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FILED PURSUANT TO
RULE NO. 424(b)(3)
REGISTRATION NO.333-10471
PROSPECTUS SUPPLEMENT
ROSLYN BANCORP, INC.
THE ROSLYN SAVINGS BANK
PARTICIPATION INTERESTS
THE ROSLYN SAVINGS BANK 401(K) SAVINGS PLAN
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This Prospectus Supplement relates to the offer and sale to participants
(the "Participants") in The Roslyn Savings Bank 401(k) Savings Plan in RSI
Retirement Trust (the "Plan") of participation interests and shares of common
stock, par value $.01 per share, of Roslyn Bancorp, Inc. (the "Common Stock"),
as set forth herein.
In connection with the proposed conversion of The Roslyn Savings Bank (the
"Bank") from a New York State chartered mutual savings bank to a New York
State chartered stock savings bank, and the issuance of the Bank's capital
stock to Roslyn Bancorp, Inc. (the "Company") pursuant to the Bank's Plan of
Conversion, as amended (the "Plan of Conversion"), the Plan has been amended
to permit the investment of Plan assets in Common Stock of the Company. The
amended Plan will permit Participants to direct the trustee of the Plan (the
"Trustee") to invest in Common Stock with amounts in the Plan attributable to
such Participants. Such investments in Common Stock would be made by means of
the Roslyn Bancorp, Inc. Stock Fund (the "Employer Stock Fund"). The
transactions contemplated in the Plan of Conversion are hereinafter referred
to as the "Conversion." Based upon the value of the Plan assets at June 28,
1996, 589,232 shares of Common Stock could be purchased with Plan assets
(assuming a purchase price of $10.00 per share). This Prospectus Supplement
relates to the initial election of a Participant to direct that all or a
portion of their accounts be invested in the Employer Stock Fund in connection
with the Conversion and also to elections by Participants to direct that all
or a portion of their accounts be invested in the Employer Stock Fund after
the Conversion.
THE PROSPECTUS OF THE COMPANY DATED OCTOBER 10, 1996 (THE "PROSPECTUS"),
WHICH IS ATTACHED TO THIS PROSPECTUS SUPPLEMENT, INCLUDES DETAILED INFORMATION
WITH RESPECT TO THE CONVERSION, THE COMMON STOCK AND THE FINANCIAL CONDITION,
RESULTS OF OPERATIONS AND BUSINESS OF THE BANK AND THE COMPANY. THIS
PROSPECTUS SUPPLEMENT, WHICH PROVIDES DETAILED INFORMATION WITH RESPECT TO THE
PLAN, SHOULD BE READ ONLY IN CONJUNCTION WITH THE PROSPECTUS.
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY EACH
PARTICIPANT, SEE "RISK FACTORS" BEGINNING ON PAGE 23 OF THE PROSPECTUS.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, THE SUPERINTENDENT OF BANKS OF THE STATE OF NEW YORK,
THE NEW YORK STATE BANKING BOARD, THE NEW YORK STATE BANKING DEPARTMENT,
THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY STATE SECURITIES
COMMISSION, OR ANY OTHER AGENCY, NOR HAS SUCH COMMISSION, BOARD,
DEPARTMENT, SUPERINTENDENT, CORPORATION OR ANY STATE SECURITIES
COMMISSION OR OTHER AGENCY PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR
DEPOSITS AND ARE NOT FEDERALLY INSURED OR GUARANTEED, NOR ARE THE SHARES OF
COMMON STOCK GUARANTEED BY THE COMPANY OR THE BANK. THE ENTIRE AMOUNT OF A
PURCHASER'S INVESTMENT IS SUBJECT TO LOSS.
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS OCTOBER 10, 1996.
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THE PROSPECTUS OR THIS
PROSPECTUS SUPPLEMENT, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE BANK
OR THE PLAN. THIS PROSPECTUS SUPPLEMENT DOES NOT CONSTITUTE AN OFFER TO SELL
OR SOLICITATION OF AN OFFER TO BUY ANY SECURITIES IN ANY JURISDICTION TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE BANK OR
THE PLAN SINCE THE DATE HEREOF, OR THAT THE INFORMATION HEREIN CONTAINED OR
INCORPORATED BY REFERENCE IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF. THIS PROSPECTUS SUPPLEMENT SHOULD BE READ ONLY IN CONJUNCTION WITH THE
PROSPECTUS THAT IS ATTACHED HERETO AND SHOULD BE RETAINED FOR FUTURE
REFERENCE.
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TABLE OF CONTENTS
<TABLE>
<S> <C>
THE OFFERING................................................................ 1
Securities Offered........................................................ 1
Election to Purchase Common Stock in the Conversion....................... 1
Value of Participation Interests.......................................... 1
Method of Directing Transfer.............................................. 1
Time for Directing Transfer............................................... 1
Irrevocability of Transfer Direction...................................... 1
Direction to Purchase Common Stock After the Conversion................... 2
Purchase Price of Common Stock............................................ 2
Nature of a Participant's Interest in the Common Stock.................... 2
Voting and Tender Rights of Common Stock.................................. 2
DESCRIPTION OF THE PLAN..................................................... 3
Introduction.............................................................. 3
Eligibility and Participation............................................. 3
Contributions Under the Plan.............................................. 4
Limitations on Contributions.............................................. 4
Investment of Contributions............................................... 6
Benefits Under the Plan................................................... 8
Withdrawals and Distributions From the Plan............................... 8
Administration of the Plan................................................ 9
Reports to Plan Participants.............................................. 9
Plan Administrator........................................................ 9
Amendment and Termination................................................. 10
Merger, Consolidation or Transfer......................................... 10
Federal Income Tax Consequences........................................... 10
ERISA and Other Qualification............................................. 12
Restrictions on Resale.................................................... 12
SEC Reporting and Short-Swing Profit Liability............................ 12
EXPERTS..................................................................... 13
LEGAL OPINIONS.............................................................. 13
INVESTMENT FORM............................................................. 14
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THE OFFERING
SECURITIES OFFERED
The securities offered hereby are participation interests in the Plan. Up to
589,232 shares (assuming the actual purchase price is $10.00 per share) of
Common Stock may be acquired by the Plan to be held in the Employer Stock
Fund. The Company is the issuer of the Common Stock. Only employees of the
Bank and its subsidiary, Residential First, Inc. (together hereinafter
referred to as the "Employer"), may participate in the Plan. The Common Stock
to be issued hereby is conditioned on the consummation of the Conversion. A
Participant's investment in units in the Employer Stock Fund in the Conversion
is subject to the priority set forth in the Plan of Conversion.
Information with regard to the Plan is contained in this Prospectus
Supplement and information with regard to the Conversion and the financial
condition, results of operations and business of the Bank is contained in the
attached Prospectus. The address of the principal executive office of the Bank
is 1400 Old Northern Boulevard, Roslyn, New York 11576. The Bank's telephone
number is (516) 621-6000.
ELECTION TO PURCHASE COMMON STOCK IN THE CONVERSION
In connection with the Bank's Conversion, the Plan has been amended to
permit each Participant to direct that all or part of the funds which
represent his or her beneficial interest in the assets of the Plan may be
transferred to the Employer Stock Fund, an investment fund in the Plan, that
will invest in Common Stock and used to purchase Common Stock issued in
connection with the Conversion. The ability of each Participant to invest in
Common Stock to be sold in the Conversion through the Plan will be based on
such Participant's status as an Eligible Account Holder (defined in the Plan
of Conversion as holders of deposit accounts of the Bank totalling $100 or
more as of April 30, 1995) or a Supplemental Eligible Account Holder (defined
in the Plan of Conversion as holders of deposit accounts of the Bank totalling
$100 or more as of September 30, 1996), the subscription priorities set forth
in the Plan of Conversion and the availability of Common Stock. The Trustee of
the Plan will follow the Participants' directions to transfer all or a portion
of his or her beneficial interest in the assets in the Plan to the Employer
Stock Fund. Funds not transferred to the Employer Stock Fund will remain in
the other investment funds of the Plan as directed by the Participant.
VALUE OF PARTICIPATION INTERESTS
The assets of the Plan were valued as of June 28, 1996, at $5,892,322 and
each Participant was informed of the value of his or her beneficial interest
in the Plan. This value represented the market value as of June 28, 1996 of
past contributions to the Plan by the Employer and the Participants and any
earnings or losses thereon, less previous withdrawals.
METHOD OF DIRECTING TRANSFER
The last page of this Prospectus Supplement is a form to direct a transfer
to the Employer Stock Fund (the "Investment Form"). If a Participant wishes to
transfer all or part of his or her beneficial interest in the assets of the
Plan to the Employer Stock Fund being established in connection with the
Conversion, he or she should indicate that decision in Section 2 of the
Investment Form. If a Participant does not wish to make such an election, he
or she does not need to take any action.
TIME FOR DIRECTING TRANSFER
The deadline for submitting a direction to transfer amounts to the Employer
Stock Fund which will purchase Common Stock issued in connection with the
Conversion is November 22, 1996. The Investment Form should be returned to the
Bank's Human Resources Division by 5:00 p.m. on such date.
IRREVOCABILITY OF TRANSFER DIRECTION
A Participant's direction to transfer amounts credited to such Participant's
account in the Plan to the Employer Stock Fund in connection with the
Conversion shall be irrevocable. Participants, however, will be able to direct
the investment of their accounts ("Accounts") under the Plan as explained
below.
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DIRECTION TO PURCHASE COMMON STOCK AFTER THE CONVERSION
After the Conversion, a Participant shall be able to direct that a certain
percentage of such Participant's interests in the trust fund established for
the Plan (the "Trust Fund") be transferred to the Employer Stock Fund and
invested in Common Stock, or to the other investment funds available under the
Plan. A Participant may also direct that a certain percentage of such
Participant's interest in the Employer Stock Fund be transferred to the Trust
Fund to be invested in accordance with the terms of the Plan. Participants
will be permitted to direct that future contributions made to the Plan by or
on their behalf will be invested in Common Stock. Following the initial
election, the allocation of a Participant's interest in the Employer Stock
Fund may be changed six times in any plan year by filing a written notice with
the plan administrator at least ten days before the effective date of the
change. Special restrictions apply to transfers directed by those Participants
who are executive officers, directors and principal shareholders of the
Company who are subject to the provisions of Section 16(b) of the Securities
Exchange Act of 1934, as amended (the "1934 Act").
PURCHASE PRICE OF COMMON STOCK
The funds transferred to the Employer Stock Fund for the purchase of Common
Stock in connection with the Conversion will be used by the Trustee to
purchase shares of Common Stock. The price to be paid by the Employer Stock
Fund for such shares of Common Stock will be the same price as is paid by all
persons who purchase shares of Common Stock in the Conversion.
Common Stock purchased by the Trustee after the Conversion will be acquired
in open market transactions. The prices paid by the Trustee for shares of
Common Stock will not exceed "adequate consideration" as defined in Section
3(18) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA").
NATURE OF A PARTICIPANT'S INTEREST IN THE COMMON STOCK
The Common Stock will be held in the name of the Trustee for the Plan, as
trustee. Each Participant has an allocable interest in the investment funds of
the Plan, but not in any particular assets of the Plan. Accordingly, a
specific number of shares of Common Stock will not be directly attributable to
the account of any Participant. Earnings, e.g., gains and losses, are
allocated to the Account of a Participant based on units in the Employer Stock
Fund held by such Participant. Therefore, earnings with respect to a
Participant's Account should not be affected by the investment designations
(including investments in Common Stock) of other Participants.
VOTING AND TENDER RIGHTS OF COMMON STOCK
The Trustee generally will exercise voting and tender rights attributable to
all Common Stock held by the Employer Stock Fund as directed by Participants
with interests in the Employer Stock Fund. With respect to each matter as to
which holders of Common Stock have a right to vote, each Participant will be
allocated a number of voting instruction rights reflecting such Participant's
proportionate interest in the Employer Stock Fund. The number of shares of
Common Stock held in the Employer Stock Fund that are voted in the affirmative
and negative on each matter shall be proportionate to the number of voting
instruction rights exercised in the affirmative and negative, respectively. In
the event of a tender offer for Common Stock, the Plan provides that each
Participant will be allotted a number of tender instruction rights reflecting
such Participant's proportionate interest in the Employer Stock Fund. The
percentage of shares of Common Stock held in the Employer Stock Fund that will
be tendered will be the same as the percentage of the total number of tender
instruction rights that are exercised in favor of tendering. The remaining
shares of Common Stock held in the Employer Stock Fund will not be tendered.
The Plan makes provision for Participants to exercise their voting instruction
rights and tender instruction rights on a confidential basis.
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DESCRIPTION OF THE PLAN
INTRODUCTION
The Plan was established effective January 1, 1979 as the Incentive Savings
Plan of The Roslyn Savings Bank. Effective as of April 1, 1985, the Plan was
amended and restated in its entirety as The Roslyn Savings Bank 401(k) Savings
Plan in the Retirement System for Savings Institutions; and effective as of
January 1, 1987, the Plan was amended and restated in its entirety as The
Roslyn Savings Bank 401(k) Savings Plan in RSI Retirement Trust. The Plan is a
cash or deferred arrangement established in accordance with the requirements
under Section 401(a) and Section 401(k) of the Internal Revenue Code of 1986
(the "Code"). The Plan will be submitted to the Internal Revenue Service (the
"IRS") in a timely manner for a determination that the Plan, as amended and
restated, is qualified under Section 401(a) of the Code, and that its related
trust is qualified under Section 501(a) of the Code.
The Bank intends that the Plan, in operation, will comply with the
requirements under Section 401(a) and Section 401(k) of the Code. The Bank
will adopt any amendments to the Plan that may be necessary to ensure the
qualified status of the Plan under the Code and applicable Treasury
Regulations.
Employee Retirement Income Security Act. The Plan is an "individual account
plan" other than a "money purchase pension plan" within the meaning of ERISA.
As such, the Plan is subject to all of the provisions of Title I (Protection
of Employee Benefit Rights) and Title II (Amendments to the Internal Revenue
Code Relating to Retirement Plans) of ERISA, except the funding requirements
contained in Part 3 of Title I of ERISA which by their terms do not apply to
an individual account plan (other than a money purchase pension plan). The
Plan is not subject to Title IV (Plan Termination Insurance) of ERISA. Neither
the funding requirements contained in Part 3 of Title I of ERISA nor the plan
termination insurance provisions contained in Title IV of ERISA will be
extended to Participants or beneficiaries under the Plan.
APPLICABLE FEDERAL LAW REQUIRES THE PLAN TO IMPOSE SUBSTANTIAL RESTRICTIONS
ON THE RIGHT OF A PLAN PARTICIPANT TO WITHDRAW AMOUNTS HELD FOR HIS BENEFIT
UNDER THE PLAN PRIOR TO THE PARTICIPANT'S TERMINATION OF EMPLOYMENT WITH THE
BANK. A SUBSTANTIAL FEDERAL TAX PENALTY MAY ALSO BE IMPOSED ON WITHDRAWALS
MADE PRIOR TO THE PARTICIPANT'S ATTAINMENT OF AGE 59-1/2, REGARDLESS OF
WHETHER SUCH A WITHDRAWAL OCCURS DURING HIS EMPLOYMENT WITH THE BANK OR AFTER
TERMINATION OF EMPLOYMENT.
Reference to Full Text of Plan. The following statements are summaries of
certain provisions of the Plan. They are not complete and are qualified in
their entirety by the full text of the Plan. Copies of the Plan are available
to all employees by filing a request with the Plan Administrator, Arthur W.
Toohig, The Roslyn Savings Bank, 1400 Old Northern Boulevard, Roslyn, New York
11576. The Plan Administrator's telephone number is (516) 621-6000. Each
employee is urged to read carefully the full text of the Plan.
ELIGIBILITY AND PARTICIPATION
Any salaried or commission-paid employee of the Bank or its subsidiary
Residential First, Inc. (together referenced to as the "Employer") is eligible
to participate in the Plan on the first day of any calender month following
completion of one year of service with an Employer. Employees compensated on
an hourly basis and employees compensated on a daily, fee or retainer basis,
leased employees (within the meaning of Section 414(n) of the Code) and
employees covered by a collective bargaining agreement which does not
expressly provide for their coverage under the Plan, are not eligible to
participate in the Plan.
As of June 28, 1996, there were approximately 257 employees eligible to
participate in the Plan, and 241 employees had elected to participate in the
Plan.
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CONTRIBUTIONS UNDER THE PLAN
401(k) Plan Contributions. Each Participant in the Plan is permitted to
elect to reduce such Participant's Compensation (as defined below) pursuant to
a "Compensation Reduction Agreement" by an amount not less than 1% and not
more than 12% and have that amount contributed to the Plan on such
Participant's behalf. Such amounts are credited to the Participant's "Basic
Contribution Account." For purposes of the Plan, "Compensation" means a
Participant's compensation from an Employer for the year, prior to any
reduction pursuant to a Compensation Reduction Agreement. Compensation
includes salary, wages and wage continuation to an employee who is absent due
to an illness or disability of a short-term nature and commissions paid on
loan originations. "Compensation" does not include expense allowances,
commissions other than those paid on the originations of loans, severance pay,
fees, bonuses, incentive payments, contributions other than Basic
Contributions made to the Plan and contributions made by the Employer to any
other pension, insurance welfare or other employee benefit plan. The annual
compensation of each Participant taken into account under the Plan is limited
to $150,000 (adjusted for increases in the cost of living as permitted by the
Code). Generally, a Participant may elect to modify the amount contributed to
the Plan under such Participant's Compensation Reduction Agreement not more
often than four times in any plan year by providing notice to the Plan
Administrator at least 10 days before commencement of the first day of the
payroll period for which the modification is to become effective. However,
special restrictions apply to persons subject to Section 16 of the 1934 Act.
Basic Contributions are transferred by the Employer to the Trustee of the
Plan.
Notwithstanding the preceding, a Participant who receives a hardship
distribution under the terms of the Plan, may not be eligible to make
additional contributions under a Compensation Reduction Agreement for a period
of twelve months after the receipt of the hardship distribution.
Employer Contributions. The Employer contributes to the Plan for each Plan
Year 50% of the Participant's Basic Contributions, up to a maximum of 3% of
the Participant's Compensation for the Plan Year. In addition, for each
Participant who has been a Participant for a total of at least sixty calendar
months, the Employer contributes an additional 50% of the Participant's Basic
Contributions for a total of 100% of Basic Contributions, up to a maximum of
6% of the Participant's Compensation for the Plan Year. Such amounts are
credited to the Participant's "Company Contribution Account." After the
Conversion, at the discretion of the Bank, the Employer contributions made
with respect to Participants who are Bank employees will be credited to the
Participant's Account in The Rosyln Savings Bank Employee Stock Ownership
Plan. At its discretion, the Employer may make an additional contribution to
the Plan as of the end of the Plan Year in an amount determined by the
Employer for the purpose of ensuring that the Plan complies with Section
401(k) of the Code. Such amounts are credited to Participants' "Special
Contribution Accounts" based on each Participant's compensation. Special
Contributions may be made only to the accounts of non-Highly Compensated
Employees, as defined below.
LIMITATIONS ON CONTRIBUTIONS
Limitations on Annual Additions and Benefits. Pursuant to the requirements
of the Code, the Plan provides that the amount of contributions allocated to
each Participant's Basic Contribution Account and Matching Contribution
Account during any Plan Year may not exceed the lesser of 25% of the
Participant's Section 415 Compensation for the Plan Year or $30,000 (adjusted
for increases in the cost of living as permitted by the Code). A Participant's
Section 415 Compensation is a Participant's Compensation, excluding any
Employer contribution to the Plan or to any other plan of deferred
compensation or any distributions from a plan of deferred compensation. In
addition, annual additions shall be limited to the extent necessary to prevent
the limitations set forth in the Code for all of the qualified defined benefit
plans and defined contribution plans maintained by the Bank from being
exceeded. To the extent that these limitations would be exceeded by reason of
excess annual additions with respect to a Participant, such excess will be
disposed of as follows:
(i) Any excess amount in the Participant's Account will be used to reduce
the Employer's contributions for such Participant in the next Limitation
Year, and each succeeding Limitation Year if necessary;
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(ii) If an excess amount still exists, and the Participant is not covered
by the Plan at the end of the Limitation Year, the excess amount will be
held unallocated in a suspense account which will then be applied to reduce
future Employer contributions for all remaining Participants in the next
Limitation Year, and each succeeding Limitation Year if necessary;
(iii) If a suspense account is in existence at any time during the
Limitation Year, it will not participate in the allocation of investment
gains and losses.
Limitation on 401(k) Plan Contributions. The annual amount of deferred
Compensation under a Compensation Reduction Agreement of a Participant (when
aggregated with any elective deferrals of the Participant under a simplified
employee pension plan or a tax-deferred annuity) may not exceed $7,000
adjusted for increases in the cost of living as permitted by the Code (the
limitation for 1996 is $9,500). Contributions in excess of this limitation
("excess deferrals") will be included in the Participant's gross income for
federal income tax purposes in the year they are made. In addition, any such
excess deferral will again be subject to federal income tax when distributed
by the Plan to the Participant, unless the excess deferral (together with any
income allocable thereto) is distributed to the Participant not later than the
first April 15th following the close of the taxable year in which the excess
deferral is made. Any income on the excess deferral that is distributed not
later than such date shall be treated, for federal income tax purposes, as
earned and received by the Participant in the taxable year in which the excess
deferral is made.
Limitation on Plan Contributions for Highly Compensated Employees. Sections
401(k) and 401(m) of the Code limit the amount of deferred Compensation that
may be made to the Plan in any Plan Year on behalf of Highly Compensated
Employees (defined below) in relation to the amount of deferred Compensation
made by or on behalf of all other employees eligible to participate in the
Plan. Specifically, the actual deferral percentage (i.e., the average of the
ratios, calculated separately for each eligible employee in each group, by
dividing the amount of deferred Compensation credited to the Basic
Contribution Account of such eligible employee by such eligible employee's
compensation for the Plan Year) of the Highly Compensated Employees may not
exceed the greater of (i) 125% of the actual deferral percentage of all other
eligible employees, or (ii) the lesser of (x) 200% of the actual deferral
percentage of all other eligible employees, or (y) the actual deferral
percentage of all other eligible employees plus two percentage points. In
addition, the actual contribution percentage for such Plan Years (i.e., the
average of the ratios calculated separately for each eligible employee in each
group, by dividing the amount of voluntary employee and employer matching
contributions credited to the Matching Contribution Account and Special
Contribution Account of such eligible employee by such eligible employee's
compensation for the Plan Year) of the Highly Compensated Employees may not
exceed the greater of (i) 125% of the actual contribution percentage of all
other eligible employees, or (ii) the lesser of (x) 200% of the actual
contribution percentage of all other eligible employees, or (y) the actual
contribution percentage of all other eligible employees plus two percentage
points.
In general, a Highly Compensated Employee includes any employee who, during
the Plan Year or the preceding Plan Year, (1) was at any time a 5% owner
(i.e., owns directly or indirectly more than 5% of the stock of the Employer,
or stock possessing more than 5% of the total combined voting power of all
stock of the Employer), (2) received compensation from the Employer in excess
of $100,000, (3) received compensation from the Employer in excess of $66,000
and was in the group consisting of the top 20% of employees when ranked on the
basis of compensation paid during the Plan Year, or (4) was at any time an
officer of the Employer and received compensation in excess of $60,000 (a
"Highly Compensated Employee"). The dollar amounts in the foregoing sentence
are for 1996. Such amounts are adjusted annually to reflect increases in the
cost of living. If the Employer does not have at least one officer whose
annual compensation is in excess of $60,000, then the highest paid officer of
the Employer will be treated as a Highly Compensated Employee.
In addition, the compensation of an employee who is a family member of a 5%
owner, or one of the ten most highly compensated employees during the relevant
period is aggregated with that of the Highly Compensated Employee. All such
family members are treated as a single employee with respect to the
application of the limitations on Highly Compensated Employees.
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In order to prevent the disqualification of the Plan, any amount contributed
by Highly Compensated Employees that exceed the average deferral limitation in
any Plan Year ("Excess Contributions"), together with any income allocable
thereto, must be distributed to such Highly Compensated Employees before the
close of the following Plan Year. However, the Employer will be subject to a
10% excise tax on any Excess Contributions unless such Excess Contributions,
together with any income allocable thereto, either are recharacterized or are
distributed before the close of the first 2-1/2 months following the Plan Year
to which such Excess Contributions relate.
Top-Heavy Plan Requirements. If for any Plan Year the Plan is a Top-Heavy
Plan (as defined below), then (i) the Bank may be required to make certain
minimum contributions to the Plan on behalf of non-key employees (as defined
below), and (ii) certain additional restrictions would apply with respect to
the combination of annual additions to the Plan and projected annual benefits
under any defined benefit plan maintained by the Bank.
In general, the Plan will be regarded as a "Top-Heavy Plan" for any Plan
Year if, as of the last day of the preceding Plan Year, the aggregate balance
of the Accounts of Participants who are Key Employees exceeds 60% of the
aggregate balance of the Accounts of all Participants. Key Employees generally
include any employee who, at any time during the Plan Year or any of the four
preceding Plan Years, is (1) an officer of the Bank having annual compensation
in excess of $60,000 who is in an administrative or policy-making capacity,
(2) one of the ten employees having annual compensation in excess of $30,000
and owning, directly or indirectly, the largest interests in the Bank, (3) a
5% owner of the Bank, (i.e., owns directly or indirectly more than 5% of the
stock of the Bank, or stock possessing more than 5% of the total combined
voting power of all stock of the Bank) or (4) a 1% owner of the Bank having
annual compensation in excess of $150,000. The dollar amounts in the foregoing
sentence are for 1996.
INVESTMENTS OF CONTRIBUTIONS
All amounts credited to Participants' Accounts under the Plan are held in
the Trust Fund which is administered by the Trustee appointed by the Bank's
Board of Trustees.
Prior to the effective date of the Conversion, the Accounts of a Participant
held in the Trust Fund have been invested by the Trustee at the direction of
the Participant in the following investment funds:
a.Core Equity Fund;
b.Emerging Growth Equity Fund;
c.Value Equity Fund;
d.Intermediate-Term Bond Fund;
e.Actively Managed Bond Fund; and
f.Short-Term Investment Fund.
The Plan, as amended effective July 30, 1996, now provides that in addition
to the Funds specified above, a Participant who is employed by the Bank may
direct the Trustee to invest all or a portion of his Basic Contribution
Account, Rollover Account and Special Contribution Account in the Employer
Stock Fund.
Participants in the Plan who are employees of Residential First, Inc. may
direct the Trustee to invest all or a portion of his Basic Contribution
Account, Company Contribution Account, Rollover Account and Special
Contribution Account in the Employer Stock Fund.
At least once in each calendar quarter, but in no event more frequently than
six times each Plan Year, a Participant may elect (in increments of 5%), to
have both past and future contributions and additions to the Participant's
Basic Contribution Account, Rollover Account and Special Contribution Account
invested either in the Employer Stock Fund or among such other Funds.
Participants may also elect to have past contributions to
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their Company Contribution Accounts (and future contributions to the Company
Contribution Account for those Participants who are Residential First, Inc.
employees) invested in either the Employer Stock Fund or among such other
Funds. The Company Contribution Account of Participants who are Bank employees
will be entirely invested in Employer Stock under the terms of The Roslyn
Savings Bank Employee Stock Ownership Plan being implemented by the Bank.
These elections will be effective on the effective date of the Participant's
written notice to the plan administrator, provided such notice is filed with
the administrator at least 10 days before it is to become effective. Any
amounts credited to a Participant's Accounts for which investment directions
are not given will be invested in accordance with the terms of the Plan.
Because investment allocations may be made in increments of 5%, Participants
can invest their Accounts in each of the seven available investment funds.
Lack of diversification with respect to the investment of a Participant's
Account should not be a significant risk given the seven investment options
available to Participants and the ability of Participants to make investment
designations six times each year.
A Participant who receives a loan from the Plan has a separate account
established under the Plan. The balance of a Participant's loan account
represents the unpaid principal and interest (if any) of such participant's
loan from the Plan. Repayments of principal and payments of interest on loans
are invested by the Trustee as directed by the Participant or, if no
investment directions are given, in accordance with the terms of the Plan.
The Participant's interest in the Employer Stock Fund consists of units
whose value is related to a pro rata portion of the net asset value ("NAV") of
the Employer Stock Fund. The NAV is determined daily and all realized and
unrealized gains, dividends, and expenses are used to calculate the NAV. For
purposes of such valuation, all assets of the Employer Stock Fund are valued
at their fair market value.
A. Previous Funds.
Prior to the effective date of the Conversion, contributions under the Plan
have been invested in the six Funds specified above. The annual percentage
return on these funds for the prior three years was:
<TABLE>
<CAPTION>
1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
a.Core Equity Fund.................................... 40.17% 1.31% 10.34%
b.Emerging Growth Equity Fund......................... 42.83 3.53 20.99
c.Value Equity Fund................................... 33.96 (1.14) 8.10
d.Intermediate-Term Bond Fund......................... 13.99 (2.54) 7.63
e.Actively Managed Bond Fund.......................... 17.70 (4.21) 11.20
f.Short-Term Investment Fund.......................... 5.39 3.40 2.40
</TABLE>
B. The Employer Stock Fund.
The Employer Stock Fund will consist of investments in Common Stock made on
and after the effective date of the Conversion. Each Participant's
proportionate undivided beneficial interest in the Employer Stock Fund is
measured by units. Each day, a unit value will be calculated by determining
the market value of the shares of Common Stock actually held and adding to
that any cash held by the Trustee. This total will be divided by the number of
units outstanding to determine the unit value of the Employer Stock Fund.
On the occasion of the payment of a cash dividend, the unit value will be
determined before the dividend is distributed. The Trustee will use the
dividend to purchase additional shares of the Common Stock. The total value of
the Employer Stock Fund will increase, as will the value of each unit. The
Board of Directors of the Company may consider a policy of paying cash
dividends on the Common Stock in the future; however, no decision has been
made with respect to the timing or payment of such dividends, if any. The
Trustee will, to the extent practicable, use all amounts held by it in the
Employer Stock Fund to purchase shares of Common Stock of the Bank. It is
expected that all purchases will be made at prevailing market prices. Under
certain circumstances, the Trustee may be required to limit the daily volume
of shares purchased. Pending investment in Common Stock, assets held in the
Employer Stock Fund will be placed in bank deposits and other short-term
investments.
7
<PAGE>
Any brokerage commissions, transfer fees and other expenses incurred in the
sale and purchase of Common Stock for the Employer Stock Fund will be paid out
of a cash account managed by the Trustee. Therefore, although Participants'
accounts will not be directly adjusted for such fees, the market value of
their accounts will be reduced.
As of the date of this Prospectus Supplement, none of the shares of Common
Stock have been issued or are outstanding and there is no established market
for the Common Stock. Accordingly, there is no record of the historical
performance of the Employer Stock Fund. Performance will be dependent upon a
number of factors, including the financial condition and profitability of the
Company and the Bank and market conditions for the Common Stock generally.
INVESTMENTS IN THE EMPLOYER STOCK FUND MAY INVOLVE CERTAIN RISKS IN
INVESTMENT IN COMMON STOCK OF THE COMPANY. FOR A DISCUSSION OF THESE RISK
FACTORS, SEE "RISK FACTORS" ON PAGES 23 THROUGH 32 IN THE PROSPECTUS.
BENEFITS UNDER THE PLAN
Vesting. A Participant, at all times, has a fully vested, nonforfeitable
interest in his Basic Contribution Account and the earnings thereon under the
Plan. A Participant vests in his Matching Contribution Account under the Plan
according to the following schedule:
<TABLE>
<CAPTION>
VESTED
PERIOD OF SERVICE PERCENTAGE
----------------- ----------
<S> <C>
less than 1 year................................................ 0%
1 year.......................................................... 20%
2 years......................................................... 40%
3 years......................................................... 60%
4 years......................................................... 80%
5 or more years................................................. 100%
</TABLE>
WITHDRAWALS AND DISTRIBUTIONS FROM THE PLAN
Withdrawals Prior to Termination of Employment. A Participant may make a
withdrawal from his Basic Contribution Account subject to the hardship
distribution rules under the Plan. These requirements ensure that Participants
have a true financial need before a withdrawal may be made.
A Participant may make a withdrawal from his Basic Contribution Account or
Rollover Contribution Account after he turns 59 1/2. A Participant may make a
withdrawal from contributions to his Basic Contribution Account made prior to
the 1992 amendment and restatement of the Plan or the vested portion of his
Matching Contribution Account at any time. However, such withdrawals may not
be made more often than four times during any Plan Year.
Distribution Upon Retirement, Disability or Termination of
Employment. Payment of benefits to a Participant who retires, incurs a
disability, or otherwise terminates employment generally shall be made in a
lump sum cash payment as soon as administratively feasible after such
termination of employment if the vested value of the Participant's Account is
$3,500 or less. If the vested portion of the Participant's Account balance is
greater than $3,500, the Participant may request a distribution (subject to
the minimum distribution rules) in a lump sum payment: (a) as soon as
administratively possible after termination, (b) as of any Valuation Date up
to 13 months after termination or (c) as of the date the Participant attains
normal retirement age. At the request of the Participant, the distribution may
include an in kind distribution of Common Stock of the Company equal to the
number of shares that can be purchased with the Participant's balance in the
Employer Stock Fund. Benefit
8
<PAGE>
payments ordinarily shall be made not later than 60 days following the end of
the Plan Year in which occurs the latest of the Participant's: (i) termination
of employment; (ii) the attainment of age 65 or (iii) 10th anniversary of
commencement of participation in the Plan; but in no event later than the
April 1 following the calendar year in which the Participant attains age 70
1/2. However, if the vested portion of the Participant's Account balances
exceeds $3,500, no distribution shall be made from the Plan prior to the
Participant's attaining age 65 unless the Participant elects to receive to an
earlier distribution.
Distribution upon Death. A Participant who dies prior to the benefit
commencement date for retirement, disability or termination of employment, and
who has a surviving spouse shall have his benefits paid to the surviving
spouse in a lump sum as soon as administratively possible following the date
of his death, unless the Participant elected prior to his death or the
beneficiary so elects within 90 days of the Participant's death, to receive
such distribution in a lump sum payment as of any Valuation Date which occurs
within one year of the Participant's death. With respect to an unmarried
Participant, and in the case of a married Participant with spousal consent to
the designation of another beneficiary, payment of benefits to the beneficiary
of a deceased Participant shall be made in the form of a lump-sum payment in
cash or in Common Stock in the same manner described above as to a Participant
with a surviving spouse.
Nonalienation of Benefits. Except with respect to federal income tax
withholding and as provided with respect to a qualified domestic relations
order (as defined in the Code), benefits payable under the Plan shall not be
subject in any manner to anticipation, alienation, sale, transfer, assignment,
pledge, encumbrance, charge, garnishment, execution, or levy of any kind,
either voluntary or involuntary, and any attempt to anticipate, alienate,
sell, transfer, assign, pledge, encumber, charge or otherwise dispose of any
rights to benefits payable under the Plan shall be void.
ADMINISTRATION OF THE PLAN
Trustee. The Trustee with respect to the Plan is the named fiduciary of the
Plan for purposes of Section 402 of ERISA.
The Trustee is appointed by the Board of Directors of the Bank to serve at
its pleasure. The current Trustee of the Plan is the RSI Retirement Trust.
However, an additional Trustee is being appointed to hold funds invested in
the Employer Stock Fund.
The Trustee receives, holds and invests the contributions to the Plan in
trust and distributes them to Participants and beneficiaries in accordance
with the terms of the Plan and the directions of the Plan Administrator. The
Trustee is responsible for investment of the assets of the Trust.
REPORTS TO PLAN PARTICIPANTS
The Administrator (as defined below) will furnish to each Participant a
statement at least quarterly showing (i) the balance in the Participant's
Account as of the end of that period, (ii) the amount of contributions
allocated to such participant's Account for that period, and (iii) the
adjustments to such participant's Account to reflect earnings or losses (if
any).
PLAN ADMINISTRATOR
Pursuant to the terms of the Plan, the Plan is administered by one or more
persons who are appointed by and who serve at the pleasure of the Bank (the
"Administrator"). Currently, the Administrator is Mr. Arthur Toohig, Senior
Vice President and Human Resources Officer of the Bank. The address and
telephone number of the Administrator is c/o The Roslyn Savings Bank, Human
Resources Officer, 1400 Old Northern Boulevard, Roslyn, New York 11576; (516)
621-6000. The Administrator is responsible for the administration of the Plan,
interpretation of the provisions of the Plan, prescribing procedures for
filing applications for benefits, preparation and distribution of information
explaining the Plan, maintenance of Plan records, books of account and all
other data necessary for the proper administration of the Plan, and
preparation and filing of all returns and reports relating to the Plan which
are required to be filed with the U.S. Department of Labor and the IRS, and
for all disclosures required to be made to Participants, Beneficiaries and
others under Sections 104 and 105 of ERISA.
9
<PAGE>
AMENDMENT AND TERMINATION
It is the intention of the Bank to continue the Plan indefinitely.
Nevertheless, the Bank may terminate the Plan at any time. If the Plan is
terminated in whole or in part, then regardless of other provisions in the
Plan, each employee affected by such termination shall have a fully vested
interest in his Accounts. The Bank reserves the right to make, from time to
time, any amendment or amendments to the Plan which do not cause any part of
the Trust to be used for, or diverted to, any purpose other than the exclusive
benefit of Participants or their beneficiaries; provided, however, that the
Bank may make any amendment it determines necessary or desirable, with or
without retroactive effect, to comply with ERISA.
MERGER, CONSOLIDATION OR TRANSFER
In the event of the merger or consolidation of the Plan with another plan,
or the transfer of the Trust assets to another plan, the Plan requires that
each Participant would (if either the Plan or the other plan then terminated)
receive a benefit immediately after the merger, consolidation or transfer
which is equal to or greater than the benefit he would have been entitled to
receive immediately before the merger, consolidation or transfer (if the Plan
had then terminated).
FEDERAL INCOME TAX CONSEQUENCES
The following is only a brief summary of certain federal income tax aspects
of the Plan which are of general application under the Code and is not
intended to be a complete or definitive description of the federal income tax
consequences of participating in or receiving distributions from the Plan. The
summary is necessarily general in nature and does not purport to be complete.
Moreover, statutory provisions are subject to change, as are their
interpretations, and their application may vary in individual circumstances.
Finally, the consequences under applicable state and local income tax laws may
not be the same as under the federal income tax laws.
PARTICIPANTS ARE URGED TO CONSULT THEIR TAX ADVISORS WITH RESPECT TO ANY
DISTRIBUTION FROM THE PLAN AND TRANSACTIONS INVOLVING THE PLAN.
The Plan will be submitted to the IRS in a timely manner for a determination
that it is qualified under Section 401(a) and 401(k) of the Code, and that the
related Trust is exempt from tax under Section 501(a) of the Code. A plan that
is "qualified" under these sections of the Code is afforded special tax
treatment which includes the following: (1) the sponsoring employer is allowed
an immediate tax deduction for the amount contributed to the Plan each year;
(2) participants pay no current income tax on amounts contributed by the
employer on their behalf; and (3) earnings of the plan are tax-exempt thereby
permitting the tax-free accumulation of income and gains on investments. The
Plan will be administered to comply in operation with the requirements of the
Code as of the applicable effective date of any change in the law. The Bank
expects to timely adopt any amendments to the Plan that may be necessary to
maintain the qualified status of the Plan under the Code. Following such an
amendment, the Bank will submit the Plan to the IRS for a determination that
the Plan, as amended, continues to qualify under Sections 401(a) and 501(a) of
the Code and that it continues to satisfy the requirements for a qualified
cash or deferred arrangement under Section 401(k) of the Code. Should the Plan
receive from the IRS an adverse determination letter regarding its tax exempt
status, all participants would generally recognize income equal to their
vested interest in the Plan, the participants would not be permitted to
transfer amounts distributed from the Plan to an IRA or to another qualified
retirement plan, and the Bank may be denied certain deductions taken with
respect to the Plan.
Lump Sum Distribution. A distribution from the Plan to a Participant or the
beneficiary of a Participant will qualify as a Lump Sum Distribution if it is
made: (i) within one taxable year of the Participant or beneficiary; (ii) on
account of the Participant's death, disability or separation from service, or
after the Participant attains age 59 1/2; and (iii) consists of the balance to
the credit of the Participant under this Plan and all other profit sharing
plans, if any, maintained by the Bank. The portion of any Lump Sum
Distribution that is required to be included in the Participant's or
beneficiary's taxable income for federal income tax purposes (the "Total
Taxable
10
<PAGE>
Amount") consists of the entire amount of such Lump Sum Distribution less the
amount of after-tax contributions, if any, made by the Participant to any
other profit sharing plans maintained by the Bank which is included in such
distribution.
Averaging Rules. The portion of the Total Taxable Amount of a Lump Sum
Distribution that is attributable to participation after 1973 in this Plan or
in any other profit-sharing plan maintained by the Bank (the "Ordinary Income
Portion") will be taxable generally as ordinary income for federal income tax
purposes. However, a Participant who has completed at least five years of
participation in this Plan before the taxable year in which the distribution
is made, or a beneficiary who receives a Lump Sum Distribution on account of
the Participant's death (regardless of the period of the Participant's
participation in this Plan or any other profit- sharing plan maintained by the
Employers), may elect to have the Ordinary Income Portion of such Lump Sum
Distribution taxed according to a special averaging rule ("five-year
averaging"). The election of the special averaging rules may apply only to one
Lump Sum Distribution received by the Participant or beneficiary, provided
such amount is received on or after the Participant turns 59 1/2 and the
recipient elects to have any other Lump Sum Distribution from a qualified plan
received in the same taxable year taxed under the special averaging rule.
Under a special grandfather rule, individuals who turned 50 by 1986 may elect
to have their Lump Sum Distribution taxed under either the five-year averaging
rule or under the prior law ten-year averaging rule. Such individuals also may
elect to have that portion of the Lump Sum Distribution attributable to the
participant's pre-1974 participation in the Plan taxed at a flat 20% rate as
gain from the sale of a capital asset.
Common Stock Included in Lump Sum Distribution. If a Lump Sum Distribution
includes Common Stock, the distribution generally will be taxed in the manner
described above, except that the total taxable amount will be reduced by the
amount of any net unrealized appreciation with respect to such Common Stock,
i.e., the excess of the value of the Common Stock at the time of the
distribution over the cost or other basis to the Trust. The tax basis of such
Common Stock to the Participant or beneficiary for purposes of computing gain
or loss on its subsequent sale will be the value of the Common Stock at the
time of distribution less the amount of net unrealized appreciation. Any gain
on a subsequent sale or other taxable disposition of such Common Stock, to the
extent of the amount of net unrealized appreciation at the time of
distribution, will be considered long-term capital gain regardless of the
holding period of such Common Stock. Any gain on a subsequent sale or other
taxable disposition of the Common Stock in excess of the amount of net
unrealized appreciation at the time of distribution will be considered either
short-term capital gain or long-term capital gain depending upon the length of
the holding period of the Common Stock. The recipient of a distribution may
elect to include the amount of any net unrealized appreciation in the Total
Taxable Amount of such distribution to the extent allowed by the regulations
to be issued by the IRS.
Distributions: Rollovers and Direct Transfers to Another Qualified Plan or
to an IRA. Pursuant to a change in the law, effective January 1, 1993,
virtually all distributions from the Plan may be rolled over to another
qualified plan or to an Individual Retirement Account ("IRA") without regard
to whether the distribution is a Lump Sum Distribution or a Partial
Distribution. Effective January 1, 1993, Participants have the right to elect
to have the Trustee transfer all or any portion of an "eligible rollover
distribution" directly to another plan qualified under Section 401(a) of the
Code or to an IRA. If the Participant does not elect to have an "eligible
rollover distribution" transferred directly to another qualified plan or to an
IRA, the distribution will be subject to a mandatory federal withholding tax
equal to 20% of the taxable distribution. An "eligible rollover distribution"
means any amount distributed from the Plan except: (1) a distribution that is
(a) one of a series of substantially equal periodic payments (not less
frequently than annually) made for the life (or life expectancy) of the
Participant or the joint lives (or life expectancies) of the Participant and
his or her designated beneficiary, or (b) for a specified period of ten years
or more; (2) any amount that is required to be distributed under the minimum
distribution rules; and (3) any other distributions excepted under applicable
federal law. The tax law change described above did not modify the special tax
treatment of Lump Sum Distributions, that are not rolled over or transferred
i.e., forward averaging, capital gains tax treatment and the nonrecognition of
net unrealized appreciation, discussed earlier.
11
<PAGE>
ERISA AND OTHER QUALIFICATIONS
As noted above, the Plan is subject to certain provisions of ERISA and will
be submitted to the IRS for a determination that it is qualified under Section
401(a) of the Code.
THE FOREGOING IS ONLY A BRIEF SUMMARY OF CERTAIN FEDERAL INCOME TAX ASPECTS
OF THE PLAN WHICH ARE OF GENERAL APPLICATION UNDER THE CODE AND IS NOT
INTENDED TO BE A COMPLETE OR DEFINITIVE DESCRIPTION OF THE FEDERAL INCOME TAX
CONSEQUENCES OF PARTICIPATING IN OR RECEIVING DISTRIBUTIONS FROM THE PLAN.
ACCORDINGLY, EACH PARTICIPANT IS URGED TO CONSULT A TAX ADVISOR CONCERNING THE
FEDERAL, STATE AND LOCAL TAX CONSEQUENCES OF PARTICIPATING IN AND RECEIVING
DISTRIBUTIONS FROM THE PLAN.
RESTRICTIONS ON RESALE
Any person receiving a distribution of shares of Common Stock under the Plan
who is an "affiliate" of the Company as the term "affiliate" is used in Rules
144 and 405 under the Securities Act of 1933, as amended (the "Securities
Act") (e.g., directors, officers and substantial shareholders of the Company)
may reoffer or resell such shares only pursuant to a registration statement
filed under the Securities Act assuming the availability thereof, pursuant to
Rule 144 or some other exemption of the registration requirements of the
Securities Act. Any person who may be an "affiliate" of the Company may wish
to consult with counsel before transferring any Common Stock owned by him. In
addition, Participants are advised to consult with counsel as to the
applicability of Section 16 of the 1934 Act which may restrict the sale of
Common Stock where acquired under the Plan, or other sales of Common Stock.
Persons who are not deemed to be "affiliates" of the Company at the time of
resale will be free to resell any shares of Common Stock distributed to them
under the Plan, either publicly or privately, without regard to the
Registration and Prospectus delivery requirements of the Securities Act or
compliance with the restrictions and conditions contained in the exemptive
rules thereunder. An "affiliate" of the Company is someone who directly or
indirectly, through one or more intermediaries, controls, is controlled by, or
is under common control, with the Company. Normally, a director, principal
officer or major shareholder of a corporation may be deemed to be an
"affiliate" of that corporation. A person who may be deemed an "affiliate" of
the Company at the time of a proposed resale will be permitted to make public
resales of the Common Stock only pursuant to a "reoffer" Prospectus or in
accordance with the restrictions and conditions contained in Rule 144 under
the Securities Act or some other exemption from registration, and will not be
permitted to use this Prospectus in connection with any such resale. In
general, the amount of the Common Stock which any such affiliate may publicly
resell pursuant to Rule 144 in any three-month period may not exceed the
greater of one percent of the Common Stock then outstanding or the average
weekly trading volume reported on the National Association of Securities
Dealers Automated Quotation System during the four calendar weeks prior to the
sale. Such sales may be made only through brokers without solicitation and
only at a time when the Company is current in filing the reports required of
it under the 1934 Act.
SEC REPORTING AND SHORT-SWING PROFIT LIABILITY
Section 16 of the 1934 Act imposes reporting and liability requirements on
executive officers, directors and persons beneficially owning more than ten
percent of public companies such as the Company. Section 16(a) of the 1934 Act
requires the filing of reports of beneficial ownership. Within ten days of
becoming a person subject to the reporting requirements of Section 16(a), a
Form 3 reporting initial beneficial ownership must be filed with the
Securities and Exchange Commission. Certain changes in beneficial ownership,
such as purchases, sales and gifts must be reported periodically, either on a
Form 4 within ten days after the end of the month in which a change occurs, or
annually on a Form 5 within 45 days after the close of the Company's fiscal
year. Certain discretionary transactions in and beneficial ownership of the
Common Stock through the Employer Stock Fund of the Plan by executive
officers, directors and persons beneficially owning more than ten percent of
Common Stock of the Company is required to be reported to the SEC by such
individuals. At June 28, 1996, 13.39% of the Plan assets were allocated to
executive officers.
12
<PAGE>
In addition to the reporting requirements described above, Section 16(b) of
the 1934 Act provides for the recovery by the Company of profits realized by
any executive officer, director or any person beneficially owning more than
ten percent of the Company's Common Stock ("Section 16(b) Persons") resulting
from non-exempt purchases and sales of the Company's Common Stock within any
six-month period.
The SEC has adopted rules that provide an exemption from the profit recovery
provisions of Section 16(b) for all transactions in employer securities within
a tax-qualified employee benefit plan, such as the Plan, provided certain
requirements are met. These requirements generally involve restrictions upon
the timing of discretionary transactions in employer securities for the
accounts of Section 16(b) Persons.
Except for distributions of Common Stock due to death, disability,
retirement, termination of employment or under a qualified domestic relations
order, Section 16(b) Persons are required to hold shares of Common Stock
distributed from the Plan for six months following such distribution.
EXPERTS
The financial statements and schedule of The Roslyn Savings Bank 401(k)
Savings Plan as of December 31, 1994 and 1993 and for the years then ended
have been included herein in reliance upon the report of KPMG Peat Marwick
LLP, independent certified public accountants, appearing elsewhere herein, and
upon the authority of said firm as experts in accounting and auditing.
LEGAL OPINIONS
The validity of the issuance of the Common Stock will be passed upon by
Muldoon, Murphy & Faucette, Washington, D.C., which firm acted as special
counsel for the Bank and the Company in connection with the Bank's Conversion
from a mutual savings bank to a stock based organization and the concurrent
formation of the Company.
13
<PAGE>
THE ROSLYN SAVINGS BANK
401(K) SAVINGS PLAN IN RSI RETIREMENT TRUST
TRANSFER BALANCES BETWEEN INVESTMENT ACCOUNTS
Print Name (Last, First, Middle Initial): ___ Social Security Number: _______
1. INSTRUCTIONS. In connection with the proposed Conversion of The Roslyn
Savings Bank from a mutual savings bank to a stock based organization (the
"Conversion"), The Roslyn Savings Bank 401(k) Savings Plan in RSI Retirement
Trust ("Plan") has been amended to permit participants to direct their current
account balances for their Basic Contribution Account, Company Contribution
Account, Rollover Account and Special Contribution Account into a new fund:
the Employer Stock Fund. The percentage of a participant's account transferred
at the direction of the participant into the Employer Stock Fund will be used
to purchase shares of common stock of Roslyn Bancorp, Inc. (the "Common
Stock").
To direct a transfer of all or a part of the funds credited to your accounts
to the Employer Stock Fund, you should complete and file this form with the
Human Resources Division of The Roslyn Savings Bank, no later than 5:00 p.m.,
November 22, 1996. A REPRESENTATIVE FOR THE PLAN ADMINISTRATOR WILL RETAIN THE
ORIGINAL COPY OF THIS FORM AND RETURN A COPY TO YOU. If you need assistance in
completing this form, please contact Mr. Arthur Toohig at (516) 621-6000,
extension 1402. If you do not complete and return this form to the Plan
Administrator by 5:00 p.m., November 22, 1996, the funds credited to your
accounts under the Plan will continue to be invested in accordance with your
prior investment direction, or in accordance with the terms of the Plan if no
investment direction has been provided.
Please be advised that there is a possibility that the Conversion may be
oversubscribed, i.e. the orders for Common Stock could exceed the amount of
Common Stock being offered. Should this event occur, the Common Stock would be
apportioned and the full amount of Common Stock requested may not be available
in the Conversion. In this event, the Plan trustee will apply the unused funds
for investment in Common Stock to be purchased by the trustee through open
market purchases and not in the Conversion.
2. INVESTMENT DIRECTIONS. I hereby authorize the Plan Administrator to
direct the Trustee to sell the units currently credited to my Basic
Contribution Account, Company Contribution Account, Rollover Account and
Special Contribution Account and to purchase units in the Employer Stock Fund.
Transfers of units from existing investment accounts must be in multiples of
5% (i.e. 5,15,35,100). Purchases of units in the Employer Stock Fund will
always be 100%:
<TABLE>
<CAPTION>
SELL UNITS FROM PURCHASE UNITS IN EMPLOYER STOCK FUND
- ----------------------------------------------------------------------------------------
<S> <C>
SELL % OF A--CORE EQUITY %
- ----------------------------------------------------------------------------------------
SELL % OF B--EMERGING GROWTH EQUITY %
- ----------------------------------------------------------------------------------------
SELL % OF C--VALUE EQUITY %
- ----------------------------------------------------------------------------------------
SELL % OF D--ACTIVELY MANAGED BOND %
- ----------------------------------------------------------------------------------------
SELL % OF E--INTERMEDIATE TERM BOND %
- ----------------------------------------------------------------------------------------
SELL % OF F--SHORT TERM %
</TABLE>
3. ACKNOWLEDGEMENT OF PARTICIPANT. I understand that this Investment Form
shall be subject to all of the terms and conditions of the Plan. I acknowledge
that I have received a copy of the Prospectus and the Prospectus Supplement.
- ----------------------------------- -----------
Participant's Signature Date
Did you have an account with The Roslyn Savings Bank on April 30,
1995?[_] Yes [_] No
Did you have an account with The Roslyn Savings Bank on September 30,
1996?[_] Yes [_] No
FOR ADMINISTRATOR'S USE ONLY
This change will become effective on
-----------------------------------
-----------------------------------
Plan Representative Date Received
THE PARTICIPATION INTERESTS REPRESENTED BY COMMON STOCK OFFERED HEREBY ARE NOT
DEPOSIT ACCOUNTS AND ARE NOT INSURED OR GUARANTEED BY THE BANK INSURANCE FUND
OR THE SAVINGS ASSOCIATION INSURANCE FUND OF THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR BY ANY OTHER GOVERNMENT AGENCY AND ARE NOT GUARANTEED BY THE
COMPANY OR BANK. THE COMMON STOCK IS SUBJECT TO INVESTMENT RISK, INCLUDING THE
POSSIBLE LOSS OF INVESTMENT.
14
<PAGE>
THE ROSLYN SAVINGS BANK
401(K) SAVINGS PLAN
FINANCIAL STATEMENTS AND SCHEDULES
DECEMBER 31, 1994 AND 1993
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
F-1
<PAGE>
THE ROSLYN SAVINGS BANK
401(K) SAVINGS PLAN
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report.......................................... F-3
Financial Statements:
Statements of Assets Available for Distribution as of December 31,
1994 and 1993...................................................... F-4
Statements of Changes in Assets Available for Distribution for the
years ended
December 31, 1994 and 1993......................................... F-5
Notes to Financial Statements......................................... F-6-F-13
Item 27a--Schedule of Assets Held for Investment Purposes............. F-14
Item 27d--Schedule of Reportable Transactions......................... F-15
</TABLE>
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Trustees The Roslyn Savings Bank:
We have audited the accompanying statements of assets available for
distribution of The Roslyn Savings Bank 401(k) Savings Plan as of December 31,
1994 and 1993, and the related statements of changes in assets available for
distribution for the years then ended. These financial statements are the
responsibility of the Plan's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the assets available for distribution of The Roslyn
Savings Bank 401(k) Savings Plan as of December 31, 1994 and 1993, and the
changes in assets available for distribution for the years then ended, in
conformity with generally accepted accounting principles.
Our audits were performed for the purpose of forming an opinion on the basic
financial statements of The Roslyn Savings Bank 401(k) Savings Plan taken as a
whole. The supplemental schedules of assets held for investment purposes and
reportable transactions are presented for the purpose of additional analysis
and are not a required part of the basic financial statements but are
supplementary information required by the Department of Labor's Rules and
Regulations for Reporting and Disclosure under the Employee Retirement Income
Security Act of 1974. The supplemental schedules have been subjected to the
auditing procedures applied in the audits of the basic financial statements
and, in our opinion, are fairly stated in all material respects in relation to
the basic financial statements taken as a whole.
/s/ KPMG Peat Marwick LLP
September 15, 1995
F-3
<PAGE>
THE ROSLYN SAVINGS BANK
401(K) SAVINGS PLAN
STATEMENTS OF ASSETS AVAILABLE FOR DISTRIBUTION
DECEMBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C>
Cash.................................................... $ -- $ 1,422
Investments managed by the RSI Retirement Trust, at es-
timated fair value:
Fixed-income funds:
Short-term investments fund......................... 1,537,920 1,926,662
Intermediate-term bond fund......................... 316,013 343,205
Actively managed bond fund.......................... 647,119 734,603
---------- ----------
Total fixed-income funds.......................... 2,501,052 3,004,470
---------- ----------
Equity funds:
Core equity fund.................................... 1,058,702 1,050,064
Emerging growth equity fund......................... 299,795 236,106
Value equity fund................................... 248,029 190,318
---------- ----------
Total equity funds................................ 1,606,526 1,476,488
---------- ----------
Employer contributions receivable....................... -- 7,604
Employee contributions receivable....................... -- 14,259
Participant loans receivable............................ 370,331 322,440
---------- ----------
Assets available for distribution....................... $4,477,909 $4,826,683
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
THE ROSLYN SAVINGS BANK
401(K) SAVINGS PLAN
STATEMENTS OF CHANGES IN ASSETS AVAILABLE FOR DISTRIBUTION
YEARS ENDED DECEMBER 31, 1994 AND 1993
<TABLE>
<CAPTION>
1994 1993
----------- ----------
<S> <C> <C>
Additions to assets:
Contributions:
Employer.......................................... $ 220,386 $ 206,842
Employee.......................................... 428,897 381,539
----------- ----------
Total contributions............................. 649,283 588,381
----------- ----------
Investment income:
Net investment income on fixed-income and equity
funds managed by The RSI Retirement Trust.......... 28,987 279,304
Interest on participant loans....................... 16,295 17,674
----------- ----------
Total investment income......................... 45,282 296,978
----------- ----------
Total additions................................. 694,565 885,359
----------- ----------
Distributions to participants and beneficiaries....... (1,043,339) (311,606)
----------- ----------
Excess (deficiency) of contributions and
investment income over distributions........... (348,774) 573,753
Assets available for distribution:
Beginning of year................................... 4,826,683 4,252,930
----------- ----------
End of year......................................... $ 4,477,909 $4,826,683
=========== ==========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
THE ROSLYN SAVINGS BANK
401(K) SAVINGS PLAN
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1993
(1) DESCRIPTION OF PLAN
The following brief description of The Roslyn Savings Bank 401(k) Savings
Plan (the Plan) is provided for general information purposes only.
Participants should refer to the Plan agreement for more complete information:
(a) General
The Roslyn Savings Bank (Bank) established the Savings Incentive Plan (Prior
Plan), effective as of January 1, 1979, for the benefit of its eligible
employees. Effective April 1, 1985, the Bank became a Participating Employer
in RSI Retirement Trust (formerly The Retirement System for Savings
Institutions) and amended and restated the Prior Plan in its entirety so as to
replace and supersede the same by a plan of participation in the System to be
known as The Roslyn Savings Bank 401(k) Savings Plan (Plan). The Plan is
effectuated through the trust established by the Bank by its adoption of the
Agreement and Declaration of Trust of the Retirement System for Savings
Institutions (now known as The RSI Retirement Trust).
The Plan is a defined contribution and thrift savings plan. All regular,
full-time employees are eligible for voluntary participation after one or more
years of continuous service. Effective June 12, 1992, Roslyn Savings Bank
purchased the East Northport Branch of Riverhead Savings Bank (Riverhead
Branch). With respect to employees of the Riverhead Branch, who became
employees of Roslyn Savings Bank, employment with Riverhead Savings Bank was
deemed employment with the Bank for purposes of determining eligibility to
participate in the Plan.
The Plan provides growth in savings through the Bank's contributions and
income from its investments. It is subject to the provisions of the Employee
Retirement Income Security Act of 1974 as amended (ERISA).
(b) Contributions to the Plan
The Plan allows the participants to contribute a specified percentage of
their base salary. The maximum percentage allowed is 12% and the minimum is
1%. The Bank makes bi-weekly contributions equal to 50% of an employee's
contribution to the Plan, up to a maximum of 3%, during the first 60 months in
which an employee contributes to the Plan. Thereafter, the Bank contributes
100% of the employee's contribution, up to a maximum of 6%.
Under the provisions of the Plan, participants are fully vested to the
extent of their contributions, together with any related investment earnings
thereon. Participants obtain a vested interest in Bank contributions, together
with any related investment earnings thereon under the following conditions:
100% in the event of:
(i) death prior to termination of employment
(ii) retirement
(iii) termination of employment due to permanent disability
(iv) completion of 5 years of service
(v) termination or partial termination of the Plan (if participant is
affected by such partial termination) or discontinuance of contributions to
the Plan;
F-6
<PAGE>
THE ROSLYN SAVINGS BANK
401(K) SAVINGS PLAN
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Otherwise:
(i) 20% upon entrance into the Plan
(ii) 40% after completion of 12 months
(iii) 60% after completion of 24 months
(iv) 80% after completion of 36 months
(v) 100% after completion of 48 months.
Forfeited balances of participants' nonvested accounts are used to reduce
future Bank contributions.
Effective January 1, 1994, the Plan was amended so as to grant vesting
credit from date of employment and to include all years of eligible service
(including any year an employee was eligible but elected not to participate).
(c) Plan Distributions
Under the provisions of the Plan, withdrawals of funds other than at
retirement, death, disability, or other termination will be permitted subject
to certain limitations. Distributions to participants are recorded when paid.
The Plan provides that withdrawals may be made twice during any Plan year
and that such payments do not result in suspension of contributions to the
Plan. The Plan was amended, effective September 1, 1992, such that each
participant may make withdrawals not more than four times during any Plan
year. Participants may withdraw their own contributions made prior to April 1,
1985 and any or all Bank contributions provided the participant is 100%
vested. Participant contributions made after April 1, 1985 may be withdrawn
under the non-hardship withdrawal provisions provided the individual is 59
1/2. If the individual is under 59 1/2, withdrawals may be made under the
hardship provisions.
Participants under age 59 1/2 may only withdraw their own contributions made
after April 1, 1985 provided they have withdrawn the maximum amount available
under the non-hardship provision and meet the hardship withdrawal
requirements. The reasons for determining financial hardship must be described
on a written notice to the Employee Benefits Committee (the Committee), which
must be submitted 15 days prior to the date the payment is to be made. The
Committee must approve the request and amount of payment. Hardship shall
include, without limitations: serious illness of a member of your immediate
family; or your educational needs or the needs of your spouse and/or children;
or the purchase or construction of a principal residence; or to prevent the
eviction of the participant from their principal residence or foreclosure of
the participant's mortgage on their principal residence; or any similar
circumstances, in the discretion of the Committee. The Plan was amended,
effective September 1, 1992, such that participants may not apply for a
hardship withdrawal more often than four times during any plan year.
Bank contributions may only be withdrawn provided the participant is 100%
vested in such contributions.
The Plan was amended September 1, 1993 to conform with the following:
1. Unemployment Compensation Amendments of 1992 effective January 1,
1993.
As per regulations issued under this Act, the Plan was amended allowing
Plan participants to transfer directly all or a portion of their
distributions to an IRA account or another qualified plan with a new
employer.
2. Technical Liberalizations of Hardship Distributions under Final
Section 401(k) regulations.
F-7
<PAGE>
THE ROSLYN SAVINGS BANK
401(K) SAVINGS PLAN
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The plan now allows participants who request hardship distributions to:
a. gross up their distributions to account for income and excise taxes;
b. receive a distribution to cover educational costs for 12 months
instead of only the current semester; and
c. include anticipated medical expenses in the hardship distribution.
Upon a participant's death, the value of his/her account(s) will be
distributed to the surviving beneficiary, or, if there is none, then to the
executor or administrator of his estate, or, if no such executor or
administrator is appointed and qualifies within a time which the Committee
shall, in their sole and absolute discretion, deem to be reasonable, then to
such one or more of the spouse, descendants, and blood relatives of the
deceased participant as the Committee, in their sole and absolute discretion,
may select.
Under the provisions of the Plan, distributions due to termination of
employment or termination of the Plan are to be paid in a lump sum. For
distributions due to retirement, death or disability, the payment can be in a
lump sum or in annual installments over a period not exceeding fifteen years;
this method of payment is at the discretion of the participant or beneficiary.
The Plan was amended, effective September 1, 1992, to allow this optional form
of distribution only for employees who became participants in the Plan prior
to September 1, 1992.
(d) Participant Loans
Subject to the approval of the Committee, a participant may borrow from his
or her accounts an amount up to the lesser of (i) fifty percent (50%) of his
vested interest in the net value of his or her basic contribution account,
participant contribution account and bank contribution account, or (ii)
$50,000 reduced by the highest outstanding loan balance during the preceding
twelve (12) months. The minimum loan permitted shall be $500. All loans shall
be for a fixed term of not more than five (5) years, except that a loan which
shall be used for the purchase or construction of the principal residence of
the participant or that of a member of his immediate family, may, in the
discretion of the Committee, be made for a term not exceeding fifteen (15)
years. Interest on a loan will be charged at the three (3) year treasury rate
in effect at the time of the loan, adjusted to the nearest quarter ( 1/4) of
one percent (1%).
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles. The significant accounting policies
followed by the Plan are as follows:
(a) Basis of Presentation
The accompanying financial statements have been prepared on an accrual basis
and present the assets available for distribution and changes in those assets
of the Plan.
(b) Trust Funds Managed by The RSI Retirement Trust
Under the terms of a trust agreement between The RSI Retirement Trust (RSI)
and the Bank, the Bank participates in a trust fund managed by RSI. All assets
of the Plan are held in trust at RSI as Trustee for the exclusive benefit of
the participants and their beneficiaries under the Plan. The Plan is
administered by the Bank and, accordingly, the Bank has the power to remove
and replace the Trustee at any time. The RSI consists of two groups of
investment funds--the fixed-income funds, which are invested in fixed income
investments with limited equity holdings, and the equity funds, which permit a
higher percentage of funds to be invested in common stocks. As of December 31,
1994 and 1993, there were eight investment funds available of which only six
are utilized by the Plan. The funds currently consist of (i) three fixed-
income funds: (a) Short-Term
F-8
<PAGE>
THE ROSLYN SAVINGS BANK
401(K) SAVINGS PLAN
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Investments Fund, (b) Intermediate-Term Bond Fund, and (c) Actively Managed
Bond Fund, and (ii) three equity funds: (a) Core Equity Fund, (b) Value Equity
Fund, and (c) Emerging Growth Equity Fund. The Plan has elected to permit
investments in certain of the fixed-income funds and the equity funds for
which RSI has sole discretionary authority concerning purchases and sales of
investments therein.
The following is a brief description of the eight investment funds
available:
Short-Term Investments Fund--portfolio is invested in high quality money
market instruments maturing in one year or less, with an average maturity of
the portfolio not to exceed twelve months.
Intermediate-Term Bond Fund--diversified, high quality, fixed income
portfolio with all issues maturing within ten years.
Actively Managed Bond Fund--portfolio's maturity, quality and sector
distributions shifted based on management's interest rate and bond market
forecasts.
Dedicated Bond Fund--invested in a diversified portfolio of fixed- income
securities with emphasis on predictable cash flows.
Core Equity Fund--invested in a broadly diversified group of financially
sound, high quality, large capitalization companies.
Emerging Growth Equity Fund--invested primarily in smaller companies with
higher than average earnings and dividend growth potential.
Value Equity Fund--invested in financially sound companies which offer
prospects for significant earnings or dividend growth.
International Equity Fund--invested primarily in stocks of companies that
are headquartered in foreign countries with concentration in the larger equity
markets of Europe, Australia and the Far East.
(c) Investments in Trust Funds and Investment Income
The Plan's investments in the funds of RSI consist of units of beneficial
interest in the funds in which the Plan participates (pooled investments). The
net investment income on trust funds managed by RSI recognized by the Plan
includes current earnings from investments, net gains or losses realized from
the sale of investments and the net change in the unrealized appreciation or
depreciation in the Plan's proportionate share of the pooled investments.
All investments are reported at fair value, as determined by the unit value
reported by RSI which is based on the value of the underlying investments at
the balance sheet date. Fair value is measured by the market price, if there
is an active market for the investment, or at an estimated fair value if a
price is not available. Investments in cash equivalents are stated at cost
which approximates fair value. Mortgages, if any, are valued on the basis of
the future principal and interest payments discounted at prevailing interest
rates for similar investments. Interest income is recorded on an accrual
method and dividend income is recorded on the ex-dividend date.
(d) Plan Investment Accounts
Participants' contributions may be included in the Plan investment accounts
listed below:
Account A--Core Equity Fund
Account B-- 1/2 Emerging Growth Equity Fund, 1/2 Value Equity Fund
Account C-- 1/3 Intermediate-Term Bond Fund, 2/3 Actively Managed Bond Fund
Account D--Short-Term Investments Fund
F-9
<PAGE>
THE ROSLYN SAVINGS BANK
401(K) SAVINGS PLAN
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Participants must direct the manner in which all contributions made on their
behalf are invested in the Plan investment accounts. Thus, they may direct the
investment of proportionate parts of those contributions in any of the
accounts described above in multiples of 5%. Participants may change their
election concerning choice of account(s) for investment of contributions in
accordance with procedures described in the Plan. The Plan was amended,
effective September 1, 1993, to allow participants to change their election of
investment direction and to transfer account balances between investment
options at least once each calendar quarter, up to a maximum of six times a
Plan year.
On May 23, 1995, RSI Trust unbundled the investment fund Accounts B and C
previously offered to the Roslyn Savings Bank 401(k) participants. (Account B
and Account C were each comprised of two individual investment accounts).
Participants' contributions will be included in the Plan investment accounts
as listed below subsequent to May 23, 1995:
Account A--Core Equity Fund
Account B--Emerging Growth Equity Fund
Account C--Value Equity Fund
Account D--Actively Managed Bond Fund
Account E--Intermediate-Term Bond Fund
Account F--Short-Term Investments Fund
(e) Administrative Expenses
The Bank bears the costs of administering the Plan.
(f) Benefits
Benefits to participants or their beneficiaries are recorded when paid.
(3) INVESTMENTS IN TRUST FUNDS MANAGED BY THE RSI RETIREMENT TRUST
The total number of units and the net asset value per unit at December 31,
1994 were as follows:
<TABLE>
<CAPTION>
UNIT CURRENT
UNITS VALUE VALUE
------ ------ ----------
<S> <C> <C> <C>
Short-Term Investments Fund........................ 82,862 $18.56 $1,537,920
Intermediate-Term Bond Fund........................ 12,491 25.30 316,013
Actively Managed Bond Fund......................... 24,737 26.16 647,119
Core Equity Fund................................... 29,865 35.45 1,058,702
Emerging Growth Equity Fund........................ 8,050 37.24 299,795
Value Equity Fund.................................. 9,540 26.00 248,029
------ ----------
$4,107,578
==========
</TABLE>
The Plan's investment in each of the following funds represent 5% or more of
the assets available for benefits at December 31, 1994; (a) Short- Term
Investments Fund, (b) Intermediate-Term Bond Fund, (c) Actively Managed Bond
Fund, (d) Core Equity Fund, (e) Emerging Growth Equity Fund and (f) Value
Equity Fund.
F-10
<PAGE>
THE ROSLYN SAVINGS BANK
401(K) SAVINGS PLAN
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The total number of units and the net asset value per unit at December 31,
1993 were as follows:
<TABLE>
<CAPTION>
UNIT CURRENT
UNITS VALUE VALUE
------- ------ ----------
<S> <C> <C> <C>
Short-Term Investments Fund....................... 107,335 $17.95 $1,926,662
Intermediate-Term Bond Fund....................... 13,221 25.96 343,205
Actively Managed Bond Fund........................ 26,899 27.31 734,603
Core Equity Fund.................................. 30,010 34.99 1,050,064
Emerging Growth Equity Fund....................... 6,564 35.97 236,106
Value Equity Fund................................. 7,236 26.30 190,318
------ ----------
$4,480,958
==========
</TABLE>
The Plan's investment in each of the following funds represent 5% or more of
the assets available for benefits at December 31, 1993; (a) Short-Term
Investments Fund, (b) Intermediate-Term Bond Fund, (c) Actively Managed Bond
Fund and (d) Core Equity Fund.
(4) FEDERAL INCOME TAXES
A determination letter dated May 24, 1994 had been obtained from the
Internal Revenue Service to the effect that the Prior Plan and all amendments
to the Prior Plan made before July 13, 1992 qualified for tax exempt status
for Federal income tax purposes. In the opinion of the Plan administrator, the
Plan and its underlying trust have operated within terms of the Plan and
remain qualified under applicable provisions of the Internal Revenue Code.
(5) PARTICIPATION IN PLAN INVESTMENT ACCOUNTS
The assets of the Plan are comprised of assets in four investment accounts,
which are managed by RSI.
The assets available for distribution for Accounts A, B, C and D as of
December 31, 1994 and 1993 and the changes in those assets for the years then
ended are as follows:
<TABLE>
<CAPTION>
1994
-----------------------------------------------------------
ACCOUNT ACCOUNT ACCOUNT ACCOUNT
A B C D OTHER TOTAL
---------- -------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Fixed-income funds:
Short-term investments
fund................. $ -- $ -- $ -- $1,537,920 $ -- $1,537,920
Intermediate-term bond
fund................. -- -- 316,013 -- -- 316,013
Actively managed bond
fund................. -- -- 647,119 -- -- 647,119
---------- -------- -------- ---------- -------- ----------
-- -- 963,132 1,537,920 -- 2,501,052
---------- -------- -------- ---------- -------- ----------
Equity funds:
Core equity fund...... 1,058,702 -- -- -- -- 1,058,702
Emerging equity growth
fund................. -- 299,795 -- -- -- 299,795
Value equity fund..... -- 248,029 -- -- -- 248,029
---------- -------- -------- ---------- -------- ----------
1,058,702 547,824 -- -- -- 1,606,526
---------- -------- -------- ---------- -------- ----------
Participant loans re-
ceivable............... -- -- -- -- 370,331 370,331
---------- -------- -------- ---------- -------- ----------
Assets available for
distribution......... $1,058,702 $547,824 $963,132 $1,537,920 $370,331 $4,477,909
========== ======== ======== ========== ======== ==========
</TABLE>
F-11
<PAGE>
THE ROSLYN SAVINGS BANK
401(K) SAVINGS PLAN
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
1993
---------------------------------------------------------------------
ACCOUNT ACCOUNT ACCOUNT ACCOUNT
CASH A B C D OTHER TOTAL
------- ---------- -------- ---------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Cash.................... $ 1,422 $ -- $ -- $ -- $ -- $ -- $ 1,422
Fixed-income funds:
Short-term investments
fund................. -- -- -- -- 1,926,662 -- 1,926,662
Intermediate-term bond
fund................. -- -- -- 343,205 -- -- 343,205
Actively managed bond
fund................. -- -- -- 734,603 -- -- 734,603
------- ---------- -------- ---------- ---------- -------- ----------
1,422 -- -- 1,077,808 1,926,662 -- 3,004,470
------- ---------- -------- ---------- ---------- -------- ----------
Equity funds:
Core equity fund...... -- 1,050,064 -- -- -- -- 1,050,064
Emerging growth fund.. -- -- 236,106 -- -- -- 236,106
Value equity fund..... -- -- 190,318 -- -- -- 190,318
------- ---------- -------- ---------- ---------- -------- ----------
-- 1,050,064 426,424 -- -- -- 1,476,488
------- ---------- -------- ---------- ---------- -------- ----------
Employer contributions
receivable............. -- -- -- -- -- 7,604 7,604
Employee contributions
receivable............. -- -- -- -- -- 14,259 14,259
------- ---------- -------- ---------- ---------- -------- ----------
-- -- -- -- -- 21,863 21,863
------- ---------- -------- ---------- ---------- -------- ----------
Participant loans re-
ceivable............... -- -- -- -- -- 322,440 322,440
------- ---------- -------- ---------- ---------- -------- ----------
Assets available for
distribution......... $ 1,422 $1,050,064 $426,424 $1,077,808 $1,926,662 $344,303 $4,826,683
======= ========== ======== ========== ========== ======== ==========
</TABLE>
F-12
<PAGE>
THE ROSLYN SAVINGS BANK
401(K) SAVINGS PLAN
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
PARTICIPANT
ACCOUNT ACCOUNT ACCOUNT ACCOUNT LOANS
CASH A B C D OTHER RECEIVABLE TOTAL
------- ---------- -------- ---------- ---------- ------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Year ended December 31,
1994:
Contributions:
Employer............... $ -- $ 71,180 $ 45,882 $ 51,180 $ 59,748 $(7,604) $ -- $ 220,386
Employee............... -- 148,158 87,164 96,817 111,017 (14,259) -- 428,897
------- ---------- -------- ---------- ---------- ------- -------- ----------
Total contributions... -- 219,338 133,046 147,997 170,765 (21,863) -- 649,283
Investment income:
Net investment income.. -- 10,998 7,004 (41,745) 52,730 -- -- 28,987
Participant loan
repayments, net of
disbursements
(including interest of
$16,295).............. (1,422) (6,651) 4,957 (17,451) (38,470) -- 75,332 16,295
------- ---------- -------- ---------- ---------- ------- -------- ----------
(1,422) 4,347 11,961 (59,196) 14,260 -- 75,332 45,282
Distributions to
participants and
beneficiaries......... -- (254,722) (66,273) (300,727) (394,176) -- (27,441) (1,043,339)
Transfers between
funds................. -- 39,675 42,666 97,250 (179,591) -- -- --
------- ---------- -------- ---------- ---------- ------- -------- ----------
Excess (deficiency) of
contributions and
investment income over
distributions......... (1,422) 8,638 121,400 (114,676) (388,742) (21,863) 47,891 (348,774)
Assets available for
distribution:
Beginning of year...... 1,422 1,050,064 426,424 1,077,808 1,926,662 21,863 322,440 4,826,683
------- ---------- -------- ---------- ---------- ------- -------- ----------
End of year............ $ -- $1,058,702 $547,824 $ 963,132 $1,537,920 $ -- $370,331 $4,477,909
======= ========== ======== ========== ========== ======= ======== ==========
<CAPTION>
PARTICIPANT
ACCOUNT ACCOUNT ACCOUNT ACCOUNT LOANS
CASH A B C D OTHER RECEIVABLE TOTAL
------- ---------- -------- ---------- ---------- ------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Year ended December 31,
1993:
Contributions:
Employer............... $ -- $ 52,726 $ 33,374 $ 42,123 $ 78,358 $ 261 $ -- $ 206,842
Employee............... -- 106,959 59,262 75,881 138,821 616 -- 381,539
------- ---------- -------- ---------- ---------- ------- -------- ----------
Total contributions... -- 159,685 92,636 118,004 217,179 877 -- 588,381
Investment income:
Net investment income.. -- 87,928 51,784 93,000 46,592 -- -- 279,304
Participant loan
repayments, net of
disbursements
(including interest of
$17,674).............. 1,204 (19,322) 1,872 16,401 (3,172) -- 20,691 17,674
------- ---------- -------- ---------- ---------- ------- -------- ----------
1,204 68,606 53,656 109,401 43,420 -- 20,691 296,978
Distributions to
participants and
beneficiaries......... -- (18,817) (15,922) (29,466) (240,729) -- (6,672) (311,606)
Transfers between
funds................. -- 84,457 (60,584) (132,708) 108,835 -- -- --
------- ---------- -------- ---------- ---------- ------- -------- ----------
Excess (deficiency) of
contributions and
investment income over
distributions......... 1,204 293,931 69,786 65,231 128,705 877 14,019 573,753
Assets available for
distribution:
Beginning of year...... 218 756,133 356,638 1,012,577 1,797,957 20,986 308,421 4,252,930
------- ---------- -------- ---------- ---------- ------- -------- ----------
End of year............ $ 1,422 $1,050,064 $426,424 $1,077,808 $1,926,662 $21,863 $322,440 $4,826,683
======= ========== ======== ========== ========== ======= ======== ==========
</TABLE>
F-13
<PAGE>
SUPPLEMENTAL SCHEDULE 1
THE ROSLYN SAVINGS BANK
401(K) SAVINGS PLAN
ITEM 27A--SCHEDULE OF ASSETS HELD FOR INVESTMENT PURPOSES
DECEMBER 31, 1994
<TABLE>
<CAPTION>
IDENTITY OF ISSUER
OR BORROWER DESCRIPTION OF INVESTMENT COST CURRENT VALUE
------------------ ------------------------- ---------- -------------
<C> <S> <C> <C>
RSI Retirement Trust Short-Term Investments Fund
(82,862 units)................. $1,539,577 $1,537,920
RSI Retirement Trust Intermediate-Term Bond Fund
(12,491 units)................. 322,633 316,013
RSI Retirement Trust Actively Managed Bond Fund
(24,737 units)................. 682,246 647,119
RSI Retirement Trust Core Equity Fund (29,865
units)......................... 705,403 1,058,702
RSI Retirement Trust Emerging Growth Equity Fund
(8,050 units).................. 243,201 299,795
RSI Retirement Trust Value Equity Fund (9,540
units)......................... 257,759 248,029
*Plan participants Participant Loans Receivable
(maturing within 15 years at
the rates ranging from 4.25% to
8.75%)......................... 370,331 370,331
----------
$4,477,909
==========
</TABLE>
F-14
<PAGE>
SUPPLEMENTAL SCHEDULE 2
THE ROSLYN SAVINGS BANK
401(K) SAVINGS PLAN
ITEM 27D--SCHEDULE OF REPORTABLE TRANSACTIONS
YEAR ENDED DECEMBER 31, 1994
<TABLE>
<CAPTION>
CURRENT
VALUE OF
EXPENSE ASSET ON
IDENTITY OF PURCHASE SELLING LEASE INCURRED WITH COST OF TRANSACTION NET GAIN
PARTY INVOLVED DESCRIPTION OF ASSETS PRICE PRICE RENTAL TRANSACTION ASSET DATE (LOSS)
- -------------- --------------------- --------- -------- ------ ------------- ------- ----------- --------
(1) (2)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
RSI Retirement Trust Short-Term
Investments Fund $ 441,940 $ -- $-- $-- $-- $441,940 $--
========= ======== ==== ==== ==== ======== ====
RSI Retirement Trust Short-Term
Investments Fund $ -- $883,411 $-- $-- $-- $883,411 $--
========= ======== ==== ==== ==== ======== ====
RSI Retirement Trust Actively Managed
Bond Fund $ 329,197 $ -- $-- $-- $-- $329,197 $--
========= ======== ==== ==== ==== ======== ====
RSI Retirement Trust Actively Managed
Bond Fund $ -- $384,347 $-- $-- $-- $384,347 $--
========= ======== ==== ==== ==== ======== ====
RSI Retirement Trust Core Equity Fund $ 407,092 $ -- $-- $-- $-- $407,092 $--
========= ======== ==== ==== ==== ======== ====
RSI Retirement Trust Core Equity Fund $ -- $409,452 $-- $-- $-- $409,452 $--
========= ======== ==== ==== ==== ======== ====
</TABLE>
- --------
(1) Expenses incurred as a result of these transactions were immaterial and
therefore not shown on this schedule.
(2) Actual cost of asset was not available, however, RSI marks each investment
to market, therefore, they are considered to be at fair market value at the
time of sale.
F-15
<PAGE>
PROSPECTUS
[LOGO] ROSLYN
BANCORP, INC.
(PROPOSED HOLDING COMPANY FOR THE ROSLYN SAVINGS BANK)
36,844,660 SHARES OF COMMON STOCK
Roslyn Bancorp, Inc. (the "Company" or "Roslyn Bancorp"), a Delaware
corporation, is offering up to 36,844,660 shares of its common stock, par
value $.01 per share (the "Common Stock"), in connection with the conversion
of The Roslyn Savings Bank (the "Bank" or "Roslyn") from a New York State
chartered mutual savings bank to a New York State chartered stock savings bank
and the issuance of the Bank's capital stock to the Company pursuant to the
Bank's plan of conversion, as amended (the "Plan" or "Plan of Conversion").
The simultaneous conversion of the Bank to stock form, the issuance of the
Bank's stock to the Company and the offer and sale of the Common Stock by the
Company are herein referred to as the "Conversion." In certain circumstances,
the Company may increase the amount of Common Stock offered hereby up to
42,371,359 shares. See Footnote 4 to the table below.
(continued on following page)
---------------
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY EACH
PROSPECTIVE INVESTOR, SEE "RISK FACTORS" ON PAGES 23 THROUGH 32.
---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, THE SUPERINTENDENT OF BANKS OF THE STATE OF NEW YORK,
THE NEW YORK STATE BANKING BOARD, THE NEW YORK STATE BANKING DEPARTMENT,
THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY STATE SECURITIES
COMMISSION, OR ANY OTHER AGENCY, NOR HAS SUCH COMMISSION, BOARD,
DEPARTMENT, SUPERINTENDENT, CORPORATION OR ANY STATE SECURITIES
COMMISSION OR OTHER AGENCY PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
---------------
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT DEPOSIT ACCOUNTS AND ARE
NOT INSURED OR GUARANTEED BY THE BANK INSURANCE FUND OR THE SAVINGS
ASSOCIATION INSURANCE FUND OF THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER GOVERNMENT AGENCY AND ARE NOT
GUARANTEED BY THE COMPANY OR THE BANK. THE COMMON STOCK IS
SUBJECT TO INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS
OF THE PRINCIPAL INVESTED.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ESTIMATED
UNDERWRITING
COMMISSIONS
SUBSCRIPTION AND OTHER FEES ESTIMATED
PRICE(1) AND EXPENSES(2) NET PROCEEDS(3)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Minimum Per Share................. $10.00 $0.25 $9.75
- --------------------------------------------------------------------------------
Midpoint Per Share................ $10.00 $0.24 $9.76
- --------------------------------------------------------------------------------
Maximum Per Share................. $10.00 $0.23 $9.77
- --------------------------------------------------------------------------------
Total Minimum(1).................. $272,330,100 $6,699,000 $265,631,100
- --------------------------------------------------------------------------------
Total Midpoint(1)................. $320,388,350 $7,473,000 $312,915,350
- --------------------------------------------------------------------------------
Total Maximum(1).................. $368,446,600 $8,247,000 $360,199,600
- --------------------------------------------------------------------------------
Total Maximum as adjusted(4)...... $423,713,590 $9,137,000 $414,576,590
- --------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
(1) Determined in accordance with an independent appraisal prepared by FinPro,
Inc. ("FinPro") dated as of September 12, 1996, which states that the
estimated pro forma market value of the Common Stock being offered for
sale in the Conversion ranged from $272,330,100 to $368,446,600 with a
midpoint of $320,388,350 (the "Valuation Range"). The independent
appraisal of FinPro is based upon estimates and projections that are
subject to change and the valuation must not be construed as a
recommendation as to the advisability of purchasing the Common Stock nor
an assurance that a purchaser of Common Stock will thereafter be able to
sell the Common Stock at prices within the Valuation Range. Based on the
Valuation Range, the Board of Directors of the Company and the Board of
Trustees of the Bank established an estimated price range of the Common
Stock being offered for sale in the Conversion within the Valuation Range
of $272.3 million to $368.4 million (the "Estimated Price Range") or
between 27,233,010 and 36,844,660 shares of Common Stock issued at the
$10.00 per share price (the "Purchase Price") to be paid for each share of
Common Stock subscribed for or purchased in the Offering. See "The
Conversion--Stock Pricing."
(2) Consists of the estimated costs to the Bank and the Company arising from
the Conversion, including estimated fixed expenses of approximately $2.4
million, and marketing fees to be paid to Sandler O'Neill & Partners, L.P.
("Sandler O'Neill") estimated to be between $4.3 million and $5.8 million
at the minimum and maximum of the Estimated Price Range, respectively. See
"The Conversion--Marketing and Underwriting Arrangements." The actual fees
and expenses may vary from the estimates. See "Pro Forma Data" for the
assumptions used to arrive at these estimates.
(3) Actual net proceeds may vary substantially from estimated amounts
depending upon the number of shares sold and other factors. Includes the
purchase of shares of Common Stock by The Roslyn Savings Bank Employee
Stock Ownership Plan and related trust (the "ESOP") which is intended to
be funded by a loan to the ESOP from the Company or from a third party,
which will be deducted from the Company's stockholders' equity. See "Use
of Proceeds" and "Pro Forma Data."
(4) As adjusted to reflect the sale of up to an additional 15% of the Common
Stock which may be offered at the Purchase Price, without resolicitation
of subscribers or any right of cancellation, due to regulatory
considerations or changes in market or general financial and economic
conditions. See "Pro Forma Data" and "The Conversion--Stock Pricing." For
a discussion of the distribution and allocation of the additional shares,
if any, see "The Conversion--Subscription Offering and Subscription
Rights," "--Community Offering" and "--Limitations on Common Stock
Purchases."
---------------
Sandler O'Neill & Partners, L.P.
---------------
The date of this Prospectus is October 10, 1996.
<PAGE>
(continued from previous page)
NON-TRANSFERABLE RIGHTS TO SUBSCRIBE FOR THE COMMON STOCK IN A SUBSCRIPTION
OFFERING (THE "SUBSCRIPTION OFFERING") HAVE BEEN GRANTED IN THE FOLLOWING
ORDER OF PRIORITY TO: (1) THE BANK'S ELIGIBLE ACCOUNT HOLDERS (DEFINED AS
HOLDERS OF DEPOSIT ACCOUNTS TOTALLING $100 OR MORE AS OF APRIL 30, 1995); (2)
THE COMPANY'S AND BANK'S TAX-QUALIFIED EMPLOYEE BENEFIT PLANS (COLLECTIVELY,
THE "EMPLOYEE PLANS"), INCLUDING THE ESOP WHICH INTENDS TO SUBSCRIBE FOR UP TO
8% OF THE COMMON STOCK ISSUED IN CONNECTION WITH THE CONVERSION (INCLUDING
SHARES ISSUED TO THE ROSLYN SAVINGS BANK FOUNDATION (THE "FOUNDATION")); AND
(3) THE BANK'S SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS (DEFINED AS HOLDERS OF
DEPOSIT ACCOUNTS TOTALLING $100 OR MORE AS OF SEPTEMBER 30, 1996).
SUBSCRIPTION RIGHTS ARE NON-TRANSFERABLE. PERSONS FOUND TO BE TRANSFERRING
SUBSCRIPTION RIGHTS WILL BE SUBJECT TO FORFEITURE OF SUCH RIGHTS AND POSSIBLE
FURTHER SANCTIONS AND PENALTIES IMPOSED BY THE NEW YORK STATE BANKING
DEPARTMENT (THE "NYBD"). Concurrently, and subject to the prior rights of
holders of subscription rights, the Company is offering the shares of Common
Stock not subscribed for in the Subscription Offering for sale in a community
offering to certain members of the general public (the "Community Offering").
Shares not subscribed for in the Subscription and Community Offerings will be
offered to certain members of the general public in a syndicated community
offering (the "Syndicated Community Offering") (the Subscription Offering, the
Community Offering and the Syndicated Community Offering are referred to
collectively as the "Offerings").
Except for the ESOP, no Eligible Account Holder or Supplemental Eligible
Account Holder may, in their respective capacities as such, purchase in the
Subscription Offering more than $675,000 of Common Stock; no person, together
with associates and persons acting in concert with such person, may purchase
in the Community Offering and Syndicated Community Offering more than $675,000
of Common Stock; and no person, together with associates of and persons acting
in concert with such person, may purchase in the aggregate more than the
overall maximum purchase limitation of 1.0% of the total number of shares of
Common Stock offered in the Conversion; provided, however, such overall
purchase limitation may be increased and the amount that may be subscribed for
may be increased or decreased at the sole discretion of the Bank and the
Company without further approval of subscribers or the Bank's depositors. The
minimum purchase is 25 shares. See "The Conversion--Subscription Offering and
Subscription Rights," "--Community Offering" and "--Limitations on Common
Stock Purchases."
Pursuant to the Plan, the Company intends to establish a charitable
foundation in connection with the Conversion. The Plan provides that the Bank
and the Company will create The Roslyn Savings Bank Foundation and fund the
Foundation with shares of Common Stock contributed by the Company from
authorized but unissued shares, in an amount equal to 3% of the number of
shares of Common Stock sold in the Conversion. The Foundation will be
dedicated to charitable purposes within the Bank's local community. For a
discussion of the Foundation and its effects on the Conversion, see "Risk
Factors--Establishment of the Charitable Foundation," "Pro Forma Data" and
"The Conversion--Establishment of the Charitable Foundation."
The Bank has engaged Sandler O'Neill to consult with and advise the Company
and the Bank in the Offerings and Sandler O'Neill has agreed to assist the
Company and the Bank with the solicitation of subscriptions and purchase
orders for shares of Common Stock in the Offerings. Sandler O'Neill is not
obligated to take or purchase any shares of Common Stock in the Offerings. The
Bank and the Company will pay a fee to Sandler O'Neill which will be based on
the aggregate Purchase Price of the Common Stock sold in the Offerings. The
Company and the Bank have agreed to indemnify Sandler O'Neill against certain
liabilities arising under the Securities Act of 1933, as amended (the
"Securities Act"). See "The Conversion--Marketing and Underwriting
Arrangements."
THE SUBSCRIPTION AND COMMUNITY OFFERINGS WILL TERMINATE AT 12:00 NOON, NEW
YORK TIME, ON DECEMBER 2, 1996 (THE "EXPIRATION DATE") UNLESS EXTENDED BY THE
BANK AND THE COMPANY, WITH THE APPROVAL OF THE SUPERINTENDENT OF BANKS OF THE
STATE OF NEW YORK (THE "SUPERINTENDENT") AND THE FEDERAL DEPOSIT INSURANCE
CORPORATION (THE "FDIC"), IF NECESSARY. Orders submitted are irrevocable until
the completion of the Conversion; provided, that, if the Conversion is not
completed within 45 days after the close of the Subscription and Community
Offerings, unless such period has been extended with the consent of the
Superintendent and FDIC, if necessary, all subscribers will have their funds
returned promptly with interest, and all withdrawal authorizations will be
cancelled. Such extensions may not go beyond October 9, 1998. See "The
Conversion--Procedure for Purchasing Shares in Subscription and Community
Offerings."
The Company has received approval from the National Association of
Securities Dealers, Inc. ("NASD"), conditioned on the consummation of the
Conversion, to have its Common Stock quoted on the Nasdaq National Market
under the symbol "RSLN." Prior to this offering there has not been a public
market for the Common Stock, and there can be no assurance that an active and
liquid trading market for the Common Stock will develop, or that resales of
the Common Stock can be made at or above the Purchase Price. To the extent an
active and liquid trading market does not develop, the liquidity and market
value of the Common Stock may be adversely affected. See "Risk Factors--
Absence of Market for Common Stock" and "Market for the Common Stock."
2
<PAGE>
LOGO
3
<PAGE>
OVERVIEW OF THE CONVERSION AND THE OFFERINGS
The following summary of the Conversion and the Offerings is qualified in its
entirety by the more detailed information appearing elsewhere in this
Prospectus.
Risk Factors.............. A purchase of the Common Stock involves a substan-
tial degree of risk. Eligible Account Holders, Sup-
plemental Eligible Account Holders and other pro-
spective investors should carefully consider the
matters set forth under "Risk Factors." THE SHARES
OF COMMON STOCK OFFERED HEREBY ARE NOT INSURED OR
GUARANTEED BY THE FDIC OR ANY OTHER GOVERNMENT
AGENCY AND ARE NOT GUARANTEED BY THE COMPANY OR THE
BANK.
Roslyn Bancorp, Inc....... Roslyn Bancorp, Inc. is a Delaware corporation or-
ganized at the direction of The Roslyn Savings Bank
to become a savings and loan holding company and
own all of the Bank's capital stock to be issued
upon its conversion from mutual form to stock form.
To date, the Company has not engaged in any busi-
ness. Its executive office is located at 1400 Old
Northern Boulevard, Roslyn, New York 11596 and its
telephone number is (516) 621-6000.
The Roslyn Savings Bank... The Bank is a New York State chartered mutual sav-
ings bank. At May 31, 1996, the Bank had total as-
sets of $1.77 billion, total deposits of $1.44 bil-
lion and retained earnings of $222.2 million. The
Bank is located at 1400 Old Northern Boulevard,
Roslyn, New York 11596 and its telephone number is
(516) 621-6000.
The Conversion............ The Board of Trustees of the Bank has adopted a
Plan of Conversion pursuant to which the Bank in-
tends to convert to a New York State chartered
stock savings bank and issue all of its stock to
the Company. The Company is offering shares of its
Common Stock in the Offerings in connection with
the Bank's Conversion. Management believes the Con-
version offers a number of advantages, including:
(i) the ability to attract new customers; (ii) the
ability to provide future access to capital mar-
kets; and (iii) the ability to increase its pres-
ence in the communities it serves through the ac-
quisition or establishment of branch offices or the
acquisition of other financial institutions.
The Roslyn Savings Bank
Foundation...............
The Bank's Plan of Conversion provides for the es-
tablishment of a charitable foundation in connec-
tion with the Conversion. The Foundation, which
will be incorporated under Delaware law as a non-
stock corporation, will be funded with a contribu-
tion of Common Stock by the Company in an amount
equal to 3% of the Common Stock sold in the Conver-
sion. The authority for the affairs of the Founda-
tion will be vested in the Board of Directors of
the Foundation, all of whom will be members of the
Company's Board of Directors or officers of the
Company or the Bank. See "The Conversion--Estab-
lishment of the Charitable Foundation."
Terms of the Offering..... The shares of Common Stock to be sold in connection
with the Conversion are being offered at a fixed-
price of $10.00 per share in the Subscription Of-
fering pursuant to subscription rights in the fol-
lowing
4
<PAGE>
order of priority to: (i) holders of deposit ac-
counts with a balance of $100 or more on April 30,
1995 ("Eligible Account Holders"); (ii) the Bank's
Employee Plans, including the ESOP; and (iii) de-
positors whose accounts in the Bank totalled $100
or more on September 30, 1996 ("Supplemental Eligi-
ble Account Holders"). Concurrently, and subject to
the prior rights of holders of subscription rights,
any shares of Common Stock not subscribed for in
the Subscription Offering are being offered in the
Community Offering at $10.00 per share to certain
members of the general public. Subscription rights
will expire if not exercised by 12:00 noon, New
York time, on December 2, 1996 unless extended by
the Bank and the Company, See "The Conversion--Sub-
scription Offering and Subscription Rights" and "--
Community Offering."
Exercise of Subscription Forms to order Common Stock offered in the Sub-
Rights................... scription Offering and the Community Offering will
be preceded or accompanied by a Prospectus. Any
person receiving a stock order and certification
form who desires to subscribe for shares must do so
prior to the Expiration Date by delivering to the
Bank a properly executed stock order and certifica-
tion form together with full payment. Once ten-
dered, subscription orders cannot be revoked or
modified without the consent of the Bank. See "The
Conversion--Procedure for Purchasing Shares in Sub-
scription and Community Offerings."
Payment for Shares........ Payment for subscriptions may be made (i) in cash
(if delivered in person); (ii) by check or money
order; or (iii) by authorization of withdrawal from
deposit accounts maintained at the Bank. See "The
Conversion--Procedure for Purchasing Shares in Sub-
scription and Community Offerings."
Nontransferability of
Subscription Rights......
The subscription rights of Eligible Account Hold-
ers, Supplemental Eligible Account Holders and the
Employee Plans, including the ESOP, are
nontransferable. See "The Conversion--Restrictions
on Transfer of Subscription Rights and Shares."
Purchase Limitations...... No Eligible Account Holder or Supplemental Eligible
Account Holder may purchase in the Subscription Of-
fering more than $675,000 of Common Stock. No per-
son, together with associates and persons acting in
concert with such person, may purchase in the Com-
munity Offering and the Syndicated Community Offer-
ing more than $675,000 of Common Stock. No person,
together with associates or persons acting in con-
cert with such person, may purchase in the aggre-
gate more than 1% of the Common Stock offered. How-
ever, the Employee Plans, including the ESOP, may
purchase up to 10% of the Common Stock issued, in-
cluding shares issued to the Foundation. Pursuant
to the Plan of Conversion, it is the intent of the
ESOP to purchase 8% of the Common Stock issued, in-
cluding shares issued to the Foundation. The mini-
mum purchase is 25 shares of Common Stock.
Securities Offered and
Purchase Price...........
The Company is offering between 27,233,010 and
36,844,660 shares of Common Stock at a Purchase
Price of $10.00 per share. The maximum of the Esti-
mated Price Range may be increased by up to 15% and
the
5
<PAGE>
number of shares of Common Stock to be issued may
be increased up to 42,371,359 shares due to regula-
tory considerations and changes in market or gen-
eral financial or economic conditions. See "The
Conversion--Stock Pricing" and "--Number of Shares
to be Issued."
Appraisal................. The Purchase Price per share has been fixed at
$10.00. The total number of shares to be issued in
the Conversion is based upon an independent ap-
praisal prepared by FinPro, dated as of September
12, 1996, which states that the estimated pro forma
market value of the Common Stock ranged from
$272,330,100 to $368,446,600. The final aggregate
value will be determined at the time of closing of
the Offerings and is subject to change due to
changing market conditions and other factors. See
"The Conversion--Stock Pricing."
Use of Proceeds........... A portion of net proceeds retained by the Company
will be used for general business activities, in-
cluding a loan by the Company directly to the ESOP
to enable the ESOP to purchase up to 8% of the
stock issued in connection with the Conversion, in-
cluding shares issued to the Foundation. To the ex-
tent shares are unavailable to satisfy the ESOP's
subscription for 8% of the Common Stock issued, the
ESOP may purchase Common Stock in open market
transactions subsequent to the Conversion. The Com-
pany intends to initially invest the remaining net
proceeds in mortgage-backed and mortgage related
securities, short and medium term debt securities
and common and preferred stock. The Bank intends to
utilize net proceeds for general business purposes.
See "Use of Proceeds."
Dividend Policy........... Upon Conversion, the Board of Directors of the Com-
pany will have the authority to declare dividends
on the Common Stock, subject to statutory and regu-
latory requirements. In the future, the Board of
Directors of the Company may consider a policy of
paying cash dividends on the Common Stock. However,
no decision has been made with respect to such div-
idends, if any. See "Dividend Policy."
Benefits of the
Conversion to
Management...............
Among the benefits to the Bank and the Company an-
ticipated from the Conversion is the ability to at-
tract and retain personnel through the prudent use
of stock options and other stock based benefit pro-
grams. Subsequent to the Conversion, the Company
intends to adopt Stock Programs (as defined herein)
and Stock Option Plans (as defined herein) for the
benefit of directors, officers and employees. If
such benefit plans are adopted within one year af-
ter the Conversion, such plans will be subject to
stockholders' approval at a meeting of stockholders
which may not be held earlier than six months after
the Conversion. The Company intends to adopt the
Stock Programs which would provide for the granting
of Common Stock to officers, directors and employ-
ees of the Bank and Company in an amount equal to
4% of the Common Stock issued in the Conversion,
including shares issued to the Foundation. The
Stock Option Plans that the Company intends to
adopt would provide the Company with the ability to
grant options to officers, directors and employees
of the Bank and Company to purchase Common Stock
equal to 10% of the number of shares of Common
Stock issued
6
<PAGE>
in the Conversion, including shares issued to the
Foundation. For a further description of the Stock
Programs and Stock Option Plans, see "Risk Fac-
tors--Stock-Based Benefits to Management, Employ-
ment Contracts and Change in Control Payments" and
"Management of the Bank--Benefit Plans." See "Man-
agement of the Bank--Subscriptions of Executive Of-
ficers, Directors and Trustees," "Restrictions on
Acquisition of the Company and the Bank--Restric-
tions in the Company's Certificate of Incorporation
and Bylaws," and "The Conversion--Establishment of
the Charitable Foundation."
Voting Control of
Officers and Directors...
Trustees, Directors and executive officers of the
Bank and the Company expect to purchase approxi-
mately 1.8% or 1.3% of shares of Common Stock to be
issued, based upon the minimum and the maximum of
the Estimated Price Range, respectively. Assuming
the implementation of the ESOP, Stock Programs and
Stock Option Plan, Directors, executive officers
and employees have the potential to control the
voting of approximately 21.6% or 21.2% of the then
outstanding shares of Common Stock at the minimum
and the maximum of the Estimated Price Range, re-
spectively. Additionally, the Foundation will hold
Common Stock in an amount equal to 3% of the Common
Stock sold in the Conversion. If a waiver is ob-
tained from the FDIC of a condition agreed to by
the Foundation which restricts the voting of Common
Stock held by the Foundation, such shares of Common
Stock may be voted as directed by the Board of Di-
rectors of the Foundation, who are also Directors
or officers of the Company and the Bank. See "The
Conversion--Establishment of the Charitable Founda-
tion," "Management of the Bank--Subscriptions of
Executive Officers, Directors and Trustees," and
"Restrictions on Acquisition of the Company and the
Bank--Restrictions in the Company's Certificate of
Incorporation and Bylaws."
Expiration Date for the
Subscription Offering....
The Expiration Date of the Subscription Offering is
12:00 noon, New York time on December 2, 1996 un-
less extended by the Bank and the Company. See "The
Conversion--Subscription Offering and Subscription
Rights."
Expiration Date for the
Community Offering.......
The Expiration Date for the Community Offering is
12:00 noon, New York time on December 2, 1996, un-
less extended by the Bank and the Company. See "The
Conversion--Community Offering."
Market for Stock.......... As a mutual institution, the Bank has never issued
capital stock and consequently, there is no exist-
ing market for the Common Stock. The Company has
received conditional approval to have its Common
Stock quoted on the Nasdaq National Market under
the symbol "RSLN" subject to the completion of the
Conversion and compliance with certain conditions,
including the presence of at least two registered
and active market makers. See "Market for the Com-
mon Stock."
7
<PAGE>
No Board Recommendations.. The Bank's Board of Trustees and the Company's
Board of Directors are not making any recommenda-
tions to depositors or other potential investors
regarding whether such persons should purchase the
Common Stock. An investment in the Common Stock
must be made pursuant to each investor's evaluation
of his or her best interests.
Conversion Center......... If you have any questions regarding the Conversion,
call the Conversion Center at (516) 621-6296.
8
<PAGE>
SUMMARY
This summary is qualified in its entirety by the more detailed information
and Consolidated Financial Statements of the Bank and Notes thereto appearing
elsewhere in this Prospectus.
ROSLYN BANCORP, INC.
Roslyn Bancorp, Inc. is a Delaware corporation recently organized by the
Bank for the purpose of acquiring all of the capital stock of the Bank to be
issued in the Conversion. Immediately following the Conversion, the only
significant assets of the Company will be the capital stock of the Bank, the
Company's loan to the ESOP and the net proceeds of the Offerings retained by
the Company. The Company will purchase all of the capital stock of the Bank to
be issued upon the Conversion in exchange for 50% of the net Conversion
proceeds with the remaining net proceeds to be retained by the Company to be
used for general business activities, including a loan by the Company directly
to the ESOP to enable the ESOP to purchase up to 8% of the Common Stock issued
in connection with the Conversion, including shares issued to the Foundation.
Initially, the net proceeds are expected to be invested by the Company
primarily in mortgage-backed and mortgage related securities, short- and
medium-term debt securities and common and preferred stock. See "Use of
Proceeds" and "The Conversion--General." The business of the Company will
consist initially of the business of the Bank. See "Business of the Company"
and "Regulation and Supervision--Holding Company Regulation."
The Company's executive offices are located at the administrative office of
the Bank at 1400 Old Northern Boulevard, Roslyn, New York 11576. The Company's
telephone number is (516) 621-6000.
THE ROSLYN SAVINGS BANK
The Bank was organized in 1875 as a New York State chartered mutual savings
bank. The Bank's deposits are insured by the Bank Insurance Fund ("BIF"), as
administered by the FDIC, up to the maximum amount permitted by law. The Bank
conducts business from its administrative/home office in Roslyn, New York and
its five branch offices located in the New York counties of Nassau and
Suffolk. In August 1996, the Bank entered into a contract for the purchase of
two additional branch office facilities located in Nassau County which are
expected to open for business in November 1996. The Bank, through its wholly-
owned mortgage banking subsidiary, Residential First, Inc. ("RFI"), also
operates six mortgage loan origination offices located in the New York
counties of Queens, Nassau, Suffolk and Albany and the New Jersey counties of
Morris and Monmouth, and it currently is seeking to open two additional
mortgage origination offices in southern and central Connecticut in late 1996
or early 1997. As of May 31, 1996, the Bank had total assets of $1.77 billion,
total deposits of $1.44 billion, retained earnings of $222.2 million and had a
leverage capital ratio of 12.39% and a total risk-based capital ratio of
28.10%. See "Regulation and Supervision--FDIC Regulations--Capital
Requirements."
The Bank is a community-oriented savings institution whose businesses
primarily consist of accepting deposits from customers in its primary market
area consisting of the New York counties of Nassau and Suffolk, and investing
those funds in mortgage-backed and mortgage related securities, debt and
equity securities, mortgage loans secured by one- to four-family residences,
multi-family properties and commercial properties construction and development
loans, home equity loans, second mortgage loans, and student and consumer
loans. The Bank's primary market area for one- to four-family lending extends
beyond Nassau and Suffolk Counties to the areas in New York and New Jersey
where RFI mortgage origination offices are located and would extend into
Connecticut when it opens two additional mortgage origination offices. See
"Business of the Bank--Lending Activities--Loan Sales, Servicing and Mortgage
Banking Activities."
The Bank's operating strategy concentrated on maintaining profitability by
primarily investing in mortgage-backed and mortgage related securities and
U.S. Government or agency debt securities. Since 1993, the Bank has increased
its emphasis on building its loan portfolio by restructuring its lending
department, hiring experienced commercial real estate loan personnel and
revising its underwriting policies and procedures. More recently, through its
purchase of certain of the assets and liabilities of a mortgage banking
company and establishment of RFI in 1995, the Bank has increased its emphasis
on mortgage banking activities and enhancing
9
<PAGE>
its one- to four-family loan portfolio. The Bank's current operating strategy
consists primarily of: (i) investing funds not utilized for loan originations
and purchases in shorter-term debt securities and mortgage-backed and mortgage
related securities and preferred stock of corporate issuers; (ii) building its
loan portfolio by purchasing one- to four-family loans originated by RFI and
placing emphasis on the origination of high quality commercial real estate
loans to selected real estate developers operating in the Bank's primary
market area; (iii) increasing non-interest income and building its loan
servicing portfolio through its mortgage banking operations whereby it sells,
generally on a servicing retained basis, certain one- to four-family mortgage
loans that it originates through RFI as a means of increasing servicing fee
income; (iv) attracting and retaining deposit accounts by paying competitive
rates on its deposit products and opening new branches; and (v) maintaining a
lower expense ratio by efficiently utilizing personnel and branch facilities
to service its customers.
The Bank's securities investment activities primarily consist of investments
in mortgage-backed and mortgage related securities and various debt and equity
securities. In November 1995, in accordance with the Financial Accounting
Standards Board ("FASB") interpretation regarding Statement of Financial
Accounting Standards ("SFAS") No. 115, the Bank restructured its investment
portfolio and transferred securities having a carrying value of $648.7 million
and a market value of $658.3 million at that date, from its held-to-maturity
portfolio to its available-for-sale portfolio. Shortly thereafter, the Bank
sold $115.7 million in lower yielding U.S. Government securities and corporate
debt obligations at a nominal loss and reinvested the proceeds in higher
yielding mortgage-backed and mortgage related securities. At May 31, 1996, the
Bank's securities portfolio totalled $1.27 billion, or 71.4% of total assets,
of which $951.3 million was categorized as available-for-sale and $314.2
million was classified as held-to-maturity. At May 31, 1996, the Bank's
mortgage-backed and mortgage related securities portfolio totalled $831.6
million, or 46.9% of total assets, of which $519.4 million was classified as
available-for-sale and $312.2 million was classified as held-to-maturity, and
consisted of mortgage-backed securities, guaranteed or issued by U.S.
Governmental-sponsored and federal agencies such as the Federal National
Mortgage Association ("FNMA"), Federal Home Loan Mortgage Corporation
("FHLMC") and Government National Mortgage Association ("GNMA") and
collateralized mortgaged obligations ("CMOs") issued by FNMA, FHLMC, GNMA and
private issuers. At May 31, 1996, the Bank's debt securities portfolio
totalled $295.1 million, or 16.7% of total assets, of which $293.2 million was
classified as available-for-sale and $1.9 million was classified as held-to-
maturity. The Bank's debt securities generally consist of United States
Government securities, obligations of FNMA, FHLMC and GNMA, obligations of
corporate issuers, public utility bonds and bonds issued by states and
municipalities. At May 31, 1996, the Bank's equity securities portfolio
totalled $138.8 million, or 7.8% of total assets, all of which was classified
as available-for-sale. The Bank's equity securities portfolio at such date
consisted primarily of preferred stock of corporate issuers. See "Business of
the Bank--Securities Investment Activities" and "Risk Factors--Dependence on
Securities Investments."
At May 31, 1996, the Bank's gross loan portfolio totalled $438.1 million, or
24.7% of total assets, of which $213.0 million were one- to four-family loans,
$33.3 million were multi-family loans, $153.6 million were commercial real
estate loans, $31.0 million were construction and development loans, and $7.2
million were home equity, second mortgage, student and consumer loans. At May
31, 1996, $14.3 million of the Bank's loans were classified as held-for-sale
and consisted primarily of one- to four-family loans. Currently, all of the
Bank's one- to four-family loan origination and related servicing and sale
activities are conducted through RFI. RFI originates for sale to investors,
including the Bank, one- to four-family loans generally secured by properties
located in the New York counties of Nassau, Suffolk, Kings, Queens and Albany
and the New Jersey counties of Morris and Monmouth. For the five months ended
May 31, 1996, the Bank has purchased $21.6 million in one- to four-family
loans from RFI, which represented 16.9% of loans originated by RFI in that
period. RFI generally sells FNMA and FHLMC conforming loans on a servicing
retained basis and services such sold loans for others through a third party
subservicer. At May 31, 1996, loans serviced for others totalled $762.7
million, of which $48.8 million was being directly serviced by the Bank and
$713.9 million was being serviced by RFI. See "Business of the Bank--Lending
Activities."
At May 31, 1996, the Bank's deposit accounts totalled $1.44 billion, or
93.0% of total liabilities, of which $570.0 million, or 39.5%, was comprised
of saving accounts, negotiable order of withdrawal ("NOW")
10
<PAGE>
accounts, money market accounts and non-interest-bearing checking accounts
(collectively, "core deposits"). In addition to core deposits, the Bank had
$871.9 million of certificate accounts, or 56.3% of total liabilities, of
which $688.2 million were certificates of deposit with maturities of one year
or less and $140.7 million were certificates of deposit with balances of
$100,000 or more ("jumbo deposits").
THE ROSLYN SAVINGS BANK FOUNDATION
In furtherance of the Bank's commitment to its local community, the Bank's
Plan of Conversion provides for the establishment of a charitable foundation
in connection with the Conversion. The Plan provides that the Bank and the
Company will create The Roslyn Savings Bank Foundation, which will be
incorporated under Delaware law as a non-stock corporation and will fund the
Foundation with shares of Common Stock contributed by the Company, as further
described below. The Company and the Bank believe that the funding of the
Foundation with Common Stock of the Company is a means of establishing a
common bond between the Bank and its community and thereby enables the Bank's
community to share in the potential growth and success of the Company over the
long term. While the Bank has made charitable contributions in the past, the
Bank has not previously formed a charitable foundation nor has it made
contributions to charitable organizations of the magnitude of the contribution
that will be made to the Foundation in the Conversion. By further enhancing
the Bank's visibility and reputation in its local community, the Bank believes
that the Foundation will enhance the long-term value of the Bank's community
banking franchise. See "The Conversion--Establishment of the Charitable
Foundation--Structure of the Foundation."
The members of the Foundation will be the Board of Directors of the
Foundation. The authority for the affairs of the Foundation will be vested in
the Board of Directors of the Foundation, which will be comprised of officers
of the Company or the Bank and certain existing members of the Company's Board
of Directors, who will receive no fees for serving on the Foundation's Board
of Directors. The Directors of the Foundation will be responsible for
establishing the policies of the Foundation with respect to grants or
donations by the Foundation, consistent with the purposes for which the
Foundation was established. Although no formal policy governing Foundation
grants exists at this time, the Foundation's Board of Directors will adopt
such a policy upon establishment of the Foundation. The Directors of the
Foundation will also be responsible for directing the activities of the
Foundation, including the management of the Common Stock held by the
Foundation. However, establishment of the Foundation is subject to certain
conditions, including a requirement that the Common Stock of the Company held
by the Foundation be voted in the same ratio as all other shares of the
Company's Common Stock on all proposals considered by stockholders of the
Company. See "The Conversion--Establishment of the Charitable Foundation--
Regulatory Conditions Imposed on the Foundation."
The Company proposes to fund the Foundation by contributing to the
Foundation immediately following the Conversion a number of shares of
authorized but unissued Common Stock equal to 3.0% of the Common Stock sold in
the Offerings, or 816,990, 961,165 and 1,105,340 shares at the minimum,
midpoint and maximum of the Estimated Price Range, respectively. Such
contribution, once made, will not be recoverable by the Company or the Bank.
Assuming the sale of shares at the maximum of the Estimated Price Range and
the issuance of shares to the Foundation, the Company will have 37,950,000
shares issued and outstanding, of which the Foundation will own 1,105,340
shares, or 2.9%. DUE TO THE ISSUANCE OF ADDITIONAL SHARES OF COMMON STOCK TO
THE FOUNDATION, PERSONS PURCHASING SHARES IN THE CONVERSION WILL HAVE THEIR
OWNERSHIP AND VOTING INTERESTS IN THE COMPANY DILUTED BY 2.9%. SEE "PRO FORMA
DATA."
As a result of the establishment of the Foundation, the Company will
recognize an expense of the full amount of the contribution, offset in part by
a corresponding tax benefit, during the quarter in which the contribution is
made, which is expected to be the fourth quarter of 1996. Such expense will
reduce earnings and have a material impact on the Company's earnings for such
quarter and for the year. While management cannot predict earnings for 1996,
it expects that the establishment and funding of the Foundation will have an
adverse impact on the Company's earnings for the year in which it is made.
Assuming a contribution of $11.1 million in Common Stock in 1996, based on the
maximum of the Estimated Price Range and assuming a tax rate of 37%,
11
<PAGE>
the Company estimates a net tax effected expense of $7.0 million. If the
Foundation had been established at December 31, 1995, the Bank would have
recorded net income of $11.7 million, rather than recording net income of
$18.7 million for the year ended December 31, 1995, based on an assumed tax
rate of 37%. In addition to the contribution of Common Stock by the Company to
the Foundation, the Bank expects in the future to continue making ordinary
charitable contributions within its local community. The Bank does not
anticipate making future charitable contributions to the Foundation during the
first five years following the initial contribution to the Foundation. For
further discussion of the Foundation and its impact on purchasers in the
Conversion, see "Risk Factors--Establishment of the Charitable Foundation,"
"Pro Forma Data" and "The Conversion-- Establishment of the Charitable
Foundation ."
The establishment and funding of a charitable foundation as part of a
conversion of a mutual savings institution to stock form has, to the knowledge
of the Bank, only been done on one prior occasion. As such, the establishment
of the Foundation in connection with the Conversion and the Superintendent's
approval and FDIC's non-objection to the Plan of Conversion may be subject to
potential challenges which could result in delays in the Conversion. See "Risk
Factors--Establishment of the Charitable Foundation--Potential Challenges."
THE CONVERSION AND THE OFFERINGS
On May 29, 1996 the Board of Trustees of the Bank adopted the Plan of
Conversion which was subsequently amended on July 30, 1996 and September 30,
1996. Pursuant to the Plan, the Bank is converting from a New York State
chartered mutual savings bank to a New York State chartered stock savings
bank, the Common Stock of the Company will be offered and sold hereby and all
of the outstanding capital stock of the Bank will be acquired by the Company
in exchange for 50% of the net proceeds of the Offerings. The Conversion and
the Offerings are subject to approval by the Superintendent and non-objection
by the FDIC, and approval of Eligible Account Holders at a special meeting to
be held on November 26, 1996 (the "Special Meeting"). The Superintendent
issued an approval letter on October 9, 1996 and the FDIC issued a notice of
intent not to object to the Conversion on October 9, 1996. See "The
Conversion--General."
The Bank is converting to increase its capital and structure itself in the
holding company form of organization used by many commercial banks and other
business entities and a growing number of savings institutions. The Conversion
will enhance the Bank's ability to access capital markets, expand its current
operations, acquire other financial institutions or branch offices and
diversify into other financial services, to the extent allowable by applicable
law and regulation. The holding company form of organization is expected to
provide additional flexibility to diversify the Bank's business activities
through existing or newly formed subsidiaries, or through acquisitions of or
mergers with other financial institutions, as well as other companies.
Although there are no current arrangements, understandings or agreements
regarding any such opportunities, the Company will be in a position after the
Conversion, subject to regulatory limitations and the Company's financial
position, to take advantage of any such opportunities that may arise. See "The
Conversion--Purposes of Conversion."
Common Stock will be offered in the Subscription and Community Offerings
and, to the extent shares are available, in the Syndicated Community Offering.
Common Stock offered in the Subscription Offering will be offered in the
following order of priority: (1) depositors whose accounts in the Bank
totalled $100 or more on April 30, 1995; (2) the Employee Plans, including the
ESOP; and (3) depositors whose accounts in the Bank totalled $100 or more on
September 30, 1996. Subject to the prior rights of holders of subscription
rights, Common Stock not subscribed for in the Subscription Offering is being
concurrently offered in the Community Offering to certain members of the
general public. The Company and the Bank reserve the absolute right to reject
or accept any orders in the Community Offering, in whole or in part, in their
sole discretion, either at the time of receipt of an order or as soon as
practicable following the Expiration Date.
All shares of Common Stock not purchased in the Subscription and Community
Offerings, if any, will be offered for sale to the general public in a
Syndicated Community Offering through a syndicate of registered
12
<PAGE>
broker-dealers to be formed and managed by Sandler O'Neill acting as agent of
the Company to assist the Company and the Bank in the sale of the Common
Stock. The Company and the Bank reserve the absolute right to reject orders,
in whole or part, in their sole discretion, in the Syndicated Community
Offering.
The Bank and Company have engaged Sandler O'Neill as conversion agent and
financial advisor in connection with the Offerings and to assist the Bank and
the Company in soliciting subscriptions and purchase orders in the Offerings.
The Bank and Company will pay a fee to Sandler O'Neill which will be based on
the aggregate Purchase Price of the Common Stock sold in the Offerings. See
"The Conversion--Marketing and Underwriting Arrangements." Neither Sandler
O'Neill nor any registered broker-dealer shall have any obligation to take or
purchase any shares of the Common Stock in the Subscription Offering,
Community Offering or Syndicated Community Offering. However, Sandler O'Neill
has agreed to use its best efforts in the sale of shares in the Syndicated
Community Offering. Subscription rights will expire if not exercised by 12:00
noon, New York time on December 2, 1996 (the "Expiration Date"), unless
extended by the Bank and Company. See "The Conversion--Subscription Offering
and Subscription Rights" and "--Community Offering."
PROSPECTUS DELIVERY AND PROCEDURE FOR PURCHASING SHARES
To ensure that each purchaser receives a prospectus at least 48 hours prior
to the Expiration Date in accordance with Rule 15c2-8 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), no prospectus will be
mailed any later than five days prior to the Expiration Date or hand delivered
any later than two days prior to such date. Stock order forms will only be
distributed with a prospectus. The Bank is not obligated to accept for
processing orders not submitted on an original stock order form. Stock order
forms unaccompanied by an executed certification form will not be accepted.
Payment by check, money order, cash (if delivered in person) or debit
authorization to an existing account at the Bank must accompany the stock
order and certification forms. No wire transfers will be accepted. See "The
Conversion--Procedure for Purchasing Shares in Subscription and Community
Offerings."
RESTRICTIONS ON TRANSFER OF SUBSCRIPTION RIGHTS
Prior to the completion of the Conversion, no person may transfer or enter
into any agreement or understanding to transfer the legal or beneficial
ownership of the subscription rights issued under the Plan or the shares of
Common Stock to be issued upon their exercise. Following the Conversion, there
generally will be no restrictions on the transfer or sale of shares by
purchasers other than affiliates of the Company and Bank. See "Regulation and
Supervision--Federal Securities Laws" and "The Conversion--Restrictions on
Transfer of Subscription Rights and Shares."
PURCHASE LIMITATIONS
The minimum purchase in the Subscription and Community Offerings is 25
shares. With the exception of the ESOP, no Eligible Account Holder or
Supplemental Eligible Account Holder may purchase, in his or her capacity as
such, in the Subscription Offering more than $675,000 of Common Stock; no
person, together with associates and persons acting in concert with such
person, may purchase in the Community Offering and Syndicated Community
Offering more than $675,000 of Common Stock; and no person or entity,
individually or together with associates and persons acting in concert, may
purchase in the aggregate in the Offerings more than the overall maximum
purchase limitation of 1.0% of the total number of shares of Common Stock
offered in the Conversion, exclusive of any shares issued pursuant to an
increase in the Estimated Price Range of up to 15%. At any time during the
Conversion and without approval of the Bank's depositors or a resolicitation
of subscribers, the Bank and Company may, in their sole discretion, decrease
the maximum purchase limitation below $675,000 of Common Stock, however, such
amount may not be reduced to less than 0.10% of the Common Stock offered.
Additionally, at any time during the Conversion, the Bank and Company may, in
their sole discretion, increase the maximum purchase limitation in the
Subscription and Community Offerings to an amount in excess of $675,000 up to
a maximum of 5% of the shares to be issued in the Conversion. Similarly, the
1.0% overall maximum purchase limitation may be increased up to 5.0% of total
shares of Common Stock
13
<PAGE>
offered in the Conversion. Prior to consummation of the Conversion, if the
maximum purchase limitation is increased, subscribers for the maximum amount
will be, and certain other large subscribers in the sole discretion of the
Bank and Company may be, given the opportunity to increase their subscriptions
up to the then applicable limits. In the event of an increase in the Estimated
Price Range, the additional shares will be distributed and allocated to fill
unfilled orders in the Subscription and Community Offerings without any
resolicitation of subscribers as described in "The Conversion--Subscription
Offering and Subscription Rights" and "--Community Offering" and in accordance
with the Plan of Conversion.
STOCK PRICING AND NUMBER OF SHARES TO BE ISSUED IN THE CONVERSION
New York State Banking Board ("NYBB") regulations require that the aggregate
purchase price of the Common Stock to be issued in the Conversion be
consistent with an independent appraisal of the estimated pro forma market
value of the Common Stock giving effect to the Conversion. FinPro, an
independent appraiser, has advised the Bank that in its opinion, dated as of
September 12, 1996, the aggregate estimated pro forma market value of the
Common Stock being offered for sale in connection with the Conversion ranges
from $272.3 million to $368.4 million (with a midpoint of $320.4 million). For
information regarding FinPro, see "The Conversion--Stock Pricing."
Based upon the above Valuation Range, the Board of Trustees of the Bank has
established the Estimated Price Range of $272.3 million to $368.4 million,
assuming the issuance of 27,233,010 shares to 36,844,660 shares of Common
Stock at the Purchase Price of $10.00 per share. All shares of Common Stock
issued in the Conversion will be sold at the Purchase Price of $10.00 per
share, as determined by the Bank and approved by the Company. The actual
number of shares to be issued in the Conversion will be determined by the
Company and the Bank based upon FinPro's updated estimate of the aggregate pro
forma market value of the Common Stock, giving effect to the Conversion, at
the completion of the Offerings. The maximum of the Estimated Price Range may
be increased by up to 15% and the number of shares of Common Stock to be
issued may be increased up to 42,371,359 shares due to regulatory
considerations and changes in market or general financial and economic
conditions. No resolicitation of subscribers will be made and subscribers will
not be permitted to modify or cancel their subscriptions unless the gross
proceeds from the sale of the Common Stock are less than the minimum or more
than 15% above the maximum of the current Estimated Price Range. See "Pro
Forma Data," "The Conversion--Stock Pricing" and "--Number of Shares to be
Issued."
The Company will issue an additional amount of Common Stock to the
Foundation from authorized but unissued shares equal to 3.0% of Common Stock
sold in the Conversion (or 816,990 to 1,105,340 shares based on the minimum
and maximum of the Estimated Price Range, respectively) immediately following
completion of the Conversion. As a result, the Company will have a total of
37,950,000 shares of Common Stock outstanding (based on the issuance of
36,844,660 shares of Common Stock being offered for sale) which will have the
effect of diluting the ownership and voting interests of persons purchasing
shares in the Conversion by 2.9% since a greater number of shares will be
outstanding upon completion of the Conversion. See "Pro Forma Data" and "Risk
Factors--Establishment of the Charitable Foundation."
USE OF PROCEEDS
Net proceeds from the sale of the Common Stock are estimated to be between
$265.6 million and $360.2 million (or $414.6 million if the Estimated Price
Range is increased by 15%) depending on the number of shares sold and the
expenses of the Conversion. See "Pro Forma Data." The Company will purchase
all of the outstanding capital stock of the Bank to be issued upon Conversion
in exchange for 50% of the net proceeds, with the remaining net proceeds to be
retained by the Company. Net proceeds to be retained by the Company after the
purchase of the capital stock of the Bank are estimated to be between $132.8
million and $180.1 million (or $207.3 million if the Estimated Price Range is
increased by 15%). The Company will be unable to utilize any of the net
proceeds until the close of the Offerings.
14
<PAGE>
Funds retained by the Company will be used for general business activities,
including a loan by the Company directly to the ESOP to enable the ESOP to
purchase up to 8% of the stock issued in connection with the Conversion,
including shares issued to the Foundation. The Company intends initially to
invest the net proceeds not used to fund the ESOP in mortgage-backed and
mortgage related securities, short and medium term debt securities and common
and preferred stock. Funds may also be used by the Company in the future for
the possible payment of dividends and repurchases of Common Stock. Assuming
the acquisition by the ESOP of 8% of the shares to be issued in the
Conversion, including shares issued to the Foundation, the amount of the loan
to the ESOP is estimated to be between $22.4 million and $30.4 million (or
$34.9 million if the Estimated Price Range is increased by 15%) to be repaid
over a 30 year period at the prevailing prime rate, which is currently 8.75%.
See "Management of the Bank--Benefit Plans--ESOP." Funds received by the Bank
from the Company's purchase of its capital stock will be used for general
business purposes, including investment in securities and loans.
The Company and the Bank may also use net proceeds raised in the Conversion
to expand operations through the acquisition or establishment of branch
offices and the acquisition of financial institutions or assets of other
financial institutions or financial services companies. Other than the
agreement to purchase two additional branch office facilities and intention to
open two additional mortgage origination offices, neither the Bank nor the
Company has any pending agreements or understandings regarding acquisitions of
any specific financial institutions, branch offices, financial services
companies, or assets of other financial institutions or financial services
companies. See "Use of Proceeds" and "Business of the Bank." To the extent
that the stock-based benefit plans which the Company or the Bank intend to
adopt subsequent to the Conversion are not funded with authorized but unissued
common stock of the Company, the Company or Bank may use net proceeds from the
Conversion to fund the purchase of stock to be awarded under such stock-based
benefit plans. See "Risk Factors--Stock-Based Benefits to Management,
Employment Contracts and Change in Control Payments" and "Management of the
Bank--Benefit Plans--Stock Option Plans" and "--Stock Programs."
DIVIDENDS
Following the Conversion, the Board of Directors of the Company may
consider a policy of paying cash dividends on the Common Stock. However, no
decision has been made as to the amount or timing of such dividends, if any.
See "Dividend Policy."
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered by prospective investors.
15
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF THE BANK
Set forth below are selected consolidated financial and other data of the
Bank. This financial data is derived in part from, and should be read in
conjunction with, the Consolidated Financial Statements of the Bank and Notes
thereto presented elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT MAY 31, ------------------------------------------------------
1996(1) 1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
SELECTED FINANCIAL CON-
DITION DATA:
Total assets............ $1,772,175 $1,596,744 $1,438,379 $1,344,432 $1,305,369 $1,144,217
Debt securities(2):
Available-for-
sale/held-for-sale.... 293,151 260,553 -- -- 31,674 --
Held-to-maturity/held-
for-investment........ 1,930 1,930 466,204 530,802 477,250 370,996
Equity securities(2):
Available-for-sale..... 138,781 118,778 89,787 -- -- --
Held-for-investment.... -- -- -- 66,298 38,215 32,377
Mortgage-backed and
mortgage related
securities, net(2):
Available-for-sale..... 519,399 413,485 50,711 -- -- --
Held-to-maturity/held-
for-investment........ 312,233 347,213 411,341 399,417 373,903 305,856
Loans held for sale,
net.................... 14,265 17,151 -- 8,105 -- --
Loans receivable held
for investment, net(3). 399,484 365,265 342,091 264,667 307,317 379,275
Deposits................ 1,441,845 1,335,550 1,219,518 1,141,565 1,134,543 961,521
Borrowed funds.......... 69,598 1,647 -- -- -- 27,244
Retained earnings....... 222,244 226,418 193,071 176,385 152,242 137,315
</TABLE>
<TABLE>
<CAPTION>
FOR THE FIVE
MONTHS ENDED
MAY 31, FOR THE YEAR ENDED DECEMBER 31,
--------------- -----------------------------------------
1996(1) 1995(1) 1995 1994 1993 1992 1991
------- ------- -------- ------- ------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Interest income......... $50,063 $44,550 $111,034 $94,516 $95,004 $100,641 $94,955
Interest expense........ 27,128 22,738 59,298 40,353 39,698 46,902 56,603
------- ------- -------- ------- ------- -------- -------
Net interest income be-
fore provision for
possible loan losses.. 22,935 21,812 51,736 54,163 55,306 53,739 38,352
Provision for possible
loan losses............ 300 250 600 600 6,860 9,300 18,600
------- ------- -------- ------- ------- -------- -------
Net interest income af-
ter provision for pos-
sible loan
losses................ 22,635 21,562 51,136 53,563 48,446 44,439 19,752
Non-interest income..... 3,497 1,130 5,714 2,049 4,864 528 18,780
Non-interest expense.... 14,087 11,242 29,622 26,172 24,564 19,124 16,878
------- ------- -------- ------- ------- -------- -------
Income before income
taxes and cumulative
effect of changes in
accounting principles.. 12,045 11,450 27,228 29,440 28,746 25,843 21,654
Provision for income
taxes.................. 3,654 3,876 8,510 10,018 10,586 10,916 10,968
------- ------- -------- ------- ------- -------- -------
Income before cumulative
effect of changes in
accounting principles.. 8,391 7,574 18,718 19,422 18,160 14,927 10,686
Cumulative effect of
changes in accounting
principles(4).......... -- -- -- -- 5,983 -- --
------- ------- -------- ------- ------- -------- -------
Net income.............. $ 8,391 $ 7,574 $ 18,718 $19,422 $24,143 $ 14,927 $10,686
======= ======= ======== ======= ======= ======== =======
</TABLE>
(continued on next page)
16
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE FIVE
MONTHS ENDED AT OR FOR THE YEAR ENDED
MAY 31, DECEMBER 31,
-------------------- --------------------------------------------
1996(1) 1995(1) 1995 1994 1993(14) 1992 1991
--------- --------- ------- ------- -------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED FINANCIAL RA-
TIOS AND OTHER DA-
TA(5):.................
PERFORMANCE RATIOS:
Return on average as-
sets 1.19% 1.20% 1.21% 1.39% 1.35% 1.21% 0.99%
Return on average re-
tained earnings....... 8.96 8.92 8.82 10.27 10.85 10.26 8.03
Average retained earn-
ings to average as-
sets.................. 13.31 13.50 13.69 13.56 12.48 11.78 12.36
Retained earnings to
total assets at end of
period................ 12.54 13.42 14.18 13.42 13.12 11.66 12.00
Net interest rate
spread(6)............. 2.74 2.98 2.79 3.54 3.82 3.93 2.72
Net interest margin(7). 3.38 3.58 3.45 4.02 4.28 4.49 3.66
Average interest-earn-
ing assets to average
interest-bearing lia-
bilities.............. 116.31 116.16 116.55 116.11 114.72 114.29 117.32
Total non-interest ex-
pense to average as-
sets(8)............... 2.00 1.78 1.89 1.87 1.83 1.55 1.57
Efficiency ratio(9).... 50.97 46.74 50.14 44.99 41.34 34.57 42.51
Net interest income to
operating expenses.... 162.81 194.01 174.65 206.95 225.15 281.01 227.22
REGULATORY CAPITAL RA-
TIOS(10):
Leveraged capital...... 12.39 13.34 13.27 13.57 13.07 11.60 12.00
Total Risk-based capi-
tal................... 28.10 28.77 28.93 27.01 30.95 33.22 32.58
ASSET QUALITY RATIOS AND
DATA:
Total non-performing
loans(11)............. $ 11,945 $ 18,321 $12,173 $25,055 $31,343 $29,097 $31,905
Real estate owned, net. 5,366 3,486 6,047 3,359 2,613 2,911 519
Total non-performing
assets(12)............ 17,311 21,807 18,220 28,414 33,956 32,008 32,424
Non-performing loans as
a percent of
loans(11)(13)......... 2.83% 5.02% 3.13% 6.82% 10.84% 8.80% 8.00%
Non-performing assets
as a percent of total
assets(12)............ 0.98 1.42 1.14 1.98 2.53 2.45 2.83
Allowance for possible
loan losses as a per-
cent of loans(3)(13).. 5.29 6.62 6.01 6.84 8.47 7.02 4.94
Allowance for possible
loan losses as a
percent of total non-
performing
loans(3)(11).......... 186.79 131.68 191.82 100.28 78.17 79.69 61.74
OTHER DATA:
Number of deposit ac-
counts................ 112,543 105,291 107,441 99,305 94,257 99,088 96,511
Number of full service
customer facilities... 6 6 6 6 6 6 5
Number of mortgage
origination offices... 6 -- 6 -- -- -- --
</TABLE>
- --------
(1) The data presented for the five months ended May 31, 1996 and 1995 were
derived from unaudited consolidated financial statements and reflect, in
the opinion of management, all adjustments (consisting only of normal
recurring adjustments) which are necessary to present fairly the results
for such interim periods. Interim results at and for the five months
ended May 31, 1996 are not necessarily indicative of the results that may
be expected for the year ending December 31, 1996.
(2) The Bank adopted SFAS No. 115 as of January 1, 1994, and reclassified
securities having a market value of $658.3 million from its held-to-
maturity portfolio to its available-for-sale portfolio in November 1995
pursuant to a FASB interpretation of SFAS No. 115. Prior to the adoption
of SFAS No. 115, securities were carried at amortized cost, as adjusted
for amortization of premiums and accretion of discounts over the
remaining terms of the securities from the dates of purchase. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations--Comparison of Financial Condition at December 31, 1995 and
December 31, 1994."
(3) All loans receivable held for investment are presented net of the Bank's
allowance for possible loan losses which at May 31, 1996, December 31,
1995, 1994, 1993, 1992 and 1991 was $22.3 million, $23.4 million, $25.1
million, $24.5 million, $23.2 million and $19.7 million, respectively.
(4) Reflects the net cumulative effect of the Bank's adoption of SFAS No.
106, "Employer's Accounting for Post-retirement Benefits Other than
Pensions" and SFAS No. 109, "Accounting for Income Taxes." See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations--Comparison of Operating Results for the Years Ended
December 31, 1994 and December 31, 1993--Cumulative Effect of Changes in
Accounting Principles."
(5) Asset Quality Ratios and Regulatory Capital Ratios are end of period
ratios. With the exception of end of period ratios, all ratios are based
on average monthly balances during the indicated periods and are
annualized where appropriate.
(6) The net interest rate spread represents the difference between the
weighted average yield on average interest-earning assets and the
weighted average cost of average interest-bearing liabilities and
includes the effect of the Bank's payment of a special interest payment
which has generally ranged from 10% to 25% of the interest paid on
savings and NOW accounts. See "Business of the Bank--Sources of Funds."
(7) The net interest margin represents net interest income as a percent of
average interest-earning assets and includes the effect of the Bank's
payment of a special interest payment which has generally ranged from 10%
to 25% of the interest paid on savings and NOW accounts. See "Business of
the Bank--Sources of Funds."
(8) Excludes the effect of the amortization of goodwill.
(9) The efficiency ratio represents the ratio of operating expenses,
excluding the amortization of goodwill, divided by the sum of net
interest income and non-interest income.
(10) For definitions and further information relating to the Bank's regulatory
capital requirements, see "Regulation and Supervision--FDIC Regulations--
Capital Requirements." See "Regulatory Capital Compliance" for the Bank's
pro forma capital levels as a result of the Offerings.
(11) Non-performing loans consist of all non-accrual loans and all other loans
90 days or more past due. It is the Bank's policy to generally cease
accruing interest on all loans 90 days or more past due. See "Business of
the Bank--Delinquent Loans, Real Estate Owned and Classified Assets."
(12) Non-performing assets consist of non-performing loans and real estate
owned, net ("REO").
(13) Loans include loans receivable held for investment, net, excluding the
allowance for possible loan losses.
(14) Does not include the net effect of accounting changes due to the
implementation of SFAS Nos. 106 and 109.
17
<PAGE>
RECENT DEVELOPMENTS
The following table sets forth certain consolidated financial and other data
of the Bank at and for the periods indicated. Consolidated financial and
operating data and financial ratios and other data at and for the year ended
December 31, 1995 have been derived from and should be read in conjunction
with the audited Consolidated Financial Statements of the Bank and Notes
thereto presented elsewhere in this Prospectus. Consolidated financial and
operating data and financial ratios and other data at and for the eight months
ended August 31, 1996 and 1995 were derived from unaudited Consolidated
Financial Statements. The results of operations and ratios and other data
presented for the eight months ended August 31, 1996 are not necessarily
indicative of the results of operations for the year ending December 31, 1996.
<TABLE>
<CAPTION>
AT AUGUST 31, AT DECEMBER 31,
1996(1) 1995
------------- ---------------
(IN THOUSANDS)
<S> <C> <C>
SELECTED FINANCIAL CONDITION DATA:
Total assets.................................. $1,973,056 $1,596,744
Debt securities(2):
Available-for-sale.......................... 319,733 260,553
Held-to-maturity............................ 1,930 1,930
Equity securities available-for-sale(2)....... 145,631 118,778
Mortgage-backed and mortgage related securi-
ties, net(2):
Available-for-sale.......................... 648,848 413,485
Held-to-maturity............................ 296,146 347,213
Loans held for sale, net...................... 12,466 17,151
Loans receivable held for investment, net(3).. 438,272 365,265
Deposits...................................... 1,542,799 1,335,550
Borrowed funds................................ 162,384 1,647
Retained earnings............................. 227,958 226,418
<CAPTION>
FOR THE EIGHT MONTHS
ENDED AUGUST 31,
-----------------------------
1996(1) 1995(1)
------------- ---------------
(IN THOUSANDS)
<S> <C> <C>
SELECTED OPERATING DATA:
Interest income............................... $ 83,333 $ 72,516
Interest expense.............................. 45,771 38,261
---------- ----------
Net interest income before provision for
possible loan losses....................... 37,562 34,255
Provision for possible loan losses............ 600 400
---------- ----------
Net interest income after provision for pos-
sible loan losses.......................... 36,962 33,855
Non-interest income........................... 5,907 2,010
Non-interest expense.......................... 22,535 18,736
---------- ----------
Income before income taxes.................. 20,334 17,129
Provision for income taxes.................... 6,761 5,536
---------- ----------
Net income.................................. $ 13,573 $ 11,593
========== ==========
</TABLE>
(continued on next page)
18
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE
EIGHT MONTHS
ENDED AUGUST 31,
------------------------
1996(1) 1995(1)
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
SELECTED FINANCIAL RATIOS AND OTHER DATA(4):
PERFORMANCE RATIOS:
Return on average assets........................ 1.16% 1.14%
Return on average retained earnings............. 9.03 8.40
Average retained earnings to average assets..... 12.88 13.54
Retained earnings to total assets at end of pe-
riod........................................... 11.55 13.17
Net interest rate spread(5)..................... 2.69 2.82
Net interest margin(6).......................... 3.35 3.47
Average interest-earning assets to average in-
terest-bearing liabilities..................... 116.01 116.83
Total non-interest expense to average assets(7). 1.93 1.84
Efficiency ratio(8)............................. 49.67 49.20
Net interest income to operating expenses....... 166.68 182.83
REGULATORY CAPITAL RATIOS(9):
Leverage capital................................ 11.39 13.23
Total Risk-based capital........................ 26.78 28.27
ASSET QUALITY RATIOS AND DATA:
Total non-performing loans(10).................. $ 11,203 $ 15,993
Real estate owned, net.......................... 4,918 5,096
Total non-performing assets(11)................. 16,121 21,089
Non-performing loans as a percent of
loans(10)(12).................................. 2.43% 4.41%
Non-performing assets as a percent of total as-
sets(11)....................................... 0.82 1.34
Allowance for possible loan losses as a percent
of loans(3)(12)................................ 4.80 6.51
Allowance for possible loan losses as a percent
of total non-performing loans(3)(10)........... 197.25 147.68
OTHER DATA:
Number of deposit accounts...................... 114,602 106,546
Number of full service customer facilities...... 6 6
Number of mortgage origination offices.......... 6 6
</TABLE>
- --------
(1) The data presented at and for the eight months ended August 31, 1996 and
1995 were derived from unaudited consolidated financial statements and
reflect, in the opinion of management, all adjustments (consisting only
of normal recurring adjustments) which are necessary to present fairly
the results for such interim periods. Interim results at and for the
eight months ended August 31, 1996 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1996.
(2) The Bank adopted SFAS No. 115 as of January 1, 1994, and reclassified
securities having a market value of $658.3 million from its held-to-
maturity portfolio to its available-for-sale portfolio in November 1995
pursuant to a FASB interpretation of SFAS No. 115. Prior to the adoption
of SFAS No. 115, securities were carried at amortized cost, as adjusted
for amortization of premiums and accretion of discounts over the
remaining terms of the securities from the dates of purchase. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations--Comparison of Financial Condition at December 31, 1995 and
December 31, 1994."
(3) All loans receivable held for investment are presented net of the Bank's
allowance for possible loan losses which at August 31, 1996 and August
31, 1995, was $22.1 million and $23.6 million, respectively.
(4) Asset Quality Ratios and Regulatory Capital Ratios are end of period
ratios. With the exception of end of period ratios, all ratios are based
on average monthly balances during the indicated periods and are
annualized where appropriate.
(5) The net interest rate spread represents the difference between the
weighted average yield on average interest-earning assets and the
weighted average cost of average interest-bearing liabilities and
includes the effect of the Bank's payment of a special interest payment
which has ranged from 20% to 25% of the interest paid on savings and NOW
accounts for the periods indicated. See "Business of the Bank--Sources of
Funds."
(6) The net interest margin represents net interest income as a percent of
average interest-earning assets and includes the effect of the Bank's
payment of a special interest payment which has ranged from 20% to 25% of
the interest paid on savings and NOW accounts for the periods indicated.
See "Business of the Bank--Sources of Funds."
(7) Excludes the effect of the amortization of goodwill.
(8) The efficiency ratio represents the ratio of operating expenses,
excluding the amortization of goodwill, divided by the sum of net
interest income and non-interest income.
(9) For definitions and further information relating to the Bank's regulatory
capital requirements, see "Regulation and Supervision--FDIC Regulations--
Capital Requirements." See "Regulatory Capital Compliance" for the Bank's
pro forma capital levels as a result of the Offerings.
(10) Non-performing loans consist of all non-accrual loans and all other loans
90 days or more past due. It is the Bank's policy to generally cease
accruing interest on all loans 90 days or more past due. See "Business of
the Bank--Delinquent Loans, Real Estate Owned and Classified Assets."
(11) Non-performing assets consist of non-performing loans and real estate
owned, net ("REO").
(12) Loans include loans receivable held for investment, net, excluding the
allowance for possible loan losses.
19
<PAGE>
COMPARISON OF FINANCIAL CONDITION AT AUGUST 31, 1996 AND DECEMBER 31, 1995
Assets at August 31, 1996 totalled $1.97 billion, an increase of $376.3
million, or 23.6%, as compared to $1.60 billion at December 31, 1995. The
growth was primarily attributable to the purchase of debt and equity and
mortgage-backed and mortgage related securities funded by deposit inflows and
short-term borrowings. As a result, the Bank's securities available-for-sale
portfolio increased by $321.4 million or 40.5%. Debt and equity securities
available-for-sale increased by $86.1 million to a balance of $465.4 million
at August 31, 1996, compared to a balance of $379.3 million at December 31,
1995, and mortgage-backed and mortgage related securities available-for-sale
increased by $235.3 million to $648.8 million at August 31, 1996 from $413.5
million at December 31, 1995. Real estate loans, net, also increased by $72.2
million, or 18.7%, from $386.8 million at December 31, 1995, to $459.0 million
at August 31, 1996, primarily due to increased one-to four-family loan
purchases from RFI and an increase in the origination level of commercial real
estate loans. Cash and due from banks increased by $4.3 million from $9.7
million at December 31, 1995 to $14.0 million at August 31, 1996. Federal
funds sold totalled $27.5 million at August 31, 1996, an increase of $17.5
million from $10.0 million at December 31, 1995. The increase in cash and due
from banks and federal funds sold was a result of the timing of operating and
investing cash flows. Real estate loans held for sale decreased by $4.7
million, or 27.3%, to $12.5 million at August 31, 1996, from $17.2 million at
December 31, 1995 primarily due to the Bank's purchases of an increased
percentage of total loans originated by RFI, thus reducing the amount of loans
available to be sold by RFI to outside investors in the secondary market.
Deposit balances at August 31, 1996 were $1.54 billion compared to $1.34
billion at December 31, 1995, an increase of $207.2 million, or 15.5%. The
overall increase in deposits is primarily attributable to an increase in
certificates of deposit of $240.1 million, or 33.3%, due to the Bank's
strategy of offering competitive rates on all of its certificate of deposit
products. Additionally, deposits at August 31, 1996 include $50.0 million of
brokered deposits as compared to no brokered deposits at December 31, 1995.
The Bank intends to purchase an additional $50.0 million of brokered deposits
in October 1996 and utilize such funds primarily for the purchase of mortgage-
backed and mortgage related securities and common and preferred stock.
Borrowed funds increased to $162.4 million at August 31, 1996 from $1.6
million at December 31, 1995, as management determined to utilize borrowings,
primarily in the form of reverse repurchase agreements, to fund a portion of
the Bank's asset growth.
Retained earnings at August 31, 1996 were $228.0 million, an increase of
$1.6 million, compared to $226.4 million at December 31, 1995. Retained
earnings increased due to net income of $13.6 million which was significantly
offset by a reduction in the net unrealized gain on securities available-for-
sale, net of tax, of $12.0 million due primarily to rising interest rates
during 1996 which resulted in a decline in the fair market value of mortgage-
backed securities available-for-sale.
COMPARISON OF OPERATING RESULTS FOR THE EIGHT MONTHS ENDED AUGUST 31, 1996 AND
AUGUST 31, 1995
General
The Bank's net income for the eight months ended August 31, 1996 was $13.6
million, an increase of $2.0 million, or 17.1%, as compared to $11.6 million
for the eight months ended August 31, 1995. The $2.0 million increase was
primarily attributable to a $3.3 million increase in net interest income,
which primarily resulted from an increase in the average balance of interest-
earning assets, and a $3.9 million increase in non-interest income primarily
related to the establishment of RFI in August 1995. The increases were partly
offset by a $3.8 million increase in non-interest expense, also due to the
establishment of RFI, and a $1.2 million increase in income tax expense.
Interest Income
Interest income for the eight months ended August 31, 1996 was $83.3
million, compared to $72.5 million for the eight months ended August 31, 1995,
an increase of $10.8 million, or 14.9%. The increase in interest
20
<PAGE>
income was the result of a significant increase in the average balance of the
mortgage-backed and mortgage related securities available-for-sale portfolio
and a 13 basis point increase in the yield on such securities. The increase in
the average balance of mortgage-backed and mortgage related securities was
primarily due to increased purchases of such securities in accordance with the
Bank's current securities investment strategy and as a result of the
restructuring of the securities portfolio in November 1995 in connection with
the FASB interpretation of SFAS No. 115. Interest income on real estate loans
increased $2.9 million to $24.8 million for the eight months ended August 31,
1996 from $21.9 million for the eight months ended August 31, 1995, reflecting
a $70.3 million increase in the average balance of such loans, partially
offset by a 48 basis point decrease in the average yield which was due in part
to a $700,000 interest recovery in March 1995 on the satisfaction of a non-
performing loan. The increase in the average balance of real estate loans,
net, was primarily attributable to the establishment of RFI in August 1995 and
an increase in the level of commercial real estate loan originations.
Interest Expense
Interest expense on deposits increased $6.1 million to $43.1 million for the
eight months ended August 31, 1996 from $37.0 million for the eight months
ended August 31, 1995. This increase reflects a $144.9 million increase in the
average balance of interest bearing deposits and a 20 basis point increase in
the average rate paid on such liabilities to 4.68% for the eight months ended
August 31, 1996 from 4.48% for the same period in the prior year. The increase
in average interest-bearing deposits was primarily attributable to a $191.4
million increase in the average balance of certificates of deposit to $838.7
million from $647.3 million, partially offset by a $42.8 million decrease in
the average balance of savings accounts to $434.2 million from $477.0 million.
The effect of the increase in the average balance of certificates of deposit
was partly offset by a 16 basis point decrease in the average rate paid on
such accounts resulting in a $6.5 million increase in interest expense on
certificates of deposit. The overall increase in interest expense and average
rate paid on deposits for the eight months ended August 31, 1996 compared to
the same period in the prior year reflects the continuance of depositors
shifting funds from lower yielding core deposit accounts to higher yielding
certificate of deposit accounts and the Bank's competitive pricing of
certificate of deposit accounts to attain and retain such deposits. Interest
expense on borrowings increased $1.2 million in the eight months ended August
31, 1996 compared to the same period in 1995, primarily reflecting higher
average balances due to management's decision to use borrowings to fund a
portion of the Bank's asset growth through the purchase of investment and
mortgage-backed and mortgage related securities.
Provision for Possible Loan Losses
The Bank's provision for possible loan losses totalled $600,000 for the
eight months ended August 31, 1996, as compared to $400,000 for the eight
months ended August 31, 1995, an increase of $200,000 or 50.0%. The Bank's
allowance for possible loan losses at August 31, 1996 was $22.1 million as
compared to $23.3 million at December 31, 1995. Although the level of non-
performing loans in the Bank's portfolio has decreased, management has
continued to provide reserves due to the overall increase in the Bank's loan
portfolio, including continued originations of commercial real estate loans,
and management's evaluation of the adequacy of the reserve in the context of
the Bank's historical loan loss experience. Loan charge-offs for the eight
month period ended August 31, 1996 were $1.9 million as compared to $2.0
million for the same period in 1995. At August 31, 1996, the Bank's allowance
for possible loan losses as a percentage of total loans was 4.80%, compared to
6.51% at August 31, 1995, and the Bank's allowance for possible loan losses as
a percentage of non-performing loans was 197.25% at August 31, 1996, as
compared to 147.68% at August 31, 1995.
Non-Interest Income
Non-interest income increased to $5.9 million for the eight months ended
August 31, 1996 from $2.0 million for the eight months ended August 31, 1995.
Non-interest income improved primarily due to net gains of $2.8 million on the
sale of loans and $3.9 million of loan servicing and fee income recorded
during the eight months ended August 31, 1996 as compared to net gains of
$392,000 on the sale of loans and $2.4 million of loan
21
<PAGE>
servicing and fee income recorded during the same period in 1995. The
increases are primarily reflective of the Bank's establishment of RFI in
August 1995, which has had a significant effect on the Bank's level of
originations and sales of residential one-to four-family loans and the
outstanding balance of loans serviced for others. The Bank's non-interest
income was also affected by net losses on real estate operations in the eight
months ended August 31, 1996 compared to net gains in the comparable period in
1995.
Non-Interest Expense
Non-interest expense increased by $3.8 million, or 20.3%, from $18.7 million
for the eight months ended August 31, 1995 to $22.5 million for the eight
months ended August 31, 1996 primarily due to the establishment of RFI.
Compensation and employee benefits totalled $12.8 million for the eight months
ended August 31, 1996 as compared to $10.0 million for the same period in
1995, an increase of $2.8 million or 27.9%. Compensation and employee benefits
expense relating to the operations of RFI amounted to $3.2 million for the
eight months ended August 31, 1996. Other significant changes in the Bank's
operating expenses included a $1.9 million decrease in insurance premiums paid
to the FDIC resulting from the FDIC's decision to lower the insurance premiums
paid by BIF-insured institutions to the legal minimum effective January 1,
1996. See "Regulation and Supervision--Insurance of Deposits" and "Risk
Factors--Payment of Financing Corporation Bonds." Other non-interest expense
increased $1.7 million from $3.8 million for the eight months ended August 31,
1995 to $5.5. million for the eight months ended August 31, 1996 primarily due
to an increase in professional fees of $278,000 and other non-interest
expenses associated with RFI of $841,000 primarily related to mortgage
recording taxes and certain general and administration expenses. Amortization
of the excess of cost over fair value of net assets acquired ("goodwill")
increased to $313,000 for the eight months ended August 31, 1996 from $110,000
for the same period in 1995. The increase is directly attributable to the
Bank's establishment of RFI in August 1995. The consideration paid for the
assets and liabilities of Residential Mortgage Banking, Inc. ("RMBI"),
including a $623.0 million loan servicing portfolio, exceeded the estimated
fair value of the net assets acquired by approximately $3.5 million, which was
recorded by RFI as goodwill and is being amortized on a straight line basis
over a ten year period.
Income Taxes
Income tax expense was $6.8 million for the eight months ended August 31,
1996, compared to $5.5 million for the eight months ended August 31, 1995. The
increase in income tax expense was the result of the increase in income before
income taxes. The effective tax rate for the eight months ended August 31,
1996 was 33.3% as compared to 32.3% for the same period in 1995.
22
<PAGE>
RISK FACTORS
The following risk factors, in addition to those discussed elsewhere in this
Prospectus, should be considered by investors in deciding whether to purchase
the Common Stock offered hereby.
SENSITIVITY TO INCREASES IN INTEREST RATES
The Bank's profitability, like that of most financial institutions, is
dependent to a large extent upon its net interest income, which is the
difference between its interest income on interest-earning assets, such as
loans and securities, and its interest expense on interest-bearing
liabilities, such as its deposits and borrowed funds. Accordingly, the Bank's
results of operations and financial condition are largely dependent on
movements in market interest rates and its ability to manage its assets and
liabilities in response to such movements.
While the Bank emphasizes investment in adjustable rate or shorter term
loans, the Bank currently invests in one- to four-family mortgage loans with
terms in excess of 15 years if such loans bear interest rates of 8% or
greater. At May 31, 1996, 61.7% of the Bank's gross loans had adjustable
interest rates and its loan portfolio had an average weighted maturity of 13.2
years. At such date, $118.5 million, or 9.4%, of the Bank's securities had
adjustable interest rates and its securities portfolio had a weighted average
maturity of 3.2 years. At May 31, 1996, the Bank had $688.2 million of
certificates of deposit with maturities of one year or less and $140.7 million
of deposits over $100,000, which tend to be less stable sources of funding as
compared to core deposits and represented 46.4% of the Bank's interest-bearing
liabilities. As a result, the ratio of the Bank's interest-earning assets
repricing or maturing within one year or less as compared to its interest-
bearing liabilities maturing or repricing in one year or less ("one year gap
position") was a negative 22.8%. Due to the Bank's level of shorter term
certificates of deposit, the Bank's cost of funds may increase at a greater
rate in a rising interest rate environment than if it had a greater amount of
core deposits which, in turn, may adversely affect net interest income and net
income. Accordingly, in a rising interest rate environment, the Bank's
interest-bearing liabilities may adjust upwardly more rapidly than the yield
on its adjustable-rate loans, adversely affecting the Bank's net interest rate
spread, net interest income and net income.
Significant increases in the level of market interest rates also may
adversely affect the fair value of the Bank's securities and other interest-
earning assets. At May 31, 1996, $1.15 billion, or 90.6%, of the Bank's
securities had fixed interest rates. Generally, the value of fixed-rate
instruments fluctuates inversely with changes in interest rates. As a result,
increases in interest rates could result in decreases in the market value of
interest-earning assets which could adversely affect the Bank's results of
operations if sold or, in the case of interest-earning assets classified as
available-for-sale, the Bank's retained earnings if retained. Increases in
market interest rates also can affect the type (fixed-rate or adjustable-rate)
and amount of loans originated by the Bank and the average life of loans and
securities, which can adversely impact the yields earned on the Bank's loan
and securities portfolio. In periods of decreasing interest rates, the average
life of loans held by the Bank may be shortened to the extent increased
prepayment activity occurs during such periods which, in turn, may result in
the Bank investing funds from such prepayments in lower yielding assets. The
Bank's loan sale and servicing activity may also be adversely affected by a
declining interest rate environment to the extent such environment results in
increased loan prepayment activity of serviced loans or losses associated with
the use of forward commitment loan sale contracts. In this regard, at May 31,
1996, the Bank and RFI were servicing $762.7 million of loans for others and
at such date had recorded an $8.6 million mortgage servicing rights asset. To
the extent loan prepayment activity of serviced loans increases, it would also
result in a reduction in the value of the Bank's mortgage servicing rights
which, in turn, would adversely affect net income. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Management of Interest Rate Risk."
INCREASED LENDING RISKS ASSOCIATED WITH COMMERCIAL REAL ESTATE, MULTI-FAMILY
AND CONSTRUCTION AND DEVELOPMENT LENDING
At May 31, 1996, the Bank's commercial real estate, multi-family and
construction and development loan portfolios totalled $218.0 million, or 49.7%
of total loans and 12.8% of total interest-earning assets. At that date,
23
<PAGE>
multi-family loans totalled $33.3 million, or 7.6% of total loans, commercial
real estate loans totalled $153.6 million, or 35.1% of total loans, and
construction and development loans totalled $31.0 million, or 7.1% of total
loans. Additionally at such date, the Bank had $87.5 million of outstanding
commitments to fund commercial real estate, multi-family and construction and
development loans.
Commercial real estate and multi-family loans are generally viewed as
exposing the lender to a greater risk of loss than one- to four-family
residential loans. Repayment of commercial real estate and multi-family loans
generally is dependent, in large part, on sufficient income from the property
to cover operating expenses and debt service. Economic events and government
regulations, which are outside the control of the borrower or lender, could
impact the value of the security for the loan or the future cash flow of the
affected properties. Additionally, although commercial real estate and multi-
family values have stabilized in recent periods, the decline in real estate
values experienced in the Bank's primary market area in the late 1980s and
early 1990s was more pronounced with respect to commercial real estate and
multi-family properties than one- to four-family residential properties.
Construction and development financing is generally considered to involve a
higher degree of credit risk than long-term financing on improved, owner-
occupied real estate as the risk of loss on such loans is dependent largely
upon the accuracy of the initial estimate of the property's value at
completion of construction or development compared to the estimated cost
(including interest) of construction. If the estimate of value proves to be
inaccurate, the property securing the loan, when completed, may have a value
which is insufficient to assure full repayment of the loan.
Prior to 1993, the Bank had experienced significant charge-offs on its
commercial real estate and construction and development loans, including
charge-offs of $8.0 million, $5.6 million and $5.2 million for 1991, 1992 and
1993, respectively. Beginning in 1993, the Bank restructured its multi-family,
commercial real estate and construction and development lending procedures and
policies and hired experienced commercial real estate loan personnel in an
effort to improve such loan programs and, since such time, has placed
increased emphasis on commercial real estate loan originations. Given the
recent growth in the Bank's commercial real estate loan portfolio and the
relatively recent nature of its commercial real estate loan origination
activity, the Bank has a more limited history of loan loss experience on such
loans which it may utilize to base its commercial real estate loan
underwriting and to establish its level of loan loss reserves for such loans.
Accordingly, the Bank's historical loan loss activity associated with its
commercial real estate lending may not be indicative of the future performance
of its commercial real estate loan portfolio. See "--Weaknesses in Local
Economy" and "Business of the Bank--Lending Activities" for discussions of the
Bank's underwriting procedures utilized in originating commercial real estate,
multi-family and other loans. The Bank's commercial real estate portfolio has
grown from $101.8 million at December 31, 1993 to $153.6 million at May 31,
1996. Of the $153.6 million of commercial real estate loans in the Bank's loan
portfolio as of May 31, 1996, $103.6 million of such loans, or 67.6%, were
originated since 1993 and of the $50.0 million of such loans originated during
or prior to 1993, $7.4 million were included in nonperforming loans at May 31,
1996. Additionally, at May 31, 1996, the Bank had $14.1 million of outstanding
commitments to fund commercial real estate loans.
DEPENDENCE ON SECURITIES INVESTMENTS
Prior to 1993, the Bank's operating strategy focused on investing funds in
U.S. Government and mortgage-backed and mortgage related securities, and the
Bank did not emphasize investment in whole loans. Beginning in 1993, the Bank
refocused its operating strategy on loan production primarily in the areas of
one- to four-family loans and commercial real estate loans. Although the
Bank's loan portfolio has grown from $297.3 million at December 31, 1993 to
$438.1 million at May 31, 1996, the Bank has not significantly increased its
loan portfolio as a percentage of total assets. As a result, at May 31, 1996,
the Bank's net loan portfolio, excluding loans held for sale, totalled $399.5
million, or 23.5% of total interest earning assets, and its securities
portfolio totalled $1.27 billion, or 74.5% of total interest-earning assets.
As of May 31, 1996, the weighted average rate of the Bank's securities
portfolio was 6.96% as compared to the weighted average rate of its mortgage
loan portfolio of 8.57%. As a result, at May 31, 1996, the Bank's net interest
spread (the difference between the average yield on its interest-earning
assets and the average cost of interest-bearing liabilities) was
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2.89%. To the extent the Bank's investment in loans as a percentage of total
interest-earning assets remains at current levels or declines, the net yield
on the Bank's interest-earning assets may be below that of its peer group and
its net interest spread may correspondingly be below its peer group.
Investments in mortgage-backed and mortgage related securities also involve
the risk that actual prepayment of the loans underlying the securities exceed
the prepayments estimated over the life of the security, which may result in
the loss of any premium paid for such security and thereby reduce the net
yield on such securities.
In an effort to broaden its lending operations in August 1995, the Bank
purchased certain assets and liabilities of RMBI, including its loan servicing
portfolio, and with such assets and liabilities established its mortgage
banking subsidiary, RFI, on August 1, 1995. Through RFI, the Bank has
attempted to increase its investment in one- to four-family loans and increase
its loan servicing-related income, thereby lessening its dependence on
securities investments. In addition, since 1993, the Bank has restructured its
commercial lending activities by hiring qualified commercial real estate and
construction and development loan personnel who are familiar with the Bank's
primary market area and local developers and by revising its commercial real
estate loan underwriting policies and processing procedures, in an effort to
increase its investment in higher-yielding commercial real estate and
construction and development loans.
If current economic conditions persist and loan demand remains at current
levels, no assurances can be made that the Bank will be able to increase the
level of its mortgage loan portfolio, or that RFI or the Bank will be able to
increase the level of originations or purchases of mortgage loans in the
Bank's primary market area, or that it will be able to invest a significant
portion of the net Conversion proceeds in mortgage loans.
ESTABLISHMENT OF THE CHARITABLE FOUNDATION
Pursuant to the Plan, the Company intends to voluntarily establish a
charitable foundation in connection with the Conversion. The Plan provides
that the Bank and the Company will establish the Foundation, which will be
incorporated under Delaware law as a non-stock corporation and will be funded
with shares of Common Stock contributed by the Company. The contribution of
Common Stock to the Foundation will be dilutive to the interests of
stockholders and will have an adverse impact on the reported earnings of the
Company in 1996, the year in which the Foundation is established.
Dilution of Stockholders' Interests. The Company proposes to fund the
Foundation with Common Stock of the Company in an amount equal to 3.0% of the
Common Stock to be sold in the Conversion. At the minimum, midpoint and
maximum of the Estimated Price Range, the contribution to the Foundation would
equal 816,990, 961,165 and 1,105,340 shares of Common Stock, with a value of
$8.2 million, $9.6 million and $11.1 million, respectively, based on the
Purchase Price of $10 per share. Assuming the sale of Common Stock at the
maximum of the Estimated Price Range, upon completion of the Conversion and
establishment of the Foundation, the Company will have 37,950,000 shares
issued and outstanding of which the Foundation will own 1,105,340 shares of
Common Stock, or 2.9%. AS A RESULT, PERSONS PURCHASING SHARES OF COMMON STOCK
IN THE CONVERSION WILL HAVE THEIR OWNERSHIP AND VOTING INTERESTS IN THE
COMPANY DILUTED BY 2.9%. SEE "PRO FORMA DATA."
Impact on Earnings. The contribution of Common Stock to the Foundation will
have an adverse impact on the Company's and the Bank's earnings in the year in
which the contribution is made. The Company will recognize the full expense in
the amount of the contribution of Common Stock to the Foundation in the
quarter in which it occurs, which is expected to be the fourth quarter of
1996. The amount of the contribution will range from $8.2 million to $11.1
million, based on the minimum and maximum of the Estimated Price Range,
respectively. The contribution expense will be partially offset by the tax
benefit related to the expense. The Company and the Bank have been advised by
their independent tax advisors that the contribution to the Foundation will be
tax deductible, subject to an annual limitation based on 10% of the Company's
annual taxable income. Assuming a contribution of $11.1 million in Common
Stock (based on the maximum of the Estimated Price Range), the Company
estimates a net tax effected expense of $7.0 million (based upon a 37% tax
rate). If the Foundation had been established at December 31, 1995, the Bank
would have reported net income of $11.7 million, rather than reporting net
income of $18.7 million for the year ended December 31, 1995. Management
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cannot predict earnings for 1996, but expects that the establishment and
funding of the Foundation will have an adverse impact on the Company's
earnings for the year. In addition to the contribution to the Foundation, the
Bank expects in the future to continue making ordinary charitable
contributions within its community but the Company and the Bank do not
currently anticipate making additional contributions to the Foundation within
the first five years following the initial contribution.
Tax Considerations. The Company and the Bank have been advised by their
independent tax advisors that an organization created for the above purposes
would qualify as a Section 501(c)(3) exempt organization under the Internal
Revenue Code of 1986, as amended (the "Code"), and would be classified as a
private foundation. The Foundation will submit a request to the IRS to be
recognized as an exempt organization. The Company and the Bank have received
an opinion of their independent tax advisors that the Foundation would qualify
as a Section 501(c)(3) exempt organization under the Code, except that such
opinion does not consider the impact of the condition to be agreed to by the
Foundation that Common Stock issued to the Foundation be voted in the same
ratio as all other shares of the Company's Common Stock on all proposals
considered by stockholders of the Company. See "The Conversion--Establishment
of the Charitable Foundation--Regulatory Conditions Imposed on the
Foundation." Consistent with this condition, in the event that the Company or
the Foundation receives an opinion of their legal counsel that compliance with
the voting restriction would have the effect of causing the Foundation to lose
its tax-exempt status, or otherwise have a material and adverse tax
consequence on the Foundation or subject the Foundation to an excise tax under
Section 4941 of the Code, the FDIC shall waive such voting restriction upon
submission of a legal opinion by the Company or the Foundation that is
satisfactory to the FDIC. The independent tax advisors' opinion further
provides that there is substantial authority for the position that the
Company's contribution of its own stock to the Foundation would not constitute
an act of self-dealing, and that the Company would be entitled to a deduction
in the amount of the fair market value of the stock at the time of the
contribution less the nominal par value that the Foundation is required to pay
to the Company for such stock, subject to an annual limitation based on 10% of
the Company's annual taxable income. The Company, however, would be able to
carry forward any unused portion of the deduction for five years following the
contribution. Thus, while the Company would have received a charitable
contribution deduction of approximately $2.7 million in 1995 (based upon the
sale of stock at the maximum of the Estimated Price Range and a contribution
of $11.1 million of Common Stock and the Bank's pre-tax income for 1995), the
Company is permitted under the Code to carry over the excess contribution in
the five following years. Assuming the sale of Common Stock at the midpoint of
the Estimated Price Range, the Company estimates that substantially all of the
deduction should be deductible over the six-year period. Although the Company
and the Bank have received an opinion of their independent tax advisors that
the Company will be entitled to the deduction for the charitable contribution,
there can be no assurances that the IRS will recognize the Foundation as a
Section 501(c)(3) exempt organization or that the deduction will be permitted.
In such event, the Company's tax benefit related to the Foundation would have
to be fully expensed, resulting in a further reduction in earnings in the year
in which the IRS makes such a determination.
Comparison of Valuation and Other Factors Assuming the Foundation is Not
Established as Part of the Conversion. The establishment of the Foundation was
taken into account by FinPro in determining the estimated pro forma market
value of the Common Stock of the Company. The aggregate price of the shares of
Common Stock being offered in the Subscription and Community Offerings is
based upon the independent appraisal conducted by FinPro of the estimated pro
forma market value of the Common Stock of the Company. The pro forma aggregate
price of the Common Stock being offered for sale in the Conversion is
currently estimated to be between $272.3 million and $368.4 million, with a
midpoint of $320.4 million. The pro forma price to book ratio and the pro
forma price to earnings ratio, at and for the five months ended May 31, 1996,
are 66.14% and 10.96x, respectively, at the midpoint of the Estimated Price
Range. In the event that the Conversion did not include the Foundation, FinPro
has estimated that the estimated pro forma market value of the Common Stock
would be $339.2 million at the midpoint based on a pro forma price to book
ratio and the pro forma price to earnings ratio that are approximately the
same as the independent appraisal at 66.14% and 10.96x, respectively. The
amount of Common Stock being offered for sale in the Conversion at the
midpoint of the Estimated Price Range is approximately $18.8 million less than
the estimated amount of Common Stock that would be offered in the Conversion
without the Foundation based on the estimate provided by FinPro. Accordingly,
certain account
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holders of the Bank who subscribe to purchase Common Stock in the Subscription
Offering would receive fewer shares depending on the size of a depositor's
stock order and the amount of his or her qualifying deposits in the Bank and
the overall level of subscriptions. See "Comparison of Valuation and Pro Forma
Information with No Foundation." This estimate by FinPro was prepared solely
for purposes of providing Eligible Account Holders and subscribers with
information with which to make an informed decision on the Conversion.
The decrease in the amount of Common Stock being offered as a result of the
contribution of Common Stock to the Foundation will not have a significant
effect on the Company or the Bank's capital position. The Bank's regulatory
capital is significantly in excess of its regulatory capital requirements and
will further exceed such requirements following the Conversion. The Bank's
leverage and risk-based capital ratios at May 31, 1996 were 12.39% and 28.10%,
respectively. Assuming the sale of shares at the midpoint of the Estimated
Price Range, the Bank's pro forma leverage and risk-based capital ratios at
May 31, 1996 would be 17.82% and 39.92%, respectively. On a consolidated
basis, the Company's pro forma stockholders' equity would be $499.1 million,
or approximately 24.36% of pro forma consolidated assets, assuming the sale of
shares at the midpoint of the Estimated Price Range. Pro forma stockholders'
equity per share and pro forma net earnings per share would be $15.12 and
$0.38, respectively. If the Foundation was not being established in the
Conversion, based on the FinPro estimate, the Company's pro forma
stockholders' equity would be approximately $513.0 million, or approximately
24.87% of pro forma consolidated assets at the midpoint of the estimate, and
pro forma stockholder's equity per share and pro forma net earnings per share
would be substantially similar with the Foundation as without the
establishment of the Foundation. See "Comparison of Valuation and Pro Forma
Information with No Foundation."
Potential Anti-Takeover Effect. Upon completion of the Conversion, the
Foundation will own 2.9% of the total shares of the Company's Common Stock
outstanding. Such shares will be owned solely by the Foundation; however,
pursuant to a condition to be agreed to by the Foundation, the shares of
Common Stock held by the Foundation must be voted in the same ratio as all
other shares of the Company's Common Stock on all proposals considered by the
stockholders of the Company. The Company and the Foundation will take the
necessary steps to provide this voting restriction in the Foundation's
corporate governance documents. As such, the Company does not believe the
Foundation will have an anti-takeover effect on the Company. However, in the
event that the FDIC were to waive this voting restriction for the reasons
described herein as provided in the condition, the Foundation's board of
directors would exercise sole voting power over such shares and would no
longer be subject to the restriction. See "The Conversion--Establishment of
the Charitable Foundation--Regulatory Conditions Imposed on the Foundation."
As the Foundation's Board of Directors will be comprised of the members of the
Board of Directors of the Company and officers of the Company and the Bank, in
the event the FDIC waived the voting restriction, management of the Company
and the Bank may benefit to the extent that the board of directors of the
Foundation determines to vote the shares of Common Stock held by the
Foundation in favor of proposals supported by the Company and the Bank.
Furthermore, in such an event, when the Foundation's shares are combined with
shares purchased directly by officers and directors of the Company, shares
held by the Stock Programs trust, and shares held by the ESOP trust, the
aggregate of such shares could exceed 20% of the Company's outstanding Common
Stock, which could enable management to defeat stockholder proposals requiring
80% approval. Consequently, such potential voting control might preclude
takeover attempts that certain stockholders deem to be in their best interest,
and might tend to perpetuate management. However, since the ESOP shares are
allocated to all eligible employees of the Bank, and any unallocated shares
will be voted by an independent trustee, and because the Stock Programs must
first be approved by stockholders no sooner than six months following
completion of the Conversion, and awards under such proposed plans may be
granted to employees other than executive officers and trustees, management of
the Company does not expect to have voting control of all shares covered by
the ESOP and other stock-based benefit plans. See "--Certain Anti-Takeover
Provisions--Voting Control of Officers and Trustees." Moreover, as the
Foundation sells its shares of Common Stock over time, its ownership interest
and voting power in the Company is expected to decrease.
Potential Challenges. The establishment and funding of a charitable
foundation as part of a conversion of a mutual savings institution to stock
form has, to the Bank's knowledge, been done only on one prior occasion.
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As such, the Foundation and the Superintendent's approval of the Conversion
and the FDIC's nonobjection to the Conversion may be subject to potential
challenges notwithstanding that the Board of Directors of the Company and the
Board of Trustees of the Bank have carefully considered the various factors
involved in the establishment of the Foundation in reaching their
determination to establish the Foundation as part of the Conversion. See "The
Conversion--Establishment of the Charitable Foundation--Purpose of the
Foundation." If challenges were to be instituted seeking to require the Bank
to eliminate establishment of the Foundation in connection with the
Conversion, no assurances can be made that the resolution of such challenges
would not result in a delay in the consummation of the Conversion or that any
objecting persons would not be ultimately successful in obtaining such removal
or other relief against the Company or the Bank. Additionally, if the Company
and the Bank are forced to eliminate the Foundation, the Company may be
required to resolicit subscribers in the Offerings.
HIGHLY COMPETITIVE INDUSTRY AND GEOGRAPHIC AREA
The Bank faces significant competition in its primary market area both in
attracting deposits and in originating loans. The Long Island, New York area
is a highly competitive market. The Bank's share of deposits in Suffolk and
Nassau Counties amounts to 2.4%. The Bank faces direct competition from a
significant number of financial institutions operating in its market area,
many with a state-wide or regional presence, and, in some cases, a national
presence. This competition arises from commercial banks, savings banks,
mortgage banking companies, credit unions and other providers of financial
services, many of which are significantly larger than the Bank and, therefore,
have greater financial and marketing resources than those of the Bank. See
"Business of the Bank--Market Area."
WEAKNESS IN LOCAL ECONOMY
During the late 1980s to the early 1990s, the New York City metropolitan
area experienced reduced employment as a result of layoffs in the financial
services industry, corporate relocations and the general decline of the local,
regional and national economies. Additionally, during that period the area
experienced a general weakening of real estate values and a decline in home
sales and construction. In particular, the New York counties of Nassau and
Suffolk suffered reduced employment levels as a result of restructuring and
downsizing in the high technology and defense related industries, which
historically have been significant sources of employment in the Bank's primary
market area. As a result, loan delinquencies increased and the underlying
values of properties securing non-performing loans made by lending
institutions generally declined resulting in substantial losses to some
institutions. In 1993, however, the economy of the Bank's primary market area
began to stabilize as demonstrated by improved employment and economic
indicators. Since such time, residential real estate values in the Bank's
primary market have stabilized and recently have begun to improve. However,
commercial real estate values, which experienced the greatest declines during
the late 1980s and early 1990s, have only recently begun to stabilize and have
not improved as much as residential real estate and generally remain below the
values experienced in the late 1980s.
Management does not believe that the current national or local economic
trends will severely affect the Bank's financial condition, since a
substantial portion of the Bank's assets are invested in mortgage-backed
securities, mortgage related securities and U.S. Government securities. There
can be no assurances, however, that conditions in the local economy, national
economy, or real estate market in general will not deteriorate and adversely
affect the financial condition and results of operations of the Bank. Based on
information available to management at this time, management believes the
current allowance for possible loan losses is adequate. Although management of
the Bank believes that the current allowance for loan losses is adequate in
light of current economic conditions, many factors may require additions to
the allowance for loan losses in future periods above those reasonably
anticipated. Future adjustments to the allowance also may be necessary if
economic or other conditions differ substantially from those underlying the
assumptions used in making such estimates. In addition, the Bank's plan to
increase its investment in commercial real estate and multi-family loans can
be expected to increase the overall level of credit risk inherent in the
Bank's loan portfolio. The greater risk associated with commercial real estate
and multi-family loans may require the Bank to increase its provisions for
loan losses and to maintain an allowance for loan losses as a percentage of
total loans that is in excess of the allowance currently maintained by the
Bank.
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PAYMENT OF FINANCING CORPORATION BONDS
Deposits of the Bank are presently insured by the BIF. Both the BIF and the
Savings Association Insurance Fund ("SAIF"), the deposit insurance fund that
covers most savings and loan association deposits, are statutorily required to
be recapitalized to a 1.25% of insured deposits reserve ratio. A portion of
the insurance assessment paid by SAIF members has been required by statute to
be used to make payments on bonds issued by the Financing Corporation
("FICO"), which were issued in the late 1980's to recapitalize the predecessor
to the SAIF.
The BIF has achieved the 1.25% ratio and the FDIC adopted a new assessment
rate schedule of 0 to 27 basis points for BIF members. Under the new schedule,
approximately 92% of BIF members were required to pay only $2,000 per year,
the legal minimum, in insurance premiums. With respect to SAIF member
institutions, the FDIC adopted a final rule retaining the existing assessment
rate schedule applicable to SAIF member institutions of 23 to 31 basis points.
The SAIF was several years away from achieving the required ratio largely due
to the required FICO payments. Consequently, a significant differential in the
insurance premiums paid by BIF and SAIF members arose.
Legislation was recently enacted to mitigate the effect of the BIF/SAIF
premium disparity. The legislation, among other things, imposes a special
assessment on SAIF deposits held as of March 31, 1995 to capitalize the SAIF
to the required levels. The legislation also spreads to BIF members a portion
of the burden of making FICO payments. Beginning on January 1, 1997, BIF
deposits will be assessed for FICO payments at a rate of 20% of the rate
assessed on SAIF deposits and, based on current estimates, BIF deposits will
be assessed a FICO payment of 1.3 basis points, while SAIF deposits will pay
an estimated 6.4 basis points on FICO. Full pro rata sharing of the FICO
payments by BIF members will occur on the earlier of January 1, 2000 or the
date the BIF and SAIF are merged. The legislation specifies that the BIF and
SAIF will be merged on January 1, 1999, provided that there are no more
savings associations as of that date. This will require subsequent legislation
eliminating the thrift charter. Management cannot predict the exact amount of
the assessment rates on BIF deposits for FICO obligations or whether the BIF
and SAIF will eventually be merged.
CERTAIN ANTI-TAKEOVER PROVISIONS
Provisions in the Company's and the Bank's Governing Instruments. Certain
provisions of the Company's Certificate of Incorporation and Bylaws,
particularly a provision limiting voting rights, and the Bank's Restated
Organization Certificate (the "Restated Organization Certificate") and Bylaws,
as well as certain federal and state regulations, assist the Company in
maintaining its status as an independent publicly owned corporation. These
provisions provide for, among other things, supermajority voting, staggered
boards of directors, noncumulative voting for directors, limits on the calling
of special meetings of shareholders, limits on the ability to vote Common
Stock in excess of 10% of outstanding shares, and certain uniform price
provisions for certain business combinations. The New York State Banking
Regulations prohibit, for a period of one year following the date of
conversion, offers to acquire or the acquisition of beneficial ownership of
more than 10% of the outstanding stock of the Bank. The Bank's Restated
Organization Certificate also prohibits, for three years, the acquisition,
directly or indirectly, of the beneficial ownership of more than 10% of the
Bank's equity securities. Any person, or group acting in concert, violating
this restriction may not vote the Bank's or Company's securities in excess of
10%. These provisions in the Bank's and the Company's governing instruments
may discourage potential proxy contests and other potential takeover attempts,
particularly those which have not been negotiated with the Board of Directors,
and thus, generally may serve to perpetuate current management. See
"Restrictions on Acquisitions of the Holding Company and the Bank."
Voting Control of Officers and Trustees. Trustees, directors and executive
officers of the Bank and the Company expect to purchase approximately 1.8% or
1.3% of the shares of Common Stock to be issued in the Conversion, based upon
the minimum and the maximum of the Estimated Price Range, respectively,
exclusive of shares that may be attributable to directors and officers through
the Stock Programs, the Stock Option Plans and the ESOP, which may give
directors, trustees, executive officers and employees the potential to control
the voting of an additional 20% of the Company's Common Stock on a fully
diluted basis at the maximum of the Estimated Price Range. In addition, the
Foundation will be funded with a contribution by the Company equal to
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3% of the Common Stock sold in the Conversion, which if a waiver of the voting
restriction imposed on such Common Stock is obtained from the FDIC, may be
voted as determined by the Directors of the Foundation who are also Directors
and officers of the Company and the Bank. Management's potential voting
control could, together with additional stockholder support, defeat
stockholder proposals requiring 80% approval of stockholders. As a result,
this potential voting control may preclude takeover attempts that certain
stockholders deem to be in their best interest and may tend to perpetuate
existing management. See "Restrictions on Acquisition of the Company and the
Bank--Restrictions in the Company's Certificate of Incorporation and Bylaws"
and "The Conversion--Establishment of the Charitable Foundation."
ABSENCE OF MARKET FOR COMMON STOCK
The Company, as a newly organized company, has never issued capital stock
and, consequently, there is no established market for its Common Stock at this
time. The Company has received approval to have its Common Stock quoted on the
Nasdaq National Market under the symbol "RSLN" conditioned on the consummation
of the Conversion. A public trading market having the desirable
characteristics of depth, liquidity and orderliness depends upon the existence
of willing buyers and sellers at any given time, the presence of which is
dependent upon the individual decisions of buyers and sellers over which
neither the Company nor any market maker has control. Accordingly, there can
be no assurance that an active and liquid trading market for the Common Stock
will develop or that, if developed, will continue, nor is there any assurance
that purchasers of the Common Stock will be able to sell their shares at or
above the Purchase Price. In the event a liquid market for the Common Stock
does not develop or market makers for the Common Stock discontinue their
activities, such occurrences may have an adverse impact on the liquidity of
the Common Stock and the market value of the Common Stock.
STOCK-BASED BENEFITS TO MANAGEMENT, EMPLOYMENT CONTRACTS AND CHANGE IN CONTROL
PAYMENTS
Stock Programs. The Company intends to adopt stock-based benefit plans which
would provide stock grants of Common Stock to non-employee trustees and
directors and selected officers and employees of the Company and Bank (the
"Stock Programs") and intends to seek stockholder approval of such plans at a
meeting of stockholders following the Conversion, which may be held no earlier
than six months after completion of the Conversion. The Company expects to
acquire Common Stock on behalf of the Stock Programs in an amount equal to 4%
of the Common Stock issued in connection with the Conversion, including shares
issued to the Foundation, or 1,122,000 shares and 1,518,000 shares at the
minimum and maximum of the Estimated Price Range, respectively. These shares
will be acquired either through open market purchases or from authorized but
unissued Common Stock. See "--Possible Dilutive Effect of Stock Programs and
Stock Options."
Although no specific award determinations have been made, the Company
anticipates that it will provide awards under the Stock Programs to the
trustees, directors and selected officers and employees of the Company and
Bank to the extent permitted by applicable regulations. Current NYBB and FDIC
regulations provide that, to the extent any non-tax qualified stock or stock
option plan is implemented within one year after conversion, no individual may
receive more than 25% of the shares of any such stock-based benefit plan and
non-employee directors or trustees may not receive more than 5% individually,
or 30% in the aggregate, of the shares awarded under any such plan. These
shares granted under the Stock Programs will be awarded at no cost to the
recipients. Under the terms of the Stock Programs, an independent trustee will
vote unallocated shares in the same proportion as it receives instructions
from recipients with respect to allocated shares which have not been earned
and distributed. Recipients will vote allocated shares. The plan trustee will
not vote allocated shares if it does not receive instructions from the
recipient. The specific terms of the Stock Programs intended to be adopted and
the amounts of awards thereunder have not yet been determined by the Board of
Directors, and any such determination will include consideration of various
factors, including but not limited to, the financial condition of the Company,
current and past performance of plan participants and tax and securities law
and regulation requirements. The stock-based benefits provided under the Stock
Programs and stock option plans, discussed below, may be provided under
separate plans established for officers and employees and non-employee
trustees and directors or such benefits may be provided for under a single
master stock-based benefit plan adopted by the Company which would incorporate
the benefits and features of the separate plans (the "Master Stock-Based
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Benefit Plan"). Additionally, the granting or vesting of awards under such
benefit plans may be conditioned upon the achievement of individual or
company-wide performance goals, including the achievement by the Company or
Bank of specified levels of net income or returns on equity or assets. The
implementation of such Stock Programs may result in increased compensation
expenses to the Company and may have a dilutive effect on existing
stockholders. See "Management of the Bank--Benefit Plans--Stock Programs" and
"--Possible Dilutive Effect of Stock Programs and Stock Options."
Stock Option Plans. The Company also intends to adopt stock-based benefit
plans which would provide options to purchase Common Stock ("Stock Options")
to officers, employees and non-employee trustees and directors of the Company
and Bank (the "Stock Option Plans") and intends to seek stockholder approval
of such plans at a meeting of stockholders following the Conversion, which may
be held no earlier than six months after completion of the Conversion.
Although no specific determinations have been made, the Company expects that
non-employee directors and selected officers and employees of the Company and
Bank will be granted options to purchase Common Stock in an amount equal to
10% of the Common Stock issued in connection with the Conversion, including
shares issued to the Foundation (or 2,805,000 shares and 3,795,000 shares at
the minimum and maximum of the Estimated Price Range, respectively). It is
currently intended that the exercise price of the Stock Options will be equal
to the fair market value of the underlying Common Stock on the date of grant.
Stock Options will permit such trustees, directors, officers and employees to
benefit from any increase in the market value of the shares in excess of the
exercise price at the time of exercise. Recipients of Stock Options will not
be required to pay for the shares until the date of exercise. The specific
terms of the Stock Option Plans intended to be adopted and amounts and awards
thereunder have not yet been determined by the Board and any such
determination will include consideration of various factors, including but not
limited to, the financial condition of the Company, current and past
performance of award recipients and tax and securities law and regulation
requirements. The Stock Options discussed above may be provided under a single
stock option plan, may be granted under separate stock option plans for
officers and employees and non-employee directors or may be provided for under
the Master Stock-Based Benefit Plan which would incorporate the features and
benefits of the separate stock option plans and the Stock Programs, and
benefits awarded thereunder may be conditioned upon the achievement of
individual or company-wide performance goals, including the achievement by the
Company or Bank of specified levels of net income or returns on equity or
assets. The implementation of such Stock Option Plans may have a dilutive
effect upon existing stockholders of the Company to the extent option
exercises are satisfied with authorized but unissued shares. See "--Possible
Dilutive Effect of Stock Programs and Stock Options" and "Management of the
Bank--Benefit Plans--Stock Option Plans."
Change In Control Provisions. Employment or change in control agreements
with certain officers of the Bank and Company provide for benefits and cash
payments in the event of their termination following a change in control of
the Company or Bank. These provisions may have the effect of increasing the
cost of acquiring the Company or Bank, thereby discouraging future attempts to
take over the Company or the Bank. Additionally, the Bank's employee severance
compensation plan, which similarly provides a cash payment and benefits to
eligible employees upon such employees' termination following a change in
control of the Company or Bank, also may have the effect of increasing the
cost of acquiring the Company or Bank. Based on current salaries, cash
payments to be paid in the event of a change in control pursuant to the terms
of the employment agreements, change in control agreements and the employee
severance compensation plan would be approximately $7.7 million. However, the
actual amount to be paid in the event of a change in control of the Bank or
the Company cannot be estimated at this time because the actual amount is
based on the average salary of the employee and other factors existing at the
time of the change in control. See "Restrictions on Acquisition of the Company
and the Bank--Restrictions in the Company's Certificate of Incorporation and
Bylaws," "Management of the Bank--Employment Agreements," "--Change in Control
Agreements," "--Employee Severance Compensation Plan," "--Benefit Plans--Stock
Option Plans" and "--Benefit Plans--Stock Programs."
POSSIBLE DILUTIVE EFFECT OF STOCK PROGRAMS AND STOCK OPTIONS
Following the Conversion, the Stock Programs will acquire an amount of
shares equal to 4% of the shares of Common Stock issued in the Conversion,
either through open market purchases or the issuance of authorized
31
<PAGE>
but unissued shares of Common Stock from the Company. If the Stock Programs
are funded by the issuance of authorized but unissued shares, the voting
interests of existing shareholders will be diluted by 3.7%. Also following the
Conversion, the Company intends to implement the Stock Option Plans which will
provide trustees, directors and selected employees of the Company and the Bank
with Stock Options to purchase authorized but unissued shares in an amount
equal to 10% of the Common Stock issued in the Conversion. If all of the Stock
Options intended to be granted were to be exercised using authorized but
unissued Common Stock and if the Stock Programs were funded with authorized
but unissued shares, the voting interests of existing stockholders would be
diluted by 11.9%.
POSSIBLE ADVERSE INCOME TAX CONSEQUENCES OF THE DISTRIBUTION OF SUBSCRIPTION
RIGHTS
The Bank has received an opinion of FinPro that subscription rights granted
to Eligible Account Holders have no value. However, this opinion is not
binding on the IRS. If the subscription rights granted to Eligible Account
Holders or Supplemental Eligible Account Holders are deemed to have an
ascertainable value, such recipients could be taxed upon receipt or exercise
of such subscription rights. Additionally, the Bank could recognize a gain for
tax purposes on such distribution. Whether subscription rights are considered
to have ascertainable value is an inherently factual determination. See "The
Conversion--Effects of Conversion" and "--Tax Aspects."
POSSIBLE INCREASE IN ESTIMATED PRICE RANGE AND NUMBER OF SHARES ISSUED
The number of shares to be sold in the Conversion may be increased as a
result of an increase in the Estimated Price Range of up to 15% to reflect
changes in market and financial conditions following the commencement of the
Subscription and Community Offerings. In the event that the Estimated Price
Range is so increased, it is expected that the Company will issue up to
42,371,359 shares of Common Stock at the Purchase Price for an aggregate
purchase price of up to $423,713,590. An increase in the number of shares
issued will decrease a subscriber's pro forma net earnings per share and
stockholders' equity per share and will increase the Company's pro forma
consolidated stockholders' equity and net earnings. Such an increase will also
increase the Purchase Price as a percentage of pro forma stockholders' equity
per share and net earnings per share.
ROLE OF THE MARKETING ADVISOR
The Bank has engaged Sandler O'Neill as a conversion agent and Sandler
O'Neill has agreed to assist the Bank and the Company in its solicitation of
subscriptions and purchase orders for Common Stock in the Offerings. Sandler
O'Neill has not prepared any report or opinion constituting recommendations or
advice to the Bank. In addition, Sandler O'Neill has expressed no opinion as
to the prices at which Common Stock to be issued in the Offerings may trade.
Furthermore, Sandler O'Neill has not verified the accuracy or completeness of
the information contained in the Prospectus or the Proxy Statement. See "The
Conversion--Marketing and Underwriting Arrangements."
32
<PAGE>
ROSLYN BANCORP, INC.
Roslyn Bancorp was recently organized at the direction of the Board of
Trustees of the Bank for the purpose of acquiring all of the capital stock of
the Bank to be issued in the Conversion. The Company has received approval
from the Office of Thrift Supervision ("OTS") to become a savings and loan
holding company and, upon completion of the Conversion, will be subject to
regulation by the OTS. See "The Conversion--General" and "Regulation and
Supervision--Holding Company Regulation." Upon consummation of the Conversion,
the Company will have no significant assets other than the shares of the
Bank's common stock acquired in the Conversion and an amount equal to 50% of
the net proceeds of the Conversion, including the loan to the ESOP, and will
have no significant liabilities. The Company intends to use a portion of the
net proceeds it retains to loan to the ESOP funds to enable the ESOP to
purchase up to 8% of the stock issued in connection with the Conversion,
including shares issued to the Foundation. See "Use of Proceeds." The
management of Roslyn Bancorp, Inc. is set forth under "Management of the
Company." Initially, the Company will neither own nor lease any property, but
will instead use the premises, equipment and furniture of the Bank. At the
present time, the Company does not intend to employ any persons other than
certain officers who are currently officers of the Bank but will utilize the
support staff of the Bank from time to time. Additional employees will be
hired as appropriate to the extent the Company expands its business in the
future.
Management believes that the holding company structure will provide the
Company additional flexibility to diversify its business activities through
existing or newly formed subsidiaries, or through acquisitions of or mergers
with other financial institutions and financial services related companies.
With the exception of the Bank's plans to open two new branches in November
1996 and its intention to establish two new loan origination offices, there
are no current arrangements, understandings or agreements regarding any such
opportunities. However, subsequent to the Conversion, the Company will be in a
position after the Conversion, subject to regulatory limitations and the
Company's financial position, to take advantage of any such acquisition and
expansion opportunities that may arise. The initial activities of the Company
are anticipated to be funded by the proceeds to be retained by the Company,
income thereon and through dividends from the Bank.
The Company's executive office is located at the administrative offices of
the Bank, 1400 Old Northern Boulevard, Roslyn, New York 11576. Its telephone
number is (516) 621-6000.
THE ROSLYN SAVINGS BANK
The Bank was organized in 1875 as a New York State chartered mutual savings
bank. The Bank's deposit accounts are insured to the maximum allowable amount
by the BIF as administered by the FDIC. Including the Bank's principal office,
which is located in Roslyn, New York, the Bank services its customers from six
full service banking facilities located in the New York Counties of Nassau and
Suffolk and also operates, through its wholly-owned mortgage banking
subsidiary, RFI, six mortgage loan origination offices located in the New York
counties of Queens, Nassau, Suffolk and Albany and the New Jersey counties of
Morris and Monmouth. In August 1996, the Bank entered into a contract for the
purchase of two additional branch office facilities located in Nassau County
which are expected to open for business in November 1996 and currently intends
to establish two new mortgage origination offices in Connecticut. At May 31,
1996, the Bank had total assets of $1.77 billion, total deposits of $1.44
billion and retained earnings of $222.2 million.
The Bank is a community-oriented savings institution whose businesses
primarily consist of accepting deposits from customers and investing those
funds in mortgage-backed and mortgage related securities, debt and equity
securities, mortgage loans secured by one- to four-family residences, multi-
family properties and commercial properties, construction and development
loans and home equity, second mortgage, student and consumer loans. At May 31,
1996, the Bank's securities portfolio totalled $1.27 billion, or 71.4% of
total assets, and its gross loan portfolio totalled $438.1 million, or 24.7%
of total assets, of which $213.0 million were one- to four-family loans, $33.3
million were multi-family loans, $153.6 million were commercial real estate
loans,
33
<PAGE>
$31.0 million were construction and development loans, and $7.2 million were
home equity and second mortgage, student and consumer loans. Currently, all of
the Bank's one- to four-family loan origination and related loan servicing and
sale activities are conducted through its wholly-owned mortgage banking
subsidiary, RFI, which the Bank formed in August 1995 in connection with its
purchase of certain assets and liabilities of RMBI, a mortgage banking firm
that primarily operated in the New York and New Jersey counties in and
surrounding New York City as well as Albany, New York.
The Bank's investment activities primarily consist of investments in
mortgage-backed and mortgage related securities and various debt and equity
securities. At May 31, 1996, the Bank had $831.6 million in mortgage-backed
and mortgage related securities, or 46.9% of total assets, including CMOs
guaranteed or issued by governmental-sponsored and federal agencies such as
FNMA, FHLMC and GNMA as well as CMOs issued by private issuers, of which
$519.4 million was classified as available-for-sale and $312.2 million was
classified as held-to-maturity. The debt securities owned by the Bank
generally consist of U.S. Government securities, obligations of FNMA, FHLMC
and GNMA, obligations of corporate issuers, public utility bonds, and bonds
issued by states and other municipalities consisting of $293.2 million of
securities classified as available-for-sale and $1.9 million of securities
classified as held-to-maturity. At May 31, 1996, the Bank's equity securities
totalled $138.8 million and consisted of preferred stock of corporate issuers,
common stock of corporate issuers and mutual fund securities, all of which
were classified as available-for-sale. In November 1995, in accordance with
the FASB interpretation regarding SFAS No. 115, the Bank transferred
investment securities having a carrying value of $648.7 million and a market
value of $658.3 million at that date, from its held-to-maturity portfolio to
its available-for-sale portfolio. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations-- Comparison of Financial
Condition at December 31, 1995 and December 31, 1994."
The Bank's executive office is located at 1400 Old Northern Boulevard,
Roslyn, New York 11576. Its telephone number is (516) 621-6000.
34
<PAGE>
REGULATORY CAPITAL COMPLIANCE
At May 31, 1996, the Bank exceeded each of its regulatory capital
requirements. Set forth below is a summary of the Bank's compliance with the
FDIC capital standards as of May 31, 1996, on an historical and pro forma
basis assuming that the indicated number of shares were sold as of such date
and receipt by the Bank of 50% of the net proceeds. For purposes of the table
below, the amount expected to be borrowed by the ESOP and the cost of its
shares expected to be acquired by the Stock Programs are deducted from pro
forma regulatory capital.
<TABLE>
<CAPTION>
PRO FORMA AT MAY 31, 1996 BASED UPON THE SALE AT $10.00 PER SHARE
----------------------------------------------------------------------------------------------
42,371,359 SHARES
27,233,010 SHARES 32,038,835 SHARES 36,844,660 SHARES (15% ABOVE
(MINIMUM OF THE (MIDPOINT OF THE (MAXIMUM OF THE MAXIMUM OF THE
HISTORICAL AT ESTIMATED ESTIMATED ESTIMATED ESTIMATED
MAY 31, 1996 PRICE RANGE) PRICE RANGE) PRICE RANGE) PRICE RANGE)(1)
------------------ ------------------ ------------------ ------------------ ------------------
PERCENT PERCENT PERCENT PERCENT PERCENT
OF OF OF OF OF
AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2) AMOUNT ASSETS(2)
-------- --------- -------- --------- -------- --------- -------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GAAP(3) Capital......... $222,244 12.54% $321,399 17.17% $339,101 17.95% $356,804 18.71% $377,161 19.57%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
Leverage Capital:
Capital Level(4)...... $219,267 12.39% $318,423 17.04% $336,125 17.82% $353,827 18.58% $374,185 19.44%
Requirement(5)........ 53,091 3.00 56,066 3.00 56,597 3.00 57,128 3.00 57,739 3.00
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Excess................ $166,176 9.39% $262,357 14.04% $279,528 14.82% $296,699 15.58% $316,446 16.44%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
Risk-Based Capital:
Capital Level(4)(6)... $229,474 28.10% $329,187 38.23% $346,989 39.92% $364,791 41.59% $385,263 43.47%
Requirement........... 65,322 8.00 68,891 8.00 69,529 8.00 70,166 8.00 70,899 8.00
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Excess................ $164,152 20.10% $260,296 30.23% $277,460 31.92% $294,625 33.59% $314,364 35.47%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
- ----
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to 15%
as a result of regulatory considerations or changes in market conditions
or general financial and economic conditions following the commencement of
the Subscription and Community Offerings.
(2) Leverage capital levels are shown as a percentage of tangible assets.
Risk-based capital levels are calculated on the basis of a percentage of
risk-weighted assets.
(3) GAAP defined as Generally Accepted Accounting Principles.
(4) Pro forma capital levels assume receipt by the Bank of 50% of the net
proceeds from the shares of Common Stock sold at the minimum, midpoint and
maximum of the Estimated Price Range. These levels also assume funding by
the Bank of the Stock Programs equal to 4% of the Common Stock issued and
repayment of the Company's loan to the ESOP to enable the ESOP to purchase
8% of the Common Stock issued valued at the minimum, midpoint and maximum
of the Estimated Price Range. See "Management of the Bank--Benefit Plans"
for a discussion of the Stock Programs and ESOP.
(5) The current leverage capital requirement for savings banks is 3% of total
adjusted assets for savings banks that receive the highest supervisory
rating for safety and soundness and that are not experiencing or
anticipating significant growth. The current leverage capital ratio
applicable to all other savings banks is 4% to 5%. See "Regulation and
Supervision--FDIC Regulations--Capital Requirements." The Company will not
be subject to regulatory capital requirements.
(6) Assumes net proceeds are invested in assets that carry a risk-weighting
equal to the actual risk weighting of the Bank's assets as of May 31,
1996.
35
<PAGE>
USE OF PROCEEDS
Although the actual net proceeds from the sale of the Common Stock cannot be
determined until the Conversion is completed, it is presently anticipated that
the net proceeds from the sale of the Common Stock will be between $265.6
million and $360.2 million (or $414.6 million if the Estimated Price Range is
increased by 15%). See "Pro Forma Data" and "The Conversion--Stock Pricing" as
to the assumptions used to arrive at such amounts. The Company will be unable
to utilize any of the net proceeds of the Offerings until the consummation of
the Conversion.
The Company will purchase all of the outstanding capital stock of the Bank
to be issued upon Conversion in exchange for 50% of the net proceeds of the
Offerings. Based on net proceeds of $265.6 million to $360.2 million, the
Company expects to utilize between $132.8 million and $180.1 million of net
proceeds to purchase the common stock of the Bank. Such portion of net
proceeds received by the Bank from the Company will be added to the Bank's
general funds which the Bank currently intends to utilize for general
corporate purposes, including investments in short- and medium-term,
investment grade debt securities, mortgage-backed and mortgage related
securities and common and preferred stock. The Bank also intends to utilize
funds to increase its emphasis on one- to four-family, multi-family and
commercial real estate lending depending on market conditions. The Bank may
also use such funds for the expansion of its facilities, and to expand
operations through acquisitions of other financial institutions, branch
offices or other financial services companies, including those located within
the Bank's primary market area. To the extent that the stock-based benefit
programs which the Company or the Bank intend to adopt subsequent to the
Conversion are not funded with authorized but unissued common stock of the
Company, the Company or Bank may use net proceeds from the Conversion to fund
the purchase of stock to be awarded under such stock benefit programs. See
"Risk Factors--Stock-Based Benefits to Management, Employment Contracts and
Change in Control Payments" and "Management of the Bank--Benefit Plans--Stock
Option Plans" and "--Benefit Plans--Stock Programs."
The Company intends to use a portion of the net proceeds it retains (i.e.,
50% of the net proceeds, which based on net proceeds of $265.2 million to
$360.2 million will be between $132.8 million and $180.1 million) to make a
loan directly to the ESOP to enable the ESOP to purchase in the Conversion, or
in the open market to the extent Common Stock is not available to fill the
ESOP's subscription, 8% of the Common Stock issued in connection with the
Conversion, including shares issued to the Foundation. Based upon the sale of
27,233,010 shares or 36,844,660 shares at the minimum and maximum of the
Estimated Price Range, and the issuance of shares to the Foundation, the
amount of the loan to the ESOP would be $22.4 million or $30.4 million,
respectively (or $34.9 million if the Estimated Price Range is increased by
15%), with a term of 30 years at the prevailing prime rate of interest, which
currently is 8.75%. The Company and Bank may alternatively choose to fund the
ESOP's stock purchases through a loan by a third party financial institution.
See "Management of the Bank--Benefit Plans--ESOP." The remaining net proceeds
retained by the Company will initially be invested in short- and medium-term
debt obligations, mortgage-backed and mortgage related securities and other
investment grade marketable equity securities.
The net proceeds retained by the Company may also be used to support the
future expansion of operations through branch acquisitions, the establishment
of branch offices and the acquisition of savings associations, savings banks
and commercial banks or their assets, including those located within the
Bank's market area or diversification into other banking related businesses.
Except for the Bank's intended purchase of two branches, which are expected to
open in November 1996, and its intention to open two loan origination
facilities in Connecticut, the Company and the Bank have no current
arrangements, understandings or agreements regarding any such transactions.
The Company, upon the Conversion, will be a unitary savings and loan holding
company, which under existing laws would not be restricted as to the types of
business activities in which it may engage. See "Regulation and Supervision--
Holding Company Regulation" for a description of certain regulations
applicable to the Company.
Upon completion of the Conversion, the Board of Directors of the Company
will have the authority to adopt stock repurchase plans, subject to statutory
and regulatory requirements. Unless approved by the Superintendent,
36
<PAGE>
the Company, pursuant to NYBB regulations, may not repurchase any Common Stock
in the first year after conversion and, during the next two following years,
may only repurchase up to 5% of its outstanding capital stock during each
twelve-month period. Further, the Company may not repurchase any of its Common
Stock if the repurchases would cause the Bank to become "undercapitalized"
within the meaning of the FDIC prompt corrective action regulation. See
"Regulation and Supervision--Prompt Corrective Regulatory Action." In
addition, the FDIC prohibits an insured mutual state savings bank which has
converted from the mutual to stock form of ownership from repurchasing its
capital stock within one year following the date of its conversion to stock
form, except that stock repurchases of no greater than 5% of a bank's
outstanding capital stock may be repurchased during this one-year period where
compelling and valid business reasons are established to the satisfaction of
the FDIC. Based upon facts and circumstances following the Conversion and
subject to applicable regulatory requirements, the Board of Directors may
determine to repurchase stock in the future. Such facts and circumstances may
include but not be limited to: (i) market and economic factors such as the
price at which the stock is trading in the market, the volume of trading, the
attractiveness of other investment alternatives in terms of the rate of return
and risk involved in the investment, the ability to increase the book value
and/or earnings per share of the remaining outstanding shares, and the
opportunity to improve the Company's return on equity; (ii) the avoidance of
dilution to stockholders by not having to issue additional shares to cover the
exercise of stock options or to fund employee stock benefit plans; and (iii)
any other circumstances in which repurchases would be in the best interests of
the Company and its shareholders. In the event the Company determines to
repurchase stock, such repurchases may be made at market prices which may be
in excess of the Purchase Price in the Conversion. To the extent that the
Company repurchases stock at market prices in excess of the Purchase Price in
the Conversion, such repurchases may have a dilutive effect upon the interests
of existing stockholders. Any stock repurchases will be subject to the
determination of the Board of Directors that both the Company and the Bank
will be capitalized in excess of all applicable regulatory requirements after
any such repurchases and that such capital will be adequate, taking into
account, among other things, the level of non-performing and other risk
assets, the Company's and the Bank's current and projected results of
operations and asset/liability structure, the economic environment, tax and
other considerations. See "The Conversion--Certain Restrictions on Purchase or
Transfer of Shares after Conversion."
DIVIDEND POLICY
Upon Conversion, the Board of Directors of the Company will have the
authority to declare dividends on the Common Stock, subject to statutory and
regulatory requirements. Following the Conversion, the Board of Directors may
consider a policy of paying cash dividends on the Common Stock. However, no
decision has been made as to the amount or timing of such dividends, if any.
The Bank will not be permitted to pay dividends on its common stock or
repurchase shares of its common stock if its stockholders' equity would be
reduced below the amount required for the liquidation account. See "The
Conversion--Liquidation Rights." Under New York State Banking Law, dividends
may be declared and paid only out of the net profits of the Bank. The approval
of the Superintendent is required if the total of all dividends declared in
any calendar year will exceed net profits for that year plus the retained net
profits of the preceding two years, less any required transfer to surplus or a
fund for the retirement of any preferred stock. In addition, no dividends may
be declared, credited or paid if the effect thereof would cause the Bank's
capital to be reduced below the amount required by the Superintendent or the
FDIC. See "Regulation and Supervision." As of May 31, 1996, the Bank had $46.5
million available for the payment of dividends without prior approval of the
Superintendent. Subsequent to the Conversion, the availability of the Bank's
funds for the payment of dividends may be limited by the liquidation account.
See "The Conversion--Liquidation Rights." Dividends or any repurchase by the
Bank of its stock in excess of the Bank's current and accumulated earnings
could result in the realization by the Bank of taxable income. See "Federal
and State Taxation--Federal Taxation."
Unlike the Bank, the Company is not subject to the restrictions imposed by
the New York State Banking Law on the payment of dividends to its
stockholders, although the source of such dividends will be, in part,
37
<PAGE>
dependent upon dividends from the Bank in addition to the net proceeds
retained by the Company and earnings thereon. The Company is subject, however,
to the requirements of Delaware law, which generally limit dividends to an
amount equal to the excess of the net assets of the Company (the amount by
which total assets exceed total liabilities) over its statutory capital, or if
there is no such excess, to its net profits for the current and/or immediately
preceding fiscal year.
Additionally, in connection with the Conversion, the Company and Bank have
committed to the FDIC that during the one-year period following the
consummation of the Conversion, the Company will not declare an extraordinary
dividend to stockholders which would be treated by recipient stockholders as a
tax-free return of capital for federal income tax purposes without prior
approval of the FDIC.
MARKET FOR THE COMMON STOCK
The Company was recently formed and has never issued capital stock. The
Bank, as a mutual institution, has never issued capital stock. The Company has
received conditional approval to have its Common Stock quoted on the Nasdaq
National Market under the symbol "RSLN" subject to the completion of the
Conversion and compliance with certain conditions including the presence of at
least two registered and active market makers. The Company will seek to
encourage and assist at least two market makers to make a market in its Common
Stock. Making a market involves maintaining bid and ask quotations and being
able, as principal, to effect transactions in reasonable quantities at those
quoted prices, subject to various securities laws and other regulatory
requirements. There can be no assurance that the Common Stock will be able to
meet the applicable listing criteria in order to maintain its quotation on the
Nasdaq National Market or that an active and liquid trading market will
develop or, if developed, will be maintained. A public market having the
desirable characteristics of depth, liquidity and orderliness, however,
depends upon the presence in the marketplace of both willing buyers and
sellers of Common Stock at any given time, which is not within the control of
the Company. No assurance can be given that an investor will be able to resell
the Common Stock at or above the Purchase Price of the Common Stock after the
Conversion. See "Risk Factors--Absence of Market for Common Stock."
38
<PAGE>
CAPITALIZATION
The following table presents the historical capitalization of the Bank at
May 31, 1996, and the pro forma consolidated capitalization of the Company
after giving effect to the Conversion, including the issuance of shares to the
Foundation, based upon the sale of the number of shares indicated in the table
and the other assumptions set forth under "Pro Forma Data."
<TABLE>
<CAPTION>
COMPANY PRO FORMA BASED UPON SALE AT $10.00 PER
SHARE
------------------------------------------------------
27,233,010 36,844,660 42,371,359
SHARES 32,038,835 SHARES SHARES
(MINIMUM OF SHARES (MAXIMUM OF (15% ABOVE
ESTIMATED (MIDPOINT OF ESTIMATED MAXIMUM OF
BANK PRICE ESTIMATED PRICE ESTIMATED
HISTORICAL RANGE) PRICE RANGE) RANGE) PRICE RANGE)(1)
---------- ----------- ------------ ----------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Deposits(2)............. $1,441,845 $1,441,845 $1,441,845 $1,441,845 $1,441,845
---------- ---------- ---------- ---------- ----------
Total deposits and
borrowed funds......... $1,511,443 $1,511,443 $1,511,443 $1,511,443 $1,511,443
========== ========== ========== ========== ==========
Stockholders' equity:
Preferred Stock, $.01
par value, 10,000,000
shares authorized;
none to be issued.... $ -- $ -- $ -- $ -- $ --
Common Stock, $.01 par
value, 100,000,000
shares authorized;
shares to be issued
as reflected......... -- 281 330 379 436
Additional paid-in
capital(3)........... -- 273,520 322,197 370,874 426,852
Retained earnings(4).. 222,916 222,916 222,916 222,916 222,916
Less:
Expense of
contributions to
Foundation........... -- (8,170) (9,612) (11,053) (12,711)
Plus:
Tax effect of
contribution to
Foundation(5)........ -- 3,023 3,556 4,090 4,703
Net unrealized loss on
securities available-
for-sale, net of
taxes................ (672) (672) (672) (672) (672)
Less:
Common Stock acquired
by the ESOP(6)....... -- (22,440) (26,400) (30,360) (34,914)
Common Stock acquired
by the Stock
Programs(7).......... -- (11,220) (13,200) (15,180) (17,457)
---------- ---------- ---------- ---------- ----------
Total stockholders'
equity................. $ 222,244 $ 457,238 $ 499,115 $ 540,994 $ 589,153
========== ========== ========== ========== ==========
</TABLE>
- --------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to 15%
as a result of regulatory considerations or changes in market or general
financial and economic conditions following the commencement of the
Subscription and Community Offerings.
(2) Does not reflect withdrawals from deposit accounts for the purchase of
Common Stock in the Conversion. Such withdrawals would reduce pro forma
deposits by the amount of such withdrawals.
(3) Reflects the issuance of shares sold in the Offerings and the issuance of
additional shares of Common Stock to the Foundation at a value of $10.00
per share. No effect has been given to the issuance of additional shares
of Common Stock pursuant to the Company's proposed Stock Option Plans
intended to be adopted by the Company and presented for approval of
stockholders at a meeting of stockholders following the Conversion. The
Stock Option Plans would provide the grant of stock options to purchase an
amount of Common Stock equal to 10% of the shares of Common Stock issued
in the Conversion including shares issued to the Foundation. See
"Management of the Bank--Benefit Plans--Stock Option Plans."
(4) The retained earnings of the Bank will be substantially restricted after
the Conversion. See "The Conversion--Liquidation Rights."
(5) Represents the tax effect of the contribution of Common Stock to the
Foundation based on a 37% tax rate. The realization of the deferred tax
benefit is limited annually to 10% of the Company's annual taxable income,
subject to the ability of the Company to carry forward any unused portion
of the deduction for five years following the year in which the
contribution is made.
(6) Assumes that 8% of the shares issued in connection with the Conversion,
including shares issued to the Foundation, will be purchased by the ESOP
and the funds used to acquire the ESOP shares will be borrowed from the
Company. The Common Stock acquired by the ESOP is reflected as a reduction
of stockholders' equity. See "Management of the Bank--Benefit Plans--ESOP"
and "--Benefit Plans--Stock Programs."
(7) Assumes that, subsequent to the Conversion, an amount equal to 4% of the
shares of Common Stock issued in the Conversion, including shares issued
to the Foundation, is purchased by the Stock Programs through open market
purchases. The Common Stock purchased by the Stock Programs is reflected
as a reduction of stockholders' equity. See "Risk Factors--Possible
Dilutive Effect of Stock Programs and Stock Options," Footnote 2 to the
tables under "Pro Forma Data" and "Management of the Bank--Benefit Plans--
Stock Programs."
39
<PAGE>
PRO FORMA DATA
The actual net proceeds from the sale of the Common Stock cannot be
determined until the Conversion is completed. However, net proceeds are
currently estimated to be between $265.6 million and $360.2 million based upon
the following assumptions: (i) $4.5 million will be sold to executive
officers, Trustees, Directors and employees of the Bank and Company, the ESOP
will purchase 8% of the Common Stock issued in connection with the Conversion,
including shares issued to the Foundation, and the remaining shares will be
sold in the Subscription and Community Offerings; (ii) Sandler O'Neill will
receive a fee equal to 1.75% of the aggregate Purchase Price of the shares
sold in the Subscription Offering and Community Offerings, except that no fee
will be paid with respect to shares purchased by the Employee Plans, including
the ESOP, officers, employees, Trustees and Directors of the Bank and Company
and members of their immediate families or any partner or employee of the
Bank's general counsel; (iii) the Company will issue to the Foundation an
amount of Common Stock equal to 3% of the Common Stock sold in the Conversion
from authorized but unissued shares; and (iv) Conversion expenses, excluding
the marketing fees paid to Sandler O'Neill, will be approximately $2.4
million. Actual Conversion expenses may vary from those estimated.
Pro forma consolidated net income of the Company for the five months ended
May 31, 1996 and for the year ended December 31, 1995 have been calculated as
if the Common Stock had been sold at the beginning of the respective periods
and the net proceeds had been invested at 5.78% (the one year U.S. Treasury
bill rate as of July 30, 1996). The tables do not reflect the effect of
withdrawals from deposit accounts for the purchase of Common Stock. The pro
forma after-tax yield for the Company and the Bank is assumed to be 3.64% for
the five months ended May 31, 1996 (based on an assumed tax rate of 37.0%),
and 3.64% for the year ended December 31, 1995 (based on an assumed tax rate
of 37.0%). Historical and pro forma per share amounts have been calculated by
dividing historical and pro forma amounts by the indicated number of shares of
Common Stock, as adjusted to give effect to the purchase of shares by the ESOP
and the effect of the issuance of shares to the Foundation. No effect has been
given in the pro forma stockholders' equity calculations for the assumed
earnings on the net proceeds. As discussed under "Use of Proceeds," the
Company will retain 50% of the net Conversion proceeds.
The following pro forma information may not be representative of the
financial effects of the foregoing transactions at the dates on which such
transactions actually occur and should not be taken as indicative of future
results of operations. Pro forma consolidated stockholders' equity represents
the difference between the stated amount of assets and liabilities of the
Company. The pro forma stockholders' equity is not intended to represent the
fair market value of the Common Stock and may be greater than amounts that
would be available for distribution to stockholders in the event of
liquidation.
The following tables summarize historical data of the Bank and pro forma
data of the Company at or for the five months ended May 31, 1996, and at or
for the year ended December 31, 1995, based on the assumptions set forth above
and in the table and should not be used as a basis for projections of market
value of the Common Stock following the Conversion. The tables below give
effect to the Stock Programs, which are expected to be adopted by the Company
following the Conversion and presented to stockholders for approval at a
meeting of stockholders. See Footnote 2 to the tables and "Management of the
Bank--Benefit Plans--Stock Programs." No effect has been given in the tables
to the possible issuance of additional shares reserved for future issuance
pursuant to the Stock Option Plans to be adopted by the Board of Directors of
the Company and presented to stockholders for approval at a meeting of
stockholders, nor does book value as presented give any effect to the
liquidation account to be established for the benefit of Eligible Account
Holders or, in the event of liquidation of the Bank, to the tax effect of the
bad debt reserve and other factors. See Footnote 3 to the tables below, "The
Conversion --Liquidation Rights" and "Management of the Bank--Benefit Plans--
Stock Option Plans." THE FOLLOWING TABLE GIVES EFFECT TO THE ISSUANCE OF
AUTHORIZED BUT UNISSUED SHARES OF THE COMPANY'S COMMON STOCK TO THE FOUNDATION
CONCURRENTLY WITH THE COMPLETION OF THE CONVERSION. THE VALUATION RANGE, AS
SET FORTH HEREIN AND IN THE TABLE BELOW, TAKES INTO ACCOUNT THE DILUTIVE
IMPACT OF THE ISSUANCE OF SHARES TO THE FOUNDATION.
40
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE FIVE MONTHS ENDED MAY 31, 1996
------------------------------------------------------------------------
27,233,010 32,038,835 36,844,660 42,371,359
SHARES SOLD AT SHARES SOLD AT SHARES SOLD AT SHARES SOLD AT
$10.00 PER SHARE $10.00 PER SHARE $10.00 PER SHARE $10.00 PER SHARE (15%
(MINIMUM (MIDPOINT (MAXIMUM ABOVE MAXIMUM
OF ESTIMATED OF ESTIMATED OF ESTIMATED OF ESTIMATED
PRICE RANGE) PRICE RANGE) PRICE RANGE) PRICE RANGE)(8)
---------------- ---------------- ---------------- ---------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Gross proceeds.......... $272,330 $320,388 $368,447 $423,714
Plus: Shares acquired by
Foundation (equal to
3% of stock issued
in Conversion)...... 8,170 9,612 11,053 12,711
-------- -------- -------- --------
Pro forma market capi-
talization............. $280,500 $330,000 $379,500 $436,425
======== ======== ======== ========
Gross proceeds.......... $272,330 $320,388 $368,497 $423,714
Less: Offering expenses
and commissions........ (6,699) (7,473) (8,247) (9,137)
-------- -------- -------- --------
Estimated net proceeds.. $265,631 $312,915 $360,200 $414,577
Less: Common Stock pur-
chased by ESOP...... (22,440) (26,400) (30,360) (34,914)
Common Stock purchased
by Stock Programs.... (11,220) (13,200) (15,180) (17,457)
-------- -------- -------- --------
Estimated net proceeds,
as adjusted........... $231,971 $273,315 $314,660 $362,206
======== ======== ======== ========
Net income(1):
Historical............. $ 8,391 $ 8,391 $ 8,391 $ 8,391
Pro forma income on net
proceeds, as adjusted. 3,520 4,147 4,774 5,496
Pro forma ESOP adjust-
ment(2)............... (196) (231) (266) (305)
Pro forma Stock Program
adjustment(3)......... (589) (693) (797) (916)
-------- -------- -------- --------
Pro forma net income.. $ 11,126 $ 11,614 $ 12,102 $ 12,666
======== ======== ======== ========
Per share net income(1):
Historical............. $ 0.32 $ 0.27 $ 0.24 $ 0.21
Pro forma income on net
proceeds, as adjusted. 0.14 0.14 0.14 0.14
Pro forma ESOP adjust-
ment(2)............... (0.01) (0.01) (0.01) (0.01)
Pro forma Stock Pro-
grams adjustment(3)... (0.02) (0.02) (0.02) (0.02)
-------- -------- -------- --------
Pro forma net income
per share............ $ 0.43 $ 0.38 $ 0.35 $ 0.32
======== ======== ======== ========
Stockholders' equity:
Historical............. $222,244 $222,244 $222,244 $222,244
Estimated net proceeds. 265,631 312,915 360,200 414,577
Plus: Shares issued to
Foundation............ 8,170 9,612 11,053 12,711
Less: Contribution to
Foundation............ (8,170) (9,612) (11,053) (12,711)
Plus: Tax benefit of
the contribution to
the Foundation..... 3,023 3,556 4,090 4,703
Less: Common Stock ac-
quired by ESOP(2)..... (22,440) (26,400) (30,360) (34,914)
Less: Common Stock
acquired by Stock
Programs(3)........ (11,220) (13,200) (15,180) (17,957)
-------- -------- -------- --------
Pro forma stockhold-
ers' equity(3)(4)(5). $457,238 $499,115 $540,994 $589,153
======== ======== ======== ========
Stockholders' equity per
share(6):
Historical............. $ 7.92 $ 6.73 $ 5.86 $ 5.09
Estimated net proceeds. 9.47 9.48 9.49 9.50
Plus: Shares issued to
Foundation............ 0.29 0.29 0.29 0.29
Less: Shares issued to
Foundation............ (0.29) (0.29) (0.29) (0.29)
Plus: Tax benefit of
Foundation............ 0.11 0.11 0.11 0.11
Less: Common Stock
acquired by ESOP(2)... (0.80) (0.80) (0.80) (0.80)
Common Stock acquired
by Stock
Programs(3)......... (0.40) (0.40) (0.40) (0.40)
-------- -------- -------- --------
Pro forma stockholders'
equity per
share(3)(4)(5)........ $ 16.30 $ 15.12 $ 14.26 $ 13.50
======== ======== ======== ========
Offering price as a per-
centage of pro forma
stockholders' equity
per share.............. 61.35% 66.14% 70.03% 74.07%
Offering price to pro
forma net earnings per
share(7)............... 9.69x 10.96x 11.90x 13.02x
</TABLE>
(see footnotes on next page)
41
<PAGE>
- --------
(1) Does not give effect to the non-recurring expense that will be recognized
in 1996 as a result of the establishment of the Foundation. The Company
will recognize an after-tax expense for the amount of the contribution to
the Foundation which is expected to be $5.1 million, $6.1 million, $7.0
million and $8.0 million at the minimum, midpoint, maximum and maximum, as
adjusted, of the Estimated Price Range, respectively. Assuming the
contribution to the Foundation was expensed during the five month period
ended May 31, 1996, pro forma net earnings per share would be $0.23,
$0.18, $0.15 and $0.12, at the minimum, midpoint, maximum and maximum as
adjusted, respectively. Per share net income data is based on 25,837,167,
30,396,667, 34,956,167 and 40,199,592 shares outstanding which represents
shares sold in the Conversion, shares contributed to the Foundation and
shares to be allocated or distributed under the ESOP and Stock Programs
for the period presented.
(2) It is assumed that 8% of the shares of Common Stock issued in connection
with the Conversion, including shares issued to the Foundation, will be
purchased by the ESOP. For purposes of this table, the funds used to
acquire such shares are assumed to have been borrowed by the ESOP from the
Company. The amount to be borrowed is reflected as a reduction of
stockholders' equity. The Bank intends to make annual contributions to the
ESOP in an amount at least equal to the principal and interest requirement
of the debt. The Bank's total annual payment of the ESOP debt is based
upon 30 equal annual installments of principal, with an assumed interest
rate at 8.75%. The pro forma net earnings assumes: (i) that the Bank's
contribution to the ESOP is equivalent to the debt service requirement for
the five months ended May 31, 1996, and was made at the end of the period;
(ii) that 31,167, 36,667, 42,167, and 48,492 shares at the minimum,
midpoint, maximum and 15% above the maximum of the range, respectively,
were committed to be released during the five months ended May 31, 1996,
at an average fair value of $10.00 per share in accordance with Statement
of Position ("SOP") 93-6; and (iii) only the ESOP shares committed to be
released were considered outstanding for purposes of the net earnings per
share calculations. See "Management of the Bank--Benefit Plans--ESOP."
(3) Gives effect to the Stock Programs expected to be adopted by the Company
following the Conversion and presented for approval at a meeting of
stockholders. The Stock Programs intend to acquire an amount of Common
Stock equal to 4% of the shares of Common Stock sold in the Conversion and
issued to the Foundation, or 1,122,000, 1,320,000, 1,518,000 and 1,745,700
shares of Common Stock at the minimum, midpoint, maximum and 15% above the
maximum of the Estimated Price Range, respectively, either through open
market purchases, if permissible, or from authorized but unissued shares
of Common Stock or treasury stock of the Company, if any. Funds used by
the Stock Programs to purchase the shares will be contributed to the Stock
Programs by the Bank. In calculating the pro forma effect of the Stock
Programs, it is assumed that the shares were acquired by the Stock
Programs at the beginning of the period presented in open market purchases
at the Purchase Price and that 8.3% of the amount contributed was an
amortized expense during such period. The issuance of authorized but
unissued shares of the Company's Common Stock to the Stock Programs
instead of open market purchases would dilute the voting interests of
existing stockholders by approximately 3.8% and pro forma net earnings per
share would be $0.41, $0.37, $0.33 and $0.30 at the minimum, midpoint,
maximum and 15% above the maximum of the range, respectively, and pro
forma stockholders' equity per share would be $16.06, $14.93, $14.09 and
$13.36 at the minimum, midpoint, maximum and 15% above the maximum of the
range, respectively. There can be no assurance that the actual purchase
price of the shares granted under the Stock Programs will be equal to the
Purchase Price. See "Management of the Bank--Benefit Plans--Stock
Programs."
(4) No effect has been given to the issuance of additional shares of Common
Stock pursuant to the Stock Option Plans expected to be adopted by the
Company following the Conversion. The Company expects to present the Stock
Option Plans for approval at a meeting of stockholders. Under the Stock
Option Plans, an amount equal to 10% of the Common Stock issued in
connection with the Conversion, including shares issued to the Foundation,
or 2,805,000, 3,300,000, 3,795,000 and 4,364,250 shares at the minimum,
midpoint, maximum and 15% above the maximum of the Estimated Price Range,
respectively, will be reserved for future issuance upon the exercise of
options to be granted under the Stock Option Plans. The issuance of Common
Stock pursuant to the exercise of options under the Stock Option Plans
will result in the dilution of existing stockholders' interests. Assuming
all options were exercised at the end of the period at an exercise price
of $10.00 per share, the pro forma net earnings per share would be $0.40,
$0.35, $0.32 and $0.29, respectively, and the pro forma stockholders'
equity per share would be $15.73, $14.66, $13.87 and $13.18, respectively.
See "Management of the Bank--Benefit Plans--Stock Option Plans."
(5) The retained earnings of the Bank will continue to be substantially
restricted after the Conversion. See "Dividend Policy," "The Conversion--
Liquidation Rights" and "Regulation and Supervision--New York State Law."
(6) Stockholders' equity per share data is based upon 28,050,000, 33,000,000,
and 37,950,000 and 43,642,500 shares outstanding representing shares sold
in the conversion, shares contributed to the Foundation and shares
purchased by the ESOP and Stock Programs.
(7) Based on pro forma net earnings for the five months ended May 31, 1996
that have been annualized.
(8) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to 15%
as a result of regulatory considerations or changes in market or general
financial and economic conditions following the commencement of the
Subscription and Community Offerings.
42
<PAGE>
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31, 1995
------------------------------------------------------
27,233,010 32,038,835 36,844,660 42,371,359
SHARES SOLD SHARES SOLD SHARES SOLD SHARES SOLD
AT $10.00 AT $10.00 AT $10.00 AT $10.00 PER
PER SHARE PER SHARE PER SHARE SHARE (15%
(MINIMUM (MIDPOINT (MAXIMUM ABOVE MAXIMUM
OF ESTIMATED OF ESTIMATED OF ESTIMATED OF ESTIMATED
PRICE RANGE) PRICE RANGE) PRICE RANGE) PRICE RANGE)(8)
------------ ------------ ------------ ---------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Gross proceeds.......... $272,330 $320,388 $368,447 $423,714
Plus: Shares acquired by
Foundation (equal to 3%
of stock issued in Con-
version)............... 8,170 9,612 11,053 12,711
-------- -------- -------- --------
Pro forma market capi-
talization............. $280,500 $330,000 $379,500 $436,425
======== ======== ======== ========
Gross proceeds.......... $272,330 $320,388 $368,447 $423,714
Less: Offering expenses
and commissions........ (6,699) (7,473) (8,247) (9,137)
-------- -------- -------- --------
Estimated net proceeds.. $265,631 $312,915 $360,200 $414,577
Less: Common Stock pur-
chased by ESOP......... (22,440) (26,400) (30,360) (34,914)
Common Stock pur-
chased by Stock Pro-
grams................ (11,220) (13,200) (15,180) (17,457)
-------- -------- -------- --------
Estimated net pro-
ceeds, as adjusted... $231,971 $273,315 $314,660 $362,206
======== ======== ======== ========
Net income(1):
Historical............ $ 18,718 $ 18,718 $ 18,718 $ 18,718
Pro forma income on
net proceeds, as ad-
justed............... 8,447 9,953 11,458 13,189
Pro forma ESOP adjust-
ment(2).............. (471) (554) (638) (733)
Pro forma Stock Pro-
grams adjustment(3).. (1,414) (1,663) (1,913) (2,200)
-------- -------- -------- --------
Pro forma net in-
come............... $ 25,280 $ 26,454 $ 27,625 $ 28,974
======== ======== ======== ========
Per share net income(1):
Historical............ $ 0.72 $ 0.61 $ 0.53 $ 0.46
Pro forma income on
net proceeds, as ad-
justed............... 0.33 0.33 0.33 0.33
Pro forma ESOP adjust-
ment(2).............. (0.02) (0.02) (0.02) (0.02)
Pro forma Stock Pro-
grams adjustment(3).. (0.05) (0.05) (0.05) (0.05)
-------- -------- -------- --------
Pro forma net income
per share.......... $ 0.98 $ 0.87 $ 0.79 $ 0.72
======== ======== ======== ========
Stockholders' equity:
Historical............ $226,418 $226,418 $226,418 $226,418
Estimated net pro-
ceeds................ 265,631 312,915 360,200 414,577
Plus: Shares issued to
Foundation........... 8,170 9,612 11,053 12,711
Less: Contribution to
Foundation........... (8,170) (9,612) (11,053) (12,711)
Plus: Tax benefit of
the contribution to
the Foundation....... 3,023 3,556 4,090 4,703
Less: Common Stock ac-
quired by ESOP(2).... (22,440) (26,400) (30,360) (34,914)
Less: Common Stock ac-
quired by Stock Pro-
grams(3)............. (11,220) (13,200) (15,180) (17,457)
-------- -------- -------- --------
Pro forma stockhold-
ers' equi-
ty(3)(4)(5)........ $461,412 $503,289 $545,168 $593,327
======== ======== ======== ========
Stockholders' equity per
share(6):
Historical............ $ 8.07 $ 6.86 $ 5.97 $ 5.19
Estimated net pro-
ceeds................ 9.47 9.48 9.49 9.50
Plus: Shares issued to
Foundation........... 0.29 0.29 0.29 0.29
Less: Shares issued to
Foundation........... (0.29) (0.29) (0.29) (0.29)
Plus: Tax benefit of
Foundation........... 0.11 0.11 0.11 0.11
Less: Common Stock ac-
quired by ESOP(2).... (0.80) (0.80) (0.80) (0.80)
Common Stock ac-
quired by Stock
Programs(3)........ (0.40) (0.40) (0.40) (0.40)
-------- -------- -------- --------
Pro forma stockhold-
ers' equity per
share(3)(4)(5)..... $ 16.45 $ 15.25 $ 14.37 $ 13.60
======== ======== ======== ========
Offering price as a
percentage of pro forma
stockholders' equity
per share.............. 60.79% 65.57% 69.59% 73.53%
Offering price to pro
forma net earnings per
share(7)............... 10.20x 11.49x 12.66x 13.89x
</TABLE>
(see footnotes on next page)
43
<PAGE>
- --------
(1) Does not give effect to the non-recurring expense that will be recognized
in 1996 as a result of the establishment of the Foundation. The Company
will recognize an after-tax expense for the amount of the contribution to
the Foundation which is expected to be $5.1 million, $6.1 million, $7.0
million and $8.0 million at the minimum, midpoint, maximum and maximum, as
adjusted, of the Estimated Price Range, respectively. Assuming the
contribution to the Foundation was expensed during the year ended
December 31, 1995, pro forma net earnings per share would be $0.78, $0.67,
$0.59 and $0.52, at the minimum, midpoint, maximum and maximum as
adjusted, respectively. Per share net income data is based on 25,880,800,
30,448,000, 35,015,200 and 40,267,480 shares outstanding which represents
shares sold in the Conversion shares contributed to the Foundation and
shares to be allocated or distributed under the ESOP and Stock Program for
the period presented.
(2) It is assumed that 8% of the shares of Common Stock issued in connection
with the Conversion, including shares issued to the Foundation, will be
purchased by the ESOP. For purposes of this table, the funds used to
acquire such shares are assumed to have been borrowed by the ESOP from the
Company. The amount to be borrowed is reflected as a reduction of
stockholders' equity. The Bank intends to make annual contributions to the
ESOP in an amount at least equal to the principal and interest requirement
of the debt. The Bank's total annual payment of the ESOP debt is based
upon 30 equal annual installments of principal, with an assumed interest
rate at 8.75%. The pro forma net earnings assumes: (i) that the Bank's
contribution to the ESOP is equivalent to the debt service requirement for
the year ended December 31, 1995, and was made at the end of the period;
(ii) that 74,800, 88,000, 101,200 and 116,380 shares at the minimum,
midpoint, maximum and 15% above the maximum of the range, respectively,
were committed to be released during the year ended December 31, 1995 at
an average fair value of $10.00 per share in accordance with SOP 93-6; and
(iii) only the ESOP shares committed to be released were considered
outstanding for purposes of the net earnings per share calculations. See
"Management of the Bank--Benefit Plans--ESOP."
(3) Gives effect to the Stock Programs expected to be adopted by the Company
following the Conversion and presented for approval at a meeting of
stockholders. The Stock Programs intend to acquire an amount of Common
Stock equal to 4% of the shares of Common Stock issued in connection with
the Conversion, including shares issued to the Foundation, or 1,122,000,
1,320,000, 1,518,000 and 1,745,700 shares of Common Stock at the minimum,
midpoint, maximum and 15% above the maximum of the Estimated Price Range,
respectively, either through open market purchases, if permissible, or
from authorized but unissued shares of Common Stock or treasury stock of
the Company, if any. In calculating the pro forma effect of the Stock
Programs, it is assumed that the shares were acquired by the Stock
Programs at the beginning of the period presented in open market purchases
at the Purchase Price and that 20% of the amount contributed was an
amortized expense during such period. The issuance of authorized but
unissued shares of the Company's Common Stock to the Stock Programs
instead of open market purchases would dilute the voting interests of
existing stockholders by approximately 3.8% and pro forma net earnings per
share would be $0.94, $0.83, $0.76 and $0.69 at the minimum, midpoint,
maximum and 15% above the maximum of the range, respectively and pro forma
stockholders' equity per share would be $16.20, $15.05, $14.20 and $13.46
at the minimum, midpoint, maximum and 15% above the maximum of the range,
respectively. There can be no assurance that the actual purchase price of
the shares granted under the Stock Programs will be equal to the Purchase
Price. See "Management of the Bank--Benefit Plans--Stock Programs."
(4) No effect has been given to the issuance of additional shares of Common
Stock pursuant to the Stock Option Plans expected to be adopted by the
Company following the Conversion. The Company expects to present the Stock
Option Plans for approval at a meeting of stockholders. Under the Stock
Option Plans, an amount equal to 10% of the Common Stock issued in
connection with the Conversion, including shares issued to the Foundation,
or 2,805,000, 3,300,000, 3,795,000 and 4,364,250 shares at the minimum,
midpoint, maximum and 15% above the maximum of the Estimated Price Range,
respectively, will be reserved for future issuance upon the exercise of
options to be granted under the Stock Option Plans. The issuance of Common
Stock pursuant to the exercise of options under the Stock Option Plans
will result in the dilution of existing stockholders' interests. Assuming
all options were exercised at the end of the period at an exercise price
of $10.00 per share, the pro forma net earnings per share would be $0.88,
$0.78, $0.71 and $0.65, respectively, and the pro forma stockholders'
equity per share would be $15.86, $14.77, $13.97 and $13.27, respectively.
See "Management of the Bank--Benefit Plans--Stock Option Plans."
(5) The retained earnings of the Bank will continue to be substantially
restricted after the Conversion. See "Dividend Policy," "The Conversion--
Liquidation Rights" and "Regulation and Supervision--New York State Law."
(6) Stockholders' equity per share data is based upon 28,050,000, 33,000,000,
37,950,000 and 43,642,500 shares outstanding representing shares sold in
the conversion, shares contributed to the Foundation and shares purchased
by the ESOP and Stock Programs.
(7) Based on pro forma net earnings for the five months ended May 31, 1996
that has been annualized.
(8) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Price Range of up to 15%
as a result of regulatory considerations or changes in market or general
financial and economic conditions following the commencement of the
Subscription and Community Offerings.
44
<PAGE>
COMPARISON OF VALUATION AND PRO FORMA INFORMATION WITH NO FOUNDATION
In the event that the Foundation was not being established as part of the
Conversion, FinPro has estimated that the pro forma aggregate market
capitalization of the Company would be approximately $339.2 million at the
midpoint, which is approximately $9.2 million greater than the pro forma
aggregate market capitalization of the Company if the Foundation is included,
and would result in approximately an $18.8 million increase in the amount of
Common Stock offered for sale in the Conversion. The pro forma price to book
ratio and pro forma price to earnings ratio would be the same under both the
current appraisal and the estimate of the value of the Company without the
Foundation. Further, assuming the midpoint of the Estimated Price Range, pro
forma stockholders' equity per share and pro forma earnings per share would be
the same at $15.12 and $0.38, respectively,with the Foundation or without the
Foundation. The pro forma price to book ratio and the pro forma price to
earnings ratio are the same with and without the Foundation at the midpoint at
66.14% and 10.96x, respectively. There is no assurance that in the event the
Foundation was not formed that the appraisal prepared at that time would have
concluded that the pro forma market value of the Company would be the same as
that estimated herein. Any appraisal prepared at that time would be based on
the facts and circumstances existing at that time, including, among other
things, market and economic conditions.
For comparative purposes only, set forth below are certain pricing ratios
and financial data and ratios, at the minimum, midpoint, maximum and maximum,
as adjusted, of the Estimated Price Range, assuming the Conversion was
completed at May 31, 1996.
<TABLE>
<CAPTION>
AT THE MAXIMUM,
AT THE MINIMUM AT THE MIDPOINT AT THE MAXIMUM AS ADJUSTED
------------------------ ------------------------- ------------------------- ------------------------
WITH NO WITH NO WITH NO WITH NO
FOUNDATION FOUNDATION FOUNDATION FOUNDATION FOUNDATION FOUNDATION FOUNDATION FOUNDATION
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Estimated offering
amount................... $ 272,330 $ 288,320 $ 320,388 $ 339,200 $ 368,447 $ 390,080 $ 423,714 $ 448,592
Pro forma market capital-
ization.................. 280,500 288,320 330,000 339,200 379,500 390,080 436,425 448,592
Total assets............. 2,007,169 2,018,952 2,049,046 2,062,909 2,090,925 2,106,867 2,139,084 2,157,418
Total liabilities........ 1,549,931 1,549,931 1,549,931 1,549,931 1,549,931 1,549,931 1,549,931 1,549,931
Pro forma stockholders'
equity................... 457,238 469,021 499,115 512,978 540,994 556,936 589,153 607,487
Pro forma consolidated
net earnings............. 11,126 11,328 11,614 11,853 12,102 12,377 12,666 12,980
Pro forma stockholders'
equity per share......... 16.30 16.27 15.12 15.12 14.26 14.28 13.50 13.54
Pro forma consolidated
net earnings per share... 0.43 0.43 0.38 0.38 0.35 0.34 0.32 0.31
Pro Forma Pricing Ratios:
Offering price as a per-
centage of pro forma
stockholders' equity per
share................... 61.35% 61.46% 66.14% 66.14% 70.13% 70.03% 74.07% 73.86%
Offering price to pro
forma net earnings per
share................... 9.69x(1) 9.69x 10.96x(1) 10.96x 11.90x(1) 11.90x 13.02x(1) 13.24x
Pro Forma Market
Capitalization to
assets.................. 13.97% 14.28% 16.10% 16.44% 18.15% 18.51% 20.40% 20.79%
Pro Forma Financial Ra-
tios:
Return on assets........ 1.33 (2) 1.35 1.36 (2) 1.38 1.39 (2) 1.41 1.42 (2) 1.44
Return on stockholders'
equity.................. 5.84 (3) 5.80 5.58 (3) 5.55 5.37 (3) 5.33 5.16 (3) 5.13
Stockholders' equity to
assets.................. 22.78 23.23 24.36 24.87 25.87 26.43 27.54 28.16
</TABLE>
- ----
(1) If the contribution to the Foundation had been expensed during the five
months ended May 31, 1996, the offering price to pro forma net earnings
per share would have been 18.12x, 23.15x, 27.78x and 34.72x at the
minimum, midpoint, maximum and maximum, as adjusted, respectively.
(2) If the contribution to the Foundation had been expensed during the five
months ended May 31, 1996, return on assets would have been 0.71%, 0.65%
0.59% and 0.52% at the minimum, midpoint, maximum and maximum, as
adjusted, respectively.
(3) If the contribution to the Foundation had been expensed during the five
months ended May 31, 1996, return on stockholders' equity would have been
3.14%, 2.67%, 2.28% and 1.90% at the minimum, midpoint, maximum and
maximum, as adjusted, respectively.
45
<PAGE>
THE ROSLYN SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
The following Consolidated Statements of Income of the Bank for each of the
years in the three-year period ended December 31, 1995 have been audited by
KPMG Peat Marwick LLP, independent certified public accountants, whose report
thereon appears elsewhere in this Prospectus. Such report includes an
explanatory paragraph relating to changes in accounting principles. With
respect to information for the five months ended May 31, 1996 and 1995, which
is unaudited, in the opinion of management, all adjustments necessary for a
fair presentation of such interim periods have been included and are of a
normal recurring nature. Results for the five months ended May 31, 1996 are
not necessarily indicative of the results that may be expected for the year
ended December 31, 1996. These statements should be read in conjunction with
the Consolidated Financial Statements and Notes thereto and Management's
Discussion and Analysis of Financial Condition and Results of Operations
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FOR THE FIVE MONTHS FOR THE YEAR
ENDED MAY 31, ENDED DECEMBER 31,
---------------------- -------------------------------
1996 1995 1995 1994 1993
---------- ---------- -------------- ------- -------
(UNAUDITED) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Interest income:
Federal funds sold and
short term deposits.. $ 587 $ 722 $ 1,819 $ 1,069 $ 949
Debt and equity secu-
rities............... 11,287 15,197 37,891 38,972 39,638
Mortgage-backed and
mortgage related se-
curities............. 22,940 14,207 37,086 27,976 27,897
Real estate loans..... 15,024 13,751 33,341 24,665 24,742
Consumer and student
loans................ 225 673 897 1,834 1,778
---------- ---------- -------- ------- -------
Total interest in-
come............... 50,063 44,550 111,034 94,516 95,004
---------- ---------- -------- ------- -------
Interest expense:
Deposits.............. 26,198 22,038 57,744 40,353 39,516
Borrowed funds........ 930 700 1,554 -- 182
---------- ---------- -------- ------- -------
Total interest ex-
pense.............. 27,128 22,738 59,298 40,353 39,698
---------- ---------- -------- ------- -------
Net interest income
before provision for
possible loan losses... 22,935 21,812 51,736 54,163 55,306
Provision for possible
loan losses............ 300 250 600 600 6,860
---------- ---------- -------- ------- -------
Net interest income af-
ter provision for pos-
sible loan losses...... 22,635 21,562 51,136 53,563 48,446
---------- ---------- -------- ------- -------
Non-interest income:
Loan servicing and fee
income............... 2,477 1,226 3,729 3,339 3,363
Net gains (losses) on
sales of loans....... 1,351 455 1,827 (289) 33
Net (losses) gains on
securities........... (257) (758) (811) (1,181) 3,123
Net (losses) gains on
real estate opera-
tions................ (271) 203 714 156 (1,665)
Other non-interest in-
come................. 197 4 255 24 10
---------- ---------- -------- ------- -------
Total non-interest
income............. 3,497 1,130 5,714 2,049 4,864
---------- ---------- -------- ------- -------
Non-interest expense:
General and adminis-
trative expenses:
Compensation and em-
ployee benefits...... 8,167 6,032 15,815 13,409 12,492
Occupancy and equip-
ment................. 1,427 1,245 3,288 2,845 2,539
Deposit insurance pre-
miums................ 1 1,142 1,430 2,630 2,587
Advertising and promo-
tion................. 918 604 1,708 1,350 1,200
Other non-interest ex-
penses............... 3,378 2,168 7,115 5,816 5,654
---------- ---------- -------- ------- -------
Total general and
administrative ex-
penses............. 13,891 11,191 29,356 26,050 24,472
Amortization of excess
of cost over fair
value of net assets
acquired............. 196 51 266 122 92
---------- ---------- -------- ------- -------
Total non-interest
expense............ 14,087 11,242 29,622 26,172 24,564
---------- ---------- -------- ------- -------
Income before income
taxes and cumulative
effect of changes in
accounting principles.. 12,045 11,450 27,228 29,440 28,746
Provision for income
taxes.................. 3,654 3,876 8,510 10,018 10,586
---------- ---------- -------- ------- -------
Income before cumulative
effect of changes in
accounting principles.. 8,391 7,574 18,718 19,422 18,160
Cumulative effect of
changes in accounting
principles............. -- -- -- -- 5,983
---------- ---------- -------- ------- -------
Net income.............. $ 8,391 $ 7,574 $ 18,718 $19,422 $24,143
========== ========== ======== ======= =======
</TABLE>
(See accompanying notes to the consolidated financial statements)
46
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company has only recently been formed and, accordingly, has no results
of operations. The Bank's results of operations are dependent primarily on net
interest income, which is the difference between the income earned on its loan
and securities portfolios and its cost of funds, consisting of the interest
paid on deposits and borrowings. Results of operations are also affected by
the Bank's provision for possible loan losses, real estate operations expense,
securities and loan sale activities and loan servicing activities. The Bank's
non-interest expense principally consists of compensation and benefits,
occupancy and equipment expense, federal deposit insurance premiums and other
expenses. Results of operations are also significantly affected by general
economic and competitive conditions, particularly changes in interest rates,
government policies and actions of regulatory authorities. See "Regulation and
Supervision" for a discussion of the regulatory changes resulting from the
Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA")
and the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") and the impact of such changes on the Bank. Future changes in
applicable law, regulations or government policies may materially impact the
Bank. On August 1, 1995, the Bank acquired through its wholly-owned
subsidiary, RFI, certain assets and liabilities, including the loan
origination business and the loan servicing portfolio of RMBI, a mortgage
banking company which primarily operated in the New York and New Jersey areas
in and surrounding the New York City metropolitan area and in Albany, New
York. The acquisition was accounted for under the purchase method of
accounting. Accordingly, the information contained in this section regarding
periods subsequent to July 31, 1995 reflects the consolidated operations of
the Bank, inclusive of its mortgage banking subsidiary.
MANAGEMENT STRATEGY
In recent years, the Bank's operating strategy concentrated on maintaining
profitability by primarily investing in mortgage-backed and mortgage related
and U.S. Government or agency debt securities. Since 1993, the Bank has
decreased its emphasis on investments in U.S. Government securities and
increased its emphasis on building its loan portfolio by restructuring its
lending department, hiring experienced commercial real estate loan personnel
and revising its underwriting policies and procedures. More recently, through
its purchase of certain of the assets and liabilities of a mortgage banking
company and the establishment of RFI, the Bank has increased its emphasis on
mortgage banking activities and developed a resource for developing its one-
to four-family loan portfolio. The Bank's current operating strategy consists
primarily of: (i) investing funds not utilized for loan originations and
purchases in shorter-term debt securities and mortgage-backed and mortgage
related securities and preferred stock of corporate issuers; (ii) building its
loan portfolio by purchasing one- to four-family loans originated by RFI and
placing emphasis on the origination of high quality commercial real estate
loans to selected real estate developers operating in the Bank's primary
market area; (iii) increasing non-interest income and building its loan
servicing portfolio through its mortgage banking operations whereby it sells,
generally on a servicing retained basis, one- to four-family mortgage loans
that it originates through RFI; (iv) attracting and retaining deposit accounts
by paying competitive rates on its deposit products and opening new branches;
and (v) maintaining a lower expense ratio by efficiently utilizing personnel
and branch facilities to service its customers.
MANAGEMENT OF INTEREST RATE RISK
The principal objective of the Bank's interest rate risk management is to
evaluate the interest rate risk inherent in certain balance sheet accounts,
determine the level of risk appropriate given the Bank's business strategy,
operating environment, capital and liquidity requirements and performance
objectives, and manage the risk consistent with the Board of Trustees'
approved guidelines. Through such management, the Bank seeks to reduce the
vulnerability of its operations to changes in interest rates. The Bank's Board
of Trustees reviews the Bank's interest rate risk position on a monthly basis.
The Bank's Asset/Liability Committee is comprised of the Bank's senior
management under the direction of the Board of Trustees, with senior
management responsible for
47
<PAGE>
reviewing with the Board of Trustees its activities and strategies, the effect
of those strategies on the Bank's net interest margin, the market value of the
portfolio and the effect that changes in interest rates will have on the
Bank's portfolio and the Bank's exposure limits. See "Risk Factors--
Sensitivity to Increases in Interest Rates."
In recent years, the Bank has utilized the following strategies to manage
interest rate risk: (1) emphasizing the origination and retention of fixed-
rate mortgage loans having terms to maturity of not more than fifteen years,
adjustable-rate loans and consumer loans consisting primarily of home equity
loans and second mortgage loans; (2) selling substantially all 30-year fixed-
rate mortgage loans originated to the secondary market without recourse and on
a servicing retained basis (except for such loans with interest rates of 8% or
greater, which the Bank retains in its loan portfolio); and (3) investing in
shorter term and, to a lesser extent, adjustable rate securities which
generally bear lower yields as compared to longer term investments, but which
better position the Bank for increases in market interest rates. In recent
years, the Bank has attempted to shorten the maturities of its interest-
earning assets by increasing its investment in shorter term investments to
better match the maturities of its deposit accounts, in particular its
certificates of deposit that mature in one year or less, which, at May 31,
1996, totalled $688.2 million, or 46.4% of total interest-bearing liabilities.
These strategies may adversely impact net interest income due to lower initial
yields on these investments in comparison to longer term fixed rate
investments and whole loans. However, management believes that reducing its
exposure to interest rate fluctuations will enhance long-term profitability.
Gap Analysis. The matching of assets and liabilities may be analyzed by
examining the extent to which such assets and liabilities are "interest rate
sensitive" and by monitoring a bank's interest rate sensitivity "gap." An
asset or liability is said to be interest rate sensitive within a specific
time period if it will mature or reprice within that time period. The interest
rate sensitivity gap is defined as the difference between the amount of
interest-earning assets maturing or repricing within a specific time period
and the amount of interest-bearing liabilities maturing or repricing within
that same time period. At May 31, 1996, the Bank's one-year gap position, the
difference between the amount of interest-earning assets maturing or repricing
within one year and interest-bearing liabilities maturing or repricing within
one year, was negative 22.8%. A gap is considered positive when the amount of
interest rate sensitive assets exceeds the amount of interest rate sensitive
liabilities. A gap is considered negative when the amount of interest rate
sensitive liabilities exceeds the amount of interest rate sensitive assets.
Accordingly, during a period of rising interest rates, an institution with a
negative gap position would be in a worse position to invest in higher
yielding assets which, consequently, may result in the cost of its interest-
bearing liabilities increasing at a rate faster than its yield on interest-
earning assets than if it had a positive gap. During a period of falling
interest rates, an institution with a negative gap would tend to have its
interest-bearing liabilities repricing downward at a faster rate than its
interest-earning assets as compared to an institution with a positive gap
which, consequently, may tend to positively affect the growth of its net
interest income. Given the Bank's existing liquidity position and its ability
to sell securities from its available-for-sale portfolio, management of the
Bank believes that its negative gap position will have no material adverse
effect on its liquidity position. If interest rates decrease, there will be a
corresponding effect on the Bank's interest rate margin and corresponding
operating results.
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at May 31, 1996, which are
anticipated by the Bank, based upon certain assumptions, to reprice or mature
in each of the future time periods shown (the "GAP Table"). Except as stated
below, the amount of assets and liabilities shown which reprice or mature
during a particular period were determined in accordance with the earlier of
term to repricing or the contractual maturity of the asset or liability. The
table sets forth an approximation of the projected repricing of assets and
liabilities at May 31, 1996, on the basis of contractual maturities,
anticipated prepayments, and scheduled rate adjustments within a three month
period and subsequent selected time intervals. For loans on residential
properties, adjustable-rate loans, and fixed-rate loans, prepayment rates were
assumed to range from 6.66% to 15.24% annually. Mortgage-backed securities
were assumed to prepay at rates between 6.54% and 36.54% annually. Savings
accounts were assumed to decay at 7.00%, 7.00%, 7.00%, 10.00%, 10.00%, 10.00%
and 49.00%, NOW accounts and money market savings accounts were assumed to
decay at 10.00%, 5.00%, 5.00%, 10.00%, 10.00%, 10.00% and 50.00%, for the
periods of three months or
48
<PAGE>
less, three to six months, six to 12 months, one to three years, three to five
years, five to ten years and more than ten years, respectively. Prepayment and
deposit decay rates can have a significant impact on the Bank's estimated gap.
While the Bank believes such assumptions to be reasonable, there can be no
assurance that assumed prepayment rates and decay rates will approximate
actual future loan prepayment and deposit withdrawal activity. See "Business
of the Bank--Lending Activities," "--Securities Investment Activities" and "--
Sources of Funds."
<TABLE>
<CAPTION>
AT MAY 31, 1996
------------------------------------------------------------------------------------------
MORE MORE
MORE MORE THAN THAN
MORE THAN SIX THAN THREE FIVE
THREE THAN THREE MONTHS TO ONE YEAR YEARS YEARS
MONTHS OR MONTHS TO ONE TO THREE TO FIVE TO 10 MORE THAN
LESS SIX MONTHS YEAR YEARS YEARS YEARS 10 YEARS TOTAL
--------- ---------- ---------- -------- -------- -------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING AS-
SETS(1):
Federal funds sold..... $ 18,500 $ -- $ -- $ -- $ -- $ -- $ -- $ 18,500
Debt and equity secu-
rities(2)............. 12,530 8,988 21,005 143,373 70,939 137,379 33,132 427,346
Mortgage-backed and
mortgage related se-
curities(2)........... 75,686 56,622 106,320 290,740 170,893 109,137 29,923 839,321
Real estate loans,
net(3)(4)............. 55,746 4,452 104,873 34,835 128,847 66,766 26,159 421,678
Consumer and student
loans(4).............. 1,915 4 9 35 35 88 352 2,438
--------- --------- --------- -------- -------- -------- --------- ----------
Total interest-earn-
ing
assets.............. 164,377 70,066 232,207 468,983 370,714 313,370 89,566 1,709,283
--------- --------- --------- -------- -------- -------- --------- ----------
INTEREST-BEARING LIABIL-
ITIES:
Money market savings
accounts.............. 6,141 3,071 3,071 6,141 6,141 6,141 30,705 61,411
Savings accounts....... 30,505 31,994 30,505 43,578 43,578 43,578 213,534 437,272
NOW accounts........... 3,736 1,868 1,868 3,736 3,736 3,736 18,679 37,359
Certificates of depos-
it.................... 226,486 226,486 235,404 88,506 83,139 11,855 -- 871,876
Borrowed funds......... 69,598 -- -- -- -- -- -- 69,598
--------- --------- --------- -------- -------- -------- --------- ----------
Total interest-bear-
ing
liabilities........ 336,466 263,419 270,848 141,961 136,594 65,310 262,918 1,477,516
--------- --------- --------- -------- -------- -------- --------- ----------
Interest sensitivity
gap(5)................ $(172,089) $(193,353) $ (38,641) $327,022 $234,120 $248,060 $(173,352) $ 231,767
========= ========= ========= ======== ======== ======== ========= ==========
Cumulative interest
sensitivity gap....... $(172,089) $(365,442) $(404,083) $(77,061) $157,059 $405,119 $ 231,767
========= ========= ========= ======== ======== ======== =========
Cumulative interest
sensitivity gap as a
percentage of total
assets................ (9.71)% (20.62)% (22.80)% (4.35)% 8.86% 22.86% 13.08%
Cumulative interest
sensitivity gap as a
percentage of total
interest-earning
assets................ (104.69)% (521.57)% (174.02)% (16.43)% 42.37% 129.28% 258.77%
Cumulative net
interest-earning
assets as a
percentage of
cumulative interest-
bearing liabilities... 48.85% 39.08% 53.59% 92.39% 113.67% 133.35% 115.69%
</TABLE>
- --------
(1) Interest-earning assets are included in the period in which the balances
are expected to be redeployed and/or repriced as a result of anticipated
prepayments, scheduled rate adjustments, and contractual maturities.
(2) Debt and equity and mortgage-backed and mortgage related securities are
shown excluding the market value adjustment of ($1.2 million) before tax,
from the implementation of SFAS No. 115. Equity securities primarily
consist of callable preferred stock, the maturities of which have been
assumed to be the date on which they are initially callable.
(3) For purposes of the gap analysis, the allowance for possible loan losses
and non-performing loans have been excluded.
(4) Loans held for sale are included in the three months or less category.
(5) Interest sensitivity gap represents the difference between net interest-
earning assets and interest-bearing liabilities.
49
<PAGE>
Certain shortcomings are inherent in the method of analysis presented in the
GAP Table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on
certain types of assets and liabilities may fluctuate in advance of changes in
market interest rates, while interest rates on other types may lag behind
changes in market rates. Additionally, certain assets, such as adjustable-rate
loans, have features which restrict changes in interest rates both on a short-
term basis and over the life of the asset. Further, in the event of changes in
interest rates, prepayment and early withdrawal levels would likely deviate
significantly from those assumed in calculating the table. Finally, the
ability of many borrowers to service their adjustable-rate loans may decrease
in the event of an interest rate increase.
Net Portfolio Value. The Bank's interest rate sensitivity is monitored by
management through the use of a Net Portfolio Value Model which generates
estimates of the change in the Bank's net portfolio value ("NPV") over a range
of interest rate scenarios. NPV is the present value of expected cash flows
from assets, liabilities, and off-balance sheet contracts. The NPV ratio,
under any interest rate scenario, is defined as the NPV in that scenario
divided by the market value of assets in the same scenario. The model assumes
estimated loan prepayment rates, reinvestment rates and deposit decay rates
similar to the assumptions utilized for the GAP Table. The following NPV Table
sets forth the Bank's NPV as of May 31, 1996.
<TABLE>
<CAPTION>
CHANGE IN NPV AS % OF PORTFOLIO
INTEREST RATES NET PORTFOLIO VALUE VALUE OF ASSETS
IN BASIS POINTS ---------------------------- --------------------------
(RATE SHOCK) AMOUNT $ CHANGE % CHANGE NPV RATIO % CHANGE
--------------- -------- --------- -------- ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
400................... $260,158 $(108,917) (29.51)% 17% (10.97)%
300................... 286,734 (82,341) (22.31) 18 (8.35)
200................... 315,619 (53,455) (14.48) 19 (5.55)
100................... 342,633 (26,442) (7.16) 20 (2.79)
Static................ 369,075 -- -- 21 --
(100)................. 388,416 19,342 5.24 22 2.43
(200)................. 396,441 27,366 7.41 22 4.28
(300)................. 399,318 30,243 8.19 21 5.91
(400)................. 405,999 36,924 10.00 21 7.84
</TABLE>
As is the case with the GAP Table, certain shortcomings are inherent in the
methodology used in the above interest rate risk measurements. Modeling
changes in NPV require the making of certain assumptions which may or may not
reflect the manner in which actual yields and costs respond to changes in
market interest rates. In this regard, the NPV Table presented assumes that
the composition of the Bank's interest sensitive assets and liabilities
existing at the beginning of a period remains constant over the period being
measured and also assumes that a particular change in interest rates is
reflected uniformly across the yield curve regardless of the duration to
maturity or repricing of specific assets and liabilities. Accordingly,
although the NPV Table provides an indication of the Bank's interest rate risk
exposure at a particular point in time, such measurements are not intended to
and do not provide a precise forecast of the effect of changes in market
interest rates on the Bank's net interest income and will differ from actual
results.
ANALYSIS OF NET INTEREST INCOME
Net interest income represents the difference between income on interest-
earning assets and expense on interest-bearing liabilities. Net interest
income also depends on the relative amounts of interest-earning assets and
interest-bearing liabilities and the interest rate earned or paid on them.
Average Balance Sheet. The following table sets forth certain information
relating to the Bank at May 31, 1996 and for the five months ended May 31,
1996 and 1995 and for the years ended December 31, 1995, 1994 and 1993. The
average yields and costs are derived by dividing income or expense by the
average balance of interest-earning assets or interest-bearing liabilities,
respectively, for the periods shown and reflect annualized yields and costs.
Average balances are derived from average daily balances. The yields and costs
include fees which are considered adjustments to yields.
50
<PAGE>
<TABLE>
<CAPTION>
FOR THE FIVE MONTHS ENDED MAY 31,
--------------------------------------------------------
AT MAY 31, 1996 1996 1995
------------------ --------------------------- ---------------------------
AVERAGE AVERAGE AVERAGE
YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE COST BALANCE INTEREST COST BALANCE INTEREST COST
---------- ------- ---------- -------- ------- ---------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning as-
sets(1):
Federal funds sold and
short-term deposits... $ 18,500 5.16% $ 26,984 $ 587 5.22% $ 28,738 $ 722 6.03%
Debt and equity securi-
ties.................. 433,862 7.34 403,020 11,287 6.72 572,400 15,197 6.37
Mortgage-backed and
mortgage related
securities, net....... 831,632 6.77 803,795 22,940 6.85 509,206 14,207 6.70
Real estate loans,
net(2)................ 411,311 8.57 388,682 15,024 9.28 333,265 13,751 9.90
Consumer and student
loans................. 2,438 9.38 4,296 225 12.57 18,908 673 8.54
---------- ---------- ------- ---------- -------
Total interest-earning
assets............... 1,697,743 7.34 1,626,777 50,063 7.39 1,462,517 44,550 7.31
------ ------- ------ ------- ------
Non-interest-earning
assets................ 74,432 62,917 46,723
---------- ---------- ----------
Total assets.......... $1,772,175 $1,689,694 $1,509,240
========== ========== ==========
LIABILITIES AND RETAINED
EARNINGS:
Interest-bearing liabil-
ities:
Deposits:
Money market accounts.. $ 61,411 2.97% $ 64,051 $ 768 2.88% $ 73,539 $ 872 2.85%
Savings accounts
(3)(4)................ 441,842 2.58 451,871 6,045 3.21 507,861 6,437 3.04
NOW accounts(4)........ 37,359 2.24 35,163 373 2.55 33,367 336 2.42
Certificates of depos-
it.................... 871,876 5.52 806,584 19,012 5.66 618,016 14,393 5.59
---------- ---------- ------- ---------- -------
Total deposits........ 1,412,488 4.40 1,357,669 26,198 4.63 1,232,783 22,038 4.29
Borrowed funds......... 69,598 5.44 41,041 930 5.44 26,276 700 6.39
---------- ---------- ------- ---------- -------
Total interest-bearing
liabilities.......... 1,482,086 4.45 1,398,710 27,128 4.65 1,259,059 22,738 4.33
------ ------- ------ ------- ------
Non-interest-bearing
liabilities............ 67,845 66,121 46,383
---------- ---------- ----------
Total liabilities..... 1,549,931 1,464,831 1,305,442
Total retained earnings. 222,244 224,863 203,798
---------- ---------- ----------
Total liabilities and
retained earnings.... $1,772,175 $1,689,694 $1,509,240
========== ========== ==========
Net interest
income/interest rate
spread(5).............. 2.89% $22,935 2.74% $21,812 2.98%
====== ======= ====== ======= ======
Net interest margin as a
percentage of interest-
earning assets(6)...... 3.38% 3.58%
====== ======
Ratio of interest-
earning assets to
interest-bearing
liabilities............ 114.55% 116.31% 116.16%
====== ====== ======
</TABLE>
- --------
(1) Includes related assets available-for-sale and unamortized discounts and
premiums.
(2) Amount is net of deferred loan fees, deferred mortgage interest,
unamortized discounts net and allowance for possible loan losses and
includes loans held for sale and non-performing loans.
(3) Savings accounts includes mortgagor's escrow deposits.
(4) The average cost of savings and NOW accounts at May 31, 1996 does not
reflect the payment of a special interest payment of approximately 25% of
interest paid on such accounts in prior years. To the extent such special
interest payments were paid on such accounts, the additional average cost
of savings and NOW accounts would have been 64 basis points and 56 basis
points at May 31, 1996, respectively. Such payments resulted in an
additional cost of savings accounts of 63 basis points and 57 basis points
for the five months ended May 31, 1996 and 1995, respectively, and an
additional cost of NOW accounts of 50 basis points and 40 basis points for
the five months ended May 31, 1996 and 1995, respectively.
(5) Net interest rate spread represents the difference between the yield on
interest-earning assets and the cost of interest-bearing liabilities.
(6) Net interest margin represents net interest income divided by average
interest-earning assets.
51
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------
1995 1994 1993
--------------------------- --------------------------- ---------------------------
AVERAGE AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST
---------- -------- ------- ---------- -------- ------- ---------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning
assets(1):
Federal funds sold and
short-term deposits... $ 30,568 $ 1,819 5.95% $ 23,420 $ 1,069 4.56% $ 28,600 $ 949 3.32%
Debt and equity
securities............ 560,663 37,891 6.76 586,096 38,972 6.65 603,367 39,638 6.57
Mortgage-backed and
mortgage related
securities, net....... 545,642 37,086 6.80 439,239 27,976 6.37 371,397 27,897 7.51
Real estate loans,
net(2)................ 350,802 33,341 9.50 275,661 24,665 8.95 268,944 24,742 9.20
Consumer and student
loans................. 9,816 897 9.14 21,580 1,834 8.50 21,325 1,778 8.34
---------- -------- ---------- ------- ---------- -------
Total interest-earning
assets............... 1,497,491 111,304 7.41 1,345,996 94,516 7.02 1,293,633 95,004 7.34
-------- ------ ------- ------ ------- ------
Non-interest-earning
assets................ 53,237 49,302 46,797
---------- ---------- ----------
Total assets.......... $1,550,728 $1,395,298 $1,340,430
========== ========== ==========
LIABILITIES AND RETAINED
EARNINGS:
Interest-bearing
liabilities:
Deposits:
Money market accounts.. $ 69,237 $ 2,007 2.90% $ 83,482 $ 2,025 2.43% $ 91,606 $ 2,241 2.45%
Savings accounts(3)(4). 480,572 15,317 3.19 612,447 17,844 2.91 604,487 19,588 3.24
NOW accounts(4)........ 33,135 837 2.53 33,248 820 2.47 30,012 854 2.85
Certificates of
deposit............... 677,510 39,583 5.84 430,022 19,664 4.57 396,040 16,833 4.25
---------- -------- ---------- ------- ---------- -------
Total deposits........ 1,260,454 57,744 4.58 1,159,199 40,353 3.48 1,122,145 39,516 3.52
Borrowed funds......... 24,345 1,554 6.38 -- -- 0.00 5,527 182 3.29
---------- -------- ---------- ------- ---------- -------
Total interest-bearing
liabilities.......... 1,284,799 59,298 4.62 1,159,199 40,353 3.48 1,127,672 39,698 3.52
-------- ------ ------- ------ ------- ------
Non-interest-bearing
liabilities........... 53,610 46,914 45,430
---------- ---------- ----------
Total liabilities..... 1,338,409 1,206,113 1,173,102
Total retained
earnings.............. 212,319 189,185 167,328
---------- ---------- ----------
Total liabilities and
retained earnings.... $1,550,728 $1,395,298 $1,340,430
========== ========== ==========
Net interest
income/interest rate
spread(5)............. $ 51,736 2.79% $54,163 3.54% $55,306 3.82%
======== ====== ======= ====== ======= ======
Net interest margin as
a percentage of
interest-earning
assets(6)............. 3.45% 4.02% 4.28%
====== ====== ======
Ratio of interest-
earning assets to
interest-bearing
liabilities........... 116.55% 116.11% 114.72%
====== ====== ======
</TABLE>
- --------
(1) Includes related assets available-for-sale and unamortized discounts and
premiums.
(2) Amount is net of deferred loan fees, deferred mortgage interest,
unamortized discounts net and allowance for possible loan losses and
includes loans held for sale and non-performing loans.
(3) Savings accounts includes mortgagor's escrow deposits.
(4) The average cost of savings and NOW accounts for the periods above
reflects the payment of a special interest payment of approximately 25% of
interest paid on such accounts. Such payments resulted in additional cost
of savings accounts of 61 basis points, 46 basis points and 52 basis
points for the years ended December 31, 1995, December 31, 1994 and
December 31, 1993, respectively, and additional cost of NOW accounts of 49
basis points, 39 basis points and 44 basis points for the years ended
December 31, 1995, December 31, 1994 and December 31, 1993, respectively.
(5) Net interest rate spread represents the difference between the yield on
interest-earning assets and the cost of interest-bearing liabilities.
(6) Net interest margin represents net interest income divided by average
interest-earning assets.
52
<PAGE>
Rate/Volume Analysis. The following table presents the extent to which
changes in interest rates and changes in the volume of interest-earning assets
and interest-bearing liabilities have affected the Bank's interest income and
interest expense during the periods indicated. Information is provided in each
category with respect to: (i) changes attributable to changes in volume
(changes in volume multiplied by prior rate); (ii) changes attributable to
changes in rate (changes in rate multiplied by prior volume); and (iii) the
net change. The changes attributable to the combined impact of volume and rate
have been allocated proportionately to the changes due to volume and the
changes due to rate.
<TABLE>
<CAPTION>
FIVE MONTHS ENDED YEAR ENDED YEAR ENDED
MAY 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
COMPARED TO COMPARED TO COMPARED TO
FIVE MONTHS ENDED YEAR ENDED YEAR ENDED
MAY 31, 1995 DECEMBER 31, 1994 DECEMBER 31, 1993
----------------------- ------------------------ -------------------------
INCREASE INCREASE INCREASE
(DECREASE) (DECREASE) (DECREASE)
DUE TO DUE TO DUE TO
-------------- --------------- ----------------
VOLUME RATE NET VOLUME RATE NET VOLUME RATE NET
------- ----- ------- ------ ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING
ASSETS(1):
Federal funds sold and
short-term deposits... $ (42) $ (93) $ (135) $ 375 $ 375 $ 750 $ (192) $ 312 $ 120
Debt and equity
securities............ (4,706) 796 (3,910) (1,716) 635 (1,081) (1,145) 479 (666)
Mortgage-backed and
mortgage related
securities, net....... 8,408 325 8,733 7,125 1,985 9,110 4,668 (4,589) 79
Real estate loans, net. 2,176 (903) 1,273 7,080 1,596 8,676 607 (684) (77)
Consumer and student
loans................. (672) 224 (448) (1,066) 129 (937) 22 34 56
------- ----- ------- ------ ------- ------- ------- ------- -------
Total interest-earning
assets............... 5,164 349 5,513 11,798 4,720 16,518 3,960 (4,448) (488)
------- ----- ------- ------ ------- ------- ------- ------- -------
INTEREST-BEARING
LIABILITIES:
Money market accounts.. (113) 9 (104) (376) 358 (18) (198) (18) (216)
Savings accounts(2).... (737) 345 (392) (4,117) 1,590 (2,527) 257 (2,001) (1,744)
NOW accounts........... 19 18 37 (3) 20 17 87 (121) (34)
Certificates of
deposit............... 4,437 182 4,619 13,433 6,486 19,919 1,508 1,323 2,831
Borrowed funds......... 346 (116) 230 1,554 -- 1,554 (182) -- (182)
------- ----- ------- ------ ------- ------- ------- ------- -------
Total interest-bearing
liabilities.......... 3,952 438 4,390 10,491 8,454 18,945 1,472 (817) 655
------- ----- ------- ------ ------- ------- ------- ------- -------
Net change in net
interest income........ $ 1,212 $ (89) $ 1,123 $1,307 $(3,734) $(2,427) $ 2,488 $(3,631) $(1,143)
======= ===== ======= ====== ======= ======= ======= ======= =======
</TABLE>
- --------
(1) Includes assets available-for-sale.
(2) Includes mortgagors' escrow deposits.
COMPARISON OF FINANCIAL CONDITION AT MAY 31, 1996 AND DECEMBER 31, 1995
Total assets increased by $175.4 million, or 11.0%, from $1.60 billion at
December 31, 1995 to $1.77 billion at May 31, 1996. The growth in assets is
primarily attributable to a $158.5 million increase in debt, equity and
mortgage-backed and mortgage related securities available-for-sale and a $33.5
million increase in real estate loans held-for-investment, net. Asset growth
was funded primarily through deposit inflows and borrowed funds. The asset
growth was partially offset by a $35.0 million decrease in mortgage-backed and
mortgage related securities held-to-maturity. Debt and equity securities at
May 31, 1996, totalled $433.9 million, an increase of $52.6 million, or 13.8%,
compared to $381.3 million at December 31, 1995. Mortgage-backed and mortgage
related securities increased by $70.9 million, or 9.32%, from $760.7 million
at December 31, 1995 to $831.6 million at May 31, 1996. Substantially all of
the increase in securities was attributable to new purchases of adjustable-
rate and short-term fixed-rate mortgage-backed and mortgage related securities
and federal agency obligations, and preferred stock of corporate issuers. The
Bank's held-to-maturity securities portfolio continued to decrease through the
normal amortization of securities so designated. Real estate loans, net,
increased by $33.5 million, or 8.7%, from $386.8 million at December 31, 1995
to $420.3 million at May 31, 1996, primarily due to increased one- to four-
family loan purchases from RFI and increased origination of commercial real
estate loans. The relatively low interest rate environment in late 1995 and
early 1996 increased one- to four-family loan refinance activity, primarily in
the adjustable-rate and 15-year fixed-rate mortgage products, which the Bank
retains. Premises and equipment increased by $2.2 million, or 17.7%, primarily
due to the purchase in May 1996
53
<PAGE>
of land and a building, which upon renovation will provide additional office
space for the Bank's administrative operations. The renovation is due to be
completed in October 1996.
Total deposits at May 31, 1996 were $1.44 billion, an increase of $106.3
million, or 8.0%, compared to $1.34 billion at December 31, 1995. The increase
was primarily due to an increase of $122.1 million, or 16.3%, in certificates
of deposit from $749.8 million at December 31, 1995 to $871.9 million at May
31, 1996. The increase in certificates of deposit was primarily attributable
to the Bank's strategy of offering competitive rates on all of its
certificates of deposit products in order to fund the Bank's asset growth and
increase net interest income. To a lesser extent, the increase in certificate
accounts and decrease in core deposits is reflective of depositors shifting
funds from lower yielding core savings accounts into higher-yielding
certificates of deposit. The Bank's core deposit accounts, which totalled
$585.8 million at December 31, 1995, declined by $15.8 million during the five
month period ending May 31, 1996. Borrowed funds increased to $69.6 million at
May 31, 1996 from $1.6 million at December 31, 1995 as management determined
to utilize borrowings, primarily in the form of reverse repurchase agreements,
to fund a portion of the Bank's asset growth.
Retained earnings decreased by $4.2 million, or 1.8%, from $226.4 million at
December 31, 1995 to $222.2 million at May 31, 1996, resulting in the Bank's
ratio of equity capital to total assets decreasing from 14.18% at December 31,
1995 to 12.54% at May 31, 1996. The decrease in equity resulted from a $12.6
million decline in the after-tax net unrealized gain on available-for-sale
securities due to higher market interest rates which adversely affected the
market value of the Bank's securities; this was offset, in part, by net income
of $8.4 million during the period.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1995 AND DECEMBER 31, 1994
Total assets at December 31, 1995 were $1.60 billion as compared to total
assets of $1.44 billion at December 31, 1994, an increase of $158.4 million,
or 11.0%. Asset growth was funded primarily through deposits which increased
$116.0 million, or 9.5%, from $1.22 billion at December 31, 1994 to $1.34
billion at December 31, 1995, primarily due to a $232.3 million increase in
certificates of deposit. Asset growth during the year ended December 31, 1995
was concentrated in the mortgage-backed and mortgage related securities and
one- to four-family and commercial real estate loans. The securities portfolio
increased by $123.9 million, or 12.2%, from $1.02 billion at December 31, 1994
to $1.14 billion at December 31, 1995. The growth in the securities portfolio
resulted primarily from total mortgage-backed and mortgage related securities
increasing by $298.6 million, or 64.6%, from $462.1 million at December 31,
1994, to $760.7 million at December 31, 1995, offset by a $174.7 million, or
31.4%, decrease in debt and equity securities. The increase in the mortgage-
backed securities portfolio was primarily attributable to new purchases of
both adjustable-rate and short-term fixed-rate securities, consistent with the
Bank's interest rate risk management strategy.
In November 1995, in accordance with the FASB interpretation regarding SFAS
No. 115, the Bank transferred securities having a carrying value of $648.7
million and a market value of $658.3 million at that date, from its held-to-
maturity portfolio to its available-for-sale portfolio. The securities
reclassified consisted of $415.3 million of debt securities and $233.4 million
of mortgage-backed and mortgage related securities from held-to-maturity to
available-for-sale. Subsequent to this reclassification, but prior to the end
of 1995, the Bank sold $115.7 million in lower yielding U.S. Government
obligations and corporate bonds, incurring a loss of $14,000. The sale
proceeds were reinvested primarily in private label and agency issued
mortgage-backed and mortgage related securities with average lives not
exceeding four years. Under the provisions of SFAS No. 115, securities
categorized as available-for-sale are reported at fair value, with unrealized
gains and losses reported as a separate component of equity. At December 31,
1995, the fair value of the Bank's debt and equity and mortgage-backed and
mortgage-related securities available-for-sale exceeded the related amortized
cost by $20.8 million.
Gross loans increased by $38.7 million, or 10.5%, to $407.7 million at
December 31, 1995. One-to-four family loans increased by $44.2 million, or
28.8%, commercial real estate loans increased by $10.7 million, or 9.3%,
multi-family loans increased by $17.7 million, or 95.3%, and construction and
development loans
54
<PAGE>
decreased $14.6 million, or 25.9%. Due to changes in the Federal Family
Educational Loan Program, in April 1995, the Bank sold $21.5 million of
student loans to the Student Loan Marketing Association ("SLMA"), recording an
aggregate net gain of $496,000. The sale proceeds were reinvested in short-
term adjustable and fixed-rate mortgage-backed securities. The increase in
one- to four-family loans was primarily attributable to origination activity
of the Bank's mortgage banking operations through RFI, which commenced on
August 1, 1995. At December 31, 1995, real estate loans held-for-sale were
$15.3 million compared to none at December 31, 1994. Federal funds sold
totalled $10.0 million at December 31, 1995, a decrease of $15.0 million from
December 31, 1994. Cash and due from banks was $9.7 million at December 31,
1995, an increase of $7.4 million from $2.3 million at December 31, 1994. The
increase in cash and due from banks was a result of the timing of operating
and investing cash flows. Mortgage servicing rights, net, were $8.3 million at
December 31, 1995, which primarily represented servicing purchased from RMBI.
The purchase of certain assets and liabilities of RMBI also resulted in the
Bank's recognition of $3.5 million of goodwill which is being amortized over a
ten year period.
The increase in deposit growth was attributable to the combined effect of
net deposit inflows of $58.8 million and interest paid on deposits of $57.2
million during the period. The composition of the Bank's deposits continued to
change, as reflected in the shift of deposits out of lower yielding savings
accounts and into higher yielding certificates of deposit in the declining
interest rate environment during 1995. The Bank's core deposit accounts, which
totalled $585.8 million at December 31, 1995, declined by $116.3 million, or
16.6%, during the year ended December 31, 1995. Certificates of deposit, on
the other hand, increased by $232.3 million, or 44.9%, during the period to
$749.8 million, representing 56.1% of total deposits at December 31, 1995. The
shift in deposits reflects depositors shifting funds from lower yielding core
deposit accounts to higher yielding certificate of deposit accounts in the
declining interest rate environment and the Bank's competitive pricing of
certificate of deposit accounts. See "--Management Strategy" and "--Management
of Interest Rate Risk."
Retained earnings totalled $226.4 million at December 31, 1995, or 14.2% of
total assets, an increase of $33.3 million from December 31, 1994. The
increase is attributable to net income of $18.7 million during the period and
a $14.6 million increase in the component of net unrealized gain on the Bank's
available-for-sale securities portfolio, net of taxes, as required by SFAS No.
115.
COMPARISON OF OPERATING RESULTS FOR THE FIVE MONTHS ENDED MAY 31, 1996 AND MAY
31, 1995
General. Net income for the five months ended May 31, 1996 increased by
$817,000, or 10.8%, from $7.6 million for the five months ended May 31, 1995
to $8.4 million for the same period in 1996. The increase was due primarily to
an increase in net interest income which primarily resulted from an increase
in the average balance of interest-earning assets, an increase in non-interest
income related to the sale of loans by RFI and a decrease in FDIC insurance
premiums. The increases were partially offset by a 24 basis point decrease in
the average interest rate spread to 2.74% for the 1996 period from 2.98% for
the 1995 period, and a $2.9 million increase in non-interest expense due
primarily to the operations of RFI.
Interest Income. Interest income amounted to $50.1 million for the five
months ended May 31, 1996, representing an increase of $5.5 million from the
same period in 1995. The increase was the result of the combined effect of a
$164.3 million increase in average interest-earning assets and an 8 basis
point increase in the yield on interest earning assets. The increase in the
average interest rate on interest earning assets was primarily due to the
higher interest rate environment during the five month period ended May 31,
1996 which affected both new securities purchased and the reallocation of
interest-earning assets from lower yielding U.S. Government securities to
higher yielding real estate loans and mortgage-backed and mortgage related
securities and repricing assets, mostly adjustable- rate mortgage-backed and
mortgage related securities and whole loans. Generally, market interest rates
during January and February of 1996 remained at the levels experienced during
1995 and began to increase in March 1996 through May 1996. Interest income on
mortgage-backed and mortgage related securities increased $8.7 million for the
five months ended May 31, 1996, as compared to the same period in 1995. This
increase was primarily due to an increase in the average balance of mortgage-
backed and mortgage related securities of $294.6 million, which resulted from
the restructuring of the securities portfolio and
55
<PAGE>
investment of excess funds not utilized for loan demand into mortgage-backed
and mortgage related securities. The yield on the mortgage-backed and mortgage
related securities portfolio increased by 15 basis points due to the increased
rate environment for new purchases and the repricing of adjustable-rate
securities purchased in prior periods. Interest income on debt and equity
securities decreased $3.9 million due to management's restructuring of its
securities portfolio.
The increase in interest income on loans was a result of growth in the
average balance of loans outstanding. As a result of the establishment of RFI
in August 1995, and the relatively low interest rate environment during most
of the first quarter of 1996, the Bank was able to increase its one- to four-
family loan portfolio through an increased market presence and refinance
activity, primarily in adjustable-rate and 15-year fixed-rate mortgage
products, which the Bank retains. Further contributing to the increase in
interest income for the period was a 34.8% decrease in non-performing loans,
from $18.3 million at May 31, 1995 to $11.9 million at May 31, 1996. Although
interest income on real estate loans increased during the period, the average
yield decreased by 62 basis points, from 9.90% for the five months ended May
31, 1995 to 9.28% for the same period in 1996, primarily because of a $700,000
interest recovery in March 1995 on the satisfaction of a non-performing loan.
Interest income on consumer and student loans decreased $448,000 from $673,000
for the five months ended May 31, 1995 to $225,000 for the same period in
1996, principally due to the sale in April 1995 of $21.5 million of student
loans to SLMA.
Interest Expense. Interest expense for the five months ended May 31, 1996
was $27.1 million, compared to $22.7 million for the five months ended May 31,
1995, an increase of $4.4 million, or 19.3%. This increase reflects both a
$124.9 million increase in the average balance of interest-bearing deposits in
the 1996 period compared to the 1995 period, and a 34 basis point increase in
the average rate paid on such liabilities over the same period due to a higher
interest rate environment. The increase in average interest-bearing deposits
was primarily attributable to an increase in the average balance of
certificates of deposit to $806.6 million for the five months ended May 31,
1996 from $618.0 million for the five months ended May 31, 1995. Certificates
of deposit increased during this period due to a higher interest rate
environment resulting in a continued shift of deposits out of savings accounts
and into higher costing certificate of deposit accounts, and management's
strategy of funding its asset growth by offering competitive rates. The
combined effect of the higher average balance and rate was an increase of $4.6
million in interest expense on certificates of deposit. Interest expense
decreased $392,000 on savings accounts to $6.0 million for the five months
ended May 31, 1996 from the same period a year earlier. This decrease was
attributable to a decline in the average balance of these accounts to $451.9
million for the five months ended May 31, 1996, from $507.9 million during the
comparable period in 1995, partially offset by an increase in the average cost
to 3.21% from 3.04% during the same periods.
Interest expense on borrowed funds increased $230,000, or 32.9%, in the five
months ended May 31, 1996 to $930,000 due to a $14.8 million increase in the
average balance of such funds to $41.0 million, which was partially offset by
a 95 basis point reduction in the average rate paid on borrowed funds to 5.44%
at May 31, 1996. The increase in borrowed funds in 1996 reflects management's
decision to increase its utilization of reverse repurchase agreements to fund
investments in securities in periods when such agreements are cost effective
as a source of funds. See "Business of the Bank--Source of Funds--Borrowed
Funds."
Provision For Possible Loan Losses. The Bank's provision for possible loan
losses increased by $50,000, or 20.0%, from $250,000 for the five months ended
May 31, 1995, to $300,000 for the five months ended May 31, 1996. The increase
in the provision was due primarily to management's assessment of charge-off
activity, particularly commercial real estate and construction and development
loan charge-offs relating to five loans which totalled $1.3 million during the
five month period ending May 31, 1996. The events leading to such charge-offs
associated with such loans were generally attributable to events occurring in
early 1996 which resulted in the Bank reevaluating such loans or obtaining
updated appraisals on the properties securing such loans. The increased
provision also reflects management's strategy to continue to originate
commercial real estate and construction and development loans, which amounted
to 29.74% and 62.34% of loans originated during the five months ended May 31,
1996 and 1995, respectively. Such loans generally bear a greater degree of
risk as
56
<PAGE>
compared to one- to four-family loans. At May 31, 1996, the Bank's allowance
for possible loan losses as a percentage of total non-performing loans was
186.79%, compared to 131.68% at May 31, 1995, due to the increase in the
provision and a decrease in non-performing loans from $18.3 million at May 31,
1995 to $11.9 million at May 31, 1996. At May 31, 1996, the Bank's allowance
for possible loan losses as a percentage of loans, net, excluding loans held
for sale was 5.29%. Management of the Bank assesses the adequacy of the
allowance for possible loan losses based on evaluating known and inherent
risks in the loan portfolio and upon management's continuing analysis of the
factors underlying the quality of the loan portfolio. While management
believes that, based on information currently available, the Bank's allowance
for possible loan losses is sufficient to cover losses inherent in its loan
portfolio at this time, no assurances can be given that the Bank's level of
allowance for possible loan losses will be sufficient to cover future possible
loan losses incurred by the Bank or that future adjustments to the allowance
for possible loan losses will not be necessary if economic and other
conditions differ substantially from the economic and other conditions used by
management to determine the current level of the allowance for possible loan
losses. Management may in the future increase its level of allowance for
possible loan losses as a percentage of total loans and non-performing loans
in the event it increases the level of commercial real estate, multi-family,
commercial, construction and development or consumer lending as a percentage
of its total loan portfolio. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the Bank's
allowance for possible loan losses. Such agencies may require the Bank to
provide additions to the allowance based upon judgments different from
management. See "Risk Factors--Increased Lending Risks Associated With
Commercial Real Estate, Multi-Family and Construction and Development Lending"
and "Business of the Bank--Delinquent Loans, Real Estate Owned and Classified
Assets" and "--Allowance for Possible Loan Losses."
Non-Interest Income. Non-interest income is composed of fee income for bank
services and profits from the sale of assets. Total non-interest income for
the five months ended May 31, 1996 increased $2.4 million, or 209.5%, from
$1.1 million for the five months ended May 31, 1995 to $3.5 million for the
five months ended May 31, 1996. The primary reasons for the improvement were
net gains of $1.4 million on the sale of loans and $2.5 million of loan
servicing and fee income during the five months ended May 31, 1996 as compared
to net gains of $455,000 on the sale of loans and $1.2 million of loan
servicing and fee income in the comparable period for 1995. The increases are
primarily reflective of the Bank's establishment of RFI in August 1995, which
has had a significant effect on the Bank's level of originations and sales of
residential one- to four-family loans and the outstanding balance of loans
serviced for others. One- to four-family originations increased $121.5 million
for the five months ended May 31, 1996 from $7.1 million for the same period
in 1995. For the same period, loan sales were $106.2 million and $18.9
million, respectively. At May 31, 1996 the Bank and RFI were servicing $762.7
million of loans for others compared to $36.5 million at May 31, 1995,
resulting in loan servicing fee income of $828,000 for the five months ended
May 31, 1996 as compared to $51,000 for the same period in 1995. Additionally,
non-interest income increased in 1996 due to a $501,000 reduction in the
losses on securities from losses of $758,000 in 1995 to losses of $257,000 in
1996. The increases in these items of non-interest income were partially
offset by a change in results in real estate operations from gains of $203,000
for 1995 to losses of $271,000 for 1996.
Non-Interest Expense. Non-interest expense increased by $2.9 million, or
25.3%, from $11.2 million for the five months ended May 31, 1995 to $14.1
million for the five months ended May 31, 1996 primarily due to increased
costs related to the August 1995 establishment of RFI. Compensation and
employee benefits expense increased $2.1 million to $8.2 million for the five
months ended May 31, 1996 from $6.0 million for the same period in 1995.
Compensation and employee benefits expense relating to the operations of RFI
amounted to $2.0 million for the five months ended May 31, 1996. Other
significant changes in the Bank's operating expenses included a $1.1 million
decrease in the insurance premiums paid to the FDIC resulting from the FDIC's
decision to lower the insurance premiums paid by BIF-insured institutions to
the legal minimum effective January 1, 1996. See "Regulation and Supervision--
Insurance of Deposit Accounts" and "Risk Factors--Payment of Financing
Corporation Bonds." Other non-interest expenses increased $1.2 million to $3.4
million for the five months ended May 31, 1996 compared to $2.2 million for
the five months ended May 31, 1995 primarily due to an increase in
professional fees of $343,000, mortgage recording taxes of $223,000, and
certain general and administrative costs associated with RFI. The Bank expects
that compensation and benefits expense may increase
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after the Conversion, primarily as a result of the adoption of various
employee benefit plans and compensation adjustments contemplated in connection
with the Conversion. In this regard, the proposed ESOP, which intends to
purchase 8% of the Common Stock issued in connection with the Offering,
including shares issued to the Foundation, and the Stock Programs which, if
implemented, would purchase an amount of Common Stock equal to 4% of the
Common Stock issued in connection with the Offering, including shares issued
to the Foundation, may result in increased compensation and benefits expense
as the amortization of the ESOP loan and amortization of the Stock Program
awards will be reflected as compensation expense. See "Management of the
Bank--Benefit Plans--ESOP." In addition, the Bank expects non-interest
expenses to increase in future periods as a result of its current renovation
of a new administrative office and the opening of at least two new branch
offices in late 1996.
Income Taxes. Total income tax expense was $3.7 million for the five months
ended May 31, 1996 compared to $3.9 million for the same period in 1995.
Despite an increase in pre-tax income for the 1996 period of $595,000, there
was a decrease in income tax expense of $222,000, or 5.7%, due primarily to an
increase of $688,000 in the Bank's dividends received deduction on its equity
securities portfolio. The effective tax rate was 30.3% for the five months
ended May 31, 1996 as compared to 33.9% for the same period in 1995.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1995 AND
DECEMBER 31, 1994
General. Net income for the year ended December 31, 1995 was $18.7 million,
compared to $19.4 million for the year ended December 31, 1994. Interest rates
rose sharply in early 1994, then gradually declined after January 1995,
resulting in a higher yield on interest-earning assets and higher cost of
interest-bearing liabilities in 1995 than in 1994 and more interest-bearing
liabilities repricing than interest-earning assets during the year. The result
was a decline in both net interest income and net income for the Bank during
1995. Net income decreased $704,000, or 3.6%, from the previous year, due to
the decline in net interest income, which decreased by $2.4 million, and an
increase in non-interest expense of $3.5 million which were substantially
offset by an increase in non-interest income of $3.7 million and a reduction
in income tax expense of $1.5 million. The increases in both non-interest
income and non-interest expense is primarily attributable to the Bank's
acquisition of assets and liabilities of RMBI in connection with the
establishment of RFI in August 1995. The decrease in income tax expense is
attributable to both a decrease in taxable income and a decrease in the Bank's
effective tax rate due to a higher level of preferred stock purchased in 1995.
Interest Income. Interest income totalled $111.0 million for 1995 compared
to $94.5 million for 1994. This increase reflects a $151.5 million increase in
total average interest-earning assets in 1995 compared to 1994 and a 39 basis
point increase in the average yield on such assets over the same period.
Interest income on real estate loans increased by $8.7 million to $33.3
million for 1995 from $24.7 million in 1994, reflecting a $75.1 million
increase in the average balance of real estate loans and a 55 basis point
increase in the average yield to 9.50%. The increase in the average balance of
real estate loans was primarily due to an increase in residential one-to-four
family and multi-family loans. The increase in the average yield on interest-
earning assets was due primarily to an increase in market interest rates and a
51.4% decrease in non-performing loans, from $25.1 million to $12.2 million,
at December 31, 1994 and 1995, respectively. On a combined basis, interest
income on debt and equity and mortgage-backed and mortgage related securities
increased $8.0 million to $75.0 million for 1995 from $67.0 million for 1994.
The increase was primarily due to a $9.1 million increase in interest income
on mortgage-backed and mortgage related securities, attributable to a $106.4
million increase in the average balance of such securities to $545.6 million
and a 43 basis point increase in the yield to 6.80%. Interest income on debt
and equity securities decreased $1.1 million to $37.9 million for 1995,
reflecting a $25.4 million decrease in the average balance of such securities,
consistent with management's continuing reallocation of its securities
portfolio from lower yielding government bonds to higher yielding real estate
loans and mortgage-backed and mortgage related securities. The average yield
on debt and equity securities increased 11 basis points during the period due
to an increase in market interest rates. Interest income on consumer and
student loans decreased $937,000 from $1.8 million for 1994 to $897,000 for
1995, principally due to the sale in April 1995 of $21.5 million of student
loans to SLMA.
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Interest Expense. Total interest expense for 1995 was $59.3 million,
compared to $40.4 million for 1994, an increase of $18.9 million, or 46.9%.
The increase in interest expense was the result of a $125.6 million increase
in the average balance of interest-bearing liabilities and an increase in the
average costs of deposits and borrowings to 4.62% for 1995, from 3.48% for
1994. Interest on deposits increased by $17.4 million to $57.7 million for
1995 compared to $40.4 million for 1994. This increase reflects both a $101.3
million increase in the average balance of interest-bearing deposits in 1995
compared to 1994, and a 110 basis point increase in the average rate paid on
such liabilities over the same period. Such increase was primarily
attributable to an increase in the average balance of higher yielding
certificates of deposit, which increased from $430.0 million for 1994 to
$677.5 million for 1995 and an increase in the average rate paid on such
accounts from 4.57% to 5.84%, respectively. These two increases resulted in
the interest expense on certificate of deposit accounts increasing from $19.7
million for 1994 to $39.6 million for 1995, a 101.3% increase. These increases
were partially offset by a decrease in interest expense on savings accounts
due to the combined effect of a decline in the average balance of such
accounts, which declined from $612.4 million for 1994 to $480.6 million for
1995, and an increase in the average rate paid on such accounts from 2.91% to
3.19%, resulting in a $2.5 million, or 14.2%, decrease in interest expense on
savings accounts. The increase in the average balance of certificates of
deposit and the decrease in the average balance of savings accounts was due
primarily to customers shifting funds from lower yielding savings accounts to
higher yielding certificates of deposit.
The Bank incurred interest expense on borrowed funds for 1995 of $1.6
million as compared to no expense for 1994 reflecting management's decision to
utilize borrowings to fund a portion of its asset growth, and, to a lesser
extent, RFI's utilization of government-sponsored agencies to fund a portion
of its loan origination activity. The average balance in borrowed funds
increased $24.3 million for the year ended December 31, 1995 as there were no
borrowings outstanding during 1994. The average rate paid on such borrowings
for 1995 was 6.38%.
Provision for Possible Loan Losses. For 1995, the Bank's provision for
possible loan losses was $600,000, the same amount as was provided in 1994.
Management determined that an increase in the provision was unnecessary in
light of its review of the Bank's loan portfolio, asset quality, trends in the
Bank's delinquent and non-performing loans and the national and regional
economies. In particular, non-performing loans decreased by $12.9 million, or
51.4%, from $25.1 million at December 31, 1994, or 6.82% of loans, to $12.2
million at December 31, 1995, or 3.13% of loans, primarily reflective of the
general improvement in the overall credit quality of the Bank's loan portfolio
during 1995. The decrease in non-performing loans was primarily attributable
to the improvement in the regional economy and also to the favorable results
of the Bank's increased efforts to resolve problem loans. At December 31,
1995, the allowance for possible loan losses totalled 191.82% of total non-
performing loans, an increase from 100.28% at December 31, 1994. Net charge-
offs for the year ended December 31, 1995 were $2.4 million representing an
increase of $2.4 million from the year ended December 31, 1994. The $2.4
million increase was primarily due to two commercial real estate loans. See
"Business of the Bank--Delinquent Loans, Real Estate Owned and Classified
Assets" and "--Allowance for Possible Loan Losses."
Non-Interest Income. Total non-interest income was $5.7 million for 1995, a
$3.7 million increase from the $2.0 million for 1994. Net gains on sales from
secondary market activity increased to $1.8 million for 1995 compared to net
losses of $289,000 for 1994. Loan servicing and fee income increased to $3.7
million for 1995 compared to $3.3 million for 1994. These increases are a
result of the increased volume of loans originated and sold in late 1995 with
servicing retained and the right to service $623.0 million in loans in the
August 1995 acquisition from RMBI. One- to four-family originations increased
$100.5 million for the year ended December 31, 1995 from $52.7 million for the
prior year. At December 31, 1995 the Bank and RFI were servicing $704.8
million of loans for others compared to $37.1 million at December 31, 1994.
Additionally, the net gains on real estate owned operations increased from
$156,000 for 1994 to $714,000 for 1995, primarily due to the sale of two
commercial real estate properties which resulted in net gains of $927,000.
Total net losses on securities decreased $370,000 to $811,000 for 1995 from
$1.2 million for 1994. The decrease was primarily attributable to the sale in
late 1995 of $38.3 million of adjustable-rate mortgage-backed securities at a
gain of $818,000. These securities were sold in the latter half of 1995 based
on the anticipation of increased prepayment levels due to a decline in market
interest rates.
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Non-Interest Expense. Total non-interest expense increased from $26.2
million for 1994 to $29.6 million for 1995. Compensation and employee benefits
expense increased $2.4 million from $13.4 million for 1994 to $15.8 million
for 1995, primarily due to the added personnel costs associated with the
employees of RFI which amounted to $1.7 million during 1995. This was
partially offset by a reduction in the rate paid to the FDIC for deposit
insurance premiums, combined with a refund from the FDIC for premiums
previously paid in the amount of $797,000, which lowered this expense by $1.2
million during 1995. Other non-interest expense increased $1.3 million from
$5.8 million for the year ended December 31, 1994 to $7.1 million for the year
ended December 31, 1995, primarily due to an increase of $635,000 in expenses
related to the operations of RFI and a provision for possible losses of
$500,000 related to litigation initiated by the Bank against another
depository institution which provided check processing for the Bank to recover
check clearing balances.
Income Taxes. Tax expense totalled $8.5 million for the year ended December
31, 1995 compared to $10.0 million in 1994. The decrease was attributable to
lower pre-tax income which fell from $29.4 million for the year ended December
31, 1994 to $27.2 million in 1995, and an increase of $864,000 in the Bank's
dividends received deduction on its equity securities portfolio.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1994 AND
DECEMBER 31, 1993
General. Net income decreased $4.7 million, or 19.6%, from $24.1 million for
the year ended December 31, 1993 to $19.4 million for the year ended December
31, 1994. The decrease was primarily attributable to $6.0 million of income
recognized in 1993 resulting from the net cumulative effect of changes in
accounting principles and a $1.1 million decrease in net interest income, a
$2.8 million decrease in non-interest income, and a $1.6 million increase in
non-interest expenses. These items were partially offset by a $6.3 million
reduction in the Bank's provision for possible loan losses and a lower
provision for taxes due to a reduction in the Bank's effective tax rate.
Interest Income. Total income from interest-earning assets declined slightly
from $95.0 million in 1993 to $94.5 million in 1994, a reduction of $488,000
due primarily to a 32 basis point decline in the average yield on interest
earning assets which was offset, in part, by a $52.4 million increase in the
average balance of interest earning assets. Interest income on the Bank's
securities portfolio fell $587,000 from $67.5 million for the year ended
December 31, 1993 to $66.9 million for the year ended December 31, 1994. New
mortgage-backed securities purchased during 1994 in the lower interest rate
environment contributed to the yield reduction on the Bank's securities
portfolio. The yield on mortgage-backed securities fell from 7.51% in 1993 to
6.37% in 1994, while the yield on the Bank's debt and equity securities
remained relatively stable at 6.65% and 6.57%, for 1994 and 1993,
respectively. Interest income on real estate loans decreased by $77,000 for
the year ended December 31, 1994. This was primarily attributable to a $6.7
million increase in the average balance of real estate loans to $275.7 million
for the year ended December 31, 1994 from $268.9 million for the year ended
December 31, 1993. The average yield on real estate loans decreased 25 basis
points, to 8.95% in 1994, from 9.20% in 1993. The decrease was due to the high
levels of prepayments on higher rate mortgage loans during late 1993 and the
effects of lower interest rates on new loan originations.
Interest Expense. Interest expense for the year ended December 31, 1994 was
$40.4 million, compared to $39.7 million for the year ended December 31, 1993,
an increase of $655,000, or 1.6%. The increase is primarily due to a $37.1
million increase in the average balance of deposits outstanding, partly offset
by a decrease in the average cost of deposits to 3.48% for 1994, from 3.52%
for 1993. The interest expense on savings accounts decreased by $1.7 million,
or 8.9%, from $19.6 million for 1993 to $17.8 million for 1994 due primarily
to the Bank's decision to reduce the rate paid on such accounts during 1994,
which was partially offset by an increase in the average balance of such
accounts from $604.5 million for 1993 to $612.4 million for 1994. The average
rate paid on savings accounts for 1994 was 2.91% compared to 3.24% for 1993.
Despite the effect of the lower interest rate environment and the decreased
cost of savings accounts, interest expense increased primarily due to higher
rates paid on certificate of deposit accounts. The average rate paid on
certificates of deposit accounts increased from 4.25% for the year ended
December 31, 1993 to 4.57% for the year ended December 31, 1994 due primarily
to the Bank's deposit pricing strategy whereby it offered more competitive
rates on certificate of
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deposit accounts than on savings accounts in an effort to extend the maturity
of its deposit accounts resulting in an increase in the average balance of
such accounts from $396.0 million for 1993 to $430.0 million for 1994. The
increase in interest expense on certificates of deposit accounts of $2.8
million more than offset the decrease in interest expense on savings accounts.
Provision for Possible Loan Losses. During 1994, the provision for possible
loan losses was reduced to $600,000 from the prior year's level of $6.9
million. The lower provision was based on management's evaluation of existing
real estate market conditions, improvement in the level of charge-offs and
non-performing loans as well as a stabilization of general economic conditions
in the Bank's market area. In particular, charge-offs decreased by $5.4
million for the year ended December 31, 1994 and non-performing loans
decreased by $6.3 million from 10.84% of total loans to 6.82% of total loans
at December 31, 1993 and December 31, 1994, respectively. At December 31,
1993, the Bank's allowance for possible loan losses to total non-performing
loans and total loans was 78.17% and 8.47%, respectively, as compared to
100.28% and 6.84%, respectively, at December 31, 1994.
Non-Interest Income. Non-interest income decreased by $2.8 million, or
57.9%, from $4.9 million in 1993 to $2.0 million in 1994. The decrease was
primarily attributable to the decrease in net gains/(losses) on securities of
$4.3 million from a net gain of $3.1 million in 1993 to a net loss of $1.2
million in 1994, as a result of amortizing premiums paid on certain callable
preferred stocks and a reduced level of sales of securities. This was
partially offset by a $1.8 million increase in the net gains/(losses) on real
estate owned operations from a $1.7 million net loss in 1993 to a $156,000 net
gain in 1994, which was primarily attributable to the decrease in the
provision for losses on real estate owned from $1.2 million in 1993 to none in
1994. The provision for losses on real estate owned in 1993 resulted from the
Bank's reevaluation of its real estate owned and based upon updated appraisals
of such properties.
Non-Interest Expense. Total non-interest expense increased $1.6 million in
1994 to $26.2 million, as compared to $24.6 million in 1993. The increase
primarily relates to compensation and employee benefits which increased by
$917,000, or 7.3%, from $12.5 million in 1993 to $13.4 million in 1994,
primarily the result of normal salary increases and an increase in the Bank's
pension related expenses.
Income Taxes. The provision for income taxes decreased by $568,000, or 5.4%,
from $10.6 million in 1993 to $10.0 million in 1994, primarily as a result of
the decrease in the Bank's effective tax rate. The effective tax rate was
34.0% for the year ended December 31, 1994 as compared to 36.8% for the prior
year. The decrease in the effective tax rate was primarily due to the Bank
increasing its portfolio of preferred stocks which earn dividends that are
substantially non-taxable.
CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES
In February 1992, the FASB issued Statement of Financial Accounting
Standards No. 109 ("SFAS No. 109"), "Accounting for Income Taxes." SFAS No.
109 required a change from the deferred method to the asset and liability
method attributable to accounting for income taxes. Under the asset and
liability method, deferred tax assets and liabilities are recognized for the
estimated future tax consequences of the differences between the tax bases and
financial reporting bases of existing assets and liabilities. The Bank adopted
SFAS No. 109 effective January 1, 1993, which resulted in a cumulative credit
to earnings of $7.5 million.
In December 1990, the FASB issued Statement of Accounting Standards No. 106
("SFAS No. 106"), "Employer's Accounting for Post-retirement Benefits Other
Than Pensions." SFAS No. 106 focuses principally on post-retirement health
care benefits and significantly changed the previous practice of accounting
for post- retirement benefits on a cash basis to requiring accrual during the
years that the employee renders the necessary service, of the expected cost of
providing those benefits to an employee and the employee's beneficiaries and
covered dependents. SFAS No. 106 became effective for fiscal years beginning
after December 15, 1992, and adoption was required on a prospective basis. The
Bank adopted SFAS No. 106 effective January 1, 1993, which resulted in an
accrued liability, net of tax, of $1.5 million.
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LIQUIDITY AND CAPITAL RESOURCES
The Bank's primary sources of funds are deposits, proceeds from the
principal and interest payments on loans, mortgage-backed and mortgage related
and debt and equity securities, and to a lesser extent, proceeds from the sale
of fixed-rate mortgage loans to the secondary market. While maturities and
scheduled amortization of loans and securities are predictable sources of
funds, deposit outflows, mortgage prepayments and mortgage loan sales are
greatly influenced by general interest rates, economic conditions and
competition.
The primary investing activities of the Bank are the origination of both
residential one-to four-family and commercial real estate loans and the
purchase of mortgage-backed and mortgage related and debt and equity
securities. During the five months ended May 31, 1996 and the years ended
December 31, 1995, 1994, and 1993, the Bank's loan originations totalled
$189.9 million, $226.3 million, $141.1 million and $61.0 million,
respectively. Purchases of mortgage-backed, mortgage related and debt and
equity securities totalled $305.4 million, $642.5 million, $225.7 million and
$459.7 million for the five months ended May 31, 1996 and the years ended
December 31, 1995, 1994, and 1993, respectively. These activities were funded
primarily by deposit growth, principal repayments on loans, mortgage-backed
and mortgage related securities and debt and equity securities. Loan sales
provided additional liquidity to the Bank, totaling $106.2 million, $134.1
million, $15.7 million and $15.8 million for the five months ended May 31,
1996 and the years ended December 31, 1995, 1994 and 1993, respectively. The
increased loan sale activity commencing in 1995 reflects the establishment of
RFI during that year.
The Bank experienced a net increase in total deposits of $106.3 million,
$116.0 million, $78.0 million and $7.0 million for the five months ended May
31, 1996 and the years ended December 31, 1995, 1994, and 1993, respectively.
Deposit flows are affected by the level of interest rates, the interest rates
and products offered by the local competitors, the Bank and other factors.
The Bank closely monitors its liquidity position on a daily basis. Excess
short-term liquidity is invested in overnight federal funds sold. In the event
the Bank should require funds beyond its ability to generate them internally,
additional sources of funds are available through the use of reverse
repurchase agreements. At May 31, 1996, the Bank had outstanding $67.1 million
in short-term reverse repurchase agreements with third parties.
Loan commitments totalled $162.2 million at May 31, 1996, comprised of $72.6
million in one-to four-family loan commitments and $14.1 million in commercial
real estate loan commitments, $73.4 million in construction and development
loan commitments and $2.1 million in home equity loan commitments. Management
of the Bank anticipates that it will have sufficient funds available to meet
its current loan commitments. Certificates of deposit which are scheduled to
mature in one year or less from May 31, 1996 totalled $688.2 million. From
January 1, 1995 to May 31, 1996, the Bank experienced a 92.6% retention rate
of funds maturing from certificates of deposit. Based upon this experience and
the Bank's current pricing strategy, management believes that a significant
portion of such deposits will remain with the Bank.
At May 31, 1996, the Bank exceeded all of its regulatory capital
requirements with a leverage capital level of $219.3 million, or 12.39% of
adjusted assets, which is above the required level of $53.1 million and risk-
based capital of $229.5 million, or 28.10% of adjusted assets, which is above
the required level of $65.3 million, or 8.00%. See "Regulatory Capital
Compliance" and "Regulation and Supervision--FDIC Regulations--Capital
Requirements."
The Bank's most liquid assets are cash and interest-bearing demand accounts.
The levels of these assets are dependent on the Bank's operating, financing,
lending and investing activities during any given period. At May 31, 1996,
cash and interest-bearing demand accounts totalled $28.4 million, or 1.6% of
total assets.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and Notes thereto presented herein
have been prepared in accordance with GAAP, which require the measurement of
financial position and operating results in terms of historical dollar amounts
without considering the changes in the relative purchasing power of money over
time
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due to inflation. The impact of inflation is reflected in the increased cost
of the Bank's operations. Unlike industrial companies, nearly all of the
assets and liabilities of the Bank are monetary in nature. As a result,
interest rates have a greater impact on the Bank's performance 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.
IMPACT OF NEW ACCOUNTING STANDARDS
Accounting for Long Lived Assets. In 1995, the FASB issued Statement of
Financial Accounting Standards No. 121, "Accounting for Impairment of Long-
Lived Assets and for Long Lived Assets to be Disposed of" ("SFAS No. 121").
This Statement establishes accounting standards for the impairment of long-
lived assets, certain identifiable intangibles, and goodwill related to those
assets to be held and used and for long-lived assets and certain identifiable
intangibles to be disposed of. This Statement became effective on January 1,
1996. Adoption of this Statement did not have a material impact on the
earnings or financial statements of the Bank.
Accounting for Stock-Based Compensation. In November 1995, the FASB issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock
Based Compensation" ("SFAS No. 123"). This statement establishes financial
accounting standards for stock-based employee compensation plans. SFAS No. 123
permits the Bank to choose either a new fair value based method or the current
Accounting Principles Board ("APB") Opinion 25 intrinsic value based method of
accounting for its stock-based compensation arrangements. SFAS No. 123
requires pro forma disclosures of net earnings and earnings per share computed
as if the fair value based method had been applied in financial statements of
companies that continue to follow current practice in accounting for such
arrangements under APB Opinion 25. SFAS No. 123 applies to all stock-based
employee compensation plans in which an employer grants shares of its stock or
other equity instruments to employees except for employee stock ownership
plans. SFAS No. 123 also applies to plans in which the employer incurs
liabilities to employees in amounts based on the price of the employer's
stock, (e.g., stock option plans, stock purchase plans, restricted stock
plans, and stock appreciation rights). The statement also specifies the
accounting for transactions in which a company issues stock options or other
equity instruments for services provided by nonemployees or to acquire goods
or services from outside suppliers or vendors. The recognition provisions of
SFAS No. 123 for companies choosing to adopt the new fair value based method
of accounting for stock-based compensation arrangements may be adopted
immediately and will apply to all transactions entered into in fiscal years
that begin after December 15, 1995, however disclosure of the pro forma net
earnings and earnings per share, as if the fair value method of accounting for
stock-based compensation had been elected, is required for all awards granted
in fiscal years beginning after December 31, 1994. Any effect that this
statement will have on the Bank will be applicable upon the consummation of
the Conversion.
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. In June 1996 the FASB issued SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("SFAS No. 125"). This Statement provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities based on consistent application of a
financial-components approach that focuses on control. It distinguishes
transfers of financial assets that are sales from transfers that are secured
borrowings. Under the financial-components approach, after a transfer of
financial assets, an entity recognizes all financial and servicing assets it
controls and liabilities it has incurred and derecognizes financial assets it
no longer controls and liabilities that have been extinguished. The financial-
components approach focuses on the assets and liabilities that exist after the
transfer. Many of these assets and liabilities are components of financial
assets that existed prior to the transfer. If a transfer does not meet the
criteria for a sale, the transfer is accounted for as a secured borrowing with
pledge of collateral. The Statement is effective for transfers and servicing
of financial assets and extinguishments of liabilities occurring after
December 31, 1996, and should be applied prospectively. Earlier or retroactive
application of this Statement is not permitted. The Company has not yet
determined the impact that this Statement will have on the Company's
consolidated financial statements.
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BUSINESS OF THE COMPANY
GENERAL
The Company was organized in July 1996 at the direction of the Board of
Trustees of the Bank for the purpose of becoming a holding company to own all
of the outstanding capital stock of the Bank. Upon consummation of the
Conversion, it is anticipated that the Bank will become a wholly-owned
subsidiary of the Company. Upon the consummation of the Conversion, the
Company will be a savings and loan holding company. See "Regulation and
Supervision--Holding Company Regulation." The Company filed an application
with, and received the approval of, the OTS to become a savings and loan
holding company and to acquire the Bank.
The Company is currently not an operating company. Following the Conversion,
in addition to directing, planning and coordinating the business activities of
the Bank, the Company will initially invest net proceeds it retains primarily
in short and medium term securities, mortgage-backed and mortgage related
securities and common and preferred stock. In addition, the Company intends to
fund the loan to the ESOP to enable the ESOP to subscribe for 8% of the Common
Stock issued in connection with the Conversion, including shares issued to the
Foundation; however, a third party lender may be utilized to lend funds to the
ESOP. In the future, the Company may acquire or organize other operating
subsidiaries, including other financial institutions and financial services
companies. See "Use of Proceeds." Presently, there are no agreements or
understandings for an expansion of the Company's operations. Initially, the
Company will neither own nor lease any property from any third party, but will
instead use the premises, equipment and furniture of the Bank. At the present
time, the Company does not intend to employ any persons other than certain
officers of the Bank, who will not be separately provided cash compensation by
the Company. The Company may utilize the support staff of the Bank from time
to time, if needed. Additional employees will be hired as appropriate to the
extent the Holding Company expands its business in the future.
BUSINESS OF THE BANK
GENERAL
The Bank is a community-oriented mutual savings bank which was originally
chartered by the State of New York in 1875. In August 1995, the Bank completed
its acquisition of certain assets and liabilities of RMBI, including its loan
servicing portfolio, through its wholly-owned mortgage banking subsidiary,
RFI. The Bank's principal business consists of the acceptance of retail
deposits from the general public in the area surrounding its branch offices
and the investment of those deposits, together with funds generated from
operations and borrowings, primarily in mortgage-backed and mortgage related
securities, various debt and equity securities, one- to four-family
residential mortgage loans and commercial real estate loans. The Bank also
invests in multi-family, construction and development, home equity and second
mortgage loans, and consumer and student loans. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Management
Strategy." The Bank currently originates all one- to four-family loans through
RFI. Currently, it is the Bank's policy to sell, on a servicing retained
basis, most longer-term fixed-rate one- to four-family loans as a method of
managing its interest rate risk and increasing its income from its loan
servicing activities. However, the Bank currently retains for its portfolio
one- to four-family loans in excess of 15 years which have interest rates of
8% or greater. The Bank's revenues are derived principally from the interest
on its securities, mortgage, consumer and commercial loans and loan sale and
servicing fees. The Bank's primary sources of funds are deposits, principal
and interest payments on loans and securities, and proceeds from the sale of
loans and securities.
The Bank's mortgage banking subsidiary, RFI, conducts mortgage banking
activities consisting of the origination, sale and servicing of one- to four-
family loans secured by properties in the Bank's primary lending area as well
as through RFI's six mortgage origination offices located in the New York
counties of Nassau, Suffolk, Queens and Albany and the New Jersey counties of
Morris and Monmouth. In addition, the Bank, through RFI, is currently seeking
to open two additional mortgage origination offices in southern and central
Connecticut in late 1996 or early 1997. See "--Lending Activities--Loan
Portfolio Composition," "--Lending
64
<PAGE>
Activities--Loan Originations" and "--Lending Activities--Loan Sales,
Servicing and Mortgage Banking Activities." Currently, all of the Bank's
origination of one- to four-family loans is conducted through RFI, which
originates loans on behalf of the Bank as well as various other financial
institutions and investors. See "--Lending Activities--Loan Sales, Servicing
and Mortgage Banking Activities."
In addition to RFI, the Bank maintains various wholly-owned subsidiaries
most of which were incorporated in New York to maintain ownership of specific
real estate properties the Bank has taken ownership over as a result of
foreclosure or in connection with its lending activities. The Bank also offers
savings bank life insurance through a department of the Bank.
MARKET AREA
The Bank has been, and intends to continue to be, a community-oriented
financial institution offering a variety of financial services to meet the
needs of the communities it serves. The Bank currently operates six full
service banking offices in Nassau and Suffolk Counties and has recently
entered into an agreement to purchase two branch facilities located in Nassau
County which it expects to open in November 1996. The Bank's primary deposit
gathering area is currently concentrated around the areas where its full
service banking offices are located in Nassau and Suffolk Counties which the
Bank generally considers to be its primary market area. The Bank's primary
lending area has also historically been concentrated in Nassau and Suffolk
Counties. However, with the establishment of RFI in August 1995, the Bank's
primary lending area with regard to one- to four-family loans was broadened to
include the areas surrounding RFI's mortgage origination offices in the New
York counties of Suffolk, Nassau, Queens and Albany and the New Jersey
Counties of Morris and Monmouth and would extend into Connecticut when it
opens two new mortgage origination offices.
The New York City metropolitan area has historically benefitted from the
presence of a large number of corporate headquarters and a variety of
financial service entities. Additionally, the counties of Nassau and Suffolk
have historically benefitted from the presence of a large developed suburban
market, well educated employment base and a variety of industrial, service and
high technology businesses. During the late 1980s and early 1990s, however,
due in part to the effects of a prolonged period of weakness in the national
economy, the decline in the regional economy, layoffs in the financial
services industry and corporate relocations, the New York City metropolitan
area experienced reduced levels of employment. In addition, the counties of
Nassau and Suffolk experienced reduced employment as a result of restructuring
and downsizing in the high technology defense related industries. These
conditions, in conjunction with a surplus of available commercial and
residential property, resulted in an overall decline in the underlying values
of properties located in the area during the late 1980s and early 1990s. Since
1993, the prices and values of real estate have stabilized and, in certain
areas, the prices and values of real estate have increased. See "Risk
Factors--Weakness in Local Economy."
LENDING ACTIVITIES
Loan Portfolio Composition. The types of loans that the Bank may originate
are subject to federal and state law and regulations. Interest rates charged
by the Bank on loans are affected principally by the demand for such loans,
the supply of money available for lending purposes and the rates offered by
its competitors. These factors are, in turn, affected by general and economic
conditions, monetary policies of the federal government, including the Federal
Reserve Board, legislative tax policies and governmental budgetary matters.
The Bank's loan portfolio consists primarily of first mortgage loans secured
by one- to four-family residences and commercial real estate properties
located in its primary lending area. At May 31, 1996, the Bank's gross loan
portfolio totalled $438.1 million, of which $213.0 million were one- to four-
family residential mortgage loans, or 48.6% of total gross loans, and $153.6
million were commercial real estate loans, or 35.1% of gross loans. At such
date, the remainder of the loan portfolio consisted of $33.3 million of multi-
family loans, or 7.6% of total gross loans; $31.0 million of construction and
development loans, or 7.1% of total gross loans; $4.7 million of home equity
and second mortgage loans, or 1.1% of total gross loans; $1.5 million of
consumer loans, primarily consisting of modernization and passbook loans, or
0.3% of total gross loans; and $955,000 of student loans, or 0.2% of total
gross loans.
65
<PAGE>
The following table sets forth the composition of the Bank's loan portfolio,
including loans held for sale, in dollar amounts and in percentages of the
respective portfolios at the dates indicated.
<TABLE>
<CAPTION>
AT MAY 31, AT DECEMBER 31,
----------------- -----------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991
----------------- ----------------- ----------------- ----------------- ----------------- -----------------
PERCENT PERCENT PERCENT PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate
loans:
One- to four-
family......... $213,045 48.63% $197,357 48.41% $153,203 41.52% $134,248 45.16% $161,693 48.92% $222,907 55.87%
Multi-family.... 33,320 7.60 36,353 8.92 18,617 5.05 21,642 7.28 24,090 7.29 25,631 6.42
Commercial real
estate......... 153,592 35.05 124,976 30.65 114,317 30.98 101,806 34.24 100,894 30.53 99,048 24.83
Construction and
development.... 31,046 7.09 41,611 10.21 56,163 15.22 12,983 4.37 17,020 5.15 23,415 5.87
Home equity and
second
mortgage....... 4,690 1.07 3,672 0.90 4,346 1.18 5,255 1.77 4,607 1.39 5,122 1.28
Consumer(1)...... 1,483 0.34 1,760 0.43 1,680 0.46 1,995 0.67 2,970 0.90 3,232 0.81
Student.......... 955 0.22 1,959 0.48 20,626 5.59 19,345 6.51 19,230 5.82 19,618 4.92
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Gross loans..... 438,131 100.00% 407,688 100.00% 368,952 100.00% 297,274 100.00% 330,504 100.00% 398,973 100.00%
====== ====== ====== ====== ====== ======
Less:
Unamortized
discounts, net. 749 763 978 -- -- --
Deferred loan
fees........... 769 666 611 -- -- --
Deferred
mortgage
interest....... 552 493 145 -- -- --
Allowance for
possible loan
losses......... 22,312 23,350 25,127 24,502 23,187 19,698
-------- -------- -------- -------- -------- --------
Total loans,
net............ 413,749 382,416 342,091 272,772 307,317 379,275
Less:
Loans held for
sale, net:
One- to four-
family......... 13,310 15,278 -- 8,105 -- --
Student......... 955 1,873 -- -- -- --
-------- -------- -------- -------- -------- --------
Loans
receivable
held for
invest-
ment, net...... $399,484 $365,265 $342,091 $264,667 $307,317 $379,275
======== ======== ======== ======== ======== ========
</TABLE>
- --------
(1)Consumer loans include modernization and passbook loans.
66
<PAGE>
Loan Originations. Prior to the establishment of its mortgage banking
subsidiary, RFI, in August 1995, all of the Bank's loan origination activity
was conducted directly by the Bank's loan personnel at its six branch offices
and through referrals from local real estate agents, attorneys and builders.
While the Bank continues to directly originate all commercial real estate,
multi-family, construction and development, home equity and second mortgage,
and consumer and student loans, since the establishment of RFI in August 1995,
all one- to four-family loan origination activity has been conducted through
RFI and RFI's commissioned loan officers operating in the Bank's full-service
banking offices as well as in RFI's six mortgage origination offices located
in the New York counties of Nassau, Suffolk, Queens and Albany and the New
Jersey counties of Morris and Monmouth.
All loans originated by the Bank or by RFI on behalf of the Bank are
underwritten pursuant to the Bank's loan underwriting policies and procedures.
The Bank originates both adjustable-rate and fixed-rate one- to four-family
loans (through RFI), multi-family loans, commercial real estate loans, home
equity and second mortgage loans, construction and development loans, consumer
loans and student loans. Since 1993, the Bank has placed increased emphasis on
the origination and retention of one- to four-family loans and commercial real
estate loans to selected real estate developers operating within the Bank's
primary market area. See "Risk Factors--Increased Lending Risks Associated
With Commercial Real Estate, Multi-Family and Construction and Development
Lending." In 1995, the Bank began to phase out its direct student loan
originations (except for its direct lending program with SLMA) in response to
the federal government's initiation of the Federal Family Education Loan
Program, which is a direct student lending program. The Bank's and RFI's
ability to originate loans is dependent upon the relative customer demand for
the type of loan and demand for fixed-rate or adjustable-rate loans, which is
affected by the current and expected future levels of interest rates.
Loan Sales, Servicing and Mortgage Banking Activities. Prior to the
establishment of RFI, the Bank's loan sale, purchase and servicing activities
were primarily conducted directly by the Bank. Since August 1995, all of the
Bank's mortgage banking operations have been conducted through RFI with the
exception of the servicing of one- to four-family loans originated by the Bank
prior to the establishment of RFI, which continue to be serviced directly by
the Bank. RFI was formed in conjunction with the Bank's August 1995
acquisition of certain assets and liabilities, including the loan servicing
portfolio, of RMBI, a mortgage banking firm operating in the New York and New
Jersey counties in and surrounding New York City and Albany, New York. RFI's
activities are directed by its two executive officers, who were two of the co-
founders of RMBI, with such activities being overseen by the Bank. RFI's
mortgage banking activities primarily involve the origination, sale and
servicing of one- to four-family loans generally secured by properties located
in the areas surrounding RFI mortgage origination offices.
RFI originates one- to four-family loans through its commissioned loan
personnel and through referrals from real estate brokers, builders, developers
and other sources. RFI loan personnel operate in the Bank's six branch offices
as well as RFI's six mortgage origination offices. RFI also utilizes a network
of approved mortgage brokers and loan correspondents. As a mortgage banking
company, RFI originates one- to four-family loans for sale to the Bank as well
as a variety of other investors, including financial institutions and
securities brokerage firms. RFI also originates loans for sale directly to
FNMA and FHLMC based upon loan terms and underwriting criteria provided to RFI
by such agencies. RFI delivers loan products to investors in the form of whole
loans and in the form of mortgage-backed securities issued by FNMA and FHLMC
which it receives in exchange for the sale of whole loans to such agencies.
RFI's one- to four-family loan production is not dedicated to the Bank as RFI
offers a variety of competing loan products to customers pursuant to loan
programs that are pre-approved by other potential loan investors. Accordingly,
the Bank competes with RFI's other investors for the purchase of one- to four-
family loans on the basis of rates and terms. With the exception of all
Federal Housing Authority ("FHA")/Veterans Administration ("VA") loans and
non-conforming loans, all loans sold by RFI are sold on a servicing retained
basis. The Bank's policy as to the types of loans it will originate for
investment through RFI varies in relation to the Bank's analysis of the
current and anticipated market interest rates and other market conditions. It
is currently the policy of the Bank to purchase from RFI for investment all
adjustable-rate one- to four-family loans and fixed-rate one- to four-family
mortgage loans with terms of 15 years or less or which have
67
<PAGE>
interest rates of 8% or more. For the five months ended May 31, 1996, RFI
originated $127.5 million of loans of which $21.6 million was purchased by the
Bank for its loan portfolio. RFI currently does not offer commercial real
estate, multi-family, construction and development, home equity, second
mortgage or consumer loans.
Funding for the origination of all loans by RFI is provided by the Bank
through a $30 million revolving line of credit whereby borrowings on such line
of credit are immediately paid down by RFI upon the sale of loans. At May 31,
1996, $2.5 million of RFI's mortgage loans were pledged to secure notes
payable to FNMA under a warehouse line of credit known as the FNMA "As Soon As
Pooled Plus Program." The notes are repaid as the related mortgage loans are
sold or collected.
RFI's mortgage banking revenues generally consist of loan origination fees,
interest income on mortgages during the period they are held for sale, less
the interest expense incurred to finance the mortgages, gains (or losses) from
the sale of mortgage loans, loan servicing fees and gains (or losses) from the
sale of any loan servicing.
The loan products currently offered by RFI include mortgage loans insured by
the FHA and VA, as well as a variety of loans which conform to the
underwriting standards specified by FNMA and FHLMC ("conforming loans") and,
to a lesser extent, non-conforming loans. Because all loans originated by RFI
are sold, such loans must meet the origination and underwriting criteria
established by the final investors in the loans, including the Bank. All loans
originated by RFI are sold pursuant to commitments negotiated with FNMA, FHLMC
and other investors to purchase loans meeting such investor's defined criteria
which may require RFI to deliver a specific amount of mortgage loans. RFI
sells most of the conforming mortgage loans it originates to FNMA and FHLMC in
exchange for FNMA and FHLMC mortgage-backed securities through purchase and
guarantee programs sponsored by these agencies; RFI, in turn, sells such FNMA
and FHLMC mortgage-backed securities to private investors. Exchanges of loans
into agency securities and sales of loans are generally made without recourse
to RFI in the event of default by the borrower, except, in the case of VA
loans, which are subject to limitations on the VA's loan guarantees. RFI
generally retains the servicing rights on the mortgage loans exchanged for
mortgage-backed securities but generally sells loans to institutional
investors on a servicing released basis. Non-conforming one- to four-family
loans originated by RFI that do not meet FNMA and FHLMC guidelines are
generally sold to the Bank and private institutional investors.
Between the time RFI issues loan commitments and the time such loans or the
securities into which they are converted are sold, RFI is exposed to movements
in the market price due to changes in market interest rates. RFI attempts to
manage this risk by utilizing forward cash sales to FNMA, FHLMC and other
approved investors or agencies and forward sales of mortgage-backed securities
to securities brokers and dealers, other financial institutions and private
investors (such forward sales of loans or mortgage-backed securities are
collectively referred to as "forward sale commitments"). Generally, RFI
attempts to cover between 75% and 105% of the principal amount of the loans
that it has committed to fund at specified interest rates with forward sale
commitments. However, the type, amount and delivery date of forward sale
commitments RFI will enter into is based upon anticipated movements in market
interest rates, bond market conditions and management's estimates as to
closing volumes and the length of the origination or purchase commitments.
Differences between the volume and timing of actual loan originations and
purchases and management's estimates can expose the Bank and RFI to losses. If
RFI is not able to deliver the mortgage loans or mortgage-backed securities
during the appropriate delivery period called for by the forward sale
commitment, RFI may be required to pay a non-delivery fee, repurchase the
delivery commitments at current market prices or purchase whole loans at
premium for delivery. The above activity is managed continually; however,
there can be no assurance that RFI will be successful in its efforts to
mitigate the risk of interest rate fluctuation between the time origination or
purchase commitments are issued and the ultimate sale of the loans. At May 31,
1996, RFI had $57.6 million of forward sale commitments representing 99.3% of
closed loans and loan commitments at specified interest rates at such date.
See "Risk Factors--Sensitivity to Increases in Interest Rates."
Currently, the Bank services all of its commercial real estate, multi-
family, home equity and second mortgage and consumer and student loans and all
one- to four-family loans originated for its portfolio prior to its
establishment of RFI on August 1, 1995. RFI services all loans it originates
on behalf of the Bank as well as for all conforming loans sold to other
investors. All FHA and VA loans are sold on a servicing-released basis, as are
68
<PAGE>
other selected loans sold to private institutional investors. In addition, in
connection with the Bank's acquisition of certain liabilities and assets from
RMBI, the Bank acquired the servicing rights of $623 million of loans sold by
RMBI. At May 31, 1996, RFI's loan servicing portfolio totalled $739.9 million,
primarily consisting of conforming fixed-rate loans. The Bank's loan servicing
portfolio totalled $417.4 million as of May 31, 1996 and primarily consisted
of one- to four-family, commercial real estate and construction and
development loans originated by the Bank prior to its acquisition of certain
assets and liabilities from RMBI. Loan servicing includes collecting and
remitting loan payments, accounting for principal and interest, contacting
delinquent mortgagors, supervising foreclosures and property dispositions in
the event of unremedied defaults, making certain insurance and tax payments on
behalf of the borrowers and generally administering the loans. RFI utilizes a
third party subservicer, Essex Home Mortgage Service Corporation ("Essex"), to
service all loans. Essex receives an annual flat fee per loan and any
ancillary fee income and RFI recognizes servicing fee income in excess of
servicing fees paid to Essex and retains the use of the escrow balances.
During the years ended December 31, 1995 and 1994, the Bank sold without
recourse, including loans sold in 1995 by RFI, approximately $70.4 million and
$15.9 million, respectively, of whole loans with loan servicing retained. For
the five months ended May 31, 1996, the Bank sold without recourse, including
loans sold by RFI, approximately $72.2 million of whole loans with loan
servicing retained.
The following tables set forth the Bank's loan originations, purchases,
sales and principal repayments for the periods indicated and includes RFI's
loan originations on behalf of the Bank commencing August 1, 1995.
<TABLE>
<CAPTION>
FOR THE FIVE MONTHS
ENDED MAY 31, FOR THE YEAR ENDED DECEMBER 31,
-------------------- ---------------------------------
1996 1995 1995 1994 1993
--------- --------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Gross loans(1):
Balance outstanding at
beginning of period.... $ 407,688 $ 368,952 $ 368,952 $ 297,274 $ 330,504
--------- --------- ---------- ---------- ----------
Loans originated:
One- to four-family. 128,559 7,073 153,206 52,668 42,106
Multi-family........ -- 5,500 19,310 960 --
Commercial real es-
tate............... 39,489 9,292 17,310 26,431 5,349
Construction and de-
velopment.......... 16,978 15,331 31,598 55,950 8,974
Home equity and sec-
ond mortgage....... 2,980 -- 50 424 1,072
Consumer and stu-
dent(2)............ 1,889 2,302 4,845 4,664 3,476
--------- --------- ---------- ---------- ----------
Total loans origi-
nated............ 189,895 39,498 226,319 141,097 60,977
Loans purchased....... -- -- 22,059 12,764 66
--------- --------- ---------- ---------- ----------
Total loans
originated and
purchased........ 189,895 39,498 248,378 153,861 61,043
--------- --------- ---------- ---------- ----------
Less:
Principal repayments.. 51,626 19,610 66,084 61,196 70,947
Sales of loans........ 106,210 18,927 134,084 15,697 15,765
Transfers to real es-
tate owned........... 276 1,797 6,964 5,119 2,016
Principal charged off. 1,340 1,300 2,510 171 5,545
--------- --------- ---------- ---------- ----------
Total loans......... 438,131 366,816 407,688 368,952 297,274
Less:
Loans held for sale,
net.................... (14,265) (83) (17,151) -- (8,105)
--------- --------- ---------- ---------- ----------
Loans receivable held
for investment at
end of period.......... $ 423,866 $ 366,733 $ 390,537 $ 368,952 $ 289,169
========= ========= ========== ========== ==========
</TABLE>
- --------
(1) Gross loans includes loans receivable held for investment and loans held
for sale.
(2) Consumer loans originated consist of modernization and passbook loans.
69
<PAGE>
Loan Maturity and Repricing. The following table shows the contractual
maturity of the Bank's loan portfolio at May 31, 1996. The table does not
include prepayments or scheduled principal amortization. Prepayments and
scheduled principal amortization on mortgage loans totalled $51.6 million for
the five months ended May 31, 1996, $66.1 million for fiscal 1995 and $61.2
million for fiscal 1994.
<TABLE>
<CAPTION>
AT MAY 31, 1996
-----------------------------------------------------------------------------------
REAL ESTATE LOANS
---------------------------------------------------
HOME
ONE-TO COMMERCIAL CONSTRUCTION EQUITY AND TOTAL
FOUR- MULTI- REAL AND SECOND LOANS
FAMILY FAMILY ESTATE DEVELOPMENT MORTGAGE CONSUMER (1) STUDENT RECEIVABLE
-------- ------- ---------- ------------ ---------- ------------ ------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Amounts due:
Within one year........ $ 14,037 $ 253 $ 17,055 $21,453 $ 174 $ 46 $955 $ 53,973
-------- ------- -------- ------- ------ ------ ---- --------
After one year:
More than one year to
three years........... 1,527 300 14,799 9,440 1,324 169 -- 27,559
More than three years
to five years......... 2,678 672 18,119 153 1,712 474 -- 23,808
More than five years to
10 years.............. 25,694 28,180 88,902 -- 731 793 -- 144,300
More than 10 years to
20 years.............. 64,248 3,915 13,219 -- 103 1 -- 81,486
More than 20 years..... 104,861 -- 1,498 -- 646 -- -- 107,005
-------- ------- -------- ------- ------ ------ ---- --------
Total due after May 31,
1997.................. 199,008 33,067 136,537 9,593 4,516 1,437 -- 384,158
-------- ------- -------- ------- ------ ------ ---- --------
Total amount due....... $213,045 $33,320 $153,592 $31,046 $4,690 $1,483 $955 438,131
======== ======= ======== ======= ====== ====== ==== --------
Less:
Unamortized discounts, net...................................................................... 749
Deferred loan fees, net......................................................................... 769
Deferred mortgage interest...................................................................... 552
Allowance for possible loan losses.............................................................. 22,312
--------
Total loans, net................................................................................ 413,749
Less: Loans held for sale, net.................................................................. 14,265
--------
Loans receivable held for investment, net....................................................... $399,484
========
</TABLE>
The following table sets forth at May 31, 1996, the dollar amount of gross
loans receivable contractually due after May 31, 1997, and whether such loans
have fixed interest rates or adjustable interest rates.
<TABLE>
<CAPTION>
DUE AFTER MAY 31, 1997
----------------------------
FIXED ADJUSTABLE TOTAL
-------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Real estate loans:
One- to four-family............................. $127,937 $ 71,071 $199,008
Multi-family.................................... 4,073 28,994 33,067
Commercial real estate............................ 19,927 116,610 136,537
Construction and development...................... -- 9,593 9,593
Home equity and second mortgage................... 912 3,604 4,516
-------- -------- --------
Total real estate loans......................... 152,849 229,872 382,721
Consumer and student loans(1)..................... 1,437 -- 1,437
-------- -------- --------
Total loans receivable.......................... $154,286 $229,872 $384,158
======== ======== ========
</TABLE>
- --------
(1) Includes modernization loans and passbook loans.
70
<PAGE>
One- to Four-Family Loans. The Bank, through RFI, currently offers both
fixed-rate and adjustable-rate mortgage loans secured by one- to four-family
residences located in the Bank's primary market area as well as in the New
York and New Jersey areas in which RFI operates mortgage origination offices,
with maturities up to thirty years. See "--Market Area." One- to four-family
mortgage loan originations are generally obtained from RFI's loan
representatives operating in the Bank's branch offices and RFI's offices and
through their contacts with the local real estate industry and direct consumer
advertising. RFI has approximately 55 commissioned loan originators who
actively solicit mortgage loan applications.
At May 31, 1996, the Bank's one- to four-family loans totalled $213.0
million, or 48.6%, of gross loans. Of the one- to four-family loans
outstanding at that date, 66.0% were fixed-rate loans and 34.0% were
adjustable-rate mortgage loans. The Bank, through RFI, offers fixed-rate
mortgage loans with terms of ten, fifteen, twenty and thirty years. The Bank,
through RFI, currently offers a number of adjustable-rate mortgage loans with
terms of up to thirty years and interest rates which adjust annually from the
outset of the loan or which adjust annually after a three, seven or ten year
initial fixed period. The interest rates for the majority of the Bank's
adjustable-rate mortgage loans are indexed to the one-year and five-year
Constant Maturity Treasury ("CMT") Index. Interest rate adjustments on such
loans are limited to a 2% annual adjustment cap and a maximum adjustment of 6%
over the life of the loan. Certain of the Bank's adjustable-rate mortgage
loans can be converted to a fixed-rate loan with interest rates based upon the
then-current market rates plus a varying margin.
The volume and type of adjustable-rate mortgage loans originated by RFI on
behalf of the Bank have been affected by such market factors as the level of
interest rates, competition, consumer preferences and the availability of
funds. The origination of adjustable-rate residential mortgage loans, as
opposed to fixed-rate residential mortgage loans, helps reduce the Bank's
exposure to increases in interest rates. However, adjustable-rate loans
generally pose credit risks not inherent in fixed-rate loans, primarily
because as interest rates rise, the underlying payments of the borrower rise,
thereby increasing the potential for default. Periodic and lifetime caps on
interest rate increases help to reduce the risks associated with adjustable-
rate loans but also limit the interest rate sensitivity thereof.
One- to four-family residential mortgage loans are generally underwritten
according to FNMA and FHLMC guidelines. The Bank, through RFI, currently
originates one- to four-family residential mortgage loans in amounts up to 90%
of the lower of the appraised value or the selling price of the property
securing the loan up to a maximum amount of $600,000 for loans originated for
sale and up to a maximum amount of $1 million for loans to be sold to private
investors, subject to certain exceptions to these guidelines which must be
approved by either the Chief Executive Officer or Chief Lending Officer and
reviewed by the Board of Trustees. The Bank currently requires private
mortgage insurance to be obtained for loans in excess of an 80% loan to value
ratio. Mortgage loans originated by the Bank generally include due-on-sale
clauses which provide the Bank with the contractual right to deem the loan
immediately due and payable in the event the borrower transfers ownership of
the property without the Bank's consent. Due-on-sale clauses are an important
means of adjusting the yields on the Bank's fixed-rate mortgage loan portfolio
and the Bank has generally exercised its rights under these clauses.
In an effort to provide financing for low and moderate income home buyers,
RFI participates in residential mortgage programs and products sponsored by
the State of New York Mortgage Agency ("SONYMA") and the New Jersey Mortgage
Housing Finance Agency ("NJMHFA"). The SONYMA and NJMHFA mortgage programs
provide low and moderate income households with fixed-rate loans which are
generally below prevailing fixed-rate mortgages and which allow below market
down payments. Such loans generally are sold by RFI.
Multi-Family Lending. The Bank originates fixed- and adjustable-rate multi-
family mortgage loans generally secured by forty to four hundred unit
apartment buildings located in the Bank's primary market area. At May 31,
1996, the Bank's multi-family loan portfolio was $33.3 million, or 7.6%, of
gross loans. In reaching its decision on whether to make a multi-family loan,
the Bank considers the qualifications and financial condition of the borrower,
including credit history, profitability and expertise, as well as the value
and condition of the
71
<PAGE>
underlying property. The factors considered by the Bank include: the net
operating income of the mortgaged premises before debt service and
depreciation; the debt coverage ratio (the ratio of net earnings to debt
service); and the ratio of loan amount to appraised value. Pursuant to the
Bank's underwriting policies, a multi-family mortgage loan may be made in an
amount up to 75% of the lower of the appraised value or sales price of the
underlying property with terms of up to 10 years, with an amortization period
of up to 30 years. The Bank's adjustable-rate multi-family loans are
originated with rates that are fixed for the first five years and adjust every
five years thereafter based upon the 5 year U.S. Treasury bill plus a margin
of 1.75% to 3.0%. The Bank's current policies limit the amount of multi-family
loans the Bank may have to 25% of the aggregate loan portfolio. The Bank's
current policies limit such loans to $10 million per project and an aggregate
of $30 million in loans outstanding per borrower, although the Bank will make
exceptions to this policy provided full Board approval for the loan is
obtained. In addition, the Bank generally requires a debt service coverage
ratio of a minimum of 120% and the personal guarantee of the borrower during
the construction stage. The Bank also requires an appraisal on the property
conducted by an independent appraiser and title insurance. Additionally, the
Bank requires a market occupancy rate of at least 90% prior to lending for
multi-unit apartment buildings. At May 31, 1996, the Bank's largest multi-
family loan was a $6.25 million loan secured by a 112 unit apartment building
located in Holbrook, New York.
When evaluating the qualifications of the borrower for a multi-family loan,
the Bank considers the financial resources and income level of the borrower,
the borrower's experience in owning or managing similar property and the
Bank's lending experience with the borrower. The Bank's underwriting policies
require that the borrower be able to demonstrate management skills and the
ability to maintain the property from current rental income. The Bank's policy
requires borrowers to present evidence of the ability to repay the mortgage
and a history of making mortgage payments on a timely basis. In making its
assessment of the creditworthiness of the borrower, the Bank generally reviews
the financial statements and credit history of the borrower, as well as other
related documentation.
Loans secured by apartment buildings and other multi-family residential
properties generally involve larger principal amounts and a greater degree of
risk than one- to four-family residential mortgage loans. Because payments on
loans secured by multi-family properties are often dependent on successful
operation or management of the properties, repayment of such loans may be
subject to a greater extent to adverse conditions in the real estate market or
the economy. The Bank seeks to minimize these risks through its underwriting
policies, which require, among other things, such loans to be qualified at
origination on the basis of the property's income and debt coverage ratio. As
part of its operating strategy, the Bank intends to increase its multi-family
lending in its primary market area depending on market demand for such loans.
Commercial Real Estate Lending. The Bank originates commercial real estate
loans that are generally secured by properties used for business purposes or a
combination of residential and retail purposes which are located in the Bank's
primary market area. The Bank's underwriting procedures provide that
commercial real estate loans generally may be made in amounts up to 75% of the
lower of the appraised value or sales value of the property, subject to the
Bank's current loans-to-one-borrower limit, which at May 31, 1996, was $30
million; however, the Bank's policies limit such loans to $10 million per
project and an aggregate of $30 million in loans outstanding per borrower.
These loans may be made with terms up to 20 years and are generally offered at
interest rates which adjust in accordance with the CMT Index. The Bank's
underwriting standards and procedures are similar to those applicable to its
multi-family loans, whereby the Bank considers the net operating income of the
property and the borrower's expertise, credit history and profitability. The
Bank has generally required that the properties securing commercial real
estate loans have debt service coverage ratios of at least 125%. At May 31,
1996, the Bank's commercial real estate loan portfolio totalled approximately
$153.6 million or 35.1% of total loans. The largest commercial real estate
loan in the Bank's portfolio at May 31, 1996, was an $8.3 million loan secured
by a shopping center located in Holbrook, New York.
Loans secured by commercial real estate properties, like multi-family loans,
generally involve larger principal amounts and a greater degree of risk than
one- to four-family residential mortgage loans. Because
72
<PAGE>
payments on loans secured by commercial real estate properties are often
dependent on successful operation or management of the properties, repayment
of such loans may be subject to adverse conditions in the real estate market
or the economy. The Bank seeks to minimize these risks through its
underwriting standards, which require such loans to be qualified on the basis
of the property's income and debt service coverage ratio. As part of the
operating strategy, the Bank intends to continue to emphasize its commercial
real estate lending activities in its primary market area depending on the
demand for such loans and commercial real estate market conditions.
Construction and Development Lending. The Bank originates loans for the
development of commercial and residential property located in its primary
market area. The Bank will originate loans for the acquisition of commercial
and residential property located in its primary market area only if such
acquisition loan is part of an overall development loan. Construction and
development loans are offered primarily to experienced local developers
operating in the Bank's primary market area. The majority of the Bank's
construction loans are originated primarily to finance the construction of
one- to four-family, owner-occupied residential, multi-family and commercial
real estate properties located in the Bank's primary market area. Such loans
are offered for the construction of properties that are pre-sold or for which
permanent financing has been secured. At May 31, 1996, the Bank had $70.8
million of construction loans committed to the construction of one- to four-
family properties. Construction loans are generally offered with terms up to
three years for residential property and up to two years for multi-family and
commercial property. Construction loans may be made in amounts up to 90% of
the estimated cost of construction. With respect to construction loans, the
Bank's policy is to require borrowers to secure permanent financing
commitments from generally recognized lenders for an amount equal to or
greater than the amount of the loan. In some cases, the Bank may itself
provide permanent financing. Loan proceeds are disbursed on a monthly basis in
increments as construction progresses and as inspections by the Bank's
supervising engineer warrant. The Bank does not originate loans secured by
undeveloped land. The largest construction loan in the Bank's portfolio at May
31, 1996 was an unfunded loan commitment for $14.8 million for the
construction of 55 single family residences in Dix Hills, New York.
Construction and development financing is generally considered to involve a
higher degree of credit risk than long-term financing on improved, owner-
occupied real estate. Risk of loss on a construction loan is dependent largely
upon the accuracy of the initial estimate of the property's value at
completion of construction or development compared to the estimated cost
(including interest) of construction and other assumptions, including the
estimated time to sell residential properties. If the estimate of value proves
to be inaccurate, the Bank may be confronted with a project, when completed,
having a value which is insufficient to assure full repayment.
Home Equity and Second Mortgage Lending. The Bank offers fixed-rate, fixed-
term home equity loans and adjustable-rate home equity lines of credit in its
primary market area. Fixed-rate, fixed-term home equity loans are offered in
amounts up to 80% of the appraised value of the property (including the first
mortgage) with a maximum loan amount of $50,000. Fixed-rate, fixed-term home
equity loans are offered with terms up to ten years and home equity lines of
credit are offered for terms up to thirty years, with interest-only payments
during the first ten years and repayment of principal and interest during the
final twenty years. Adjustable-rate home equity lines of credit are offered in
amounts up to 75% of the appraised value of the property (including the first
mortgage) with a maximum line amount of $100,000.
Consumer, Student and Other Lending. The Bank's portfolio of consumer,
student and other loans primarily consists of home modernization loans secured
by the improvement itself, loans secured by deposit accounts and student
loans. As of May 31, 1996, consumer and student loans amounted to $2.4
million, or 0.56% of the Bank's total loan portfolio, of which $955,000 were
student loans. The Bank has begun to phase out its direct student loan
originations, except for its direct lending program with SLMA. This phase-out
was made necessary by the initiation of the federal government's direct
student loan origination program. During the year ended December 31, 1995, the
Bank sold approximately $21.5 million of its student loan portfolio, recording
an aggregate gain of $496,000. The Bank also has phased out its home
improvement loans by expanding its home equity loan program.
73
<PAGE>
Loan Approval Procedures and Authority. The Board of Trustees establishes
the lending policies and loan approval limits of the Bank. The Board of
Trustees has established an Executive Committee, comprised of rotating members
of the Board of Trustees, to review and approve loans in amounts greater than
management has the authority to approve. The Board of Trustees has authorized
the following persons to approve loans up to the amounts indicated: commercial
real estate loans of up to $200,000 can be approved by the President or Senior
Lending Officer plus one additional officer in the Lending Division; all
commercial real estate loans, multi-family loans, construction loans and loan
participations in excess of $200,000 require the approval of the Executive
Committee of the Board of Trustees; when these loans exceed $1.0 million, they
require the approval of the Executive Committee and the Board of Trustees.
Home equity loans and lines of credit are approved by two officers within the
lending department, with one of those officers being a senior officer of the
Bank. All residential loans of up to $300,000 are approved within RFI by the
underwriter; loans in excess of this amount require the countersignature of a
senior officer of RFI.
With respect to all loans originated by RFI on behalf of the Bank, upon
receipt of a completed loan application from a prospective borrower, a credit
report is ordered and certain other information is verified by an independent
credit agency. If necessary, additional financial information may be required.
An appraisal of real estate intended to secure a proposed loan generally is
required to be performed by appraisers approved by the Bank. For proposed
mortgage loans, the Board annually approves independent appraisers used by the
Bank and approves the Bank's appraisal policy. The Bank's policy is to obtain
title and hazard insurance on all mortgage loans and the Bank may require
borrowers to make payments to a mortgage escrow account for the payment of
property taxes. Any exceptions to the Bank's underwriting policies must be
noted on an underwriting standards checklist and approved by the Executive
Committee for loans of up to $1 million and by the Board of Trustees for loans
of $1 million or more. The Bank subjects all loan commitments for non-
residential mortgage loans to an environmental site assessment.
DELINQUENT LOANS, REAL ESTATE OWNED AND CLASSIFIED ASSETS
Management and the Board of Trustees perform a monthly review of all
delinquent loans. The procedures taken by the Bank with respect to
delinquencies vary depending on the nature of the loan and period of
delinquency. The Bank generally requires that delinquent mortgage loans be
reviewed and that a delinquency notice be mailed no later than the 16th day of
delinquency and a late charge is assessed after 15 days. RFI's subservicer,
Essex, follows similar delinquency procedures. The Bank's policies provide
that telephone contact will be attempted to ascertain the reasons for
delinquency and the prospects of repayment. When contact is made with the
borrower at any time prior to foreclosure, the Bank will attempt to obtain
full payment or work out a repayment schedule with the borrower to avoid
foreclosure. It is the Bank's general policy to discontinue accruing interest
on all loans which are past due 90 days or when in the opinion of management
such suspension is warranted. Property acquired by the Bank as a result of
foreclosure on a mortgage loan is classified as "real estate owned" and is
recorded at the lower of the unpaid principal balance or fair value less costs
to sell at the date of acquisition and thereafter. Upon foreclosure, it is the
Bank's policy to generally require an appraisal of the property and,
thereafter, appraise the property on an as-needed basis.
At May 31, 1996, the Bank's real estate owned, net, consisting of foreclosed
assets totalled $5.4 million and was held directly by the Bank and by its
subsidiaries which were formed for the purpose of holding and maintaining
certain real estate owned. See "--Subsidiary Activities." At such date, real
estate owned, net, was comprised of six one- to four-family properties with an
aggregate carrying value of $597,000, and nine commercial real estate
properties with an aggregate carrying value of $4.8 million. Bank personnel or
an independent inspector generally conduct periodic external inspections on
all properties securing loans in foreclosure and generally conducts external
appraisals on all properties prior to taking ownership of the property. Based
upon such inspections and appraisals, the Bank will charge off any loan
principal it deems appropriate at such time. Bank personnel conduct monthly
reviews of its foreclosed real estate and periodically adjust its valuation
allowance for possible declines in the value of real estate owned. The Bank's
allowance for possible losses on real estate owned at May 31, 1996 totalled
$1.1 million, or 17.2% of the aggregate gross value of real
74
<PAGE>
estate owned. The Bank is currently offering for sale all real estate owned as
a result of foreclosure through brokers and through its own personnel.
The Bank's policies permit the financing of the sale of its foreclosed real
estate on substantially the same terms applicable to its other real estate
mortgage loans with the exception that the Bank may loan up to 80% of the
lesser of the appraised value or sales price of the foreclosed property.
Federal regulations and the Bank's Classification of Assets Policy require
that the Bank utilize an internal asset classification system as a means of
reporting problem and potential problem assets. The Bank currently classifies
problem and potential problem assets as "Substandard," "Doubtful" or "Loss"
assets. An asset is considered Substandard if it is inadequately protected by
the current net worth and paying capacity of the obligor or of the collateral
pledged, if any. Substandard assets include those characterized by the
distinct possibility that the insured institution will sustain some loss if
the deficiencies are not corrected. Assets classified as Doubtful have all of
the weaknesses inherent in those classified Substandard with the added
characteristic that the weaknesses present make collection or liquidation in
full, on the basis of currently existing facts, conditions and values, highly
questionable and improbable. Assets classified as Loss are those considered
uncollectible and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. Assets
which do not currently expose the insured institution to sufficient risk to
warrant classification in one of the aforementioned categories but possess
weaknesses are required to be designated "Special Mention."
When an insured institution classifies one or more assets, or portions
thereof, as Substandard or Doubtful, it is required to establish a general
valuation allowance for possible loan losses in an amount deemed prudent by
management unless the loss of principal appears to be remote. General
valuation allowances represent loss allowances which have been established to
recognize the inherent risk associated with lending activities, but which,
unlike specific allowances, have not been allocated to particular problem
assets. When an insured institution classifies one or more assets, or portions
thereof, as Loss, it is required either to establish a specific allowance for
losses equal to 100% of the amount of the assets so classified or to charge
off such amount.
A savings institution's determination as to the classification of its assets
and the amount of its valuation allowances is subject to review by the FDIC
and NYBD, which can order the establishment of additional general or specific
loss allowances. The FDIC, in conjunction with the other federal banking
agencies, recently adopted an interagency policy statement on the allowance
for loan and lease losses. The policy statement provides guidance for
financial institutions on both the responsibilities of management for the
assessment and establishment of adequate allowances and guidance for banking
agency examiners to use in determining the adequacy of general valuation
guidelines. Generally, the policy statement recommends that institutions have
effective systems and controls to identify, monitor and address asset quality
problems; that management has analyzed all significant factors that affect the
collectibility of the portfolio in a reasonable manner; and that management
has established acceptable allowance evaluation processes that meet the
objectives set forth in the policy statement. While the Bank believes that it
has established an adequate allowance for possible loan losses, there can be
no assurance that the regulators, in reviewing the Bank's loan portfolio, will
not request the Bank to materially increase at that time its allowance for
possible loan losses, thereby negatively affecting the Bank's financial
condition and earnings at that time. Although management believes that
adequate specific and general loan loss allowances have been established,
actual losses are dependent upon future events and, as such, further additions
to the level of specific and general loan loss allowances may become
necessary.
The Bank's senior management reviews and classifies the Bank's loans on a
monthly basis and reports the results of its review to the Board of Trustees.
At May 31, 1996, the Bank had $14.7 million of assets designated as
Substandard, consisting of 47 commercial real estate, one- to four-family and
construction loans, $600,000 of assets classified as Doubtful, consisting of
one commercial real estate loan, and no assets classified as Loss,
respectively. At May 31, 1996, the Bank had $20.1 million of assets designated
as Special Mention, consisting of 43 commercial real estate, one- to four-
family and construction loans which were designated Special Mention due to
past loan delinquencies.
75
<PAGE>
The following table sets forth delinquencies in the Bank's loan portfolio as
of the dates indicated:
<TABLE>
<CAPTION>
AT MAY 31, 1996 AT DECEMBER 31, 1995
------------------------------------- -------------------------------------
60-89 DAYS 90 DAYS OR MORE 60-89 DAYS 90 DAYS OR MORE
------------------ ------------------ ------------------ ------------------
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
-------- --------- -------- --------- -------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family..... 1 $ 40 22 $ 1,912 4 $ 297 23 $ 1,915
Multi-family............ -- -- -- -- -- -- -- --
Commercial real estate.. 1 45 11 6,446 -- -- 15 6,536
Construction and devel-
opment................. -- -- 2 752 -- -- 1 150
Home equity and second
mortgage............... 2 79 -- -- -- -- 1 123
Consumer loans(1)....... 1 13 4 27 -- -- -- --
Student loans........... -- -- -- -- -- -- 11 42
--- ------ --- ------- --- ------ --- -------
Total.................. 5 $ 177 39 $ 9,137 4 $ 297 51 $ 8,766
=== ====== === ======= === ====== === =======
Delinquent loans to to-
tal loans(2)........... 0.04% 2.17% 0.08% 2.26%
====== ======= ====== =======
<CAPTION>
AT DECEMBER 31, 1994 AT DECEMBER 31, 1993
------------------------------------- -------------------------------------
60-89 DAYS 90 DAYS OR MORE 60-89 DAYS 90 DAYS OR MORE
------------------ ------------------ ------------------ ------------------
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
-------- --------- -------- --------- -------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family..... 6 $ 173 20 $ 2,750 30 $1,401 57 $ 6,539
Multi-family............ -- -- -- -- -- -- 6 3,933
Commercial real estate.. 1 787 21 13,541 4 2,782 27 14,816
Construction and devel-
opment................. 1 388 3 2,900 1 970 3 3,226
Home equity and second
mortgage............... -- -- 1 60 2 222 1 227
Consumer loans(1)....... -- -- -- -- 2 26 2 14
Student loans........... 86 330 128 605 81 309 59 222
--- ------ --- ------- --- ------ --- -------
Total.................. 94 $1,678 173 $19,856 120 $5,710 155 $28,977
=== ====== === ======= === ====== === =======
Delinquent loans to to-
tal loans(2)........... 0.46% 5.41% 1.97% 10.02%
====== ======= ====== =======
</TABLE>
- --------
(1) Consumer loans consist of modernization loans and passbook loans.
(2) Total loans includes loans receivable held-for-investment, less deferred
loan fees, deferred mortgage interest and unamortized discounts, net.
76
<PAGE>
Non-Accrual and Past-Due Loans. The following table sets forth information
regarding non-accrual loans and REO.
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT MAY 31, -------------------------------------------
1996 1995 1994 1993 1992 1991
---------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Non-accrual loans:
One- to four-family... $ 2,936 $ 2,965 $ 4,708 $ 6,041 $ 5,130 $ 7,440
Multi-family.......... -- -- 263 1,037 925 --
Commercial real es-
tate................. 8,144 8,650 16,519 17,350 14,221 7,887
Construction and de-
velopment............ 752 150 2,900 3,226 5,475 10,149
------- ------- ------- ------- ------- -------
Total non-accrual
loans.............. 11,832 11,765 24,390 27,654 25,751 25,476
Loans contractually past
due 90 days or more,
other than non-accru-
ing.................... 113 408 665 3,689 3,346 6,429
------- ------- ------- ------- ------- -------
Total non-performing
loans.............. 11,945 12,173 25,055 31,343 29,097 31,905
Real estate owned,
net(1)................. 5,366 6,047 3,359 2,613 2,911 519
------- ------- ------- ------- ------- -------
Total non-performing
assets............. $17,311 $18,220 $28,414 $33,956 $32,008 $32,424
======= ======= ======= ======= ======= =======
Allowance for possible
loan losses as a per-
cent of loans(2)....... 5.29% 6.01% 6.84% 8.47% 7.02% 4.94%
Allowance for possible
loan losses as a per-
cent of total non-per-
forming loans(3)....... 186.79% 191.82% 100.28% 78.17% 79.69% 61.74%
Non-performing loans as
a percent of
loans(2)(3)............ 2.83% 3.13% 6.82% 10.84% 8.80% 8.00%
Non-performing assets as
a percent of total
assets(3).............. 0.98% 1.14% 1.98% 2.53% 2.45% 2.83%
</TABLE>
- --------
(1) Real estate owned balances are shown net of related loss allowances.
(2) Loans include loans receivable held for investment, net, excluding the
allowance for possible loan losses.
(3) Non-performing assets consist of non-performing loans and REO. Non-
performing loans consist of non-accruing loans and all loans 90 days or
more past due and other loans which have been identified by the Bank as
presenting uncertainty with respect to the collectibility of interest or
principal.
Non-accrual loans totalled $11.8 million as of May 31, 1996, and included 35
one- to four-family loans, with an aggregate balance of $2.9 million and 20
commercial real estate loans and construction and development loans with an
aggregate balance of $8.9 million. Non-accrual loans do not include student
loans delinquent 90 days or more as the Bank does not classify such loans as
non-accrual because delinquent principal and interest on guaranteed student
loans is guaranteed by the U.S. government.
ALLOWANCE FOR POSSIBLE LOAN LOSSES
The allowance for possible loan losses is maintained through provisions for
possible loan losses based on management's on-going evaluation of the risks
inherent in its loan portfolio in consideration of the trends in its loan
portfolio, the national and regional economies and the real estate market in
the Bank's primary lending area. The allowance for possible loan losses is
maintained at an amount management considers adequate to cover estimated
losses in its loan portfolio which are deemed probable and estimable based on
information currently known to management. The Bank's loan loss allowance
determinations also incorporate factors and analyses which consider the
potential principal loss associated with the loan, costs of acquiring the
property securing the loan through foreclosure or deed in lieu thereof, the
periods of time involved with the acquisition and sale of such property, and
costs and expenses associated with maintaining and holding the property until
sale and the costs associated with the Bank's inability to utilize funds for
other income producing activities during the estimated holding period of the
property.
77
<PAGE>
As of May 31, 1996, the Bank's allowance for possible loan losses was $22.3
million, or 5.3%, of total loans and 186.8% of non-performing loans as
compared to $23.4 million, or 6.0% of total loans and 191.8% of non-performing
loans as of December 31, 1995. The Bank had total non-performing loans of
$11.9 million and $12.2 million at May 31, 1996 and December 31, 1995,
respectively, and non-performing loans to total loans of 2.8% and 3.1%,
respectively. The Bank will continue to monitor and modify its allowance for
possible loan losses as conditions dictate. While management believes that,
based on information currently available, the Bank's allowance for possible
loan losses is sufficient to cover losses inherent in its loan portfolio at
this time, no assurances can be given that the Bank's level of allowance for
possible loan losses will be sufficient to cover future possible loan losses
incurred by the Bank or that future adjustments to the allowance for possible
loan losses will not be necessary if economic and other conditions differ
substantially from the economic and other conditions used by management to
determine the current level of the allowance for possible loan losses.
Management may in the future increase its level of loan loss allowance as a
percentage of total loans and non-performing loans in the event it increases
the level of multi-family, commercial real estate, construction and
development or other lending as a percentage of its total loan portfolio. In
addition, the FDIC and NYBD as an integral part of their examination process
periodically reviews the Bank's allowance for possible loan losses. Such
agencies may require the Bank to make additional provisions for estimated
possible loan losses based upon judgments different from those of management.
The following table sets forth activity in the Bank's allowance for possible
loan losses for the periods set forth in the table.
<TABLE>
<CAPTION>
AT OR FOR THE
FIVE MONTHS
ENDED MAY 31, AT OR FOR THE YEAR ENDED DECEMBER 31,
------------- ----------------------------------------
1996 1995 1994 1993 1992 1991
------------- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of
period................. $23,350 $25,127 $24,502 $23,187 $19,698 $ 9,098
Provision for possible
loan losses............ 300 600 600 6,860 9,300 18,600
Charge-offs:
Real estate loans:
One- to four-family. 16 14 -- 304 162 --
Multi-family........ -- -- -- -- -- --
Commercial real es-
tate............... 828 2,385 59 3,977 520 --
Construction and de-
velopment.......... 495 111 112 1,264 5,129 8,000
Consumer and student
loans................ 1 -- -- -- -- --
------- ------- ------- ------- ------- -------
Total charge-offs. 1,340 2,510 171 5,545 5,811 8,000
Recoveries:
Real estate loans:
One- to four-family. 2 40 107 -- -- --
Multi-family........ -- -- -- -- -- --
Commercial real es-
tate............... -- 92 89 -- -- --
Construction and de-
velopment.......... -- 1 -- -- -- --
Consumer and student
loans................ -- -- -- -- -- --
------- ------- ------- ------- ------- -------
Total recoveries.. 2 133 196 -- -- --
Net charge-offs (recov-
eries)................. 1,338 2,377 (25) 5,545 5,811 8,000
------- ------- ------- ------- ------- -------
Balance at end of peri-
od..................... $22,312 $23,350 $25,127 $24,502 $23,187 $19,698
======= ======= ======= ======= ======= =======
</TABLE>
78
<PAGE>
The following tables set forth the Bank's percent of allowance for possible
loan losses to total allowance and the percent of loans to total loans in each
of the categories listed at the dates indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------------------------------------------
AT MAY 31, 1996 1995 1994 1993
--------------------------- --------------------------- --------------------------- --------------------------
PERCENT PERCENT PERCENT PERCENT
OF LOANS OF LOANS OF LOANS PERCENT OF LOANS
PERCENT OF IN EACH PERCENT OF IN EACH PERCENT OF IN EACH OF IN EACH
ALLOWANCE CATEGORY ALLOWANCE CATEGORY ALLOWANCE CATEGORY ALLOWANCE CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
------- ---------- -------- ------- ---------- -------- ------- ---------- -------- ------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-fam-
ily.............. $ 2,278 10.21% 48.63% $ 2,176 9.32% 48.41% $ 2,677 10.65% 41.52% $ 2,801 11.43% 45.16%
Multi-family..... 2,820 12.64 7.60 3,036 13.00 8.92 2,824 11.24 5.05 2,938 11.99 7.28
Commercial real
estate........... 7,321 32.81 35.05 7,185 30.77 30.65 7,523 29.94 30.98 9,525 38.87 34.24
Construction and
development...... 4,276 19.16 7.09 3,872 16.58 10.21 4,426 17.61 15.22 2,533 10.34 4.37
Home equity and
second mortgage
loans............ 40 0.18 1.07 35 0.15 0.90 31 0.13 1.18 32 0.13 1.77
Consumer and
student.......... 33 0.15 0.56 34 0.15 0.91 35 0.14 6.05 38 0.16 7.18
Unallocated...... 5,544 24.85 -- 7,012 30.03 -- 7,611 30.29 -- 6,635 27.08 --
------- ------ ------ ------- ------ ------ ------- ------ ------ ------- ------ ------
Total allowance
for possible
loan
losses.......... $22,312 100.00% 100.00% $23,350 100.00% 100.00% $25,127 100.00% 100.00% $24,502 100.00% 100.00%
======= ====== ====== ======= ====== ====== ======= ====== ====== ======= ====== ======
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------------
1992 1991
--------------------------- ---------------------------
PERCENT PERCENT
OF LOANS OF LOANS
PERCENT OF IN EACH PERCENT OF IN EACH
ALLOWANCE CATEGORY ALLOWANCE CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
------- ---------- -------- ------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
One- to four-fam-
ily.............. $ 3,121 13.46% 48.92% $ 3,289 16.70% 55.87%
Multi-family..... 3,172 13.68 7.29 2,097 10.64 6.42
Commercial real
estate........... 10,014 43.19 30.53 7,821 39.70 24.83
Construction and
development...... 2,333 10.06 5.15 4,102 20.83 5.87
Home equity and
second mortgage
loans............ 31 0.13 1.39 39 0.20 1.28
Consumer and
student.......... 43 0.18 6.72 46 0.23 5.73
Unallocated...... 4,473 19.30 -- 2,304 11.70 --
------- ------ ------ ------- ------ ------
Total allowance
for possible
loan
losses.......... $23,187 100.00% 100.00% $19,698 100.00% 100.00%
======= ====== ====== ======= ====== ======
</TABLE>
79
<PAGE>
ENVIRONMENTAL ISSUES
The Bank encounters certain environmental risks in its lending activities.
Under federal and state environmental laws, lenders may become liable for
costs of cleaning up hazardous materials found on property securing their
loans. In addition, the existence of hazardous materials may make it
unattractive for a lender to foreclose on such properties. Although
environmental risks are usually associated with loans secured by commercial
real estate, risks also may be substantial for loans secured by residential
real estate if environmental contamination makes security property unsuitable
for use. This could also have a negative effect on nearby property values. The
Bank attempts to control its risk by requiring a phase one environmental
assessment be completed as part of its underwriting review for all non-
residential mortgage applications. In addition, the Bank's policy is to
maintain ownership of specific real estate properties acquired by the Bank as
a result of foreclosure in separately incorporated subsidiaries.
The Bank believes its procedures regarding the assessment of environmental
risk are adequate and, as of May 31, 1996, the Bank was unaware of any
environmental issues which would subject it to any material liability at this
time. However, no assurance can be given that the values of properties
securing loans in the Bank's portfolio will not be adversely affected by
unforeseen environmental risks.
SECURITIES INVESTMENT ACTIVITIES
The Board of Trustees sets the securities investment policy of the Bank.
This policy dictates that investment decisions will be made based on the
safety of the investment, liquidity requirements of the Bank and potential
return on the investments. In pursuing these objectives, the Bank considers
the ability of an investment to provide earnings consistent with factors of
quality, maturity, marketability and risk diversification. The Board of
Trustees has established an Investment Committee comprised of three Trustees
and the Investment Officer to supervise the Bank's securities investment
program. The Bank's Investment Committee meets quarterly and evaluates all
investment activities for safety and soundness, evaluates investment policy
and objectives for the next quarterly period and submits a report to the Board
of Trustees. The Bank's Investment Officer is responsible for making
securities investment portfolio decisions in accordance with the Bank's
policies. While the Investment Officer has the authority to conduct trades
within specific guidelines established by the Bank's investment policy, all
transactions are reviewed by the Investment Committee on a quarterly basis and
reported to the Board of Trustees on a monthly basis.
The Bank's current policies generally limit securities investments to U.S.
Government and agency securities, municipal bonds and corporate debt
obligations and corporate equities. In addition, the Bank's policies permit
investments in mortgage-backed and mortgage related securities, including
securities issued and guaranteed by FNMA, FHLMC, GNMA and privately-issued
CMOs. The Bank's current securities investment strategy is to deemphasize its
investment in U.S. government obligations, corporate debt and municipal bonds
and to emphasize the purchase of mortgage-backed and mortgage related
securities and preferred stock issued by corporate issuers in order to
increase its overall investment securities yield while remaining in short- and
medium-term investments for purposes of interest rate risk management.
At May 31, 1996, the Bank had $1.27 billion in securities, consisting
primarily of U.S. Government and agency obligations, mortgage-backed and
mortgage related securities, municipal, public utility and corporate
obligations, and preferred and common stocks. SFAS No. 115 requires the Bank
to designate its securities as held-to-maturity, available-for-sale or trading
depending on the Bank's intent regarding its investments. The Bank does not
currently maintain a trading portfolio of securities. In accordance with the
Special Report of the FASB regarding SFAS No. 115, in November 1995, the Bank
reclassified $415.3 million of debt securities and $233.4 million of mortgage-
backed and mortgage related securities from held-to-maturity to available-for-
sale. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Comparison of Financial Condition at December 31, 1995
and December 31, 1994." As of May 31, 1996, $951.3 million of the Bank's
securities portfolio, or 53.7% of total assets was classified as available-
for-sale, with an average life of the portfolio of 3.6 years. At such date,
$314.2 million of the Bank's securities portfolio, or 17.7% of total assets,
80
<PAGE>
was classified as held-to-maturity, with a market value of $311.2 million and
an average life of the portfolio of 2.0 years. Since December 1995, the Bank
designates all newly-purchased securities as available-for-sale.
Mortgage-Backed and Mortgage Related Securities. The Bank purchases
mortgage-backed and mortgage related securities in order to: (i) generate
positive interest rate spreads with minimal administrative expense; (ii) lower
its credit risk as a result of the guarantees provided by FHLMC, FNMA, and
GNMA; (iii) utilize these securities as collateral for borrowings; and (iv)
increase the liquidity of the Bank. The Bank has primarily invested in
mortgage-backed and mortgage related securities issued or sponsored by FNMA,
FHLMC and GNMA and private issuers. The Bank also invests in CMOs issued or
sponsored by FNMA and FHLMC as well as private issuers. At May 31, 1996,
mortgage-backed and mortgage related securities totalled $831.6 million, or
46.9% of total assets and 49.0% of total interest earning assets, of which
$519.4 million was classified as available-for-sale and $312.2 million was
classified as held-to-maturity. At May 31, 1996, 14.3% of the mortgage-backed
and mortgage related securities were adjustable-rate and 85.7% were fixed-
rate. The mortgage-backed and mortgage related securities portfolio had coupon
rates ranging from 5.0% to 13.5% and had a weighted average yield of 6.77% at
May 31, 1996. The estimated fair value of the Bank's mortgage-backed
securities available-for-sale at May 31, 1996, was $519.4 million, which is
$7.7 million less than the amortized cost of $527.1 million.
Mortgage-backed securities are created by the pooling of mortgages and
issuance of a security with an interest rate which is less than the interest
rate on the underlying mortgage. Mortgage-backed securities typically
represent a participation interest in a pool of single-family or multi-family
mortgages, although the Bank focuses its investments on mortgage-backed
securities backed by single-family mortgages. The issuers of such securities
(generally U.S. Government agencies and government sponsored enterprises,
including FNMA, FHLMC and GNMA) pool and resell the participation interests in
the form of securities to investors such as the Bank and guarantee the payment
of principal and interest to investors. Mortgage-backed securities generally
yield less than the loans that underlie such securities because of the cost of
payment guarantees and credit enhancements. In addition, mortgage-backed
securities are usually more liquid than individual mortgage loans and may be
used to collateralize certain liabilities and obligations of the Bank.
Investments in mortgage-backed securities involve a risk that actual
prepayments will be greater than estimated prepayments over the life of the
security, which may require adjustments to the amortization of any premium or
accretion of any discount relating to such instruments thereby reducing the
net yield on such securities. There is also reinvestment risk associated with
the cash flows from such securities or in the event such securities are
redeemed by the issuer. In addition, the market value of such securities may
be adversely affected by changes in interest rates. The Bank estimates
prepayments for its mortgage-backed securities at purchase to ensure that
prepayment assumptions are reasonable considering the underlying collateral
for the mortgage-backed securities at issue and current mortgage interest
rates and to determine the yield and estimated maturity of its mortgage-backed
security portfolio. Of the Bank's $831.6 million mortgaged-backed securities
portfolio at May 31, 1996, $67.3 million with a weighted average yield of
5.68% had contractual maturities within five years and $764.3 million with a
weighted average yield of 6.86% had contractual maturities over five years.
However, the actual maturity of a mortgage-backed security may be less than
its stated maturity due to prepayments of the underlying mortgages.
Prepayments that are faster than anticipated may shorten the life of the
security and may result in a loss of any premiums paid and thereby reduce the
net yield on such securities. Although prepayments of underlying mortgages
depend on many factors, the difference between the interest rates on the
underlying mortgages and the prevailing mortgage interest rates generally is
the most significant determinant of the rate of prepayments. During periods of
declining mortgage interest rates, refinancing generally increases and
accelerates the prepayment of the underlying mortgages and the related
security. Under such circumstances, the Bank may be subject to reinvestment
risk because, to the extent that the Bank's mortgage-backed securities prepay
faster than anticipated, the Bank may not be able to reinvest the proceeds of
such repayments and prepayments at a comparable rate.
At May 31, 1996, the Bank's CMO portfolio totalled $541.5 million, or 30.6%,
of total assets and 31.9% of total interest earning assets, consisting of
$377.2 million of CMOs issued by private issuers such as GE Capital Mortgage
Services, Inc., Prudential Home Mortgage Securities, Inc., Residential Funding
Mortgage Securities,
81
<PAGE>
Inc. and Citicorp Mortgage Securities, Inc., and $164.3 million issued by
government sponsored agencies such as FNMA and FHLMC. It is the policy of the
Bank to limit its privately issued CMOs to non-high risk securities rated
"AAA" by two credit rating agencies with an average life of seven years or
less. The Bank also limits the amount of such investments to $25 million per
transaction, 10% of the issuer's outstanding CMOs and 35% of the Bank's
assets. For government sponsored CMOs, the Bank's policy limits such
investments to non-high risk securities that have an average life of ten years
or less. The Bank also limits the amount of such investments to $50 million
per transaction. The Bank monitors the credit rating of its CMOs on a regular
basis. The current securities investment policy of the Bank prohibits the
purchase of higher risk CMOs, which are defined as those securities exhibiting
significantly greater volatility of estimated average life and price relative
to interest rates than do standard 30-year fixed rate securities. At May 31,
1996, $229.2 million of the Bank's CMO portfolio was classified as available-
for-sale and $312.2 million was classified as held-to-maturity with a market
value of $309.1 million. At such date, the Bank's CMO portfolio had an average
estimated life of 2.5 years and an average weighted yield of 6.69%.
CMOs are a type of debt security issued by a special purpose entity that
aggregates pools of mortgages and mortgage-backed securities and creates
different classes of CMO securities with varying maturities and amortization
schedules as well as a residual interest with each class possessing different
risk characteristics. The cash flows from the underlying collateral is
generally divided into "tranches" or classes whereby tranches have descending
priorities with respect to the distribution of principal and interest
repayment of the underlying mortgages and mortgage-backed securities as
opposed to pass through mortgage-backed securities where cash flows are
distributed pro rata to all security holders. In contrast to mortgage-backed
securities from which cash flow is received (and hence, prepayment risk is
shared) pro rata by all securities holders, the cash flow from the mortgages
or mortgage-backed securities underlying CMOs is paid in accordance with a
predetermined priority to investors holding various tranches of such
securities or obligations. A particular tranche of CMOs may therefore carry
prepayment risk that differs from that of both the underlying collateral and
other tranches. Accordingly, CMOs attempt to moderate risks associated with
conventional mortgage-backed securities resulting from unexpected prepayment
activity. Investments in CMOs involve a risk that actual prepayments will
differ from those estimated in pricing the security, which may result in
adjustments to the net yield on such securities. Additionally, the market
value of such securities may be adversely affected by changes in the market
interest rates. Management believes these securities may represent attractive
alternatives relative to other investments due to the wide variety of
maturity, repayment and interest rate options available.
Debt Securities. The Bank's investment in debt securities generally consists
of investments in U.S. Treasury securities and debt securities issued by
government sponsored agencies such as FNMA, GNMA and FHLMC. To a lesser
extent, the Bank invests in debt securities and commercial paper issued by
industrial and financial companies and obligations of municipalities and
public utilities.
U.S. Government and Agency Obligations. At May 31, 1996, the Bank's U.S.
Government securities portfolio totalled $188.8 million, all of which were
classified as available-for-sale. Such portfolio primarily consists of short-
to medium-term (maturities of one to five years) securities. The Bank's
current investment practice, however, is to deemphasize its investments in
such instruments. At May 31, 1996, the Bank's agency securities portfolio
totalled $86.9 million, all of which was classified as available-for-sale and
consisted of agency structured notes and callable debentures. The agency
structured notes generally provide for predetermined interest rate adjustments
("step-ups") primarily consisting of annual interest rate increases of 25 to
255 basis points. While such step-up structured notes generally do not involve
credit risk, such securities involves interest rate risk in the event market
interest rates increase at a rate faster than the structured rate adjustment,
which, in turn, may adversely affect the market value of such investment. The
Bank's callable agency debentures generally are callable on either a quarterly
or semi-annual basis following a holding period of three to six months. The
current policy of the Bank limits the purchase of agency debt obligations to a
maturity of thirty years or less and limits such purchases to $50 million per
transaction, although purchases of structured notes are limited to $20 million
per transaction and 10% of the Bank's assets.
82
<PAGE>
Corporate Bonds. The Bank's corporate bond portfolio, which at May 31, 1996,
totalled $17.4 million, all of which is classified as available-for-sale, was
composed primarily of short- and medium-term, floating-rate investment grade
issues of General Motors Corporation, U.S. West, Citicorp, Massachusetts
Electric Co. and Phillip Morris, Inc. as well as $2.8 million in public
utility bonds. At May 31, 1996, the portfolio had an average life of
approximately 2 years and an average coupon rate of 7.7%. The Bank's policy
limits investments in corporate bonds with maturities of ten years or less to
bonds rated "A" or better by at least one nationally recognized rating agency
and to a total investment of 25% of the Bank's assets, with a 1% limitation of
a single issuer. The Bank's policy limits investments in corporate bonds with
maturities between ten years and thirty years to bonds rated "A" or better by
at least one nationally recognized rating agency and a total investment of no
more than 33% of the Bank's current total corporate investments. Consistent
with the Bank's current securities investment strategy, the Bank intends to
deemphasize investments in corporate debt obligations.
Municipal Bonds. The Bank's municipal bond portfolio, which at May 31, 1996
was comprised of 12 bonds which totalled $1.9 million, had an estimated fair
value of $2.1 million. All of such securities were classified as held-to-
maturity and were comprised of general obligation bonds (i.e., obligations
backed by the general credit of the issuer). All of the Bank's municipal bonds
are currently rated "AAA." At such date the average life of the portfolio was
approximately 3.3 years and the portfolio had an average coupon rate of 7.4%.
Interest earned on municipal bonds is exempt from federal, state and local
income taxes. The Bank's current policy is to deemphasize its investment in
municipal bonds.
Equity Securities. At May 31, 1996, the Bank's equity securities portfolio
totalled $138.8 million, all of which were classified as available-for-sale.
Such portfolio consisted of $133.2 million of preferred stock issued by
corporate issuers such as Ford Motor Co., McDonald's and other nationally
recognized companies and $5.0 million of common stock issued by FHLMC. The
substantial majority of the Bank's preferred stock portfolio is redeemable by
the issuers pursuant to the terms of the preferred stock, generally after a
three to five year holding period. As of May 31, 1996, the Bank had $68.4
million of preferred stock eligible for redemption on or before December 31,
1997. The Bank benefits from its investment in common and preferred stocks due
to a tax deduction the Bank receives with regard to dividends paid by
corporate issuers on equity securities held by other corporate entities such
as the Bank. Accordingly, on an after tax basis, the yield on the Bank's
preferred stock portfolio was 9.89%. At May 31, 1996, the Bank also had a
$600,000 investment in Institutional Investors Mutual Fund, a common stock
mutual fund. The Bank's policy limit for its common and preferred stock
investments is 7.50% of its total assets and allows only for the purchase of
common stock with a 1% limitation on the purchase of any single issuer and a
total investment of 5% of the Bank's total assets. The Bank's current policies
permit the purchase of preferred stock rated "Baa" or better, with a 1%
limitation on the purchase of preferred stock of any single issuer. See
"Regulation and Supervision--FDIC Regulations."
83
<PAGE>
The following table sets forth the composition of the Bank's debt and equity
and mortgage-backed and mortgage related securities portfolios in dollar
amounts and in percentages at the dates indicated:
<TABLE>
<CAPTION>
AT MAY 31, AT DECEMBER 31,
------------------- ----------------------------------------------------------
1996 1995 1994 1993
------------------- ------------------- ------------------- ------------------
PERCENT PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
---------- -------- ---------- -------- ---------- -------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Debt securities:
U.S. Government obliga-
tions................. $ 188,847 14.92% $ 204,626 17.92% $ 333,234 32.73% $ 375,357 37.67%
Agency securities...... 86,856 6.86 34,744 3.04 34,996 3.44 39,995 4.01
Municipal bonds........ 1,930 0.15 1,930 0.17 2,715 0.27 3,235 0.33
Corporate obligations.. 14,678 1.16 18,384 1.61 75,680 7.43 78,075 7.83
Other debt obliga-
tions(1).............. 2,770 0.22 2,799 0.25 19,579 1.92 34,140 3.43
---------- ------ ---------- ------ ---------- ------ --------- ------
Total debt securi-
ties................. 295,081 23.31 262,483 22.99 466,204 45.79 530,802 53.27
---------- ------ ---------- ------ ---------- ------ --------- ------
Equity securities:
Preferred stock........ 133,212 10.53 113,768 9.96 86,305 8.48 65,581 6.58
Common stock........... 5,569 0.44 5,010 0.44 3,482 0.34 717 0.07
---------- ------ ---------- ------ ---------- ------ --------- ------
Total equity securi-
ties................. 138,781 10.97 118,778 10.40 89,787 8.82 66,298 6.65
---------- ------ ---------- ------ ---------- ------ --------- ------
Mortgage-backed and
mortgage related secu-
rities:
FHLMC.................. 141,861 11.21 116,267 10.18 86,044 8.45 86,013 8.63
GNMA................... 141,385 11.17 113,616 9.95 36,185 3.56 41,588 4.17
FNMA................... 6,925 0.55 27,299 2.39 45,580 4.48 -- --
CMOs................... 541,461 42.79 503,516 44.09 294,243 28.90 271,816 27.28
---------- ------ ---------- ------ ---------- ------ --------- ------
Total mortgage-backed
and mortgage related
securities........... 831,632 65.72 760,698 66.61 462,052 45.39 399,417 40.08
---------- ------ ---------- ------ ---------- ------ --------- ------
Total securities..... $1,265,494 100.00% $1,141,959 100.00% $1,018,043 100.00% $ 996,517 100.00%
========== ====== ========== ====== ========== ====== ========= ======
Debt and equity
securities available-
for-sale............... $ 431,932 34.13% $ 379,331 33.22% $ 89,787 8.82% $ -- --%
Debt and equity
securities held-to-
maturity............... 1,930 0.15 1,930 0.17 466,204 45.79 597,100 59.92
---------- ------ ---------- ------ ---------- ------ --------- ------
Total debt and equity
securities........... 433,862 34.28 381,261 33.39 555,991 54.61 597,100 59.92
---------- ------ ---------- ------ ---------- ------ --------- ------
Mortgage-backed and
mortgage related
securities available-
for-sale............... 519,399 41.05 413,485 36.20 50,711 4.98 -- --
Mortgage-backed and
mortgage related
securities held-to-
maturity............... 312,233 24.67 347,213 30.41 411,341 40.41 399,417 40.08
---------- ------ ---------- ------ ---------- ------ --------- ------
Total mortgage-backed
and mortgage related
securities........... 831,632 65.72 760,698 66.61 462,052 45.39 399,417 40.08
---------- ------ ---------- ------ ---------- ------ --------- ------
Total securities...... $1,265,494 100.00% $1,141,959 100.00% $1,018,043 100.00% $ 996,517 100.00%
========== ====== ========== ====== ========== ====== ========= ======
</TABLE>
- --------
(1) Includes public utility, Canadian and industrial bonds.
84
<PAGE>
The following table sets forth the Bank's securities activities for the
periods indicated:
<TABLE>
<CAPTION>
FOR THE FIVE MONTHS FOR THE YEAR
ENDED MAY 31, ENDED DECEMBER 31,
---------------------- ---------------------------------
1996 1995 1995 1994 1993
---------- ---------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BEGINNING BALANCE....... $1,141,959 $1,018,043 $1,018,043 $ 996,517 $ 921,042
---------- ---------- ---------- ---------- ---------
Debt securities pur-
chased--held-to-maturi-
ty..................... -- 88,018 176,308 24,807 174,422
Debt securities pur-
chased--available-for-
sale................... 92,384 -- 2,002 -- --
Equity securities pur-
chased--held-to-maturi-
ty..................... -- -- -- -- 38,878
Equity securities pur-
chased--available-for-
sale................... 34,849 10,745 32,957 37,470 --
Mortgage-backed and
mortgage related secu-
rities purchased--held-
to-maturity............ -- 60,878 240,702 109,433 246,373
Mortgage-backed and
mortgage related secu-
rities purchased--
available-for-sale..... 178,190 37,625 190,564 54,000 --
LESS:
Sale of debt securi-
ties--available-for-
sale................... -- -- 112,077 -- --
Sale of debt securi-
ties--held-to-maturity. -- 19,970 60,022 46,062 75,012
Sale of equity securi-
ties--available-for-
sale................... 12,180 687 11,077 5,164 --
Sale of equity securi-
ties--held-to-maturity. -- -- -- -- 10,693
Sale of mortgage-backed
and mortgage related
securities available-
for-sale............... 19,657 8,880 48,463 -- --
Principal repayments on
mortgage-backed and
mortgage related secu-
rities................. 75,905 23,138 91,987 100,381 223,002
Maturities of debt secu-
rities................. 52,393 34,913 218,757 44,542 78,058
Realized gains (losses)
received on sales of
mortgage-backed and
mortgage related
securities............. 28 85 904 -- --
Realized and unrealized
gains (losses) on debt
and equity securities.. (285) (843) (1,715) (1,181) 3,123
Accretion of
discount/Amortization
of (premium)........... 439 (632) (962) (2,076) (556)
Change in net unrealized
gains (losses) on
available-for-sale
securities............. (21,935) 10,717 25,539 (4,778) --
---------- ---------- ---------- ---------- ---------
ENDING BALANCE.......... $1,265,494 $1,137,048 $1,141,959 $1,018,043 $ 996,517
========== ========== ========== ========== =========
</TABLE>
85
<PAGE>
The following table sets forth certain information regarding the amortized
cost and market values of the Bank's debt and equity and mortgage-backed and
mortgage related securities, at the dates indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------------------------------------
AT MAY 31, 1996 1995 1994 1993(1)
---------------------- --------------------- --------------------- --------------------
AMORTIZED MARKET AMORTIZED MARKET AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE COST VALUE COST VALUE
---------- ---------- ---------- ---------- ---------- --------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Debt securities held-to-
maturity:
U.S. Government obliga-
tions................. $ -- $ -- $ -- $ -- $ 333,234 $ 326,163 $ 375,357 $ 394,872
Agency securities...... -- -- -- -- 34,996 33,539 39,995 40,480
Municipal bonds........ 1,930 2,086 1,930 2,151 2,715 2,867 3,235 3,586
Corporate obligations.. -- -- -- -- 75,680 73,343 78,075 80,015
Other debt obliga-
tions(2).............. -- -- -- -- 19,579 18,786 34,140 34,977
---------- ---------- ---------- ---------- ---------- --------- --------- ----------
Total debt securities
held-to-
maturity............. 1,930 2,086 1,930 2,151 466,204 454,698 530,802 553,930
---------- ---------- ---------- ---------- ---------- --------- --------- ----------
Debt securities avail-
able-for-sale:
U.S. Government obliga-
tions................. 185,658 188,847 195,701 204,626 -- -- -- --
Agency securities...... 88,556 86,856 34,764 34,744 -- -- -- --
Corporate obligations.. 14,409 14,678 17,838 18,384 -- -- -- --
Other debt obliga-
tions(3).............. 2,745 2,770 2,742 2,799 -- -- -- --
---------- ---------- ---------- ---------- ---------- --------- --------- ----------
Total debt securities
available-for-sale... 291,368 293,151 251,045 260,553 -- -- -- --
---------- ---------- ---------- ---------- ---------- --------- --------- ----------
Equity securities held-
to-maturity:
Preferred stock........ -- -- -- -- -- -- 65,581 67,513
Common stock........... -- -- -- -- -- -- 717 3,550
---------- ---------- ---------- ---------- ---------- --------- --------- ----------
Total equity
securities held-to-
maturity............. -- -- -- -- -- -- 66,298 71,063
---------- ---------- ---------- ---------- ---------- --------- --------- ----------
Equity securities avail-
able-for-sale:
Preferred stock........ 133,188 133,212 111,896 113,766 92,634 86,305 -- --
Common stock........... 860 5,569 259 5,012 717 3,482 -- --
---------- ---------- ---------- ---------- ---------- --------- --------- ----------
Total equity securi-
ties available-for-
sale................. 134,048 138,781 112,155 118,778 93,351 89,787 -- --
---------- ---------- ---------- ---------- ---------- --------- --------- ----------
Total debt and equity
securities........... 427,346 434,018 365,130 381,482 559,555 544,485 597,100 624,993
---------- ---------- ---------- ---------- ---------- --------- --------- ----------
Mortgage-backed and
mortgage related
securities:
Held-to-maturity:
FHLMC.................. -- -- -- -- 57,288 52,167 86,013 86,323
GNMA................... -- -- -- -- 28,319 29,043 41,588 44,881
FNMA................... -- -- -- -- 31,491 28,598 -- --
CMOs................... 312,233 309,068 347,213 348,799 294,243 284,662 271,816 274,734
---------- ---------- ---------- ---------- ---------- --------- --------- ----------
Total mortgage-backed
and mortgage related
securities held-to-
maturity............. 312,233 309,068 347,213 348,799 411,341 394,470 399,417 405,938
---------- ---------- ---------- ---------- ---------- --------- --------- ----------
Available-for-sale:
FHLMC.................. 146,761 141,861 116,100 116,267 29,351 28,756 -- --
GNMA................... 139,451 141,385 109,966 113,616 8,103 7,866 -- --
FNMA................... 7,197 6,925 27,689 27,299 14,471 14,089 -- --
CMOs................... 233,679 229,228 155,100 156,303 -- -- -- --
---------- ---------- ---------- ---------- ---------- --------- --------- ----------
Total mortgage-backed
and mortgage related
securities available-
for-sale............. 527,088 519,399 408,855 413,485 51,925 50,711 -- --
---------- ---------- ---------- ---------- ---------- --------- --------- ----------
Total mortgage-backed
and mortgage related
securities........... 839,321 828,467 756,068 762,284 463,266 445,181 399,417 405,938
---------- ---------- ---------- ---------- ---------- --------- --------- ----------
Net unrealized (losses)
gains on available-for-
sale securities........ (1,173) -- 20,761 -- (4,778) -- -- --
---------- ---------- ---------- ---------- ---------- --------- --------- ----------
Total securities........ $1,265,494 $1,262,485 $1,141,959 $1,143,766 $1,018,043 $ 989,666 $ 996,517 $1,030,931
========== ========== ========== ========== ========== ========= ========= ==========
</TABLE>
- --------
(1) The Bank adopted the provisions set forth in SFAS No. 115 on January 1,
1994, which requires entities to carry securities that are available-for-
sale at their market value.
(2) At May 31, 1996 and December 31, 1995, these securities include public
utilities. At December 1994, these securities consist of public utility
bonds and Canadian bonds and at December 1993, these securities include
public utility bonds, Canadian bonds and industrial bonds.
86
<PAGE>
The table below sets forth certain information regarding the carrying value,
weighted average yields and contractual maturities of the Bank's securities
portfolio as of May 31, 1996.
<TABLE>
<CAPTION>
AT MAY 31, 1996
-----------------------------------------------------------------------------------------------------
MORE THAN ONE MORE THAN FIVE MORE
ONE YEAR OR LESS YEAR TO FIVE YEARS YEARS TO TEN YEARS THAN TEN YEARS TOTAL
----------------- --------------------- --------------------- ----------------- -------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
-------- -------- ----------- --------- ----------- --------- -------- -------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Held-to-maturity:
Municipal bonds....... $ -- -- % $ 1,860 7.39% $ 70 7.71% $ -- -- % $ 1,930 7.40%
Mortgage-backed and
mortgage related
securities........... -- -- 9,515 5.72 28,432 6.36 274,286 6.86 312,233 6.78
------- ----------- ----------- -------- ----------
Total held-to-
maturity............. -- -- 11,375 5.99 28,502 6.37 274,286 6.86 314,163 6.78
------- ----------- ----------- -------- ----------
Available-for-sale:
Mortgage-backed and
mortgage related
securities:
FHLMC................ -- -- 46,519 5.68 -- -- 95,342 7.12 141,861 6.65
GNMA................. -- -- 948 5.64 3,316 8.76 137,120 7.18 141,385 7.23
FNMA................. -- -- 6,925 5.68 -- -- -- -- 6,925 5.68
CMOs................. -- -- 3,455 5.61 36,920 6.38 188,853 6.63 229,228 6.57
------- ----------- ----------- -------- ----------
Total mortgage-backed
and mortgage related
securities........... -- -- 57,847 5.67 40,236 6.58 421,315 6.92 519,399 6.76
------- ----------- ----------- -------- ----------
Debt Securities:
U.S. Government
obligations.......... 30,200 6.79 142,869 7.14 15,778 7.46 -- -- 188,847 7.11
Agency securities..... -- -- 23,700 6.26 63,156 6.61 -- -- 86,856 6.52
Corporate obligations. 1,005 7.65 12,423 8.02 1,250 6.50 -- -- 14,678 7.87
Other debt
obligations(1)....... 2,770 8.39 -- -- -- -- -- -- 2,770 8.39
------- ----------- ----------- -------- ----------
Total debt securities. 33,975 6.94 178,992 7.09 80,184 6.78 -- -- 293,151 6.98
------- ----------- ----------- -------- ----------
Equity Securities:
Preferred stock....... -- -- -- -- -- -- -- -- 133,212 7.20
Common stock.......... -- -- -- -- -- -- -- -- 5,569 29.04
------- ----------- ----------- -------- ----------
Total equity
securities........... -- -- -- -- -- -- -- -- 138,781 8.08
------- ----------- ----------- -------- ----------
Total available-for-
sale................. 33,975 6.94 236,839 6.74 120,420 6.71 421,315 6.92 951,331 7.02
------- ----------- ----------- -------- ----------
Total securities....... $33,975 $ 248,214 $ 148,922 $695,601 $1,265,494
======= =========== =========== ======== ==========
</TABLE>
- --------
(1) Other debt obligations consist of public utility bonds.
SOURCES OF FUNDS
General. Deposits, repayments and prepayments of loans and securities,
proceeds from sales of loans and securities, and proceeds from maturing
securities and cash flows from operations are the primary sources of the
Bank's funds for use in lending, investing and for other general purposes. To
a lesser extent, the Bank utilizes borrowed funds, primarily reverse-
repurchase agreements to fund its operations.
Deposits. The Bank offers a variety of deposit accounts with a range of
interest rates and terms. The Bank's deposit accounts consist of savings, NOW
accounts, checking accounts, money market accounts, school savings and club
accounts and certificates of deposit accounts. The Bank offers certificate of
deposit accounts
87
<PAGE>
with balances in excess of $100,000 at preferential rates (jumbo certificates)
and also offers Individual Retirement Accounts ("IRAs") and other qualified
plan accounts. To enhance the deposit products it offers and increase its
market share, in 1995, the Bank added commercial checking accounts for small-
to moderately-sized commercial businesses, a payroll accounts service with
direct deposit features, as well as a low-cost checking account service for
low-income customers.
At May 31, 1996, the Bank's deposits totalled $1.44 billion or 97.2% of
interest-bearing liabilities. For the five months ended May 31, 1996, the
average balance of core deposits (savings, NOW, money market and non-interest-
bearing checking accounts) totalled $580 million, or 41.8% of total average
deposits. At May 31, 1996, the Bank had a total of $871.9 million in
certificates of deposit, of which $688.2 million had maturities of one year or
less reflecting the shift in deposit accounts from savings accounts to
shorter-term certificate accounts that has occurred in recent years. For the
year ended December 31, 1993, the average balance of core deposits represented
approximately 65.1% of total deposits and certificate accounts represented
34.9%, as compared to core deposits representing 41.8% of total deposits and
certificate accounts representing 58.2% of deposits for the five months ended
May 31, 1996. See "Risk Factors--Sensitivity to Increases in Interest Rates."
Although the Bank has a significant portion of its deposits in shorter term
certificates of deposit, management monitors activity on the Bank's
certificate of deposit accounts and, based on historical experience and the
Bank's current pricing strategy, believes it will retain a large portion of
such accounts upon maturity.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market rates, prevailing interest rates and
competition. The Bank's deposits are obtained predominantly from the areas in
which its branch offices are located. The Bank relies primarily on competitive
pricing of its deposit products and customer service and long-standing
relationships with customers to attract and retain these deposits; however,
market interest rates and rates offered by competing financial institutions
significantly affect the Bank's ability to attract and retain deposits. In
addition, the Bank has historically paid a special interest payment on savings
and NOW accounts, ranging from 10% to 25% of interest paid on the savings
accounts during the year. For the year ended December 31, 1995, the Bank paid
a special interest payment of 25% of interest paid on savings and NOW
accounts, which totalled $3.0 million. While it is the present intention of
the Bank to pay a special interest payment on savings and NOW accounts for the
year ended December 31, 1996, the Bank has made no decision as to the amount
of such special interest payment or whether such special payments will
continue after 1996. The Bank uses traditional means of advertising its
deposit products, including radio and print media and generally does not
solicit deposits from outside its market area. While certificate accounts in
excess of $100,000 are accepted by the Bank, and may be subject to
preferential rates, the Bank does not actively solicit such deposits as such
deposits are more difficult to retain than core deposits. Although the Bank
has historically not used brokers to obtain deposits, the Bank has authorized
the utilization of brokers to obtain deposits to fund its activities and has
recently entered into a relationship with a nationally recognized retail
brokerage firm to accept deposits sold by such brokerage firm. The Bank
intends to use such brokered deposits to fund investments in securities with
durations which match the maturities of such brokered deposits. The Bank's
policies limit the amount of brokered deposits which the Bank may have at any
time to 10% of total retail deposits. At May 31, 1996, the Bank had no
brokered deposits.
The following table presents the deposit activity of the Bank for the
periods indicated.
<TABLE>
<CAPTION>
FOR THE FIVE
MONTHS
ENDED MAY 31, FOR THE YEAR ENDED DECEMBER 31,
---------------- -------------------------------
1996 1995 1995 1994 1993
-------- ------- ---------- --------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net deposits (withdrawals)... $ 84,030 $23,901 $ 58,840 $ 37,903 $ (32,610)
Interest credited on deposit
accounts.................... 22,265 18,414 57,192 40,050 39,632
-------- ------- ---------- --------- ----------
Total increase in deposit ac-
counts...................... $106,295 $42,315 $ 116,032 $ 77,953 $ 7,022
======== ======= ========== ========= ==========
</TABLE>
88
<PAGE>
At May 31, 1996, the Bank had outstanding $140.7 million in certificate of
deposit accounts in amounts of $100,000 or more, maturing as follows:
<TABLE>
<CAPTION>
WEIGHTED
MATURITY PERIOD AMOUNT AVERAGE RATE
- --------------- ------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Three months or less............................... $ 53,426 5.39%
Over three through six months...................... 27,764 5.34
Over six through 12 months......................... 33,846 5.59
Over 12 months..................................... 25,631 6.40
-------------
Total.............................................. $ 140,667 5.61%
=============
</TABLE>
The following table sets forth the distribution of the Bank's average
deposit accounts for the periods indicated and the weighted average interest
rates on each category of deposits presented. Averages for the periods
presented utilize average daily balances.
<TABLE>
<CAPTION>
FOR THE FIVE MONTHS
ENDED MAY 31, FOR THE YEAR ENDED DECEMBER 31,
---------------------------- ------------------------------------
1996 1995
---------------------------- ------------------------------------
PERCENT PERCENT
OF TOTAL WEIGHTED OF TOTAL WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE
---------- -------- -------- ------------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Money market accounts... $ 64,051 4.62% 2.88% $ 69,237 5.41% 2.90%
Savings accounts(1)..... 445,015 32.09 3.21 473,682 36.99 3.21
NOW accounts(2)......... 35,163 2.54 2.55 33,135 2.59 2.53
Non-interest-bearing ac-
counts................. 35,908 2.59 -- 26,901 2.10 --
---------- ------ ------------- ---------
Total................... 580,137 41.84 2.96 602,955 47.09 2.99
---------- ------ ------------- ---------
Certificates of deposit:
Less than six months.... 153,775 11.09 5.10 119,414 9.33 5.28
Over six through 12
months................. 292,008 21.05 5.52 238,283 18.60 5.76
Over 12 through 24
months................. 82,252 5.93 5.73 74,302 5.80 5.62
Over 24 months.......... 149,357 10.77 6.45 147,580 11.53 6.51
Certificates over
$100,000............... 129,192 9.32 5.66 97,931 7.65 5.90
---------- ------ ------------- ---------
Total certificates of
deposit.............. 806,584 58.16 5.66 677,510 52.91 5.84
---------- ------ ------------- ---------
Total average depos-
its................ $1,386,721 100.00% 4.53 $ 1,280,465 100.00% 4.50
========== ====== ============= =========
</TABLE>
89
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1994 1993
---------------------------- ----------------------------
PERCENT PERCENT
OF TOTAL WEIGHTED OF TOTAL WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE
---------- -------- -------- ---------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Money market accounts... $ 83,482 7.12% 2.43% $ 91,606 8.08% 2.45%
Savings accounts(1)..... 605,797 51.65 2.93 597,191 52.67 3.26
NOW accounts(2)......... 33,248 2.83 2.47 30,012 2.65 2.85
Non-interest-bearing ac-
counts................. 20,357 1.74 -- 18,948 1.67 --
---------- ------ ---------- ------
Total................... 742,884 63.34 2.77 737,757 65.07 3.06
---------- ------ ---------- ------
Certificates of deposit:
Less than six months.... 98,683 8.41 3.29 119,432 10.53 3.04
Over six through 12
months................. 102,913 8.77 3.61 99,757 8.80 3.54
Over 12 through 24
months................. 48,424 4.13 4.48 37,153 3.28 4.26
Over 24 months.......... 121,376 10.35 6.52 88,214 7.78 6.88
Certificates over
$100,000............... 58,626 5.00 4.45 51,484 4.54 3.95
---------- ------ ---------- ------
Total certificates of
deposit.............. 430,022 36.66 4.57 396,040 34.93 4.25
---------- ------ ---------- ------
Total average depos-
its................ $1,172,906 100.00% 3.43 $1,133,797 100.00% 3.48
========== ====== ========== ======
</TABLE>
- --------
(1) Reflects special interest payment made by the Bank on such accounts which
for the five month period ended May 31, 1996 and years ended December 31,
1995, 1994 and 1993, which resulted in an increased cost of such accounts
of 63 basis points, 61 basis points, 46 basis points and 52 basis points,
respectively.
(2) Reflects special interest payment made by the Bank on such accounts which
for the five month period ended May 31, 1996 and years ended December 31,
1995, 1994 and 1993, which resulted in an increased cost of such accounts
of 50 basis points, 49 basis points, 39 basis points and 44 basis points,
respectively.
The following table presents, by various rate categories, the amount of
certificate of deposit accounts outstanding at the dates indicated.
<TABLE>
<CAPTION>
PERIOD TO MATURITY FROM MAY 31, 1996 AT DECEMBER 31,
------------------------------------------------ --------------------------
LESS THREE FOUR FIVE
THAN ONE TO TWO TO TO TO YEARS AT
ONE TWO THREE FOUR FIVE OR MAY 31,
YEAR YEARS YEARS YEARS YEARS MORE 1996 1995 1994 1993
-------- ------- ------- ------- ------- ------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Certificates
of deposit:
0 to 4.00%.............. $ 475 $ -- $ 56 $ 2 $ -- $ 39 $ 572 $ 3,720 $108,015 $253,446
4.01 to 5.00%........... 65,792 1,108 1,133 -- -- -- 68,033 18,094 131,208 37,947
5.01 to 6.00%........... 563,758 54,971 23,332 728 7,466 1,696 651,951 464,858 142,642 31,834
6.01 to 7.00%........... 47,439 3,804 2,104 47,633 12,474 8,485 121,939 225,343 97,811 26,028
7.01 to 8.00%........... 4,116 8 28 3,552 678 1,642 10,024 12,762 13,621 14,765
8.01 to 9.00%........... 2,309 1,634 825 4,867 5,319 39 14,993 14,704 14,500 15,521
Over 9.01%.............. 4,355 -- -- 6 3 -- 4,364 10,294 9,640 8,951
-------- ------- ------- ------- ------- ------- -------- -------- -------- --------
Total.................. $688,244 $61,525 $27,478 $56,788 $25,940 $11,901 $871,876 $749,775 $517,437 $388,492
======== ======= ======= ======= ======= ======= ======== ======== ======== ========
</TABLE>
Borrowed Funds. At May 31, 1996, the Bank had $69.6 million of borrowed
funds which primarily consisted of outstanding reverse-repurchase agreements
entered into with nationally recognized securities brokerage firms. Reverse-
repurchase agreements are contracts for the sale of securities owned or
borrowed by the Bank with an agreement to repurchase those securities at an
agreed upon price and date. Historically, the Bank has entered into reverse-
repurchase agreements as a method of providing the Bank with cost effective
funding in periods where its needs for funds exceeded the amount of funds
provided by its deposit gathering activities. Currently, the Bank utilizes
such reverse-repurchase agreements in periods when the Bank can
90
<PAGE>
generate securities investments with yields in excess of its cost of such
borrowing. The Bank's policies limit the Bank's use of reverse-repurchase
agreements to maturities of overnight to five years, with collateral
consisting of U.S. Treasury obligations, U.S. agency obligations or GNMAs.
Securities brokers utilized by the Bank in these agreements must have a
minimum of $100 million of "net" excess capital with a Public Securities
Association Master repurchase agreement on file. There were no reverse-
repurchase agreements outstanding as of December 31, 1995, although the Bank
averaged approximately $22.3 million pursuant to such agreements during the
year ended December 31, 1995. At May 31, 1996, $2.5 million of RFI's mortgage
loans were pledged to secure notes payable to FNMA under a warehouse line of
credit known as the FNMA "As Soon As Pooled Plus Program." These notes are
repaid as the related mortgage loans are sold or collected.
The following table sets forth certain information regarding borrowed funds
for the dates indicated:
<TABLE>
<CAPTION>
FOR THE FIVE MONTHS FOR THE YEAR ENDED
ENDED MAY 31, DECEMBER 31,
-------------------- ----------------------
1996 1995 1995 1994 1993
--------- --------- ------- ----- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
FNMA warehouse line of credit:
Average Balance Outstanding.... $ 3,532 $ -- $ 2,053 $ -- $ --
Maximum amount outstanding at
any month end during the peri-
od............................ 2,455 -- 5,734 -- --
Balance outstanding at end of
period........................ 2,455 -- 1,647 -- --
Weighted average interest rate
during the period............. 5.71% -- 6.04% -- --
Weighted average interest rate
at end of period.............. 6.43% -- 6.84% -- --
Reverse repurchase agreements:
Average Balance Outstanding.... $ 37,509 $ 26,276 $22,292 $ -- $ 5,527
Maximum amount outstanding at
any month end during the peri-
od............................ 68,392 40,700 40,850 -- 40,030
Balance outstanding at end of
period........................ 67,143 40,700 -- -- --
Weighted average interest rate
during the period............. 5.41% 6.39% 6.42% -- 3.29%
Weighted average interest rate
at end of period.............. 5.36% 6.37% -- -- --
Total borrowed funds:
Average Balance Outstanding.... $ 41,041 $ 26,276 $24,345 $ -- $ 5,527
Maximum amount outstanding at
any month end during the peri-
od............................ 70,847 40,700 46,584 -- 40,030
Balance outstanding at end of
period........................ 69,598 40,700 1,647 -- --
Weighted average interest rate
during the period............. 5.44% 6.39% 6.38% -- 3.29%
Weighted average interest rate
at end of period.............. 5.44% 6.37% 6.84% -- --
</TABLE>
SAVINGS BANK LIFE INSURANCE
The Bank, through its Savings Bank Life Insurance ("SBLI") department,
engages in group life insurance coverage per individual under SBLI's Financial
Institution Group Life Insurance policy. The SBLI Department's activities are
segregated from the Bank and, while they do not directly affect the Bank's
earnings, management believes that offering SBLI is beneficial to the Bank's
relationship with its depositors and the general public. The SBLI Department
pays its own expenses and reimburses the Bank for expenses incurred on its
behalf.
SUBSIDIARY ACTIVITIES
Residential First, Inc. RFI is the Bank's wholly owned mortgage banking
subsidiary which was established in August 1995 for the origination, sale and
servicing of one- to four-family loans. RFI was formed in connection with the
Bank's acquisition of certain assets and liabilities of Residential Mortgage
Banking, Inc., a mortgage banking entity operating in the New York and New
Jersey counties in and surrounding the New York City metropolitan area and
Albany, New York. The consideration paid for the assets and liabilities of
RMBI,
91
<PAGE>
including a $623.0 million loan servicing portfolio, exceeded the estimated
fair market value of the net assets acquired by approximately $3.5 million,
which was recorded by RFI as goodwill and is being amortized on a straight
line basis over a ten year period. RFI is operated under the direction of its
executive officers who are two of the co-founders of RMBI and who are overseen
by RFI's Board of Directors which consists of certain members of the Board of
Trustees of the Bank and the President and Executive Vice President of RFI. In
addition to being authorized to operate as a mortgage banking company in New
York and New Jersey, RFI is authorized to conduct mortgage banking activities
in Connecticut. For a discussion of RFI's activities, see "--Lending
Activities--Loan Sale, Servicing and Mortgage Banking Activities."
RSB Agency, Inc. RSB Agency, Inc., a wholly-owned subsidiary of the Bank
incorporated in 1983, previously engaged in the sale of life insurance. RSB
Agency, Inc. is currently inactive except for its collection of commissions
for previously-issued life insurance policies.
Other Subsidiaries. The Bank has five other wholly-owned subsidiaries.
Blizzard Realty Corp., 1400 Corp. and BSR 1400 Corp. are periodically used to
hold real estate owned. Residential Mortgage Banking, Inc. was established to
preserve the name thereof for future use. Old Northern Co. Ltd. currently is
an inactive subsidiary.
COMPETITION
The Bank faces significant competition both in making loans and in
attracting deposits. The New York City metropolitan area has a high density of
financial institutions, many of which are branches of significantly larger
institutions which have greater financial resources than the Bank, and all of
which are competitors of the Bank to varying degrees. The Bank's competition
for loans comes principally from savings banks, commercial banks, savings and
loan associations, mortgage banking companies, credit unions and insurance
companies and other financial service companies. Its most direct competition
for deposits has historically come from savings and loan associations, savings
banks, commercial banks and credit unions. The Bank faces additional
competition for deposits from non-depository competitors such as the mutual
fund industry, securities and brokerage firms and insurance companies.
Competition may also increase as a result of the lifting of restrictions on
the interstate operations of financial institutions.
PROPERTIES
The Bank currently conducts its business through six full service banking
offices. In addition, RFI conducts its business through the Bank's banking
offices as well as six mortgage origination offices. The following table sets
forth the Bank's and RFI's offices as of May 31, 1996 and does not include the
two branch office facilities which the Bank plans to acquire subsequent to
such date, which are expected to open in November 1996.
<TABLE>
<CAPTION>
NET BOOK VALUE
ORIGINAL OF PROPERTY OR
YEAR DATE OF LEASEHOLD
LEASED OR LEASED OR LEASE IMPROVEMENTS AT
LOCATION OWNED ACQUIRED EXPIRATION MAY 31, 1996
- -------- --------- --------- -------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ADMINISTRATIVE/HOME OFFICE:
Roslyn Office: Owned 1932 Not Applicable $4,368
1400 Old Northern Blvd.
Roslyn, NY 11576
BRANCH OFFICES:
West Hempstead Office: Owned 1965 Not Applicable $ 934
50 Hempstead Turnpike
West Hempstead, NY 11552
Farmingdale Office: Owned 1968 Not Applicable $ 704
14 Conklin Street
Farmingdale, NY 11567
</TABLE>
(continued on next page)
92
<PAGE>
<TABLE>
<CAPTION>
NET BOOK VALUE
OF PROPERTY OR
ORIGINAL YEAR DATE OF LEASEHOLD
LEASED OR LEASED OR LEASE IMPROVEMENTS AT
LOCATION OWNED ACQUIRED EXPIRATION MAY 31, 1996
- -------- --------- ------------- -------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Bellmore Office: Owned 1972 Not Applicable $ 748
2641 Merrick Road
Bellmore, NY 11710
Woodbury Office(1): Leased 1976 2009 $ 790
8081 Jericho Turnpike
Woodbury, NY 11797
East Northport Office: Owned 1992 Not Applicable $1,881
580 Larkfield Road
East Northport, NY 11731
ADMINISTRATIVE OFFICE:
Port Washington Office: Owned 1996 Not Applicable $1,612
Two Seaview Blvd.
Port Washington, NY
11050
RFI MORTGAGE ORIGINATION OFFICES:
Hauppauge Office: Leased 1986 1996 --
350 Motor Parkway
Hauppauge, NY 11788
East Meadow Office: Leased 1992 month to month --
325 Merrick Avenue
East Meadow, NY 11554
Albany Office: Leased 1992 1996 --
427 New Karner Road
Albany, NY 12205
Bayside Office: Leased 1993 1998 --
218-15 Northern Blvd.
Bayside, NY 11361
Shrewsbury Office: Leased 1993 1998 --
1 Revmont Dr. No., Rt.
35
Shrewsbury, NJ 07702
Parsippany Office: Leased 1995 1996 --
140 Littleton Road
Parsippany, NJ 07054
</TABLE>
- --------
(1) The Bank owns the building but leases the majority portion of the land.
The Bank has the option to renew the lease upon expiration for two (2)
additional consecutive terms of thirty-three (33) years each.
LEGAL PROCEEDINGS
The Bank is not involved in any pending legal proceedings other than routine
legal proceedings occurring in the ordinary course of business which, in the
aggregate, involve amounts which are believed by management to be immaterial
to the financial condition and results of operations of the Bank.
PERSONNEL
As of May 31, 1996, the Bank and RFI had 303 full-time employees and 77
part-time employees. The employees are not represented by a collective
bargaining unit and the Bank considers its relationship with its employees to
be good. See "Management of the Bank--Benefit Plans" for a description of
certain compensation and benefit programs offered to the Bank's employees.
93
<PAGE>
FEDERAL AND STATE TAXATION
FEDERAL TAXATION
General. The Company and the Bank will report their income on a consolidated
basis, using a calendar year and the accrual method of accounting and will be
subject to federal income taxation in the same manner as other corporations
with some exceptions, including particularly the Bank's treatment of its
reserve for bad debts discussed below. The following discussion of tax matters
is intended only as a summary and does not purport to be a comprehensive
description of the tax rules applicable to the Bank or the Company. The Bank
had been audited by the IRS for the year ended December 31, 1991 resulting in
no change to taxable income. The Bank was also audited by the State of New
York for the three-year period ended December 31, 1993, resulting in
adjustments which were immaterial to the Bank's financial statements. RFI has
not been audited by the IRS, the State of New York or New York City to date.
Bad Debt Reserves. The Small Business Job Protection Act of 1996 (the "1996
Act"), which was enacted on August 20, 1996, made significant changes to
provisions of the Code relating to a savings institution's use of bad debt
reserves for federal income tax purposes and requires such institutions to
recapture (i.e. take into income) certain portions of their accumulated bad
debt reserves. The effect of the 1996 Act on the Bank is discussed below.
Prior to the enactment of the 1996 Act, the Bank was permitted to establish
tax reserves for bad debts and to make annual additions thereto, which
additions, within specified formula limits, were deducted in arriving at the
Bank's taxable income. The Bank's deduction with respect to "qualifying
loans," which are generally loans secured by certain interests in real
property, could be computed using an amount based on a six-year moving average
of the Bank's actual loss experience (the "Experience Method"), or a
percentage equal to 8% of the Bank's taxable income (the "PTI Method"),
computed without regard to this deduction and with additional modifications
and reduced by the amount of any permitted addition to the non-qualifying
reserve. The Bank's deduction with respect to non-qualifying loans was
required to be computed under the Experience Method. As of December 31, 1995,
the overall 12% of deposits limitation has restricted the Bank's deduction for
additions to its bad debt reserves.
The 1996 Act. Under the 1996 Act, for its current and future taxable years,
the Bank is not permitted to make additions to its tax bad debt reserves. In
addition, the Bank is required to recapture (i.e. take into income) over a six
year period the excess of the balance of its tax bad debt reserves as of
December 31, 1995 over the balance of such reserves as of December 31, 1987.
As of December 31, 1995, the Bank's tax bad debt reserve is equal to the
balance of such reserve as of December 31, 1987. As such, the Bank will not
incur an additional tax liability related to its tax bad debt reserves.
Distributions. Under the 1996 Act, if the Bank makes "non-dividend
distributions" to the Company, such distributions will be considered to have
been made from the Bank's unrecaptured tax bad debt reserves (including the
balance of its reserves as of December 31, 1987) to the extent thereof, and an
amount based on the amount distributed (but not in excess of such reserves)
will be included in the Bank's income. Non-dividend distributions is defined
as distributions in excess of the Bank's current and accumulated earnings and
profits, as calculated for federal income tax purposes, distributions in
redemption of stock, and distributions in partial or complete liquidation.
Dividends paid out of the Bank's current or accumulated earnings and profits
will not be so included in the Bank's income.
The amount of additional taxable income created from a non-dividend
distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, if, after
Conversion, the Bank makes a non-dividend distribution to the Company,
approximately one and one-half times the amount of such distribution (but not
in excess of the amount of such reserves) would be includable in income for
federal income tax purposes, assuming a 35% federal corporate income tax rate.
See "Regulation and Supervision" and "Dividend Policy" for limits on the
payment of dividends by the Bank. The Bank does not intend to pay dividends
that would result in a recapture of any portion of its tax bad debt reserves.
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Corporate Alternative Minimum Tax. The Code imposes a tax on alternative
minimum taxable income ("AMTI") at a rate of 20%. The excess of the bad debt
reserve deduction using the percentage of taxable income method over the
deduction that would have been allowable under the experience method is
treated as a preference item for purposes of computing the AMTI. Only 90% of
AMTI can be offset by net operating loss carryforwards. The adjustment to AMTI
based on book income will be an amount equal to 75% of the amount by which a
corporation's adjusted current earnings exceeds its AMTI (determined without
regard to this adjustment and prior to reduction for net operating losses). In
addition, for taxable years beginning after December 31, 1986 and before
January 1, 1996, an environmental tax of .12% of the excess of AMTI (with
certain modifications) over $2 million, is imposed on corporations, including
the Bank, whether or not an Alternative Minimum Tax ("AMT") is paid. Under the
President's legislative proposals, the AMT environmental tax would be extended
for tax years beginning before 2007. The Bank does not expect to be subject to
the AMT but is subject to the environmental tax liability.
Dividends Received Deduction and Other Matters. The Company may exclude from
its income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. The corporate dividends received deduction
is generally 70% in the case of dividends received from unaffiliated
corporations with which the Company and the Bank will not file a consolidated
tax return, except that if the Company and the Bank own more than 20% of the
stock of a corporation distributing a dividend, then 80% of any dividends
received may be excluded.
STATE AND LOCAL TAXATION
New York State and New York City Taxation. The Bank is subject to the New
York State Franchise Tax on Banking Corporations in an annual amount equal to
the greater of (i) 9% of the Bank's "entire net income" allocable to New York
State during the taxable year, or (ii) the applicable alternative minimum tax.
The alternative minimum tax is generally the greatest of (a) .01% of the value
of the taxable assets allocable to New York State with certain modifications,
(b) 3% of the Bank's "alternative entire net income" allocable to New York
State or (c) $250. Entire net income is similar to federal taxable income,
subject to certain modifications (including that net operating losses cannot
be carried back or carried forward) and alternative entire net income is equal
to entire net income without certain adjustments. While the Bank is not
directly subject to any New York City tax, RFI will be subject to a New York
City tax of 9% on income allocated to New York City. For purposes of computing
its entire net income, the Bank is permitted a deduction for an addition to
the reserve for losses on qualifying real property loans. For New York State
purposes, the applicable percentage to calculate bad debt deduction under the
percentage of taxable income method is 32%. However, the Bank cannot fully
utilize this deduction because its New York reserve for qualifying real
property loans is at the 6% of the qualifying real property loan limit. The
New York State tax law was recently amended to prevent the recapture of tax
bad debt reserves that would otherwise occur as a result of the enactment of
the 1996 Act. See "--Federal Taxation--Bad Debt Reserves." However, the New
York bad debt reserve is subject to recapture for "non-dividend distributions"
in a manner similar to the recapture of the federal bad debt reserves for such
distributions. See "--Federal Taxation--Distributions." Also, the New York bad
debt reserve is subject to recapture in the event that the Bank fails to
satisfy certain definitional tests relating to its assets and the nature of
its business. The Bank's deduction with respect to non-qualifying loans must
be computed under the experience method which is based on the Bank's actual
charge-offs.
A Temporary Metropolitan Transportation Business Tax Surcharge on banking
corporations doing business in the metropolitan district has been applied
since 1982. The Bank does all of its business within this District and is
subject to this surcharge. For the tax year ended December 31, 1996, the
surcharge rate is 17%. In addition, a 2.5% tax surcharge on the Bank's New
York State Franchise Tax is imposed on the Bank.
Delaware State Taxation. As a Delaware holding company not earning income in
Delaware, the Company is exempted from Delaware Corporate income tax but is
required to file an annual report with and pay an annual franchise tax to the
State of Delaware.
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REGULATION AND SUPERVISION
GENERAL
The Bank is a New York State chartered mutual savings bank and its deposit
accounts are insured up to applicable limits by the FDIC under the BIF. The
Bank is subject to extensive regulation by the Superintendent, the NYBB, the
NYBD, as its chartering agency, and by the FDIC, as the deposit insurer. The
Bank must file reports with the NYBD and the FDIC concerning its activities
and financial condition, in addition to obtaining regulatory approvals prior
to entering into certain transactions such as establishing branches and
mergers with, or acquisitions of, other depository institutions. There are
periodic examinations by the NYBD and the FDIC to assess the Bank's compliance
with various regulatory requirements and financial condition. This regulation
and supervision establishes a framework of activities in which a savings bank
can engage and is intended primarily for the protection of the insurance fund
and depositors. The regulatory structure also gives the regulatory authorities
extensive discretion in connection with their supervisory and enforcement
activities and examination policies, including policies with respect to the
classification of assets and the establishment of adequate loan loss reserves
for regulatory purposes. Any change in such regulation, whether by the NYBD,
the FDIC or through legislation, could have a material adverse impact on the
Company and the Bank and their operations and stockholders. The Company will
also be required to file certain reports with, and otherwise comply with the
rules and regulations, of the OTS, the NYBD and of the Securities and Exchange
Commission ("SEC") under the federal securities laws. Certain of the
regulatory requirements applicable to the Bank and to the Company are referred
to below or elsewhere herein.
NEW YORK STATE LAW
The Bank derives its lending, investment and other authority primarily from
the applicable provisions of New York State Banking Law and the regulations of
the NYBB, as limited by FDIC regulations. See "--Investments and Activities."
Under these laws and regulations, savings banks, including the Bank, may
invest in real estate mortgages, consumer and commercial loans, certain types
of debt securities, including certain corporate debt securities and
obligations of federal, state and local governments and agencies, certain
types of corporate equity securities and certain other assets. Under the
statutory authority for investing in equity securities, a savings bank may
directly 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 the stock of a single corporation is limited to the lesser of 2%
of the outstanding stock of such corporation or 1% of the savings bank's
assets, except as set forth below. Such equity securities must meet certain
tests of financial performance. A savings bank's lending powers are not
subject to percentage of asset limitations, although there are limits
applicable to single borrowers. A savings bank may also, pursuant to the
"leeway" authority, make investments not otherwise permitted under the New
York State Banking Law. This authority permits investments in otherwise
impermissible investments of up to 1% of the savings bank's assets in any
single investment, subject to certain restrictions and to an aggregate limit
for all such investments of up to 5% of assets. Additionally, in lieu of
investing in such securities in accordance with and reliance upon the specific
investment authority set forth in the New York State Banking Law, savings
banks are authorized to elect to invest under a "prudent person" standard in a
wider range of debt and equity securities as compared to the types of
investments permissible under such specific investment authority. However, in
the event a savings bank elects to utilize the "prudent person" standard, it
will be unable to avail itself of the other provisions of the New York State
Banking Law and regulations which set forth specific investment authority. A
New York State chartered stock savings bank may also exercise trust powers
upon approval of the NYBB.
New York State chartered savings banks may also invest in subsidiaries under
their service corporation investment power. A savings bank may use this power
to invest in corporations that engage in various activities authorized for
savings banks, plus any additional activities which may be authorized by the
NYBD. Investment by a savings bank in the stock, capital notes and debentures
of its service corporations is limited to 3% of the bank's assets, and such
investments, together with the bank's loans to its service corporations, may
not exceed 10% of the savings bank's assets.
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The exercise by an FDIC-insured savings bank of the lending and investment
powers of a savings bank under the New York State Banking Law is limited by
FDIC regulations and other federal law and regulations. In particular, the
applicable provisions of New York State Banking law and regulations governing
the investment authority and activities of an FDIC insured state-chartered
savings bank have been effectively limited by the Federal Deposit Insurance
Corporation Improvement Act of 1991 and the FDIC regulations issued pursuant
thereto. See "--Investments and Activities."
With certain limited exceptions, a New York State chartered savings bank may
not make loans or extend credit for commercial, corporate or business purposes
(including lease financing) to a single borrower, the aggregate amount of
which would be in excess of 15% of the bank's net worth. The Bank currently
complies with all applicable loans-to-one-borrower limitations.
Under New York State Banking Law, a New York State chartered stock savings
bank may declare and pay dividends out of its net profits, unless there is an
impairment of capital, but approval of the Superintendent is required if the
total of all dividends declared in a calendar year would exceed the total of
its net profits for that year combined with its retained net profits of the
preceding two years, subject to certain adjustments.
Under the New York State Banking Law, the Superintendent may issue an order
to a New York State chartered banking institution to appear and explain an
apparent violation of law, to discontinue unauthorized or unsafe practices and
to keep prescribed books and accounts. Upon a finding by the NYBB that any
director, trustee or officer of any banking organization has violated any law,
or has continued unauthorized or unsafe practices in conducting the business
of the banking organization after having been notified by the Superintendent
to discontinue such practices, such director, trustee or officer may be
removed from office by the NYBB after notice and an opportunity to be heard.
The Bank does not know of any past or current practice, condition or violation
that might lead to any proceeding by the Superintendent or the NYBB against
the Bank or any of its Trustees or officers. The Superintendent also may take
possession of a banking organization under specified statutory criteria.
FDIC REGULATIONS
Capital Requirements. The FDIC has adopted risk-based capital guidelines to
which the Bank is subject. The guidelines establish a systematic analytical
framework that makes regulatory capital requirements more sensitive to
differences in risk profiles among banking organizations. The Bank is required
to maintain certain levels of regulatory capital in relation to regulatory
risk-weighted assets. The ratio of such regulatory capital to regulatory risk-
weighted assets is referred to as the Bank's "risk-based capital ratio." Risk-
based capital ratios are determined by allocating assets and specified off-
balance sheet items to four risk-weighted categories ranging from 0% to 100%,
with higher levels of capital being required for the categories perceived as
representing greater risk.
These guidelines divide a savings bank's capital into two tiers. The first
tier ("Tier I") includes common equity, retained earnings, certain non-
cumulative perpetual preferred stock (excluding auction rate issues) and
minority interests in equity accounts of consolidated subsidiaries, less
goodwill and other intangible assets (except mortgage servicing rights and
purchased credit card relationships subject to certain limitations).
Supplementary ("Tier II") capital includes, among other items, cumulative
perpetual and long-term limited-life preferred stock, mandatory convertible
securities, certain hybrid capital instruments, term subordinated debt and the
allowance for loan and lease losses, subject to certain limitations, less
required deductions. Savings banks are required to maintain a total risk-based
capital ratio of 8%, of which at least 4% must be Tier I capital.
In addition, the FDIC has established regulations prescribing a minimum Tier
I leverage ratio (Tier I capital to adjusted total assets as specified in the
regulations). These regulations provide for a minimum Tier I leverage ratio of
3% for banks that meet certain specified criteria, including that they have
the highest examination rating and are not experiencing or anticipating
significant growth. All other banks are required to maintain a Tier I leverage
ratio of 3% plus an additional cushion of at least 100 to 200 basis points.
The FDIC may, however, set
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higher leverage and risk-based capital requirements on individual institutions
when particular circumstances warrant. Savings banks experiencing or
anticipating significant growth are expected to maintain capital ratios,
including tangible capital positions, well above the minimum levels.
The following is a summary of the Bank's regulatory capital at May 31, 1996:
<TABLE>
<S> <C>
GAAP Capital to Total Assets....................................... 12.54%
Total Capital to Risk-Weighted Assets.............................. 28.10%
Tier I Leverage Ratio.............................................. 12.39%
</TABLE>
In August 1995, the FDIC, along with the other federal banking agencies,
adopted a regulation providing that the agencies will take account of the
exposure of a bank's capital and economic value to changes in interest rate
risk in assessing a bank's capital adequacy. According to the agencies,
applicable considerations include the quality of the bank's interest rate risk
management process, the overall financial condition of the bank and the level
of other risks at the bank for which capital is needed. Institutions with
significant interest rate risk may be required to hold additional capital. The
agencies recently issued a joint policy statement providing guidance on
interest rate risk management, including a discussion of the critical factors
affecting the agencies' evaluation of interest rate risk in connection with
capital adequacy. The agencies have determined not to proceed with a
previously issued proposal to develop a supervisory framework for measuring
interest rate risk and an explicit capital component for interest rate risk.
Standards for Safety and Soundness. Federal law requires each federal
banking agency to prescribe for depository institutions under its jurisdiction
standards relating to, among other things, internal controls; information
systems and audit systems; loan documentation; credit underwriting; interest
rate risk exposure; asset growth; compensation; fees and benefits; and such
other operational and managerial standards as the agency deems appropriate.
The federal banking agencies adopted final regulations and Interagency
Guidelines Establishing Standards for Safety and Soundness (the "Guidelines")
to implement these safety and soundness standards. The Guidelines set forth
the safety and soundness standards that the federal banking agencies use to
identify and address problems at insured depository institutions before
capital becomes impaired. The Guidelines address internal controls and
information systems; internal audit system; credit underwriting; loan
documentation; interest rate risk exposure; asset growth; asset quality;
earnings and compensation; fees and benefits. If the appropriate federal
banking agency determines that an institution fails to meet any standard
prescribed by the Guidelines, the agency may require the institution to submit
to the agency an acceptable plan to achieve compliance with the standard, as
required by the Federal Deposit Insurance Act, as amended, ("FDI Act"). The
final regulation establishes deadlines for the submission and review of such
safety and soundness compliance plans.
Real Estate Lending Standards. The FDIC and the other federal banking
agencies have adopted regulations that prescribe standards for extensions of
credit that (i) are secured by real estate or (ii) are made for the purpose of
financing the construction or improvements on real estate. The FDIC
regulations require each savings association to establish and maintain written
internal real estate lending standards that are consistent with safe and sound
banking practices and appropriate to the size of the association and the
nature and scope of its real estate lending activities. The standards also
must be consistent with accompanying FDIC guidelines, which include loan-to-
value limitations for the different types of real estate loans. Associations
are also permitted to make a limited amount of loans that do not conform to
the proposed loan-to-value limitations so long as such exceptions are reviewed
and justified appropriately. The guidelines also list a number of lending
situations in which exceptions to the loan-to-value standard are justified.
Dividend Limitations. The FDIC has authority to use its enforcement powers
to prohibit a savings bank from paying dividends if, in its opinion, the
payment of dividends would constitute an unsafe or unsound practice. Federal
law prohibits the payment of dividends by a bank that will result in the bank
failing to meet applicable capital requirements on a pro forma basis.
Additionally, the Bank, as a subsidiary of a savings and loan holding company,
will be required to provide the OTS with 30 days prior written notice before
declaring any dividend. The Plan of Conversion also restricts the Bank's
payment of dividends in the event the dividend
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would impair the liquidation account established in connection with the
Conversion. The Bank is also subject to dividend declaration restrictions
imposed by New York law. See "--New York State Law" and "Dividend Policy."
INVESTMENTS AND ACTIVITIES
Since the enactment of the Federal Deposit Insurance Corporation Improvement
Act of 1991, all state-chartered financial institutions, including savings
banks and their subsidiaries, have generally been limited to activities as
principal and equity investments of the type and in the amount authorized for
national banks, notwithstanding state law. FDICIA and the FDIC regulations
thereunder permit certain exceptions to these limitations. For example,
certain state chartered banks, such as the Bank, may, with FDIC approval,
continue to exercise state authority to invest in common or preferred stocks
listed on a national securities exchange or the National Market System of
NASDAQ and in the shares of an investment company registered under the
Investment Company Act of 1940, as amended. Such banks may also continue to
sell savings bank life insurance. In addition, the FDIC is authorized to
permit such institutions to engage in state authorized activities or
investments that do not meet this standard (other than non-subsidiary equity
investments) for institutions that meet all applicable capital requirements if
it is determined that such activities or investments do not pose a significant
risk to the BIF. All non-subsidiary equity investments, unless otherwise
authorized or approved by the FDIC, must be divested by December 19, 1996,
pursuant to a FDIC-approved divestiture plan unless such investments were
grandfathered by the FDIC. The Bank received grandfathering authority from the
FDIC in February 1993 to invest in listed stocks and/or registered shares
subject to the maximum permissible investment of 100% of Tier 1 capital, as
specified by the FDIC's regulations, or the maximum amount permitted by New
York State Banking Law, whichever is less. Such grandfathering authority is
subject to termination upon the FDIC's determination that such investments
pose a safety and soundness risk to the Bank or in the event the Bank converts
its charter or undergoes a change in control. As of May 31, 1996, the Bank had
$138.8 million of securities which were subject to such grandfathering
authority.
PROMPT CORRECTIVE REGULATORY ACTION
Federal law requires, among other things, that federal bank regulatory
authorities take "prompt corrective action" with respect to banks that do not
meet minimum capital requirements. For these purposes, the law establishes
five capital tiers: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically
undercapitalized.
The FDIC has adopted regulations to implement the prompt corrective action
legislation. Among other things, the regulations define the relevant capital
measures for the five capital categories. An institution is deemed to be "well
capitalized" if it has a total risk-based capital ratio of 10% or greater, a
Tier I risk-based capital ratio of 6% or greater, and a leverage ratio of 5%
or greater, and is not subject to a regulatory order, agreement or directive
to meet and maintain a specific capital level for any capital measure. An
institution is deemed to be "adequately capitalized" if it has a total risk-
based capital ratio of 8% or greater, a Tier I risk-based capital ratio of 4%
or greater, and generally a leverage ratio of 4% or greater. An institution is
deemed to be "undercapitalized" if it has a total risk-based capital ratio of
less than 8%, a Tier I risk-based capital ratio of less than 4%, or generally
a leverage ratio of less than 4%. An institution is deemed to be
"significantly undercapitalized" if it has a total risk-based capital ratio of
less than 6%, a Tier I risk-based capital ratio of less than 3%, or a leverage
ratio of less than 3%. An institution is deemed to be "critically
undercapitalized" if it has a ratio of tangible equity (as defined in the
regulations) to total assets that is equal to or less than 2%.
"Undercapitalized" banks are subject to growth, capital distribution
(including dividend) and other limitations and are required to submit a
capital restoration plan. A bank's compliance with such plan is required to be
guaranteed by any company that controls the undercapitalized institutions. If
an "undercapitalized" bank fails to submit an acceptable plan, it is treated
as if it is "significantly undercapitalized." "Significantly undercapitalized"
banks are subject to one or more of a number of additional restrictions,
including but not limited to an order by the FDIC to sell sufficient voting
stock to become adequately capitalized, requirements to reduce total assets
and cease receipt of deposits from correspondent banks or dismiss directors or
officers, and restrictions on interest rates paid on deposits, compensation of
executive officers and capital distributions by the
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parent holding company. "Critically undercapitalized" institutions also may
not, beginning 60 days after becoming "critically undercapitalized," make any
payment of principal or interest on certain subordinated debt or extend credit
for a highly leveraged transaction or enter into any material transaction
outside the ordinary course of business. In addition, "critically
undercapitalized" institutions are subject to appointment of a receiver or
conservator. Generally, subject to a narrow exception, the appointment of a
receiver or conservator is required for a "critically undercapitalized"
institution within 270 days after it obtains such status.
TRANSACTIONS WITH AFFILIATES
Under current federal law, transactions between depository institutions and
their affiliates are governed by Sections 23A and 23B of the Federal Reserve
Act. An affiliate of a savings bank is any company or entity that controls, is
controlled by, or is under common control with the savings bank, other than a
subsidiary. In a holding company context, at a minimum, the parent holding
company of a savings bank and any companies which are controlled by such
parent holding company are affiliates of the savings bank. Generally, Section
23A limits the extent to which the savings bank or its subsidiaries may engage
in "covered transactions" with any one affiliate to an amount equal to 10% of
such savings bank's capital stock and surplus, and contains an aggregate limit
on all such transactions with all affiliates to an amount equal to 20% of such
capital stock and surplus. The term "covered transaction" includes the making
of loans or other extensions of credit to an affiliate; the purchase of assets
from an affiliate, the purchase of, or an investment in, the securities of an
affiliate; the acceptance of securities of an affiliate as collateral for a
loan or extension of credit to any person; or issuance of a guarantee,
acceptance, or letter of credit on behalf of an affiliate. Section 23A also
establishes specific collateral requirements for loans or extensions of credit
to, or guarantees, acceptances on letters of credit issued on behalf of an
affiliate. Section 23B requires that covered transactions and a broad list of
other specified transactions be on terms substantially the same, or no less
favorable, to the savings bank or its subsidiary as similar transactions with
nonaffiliates.
Further, Section 22(h) of the Federal Reserve Act restricts a savings bank
with respect to loans to directors, executive officers, and principal
stockholders. Under Section 22(h), loans to directors, executive officers and
stockholders who control, directly or indirectly, 10% or more of voting
securities of a savings bank, and certain related interests of any of the
foregoing, may not exceed, together with all other outstanding loans to such
persons and affiliated entities, the savings bank's total capital and surplus.
Section 22(h) also prohibits loans above amounts prescribed by the appropriate
federal banking agency to directors, executive officers, and shareholders who
control 10% or more of voting securities of a stock savings bank, and their
respective related interests, unless such loan is approved in advance by a
majority of the board of directors of the savings bank. Any "interested"
director may not participate in the voting. The loan amount (which includes
all other outstanding loans to such person) as to which such prior board of
director approval is required, is the greater of $25,000 or 5% of capital and
surplus or any loans over $500,000. Further, pursuant to Section 22(h), loans
to directors, executive officers and principal shareholders must be made on
terms substantially the same as offered in comparable transactions to other
persons. Section 22(g) of the Federal Reserve Act places additional
limitations on loans to executive officers.
ENFORCEMENT
The FDIC has extensive enforcement authority over insured savings banks,
including the Bank. This enforcement authority includes, among other things,
the ability to assess civil money penalties, to issue cease and desist orders
and to remove directors and officers. In general, these enforcement actions
may be initiated in response to violations of laws and regulations and to
unsafe or unsound practices.
The FDIC has authority under federal law to appoint a conservator or
receiver for an insured savings bank under certain circumstances. The FDIC is
required, with certain exceptions, to appoint a receiver or conservator for an
insured state savings bank if that savings bank was "critically
undercapitalized" on average during the calendar quarter beginning 270 days
after the date on which the savings bank became "critically undercapitalized."
For this purpose, "critically undercapitalized" means having a ratio of
tangible capital to total assets of less than 2%. See "--Prompt Corrective
Regulatory Action." The FDIC may also appoint a conservator or receiver for a
state savings bank on the basis of the institution's financial condition or
upon the
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occurrence of certain events, including: (i) insolvency (whereby the assets of
the savings bank are less than its liabilities to depositors and others); (ii)
substantial dissipation of assets or earnings through violations of law or
unsafe or unsound practices; (iii) existence of an unsafe or unsound condition
to transact business; (iv) likelihood that the savings bank will be unable to
meet the demands of its depositors or to pay its obligations in the normal
course of business; and (v) insufficient capital, or the incurring or likely
incurring of losses that will deplete substantially all of the institution's
capital with no reasonable prospect of replenishment of capital without
federal assistance.
INSURANCE OF DEPOSIT ACCOUNTS
The FDIC has adopted a risk-based insurance assessment system. The FDIC
assigns an institution to one of three capital categories based on the
institution's financial information, as of the reporting period ending seven
months before the assessment period, consisting of (1) well capitalized, (2)
adequately capitalized or (3) undercapitalized, and one of three supervisory
subcategories within each capital group. The supervisory subgroup to which an
institution is assigned is based on a supervisory evaluation provided to the
FDIC by the institution's primary federal regulator and information which the
FDIC determines to be relevant to the institution's financial condition and
the risk posed to the deposit insurance funds. An institution's assessment
rate depends on the capital category and supervisory category to which it is
assigned. Assessment rates for BIF deposits currently range from 0 basis
points to 27 basis points. The FDIC is authorized to raise the assessment
rates in certain circumstances, including to maintain or achieve the
designated reserve ratio of 1.25%, which requirement the BIF currently meets.
The FDIC has exercised its authority to raise rates in the past and may raise
insurance premiums in the future. If such action is taken by the FDIC, it
could have an adverse effect on the earnings of the Bank. In addition, recent
legislation requires BIF-insured institutions like the Bank to assist in the
payment of FICO bonds. See "Risk Factors--Payment of Financing Corporation
Bonds."
Under the FDI Act, insurance of deposits may be terminated by the FDIC upon
a finding that the institution has engaged in unsafe or unsound practices, is
in an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or
the Division. The management of the Bank does not know of any practice,
condition or violation that might lead to termination of deposit insurance.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board regulations require depository institutions to
maintain non-interest-earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The Federal Reserve Board
regulations generally require that reserves be maintained against aggregate
transaction accounts as follows: for that portion of transaction accounts
aggregating $52.0 million or less (subject to adjustment by the Federal
Reserve Board) the reserve requirement is 3%; and for accounts greater than
$52.0 million, the reserve requirement is $1.6 million plus 10% (subject to
adjustment by the Federal Reserve Board between 8% and 14%) against that
portion of total transaction accounts in excess of $52.0 million. The first
$4.3 million of otherwise reservable balances (subject to adjustments by the
Federal Reserve Board) are exempted from the reserve requirements. The Bank is
in compliance with the foregoing requirements. Because required reserves must
be maintained in the form of either vault cash, a non-interest-bearing account
at a Federal Reserve Bank or a pass-through account as defined by the Federal
Reserve Board, the effect of this reserve requirement is to reduce the Bank's
interest-earning assets. Federal Home Loan Bank ("FHLB") System members are
also authorized to borrow from the Federal Reserve "discount window," but
Federal Reserve Board regulations require institutions to exhaust all FHLB
sources before borrowing from a Federal Reserve Bank.
COMMUNITY REINVESTMENT ACT
Federal Regulation. Under the Community Reinvestment Act, as amended,
("CRA"), as implemented by FDIC regulations, a savings bank has a continuing
and affirmative obligation consistent with its safe and sound operation to
help meet the credit needs of its entire community, including low and moderate
income neighborhoods. The CRA does not establish specific lending requirements
or programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best
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suited to its particular community, consistent with the CRA. The CRA requires
the FDIC, in connection with its examination of a savings institution, to
assess the institution's record of meeting the credit needs of its community
and to take such record into account in its evaluation of certain applications
by such institution. The FIRREA amended the CRA to require, effective July 1,
1990, public disclosure of an institution's CRA rating and require the FDIC to
provide a written evaluation of an institution's CRA performance utilizing a
four-tiered descriptive rating system which replaced the five-tiered numerical
rating system. The Bank's latest CRA rating, received from the FDIC was
"satisfactory."
New York State Regulation. The Bank is also subject to provisions of the New
York State Banking Law which impose continuing and affirmative obligations
upon banking institutions organized in New York State to serve the credit
needs of its local community ("NYCRA"), which are similar to those imposed by
the CRA. Pursuant to the NYCRA, a bank must file an annual NYCRA report and
copies of all federal CRA reports with the Banking Department. The NYCRA
requires the NYBD to make an annual written assessment of a bank's compliance
with the NYCRA, utilizing a four-tiered rating system, and make such
assessment available to the public. The NYCRA also requires the Superintendent
to consider a bank's NYCRA rating when reviewing a bank's application to
engage in certain transactions, including mergers, asset purchases and the
establishment of branch offices or automated teller machines, and provides
that such assessment may serve as a basis for the denial of any such
application. The Bank's latest NYCRA rating, received from the NYBD was
"satisfactory."
HOLDING COMPANY REGULATION
Federal law allows a state savings bank that qualifies as a "qualified
thrift lender" ("QTL"), discussed below, to elect to be treated as a savings
association for purposes of the savings and loan holding company provisions of
the Home Owners' Loan Act, as amended ("HOLA"). Such election would result in
its holding company being regulated as a savings and loan holding company by
the OTS rather than as a bank holding company by the Federal Reserve Board.
The Bank has made such election and the OTS has approved the Company's
application to become a savings and loan holding company. Accordingly, the
Company will be regulated as a non-diversified unitary savings and loan
holding company within the meaning of the HOLA. As such, the Company will be
required to register with the OTS and will be subject to OTS regulations,
examinations, supervision and reporting requirements. In addition, the OTS has
enforcement authority over the Company and its non-savings institution
subsidiaries. Among other things, this authority permits the OTS to restrict
or prohibit activities that are determined to be a serious risk to the
subsidiary savings institution. Additionally, the Bank will be required to
notify the OTS at least 30 days before declaring any dividend to the Company.
As a unitary savings and loan holding company, the Company generally will
not be restricted under existing laws as to the types of business activities
in which it may engage. Upon any non-supervisory acquisition by the Company of
another savings association as a separate subsidiary, the Company would become
a multiple savings and loan holding company and would be subject to extensive
limitations on the types of business activities in which it could engage. The
HOLA limits the activities of a multiple savings and loan holding company and
its non-insured institution subsidiaries primarily to activities permissible
for bank holding companies under Section 4(c)(8) of the Bank Holding Company
Act, as amended ("BHC Act"), subject to the prior approval of the OTS, and to
other activities authorized by OTS regulation. Multiple savings and loan
holding companies are prohibited from acquiring or retaining, with certain
exceptions, more than 5% of a non-subsidiary holding company, or a non-
subsidiary company engaged in activities other than those permitted by the
HOLA. Recently proposed legislation would treat all savings and loan holding
companies as bank holding companies and would limit the activities of such
companies to those permissible for bank holding companies.
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5%
of the voting stock of another savings institution or holding company thereof
or from acquiring such an institution or company by merger, consolidation or
purchase of its assets, without prior written approval of the OTS. In
evaluating applications by holding companies to acquire savings institutions,
the OTS must consider the financial and managerial resources and future
prospects of the company
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<PAGE>
and institution involved, the effect of the acquisition on the risk to the
insurance funds, the convenience and needs of the community and competitive
factors.
The OTS is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in
more than one state, except: (i) interstate supervisory acquisitions by
savings and loan holding companies, and (ii) the acquisition of a savings
institution in another state if the laws of the state of the target savings
institution specifically permit such acquisitions. The states vary in the
extent to which they permit interstate savings and loan holding company
acquisitions.
In order to elect and continue to be regulated as a savings and loan holding
company by the OTS (rather than as a bank holding company by the Federal
Reserve Board), the Bank must continue to qualify as a QTL. In order to
qualify as a QTL, the Bank must maintain compliance with a Qualified Thrift
Lender Test ("QTL Test"). Under the QTL Test, a savings institution is
required to maintain at least 65% of its "portfolio assets" (total assets
less: (i) specified liquid assets up to 20% of total assets; (ii) intangibles,
including goodwill; and (iii) the value of property used to conduct business)
in certain "qualified thrift investments" (primarily residential mortgages and
related investments, including certain mortgage-backed and related securities)
in at least 9 months out of each 12 month period. A holding company of a
savings institution that fails the QTL test must either convert to a bank
holding company and thereby become subject to the regulation and supervision
of the Federal Reserve Board or operate under certain restrictions. As of May
31, 1996, the Bank maintained in excess of 75.51% of its portfolio assets in
qualified thrift investments. The Bank also met the QTL test in each of the
prior 12 months and, therefore, met the QTL test. Recent legislative
amendments have broadened the scope of "qualified thrift investments" that go
toward meeting the QTL test to fully include credit card loans, educational
loans and small business loans.
New York State Holding Company Regulation. In addition to the federal
holding company regulations, a bank holding company organized or doing
business in New York State may be also subject to regulation under the New
York State Banking Law. The term "bank holding company," for the purposes of
the New York State Banking Law, is defined generally to include any person,
company or trust that directly or indirectly either controls the election of a
majority of the directors or owns, controls or holds with power to vote more
than 10% of the voting stock of a bank holding company or, if the company is a
banking institution, another banking institution, or 10% or more of the voting
stock of each of two or more banking institutions, including commercial banks
and state savings banks and savings and loan associations organized in stock
form. In general, a holding company controlling, directly or indirectly, only
one banking institution will not be deemed to be a bank holding company for
the purposes of the New York State Banking Law. Under New York State Banking
Law, the prior approval of the NYBD is required before: (1) any action is
taken that causes any company to become a bank holding company; (2) any action
is taken that causes any banking institution to become or to be merged or
consolidated with a subsidiary of a bank holding company; (3) any bank holding
company acquires direct or indirect ownership or control of more than 5% of
the voting stock of a banking institution; (4) any bank holding company or
subsidiary thereof acquires all or substantially all of the assets of a
banking institution; or (5) any action is taken that causes any bank holding
company to merge or consolidate with another bank holding company.
Additionally, certain restrictions apply to New York State bank holding
companies regarding the acquisition of banking institutions which have been
chartered five years or less and are located in smaller communities. Officers,
directors and employees of New York State bank holding companies are subject
to limitations regarding their affiliation with securities underwriting or
brokerage firms and other bank holding companies and limitations regarding
loans obtained from its subsidiaries. Although the Company will not be a bank
holding company for purposes of New York State law upon the Effective Date of
the Conversion, any future acquisition of ownership, control, or the power to
vote 10% or more of the voting stock of another banking institution or bank
holding company would cause it to become such.
INTERSTATE BANKING AND BRANCHING
The Company, as a savings and loan holding company, will be limited under
HOLA with respect to its acquisition of a savings association located in a
state other than New York. In general, a savings and loan holding
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<PAGE>
company may not acquire an additional savings association subsidiary that is
located in a state other than the home state of its first savings association
subsidiary unless such an interstate acquisition is permitted by the statutes
of such other state. Many states permit such interstate acquisitions if the
statutes of the home state of the acquiring savings and loan holding company
satisfy various reciprocity conditions. New York is one of a number of states
that permit, subject to the reciprocity conditions of the New York Banking
Law, out-of-state bank and savings and loan holding companies to acquire New
York savings associations.
In contrast, bank holding companies are generally authorized to acquire
banking subsidiaries in more than one state irrespective of any state law
restrictions on such acquisitions. The Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 ("Interstate Banking Act"), which was enacted
on September 29, 1994, permits approval under the BHC Act of the acquisition
of a bank located outside of the holding company's home state regardless of
whether the acquisition is permitted under the law of the state of the
acquired bank. The Federal Reserve Board may not approve an acquisition under
the BHC Act that would result in the acquiring holding company controlling
more than 10% of the deposits in the United States or more than 30% of the
deposits in any particular state.
In the past, branching across state lines was not generally available to a
state bank such as the Bank. Out-of-state branches of savings banks are
authorized under the New York Banking Law, but similar authority does not
exist generally under the laws of most other states. The Interstate Banking
Act permits, beginning June 1, 1997, the responsible federal banking agencies
to approve merger transactions between banks located in different states,
regardless of whether the merger would be prohibited under the law of the two
states. The Interstate Banking Act also permits a state to "opt in" to the
provisions of the Interstate Banking Act prior to June 1, 1997, and permits a
state to "opt out" of the provisions of the Interstate Banking Act by adopting
appropriate legislation before that date. Accordingly, the Interstate Banking
Act will, beginning no later than June 1, 1997, permit a bank, such as the
Bank, to acquire branches in a state other than New York unless the other
state has opted out of the Interstate Banking Act. The Interstate Banking Act
also authorizes de novo branching into another state if the host state enacts
a law expressly permitting out of state banks to establish such branches
within its borders.
The Interstate Banking Act may facilitate the further consolidation of the
banking industry. The effect of the Interstate Banking Act on the Bank, if
any, is likely to occur as banking institutions, state legislators, and bank
regulators respond to the new federal regulatory structure. The states will
have to establish appropriate corporate law, tax and regulatory structures to
adjust to the growth of new interstate banks.
FEDERAL SECURITIES LAWS
The Company has filed with the SEC a registration statement under the
Securities Act for the registration of the Common Stock to be issued pursuant
to the Conversion. Upon completion of the Conversion, the Company's Common
Stock will be registered with the SEC under the Exchange Act. The Company will
then be subject to the information, proxy solicitation, insider trading
restrictions and other requirements under the Exchange Act.
The registration under the Securities Act of shares of the Common Stock to
be issued in the Conversion does not cover the resale of such shares. Shares
of the Common Stock purchased by persons who are not affiliates of the Company
may be resold without registration. Shares purchased by an affiliate of the
Company will be subject to the resale restrictions of Rule 144 under the
Securities Act. If the Company meets the current public information
requirements of Rule 144 under the Securities Act, each affiliate of the
Company who complies with the other conditions of Rule 144 (including those
that require the affiliate's sale to be aggregated with those of certain other
persons) would be able to sell in the public market, without registration, a
number of shares not to exceed, in any three-month period, the greater of (i)
1% of the outstanding shares of the Company or (ii) the average weekly volume
of trading in such shares during the preceding four calendar weeks. Provision
may be made in the future by the Company to permit affiliates to have their
shares registered for sale under the Securities Act under certain
circumstances.
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MANAGEMENT OF THE COMPANY
DIRECTORS OF THE COMPANY
The Board of Directors of the Company is divided into three classes, each of
which contains one-third of the Board. The directors shall be elected by the
stockholders of the Company for staggered three year terms, or until their
successors are elected and qualified. One class of directors, consisting of
Messrs. Calabrese, Martin and Webel, has a term of office expiring at the
first annual meeting of stockholders, a second class, consisting of Messrs.
Swiggett, Freese and Mancino, has a term expiring at the second annual meeting
of stockholders and a third class, consisting of Messrs. York, McCuaig and
Nicholson, has a term of office expiring at the third annual meeting of
stockholders. The biographical information of each Director is set forth under
"Management of the Bank--Trustees of the Bank." It is currently intended that
Directors of the Company will receive no additional fees for their services as
Directors of the Company. However, subsequent to the Conversion, the Company
and the Bank intend to engage a compensation consultant to study the level and
structure of compensation paid to the Boards of Directors of the Company and
the Bank as compared to similarly situated publicly-traded financial
institutions and, upon a review of such study, may revise the amounts of fees
paid to Board members and frequency of Board or Committee meetings. See
"Management of the Bank--Compensation of Trustees" for a discussion of fees
paid to Trustees of the Bank.
EXECUTIVE OFFICERS OF THE COMPANY
The following individuals are executive officers of the Company and hold the
offices set forth below opposite their names. The biographical information for
each executive officer is set forth under "Management of the Bank--
Biographical Information--Trustees of the Bank" and "--Executive Officers of
the Bank Who Are Not Trustees."
<TABLE>
<CAPTION>
NAME POSITION(S) HELD WITH THE COMPANY
---- ---------------------------------
<S> <C>
Joseph L. Mancino....... Chairman of the Board, President and Chief Executive Officer
John R. Bransfield, Jr.. Vice President
Michael P. Puorro....... Treasurer and Chief Financial Officer
Mary M. Ehrich.......... Secretary
</TABLE>
The executive officers of the Company are elected annually and hold office
until their respective successors have been elected and qualified or until
death, resignation, retirement or removal by the Board of Directors.
Since the formation of the Company, none of the executive officers,
Directors or other personnel has received remuneration from the Company.
Executive officers of the Company will be compensated as described below under
"Management of the Bank."
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<PAGE>
MANAGEMENT OF THE BANK
TRUSTEES OF THE BANK
The Directors of the Company are also Trustees of the Bank. Upon
consummation of the Conversion, the current Trustees of the Bank will become
Directors of the stock chartered Bank. The following table sets forth certain
information regarding the Board of Trustees of the Bank.
<TABLE>
<CAPTION>
NAME AGE(1) POSITION(S) HELD WITH THE BANK TERM EXPIRES
---- ------ ------------------------------ ------------
<S> <C> <C> <C>
Joseph L. Mancino....... 58 Chairman of the Board, President and Chief 1998
Executive Officer
Floyd N. York........... 73 Trustee 1999
Victor C. McCuaig....... 67 Trustee 1999
John P. Nicholson....... 71 Trustee 1999
James E. Swiggett....... 64 Trustee 1998
Robert G. Freese........ 66 Trustee 1998
Thomas J. Calabrese, 54 Trustee 1997
Jr.....................
Dr. Edwin Martin, Jr.... 64 Trustee 1997
Richard C. Webel........ 44 Trustee 1997
</TABLE>
- --------
(1) As of May 31, 1996.
EXECUTIVE OFFICERS OF THE BANK
The following table sets forth certain information regarding the executive
officers of the Bank, including selected executive officers of RFI.
<TABLE>
<CAPTION>
NAME AGE(1) POSITION(S) HELD WITH THE BANK
---- ------ ------------------------------
<S> <C> <C>
Joseph L. Mancino....... 58 Chairman of the Board, President and Chief Executive Officer
John R. Bransfield, Jr.. 54 Senior Vice President and Senior Lending Officer
Mary M. Ehrich.......... 53 Senior Vice President and Secretary
John L. Klag............ 38 Vice President and Investment Officer
Daniel L. Murphy........ 36 Senior Vice President and Retail Banking Officer
Michael P. Puorro....... 37 Vice President and Chief Financial Officer
Peter J. Russo.......... 52 President and Chief Executive Officer, RFI
Anthony F. Panza........ 50 Executive Vice President, RFI
</TABLE>
- --------
(1) As of May 31, 1996.
The executive officers of the Bank are elected annually and will hold office
in the converted Bank until the annual meeting of the Board of Directors of
the Bank held immediately after the first annual meeting of stockholders of
the Bank subsequent to Conversion, and until their successors are elected and
qualified or until death, resignation, retirement or removal by the Board of
Directors. Officers are re-elected by the Board of Directors annually.
BIOGRAPHICAL INFORMATION
Trustees of The Bank
Joseph L. Mancino is Chairman of the Board of Trustees, President and Chief
Executive Officer of the Bank. Mr. Mancino was elected as Chairman of the
Board in 1995, has served as President since 1991 and Chief
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<PAGE>
Executive Officer since 1992 and has served in various capacities with the
Bank since 1960. Mr. Mancino also serves on the board of directors of the
Institutional Investors Mutual Fund (a diversified open end investment fund),
the Community Bankers Association of New York State and the Savings Bank Life
Insurance Fund. Mr. Mancino also serves as President of Old Northern Co. Ltd.,
RSB Agency, 1400 Corp., BSR 1400 Corp. and Blizzard Realty Corp., as well as
Chairman of Residential First, Inc., which are subsidiaries of the Bank.
Thomas J. Calabrese, Jr. has served as a Trustee of the Bank since 1994. Mr.
Calabrese also serves as a Director of RFI, a subsidiary of the Bank. Mr.
Calabrese is currently Managing Director--Human Resources of the NYNEX
Corporation, a telecommunications firm, and has been associated with the NYNEX
Corporation since 1963.
Robert G. Freese has served as a Trustee of the Bank since 1988. Mr. Freese
also serves as a Director of BSR 1400 Corp., a subsidiary of the Bank. Mr.
Freese retired as Vice Chairman and Chief Financial Officer of Grumman
Corporation, a defense contractor, in 1991 and served with Grumman Corp. from
1956 to his retirement in 1991.
Dr. Edwin W. Martin, Jr. has served as a Trustee of the Bank since 1994. Dr.
Martin also serves as a Director of Old Northern Co. Ltd., BSR 1400 Corp. and
Blizzard Realty Corp., which are subsidiaries of the Bank. Dr. Martin served
as President and Chief Executive Officer of the National Center for Disability
Services, a non-profit education, rehabilitation and research corporation from
1981 to 1994. He is presently President Emeritus and a Director of the
National Center. He is also a Director of National Captioning Institute, a
non-profit agency which promotes captioning on television for the deaf. Dr.
Martin currently serves as a Director of Interboro Mutual Indemnity Insurance
Company, an insurance company, and Pall Corp., a manufacturer of industrial
filters.
Victor C. McCuaig has served as a Trustee of the Bank since 1970. Mr.
McCuaig also serves as a Director of RFI and Blizzard Realty Corp., which are
subsidiaries of the Bank. Mr. McCuaig is currently of counsel to and was
previously a partner in the law firm of Payne, Wood & Littlejohn, which serves
as general counsel to the Bank.
John P. Nicholson has served as a Trustee of the Bank since 1975. Mr.
Nicholson also serves as a Director of Old Northern Co. Ltd., RSB Agency, Inc.
and 1400 Corp., which are subsidiaries of the Bank. Mr. Nicholson has served
as the Chairman of Nicholson & Galloway since 1991 and was the President and
Chief Executive Officer from 1960 to 1991. Nicholson & Galloway is a local
construction firm specializing in roofing construction. Mr. Nicholson also
serves as an Advisory Director of Bank of New York, Long Island Division.
James E. Swiggett has served as a Trustee of the Bank since 1980. Mr.
Swiggett also serves as a Director of RSB Agency, Inc., 1400 Corp. and RFI,
which are subsidiaries of the Bank. Mr. Swiggett served as President and then
Chief Executive Officer and Board Chairman of Kollmorgen Corp. during the
period from 1985 to 1990 when he retired. Kollmorgen Corp. is a diversified
technology manufacturing company.
Richard C. Webel has served as a Trustee of the Bank since 1995. Mr. Webel
also serves as a Director of Blizzard Realty Corp., a subsidiary of the Bank.
Mr. Webel has served as the managing director of Innocenti & Webel, an
architectural firm, since 1985, as well as President of the Webel Corporation,
a strategic planning company since 1984, and PlantAmerica, LLC, a software
development corporation since 1996. Mr. Webel also serves as a general partner
of Roundbush Associates, a real estate development partnership.
Floyd N. York has served as a Trustee of the Bank since 1967. He served as
President of the Bank from 1968 to 1972, as President and Chief Executive
Officer from 1972 to 1978 and as Chairman and Chief Executive Officer from
1978 to 1992 and President from 1978 to 1991. Mr. York also serves as a
Director of Old Northern Co. Ltd., RSB Agency, Inc. and 1400 Corp., which are
subsidiaries of the Bank. He also served as a member of the Board of Directors
of Nationar, a defunct data and financial services provider for the financial
institutions community, for approximately six years ending in 1993.
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<PAGE>
EXECUTIVE OFFICERS OF THE BANK WHO ARE NOT TRUSTEES
Mary M. Ehrich joined the Bank in 1960 and has served the Bank in a variety
of capacities. Since 1992, Mrs. Ehrich has served as a Senior Vice President
and Secretary. Her primary area of responsibility is as Corporate Secretary
for the Bank and each of its subsidiaries.
Michael P. Puorro joined the Bank in 1992 as Assistant Vice President and
Controller; in 1994 he was appointed Vice President and Treasurer and in 1995
he became Vice President and Chief Financial Officer. His primary area of
responsibility is accounting issues and regulatory reporting matters. Mr.
Puorro also serves as an officer of each of the Bank's subsidiaries. Prior to
joining the Bank, Mr. Puorro was a senior manager at KPMG Peat Marwick LLP and
is a certified public accountant.
John R. Bransfield, Jr. joined the Bank in 1993. He serves as a Senior Vice
President and Senior Lending Officer and operates as the chief lending officer
of the Bank overseeing all lending operations. Prior to joining the Bank, Mr.
Bransfield served as President of the Long Island Region of Fleet Bank from
1988 to 1992 and Executive Vice President for Fleet Bank from 1992 to 1993.
John L. Klag joined the Bank in 1993 as Vice President and Investment
Officer. Mr. Klag's primary responsibilities include overseeing the Bank's
investment activities. Prior to joining the Bank, Mr. Klag was with a New
York-based savings bank from 1985 to 1993 and served as Vice President-Fixed
Income Portfolio Manager from 1988 to 1993.
Daniel L. Murphy joined the Bank in 1978 and served as Vice President and
Retail Banking Officer from 1993 to 1995 when he was elected Senior Vice
President and Retail Banking Officer. Mr. Murphy's primary responsibilities
include overseeing the Bank's retail deposit gathering and branch
administration.
Peter J. Russo is Director, President and Chief Executive Officer of RFI.
Mr. Russo is primarily responsible for RFI's residential lending and mortgage
banking operations. Prior to joining RFI, Mr. Russo was a co-founder and
President of Residential Mortgage Banking, Inc., a full-service mortgage
banking company which was incorporated in 1986 as Residential Mortgage
Services, Inc., the assets and liabilities of which were acquired by the Bank
in August 1995. Mr. Russo is a Certified Mortgage Banker with 23 years of
mortgage banking experience.
Anthony F. Panza is a Director and Executive Vice President of RFI. Mr.
Panza is primarily responsible for RFI's residential lending and mortgage
banking operations. Prior to joining RFI in 1995, Mr. Panza was a co-founder
and Executive Vice President of Residential Mortgage Banking Inc. Mr. Panza
has 15 years of mortgage banking experience.
MEETINGS AND COMMITTEES OF THE BOARDS OF THE BANK AND THE COMPANY
The Board of Trustees meets monthly and may have additional special meetings
as may be called by the Chairman or at the written request of three trustees.
During the fiscal year ended December 31, 1995, the Board held 14 meetings. No
Trustee attended fewer than 75% in the aggregate of the total number of
meetings of the Board or Board Committees on which such Trustee served for the
year ended December 31, 1995. There are currently five committees of the Board
of Trustees consisting of the Investment Committee, Executive Committee,
Examining and Compliance Committee, Personnel Committee and Marketing
Committee. Subsequent to the Conversion, the Board of Trustees may consider
and make revisions to the current structure of its committees.
The Board of Trustees of the Bank has established the following committees:
The Examining Committee consists of Messrs. Freese, Nicholson, Swiggett,
York and Webel. The Bank's Compliance Officer and Acting Auditor reports to
this committee. The purposes of this committee are to review audit reports and
management's actions regarding the implementation of audit findings and to
review compliance with all relevant laws and regulations. The committee
generally meets on a quarterly basis and met 5 times in 1995.
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The Executive Committee consists of Messrs. McCuaig, Swiggett, Calabrese,
Jr., Mancino and two rotating members. The purposes of this Committee are to
approve certain loans and secondary market activities. The committee meets on
a weekly basis and met 50 times in 1995.
The Investment Committee consists of Messrs. McCuaig, York and Mancino. This
Committee is responsible for all matters regarding the Bank's investment
securities. This Committee meets on a quarterly basis and met 4 times in 1995.
The Marketing Committee consists of Messrs. Martin, Jr. and Calabrese, Jr.
This Committee is responsible for reviewing all marketing and promotional
matters. This Committee meets on an as needed basis and met 1 time in 1995.
The Personnel Committee consists of Messrs. Freese, Nicholson, Swiggett,
Calabrese, Jr. and Martin, Jr. This Committee is responsible for all matters
regarding compensation and fringe benefits. The committee meets on an as
needed basis and met 5 times in 1995.
Additionally, the Bank has a number of other management committees including
the Asset/Liability and the Loan and Asset Classification Committees.
The Board of Directors of the Company has established the following
committees: the Audit Committee consisting of Messrs. Freese, Swiggett,
Nicholson, York and Webel; the Pricing Committee consisting of Messrs.
Mancino, McCuaig, Calabrese, Jr., Swiggett and Webel; and the Compensation
Committee consisting of Messrs. Mancino, Calabrese, Jr., Freese, Swiggett,
Nicholson and Martin, Jr.
COMPENSATION OF TRUSTEES
Trustees of the Bank receive fees of $1,700 per Board meeting attended and
$800 per Committee meeting attended. Subsequent to the Conversion, the Company
and the Bank intend to engage a compensation consultant to study the level and
structure of compensation paid to the Boards of Directors of the Company and
the Bank as compared to similarly situated publicly-traded financial
institutions and, upon review of such study, may revise the amount of fees
paid to Board members and frequency of Board and Committee meetings.
TRUSTEES EMERITUS
The Bank maintains a Board of Trustees Emeritus which currently consists of
three former Trustees of the Bank. Pursuant to the Bank's bylaws, Trustees
must retire in the year they reach age 75 and any Trustee who retires because
of such age limitation and has 20 years prior service on the Board of Trustees
is eligible to be elected as a Trustee Emeritus. Trustees Emeritus may be re-
elected until the year in which such person reaches age 80, although one
Trustee Emeritus has been excepted from this policy. Trustees Emeritus have no
vote and receive the same meeting fees as Trustees of the Bank.
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<PAGE>
EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth the cash
compensation paid by the Bank as well as certain other compensation paid or
accrued for services rendered in all capacities during the year ended December
31, 1995, to the Chief Executive Officer and the four highest paid executive
officers of the Bank who received salary and bonus in excess of $100,000
("Named Executive Officers").
<TABLE>
<CAPTION>
ANNUAL COMPENSATION(1) LONG-TERM COMPENSATION
------------------------------- ---------------------------------
AWARDS PAYOUTS
------------------------- -------
OTHER SECURITIES
ANNUAL RESTRICTED UNDERLYING LTIP ALL OTHER
NAME AND PRINCIPAL COMPENSATION STOCK AWARDS OPTIONS/SARS PAYOUTS COMPENSATION
POSITIONS YEAR SALARY($) BONUS($) ($)(2) ($)(#) (#)(4) ($)(5) ($)(6)
- ------------------ ---- --------- -------- ------------ ------------ ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Joseph L. Mancino....... 1995 $336,539 $ 1,600 -- -- -- -- $20,433
Chairman of the Board
of Trustees, President
and Chief Executive Of-
ficer
John R. Bransfield, Jr.. 1995 151,719 75,736 -- -- -- -- 10,578
Senior Vice President
and Senior Lending Of-
ficer
John L. Klag............ 1995 90,423 47,870 -- -- -- -- 3,004
Vice President and In-
vestment Officer
Arthur W. Toohig........ 1995 91,692 44,500 -- -- -- -- 7,400
Senior Vice President
and Human Resources Of-
ficer
Michael P. Puorro....... 1995 85,846 43,340 -- -- -- -- 2,847
Vice President and
Chief Financial Officer
</TABLE>
- --------
(1) Under Annual Compensation, the column titled "Salary" includes amounts
deferred by the Named Executive Officer under the Bank's 401(k) Plan and
the column titled "Bonus" consists of board approved discretionary bonus
as well as attendance bonuses, loan referral bonuses and recruitment
bonuses.
(2) For 1995, there were no (a) perquisites over the lesser of $50,000 or 10%
of the individual's total salary and bonus for the year; (b) payments of
above-market preferential earnings on deferred compensation; (c) payments
of earnings with respect to long-term incentive plans prior to settlement
or maturation; (d) tax payment reimbursements; or (e) preferential
discounts on stock. For 1995, the Bank had no restricted stock or stock
related plans in existence.
(3) Does not include awards pursuant to the Stock Programs, as such awards
were not earned, vested or granted in fiscal 1995. For a discussion of
the terms of the Stock Programs which are intended to be adopted by the
Company, see "- Benefit Plans--Stock Programs." For 1995, the Bank had no
stock plans in existence.
(4) No stock options or SARs were earned or granted in 1995. For a discussion
of the Stock Option Plans which are intended to be adopted by the
Company, see "--Benefit Plans--Stock Option Plans."
(5) For 1995, there were no payouts or awards under any long-term incentive
plan.
(6) Other compensation includes other benefits such as the Bank's matching
contribution under the Bank's 401(k) Plan, group term life insurance and
automobile allowance.
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REPORT OF INDEPENDENT COMPENSATION CONSULTANT
Pursuant to the NYBB regulations governing the Conversion, the Bank must
obtain the opinion of an independent compensation consultant as to whether or
not the total compensation for the executive officers, directors or trustees
of the Bank, viewed as a whole and on an individual basis, is reasonable and
proper in comparison to the compensation provided to executive officers,
directors or trustees of similar publicly-traded financial institutions. The
Bank has obtained an opinion from William M. Mercer, Incorporated, which
provides that, based upon published professional survey data of similarly
situated publicly-traded financial institutions operating in the relevant
markets as of September 1, 1996, with respect to the total cash compensation
(base salary and annual incentive) for executive officers and total
compensation for trustees of the Bank, such compensation, viewed as a whole
and on an individual basis, is reasonable and proper in comparison to the
compensation provided to similarly situated publicly-traded financial
institutions, and that, with respect to the amount of shares of Common Stock
to be reserved under the ESOP, the Stock Programs and Stock Option Plans as a
whole, such amounts reserved for granting are reasonable in comparison to
similar publicly-traded financial institutions.
EMPLOYMENT AGREEMENTS
Currently, Mr. Panza and Mr. Russo are the only officers of the Bank or any
of its subsidiaries who have employment agreements with the Bank through their
employment with RFI. Messrs. Panza's and Russo's employment agreements were
entered into in connection with the Bank's purchase of certain assets and
liabilities of RMBI in August 1995. Such employment agreements are
substantially similar and provide for five year terms which will expire in
July 2000. The agreements provide for base salaries of $225,000 per year for
each of Messrs. Panza and Russo, and also provide for an incentive cash bonus
equal to 12.5 basis points of the principal amount of one- to four-family
loans closed by RFI in excess of $200 million, subject to certain adjustments.
The incentive cash bonus provided under the agreements are subject to RFI
meeting specified financial performance goals and subject to the loan
portfolio serviced by RFI meeting certain delinquency performance goals. The
agreements also provide that Messrs. Panza and Russo shall be eligible to
participate in any tax-qualified defined contribution or defined benefit plan
that is maintained by RFI and any other insurance or medical benefits provided
to employees of RFI. Additionally, the agreements provide that the Bank shall
indemnify Messrs. Panza and Russo to the fullest extent permitted by law and
provide indemnity insurance coverage. Pursuant to the agreements, Messrs.
Panza and Russo may be terminated for cause, as defined in the agreements,
and, upon termination for cause, all unpaid compensation and benefits due
under the agreements shall be forfeited. The agreements prohibit Messrs. Panza
and Russo from competing with the Bank in any state in which the Bank engages
in business for one year after they cease to receive compensation from RFI
under the agreements.
Upon the Conversion, the Bank intends to enter into employment agreements
with Messrs. Mancino, Bransfield, Klag, Toohig and Puorro, Ms. Ehrich and two
other executive officers (individually, the "Executive") and the Company
intends to enter into employment agreements with Messrs. Mancino, Bransfield
and Puorro and Ms. Ehrich (collectively, the "Employment Agreements"). The
Employment Agreements are intended to ensure that the Bank and the Company
will be able to maintain a stable and competent management base after the
Conversion. The continued success of the Bank and the Company depends to a
significant degree on the skills and competence of the above referenced
officers.
The Employment Agreements provide for three-year terms for each Executive.
The terms of the Employment Agreements shall be extended on a daily basis
unless written notice of non-renewal is given by the Board of Directors. The
Employment Agreements provide that the Executive's base salary will be
reviewed annually. The base salaries which will be effective for such
Employment Agreements for Messrs. Mancino, Bransfield, Klag, Toohig, Puorro
and Ms. Ehrich will be $420,000, $240,000, $130,500, $131,500, $140,000 and
$118,000 respectively. In addition to the base salary, the Employment
Agreements provide for, among other things, participation in stock benefits
plans and other fringe benefits applicable to executive personnel. The
agreements provide for termination by the Bank or the Company for cause, as
defined in the Employment Agreements, at any time. In the event the Bank or
the Company chooses to terminate the Executive's employment for reasons other
than for cause, or in the event of the Executive's resignation from the Bank
and
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the Company upon: (i) failure to re-elect the Executive to his current
offices; (ii) a material change in the Executive's functions, duties or
responsibilities; (iii) a relocation of the Executive's principal place of
employment by more than 25 miles; (iv) a reduction in the benefits and
perquisites being provided to the Executive under the Employment Agreement;
(v) liquidation or dissolution of the Bank or the Company; or (vi) a breach of
the agreement by the Bank or the Company, the Executive or, in the event of
death, his beneficiary would be entitled to receive an amount equal to the
remaining base salary payments due to the Executive for the remaining term of
the Agreement and the contributions that would have been made on the
Executive's behalf to any employee benefit plans of the Bank and the Company
during the remaining term of the agreement. The Bank and the Company would
also continue and pay for the Executive's life, health, dental and disability
coverage for the remaining term of the Agreement. Upon any termination of the
Executive, the Executive is subject to a one year non-competition agreement.
Under the Employment Agreements, if voluntary or involuntary termination
follows a change in control of the Bank or the Company, the Executive or, in
the event of the Executive's death, his beneficiary, would be entitled to a
severance payment equal to the greater of: (i) the payments due for the
remaining terms of the agreement; or (ii) three times the average of the five
preceding taxable years' annual compensation. The Bank and the Company would
also continue the Executive's life, health, and disability coverage for
thirty-six months. Notwithstanding that both the Bank and Company Employment
Agreements provide for a severance payment in the event of a change in
control, the Executive would only be entitled to receive a severance payment
under one agreement.
Payments to the Executive under the Bank's Employment Agreement will be
guaranteed by the Company in the event that payments or benefits are not paid
by the Bank. Payment under the Company's Employment Agreement would be made by
the Company. All reasonable costs and legal fees paid or incurred by the
Executive pursuant to any dispute or question of interpretation relating to
the Employment Agreements shall be paid by the Bank or Company, respectively,
if the Executive is successful on the merits pursuant to a legal judgment,
arbitration or settlement. The Employment Agreements also provide that the
Bank and Company shall indemnify the Executive to the fullest extent allowable
under federal and Delaware law, respectively. In the event of a change in
control of the Bank or the Company, the total amount of payments due under the
Agreements, based solely on cash compensation paid to the officers who will
receive Employment Agreements over the past five fiscal years and excluding
any benefits under any employee benefit plan which may be payable, would be
approximately $3.2 million.
CHANGE IN CONTROL AGREEMENTS
Upon Conversion, the Bank intends to enter into two-year Change in Control
Agreements (the "CIC Agreements") with seven Vice Presidents of the Bank, none
of whom will be covered by employment contracts. Commencing on the first
anniversary date and continuing on each anniversary thereafter, the Bank CIC
Agreements may be renewed by the Board of Directors of the Bank for an
additional year. The Bank's CIC Agreements will provide that in the event
voluntary or involuntary termination follows a change in control of the
Company or the Bank, the officer would be entitled to receive a severance
payment equal to two times the officer's average annual compensation for the
five most recent taxable years. The Bank would also continue and pay for the
officer's life, health and disability coverage for 24 months following
termination. In the event of a change in control of the Company or the Bank,
the total payments that would be due under the CIC Agreements, based solely on
the current annual compensation paid to the officers covered by the CIC
Agreements and excluding any benefits under any employee benefit plan which
may be payable, would be approximately $1.2 million.
EMPLOYEE SEVERANCE COMPENSATION PLAN
The Bank's Board of Directors intends to, upon Conversion, establish the
Roslyn Savings Bank Employee Severance Compensation Plan ("Severance Plan")
which will provide eligible employees with severance pay benefits in the event
of a change in control of the Bank or the Company following Conversion.
Management
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personnel with Employment Agreements or CIC Agreements are not eligible to
participate in the Severance Plan. Generally, employees are eligible to
participate in the Severance Plan if they have completed at least one year of
service with the Bank. The Severance Plan vests in each participant a
contractual right to the benefits such participant is entitled to thereunder.
Under the Severance Plan, in the event of a change in control of the Bank or
the Company, eligible employees who are terminated from or terminate their
employment within one year (for reasons specified under the Severance Plan),
will be entitled to receive a severance payment. If the participant, whose
employment has terminated, has completed at least one year of service, the
participant will be entitled to a cash severance payment equal to one-twelfth
of annual compensation for each year of service up to a maximum of 199% of
annual compensation. Such payments may tend to discourage takeover attempts by
increasing costs to be incurred by the Bank in the event of a takeover. In the
event the provisions of the Severance Plan are triggered, the total amount of
payments that would be due thereunder, based solely upon current salary
levels, would be approximately $3.3 million. However, it is management's
belief that substantially all of the Bank's employees would be retained in
their current positions in the event of a change in control, and that any
amount payable under the Severance Plan would be considerably less than the
total amount that could possibly be paid under the Severance Plan.
BENEFIT PLANS
Retirement Plan. The Bank maintains a defined benefit plan ("Retirement
Plan") for eligible employees. The Retirement Plan is intended to satisfy the
requirements of section 401(a) of the Code. Employees who have attained age
21, have completed at least one year of service for the Bank in which the
employee completes at least 1,000 hours of service and are not (i) paid on an
hourly-rate or contract basis, (ii) regularly employed outside the Bank's own
offices in connection with the operation and maintenance of building and other
property acquired through foreclosure or deed, or (iii) leased employees.
Participants become vested in their benefits under the Retirement Plan after
being credited with at least five years of service and the attainment of age
23.
The Retirement Plan provides for a monthly benefit to the participant upon
retirement at or after the later of (i) attainment of age 65 or (ii) the fifth
anniversary of initial participation in the Plan. The Retirement Plan also
provides for a benefit upon the participant's death or early retirement. The
annual normal retirement benefit for a participant under the Retirement Plan
is determined as (i) 2% of average annual earnings multiplied by years of
credited service (up to a maximum of 30 years), plus (ii) 0.5% of average
annual earnings multiplied by the participant's number of years and months of
credited service in excess of 30 years. For purposes of the Retirement Plan,
average annual earnings means the participant's average annual basic
compensation during the 36 consecutive calendar months that yields the highest
average within the participants' final 120 consecutive calendar months of
service. A participant is eligible to receive an early retirement benefit upon
the completion of at least ten consecutive years of vested service in the
Retirement Plan and (i) attainment of age 60, or (ii) the sum of the
participant's age and years of service equals at least 75. Early retirement
benefits are a reduced benefit payable compared to the normal retirement
benefit. Benefits are generally paid in a straight life annuity with respect
to unmarried participants and in the form of a 50% joint and survivor annuity
(with the spouse as designated beneficiary) for married participants. Other
forms of benefit payments are available under the Retirement Plan.
Benefit Restoration Plan. The Bank maintains the Benefit Restoration Plan
(the "BRP"). The BRP is a non-qualified plan that is designed to permit
certain employees to receive supplemental retirement income from the Bank.
Participants in the BRP receive a benefit equal to the amount the participant
would have received under the 401(k) Plan and the Retirement Plan, but for the
reductions on such benefits and other limitations imposed on the benefits
payable under tax qualified plans under Section 401(a)(17), 401(m), 401(k)(3),
402(g) and 415 of the Code. The BRP is being amended to provide BRP
participants to also receive a benefit equal to the amount of benefits the
Participant would have received under the ESOP but for the Code limitations.
The Plan is an unfunded plan, which provides participants only with a
contractual right to obtain the benefits provided thereunder from the general
assets of the Bank. Currently, only Messrs. Mancino and Bransfield are
eligible to participate in the BRP.
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The following table sets forth the estimated annual benefits payable under
the Retirement Plan upon a participant's retirement at age 65 for the year
ended December 31, 1995, expressed in the form of a straight life annuity, and
any related amounts payable under the Benefit Restoration Plan. The covered
compensation under the Retirement Plan and Benefit Restoration Plan includes
the base salary for participants, including Named Executive Officers and does
not consider any cash bonus amounts. The benefits listed in the table below
for the Retirement Plan and Benefit Restoration Plan are not subject to a
deduction for social security benefits or any other offset amount.
<TABLE>
<CAPTION>
YEARS OF SERVICE
FINAL AVERAGE ----------------------------------------------------------------
COMPENSATION 15 20 25 30 35 40
- ------------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
$ 50,000 $ 15,000 $ 20,000 $ 25,000 $ 30,000 $ 31,250 $ 32,500
100,000 30,000 40,000 50,000 60,000 62,500 65,000
150,000 45,000 60,000 75,000 90,000 93,750 97,500
200,000 60,000 80,000 100,000 120,000 125,000 130,000
250,000 75,000 100,000 125,000 150,000 156,250 162,500
300,000 90,000 120,000 150,000 180,000 187,500 195,000
350,000 105,000 140,000 175,000 210,000 218,750 227,500
400,000 120,000 160,000 200,000 240,000 250,000 260,000
450,000 135,000 180,000 225,000 270,000 281,250 292,500
500,000 150,000 200,000 250,000 300,000 312,500 325,000
550,000 165,000 220,000 275,000 330,000 343,750 357,500
</TABLE>
The approximate years of service, as of December 31, 1995, for the named
executive officers are as follows:
<TABLE>
<CAPTION>
YEARS OF
SERVICE
--------
<S> <C>
Joseph L. Mancino................................................ 35
John R. Bransfield, Jr. ......................................... 2
John L. Klag..................................................... 2
Arthur W. Toohig................................................. 19
Michael P. Puorro................................................ 3
</TABLE>
401(k) Plan. The Bank maintains the 401(k) Savings Plan ("401(k) Plan"), a
tax-qualified profit sharing and salary reduction plan under Sections 401(a)
and 401(k) of the Code. The 401(k) Plan provides participants with retirement
benefits and may also provide benefits upon death, disability or termination
of employment with the Bank. Salaried, and as of August, 1995, commission-paid
employees, are eligible to participate in the Plan following the completion of
one year of service.
Participants may make salary reduction contributions to the 401(k) Plan up
to the lesser of 12% of the participant's compensation or the legally
permissible limit (currently $9,500). The Bank matches 50% of the amount of
the participant's salary reduction contributions up to a maximum of 3% of the
participant's compensation. For those employees who have been participants in
the 401(k) Plan for at least sixty months, the Bank contributes an additional
50% of that amount of the participant's salary reduction contributions up to a
maximum of 6% of the participant's compensation. The 401(k) Plan permits
participants to direct the investment of their 401(k) plan account into
various investment alternatives. The investment accounts are valued daily and
participants are provided with information regarding the market value of the
participant's investments and all contributions made on his or her behalf on
at least a quarterly basis.
Participants are always 100% vested in their salary reduction contributions.
Participants become 20% vested in Bank matching contributions after the
completion of one year of service with the Bank. Their vested interest in Bank
matching contributions increases by 20% for each year of service completed, so
that after the completion of 5 years of service, the participant is 100%
vested in Bank matching contributions. A participant who terminates employment
due to death, disability, or retirement also becomes fully vested in the
Bank's matching contributions credited to his or her account. A participant's
vested portion of his or her 401(k) Plan account is distributable from the
401(k) Plan upon the termination of the participant's employment, death,
disability or
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retirement. In addition, a participant may withdraw amounts rolled over to the
401(k) Plan from another qualified plan if the participant has attained age 59
1/2. Participants may also receive hardship distributions from the 401(k)
Plan. Any distribution made to a participant prior to the participant's
attainment of age 59 1/2 is subject to a 10% tax penalty. Participants may
borrow against the vested portion of their accounts. The Board of Directors
may at any time discontinue the Bank's contributions to employee accounts. For
the years ended December 31, 1995, 1994 and 1993, the Bank's matching
contributions to the 401(k) Plan were $255,257, $220,386 and $206,841,
respectively.
Participants may direct the investment of their 401(k) Plan accounts into
specified investment funds. In connection with the Conversion, the Bank will
amend the 401(k) Plan to permit participants to invest in an Employer Stock
Fund as one of the investment alternatives. The Employer Stock Fund will be
invested primarily in shares of Common Stock. The trustee may follow the
voting directions of 401(k) Plan participants investing in the Employer Stock
Fund, provided that the trustee determines such voting is consistent with its
fiduciary duties. However, the trustee is not required to follow the voting
directions of the 401(k) Plan participants with respect to Common Stock held
in the Employer Stock Fund.
ESOP. In connection with the Conversion, the Bank intends to implement an
employee stock ownership plan ("ESOP"). The ESOP is a tax qualified retirement
plan designed to invest primarily in the Common Stock. The Bank's matching
contributions that otherwise would be made to the 401(k) Plan shall be made to
the ESOP with respect to persons who are participants in both the ESOP and the
401(k) Plan. The Bank will make additional contributions to the ESOP on behalf
of all ESOP participants. The ESOP will provide eligible employees with the
opportunity to receive a Bank funded retirement benefit based on the value of
the Common Stock. All full-time salaried employees of the Bank who have
completed a year of service with the Bank in which the employee completes at
least 1,000 hours of service will be eligible to participate in the ESOP
portion of the combined plan.
The ESOP intends to purchase 8% of the Common Stock issued in connection
with the Conversion, including shares issued to the Foundation. As part of the
Conversion and in order to fund the ESOP's purchase of the Common Stock to be
issued in the Conversion, the ESOP intends to borrow funds from the Company
equal to 100% of the aggregate purchase price of the Common Stock to be
purchased by the ESOP. Alternatively, the Company and Bank may choose to fund
the ESOP's purchase of stock through a loan from a third party financial
institution. The collateral for the loan will be the Common Stock purchased by
the ESOP with the loan proceeds, as described below. The term of the ESOP loan
will be 30 years and it will be repaid principally from the Company's or the
Bank's contributions to the ESOP. The Bank intends to use matching
contributions made with respect to ESOP participants' 401(k) salary reduction
contributions and other discretionary contributions to meet the ESOP loan
obligations. Additionally, any dividends that may be paid on unallocated stock
held by the ESOP will also be used to repay the ESOP loan. Subject to receipt
of any necessary regulatory approvals or opinions, the Bank may make
additional contributions to the ESOP for repayment of the loan or to reimburse
the Company for contributions made by it. The interest rate for the loan is
expected to be the prime rate.
Shares of Common Stock purchased by the ESOP with the loan proceeds will
initially be pledged as collateral for the loan, and will be held in a
suspense account until released for allocation among participants as the loan
is repaid. The pledged shares will be released annually from the suspense
account in an amount proportional to the repayment of the ESOP loan for each
plan year. The released shares will be allocated to the accounts of ESOP
participants pursuant to two methods. First, for each eligible ESOP
participant, a portion of the shares released for the plan year will be
allocated to a special "matching" account under the ESOP equal in value to the
amount of matching contribution, if any, that such participant would be
entitled to under the terms of the Roslyn Savings Bank 401(k) Plan for the
plan year. Second, the remaining shares which have been released for the plan
year will be allocated to each eligible participant's general ESOP account
based on the ratio of each such participant's base compensation to the total
base compensation of all eligible ESOP participants. Participants will vest in
their ESOP account at a rate of 20% annually commencing after the completion
of one year of service, with 100% vesting upon the completion of 5 years of
service. Participants will also completely vest if their service is terminated
due to death, retirement, permanent disability, or upon the
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occurrence of a change in control. Prior to the completion of one year of
credited service, a participant who terminates employment for reasons other
than death, retirement, disability, or change in control of the Bank or the
Company will not receive any benefit. Forfeitures will be reallocated among
remaining participating employees, in the same proportion as contributions.
Benefits may be payable upon death, retirement, early retirement, or
separation from service. The annual contributions to the ESOP are not fixed,
so benefits payable under the ESOP cannot be estimated.
In connection with the establishment of the ESOP, a committee of the Board
of Directors and officers of the Bank will be appointed to administer the ESOP
(the "ESOP Committee"). An unrelated corporate trustee for the ESOP and the
401(k) Plan Employer Stock Fund will be appointed prior to the Conversion and
continuing thereafter. The ESOP Committee may instruct the trustee regarding
investment of funds contributed to the ESOP. The ESOP trustee, subject to its
fiduciary duties, must vote all allocated shares held in the ESOP in
accordance with the instructions of the participating employees. Under the
ESOP, unallocated shares and allocated shares for which no instructions are
given will be voted by the trustee in a manner calculated to most accurately
reflect the instructions it has received from participants regarding the
allocated stock, provided that such vote is in accordance with the provisions
of the Employee Retirement Income Security Act of 1974, as amended ("ERISA").
Management Supplemental Executive Retirement Plan. The Bank intends to
implement a non-tax qualified Supplemental Executive Retirement Plan ("SERP")
to provide certain officers and highly compensated employees with additional
retirement benefits. The SERP benefit is intended to make up benefits lost
under the ESOP allocation procedures to participants who retire prior to the
complete repayment of the ESOP loan. At the retirement of a participant, the
benefits under the SERP are determined by first: (i) projecting the number of
shares that would have been allocated to the participant under the ESOP if
they had been employed throughout the period of the ESOP loan (measured from
the participant's first date of ESOP participation); and (ii) reducing the
number determined by (i) above by the number of shares actually allocated to
the Participant's account under the ESOP; and second, by multiplying the
number of shares that represent the difference between such figures by the
average fair market value of the Common Stock over the preceding five years.
Benefits under the SERP vest in 20% annual increments over a five year period
commencing as of the date of a Participant's participation in the SERP. The
vested portion of the SERP Participant's benefits are payable upon the
retirement of the Participant upon or after the attainment of age 65 or in
accordance with the requirements of early retirement under the Retirement
Plan.
The Bank will amend the existing irrevocable grantor's trust ("grantor's
trust") established in connection with the BRP to hold the assets of the SERP.
This trust would be funded with contributions from the Bank for the purpose of
providing the benefits promised under the terms of the SERP. The grantor's
trust may hold a variety of assets including the Common Stock, other
securities, insurance contracts and cash. The SERP participants have only the
rights of unsecured creditors with respect to the trust's assets, and will not
recognize income with respect to benefits provided by the SERP until such
benefits are received by the participants. The assets of the grantor's trust
are considered part of the general assets of the Bank and are subject to the
claims of the Bank's creditors in the event of the Bank's insolvency. Earnings
on the trust's assets are taxable to the Bank.
Stock Option Plans. Following the Conversion, the Board of Directors of the
Company intends to adopt stock-based benefit plans which would provide for the
granting of options to purchase Common Stock to eligible officers, employees
and directors of the Company and Bank. Stock options are intended to be
granted under either a separate stock option plan for officers and employees
(the "Incentive Option Plan") and a separate option plan for outside directors
(the "Directors' Option Plan") (collectively, the "Option Plans") or under a
single Master Stock-Based Benefit Plan which would incorporate the benefits
and features of the Incentive Option Plan and Directors' Option Plan. At a
meeting of stockholders of the Company following the Conversion, which under
applicable NYBB regulations may be held no earlier than six months after the
completion of the Conversion, the Board of Directors intends to present the
Option Plans or the Master Stock-Based Benefit Plan to stockholders for
approval and has reserved an amount equal to 10% of the shares of Common Stock
issued in the Conversion, including shares issued to the Foundation (or
3,795,000 shares based upon the issuance of
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37,950,000 shares), for issuance under the Option Plans or Master Stock-Based
Benefit Plan. NYBB regulations provide that, in the event such plan is
implemented within the one year following the conversion, no individual
officer or employee of the Bank may receive more than 25% of the options
granted under the Option Plans or Master Stock-Based Benefit Plan and non-
employee directors may not receive more than 5% individually, or 30% in the
aggregate of the options granted under the Option Plans. NYBB and FDIC
regulations also provide that exercise price of any options granted under any
such plan must be the market price of the Common Stock as of the date of
grant.
The stock option benefits provided under the Incentive Option Plan or Master
Stock-Based Benefit Plan will be designed to attract and retain qualified
personnel in key positions, provide officers and key employees with a
proprietary interest in the Company as an incentive to contribute to the
success of the Company and reward key employees for outstanding performance.
The granting or vesting of stock options may be conditioned upon the
achievement of individual or Company-wide performance goals, including the
achievement by the Company or Bank of specified levels of net income, asset
growth, return on equity or other specific financial performance goals. All
full-time salaried and commission paid employees of the Company and its
subsidiaries may be eligible to participate in the Incentive Option Plan. The
Incentive Option Plan or Master Stock-Based Benefit Plan will provide for the
grant of: (i) options to purchase the Company's Common Stock intended to
qualify as incentive stock options under Section 422 of the Code ("Incentive
Stock Options"); (ii) options that do not so qualify ("Non-Statutory Stock
Options"); and (iii) Limited Rights (discussed below) which will be
exercisable only upon a change in control of the Bank or the Company. Unless
sooner terminated, the Incentive Option Plan or Master Stock-Based Benefit
Plan will be in effect for a period of ten years from the earlier of adoption
by the Board of Directors or approval by the Company's stockholders. The
Company intends to grant options with Limited Rights under the Incentive
Option Plan or Master Stock-Based Benefit Plan at an exercise price equal to
the fair market value of the underlying Common Stock on the date of grant.
Subject to any applicable NYBB and FDIC regulations, upon exercise of "Limited
Rights" in the event of a change in control, the employee will be entitled to
receive a lump sum cash payment equal to the difference between the exercise
price of the related option and the fair market value of the shares of common
stock subject to the option on the date of exercise of the right in lieu of
purchasing the stock underlying the option. It is anticipated that all options
granted contemporaneously with stockholder approval of the Incentive Option
Plan will be intended to be Incentive Stock Options to the extent permitted
under Section 422 of the Code.
Under the Incentive Option Plan or Master Stock-Based Benefit Plan, it is
expected that a committee of the Board of Directors will determine which
officers and employees will be granted options and Limited Rights, whether
such options will be Incentive or Non-Statutory Stock Options, the number of
shares subject to each option, the exercise price of each Non-statutory Stock
Option, whether such options may be exercised by delivering other shares of
Common Stock and when such options become exercisable. It is expected that the
per share exercise price of an Incentive Stock Option will be required to be
at least equal to the fair market value of a share of Common Stock on the date
the option is granted.
If the Incentive Option Plan or Master Stock-Based Benefit Plan is adopted
in the form described above, an employee will not be deemed to have received
taxable income upon grant or exercise of any Incentive Stock Option, provided
that such shares received through the exercise of such option are not disposed
of by the employee for at least one year after the date the stock is received
in connection with the option exercise and two years after the date of grant
of the option. No compensation deduction would be able to be taken by the
Company as a result of the grant or exercise of Incentive Stock Options,
provided such shares are not disposed of before the expiration of the period
described above (a "disqualifying disposition"). In the case of a Non-
Statutory Stock Option and in the case of a disqualifying disposition of an
Incentive Stock Option, an employee will be deemed to receive ordinary income
upon exercise of the stock option in an amount equal to the amount by which
the exercise price is exceeded by the fair market value of the Common Stock
purchased by exercising the option on the date of exercise. The amount of any
ordinary income deemed to be received by an optionee upon the exercise of a
Non-Statutory Stock Option or due to a disqualifying disposition of an
Incentive Stock Option would be a deductible expense for tax purposes for the
Company. In the case of Limited Rights, upon exercise, the option holder would
have to include the amount paid to him or her upon exercise in his gross
income for federal income
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tax purposes in the year in which the payment is made and the Company would be
entitled to a deduction for federal income tax purposes of the amount paid.
If the Incentive Option Plan or Master Stock-Based Benefit Plan is adopted
in the form described above, stock options would become vested and exercisable
in the manner specified by a committee of the Board of Directors, subject to
applicable NYBB and FDIC regulations. Options granted in connection with the
Incentive Option Plan or Master Stock-Based Benefit Plan could be exercisable
for three months following the date on which the employee ceases to perform
services for the Bank or the Company, except that in the event of death or
disability, options accelerate and become fully vested and could be
exercisable for up to one year thereafter or such longer period as determined
by the Company. However, any Incentive Stock Options exercised more than three
months following the date the employee ceases to perform services as an
employee, other than termination due to death or disability, would be treated
as a Non-Statutory Stock Option as described above. In the event of
retirement, if the optionee continues to perform services as a Director,
Director Emeritus or consultant on behalf of the Bank, the Company or an
affiliate, unvested options would continue to vest in accordance with their
original vesting schedule until the optionee ceases to serve as a Director,
Director Emeritus or consultant. If the Incentive Stock Option Plan or Master
Stock-Based Benefit Plan is adopted in the form described above, the Company,
if requested by the optionee, could elect, in exchange for vested options, to
pay the optionee, or beneficiary in the event of death, the amount by which
the fair market value of the Common Stock exceeds the exercise price of the
options on the date of the employee's termination of employment.
Under the Directors' Option Plan or Master Stock-Based Benefit Plan
contemplated, the exercise price per share of each option granted may be equal
to the fair market value of the shares of Common Stock on the date the option
is granted. All options granted to outside directors under the Directors'
Option Plan or Master Stock-Based Benefit Plan would be Non-Statutory Stock
Options and would vest and become exercisable in a manner specified by the
committee, subject to applicable NYBB and FDIC regulations, and would expire
upon the earlier of ten years following the date of grant or one year
following the date the optionee ceases to be a Director, Director Emeritus or
consultant. In the event of the death or disability of a participant, all
previously granted options would immediately vest and become fully
exercisable.
It is intended that, subject to any applicable NYBB or FDIC regulations, the
Incentive Option Plan and the Directors' Option Plan or Master Stock-Based
Benefit Plan described above provide for accelerated vesting of previously
granted options in the event of a change in control of the Company or the
Bank. A change in control would be defined in the contemplated Incentive
Option Plan, Master Stock-Based Benefit Plan or the Directors' Option Plan
generally to occur when a person or group of persons acting in concert
acquires beneficial ownership of 20% or more of any class of equity security
of the Company or the Bank or in the event of a tender or exchange offer,
merger or other form of business combination, sale of all or substantially all
of the assets of the Company or the Bank or contested election of directors
which resulted in the replacement of a majority of the Board of Directors by
persons not nominated by the directors in office prior to the contested
election.
Stock Programs. Following the Conversion, the Company intends to establish
performance-based Stock Programs as a method of providing officers, employees
and non-employee directors of the Bank and Company with a proprietary interest
in the Company in a manner designed to encourage such persons to remain with
the Bank. The benefits intended to be granted under the Stock Programs may be
provided for under either a separate plan for officers and employees and a
separate plan for outside directors or under the Master Stock-Based Benefit
Plan which would incorporate the benefits and features of such separate Stock
Program plans and the Stock Option Plans discussed above. The Company intends
to present the Stock Programs or Master Stock-Based Benefit Plan for
stockholder approval at a meeting of stockholders, which pursuant to
applicable NYBB regulations, may be held no earlier than six months after the
completion of the Conversion.
The Bank or Company expects to contribute funds to the Stock Programs or
Master Stock-Based Benefit Plan to enable such plans to acquire, in the
aggregate, an amount equal to 4% of the shares of Common Stock issued in the
Conversion, including shares issued to the Foundation (or 1,518,000 shares
based upon the issuance of 37,950,000 shares). These shares would be acquired
through open market purchases, if permitted, or from authorized but unissued
shares. Although no specific award determinations have been made, the Company
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anticipates that it would provide stock awards to the directors and employees
of the Company or Bank or their affiliates to the extent permitted by
applicable regulations. NYBB regulations provide that, to the extent the Stock
Programs are implemented within one year after the Conversion, no individual
employee may receive more than 25% of the shares of any plan and non-employee
directors may not receive more than 5% of any plan individually or 30% in the
aggregate for all Directors.
A committee of the Board of Directors would administer the Stock Programs or
Master Stock-Based Benefit Plan described above. Under the Stock Programs or
Master Stock-Based Benefit Plan, awards would be granted in the form of shares
of Common Stock held by the plans. Awards will be non-transferable and non-
assignable. The Board intends to appoint an independent fiduciary to serve as
trustee of the trust to be established pursuant to the Stock Programs or
Master Stock-Based Benefit Plan. Allocations and grants to officers and
employees under the Stock Programs or Master Stock-Based Benefit Plan may be
made in the form of base grants and allocations based on performance goals.
The granting or vesting of stock awards under the Stock Programs or Master
Stock-Based Benefit Plan may be conditioned upon the achievement of individual
or Company-wide performance goals, including the Company's or Bank's
achievement of specified levels of net income, return on assets, return on
equity or other specified financial performance goals and will be subject to
applicable NYBB and FDIC regulations.
In the event of death, grants would be 100% vested. In the event of
disability, grants would be 100% vested upon termination of employment of an
officer or employee, or upon termination of service as a director. In the
event of retirement, if the participant continues to perform services as a
Director, Director Emeritus or consultant on behalf of the Bank, the Company
or an affiliate or, in the case of a retiring Director, Director Emeritus, or
as a consulting director, unvested grants would continue to vest in accordance
with their original vesting schedule until the recipient ceases to perform
such services at which time any unvested grants would lapse.
It is intended that, subject to any applicable NYBB or FDIC regulations, the
Stock Programs or Master Stock-Based Benefit Plan described above would
provide for accelerated vesting of shares granted under the Stock Programs or
Master Stock-Based Benefit Plan in the event of a change in control of the
Bank or Company. A change in control is expected to be defined in the Stock
Programs or Master Stock-Based Benefit Plan generally to occur when a person
or group of persons acting in concert acquires beneficial ownership of 20% or
more of a class of equity securities of the Company or the Bank or in the
event of a tender or exchange offer, merger or other form of business
combination, sale of all or substantially all of the assets of the Company or
the Bank or contested election of directors which results in the replacement
of a majority of the Board of Directors by persons not nominated by the
directors in office prior to the contested election.
When shares become vested in accordance with the Stock Programs or Master
Stock-Based Benefit Plan described above, the participants would recognize
income equal to the fair market value of the Common Stock at that time. The
amount of income recognized by the participants would be a deductible expense
for tax purposes for the Company. When shares become vested and are actually
distributed in accordance with the Stock Programs or Master Stock-Based
Benefit Plan, the participants would receive amounts equal to any accrued
dividends with respect thereto. Prior to vesting, recipients of grants could
direct the voting of the shares awarded to them. Shares not subject to grants
and shares allocated subject to the achievement of performance and high
performance goals will be voted by the trustee of the Stock Programs or Master
Stock-Based Benefit Plan in proportion to the directions provided with respect
to shares subject to grants. Vested shares are distributed to recipients as
soon as practicable following the day on which they are vested.
In the event that additional authorized but unissued shares are acquired by
the Stock Programs or Master Stock-Based Benefit Plan after the Conversion,
the interests of existing shareholders would be diluted. See "Pro Forma Data."
TRANSACTIONS WITH CERTAIN RELATED PERSONS
The Bank's policies do not permit the Bank to make loans to any of its
Trustees and executive officers. The Company intends that all transactions
between the Company and its executive officers, directors, holders of 10%
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or more of the shares of any class of its Common Stock and affiliates thereof,
will contain terms no less favorable to the Company than could have been
obtained by it in arms-length negotiations with unaffiliated persons and will
be approved by a majority of independent outside directors of the Company not
having any interest in the transaction.
SUBSCRIPTIONS BY EXECUTIVE OFFICERS, DIRECTORS AND TRUSTEES
The following table sets forth the number of shares of Common Stock that the
executive officers, Trustees and Directors, and their associates, propose to
purchase, assuming shares of Common Stock are issued at the minimum and
maximum of the Estimated Price Range and that sufficient shares will be
available to satisfy their subscriptions. The table also sets forth the total
expected beneficial ownership of Common Stock as to all Trustees, Directors
and executive officers as a group.
<TABLE>
<CAPTION>
AT THE MINIMUM AT THE MAXIMUM
OF THE ESTIMATED PRICE OF THE ESTIMATED PRICE
RANGE(1) RANGE(1)
---------------------- ----------------------
AS A PERCENT AS A PERCENT
NUMBER OF SHARES NUMBER OF SHARES
NAME AMOUNT OF SHARES OFFERED OF SHARES OFFERED
- ---- ---------- --------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C>
Joseph L. Mancino....... $ 650,000 65,000 0.23% 65,000 0.17%
Floyd N. York........... 400,000 40,000 0.15 40,000 0.11
Victor C. McCuaig....... 500,000 50,000 0.18 50,000 0.14
John P. Nicholson....... 670,000 67,000 0.25 67,000 0.18
James E. Swiggett....... 600,000 60,000 0.22 60,000 0.16
Robert G. Freese........ 50,000 5,000 0.02 5,000 0.01
Thomas J. Calabrese,
Jr. ................... 100,000 10,000 0.04 10,000 0.03
Dr. Edwin Martin, Jr. .. 40,000 4,000 0.01 4,000 0.01
Richard C. Webel........ 100,000 10,000 0.04 10,000 0.03
John R. Bransfield,
Jr. ................... 100,000 10,000 0.04 10,000 0.03
Mary M. Ehrich.......... 150,000 15,000 0.06 15,000 0.04
John L. Klag............ 100,000 10,000 0.04 10,000 0.03
Daniel L. Murphy........ 200,000 20,000 0.07 20,000 0.05
Michael P. Puorro....... 160,000 16,000 0.06 16,000 0.04
Peter J. Russo.......... 500,000 50,000 0.18 50,000 0.14
Anthony F. Panza........ 500,000 50,000 0.18 50,000 0.14
---------- ------- ---- ------- ----
All Directors and Execu-
tive Officers as a
group (16 persons)..... $4,820,000 482,000 1.77% 482,000 1.31%
========== ======= ==== ======= ====
</TABLE>
- --------
(1) Includes proposed subscriptions, if any, by associates. Does not include
subscription orders by the ESOP. Intended purchases by the ESOP are
expected to be 8% of the shares issued in the Conversion, including shares
issued to the Foundation. Also does not include shares to be contributed
to the Foundation equal to 3% of the Common Stock sold, Common Stock which
may be awarded under the Stock Programs to be adopted equal to 4% of the
Common Stock issued in the Conversion, including shares issued to the
Foundation, and Common Stock which may be purchased pursuant to options
which may be granted under the Stock Option Plans equal to 10% of the
number of shares of Common Stock issued in the Conversion, including
shares issued to the Foundation.
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THE CONVERSION
THE SUPERINTENDENT OF BANKS OF THE STATE OF NEW YORK HAS APPROVED THE PLAN
OF CONVERSION SUBJECT TO THE APPROVAL OF THE BANK'S ELIGIBLE ACCOUNT HOLDERS
AND THE SATISFACTION OF CERTAIN OTHER CONDITIONS. HOWEVER, SUCH APPROVAL DOES
NOT CONSTITUTE A RECOMMENDATION OR ENDORSEMENT OF THE PLAN OF CONVERSION BY
THE SUPERINTENDENT.
GENERAL
On May 29, 1996 the Bank's Board of Trustees adopted the Plan of Conversion
pursuant to which the Bank will be converted from a New York State chartered
mutual savings bank to a New York State chartered stock savings bank. The Plan
was subsequently amended on July 30, 1996, to provide for the establishment
and funding of the Foundation in connection with the Conversion and amended
thereafter on September 30, 1996. It is currently intended that all of the
capital stock of the Bank will be held by the Company, which is incorporated
under Delaware law. The Plan has been approved by the Superintendent and the
Bank has received a notice of intent not to object to the Plan from the FDIC,
subject to, among other things, approval of the Plan by the Bank's Eligible
Account Holders. A special meeting of Eligible Account Holders has been called
for this purpose to be held on November 26, 1996.
The Company has received approval from the OTS to become a savings and loan
holding company and to acquire all of the common stock of the Bank to be
issued in the Conversion. The Company plans to retain 50% of the net proceeds
from the sale of the Common Stock and to use the remaining 50% to purchase all
of the common stock of the Bank to be issued in the Conversion. The Conversion
will be effected only upon completion of the sale of all of the shares of
Common Stock of the Company or all of the common stock of the Bank, if the
holding company form of organization is not utilized, to be issued in the
Conversion.
The Plan provides that the Board of Trustees of the Bank, at any time prior
to the issuance of the Common Stock and for any reason, may decide not to use
the holding company form of organization in implementing the Conversion. Such
reasons may include possible delays resulting from overlapping regulatory
processing, or policies or conditions, which could adversely affect the Bank's
or the Company's ability to consummate the Conversion and transact its
business after the Conversion as contemplated herein and in accordance with
the Bank's operating policies. In the event that such a decision is made, the
Bank will withdraw the Company's registration statement from the SEC and will
take all steps necessary to complete the Conversion without the Company,
including filing any necessary documents with the Superintendent. In such
event, and provided there is no regulatory action, directive or other
consideration upon which basis the Bank determines not to complete the
Conversion, if permitted by the Superintendent, the Bank will issue and sell
the common stock of the Bank and subscribers will be notified of the
elimination of the Company and resolicited (i.e., be permitted to affirm their
orders, in which case they will need to affirmatively reconfirm their
subscriptions prior to the expiration of the resolicitation offering or their
funds will be promptly refunded with interest, or be permitted to modify or
rescind their subscriptions) and notified of the time period within which the
subscriber must affirmatively notify the Bank of his intention to affirm,
modify or rescind his subscription. The following description of the Plan
assumes that a holding company form of organization will be used in the
Conversion. In the event that a holding company form of organization is not
used, all other pertinent terms of the Plan as described below will apply to
the conversion of the Bank from the mutual to stock form of organization and
the sale of the Bank's common stock.
The Plan provides generally that (i) the Bank will convert from a mutual
savings bank to a capital stock savings bank and (ii) the Company will offer
Common Stock for sale in the Subscription Offering to Eligible Account
Holders, Employee Plans, including the ESOP and Supplemental Eligible Account
Holders. Concurrently, shares will be offered in the Community Offering to
certain members of the general public, subject to the prior rights of holders
of subscription rights. It is anticipated that all shares not subscribed for
in the Subscription and Community Offerings will be offered for sale by the
Company to the general public in a Syndicated Community Offering. The Bank and
Company have the right to accept or reject, in whole or in part, any orders to
purchase shares of the Common Stock received in the Community Offering or
Syndicated Community Offering.
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The aggregate price of the shares of Common Stock to be sold in the
Conversion will be determined based upon an independent appraisal prepared by
FinPro of the estimated pro forma market value of the Common Stock giving
effect to the Conversion. All shares of Common Stock to be issued and sold in
the Conversion will be sold at the same price. FinPro's independent appraisal
will be updated and the final price of the shares will be determined at the
completion of the Subscription and Community Offerings, if all shares are
subscribed for, or at the completion of the Syndicated Community Offering. The
independent appraisal has been performed by FinPro, a consulting firm
experienced in the valuation and appraisal of savings institutions. See "--
Stock Pricing" for a determination of the estimated pro forma market value of
the Common Stock.
The following is a brief summary of material aspects of the Conversion. The
summary is qualified in its entirety by reference to the provisions of the
Plan. A copy of the Plan is available upon written request from the Bank and
is available for inspection at each branch office of the Bank and at the
office of the Superintendent. The Plan is also filed as an Exhibit to the
Registration Statement of which this Prospectus is a part, copies of which may
be obtained from the SEC. See "Additional Information."
ESTABLISHMENT OF THE CHARITABLE FOUNDATION
General. In furtherance of the Bank's commitment to its local community, the
Plan of Conversion provides for the establishment of a charitable foundation
in connection with the Conversion. The Plan provides that the Bank and the
Company will establish the Foundation, which will be incorporated under
Delaware law as a non-stock corporation, and will fund the Foundation with
Common Stock of the Company, as further described below. The Company and the
Bank believe that the funding of the Foundation with Common Stock of the
Company is a means of establishing a common bond between the Bank and its
community and thereby enables the Bank's community to share in the potential
growth and success of the Company over the long term. By further enhancing the
Bank's visibility and reputation in its local community, the Bank believes
that the Foundation will enhance the long-term value of the Bank's community
banking franchise. The Foundation will be dedicated to charitable purposes
within the Bank's local community, including community development activities.
Purpose of the Foundation. The purpose of the Foundation is to provide
funding to support charitable causes and community development activities. In
recent years, the Bank has emphasized community lending and community
development activities within the Bank's local community. The Bank received a
satisfactory Community Reinvestment Act ("CRA") rating in its last CRA
examination. The Foundation is being formed as a complement to the Bank's
existing community activities, not as a replacement for such activities. The
Bank intends to continue to emphasize community lending and community
development activities following the Conversion. However, such activities are
not the Bank's sole corporate purpose. The Foundation, conversely, will be
completely dedicated to community activities and the promotion of charitable
causes, and may be able to support such activities in ways that are not
presently available to the Bank. Since the Bank has a satisfactory record of
serving its community under the CRA and already engages in community
development activities, the Bank believes that the Foundation will enable the
Company and the Bank to assist their local community in areas beyond community
development and lending. The Bank believes the establishment of the Foundation
will enhance its current activities under the CRA. In this regard, the Board
of Trustees believes the establishment of a charitable foundation is
consistent with the Bank's commitment to community service. The Board further
believes that the funding of the Foundation with Common Stock of the Company
is a means of enabling the Bank's community to share in the potential growth
and success of the Company long after completion of the Conversion. The
Foundation will accomplish that goal by providing for continued ties between
the Foundation and Bank, thereby forming a partnership with the Bank's
community. The establishment of the Foundation will also enable the Company
and the Bank to develop a unified charitable donation strategy and will
centralize the responsibility for administration and allocation of corporate
charitable funds. Charitable foundations have been formed by other financial
institutions for this purpose, among others. The Bank, however, does not
expect the contribution to the Foundation to take the place of the Bank's
traditional community lending and charitable activities.
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Structure of the Foundation. The Foundation will be incorporated under
Delaware law as a non-stock corporation. Pursuant to the Foundation's Bylaws,
the Foundation's Board of Directors will be comprised of seven members, all of
whom are existing Directors of the Company or officers of the Company or the
Bank. A Nominating Committee of the Board, which is to be comprised of a
minimum of three members of the board, will nominate individuals eligible for
election to the board of directors. The members of the Foundation, who are
comprised of its Board members, will elect the Directors at the annual meeting
of the Foundation from those nominated by the Nominating Committee. Only
persons serving as directors of the Foundation qualify as members of the
Foundation, with voting authority. Directors will be divided into three
classes with each class appointed for three-year terms. The certificate of
incorporation of the Foundation provides that the corporation is organized
exclusively for charitable purposes, including community development, as set
forth in Section 501(c)(3) of the Code. The Foundation's certificate of
incorporation further provides that no part of the net earnings of the
Foundation will inure to the benefit of, or be distributable to its directors,
officers or members.
The authority for the affairs of the Foundation will be vested in the Board
of Directors of the Foundation. The Directors of the Foundation will be
responsible for establishing the policies of the Foundation with respect to
grants or donations by the Foundation, consistent with the purposes for which
the Foundation was established. Although no formal policy governing Foundation
grants exists at this time, the Foundation's Board of Directors will adopt
such a policy upon establishment of the Foundation. As directors of a
nonprofit corporation, directors of the Foundation will at all times be bound
by their fiduciary duty to advance the Foundation's charitable goals, to
protect the assets of the Foundation and to act in a manner consistent with
the charitable purpose for which the Foundation is established. The Directors
of the Foundation will also be responsible for directing the activities of the
Foundation, including the management of the Common Stock of the Company held
by the Foundation. However, as a condition to receiving the nonobjection of
the FDIC to the Bank's Conversion, the Foundation will commit in writing to
the FDIC that all shares of Common Stock held by the Foundation will be voted
in the same ratio as all other shares of the Company's Common Stock on all
proposals considered by stockholders of the Company; provided, however, that,
consistent with the condition, the FDIC shall waive this voting restriction
under certain circumstances if compliance with the voting restriction would:
(i) cause a violation of the law of the State of Delaware; (ii) would cause
the Foundation to lose its tax-exempt status, or cause the Internal Revenue
Service to deny the Foundation's request for a determination that it is an
exempt organization or otherwise have a material and adverse tax consequence
on the Foundation; or (iii) would cause the Foundation to be subject to an
excise tax under Section 4941 of the Code. In order for the FDIC to waive such
voting restriction, the Company's or the Foundation's legal counsel must
render an opinion satisfactory to FDIC that compliance with the voting
restriction would have the effect described in clauses (i), (ii) or (iii)
above. Under those circumstances, the FDIC shall grant a waiver of the voting
requirement upon submission of such legal opinion(s) by the Company or the
Foundation that are satisfactory to the FDIC. In the event that the FDIC were
to waive the voting requirement, the directors would direct the voting of the
Common Stock held by the Foundation.
The Foundation's place of business will be located at the Bank's
administrative offices and initially the Foundation is expected to have no
employees but will utilize the members of the staff of the Company or the
Bank. The Board of Directors of the Foundation will appoint such officers as
may be necessary to manage the operations of the Foundation. In this regard,
the Bank has provided the FDIC with a commitment that, to the extent
applicable, the Bank will comply with the affiliate restrictions set forth in
Sections 23A and 23B of the Federal Reserve Act with respect to any
transactions between the Bank and the Foundation.
The Company intends to capitalize the Foundation with Common Stock of the
Company in an amount equal to 3.0% of the total amount of Common Stock to be
sold in connection with the Conversion. At the minimum, midpoint and maximum
of the Estimated Price Range, the contribution to the Foundation would equal
816,990, 961,165 and 1,105,340 shares, which would have a market value of
$8,169,900, $9,611,650 and $11,053,400, respectively, assuming the Purchase
Price of $10.00 per share. The Company and the Bank determined to fund the
Foundation with Common Stock rather than cash because it desired to form a
bond with its community in a manner that would allow the community to share in
the potential growth and success of the Company and the Bank over the long
term. The funding of the Foundation with stock also provides the Foundation
with a
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potentially larger endowment than if the Company contributed cash to the
Foundation since, as a shareholder, the Foundation will share in the potential
growth and success of the Company. As such, the contribution of stock to the
Foundation has the potential to provide a self-sustaining funding mechanism
which reduces the amount of cash that the Company, if it were not making the
stock donation, would have to contribute to the Foundation in future years in
order to maintain a level amount of charitable grants and donations.
The Foundation will receive working capital from any dividends that may be
paid on the Company's Common Stock in the future, and subject to applicable
federal and state laws, loans collateralized by the Common Stock or from the
proceeds of the sale of any of the Common Stock in the open market from time
to time as may be permitted to provide the Foundation with additional
liquidity. As a private foundation under Section 501(c)(3) of the Code, the
Foundation will be required to distribute annually in grants or donations, a
minimum of 5% of the average fair market value of its net investment assets.
One of the conditions imposed on the gift of Common Stock by the Company is
that the amount of Common Stock that may be sold by the Foundation in any one
year shall not exceed 5% of the average market value of the assets held by the
Foundation, except where the Board of Directors of the Foundation determines
that the failure to sell an amount of common stock greater than such amount
would result in a long-term reduction of the value of the Foundation's assets
and as such would jeopardize the Foundation's capacity to carry out its
charitable purposes. Upon completion of the Conversion and the contribution of
shares to the Foundation immediately following the Conversion, the Company
would have 28,050,000, 33,000,000 and 37,950,000 shares issued and outstanding
at the minimum, midpoint and maximum of the Estimated Price Range. Because the
Company will have an increased number of shares outstanding, the voting and
ownership interests of shareholders in the Company's common stock would be
diluted by 2.9%, as compared to their interests in the Company if the
Foundation was not established. For additional discussion of the dilutive
effect, see "Pro Forma Data."
Tax Considerations. The Company and the Bank have been advised by their
independent tax advisors that an organization created for the above purposes
would qualify as a Section 501(c)(3) exempt organization under the Code, and
would likely be classified as a private foundation. The Foundation will submit
a request to the IRS to be recognized as an exempt organization. As long as
the Foundation files its application for tax-exempt status within 15 months
from the date of its organization, and provided the IRS approves the
application, the effective date of the Foundation's status as a Section
501(c)(3) organization will be the date of its organization. The Company's
independent accountants, however, have not rendered any advice on the
condition to the contribution to be agreed to by the Foundation which requires
that all shares of Common Stock of the Company held by the Foundation must be
voted in the same ratio as all other outstanding shares of Common Stock of the
Company on all proposals considered by stockholders of the Company. Consistent
with the condition, in the event that the Company or the Foundation receives
an opinion of their legal counsel that compliance with this voting restriction
would have the effect of causing the Foundation to lose its tax-exempt status
or otherwise have a material and adverse tax consequence on the Foundation, or
subject the Foundation to an excise tax under Section 4941 of the Code, the
FDIC will waive such voting restriction upon submission of a legal opinion(s)
by the Company or the Foundation satisfactory to the FDIC. See "--Regulatory
Conditions Imposed on the Foundation."
Under Delaware law, the Company is authorized by statute to make charitable
contributions and case law has recognized the benefits of such contributions
to a Delaware corporation. In this regard, Delaware case law provides that a
charitable gift must be within reasonable limits as to amount and purpose to
be valid. Under the Code, the Company may deduct up to 10% of its taxable
income in any one year and any contributions made by the Company in excess of
the deductible amount will be deductible over each of the five succeeding
taxable years. The Company and the Bank believe that the Conversion presents a
unique opportunity to establish and fund a charitable foundation given the
substantial amount of additional capital being raised in the Conversion. In
making such a determination, the Company and the Bank considered the dilutive
impact of the contribution of Common Stock to the Foundation on the amount of
Common Stock available to be offered for sale in the Conversion. Based on such
consideration, the Company and Bank believe that the contribution to the
Foundation in excess of the 10% annual limitation is justified given the
Bank's capital position and its earnings, the
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substantial additional capital being raised in the Conversion and the
potential benefits of the Foundation to the Bank's community. In this regard,
assuming the sale of the Common Stock at the midpoint of the Estimated Price
Range, the Company would have pro forma consolidated capital of $499.1 million
or 24.4% of pro forma consolidated assets and the Bank's pro forma leverage
and risk-based capital ratios would be 17.82% and 39.92%, respectively. See
"Regulatory Capital Compliance," "Capitalization," and "Comparison of
Valuation and Pro Forma Information with No Foundation." Thus, the amount of
the contribution will not adversely impact the financial condition of the
Company and the Bank and the Company and the Bank therefore believe that the
amount of the charitable contribution is reasonable given the Company's and
the Bank's pro forma capital positions. As such, the Company and the Bank
believe that the contribution does not raise safety and soundness concerns.
The Company and the Bank have received an opinion of their independent tax
advisors that the Company's contribution of its own stock to the Foundation
would not constitute an act of self-dealing, and that the Company will be
entitled to a deduction in the amount of the fair market value of the stock at
the time of the contribution, subject to a limitation based on 10% of the
Company's annual taxable income. The Company, however, would be able to carry
forward any unused portion of the deduction for five years following the
contribution. If the Foundation would have been established in 1995, the
Company would have received a charitable contribution deduction of
approximately $2.7 million (based on the Bank's pre-tax income for 1995, an
assumed tax rate of 37% and a contribution of Common Stock equal to $11.1
million). The Company is permitted under the Code to carry over the excess
contribution over the five year period following the contribution to the
Foundation. Assuming the close of the Offerings at the midpoint of the
Estimated Price Range, the Company estimates that all of the deduction should
be deductible over the six-year period. Neither the Company nor the Bank
expect to make any further contributions to the Foundation within the first
five years following the initial contribution. After that time, the Company
and the Bank may consider future contributions to the Foundation. Any such
decisions would be based on an assessment of, among other factors, the
financial condition of the Company and the Bank at that time, the interests of
shareholders and depositors of the Company and the Bank, and the financial
condition and operations of the Foundation.
Although the Company and the Bank have received an opinion of their
independent tax advisors that the Company is entitled to a deduction for the
charitable contribution, there can be no assurances that the IRS will
recognize the Foundation as a Section 501(c)(3) exempt organization or that
the deduction will be permitted. In such event, the Company's tax benefit
related to the contribution to the Foundation would be expensed without tax
benefit, resulting in a reduction in earnings in the year in which the IRS
makes such a determination. See "Risk Factors--Establishment of the Charitable
Foundation."
As a private foundation, earnings and gains, if any, from the sale of Common
Stock or other assets are exempt from federal and state corporate taxation.
However, investment income, such as interest, dividends and capital gains,
will be subject to a federal excise tax of 2.0%. The Foundation will be
required to make an annual filing with the IRS within four and one-half months
after the close of the Foundation's fiscal year to maintain its tax-exempt
status. The Foundation will be required to publish a notice that the annual
information return will be available for public inspection for a period of 180
days after the date of such public notice. The information return for a
private foundation must include, among other things, an itemized list of all
grants made or approved, showing the amount of each grant, the recipient, any
relationship between a grant recipient and the Foundation's managers and a
concise statement of the purpose of each grant. The Foundation will also be
required to file an annual report with the Charities Bureau of the Office of
the Attorney General of the State of New York.
Regulatory Conditions Imposed on the Foundation. Establishment of the
Foundation is subject to the following conditions to be agreed to by the
Foundation in writing as a condition to receiving the FDIC's non-objection of
the Bank's Conversion: (i) the Foundation will be subject to examination by
the FDIC; (ii) the Foundation must comply with supervisory directives imposed
by the FDIC; (iii) the Foundation will operate in accordance with written
policies adopted by the board of directors, including a conflict of interest
policy; and (iv) any shares of Common Stock of the Company held by the
Foundation must be voted in the same ratio as all
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other outstanding shares of Common Stock of the Company on all proposals
considered by stockholders of the Company; provided, however, that, consistent
with the condition, the FDIC shall waive this voting restriction under certain
circumstances if compliance with the voting restriction would: (a) cause a
violation of the law of the State of Delaware; (b) would cause the Foundation
to lose its tax-exempt status or otherwise have a material and adverse tax
consequence on the Foundation; or (c) would cause the Foundation to be subject
to an excise tax under Section 4941 of the Code. In order for the FDIC to
waive such voting restriction, the Company's or the Foundation's legal counsel
must render an opinion satisfactory to FDIC that compliance with the voting
restriction would have the effect described in clauses (a), (b) or (c) above.
Under those circumstances, the FDIC shall grant a waiver of the voting
restriction upon submission of such opinion(s) by the Company or the
Foundation which are satisfactory to the FDIC. There can be no assurances that
a legal opinion addressing these issues will be rendered, or if rendered, that
the FDIC will grant an unconditional waiver of the voting restriction. In no
event will the voting restriction survive the sale of shares of the Common
Stock held by the Foundation.
PURPOSES OF CONVERSION
The Bank, as a New York State chartered mutual savings bank, does not have
stockholders and has no authority to issue capital stock. By converting to the
capital stock form of organization, the Bank will be structured in the form
used by commercial banks, most business entities and a growing number of
savings institutions. The Conversion will be important to the future growth
and performance of the Bank by providing a larger capital base on which the
Bank may operate, enhanced future access to capital markets, enhanced ability
to diversify into other financial services related activities and enhanced
ability to render services to the public.
The holding company form of organization would provide additional
flexibility to diversify the Bank's business activities through existing or
newly formed subsidiaries, or through acquisitions of or mergers with both
mutual and stock financial institutions, as well as other companies. Although
there are no current arrangements, understandings or agreements regarding any
such opportunities, the Company will be in a position after the Conversion,
subject to regulatory limitations and the Company's financial position, to
take advantage of any such opportunities that may arise. While there are
benefits associated with the holding company form of organization, such form
of organization may involve additional costs associated with its maintenance
and regulation as a savings and loan company, such as additional
administrative expenses, taxes and regulatory filings or examination fees.
The potential impact of the Conversion upon the Bank's capital base is
significant. At May 31, 1996, the Bank had Tier I Leverage capital of $219.3
million, or 12.39% of total assets. Assuming that $312.9 million (based on the
$330.0 million at the midpoint of the Estimated Price Range) of net proceeds
are realized from the sale of Common Stock (see "Pro Forma Data" for the basis
of this assumption) and assuming that 50% of the net proceeds are used by the
Company to purchase the capital stock of the Bank, the Bank's Tier I Leverage
capital would increase to $336.1 million, resulting in a pro forma leverage
capital ratio of 17.82% giving effect to the Conversion. In the event that the
holding company form of organization is not utilized and all the net proceeds,
at the midpoint of the Estimated Price Range, are retained by the Bank, the
Bank's leverage capital would increase to $492.6 million, resulting in a pro
forma leverage capital ratio of 24.11% at May 31, 1996. The investment of the
net proceeds from the sale of the Common Stock will provide the Bank with
additional income to further increase its capital position.
After completion of the Conversion, the unissued Common Stock and preferred
stock authorized by the Company's Certificate of Incorporation will permit the
Company, subject to market conditions and applicable regulatory approvals, to
raise additional equity capital through further sales of securities, and to
issue securities in connection with possible acquisitions. At the present
time, the Company has no plans with respect to additional offerings of
securities, other than the issuance of additional shares to the Foundation and
issuance of shares upon exercise of stock options under the Stock Option Plans
or Master Stock-Based Benefit Plan or the possible issuance of authorized but
unissued shares to the Stock Programs or Master Stock-Based Benefit Plan.
Following the Conversion, the Company will also be able to use stock-based
benefit plans to attract and retain executive and other personnel for itself
and its subsidiaries. See "Management of the Bank--Executive Compensation."
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EFFECTS OF CONVERSION
General. Each depositor in a mutual savings bank has both a deposit account
in the institution and a pro rata ownership interest in the net worth of the
institution based upon the balance in his or her account, which interest may
only be realized in the event of a liquidation of the institution. However,
this ownership interest is tied to the depositor's account and has no tangible
market value separate from such deposit account. Any depositor who opens a
deposit account obtains a pro rata ownership interest in the net worth of the
institution without any additional payment beyond the amount of the deposit. A
depositor who reduces or closes his account receives a portion or all of the
balance in the account but nothing for his ownership interest in the net worth
of the institution, which is lost to the extent that the balance in the
account is reduced.
Consequently, mutual savings bank depositors normally have no way to realize
the value of their ownership interest, which may have realizable value only in
the unlikely event that the mutual savings bank is liquidated. In such event,
the depositors of record at that time, as owners, would have a claim to share
pro rata in any residual surplus and reserves after other claims, including
claims of depositors to the amounts of their deposits, are paid.
When a mutual savings bank converts to stock form, depositors lose all
rights to the net worth of the mutual savings bank, except to the extent
depositors have rights to claim a pro rata share of funds representing the
liquidation account established in connection with the Conversion.
Additionally, permanent nonwithdrawable capital stock is created and offered
to depositors which represents the ownership of the institution's net worth,
subject to certain claims of Eligible Account Holders with respect to amounts
representing the liquidation account. THE COMMON STOCK IS SEPARATE AND APART
FROM DEPOSIT ACCOUNTS AND CANNOT BE AND IS NOT INSURED BY THE FDIC OR ANY
OTHER GOVERNMENTAL AGENCY. Certificates are issued to evidence ownership of
the permanent stock. The stock certificates are transferable, and therefore
the stock may be sold or traded if a purchaser is available with no effect on
any deposit account the seller may hold in the institution.
Continuity. While the Conversion is being accomplished, the normal business
of the Bank of accepting deposits and making loans will continue without
interruption. The Bank will continue to be subject to regulation by the
Superintendent and the FDIC. After Conversion, the Bank will continue to
provide services for depositors and borrowers under current policies by its
present management and staff.
The Trustees of the Bank at the time of Conversion will serve as Directors
of the Bank after the Conversion. The Directors of the Company will consist of
the same individuals who will serve on the Board of Directors of the Bank. All
officers of the Bank at the time of Conversion will retain their positions
after the Conversion.
Effect on Deposit Accounts. Under the Plan, each depositor in the Bank at
the time of Conversion will automatically continue as a depositor after the
Conversion, and each such deposit account will remain the same with respect to
deposit balance, interest rate and other terms. Each such account will be
insured by the FDIC to the same extent as before the Conversion. Depositors
will continue to hold their existing passbooks and other evidences of their
accounts.
Effect on Loans. No loan outstanding from the Bank will be affected by the
Conversion, and the amount, interest rate, maturity and security for each loan
will remain as it was contractually fixed prior to the Conversion.
Effect on Voting Rights of Depositors. In its current mutual form, voting
rights and control of the Bank are vested exclusively in the Board of
Trustees. After the Conversion, direction of the Bank will be under the
control of the Board of Directors of the Bank. The Company, as the holder of
all of the outstanding common stock of the Bank, will have exclusive voting
rights with respect to any matters concerning the Bank requiring stockholder
approval, including the election of Directors of the Bank.
After the Conversion, subject to the rights of the holders of preferred
stock that may be issued in the future, the holders of the Common Stock will
have exclusive voting rights with respect to any matters concerning the
Company. Each holder of Common Stock will, subject to the restrictions and
limitations set forth in the
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Company's Certificate of Incorporation discussed below, be entitled to vote on
any matters to be considered by the Company's stockholders, including the
election of directors of the Company.
Tax Effects. The Bank has received an opinion of counsel with regard to
federal income taxation which indicates that the adoption and implementation
of the Plan of Conversion set forth herein will not be taxable for federal
income tax purposes to the Bank or its eligible account holders or the
Company, subject to the limitations and qualifications in such opinion. The
Bank has also received an opinion from O'Reilly, Marsh & Corteselli P.C. that,
with respect to New York State banking and franchise taxes, sales and use
taxes, stock transfer taxes and real property transfer gains taxes, the
Conversion will not result in a tax liability, and, with respect to New York
State real estate transfer tax purposes, a position may be taken that the
Conversion is tax free. The opinion of O'Reilly, Marsh & Corteselli P.C. does
provide that the Company will be required to pay a New York State license fee
as a foreign corporation equal to 1/20% of the apportioned par value of the
Common Stock issued by the Company, subject to the limitations and
qualifications contained in such opinions. See "--Tax Aspects."
Effect on Liquidation Rights. If a mutual savings bank were to liquidate,
all claims of creditors (including those of depositors, to the extent of
deposit balances) would be paid first. Thereafter, if there were any assets
remaining, depositors would have a claim to receive such remaining assets, pro
rata, based upon the deposit balances in their deposit accounts immediately
prior to liquidation. In the unlikely event that the Bank were to liquidate
after Conversion, all claims of creditors (including those of depositors, to
the extent of their deposit balances) would also be paid first, followed by
distribution of the "liquidation account," if any, to certain depositors (as
described in "--Liquidation Rights," below), with any assets remaining
thereafter distributed to the Company as the holder of the Bank's capital
stock.
STOCK PRICING
The Plan of Conversion requires that the purchase price of the Common Stock
must be based on the appraised pro forma market value of the Common Stock, as
determined on the basis of an independent appraisal. The Bank and the Company
have retained FinPro to make such appraisal. For its services in making such
appraisal, FinPro will receive a fee of $70,000, including fees related to the
preparation of a business plan for the Company and Bank, and will be
reimbursed for certain of its expenses. The Bank and the Company have agreed
to indemnify FinPro and its employees and affiliates against certain losses
(including any losses in connection with claims under the federal securities
laws) arising out of its services as the independent appraiser, except where
FinPro's liability results from its negligence or willful misconduct.
An appraisal has been made by FinPro in reliance upon the information
contained in this Prospectus, including the Consolidated Financial Statements.
FinPro also considered the following factors, among others: the present and
projected operating results and financial condition of the Company and the
Bank, including liquidity, capitalization, asset composition, funding mix,
amount of intangible assets owned, and level of interest rate risk; the
economic, demographic and competitive aspects of the Bank's existing marketing
area; the quality and depth of the Bank's management; certain historical,
financial and other information relating to the Bank; a comparative evaluation
of the operating and financial statistics of the Bank with those of other
savings institutions; the aggregate size of the offering of the Common Stock;
the impact of Conversion on the Bank's net worth and earnings potential; the
proposed dividend policy of the Company and the Bank; the trading market for
securities of comparable institutions and general conditions in the market for
such securities; and recent regulatory matters. In particular, the appraisal
considered the Bank's financial condition and projected and historical
operating results, including income and expense trends, asset size, loan
portfolio composition, non-performing loans and assets, interest rate
sensitivity position, capital position, and yields on assets and costs of
liabilities in comparison to other publicly-traded thrifts with assets greater
than or equal to $800 million and less than or equal to $5 billion located in
the New York City metropolitan area and other metropolitan areas in New York,
New Jersey, Pennsylvania and Connecticut. The Board of Trustees of the Bank
and Board of Directors of the Company have reviewed the appraisal of FinPro in
determining the reasonableness and adequacy of such appraisal consistent with
NYBB and FDIC regulations and have reviewed the methodology and reasonableness
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of assumptions utilized by FinPro in the preparation of such appraisal and
established the Estimated Price in a manner consistent with this appraisal.
On the basis of the foregoing, FinPro has advised the Company and the Bank
that, in its opinion dated as of September 12, 1996, the estimated pro forma
market value of the Common Stock being sold in connection with the Conversion
ranged from a minimum of $272.3 million to a maximum of $368.4 million (the
"Valuation Price Range") with a midpoint of $320.4 million. The Board of
Trustees established the Estimated Price Range of $272.3 million to $368.4
million within the Valuation Price Range based on the issuance of 27,233,010
to 36,844,660 shares at the Purchase Price of $10.00 per share. The Estimated
Price Range may be amended with the approval of the Superintendent and FDIC,
if required, if necessitated by subsequent developments in the financial
condition of the Company or the Bank or market conditions generally.
SUCH APPRAISAL, HOWEVER, IS NOT INTENDED, AND MUST NOT BE CONSTRUED, AS A
RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF PURCHASING SUCH SHARES OF
COMMON STOCK. FINPRO DID NOT INDEPENDENTLY VERIFY THE CONSOLIDATED FINANCIAL
STATEMENTS AND OTHER INFORMATION PROVIDED BY THE BANK, NOR DID FINPRO VALUE
INDEPENDENTLY THE ASSETS OR LIABILITIES OF THE BANK. THE APPRAISAL CONSIDERS
THE BANK AS A GOING CONCERN AND SHOULD NOT BE CONSIDERED AS AN INDICATION OF
THE LIQUIDATION VALUE OF THE BANK. MOREOVER, BECAUSE SUCH APPRAISAL IS
NECESSARILY BASED UPON ESTIMATES AND PROJECTIONS OF A NUMBER OF MATTERS, ALL
OF WHICH ARE SUBJECT TO CHANGE FROM TIME TO TIME, NO ASSURANCE CAN BE GIVEN
THAT PERSONS PURCHASING SUCH SHARES IN THE CONVERSION WILL THEREAFTER BE ABLE
TO SELL SUCH SHARES AT PRICES AT OR ABOVE THE PURCHASE PRICE OR IN THE RANGE
OF THE FOREGOING VALUATION OF THE PRO FORMA MARKET VALUE THEREOF. The
appraisal of FinPro may be inspected by any Eligible Account Holder or
Supplemental Eligible Account Holder at the Bank's main office located at 1400
Old Northern Boulevard, Roslyn, New York, during regular business hours of the
Bank. Copies of the appraisal may also be requested by Eligible Account
Holders or Supplemental Eligible Account Holders; provided, however, that such
Eligible Account Holders or Supplemental Eligible Account Holders shall be
responsible for all costs associated with the copying and transmittal of such
appraisal.
Following commencement of the Subscription and Community Offerings, the
maximum of the Estimated Price Range may be increased up to 15% and the number
of shares of Common Stock being sold in the Conversion may be increased to
42,371,359 shares due to regulatory considerations or changes in the market
and general financial and economic conditions, without the resolicitation of
subscribers. See "--Limitations on Common Stock Purchases" as to the method of
distribution and allocation of additional shares that may be issued in the
event of an increase in the Estimated Price Range to fill unfilled orders in
the Subscription and Community Offerings.
No sale of shares of Common Stock may be consummated unless, prior to such
consummation, FinPro confirms to the Bank, Company, Superintendent and FDIC
that, to the best of its knowledge, nothing of a material nature has occurred
which, taking into account all relevant factors, would cause FinPro to
conclude that the value of the Common Stock at the price so determined is
incompatible with its estimate of the pro forma market value of the Common
Stock at the conclusion of the Subscription and Community Offerings.
If the pro forma market value of the Common Stock is either more than 15%
above the maximum of the Estimated Price Range or less than the minimum of the
Estimated Price Range, the Bank and the Company, after consulting with the
Superintendent and FDIC, may terminate the Plan and return all funds promptly
with interest at the Bank's passbook rate of interest on payments made by
check, bank draft or money order, extend or hold a new Subscription and
Community Offering, establish a new Estimated Price Range, commence a
resolicitation of subscribers or take such other actions as permitted by the
Superintendent and FDIC in order to complete the Conversion. In the event that
a resolicitation is commenced, unless an affirmative response is received
within a reasonable period of time, all funds will be promptly returned to
investors as described above. A resolicitation following the conclusion of the
Subscription and Community Offerings would not exceed 45 days or, if following
the Syndicated Community Offering, would not exceed 60 days, unless such
resolicitation period is further extended by the Superintendent or FDIC for
periods of up to 60 days not to extend beyond October 9, 1998.
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If all shares of Common Stock are not sold through the Subscription and
Community Offerings, then the Bank and the Company expect to offer the
remaining shares in a Syndicated Community Offering which would occur as soon
as practicable following the close of the Subscription and Community Offerings
but may commence the Syndicated Community Offering during the Subscription and
Community Offerings subject to prior rights of subscribers. All shares of
Common Stock will be sold at the same price per share in the Syndicated
Community Offering as in the Subscription and Community Offerings. See "--
Syndicated Community Offering."
No sale of shares of Common Stock may be consummated unless, prior to such
consummation, FinPro confirms to the Bank, Company, Superintendent and FDIC
that, to the best of its knowledge, nothing of a material nature has occurred
which, taking into account all relevant factors, including those which would
be involved in a cancellation of the Syndicated Community Offering, would
cause FinPro to conclude that the aggregate value of the Common Stock at the
Purchase Price is incompatible with its estimate of the pro forma market value
of the Common Stock of the Company at the time of the Syndicated Community
Offering. Any change which would result in an aggregate purchase price which
is below or more than 15% above the Estimated Price Range would be subject to
Superintendent and FDIC approval. If such confirmation is not received, the
Bank may extend the Conversion, extend, reopen or commence new Subscription
and Community Offerings or Syndicated Community Offering, establish a new
Estimated Price Range and commence a resolicitation of all subscribers with
the approval of the Superintendent and FDIC or take such other actions as
permitted by the Superintendent and FDIC in order to complete the Conversion,
or terminate the Plan and cancel the Subscription and Community Offerings
and/or the Syndicated Community Offering. In the event market or financial
conditions change so as to cause the aggregate purchase price of the shares to
be below the minimum of the Estimated Price Range or more than 15% above the
maximum of such range, and the Company and the Bank determine to continue the
Conversion, subscribers will be resolicited (i.e., be permitted to continue
their orders, in which case they will need to affirmatively reconfirm their
subscriptions prior to the expiration of the resolicitation offering or their
subscription funds will be promptly refunded with interest at the Bank's
passbook rate of interest, or be permitted to decrease or cancel their
subscriptions). Any change in the Estimated Price Range must be approved by
the Superintendent and FDIC. A resolicitation, if any, following the
conclusion of the Subscription and Community Offerings would not exceed 45
days, or if following the Syndicated Community Offering, 60 days, unless
further extended by the Superintendent for periods up to 60 days not to extend
beyond October 9, 1998. If such resolicitation is not effected, the Bank will
return all funds promptly with interest at the Bank's passbook rate of
interest on payments made by check, bank draft or money order.
Copies of the appraisal report of FinPro including any amendments thereto,
and the detailed memorandum of the appraiser setting forth the method and
assumptions for such appraisal are available for inspection at the main office
of the Bank and the other locations specified under "Additional Information."
NUMBER OF SHARES TO BE ISSUED
Depending upon market or financial conditions following the commencement of
the Subscription and Community Offerings, the total number of shares to be
sold in the Conversion may be increased or decreased without a resolicitation
of subscribers, provided that the product of the total number of shares times
the price per share is not below the minimum of the Estimated Price Range or
more than 15% above the maximum of the Estimated Price Range. Based on a fixed
purchase price of $10.00 per share and FinPro's estimate of the pro forma
market value of the Common Stock ranging from a minimum of $272.3 million to a
maximum, as increased by 15%, of $423.7 million, the number of shares of
Common Stock expected to be issued is between a minimum of 27,233,010 shares
and a maximum, as adjusted by 15%, of 42,371,359 shares. The actual number of
shares issued between this range will depend on a number of factors and shall
be determined by the Bank and Company subject to Superintendent and FDIC
approval, if necessary.
In the event market or financial conditions change so as to cause the
aggregate purchase price of the shares to be below the minimum of the
Estimated Price Range or more than 15% above the maximum of the Estimated
Price Range, if the Plan is not terminated by the Company and the Bank after
consultation with the
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Superintendent and FDIC, purchasers will be resolicited (i.e., permitted to
continue their orders, in which case they will need to affirmatively reconfirm
their subscriptions prior to the expiration of the resolicitation offering or
their subscription funds will be promptly refunded, or be permitted to modify
or rescind their subscriptions). Any change in the Estimated Price Range must
be approved by the Superintendent and FDIC. If the number of shares issued in
the Conversion is increased due to an increase of up to 15% in the Estimated
Price Range to reflect changes in market or financial conditions, persons who
subscribed for the maximum number of shares will not be given the opportunity
to subscribe for an adjusted maximum number of shares. See "--Limitations on
Common Stock Purchases."
An increase in the number of shares to be issued in the Conversion as a
result of an increase in the estimated pro forma market value would decrease
both a subscriber's ownership interest and the Company's pro forma net
earnings and stockholders' equity on a per share basis while increasing pro
forma net earnings and stockholders' equity on an aggregate basis. A decrease
in the number of shares to be issued in the Conversion would increase both a
subscriber's ownership interest and the Company's pro forma net earnings and
stockholders' equity on a per share basis while decreasing pro forma net
earnings and stockholder's equity on an aggregate basis. For a presentation of
the effects of such changes, see "Pro Forma Data."
The number of shares to be issued and outstanding as a result of the sale of
Common Stock in the Conversion will be increased by a number of shares equal
to 3.0% of the Common Stock sold in the Conversion to fund the Foundation.
Assuming the sale of shares in the Offerings at the maximum of the Estimated
Price Range, the Company will contribute 1,105,340 shares of its Common Stock
from authorized but unissued shares to the Foundation immediately following
the completion of the Conversion. In that event, the Company will have total
shares of Common Stock outstanding of 37,950,000 shares. Of that amount, the
Foundation will own 2.9%. Funding the Foundation with authorized but unissued
shares will have the effect of diluting the ownership and voting interests of
persons purchasing shares in the Conversion by 2.9% since a greater number of
shares will be outstanding upon completion of the Conversion than would be if
the Foundation were not established. See "Pro Forma Data."
SUBSCRIPTION OFFERING AND SUBSCRIPTION RIGHTS
In accordance with the Plan of Conversion, rights to subscribe for the
purchase of Common Stock have been granted under the Plan of Conversion to the
following persons in the following order of descending priority: (1) holders
of deposit accounts with the Bank who had a balance of $100 or more as of
April 30, 1995 ("Eligible Account Holders"); (2) the Employee Plans, including
the ESOP; (3) holders of deposit accounts with a balance of $100 or more as of
September 30, 1996 ("Supplemental Eligible Account Holders"). All
subscriptions received will be subject to the availability of Common Stock
after satisfaction of all subscriptions of all persons having prior rights in
the Subscription Offering and to the maximum and minimum purchase limitations
set forth in the Plan of Conversion and as described below under "--
Limitations on Common Stock Purchases."
Priority 1: Eligible Account Holders. Each Eligible Account Holder will
receive, without payment therefor, first priority, nontransferable
subscription rights to subscribe for in the Subscription Offering up to the
amount permitted to be purchased in the Community Offering, currently $675,000
of Common Stock, subject to the overall maximum purchase limitation. See "--
Limitations on Common Stock Purchases." Subscription rights received by
officers and trustees of the Bank and their associates based on increased
deposits in the Bank in the one-year period preceding April 30, 1995 will be
subordinated to all other subscription rights of Eligible Account Holders.
In the event that Eligible Account Holders exercise subscription rights for
a number of shares of Common Stock in excess of the total number of such
shares eligible for subscription, the shares of Common Stock will be allocated
so as to permit each subscribing Eligible Account Holder to purchase a number
of shares sufficient to make his total allocation equal to the lesser of 100
shares or the number of shares subscribed for. Thereafter, unallocated shares
will be allocated among the remaining subscribing Eligible Account Holders
whose subscriptions remain unfilled in the proportion that the amounts of
their respective eligible deposits bear to the total amount of eligible
deposits of all remaining Eligible Account Holders whose subscriptions remain
unfilled.
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To ensure proper allocation of stock, each Eligible Account Holder must list
on his or her stock order form all accounts in which such Eligible Account
Holder has an ownership interest. Failure to list an account could result in
less shares being allocated than if all accounts had been disclosed.
Priority 2: Employee Plans. To the extent that there are sufficient shares
remaining after satisfaction of the subscriptions by Eligible Account Holders,
the Employee Plans, including the ESOP, will receive, without payment
therefor, second priority, nontransferable subscription rights to purchase, in
the aggregate, up to 10% of Common Stock issued in the Conversion, including
any increase in the number of shares of Common Stock to be issued in the
Conversion after the date hereof as a result of an increase of up to 15% in
the maximum of the Estimated Price Range. The ESOP intends to purchase 8% of
the shares to be issued in connection with the Conversion, including shares
issued to the Foundation, or 2,244,000 shares and 3,036,000 shares, based on
the issuance of 27,233,010 shares and 36,844,660 shares, respectively.
Subscriptions by the ESOP will not be aggregated with shares of Common Stock
purchased directly by or which are otherwise attributable to any other
participants in the Subscription and Community Offerings, including
subscriptions of any of the Bank's trustees, officers, employees or associates
thereof. See "Management of the Bank--Benefit Plans--ESOP."
Priority 3: Supplemental Eligible Account Holders. To the extent there are
sufficient shares remaining after the satisfaction of subscriptions by
Eligible Account Holders and the Employee Plans, each Supplemental Eligible
Account Holder will receive, without payment therefor, as third priority,
nontransferable subscription rights to subscribe for in the Subscription
Offering up to the amount permitted to be purchased in the Community Offering,
currently $675,000 of Common Stock, subject to the overall maximum purchase
limitation. See "--Limitations on Common Stock Purchases."
In the event that Supplemental Eligible Account Holders exercise
subscription rights for a number of shares of Common Stock in excess of the
total number of shares eligible for subscription after the satisfaction of
subscriptions by Eligible Account Holders and the Employee Plans, the shares
of Common Stock will be allocated so as to permit each subscribing
Supplemental Eligible Account Holder, to the extent possible, to purchase a
number of shares sufficient to make his total allocation equal to the lesser
of 100 shares or the number of shares subscribed for. Thereafter, unallocated
shares will be allocated among the remaining subscribing Supplemental Eligible
Account Holders whose subscriptions remain unfilled in the proportion that the
amounts of their respective eligible deposits bear to the total amount of
eligible deposits of all remaining Supplemental Eligible Account Holders whose
subscriptions remain unfilled.
To ensure proper allocation of stock, each Supplemental Eligible Account
Holder must list on his or her stock order form all accounts in which such
Supplemental Eligible Account Holder has an ownership interest. Failure to
list an account could result in less shares being allocated than if all
accounts had been disclosed. The subscription rights received by Eligible
Account Holders will be applied in partial satisfaction of the subscription
rights to be received as a Supplemental Eligible Account Holder.
Expiration Date for the Subscription Offering. The Subscription Offering
will expire on the Expiration Date (December 2, 1996) at 12:00 noon, New York
time, unless extended for up to 45 days by the Bank and Company or such
additional periods with the approval of the Superintendent and FDIC, if
required. Subscription rights which have not been exercised prior to the
Expiration Date will become void. The Bank will not execute orders until all
shares of Common Stock have been subscribed for or otherwise sold. If all
shares have not been subscribed for or sold within 45 days after the
Expiration Date, unless such period is extended with the consent of the
Superintendent and FDIC, all funds delivered to the Bank pursuant to the
Subscription Offering will be returned promptly to the subscribers with
interest and all withdrawal authorizations will be cancelled. If an extension
beyond the 45 day period following the Expiration Date is granted, the Bank
will notify subscribers of the extension of time and of any rights of
subscribers to modify or rescind their subscriptions and have their funds
returned promptly with interest, and of the time period within which
subscribers must affirmatively notify the Bank of their intention to confirm,
modify, or rescind their subscription. If an affirmative response to any
resolicitation is not received by the Company from a subscriber, such order
will be rescinded and all subscription funds will be promptly returned with
interest. Such extensions may not go beyond October 9, 1998.
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The Plan of Conversion provides that the Company complete the sale of the
Common Stock within 45 days after the close of the Subscription Offering. In
the event that the Company is unable to complete the sale of Common Stock and
effect the conversion within the 45-day time period, one or more extensions,
with each such extension up to 60 days, may be granted but such extensions may
not go beyond October 9, 1998 unless waived by the Superintendent and FDIC, if
necessary. If an extension is granted, each subscriber will have the right to
affirm, increase, decrease or rescind the subscription at any time prior to 20
days before the end of the extension period or at any time prior to the date
of the commencement of the Syndicated Community Offering. No assurance can be
given that an extension would be granted if requested. If an extension is
granted, the Company will notify subscribers of such extension and of any
rights of subscribers to modify or rescind their subscriptions.
COMMUNITY OFFERING
To the extent that shares remain available for purchase after satisfaction
of all subscriptions of Eligible Account Holders, the ESOP and Supplemental
Eligible Account Holders, the Bank has determined to offer shares pursuant to
the Plan to certain members of the general public. The Plan provides that with
regard to shares offered in the Community Offering, the Bank and Company may
establish relative preferences, priorities and allocations of shares among
persons, including institutional investors, subscribing for shares. The Bank
and the Company have made no decisions on such preference at this time and
will make such determination upon a review of subscriptions received in
connection with the Community Offering. Such persons, together with associates
of and persons acting in concert with such persons, may purchase up to
$675,000 of Common Stock, subject to the maximum overall purchase limitation.
See "--Limitations on Common Stock Purchases." This amount may be increased to
up to a maximum of 5% of the Common Stock issued or decreased to less than
$675,000 at the sole discretion of the Company and the Bank. THE OPPORTUNITY
TO SUBSCRIBE FOR SHARES OF COMMON STOCK IN THE COMMUNITY OFFERING CATEGORY IS
SUBJECT TO THE RIGHT OF THE BANK AND THE COMPANY, IN ITS SOLE DISCRETION, TO
ACCEPT OR REJECT ANY SUCH ORDERS, IN WHOLE OR IN PART, EITHER AT THE TIME OF
RECEIPT OF AN ORDER OR AS SOON AS PRACTICABLE FOLLOWING THE EXPIRATION DATE.
Subject to the foregoing, if the amount of stock remaining is insufficient
to fill the orders of preferred subscribers after completion of the
Subscription and Community Offerings and the filling of institutional investor
orders, such stock will be allocated first to each preferred subscriber whose
order is accepted by the Bank, in an amount equal to the lesser of 100 shares
or the number of shares subscribed for by each such preferred subscriber, if
possible. Thereafter, unallocated shares will be allocated among the preferred
subscribers whose order remains unsatisfied on a 100 shares per order basis
until all such orders have been filled or the remaining shares have been
allocated. If there are any shares remaining, shares will be allocated to
other persons who purchase in the Community Offering applying the same
allocation described above for preferred subscribers.
Residents of Foreign Countries and Certain States. The Company and the Bank
will make reasonable efforts to comply with the securities laws of all states
in the United States in which persons entitled to subscribe for stock pursuant
to the Plan reside. The Plan provides that the Bank and the Company are not
required to offer stock in the Subscription Offering to any person who resides
in a foreign country.
MARKETING AND UNDERWRITING ARRANGEMENTS
The Bank and the Company have engaged Sandler O'Neill as a consultant and
financial advisor in connection with the offering of the Common Stock, and
Sandler O'Neill has agreed to assist the Bank and the Company in its
solicitation of subscriptions and purchase orders for shares of Common Stock
in the Offerings. Sandler O'Neill will receive a fee equal to 1.75% of the
aggregate Purchase Price of all shares sold in the Offerings, excluding in
each case shares purchased by trustees, directors, officers and employees of
the Bank or Company and any immediate family member thereof or any partner or
employee of the Bank's general counsel and the Employee Plans, including the
ESOP, for which Sandler O'Neill will not receive a fee. In the event that a
selected dealers agreement is entered into in connection with a Syndicated
Community Offering, the Company
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and Bank will pay a fee (to be negotiated at such time under such agreement)
to such selected dealers, any sponsoring dealers fees, and a management fee to
Sandler O'Neill of 1.5% for shares sold by a NASD member firm pursuant to a
selected dealers agreement; provided, however, that the aggregate fees payable
to Sandler O'Neill for Common Stock sold by them pursuant to such a selected
dealers agreement shall not exceed 1.75% of the aggregate Purchase Price and
provided, further, however, that the aggregate fees payable to Sandler O'Neill
and the selected dealers will not exceed 7% of the aggregate purchase price of
the Common Stock sold by selected dealers. Fees to Sandler O'Neill and to any
other broker-dealer may be deemed to be underwriting fees, and Sandler O'Neill
and such broker-dealers may be deemed to be underwriters. Sandler O'Neill will
also be reimbursed for its reasonable out-of-pocket expenses, including legal
fees. Notwithstanding the foregoing, in the event the Offerings are not
consummated or Sandler O'Neill ceases, under certain circumstances after the
subscription solicitation activities are commenced, to provide assistance to
the Company, Sandler O'Neill will be entitled to a fee for its management
advisory services in an amount to be agreed upon by the Bank and Sandler
O'Neill, and based upon the amount of services performed by Sandler O'Neill
and will also be reimbursed for its reasonable out-of-pocket expenses as
described above. The Company and the Bank have agreed to indemnify Sandler
O'Neill for reasonable costs and expenses in connection with certain claims or
liabilities, including certain liabilities under the Securities Act. Sandler
O'Neill has received advances towards its marketing and financial advisory
service fees totalling $50,000. Total marketing fees to Sandler O'Neill are
expected to be $4,294,939 and $5,838,378 at the minimum and the maximum of the
Estimated Price Range, respectively. See "Pro Forma Data" for the assumptions
used to arrive at these estimates.
Sandler O'Neill will also perform proxy solicitation services, conversion
agent services and records management services for the Bank in the Conversion
and will receive a fee for these services of $55,000, plus reimbursement of
reasonable out-of-pocket expenses.
Directors, Trustees and executive officers of the Company and Bank may
participate in the solicitation of offers to purchase Common Stock. Questions
of prospective purchasers will be directed to executive officers or registered
representatives. Other employees of the Bank may participate in the Offering
in ministerial capacities or providing clerical work in effecting a sales
transaction. Such other employees have been instructed not to solicit offers
to purchase Common Stock or provide advice regarding the purchase of Common
Stock. The Company will rely on Rule 3a4-1 under the Exchange Act, and sales
of Common Stock will be conducted within the requirements of Rule 3a4-1, so as
to permit officers, trustees, directors and employees to participate in the
sale of Common Stock. No officer, Trustee, Director or employee of the Company
or the Bank will be compensated in connection with his participation by the
payment of commissions or other remuneration based either directly or
indirectly on the transactions in the Common Stock.
PROCEDURE FOR PURCHASING SHARES IN SUBSCRIPTION AND COMMUNITY OFFERINGS
To ensure that each purchaser receives a prospectus at least 48 hours before
the Expiration Date in accordance with Rule 15c2-8 of the Exchange Act, no
prospectus will be mailed any later than five days prior to such date or hand
delivered any later than two days prior to such date. Execution of the stock
order form and certification form will confirm receipt or delivery in
accordance with Rule 15c2-8. Stock order and certification forms will only be
distributed with a prospectus.
To purchase shares in the Subscription and Community Offerings, an executed
stock order form and certification form with the required payment for each
share subscribed for, or with appropriate authorization for withdrawal from
the Bank's deposit account (which may be given by completing the appropriate
blanks in the stock order form), must be received by the Bank at any of its
offices by 12:00 noon, New York time, on the Expiration Date. Stock order
forms which are not received by such time or are executed defectively or are
received without full payment (or appropriate withdrawal instructions) are not
required to be accepted. In addition, the Bank and Company are not obligated
to accept orders submitted on photocopied or facsimilied stock order forms and
will not accept stock order forms unaccompanied by an executed certification
form. Notwithstanding the foregoing, the Company and Bank shall have the
right, each in their sole discretion, to
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permit institutional investors to submit irrevocable orders together with a
legally binding commitment for payment and to thereafter pay for the shares of
Common Stock for which they subscribe in the Community Offering at any time
prior to 48 hours before the completion of the Conversion. The Company and the
Bank have the right to waive or permit the correction of incomplete or
improperly executed forms, but do not represent that they will do so. Once
received, an executed stock order form may not be modified, amended or
rescinded without the consent of the Bank unless the Conversion has not been
completed within 45 days after the end of the Subscription and Community
Offerings, unless such period has been extended.
In order to ensure that Eligible Account Holders and Supplemental Eligible
Account Holders are properly identified as to their stock purchase priorities,
depositors as of the Eligibility Record Date (April 30, 1995) and/or the
Supplemental Eligibility Record Date (September 30, 1996) must list all
accounts on the stock order form giving all names in each account and the
account number.
Payment for subscriptions may be made (i) in cash if delivered in person at
any branch office of the Bank, (ii) by check, bank draft or money order, or
(iii) by authorization of withdrawal from deposit accounts maintained with the
Bank. No wire transfers will be accepted. Interest will be paid on payments
made by cash, check, bank draft or money order at the Bank's passbook rate of
interest from the date payment is received until the completion or termination
of the Conversion. If payment is made by authorization of withdrawal from
deposit accounts, the funds authorized to be withdrawn from a deposit account
will continue to accrue interest at the contractual rates until completion or
termination of the Conversion, but a hold will be placed on such funds,
thereby making them unavailable to the depositor until completion or
termination of the Conversion.
If a subscriber authorizes the Bank to withdraw the amount of the purchase
price from his deposit account, the Bank will do so as of the effective date
of the Conversion. The Bank will waive any applicable penalties for early
withdrawal from certificate accounts. If the remaining balance in a
certificate account is reduced below the applicable minimum balance
requirement at the time that the funds actually are transferred under the
authorization, the certificate will be cancelled at the time of the
withdrawal, without penalty, and the remaining balance will earn interest at
the Bank's passbook rate.
If the ESOP subscribes for shares during the Subscription Offering, the ESOP
will not be required to pay for the shares subscribed for at the time it
subscribes, but rather, may pay for such shares of Common Stock subscribed for
at the Purchase Price upon consummation of the Subscription and Community
Offering, if all shares are sold, or upon consummation of the Syndicated
Community Offering if shares remain to be sold in such offering; provided,
that there is in force from the time of its subscription until such time, a
loan commitment from an unrelated financial institution or the Company to lend
to the ESOP, at such time, the aggregate Purchase Price of the shares for
which it subscribed.
Owners of self-directed IRAs and other Qualified Plan accounts, such as
Keogh accounts, may use the assets of such IRAs and other Qualified Plan
accounts to purchase shares of Common Stock in the Subscription and Community
Offerings, provided that such IRAs or other Qualified Plan accounts are not
maintained at the Bank. Persons with self-directed IRAs or Qualified Plan
accounts maintained at the Bank must have their accounts transferred to an
unaffiliated institution or broker to purchase shares of Common Stock in the
Subscription and Community Offerings. In addition, the provisions of ERISA and
IRS regulations require that officers, directors and ten percent shareholders
who use self-directed IRA or Qualified Plan account funds to purchase shares
of Common Stock in the Subscription and Community Offerings make such
purchases for the exclusive benefit of the IRAs or Qualified Plan accounts.
Certificates representing shares of Common Stock purchased will be mailed to
purchasers at the address specified in properly completed stock order forms,
as soon as practicable following consummation of the sale of all shares of
Common Stock. Any certificates returned as undeliverable will be disposed of
in accordance with applicable law.
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RESTRICTIONS ON TRANSFER OF SUBSCRIPTION RIGHTS AND SHARES
Prior to the completion of the Conversion, the NYBB regulations prohibit any
person with subscription rights, including the Eligible Account Holders, the
ESOP and Supplemental Eligible Account Holders, from transferring or entering
into any agreement or understanding to transfer the legal or beneficial
ownership of the subscription rights issued under the Plan or the shares of
Common Stock to be issued upon their exercise. Such rights may be exercised
only by the person to whom they are granted and only for his or her account.
Each person exercising such subscription rights will be required to certify
that he or she is purchasing shares solely for his or her own account and that
he or she has no agreement or understanding regarding the sale or transfer of
such shares. The regulations also prohibit any person from offering or making
an announcement of an offer or intent to make an offer to purchase such
subscription rights or shares of Common Stock prior to the completion of the
Conversion.
THE BANK AND THE COMPANY WILL PURSUE ANY AND ALL LEGAL AND EQUITABLE
REMEDIES (INCLUDING FORFEITURE) IN THE EVENT THEY BECOME AWARE OF THE TRANSFER
OF SUBSCRIPTION RIGHTS AND WILL NOT HONOR ORDERS KNOWN BY THEM TO INVOLVE THE
TRANSFER OF SUCH RIGHTS.
SYNDICATED COMMUNITY OFFERING
As a final step in the Conversion, the Plan provides that, if feasible, all
shares of Common Stock not purchased in the Subscription and Community
Offerings, if any, will be offered for sale to the general public in a
Syndicated Community Offering through a syndicate of registered broker-dealers
to be formed and managed by Sandler O'Neill acting as agent of the Company to
assist the Company and the Bank in the sale of the Common Stock. THE COMPANY
AND THE BANK HAVE THE RIGHT TO REJECT ORDERS IN WHOLE OR IN PART IN THEIR SOLE
DISCRETION IN THE SYNDICATED COMMUNITY OFFERING. Neither Sandler O'Neill nor
any registered broker-dealer shall have any obligation to take or purchase any
shares of the Common Stock in the Syndicated Community Offering, however,
Sandler O'Neill has agreed to use its best efforts in the sale of shares in
the Syndicated Community Offering.
The price at which Common Stock is sold in the Syndicated Community Offering
will be determined as described above under "--Stock Pricing." Subject to the
overall maximum purchase limitation, no person, together with any associate or
group of persons acting in concert, will be permitted to subscribe in the
Syndicated Community Offering for more than $675,000 of Common Stock;
provided, however, that shares of Common Stock purchased in the Community
Offering by any persons, together with associates of or persons acting in
concert with such persons, will be aggregated with purchases in the Syndicated
Community Offering and be subject to an overall maximum purchase limitation of
1.0% of the shares offered exclusive of an increase in shares issued pursuant
to an increase in the Estimated Price Range by up to 15%.
Payments made in the form of a check, bank draft, money order or in cash
will earn interest at the Bank's passbook rate of interest from the date such
payment is actually received by the Bank until completion or termination of
the Conversion.
In addition to the foregoing, if a syndicate of broker-dealers ("selected
dealers") is formed to assist in the Syndicated Community Offering, a
purchaser may pay for his shares with funds held by or deposited with a
selected dealer. If an order form is executed and forwarded to the selected
dealer or if the selected dealer is authorized to execute the order form on
behalf of a purchaser, the selected dealer is required to forward the order
form and funds to the Bank for deposit in a segregated account on or before
noon of the business day following receipt of the order form or execution of
the order form by the selected dealer. Alternatively, selected dealers may
solicit indications of interest from their customers to place orders for
shares. Such selected dealers shall subsequently contact their customers who
indicated an interest and seek their confirmation as to their intent to
purchase. Those indicating an intent to purchase shall execute order forms and
forward them to their selected dealer or authorize the selected dealer to
execute such forms. The selected dealer will acknowledge receipt of the order
to its customer in writing on the following business day and will debit such
customer's account on the third business day after the customer has confirmed
his intent to purchase (the "debit date") and on or before
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noon of the next business day following the debit date will send order forms
and funds to the Bank for deposit in a segregated account. Although
purchasers' funds are not required to be in their accounts with selected
dealers until the debit date in the event that such alternative procedure is
employed once a confirmation of an intent to purchase has been received by the
selected dealer, the purchaser has no right to rescind his order.
Certificates representing shares of Common Stock purchased, together with
any refund due, will be mailed to purchasers at the address specified in the
order form, as soon as practicable following consummation of the sale of the
Common Stock. Any certificates returned as undeliverable will be disposed of
in accordance with applicable law.
The Syndicated Community Offering will terminate no more than 45 days
following the Subscription Expiration Date, unless extended by the Company
with the approval of the Superintendent and FDIC. Such extensions may not be
beyond October 9, 1998. See "--Stock Pricing" above for a discussion of rights
of subscribers, if any, in the event an extension is granted.
LIMITATIONS ON COMMON STOCK PURCHASES
The Plan includes the following limitations on the number of shares of
Common Stock which may be purchased during the Conversion:
(1) No less than 25 shares;
(2) Each Eligible Account Holder may subscribe for and purchase in the
Subscription Offering up to the amount permitted to be purchased in the
Community Offering, currently $675,000 of Common Stock, subject to the
overall maximum purchase limitation described in (7) below;
(3) The Employee Plans, including the ESOP, are permitted to purchase, in
the aggregate, up to 10% of the shares of Common Stock issued in the
Conversion, including shares issued in the event of an increase in the
Estimated Price Range of 15%, and the ESOP intends to purchase 8% of the
shares of Common Stock issued in connection with the Conversion, including
shares issued to the Foundation;
(4) Each Supplemental Eligible Account Holder may subscribe for and
purchase in the Subscription Offering up to the greater of the amount
permitted to be purchased in the Community Offering, currently $675,000 of
Common Stock, subject to the overall maximum purchase limitation described
in (7) below;
(5) Persons purchasing shares of Common Stock in the Community Offering,
together with associates of and groups of persons acting in concert with
such persons, may purchase in the Community Offering up to $675,000 of
Common Stock, subject to the overall maximum purchase limitation described
in (7) below;
(6) Persons purchasing shares of Common Stock in the Syndicated Community
Offering, together with associates of and persons acting in concert with
such persons, may purchase in the Syndicated Offering up to $675,000 of
Common Stock subject to the overall maximum purchase limitation described
in (7) below and, provided further, that shares of Common Stock purchased
in the Community Offering by any persons, together with associates of and
persons acting in concert with such persons, will be aggregated with
purchases in the Syndicated Community Offering in applying the $675,000
purchase limitation;
(7) Eligible Account Holders and Supplemental Eligible Account Holders
may purchase stock in the Community Offering and Syndicated Community
Offering, subject to the purchase limitations described in (5) and (6)
above, provided that, except for the ESOP, the overall maximum number of
shares of Common Stock subscribed for or purchased in all categories of the
Conversion by any person, together with associates of and groups of persons
acting in concert with such persons, shall not exceed 1.0% of the shares of
Common Stock offered in the Conversion, exclusive of an increase in the
total number of shares issued due to an increase in the Estimated Price
Range of up to 15%; and
(8) No more than 25% of the total number of shares issued in the
Conversion may be purchased by Trustees, Directors and officers of the Bank
or Company and their associates in the aggregate, excluding purchases by
the ESOP.
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Subject to any required regulatory approval and the requirements of
applicable laws and regulations, but without further approval of depositors of
the Bank or subscribers for Common Stock, both the individual amount permitted
to be subscribed for and the overall maximum purchase limitation may be
increased to up to a maximum of 5% of the Common Stock to be issued at the
sole discretion of the Company and the Bank. If such amount is increased,
subscribers for the maximum amount will be, and certain other large
subscribers in the sole discretion of the Bank may be, given the opportunity
to increase their subscriptions up to the then applicable limit.
The overall maximum purchase limitation may not be reduced to less than 1.0%
and the individual amount permitted to be subscribed for may not be reduced by
the Bank to less than 0.10% without the further approval of members or
resolicitation of subscribers. An Eligible Account Holder or Supplemental
Eligible Holder may not purchase individually in the Subscription Offering the
overall maximum purchase limit of 1.0% of the shares offered, but may make
such purchase, together with associates of and persons acting in consert with
such person, by also purchasing in other available categories of the
Conversion, subject to availability of shares and the maximum overall purchase
limit for purchases in the Conversion.
The term "associate" of a person is defined to mean: (i) any corporation
(other than the Bank or a majority-owned subsidiary of the Bank) of which such
person is an officer, partner or 10% stockholder; (ii) any trust or other
estate in which such person has a substantial beneficial interest or serves as
a trustee or in a similar fiduciary capacity; provided, however, such term
shall not include any employee stock benefit plan of the Bank in which such
person has a substantial beneficial interest or serves as a trustee or in a
similar fiduciary capacity; and (iii) any relative or spouse of such person,
or any relative of such spouse, who either has the same home as such person or
who is a trustee or officer of the Bank. Trustees are not treated as
associates of each other solely because of their Board membership. For a
further discussion of limitations on purchases of a converting institution's
stock at the time of Conversion and subsequent to Conversion, see "Management
of the Bank--Subscriptions by Executive Officers, Directors and Trustees," "--
Certain Restrictions on Purchase or Transfer of Shares After Conversion" and
"Restrictions on Acquisition of the Company and the Bank."
LIQUIDATION RIGHTS
In the unlikely event of a complete liquidation of the Bank in its present
mutual form, each depositor would have a claim to receive their pro rata share
of any assets of the Bank remaining after payment of claims of all creditors
(including the claims of all depositors to the withdrawal value of their
accounts). To the extent there are remaining assets, a depositor would have a
claim to receive a pro rata share of any such remaining assets in the same
proportion as the value of such depositor's deposit accounts to the total
value of all deposit accounts in the Bank at the time of liquidation. After
the Conversion, each depositor, in the event of a complete liquidation, would
have a claim as a creditor of the same general priority as the claims of all
other general creditors of the Bank. However, except as described below, his
claim would be solely in the amount of the balance in their deposit account
plus accrued interest. Such depositor would not have an interest in the value
or assets of the Bank above that amount.
The Plan provides for the establishment, upon the completion of the
Conversion, of a special "liquidation account" for the benefit of Eligible
Account Holders in an amount equal to the surplus and reserves of the Bank as
of the date of its latest balance sheet contained in the final Prospectus used
in connection with the Conversion. Eligible Account Holders, if they were to
continue to maintain their deposit account at the Bank, would, on a complete
liquidation of the Bank, have a claim to an interest in the liquidation
account after payment of all creditors prior to any payment to the
stockholders of the Bank. Each Eligible Account Holder would have an initial
interest in such liquidation account for each deposit account, demand account,
NOW account, money market deposit account, and certificate of deposit account,
with a balance of $100 or more held in the Bank on April 30, 1995 ("Deposit
Account"). Each Eligible Account Holder will have a claim to a pro rata
interest in the total liquidation account for each of his Deposit Accounts
based on the proportion that the balance of each such Deposit Account on the
April 30, 1995 eligibility record date bore to the balance of all Deposit
Accounts in the Bank on such date.
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If, however, at the close of business on the last day of any period for
which the Bank or Company has prepared audited financial statements subsequent
to the effective date of the Conversion ("annual closing date"), the amount in
any Deposit Account is less than the amount in such Deposit Account on any
other annual closing date, then such person's interest in the liquidation
account relating to such Deposit Account would be reduced from time to time by
the proportion of any such reduction, and such interest will cease to exist if
such Deposit Account is withdrawn or closed. For purposes of the liquidation
account, time deposit accounts shall be deemed to be closed upon maturity
regardless of any renewal thereof. In addition, no interest in the liquidation
account would ever be increased despite any subsequent increase in the related
Deposit Account. Any assets remaining after the above liquidation rights of
Eligible Account Holders are satisfied would be distributed to the Company as
the sole stockholder of the Bank.
TAX ASPECTS
Consummation of the Conversion is expressly conditioned upon the receipt by
the Bank of either a favorable ruling from the IRS or an opinion of counsel
with respect to federal income taxation, and an opinion of its independent
auditors with respect to certain New York state taxation, to the effect that
the Conversion will not be a taxable transaction to the Company, the Bank,
Eligible Account Holders or Supplemental Eligible Account Holders, except as
noted below. The federal and New York tax consequences will remain unchanged
in the event that a holding company form of organization is not utilized.
No private ruling has been requested from the IRS with respect to the
proposed Conversion. Instead, the Bank has received an opinion of its counsel,
Muldoon, Murphy & Faucette, which has been filed with the SEC as an exhibit to
the Company's Registration Statement to the effect that for federal income tax
purposes, among other matters: (i) the Bank's change in form from mutual to
stock ownership will constitute a reorganization under section 368(a)(1)(F) of
the Internal Revenue Code and neither the Bank nor the Company will recognize
any gain or loss as a result of the Conversion; (ii) no gain or loss will be
recognized to the Bank or the Company upon the purchase of the Bank's capital
stock by the Company or to the Company upon the purchase of its Common Stock
in the Conversion; (iii) no gain or loss will be recognized by Eligible
Account Holders or Supplemental Eligible Account Holders upon the issuance to
them of deposit accounts in the Bank in its stock form plus their interests in
the liquidation account in exchange for their deposit accounts in the Bank;
(iv) the tax basis of the depositors' deposit accounts in the Bank immediately
after the Conversion will be the same as the basis of their deposit accounts
immediately prior to the Conversion; (v) the tax basis of each Eligible
Account Holder's or Supplemental Eligible Account Holder's interest in the
liquidation account will be zero; (vi) no gain or loss will be recognized by
Eligible Account Holders or Supplemental Eligible Account Holders upon the
distribution to them of nontransferable subscription rights to purchase shares
of the Common Stock, provided that the amount to be paid for the Common Stock
is equal to the fair market value of such stock; and (vii) the tax basis to
the stockholders of the Common Stock of the Company purchased in the
Conversion will be the amount paid therefor and the holding period for the
shares of Common Stock purchased by such persons will begin on the date on
which their subscription rights are exercised. O'Reilly, Marsh & Corteselli
P.C. has opined, subject to the limitations and qualifications in its opinion,
that: the Conversion will not be a taxable transaction for the purposes of the
New York State banking franchise taxes, sales and use taxes, stock transfer
taxes, and real property transfer gains taxes; a position may be taken that
the Conversion will likely not be a taxable transaction for purposes of New
York State real estate transfer taxes; and the Company, as a foreign
corporation, will be subject to a license fee at a rate of 1/20% of the
apportioned par value of the Common Stock issued. Certain portions of both the
federal and the state and local tax opinions are based upon the opinion of
FinPro that subscription rights issued in connection with the Conversion will
have no value.
In the opinion of FinPro, which opinion is not binding on the IRS, the
subscription rights do not have any value, based on the fact that such rights
are acquired by the recipients without cost, are nontransferable and of short
duration, and afford the recipients the right only to purchase the Common
Stock at a price equal to its estimated fair market value, which will be the
same price as the Purchase Price for the unsubscribed shares of Common Stock.
If the subscription rights granted to Eligible Account Holders or Supplemental
Eligible Account
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Holders are deemed to have an ascertainable value, such recipients could be
taxed either on the receipt or exercise of such subscription rights.
Unlike private rulings, an opinion of counsel is not binding on the IRS and
the IRS could disagree with conclusions reached therein. In the event of such
disagreement, there can be no assurance that the IRS would not prevail in a
judicial or administrative proceeding.
CERTAIN RESTRICTIONS ON PURCHASE OR TRANSFER OF SHARES AFTER CONVERSION
All shares of Common Stock purchased in connection with the Conversion by a
Director, Trustee or an executive officer of the Bank or Company will be
subject to a restriction that the shares not be sold for a period of one year
following the Conversion, except in the event of the death of such Director,
Trustee or executive officer. Each certificate for such restricted shares will
bear a legend giving notice of this restriction on transfer, and instructions
will be issued to the effect that any transfer within such time period of any
certificate or record ownership of such shares other than as provided above is
a violation of such restriction. Any shares of Common Stock issued at a later
date as a stock dividend, stock split, or otherwise, with respect to such
restricted stock will be subject to the restriction that they may not be sold
for a period of one year following the Conversion. The Directors, Trustees and
executive officers of the Bank or Company will also be subject to the insider
trading rules promulgated pursuant to the Exchange Act.
Purchases of outstanding shares of Common Stock of the Company by Trustees,
Directors, executive officers (or any person who was an executive officer or
Trustee of the Bank after adoption of the Plan of Conversion) and their
associates during the three-year period following Conversion may be made only
through a broker or dealer registered with the SEC, except with the prior
written approval of the Superintendent. This restriction does not apply,
however, to the purchase of Common Stock pursuant to the Stock Programs or
Stock Option Plans.
INTERPRETATION, AMENDMENT AND TERMINATION
All interpretations of the Plan by the Board of the Bank will be final,
subject to the authority of the Superintendent and FDIC. The Plan provides
that, if deemed necessary or desirable by the Board of Trustees of the Bank,
the Plan may be substantively amended prior to the solicitation of proxies
from Eligible Account Holders by a vote of the Board of Trustees; amendment of
the Plan thereafter requires the approval of the Superintendent and FDIC. The
Plan will terminate if the sale of all shares of stock being offered pursuant
to the Plan is not completed prior to 24 months after the date of the approval
of the Plan by the Superintendent unless a longer time period is permitted by
governing laws and regulations. The Plan may be terminated by a vote of the
Board of Trustees of the Bank at any time prior to the Special Meeting, and
thereafter by such a vote with the approval of the Superintendent and FDIC.
RESTRICTIONS ON ACQUISITION OF THE COMPANY AND THE BANK
GENERAL
The Bank's Plan of Conversion provides for the Conversion of the Bank from
the mutual to the stock form of organization and in connection therewith, a
Restated Organization Certificate and Bylaws to be adopted by Eligible Account
Holders of the Bank. The Plan also provides for the concurrent formation of a
holding company. See "The Conversion--General." Certain provisions in the
Company's Certificate of Incorporation and Bylaws and in its management
remuneration provided for in the Conversion, together with provisions of
Delaware corporate law, may have anti-takeover effects. In addition, the
Bank's Restated Organization Certificate and Bylaws and management
remuneration provided for in the Conversion may have anti-takeover effects as
described below. Finally, regulatory restrictions may make it difficult for
persons or companies to acquire control of either the Company or the Bank.
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RESTRICTIONS IN THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
A number of provisions of the Company's Certificate of Incorporation and
Bylaws deal with matters of corporate governance and certain rights of
stockholders. The following discussion is a general summary of certain
provisions of the Company's Certificate of Incorporation and Bylaws and
certain other statutory and regulatory provisions relating to stock ownership
and transfers, the Board of Directors and business combinations, which might
be deemed to have a potential "anti-takeover" effect. These provisions may
have the effect of discouraging a future takeover attempt which is not
approved by the Board of Directors but which individual Company stockholders
may deem to be in their best interests or in which stockholders may receive a
substantial premium for their shares over then current market prices. As a
result, stockholders who might desire to participate in such a transaction may
not have an opportunity to do so. Such provisions will also render the removal
of the current Board of Directors or management of the Company more difficult.
The following description of certain of the provisions of the Certificate of
Incorporation and Bylaws of the Company is necessarily general and reference
should be made in each case to such Certificate of Incorporation and Bylaws,
which are incorporated herein by reference. See "Additional Information" as to
how to obtain a copy of these documents.
Limitation on Voting Rights. The Certificate of Incorporation of the Company
provides that in no event shall any record owner of any outstanding Common
Stock which is beneficially owned, directly or indirectly, by a person who
beneficially owns in excess of 10% of the then outstanding shares of Common
Stock (the "Limit") be entitled or permitted to any vote in respect of the
shares held in excess of the Limit. Beneficial ownership is determined
pursuant to Rule 13d-3 of the General Rules and Regulations promulgated
pursuant to the Exchange Act, and includes shares beneficially owned by such
person or any of his affiliates (as defined in the Certificate of
Incorporation), shares which such person or his affiliates have the right to
acquire pursuant to any agreement, arrangement or understanding or upon the
exercise of conversion rights, exchange rights, warrants or options or
otherwise and shares as to which such person and his affiliates have sole or
shared voting or investment power, but shall not include shares that are
subject to a publicly solicited revocable proxy and that are not otherwise
deemed to be beneficially owned by such person and his affiliates. No Director
or officer (or any affiliate thereof) of the Company shall, solely by reason
of any or all of such Directors or officers acting in their capacities as
such, be deemed to beneficially own any shares beneficially owned by any other
Director or officer (or affiliate thereof) nor will the ESOP or any similar
plan of the Company or the Bank or any trustee with respect thereto (solely by
reason of such trustee's capacity) be deemed to beneficially own any shares
held under any such plan. The Certificate of Incorporation of the Company
further provides that the provisions limiting voting rights may only be
amended upon the vote of the holders of at least 80% of the voting power of
all then outstanding shares of capital stock entitled to vote thereon (after
giving effect to the provision limiting voting rights).
Board of Directors. The Board of Directors of the Company is divided into
three classes, each of which shall contain approximately one-third of the
whole number of the members of the Board. Each class shall serve a staggered
term, with approximately one-third of the total number of Directors being
elected each year. The Company's Certificate of Incorporation and Bylaws
provide that the size of the Board shall be determined by a majority of the
Whole Board of Directors. The Certificate of Incorporation and the Bylaws
provide that any vacancy occurring in the Board, including a vacancy created
by an increase in the number of Directors or resulting from death,
resignation, retirement, disqualification, removal from office or other cause,
shall be filled for the remainder of the unexpired term exclusively by a
majority vote of the Directors then in office. The classified Board is
intended to provide for continuity of the Board of Directors and to make it
more difficult and time consuming for a stockholder group to fully use its
voting power to gain control of the Board of Directors without the consent of
the incumbent Board of Directors of the Company. Directors may be removed by
the shareholders only for cause by the affirmative vote of the holders of at
least 80% of the voting power of all then outstanding shares of capital stock
entitled to vote thereon.
In the absence of these provisions, the vote of the holders of a majority of
the shares could remove the entire Board, with or without cause, and replace
it with persons of such holders choice.
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Cumulative Voting, Special Meetings and Action by Written Consent. The
Certificate of Incorporation does not provide for cumulative voting for any
purpose. Moreover, special meetings of stockholders of the Company may be
called only by a resolution adopted by a majority of the Whole Board of
Directors of the Company. The Certificate of Incorporation also provides that
any action required or permitted to be taken by the stockholders of the
Company may be taken only at an annual or special meeting and prohibits
stockholder action by written consent in lieu of a meeting.
Authorized Shares. The Certificate of Incorporation authorizes the issuance
of 100 million shares of Common Stock and 10 million shares of preferred
stock. The shares of Common Stock and preferred stock were authorized in an
amount greater than that to be issued in the Conversion to provide the
Company's Board of Directors with as much flexibility as possible to effect,
among other transactions, financings, acquisitions, stock dividends, stock
splits and employee stock options. However, these additional authorized shares
may also be used by the Board of Directors consistent with its fiduciary duty
to deter future attempts to gain control of the Company. The Board of
Directors also has sole authority to determine the terms of any one or more
series of preferred stock, including voting rights, conversion rates, and
liquidation preferences. As a result of the ability to fix voting rights for a
series of preferred stock, the Board has the power to the extent consistent
with its fiduciary duty to issue a series of preferred stock to persons
friendly to management in order to attempt to block a post-tender offer merger
or other transaction by which a third party seeks control, and thereby assist
management to retain its position. The Company's Board currently has no plans
for the issuance of additional shares, other than the issuance of shares in
the Conversion, including shares contributed to the Foundation, and the
issuance of additional shares upon exercise of stock options.
Stockholder Vote Required to Approve Business Combinations with Interested
Stockholders. The Certificate of Incorporation requires the approval of the
holders of at least 80% of the Company's outstanding shares of voting stock
entitled to vote thereon to approve certain "Business Combinations" with an
"Interested Stockholder," each as defined therein, and related transactions.
Under Delaware law, absent this provision, business combinations, including
mergers, consolidations and sales of all or substantially all of the assets of
a corporation must, subject to certain exceptions, be approved by the vote of
the holders of only a majority of the outstanding shares of common stock of
the company and any other affected class of stock. Under the Certificate of
Incorporation, the approval of the holders of at least 80% of the shares of
capital stock entitled to vote thereon is required for any business
combination involving an Interested Stockholder (as defined below) except (i)
in cases where the proposed transaction has been approved by a majority of
those members of the Company's Board of Directors who are unaffiliated with
the Interested Stockholder and were Directors prior to the time when the
Interested Stockholder became an Interested Stockholder or (ii) if the
proposed transaction meets certain conditions set forth therein which are
designed to afford the stockholders a fair price in consideration for their
shares. In each such case, where stockholder approval is required, the
approval of only a majority of the outstanding shares of voting stock is
sufficient. The term "Interested Stockholder" is defined to include, among
others, any individual, a group acting in concert, corporation, partnership,
association or other entity (other than the Company or its subsidiary) who or
which is the beneficial owner, directly or indirectly, of 10% or more of the
outstanding shares of voting stock of the Company. This provision of the
Certificate of Incorporation applies to any "Business Combination," which is
defined to include: (i) any merger or consolidation of the Company or any of
its subsidiaries with any Interested Stockholder or Affiliate (as defined in
the Certificate of Incorporation) of an Interested Stockholder or any
corporation which is, or after such merger or consolidation would be, an
Affiliate of an Interested Stockholder; (ii) any sale, lease, exchange,
mortgage, pledge, transfer, or other disposition to or with any Interested
Stockholder or Affiliate of 25% or more of the assets of the Company or
combined assets of the Company and its subsidiary; (iii) the issuance or
transfer to any Interested Stockholder or its Affiliate by the Company (or any
subsidiary) of any securities of the Company (or any subsidiary) in exchange
for any cash, securities or other property the value of which equals or
exceeds 25% of the fair market value of the Common Stock of the Company; (iv)
the adoption of any plan for the liquidation or dissolution of the Company
proposed by or on behalf of any Interested Stockholder or Affiliate thereof;
and (v) any reclassification of securities, recapitalization, merger or
consolidation of the Company with any of its subsidiaries which has the effect
of increasing the proportionate share of Common Stock or any class of equity
or convertible securities of
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the Company or subsidiary owned directly or indirectly, by an Interested
Stockholder or Affiliate thereof. The Trustees and executive officers of the
Bank are purchasing in the aggregate approximately 1.31% of the shares of the
Common Stock based on the maximum of the Estimated Price Range. In addition,
the ESOP intends to purchase 8% of the Common Stock issued in connection with
the Conversion, including shares issued to the Foundation. Additionally, the
Company expects to acquire 4% of the Common Stock issued in connection with
the Conversion, including shares issued to the Foundation, on behalf of the
Stock Programs and expects to grant options to issue an amount equal to 10% of
the Common Stock issued in connection with the Conversion, including shares
issued to the Foundation, under the Stock Option Plans to Directors and
executive officers. As a result, Directors, executive officers and employees
have the potential to control the voting of approximately 21.2% of the
Company's Common Stock (or 23.8% assuming the voting restriction relating to
the Foundation is waived by the FDIC) on a fully diluted basis at the maximum
of the Estimated Price Range, thereby enabling them to prevent the approval of
the transactions requiring the approval of at least 80% of the Company's
outstanding shares of voting stock described hereinabove.
Evaluation of Offers. The Certificate of Incorporation of the Company
further provides that the Board of Directors of the Company, when evaluating
any offer of another "Person" (as defined therein), to (i) make a tender or
exchange offer for any equity security of the Company, (ii) merge or
consolidate the Company with another corporation or entity or (iii) purchase
or otherwise acquire all or substantially all of the properties and assets of
the Company, may, in connection with the exercise of its judgment in
determining what is in the best interest of the Company and the stockholders
of the Company, give due consideration to all relevant factors, including,
without limitation, those factors that directors of any subsidiary (including
the Bank) may consider in evaluating any action that may result in a change or
potential change of control of such subsidiary, and the social and economic
effects of acceptance of such offer on: the Company's present and future
customers and employees and those of its subsidiaries (including the Bank);
the communities in which the Company and the Bank operate or are located; the
ability of the Company to fulfill its corporate objectives as a savings and
loan holding company; and the ability of the Bank to fulfill the objectives of
a stock savings bank under applicable statutes and regulations. By having
these standards in the Certificate of Incorporation of the Company, the Board
of Directors may be in a stronger position to oppose such a transaction if the
Board concludes that the transaction would not be in the best interest of the
Company, even if the price offered is significantly greater than the then
market price of any equity security of the Company.
Amendment of Certificate of Incorporation and Bylaws. Amendments to the
Company's Certificate of Incorporation must be approved by a majority vote of
its Board of Directors and also by a majority of the outstanding shares of its
voting stock, provided, however, that an affirmative vote of the holders of at
least 80% of the outstanding voting stock entitled to vote (after giving
effect to the provision limiting voting rights) is required to amend or repeal
certain provisions of the Certificate of Incorporation, including the
provision limiting voting rights, the provisions relating to approval of
certain business combinations, calling special meetings, the number and
classification of Directors, Director and officer indemnification by the
Company and amendment of the Company's Bylaws and Certificate of
Incorporation. The Company's Bylaws may be amended by a majority of the Whole
Board of Directors, or by a vote of the holders of at least 80% (after giving
effect to the provision limiting voting rights) of the total votes eligible to
be voted at a duly constituted meeting of stockholders.
Certain Bylaw Provisions. The Bylaws of the Company also require a
stockholder who intends to nominate a candidate for election to the Board of
Directors, or to raise new business at an annual stockholder meeting to give
at least 90 days' advance notice to the Secretary of the Company. The notice
provision requires a stockholder who desires to raise new business to provide
certain information to the Company concerning the nature of the new business,
the stockholder and the stockholder's interest in the business matter.
Similarly, a stockholder wishing to nominate any person for election as a
Director must provide the Company with certain information concerning the
nominee and the proposing stockholder.
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ANTI-TAKEOVER EFFECTS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
AND MANAGEMENT REMUNERATION ADOPTED IN CONVERSION
The provisions described above are intended to reduce the Company's
vulnerability to takeover attempts and certain other transactions which have
not been negotiated with and approved by members of its Board of Directors.
Certain provisions of the Stock Option Plans and Stock Programs may provide
for accelerated benefits to participants in the event of a change in control
of the Company or the Bank or a tender or exchange offer for their stock. See
"Management of the Bank--Benefit Plans--Stock Option Plans," and "--Benefit
Plans--Stock Programs." The Company and the Bank have also entered into
agreements with key officers and intends to establish the Severance
Compensation Plan which will provide such officers and eligible employees with
additional payments and benefits on the officer's termination in connection
with a change in control of the Company or the Bank. See "Management of the
Bank--Employment Agreements," "--Change in Control Agreements" and "--Employee
Severance Compensation Plan." The foregoing provisions and limitations may
make it more difficult for companies or persons to acquire control of the
Bank. Additionally, the provisions could deter offers to acquire the
outstanding shares of the Company which might be viewed by stockholders to be
in their best interests.
The Company's Board of Directors believes that the provisions of the
Certificate of Incorporation and Bylaws are in the best interest of the
Company and its stockholders. An unsolicited non-negotiated takeover proposal
can seriously disrupt the business and management of a corporation and cause
it great expense. Accordingly, the Board of Directors believes it is in the
best interests of the Company and its stockholders to encourage potential
acquirors to negotiate directly with management and that these provisions will
encourage such negotiations and discourage non-negotiated takeover attempts.
DELAWARE CORPORATE LAW
The State of Delaware has a statute designed to provide Delaware
corporations with additional protection against hostile takeovers. The
takeover statute, which is codified in Section 203 of the Delaware General
Corporate Law ("Section 203"), is intended to discourage certain takeover
practices by impeding the ability of a hostile acquiror to engage in certain
transactions with the target company.
In general, Section 203 provides that a "Person" (as defined therein) who
owns 15% or more of the outstanding voting stock of a Delaware corporation (an
"Interested Stockholder") may not consummate a merger or other business
combination transaction with such corporation at any time during the three-
year period following the date such "Person" became an Interested Stockholder.
The term "business combination" is defined broadly to cover a wide range of
corporate transactions including mergers, sales of assets, issuances of stock,
transactions with subsidiaries and the receipt of disproportionate financial
benefits.
The statute exempts the following transactions from the requirements of
Section 203: (i) any business combination if, prior to the date a person
became an Interested Stockholder, the board of directors approved either the
business combination or the transaction which resulted in the stockholder
becoming an Interested Stockholder; (ii) any business combination involving a
person who acquired at least 85% of the outstanding voting stock in the
transaction in which he became an Interested Stockholder, excluding, for
purposes of determining the number of shares outstanding, shares owned by the
corporation's directors who are also officers and certain employee stock
plans; (iii) any business combination with an Interested Stockholder that is
approved by the board of directors and by a two-thirds vote of the outstanding
voting stock not owned by the Interested Stockholder; and (iv) certain
business combinations that are proposed after the corporation had received
other acquisition proposals and which are approved or not opposed by a
majority of certain continuing members of the board of directors. A
corporation may exempt itself from the requirements of the statute by adopting
an amendment to its certificate of incorporation or bylaws electing not to be
governed by Section 203. At the present time, the Board of Directors does not
intend to propose any such amendment.
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RESTRICTIONS IN THE BANK'S RESTATED ORGANIZATION CERTIFICATE AND NEW BYLAWS
Although the Board of Trustees of the Bank is not aware of any effort that
might be made to obtain control of the Bank after Conversion, the Board of
Trustees believes that it is appropriate to adopt certain provisions permitted
by General Regulations of the NYBB to protect the interests of the converted
Bank and its stockholders from any hostile takeover. Such provisions may,
indirectly, inhibit a change in control of the Company, as the Bank's sole
stockholder. See "Risk Factors--Certain Anti-Takeover Provisions."
The Bank's Restated Organization Certificate will contain a provision
whereby the acquisition of beneficial ownership of more than 10% of the issued
and outstanding shares of any class of equity securities of the Bank by any
person (i.e., any individual, corporation, group acting in concert, trust,
partnership, joint stock company or similar organization), either directly or
through an affiliate thereof, will be prohibited for a period of three years
following the date of completion of the Conversion. Any stock in excess of 10%
acquired in violation of the charter provision will not be counted as
outstanding for voting purposes. This limitation shall not apply to any
transaction in which the Bank forms a holding company without a change in the
respective beneficial ownership interests of its stockholders other than
pursuant to the exercise of any dissenter or appraisal rights. In the event
that holders of revocable proxies for more than 10% of the shares of the
Common Stock of the Company seek, among other things, to elect one-third or
more of the Company's Board of Directors, to cause the Company's stockholders
to approve the acquisition or corporate reorganization of the Company or to
exert a continuing influence on a material aspect of the business operations
of the Company, which actions could indirectly result in a change in control
of the Bank, the Board of Directors of the Bank will be able to assert this
provision of the Bank's Restated Organization Certificate against such
holders. Although the Board of Directors of the Bank is not currently able to
determine when and if it would assert this provision of the Bank's Restated
Organization Certificate, the Board of Directors, in exercising its fiduciary
duty, may assert this provision if it were deemed to be in the best interests
of the Bank, the Company and its stockholders. It is unclear, however, whether
this provision, if asserted, would be successful against such persons in a
proxy contest which could result in a change in control of the Bank indirectly
through a change in control of the Company.
In addition, stockholders will not be permitted to call a special meeting of
stockholders or to cumulate their votes in the election of Directors.
Furthermore, the Bank's Restated Organization Certificate and Bylaws provide
for the election of three classes of directors to staggered terms. The
staggered terms of the Board of Directors could have an anti-takeover effect
by making it more difficult for a majority of shares to force an immediate
change in the Board of Directors since only one-third of the Board is elected
each year. The purpose of these provisions is to assure stability and
continuity of management of the Bank in the years immediately following the
Conversion.
Finally, the Restated Organization Certificate provides for the issuance of
shares of preferred stock on such terms, including conversion and voting
rights, as may be determined by the Bank's Board of Directors without
stockholder approval. Although the Bank has no arrangements, understandings or
plans at the present time for the issuance or use of the shares of
undesignated preferred stock (the "Preferred Stock") proposed to be
authorized, the Board of Trustees believes that the availability of such
shares will provide the Bank with increased flexibility in structuring
possible future financings and acquisitions and in meeting other corporate
needs which may arise. In the event of a proposed merger, tender offer or
other attempt to gain control of the Bank of which management does not
approve, it might be possible for the Board of Directors to authorize the
issuance of one or more series of Preferred Stock with rights and preferences
which could impede the completion of such a transaction. An effect of the
possible issuance of such Preferred Stock, therefore, may be to deter a future
takeover attempt. The Board of Trustees does not intend to issue any Preferred
Stock except on terms which the Board deems to be in the best interest of the
Bank and its then existing stockholders.
REGULATORY RESTRICTIONS
New York State Banking Board Conversion Regulations. NYBB regulations
prohibit any person, prior to the completion of the Conversion, from
transferring, or from entering into any agreement or understanding to
transfer, to the account of another, legal or beneficial ownership of the
subscription rights issued under the or the
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Common Stock to be issued upon their exercise. The NYBB regulations also
prohibit any person, prior to the completion of the Conversion, from offering,
or making an announcement of an offer or intent to make an offer, to purchase
such subscription rights or Common Stock. See "The Conversion--Restrictions on
Transfer of Subscription Rights and Shares."
For one year following the Conversion, NYBB regulations prohibit any person
from acquiring or making an offer to acquire more than 10% of the stock of any
converted savings institution, except with the prior approval of the
Superintendent.
OTS Regulations. In addition, any proposal to acquire 10% of any class of
equity security of the Company generally would be subject to approval by the
OTS under the Change in Bank Control Act. The OTS requires all persons seeking
control of a savings institution and, therefore, indirectly its holding
company, to obtain regulatory approval prior to offering to obtain control.
Federal law generally provides that no "person," acting directly or indirectly
or through or in concert with one or more other persons, may acquire directly
or indirectly "control," as that term is defined in OTS regulations, of an
OTS-regulated savings and loan holding company without giving at least 60
days' written notice to the OTS and providing the OTS an opportunity to
disapprove the proposed acquisition. Such acquisitions of control may be
disapproved it is determined, among other things, that (i) the acquisition
would substantially lessen competition; (ii) the financial condition of the
acquiring person might jeopardize the financial stability of the savings
institution or prejudice the interests of its depositors; (iii) the
competency, experience or integrity of the acquiring person or the proposed
management personnel indicates that it would not be in the interest of the
depositors or the public to permit the acquisition of control by such person.
Such change in control restrictions on the acquisition of holding company
stock are not limited to a set time period but will apply for as long as the
regulations are in effect. Persons holding revocable or irrevocable proxies
may be deemed to be beneficial owners of such securities under OTS regulations
and therefore prohibited from voting all or the portion of such proxies in
excess of the 10% aggregate beneficial ownership limit. Such regulatory
restrictions may prevent or inhibit proxy contests for control of the Company
or the Bank which have not received prior regulatory approval.
New York State Bank Holding Company Regulation. Under the New York Banking
Law, the prior approval of the NYBD is required before: (1) any action is
taken that causes any company to become a bank holding company; (2) any action
is taken that causes any banking institution to become or to be merged or
consolidated with a subsidiary of a bank holding company; (3) any bank holding
company acquires direct or indirect ownership or control of more than 5% of
the voting stock of a banking institution; (4) any bank holding company or
subsidiary thereof acquires all or substantially all of the assets of a
banking institution; or (5) any action is taken that causes any bank holding
company to merge or consolidate with another bank holding company. See
"Regulation and Supervision--Company Regulation--New York Bank Company
Regulation."
New York State Change in Control Regulation. Prior approval of the NYBB is
also required before any action is taken that causes any company to acquire
direct or indirect control of a banking institution. Control is presumed to
exist if any company directly or indirectly owns, controls or holds with power
to vote 10% or more of the voting stock of a banking institution or of any
company that owns, controls or holds with power to vote 10% or more of the
voting stock of a banking institution. Accordingly, prior approval of the NYBB
would be required before any company could acquire 10% or more of the Common
Stock of the Company.
FRB Regulations. In the event the Bank does not qualify to be a QTL,
attempts to acquire control of the Bank become subject to regulations of the
FRB under the Change in Bank Control Act.
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DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
GENERAL
The Company is authorized to issue 100 million shares of Common Stock having
a par value of $.01 per share and 10 million shares of preferred stock having
a par value of $.01 per share (the "Preferred Stock"). Based on the sale of
Common Stock in connection with the Conversion and issuance of authorized but
unissued Common Stock in an amount equal to 3% of the Common Stock sold in the
Conversion to the Foundation, the Company currently expects to issue up to
42,371,359 shares of Common Stock (based on the maximum of the Estimated Price
Range, as adjusted by 15%) and no shares of Preferred Stock in the Conversion.
Except for shares issued in connection with the Conversion, the Company
presently does not have plans to issue Common Stock. Each share of the
Company's Common Stock will have the same relative rights as, and will be
identical in all respects with, each other share of Common Stock. Upon payment
of the Actual Purchase Price for the Common Stock, in accordance with the Plan
of Conversion, all such stock will be duly authorized, fully paid and
nonassessable.
The Common Stock of the Company will represent nonwithdrawable capital, will
not be an account of an insurable type, and will not be insured by the FDIC.
COMMON STOCK
Dividends. The Company can pay dividends out of statutory surplus or from
certain net profits if, as and when declared by its Board of Directors. The
payment of dividends by the Company is subject to limitations which are
imposed by law and applicable regulation. See "Dividend Policy" and
"Regulation and Supervision." The holders of Common Stock of the Company will
be entitled to receive and share equally in such dividends as may be declared
by the Board of Directors of the Company out of funds legally available
therefor. If the Company issues Preferred Stock, the holders thereof may have
a priority over the holders of the Common Stock with respect to dividends.
Voting Rights. Upon the Conversion, the holders of Common Stock of the
Company will possess exclusive voting rights in the Company. They will elect
the Company's Board of Directors and act on such other matters as are required
to be presented to them under Delaware law or as are otherwise presented to
them by the Board of Directors. Except as discussed in "Restrictions on
Acquisition of the Company and the Bank," each holder of Common Stock will be
entitled to one vote per share. Stockholders will not have any right to
cumulate votes in the election of Directors. If the Company issues Preferred
Stock, holders of the Preferred Stock may also possess voting rights. Certain
matters require an 80% stockholder vote (after giving effect to the provision
limiting voting rights). See "Restrictions on Acquisition of the Company and
the Bank."
As a New York State mutual savings bank, corporate powers and control of the
Bank are vested in its Board of Trustees, who elect the officers of the Bank
and who fill any vacancies on the Board of Trustees as it exists upon
Conversion. Subsequent to Conversion, voting rights will be vested exclusively
in the owners of the shares of capital stock of the Bank, which will be the
Company, and voted at the direction of the Company's Board of Directors.
Consequently, the holders of the Common Stock will not have direct control of
the Bank.
Liquidation. In the event of any liquidation, dissolution or winding up of
the Bank, the Company, as holder of the Bank's capital stock would be entitled
to receive, after payment or provision for payment of all debts and
liabilities of the Bank (including all deposit accounts and accrued interest
thereon) and after distribution of the balance in the special liquidation
account to Eligible Account Holders (see "The Conversion--Liquidation
Rights"), all assets of the Bank available for distribution. In the event of
liquidation, dissolution or winding up of the Company, the holders of its
Common Stock would be entitled to receive, after payment or provision for
payment of all of its debts and liabilities, all of the assets of the Company
available for distribution. If Preferred Stock is issued, the holders thereof
may have a priority over the holders of the Common Stock in the event of
liquidation or dissolution.
147
<PAGE>
Preemptive Rights; Redemption. Holders of the Common Stock of the Company
will not be entitled to preemptive rights with respect to any shares which may
be issued. The Common Stock is not subject to redemption.
Indemnification and Limit on Liability. The Company's Certificate of
Incorporation contains provisions which limit the liability of directors,
officers and employees of the Company and indemnify such individuals. Such
provisions provide that each person who was or is made a party or is
threatened to be made a party to or is otherwise involved in any action, suit
or proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that he or she is or was a director or officer of the
Company shall be indemnified and held harmless by the Company to the fullest
extent authorized by the Delaware General Corporation Law against all expense,
liability and loss reasonably incurred. Under certain circumstances, the right
to indemnification shall include the right to be paid by the Company the
expenses incurred in defending any such proceeding in advance of its final
disposition. In addition, a Director of the Company shall not be personally
liable to the Company or its stockholders for monetary damages except for
liability for any breach of the duty of loyalty, for acts or omissions not in
good faith or which involve intentional misconduct or knowing violation of the
law, under Section 174 of the Delaware General Corporation Law, or for any
transaction from which the Director derived an improper personal benefit.
PREFERRED STOCK
None of the shares of the Company's authorized Preferred Stock will be
issued in the Conversion. Such stock may be issued with such designations,
powers, preferences and rights as the Board of Directors may from time to time
determine. The Board of Directors can, without stockholder approval, issue
Preferred Stock with voting, dividend, liquidation and conversion rights which
could dilute the voting strength of the holders of the Common Stock and may
assist management in impeding an unfriendly takeover or attempted change in
control. The Company presently does not have plans to issue Preferred Stock.
DESCRIPTION OF CAPITAL STOCK OF THE BANK
GENERAL
In the event the holding company form of organization is not utilized in
connection with the Conversion, the Bank may offer shares of its common stock
in connection with the Conversion. The following is a discussion of the
capital stock of the Bank.
The Restated Organization Certificate of the Bank, to be effective upon the
Conversion, authorizes the issuance of capital stock consisting of 100 million
shares of common stock, par value $0.01 per share, and 10 million shares of
preferred stock, par value $0.01 per share, which preferred stock may be
issued in series and classes having such rights, preferences, privileges and
restrictions as the Board of Directors may determine. Each share of common
stock of the Bank will have the same relative rights as, and will be identical
in all respects with, each other share of common stock. After the Conversion,
the Board of Directors will be authorized to approve the issuance of common
stock up to the amount authorized by the Restated Organization Certificate
without the approval of the Bank's stockholders. Assuming that the holding
company form of organization is utilized, all of the issued and outstanding
common stock of the Bank will be held by the Company as the Bank's sole
stockholder. THE CAPITAL STOCK OF THE BANK WILL REPRESENT NON-WITHDRAWABLE
CAPITAL, WILL NOT BE AN ACCOUNT OF AN INSURABLE TYPE, AND WILL NOT BE INSURED
BY THE FDIC.
COMMON STOCK
Dividends. The holders of the Bank's common stock will be entitled to
receive and to share equally in such dividends as may be declared by the Board
of Directors of the Bank out of funds legally available therefor. See
"Dividend Policy" for certain restrictions on the payment of dividends and
"Federal and State Taxation--
148
<PAGE>
Federal Taxation" for a discussion of the consequences of the payment of cash
dividends from income appropriated to bad debt reserves.
Voting Rights. Immediately after the Conversion, the holders of the Bank's
common stock will possess exclusive voting rights in the Bank. Each holder of
shares of common stock will be entitled to one vote for each share held.
Shareholders shall not be entitled to cumulate their votes for the election of
directors. See "Restrictions on Acquisition of the Company and the Bank--Anti-
Takeover Effects of the Company's Certificate of Incorporation and Bylaws and
Management Remuneration Adopted in Conversion."
Liquidation. In the event of any liquidation, dissolution, or winding up of
the Bank, the holders of common stock will be entitled to receive, after
payment of all debts and liabilities of the Bank (including all deposit
accounts and accrued interest thereon), and distribution of the balance in the
special liquidation account to Eligible Account Holders, all assets of the
Bank available for distribution in cash or in kind. If additional preferred
stock is issued subsequent to the Conversion, the holders thereof may also
have priority over the holders of common stock in the event of liquidation or
dissolution.
Preemptive Rights; Redemption. Holders of the common stock of the Bank will
not be entitled to preemptive rights with respect to any shares of the Bank
which may be issued. Upon receipt by the Bank of the full specified purchase
price therefor, the common stock will be fully paid and non-assessable.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Registrar and
Transfer Company.
EXPERTS
The consolidated financial statements of the Bank and its subsidiaries as of
December 31, 1995 and 1994, and for each of the years in the three-year period
ended December 31, 1995, have been included herein in reliance upon the report
of KPMG Peat Marwick LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing. Such report includes an explanatory paragraph relating to
changes in accounting principles.
William M. Mercer, Incorporated has consented to the publication herein of
the summary of its opinion relating to compensation matters.
FinPro has consented to the publication herein of the summary of its report
to the Bank and Company setting forth its opinion as to the estimated pro
forma market value of the Common Stock upon Conversion and its opinion with
respect to subscription rights.
LEGAL AND TAX OPINIONS
The legality of the Common Stock and the federal income tax consequences of
the Conversion will be passed upon for the Bank and Company by Muldoon, Murphy
& Faucette, Washington, D.C., special counsel to the Bank and Company. The
federal income tax consequences of The Roslyn Savings Bank Foundation will be
passed upon for the Bank and the Company by KPMG Peat Marwick LLP, independent
certified public accountants. Muldoon, Murphy & Faucette will rely as to
certain matters of Delaware law on the opinion of Morris, Nichols, Arsht &
Tunnell. New York State and New York City income tax consequences will be
passed upon by O'Reilly, Marsh & Corteselli. Certain legal matters will be
passed upon for Sandler O'Neill by Thacher Proffitt & Wood.
149
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the SEC a registration statement under the
Securities Act with respect to the Common Stock offered hereby. As permitted
by the rules and regulations of the SEC, this Prospectus does not contain all
the information set forth in the registration statement. Such information,
including the Conversion Valuation Appraisal Report, which is an exhibit to
the Registration Statement, can be examined without charge at the public
reference facilities of the SEC located at 450 Fifth Street, N.W., Washington,
D.C. 20549, and copies of such material can be obtained from the SEC at
prescribed rates. In addition, the SEC maintains a web site
(http://www.sec.gov) that contains reports, proxy and information statements
and other information regarding registrants that file electronically with the
SEC, including the Company. The Conversion Valuation Appraisal Report may also
be inspected by Eligible Account Holders and Supplemental Eligible Account
Holders at the offices of the Bank during normal business hours. The
statements contained in this Prospectus as to the contents of any contract or
other document filed as an exhibit to the registration statement are, of
necessity, brief descriptions thereof and are not necessarily complete; each
such statement is qualified by reference to such contract or document.
The Bank has filed an application for approval of the Conversion with the
Superintendent and the FDIC. Pursuant to the rules and regulations of the
Superintendent, this Prospectus omits certain information contained in that
application. The application may be examined at the principal office of the
Superintendent, Two Rector Street, New York, New York 10006.
The Company has filed with the Office of Thrift Supervision an Application
to Form a Holding Company. This Prospectus omits certain information contained
in such Application. Such Application may be inspected at the offices of the
OTS, 1700 G Street, N.W., Washington, D.C. 20552.
In connection with the Conversion, the Company will register its Common
Stock with the SEC under Section 12(g) of the Exchange Act, and, upon such
registration, the Company and the holders of its stock will become subject to
the proxy solicitation rules, reporting requirements and restrictions on stock
purchases and sales by Directors, officers and greater than 10% stockholders,
the annual and periodic reporting and certain other requirements of the
Exchange Act. Under the Plan, the Company has undertaken that it will not
terminate such registration for a period of at least three years following the
Conversion. In the event that the Bank amends the Plan to eliminate the
concurrent formation of the Company as part of the Conversion, the Bank will
register its stock with the Federal Deposit Insurance Corporation under
Section 12(g) of the Exchange Act and, upon such registration, the Bank and
the holders of its stock will become subject to the same obligations and
restrictions.
A copy of the Certificate of Incorporation and the Bylaws of the Company and
the Restated Organization Certificate and Bylaws of the Bank are available
without charge from the Bank. The Bank's principal office is located at 1400
Old Northern Boulevard, Roslyn, New York and its telephone number is (516)
621-6000.
150
<PAGE>
THE ROSLYN SAVINGS BANK
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report....................................... F-2
Consolidated Statements of Financial Condition as of May 31, 1996
(unaudited), and December 31, 1995 and 1994....................... F-3
Consolidated Statements of Income for the five months ended May 31,
1996 and 1995 (unaudited), and the years ended December 31, 1995,
1994 and 1993..................................................... 46
Consolidated Statements of Changes in Retained Earnings for the
five months ended
May 31, 1996 (unaudited), and the years ended December 31, 1995,
1994 and 1993..................................................... F-4
Consolidated Statements of Cash Flows for the five months ended May
31, 1996 and 1995 (unaudited), and the years ended December 31,
1995, 1994 and 1993............................................... F-5 to F-7
Notes to Consolidated Financial Statements......................... F-8 to F-35
</TABLE>
All schedules are omitted because they are not required or applicable, or
the required information is shown in the consolidated financial statements or
notes thereto.
The financial statements of Roslyn Bancorp, Inc. have been omitted because
Roslyn Bancorp, Inc. has not yet issued any stock, has no assets and no
liabilities, and has not conducted any business other than of an
organizational nature.
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees
The Roslyn Savings Bank:
We have audited the consolidated financial statements of The Roslyn Savings
Bank and subsidiaries (the Bank) as of December 31, 1995 and 1994, and for each
of the years in the three-year period ended December 31, 1995, as listed in the
accompanying index to the consolidated financial statements. These consolidated
financial statements are the responsibility of the Bank's management. Our
responsibility is to express an opinion on those 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 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 The Roslyn
Savings Bank and subsidiaries as of December 31, 1995 and 1994, and the results
of their operations and their cash flows for each of the years in the three-
year period ended December 31, 1995 in conformity with generally accepted
accounting principles.
As discussed in note 1(d) to the consolidated financial statements, effective
January 1, 1995, the Bank adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 122, "Accounting for Mortgage Servicing
Rights". As discussed in note 1(c) to the consolidated financial statements,
effective January 1, 1994, the Bank adopted the provisions of SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities". As
discussed in notes 1(j) and 1(k) to the consolidated financial statements,
effective January 1, 1993, the Bank adopted the provisions of SFAS Nos. 109,
"Accounting for Income Taxes", and 106, "Employers' Accounting for
Postretirement Benefits Other than Pensions".
/s/ KPMG PEAT MARWICK LLP
Jericho, New York
March 8, 1996
F-2
<PAGE>
THE ROSLYN SAVINGS BANK
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
MAY 31, 1996 (UNAUDITED) AND DECEMBER 31, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
MAY 31, ----------------------
1996 1995 1994
----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents:
Cash and cash items...................... $ 1,044 $ 1,479 $ 1,841
Due from banks........................... 8,877 8,224 418
Federal funds sold....................... 18,500 10,000 25,000
---------- ---------- ----------
28,421 19,703 27,259
Debt and equity securities, net:
Held-to-maturity (estimated fair value of
$2,086, $2,151 and $454,698,
respectively)........................... 1,930 1,930 466,204
Available-for-sale....................... 431,932 379,331 89,787
Mortgage-backed and mortgage related
securities, net:
Held-to-maturity (estimated fair value of
$309,068, $348,799 and $394,470,
respectively)........................... 312,233 347,213 411,341
Available-for-sale....................... 519,399 413,485 50,711
---------- ---------- ----------
1,265,494 1,141,959 1,018,043
Loans held for sale, net................... 14,265 17,151 --
Loans receivable held for investment, net:
Real estate loans, net................... 420,313 386,769 344,912
Consumer and student..................... 1,483 1,846 22,306
---------- ---------- ----------
421,796 388,615 367,218
Less allowance for possible loan losses.. (22,312) (23,350) (25,127)
---------- ---------- ----------
399,484 365,265 342,091
Banking house and equipment, net........... 14,624 12,423 11,647
Accrued interest receivable................ 11,881 11,563 13,988
Mortgage servicing rights, net............. 8,619 8,297 --
Excess of cost over fair value of net
assets acquired........................... 3,648 3,844 642
Real estate owned, net..................... 5,366 6,047 3,359
Deferred tax asset, net.................... 16,511 7,368 18,856
Other assets............................... 3,862 3,124 2,494
---------- ---------- ----------
Total assets........................... $1,772,175 $1,596,744 $1,438,379
========== ========== ==========
LIABILITIES AND RETAINED EARNINGS
Deposits:
Savings accounts......................... $ 437,273 $ 455,511 $ 566,648
Certificates of deposit.................. 871,876 749,775 517,437
Money market accounts.................... 61,411 64,426 77,359
Demand deposit accounts.................. 71,285 65,838 58,074
---------- ---------- ----------
Total deposits......................... 1,441,845 1,335,550 1,219,518
Borrowed funds............................. 69,598 1,647 --
Accrued dividends and interest on deposits. 5,077 883 489
Mortgagors' escrow and security deposits... 5,501 7,091 6,462
Accrued taxes payable...................... 9,595 8,265 9,063
Accrued expenses and other liabilities..... 18,315 16,890 9,776
---------- ---------- ----------
Total liabilities...................... 1,549,931 1,370,326 1,245,308
---------- ---------- ----------
Retained earnings:
Surplus fund............................. 22,484 22,484 22,484
Undivided profits........................ 200,432 192,041 173,323
Net unrealized (loss) gain on securities
available-for-sale, net of tax.......... (672) 11,893 (2,736)
---------- ---------- ----------
Total retained earnings................ 222,244 226,418 193,071
---------- ---------- ----------
Total liabilities and retained earn-
ings.................................. $1,772,175 $1,596,744 $1,438,379
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
THE ROSLYN SAVINGS BANK
CONSOLIDATED STATEMENTS OF CHANGES IN RETAINED EARNINGS
FIVE MONTHS ENDED MAY 31, 1996 (UNAUDITED) AND
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(IN THOUSANDS)
<TABLE>
<S> <C>
Balance at December 31, 1992........................................ $152,242
Net income for year ended December 31, 1993......................... 24,143
--------
Balance at December 31, 1993........................................ 176,385
Net income for year ended December 31, 1994......................... 19,422
Effect of change in accounting for securities available-for-sale at
January 1, 1994--net unrealized gain, net of tax................... 2,625
Change in net unrealized gain in available-for-sale securities, net
of tax for the year ended December 31, 1994........................ (5,361)
--------
Balance at December 31, 1994........................................ 193,071
Net income for year ended December 31, 1995......................... 18,718
Net unrealized gain on securities transferred from held-to-maturity
to available-for-sale, net of tax.................................. 5,484
Change in net unrealized gain in available-for-sale securities, net
of tax for the year ended December 31, 1995........................ 9,145
--------
Balance at December 31, 1995........................................ 226,418
Net income for the five months ended May 31, 1996 (unaudited)....... 8,391
Change in net unrealized gain in available-for-sale securities, net
of tax for the period ended May 31, 1996 (unaudited)............... (12,565)
--------
Balance at May 31, 1996 (unaudited)................................. $222,244
========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
THE ROSLYN SAVINGS BANK
CONSOLIDATED STATEMENTS OF CASH FLOWS
FIVE MONTHS ENDED MAY 31, 1996 AND 1995 (UNAUDITED) AND
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
FIVE MONTHS ENDED
MAY 31, YEARS ENDED DECEMBER 31,
-------------------- -------------------------------
1996 1995 1995 1994 1993
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net income........... $ 8,391 $ 7,574 $ 18,718 $ 19,422 $ 24,143
Adjustments to
reconcile net income
to net cash provided
by operating
activities:
Cumulative effect
of changes in
accounting
principles........ -- -- -- -- (5,983)
Provision for
possible loan
losses............ 300 250 600 600 6,860
Provision for
possible losses on
real estate owned. 150 -- -- -- 1,200
Originated mortgage
servicing rights,
net of
amortization...... (322) -- (246) -- --
Amortization of
excess of cost
over fair value of
net assets
acquired.......... 196 51 266 122 92
Depreciation and
amortization...... 488 501 1,327 1,066 854
Accretion of
discounts, net of
amortization of
premiums.......... (439) 632 962 2,076 556
Proceeds from sales
of loans held for
sale, net of
originations and
purchases......... 2,699 -- 6,307 -- --
(Gains) losses on
sales of loans.... (1,599) (455) (1,827) 289 (33)
Net losses (gains)
on securities..... 257 758 811 1,181 (3,123)
Net gains on sales
of real estate
owned............. (9) (496) (1,113) (822) (34)
Deferred income
taxes............. 227 (232) 578 (732) (2,095)
Changes in assets
and liabilities
(net of effects
from the purchase
of assets and
liabilities of
RMBI):
(Increase)
decrease in
accrued interest
receivable...... (318) 537 2,452 (1,109) 2,554
(Increase)
decrease in
other assets.... (738) (886) (167) (339) 243
(Increase)
decrease in
accrued
dividends and
interest on
deposits........ 4,194 4,114 394 176 (191)
Increase
(decrease) in
accrued taxes
payable......... 1,330 2,208 (798) (1,302) 2,511
Increase
(decrease) in
accrued expense
and other
liabilities..... 1,425 1,107 7,004 1,272 (263)
Net increase in
unearned income. 148 371 187 1,734 --
Other, net....... (12) (128) (131) 22 83
--------- --------- --------- --------- ---------
Net cash
provided by
operating
activities.... 16,368 15,906 35,324 23,656 27,374
--------- --------- --------- --------- ---------
</TABLE>
F-5
<PAGE>
THE ROSLYN SAVINGS BANK
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
FIVE MONTHS ENDED MAY 31, 1996 AND 1995 (UNAUDITED) AND
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
FIVE MONTHS ENDED
MAY 31, YEARS ENDED DECEMBER 31,
-------------------- -------------------------------
1996 1995 1995 1994 1993
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from
investing activities:
Purchase of assets and
liabilities of RMBI.. $ -- $ -- $ (12,220) $ -- $ --
Proceeds from sales
and redemptions of
debt and equity
securities held-to-
maturity............. 52,393 54,883 278,779 90,604 163,763
Proceeds from sales
and repayments of
mortgage-backed and
mortgage related
securities held-to-
maturity............. 75,905 23,138 92,207 100,381 223,002
Purchases of mortgage-
backed and mortgage
related securities
held-to-maturity..... -- (60,878) (240,702) (109,433) (246,373)
Purchases of debt and
equity securities
held-to-maturity..... -- (88,018) (176,308) (24,807) (213,300)
Proceeds from sales
and repayments of
debt, equity,
mortgage-backed and
mortgage related
securities available-
for-sale............. 31,837 9,567 171,397 5,164 --
Purchases of debt,
equity, mortgage-
backed and mortgage
related securities
available-for-sale... (305,423) (48,370) (225,523) (91,470) --
Loan originations and
purchases, net of
principal repayments. (37,480) (19,888) (80,698) (92,665) 9,904
Proceeds from sales of
loans................ 4,322 19,382 28,008 15,408 15,798
Purchases of banking
house and equipment,
net.................. (2,685) (992) (1,708) (3,460) (2,848)
Proceeds from sales of
real estate owned.... 825 2,342 5,580 5,371 1,174
--------- --------- --------- --------- ---------
Net cash used in
investing
activities......... (180,306) (108,834) (161,188) (104,907) (48,880)
--------- --------- --------- --------- ---------
Cash flows from
financing activities:
(Decrease) increase in
demand deposit, money
market, and savings
accounts............. $ (15,806) $(111,364) $(116,306) $ (50,992) $ 26,006
Increase (decrease) in
certificates of
deposit.............. 122,101 153,679 232,338 128,945 (18,984)
Increase in borrowed
funds................ 67,951 40,700 1,647 -- --
(Decrease) increase in
mortgagors' escrow
and security
deposits............. (1,590) (1,439) 629 (838) (2,164)
--------- --------- --------- --------- ---------
Net cash provided by
financing
activities......... 172,656 81,576 118,308 77,115 4,858
--------- --------- --------- --------- ---------
Net increase (decrease)
in cash and cash
equivalents............ 8,718 (11,352) (7,556) (4,136) (16,648)
Cash and cash
equivalents at
beginning of period.... 19,703 27,259 27,259 31,395 48,043
--------- --------- --------- --------- ---------
Cash and cash
equivalents at end of
period................. $ 28,421 $ 15,907 $ 19,703 $ 27,259 $ 31,395
========= ========= ========= ========= =========
</TABLE>
F-6
<PAGE>
THE ROSLYN SAVINGS BANK
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
FIVE MONTHS ENDED MAY 31, 1996 AND 1995 (UNAUDITED) AND
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
FIVE MONTHS
ENDED MAY 31, YEARS ENDED DECEMBER 31,
--------------- ------------------------
1996 1995 1995 1994 1993
------- ------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest on deposits and borrowed
funds............................ $22,934 $18,624 $ 58,904 $40,177 $39,889
======= ======= ======== ======= =======
Income taxes...................... $ 2,371 $ 1,958 $ 8,888 $11,428 $10,586
======= ======= ======== ======= =======
Non-cash investing activities:
Additions to real estate owned,
net.............................. $ 276 $ 1,797 $ 6,964 $ 5,119 $ 2,016
======= ======= ======== ======= =======
Transfer of securities from held-to-
maturity to available-for-sale..... $ -- $ -- $648,705 $66,483 $ --
======= ======= ======== ======= =======
Fair value of assets acquired from
RMBI:
Loans held for sale................. $ 22,571
Mortgage servicing rights........... 8,051
Excess of cost over fair value of
net assets acquired................ 3,469
Other assets........................ 628
--------
34,719
--------
Liabilities assumed from RMBI:
Borrowed funds...................... 22,061
Other............................... 438
--------
22,499
--------
Cash paid in acquisition.............. $ 12,220
========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
THE ROSLYN SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1996 AND 1995 (UNAUDITED) AND DECEMBER 31, 1995, 1994 AND 1993
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RELATED MATTERS
The following is a summary of significant accounting policies:
The Roslyn Savings Bank and its wholly-owned subsidiaries (the Bank) primary
business activities include attracting deposits from the general public and
originating residential property loans (one-to-four family home mortgage,
cooperative apartment and multi-family property loans). The Bank also makes
commercial real estate loans and consumer loans. The Bank is subject to
competition from other financial institutions. Deposits at the Bank are
insured up to applicable limits by the Bank Insurance Fund (BIF) of the
Federal Deposit Insurance Corporation (FDIC). The Bank is a New York State
chartered savings bank and is subject to comprehensive regulation, examination
and supervision by the New York State Banking Department and the FDIC.
(a) Principles of Consolidation and Basis of Financial Statement Presentation
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles (GAAP) and include the accounts of
the Bank and its wholly-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
Historically, the Bank has been required to issue audited financial
statements to meet regulatory requirements. As more fully discussed in note
18, the Bank plans to convert from a mutual to capital stock form of
ownership. As a stock institution and as a result of the public offering of
the stock of the holding company intended to be formed by the Bank, the Bank
will be subject to the financial reporting requirements of the Securities
Exchange Act of 1934, as amended. Accordingly, in connection with the
conversion, the Bank performed a comprehensive review of its accounting
policies and practices, and made a determination that certain of such policies
and practices should be changed to adopt preferable accounting practices. The
accompanying consolidated financial statements have been prepared to reflect
such preferred accounting policies, which are referred to in the paragraphs
below and relate principally to the timing of loan loss provisions and the
accounting for premiums paid on certain callable preferred stock.
On August 1, 1995, The Roslyn Savings Bank acquired, through a wholly-owned
subsidiary now known as Residential First, Inc. (RFI), certain assets and
liabilities, including the loan origination business and the $623 million loan
servicing portfolio (the acquisition), of Residential Mortgage Banking, Inc.
(RMBI), a mortgage banking firm which operated in New York and New Jersey. RFI
has entered into a sub-servicing agreement with another mortgage banking firm
to provide for the servicing of loans.
The acquisition was funded by The Roslyn Savings Bank, and was accounted for
under the purchase method of accounting; accordingly, the purchase price was
allocated to the assets and liabilities acquired based on their estimated fair
values as of August 1, 1995, including $8.1 million relating to the value of
the loan servicing portfolio acquired. The consideration paid exceeded the
estimated fair value of the net assets acquired by $3.5 million. This amount
was recorded as goodwill and is being amortized over 10 years.
A substantial portion of the Bank's loans are secured by real estate in the
New York Metropolitan area. Accordingly, the ultimate collectibility of such
loan portfolio is susceptible to changes in market conditions in the New York
Metropolitan area.
In preparing the consolidated financial statements, management is required
to make estimates and assumptions that affect the reported amounts of assets
and liabilities as of the date of the consolidated financial statements and
results of operations for the periods then ended. Actual results could differ
from those estimates. Material estimates that are particularly susceptible to
change in the near-term relate to the determination of the
F-8
<PAGE>
THE ROSLYN SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MAY 31, 1996 AND 1995 (UNAUDITED) AND DECEMBER 31, 1995, 1994 AND 1993
allowance for possible loan losses. In connection with the determination of
the allowance for possible loan losses, management obtains independent
appraisals for significant properties.
Management believes that the allowance for possible loan losses is adequate.
While management uses available information to recognize losses on loans,
future additions to the allowance may be necessary based on unanticipated
changes in economic conditions, particularly in the New York Metropolitan
area. In addition, the New York State Banking Department and the FDIC, as an
integral part of their examination process, periodically review the Bank's
allowance for possible loan losses. Such agencies may require the Bank to
recognize additions to the allowance based on their judgments about
information available to them at the time of their examination.
Certain reclassifications have been made to prior periods amounts to conform
to the current period presentation.
(b) Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand, amounts due from banks and federal funds, which are generally sold
for one to three day periods.
(c) Debt, Equity, Mortgage-Backed and Mortgage Related Securities
In accordance with Statement of Financial Accounting Standards No. (SFAS)
115, "Accounting for Certain Investments in Debt and Equity Securities", which
the Bank adopted effective January 1, 1994, the Bank is required to report
debt, readily-marketable equity, mortgage-backed and mortgage related
securities in one of the following categories: (i) "held-to-maturity"
(management has a positive intent and ability to hold to maturity) which are
to be reported at amortized cost adjusted, in the case of debt securities, for
the amortization of premiums and accretion of discounts; (ii) "trading" (held
for current resale) which are to be reported at fair value, with unrealized
gains and losses included in earnings; and (iii) "available-for-sale" (all
other debt, equity, mortgage-backed and mortgage related securities) which are
to be reported at fair value, with unrealized gains and losses reported net of
tax as a separate component of retained earnings. The Bank classified all of
its holdings of debt, readily-marketable equity, mortgage-backed and mortgage
related securities at January 1, 1994 as either "held-to-maturity" or
"available-for-sale"; thereafter, at the time of new securities purchases, a
determination is made as to the appropriate classification.
In November 1995, the Financial Accounting Standards Board (FASB) issued an
implementation guide for SFAS 115. The implementation allowed an opportunity
from mid-November 1995 to December 31, 1995 for banks to reclassify securities
in the "held-to-maturity" portfolio to the "available-for-sale" portfolio
without tainting the remainder of the portfolio. In connection with this
opportunity the Bank reclassified $415.3 million of debt securities and $233.4
million of mortgage-backed and mortgage related securities previously
classified as "held-to-maturity" to securities "available-for-sale".
Premiums and discounts on debt, mortgage-backed and mortgage related
securities are amortized to expense and accreted to income over the estimated
life of the respective security using the interest method. Premiums paid on
certain callable preferred stock are amortized to expense over the period to
the call date. Gains and losses on the sales of securities are recognized on
realization.
(d) Real Estate and Other Loans
Loans receivable are stated at unpaid principal balances, including negative
escrow, less unearned discounts, deferred mortgage interest and net deferred
loan origination fees.
F-9
<PAGE>
THE ROSLYN SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MAY 31, 1996 AND 1995 (UNAUDITED) AND DECEMBER 31, 1995, 1994 AND 1993
Purchased loans are recorded at cost. Related premiums or discounts on
mortgages and other loans purchased are amortized to expense or accreted to
income using the interest method over the estimated life of the loans.
Loans held for sale are carried at the aggregate lower of cost or market
value as determined by outstanding commitments from investors or current
investor yield requirements calculated on an aggregate loan basis.
The Bank places loans, including impaired loans, on non-accrual status when
they become past due 90 days. All interest previously accrued and not
collected is reversed against interest income, and income is subsequently
recognized only to the extent cash is received until, in management's
judgment, a return to accrual status is warranted. Loans are generally
returned to accrual status when principal and interest payments are current,
full collectibility of principal and interest is reasonably assured and a
consistent record of performance, generally six months, has been demonstrated.
On January 1, 1995, the Bank adopted SFAS 114. "Accounting by Creditors for
Impairment of a Loan: and the amendment thereof, SFAS 118," "Accounting by
Creditors for Impairment of a Loan-Income Recognition and Disclosure." These
statements require that impaired loans that are within their scope be measured
based on the present value of expected future cash flows discounted at the
loan's observable market price, or the fair value of the collateral if the
loan is collateral dependent. The amount by which the recorded investment of
an impaired loan exceeds the measurement value is recognized by creating a
valuation allowance within the allowance for possible loan losses. SFAS 114
generally does not apply to those smaller-balance homogeneous loans that are
collectively evaluated for impairment, which for the Bank, include one-to
four-family first mortgage loans, student loans and consumer loans, other than
those modified in a troubled debt restructuring ("TDR"). The implementation of
SFAS 114 and SFAS 118 did not materially affect the Bank's consolidated
financial statements.
In accordance with SFAS 114, the Bank considers a loan impaired when, based
upon current information and events, it is possible that it will be unable to
collect all amounts due, both principal and interest, by the Bank within the
scope of SFAS 114 are limited to loans modified in a TDR and commercial and
multi-family first mortgage loans. The measurement value of the Bank's
impaired loans was based on fair value of the underlying collateral. The Bank
identifies and measures impaired loans in conjunction with its review of the
adequacy of its allowance for possible loan losses. Specific factors utilized
in the identification of impaired loans include, but not limited to,
delinquency status, loan-to-value ratio, the condition of the underlying
collateral, credit history and debt coverage.
Cash receipts on non-accrual loans, including impaired loans, are applied to
principal and interest in accordance with the contractual terms of the loan
unless full payment of principal is not expected, in which case both principal
and interest payments received are applied as a reduction of the carrying
value of the loan.
In May 1995, SFAS 122, "Accounting for Mortgage Servicing Rights" was
issued. SFAS 122 is effective for fiscal years beginning after December 15,
1995, with earlier adoption permitted. The statement amends SFAS 65,
"Accounting for Certain Mortgage Banking Activities", to require that a
mortgage banking enterprise recognize as separate assets rights to service
mortgage loans for others, however acquired. For mortgage servicing rights
that are created through the origination of mortgage loans, and where the
loans are subsequently sold or securitized with servicing rights retained, the
statement requires that the total cost of the mortgage loans should be
allocated to the mortgage servicing rights and the loans based on their
relative fair values. The statement also requires the assessment of
capitalized mortgage servicing rights for impairment to be based on
F-10
<PAGE>
THE ROSLYN SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MAY 31, 1996 AND 1995 (UNAUDITED) AND DECEMBER 31, 1995, 1994 AND 1993
the current fair value of those rights and recognized through a valuation
allowance. The Bank adopted SFAS 122 effective January 1, 1995, the impact of
which was not material to its financial statements.
Fees earned for servicing loans are reported as income when the related
mortgage loan payments are collected. Mortgage servicing rights (MSRs) are
amortized as a reduction to loan service fee income using the interest method
over the estimated remaining life of the underlying mortgage loans. MSR assets
are carried at fair value and impairment, if any, is recognized through a
valuation allowance.
(e) Allowance for Possible Loan Losses
The allowance for possible loan losses is based on a periodic analysis of
the loan portfolio and reflects an amount which, in management's judgment, is
adequate to provide for possible loan losses in the existing portfolio. In
evaluating the portfolio, management takes into consideration numerous factors
such as the Bank's loan growth, prior loss experience, present and potential
risks of the loan portfolio and current economic conditions. Provisions for
possible losses on loans are charged to operations. Loans, including impaired
loans, are charged off against the allowance for possible loan losses when the
collectibility of loan principal is unlikely. Recoveries of loans previously
charged off are credited to the allowance.
(f) Commitment and Loan Origination Fees
The Bank defers certain loan origination and commitment fees net of certain
origination costs and amortizes them as an adjustment of the loan's yield over
the term of the related loan using the interest method.
(g) Banking House and Equipment
Land is carried at cost and buildings are carried at cost, less allowance
for depreciation computed on the straight-line method over a twenty-five to
fifty year period. Leasehold improvements are stated at cost, less accumulated
amortization. Amortization is computed on the straight-line method over the
terms of the respective lease or the life of the improvement, whichever is
shorter. Furniture, fixtures and equipment are stated at cost, less
accumulated depreciation. Depreciation is computed on the straight-line method
on the estimated service lives over a three to ten year period.
(h) Real Estate Owned
Real estate acquired through foreclosure or deed-in-lieu of foreclosure, are
reported at the lower of cost or fair value at the acquisition date, and
subsequently at the lower of its new cost or fair value less estimated selling
costs. Cost represents the unpaid loan balance at the acquisition date plus
expenses, when appropriate, incurred to bring the property to a salable
condition. The Bank maintains an allowance for subsequent declines in
estimated fair value less estimated selling costs. Certain costs relating to
holding the properties, and gains or losses resulting from the disposition of
properties are recognized in the current period's operations.
(i) Surplus Fund
As required under State of New York Banking Law, if the retained earnings of
the Bank is less than ten percent of deposits at the close of any accounting
period, ten percent of net income during the year, as defined, is credited to
surplus. During the years ended December 31, 1995, 1994, and 1993 and the five
months ended May 31, 1996 and 1995, no amount was required to be credited to
surplus.
F-11
<PAGE>
THE ROSLYN SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MAY 31, 1996 AND 1995 (UNAUDITED) AND DECEMBER 31, 1995, 1994 AND 1993
(j) Income Taxes
The Bank adopted SFAS 109, "Accounting for Income Taxes" effective January
1, 1993. Under the asset and liability method of SFAS 109, deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. To the extent that
current available evidence about the future raises doubt about the realization
of a deferred tax asset, a valuation allowance must be established. 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. The cumulative effect of adopting SFAS 109
as of January 1, 1993 is included in the 1993 consolidated statement of
income.
(k) Summary of Retirement Benefits Accounting
The Bank's retirement plan is noncontributory and covers substantially all
eligible employees. The plan conforms to the provisions of the Employee
Retirement Income Security Act of 1974, as amended. The Bank's policy is to
accrue for all pension costs and to fund the maximum amount allowable for tax
purposes. Actuarial gains and losses that arise from changes in assumptions
concerning future events, used in estimating pension costs, are amortized over
a period that reflects the long-range nature of pension expense. The Bank
adopted SFAS 106 (SFAS 106), "Employers' Accounting for Post-Retirement
Benefits Other Than Pensions", on January 1, 1993. This statement established
accounting standards for postretirement benefits other than pensions
(hereinafter referred to as post-retirement benefits). This statement focuses
principally on health care benefits, although it applies to all forms of
postretirement benefits other than pensions. SFAS 106 changed the Bank's
practice of accounting for postretirement benefits on a cash basis by
requiring accrual of the cost of providing those benefits to an employee, and
the employee's beneficiaries and covered dependents, during the years that the
employee renders the necessary service. The cumulative effect of adopting SFAS
106 as of January 1, 1993, based on the Bank's option to recognize all of the
transition obligation in the year of adoption, is included in the 1993
consolidated statement of income, net of related tax effect.
(l) Employers' Accounting for Postemployment Benefits
In November 1992, the FASB issued SFAS 112, "Employers' Accounting for
Postemployment Benefits." SFAS 112 focuses principally on postemployment
benefits for employers who provide benefits to former or inactive employees
after employment but before retirement. Postemployment benefits are all types
of benefits provided to former or inactive employees, their beneficiaries and
covered dependents. This statement requires employers to recognize the
obligation to provide postemployment benefits in accordance with SFAS 43,
"Accounting for Compensated Absences," if the obligation is attributable to
employees' service already rendered, employees' rights to those benefits
accumulate or vest, payment of the benefits is probable, and the amount of the
benefits can be reasonably estimated. If those four conditions are not met,
the employer should account for postemployment benefits when it is probable
that a liability has been incurred and the amount can be reasonably estimated
in accordance with SFAS 5, "Accounting for Contingencies." If an obligation
for postemployment benefits is not accrued in accordance with SFAS 5 or SFAS
43 only because the amount cannot be reasonably estimated, the financial
statements shall disclose that fact.
The Bank adopted SFAS 112 on January 1, 1994. The impact of the Bank's
adoption of SFAS 112 was minimal because the majority of the Bank's benefits
do not vest or accumulate or are not attributable to past service.
F-12
<PAGE>
THE ROSLYN SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MAY 31, 1996 AND 1995 (UNAUDITED) AND DECEMBER 31, 1995, 1994 AND 1993
(m) Recently Adopted Accounting Pronouncements
In March 1995, the FASB issued SFAS 121, "Accounting for the Impairment of
Long-Lived Assets to be Disposed Of." SFAS 121 is effective for fiscal years
beginning after December 15, 1995 and establishes accounting standards for
impairment of long-lived assets, certain identifiable intangibles, and
goodwill related to those assets to be held and used and for long-lived assets
and certain identifiable intangibles to be disposed of. This statement
requires that long-lived assets and certain identifiable intangibles, to be
held and used by an entity, be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. In performing the review for recoverability, the entity should
estimate the future cash flows expected to result from the use of the asset
and its eventual disposition. If the sum of the expected future cash flows is
less than the carrying amount of the asset, an impairment loss should be
recognized. This statement requires that long-lived assets and certain
identifiable intangibles to be disposed of be reported at the lower of
carrying amount or fair value less cost to sell. The Bank adopted SFAS 121 on
January 1, 1996 Adoption of this statement did not have a material effect on
the Bank's consolidated financial statements.
(2) DEBT AND EQUITY SECURITIES
Investments in debt and equity securities at May 31, 1996 are summarized as
follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Held-to-maturity:
Debt securities:
State, county and municipal...... $ 1,930 $ 156 $ -- $ 2,086
======== ====== ======= ========
Available-for-sale:
Debt securities:
United States Government--direct
and guaranteed.................. $185,658 $3,245 $ (56) $188,847
United States Government
agencies........................ 88,556 -- (1,700) 86,856
Public utility................... 2,745 25 -- 2,770
Other............................ 14,409 295 (26) 14,678
-------- ------ ------- --------
Total debt securities
available-for-sale............ $291,368 $3,565 $(1,782) $293,151
-------- ------ ------- --------
Equity securities:
Common........................... $ 258 $4,700 $ -- $ 4,958
Preferred........................ 133,188 1,996 (1,972) 133,212
Other............................ 602 9 -- 611
-------- ------ ------- --------
Total equity securities
available-for-sale............ $134,048 $6,705 $(1,972) $138,781
-------- ------ ------- --------
$431,932
========
</TABLE>
F-13
<PAGE>
THE ROSLYN SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MAY 31, 1996 AND 1995 (UNAUDITED) AND DECEMBER 31, 1995, 1994 AND 1993
Investments in debt and equity securities at December 31, 1995 are summarized
as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Held-to-maturity:
Debt securities:
State, county and municipal...... $ 1,930 $ 221 $ -- $ 2,151
======== ====== ======= ========
Available-for-sale:
Debt securities:
United States Government--direct
and guaranteed.................. $195,701 $8,925 $ -- $204,626
United States Government
agencies........................ 34,764 6 (26) 34,744
Public utility................... 2,742 57 -- 2,799
Other............................ 17,838 557 (11) 18,384
-------- ------ ------- --------
Total debt securities
available-for-sale............ $251,045 $9,545 $ (37) $260,553
-------- ------ ------- --------
Equity securities:
Common........................... $ 257 $4,753 $ -- $ 5,010
Preferred........................ 111,896 3,096 (1,226) 113,766
Other............................ 2 -- -- 2
-------- ------ ------- --------
Total equity securities
available-for-sale............ $112,155 $7,849 $(1,226) $118,778
======== ====== ======= --------
$379,331
========
</TABLE>
Investments in debt and equity securities at December 31, 1994 are summarized
as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Held-to-maturity:
Debt securities:
United States Government--direct
and guaranteed.................. $333,234 $ 144 $ (7,215) $326,163
United States Government
agencies........................ 34,996 -- (1,457) 33,539
State, county and municipal...... 2,715 153 (1) 2,867
Public utility................... 16,032 22 (758) 15,296
Foreign.......................... 3,547 -- (57) 3,490
Other............................ 75,680 184 (2,521) 73,343
-------- ------ -------- --------
Total debt securities held-to-
maturity...................... $466,204 $ 503 $(12,009) $454,698
======== ====== ======== ========
Available-for-sale:
Equity securities:
Common........................... $ 580 $2,817 $ -- $ 3,397
Preferred........................ 92,634 460 (6,789) 86,305
Institutional Investors Mutual
Fund, Inc....................... 137 -- (52) 85
-------- ------ -------- --------
Total equity securities
available-for-sale............ $ 93,351 $3,277 $ (6,841) $ 89,787
======== ====== ======== ========
</TABLE>
F-14
<PAGE>
THE ROSLYN SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MAY 31, 1996 AND 1995 (UNAUDITED) AND DECEMBER 31, 1995, 1994 AND 1993
U.S. Government direct and guaranteed obligations pledged as collateral were
$-0-, $-0- and $15.0 million at May 31, 1996 and December 31, 1995 and 1994,
respectively.
Sales of investments in debt and equity securities are summarized as
follows:
<TABLE>
<CAPTION>
FIVE MONTHS
ENDED MAY 31, YEARS ENDED DECEMBER 31,
--------------- ------------------------
1996 1995 1995 1994 1993
------- ------- -------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Proceeds from sales:
Equity securities.................... $12,180 $ 687 $ 11,077 $ 5,164 $10,693
Debt securities...................... -- 19,970 172,099 46,062 75,012
Gross gains:
Equity securities.................... 7 88 189 6 1,660
Debt securities...................... -- 8 159 102 1,682
Gross losses:
Equity securities.................... 329 74 685 41 26
Debt securities...................... -- 36 231 13 8
</TABLE>
During the five month periods ended May 31, 1996 and 1995, and the years
ended December 31, 1995 and 1994, sales of investments in debt securities were
from both the "held-to-maturity" and "available-for-sale" portfolios and the
sales of investments in equity securities were from the "available-for-sale"
portfolio. Investments in debt securities sold from the "held-to-maturity"
portfolio were either called or sold within 90 days of the maturity date.
The Bank wrote-off its investment in Nationar, a failed bank service
institution, in the amount of $376,000 and $561,000 for the five months ended
May 31, 1995 and the year ended December 31, 1995, respectively. In addition,
the Bank amortized premiums relating to its investments in certain callable
preferred stocks in the amounts of $292,000 and $453,000 for the five months
ended May 31, 1996 and 1995, respectively, and $1.2 million, $1.2 million, and
$185,000 for the years ended December 31, 1995, 1994 and 1993, respectively.
Included in the gross losses realized on sales of equity securities is
$329,000 and $611,000 for the five months ended May 31, 1996,and the year
ended December 31, 1995, respectively, which had been previously charged to
income as a result of the aforementioned premium amortization.
The maturities of the investments in debt securities at May 31, 1996 are as
follows:
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE
-------------------
ESTIMATED
AMORTIZED FAIR
MATURITY COST VALUE
-------- --------- ---------
(IN THOUSANDS)
<S> <C> <C>
Within 1 year......................................... $ 33,735 $ 33,975
After 1 year through 5 years.......................... 176,688 178,992
After 5 years through 10 years........................ 80,945 80,184
-------- --------
$291,368 $293,151
======== ========
<CAPTION>
HELD-TO-MATURITY
-------------------
ESTIMATED
AMORTIZED FAIR
COST VALUE
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
After 1 year through 5 years.......................... $ 1,860 $ 2,006
After 5 years through 10 years........................ 70 80
-------- --------
$ 1,930 $ 2,086
======== ========
</TABLE>
F-15
<PAGE>
THE ROSLYN SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MAY 31, 1996 AND 1995 (UNAUDITED) AND DECEMBER 31, 1995, 1994 AND 1993
The maturities of the investments in debt securities at December 31, 1995
are as follows:
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE
-------------------
ESTIMATED
AMORTIZED FAIR
MATURITY COST VALUE
-------- --------- ---------
(IN THOUSANDS)
<S> <C> <C>
Within 1 year......................................... $ 24,539 $ 24,797
After 1 year through 5 years.......................... 179,007 184,405
After 5 years through 10 years........................ 47,499 51,351
-------- --------
$251,045 $260,553
======== ========
<CAPTION>
HELD-TO-MATURITY
-------------------
ESTIMATED
AMORTIZED FAIR
MATURITY COST VALUE
-------- --------- ---------
(IN THOUSANDS)
<S> <C> <C>
After 1 year through 5 years.......................... $ 1,630 $ 1,802
After 5 years through 10 years........................ 300 349
-------- --------
$ 1,930 $ 2,151
======== ========
</TABLE>
The maturities of the investments in debt securities at December 31, 1994
are as follows:
<TABLE>
<CAPTION>
HELD-TO-MATURITY
-------------------
ESTIMATED
AMORTIZED FAIR
MATURITY COST VALUE
-------- --------- ---------
(IN THOUSANDS)
<S> <C> <C>
Within 1 year......................................... $ 88,839 $ 88,267
After 1 year through 5 years.......................... 305,120 295,918
After 5 years through 10 years........................ 71,440 69,706
Over 10 years......................................... 805 807
-------- --------
$466,204 $454,698
======== ========
</TABLE>
Included in available-for-sale securities at May 31, 1996 and December 31,
1995 and in held-to-maturity securities at December 31, 1994 are callable step
up notes which were issued by U.S. Government agencies. The amortized cost and
estimated fair values of these notes aggregated $15.0 million and $14.6
million, respectively, at May 31, 1996, $14.9 million and $14.9 million,
respectively, at December 31, 1995 and $35.0 million and $33.5 million,
respectively, at December 31, 1994. These notes represent general U.S.
Government agency obligations that provide for annual fixed rate step ups of
interest and are callable at par after one year and in six month intervals
thereafter. The weighted average rate of the notes was 6.00%, 5.54% and 5.55%
at May 31, 1996 and December 31, 1995 and 1994, respectively.
(3) MORTGAGE-BACKED AND MORTGAGE RELATED SECURITIES
Included in the Bank's available-for-sale and held-to-maturity securities
portfolios are mortgage-backed and mortgage related securities which, except
for collateralized mortgage obligations (CMOs), represent participating
interests in pools of first mortgage loans.
F-16
<PAGE>
THE ROSLYN SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MAY 31, 1996 AND 1995 (UNAUDITED) AND DECEMBER 31, 1995, 1994 AND 1993
Mortgage-backed and mortgage related securities at May 31, 1996 are
summarized as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Held-to-maturity:
Whole loan private collateralized
mortgage obligations, net......... $312,233 $1,395 $ (4,560) $309,068
======== ====== ======== ========
Available-for-sale:
GNMA pass through securities, net.. 20,978 1,857 -- 22,835
FNMA pass through securities, net.. 7,197 -- (271) 6,926
FHLMC pass through securities, net. 146,761 -- (4,900) 141,861
GNMA adjustable rate mortgage pass
through securities, net........... 118,473 527 (451) 118,549
Agency collateralized mortgage
obligations, net.................. 167,328 488 (3,519) 164,297
Whole loan private collateralized
mortgage obligations, net......... 66,351 25 (1,445) 64,931
-------- ------ -------- --------
Mortgage-backed and mortgage related
securities available-for-sale, net.. $527,088 $2,897 $(10,586) $519,399
======== ====== ======== ========
</TABLE>
Mortgage-backed and mortgage related securities at December 31, 1995 are
summarized as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Held-to-maturity:
Whole loan private collateralized
mortgage obligations, net......... $347,213 $3,513 $(1,927) $348,799
======== ====== ======= ========
Available-for-sale:
GNMA pass through securities, net.. 23,090 2,393 -- 25,483
FNMA pass through securities, net.. 27,689 -- (390) 27,299
FHLMC pass through securities, net. 116,100 766 (599) 116,267
GNMA adjustable rate mortgage pass
through securities, net........... 86,876 1,257 -- 88,133
Agency collateralized mortgage
obligations, net.................. 155,100 1,796 (593) 156,303
-------- ------ ------- --------
Mortgage-backed and mortgage related
securities available-for- sale, net. $408,855 $6,212 $(1,582) $413,485
======== ====== ======= ========
</TABLE>
F-17
<PAGE>
THE ROSLYN SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MAY 31, 1996 AND 1995 (UNAUDITED) AND DECEMBER 31, 1995, 1994 AND 1993
Mortgage-backed and mortgage related securities at December 31, 1994, are
summarized as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
--------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Held-to-maturity:
GNMA pass through securities, net.. $ 28,319 $ 916 $ (192) $ 29,043
FNMA pass through securities, net.. 31,491 61 (2,954) 28,598
FHLMC pass through securities, net. 57,288 -- (5,121) 52,167
Collateralized mortgage
obligations, net:
Agency........................... 114,145 2,812 (2,829) 114,128
Whole loan private............... 180,098 3,180 (12,744) 170,534
-------- ------ -------- --------
Mortgage-backed and mortgage related
securities held-to- maturity, net... $411,341 $6,969 $(23,840) $394,470
======== ====== ======== ========
Available-for-sale:
GNMA adjustable rate mortgage pass
through securities, net........... $ 8,103 $ -- $ (237) $ 7,866
FNMA adjustable rate mortgage pass
through securities, net........... 14,471 -- (382) 14,089
FHLMC adjustable rate mortgage pass
through securities, net........... 29,351 -- (595) 28,756
-------- ------ -------- --------
Mortgage-backed and mortgage related
securities available-for-sale, net.. $ 51,925 $ -- $ (1,214) $ 50,711
======== ====== ======== ========
</TABLE>
Sales of investments in mortgage-backed and mortgage related securities are
summarized as follows:
<TABLE>
<CAPTION>
FIVE MONTHS
ENDED MAY 31, YEAR ENDED
-------------- DECEMBER 31,
1996 1995 1995
------- ------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Proceeds from sales........................... $19,657 $8,880 $48,463
Gross gains................................... 46 85 904
Gross losses.................................. 18 -- --
</TABLE>
During the five month periods ended May 31, 1996 and 1995, and the year
ended December 31, 1995, sales of mortgage-backed and mortgage related
securities were from the "available-for-sale" portfolio. There were no sales
of mortgage-backed and mortgage related securities during the years ended
December 31, 1994 and 1993.
The contractual maturities of the investments in mortgage-backed and
mortgage related securities, net at May 31, 1996 are as follows:
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE
--------------------
AMORTIZED ESTIMATED
MATURITY COST FAIR VALUE
-------- --------- ----------
(IN THOUSANDS)
<S> <C> <C>
After 1 year through 5 years......................... $ 60,808 $ 57,848
After 5 years through 10 years....................... 40,963 40,236
Over 10 years........................................ 425,317 421,315
-------- --------
$527,088 $519,399
======== ========
</TABLE>
F-18
<PAGE>
THE ROSLYN SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MAY 31, 1996 AND 1995 (UNAUDITED) AND DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
HELD-TO-MATURITY
--------------------
AMORTIZED ESTIMATED
MATURITY COST FAIR VALUE
-------- --------- ----------
(IN THOUSANDS)
<S> <C> <C>
After 1 year through 5 years......................... $ 9,515 $ 9,293
After 5 years through 10 years....................... 28,433 28,333
Over 10 years........................................ 274,285 271,442
-------- --------
$312,233 $309,068
======== ========
</TABLE>
The contractual maturities of the investments in mortgage-backed and
mortgage related securities, net at December 31, 1995 are as follows:
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE
--------------------
AMORTIZED ESTIMATED
MATURITY COST FAIR VALUE
-------- --------- ----------
(IN THOUSANDS)
<S> <C> <C>
After 1 year through 5 years......................... $ 74,338 $ 73,459
After 5 years through 10 years....................... 38,589 39,429
Over 10 years........................................ 295,928 300,597
-------- --------
$408,855 $413,485
======== ========
<CAPTION>
HELD-TO-MATURITY
--------------------
AMORTIZED ESTIMATED
MATURITY COST FAIR VALUE
-------- --------- ----------
(IN THOUSANDS)
<S> <C> <C>
After 1 year through 5 years......................... $ 59,702 $ 59,092
After 5 years through 10 years....................... 46,785 46,797
Over 10 years........................................ 240,726 242,910
-------- --------
$347,213 $348,799
======== ========
</TABLE>
The contractual maturities of the investments in mortgage-backed and
mortgage related securities, net at December 31, 1994 are as follows:
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE
--------------------
AMORTIZED ESTIMATED
MATURITY COST FAIR VALUE
-------- --------- ----------
(IN THOUSANDS)
<S> <C> <C>
Over 10 years........................................ $ 51,925 $ 50,711
======== ========
<CAPTION>
HELD-TO-MATURITY
--------------------
AMORTIZED ESTIMATED
MATURITY COST FAIR VALUE
-------- --------- ----------
(IN THOUSANDS)
<S> <C> <C>
After 1 year through 5 years......................... $ 45,939 $ 42,172
After 5 years through 10 years....................... 167,847 161,199
Over 10 years........................................ 197,555 191,099
-------- --------
$411,341 $394,470
======== ========
</TABLE>
Expected maturities differ from contractual obligations since borrowers may
have the right to call or prepay obligations with or without call or
prepayment penalties. Generally, the aging of mortgage-backed and mortgage
related securities is based on their weighted average maturities.
F-19
<PAGE>
THE ROSLYN SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MAY 31, 1996 AND 1995 (UNAUDITED) AND DECEMBER 31, 1995, 1994 AND 1993
(4) LOANS HELD-FOR-SALE, NET AND LOANS RECEIVABLE HELD FOR INVESTMENT, NET
Loans held-for-sale, net are summarized as follows:
<TABLE>
<CAPTION>
MAY 31, DEC. 31,
1996 1995
------- --------
(IN THOUSANDS)
<S> <C> <C>
One-to-four family loans................................. $13,310 $15,278
Student loans............................................ 955 1,873
------- -------
Total loans held for sale, net......................... $14,265 $17,151
======= =======
</TABLE>
There were no loans held for sale at December 31, 1994.
RFI originates most fixed rate loans for immediate sale to the Federal
National Mortgage Association (FNMA) or other investors. Generally, the sale
of such loans is arranged at the time the loan application is received through
commitments.
In addition, student loans are sold to the Student Loan Mortgage Association
generally before repayment begins during the grace period of the loan. During
the five month periods ended May 31, 1996 and 1995, and the years ended
December 31, 1995, 1994 and 1993, the Bank sold approximately $2.7 million,
$18.8 million, $21.5 million, $49,000 and $192,000, respectively, of student
loans, recording aggregate net gains of $28,000, $455,000, $496,000, $0 and
$0, respectively.
Loans receivable held for investment, net are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
MAY 31 ------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Real estate loans, net:
One-to four-family........ $199,735 $182,079 $153,203
Multi-family.............. 33,320 36,353 18,617
Home equity and second
mortgage................. 4,690 3,672 4,346
Commercial real estate.... 153,592 124,976 114,317
Construction and develop-
ment..................... 31,046 41,611 56,163
-------- -------- --------
Total real estate loans. 422,383 388,691 346,646
-------- -------- --------
Less:
Deferred income........... (1,301) (1,256) (1,123)
Net deferred loan origina-
tion fees................ (769) (666) (611)
-------- -------- --------
Total real estate loans,
net.................... 420,313 386,769 344,912
-------- -------- --------
Other loans:
Consumer loans............ 1,483 1,760 1,680
Student................... -- 86 20,626
-------- -------- --------
Total other loans....... 1,483 1,846 22,306
-------- -------- --------
Less allowance for possi-
ble loan losses.......... (22,312) (23,350) (25,127)
-------- -------- --------
Loans receivable held
for investment, net.... $399,484 $365,265 $342,091
======== ======== ========
</TABLE>
F-20
<PAGE>
THE ROSLYN SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MAY 31, 1996 AND 1995 (UNAUDITED) AND DECEMBER 31, 1995, 1994 AND 1993
The principal balance of non-accrual loans and loans where the terms have
been restructured due to a deterioration in the ability of the borrower to
service the outstanding debt approximated $11.8 million, $11.8 million and
$24.4 million at May 31, 1996 and December 31, 1995 and 1994, respectively.
Interest income that would have been recorded if the loans had been performing
in accordance with their original terms aggregated approximately $426,000,
$773,000, $1.5 million, $1.9 million and $1.8 million during the five month
periods ended May 31, 1996 and 1995, and the years ended December 31, 1995,
1994 and 1993, respectively.
Loans in arrears three months or more were as follows:
<TABLE>
<CAPTION>
AMOUNT % OF LOANS
------------ -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
May 31, 1996................................... $ 9,137 2.17%
============ =========
December 31, 1995.............................. $ 8,766 2.26%
============ =========
December 31, 1994.............................. $ 19,856 5.41%
============ =========
</TABLE>
The Bank has entered into various agreements to service loans for others. At
May 31, 1996 and December 31, 1995 and 1994, 6,499 loans, 6,039 loans and 361
loans, respectively, with a total balance of $762.7 million, $704.8 million
and $37.1 million, respectively, were being serviced for others. The Bank has
not retained a participation in these loans.
The right to service loans for others is generally obtained by either the
sale of loans with servicing retained, the open market purchase of mortgage
servicing rights or the creation of mortgage servicing rights pursuant to SFAS
122 (collectively referred to as mortgage servicing rights ("MSRs")).
During the five month periods ended May 31, 1996 and May 31, 1995, and the
years ended December 31, 1995, 1994 and 1993, the Bank sold without recourse
approximately $72.2 million, $1.4 million, $70.4 million, $15.9 million and
$17.6 million, respectively, of whole loans with servicing retained. Servicing
fee income of $828,000, $51,000, $888,000, $115,000 and $27,000 is included in
loan servicing and fee income, net in the accompanying consolidated statements
of income for the five months ended May 31, 1996 and 1995, and the years ended
December 31, 1995, 1994 and 1993, respectively.
In connection with the 1995 acquisition of certain assets and liabilities of
RMBI, the Bank recorded MSRs with a fair value of $8.1 million. No servicing
rights were purchased prior thereto. In addition, effective January 1, 1995,
the Bank adopted SFAS 122. SFAS 122 provides for the capitalization of MSRs
when mortgage loans are originated and subsequently sold or securitized where
the right to service the loans is retained. Accordingly, pursuant to the
adoption of SFAS 122, the Bank recorded MSRs in the amount of $690,000 during
1995. The Bank did not record any MSRs during the five months ended May 31,
1995. During the five months ended May 31, 1996, the Bank recorded MSRs in the
amount of $878,000.
Fees earned for servicing loans are reported as income when the related
mortgage loan payments are collected. Mortgage servicing rights are amortized
as a reduction to loan servicing and fee income on the interest method over
the estimated remaining life of the underlying mortgage loans. MSR assets are
carried at fair value and impairment, if any, is recognized through a
valuation allowance. For the five months ended May 31, 1996 and the year ended
December 31, 1995, no impairment existed in the MSRs and as a result, there
was no valuation allowance required. See note 15 for risk characteristics and
assumptions used to estimate fair value.
F-21
<PAGE>
THE ROSLYN SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MAY 31, 1996 AND 1995 (UNAUDITED) AND DECEMBER 31, 1995, 1994 AND 1993
MSR activity is summarized as follows:
<TABLE>
<CAPTION>
FIVE MONTHS
ENDED YEAR ENDED
MAY 31, 1996 DEC. 31, 1995
------------ -------------
(IN THOUSANDS)
<S> <C> <C>
Balance at beginning of period................. $8,297 $ --
Acquired in the acquisition.................. -- 8,051
Originated mortgage servicing rights......... 878 690
Less:
Amortization............................... (556) (444)
------ ------
Balance at end of period....................... $8,619 $8,297
====== ======
</TABLE>
(5) ALLOWANCE FOR POSSIBLE LOAN LOSSES
Impaired loans and related allowances for possible loan losses have been
identified and calculated in accordance with the provisions of SFAS 114. The
total allowance for possible loan losses has been determined in accordance
with the provisions of SFAS 5, "Accounting for Contingencies". As such, the
Bank has provided amounts for anticipated losses that exceed the immediately
identified losses associated with loans that have been deemed impaired.
Provisions have been made and established accordingly, based upon experience
and expectations, for losses associated with the general population of loans,
specific industry and loan types, including residential and consumer loans
which are not subject to the provisions of SFAS 114.
The following table summarizes information regarding the Bank's impaired
loans at May 31, 1996 and December 31, 1995:
<TABLE>
<CAPTION>
MAY 31, 1996
----------------------------------
RELATED
ALLOWANCE
RECORDED FOR POSSIBLE NET
INVESTMENT LOAN LOSSES INVESTMENT
---------- ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Nonresidential loans:
Without a related allowance.......... $5,165 $-- $5,165
====== ==== ======
Total impaired loans............... $5,165 $-- $5,165
====== ==== ======
<CAPTION>
DECEMBER 31, 1995
----------------------------------
RELATED
ALLOWANCE
RECORDED FOR POSSIBLE NET
INVESTMENT LOAN LOSSES INVESTMENT
---------- ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Nonresidential loans:
With a related allowance............. $2,320 $828 $1,492
Without a related allowance.......... 2,332 -- 2,332
------ ---- ------
Total impaired loans............... $4,652 $828 $3,824
====== ==== ======
</TABLE>
The Bank's average recorded investment in impaired loans for the five months
ended May 31, 1996 and 1995 and the year ended December 31, 1995 was $5.5
million, $1.2 million, and $5.1 million, respectively. Interest income
recognized on impaired loans, which was not materially different from cash-
basis interest
F-22
<PAGE>
THE ROSLYN SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MAY 31, 1996 AND 1995 (UNAUDITED) AND DECEMBER 31, 1995, 1994 AND 1993
income, amounted to $84,000, $196,000 and $378,000 for the five months ended
May 31, 1996 and 1995 and the year ended December 31, 1995.
The following is a summary of the activity in the allowance for possible
loan losses account:
<TABLE>
<CAPTION>
FIVE MONTHS ENDED
MAY 31, YEARS ENDED DECEMBER 31,
------------------ ----------------------------
1996 1995 1995 1994 1993
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of
period.................. $ 23,350 $ 25,127 $ 25,127 $ 24,502 $ 23,187
Provisions for loan loss-
es...................... 300 250 600 600 6,860
Charge-offs.............. (1,340) (1,300) (2,510) (171) (5,545)
Recoveries............... 2 49 133 196 --
-------- -------- -------- -------- --------
Balance at end of peri-
od.................... $ 22,312 $ 24,126 $ 23,350 $ 25,127 $ 24,502
======== ======== ======== ======== ========
</TABLE>
(6) BANKING HOUSE AND EQUIPMENT
A summary of banking house and equipment at cost, net of accumulated
depreciation and amortization, and land at cost is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
MAY 31, ----------------
1996 1995 1994
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Land.............................................. $ 2,558 $ 1,957 $ 1,957
Banking house..................................... 12,036 10,232 9,290
Furniture, fixtures and equipment................. 5,108 4,835 5,425
------- ------- -------
19,702 17,024 16,672
Accumulated depreciation and amortization......... (5,078) (4,601) (5,025)
------- ------- -------
$14,624 $12,423 $11,647
======= ======= =======
</TABLE>
(7) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
MAY 31, ---------------
1996 1995 1994
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Loans................................................ $ 2,740 $ 2,426 $ 2,345
Mortgage-backed and mortgage related securities...... 4,737 4,250 2,395
Debt and equity securities........................... 4,404 4,887 9,248
------- ------- -------
Total accrued interest receivable.................. $11,881 $11,563 $13,988
======= ======= =======
</TABLE>
(8) EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED
The main component of excess of cost over fair value of net assets acquired
("goodwill") represents the excess of purchase price over fair value of net
assets acquired from RMBI. This goodwill is being amortized on a straight-line
basis over ten years. RFI will assess the recoverability of this intangible
asset by determining whether the amortization of the goodwill over its
remaining life can be recovered through future operating cash
F-23
<PAGE>
THE ROSLYN SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MAY 31, 1996 AND 1995 (UNAUDITED) AND DECEMBER 31, 1995, 1994 AND 1993
flows of RFI. The unamortized balance of goodwill relating to the purchase of
RMBI was $3.2 million and $3.3 million as of May 31, 1996 and December 31,
1995, respectively.
In 1992, the Bank purchased certain assets and assumed the deposit
liabilities of the Riverhead Savings Bank's East Northport, New York branch.
The acquisition was accounted for under the purchase method and, accordingly,
all of the acquired assets and assumed liabilities were adjusted to and
recorded at their fair market value. The excess of acquisition costs over the
fair market value of net assets acquired ("goodwill") was $855,000 which is
being amortized on a straight-line basis over seven years. The unamortized
balance of the goodwill as of May 31, 1996 and December 31, 1995 and 1994 was
$468,000, $519,000 and $642,000, respectively.
(9) REAL ESTATE OWNED, NET
Real estate owned, at the lower of its cost or fair value minus estimated
costs to sell, was as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
MAY 31, ----------------
1996 1995 1994
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
One-to four-family real estate properties..... $ 814 $ 527 $ 349
Commercial/building properties................ 5,664 6,570 4,519
Allowance for possible losses on real estate
owned........................................ (1,112) (1,050) (1,509)
------- ------- -------
$ 5,366 $ 6,047 $ 3,359
======= ======= =======
</TABLE>
The following is a summary of the activity in the allowance for possible
losses on real estate owned account:
<TABLE>
<CAPTION>
FIVE MONTHS
ENDED MAY 31, YEARS ENDED DECEMBER 31,
-------------- ----------------------------
1996 1995 1995 1994 1993
------ ------ -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance at beginning of peri-
od.......................... $1,050 $1,509 $ 1,509 $ 1,882 $ 700
Provisions for losses........ 150 -- -- -- 1,200
Charge-offs.................. (101) (59) (459) (415) (18)
Recoveries................... 13 -- -- 42 --
------ ------ -------- -------- --------
Balance at end of period..... $1,112 $1,450 $ 1,050 $ 1,509 $ 1,882
====== ====== ======== ======== ========
</TABLE>
(10) DEPOSITS
Savings and time deposit account balances (excluding demand deposit
accounts) are summarized as follows:
<TABLE>
<CAPTION>
MAY 31, 1996
------------------------
WEIGHTED
TYPE OF ACCOUNT AVERAGE RATE AMOUNT
--------------- ------------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Savings accounts................................ 2.58% $ 437,273
Certificates of deposit......................... 5.52 871,876
Money market accounts........................... 2.97 61,411
----------
$1,370,560
==========
</TABLE>
F-24
<PAGE>
THE ROSLYN SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MAY 31, 1996 AND 1995 (UNAUDITED) AND DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------------
WEIGHTED
TYPE OF ACCOUNT AVERAGE RATE AMOUNT
--------------- ------------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Savings accounts................................. 2.57% $ 455,511
Certificates of deposit.......................... 5.83 749,775
Money market accounts............................ 2.97 64,426
----------
$1,269,712
==========
<CAPTION>
DECEMBER 31, 1994
-----------------------
WEIGHTED
TYPE OF ACCOUNT AVERAGE RATE AMOUNT
--------------- ------------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Savings accounts................................. 2.57% $ 566,648
Certificates of deposit.......................... 5.18 517,437
Money market accounts............................ 2.97 77,359
----------
$1,161,444
==========
</TABLE>
Scheduled maturities of certificates of deposit are as follows:
<TABLE>
<CAPTION>
MAY 31, 1996
-----------------------------
WEIGHTED
AVERAGE RATE AMOUNT PERCENT
------------ -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
1 year or less................................ 5.38% $688,244 78.94%
Greater than 1 year through 2 years........... 5.72 61,525 7.06
Greater than 2 years through 3 years.......... 5.62 27,478 3.15
Greater than 3 years through 4 years.......... 6.75 56,788 6.51
Greater than 4 years through 5 years.......... 6.55 25,940 2.97
Over 5 years.................................. 6.53 11,901 1.37
-------- ------
$871,876 100.00%
======== ======
<CAPTION>
DECEMBER 31, 1995
-----------------------------
WEIGHTED
AVERAGE RATE AMOUNT PERCENT
------------ -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
1 year or less................................ 5.72% $574,724 76.65%
Greater than 1 year through 2 years........... 6.04 60,397 8.06
Greater than 2 years through 3 years.......... 5.75 26,412 3.52
Greater than 3 years through 4 years.......... 6.47 53,812 7.18
Greater than 4 years through 5 years.......... 7.06 21,725 2.90
Over 5 years.................................. 6.80 12,705 1.69
-------- ------
$749,775 100.00%
======== ======
</TABLE>
F-25
<PAGE>
THE ROSLYN SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MAY 31, 1996 AND 1995 (UNAUDITED) AND DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
DECEMBER 31, 1994
-----------------------------
WEIGHTED
AVERAGE RATE AMOUNT PERCENT
------------ -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
1 year or less................................ 4.50% $314,556 60.79%
Greater than 1 year through 2 years........... 6.31 86,183 16.65
Greater than 2 years through 3 years.......... 5.87 20,340 3.93
Greater than 3 years through 4 years.......... 5.70 22,860 4.42
Greater than 4 years through 5 years.......... 6.45 51,937 10.04
Over 5 years.................................. 7.17 21,561 4.17
-------- ------
$517,437 100.00%
======== ======
</TABLE>
Certificates of deposit in excess of $100,000 were approximately $140.7
million, $114.2 million and $74.3 million at May 31, 1996 and at December 31,
1995 and 1994, respectively.
Demand deposits are summarized as follows:
<TABLE>
<CAPTION>
MAY 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
-------------------- -------------------- --------------------
TYPE OF WEIGHTED WEIGHTED WEIGHTED
ACCOUNT AVERAGE RATE AMOUNT AVERAGE RATE AMOUNT AVERAGE RATE AMOUNT
------- ------------ ------- ------------ ------- ------------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Personal................ -- $33,926 -- $30,781 -- $22,661
NOW..................... 2.24% 37,359 2.05% 35,057 2.05% 35,413
------- ------- -------
$71,285 $65,838 $58,074
======= ======= =======
</TABLE>
The FDIC insures deposits of account holders up to $100,000 per insured
depositor. To provide for this insurance, the Bank must pay a risk-based
annual assessment which considers the financial soundness of the institution
and capitalization level (note 17). At December 31, 1995, the Bank was
assessed at the FDIC's lowest assessment level, as a well capitalized
institution. During the third quarter of 1995, the FDIC announced that the BIF
was recapitalized as of May 31, 1995, and issued refunds of deposit insurance
overpayments from June 1 through September 30, 1995. For 1996, it is expected
that the Bank will pay $2,000 in FDIC insurance premiums, the statutory
minimum, provided that the fund remains at its targeted capital level.
Interest expense on deposit balances is summarized as follows:
<TABLE>
<CAPTION>
FIVE MONTHS YEARS ENDED
ENDED MAY 31, DECEMBER 31,
--------------- -----------------------
1996 1995 1995 1994 1993
------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Savings accounts.................... $ 6,418 $ 6,773 $16,154 $18,664 $20,442
Money market accounts............... 768 872 2,007 2,025 2,241
Certificates of deposit............. 19,012 14,393 39,583 19,664 16,833
------- ------- ------- ------- -------
$26,198 $22,038 $57,744 $40,353 $39,516
======= ======= ======= ======= =======
</TABLE>
(11) BORROWED FUNDS AND REPURCHASE AGREEMENTS
From time to time, the Bank enters into sales of securities under agreements
to repurchase (reverse-repurchase agreements). Fixed-coupon reverse-repurchase
agreements are treated as financing transactions, and
F-26
<PAGE>
THE ROSLYN SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MAY 31, 1996 AND 1995 (UNAUDITED) AND DECEMBER 31, 1995, 1994 AND 1993
the obligations to repurchase are reflected as a liability in the consolidated
statements of financial condition. The dollar amount of securities underlying
the agreements remains in the asset account.
At May 31, 1996, the Bank has $67.1 million in reverse repurchase agreements
with a weighted-average interest rate of 5.36% and a weighted-average maturity
of 51 days.
Reverse repurchase agreements averaged approximately $37.5 million and $26.3
million for the five months ended May 31, 1996 and 1995, respectively, and
$22.3 million, $-0-, and $5.5 millionduring the years ended December 31, 1995,
1994, and 1993, respectively. The maximum amount outstanding at the end of any
month was $68.4 million and $40.7 million for the five months ended May 31,
1996 and 1995, and $40.9 million, $-0-, and $40.0 million for the years ended
December 31, 1995, 1994, and 1993, respectively.
There were no reverse repurchase agreements outstanding at December 31, 1995
or 1994.
At May 31, 1996 and December 31, 1995, $2.5 million and $1.6 million,
respectively of the mortgage loans held for sale were pledged to secure notes
payable to the FNMA under a warehouse line of credit known as the FNMA "As
Soon As Pooled Plus Program". The notes are repaid as the related mortgage
loans are sold or collected.
(12) INCOME TAXES
As discussed in note 1, the Bank adopted SFAS 109 as of January 1, 1993. The
cumulative effect of this change in accounting for income taxes of $7,526,000
was determined as of January 1, 1993 and is reported in the consolidated
statement of income for the year ended December 31, 1993.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at May 31,
1996, December 31, 1995 and 1994 are presented below:
<TABLE>
<CAPTION>
DECEMBER 31,
MAY 31, ---------------
1996 1995 1994
------- ------ -------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred tax assets:
Mortgages and other loans receivable, primarily due
to allowances for loss and deferred loan fees..... $ 9,101 $9,579 $10,568
Real estate owned, primarily due to allowance for
loss.............................................. 873 809 812
Postretirement benefits............................ 1,262 1,261 1,266
Non-accrual loan interest.......................... 778 671 1,006
Employee bonus and fringe benefits................. 3,036 2,685 2,318
Unrealized loss on available-for-sale securities... 501 -- 2,041
Callable preferred stock........................... 931 807 578
Amortization of purchased mortgage servicing
rights............................................ 162 77 --
Mark to market on mortgage loans held for sale..... 135 138 --
Other.............................................. 510 569 308
------- ------ -------
Total gross deferred tax assets.................. 17,289 16,596 18,897
Deferred tax liabilities:
Unrealized gain on available-for-sale securities... -- (8,869) --
Originated mortgage servicing rights............... (715) (303) --
Other.............................................. (63) (56) (41)
------- ------ -------
Total gross deferred tax liabilities............. (778) (9,228) (41)
------- ------ -------
Net deferred tax asset........................... $16,511 $7,368 $18,856
======= ====== =======
</TABLE>
F-27
<PAGE>
THE ROSLYN SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MAY 31, 1996 AND 1995 (UNAUDITED) AND DECEMBER 31, 1995, 1994 AND 1993
Provisions for income taxes are comprised of the following amounts:
<TABLE>
<CAPTION>
FIVE MONTHS
ENDED MAY 31, YEARS ENDED DECEMBER 31,
-------------- --------------------------
1996 1995 1995 1994 1993
------- ------ ---------------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Current:
Federal........................ $ 2,190 $3,129 $ 5,771 $ 7,744 $ 9,539
State and local................ 1,237 979 2,161 3,006 3,142
------- ------ ------- -------- --------
3,427 4,108 7,932 10,750 12,681
------- ------ ------- -------- --------
Deferred:
Federal........................ 167 (170) 406 (620) (1,667)
State and local................ 60 (62) 172 (112) (428)
------- ------ ------- -------- --------
227 (232) 578 (732) (2,095)
------- ------ ------- -------- --------
$ 3,654 $3,876 $ 8,510 $ 10,018 $ 10,586
======= ====== ======= ======== ========
</TABLE>
Total income tax expense differed from the amounts computed by applying the
U.S. Federal income tax rate of 35% to income before income tax expense and
cumulative effect of changes in accounting as a result of the following:
<TABLE>
<CAPTION>
FIVE MONTHS
ENDED MAY 31, YEARS ENDED DECEMBER 31,
-------------- ---------------------------
1996 1995 1995 1994 1993
------ ------ -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Expected income tax expense at
statutory Federal tax rate....... $4,216 $4,008 $ 9,530 $ 10,304 $ 10,061
State and local taxes, net of Fed-
eral income tax benefit.......... 908 690 1,743 1,882 1,765
Dividend received deduction....... (826) (585) (1,992) (1,690) (906)
Tax exempt income................. -- (30) (70) (77) (92)
Reversal of prior year taxes...... (600) (310) (750) (400) --
Tax rate change................... -- -- -- -- (286)
Other, net........................ (44) 103 49 (1) 44
------ ------ ------- -------- --------
Total income tax expense........ $3,654 $3,876 $ 8,510 $ 10,018 $ 10,586
====== ====== ======= ======== ========
</TABLE>
The Bank's retained earnings includes approximately $10.3 million at May 31,
1996 and December 31, 1995 and 1994 which has been segregated for Federal
income tax purposes as a bad debt reserve and for which no provision for
Federal income tax has been made. The use of this amount for purposes other
than to absorb losses on loans may result in taxable income for Federal income
taxes at the then current tax rate. Under the Internal Revenue Code, the Bank
is allowed a special bad debt deduction for additions to tax bad debt reserves
established for the purpose of absorbing losses. For tax years beginning after
January 1, 1987, the allowable deduction is calculated utilizing either an
experience method or by applying the statutory rate of 8% of taxable income.
(13) EMPLOYEE BENEFIT PLANS
Pension Plan--The Bank's noncontributory pension plan with The RSI
Retirement Trust covers substantially all employees.
F-28
<PAGE>
THE ROSLYN SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MAY 31, 1996 AND 1995 (UNAUDITED) AND DECEMBER 31, 1995, 1994 AND 1993
The following table depicts the components of pension expense for the years
ended December 31, 1995, 1994 and 1993 projected by RSI:
<TABLE>
<CAPTION>
1995 1994 1993
------- ----- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost...................................... $ 384 $ 391 $ 347
Interest cost..................................... 822 740 797
Expected return on assets......................... (2,044) (9) (788)
Amortization of unrecognized transition asset..... (115) (115) (115)
Amortization of unrecognized loss................. -- 35 --
Amortization of unrecognized past service liabili-
ty............................................... 5 22 3
Deferred investment loss.......................... 1,233 (758) --
------- ----- -----
Net periodic pension expense.................... $ 285 $ 306 $ 244
======= ===== =====
</TABLE>
The following table sets forth the Bank's defined benefit plan funded status
at September 30, 1995 and 1994 (the latest valuation dates) as determined by
the plan's actuary:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested ben-
efits of $9,057 and $8,281 in 1995 and 1994, respec-
tively.............................................. $ 9,502 $ 8,761
=========== ===========
Projected benefit obligation for services rendered to
September 30, 1995 and 1994......................... (11,302) (10,432)
Market value of plan assets at September 30, 1995 and
1994................................................ 11,670 9,969
----------- -----------
Plan assets greater (less) than projected benefit ob-
ligation............................................ 368 (463)
Unrecognized net transition asset being amortized
over 10.40 years.................................... (165) (280)
Unrecognized net loss................................ 311 950
Unrecognized past service liability.................. 35 13
----------- -----------
Prepaid pension expense............................ $ 549 $ 220
=========== ===========
Assumed rate of return on assets..................... 8.00% 8.00%
=========== ===========
Assumed rate of compensation increase................ 5.50% 6.00%
=========== ===========
Assumed discount rate................................ 7.50% 8.25%
=========== ===========
</TABLE>
The projected benefit obligation represents the obligation to plan members
for services already rendered and then increases that obligation for future
compensation levels.
Supplemental Plan--The former chief executive officer is also covered by a
supplemental executive retirement plan with The RSI Retirement Trust. The
actuarial present value of the accumulated benefit obligation at December 31,
1995 and 1994 was $659,000 and $704,000 respectively. Included in the employee
benefit expense for the years ended December 31, 1995, 1994 and 1993 was
$55,000, $39,000 and $39,000, respectively, related to this obligation.
Benefit Restoration Plan--The plan provides benefits for any highly
compensated employee whose benefits are restricted under the Bank's defined
benefit and defined contribution plans. The actuarial present value of the
accumulated benefit obligation at December 31, 1995 and 1994 was $268,000 and
$68,000, respectively.
F-29
<PAGE>
THE ROSLYN SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MAY 31, 1996 AND 1995 (UNAUDITED) AND DECEMBER 31, 1995, 1994 AND 1993
Included in employee benefit expense for the years ended December 31, 1995,
1994 and 1993 was $168,000, $71,000 and $13,000, respectively, related to this
obligation.
401(k) Plan--The Bank also has a defined contribution and thrift savings
plan under Section 401(k) of the Internal Revenue Code. All regular, full-time
employees are eligible for voluntary participation after one or more years of
continuous service. The Plan is effectuated through a trust established by the
Bank. Under this plan, the Bank will make contributions of 6% of the
participant's base pay, provided that the participant contributes at least 6%
of their base pay. The Bank has contributed $255,000, $220,000 and $207,000
for the years ended December 31, 1995, 1994 and 1993, respectively.
(14) POSTEMPLOYMENT HEALTH CARE AND LIFE INSURANCE BENEFITS
The Bank currently provides health care and life insurance benefits for
retirees and their eligible dependents. The coverage provided depends upon the
date they retired.
The cost of the Bank's postretirement health care and life insurance
benefits is recognized in the financial statements during the employee's
active working career.
The cumulative effect of adopting SFAS 106, effective January 1, 1993,
resulted in the recording of an actuarially determined accrued benefit
obligation as of January 1, 1993 of $2,693,000, a $1,150,000 deferred tax
asset, and a related charge to earnings of $1,543,000, (which was net of the
income tax benefit).
The status of the plan, which is unfunded, at December 31, 1995 and 1994 is
as follows:
<TABLE>
<CAPTION>
1995 1994
------- -------
(IN THOUSANDS)
<S> <C> <C>
Accumulated postretirement benefit obligation.......... $ 3,135 $ 2,808
Unrecognized net (loss) gain........................... (64) 155
------- -------
Accrued postretirement benefit cost recognized in the
accompanying consolidated statements of financial con-
dition................................................ $ 3,071 $ 2,963
======= =======
</TABLE>
Net periodic postretirement benefit cost included in salaries and employee
benefits in the accompanying consolidated statements of income for the years
ended December 31, 1995, 1994 and 1993 is comprised of the following
components:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost-benefits earned during the year.............. $ 40 $ 49 $ 39
Interest cost on accumulated postretirement benefit obli-
gation................................................... 228 190 214
---- ---- ----
Net periodic postretirement benefit cost.................. $268 $239 $253
==== ==== ====
</TABLE>
For measurement purposes, a 14% annual rate of increase in the per capita
cost of covered benefits (health care cost trend rate) was assumed for 1995;
with the rate assumed to gradually decrease to 5.5% by the year 2000 and
remain at that level thereafter. This rate assumption has a significant effect
on the estimate of the accumulated postretirement benefit obligation and
aggregate service and interest cost components of net periodic postretirement
benefit cost. A 1% point increase in the health care cost trend rate would
increase the accumulated postretirement benefit obligation by 11.3% as of
December 31, 1995 while the aggregate of the service and interest cost
components of net periodic postretirement benefit cost for the year ended
December 31, 1995 would
F-30
<PAGE>
THE ROSLYN SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MAY 31, 1996 AND 1995 (UNAUDITED) AND DECEMBER 31, 1995, 1994 AND 1993
increase 14.8%. The discount rate used in determining the accumulated
postretirement benefit obligation was 7.5% and 7.0%, respectively, at December
31, 1995 and 1994.
(15) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS 107, "Disclosures About Fair Value of Financial Instruments", requires
the Bank to disclose the fair value of its on- and off-balance sheet financial
instruments. A financial instrument is defined in SFAS 107 as cash, evidence
of an ownership interest in an entity or a contract that creates a contractual
obligation or right to deliver or receive cash or another financial instrument
from a second entity on potentially favorable or unfavorable terms. SFAS 107
defines the fair value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between willing
parties, other than in a forced or liquidation sale.
The following table represents the carrying amounts and fair values of the
Bank's financial instruments:
<TABLE>
<CAPTION>
MAY 31, 1996
-------------------
CARRYING ESTIMATED
AMOUNT FAIR VALUE
-------- ----------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents............................. $ 28,421 $28,421
Debt and equity securities, net:
Held-to-maturity.................................... 1,930 2,086
Available-for-sale.................................. 431,932 431,932
Mortgage-backed and mortgage related securities, net:
Held-to-maturity.................................... 312,233 309,068
Available-for-sale.................................. 519,399 519,399
Loans held for sale, net.............................. 14,265 15,511
Loans receivable held for investment, net............. 399,484 397,313
Mortgage servicing rights, net........................ 8,619 8,918
Certificates of deposits (CD's)....................... 871,876 872,767
Deposits, excluding CD's.............................. 569,969 569,969
Borrowed funds........................................ 69,598 69,598
<CAPTION>
DECEMBER 31, 1995
-------------------
CARRYING ESTIMATED
AMOUNT FAIR VALUE
-------- ----------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents............................. $ 19,703 $19,703
Debt and equity securities, net:
Held-to-maturity.................................... 1,930 2,151
Available-for-sale.................................. 379,331 379,331
Mortgage-backed and mortgage related securities, net:
Held-to-maturity.................................... 347,213 348,779
Available-for-sale.................................. 413,485 413,485
Loans held for sale, net.............................. 17,151 17,607
Loans receivable held for investment, net............. 365,265 363,280
Mortgage servicing rights, net........................ 8,297 8,355
Certificates of deposits (CD's)....................... 749,775 755,841
Deposits, excluding CD's.............................. 585,775 585,775
Borrowed funds........................................ 1,647 1,647
</TABLE>
F-31
<PAGE>
THE ROSLYN SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MAY 31, 1996 AND 1995 (UNAUDITED) AND DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
DECEMBER 31, 1994
-------------------
CARRYING ESTIMATED
AMOUNT FAIR VALUE
-------- ----------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents............................. $ 27,259 $ 27,259
Debt and equity securities, net:
Held-to-maturity.................................... 466,204 454,698
Available-for-sale.................................. 89,787 89,787
Mortgage-backed and mortgage related securities, net:
Held-to-maturity.................................... 411,341 394,470
Available-for-sale.................................. 50,711 50,711
Loans receivable held for investment, net............. 342,091 334,089
Certificates of deposits (CD's)....................... 517,437 509,649
Deposits, excluding CD's.............................. 702,081 702,081
</TABLE>
The carrying amounts in the table are included in the consolidated
statements of condition under the indicated captions.
The following summarizes the major methods and assumptions used in
estimating the fair values of the financial instruments:
Cash and Cash Equivalents--The carrying amounts for cash and cash
equivalents approximate fair value as they mature in 30 days or less and do
not present unanticipated credit concerns.
Securities--The fair values of securities are estimated based on bid
quotations received from securities dealers or from prices obtained from firms
specializing in providing securities pricing services.
Loans held for sale, net--Fair value is estimated based on current prices
established in the secondary market or, for those loans committed to be sold,
based upon the price established in the commitment.
Loans receivable held for investment, net--Fair values are estimated for
portfolios of loans with similar financial characteristics. Loans are
segregated by type, such as commercial real estate and residential mortgage.
Each loan category is further segmented into fixed and adjustable rate
interest terms and by performing and non-performing categories. For performing
residential mortgage loans, fair values are estimated by discounting
contractual cash flows through the estimated maturity using discount rates and
prepayment estimates based on secondary market sources adjusted to reflect
differences in servicing and credit costs. The estimated fair value of
remaining performing loans is calculated by discounting scheduled cash flows
using estimated market discount rates that reflect the credit and interest
rate risk inherent in the loan. Fair values for non-performing real estate
loans are based on recent appraisals.
Mortgage servicing rights, net--Mortgage servicing rights are valued based
upon the Bank's stratification of the mortgage servicing portfolio.
Stratification is based upon the predominate risk characteristics of the
underlying loans, including but not limited to, interest rates, loan type, the
frequency of interest rate adjustments in the case of ARM loans, etc. Each
strata is then discounted to reflect the present value of the future cash
flows utilizing current market assumptions regarding discount rates,
prepayment speeds, delinquency rates, etc.
Deposit Liabilities--All deposits, except savings investment certificates,
are subject to rate changes at any time, and therefore are considered to be
carried at estimated fair value. The fair value of savings investment
certificates was estimated by computing the present value of contractual
future cash flows for each certificate.
F-32
<PAGE>
THE ROSLYN SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MAY 31, 1996 AND 1995 (UNAUDITED) AND DECEMBER 31, 1995, 1994 AND 1993
The present value rate utilized was the rate offered by the Bank at each date
presented on certificates with an initial maturity equal to the remaining term
to maturity of the existing certificates.
Borrowed Funds--Borrowed funds have maturities or terms to repricing not
exceeding 30 days. Therefore, the carrying amount is a reasonable estimate of
fair value.
Limitations--SFAS 107 requires disclosures of the estimated fair value of
financial instruments. Fair value estimates are made at a specific point in
time, based on relevant market information about the financial instrument.
These estimates do not reflect any premium or discount that could result from
offering for sale at one time the Bank's entire holdings of a particular
financial instrument nor the resultant tax ramifications or transaction costs.
Because no market exists for a significant portion of the Bank's financial
instruments, fair value estimates are based on judgments regarding current
economic conditions, risk characteristics of various financial instruments,
and other factors. 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.
Fair value estimates are based on existing on-and-off balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not
considered financial instruments. For example, the Bank has a mortgage
servicing department that contributes fee income annually. The mortgage
servicing department is not considered a financial instrument, and as such its
value has not been incorporated into the fair value estimates. Other
significant assets of the Bank that are not considered financial assets
include banking house and equipment and deferred tax assets. In addition, the
tax ramifications related to the unrealized gains and losses can have a
significant effect on fair value estimates and have not been considered.
Commitments--The fair value of commitments is estimated using the fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the
counterparties. For fixed rate loan commitments and commitments to sell loans
at specified prices, fair value also considers the difference between current
levels of interest rates and the committed rates.
Accrued Interest Receivable/Payable--The fair value of the accrued interest
receivable and payable balances are estimated to be their book value.
(16) COMMITMENTS AND CONTINGENCIES
In the normal course of the Bank's business, there are outstanding various
commitments and contingent liabilities that have not been reflected in the
consolidated statements of condition. In the opinion of management, the
financial position of the Bank will not be affected materially as a result of
such commitments and contingent liabilities.
In the normal course of business, there are various outstanding legal
proceedings. In the opinion of management, after consultation with legal
counsel, the financial position, results of operations and liquidity of the
Bank will not be affected materially by the outcome of such legal proceedings.
At May 31, 1996 and December 31, 1995, respectively, there were outstanding
loan commitments by the Bank to advance approximately $162.2 million and $81.8
million for mortgage loans substantially all of which were fixed rate
commercial and residential real estate loans. Lease commitments are not
significant.
F-33
<PAGE>
THE ROSLYN SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MAY 31, 1996 AND 1995 (UNAUDITED) AND DECEMBER 31, 1995, 1994 AND 1993
At May 31, 1996 and December 31, 1995, the Bank had no available lines of
credit with banks and other institutions.
In the normal course of its mortgage banking activities, the Bank enters
into both optional and mandatory commitments to sell packages of mortgage
loans that it originates. The Bank commits to sell the loans at specified
prices in a future period generally ranging from 30 to 120 days from date of
commitment either directly to the FNMA and to other agencies or via pass-
through certificates guaranteed by these agencies. Market risk is associated
with these financial instruments which results from movements in interest
rates and is reflected by gains or losses on the sale of the mortgage loan
packages determined by the difference between the price of the packaged loans
and the price guaranteed in the commitment.
The Bank had unfilled mandatory delivery commitments with investors totaling
approximately $57.6 million and $35.4 million and optional delivery
commitments of approximately $2 million and $2 million at May 31, 1996 and
December 31, 1995, respectively.
(17) RETAINED EARNINGS
The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
established a capital based supervisory system of Prompt Corrective Action
(PCA) for all insured depository institutions. The regulations adopted
pursuant to FDICIA and effective December 19, 1992, established capital
categories that determine the degree of supervisory PCA to which a depository
institution could be subjected. The categories consist of "well capitalized",
"adequately capitalized", "undercapitalized", "significantly undercapitalized"
and "critically undercapitalized." An institution is deemed to be "well
capitalized" if (a) its risk-based capital ratio is 10% or greater, (b) its
Tier 1 risk-based capital ratio is 6% or greater, and (c) its leverage ratio
is 5% or greater. At May 31, 1996, the Bank is "well capitalized."
When an insured depository institution's capital ratios fall below the "well
capitalized" level it becomes subject to a series of increasingly restrictive
supervisory actions, to the point where a conservator or receiver must be
designated for a "critically undercapitalized" institution unless certain
certifications are made by the appropriate regulatory agencies. An institution
is deemed to be "critically undercapitalized" if its ratio of Tier 1 capital
to total assets is 2% or less.
(18) CONVERSION TO CAPITAL STOCK FORM OF OWNERSHIP
On May 29, 1996, the Board of Trustees of the Bank adopted a Plan of
Conversion (Plan), which was subsequently amended on July 30, 1996 and
September 30, 1996, to convert from a state chartered mutual savings bank to a
state chartered capital stock savings bank with the concurrent formation of a
holding company, Roslyn Bancorp, Inc. (Company), subject to the approval by
regulatory authorities and depositors of the Bank. The conversion is expected
to be accomplished through restatement of the Bank's state organization
certificate and the sale of the holding company's common stock in an amount
equal to the consolidated pro forma market value of the holding company and
the Bank after giving effect to the conversion. A subscription offering of the
shares of common stock will be offered initially to depositors, employee
benefit plans of the Bank, and to certain other eligible subscribers. Any
shares of common stock not sold in the offering are expected to be sold to the
underwriters for resale to the general public.
At the time of conversion, the Bank will establish a liquidation account in
an amount equal to its capital as of the date of the latest consolidated
statement of financial condition appearing in the final prospectus. The
liquidation account will be maintained for the benefit of eligible account
holders who continue to maintain their
F-34
<PAGE>
THE ROSLYN SAVINGS BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
MAY 31, 1996 AND 1995 (UNAUDITED) AND DECEMBER 31, 1995, 1994 AND 1993
accounts at the Bank after the conversion. The liquidation account will be
reduced annually to the extent that eligible account holders have reduced
their qualifying deposits as of each anniversary date. Subsequent increases
will not restore an eligible account holder's interest in the liquidation
account. In the event of a complete liquidation, each eligible account holder
will be entitled to receive balances for accounts then held.
Subsequent to the conversion, the Bank may not declare or pay cash dividends
on or repurchase any of its shares of common stock if the effect thereof would
cause stockholder's equity to be reduced below applicable regulatory capital
maintenance requirements or if such declaration and payment would otherwise
violate regulatory requirements.
Conversion costs will be deferred and reduce the proceeds from the shares
sold in conversion. If the conversion is not completed, all costs will be
charged as expense. As of May 31, 1996, no conversion costs have been
incurred.
Pursuant to the Plan, as amended, the holding company intends to establish a
Charitable Foundation in connection with the conversion. The Plan provides
that the Bank and the Company will create the Foundation immediately following
the conversion by contributing Company common stock in an amount equal to 3.0%
of the total amount of common stock to be sold in the conversion. The
Foundation is being formed as a complement to the Bank's existing community
activities and will be dedicated to community activities and the promotion of
charitable causes.
The Foundation will submit a request to the Internal Revenue Service to be
recognized as a tax-exempt organization and would likely be classified as a
private foundation. A contribution of common stock to the Foundation by the
Company would be tax deductible, subject to an annual limitation based on 10%
of the Company's annual taxable income. The Company, however, would be able to
carry forward any unused portion of the deduction for five years following the
contribution. Upon funding the Foundation, the Company will recognize an
expense in the full amount of the contribution, offset in part by the
corresponding tax benefit, during the quarter in which the contribution is
made.
F-35
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESMAN OR ANY OTHER PERSONS HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS PRO-
SPECTUS IN CONNECTION WITH THE OFFERINGS MADE HEREBY, AND, IF GIVEN OR MADE,
SUCH OTHER INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY ROSLYN BANCORP, INC., THE ROSLYN SAVINGS BANK OR SANDLER
O'NEILL & PARTNERS, L.P. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO
ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AU-
THORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUAL-
IFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF ROSLYN BANCORP, INC. OR THE ROSLYN
SAVINGS BANK SINCE ANY OF THE DATES AS OF WHICH INFORMATION IS FURNISHED
HEREIN OR SINCE THE DATE HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary................................................................... 9
Selected Consolidated Financial and Other Data of the Bank................ 16
Recent Developments....................................................... 18
Risk Factors.............................................................. 23
Roslyn Bancorp, Inc....................................................... 33
The Roslyn Savings Bank................................................... 33
Regulatory Capital Compliance............................................. 35
Use of Proceeds........................................................... 36
Dividend Policy........................................................... 37
Market for the Common Stock............................................... 38
Capitalization............................................................ 39
Pro Forma Data............................................................ 40
Consolidated Statements of Income......................................... 46
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 47
Business of the Company................................................... 64
Business of the Bank...................................................... 64
Federal and State Taxation................................................ 94
Regulation and Supervision................................................ 96
Management of the Company................................................. 105
Management of the Bank.................................................... 106
The Conversion............................................................ 121
Restrictions on Acquisition of the Company and the Bank................... 140
Description of Capital Stock of the Company............................... 147
Description of Capital Stock of the Bank.................................. 148
Transfer Agent and Registrar.............................................. 149
Experts................................................................... 149
Legal and Tax Opinions.................................................... 149
Additional Information.................................................... 150
Index to Financial Statements............................................. F-1
</TABLE>
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UNTIL NOVEMBER 13, 1996 OR 25 DAYS AFTER COMMENCEMENT OF THE SYNDICATED COM-
MUNITY OFFERING, IF ANY, WHICHEVER IS LATER, ALL DEALERS EFFECTING TRANSAC-
TIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DIS-
TRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO OB-
LIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND
WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
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36,844,660 SHARES
LOGO ROSLYN
BANCORP, INC.
(PROPOSED HOLDING COMPANY FOR
THE ROSLYN SAVINGS BANK)
COMMON STOCK
(PAR VALUE $0.01 PER SHARE)
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PROSPECTUS
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OCTOBER 10, 1996
SANDLER O'NEILL & PARTNERS, L.P.
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