SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[X] Preliminary Proxy Statement [_] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[_] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
CNY FINANCIAL CORPORATION
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[_] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
COMMON STOCK and options to purchase common stock
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(2) Aggregate number of securities to which transaction applies:
4,568,385 shares plus 340,690 options
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
$18.75 per share for shares and difference between $18.75 and
option exercise price for all options which will be cancelled
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(4) Proposed maximum aggregate value of transaction:
$87,947,221
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(5) Total fee paid:
$17,589.44
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[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
Notes:
CNY FINANCIAL CORPORATION
One North Main Street
Cortland, New York 13045
(607) 756-5643
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To be Held on April __, 2000
Please take notice that a Special Meeting of Stockholders of CNY
Financial Corporation will be held at ___ p.m., New York time, on April __, 2000
at ____________________________________________.
A Proxy Card and a Proxy Statement for the meeting are included with
this notice.
The meeting is for the purpose of considering and acting upon the
approval of an Agreement and Plan of Merger with Niagara Bancorp, Inc. and
Niagara Merger Corp and such other matters as may properly come before the
meeting or any adjournments. The Board of Directors is not aware of any other
business to come before the meeting.
Action may be taken on the foregoing proposal at the meeting on the
date specified above, or on any date or dates to which the meeting may be
adjourned. Stockholders of record at the close of business on March ___, 2000
are the stockholders entitled to vote at the meeting and any adjournments.
Please complete and sign the enclosed form of proxy and mail it
promptly in the enclosed envelope. The proxy will not be used if you attend and
vote at the meeting in person. Each of our stockholders has one vote for each
share of common stock owned.
BY ORDER OF THE BOARD OF DIRECTORS
Cortland, New York
March __, 2000
IMPORTANT: PLEASE RETURN YOUR PROXY PROMPTLY, WHICH WILL SAVE US THE EXPENSE OF
FURTHER REQUESTS FOR PROXIES TO ENSURE A QUORUM AT THE MEETING. A SELF ADDRESSED
ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE. NO POSTAGE IS REQUIRED IF MAILED
WITHIN THE UNITED STATES.
CNY FINANCIAL CORPORATION
One North Main Street
Cortland, New York 13045
(607) 756-5643
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PROXY STATEMENT
Special Meeting of Stockholders
to be held on April ___, 2000 at ____:00 pm
at ________________________________________
CNY Financial Corporation (referred to as "CNY" or the "Company" in
this Proxy Statement) is holding a special meeting of stockholders to vote on an
Agreement and Plan of Merger with Niagara Bancorp, Inc. and Niagara Merger Corp.
If stockholders approve the Agreement and the other conditions described below
are met, CNY will merge with Niagara Merger Corp and each stockholder of CNY
will receive $18.75 per share in cash for each share of CNY common stock that
the stockholders own, subject to reduction in certain circumstances as described
in this Proxy Statement.
There were 4,601,373 shares of CNY common stock outstanding and
entitled to vote on the Record Date. Each share is entitled to one vote on the
approval of the Agreement. A majority vote of the shares entitled to vote is
necessary to approve the Agreement. The merger cannot occur unless the Board of
Governors of the Federal Reserve System and the New York State Banking Board
approve the merger.
CNY has granted to Niagara Bancorp an option to purchase up to 919,814
shares of CNY common stock at $16.75 per share in connection with the Agreement.
In addition, the directors and executive officers of CNY and Cortland Savings
Bank have agreed to vote all their shares of stock in favor of the approval of
the Agreement.
CNY is first furnishing this Proxy Statement to its stockholders on
approximately March ____, 2000. The Record Date to determine who may vote at the
meeting is March ___, 2000. Please see the "Glossary" on page __ for definitions
of capitalized terms used in this Proxy Statement.
PLEASE SIGN AND RETURN THE ENCLOSED PROXY CARD AS SOON
AS POSSIBLE TO SIGNIFY HOW YOU WANT TO VOTE YOUR SHARES.
THE BOARD OF DIRECTORS OF CNY FINANCIAL CORPORATION UNANIMOUSLY RECOMMENDS
THAT YOU VOTE IN FAVOR OF THE AGREEMENT AND PLAN OF MERGER.
SUMMARY OF TERMS
This is a summary of the most material terms of the transaction between
CNY, Niagara Bancorp, Inc. and Niagara Merger Corp.
o If the merger occurs, each stockholder of CNY will receive
$18.75 per share in cash for each share of CNY common stock.
See the discussion under the caption "Description of the
Agreement" beginning at page ____ for more information.
o The per share price payable to CNY stockholders may be reduced
under certain circumstances if the cost, if any, of
environmental remediation at one of Cortland Savings' branches
exceeds $100,000. CNY management believes it is very unlikely
that costs would exceed that amount. See the discussion under
the caption "Environmental Matters" beginning at page for more
information.
o The merger cannot occur unless CNY stockholders approve the
merger by a majority of the total shares outstanding AND both
the Federal Reserve Board of Governors and the New York State
Banking Board approve the merger. See the discussion under the
caption "Regulatory Approval" beginning at page ____ for more
information.
o The Board of Directors of CNY has approved the merger and has
unanimously recommended that CNY stockholders vote in favor of
it. See the discussion under the caption "Background and
Reasons for the Merger" beginning at page ____ for more
information.
o CIBC World Markets Corp. has issued a fairness opinion dated
December 28, 1999 that, as of that date, the amount which will
be paid to CNY stockholders in the merger is fair from a
financial point of view. See the discussion under the caption
"Opinion of the Financial Advisor to CNY" beginning at page
____ for more information.
o CNY has given Niagara Bancorp an option to purchase 919,814
shares of CNY common stock for $16.75 per share. See the
discussion under the caption "Niagara's Option to Purchase
919,814 Shares of CNY Common Stock" beginning at page ____ for
more information.
o In general, CNY has agreed that it will not seek or encourage
a competing transaction to acquire CNY or Cortland Savings
Bank, except in very limited situations in which an
unsolicited offer is made. See the discussion under the
caption "Other Acquisition Proposals" beginning at page ____
for more information.
o The directors and executive officers of CNY and Cortland
Savings Bank have agreed to vote their shares of CNY stock in
favor of the merger. See the discussion under the caption
"Voting Agreement" beginning at page ____ for more
information.
o Niagara has stated that it intends to keep Cortland Savings
Bank as a separate institution for at least two years after
the merger with most of the current members of the Cortland
Savings Bank directors remaining as directors of Cortland
Savings Bank after the merger. See the discussion under the
caption "Background and Reasons for the Merger" beginning at
page ____ for more information.
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o The directors and executive officers of CNY and Cortland
Savings Bank who have stock options and restricted stock
awards under the CNY Financial stock benefit plans will
receive payment for their awards based upon the $18.75 price
per share. They and other employees will also receive other
benefits from the merger. See page ___ under the caption
"Benefits of the Merger to Directors and Executive Officers"
for more information.
o Stockholders who disagree with the merger have the right to
receive the appraised value of the shares if the merger is
consummated, provided that they satisfy certain requirements
of Delaware Law. See the discussion under the caption
"Appraisal Rights" beginning at page ____ for more
information.
TABLE OF CONTENTS
Page
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Summary of Terms...............................................................2
Glossary.......................................................................4
General Information About the Meeting, Proxies and Voting......................5
The Agreement and the Merger...................................................7
Principal Owners of CNY Common Stock..........................................22
Information Regarding the Market for CNY Common Stock and Related Matters.....24
Selected Financial Data.......................................................25
The Business of CNY Financial.................................................27
Management's Discussion and Analysis of Financial
Condition and Results of Operations........................................40
CNY Financial Corporation Index to Financial Statements......................F-1
Exhibit A - Agreement and Plan of Merger.....................................A-1
Exhibit B - Opinion Letter of CIBC World Markets Corp........................B-1
Exhibit C - Delaware General Corporation Law Section 262.....................C-1
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GLOSSARY
The following definitions are used in this Proxy Statement.
The "Agreement" means the Agreement and Plan of Merger among CNY, Niagara and
Niagara Merger Corp dated December 28, 1999. A copy of the Agreement is attached
as Exhibit A to this Proxy Statement.
"CIBC" means CIBC World Markets Corp., the financial advisor to CNY.
"CNY" means CNY Financial Corporation.
"Cortland Savings" means Cortland Savings Bank, a wholly-owed subsidiary of CNY.
The "ESOP" means the CNY Employee Stock Ownership Plan.
The "meeting" means the meeting of stockholders of CNY to be held on April ___,
and any adjournments or postponements of the meeting, at which CNY will present
the Agreement to its stockholders for approval.
The "merger" means the transaction in which CNY will merge into Niagara Merger
Corp (a subsidiary of Niagara) and each stockholder of CNY will be entitled to
receive $18.75 for each share of CNY common stock that the stockholder owns.
"Niagara" means Niagara Bancorp, Inc., a federally registered bank holding
company which now owns First Niagara Bank, formerly known as Lockport Savings
Bank.
The "PRRP" means the CNY Financial Corporation Personnel Recognition and
Retention Plan which the Board of Directors adopted and which stockholders
approved at a meeting held on April 28, 1999, including the amendment which
stockholders approved on October 18, 1999.
The "Record Date" means March ___, 2000, which is the date which CNY will use to
determine which CNY stockholders of record are entitled to vote at the meeting.
The "Stock Option Plan" means the CNY Financial Corporation Stock Option Plan
which the Board of Directors adopted and which stockholders approved at a
meeting held on April 28, 1999, including the amendment which stockholders
approved on October 18, 1999.
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GENERAL INFORMATION ABOUT THE MEETING, PROXIES AND VOTING
The Board of Directors of CNY is circulating this Proxy Statement and
is soliciting stockholder votes with the accompanying proxy card. If you sign
and return that proxy card so CNY receives it before the polls close at the
meeting, your votes will be cast as you mark on the proxy card. If you sign and
return your proxy card but you do not mark how you want to vote, then your
shares will be voted in favor of the Agreement.
If you want to revoke the proxy you submit in response to this proxy
solicitation, you must: (i) sign and deliver a written notice with a later date
to the Secretary of CNY at or before the meeting stating that you want to revoke
the proxy, (ii) sign and deliver to the Secretary of CNY at or before the
meeting a later-dated proxy card relating to the same shares, or (iii) attend
the meeting and vote in person. Revoking a proxy is effective only if it occurs
before the polls close at the meeting. Attending the meeting does not
automatically revoke a proxy. You must deliver written notice revoking a proxy
to Sandy Samson, Secretary, CNY Financial Corporation, One North Main Street,
Cortland, New York 13045.
There were 4,601,373 shares of CNY common stock outstanding on the
Record Date. A majority of those shares, represented in person or by proxy, is a
quorum which allows CNY to begin the meeting. Once a quorum is present, the
meeting can continue even if some stockholders leave the meeting. If a
stockholder is present in person or by proxy but abstains from voting any
shares, or if a broker submits a proxy for shares but does not vote those
shares, then the shares are counted as present for purposes of determining a
quorum.
The approval of the Agreement requires the affirmative vote of a
majority of all shares outstanding. Therefore, an abstention, a failure to vote,
or a broker non-vote, has the same effect as a vote against the Agreement.
The CNY bylaws provide that no matters other than those proposed by the
CNY Board of Directors may be voted upon at a special meeting of stockholders.
CNY does not anticipate that any other matter will be presented for a vote at
the meeting. If stockholders vote on any other matter at the meeting, including
a proposal to adjourn the meeting, the Board of Directors as the holder of the
proxies which the Board is soliciting may vote on those matters based on their
judgment.
IMPORTANT INFORMATION FOR STOCKHOLDERS WHOSE STOCK IS HELD IN STREET NAME
If you hold your stock in street name, which means that your stock is
held for you in a brokerage account and is not registered on CNY's stock records
in your own name, your broker will not vote your shares on the Agreement unless
you instruct your broker how you want your votes to be cast. Please tell your
broker as soon as possible how to vote your shares to make sure that your broker
has enough time to vote your shares before the polls close at the meeting. If
your broker does not vote your shares, that will have the same effect as a vote
against the Agreement. If your stock is held in street name, you do not have the
direct right to vote your shares or to revoke a proxy for your shares unless the
record holder of your stock gives you that right in writing.
CNY is a Delaware corporation and Delaware law governs certain of its
corporate matters. Delaware law provides that stockholders of CNY may elect to
have their shares appraised by the Delaware Court of Chancery. See the
discussion below under the caption "The Agreement and the Merger - Appraisal
Rights" for more information.
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CNY will pay its costs of soliciting proxies. In addition, directors,
officers and regular employees of CNY and its subsidiary, Cortland Savings, may
solicit proxies personally, by telephone or by other means without additional
compensation. CNY will, upon the request of brokers, dealers, banks and voting
trustees, and their nominees, who were holders of record or participants in
depositories on the Record Date, bear their reasonable expenses for mailing
copies of this Proxy Statement, the notice of meeting and the form of proxy card
to beneficial owners. CNY has retained Regan & Associates, Inc., to assist in
the solicitation of proxies, for a fee of $4,250 plus expenses of not more than
$2,000, to assist in the proxy solicitation process. The $4,250 fee is not
payable unless stockholders approve the Agreement.
If CNY completes the merger promptly, then there may not be a 2000
annual meeting of stockholders of CNY. In order for a stockholder to be
entitled, under the regulations of the Securities and Exchange Commission, to
have a stockholder proposal included in CNY's Proxy Statement for the 2000
annual meeting, if such a meeting is held, the proposal must have been received
by CNY at its principal executive offices, One North Main Street, Cortland, New
York 13045, Attention: Sandy Samson, Secretary, no later than November 15, 1999,
which is 120 days in advance of the date in 2000 which corresponds to the date
in 1999 on which CNY released the proxy materials for its 1999 annual meeting.
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THE AGREEMENT AND THE MERGER
DESCRIPTION OF THE AGREEMENT
CNY, Niagara and Niagara Merger Corp entered into the Agreement on
December 28, 1999. The Agreement provides that if the conditions described below
are met, CNY will merge into Niagara Merger Corp, a wholly owned subsidiary of
Niagara. Each stockholder of CNY will then receive $18.75 in cash for each share
of CNY common stock owned. The CNY stockholders will cease to be stockholders of
CNY and will not become stockholders of Niagara. Cortland Savings will become a
subsidiary of Niagara. A copy of the Agreement is attached as Exhibit A to this
Proxy Statement.
CNY has also granted Niagara an option to purchase 919,814 shares of
CNY common stock at a price of $16.75 per share. The directors and executive
officers of CNY and Cortland Savings have agreed to vote their shares of stock
in favor of the Agreement. The form of option and voting agreement are included
as attachments to the Agreement and are reproduced as part of Exhibit A to this
Proxy Statement.
Niagara is the holding company for First Niagara Bank, formerly known
as Lockport Savings Bank, a New York chartered savings bank with nineteen
offices in western New York. Niagara also owns other subsidiaries involved in
insurance brokerage and providing financial services. The address and telephone
number of the principal executive offices of Niagara and Niagara Merger Corp are
6950 South Transit Road, Lockport, New York 14095-0514; (716) 625-7500.
The consummation of the merger will only occur if all of the following
conditions are met:
o The stockholders of CNY approve the Agreement.
o The Board of Governors of the Federal Reserve System and the
New York Banking Board approve the merger.
o No event occurs which causes a material adverse effect on CNY
between the date of the Agreement and the closing date, other
than material adverse effects caused by (i) any change in the
value of assets resulting from a change in interest rates
generally, (ii) any change in any federal or state law, rule
or regulation or in generally accepted accounting principles
which change affects financial institutions generally, or
(iii) any action taken by CNY or any of its subsidiaries at
the request of Niagara.
o The representations and warranties of all the parties to the
Agreement are true and correct on the closing date.
o There is no court or agency order, injunction or decree which
enjoins or prohibits the merger.
o Niagara deposits funds with the Exchange Agent sufficient to
pay the amount that the stockholders of CNY are entitled to
receive.
o The stockholders' equity of CNY has not declined below $67.6
million, except as a result of actions taken at the request of
Niagara or changes in the net unrealized gain or loss in
securities available for sale.
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o Other customary closing conditions are met.
CNY and Niagara may terminate the Agreement if one or more of the following
happens.
o The merger does not occur by September 30, 2000.
o There is a material uncured breach of any representation,
warranty or covenant of the other party under the Agreement.
o There is a court order enjoining or prohibiting the
consummation of the transactions described in the Agreement.
o Any regulatory authority which must approve or consent to the
merger informs either party in writing that its approval or
consent is unlikely to be granted.
o There has been no "Superior Proposal" and the stockholders of
CNY do not approve the Agreement. See page under the caption
"Other Acquisition Proposals" for an explanation of Superior
Proposals.
In addition, CNY can terminate the Agreement if CNY receives a Superior
Proposal and the CNY Board of Directors determines that it would be in
accordance with its fiduciary duties, based upon the advice of its outside legal
counsel, to accept the Superior Proposal. Similarly, Niagara can terminate the
Agreement if the CNY Board withdraws, modifies or qualifies its recommendation
that stockholders approve the Agreement after receiving a Superior Proposal or
CNY enters into an agreement to be acquired by, merge with or combine with a
third party in connection with a Superior Proposal. Any termination for this
reason will not affect Niagara's rights under the option to purchase CNY common
stock that CNY has granted to Niagara.
CNY may also terminate the Agreement if environmental remediation
costs, if any, at its Homer branch exceed $600,000, as discussed in the
following section.
ENVIRONMENTAL MATTERS
There are abandoned underground petroleum storage tanks at the Homer
branch of Cortland Savings. An environmental firm retained by Cortland Savings
has performed tests at the site and the test results have been submitted to
government agencies for evaluation to determine whether any further action will
be required. The Agreement provides that if the cost of remediation, if any,
necessary to obtain a letter from the New York State Department of Environmental
Conservation that no further action with respect to the Homer Site is required
is $100,000 or less, the matter has no effect on the Agreement and the merger.
If the cost exceeds $100,000, then for each $50,000 that the cost exceeds
$100,000, the $18.75 payable for each share of CNY stock shall be reduced by
$0.01 per share. If the aggregate reduction would be more than $0.10 per share,
then CNY may terminate the Agreement and the option that CNY granted to Niagara
to purchase CNY stock. CNY management believes, based upon the results of
testing to date and discussions with experts hired by it, that it is very
unlikely that the costs of remediation, if any, will exceed the $100,000
threshold.
If remediation costs exceed $600,000, the CNY Board would,
consistent with its fiduciary duties, take into account all relevant facts and
circumstances which then exist in making its decision as to whether to terminate
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the Agreement. Once CNY stockholders approve the Agreement, the CNY Board will
have the power to elect to consummate the merger even though the remediation
costs exceed $600,000, causing the per share amount payable in the merger to be
less than $18.65. The CNY Board may elect to do so without any further action
by, or resolicitation of proxies from, CNY stockholders. The fairness opinion
which the CNY Board received from CIBC, as described below, is dated as of the
date that the CNY Board approved the Agreement and is based upon a per share
merger consideration of from $18.65 to $18.75. It does not address the
circumstances that might arise if the remediation costs exceed $600,000.
CNY also has the right to purchase insurance against remediation
expenses and if the cost of the insurance, plus actual remediation costs, is
less than $100,000, there will be no price reduction.
BACKGROUND AND REASONS FOR THE MERGER
Cortland Savings converted from the mutual to the stock form of
ownership on October 6, 1998, and became a wholly-owned subsidiary of CNY. The
Board of Directors of CNY worked to implement a vision in which CNY would become
the holding company for not only Cortland Savings, but also other
community-based financial institutions. Despite efforts to locate other
financial institutions in the Central New York region which were interested in
such an approach, CNY was unable to find other partners to join with it. This
adversely affected the ability of CNY to leverage the capital it obtained in its
stock offering.
As a result, the Board of Directors decided to consider the possibility
of redirecting its efforts towards finding an appropriate merger partner with a
similar vision that would be willing to acquire CNY. The Board began to explore
whether it could identify a potential transaction in which CNY stockholders
would realize a fair price for their shares and Cortland Savings would become
part of a holding company but remain a vibrant part of the local community. At
CNY's request, CIBC analyzed various potential acquirors to identify which
institutions, based upon financial resources, geographic and strategic fit, and
other factors, would be most likely to be interested in and able to engage in a
transaction with CNY meeting those criteria. Following the Board's consideration
of this analysis, the Board identified one institution as the most likely to be
both interested in and capable of completing a transaction. CNY commenced
discussions with that institution and the institution conducted due diligence.
The language of a proposed definitive agreement was negotiated during the last
ten days of November, 1999, based upon an offer price of $18.70 per share. In
early December, immediately prior to the signing of a definitive agreement, the
potential acquiror advised CNY that due to a change in its economic analysis, it
was withdrawing its offer. After further discussions with CNY, the potential
acquiror then made a new offer for $0.30 per share less.
CNY's Board decided to reject the reduced offer and seek another
transaction. During this period, CNY had received indications of interest from
three other financial institutions, including Niagara, regarding a potential
acquisition of CNY. In the judgment of the CNY Board, after consultation with
CIBC, one of the two other institutions clearly lacked the financial resources
to consummate an acquisition of CNY using either cash or stock at a price
comparable to the amount being discussed with the initial potential acquiror.
Accordingly, CNY decided not to pursue further discussions with that
institution. After a meeting with the second institution and consultations with
CIBC, the CNY Board came to the same conclusion regarding the second
institution. In addition, after CNY had advised the second institution that its
indicated offer price of $18.60 per share was lower than the price then under
discussion with another institution, the second institution submitted an offer
to acquire CNY at a price of $18.00 per share. The CNY Board determined not to
pursue this offer because it was lower than the offer then under discussion and
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because of the significant doubts about the ability of the offeror to complete a
transaction at an acceptable price.
CNY received the indication of interest from Niagara in mid-November.
Following discussions between senior management of the two companies, Niagara
indicated that it was interested in pursuing a possible acquisition of CNY at a
price of $18.25 to $18.50 per share in cash. CNY told Niagara that this price
was not competitive with another offer that CNY was considering. However,
Niagara declined to increase its offer and CNY terminated discussions with
Niagara.
After the negotiations with the first potential acquiror terminated in
early December, CNY asked CIBC to approach Niagara to determine whether there
was interest in resuming discussions. After receiving an affirmative response,
the parties discussed the business terms of a proposed transaction. Niagara
initially proposed an acquisition price of $18.70 per share in cash. After
negotiation, Niagara increased its offer to $18.75 per share. CNY then allowed
Niagara to conduct a full due diligence review of CNY. The parties also
proceeded to negotiate the details of the Agreement and Niagara conducted due
diligence. Between December 22 and December 28, 1999, the parties agreed on the
remaining terms of the transaction, including the possible reduction in the
price discussed above based upon environmental concerns raised in Niagara's due
diligence. The parties finalized the text of the Agreement and the CNY Board
approved it on December 28, 1999.
The Board of Directors of CNY believes that Niagara shares a similar
vision of fostering community-based financial service providers. The Agreement
confirms that it is the intent of Niagara to keep Cortland Savings as a separate
entity for at least two years, with a Board of Directors which will include at
least seven current directors of Cortland Savings.
THE CNY BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS OF CNY
VOTE IN FAVOR OF THE AGREEMENT AND THE MERGER.
THE OPINION OF THE FINANCIAL ADVISOR TO CNY
CNY retained CIBC World Markets Corp. as its financial advisor in
connection with the merger. CIBC is an investment banking firm which regularly
provides financial valuations and analyses of business enterprises and
securities in connection with mergers, acquisitions, mutual-to-stock
conversions, initial and secondary stock offerings and other corporate
transactions. CNY retained CIBC based upon its reputation, its substantial
experience in merger and acquisition matters, and CNY's prior satisfactory
experience with CIBC.
At a meeting of the Board of Directors of CNY held on December 28,
1999, CIBC rendered its opinion to the Board that, as of that date and subject
to limitations set forth in the opinion, the merger consideration of $18.75 per
share was fair to the stockholders of CNY from a financial point of view. CNY
imposed no limitations on CIBC with respect to the investigation made or
procedures followed by it in rendering its opinion.
CIBC's opinion and the financial analysis that CIBC presented to the
CNY Board of Directors were among the many factors that the CNY Board considered
in its evaluation of the merger. Stockholders should not treat the opinion as
determinative of the Board's decision regarding the merger.
The full text of the CIBC opinion, which sets forth assumptions made,
matters considered and limits on the review undertaken by CIBC, is included as
Exhibit B to this Proxy Statement. CNY urges its stockholders to read the
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opinion in its entirety before deciding how to vote on the Agreement. CIBC's
opinion is directed only to the Board of Directors of CNY and relates only to
the fairness from a financial point of view of the merger consideration which
the stockholders of CNY will receive. It does not address any other aspect of
the merger or any related transaction and does not constitute a recommendation
to any CNY stockholder as to how to vote at the meeting. The summary of the CIBC
opinion in this Proxy Statement is qualified in its entirety by reference to the
full text of the opinion attached as Exhibit B.
In connection with its fairness opinion, CIBC reviewed:
1. The Agreement, the option granted to Niagara and the director and
officer voting agreements;
2. Audited consolidated financial statements and management's discussions
and analysis of the financial condition and results of operations for
CNY and for Niagara for the three fiscal years ended December 31, 1998;
3. Unaudited consolidated financial statements for CNY and for Niagara for
the nine months ended September 30, 1999;
4. Certain other publicly available business and financial information
relating to CNY and to Niagara;
5. The views of senior management of CNY of the past and current business
operations, results thereof, financial condition and future prospects
of CNY;
6. A comparison of certain financial information for CNY with similar
information for certain other companies CIBC considered comparable to
CNY;
7. The financial terms of certain recent business combinations in the
banking industry;
8. The current market environment generally and the banking environment in
particular; and
9. Such other information, financial studies, analyses and investigations
and financial, economic and market criteria as CIBC considered
appropriate in the circumstances.
The fairness opinion states that CIBC has relied on the accuracy and
completeness of the information provided by the parties to the Agreement and
obtained by it from public sources and the representations and warranties in the
Agreement, without independent verification. CIBC did not make an independent
evaluation or appraisal of the assets and liabilities of CNY and neither CNY nor
anyone else furnished CIBC with such an appraisal. CIBC's opinion was based upon
economic, market and other conditions as in effect on, and the information made
available to it as of, the date of the fairness opinion.
-11-
In connection with the issuance of this Proxy Statement, CIBC confirmed
to CNY the appropriateness of its continued reliance on the analyses used to
render its December 28, 1999 opinion by performing procedures to update certain
of such analyses and by reviewing the assumptions on which such analyses were
based and the factors considered in connection therewith.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to a partial analysis or summary description. CIBC
believes that its analyses must be considered as a whole and that selecting
portions of its analyses, without considering the analyses taken as a whole,
would create an incomplete view of the process underlying the analyses set forth
in its opinion. In addition, CIBC considered the results of all such analyses
and, except as discussed below, did not assign relative weights to any of the
analyses, so that the ranges of valuations resulting from any particular
analysis described below should not be taken to be CIBC's view of the actual
value of CNY or the combined entity.
In performing its analyses, CIBC made numerous assumptions with respect
to industry performance, general business and economic conditions and other
matters, many of which are beyond the control of CNY. No company or transaction
used in these analyses is identical to CNY, Niagara or the merger. The analyses
performed by CIBC are not necessarily indicative of actual values, which may be
significantly more or less favorable than suggested by such analyses. Such
analyses were prepared solely as part of CIBC's December 28, 1999 opinion; the
analyses do not purport to be appraisals or to reflect the prices at which a
company might actually be sold.
The following is a summary of the material analyses presented by CIBC
to the CNY Board at its meeting on December 28, 1999 in connection with CIBC's
opinion. It is not a complete description of the analyses performed by CIBC.
COMPARABLE COMPANIES ANALYSIS. CIBC analyzed selected operating and
stock market data for a group of peer companies that CIBC selected and deemed to
be relevant for this purpose. The peer group consisted of 26 publicly traded
thrifts located in the Northeast with assets of between $200 million and $1
billion. For each of these companies in the peer group CIBC calculated the
multiple of market price (based on the closing price on December 22, 1999) to
book value, tangible book value, estimated 1999 earnings and estimated 2000
earnings. Estimated earnings were based on consensus earnings per share
estimates published by First Call, Inc. as of December 22, 1999. First Call is
an industry service provider of global earnings information based on an average
of earnings estimates published by various investment banking firms.
The results of this analysis for the peer group are summarized in the
following table:
Multiple Range
---------------------------------------------------
Per Share: Low (x) Mean (x) High (x)
- - - - - - - ---------- ------- -------- --------
Book value 0.66 1.10 1.90
Tangible book value 0.68 1.11 1.90
1999 estimated earnings 6.15 11.50 19.13
2000 estimated earnings 5.85 10.81 18.21
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CIBC then applied the range of multiples derived from the analysis of
1999 and 2000 estimated earnings for the peer group to corresponding estimated
earnings data for CNY and derived an imputed valuation range for CNY's common
stock of $4.17 to $14.17 per share. CIBC did not use the multiples based on book
value or tangible book value to derive an imputed valuation range for CNY's
common stock because of the significant difference in equity to asset levels
between CNY and the peer group.
PRECEDENT TRANSACTION ANALYSIS. CIBC compared the financial terms of
the merger to the financial terms, to the extent publicly available, of
acquisitions of other comparable companies during recent time periods. These
companies were divided into three categories for purposes of the analysis: (1)
five thrift institutions in New York State outside of the New York City
metropolitan area with total assets of less than $1.0 billion which were
acquired in transactions announced or completed from January 1, 1998 to December
28, 1999; (2) eight thrift institutions nationwide with total assets from $200
to $500 million which were acquired in transactions announced or completed from
January 1, 1999 to December 28, 1999, in which the acquisition value was greater
than $30 million; (3) fourteen thrift institutions nationwide with an equity to
assets ratio in excess of 20% which were acquired in transactions announced or
completed from January 1, 1997 to December 28, 1999. For each of the
transactions in the first two categories, CIBC calculated, among other things,
the multiples of the transaction value to book value, tangible book value and
last twelve months net income. CIBC also calculated the core deposit premium
(defined as the transaction value minus tangible book value divided by core
deposits, excluding certificates of deposit with balances equal to or greater
than $100,000). For transactions in the third category, CIBC calculated, among
other things, the multiples of transaction value to book value. CIBC then
compared these multiples to comparable data for CNY as shown in the following
table:
Acquired New York Thrifts With U.S. Acquired Thrifts With Acquired
Niagara/ Assets Less Assets From $200 Thrifts With Capital
CNY Than $1.0 Billion to $500 Million Ratios >20%
------- ------------------------------ --------------------------- --------------------------
Low Mean High Low Mean High Low Mean High
--- ---- ---- --- ---- ---- --- ---- ----
Price to Book Value 1.30x 1.28x 1.67x 2.15x 1.06x 1.96x 2.98x 1.04x 1.25x 1.54x
Price to Tangible Book
Value 1.30x 1.28x 1.68x 2.20x 1.06x 2.09x 3.61x - - -
Price to Last Twelve
Months Earnings 36.01x1 13.72x 30.20x 47.77x 16.54x 23.38x 28.01x - - -
Core Deposit Premium 11.13% 6.00% 9.59% 11.53% 9.13% 13.19%2 18.07% - - -
1 - Price to earnings ratio for CNY based upon then projected 1999 full year
earnings was 28.17x.
2 - Excludes three transactions which CIBC deemed not meaningful for
comparative purposes.
CIBC then applied these ranges of multiples derived from these analyses
to comparable data for CNY and derived the following imputed valuation ranges
for CNY's common stock:
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Acquired New York Thrifts U.S. Acquired Thrifts With
With Assets Less Than $1.0 Assets From $200 to $500 Acquired Thrifts With
Billion Million Capital Ratios >20%
-------------------------- -------------------------- -------------------
Imputed Valuation Range $13.79-$19.42 $11.28 - $25.52 $15.35 - $22.75
Mean Imputed Valuation $17.69 $17.76 $18.45
DISCOUNTED CASH FLOW ANALYSIS. CIBC performed a discounted cash flow
analysis of future income streams of CNY, based on management's internal
projections of net income for 2000 and 2001, followed by assumed annual
percentage increases in net income of 5%, 8% and 10%, in all cases adjusted for
the excess of the provision for loan losses over actual projected charge offs.
This analysis assumed CNY was not acquired but remained independent for five
years.
Based on these assumptions, CIBC determined the theoretical value of a
share of CNY common stock at the end of the five year period by applying
terminal multiples (ranging from 12x to 15x terminal year adjusted earnings) and
discount rates (ranging from 10-13%) that CIBC viewed as appropriate for a
company with CNY's particular risk characteristics. The following table sets
forth the imputed valuation ranges that CIBC calculated for CNY's common stock
using these discounted cash flow analyses:
Case Imputed Valuation Range
---------------------- -----------------------
5.00% Estimated Growth $9.11 - $11.97
8.00% Estimated Growth $9.81 - $12.92
10.00% Estimated Growth $10.30 - $13.58
PREMIUMS PAID ANALYSIS. CIBC analyzed the premiums paid in selected
recent acquisitions compared to the trading price of the target company's common
stock one day, one week and four weeks prior to the transaction date. For
purposes of this analysis, CIBC reviewed all 28 acquisitions announced between
January 1, 1998 and December 23, 1999 in which the target company was a thrift
institution with assets of $200 million to $500 million. This analysis indicated
a range of premiums paid from 4.52% to 69.24% over the pre-announcement trading
price. Applying these premiums to CNY's stock price at comparable times prior to
the announcement of the signing of the Agreement, CIBC derived an implied
valuation of CNY's common stock of $18.03 to $29.19. CIBC noted, however, that
CNY's stock price appeared to reflect a significant element of takeover
speculation in recent periods (particularly after Seidman and Associates, LLC,
acquired 10% of CNY's stock and a board seat in March 1999) and therefore its
pre-announcement trading prices might not necessarily be comparable to those of
the companies involved in the precedent transactions. CIBC accordingly gave less
weight to this analysis than to the other analyses.
CIBC has from time to time in the past provided investment banking
services to both Niagara and CNY. In 1998, CIBC acted as lead advisor in the
mutual to stock conversions of both Lockport Savings Bank, the principal
subsidiary of Niagara, and Cortland Savings, the principal subsidiary of CNY.
CNY paid CIBC $481,245 for its services in connection with it stock conversion
and $50,000 for investment banking services during 1999. In the ordinary course
of its market making and other trading activities, CIBC may buy or sell
securities of CNY and Niagara both for its own account and for the accounts of
customers and, accordingly, may at any time hold a long or short position in
these securities. CIBC has acted as financial advisor to CNY in connection with
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the merger and will receive a fee of approximately $1.1 million, which is 1.2%
of the total merger consideration. Approximately $755,000 of this fee is
contingent on the consummation of the merger. CNY has also agreed to indemnify
CIBC against certain liabilities which may arise in connection with its service
as an advisor to CNY.
PAYMENT PROCEDURES
CNY and Niagara will appoint an Exchange Agent to facilitate the
payment for shares of CNY stock. On the closing date of the merger, Niagara will
pay the Exchange Agent sufficient funds so that the Exchange Agent can pay the
merger consideration to all remaining stockholders of CNY. No later than five
days after the merger is consummated, the Exchange Agent will mail transmittal
letters and instructions to all CNY stockholders at their addresses as shown on
CNY's official stock records. Stockholders can then use the transmittal letters
to submit their stock certificates for payment. Within three business days after
the Exchange Agent receives a properly completed transmittal letter and the
applicable stock certificate, the Exchange Agent will mail the payment to the
stockholder. If a stockholder has lost his or her stock certificate, the
Agreement requires that the stockholder submit an affidavit and a lost
certificate indemnity bond in order to receive payment.
The merger consideration of $18.75 per share will be paid without
interest. Therefore, stockholders of CNY should promptly complete and return
their transmittal letters as quickly as possible. The Exchange Agent will no
longer process requests for payment one year after the merger is effective. Any
CNY stockholders who submit their shares for payment more than one year after
the merger is consummated must submit their share certificates and transmittal
letters to Niagara Bancorp.
Transmittal letters will be sent to the addresses used to mail this
proxy statement. If you own your stock directly in your own name and you want to
update your address, you should immediately contact our transfer agent,
Registrar and Transfer Company at 1-800-368-5948. If you own your stock in
"street name" through a broker, the Exchange Agent will send the transmittal
letter to the record owner of your shares and you will not submit your shares
yourself for payment. Instead, you should contact your broker to receive
payment.
OTHER ACQUISITION PROPOSALS
The Agreement provides that CNY, Cortland Savings, their subsidiaries
and their officers, directors, employees, representatives, agents, affiliates,
investment bankers, attorneys or accountants may not, directly or indirectly,
initiate, solicit or knowingly encourage or facilitate any inquiries or the
making of any proposal that is or could lead to a competing proposal to acquire
CNY. The Agreement also prohibits an extensive list of related activities in
support of or in furtherance of any competing proposal.
However, the Board of Directors of CNY may furnish information to, or
enter into discussions or negotiations with, any person or entity if it receives
a "Superior Proposal" from that person or entity before the meeting. A "Superior
Proposal" is an unsolicited, written, bona fide proposal to acquire CNY or
Cortland Savings, if, and only to the extent that, (a) the Board of Directors of
CNY receives a written opinion from its independent financial advisor that the
proposal may be superior to the transactions contemplated by the Agreement from
a financial point of view to CNY's stockholders; (b) the Board of Directors of
CNY, upon the advice of independent legal counsel, determines in good faith that
furnishing information or entering into discussions or negotiations is necessary
for the Board of Directors of CNY to comply with its fiduciary duties to
stockholders; and (c) the CNY stockholders' meeting to approve the Agreement has
not yet been held. The person or entity making the Superior Proposal must also
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enter into a confidentiality agreement with CNY. The Board of Directors of CNY
may withdraw or modify its recommendation that stockholders approve the
Agreement, and may enter into an agreement to implement a Superior Proposal, if
the Board of Directors, after consultation with and based upon the advice of
independent legal counsel, determines in good faith that such action is
necessary for the Board of Directors to comply with its fiduciary duties to
stockholders.
CNY did not receive a Superior Proposal from any person or entity
either before or after entering into the Agreement with Niagara.
BENEFITS OF THE MERGER TO DIRECTORS AND EXECUTIVE OFFICERS
Each director and executive officer of CNY or Cortland Savings who owns
stock of CNY will receive the same payment per share as any other stockholder.
When and if the stockholders approve the Agreement, all existing awards to
directors, officers and employees under the PRRP and the Stock Option Plan will
automatically vest in full. Directors and officers who have received awards of
stock under the PRRP will receive $18.75 per share, just like other
stockholders. The holders of options under the Stock Option Plan will receive,
for each share subject to an option, a payment equal to the difference between
$18.75 and the exercise price of the option.
The following table sets forth the amounts which directors and
executive officers will be entitled to receive for their awards under the PRRP
and the Stock Option Plan.
Stock Plan Benefits for Directors and Executive Officers
--------------------------------------------------------------------------------
Payments for PRRP Shares at Payments for Options at
$18.75 $18.75 Per Share Minus the
Per Share Exercise Price Total
--------------------------- -------------------------- ---------------
Each 10 Non-Employee
Directors of CNY or
Cortland Savings*................. $ 133,912 $ 116,500 $ 250,412
Wesley D. Stisser, Director and
President ........................ $ 750,000 $ 362,500 $ 1,112,500
Michael Stapleton................. $ 468,750 $ 181,250 $ 650,000
Steven A. Covert.................. $ 375,000 $ 181,250 $ 556,250
Kerry D. Meeker................... $ 375,000 $ 145,000 $ 520,000
All Directors and Executive
Officers as a Group............... $ 3,173,962 $ 2,035,003 $ 5,208,965
* - Director Lawrence Seidman declined to accept awards under the PRRP, and thus
he will receive only the payment on account of stock options granted to him.
After the merger, at least seven existing directors of Cortland Savings
will continue to be directors and Harvey Kaufman will continue to be the
chairman of the board of Cortland Savings. Directors fees will continue at
current levels - an annual retainer of $3,000 plus $250 for each board meeting
and $400 for each committee meeting. The chairman of the board will receive a
$12,000 annual retainer plus per meeting fees, but no fees will be paid to the
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chairman of the board for attendance at a committee meeting in an ex officio
capacity. The chair of each committee receives an additional $100 per committee
meeting. Per meeting fees are paid only for actual attendance at a meeting but
not for attendance by conference telephone call. In addition, Mr. Kaufman, will
become a director of Niagara and will be entitled to receive the same directors
fees as other non-employee directors of Niagara. Niagara has also agreed to
continue to honor all of CNY's or Cortland Savings' obligations to pay
previously-earned directors fees which were deferred under existing deferral
plans.
When CNY completes the merger, its president, Wesley D. Stisser, will
retire. He has waived his right to receive any severance payment or payment upon
change in control under his employment contract with Cortland Savings. The
Agreement provides that Michael Stapleton, now the executive vice president of
Cortland Savings, will be elected chief executive officer of Cortland Savings
and will be appointed to its board of directors. The Agreement provides that Mr.
Stapleton will be offered a one year employment agreement at an unspecified
salary. Cortland Savings anticipates that it will continue to employ Senior Vice
President Kerry D. Meeker after the merger. Therefore, Messrs. Stapleton and
Meeker will not be entitled to any severance payment. The employment of
Executive Vice President and Chief Financial Officer Steven A. Covert will
terminate when the merger is completed, and he will receive a severance payment
under his employment contract equal to approximately $348,000. All four
executive officers will be entitled to receive payment for their stock options
and PRRP awards as set forth in the table above. In addition, the CNY ESOP will
terminate once the merger is effective and the four executive officers, as well
as all other employees of CNY and Cortland Savings, will share in the
distribution of the assets of the ESOP.
Niagara has agreed, for six years after the merger is consummated, to
indemnify present and former directors and officers of CNY and its subsidiaries
from liabilities, judgments or amounts paid in settlement in connection with any
matter existing or occurring at or prior to the consummation of the merger. The
indemnification applies to claims based in whole or in part or arising in whole
or in part out of the fact that the indemnified person is or was a director or
officer of CNY or one of its subsidiaries. The indemnification applies to the
fullest extent that the indemnified directors and officers are entitled to
indemnification under the Delaware General Corporation Law, CNY's certificate of
incorporation and bylaws, and other applicable law. In addition, for three years
after the merger is consummated, Niagara has agreed to maintain in effect CNY's
current directors' and officers' liability insurance policy or provide a
substitute policy that is not materially less favorable.
Cortland Savings has an Employee Severance Plan which provides for
severance benefits for any employee who is terminated within one year after the
merger. The severance benefit is two weeks of salary for each year of service
with a minimum of eight weeks and a maximum of 26 weeks of salary. The Agreement
provides that if it is necessary to retain certain Cortland Savings back office
personnel for longer periods, they will still be entitled to benefits under the
Employee Severance Plan if they are terminated within 18 months after the
merger. The four executive officers of CNY and Cortland Savings, Messrs.
Stisser, Stapleton, Covert and Meeker, are not eligible to participate in the
Employee Severance Plan.
THE CLOSING DATE
The merger will be consummated on the Closing Date, which will be a
date selected by Niagara not more than 15 days after the last condition
precedent to the merger has been satisfied, or on any other date that Niagara
and CNY agree upon.
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RESTRICTIONS ON OPERATIONS
CNY has agreed to restrictions on its operations pending completion of
the merger. These restrictions include, among others, limits on the size of
loans that CNY or Cortland Savings may make without the approval of Niagara,
restrictions on modifying employee plans and contracts and restrictions on
dividends and other stock transactions. However, the Agreement preserves the
ability of CNY to declare and pay a quarterly cash dividend of $0.10 per quarter
in accordance with existing practice.
REPRESENTATIONS AND WARRANTIES
CNY has given extensive representations and warranties in the
Agreement. If any of these is materially false on the Closing Date, Niagara has
the right to terminate the Agreement and not proceed with the merger. In
summary, the representations and warranties provide, among other things, that,
except as CNY has disclosed to Niagara, CNY and its subsidiaries (i) have
properly approved the Agreement; (ii) are legally organized and in good
standing; (iii) have accurately disclosed financial information and information
about outstanding contracts and arrangements; (iv) have paid their taxes; (v)
have not suffered a material adverse effect; (vi) own their property free of
liens and with adequate insurance; (vii) are not involved in any material legal
proceedings; (viii) have complied with applicable laws; (ix) have not employed
any broker, finder or business advisor other than CIBC; (x) do not have any
environmental contamination on their properties and are not aware of any
environmental contamination on any property mortgaged to them as security for a
loan; (xi) have valid and enforceable legal documents for all loans on their
books; (xii) have an adequate allowance for loan losses; (xiii) have not engaged
in any transactions with affiliates except as disclosed to Niagara and all
transactions which were disclosed were on the same terms and conditions as those
prevailing at the same time for comparable transactions with persons who were
not affiliates; (xiv) do not have any brokered deposits; and (xv) are Year 2000
compliant.
REGULATORY APPROVAL
In order for the merger to occur, the Board of Governors of the Federal
Reserve System must approve the acquisition of CNY by Niagara under the federal
Bank Holding Company Act because the merger will cause Niagara, a registered
bank holding company, to acquire control of CNY, another bank holding company,
and Cortland Savings. Similarly, the New York State Banking Board must approve
the transaction because Banking Board approval is required for Niagara to
control Cortland Savings. Niagara has filed applications for those approvals.
The merger can not be consummated unless and until Niagara and CNY obtain these
approvals. In addition, there is a thirty day waiting period after the Federal
Reserve approves the merger, which the Federal Reserve has the authority to
shorten to 15 days, before the merger can be effective.
APPRAISAL RIGHTS
Stockholders of CNY have what are commonly known as appraisal rights or
dissenters' right under Section 262 of the Delaware General Corporation Law. A
copy of Section 262 is attached to this proxy statement as Exhibit C for the
information of stockholders.
Section 262 provides that a stockholder has the right to receive the
value of his or her stock of CNY, as the Court of Chancery of the State of
Delaware determines, instead of receiving $18.75 per share. In order to exercise
appraisal rights, a CNY stockholder must:
1. Not vote in favor of the Agreement and not consent to the
Agreement;
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2. Deliver to CNY, before the vote is taken on the Agreement, written
demand for an appraisal which sets forth the name of the
stockholder and that the stockholder intends to demand the
appraisal of his or her stock (a proxy or vote against the
Agreement is not sufficient to constitute a demand for appraisal);
3. Continue to own the stock of CNY from the date the demand is made
under item 2 until the merger is consummated.
Within 10 days after the merger is effective, Niagara Merger Corp must
send notice to all stockholders who have properly exercised appraisal rights
that the merger has occurred. Within 120 days after merger is effective, any
stockholder who has satisfied these requirements, or Niagara Merger Corp as the
survivor of the merger, has the right to file a petition in the Delaware Court
of Chancery demanding a determination of the value of the stock of all
stockholders who have properly demanded appraisal rights. A stockholder has the
right to withdraw a demand for appraisal within 60 days after the merger is
effective.
Section 262 states that the Chancery Court's appraisal of the stock
must exclude "any element of value arising from the accomplishment or
expectation of the merger . . .." Section 262 also provides that the costs of
the proceeding shall be determined by the Court and charged to the parties in
such manner as the court deems equitable. The Court may require that the
expenses of any stockholder in the proceeding, such as attorneys fees and expert
fees, be charged against the value of all shares being appraised.
TAX CONSEQUENCES
In general, stockholders who hold their shares of CNY common stock as
capital assets will have a capital gain for tax purposes when and if the merger
is consummated equal to the difference between the cash price paid in the merger
and the stockholder's basis in the stock. Whether this capital gain is taxed at
long-term or short-term capital gain rates generally depends upon how long the
stockholder has owned the shares. The tax treatment for stockholders who
exercise appraisal rights will be substantially the same as for other
stockholders.
The transmittal letters that the Exchange Agent will send to
stockholders will include a certification as to the accuracy of the
stockholder's taxpayer identification number (social security number or employer
identification number). Unless the stockholder signs the certification or
establishes to the Exchange Agent that there is a valid exemption, the Exchange
Agent must withhold 31% of the amount payable to the stockholder. The
withholding is also required if the stockholder has been notified by the IRS
that he or she is subject to back up withholding.
The federal income tax consequences described above are generally
applicable to stockholders, but may not apply to all stockholders depending upon
their individual circumstances. In addition, stockholders may be liable for
state or local income taxation on the gain they receive depending upon the
residence of the stockholders. Therefore, CNY urges stockholders to consult with
their tax advisors about their individual circumstances.
NIAGARA'S OPTION TO PURCHASE 919,814 SHARES OF CNY COMMON STOCK
When CNY signed the Agreement, CNY also gave Niagara an option to
purchase 919,814 shares of CNY common stock, equal to 19.99% of the shares then
outstanding. The exercise price of the option is $16.75 per share. Niagara
-19-
cannot exercise the option at this time. Niagara can exercise the option only if
an "Initial Triggering Event" occurs and additional conditions are met. An
Initial Triggering Event includes any one of the following:
(i) CNY participates in negotiations regarding a Superior Proposal;
(ii) CNY or any of its subsidiaries enters into an agreement to engage
in a merger, sale of substantially all of its assets, or sale of 15% or more of
the voting power of CNY or any of its significant subsidiaries;
(iii) Any person or group other than Niagara or its subsidiaries
acquires beneficial ownership or the right to acquire beneficial ownership of
15% or more of the outstanding shares of CNY's common stock;
(iv) CNY's Board of Directors withdraws, modifies or changes its
recommendation that stockholders approve the Agreement in a manner adverse to
Niagara;
(v) A competing proposal is made by a third party and either (A) CNY
intentionally and knowingly breaches any representation, warranty, covenant or
agreement contained in the Agreement and such breach would entitle Niagara to
terminate the Agreement but is not cured before Niagara exercises the option, or
(B) the CNY stockholders fail to approve the Agreement; or
(vi) Any person other than Niagara or its subsidiaries, files an
application or notice with any federal or state bank regulatory authority for
approval to engage in a competing transaction.
Once an Initial Triggering Event occurs, Niagara may exercise the
option, in whole or in part, and has 180 days to do so, if and only if the
Initial Triggering Event is of the type described in item (ii) or if any person
other than Niagara or its subsidiaries acquires beneficial ownership of 25% or
more of CNY's outstanding common stock.
The option terminates and is no longer exercisable by Niagara if (A)
the Agreement terminates for any reason and there has not then been an Initial
Triggering Event or (B) 18 months have passed since the Agreement was terminated
and the termination was at the same time as or followed an Initial Triggering
Event.
The option includes extensive provisions designed to avoid
circumvention of the option, such as anti-dilution provisions and provisions
regarding the continuance of the option if CNY engages in a business combination
with a third party. Under certain conditions, Niagara may require that CNY pay
the economic benefit of the option to Niagara instead of Niagara exercising the
option and receiving stock of CNY.
The purpose of the option is to increase the likelihood that the merger
as described in the Agreement will occur. The option may discourage third
parties from proposing competing proposals even if the competing proposal might
otherwise involve a higher payment to CNY stockholders. The existence of the
option could significantly increase the cost of acquiring CNY to a potential
acquiror, other than Niagara.
-20-
VOTING AGREEMENT
The directors and executive officers of CNY and Cortland Savings have
all signed letters to Niagara which provide that they will vote all their shares
of stock of CNY in favor of the Agreement. The letters prohibit the directors
and executive officers from selling any of their shares of CNY prior to the
stockholders meeting to approve the Agreement over which they or members of
their immediate family have sole or shared voting power. The letter agreements
cover, in the aggregate, approximately 760,000 shares of CNY common stock,
including shares owned by directors and executive officers, shares allocated to
them under the ESOP, shares awarded to them under the CNY PRRP, and certain
shares owned by their family members. These shares represent approximately 16.5%
of the total shares outstanding and entitled to vote on the Agreement.
-21-
PRINCIPAL OWNERS OF CNY COMMON STOCK
The following table provides you with information, to the best of CNY's
knowledge, about stock ownership by directors, executive officers, and any
person or group CNY knows to beneficially own more than 5% of its outstanding
common stock. The information is as of the Record Date. Information about
persons or groups who own beneficially more than 5% of our common stock is based
on filings with the Securities and Exchange Commission on or before the Record
Date.
Shares Beneficially Percent of total
Owned shares
Beneficial Owner at _______ 2000(1) outstanding(2)
- - - - - - - ---------------- ------------------ --------------
CNY Employee Stock Ownership Plan
One North Main Street, Cortland, New York 13045 401,696(3) 8.62%
Wesley D. Stisser, President and Chief Executive Officer 67,715(4) 1.45%
Joseph H. Compagni, Director 39,355(5) *
Patrick J. Hayes, M.D., Director 46,355(6) 1.00%
Robert S. Kashdin, CPA., Director 27,355(7) *
Harvey Kaufman, Director and Chairman of the Board 30,355(8) *
Donald P. Reed, Director 26,355(9) *
Lawrence B. Seidman, Esq., Director 463,882(10) 9.96%
Terrance D. Stalder, Director 20,395(11) *
Steven A. Covert, Executive Vice President and Chief Financial Officer 36,278(12) *
Directors and Executive Officers of CNY and Executive Officers of
Cortland Savings, as a group (11 persons) 834,712(13) 17.92%
- - - - - - - --------------------------------
NOTES TO THE STOCK OWNERSHIP TABLE:
An asterisk ("*") means that the percentage is less than 1%.
(1) Amount includes shares held directly, as well as shares allocated to such
individuals under the CNY ESOP, and other shares with respect to which a person
may be deemed to have sole voting or investment power. The table also includes
7,142 shares awarded in April 1999 to each non-employee director (except for
Lawrence B. Seidman) pursuant to the PRRP. The table also includes 3,213 options
awarded to each of the ten non-employee directors, 10,000 options for Mr.
Stisser, 5,000 options for Mr. Covert and 9,000 options for other executive
officers. These options, representing 20% of the options awarded to such persons
under the CNY Stock Option Plan, will become exercisable on April 28, 2000 and
hence are includable in the table.
(2) Based upon 4,601,373 shares outstanding on the Record Date plus 56,130
options exercisable on April 28 as described in note 1.
(3) Excludes 26,836 shares allocated to ESOP participants. HSBC Bank, the
trustee of the ESOP, may be deemed to own beneficially the unallocated shares
held by the ESOP. Unallocated shares and allocated shares for which no voting
instructions are received are voted in the same proportion as allocated shares
voted by participants.
-22-
(4) Includes 40,000 unvested PRRP shares, 15,047 shares owned by Mr. Stisser
through CNY's 401(k) Plan; 500 shares in custodial accounts for the benefit of
his grandchildren; and 2,168 shares allocated to Mr. Stisser in the CNY ESOP.
(5) Includes 1,000 shares owned by a testamentary trust of which Mr. Compagni is
the trustee and his mother is a beneficiary.
(6) Includes 36,000 shares owned by Dr. Hayes' Individual Retirement Account.
(7) Includes 2,500 shares owned by Mr. Kashdin's Individual Retirement Account
and 1,000 shares owned by his wife.
(8) Includes 15,000 shares owned by Mr. Kaufman's Individual Retirement Account.
(9) Includes 3,100 shares owned by Mr. Reed's Individual Retirement Account. The
amount shown excludes 15,000 shares owned by Dryden Mutual Insurance Company.
Mr. Reed is the Chairman of the Board of Dryden Mutual Insurance Company but is
not an employee of it. He has no ownership interest in Dryden Mutual except for
a minuscule interest as a policy holder. Mr. Reed disclaims any ownership
interest in those shares and does not vote as a director of Dryden Mutual on any
matters related to the investment in or the voting of those shares.
(10) The shares shown include all shares listed on a report filed under Section
13(d) of the Securities Exchange Act of 1934 by Lawrence B. Seidman, 100 Misty
Lane, Parsippany, New Jersey 07054, jointly with Seidman and Associates L.L.C.
("SAL"), Seidman and Associates II, L.L.C. ("SALII"), Seidman Investment
Partnership, L.P. ("SIP"); Seidman Investment Partnership II, L.P. ("SIPII")
(the address of the last three named entities is 19 Veteri Place, Wayne, New
Jersey 07470); Kerrimatt, LP ("Kerrimatt"), 80 Main Street, West Orange, New
Jersey 07052; Federal Holdings L.L.C. ("Federal"), One Rockefeller Plaza, 31st
Floor, New York, NY 10020; The Benchmark Company, Inc. ("TBCI"); Benchmark
Partners, LP ("Partners"); Richard Whitman; Lorraine DiPaolo (the address of the
last two named individuals and the previous two named entities is 750 Lexington
Avenue, New York, NY 10022); and Dennis Pollack, 47 Blueberry Drive, Woodcliff
Lakes, NJ 07675. Not all of the shares shown are reported to be owned
beneficially by Mr. Seidman, but all are reported to be owned beneficially by
the individuals and entities filing the Schedule 13D as a group. According to
the Schedule 13D, the following is a breakdown of the ownership of the shares
shown: (a) Mr. Seidman has sole investment discretion and voting authority for
374,400 shares of CNY owned by SAL, SALII, SIP, SIPPII, Kerrimatt, Federal and
various individual clients of Mr. Seidman; (b) Mr. Whitman and Ms. DiPaola share
the investment discretion and voting authority for 72,400 shares of CNY owned by
TBCI and Partners, and each of them has sole investment discretion and voting
authority for an additional 1,000 shares each; (c) Mr. Pollack has the sole
investment discretion and voting authority over 11,869 shares owned by him.
(11) Includes 8,540 shares owned by Mr. Stalder's Individual Retirement Account.
(12) Includes 20,000 unvested PRRP shares. Also includes 1,278 shares allocated
to Mr. Covert in the CNY ESOP.
(13) This total includes shares beneficially owned by all directors and
executive officers listed in the table plus two executive officers not
separately listed. The total also includes 45,000 unvested PRRP shares awarded
to the two executive officers of CNY and Cortland Savings who are not separately
named and 2,449 shares allocated to those officers in the CNY ESOP. The total
also includes 86,269 shares reported in the Schedule 13D filed by Mr. Seidman
and others, over which other persons are reported to have investment discretion
and voting authority (see note 9).
-23-
INFORMATION REGARDING THE MARKET FOR
CNY COMMON STOCK AND RELATED MATTERS
CNY's common stock is traded on the Nasdaq National Market System under
the symbol "CNYF". At December 31, 1999, there were 4,601,373 shares of CNY
Financial Corporation common stock issued and outstanding, and there were
approximately 1,500 holders of record. The table below shows the high and low
bid price of the common stock and cash dividends per share declared during the
last two years. The share prices shown do not represent actual transactions and
do not include retail markups, markdowns or commissions.
Bid
------------------------------ Dividends
High Low Per Share
--------------------------------------------
1998:
October 6 - December 31 (1) $ 10.19 $ 8.88 $ --
1999 quarter ended:
------------------
March 31 $ 12.13 $ 9.88 $ 0.04
June 30 12.06 11.25 0.05
September 30 15.63 11.88 0.08
December 31 17.94 13.94 0.10
(1) The Company's common stock began trading on October 6, 1998.
The stock price information set forth in the table above was provided
by the National Association of Securities Dealers, Inc.
-24-
FINANCIAL INFORMATION REGARDING CNY FINANCIAL CORPORATION
CNY is providing the following financial information to its
stockholders as part of this proxy statement to assist stockholders in making
their decision on whether to vote in favor of the Agreement and the merger. CNY
urges stockholders to please review the following information carefully before
deciding how to vote.
SELECTED FINANCIAL DATA
The following selected balance sheet and income statement data are
derived from the audited consolidated financial statements of CNY Financial
Corporation and Subsidiary. The consolidated financial statements as of December
31, 1999 and 1998 and for each of the years in the three-year period ended
December 31, 1999 are included in this Proxy Statement beginning at page F-1.
DECEMBER 31,
--------------------------------------------------------------------------
SELECTED BALANCE SHEET DATA: 1999 1998 1997 1996 1995
--------------------------------------------------------------------------
(In thousands, except share data)
Total assets $ 287,445 $ 281,186 $ 233,729 $ 238,100 $ 235,681
Loans receivable, net 166,657 159,207 155,422 158,611 158,507
Allowance for loan losses 2,430 2,494 2,143 1,952 2,002
Loans held-for-sale -- -- 2,541 -- --
Securities available-for-sale 97,560 88,437 44,140 45,594 41,777
Securities held-to-maturity 7,103 10,318 12,550 11,757 11,188
Cash & cash equivalents 6,272 14,536 8,079 12,536 14,176
Real estate owned 309 260 964 563 374
Deposits 195,470 196,014 199,770 204,640 203,110
Borrowings 19,200 1,000 -- -- --
Total stockholders' equity $ 67,700 $ 79,070 $ 30,740 $ 30,345 $ 29,030
Book value per share(1) $ 15.43 $ 15.06 N/A N/A N/A
Book value per share, excluding
unallocated ESOP shares(2) $ 16.99 $ 16.38 $ N/A $ N/A N/A
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
SELECTED OPERATIONS DATA: 1999 1998 1997 1996 1995
---------------------------------------------------------------------------
(In thousands, except share data)
Interest income $ 19,770 $ 18,003 $ 17,667 $ 17,787 $ 17,811
Interest expense 7,607 7,986 8,328 8,758 8,613
- - - - - - - ----------------------------------------------------------------------------------------------------------------------------------
Net interest income 12,163 10,017 9,339 9,029 9,198
Provision for loan losses 100 325 3,300 1,380 600
- - - - - - - ----------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 12,063 9,692 6,039 7,649 8,598
Other non-interest income 1,078 1,583 889 770 671
- - - - - - - ----------------------------------------------------------------------------------------------------------------------------------
10,985 11,275 6,928 8,419 9,269
Other non-interest expense 7,874 8,326 6,872 6,201 5,945
- - - - - - - ----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 5,267 2,949 56 2,218 3,324
Income tax expense (benefit) 2,295 1,270 (16) 853 1,400
- - - - - - - ----------------------------------------------------------------------------------------------------------------------------------
Net income $ 2,972 $ 1,679 $ 72 $ 1,365 $ 1,924
Basic earnings per share(3) $ 0.67 $ -- N/A N/A N/A
Diluted earnings per share(3) $ 0.66 $ -- N/A N/A N/A
- - - - - - - ----------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share, excluding contribution
to Foundation(4) $ 0.66 $ 0.13 N/A N/A N/A
==================================================================================================================================
Weighted average diluted shares outstanding 4,496,584 4,928,044 N/A N/A N/A
==================================================================================================================================
-25-
SELECTED FINANCIAL RATIOS AND OTHER DATA: AT OR FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------
1999 1998 1997 1996 1995
================================================================================================================================
PERFORMANCE RATIOS:
Return on average assets 1.04% 0.64% 0.03% 0.58% 0.82%
Return on average assets, excluding
contribution to Foundation(4) 1.04% 0.87% 0.03% 0.58% 0.82%
Return on average equity 3.96% 3.21% 0.23% 4.64% 6.85%
Return on average equity, excluding
contribution to Foundation(4) 3.96% 4.38% 0.23% 4.64% 6.85%
Net interest rate spread 3.36% 3.52% 3.58% 3.48% 3.70%
Net interest margin 4.46% 4.28% 4.17% 4.02% 4.18%
Efficiency ratio 59.57% 72.00% 67.49% 63.38% 60.34%
Efficiency ratio, excluding
contribution to Foundation(4) 59.57% 63.15% 67.49% 63.38% 60.34%
STOCKHOLDERS' EQUITY AND ASSET QUALITY RATIOS:
Average equity to average total assets 26.31% 19.86% 13.04% 12.40% 12.00%
Total equity to assets end of period 23.55% 28.12% 13.15% 12.74% 12.32%
Non-performing assets to total assets 0.32% 0.42% 2.04% 1.78% 1.00%
Non-performing loans to total loans 0.36% 0.58% 2.37% 2.28% 1.24%
Allowance for loan losses to total loans 1.44% 1.54% 1.34% 1.22% 1.25%
Allowance for loan losses to non-performing loans 399.01% 266.74% 56.48% 53.23% 100.40%
OTHER DATA:
Full service offices 3 3 3 3 3
Full-time equivalent employees 98 91 93 95 96
================================================================================================================================
(1) Book value per share is equal to total stockholders' equity divided by the
common shares outstanding at December 31.
(2) Equal to stockholders' equity divided by common shares outstanding, less
unallocated ESOP shares.
(3) Earnings per share for 1998 calculated on earnings from date of conversion
(October 6, 1998) to December 31, 1998.
(4) Excludes contribution expense to the Cortland Savings Foundation of
$1,023,000, or $614,000 after taxes, in 1998.
-26-
THE BUSINESS OF CNY FINANCIAL
CNY, a Delaware corporation, is a bank holding company headquartered in
Cortland, New York with total assets of over $287 million at December 31, 1999.
Through its wholly owned subsidiary, Cortland Savings, which was founded in
1866, CNY engages in full service community banking. Cortland Savings is also
headquartered in Cortland, New York, and has three full service offices in
Cortland County, and loan production offices in Ithaca, Tompkins County, and
Liverpool, Onondaga County.
CNY provides community banking services primarily to individuals and
small-to-medium-sized businesses, in Cortland County and the neighboring
counties. These services include traditional checking, NOW, money market,
savings and time deposit accounts. CNY offers home equity, home mortgage,
commercial real estate, commercial and consumer loans, safe deposit facilities
and other services specially tailored to meet the needs of customers in its
target markets.
CNY commenced operations on October 6, 1998, when Cortland Savings
converted from a state chartered mutual savings bank to a state chartered stock
savings bank. References to the business activities, financial condition and
operations of CNY prior to October 6, 1998 refer to Cortland Savings, while
references to CNY on or after that date refer to both CNY and Cortland Savings
as consolidated, unless the context indicates otherwise.
The following discussion should be read in conjunction with CNY's
Consolidated Financial Statements, including the accompanying notes, which
appear in Item 8 of this Form 10-K.
INVESTMENT ACTIVITIES
GENERAL. The investment policy of CNY, which is approved by the Board
of Directors, is based upon its asset/liability management goals and is designed
primarily to provide satisfactory yields, while maintaining adequate liquidity,
a balance of high quality, diversified investments, and minimal risk. The
investment policy is implemented by the President and the Chief Financial
Officer. CNY is assisted in its investment decisions by an independent
nationally recognized investment advisory firm. All securities purchases and
sales must be approved by at least two executive officers and are reported to
the Board of Directors each month. CNY generally classifies its new securities
investments as available-for-sale in order to maintain flexibility in satisfying
future investment and lending requirements.
-27-
The following table sets forth certain information with respect to
CNY's securities portfolio.
---------------------------------------------------------------
AT DECEMBER 31,
---------------------------------------------------------------
1999 1998 1997
---------------------------------------------------------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
- - - - - - - ----------------------------------------------------------------------------------------------------------
SECURITIES AVAILABLE-FOR-SALE: (Dollars in thousands)
U.S. Treasury securities $ 3,016 $ 3,021 $ 8,041 $ 8,136 $ 15,045 $ 15,141
U.S. Government agencies 11,453 11,225 4,996 5,028 996 1,005
Corporate debt obligations 20,553 20,328 27,649 27,822 13,819 13,861
State and municipal sub-divisions 1,865 1,804 917 927 -- --
Mortgage-backed securities 58,684 56,437 42,801 43,041 12,144 12,211
- - - - - - - ----------------------------------------------------------------------------------------------------------
Total debt securities 95,571 92,815 84,404 84,954 42,004 42,218
Equity securities 2,827 4,745 2,072 3,483 1,192 1,922
- - - - - - - ----------------------------------------------------------------------------------------------------------
Total available-for-sale 98,398 97,560 86,476 88,437 43,196 44,140
- - - - - - - ----------------------------------------------------------------------------------------------------------
SECURITIES HELD-TO-MATURITY:
U.S. Government agencies 1,000 989 1,505 1,507 1,992 1,995
Corporate debt obligations 1,853 1,850 2,858 2,878 1,854 1,870
State and municipal sub-divisions 742 737 747 764 425 430
Mortgage-backed securities 3,508 3,450 5,208 5,255 8,279 8,274
- - - - - - - ----------------------------------------------------------------------------------------------------------
Total held-to-maturity 7,103 7,026 10,318 10,404 12,550 12,569
- - - - - - - ----------------------------------------------------------------------------------------------------------
TOTAL SECURITIES $105,501 $104,586 $ 96,794 $ 98,841 $ 55,746 $ 56,709
==========================================================================================================
DEBT SECURITIES. The carrying value of CNY's debt securities totaled
$99.9 million at December 31, 1999. It is the policy of CNY to invest in debt
securities issued by the United States Government, its agencies, municipalities
and corporations. CNY purchases only investment grade debt securities for its
investment portfolio and at December 31, 1999, none of its debt securities were
in default or otherwise classified. CNY seeks to balance its debt securities
purchases between U.S. government and related securities which are virtually
risk-free but which have lower yields and corporate debt securities which offer
higher yields. Corporate debt securities present greater risks than U.S.
Government securities because of the increased possibility that the corporate
obligor, compared to the U.S. government, will default. To control risks, CNY
limits its investment in corporate debt securities to those rated in the three
highest grades by a nationally recognized rating organization.
CNY also invests in mortgage-backed securities. Mortgage-backed
securities generally have higher yields than other debt securities because of
their longer terms and the uncertainties associated with the timing of mortgage
repayments. In addition, mortgage-backed securities are more liquid than
individual mortgage loans and may be used to collateralize borrowings of CNY.
However, these securities generally yield less than the loans that underlie them
because of the cost of payment guarantees or credit enhancements that reduce
credit risk.
While mortgage-backed securities carry a reduced credit risk as
compared to loans, such securities remain subject to the risk that a fluctuating
interest rate environment, along with other factors such as the geographic
distribution of the underlying mortgage loans, may alter the prepayment rate of
such mortgage loans and so affect both the prepayment speed, and value, of such
securities.
CNY began an investment program in 1999 to increase CNY's investment in
mortgage-backed securities. The purchases were funded through Federal Home Loan
Bank of New York borrowings and a reduction in short-term investments. The
amortized cost of mortgage-backed securities was $62.2 million at December 31,
1999, compared with $48.0 million at the end of 1998. One effect of this program
has been a lengthening of the stated maturity of CNY's investment portfolio as
shown in the table below.
Debt securities are generally purchased with a remaining term to
maturity of two to three years, with the exception of mortgage-backed
securities, which
-28-
have amortization schedules as long as thirty years and municipal bonds with
maturity dates as great as 10 years. At December 31, 1999, more than 95.0% of
the carrying value of CNY's debt securities, excluding mortgage-backed
securities, had remaining terms to maturity of five years or less.
SECURITIES, MATURITIES AND YIELDS. The following table sets forth
contractual maturities and the weighted average yields of CNY's debt securities
portfolio at December 31, 1999 and the comparable total at December 31, 1998.
MORE THAN
ONE YEAR OR LESS ONE TO FIVE YEARS FIVE TO TEN YEARS TEN YEARS TOTAL DEBT SECURITIES
-----------------------------------------------------------------------------------------------------
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
- - - - - - - --------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
U.S. Treasury securities $ 3,007 6.22% $ 14 5.25% $ -- --% $ -- --% $ 3,021 6.21%
U.S. Government agencies 500 6.19% 11,725 5.94% -- --% -- --% 12,225 5.95%
Corporate debt 8,334 5.95% 13,847 5.98% -- --% -- --% 22,181 5.97%
State and municipal
subdivisions 176 4.14% 358 4.50% 2,012 4.39% -- --% 2,546 4.39%
Mortgage-backed securities 252 6.99% 1,233 6.22% 3,723 6.17% 54,737 6.40% 59,945 6.39%
- - - - - - - --------------------------------------------------------------------------------------------------------------------------------
Total 1999 $ 12,269 $27,177 $ 5,735 $54,737 $99,918
================================================================================================================================
Total 1998 $ 20,139 $28,660 $ 5,799 $40,674 $95,272
================================================================================================================================
Expected maturities may differ from contractual maturities because
issuers may have the right to call or prepay obligations with or without
prepayment penalties.
EQUITY SECURITIES. CNY and Bank invest a limited amount of their assets
in corporate equity securities. These investments are made to diversify CNY's
investments and provide opportunities for capital appreciation as well as
dividend income. All equity securities are classified as available-for-sale. CNY
does not regularly trade such securities and generally does not purchase them
for the purpose of near term sale. Equity securities had a fair value of $4.7
million at December 31, 1999.
SECURITIES OF A SINGLE ISSUER. There were no securities of any singe
issuer, other than the U.S. Treasury or U.S. government sponsored entities,
which had a book value in excess of ten percent of stockholders' equity at
December 31, 1999.
LENDING ACTIVITIES
The loan portfolio is the largest category of CNY's interest earning
assets.
LOAN PORTFOLIO COMPOSITION. The following table sets forth the
composition of CNY's loan portfolio in dollar amounts and in percentages at the
dates indicated.
-29-
---------------------------------------------------------------------------------------------------------
AT DECEMBER 31,
---------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---------------------------------------------------------------------------------------------------------
PERCENT PERCENT PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
- - - - - - - ----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Real estate loans:
Residential $ 104,494 61.76% $101,885 62.96% $ 97,303 61.66% $ 96,097 59.73% $ 95,854 59.57%
Construction 1,790 1.06 145 0.09 316 0.20 528 0.33 155 0.10
Home equity 6,520 3.85 6,804 4.20 5,924 3.75 5,882 3.66 6,344 3.94
Commercial mortgages 31,864 18.83 29,224 18.06 30,867 19.56 35,119 21.83 35,165 21.86
- - - - - - - ----------------------------------------------------------------------------------------------------------------------------------
Total real estate loans 144,668 85.50 138,058 85.31 134,410 85.17 137,626 85.55 137,518 85.47
- - - - - - - ----------------------------------------------------------------------------------------------------------------------------------
Other loans:
Guaranteed student
loans 741 0.44 1,016 0.63 1,507 0.96 1,552 0.96 1,747 1.09
Property improvement
loans 661 0.39 709 0.44 907 0.57 1,031 0.64 916 0.57
Automobile loans 12,641 7.47 10,854 6.71 8,902 5.64 6,378 3.96 5,510 3.42
Other consumer loans 4,208 2.49 4,597 2.84 5,031 3.19 6,289 3.91 6,174 3.84
Commercial loans 6,278 3.71 6,588 4.07 7,049 4.47 8,020 4.98 9,023 5.61
- - - - - - - ----------------------------------------------------------------------------------------------------------------------------------
Total other loans 24,529 14.50 23,764 14.69 23,396 14.83 23,270 14.45 23,370 14.53
- - - - - - - ----------------------------------------------------------------------------------------------------------------------------------
Total loans 169,197 100.00% 161,822 100.00% 157,806 100.00% 160,896 100.00% 160,888 100.00%
Less:
Deferred loan fees, net 110 121 241 333 379
Allowance for loan 2,430 2,494 2,143 1,952 2,002
losses
- - - - - - - ----------------------------------------------------------------------------------------------------------------------------------
Total loans, net $ 166,657 $159,207 $155,422 $158,611 $158,507
==================================================================================================================================
RESIDENTIAL MORTGAGE LOANS. CNY offers both adjustable-rate and
fixed-rate mortgage loans. The relative proportion of fixed versus adjustable
mortgage loans originated by CNY depends principally upon customer preferences,
which are generally driven by general economic and interest rate conditions and
the pricing offered by CNY's competitors. In recent years, with relatively low
mortgage interest rates, customer preference has favored fixed-rate mortgage
loans. The adjustable-rate loans generally carry annual or triennial interest
rate caps and life-of-the-loan ceilings which limit interest rate adjustments.
Generally, credit risks on adjustable-rate loans are somewhat greater
than on fixed-rate loans primarily because, as interest rates rise, so do
borrowers' payments, increasing the potential for default. CNY offers
promotional rate loans with low initial interest rates that are not based upon
the index plus the margin for determining future rate adjustments; however, CNY
judges the borrower's ability to repay based on the payment due at an interest
rate 2% higher than the initial rate.
In addition to verifying income and assets of borrowers, CNY obtains
independent appraisals on all residential first mortgage loans and attorney's
opinions of title are required at closing. CNY generally uses title opinions
rather than title insurance on residential mortgage loans, but has not
experienced losses due to its reliance on title opinions instead of title
insurance. Private mortgage insurance is required on most loans with a loan to
value ratio in excess of 80%. Real estate tax escrows are generally required on
residential mortgage loans with loan to value ratios in excess of 80%.
Adjustable-rate mortgage loans originated in recent years have interest
rates that adjust annually or every three years based on the one or three year
Treasury bill index, plus 3%. Interest rate adjustments are generally limited to
2% per year for one-year adjustable loans and 3% per adjustment for three-year
adjustable loans. There is normally a lifetime maximum interest rate adjustment,
measured from the initial interest rate, of 6%.
Fixed-rate residential mortgage loans generally have terms of 10 to 30
years. Although fixed-rate mortgage loans may adversely affect CNY's net
interest income in periods of rising interest rates, CNY originates such loans
-30-
to satisfy customer demand. Such loans are generally originated at initial
interest rates which exceed the fully indexed rate on adjustable-rate mortgage
loans offered at the same time. Therefore, during periods of level interest
rates, they tend to provide higher yields than adjustable loans. Fixed-rate
residential mortgage loans originated by CNY generally include due-on-sale
clauses which permit CNY to demand payment in full if the borrower sells the
property without CNY's consent. Due-on-sale clauses are an important means of
adjusting the rates of CNY's fixed-rate mortgage loan portfolio, and CNY has
generally exercised its rights under these clauses.
HOME EQUITY LOANS. CNY offers a home equity line of credit secured by a
residential one-to-four family mortgage, usually a second lien. These loans have
adjustable rates of interest and generally provide for an initial advance period
of ten years, during which the borrower pays interest only and can borrower,
repay, and re-borrow the principal balance. CNY also offers home equity loans
which are fully advanced at closing and repayable in monthly principal and
interest installments over a period not to exceed 10 years. The maximum loan to
value ratio, including prior liens, is 80% for lines of credit and 85% for
regular amortizing home equity loans.
COMMERCIAL MORTGAGE LOANS. CNY originates commercial mortgage loans
secured by office buildings, retail establishments, multi-family residential
real estate and other types of commercial property. Substantially all of the
properties are located in CNY's market area or in nearby areas of Central New
York State.
CNY makes commercial mortgage loans with loan to value ratios up to
75%, terms up to five years, and amortization periods up to 20 years. Most of
CNY's recent fixed-rate commercial mortgage loans mature after five years, which
allows CNY to adjust the interest rate after five years if appropriate.
For commercial mortgage loans, CNY generally requires a debt service
coverage ratio of at least 120% and the personal guarantee of the principals of
the borrower. CNY also requires an appraisal by an independent appraiser. Title
insurance is required for loans in excess of $500,000. Attorneys' opinions of
title are used instead of title insurance for smaller commercial mortgage loans,
but CNY has not experienced losses as a result of not having title insurance.
Loans secured by commercial properties generally involve a greater
degree of risk than one-to-four family residential mortgage loans. Because
payments on such loans are often dependent on successful operation or management
of the properties, repayment may be subject, to a greater extent, to adverse
conditions in the real estate market or the economy. CNY seeks to minimize these
risks through its underwriting policies. CNY evaluates the qualifications and
financial condition of the borrower, including credit history, profitability and
expertise, as well as the value and condition of the underlying property. The
factors considered by CNY include net operating income; the debt coverage ratio
(the ratio of cash net income to debt service); and the loan to value ratio.
When evaluating the borrower, CNY considers the resources and income level of
the borrower, the borrower's experience in owning or managing similar property
and CNY's lending experience with the borrower. CNY's policy requires borrowers
to present evidence of the ability to repay the loan without having to resort to
the sale of the mortgaged property.
AUTOMOBILE LOANS. In recent years, CNY has exerted efforts to increase
its level of automobile loans in order to provide improved yields, increase the
interest rate sensitivity of its assets and expand its customer base. Automobile
loans are originated both through direct contact between CNY and the borrower
and through automobile dealers who refer the borrowers to CNY. CNY conducts its
own analysis of the creditworthiness of borrowers referred to it by dealers
before approving any automobile loan. The dealer loans are represented by
-31-
installment sales contracts between the dealer and the purchaser which are
immediately assigned to CNY. The dealers receive fees from CNY for the
referrals.
CNY offers automobile loans for both new and used cars. The loans have
fixed rates with maturities not more than five and a half years. Loan amounts
generally equal 85% of the purchase price of the car. These loans tend to
present greater risks of loss than mortgage loans because the collateral is
rapidly depreciable and easier to conceal. Therefore, CNY evaluates the credit
and repayment ability of the borrower as well as the value of the collateral in
determining whether to approve a loan.
OTHER CONSUMER LOANS. CNY also makes short-term fixed rate consumer
loans, either unsecured or secured by savings accounts or other consumer assets,
as well as adjustable-rate revolving credit card loans and overdraft checking
loans. The fixed-rate loans generally have terms of not more than five years and
have interest rates higher than mortgage loans. The shorter terms to maturity or
adjustable rates are helpful in managing CNY's interest rate risk. Applications
for these loans are evaluated based upon the borrowers' ability to repay and, if
applicable, the value of the collateral. Collateral value, except for loans
secured by bank deposits or marketable securities, is a secondary consideration
because personal property collateral generally rapidly depreciates in value, is
difficult to repossess, and rarely generates close to full value at a forced
sale.
COMMERCIAL LOANS. CNY makes commercial loans to businesses for
automobile dealer floor plan financing, working capital, machinery and equipment
purchases, expansion, and other business purposes. These loans generally have
higher yields than mortgage loans, with maturities that generally are not more
than seven years. Working capital lines of credit tend to provide for one-year
terms with annual reviews.
Commercial loans tend to present greater risks than mortgage loans
because the collateral, if any, tends to be rapidly depreciable, difficult to
sell at full value and easier to conceal. In order to limit these risks, CNY
evaluates these loans based upon the borrower's ability to repay the loan from
ongoing operations. CNY considers the business history of the borrower and
perceived stability of the business as important factors when considering
applications for such loans. Occasionally, the borrower provides commercial or
residential real estate collateral for such loans, in which case the value of
the collateral may be a significant factor in the loan approval process.
LOAN MATURITIES
The following table sets forth the contractual maturities of commercial
and real estate construction loans outstanding at December 31, 1999. Also set
forth are the amounts of such loans due after one year, classified according to
sensitivity to changes in interest rates.
MATURITY
--------------------------------------------------------------------------------
DUE IN ONE DUE AFTER ONE YEAR
YEAR OR LESS THROUGH FIVE YEARS DUE AFTER FIVE YEARS TOTAL
- - - - - - - -------------------------------------------------------------------------------------------------------------------------------
FLOATING FLOATING
FIXED RATE FIXED RATE
-----------------------------------------------
(In thousands)
Commercial and real estate construction loans $ 4,230 $ 2,404 $ -- $ 1,434 $ -- $ 8,068
===============================================================================================================================
ASSET QUALITY
NON-PERFORMING LOANS. Non-performing loans include: (1) loans accounted
for on a non-accrual basis; (2) accruing loans contractually past due ninety
-32-
days or more as to interest or principal payments; and (3) loans whose terms
have been renegotiated to provide a reduction or deferral of interest or
principal because of a deterioration in the financial position of the borrower.
The following table provides certain information on CNY's
non-performing loans at the dates indicated.
AT DECEMBER 31,
----------------------------------------------
1999 1998 1997 1996 1995
- - - - - - - ----------------------------------------------------------------------------------------------------------
(Dollars in thousands)
NON-ACCRUAL LOANS: (1)
Residential mortgages $ 539 $ 667 $2,010 $1,069 $ 772
Commercial mortgages -- 167 1,235 1,416 421
- - - - - - - ----------------------------------------------------------------------------------------------------------
Total real estate loans 539 834 3,245 2,485 1,193
Commercial loans 57 71 331 790 739
Other loans 7 15 209 358 62
- - - - - - - ----------------------------------------------------------------------------------------------------------
Total non-accrual loans 603 920 3,785 3,633 1,994
Accruing loans past due 90 days or more:
Residential mortgages -- -- 2 1 --
Commercial mortgages -- -- -- -- --
- - - - - - - ----------------------------------------------------------------------------------------------------------
Total real estate loans -- -- 2 1 --
Commercial loans -- 11 -- -- --
Other loans 6 4 7 33 --
- - - - - - - ----------------------------------------------------------------------------------------------------------
Total loans past due 90 days or more
and still accruing 6 15 9 34 --
Total non-performing loans 609 935 3,794 3,667 1,994
Real estate owned 309 260 964 563 374
- - - - - - - ----------------------------------------------------------------------------------------------------------
Total non-performing assets $ 918 $1,195 $4,758 $4,230 $2,368
==========================================================================================================
Non-performing loans as a percent of total loans 0.36% 0.58% 2.37% 2.28% 1.24%
Non-performing assets as a percent of total assets 0.32% 0.42% 2.04% 1.78% 1.00%
==========================================================================================================
(1) Non-accrual loans at December 31, 1997 include $2.3 million of
non-accrual loans held for sale. These loans were sold during the first quarter
of 1998, representing the largest component of the decline in non-accrual loans.
At December 31, 1999 there were no loans other than those included in
the table with regard to which management had information about possible credit
problems of the borrower that caused management to seriously doubt the ability
of the borrower to comply with present loan repayment terms.
DELINQUENCY PROCEDURES. When a borrower fails to make a required
payment on a loan, CNY attempts to cause the deficiency to be cured by
contacting the borrower. Late notices are sent when a payment is more than 15
days past due and a late charge is generally assessed at that time. CNY attempts
to contact personally any borrower who is more than 20 days past due. All loans
past due 90 days or more are added to a watch list and an employee of CNY
contacts the borrower on a regular basis to seek to cure the delinquency. If a
mortgage loan becomes past due from 90 to 120 days, CNY refers the matter to an
attorney, who first seeks to obtain payment without litigation and, if
unsuccessful, generally commences a foreclosure action or other appropriate
legal action to collect the loan. A foreclosure action, if the default is not
cured, generally leads to a judicial sale of the mortgaged real estate.
-33-
If an automobile loan becomes 60 days past due, CNY seeks to repossess
the collateral. If the default is not cured, then upon repossession CNY sells
the automobile as soon as practicable through a local automobile auction. When
other types of non-mortgage loans become past due, CNY takes measures to cure
defaults through contacts with the borrower and takes appropriate action,
depending upon the nature of the borrower and the collateral, to obtain
repayment of the loan.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is maintained
at a level considered adequate to provide for potential losses. The level of the
allowance is based upon management's periodic and comprehensive evaluation of
the loan portfolio, as well as current and projected economic conditions.
Reports of examination furnished by state and federal banking authorities are
also considered by management in this regard. These evaluations by management in
assessing the adequacy of the allowance include consideration of past loan loss
experience, changes in the composition of the loan portfolio, the volume and
condition of loans outstanding and current market and economic conditions.
The analysis of the adequacy of the allowance is reported to and
reviewed by the Loan Committee of the Board of Directors of Cortland Savings
monthly. Management believes it uses a reasonable and prudent methodology to
measure the inherent risk in the current portfolio, and hence assess the
adequacy of the allowance for loan losses. However, any such assessment is
speculative and future adjustments may be necessary if economic conditions or
CNY's actual experience differ substantially from the assumptions upon which the
evaluation of the allowance was based. Moreover, future additions to the
allowance may be necessary based on changes in economic and real estate market
conditions, new information regarding existing loans, identification of
additional problem loans and other factors, both within and outside of
management's control.
Loans are charged to the allowance for loan losses when deemed
uncollectible by management, unless sufficient collateral exists to repay the
loan.
Set forth in the following table is an analysis of the allowance for
loan losses.
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
- - - - - - - --------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Allowance for loan losses,
beginning of year $ 2,494 $ 2,143 $ 1,952 $ 2,002 $ 1,752
Provision for loan loss 100 325 3,300 1,380 600
- - - - - - - --------------------------------------------------------------------------------------------------------
Charge-offs:
Real estate 145 16 2,484 264 478
Commercial -- 52 395 898 31
Other 135 112 400 551 96
- - - - - - - --------------------------------------------------------------------------------------------------------
Total charge-offs 280 180 3,279 1,713 605
Recoveries:
Real estate 20 96 9 24 161
Commercial 17 40 61 190 --
Other 79 70 100 69 94
- - - - - - - --------------------------------------------------------------------------------------------------------
Total recoveries 116 206 170 283 255
- - - - - - - --------------------------------------------------------------------------------------------------------
Net charge-offs (recoveries) 164 (26) 3,109 1,430 350
- - - - - - - --------------------------------------------------------------------------------------------------------
Allowance for loan losses, end of year $ 2,430 $ 2,494 $ 2,143 $ 1,952 $ 2,002
========================================================================================================
Allowance for loan losses as a
percent of total loans 1.44% 1.54% 1.34% 1.22% 1.25%
Allowance for loan losses as a
percent of non-performing loans 399.01% 266.74% 56.48% 53.23% 100.40%
Ratio of net charge-offs (recoveries)
to average loans outstanding 0.10% (0.02)% 1.97% 0.90% 0.22%
========================================================================================================
-34-
The following table presents the allocation of the allowance for loan
losses.
AT DECEMBER 31,
-----------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
-----------------------------------------------------------------------------------------------
PERCENT PERCENT PERCENT PERCENT PERCENT
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
- - - - - - - ----------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
ALLOWANCE FOR LOAN
LOSSES
ALLOCATED TO:
Residential mortgages $ 1,276 62.82% $ 1,187 67.25% $ 661 65.61% $ 389 63.72% $ 112 63.61%
Commercial mortgages 503 18.83 617 18.06 638 19.56 818 21.83 753 21.86
Commercial loans 296 3.71 279 4.07 183 4.47 478 4.98 961 5.61
Other loans 355 14.64 411 10.62 192 10.36 267 9.47 176 8.92
Unallocated -- -- -- -- 469 -- -- -- -- --
- - - - - - - ----------------------------------------------------------------------------------------------------------------------------
Total allowance $ 2,430 100.00% $ 2,494 100.00% $ 2,143 100.00% $ 1,952 100.00% $ 2,002 100.00%
============================================================================================================================
SOURCES OF FUNDS
GENERAL. CNY's primary source of funds is deposits. In addition, CNY
derives funds for loans and investments from loan and security repayments and
prepayments, borrowings, and revenues from operations. Scheduled payments on
loans and securities are a relatively stable source of funds, while savings
inflows and outflows and loan and securities prepayments are significantly
influenced by general interest rates and money market conditions.
DEPOSITS. CNY offers several types of deposit programs to its
customers, including passbook and statement savings accounts, NOW accounts,
money market deposit accounts, checking accounts and certificates of deposit.
Deposit account terms vary according to the minimum balance required, the time
periods the funds must remain on deposit and the interest rate, among other
factors. CNY's deposits are obtained predominantly from its Cortland County
market area. CNY relies primarily on customer service and long-standing
relationships with customers to attract and retain these deposits; however,
market interest rates and rates offered by competing financial institutions
significantly affect CNY's ability to attract and retain deposits. CNY does not
use brokers to obtain deposits and has no brokered deposits.
CNY prices its deposit offerings based upon market and competitive
conditions in its market area. Pricing determinations are made weekly by a
committee of senior officers. CNY seeks to price its deposit offerings to be
competitive with other institutions in its market area.
The following table sets forth the maturities of certificates of
deposit and other time deposits of $100,000 or more at December 31, 1999.
December 31, 1999
---------------------------------------------------------------
(Dollars in thousands)
Maturing within three months $ 1,491
After three but within six months 2,293
After six but within twelve months 3,277
After twelve months 6,940
---------------------------------------------------------------
Total $ 14,001
===============================================================
-35-
BORROWINGS. CNY maintains an available overnight line of credit with
the Federal Home Loan Bank of New York (FHLB) for use in the event of
unanticipated funding needs which cannot be satisfied from other sources.
Additionally, CNY may borrow term advances for the FHLB. CNY had $19.2 million
of borrowings from the FHLB at December 31, 1999, compared with $1.0 million at
the end of 1998. This $18.2 million increase is primarily attributed to the
mortgage-backed securities investment program previously discussed as well as
general cash flow requirements.
SUPERVISION AND REGULATION
Federal and state laws and the regulations of federal and state bank
regulatory agencies have substantial effects on CNY and Cortland Savings. The
following is a brief summary of laws and regulations material to CNY and
Cortland Savings. Any change in applicable laws or regulations may have a
material adverse effect on the business of CNY and Cortland Savings.
BANK HOLDING COMPANY REGULATION. CNY is a bank holding company subject
to supervision by the Federal Reserve. The Federal Reserve has the authority to
examine CNY and may also examine Cortland Savings.
A bank holding company, such as CNY or Niagara Bancorp, Inc., must
obtain prior Federal Reserve approval to acquire direct or indirect ownership or
control of more than 5% of the voting stock of any other bank holding company.
Therefore, Niagara Bancorp must obtain Federal Reserve approval before it
acquires CNY. In addition, any company, person or group acting in concert that
is not already a bank holding company may be required to obtain prior approval
of the Federal Reserve before acquiring 10% or more of the stock of CNY. New
York State law similarly requires approval from the New York State Banking
Board. These approval requirements could discourage other companies, persons or
groups from attempting to acquire CNY in competition to the currently pending
transaction with Niagara Bancorp.
The Federal Reserve requires that bank holding companies maintain
minimum capital levels. CNY's capital ratios substantially exceed Federal
Reserve requirements. At December 31, 1999, CNY had a ratio of total capital to
risk-weighted assets of 42.81% compared to a Federal Reserve minimum requirement
of 8%, at least 4% of which must be core capital. CNY also had a ratio of core
capital to total average assets (the "leverage ratio") of 23.91%, compared to a
minimum requirement of from 4% to 6%. Substantially all of CNY's capital is core
capital.
TRANSACTIONS WITH AFFILIATES. Federal and state laws and regulations
restrict transactions between a bank and its holding company or other
affiliates, such as loans, purchases of assets, and payments of fees or other
distributions. In general, these restrictions limit the amount of transactions
between an institution and the affiliate, as well as the aggregate amount of
transactions between an institution and all of its affiliates. Transactions with
affiliates must generally be on terms comparable to those for transactions with
unaffiliated entities.
DIVIDEND LIMITATIONS. Federal Reserve policy provides that a bank
holding company should not pay dividends unless (i) the bank holding company's
net income over the prior year is sufficient to fully fund the dividends and
(ii) the prospective rate of earnings retention appears consistent with the
capital needs, asset quality and overall financial condition of the bank holding
company
-36-
and its subsidiaries. Under Delaware law, CNY may not pay dividends to its
stockholders if, after giving effect to the dividend, CNY would not be able to
pay its debts as they become due.
Under the New York Banking Law, Cortland Savings may pay dividends out
of its net profits unless there is an impairment of capital. Cortland Savings
may not declare dividends in any year which exceed its total net profits of that
year combined with its retained net profits of the preceding two years, subject
to certain adjustments, without the approval of the New York Superintendent of
Banks. Furthermore, Cortland Savings may not declare a dividend which would
cause it to fail to meet its capital requirements and may not declare a dividend
that would cause its capital to decline below the liquidation account created
when Cortland Savings converted from a mutual to a stock institution.
CNY and Cortland Savings have satisfied these rules regarding dividend
payments.
The FDIC and the New York Superintendent of Banks may prohibit Cortland
Savings from paying dividends if, in either of their opinions, the payment of
dividends would constitute an unsafe or unsound practice. Dividends are also
prohibited if the payment would cause Cortland Savings to be undercapitalized.
BANK REGULATIONS. Cortland Savings is subject to extensive regulation,
examination, and supervision by the New York State Banking Department and the
FDIC. Cortland Savings' deposit accounts are insured up to applicable limits by
the Bank Insurance Fund of the FDIC. Cortland Savings must get regulatory
approvals before entering into certain transactions, such as mergers with other
banks. The Banking Department and the FDIC conduct periodic examinations of
Cortland Savings to determine the safety and soundness of Cortland Savings and
whether Cortland Savings is complying with regulatory requirements.
BUSINESS ACTIVITIES. Cortland Savings derives its lending, investment
and other authority primarily from the New York Banking Law and the regulations
of the Superintendent of Banks and the New York State Banking Board, as limited
by FDIC regulations and other federal laws and regulations. Cortland Savings may
make investments and engage in activities only as permitted under specific laws
and regulations which grant powers to Cortland Savings. Cortland Savings may
invest in real estate mortgages, consumer and commercial loans, certain types of
debt securities, including certain corporate debt securities and obligations of
federal, state and local government agencies, certain types of corporate equity
securities and certain other assets. Cortland Savings may invest up to 7.5% of
its assets in certain corporate stock and may also invest up to 7.5% of its
assets in certain mutual fund securities. Investment in stock of a single
corporation is limited to the lesser of 2% of the outstanding stock of such
corporation or 1% of Cortland Savings' assets, except as set forth below. In
order to qualify for investment by Cortland Savings, the equity securities must
meet certain tests of financial performance. Cortland Savings may also make
investments not otherwise permitted under the Banking Law. This authority
permits investments in otherwise impermissible investments of up to 1% of
Cortland Savings' assets in any single investment, subject to certain
restrictions, and to an aggregate limit for all such investments of up to 5% of
assets.
Under FDIC regulations, Cortland Savings generally may not directly or
indirectly acquire or retain any equity investment that is not permissible for a
national bank. In addition, Cortland Savings may not directly or indirectly
through a subsidiary, engage as "principal" in any activity that is not
permissible for a national bank unless the FDIC has determined that such
activities would pose no risk to the applicable FDIC insurance fund and Cortland
Savings is in compliance with applicable regulatory capital requirements.
Savings bank life insurance activities are permitted if (i) the FDIC
does not decide that such activities pose a significant risk to the applicable
deposit insurance fund, (ii) the insurance underwriting is conducted through a
division
-37-
of Cortland Savings that meets the definition of a separate department under
FDIC regulations, and (iii) Cortland Savings discloses to purchasers of life
insurance policies and other products that they are not insured by the FDIC,
among other things.
Also excluded from the prohibition on making investments not permitted
for national banks are certain investments in common and preferred stock listed
on a national securities exchange and in shares of an investment company
registered under the Investment Company Act of 1940, as amended. Cortland
Savings' total investment in such securities may not exceed 100% of the Tier 1
capital as calculated under FDIC regulations. Cortland Savings qualifies for
this exclusion and has used its authority to invest in corporate equity
securities. The authority to continue these investments may terminate if the
FDIC determines that the investments pose a safety and soundness risk to
Cortland Savings or if Cortland Savings converts its charter or undergoes a
change in control.
LOANS TO ONE BORROWER. Generally, Cortland Savings may not make
non-mortgage loans for commercial, corporate or business purposes (including
lease financing) to a single borrower in an aggregate amount in excess of 15% of
Cortland Savings' stockholders' equity, plus an additional 10% of Cortland
Savings' stockholders' equity if such amount is secured by certain types of
readily marketable collateral. Cortland Savings currently complies with these
limits.
CAPITAL REQUIREMENTS. The FDIC regulates the capital adequacy of
Cortland Savings. At December 31, 1999, Cortland Savings' leverage capital ratio
was 22.43% compared to a minimum requirement of from 4% to 5%. At December 31,
1999, Cortland Savings' total risk-based capital ratio was 39.29%, compared to a
minimum requirement of 8%, at least 4% of which must be core capital.
Substantially all of Cortland Savings' capital is core capital.
COMMUNITY REINVESTMENT. Under the Community Reinvestment Act, Cortland
Savings must, consistent with its safe and sound operation, help meet the credit
needs of its entire community, including low and moderate income neighborhoods.
There are no specific lending requirements or programs nor does the law limit
Cortland Savings' discretion to develop products and services that it believes
are best suited to its particular community. The FDIC periodically assesses
Cortland Savings' record of meeting the credit needs of its community and must
take such record into account in its evaluation of certain applications made by
Cortland Savings. Cortland Savings received a satisfactory rating from the FDIC
at its last examination under the Community Reinvestment Act.
The New York Banking Law imposes similar community reinvestment
obligations on Cortland Savings. Cortland Savings received a satisfactory rating
from the New York Banking Department at its last state community reinvestment
examination.
STANDARDS FOR SAFETY AND SOUNDNESS. The Federal Reserve and the FDIC,
together with the other federal bank regulatory agencies, have established
guidelines relating to internal controls and information systems, internal audit
systems, loan documentation, credit underwriting, interest rate exposure, asset
growth, and compensation, fees and benefits. In general, the guidelines require,
among other things, appropriate systems and practices to identify and manage the
risks and exposures specified in the guidelines. The guidelines also cover asset
quality and earnings evaluation and monitoring. The guidelines prohibit
excessive compensation as an unsafe and unsound practice and describe
compensation as excessive when the amounts paid are unreasonable or
disproportionate to the services performed by an executive officer, employee,
director or principal stockholder. The FDIC has various enforcement powers if
Cortland Savings violates these guidelines. If non-compliance continues, the
FDIC may proceed as in the case of an undercapitalized bank under the "prompt
corrective action" requirements described below. The FDIC may also seek judicial
-38-
enforcement and civil money penalties. The FDIC has not asserted any material
violations of these guidelines by Cortland Savings.
PROMPT CORRECTIVE ACTION. Institutions that are not adequately
capitalized may be subject to a variety of supervisory actions including, but
not limited to, restrictions on growth, investment activities, capital
distributions and affiliate transactions. They must submit a capital restoration
plan which, to be accepted by the regulators, must be guaranteed in part by any
company having control of the institution (such as CNY). Federal banking
agencies have indicated that, in regulating bank holding companies, the agencies
may take appropriate action at the holding company level based on their
assessment of the effectiveness of supervisory actions imposed upon subsidiary
insured depository institutions pursuant to the prompt corrective action rules.
The capital ratios of CNY and Cortland Savings are high enough that the prompt
corrective action requirements have not had any effect on either of them.
PERSONNEL
At December 31, 1999, CNY employed 98 full-time equivalent employees.
The employees are not represented by a collective bargaining unit, and CNY
considers its relationship with its employees to be good.
COMPETITION
CNY's principal competitors for deposits are other savings banks,
savings and loan associations, commercial banks and credit unions in CNY's
market area, as well as money market mutual funds, insurance companies and
securities brokerage firms, many of which are substantially larger in size than
CNY. CNY's competition for loans comes principally from savings banks, savings
and loan associations, commercial banks, mortgage bankers, finance companies and
other institutional lenders. Some of the institutions which compete with CNY
have much greater financial and marketing resources than CNY. CNY's principal
methods of competition include loan and deposit pricing, maintaining close ties
with its local community, advertising and marketing programs and the types of
services provided.
PROPERTIES
CNY conducts its business through its headquarters in the City of
Cortland, a nearby drive-up facility, and two branches in adjacent communities
in Cortland County. CNY also has representative offices in Ithaca and Liverpool
for the origination of loans. CNY believes that these properties are adequate
for current needs. The following table sets forth certain information regarding
CNY's deposit-taking and loan production offices at December 31, 1999.
DATE OWNED/ NET BOOK
LOCATION ACQUIRED LEASED VALUE
- - - - - - - -----------------------------------------------------------------------------------------------------
(In thousands)
One North Main Street, Cortland, NY 13045
and nearby drive through facility at 29-31 North Main Street Various Owned $ 843
12 South Main Street, Homer, NY 13077 Various Owned $ 922
860 Route 13, Cortlandville, NY 13045 Various Owned $ 475
200 East Buffalo Street, Ithaca, NY 14850 1998 Leased None
290 Elwood Davis Rd, Liverpool, NY 13088 1999 Leased None
- - - - - - - -----------------------------------------------------------------------------------------------------
LEGAL PROCEEDINGS
CNY and Cortland Savings are from time to time parties in various
routine legal actions arising in the normal course of business. Management
believes that there is no proceeding threatened or pending against CNY or
Cortland Savings which, if determined adversely, would materially adversely
affect the consolidated financial position or operations of CNY.
-39-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements of CNY, including the accompanying notes,
appearing later in this proxy statement.
GENERAL
CNY's principal business is conducted by its wholly-owned subsidiary,
Cortland Savings. Cortland Savings' results of operations depend principally on
its net interest income, which is the difference between the income earned on
its loans and securities and its cost of funds, principally interest paid on
deposits. Net interest income is dependent on the amounts and yields of interest
earning assets as compared to the amounts of and rates on interest bearing
liabilities. Net interest income is sensitive to changes in market rates of
interest and CNY's asset/liability management procedures in coping with such
changes. Results of operations are also affected by the provision for loan
losses, the volume of non-performing assets and the levels of non-interest
income, and non-interest expense.
Sources of non-interest income include categories such as deposit
account fees and other service charges, gains on the sale of securities and fees
for banking services such as safe deposit boxes. The largest category of
non-interest expense is compensation and benefits expense. Other principal
categories of non-interest expense are occupancy expense and real estate owned
expense, which represents expenses in connection with real estate acquired in
foreclosure or in satisfaction of a debt owed to CNY.
CNY commenced operations on October 6, 1998, when Cortland Savings
converted from a state chartered mutual savings bank to a state chartered stock
savings bank (the "Conversion"). On that date, CNY sold 5,251,629 shares of
common stock in its initial public offering and received $50.3 million of net
proceeds from the sale, which have been invested primarily into mortgage-backed
securities and investment grade corporate bonds. The shares sold included
428,532 shares purchased by CNY's Employee Stock Ownership Plan, which purchase
was funded by a loan from CNY. CNY contributed an additional 105,033 shares to
the Cortland Savings Foundation as part of the Conversion and recorded an
expense of $1.0 million, or approximately $614,000 after taxes, in October 1998
due to this donation.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1999 AND DECEMBER 31, 1998
Total assets at December 31, 1999 were $287.4 million, compared to
$281.2 million at December 31, 1998. The primary cause of the $6.3 million
increase was increased investing and lending activity by CNY.
CNY repositioned a portion of its invested funds in 1999 to take
advantage of higher rates available by extending the average maturity of
investments. CNY also expanded its investment program to enhance net interest
income. CNY concentrated its new securities investments in mortgage-backed
securities which tend to have higher yields than government and corporate debt
securities. The mortgage-backed securities had contractual terms to maturity of
15 to 30 years, and were funded by a reduction in cash and short-term
investments of $8.3 million and an increase in borrowings.
Net loans were $166.7 million at December 31, 1999, an increase of $7.5
million from the end of 1998. This growth occurred as CNY maintained its
emphasis in residential lending and increased its level of loan originations.
Loan closings, including undisbursed funds and refinancings, totaled $41.3
million in 1999, an increase of 4.8% from the 1998 total of $39.4 million.
-40-
Total deposits were $195.5 million at the end of 1999, compared to
$196.0 million at December 31, 1998. This $544,000 reduction is attributed to a
$3.9 million reduction in certificates of deposit and a $711,000 decline in
savings accounts, partially offset by a $1.3 million increase in demand accounts
and a $2.8 million increase in money market accounts. During 1999, management
chose to reduce CNY's reliance on higher cost certificates of deposit and
actively promote CNY's checking account and money market products.
Borrowings were $19.2 million and $1.0 million at December 31, 1999 and
1998, respectively. This $18.2 million increase was required to fund the growth
in assets, and the stock repurchases discussed in the following paragraph.
Stockholders' equity was $67.7 million on December 31, 1999 compared to
$79.1 million at the end of 1998. The primary contributor to this $11.4 million
decline was completion of CNY's share repurchase programs. 649,664 shares of
CNY's common stock were purchased during 1999 at an aggregate price of $9.4
million. Additionally, CNY repurchased 214,266 shares in May 1999 at a price of
$12.00 per share to be used for grants under CNY's Personnel Recognition and
Retention Plan. As of December 31, 1999, a total of 181,278 shares have been
granted to participants in this plan.
-41-
INTEREST EARNING ASSETS AND INTEREST BEARING LIABILITIES
The following table sets forth the average daily balances, net interest
income and expense and average yields and rates for CNY's earning assets and
interest bearing liabilities for the indicated periods. No tax-equivalent
adjustments were made.
YEAR ENDED DECEMBER 31,
1999 1998 1997
------------------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
INTEREST BALANCE COST INTEREST BALANCE COST INTEREST BALANCE COST
------------------------------------------------------------------------------------------
(Dollars in thousands)
Loans(1) $ 13,183 $161,371 8.17% $13,420 $156,649 8.57% $13,582 $157,713 8.61%
Securities(2) 6,429 107,571 5.98% 4,016 66,228 6.06% 3,769 60,226 6.26%
Other short-term investments 158 3,615 4.37% 567 11,387 4.98% 316 6,019 5.25%
- - - - - - - ----------------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 19,770 272,557 7.25% 18,003 234,264 7.68% 17,667 223,958 7.89%
Non-interest-earning assets 12,697 29,141 12,254
- - - - - - - ----------------------------------------------------------------------------------------------------------------------------
Total assets $285,254 $263,405 $236,212
============================================================================================================================
Savings accounts(3) 1,517 $ 63,853 2.38% 1,851 $ 66,709 2.77% 1,936 $ 64,576 3.00%
Money market accounts 256 9,211 2.78% 220 8,176 2.69% 243 8,643 2.81%
NOW accounts 133 10,747 1.24% 167 10,015 1.67% 166 9,457 1.76%
Certificates of deposit 5,140 102,470 5.02% 5,723 106,860 5.36% 5,983 110,728 5.40%
Borrowings 561 9,237 6.07% 25 430 5.81% -- -- --
- - - - - - - ----------------------------------------------------------------------------------------------------------------------------
Total interest-bearing 195,518 3.89%
liabilities 7,607 7,986 192,190 4.16% 8,328 193,404 4.31%
Non-interest-bearing liabilities 14,684 18,900 12,002
- - - - - - - ----------------------------------------------------------------------------------------------------------------------------
Total liabilities 210,202 211,090 205,406
Stockholders' equity 75,052 52,315 30,806
- - - - - - - ----------------------------------------------------------------------------------------------------------------------------
Total liabilities and equity $285,254 $263,405 $236,212
============================================================================================================================
Net interest income/spread $ 12,163 3.36% $10,017 3.53% $ 9,339 3.58%
Net earning assets/net
interest margin $ 77,039 4.46% $ 42,074 4.28% $ 30,554 4.17%
Ratio of average interest-earning assets
to average interest-bearing liabilities 1.39x 1.22x 1.16x
- - - - - - - ---------------------------------
(1) Average balances include loans held-for-sale and nonaccrual loans, net of
the allowance for loan losses. Interest is recognized on nonaccrual loans only
as and when received.
(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. Securities include Federal Home Loan Bank stock.
(3) Includes advance payments for taxes and insurance (mortgage escrow
deposits).
-42-
CHANGES IN INTEREST INCOME AND EXPENSE
One method of analyzing net interest income is to consider how changes
in average balances and average rates from one period to the next affect net
interest income. The following table shows the dollar amount of changes in
interest income and expense by major categories of interest earning assets and
interest bearing liabilities attributable to changes in volume or rate or both,
for the periods indicated.
Volume variances are computed using the change in volume multiplied by
the previous year's rate. Rate variances are computed using the changes in rate
multiplied by the previous year's volume. The change in interest due to both
rate and volume has been allocated between the factors in proportion to the
relationship of the absolute dollar amounts of the change in each.
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1999 VS. 1998 1998 VS. 1997
--------------------------------------------------------------
INCREASE (DECREASE) DUE TO: INCREASE (DECREASE) DUE TO:
VOLUME RATE TOTAL VOLUME RATE TOTAL
--------------------------------------------------------------
(In thousands)
INTEREST-EARNING ASSETS:
Loans $ 398 $ (635) $ (237) $ (91) $ (71) $ (162)
Securities 2,472 (59) 2,413 367 (120) 247
Other short-term investments (347) (62) (409) 268 (17) 251
- - - - - - - ---------------------------------------------------------------------------------------------------------------
Total interest-earning assets $ 2,523 $ (756) $ 1,767 $ 544 $ (208) $ 336
===============================================================================================================
INTEREST-BEARING LIABILITIES:
Savings accounts $ (76) $ (258) $ (334) $ 62 $ (147) (85)
Money market accounts 29 7 36 (13) (10) (23)
NOW accounts 11 (45) (34) 9 (8) 1
Certificates of deposit (229) (354) (583) (207) (53) (260)
Borrowings 535 1 536 25 -- 25
- - - - - - - ---------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities $ 270 $ (649) $ (379) $ (124) $ (218) $ (342)
===============================================================================================================
Net change in net interest income $ 2,253 $ (107) $ 2,146 $ 668 $ 10 $ 678
===============================================================================================================
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1999 AND
DECEMBER 31, 1998
GENERAL. Net income for 1999 was $3.0 million compared to net income of
$1.7 million in 1998. The primary reason for the improvement was an increase in
net interest income of $2.1 million and a $452,000 decrease in other operating
expenses. These improvements were partially offset by a $505,000 reduction in
non-interest income and a $1.0 million increase in income tax expense
NET INTEREST INCOME. Net interest income increased by $2.1 million or
24.5% from 1998 to 1999. This improvement occurred primarily due to a $38.3
million increase in average total earning assets as a result of CNY's stock
offering on October 6, 1998, offset partially by a reduction in the average rate
earned on assets of 43 basis points. The reduction in rate is attributable to an
increase in securities as a percentage of total earning assets and a reduction
in the rate earned on loans due to competitive pressures and market interest
rates in general. Securities increased as CNY invested the proceeds of its stock
offering in such investments pending redeployment in loans as appropriate
opportunities arise and due to the investment program previously discussed.
Loans generally have higher yields than CNY's other investments.
CNY also experienced a decline in the cost of interest-bearing
liabilities to 3.89% in 1999 compared to 4.16% in 1998. The decline in market
interest rates at the end of 1998 allowed CNY to reduce its savings and NOW
-43-
account pricing while remaining competitive in its market. Furthermore, the
infusion of capital from CNY's conversion allowed CNY to be more conservative in
pricing its certificates of deposit. The investment of the additional capital
resulted in an increase in average net earning assets of $35.0 million in 1999,
which resulted in an improvement in CNY's net interest margin to 4.46% in 1999,
compared to 4.28% in 1998.
PROVISION FOR LOAN LOSSES. The provision for loan losses results from
management's analysis of the adequacy of CNY's allowance for loan losses. If
management determines that an increase in the allowance is warranted, then the
increase is accomplished through a provision for loan losses, which is charged
as an expense on CNY's consolidated income statement. The provision for loan
losses was $100,000 for the year ended December 31, 1999 compared to $325,000 in
1998. A lower provision was appropriate in 1999 due to CNY's improved asset
quality.
NON-INTEREST INCOME. CNY's primary source of recurring non-interest
income is service charges, principally on deposit accounts. Service charges
increased by $117,000 in 1999 versus 1998, which increase related primarily to
the implementation of ATM surcharges and increased debit card usage by CNY's
customers.
CNY began surcharging persons other than Cortland Savings depositors
for using its ATMs in April 1999. A total of $61,000 of income was recognized
for this service during the year. Additionally, through a customer awareness
campaign, debit card usage increased, resulting in a $44,000 improvement in
income from this product.
During 1998, CNY also received $658,000 in settlement of its insurance
claim related to an officer defalcation which was discovered in 1996. The
settlement brought this matter to a close.
NON-INTEREST EXPENSE. Non-interest expense decreased $452,000 from 1998
to 1999. The primary reasons for the decrease were a $415,000 decrease in
salaries and employee benefits and the $1.0 million contribution to the Cortland
Savings Foundation in 1998. Partially reducing the impact of these items was
$315,000 of expenses incurred related to the announced merger with Niagara
Bancorp, Inc. These merger expenses are not tax deductible, and thus net income
was reduced by that amount.
The decrease in salaries and employee benefits included a $516,000
reduction of expense related to the termination of CNY's defined benefit pension
plan, versus an expense of $377,000 in 1998. This reduction was partially offset
by increased expense of CNY's ESOP and stock grant plan, increased medical
claims of $85,000 and normal merit increases.
The fluctuation in the impact of the defined benefit plan termination
between 1998 and 1999 was caused by the settlement gain on the termination of
the plan in 1999 of $394,000 combined with a $122,000 reduction in the actual
contribution to CNY's 401(k) plan in 1999 from the estimate recorded in 1998.
Expense related to the allocation of ESOP shares was $279,000 for the
year ended December 31, 1999, compared with $51,000 in 1998. The primary cause
of this $228,000 increase was a full year of allocation in 1999 versus one
quarter in 1998. The higher average per share price of CNY's common stock in
1999 versus 1998 also contributed to this increase.
Shareholders of CNY approved the Personnel Recognition and Retention
Plan in April 1999 and stock grants were made to officers and directors of CNY
under this plan. Expense of $288,000 was recorded in 1999 for this plan, and
there was no such expense in 1998.
-44-
During the fourth quarter of 1998, CNY donated 105,033 share of its
common stock to the Cortland Savings Foundation, a charitable foundation created
in connection with the Conversion. The donation resulted in a pre-tax $1.0
million financial statement expense during 1998.
Professional fees increased by $213,000 from 1998 to 1999, due to a
variety of matters, including the establishment of a real estate investment
trust in 1999.
CNY recorded net expense of $83,000 from its real estate owned in 1999
compared with net revenue of $72,000 in 1998. This $155,000 increase in expense
occurred because CNY recorded a gain of $209,000 on the sale of one property in
1998 which gain exceeded the aggregate other expenses incurred on real estate
owned during that year.
Other non-interest expense increased $412,000 from 1998 to 1999,
reflecting increased costs associated with being a publicly-traded company for a
full year in 1999 versus less than one quarter in 1998. Adding to the increase
in other expense was a $51,000 increase in the costs of upgrading personal
computers in 1999, and a $55,000 increase in the costs associated with ATM and
debit cards due to higher volume levels as previously discussed. Furthermore,
CNY experienced a $74,000 increase in foreclosure expenses as the number of
actions increased compared with 1998. This increased activity did not, however,
result in an increase in the level of other real estate owned because CNY
aggressively worked to manage its level of nonperforming assets.
INCOME TAXES. Income tax expense increased $1.0 million from 1998 to
1999, primarily reflecting the improved earnings of CNY.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1998 AND
DECEMBER 31, 1997
GENERAL. Net income for 1998 was $1.7 million compared to net income of
$72,000 in 1997. The primary reason for the improvement was the reduction in the
costs incurred to resolve CNY's problem assets, including a $3.0 million
reduction in the provision for loan losses and a $572,000 reduction in the
expense of real estate owned. Also affecting the improvement in net income was
an improvement in net interest income of $678,000, a $694,000 increase in other
operating income and a $1.5 million increase in other operating expenses.
During the fourth quarter of 1997, CNY decided that its non-performing
loans were creating too great a strain on management resources and the work
necessary to collect those assets was diverting management from its core goal of
running CNY in a profitable manner. Therefore, in order to improve overall asset
quality and free management from less productive tasks associated with the
resolution of problem loans, CNY decided to seek to sell a substantial portion
of its non-performing loans to a single unrelated purchaser which was completed
in the first quarter of 1998. The decision to sell the loans resulted in a $1.7
million charge against the allowance for loan losses.
NET INTEREST INCOME. Net interest income increased by $678,000 or 7.3%
form 1997 to 1998. This improvement occurred primarily due to a $10.3 million
increase in average total earning assets as a result of CNY's stock offering on
October 6, 1998, offset partially by a reduction in the average rate earned on
assets of 21 basis points. The reduction in rate is attributable to an increase
in securities and other short-term investments and the overall decline in market
interest rates.
CNY also experienced a decline in the cost of interest-bearing
liabilities to 4.16% in 1998 compared to 4.31% in 1997. The decline in market
interest rates allowed CNY to reduce its deposit pricing while remaining
-45-
competitive in its market. The infusion of capital from Cortland Savings'
conversion, and related increase in average net earning assets of $11.5 million
in 1998, resulted in an improvement in CNY's net interest margin to 4.28% for
1998, compared to 4.17% in 1997.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $325,000
for the year ended December 31, 1998 compared to $3.3 million in 1997. A lower
provision was appropriate in 1998 due to the significant improvement in CNY's
asset quality. Despite the decrease in the provision, the allowance for loan
losses increased from $2.1 million at year-end 1997 to $2.5 million at year-end
1998, when it represented 1.54% of total loans.
NON-INTEREST INCOME. CNY's primary source of recurring non-interest
income is service charges, principally on deposit accounts. Service charges
increased by $87,000 in 1998 versus 1997, which increase related primarily to
fee changes on products and an increase in loan-related fees.
During 1998, CNY also received $658,000 from the insurance claim
settlement previously discussed.
NON-INTEREST EXPENSES. Non-interest expense increased $1.4 million from
1997 to 1998. The primary reasons for the increase were a $918,000 increase in
salaries and employee benefits and a $1.0 million contribution to the Cortland
Savings Foundation. The increase in salaries and employee benefits included a
$377,000 expense related to the termination of CNY's defined benefit pension
plan, $113,000 of severance expense for employee terminations, increased medical
claims of $82,000, $51,000 of expense related to CNY's ESOP, representing ESOP
expense for approximately one quarter of the year, and normal merit increases.
The $377,000 expense related to the termination of CNY's defined
benefit plan represents the estimated plan curtailment expense of $35,000
combined with an estimated expense of $437,000 for CNY's commitment to
contribute 25% of the excess of plan assets over the cost of annuities to be
purchased at the time of settlement of the plan (which occurred in 1999) to
CNY's 401(k) plan. These amounts are partially offset by the $95,000 benefit of
the pension plan prior to termination.
Professional fees increased by $257,000 from 1997 to 1998, reflecting
$210,000 of expenses related to CNY's unsuccessful attempt to acquire another
financial institution during the fourth quarter of 1998.
Directors' fees increased $189,000, primarily the effect of a $150,000
retirement benefit for three retired directors in 1998.
CNY recorded net revenues of $72,000 from its real estate owned in 1998
compared with a net expense of $500,000 in 1997. This improvement occurred as
the level of real estate owned declined significantly during 1998 as CNY
continued its efforts to resolve and reduce non-performing assets. CNY recorded
a gain of $209,000 on the sale of one property, which gain exceeded the
aggregate other expenses incurred on real estate owned.
INCOME TAXES. Income tax expense increased $1.3 million from 1997 to
1998, reflecting the improved earnings of CNY, as well as an $80,000 excise tax
recorded for the termination of the defined benefit plan.
LIQUIDITY AND CAPITAL
CNY's primary sources of funds are deposits, borrowings, and payments
received on loans and securities. While scheduled payments on loans and
securities, either installment payments or payments at maturity, are relatively
-46-
predictable sources of funds, deposit outflows and loan prepayments can
fluctuate and are influenced by market interest rates, economic conditions and
competition.
CNY's primary investing activities are the origination of loans and the
purchase of securities. CNY's loans, net, after payments and charge-offs,
increased by $7.5 million during 1999 and $4.1 million during 1998, and
decreased by $3.1 million during 1997. Securities, excluding the effect of
unrealized gains and losses, increased by $8.7 million in 1999 and $41.0 million
during 1998 and decreased by $1.2 million during 1997.
In general, CNY invests available funds in securities, federal funds
sold and short-term investments pending the investment of those funds in loans.
Generally, the regular flow of deposits and loan repayments, along with payments
on and maturities of securities, provides sufficient funds to fund new loan
originations. CNY can also regulate the level of deposits, and hence the flow of
funds, by adjusting the rates it offers on deposits, especially certificates of
deposit. Federal funds sold and other short-term investments are transitory and
also provide available funds when needed for other purposes. Furthermore, as
part of its management of the loan origination process, CNY tracks the progress
of loan applications and commitments so that the volume and timing of new
securities purchases can be adjusted as funds are needed for other purposes.
Finally, Cortland Savings has available lines of credit and borrowing
capabilities to provide additional funds if the need arises. At December 31,
1999, CNY had available lines of credit and borrowing capabilities with the
Federal Home Loan Bank of New York of $27.3 million.
At December 31, 1999, CNY and Cortland Savings substantially exceeded
all regulatory capital requirements of the Federal Reserve Board of Governors
and the FDIC applicable to them. Compliance with minimum capital requirements
does not currently have a material affect on Cortland Savings or CNY. Cortland
Savings was classified as "well capitalized" at December 31, 1999 under FDIC
regulations.
IMPACT OF INFLATION AND CHANGING PRICES
CNY prepares its financial statements and other financial disclosures
according to Generally Accepted Accounting Principles, which in most cases
require the measurement of financial condition and operating results in terms of
historical dollar amounts without considering the changes in the relative
purchasing power of money over time due to inflation. Inflation can increase
operating costs and affect the value of collateral for loans in general, and
real estate collateral in particular. Unlike industrial companies, nearly all of
CNY's assets and liabilities are monetary in nature. As a result, interest rates
have a greater impact on net income than do the effects of general levels of
inflation. Interest rates do not necessarily move in the same direction or to
the same extent as the price of goods and services. However, interest rates
generally increase during periods when the rate of inflation is increasing and
decrease during periods of decreasing inflation. Periods of high inflation are
ordinarily accompanied by high interest rates, which could have a negative
effect on net income.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ASSET/LIABILITY MANAGEMENT AND MARKET RISK. As a continuing part of its
financial strategy, CNY attempts to manage the impact of fluctuations in market
interest rates on its net interest income. This effort entails providing a
reasonable balance between interest rate risk, credit risk, liquidity risk and
maintenance of yield. Asset/liability management policies are established and
monitored by management in conjunction with the Board of Directors of Cortland
Savings, subject to general oversight by CNY Financial Corporation's Board of
Directors. The policies establish guidelines for acceptable limits on the
sensitivity of the market value of assets and liabilities to changes in interest
rates.
-47-
CNY's net income is dependent on its net interest income. Net interest
income is susceptible to interest rate risk to the degree that interest-bearing
liabilities mature or reprice on a different basis than interest-earning assets.
When interest-bearing liabilities mature or reprice more quickly than
interest-earning assets in a given period, a significant increase in market
rates of interest could adversely affect net interest income. Similarly, when
interest-earning assets mature or reprice more quickly than interest-bearing
liabilities, falling interest rates could result in a decrease in net income.
The following table illustrates CNY's estimated interest rate
sensitivity and periodic and cumulative gap positions as calculated as of
December 31, 1999.
AMOUNTS ESTIMATED TO MATURE OR REPRICE WITHIN
------------------------------------------------------------------------------
LESS THAN
THREE 3 - 6 6 MONTHS 1 - 2 3 - 5 OVER 5
MONTHS MONTHS TO 1 YEAR YEARS YEARS YEARS TOTAL
- - - - - - - ------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
INTEREST-EARNING ASSETS:
Short-term investments $ 221 $ -- $ -- $ -- $ -- $ -- $ 221
Securities, including FHLB stock 3,082 7,864 8,593 18,290 39,123 29,348 106,300
Loans 13,672 8,636 13,207 18,762 45,237 67,143 166,657
- - - - - - - ------------------------------------------------------------------------------------------------------------------
Total interest-earning assets 16,975 16,500 21,800 37,052 84,360 96,491 273,178
- - - - - - - ------------------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Savings accounts, including escrow 1,493 2,986 4,479 8,958 26,873 17,915 62,704
Money market accounts 360 719 1,079 2,158 6,473 -- 10,789
NOW accounts 370 740 1,110 2,220 6,661 -- 11,101
Certificates of deposit 9,114 18,983 29,408 24,400 18,533 -- 100,438
Borrowings 1,200 2,000 8,000 1,000 7,000 -- 19,200
- - - - - - - ------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 12,537 25,428 44,076 38,736 65,540 17,915 204,232
Interest sensitivity gap $ 4,438 $ (8,928) $(22,276) $ (1,684) $ 18,820 $ 78,576 $ 68,946
==================================================================================================================
Cumulative interest
sensitivity gap $ 4,438 $ (4,490) $(26,766) $(28,450) $ (9,630) $ 68,946
==================================================================================================================
Ratio of cumulative gap to total
interest-earning assets 1.62% (1.64%) (9.80%) (10.41%) (3.53%) 25.24%
==================================================================================================================
Ratio of interest-earnings assets
To interest-bearing liabilities 135.40% 64.89% 49.46% 95.65% 128.72% 538.60% 133.76%
==================================================================================================================
While the gap position illustrated above is a useful tool that management
can assess for general positioning of CNY's balance sheet, management uses an
additional measurement tool to evaluate its asset/liability sensitivity which
determines exposure to changes in interest rates by estimating the percentage
change in net interest income due to changes in rates over a one-year time
horizon. Management measures the estimated percentage change assuming an
instantaneous permanent parallel shift in the yield curve of 100 and 200 basis
points, both upward and downward. The model uses an option-based pricing
approach to estimate the sensitivity of mortgage loans. The most significant
embedded option in these types of assets is the borrower's optional right to
prepay the loan. The model uses various prepayment assumptions depending upon
the type of mortgage instrument (residential mortgages, commercial mortgages,
mortgage-backed securities, etc.). Prepayment rates for mortgage instruments
ranged from 1% to 39% CPR (Constant Repayment Rate) as of December 31, 1999. For
administered rate core deposits (e.g. NOW and savings accounts), the model
utilizes interest rate floors equal to 100 basis points below their current
levels.
-48-
Utilizing this measurement concept, the estimated interest rate risk of
CNY, expressed as a percentage change in net interest income over a one-year
time horizon due to changes in interest rates, at December 31, 1999, was as
follows:
BASIS POINT CHANGE
--------------------------------------------------
+200 +100 -100 -200
--------------------------------------------------
Estimated percentage change in net interest income due to an
immediate change in interest rates over a one-year time horizon ........ (3.55%) (1.09%) 3.87% 3.95%
Actual results may differ from these estimates due to the inherent
uncertainty of the assumptions, including the timing, magnitude and frequency of
rate changes, customer buying patterns, economic conditions, and management
strategies.
CNY does not currently engage in trading activities or use instruments
such as swaps, collars or floors to control interest rate risk. Even though such
activities may be permitted with the approval of the Board of Directors, CNY
does not intend to engage in such activities in the immediate future.
Market risk is the risk of loss from adverse changes in market prices
and rates. CNY's market risk arises primarily from interest rate risk inherent
in its lending and deposit activities. Other types of market risk, such as
foreign currency exchange rate risk and commodity price risk, do not arise in
the normal course of CNY's business activities.
FORWARD-LOOKING STATEMENTS
In this Proxy Statement, CNY, when discussing the future, has used
words like "will probably result", "are expected to", "may cause", "is
anticipated", "estimate", "project", or similar words. These words and the
related discussions represent forward-looking statements. In addition, any
analysis of the adequacy of the allowance for loan losses, or the interest rate
sensitivity of CNY's assets and liabilities, represent attempts to predict
future events and circumstances which are also represent forward-looking
statements.
Many factors could cause future results to differ from what is
anticipated in the forward-looking statements. For example, future financial
results could be affected by (i) deterioration in local, regional, national or
global economic conditions which could cause an increase in loan delinquencies,
a decrease in property values, or a change in the housing turnover rate; (ii)
changes in market interest rates or changes in the speed at which market
interest rates change; (iii) changes in laws and regulations affecting the
financial service industry; (iv) changes in competition and (v) changes in
consumer preferences. The consummation of the proposed transaction with Niagara
Bancorp could be affected by many conditions and contingencies discussed in this
proxy statement, such as the ability to obtain regulatory approval and whether
CNY's stockholders approve the Agreement and the merger.
Please do not place unjustified or excessive reliance on any
forward-looking statements. They speak only as of the date made and are not
guarantees, promises or assurances of what will happen in the future. Remember
that various factors, including those described above, could affect CNY's
financial performance and could cause CNY's actual results or circumstances for
future periods to be materially different from what has been anticipated or
projected.
-49-
CNY FINANCIAL CORPORATION
AND SUBSIDIARY
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report .............................................. F-2
Consolidated Balance Sheets at December 31, 1999 and 1998 ................. F-3
Consolidated Statements of Income for the Years Ended
December 31, 1999, 1998 and 1997 ........................................ F-4
Consolidated Statements of Stockholders' Equity and Comprehensive
Income for the Years Ended December 31, 1999, 1998 and 1997 ............. F-5
Consolidated Cash Flow Statements for the Years Ended
December 31, 1999, 1998 and 1997 ........................................ F-6
Notes to Consolidated Financial Statements ................................ F-8
F-1
Independent Auditors' Report
The Board of Directors and Stockholders
CNY Financial Corporation
We have audited the accompanying consolidated balance sheets of CNY
Financial Corporation and subsidiary as of December 31, 1999 and 1998
and the related consolidated statements of income, stockholders' equity
and comprehensive income and cash flows for each of the years in the
three-year period ended December 31, 1999. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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 consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CNY
Financial Corporation and subsidiary at December 31, 1999 and 1998, and
the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1999, in conformity
with generally accepted accounting principles.
/s/ KPMG, LLP
Syracuse, New York
January 14, 2000
F-2
CNY Financial Corporation and Subsidiary
Consolidated Balance Sheets
December 31, 1999 and 1998
(In thousands, except share data)
1999 1998
- - - - - - - ------------------------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 6,051 $ 4,432
Interest-bearing balances at financial institutions 221 6,104
Federal funds sold -- 4,000
Securities available-for-sale, at fair value 97,560 88,437
Securities held-to-maturity (fair value of $7,026 in 1999 and
$10,404 in 1998) 7,103 10,318
Loans, net of deferred fees 169,087 161,701
Less allowance for loan losses 2,430 2,494
- - - - - - - ------------------------------------------------------------------------------------------------
Net loans 166,657 159,207
Premises and equipment, net 3,084 3,243
Federal Home Loan Bank stock, at cost 1,637 1,303
Other assets 5,132 4,142
- - - - - - - ------------------------------------------------------------------------------------------------
$ 287,445 $ 281,186
================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Non-interest bearing demand accounts $ 12,033 $ 10,780
Savings accounts 61,109 61,820
Certificates of deposit 100,438 104,317
Money market accounts 10,789 7,975
NOW accounts 11,101 11,122
- - - - - - - ------------------------------------------------------------------------------------------------
Total deposits 195,470 196,014
Advance payments by borrowers for property taxes and insurance 1,595 1,450
Borrowings 19,200 1,000
Other liabilities 3,480 3,652
- - - - - - - ------------------------------------------------------------------------------------------------
Total liabilities 219,745 202,116
- - - - - - - ------------------------------------------------------------------------------------------------
Commitments and contingencies (note 13)
Stockholders' equity
Common Stock, $0.01 par value, 20,000,000 shares authorized,
5,356,662 shares issued 54 54
Additional paid-in capital 51,353 51,289
Retained earnings, substantially restricted 33,554 31,848
Accumulated other comprehensive income (loss) (503) 1,178
Treasury stock, at cost 788,277 shares in 1999 and 105,625
in 1998 (10,908) (1,067)
Unallocated shares of Employer Stock Ownership Plan (ESOP),
401,749 shares in 1999 and 423,175 in 1998 (4,017) (4,232)
Unearned common stock for PRRP (1,833) --
- - - - - - - ------------------------------------------------------------------------------------------------
Total stockholders' equity 67,700 79,070
- - - - - - - ------------------------------------------------------------------------------------------------
$ 287,445 $ 281,186
================================================================================================
See accompanying notes to consolidated financial statements
F-3
CNY Financial Corporation and Subsidiary
Consolidated Statements of Income
Years Ended December 31, 1999, 1998 and 1997
(In thousands, except share data)
1999 1998 1997
- - - - - - - --------------------------------------------------------------------------------------------------------
Interest income
Loans $ 13,183 $ 13,420 $ 13,582
Securities 6,429 4,016 3,769
Other short-term investments 158 567 316
- - - - - - - --------------------------------------------------------------------------------------------------------
Total interest income 19,770 18,003 17,667
Interest expense
Deposits 7,046 7,961 8,328
Borrowings 561 25 --
- - - - - - - --------------------------------------------------------------------------------------------------------
Total interest expense 7,607 7,986 8,328
- - - - - - - --------------------------------------------------------------------------------------------------------
Net interest income 12,163 10,017 9,339
Provision for loan losses 100 325 3,300
- - - - - - - --------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 12,063 9,692 6,039
Non-interest income
Service charges 840 723 636
Net gain on sale of securities 23 6 46
Gain on loan sales -- 30 --
Insurance proceeds -- 658 --
Other 215 166 207
- - - - - - - --------------------------------------------------------------------------------------------------------
Total non-interest income 1,078 1,583 889
Non-interest expense
Salaries and employee benefits 3,431 3,846 2,928
Building, occupancy and equipment 822 905 981
Postage and supplies 337 349 323
Professional fees 738 525 361
Directors fees 297 311 122
Real estate owned 83 (72) 500
Contribution to charitable foundation -- 1,023 --
Merger related expenses 315 -- --
Other 1,851 1,439 1,657
- - - - - - - --------------------------------------------------------------------------------------------------------
Total non-interest expenses 7,874 8,326 6,872
- - - - - - - --------------------------------------------------------------------------------------------------------
Income before income tax expense (benefit) 5,267 2,949 56
Income tax expense (benefit) 2,295 1,270 (16)
Net income $ 2,972 $ 1,679 $ 72
========================================================================================================
Earnings per share (for 1998 calculated using post
conversion net income) (see note 2)
Basic $ 0.67 $ -- N/A
Diluted $ 0.66 $ -- N/A
Weighted average diluted shares outstanding 4,496,584 4,928,044 N/A
========================================================================================================
See accompanying notes to consolidated financial statements
F-4
CNY Financial Corporation and Subsidiary
Consolidated Statements of Stockholders' Equity and Comprehensive Income
Years Ended December 31, 1999, 1998 and 1997
(In thousands, except share data)
Accumulated Unearned
Additional Other Unallocated Common
Common Paid-in Retained Comprehensive Treasury ESOP Stock
Stock Capital Earnings Income Stock Shares For PRRP Total
- - - - - - - ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 $ -- $ -- $ 30,097 $ 248 $ -- $ -- $ -- $ 30,345
Comprehensive income:
Other comprehensive income -- -- -- 323 -- -- -- 323
Net income -- -- 72 -- -- -- -- 72
- - - - - - - ----------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income -- -- 72 323 -- -- -- 395
- - - - - - - ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 -- -- 30,169 571 -- -- -- 30,740
Net proceeds from issuance of 5,251,629
shares of common stock 53 50,294 -- -- -- -- -- 50,347
Common stock acquired by ESOP
(428,532 shares) -- -- -- -- -- (4,285) -- (4,285)
Charitable contribution of common stock
to Cortland Savings Foundation
(105,033 shares) 1 997 -- -- -- -- -- 998
Treasury stock purchased (105,625 shares) -- -- -- -- (1,067) -- -- (1,067)
ESOP shares released for allocation
(5,357 shares) -- (2) -- -- -- 53 -- 51
Comprehensive income:
Other comprehensive income -- -- -- 607 -- -- -- 607
Net income -- -- 1,679 -- -- -- -- 1,679
- - - - - - - ---------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income -- -- 1,679 607 -- -- -- 2,286
- - - - - - - ---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 54 51,289 31,848 1,178 (1,067) (4,232) -- 79,070
- - - - - - - ---------------------------------------------------------------------------------------------------------------------------------
Treasury stock purchased (863,930 shares) -- -- -- -- (12,016) -- -- (12,016)
ESOP shares released for allocation
(21,426 shares) -- 64 -- -- -- 215 -- 279
Stock awarded under Personal Recognition and
Retention Plan (PRRP) (181,278 shares) -- -- (54) -- 2,175 -- (2,121) --
Expense of PRRP -- -- -- -- -- -- 288 288
Dividend payments ($0.27 per share) -- -- (1,212) -- -- -- -- (1,212)
Comprehensive income:
Other comprehensive loss -- -- -- (1,681) -- -- -- (1,681)
Net income -- -- 2,972 -- -- -- -- 2,972
- - - - - - - ---------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income -- -- 2,972 (1,681) -- -- -- 1,291
- - - - - - - ---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 $ 54 $ 51,353 $ 33,554 $ (503) $(10,908) (4,017) $ (1,833) $67,700
=================================================================================================================================
See accompanying notes to consolidated financial statements.
CNY Financial Corporation and Subsidiary
Consolidated Cash Flow Statements
Years Ended December 31, 1999, 1998 and 1997
(In thousands)
1999 1998 1997
- - - - - - - -------------------------------------------------------------------------------------------------------------
Cash flow from operating activity:
Net income $ 2,972 $ 1,679 $ 72
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 474 487 579
(Increase) decrease in accrued interest receivable 40 (306) 233
Provision for loan losses 100 325 3,300
Write-down of real estate owned 10 50 365
Net gains on sales of securities (23) (6) (46)
Nationar recovery -- -- (45)
Net gain on sale of real estate owned (7) (192) (11)
Net amortization of premiums and discounts (98) 55 104
Net gain on sale of loans held-for-sale -- (30) --
Proceeds from sale of loans held-for-sale -- 3,131 --
Increase in other liabilities 853 807 148
Deferred tax expense (benefit) 86 277 (869)
Decrease (increase) in other assets 51 1,032 (709)
Donation to charitable foundation -- 997 --
PRRP expense 288 -- --
ESOP shares released for allocation 279 51 --
Gain on curtailment of postretirement benefit plan (70) -- --
- - - - - - - -------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 4,955 8,357 3,121
- - - - - - - -------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Net increase in loans (7,816) (4,744) (3,746)
Proceeds from recovery of Nationar -- -- 45
Proceeds from sales of securities available-for-sale 6,108 2,006 3,121
Proceeds from maturities and principle reductions of
securities available-for-sale 53,297 18,337 18,040
Purchases of securities available-for-sale (71,686) (63,237) (19,237)
Purchase of securities held-to-maturity -- (2,484) (3,847)
Proceeds from maturities and principle reductions
of securities held-to-maturity 3,196 4,780 3,054
Proceeds from sale of real estate owned 214 920 340
Additions to premises and equipment (315) (283) (371)
Purchase of FHLB stock (334) (12) (63)
- - - - - - - -------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (17,336) (44,717) (2,664)
- - - - - - - -------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Decrease in deposits (544) (3,756) (4,870)
Net increase in Federal Home Loan Bank advances 18,200 1,000 --
Increase (decrease) in advance payments by borrowers for
property taxes and insurance 145 121 (44)
Net proceeds from issuance of common stock -- 50,347 --
Purchase of shares of common stock by ESOP -- (4,285) --
Par value of donation of stock to charitable foundation -- 1 --
Treasury stock purchases (12,472) (611) --
Dividends paid (1,212) -- --
- - - - - - - -------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (4,117) 42,817 (4,914)
- - - - - - - -------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (8,264) 6,457 (4,457)
Cash and cash equivalents at beginning of year 14,536 8,079 12,536
- - - - - - - -------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 6,272 $ 14,536 $ 8,079
=============================================================================================================
F-6
CNY Financial Corporation and Subsidiary
Consolidated Cash Flow Statements (Continued)
Years Ended December 31, 1999, 1998 and 1997
(In thousands)
1999 1998 1997
- - - - - - - -------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Non-cash investing activities:
Purchases of securities available-for-sale not settled $ -- $ 499 $ --
Treasury stock purchases not settled -- 456 --
Transfer of loans held-to-maturity to loans held-for-sale -- 661 2,541
Transfer of loans held-for-sale to loans held-for-maturity -- 101 --
Additions to real estate owned 266 74 1,095
Cash paid during the year for:
Interest 7,568 7,991 8,321
Income taxes $ 1,854 $ 105 $ 1,125
=============================================================================================================
See accompanying notes to consolidated financial statements.
F-7
CNY Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
(1) BUSINESS
CNY Financial Corporation (the "Company") is a registered bank holding
company, organized under the laws of Delaware and is the parent company
of Cortland Savings Bank and subsidiary (the "Bank"). The Company
commenced operations on October 6, 1998, when the Bank converted from a
state chartered mutual savings bank to a state chartered stock savings
bank (the "Conversion"). On that date, the Company sold 5,251,629 shares
of common stock in its initial public offering and received $50.3 million
of net proceeds from the sale. The shares sold included 428,532 shares
purchased by the Company's Employee Stock Ownership Plan (ESOP), which
was funded by a loan from the Company. The Company contributed an
additional 105,033 shares to the Cortland Savings Foundation as part of
the Conversion and an expense of $1.0 million or approximately $614,000
after taxes, was recorded in October 1998 due to this donation. The
Company operates solely in the financial services industry and includes
the provision of traditional community banking services primarily for
individuals and small- to medium-sized businesses concentrated in
Cortland County, New York and surrounding areas. The financial services
subsidiary of the Bank has been inactive since its formation in 1986. The
Company and its subsidiary financial institution are subject to the
regulations of certain Federal and State agencies and undergo periodic
examinations by those regulatory agencies.
On December 28, 1999, the Company signed a definitive agreement with
Niagara Bancorp, Inc. under which Niagara Bancorp, Inc. will acquire all
of the outstanding shares of the Company for $18.75 per share. Cortland
Savings Bank will become a wholly-owned subsidiary of Niagara Bancorp,
Inc. Included in non-interest expenses is $315,000 in merger related
expenses consisting primarily of the fees for the fairness opinion
delivered by the Company's investment banker. This transaction is
expected to close during the second quarter of 2000.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated 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 consolidated 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.
(a) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary. All significant
intercompany balances and transactions have been eliminated in
consolidation.
(b) CASH AND CASH EQUIVALENTS
Cash and cash equivalents include vault cash, amounts due from banks
and Federal funds sold which represent short-term highly liquid
investments.
(c) SECURITIES
The Company classifies its debt securities as either
available-for-sale or held-to-maturity as the Company does not hold
any securities considered to be trading. Equity securities are
classified as available-for-sale. Held-to-maturity securities are
those debt securities the Company has the ability and intent to hold
until maturity. All other debt securities are classified as
available-for-sale.
F-8
CNY Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(c) SECURITIES, CONTINUED
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 component of accumulated other comprehensive income in
stockholders' equity until realized.
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.
Purchases and sales are recorded on a trade date basis with
settlement occurring shortly thereafter. 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 as an adjustment of yield using
the interest method over the lives of the loans. The Company has the
ability and intent to hold its loans to maturity except for
education loans which are sold to a third party upon reaching
repayment status.
Interest on loans is accrued and included in income at contractual
rates applied to principal outstanding. The accrual of interest on
loans (including impaired loans) is generally discontinued and
previously accrued interest is reversed when loan payments are 90
days or more past due or when, by the judgment of management,
collectibility becomes uncertain. 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.
The allowance for loan losses is maintained at a level believed by
management to be sufficient to absorb probable losses related to
loans outstanding as of the balance sheet date. 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 Company's allowance for loan losses and may
require the Company to recognize additions to the allowance based on
their judgment of information available to them at the time of their
examination.
F-9
CNY Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(e) ALLOWANCE FOR LOAN LOSSES, CONTINUED
The Company 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. Impairment losses
are included as a component of the allowance for loan losses. A loan
is considered impaired when it is probable that the Company 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, home equity lines of credit and education loans are
evaluated collectively since they are homogenous and generally carry
smaller individual balances. The Company 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) PREMISES AND EQUIPMENT
Land is carried at cost and buildings and improvements and furniture
and equipment are carried at cost less accumulated depreciation.
Depreciation is computed on the straight-line method over the
estimated useful lives of the assets (3-39 years for building and
improvements; 3-7 years for furniture and equipment.)
(g) 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.
(h) INCOME TAXES
Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to temporary 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
income in the period that includes the enactment date.
(i) PENSION AND OTHER POSTRETIREMENT PLANS
The Company sponsors a defined benefit health care and life
insurance plan that provides postretirement benefits to current and
retired employees and certain eligible dependents who meet minimum
age and service requirements. The estimated costs of providing
benefits are accrued over the years the employees render services
necessary to earn those benefits.
The Company also maintained a non-contributory defined benefit
pension plan that covered substantially all employees, but
terminated the plan effective December 31, 1998. The benefits under
the pension plan were based on the employee's years of service and
compensation. The cost of this program was funded currently.
F-10
CNY Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(j) OTHER EMPLOYEE BENEFIT PLANS
The Company sponsors a non-contributory Employee Stock Ownership
Plan (ESOP) covering substantially all employees. Allocations to
individual participant accounts are based on participant
compensation. The Company accounts for ESOP shares purchased in
accordance with Statement of Position No. 93-6, EMPLOYERS'
ACCOUNTING FOR EMPLOYEE STOCK OWNERSHIP PLANS. Accordingly, as
shares are committed to be released to participants, the Company
reports compensation expense equal to the average market price of
the shares and the shares become outstanding for earnings per share
computations.
The Company's Personal Recognition and Retention Plan ("PRRP") is
accounted for in accordance with APB Opinion No. 25. The fair value
of the shares awarded, measured as of the grant date, is recognized
as unearned compensation (a component of stockholders' equity) and
amortized to compensation expense as the shares become vested.
(k) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company's only financial instruments with off-balance sheet risk
are limited to commitments to extend credit and commitments under
unused lines of credit. The Company's policy is to record such
instruments when funded.
(l) EARNINGS PER SHARE
Basic earnings per share is calculated by dividing net income
available to common shareholders by the weighted average number of
shares outstanding during the year. Stock options and unvested stock
grants are regarded as common stock equivalents and are considered
in earnings per share calculations if dilutive. Prior to the
conversion to a stock savings bank, earnings per share are not
applicable as the mutual savings bank had no shares outstanding.
After the conversion, earnings per share is determined from October
6, 1998, the date of conversion, to the end of the reporting period
based upon the weighted average number of shares outstanding for the
period. The income included in the computation is based on the
actual results of operations only for the post-conversion period.
Unallocated shares held by the Company's ESOP are not included in
the weighted average number of shares outstanding. The following
table summarizes the computation of earnings per share for the years
ended December 31:
1999 1998
------------------------------------------------------------------------------------
Per Per
Income Shares Share Income Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------------------------------------------------------------------------------
(In thousands, except per share amounts)
Basic EPS
Net income $ 2,972 4,465 $ 0.67 $ 7 4,928 $ --
Effect of Dilutive
Securities
Options 9 --
Unearned stock grants 23 --
----------------------- ---------------------
Diluted EPS $ 2,972 4,497 $ 0.66 $ 7 4,928 $ --
=================================================================================================================
(m) COMPREHENSIVE INCOME
Comprehensive income represents net income and the net change in
unrealized gains or losses on securities available for sale, net of
taxes, and is presented in the Consolidated Statements of
Stockholders' Equity and Comprehensive Income.
F-11
CNY Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(n) SEGMENT REPORTING
The Company's operations are solely in the financial services
industry and include the provision of traditional banking services.
The Company operates primarily in Cortland County and surrounding
areas in New York State. The Company has determined that it has no
reportable segments.
(3) SECURITIES
Securities are summarized as follows (in thousands):
December 31, 1999
-----------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------------------------------------------------------------------------------
Available-for-sale:
U.S. Government and sponsored
Enterprise securities $14,469 $ 5 $ 228 $14,246
Mortgage-backed securities 58,684 39 2,286 56,437
State and municipal sub-divisions 1,865 -- 61 1,804
Corporate debt securities 20,553 -- 225 20,328
----------------------------------------------------------------------------------
Total debt securities 95,571 44 2,800 92,815
Equity securities 2,827 2,066 148 4,745
----------------------------------------------------------------------------------
$98,398 $ 2,110 $ 2,948 $97,560
==================================================================================
Held-to-maturity:
U.S. Government and sponsored
Enterprise securities $ 1,000 $ -- $ 11 $ 989
Mortgage-backed securities 3,508 20 78 3,450
State and municipal sub-divisions 742 1 6 737
Corporate debt securities 1,853 -- 3 1,850
----------------------------------------------------------------------------------
$ 7,103 $ 21 $ 98 $ 7,026
==================================================================================
December 31, 1998
-----------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------------------------------------------------------------------------------
Available-for-sale:
U.S. Government and sponsored
Enterprise securities $13,037 $ 128 $ 1 $13,164
Mortgage-backed securities 42,801 265 25 43,041
State and municipal sub-divisions 917 10 -- 927
Corporate debt securities 27,649 178 5 27,822
----------------------------------------------------------------------------------
Total debt securities 84,404 581 31 84,954
Equity securities 2,072 1,470 59 3,483
----------------------------------------------------------------------------------
$86,476 $ 2,051 $ 90 $88,437
==================================================================================
Held-to-maturity:
U.S. Government and sponsored
Enterprise securities $ 1,505 $ 2 $ -- $ 1,507
Mortgage-backed securities 5,208 69 22 5,255
State and municipal sub-divisions 747 17 -- 764
Corporate debt securities 2,858 21 1 2,878
----------------------------------------------------------------------------------
$10,318 $ 109 $ 23 $ 10,404
==================================================================================
F-12
CNY Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
(3) SECURITIES, CONTINUED
The following table presents the amortized cost and fair value of debt
securities at December 31, 1999, based on the earlier of call or maturity
date. Actual maturities may differ from contractual maturities because
issuers may have the right to call or prepay obligations with or without
call or prepayment penalties. (in thousands):
Amortized Fair
Cost Value
--------------------------------------------------------------------------------------------------------
Available-for-sale
Due within one year $ 10,005 $ 9,989
Due after one year through five years 25,017 24,586
Due after five years through ten years 1,865 1,803
Due after ten years -- --
Mortgage-backed securities 58,684 56,437
--------------------------------------------------------------------------------------------------------
$ 95,571 $ 92,815
========================================================================================================
Held-to-maturity:
Due within one year $ 2,028 $ 2,025
Due after one year through five years 1,358 1,348
Due after five years through ten years 209 203
Due after ten years -- --
Mortgage-backed securities 3,508 3,450
--------------------------------------------------------------------------------------------------------
$ 7,103 $ 7,026
========================================================================================================
Gross gains of $41,000, $6,000 and $46,000 were realized on sales of
securities in 1999, 1998 and 1997, respectively. Gross losses of $18,000
were realized on sales of securities in 1999. There were no gross losses
in 1998 and 1997.
Securities carried at $30.4 million at December 31, 1999 were pledged for
borrowings and other purposes required by law. There were no securities
of a single issuer (other than the U.S. Government and sponsored
enterprises) that exceeded 10% of stockholders' equity at December 31,
1999 or 1998.
(4) LOANS
Loans are summarized as follows (in thousands):
December 31,
----------------------------------------
1999 1998
--------------------------------------------------------------------------------------------------------
Mortgage loans:
Residential $ 105,407 $ 100,976
Commercial 31,864 29,224
Partially guaranteed by VA 246 337
Insured by FHA 631 717
--------------------------------------------------------------------------------------------------------
138,148 131,254
--------------------------------------------------------------------------------------------------------
Other loans:
Commercial 6,278 6,588
Automobile 12,641 10,854
Home equity line of credit 6,520 6,804
Property improvement 661 709
Guaranteed student 741 1,016
Other consumer 4,208 4,597
--------------------------------------------------------------------------------------------------------
31,049 30,568
--------------------------------------------------------------------------------------------------------
Total loans 169,197 161,822
--------------------------------------------------------------------------------------------------------
Less: Net deferred origination fees 110 121
--------------------------------------------------------------------------------------------------------
$ 169,087 $ 161,701
========================================================================================================
F-13
CNY Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
(4) LOANS, CONTINUED
Changes in the allowance for loan losses are summarized as follows (in
thousands):
Years Ended
December 31,
-----------------------------------------
1999 1998 1997
-------------------------------------------------------------------------------------
Balance at beginning of year $ 2,494 $ 2,143 $ 1,952
Provision charged to operations 100 325 3,300
Recoveries 116 206 170
Loans charged off (280) (180) (3,279)
-------------------------------------------------------------------------------------
Balance at end of year $ 2,430 $ 2,494 $ 2,143
=====================================================================================
At December 31, 1999 and 1998, impaired loans totaled $49,000 and
$736,000, respectively. At December 31, 1999, impaired loans included
$49,000 of loans for which the related allowance for loan losses was
$25,000. At December 31, 1998, impaired loans included $736,000 of loans
for which the related allowance for loan losses was $194,000. The average
recorded investment in impaired loans was $564,000, $1.1 million and $2.7
million during the years ended December 31, 1999, 1998 and 1997,
respectively. Interest income recognized on impaired loans was $7,000,
$147,000 and $290,000 during the years ended December 31, 1999, 1998 and
1997, respectively, all of which was recognized using the cash basis of
income recognition.
The principal balances of loans not accruing interest amounted to
approximately $603,000 and $920,000 at December 31, 1999 and 1998,
respectively. Interest income that would have been recorded if the
non-accruing loans had been performing in accordance with their original
terms was approximately $44,000, $115,000 and $402,000 during the years
ended December 31, 1999, 1998 and 1997, respectively.
In the ordinary course of business, the Company makes loans to directors,
officers and employees, as well as to other related parties on
substantially the same terms, including interest rate and collateral, as
those prevailing at the same time for comparable transactions with other
customers and do not involve more than normal risk of collectibility or
present other unfavorable features.
A summary of the changes in these outstanding loans is as follows (in
thousands):
Years End
December 31,
------------------------------
1999 1998
-------------------------------------------------------------------------
Balance at beginning of year $ 2,151 $ 2,207
New loans and increase in existing loans 731 521
Loan principal repayments (808) (577)
-------------------------------------------------------------------------
Balance at end of year $ 2,074 $ 2,151
=========================================================================
F-14
CNY Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
(5) PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows (in thousands):
December 31,
-------------------------------
1999 1998
----------------------------------------------------------------------------------------
Land $ 886 $ 886
Buildings and furniture 2,978 2,901
Furniture and equipment 1,805 1,962
----------------------------------------------------------------------------------------
5,669 5,749
Less accumulated depreciation and amortization 2,585 2,506
----------------------------------------------------------------------------------------
$ 3,084 $ 3,243
========================================================================================
Depreciation and amortization expense amounted to $474,000, $487,000 and
$579,000 during the years ended December 31, 1999, 1998 and 1997,
respectively.
(6) DEPOSITS
At December 31, 1999 and 1998, the aggregate amounts of time deposits in
denominations of $100,000 or more were approximately $14.0 million and
$13.0 million, respectively.
Contractual maturities of certificates of deposit at December 31, are
summarized as follows (in thousands):
1999
------------------------------------------------------------------
Within one year $ 57,505
One through two years 24,400
Two through three years 9,612
Three through four years 6,439
Four through five years 2,482
Five years and over --
------------------------------------------------------------------
Total certificates of deposit $ 100,438
==================================================================
Interest expense on deposits is summarized as follows (in thousands):
Years Ended
December 31,
--------------------------------------------
1999 1998 1997
-------------------------------------------------------------------------
Savings accounts $ 1,517 $ 1,861 $ 1,936
Certificates of deposit 5,140 5,713 5,983
Money market accounts 256 220 243
NOW accounts 133 167 166
-------------------------------------------------------------------------
$ 7,046 $ 7,961 $ 8,328
=========================================================================
(7) BORROWINGS
The Company is a member of the Federal Home Loan Bank (FHLB). As a
member, the Company is required to own capital stock in the FHLB and is
authorized to apply for advances from the FHLB.
F-15
CNY Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
(7) BORROWINGS, CONTINUED
At December 31, 1999 and 1998, advances from the FHLB were as follows (in
thousands):
Advance Amount
-------------------------------
Maturity Date Interest Rate Fixed or Variable 1999 1998
----------------------------------------------------------------------------------------------------
1/03/00 5.60% Fixed $ 1,200 $ --
3/24/00 6.08% Fixed 2,000 --
9/20/00 5.92% Fixed 5,000 --
9/27/00 5.96% Fixed 3,000 --
6/25/01 5.99% Fixed 1,000 --
7/30/01 5.52% Fixed -- 1,000
6/17/02 6.23% Fixed 3,000 --
6/23/04 6.53% Fixed 4,000 --
----------------------------------------------------------------------------------------------------
Total $ 19,200 $ 1,000
====================================================================================================
Under terms of a blanket collateral agreement with the FHLB, these
outstanding balances are collateralized by certain qualifying assets not
otherwise pledged (primarily first mortgage loans). At December 31,1999
the Company may borrow up to an additional $27.3 million from the FHLB.
(8) INCOME TAXES
The components of income tax expense (benefit) attributable to income
from operations are (in thousands):
Years Ended
December 31,
----------------------------------------------
1999 1998 1997
-------------------------------------------------------------------------
Current:
Federal $ 1,761 $ 799 $ 672
State 448 194 181
-------------------------------------------------------------------------
2,209 993 853
Deferred:
Federal 53 207 (698)
State 33 70 (171)
-------------------------------------------------------------------------
86 277 (869)
-------------------------------------------------------------------------
$ 2,295 $ 1,270 $ (16)
=========================================================================
Actual tax expense (benefit) attributable to income before income taxes
differed from "expected" tax expense (benefit), computed by applying the
U.S. Federal statutory tax rate of 34% to income before income tax as
follows (in thousands):
Years Ended
December 31,
---------------------------------------------
1999 1998 1997
----------------------------------------------------------------------------------------------------
Computed "expected" tax expense $ 1,791 $ 1,003 $ 19
Increase (decrease) in income taxes resulting from:
State taxes, net of Federal tax benefits 310 175 7
Non-taxable interest income (40) (21) (35)
Non-deductible merger expenses 107 -- --
Other non-deductible expenses 35 48 16
Pension termination excise tax 109 80 --
Other items, net (17) (15) (23)
----------------------------------------------------------------------------------------------------
$ 2,295 $ 1,270 $ (16)
====================================================================================================
F-16
CNY Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
(8) INCOME TAXES, CONTINUED
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are (in
thousands):
December 31,
-------------------------------
1999 1998
----------------------------------------------------------------------------------------------------
Deferred tax assets:
Allowance for loan losses $ 946 $ 986
Net deferred loan fees 99 98
Postretirement benefit obligation 663 669
Deferred director fees 143 92
Foundation contribution carryforward 115 329
Personnel Recognition and Retention Plan vesting 112 --
Unrealized loss on securities, net 335 --
Other 36 56
----------------------------------------------------------------------------------------------------
Total gross deferred tax assets 2,449 2,230
----------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Accumulated depreciation on premises and equipment (115) (101)
Unrealized gains on securities, net -- (783)
Tax allowance for loan losses in excess of base year amount (43) (105)
Other (38) (20)
----------------------------------------------------------------------------------------------------
Total gross deferred tax liabilities (196) (1,009)
----------------------------------------------------------------------------------------------------
Net deferred tax assets $ 2,253 $ 1,221
====================================================================================================
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.
In accordance with SFAS No. 109, the Company has not recognized deferred
tax liabilities with respect to the Bank's Federal and state base-year
reserve of approximately $3.7 million at December 31, 1999, since the
Company does not expect that these amounts will become taxable in the
forseeable future. Under the tax laws, as amended, events that would
result in taxation of these reserves include redemptions of the Bank's
stock or certain excess distributions to the Company. The unrecognized
deferred tax liability at December 31, 1999 with respect to the base-year
reserve was approximately $1.4 million.
(9) PENSION AND OTHER POSTRETIREMENT PLANS
The following table presents changes in the Company's pension and
postretirement plans' accumulated benefit obligations and plan assets and
the plans' funded status reconciled with amounts recognized in the
Company's consolidated balance sheet at December 31. (in thousands):
F-17
CNY Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
(9) PENSION AND OTHER POSTRETIREMENT PLANS, CONTINUED
Pension Benefits Other Benefits
---------------- --------------
1999 1998 1999 1998
-------------------------------------------------------------------------------------------------------------
Change in benefit obligations:
Benefit obligation at beginning of year $ 4,075 $ 3,490 $ 1,890 $ 1,597
Service cost -- 84 47 42
Interest cost -- 244 121 108
Amendments -- 60 -- --
Curtailment -- (591) (264) --
Actuarial loss (gain) 610 938 (86) 238
Benefits paid (3,032) (150) (87) (95)
Settlement gain (394) -- -- --
Paid to Company (1,259) -- -- -
-------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $ -- $ 4,075 $ 1,621 $ 1,890
=============================================================================================================
Change in plan assets:
Fair value of plan assets at beginning of year $ 4,940 $ 5,083 $ -- $ --
Actual return on plan assets (649) 7 -- --
Employer contribution -- -- 87 95
Benefits paid (3,032) (150) (87) (95)
Paid to Company (1,259) -- -- --
-------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ -- $ 4,940 $ -- $ --
=============================================================================================================
Funded status $ -- $ 865 $ (1,621) $ (1,890)
Unrecognized net actuarial (gain) loss -- -- (50) 235
-------------------------------------------------------------------------------------------------------------
Prepaid (accrued) benefit cost $ -- $ 865 $ (1,671) $ (1,655)
=============================================================================================================
Weighted average assumptions:
Discount rate N/A 5.00% 7.75% 6.50%
Expected return on plan assets N/A 7.00% --% --%
Rate of compensation increase N/A 4.00% 5.50% 4.50%
For measurement purposes, a 6.50% annual rate of increase in the per
capita cost of covered health care benefits was assumed for 1999. The
rate was assumed to decrease gradually to 5.00% for 2003 and remain at
that level thereafter. A one-percentage point increase or decrease in
assumed health care cost trend rates does not have a material effect on
the benefit obligation.
Pension Benefits Other Benefits
---------------- --------------
1999 1998 1997 1999 1998 1997
-------------------------------------------------------------------------------------------------------------
Components of net periodic benefit cost: (in thousands)
Service cost $ -- $ 84 $ 87 $ 47 $ 42 $ 37
Interest cost -- 244 242 121 108 107
Expected return on plan assets -- (391) (350) -- -- --
Recognized net actuarial gain (39) (32) -- -- -- --
Curtailment charge -- 35 -- (70) -- --
Settlement gain (394) -- -- -- -- --
-------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ (433) $ (60) $ (21) $ 98 $ 150 $ 144
=============================================================================================================
F-18
CNY Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
(9) PENSION AND OTHER POSTRETIREMENT PLANS, CONTINUED
In 1998, the Company recorded a curtailment expense of $35,000 related to
the termination of its defined benefit pension plan. The settlement of
the plan's obligations was expected to occur in 1999 through the purchase
of annuities for the plan participants. In 1998, the Company also
committed to contribute 25% of the excess of the plan's assets over the
cost of purchasing annuities to the Company's 401(k) plan. An estimated
accrual of $437,000 was recorded related to this commitment.
During 1999, the Company recorded a settlement gain on the termination of
its defined benefit pension plan of $394,000, as well as a $122,000
reduction in the actual contribution to the Company's 401(k) from the
estimate recorded in 1998.
(10) STOCK OPTION PLAN
On April 28, 1999, the Company's shareholders approved the CNY Financial
Corporation Stock Option Plan ("Stock Option Plan"). The primary
objective of the Stock Option Plan is to provide officers and directors
with a proprietary interest in the Company and an incentive to encourage
such persons to remain with the Company.
Under the Stock Option Plan, 535,662 shares of authorized but unissued
common stock are reserved for issuance upon option exercises. The Company
also has the alternative to fund the Stock Option Plan with treasury
stock. Options under the plan may be either non-qualified stock options
or incentive stock options. Each option entitles the holder to purchase
one share of common stock at an exercise price equal to the fair market
value on the date of grant. On April 28, 1999, 280,690 options were
awarded at an exercise price of $11.50 per share and on September 8,
1999, 60,000 shares were awarded at an exercise price of $14.50 per
share. These options have a ten year term and vest at a rate of 20% per
year from the grant date.
A summary of the status of the Company's Stock Option Plan as of December
31, 1999 and changes during the year ended December 31, 1999 is presented
below:
Weighed-Average
Shares Exercise Price
-------------------------------------------------------------------------------------------------------------
OPTIONS
Outstanding at beginning of year -- $
Granted 340,690 12.03
Exercised --
Forfeited --
-------------------------------------------------------------------------------------------------------------
Outstanding at end of year 340,690 12.03
=============================================================================================================
Exercisable at end of year -- N/A
=============================================================================================================
Estimated weighted-average fair value of options granted on December 31, 1999 $ 3.81
=============================================================================================================
The Company applies APB Option No. 25 and related Interpretations in
accounting for its Stock Option Plan. Accordingly, no compensation cost
has been recognized for its Stock Option Plan. SFAS No. 123 requires
companies not using a fair value based method of accounting for stock
options or similar plans, to provide pro forma disclosure of net income
and earnings per shares as if that method of accounting had been applied.
The fair value of each option grant is estimated on the dates of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in the year ended December
31, 1999; dividend yield of 2.00%; expected volatility of 30.20%; risk
free interest rate of 6.70%; expected lives of five years.
F-19
CNY Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
(10) STOCK OPTION PLAN, CONTINUED
Pro forma disclosures for the Company for the year ended December 31,
1999 utilizing the estimated fair value of the options granted and an
assumed 5% forfeiture rate are as follows:
Basic Diluted
Net Earnings Earnings
Income Per Share Per Share
-------------------------------------------------------------------------
(in thousands, except per share data)
As reported $ 2,972 $ 0.67 $ 0.66
Pro Forma $ 2,876 $ 0.64 $ 0.64
=========================================================================
Because the Company's stock options have characteristics significantly
different from those of traded options for which the Black-Scholes model
was developed, and because changes in the subjective input assumptions
can materially affect the fair value estimate, the existing models, in
management's option, do not necessarily provide a reliable single measure
of the fair value of its stock options. In addition, the effect on
reported net income and earnings per share for the year ended December
31, 1999 may not be representative of the effects on reported net income
or earnings per share for future years.
(11) PERSONNEL RECOGNITION AND RETENTION PLAN
The Company's shareholders also approved the CNY Financial Corporation
Personnel Recognition and Retention Plan ("PRRP") on April 28, 1999. The
purpose of the plan is to promote the long-term interests of the Company
and its shareholders by providing a stock-based compensation program to
attract and retain officers and directors.
During 1999, 181,278 shares were awarded under the PRRP. The shares vest
over a period of equal installments commencing one year from the date of
grant. The fair market value of the shares awarded under the plan was
$2.1 million at the grant date, and is being amortized to compensation
expense on a straight-line basis over the vesting periods of the
underlying shares. Compensation expense of $288,000 was recorded in 1999,
with the remaining unearned compensation cost of $1.8 million shown as a
reduction of stockholders' equity at December 31, 1999. The shares
awarded under the PRRP were transferred from treasury stock at cost with
the difference between the fair market value on the grant date and the
cost of the shares recorded as a reduction of retained earnings.
(12) OTHER EMPLOYEE BENEFIT PLANS
The Company sponsors a defined contribution 401(k) Savings Plan covering
substantially all employees. Employees are permitted to contribute up to
6% of base pay to the Savings Plan, subject to certain limitations. The
Company matches 50% of each employee contribution up to 6%.
Contributions to the defined contribution 401(k) Savings Plan were
approximately $44,000, $60,000 and $64,000 during the years ended
December 31, 1999, 1998 and 1997, respectively.
In connection with establishing the Employee Stock Ownership Plan (ESOP)
in 1998, the ESOP borrowed $4.3 million from the Company to purchase
428,532 common shares of the Company. The loan bears interest at 8.25%
and is payable in twenty equal annual installments. At December 31, 1999,
26,783 shares were released or committed to be released and 401,749
remained as unallocated shares. The fair value of the unallocated shares
on December 31, 1999 was $7.2 million. The Company recognized
compensation expense of $279,000 and $51,000 in 1999 and 1998,
respectively.
F-20
CNY Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
(13) COMMITMENTS AND CONTINGENCIES
The Company 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
consolidated 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.
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
Company evaluates each customer's creditworthiness on a case-by-case
basis. The amount of collateral obtained, if deemed necessary by the
Company 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.
The Company was committed to originate fixed and adjustable rate
mortgages of approximately $7.3 million and $3.9 million at December 31,
1999 and 1998, respectively. Unused lines of credit, which includes home
equity, consumer, commercial and credit cards, amounted to $11.8 million
and $10.7 million at December 31, 1999 and 1998, respectively.
The Company'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 Company uses the same credit policies in making commitments as it
does for on-balance sheet instruments. The Company 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 Company.
(14) CONCENTRATIONS OF CREDIT
A substantial portion of the Company's loans are mortgage and consumer
loans in Central New York State. Accordingly, the ultimate collectibility
of a substantial portion of the Company's loan portfolio is susceptible
to changes in market conditions in this area. A majority of the Company's
loan portfolio is secured by real estate.
The Company'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.
F-21
CNY Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
(15) COMPREHENSIVE INCOME
The following summarizes the components of other comprehensive income (in
thousands):
Year Ended December 31,
----------------------------------
1999 1998 1997
-------------------------------------------------------------------------------------------------------------
Other comprehensive income, before tax:
Net unrealized holding gain (loss) on securities $(2,776) $ 1,023 $ 575
Reclassification adjustment for net gains realized on the sale of
securities (23) (6) (46)
-------------------------------------------------------------------------------------------------------------
Other comprehensive income, before tax (2,799) 1,017 529
Income tax expense (benefit) related to items of other comprehensive
income (1,118) 410 206
-------------------------------------------------------------------------------------------------------------
Other comprehensive income, net of tax $(1,681) $ 607 $ 323
=============================================================================================================
(16) STOCKHOLDERS' EQUITY AND CAPITAL STANDARDS
The Company's ability to pay dividends is primarily dependent upon the
ability of its subsidiary bank to pay dividends to the Company. The
payment of dividends by the Bank is subject to continued compliance with
minimum regulatory capital requirements. In addition, regulatory approval
is generally required prior to the Bank declaring dividends in an amount
in excess of net income for that year plus net income retained in the
preceding two years.
The Company and the Bank are subject to various regulatory requirements
administered by the federal banking agencies and the Bank is further
regulated by the New York State Banking Department.
Under capital adequacy guidelines, the Company and Bank must meet
specific guidelines that involve quantitative measures of assets,
liabilities, and certain off-balance sheet items as calculated under
regulatory accounting practices. Capital amounts are also subject to
qualitative judgments by the regulators about components, risk
weightings, and other factors. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary, actions by the regulators that, if undertaken, could have
a direct material effect on the Company's and Bank's financial
statements.
The Federal Deposit Insurance Corporation Improvement Act of 1991
(FDICIA), established capital levels for which insured institutions are
categorized as well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, or critically
undercapitalized.
As of December 31, 1999 and 1998, the most recent notification from the
FDIC categorized the Bank as well capitalized under the regulatory
framework for prompt corrective actions. To be categorized as well
capitalized, the Bank must meet the minimum ratios as set forth in the
table. There have been no conditions or events since that notification
that management believes have changed the Bank's category. Management
believes, as of December 31, 1999, that the Company and Bank meet all
capital adequacy requirements to which they are subject.
F-22
CNY Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
(16) STOCKHOLDERS' EQUITY AND CAPITAL STANDARDS, CONTINUED
The following is a summary of the Company's and Bank's actual capital
amounts and ratios compared to the regulatory minimum capital adequacy
requirements and the FDIC requirements for classification as a well
capitalized institution under prompt corrective action provisions
(dollars in thousands):
To be classified as
Minimum capital well capitalized under
adequacy prompt corrective
Actual requirements action provisions
------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
-------------------------------------------------------------------------------------------------------------
At December 31, 1999:
TOTAL CAPITAL (TO RISK WEIGHTED ASSETS):
Company $ 71,149 42.81% $ 13,295 =>8.00% N/A
Bank $ 64,415 39.29% $ 13,116 =>8.00% $ 16,394 => 10.00%
TIER 1 CAPITAL (TO RISK WEIGHTED ASSETS):
Company $ 68,204 41.04% $ 6,648 =>4.00% N/A
Bank $ 61,487 37.51% $ 6,558 =>4.00% $ 9,837 => 6.00%
TIER I CAPITAL (TO AVERAGE ASSETS):
Company $ 68,204 23.91% $ 11,410 =>4.00% N/A
Bank $ 61,487 22.43% $ 10,965 =>4.00% $ 13,706 => 5.00%
At December 31, 1998:
TOTAL CAPITAL (TO RISK WEIGHTED ASSETS):
Company $ 80,333 48.91% $ 13,140 =>8.00% N/A
Bank $ 60,078 38.82% $ 12,381 =>8.00% $ 15,476 => 10.00%
TIER 1 CAPITAL (TO RISK WEIGHTED ASSETS):
Company $ 77,892 47.42% $ 6,571 =>4.00% N/A
Bank $ 57,751 37.32% $ 6,191 =>4.00% $ 9,286 => 6.00%
TIER I CAPITAL (TO AVERAGE ASSETS):
Company $ 77,892 29.57% $ 10,536 =>4.00% N/A
Bank $ 57,751 23.40% $ 9,873 =>4.00% $ 12,341 => 5.00%
In order to grant priority in the Conversion to the eligible depositors,
the Bank established a special account at the time of conversion in an
amount equal to its total net worth at September 30, 1998. In the event
of a future liquidation of the converted bank (and only in such event),
eligible account holders who continue to maintain accounts shall be
entitled to receive a distribution from the special account. The total
amount of the special account will be decreased (as the balances of
eligible accounts are reduced) on annual determination dates. No cash
dividends may be paid to the stockholders and no shares may be
repurchased by the Company if such actions would reduce the Bank's
stockholders' equity below the amount required for the special account.
At December 31, 1999, the amount remaining in this liquidation account
was $14.4 million.
(17) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating fair values of financial instruments:
CASH AND CASH EQUIVALENTS: The fair values are considered to
approximate the carrying values, as reported on the consolidated
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.
F-23
CNY Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
(17) FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED
LOANS AND ACCRUED INTEREST RECEIVABLE: 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.
DEPOSITS: The fair values of demand deposits (interest and
non-interest checking), passbook, statement savings, club 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 certificates of deposits and individual
retirement accounts 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.
ADVANCE PAYMENTS BY BORROWERS FOR PROPERTY TAXES AND INSURANCE: The
fair value of advance payments by borrowers for property taxes and
insurance is, by definition, equal to the amount payable at the
reporting date (i.e., its carrying amount).
BORROWINGS: The fair value of term advances from the Federal Home
Loan Bank is estimated using discounted cash flow analysis based on
the Company's current incremental borrowing rate for similar
borrowing arrangements.
OFF-BALANCE-SHEET INSTRUMENTS: Fair values for the Company'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.
The estimated carrying values and fair values of the Company's financial
instruments are as follows: (in thousands):
December 31,
-----------------------------------------------------------
1999 1998
-----------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------------------------------------------------------------------------------------------------
Financial assets:
Cash and cash equivalents $ 6,272 $ 6,272 $ 14,536 $ 14,536
Securities 104,663 104,586 98,755 98,841
Loans, net 166,657 165,478 159,207 166,435
FHLB stock 1,637 1,637 1,303 1,303
Accrued interest receivable 1,945 1,945 1,985 1,985
Financial liabilities:
Deposits:
Demand accounts 12,033 12,033 10,780 10,780
Savings accounts 61,109 61,109 61,820 61,820
Certificates of deposits 100,438 99,523 104,317 104,575
Money market accounts 10,789 10,789 7,975 7,975
NOW accounts 11,101 11,101 11,122 11,122
Advance payments by borrowers
for property taxes and
insurance 1,595 1,595 1,450 1,450
Borrowings $ 19,200 $ 19,153 $ 1,000 $ 997
=================================================================================================
F-24
CNY Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
(17) FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED
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.
(18) CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
Presented below are the condensed balance sheets as of December 31, 1999
and 1998 and statements of income and statements of cash flows for the
year ended December 31, 1999 and for the period from October 6, 1998 to
December 31, 1998 for CNY Financial Corporation (in thousands):
Condensed Balance Sheets 1999 1998
-------------------------------------------------------------------------------
Assets:
Cash and cash equivalents $ 1,951 $ 11,929
Securities available-for-sale, at fair value 5,399 8,238
Investment in bank subsidiary 61,037 58,939
Other assets 368 712
-------------------------------------------------------------------------------
$ 68,755 $ 79,818
===============================================================================
Liabilities:
Other liabilities $ 1,055 $ 748
-------------------------------------------------------------------------------
Total liabilities 1,055 748
-------------------------------------------------------------------------------
Total stockholders' equity 67,700 79,070
-------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 68,755 $ 79,818
===============================================================================
Condensed Statements of Income 1999 1998
-------------------------------------------------------------------------------
Interest from securities available-for-sale $ 532 $ --
-------------------------------------------------------------------------------
Total operating income 532 --
Donation to charitable foundation -- (1,023)
Other operating expenses (1,536) (192)
-------------------------------------------------------------------------------
Total operating expenses (1,536) (1,215)
-------------------------------------------------------------------------------
Loss before undistributed income of subsidiary (1,004) (1,215)
Applicable income tax benefit (240) (485)
Equity in undistributed income of subsidiary bank 3,736 2,409
-------------------------------------------------------------------------------
Net income $ 2,972 $ 1,679
===============================================================================
(CONTINUED ON FOLLOWING PAGE)
F-25
CNY Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
(18) CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS, CONTINUED
1999 1998
---------------------------------------------------------------------------------------------------------
Condensed Statements of Cash Flows
Operating activities:
Net income $ 2,972 $ 1,679
Adjustments to reconcile net income to cash provided by
(used in) operating activities:
Equity in undistributed earnings of subsidiary bank (3,736) (2,409)
Decrease (increase) in other assets 372 (712)
Increase in other liabilities 763 292
ESOP shares released for allocation 279 51
Donation to charitable foundation -- 997
PRRP expense 288 --
---------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 938 (102)
Investing activities:
Purchase of securities available-for-sale (38,105) (33,421)
Proceeds from sales of securities available-for-sale 4,563 --
Proceeds from maturities of securities available-for-sale 36,310 --
---------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 2,768 (33,421)
Financing activities:
Par value of donation of stock to charitable foundation -- 1
Purchase of shares of common stock by ESOP -- (4,285)
Payments on ESOP loan --
Treasury stock purchases (12,472) (611)
Dividends (1,212) --
Net proceeds from issuance of common stock -- 50,347
---------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (13,684) 45,452
Net (decrease) increase in cash (9,978) 11,929
Cash at beginning of year 11,929 --
---------------------------------------------------------------------------------------------------------
Cash at December 31 $ 1,951 $ 11,929
=========================================================================================================
F-26
CNY Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998 and 1997
(19) UNAUDITED INTERIM FINANCIAL INFORMATION
The following table summarizes the Company's quarterly results for the
years ended December 31, 1999 and 1998 (in thousands, except share data):
1999
----------------------------------------------------------
First Second Third Fourth
-------------------------------------------------------------------------------------------------------------
Interest income $ 4,816 $ 4,861 $ 5,074 $ 5,019
Interest expense 1,792 1,822 1,966 2,027
-------------------------------------------------------------------------------------------------------------
Net interest income 3,024 3,039 3,108 2,992
Provision for loan losses 75 25 -- --
Total non-interest income 216 291 285 286
Total non-interest expenses 1,830 1,862 2,092 2,090
-------------------------------------------------------------------------------------------------------------
Income before income taxes 1,335 1,443 1,301 1,188
-------------------------------------------------------------------------------------------------------------
Net income $ 749 $ 893 $ 740 $ 590
=============================================================================================================
Net income per diluted common share $ 0.16 $ 0.19 $ 0.16 $ 0.14
=============================================================================================================
1998
----------------------------------------------------------
First Second Third Fourth
-------------------------------------------------------------------------------------------------------------
Interest income $ 4,311 $ 4,337 $ 4,442 $ 4,913
Interest expense 2,010 2,003 2,064 1,909
-------------------------------------------------------------------------------------------------------------
Net interest income 2,301 2,334 2,378 3,004
Provision for loan losses 75 75 100 75
Total non-interest income 245 278 817 243
Total non-interest expenses 1,645 1,693 1,953 3,035
-------------------------------------------------------------------------------------------------------------
Income before income taxes 826 844 1,142 137
-------------------------------------------------------------------------------------------------------------
Net income $ 493 $ 561 $ 566 $ 59(2)
=============================================================================================================
Net income per common share (1) (1) (1) $ --
=============================================================================================================
(1) Not applicable because the Company converted from mutual to stock
form of ownership in October 1998. Income per common share is
presented from October 6, 1998, the date of the conversion, based
upon the weighted average number of shares issued and outstanding
since that date. The income included in the computation is based on
the actual operating results only for the post-conversion period.
(2) The decrease in net income in the fourth quarter is related to the
stock contribution to the Cortland Savings Foundation of $614,000
after taxes.
Summation of the quarterly net income per diluted common share does not
necessarily equal the annual amount due to the averaging effect of the
number of shares throughout the year.
F-27