Finally, the bylaws impose certain notice and information requirements in
connection with the nomination by stockholders of candidates for election to the
board of directors or the proposal by stockholders of business to be acted upon
at an annual meeting of stockholders.
The certificate of incorporation provides that a director may only be
removed for cause by the affirmative vote of at least 80% of the shares of the
Company entitled to vote generally in an election of directors cast at a meeting
of stockholders called for that purpose.
RESTRICTIONS ON CALL OF SPECIAL MEETING. The certificate of incorporation
of the Company provides that a special meeting of stockholders may be called
only pursuant to a resolution adopted by a majority of the board of directors,
or a Committee of the board.
ABSENCE OF CUMULATIVE VOTING. The Company's certificate of incorporation
provides that stockholders may not cumulate their votes in the election of
directors.
79
AUTHORIZED SHARES. The certificate of incorporation authorizes the
issuance of 3,000,000 shares of common stock and 500,000 shares of preferred
stock. The shares of common stock and preferred stock were authorized in an
amount greater than that to be issued in the conversion to provide the Company's
board of directors with as much flexibility as possible to effect, among other
transactions, financings, acquisitions, stock dividends, stock splits and the
exercise of stock options. However, these additional authorized shares may also
be used by the board of directors consistent with its fiduciary duty to deter
future attempts to gain control of the Company. The board of directors also has
sole authority to determine the terms of any one or more series of Preferred
Stock, including voting rights, conversion rates, and liquidation preferences.
As a result of the ability to fix voting rights for a series of Preferred Stock,
the board has the power, to the extent consistent with its fiduciary duty, to
issue a series of Preferred Stock to persons friendly to management in order to
attempt to block a post-tender offer merger or other transaction by which a
third party seeks control, and thereby assist management to retain its position.
The Company's board currently has no plans for the issuance of additional
shares, other than the possible issuance of additional shares pursuant to stock
benefit plans.
PROCEDURES FOR CERTAIN BUSINESS COMBINATIONS. The certificate of
incorporation requires the affirmative vote of at least 80% of the outstanding
shares of the Company entitled to vote in the election of director in order for
the Company to engage in or enter into certain "Business Combinations," as
defined therein, with any "Interested Shareholder" (as defined below) or any
affiliates of the "Interested Shareholder", unless the proposed transaction has
been approved in advance by the Company's board of directors, excluding those
who were not directors prior to the time the "Interested Shareholder" became the
"Interested Shareholder." Absent this provision, only the approval of a
majority of the shares outstanding would be required.
The term "Interested Shareholder" is defined to include any person and the
affiliates and associates of the person (other than the Company or its
subsidiary) who beneficially owns, directly or indirectly, 10% or more of the
outstanding shares of voting stock of the Company. Any amendment to this
provision requires the affirmative vote of at least 80% of the shares of the
Company entitled to vote generally in an election of directors.
AMENDMENT TO CERTIFICATE OF INCORPORATION AND BYLAWS. Amendments to the
Company's certificate of incorporation must be approved by the Company's board
of directors and also by a majority of the outstanding shares of the Company's
voting stock, provided, however, that approval by at least 80% of the
outstanding voting stock is generally required for certain provisions (i.e.,
provisions relating to restrictions on the acquisition and voting of greater
than 10% of the common stock; number, classification, election and removal of
directors; amendment of Bylaws; call of special stockholder meetings; director
liability; certain business combinations; power of indemnification; and
amendments to provisions relating to the foregoing in the certificate of
incorporation).
80
The bylaws may be amended by a majority vote of the board of directors or
the affirmative vote of the holders of at least 80% of the outstanding shares of
the Company entitled to vote in the election of directors cast at a meeting
called for that purpose.
NEW YORK BUSINESS CORPORATION ACT
The New York Business Corporation Law contains two provisions described
below which will be applicable to the Company upon completion of the conversion.
BUSINESS COMBINATION STATUTE. The New York Business Corporation Law
restricts for a period of five years a domestic corporation from engaging in a
business combination with an "interested shareholder" of the corporation unless
such business combination or the stock acquisition that resulted in the
interested shareholder achieving such status was approved by the board of
directors of such corporation prior to the subject stockholder's stock
acquisition date. The statute also restricts a corporation from engaging in a
business combination with an interested shareholder at any time other than (i) a
business combination approved by the board of directors prior to the interested
shareholder's stock acquisition date, (ii) a business combination approved by
the majority of the outstanding shares not owned by such stockholder but no
earlier than five years after the date of such stockholder's stock acquisition
date, or (iii) a business combination that satisfies certain "fair price"
provisions and other requirements. Under New York law, this statute is
applicable to all New York corporations with a class of securities registered
pursuant to the Exchange Act unless the corporation adopts a specific bylaw
provision opting out of its coverage. The common stock will be registered
pursuant to the Exchange Act and the bylaws do not contain any provision opting
out of its coverage.
ANTI-GREENMAIL PROVISION. Pursuant to New York law, the Company will be
prohibited from repurchasing ten percent or more of its shares from a
stockholder for more than the market value thereof unless such repurchase has
been approved by a majority vote of the outstanding shares or such stockholder
has held such shares for more than two years.
BENEFIT PLANS
In addition to the provisions of the Company's certificate of incorporation
and bylaws described above, certain benefit plans of ours adopted in connection
with the conversion contain provisions which also may discourage hostile
takeover attempts which the boards of directors might conclude are not in the
best interests for us or our stockholders. For a description of the benefit
plans and the provisions of such plans relating to changes in control, see
"Management of Ogdensburg Federal Savings and Loan Association -- Proposed
Future Stock Benefit Plans."
81
REGULATORY RESTRICTIONS
For three years following conversion, OTS regulations prohibit any person,
without the prior approval of the OTS, from acquiring or making an offer to
acquire more than 10% of the stock of any converted savings institution if such
person is, or after consummation of such acquisition would be, the beneficial
owner of more than 10% of such stock. In the event that any person, directly or
indirectly, violates this regulation, the securities beneficially owned by such
person in excess of 10% shall not be counted as shares entitled to vote and
shall not be voted by any person or counted as voting shares in connection with
any matter submitted to a vote of stockholders.
Federal law provides that no company, "directly or indirectly or acting in
concert with one or more persons, or through one or more subsidiaries, or
through one or more transactions," may acquire "control" of a savings
association at any time without the prior approval of the OTS. In addition, any
company that acquires such control becomes a "savings and loan holding company"
subject to registration, examination and regulation as a savings and loan
holding company. Control in this context means ownership of, control of, or
holding proxies representing more than 25% of the voting shares of a savings
association or the power to control in any manner the election of a majority of
the directors of such institution.
Federal law also provides that no "person," acting directly or indirectly
or through or in concert with one or more other persons, may acquire control of
a savings association unless at least 60 days prior written notice has been
given to the OTS and the OTS has not objected to the proposed acquisition.
Control is defined for this purpose as the power, directly or indirectly, to
direct the management or policies of a savings association or to vote more than
25% of any class of voting securities of a savings association. Under federal
law (as well as the regulations referred to below) the term "savings
association" includes state-chartered and federally chartered SAIF-insured
institutions, federally chartered savings and loans and savings banks whose
accounts are insured by the FDIC and holding companies thereof.
Federal regulations require that, prior to obtaining control of an insured
institution, a person, other than a company, must give 60 days notice to the OTS
and have received no OTS objection to such acquisition of control, and a company
must apply for and receive OTS approval of the acquisition. Control, involves a
25% voting stock test, control in any manner of the election of a majority of
the institution's directors, or a determination by the OTS that the acquiror has
the power to direct, or directly or indirectly to exercise a controlling
influence over, the management or policies of the institution. Acquisition of
more than 10% of an institution's voting stock, if the acquiror also is subject
to any one of either "control factors," constitutes a rebuttable determination
of control under the regulations. The determination of control may be rebutted
by submission to the OTS, prior to the acquisition of stock or the occurrence of
any other circumstances giving rise to such determination, of a statement
setting forth facts and circumstances which would support a finding that no
control relationship will exist and containing certain undertakings. The
regulations provide that persons or companies which acquire beneficial ownership
exceeding 10% or more of any class of a savings association's stock after the
effective date of the regulations must file with the OTS a
82
certification that the holder is not in control of such institution, is not
subject to a rebuttable determination of control and will take no action which
would result in a determination or rebuttable determination of control without
prior notice to or approval of the OTS, as applicable.
DESCRIPTION OF CAPITAL STOCK
The Company is authorized to issue 3,000,000 shares of the common stock,
$0.01 par value per share, and 500,000 shares of preferred stock, $0.01 par
value per share. The Company currently expects to issue up to 198,375 shares of
common stock in the conversion. The Company does not intend to issue any shares
of preferred stock in the conversion, nor are there any present plans to issue
such preferred stock following the conversion. Each share of common stock will
have the same relative rights as, and will be identical in all respects with,
each other share of common stock. THE COMMON STOCK OF THE COMPANY WILL REPRESENT
NONWITHDRAWABLE CAPITAL AND WILL NOT BE INSURED BY US, THE FDIC, OR ANY OTHER
GOVERNMENT AGENCY.
COMMON STOCK
VOTING RIGHTS. Each share of the common stock will have the same relative
rights and will be identical in all respects with every other share of the
common stock. The holders of the common stock will possess exclusive voting
rights in the Company, except to the extent that shares of Preferred Stock
issued in the future may have voting rights, if any. Each holder of the common
stock will be entitled to only one vote for each share held of record on all
matters submitted to a vote of holders of the common stock and will not be
permitted to cumulate their votes in the election of the Company's directors.
LIQUIDATION. In the unlikely event of the complete liquidation or
dissolution of the Company, the holders of the common stock will be entitled to
receive all assets of the Company available for distribution in cash or in kind,
after payment or provision for payment of (i) all debts and liabilities of the
Company (including all deposits with us and accrued interest thereon); (ii) any
accrued dividend claims; (iii) liquidation preferences of any preferred stock
which may be issued in the future; and (iv) any interests in the liquidation
account established upon the conversion for the benefit of Eligible Account
Holders and Supplemental Eligible Account Holders who continue to have their
deposits with us.
DIVIDENDS. From time to time, dividends may be declared and paid to the
holders of the common stock, who will share equally in any such dividends. For
information about cash dividends, see "Dividends" and "Taxation."
RESTRICTIONS ON ACQUISITION OF THE COMMON STOCK. See "Restrictions on
Acquisition of the Company" for a discussion of the limitations on acquisition
of shares of the common stock.
83
OTHER CHARACTERISTICS. Holders of the common stock will not have
preemptive rights with respect to any additional shares of the common stock
which may be issued. Therefore, the board of directors may sell shares of
capital stock of the Company without first offering such shares to existing
stockholders of the Company. The common stock is not subject to call for
redemption, and the outstanding shares of common stock when issued and upon
receipt by the Company of the full purchase price therefor will be fully paid
and non-assessable, except as set forth under " -- Possible Liability of Large
Stockholders" below.
POSSIBLE LIABILITY OF LARGE STOCKHOLDERS. Under New York law, the ten
largest stockholders of a New York corporation, as determined by the fair value
of their stock, are jointly and severally liable for any unpaid wages due to the
corporation's laborers, servants or other employees. Corporations whose stock is
either listed on a national securities exchange or regularly quoted in an over-
the-counter market by one or more members of a national or any affiliated
securities association are exempt from this provision. Upon completion of the
Offering, the Company intends to list the common stock over-the-counter.
Trident Securities, Inc., a member of the National Association of Securities
Dealers has indicated that it will make a market in the common stock. Trident
Securities, Inc. is not obligated to do so, however, and may stop doing so at
any time. If the common stock of the Company is not either listed on a national
securities exchange or regularly quoted in an over-the-counter market, the ten
largest stockholders of the Company would be personally liable in the event the
Company failed to pay wages due to laborers, servants or employees.
SERIAL PREFERRED STOCK
None of the 500,000 authorized shares of preferred stock of the Company
will be issued in the conversion. After the conversion is completed, the board
of directors of the Company will be authorized to issue serial preferred stock
and to fix and state voting powers, designations, preferences or other special
rights of such shares and the qualifications, limitations and restrictions
thereof, subject to regulatory approval but without stockholder approval. If and
when issued, the serial preferred stock is likely to rank prior to the common
stock as to dividend rights, liquidation preferences, or both, and may have full
or limited voting rights. The board of directors, without stockholder approval,
can issue serial preferred stock with voting and conversion rights which could
adversely affect the voting power of the holders of the common stock. The board
of directors has no present intention to issue any of the serial preferred
stock.
LEGAL AND TAX MATTERS
The legality of the common stock has been passed upon for us by Housley
Kantarian & Bronstein, P.C., Washington, D.C. Certain legal matters for
Trident Securities may be passed upon by Malizia, Spidi, Sloane & Fisch, P.C.,
Washington, D.C. The federal income tax consequences of the conversion have
been passed upon for us by Housley Kantarian & Bronstein, P.C., Washington, D.C.
The New York income tax consequences of the conversion have been passed upon for
us by Silver and Silver, Morristown, New York.
84
EXPERTS
The financial statements of Ogdensburg Federal Savings and Loan Association
as of December 31, 1997 and 1996, and for the years then ended, have been
included herein and the registration statement filed with the SEC in reliance
upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
Feldman has consented to the publication herein of a summary of its letters
to us setting forth its opinion as to the estimated pro forma market value of us
in the converted form and its opinion setting forth the value of subscription
rights and to the use of its name and statements with respect to it appearing in
this document.
ADDITIONAL INFORMATION
The Company has filed with the SEC a registration statement on Form SB-2
under the Securities Act of 1933, as amended, with respect to the common stock
offered in this document. As permitted by the rules and regulations of the SEC,
this document does not contain all the information set forth in the registration
statement. Such information can be examined without charge at the public
reference facilities of the SEC located at 450 Fifth Street, N.W., Washington,
D.C. 20549, and copies of such material can be obtained from the SEC at
prescribed rates. The SEC also maintains an internet address ("Web site") that
contains reports, proxy and information statements and other information
regarding registrants, including the Company, that file electronically with the
SEC. The address for this Web site is "http: //www. sec. gov." The statements
contained in this document as to the contents of any contract or other document
filed as an exhibit to the Form SB-2 describe the material features of such
contract or document but are, of necessity, brief descriptions and are not
necessarily complete; each such statement is qualified by reference to such
contract or document.
Ogdensburg Federal Savings and Loan Association has filed an Application
for conversion with the OTS with respect to the conversion. Pursuant to the
rules and regulations of the OTS, this document omits certain information
contained in that Application. The Application may be examined at the principal
office of the OTS, 1700 G Street, N.W., Washington, D.C. 20552 and at the
Northeast Regional Office of the OTS, 10 Exchange Place, 18th Floor, Jersey
City, New Jersey 07302 without charge.
A copy of the certificate of incorporation and the bylaws of the Company
are available without charge from Ogdensburg Federal Savings and Loan
Association.
85
OGDENSBURG FEDERAL SAVING AND LOAN ASSOCIATION
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report F-2
Statements of Financial Condition as of June 30, 1998 (unaudited)
and December 31, 1997 and 1996 F-3
Statements of Income for the Six Months Ended June 30, 1998 and
1997 (unaudited) and the Years Ended December 31, 1997 and 1996 F-4
Statements of Equity for the Six Months Ended June 30, 1998
(unaudited) and the Years Ended December 31, 1997 and 1996 F-5
Statements of Cash Flows for the Six Months Ended June 30, 1998
and 1997 (unaudited) and the Years Ended December 31, 1997 and 1996 F-6
Notes to Financial Statements F-8
All financial statement schedules are omitted because the required information
is either not applicable or is included in the financial statements or related
notes.
Separate financial statements for the Company have not been included since it
will not engage in material transactions until after the conversion. The
Company, which has been inactive to date, has no significant assets,
liabilities, revenues, expenses or contingent liabilities.
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Ogdensburg Federal Savings and Loan Association:
We have audited the accompanying statements of financial condition of Ogdensburg
Federal Savings and Loan Association as of December 31, 1997 and 1996, and the
related statements of income, equity and cash flows for the years then ended.
These financial statements are the responsibility of the Bank's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Ogdensburg Federal Savings and
Loan Association as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
July 24, 1998
Syracuse, New York
F-2
OGDENSBURG FEDERAL SAVINGS AND LOAN ASSOCIATION
Statements of Financial Condition
(In thousands)
December 31,
June 30, ------------------
ASSETS 1998 1997 1996
----------- ------ -------
(unaudited)
Cash and due from banks $ 622 674 671
Interest-bearing deposits with other banks 617 553 900
Securities available-for-sale, at fair value - 737 804
Securities held-to-maturity (fair value of $3,552 (unaudited)
in 1998, $4,038 in 1997 and $3,572 in 1996) 3,546 4,031 3,561
Loans, net of deferred fees 18,863 16,832 15,475
Less allowance for loan losses 165 164 116
------- ------ ------
Net loans 18,698 16,668 15,359
Premises and equipment, net 426 434 455
Federal Home Loan Bank stock, at cost 139 137 136
Accrued interest receivable 150 125 92
Real estate owned 40 40 -
Other assets 9 3 20
------- ------ ------
Total assets $24,247 23,402 21,998
======= ====== ======
LIABILITIES AND EQUITY
Liabilities:
Deposits:
Demand accounts 735 638 470
Savings and club accounts 3,131 2,733 2,687
Time certificates 16,519 16,306 15,358
NOW and money market accounts 1,971 2,088 1,974
------- ------ ------
Total deposits 22,356 21,765 20,489
Advance payments by borrowers for property
taxes and insurance 3 3 5
Other liabilities 240 57 27
------- ------ ------
Total liabilities 22,599 21,825 20,521
------- ------ ------
Commitments and contingencies (note 11)
Equity:
Retained earnings 1,648 1,576 1,488
Accumulated other comprehensive income - 1 (11)
------- ------ ------
Total equity 1,648 1,577 1,477
------- ------ ------
Total liabilities and equity $24,247 23,402 21,998
======= ====== ======
See accompanying notes to financial statements.
F-3
OGDENSBURG FEDERAL SAVINGS AND LOAN ASSOCIATION
Statements of Income
(In thousands)
Six-months
ended Years ended
June 30, December 31,
--------------------- --------------------
1998 1997 1997 1996
---------- ---------- -------- ----------
(unaudited)
Interest income:
Loans $ 727 645 1,330 1,266
Securities 127 132 277 260
Other short-term investments 28 35 55 66
----- ---- ----- -----
Total interest income 882 812 1,662 1,592
----- ---- ----- -----
Interest expense:
Deposits 522 477 998 954
Borrowings - - - 1
----- ---- ----- -----
Total interest expense 522 477 998 955
----- ---- ----- -----
Net interest income 360 335 664 637
Provision for loan losses 3 - 57 -
----- ---- ----- -----
Net interest income after provision
for loan losses 357 335 607 637
----- ---- ----- -----
Non-interest income:
Service charges 14 11 30 14
Net gain on sale of securities 1 - - -
Other 7 9 14 16
----- ---- ----- -----
Total non-interest income 22 20 44 30
----- ---- ----- -----
Non-interest expenses:
Salaries and employee benefits 140 128 258 258
Directors fees 22 20 39 36
Building, occupancy and equipment 27 32 73 59
Data processing 15 14 28 27
Postage and supplies 12 8 25 23
Deposit insurance premium 7 4 11 174
Insurance 5 7 17 14
Other 53 37 74 65
----- ---- ----- -----
Total non-interest expenses 281 250 525 656
----- ---- ----- -----
Income before income tax expense 98 105 126 11
Income tax expense 26 28 38 3
----- ---- ----- -----
Net income $ 72 77 88 8
===== ==== ===== =====
See accompanying notes to financial statements.
F-4
OGDENSBURG FEDERAL SAVINGS AND LOAN ASSOCIATION
Statements of Equity
Six-months ended June 30, 1998 and
years ended December 31, 1997 and 1996
(In thousands)
Accumulated
Other
Retained Comprehensive
Earnings Income Total
-------- ------ -----
Balance at December 31, 1995 $1,480 1 1,481
Comprehensive income:
Change in net unrealized gain (loss) on
securities, net of tax and
reclassification adjustment - (12) (12)
Net income 8 - 8
------ ------ -----
Comprehensive income 8 (12) (4)
------ ------ -----
Balance at December 31, 1996 1,488 (11) 1,477
Comprehensive income:
Change in net unrealized gain (loss) on
securities, net of tax and
reclassification adjustment - 12 12
Net income 88 - 88
------ ------ -----
Comprehensive income 88 12 100
------ ------ -----
Balance at December 31, 1997 1,576 1 1,577
Comprehensive income:
Change in net unrealized gain (loss) on
securities, net of tax and
reclassification adjustment(unaudited) - (1) (1)
Net income (unaudited) 72 - 72
------ ------ -----
Comprehensive income 72 (1) 71
------ ------ -----
Balance at June 30, 1998 (unaudited) $1,648 - 1,648
====== ====== =====
See accompanying notes to financial statements.
F-5
OGDENSBURG FEDERAL SAVINGS AND LOAN ASSOCIATION
Statements of Cash Flows
(In thousands)
Six-months
ended Years ended
June 30, December 31,
----------------- ----------------
1998 1997 1997 1996
-------- ------- ------- -------
(unaudited)
Cash flows from operating activities:
Net income $ 72 77 88 8
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 8 10 21 22
(Increase) decrease in accrued interest receivable (25) - (33) 3
Provision for loan losses 3 - 57 -
Net gains on sales of securities (1) - - -
Net amortization (accretion) of
premiums/discounts (56) (99) (196) (186)
Increase in other liabilities 177 32 39 25
Deferred income taxes 6 5 (14) (10)
(Increase) decrease in other assets (6) 13 17 (16)
------- ------ ------ -------
Net cash provided (used) by operating
activities 178 38 (21) (154)
------- ------ ------ -------
Cash flows from investing activities:
Net increase in loans (2,033) (447) (1,406) (498)
Proceeds from sales of securities available-for-sale 712 - - -
Proceeds from maturities and principal
reductions of securities available-for-sale 18 19 83 87
Purchases of securities held-to-maturity (2,957) (3,882) (8,796) (6,952)
Proceeds from maturities and principal
reductions of securities held-to-maturity 3,505 3,513 8,523 8,007
Purchase of FHLB stock (2) (1) (1) (5)
------- ------ ------ -------
Net cash provided (used) by
investing activities (757) (798) (1,597) 639
------- ------ ------ -------
Cash flows from financing activities:
Increase in deposits 591 738 1,276 922
Decrease in advance payments by
borrowers for property taxes and insurance - (2) (2) (31)
Borrowing from FHLB - - - 200
Repayment to FHLB - - - (200)
------- ------ ------ -------
Net cash provided by financing activities 591 736 1,274 891
------- ------ ------ -------
Net increase (decrease) in cash and cash equivalents 12 (24) (344) 1,376
Cash and cash equivalents at beginning of period 1,227 1,571 1,571 195
------- ------ ------ -------
Cash and cash equivalents at end of period $ 1,239 1,547 1,227 1,571
======= ====== ====== =======
F-6
OGDENSBURG FEDERAL SAVINGS AND LOAN ASSOCIATION
Statements of Cash Flows, Continued
(In thousands)
Six-months
ended Years ended
June 30, December 31,
------------------- -----------------
1998 1997 1997 1996
---- ---- ----- -----
(unaudited)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Non-cash investing activities:
Additions to real estate owned $ - - 40 -
Cash paid during the period for:
Interest 522 477 998 955
Income taxes 24 - - 28
======== ======== ======== ========
See accompanying notes to financial statements.
F-7
OGDENSBURG FEDERAL SAVINGS AND LOAN ASSOCIATION
Notes to Financial Statements
Six-Months Ended June 30, 1998 and 1997 (unaudited) and
years ended December 31, 1997 and 1996
(1) BUSINESS
Ogdensburg Federal Savings and Loan Association (the "Bank") is organized
under the laws of the United States. The Bank is subject to regulation by
the Office of Thrift Supervision (OTS) as a mutual savings and loan
association. The Bank's lending activity is concentrated in St. Lawrence
County and surrounding areas.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) BASIS OF PRESENTATION
The statements of financial condition as of June 30, 1998 and the
related statements of income and cash flows for the six-month periods
ended June 30, 1998 and 1997 and changes in equity for the six-month
period ended June 30, 1998 are unaudited and, in the opinion of
management, all adjustments (consisting of normal recurring accruals)
necessary for a fair presentation as of June 30, 1998 and for the
results for the unaudited periods have been made.
The financial statements have been prepared in conformity with
generally accepted accounting principles. Certain prior year amounts
have been reclassified to conform to the current year's
classifications. A description of the significant accounting policies
is presented below. In preparing the financial statements, management
is required to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities as of the date of the balance sheet and revenues and
expenses for the period. Actual results could differ from those
estimates.
(B) CASH AND CASH EQUIVALENTS
Cash and cash equivalents include vault cash, amounts due from banks
which represents short-term highly liquid investments.
(C) SECURITIES
The Bank classifies its debt securities as either available-for-sale
or held-to-maturity as the Bank does not hold any securities
considered to be trading. Held-to-maturity securities are those debt
securities the Bank has the ability and intent to hold until maturity.
All other debt securities are classif ied as available-for-sale.
Available-for-sale securities are recorded at fair value. Held-to-
maturity securities are recorded at amortized cost. Unrealized holding
gains and losses, net of the related tax effect, on available-for-sale
securities are excluded from earnings and reported as a separate
component of equity until realized. Transfers of securities between
categories are recorded at fair value at the date of transfer.
F-8
OGDENSBURG FEDERAL SAVINGS AND LOAN ASSOCIATION
Notes to Financial Statements, Continued
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(C) SECURITIES, CONTINUED
A decline in the fair value of an available-for-sale or held-to-
maturity security that is deemed to be other than temporary results in
a charge to earnings resulting in the establishment of a new cost
basis for the security.
Premiums and discounts are amortized or accreted over the life of the
related security as an adjustment to yield using the interest method.
Dividend and interest income are recognized when earned. Realized
gains and losses on securities are included in earnings and are
calculated using the specific identification method, for determining
the cost of the securities sold.
(D) LOANS
Loans are reported at the principal amount outstanding, net of
deferred fees. Fees and certain direct origination costs related to
lending activities are recognized using the interest method over the
contractual lives of the loans. Management has the ability and intent
to hold its loans to maturity.
Interest on loans is accrued and included in income at contractual
rates applied to the principal outstanding. The accrual of interest on
loans (including impaired loans) is generally discontinued and
previously accrued interest is reversed or an allowance is established
when loan payments are 90 days or more past due or when, by the
judgment of management, collectibility becomes uncertain. The
allowance is established by a charge to interest income equal to all
interest previously accrued. Subsequent recognition of income occurs
only to the extent that payment is received. Loans are returned to an
accrual status when both principal and interest are current and the
loan is determined to be performing in accordance with the applicable
loan terms.
(E) ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses consists of the provision charged to
operations based upon past loan loss experience, management's
evaluation of the loan portfolio under current economic conditions and
such other factors that require current recognition in estimating loan
losses. Loan losses and recoveries of loans previously written-off are
charged or credited to the allowance as incurred or realized,
respectively.
Management believes that the allowance for loan losses is adequate.
Management uses presently available information to recognize losses on
loans; however, future additions to the allowance may be necessary
based on changes in economic conditions. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses and may
require the Bank to recognize additions to the allowance based on
their judgment of information available to them at the time of their
examination.
F-9
OGDENSBURG FEDERAL SAVINGS AND LOAN ASSOCIATION
Notes to Financial Statements, Continued
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(E) ALLOWANCE FOR LOAN LOSSES, CONTINUED
The Bank estimates losses on impaired loans based on the present value
of expected future cash flows (discounted at the loan's effective
interest rate) or the fair value of the underlying collateral if the
loan is collateral dependent. An impairment loss exists if the
recorded investment in a loan exceeds the value of the loan as
measured by the aforementioned methods. A loan is considered impaired
when it is probable that the Bank will be unable to collect all
amounts due according to the contractual terms of the loan agreement.
Generally, all commercial mortgage loans and commercial loans in a
delinquent payment status (90 days or more delinquent) are considered
impaired. Residential mortgage loans, consumer loans and home equity
lines of credit are evaluated collectively since they are homogenous
and generally carry smaller individual balances. Impairment losses are
included as a component of the allowance for loan losses. The Bank
recognizes interest income on impaired loans using the cash basis of
income recognition. Cash receipts on impaired loans are generally
applied according to the terms of the loan agreement, or as a
reduction of principal, based upon management judgment and the related
factors discussed above.
(F) REAL ESTATE OWNED
Real estate acquired in settlement of loans is carried at the lower of
the unpaid loan balance or fair value less estimated costs to sell.
Write-downs from the unpaid loan balance to fair value at the time of
foreclosure are charged to the allowance for loan losses. Subsequent
write-downs to fair value, net of disposal costs, are charged to other
expenses.
(G) PREMISES AND EQUIPMENT
Land is carried at cost and buildings and improvements and furniture
and equipment are carried at cost less accumulated depreciation and
amortization. Depreciation is computed on the straight-line method
over the estimated useful lives of the assets (10-36 years for
building and improvements; 5-7 years for furniture and equipment).
(H) EMPLOYEE BENEFIT PLANS
The Bank has a non-contributory multiemployer pension plan which
participates in the Financial Institutions Retirement Fund. All full
time employees are covered by the plan.
The Bank has a defined contribution 401(k) Plan (the Plan) for all
eligible salaried employees. Employees are permitted to contribute up
to 15% of base pay to the Plan, subject to certain limitations. The
Bank matches each employee's contribution up to 5%.
F-10
OGDENSBURG FEDERAL SAVINGS AND LOAN ASSOCIATION
Notes to Financial Statements, Continued
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(I) INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income
in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in the period that
includes the enactment date.
(J) COMPREHENSIVE INCOME
On January 1, 1998, the Bank adopted the provisions of Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive
Income. This statement establishes standards for reporting and display
of comprehensive income and its components. Comprehensive income
includes the reported net income of a bank adjusted for items that are
currently accounted for as direct entries to equity, such as the mark
to market adjustment on securities available for sale, foreign
currency items and minimum pension liability adjustments. At the Bank,
comprehensive income represents net income plus other comprehensive
income, which consists of the net change in unrealized gains or losses
on securities available for sale for the period. Accumulated other
comprehensive income represents the net unrealized gains or losses on
securities available for sale as of the balance sheet dates.
Comprehensive income for the six-month periods ended June 30, 1998 and
1997 (unaudited) was $71,000 and $81,000, respectively.
The following summarizes the components of other comprehensive income
(in thousands):
Six-months
ended Years ended
June 30, December 31,
-------------------- --------------------
1998 1997 1997 1996
------ ---- ---- ----
(unaudited)
Other comprehensive income, before tax:
Net unrealized holding gain (loss) on
securities $ - - 17 (17)
Reclassification adjustment for (gains)
losses included in net income (1) - - -
-------- ------- ------- -------
Other comprehensive income, before tax (1) - 17 (17)
Income tax expense related to items of
other comprehensive income - - 5 (5)
-------- ------- ------- -------
Other comprehensive income,
net of tax $ (1) - 12 (12)
======== ======= ======= =======
F-11
OGDENSBURG FEDERAL SAVINGS AND LOAN ASSOCIATION
Notes to Financial Statements, Continued
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(K) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Bank does not engage in the use of derivative financial
instruments. The Bank's off-balance sheet financial instruments are
limited to commitments to extend credit.
(L) NEW ACCOUNTING STANDARDS
Effective January 1, 1998, the Bank adopted the remaining provisions
of Statement of Financial Accounting Standards ("SFAS") No. 125,
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, which relate to the accounting for
securities lending, repurchase agreements, and other secured financing
activities. These provisions, which were delayed for implementation by
SFAS No. 127, are not expected to have a material impact on the Bank.
(3) SECURITIES
Securities are summarized as follows (in thousands):
June 30, 1998
-----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- -----------
(unaudited)
Held-to-maturity:
U.S. Government securities $3,482 3 4 3,481
Mortgage-backed securities - GNMA 64 7 - 71
---------- ---------- ---------- -----------
$3,546 10 4 3,552
========== ========== ========== ===========
December 31, 1997
-----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- -----------
Available-for-sale:
Mortgage-backed securities - GNMA $ 736 1 - 737
---------- ---------- ---------- -----------
$ 736 1 - 737
========== ========== ========== ===========
Held-to-maturity:
U.S. Government securities $3,962 3 3 3,962
Mortgage-backed securities - GNMA 69 7 - 76
---------- ---------- ---------- -----------
$4,031 10 3 4,038
========== ========== ========== ===========
F-12
OGDENSBURG FEDERAL SAVINGS AND LOAN ASSOCIATION
Notes to Financial Statements, Continued
(3) SECURITIES, CONTINUED
December 31, 1996
-----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----------
Available-for-sale:
Mortgage-backed securities - GNMA $ 820 - 16 804
------- ---------- ---------- -----------
$ 820 - 16 804
--------- ---------- ---------- -----------
Held-to-maturity:
U.S. Government securities $ 3,470 - 1 3,469
Mortgage-backed securities - GNMA 91 12 - 103
--------- ---------- ---------- -----------
$ 3,561 12 1 3,572
========= ========== ========== ===========
The following table presents the carrying value and fair value of
securities based on the earlier of call or maturity date at June 30, 1998
(unaudited):
Amortized Fair
Cost Value
--------- -----
(In thousands)
Held-to-maturity:
Due within one year $1,482 1,482
Due after one year through five years 2,000 1,999
Due after ten years 64 71
------ -----
$3,546 3,552
====== =====
The following table presents the carrying value and fair value of
securities based on the earlier of call or maturity date at December 31,
1997:
Amortized Fair
Cost Value
--------- -----
(In thousands)
Available-for-sale:
Due after ten years $ 736 737
------ -----
$736 737
====== =====
Held-to-maturity:
Due within one year 2,962 2,959
Due after one year through five years 1,000 1,003
Due after ten years 69 76
------ -----
$4,031 4,038
====== =====
F-13
OGDENSBURG FEDERAL SAVINGS AND LOAN ASSOCIATION
Notes to Financial Statements, Continued
(3) SECURITIES, CONTINUED
The amortized cost and fair value of mortgage-backed securities are
presented by contractual maturity in the preceding table. Expected
maturities will differ from contractual maturities because borrowers may
have the right to call or prepay obligations without call or prepayment
penalties.
Gross gains of $1,000 were realized on sales of available-for-sale
securities during the six months ended June 30, 1998 (unaudited). There
were no sales of securities during the six months ended June 30, 1997
(unaudited) or the years ended December 31, 1997 and 1996.
(4) LOANS RECEIVABLE
Loans are summarized as follows (in thousands):
June 30, December 31,
-------- ------------
1998 1997 1996
---- ---- ----
(unaudited)
Mortgages:
One to four family residential $12,377 11,893 11,838
Commercial 726 706 553
Construction 199 67 115
------- ------ ------
13,302 12,666 12,506
Other loans:
Automobile 3,299 2,121 1,400
Home equity 1,061 1,226 903
Passbook 219 217 270
Commercial 200 100 -
Other 803 526 422
------- ------ ------
5,582 4,190 2,995
------- ------ ------
Total loans 18,884 16,856 15,501
Less:
Net deferred fees 21 24 26
------- ------ ------
$18,863 16,832 15,475
======= ====== ======
Changes in the allowance for loan losses are summarized as follows (in
thousands):
Six-months ended Years ended
June 30, December 31,
-------- ------------
1998 1997 1997 1996
---- ---- ---- ----
(unaudited)
Balance at beginning of period $ 164 116 116 116
Provision charged to operations 3 - 57 -
Recoveries 1 - - -
Loans charged off (3) (2) (9) -
------- ------ ------ ------
Balance at end of period $ 165 114 164 116
======= ====== ====== ======
F-14
OGDENSBURG FEDERAL SAVINGS AND LOAN ASSOCIATION
Notes to Financial Statements, Continued
(4) LOANS RECEIVABLE, CONTINUED
At June 30, 1998 (unaudited) and December 31, 1997, impaired loans totaled
$269,000 and $271,000, respectively with no related allowance for loan
losses as a result of cash flow analysis. Management believes it has no
impaired loans at December 31, 1996. The average recorded investment in
impaired loans was $270,000 and $0 during the six months ended June 30,
1998 and 1997 (unaudited), respectively and $23,000 and $0 during the years
ended December 31, 1997 and 1996, respectively. Interest income recognized
on impaired loans was $20,000 and $0 during the six months ended June 30,
1998 and 1997 (unaudited), respectively and $0 during the years ended
December 31, 1997 and 1996.
The principal balances of loans not accruing interest amounted to
approximately $303,000 (unaudited), $293,000 and $9,000 at June 30, 1998,
December 31, 1997 and 1996, respectively. The interest income foregone for
non-accruing loans was approximately $1,000 during the six months ended
June 30, 1998 and 1997 (unaudited) and $8,000 and $1,000 during the years
ended December 31, 1997 and 1996, respectively.
In the ordinary course of business, the Bank has and expects to continue to
have transactions, including borrowings, with its officers and directors.
In the opinion of management, such transactions were on substantially the
same terms, including interest rates and collateral, as those prevailing at
the time of comparable transactions with other persons and did not involve
more than a normal risk of collectibility or present any other unfavorable
features to the Bank. The following table presents a summary of the
activity with respect to loans to directors and executive officers at June
30, 1998 and December 31, 1997 and 1996.
June 30, December 31,
-------- ------------
1998 1997 1996
---- ---- ----
(unaudited)
Balance outstanding - beginning of year $ 209,552 308,989 310,965
New loans 477,000 14,500 34,800
Principal repayments (108,036) (113,937) (36,776)
--------- -------- -------
Balance outstanding - end of year $ 578,516 209,552 308,989
========= ======== =======
(5) PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows (in thousands):
June 30, December 31,
-------- ------------
1998 1997 1996
---- ---- ----
(unaudited)
Land $ 125 125 125
Buildings and improvements 429 429 429
Furniture and equipment 63 63 125
--------- -------- -------
617 617 679
Less accumulated depreciation and
amortization 191 183 224
--------- -------- -------
$ 426 434 455
========= ======== =======
Depreciation and amortization expense amounted to $8,000 and $10,000 during
the six months ended June 30, 1998 and 1997 (unaudited), respectively and
$21,000 and $22,000 during the years ended December 31, 1997 and 1996,
respectively.
F-15
OGDENSBURG FEDERAL SAVINGS AND LOAN ASSOCIATION
Notes to Financial Statements, Continued
(6) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows (in thousands):
June 30, December 31,
------------
1998 1997 1996
-------- ---- ----
(unaudited)
Loans $ 101 91 86
Securities 49 34 6
----- ---- ----
$ 150 125 92
===== ==== ====
(7) DEPOSITS
At June 30, 1998, December 31, 1997 and 1996, the aggregate amounts of time
deposits in denominations of $100,000 or more were approximately $1,680,000
(unaudited), $1,677,000 and $1,405,000, respectively. Deposit balances in
excess of $100,000 are not insured by the FDIC.
Contractual maturities of time certificates are summarized as follows (in
thousands):
June 30, December 31,
1998 1997
---------- ------------
unaudited)
Within one year $ 12,267 14,427
One through two years 3,658 1,339
Two through three years 420 381
Three through four years 160 155
Four through five years 14 4
--------- ------------
Total time certificates $ 16,519 16,306
========= ============
Interest expense on deposits is summarized as follows (in thousands):
Six-months ended Years ended
June 30, December 31,
-------------------- ------------------
1998 1997 1997 1996
---- ---- ---- ----
(unaudited)
Savings, club, and escrow accounts $ 40 39 79 86
Time certificates 465 420 883 832
NOW accounts and money
market accounts 17 18 36 36
------- ------ ------ ------
$ 522 477 998 954
======= ====== ====== ======
F-16
OGDENSBURG FEDERAL SAVINGS AND LOAN ASSOCIATION
Notes to Financial Statements, Continued
(8) BORROWINGS
The Bank is a member of the Federal Home Loan Bank of New York (FHLB). As a
member, the Bank is required to own capital stock in the FHLB and is
authorized to apply for advances from the FHLB. At June 30, 1998
(unaudited) and December 31, 1997 the Bank may borrow up to 30 percent of
total assets.
During the six-month period ended June 30, 1998 (unaudited) and 1997 the
Bank did not hold borrowings with the FHLB. During 1996 the Bank borrowed
$200,000 which was repaid prior to December 31, 1996.
(9) INCOME TAXES
Income taxes were allocated as follows (in thousands):
Six-months ended Years ended
June 30, December 31,
------------------- ----------------
1998 1997 1997 1996
-------- ------- ------- -------
(unaudited)
Income before income tax
expense $ 26 28 38 3
Changes in equity, for
changes in unrealized gains
on securities - - 5 (5)
----- ---- ---- -----
$ 26 28 43 (2)
===== ==== ==== =====
The components of income tax expense attributable to income from operations
are (in thousands):
June 30, December 31,
----------------- ----------------
1998 1997 1997 1996
---- ---- ---- ----
(unaudited)
Current:
Federal $ 15 20 46 7
State 5 3 6 6
----- ---- ---- -----
20 23 52 13
----- ---- ---- -----
Deferred:
Federal 4 3 (12) (6)
State 2 2 (2) (4)
----- ---- ---- -----
6 5 (14) (10)
----- ---- ---- -----
$ 26 28 38 3
===== ==== ==== =====
F-17
OGDENSBURG FEDERAL SAVINGS AND LOAN ASSOCIATION
Notes to Financial Statements, Continued
(9) INCOME TAXES, CONTINUED
Actual tax expense attributable to income before income taxes differed from
"expected" tax expense, computed by applying the U.S. Federal statutory tax
rate of 34% to income before income tax as follows (in thousands) :
Six-months ended Years ended
June 30, December 31,
----------------- ----------------
1998 1997 1997 1996
------ ------ ------ ------
(unaudited)
Computed "expected" tax expense $ 33 36 43 4
Increase (decrease) in income
taxes resulting from:
State taxes, net of
Federal tax benefits 5 5 3 1
Benefit of Federal tax rates
below statutory rates (14) (13) (7) (2)
Other items, net 2 - (1) -
----- ---- ---- ----
$ 26 28 38 3
===== ==== ==== ====
Effective tax rate 26.5% 26.7% 30.1% 27.3%
===== ==== ==== ====
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are (in
thousands):
June 30, December 31,
-----------------
1998 1997 1996
----------- ------ ------
(unaudited)
Deferred tax assets:
Allowance for loan losses $ 60 60 42
Net deferred loan fees 8 8 10
Accrued expenses 8 2 4
Unrealized losses on available-for-sale securities - - 5
Other 4 4 4
----- ---- ----
Total gross deferred tax assets 80 74 65
----- ---- ----
Deferred tax liabilities:
Accumulated depreciation on premises
and equipment 6 7 10
Accrued interest receivable 68 55 49
Prepaid expenses 1 - -
Bad debt reserves in excess of base year reserve 14 15 18
----- ---- ----
Total gross deferred tax liabilities 89 77 77
----- ---- ----
Net deferred tax assets (liabilities) $ (9) (3) (12)
===== ==== ====
F-18
OGDENSBURG FEDERAL SAVINGS AND LOAN ASSOCIATION
Notes to Financial Statements, Continued
(9) INCOME TAXES, CONTINUED
Realization of deferred tax assets is dependent upon the generation of
future taxable income or the existence of sufficient taxable income within
the carryback period. A valuation allowance is provided when it is more
likely than not that some portion of the deferred tax assets will not be
realized. In assessing the need for a valuation allowance, management
considers the scheduled reversal of the deferred tax liabilities, the level
of historical taxable income and projected future taxable income over the
periods in which the temporary differences comprising the deferred tax
assets will be deductible. Management believes that no valuation allowance
is necessary.
Included in retained earnings at June 30, 1998 (unaudited) and December 31,
1997 is approximately $426,000 representing aggregate provisions for loan
losses taken under the Internal Revenue Code. Use of these reserves to pay
dividends in excess of earnings and profits or to redeem stock, or if the
institution fails to qualify as a bank for Federal income tax purposes,
would result in taxable income to the Bank.
(10) PENSION PLAN
The Bank has a non-contributory multiemployer pension plan.
The Bank participates in the Financial Institutions Retirement Fund. The
Fund is a tax-qualified pension trust covering 319 participating employers.
Separate actuarial valuations are not made with respect to each employer.
All full-time employees of the Bank are covered by the plan. Statement of
Financial Accounting Standards (SFAS) No. 87, Employers' Accounting for
Pensions requires that in multiemployer plans, pension expense is equal to
contributions required each accounting period. During the six-months ended
June 30, 1998 (unaudited) and the years ended December 31, 1997 and 1996
the Bank was not required to make contributions to the plan and the expense
was $0.
The plan uses the projected unit credit cost method as its funding method.
The maximum number of years in which the initial past service liability
would be required to be paid off by any participating employer is 15.
Actuarial gains and losses are spread as a part of the valuation method.
The Bank adopted a 401(k) Plan effective January 1, 1994 covering all full-
time employees. The Bank matches an employee's contribution up to a maximum
of 5%. The expense for this Plan was $5,000 (unaudited) for the six-months
ended June 30, 1998 and 1997 and $10,000 and $8,000 for the years ended
December 31, 1997 and 1996, respectively.
The Bank is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments consist of commitments to extend credit and
involve, to varying degrees, elements of credit, market and interest rate
risk in excess of the amounts recognized in the balance sheet. Credit risk
represents the accounting loss that would be recognized at the reporting
date if obligated counterparties failed completely to perform as
contracted. Market risk represents risk that future changes in market
prices make financial instruments less valuable.
F-19
OGDENSBURG FEDERAL SAVINGS AND LOAN ASSOCIATION
Notes to Financial Statements, Continued
(11) COMMITMENTS AND CONTINGENCIES
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since some of the commitments are
expected to expire without being drawn upon, the total commitment amounts
do not necessarily represent future cash requirements. The Bank evaluates
each customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by the Bank upon extension of
credit, is based on management's evaluation of the customer's financial
position. Collateral held varies, but may include real estate, accounts
receivable, inventory, property, plant and equipment and income-producing
commercial properties. Substantially all commitments to extend credit, if
exercised, will represent loans secured by real estate.
Commitments to originate fixed and adjustable rate loans are as follows (in
thousands):
June 30, December 31,
1998 1997
----------- ------------
(unaudited)
Fixed rate
7.00 - 7.99% $ 56 -
8.00 - 8.99% 26 -
----- -----
Total fixed rate 82 -
Adjustable rate 220 15
----- -----
Total commitments to originate loans $ 302 15
===== =====
Unused lines of credit, which includes home equity, consumer and
commercial, amounted to $326,000 (unaudited) and $345,000 at June 30, 1998
and December 31, 1997, respectively.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for loan commitments is represented
by the contractual or notional amount of these instruments. The Bank uses
the same credit policies in making commitments as it does for on-balance
sheet instruments. The Bank controls its credit risk through credit
approvals, limits, and monitoring procedures.
In the normal course of business, there are various outstanding legal
proceedings. In the opinion of management, the aggregate amount involved in
such proceedings is not material to the financial condition or results of
operations of the Bank.
F-20
OGDENSBURG FEDERAL SAVINGS AND LOAN ASSOCIATION
Notes to Financial Statements, Continued
(12) CONCENTRATIONS OF CREDIT
A substantial portion of the Bank's loans are mortgages in Northern New
York State. Accordingly, the ultimate collectibility of a substantial
portion of the Bank's loan portfolio is susceptible to changes in market
conditions in this area. A majority of the Bank's loan portfolio is secured
by real estate.
The Bank's concentrations of credit risk are disclosed in the schedule of
loan classifications. Other than general economic risks, management is not
aware of any material concentrations of credit risk to any industry or
individual borrower.
(13) REGULATORY MATTERS
In 1996 the Government mandated a one-time assessment related to the
recapitalization of the Savings Association Insurance Fund (SAIF). Of the
total deposit insurance premium in 1996, the SAIF assessment amounted to
$128,000.
The Bank is subject to various regulatory capital requirements administered
by its primary Federal regulator, the Office of Thrift Supervision (OTS).
Failure to meet the minimum regulatory capital requirements can initiate
certain mandatory, and possible additional discretionary actions by
regulators, that if undertaken, could have a direct material affect on the
Bank and the financial statements. Under the regulatory capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Bank must meet specific capital guidelines involving 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 under the prompt corrective action guidelines
are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of: total risk-
based capital and Tier I capital to risk-weighted assets (as defined in the
regulations), Tier I capital to adjusted tangible assets (as defined), and
tangible capital to tangible assets (as defined). As discussed in greater
detail below, as of December 31, 1997, the Bank met all of the capital
adequacy requirements to which it is subject.
As of March 31, 1997, the most recent notification from the OTS, the Bank
was categorized as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Bank
has to maintain minimum total risk-based, Tier I risk-based, and Tier I
leverage ratios as disclosed in the table below. There are no conditions or
events since the most recent notification that management believes have
changed the Bank's prompt corrective action category.
F-21
OGDENSBURG FEDERAL SAVINGS AND LOAN ASSOCIATION
Notes to Financial Statements, Continued
(13) REGULATORY MATTERS, CONTINUED
The following is a reconciliation of the Bank's GAAP and Regulatory capital
at June 30, 1998 (unaudited), December 31, 1997 and December 31, 1996 (in
thousands):
GAAP Tangible Core Risk-based
capital capital % capital % capital %
-------- -------- ------ -------- ------ ----------- -------
June 30, 1998 (unaudited) $ 1,648 1,648 1,648 1,648
- ------------------------
Regulatory capital adjustments:
General allowance for loan
losses (up to 1.25% of
risk-weighted assets) - - 165
-------- -------- -----------
Total regulatory capital 1,648 6.8% 1,648 6.8% 1,813 13.2%
Regulatory capital requirement 364 1.5% 727 3.0% 1,100 8.0%
-------- -------- -----------
Regulatory capital excess $ 1,284 921 713
======== ======== ===========
GAAP Tangible Core Risk-based
capital capital % capital % capital %
-------- -------- ------ -------- ------ ----------- -------
December 31, 1997 $ 1,577 1,577 1,577 1,577
- -----------------
Regulatory capital adjustments:
General allowance for loan
losses (up to 1.25% of
risk-weighted assets) - - 150
Net unrealized gain on
securities available for sale (1) (1) (1)
-------- -------- -----------
Total regulatory capital 1,576 6.7% 1,576 6.7% 1,726 14.4%
Regulatory capital requirement 351 1.5% 702 3.0% 958 8.0%
-------- -------- -----------
Regulatory capital excess $ 1,225 874 768
======== ======== ============
GAAP Tangible Core Risk-based
capital capital % capital % capital %
---------- --------- --- --------- --- ------------- ---
December 31, 1996 $ 1,477 1,477 1,477 1,477
- -----------------
Regulatory capital adjustments:
General allowance for loan
losses (up to 1.25% of
risk-weighted assets) - - 116
Net unrealized gain on
securities available for sale 11 11 11
--------- --------- -------------
Total regulatory capital 1,488 6.8% 1,488 6.8% 1,604 15.4%
Regulatory capital requirement 330 1.5% 660 3.0% 836 8.0%
--------- --------- -------------
Regulatory capital excess $ 1,158 828 768
========= ========= =============
F-22
OGDENSBURG FEDERAL SAVINGS AND LOAN ASSOCIATION
Notes to Financial Statements, Continued
(13) REGULATORY MATTERS, CONTINUED
The following is a summary of the Bank's actual capital amounts and ratios
compared to the OTS minimum capital adequacy requirements and the OTS
requirements for classification as a well capitalized institution under
prompt corrective action provisions (in thousands):
To be classified as
well-capitalized under
Minimum capital prompt corrective
Actual adequacy requirements action provisions
----------------- ---------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ------- ---------- ---------- --------- -----------
As of June 30, 1998
- -------------------
(unaudited)
Total capital (to risk
weighted assets) $1,813 13.2% 1,100 8.0% 1,375 10.0%
Tier 1 Capital (to risk
weighted assets) 1,648 12.0 550 4.0 825 6.0
Tier 1 Capital (to adjusted
tangible assets) 1,648 6.8 727 3.0 1,212 5.0
Tangible Capital (to
tangible assets) 1,648 6.8 364 1.5 - N/A
As of December 31, 1997
- -----------------------
Total capital (to risk
weighted assets) $1,726 14.4% 958 8.0% 1,198 10.0%
Tier 1 Capital (to risk
weighted assets) 1,576 13.2 479 4.0 719 6.0
Tier 1 Capital (to adjusted
tangible assets) 1,576 6.7 702 3.0 1,170 5.0
Tangible Capital (to
tangible assets) 1,576 6.7 351 1.5 - N/A
As of December 31, 1996
- -----------------------
Total capital (to risk
weighted assets) $1,604 15.4% 836 8.0% 1,045 10.0%
Tier 1 Capital (to risk
weighted assets) 1,488 14.2 418 4.0 627 6.0
Tier 1 Capital (to adjusted
tangible assets) 1,488 6.8 660 3.0 1,101 5.0
Tangible Capital (to
tangible assets) 1,488 6.8 330 1.5 - N/A
F-23
OGDENSBURG FEDERAL SAVINGS AND LOAN ASSOCIATION
Notes to Financial Statements, Continued
(14) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Bank in estimating
fair values of financial instruments:
Cash and cash equivalents: The fair values are considered to
approximate the carrying values, as reported in the balance sheet.
Securities: Fair values of securities are based on exchange quoted
market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of similar
instruments.
Loans: For variable rate loans that reprice frequently and loans due
on demand with no significant change in credit risk, fair values are
considered to approximate carrying values. The fair values for certain
mortgage loans (e.g., one-to-four family residential) and other
consumer loans are based on quoted market prices of similar loans sold
on the secondary market, adjusted for differences in loan
characteristics. The fair values for other loans (e.g., commercial
real estate and rental property mortgage loans) are estimated using
discounted cash flow analyses, using interest rates currently being
offered for loans with similar terms to borrowers of similar credit
rating. The carrying amount of accrued interest approximates its fair
value.
FHLB Stock: The carrying value of this instrument, which is redeemable
at par, approximates fair value.
Off-balance-sheet instruments: Fair values for the Bank's off-balance-
sheet instruments (lines of credit and commitments to fund loans) are
based on fees currently charged to enter into similar agreements,
taking into account the remaining terms of the agreements and the
counterparties' credit standing. The fair value of these financial
instruments is immaterial and has therefore been excluded from the
table below.
Deposits: The fair values of demand, savings, club, NOW and money
market accounts are, by definition, equal to the amount payable on
demand at the reporting date (i.e., their carrying amounts). Fair
values for fixed-rate time certificates are estimated using a
discounted cash flow calculation that applies interest rates currently
being offered on these products to a schedule of aggregated expected
monthly maturities on time deposits.
F-24
OGDENSBURG FEDERAL SAVINGS AND LOAN ASSOCIATION
Notes to Financial Statements, Continued
(14) FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED
The estimated carrying values and fair values of the Bank's financial
instruments are as follows (in thousands):
June 30, December 31,
------------------------------------------------
1998 1997 1996
--------------------- -------------------- ---------------------
(unaudited)
Carrying Fair Carrying Fair Carrying Fair
Amount Value Amount Value Amount Value
-------- --------- --------- ------- --------- -------
Financial assets:
Cash, cash equivalents $ 1,239 1,239 1,227 1,227 1,571 1,571
Securities 3,546 3,552 4,768 4,775 4,365 4,376
Loans, net 18,698 18,888 16,668 16,306 15,359 14,687
FHLB stock 139 139 137 137 136 136
Financial liabilities:
Deposits:
Demand accounts 735 735 638 638 470 470
Savings and club
accounts 3,131 3,131 2,733 2,733 2,687 2,687
Time certificates 16,519 16,544 16,306 16,329 15,358 15,397
NOW and money
market accounts 1,971 1,971 2,088 2,088 1,974 1,974
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates are subjective in nature and involve uncertainties and
matters of significant judgment and, therefore, cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
(15) PLAN OF CONVERSION
On July 23, 1998, the Board of Directors of Ogdensburg Federal Savings and
Loan Association (the "Bank"), subject to regulatory approval and approval
by the depositors of the Bank, unanimously adopted a plan to convert from a
Federally-chartered mutual savings and loan association to a Federally-
chartered stock savings and loan association with the concurrent formation
of a holding company. It is anticipated that upon consummation of the
conversion, the holding company will own 100% of the stock of the Bank. It
is contemplated that stock in the holding company will be offered to
certain depositors of the Bank, an employee stock ownership plan for the
Bank and, if shares remain unsold, to the general public with a preference
to persons residing in St. Lawrence County, New York. At the time of the
conversion, the Bank will establish a liquidation account in an amount
equal to its total net worth as of the date of its latest balance sheet
appearing in the final prospectus. The liquidation account will be
maintained for the benefit of Eligible Account Holders and Supplemental
Eligible Account Holders who continue to maintain their accounts at the
Bank after conversion. The liquidation account will be reduced annually to
the extent that Eligible Account Holders and Supplemental Eligible Account
Holders reduce their qualifying deposits. Subsequent increases will not
restore an eligible depositor's interest in the liquidation account. In the
event of a complete liquidation, each eligible depositor will be entitled
to receive a distribution from the liquidation account based on the
proportionate share of the then total remaining qualifying deposits. The
Bank may not pay dividends that would reduce stockholders' equity below the
required liquidation account balance.
F-25
OGDENSBURG FEDERAL SAVINGS AND LOAN ASSOCIATION
Notes to Financial Statements, Continued
(15) PLAN OF CONVERSION, CONTINUED
Upon consummation of the conversion, each depositor of the Bank will have a
deposit account in the resulting Bank.
The costs of the conversion will be deferred and reduce the proceeds from
the sale of the common stock of the holding company. If the conversion is
not completed, all costs will be charged to expense. The Bank has not
incurred any conversion costs as of June 30, 1998 (unaudited).
F-26
GLOSSARY
ARM Loan Adjustable-rate mortgage loan.
BIF Bank Insurance Fund of the FDIC
Common Stock The common stock, $.01 par value per share, of Peoples
Bankcorp, Inc.
Community Offering Offering for sale to certain members of the general
public of any shares of common stock not subscribed for
in the Subscription Offering, including the possible
offering of common stock in a Syndicated Community
Offering
Company Peoples Bankcorp, Inc.
Conversion Simultaneous conversion of Ogdensburg Federal Savings
and Loan Association, to stock form, the issuance of
the Ogdensburg Federal Savings and Loan Association's
outstanding capital stock to the Company and the
Company's offer and sale of common stock
Eligible Account
Holders Savings account holders of Ogdensburg Federal Savings
and Loan Association with account balances of at least
$50 as of the close of business on June 30, 1997
ERISA Employee Retirement Income Security of 1974, as amended
ESOP Employee Stock Ownership Plan
Estimated
Valuation Range Estimated pro forma market value of the common stock
ranging from $1,275,000 to $1,725,000
Exchange Act Securities Exchange Act of 1934, as amended
Expiration Date 12:00 p.m., Eastern time, on December 14, 1998
FASB Financial Accounting Standards Board
FDIC Federal Deposit Insurance Corporation
Federal Reserve System The Board of Governors of the Federal Reserve System
A-1
Feldman Feldman Financial Advisors
FHLB Federal Home Loan Bank
FHLMC Federal Home Loan Mortgage Corporation
FNMA Federal National Mortgage Association
IRA Individual retirement account or arrangement
IRS Internal Revenue Service
MRP Management recognition plan to be adopted no earlier
than six months after the conversion
NASD National Association of Securities Dealers, Inc.
NOW account Negotiable order of withdrawal account
NPV Net portfolio value
Offering Subscription, Community and Syndicated Community
offerings, collectively
Option Plan Stock option plan to be adopted within one year of the
conversion
Order Form Form for ordering stock accompanied by a certification
concerning certain matters
Other Members Savings account holders (other than eligible account
holders and supplemental eligible account holders) and
borrowers who are entitled to vote at the Special
Meeting due to the existence of a savings account or a
borrowing, respectively, on the Voting Record Date for
the Special Meeting
OTS Office of Thrift Supervision
Plan of Conversion Plan of Ogdensburg Federal Savings and Loan Association
to convert from a federally chartered mutual savings
bank to a federally chartered stock savings bank and
the issuance of all of Ogdensburg Federal Savings and
Loan Association's outstanding capital stock to the
Company and the issuance of the Company's stock to the
public
A-2
Purchase Price $10.00 per share price of the common stock
SAIF Savings Association Insurance Fund of the FDIC
SEC Securities and Exchange Commission
Securities Act Securities Act of 1933, as amended
SFAS Statement of Financial Accounting Standards adopted by
FASB
Special Meeting Special Meeting of members of Ogdensburg Federal
Savings and Loan Association called for the purpose of
approving the Plan
Subscription Offering Offering of non-transferable rights to subscribe for
the common stock, in order of priority, to Eligible
Account Holders, tax-qualified employee plans,
Supplemental Eligible Account Holders and Other Members
Supplemental Eligible Depositors, who are not Eligible Account Holders of
Account Holders Ogdensburg Federal Savings and Loan Association, with
account balances of at least $50 on September 30, 1998.
Syndicated Community Offering of shares of common stock remaining after the
Offering Subscription Offering and undertaken prior to the end
and as part of the Community Offering, and which may,
at our discretion be made to the general public on a
best efforts basis by a selling group of broker-
dealers.
Trident Securities Trident Securities, Inc.
Voting Record Date The close of business on November 12, 1998, the date
for determining members entitled to vote at the Special
Meeting.
A-3
No dealer, salesman or other person has been authorized to give any information
or to make any representations not contained in this document in connection with
the offering made hereby, and, if given or made, such information or
representations must not be relied upon as having been authorized by Ogdensburg
Federal Savings and Loan Association, the Company, or Trident Securities. This
document does not constitute an offer to sell, or the solicitation of an offer
to buy, any of the securities offered hereby to any person in any jurisdiction
in which such offer or solicitation would be unlawful. Neither the delivery of
this document by Ogdensburg Federal Savings and Loan Association, the Company,
or Trident Securities nor any sale made hereunder shall in any circumstances
create an implication that there has been no change in the of Ogdensburg Federal
Savings and Loan Association or the Company, since any of the dates as of which
information is furnished herein or since the date hereof.
PEOPLES BANKCORP, INC.
UP TO 198,375 SHARES
COMMON STOCK
PROSPECTUS
TRIDENT SECURITIES, INC.
DATED NOVEMBER 12, 1998
THESE SECURITIES ARE NOT DEPOSITS OR ACCOUNTS
AND ARE NOT FEDERALLY INSURED OR GUARANTEED.
UNTIL FEBRUARY 10, 1999 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS
IS IN ADDITION TO THE DEALER OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.